2018
Annual Report
santander.com
2018 Annual Report
Message from
Ana Botín
Message from
José Antonio Álvarez
Strategic
overview
Unless otherwise specifed, references in this annual report to other documents, including but not
limited to other reports and websites, including our own, are for informational purposes only. The
contents of such other documents and websites are not incorporated by reference in this annual
report nor otherwise considered to be a part of it.
Unless the context requires otherwise, the ‘Bank’ means Banco Santander, S.A., and ‘Santander’, the
‘Group’ and ‘Santander Group’ mean Banco Santander, S.A. and subsidiaries.
2
Annual Report 2018
Consolidated directors’ report
04. Santander vision
10. Responsible
banking
106. Corporate
240. Economic
336. Risk
governance
and fnancial
review
%
management
12 Our approach
22 Challenge 1: New
108 Overview of corporate
governance in 2018
242 Economic, regulatory and
competitive context
338 Risk management and
control model
business environment
112 Ownership structure
244 Group selected data
346 Risk map and risk profle
48 Challenge 2: Inclusive and
116 Shareholders.
sustainable growth
70 Key metrics
78 Contribution to UN
Sustainable Development
Goals
80 Further information
81 Non-fnancial information
Law content index
Engagement and
shareholders meeting
124 Board of directors
169 Management team
172 Remuneration
196 Group structure and
internal governance
198 Internal control over
86 Global Reporting Initiative
fnancial reporting (ICFR)
(GRI) content index
208 Other corporate
103 Independent verifcation
governance information
report
246 Group fnancial
performance
284 Business areas
performance
323 Research, development
and innovation (R&D&I)
325 Signifcant events since
year end
326 Trend information 2019
330 Alternative performance
measures (APMs)
348 Credit risk
373 Trading market risk,
structural risk
and liquidity risk
390 Capital risk
393 Operational risk
400 Compliance and conduct
risk
411 Model risk
413 Strategic risk
Auditor’s report and consolidated fnancial statements
(consolidated annual accounts)
423. Auditor’s
report
414 Glossary
General information
435. Consolidated
fnancial
statements
451. Not
es to the
consolidated
fnancial
statements
659. Appendix
The introduction to our 2018 consolidated directors’ report on page 2 contains important information about this document.
On page 414 you will fnd a Glossary with certain acronyms and defned terms used throughout this document.
Our 2018 annual report is provided in Spanish and English versions. In case of discrepancy the Spanish version prevails.
3
Message from Ana Botín
Dear shareholder,
During 2018, we have once again
been relentless in focusing on
earning the lasting loyalty of our
people, customers, shareholders
and communities. We have made
more of what we do Simple,
Personal and Fair. And we have
done all we can to fulfl our purpose
– to help people and businesses
prosper.
I want to start by thanking every
single one of the Santander team
for once again doing their very best,
and our Board for all their support
and guidance.
1.- Successful execution of
our strategy delivers Growth,
Proftability and Strength
The benefts of our strategy are now
clear: we have successfully delivered
on the targets we set in 2015,
generating growth, proftability and
fnancial strength.
First, growth. Very few European
banks have been able to grow their
revenues in the last three years, but
Santander has delivered a +7% CAGR
in revenues since year-end 2015,
excluding the impact of currency
depreciation. Customer revenues
have reached 46 billion euros in
2018, up from 37 billion euros in
2015 on a constant currency basis
and net fees have grown at a 10%
CAGR over the last three years.
We have done this in a sustainable
way, increasing our loyal individual
customer base by 43% to 18.1
million over the period; and
increasing our loyal SMEs and
corporates customer base by 66%
to 1.7 million. This has been driven
in large part by our digital and
commercial transformation. We now
have 32 million digital customers,
up from less than 17 million in
2015.
This strong Group performance is
thanks to the turnaround led by our
new teams over the plan period. For
example, in Brazil and Mexico, our
focus on earning customer loyalty
has improved the RoTE from below
15% to 20%. We are now applying
the same approach in the US, where
we have spent the last three years
laying the right foundations for
future growth.
Our global businesses, which allow
our local banks to leverage the
Group’s scale, have also powered our
progress. Santander Corporate and
Investment Banking can combine the
strengths, expertise and relationship
of our local banks with our Group’s
global presence, achieving an
improved cost-to-income ratio close
to 40% and a RoRWA of 1.8%. Our
new Wealth Management division
has grown underlying attributable
proft by 17% and reached a RoTE of
77% (excluding excess capital) in its
frst year of operations as a global
unit, demonstrating the value we
are able to generate when working
together. Combined, these two
global platforms represent around
22% of our proft.
Next, proftability. The Group
remains one of the most proftable
and efcient banks among its global
peers. Our attributable proft has
II
grown from 6.0 billion euros in 2015
to 7.8 billion euros in 2018. We have
an underlying RoTE of 12.1%, an
improvement of +110 basis points
compared to 2015, and a best-in-
class cost-to-income ratio of 47.0%.
Finally, strength. Thanks to
this performance, we have
become stronger. Santander has
strengthened its capital signifcantly
– adding about 18 billion euros to its
Common Equity Tier 1 (CET1) ratio
fully loaded since 2015, taking it
from 10.1% to 11.3%, exceeding our
revised target of being above 11%.
We have done all this while
rewarding our shareholders’ loyalty,
with clear targets since 2015
of improving per share metrics.
Total dividends from 2018 proft is
expected to be 23 euro cents per
share. Since 2015, cash dividend
per share has increased by 31% (up
to 0.20 euros per share), and total
dividend per share has increased
by 17%. When you look at the big
picture, we have created signifcant
shareholder value during the period,
increasing tangible book value per
share plus cumulative cash dividend
per share by +27% (+8% CAGR)
for the last three years, taking into
account the scrip dividend impact.
On a constant currency basis, the
increase was +41% (+12% CAGR) for
the same period.
Santander’s market valuation is
among the best of our European
peers – and we have consistently
been in the top quartile in terms of
Total Shareholder Return over the
plan period.
2.- Strengthening our
foundations
At the same time, we have
implemented fundamental change
across our organization, which has
underpinned this performance. We
have strengthened and reinvigorated
our teams, both at headquarters
and in the countries. We have also
refreshed our governance and
embedded a new culture, all of
which bolstered the Group’s solid
foundations.
We have made our teams and
our Board, at Group and in our
main markets, more diverse and
international. We have reinforced
our leadership teams at Group level
with high-calibre new hires for key
roles in Digital or Technology and
Operations, equipping our senior
management with more broadly
based global perspectives and
expertise. Since 2015, we have built
a top-class team leading our local
banks, with new Country Heads for
our top fve markets.
Although Banco Santander leads the
Bloomberg Gender-Equality Index,
last year we issued guidelines to
ensure that building a diversifed
workforce is a priority across the
Group. Our aim is to have women
in 30% of leadership positions
by 2025. In addition, the Board
recognises the important benefts
of having an appropriately balanced
board composition. It has therefore
adopted the aim of achieving an
increased female representation on
the Board between the range of 40%
to 60%.
“The benefts of our
strategy are now clear:
we have successfully
delivered on the
targets we set in 2015,
generating growth,
proftability and fnancial
strength”
2015
2018
Loyal customers
(mn)
13.8 19.9
Digital customers
(mn)
16.6 32.0
Net fee income
(%)
-
~10
Cost of credit (%)
Cost-to-income
(%)
FL CET1(%)
2015
2018
1.25 1.121
47
10.05 11.3
48
EPS (%)
DPS (EUR)
RoTE (%)
2015
-
2018
11.2
0.20 0.23
10.0 11.7
Underlying 2018 RoTE 12.1%.
1. 2018 fgure relates to 2015 – 2018
average
2015 (%)
2018 (%)
CIB RoRWA
1.5
1.8
III
“We have strengthened
and reinvigorated
our teams, both at
headquarters and
in the countries. We
have also refreshed
our governance and
embedded a new
culture, all of which
bolstered the Group’s
solid foundations”
Scale
144 million customers
worldwide
Business model
100,000 of our people
interact with
customers each
day
Diversifed
Contribution to underlying
attributable proft
52%
Europe
48%
Americas
IV
While doing this, over the last
three years, we have embedded a
new culture. We want everything
to be done in a Simple, Personal
and Fair way, and we now measure
our performance at doing this.
The remuneration of our senior
team is now based on how they
achieve their goals, not simply
what they achieve. Underpinning
this, we have embedded eight
corporate behaviours that we
expect everyone to follow; a strong
common approach to risk (RiskPro);
and several programmes to ensure
that people have the confidence to
raise issues or concerns.
These improvements build on the
Group’s strong foundations. We
have scale. We now serve 144
million customers worldwide
(up from 121 million in 2015),
representing a wide range of
income groups in developed and
emerging economies. Our markets
have a combined population of
one billion people – 200 million
of whom in Latin America are
“unbanked”. We are one of the top
three banks in nine core countries
in Europe and the Americas.
This scale is integral to our
business model. 100,000 of our
people interact with customers
each day. With 13,000 branches
across our markets and the reach
of our digital banking offering, we
are able to leverage unprecedented
customer insight to create deep
and lasting relationships with
them.
In addition, we are diversified.
In 2018, 52% of our underlying
attributable profit came from
European markets and 48%
from the Americas, where the
potential for profitable growth is
significantly higher. Out of our 874
billion euros gross loans at end of
2018, 19% was in Latin America,
10% in US and 71% in Europe.
This diversification, together with
our scale and business model,
makes us more predictable:
we deliver consistent results
throughout the economic cycle,
generating superior value for our
shareholders. Compared with our
peers, who are some of the best
banks in the world, Santander
has had the lowest volatility in
earnings per share over the last 20
years, as well as over the past four
years, while we have continued to
increase our profitability.
This performance is also based on
prudent risk management. Our
long-standing approach to risk
is now bolstered by our use of
the latest technology. Santander
Analytics has hired around 200
scientists from key technical
fields (mathematics, statistics,
engineering, data science), who
collaborate with global experts in
data analytics. We are introducing
cutting-edge techniques based on
artificial intelligence and machine
learning to support advanced risk
management.
All of this has helped to improve
our risk profile: the credit quality of
our portfolios has shown a positive
trend for over five years, both in
terms of non-performing loans
and cost of credit (now at pre-
crisis levels). We have also proven
our resilience in the 2018 ECB/
EBA stress test exercise, where
Santander was the bank with
the strongest capital generation
among its peers in the baseline
scenario, and had the least capital
depletion in the stress scenario.
3.- Our focus on improving
returns
This brings me to the issue of
capital. Over the last three years,
we have taken a number of
actions to bolster capital levels
and improve capital allocation
to enhance profitability as the
European banking sector continued
to face heightened capital
requirements.
In 2015, only 40% of our capital
was invested above the cost of
equity returns. Today about 90% is
yielding returns above that level.
In particular, the increase in our
profitability in Brazil, Mexico and
Spain has led to a significantly
improved RoTE at a Group level.
Additionally, we have made great
strides improving our overall
business in the US and today
most of our businesses there are
delivering returns above the cost of
equity, we have plans to continue
improving. The US as a country
delivered 7.6% RoTE in 2018
(with normalized 11.3% capital
level) and increased underlying
profits by 42% year on year (+74%
attributable profit).
Over the last three years, we
have focused on building the
foundations for growth at SBNA –
making leadership changes, fixing
regulatory issues, and enhancing
technology. These efforts are
starting to bear fruits in terms
of margin improvement and cost
containment, and we are confident
we will be able to generate value
from our US franchise, which will
accrue to the Group over the next
few years.
This improvement in our capital
allocation and profitability has
been combined with a very
disciplined approach to inorganic
growth over the last three years –
like the acquisition of the Deutsche
Bank retail franchise in Poland
or BANIF in Portugal – or on the
buyback of strategic businesses
like Santander Asset Management.
We have also had the discipline
to divest non-core assets such as
the Allfunds platform, Totalbank
in the US, Private Banking in
Italy, and a reduction of our real
estate exposure in Spain by over
70% in 2018. The acquisition of
Banco Popular was the largest
transaction we undertook in the
last three years, making us Spain’s
biggest bank and strengthening
our position in the strategic SMEs
segment of the market. This
acquisition was supplemented by
the quick disposal of 51% Popular’s
real estate assets. It will deliver the
13% - 14% return on investment
we identified at the time of the
transaction.
“Over the last three
years, we have taken
a number of actions to
bolster capital levels
and improve capital
allocation to enhance
proftability”
Brazil
Spain
UK
SCF
Mexico
Chile
US1
SBNA1,2
SC USA1
Portugal
Poland
Argentina
RoTE 2018
20%
11%
9%
16%
20%
18%
8%
7%
21%
12%
10%
12%
1. Adjusted RoTE for 11.30% CET1, otherwise
Santander US 4%, SC USA 13.3%
2. SBNA excluding US HoldCo
“We are confdent we will
be able to generate value
from our US franchise,
which will accrue to the
Group over the next few
years”
V
“This improvement in
our capital allocation
and proftability has
been combined with
a very disciplined
approach to inorganic
growth over the last 3
years”
Adjusted TNAVps+cash DPS
(Jan15-Dec18)
+33% (CAGR 7%)
Adjusted TNAVps+cash DPS
Excluding FX
(Jan15-Dec18)
+47% (CAGR 10%)
VI
On top of this approach to
acquisitions and disposals, we
have improved, and will continue
improving, our internal capital
allocation in the following ways.
First, we have established a target
minimum threshold return per
client in our CIB business as well
as limiting the investment period.
As a result, we have improved our
RoRWA in this business from 1.5%
to 1.8% in 2018. We are now
implementing this methodology for
the next segment, middle market
corporates, in all our core countries,
combining fnancial discipline with
providing the best service to our
loyal customers.
Second, proftability and capital
allocation have greater weighting in
senior managers’ remuneration, as
we have increased the weight of the
RoTE for the bonus pool calculation.
And fnally, we continually examine
our balance sheet to identify non-
core assets for disposal, such as real
estate (including our own), equity
stakes we hold in companies, or
non-core IT assets.
By improving our core proftability
to generate a RoTE between
13-15% in the next few years
(depending on where interest
rates end up) and using capital
more efciently, we will be able to
generate more capital that can be
used to re-invest in high growth
proftable businesses, pay more
dividends and, if necessary, increase
capital bufers.
4.- A digital Santander
To continue growing in a
sustainable and proftable way
and to accelerate execution, we
will remain focused on our digital
transformation.
First, the transformation of our
core banks (“supertankers”). Every
product and service we ofer today
to our customers can, and should
be delivered digitally. And, in
parallel, we must deliver a more
efcient and better service.
The digitisation of our core banks is
already delivering revenue growth
and continuous improvement
of our cost-to-income ratio. The
acceleration of our transformation
will power the virtuous circle
of success – as ofering a better
service to our customers should
increase their engagement with
us, thereby increasing their loyalty,
consequently growing our revenue.
Second, we are changing our
organization to increase speed of
execution and bring the benefts
of the Group to a broader set of
customers – small and medium
sized companies and merchants.
During the frst quarter of 2019,
we are launching two new global
platforms, Global Trade Services
and Global Merchant Services,
which will report to our Brazil
and Mexican CEOs and will be
supported by Group teams. This
will further leverage our scale
across the Group – just as we have
successfully done with our CIB and
Wealth Management businesses.
These new digital platforms
are fexible, ofering Santander
customers – and non-customers
– an ecosystem of services, and an
improved customer experience at
a lower price. We will give further
details on them at our Investor Day.
While we future-proof our
“supertankers” and build Group-
wide platforms, we are also
creating “speedboats”. These
new ventures can compete in –
and disrupt – markets that our
“supertankers” cannot easily enter;
they can service customers in our
core banks; and they can also grow
faster as autonomous businesses.
Openbank is a good example.
Based in Spain, it is now the
single largest fully digital bank
in Europe in terms of balance
sheet and deposits, and one of
the few to provide the full array of
banking products to individuals.
With around 8.3 billion euros in
customer deposits (up 1.3 billion
euros since last year), it has grown
its mortgages 370% in the last year
and primary – loyal – customers by
51% in just two years. Openbank
is also the testing ground for our
future technology platform, as well
as other ideas and initiatives which
are shared across the Group.
Then there’s OnePay FX, one of the
frst applications of blockchain-
based technology to operate at
scale anywhere in the world. It
allows customers in the UK, Spain,
Brazil and Poland to transfer funds
more quickly and transparently
than ever before. Meanwhile, in
Latin American there’s Superdigital.
Providing basic banking services,
it is focused mainly on the
unbanked population as a low-cost
alternative to traditional banking.
Its active customer base has grown
70% since 2016 and it has already
reached breakeven with 1 million
euros in EBITDA.
Building global digital platforms is
critical if we want our customers to
see Santander as “my bank”, a bank
that understands their individual
needs and ofers them the products
and services they want, whenever
and wherever they want them. The
goal is not only to serve our current
customers better and attract new
ones, but also to attract third
parties to Santander’s platforms,
to build a network, boosting
innovation and making it quicker to
bring new products and services to
the market. Better still, thanks to
our shared services and common
infrastructure across the world, we
can change the rules of the game in
markets where we were previously
sub-scale, such as the US.
We are developing a culture of
experimentation. We are willing
to try promising ideas, accepting
that some might not work; and we
are ensuring that when they don’t,
we stop investing. Importantly,
“speedboats” and “supertankers”
work independently, but far from
“cannibalizing” each other, by
sharing their knowledge and
capabilities are accelerating our
transformation, boosting our
growth.
“To continue growing
in a sustainable and
proftable way and to
accelerate execution,
we will remain
focused on our digital
transformation”
VII
“Doing the basics
brilliantly is essential
– but it is no longer
enough. We need to
show how our business
is delivering proft with
a purpose”
273,000 microentepreneurs
supported in 2018
by Santander
VIII
5.- A more responsible
Santander
Digital technology has given
customers more power and choice
than ever before. They don’t just
expect us to deliver a great service
at a great price, but want us to use
our role and position in the market
to help address wider challenges
that society faces. Santander has
always strived to do this, but now it
is even more important that we are
responsible in all we do. Doing the
basics brilliantly is essential – but it is
no longer enough. We need to show
how our business is delivering proft
with a purpose. All our stakeholders –
our people, customers, shareholders
and communities – expect no less.
To achieve this, we have begun to
embed new governance across the
Group, including during 2018 the
creation of the new Responsible
Banking, Sustainability and Culture
Committee of the Board, to ensure
that wherever we operate, our senior
management is focused on the need
to be responsible in all we do and on
the challenges we face.
First, there is the challenge of
the new business environment.
Regulators, governments and society
as a whole are placing increasing
demands on how businesses are
run, beyond compliance. So we must
ensure we have the right culture,
skills, governance and business
practices. The second challenge is
to support inclusive and sustainable
growth – especially in a world where
there is a rising sense of inequality,
and a growing recognition of the
urgent need to tackle climate change.
We can address these challenges
in a number of ways – such as our
Universities programme, our fnancial
empowerment initiatives or the
fnancing we provide to renewables,
which are just some examples of
what we are doing.
The strength of our performance
overall is born out by Santander being
ranked third in the world among
banks – and number one in Europe –
in the Dow Jones Sustainability Index.
Behind that achievement are stories
of how, each day, we are helping to
improve people’s lives.
Let me take you to Santiago
Tianguistenco in Mexico. There, I met
some women who told me that,
in the past, banks had told them
their businesses were too small
for them to open an account. Now,
thanks to Santander’s Tuiio fnancial
empowerment programme, they
can grow their family businesses.
The micro-loans we ofer are small,
and the default rate is extremely
low. The loan is provided to a group
of women, to fnance their various
businesses. One woman told me she
now saves four hours every day, as
she no longer has to go to Mexico City
to collect payments from customers.
She showed me her Santander
credit card, her frst ever, which she
proudly displayed as a sign of her
entrepreneurial status. These women
– many are women – were grateful
that a bank had taken an interest in
them.
Now let’s go south, to São Mateus
just outside of São Paulo, Brazil,
where I visited the Santander
branch on Avenida Mateo Bei.
Through Santander Prospera we
ofer microcredit and other fnancial
services to those on very low
incomes. Half of our clients are below
the poverty line and our subsidized
low-interest rates loans can be for as
little R$100 up to R$13,000 (around
20 to 3,000 euros).
Digital technology is allowing us
to help more people. For example,
via Prospera, one year ago it took
us 10 days to approve a loan: now
it only takes us 10 seconds. In one
year, we have helped 100,000
customers – the same as we have
helped in the previous 10 years. As
we help transform people’s lives,
we are building a new business with
tremendous potential. The scale
of the unbanked and underserved
population in markets such as Brazil
or Mexico will contribute to our
growth, delivering shareholder value
by creating proft while fulflling our
purpose as a bank.
Alongside this, we obviously bank
large multinationals and corporates.
As a leader in project fnance, our
loans help these businesses beneft
society by, for example, building the
largest solar power plant in Latin
America. We have been recognized
as the leading bank in the world by
number of renewable energy projects
fnanced.
the benefts of economic growth.
While we’re proud of what we
have achieved, we’re certainly not
complacent. We have plans to do
more in the years ahead to deliver
proft with a purpose: supporting
more small businesses to create jobs;
helping more people access fnance;
providing more fnance for the low
carbon economy; widening access to
education; and fostering sustainable
consumption.
6.- Looking ahead
Like all businesses, we operate
in a volatile global economy. In
many of our markets there is
increasing political uncertainty.
And all this is against a backdrop of
tough supervisory and regulatory
requirements, especially in Europe.
While the global economic
expansion is weakening as a
result of the resurgence of trade
tensions, the growth prospects
for the world economy in 2019
continue to be reasonably positive,
particularly in the main markets
in which we operate. Specifcally,
the IMF forecasts that Spain, at
2.2%, will continue to exhibit the
highest growth rate of the major
European Union economies; that the
United Kingdom, despite Brexit, will
maintain a growth rate of 1.5%; that
Brazil’s growth will accelerate from
last year to 2.5%; and that Mexico
will grow at 2.1%.
This is responsible banking in
action – helping people to realise
their dreams and to create new jobs
and new opportunities, sharing
Against this backdrop, banking
activity should grow thanks to
changing demography, and more
people using more fnancial services.
“While the global
economic expansion is
weakening as a result
of the resurgence of
trade tensions, the
growth prospects for
the world economy in
2019 continue to be
reasonably positive,
particularly in the main
markets in which we
operate”
IX
“Santander’s aim as a
bank is to be the best
open fnancial services
platform by acting
responsibly and earning
the lasting loyalty of
our people, customers,
shareholders and
communities. We shall
achieve this by being
Simple, Personal and
Fair in all we do”
Our medium term targets
13% - 15%
11% - 12%
RoTE
CET1
X
Countries’ GDP grows faster when
the proportion of people who are
in their late 20s and early 30s
expands rapidly – as people in
these age segments are in their
most productive years, both in
terms of earning and spending. This
happened in the US with the “baby
boomers”, and in Spain over the last
30 years. We are now seeing this
trend in Latin America where the
median age is the late 20s and early
30s – and there are 400 million
people living in the markets in which
we operate.
As a result, Brazil – where we
are one of the top three privately
owned banks, with 42.1 million
customers – is projected by PwC to
become the 5th largest economy in
the world by 2050. Mexico, where
we are also one of the top three
banks, will become the world’s 7th
largest economy. Argentina, despite
its current economic difculties, is
expected to grow into a $2.4 trillion
economy. In the medium term, we
expect the Latin America economy
to grow between 3-4% as per its
GDP potential. On top of this, the
growth in digital will spread banking
in Latin America, with more digital
customers who are more loyal,
use more products and services,
contributing to our revenue growth.
As mentioned, we anticipate
growth this year will not be as
strong in more mature economies.
Santander can counterbalance
this thanks to recent acquisitions
in Spain, Portugal and Poland – a
country with 38 million people and
high growth potential – and the
continuing commercial turnaround
of our businesses in the US. In the
UK, where we have weathered
uncertainties in the past, we are
confdent we are ready to do so once
again. Finally, elsewhere in Europe,
Santander Consumer Finance will
maintain its solid progress and best
in class proftability. And the United
States remains the largest and most
attractive banking market in the
world, with attractive margins, scale
and growth.
All this should allow us to keep
delivering on our plans as we have
done for the last strategic cycle
(2015-2018), growing our revenues
and our earnings per share while
achieving our medium term targets
of a RoTE of 13% - 15% and a CET1
Fully Loaded of 11% - 12%.
I am confdent we can do this
because we have scale, 144 million
customers in 10 large markets,
local leadership positions, and
a proven business model that
creates unique and deep personal
relationships with our customers.
And because, coupled with our
diversifcation across developed and
developing markets and Europe and
the Americas, these deliver more
predictable and proftable growth.
In April we will set out our plan
for the next few years. The basics
of the strategy will not change
– we will continue to follow the
same approach that has delivered
success over the past three years: a
relentless focus on loyalty.
But as we look to the future, we
need to refect our approach to
responsible banking and digital
technology in our bank’s global aim.
Therefore, from now on, Santander’s
aim as a bank is to be the best open
fnancial services platform by acting
responsibly and earning the lasting
loyalty of our people, customers,
shareholders and communities. We
shall achieve this by being Simple,
Personal and Fair in all we do. By
doing this, we will fulfll our purpose.
I would like to end as I started:
by thanking the Santander team
for the commitment, energy and
dedication everyone has shown over
the last few years. We have shown
we can rise to the challenges we
face by going the extra mile for our
customers, and that we have what is
required for Santander to succeed in
the future. Again, thank you also to
our outstanding Board of Directors
for their support and counsel.
I am confdent that together we
will continue to progress and we
will achieve our goals for the next
years. Our success since 2015 shows
we have all we need to help more
people and businesses prosper.
Ana Botín
Group Executive Chairman
XI
Message from Jose Antonio Álvarez
The global economy generally
remained dynamic and solid in
2018. The sustained growth in
mature economies, particularly
the United States, offset the
turbulence in some developing
countries.
The trade tensions from
protectionist threats, despite
the agreement reached in the
renegotiation of NAFTA, and
the tightening of US monetary
policy, with interest rate hikes,
contributed to the greater
uncertainty and triggered varying
degrees of tensions, especially
in developing markets such as
Turkey, Argentina and, to a lesser
extent, Brazil, which was also
affected by general elections.
Other factors such as the lack
of agreement in the Brexit
negotiations and the shaping of
Italy’s fiscal policy also weighed
on the markets.
Therefore, and in my opinion,
the instability that characterised
the markets’ behaviour this year
was “cyclical”, quite apart from
the “structural” situation in 2011,
when the European economies
were in recession.
As well as this macroeconomic
context, there are challenges
facing the international
financial sector. Thanks to the
transformation of our Bank
over the last few years, we are
well placed to manage these
challenges proactively and
responsibly.
The factors that had the most
impact on our business were:
1. In the first place, the sector’s
need to digitalise its business
in order to improve customer
service, adapt to the multi-
channel demands, particularly
from younger generations,
and boost productivity and
transactional levels. This
implies building a bank aligned
with the challenges of the
future.
At the moment, the investments
in digitalisation and to improve
cybersecurity, as well as anti-
fraud policies, inevitably entail
higher technology costs. This
is exerting more pressure on
the financial sector’s short-
term profitability, particularly
in an environment of very low
interest rates in some markets.
2. On the other hand, competition
is much stiffer as a result of the
entry of the so-called fintechs
in providing some financial
services. These companies enjoy
some advantages, particularly
in terms of costs (they do not
have branches and do not have
to renew outdated technology),
and in the products and markets
where they operate, as they
focus on the most profitable
ones and do not provide the
universal service that we do.
We need to end asymmetric
regulations, as banks, on the
one hand, and digital platforms
and start-ups, on the other,
XII
are not competing on a level
playing field, whether in
terms of capital requirements,
compliance or use of data.
We are not an IT company, but
it is our duty to use the best
technology and look for the
best possible solutions for the
real financial challenges of our
customers, providing them
exactly with what they need.
3. While greater regulation
over the last years helped
to make the financial sector
more solvent, especially in
terms of capital, liquidity
and governance, it should
be streamlined in order to
avoid excessive bureaucracy
and asymmetries with other
countries, such as the United
States, whose regulation is
more flexible.
4. Lastly, we need to progress
in building a single banking
market in Europe, with a single
deposit guarantee fund, that
does not restrict the movement
of liquidity between countries,
harmonises supervisory
standards and practices with
customers and creates a
level playing field for entities
throughout the Banking Union.
Completing this Banking Union
and building a single market
would allow the financial
sector to develop substantial
economies of scale as in the US,
improving the quality of service
and costs and so profitability.
In addition, we should not forget
that the financial sector has to
increasingly assume a more
committed role with society,
fostering the idea of Responsible
banking and financial inclusion
of the least bankarised sectors.
Santander is a pioneer in this
matter, as our main purpose is
to help people and businesses
prosper in the countries where
we operate, in a way that we call
“Simple, Personal and Fair”.
The Group’s evolution in
2018
Results
The Group generated an
attributable profit of EUR 7,810
million, 18% more in euros than
in 2017 and 32% in constant
euros, largely because of the
depreciation of the Brazilian real
and the Argentine peso. Moreover,
these results were hit by non-
recurring charges, mainly related
to integration processes in Spain,
Portugal and the Corporate Centre.
Underlying profit (before capital
gains and provisions) was EUR
8,064 million, increasing in their
respective currencies in 7 of the 10
core markets. Of note were the US,
Brazil, Spain, Mexico and Portugal,
which registered double-digit
growth.
As regards gross income, net
interest income rose 9%, thanks
to management of spreads and
higher volumes of loans and
deposits, chiefly in developing
countries which, overall,
recorded double-digit growth.
“The Group is well
placed to face the
new challenges of the
international fnancial
sector”
Growth
Attributable proft
EUR 7,810 Mn
+32%
Revenue
EUR 48,424 Mn
+9%
All changes in the highlights of these
pages exclude the exchange rate impact,
unless otherwise indicated.
XIII
in systems and in training its
employees are our greatest
strengths when it comes to
protection from cyberthreats.
Balance sheet
Lending continued to be well
balanced between individuals
(62%, including mortgages and
consumer credit), SMEs and
companies (27%) and large
companies (11%). Eight of the 10
core units increased their lending,
notably the developing countries
(+14%).
Almost all units increased
customer funds. The largest rises
were in Argentina (+51%), Poland
(+32%), Brazil (+15%) and Chile
(+8%).
Regarding solvency, we again
generated capital and reached
our targets (FL CET1 of more
than 11%). Our capital position
was recognised by the European
Banking Authority’s stress test
exercise, in which we again
achieved excellent results. We
are the bank with the least capital
destroyed among our peers in an
adverse scenario.
In liquidity, the Bank comfortably
meets the regulatory ratios.
Our strategy reflects prudent
management as regards funding
sources, wide diversification in
terms of wholesale issues and a
high proportion of liquid assets.
Fee income (+9%) also grew,
reflecting greater activity and
customer loyalty, as well as the
growth strategy in services and
high value-added products and
in areas of low consumption of
capital. Fee income increased in
Retail Banking and particularly in
Wealth Management business.
Operating expenses were 7%
higher because of inflation in
some countries, investments in
transformation and digitalisation,
greater costs in global projects
and the perimeter impact. The
synergies and optimisation
plans are already beginning
to bear fruit in some countries
such as Spain, Portugal and the
United States and will continue
to increase over time. All of this
was achieved while maintaining
the Bank’s commitment to the
quality of customer service.
In risks, credit quality performed
well. The NPL ratio and the cost
of credit in the last 12 months
improved, and coverage remained
high.
As regards non-credit risks, I
would like to point out that unlike
other agents entering the financial
sector, Santander, as one of the
world’s strongest and most solid
banks, guarantees data protection
and customers’ savings.
Cyberrisks, for example, are
increasingly global and can affect
both our professional and personal
lives. In this sense, the Bank´s
experience and investments
Sharp growth in net interest
income and fee income
Flat costs in real terms
Good performance of the credit
quality ratios
Strength
Fully loaded CET1
11.30%
+46 bps
TNAV
4.19 euros
EUR +0.04
“Loans and funds
increased in 8 of our
core units”
XIV
Profitability
We ended 2018 with one of the
best RoTE among our peers, and a
RoRWA well above that in 2017,
partly due to measures to reduce
the consumption of capital of our
risk-weighted assets. In terms of
creating shareholder value, the
growth in TNAV together with
the dividend per share in cash
increased 8%.
This good performance of
the Bank’s main metrics did
not feed through completely
to the share price, due to
external factors that hit the
Eurozone and UK stock markets.
Nevertheless, I am optimistic
about future performance, as
reflected in the reports of the
main analyst units. We are one
of the large international banks
with the greatest number of buy
recommendations.
Evolution of the Group’s
business units in 2018
All of this explains the consistent
improvement we made during
the year in profit terms and in the
main metrics in almost all the
countries where we do business.
Before looking in detail at the
main trends of the business units,
I would like to recall some key
aspects of the Group’s strategy.
The first point is our business
model through which the Bank’s
more than 100,000 professionals
are in daily contact with our
customers, via an extensive branch
network and a unique relationship
model, tailored to meet the
different needs.
The second is our commitment
to geographic diversification,
which is balanced between mature
and developing markets and has
proved to be vital in generating
recurring and foreseeable results.
The third is our leadership
position in most of the countries
where we operate, enabling us to
capture economies of scale and
be the benchmark in the main
markets.
In this environment:
Spain
We completed the legal integration
of Banco Popular and began to
integrate the branch network.
We are taking advantage of
Popular’s strong position in SMEs
to strengthen our market share in
this segment while reducing its
portfolio of real estate assets and
the cost of deposits that have come
from Banco Popular.
In addition, we continued
our digitalisation strategy,
strengthening our position in
mobile payments while showing
a good commercial dynamic in
insurance, turnover of cards and
SME loans. We remained the
leader in large companies and
private banking.
Proftability
RoTE
11.7%
+129 bps
RoRWA
1.55%
+20 bps
“Our geographic
diversifcation has
proved to be vital in
generating recurring
and foreseeable
results”
Evolution of the business units
in 2018
Spain
Underlying proft
EUR 1,738 Mn
(+21%)
XV
These measures were reflected in
the good performance of results:
profit grew at double-digit rates,
driven by customer revenue, gains
on financial transactions and
enhanced efficiency.
Santander Consumer Finance
SCF remained the leader in the
European consumer finance
market, with a business
model based on geographic
diversification, efficiency, and risk
and recovery systems, enabling us
to maintain NPL ratios and cost of
credit at historic lows.
We advanced in optimising,
transforming and digitalising
the area. This enabled us to
increase business in almost all
countries, maintain a high level of
profitability and increase profit for
the ninth year running.
Portugal
The integration of Popular’s
business was completed in
the fourth quarter of 2018.
This process has enabled us to
strengthen our position as the
country’s largest privately owned
bank by assets and loans in
domestic business.
We strengthened our business
with companies, boosted customer
loyalty and continued to transform
the commercial model, now under
the Santander brand. All of this
is reflected in the good evolution
of profits, thanks to net interest
income and provisions and the cost
of credit at very low levels.
Poland
In Poland, which is growing at
one of the fastest rates in Europe,
we completed the acquisition of
the retail and SME businesses
from Deutsche Bank Polska,
strengthening our position as
one of the country’s main banks.
Also, Bank Zachodni adopted the
Santander brand and modernised
its branch network.
We maintained our leadership
in digital banking, launching
new apps and platforms and
consolidating business growth at
double-digit rates.
Good evolution of profit spurred by
customer revenue.
United Kingdom
The UK economy saw moderate
growth, uncertainty over Brexit
and greater competition. In this
context, the Bank worked to
fully install the new ring-fence
infrastructure that separates retail
from wholesale banking and with
minimal disruption to customers.
Our strategic priorities continued
to focus on customer loyalty and
digital and operational excellence.
We are number one in service
quality.
Profit was impacted by
competitive pressure on revenue
and on costs by regulatory and
strategic projects and digital
transformation.
Evolution of the business units
in 2018
SCF
Underlying proft
EUR 1,296 Mn
(+4%)
Portugal
Underlying proft
EUR 480 Mn
(+10%)
Poland
Underlying proft
EUR 298 Mn
(-1%)
United Kingdom
Underlying proft
EUR 1,362 Mn
(-8%)
XVI
United States
The United States is in a phase of
the cycle ahead of other mature
economies, with strong growth,
a historically low unemployment
rate and controlled inflation.
In this environment, 2018 was a
great year for our franchise, clearly
reflecting the efforts made in
previous years in transformation,
regulatory compliance and
optimising the capital structure.
SH USA passed the Federal
Reserve’s stress tests and received
no objections to its capital plan,
enabling it to normalise its
dividend payment policy.
We improved the trend in volumes
and turned around profits, which
increased more than 40% in a
favourable environment for banks
following the rise in interest rates
and the tax reform. I am optimistic
we will continue to improve
profitability.
Latin America, a region with
higher economic growth
potential, larger rises in business
volumes and high bankarisation
opportunities, experienced bouts
of instability, due to elections
in Mexico and Brazil and the
depreciation of some currencies
that affected the Group’s results.
In this environment:
Brazil
Brazil enjoyed an excellent
year, thanks to the increasing
strength of our franchise, a
strategy focused on improving
the customer experience and
satisfaction (we are the leader
in service quality) and the good
performance of volumes: lending
and funds continued to grow at
double-digit rates.
In results, the performance was
clearly diferent from that of our
competitors. We reduced the gap
in proftability due to the good
evolution of net interest income and
fee income. We reached the best
level of efciency in the last fve
years and the cost of credit was the
lowest in seven.
In less than four years, despite
the deep recession of the country,
the Bank doubled its profit and
increased its return on capital
from 12% to 20%. There is still
the potential to improve our
positioning.
Mexico
In Mexico, a country with
strong growth potential, we
continued to strengthen our
distribution capacity by investing
in technological and digital
developments and transforming
the branch network.
We launched many products
and apps in order to meet each
segment’s needs. This produced a
significant rise in loyal and digital
customers and solid growth in
business volumes.
Profit grew at double-digit rates,
driven by the good evolution of
customer revenue and the lower
cost of credit.
Evolution of the business units
in 2018
United States
Underlying proft
EUR 552 Mn
(+42%)
Brazil
Underlying proft
EUR 2,605 Mn
(+22%)
Mexico
Underlying proft
EUR 760 Mn
(+14%)
“Our leading position
in most countries is
enabling us to capture
economies of scale and
be the benchmark in
the main markets”
XVII
Chile
Chile remained focused on
transforming the commercial
network with more openings of
Work Cafés (a model we have
replicated in other countries)
and the launch of a new branch
format in the fourth quarter. We
also extended the range of our
specialised products such as One
Pay for companies and Santander
Life and Life 2.0, which offers a
new kind of relationship between
the Bank and our customers.
In a more dynamic economic
environment, we accelerated
growth in business with large
companies and SMEs. Attributable
profit was higher, driven by the
good performance of customer
revenue.
Argentina
Macroeconomic instability led
the country to renegotiate its
agreement with the IMF, thereby
covering the financing needs
for 2018-2019. The economic
programme was revamped,
focusing on correcting the fiscal
deficit and inflation in order to
stabilise the economy.
In a complicated environment,
Santander Río’s business and
customer revenue performed
well, and we made progress in
the digital transformation. We
continued to be the sector’s leader.
But this was not reflected in the
Bank’s profit as it was hit by the
peso’s sharp depreciation and the
adjustment from high inflation.
The units in Uruguay and Peru
recorded a strong growth in
profits, spurred by the rise in
total income and the commercial
transformation process.
Global Segments
Santander Corporate &
Investment Banking, our
wholesale banking business,
focused on improving profitability
and on the efficient use of capital.
We maintained our leadership
position in Latin America and
Europe, developed the franchises
in the UK and the US, and
strengthened integration with
the retail networks. Profit was 8%
higher.
We created the Wealth
Management division, which
integrates the businesses
of private banking and asset
management, at the end of 2017.
In 2018 we strengthened our offer
to customers in both businesses
in order for them to be more
global, coordinated and based
on the specific needs of each
client. The total contribution to
the Group’s profit was EUR 1,015
million (including the fee income
generated by this business), 13%
more than in 2017. RoRWA was
12.1%.
In 2019 the insurance business
will be included in Santander
Wealth Management unit,
which will increase the unit’s
contribution to the Group and its
global synergies.
Evolution of the business units
in 2018
Chile
Underlying proft
EUR 614 Mn
(+8%)
Argentina
Underlying proft
EUR 84 Mn
(-54%)
SCIB
Underlying proft
EUR 1,705 Mn
(+8%)
WM
Underlying proft
EUR 528 Mn
(+17%)
XVIII
Mid-term targets
RoTE
13% - 15%
FL CET1
11% - 12%
Our objectives
The focus in 2019 in the Eurozone
countries where we operate will
be on generating further synergies
in the ongoing integration
processes and gaining market
share, in order to offset the
expected low interest rates and
slower economic growth.
In the UK, and in an environment
with some uncertainties, our
aim is to become the best open
digital bank, in order to offer
operational excellence, maximise
efficiency and improve customer
satisfaction.
Santander’s management in
the United States will focus on
continuing to boost profitability,
drive growth in customers and
business volumes and enhance
efficiency.
Lastly, in Latin America we want
to take advantage of the greater
growth potential to improve our
distribution networks, while
continuing to develop our growth
and customer loyalty strategy
At the Group level, as the
Chairman has explained in her
message, we met the targets we
set three years ago in customer
loyalty and digitalisation, results,
profitability, capital and evolution
of the dividend. This places us in
the best starting point for attaining
the new medium term goals,
which will be announced at the
next Investor Day.
We are now in a position to
advance toward our main goals:
1. As regards solvency, we are
looking at a FL CET1 ratio of
between 11% and 12%, a range
we believe is comfortable,
not only in order to face
unforeseen risks, but also in
terms of flexibility so as to
take advantage of new growth
opportunities. With this in mind,
we are working on a capital-
light model.
2. In terms of profitability, our
aim is a RoTE of more than 13%,
although our efforts are focused
on reaching 15%. There are two
main drivers to achieve this:
• Foster cooperation via
countries and business
units, working transversally,
sharing initiatives and
developing common
platforms. This will enable
us to give the best value
offer for our customers and
generate more revenue.
• Second, improve efficiency.
I am convinced that the
digitalisation of our
traditional banks will help
us to cut operating costs
associated with launching
new products. Moreover, we
are building global processes
that generate significant
savings and centralising,
also at the global level,
the negotiation of our
technological infrastructure
and operation of services.
XIX
“Our employees are
the key to our excellent
results, and thanks
to their engagement,
dedication, passion and
efort we continue to
get better every day”
The beginning of this phase
is a new challenge for
all of us, and as with the
previous Strategic Plan,
we will continue to work
to achieve our profitability,
efficiency and value creation
targets in accordance with
the market’s demand and
our shareholders, that are
sustainable over time, while
we build the best open digital
financial services platform for
our customers, shareholders,
society and our employees.
I will end with some words
on our employees. All of
them are the key to our
excellent results, and
thanks to their engagement,
dedication, passion and effort
we continue to get better
every day.
José Antonio Álvarez
Vice chairman and
Chief executive officer
XX
2018 Annual Report
Strategic overview
Our success is based on a clear purpose, aim and approach
to business. We are building a more responsible bank
Our aim
as a bank
To be the best open
fnancial services platform,
by acting responsibly and
earning the lasting loyalty
of our people, customers,
shareholders and
communities.
Our
how
Everything we
do should be
Simple, Personal
and Fair.
Our
purpose
To help people
and businesses
prosper.
k
n
a
b
e
l
b
i
s
n
o
p
s
e
r
e
r
o
m
A
XXII
We want to help people and businesses prosper in a Simple,
Personal and Fair way, to earn the lasting loyalty of our
people, customers, shareholders and communities
In our day-to-day business, we do not
simply meet our legal and regulatory
requirements, but we aspire to exceed
people ́s expectations by being Simple,
Personal and Fair in all we do.
We focus on areas where, as a Group,
our activity can have a major impact
by helping more people and businesses
prosper in an inclusive and sustainable way.
XXIII
By focusing on loyalty, we have met the fnancial targets
we set in 2015. We have consistently delivered growth,
proftability and balance sheet strength
Growth
Loyal customers
19.9 mn (+44%)
Customer revenues
EUR 45.8 bn (+24%)1
Proftability
RoTE
11.7% (+171 bps)
Cost-to-income
47% (-61 bps)
Strength
Fully loaded CET1
11.30% (+125 bps)
NPL ratio
3.73% (-63 bps)
2015 vs. 2018
XXIV
e
c
n
a
m
r
o
f
r
e
p
g
n
o
r
t
s
A
Number of core markets where the
Bank is among the top 3 best banks
to work for
2015
2018
3
7
Loyal customers (mn)
13.8
19.9
Digital customers (mn)
16.6
32.0
Fee income (%)2
-
~10
Cost of credit (%)
1.25
1.123
Cost-to-income (%)
Growth in earnings per share (%)
48
-
47
11.2
Dividend per share (EUR)
0.20
0.234
Fully loaded CET1 (%)
10.05
11.305
RoTE (%)6
Scholarships and grants (thousand)
People supported in our
communities (mn)
10.0
11.7
35
1.2
1557
6.37
1. Constant euros.
2. % change (constant euros), 2018 fgure relates to 2015-2018 CAGR.
3. 2018 fgure relates to 2015-2018 average.
4. Total dividend charged to 2018 earnings is subject to approval by the 2019 AGM.
5. 2018 data applying the IFRS9 transitional arrangements.
6. Underlying 2015 RoTE: 11.0%. Underlying 2018 RoTE 12.1%.
7. Refers to cumulative activity in 2016-2018. The Bank has devised a corporate
methodology reviewed by an external auditor to consistently keep track of people
who have benefted from our social programmes, services and products.
Note: 2015 metrics have been re-stated to refect the capital increase of July 2017.
By building loyalty, and acting responsibly, we generate value
for all our stakeholders
People
202,713
employees
more motivated
and engaged
employees...
Communities
6.3
million people
supported7
resulting in higher
investment in the
community...
Customers
144
million
make our customers
more satisfed
and loyal...
Shareholders
4.1
million
driving proftability
and sustainable
growth...
XXV
People 202,713 employees
We want to be among the top three banks to work for in
most of our core markets and we have already achieved this
in seven of them
A strong corporate culture is key to having professionals who are engaged
and motivated.
e
l
p
o
e
P
–
s
t
n
e
m
e
v
e
i
h
c
a
n
a
l
p
r
a
e
y
3
XXVI
Team engagement
Proud to work for Santander
Motivated to go
beyond their formal job
responsibilities
82%
86%
81%
+7pp1
+4pp1
+7pp1
Simple, Personal, Fair
Diversity
Evaluation and remuneration
83%
Of employees feel
motivated to contribute
to building a bank that
is Simple, Personal
and Fair
55%
Of the total workforce
are women
1. 2015 vs. 2018.
60% what we do
40% how we do it
Rewarding people for
doing things in a Simple,
Personal and Fair way
XXVII
Customers 144 million
We want to be the best retail and commercial bank for our
customers
The number of loyal and digital customers has grown, along with customer
satisfaction, generating more revenue.
s
r
e
m
o
t
s
u
C
–
s
t
n
e
m
e
v
e
i
h
c
a
n
a
l
p
r
a
e
y
3
XXVIII
More loyal customers
Growth in loyal customers (mn)
Loyal customers generate:
2015
13.8
2018
19.9
+44%
Higher returns
Revenue per customer (EUR)1
x3.4
Lower churn
Attrition rate
-66%
More digital customers
Growth in digital customers (mn)
Digital sales as % of total sales
2015
16.6
2018
32.0
x2
2015
2018
15
32
x2
More satisfaction and revenues
Top 3 bank
in 7 core countries
for customer
satisfaction2
Fee income
EUR 11.5 bn
+31%
In constant EUR (2015-2018)
Customer revenues3
EUR 45.8 bn
+24%
In constant EUR (2015-2018)
1. Individuals and SMEs in retail franchises.
2. Source: customer satisfaction study (customers and non-customers) audited by Stiga / Conento.
3. Net interest income + fee income.
XXIX
Shareholders 4.1 million
We want to remain leaders in proftability and efciency
We have delivered higher shareholder returns while strengthening our capital base.
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XXX
More proftable and efcient
RoTE1 (%)
RoRWA (%)
+171 bps
+35 bps
10.0
2015
11.7
2018
1.20
1.55
2015
2018
Best-in-class efciency
(47% vs. ~65% peer average)
One of the most proftable
banks in Europe
(RoTE 186 bps above peer average)
Higher returns for our shareholders
Growing TNAVPS + Cash DPS by 27%2 in 2015-2018 period
Statutory earnings per share (EPS)
(EUR)
2015
2018
4.00
0.15
4.19
0.203
2015
EUR 0.397
2018 EUR 0.449
Increase in fully loaded CET1 capital ratio (%)
2015
10.05
2018
11.304
1. Underlying 2015 RoTE: 11.0%. Underlying 2018 RoTE 12.1%.
2. Considering the impact of the scrip dividend shares.
3. Total dividend charged to 2018 earnings is subject to approval by the 2019 AGM.
4. 2018 data applying the IFRS9 transitional arrangements.
Note: 2015 metrics have been re-stated to refect the capital increase of July 2017.
XXXI
Communities 6.3 million people supported1
We want to help more people and businesses prosper in the
communities where we operate
We are the company that provides most support to higher education worldwide2.
We have more than 1,200 agreements with universities and other academic
institutions in 33 countries.
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XXXII
We are supporting higher education
EUR 406 mn
investment in universities1
155,000 university scholarships and
grants awarded1
We launched the new scholarship website
(www.santander-grants.com) ofering study,
mobility and research opportunities to students
for their academic and professional development
We are promoting fnancial inclusion and entrepreneurship
EUR 160 mn
in microfnance loans
273,000
microentrepreneurs supported
We are supporting sustainable growth
Leading Global Bank
in the fnancing of renewable
energy projects3
6,689
megawatts (MW) fnanced. A generation capacity
equivalent to the consumption of 5.7 million
households
3rd
bank in the world
1st
bank in Europe
1. Refers to cumulative activity in 2016-2018.
2. The Fortune 500 Change the World report.
3. #1 position based on number of operations; #2 position based on volume; Source: Dealogic.
XXXIII
Our progress and core strengths mean we can now accelerate
our transformation
Scale + business model + diversifcation = predictable and proftable growth.
Our scale benefts our
leading local banks
Unique personal
relationships strengthen
customer loyalty
Our business model and
geographical diversifcation
have made us more
resilient than our peers
Resulting in more
predictable and proftable
earnings
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XXXIV
Top bank
in 6 out of our 10 Markets1
144 million
customers in markets with a total
population of >1bn people
100,000
people talking to our customers
everyday
Over 13,000
branches across all our geographies
Diversifcation2
Resilient
Best performer under stress
52%
48%
Europe
The Americas
Capital depletion under EBA adverse scenario
(-141 bps vs. -403 bps peer average)3
More predictable and
proftable earnings
Earnings have increased x4 over the
last 20 years, with low volatility
1. Leadership position by market share in lending. Top bank in Spain, Poland, Argentina, Portugal, Chile and SCF. Only private sector banks in the case
of Poland, Argentina and Portugal. 2. 2018 underlying attributable proft. Excluding Corporate Centre and Spain Real Estate Activity. 3. Source: EBA
stress test 2018.
XXXV
Our progress is powered by digital transformation, which is a
key to success in the new economic environment
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XXXVI
The digital transformation of our core banks is focused on two customer
priorities in order to continue to deliver the best customer service:
Ofer all our products and
services through end to end
digital channels
Deliver all products
and services in a fast
and efcient way
We are transforming our core banks in fve ways:
Transforming the FRONT
Making all products and services available in digital channels (end-to-end)
Transforming the BACK
Re-engineering, digitising and automating all our processes
Evolving our IT architecture and systems
Our core banking system is a structural advantage
Onboarding new technologies
Rapid integration of new technologies into our day-to-day operations
Becoming an agile data-driven organisation
XXXVII
Our digital transformation is already delivering results
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We have more digital customers...
...who are more engaged...
x2
digital customers
(32 mn in 2018 vs. 16.6 mn in 2015)
18
monthly accesses per customer
to the digital channels
(14 in 2015)
48%
digital customers as %
of active customers
(30% in 2015)
68%
of digital customers access us
via mobile apps
XXXVIII
...complete more transactions...
...and increase sales
x2
more transactions in digital
channels since 2015
32%
digital sales as % of total
(15% in 2015)
38%
of digital transactions
through mobile apps
15%
digital sales
through mobile apps
XXXIX
We have launched new digital businesses, which complement
our banks and compete in the market
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XL
One of the largest fully digital
banks by balance sheet with
a full suite of products and
services
+370% mortgages1 (front book)
c.90% asset growth1
+19% deposit growth1
1st Blockchain-based retail
payments solution
Launched in 4 geographies simultaneously
230% growth in the monthly volumes of
One Pay FX transactions from May to
December 2018
c.70% active customer growth vs. 2016
(c.400 thousand)
130% revenue growth vs. 2016
Breakeven with EUR 1 mn EBITDA
Financial solutions for
the unbanked
1. YoY growth; digital mortgages were launched in 2017.
XLI
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XLII
Our 10 core markets are
ready to lead in the future
by working together
better, and faster
By successfully completing our
three-year plan, we have
strengthened the Group so we can
continue to grow.
XLIII
Spain
We have undergone a signifcant transformation since 2015, resulting in stronger
proftability and a strengthened balance sheet. This is thanks to customer loyalty,
which has doubled, as a result of the 1l2l3 strategy; strong business growth
in high-added value products (the SMEs loan book has grown by EUR 24 bn);
and accelerated digital transformation. Our operations have been strengthened
further by the Banco Popular acquisition.
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XLIV
2.7
million
4.8
million
10.8%
56.8%
Loyal customers
+163%
Digital customers
+96%
Underlying RoTE
+2.66pp
C
ost-to-income
+0.3pp
Ignacio ‘Pincho’ Ortega
2015 vs. 2018.
Ignacio has been playing basketball for the last 10 years and
he is a core member of the Spanish senior team and also of
the Under-22s, on which he is a standout. Last summer, at
age 18, he received the Most Valuable Player award in the
European Under-22 Championship.
He has also received the frst Sports Scholarship for students
with disabilities from Fundación Universia.
This will allow Ignacio to pursue his athletic career while
studying International Relations at the University of
Alabama, in the United States, an elite centre for wheelchair
basketball.
XLV
Santander Consumer Finance
A leading consumer business in Europe, its auto fnance and consumer businesses
have grown by strengthening its digital channels.
19.4
million
15
15.9%
43.1%
Active customers
+2.7mn
Countries
Underlying RoTE
+3.23pp
Cost-to-income
-1.6pp
2015 vs. 2018.
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XLVI
Poland
Customer loans and deposits up by around 50%1 since 2015 – strong organic
growth and market position reinforced by the agreement to acquire the retail
and private banking business of Deutsche Bank Polska. Strong focus on efciency
(C/I down to below 43%) has been achieved while growing the number of digital
customers by 17% since 2015.
1.8
million
2.2
million
10.3%
42.8%
Loyal customers
+38%
Digital customers
+17%
Underlying RoTE
-2.60pp
Cost-to-income
-3.7pp
1. In constant euros.
2015 vs. 2018.
XLVII
United Kingdom
We continued to deliver shareholder value despite facing an uncertain and
challenging operating environment in the UK (9% RoTE). We are well positioned
to succeed, with improved customer satisfaction (Top 3) and growth in digital
customers (+50% since 2015), while remaining strongly capitalised (CET1 13.2%,
up 160 bps).
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XLVIII
4.4
million
5.5
million
9.3%
55.2%
Loyal customers
+12%
Digital customers
+50%
Underlying RoTE
-2.51pp
Cost-to-income
+2.6pp
Jenny Evans
Entrepreneurship Awards UK
Jenny Evans was a winner of the 2017 Santander Universities
Entrepreneurship Awards and was awarded £25,000 in seed
funding, as well as two fully funded internships. She also
receives mentoring from our UK CEO, Nathan Bostock.
“At Jenny Kate we create beautiful textile prints inspired by
nature to bring the outdoors into your life and home. Winning
the Post-Revenue category was an incredible experience and
has completely revolutionised my business. I’ve built a huge
new network of people to work with and get advice from,
gained an accountability partner, new business collaborations,
had an incredible week of working on my business with CEOs
and industry experts and I also gained an advisory board
member – all before I won!”
2015 vs. 2018.
XLIX
Brazil
Santander Brasil is the country’s third-largest privately owned bank and the
largest foreign bank in the country. It is the leader in customer satisfaction. Since
2015, it has experienced strong growth in loyal customers and digital customers.
Over the same period, its underlying attributable proft rose (+88%)1 as did
its proftability (RoTE +19.8%), refecting its higher productivity and improved
efciency in recent years.
1. In constant euros.
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L
5.2
million
11.4
million
19.8%
33.6%
Loyal customers
+65%
Digital customers
+158%
Underlying RoTE
+5.68pp
Cost-to-income
-6.4pp
Bernadete Fentrin
Creating jobs
After Bernadete lost her job she rented a small shop, took the
2 sewing machines that her family had, and began to make
and sell clothes.
She has been a customer of Prospera for 13 years, and she
now has her own house, a shop and employs 4 people.
Thanks to the microcredit, she has been able to buy
machinery to grow the business. Bernadete has also been
part of the “Parceiros em Ação” fnancial training program.
In October 2018, supported by Santander, she went to the
Sao Paulo Fashion Week for the frst time.
2015 vs. 2018.
LI
Portugal
In 2018 we became the leading privately owned bank, particularly in terms
of total credit and proftability, while substantially growing the number of
digital customers. In October, we completed the operational and technological
integration of Banco Popular Portugal.
752
thousand
734
thousand
12.1%
47.8%
Loyal customers
+42%
Digital customers
+93%
Underlying RoTE
-0.47pp
Cost-to-income
-0.9pp
2015 vs. 2018.
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LII
Chile
We lead in loans, customer deposits and online banking. WorkCafé, Santander Life
and Digital Onboarding have helped us become leaders in innovation and digital
banking in Chile. Our RoTE has reached 18%.
668
thousand
1.1
million
18.4%
41.2%
Loyal customers
+19%
Digital customers
+18%
Underlying RoTE
+2.88pp
Cost-to-income
-1.8pp
2015 vs. 2018.
LIII
Mexico
Our focus on loyalty and digital transformation has seen the number of loyal and
digital customers grow, by 81% and x3.3 respectively, since 2015. The RoTE has
expanded by more than 700 bps during the same period, reaching 20% in 2018.
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LIV
2.5
million
2.9
million
20.4%
41.5%
Loyal customers
+81%
Digital customers
x3.3
Underlying RoTE
+7.16pp
Cost-to-income
+0.2pp
Juana Edith Esparza Briones
Mobility Scholarship
Juana was born in the municipality of El Llano, to a very
poor family. Her parents had not had the opportunity to
go to school. With much efort, by both her and her family,
Juana was admitted to the university, where she received a
Santander Scholarship to study in the United States for four
months. This opportunity changed her life and allowed her to
travel abroad for the frst time.
“The support I received from Santander meant a lot because it
changed my life.”
Juana discovered that there are no barriers, and that to get
ahead all she needed was the support of someone who
believed in her.
2015 vs. 2018.
LV
Argentina
Santander Río remains the leading private bank based on four pillars: proftable
growth, customer centricity, efciency and risk control. In 2018, 71% of our active
customers used digital channels, and 40% are now exclusively mobile customers.
1.4
million
2.1
million
11.8%
61.9%
Loyal customers
+35%
Digital customers
+66%
Underlying RoTE
-20.45pp
Cost-to-income
+6.3pp
2015 vs. 2018.
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LVI
United States
Santander US underlying attributable proft grew by 42% in 2018 vs. 2017. Auto
loan originations at Santander Consumer USA, Santander US’s biggest business,
grew by 43% to $28.8 bn. Santander US made signifcant progress closing legacy
regulatory issues in 2018.
3391
thousand
8941
thousand
Loyal customers
+28%
Digital customers
+45%
7.6%2
RoTE
-0.8pp3
43.4%
Cost-to-income
+4.6pp
1. Only SBNA.
2. Underlying RoTE adjusted for 11.3% CET1. Otherwise Santander US 4% and SC USA 13.3%.
3. Underlying adjusted RoTE.
2015 vs. 2018.
LVII
Corporate & Investment Banking
Corporate & Investment Banking is Santander’s global division that supports
corporate and institutional clients, ofering tailored services and value-added
wholesale products suited to their complexity and sophistication.
1.8%
EUR 1,418
million
EUR 5,807
million
EUR 1,705
million
RoRWA
Revenue synergies1
Revenues
Attributable proft
+21%2
+2%2
+8%2
1. Revenue synergies from leveraging SCIB value proposition to corporates and SMEs.
2. In constant euros.
2017 vs. 2018.
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LVIII
Wealth Management
Operating in all our markets, Santander Private Banking and Santander
Asset Management have strengthened our customer ofering by improving
collaboration between our banks, driving proftability (attributable proft EUR 528
million) and growth (+17%1 YoY).
EUR 329
billion
Assets under
management
-2%2
174
thousand
Private Banking
Customers
+2%
12.1%
RoRWA
+0.2pp
EUR 1,015
million
Proft contribution3
13%
1. Underlying proft.
2. In constant euros.
3. Including net proft and total fee income generated by this business.
2017 vs. 2018.
LIX
2018 consolidated directors’ report
This report has been approved unanimously by our board
of directors on 26 February 2019.
Our new approach to this document
The presentation of our consolidated directors’ report has been improved to provide in a single,
streamlined document the contents of several documents that were previously published separately
and will no longer be prepared but as sections of the consolidated directors’ report. In particular, in
2017, the contents now included in this report were spread in the following documents:
2017 documents now included in the consolidated directors’ report
Annual report
Consolidated directors’ report
Annual corporate governance report (CNMV format document)
Report of the board committees
Sustainability report
Annual report on our directors’ remuneration (CNMV format document)
santander.com
The new format allows a clearer
presentation of the information and,
therefore, of understanding, avoids
repetition and, at the same time,
enhances the level of disclosure rather
than reducing it.
The 2018 consolidated directors’
report includes all the information
requirements to comply with Spanish
Law 11/2018 on non-fnancial
information and diversity under
the chapters Santander vision and
Responsible banking.
Level of auditors’ review
The contents of our 2018 consolidated directors’ report have
been subject, as required by applicable legislation, to diferent
levels of review by our independent statutory auditors,
PricewaterhouseCoopers Auditores, S.L. These diferent levels of
review can be summarised as follows:
PricewaterhouseCoopers Auditores, S.L. has verifed that the
information in this consolidated directors’ report is consistent
with that of our consolidated fnancial statements and its
contents comply with applicable regulations. For further
information see ‘Other information: Consolidated management
report section of the Auditor’s report, on page 432 in this report.
PricewaterhouseCoopers Auditores, S.L. has issued a verifcation
report with a limited assurance scope on the non-fnancial and
diversity information required by Spanish Law 11/2018 and
included in this consolidated directors’ report. Such report is
included as Independent verification report of the Responsible
banking chapter.
PricewaterhouseCoopers Auditores, S.L. has issued an
independent reasonable assurance report on the design and
effectiveness of the Group´s internal control over financial
reporting which is included in section 8.6 of the Corporate
governance chapter.
2
Annual Report 2018
Non-IFRS and alternative performance
measures
In addition to fnancial information prepared in accordance with
International Financial Reporting Standards (IFRS) and derived from
our consolidated fnancial statements, this consolidated directors’
report contains fnancial measures that constitute alternative
performance measures (APMs) as defned in the Guidelines
on Alternative Performance Measures issued by the European
Securities and Markets Authority (ESMA) on 5 October 2015 and
other non-IFRS measures.
The fnancial measures contained in this consolidated directors’ report
that qualify as APMs and non-IFRS measures have been calculated
using the fnancial information from Santander Group but are not
defned or detailed in the applicable fnancial reporting framework and
have neither been audited nor reviewed by our auditors.
We use these APMs and non-IFRS measures when planning,
monitoring and evaluating our performance. We consider these
APMs and non-IFRS measures to be useful metrics for management
and investors to facilitate operating performance comparisons
from period to period. While we believe that these APMs and
non-IFRS measures are useful in evaluating our business, this
information should be considered as supplemental in nature and
is not meant as a substitute of IFRS measures. In addition, other
companies, including companies in our industry, may calculate or
use such measures diferently, which reduces their usefulness as
comparative measures.
Section 8 of the Economic and fnancial review provides further
information about those APMs and non-IFRS measures.
Forward-looking statements
Santander cautions that this annual report contains statements that
constitute “forward-looking statements” within the meaning of
the US Private Securities Litigation Reform Act of 1995. Forward-
looking statements may be identifed by words such as ‘expect’,
‘project’, ‘anticipate’, ‘should’, ‘intend’, ‘probability’, ‘risk’, ‘target’,
‘goal’, ‘objective’, ‘estimate’, ‘future’ and similar expressions. These
forward-looking statements are found in various places throughout
this annual report and include, without limitation, statements
concerning our future business development and economic
performance and our shareholder remuneration policy. While
these forward-looking statements represent our judgment and
future expectations concerning the development of our business,
a number of risks, uncertainties and other important factors could
cause actual developments and results to difer materially from our
expectations.
The following important factors, in addition to those discussed
elsewhere in this consolidated fnancial statements, could afect
our future results and could cause outcomes to difer materially
from those anticipated in any forward-looking statement: (1)
general economic or industry conditions in areas in which we have
signifcant business activities or investments, including a worsening
of the economic environment, increasing in the volatility of the
capital markets, infation or defation, and changes in demographics,
consumer spending, investment or saving habits; (2) exposure to
various types of market risks, principally including interest rate risk,
foreign exchange rate risk, equity price risk and risks associated with
the replacement of benchmark indices; (3) potential losses associated
with prepayment of our loan and investment portfolio, declines in
the value of collateral securing our loan portfolio, and counterparty
risk; (4) political stability in Spain, the UK, other European countries,
Latin America and the US; (5) changes in laws, regulations or taxes,
including changes in regulatory capital and liquidity requirements,
including as a result of the UK exiting the European Union and
increased regulation in light of the global fnancial crisis; (6) our
ability to integrate successfully our acquisitions and the challenges
inherent in diverting management’s focus and resources from other
strategic opportunities and from operational matters while we
integrate these acquisitions; and (7) changes in our ability to access
liquidity and funding on acceptable terms, including as a result of
changes in our credit spreads or a downgrade in our credit ratings or
those of our more signifcant subsidiaries.
Numerous factors could afect the future results of Santander
and could result in those results deviating materially from those
anticipated in the forward-looking statements. Other unknown or
unpredictable factors could cause actual results to difer materially
from those in the forward-looking statements.
Forward-looking statements speak only as of the date of this
annual report and are based on the knowledge, information
available and views taken on such date; such knowledge,
information and views may change at any time. Santander does not
undertake any obligation to update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise.
Historical performance is not indicative
of future results
Statements as to historical performance or fnancial accretion
are not intended to mean that future performance, share price or
future earnings (including earnings per share) for any period will
necessarily match or exceed those of any prior period. Nothing in
this annual report should be construed as a proft forecast.
No ofer
Neither this annual report nor any of the information contained
therein constitutes an ofer to sell or the solicitation of an ofer to
buy any securities.
3
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Santander vision
Building a responsible
Santander is a retail bank with a unique
Our purpose
To help people and businesses prosper.
Our aim as a bank
To be the best open fnancial services
platform by acting responsibly and earning
the lasting loyalty of our people, customers,
shareholders and communities.
Our How:
Simple | Personal | Fair
In everything we do.
4
1. Our scale provides
potential for organic
growth.
2. Unique personal
banking relationships
strengthen customer
loyalty.
3. Our geographic and
business diversifcation
and our model of
subsidiaries make us
more resilient under
adverse circumstances.
Our strengths have
historically resulted in:
Higher
earnings
predictability
Our vision and our
strengths are sound
pillars to face potential
challenges:
2018 Annual Report
sponsible bank from our core strengths
e business model underpinned by 3 strengths.
• We maintain a leadership position in our core markets.
• Collaboration across the Group results in signifcant cost
Top 3
Top 5
savings and higher revenues.
Auto LendingB
Top bank in 6 out of our 10 core marketsA
A. Market share by lending.
B. Non-prime auto lending.
• We serve 144 million customers in markets, with a total
population of more than 1 billion people.
• We have over 100,000 people talking to our customers
every day in our more than 13,000 branches and contact
centres.
• We have a well-balanced distribution between mature
and developing markets, and a good mix of products for
individuals and companies.
• Our model of subsidiaries, autonomous in liquidity and
capital, allows the Group to mitigate the risk that the
difculties of one subsidiary afect the rest.
• Subsidiaries are managed by local teams providing the
best customers knowledge within their markets.
#1 Branch network1
Balanced diversifcationA
48%
Americas
52%
Europe
c.97%
of our profts from
our 10 core markets
A. Underlying attributable proft 2018, excluding Corporate Centre and
Spain Real Estate Activity. For further details, see more information
in sections 3 and 4 of the Economic and fnancial review chapter.
Resilient proft generation throughout the cycle
Group net operating incomeA (EUR billion)
Over the last 20 years,
earnings have increased
x4 with low volatility
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
A.Net operating income = Total income-operating expenses
Our strong balance sheet and our model of subsidiaries make us less vulnerable to face a potentially adverse macro
environment.
Our scale and best-in-class efficiency ratio mitigate potential impacts from increases in costs of doing business.
We are transforming our core banks while launching innovative ventures to address challenges emerging from the
new digital era.
We have a clear focus on acting responsibly to meet higher expectations from our stakeholders.
1. Excluding Chinese banks and Sberbank.
5
Responsible bankingCorporate governanceEconomic and financial reviewRisk management We have successfully completed our 3 year plan
Strategic priorities
Key metrics
2015
2018
Be the best bank to work for and
have a strong internal culture.
Number of core markets where the Bank is
among the three leading banks to work for
3
7
People
Earn the lasting loyalty of
our individual and business
customers. Digital transformation
and operational excellence.
Customers
Loyal customers (mn)
13.8
19.9
Digital customers (mn)
16.6
32.0
Fee income (%)A
-
~10
Shareholders
Capital strength,
risk management
and proftability.
Communities
People supported
in the local
communities where
the Group operates.
Cost of credit (%)
Efciency ratio (%)
Growth in earnings per share (%)
1.25
1.12B
48
-
47
11.2
Dividend per share (EUR)
0.20
0.23C
Fully loaded CET1 capital ratio (%)
10.05
11.30D
RoTE (%)E
10.0
11.7
Scholarships (thousand)
People supported in our communities (mn)
35
1.2
155F
6.3F
A .% change (constant euros). 2018 fgure relates to 2015-2018 CAGR.
B. 2018 fgure relates to 2015-2018 average.
C. Total dividend charged to 2018 earnings is subject to the 2019 AGM approval.
D. 2018 data applying IFRS 9 transitional arrangements.
E. Underlying RoTE 2015: 11.0%. Underlying RoTE 2018 12.1%.
F. It refers to cumulative activity in 2016-2018.
Note: 2015 metrics have been re-stated to refect the capital increase of July 2017.
Our new strategic plan will be announced at next Santander Investor DayA
A . The information that will be made available in the Investor Day is not incorporated by reference in this annual report nor otherwise considered to be a part of it.
6
2018 Annual Report
Our strategy is built around a virtuous circle based on trust:
People
Employees who are engaged...
Team engagement
Strong S|P|F cultureA
82%
75%
2015
2018
>6pp
than the avg.
fnancial
industry
63%
63%
75%
Simple
Personal
Fair
69%
74%
79%
A key focus of our strategy is to embed a strong
culture based on our values: Simple, Personal and Fair.
How we do things is as important as What we do.
Our employee engagement levels are above the
industry average.
2015
2018
% of employees that consider Santander is Simple, Personal and Fair.
Customers
...generate more loyal customers...
Digital sales over total sales
Loyal customers
32%
x2
15%
2015
2018
Lower churn
Attrition rate (%)
-66%
Increase in loyal customers, both individuals and
businesses, has resulted in a signifcant growth in
revenues, loans and customer funds.
Loyal customers use more our digital channels as
they hold more of our products and services and
interact with us more often.
Shareholders
...leading to strong fnancial results...
Group customer revenues
Net interest income + Net
fees (constant EUR billion)
45.8
37.0
2015
2018
Earnings per share
Double digit growth
11.2%
(2018 vs.2017)
Cash dividend per share
+31%
Increase since 2015
Our focus on customer loyalty is delivering results:
customer revenues have increased 24% from 2015
to nearly EUR 46 billion.
We have signifcantly strengthened our balance
sheet in the last 4 years generating 304 basis points
of capital (applying IFRS 9 transitional arragements).
We have become even more resilient while growing
our business and increasing dividends.
Communities
...and more investment in communities.
6.3
million people
supported
2016-2018
155
thousand
scholarships
granted 2016-2018
3rd
1st
bank
in the world in Europe
bank
Highest score among peers:
95.3 points out of 100
We 1,235 have agreements with academic
institutions in 33 countries. 7,647 partnerships with
social institutions and entities.
We are the leading global bank fnancing renewable
energy projects (#1 by number of transaccions, #2
by volume, according to Dealogic).
We are delivering profts in a responsible way
supporting inclusive and sustainable growth.
7
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Our balanced geographic diversifcation has been
key to deliver stable and predictable growth
United States
Proft contributionA
Customers
Employees
Market shareB
5%
5,220,211
17,309
3%
Mexico
Proft contributionA
8%
Customers
16,690,402
Employees
Market shareB
19,859
13%
Colombia
Peru
Chile
Proft contributionA
Customers
Employees
Market shareB
6%
3,460,654
12,008
19%
Argentina
Proft contributionA
1%
Customers
Employees
Market shareB
3,701,498
9,324
10%
Brazil
Proft contributionA
26%
Customers
42,074,640
Employees
Market shareB
46,914
9%
Uruguay
A. 2018 underlying proft. Excluding Corporate Centre and Spain real estate activity. For further details, see more information in sections 3 and 4
of the Economic and fnancial review chapter.
B. Loans. UK: lending comprises UK mortgages (excluding social housing), consumer credit and commercial lending (excluding fnancial
institutions). Poland: including Santander Consumer Finance business (SCF); US: in the states where the Group operates. SCF: Top3 in our main
markets in new lending of auto loans.
8
2018 Annual Report
United Kingdom
Proft contributionA
13%
Customers
25,519,550
Employees
Market shareB
25,872
10%
Portugal
Proft contributionA
Customers
Employees
Market shareB
5%
4,912,459
6,705
18%
Spain
Proft contributionA
17%
Customers
17,290,847
Employees
Market shareB
32,313
18%
Santander Consumer
Finance
Proft contributionA
13%
Customers
19,427,871
Employees
Market shareB
14,865
Top 3C
Poland
Proft contributionA
Customers
Employees
Market shareB
3%
4,525,138
12,515
12%
Main countries
Santander Consumer Finance
Other countries
9
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Responsible
banking
Our approach
What our stakeholders tell us
Challenges and opportunities
Principles and governance
2018 highlights
Challenge 1: New business environment
Strong corporate culture
A talented and motivated team
Responsible business practices
Risk culture
Shareholder value
Responsible procurement
Challenge 2: Inclusive and sustainable growth
Meeting the needs of everyone in society
Boosting enterprise
Financial empowerment
Supporting higher education
Community investment
Tax contribution
Sustainable fnance
Analysis of environmental and social risks
Environmental footprint
Key metrics
Contribution to UN Sust
ainable Development Goals
Further information
Non-financial information Law content index
Global Reporting Initiative (GRI) content index
14
16
18
20
24
28
38
42
44
46
50
52
54
56
58
60
62
66
68
70
78
80
81
86
Independent verification report
103
Consolidated non-financial information statement
10
11
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Our approach
“ By delivering on our purpose, and helping people and businesses
prosper, we grow as a business and we can help society address its
challenges too. Economic progress and social progress go together.
The value created by our business is shared – to the beneft of all.
Communities are best served by corporations that have aligned their
goals to serve the long term goals of society. ”
Ana Botín
By being responsible, we build loyalty
People
Customers
Shareholders
Communities
I´m loyal to Santander because...
... Santander
treats me
responsibly
In our day-to-day businesses,
we ensure that we do not simply
meet our legal and regulatory
requirements, but we exceed people´s
expectations by being Simple,
Personal and Fair in all we do.
... Santander acts
responsibly
in society
We focus on areas where, as a
Group, our activity can have a
major impact on helping people
and businesses prosper.
12
2018 Annual Report
10.4 years
Average length of
employment
>273,000
Microbusinesses
supported
EUR 0.23
Dividend per share,
4.5%C vs 2017
EUR 58 million
Investment in programmes and
projects to support communities
Helping people and businesses prosper - our performance
People
EUR 11,865 million
Personnel costsA
Customers
96%
of employees with
permanent contracts
EUR 882,921 million
Loans outstanding (net)
EUR 487,695 million
to households
EUR 22,659 million
to public administrations
EUR 301,975 million
to companies
EUR 70,592 million
to othersB
Shareholders
EUR
64,508
million
Stock market value at
year-end 2018, largest
bank in the euro zone
EUR 121 million
Investment in universities
3,724
EUR
Total shareholder
remunerationC
million
Communities
EUR 179 million
Community investment
Suppliers
EUR 3,619 million
Payments to suppliersD
Tax contribution
EUR 16,658 million
Taxes paid and collected
by Santander
10,628
Approved suppliers through our
global procurement model
95%
Local group’s suppliers
3,458
EUR
Corporate income tax
million
3,598
EUR
Other own taxes paid,
including social contributions
million
A. From Group consolidated fnancial statements.
B. Including fnancial business activities and customer prepayments.
C. Subject to the approval of the total dividend against the 2018 results by 2019 Annual General Meeting.
D. Data refers exclusively to purchases negociated by Aquánima.
13
Our approachResponsible bankingCorporate governanceEconomic and financial reviewRisk management
What our stakeholders tell us
Analysing, assessing and responding to the opinions and concerns of
all our stakeholders is a fundamental part of our effort to operate as a
responsible bank and make all we do Simple, Personal and Fair (SPF).
Engagement with all
stakeholders hepls to build
value
Earning and keeping people’s loyalty is the
key to creating lasting value. To do this, we
must understand the concerns of all our
stakeholders. By listening to their opinions,
and measuring their perceptions of the
Group, we not only identify issues, we also
spot opportunities.
In 2018 we conducted a survey to identify
what our employees, customers and
society think a responsible bank should do.
These fndings helped us as we analysed
what the leading environmental, social and
governance analysts are telling us.
88%
of participation
in the global
engagement
survey
83%
of employees
believe that their
colleagues behave
more simple
86%
of employees feel
proud to work
for Santander
3,879
complaints
received through
ethical channels
1,235
agreements
6,000
interviews to
university students with universities
about the perception and academic
of Santander as
Simple, Personal
and Fair
institutions
People
Customers
Key dialogue channels
for stakeholders
253
7,647
partnerships with profles and
16 millions
social institutions
followers in
and entities
social networks
Communities
Shareholders
14
1 million
surveys to
measure and
monitor customer
satisfaction
13,217
branches
+40,000
interviews to
banked population
about the perception
of Santander as
Simple, Personal
and Fair
316,094
complaints
received
10,000
interviews to
shareholders about
the perception of
Santander as Simple,
Personal and Fair
166,149
queries managed
by email, phone,
WhatsApp and
online meetings
391,926
Shareholder
and investor
consultations
trough studies
and qualitative
surveys
252
meetings with
shareholders
2018 Annual Report
Identifying the issues
that matter
The materiality matrix shows the concerns
Santander has identifed as most important
for its stakeholders in the analysis.
Santander also regularly analyses the most
relevant social, environmental and ethical
behaviour issues through its materiality
assessment. This systematic study is
conducted across the whole Group’s value
chain on an annual basis, and consists of a
far-reaching quantitative and qualitative
analysis that uses information from both
internal and external sources.
Relevant aspects for the Group matrix
Challenge 1
Challenge 2
New business environment
Inclusive and sustainable growth
e
c
n
a
v
e
l
e
R
l
a
n
r
e
t
x
E
Ethical behaviour and risk
management control
Indirect environmental impact
Talent attraction &
retention
Cybersecurity & data protection
Strong corporate governance
& management transparency
Environmental
footprint
Incentives linked
to ESG criteria
Financial literacy
Material
concerns
Products and services with
social/environmental value
Compliance and adaptation
to regulatory changes
Diversity
Financial
inclusion
Community investment
Customer
satisfaction
Multichannel
strategy and
digitalisation
Transparent & fair
products and services
Through this analysis, we have identifed two major challenges
to move towards a more responsible banking model.
Internal Relevance
15
Responsible bankingCorporate governanceEconomic and financial reviewRisk managementOur approach
Challenges and opportunities
Like every business, Santander operates in a world that is changing fast,
creating new challenges and opportunities. Using the results of the materiality
assessment, we have identified two core challenges – the challenge of the new
business environment, and the challenge of inclusive and sustainable growth.
Challenge 1:
New business environment.
Adapting to an evolving world
The transformation that is happening in the world economy is
unprecedented. The opening of new markets, the availability of global
capital and advances in information technology and communications
are changing the competitive environment of companies across the
world. This new competitive framework, in a time of constant change,
requires companies to assume greater responsibilities to innovate and
work in new ways.
Santander, like all businesses, needs a motivated, skilled
workforce able to deliver what customers want, harnessing the
power of new technology. Meanwhile, we face new regulations
and laws. These trends create the challenge of new business
environment in which we operate. Our task is to exceed our
stakeholders expectations, to do the basics brilliantly, every day.
Key to this is having a strong culture – a business in which all we
do is Simple, Personal and Fair.
For more detailed information on our
strategy to tackle this challenge and
turn it into an opportunity, please see
section “Challenge 1: New business
environment” of this chapter.
16
2018 Annual Report
Challenge 2:
Inclusive & sustainable growth.
Helping society achieve its goals
Growth should meet the needs of today’s generation,
without hampering future generations’ ability to meet their
own needs: a balance should always be struck between
economic growth, social welfare and environmental
protection. Financial institutions can deliver this by
managing their own operations responsibly, and lending
responsibly to help society achieve its goals.
We can play a major role in helping ensure growth is both inclusive and
sustainable. Inclusive: by meeting all our customers’ needs, helping
entrepreneurs start companies and create jobs, strengthening local
economies, improving fnancial empowerment, and supporting people
get the education and training they need. Sustainable: by fnancing
renewable energy, supporting smart infrastructure and technology
to tackle climate change (such as agrotech and green tech). We do
this while taking into account the social and environmental risks and
opportunities in our operations, and actively contributing to a more
balanced and inclusive economic and social system.
For more detailed information on our
strategy to tackle this challenge and
turn it into an opportunity, please
see section “Challenge 2: Inclusive &
sustainable growth” of this chapter.
17
Our approachResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Principles and governance
All our activity is guided by policies, principles and frameworks to ensure we
behave responsibly in everything we do. We have redesigned and strengthened
our responsible banking governance, both to ensure we are compliant and to
help us manage initiatives which tackle the two challenges we have identified.
Policies that support our responsible banking strategy
General code of
conduct
Corporate
culture policyA
General
sustainability
policy
Human
rights policy
Climate change
and environmental
management policy
Sector
policies
Brings together the
ethical principles
and rules of conduct
governing the actions
of all of the Group’s
staf and is the central
element of the
Group’s compliance
programme.
Establishes the
guidelines and
required standards
to be followed
ensuring a consistent
culture is embedded
throughout
the Group.
Defnes our general
sustainability
principles, and
our voluntary
commitments
with our main
stakeholders,
lasting value.
Sets out how we
protect human rights
in all operations,
and refects the UN
Guiding Principles
on Business and
Human Rights.
Sets out Santander’s
policy to protect the
environment and
mitigate the impact
of climate change.
Lays down the
criteria governing
the Group´s fnancial
activity with the
defence, energy,
mining & metals and
soft commodities
(products such as
palm oil, soy and
timber) sectors.
Consumer
protection
policyB
Code of
conduct in
security
markets
Cybersecurity
policy
Suppliers
certifcation
policyC
Tax policy
Conficts
of interest
policy
Financing
of political
parties
policy
Policy on
contributions
for social
purposes
Corporate
volunteering
policy
A. Includes employee’s diversity principles.
B. Includes fnancial consumer acting principles.
C. Includes principles of responsible behaviour for suppliers.
Changes to policies in 2018
• Update of the general sustainability
policy, to refect the current governing
bodies and to improve the clarity around
prohibitions and restrictions in fnancing
certain customers and / or activities, as
set out in its sectoral policies (energy,
defence, mining & metals and soft
commodities).
protect the Rights of LGBTI individuals
as a relevant international declaration
supported by Santander.
• Update of the suppliers certifcation
policy to include new principles of
responsible behaviour for suppliers.
• Approval of global policy on induction,
• Update of climate change and
knowledge and development.
environmental management policy to
refect the current governing bodies.
• Update of the human rights policy to
refect the current governing bodies and
to include: a reference to The Global
Standard Conduct for Business to
• Approval of cybersecurity policy, taking
into account new risks and legislation in
this feld.
• Approval of contribution for social
purposes policy.
18
Risk culture
Our risk management and compliance
model is key to ensure we operate and
behave in a way that refects our values
and corporate culture, and delivers our
responsible banking strategy.
For more information,
please see ‘Risk
culture’ section in this
chapter.
2018 Annual Report
Our approach
Strategic overview and coordination
Responsible banking, sustainability & culture committee (RBSCC)
Assisting the board of directors in fulflling its oversight responsibilities with respect to
the responsible banking strategy, sustainability and culture issues of the Group: corporate
culture, ethics and conduct, the digital transformation, inclusive and sustainable growth.
Culture steering
This group ensures we have the right culture,
skills, governance, digital and business
practices to meet stakeholders’ expectations.
Inclusive & sustainable banking steering
To meet the challenge of inclusive and
sustainable growth, this group supports
small businesses to create new jobs,
improving fnancial empowerment,
supporting fnance the low carbon economy
and fostering sustainable consumption.
To drive progress on the responsible banking agenda, a new unit under the Executive Chaiman´s Ofce team has
been established.
Santander has appointed a Senior Advisor on Responsible Business Practices, who reports directly to the
executive chairman and works with the Responsible Banking Unit.
Santander subsidiaries
Guiding principles have been developed for subsidiaries (and global
business units) to ensure governance and implementation of its responsible
banking agenda is embedded across the Group as a whole.
Likewise, each subsidiary has appointed a senior responsible for the function.
Group strategy metrics & targets
Key initiatives proposed and agreed by the RBSCC in 2018:
The new governance model for responsible banking.
Approval of the guiding principles of governance
and supervision in matters of responsible banking,
sustainability and culture for the Group’s subsidiaries.
Established lines of accountability and agreed
metrics.
Update of the criteria for fnancing activities related
to coal, both those related to its extraction (mining)
and its use as an energy source (energy).
Update of the fnancing policy to sensitive sectors, to
incorporate new criteria and guidelines regarding the
gambling sector, and the defense.
Main priorities in 2019:
• Financial and social inclusion.
• Responsible and sustainable products ofered.
• Social and environmental risk and opportunities.
• Group´s corporate culture.
For more information,
please see section
4.3 ‘Activity report’ in
Corporate governance
chapter.
19
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2018 highlights
We have built on our success by helping more people
and businesses prosper, while bringing a new focus
to our efforts to be a more responsible bank.
We have received
global recognitions
for our eforts…
…we strived to address the
challenge of the new business
environment…
• Santander was ranked third in the world and
frst in Europe among banks in the Dow Jones
Sustainability Index.
• Fortune Magazine named Santander in its
2018 Change the World list – recognising the
Group among companies who “do well by
doing good”.
• Santander received Top Employers Europe
2018 certifcation, and ranked in the top 3 of
the best fnancial institutions to work in Latin
America, according to Great Place to Work.
• Prospera microfnance program, was chosen
as an example of good practice by the
Brazilian Network of the Global Compact to
reach the SDGs in 2030.
• Santander X, our global community of
university entrepreneurship, was chosen as
an example of good practice by the Spanish
Network of the Global Compact to reach the
SDGs in 2030.
20
• The board approved a new policy to ensure a consistent
culture is embedded throughout the Group.
• New employee value proposition created, positioning
Santander as an employer of choice both internally and
externally. 86% of employees feel proud to work for
Santander.
• More than 56,000 SPF surveys were sent to customers,
shareholders, investors and university students to
know their perception of Santander as Simple, Personal
and Fair.
• New corporate diversity & inclusion principles were
agreed, to consolidate our cultural transformation.
• Awareness and understanding of cybersecurity was
increased through comprehensive communication and
education activities and launch of a new, cybersecurity
policy taking into account new risk and legislation.
• New suppliers certifcation policy was approved, which
includes principles of responsible behaviour for suppliers.
• New internal governance website was created,
including a single global portal for all corporate
frameworks, ensuring strong governance and
consistency across the Group.
Simple I Personal I Fair
...Everyone´s business
2018 Annual Report
Our approach
…while ensuring that we
promote inclusive and
sustainable growth…
…and building
an even more
responsible bank
• Santander joined United Nations Environment Programme
Finance Initiative (UNEP FI) to develop the principles for
responsible banking to align the sector with the SDGs and
the Paris Climate Agreement.
• New board committee on responsible
banking, sustainability and culture
was formed to drive and co-ordinate our
responsible banking approach across the
Group.
Main SDGs
where Santander’s business activities
and community investments have the
most impact.
• CEOs of diferent international companies and UN
Special Advocate launched a Private Sector Partnership
for Financial Inclusion, with Santander representing
the banking sector.
• Santander Asset Management launched a new range of
sustainable funds, which combine fnancial criteria with
non-fnancial ones.
• Santander Corporate & Investment Banking (SCIB)
consolidated its leading position in renewable energy
transactions. 6,689 MW of renewable energy fnanced,
equivalent to the consumption of 5,7 million households.
• 4th Universia International Rectors’ Meeting was held in
Salamanca. The meeting brought together 600 rectors from
26 countries, representing 10 million university students
around the world, in a discussion entitled ‘University,
Society and Future’ on the challenges facing higher
education.
21
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Challenge 1:
New business environment
To meet the challenge of the new business
environment, we’re focusing on...
22
2018 Annual Report
Strong corporate culture
The Santander Way defnes our purpose, our aim and how we do
business, by being Simple, Personal and Fair in everything we do.
Talented and motivated team
The more prepared and motivated our workforce is, the stronger
their commitment to helping people and businesses prosper will
be. Our workforce is diverse in terms of expertise and gender.
Responsible business practices
We develop our products and services responsibly, and aspire to deliver excellent
customer service. Customer protection data is one of our main priorities.
Risk culture
As a bank, managing risks is an essential part of our daily business.
We have a robust risk management model and risk culture to
ensure we operate in a prudent and responsible way.
Shareholder value
We have clear and robust governance. Risks and opportunities are
prudently managed; and long-term strategy is designed to safeguard
the interests of our shareholders and society at large.
Responsible procurement
Our procurement processes are based on ethical, social and environmental
criteria to ensure we operate in a sustainable way throughout our operations.
23
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Strong corporate culture
The Santander Way is our strong global culture, fully aligned to
our corporate strategy. It includes our purpose, our aim, and how
we do business. It is the bedrock of our bank, a responsible bank.
The Santander Way
Simple I Personal I Fair
Simple, Personal and Fair is how we
do business and behave as part of our
corporate culture. It embodies how
all Santander's professionals think
and operate, and represents what our
customers expect of us as a bank. It
defnes how we go about our business and
take decisions, and the way we interact
with customers, shareholders and the
community.
The entire team at Santander strives each
day to make sure that all they do is Simple,
Personal and Fair – a
s this is the way to
earn customers’ lasting loyalty – while
doing all they can to fulfl our purpose, to
help people and businesses prosper.
as what we do is
“ Just as important
how we do it ”
Ana Botín
Simple
Personal
Fair
We ofer an accessible service
for our customers, with
simple, easy-to-understand
products. We use plain
language and improve our
processes every day.
We treat our customers in
an individual and personal
way, ofering them the
products and services that
best suit their needs. We want
each and every one of our
employees and customers
to feel unique and valued.
We treat our employees and
customers fairly and equally,
are transparent and keep our
promises. We establish good
relations with our stakeholders
because we understand that
what is good for them is also
good for Santander.
Our corporate culture includes eight corporate behaviours...
Show
respect
Truly listen
Talk
straight
Keep
promises
Support
people
Embrace
change
Actively
collaborate
Bring
passion
…and a strong risk culture where everyone is personally responsible for managing
their risks in their day to day work
...Everyone´s business
24
2018 Annual Report
The Santander Way:
governance
To ensure The Santander Way is
understood and embedded, we need
to develop, promote and monitor the
consistency and implementation of our
global culture across all the markets where
Santander operates.
We have a culture steering governing
body which meets monthly, incorporating
senior members from across the Group to
promote, approve, support and evaluate
the implementation and progress of global
and local culture initiatives in line with the
board approved corporate culture policy.
For more
information
on employee
ethical channels,
please see 'Risk
management'
chapter.
For more
information on
supplier ethical
standards,
please see 'Risk
management'
chapter.
Code of conduct
The General Code of Conduct defnes the
standards and principles which establish
the basis for all actions to be applied by
the Group employees in their day-to-
day activities and is the central pillar of
the Group’s compliance programme.
It also covers equal opportunities and
non-discrimination, respect for people,
work-life balance, occupational risk
prevention, environmental protection and
collective rights. Santander promotes the
opportunities for its employees to raise
concerns and operates ethical channels,
managed by the compliance and conduct
function, ensuring confdentiality, an that
there is no retaliation against whistle-
blowers.
We also ensure that our suppliers abide by
our ethical standards.
Corporate culture policy
We have a corporate culture policy that
establishes the guidelines to be followed
ensuring a consistent culture is formed and
embedded throughout the Group.
This policy has been developed in
partnership with country culture teams and
key stakeholders. It is structured on three
levels:
Common elements: these are the
backbone of our culture. They have been
formed through a bottom-up process and
apply to the entire Group.
Mandatory global initiatives: these must
be implemented across the Group, but are
adapted and managed at local level.
Local initiatives: these are developed by
local units whilst respecting the corporate
culture policy and other corporate
frameworks.
Further information
can be found on 'Risk
culture' section of this
chapter.
Risk culture ‘risk pro’
We have a strong risk culture known as
risk pro, which defnes the way in which
we understand and manage risks on a day-
to-day basis. It is based on the fact that all
professionals are responsible for the risks
they manage.
25
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Examples of cultural iniciatives to show how we are doing Simple, Personal and Fair
1. People
2. Customers
3. Shareholders
4. Communities
The Santander Way
of working
Diversity & inclusion
Simplifed processes
Transparent communications
Customer experience
Robust internal governance
Operational excellence
Risk culture
Future talent support via
Santander Universities
programme
Corporate volunteering
Behaviours & leadership
Cyber and data protection
Employee value proposition
Six key focus areas in 2018
Objectives
Listening strategy
Promoting an environment of openness and speaking up, improving survey
execution and analytics to better understand feedback and act on it.
Leadership
Common leadership commitments for all people managers.
Diversity & Inclusion
Group Diversity & Inclusion principles providing
global guidance and minimum standards.
Behaviours
Embedding corporate behaviours in the employee
lifecycle and in our everyday activities.
Global collaboration
Increasing global collaboration, sharing best
practices and simplifying processes.
Communities
To continue to help communities to prosper by fostering
and supporting inclusive and social programmes.
26
2018 Annual Report
Across the Group, we are embedding Simple, Personal and Fair1
By building a loyal and committed workforce, we deliver sustainable growth and fulfl our purpose
Employees who are more motivated and committed...
People
203 thousands
employees
83%
of employees believe that
their colleagues behave more
simple, personal and fair
82%
of employees
are engaged
... make our customers more satisfed and loyal...
19.9
million loyal
customers (+15%)
88%
customers
satisfaction
Customers
144 million
... which drives proftability and sustainable growth...
Shareholders
4.1 million
+4.5%
increase of dividend
per share
EUR 3,724 million
Total shareholder
remuneration
... and results in more investment in communities.
7,647
social entities we
have partnered
with
1,235
agreements with
academic institutions
in 33 countries
Communities
2.5 million
people helped
1. 2018 fgures.
27
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
A talented and motivated team
To win in the new business environment, and to earn and keep customers’
loyalty, we need a workforce that is both talented and motivated. And if we
are to meet the needs of today’s society, our team needs to reflect society.
Talent Management
Successful businesses need skilled and
motivated teams: a responsible business
attracts the best talent and earns its loyalty.
Talent management and retention is therefore
one of our key human resources strategies.
Each year, we implement various initiatives and
programmes aimed at helping our employees
grow personally and professionally, thereby
enhancing their ability to serve our customers
in a Simple, Personal and Fair way.
Main group data
Total employees (thousand)
% employees with a
permanent contract
% employees working full time
Employees joining/leaving (turnover)
% of workforce promoted
Average length of service (years)
% coverage of collective agreements
2018
203
96.0
94.6
15.4
8.6
10.3
70.6
Programmes to identify the best talent
For additional
information,
see ‘Key metrics’
section of this chapter.
• Young Leaders. Launched in 2018, this
professional development programme,
has involved 280 young employees from
22 countries. Participants were chosen
by their peers, and are engaged directly
with our top executives, giving them the
chance to develop the Group’s strategy by
bringing in new ideas and perspective.
• Talent valuation committees. A structured
process to identify our future pontential talent.
• Succession planning for leaders.
Succession planning for the key positions
in the Group to ensure the sustainability
and management control.
• Action Learning Programme Santander
(ALPS). A learning programme aimed
at managerial talents. ALPS develops
leadership and business problem resolution
skills within a collaborative environments.
Management takes part as sponsors.
• Digital Cellar. New methods of recruitment
to understand and attract digital talent,
ofering spaces to execute projects (challenges
that Santander faces and wants to solve).
Development and mobility programmes
• Global Job Posting. Ofers all employees
the chance to apply for vacant positions
in other countries, companies or divisions.
Since its launch in 2014, over 4,000
positions have been published globally.
• Mundo Santander. Our employees can work
for several months on a project in another
country, promoting the exchange of best
practices and broadening their global vision.
Since its launch, 1,907 people in 28 diferent
countries have taken part.
28
2018 Annual Report
Santander, a great company to work for
and ranked in the top 3 of the best fnancial
institutions, thanks to the performance of our
operations in Argentina, Brazil, Chile and Mexico.
This 2018 Great Place to Work certifcation marks
a further step forward towards our objective of
becoming one of the best companies to work
for. It refects the huge eforts we have been
making across all countries to become a more
attractive organisation that is capable of attracting
and retaining the fnest talent, in turn allowing
us to help people and businesses prosper
while making us a more responsible bank.
The talent, commitment and motivation of our
202,000 employees is the basis of our success.
In 2018 Santander received Top Employers
Europe 2018 certifcation which acknowledges
the working conditions companies create
for their employees. The Group received
certifcation for Santander Spain, Poland (Bank
Zachodni WBK), the UK and its Santander
Consumer Finance units in Austria, Belgium,
Germany, Italy, the Netherlands and Poland.
Likewise, in 2018 Great Place to Work recognised
Santander as one of the best fnancial
institutions to work in Latin America. Santander
ranked 20th in the Best Multinationals Ranking
Leadership commitments
We know that Leadership is fundamental to the
pace of our culture change. Having great leaders
helps us to change faster and make the change
with more stable and lasting foundations.
In 2018, more than 300 colleagues in 28
countries or units across Santander Group
have contributed to identifed and defne
our new leaderships commitments.
In the last few years, Santander has undergone various restucturings
that afected jobs and employment. Wherever this has happened, we
have followed a series of steps, namely:
• Participation is facilitated and negotiations take
place with the employees’ legal representatives.
We engage closely with employees’ legal
representations.
• The legal regulatory minimums for redundancy
payments are exceeded. We help individuals
relocate and fnd new work.
• Social plans that have been presented include aid
for relocation and actions to give themaximum
support for the employability of those afected.
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New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Knowledge and development
Continuous learning is key to help our employees
adapt to a fast-paced, continuously changing work
environment. In 2018 a global policy on induction,
knowledge and development was developed and
approved.
This provides criteria for the design, review,
implementation and supervision of training to:
• Support the business transformation.
• And supports the company’s cultural
transformation under the governance
standards set for the Group.
Main group data
Millions invested in training
Investment per employee (euros)
% employees trained
• Encourage global talent management,
Hours of training per employee
facilitating innovation, knowledge transfer and
sharing and identifying key employees in the
various knowledge areas.
% of e-learning hours
Employee satisfaction (over 10)
2018
98.7
486.8
100.0
33.8
48.1
8.0
The ‘Never Stop Learning’ strategy
1
Global Knowledge
campus:
a training space to
share knowledge and
best practices.
2
Leading by Example
programme:
a training programme that
helps leaders identify the
role that they should play to
implement the SPF culture.
3
Santander Business
Insights:
a series of conferences that
combine internal and external
visions to sensitise employees
to the importance of certain
behaviours in their daily work.
Leaders Academy Experience
This is a new training plan to make it easier for leaders to transform the
Group, to equip them with the tools and training they need to accelerate
change, and to set an example for their teams and the organisation.
This consists of a four stage learning journey, one sesion held per quarter, focusing
on people and an inclusive worforce, new ways of working and business models
in the digital age, the “new normal” and how to be great leaders.
In 2018 three conferences, 12 virtual sessions and four workshops were held.
30
For additional information,
see ‘Key metrics’ section of
this chapter.
2018 Annual Report
Evaluation and remuneration
We have a comprehensive remuneration system,
based on principles approved in 2018 (see
Corporate governance chapter of this annual
report). It combines a fxed salary (which refects
the individual’s role and level of responsibility)
with short- and long-term variable remuneration.
This rewards employees for their performance
on the basis of merit. It refects what has been
achieved (group targets and individual or team
targets) and how these results are obtained
(refecting behaviour and conduct such as
leadership, commitment, development and risk
management). In addition, the Group also ofers
pension plans and other benefts such as banking
products and services, life insurance and medical
insurance.
Fixed remuneration is determined by reference
to the local markets. Remuneration levels are
set according to local practices and strictly
follow the collective agreements applicable
in each geography and community. Variable
remuneration is a form of reward for achieving
the Group’s quantitative and qualitative strategic
targets.
Furthermore, to meet European regulations
on remuneration, we have identifed 1,384
people who take decisions that may involve
some risk for the Group and applies to them a
deferral policy for their variable renuneration
with includes deferral of between three and
fve years, payment in shares (50% of variable
remuneration) and potential reduction (malus) or
recovery (clawback).
Main initiatives developed in 2018:
• Review, together with the compliance function,
of the local systems of variable remuneration
of sales force (linked to the quality of service
and behavior with customers).
• Reinforcement of the elements of risks linked
to variable remuneration.
For additional information regarding
remuneration data see ‘Key metrics’
section of this chapter.
• Adoption of the necessary methodology for
a consistent analysis of the gender wage
gap, including gender wage equity for the
performance of the same function.
For aditional information regarding
board remuneration see section 6 of
the Corporate governance chapter.
MyContribution
Our employee evaluation model is
designed to reinforce the key role that the
corporate culture has in driving the Group’s
transformation. The model and has an impact
on employees´ variable remuneration.
In 2018, this model was applied to all the Group’s
executives, and it has been extended to other
employees in diferent geographies and in the
corporate centre. In addition, for a group of
managers (8,000 people from all geographies in
which Santander operates), the corporate bonus
schemes takes into account the achievement of
strategic targets related to customer satisfaction
and loyalty, risk management, the capital base
and the risk-adjusted return. Remuneration
therefore refects what an individual has
achieved as well as how he or she has behaved.
How we do it
40%
• Leadership
• Commitment
• Development
• Risk management
What we do
60%
• Group targets
• Team targets
• Individual targets
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New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Diversity & Inclusion
If we are to understand modern society, we
need a diverse and inclusive workforce that
refects society. Managing this talent diversity
in an inclusive way, refecting our values, will
enable us to attract, develop and retain the best
professionals and to achieve better results in a
sustainable manner.
We have defned our general principles on
Diversity & Inclusion (D&I), with the aim of
serving as an ‘umbrella’ for all local initiatives as
well as setting minimum standards for countries
in their action plans, which will further improve
diversity and inclusion in Santander. These
general principles have been incorporated into
our corporate culture policy as a key enabler to
consolidate the cultural transformation.
% of women employed
% of women in management positions
Average age of the workforce
% Employees with a disabilityA
A. US and Mexico not included.
2018
54.5
20.5
38.8
1.7
and give direction to Group diversity and
inclusion strategy.
• A Global Network of D&I experts with
representatives from the countries (operational
team to share practices and be the transmission
chain at a local level).
To ensure appropriate management and promote
diversity and inclusion at Group level we have
created two working groups:
• A Global D&I Executive Working Group with
business infuencers and decision makers from
diferent geographies and functions to develop
Additionally, in order to foster an inclusive
leadership and to help to raise awareness,
we have launched a global D&I online
training based on learning experiences where
participants will get to explore how to shift
mindset and develop new skills.
In 2018 the following diversity and inclusion plans were
approved to be implemented across the Group
Disability
• Mapping and monitoring in all
geographies. Include topic at
the agenda of local boards.
• New programs to promote the
hiring of people with diferent
disabilities.
Enablement
• Making sure employees
are aware of D&I Training &
Awareness programmes.
Gender
• Talent selection: improve or
at least mantain male/female
ratio in divisions in selections for
leadership positions.
• Talent identifcation: increase
the percentage of women in
the pipeline for succession
planning in order to meet 2025
commitments.
• Eliminate gender pay inequality
for those holding positions at the
same level and department.
• Scorecard refecting diverse
representation for leaders.
• Support women growth by
cross function mentoring and
development programs.
• Actions to support maternity
and parents.
Culture+ identity
• Cultural Diversity Mapping.
• Continue to reinforce
Flexiworking by facilitating
fexibility measures that
promotes a better work-life
balance.
• Afnity Groups.
Minorities represented
in diferent employees’
networks.
32
85%
of employees believe
Santander treats employees
fairly regardless of their
age, family, marital status,
gender identity, expression,
disability, race, colour, religion
or sexual orientation.
+4 vs 2017.A
A. 2018 Global engagement survey
Further information regarding diversity
in the Group available in ‘Key metrics’
section of this chapter.
2018 Annual Report
Our commitments
Gender diversity
30%1
2025
Cultural diversity
(Diferent educational
background, experience
in diferent sector,
international experience, race)
2025
70%
1. In top executive positions.
Gender equality
Equal opportunities between men and women
is a priority throughout the Group. We are
promoting multiple initiatives in order to achieve
efective equality between men and women at all
levels.
The equal pay gap compares women and men
who have the same job, level and function. In
Santander this is very small. The gender pay
gap (GPG) takes into account aggregate data
of remuneration of men and women. Here,
we still have a lot to do in terms of increasing
representation of women at senior management
levels (where remuneration is higher and gender
diversity is still low). Changing this is a priority
for the Group. This is why we have established
specifc diversity objectives for our top-level
executives.
Gender pay gap
31%
Gender pay gap measures the diference in pay, regardless
of the work´s nature, in an organisation, a business, an entire
industry or the economy in general.
GPG is calculated as the diference of the median of the
compensation paid to male and female employees expressed
as a percentage of the median of the male compensation.
For this calculation, compensation includes base salary
and variable remuneration, excluding benefts/in kind
remuneration or local allowances.
Reported fgures are from a study conducted in 2018 (on
the basis of 90% of the workforce), based on full-year 2017
compensation data updated to include 2018 compensation
projections.
At the board level, 33% of members are women
(December 2018). In February 2019, the board
agreed to increase our current objective of
women representation of 30% (which we have
had since 2015) to equal presence (between 40%
and 60%) in 2021.
In order to address the gender pay gap, we
have established a methodology based on best
practices, establishing common guidelines for
both the Group and local units on how to address
the pay gap. Likewise, local action plans have
been promoted with periodic monitoring and
control plans.
The bank also needs to have more diverse talent
in STEM skills (Science, Technology, Engineering
and Mathematics) - and to do so without harming
gender diversity.
Equal pay gap
3%
Calculation of equal pay gap compares employees of the
same job, level and function. This allows to compare like for
like jobs.
Factors included in the Group’s local policies which may
impact compensation gap between male and female such
as tenure in position, years of service, previous experience
or background have not been considered to mitigate the
reported fgures.
Banco Santander leads the Bloomberg
Gender-Equality Index made up of 230
companies from diferent sectors
95.32
points out to 100
For the second consecutive year Santander has obtained the highest score out of the 230
companies that form part of the Bloomberg Gender-Equality Index, which evaluates the
performance of companies in gender equality.
33
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Employee experience
Keeping our workforce motivated is key to ensuring their
commitment and success in helping people and businesses
to prosper. At Santander we do it by implementing measures
that encourage listening, work-life balance and a healthy and
personally fulflling environment.
1
Speaking up / active listening
If we are to build a responsible bank, everyone should feel able
to speak up, not just to suggest how to improve doing things, but
to alert management when things go wrong, or when there is
suspected malpractice.
Listening Speak up
Take action
Global engagement survey
Tracking our employees’ satisfaction via the engagement survey is
fundamental for our Group, as it enables us to continue to progress
towards being the best bank to work for.
2018 results show that our team is proud of working for Santander and
committed to continue making a bank that is more Simple, Personal and
Fair. The results also show a signifcant improvement in the perception
that the Group promotes a culture that fosters diversity and which
focusses on results. Important areas of improvement include the need
to continue improving our processes to make them simpler and more
transparent, giving the resources required to ensure the job is done as
efciently as possible.
Ethics channels
In 2018 we have implemented several
initiatives to encourage people to speak
up and we have created new ways to
protect confdentiality and whistleblowers’
anonymity. We have worked on a project
to develop a single ethical channel,
through which employees will be able
to report breaches both of the Code of
Conduct and our Simple, Personal and Fair
corporate culture. This channel will be
managed by an independent third party,
in order to ensure confdentiality and the
anonymity of the complaint.
For further
information see
section 7 of Risk
management chapter.
34
88%
of participation
+4 vs 2017
82%
of employees committed
+5 vs 2017
84%
of employees are
satisfed with Santander
as a place to work.
+9 vs 2017
88%
of employees believe
Santander acts responsibly
in the way it does business
+1 vs 2017
2018 Annual Report
2
New ways of working
We promote the transition towards a more fexible way of working
that enhances the work-life balance of our employees.
Our corporate fexiworking policy, applicable to the entire Group,
includes a set of measures to which each person can beneft based
on their personal needs and their professional situation. These
measures refer to:
• How we organise the working day (fexibility and time):
schedules of entry / exit, alternative confgurations to the day,
regulation of vacations, guides and recommendations for the
rational use of mail and meetings.
• Where we work from (fexibility in space): working remotely,
teleworking.
In addition, through an agreement signed with the representation
of workers, Santander has committed to promoting a rational
management of working time and its fexible application, as well
as the use of technologies that allow a better organisation of the
work of our professionals and that includes the right to digital
disconnection.
Likewise, we are also redesigning our ofces to obtain a new work
space that better encourages collaboration.
82%
of employees indicate
that their direct manager
helps them reach a
reasonable balance
between personal and
professional life.A
84%
employees indicate that their
direct manager facilitates
fexibility in the work team.A
A. 2018 Global engagement survey results.
3
Culture of recognition
The StarMeUp initiative is a global recognition network that
allows employees to appraise employees who lead by example by
championing SPF behaviours.
In 2018, one and a half million StarMeUp stars have already been
given by Santander’s professionals to other colleagues. This is
proof of how the culture of recognition is being consolidated in the
Group.
This year, we have reached more than 132,000 active users of
StarMeUp in the Group, 11% more than the goal set during the frst
months of 2018, and we have already given 689,000 stars to our
colleagues.
StarMeUp
1.5
million stars given
by employees
35
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
4
Volunteering
Volunteering builds a strong team spirit and a sense of
purpose – while also helping the communities in which
we operate. Thanks to our corporate volunteering policy,
employees are entitled to spend a certain number of working
hours each month or year volunteering.
In 2018 our legal services, in line with the strategy and culture
of the Group, have launched Santander Legal Pro Bono. This
challenge requires our lawyers to provide voluntary and
unpaid work, using all their knowledge and professional
skills to support non-proft social, cultural or educational
organisations that cannot aford legal services, and whose aim
is helping persons in a situation of social vulnerability.
Likewise, in headquarters, throughout December, we
developed ‘ideas marathons’ (related to communication
and marketing, technology and systems, human resources),
at which our team helped various NGOs to improve their
identity and brand image, their presence on social networks
and branding, as well as their organisation and analysis of
data. We also helped organisations develop their support for
communities – for example, so that one charity which cares for
young people can help train them for the labour market.
Pro Bono activities are part of the Group’s corporate social
responsibility and, in particular, in the objective of creating
value for the community in the long-term.
In countries such as Brazil, Spain, the United States, Poland,
Portugal, or the United Kingdom, our employees have also
devoted working hours to promoting fnancial education and
teaching people to manage their fnances in an efective and
organised way.
Likewise, employees also participate in numerous initiatives to
improve the quality of life of people.
36
Our Group Executive Chairman Ana Botín, participating in
a chariry toy collection organised in collaboration with the
Spanish Red Cross in Boadilla del Monte, Madrid.
+40,000
employees participating
in community activities
+130,000
hours devoted
Banco Santander, host of the European
Pro-Bono Summit 2018
The Group City hosted the European Pro-Bono and Skills-Based
Volunteering Summit, the leading international congress in
this feld. The gathering was attended by over 130 people
from around 20 countries across fve continents, addressed
by more than 35 international speakers on how to leverage
employee talent and generate a positive social impact.
2018 Annual Report
5
Health and occupational risk prevention
Santander has an occupational risk prevention plan available to all
the employees on the corporate intranet.
We are aware that one of the important aspects of motivation,
commitment and real equality for our employees is the balance
between personal and work life.
Santander continues to promote a healthy and work-life balance,
through policies and services to address the personal and family
needs of our employees. Our General Code of Conduct highlights
the importance of promoting a working environment that is
compatible with personal and family life.
In addition, within the New Ways of Working initiative, Santander
has designed the new work spaces and their equipment, both from
the ergonomic perspective and from the safety aspect.
BeHealthy
In Santander, the health of our people is the health of our
company. This is why we have a commitment to be one of
the healthiest companies in the world, and ofer employees
health and wellness benefts, and raise awareness on
this topic, through our BeHealthy programme.
In 2018 we partnered with The Leadership Academy of
Barcelona to launch a digital space where employees around
the world can access training on the four pillars of BeHealthy:
Know your numbers, Move, Eat well, and BeBalanced. In this
space employees can access the fagship training programme
called Sustaining Executive Performance where they can fnd
the keys to achieving improved performance, both personally
and at work, by through encouraging healthy habits.
Also, in 2018 we signed a global agreement with an innovative
company called Gympass that ofers colleagues the chance to
beneft from over 40,000 afliated health and wellness centers
across the globe for one membership, ofering a wide range of
activities from gyms, cross-ft, dancing, yoga, pilates, among
others.
3.7%
Absenteeism rateA
10,367
thousand hours
missed due to non-
working related
illnesses & accidents
0.5%
Work-related
illness rateB
For additional data
disclosure, see ‘Key
metrics’ section of
this chapter.
A. Hours missed due to occupational accident, non-work related illness or non-work related accident for every 100 hours worked.
B. Hours missed due to occupational accident involving leave for every 100 hours worked.
37
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Responsible business practices
Being responsible means offering our customers products and services that
are Simple, Personal and Fair. We need to do the basics brilliantly and, when
things go wrong, we need to solve problems fast and learn from our mistakes.
Products and services commercialisation
and consumer protection
Our Product Governance and Consumer
Protection function, within our Compliance and
Conduct area, designs the crucial elements for
the appropriate management and control of
marketing and consumer protection.
In this context the Group has a commercialisation
committee, whose objective is to prevent
the inappropriate distribution of products
and services and to ensure the protection of
customers by validating products and services. It
also has a monitoring and consumer protection
committee, which monitors the products and
services we already have in the market and
ensures that customers‘ needs are met and
their rights are protected throughout the entire
product life cycle.
Additionally, our corporate consumer protection
policy sets out the specifc criteria to identify,
organise and execute the principles of consumer
protection for our customers, and also sets
out the specifc criteria for the control and
monitoring of compliance.
Financial education
Financial education is a key element in the
relationship with our customers and is part of
our principles of consumer protection. We are
committed to promoting fnancial knowledge,
educating on how to use banking services
efectively and generating more confdence and
security in their use.
In order to structure this activity and ensure
homogeneous principles of conduct across
all fnancial education initiatives, we continue
working on the design and development of some
best practice guidelines applicable to all these
initiatives, in line with the criteria of supervisors
and regulators.
For more detail on product
governance and consumer
protection see ‘Risk
management’ chapter.
For more information on
fnancial education see
‘Community investment’
section of this chapter.
Corporate consumer protection policy:
principles of fnancial consumer protection
Treat Customer
fairly
Complaints
handling
Consideration of special
customers’ circumstances
and prevention of over-
indebtedness
Data
protection
Customer-centric design
of products and services
Responsible
pricing
Financial
education
Transparent
communication
Responsible
innovation
Safeguarding
of assets
38
2018 Annual Report
Vulnerable customers
The Group has worked on standards and
good practices when dealing with vulnerable
customers and preventing over-indebtedness.
This enables us to transmit to all business
units, standards of action to promote
the defnition, identifcation, treatment
and management of clients in special
circumstances and apply solutions that suit
their specifc needs, to proceed in their best
interests and always ofer viable solutions.
These standards and good practices will
be included in a corporate guide that will
establish, among other, a common defnition
of vulnerable customer and prevention
measures of over-indebtedness.
We adapt quickly to market changes
After the fnancial reform carried out in Mexico,
a specifc complaints channel was created so
that customers could raise their complaints
about certain activity cases of the recovery
agencies.
In response we evaluated the treatment of
customers throughout the Group in order to
identify possible improvements in this process
and share good practices among all business
units.
39
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Operational excellence and customer satisfaction
We are consistently tracking our customers’
views and their experiences with Santander. This
data reveals where we can improve our services
further, and helps us gauge customers’ loyalty
to Santander. More than a million surveys are
conducted annually.
To ensure that the entire Group remains focused
on the customer, customer satisfaction has been
included as a metric in the variable remuneration
systems of most of the Group’s employees.
Customer satisfaction
% satisfaction among active retail customers
95.7%
94.9%
2018 Target
89.0%
87.0%
Branch
Telephone
Internet
Mobile
Customer satisfaction by countries
to rank among the
top 3 for customer
satisfaction in main
marketsA
TOP
competitors
A. Except in US.
2018 Achievement
This year, the Group is in the
top 3 for customer satisfaction
in seven countries
7
countries in
the top 3
RANKING
5
1
2
3
3
3
3
1
9
% satisfed
customersB
83.3%
79.6%
85.8%
87.1%
97.8%
97.5%
91.3%
97.0%
83.3%
88.75%
ARGENTINA
BRAZIL
CHILE
SPAIN
MEXICO
POLAND
PORTUGAL
UK
US
GROUP
B. Internal benchmark of active individual customers’ experience and satisfaction. Data at 2018 year-end. Audited.
New, redesigned branches are transforming customers’ 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.
40
are
20%
more productive
generate
96%
customer satisfaction
Increase brand visibility
and engagement with
communities
2018 Annual Report
Complaints management
We don’t simply aim to address complaints, but
to learn from them – tackling the issues that
gave rise to complaints in the frst place. The
Group procedure for complaint management
and analysis aims at adequately handle any
complaints submitted, ensuring compliance with
the local and sectoral regulations applicable,
and to provide customers with the best possible
service.
Root-cause analysis has been reinforced with
the application of Group methodologies and
standards. In addition, reporting and governance
in all units has been completed in order to identify
recurrent or systemic incidents or problems that
could generate detriment in customers, to correct
their original causes.
Listen
We consider it essential to listen carefully to our
customers´ questions, complaints and claims.
Analyse
Review and understand the customers’ needs.
Act
According to the nature of the complaints, provide
innovative solutions.
We listen to
our customers,
as their loyalty
to Santander
generates
sustainable
returns.
Improve
Apply the improvement globally.
Type of complaints
%
12
5
22
Banking procedure
Loans
Investments
Average resolution time
%
5
Resolution
%
Payment methods
30
65
27
3
31
Insurance
Other
<10
10-30 days
>30 days
31
In favour of
the customer
69
In favour
of the Bank
US
Mexico
In the US, the Santander complaints management
team has evolved signifcantly and improved complaint
management. This in turn has led to improved
customer satisfaction through the development of a
new methodology to identify vulnerable customers.
This new development allows us to support those
vulnerable customers accordingly and to provide them
with a solution in keeping with their circumstances.
In Mexico, we have launched a new app that allows
customers to submit claims for charges not recognised
for purchases made with a card. This process will reduce
the time in which a clarifcation is recorded by up to 60%,
and makes it possible to track any report, even if it has
been initiated by other channels. The customer’s balance
is not afected while the claim is being resolved.
41
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Risk culture
Managing risk prudently is a cornerstone of a responsible bank. This
requires clear policies, processes and lines of accountability – all
backed by a strong culture that refects the fact that in a bank like
Santander, everyone has a role to play in managing risk.
The risk pro culture is reinforced in all the
Group’s units by the following initiatives:
•Employee life cycle. From the selection and
hiring phases and throughout their professional
career, employees are made aware of their
personal responsibility for risk management.
•Risk management is included in all employees’
training. The Risk Pro Banking School and
Academy help defne the best strategic training
goals for our professionals in accordance with
Group priorities, in addition to disseminating the
risk culture and developing the best talent.
•Risk culture awareness, its understanding and
embedding has been driven globally and locally
through the various initiatives.
•Communication. The conduct, best practices
and initiatives that exemplify the risk culture are
disseminated through various communication
channels, leadership direction and individual
actions.
•Risk culture assessment. The 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 the simplifcation
of global indicators used to assess the level
of penetration and dissemination of the risk
culture within the Group.
•Governance. The risk culture and risk
management are underpinned by sound
internal global culture and risk management
governance.
•Advanced Risk Management (ARM). ARM is a
refection of the importance of having a robust
risk culture. For the Group, it is a priority aspect
for its long-term goal for remaining a solid and
sustainable bank.
Our risk management and compliance model is
key ensuring we operate and behave in a way
that refects our values and corporate culture,
and delivers our responsible banking strategy. It
is based on three lines of defence:
1. business and support units,
2. risk management and compliance,
3. internal audit.
The board of directors is responsible for the risk
control and management, and, in particular, for
setting the risk appetite for the Group.
Of particular interest in the area of responsible
banking are risks related to compliance, conduct,
digitalisation and climate change, as well
as the analysis of social, environmental and
reputational risks.
Risk culture as part of our
corporate culture - Risk Pro1
Risk management is underpinned1 by a shared
culture that ensures that all employees
understand and manage the risks that are part of
their daily work.
Santander’s strong 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 Santander has earned the
trust of its employees, customers, shareholders
and society as a whole.
Against a backdrop of constant change, with new
types of risk emerging and increasing regulatory
requirements, the Group maintains an excellent
level of risk management that enables it to
achieve sustainable growth.
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 employees.
1. I AM RISK in UK and US.
42
...Everyone´s business
For more information,
see the Risk
management chapter.
2018 Annual Report
93%
of employees claim that they
are able to identify and feel
responsible for the risks they
face in their daily work.A
A. Global engagement survey 2018
Embedding risk management into the employee lifecycle
Talent selection & profling
• Risk within Recruitment practices
• Risk included in Onboarding
Inspirational Leadership
• Top management
engaged in risk
• Alignment with The
Santander Way
...Everyone´s business
Reward & Recognition
• 10% risk objectives included in
employees performance assesments
• Risk recognition
Cyberrisks
Cybersecurity is critical in the digital
age. Cyberattacks and fraud risks pose
systemic risks to fnancial services.
Customers expect their data to be
held securely and handled ethically.
Growth and Development
• Group-wide risk pro
e-learning completed by
132k employees and new
employees in 2017
• Increase in risk management
training through Risk pro
banking schools, Academies
and The Santander Way
training
Daily work
• Unique Risk Portal as a single
information point
• Simplifed risk policies
• Ongoing awareness +
understanding
To address this, in 2018 we have continued
to strengthen our digital defences through
the new cybersecurity framework. As our
employees are our frst line of defence,
we have launched a new cybersecurity
and IT conduct policy that provides fve
simple rules to help protect employees
and Santander from cybercriminals.
Think before you
click or reply
If you suspect
it, report it
Be discreet online
and in public
Keep your
passwords safe
Protect your
information and
equipment
43
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Shareholder value
Our aim is to build lasting loyalty among our more than four millions shareholders
by aiming to deliver sustainable growth, predictable profits and transparency.
Creating value, building loyalty
Our approach is to earn the lasting loyalty
and confdence of our more than 4,1 million
shareholders in 170 countries. As a responsible
banking, transparency and engaging with
investors and shareholders is a priority.
can hold virtual one-on-one meetings with the
Shareholder and Investor Relations team.
Shareholder remuneration
In 2018 the Santander remained one of the most
proftable banks in the world.
We are addressing key shareholder issues as
follows:
• Principle of one share, and one vote and one
dividend.
• No defensive mechanisms in the Bylaws.
• Encouragement of active and informed
participation at meetings. In 2018 Santander
broke its record for participation at the general
shareholders’ meeting (quorum of 64.55%).
• Use of new technologies to improve processes.
Blockchain was used for investor voting at the
2018 annual general shareholders’ meeting.
This enhanced global proxy vote transparency
and increased operational efciency, security
and analytics, which is benefcial for investors,
issuers, agent banks and custodian banks.
Meanwhile, we remain in constant
communication with shareholders, sharing
relevant information in a timely way whith them
(as set out in our policy on communication and
contact with chareholders, institutional investors
and Proxy Advisors). In 2018, we launched a
‘Virtual Customer’ channel so shareholders
• In a trading environment of high volatility,
we have met all the fnancial targets we set,
increasing shareholder remuneration to 23 cents
per share in 20181.
• This represents an increase of 4.5% per year of
the total dividend per share, with a 9% increase
in cash per share1.
• In a difcult environment, the main indices and
the Santander share ended lower. The Santander
share was down 27.5%, while Stoxx Banks fell
28.0%. Santander’s total shareholder return was
24.3% lower.
• On 31 December, Santander was the number
one bank in the Eurozone and in the sixteenth-
largest bank in the world by market cap - at EUR
64,508 million.
• At year end, Santander had 16,236,573,942
shares outstanding and posted daily average
trading of 74.7 million shares in 2018, the most
liquid in Europe.
4.131
million shareholders
EUR 3,724
million total remuneration1
EUR 0.23
euro/share
Dividend per share:
4.5%
increase vs 2017
Earnings per share:
11%
increase vs 2017
Remuneration in cash1
Euros per share
2018
2017
2016
0.203
0.186
0.167
1. Total divided charged to 2018 results
is subject to 2019 AGM approval
Capital distribution by shareholder type
Capital distribution by geographic location
1.1%
39.8%
59.1%
BoardA
Retail shareholders
Institutional investors
1.1%
77.3%
21.6%
Americas
Europe
Rest of the world
A. Shares owned or represented by directors. For further details on shares owned and represented by directors, see ‘Tenure,
committee membership and equity ownership’ in section 4.2 and subsection A.3 in section 9.2 ‘Statistical information on
corporate governance required by CNMV’ in the Corporate governance chapter.
For more information
on shareholder
transparency &
remuneration,
please see section
3 of the Corporate
governance chapter.
44
2018 Annual Report
Awards and
recognitions
Environmental
commitment
Social
commitment
The performance of our Shareholder
and Investor Relations team was
recognised by prestigious industry
publications such as IR Magazine and
Institutional Investor and it gained
prominent positions in the Extel survey.
In 2018 we have worked to reduce
the carbon footprint - left as a result
of the trips to and from the annual
general meeting - by 52% compared
to 2017. Likewise, this footprint
has been ofset continuing the
programme established in 2016.
In collaboration with the Universia
Foundation, in 2018 Santander awarded
58 Capacitas grants to shareholders and
their families to support disabled people
integrate into socety and fnd work.
Engagement with shareholders,
investors and analysts
The shareholder and investor relations team
had the following priorities in 2018:
Maintain continuous, fuid communication as well
as the dissemination of relevant information to our
stakeholders, fostering a fowing dialogue.
Optimise and enhance the Group’s reputation in the markets.
Enhance personalised service to shareholders
and seek their opinions.
Facilitate the participation of shareholders at
the general shareholders´ meeting.
Ofer exclusive products and benefts through
yosoyaccionista.santander.com website.
391,926
shareholder and investor
consultations through studies
and qualitative surveys
1,134
contacts with institutional
investors
252
meetings with shareholders
166,149
queries managed by
email, phone, WhatsApp
and online meetings
+1,000
communications sent using
mainly digital channels
53
meetings with ESG
investors and analysts
Evaluation of Santander by ESG indexes and analysts
Santander sustainability performance is
periodically evaluated by well regarded indices
and ESG analysts.
These evaluations and their results are used
internally to measure our performance and fnd
improvement opportunities.
In 2018, our results stand out in the Dow
Jones Sustainability Index, where Santander
ranked third bank in the world and the frst in
Europe. Santander remains a constituent of the
FTSE4Good Index Series.
Others ESG analyst valuations1
Rating/Scoring
2018
Vs. last year
2017
=
ISS-oekom
MSCI
Sustainalytics
Vigeo Eiris
C
A
70
57
C
BBB
68
46
Vs. Sector
average
>
>
>
>
Santander is also evaluated by ESG analysts
such as Sustainalytics, Vigeo Eiris, ISS-oekom
or MSCI.
1. Source, latest rating /scoring available at the end of reference period: Sustainalytic ESG
Score relative to our peers at Nov 2018 and Dec 2017; ISS-oekom rating at Dec 2018
and Jan 2018. Vigeo Eiris ESG overall score at Dec 2018 and Dec 2016; MSCI ESG Ratings
assessment (on a scale of AAA-CCC) Oct 2018 and Oct 2017.
45
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Responsible procurement
Our suppliers throughout the world also have an impact on communities
and the environment. So we expect our suppliers operate in an ethical
way, upholding the ethical, social and sustainable standards as we do.
We have a model and policy for managing our
suppliers, setting out a common methodology
for all countries to follow when selecting,
approving and evaluating suppliers. In addition
to traditional criteria such as price and quality
of service, sustainability issues are included in
this methodology. Where necessary, both the
supplier and Santander are advised to change
processes and practices.
In 2018, we have strengthened the principles
of responsible behaviour for suppliers, which
have been included in our supplier certifcation
policy. These principles establish the minimum
principles that we expect from our suppliers in
the areas of ethics and conduct, social matters
(human rights, health and safety and diversity
and inclusion) and the environment. These
principles are aligned with the ten principles of
the Global Compact.
Likewise, we have a whistleblowing channel
for suppliers, through which any supplier that
provides services to Banco Santander, S.A. or
its subsidiaries are able to report inappropriate
conduct by Group employees which breaches
the framework of the contractual relationship
between the supplier and Santander. This
whistleblowing channel was implemented in
Argentina, Brazil, Chile, Mexico, Portugal, Spain
and United Kingdom. In 2018, channels were
also established in two more countries where
Santander Consumer Finance operates: Germany
and Italy.
1. Supplier certifcation policy
In 2018, we reviewed our supplier certifcation policy, and
strengthened our social and environmental criteria. According
to this policy, a supplier is viewed positively if:
Certifcation:
• They have obtained ofcial certifcations related to quality,
environment management, labour relations, prevention
of occupational risks, corporate social responsibility or
similar.
Sustainability standards:
• They have signed up to the Global Compact or have their
own ethical, social and environmental principles with a
periodic reporting.
• They have frameworks, policies, procedures, indicator
records and/ or related initiatives on environmental and
social issues.
Code of conduct:
• They have a code of conduct and its corresponding
governance (deployment, monitoring and control).
2. Risk control
• We have updated the risks criteria assessment, according to
the Group policies in this area, related to cyber, data privacy,
business continuity, facilities and security.
• In Spain, we have implemented a vendor risk assessment
center in order to ensure a uniform application of our
supplier certifcation, that will be implemented in other
countries progressively during 2019 and 2020.
Country best practices
Santander Totta, certifed
as a family responsible
company by the Màsfamilia
Foundation, recommends that
its suppliers adopt measures to
improve the work-life balance
of its employees.
46
Santander US, committed
to diversity, works with
business organisations that
support minorities, women and
disadvantaged and local
companies in their supply chain.
Santander Brazil, in 2018,
invited 250 suppliers to
participate in the Carbon
Disclosure Project Supply Chain.
2018 Annual Report
Principles of Responsible Behaviour for Suppliers
Ethics and conduct
All actions by suppliers within the Group must
be subject to the principles of transparency
and honesty in any relationship they have
with any public body and private individuals,
and not be involved in any actions associated
with bribery, infuence peddling or any form
of corruption in both the public and private
sectors. They shall refrain from actions such
as ofering, giving or receiving commissions,
gifts (with the exception of those that conform
to social customs) or advantages of any kind
that could be considered acts of corruption.
In addition, suppliers shall take all necessary
measures to avoid conficts of interest. The
supplier shall avoid any relationship with
Group management or any other person with
decision-making or infuence in relation to a
contract or transaction that they are negotiating
in their capacity as suppliers for Santander.
Santander also expects its suppliers to
have internal ethical policies, standards or
procedures that include at least compliance
with local laws, anti-corruption measures
and initiatives to ensure business integrity.
Social
Human rights: Santander expects its suppliers
to work to support and respect the protection
of human rights in accordance with the
United Nations Universal Declaration of
Human Rights, the Fundamental Conventions
of the International Labour Organization
and the United Nations Guiding Principles
on Business and Human Rights.
This means that suppliers must:
• Prohibit forced labour and ill-treatment
of their employees. This includes a ban
on all trafcking in human beings.
• Ensure the absence of child labour.
• Allocate a living wage sufcient to meet the
basic needs of their employees and ensure
compliance with the regulations in force
in the countries where they operate.
• Ensure that working hours are not excessive
and that the maximum working day
complies with national legislation.
• Respect their employees’
freedom of association.
Health and safety: Suppliers must comply
with health and safety requirements to
provide their employees with a safe and
appropriate working environment.
Diversity and Inclusion: Suppliers must
undertake to treat all their employees fairly and
equally and not to discriminate on the basis of
origin, race, sex, religion, opinion or any other
personal or social condition or circumstance.
Environment
Banco Santander is frmly committed to
environmental protection and the transition to a
low carbon economy. Santander therefore invites
all suppliers to join it in this commitment by:
• Having a sustainability or environmental
policy that is aligned with the size and
operations of the company and that
addresses the prevention, mitigation and
control of environmental impacts.
• Implementing environmental
management systems.
• Setting targets for reducing
emissions and consumption.
• Promoting continuous improvement.
47
New business environmentResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Challenge 2:
Inclusive and sustainable growth
We play a major role
in supporting inclusive
and sustainable growth
Inclusive...
by meeting customers needs, helping entrepreneurs start companies and
create jobs, strengthening local economies, tacking fnancial exclusion, and
supporting people to receive the education and training they need.
Meeting the needs of
everyone in society
Boosting
enterprise
Financial
empowerment
We develop innovative, simple,
and personalised solutions
to respond to customers’
demands and meet the needs
of everyone in society.
We develop products and services
designed to cater for the needs of
small and medium-sized enterprises
(SMEs), to help them prosper,
increasing employment and sharing
wealth more broadly across society.
We develop products and
services for the most vulnerable
and hard pressed in society,
giving them both access to
fnancial services and the skills
to manage their fnances.
Support to higher
education
Community
investment
Tax
contribution
We have created a world leading
network of universities, through
which we help people access
education and learn new skills.
We run various social programmes
to help local communities
access childcare, fnancial
education, art and culture.
Wherever we operate, we
pay our fair share in taxes,
contributing to the growth and
progress of the communities
in which we are present.
48
2018 Annual Report
Sustainable...
by fnancing renewables energies, supporting smart infrastructure in the developing world, as
well as agrotech and green tech. We actively support the transition to a low carbon economy.
Sustainable
Finance
We innovate to ofer new
fnancial products and
services that integrate
ESG criteria along three
main lines: sustainable
infrastructures, socially
responsible investment
and climate fnance.
Analysis of
environmental and
social risks
We analyse and measure
the social and environmental
risks of our investments, as
well as the opportunities
that responsible products
and services can bring.
Environmental
footprint
We measure our environmental
footprint and we are committed
to reducing our environmental
impact in the countries
in which we operate.
49
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Meeting the needs
of everyone in society
We want to be the bank of choice for all customers,
including those on low incomes and from vulnerable groups,
offering them the services and products they need.
1|2|3 World and other
engagement strategies
We ofer a wide range of simple and innovative
services and products that enable every
customer to manage their fnances in the best
possible way.
1|2|3 World is our value proposition for
individual customers in Portugal, Spain and
the UK. It allows them to earn interest on their
account balance and money back on spending,
as well as other benefts. In Mexico, we also
developed Santander Plus, the local version
of 1I2I3.
Santander Life, in Chile, ofers an
unprecedented value proposition for the
middle and low income segments.
In Argentina, the range of Super Account and
Infnity accounts ofers diferent solutions to
meet the difering needs of our customers
including unlimited movements without
charge, savings on card purchases and other
bonuses.
Santander Bank, in the US, ofers Simply Right
Checking, a simple checking account with no
hassles, and no surprises. Also we ofer the
Santander Basic Checking Account with no
gimmicks, no minimum balance requirements,
and a low, fxed monthly fee.
50
Credit to households
Loans to customers at December 31, 2018, net of impairment losses
Residencial
Consumer loans
Other purposes
Total
millons euros
314,017
156,116
17,562
487,695
Products & services for low income
and vulnerable groups
Superdigital is a platform that allows customers to
open a digital payments account with which they can operate in a
matter of minutes, without needing to have a bank account. It
provides simplifed fnancial solutions and enables fnancial access
to all users, including the unbanked and those residing in areas
with little or no bank coverage.
Our Community Development Finance unit lends to
projects that beneft low-to moderate-income individuals
and communities, primarily through afordable housing
projects, whereby tenants pay below market rent, and many
units are earmarked to individuals with specifc needs.
We help families with problems to cope with the
payment of hoysing. Since 2011, we have helped more than
140,000 families with fnancial problems to continue paying
their homes, with specifc measures which include: the
suspension of evictions to 9,362 families, without any eviction
since November 2012; donations in payment to 13,760 families;
and more than 134,100 refnancing and restructuring of 112,300
families and 21,800 companies mortgages. In addition, to
facilitate access to housing, Santander has contributed 1,000
homes to the Social Housing Fund, of which 963 are for rent.
On the other hand, we have in social rent other 568 houses
with more afordable rents conditions for families in vulnerable
situation. Santander was the frst large fnancial institution to
adhere to the code of good banking practices in March 2012.
All front-line and customer-facing employees are provided
with additional training to help recognise and understand issues
which might impact customers, particularly those customers
who are dealing with (or facing) vulnerable situations.
2018 Annual Report SMART RED branches
Our branches are where we interact face-to-face with
our customers. As part of our digital approach, we are
renovating them to create a better customer experience with
an innovative and functional design to make them more
comfortable. We have stripped out architectural barriers to
make them accessible to all and increased the technology
available to provide a more agile and personalised service.
Ofces
13,217
Digital Solutions
One Pay FX. Is a new
blockchain-based
service for international payments. It allows
our customers to make international
payments of up to EUR 11,000 per day, in a
quick and easy way.
Mobile payments. We provide all
available mobile payments for credit
cards.
GPI Swift. This is a certifcation program
for global payment solutions which
speeds up, and makes it possible to track,
international transactions.
Digitalisation (Super Net, Super Movil,
Super Wallet) that improves online and
mobile banking platforms to ofer customers
innovative and high-quality services.
ChatBot Customer Service. This is an
automated customer service solution
that uses artifcial intelligence to understand
and solve customer needs in real time.
Mobile
banking users
32 million
(Users of both internet and
mobile banking count as one.)
Blockchain
Openbank
We are playing an important role in the fnancial services
blockchain community. One Pay FX was the frst blockchain-
based international transfer service launched for private
customers in various countries. We are also a founding partner
of the Enterprise Ethereum Alliance, Alastria, we.trade and
Utility Settlement Coin.
In 2018 Openbank, the largest digital bank by balance
sheet size, increased its deposits by 19%, its number of
credits by 90% and its number of customers by 8%, which
already exceed one million users. We have launched new
functionalities to meet our customers’ expectations, such as a
robo-advisor (an automated investment service) and a service
to add accounts from other banks.
51
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management Boosting enterprise
Entrepreneurs and small businesses generate jobs
and wealth that underpin inclusive societies. By
helping them, we can help all society to prosper.
Santander SMEs
Our strategy to help SMEs refects the diferent
market conditions in the countries where we
operate. We aim to help all sizes of businesses,
both by lending and ofering non-fnancial
support - such as training and access to our
networks. Our objective is not just to be an
SME’s bank, but its partner as it grows. We use
our scale to help SMEs fnd new customers and
enter new markets.
EUR 117,420
million in loans to SMEs
and self employed
professionals
New solutions in 2018
In Mexico, Santander and the country’s
Secretariat of Economy signed an agreement
to make it easier for entrepreneurs
and SMEs to open digital accounts
using a new system which will beneft
18,000 customers in 2019 alone.
In Spain, Santander launched a fully
digital onboarding service for companies,
which streamlines the process. You
can register from a computer, mobile
phone or tablet in only fve steps and
with the same safety and compliance
standards as the paper-based process.
.
Global digital solutions to boost SMEs growth
Santander Trade, support for Exporters.
To help companies export, we ofer them free
online information about markets, partners,
regulations, currencies, and much more.
In addition, companies can access the entire
network of the Group, as well as an exclusive
community of more than three million
exporting and importing business customers
of Santander throughout the world.
Santander Trade also ofers webinars and
online seminars taught by the best experts.
And it has a wide network of non-banking
professionals to help companies trade globally.
Santander Cash Nexus, global connectivity.
This agile treasury management platform
allows companies to digitise the management
of liquidity, collection and payment transactions,
as well as direct debits; and to centralise
information through electronic channels. It
combines our global service with a wide range of
local services, all through a single online portal.
We.trade, simplifcation of operations.
In collaboration with eight other European
banks and IBM, we have developed the frst
trading platform for commercial clients
and their banks based on blockchain.
This platform ofers companies a simple
interface that takes advantage of the
innovation of ‘smart contracts’ and opens
the door to new business opportunities.
Santander won
‘Most innovative
use of blockchain in
the fnancial sector
2018’ award in the
Blockchain Expo
Europe.
52
2018 Annual Report
Agreements with multilateral entities to boost fnancing to SMEs
In Spain in 2018 Santander signed four new agreements with the
European Investment Bank (EIB) to provide fnancing to SMEs
on advantageous terms, for a total amount of EUR 875 million.
In Brazil the Group also signed, with the Development Bank
of Latin America, a line of credit for CAF SMEs controlled
by women, for a total value of EUR 42 million.
In total, in the last 3 years, the Group has signed agreements
with multilaterals such as EIB, EBRD, IFC, CEB and CAF
to ofer fnancing lines to SMEs in Spain, Brazil, Poland
and Portugal for a total value of EUR 3,870 million.
Non fnancial solutions programs for SMEs
United States
Business First
Mexico
Santander
Pyme
United Kingdom
Santander Breakthrough
Spain
Santander Advance
Portugal
Santander Advance
Chile
Santander Pyme
Advance
Brazil
Programa Avancar
Argentina
Santander Rio Advance
We also ofer
additional non fnancial
solutions to boost the
internationalisation,
training, employment and
digitalisation of SMEs.
This includes basic and
advanced business
management courses,
as well as lectures
and masterclasses to
improve their fnancial
management skills,
teaching them how to
use the diferent fnancial
tools and services
available to them to
promote and grow their
businesses in an inclusive
and sustainable way.
53
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Financial empowerment
We help people get access to finance, set up or grow
microbusinesses, and give them the skills to manage their finances.
Financial empowerment
boosted by digital technology
We want to give everyone access to fnancial
services, regardless of where they live, age or
fnancial situation. Digital technology helps us
to ofer thousands of people not just a bank
account, but also education in fnancial matters.
Data helps us tailor our products and services to
their individual needs. What’s more, by banking
online, our customers have the peace of mind
that they don’t need to carry cash - and can make
payments more easily.
Traditional banking
Digital banking
Branches and ATMs
Internet + Mobile banking
Guaranteeing access for all segments
Sparsely
populated
communities
Low-income
communities
Most
vulnerable
groups
University
students
Example 1:
Digital solutions
Example 2:
Working with others
Example 3:
Sparsely populated regions
Superdigital is a Santander platform that
allows users to make deposits, withdrawals
and payments without the need to have a bank
account.
In Mexico, Santander ofers
customers the possibility of carrying
out basic transactions through more
than 19,000 stores such as Oxxo, 7
Eleven and others.
In Spain, Santander has 526
branches and 114 agents
establishments in sparsely
populated regions with under
10,000 inhabitants.
Products and services that
meet the needs of every
community
We ofer microfnance services to low income
and underbanked entrepreneurs to help them
set up small businesses, which are the driver of
economic growth and social mobility.
EUR 160 million
in outstanding credit to
micro-entrepreneurs at
the end of 2018
+273,000
micro-entrepreneurs
supported in 2018
Promoting fnancial education
Our objective is not merely to help people open
bank accounts, but to ensure that they have the
skills to manage their fnances, and can make
the right choices about the products and services
that suit them.
+360,000
People benefted from
fnancial education
programmes in 2018
54
2018 Annual Report
Main microfnance programmes supported by Santander
1,7 billion
unbanked people
in the world, of
which 200
million are in
Latin America.
Source: World Bank
Tuiio
Launched in 2017, TUIIO ofers products
and services specially designed for low-
income and underbanked population.
Prospera
Santander is recognised as the
leading provider of microcredits
among the private banks in Brazil.
Microfnance in Santander Río
Since 2015, Santander has ofered
productive microcredits to customers
of its fnancial inclusion branches.
Financial inclusion program aimed at promoting a social
impact in the communities.
Focus on the support and development of productive
activities.
Micro-loans are granted to community groups composed of
at least 8 micro-entrepreneurs.
Average loan: 400 euros.
Average term: 4 months.
Productive and oriented microfnance model.
Focus on those who do not have access to the formal
fnancial system.
Micro-loans are granted to neighbourhood groups
composed of 3 or 4 micro-entrepreneurs.
65% microcredits are received by female heads of
household.
Average loan: 600 euros.
Average term: 7 months.
Cleonice, Brazil.
Since when she was a little girl, Cleonice liked to see her mother
sewing. She started helping her at an early age.
Today Cleonice makes clothes, has three employees, a shop and a
sewing room. Prospera supported her with the renovation of her
workshop and the purchase of more machines so that she could
serve her customers faster.
55
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Supporting higher education
Banco Santander is the world’s largest corporate contributor to education1.
We have built a unique network of 1,235 universities worldwide,
through which we support students, research and entrepreneurs.
EUR 121 million
to universities
1,235
agreements with
universities and other
academic institutions
in 33 countries
Main lines of action of Santander Universities
1 Education
We have created the largest scholarship programme in the
world fnanced by a private company, as we believe that
education and people progress go hand in hand. Since 2002
we have invested more than EUR 1,700 million.
73,741
university study grants
2018 metrics
2 Entrepreneurship
Santander X, aims to become the world’s largest
ecosystem for university entrepreneurship, connecting
entrepreneurs with the three most valuable types of
resources for them: talent, clients and fnancing. This helps
them turn an idea into a company. To do this we promote
collaboration between universities, the business sector and
entrepreneurs themselves.
20,000
university entrepreneurs
supported
3 Employability
Universia is a digital platform of non-fnancial services for
the university ecosystem. We ofer career guidance and
employment services, as we aim to be the main source
of advice in the Ibero-American world for young talent
management.
600,000
jobs intermediated in
7 countriesA
A. Estimate 40% of the total published vacancies in 2018.
Universia Foundation
Through scholarships, internships and
employment, the foundation helps students
with disabilities fnd work and integrate into
society. Meanwhile, through the foundation,
we have also supported numerous initiatives to
1. According to The Fortune 2018 Change the World list.
56
raise awareness of the challenges of disability,
linked to culture and sports, with which we
have reached more than 130,000 people.
In 2018:
603
university students with
disabilities received a
scholarship
153
people with disabilities were
included in employment
2018 Annual Report
IV Universia International Rector’s Meeting
In 2018 we held IV Universia International
Rector’s Meeting in Salamanca, Spain. The
meeting brought together 600 rectors from
26 countries representing 10 million university
students around the world to discuss ‘University,
Society an Future’.
The conclusions are set out in the ‘Salamanca
Charter’, a document that reiterates the
universities’ commitment to continue leading
progress by reinventing and transforming
themselves.
For more information visit
https://en.universiasalamanca2018.
com
Santander scholarship programme
New Santander Scholarship website
where the university community can fnd
scholarships and grants for studies, mobility
and research that will help them in their
academic and professional development.
Since its launch in july 2018, we have
received more than 2.5 million visits.
We are committed to a vision of the future
in which inclusion, equal opportunities
and sustainability, will be the priorities
that guide all our decisions.
Ibero-american mobility grant
José Rivera Contreras,
Universidad Católica de Norte, Chile
Thanks to an exchange programme with Spanish
universities, run by Santander, he was able to
focus on environmental law at The University of
Zaragoza.
“Living in another country helps you to form
professional connections and friendships with
people from all over the world. Creating a network
of contacts with people from all kinds of cultural and
social backgrounds is amazing for your professional
future. I have moved up a rung on the ladder thanks
to the opportunity I was given by Santander.”
“In the next three years
more than 200,000
students will receive a
Santander scholarship,
achieve a practice in an
SME or participate in
entrepreneurship programs
led by your universities and
supported by Santander”
Ana Botín, chaiman of Banco
Santander
See video
For more information visit
www.becas-santander.com
57
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Community investment
We encourage inclusive and sustainable growth through initiatives and
programmes that support access to education, social entrepreneurship,
employability and welfare in the communities where we operate.
EUR 58
million in social
investment
7,647
partnerships with NGOs
and social welfare
institutions
2.51
million people
helped
Commitment to
childhood education
Financial
education
We conduct various activities
that support educational
projects focused in Latin
America. For many years we
have supported education
projects in diferent countries,
to provide equal opportunities
for all children and support the
sustainable development.
We support fnancial education
programmes in partnership
with local organisations to
raise children’s awareness of
the importance of saving. This
helps prepare young people for
embarking on an independent
life and to assist families when
making basic fnancial decisions.
We also run fnancial training
workshops and masterclasses
for our SME and self-employed
professional customers to
help them strengthen basic
management skills.
Support for
social welfare
We run several programmes to
tackle poverty, vulnerability and
social marginalisation. We also
support programmes to prevent
disease; and promote health
and welfare programmes
designed to help disabled
people and their families.
+600,000
children helped through
programmes to support
childhood education
+350,000
people helped through
fnancial education
programmes
+1 million
people helped through
programmes designed to
tackle social exclusion
1. The Bank has devised a corporate methodology tailored to Santander’s requirements and specifc model for contributing to society. This
methodology identifes a series of principles, defnitions and criteria to allow the Bank to consistently keep track of those people who have
benefted from the programmes, services and products with a social and/or environmental component promoted by the Bank. This methodology
has been reviewed by an external auditor.
58
2018 Annual Report
Protection
and dissemination of culture
And we support cultural
initiatives mainly through:
The Santander Foundation, which
supports activities in the felds of art,
education and young talent, literature,
the environment and science.
Santander Cultural, which ofers
programmes in visual arts, culture,
music, education and flms.
+1 million
people benefted from art and
culture initiatives
59
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Tax contribution
We support the progress of the communities
where we operate, through a fiscal contribution
consistent with our activity in each of them.
As a part of our way of understanding
responsible banking, Santander pays its fair
share in taxes in every jurisdiction where we
operate, according to the value created by the
bank. Our tax strategy, which has been approved
by the Board, sets out the principles by which
the entire Group operates. It is published on our
website.
The tax risk management and control system in
the Group diferent entities must comply with
the principles established in this policy, refecting
the Group’s internal control model, as well as on
the evaluation and certifcation processes of the
controls it incorporates.
Santander has been a member since 2010 of the
Code of Good Tax Practices in Spain and the Code
of Practice on Taxation for Banks in the United
Kingdom, actively participating in cooperative
compliance programs that are being developed
by diferent Tax administrations.
Principles of the Group’s tax strategy
Fulfll obligations tributaries
making a reasonable interpretation
of applicable rules that address its
spirit and purpose.
Respect the rules on transfer
prices, pursuing the adequate
taxation in each jurisdiction based
on the functions developed, risks
assumed and benefts generated.
Do not provide any kind of advice
or tax planning to customers in
the marketing and sale of fnancial
products and services.
Communicate transparently the
total tax contribution of the Group,
distinguishing for each jurisdiction
the taxes of third-party taxes.
Do not create or acquire entities
domiciled in ofshore jurisdictions
without the specifc authorization
of the board of directors, ensuring
adequate control over the presence
of the Group in these territories.A
A. See detailed information on of-shore
entities in note 3 c) of the notes to the
consolidated fnancial statements.
Pursue the establishment of a
cooperative relationship with
the Tax administration, based on
the principles of transparency
and mutual trust, which allows
avoid conficts and consequently
minimize litigation in Courts.
Tax contribution
Santander contributes economically and socially
to the countries in which it operates by paying all
taxes borne directly by the Group (own taxes1)
and collecting or withholding taxes from third
parties generated through business activity,
cooperating as required with the local tax
authorities (taxes from third parties2).
remainder being taxes collected from third parties.
Therefore, for every 100 euros of gross proft
earned by the Group, 35 euros correspond to taxes
paid and collected, as follows:
• 20 euros for the payment of taxes collected from
third parties.
Total taxes raised and paid by the Group in 2018
amount to EUR 16,658 million, of which EUR
7,056 million correspond to own taxes with the
• 15 euros for own taxes paid directly by the Group.
1. Including net income tax payments, VAT and other non-recoverable indirect taxes, social security payments made as
employer and other payroll taxes, and other taxes and levies.
2. Including net payments for salary withholdings and employee social security contributions, recoverable VAT, tax deducted at
source on capital, tax on non-residents and other taxes.
60
2018 Annual Report
The taxes included in each year’s income
statement are largely income tax accrued in the
period (EUR million 4,886 in the 2018 fnancial
year, see page 440 of de consolidated annuals
accounts, which represents an efective rate
of 34.4% or, if the extraordinary results are
discounted, EUR million 5,230, which represents
a 35.4% cash rate – see note 52.c of the
aforementioned report), non-recoverable VAT,
social security contributions as employer, and
other levies paid, regardless of the date these
amounts are paid.
The Group’s own taxes shown in the
accompanying table are included in the cash
fow statement. These magnitudes usually difer
from each other, given that the date of payment
established by the regulations of each country
on numerous occasions does not coincide with
the date of generation of the income or of the
operation taxed by the tax. Thus, the efective
rate that results when comparing the data on
income tax paid (EUR million 3,458 according
to the attached table) with the Group’s pre-tax
proft is 24.4%.
The payment of taxes occurs in those
jurisdictions where the Group’s proft is
generated. Thus, 99% of the profts obtained,
taxes accrued and taxes paid correspond to
the countries in which the Group carries out its
activity.
Total own taxes paid amounts to 50% of the
proft before taxes. These own taxes include
not only non-recoverable indirect taxes and
contributions to public social security systems,
but also other taxes that are exclusively levied
on banking activities (such as bank levy in the
United Kingdom, Poland and Portugal), and
taxes imposed on fnancial transactions (in Brazil
and Argentina among others) that have been
increasing in recent years.
Tax disclosure by jurisdiction
EUR million
Jurisdiction
Spain
UK
Portugal
Poland
Germany
Rest of Europe
Total Europe
Brazil
Mexico
Chile
Argentina
Uruguay
Rest of
Latin America
Total Latin America
United States
Other
TOTAL
Own taxes
Corporate Other own
taxes paid
income tax
Total own Third-party
taxes
taxes paid
Total
contribution
1,765
1,032
142
407
167
553
4,066
1,468
524
263
447
115
32
1,822
447
111
134
218
-35
2,697
2,395
488
304
2,859
36
13
3,588
1,478
253
541
385
518
6,761
3,863
1,012
567
3,307
151
45
464
537
25
228
119
355
1,301
495
117
179
48
198
1,728
2,338
470
202
61
329
80
12
998
322
202
118
35
20
1,695
29
6
1,154
2,849
6,095
8,945
104
3
133
9
800
9
933
19
3,458
3,599
7,057
9,601
16,658
EUR 7,056 million
in own taxes
EUR 9,602 million
in third-party taxes
EUR 16,658 million
in total contribution
61
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Sustainable fnance
We support sustainable growth by financing renewable energy, supporting smart
infrastructure and fostering research and development in new technologies. Our
approach is building more balanced and inclusive economies and societies.
Climate Finance
We are supporting the development of
renewables and the more efcient use of energy
while helping our clients make the transition to
a low carbon economy. At the same time, the
need to take measures to adapt and mitigate
Financing of renewable energies ranking1, 2
climate change presents signifcant investment
opportunities, which we are ready to seize by
taking positive action against climate change.
8,000
7,000
6,000
5,000
3,000
2,000
1,000
0
EUR million
XX
Number of projects
56
45
63
37
41
40
28
24
26
27
Bank 1
Bank 2
Banco
Santander
Peer 1
Peer 2
Bank 3
Peer 3
Bank 4
Bank 5
Bank 6
1. As indicated by Dealogic and Bloomberg New Energy Finance league tables for project fnancing within the Lead Arranger category.
2. Peers are considered those banks that due to their size an market capitalization are comparable to Santander. The peers' list includes: Bank of America, Barclays, BBVA,
BNP Paribas, Citi, Deutsche Bank, HSBC, Intesa San Paolo, ING, ITAÚ, JP Morgan Chase, Lloyds Bank, Societe Generale, Standard Chartered, UBS, UniCredit, Wells Fargo.
Santander Corporate & Investment Banking (SCIB) named project
fnance bank of the year in Europe by Project Finance International
SCIB was named project fnance bank of the year in Europe by PFI
thanks to its extensive activity and the range of fnancing and advisory
services provided during 2018, as Santander expanded its project fnance
expertise through a mix of infrastructure and energy deals in Europe.
Santander Corporate & Investment Banking was particularly active in the
UK, funded projects in Belgium, advised others in France and was a pioneer
in fnancing wind farms in Spain, Portugal and Continental Europe.
62
2018 Annual Report
Finance for renewable energy and energy efciency
As a major fnancier of energy production infrastructure, we understand that the banking sector has to
play a particularly prominent role in the transformation of the energy sector. In recent years we have
consistently increased our fnancing of renewable energy projects.
Financing of renewable energy
Breakdown of MW fnanced by type of renewable energy
(MW fnanced)
2018
2017
2016
3,390
4,074
6,689
Wind energy
88%
2016
81%
2017
77%
2018
Solar energy
OtherA
8%
2016
4%
2016
19%
2017
22%
2018
–
2017
1%
2018
In 2018,
Santander
participated in
the fnancing
of renewable
energy
projects, with
a generation
capacity
equivalent to the
consumption
of 5.7million
households.C
Breakdown of renewable MW fnanced by country in 2018
3,368 MW
United
Kingdom
1,225 MW
United States
985 MW
Brazil
487 MW
Bélgica
364 MW
Spain
210 MW
Chile
50 MW
Uruguay
Green bonds & ESG loans
Through our Santander Corporate &
Investment Banking division we act as joint
bookrunner in numerous emissions of green
& sustainable bonds and EGS loans.
In 2018, we have participated in green
bond emissions for a total value of
EUR 730 millionB, and in EUR 2,017
million in ESG syndicated loans
A. Include hydroelectric for 2016 and biomass for 2018.
B. Information includes green, social and sustainable Bond and has been obtained from Dealogic Green Bonds League table.
C. Equivalence calculated using data on the average electricity usage in households for countries in which renewable energies
projects have been funded, published by the World Energy Council (2014).
63
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Credit lines with multilateral entities
In Spain, in 2018 Santander has signed a credit
line of EUR 200 million for the construction of
renewable energy plants with the Development
Bank of the Council of Europe. This loan is part of
the “Europe 2020” plan in Spain for renewable
energy.
In Brazil, Santander has also signed a line
of credit in 2018, in collaboration with the
Development Bank of Latin America CAF, to
fnance the purchase of photovoltaic equipment
for a total value of USD 84 million.
In Poland, Santander has signed a EUR 50
million line of credit with the European Bank
for Reconstruction and Development (EBRD) to
fnance energy efciency investments in local
companies. Likewise, the EBRD subscribed the
equivalent of EUR 36 million of subordinated
debt issued in Police currency by Santander
Bank Polska, with Santander’s commitment to
allocate the resources to fnance residential and
commercial construction with energy efciency
certifcations.
In 2018 we signed agreements for a total value
of EUR 345 million to ofer fnancing lines
for energy efciency and renewable energy
projects. An in the in the last 3 years, we signed
agreements fr a total value of EUR 1,080 million1
in Spain, Brazil, Poland and Peru.
Financing low-emission, electric and hybrid
vehicles
We concentrate eforts on shifting the
automotive sector towards a low-carbon
economy through services such as vehicle leasing
and renting, to promote the use of hybrid or
electric cars in the countries where it operates.
• In Spain Santander fnances a feet of
24,665 vehicles. In 2018, we fnanced 7,463
transactions.
Partnering for a greener mobility
We ofer an emission ofset tool in Brazil to
all customers who take out a loan to fnance
the purchase of a car. Since 2015 we have
sponsored a bike sharing scheme in London,
and more recently in Boadilla del Monte,
close to our headquarters in Madrid.
Funding sustainable agriculture
and livestock farming
We fund agricultural initiatives that promote the
sustainable agricultural practices.
Bunge, Santander Brasil and The Nature
Conservancy have joined forces to ofer soy
farmers long-term loans to expand production
without clearing native habitat in the Brazilian
region of Cerrado.
Santander spain launched app agro: this brings
farmers breaking news about agriculture,
especially news related to government subsidies
and information about crop prices as well
as agricultural products. So far it has been
downloaded 30,000 with 11,000 active users in
2018. It was voted best agro app of the spanish
fnancial sector.
1. Agreements signed with EIB, EBRD, IFC, CEB, and CAF among others.
64
2018 Annual Report
Socially Responsible
Investment
Santander Asset Management is fully committed
to socially responsible investment (SRI), and is
undertaking the following initiatives:
• Investment. When we analyse and invest our SRI
products, we combine fnancial criteria with non-
fnancial criteria (ESG) to select assets.
Currently we manage nine SRI funds, seven
in Spain (Inveractivo Confanza, Santander
Responsabilidad Solidario, Santander Solidario
Dividendo Europa, the three funds of the new
Santander sustainable range, and the new
Santander Equality Acciones fund), one in Brazil
(Fundo Ethical), and a new one in Portugal
(Santander Sustentável Fund).
• Training. We collaborate with universities and
educational centers, organising and participating
in events and training days in SRI.
• Dissemination and development. We
participate in initiatives and organisations to
help spread SRI, and which enable diferent
organisations share best practice and
understanding.
• Social impact investment. We work with NGOs,
and indirectly with our social responsible
investment products, to support initiatives which
help those who are at risk of social exclusion.
In addition, both Santander Pensiones SA SGFP
in Spain (since 2010) and Santander Asset
Management Brazil (since 2008), are signatories
to the United Nations principles for responsible
investment (PRI).
Santander employees’ pension fund in Spain is
also a signatory to this initiative, and in 2018
participated in an initiative promoted by the
United Nations to require governments to do more
to tackle climate change.
New Santander
Sostenible range
Santander Sostenible is the latest innovation
of Santander Asset Management. The
investment process aims to identify those
issuers that are best prepared to face the
challenges of the future, and does so by
applying an analysis of four sustainability axes:
financial, environmental, social and corporate
governance. It is composed of three funds:
• Santander Sostenible 1
• Santander Sostenible 2
• Santander Sostenible Acciones
Santander Equality
Acciones
Launched in 2018, this is the frst investment
fund in Spain that invests in companies
that promote gender equality at all levels
of their operations, while also presenting
good opportunities for fnancial returns.
Santander Totta launches
Santander Sustentável Fund
The Santander Sustentável Fund follows
a conservative investment policy, with the
portfolio composed mainly of bonds. In
addition to the usual fnancial criteria, our
managers analyse the performance of
around 900 companies and 90 countries,
through a study of more than 100 indicators
of three sustainability areas: environmental,
social and corporate governance.
For information on socially responsible
Investment visit:
www.santanderassetmanagement.es.
65
Inclusive and sustainable growthResponsible bankingCorporate governanceEconomic and financial reviewRisk management Analysis of environmental
and social risks
Within the framework of our sustainability policies, we analyse the
environmental and social risks of all our project finance deals.
At Santander we attach great importance to
the environmental and social risks wich might
result from our customers’ activities in sensitive
sectors.
And we respects international best practices
regarding social welfare and the environment,
particularly the Equator Principles, as signatory
since 2009.
Equator Principles
In 2018, 35 projects were analysed under the
Equator Principle’s scope, all within the project
fnance category. The majority are included
under categories B and C, which are those
classifed with medium and low risk.
UNEP FI pilot project on implementing the
TCFD recommendations for banks
In 2017 Santander – together with 15 other
leading banks – joined this initiative to develop
models and metrics to enable scenario-based,
forward-looking assessment and disclosure of
climate-related risks and opportunities.
In 2018 two documents were published: the
frst, guidance focusing on transition risk
(Extending Our Horizons: Accessing credit risk
and opportunity in a changing climate); and,
second, a report that helps banks assess risks
and opportunities arising from physical risk
(Navigating a New Climate).
Sector policies
The Group has approved specifc sectoral
policies that contain the criteria for analysing
environmental and social risks in customers’
activities in sensitive sectors, such as defence,
energy, soft commodities and mining & metals
or other policies carried out in this respect.
Equator Principles
Project Finance
Category
TOTAL
Sector
Infrastructures
Oil & gas
Energy
Real estate
Others
Region
America
United States
Mexico
Chile
Colombia
Peru
Europe
United Kingdom
Italy
Spain
Asia
Oman
Kuwait
Azerbaijan
Arab Emirates
Type
Designated countries1
Non-designated countries
Independent review
Yes
No
A
4
1
3
0
0
0
0
0
0
1
0
0
0
0
1
1
1
0
0
4
4
0
B
25
2
2
16
3
2
9
3
3
0
1
6
0
2
0
0
0
1
20
5
24
1
C
6
2
0
2
2
0
3
2
0
0
0
0
1
0
0
0
0
0
4
2
6
0
1. In accordance with the defnition of designated countries included in the Equator Principles, i.e., those
countries considered to have a solid framework of environmental and social governance, legislation
and institucional capacity to protect their inhabitants and the environment.
66
2018 Annual Report
Control and monitoring of controversial projects - Punta Catalina
Design, engineering & construction of a coal-
fred power plant in the Dominican Republic. The
debtor is the Ministry of Finance, the Dominican
Corporation of State Electric Companies being
the importer. And Santander participates in
the syndicated fnancing of the equipment.
The due diligence processes at the outset of the
project met with the energy policy in force and
other environmental and social requirements.
Nevertheless, the project has been controversial
due to corruption issues. Santander has
elevated the case to executive level for
detailed follow up. In addition, Santander
maintains an ongoing dialogue with the NGOs
involved, having responded to their letters.
The internal procedure to respond to NGOs
has been applied engaging diferent relevant
areas within the Group, like compliance, risk,
business & sustainability amongst others. A
continuous dialogue is also maintained with
the syndicate regarding the environmental,
social & ethical issues arising from this project.
Sectorial policies update
Energy policy:
includes the new
criteria for coal
power plants.
Mining & Metals
policy: includes
the new criteria
for coal mining.
Defence policy: has
been updated in
accordance with the
EC decision regarding
the exclusion
criteria based on
activities related to
prohibited material
instead of clients.
Soft Commodities policy:
includes its alignment
with the Soft Commodities
Compact, the Banking
Environmental Initiative
which Santander
adhered in 2009, since
the obligation for clients
to be certifed by 2020
has been removed.
67
Inclusive and sustainable growthResponsible bankingCorporate governance Economic and financial reviewRisk management
Environmental
footprint
We are firmly committed to contribute to the protection of the
environment by reducing our own environmental footprint.
We believe that measuring, reporting and
reducing our environmental impact is essential
not just for reasons of compliance, but if we are
to earn the loyalty of all our stakeholders.
Since 2001, we have been measuring our
environmental footprint by quantifying energy
consumption, waste and atmospheric emissions.
And since 2011 the Group has implemented strict
criteria through diferent energy efciency and
sustainability plans to ensure its environmental
impact is kept to an absolute minimum.
In 2016 we launched the 2016-2018 efciency
plan which compromised more than 250
initiatives with an investment of 69,8 million of
euros, focusing on energy savings, saving raw
materials, waste reduction, emission reduction
and awareness campaigns.
Looking ahead, the Bank maintains its frm
commitment to the environment, and will
continue to establish more ambitious objectives
that will help reduce its consumption, its waste
generation and its emissions in its own business
operations. To do so, we are going to implement
a new energy efciency and sustainability plan
for the period 2019-2021. Optimization of ofce
space, increase of the amount of green energy
and more environmental management systems
are some of the initiatives in which the countries
will be working on.
2016-2018 efciency plan
Electricity
consumption
Reducing electricity
consumption in
buildings -9% in
G10 countries.
Target
Greenhouse
gas emissions
Reducing greenhouse
gas emissions -9%
in G10 countries.
Paper
consumption
Reducing paper
consumption -4%
in G10 countries.
2016-2018
efciency plan targets
Achievement
-9%
-9%
-26%
100%
2016-2018 efciency plan
2011-2013 Energy Efciency Plan
• Emissions of CO2: a 3.5% reduction in the frst
year, and a 9% reduction up to 2013 in the G5.
• Electricity consumption: a 3% reduction in the
frst year in G20 countries.
2012-2015 Energy Savings Plan
• Emissions of CO2: a 20% reduction of emissions
in G10 countries.
• Electricity consumption: a 20% reduction of
electricity consumption in G10 countries.
68
Result of plans
2011
2018
36% reduction of paper
15% reduction of electricity
27% reduction of emissions
186k
Number of employees (+8.6%)
202k
2018 Annual Report
2018 main highlights
100% green energy in all of the
ofce buildings and branches of
Santander in Germany, Spain and
United Kingdom. United States
and Brazil also acquire green
energy for some of their facilities’
consumption.
In 2018 new buildings have been
certifed according to international
LEED and ISO 14001 standards:
• LEED GOLD certifcation
in SCF Germany
headquarters building
at Mönchengladbach, in
Santander DPC in Spain and
in and new Santander Spain
headquarters.
• ISO 14001 certifcations in
corporate buildings in City
of Mexico and Querétaro in
Mexico.
As well as this, we have
certifcations for the head
ofce buildings in the main
countries where santander
operates. Santander considers
that the implementation of an
environmental management
system in buildings creates a
correct and environmenmtally
friendly performance, while
improving the building’s use.
2018 environmental footprint1
2,956,420 M3
water consumed
Var. 2017-2018 (%)
2.9
379,988 T CO2 teq
total emissions (market based)
Var. 2017-2018 (%)
-0.5
1,077 MILL. KWH
total electricity
50%
renewable
energy
-3.2
Scope 1
31,227 T CO2 teq
direct emissions
16,764 T
total paper consumed
86%
recycled or
certifed paper
-16.2
Scope 2
7,656,046 KG
paper and cardboard waste
-14.7
223,920 T CO2teq
indirect electricity emissions
(market based)
364,682 T CO2 teq
indirect electricity emissions
(location based)
4,404,809 GJ
total internal electricity consumption
-2.6
Scope 3
124,840 T CO2 teq
indirect emissions from employees
travelling to work
1. The environmental footprint table with 2-year historical data and the consumptions and emissions per employee can be found in the ‘Key
Metrics’ section.
69
Inclusive and sustainable growthResponsible bankingCorporate governance Economic and financial reviewRisk management
Key Metrics
Employees
1. Employees by geographies and gender1
Geographies
Nº employees
% men
% women
% graduates
Spain
Brazil
Chile
Poland
Argentina
Mexico
Portugal
UK
USA
SCF
Other
Total
30,868
45,179
11,614
12,403
9,000
19,096
6,499
18,297
16,783
12,642
20,332
202,713
54
43
46
30
50
46
55
40
42
46
49
45
46
57
54
70
50
54
45
60
58
54
51
55
73
79
42
86
23
49
55
22
15
34
31
52
1. The employee data presented is broken down according to the criteria of legal entities, and is therefore not comparable to that found in the Auditors’ report and annual
consolidated accounts , which are presented by management criteria.
2. Functional distribution by gender
Senior ofcers
Other managers
Other employees
Men
Women
Total
Men
Women
Total
Men
Women
Total
Continental
Europe
United
Kingdom
Latin America
and other regions
913 (77.8)
260 (22.2)
1,173
6,735 (64.5)
3,711 (35.5)
10,446
26,173 (44.4)
32,759 (55.6)
58,932
107 (73.3)
39 (26.7)
146
1,309 (67.2)
640 (32.8)
1,949
9,218 (39.9)
13,862 (60.1)
23,080
523 (83.9)
100 (16.1)
623
6,427 (60.2)
4,256 (39.8)
10,683
40,729 (42.6)
54,952 (57.4)
95,681
Group total
1,543 (79.5)
399 (20.5)
1,942
14,471 (62.7) 8,607 (37.3)
23.078
76,120 (42.8) 101,573 (57.2)
177,693
3. Workforce distribution by age bracket
Number and % of total
aged <= 25
aged 26 - 35
aged 36 - 45
aged 46 - 50
age over 50
Continental Europe
United Kingdom
2,352 (3.33)
14,715 (20.86)
27,241 (38.61)
10,739 (15.22)
15,504 (21.98)
3,964 (15.75)
7,092 (28.17)
6,470 (25.70)
2,810 (11.16)
4,839 (19.22)
Latin America and other regions
11,474 (10.72)
46,233 (43.21)
29,553 (27.62)
8,637 (8.07)
11,090 (10.37)
Group total
17,790 (8,78)
68,040 (33.56)
63,264 (31.21)
22,186 (10.94)
31,433 (15.51)
70
2018 Annual Report 4. Distribution by type of contract1
Permanent / Full time
Men
Women
Continental Europe
United Kingdom
32,252 (49.7)
32,604 (50.3)
9,580(53.5)
8,338 (46.5)
Latin America and other regions
45,950(44.8)
56,591 (55.2)
Group total
87,782 (47.4)
97,533 (52.6)
Continental Europe
United Kingdom
Temporary / Full time
Men
Women
966 (33.2)
1,942 (66.8)
380 (49.5)
387 (50.5)
Latin America and other regions
1,249 (46.5)
1,436 (53.5)
Group total
2,595 (40.8)
3,765 (59.2)
Total
64,856
17,918
102,541
185,315
Total
2,908
767
2,685
6,360
Permanent / Part-time
Men
Women
348 (17.3)
1,662 (82.7)
622 (9.8)
5,711 (90.2)
204 (25.6)
594 (74.4)
1,174 (12.8)
7,967 (87.2)
Total
2,010
6,333
798
9,141
Temporary / Part-time
Men
Women
255 (32.8)
522 (67.2)
52 (33.1)
105 (66.9)
276 (28.7)
687 (71.3)
583 (30.7)
1,314 (69.3)
Total
777
157
963
1,897
1. Regarding indefnite contracts, 84% corresponds to “Other employees” and the remaining 12% to “Senior ofcers” and “other managers”. Also, in relation to temporary
contracts, 3.5% corresponds to “Other employees” and the remaining 0.5% to “Senior ofcers” and “other managers”.
The totality of temporary contracts is in the age brackets <25 and 25-35 years. The rest of the age brackets correspond to indefnite contracts.
5. Employees who work in their home country1
%
Continental Europe
United Kingdom
Latin America and other regions
Group total
1. United States data not included.
Managers
Other employees
89.77
92.47
88.44
89.55
96.83
96.89
98.94
97.96
Total
96.72
96.87
98.88
97.88
6. Diferently-abled employees ratio by region1
6. Diferently-abled employees1
%
Continental Europe
United Kingdom
Latin America and other regions
Group total
1. United States and Mexico data not included.
1.24
1.61
2.09
1.73
Spain
Rest of the Group
1. United States and Mexico data not included.
Total Group
365
3,071
3,436
71
Key MetricsResponsible bankingCorporate governanceEconomic and financial reviewRisk management
7. Coverage of the workforce by collective agreement
%
Nº Employees
Spain
Brazil
Chile
Poland
Argentina
Mexico
Portugal
UK
US
SCF
Other business units
Total Group
99.94
94.13
100.00
0.00
99.00
20.05
99.40
100.00
0.00
50.22
70.31
70.61
30,848
42,529
11,614
-
8,910
3,829
6,460
18,297
-
6,349
14,295
143,131
8. Distribution of new hires by age bracket
% of total
Continental Europe
United Kingdom
Latin America and other regions
Group total
aged <= 25
aged 26-35
aged 36-45
aged over 45
aged > 50
23.79
47.81
33.84
33.67
44.73
28.51
44.04
41.72
23.50
13.39
15.19
16.89
4.69
4.09
3.49
3.87
3.30
6.20
3.44
3.85
9. Distribution of dismissals by gender1
Senior ofcers
Other managers
Managers
Total Group
aged <=25
aged 26-35
aged 36-45
aged 46-50
aged >50
Total Group
Men
68
375
3,087
3,530
Men
382
1,071
884
395
798
3,530
Woman
26
189
3,681
3,896
Woman
492
1,310
1,028
343
723
3,896
Total
94
564
6,768
7,426
Total
874
2,381
1,912
738
1,521
7,426
1. Dismissal: unilateral termination. decided by the company. of an employment contract not subject to term expiration. The
concept includes encouraged redundancies within the context of restructuring processes.
10. External turnover rate by gender1
%
Continental Europe
United Kingdom
Latin America and other regions
Group total
Men
12.32
16.39
17.99
15.70
Women
12.48
14.17
17.01
15.10
Total
12.41
15.10
17.45
15.37
1. Excludes temporary leaves of absence and transfers to other Group companies.
72
2018 Annual Report
11. External turnover rate by age bracket1
% of total
Continental Europe
United Kingdom
Latin America and other regions
Group total
aged <= 25
aged 26-35
aged 36-45
aged 46-50
aged over 50
40.01
35.72
25.73
29.84
16.15
15.74
17.16
16.75
8.68
8.75
13.72
11.04
7.46
6.48
15.49
10.46
14.43
10.52
21.45
16.31
Total
12.41
15.10
17.45
15.37
1. Excludes temporary leaves of absence and transfers to other Group companies.
12. Employees average remuneration by gender
Euros
Total remuneration (average)1
Variación 2018 vs. 2017
By gender
By professional category
Men
51,855
0%
Women
32,900
4%
Senior
ofcers2
418,105
3%
Others
managers
Other
employees
87,167
-8%3
32,906
5%
Total
41,522
2%
1. Data at end of 2018. The total remuneration of employees includes annual base salary, pensions and variable remuneration paid in the year.
2. Includes Group Sr. Executive VP. Executive VP and Vice President.
3. The variation includes the efect of internal reclassifcation between the category and the rest of employees carried out in diferent geographies.
4 The average remunerations for age brackets are not broken down since the employee remuneration criteria are established according to their professional
category, job responsibilities and competences. In this sense, age is not a material factor in determining the remuneration of Santander Group employees for the
specifcities of the fnancial sector.
13. Ratio between the Bank’s minimum annual salary
and the legal minimum annual salary by country
% Legal minimum wage
Germany
Argentina
Brazil
Chile
US
Spain
Mexico
Poland
Portugal
UK
228.49%
336.53%
183.12%
111.63%
193.02%
212.58%
130.23%
107.14%
206.90%
102.43%
14. Training
15. Hours of training by category
2018
2017
Total hours of training
6,842,825
8,016,912
% employees trained
Total attendees
100.0
95.9
4,700,013
5,297,451
Hours of training per employee
33.76
39.6
Total investment in training
98,689,210
97,787,322
Investment per employee
Cost per hour
% female participants
% of e-learning training attendees
% of e-learning hours
Employee satisfaction (up to 10)
486.84
14.42
54.4
90.0
48.1
8.0
483.5
12.2
54.6
48.1
93.3
8.1
Senior ofcers
Managers
Other employees
Group total
Hours
69,358
764,104
6,009,363
6,842,825
Average
35.71
33.11
33.82
33.76
16.Hours of training by gender
Men
Women
Group total
Average
34.27
33.37
33.76
73
Key MetricsResponsible bankingCorporate governanceEconomic and financial reviewRisk management
17. Absenteeism by gender and region1
%
Continental Europe
United Kingdom
Latin America and other regions
Group total
Men
1.85
3.65
3.05
2.64
Women
4.36
5.14
4.22
4.40
Total
3.18
4.54
3.70
3.61
1. Hours missed due to occupational accident. non-work related illness and non-work related accident for
every 100 hours worked.
18. Work-related illness rate1, 2
%
Continental Europe
United Kingdom
Latin America and other regions
Group total
Men
0.07
0.01
0.66
0.36
Women
0.09
0.05
0.95
0.53
Total
0.08
0.03
0.83
0.45
1. Hours missed due to occupational accident involving leave for every 100 hours worked.
2 The frequency and severity of work accidents are not detailed due to the low value they represent.
19. Occupational health and safety
No. of fatal occupational accidents
Hours of absenteeism (hours not worked due to common
illness and non-work accident) (millions of hours).
4
10,164,315
Customers
20. Group customers1
Million
Spain
Portugal
UK
Poland
SCF
Rest of Europe
Total Europe
Brazil
Mexico
Chile
Argentina
Rest of Latin America
Rest Latin America
US
Total Group
17.3
4.9
25.5
4.5
19.4
0.1
71.7
42.1
16.7
3.5
3.7
0.9
66.9
5.2
143.8
1. Figures for total customers; i.e. holders of any product
and service with a valid contract. Of the countries in
Europe listed, Santander Consumer Finance customers
are included in “Rest of Europe” except those of the UK.
Canada is included in “Rest of Latin America”.
74
2018 Annual Report
21. Dialogue by channel
Branches
Number of branches
ATMs
Nº ATMs
1
Digital banking
Users2
Visits
Monetary transactions3
1. Santander Consumer Finance not included.
2. Counts once for users of both Internet and mobile banking.
3. Millions.
22. Customer satisfaction
% satisfaction among active retail customers
Spain
Portugal
UK
Poland
Brazil
Mexico
Chile
Argentina
US
Total
2018
13,217
2017
11,920
38,503
35,700
32.0
6,302
1,843
25.4
4,271
1,129
2018
87.1
91.3
97.0
97.5
79.6
97.8
85.8
83.3
83.3
88.0
2017
85.5
91.4
96.0
95.9
77.9
96.4
91.6
87.1
81.8
88.0
Var.
11%
8%
26%
48%
63%
2016
85.0
91.9
96.2
96.0
74.8
94.1
95.9
87.1
84.6
87.5
Source: Corporate benchmarking of experience and satisfaction among active Retail & Commercial banking customers. Based on
audited external and local studies developed by well-known vendors (IPSOS, IBOPE,GFK,TNS…) (Data at end 2017, corresponding
to survey results in the second half of the year).
23. Total complaints received
Spain1
Portugal
United Kindom 2
Poland
Brazil 3
Mexico4
Chile5
Argentina6
US
SCF
2018
85,519
4,298
33,797
4,480
111,829
60,740
6,171
5,464
4,160
29,067
2017
107,103
4,275
37,746
4,785
101,589
51,895
5,526
4,372
4,041
30,126
2016
34,920
5,028
39,926
4,501
88,623
48,524
5,562
2,838
2,477
33,027
Compliance metrics according to Group criteria, homogeneous for all geographies.
It may not match with other local criteria such us Financial Conduct Authority (FCA) in the United Kingdom or in Brazil.
1. Even Popular Bank complaints have been included, in Spain complaints infow has decreased due to the efects of Supreme Court
Ruling related to set up mortgages fees.
2. In UK complaints volumes reduced due to the new approach of complaints management model adopted across all frontline areas,
as well as improvements on complaints root cause analysis governance.
3. In Brazil complaints infows have increased mainly due to fees, charges not recognised, and direct debits.
4. In Mexico complaints are increasing mainly due to fraud cases, especially e-commerce, and debt collecting (REDECO Channel).
5. Chile shows a slight increase mainly due to fraud cases, especially online cases.
6. In Argentina Complaints volumes increased due to fees and fraud cases.
75
Key MetricsResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Environment and climate change
24. Environmental footprint 2016-20171
2018
2017
Var. 2017-2018 (%)
Consumption
Water (m3)2
Water (m3/employee)
Normal electricity (millions of kwh)
Green electricity (millions of kwh)
Total electricity (millions of kwh)
2,956,420
2,872,853
15.24
557
462
1,019
14.68
639
473
1,112
Total internal energy consumption (GJ)
4,314,890
4,522,999
Total internal energy consumption
(GJ/employee)
Total paper (t)
Recycled or certifed paper (t)
Total paper (t/employee)
Waste
Paper and cardboard waste (kg)3
Paper and cardboard waste (kg/employee)
Greenhouse gas emissions
Direct emissions (CO2 teq)4
Indirect electricity emissions
(CO2 teq)-MARKET BASED5
Indirect electricity emissions (CO
2
teq)-LOCATION BASED5
Indirect emissions from displacement
of employees (CO2 teq)6
Total emissions (CO2 teq)- MARKET BASED
Total emissions (CO2 teq/employee)
Average number of employees
22.24
16,764
14,583
0.09
7,656,046
39.46
37,635
213,815
23.11
20,010
16,969
0.10
8,972,420
45.84
29,108
226,455
354,745
374,346
124,778
376,229
1.94
194,027
126,287
381,849
1.95
195,732
2.9
3.8
-12.8
-2.4
-8.4
-4.6
-3.8
-16.2
-14.1
-15.5
-14.7
-13.9
29.3
-5.6
-5.2
-1.2
-1.5
-0.6
-0.9
1. The scope of the information includes the main operating countries: Argentina, Brazil, Chile, Germany, Mexico, Poland, Portugal, Spain, United
Kingdom and United States (excluding Puerto Rico and Miami). The data regarding Banco Popular is included in Spain and Portugal in a consolidated
manner.
2. Only consumption of mains water is reported.
3. 2017 and 2018 fgures do not include waste from Argentina and Brazilian sales network.
4. T hese emissions include those arising from the direct consumption of energy (natural gas and diesel) and correspond to Scope 1 defned by the
standard GHG Protocol. For the calculation of these emissions, the 2018 DEFRA emission factors have been applied for 2018 emissions and 2017
DEFRA for 2017. The variation is due to the consideration of the emissions derived from the use of own vehicles in Mexico
5. These emissions include those resulting from electricity consumption and correspond to Scope 2 defned by the standard GHG Protocol. In 2017 and
2018, IEA (International Energy Agency) 2015 emission factors were used.
· I ndirect electricity emissions - Market-based: zero emissions have been considered for green electricity consumed in Germany, Brazil, Spain, UK,
USA, which has meant a reduction of 140,762 tons of CO2 equivalent in 2018 and 147,892 in 2017. For the rest of the electric power consumed has been
applied the emission factor of the IEA corresponding to each country.
· I ndirect electricity emissions - Location-based: the emission factor of the IEA corresponding to each country has been applied for the totality of
electrical energy consumed, regardless of its source of origin (renewable or non-renewable).
6. T hese emissions include the emissions generated by employees working at central services of each country as they commute to work in private car,
group transport and or by train, and also includes the business travel of employees when travelling in plane or by car. Employee distribution by type
of travel has been determined through surveys or other estimates. For the calculation of emissions resulting from the displacement of employees,
the 2018 DEFRA conversion factors have been applied for 2018 emissions and 2017 DEFRA for 2017.
· Employees commuting to work in private car has been estimated with regard solely to the number of parking bays available to employees at the
head ofces of each country and the consumption mix of petrol/diesel for the vehicle feet of each country. There is no reported data for employee
travel in private vehicles in Argentina, Poland or the United Kingdom because this information is not available.
· The displacement of employees in group vehicles has been calculated from the average distance travelled by vehicles rented by Santander Group
for the group transport of their employees in the following countries: Brazil, Germany, Mexico, Poland Consumer, Portugal, Spain, US, and within
central services in Spain (CGS).
· There is no reported data for business trips made by plane from Poland Geoban or for business travel made by car from Poland Geoban and USA
Consumer on account of the information not being available.
· Emissions deriving from the use of courier services have not been included, nor have those generated by transport of cash or from any other kind of
products or services arranged or indirectly generated by the fnancial services provided.
76
2018 Annual Report
77
Key MetricsResponsible bankingCorporate governanceEconomic and financial reviewRisk management Contribution to UN
Sustainable Development Goals
All social agents, including companies, have a responsability to contribute to the Sustainable
Development Goals (SDG) of the United Nations. We contribute directly to achieving the SDGs
through our business activities and also through our community investment programmes.
Main SDGs where Banco Santander’s business activities and community investments have the most weight.
We support the health and well-being
of our employees and the communities
in which we are present
• BeHealthy Program: access for employees
to information and training to improve and
renew healthy living habits. Access to more
than 40,000 afliated health and welfare
centers around the world.
• Support to the community: +1 million people helped through
programs designed to address social exclusion and boost the
well-being of people.
We invests more in support for educations
than any other private company in the
world. And we promote the largest private
scholarship program in the world.
• More than 1,200 universities with which we
maintain agreements.
• More than 70,000 scholarships and grants awarded to students
in 2018. The largest private scholarship program in the world.
Santander X, our international university entrepreneurship project,
chosen as good practice by the Spanish Network of the Global
Compact to achieve the SDGs in 2030.
We promote a diverse and inclusive
workforce that refects society and
allows us to face future challenges.
• New general principles on diversity and
inclusion that provide global guidelines and
minimum standards.
We have a prepared and committed team
that allows us to respond and meet the
needs of customers, help entrepreneurs to
create businesses and employment, and
strengthen local economies.
• 94.6% of employees with a fxed contract
• 54.5% of women in the workforce, 20.5% of women in
• 8.6% of the staf promoted.
management positions.
For the second consecutive year, Santander has obtained the
highest score among the 230 companies that are part of the
Bloomberg Gender-Equality Index.
• Flexiworking: incorporates multiple conciliation initiatives.
In 2018 we received the Top Employers Europe 2018 certifcation
and occupied one of the frst three positions in the ranking of the
best fnancial institutions to work for in Latin America in 2018,
according to Great Place to Work.
We develop products and services for the
most vulnerable in society, giving them
access to fnancial services and teaching
them how to use these in an appropriate
way to manage their fnances in the best
possible way
We fnance SMEs and self-employed
professionals who boost local economies,
generate wealth and create employment
opportunities.
• 117,420 million euros in loans to SMEs and the
self-employed.
• 160 million euros in loans granted at the end of 2018.
• Agreements with multilateral entities such as the EIB and the CAF
• More than 2,730,000 micro-entrepreneurs helped.
to boost fnancing to SMEs.
The Prospera microfnance program in Brazil, chosen as good
practice by the Brazilian Global Compact Network to achieve the
SDGs in 2030
• Global digital solutions that promote connectivity between
companies, help export and ofer more innovative and simple
platforms to operate.
• We invest in fntechs that promote fnancial technology and
facilitate access to and use of fnancial services.
78
2018 Annual Report
Contribution to SDGs
We promote sustainable consumption
both in our own operations as well as
with our clients.
• Environmental footprint: 25.9% reduction in
paper and 13.5% reduction in electricity from
2016 to 2018. In 2018, 53% of the energy
consumed by Santander was renewable
energy.
We support the fght against climate
change and the transition to a low carbon
economy. And we commit ourselves to
actively contribute to the protection of the
environment.
• 6,689 MW of renewable energy fnanced,
equivalent to the consumption of 5.7 million
households.
• Environmental and social risks analysis: 35 projects fnanced
• Agreements with multilaterals for the fnancing and
under Equator Principles criteria.
development of energy efciency projects
• Responsible procurement: New principles of responsible
• Financing of vehicles with low CO2, electric and hybrid emissions
behavior of suppliers; 95% Local group’s suppliers
• Updated sector policies with new thermal coal prohibitions.
We participate actively and we are part
of the main initiatives and working
groups at local and international level as
an important way to support SDG 17 on
partnerships for the goals.
• World Business Council for Sustainable Development
(WBCSD). Our president, Ana Botín, is a member of the
executive committee. And we participate in the WBCSD Future
of Work initiative, by looking into how to adapt our own
business and human resource strategy to evolve with the digital
age.
• Banking Environment Initiative (BEI). We participate in two
climate related work streams, the Soft Commodities Compact
and the new initiative Bank 2030 which aims to build a roadmap
for the banking industry to 2030 seeking to increase the
fnancing to low carbon activites.
• UNEP Finance initiative. Together with 27 other banks, we
promote the principles for responsible banking of the United
Nations. We also participated along with other 15 banks in
2018 in the UNEP FI pilot project on implementing the TCFD
recommendations for banks.
• United Nations Global Compact. We are committed to the
development of our business activity with the ten principles
of the Global Compact and we extend them to our value chain,
demanding our suppliers to assume and also comply with them.
• CEO Partnership for Financial Inclusion. We, along with other
9 companies are part of a private sector alliance for fnancial
inclusion, an initiative promoted by Queen Maxima of the
Netherlands, Special Representative of the United Nations to
promote Inclusive Financing for development.
• Principles of Ecuador. We analyze the environmental and social
risks of all our fnancing operations of projects that are under the
scope of the principles of Ecuador and participate actively in the
evolution of the criteria
• Principles of Responsible Investment. We manage our pension
funds of employees in Spain and Brazil applying criteria of
responsible investment.
• Others include: Wolfsberg Group; Round table on responsible
soy; Sustainable livestock working group; CDP (formerly Carbon
Disclosure Project); Climate Leadership Council.
UNEP FI – Principles for responsible banking
The Principles provide the banking industry with a single
framework that embeds sustainability across all business areas.
The Principles align banks with society’s goals as expressed
in the Sustainable Development Goals and the Paris Climate
Agreement.
Transparency, accountability, governance, target setting and
working with all stakeholders towards positive impacts are at
the core of the Principles and will help banks increase their
contribution to address global challenges.
79
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Further information
This Responsible banking chapter constitues the tradictional sustainability report
that the Group prepares and is one of the main tools used by the Group to report
on sustainability issues.
When the limitations and scope of the information,
and the changes in criteria applied with respect to
the to the 2017 sustainability report are signifcant,
these are refected in the corresponding section of
the report and the GRI Content Index.
Material aspects and stakeholder involvement
The Group maintains active dialogue with its
stakeholders in order to identify those issues that
concern them. In addition, a survey was conducted
to determine the most relevant aspects to be
addressed in this sustainability report. The Group
also closely monitors the questionnaires and
recommendations of the main sustainability indexes
(Dow Jones, FTSE4Good, etc.) and the various
international sustainability initiatives to which the
Group is party, such as the World Business Council
for Sustainable Development (WBCSD).
In fagging and identifying content to be included in
the report, and in addition to the materiality study
conducted, the sustainability context of the Group
at both the global and local level was considered.
Moreover, and insofar as there was sufcient
available information, the impacts both within and
outside the Bank were addressed.
The details of this process, as well as the results of
the materiality study, can be found on section 'What
our stakeholders tell us' of this document.
International standards and response to
legislation in preparing this Responsible
banking chapter
Santander has relied on internationally recognized
standards such as the Global Reporting Initiative
(GRI) in the preparation of its successive
Sustainability Reports. This chapter has been
prepared in accordance with the GRI Standards:
Comprehensive option.
Additionally, in this chapter detailed information
is provided to respond to the Law 11/2018, which
transposes to the Spanish legal order the Directive
2014/95/EU of the European Parliament and of the
Council of 22 October 2014 amending Directive
2013/34/EU as regards disclosure of non-fnancial
and diversity information.
Scope
This chapter is the ffteenth annual document that
the Santander Group has published, giving account
of its sustainability commitments, and refers to the
period from 1 January to 31 December 2018. This
report has been verifed by PricewaterhouseCoopers
Auditores, S.L., and independent frm which also
audited the Group´s annual fnancial statements for
the year.
This report also covers the Group´s relevant activities
in the geographical areas in which it is present:
Continental Europe, the United Kingdom, the United
States and Latin America. The economic information
is presented according to the defnition used by
the Group for accounting purposes; the social and
environmental information has been prepared
according to the same defnition, wherever this is
available.
Data contained in this chapter covers Banco
Santander SA. and subsidiaries (for more
information see notes 3 and 52 to the consolidated
fnancial statements and sections 3 and 4 of the
economic and fnancial chapter).
80
2018 Annual Report
Non-fnancial information
Law content index
Equivalent table of legal disclosure requirements under Spanish law 11/2018
Description of the metric/concept included in the
11/2018 Law to be disclosed
Chapters/section of the Consolidated directors
report where the info is available
Correspondence
with GRI indicators
Short description of the Group’s business model (it will include its
business environment, its organisation and structure, the markets
in which it operates, its objectives and strategies, and the main
factors and trends that may afect its future performance).
Pag. 4-9
A description of the policies that the Group applies, which
will include: the due diligence procedures applied for the
identifcation, assessment, prevention and mitigation of
risks and signifcant impacts and of verifcation and control,
including the measures in which they have been adopted):
Principles and governance. Pag. 18-19
GRI 102-1
GRI 102-2
GRI 102-3
GRI 102-4
GRI 102-6
GRI 102-7
GRI 102-14
GRI 102-15
GRI 103-2
GRI 103-3
n
o
i
t
a
m
r
o
f
n
I
l
a
r
e
n
e
G
.
0
The results of these policies, including key indicators of
relevant non-fnancial results that allow the monitoring and
evaluation of progress and that favour the comparability between
companies and sectors, in accordance with national, European or
international frameworks of reference used for each matter.
The main risks related to these matters associated with
the Group’s activities (business relationships, products or
services) that may have a negative efect in these areas, and
how the Group manages these risks, explaining the procedures
used to detect and assess them in accordance with national,
European or international frameworks of reference for each
matter. It must include information about the impacts that
have been detected, ofering a breakdown, in particular
of the main risks in the short, medium and long term.
Detailed information on the current and foreseeable effects
of the activities of the company in the environment and, where
appropriate, health and safety, environmental evaluation or
certification procedures; the resources dedicated to the
prevention of environmental risks; the application of the
principle of caution, the amount of provisions and guarantees
for environmental risks.
Sustainable fnance. Pag. 62-69
Challenge 2: Inclusive and
sustainable growth. Pag. 48-61
A talented and motivated team. Pag. 28-37
GRI 103-2
GRI 103-3
Principles and governance, Responsible
Procurement, Analisis of Social
&Environmental pisk management,
Pag. 18-19, 46-47, 66-67
Principles and governance, Responsible
procurement, Analisis of Social
&Environmental Risk management,
Pag. 18-19, 46-47, 66-67
GRI 102-15
GRI 102-30
Sustainable fnance. Pag. 62-69
Environmental footprint. Pag. 69
Analysis of environmental
and social risks. Pag. 66-67
Provisions and guarantees for environmental
risks is not a material aspect of the total
provisions of Banco Santander, because
the environmental risk associated
with its direct activities is small.
GRI 102-29
GRI 102-31
GRI 201-2
GRI 103-2 (GRI
de la dimensión
ambiental)
GRI 102-11
GRI 102-29
GRI 102-11
-
81
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Description of the metric/concept included in the
11/2018 Law to be disclosed
Chapters/section of the Consolidated directors
report where the info is available
Correspondence
with GRI indicators
Contamination:
Measures to prevent, reduce or repair CO2 emissions that
seriously afect the environment, taking into account any
form of air pollution, including noise and light pollution.
Circular economy and waste prevention and management:
Waste prevention measures, waste recycling measures,
waste reuse measures; other forms of waste recovery
and reuse; actions againts food waste.
Sustainable use of resources:
Use and supply of water according to local limitations
Consumption of raw materials and measures
taken to improve the efciency of its use.
Energy: direct and indirect consumption, measures taken to
improve energy efciency, use of renewable energies
Climate change:
Important elements of greenhouse gas emissions generated as
a business activity (including goods and services produced)
Measures taken to adapt to the consequences of climate change
Reduction targets voluntarily established in the medium
and long term to reduce greenhouse gas emissions
and means implemented for this purpose.
Protection of biodiversity:
Measures taken to preserve or restore biodiversity
Impacts caused by the activities or operations of protected areas
-
-
Environmental footprint. Pag. 68-69
GRI 103-2 (GRI
302 y 305)
Environmental footprint. Pag. 68-69
Environmental footprint. Pag. 68-69
Environmental footprint. Pag. 68-69
Environmental footprint. Pag. 68-69
Environmental footprint. Pag. 68-69
Sustainable fnance. Pag. 62-69
Environmental footprint. Pag. 68-69
GRI 103-2
(GRI 306)
GRI 301-2
GRI 306-1
GRI 303-1
GRI 103-2
(GRI 301)
GRI 301-1
GRI 301-2
GRI 103-2
(GRI 302)
GRI 302-1
GRI 302-3
GRI 103-2
(GRI 305)
GRI 305-1
GRI 305-2
GRI 305-3
GRI 305-4
GRI 103-2
(GRI 305)
GRI 201-2
GRI 103-2
(GRI 305)
Los impactos causados por las actividades
directas de Banco Santader sobre la biodiversidad
no son materiales debido a la actividad
fnanciera desarrollada por la entidad.
-
82
2018 Annual Report
Description of the metric/concept included in the
11/2018 Law to be disclosed
Chapters/section of the Consolidated directors
report where the info is available
Correspondence
with GRI indicators
l
a
i
c
o
S
.
2
Employment:
Total number and distribution of employees by gender,
age, country and professional classifcation
Total number and distribution of contracts modes and annual
average of undefned contracts, temporary contracts, and part-
time contracts by: sex, age and professional classifcation.
Key Metrics. Pag. 70
Key Metrics. Pag. 71
Number of dismissals by: gender, age and professional classifcation.
Key Metrics. Pag. 72
Average remuneration and its progression broken down
by gender, age and professional classifcation
Salary gap and remuneration of equal or average jobs in society
Average remuneration of directors and executives (including
variable remuneration, allowances, compensation,
payment to long-term savings forecast systems and
any other payment broken down by gender)
Implementation of work disconnection policies
Employees with disabilities
Organisation of work:
Organisation of work time
Number of absent hours
Measures designed to facilitate work-life balance and encourage
a jointly responsible use of said measures by parents
Health and safety:
Conditions of health and safety in the workplace
Occupational accidents, in particular their frequency and severity,
as well as occupational illnesses. Broken down by gender.
Social relations:
Organisation of social dialogue (including procedures to
inform and consult staf and negotiate with them)
Percentage of employees covered by collective
bargaining agreements by country
Balance of the collective bargaining agreements (particularly
in the feld of health and safety in the workplace)
Training:
The policies implemented in the feld of training
Total number of hours of training by professional categories.
Accessibility:
Universal accessibility of people
Equality:
Measures taken to promote equal treatment and opportunities
between women and men, Equality plans (Chapter III of
Organic Law 3/2007, of 22 March, for the efective equality of
women and men), measures taken to promote employment,
protocols against sexual and gender-based harassment, Policy
against all types of discrimination and, where appropriate,
integration of protocols against sexual and gender-based
harassment and protocols against all types of discrimination
and, where appropriate, management of diversity
GRI 103-2
(GRI 401)
GRI 102-8
GRI 405-1
GRI 102-8
GRI 405-1
GRI 401-1
GRI 405-2
GRI 103-2
(GRI 405)
GRI 405-2
Key Metrics. Pag. 73
Pag. 33
Key Metrics. Pag. 73
Corporate governance chapter (pág. )
GRI 102-35
GRI 102-36 GRI
103-2 (GRI 405)
A talented and motivated team. Pag. 28-37
Key metrics. Pag. 32, 71
A talented and motivated team
Key Metrics. Pag. 37, 74
A talented and motivated team. Pag. 28, 72
GRI 103-2
(GRI 401)
GRI 405-1
GRI 103-2
(GRI 401)
GRI 403-2
GRI 103-2
(GRI 401)
A talented and motivated team. Pag. 28, 72
GRI 102-41
Key Metrics. Pag. 74
What our stakeholders tell us. Pad. 14-15
Key Metrics. Pag. 28, 72
GRI content index.
A talented and motivated team. Pag. 28-37
Key Metrics. Pag. 73
Challenge 2: Inclusive and
sustainable growth. Pag. 32, 51.
A talented and motivated team. Pag. 28-37
SMEs & job creation. Pag. 28-3
GRI 403-2
GRI 403-3
GRI 103-2
(GRI 402)
GRI 102-41
GRI 403-1
GRI 403-4
GRI 103-2
(GRI 404)
GRI 404-2
GRI 404-1
GRI 103-2
(GRI 405)
GRI 103-2 (GRI
405 y 406)
83
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Description of the metric/concept included in the
11/2018 Law to be disclosed
Chapters/section of the Consolidated directors
report where the info is available
Correspondence
with GRI indicators
Application of due diligence procedures in the feld of Human Rights
i
s
t
h
g
R
n
a
m
u
H
.
3
Prevention of the risks of Human Rights violations and,
where appropriate, measures to mitigate, manage
and repair any possible abuses committed
Complaints about cases of human rights violations
Promotion and compliance with the provisions of
the fundamental conventions of the International
Labour Organisation regarding respect for freedom of
association and the right to collective bargaining.
Measures taken to prevent corruption and bribery
i
t
s
n
a
g
a
t
h
g
F
.
i
4
n
o
i
t
p
u
r
r
o
c
Measures to combat money laundering
Contributions to non-proft foundations and entities
Commitments of the company to sustainable development:
The impact of the company’s activity on
employment and local development
The impact of the company’s activity on local
towns and villages and in the country
Relations maintained with the representatives of local
communities and the modalities of dialogue with them
Association or sponsorship actions*
Outsourcing and suppliers:
Inclusion of social, gender equality and environmental
issues in the procurement policy
y
n
a
p
m
o
c
e
h
t
n
o
n
o
i
t
a
m
r
o
f
n
I
.
5
Consideration in relations with suppliers and
subcontractors of their responsibility
Supervision and audit systems and resolution thereof
Consumers:
Measures for the health and safety of consumers
Systems for complaints received and resolution thereof
Tax information:
The profts obtained country by country
Taxes earned on benefts paid
Public grants received
Any other relevant information:
Principles and governance, Analisis of
Social &Environmental Risk, Responsible
Procurement. Pag. 18-19, 66-67.
Principles and governance, Responsible
Procurement. Analisis of Social
&Environmental Risk, Pag. 18-19, 66-67.
GRI content index. Risk
management chapter (p.)
GRI 102-16
GRI 102-17
GRI 103-2
(GRI 412)
GRI 410-1
GRI 412-1
GRI 412-3
GRI 406-1
A talented and motivated team. Pag. 18-19
GRI 103-2 (406,
407, 408 y 409)
Principles and governance, Risk
management chapter (p.)
Principles and governance,
Risk management chapter (p.)
GRI 102-16
GRI 102-17
GRI 103-2
(GRI 205)
GRI 205-1
GRI 205-2
GRI 205-3
Community investment. Pag. 58.59
GRI 413-1
SMEs & job creation, Community
investment. Pag. 52-53, 58-59
SMEs & job creation, Community
investment. Pag. 52-53, 58-59
What our stakeholders tell us. Pag. 14-15
Community investment. Pag. 58-59
Responsible procurement. Pag. 46-47
Responsible procurement. Pag. 46-47
Responsible procurement. Pag. 13, 46-47
Responsible Business Practices. Pag. 38-39
Risk management chapter (p.)
Responsible Business Practices. Pag. 38-41
Key metrics. Pag. 75. Risk
management chapter (p.)
GRI content index.
GRI 103-2 (GRI
204, 308 y 414)
GRI 102-9
Cadena de
suministro
GRI 103-2 (GRI
204, 308 y 414)
GRI 204-1
GRI 308-1
GRI 414-1
GRI 103-2
(GRI 204)
GRI 103-2 (GRI
416, 417 y 418)
GRI 416-1
GRI 417-1
G4-FS15
GRI 102-17
GRI 103-2 (GRI
416, 417 y 418)
GRI 416-2
GRI 417-2
GRI 418-1
Appendix VI in Auditor's report and
annual consolidate accounts (Pág. 289)
Tax contribution. Pag. 13, 61
GRI content index.
GRI 103-2
(GRI 201)
GRI 201-4
*NB: The data to report this indicator could be quantitative or qualitative
In addition to the contents mentioned in the previous table, the consolidated non-fnancial information statement of Banco Santander includes the following
contents: 102-5, 102-9, 102-10, 102-12, 102-13, 102-18, 102-19, 102-20, 102-21, 102-22, 102-23, 102-24, 102-25, 102-26, 102-27, 102-28, 102-32, 102-33, 102-34, 102-37,
102-40, 102-42, 102-43, 102-44, 102-45, 102-46, 102-47, 102-48, 102-49, 102-50, 102-51, 102-52, 102-53, 102-54, 102-55, 102-56, 201-1, 201-3, 202-1, 202-2, 203-1,
203-2, 206-1, 302-1, 302-3, 307-1, 308-2, 401-2, 402-1, 404-3, 405-2, 411-1, 414-2, 415-1, 417-3, 419-1.
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85
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Global Reporting Initiative
(GRI) content index
GRI Standards: GENERAL DISCLOSURES
GRI Standard
Disclosure
GRI 101: FOUNDATION
GRI 102: GENERAL DISCLOSURES
Page/Omission
Review
102-1 Name of the organization
P. 80
102-2 Activities, brands, products, and services
P. 12-13, 18, 23-24, 25, 26-27, 48-
49, 54-55, 56 and 62-65.
102-3 Location of headquarters
P. 80
102-4 Location of operations
Table 20 in Key metrics from the
chapter Responsinle Banking (P. 74).
Annual consolidated accounts.
102-5 Ownership and legal form
P. 44-45 and 708
102-6 Markets served
ORGANISATIONAL
PROFILE
102-7 Scale of the organization
102-8 Information on employees and other workers
Table 20 in Key metrics from the
Responsible Banking chapter (P. 68),
P. 13, 38-39, 50-51 and 54-55.
P. 13, 27, 28 and 44 and tables 1 (p.
70) y 20 (p. 72) in Key metrics
P. 13, 27, 28 and 44 and tables 1 (p.
70) y 20 (p. 72) in Key metrics
102-9 Supply chain
P. 46-47.
102-10 Signifcant changes to the organization and its supply chain P. 81
102-11 Precautionary Principle or approach
102-12 External initiatives
102-13 Membership of associations
P. 13, 27, 28 and 44 and tables 1 (p.
70) y 20 (p. 72) in Key metrics
P. 31, 40-41, 46, 50-55 and 65-66
Santander participates in industry
associations representing fnancial
activity in the countries where it
operates, as the AEB in the case of Spain
102-14 Statement from senior decision-maker
P. 12, 24 and 57.
STRATEGY
ETHICS AND
INTEGRITY
102-15 Key impacts, risks, and opportunities
P. 21, 23, 28-29 42-43, 46-47, 66-
69 and p. 214 from the annual
consolidated accounts.
102-16 Values, principles, standards, and norms of behavior
P. 20-21, 23, 24-25, 31 and 47.
102-17 Mechanisms for advice and concerns about ethics
P. 20-21, 25-27, 34-39, 47,
54-59 and 62-66.
√
√
√
√
√
√
√
√1
√
√
√
√
√
√
√
√
√
86
2018 Annual Report
GRI Standard
Disclosure
Page/Omission
Review
102-18 Governance structure
102-19 Delegating authority
102-20 Executive-level responsibility for economic,
environmental, and social topics
102-21 Consulting stakeholders on economic,
environmental, and social topics
P. 16-17 and Corporate Governance
chapter of the annual report.
P. 16-17 and Corporate Governance
chapter of the annual report.
P. 16-17 and Corporate Governance
chapter of the annual report.
P. 24-25, 32-33, 38 and 43 and
Corporate Governance chapter of the
annual report. Annual accounts.
102-22 Composition of the highest governance
body and its committees
P.17 and Corporate Governance
chapter of the annual report.
102-23 Chair of the highest governance body
102-24 Nominating and selecting the highest governance body
102-25 Conficts of interest
102-26 Role of highest governance body in setting
purpose, values, and strategy
102-27 Collective knowledge of highest governance body
GOVERNANCE
102-28 Evaluating the highest governance body’s performance
P. 125 and 108-113 from the Corporate
Governance chapter of the annual
report. Annual accounts
P. 138-140 and 156-157 from the
Corporate Governance chapter of the
annual report. Annual accounts.
P. 16, 45, 108, 152, 160-162 from the
Corporate Governance chapter of the
annual report. Annual accounts.
P. 18-19, 42, 60. P. 116-160 Corporate
Governance. Chapter 2 of the
Regulations of the Board of Directors
of Banco Santander, S.A
P. 116-127 from the Corporate
Governance chapter of the annual
report. Annual accounts.
P. 108-111, 140, 146 from the Corporate
Governance chapter of the annual
report.Annual accounts.
102-29 Identifying and managing economic,
environmental, and social impacts
P. 66.
Annual accounts.
102-30 Efectiveness of risk management processes
P. 18-19, 42-43 and 66-67.
102-31 Review of economic, environmental, and social topics
102-32 Highest governance body’s role in sustainability reporting
Risk manegement chapter of
the annual accounts.
Santander´s Board approved this
report on February, 26th 2019 related
to 2018 period (p. 24-25 from the 2018
Annual report, and p. 108 from the
Corporate Governance Chapter of the
Annual Report published in 2019).
102-33 Communicating critical concerns
Annual accounts.
102-34 Nature and total number of critical concerns
P. 18, 42-43, 66-67.
102-35 Remuneration policies
P. 31 and 33. P. 186-192 from the Corporate
Governance Chapter of the Annual Report
102-36 Process for determining remuneration
102-37 Stakeholders’ involvement in remuneration
P. 31 and 33. P. 180 and 224 from
the Corporate Governance Chapter
of the Annual Report. Report of
the remuneration committee
P. 31 and 33. P. 180 and 224 from
the Corporate Governance Chapter
of the Annual Report. Report of
the risk, supervision, regulation
and compliance committee
102-38 Annual total compensation ratio
Confdential information
102-39 Percentage increase in annual total compensation ratio
Confdential information
102-40 List of stakeholder groups
P. 13-14, 26-27 and 80.
102-41 Collective bargaining agreements
P. 26-27 and 54.
102-42 Identifying and selecting stakeholders
P. 14-15 and 26-27.
102-43 Approach to stakeholder engagement
P. 26, 40-41 and 80 and table
22 in Key Metrics (p. 73).
102-44 Key topics and concerns raised
P. 14-17, 22-23 and 48-49.
STAKEHOLDER
ENGAGEMENT
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
NO
NO
√
√
√
√
√
87
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
GRI Standard
Disclosure
102-45 Entities included in the consolidated fnancial statements
Page/Omission
P. 80.
Annual accounts.
102-46 Defning report content and topic Boundaries
P. 15 and 80.
REPORTING
PRACTICE
102-47 List of material topics
102-48 Restatements of information
102-49 Changes in reporting
102-50 Reporting period
102-51 Date of most recent report
102-52 Reporting cycle
P. 15
P. 80
P. 80
P. 80
P. 80
P. 80
102-53 Contact point for questions regarding the report
P. 709
102-54 Claims of reporting in accordance with the GRI Standards
P. 80
102-55 GRI content index
102-56 External assurance
GRI Content Index (p. 86-102).
P. 80. Independent
verification report.
Review
√
√
√
√
√
√
√
√
√
√
√
√
88
2018 Annual Report GRI Standards: Topic-specifc diclosures
Identifed
material aspect
Material aspect
boundary
GRI Standard
ECONOMIC STANDARDS
ECONOMIC PERFORMANCE
Disclosure
Page/Omission
Scope
Review
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (P. 87-99)
103-2 The management
approach and its components
P. 13 and column "Page/Omission" of the
GRI 201: Economic Performance" (p. 87)
103-3 Evaluation of the
management approach
P. 13 and column "Page/Omission" of the
GRI 201: Economic Performance" (p. 87)
-
-
-
√
√
√
201-1 Direct economic value
generated and distributed
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
GRI 201: ECONOMIC
PERFORMANCE
€ million
Economic value generated1
Gross income
Net loss on discontinued
operations
Gains/(losses) on disposal
of assets not classifed as
non-current held for sale
Gains/(losses) on disposal
of assets not classifed as
discontinued operations
Economic value distributed
Dividends3
Other administrative
expenses (except taxes)
Personnel expenses
Income tax and other taxes2
CSR investment
Economic value retained
(economic value generated less
economic value distributed)
2018
48,329
48,424
0
28
-123
28,711
3,292
8,489
11,865
4,886
179
19,618
Group
√
1. Gross income plus net gains on asset disposals.
2. Only includes income tax on profts accrued and
taxes recognised during the period. The chapter
on Community Investment provides additional
information on the taxes paid.
3. In addition to the EUR 3,392 million, EUR 132 million
were allocated in shares to shareholders in the
framework of the shareholder compensation
scheme (Santander Dividendo Election) approved by
shareholders’ general meeting of 23th March 2018.
According to this, the Bank has ofered the possibility
of getting an amount in cash or in new shares that
is equivalent to the second interim dividend for
the year 2018. This fgure does not come directly
from consolidated annual accounts, otherwise
turning to a specifcally created detail to monitor the
remuneration of the shareholder. This detail can be
included at the beginning of chapter 4, “Distribution
of the Bank’s results, shareholders remuneration
system and beneft per share”, section a).
201-2 Financial implications and
other risks and opportunities
due to climate change
P. 18, 49, 62-69. Table 24 in
Key metrics (p. 74).
201-3 Defned beneft plan
obligations and other
retirement plans
201-4 Financial assistance
received from government
The liability for provisions for pensions
and similar obligations at 2017 year-
end amounted to EUR 5.558 million.
Endowments and contributions to the
pension funds in the 2017 fnancial year
have amounted to EUR 371 million. The
detail may be consulted in Auditor´s report
and annual consolidated accounts.
The Bank has not received signifcant
subsidies or public aids during 2017. The
detail may be consulted in Auditor´s report
and annual consolidated accounts.
Group
√2
Group
√
Group
√
89
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Identifed
material aspect
Material aspect
boundary
GRI Standard
MARKET PRESENCE
Disclosure
Page/Omission
Scope
Review
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (P. 86-102)
103-2 The management
approach and its components
P. 24-25 and column “Page/Omissionn” of
the GRI 201: Economic Performance (p. 90).
103-3 Evaluation of the
management approach
P. 24-25 and column “Page/Omissionn” of
the GRI 201: Economic Performance (p. 90).
-
-
-
√
√
√
202-1 Ratios of standard entry
level wage by gender compared
to local minimum wage
Table 13 in Key metrics (P. 73).
Group
√3
202-2 Proportion of senior
management hired from
the local community
The Group Corporate Human Resources
Model aims to attarct and retain the best
professionals in the countries in which it
operates. Table 7 in Key metrics (p. 71)
Gruop
excluding
USA
103-1 Explanation of the material del tema material” del Índice de
topic and its boundary
contenidos GRI (P. 86-102).
P. 14-15, columna “Cobertura
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 54-59.
P. 54-59.
203-1 Infrastructure investments
and services supported
P. 56, 58-59.
203-2 Signifcant indirect
economic impacts
P. 56, 58-59.
103-1 Explanation of the material del tema material” del Índice de
topic and its boundary
contenidos GRI (P. 89-101).
P. 14-15, columna “Cobertura
GRI 103: ENFOQUE
DE GESTIÓN
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 46-47
P. 46-47
GRI 204:
PROCUREMENT
PRACTICES
204-1 Proportion of spending
on local suppliers
P. 46-47
103-1 Explanation of the material del tema material” del Índice de
topic and its boundary
contenidos GRI (P. 86-102).
P. 14-15, columna “Cobertura
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
205-1 Operations assessed for
risks related to corruption
205-2 Communication and
training about anti-corruption
policies and procedures
205-3 Confrmed incidents of
corruption and actions taken
P. 20-21, 23, 24-25, 31 and 47.
P. 20-21, 23, 24-25, 31 and 47.
Risk management chapter
Group
Risk management chapter
Risk management chapter
Group
Group
-
-
-
Group
Group
-
-
-
-
-
-
Group
√8
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√6
GRI 103:
MANAGEMENT
APPROACH
GRI 202: MARKET
PRESENCE
GRI 103:
MANAGEMENT
APPROACH
GRI 203: INDIRECT
ECONOMIC IMPACT
Attracting and
retaining talent
/ Diversity /
Community
investment
Internal
INDIRECT ECONOMIC IMPACT
Community
investment
External
PROCUREMENT PRACTICES
Ethical behaviour
and risk
management
External
ANTI-CORRUPTION
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes /
Corporate
governance-
transparency
Internal and
external
GRI 103:
MANAGEMENT
APPROACH
GRI 205: ANTI-
CORRUPTION
90
2018 Annual Report Identifed
material aspect
Material aspect
boundary
GRI Standard
ANTI-COMPETITIVE BEHAVIOR
Disclosure
Page/Omission
Scope
Review
-
-
-
√
√
√
Group
√5
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
GRI 103:
MANAGEMENT
APPROACH
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
GRI 206: ANTI-
COMPETITIVE
BEHAVIOUR
206-1 Legal actions for anti-
competitive behavior, anti-trust,
and monopoly practices
P. 20-21, 23, 24-25, 31 ,47 and column
“Page/Omission” of the GRI 206:
Anti-competitive Behaviour (p. 91).
P. 20-21, 23, 24-25, 31 ,47 and column
“Page/Omission” of the GRI 206:
Anti-competitive Behaviour (p. 91).
After an administrative investigation on
several fnancial entities, including Banco
Santander, S.A., in relation to possible
collusive practices or price-fxing agreements,
as well as exchange of commercially
sensitive information in relation to fnancial
derivative instruments used as hedge of
interest rate risk for syndicated loans, on 13
February 2018, the Competition Directorate
of the Spanish “National Commission for
Antitrust and Markets” (CNMC) published
its decision, by which it fned the Bank and
another three fnancial institutions with EUR
91 million (EUR 23.9 million for the Bank) for
ofering interest rate derivatives in breach
of Articles 1 of the Spanish Act 15/2007
on Defence of Competition and 101 of the
Treaty of Functioning of the European Union.
According to the CNMC, there is evidence
that there was coordination between the
hedging banks/lenders to coordinate the
price of the derivatives and ofer clients, in
each case, a price diferent from the “market
price”. This decision has been appealed
before the Spanish National Court by the
Bank, that has already paid the fne.
The Italian Competition Authority has
imposed to Banca PSA Italia a fne of €
6.077.606 as part of an investigation against
the Captive Banks, Assofn and Assilea.
According to the decision, the Captive Banks,
Assofn and Assilea ran an unlawful cartel
from 2003 to April 2017, aimed at exchanging
sensitive commercial information in the car
fnancing market in Italy, in order to restrict
competition for the sale of fnanced cars, in
violation of Article 101 TFEU. The decision will
be appeal. Further information on litigation
and other Group contingencies can be found
in the Auditor’s Report and Annual Accounts
ENVIRONMENTAL STANDARDS
MATERIALS
Internal
environmental
footprint
Internal and
external
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
P. 62, 63, 64, 66, 68-69.
103-3 Evaluation of the
management approach
301-1 Materials used by
weight or volume
P. 62, 63, 64, 66, 68-69.
P. 69 and table 24 de Principales
métricas (P. 76).
Group
-
-
-
√
√
√
√4
GRI 301: MATERIALS
301-2 Recycled input
materials used
The percentage of the environmentally-
friendly paper consumption with respect to
the total consumption is 86%. This percentage
includes both recycled and certifed paper
301-3 Reclaimed products and
their packaging materials
Not applicable due to the type
of Group fnancial activity
Group
√4
Group
NO
91
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Identifed
material aspect
Material aspect
boundary
GRI Standard
ENERGY
Disclosure
Page/Omission
Scope
Review
-
-
-
Group
Group
Group
Group
-
-
-
√
√
√
√4
NO
√4
√
√
√
√4
NO
NO
NO
NO
NO
103-1 Explanation of the material
topic and its boundary
P. 12-13 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
GRI 103:
MANAGEMENT
APPROACH
GRI 302: ENERGY
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
302-1 Energy consumption
within the organization
302-2 Energy consumption
outside of the organization
P. 62, 63, 64, 66 and 68-69.
P. 62, 63, 64, 66 and 68-69.
P. 69 and Table 24 in Key metrics (p. 76)
Group
Not available
302-3 Energy intensity
Table 24 in Key metrics (p. 76)
302-4 Reduction of
energy consumption
302-5 Reductions in
energy requirements of
products and services
An specifc analysis of cause and efect
relation for the implemented measures and
of the obtained reduction is not available
Not applicable due to the type
of Group fnancial activity
Group
NO
Group
NO
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-101)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 62, 63, 64, 66 and 68-69.
P. 62, 63, 64, 66 and 68-69.
-
-
-
303-1 Water withdrawal by source P. 69 and Table 24 in Key metrics (p. 76)
Group
GRI 303: WATER
303-2 Water sources signifcantly Not applicable due to the type
afected by withdrawal of water
of Group fnancial activity
303-3 Water recycled and reused
Not applicable due to the type
of Group fnancial activity
GRI 103:
MANAGEMENT
APPROACH
GRI 304:
BIODIVERSITY
103-1 Explanation of the material
topic and its boundary
Not material
Not material
Not material
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
304-1 Operational sites owned,
leased, managed in, or adjacent
to, protected areas and areas
of high biodiversity value
outside protected areas
304-2 Signifcant impacts
of activities, products, and
services on biodiversity
304-3 Habitats protected
or restored
304-4 IUCN Red List species
and national conservation
list species with habitats in
areas afected by operations
Not material
Group
NO
Not material
Not material
Group
NO
Group
NO
Not material
Group
NO
Internal
environmental
footprint
Internal and
external
WATER
Internal
environmental
footprint
Internal and
external
BIODIVERSITY
Not material
Not applicable
92
2018 Annual Report
√
√
√
√4
√4
√4
√4
√
√
√
NO
√4
NO
NO
NO
√
√
√
Identifed
material aspect
Material aspect
boundary
GRI Standard
EMISSIONS
GRI 103:
MANAGEMENT
APPROACH
Internal
environmental
footprint
Internal and
external
GRI 305: EMISSIONS
Disclosure
Page/Omission
Scope
Review
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-101)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
305-1 Direct (Scope 1)
GHG emissions
305-2 Energy indirect
(Scope 2) GHG emissions
305-3 Other indirect (Scope
3) GHG emissions
P. 62, 63, 64, 66 and 68-69.
P. 62, 63, 64, 66 and 68-69.
P. 69 and Table 24 in Key metrics (p. 76)
Group
P. 69 and Table 24 in Key metrics (p. 76)
Group
P. 69 and Table 24 in Key metrics (p. 76)
Group
-
-
-
305-4 GHG emissions intensity
Table 24 in Key metrics (p. 76)
Group
305-5 Reduction of
GHG emissions
An specifc analysis of cause and efect
relation for the implemented measures and
of the obtained reduction is not available
305-6 Emissions of ozone-
depleting substances (ODS)
Not applicable due to the type
of Group fnancial activity
305-7 Nitrogen oxides (NOX),
sulfur oxides (SOX), and other
signifcant air emissions
Not applicable due to the type
of Group fnancial activity
Group
NO
Group
NO
Group
NO
EFFLUENTS AND WASTE
Internal
environmental
footprint
Internal and
external
ENVIRONMENTAL COMPLIANCE
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
-
-
-
Group
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p.86-101)
103-2 The management
approach and its components
P. 62, 63, 64, 66 and 68-69.
103-3 Evaluation of the
management approach
306-1 Water discharge by
quality and destination
306-2 Waste by type
and disposal method
P. 62, 63, 64, 66 and 68-69.
Not applicable due to the type
of Group fnancial activity
P. 69 and Table 24 in Key metrics (p. 76)
Group
GRI 306: EFFLUENTS
AND WASTE
306-3 Signifcant spills
306-4 Transport of
hazardous waste
Not applicable due to the type
of Group fnancial activity
Not applicable due to the type
of Group fnancial activity
306-5 Water bodies afected by
water discharges and/or runof
Not applicable due to the type
of Group fnancial activity
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-101)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 32-33
P. 32-33
Group
Group
Group
-
-
-
GRI 307:
ENVIRONMENTAL
COMPLIANCE
307-1 Non-compliance
with environmental laws
and regulations
The Bank has not received fnal sanctions
for this concept. In addition, information
on litigation and other Group contingencies
can be found in Auditors’ report and
annual consolidated accounts.
Group
√5
SUPPLIER ENVIRONMENTAL ASSESSMENT
Ethical behaviour
and risk
management
Internal and
external
GRI 103:
MANAGEMENT
APPROACH
GRI 308: SUPPLIER
ENVIRONMENTAL
ASSESSMENT
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column “Material aspect
boundary” of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
308-1 New suppliers that
were screened using
environmental criteria
308-2 Negative environmental
impacts in the supply chain
and actions taken
P. 46-47
P. 46-47
P. 46-47
P. 46-47
-
-
-
√
√
√
Group
√8, 9
Group
√8, 9
93
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Identifed
material aspect
Material aspect
boundary
GRI Standard
Disclosure
Page/Omission
Scope
Review
SOCIAL STANDARDS
EMPLOYMENT
Attracting and
retaining talent
/ Diversity
Internal
LABOUR/MANAGEMENT RELATIONS
Attracting and
retaining talent
/ Diversity
Internal
OCCUPATIONAL HEALTH AND SAFETY
Attracting and
retaining talent
/ Diversity
Internal
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 27-28 and 56
P. 27-28 and 56
-
-
-
401-1 New employee hires
and employee turnover
P. 27-28 and 56 and Tables 10 and
11 in Key metrics (p. 70-72)
Group
√
√
√
√
GRI 401:
EMPLOYMENT
401-2 Benefts provided to
full-time employees that are
not provided to temporary
or part-time employees
Benefts detailed in p. 26-29 are
regarding only full-time employees
Group
√
401-3 Parental leave
Not available
Group
NO
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
Column "Page/Omission" of the GRI 402:
Labor/Management relations" (p. 94)
103-3 Evaluation of the
management approach
Column "Page/Omission" of the GRI 402:
Labor/Management relations" (p. 94)
-
-
-
√
√
√
GRI 402: LABOR/
MANAGEMENT
RELATIONS
402-1 Minimum notice periods
regarding operational changes
Santander Group has not established any
minimum period to give prior notice relating
to organisational changes diferent from
those required by law in each country
Group
√
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
P. 34 y column "Page/Omission" of the GRI
403: Occupational Safe and Safety (p. 85)
103-3 Evaluation of the
management approach
P. 36 y column "Page/Omission" of the GRI
403: Occupational Safe and Safety (p. 87)
-
-
-
403-1 Workers representation in
formal joint management–worker
health and safety committees
In Banco Santander S.A, the percentage
of workforce represented in the Health
and Safety Committee in 100%
Banco
Santander
S.A. and
SCF
√
√
√
√
GRI 403:
OCCUPATIONAL
HEALTH AND
SAFETY
403-2 Types of injury and rates
of injury, occupational diseases,
lost days, and absenteeism, and
number of work-related fatalities
403-3 Workers with high
incidence or high risk of diseases
related to their occupation
403-4 Health and safety
topics covered in formal
agreements with trade unions
P. 36 and Tables 17, 18 and 19
in Key metrics (p. 73)
Group
√1
There have not been identifed work
posts with high risk of desease
Group
NO
Formal agreements with unions take into
account issues concerning the health of
workers and occupational health and safety,
such as health monitoring and check-ups,
both periodic for all workers and for workers
returning from prolonged sick leave
Banco
Santander
S.A. and
SCF
√
94
2018 Annual Report
Identifed
material aspect
Material aspect
boundary
GRI Standard
TRAINING AND EDUCATION
Disclosure
Page/Omission
Scope
Review
Attracting and
retaining talent
/ Diversity
Internal
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
P. 26,28-29. Column "Page/Omission" of
the GRI 404: Training and education (p. 95)
103-3 Evaluation of the
management approach
P. 26,28-29. Column “Page/Omission” of
the GRI 404: Training and education (p. 95)
-
-
-
404-1 Average hours of training
per year per employee
P. 30-31 and tables 14, 15 and 16
in Key metrics (p. 72-73)
GRI 404: TRAINING
AND EDUCATION
404-2 Programs for upgrading
employee skills and transition
assistance programs
Banco Santander in Spain ofers programmes
for skills management and lifelong
learning that support the employability of
their employees once they have fnished
their carrers or have been afected by
collective redundancies. P. 28 y 30-31
and table 14 in Key metrics (p. 72)
Group
Banco
Santander
S.A.
√
√
√
√
√
404-3 Percentage of employees
receiving regular performance
and career development reviews
P. 28-29. Regular performance and
career development reviews are received
by the 100% of the employees
Group
√
Group
NO
-
-
-
√
√
√
DIVERSITY AND EQUAL OPPORTUNITY
Attracting and
retaining talent
/ Diversity /
Incentives tied
to ESG criteria
Internal
NON-DISCRIMINATION
GRI 103:
MANAGEMENT
APPROACH
GRI 405: DIVERSITY
AND EQUAL
OPPORTUNITIES
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (P. 86-102).
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 32-33
P. 32-33
-
-
-
405-1 Diversity of governance
bodies and employees
P. 18-19, 25, 32-33 and Tables 1, 3
and 6 in Key metrics (p. 70-71)
Group
√
√
√
√
405-2 Ratio of basic salary and
remuneration of women to men
P.33
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
P. 14-15 and column "Material aspect
boundary" of GRI Content Index (P. 86-102).
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 28-29 y 56.
P. 28-29 y 56.
GRI 406: NON-
DISCRMINATION
406-1 Incidents of discrimination
and corrective actions taken
Risk management chapter
Group
√6
FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING
Not material
Not applicable
CHILD LABOR
Not material
Not applicable
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
Not material
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
Not material
Not material
-
-
-
√
√
√
GRI 407: FREEDOM
OF ASSOCIATION
AND COLLECTIVE
BARGAINING
407-1 Operations and suppliers
in which the right to freedom
of association and collective
bargaining may be at risk
Not material
Group
NO
GRI 103:
MANAGEMENT
APPROACH
GRI 408: CHILD
LABOR
103-1 Explanation of the material
topic and its boundary
Not material
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
408-1 Operations and
suppliers at signifcant risk
for incidents of child labor
Not material
Not material
Not material
-
-
-
√
√
√
Group
NO
95
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Disclosure
Page/Omission
Scope
Review
Identifed
material aspect
Material aspect
boundary
GRI Standard
FORCED OR COMPULSORY LABOR
Not material
Not applicable
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material
topic and its boundary
Not material
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
Not material
Not material
Not material
GRI 409: FORCED
OR COMPULSORY
LABOR
409-1 Operations and suppliers
at signifcant risk for incidents
of forced or compulsory labor
-
-
-
√
√
√
Group
NO
-
-
-
√
√
√
-
-
-
√
√
√
Group
√2, 10
GRI 103:
MANAGEMENT
APPROACH
GRI 410: SECUTIRY
PRACTICES
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
Column "Page/Omission" of the GRI
410: Security Practices (p. 96)
103-3 Evaluation of the
management approach
410-1 Security personnel
trained in human rights
policies or procedures
Column "Page/Omission" of the GRI
410: Security Practices (p. 96)
Santander requires to its Safety Services
suppliers during the hiring process compliance
with Human Rights Regulations
Banco
Santander √
S.A.
103-1 Explanation of the material P. 12-13 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
P. 66 and Column "Page/Omission" of the
GRI 411: Rights of Indigenous People (p. 96)
103-3 Evaluation of the
management approach
P. 66 and Column “Page/Omission” of the
GRI 411: Rights of Indigenous People (p. 96)
GRI 411: RIGHTS
OF INIDGENOUS
PEOPLE
411-1 Incidents of violations
involving rights of
indigenous people
The Bank ensures, through social and
environmental risk assessments in their
fnancing operations under the Equator
Principles, that no violations of the indigenous
peoples’ rights occur in such operations.
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
Column "Page/Omission" of the GRI 412:
Human Rights assessment (p. 96)
103-3 Evaluation of the
management approach
Column "Page/Omission" of the GRI 412:
Human Rights assessment (p. 96)
-
-
-
√
√
√
412-1 Operations that have
been subject to human rights
reviews or impact assessments
All the Bank’s fnancing operations under
the Equator Principles are subject to social
and environmental risk assessments
(which includes human rights aspects).
In 2018, a total of 35 operations
were evaluated in this respect.
Group
10
√
GRI 412:
HUMAN RIGHTS
ASSESSMENT
412-2 Employee training
on human rights policies
or procedures
Not available
Group
NO
412-3 Signifcant investment
agreements and contracts
that include human rights
clauses or that underwent
human rights screening
A new supplier certifcation policy was
approved in 2018. This policy includes an
annex with the “principles of responsible
conduct for suppliers”. These principles are
mandatory for all the Bank’s suppliers and
include, among others, human rights aspects.
√2
SECURITY PRACTICES
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
RIGHTS OF INDIGENOUS PEOPLES
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
External
HUMAN RIGHTS ASSESSMENT
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
External
96
2018 Annual Report Identifed
material aspect
Material aspect
boundary
GRI Standard
LOCAL COMMUNITIES
Disclosure
Page/Omission
Scope
Review
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p.86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 54-59 and 62-63
P. 54-59 and 62-63
√
√
√
Community
investment
External
413-1 Operations with local
community engagement,
impact assessments, and
development programs
GRI 413: LOCAL
COMMUNITIES
The Santander Group has several
programmes in its ten main countries aim to
encourage development and participation
of local communities, in which it is carried
out an assessment on people helped,
scholarships given through agreement
with Universities, among others. Moreover,
in the last years the Group has developed
diferent products and services ofering
social and/or environmental added value
adapted to each country where Santander
developes its activities. P. 54-59 y 56-57.
Group
√11
413-2 Operations with signifcant
actual and potential negative
impacts on local communities
Not available
Group
NO
SUPPLIER SOCIAL ASSESSMENT
Control and
management of
risks, ethics and
compliance
Internal and
external
PUBLIC POLICY
Ethical behaviour
and risk
management
/ Compliance
and adapting
to regulatory
changes
Internal and
external
CUSTOMER HEALTH SAFETY
Products and
services that
are transparent
and fair
GRI 103:
MANAGEMENT
APPROACH
GRI 414:
SUPPLIER SOCIAL
ASSESSMENT
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
414-1 New suppliers that were
screened using social criteria
414-2 Negative social
impacts in the supply chain
and actions taken
P. 46-47
P. 46-47
P. 46-47
P. 46-47
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
GRI 103:
MANAGEMENT
APPROACH
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
GRI 415: PUBLIC
POLICY
415-1 Political contributions
P. 20-21, 23, 24-25, 31 and 47 and
column “Page/Omission” of the
GRI 415: Public Policy (p. 97)
P. 20-21, 23, 24-25, 31 and 47 and
column “Page/Omission” of the
GRI 415: Public Policy (p. 97)
The vinculation, memebership or
collaboration with political parties or
with other kind of entities, institutions
os associations with public purposes, as
well as contributions or services to them,
should be done in a way that can assure
the personal character and that avoids any
involvement of the Group, as indicated in
Santander Group General Code of Conduct
GRI 103:
MANAGEMENT
APPROACH
GRI 416: CUSTOMER
HEALTH AND
SAFETY
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 38-41
P. 38-41
416-1 Assessment of the health
and safety impacts of product
and service categories
416-2 Incidents of non-
compliance concerning the
health and safety impacts
of products and services
The Commercialisation Committee
evaluates potential impact of all products
and services, previously they are launched
onto the market. These impacts include,
among others, clients security and
compatibility with other products (p. 38-41)
The Bank has not received fnal sanctions
for this concept. In addition, information
on litigation and other Group contingencies
can be found in Auditors’ report and
annual consolidated accounts.
-
-
-
√
√
√
Group
√8 9
Group
√8 9
-
-
-
√
√
√
Group
√2
-
-
-
√
√
√
Group
√
Group
√5
97
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Identifed
material aspect
Material aspect
boundary
GRI Standard
MARKETING AND LABELING
Disclosure
Page/Omission
Scope
Review
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 38-41
P. 38-41
Products and
services that
are transparent
and fair
Internal and
external
GRI 417: MARKETING
AND LABELING
417-1 Requirements for
product and service
information and labeling
417-2 Incidents of non-compliance
concerning product and service
information and labeling
417-3 Incidents of non-
compliance concerning
marketing communications
The Commercialisation Committee evaluates
potential impact of all products and services,
previously they are launched onto the market.
These impacts include, among others, clients
security and compatibility with other products
(p. 38-41). In addition, the Bank is member
of the Association for Commercial Self-
Regulation (Autocontrol) assuming the ethical
commitment to be responsible regarding the
freedom of commercial communication
A fne of 120.000 euros imposed by the Instituto
Vasco de Consumo for an alleged abuse of the
clause of expenses of mortgage loan contracts
by the Bank. The decision has been appealed.
A fne of 4.5 million euros imposed by
Bank of Spain for breaches relating to the
content and delivery of contractual and
pre-contractual information of contracts
with mortgage guarantee and in relation
to the collection of commissions and
roundings, by the former Banco Popular
A fne of 4.5 million euros imposed by the CNMV
for the undue collection of incentives derived
from investments in foreign and domestic
collective investment schemes by the Bank.
Moreover, the information regarding litigation
and the Group's other contingencies is provided
in the auditor's report and annual accounts.
In Spain, the Bank forms part of the Spanish
Advertising Association (AEA). It is also a
member of the Association for the Self-
regulation of Commercial Communication,
which in turn is a member of the European
Advertising Standards Alliance.
On November 20 2018, SC and the CFPB
resolved an investigation of SC’s marketing
of gap waiver coverage – a product that
provides coverage for the amount of the
outstanding automobile loan in the event
of a total loss of the vehicle (through
accident or theft) where the insurance
proceeds are less than the amount owed
on the vehicle at the time of the loss -- and
disclosures associated with loan deferrals
and extensions pursuant to a Consent Order
which requires SC to (1) pay approximately
$2 million in customer remediation; (2) a
civil monetary penalty of $2.5 million; and
waive approximately $7.2 million of balances.
Information on litigation and other Group
contingencies can be found in Auditors’
report and annual consolidated accounts .
-
-
-
√
√
√
Group
√7
Group
√5
Group
√5
CUSTOMER PRIVACY
Measures taken
for customer
satisfaction
Internal and
external
GRI 103:
MANAGEMENT
APPROACH
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
P. 38-41
P. 38-41
GRI 418: CUSTOMER
PRIVACY
418-1 Substantiated complaints
concerning breaches of
customer privacy and
losses of customer data
The Bank has not received fnal sanctions
for this concept. In addition, information
on litigation and other Group contingencies
can be found in Auditors’ report and
annual consolidated accounts.
-
-
-
√
√
√
Group
√5
98
2018 Annual Report Identifed
material aspect
Material aspect
boundary
GRI Standard
SOCIOECONOMIC COMPLIANCE
Disclosure
Page/Omission
Scope
Review
Products and
services that
are transparent
and fair / Ethical
behaviour and risk
management
Internal and
external
103-1 Explanation of the material P. 14-15 and column "Material aspect
topic and its boundary
boundary" of GRI Content Index (p. 86-102)
GRI 103:
MANAGEMENT
APPROACH
103-2 The management
approach and its components
103-3 Evaluation of the
management approach
GRI 419:
SOCIOECONOMIC
COMPLIANCE
419-1 Non-compliance with
laws and regulations in the
social and economic area
P. 20-21, 23, 24-25, 31 and 47.and
column “Page/Omission” of the GRI 419:
Socioeconomic Compliance (p. 99)
P. 20-21, 23, 24-25, 31 and 47.and
column “Page/Omission” of the GRI 419:
Socioeconomic Compliance (p. 99)
The Bank has not received fnal sanctions
for this concept. In addition, information
on litigation and other Group contingencies
can be found in Auditors’ report and
annual consolidated accounts.
-
-
-
√
√
√
Group
√5
99
Responsible bankingCorporate governanceEconomic and financial reviewRisk management GRI Standards - fnancial services sector disclosures
Identifed material
aspects
Material aspect
boundary
G4
Standard Disclosure
Page/Omission
Scope
Review
FINANCIAL SERVICES SECTOR DISCLOSURES
PRODUCT PORTFOLIO
FS1
FS2
FS3
FS4
FS5
FS6
FS7
FS8
Policies with specifc
environmental and social
components applied
to business lines
Procedures for assesign and
screening environmental and
social risks in business lines
Processes for monitoring
clients´ implementation of and
compliance with environmental
and social requirements included
in agreements of transactions
Process(es) for improving staf
competency to implement
the environmentas and social
policies and procedures as
applied to business lines
Interactions with clients/
investees/business partners
regarding environmental and
social risks and opportunities
Percentage of the portfolio
for business lines by specifc
region, size (e.g. micro/
SME/large) and by sector
Moneraty value of products
and services designed to
deliver a specifc social
beneft for each business line
broken down by purpose
Monetary value of products
and servicies designed to
deliver a specifc environmental
beneft foir each business line
broken down by purpose
P. 18-19
Group √
P. 18-19, 38-41 and 66.
Group √
P. 18-19, 38-41 and 66.
Group √
To raise awareness and
transmit the policies
content, the Bank has
continued with its
employee training and
awareness campaigns.
The latest was a video
tutorial explaining the
process of adaptation
for the sector-specifc
policies and involving
those from the Bank
who are ultimately
responsible for this area
Group √
P. 20-21 and 45
Group √
P. 38-41
Group √
P. 50-54
Group √
P. 50-54
Group √
Ethical behaviour and
risk management
/ Compliance
and adapting to
regulatory changes /
Products and services
that are transparent
and fair / Products
and servicies
ofering social and
environmental
added value
Internal and external
100
2018 Annual Report
Identifed material
aspects
Material aspect
boundary
G4
Standard Disclosure
Page/Omission
Scope
Review
AUDIT
Ethical behaviour and
risk management
/ Compliance
and adapting to
regulatory changes
Internal and external
FS9
Coverage and frequency of audits
to assess implementation of
environmental and social policies
and risk assesment procedures
ACTIVE OWNERSHIP
The Group’s Internal
Audit Area conducts a
bi-annual review of the
sustainability function
to assess, among other
aspects, the degree of
compliance with the
Social and Environmental
Responsibility Policies,
which include both the
revision of the Equator
Principles and other
additional procedures
of risk assessment
on specifc sectors.
The last one was
carried out in 2016
Group √
FS10
Percentage and number of
companies held in the instituition´s
portfolio with which the reporting
organization has interacted on
environmental or social issues
P. 66
Group √10
FS11
Percentage of assets subject
to positive and negative
environmental or social screening
P. 66
Group √10
Ethical behaviour and
risk management
/ Compliance
and adapting to
regulatory changes /
Products and services
that are transparent
and fair / Products
and servicies
ofering social and
environmental
added value
Internal
FS12
Voting policy(ies) applied to
environmental or social issues for
shares over which the reporting
organization hold the right to
vote shares pr advises on voting
The Santander Group
has no voting policies
relating to social and/or
environmental matters
for entities over which
acts as an advisor. The
Santander Employees
Pension Fund does have
a policy of formal vote
in relation to socuial and
environmental aspects,
for shareholder meetings
of the entities over which
it has voting rights
Group √
FS13
FS14
FS15
FS16
Access points in low-
populated or economically
disadvantaged areas by type
P. 54
Group √
Initiatives to improve access
to fnancial servicies for
disadvantaged people
P. 48-50 and Table 21
in Key metrics (p. 75)
Group √
Policies for the fair design and sale
of fnancial products and servicies
P. 38-41
Group √
Initiatives to enhance fnancial
literacy by type of benefciary
P. 38-41
Group √
101
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
The independent verification report is included in p. 103-105 of this chapter.
√ Reviewed content according to described scope.
NO Non reviewed content.
1. Only information regarding owned employees is disclosed.
2. Only qualitative information is disclosed.
3. Not broken down by gender.
4. The scope and limitations of this indicator are described on p. 57.
5. Information is provided on accounting provisions for claims of any type and over €60,000.
6. Information is provided on the total number of complaints channels, for any reason.
7. Information about each type of products and services is not detailed.
8. Data refers exclusively to centralised purchases data in Aquánima.
9. Only total amount of approved suppliers is included.
10. Information is only provided on the number of project fnance deals of Santander’s Bank, which have been analysed regarding social and environmental risks in
Equator Principles’ frame.
11. Information is provided on programmes and their direct impacts of the ten main countries of the Group, instead on centers.
102
2018 Annual Report
Independent verification
report
Independent
verification report
103
Responsible bankingCorporate governanceEconomic and financial reviewRisk management 104
2018 Annual Report 105
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Corporate governance
1 Overview of corporate governance in 2018
Redesigned corporate governance report
1.1 Refreshing the board
1.2 Ne w responsible banking, sustainability
and culture committee
1.3 Achieving our 2018 priorities
1.4 C ontinued improvement in
corporate governance
1.5 Priorities for 2019
2 Ownership structure
2.1 Share capital
2.2 Authority to increase capital
2.3 Signifcant shareholders
2.4 Shareholders’ agreements
2.5 Treasury shares
2.6 St ock market information
3 Shareholders.
Engagement and shareholders meeting
3.1 Shareholder engagement
3.2 Shareholder rights
3.3 Dividend policy
3.4 2018 AGM
3.5 Our coming 2019 AGM
4 Board of directors
4.1 Our directors
4.2 Board composition
4.3 Board functioning and efectiveness
4.4 Audit committee activities in 2018
108
108
108
109
109
110
111
112
112
112
113
114
114
115
116
116
117
119
120
122
124
126
132
140
151
4.5 Appointments committee activities in 2018
156
4.6 Remuneration committee activities in 2018
159
4.7 Risk supervision, r
egulation and
compliance committee activities in 2018
162
6 Remuneration
6.1 Principles of the remuneration policy
6.2 R emuneration of directors for the
performance of supervisory and collective
decision-making duties: policy applied
in 2018
6.3 R emuneration of directors for
the performance of executive duties
6.4 Dir ectors remuneration policy for 2019,
2020 and 2021 that is submitted to
a binding vote of the shareholders
172
172
173
175
186
6.5 Pr eparatory work and decision-making
process with a description of the
participation of the remuneration committee 192
6.6 R emuneration of non-director members
of senior management
193
6.7 Prudentiall
y signifcant disclosures document
194
7 Group structure and internal governance
7.1 Corporate Centre
7.2 Internal governance of the Group
196
196
196
8 Internal control over fnancial reporting (ICFR) 198
8.1 Control environment
8.2 Risk assessment in fnancial reporting
8.3 Control activities
8.4 Information and communication
8.5 Monitoring
8.6 External auditor report
9 Other corporate governance information
198
200
201
202
204
205
208
9.1 R econciliation to CNMV’s
corporate governance report model
208
9.2 St atistical information on corporate
governance required by CNMV
211
9.3 Cr oss-reference table for comply or explain in
corporate governance recommendations
230
9.4 R econciliation to CNMV’s
remuneration report model
231
232
239
4.8 R elated-party transactions and
conficts of interest
5 Management team
167
169
9.5 St atistical information on
remuneration required by CNMV
9.6 Other
information of interest
106
2018 Annual Report
107
Responsible bankingCorporate governanceEconomic and financial reviewRisk management 1. Overview of corporate
governance in 2018
Redesigned corporate governance report
On 12 June 2018, the Spanish National Securities Market
Commission (CNMV) approved new formats for the annual
corporate governance and remuneration reports required for
listed Spanish companies and, more importantly, allowed
companies to draft their reports in a free format.
This welcome regulatory fexibility, together with the fresh
look that we have given to this 2018 consolidated directors'
report (see introduction to this report on page 2) has led
to a new approach being adopted for the 2018 corporate
governance report which now consists in this chapter in the
consolidated directors' report.
Key to understanding the changes:
• In this 2018 corporate governance report, we have opted to
follow a free format.
• This has allowed us in this 2018 corporate governance report
to merge (1) the summary content that we typically included
in the annual report and (2) the legally required content for
the corporate governance report proper.
• With the purpose of providing a holistic view of our corporate
governance practices in one single document, we have also
included in this 2018 report the content that was previously
set out in the reports on the activities of our board of directors’
committees (see sections 4.4 to 4.7).
• This year’s report also includes (1) the annual report on
directors’ remuneration that we are required to prepare
and submit to a non-binding vote at our annual general
shareholders’ meeting (AGM), (see section 6 'Remuneration')
and, (2) our directors’ remuneration policy, (see section 6.4
'Directors remuneration policy for 2019, 2020 and 2021 that is
submitted to a binding vote of the shareholders' at our 2019
AGM). These were published previously separately but there
was signifcant overlap with the corporate governance report.
• Therefore, we now publish in a single document the content
that was previously included in at least fve documents
covering the same subject matter.
It is important to point out that the new format does not imply
a reduction in the information we provide. It simply presents it
in a more rational and organised manner. To achieve this, the
2018 corporate governance report does not fully diverge from
its previous format:
• Section 9.1 'Reconciliation to CNMV’s corporate governance
report model' and section 9.4 'Reconciliation to CNMV’s
remuneration report model' include cross references
to where information can be found in this chapter or
elsewhere in this annual report for each section of the
corporate governance and remuneration reports in CNMV's
prescribed format.
• Moreover, we have traditionally flled in the 'comply or
explain' section for all recommendations in the Spanish
Corporate Governance Code for Listed Companies to establish
where we comply and also the few instances where we do
not comply or we comply partially. Therefore, have included
in section 9.3 'Cross-reference table for comply or explain in
corporate governance recommendations' a chart with cross-
references showing where the information supporting each
response can be found in this 2018 corporate governance
chapter or elsewhere in this consolidated directors´report.
1.1 Refreshing the board
Continued board composition improvement
Throughout 2018, we continued to refresh and strengthen our
board, refecting our strong commitment to ensuring balance and
diversity. The main board changes were as follows:
Mr Álvaro Cardoso de Souza was appointed as an independent
director at our 2018 AGM. He flled the vacancy left by executive
director Mr Matías Rodríguez Inciarte.
Mr Álvaro Cardoso de Souza strengthens the international
diversity of the board and brings to it his strong industry
experience, which also reinforces the overall risk management
and accounting skills within the board. This experience was
acquired in an international environment considered strategic for
our Group, as he has held diferent executive positions at Citibank
and several listed companies in Brazil.
• Mr Henrique de Castro has been proposed by the board of
directors for election at our 2019 AGM as new independent
director to fll the vacancy left by Mr Juan Miguel Villar Mir on 1
January 2019.
108
2018 Annual Report
Mr Henrique de Castro brings to the board his sound experience
in the technological and digital industry along with signifcant
experience in the US market, which he has acquired through top
positions held in companies such as Yahoo! Inc. and Google, Inc.
• Mr José Antonio Álvarez, who continues as our Chief Executive
Ofcer (CEO), has been appointed executive vice chairman of the
board on 15 January 2019. Mr Guillermo de la Dehesa, in turn,
continues as director but ceased to be vice chairman on that date.
Changes
Stepping down
from role
Increase in independent Mr Matías
directors
Rodríguez Inciarte de Souza
Taking up role
Mr Álvaro Cardoso
Refreshment of
independent directors
Mr Juan Miguel
Villar Mir
Mr Henrique
de Castro
Refreshment of
vice chairman
Mr Guillermo
de la Dehesa
Mr José Antonio
Álvarez
Board committees
Our board has also made changes to the composition of its
committees, in order to continue strengthening their performance
and support to the board in their respective areas, according to the
best international practices and internal rules and regulations.
The changes efected are:
• Executive committee: Ms Belén Romana became a member
of the committee on 1 July 2018, increasing the number of
independent directors in the committee.
• Appointments committee: Mr Ignacio Benjumea left the
committee on 1 July 2018, diferentiating the composition of the
appointments committee from the remuneration committee, in
line with best practices.
• Risk supervision, regulation and compliance committee:
Mr Álvaro Cardoso de Souza became a member of the committee
on 23 April 2018 and subsequently was appointed as its chairman
on 1 October 2018. Mr Bruce Carnegie-Brown, the former
chairman, left the committee on 1 January 2019, following a
suitable transition period. Mr Guillermo de la Dehesa left the
committee on 1 July 2018.
• Innovation and technology committee: Mr Rodrigo Echenique
Gordillo and Ms Esther Giménez-Salinas i Colomer left the
committee on 1 July 2018.
• The new responsible banking, sustainability and culture
committee was established, appointing Mr Ramiro Mato García-
Ansorena as chairman and Ms Ana Botín-Sanz de Sautuola y
O’Shea, Ms Belén Romana García, Ms Homaira Akbari, Ms Sol
Daurella Comadrán, Ms Esther Giménez-Salinas i Colomer and
Mr Ignacio Benjumea Cabeza de Vaca as members. On 24 July
2018 Mr Álvaro Cardoso de Souza was appointed also member
of this committee.
1.2 New responsible banking,
sustainability and culture committee
Our board has created a responsible banking, sustainability and
culture committee to help the Group progress towards its goal of
being a more responsible Bank.
The committee’s purpose is to assist our board in pursuing and
reviewing the corporate culture and values and to advise on its
relations with the various stakeholders, especially employees,
customers and communities in which our Group carries out
its activities.
The committee will also supervise the way in which the Group
manages business responsibly and how we are helping people and
businesses prosper.
For further information see 'Responsible banking, sustainability
and culture committee' in section 4.3 of this chapter and the
'Responsible banking' chapter.
1.3 Achieving our 2018 priorities
The 2017 annual report disclosed our corporate governance goals
and priorities for 2018. The following chart describes how we have
delivered on each priority.
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Overview of corporate governance in 2018Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2018 goals
How we have delivered
Board refreshment
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
a suitable composition of the committees
to improve performance of their functions
and their respective areas of action.
Boardroom
Further improve the independence of the
board by increasing the number of meetings
between the independent board members
and the lead independent director.
Board dynamics
Intensify the board’s dedication to strategic
matters and, in addition to the specifc annual
meeting dedicated specifcally to strategic
matters, hold a meeting every six months on
the progress of the strategic plan. Dedication
to the supervision of emerging risks and
cybersecurity will also be strengthened.
Board committees
Continue strengthening the functions
and activities of the committees in
advising and supporting the board.
Responsible banking, sustainability
and culture committee
Establish the new responsible banking,
sustainability and culture committee. Intensify
the board’s involvement in the development
of corporate culture and its commitment to
responsible business practices in relation
to diversity, inclusion and sustainability.
Regulatory framework
Execute the modifcations 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), and also
meet the expectations of the supervisor.
Throughout 2018, signifcant work has been carried out to ensure that the overall
composition and skills of our board of directors and board committees are appropriate.
Desired areas of experience were identifed and incorporated into board succession
and recruitment planning overseen by the appointments committee.
Mr Álvaro Cardoso de Souza’s appointment has further strengthened the board’s
international diversity, specifcally in relation to Latin America / Brazil.
Section 1.1 'Refreshing the board' describes other changes and improvements
made to the composition of our board and board committees.
In addition, the tenure of board members remained a key area of focus, ensuring
that an appropriate balance between board refreshment and retaining continuity
and stability was achieved. Our appointments committee also assessed the
composition of the board committees to ensure continuity of efectiveness, skillset,
experience, overall stability and appropriate distribution of workload following the
creation of the responsible banking, sustainability and culture committee.
The number of private meetings between independent directors and the lead independent
director was increased, scheduled at regular intervals throughout the year.
Our board reviews the progress of the strategic plan on a regular basis in line
with the established priority, and held its annual Strategy Day in June 2018.
Our board has focused closely on emerging risks, including cybersecurity risks. Our
Group chief risk ofcer reports to the board on a monthly basis on all risks and the
Group cybersecurity ofcer reports on cybersecurity matters on a quarterly basis.
All board committee functions are under constant review to ensure that all matters reviewed
by the board have been previously assessed and challenged by the appropriate board
committee(s). In addition, the main issues addressed by our committees are disclosed to our
board as part of the report made by the relevant committee chair to the board in each meeting.
Our responsible banking, sustainability and culture committee has been set up in June
2018. See section 1.2 'New responsible banking, sustainability and culture committee'.
The committee’s key areas include whistleblowing, corporate culture, disclosure of the
Bank’s approach to tax and the Bank’s approach to various stakeholders; in addition to
the oversight and scrutiny of how the Bank is fulflling its purpose, including tackling
issues such as fnancial exclusion, providing green fnance and supporting small- and
medium-sized enterprises. The committee operates in full coordination with the risk
supervision, regulation and compliance committee given convergence of responsibilities.
Various actions have been taken: our audit committee has carried out a fnal assessment of
the external auditor’s performance in relation to the audit of the annual fnancial statements,
as well as an annual assessment of the internal audit function and the performance of the
head of this function. The supervisory role of our risk supervision, regulation and compliance
committee has been strengthened with regard to risk and compliance functions. The
composition of the appointments committee has been modifed in line with best practices.
1.4 Continued improvement
in corporate governance
We have a strong commitment to continuously strengthening
our corporate governance framework and further improving
its soundness and efectiveness in the coming years. This is
key to successfully fulflling our mission of becoming a more
responsible Bank in an era of disruption, and to our success in
tackling the many challenges that face us in today´s digital world.
That is why, on top of delivering on our 2018 priorities and the
other enhancements mentioned above, we have continued to
work on improvements on corporate governance:
• Greater transparency. As mentioned in the 'Introduction' to
this consolidated directors’ report and in the introduction of
this Corporate governance chapter, in 2018 we have taken a
signifcant leap forward in terms of improved disclosure in
corporate governance and generally.
• Further insight into the skills of our directors. In our 2017
annual report we took the step of identifying each director in
our board skills matrix. In this report, we have further revised
110
2018 Annual Report
the matrix, adding new skills that have become relevant to
our shareholders and ourselves (such as responsible banking
and sustainability, human resources, talent, culture and
remuneration), covering thematic skills, horizontal skills and
diversity separately and including board tenure side-by-side
for a clearer and more complete view . See 'Board skills and
diversity matrix' in section 4.2. In addition, we have highlighted
key skills attributed to each director in their profles under
section 4.1 'Our directors'.
• Moving to full gender equality at board level. On 26 February
2019 our board took the signifcant step of replacing our already
achieved target of 30% of women representation in our board
to a gender equality target that we will seek to achieve by 2021.
This new gender equality target will mean that our board will
strive to have a presence of women in the board of 40% to 60%.
See section 4.2 'Board composition'.
• Refecting our good long-standing practices in our Rules
and regulations of the board. We have in many respects
gone beyond our own board rules in adopting best practices in
corporate governance. From time to time, we amend our Rules
and regulations of the board to embed those practices more
formally. These are just the latest examples:
• Refecting in our Rules and regulations of the board the full
independence of our audit committee. Since 2005, we have
gone beyond what our Rules and regulations of the board require
by having an audit committee composed entirely of independent
directors. On 26 February 2019 our board decided to build that
practice into a rule by amending our Rules and regulations of the
board. See section 4.3 'Board functioning and efectiveness'.
• The transferring of main responsibility for corporate
governance to our appointments committee. The strong
oversight of our appointments committee on board efectiveness
has meant that it has increasingly dealt with corporate
governance-related matters beyond efectiveness. On 26
February 2019 our board, following best practices, decided
to broaden the mandate of our appointments committee
in corporate governance matters and has correspondingly
reduced that of the risk supervision, regulation and compliance
committee. In addition, given his particular involvement in
corporate governance of our lead director, engagement with
shareholders and appointments issues, the board has also
expressly provided in the Rules and regulations of the board for
his membership of the appointments committee. See 'Rules and
regulations of the board' in section 4.3.
1.5 Priorities for 2019
Our board’s priorities on corporate governance for 2019 are the
following:
• Responsible banking will be a higher priority than ever. Our
culture and corporate values are essential for long term value
creation. For these purposes we will focus on:
• Overseeing our business practices to ensure they are sound
and responsible and how we engage with all our stakeholders.
• Strong governance in decisions relating to sustainability and
responsible banking, as well as transparency and disclosure
of our non-fnancial information (environmental, social,
prevention of corruption and bribery, ethics, etc.) will be also
key for our responsible banking, sustainability and culture
committee.
• Strategy: in the complex environment of today´s fnancial
markets, the success of the Bank requires:
• The understanding that innovation and digital/technological
transformation are a catalyst in our business model and
strategy, turning technology challenges into opportunities.
• In addition to the close monitoring of emerging and
geopolitical risks.
• Engagement with investors and other stakeholders, closely
monitored by:
• Providing tailored feedback to all of stakeholders through,
among others, the leadership of the lead independent
director and one-to-one meetings, and meeting their
expectations with transparency and reliability. Listening and
giving voice to investors will enable the Bank to deliver better
long term returns.
• Leveraging on the implementation of the European Union
shareholders’ rights directive and other legislation to enhance
and encourage stakeholder relations.
• Diversity in the boardroom: a strong and unbreakable
commitment with broader diversity will remain a focus for
our board and our appointments committee. The updated
board skills and diversity matrix mentioned above will allow
any gender and/or other types of imbalance to be addressed.
Diversity is not a box to be ticked but a strategy for our success.
• Ongoing board refreshment with an appropriate and diverse
composition of our board and board committees, in addition to a
balanced tenure within the board, will remain a priority for the
coming years.
• Compensation efectiveness: our board and the remuneration
committee will continue to focus on shaping compensation
structures and schemes for our executives, according to our
corporate culture and values, while driving them towards
alternative performance metrics.
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Overview of corporate governance in 2018Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2. Ownership structure
Broad, widely distributed and well balanced shareholder base
A single class of shares
No takeover defences in our Bylaws
Authorised capital in line with best practices, providing the necessary fexibility
2.1 Share capital
Our share capital is represented by ordinary shares with a par
value of 0.50 euros each. All shares belong to the same class and
carry the same rights, including as to voting and dividend.
There are no outstanding bonds or securities convertible
into shares, other than the contingent convertible preferred
securities (CCPPS) referred to in the next section 2.2 'Authority to
increase capital'.
At 31 December 2018, the Bank had a share capital of EUR
8,118,286,971 represented by 16,236,573,942 shares.
In 2018, the share capital was altered only once through the
capital increase made on 6 November 2018 as part of the
Santander scrip dividend programme. A total of 100,420,360
new shares were issued representing 0.62% of the share capital
at 31 December 2018.
We have a broad, widely distributed and balanced shareholder
structure. At 31 December 2018, the total number of Santander
shares owned or represented by shareholders was 4,131,489 and the
distribution by type of investor, continent and size of shareholding
was as follows:
Type of investor
BoardA
Institutional
Retail
Total
% of share capital
1.13%
59.11%
39.76%
100%
A. Shares owned or represented by directors. For further details on
shares owned and represented by directors, see 'Tenure, committee
membership and equity ownership' in section 4.2 and subsection A.3 in
section 9.2 'Statistical information on corporate governance required by
CNMV'.
Continent
Europe
Americas
Rest of the world
Total
% of share capital
77.29%
21.63%
1.08%
100%
Size of shareholding
% of share capital
1-3,000
3,001-30,000
30,001-400,000
Over 400,000
Total
9.44%
17.19%
11.60%
61.77%
100%
2.2 Authority to increase capital
Under Spanish law, the authority to increase share capital rests
with the general shareholder’s meeting (GSM). However, our GSM
may delegate to our board of directors the authority to approve
or execute capital increases. Our Bylaws are fully aligned with
Spanish law, and do not establish any diferent conditions for share
capital increases.
At 31 December 2018, our board of directors has been authorised
by the GSM to approve or execute the following capital increases:
• Authorised capital to 2021: At our 2018 AGM, our board was
authorised to increase share capital on one or more occasions
and at any time by up to EUR 4,034,038,395.50 (or approx. 8,000
million shares representing approximately 49.70% of the share
capital at 31 December 2018). This authority was granted for
three years (i.e. until 23 March 2021).
The authority can be used for issuances for a cash consideration,
with or without pre-emptive rights for shareholders, and for
capital increases to back any convertible bonds or securities
issued under the authority granted to our board by the 2015 GSM
to issue convertible bonds and securities.
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2018 Annual Report
Ownership structure
The issuance of shares without pre-emptive rights under
this authority is capped at EUR 1,613,615,358 (20% of capital
at the time of the 2018 AGM or approx. 3,227 million shares
representing approximately 19.88% of the share capital at 31
December 2018). This limit applies also to capital increases
to convert bonds or other convertible securities, other than
contingent convertible preferred securities (which can only be
converted into newly-issued shares when the CET1 ratio falls
below a pre-established threshold).
This authority has not been used to date except in connection
with the issuances of CCPS of 8 February 2019 mentioned below.
• Capital increases approved for contingent conversion of CCPS:
We have issued contingent convertible preferred securities that
qualify as additional tier 1 instruments for regulatory capital
purposes and which would convert into newly-issued shares
if the CET1 ratio fall below a pre-established threshold. Each
of these issuances is therefore backed by a capital increase
approved under the authority to increase capital granted by
the GSM to our board in force at the time of the CCPS issuance.
The following chart shows the CCPS in circulation at the time of
preparing this corporate governance report, with details of the
capital increases backing them. The execution of these capital
increases is therefore contingent and has been delegated to the
board of directors.
Issues of contingent convertible preferred securities
Date of issuance
Nominal amount
Discretionary remuneration
per annum
Conversion
12/03/2014
EUR 1,500 million
6.25% for the frst fve years
19/05/2014
USD 1,500 million
6.375% for the frst fve years
11/09/2014
EUR 1,500 million
6.25% for the frst seven years
25/04/2017
EUR 750 million
6.75% for the frst fve years
29/09/2017
EUR 1,000 million
5.25% for the frst six years
19/03/2018
EUR 1,500 million
4.75% for the frst seven years
08/02/2019
USD 1,200 million
7.50% for the frst fve years
If, at any time, the CET1
ratio of the Bank or the
Group is less than 5.125%
Maximum number
of shares in case
of conversionA
345,622,119
228,798,047
299,401,197
207,125,103
263,852,242
416,666,666
388,349,514
A. The fgure corresponds to the maximum number of shares that could be required to cover the conversion of the relevant CCPS, calculated as the
quotient (rounded of by default) of the nominal amount of the CCPS issue divided by the minimum conversion price determined for each CCPS
(subject to any anti-dilution adjustments and the resulting conversion ratio).
• Annual delegation to execute a capital increase (which is
nearing expiry and will not be renewed): As has occurred
every year in the recent past, at our 2018 AGM, our board was
delegated the power to execute a capital increase with pre-
emptive rights for shareholders of EUR 500 million (or 1,000
million shares). Our board has not exercised this delegated power
to date and the agreement will expire on the anniversary of our
2018 AGM (i.e. 23 March 2019). Our board will not propose the
same delegation of power at our 2019 AGM in line with best
practices in this area and the fact that the desired fexibility to
increase capital is achieved with the authorised capital referred
to above, which is consistent with those best practices.
2.3 Signifcant shareholders
At 31 December 2018, no shareholder of the Bank individually held
more than 3% of its total share capital (which is the signifcant
threshold generally established under Spanish regulations for
a signifcant holding in a listed company to be disclosed)1. Our
Bylaws do not include any specifc provisions for signifcant
holdings.
While at 31 December 2018 certain custodians appeared in our
register of shareholders as holding more than 3% of our share
capital, we understand that those shares were held in custody on
behalf of other investors, none of which exceed that threshold
individually. These custodians are State Street Bank and Trust
Company (13.091%), The Bank of New York Mellon Corporation
(8.853%), Chase Nominees Limited (6.695%), EC Nominees Limited
(3.958%) and BNP Paribas (3.791%).
In addition, BlackRock Inc. had as of that date informed CNMV of
its signifcant holding of voting rights in the Bank (5.585%) but had
noted in its communications that the corresponding shares were
being held for the account of a number of mutual funds or other
investment entities, none of which exceeded 3% individually.
Throughout 2018 BlackRock Inc. informed CNMV of the following
movements regarding its voting rights in the Bank: 23 April,
decrease below 5%, 8 May, increase above 5%, 24 July, decrease
below 5%, 3 August, increase above 5%, and 11 December,
decrease below 5%. In addition, the asset manager Capital
Research and Management Company notifed CNMV that on 21
March 2018 it had increased its voting rights above 3%, and on
9 August 2018 that it had decreased it below 3%. The website of
CNMV contains the aforementioned notices.
It should be noted that there may be some overlap in the holdings
declared by the above mentioned custodians and asset manager.
1. At 31 December 2018 neither our shareholders registry nor CNMV's registry showed any shareholder resident in a tax haven with a shareholding of 1% or higher of our
share capital (which is the other threshold applicable under Spanish regulations).
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
While there are currently no shareholders qualifying as a
signifcant shareholder, it should be noted that our Bylaws and
Rules and regulations of the board provide an appropriate system
for vetting and approving related party transactions as indicated in
section 4.8 'Related-party transactions and conficts of interest'.
Subsection A.7 of section 9.2 'Statistical information on corporate
governance required by CNMV' shows the list of parties to the
shareholders´ agreement.
2.5 Treasury shares
2.4 Shareholders’ agreements
In February 2006, a shareholders’ agreement was entered into
by various persons linked to the Botín-Sanz de Sautuola y O’Shea
family whereby a syndicate was created with respect to the Bank’s
shares. CNMV was informed of the execution of this agreement
and the subsequent amendments made by the parties, and this
information can be found on CNMV website2. There have been no
amendments in fnancial year 2018.
The main provisions of the agreement are the following:
Our current treasury share policy was approved by our board on 23
October 2014, following recommendations published by CNMV in
this respect. The policy provides that treasury share transactions
shall have the following objectives3:
• 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 in supply
and demand.
• To take advantage, for the beneft of shareholders as a whole, of
situations of share price weakness in relation to medium-term
performance prospects.
• Transfer restrictions: except when the transferee is also a party
to the agreement or the Fundación Botín, any transfer of the
Bank’s shares expressly included in the agreement requires prior
authorisation from the syndicate meeting, which may be granted
or denied freely; and
The policy further establishes that treasury share transactions may not
be carried out for the purpose of intervening in the free formation of
prices. Therefore, it requires that:
• Orders to buy should be made at a price not higher than the greater of
• Voting syndicate: under the agreement, the parties undertake
to syndicate and pool the voting rights attached to their shares in
the Bank, so that these rights may be exercised, and, in general,
the syndicate members will act towards the Bank in a concerted
manner, in accordance with the instructions and indications and with
the voting criteria and orientation established by the syndicate. This
syndication and pooling of voting rights covers not only the shares
expressly attached to the syndicate under the agreement but also
any voting rights attached to other Bank shares held either directly
or indirectly by the parties to the agreement, and any other voting
rights assigned thereto, for as long as they hold those shares or
are assigned those rights. For this purpose, representation of the
syndicated shares is attributed to the chair of the syndicate, who
shall be the chairman of the Fundación Botín (currently Mr Francisco
Javier Botín-Sanz de Sautuola y O’Shea). Ms Ana and Mr Javier Botín-
Sanz de Sautuola y O’Shea are siblings.
The initial term of the agreement ends on 1 January 2056, but
it will be automatically extended for further 10-year periods unless
terminated by one of the parties with 6-months prior notice
before the end of the initial term or the end of one of the
extension periods. The agreement may only be terminated by
unanimous agreement of all the syndicated shareholders.
At the date of execution of the agreement, the syndicate comprised
a total of 44,396,513 shares of the Bank (0.273% of its share capital
at the end of 2018). In addition, as established in the shareholders’
agreement, the syndication extends, solely with respect to the
exercise of the voting rights, to other Bank shares held either directly
or indirectly by the parties to the agreement, or whose voting rights
are attributed to them, from time to time. Accordingly, at 31 December
2018, a further 39,057,250 shares (0.241% of the Bank’s share capital
at such date) were also included in the syndicate. The total number
of shares subject to the shareholders’ agreement was 79,798,339,
representing 0.491% of the Bank’s share capital at such date.
the following two:
• The price of the last trade carried out in the market by
independent persons; and
• The highest price contained in a buy order of the order book.
• Orders to sell should be made at a price not lower than the lesser
of the following two:
• The price of the last trade carried out in the market by
independent persons; and
• The lowest price contained in a sell order of the order book.
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.
Trading in treasury shares was last authorised at our 2018 AGM. This
authorisation has a validity of fve years (i.e. until 23 March 2023) and
permits the acquisition of treasury shares provided that the shares held
at any point in time do not exceed the legal limit provided for under the
Spanish Companies Act (currently, 10% of the Bank’s share capital).
The authorization further requires that acquisitions are made at a price
that is not lower than the nominal value of the shares and does not
exceed the last trading price in the Spanish market for a transaction in
which the Bank was not acting for its own account by more than 3%.
We are proposing to our 2019 AGM the renewal of this authorization.
See section 3.5 'Our coming 2019 AGM'.
At 31 December 2018, the Bank and its subsidiaries held 12,249,652
shares representing 0.075% of our share capital at that date
(compared to 3,913,340 at 31 December 2017, representing 0.024% of
our Bank’s share capital).
2. For more information about this shareholder agreement, see material facts with entry numbers 64179, 171949, 177432, 194069, 211556, 218392, 223703 and 226968 fled
in CNMV on 17 February 2006, 3 June 2012, 19 November 2012, 17 October, 2013, 3 October 2014, 6 February 2015, 29 May 2015 and 29 July 2015, respectively and also can
be found on the Group's website.
3. The policy focuses on the discretionary trading of treasury shares. The policy applies partially to trading of treasury shares linked to customer activities, such as market
risk hedging and brokerage activities, or hedging for customers.
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2018 Annual Report
Ownership structure
The following chart summarises the monthly average percentages of
treasury shares between 2018 and 2017.
Monthly average percentages of treasury sharesA
% of the Bank’s share capital at month end
January
February
March
April
May
June
July
August
September
October
November
December
2018
0.04%
0.03%
0.02%
0.04%
0.05%
0.07%
0.07%
0.07%
0.07%
0.07%
0.07%
0.07%
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%
A. Monthly average of daily positions of treasury shares.
In 2018, trading of treasury shares by the Bank and its subsidiaries
involved:
• The purchase of 206,780,988 shares equivalent to a par value of
EUR 103,4 million (cash amount of EUR 1,026.4 million) at an average
purchase price of EUR 4.96 per share;
• The sale of 198,444,971 shares equivalent to a par value of EUR 99.2
million (cash amount of EUR 988.3 million) at an average price of EUR
4.98 per share; and
• A net loss for the Group of EUR 118,080 that has been recognised in
the Group’s equity under shareholders’ equity-reserves.
Stock Exchange (with trading symbol SAN). They also trade on the
unsponsored Sistema Internacional de Cotizaciones of the Mexican Stock
Exchange (with trading symbol SANN).
From July 2018 to early 2019, the number of secondary listings was
streamlined and the Bank’s shares were delisted from the Buenos Aires,
Milan, Lisbon and São Paulo stock exchanges. In Mexico the Bank shares
have been delisted from the Índice de Precios y Cotizaciones and listed in
the above mentioned Sistema Internacional de Cotizaciones.
Share price performance
Markets ended 2018 much lower, after a start to the year with rises
driven by the positive impact of the US’s tax reform. This positive
environment, however, dissipated in the following months because
of greater volatility in stock markets mainly due to: (i) the political
uncertainty in Italy and Brazil; (ii) the lack of agreement over Brexit;
(iii) the increase in fnancial tensions in developing countries because
of the dollar’s appreciation, after the Fed raised its interest rates and
the European Central Bank (ECB) continued its policy of monetary
normalisation and announced the end of quantitative easing and (iv)
the escalation of trade tensions between US and China and its possible
impact on confdence and the global economy. Fears of slowdown
in the global economy, coupled with the partial shutdown of the US
government, intensifed the fall in shares in the last part of the year.
In this context, the main indices and the Santander share ended lower.
The Santander share was down 27.5% at EUR 3.973, while Euro Stoxx
Banks and Stoxx Banks fell 33.3% and 28.0%, respectively. The Spanish
market Ibex 35 benchmark index declined 15.0%, the DJ Stoxx 50 13.1%
and the MSCI World Banks 19.7%. Santander’s total shareholder return
was 24.3% negative.
Market capitalisation and trading
As of 31 December 2018, Santander was the largest bank in the eurozone
by market capitalisation (EUR 64,508 million) and 16th in the world. A
total of 19,040 million Santander shares were traded during 2018 for
an efective value of EUR 95,501 million, the largest fgure among the
shares that comprise the EuroStoxx (liquidity ratio of 118%in 20184).
The following chart refects the signifcant changes in treasury stock
during the year, which have been communicated to CNMV.
The Santander share
Total of
acquired
Notifcation date direct shares
Total of
acquired
indirect shares
Total % of
share capitalA
04/04/2018
128,699,007
32,857,278
1.002%
29/06/2018
76,457,880
8,469,406
0.526%
A. Percentage calculated with the existing share capital at the date of the
notifcation.
2.6 Stock market information
Markets
The Bank’s shares are listed on the Spanish stock exchanges (Madrid,
Barcelona, Bilbao and Valencia, with trading symbol SAN), the New
York Stock Exchange (NYSE) (in the form of American Depositary
Shares, 'ADS', with trading symbol SAN and where each ADS
represents one share of the Bank), the London Stock Exchange (in the
form of Crest Depositary Interests, 'CDI', with trading symbol BNC and
where each CDI represents one share of the Bank) and the Warsaw
4. Total volume of shares traded over average number of shares in issue.
Shares (million)
Price (EUR)
Closing price
Change in the price
Maximum for the period
Date of maximum for the period
Minimum for the period
Date of minimum for the period
Average for the period
End-of-period market
capitalisation (million)
Trading
Total volume of shares traded (million)
Average daily volume of
shares traded (million)
Total cash traded (EUR million)
Average daily cash traded (EUR million)
2018
2017
16,236.6
16,136.2
3.973
-27.5%
6.093
5.479
+12.3%
6.246
26/01/18
08/05/17
3.800
4.838
27/12/18
02/01/17
4.844
5.562
64.508
88.410
19,040
20,222
74.7
79.3
95,501
113,665
374.5
445.7
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3. Shareholders. Engagement
and shareholders meeting
One share, one vote, one dividend
No takeover defences in our Bylaws
High participation and engagement of shareholders in our AGM
3.1 Shareholder engagement
The Bank is at the forefront of the best practices in engagement
with shareholders and institutional investors, focusing in earning
their lasting loyalty and driving proftability and sustainable
growth to their investments, in a Simple, Personal and Fair way
and according to our corporate culture and values.
We consider transparency is vital to gain trust among our
shareholders and other stakeholders and we take a proactive
approach to align our reporting and disclosure with their
expectations.
We engage with investors actively, fairly and transparently in the
following ways:
• Annual engagement through the AGM. We consider our AGM as
the most important annual corporate event for our shareholders.
For that reason we strive to encourage the assistance and
informed participation of our shareholders wherever they are
based. See 'Participation of shareholders at the GSM' in section
3.2.
With that aim we have adopted measures to facilitate the
participation of shareholders in the AGM. In addition to make
available to them the relevant information as required by law,
we answer in writing all requests that shareholders send before
the AGM in connection with the agenda. See 'Right to receive
information' in section 3.2.
Furthermore, during the AGM the chairman informs in sufcient
detail on the most relevant developments of the Group's
corporate governance, occurred during the year, supplementing
the written information made available in the corporate
governance report, and addresses any questions that the
shareholders may pose verbally during the course of the general
shareholders’ meeting in connection with the matters included
in the agenda. When it is impossible to satisfy the shareholder's
right during the course of the meeting, and in the case of
those requests made by remote attendees at the meeting, the
appropriate information is provided in writing within seven days
after the end of the AGM.
The chairmen of the audit, appointments and remuneration
committees also report to the AGM on the tasks of those
committees, supplementing the committees activities annual
reports which are now included in this Corporate governance
chapter.
We also broadcast our GSMs live on our corporate website.
This allows non-attending shareholders, other investors and
stakeholders in general to be fully informed of the discussions
and results.
The record quorum and outstanding voting results in our 2018
AGM show the importance we put on engagement through our
GSMs. See section 3.4 '2018 AGM'.
• Quarterly results presentations. Each quarter we hold a results
presentation on the same day we disclose those results. The results
presentation can be followed live, via conference call or webcast.
The corresponding fnancial report and results presentation
material are available that day before the market opens. During the
conference call it is possible to ask questions or send them via email
to: investor@gruposantander.com.
Our last event has been on 30 January 2019, when the 2018 Results
Presentation took place. During 2018, the frst, second and third
quarter results presentations took place on 24 April, 25 July and 31
October, respectively.
• Investor and strategy days. We also organise investor and
strategy days. These events allow our senior management to
lay out our strategy for investors and stakeholders in a broader
context than what results presentations typically allow. These
events also allow investors to have direct interaction with senior
management and some of our directors, something we see
as increasingly important as a way to further underscore the
strength of our board. In line with CNMV recommendations,
announcements of meetings with analysts and investors and the
documentation to be used at those meetings are published in
advance by the Bank. The Bank has already announced that its
next investor day will take place on 3 April 2019 in London5.
5. The information that will be made available in the investor day is not incorporated by reference in this annual report nor otherwise considered to be a part of it.
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and shareholders meeting
• Lead independent director engagement with key investors. Our
lead independent director, Mr Bruce Carnegie-Brown, maintains
regular contact with investors and shareholders in Europe and
North America, particularly during the months prior to our AGM,
allowing us to gather their insights and to form an opinion about
their concerns, especially in connection with our corporate
governance. As he is also chairman of the appointments and the
remuneration committees, he is well suited to provide all the
perspectives on the governance of the Group and get in detail
investors sentiment and views. During 2018 and early 2019 he
met with 30 investors in 7 diferent cities totalling a 22% of our
share capital. The contribution of our lead independent director
in incorporating international best practices, developing relations
with institutional investors and providing them tailored feedback
is highly valued by the other directors in our annual board self-
assessment.
• Investor roadshows. Our Investors Relations department
is in constant contact with our investors, analysts and other
stakeholders, seeking direct contact to provide all-round
discussion on shareholder value, on covering also improvements
to governance and remuneration structures and sustainability
matters.
During 2018 they had 1,134 contacts with 678 diferent
institutional investors. Those included roadshows, 1 on 1 and
group meetings and telephone calls. The team reached 33.62%
of our share capital, that is more than 50% of the capital held by
institutional investors.
• Shareholder and Investor Relations team. As part of our exercise
of openness towards our retail shareholders, during 2018 we
held 252 events where they were informed about the latest
results and the Group´s strategy, as well as the evolution of the
share. Our Shareholders team has personally attended to 16,943
shareholders who represent 6.55% of the Bank´s share capital in
diferent roadshows and 1 on 1 group meetings.
To comply with our commitment to transparency and
information, our Shareholder and Investor Relations team ofers
numerous attention channels. In 2018, we responded to 166,149
queries received via our shareholder helplines, mailboxes and
WhatsApp and achieved a 98% recommendation score in the
satisfaction surveys carried out. New in 2018, and in line with our
digital transformation and Simple, Personal and Fair culture, we
launched a 'Virtual Customer' channel where shareholders can
hold one-on-one meetings with the Shareholder and Investor
Relations team using their mobile devices.
• Proxy advisors, environment, social and governance (ESG)
analysts and other infuencers. We have for a long time
recognised the importance and value for our investors that can be
obtained by seeking an open dialogue with corporate infuencers
such as proxy advisors and ESG analysts. Ensuring our priorities
and messages are well understood by those players translates
into better communication to the end investors that look to them
for advice or counsel.
• Respect of fair disclosure principles. All our interactions with
investors, analysts and other stakeholders follow the principle of
fair disclosure and CNMV’s guidelines in this respect. Therefore,
material information on our fnancial performance and prospects
and other similarly relevant information is only disclosed in
the types of interaction mentioned above or in other analysts
meetings for which we announce the fact that the meeting will
take place and publish the documentation that will be used,
according to CNMV´s recommendations regarding informational
meetings with analysts, institutional investors and other stock
market professionals. The purpose of other interactions is
therefore to better explain the public information available to all
investors and be able to directly address and understand areas of
interest or concern.
Our policy for communicating with shareholders, institutional
investors and proxy advisors establishes the rules and applicable
practices in this respect, is respectful of market abuse regulations
and dispenses similar treatment to all shareholders. The policy is
published on the Bank´s corporate website.
3.2 Shareholder rights
Our Bylaws provide for only one class of shares (ordinary shares),
granting all holders the same rights. Each Santander share entitles
the holder to one vote.
The Bank does not have any defensive mechanisms in the
Bylaws, fully conforming to the principle of one share, one vote,
one dividend.
In this section we highlight certain key features available to our
shareholders.
No restrictions on voting rights or on the
free transfer of shares in our Bylaws
There are no legal or bylaw restrictions on the exercise of voting
rights except for those resulting from the failure to comply with
applicable regulations as indicated below.
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 qualifed majorities other
than those established by law.
There are no restrictions on the free transfer of shares other than
the legal restrictions indicated in this section.
The transferability of the shares is not restricted by our Bylaws
or in any other manner other than by the application of legal and
regulatory provisions. Likewise, there are no bylaw restrictions on
the exercise of voting rights (except where an acquisition has been
made in breach of legal or regulatory provisions).
Further, the Bylaws do not include any neutralisation provisions
(as these are referred to in Spanish Securities Market Law), which
apply in the event of a tender ofer or takeover bid.
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Please also note that the shareholders’ agreement referred to
in section 2.4 'Shareholders' agreements' contains transfer and
voting restrictions on the shares subject to that agreement.
These rights must be exercised by means of a certifed notice that
must be received by the Bank’s registered ofce within fve days
after the publication of the notice of the call to meeting.
Legal and regulatory restrictions on the acquisition of signifcant
holdings
These legal and regulatory provisions apply mainly because of
the Bank’s presence in regulated sectors (which implies that
the acquisition of signifcant holdings or infuence is subject to
regulatory approval or non-objection) and its status as a listed
company (which implies that a tender ofer or takeover bid for
the Bank’s shares must be made for the acquisition of control and
other similar transactions).
The acquisition of signifcant ownership interests is regulated
mainly by:
• Regulation (EU) 1024/2013 of the Council of 15 October 2013,
conferring specific tasks on the ECB relating to the prudential
supervision of credit institutions;
• Spanish Securities Markets Law; and
• Law 10/2014, of 26 June, on the organisation, supervision and
solvency of credit institutions (articles 16 to 23) and its
implementing regulation, Spanish Royal Decree 84/2015, of 13
February.
The acquisition of a signifcant stake in the Bank may also require
the authorisation of other domestic and foreign regulators with
supervisory powers over the Bank’s and its subsidiaries' activities
and shares listings or other actions in connection with those
regulators or subsidiaries.
Participation of shareholders at the GSM
All registered holders of shares on record at least fve days prior
to the day on which a meeting is scheduled to be held are entitled
to attend. The Bank allows shareholders to exercise their rights to
attend, delegate and vote using remote communication systems,
which also foster participation in the GSM.
Another communications channel available to shareholders is the
electronic shareholders’ forum. This forum, which is available on
our Bank’s corporate website at the time of the meeting, 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 ofers or requests to act as a voluntary proxy.
Supplement to the meeting call
Shareholders representing at least 3% of the share capital may
request the publication of a supplement to the AGM call with
a statement of the name of the shareholders exercising this
right and of the number of shares held by them, as well as the
items to be included on the agenda, attaching a rationale or
substantiated proposal for resolutions concerning these items and,
if appropriate, any other relevant documentation.
Shareholders representing at least 3% of the share capital may
also submit duly grounded resolutions concerning matters that
have already been included or to be included, relating to one or
more items on the agenda.
118
Right to receive information
From the publication of the call to the GSM until the ffth day,
inclusive, prior to the date for which the meeting has been
called at frst call, shareholders may deliver written requests for
information or clarifcations, or submit written questions on issues
they consider to be relevant concerning the items on the meeting
agenda. In addition, in the same manner and within the same
period, shareholders may deliver written requests for clarifcations
concerning the relevant information that the Bank has provided
to CNMV since the last GSM was held or concerning the auditor’s
reports. The requested information and the answers provided by
the Bank are published in its corporate website.
Additionally, this information right may be exercised in
the meeting itself but when it is impossible to satisfy the
shareholder’s right during the course of the meeting, or those
requests made by remote attendees at the meeting, the
appropriate information is provided in writing within seven days
following after the end of the GSM.
Quorum and majorities required for
passing resolutions at the GSM
The quorum required to hold a valid general shareholders’ meeting
and the system for adopting resolutions set out in our Bylaws and
in the Rules and regulations for the Bank’s GSM are the same as
those set down by Spanish law.
Except for specifc matters as indicated below, the quorum on frst
call shall be met by the attendance of shareholders representing at
least twenty fve per cent of the subscribed share capital with the
right to vote. If a sufcient quorum is not available, the GSM shall
be held on second call, where no minimum quorum is required.
For purposes of determining the quorum, shareholders who
vote by mail or through electronic means before the meeting are
counted as present at the meeting, as provided by the Rules and
regulations for the Bank’s GSM.
Except for specifc matters as indicated below, resolutions
at GSMs are passed when, with respect to the voting capital
present or represented at the meeting, the number of votes
in favour is higher than the number of votes against.
The quorum and majorities required for Bylaws amendments,
issuances of shares and bonds, structural modifcations and
other signifcant resolutions provided for in applicable law
are those set out below for Bylaws amendments. In addition,
pursuant to the rules applying to credit institutions, the
increase above 100% (up to 200%) of the ratio of the variable
remuneration components over the fxed ones for executive
directors and other key function holders requires a qualifed
majority of two thirds if there is a quorum of more than 50%
and a majority of three quarters if there is not such a quorum.
Our Bylaws do not require any decisions that entail an acquisition,
disposal or contribution to another company of core assets or other
similar corporate transactions to be subject to the approval of the
GSM, except in those cases established by law.
2018 Annual Report
Shareholders. Engagement
and shareholders meeting
Rules governing amendments to our Bylaws
The GSM has the power to decide on any amendment of the
Bylaws, except for the change in the location of the registered
ofce within Spain, which may be decided by the board.
If the Bylaws are to be amended by the GSM, the Bank’s board or,
where appropriate, the shareholders tabling the resolution, must
draft the complete text of the proposed amendment along with
a written report justifying the proposed change, which must be
provided to shareholders with the call notice for the meeting at
which the proposed amendment will be voted on.
Furthermore, the call notice for the GSM must clearly set out
the items to be amended, detailing the right of all shareholders
to examine the full text of the proposed amendment and
accompanying report at the Bank’s registered ofce, and to request
that these documents be delivered or sent to them free
of charge.
If the shareholders are called upon to deliberate on amendments
to the Bylaws, the required quorum on frst call shall be met by
the attendance of shareholders representing at least ffty per cent
of the subscribed share capital with the right to vote. If a sufcient
quorum is not available, the GSM shall be held on second call,
where at least twenty-fve per cent of the subscribed share capital
with voting rights must be present.
When shareholders representing less than ffty per cent of the
subscribed share capital with the right to vote are in attendance,
the resolutions on amendments to the Bylaws may only be validly
adopted with the favourable vote of two-thirds of the share capital
present in person or by proxy at the meeting. However, when
shareholders representing ffty per cent or more of the subscribed
share capital with the right to vote are in attendance, resolutions
may be validly adopted by absolute majority.
Any changes to the Bylaws involving new obligations for
shareholders must have the consent of those afected.
Authorisation is required under the Single Supervisory Mechanism
(SSM) to amend our Bylaws. However, the following amendments
are exempt from this authorisation procedure, although they must
nevertheless be reported to the SSM: those intended to refect
a change in registered ofce within Spain, a capital increase,
additions to the wording of the Bylaws of legal or regulatory
requirements of an imperative or prohibitive nature or wording
changes to comply with court or administrative rulings and any
other amendments which the SSM has ruled to be exempt from
authorisation due to a lack of materiality in response to prior
consultations submitted to it for this purpose.
Corporate website
Our corporate website includes the information on corporate
governance as required by law. In particular, it includes (i) the
key internal regulations of Banco Santander (Bylaws, Rules and
regulations of the board, Rules and regulations for the GSM, etc.);
(ii) information on our board of directors and its committees as well
as the professional biographies of the directors and (iii) information
relating to the GSMs.
The route to the information on corporate governance in our
corporate website is: https://www.santander.com/csgs/Satellite/
CFWCSancomQP01/es_ES/Informacion-para-accionistas-
e-inversores.html?leng=en_GB. This route is included for
informational purposes only. The contents of our corporate website
are not incorporated by reference in this annual report or otherwise
considered to be a part of it.
3.3 Dividend policy
In relation to the fnancial year 2018, the board of directors intends
the payment against earnings for the year to be EUR 0.23 per
share, to be paid quarterly. EUR 0.065 and EUR 0.065 per share
has already been paid in cash in August 2018 and February 2019,
respectively, as well as EUR 0.035 per share through the Santander
Scrip dividend programme (with a 76.55% acceptance rate of the
payment in shares) in November 2018. The remaining EUR 0.065
per share is expected to be paid in April/May 2019, in cash as fourth
dividend against the 2018 results subject to the approval of the
2019 AGM.
This remuneration represents an average return of 4.75% on the
share price in 2018.
The dividend per share, once the fnal payment of EUR 0.065 per
share is approved and made, will have increased 4.50% compared
to 2017.
In order to have fexibility in determining how shareholder
remuneration is paid to shareholders, the board is proposing a
resolution to the 2019 AGM authorizing the acquisition of shares
to be held in treasury with the express possibility of executing
share repurchases to reduce the number of shares in issue, should
market conditions make such action advisable. Any such share
repurchases may also be made in conjunction with a scrip dividend,
referred to below, should such a dividend be deemed appropriate.
In addition, in view of the signifcant acceptance of the scrip
dividend, especially among our retail shareholders, and to
allow the required fexibility to be able to take advantage of the
opportunities for proftable growth in our markets, the board has
decided to propose to shareholders to retain the option to use a
scrip dividend. This could be combined with share repurchases to
satisfy the maximum number of shareholders, institutional and
retail, with the target of maximizing earnings per share.
These proposals will provide the board with the required
fexibility to determine whether or not to use these mechanisms,
depending on the Group’s performance and its progress against
the targets set.
The board will announce the 2019 interim dividend after the
September board of directors meeting. To align ourselves with
our European peers current practice, it is the board’s intention
to set a pay-out ratio of 40-50% in the mid-term, increasing it
from the current pay-out ratio of 30-40%; that the proportion
of dividend paid in cash is not lower than that of the last year;
and, as was announced in the 2018 AGM, to make two payments
against the results of 2019.
The agenda for the 2019 AGM includes two proposals in this
respect. See section 3.5 ‘Our coming 2019 AGM’.
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3.4 2018 AGM
• Record quorum of 64.55%
• Corporate management of the Bank in 2017 approved
with 99.22% voting in favour
• 2017 annual report on directors remuneration
approved with 94.42% voting in favour
• Appointment and re-election of directors approved
with at least 96.98% voting in favour
• No opposing vote of more than 15.43%
Quorum and attendance
The quorum for the annual general meeting of 2018 rose to
64.55%, our highest to date.
Quorum at annual general shareholders’ meetings
53.7%
54.9%
55.9%
58.8%
59.7%
57.6%
64.03% 64.55%
2011
2012
2013
2014
2015
2016
2017
2018
The breakdown of the quorum was as follows:
Physically present and remote attendance
0.823%
By proxy
Cast by post or directly
Via Internet
Remote voting
Cast by post
Via Internet
Total
44.982%
2.630%
15.735%
0.377%
64.547%
Voting results and resolutions
All items in the agenda were approved. The average percentage of
votes in favour for proposals submitted by our board was 97.61%.
The following chart summarises the resolutions approved at the
2018 AGM and the voting results:
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2018 Annual Report
Shareholders. Engagement
and shareholders meeting
1. Annual accounts and corporate management
1A. Annual accounts and directors’ reports for 2017
1B. Corporate management 2017
2. Application of results
3. Appointment, re-election or ratifcation of directors
3A. Establishing the number of directors
3B. Mr Álvaro Cardoso de Souza
3C. Mr Ramiro Mato
3D. Mr Carlos Fernández
3E. Mr Ignacio Benjumea
3F. Mr Guillermo de la Dehesa
3G. Ms Sol Daurella Comadrán
3H. Ms Homaira Akbari
4. Authorisation to acquire treasury shares
5. Amendments of Bylaws
Valid votes
For
Against
Blank
TotalA
TotalB Abstention
99.31
99.22
99.47
99.39
99.28
99.29
98.67
97.51
96.98
98.93
98.84
98.08
0.12
0.15
0.14
0.18
0.24
0.24
0.89
2.04
2.45
0.63
0.60
1.52
0.07
0.07
0.07
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.07
99.51
99.45
99.69
99.65
99.60
99.61
99.64
99.64
99.52
99.64
99.52
99.67
64.23
64.19
64.35
64.32
64.29
64.29
64.31
64.31
64.24
64.32
64.24
64.33
0.49
0.55
0.31
0.35
0.40
0.39
0.36
0.36
0.48
0.36
0.48
0.33
5A. Regarding the board of directors
98.76
0.79
0.08
99.64
64.31
0.36
5B. Regarding the delegation of powers of
the board and to board committees
5C. Relating to reporting tools
6. Delegation to the board of the power to increase share capital
7. Authorisation granted to the board to increase share capital
8. Increase in share capital via scrip dividend
9. Directors' remuneration policy
10. Maximum total annual remuneration of
directors in their capacity as directors
11. Maximum ratio of fxed and variable components
in the total remuneration of executive directors
12. Remuneration plans which entail the
delivery of shares or share options:
12A. Deferred multiyear objectives variable remuneration plan
12B. Deferred conditional variable remuneration plan
12C. Group buy-out policy
12D. Plan for employees of Santander UK Group Holdings
and other companies of the Group in the UK
13. Authorisation to implement the resolutions approved
14. Annual directors' remuneration report
15 to 28. Dismissal and removal of directorsC
A. Percentage of total valid votes and abstentions.
B. Percentage of the share capital at the date of the 2018 AGM.
99.34
99.38
96.30
84.16
99.10
94.22
0.20
0.16
3.30
15.43
0.51
3.61
0.08
0.08
0.07
0.07
0.07
0.08
99.62
99.63
99.67
99.67
99.68
97.92
64.30
64.31
64.34
64.33
64.34
63.21
0.38
0.37
0.33
0.33
0.32
2.08
98.24
0.95
0.08
99.28
64.08
0.72
98.31
1.20
0.08
99.60
64.14
0.40
95.65
96.90
97.59
98.86
99.40
94.42
0.00
2.32
2.31
1.60
0.66
0.18
3.74
98.54
0.08
0.08
0.08
0.09
0.07
0.08
0.00
98.05
99.29
99.28
99.60
99.66
98.25
98.54
63.29
64.09
64.08
64.29
64.33
63.42
47.73
1.95
0.71
0.72
0.40
0.34
1.75
1.46
C. Items 15 to 28, not included in the agenda, were submitted to a separate vote. Each item refers to the proposal for dismissal and removal of each
director in ofce at the 2018 AGM.
The full texts of the resolutions adopted at the 2018 AGM can be
viewed on the Group’s corporate website and on CNMV’s website,
since they were fled as a signifcant event on 23 March 2018.
Shareholder communications
In line with the policy for communicating with shareholders,
institutional investors and proxy advisors, in 2018 Banco Santander
continued to strengthen communications with, service to and contact
with its shareholders and investors in the context of the 2018 AGM.
Telephone service lines
9,522 queries addressed
Shareholder and investor mailbox
792 e-mails replied
WhatsApp
14 queries addressed
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3.5 Our coming 2019 AGM
The board of directors has agreed to call the 2019 annual general
shareholders’ meeting on 11 or 12 April, at frst or second call
respectively, with the following proposed resolutions.
• Remuneration of directors. To approve the fxed annual amount
of remuneration for directors in their capacity as such. For further
information see section 6.4 'Directors remuneration policy for
2019, 2020 and 2021 that is submitted to a binding vote of the
shareholders'.
• Annual accounts and corporate management. To approve:
• Variable remuneration. To approve a maximum ratio of
• The annual accounts and the directors reports of the Bank and
its consolidated Group for the fnancial year ended 31 December
2018. For further information see 'consolidated fnancial
statements'.
• The consolidated non-fnancial statement for the fnancial year
ended 31 December 2018, which forms part of this consolidated
directors' report. See 'Santander vision' and the 'Responsible
banking' chapter.
• The corporate management for the fnancial year ended 31
December 2018.
200% between the variable and fxed components of the total
remuneration for executive directors and certain employees
belonging to professional categories that have a material impact
on the Group’s risk profle. For further information see section
6.4 'Directors remuneration policy for 2019, 2020 and 2021 that is
submitted to a binding vote of the shareholders'.
• Remuneration plans. To approve the implementation of
remuneration plans involving the delivery of shares or
share options or referenced to the value of shares. For further
information see section 6.4 'Directors remuneration policy for
2019, 2020 and 2021 that is submitted to a binding vote of the
shareholders'.
• The application of results obtained during fnancial year 2018.
• Annual directors’ remuneration report. To provide a
consultative vote on the annual directors’ remuneration report.
For further information see section 6 'Remuneration'.
The related documents and information shall be available for
viewing on the Bank’s corporate website (www.santander.com)
as from the date of publication of the announcement of the call
to meeting.
Likewise, the Bank will provide a live broadcast of our 2019
AGM, as it did with the 2018 AGM. We will not remunerate the
attendance at the 2019 AGM, and therefore it is not necessary
to establish a general, long-term policy in this respect.
Notwithstanding the above, and as has been a tradition for
decades, the Bank ofers attendees of the AGM a commemorative
courtesy gift.
See section 3.3 'Dividend policy'.
• Appointment of directors.
• Set the number of directors at 15, within the maximum and the
minimum established by the Bylaws.
• Appointment of Mr Henrique de Castro as new independent
director (see section 1.1 'Refreshing the Board') and re-election
of the following board members for a three-year period: Mr
Javier Botín-Sanz de Sautuola O’Shea, Mr Ramiro Mato García-
Ansorena, Mr Bruce Carnegie-Brown, Mr José Antonio Álvarez
Álvarez and Ms Belén Romana García.
• External auditor. To re-elect the frm PricewaterhouseCoopers
Auditores, S.L. (PwC), as external auditor for fnancial year 2019.
See 'External auditor' in section 4.4.
• Authorization to acquire treasury shares, with express provision
for executing share repurchase programs. See section 3.3
'Dividend policy'.
• Increase in share capital via scrip dividend. See section 3.3
'Dividend policy'.
• Authority to issue convertible securities. To delegate to the
board of directors the authority to issue debentures, bonds,
preferred interests and other fxed-income securities or debt
instruments of a similar nature that are convertible into shares of
the Bank.
• Authority to issue non-convertible securities. To delegate to
the board of directors the authority to issue debentures, bonds,
preferred interests and other fxed-income securities or debt
instruments of a similar nature that are not convertible into
shares of the Bank.
• Remuneration policy. To approve the Bank’s directors
remuneration policy for 2019, 2020 and 2021. For further
information see section 6.4 'Directors remuneration policy for
2019, 2020 and 2021 that is submitted to a binding vote of the
shareholders'.
122
2018 Annual Report 123
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
4. Board of directors
A committed, balanced and diverse board
Efective governance
• Of the 15 directors, 12 are non-executive and 3 are
• Thematic committees supporting the board
executive
• A majority of independent directors
• 33% female board members
• New responsible banking, sustainability
and culture committee focusing on priorities
Complementarity roles: executive chairman, CEO and
lead independent director
124
2018 Annual Report
Board of directors
16
11
12
13
7
9
4
2
1
3
5
6
8
15
14
10
0
1. Ms Ana Botín-Sanz de Sautuola y O’Shea
Group executive chairman. Executive director
0
2. Mr José Antonio Álvarez Álvarez
Vice chairman6 and Chief executive ofcer (CEO)
Executive director
0
3. Mr Bruce Carnegie-Brown
Vice chairman and lead independent director.
Non-executive director (independent)
0
4. Mr Rodrigo Echenique Gordillo
Vice chairman. Executive director
0
5. Ms Homaira Akbari
Non-executive director (independent)
0
6. Mr Ignacio Benjumea Cabeza de Vaca
Non-executive director
0
7. Mr Javier Botín-Sanz de Sautuola y O’Shea
Non-executive director
0
8. Mr Álvaro Cardoso de Souza
Non-executive director (independent)
0
9. Ms Sol Daurella Comadrán
Non-executive director (independent)
10. Mr Guillermo de la Dehesa Romero
Non-executive director7
11. Mr Carlos Fernández González
Non-executive director (independent)
12. Ms Esther Giménez-Salinas i Colomer
Non-executive director (independent)
13. Mr Ramiro Mato García-Ansorena
Non-executive director (independent)
14. Ms Belén Romana García
Non-executive director (independent)
15. Mr Juan Miguel Villar Mir8
Non-executive director (independent)
16. Mr Jaime Pérez Renovales
General secretary and secretary of the board
125
6. Mr José Antonio Álvarez was appointed vice chairman of the board on 15 January 2019
7. Mr Guillermo de la Dehesa has been vice chairman of the board until 15 January 2019.
8. Mr Juan Miguel Villar Mir left the board on 1 January 2019.
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
4.1 Our directors
This information is presented as at 31 December 2018.
Ms Ana
Botín-Sanz de Sautuola y O’Shea
GROUP EXECUTIVE CHAIRMAN
Executive director
Joined the board in 1989.
Nationality: Spanish. Born in 1960 in Santander, Spain.
Education: Degree in Economics from Bryn Mawr College
(Pennsylvania, United States).
Experience: 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 Banco Español de Crédito,
S.A. Between 2010 and 2014 she was chief executive ofcer 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 chairman of the CyD
Foundation (which supports higher education) and of the Empieza
por Educar Foundation (the Spanish subsidiary of the international
NGO Teach for All) and she sits on the advisory board of the
Massachusetts Institute of Technology (MIT).
Positions in other Group companies (non-executive in all
cases and director unless otherwise indicated): Santander UK
plc., Santander UK Group Holdings plc., Portal Universia, S.A.
(chairman) and Universia Holding, S.L. (chairman).
Membership of board committees: Executive committee
(chairman), innovation and technology committee (chairman), and
responsible banking, sustainability and culture committee.
Skills and competencies: She has an extensive international
executive career in the banking sector, where she has held the
highest executive positions. She has also led the transformational,
strategic and cultural change in the Santander Group. In addition,
she has shown an ongoing commitment to sustainable and
inclusive growth, as refected in her philanthropic activities.
Mr José Antonio
Álvarez Álvarez
VICE CHAIRMAN9 &
CHIEF EXECUTIVE OFFICER
Executive director
Joined the board in 2015.
Nationality: Spanish. Born in 1960 in León, Spain.
Education: Graduate in Economics and Business
Administration. MBA from the University of Chicago.
Experience: He joined Santander in 2002 and was appointed
senior executive vice president of the Financial Management
and Investor Relations division in 2004 (Group chief fnancial
ofcer). He also served as director at SAM Investments
Holdings Limited, Santander Consumer Finance, S.A. and
Santander Holdings US, Inc. He also sat on the supervisory
boards of Santander Consumer AG, Santander Consumer Bank
GmbH and Santander Bank Polska, S.A. He was also a board
member of Bolsas y Mercados Españoles, S.A. (BME).
Other positions of note: None.
Positions in other Group companies: (non-executive in all cases
and director unless otherwise indicated): Banco Santander (Brasil)
S.A.
Membership of board committees: Executive committee and
innovation and technology committee.
Skills and competencies: With a distinguished career in the
banking sector, he is a highly qualifed and talented leader.
He brings to the board signifcant strategic and international
management expertise, in particular in relation to fnancial
planning, asset management and consumer fnance. He has a
strong experience with and reputation amongst key stakeholders,
such as regulators and investors.
9. Mr José Antonio Álvarez was appointed vice chairman of the board on 15 January 2019.
126
2018 Annual Report
Board of directors
Mr Bruce
Carnegie-Brown
VICE CHAIRMAN
LEAD INDEPENDENT DIRECTOR
Non-executive director (independent)
Joined the board in 2015.
Nationality: British. Born in 1959 in Freetown, Sierra Leone.
Education: Master of Arts in English Language and Literature
from the University of Oxford.
Experience: He was non-executive director of Jardine Lloyd
Thompson Group plc (2016-2017), non-executive director of
Santander UK Group Holding Ltd (2014-2017), non-executive
director of Santander UK, plc. (2012-2017) and he held the non-
executive chair of AON UK Ltd (2012-2015). He was also the
founder and managing partner of the quoted private equity
division of 3i Group plc., and president and chief executive
ofcer of Marsh Europe, S.A. He was also lead independent
director at Close Brothers Group plc. (2006-2014) and at Catlin
Group Ltd (2010-2014). He previously worked at JP Morgan
Chase for eighteen years and at Bank of America for four years.
Other positions of note: He is currently the non-executive chairman
of Moneysupermarket.com Group plc. and Lloyd’s of London.
Positions in other Group companies: None.
Membership of board committees: Executive committee,
appointments committee (chairman), remuneration committee
(chairman), innovation and technology committee and risk
supervision, regulation and compliance committee (he stepped
down from this committee on 1 January 2019).
Skills and competencies: He has a broad insurance background
and fnancial services experience (in particular, in investment
banking). He also possesses signifcant international experience,
having had extensive exposure to Europe (UK), Middle East and
Asia. His top management experience brings to the board know
how in remuneration, appointments and risk-related matters. In
addition, as lead independent director, he has gained an excellent
understanding of investor expectations and experience in
managing relations with them and with fnancial communities.
Mr Rodrigo
Echenique Gordillo
VICE CHAIRMAN
Executive director
Joined the board in 1988.
Nationality: Spanish. Born in 1946 in Madrid, Spain.
Education: Graduate in Law and State Attorney.
Experience: From 1973 to 1976 he held several positions in
the Spanish Public Administration (General Secretary of the
Post and Telecommunications Ofce, Technical Advisor in the
Ofce of the Spanish Prime Minister and other positions in
the Spanish Tax Authority ofces in Pontevedra and Madrid).
Former chief executive ofcer of Banco Santander, S.A. between
1988 and 1994. He served on the board of directors of several
industrial and fnancial companies, including Ebro Azúcares y
Alcoholes, S.A. and Industrias Agrícolas, S.A., and was chairman
of the advisory board of Accenture, S.A. He was also non-
executive chairman of NH Hotels Group, S.A., Vocento, S.A.,
Vallehermoso, S.A. and Merlin Properties SOCIMI, S.A. He has
also been non-executive chairman of Banco Popular Español, S.A.
Other positions of note: He is currently a non-executive director
of Inditex, S.A. and chairman of the board of trustees and the
executive committee of the Banco Santander Foundation.
Positions in other Group companies: (non-executive in all cases and
director unless otherwise indicated): Universia Holding, S.L., Grupo
Financiero Santander México, S.A.B. de C.V., Santander Vivienda,
S.A. de C.V. SOFOM, E.R. Grupo Financiero Santander México, Banco
Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo
Financiero Santander México, Casa de Bolsa Santander, S.A. de
C.V., Grupo Financiero Santander México, Santander Consumo, S.A.
de C.V., SOFOM. E.R., Grupo Financiero Santander México, Banco
Santander International and Portal Universia, S.A.
Membership of board committees: Executive committee.
Skills and competencies: His extensive experience with senior
executive and other non-executive roles in various industrial
and fnancial companies along with his deep knowledge on the
Santander Group are very valuable for the board. In addition, his
prior experience in the Spanish government provides the board with
strategic insights into regulations and relations with the public sector.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Ms Homaira
Akbari
Non-executive director (independent)
Joined the board in 2016.
Nationality: North-American and French. Born in 1961 in Tehran,
Iran.
Education: Doctorate in Experimental Particle Physics from
Tufts University and MBA from Carnegie Mellon University.
Experience: She was chairman and CEO of SkyBitz, Inc., managing
director of TruePosition 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.
Other positions of note: She is chief executive ofcer of
AKnowledge Partners, LLC. She is also a non-executive director of
Gemalto NV. Landstar System, Inc. and Veolia Environment, S.A.
Positions in other Group companies: None.
Membership of board committees: Audit committee, innovation
and technology committee and the responsible banking,
sustainability and culture committee.
Skills and competencies: She brings signifcant executive
experience in technology-related companies. Her knowledge of
the digital transformation challenges is an asset to the board. In
addition, her insights, gained from her extensive international
experience in a diverse range of geographies, are of particular
value to our Group.
Mr Ignacio
Benjumea Cabeza de Vaca
Non-executive director
Españoles, S.A. (BME) and of the Governing Body of the Madrid
Stock Exchange.
Other positions of note: He is vice chairman of the board of
trustees and member of the executive committee of the Financial
Studies Foundation and a member of the board of trustees and
the executive committee of the Banco Santander Foundation.
Joined the board in 2015.
Positions in other Group companies: None.
Nationality: Spanish. Born in 1952 in Madrid, Spain.
Education: Degree in Law from Deusto University, ICADE E-3
and State Attorney.
Membership of board committees: Executive committee,
remuneration committee, risk supervision, regulation and
compliance committee, innovation and technology committee and
responsible banking, sustainability and culture committee.
Experience: Former senior executive vice president, general
secretary and secretary of the board of Banco Santander,
and board member, senior executive vice president, general
secretary and secretary to the board of Banco Santander de
Negocios, S.A. and of Santander Investment, S.A. He was also
technical general secretary of the Ministry of Employment and
Social Security, general secretary of Banco de Crédito Industrial,
S.A. and director of Dragados, S.A., Bolsas y Mercados
Skills and competencies: He brings signifcant fnancial expertise
to the board, in particular in banking and capital markets. He also
has a wide experience in corporate governance and regulatory
matters, having served as general secretary and secretary of the
board of several banking institutions and held several positions in
the Spanish government. He also has a signifcant involvement in
several foundations.
Mr Javier
Botín-Sanz de Sautuola y O’Shea
Non-executive director
Joined the board in 2004.
Nationality: Spanish. Born in 1973 in Santander, Spain.
Education: Degree in Law from the Complutense University of
Madrid.
Experience: Co-founder and executive director, equities
division of M&B Capital Advisers. S.V., S.A. (2000-2008).
Previously he was legal advisor to the International Legal
Department of Banco Santander (1998-1999).
128
Other positions of note: Executive chairman of JB Capital
Markets, Sociedad de Valores, S.A.U. In addition to his work
in the fnancial sector, he collaborates with several non-proft
organisations. Since 2014 he has been chairman of the Botín
Foundation. He is also a trustee of the Princess of Girona
Foundation.
Positions in other Group companies: None.
Membership of board committees: None.
Skills and competencies: He brings to the board international
and management experience, in particular in the fnancial sector.
He also brings a deep knowledge of the Santander Group and its
operations and strategy, acquired through his tenure as a non-
executive director of the Bank.
2018 Annual Report
Board of directors
Mr Álvaro
Cardoso de Souza
Non-executive director (independent)
Joined the board in 2018.
Nationality: Portuguese. Born in 1948 in Guarda, Portugal.
Education: Degree in Economics and Business Administration
from Pontifcia Universidade Católica de Sao Paulo, Master
of Business Administration (MBA-Management Program for
Executives) from the University of Pittsburgh and a graduate
of the Investment Banking Marketing Program from Wharton
Business School.
Experience: He has held various positions at the Citibank
Group, including CEO of Citibank Brazil and various senior
positions in the US with respect to the consumer fnance,
private banking and Latin American businesses. He was a
member of the board of AMBEV. S.A., Gol Linhas Aéreas, S.A.
and of Duratex, S.A. He has been chairman of WorldWildlife
Group (WWF) Brazil, member of the board of WWF International
and chairman and member of the audit and asset management
committees of FUNBIO (Fundo Brasileiro para a Biodiversidade).
Other positions of note: None.
Positions in other Group companies (non-executive in all
cases and director unless otherwise indicated): Non-executive
chairman of Banco Santander (Brasil) S.A.
Membership of board committees: Risk supervision, regulation
and compliance committee (chairman) and responsible banking,
sustainability and culture committee.
Skills and competencies: He possesses a broad international
banking experience, particularly in Brazil. He has a solid
understanding of strategy and risk management-related
matters, acquired from his executive experience, which is key
to his role as chairman of our risk supervision, regulation and
compliance committee. In addition, he actively collaborates in
several environmental foundations and NGOs which brings him
very useful knowledge in sustainability matters.
Ms Sol
Daurella Comadrán
Non-executive director (independent)
Other positions of note: She is chairman of Coca Cola European
Partners, plc., executive chairman of Olive Partners. S.A. and holds
several positions at companies belonging to the Cobega Group.
Joined the board in 2015.
Nationality: Spanish. Born in 1966 in Barcelona, Spain.
Education: Degree in Business and MBA from ESADE.
Experience: She 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
the honorary consul general of Iceland in Barcelona since 1992.
Mr Guillermo
de la Dehesa Romero
Non-executive director10
Joined the board in 2002.
Nationality: Spanish. Born in 1941 in Madrid, Spain.
Education: Government Economist and head of ofce of the
Bank of Spain.
Experience: Former secretary of state of Economy, secretary
general of Trade, chief executive ofcer of Banco Pastor, S.A.,
international advisor to Goldman Sachs International, chairman
of Aviva Grupo Corporativo, S.L. and non-executive chairman of
Santa Lucía Vida y Pensiones, S.A.
Positions in other Group companies: None.
Membership of board committees: Appointments committee,
remuneration committee and responsible banking, sustainability and
culture committee.
Skills and competencies: She brings to the board excellent skills
in strategy and high-level management, acquired through her
international top executive experience in listed and large privately
held entities, in particular in the distribution sector. The above also
provides her a vast knowledge of corporate governance matters. In
addition, her experience as a trustee of various Foundations oriented
to health, education and environmental matters brings the board
responsible business and sustainability insights.
Other positions of note: 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 and chairman of the
board of trustees of IE Business School.
Positions in other Group companies: None.
Membership of board committees: Executive committee,
appointments committee, remuneration committee, and
innovation and technology committee.
Skills and competencies: Due to his experience and education,
he brings to the board strategic insights in the macroeconomic
and regulatory environment and on business management, after
having held top management positions as well as non-executive
positions.
10. Mr Guillermo de la Dehesa has been vice chairman of the board until 15 January 2019.
129
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Mr Carlos
Fernández González
Non-executive director (independent)
Other positions of note: He is the chairman of the board
of directors of Finaccess, S.A.P.I., non-executive director of
Inmobiliaria Colonial. S.A. and member of the supervisory board
of AmRest Holdings, SE.
Joined the board in 2015.
Positions in other Group companies: None.
Membership of board committees: Audit committee,
appointments committee and remuneration committee.
Nationality: Mexican and Spanish. Born in 1966 in Mexico City,
Mexico.
Education: Industrial engineer. He completed graduate studies
in business administration at the Instituto Panamericano de
Alta Dirección de Empresas.
Skills and competencies: He possesses signifcant international
experience not only in fnancial, but also in other retail
businesses, where he has held top executive positions with
overall responsibility for fnancial reporting and audit functions
as well as human resources matters.
Experience: Mr Fernández has also sat on the boards of
Anheuser-Busch Companies, LLC and Televisa S.A. de C.V.,
among other companies.
Ms Esther
Giménez-Salinas i Colomer
Government of Catalonia and member of the advisory board of Endesa-
Catalunya.
Non-executive director (independent)
Joined the board in 2012.
Nationality: Spanish. Born in 1949 in Barcelona, Spain.
Education: PhD in Law and Psychologist by the University of
Barcelona.
Experience: She was chancellor of the Ramon Llull University,
member of the Conference of Rectors of Spanish Universities
(CRUE), member of the General Council of the Judiciary of Spain,
member of the scientifc committee on criminal policy of the
Council of Europe, executive vice president of the Centre for Legal
Studies and Specialised Training of the Justice Department of the
Other positions of note: Professor emeritus at Ramón Llull University,
director of the Chair of Restorative and Social Justice at the Pere Tarrés
Foundation, Special Chair of Restorative Justice Nelson Mandela of
the National Human Rights Comission of Mexico, director of Aqu
(quality assurance agency for the Catalan university system) and of
Gawa Capital Partners, S.L. Member of the Bioethics Committee of the
Government of Catalonia.
Positions in other Group companies: None.
Membership of board committees: Risk supervision, regulation and
compliance committee and responsible banking, sustainability and
culture committee.
Skills and competencies: Her relevant experience in senior academic
and governmental roles, for which she has a strong reputation, enhances
the oversight capacities of the board. In addition, her career path brings
to the board knowledge and experience in legal matters, cultural
transformation and in embedding an ethical and responsible culture.
Mr Ramiro
Mato García-Ansorena
Non-executive director (independent)
(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).
Joined the board in 2017.
Nationality: Spanish. Born in 1952 in Madrid, Spain.
Education: Degree in Economics from the Complutense
University of Madrid and Management Development
Programme of the Harvard Business School.
Experience: He has held several positions in Banque BNP
Paribas, including chairman of the BNP Paribas Group in Spain.
Previously, he held several signifcant positions in Argentaria.
He has been a member of the Spanish Banking Association
130
Other positions of note: None.
Positions in other Group companies: None.
Membership of board committees: Executive committee, audit
committee, risk supervision, regulation and compliance
committee and responsible banking, sustainability
and culture committee (chairman).
Skills and competencies: He has had an extensive career in banking
and capital markets, where he has held senior executive and non-
executive positions. He brings to the board signifcant expertise in
top management and also in audit, risk and strategy, mainly related
to the fnancial sector. In addition, he has been actively participating
in the boards of trustees of several foundations aimed at enhancing
education.
2018 Annual Report
Board of directors
Ms Belén
Romana García
Non-executive director (independent)
Joined the board in 2015.
Nationality: Spanish. Born in 1965 in Madrid, Spain.
Education: Graduate in Economics and Business Administration
from Universidad Autónoma de Madrid and Government
Economist.
Experience: She was formerly senior executive vice president of
Economic Policy and senior 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 CNMV. She also held the
position of director of the Instituto de Crédito Ofcial and of other
entities on behalf of the Spanish Ministry of Economy. She served
as non-executive director of Banco Español de Crédito, S.A. and
Mr Juan Miguel
Villar Mir11
Non-executive director (independent)
Joined the board of directors in 2013 and left the board on 1
January 2019.
Nationality: Spanish. Born in 1931 in Madrid, Spain.
Education: Doctorate in Civil Engineering, graduate in Law with
a certifcate in Industrial Organisation.
Experience: He was Minister of Finance and vice president of
the government for Economic Afairs from 1975 to 1976. He
also acted as chairman of Grupo OHL, Electra de Viesgo, Altos
Hornos de Vizcaya, Hidro Nitro Española, Empresa Nacional de
Celulosa, Empresa Nacional Carbonífera del Sur, Cementos del
Mr Jaime
Pérez Renovales
Ge neral secretary and secretary
of the board
He joined the Group in 2003.
Nationality: Spanish. Born in 1968 in Valladolid, Spain.
Education: Graduate in Law and Business Administration
at Universidad Pontifcia de Comillas (ICADE E-3) and State
Attorney.
11. Mr Juan Miguel Villar Mir left the board on 1 January 2019.
executive chairman of Sociedad de Gestión de Activos Procedentes de
la Reestructuración Bancaria, S.A. (SAREB).
Other positions of note: 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 and co-chair of the Global Board of
Trustees of the Digital Future Society.
Positions in other Group companies: None.
Membership of board committees: Executive committee, audit
committee (chairman), risk supervision, regulation and compliance
committee, innovation and technology committee and responsible
banking, sustainability and culture committee.
Skills and competencies: Her background as a government
economist and her overall, executive and non-executive, experience
in the fnancial sector (in particular, in the audit committee of listed
companies) support her recognition as fnancial expert and qualify her
for her role as chairman of the audit committee.
In addition, the relevant positions held in Spanish credit institutions in
the feld of capital markets provide the board with strategic insights
into fnancial regulations and Spanish government relations.
Cinca, Cementos Portland Aragón, Puerto Sotogrande, Fundación
COTEC and the National College of Civil Engineering.
Other positions of note: He serves as chairman of Grupo Villar
Mir. He is also currently Professor of Business Organisation at the
Politécnica University of Madrid, a full member of the Spanish
Royal Academy of Engineering and the Spanish Royal Academy of
Moral and Political Sciences, an honorary member of the Spanish
Royal Academy of Doctors and a supernumerary member of the
Spanish Royal Academy of Economic and Financial Sciences.
Positions in other Group companies: None.
Membership of board committees: None.
Skills and competences: He brings to the board strategic insights
into Spanish government relations, due to the relevant positions
that he has held. In addition, his experience as chairman and frst
executive brings the board signifcant corporate governance and
top management skills.
Experience: He was director of the ofce of the second vice
president of the Government for Economic Afairs and Minister of
Economy, deputy secretary of the Presidency of the Government,
chairman of the Spanish State Ofcial Gazzete and of the
committee for the Public Administration Reform. Previously, he
was general vice secretary and vice secretary of the board and
head of legal of the Santander Group, general secretary and
secretary of the board of Banco Español de Crédito, S.A. and
deputy director of legal services at CNMV.
Secretary of all board committees.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
4.2 Board composition
Size
At 31 December 2018, our board of directors was made up of the
15 members whose profle and background are described in the
section 4.1 'Our directors' above. Our Bylaws allow for a board with
a minimum of 12 and a maximum of 17 members.
Composition by type of director
The composition of our board of directors is balanced between
executive and non-executive directors, most of whom are
independent.
The status of each director has been verifed by the appointments
committee and submitted to our board.
Our board composition
20%
20%
60%
Independent non-executive
directors 9/15
Executive directors 3/15
Othe external directors
(non propietary and
non-independent) 3/15
Diversity
We believe that a diverse environment is essential to ensure that
objectives are achieved and that the combination of experiences
and skills in the board provides an environment where diferent
views emerge and the quality of decision-making is improved.
Therefore, we seek a solid balance of technical skills, experiences
and perspectives in the board.
As further detailed below, our policy governing the selection,
suitability assessment and succession of directors promotes
diversity within the board, including diversity of gender,
geography, experience and knowledge, with no implicit bias that
could lead to any form of discrimination on the grounds of age,
disability, race or ethnic origin. This policy was amended in July
2018 in order to bring it into line with recent European legislation
on the disclosure of non-fnancial and diversity information
and with EBA and ESMA guidelines on suitability assessment of
board members and key functions holders. The Bank applies this
policy when selecting directors to fll any vacancy or looking for
candidates to add or replace board members.
The selection policy promotes diversity in the board of directors
from diferent standpoints:
• Geographical provenance or background diversity: the
selection process takes into account the diversity of cultural or
international educational background, especially in the main
geographies where the Group is present.
• 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 women to the board who meet
the requirements of ability, suitability and efective dedication to
the position of director, making a conscious efort to search for
female candidates who have the required profle. Our internal
policy promotes a selection of directors, that endeavours to
include a sufcient number of female board members to have a
balanced presence of women and men.
On 26 February 2019, our board replaced the target set in 2016 by
the appointments committee for the minority gender (women)
from 30% in 2020 to a gender equality target in the board, which
implies a presence of women in the board of 40% to 60%, to
be achieved by 2021. The board has exceeded the initial target
women currently comprise 33.35% of the board.
Female representation on our board is well above the average for
large listed companies in Europe. According to a study conducted
by the European Commission with data at October 2017, the
percentage of female board members at large listed companies
was 28.25% for all 28 countries in the European Union and 22%
for Spain.
• Education and professional background: the selection of
candidates ensures that they are qualifed and suitable for the
overall understanding of our Group, its businesses, structure
and the geographies in which it operates, both individually and
collectively; that they are aligned with the Santander culture.
The selection process ensures that the candidates have skills and
competencies in banking and fnancial services and in other areas
identifed as relevant in our board skills and diversity matrix. In
this regard, knowledge acquired in an academic environment is
taken into account, together with experience in the professional
performance of duties.
• The policy has no implicit bias that could lead to discrimination
by age, race, disability and/or ethnic origin. With regard to age,
there are no age limits for directors or for any position on the
board, including the chairman and CEO.
132
2018 Annual Report
Board of directors
In 2018, the Bank placed great emphasis on ensuring a diverse
composition in the board covering aspects such as gender and
geographical diversity but also ensuring there is no discrimination
on account of race, age or disability. We believe that such an
environment is vital to ensure that our goals as a business are
achieved. The combination of experience and personalities on the
board provides a good range of perspectives and improves the
quality of decision-making.
The result of implementing these diferent diversity criteria in
2018 is described in section 1.1 'Refreshing the board'. In particular,
international diversity in the board as well as the need to ensure
it has a balanced and adequate composition at all times was a
priority for us in 2018, as indicated in section 1.3 'Achieving our 2018
priorities'.
The functioning, efectiveness and results of the execution of
our diversity policy can be evidenced by the breadth of skills,
experience and diversity on the board and its committees shown in
the 'Board skills and diversity matrix' below. This year, as stated in
section 1.4 'Continued improvement in corporate governance', we
provide in the matrix more information on the skills and diversity
of our board, adding new skills that have become relevant to
our shareholders and for the management of the Bank, covering
diversity and board tenure separately.
Our strong and unbreakable commitment with broader diversity
will remain a focus for our appointments committee in 2019
because, as we stated in section 1.5 'Priorities for 2019', diversity is
not a box to be ticked but a strategy for our success.
Board skills and diversity matrix
Our board composition provides the balance of knowledge,
capabilities, qualifcations, diversity and experience required to
execute our long-term strategy in an evolving market environment.
This balance is refected in the board´s skills matrix that has been
updated in 2018 in order to make it simpler, more transparent
and also meet the expectations of our investors and other
stakeholders, who are demanding greater visibility on certain
skills within the board. In addition, the new structure takes into
account the recommendations of the new EBA and ESMA guide on
the suitability assessment of board members and key functions
holders, which came into efect in June 2018. To this end, and
in relation to the skills matrix from last year, the key changes
introduced are as follows:
• We have diferentiated two groups of skills or competences:
thematic skills and horizontal skills.
• Regarding thematic skills, we have regrouped and renamed the
skills th at we had included in the past, and added the following
new categories 'HR, Culture, Talent & Remuneration' and
'Responsible Business & Sustainability'.
• Regarding horizontal skills, we have included in this section skills
additional to the thematic ones and which are also desirable. The
skills in this section had been included in previous years and are
now re-grouped under this heading, with the addition of a new
skill labelled 'signifcant directorship tenure'.
• In addition, we have introduced a new diversity section, including
not only gender diversity but also diversity in geographical
provenance and/or training or education abroad, and a new
board tenure section, refecting the tenure of each directorship.
These changes have transformed our board skills matrix into a
more complete board skills and diversity matrix, now with more
information for shareholders and investors.
As last year, the skills matrix discloses the skills and competencies
of each board member showing our commitment to transparency
in this matter. In addition, to more clearly identify the background
for this skills matrix, we have included a paragraph on skills and
competencies for each director in section 4.1 'Our directors'.
133
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
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Board skills and diversity matrixA
SKILLS AND EXPERIENCE
THEMATIC SKILLS
Banking (93.3%)
Other fnancial services (73.3%)
Accounting, auditing &
fnancial literacy (93.3%)
Retail (93.3%)
Digital & information technology (33.3%)
Risk management (86.7%)
Business strategy (86.7%)
Responsible business &
sustainability (86.7%)
Human resources, culture, talent
& remuneration (93.3%)
Legal (26.7%)
Governance & control (93.3%)
International experience
HORIZONTAL SKILLS
Top management (93.3%)
Government, regulatory &
public policy (40.0%)
Academia & education (60%)
Significant directorship tenure (100%)
DIVERSITY
Female (33.3%)
Geographical provenance /
international education
BOARD TENURE
0 to 3 years (20%)
4 to 11 years (53.3%)
12 years or more (26.7%)
A. As at 31 December 2018.
Europe (93.3%)
US/UK (80%)
Latam (66.7%)
Others (33.3%)
Europe (73.3%)
US/UK (46.7%)
Latam (20%)
Others (6.7%)
B. Mr José Antonio Álvarez was appointed vice chairman of the board on 15 January 2019.
C. Mr Guillermo de la Dehesa has been vice chairman of the board until 15 January 2019.
D. Mr Juan Miguel Villar Mir left the board on 1 Janaury 2019.
134
2018 Annual Report
Board of directors
Independent
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135
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Executive directors
• Ms Ana Botín-Sanz de Sautuola y O’Shea, Group executive
chairman.
• Mr José Antonio Álvarez Álvarez, Group vice chairman12 and CEO.
• Mr Rodrigo Echenique Gordillo, Group vice chairman.
A more detailed description of their roles and duties is included in
'Group executive chairman and chief executive ofcer' in section 4.3.
Independent non-executive directors
• Mr Bruce Carnegie-Brown (lead independent director).
• Ms Homaira Akbari.
• Mr Álvaro Cardoso de Souza.
• Ms Sol Daurella Comadrán.
• Mr Carlos Fernández González.
• Ms Esther Giménez-Salinas i Colomer.
• Mr Ramiro Mato García-Ansorena.
• Ms Belén Romana García.
Years of service of independent directors
11.1
10.2
9.5
7.3
3.0
3.4
3.01
3.56
2011
2012
2013
2014
2015
2016
2017
2018
Other external directors
• Mr Ignacio Benjumea Cabeza de Vaca.
• Mr Javier Botín-Sanz de Sautuola y O’Shea.
• Mr Guillermo de la Dehesa Romero13.
• Mr Juan Miguel Villar Mir. He left the board on 1 January 2019.
On an annual basis, the appointments committee verifes and
informs the board about the category of the independent directors,
taking into account all the circumstances that are pertinent to each
case and, in particular, the existence of any possible signifcant
business relationships that could afect their independence.
This analysis is described further in section 4.5 'Appointments
committee activities in 2018'.
Independent non-executive directors account for 60% of our board,
following best practices in corporate governance and complying
with the Rules and regulations of the board that require the board
to be made up predominantly of non-executive directors and have
a number of independent directors that represent at least 50% of
the board.
At year-end 2018, the average length of service for independent
non-executive directors was 3.56 years.
These directors cannot be classifed as proprietary directors as
they do not hold or represent shareholdings equal to or greater
than the size of shareholding that qualifes as signifcant by law
nor have been appointed as directors on account of their status as
shareholders14.
Mr Botín is a party to the shareholders' agreement referred to
under section 2.4 'Shareholders agreement', to which the executive
chairman is also a party.
They also cannot be considered independent directors for the
followings reasons:
• Mr Botín and Mr de la Dehesa have both held position of director
for over 12 years.
• In the case of Mr Benjumea the required period has not lapsed
since he ceased his professional relationship with the Bank (other
than that as a director of the Bank and of Santander Spain).
12. Mr José Antonio Álvarez was appointed vice chairman of the board on 15 January 2019.
13. Mr Guillermo de la Dehesa has been vice chairman of the board until 15 January 2019.
14. 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 signifcant 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%) was 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. As a consequence, the board of directors, following the
proposal of the said committee, resolved on that date, to categorize him as other external director.
136
2018 Annual Report
Board of directors
137
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Tenure, committee membership and equity ownershipA
Board of directors
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Ms Ana Botín-Sanz de
Sautuola y O’Shea
Vice chairmanB
and Chief
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Mr José Antonio
Álvarez Álvarez
Mr Bruce Carnegie-BrownC
C
C
Vice chairmen
Members
General secretary
and secretary
of the board
C Chairman
Mr Rodrigo Echenique
Gordillo
Ms Homaira Akbari
Mr Ignacio Benjumea
Cabeza de Vaca
Mr Javier Botín-Sanz
de Sautuola y O’Shea
Mr Álvaro Cardoso
de Souza
Ms Sol Daurella Comadrán
Mr Guillermo de la
Dehesa RomeroD
Mr Carlos Fernández
González
Ms Esther Giménez-
Salinas i ColomerH
Mr Ramiro Mato
García-Ansorena
Ms Belén Romana García
Mr Juan Miguel Villar MirI
Total
Mr Jaime Pérez Renovales
C
C
C
A. Data at 31 December 2018 except where otherwise indicated. The changes in the membership of the committee during 2018 are shown in section 1.1
'Refreshing the board'.
B. Mr José Antonio Álvarez was appointed vice chairman of the board on 15 January 2019.
C. Mr Bruce Carnegie-Brown left the risk supervision, regulation and compliance committee on 1 January 2019.
D. Mr Guillermo de la Dehesa has been vice chairman of the board until 15 January 2019.
E. For further explanation, see 'Election, refreshment and succession' in section 4.2. Indicated periods do not take into account the additional period that
may apply under article 222 of the Spanish Companies Act.
F. The Bank has a shareholding policy that is intended to reinforce the alignment of executive directors with the long-term interests of shareholders.
This policy includes the directors’ commitment to maintain a signifcant personal investment in the Bank’s shares while they are actively performing
their executive duties, equivalent to two times the amount of their annual fxed remuneration (net of taxes). A 5-year period from the approval of the
policy in 2016 (or, if later, after the appointment of the director) is granted to attain the established investment level.
G. Includes shares owned by Fundación Botín, of which Mr Javier Botín is the chairman, and syndicated shares, except those corresponding to Ms
Ana Botín and Mr Javier Botín as they are already included within their direct or direct shareholdings. In subsection A.3 of section 9.2 ‘Statistical
information on corporate governance required by CNMV’ we have adapted this information to CNMV’s format, and have therefore added all the
syndicated shares as shareholding of Mr Javier Botín. See 2.4 'Shareholders’ agreements'.
H Ms Esther Giménez-Salinas left the innovation and technology committee on 1 July 2018.
I. Mr Juan Miguel Villar Mir left the board on 1 January 2019.
138
2018 Annual Report
Board of directors
Tenure
Bank shareholdingF
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T
04/02/1989
07/04/2017
First six months of 2020
668,836
20,334,245
21,003,081
0.129%
25/11/2014
07/04/2017
First six months of 2020
1,083,149
1,083,149
0.007%
25/11/2014
18/03/2016
First six months of 2019
22,443
22,443
0.000%
07/10/1988
07/04/2017
First six months of 2020
1,039,401
14,591
1,053,992
0.006%
27/09/2016
07/04/2017
First six months of 2021
22,000
9,000
31,000
0.000%
30/06/2015
23/03/2018
First six months of 2021
3,516,698
3,516,698
0.022%
25/07/2004
23/03/2018
First six months of 2019
5,272,830
12,652,340
119,468,000G
137,393,170
0.846%
23/03/2018
23/03/2018
First six months of 2019
0
0
0
0.000%
25/11/2014
23/03/2018
First six months of 2021
143,255
456,970
600,225
0.004%
24/06/2002
23/03/2018
First six months of 2021
173
25/11/2014
23/03/2018
First six months of 2021
18,524,499
30/03/2012
07/04/2017
First six months of 2020
6,062
28/11/2017
23/03/2018
First six months of 2019
40,325
22/12/2015
07/04/2017
First six months of 2020
07/05/2013
27/03/2015
First six months of 2018
167
1,338
0
4
0
0
0
0
173
0.000%
18,524,503
0.114%
6,062
0.000%
40,325
0.000%
167
1,338
0.000%
0.000%
30,341,176
33,467,150
119,468,000
183,276,326
1.13%
For further details see section 9.2 'Statistical information on
corporate governance required by CNMV'.
Election, refreshment and succession of directors
and order of the respective appointment. Outgoing directors may
be re-elected. Each appointment, re-election and ratifcation is
submitted to a separate vote at the AGM.
Election of directors
Our directors are appointed for three-year terms, and one-third of
our board is renewed each year, following the order established
by the length of the service on the board, according to the date
Procedures for appointing, re-electing, evaluating and
removing directors
Our internal policy for the selection, suitability assessment
and succession of directors, stipulates the criteria concerning
the quantitative and qualitative composition of our board of
139
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
directors, the process for reviewing its composition, the process
for identifying potential candidates and the selection and
appointments process.
The appointment and re-election of directors corresponds to the
GSM. In the event that directors vacate their ofce during the
term for which they were appointed, the board of directors may
provisionally designate another director, by co-option, until the
shareholders, at the earliest subsequent GSM, either confrm or
revoke this appointment.
The proposals for appointment, re-election and ratifcation of
directors, regardless of the status thereof, that the board of
directors submits to the shareholders at the GSM and the decisions
adopted by the board itself in cases of co-option must be preceded
by the corresponding report and reasoned proposal of the
appointments committee.
The proposal must be accompanied by a duly substantiated
report prepared by the board containing an assessment of the
qualifcations, experience and merits of the proposed candidate.
In cases of re-election or ratifcation of directors, this committee
proposal shall contain an assessment of the work and efective
dedication to the position during the last period in which the
proposed director occupied the post. If the board disregards the
proposal made by the appointments committee, it must give the
reasons for its decision and place these reasons in the minutes for
the record.
Our directors must meet the specifc requirements set forth by law
for credit institutions and the provisions of our Bylaws, and must
formally undertake, upon taking ofce, to fulfl the obligations and
duties prescribed therein and in the Rules and regulations of the
board.
Our directors must be persons of renowned commercial and
professional integrity, and must have the knowledge and
experience needed to exercise their function and be in a position
to carry out the good governance of the entity. Candidates for
the position of director will also be selected on the basis of their
professional contribution to the board as a whole.
For further information see section 4.1 'Our directors' and under
'Board skills and diversity matrix' within this section 4.2.
In all cases, our board of directors shall endeavour to ensure that
external or non-executive directors represent a signifcant majority
over executive directors and that the number of independent
directors represents at least half of all directors.
Our directors shall cease to hold ofce when the term for which
they were appointed elapses, unless they are re-elected, when
the GSM so resolves, or when they resign (explaining the reasons
for this in a letter that shall be sent to the other members of the
board) or place their ofce at the disposal of the board of directors.
Directors must tender their resignation to the board of directors
and formally resign from their position if the board of directors,
following a report from the appointments committee, deems it ft,
in those cases in which they may adversely afect the operation of
the board or the credit or reputation of the Bank and, in particular,
if they are involved in any of the circumstances of incompatibility
or prohibition provided by law. The foregoing without prejudice
to the provisions of Royal Decree 84/2015, which implements Law
140
10/2014 on the organisation, supervision and solvency of credit
institutions, on the honorability requirements for directors and
the consequences of directors subsequently failing to meet such
requirements.
Directors must notify the board, as soon as possible, of those
circumstances afecting them that might prejudice the credit or
reputation of the Bank, and particularly the criminal cases with
which they are charged.
Furthermore, proprietary non-executive directors must tender
their resignation when the shareholder they represent disposes of,
or signifcantly reduces, its ownership interest.
Finally, succession planning for the main directors is a key element
of the Bank’s good governance, ensuring an orderly leadership
transition whilst maintaining continuity and stability of the board.
Board succession planning continues to be an area of focus for the
appointment committee and the board, with appropriated and
robust plans in place that are regularly revisited.
In application of these procedures, in September 2018 the
Bank resolved to appoint Mr Andrea Orcel as new CEO,
subject to obtaining the necessary regulatory approvals, the
shareholders´meeting passing the relevant resolutions on his
future remuneration and to the termination of the contractual
relationship with his former employer. Subsequently, due to
the change on the basis upon which such decision was taken
and the fact that the costs of compensating Mr Orcel for past
remuneration exceeded those having been considered at the time
of his appointment, the board resolved in January 2019 to leave
without efect Mr Orcel’s appointment.
4.3 Board functioning and efectiveness
Our Board is the highest decision-making body,
focusing on the supervisory function
Except in matters falling within the exclusive purview of the GSM,
our board of directors is the Bank’s highest decision-making body
and performs its duties with unity of purpose and independent
judgement.
The board’s stated policy is delegating the day-to-day
management of the Bank and the implementation of its strategy
to the executive bodies and the management team and focusing
its activity on the general supervisory function and those functions
that it cannot delegate as provided by law, the Bylaws, and the
Rules and regulations of the board, which in summary are the
following:
• General policies and strategies (including capital and liquidity
strategy, new products, activities and services; corporate
governance and corporate policy and internal culture and
values; risk control; remuneration policy and compliance).
• Financial information and general information reported to
shareholders, investors and the general public,
and the processes and controls that ensure the integrity of
this information.
• Approval of policies for the provision of information to and for
communication with shareholders, markets and public opinion,
and supervision of the process of dissemination of information
and communications relating to the Bank.
2018 Annual Report
Board of directors
• Internal audit plan and results.
• Selection, succession and remuneration of directors.
Rules and regulations of the board
Our Rules and regulations of the board and the Bank’s Bylaws are
available at www.santander.com.
• Selection, succession and remuneration of senior management
• Bylaws. Our Bylaws contain the basic rules and regulations that
and other key positions.
• Efectiveness of the Group’s corporate and internal governance
system.
• Signifcant corporate & investment transactions.
• Call the general shareholders’ meeting.
• In general, governance-related matters such as related party
transactions.
• Corporate governance and internal governance of the Bank and
its Group, including the group-subsidiary governance model,
corporate frameworks and relevant group internal regulation.
Structure of the board
Our board has implemented a governance structure to ensure it
discharges its duties efectively. Further details of this structure
are provided in the next pages of this section and it can be split into
four dimensions:
• Group executive chairman and chief executive ofcer who, as
further explained under 'Group executive chairman and chief
executive ofcer' within this section 4.3 are the top responsibles
for the strategic and ordinary management of the Bank which
that board is responsible for overseeing, ensuring at the same
time that there is a clear separation and complementarity of their
roles.
apply to the composition and functioning of the board of directors
and its members' duties, which are supplemented and further
developed by the Rules and regulations of the board. They can
be amended only by our GSM, as described in 'Rules governing
amendments to our Bylaws' in section 3.2.
• Rules and regulations of the board. The Rules and regulations
of the board establish the rules of operation and internal
organisation of our board of directors and its committees through
the development of applicable legal and bylaw provisions,
setting forth the principles that are to govern all action taken by
the board and its committees and the rules of behaviour to be
observed by its members.
• Our board amended its Rules and regulations on 25 June 2018
to allow the responsible banking, sustainability and culture
committee to be chaired by an independent director. In 2019, on
26 February the board amended again its Rules and regulations
in order, among others:
• To establish the audit committee to be composed entirely
of independent directors and to strengthen its supervision
functions over the non-fnancial information.
• To broaden the mandate of our appointments committee in
corporate governance matters taking up functions previously
fell with the risk supervision, regulation and compliance
committee.
• To expressly provide that the lead independent director must be
• A lead independent director who, as further explained under
a member of the appointments committee.
'Lead independent director' within this section 4.3 is responsible
for the efective coordination of non-executive directors and
generally ensuring that they serve as an appropriate counter-
balance to executive directors.
• A board committees structure, which, as further described under
'Board committee structure', within this section 4.3, supports our
board in three main areas:
• In the management of the Bank by exercising decision-making
powers through the executive committee.
• In defning strategy in key areas, through the responsible
banking, sustainability and culture committee and the
innovation and technology committee.
• In its supervisory functions and signifcant decision-making,
through the audit, appointments, remuneration and risk
supervision, regulation and compliance committees.
• A board secretary, who, as further described under 'Secretary
of the board', within this section 4.3 supports the board, its
committees and our chairman, and is also the general secretary
of the Group.
• To include other minor changes in the composition and
functioning of the appointments and remuneration committees
anticipating the recommendations and good operating
practices.
Our Rules and regulations of the board meet all legal requirements
and adhere to the main principles and recommendations
established in the Spanish Corporate Governance Code for Listed
Companies of CNMV of February 2015, the Corporate Governance
Principles for Banks of the Basel Committee on Banking
Supervision of July 2015, as well as the guidelines established
by the EBA in 'Guidelines on internal governance under Directive
2013/36/EU' that came into force on 30 June 2018.
Our rules on the audit committee also adhere to the
recommendations and good operating practices established in
Technical Guide 3/2017 of CNMV, on Audit Committees of Public
Interest Entities, of 27 June 2017. This committee also complies
with the regulations applicable in the US because of the listing of
our shares as American Depositary Shares on the New York Stock
Exchange and with Rule 10A-3 under the Securities Exchange
Act introduced by the Sarbanes-Oxley Act of 2002 (SOx), on
requirements for the audit committees of companies.
141
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Group executive chairman and chief executive ofcer
Our Group executive chairman is Ms Ana Botín-Sanz de Sautuola
y O’Shea and our chief executive ofcer is Mr José Antonio Álvarez
Álvarez.
Lead independent director
Our board has appointed Mr Bruce Carnegie-Brown as lead
independent director.
The role of the lead independent director is key in our governance
structure, as he oversees the proper coordination of non-executive
directors and ensures that they serve as an appropriate counter-
balance to the executive directors.
The following chart illustrates his functions and their application
in 2018:
Duties
Activities during 2018
Three meetings were held
with non-executive directors,
without executive directors being
present, where they were able to
voice any concerns or opinions.
Leadership in the annual
assessment of the chairman for
the determination of her variable
remuneration and for the board
efectiveness annual review.
See section 3.1 'Shareholder
engagement'.
He has chaired three meetings
of the executive committee
due to such absence.
• Coordinate and organise
meetings of non-executive
directors and voice their
concerns.
• Direct the regular assessment
of the chairman of the board
of directors and coordinate her
succession plan.
• 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.
• Substitute the chairman in the
event of absence under the
terms set down in the Rules
and regulations of the board of
directors.
• 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.
The roles of our Group executive chairman and chief executive
ofcer are clearly separated, as follows:
Group executive chairman
Chief executive ofcer
• The chief executive ofcer is
responsible for the day-to-day
management of the business,
with the highest executive
functions.
• The chief executive ofcer’s
direct reports manage
businesses and ordinary
management support
corporate divisions.
• The country heads, who are the
Group’s frst representatives
in the countries in which it
operates, also report to the
chief executive ofcer.
• The chairman is the highest-
ranking ofcer of the Bank, and
is responsible for ensuring that
its Bylaws are fully complied
with and that the resolutions
adopted at the general
shareholders’ meeting and
by the board of directors are
carried out. The chairman is
also responsible for the overall
inspection of the Bank and all
its services.
• The chairman is the main Group
representative vis-a-vis the
regulators, authorities and
other major stakeholders.
• The chairman’s direct reports
are related to long-term
strategy.
• The chairman is in charge of
leading succession planning of
main executives of the Bank.
There is a clear separation of duties between those of the Group
executive chairman, the chief executive ofcer, the board, and its
committees, and various checks and balances that assure proper
equilibrium in the Bank’s corporate governance structure, including
the following:
• The board and its committees oversee and control the
activities of both the Group executive chairman and the chief
executive ofcer.
• The lead independent director is responsible for convening and
coordinating the non-executive directors, and communicating
their concerns. The lead independent director also oversees
the periodic process of assessing the Group executive chairman
and coordinates the succession plan with the appointments
committee.
• The audit committee is chaired by an independent director
considered to be a fnancial expert, as this term is defned in
Regulation S-K of the Securities and Exchange Commission (SEC).
• The Group executive chairman may not hold simultaneously the
position of chief executive ofcer of the Bank.
• The corporate risk, compliance and internal audit functions, as
independent units, report to a committee or a member of the
board of directors and have direct access to the board when they
deem it appropriate.
The board of directors has delegated to each of the executive
chairman and the chief executive ofcer all the powers of the
board except those that cannot be delegated pursuant to the law,
the Bylaws and the Rules and regulations of the board. The board
directly exercises those powers in the performance of its general
supervisory function.
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2018 Annual Report
Board of directors
Board committee structure
Our board currently has seven committees and one international advisory board.
For a description of the composition, functions, rules of operation and activities of:
• The executive committee, the responsible banking, sustainability and culture committee, and the innovation and technology
committee, see the following sections within this section 4.3.
• The audit, appointments, remuneration, and the risk supervision, regulation and compliance committees, see their activities
reports in sections 4.4, 4.5, 4.6 and 4.7, respectively.
Voluntary committees
(permitted under Bylaws)
Mandatory committees
(required by law and under Bylaws)
Decision-making
powers
Support and proposal
in strategic areas
Supervision, information advice and proposal
functions in risks, fnancial information and audit
matters
Executive
committee
Responsible banking,
sustainability and
culture committee
Audit
committee
Appointments
committee
Innovation and
technology committee
Risk supervision,
regulation and
compliance committee
Remuneration
committee
International
advisory board
(members are
non-directors)
Board
committees
External
advisory
board
Secretary of the board
Our board secretary is Mr Jaime Pérez Renovales. He assists the
chairman in her duties and ensures the formal and substantive
legality of all action taken by the board. He also ensures that the
good governance recommendations and procedures are observed
and regularly reviewed.
The secretary of our board is the general secretary of the Bank,
and also acts as secretary for all board committees; he does not
need to be a director in order to hold this position.
A report from the appointments committee is required prior to
submission to the board of proposals for the appointment or
removal of the secretary of the board. Our board also has a deputy
secretary to the board, Mr Óscar García Maceiras, who assists the
secretary and replaces him in the performance of his duties in the
event of absence, inability to act or illness.
Proceedings of the board
Our board of directors held 12 meetings in 2018. The Rules and
regulations of the board provide that it shall hold no less than nine
annual ordinary meetings, and one meeting at least quarterly. In
2018, the average estimated time dedicated by each member to
preparing for and participating in meetings was approximately
12 hours per meeting, with the chairman estimated to have spent
double that time per meeting.
The board holds its meetings in accordance with a calendar
established annually and an agenda of matters to be discussed,
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. Directors will be duly informed of any
modifcations to the calendar or the agenda of matters to be
discussed.
Likewise, the board keeps a formal list of matters reserved to
it and will prepare a plan for the distribution of those matters
between the ordinary meetings established in the provisional
calendar approved by the board.
The relevant documentation for each meeting of the board of
directors and of the diferent committees to which the directors
are members, is sent to the directors four business days before the
board meeting and three business days before the corresponding
committee meeting. The information, which is provided to the
directors via secure electronic means, is specifcally for the purpose
of preparing these meetings. In the opinion of the board, that
information is complete and is sent sufciently in advance.
In addition, the Rules and regulations of the board of directors
expressly recognise the directors’ right to request and obtain
information regarding any aspect of the Bank and its subsidiaries,
whether domestic or foreign, as well as the right to inspect, which
allows them to examine the books, fles, documents and any other
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
records of corporate transactions, and to inspect the premises
and facilities of these companies. Furthermore, directors are
also entitled to request and obtain, through the secretary, such
information and advice deemed necessary for the performance of
their duties.
The board shall meet whenever the chairman so decides, acting on
her own initiative or at the request of not less than three directors.
Generally, the meeting must be called 15 days in advance by the
board secretary.
Additionally, the lead independent director is authorised to request
that a meeting of the board of directors be called or that new items
be added to the agenda for a meeting that has already been called.
Our directors must attend the meetings in person and shall
endeavour to ensure that absences are reduced to cases of
absolute necessity. However, if directors are unable to personally
attend a meeting, they may grant a proxy to another director,
in writing and specifcally for each meeting, to represent them
for all purposes therein. Proxy is granted with instructions and
non-executive directors may only be represented by another
non-executive director. A director may hold more than one proxy.
For more information about directors’ attendance see 'Board and
committees attendance' in this section 4.3.
not also members of the executive committee may attend the
meetings of such executive committee at least twice a year, for
which purpose they shall be called by the chairman.
During the year, directors that are not members of the executive
committee attended 27 of the total of 45 meetings held.
Comparison of number of meetings heldA
Board
Executive
committee
Audit committee
Appointments
committee
Remuneration
committee
Risk supervision,
regulation and
compliance
committee
Santander
Average
Spain
US
average
UK
average
12
45
13
13
11
11.1
8.5
8.4
6.3
6.3
8
-
8.4
4.6
6.2
7.3
-
5.2
4
5.2
13
13
NA
6.1
A. Source: Spencer Stuart Board Index 2018 (Spain, United States and
Our 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.
United Kingdom).
NA: Not available
The chart and table below show the distribution of the
approximate time dedicated to each task at the meetings held by
the board in 2018 and the high rate of attendance to board and
committee meetings, respectively.
2018 Approximated allocators of time
14%
19%
41%
10%
16%
Business performance
Risk management
Internal and external
audit and review of the
fnancial information
General policies
and strategies
Capital & liquidity
Board meetings are validly convened when more than half of its
members are present in person or by proxy.
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. The Bylaws and the Rules and regulations of
the board only provide for qualifed majorities for matters in which
the law prescribes a qualifed majority.
The board secretary maintains the documentation relating to the
board of directors and maintains a record in the minutes of the
content of the meetings. The minutes of the meetings held by
the board of directors and its committees include any statements
made at meetings that are expressly requested to be included in
them.
The board and its committees may contract legal, accounting or
fnancial advisers or other experts, at the Bank´s expense, to assist
in the exercise of their functions.
Our 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 and the responsible banking,
sustainability and culture committee. In this regard, any director
may attend and participate in, 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 attendance to the chairman
of the board. Furthermore, all members of the board who are
144
2018 Annual Report
Board of directors
Board and committees attendance
Directors
Board
Executive
Audit Appointments Remuneration
Risk
supervision,
regulation
and
compliance
Committees
95%
98%
94%
96%
97%
Average attendance
Individual attendance
Ms Ana Botín-Sanz de
Sautuola y O´Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce Carnegie-BrownA
Mr Rodrigo Echenique
GordilloB
Ms Homaira Akbari
Mr Ignacio Benjumea
Cabeza de VacaC
Mr Javier Botín-Sanz de
Sautuola y O´Shea
Mr Álvaro Cardoso de SouzaD
Ms Sol Daurella Comadrán
Mr Guillermo de la
Dehesa RomeroE
Mr Carlos Fernández
González
Ms Esther Giménez-
Salinas i ColomerF
Mr Ramiro Mato
García-Ansorena
Ms Belén Romana GarcíaG
Mr Juan Miguel Villar-MirH
96%
-
12/12
12/12
12/12
12/12
12/12
42/45
-
43/45
38/45
45/45
-
-
-
-
-
-
13/13
12/12
45/45
12/12
7/8
12/12
-
-
-
12/12
42/45
-
-
-
-
-
12/12
12/12
12/12
12/12
7/12
-
12/13
-
-
45/45
13/13
23/23
13/13
-
-
Innovation
and
technology
92%
-
3/3
3/3
2/3
1/2
3/3
3/3
-
-
-
3/3
-
2/2
-
3/3
-
Responsible
banking,
sustainability
and culture
100%
-
2/2
-
-
-
2/2
2/2
-
2/2
2/2
-
-
2/2
2/2
2/2
-
-
-
-
-
-
-
-
-
-
13/13
11/11
13/13
-
-
-
-
-
-
7/7
11/11
13/13
-
-
12/13
12/13
12/13
-
-
-
-
-
-
10/11
10/11
11/11
-
-
-
-
-
6/8
-
7/7
-
13/13
13/13
13/13
-
A. Left risk supervision, regulation and compliance committee on 1 January 2019. Relinquished chairmanship of that committee on 1 October 2018.
B. Left the innovation and technology committee on 1 July 2018.
C. Left the appointments committee on 1 July 2018.
D. Member of the board since 1 April 2018 and member of the risk supervision, regulation and compliance committee since 23 April 2018.
E. Left the risk supervision, regulation and compliance committee on 1 July 2018.
F. Left the innovation and technology committee on 1 July 2018.
G. Member of the executive committee since 1 July 2018.
H. Mr Juan Miguel Villar Mir left the board on 1 January 2019.
On average, each of our directors has dedicated approximately 144
hours to board meetings. In addition, those who are members of the
executive committee dedicated approximately 225 hours; members
of the audit committee 130 hours; members of the appointments
committee 52 hours; members of the remuneration committee 44
hours; members of the risk supervision, regulation and compliance
committee 130 hours; members of the innovation and technology
committee 12 hours and members of the responsible banking,
sustainability and culture committee 10 hours. In all the cases, the
relevant chairman is estimated to have dedicated double that time.
Directors must inform the appointments committee of any
professional activity or position for which they are going to be
proposed, so that the time commitment to the Group can be
assessed on an ongoing basis, and any possible confict of interest
derived from such position can be verifed.
Additionally, the annual suitability reassessment made by our
appointments committee (see in section 4.5 'Appointments
committee activities in 2018') allows us to keep up to date all
information relating to the estimated time dedicated by directors
to other positions and/or professional activities and to confrm
their capacity to exercise good governance as directors of the Bank.
This allows the Bank to verify compliance with applicable legal
requirements regarding the maximum number of company boards
to which our directors may belong at the same time (no more than
one executive position and two non-executive positions, or four
non-executive positions, including positions held in the same Group
as a single position and not including positions held at non-proft
organisations or entities that do not pursue commercial activities)15.
15. This maximum is established, as provided for in article 36 of the Rules and regulations of the board, in article 26 of Spanish Law 10/2014 on the ordering, supervision
and solvency of credit institutions. This rule is further developed by articles 29 and subsequent of Royal Decree 84/2015 and by Rules 30 and subsequent of Bank of
Spain Circular 2/2016.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Training of directors and induction
programme for new directors
Given the board´s commitment to continuously improve its
functioning, an ongoing training programme for the board as a
whole is in place, which in 2018 consisted in fve training sessions
provided by internal and external speakers. Among others
the training program included items like model risk, payment
services directive II (PSD2), responsible banking, cyberrisk and
cybersecurity, digital transformations, anti-money laundering
and risk appetite.
Likewise, our board has a robust induction and development
programme for new directors to develop their understanding
of the Group’s business, including governance rules, where key
members of the management of the Group provide detailed
information on their areas of responsibility, while addressing
any development needs identifed in the suitability assessment
process. In 2018, Mr Ramiro Mato and Mr Álvaro Cardoso de Souza
completed their respective induction programmes designed for
them on the basis of their experience and the specifc induction
needs identifed during their suitability assessment processes.
the performance of the executive chairman, the chief executive
ofcer, the lead independent director, the secretary and each
director´s performance.
The process was coordinated by the executive chairman and the
chairman of the appointments committee.
It was based on a confdential, anonymous questionnaire covering
the scope referred above that was fully completed by all of our
board members. The assessment process focused on the following
aspects:
• In relation to the board as a whole: (i) structure (size and
composition; skills and competencies), (ii) organisation and
functioning (planning of meetings, quality of reporting, training
areas, reporting by committees) and (iii) dynamics and internal
culture (formal and informal engagement).
• In relation to the board committees: (i) leadership, size and
composition (including skills), (ii) responsibilities and (iii) quality
of reporting and timelines.
In 2018, incorporating feedback from the external board
efectiveness review conducted in 2017, training sessions were
scheduled to take into account the board and board committees
operations rhythm in order to optimise the attendance.
• Individual performance of the chairman of the board, chief
executive ofcer, lead independent director and general
secretary.
Self-assessment of the board
Our board conducts a yearly assessment of its functioning and
the efectiveness of its work. At least once every three years,
the assessment is conducted with the assistance of an external
independent consultant, whose independence is assessed by the
appointments committee.
Action Plan following the 2017 self-assessment
In 2017 our appointments committee carried out the board self-
assessment with the assistance of an external consultant. The
appointments committee verifed the expert´s independence, and
in particular the absence of other relevant business relationships
with the Group that could impair its independence.
The overall review was positive in terms of outcome and key
fnding and the exercise resulted in an action plan for further
improvement in board efectiveness, which focused mainly on
the composition and organisation of the board, board dynamics
and internal culture and the functioning of board committees, as
described in section 1.3 'Achieving our 2018 priorities'.
In 2018 these actions contained in the action plan were monitored
by the appointments committee and were successfully completed
and implemented, enhancing the board’s overall functioning and
efectiveness. The status of those actions was periodically reported
to the board of directors.
2018 self-assessment
In 2018 and according to the Rules and regulations of the board
that contemplate an annual assessment and with the assistance
of external consultant every three years, the board made self-
assessment internally. The scope of the assessment included
the functioning of the board and all its committees, as well as
• In relation to each individual director: (i) willingness to speak at
the meetings, (ii) contribution and receptivity of other views,
(iii) constructively challenging fellow directors and proposals and
management of senior management, (iv) applying a strategic
mindset to board and (v) bringing their own skills and experience
to board.
The results of the 2018 assessment process, after the board and
the committees have discussed fndings and actions specifc to
them, revealed the following:
• Directors´ satisfaction with the progress the board has made to
enhance its efectiveness.
• The size and level of independence within the board and
committees is appropriate and we have made positive
enhancements to board skills through recent appointments.
• The open and transparent discussions and the constructive
challenge with fellow directors and senior management.
• The leadership and operation of the committees is efective.
• The positive overall performance of the executive chairman/
chairman of the board, CEO, lead independent director and
general secretary and the high degree of confdence that
directors have in these individuals´ competence to serve their
roles to a high standard.
• The positive assessment of all other directors refects the view
that overall the board is seen as efective.
As a result of the self-assessment, on 26 February 2019, our board,
with the prior report of our appointments committee, approved an
action plan with improvements in the following areas:
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2018 Annual Report
Board of directors
• Strength the composition of the board with international
Executive committee
experience in countries where the Group has operations and
greater technology experience, sustainability and environmental
matters.
• To enhance the current new director induction and development
programme to incorporate visits to the Bank´s main subsidiaries,
covering country-specifc macroeconomic environment, business
activities and regulation.
• To review the annual agenda to ensure appropriate scheduling
and time allocation continues to be devoted to business strategy
and to review the Bank´s major risks.
• To consider whether the new responsible banking, sustainability
and culture committee should meet with greater frequency
and establish greater coordination with the countries, in those
matters.
• Continue to provide opportunities for the board to interact with
executive team and strengthen relations between them.
• Continue to focus on gender diversity amongst the board and
senior executives.
Composition
Chairman
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce Carnegie-
Brown
Category
Executive
Executive
Independent
Mr Rodrigo Echenique
Gordillo
Executive
Members Mr Ignacio Benjumea
Cabeza de Vaca
Mr Guillermo de la
Dehesa Romero
Mr Ramiro Mato
García-Ansorena
Other external
(neither proprietary
nor independent)
Other external
(neither proprietary
nor independent)
Independent
Ms Belén Romana García
Independent
Secretary Mr Jaime Pérez Renovales
Functions
Our executive committee is a basic instrument for the corporate
governance of the Bank and its Group. It exercises by delegation all
the powers of our board, except those which cannot be delegated
pursuant to the law, the Bylaws or the Rules and regulations of the
board. This allows our board to focus on its general supervisory
function. Oversight of our executive committee is ensured
through regular reports submitted to the board on the principal
matters dealt with by the committee and by making available to
all directors the minutes of its meetings and all the supporting
documentation made available to it.
Organisation
Our board of directors determines the size and qualitative
composition of the executive committee, adjusting to efciency
criteria and refecting the guidelines for determining the
composition of the board. The executive committee, although it
does not exactly replicate the qualitative composition of the board
of directors, since the presence of all executive directors must be
combined with a size that allows an agile development of their
functions, is aligned with having a majority of external directors,
including three independent directors. The secretary of the board
is also the secretary of the executive committee.
Our executive committee meets as many times as it is called to
meeting by its chairman or by the vice chairman in her absence. It
generally meets once a week.
Meetings of the executive committee are held when more than
one-half of its members are present in person or by proxy. The
committee adopts its resolutions by majority vote of those present
in person or by proxy. In the event of a tie, the chairman of the
committee has the tie-breaking vote. The committee members may
grant a proxy to another member, although non-executive directors
may only be represented by another non-executive director.
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Main activities in 2018
During 2018 the executive committee took action relating to
business of the Group, the main subsidiaries, risk matters,
corporate transactions and the main matters that are subsequently
submitted to the full board:
time per meeting. 'Board and committees attendance' in section
4.3 provides information on the attendance of executive committee
members at those meetings.
Responsible banking, sustainability and culture committee
• Earnings: the committee was also kept up to date on Group
earnings, and their impact on investors and analysts.
• Business performance: the committee was kept continuously
and fully informed of the performance of the Group’s various
business areas, through management reports or specifc reports
on determined subjects submitted. It was also informed of
various projects relating to the transformation and development
of the Group’s culture (Simple, Personal and Fair).
• Information reported by the chairman: the chairman of our
board of directors, who also chairs the executive committee,
regularly reported on key aspects relating to Group management
and on strategy and institutional issues.
• Corporate transactions: the committee analysed and, where
applicable, approved corporate transactions carried out by the
Group (investments and divestments, joint ventures, capital
transactions, etc.).
• Banco Popular: the Banco Popular integration process and its
associated risks and mitigating controls were an item that was
continuously monitored by the committee.
• Risks: the committee was regularly informed about the
risks facing the Group and, within the framework of the risk
governance model, made decisions about transactions that had
to be approved by it due to their amount or relevance.
• Subsidiaries: the committee received reports on the performance
of the various units and, in line with current internal procedures,
authorised transactions and appointments of directors of
subsidiaries.
• Capital and liquidity: the committee received frequent
information on the performance of capital ratios and of the
measures being used to optimise these ratios, in addition to
reviewing regulatory plans.
• Talent and culture: the committee received ongoing reports of
the implementation of the corporate culture and values within
the Group.
Composition
Chairman
Mr Ramiro Mato
García-Ansorena
Category
Independent
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Executive
Mr Homaira Akbari
Independent
Mr Ignacio Benjumea
Cabeza de Vaca
Other external
(neither proprietary
nor independent)
Members Mr Álvaro Cardoso
de Souza
Ms Sol Daurella
Comadrán
Ms Esther Gimenez-
Salinas i Colomer
Independent
Independent
Independent
Ms Belén Romana García
Independent
Secretary Mr Jaime Pérez Renovales
Functions
The purpose of this committee is to assist our board of directors
in fulflling its oversight responsibilities with respect to the
responsible business strategy and sustainability issues of the
Group, preparing and reviewing the corporate culture and
values and advising on its relations with various stakeholders,
especially with employees, customers and communities with
which the Group carries out its activities, and in particular in the
following areas:
• Formulation of the corporate culture and values, including the
strategy on responsible business practices and sustainability.
• Formulation of the Group’s strategy on relations with
stakeholders, including employees, customers and communities
in which the Group develops its activities.
• Corporate reputation particularly on social and environmental
matters.
• Assist the board in the promotion of the corporate culture and
values across the Group, including liaising:
• Activities with supervisors and regulatory matters: the
• With the remuneration committee in the alignment of the
committee was regularly informed of the initiatives and activities
of supervisors and regulators, in addition to projects to ensure
compliance with its recommendations and regulatory changes.
Group’s remuneration programmes with the referred culture
and values.
• Governance Models: the committee approved the Governance
Models of the newly created Wealth Management division, of
Santander Universities and Universia and that of the international
branches under the management responsibility of Santander
Corporate & Investment Banking division.
In 2018, the executive committee held 45 meetings. In 2018, the
average estimated time dedicated by each member to preparing
for and participating in meetings was approximately fve hours per
meeting, with the chairman estimated to have spent double that
• With the risk supervision, regulation and compliance committee
in (i) the alignment of the risk appetite and limits of the Group
with our culture and values and (ii) assessment of the Group’s
non-fnancial risks.
• With the appointments committee in (i) the supervision of the
strategy for communication and relations with shareholders
and investors, including small and medium-sized shareholders,
and (ii) in the processes of communication and relations with
the other stakeholders.
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• Liaise and coordinate with the committees of the board in
relation to issues concerning responsible banking practices and
sustainability and ensure that adequate and efective control
processes are in place and that risks and opportunities relating to
sustainability and responsibility are identifed and managed.
• Report periodically to the board of directors on the Bank’s
and its Group’s performance and the progress made with
regard to responsible business practices and sustainability,
providing advice in relation to these matters, issuing reports and
implementing procedures within its area of responsibility at the
request of the board of directors or its chairman.
Organisation
Our responsible banking, sustainability and culture committee
approves an annual calendar of meetings, which provides for at
least four meetings. The committee meets as many times as it is
required to fulfl its responsibilities.
Meetings of the committee are held when more than one-half of
its members are present in person or by proxy. The committee
adopts its resolutions by majority vote of those present in person
or by proxy. In the event of a tie. The chairman, who shall be
necessarily an independent director of the committee has the
casting vote. The committee members may grant a proxy to
another member, although non-executive directors may only
represent another non-executive director.
The committee has the power to require executives to attend its
meetings under the terms stated by it.
The committee, through its chairman, reports to the board of
directors on its activities and work. Furthermore, the supporting
documentation that is provided to the committee is made available
to all directors as well as a copy of the minutes.
Main activities in 2018
The main topics discussed since the committee was set up are as
follows:
• The new responsible banking governance model.
The main priorities for the committee in 2019 are set out in
page 19 of the 'Responsible banking' chapter.
Since it was created in June 2018 it has met on two occasions.
In 2018, the average estimated time dedicated by each member
to preparing for and participating in meetings was approximately
fve hours per meeting, with the chairman estimated to have
spent double that time per meeting. 'Board and committees
attendance' in section 4.3 provides information on the
attendance of the responsible banking, sustainability and culture
committee members at those meetings.
Innovation and technology committee
Composition
Chairman
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Category
Executive
Members
Ms Homaira Akbari
Independent
Mr José Antonio
Álvarez Álvarez
Executive
Mr Ignacio Benjumea
Cabeza de Vaca
Mr Bruce Carnegie-
Brown
Mr Guillermo de la
Dehesa Romero
Other external
(neither proprietary
nor independent)
Independent
Other external
(neither proprietary
nor independent)
Ms Belén Romana García
Independent
Secretary
Mr Jaime Pérez Renovales
Functions
The purpose of our innovation and technology committee is to
assist our board of directors in fulflling its oversight responsibilities
and activities with respect to the overall role of technology in the
business strategy of the Group and in matters related to the Group
innovation strategy and plans as well as the trends resulting from
new business models, technologies and products. In particular, it has
the following functions:
• The guiding principles of governance and supervision in matters
of responsible banking, sustainability and culture for the Group’s
subsidiaries.
• Review and report on plans and activities relating to technology
and innovation.
• Assist the board with implementation of the framework for the
• The establishment of main lines of action and monitoring
Group strategic technology plan.
metrics.
• The review of the adequacy of the general sustainability and
innovation agenda.
socio-environmental policies, and analysis of potential gaps to
internally regulate these topics. More specifcally, the review
of the criteria for fnancing activities related to coal, both those
related to its extraction (mining) and its use as an energy source.
• Assist the board in the identifcation of key threats to the status
quo resulting from new business models, technologies, processes,
products and concepts.
• Assist the board with recommendations covering the Group’s
• The positioning of the Bank as a relevant player in the fnancing
• Propose to the board the annual systems plan.
of clean energy projects.
• Assist the board in evaluating the quality of the technological
service.
• Assist the board in evaluating the capabilities and conditions for
innovation at a Group and country level.
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• Assist the risk supervision, regulation and compliance committee
International advisory board
in the supervision of technological risks and cybersecurity.
Organisation
Our innovation and technology committee approves an annual
calendar of meetings, which provides for at least four meetings.
The committee meets as many times as it is required to fulfl its
responsibilities.
Meetings of the committee are validly held when more than
one-half of its members are present in person or by proxy. The
committee adopts its resolutions by majority vote of those present
in person or by proxy. In the event of a tie, the chairman of the
committee has the casting vote. The committee members may
grant a proxy to another member, although non-executive
directors may only represent another non-executive director.
The committee has the power to require executives to attend its
meetings under the terms stated by it.
The committee, through its chairman, reports to our board of
directors on its activities and work. Furthermore, the supporting
documentation that is provided to the committee is made available
to all directors as well as the minutes.
Main activities in 2018
During 2018 the innovation and technology committee carried out,
amongst others, the following activities:
• Review of the Global Technology Strategy Plan.
• Review of the platform and cloud strategy.
• Review of the policy on data and artifcial intelligence (machine
learning) and its potential impact.
Composition
Positions
Chairman
Mr Larry
Summers
Ms Sheila
C. Bair
Mr Mike
Rhodin
Former Secretary of the US
Treasury and president emeritus
of Harvard University
Former chairman of the Federal
Deposit Insurance Corporation
and former president of
Washington College
Board member of TomTom,
HzO and Syncsort. Former
IBM senior Vice President
Members
Ms Marjorie
Scardino
Former CEO of Pearson and
director of Twitter
Mr Francisco
D’Souza
CEO of Cognizant and director
of General Electric
Mr James
Whitehurst
Mr George
Kurtz
Ms Blythe
Masters
Chairman and CEO of Red Hat
CEO and co-founder of CrowdStrike
CEO of Digital Asset Holdings
Secretary Mr Jaime Pérez Renovales
Functions
The purpose of Banco Santander’s international advisory board,
which comprises external experts in economy, strategy, IT and
innovation, is to provide strategic advice to the Group, with a
special focus on innovation, digital transformation, cybersecurity
and new technologies. It also provides views on trends in capital
markets, corporate governance, brand and reputation, regulation
and compliance, and global fnancial services with a customer-
based approach.
• Review of main digital strategies to transform the core, and
accelerate the growth of new businesses.
Meetings
The international advisory board meets at least twice per year.
• Review of metrics to measure and monitor the impact of digital
transformation.
In 2018, the international advisory board met twice, one in spring
and one in fall.
• Review of the status update for the implementation of
cybersecurity within the Group, the main risks and mitigating
controls.
• Review of the status of OpenBank digital and technological
projects.
The committee met on three occasions in 2018. In 2018, the
average estimated time dedicated by each member to preparing
for and participating in meetings was approximately fve hours per
meeting, with the chairman estimated to have spent double that
time per meeting. 'Board and committees attendance' in section
4.3 provides information on the attendance of the innovation and
technology committee members at those meetings.
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4.4 Audit committee activities in 2018
This section constitutes the audit committee report that in
previous years was issued separately and that is now provided as
part of the annual corporate governance report as discussed in
'Redesigned corporate governance report' in section 1. This report
was prepared by the audit committee on 21 February 2019 and
approved by the board of directors on 26 February 2019.
Composition
Composition
Category
Chairman
Ms Belén Romana García
Independent
Ms Homaira Akbari
Independent
Members
Mr Carlos Fernández
González
Mr Ramiro Mato
García-Ansorena
Independent
Independent
Secretary
Mr Jaime Pérez Renovales
The board of directors has appointed the members of the
committee bearing in mind their knowledge and experience
in fnance, accounting, auditing, internal control, information
technologies, business and risk management. Specifcally, Ms
Belén Romana García, the committee’s chairman, is considered
to be a fnancial expert, as defned in SEC Regulation S-K, based
on her training and expertise in accounting, auditing and risk
management, and as a result of having held various positions of
responsibility at entities in which knowledge of accounting and risk
management was essential.
For further information about the skills, knowledge and experience
of each of the committee members, see section 4.1 'Our directors'
and 'Board skills and diversity matrix' in section 4.2.
There have been no changes in the composition of the committee
during 2018.
How the committee works
Our audit committee meets in accordance with an annual calendar,
which includes at least four meetings, and there is an annual work
plan of issues to be discussed by the committee.
Meetings of the committee shall be validly held with the
attendance, either present or represented, of more than half
of its members, who may designate another member as proxy.
Resolutions are passed by a majority vote of the attendees and the
chairman has the casting vote in the event of a tie.
Committee members are provided with the relevant
documentation for each meeting sufciently in advance of the
meeting date, thereby ensuring committee efectiveness.
The committee has the power to require executives to attend its
meetings, by invitation from the chairman of the committee to
attend under the terms established by the committee.
The post of secretary to the committee corresponds, in a non-
voting capacity, to the general secretary and secretary to the
board, who is also head of the Group’s Human Resources area,
fostering a fuid and efcient relationship with the diferent units
that are expected to collaborate with, or provide information to,
the committee.
The committee may contract legal, accounting or fnancial advisers
or other experts, at the Bank´s expense, to assist in the exercise of
its functions.
Without prejudice to the fact that the committee chairman reports
on the content of its meetings and its activities at each of the
board of directors meetings held, all documentation distributed
for its meetings and the minutes thereof are made available to all
directors.
External auditor
Our external auditor is PricewaterhouseCoopers Auditores, S.L.
(PwC) with registered ofce in Madrid, Paseo de la Castellana, no.
259 B, with Tax ID Code B-79031290 and registered in the Ofcial
Registry of Auditors of Accounts (Registro Ofcial de Auditores
de Cuentas) of the Accounting and Audit Institute (Instituto de
Contabilidad y Auditoría de Cuentas, (ICAC)) of the Ministry for
Economy with number S0242.
The lead partner is Mr Alejandro Esnal, a leading audit partner for
the banking sector in Spain (having audited entities such as Banco
Sabadell, S.A., Unicaja and Barclays Bank Spain). Throughout his
25 years of professional career, he has led numerous projects both
in Spain and New York and London, mainly in audit services, as
well as in internal control environments of fnancial entities. As
an audit leader for banking, he participates actively in committees
and working groups of the sector and collaborates proactively
with the fnancial regulation department, in matters such as
the restructuring of the sector or the strengthening of banking
practices.
Report on the independence of the external auditor
The audit committee has verifed favorably the independence of
the external auditor, at its meeting of 21 February 2019 and prior
to the issuance of the auditor’s report on the fnancial statements,
in the terms established section 4.f) of article 529 quaterdecies
of the Spanish Companies Act, and under article 17.4.c)(iii) of
the Rules and regulations of the board, concluding that in the
committees’ opinion there are no objective reasons for doubting
the independence of the external auditor.
To evaluate the independence of the external auditor, the
committee has considered the information included under
section 'Duties and activities in 2018' on the remuneration of
the auditor for audit services and any other services and the
written confrmation from the external auditor itself confrming
its independence with respect to the Bank under the applicable
European and Spanish legislation, the SEC rules and the rules of
the Public Company Accounting Oversight Board (PCAOB).
Proposed reelection of the external auditor for 2019
As indicated in section 3.5 'Our coming 2019 AGM', the board of
directors, following the proposal of the audit committee, has
submitted to our 2019 AGM the reelection of PwC as external
auditor for 2019.
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Duties and activities in 2018
This section contains a summary of the audit committee’s activities
in 2018, classifed in accordance with the committee’s basic duties.
Duties
Actions taken by the audit committee
Financial statements and other fnancial information
• Review the fnancial
• Reviewed the individual and consolidated fnancial statements and directors´ reports for 2018 and endorsed
statements and other
fnancial information
their content prior to their authorisation for issue by the board, and ensured compliance with legal
requirements and the proper application of generally accepted accounting principles and that the external
auditor issued the corresponding report with regard to the efectiveness of the Group’s system of internal
control of fnancial reporting (ICFR).
• Endorsed quarterly the fnancial information statements dated 31 March, 30 June, 30 September and 31
December 2018, respectively, prior to their approval by the board and their disclosure to the markets and to
supervisory bodies.
• Endorsed other fnancial information such as: annual corporate governance report; DRA fled with CNMV;
Form 20-F with the fnancial information of 2017, fled with SEC; the half-yearly fnancial information fled with
CNMV and with SEC in Form 6-K, and the Group’s interim consolidated fnancial statements specifc to Brazil.
• Monitored the implementation of IFRS9 throughout the year.
• Report to the board
• Received information from the Group’s tax advisory unit regarding the tax policies applied, in compliance with
about the tax policies
applied
the Code of Good Tax Practices and submitted this information for the board of directors.
Relationship with the external auditor
Auditing the fnancial statements
• Receive information
• Obtained confrmation from the external auditor that it has had full access to all information, to conduct its
on the audit plan and
its implementation
activity.
• Discussed improvements in the reporting of fnancial information resulting from changes to accounting
standards, and best international practices.
• Analysed the detailed information on the planning, progress and execution of the audit plan and its
implementation.
• Analysed the auditor’s reports for the annual fnancial statements prior to the external auditor’s report to the
board of directors.
• Relations with the
external auditor
• The external auditor attended 11 of 13 committee meetings held in 2018, serving as a channel of
communication between the auditor and the board.
• Met two times with the external auditor without the presence of the Bank’s executives relating to the audit
work.
• Assessment of
the auditor’s
performance
• Performed an evaluation of the external auditor and how it has contributed to the integrity of the fnancial
information. In this evaluation, our committee was informed by the auditor and also analysed the results
of any inspections carried out by the regulators on PwC, concluding that it did not observe threats to its
independence as external auditor.
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Duties
Actions taken by the audit committee
Independence
PwC’s remuneration
for audit and non-
audit services
• Monitored the remuneration of PwC; the fees for the audit and non-audit services provided to the Group that
were as follows:
EUR million
Audits
Audit-related services
Tax advisory services
Other services
Total
2018
90.0
6.5
0.9
3.4
100.8
2017
88.1
6.7
1.3
3.1
99.2
2016
73.7
7.2
0.9
3.6
85.4
The 'Audits' heading includes fees paid for auditing the annual consolidated fnancial statements of Banco
Santander and its Group; the consolidated fnancial statements on Form 20-F fled in the SEC; internal
control audit (SOX) for those required entities; the audit of fnancial statements of the Bank for the Brazilian
regulator; and the regulatory reports required from the auditor corresponding to the diferent locations of the
Group.
The 'Audit-related services' refer to aspects such as the issuance of comfort letters and other services
required by other regulations in relation to aspects such as, for example, securitisation and other services
provided by the external auditor.
The amount of fees paid for non-audit works and the percentage they represent of all fees invoiced to the
Bank and/or its group is as follows:
Amount of non-audit work (EUR thousand)
Amount of non-audit work as a
% amount of audit work
585
0.6%
Company
Group companies
3,665
Total
4,250
3.6%
4.2%
In 2018, the Group commissioned services from audit frms other than PwC in the amount of EUR 173.9 million
(115.6 and 127.9 EUR million in 2017 and 2016, respectively).
• Non-audit services.
• Reviewed and updated the internal policy of the approval of non-audit services.
Assess threats to the
independence and the
safeguard measures
• Reviewed services rendered by PwC, and verifed its independence. For these purposes:
• Verifed that all services rendered by the Group’s auditor, including audit and audit-related services, tax
advisory services and other services detailed in the section above, meet the independence requirements
set out in the applicable regulation.
• Verifed the ratio of fees received during the year for non-audit and audit-related services to total fees
received by the auditor for all services provided to the Group, with this ratio for 2018 standing at 4.2%.
• Average fees paid to auditors in 2018 for non-audit and related services account for 15% of total fees
paid as a benchmark according to available information on the leading listed companies in Spain.
• Verifed the ratio of fees paid for all items relating to the services provided to the Group to total fees
generated by PwC frm in 2018. Group’s total fees paid are less than 0.3% of PwC’s total revenue in the
world.
• Reviewed the banking transactions performed with companies related to PwC, concluding that no
transactions have been carried out that compromise PwC’s independence.
• External auditor
• After considering the information detailed above, the committee issued the 'Report on the independence of
independence report
the external auditor'.
Re-election of the external auditor
• Re-election of the
external auditor
• Submitted to the board of directors the proposal to re-elect PwC as external auditors for 2019. The board
submitted PwC’s re-election proposal as the Bank’s external auditors to our 2019 AGM.
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Duties
Actions taken by the audit committee
Internal audit function
• Assess the
• Supervised the Internal Audit function and ensured its independence and efcacy throughout 2018.
performance of
internal audit function
• Reported on the progress of the internal audit plan, allowing the committee to have and exhaustive control on
Internal Audit recommendations and ratings of the diferent units and divisions.
• Representatives of the Internal Audit division attended 11 of 13 meetings held by the audit committee in 2018,
one of them only with the chief audit executive without the presence of other executives or the external
auditor.
• Proposed the budget of Internal Audit function for 2019, ensuring that it has the material and human
resources necessary to carry out its function.
• Reviewed the annual audit plan for 2019 and submitted it to the board for approval.
• Received regular information of the internal audit activities carried out in 2018.
• Reviewed the application of the measures included in the strategic internal audit plan for the 2016-2018
period.
• Reviewed and was informed about internal audit function, methodologies, ratings, recommendations and
main conclusions of the internal audit work in other units and geographies.
• Assessed the adequacy and efectiveness of the function when performing its mission, as well as the chief
audit executive’s performance in 2018, which was reported to the remuneration committee and to the board
in order to establish their variable remuneration.
Internal control systems
• Monitor the efcacy
of internal control
systems
• Received information of the process of evaluating and certifying the Group’s internal control model (ICM)
for 2017 and the conclusions on its efectiveness. No material weaknesses were detected at Group level in
accordance with this annual evaluation process.
• Reviewed the efectiveness of the Bank’s internal controls on the generation of fnancial information
contained in the Group’s consolidated annual report fled in the US (Form 20-F) for 2017, as required by the
Sarbanes-Oxley Act, concluding that, in its opinion, the Group maintained efective internal control over said
fnancial information, in all material aspects.
• Whistleblowing
• Received information from the Compliance & Conduct area about the activity of the whistleblowing
channel
channel and the irregularities committees existing in the Group for these purposes specially in regard to
issues relating to questionable fnancial and accounting practices and the process of generating fnancial
information, auditing and internal controls, verifying that in 2018 there was not any claim about this issues
fled through these channels.
• Coordination with Risk
• Joint meetings with board risk supervision, regulation and compliance committee in order to share
information regarding IFRS9, IT and obsolescence risk, whistleblowing, policy on outsourcing of services and
other matters.
• Communications
• Submitted to CNMV information requested about the compliance with the obligations related to the
with regulators and
supervisors
composition, functions and operating of the audit committee.
Related-party and corporate transactions
• Creation of special-
purpose vehicles or
entities in countries
considered tax havens
• Received the justifcation of the establishment of a new company in Jersey and separate the activity in Jersey
and isle of Man from the so-called Ring Fenced Bank to comply with the banking reform in UK. Finally, this
company in Jersey was incorporated but it remains inactive. The committee was informed that the business in
Jersey and the Isle of Man will remain within the Group in the UK, although outside Santander UK.
• Approval of related
party transactions
• Reviewed the transactions that the Bank carried out with related parties, and ensured that they were made
under the terms envisaged by law and in the Rules and regulations of the board and did not require approval
from the governing bodies; otherwise, approval was duly obtained following a favourable report issued
by the committee, once the agreed consideration and other terms and conditions were found to be within
market parameters. No member of the board of directors, direct or indirectly, has carried out any signifcant
transactions or any transaction on non-customary market conditions with the Bank. The committee has
examined the information regarding related party transactions in the fnancial statements. See section 4.8
'Related-party transactions and conficts of interest'.
• Transactions involving
structural or corporate
modifcations
• Reviewed the transactions involving structural or corporate modifcations planned by the Group during 2018
previously to the submission to the board of directors, analysing their economic conditions and the accounting
impact. Among others, the committee reviewed the absorbtion of Banco Popular and the efectiveness of the
Bank’s internal controls concerning its integration.
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Duties
Actions taken by the audit committee
Information for the general shareholders’ meeting and corporate documentation
• Shareholders
information
• Corporate
documentation for
2017
• At our 2018 AGM, Ms Belén Romana, acting as the committee’s chairman, reported to the shareholders on the
matters and activities within the purview of the audit committee.
• Drafted the report of the committee for the year 2017, which includes a section dedicated to the activities
carried out during the year, an analysis and assessment of the fulflment of the functions entrusted to it, and
the priorities for 2018 identifed following the self-assessment carried out by our board and its committees.
Time devoted to each task
In 2018, the audit committee held 13 meetings. In section 4.3
'Board and committees attendance' provides information on the
attendance of committee members at those meetings.
The average estimated time dedicated by each member of the
committee to preparing for and participating in meetings held in
2018 was approximately 10 hours per meeting, with the chairman
estimated to have spent double that time per meeting.
accurate documentation was provided on the topics discussed,
the proper presentation of which enhanced the quality of debate
among members and sound decision-making.
2019 priorities
The committee’s self-assessment exercise identifed the following
priorities for 2019:
• Ongoing focus on the size and composition of the committee,
particularly in connection with necessary accounting, fnancial,
risk management and audit expertise to guarantee its
efectiveness.
8%
11%
19%
Financial statements
• Continue working on coordination with units and Group
divisions, implementing information sharing mechanisms on a
regular basis.
• Build up a holistic of certain key topics using ‘white books’ to
ensure proper oversight and monitor the activities of units and
divisions taking into account the recommendations provided by
Internal Audit.
• Monitor the implementation of IFRS9, made in 2018, analysing
the impact of the new standard and the Bank’s adaptation
process, in order to reduce implementation costs and compliance
risk.
External audit
Internal audit
Internal control systems
17%
Others
45%
Annual assessment of the functioning and performance
of the committee and fulflment of the goals set for 2018
The committee’s efectiveness during 2018 was considered as part
of the overall internal assessment of board efectiveness carried
out internally this year. The committee considered the fndings and
suggested actions resulting from the review and related to the
audit committee.
In 2018, the committee successfully addressed all the challenges
put forward for the year and identifed in the 2017 activities
report, especially regarding coordination with the risk supervision,
regulation and compliance committee in supervising the execution
of the internal audit plan which has provided a holistic view of
the key internal audit risks, internal audit methodologies, ratings,
recommendations and main conclusions of the internal audit work
in the most relevant units.
Further, the regular meetings held by the chairman of the Group
audit committee with the chairmen of the audit committees of
the diferent subsidiaries in main geographies during the second
half of the year provided their coordination and the agreement on
key issues, and also allowed sharing an overview of regulatory
matters and new regulations, applied across the Group’s main
geographies.
As a result of this assessment, it was concluded that the
committee efectively performed its functions of supporting and
advising the board. This was demonstrated through holding,
an appropriate number of meetings, for which sufcient and
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4.5 Appointments committee
activities in 2018
This section constitutes the appointments committee report that
in previous years was issued separately and that is now provided
as part of the annual corporate governance report as discussed in
'Redesigned corporate governance report' in section 1. This report
was prepared by the appointments committee on 25 February 2019
and approved by the board of directors on 26 February 2019.
Composition
Composition
Chairman
Mr Bruce Carnegie-
Brown
Ms Sol Daurella
Comadrán
Category
Independent
Independent
Members
Mr Guillermo de la
Dehesa Romero
Other external
(neither proprietary
nor independent)
Mr Carlos Fernández
González
Independent
Secretary
Mr Jaime Pérez Renovales
Committee members are provided with the relevant
documentation for each meeting sufciently in advance of the
meeting date, thereby ensuring committee efectiveness.
The committee has the power to require executives to attend its
meetings, by invitation from the chairman of the committee to
attend under the terms established by the committee.
The post of secretary to the committee corresponds, in a non-
voting capacity, to the general secretary and secretary to the
board, who is also head of the Group’s Human Resources area,
fostering a fuid and efcient relationship with the diferent units
that are expected to collaborate with, or provide information to,
the committee.
The committee may contract legal, accounting or fnancial
advisers or other experts, at Bank´s expense, to assist in the
exercise of its functions.
Without prejudice to the fact that the committee chairman
reports on the content of its meetings and its activities at each
of the board of directors meetings held, all documentation
distributed for its meetings and the minutes thereof are made
available to all directors.
The board of directors has appointed the members of the committee
bearing in mind their knowledge, aptitude and experience in relation
to the committee's mission.
For further information about the skills, knowledge and experience
of each of the committee members, see section 4.1 'Our directors'
and 'Board skills and diversity matrix' in section 4.2.
How the committee works
Our appointments committee holds its meetings in accordance
with an annual calendar, which includes at least four meetings,
and there is an annual work plan of issues to be discussed by
the committee.
Meetings of the committee shall be validly held with the
attendance, either present or represented, of more than half
of its members, who may designate another member as proxy.
Resolutions are passed by a majority vote of the attendees, either
present or represented, and the chairman has the casting vote in
the event of a tie.
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Duties and activities in 2018
This section contains a summary of the appointments committee’s
activities in 2018, classifed in accordance with the committee’s
basic duties.
Duties
Actions taken by the Appointments Committee
Appointments and removal of directors and committee members
• Selection and succession
policy and renewal of the
board and its committees
• Updated the policy for the selection, suitability assessment and succession of directors in accordance
with EBA and ESMA guidelines on suitability, assessment for directors and the ECB Guide to ft and
proper assessments.
• Appointment, re-election,
ratifcation and removal of
directors, and committee
members
• Ensured that the procedures for selecting board members guaranteed the individual and collective
training of directors, fostering diversity of gender, experience and knowledge and, in partnership with an
external frm, conducted the relevant analysis of the necessary competencies and skills for the position,
and assessing the time and dedication required to properly perform the role.
• Also assessed the composition of the board committees to ensure continuity of appropriate skillset and
experience, overall stability and appropriate distribution for the better development of their duties.
• Analysed the candidates presented, as well as their credentials, and assessed their skills and suitability
for the position.
• Took note of the resignation of Mr Juan Miguel Villar Mir as director, once his tenure expired, after
requesting not to be proposed for re-election at the last AGM.
• In 2018 Mr Álvaro Cardoso de Souza was appointed, Mr Ramiro Mato was ratifed, and Mr Carlos
Fernández, Mr Ignacio Benjumea, Mr Guillermo de la Dehesa, Ms Sol Daurella, and Ms Homaira Akbari
were re-elected. All these appointment, ratifcation and re-election were proposed to the board by the
appointments committee.
• Submitted a proposal to the board regarding changes in the composition of the board committees, to
further strengthen their performance and support to the board in their respective areas, according to the
best international practices and our internal Rules and regulations of the board (for more information
see 'Board committees' in section 1.1).
• Approved, upon completion of one year of their term of ofce and in accordance with the Bylaws, the
re-election of members of the Santander Group’s international advisory board (for more information see
'International advisory board' in section 4.3).
• In 2018, our appointments committee examined the overall composition and skills of our board of
directors and board committees to ensure that they are appropriate. The committee identifed, utilising
the skills matrix, the desired areas of expertise and experience profles for recruitment which informed
the selection process. The committee proposed Mr Álvaro Cardoso de Souza’s appointment as member
of the board who has further strengthened the board’s international diversity, specifcally in relation to
Latin America / Brazil.
Succession plan
• Succession plan for executive
• Continued the regular review of talent and succession plans from executive directors and senior
directors and senior
management
management of the Group to ensure that they are oriented to have, at all times, sufciently qualifed
personnel to allow the execution of Group´s strategic plans without interruption, safe-guard business
continuity and avoid any relevant functions not being take care of. This involves identifying possible
replacements for key positions, in order to provide them with appropriate training and capabilities in
advance.
Verifcation of the status of directors
• Annual verifcation of the
status of directors
• Verifed the classifcations of each director (as executive, independent and other external) and submitted
its proposal to the board of directors for the purpose of its confrmation or review at the AGM and in the
annual corporate governance report. See section 4.2. 'Board composition'.
• When assessing the independence directors, the committee has verifed that there is no signifcant
business relationship between Santander Group and the companies in which they are, or have previously
been, signifcant shareholders or directors and, in particular, with regard to the fnancing granted
by the Santander Group to these companies. In all cases, the committee concluded that the existent
relationships were not signifcant, among other reasons, as the business relationships: (i) do not
generate a situation of economic dependence in the relevant companies in view of the substitutability
of this fnancing for other sources of funding, either bank-based fnancing or other, (ii) are aligned with
the market share of Santander Group within the relevant market, and (iii) have not reached certain
comparable materiality thresholds used in other jurisdictions as reference: e.g. NYSE, Nasdaq and
Canada’s Bank Act.
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Duties
Actions taken by the Appointments Committee
Periodic assessment
• Annual suitability
• Assessed the suitability of the members of the board, the senior management, those responsible
assessment of directors and
key functions holders
for internal control functions and those holding key positions for the conduct of the Group’s banking
business, ensuring that they demonstrate commercial and professional integrity, and have suitable
knowledge and experience to perform their duties. Likewise, the committee concluded that the
members of the board are capable of carrying out good governance of the Bank, and have capacity to
make independent and autonomous decisions for the Group´s beneft.
• Verifed that the Bank had not been informed by any director of any circumstances that, in its opinion and
in opinion of the board would have justifed their dismissal as a member of the board of directors of the
Bank.
• Potential conficts
of interest and other
directors´professionals
activities
• Examined the information provided by the directors regarding other professional activities or positions
to which they had been proposed concluding that such obligations did not interfere with the dedication
required as Bank´s directors and that they were not involved in potential conficts of interest that could
afect the performance of their duties.
• Board self-assessment
• In coordination with the executive chairman, the 2018 self-assessment was performed internally,
process
Senior management
without the assistance of an external expert. The scope of the assessment included the board and all
its committees, as well as the executive chairman, the chief executive ofcer, the lead director, the
secretary and each director. See 'Self-assessment of the board' in section 4.3.
• Updated and submitted the board skills and diversity matrix to the board of directors for approval.
See section 4.2. 'Board skills and diversity matrix'.
• Assessment of senior
• The committee issued favourable opinions, among others, regarding the following appointments,
executive vice chairman and
other key positions
agreed by the board of directors:
• Mr Dirk Marzluf as the new head of the Group’s Technology and Operations Division, replacing Mr
Andreu Plaza.
• Mr Keiran Foad as the new chief risk ofcer (CRO) replacing Mr José María Nus Badía.
• In addition, the committee reported favourably on the appointment of directors and members of
senior management of the main subsidiaries of the Santander Group.
• Simplifcation and
homogenization of senior
management positions
• Informed favourably on and submitted to the board to replace the previous management titles ('director
general', 'director general adjunto', 'subdirector general' and 'subdirector general adjunto') with new
titles common throughout the Group, according to international standards and practices (at a corporate
level: Group senior executive vice-president, Group executive vice-president and Group vice-president,
and, at a subsidiary level: senior executive vice-president, executive vice-president and vice-president)
Internal Governance
• Oversee internal governance
including Group subsidiary
governance
• Assessed the suitability of a number of appointments and/or re-elections to Group’s subsidiaries subject
to the Group’s appointments and suitability procedure.
• Reviewed and updated the key board policies in accordance with the EBA guidelines on Internal
Governance such as: suitability, induction, knowledge and development, and confict of interest policies,
and approval of an action plan for improvements.
• The committee verifed the monitoring of guidelines of the subsidiaries with the Group - subsidiary
governance model in relation to the board and board committees of structure of the subsidiaries and
their duties in line with best practices.
• Proposed and approved the appointment of lead Group-nominated directors to ensure that those
persons representing the signifcant shareholder on subsidiary boards are suitable and fully aware of
their duties and responsibilities.
Information for the general shareholders’ meeting and corporate documentation
• Shareholders information
• At our 2018 AGM, Mr Bruce Carnegie-Brown acting as the committee’s chairman, reported to the
shareholders on the matters and activities within the purview of the appointments committee.
• Corporate documentation
• Drafted the report of the committee for the year 2017, which includes a section dedicated to the
for 2017
activities carried out during the year, an analysis and assessment of the fulflment of the functions
entrusted to it, and the priorities for 2018 identifed following the self-assessment carried out by our
board and its committees.
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2018 Annual Report
Board of directors
Time devoted to each task
In 2018, the appointments committee held 13 meetings. Section
'Board and committees attendance' in section 4.3 provides
information on the attendance of committee members at those
meetings.
The average estimated time dedicated by each member of the
committee to preparing for and participating in meetings held in
2018 was approximately four hours per meeting, with the chairman
estimated to have spent double that time per meeting.
28%
11%
12%
49%
Appointments and
suitability assessments
Board and board
committee, succession
planning and
efectiveness
Governance
Senior management,
succession planning
and related activities
Annual assessment of the functioning and performance
of the committee and fulflment of the goals set for 2018
The committee’s efectiveness during 2018 was considered as part
of the overall internal assessment of board efectiveness carried
out internally this year. The committee considered the fndings and
suggested actions resulting from the review and related to the
appointments committee.
In 2018, the committee successfully addressed all the challenges
put forward for the year and identifed in the 2017 activities
report. In particular, confrmed its leadership role in the proper
composition of the board of directors achieving a broader
geographical diversity as a result of the incorporation of
Mr Alvaro Cardoso de Souza in 2018 and reviewing also its own
composition avoiding the identity of its members with those of
the remuneration committee, in line with the best practices.
The self-assessment process positively rated both the
composition of the committee and the very high degree of
dedication among its members, as well as the chairman’s
leadership. The frequency and duration of its meetings were
also found to be appropriate for its proper functioning and for
the performance of their duties and that sufcient and accurate
documentation was provided on the topics discussed, the proper
presentation of which strengthened the quality of the debates
among members and sound decision-making.
2019 priorities
• Cultural transformation: continue working on the Bank’s cultural
transformation, ensuring the attraction and retention of the
appropriate talent to cover the future needs of the business.
• Diversity: continue working to strive towards gender balance
and broader diversity in the Group board and the rest of the
organisation.
• Succession planning: regular review of succession plans of
members of the board and senior management, relating to
current and future strategy and potential challenges the business
may face.
4.6 Remuneration committee
activities for 2018
This section constitutes the remuneration committee report that
in previous years was issued separately and that is now provided
as part of the annual corporate governance report as discussed in
'Redesigned corporate governance report' in section 1. This report
has been prepared by the remuneration committee on 25 February
2019 and approved by the board of directors on 26 February 2019.
Composition
Composition
Category
Chairman
Mr Bruce Carnegie-Brown
Independent
Members
Mr Ignacio Benjumea
Cabeza de Vaca
Ms Sol Daurella
Comadrán
Mr Guillermo de la
Dehesa Romero
Other external
(neither proprietary
nor independent)
Independent
Other external
(neither proprietary
nor independent)
Ms Carlos Fernández
González
Independent
Secretary
Mr Jaime Pérez Renovales
Our board of directors has appointed the members of the
committee bearing in mind their knowledge, aptitude and
experience in relation to the committee's mission.
For further information about the skills, knowledge and experience
of each of the committee members, see section 4.1 'Our directors'
and 'Board skills and diversity matrix' in 4.2.
There have been no changes in the composition of the committee
during 2018.
How the committee works
Our appointments committee holds its meetings in accordance
with an annual calendar, which includes at least four meetings,
and there is an annual work plan of issues to be discussed by
the committee.
Meetings of the committee shall be validly held with the
attendance, either present or represented, of more than half
of its members, who may designate another member as proxy.
Resolutions are passed by a majority vote of the attendees and the
chairman has the casting vote in the event of a tie.
• Corporate and subsidiary governance: driving the continuous
improvement of corporate governance across the Group, focusing
on the efective functioning of board of directors with the support
of the board committees and the proper oversight and control
of subsidiary transactions. Review trends, and best governance
practices in corporate governance.
Committee members are provided with the relevant
documentation for each meeting sufciently in advance of the
meeting date, ensuring committee efectiveness.
The committee has the power to require executives to attend its
meetings, by invitation from the chairman of the committee to
attend under the terms established by the committee .
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The post of secretary to the committee corresponds, in a non-
voting capacity, to the general secretary and secretary to the
board, who is also head of the Group’s Human Resources, fostering
a fuid and efcient relationship with the diferent units that
are expected to collaborate with, or provide information to, the
committee.
The committee may contract legal, accounting or fnancial advisers
or other experts, at the Bank´s expense, to assist in the exercise of
its functions.
Without prejudice to the fact that the committee chairman
reports on the content of its meetings and its activities at each
of the board of directors meetings held, all documentation
distributed for its meetings and the minutes thereof are made
available to all directors.
Duties and activities in 2018
This section contains a summary of the remuneration committee’s
activities in 2018, classifed in accordance with the committee’s
basic functions.
Duties
Action taken by the Remuneration Committee
Remuneration of directors
• Individual
remuneration of
directors in their
capacity as such
• Analysed the individual remuneration of directors in their capacity as such based on the positions held by the
directors on the collective decision-making body, membership on and attendance at the various committees,
and any other objective circumstances evaluated by the board. Submission of a proposal to the board for
remuneration of the new members of the responsible banking, sustainability and culture and also to increase
the remuneration of members of the board as members of the board (+2.5%) in 2018 and the annual amount
for the chairman of the audit and risk committees (from EUR 50 thousand to EUR 70 thousand). The rest of the
remuneration components remained unchanged.
• Beneft scheme
• The Remuneration Policy mentioned above provided for the elimination in 2018 of the supplemental beneft
scheme for the contingencies of death and permanent disability while in ofce of serving directors provided for
in the contracts of the chairman and the CEO, attributing to them an exceptional, non-cumulative supplement
to the fxed remuneration. This change did not involve an increased cost to the Bank and eliminated the
risk of the cost of this beneft rising in the future, completing the process of reducing risks from pension
commitments (derisking).
• Individual fxed
remuneration for
executive directors
• Submitted a proposal to the board to maintain the same gross salary for the executive chairman and CEO in
2018 as in 2017, with an increase equivalent to the reduction of fxed pension contributions, without the total
compensation being increased as a result of this change, as well as a proposal to increase the gross annual
salary of Mr Rodrigo Echenique in consideration of the new responsibilities he assumed in relation to the
integration of Banco Popular into the Santander Group.
• Proposed to the board to maintain the gross annual salary for executive directors in 2019 as in the prior year.
• Individual variable
remuneration for
executive directors
• Submitted a proposal to the board, for subsequent submission to the 2018 AGM, for the approval of a
maximum level of variable remuneration up to 200% of the fxed component for executive directors and
persons belonging to categories of staf whose professional activities (excluding control functions) have a
material impact on the risk profle of the Group (the 'Identifed Staf' or 'Material Risk Takers').
• Determined the annual variable remuneration for 2017 payable immediately and the deferred amounts, part of
which are established as a maximum and are conditioned to compliance with long term objectives established
for executive directors, to be approved by the board, taking into account the directors´ remuneration policy,
based on the individual level of achievement of the annual performance targets and the weightings previously
established by the board, and the application of the corresponding targets, scales and weightings.
• As part of the directors´ remuneration policy, the committee submitted a proposal for the annual performance
indicators and targets to be used for the calculation of the annual variable remuneration for 2019, to be
approved by the board. In addition, for submission to the board, establishing the achievement scales for annual
and multi-year performance targets and their associated weightings.
• Share plans
• Submitted a proposal to the board, for subsequent submission to the 2018 AGM regarding the approval of the
application of remuneration plans involving the delivery of shares or share options (deferred multiyear targets
variable remuneration plan, deferred and conditional variable remuneration plan, application of the Group’s
buy-out policy and plan for employees of Santander UK Group Holdings plc. and other companies of the Group
in the UK).
•
Propose the
directors´
remuneration
policy to the board
• A proposal was submitted to the board, for subsequent submission to a binding vote at the 2018 AGM,
regarding the approval of the directors´ remuneration policy for 2018, 2019 and 2020, and the committee
issued the required explanatory Report regarding the directors' remuneration policy.
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2018 Annual Report
Board of directors
Duties
Action taken by the Remuneration Committee
• Propose the
• Submitted of a proposal to the board, for subsequent submission to a consultative vote at the 2018 AGM,
annual directors´
remuneration
Report to the board
regarding the annual directors’ remuneration report.
• The committee assisted the board of directors in supervising compliance with the director remuneration policy.
• The committee was informed by the lead independent director about the contacts with key shareholders and
proxy advisors on remuneration issues for executive directors.
• Celebrated four joint sessions with the risk supervision, regulation and compliance committee in order to verify
that the remuneration schemes factor in risk, capital and liquidity and that no incentives are offered to assume
risk that exceeds the level tolerated by the Bank, therefore promoting and being compatible with adequate and
effective risk management.
Remuneration of non-director members of senior management
• Remuneration
• Established the basic terms of the contracts and remuneration for members of senior management in
policy for senior
executive vice
presidents and
other members of
senior management
terms of their fxed and variable annual remuneration, submitting to the board the corresponding proposals
for approval.
• Established the annual variable remuneration for 2017 payable immediately and the deferred remuneration
of members of senior management to be approved by the board, based on the individual level of achievement
of the annual performance targets and their weightings as previously established by the board, and the
application of the corresponding targets, scales and weightings.
• Established of the annual performance indicators to be used for the calculation of variable remuneration
for 2019 to be approved by the board, and with the cooperation of the human resources committee, and
establishment, for submission to the board, the achievement scales for the annual and multi-year performance
targets and weightings.
Remuneration of other executives whose activities may have a signifcant impact on the Group’s assumption of risks
• Remuneration for
other executives
who, although not
members of senior
management, are
identifed staf
• Assist the board
of directors in
supervising
compliance
with director
remuneration
policies
• Established the key elements of the remuneration of ‘identifed staf’.
• Reviewed and updated the composition of the identifed staf in order to identify the persons within the Group who
fall within the parameters established for being included in such group.
• Submitted a proposal to the board, for subsequent submission to the 2018 AGM, regarding the approval of
a maximum level of variable remuneration up to 200% of the fxed component for certain Group employees
belonging to categories of staf whose professional activities have a material impact on the risk profle of the Bank
or the Group.
• Reviewed the remuneration programmes to ensure they are up-to-date, giving weight to their adaptation and
performance; ensuring that directors’ remuneration is appropriate taking into account the Bank’s results, culture
and risk appetite; and that no incentives are ofered to assume risk that exceeds the level tolerated by the Bank,
therefore promoting adequate and being compatible with and efective risk management.
• The committee informed the board of the content of the report issued by an external consultant assessing the
remuneration policy, in application of the provisions of Law 10/2014, which establishes that the remuneration
policy of credit institutions will be subject, at least once a year, to a central and independent internal evaluation,
in order to verify whether the remuneration guidelines and procedures adopted by the board of directors in its
supervisory function have been complied with.
• Assisted the board in its supervision of the compliance with the remuneration policy for the directors and other
members of the identifed staf, as well as with any other Group's remuneration policies.
• Monitored the gender pay reporting analysis and identifed the areas for improvement.
• Verifed the independence of the external consultants contracted to assist the committee in the performance of its
duties.
Information for the general shareholders’ meeting and corporate documentation
• Shareholders
information
• Corporate
documentation
for 2017
• At our 2018 AGM, Mr Bruce Carnegie-Brown acting as the committee’s chairman, reported to the shareholders on
the matters and activities within the purview of the committee during 2017.
• Drafted the report of the committee for the year 2017 an analysis and assessment of the fulflment of the
functions entrusted to it, and the priorities for 2018 identifed following the self-assessment carried out by our
board and its committees.
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Time devoted to each task
In 2018, the remuneration committee held 11 meetings. Section
4.3, 'Board and committees attendance' provides information on
the attendance of committee members at those meetings.
The average estimated time dedicated by each member of the
committee to preparing for and participating in meetings held in
2018 was approximately four hours per meeting, with the chairman
estimated to have spent, approximately, double that time per
meeting.
10%
14%
59%
17%
Remuneration of
board members
Remuneration of
senior management
and key positions
Remuneration schemes
and policies
Others
Annual assessment of the functioning and performance
of the committee and fulflment of the goals set for 2018
The committee’s efectiveness during 2018 was considered as part
of the overall internal assessment of board efectiveness carried
out internally this year. The committee considered the fndings and
suggested actions resulting from the review and related to the
remuneration committee.
As a result of this assessment, it was concluded that the committee
efectively performed its functions of supporting, informing,
proposing and advising the board. This was demonstrated to
holding an appropriate number of meetings, for which sufcient
and accurate documentation was provided on the topics discussed,
the proper presentation of which strengthened the quality of the
debates among members and sound decision-making.
In 2018 the remuneration committee followed up on all
organisational actions and improvements that were launched as a
result of the efectiveness assessment carried out in 2017.
The committee has continued to monitor the gender pay reporting
analysis and to identify areas of improvement. The committee
is conscious that any unjustifed gender imbalances that may be
identifed within the organization must be fought. In addition,
the committee continued with its work in identifying areas for
potential improvement in the various Group units.
The committee has celebrated joint sessions with the risk
supervision, regulation and compliance committee in order to
verify that the remuneration schemes factor in risk, capital and
liquidity that do not incentivise assuming risks that exceed the
level tolerated by the Bank and are consistent with the approved
risk strategy of the Bank.
Report regarding the director remuneration policy
As provided for under section 2 of article 529 novodecies of the
Spanish Companies Act, the remuneration committee issues this
report regarding the director remuneration policy for 2019, 2020
and 2021 that the board of directors intends to submit to binding
approval of the shareholders at the coming AGM as a separate
item of the agenda and which is an integral part of this report. See
section 6.4 'Director remuneration policy for 2019, 2020 and 2021
that is submitted to a binding vote of the shareholders'.
162
Considering the analysis made in the context of the elaboration
of the 2018 annual report on director remuneration and its
continuous supervision task in relation to remuneration policies,
the remuneration committee is of the opinion that the director
remuneration policy for 2019, 2020 and 2021, which is expected to
be submitted to the shareholders vote and is included in section
6.4 below, conforms to the principles of the Bank’s remuneration
policy and to the by-law mandated remuneration system.
2019 Priorities
• Intragroup coordination: coordination with the remuneration
committees of the Group subsidiaries is a priority, to monitor
the adequate implementation and application of the corporate
policies regarding remuneration.
• Gender pay gap: The committee will continue working in
analysing pay gaps that may exist due to gender or other factors,
adopting solutions for unjustifed imbalances when detected.
• Efective compensation: ongoing focus on shaping compensation
structures and schemes to refect the Bank’s culture and continue
driving these towards meritocracy and the corporate values.
Review the Bank’s remuneration policies to ensure that they are
aligned with international best practices, and that they foster
talent attraction and retention.
4.7 Risk supervision, regulation and
compliance committee activities in 2018
This section constitutes the risk supervision, regulation and
compliance committee report that in previous years was issued
separately and that is now provided as part of the annual corporate
governance report as discussed in 'Redesigned corporate
governance report' in section 1. This report was prepared by
the risk supervision, regulation and compliance committee on
25 February 2019 and approved by the board of directors on 26
February 2019.
Composition
Composition
Chairman
Mr Álvaro Cardoso
de Souza
Mr Ignacio Benjumea
Cabeza de Vaca
MembersA
Ms Esther Giménez
Salinas i Colomer
Mr Ramiro Mato
García-Ansorena
Category
Independent
Other external
(neither proprietary
nor independent)
Independent
Independent
Ms Belén Romana García
Independent
Secretary
Mr Jaime Pérez Renovales
A. Mr Bruce Carnegie-Brown ceased as member of the committee on 1
January 2019.
The board of directors has appointed the members of the
committee bearing in mind their knowledge, aptitude and
experience in relation to the committee’s mission.
2018 Annual Report
Board of directors
For further information the skills, knowledge and experience of
each of the committee members, see section 4.1 'Our directors' and
'Board skills and diversity matrix' in 4.2.
How the committee works
Our appointments committee holds its meetings in accordance
with an annual calendar, which includes at least four meetings,
and there is an annual work plan of issues to be discussed by
the committee.
Meetings of the committee shall be validly held with the
attendance, either present or represented, of more than half
of its members, who may designate another member as proxy.
Resolutions are passed by a majority vote of the attendees and the
chairman has the casting vote in the event of a tie.
Committee members are provided with the relevant
documentation for each meeting sufciently in advance of the
meeting date, thereby ensuring committee efectiveness.
The committee has the power to require executives to attend its
meetings, by invitation from the chairman of the committee to
attend under the terms established by the committee.
The post of secretary to the committee corresponds, in a non-
voting capacity, to the general secretary and secretary to the
board, who is also head of the Group’s Human Resources area,
fostering a fuid and efcient relationship with the diferent units
that are expected to collaborate with, or provide information to,
the committee.
The committee may contract legal, accounting or fnancial advisers
or other experts, at the Bank´s expense to assist in the exercise of
its functions.
Without prejudice to the fact that the committee chairman
reports on the content of its meetings and its activities at each
of the board of directors meetings held, all documentation
distributed for its meetings and the minutes thereof are made
available to all directors.
Duties and activities in 2018
This section contains a summary of the risk supervision, regulation
and compliance committee’s activities in 2018, classifed in
accordance with the committee’s basic duties.
Duties
Risk
Actions taken by the Risk Supervision, Regulation and Compliance Committee
• Assist the board in (i)
• The committee carried out an overview of the Group’s risks, and specifc analyses by unit and risk type, and
defning the Group’s risk
policies, (ii) determining
the risk appetite
strategy and culture
and (iii) supervising
their alignment with the
Group’s corporate values
assessed proposals, and assessed issues and projects relating to risk management and control.
• Established and proposed to the board the approval of the risk appetite (risk appetite framework or RAF
and the risk appetite statement), including proposals for new metrics. Reviewed on a quarterly basis the
compliance with the limits.
• Received information about matters relating to the proper management and control of risks within the
Group, most notably the Risk Identifcation and Assessment (RIA), the Risk Control Self-Assessment (RCSA),
one of the main tools for controlling these risks.
• Received regular updates on the main risks afecting the diferent (e.g. Brexit, ring fencing, hyperinfation
and devaluation in Argentina) business units and subsidiaries. The chairmen of the committee and of
the risk committees of the diferent main global businesses and geographies of the Group held a risk
convention to obtain a holistic view of the risks within the Group.
• Monitored risks derived from technological obsolescence and related to cybersecurity, including data
leakage, incident and vulnerability detection, patch management, network security and access control,
amongst others. The committee was informed on the status of the main IT development and projects.
Oversight was coordinated with the innovation and technology board committee, with which one joint
session was held.
• Supervised the diferent risks associated with the main corporate transactions analysed by the Bank and
the diferent mitigating measures proposed to address them. In particular, it monitored the risks associated
with the integration of Banco Popular in Spain and Portugal.
• The Group chief fnancial ofcer (CFO) submitted the 2018 Recovery Plan to the committee, assessing
the Group’s resilience in scenarios of severe stress. The plan was submitted to the board of directors for
approval.
• Supervised and submitted for approval to the board of directors the risk strategy.
• Supervised the alignment of the risk strategy with the 3-year strategic fnancial plan, P-21 (from 2019 to
2021), which covers, in qualitative terms and for the entire Group, the priorities and projects for the next
three years and, in quantitative terms, a fnancial plan for that period.
• Joint meetings with board audit committee in order to share information regarding IFRS9, cybersecurity and
obsolescence risk, whistleblowing,policy on outsourcing of services and other matters.
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Duties
Actions taken by the Risk Supervision, Regulation and Compliance Committee
• Assess the activity linked
to Risk Management and
Control
• Ensured that the pricing policy for the assets, liabilities and services ofered to customers fully takes into
consideration the business model and appetite and risk strategy of the Bank.
• Ascertained the risks resulting from the macroeconomic environment and economic cycles pertaining to the
activities of the Bank and its Group.
• Reviewed the main exposures of the Group with customers, economic sectors, geographical areas and
types of risk.
• Supported and assisted the board in conducting stress tests of the Bank. In particular, it assessed the
scenarios and assumptions to be used in such tests, analysing the results and the measures proposed by the
Risk function as a result.
• Supervise the Risk
• Ensured the independence and efcacy of the Risk function and that material and human resources were
function
duly provided.
• Assessed the Risk function and the performance of the Chief risk ofcer (CRO) and shared its assessment to
the remuneration committee and the board, in order to establish the variable remuneration payable to him.
• Collaboration to establish
rational remuneration
policies and practices
• Examined in conjunction with the remuneration committee whether the incentives policy envisaged in the
remuneration scheme takes into account risk, capital, liquidity and the probability of proft.
• Analysed in conjunction with the remuneration committee, the factors used to determine the ex-ante risk
adjustment of the total variable remuneration assigned to the units, based on how previously assessed
risks actually materialised.
Capital and liquidity
• Assist the board in
approving the capital
and liquidity strategies
and supervise their
implementation
• Reviewed the annual capital self-assessment report (ICAAP) prepared by the Finance and Risks divisions in
accordance with industry best practices and supervisory guidelines and submitted this report to the board
for approval. Moreover, a capital plan was drawn up in accordance with the scenarios envisaged over a
three-year time frame.
• Endorsed the Pillar III disclosures report, which was submitted to and fnally approved by the board.
The report describes various aspects of the Group’s management of capital and of risk and provides an
overview of the function and management of capital; base capital and prescribed capital requirements;
policies for managing the various risks undertaken by the Bank from the standpoint of capital consumption;
composition of the Group’s portfolio and its credit quality, measured in terms of capital and the roll-out of
advanced internal models.
• Assessed the liquidity plan (ILAAP), developed in the context of the Group’s business model and submitted
for approval by the board.
Compliance and conduct
• Supervise the Compliance
• Monitored the implementation of the compliance programs and the Target Operating Model (TOM) across
and Conduct function
the Group.
• The Group Chief compliance ofcer (CCO) attended to all committee sessions (thirteen) in 2018 to report on
matters under her responsibility, including the four joint sessions held in 2018 with the audit committee, the
remuneration committee and the innovation and technology committee.
• Ensured the independence and efcacy of the Compliance function.
• Assessed the Compliance function (including the analysis of the function’s stafng to ensure that
the function has the physical and human resources needed for the performance of its work) and the
performance of the CCO and shared it with to the remuneration committee and the board in order to
establish her variable remuneration.
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Board of directors
Duties
Actions taken by the Risk Supervision, Regulation and Compliance Committee
• Supervise the efcacy of
• Assessed the operation of the corporate defence model and its efcacy in preventing or mitigating criminal
the Compliance policy, the
General Code of Conduct,
anti-money laundering
and terrorist fnancing
manuals, and all other
sector codes and rules
ofences.
• Monitored the compliance with regulatory requirements regarding:
• The implementation of GDPR throughout the year within the Group; analysed the main risks and
mitigation plans.
• The implementation of MiFID II throughout the year.
• Monitored and assessed new regulations afecting the Group´s activity in the diferent jurisdictions.
• Monitored key strategies and initiatives for enhancing AML management in the medium term through the
application of innovative technologies.
• Received an external expert’s report in line with legal obligations on the prevention of money
laundering in relation to Spain entities.
• Regulatory compliance reported:
• Volcker's compliance programme and the results of the Group's certifcation.
• The global supervision model of market abuse at the Group, highlighting its maturity, endorsed by
Internal Audit.
• The Bank’s treasury share trading, which complied with the applicable regulations.
• Product governance and
consumer protection
• Reviewed and submitted to the board the annual report from the Group's customer services department,
explaining its activities in 2017.
• Received information about the progress of the local action plans regarding internal sales force
remuneration in the Group and an overview of an initial assessment of the external sales force regarding
their potential conduct risk impact.
• Received an update on the status of customers’ complaints in the frst half of 2018 and action plans in place
to address any defciencies and detriment to customers identifed.
• Received information on some of the conclusions reached from the activities carried out by the product
governance and consumer protection unit.
• Supervise the
whistleblower channels
• Supervised the activity of the whistleblowing channel that allows Group employees to confdentially and
anonymously report any breaches of external or internal rules, and submitted the conclusions achieved to
the audit committee.
• Reviewed and reported the measures taken in the diferent countries to promote the use of whistleblower
channels and their results, in accordance with the request by the board of directors.
• The Culture and Regulatory Compliance functions developed a joint proposal to create a single channel
model for reporting violations of the General Code of Conduct and behaviours contrary to the values of
Simple, Personal and Fair.
• Communications received
• Received monthly reports on the most relevant communications received from supervisory bodies in
from supervisors and
regulators
the area of compliance and conduct, and supervised the implementation of the associated actions and
measures approved.
Governance
• Corporate governance and • The committee assessed the suitability of the Bank’s corporate governance system, concluding that the
internal governance
board fulfls its mission of promoting social interest and takes stakeholders’ interests into account, thereby
reporting favourably the content of the corporate governance report.
• Received information on the meetings held with institutional investors to explain the main initiatives
implemented by the board in the area of corporate governance.
• Reported favourably on the corporate governance annual report.
• Reported favourably on the proposed amendments to the Rules and regulations of the board prior to its
approval by the board.
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Duties
Actions taken by the Risk Supervision, Regulation and Compliance Committee
Regulations and relations with supervisors
• Regulation and relations
• Monitored reports on the main issues raised up by supervisors, the status of the action plans associated
with supervisors
with these issues and those responsible for their implementation.
• Received information about the priorities published by the European Central Bank that will guide the Single
Supervisory Mechanism (SSM). Likewise, the committee was informed about the results of the Supervisory
Review and Evaluation Process (SREP) carried out by the ECB and about other regulatory updates.
• Received from periodic information about the macroeconomic environment and economic and political
performance and the outlook in various countries, as well as with regard to the main regulatory principles,
new regulations and matters being debated in the fnancial sector that could afect the Group’s activity, in
addition to its position in connection with these.
• The committee was informed about the updates in relation to the new interbank ofered rates (IBORS)
based on alternative risk-free rates, which are being developed by the supervisors of the main jurisdictions.
Information for the general shareholders’ meeting and corporate documentation
• Shareholders
information
• Corporate
documentation for 2017
• At our 2018 AGM, Mr Bruce Carnegie-Brown acting as the committee’s chairman at that moment, reported
to the shareholders on the matters and activities within the purview of the appointments committee.
• Drafted the activities report of the committee for the year 2017, which includes a section dedicated to
the activities carried out during the year, an analysis and assessment of the fulflment of the functions
entrusted to it, and the priorities for 2018 identifed following the self-assessment carried out by our board
and its committees.
Time devoted to each task
In 2018, the risk, supervision regulation and compliance
committee held 13 meetings. In section 4.3 'Board and committees
attendance' provides information on the attendance of committee
members at those meetings.
The average estimated time dedicated by each member of the
committee to preparing for and participating in meetings held in
2018 was approximately 10 hours per meeting, with the chairman
estimated to have spent double that time per meeting.
5%
6%
63%
Risk
16%
10%
Compliance and Conduct
Regulations and relations
with stakeholders
Capital & Liquidity
Governance
Annual assessment of the functioning and performance
of the committee and fulflment of the goals set for 2018
The committee’s efectiveness was considered as part of the
overall internal assessment of board efectiveness carried out
internally in 2018. The committee considered the fndings and
suggested actions resulting from the review and related to the
risk, supervision regulation and compliance committee.
As a result of this assessment, it was concluded that the committee
efectively performed its functions of supporting and advising the
board. This was demonstrated to holding an appropriate number
of meetings, for which sufcient and accurate documentation was
provided on the topics discussed, the proper presentation of which
strengthened the quality of the debates among members and
sound decision-making.
In 2018, our risk supervision, regulation and compliance committee
followed up on all organisational actions and improvements that
were launched as a result of the assessment carried out in 2017:
• It continued its collaboration with the innovation and technology
board committee, holding joint meetings to allow coordinated
oversight of technology and cybersecurity risk, ensuring the
provision of necessary resources.
• It consolidated its function of supporting and assisting to
the board as a committee specialised in the control and
supervision of the Risks and Compliance functions, increasing
its collaboration with the audit committee in the supervision of
internal audit activities; and;
• It strengthened its relationship with the risk supervision,
regulation and compliance committees of the main subsidiaries
of the Group, through continuous communication and sharing of
best practices, among the chairman of these committees.
2019 Priorities
The committee has identifed the following priorities for 2019:
• Ongoing focus on material risks and the potential impact of
their outcomes and continuous analysis of the macroeconomic
environment and early warning indicators.
• Ensuring the proper coordination with other board committees,
including, among others, the responsible banking, sustainability
and culture committee, the remuneration committee and the
audit committee, and that they are aware of the work of the
committee and how it relates to their respective responsibilities.
• Oversight of transformational projects (regulatory and non
regulatory).
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Board of directors
4.8 Related-party transactions
and conficts of interest
Related-party transactions
Directors, senior management and signifcant shareholders
This subsection includes the report on related-party transactions
referred to in recommendation six of the Good Governance Code of
Spanish Listed Companies.
In accordance with the Rules and regulations of the board, the
board of directors shall examine any transactions that the Bank or
Group companies carry out with directors, with shareholders that
own, whether individually or together with others, a signifcant
interest, including shareholders represented on the board of
directors of the Bank or of other Group companies, or with persons
related to them.
These transactions require the authorisation of the board,
following a favourable report from the audit committee, except
where the law provides that the approval corresponds to the GSM.
Exceptionally, when so advised for reasons of urgency, related-
party transactions may be authorised by the executive committee,
with subsequent ratifcation by the board.
Such transactions shall be evaluated in the light of the principle of
equal treatment and in view of market conditions.
Authorisation of the board shall not be required, however, for
transactions that simultaneously meet the following three
conditions:
• They are carried out under contracts with basically standard
terms that customarily apply to the customers contracting for the
type of product or service in question.
• They are entered into prices or rates generally established by
the party acting as supplier of the goods or service in question
or, if the transactions concern goods or services for which no
rates are established under arm’s length conditions, similar to
those applied to commercial relationships with customers having
similar characteristics.
• The amount thereof does not exceed 1% of the Bank’s annual
income.
During 2018, no member of the board of directors, no person
represented by a director, and no company of which such persons,
or persons acting in concert with them or through nominees
therein, are directors, members of senior management or
signifcant shareholders, to the best knowledge, has entered with
the Bank into any signifcant transactions or under conditions
which were not market conditions.
The audit committee has verifed that all transactions completed
with related parties during the year were fully compliant with
the abovementioned conditions in order not to require approval
from the governing bodies as mentioned in the audit committee
activities report in section 4.4. 'Audit committee activities in 2 018'.
Group direct risks regarding the Bank's directors and members
of senior management as of 31 December 2018 in the form of
loans and credits and guarantees provided in the ordinary course
of business, are shown in note 5.f of the 'consolidated fnancial
statements'. Their conditions are equivalent to those made under
market conditions or the corresponding remuneration in kind has
been attributed.
In addition, the Bank also has a policy for the authorization of
loans, credits, loans and guarantees to directors and members of
senior management that contains the procedure established for
the authorization and formalization of risk transactions of which
they or their related parties are benefciaries.
The policy includes general rules on maximum borrowing levels,
interest rates and other conditions applicable in similar terms to
those applicable to the rest of employees.
According to the mentioned policy and with the regulations
applicable to credit institutions, the loans, credits or guarantees to
be granted to directors and senior managers of the Bank need to
be authorised by the board and subsequently by the ECB. There are
two exceptions:
• Transactions subject to the conditions of a collective agreement
agreed by the Bank and whose conditions are similar to the
conditions of transactions granted to any Bank employee.
• Transactions carried out under contracts whose conditions
are standardised and generally applied to a large number of
customers, provided that the amount granted to the benefciary
or its related parties does not exceed the amount of EUR 200,000.
Intra-group transactions
With regard to intra-group transactions, identical rules, approval
bodies and procedures apply as to transactions with customers,
with mechanisms in place to monitor that such transactions are
under market prices and conditions.
The amounts of the transactions with other Group entities
(subsidiaries, associates and multigroup entities), as well as
with directors, senior management and their related parties are
included in note 53 ('Related parties') in the 'consolidated fnancial
statements' and note 47 ('Related parties') in the individual
fnancial statements.
Conficts of interests
The Bank has approved standards and procedures that establish
the criteria for the prevention of conficts of interest that may arise
as a result of the various activities and functions carried out by the
Bank, or between the Bank's interests and those of its directors
and senior management.
In 2018, we have approved an internal policy on conficts of
interest that is a compilation of various binding documents that
existed prior to that time, that provides the employees, directors
and entities of the Group with criteria to prevent and manage any
confict of interest that may arise as a result of their activities.
Directors and senior management
Our directors must adopt the measures that are necessary to
prevent situations in which their interests, whether their own or
through another party, may enter into confict with the corporate
interest and their duties towards the Bank.
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Group companies
The Bank is the only Santander Group company listed in Spain, so
it is not necessary to have mechanisms in place to resolve possible
conficts of interest with subsidiaries listed in Spain.
Notwithstanding, in case of conficts of interest that may arise
between a subsidiary and the Bank, the latter as the parent
company must take into account the interests of all its subsidiaries
and the way such interests contribute to the long term interest of
the subsidiaries and the Group as a whole. Likewise, the entities
of the Santander Group must take into account the interests of the
Santander Group as a whole and, consequently, also examine how
decisions adopted at the subsidiary level may afect the Group.
The Bank, as the parent company of Santander Group, structures
the governance of the Santander Group through a system as
ruler that guarantees the existence of rules of governance and an
adequate control system, as described in section 7 'Group structure
and internal governance'.
The duty to avoid conficts of interest requires directors to fulfl
certain obligations such as abstaining from using the Bank’s
name or their capacity as directors to unduly infuence private
transactions, using corporate assets, including the confdential
information of the Bank, for private purposes, taking advantage
of business opportunities of the Bank, obtaining benefts or
remuneration from third parties in connection with the holding
of their position, except for those received merely as a sign of
courtesy, carrying out activities, on their own behalf or on behalf
of others, which actually or potentially entail efective competition
with the Bank or which otherwise place them in a situation of
permanent confict with the interests of the Bank.
In any case, they must inform the board of any direct or indirect
confict of interest between their own interests or those of their
related parties and those of the Bank that will be disclosed in the
fnancial statements.
No director has communicated during the year 2018 any situation
that places him in a confict of interest with the Group. However,
in 2018, there were 60 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 60 cases is as follows: on 26 occasions the abstention was due
to proposals to appoint, re-elect or remove directors, and their
appointment as members of board committees or as members
of other boards at Santander Group companies; on 30 occasions
the matter under consideration related to remuneration or the
granting of loans or credits; on 1 occasion the matter concerned
the discussion of a risk transaction involving a party related to a
director; and on 3 occasions the abstention concerned the annual
verifcation of the status and the suitability of directors.
Further, the mentioned policy of conficts of interest and the Code
of Conduct in Securities Markets to which both, the directors and
the senior management of the Bank have adhered to, establishes
mechanisms to detect and address conficts of interest. These
persons must present a statement to the Compliance function of
the Bank detailing any relations they hold. This statement must
be continuously updated. They must also notify the Compliance
function of any situation in which a confict of interest could occur
owing to their relations or due to any other reason or circumstance
and they shall abstain from deciding, or where applicable, voting
in situations where a confict exists and shall likewise inform about
the confict to those who are to take the respective decision.
Conficts of interest shall be resolved by the person holding the
highest responsibility for the area involved. If several areas are
afected, the resolution shall be made by the most senior ofcer in
all such areas or if none of the foregoing rules are applicable, by
the person appointed by the Compliance function. In the event of
any doubt, the Compliance function should be consulted.
The control mechanisms and the bodies in charge of resolving this
type of situations are described in the Code of Conduct in Securities
Markets, which is available on the Group’s corporate website.
According to this code, and in relation to the Group’s shares and
securities, neither directors, the senior management nor their
related parties may: (i) carry out counter-transactions on securities
of the Group within 30 days following each acquisition or sale
thereof; or (ii) carry out transactions on Group securities in the one
month preceding the announcement of quarterly, six-monthly or
annual results until they are published
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5. Management team
The table below shows the profles of the Bank’s senior management (other than the executive directors described in section 4.1 'Our
directors') as of 31 December 2018.
Mr Rami Aboukhair
COUNTRY HEAD –
SANTANDER SPAIN
Mr Enrique Álvarez
HEAD OF STRATEGY,
CORPORATE DEVELOPMENT
AND NEW BUSINESSES
DEVELOPMENT – SANTANDER UK
Ms Lindsey Argalas
HEAD OF SANTANDER DIGITAL
Mr Juan Manuel Cendoya
GROUP HEAD OF
COMMUNICATIONS, CORPORATE
MARKETING AND RESEARCH
Mr José Doncel
GROUP HEAD OF ACCOUNTING
AND FINANCIAL CONTROL
Born in 1967. He joined the Group in 2008 as a director of
Santander Insurance and head of Products and Marketing. He
also served as managing director of products, marketing and
customers in Banco Español de Crédito, S.A. (Banesto) and as
managing director and head of Retail Banking in Santander UK.
In 2015 he was appointed country head for Santander Spain and
in 2017 he was named CEO of Banco Popular Español, S.A. until
its merger with Banco Santander, S.A. He is currently senior
executive vice president and country head of Santander Spain.
Born in 1978. He joined the Group in 2015 as deputy head of
strategy. He is currently senior executive vice president, and
until 15 February 2019 Group head of Chairman’s Ofce and
Strategy and global head of Insurance Network Banking and
Responsible Banking. He is currently head of strategy corporate
development and New Businesses Development in Santander
UK. He is also a director of Open Digital Services, S.L., Santander
Fintech Limited and Zurich Santander Insurance America, S.L.
Previously he was a partner in McKinsey & Company.
Born in 1968. In 2017 she joined the Group as senior executive
vice president and Group head of Santander Digital. She served
as principal of The Boston Consulting Group (BCG) (1998-2008).
She also served as senior vice president and chief of staf to the
CEO of Intuit Inc. (2008-2017).
Born in 1967. He joined the Bank in July 2001 as Group senior
executive vice president and head of the Communications,
Corporate Marketing and Research division. In 2016 he was
appointed vice chairman of the board of directors of Santander
Spain and head of Institutional and Media Relations of that unit,
in addition to his function as Group head of Communications,
Corporate Marketing and Research. He is also a member of
the board of directors of Universia. Formerly, he was head of
the legal and tax department of Bankinter, S.A. Juan Manuel
Cendoya is a State Attorney.
Positions held in other non-Group companies: He is currently
a non-executive director at Arena Media Communications
Network, S.L.
Born in 1961. He joined the Group in 1989 as head of accounting.
He also served as head of accounting and fnancial management
at Banco Español de Crédito, S.A. (Banesto) (1994-2013). In 2013
he was appointed senior executive vice president and head of
the Internal Audit division. In 2014 he was appointed Group
head of Accounting and Financial Control. Currently he serves as
Group chief accounting ofcer.
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Mr Keiran Foad
GROUP CHIEF RISK OFFICER
Mr José Antonio
García Cantera
GROUP CHIEF FINANCIAL OFFICER
Mr Juan Guitard
GROUP CHIEF AUDIT EXECUTIVE
Mr José María Linares
GLOBAL HEAD OF
CORPORATE & INVESTMENT
BANKING
Ms Mónica López-Monís
GROUP CHIEF COMPLIANCE
OFFICER
Mr Javier Maldonado
GROUP HEAD OF COSTS
Born in 1968. He joined the Group in 2012 as deputy chief risk
ofcer of Santander UK. He also served in various risk and
corporate leadership roles at Barclays Bank, plc. (1985-2011)
and as chief risk ofcer at Northern Rock, plc. In 2016 he was
appointed senior executive vice president and deputy chief risk
ofcer of the Bank until his appointment in 2018 as the Group
chief risk ofcer.
Born in 1966. He joined the Group in 2003 as senior executive
vice president of global wholesale banking of Banco Español
de Crédito, S.A. (Banesto). In 2006 he was appointed Banesto’s
chief executive ofcer. Formerly, he was member of the
executive committee of Citigroup EMEA and member of the
board of directors of Citigroup Capital Markets Int, Ltd. and
Citigroup Capital Markets UK. In 2012 he was appointed senior
executive vice president of Global Corporate Banking. Currently
he serves as Group chief fnancial ofcer.
Born in 1960. He joined the Group in 1997 as head of human
resources of Santander Investment, S.A. He was also General
Counsel and Secretary of the board of Santander Investment,
S.A. and Banco Santander de Negocios. In 2013 he was head of
the Bank’s Risk division. In November 2014 he was appointed
head of the Internal Audit division. Currently, he serves as
Group chief audit executive. Juan Guitard is a State Attorney.
Born in 1971. He served as an equity analyst in Morgan
Stanley & Co. New York (1993-1994). He worked as senior vice
president and senior Latin America telecom equity analyst at
Oppenheimer & Co. New York (1994-1997). He also served as
Director Senior Latin America TMT equity analyst at Société
Générale, New York & São Paolo (1997-1999). In 1999 he joined
J.P. Morgan and in 2011 was appointed as managing director
and head of Global Corporate Banking at J.P. Morgan Chase
& Co. (2011-2017). In 2017 he was appointed senior executive
vice president of the Group and Global head of Corporate &
Investment Banking.
Born in 1969. She joined the Group in 2009 as general secretary
and board secretary of Banco Español de Crédito, S.A.
(Banesto). Formerly, she was general secretary of Aldeasa, S.A.
She also served as general secretary of Bankinter, S.A. In 2015
she was appointed senior executive vice president of Santander
and Group chief compliance ofcer. Mónica López-Monís is a
State Attorney.
Born in 1962. He joined the Group in 1995 as head of the
international legal division of Banco Santander de Negocios.
He was in charge of several positions in Santander UK. He was
appointed senior executive vice president of Santander and
head of coordination and control of regulatory projects in 2014.
He currently serves as Group senior executive vice president
and head of Costs.
Positions held in other non-Group companies:
He is non-executive director of Alawwal Bank.
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Management team
Mr Dirk Marzluf
GROUP HEAD OF TECHNOLOGY
AND OPERATIONS
Mr Víctor Matarranz
GLOBAL HEAD OF WEALTH
MANAGEMENT
Mr José Luis de Mora
GROUP HEAD OF FINANCIAL
PLANNING AND CORPORATE
DEVELOPMENT
Mr José María Nus
RISK ADVISER TO GROUP
EXECUTIVE CHAIRMAN
Mr Jaime Pérez
Renovales
GROUP HEAD OF GENERAL
SECRETARIAT AND HUMAN
RESOURCES
Ms Magda Salarich
HEAD OF SANTANDER CONSUMER
FINANCE
Ms Jennifer Scardino
HEAD OF GLOBAL
COMMUNICATIONS.
GROUP DEPUTY HEAD OF
COMMUNICATIONS, CORPORATE
MARKETING AND RESEARCH
Born in 1970. He joined the Group in 2018 as Group senior
executive vice president and Group head of IT and operations.
Previously he held several positions in AXA Group, where he
served as group CIO from 2013 leading the insurance group’s
technology and information security transformation and co-
sponsor of its digital strategy. His global roles include previous
work at Accenture, Daimler Chrysler and Winterthur Group.
Born in 1976. He joined the Group in 2012 as head of strategy
and innovation in Santander UK. In 2014 he was appointed
senior executive vice president and head of executive
chairman´s ofce and strategy. Previously, he held several
positions in McKinsey & Company where he became partner.
Currently, he serves as senior executive vice president and
Global head of Wealth Management.
Born in 1966. He joined the Group in 2003. Since 2003, he has
been in charge of developing the Group strategic plan and
acquisitions. In 2015 he was appointed Group senior executive
vice president and Group head of Financial Planning and
Corporate Development. Since 15 February 2019, the strategy
function has been integrated with the corporate development
function.
Born in 1950. He joined the Group in 1996 as executive director
and chief risk ofcer of Banco Español de Crédito, S.A. (Banesto).
In 2010 he was appointed executive director and chief risk
ofcer of Santander UK. He also served as Group chief risk
ofcer until June 2018. Formerly, he served as senior executive
vice president in Argentaria and Bankinter. He currently serves
as senior executive vice president and risk advisor to Group
executive chairman.
See profle in section 4.1. 'Our directors'.
Born in 1956. She joined the Group in 2008 as senior executive
vice president and head of Santander Consumer Finance.
Previously, she held several positions in the automobile
industry, including the position of director and executive
vice president of Citroën España and head of commerce and
marketing for Europe of Citroën Automobiles.
Born in 1967. She joined the Group in 2011 as head of
corporate communications, public policy and corporate social
responsibility for Santander UK. She also held several positions
in the US Securities and Exchange Commission (1993-2000).
She was appointed managing director of Citigroup (2000-2011).
In 2016 she was appointed senior executive vice president and
head of Global Communications and Group deputy head of
Communications, Corporate Marketing and Research.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
6. Remuneration
Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.7, 9.4 and 9.5 below constitute the
annual report on directors´ remuneration that must be prepared
and submitted to the consultative vote of thegeneral shareholders'
meeting. This report was published in previous years separately
while now it is published as part of this Corporate governance
chapter, as indicated in its introduction, 'Redesigned corporate
governance report'.
Pursuant to the previous paragraph, this annual report on
remuneration of directors has been approved by the board of
directors of the Bank, in its meeting held 26 February 2019. None
of the directors voted against nor abstained in relation to the
approval of this report.
2. Fixed remuneration must represent a signifcant proportion of
total compensation.
3. Variable remuneration must compensate for performance in
terms of the achievement of agreed goals of the individual and
within the framework of prudent risk management.
4. The global remuneration package and the structure thereof
must be competitive, in order to appeal to and retain
professionals.
5. Conficts of interest and discrimination must be avoided in
decisions regarding remuneration.
The text of the remuneration policy for directors in force at the
date of this report is available at our corporate website.
The assistance of Willis Towers Watson was sought by the
remuneration committee and the board for the following
purposes:
6.1 Principles of the remuneration policy
Remuneration of directors in their capacity as such
The individual remuneration of directors, both executive and
otherwise, for the performance of supervisory and collective
decision-making duties, is determined by the board of directors,
within the amount set by the shareholders, based on the positions
held by the directors on the collective decision-making body itself
and their membership and attendance of the various committees,
as well as any other objective circumstances that the board may
take into account.
Remuneration of directors for the
performance of executive duties
The most notable principles of the Bank’s remuneration policy for
the performance of executive duties are as follows:
1. Remuneration must be aligned with the interests of
shareholders and be focused on long-term value creation, while
remaining compatible with rigorous risk management and with
the Bank’s long-term strategy, values and interests.
• To compare the relevant data with that on the markets and
comparable entities, given the size, characteristics and activities
of the Group.
• To analyse and confrm the compliance of certain quantitative
metrics relevant to the assessment of certain objectives.
• To estimate the fair value of the variable remuneration linked to
long-term objectives.
Banco Santander performs an annual comparative review of the
total compensation of executive directors and senior executives.
The 'peer group' in 2018 comprised the following banks: Itaú, JP
Morgan Chase, 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.
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2018 Annual Report
6.2 Remuneration of directors for
the performance of supervisory
and collective decision-making
duties: policy applied in 2018
A. Composition and limits
As set out in Banco Santander´s Bylaws, the remuneration
remuneration of directors for their status as such now consists of
a fxed annual amount determined at the general shareholders’
meeting. This amount shall remain in efect until the shareholders
resolve to amend it, though the board may reduce its amount
in the years it considers such a reduction appropriate. The
remuneration established at the general shareholders’ meeting
for 2018 was EUR 6 million, with two components: (a) annual
allotment and (b) attendance fees.
Bylaw-stipulated emoluments earned by the board in 2018
amounted to EUR 4.6 million, which is 23% less than the amount
approved at the general shareholders’ meeting.
In addition, the Bank contracts a civil liability insurance policy for
its directors upon customary terms that are proportionate to the
circumstances of the Bank. Directors are also entitled to receive
shares, share options or share-linked compensation following the
approval of the general shareholders´ meeting.
Directors are also entitled to receive other compensation
following a proposal made by the remuneration committee and
upon resolution by the board of directors, as may be deemed
appropriate in consideration for the performance of other duties
in the Bank, whether they are the duties of an executive director
or otherwise, other than the supervisory and collective decision-
making duties that they discharge in their capacity as members of
the board.
None of the non-executive directors has the right to receive any
beneft on the occasion of their removal as such.
B. Annual allotment
The amounts received individually by the directors during the
last two years based on the positions held on the board and their
membership on the various board committees were as follows:
Amount per director in euros
2018
2017
Members of the board of directors
90,000
87,500
Members of the executive committee
170,000
170,000
Members of the audit committee
40,000
40,000
Members of the appointments committee
25,000
25,000
Members of the remuneration committee
25,000
25,000
Members of the risk supervision,
regulation and compliance committee
Members of the responsible banking,
sustainability and culture committee
40,000
40,000
15,000
-
Chairman of the audit committee
70,000
50,000
Chairman of the appointments committee
50,000
50,000
Chairman of the remuneration committee
50,000
50,000
Chairman of the risk supervision,
regulation and compliance committee
Chairman of the responsible banking,
sustainability and culture committee
Lead directorA
Non-executive vice chairmen
70,000
50,000
50,000
-
110,000
110,000
30,000
30,000
A. Mr Bruce Carnegie-Brown, for duties performed as part of the board
and board committees, specifcally as chairman of the appointments
and remuneration committees and as lead director, and for the time
and dedication required to perform these duties, has been allocated
minimum total annual remuneration of EUR 700,000 since 2015,
including the aforementioned annual allowances and attendance fees
corresponding to him.
C. Attendance fees
By resolution of the board, at the proposal of the remuneration
committee, the amount of attendance fees applicable to meetings
of the board and its committees (excluding the executive
committee, for which no fees are provided) during the last two
years was as follows:
Attendance fees per director per meeting in euros
Board of directors
Audit committee and risk supervision,
regulation and compliance committee
Other committees (excluding executive committee)
2018 and
2017
2,600
1,700
1,500
D. Breakdown of bylaw-stipulated emoluments
The total amount accrued for bylaw-stipulated emoluments and
attendance fees was EUR 4,6 million in 2018 (EUR 4,7 million in
2017). The individual amount accrued for each director for these
items is as follows:
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Directors
Ms Ana
Botín-Sanz
de Sautuola
y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce
Carnegie-
Brown
Mr Rodrigo
Echenique
Gordillo
Mr Guillermo
de la Dehesa
Romero
Ms Homaira
Akbari
Mr Ignacio
Benjumea
Cabeza de Vaca
Mr Francisco
Javier Botín-
Sanz de
Sautuola y
O’SheaA
Ms Sol Daurella
Comadrán
Mr Carlos
Fernández
González
Ms Esther
Giménez-
Salinas i
Colomer
Ms Belén
Romana García
Mr Juan Miguel
Villar MirC
Mr Ramiro
Mato García-
AnsorenaD
Mr Alvaro
Cardoso de
SouzaE
Mr Matías
Rodríguez
InciarteF
Ms Isabel
Tocino
BiscarolasagaF
Total
I
I
I
I
I
I
I
I
e
v
i
t
u
c
e
e
v
i x
t
eu
-c
ne
x o
E N BoardG
Amount in euros
2018
Annual allotment
EC
AC
ASC
RC
RSRCC RBSCC
Total
2017
Total bylaw-
stipulated
Board and emoluments
and
committee
attendance
attendance
fees
fees
90,000
170,000
90,000
170,000
I
383,000
170,000
90,000
170,000
N
120,000
170,000
-
-
-
-
-
-
-
-
-
- 8,000 268,000
39,000
307,000
301,000
-
-
260,000
34,000
294,000
301,000
25,000 25,000
40,000
- 643,000
89,000
732,000
731,400
-
-
-
25,000 25,000
20,000
-
-
260,000
33,000
293,000
295,400
360,000
81,000
441,000
472,700
I
90,000
-
40,000
-
-
- 8,000
138,000
61,000
199,000
159,156
-
-
-
13,000 25,000
40,000 8,000 346,000
86,000
432,000
444,400
-
-
-
-
90,000
31,000
121,000
123,900
25,000 25,000
- 8,000
148,000
67,000
215,000
206,900
40,000
25,000 25,000
-
-
180,000
86,000
266,000
285,000
N
90,000
170,000
NB
90,000
90,000
90,000
90,000
-
-
-
-
-
160,000
85,000
40,000
90,000
-
-
115,000
170,000
40,000
85,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
40,000 8,000
138,000
58,000
196,000
161,756
40,000 8,000 268,000
81,000
414,000
297,300
-
-
90,000
18,000
108,000
170,388
40,000 8,000 373,000
39,000
450,000
36,001
27,000 5,000
117,000
31,000
148,000
-
-
-
275,511
417,577
4,679,389
1,763,000
1,275,000
160,000
113,000
125,000
247,000 61,000 3,744,000
872,000
4,616,000
A. All amounts received were reimbursed to Fundación Botín.
B. Mr Javier Botín-Sanz de Sautuola is non-external (neither propietary nor independent) since 13 February 2018 (propietary at the beginning of 2018).
C. Ceased to be a director on 1 January 2019.
D. Director since 28 November 2017.
E. Director since 23 March 2018.
F. Ceased to be a director on 28 November 2017.
G. Includes committees chairmanship and other role emoluments.
P: Proprietary I: Independent N: Non-external (neither proprietary nor independent).
EC: Executive committee AC: Audit committee ASC: Appointments committee RC: Remuneration committee RSRCC: Risk supervision, regulation and compliance
committee. RBSCC: Responsible Banking, sustainability and culture committee.
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2018 Annual Report
6.3 Remuneration of directors for the
performance of executive duties
The policy applied to the remuneration of directors in 2018 for
the performance of executive duties was approved by the board
of directors and submitted to a binding vote at the general
shareholders’ meeting of 23 March 2018, with 94.22% of the votes
in favour. The table below summarises the remuneration policy
and its implementation.
Type of
component
Policy
Component
Gross annual
salary
Fixed
Variable
remuneration
Variable
• Paid in cash on a monthly basis.
• Base salary for Ana Botín and José Antonio Alvarez
reviewed in 2018 to refect pension transformation
(equivalent reduction of pension contribution).
• Base salary for Rodrigo Echenique reviewed
due to increased responsibilities.
• Individual benchmark reference.
• Calculated against a set of annual quantitative
metrics and a qualitative assessment with
input of individual performance.
• 50% of each payment is made in shares subject
to a one-year retention. The number of shares
is determined at the time of the award.
• 40% paid in 2019; 60% deferred in fve years.
• 24% paid in equal parts in 2020 and 2021.
• 36% paid in equal parts in 2022, 2023 and
2024 subject to the compliance with a set
of long-term objectives (2018-2020).
Implementation in 2018
• Ana Botin: EUR 3,176 thousand.
• José Antonio Álvarez: EUR 2,541 thousand.
• Rodrigo Echenique: EUR 1,800 thousand.
• Pension transformation detailed in section 6.3 C.
• See section 6.3 B ii) for details of
annual metrics and assessment.
• See section 6.3 B iv) for details
of the long-term metrics.
• See section 6.3 B iii) for details
of the individual awards.
Beneft system
Fixed
• Annual contribution at 22% of base salary.
• Mr Echenique´s current contract does not provide for
any pension beneft, without prejudice to his pension
rights before he was appointed executive director.
Variable
• Annual contribution at 22%of the 30% of the average
of the last three-years variable remuneration.
Other
remuneration
Fixed
• Includes life and accident and medical insurance,
including any tax due on benefts.
• Includes a fxed remuneration supplement in cash (not
salary nor pensionable) as part of the elimination of
the death and disability supplementary benefts.
Shareholding
policy
N/A
• 200% of the net tax amount of the
annual gross basic salary.
• Five years from 2016 to demonstrate the shareholding.
• Until 2017, the annual contribution was
55% of the fxed and variable pensionable
bases. Salary and incentive benchmark
reviewed in the amount reduced in pension,
with no cost increase for the Bank.
• Supplementary death and disability
benefts eliminated.
• See section 6.3 C for details of the annual
contributions and pension balance.
• Life and accident annuities has been
increased as a result of the elimination of the
supplementary death and disability benefts.
• Implementation of the fxed remuneration
supplement as supplementary
benefts are eliminated.
• See section 6.3 C for details on the
pension transformation.
• No change from 2017.
A. Gross annual salary
The board resoled to maintain the same gross annual salary for Ms
Ana Botín and Mr José Antonio Álvarez for 2018 as in 2017, although
with an increase in the amount equivalent to the reduction of the
fxed pension contributions in the terms described in section 6.3 C,
and neither the total compensation nor the cost were increased.
Until 2017, the annual fxed contributions were 55% of the gross
annual salary. From 2018 onwards, the fxed contributions will be
22% of the gross annual salary.
The board approved an increase in the gross annual salary of Mr
Rodrigo Echenique on consideration of his new responsibilities in
relation with the integration of Banco Popular into the Santander
Group. His annual gross salary is EUR 1,800 thousand from January
2018.
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management
In summary, the executive directors’ gross annual salary and fxed
annual contribution to pension for 2018 and 2017 were as follows:
EUR thousand
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez InciarteA
2018
Fixed annual
pension
contribution
699
559
Gross
annual
salary
3,176
2,541
1,800
Total
3,875
3,100
1,800
Total
7,517
1,258
8,775
2017
Fixed annual
pension
contribution
1,375
1,100
-
-
Total
3,875
3,100
1,500
1,568
2,475
10,043
Gross annual
salary
2,500
2,000
1,500
1,568
7,568
A. Ceased to be a director on 28 November 2017. Figure includes his gross annual salary until he ceased to be a director. The portion of gross annual salary
for discharging his duties as senior executive vice president from 28 November 2017 is included in the corresponding section.
B. Variable remuneration
i) General policy for 2018
The board approved the variable remuneration of the Group
executive chairman, the chief executive ofcer and the other
executive directors, at the proposal of the remuneration
committee, in consideration of the approved policy:
• The variable components16 of the total remuneration of
executive directors in 2018 amounts to less than 200% of the
fxed components, as provided by agreement at the general
shareholders’ meeting of 23 March 2018.
• At the request of the remuneration committee, at the beginning
of 2019 the board approved the fnal amount of the incentive for
2018, based on the individual benchmark variable remuneration
fgure in accordance with the following:
• A group of short-term quantitative metrics measured against
annual objectives.
• A qualitative assessment which cannot adjust the quantitative
result by more than 25 percentage points upwards or downwards.
• Where applicable, an exceptional adjustment that will be
supported by the substantiated evidence.
• The fnal variable remuneration is adjusted based on the
individual assessment of the executive director, which is
carried out in accordance with the current model and taking
into account their individual objectives, as well as how they
are achieved, for which the management of employees, the
adherence to the corporate behaviours and the development of
initiatives in the communities in which the Bank operates.
Individual
benchmark
variable
remuneration
Quantitavie
metrics and
qualitative
assessmentA
Individual
performance
Final
individual
variable
remuneration
A. Where applicable, an exceptional adjustment based on substantiated evidence
The quantitative metrics and the elements of the qualitative
assessment are described below.
• The approved incentive is paid 50% in cash and 50% in shares17,
a portion in 2019 and portion deferred and linked to multi-year
targets. 40% shall be paid immediately once the fnal amount has
been determined, and the remaining 60% shall be deferred in
equal parts over fve years, as follows:
• Payment of the amount deferred over the frst two years (24%
of the total), payable in 2020 and 2021, where applicable, shall
be conditional on none of the malus clauses described below
being triggered.
• The amount deferred over the next three years (36% of the
total), payable in 2022, 2023 and 2024, where applicable,
shall be conditional not only on the malus clauses not being
triggered but also on the achievement of the multi-year targets
described below. These objectives can only decrease the
amounts and the number of deferred shares.
• When the deferred amount is paid in cash, the benefciary
may be paid the adjustment for infation through the date of
payment.
• All payments in shares are subject to a one-year retention
period after being delivered.
16. As stated in the initial table of this section 6.3, contributions to below of this section of the report, contributions to the benefts systems for two executive directors
include both fxed components and variable components, which become part of the total variable remuneration.
17. Since variable remuneration involves the delivery of shares of the Bank, the board of directors submitted to the shareholders at the 2018 annual general shareholders’
meeting, which so approved, the application of the third cycle of the Deferred Variable Remuneration Plan Linked to Multi-Year Targets, through which the
aforementioned variable remuneration for executive directors is instrumented.
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2018 Annual Report
• The hedging of Santander shares received during the retention
and deferral periods is expressly prohibited. The sale of shares
is also prohibited for one year from the receipt thereof.
The payment schedule of the incentive is illustrated below.
Immediately
following
performance year
40%
Deferred (malus)
Long-term performance deferral
12%
12%
2019
2020
2021
12%
2022
12%
2023
12%
2024
Cash
Shares
Total
40%
24%
36%
100%
All deferred payments, whether or not subject to long-term
objectives, are subject to malus.
Similarly, the incentives already paid will be subject to clawback by
the Bank in the scenarios and for the period set forth in the Group’s
malus and clawback policy.
ii) Quantitative metrics and qualitative assessment for 2018
The variable remuneration for executive directors in 2018 factored
in the quantitative metrics and qualitative factors approved by the
board at the beginning of 2018 at the proposal of the remuneration
committee18, which has taken into account the policy referred to
in the paragraphs above and the work of the human resources
committee19. The result of aggregating the quantitative and
qualitative weighted results is as follows:
18. Before determining the variable remuneration of executive directors and other senior managers, the committee receives a joint report from the risk compliance, audit
and fnancial control functions of the Group identifying material errors which occurred during the year and satisfying itself that this has been appropiately refected in the
compensation proposals for each of these executives. Downward adjustment were made to the compensation of 68 material risk takers across the Group due to material
errors, none related to the performance of executive directors or senior managers.
19. This committee was aided by members of senior management who are also responsible for diferent functions in the Group, including risk, internal audit, compliance,
general secretariat and human resources, fnancial management, fnancial accounting and control. Their role in this committee consisted of analysing quantitative
metrics information, undertaking a qualitative analysis, and considering whether or not to apply exceptional adjustments. This analysis included diferent matters
related to risk, capital, liquidity, quality and recurrence of results, and other compliance and control matters.
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Category
and (weight)
Customers
(20%)
Quantitative metrics
Qualitative
Metrics
Assessment
Weighted
assessmentA
Component
Customer
satisfaction
Number of loyal
customers
110.9%
11.1%
100.1%
10.0%
Efective compliance with the
objectives of the rules on risk
conduct in respect of customers.
Risks (10%)
Non-performing
loans ratio
Cost of lending
ratio
102.7%
105.1%
5.1%
5.3%
Appropriate management of risk
appetite and excesses recognised.
Adequate management
of operational risk.
Capital (20%)
Capital ratio
(CET1)
101.9%
20.4%
Efcient capital management.
Return (50%)
Ordinary net
proft (ONP)C
RoRWA: return
on risk weighted
assetsD
96.8%
26.6%
102.2%
23.0%
Suitability of business growth
compared to the previous
year, considering the market
environment and competitors.
Sustainability and solidity of results.
Efcient cost management and
achievement of efciency goals.
Assessment
+2.4% -
Strengthened
governance and
management of
commercialization
conduct as part of
Santander culture.
+1.2% - Improving
underlying
controls. No
material breaches
of risk appetite.
+3.2% - Exceeded
capital plan,
through sustainable
underlying actions.
0 % Results in line
with expectations.
Exceptional
adjustment
TOTAL
Elements (non-exhaustive) under
consideration: general control
environment, compliance with
internal and external regulations,
prudent and efcient liquidity and
capital planning management.
Based on strong business performance,
specifcally recognizing exceptional proft
growth in a challenging international context,
in particular in relation to macroeconomic
conditions and monetary policy changes in 2018
in some of the main markets of the Group.
Total
weighted
scoreB
23.5%
11.6%
23.6%
49.6%
12.3%
120.6%
A. The weighted assessment is the result of multiplying the assessment of each objective by the weight of each objective. When there is more than one
objective in the category and save for Note D below, the weight of each objective in the category is the same.
B. Result of adding or substracting the qualitative assessment to the weighted assessment.
C. For this purpose, ONP is attributed ordinary net proft, adjusted upwards or downwards for those transactions that, in the opinion of the board, have
an impact outside of the performance of the directors being evaluated, whereby extraordinary proft, corporate transactions, special allowances, or
accounting or legal adjustments that may occur during the year are evaluated for this purpose.
D. The specifc weight of ONP in the total scorecard is 27.5% and RoRWA is 22.5%.
The variable remuneration allocated to each executive director was
determined by applying the aforementioned metrics to the sum of
the benchmark variable remuneration of the executive directors,
together with the level of compliance with individual goals and the
market reference. The individual variable remuneration approved
by the board are set out in the section below.
It was also verifed that none of the following circumstances
have occurred:
• The Group’s ONP20 for 2018 was not less than 50% of that for
2017. If this had occurred, the variable remuneration would not
have been greater than 50% of the benchmark incentive.
iii) Determination of the individual variable
remuneration for executive directors in 2018
The board approved the variable remuneration of the Group
executive chairman, the chief executive ofcer and the other
executive directors, at the proposal of the remuneration
committee, taking into account the policy referred to in the
paragraphs above and the result of the quantitative metrics and
qualitative assessment set out in the section above.
• The Group’s ONP has not been negative. If this had occurred, the
incentive would have been zero.
The variable remuneration allocated to each executive director
was determined by applying the aforementioned metrics to the
sum of the benchmark variable remuneration of the executive
directors, together with the level of compliance with individual
goals, including people management, adherence to the corporate
behaviours and the implementation of initiatives for communities.
20. For this purpose, ONP is attributed ordinary net proft, adjusted upwards or downwards for those transactions that, in the opinion of the board, have an impact outside
of the performance of the directors being evaluated, whereby extraordinary proft, corporate transactions, special allowances, or accounting or legal adjustments that
may occur during the year are evaluated for this purpose.
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2018 Annual Report
For Ms Ana Botín and Mr José Antonio Álvarez the board resolved
to maintain in 2018 the same benchmark incentive as in 2017
increased in the amount equivalent to the reduction of the variable
pension contributions in the terms described in section 6.3 C,
without the total compensation being increased as a result of
this change. Until 2017, the annual variable contributions were
55% of the average of the last three variable remunerations
amounts. From 2018, the variable contributions are 22% of the
same pensionable base. This has resulted in a reduction of variable
pension and an equivalent increase in the benchmark incentive of
EUR 516 and 349 thousand for Ms Ana Botín and Mr José Antonio
Álvarez, respectively.
As a result of the aforementioned process, the review of the
benchmark variable remuneration and following a proposal by
the remuneration committee, the board of directors approved the
following amounts for variable remuneration payable immediately
and the deferred amounts not linked to long-term metrics:
Immediately payable and deferred (not link to long-term objectives) variable remuneration
EUR thousand
2018
In cash
In sharesB
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez InciarteA
Total
2,368
1,582
1,256
-
5,206
2,368
1,582
1,256
-
5,206
10,412
Total
4,736
3,164
2,512
-
2017
In cash
In shares
2,192
1,466
1,142
1,117
5,918
2,192
1,466
1,142
1,117
5,918
Total
4,384
2,932
2,284
2,234
11,836
A. Ceased to be a member of the board on 28 November 2017. Figure includes his deferred bonus payable immediately, not subject to long-term
objectives, until he ceases to be a director. The portion for discharging his duties from 28 November is included in the corresponding section.
B. The share amounts in the foregoing table correspond to a total of 1,211 thousand shares in Banco Santander (992 in 2017).
The deferred portion of the variable remuneration, which will only
be received, in 2022, 2023 and 2024, if the aforementioned long-
term multi-year targets are met (see section 6.3 B iv)), on condition
that the benefciaries continue to be employed at the Group and
provided malus and clawback clauses have not been triggered, is
stated at its fair value as follows21:
Deferred and linked to long-term objectives variable remuneration
EUR thousand
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez InciarteA
2018
In cash
In sharesB
932
623
495
-
932
623
495
-
Total
2,050
2,050
Total
1,864
1,246
990
-
4,100
2017
In cash
In shares
863
577
450
440
863
577
450
440
Total
1,726
1,154
900
880
2,330
2,330
4,660
A. Ceased to be a member of the board on 28 November 2017. Figure includes his bonus subject to long-term objectives for service until cessation
as a director on 28 November 2017. The portion for discharging his duties from 28 November as senior executive vice president is included in the
corresponding section.
B. The share amounts in the foregoing table correspond to a total of 477 thousand shares in Banco Santander (391 thousand shares in 2017).
The fair value has been determined at the grant date based on the
valuation report of an independent expert, Willis Towers Watson.
According to the design of the plan for 2018 and the levels of
achievement of similar plans in comparable entities, the expert
concludes that the reasonable range for estimating the initial
achievement ratio is around 60% - 80%. It has been considered
that the fair value is 70% of the maximum.
The maximum total number (without the fair value adjustment)
of shares relating to the plan (1,893 thousand shares) is within the
maximum limit of 2,676 shares authorised for executive directors
by the shareholders at the general shareholders’ meeting of 23
March 2018, and has been calculated on the basis of the average
weighted daily volume of the average weighted listing prices of
Santander shares for the 15 trading sessions prior to the Friday
21. Corresponding to the fair value of the maximum amount to be received over a total of 3 years, subject to continued service, with the exceptions envisaged, the non-
applicability of malus clauses and compliance with the defned goals. Fair value was estimated at the plan award date, taking into account various possible scenarios for
the diferent variables contained in the plan during the measurement periods.
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management
(not inclusive) before 29 January 2019 (the date on which the board
approved the bonus for the executive directors for 2018), which
was 4.298 euros per share.
iv) Multi-year targets linked to the payment of deferred amounts
in 2022, 2023 and 2024
The multi-year targets linked to the payment of the deferred
amounts payable in 2022, 2023 and 2024 are summarised
as follows:
A
B
C
Metrics
Earnings per share (EPS)
growth in 2020 vs 2017
Relative Total Shareholder
Return (TSR)A in 2018- 2020
within a peer group
Fully loaded target common equity
Tier 1 ratio (CET1)B for 2020
Weight Target and compliance scales (metrics ratios)
33%
33%
33%
If EPS growth ≥ 25%, then metric ratio is 1
If EPS growth ≥ 0% but < 25%, then metric ratio is 0 – 1C
If EPS growth < 0%, then metric ratio is 0
If ranking of Santander above percentile 66, then metric ratio is 1
If ranking of Santander between percentiles 33 and 66, then ratio is 0 – 1D
If ranking of Santander below percentile 33, then metric ratio is 0
If CET1 is ≥ 11,30%, then metric ratio is 1
If CET1 is ≥ 11% but < 11.30%, then metric ratio is 0 – 1E
If CET1 is < 11%, then metric ratio is 0
A. For this purpose, TSR refers to the diference (expressed as a percentage) between the fnal value of an investment in ordinary shares of Banco Santander
and the initial value of the same investment, factoring in to the calculation of the fnal value the dividends or other similar instruments (such as the
Santander Scrip Dividend Programme) received by the shareholder in relation to this investment during the corresponding period of time as if an
investment had been made in more shares of the same type at the frst date on which the dividend or similar concept was payable to shareholders and
the weighted average share price at that date. To calculate TSR, the average weighted daily volume of the average weighted listing prices for the ffteen
trading sessions prior to 1 January 2018 (exclusive) is taken into consideration (to calculate the initial value) and that of the ffteen trading sessions prior to
1 January 2021 (exclusive) (to calculate the fnal value).
The peer 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.
B. To verify compliance with this objective, possible increases in CET1 resulting from capital increases shall be disregarded (with the exception of those
related to the Santander Scrip Dividend programme). Further, the CET1 ratio at 31 December 2020 could be adjusted to strip out the impact of any
regulatory changes afecting its calculation implemented until that date.
C. Linear increase in the EPS ratio based on the specifc percentage that EPS growth in 2020 represents with respect to 2017 EPS within this bracket of the scale.
D. Proportional increase in the TSR ratio based on the number of positions moved up in the ranking.
E. Linear increase in the CET1 coefcient as a function of the CET1 ratio in 2020 within this bracket of the scale.
of the benchmark bonus in 2015. Based on that fgure, an amount of LTI
amount was set for each director (the 'approved LTI amount') taking
into account the performance of two indicators in 2015: (1) the earnings
per share (EPS) of Santander Group in 2015 compared to the target
amount for such year; and (2) the return on tangible equity (RoTE)
in 2015 compared to the target for that year. The application of the
compliance scales associated to these metrics resulted in an approved
LTI amount of 91.50% of the (maximum) established benchmark. The
maximum number of shares are set out below as per this % of the
approved LTI amount.
At year-end 2018, the corresponding amounts to be received by each
exclusive director in relation to LTI (the accrued LTI amount) was
established as follows:
To determine the annual amount of the deferred portion linked
to objectives corresponding to each board member in 2022, 2023
and 2024, the following formula shall be applied to each of these
payments ('Final annuity') without prejudice to any adjustment
deriving from the malus clauses:
Final annuity = Amt. x (1/3 x A + 1/3 x B + 1/3 x C)
where:
• 'Amt.' is one third of the variable remuneration amount deferred
conditional on performance (i.e. Amt. will be 12% of the total
variable remuneration set in early 2018).
• 'A' is the EPS ratio according to the scale in the table above, based
on EPS growth in 2020 vs 2017.
• 'B' is the TSR ratio according to the scale in the table above,
according to the relative performance of the Bank’s TSR within its
peer group in 2018-2020.
• 'C' is the CET1 ratio according to compliance with the CET1 target
for 2020 described in the table above.
v) Vesting of the second cycle of the Performance Shares Plan
The annual general meeting held on 27 March 2015 approved the
second cycle of the performance shares plan. The accrual of this
long-term incentive plan (LTI) and its amount were conditional on the
performance of certain metrics of Banco Santander between 2015 and
2017, as well as compliance with the remaining conditions of the plan
until the end of the accrual period (31 December 2018). The maximum
benchmark LTI for executive directors was set by the board, at the
proposal of the remuneration committee, at an amount equal to 20%
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2018 Annual Report
Metric
Ranking of Santander’s EPS
growth for the 2015-2017 period
compared to a peer group of 17 credit
institutions (the peer group)A
Weighting
25%
Target and compliance
scale (metric ratio)
From 1st to 5th: 1
6th: 0.875
7th: 0.75
8th: 0.625
9th 0.50
From 10th to 18th: 0
Result
Position 11
in ranking
Score
0%
Total weighted
score
0%
RoTE in 2017 (%)
Number of principal marketsB in
which Santander is in the Top 3 of
the best banks to work for in 2017
Number of principal marketsC in
which Santander is in the Top 3 of
the best banks on the customer
satisfaction index in 2017
Retail loyal customers (million)
at 31 December 2017
SME and corporate retail
loyal customers (million)
at 31 December 2017
Total
25%
≥ 12%:1
> 11% but < 12% 0,75 – 1B
≤ 11% 0
20%
6 or more: 1
5 or fewer: 0
10: 1
Between 6 and 9: 0.2 – 0.8B
5 or fewer: 0
≥ 17: 1
> 15 but < 17: 0.5 – 1B
≤ 15: 0
≥ 1.1: 1
> 1 but < 1.1: 0.5 – 1B
≤ 1: 0
15%
7.5%
7.5%
100%
11.83%
95.69%
23.92%
7 markets
100%
8 markets
60%
20%
9%
15.8 million
70%
5.25%
1.5 million
100%
7.5%
65.67%
A. The peer group comprised the following entities: Wells Fargo, JP Morgan Chase, HSBC, Bank of America, Citigroup, BNP Paribas, Lloyds, UBS, BBVA,
Barclays, Standard Chartered, ING, Deutsche Bank, Société Générale, Intesa San- Paolo, Itaú and Unicredito.
B. Straight-line increase in the ratio based on the results within the respective bracket of the scale of each metric.
C. For these purposes, the Santander Groups 'principal markets' are: Argentina, Brazil, Chile, Germany, Mexico, Poland, Portugal, Spain, the US and the
UK.
As a result of the aforementioned process and following a
proposal by the remuneration committee, the board of directors
approved the following number of shares to be paid in 2019:
Number of shares
Approved
LTI
amountA
Final
number of
shares
Ratio
187,080
65.67%
122,855
126,279
65.67%
82,927
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Rodrigo Echenique
Gordillo
Total
406,899
93,540
65.67%
61,428
267,210
A. 91.50% of the maximum established benchmark approved at the AGM
on 27 March, 2015.
The shares to be delivered in 2019 to executive directors based
on compliance with the related multiannual target were fully
deferred at the time of the accrual until their delivery. The
payment in shares is subject to a one-year retention period after
being delivered.
vi) Malus and clawback
Accrual of the deferred amounts (whether or not linked to multi-
year targets) is also conditional upon the benefciary’s continued
service in the Group22, and upon none of the circumstances
arising, in the period prior to each payment, that give rise to the
application of malus arrangements in accordance with the section
on malus and clawback clauses in the Group’s remuneration policy.
Similarly, the variable remuneration already paid will be subject to
clawback by the Bank in the scenarios and for the period set forth
in said policy, all under the terms and conditions therein provided.
The variable remuneration corresponding to 2018 is subject to
clawback until the beginning of 2025.
22. When the relationship with Banco Santander or another Santander Group entity is terminated due to retirement, early retirement or pre-retirement of the benefciary,
a dismissal considered by the courts to be improper, unilateral withdrawal for good cause by an employee (which includes, in any case, the situations set forth in article
10.3 of Royal Decree 1382/1985, of 1 August, governing the special relationship of senior management, for the persons subject to these rules), permanent disability or
death, or as a result of an employer other than Banco Santander ceasing to belong to the Santander Group, as well as in those cases of mandatory redundancy, the
right to receive shares and deferred amounts in cash and, where applicable, the amounts arising from the adjustment for infation of the deferred amounts in cash shall
remain under the same conditions in force as if none of such circumstances had occurred.
In the case of death, the right shall pass to the successors of the benefciary.
In cases of justifed temporary leave due to temporary disability, suspension of the contract due to maternity or paternity leave, or leave to care for children or a relative,
there shall be no change in the rights of the benefciary.
If the benefciary goes to another Santander Group company (including through international assignment and/or expatriation), there shall be no change in the rights
thereof.
If the relationship is terminated by mutual agreement or because the benefciary obtains a leave not referred to in any of the preceding paragraphs, the terms of the
termination or temporary leave agreement shall apply.
None of the above circumstances shall give the right to receive the deferred amount in advance. If the benefciary or the successors thereof maintain the right to receive
the deferred remuneration in shares and cash and, where applicable, the amounts arising from the adjustment for infation of the deferred amounts in cash, it shall be
delivered within the periods and under the terms provided in the rules for the plans.
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Malus and clawback clauses are triggered in situations in which
there is poor fnancial performance of the Bank as a whole or a
specifc division or area thereof or of the exposure generated by
staf, taking into account at least the following:
Category
Factors
Risk
Capital
Regulation and
internal codes
Conduct
Signifcant failures in risk
management by the Bank, or by
a business or risk control unit.
An increase in capital requirements
at the Bank or one of its business
units not planned at the time
that exposure was generated.
Regulatory penalties or legal
convictions for events that might
be attributable to the unit or staf
responsible for them. Likewise,
failure to comply with the Bank’s
internal codes of conduct.
Improper conduct, whether individual
or collective. Negative efects deriving
from the marketing of unsuitable
products and the liability of persons
or bodies making such decisions will
be considered especially signifcant.
The application of malus or clawback clauses for executive directors
shall be determined by the board of directors, at the proposal of the
remuneration committee, and cannot be proposed once the retention
period related to the fnal payment in shares in accordance with
the plan has elapsed in the beginning of 2025. Consequently, the
board of directors, at the proposal of the remuneration committee
and depending on the level of compliance with the aforementioned
conditions regarding malus clauses, shall determine the specifc
amount of the deferred incentive to be paid and, where applicable, the
amount that could be subject to clawback.
C. Main features of the beneft plans
The executive directors other than Mr Rodrigo Echenique participate
in the defned beneft system created in 2012, which covers the
contingencies of retirement, disability and death. The Bank makes
annual contributions to the beneft plans of its executive directors. In
2012 the contracts of the executive directors (and of other members
of the Bank’s senior management) with defned beneft pension
commitments were amended to transform them into a defned
contribution system. The new system gives executive directors the
right to receive benefts upon retirement23, regardless of whether or
not they are active at the Bank at such time, based on contributions
to the system, and replaced their previous right to receive a pension
supplement in the event of retirement. In the event of pre-retirement
and up until the retirement date, the executive directors other than
Mr Rodrigo Echenique have the right to receive an annual allotment.
In the case of Ms Ana Botín, this allotment is the sum of her fxed
remuneration and the 30% of the average of the three remunerations
as maximum. In the case of Mr José Antonio Álvarez, this allotment is
the fixed remuneration as senior vice president.
The initial balance for each of the executive directors in the new
defned benefts system corresponded to the market value of the
assets from which the provisions corresponding to the
respective accrued obligations had materialised on the date on which
the old pension commitments were transferred into the new benefts
system24.
Since 2013, the Bank has made annual contributions to the benefts
system in favour of executive directors and senior executives, in
proportion to their respective pensionable bases, until they leave the
Group or until their retirement within the Group, death, or disability
(including, if applicable, during pre-retirement)25.
Mr Rodrigo Echenique's contract does not provide for any charge to
Banco Santander regarding benefts, without prejudice to the pension
rights to which Mr Echenique was entitled prior to his appointment as
executive director.
In application of that set forth in remuneration regulations, the
contributions calculated on the basis of variable remuneration are
subject to the discretionary pension benefts scheme. Under this
scheme, these contributions are subject to malus and clawback
clauses in accordance with the policy in place at any given time and
during the same period in which variable remuneration is deferred.
Furthermore, they must be invested in shares of the Bank for a period
of fve years from the date of the executive director leaves the Group,
regardless of whether or not they leave to retire. Once that period
has elapsed, the amount invested in shares will be reinvested, along
with the remainder of the cumulative balance corresponding to the
executive director, or it will be paid to the executive director or to
their benefciaries in the event of a contingency covered by the
benefts system.
The beneft plan is outsourced to Santander Seguros y Reaseguros,
Compañía Aseguradora, S.A., and the economic rights of the foregoing
directors under this plan belong to them regardless of whether
or not they are active at the Bank at the time of their retirement,
death or disability. The contracts of these directors do not provide
for any severance payment in the event of termination other than
as may be required by law, and, in the case of pre-retirement, to the
aforementioned annual allotment.
Until March 2018, the system also included a supplementary benefts
scheme for cases of death (death of spouse and death of parent) and
permanent disability of serving directors envisaged in the contracts of
Ms Ana Botín and Mr José Antonio Álvarez.
As per the director's remuneration policy approved at the 23 March
2018 general shareholder´s meeting, in 2018 the system has been
changed with a focus on:
• Aligning the annual contributions with practices of comparable
institutions.
23. As provided in the contracts of the executive directors prior to 2012, Mr Matías Rodríguez Inciarte exercised the option to receive accrued pensions (or similar amounts)
in the form of capital, i.e., in a lump sum, which means that he ceased to accrue pensions from such time, with a fxed capital amount to be received, which shall be
updated at the agreed interest rate.
24.In the case of Mr Matías Rodríguez Inciarte, the initial balance corresponded to the amount that was set when, as described above, he exercised the option to receive a
lump sum, and includes the interest accrued on this amount from that date.
25. In the event of Mr José Antonio Alvarez´s pre-retirement, his pensionable base in case of pre-retirement will be his fxed remuneration as senior executive vicepresident.
182
2018 Annual Report
• Reduce future liabilities (derisking) of the plan by eliminating the
supplementary benefts scheme in the event of death (death of
spouse or parent) and permanent disability of serving directors.
The balance in the benefts system corresponding to each of the
executive directors at 31 December 2018 and 2017 is as follows:
• No increase in total costs for the Bank.
The changes to the system are the following:
EUR thousand
2018
2017
Ms Ana Botín-Sanz de Sautuola y O’Shea
46,093
45.798
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique GordilloA
16,630
16.151
13,614
13.957
76,337
75,906
2017 system
2018 system
TotalA
Pensionable
base
Fixed contribution: 55%
of annual gross salary.
Variable contribution:
55% of 30% of the
average of their
last three variable
remunerations
amounts.
Supplementary
benefts
In case of death
(death of spouse and
death of parent) and
permanent disability of
Ms Ana Botín and Mr
José Antonio Álvarez.
Widow/widower
and children under
25 entitlement to a
pension supplemental
to the pension which
they would be entitled
to receive from
social security.
Contributions at 22%
of the respective
pensionable bases. The
diference between
contributions has
been increased by
the annual gross
salary in the case of
fxed contributions
(see 6.3 A) and in the
benchmark variable
remuneration in
the case of the
variable contribution
(see 6.3 B iii)).
The supplementary
benefts were
eliminated since 1
April 2018, increasing
the sum insured
in the life accident
insurance and setting
a fxed remuneration
supplement in cash
refected in 'Other
remuneration'.
As a result of the aforementioned changes, the provisions
recognised in 2018 and 2017 for retirement pensions and
supplementary benefts (death of spouse, death of parent and
permanent disability) amounted to EUR 2,284 thousand (EUR 5,163
thousand in 2017), as broken down below.
EUR thousand
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
2018
1,234
1,050
-
-
2017
2,707
2,456
-
-
Total
2,284
5,163
A. Mr Rodrigo Echenique does not participate in the defned pensions scheme
described in the preceding paragraphs. However, as an executive director
and for informational purposes, this year’s table includes the rights to
which he was entitled prior to his designation as such. The payments made
to him in 2018 to him with respect to his participation in this plan amounted
to EUR 0.9 million euros (EUR 0.9 million euros in 2017).
D. Other remuneration
In addition to the above, the Group has insurance policies for life,
health and other contingencies for the executive directors of the
Bank. This component includes the fxed supplement approved
for Ms Ana Botín and Mr José Antonio Álvarez to replace the
supplementary benefts in the beneft systems eliminated in
2018. It also includes the life insurance contracted so that, in
case of death or disability whilst in active or at pre-retirement,
the executive directors or whoever they appoint, will receive the
amounts of the fxed remuneration supplement that were to be
paid until their retirement date. Similarly, the executive directors
are covered under the civil liability insurance policy contracted by
the Bank. Note 5 of the Group´s consolidated fnancial statements
provides more detailed information about other benefts received
by the executive directors.
E. Holding shares
Following a proposal submitted by the remuneration committee,
in 2016 the board of directors approved a share holding policy
aimed at strengthening the alignment of executive directors with
shareholders’ long-term interests.
According to this policy, each executive director active on 1
January 2016 would have fve years in which to demonstrate that
their personal assets include an investment in the Bank’s shares
equivalent to twice the net tax amount of their gross annual salary
at the same date.
The shareholding policy also refects the executive directors’
commitment to maintaining a signifcant personal investment in
the Bank’s shares while they are actively performing their duties
within the Group.
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management
F. Remuneration of board members as
representatives of the Bank
By resolution of the executive committee, all remuneration
received by the Bank’s directors who represent the Bank on
the boards of directors of companies in which it has an interest
and which relates to appointments made after 18 March 2002,
will accrue to the Group. The directors of the Bank received no
remuneration from this type of representation in 2018 or 2017, save
for one of the Bank’s directors, Mr Matías Rodríguez Inciarte, who
received a total of EUR 42 thousand in 2017, in his role as a non-
executive director of U.C.I., S.A.
G. Individual remuneration of directors for all items in 2018
The detail, by Bank director, of salary remuneration payable in
the short term (or immediately) and of deferred remuneration not
linked to long-term goals for 2018 and 2017 is provided below.
The Note 5 to the consolidated fnancial statements contains
disclosures on the shares delivered in 2018 by virtue of the
deferred remuneration schemes in place in previous years, the
conditions for delivery of which were met in the related years.
EUR thousand
2018
Salary remuneration of executive directors
2017
Immediate
payment
(50% in
shares)
Deferred
payment
(50% in
shares)
Pension
Other
contribution remunerationG
Total
Total
Total
Bylaw-stipulated
emoluments
Board
and board
committees
annual
allotment
Board and
committee
attendance
fees
268
260
643
260
360
138
346
90
148
180
138
333
90
373
117
-
-
39
34
89
33
81
61
86
31
67
86
58
81
18
77
31
-
-
Directors
Ms Ana Botín-Sanz
de Sautuola
y O´Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce
Carnegie-Brown
Mr Rodrigo
Echenique Gordillo
Mr Guillermo de la
Dehesa Romero
Ms Homaira Akbari
Mr Ignacio
Benjumea
Cabeza de Vaca
Mr Francisco Javier
Botín-Sanz de
Sautuola y O´SheaA
Ms Sol Daurella
Comadrán
Mr Carlos
Fernández
González
Ms Esther
Giménez-Salinas
i Colomer
Ms Belén
Romana García
Mr Juan Miguel
Villar MirB
Mr Ramiro Mato
García-AnsorenaC
Mr Álvaro Cardoso
de SouzaD
Mr Matías
Rodríguez InciarteE
Ms Isabel Tocino
BiscarolasagaF
Total 2018
Total 2017
Fixed
3,176
2,541
-
2,960
1,978
-
1,776
1,186
-
7,912
5,705
-
1,800
1,570
942
4,312
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,234
1,050
1,030
10,483
10,582
1,596
8,645
8,893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
732
225
4,830
-
-
441
199
81
513
-
-
-
-
-
-
-
-
-
-
121
215
266
196
414
108
450
148
-
-
731
4,281
473
159
550
124
207
285
162
297
170
36
-
4,266
418
-
31,634
3,744
3,708
872
973
7,517
7,568
6,508
7,396
3,904
4,438
17,929
19,402
2,284
5,164
2,932
2,387
27,761
-
A. All amounts received were reimboursed to Fundación Botín.
B. Ceased to be a member of the board on 1 January 2019.
C. Appointed director with efect from 28 November 2017.
D. Appointed director with efect from 23 March 2018.
E. Ceased to be a member of the board on 28 November 2017 and senior executive vice president on 2 January 2018. The remuneration for discharging his
duties as senior executive vice president from 28 November is included in the corresponding section.
F. Ceased to be a member of the board on 28 November 2017.
G. Includes fxed income supplement (see section 6.3 D).
184
2018 Annual Report
In addition, the following table provides the individual detail of
the salary remuneration of executive directors linked to multi-
year targets, which will only be paid if the conditions of continued
service at the Group, non-applicability of the malus clauses and
compliance with the defned multi-year targets are fulflled (or,
as applicable, of the minimum thresholds of these, with the
consequent reduction of the agreed amount at the end of the year).
I. Summary of remuneration of executive
directors and attributable net proft
There following chart shows an overview of the compensation
(short-term remuneration, deferred variable remuneration and/
or deferred variable remuneration linked to multi-year targets)
of the directors performing executive duties as compared with
attributable net proft.
Executive directors’ total remuneration
as % of attributable netproft
1,20%
1.12%
1,00%
0,80%
0,60%
0,40%
0,20%
0,00%
0.41%
0.45%
0.42%
0.42%
0.36%
0.50%
2012
2013
2014
2015
2016
2017
2018
The variable remuneration received by the executive directors is
also shown below as a percentage of the cash dividends paid.
Variable remuneration for all executives
directors as % of cash dividends
1,40%
1,20%
1,00%
0,80%
0,60%
0,40%
0,20%
0,00%
1.17%
1.17%
1.07%
0.60%
0.56%
0.44%
0.65%
2012
2013
2014
2015
2016
2017
2018
J. Summary of link between risk, performance and reward
Banco Santander's remuneration policy and its implementation
in 2018 promote sound and efective risk management while
supporting the business objectives. They key elements of the
remuneration policy for executive directors making for alignment
between risk, performance and reward in 2018 were as follows:
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez InciarteB
EUR thousand
2018 (50%
in shares)A
2017 (50%
in shares)
1,864
1,246
990
-
1,726
1,154
900
880
Total
4,100
4,660
A Fair value of the maximum amount receivable over a total of 3 years
(2022, 2023 and 2024), which was estimated at the plan award date,
taking into account various possible scenarios for the diferent variables
contained in the plan during the measurement periods.
B. Ceased to be a member of the board on 28 November 2017 and
senior executive vice president on 2 January 2018. Long-term salary
remuneration between 28 November and 31 December 2017 is included
in the relevant section.
H. Ratio of variable to fxed components of remuneration in 2018
Shareholders at the general shareholders’ meeting of 23 March
2018 approved a maximum ratio between variable and fxed
components of executive directors’ remuneration of 200%.
The following table shows the percentage of the variable
components of total remuneration compared to the fxed
components for each executive director in 2018:
Executive directors
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
For these purposes:
Variable
components / fxed
components (%)
145%
99%
169%
• The variable components of remuneration includes all items of
this nature, including the portion of contributions to the benefts
system that are calculated on the variable remuneration of the
related director.
• The fxed components of remuneration includes the other items
of remuneration that each director receives for the performance
of executive duties, including contributions to the benefts
systems calculated on the basis of fxed remuneration and other
benefts, as well as all bylaw-stipulated emoluments that the
director in question is entitled to receive in his or her capacity
as such.
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Key words
Risk, performance and reward alignment element
Metrics balance
The balance of quantitative metrics and qualitative assessment, including customer, risk, capital and
risk related proftability, used to determine the executive directors´ variable remuneration.
Financial thresholds
The adjustment to variable remuneration if certain fnancial thresholds are not reached, which may limit
the variable remuneration to 50% of the previous year´s amount or lead to it not being awarded at all.
Long-term objectives
The long-term objectives linked to the last three portions of the deferred variable remuneration.
These objectives are directly associated with the absolute return to shareholders, relative
performance with the peer group and to maintaining a sound capital base.
Individual performance
The discretion of the board to consider the individual performance of the executive
directors in the award of their individual variable remuneration.
Variable remuneration cap
200% of fxed remuneration.
Control functions
involvement
The work done by the human resources committee aided by members of senior management leading control
functions in relation with the analysis of quantitative metrics information and undertaking the qualitative analysis.
Malus and clawback
Malus can be made to unvested deferred awards and clawback can be applied to vested or paid
awards in the conditions and situations set out in the Group´s remuneration policy.
Payment in shares
At least 50% of variable remuneration is paid in shares subject to a one-year retention period after delivery.
6.4 Directors remuneration policy for
2019, 2020 and 2021 that is submitted
to a binding vote of the shareholders
Principles of the remuneration policy
and remuneration system
A. Remuneration of directors in their capacity as such
The director remuneration system is regulated by article 58
of the Bylaws of Banco Santander and article 33 of the rules
and regulations of the board. No changes in the principles or
composition of the remuneration of directors for the performance
of supervisory and collective decision-making duties are planned
in 2019, 2020 and 2021 are planned with respect to those in 2018.
They are set forth in sections 6.1 and 6.2.
B. Remuneration of executive directors
For the performance of executive duties, executive directors
shall be entitled to receive remuneration (including, if applicable,
salaries, incentives, bonuses, possible severance payments for
early termination from such duties, and amounts to be paid by the
Bank for insurance premiums or contributions to savings schemes)
which, following a proposal from the remuneration committee
and by resolution of the board of directors, is deemed to be
appropriate, subject to the limits of applicable law. No changes in
the principles of the remuneration of executive directors for the
performance of executive duties are planned in 2019, 2020 and
2021, save for the change in the peer group indicated below, with
respect to those in place in 2018. They are set forth in sections 6.1
and 6.3.
Banco Santander performs an annual comparative review of
the total compensation of executive directors and other senior
executives above. The 'peer group' will comprise in 2019 the
following entities: BBVA, BNP Paribas, Citi, Credit Agricole, HSBC,
ING, Itaú, Scotia Bank and Unicredit.
Remuneration of directors for 2019
A. Remuneration of directors in their capacity as such
In 2019, the directors, in their capacity as such, shall continue to
receive remuneration for the performance of supervisory and
collective decision-making duties for a collective amount of up to
EUR 6 million as authorised by the shareholders at the 2018 annual
general shareholders’ meeting (and again subject to approval by the
shareholders at the 2019 general shareholders’ meeting), with two
components:
• Annual allocation; and
• Attendance fees.
The specifc amount payable for the above-mentioned items to
each of the directors and the form of payment thereof shall be
determined by the board of directors under the terms set forth in
section 6.2 above.
In addition, as stated in the description of the director remuneration
system, in 2019 the Bank will pay the premium for the civil liability
insurance for its directors, obtained upon customary market terms
and proportional to the circumstances of the Bank.
B. Remuneration of directors for the
performance of executive duties
i) Fixed components of remuneration
A) Gross annual salary
At the proposal of the committee, the board resolved that Ms Ana
Botín, Mr José Antonio Álvarez and Mr Rodrigo Echenique would
maintain their same gross annual salaries in 2019 as in 2018.
B) Other fxed components of remuneration
• Benefts systems: defned contribution plans26 as set out in section
'Pre-retirement and beneft plans'.
26.As stated in the section below, contributions to the benefts systems for two executive directors include both fxed components and variable components.
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2018 Annual Report
• Fixed salary supplement: the executive directors, other than
Mr Rodrigo Echenique, will receive a fxed salary supplement
approved in 2018 when the death and disability supplementary
benefts systems was eliminated. Ms Ana Botín will receive EUR
525 thousand in 2019 for this component and Mr José Antonio
Álvarez EUR 710 thousand in the same year.
• Social welfare benefts: executive directors will also receive certain
social welfare benefts such as life insurance premiums, medical
insurance and, if applicable, the allocation of remuneration
for employee loans, in accordance with the customary policy
established by the Bank for senior management. Additional
information is included in section 'Pre-retirement and beneft
plans'.
ii) Variable components of remuneration
The variable remuneration policy for executive directors for
2019, which was approved by the board at the proposal of the
remuneration committee, is based on the principles of the
remuneration policy described in section 6.3.
The variable components of the executive directors’ total
remuneration for 2019 must not exceed a limit of 200% of the fxed
components, although the European regulation on remuneration
allows certain variable components of an exceptional nature to
be excluded.
A) Benchmark incentive
Variable remuneration for executive directors in 2019 shall be
determined based on a standard benchmark incentive conditional
upon compliance with 100% of the established targets. The board
of directors, at the proposal of the remuneration committee and
based on market and internal contribution criteria, may review the
benchmark variable remuneration.
B) Setting the fnal incentive based on results for the year
Based on the aforementioned benchmark standard, the 2019
variable remuneration for executive directors shall be set on the
basis of the following key factors:
• A group of short-term quantitative metrics measured against
annual objectives.
The variable remuneration of executive directors consists of a single
incentive27, linked to the achievement of short-and long-term goals,
structured as follows:
• A qualitative assessment which cannot adjust the quantitative
result by more than 25% upwards or downwards.
• The fnal amount of the variable remuneration shall be determined
at the start of the following year (2020) based on the benchmark
amount and subject to compliance with the annual objectives
described in section B) below.
• An exceptional adjustment that must be supported by
substantiated evidence and that may involve changes prompted
by defciencies in control and/or risks, negative assessments from
supervisors or unexpected material events.
• 40% of the incentive shall be paid immediately once the fnal
amount has been determined and the remaining 60% shall be
deferred in equal parts over fve years, as follows:
• The payment of the amount deferred over the frst two years
(24% of the total), payable in the two following years, 2021 and
2022, shall be conditional on none of the malus clauses described
in section 6.3 B vi) above being triggered.
• The amount deferred over the next three years (36% of the total),
payable in 2023, 2024 and 2025, shall be conditional not only on
the malus clauses not being triggered but also on the executive
achieving the long-term objectives described in section the D)
below (deferred incentive subject to long-term performance
objectives).
Similarly, the incentives already paid will be subject to clawback by
the Bank in the scenarios and for the period set forth in the Group’s
malus and clawback policy, to which section 6.3 B vi) above refers.
Exceptionally and as a result of the hiring of a new executive
director, the variable remuneration of the new executive directors
may include sign-on bonus and/or buyouts.
27. Likewise, and as stated in section below, contributions to the benefts systems for the executive directors include both fxed components and variable components,
which become part of the total variable remuneration.
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The detailed quantitative metrics, qualitative assessment factors
and weightings are indicated in the following scorecard:
b) 60% is paid, if applicable, in fve equal parts in 2021, 2022, 2023,
2024 and 2025, net of taxes, half in cash and half in shares,
subject to the conditions stipulated in section E) below.
Category
and
weighting metrics
Quantitative
Customers NPS/CSIA
Number
(20%)
of loyal
customers
Qualitative assessment
Efective compliance with the
objectives of the rules on risk
conduct in respect of customers.
The last three payments shall also be conditional upon the long-
term objectives described in section D) below.
The portion paid in shares may not be sold until one year has
elapsed from delivery thereof.
Risks
(10%)
Non-
performing
loans ratio
Cost of credit
ratio (IFRS9)
Appropriate management of risk
appetite and excesses recognised.
Adequate management
of operational risk.
)
%
0
8
s Capital Capital ratio
(
r (20%)
e
d
l
o
h Return Ordinary net proft Suitability of business growth
e
r (50%)
a
h
S
Efcient capital management.
(CET1)B
(ONP)C (20%)
RoTE: return
on tangible
equityB (30%)
compared to the previous
year, considering the market
environment and competitors.
Sustainability and solidity of results.
Efcient cost management and
achievement of efciency goals.
A. Net promoter score / customer satisfaction index.
B. For this purpose, the capital ratio (CET1) and the RoTE will be adjusted
upwards or downwards to refect the adjustments made to the ONP
pursuant to note C.
C. For this purpose, ONP is attributed ordinary net proft, adjusted
upwards or downwards for those transactions that, in the opinion of the
board, have an impact outside of the performance of the directors being
evaluated, whereby extraordinary proft, corporate transactions, special
allowances, or accounting or legal adjustments that may occur during
the year are evaluated for this purpose.
Lastly, and as additional conditions, in determining the incentive, it
will be verifed whether or not the following circumstances
have occurred:
• If the Group’s ONP for 2019 is less than 50% of the ONP for 2018,
the incentive would in no case exceed 50% of the benchmark
incentive for 2019.
• If the Group’s ONP is negative, the incentive would be zero.
When determining individual bonuses, the board will also take into
account whether any restrictions to the dividends policy have been
imposed by supervisory authorities.
C) Form of payment of the incentive
Variable remuneration is paid 50% in cash and 50% in shares, one
portion in 2020 and the deferred portion over fve years and subject
to long-term metrics, as follows:
a) 40% of the incentive is paid in 2020 net of taxes, half in cash
and half in shares.
D) Deferred variable remuneration
subject to long-term objectives
As indicated above, the amounts deferred in 2023, 2024 and 2025
shall be conditional upon, in addition to the terms described in
section E) below, compliance with the Group’s long-term objectives
for 2019-2021. The long-term metrics are as follows:
(a) Compliance with the consolidated EPS growth target of Banco
Santander in 2021 vs. 2018. The EPS ratio relating to this target
is obtained as shown in the table below:
EPS growth in 2021
(% vs. 2018)
≥ 15%
≥ 10% but < 15%
< 10%
'EPS Ratio'
1
0 – 1A
0
A. Straight-line increase in the EPS ratio based on the specifc percentage
that EPS growth in 2021 represents with respect to 2018 EPS within this
bracket of the scale.
In addition, total or partial compliance of this objective requires
that EPS growth in 2019 and 2020 is higher than 0%.
(b) Relative performance of the Bank’s total shareholder return
(TSR) in 2019-2021 compared to the weighted TSR of a peer
group comprising 9 credit institutions, applying the appropriate
TSR ratio according to the Bank’s TSR within the peer group.
Ranking of Santander TSR
'TRS Ratio'
Above percentile 66
Between percentiles 33 and
66 (both inclusive)
Below percentile 33
1
0 – 1A
0
A. Proportional increase in the TSR ratio based on the number of positions
moved up in the ranking.
TSR28 measures the return on investment for shareholders as a
sum of the change in share price plus dividends and other similar
items (including the Santander Scrip Dividend programme) that
shareholders may receive during the period in question.
28. TSR is the diference (expressed as a percentage) between the end value of an investment in ordinary shares of Banco Santander and the initial value of the same
investment, factoring in to the calculation of the fnal value the dividends or other similar instruments (such as the Santander Scrip Dividend Programme) received by
the shareholder in relation to this investment during the corresponding period of time as if an investment had been made in more shares of the same type at the frst
date on which the dividend or similar concept was payable to shareholders and the weighted average share price at that date. To calculate TSR, the average weighted
daily volume of the average weighted listing prices for the ffteen trading sessions prior to 1 January 2019 (exclusive) is taken into consideration (to calculate the initial
value) and that of the ffteen trading sessions prior to 1 January 2022 (exclusive) (to calculate the fnal value).
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2018 Annual Report
The peer group comprises the following entities: BBVA, BNP
Paribas, Citi, Credit Agricole, HSBC, ING, Itaú, Scotiabank y
Unicredit.
The hedging of Santander shares received during the retention and
deferral periods is expressly prohibited.
(c) Compliance with the Santander Group’s consolidated fully
loaded target common equity tier 1 ratio (CET1) for 2021. The
CET1 ratio relating to this target is obtained as described below:
CET1 in 2021
≥ 12%
≥ 11.50% but < 12%
< 11.50%
CET1 ratio
1
0.5 – 1A
0
A. Linear increase in the CET1 ratio based on the CET1 ratio for 2021 within
this bracket of the scale.
To verify compliance with this objective, possible increases in
CET1 resulting from capital increases shall be disregarded (with
the exception of those related to the Santander Scrip Dividend
programme). Further, the CET1 ratio at 31 December 2021 could be
adjusted to strip out the impact of any regulatory changes afecting
its calculation implemented until that date.
To determine the annual amount of the deferred variable
remuneration tied to performance corresponding, if applicable,
to each executive director in 2023, 2024 and 2025, the following
formula shall be applied to each of these payments ('Final
annuity') without prejudice to any adjustment deriving from the
application of the malus policy described in section 6.3 B vi) above:
Final annuity = Amt. x (1/3 x A + 1/3 x B + 1/3 x C)
where:
• 'Amt.' is one third of the variable remuneration amount deferred
conditional on performance (i.e., Amt. will be 12% of the total
incentive set in early 2020).
The efect of infation on the deferred amounts in cash may be
ofset.
The sale of shares is also prohibited for at least one year from
the receipt thereof.
The remuneration committee may propose to the board
adjustments in variable remuneration under exceptional
circumstances due to internal or external factors, such as
regulatory requirements or requests or recommendations
issued by regulatory or supervisory bodies. These adjustments
shall be described in detail in the corresponding report of the
remuneration committee and in the annual report on director´s
remuneration submitted each year to an advisory vote of
the shareholders at the general shareholders’ meeting.
iii) Holding shares
No changes in the holding shares policy are planned with respect to
the terms in place for 2018 and set forth in section 6.3 E.
Remuneration of directors for 2020 and 2021
A. Remuneration of directors in their capacity as such
No changes to the remuneration of directors in their capacity as such
for 2020 and 2021 with respect to the remuneration described for
2019 are expected, without prejudice to the fact that shareholders at
the 2020 or 2021 annual general meeting may approve an amount
higher than the six million euros currently in force, or that the board
may determine, within such limit, a diferent distribution thereof
among directors.
B. Remuneration of directors for the
performance of executive duties
Remuneration of executive directors shall conform to
principles similar to those applied in 2019, with the diferences
described below.
• 'A' is the EPS ratio according to the scale in section (a) above,
based on EPS growth in 2021 vs. 2018.
i) Fixed components of remuneration
• 'B' is the TSR ratio according to the scale in section (b) above,
according to the relative performance of the TSR within its peer
group in 2019-2021.
• 'C' is the CET1 ratio according to compliance with the CET1 target
for 2021 described in section (c) above.
The estimated maximum amount to be delivered in shares to
executive directors is EUR 11.5 million.
E) Other terms of the incentive
Accrual of the deferred amounts, including amounts linked
to long-term objectives, shall also be conditional upon the
benefciary’s continued service in the Group and upon none of
the circumstances arising that give rise to the application of
malus arrangements in accordance with the section on malus and
clawback clauses in the Group’s remuneration policy, all under
terms similar to those indicated for 2018. Similarly, the incentives
already paid will be subject to clawback by the Bank in the
scenarios and for the period set forth in said policy, all under the
terms and conditions therein provided.
A) Gross annual salary
The annual gross fxed remuneration may be revised each year
depending on the criteria approved at any given time by the
remuneration committee, whereby the maximum increase for 2020
and 2021 for each executive director may not exceed 5% of their
annual gross salary for the previous year. Nonetheless, this increase
may be higher for one or several directors provided that, when
applying the rules or requirements or supervisory recommendations
that may be applicable, and if so proposed by the remuneration
committee, it is appropriate to adjust their remuneration mix and, in
particular, their variable remuneration in view of the functions they
perform, without these increases possibly leading to an increase
in the total remuneration of these directors for this reason. Should
these circumstances arise, they will be described in detail in the
corresponding report of the remuneration committee and in the
annual report on director's remuneration submitted each year to an
advisory vote at the general shareholders’ meeting.
B) Other fxed components of remuneration
No changes planned with respect to 2019.
ii)Variable components of remuneration
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The policy on variable remuneration for executive directors for 2020
and 2021 will be based on much the same principles as in 2019,
following the same single-incentive scheme described above, and
subject to the same rules of operation and limitations.
Long-term metrics shall at least include objectives relating to value
creation and return for shareholders and capital in a multi-year
period of at least three years. These metrics shall be aligned with
the Group’s strategic plan and refect its main priorities from its
stakeholders’ perspective.
A) Setting the variable remuneration
Variable remuneration for 2020 and 2021 for executive directors
shall be determined based on a benchmark incentive approved for
each year which takes into account:
These metrics may be measured at the level of the Group or of the
country or business, when appropriate, and the performance thereof
may be relatively compared to a peer group.
• A group of short-term quantitative metrics measured against
annual objectives. These metrics shall be aligned with the Group
strategic plan and include, at least, shareholder return targets, risk
objectives, capital and customers. The metrics may be measured at
Group level, and where applicable, at division level if the executive
director is responsible for managing a specifc business division.
The results of each metric may be compared to both the budget
established for the fnancial year as well as to growth compared to
the prior year.
• A qualitative assessment which cannot adjust the quantitative
result by more than 25% upwards or downwards. The qualitative
assessment shall be performed on the same categories as the
quantitative metrics, including shareholder returns, risk and capital
management and customers.
• Potential exceptional adjustments that must be based on
substantiated evidence and that may involve changes prompted
by defciencies in control and/or risks, negative assessments from
supervisors or unexpected material events.
The quantitative metrics, qualitative assessment and potential
extraordinary adjustments will ensure that the main objectives are
considered from the perspective of diferent stakeholders, and that
the importance of risk and capital management is factored in.
Lastly, in determining the incentive it will be verifed whether or not
the following circumstances have occurred:
• If the quantitative metrics linked to proft do not reach a certain
compliance threshold, the incentive may not be greater than 50%
of the benchmark incentive for a given year.
• If the results of the metrics linked to proft are negative, the
incentive shall be zero.
• When determining individual bonuses, the board will also take into
account whether any restrictions to the dividends policy have been
imposed by supervisory authorities.
B) Form of payment of the incentive
No changes in form of payment are planned with respect to the
terms in place for 2019.
C) Deferred variable remuneration subject to long-term objectives
The last three annual payments of the deferred amount of each
variable remuneration shall be conditional upon, in addition to the
terms described in section E) above, compliance with the Group’s
long-term objectives for at least a three-year period, compliance
with which may only confrm or reduce the amounts and number of
deferred shares.
The portion paid in shares of the incentives may not be sold until at
least one year has elapsed from delivery thereof.
D) Other terms of the incentive
No changes in form of payment are planned with respect to the
continuity, malus and clawback terms terms in place for 2019 and
that are described in section E) of the remuneration policy for 2019.
Likewise, no changes are planned to the hedging prohibition or the
infation-related adjustments on cash deferred amounts terms set
out in the same section.
iii) Holding shares
The share holding policy approved in 2016 shall apply in 2020
and 2021, unless the remuneration committee, under exceptional
circumstances such as regulatory requirements or requests or
recommendations issued by regulatory or supervisory bodies, were
to propose amendments to this policy to the board. Any potential
amendments would be described in detail in the corresponding
remuneration committee report and in the annual report on
director´s remuneration submitted each year to an advisory vote at
the general shareholders’ meeting.
Terms and conditions of executive directors’ contracts
The terms for the provision of services by each of the executive
directors are governed by the contracts signed by each of them with
the Bank, as approved by the board of directors.
The basic terms and conditions of the contracts of the executive
directors, besides those relating to the remuneration, are the
following:
A. Exclusivity and non-competition
Executive directors may not enter into contracts to provide services
to other companies or entities except where expressly authorised
by the board of directors. In all cases, a duty of non-competition
is established with respect to companies and activities similar in
nature to those of the Bank and its consolidated Group.
Likewise, the contracts of the executive directors provide for certain
prohibitions against competition and the poaching of clients,
employees and suppliers that may be enforced for two years after
the termination thereof for reasons other than retirement or a
breach by the Bank. The compensation to be paid by the Bank for
this duty of non-competition is 80% of the fxed remuneration,
40% payable on termination of the contract and 60% at the end of
the two-year period for Ms Ana Botín and Mr José Antonio Álvarez.
In the case of Mr Rodrigo Echenique, the compensation to be paid
is two times his fxed salary, receiving 50% on termination of the
contract and 50% at the beginning of the second year of the non-
competition period.
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B. Code of Conduct
There is an obligation to strictly observe the provisions of the
Group’s general code and of the code of conduct in securities
markets, in particular with respect to rules of confdentiality,
professional ethics and conficts of interest.
C. Termination
The contracts are of indefnite duration and do not provide for any
severance payment in the case of termination other than as may be
required by law.
In the event of termination of her contract by the Bank, Ms Ana
Botín-Sanz de Sautuola y O’ Shea must remain available to the Bank
for a period of four months to ensure a proper transition, during
which period she would continue to receive her gross annual salary.
D. Pre-retirement and beneft plans
The contracts of the following executive directors acknowledge their
right to pre-retire under the terms stated below when they have not
yet reached retirement age:
• Ms Ana Botín-Sanz de Sautuola will be entitled to pre-retirement
in the event of leaving her post for reasons other than breach of
duty. In this case, she will be entitled to an annual allotment equal
to the sum of her fxed remuneration and 30% of the average
amount of her last variable remunerations, to a maximum of three.
This allotment shall be reduced by 8% in the event of voluntary
termination prior to the age of 60. This allotment is subject to the
malus and clawback provisions in place for a period of fve years.
• Mr José Antonio Álvarez Álvarez will be entitled to pre-retire in
the event of leaving his post for reasons other than his own free
will or breach of duty In that case, he will be entitled to an annual
allocation equivalent to the fxed remuneration corresponding to
him as a senior manager. This allotment is subject to the malus and
clawback provisions in place for a period of fve years.
The executive directors, other than Mr Rodrigo Echenique,
participate in the defned contribution system created in 2012,
which covers the contingencies of retirement, disability and death.
The Bank makes annual contributions to the beneft plans of the
executive directors who participate in the beneft system. The
annual contributions are calculated in proportion to the respective
pensionable bases of the executive directors, and shall continue to
be made until they leave the Group or until their retirement within
the Group, or their death or disability (including, if applicable, during
pre-retirement). The pensionable base for the purposes of the
annual contributions for the executive directors is the sum of fxed
remuneration plus 30% of the average of their last three variable
remuneration amounts (or, in the event of Mr José Antonio Álvarez’s
pre-retirement, his fxed remuneration as a senior executive vice
president). The contributions will be 22% of the pensionable bases
in all cases.
The pension amount corresponding to contributions linked to
variable remuneration will be invested in Santander shares for a
period of fve years on the retirement date or, if earlier, the cessation
date, and shall be paid in cash after fve years have elapsed or,
if subsequent, on the retirement date. Moreover, the malus and
clawback clauses corresponding to contributions linked to variable
remuneration shall be applied for the same period as the bonus or
incentive upon which said contributions depend.
The beneft plan is outsourced to Santander Seguros y Reaseguros,
Compañía Aseguradora, S.A., and the economic rights of the
foregoing directors under this plan belong to them regardless
of whether or not they are active at the Bank at the time of their
retirement, death or disability. The contracts of these directors do
not provide for any severance payment in the case of termination
other than as may be required by law, and, in the case of pre-
retirement, the aforementioned annual allotment.
Mr Rodrigo Echenique's contract does not provide for any charge
to the Bank´s regarding benefts, without prejudice to the pension
rights to which Mr Echenique was entitled prior to his appointment
as executive director.
E. Insurance and other remuneration and benefts in kind
Ms Ana Botín and Mr José Antonio Álvarez will receive the fxed
remuneration supplement approved as a result of the elimination
of the supplementary benefts scheme in 2018. This supplement
will be paid in the same amount in 2019, 2020 and 2021 and will
continue to be paid until their retirement age, even if the director is
then still active.
The Group has arranged life and health insurance policies for the
directors.
The premiums for 2019 corresponding to this insurance amount
to EUR 875 thousand, which includes the standard life insurance
and, in the case of Ms Ana Botín and Mr José Antonio Alvarez, the
life insurance coverage for the aforementioned fxed remuneration
supplement. In 2020 and 2021, these premiums could vary in the
event of a change in the fxed remuneration of directors or in their
actuarial circumstances.
Similarly, executive directors are covered by the Bank’s civil liability
insurance policy.
Finally, executive directors may receive other benefts in kind (such
as health insurance or employee loans) in accordance with the
Bank’s general policy and the corresponding tax treatment.
F. Confdentiality and return of documents
A strict duty of confdentiality is established during the relationship
and following termination thereof, pursuant to which executive
directors must return to the Bank the documents and items related
to their activities that are in their possession.
G. Other terms and conditions
The advance notice periods contained in the contracts with the
executive directors are as follows:
By decision
of the Bank
(months)
By decision of
the director
(months)
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique
−
−
−
Payment clauses in place of pre-notice periods are not
contemplated.
4
−
−
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Appointment of new executive directors
The components of remuneration and basic structure of the
agreements described in this remunerations policy will apply
to any new director that is given executive functions,
notwithstanding the possibility of amending specifc terms of
agreements so that, overall, they contain conditions similar to those
previously described.
In particular, the total remuneration of the director for performing
executive duties may not be greater than the highest remuneration
received by the current executive directors of the Bank pursuant to
the remuneration policy approved by the shareholders. The same
rules shall apply if a director assumes new duties that said director
did not previously discharge or becomes an executive director.
If executive responsibilities are assumed with respect to a
specifc division or country, the board of directors, at the proposal
of the remuneration committee, may adapt the metrics used for
the establishment and accrual of the incentive in order to take into
account not just the Group but also the respective division
or country.
The remuneration of directors in their capacity as such, it shall be
included within the maximum distributable amount set by the
shareholders and to be distributed by the board of directors as
described above.
Additionally, if the new director comes from an entity that is not part
of the Santander Group, they could be the benefciary of a buyout to
ofset the loss of variable remuneration corresponding to their prior
post if they have not accepted a contract with the Group or of a sign-
on bonus to attract them to join Banco Santander.
This compensation could be paid fully or partly in shares, subject to
the delivery limits approved at the general shareholders’ meeting.
Therefore, authorisation is expected to be sought at the next general
shareholders’ meeting to deliver a specifed maximum number of
shares as part of any hires to which the buyout regulation applies.
Sign-on bonuses can only be agreed once with the new executive
directors, they can be paid in cash or shares and in each case will
not exceed the maximum variable remuneration awarded for all
executive directors the preceding year.
6.5 Preparatory work and decision-
making process with a description of the
participation of the remuneration committee
Section 4.6 Remuneration committee activities for 2018, details the
following:
• Pursuant to the Bylaws and the Rules and regulations of the
board of the Bank, the duties relating to the remuneration of the
directors performed by the remuneration committee.
• The composition of the remuneration committee at the date of
approving this report.
• The number of meetings with the risk supervision, regulation and
compliance committee held in 2018, including those held jointly
with the risk, compliance and regulation supervision committee.
• The date of the meeting when this report was approved.
• The 2017 annual report on directors´ remuneration was approved
by the board of directors and submitted to a binding vote at the
general shareholders’ meeting of 23 March 2018, with 94.42% of
the votes in favour. The detail of vote was as follows:
Votes cast
10,233,121,753
98.25%
Number
% of totalA
Votes against
Votes in favour
Abstentions
Number
% of totalA
389,585,931
9,834,835,228
182,466,168
3.74%
94.42%
1.75%
A. Percentage on total valid votes and abstentions.
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2018 Annual Report
6.6 Remuneration of non-director
members of senior management
At its meeting of 28 January 2019, the committee agreed to
propose to the board of directors the approval of the variable
remuneration for 2018 of members of senior management who
are not directors. The committee’s proposal was approved by the
board at its meeting of 29 January 2019.
The Bank’s general remuneration policy was applied in order
to determine this variable remuneration, as well as the
specifcities corresponding to senior management. In general,
their variable remuneration packages were calculated on the
same balance of quantitative metrics and qualitative assessment
used for executive directors described in section 6.3 B ii).
The contracts of certain senior managers have gone through
changes similar to those set out in section 6.3 C for Ms Ana
Botín and Mr José Antonio Álvarez. The changes aim to align the
annual contributions with practices of comparable institutions
and to reduce future liabilities (derisking) by eliminating the
supplementary benefts scheme in the event of death (death
of spouse or parent) and permanent disability of certain with
no increase in total costs for the Bank. The changes are the
following:
• Contributions of the pensionable bases have been reduced.
The diference between contributions has been increased in the
same amount in the annual gross salary.
• The supplementary benefts have been eliminated since
1 January 2018.
• The sum insured of the life insurance have been improved.
• A fxed remuneration supplement refected in the Other
remuneration element of the table below was implemented
for certain senior managers.
These changes have not meant an increase in total cost for the
Bank.
The table below shows the amounts of short-term
remuneration (immediately payable) and deferred remuneration
(excluding that linked to multi-year targets) for members of
senior management at 31 December 2018 and 2017, excluding
remuneration corresponding to the executive directors
shown previously:
Short-term and deferred salary remuneration
EUR thousand
Year
2018
2017
Number
of people
18
19
Fixed
22,475
17,847
Immediately
receivable variable
remuneration
(50% in shares)A
16,748
17,758
Deferred variable
remuneration
(50% in shares)B
Pension
contributions
Other
remunerationC
7,582
8,104
6,193
13,511
7,263
7,348
TotalD
60,261
64,568
A. The amount of immediate payment in shares for 2018 is of 1,936 thousand Santander shares (1,430 thousand Santander shares and 226 thousand
shares of Banco Santander (México) S.A. in 2017).
B. The amount of deferred shares for 2018 is of 877 thousand Santander shares.
C. Includes other items of remuneration such as life insurance premiums in the amount of EUR 1,641 thousand (692 thousand in 2017), health insurance
and relocation packages.
D. In addition, as a result of the agreements for incorporation and ofsetting of long-term remuneration and deferred losses in previous positions,
compensation amounting to EUR 4,650 thousand and 649,000 shares of Banco Santander, S.A. was agreed in 2017. This compensation will be partially
subject to deferral and/or recovery in certain cases.
The following table shows a breakdown of the salary
remuneration linked to multi-year targets for members of senior
management at 31 December 2018 and 2017. This remuneration
will only be received if the terms of continued service, non-
applicability of the malus clauses, and compliance with long-term
goals are met in the corresponding deferral periods.
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Every year, the remuneration committee reviews and, if applicable,
updates the composition of the identifed staf in order to identify
the persons in the organisation who fall within the aforementioned
parameters. The Remuneration Policies chapter of the 2018 Pillar III
disclosures report29 describes the criteria used for identifying staf
and the applicable regulation for the same purpose.
According to these criteria, at year-end 2018, this group comprised
1,384 executives across the Group (including executive directors
and non-director senior managers) (1,255 in 2017), accounting for
0.68% of total staf (0.62% in 2017).
The directors that are identifed staf other than executive directors
are subject to the same remuneration standards applicable to the
latter described in sections 6.1 and 6.3, except for:
• The various deferral percentages and terms that apply based on
their category.
• The possibility that in 2018 the deferred part of the incentive
of certain categories of managers is not conditional upon
performance but only to the malus clause.
• As occurred with the bonuses in previous years, the variable
remuneration amount that is paid or deferred in shares to
the executives of the Group in Brazil, Chile, Mexico, Poland,
and Santander Consumer US, is delivered in shares or similar
instruments of their own listed entities.
In the fnancial year 2019, the board of directors will maintain its
fexibility for agreeing total or partial payment in shares or similar
instruments of Banco Santander and/or the respective subsidiary
in the proportion it considers appropriate in each case (subject,
in any event, to the maximum number of Santander shares to be
delivered as agreed by shareholders at the general meeting and
any regulatory restrictions applicable in each jurisdiction).
The aggregate amount of the 2018 variable remuneration of
identifed staf, the amounts deferred in cash and in instruments
and the ratio between the variable components of remuneration
to the fxed components are detailed in the remuneration policies
chapter of the 2018 Pillar III disclosures report mentioned above.
Thousands of euros
Number of people
Deferred variable remuneration
subject to long-term
metricsA (50% in shares)B
18
19
7,962
8,510
Year
2018
2017
A. In 2018, this corresponds to the fair value of the maximum annual
payments for 2022, 2023 and 2024 of the third cycle of the deferred
variable remuneration plan linked to multi-year targets. In 2017,
this corresponds to the estimated fair value of the maximum
annual payments for 2021, 2022 and 2023 of the second cycle of the
deferred variable remuneration plan linked to multi-year targets.
The fair value has been determined at the grant date based on the
valuation report of an independent expert, Willis Towers Watson.
Depending on the design of the plan for 2018 and the levels of
achievement of similar plans in comparable entities, the expert
concludes that the reasonable range for estimating the initial
achievement ratio is around 60% - 80%. It has been considered that
the fair value is 70% of the maximum.
B. The amount of shares of the deferred variable remuneration subject
to long-term metrics shown in the table above is of 921 thousand
Santander shares in 2018.
The long-term goals are the same as those for executive directors.
They are described in section 6.3 B iv).
Additionally, those senior executive vice presidents that ceased to
carry out their duties in 2018 and who were not members of senior
management at year-end, received salary remuneration and other
remuneration relating to the cessation of their duties for a total
amount of EUR 1,861 thousand during the year (EUR 5,237 thousand
for those leaving their posts in 2017). Those leaving in 2017 also
received long-term variable remuneration for a total of EUR 999
thousand (none in 2018).
In 2018, the ratio between the variable components of
remuneration to the fxed components was 103% of the total for
senior managers, in all cases respecting the upper limit of 200%
set by the shareholders.
See note 5 of the Group’s 2017 consolidated fnancial statements
for further details.
6.7 Prudentially signifcant
disclosures document
The board of directors is responsible for approving, at the
proposal of the remuneration committee, the key elements of the
remuneration of managers or employees who, while not belonging
to senior management, take on risks, carry out control functions (i.e.
internal audit, risk management and compliance) or who receive
global remuneration that places them in the same remuneration
bracket as senior management and employees who take on risk,
and whose professional activities may have an important impact
on the Group’s risk profle (all of these together with the senior
management and the Bank’s board of directors form the so called
identifed staf or material risk takers).
29. The 2018 Pillar III disclosures report is published at our corporate website.
194
2018 Annual Report
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RemunerationResponsible bankingCorporate governanceEconomic and financial reviewRisk management 7. Group structure and
internal governance
The structure of the Santander Group is a model of legally
independent subsidiaries whose parent is Banco Santander,
S.A. The Group has registered address in the city of Santander
(Cantabria, Spain) and its Corporate Centre in Boadilla del Monte
(Madrid, Spain).
The Group has established a Group subsidiary governance model
for its main subsidiaries. Any reference to subsidiaries in this
section refers to the Bank’s most signifcant subsidiaries.
The key features of the Group subsidiary governance model are
as follows:
• The governing bodies of each subsidiary shall ensure that their
company is managed rigorously and prudently, while ensuring
their economic solvency and upholding the interests of their
shareholders and other stakeholders.
• Management of the subsidiaries is a local matter carried out by
local management teams which provide extensive knowledge
and experience in relation to local customers and markets, while
also benefting 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 ECB.
• Customer funds are secured by virtue of the deposit guarantee
funds in place in the relevant country, in accordance to the
applicable laws.
Subsidiaries fnance 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 diferent units, which reduces systemic risk. Each
subsidiary has its own resolution plan.
7.1 Corporate Centre
The Group subsidiary governance model of Banco Santander
is further complemented with a Corporate Centre that brings
together Group control and support units tasked with functions
relating to strategy, risks, auditing, technology, human resources,
legal services, communications and marketing, among others. The
Corporate Centre adds value to the Group by:
• Making its governance more robust, through corporate
frameworks, models, policies and procedures that allow
corporate expectations to be implemented and ensure efective
supervision of the Group.
• Making the Group’s units more efcient by unlocking cost
management synergies, economies of scale and achieving a
common brand.
• Sharing the best commercial practices, focusing on global
connectivity, launching global commercial initiatives and
fostering digitalisation.
7.2 Internal governance of the 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. In addition, 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, are embedded.
• Between the CEOs (Chief executive ofcers) and country heads
of the subsidiaries and of the Group and between the ofcers
and teams deemed suitable to exercise key control functions
within the Group and at the subsidiaries. These ofcers and
teams comprise the following: CRO (chief risk ofcer); CCO (chief
196
2018 Annual Report
Group structure
and internal governance
compliance ofcer); CAE (chief audit executive); CFO
(chief fnancial ofcer); CAO (chief accounting ofcer) and key
support functions (IT, Operations, HR, General Secretary’s Ofce,
Legal Services, Marketing, Communications and Strategy) as well
as business functions (SCIB, Wealth Management and Digital
and Innovation).
In relation to CEOs, country heads and other signifcant ofce
holders, the governance model establishes, among other aspects,
the relevant rules and regulations to be followed in relation to
their appointment, setting targets, assessment, and fxing of
variable remuneration and succession planning. It also explains
how Group ofcers and their counterparts at the subsidiaries
should liaise and interact.
Santander also has thematic frameworks (corporate frameworks)
for matters considered to be important due to their impact on the
Group’s risk profle, notable among which are risk, capital, liquidity,
compliance, technology, auditing, accounting, fnance, strategy,
human resources, cybersecurity and communications and brand,
and which specify:
• The way the Group exercises oversight and control 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
efectively make up the internal governance system and are
approved by the board of directors of Banco Santander, S.A.
for subsequent adherence to by the governing bodies of the
subsidiaries, with due regard to any local requirements to
which these 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. They are subject to annual review by
the Group board of directors.
Based on the corporate frameworks, the functions included in
the governance model prepare internal regulatory documents
(models, policies and procedures) that are given to the Group’s
subsidiaries as reference and development documentation,
ensuring that they are efectively implemented and embedded
at local level, and in full compliance with local law and local
supervisory expectations. This approach also drives a consistency
of application throughout the Group as a whole.
An Internal Governance Ofce at Group level, comprising
Governance expertise, and the subsidiaries’ General Secretaries
are responsible for promoting the efective embedding of the
Governance model and Corporate Frameworks. The extent and
completeness of this activity is assessed by the Group on an annual
basis with associated reporting to relevant Governing bodies.
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8. Internal control over
fnancial reporting (ICFR)
This section describes key aspects of the internal control and risk
management systems in place at Santander Group with respect
to the fnancial reporting process, specifcally addressing the
following aspects:
• Control environment.
• Risk assessment in fnancial reporting.
• Control activities.
• Information and communication.
• Monitoring.
• External auditor report.
8.1 Control environment
Governance and responsible bodies
Our board of directors approves the fnancial information that,
due to its status as a listed company, Banco Santander must
periodically make public and is responsible for overseeing and
guaranteeing the integrity of the internal information and control
systems, as well as the accounting and fnancial information
systems. This includes operational and fnancial control and
compliance with applicable legislation.
Our board of directors has set up an audit committee that assists
the board in supervising the fnancial reporting process and
internal control systems.
According to the Rules and regulations of the board, our audit
committee oversees the process of preparing and presenting
the mandatory fnancial information relating to the Bank and
the Group, and the adequate delimitation of the consolidation
perimeter and the correct application of the accounting criteria,
including the related non-fnancial information, in addition to its
completeness; as well as the efectiveness of the internal control
systems, so that the main risks are identifed, managed and
properly brought to light.
198
In addition, our audit committee discusses with the external
auditor any signifcant defciencies in the internal control system
that may be detected in the course of the audit and ensures that
the external auditor issues a report regarding the internal control
system for fnancial information.
The existence of an adequate ICFR, prepared and coordinated
by the non-fnancial risk control area, corresponds to the entire
organisational structure with control relevance, through a direct
scheme of individually assigned responsibilities. In addition, the
fnancial accounting and management control units in each of the
countries in which the Group operates -each led by a controller-
have an important role in complying with the standard. Section
below includes more information on the functions carried out by
each organisational structure, the controllers and the non-fnancial
risk control area.
Functions Responsible, Code of Conduct,
whistleblowing channel and training
Functions Responsible
The Group, through the corporate organisation area and the
organisational units for each country/entity or business, defnes,
implements and maintains the organisational structures,
catalogue of job positions and size of the units. Specifcally, the
corporate organisation function defnes a reference managing and
staf structure, which serves as a Manual across de Group.
The business and support areas channel any initiative related to
their structure through these organisational units. These units
are responsible for analysing, reviewing and, where appropriate,
incorporating any structural modifcations into the corporate
technology tools. The organisation units are responsible for
identifying and defning the main functions under the responsibility
of each structural unit.
Based on this assignment, each of the business/support areas
identifes and documents the necessary tasks and controls in
its area within the Internal Control Model (ICM), based on its
knowledge and understanding of its activities, processes and
potential risks.
2018 Annual Report
Internal control over financial
reporting (ICFR)
Each unit thus detects the potential risks associated with those
processes, which are necessarily covered by the ICM. This
detection takes place based on the knowledge and understanding
that management has of the business and process.
It also has to establish those responsible for the various controls,
tasks and functions of the documented processes, so that all the
members of the division have clearly assigned responsibilities.
The purpose of this is to try to ensure, among other things, that the
organisational structure provides a solid model of ICFR.
With respect to the specifc process of preparing its fnancial
information, the Group has defned clear lines of responsibility
and authority. The process entails exhaustive planning, including,
among other things, the distribution of tasks and functions, the
required timeline and the various reviews to be performed by
each manager. To this end, the Group has fnancial accounting and
control units in each of its operating markets; these are headed up
by a controller whose duties include the following:
• Integrating the corporate policies defned at the Group level into
their management, adapting them to local requirements.
• Ensuring that the organisational structures in place are conducive
to due performance of the tasks assigned, including a suitable
hierarchical-functional structure.
• Deploying critical procedures (control models), leveraging the
Group’s corporate IT tools to this end.
• Implementing the corporate accounting and management
information systems, adapting them to each entity’s specifc
needs as required.
In order to preserve their independence, the controllers report to
their country heads and to the Group’s fnancial accounting and
control division.
The code can be consulted on the corporate website
(www.santander.com).
This code is binding for all members of the Group’s governance
bodies and all employees of Banco Santander, S.A., who
acknowledge as much when they join the Group, notwithstanding
the fact that some of these individuals are also bound by the
Code of Conduct in Securities Markets and other codes of conduct
specifc to the area or business in which they work.
The Group provides all its employees with e-learning courses
on the aforementioned general code of conduct. Moreover, the
compliance department is available to address any queries with
respect to its application. The general code sets out the functions
of the Group’s governance bodies, units and areas required to
implement the code, in addition to the compliance area.
The irregularities committee, consisting of representatives from
various parts of the Group, is responsible for imposing disciplinary
measures for any breaches of the general code and proposing
corrective actions, which may lead to labour-ofence sanctions,
notwithstanding any administrative or criminal sanctions that may
also result from such a breach.
Whistleblowing channel
Banco Santander has a whistleblowing channel, through which
employees can report, confdentially and anonymously, any
allegedly unlawful acts or breaches of the general code of
conduct that comes to their knowledge during the course of their
professional activities.
In addition, through this whistleblowing channel, employees
can confdentially and anonymously report irregularities in
accounting or auditing matters, in accordance with
SOX. When reports concerning accounting or auditing matters
are received, the compliance function will report to the audit
committee to resolve the issue and adopt the appropriate
measures.
In addition, to support the existence of adequate documentation
for the Group’s internal control model, the corporate non-fnancial
risk control department is responsible for establishing and
reporting the work method governing the process of documenting,
evaluating and certifying the internal control model that covers
the ICFR system, among other regulatory and legal requirements.
It also handles maintaining documentation up-to-date to adapt
it to organisational and regulatory changes and, together with
the general controller and management control division and, if
appropriate, the representatives of the divisions and/or companies
concerned, present the conclusions of the internal control model
evaluation process to the audit committee. There are similar
functions at each unit that report to the corporate non-fnancial
risk control department.
To preserve the confidentiality of communications prior to
their examination by the audit committee, the procedure does
not require the inclusion of personal an contact data from the
sender. In addition, only certain persons in the Compliance area
review the content of the communication in order to determine
whether it is related to accounting or auditing matters, and, if
applicable, submit it to the audit committee.
Training
Group employees involved in preparing and reviewing its fnancial
information participate in training programmes and regular
refresher courses which are specifcally designed to provide them
with the knowledge required to allow them to discharge their
duties properly.
Code of Conduct
The Group’s general Code of Conduct is approved by the Bank’s
board of directors, setting out behavioural guidelines of ethical
principles and rules of conduct that govern the actions of all
Santander Group employees and, therefore, constitutes the
central pillar of the Group compliance function. It also establishes
guidelines for conduct, among other matters, in relation to
accounting obligations and fnancial information.
The training and refresher courses are mostly promoted by the
management control and general audit division itself and are
designed and overseen together with the corporate learning
and career development unit which is, in turn, part of the HR
department and is responsible for coordinating and imparting
training across the Group.
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These training initiatives take the form of a mixture of e-learning
and onsite sessions, all of which are monitored and overseen by
the aforementioned corporate unit in order to guarantee they
are duly taken and that the concepts taught have been properly
assimilated.
The following aspects of the Group’s ICM model are worth
highlighting:
It is a corporate model involving the whole organisational structure
through a direct scheme of responsibilities assigned individually.
The training and periodic update programmes taught in 2018 have
focused, among other subjects, on: risk analysis and management,
accounting and fnancial statement analysis, the business, banking
and fnancial environment, fnancial management, costs and
budgeting, numerical skills, calculations and statistics and fnancial
statement auditing, among other matters directly and indirectly
related to the fnancial information process.
The management of the ICM documentation is decentralised,
being delegated to the Group’s various units, while its coordination
and monitoring is the duty of the non-fnancial risk control
department, which issues general criteria and guidelines to
ensure uniformity and standardisation of the documentation of
procedures, control assessment tests, criteria for the classifcation
of potential weaknesses and rule changes.
59,636 employees from the Group’s entities in the various
countries in which it operates were involved in these training
programmes, involving over 255,500 training hours at the
Corporate Centre in Spain and remotely (e-learning). In addition,
each country develops its own training programme based on that
developed by the parent.
8.2 Risk assessment in fnancial reporting
Santander Group’s ICM is defned as the process carried out by the
board of directors, senior management and the rest of the Group’s
employees to provide reasonable assurance that their targets will
be attained.
The Group’s ICM complies with the most stringent international
standards and specifcally complies with the guidelines established
by the Committee of Sponsoring Organisations of the Tradeway
Commission (COSO) in its most recent framework published in
2013, which addresses control targets in terms of operations
efectiveness and efciency, fnancial information reliability and
compliance with applicable rules and regulations.
ICM documentation is implemented at the main Group companies
using standard and uniform methodology such that it ensures
inclusion of the appropriate controls and covers all material
fnancial information risk factors.
The risk identification process takes into account all classes
of risk (particularly those included in the recommendations
issued by the Basel Risk Committee). Its scope is greater than
all of the risks directly related to the preparation of the Group’s
financial information.
The identifcation of potential risks that must be covered by
the ICM is based on the knowledge and understanding that
management have of the business and its operating processes,
taking into account both criteria of relative importance and
qualitative criteria associated with the type, complexity or the
structure of the business itself.
In addition, the Bank ensures the existence of controls covering
the potential risk of error or fraud in the issuance of the fnancial
information, i.e., potential errors in terms of: i) the existence of the
assets, liabilities and transactions as of the corresponding date; ii)
the fact that the assets are Group goods or rights and the liabilities
Group obligations; iii) proper and timely recognition and correct
measurement of its assets, liabilities and transactions; and iv)
the correct application of the accounting rules and standards and
adequate disclosures.
200
It is an extensive model with a global scope of application, which
not only documents the activities relating to generation of the
consolidated fnancial information, its core scope of application,
but also other procedures developed by each entity’s support areas
which, while not generating a direct impact on the accounting
process, could cause possible losses or contingencies in the case of
incidents, errors, regulatory breaches and/or fraud.
It is dynamic and updated continually to mirror the reality of the
Group’s business as it evolves, the risks to which it is exposed and
the controls in place to mitigate these risks.
It generates comprehensive documentation of all the processes
falling under its scope of application and includes detailed
descriptions of the transactions, evaluation criteria and checks
applied to the ICM model.
All of the Group companies’ ICM documentation is compiled into
a corporate IT application which is accessed by employees of
difering levels of responsibility in the evaluation and certifcation
process of Santander Group’s internal control system.
The Group has a specifc process for identifying the companies that
should be included within its scope of consolidation. This is mainly
monitored by the fnancial accounting and control division and the
ofce of the general secretary and human resources.
This procedure enables the identifcation of not just those
entities over which the Group has control through voting rights
from its direct or indirect holdings, but also those over which it
exercises control through other channels, such as mutual funds,
securitisations and other structured vehicles. This procedure
analyses whether the Group has control over the entity, has rights
over or is exposed to its variable returns, and whether it has the
capacity to use its power to infuence the amount of such variable
returns. If the procedure concludes that the Group has such
control, the entity is included in the scope of consolidation, and is
fully consolidated. If not, it is analysed to identify whether there is
signifcant infuence or joint control. If this is the case, the entity is
included in the scope of consolidation, and consolidated using the
equity method.
Finally, the audit committee is responsible for supervising the Bank
and Group’s regulated fnancial information process and internal
control system.
In supervising this fnancial information, particular attention is
paid to its integrity, compliance with regulatory requirements
and accounting criteria, and the correct defnition of the scope of
2018 Annual Report
Internal control over financial
reporting (ICFR)
consolidation. The internal control and risk management systems
are regularly reviewed to ensure their efectiveness and adequate
identifcation, management and reporting.
Our Group’s chief accounting ofcer presents to be validated
the Group’s fnancial information to the audit committee on a
quarterly basis, at least, providing explanations of the main criteria
employed for estimates, valuations and value judgements.
8.3 Control activities
Procedures for reviewing and authorising
the fnancial information
Our audit committee by mandate of the board oversees the
process of preparing and presenting the mandatory fnancial
information regarding the Bank and the Group, which includes the
related non-fnancial information, as well as its completeness, and
reviews compliance with regulatory requirements, the appropriate
delimitation of the perimeter of consolidation and the correct
application of accounting criteria, ensuring that this information is
permanently updated on the Bank’s website.
The process of creating, reviewing and authorising the fnancial
information and the description of the ICFR is documented in
a corporate tool which integrates the control model into risk
management, including a description of the activities, risks,
tasks and the controls associated with all of the transactions
that may have a material efect on the fnancial statements. This
documentation covers recurrent banking transactions and one-
of transactions (stock trading, property deals, etc.) and aspects
related to judgements and estimates, covering the registration,
assessment, presentation and disclosure of fnancial information.
The information in the tools is updated to refect changes in the
way of carrying out, reviewing and authorising procedures for
generating fnancial information.
Our audit committee also has the duty to report to the board,
prior to its adoption of the corresponding decisions, regarding the
fnancial information that the Group must periodically make public,
ensuring that such information is prepared in accordance with
the same principles and practices used to prepare the fnancial
statements and is as reliable as these statements.
The most signifcant aspects of the accounting close process and
the review of the material judgements, estimates, measurements
and projections used are as follows:
• Impairment losses on certain assets;
• The assumptions used in the actuarial calculation of the post-
employment beneft liabilities and commitments and other
obligations;
• The useful life of the tangible and intangible assets;
• The measurement of goodwill arising on consolidation;
• The calculation of provisions and the consideration of contingent
liabilities;
• The fair value of certain unquoted assets and liabilities;
• The recoverability of tax assets;
• The fair value of the identifable assets acquired and the liabilities
assumed in business combinations.
The information provided to directors prior to board meetings,
including information on value judgements, estimates and
forecasts relating to the fnancial information, is prepared
specifcally for the purposes of these meetings.
To verify that the ICM is working properly and check the
efectiveness of the defned functions, tasks and controls, the
Group has in place an assessment and certifcation process that
starts with an evaluation of the control activities by the staf
responsible for them. Depending on the conclusions drawn,
the next step is to certify the tasks and functions related to the
generation of fnancial information so that, having analysed all
such certifcations, the chief executive ofcer, the chief fnancial
ofcer and the chief accounting ofcer/controller certify the
efectiveness of the ICM.
The annual process identifes and assesses the criticality of risks
and the efectiveness of the controls identifed in the Group.
The non-fnancial risk control unit prepares a report spelling
out the conclusions reached as a result of the certifcation
process conducted by the units, taking the following aspects into
consideration:
• Detail of the certifcations obtained at all levels.
• Any additional certifcations considered necessary.
• Specifc certifcation of all signifcant outsourced services.
• The ICM design and operation tests performed by those
responsible for its maintenance and/or independent experts.
This report also itemises the main defciencies identifed
throughout the certifcation process by any of the parties
involved, indicating whether these defciencies have been
properly resolved or, if not, what plans are in place to correct
them in a satisfactory manner.
The conclusions of these evaluation processes are presented to
the audit committee by the non-fnancial risk control department,
together with Accounting and Management Control division
and, if appropriate, the sponsors of the divisions and/or work
companies concerned, after having been presented to the risk
control committee.
Lastly, based on this report, the Group’s chief accounting ofcer /
controller (CAO), chief fnancial ofcer (CFO) and its chief executive
ofcer (CEO) certify the efectiveness of the ICM in terms of
preventing or detecting errors which could have a material impact
on the consolidated fnancial information.
In 2018, the Group has worked to strengthen the identifcation
and documentation of the most relevant controls for the Group
(special monitoring controls) in order to ensure an adequate
internal control system over fnancial information. Further, in order
to continue strengthening the Santander Group ICM, it has been
decided that from 2019 onwards the internal audit function will
perform independent tests on these controls as part of its audits.
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Internal control policies and procedures for IT systems
The Technology and Operations division issues corporate IT
policies.
In addition, there are specifc force majeure risk mitigation
strategies in place, such as virtual data processing centres, back-up
power suppliers and ofsite storage facilities.
For internal control purposes, the following policies are of
particular importance.
The Group’s IT systems which are directly or indirectly related
to the fnancial statements are confgured to ensure the correct
preparation and publication of fnancial information at all times by
means of a specifc internal control protocol.
To this end, the entity has internal policies and procedures, which
are duly updated and distributed, relating to systems security and
access to the IT applications and systems based on roles and in
accordance with the duties and clearances assigned to each unit/
post so as to ensure proper separation of powers.
The Group’s internal policies establish that access to all systems
that store or process data shall be strictly controlled, and that the
level of access control required is determined by potential impact
on the business. Access rights are assigned by Group experts in this
area (known as authorised signatures), by roles and functions. In
addition, to ensure the compliance of processes related to control
and maintenance of users and profles, personnel in each area are
tasked with ensuring that information is only accessed by persons
who need it for their work.
The Group’s methodology is designed to ensure that any new
software developments and the updating and maintenance of
existing programmes go through a defnition-development-testing
cycle that guarantees that fnancial information is handled reliably.
In this way, once software developments have been completed
on the basis of the defned requirements (detailed documentation
of the processes to be implemented), these developments are
subjected to exhaustive testing by a specialist ‘software lab’.
The Corporate Certifcation Ofce is then responsible for the
complete testing cycle of the software in a pre-production
environment, prior to its fnal implementation. The
aforementioned ofce manages and coordinates this whole cycle,
which includes: technical and functional testing, performance
testing, user acceptance testing, and pilot and prototype testing as
defned by the entities, prior to making the applications available
to all end users.
Underpinned by corporate methodology, the Group guarantees
the existence of business continuity plans that ensure on-going
performance of key functions in the event of disasters or other
events that could halt or interrupt business operations.
These plans catalogue the measures, which translate into specifc
initiatives, designed to mitigate the scale and severity of IT
incidents and to ensure that operations are up and running again as
quickly and with as little fallout as possible.
To this end, the Group has highly automated back-up systems to
ensure the continuity of the most critical systems with little or no
human intervention thanks to parallel redundant systems, high-
availability systems and redundant communication lines.
Internal control policies and procedures over outsourced
activities and valuation services from independent experts
The Group has established an action framework and specifc
implementation policies and procedures to ensure the adequate
coverage of the risks associated with subcontracting activities to
third parties.
The relevant processes include:
• The performance of tasks relating to the initiation, recording,
processing, settlement, reporting and accounting of asset
valuations and transactions.
• The provision of IT support in its various manifestations: software
development, infrastructure maintenance, incident management,
IT security and IT processing.
• The provision of other material support services not directly
related to the generation of fnancial information: supplier
management, property management, HR management, etc.
The main control procedures in place to ensure adequate coverage
of the risks intrinsic to these processes are:
• Relations among Group companies are documented in contracts
which detail exhaustively the type and level of service provided.
• All of the Group’s service providers document and validate the
main processes and controls related to the services they provide.
• Entities to which activities are outsourced document and validate
their controls in order to ensure that the material risks associated
with the outsourced services are kept within reasonable levels.
The Group assesses its estimates in-house. Whenever it
considers it advisable to hire the services of a third party to help
with specifc matters, it does so having verifed their expertise
and independence, for which procedures are in place, and
having validated their methods and the reasonableness of the
assumptions made.
Furthermore, the Group has signed service level agreements
and put in place controls to ensure the integrity and quality of
information for external suppliers providing signifcant services
that might impact the fnancial statements.
8.4 Information and communication
Function in charge of accounting policies
The Financial Accounting and Control division includes the
accounting policies area, the head of which reports directly to the
controller and has the following exclusive responsibilities:
• Defning the accounting treatment of the transactions that
constitute the Bank’s business in keeping with their economic
substance and the regulations governing the fnancial system.
202
2018 Annual Report
Internal control over financial
reporting (ICFR)
• Defning and updating the Group’s accounting policies and
resolving any questions or conficts deriving from their
interpretation.
• Business systems: software encompassing the full product-
contract-customer life cycle.
• Enhancing and standardising the Group’s accounting practices.
• Assisting and advising the professionals responsible for new IT
developments with respect to accounting requirements and ways
of presenting information for internal consumption and external
distribution and on how to maintain these systems as they relate
to accounting issues.
The Corporate Accounting, Financial Reporting and Management
Framework sets out the principles, guidelines and procedures
for accounting, fnancial reporting and management that apply
to all entities of the Santander Group as a key underpinning of
good governance. The structure of the Group calls for stipulating
uniform principles, guidelines and procedures so that each
Group entity can rely on efective consolidation methods and
apply uniform accounting policies. The principles set out in this
Framework are appropriately implemented and specifed in the
Group’s accounting policies.
Accounting policies must be treated as a supplement to the
fnancial and accounting standards that apply in the given
jurisdiction, being their overarching objectives(i) fnancial
statements and other fnancial information made available to
management bodies, regulators and third parties must provide
accurate and reliable information for decision-making relating to
the Group, and (ii) all Group entities must be enabled to comply in
a timely manner with legal duties and obligations and regulatory
requirements. The Accounting Policies are subject to revision
whenever the reference regulations are modifed and, at least,
once a year.
Additionally, on a monthly basis, the accounting policies area
publishes internally a bulletin that contains any news in accounting
matters, including both the new published regulations and the
most relevant interpretations. These documents are stored in the
accounting standards library (NIC-KEY), which is accessible to all
Group units.
The Financial Accounting and Control division has put in place
procedures to ensure it has all the information it needs to update
the accounting plan to cover the issue of new products and
regulatory and accounting changes that make it necessary to adapt
the plan and accounting principles and policies.
The Group entities, through the heads of their operations or
accounting units, maintain an on-going and fuid dialogue with the
fnancial regulation and accounting processes area and with the
other areas of the management control unit.
Mechanisms for the preparation of fnancial information
The Group’s computer applications are confgured into a
management model which, using an IT system structure
appropriate for a bank, is divided into several ‘layers’, which supply
diferent kinds of services, including:
• General information systems: these provide information to
division/business unit heads.
• Management systems: these produce information for business
monitoring and control purposes.
• Structural systems: these support the data shared and used by
all the applications and services. These systems include all those
related to the accounting and fnancial information.
All these systems are designed and developed in accordance with
the following IT architecture:
• General software architecture, which defnes the design patterns
and principles for all systems.
• Technical architecture, including the mechanisms used in the
model for design outsourcing, tool encapsulation and task
automation.
One of the overriding purposes of this model is to provide the
Group’s IT systems with the right software infrastructure to
manage all the transactions performed and their subsequent entry
into the corresponding accounting registers, with the resources
needed to enable access to and consultation of the various levels
of supporting data.
The software applications do not generate accounting entries
per se; they are based on a model centred on the transaction
itself and a complementary model of accounting templates that
specifes the accounting entries and movements to be made for
the said transaction. These accounting entries and movements are
designed, authorised and maintained by the Financial Accounting
and Control division.
The applications execute all the transactions performed in a given
day across various distribution channels (branches, internet,
telephone banking, e-banking, etc.) into the ‘daily transaction
register’ (DGO for its acronym in Spanish).
The DGO generates the transaction accounting entries and
movements on the basis of the information contained in the
accounting template, uploading it directly into the accounting
infrastructure application.
This application carries out the other processes necessary
to generate fnancial information, including: capturing and
balancing the movements received, consolidating and reconciling
with application balances, cross-checking the software and
accounting information for accuracy, complying with the
accounting allocation structural model, managing and storing
auxiliary accounting data and making accounting entries for
saving in the accounting system itself.
Some applications do not use this process. These rely instead on
their own account assistants who upload the general accounting
data directly by means of account movements, so that the
defnition of these accounting entries resides in the applications
themselves.
In order to control this process, before inputting the movements
into the general accounting system, the accounting information is
uploaded into a verifcation system which performs a number of
controls and tests.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
This accounting infrastructure and the aforementioned structural
systems generate the processes needed to generate, disclose and
store all the fnancial information required of a fnancial institution
for regulatory and internal purposes, all of which under the
guidance, supervision and control of the Financial Accounting and
Control division.
To minimise the attendant operational risks and optimise the
quality of the information produced in the consolidation process,
the Group has developed two IT tools which it uses in the fnancial
statement consolidation process.
In accordance with this, internal audit is a permanent function
and independent from all other functions and units. Its mission
is to provide the board of directors and senior management with
independent assurances in regard to the quality and efcacy of
the systems and processes of internal control, risk management
(current and emerging) and governance, thereby helping to
safeguard the organisation’s value, solvency and reputation.
Internal audit reports to the audit committee and to the board
of directors on a regular basis and at least twice a year, as an
independent unit, it has direct access to the board when it deems
it appropriate.
The frst channels information fows between the units and
the Financial Accounting and Control division, while the second
performs the consolidation proper on the basis of the information
provided by the former.
The internal audit evaluates:
• The efcacy and efciency of the processes and systems cited
above;
Each month, all of the entities within the Group’s scope of
consolidation report their fnancial statements, in keeping with the
Group’s audit plan.
• Compliance with applicable legislation and requirements of
supervisory bodies;
• The reliability and integrity of fnancial and operating
The Group’s audit plan, which is included in the consolidation
application, generally contains the disclosure needed to comply
with the disclosure requirements imposed on the Group by Spanish
and international authorities.
information; and
• The integrity of capital.
The consolidation application includes a module that standardises
the accounting criteria applied so that the units make the
accounting adjustments needed to make their fnancial statements
consistent with the accounting criteria followed by the Group.
Internal audit is the third line of defence, independent of the other
two.
The scope of its work encompasses:
The next step, which is automated and standardised, is to convert
the fnancial statements of the entities that do not operate in euros
into the Group’s functional currency.
• Separate asset pools (for example, mutual funds) managed by
the entities mentioned in the previous section; and
• All Group entities over which it exercises efective control;
The fnancial statements of the entities comprising the scope of
consolidation are subsequently aggregated.
• All entities (or separate asset pools) not included in the previous
points, for which there is an agreement for the Group to provide
internal audit functions.
The consolidation process identifes intragroup items, ensuring
they are correctly eliminated. In addition, in order to ensure
the quality and comprehensiveness of the information, the
consolidation application is confgured to make investment-equity
elimination adjustments and to eliminate intragroup transactions,
which are generated automatically in keeping with the system
settings and checks.
Lastly, the consolidation application includes another module (the
annex module) which allows all units to upload the accounting and
non-accounting information not specifed in the aforementioned
audit plan and which the Group deems opportune for the purpose
of complying with applicable disclosure requirements.
This entire process is highly automated and includes automatic
controls to enable the detection of incidents in the consolidation
process. The Financial Accounting and Control division also
performs additional oversight and analytical controls.
8.5 Monitoring
2018 ICFR monitoring activities and results
Our board has approved a corporate internal audit framework for
the Santander Group, defning the global function of internal audit
and how it is to be carried out.
204
This scope, subjectively defned, includes the activities,
businesses and processes carried out (either directly or through
outsourcing), the existing organisation and any commercial
networks. In addition, and also as part of its mission, internal
audit can undertake audits in other subsidiaries not included
among the points above, when the Group has reserved this right
as a shareholder, and in outsourced activities pursuant to the
agreements reached in each case.
Our audit committee supervises the Group’s internal audit function
and, specifcally, must: (i) propose the selection, appointment
and withdrawal of the ofcer responsible for internal audit; (ii)
ensure the independence and efectiveness of the internal audit
function; (iii) ensure that the internal audit function has the
physical and human resources needed for the performance of its
work and propose the budget for this service; (iv) receive periodic
information regarding the activities thereof and review the annual
activities report; (v) annually assess the function of the internal
audit unit and the performance of its leading ofcer, which shall be
communicated to the remuneration committee and to the board
to determine the variable remuneration thereof and (vi) verify
that senior management and the board take into account the
conclusions and recommendations set forth in its reports.
2018 Annual Report
Internal control over financial
reporting (ICFR)
At year-end 2018, internal audit employed 1,210 people, all
dedicated exclusively to this service. Of these, 266 were based at
the Corporate Centre and 944 in local units situated in the principal
geographic areas in which the Group is present, all of who work
exclusively at those locations.
Each year, Internal Audit prepares an audit plan based on a self-
assessment exercise of the risks to which the Group is exposed.
Internal Audit is solely responsible for executing the plan. From
the reviews carried out, audit recommendations may be prepared.
These are prioritised according to their relative importance and are
monitored continuously until their complete implementation.
It deals with any control defciencies that might afect the
reliability and accuracy of the fnancial statements. To this end,
it can call in the various areas of the Group involved to provide
the necessary information and clarifcations. The committee also
takes stock of the potential impact of any faws detected in the
fnancial information.
The audit committee, as part of its remit to oversee the fnancial
reporting process and the internal control systems, is responsible
for discussing with the external auditors any signifcant
weaknesses detected in the course of the audit.
At its meeting on 21 February 2019, the audit committee considered
and approved the audit plan for 2019, which was submitted to, and
approved by the board at the meeting held on 26 February 2019.
As part of its supervision work, our audit committee assesses the
results of the work of the Internal Audit division, and can take
action as necessary to correct any defciencies identifed in the
fnancial information.
In 2018, the efectiveness and functioning of the main elements of
the internal control system and controls on information systems in
the units analysed were assessed.
The main objectives of the internal audit reviews were:
In 2018, our audit committee was informed about the evaluation
and certifcation of the ICM corresponding to tax year 2017 and
drew conclusions on the efectiveness of the Group’s ICM, in
compliance with CNMV ICFR and SEC Sarbanes-Oxley Law (SOX)
and ICFR.
• Verify compliance with sections 302, 404, 406, 407 and 806 of
the Sarbanes-Oxley Act.
Internal audit has maintained the 2017 ICFR rating, identifying no
material defciencies in the control environment.
• Check the existing governance on the information related to the
internal control system over fnancial information.
8.6 External auditor report
• Review the functions performed by the internal control
departments and other departments, areas or divisions involved
in compliance with the SOX Act.
The external auditor has issued an independent reasonable
assurance report on the design and efectiveness of the ICFR and
the description on the ICFR that is provided in this section 8 of the
annual corporate governance report.
This report is included in the next pages.
• Check that the SOX support documentation is updated.
• Verify the efectiveness of the controls documented in the
process.
• Evaluate the rigour of the certifcations carried out by the
diferent units, especially their consistency with any observations
and recommendations set forward by Internal Audit, the auditors
of the statutory accounts or the supervisory bodies themselves
within the framework of their reviews.
• Verify proper compliance with the recommendations made in
previous audits.
In 2018, the audit committee and the board of directors were
kept informed of the work carried out by the Internal Audit
division on its annual plan and other issues related to the audit
function. The audit committee assessed whether the work of
internal audit was sufcient and the results of its activity and
monitored the recommendations made, particularly the most
important. It also reviewed the efects of the results of this work
on the fnancial information. Finally, the committee monitored
the corrective actions implemented, giving priority to the most
important of these.
Detection and management of defciencies
Our audit committee is ofcially tasked with overseeing the
fnancial information process and the internal control systems.
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9. Other corporate
governance information
As indicated in the introduction of this chapter 'Redesigned
corporate governance report', since 12 June 2018 (Circular 2/2018)
CNMV has allowed the annual corporate governance and directors’
remuneration reports mandatory for Spanish listed companies to
be drafted in a free format. We have opted to use a free format
for our 2018 corporate governance report and 2018 directors’
remuneration report.
for corporate governance and remuneration reports, prescribed
formats, a cross reference to where this information may be found
in the free format 2018 annual corporate governance report or
in the other chapters of this annual report. Please note however
that CNMV’s prescribed formats have changed slightly in 2018 and
therefore the content for each section varies from the previous
year.
However, CNMV requires any issuer opting to use a free format to
provide certain information in a format established by CNMV so
that it can be aggregated for statistical purposes. This information
is included (i) for corporate governance matters under section 9.2
'Statistical information on corporate governance required by CNMV'
and also covers the section 'comply with the recommendations
in the Spanish Corporate Governance Code for Listed Companies
or explain' and (ii) for remuneration matters under section 9.5
'Statistical information on remuneration required by CNMV'.
In addition, since some shareholders or other stakeholders may be
accustomed to the prescribed formats required by CNMV, section
9.1 'Reconciliation to CNMV’s corporate governance report model'
and section 9.4 'Reconciliation to CNMV’s remuneration report
model' include, for each section in the CNMV’s prescribed formats
Moreover, we have traditionally flled in the 'comply or explain'
section for all recommendations in the Spanish Corporate
Governance Code for Listed Companies to establish where we
comply and also the few instances where we do not comply or we
comply partially. Therefore, have included in section 9.3 'Cross-
reference table for comply or explain in corporate governance
recommendations' a chart with cross-references showing where
the information supporting each response can be found in this 2018
corporate governance chapter or elsewhere in this consolidated
directors´report.
9.1 Reconciliation to CNMV’s corporate governance report model
Section in CNMV model
Included in
statistical report
Comments
A. OWNERSHIP STRUCTURE
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
No
Yes
No
No
Yes
A.1
A.2
A.3
A.4
A.5
A.6
A.7
A.8
A.9
A.10
A.11
A.12
A.13
A.14
208
See section 2.1.
See section 2.3 where we explain there are no signifcant shareholders for its own acount.
See 'Tenure, committee membership and equity ownership' in section 4.2 and section 6.
See section 2.3 where we explain there are no signifcant shareholders for its own acount so this
section does not apply.
See section 2.3 where we explain there are no signifcant shareholders for its own acount so this
section does not apply.
See section 2.3 where we explain there are no signifcant shareholders for its own acount so this
section does not apply.
See section 2.4.
Not applicable.
See section 2.5.
See section 2.5.
See section 2.1 and statistical information.
See section 3.2.
See section 3.2.
See section 2.6.
2018 Annual Report
Other corporate governance
information
Section in CNMV model
Included in
statistical report
Comments
B. GENERAL SHAREHOLDERS’ MEETING
B.1
B.2
B.3
B.4
B.5
B.6
B.7
B.8
No
No
No
Yes
Yes
Yes
No
No
See 'Quorum and majorities required for passing resolutions at the GSM' in section 3.2.
See 'Quorum and majorities required for passing resolutions at the GSM' in section 3.2.
See 'Quorum and majorities required for passing resolutions at the GSM' and 'Rules governing
amendments to our Bylaws' in section 3.2.
None.
See section 3.4.
See 'Participation of shareholders at the GSM' in section 3.2.
See 'Quorum and majorities required for passing resolutions at the GSM' in section 3.2.
See 'Corporate website' in section 3.2.
C. MANAGEMENT STRUCTURE
C.1 Board of directors
C.1.1
C.1.2
C.1.3
C.1.4
C.1.5
C.1.6
C.1.7
C.1.8
C.1.9
C.1.10
C.1.11
C.1.12
C.1.13
C.1.14
C.1.15
C.1.16
C.1.17
C.1.18
C.1.19
C.1.20
C.1.21
C.1.22
C.1.23
C.1.24
C.1.25
C.1.26
C.1.27
C.1.28
C.1.29
C.1.30
C.1.31
C.1.32
C.1.33
Yes
Yes
Yes
Yes
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
Yes
No
Yes
No
Yes
Yes
Yes
No
Yes
No
Yes
Yes
Yes
See 'Size' in section 4.2.
See 'Tenure, committee membership and equity ownership' in section 4.2.
See section 2.4, 4.1 and 'Executive directors', 'Independent non-executive directors', 'Other external
directors' and 'Composition by type of director' in section 4.2.
See section 1.4 and'Diversity' in section 4.2.
See 'Diversity' in section 4.2 and section 4.5 and regarding top excecutive positions, see
'Responsible banking' chapter.
See 'Diversity' in section 4.2 and section 4.5.
See section 1.4 and 'Diversity' in section 4.2.
Not applicable.
See section 'Group executive chairman and chief executive
ofcer' and 'Executive committee' in section 4.3.
See section 4.1.
See section 4.1.
See 'Board and committees attendance' in section 4.3.
See section 6 and, additionally, note 5 c) to our 'consolidated financial statements'.
See section 5 and 6.
See 'Rules and regulations of the board' in section 4.3.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Self-assessment of the board' in section 4.3 and section 4.5.
See 'Self-assessment of the board' in section 4.3.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Proceedings of the board' in section 4.3.
Not applicable.
See 'Diversity' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See section 4.3 'Board functioning and efectiveness'.
See section 4.3 'Board functioning and efectiveness' and sections 4.4, 4.5, 4.6 and 4.7.
See 'Board and committees attendance' in section 4.3.
See statistical information.
See 'Duties and activities in 2018' in section 4.4.
See 'Secretary of the board' in section 4.3.
See 3.1; 'Duties and activities in 2018' in section 4.4; and section 9.6.
See 'External auditor' in section 4.4.
See 'Duties and activities in 2018' in section 4.4.
Not applicable.
209
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Section in CNMV model
Included in
statistical report
Comments
C.1.34
C.1.35
C.1.36
C.1.37
C.1.38
C.1.39
C.2 Board committees
C.2.1
C.2.2
C.2.3
Yes
Yes
No
No
No
Yes
Yes
Yes
No
See statistical information.
See 'Proceedings of the board' in section 4.3.
See 'Election, refreshment and succession of directors' in section 4.2.
Not applicable.
Not applicable.
See section 6.4. and 6.7.
See 'Board committees structure'; 'Executive committee'; 'Responsible
banking, sustainability and culture committee' and 'Innovation and technology
committee' in section 4.3 and sections 4.4, 4.5, 4.6 and 4.7.
See statistical information.
See 'Rules and regulations of the board' in section 4.3 and sections 4.4, 4.5, 4.6 and 4.7.
D. RELATED PARTY AND INTRAGROUP TRANSACTIONS
D.1
D.2
D.3
D.4
D.5
D.6
D.7
No
Yes
Yes
Yes
Yes
No
Yes
See 'Related-party transactions' in section 4.8.
Not applicable.
Not applicable. See 'Related-party transactions' in section 4.8.
See statistical information.
Not applicable. See section 4.8 ‘Related-party transactions and conficts of interest’ .
See ‘Related-party transactions and conficts of interest' in section 4.8.
Not applicable.
E. CONTROL AND RISK MANAGEMENT SYSTEMS
E.1
E.2
E.3
E.4
E.5
E.6
F. ICFRS
F.1
F.2
F.3
F.4
F.5
F.6
F7
No
No
No
No
No
No
No
No
No
No
No
No
No
See chapter 'Risk management' of this consolidated directors´ report, in
particular section 1 'Risk management and control model' and sections 'Risk
culture' and 'Tax strategy' in the Responsible banking chapter.
See chapter 'Risk management' of this consolidated directors´ report, in particular section 1.1 'Risk
governance' and sections 'Risk culture' and 'Tax strategy' in the Responsible banking chapter.
See chapter 'Risk management' of this consolidated directors´ report, in particular
section 2 'Risk map and risk profle',and 'Responsible banking' chapter and for our capital
needs, see also section 'Economic capital' in Economic and fnancial review chapter.
See chapter 'Risk management' of this consolidated directors´ report, in
particular section 1.3 'Management processes and tools' and sections 'Risk
culture' and 'Tax strategy' in the Responsible banking chapter.
See chapter 'Risk management' of this consolidated directors´ report, in particular
section 2 'Risk map and risk profle', and sections 3 to 9 of such chapter for each
risk. Additionally, see note 25e.i to our consolidated fnancial statements.
See chapter 'Risk management' of this consolidated directors´ report, in particular
section 2 'Risk map and risk profle', and sections 3 to 9 of such chapter for each risk.
See section 8.1 'Control environment'.
See section 8.2 'Risk assessment in fnancial reporting'.
See section 8.3 'Control activities'.
See section 8.4 'Information and communication'.
See section 8.5 'Monitoring'.
Not applicable.
See section 8.6 'External auditor report'.
G. DEGREE OF COMPLIANCE WITH CORPORATE GOVERNANCE RECOMMENDATIONS
G
Yes
See 'Degree of compliance with the corporate governance
recommendations' in section 9.2 and section 9.3.
210
2018 Annual Report
Other corporate governance
information
9.2 Statistical information on corporate
governance required by CNMV
Unless otherwise indicated all data as of 31 December 2018.
A. OWNERSHIP STRUCTURE
A.1 Complete the following table on the company’s share capital:
Date of last
modifcation
Share capital
(euros)
Number of
shares
Number of
voting rights
06/11/2018
8,118,286,971
16,236,573,942
16,236,573,942
Indicate whether diferent types of shares
exist with diferent associated rights:
Yes
No
A.2 List the direct and indirect holders of signifcant
ownership interests at year-end, excluding directors:
Name or corporate name of shareholder
BlackRock Inc.
Direct
0
Indirect
4.50%
Direct
Indirect voting rights
0
1.10%
5.60%
% of voting rights
attributed to shares
% of voting rights through
fnancial instruments
Total % of
Details of the indirect shares:
Name or corporate name of
the indirect shareholder
Name or corporate name of
the direct shareholder
% of voting rights
attributed to shares
% of voting rights through
fnancial instruments
Total % of
voting rights
BlackRock Inc.
Subsidiaries of BlackRock Inc.
4.50%
1.10%
5.60%
A.3 Complete the following tables on company directors
holding voting rights through company shares:
Name or corporate name of director
Direct
Indirect
Direct
Indirect
% of voting rights
attributed to shares
% of voting rights
through fnancial
instruments
% of voting rights that
may be transferred
through fnancial
instruments
Direct
Indirect
Total %
of voting
rights
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
Ms Homaira Akbari
Mr Ignacio Benjumea Cabeza de Vaca
Mr Javier Botín-Sanz de Sautuola y O’Shea
Mr Álvaro Cardoso de Souza
Ms Sol Daurella Comadrán
Mr Guillermo de la Dehesa Romero
Mr Carlos Fernández González
Ms Esther Giménez-Salinas i Colomer
Mr Ramiro Mato García Ansorena
Ms Belén Romana García
Mr Juan Miguel Villar Mir
0.00
0.01
0.00
0.01
0.00
0.02
0.03
0.00
0.00
0.00
0.11
0.00
0.00
0.00
0.00
0.13
0.00
0.00
0.00
0.00
0.00
0.46
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.13
0.01
0.00
0.01
0.00
0.02
0.49
0.00
0.00
0.00
0.11
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
% total voting rights held by the board of directors
0.77%
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
211
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A.7 Indicate whether the company has been notifed of any shareholders’ agreements pursuant to Articles 530 and 531 of the
Spanish Companies Act (LSC). Provide a brief description and list the shareholders bound by the agreement, as applicable:
Yes
No
Parties to the shareholders’ agreement
capital afected Brief description of agreement
% of share
Expiry date, if
applicable
Mr Francisco Javier Botín-Sanz de
Sautuola y O’Shea (directly and through
Agropecuaria El Castaño, S.L.U.)
Mr Emilio Botín-Sanz de Sautuola y O’Shea
(directly and through Puente San Miguel, S.L.U.)
Ms Ana Botín-Sanz de Sautuola y O’Shea
(directly and through CRONJE, S.L.U.)
Ms Carolina Botín-Sanz de Sautuola y
O’Shea (through Nueva Azil, S.L.)
Ms Paloma Botín-Sanz de Sautuola y O’Shea
(directly and through Bright Sky 2012, S.L.)
Ms Carmen Botín-Sanz de Sautuola y O’Shea
Latimer Inversiones, S.L.
0.49%
Transfer restrictions and syndication of
voting rights as described under section
2.4 'Shareholders’ agreements' of the
Corporate governance chapter in the
consolidated directors' report.
01/01/2056
Indicate whether the company is aware of the existence of any concerted actions among its shareholders. Give a brief description as
applicable:
Yes
No
Participants in the concerted action
capital afected Brief description of concerted action
% of share
Expiry date, if
applicable
Mr Francisco Javier Botín-Sanz de
Sautuola y O’Shea (directly and through
Agropecuaria El Castaño, S.L.U.)
Mr Emilio Botín-Sanz de Sautuola y O’Shea
(directly and through Puente San Miguel, S.L.U.)
Ms Ana Botín-Sanz de Sautuola y O’Shea
(directly and through CRONJE, S.L.U.)
Ms Carolina Botín-Sanz de Sautuola y
O’Shea (through Nueva Azil, S.L.)
Ms Paloma Botín-Sanz de Sautuola y O’Shea
(directly and through Bright Sky 2012, S.L.)
Ms Carmen Botín-Sanz de Sautuola y O’Shea
Latimer Inversiones, S.L.
0.49%
Transfer restrictions and syndication of voting
rights as described under section 2.4 'Shareholders’
agreements' of the Corporate governance
chapter in the consolidated directors' report.
01/01/2056
A.8 Indicate whether any individual or entity currently
exercises control or could exercise control over the
company in accordance with article 5 of the Spanish
Securities Market Act. If so, identify them:
Yes
No
A.9 Complete the following tables on
the company’s treasury shares:
(*)Through:
Name or corporate name
of the direct shareholder
Pereda Gestión, S.A.
Banco Santander Río, S.A.
Total:
Number of shares held directly
11,400,000
849,652
12,249,652
At year end:
A.11 Estimated free foat:
Number of shares
held directly
Number of shares
held indirectly*
% of total
share capital
Estimated free foat
%
93.59%
0
12,249,652
0.07%
A.14 Indicate whether the company has issued securities
not traded in a regulated market of the European Union.
Yes
No
212
2018 Annual Report
Other corporate governance
information
B. GENERAL SHAREHOLDERS’ MEETING
B.4 Indicate the attendance fgures for the general
shareholders’ meetings held during the fscal year to which
this report relates and in the two preceding fscal years:
Date
of General Meeting
% attending
in person
18/03/2016
of which free foat:
0 .86%
0.19%
Date
of General Meeting
% attending
in person
07/04/2017
of which free foat:
0.90%
0.26%
Date of General Meeting
23/03/2018
of which free foat:
% attending
in person
0.82%
0.18%
Attendance data
% by proxy
% remote voting
Electronic means
43.46%
43.46%
0.27%
0.27%
Other
13.04%
13.04%
Attendance data
% by proxy
% remote voting
Electronic means
Other
47.48%
47.48%
0.37%
0.37%
15.27%
15.27%
Attendance data
% by proxy
% remote voting
Electronic means
47.61%
47.61%
0.38%
0.38%
Other
15.74%
15.74%
B.5 Indicate whether in the general shareholders’ meetings
held during the fscal year to which this report relate there
has been any matter submitted to them which, for any
reason, has not been approved by the shareholders.
Yes
No
B.6 Indicate whether the bylaws require a minimum
holding of shares to attend to or to vote remotely
in the general shareholders’ meeting:
Yes
No
C. MANAGEMENT STRUCTURE
C.1 Board of directors
C.1.1 Maximum and minimum number of
directors provided for in the Bylaws:
Maximum number of directors
Minimum number of directors
Number of directors fxed by GSM
17
12
15
Total
57.63%
56.96%
Total
64.02%
63.38%
Total
64.55%
63.91%
213
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
C.1.2 Complete the following table with the directors’ details:
Representative
Category of
director
Position in
the board
Date of frst
appointment
Date of last
appointment
Name or corporate
name of director
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce Carnegie-
Brown
Mr Rodrigo
Echenique Gordillo
Ms Homaira Akbari
Mr Ignacio Benjumea
Cabeza de Vaca
N/A
N/A
N/A
N/A
N/A
N/A
Mr Javier Botín-Sanz
de Sautuola y O’Shea
N/A
Mr Álvaro Cardoso
de Souza
Ms Sol Daurella
Comadrán
Mr Guillermo de la
Dehesa Romero
Mr Carlos Fernández
González
Ms Esther Giménez-
Salinas i Colomer
Mr Ramiro Mato
García-Ansorena
Ms Belén Romana
García
Mr Juan Miguel
Villar Mir
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Executive
Chairman
04/02/1989
07/04/2017
Executive
Non-executive
independent
Executive
Non-executive
independent
Other external
(neither
independent nor
proprietary)
Other external
(neither
independent
nor proprietary
Non-executive
independent
Non-executive
independent
Other external
(neither
independent nor
proprietary)
Non-executive
independent
Non-executive
independent
Non-executive
independent
Non-executive
independent
Non-executive
independent
Chief
executive
ofcer
Lead
independent
director
Vice chairman
25/11/2014
07/04/2017
25/11/2014
18/03/2016
07/10/1988
07/04/2017
Director
27/09/2016
23/03/2018
Director
30/06/2015
23/03/2018
Director
25/07/2004
18/03/2016
Director
23/03/2018
23/03/2018
Director
25/11/2014
23/03/2018
Vice chairman
24/06/2002
23/03/2018
Director
25/11/2014
23/03/2018
Director
30/03/2012
07/04/2017
Director
28/11/2017
23/03/2018
Director
22/12/2015
07/04/2018
Director
07/05/2013
27/03/2015
Election procedure
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Vote in general
Shareholders´meeting
Vote in general
shareholders’ meeting
Vote in general
shareholders’ meeting
Total number of directors
15
Indicate any directors who have left during the fscal year
to which this report relates, regardless of the reason
(whether for resignation, removal or any other):
Name or corporate
name of director
Category of
director at the
time he/her left
Date of last
appointment
Date of leave
Indicate whether he or she has left
Board committees he
or she was a member of before the expiry of his or her term
N/A
N/A
N/A
N/A
N/A
N/A
214
2018 Annual Report Other corporate governance
information
C.1.3 Complete the following tables for the
directors in each relevant category:
Executive directors
Name or corporate
name of director
Position held in
the company
Profle
See section 4.1
'Our directors'
in the Corporate
governance chapter
in the consolidated
directors' report.
See section 4.1
'Our directors'
in the Corporate
governance chapter
in the consolidated
directors' report.
See section 4.1
'Our directors'
in the Corporate
governance chapter
in the consolidated
directors' report.
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Group executive
chairman
Mr José Antonio
Álvarez Álvarez
CEO
Mr Rodrigo Echenique
Gordillo
Vice chairman
Total number of executive directors
% of the Board
Proprietary non-executive directors
Name or corporate
name of director
Name or corporate
name of signifcant
shareholder represented
or having proposed his
or her appointment
N/A
N/A
Profle
N/A
Total number of proprietary non-executive directors
% of the Board
3
20%
0
0%
Independent non-executive directors
Name or corporate
name of director
Profle
Mr Bruce
Carnegie-Brown
Ms Homaira Akbari
Mr Álvaro Cardoso
de Souza
Ms Sol Daurella
Comadrán
Mr Carlos Fernández
González
Ms Esther Giménez-
Salinas i Colomer
Mr Ramiro Mato
García-Ansorena
Ms Belén Romana
García
Mr Juan Miguel
Villar Mir
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
See section 4.1 'Our directors' in the
Corporate governance chapter in the
consolidated directors' report.
Total number of independent directors
% of the Board
9
60%
Identify any independent director who receives from the company or its group any amount or perk other than his or her director
remuneration or who maintain or have maintained during the fscal year covered in this report a business relationship with the company or
any group company, either in his or her own name or as a signifcant shareholder, director or senior manager of an entity which maintains
or has maintained such a business relationship.
In such a case, a reasoned statement from the Board on why the relevant director(s) is able to carry on their duties as independent director
(s) shall be included.
Name or corporate
name of director
Description of the relationship
Reasoned statement
Sol Daurella Comadrán
Financing
Juan Miguel Villar Mir
Financing
When assessing the annual verifcation of independent directors the
appointments committee has verifed whether there are signifcant business
relationships between Santander Group and the companies in which
these directors are or have previously been signifcant shareholders or
directors, with regard to the fnancing granted by the Santander Group to
these companies. In all cases, the committee concluded that the existing
relations did not have the condition of signifcant among other reasons,
as the business relationships: (i) do not generate a situation of economic
dependence in the relevant companies in view of the substitutability of this
fnancing for other sources of funding, either bank-based fnancing or other,
(ii) are aligned with the market share of Santander Group within the relevant
market, and (iii) have not reached certain comparable materiality thresholds
used in other jurisdictions: e.g. NYSE, Nasdaq and Canada’s Bank Act.
215
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Other non-executive directors
Identify all other non-executive directors and explain why these cannot be considered proprietary or
independent directors and detail their relationships with the company, its executives or shareholders:
Name or corporate
name of director
Mr Guillermo de la
Dehesa Romero
Mr Ignacio Benjumea
Cabeza de Vaca
Reasons for not qualifying
under other category
He has held the position of
director for more than 12 years.
Entity, executive or
shareholder with whom it
maintains a relationship
Banco Santander, S.A.
As the required period has
not lapsed since he ceased
his professional relationship
with the Bank (other tan
that as a director of the Bank
and of Santander Spain).
Banco Santander, S.A.
Mr Javier Botín-Sanz de
Sautuola y O’Shea
He has held the position of
director for more than 12 years.
Banco Santander, S.A.
Profle
See section 4.1 'Our directors'
in the Corporate governance
chapter in the consolidated
directors' report.
See section 4.1 'Our directors'
in the Corporate governance
chapter in the consolidated
directors' report.
See section 4.1 'Our directors'
in the Corporate governance
chapter in the consolidated
directors' report.
Total number of other non-executive directors
% of the Board
3
20%
List any changes in the category of a director which have occurred during the period covered in this report.
Name or corporate name of director
Date of change
Previous category
Current category
Mr Javier Botín-Sanz de Sautuola y O’Shea
13/02/ 2018
Proprietary director
Other external director
C.1.4 Complete the following table on the number of female directors at the end of each the past four years and their category:
Number of female directors
% of total directors of each category
FY 2018
FY 2017
FY 2016
FY 2015
FY 2018
FY 2017
FY 2016
Executive
Proprietary
Independent
Other external
Total:
1
0
4
0
5
1
0
4
0
5
1
0
5
0
6
1
0
4
0
5
33.33%
0.00%
33.33%
0.00%
44.44%
50.00%
0.00%
33.33%
0.00%
35.71%
25.00%
0.00%
62.5%
0.00%
40.00%
FY 2015
25.00%
0.00%
50.00%
0.00%
33.33%
C.1.11 Identify those directors (or individuals representing the director in the case of directors who are body corporates)
who hold a directorship of other non-group companies that are listed on ofcial securities markets (or who are the
individuals representing a body corporate holding such a directorship), if communicated to the company:
Name or corporate name of director
Name of the listed company
Ms Ana Botín-Sanz de Sautuola y O’Shea
The Coca-Cola Company
Mr Bruce Carnegie-Brown
Moneysupermarket.com Group plc.
Mr Rodrigo Echenique Gordillo
Industria de Diseño Textil, S.A. (Inditex)
Position
Director
Chairman
Director
Mr Guillermo de la Dehesa Romero
Amadeus IT Group, S.A.
Vice Chairman
Ms Homaira Akbari
Veolia Environnment, S.A.
Landstar System, Inc.
Gemalto N.V.
Ms Sol Daurella Comadrán
Coca-Cola European Partners plc.
Mr Carlos Fernández González
Inmobiliaria Colonial, S.A.
AmRest Holdings SE
Ms Belén Romana García
Aviva plc.
Director
Director
Director
Chairman
Director
Director
Director
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2018 Annual Report Other corporate governance
information
C.1.12 Indicate and, if applicable explain, if the company has
established rules on the maximum number of directorships
its directors may hold and, if so, where they are regulated:
Yes
No
This maximum is established, as provided for in article 30 of
the Rules and regulations of the board, in article 26 of Spanish
Law 10/2014 on the ordering, supervision and solvency of
credit institutions. This rule is further developed by articles
29 and subsequent of Royal Decree 84/2015 and by Rules
30 and subsequent of Bank of Spain Circular 2/2016.
Name or corporate name
Position (s)
Mr Dirk Marzluf
Mr Víctor Matarranz Sanz de Madrid
Mr José Luis de Mora Gil-Gallardo
Mr José María Nus Badía
Mr Jaime Pérez Renovales
Group head of Technology
and Operations
Global head of Wealth
Management
Group head of Financial
Planning and Corporate
Development
Risk adviser to Group
executive chairman
Group head of General
Secretariat and
Human Resources
C.1.13 Identify the following items of the total remuneration
of the board of directors:
Ms Magda Salarich Fernández
de Valderrama
Head of Santander
Consumer Finance
Board remuneration accrued in the
fscal year (EUR thousand)
Amount of accumulated pension rights
of current directors (EUR thousand)
Amount of accumulated pension rights
of former directors (EUR thousand)
28,910
76,337
70,169
Ms Jennifer Scardino
Head of Global
communications.
Group deputy head of
Communications, Corporate
Marketing and Research
Total remuneration accrued by the
senior management (EUR thousand)
62,478
C.1.14 Identify the members of the company’s senior
management who are non executive directors and indicate
total remuneration they have accrued during the fscal year:
Name or corporate name
Position (s)
C.1.15 Indicate whether any changes have been made to
the board Rules and regulations during the fscal year:
Yes
No
Mr Rami Aboukhair Hurtado
Mr Enrique Álvarez Labiano
Country head -
Santander Spain
Group head of Chairman’s
Ofce and Strategy.
Global head of Insurance,
Network Banking and
Responsible Banking
Ms Lindsey Tyler Argalas
Head of Santander Digital
Mr Juan Manuel Cendoya
Méndez de Vigo
Mr José Fransisco Doncel Razola
Group head of
Communications, Corporate
Marketing and Research
Group head of Accounting
and Financial Control
Mr Keiran Paul Foad
Group Chief Risk Ofcer
Mr José Antonio García Cantera
Group Chief Financial Ofcer
Mr Juan Guitard Marín
Group Chief Audit Executive
Mr José María Linares Perou
Ms Mónica López-Monís Gallego
Global head of Corporate
& Investment Banking
Group Chief
Compliance Ofcer
Mr Javier Maldonado Trinchant
Group head of Costs
C.1.21 Indicate whether there are any specifc
requirements, other than those applying to directors
generally, to be appointed chairman.
Yes
No
C.1.23 Indicate whether the bylaws or the board
Rules and regulations set a limited term of ofce (or
other requirements which are stricter than those
provided for in the law) for independent directors
diferent than the one provided for in the law.
Yes
No
C.1.25 Indicate the number of board meetings held during
the fscal year and how many times the board has met
without the chairman’s attendance. Attendance will also
include proxies appointed with specifc instructions.
Number of board meetings
Number of board meetings held without
the chairman’s attendance
Indicate the number of meetings held by the lead
independent director with the rest of directors without the
attendance or representation of any executive director.
Number of meetings
12
0
3
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Indicate the number of meetings of the various
board committees held during the fscal year.
Number of meetings of the audit committee
Number of meetings of the responsible banking,
sustainability and culture committee
Number of meetings of the innovation
and technology committee
Number of meetings of the
appointments committee
Number of meetings of the
remuneration committee
Number of meetings of the risk supervision,
regulation and compliance committee
Number of meetings of the executive committee
13
2
3
13
11
13
45
C.1.26 Indicate the number of board meetings held during the
fscal year and data about the attendance of the directors.
C.1.31 Indicate whether the company has changed its
external audit frm during the fscal year. If so, identify
the incoming audit frm and the outgoing audit frm:
Yes
No
C.1.32 Indicate whether the audit frm performs non-audit work
for the company and/or its group. If so, state the amount of
fees paid for such work and the percentage they represent
of all fees invoiced to the company and/or its group.
Yes
No
Group
Company companies
Total
Amount of non-audit
work (EUR thousand)
Amount of non-audit work as
a % of amount of audit work
585
3,665
4,250
0.6%
3.6%
4.2%
Number of meetings with at least
80% of directors being present
% of votes cast by members present
over total votes in the fscal year
Number of board meetings with all
directors being present (or represented
having given specifc instructions)
% of votes cast by members present at
the meeting or represented with specifc
instructions over total votes in the fscal year
C.1.33 Indicate whether the audit report on the previous
year’s fnancial statements is qualifed or includes
reservations. Indicate the reasons given by the chairman
of the audit committee to the shareholders in the
general shareholders meeting to explain the content
and scope of those reservations or qualifcations.
Yes
No
12
98.27%
10
100%
C.1.27 Indicate whether the company´s consolidated and
individual fnancial statements are certifed before they
are submitted to the board for their formulation.
Yes
No
Identify, where applicable, the person(s) who certifed
the company’s individual and consolidated fnancial
statements prior to their formulation by the board:
Name
Position
Mr José Francisco Doncel Razola Group chief accounting ofcer
C.1.29 Is the secretary of the board also a director?
Yes
No
If the secretary of the board is not a
director fll in the following table:
C.1.34 Indicate the number of consecutive years during which
the current audit frm has been auditing the fnancial statements
of the company and/or its group. Likewise, indicate for how
many years the current frm has been auditing the fnancial
statements as a percentage of the total number of years
over which the fnancial statements have been audited:
Individual
fnancial
statements
Consolidated
fnancial
statements
Number of consecutive years
3
3
Company
Group
Number of years audited by current
audit frm/Number of years the
company’s or its Group fnancial
statements have been audited (%)
8.11%
8.33%
C.1.35 Indicate and if applicable explain whether there are
procedures for directors to receive the information they need in
sufcient time to prepare for meetings of the governing bodies:
Name or corporate name
of the secretary
Representative
Mr Jaime Pérez Renovales
N/A
Yes
No
Procedures
Our Rules and regulations of the board stipulate that members
of the board and committees are provided with the relevant
documentation for each meeting sufciently in advance of the
meeting date, thereby ensuring the confdentiality of the information.
218
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C.1.39 Identify, individually in the case of directors, and
in the aggregate in all other cases, and provide detailed
information on, agreements between the company and
its directors, executives and employees that provide
indemnifcation, guarantee or golder parachute clause in
the event of resignation, unfair dismissal or termination as
a result of a takeover bid or other type of transaction.
Number of benefciaries
17
Type of benefciary
Description of the agreement:
Employees
The Bank has no commitments to
provide severance pay to directors.
A number of employees have a right
to compensation equivalent to one
to two years of their basic salary in
the event of their contracts being
terminated by the Bank in the frst two
years of their contract in the event
of dismissal on grounds other than
their own will, retirement, disability
or serious dereliction of duties.
In addition, for the purposes of
legal compensation, in the event of
redundancy a number of employees
are entitled to recognition of length
of service including services provided
prior to being contracted by the Bank;
this would entitle them to higher
compensation than they would be
due based on their actual length
of service with the Bank itself.
Indicate whether these agreements must be reported to and/
or authorised by the governing bodies of the company or its
group beyond the procedures provided for in applicable law.
If applicable, specify the process applied, the situations in
which they apply, and the bodies responsible for approving or
communicating those agreements:
Board of
directors
General Shareholders’
Meeting
Body authorising
clauses
Is the general shareholders’ meeting
informed of such clauses?
YES
NO
C.2 Board committees
C.2.1 Give details of all the board committees,
their members and the proportion of executive,
independent and other external directors.
Executive committee
Name
Position
Type
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Ignacio Benjumea
Cabeza de Vaca
Chairman Executive director
Member
Executive director
Member Other external director
(neither proprietary
nor independent)
Independent non-
executive director
Mr Bruce Carnegie-Brown Member
Mr Guillermo de la
Dehesa Romero
Mr Rodrigo Echenique
Gordillo
Member Other external director
(neither proprietary
nor independent)
Member
Executive director
Mr Ramiro Mato
García-Ansorena
Member
Independent non-
executive director
Ms Belén Romana García
Member
Indenpendent non-
executive director
% of executive directors
% of proprietary directors
% of independent directors
% of other non-executive directors
37.50%
0%
37.50%
25%
Audit committee
Name
Position
Type
Ms Belén Romana García
Chairman
Ms Homaira Akbari
Member
Mr Carlos Fernández
González
Mr Ramiro Mato
García-Ansorena
Member
Member
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
% of executive directors
% of proprietary directors
% of independent directors
% of other non-executive directors
0%
0%
100%
0%
Identify those directors in the audit committee who have
been appointed on the basis of their knowledge and
experience in accounting, audit or both and indicate the
date of appointment of the committee chairman.
Name of directors with
accounting or audit experience
Date of appointment of
the committee Chairman
for that position
Ms Belén Romana García
Ms Homaira Akbari
Mr Carlos Fernández González
Mr Ramiro Mato García-Ansorena
26 April 2016
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Appointments committee
Responsible banking, sustainability and culture committee
Name
Position
Type
Name
Position
Type
Mr Bruce Carnegie-Brown
Chairman
Independent non-
executive director
Mr Ramiro Mato
García-Ansorena
Chairman
Independent non-
executive director
Mr Guillermo de la
Dehesa Romero
Member
Other external director
(neither proprietary
nor independent)
Ms Sol Daurella Comadrán Member
Mr Carlos Fernández
González
Member
Independent non-
executive director
Independent non-
executive director
% of executive directors
% of proprietary directors
% of independent directors
% of other external directors
0%
0%
75.00%
25.00%
Remuneration committee
Name
Position
Type
Mr Bruce Carnegie-Brown
Chairman
Mr Ignacio Benjumea
Cabeza de Vaca
Mr Guillermo de la
Dehesa Romero
Member
Member
Ms Sol Daurella Comadrán Member
Mr Carlos Fernández
González
Member
Independent non-
executive director
Other external director
(neither proprietary
nor independent)
Other external director
(neither proprietary
nor independent)
Independent non-
executive director
Independent non-
executive director
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Member
Executive director
Ms Homaira Akbari
Member
Mr Ignacio Benjumea
Cabeza de Vaca
Member
Mr Álvaro Cardoso de Souza Member
Ms Sol Daurella Comadrán Member
Ms Esther Giménez-
Salinas i Colomer
Member
Ms Belén Romana García
Member
Independent non-
executive director
Other external director
(neither proprietary
nor independent)
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
% of executive directors
% of proprietary directors
% of independent directors
% of other external directors
12.50%
0%
75%
12.50%
Innovation and technology committee
Name
Position
Type
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Chairman
Executive director
Mr José Antonio Álvarez Álvarez Member
Executive director
% of executive directors
% of proprietary directors
% of independent directors
% of other external directors
0%
0%
60.00%
40.00%
Mr Bruce Carnegie-Brown
Member
Ms Homaira Akbari
Member
Mr Ignacio Benjumea
Cabeza de Vaca
Member
Risk supervision, regulation and compliance committee
Name
Position
Type
Independent non-
executive director
Independent non-
executive director
Other external
director (neither
proprietary nor
independent)
Other external
director (neither
proprietary nor
independent)
Independent non-
executive director
28.57%
0%
42.86%
28.57%
Mr Guillermo de la
Dehesa Romero
Member
Ms Belén Romana García
Member
% of executive directors
% of proprietary directors
% of independent directors
% of other external directors
Chairman
Member
Independent non-
executive director
Independent non-
executive director
Other external director
(neither proprietary
nor independent)
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
0%
0%
83.33%
16.67%
Mr Álvaro Cardoso
de Souza
Mr Bruce
Carnegie-Brown
Mr Ignacio Benjumea
Cabeza de Vaca
Ms Esther Giménez-
Salinas i Colomer
Mr Ramiro Mato
García-Ansorena
Member
Member
Member
Ms Belén Romana García
Member
% of executive directors
% of proprietary directors
% of independent directors
% of other external directors
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2018 Annual Report
Other corporate governance
information
C.2.2 Complete the following table on the
number of female directors on the various board
committees over the past four years.
Number of female directors
FY 2018
FY 2017
FY 2016
FY 2015
Number
%
Number
%
Number
%
Number
%
Audit committee
Responsible banking, sustainability
and culture committee
Innovation and technology
committee
Appointments committee
Remuneration committee
Risk supervision, regulation
and compliance committee
Executive committee
2
5
3
1
1
2
2
50%
62.5%
42.85%
25%
20%
33.3%
25%
2
-
4
1
1
2
1
50.0%
-
44.4%
20.0%
20.0%
33.3%
14.29%
2
-
3
1
2
2
2
50.0%
-
33.33%
20.0%
40.0%
28.57%
25.0%
1
-
2
1
2
1
2
25.0%
-
25.0%
20.0%
33.33%
14.29%
25.0%
D. RELATED-PARTY AND INTRAGROUP TRANSACTIONS
D.2 List any signifcant transactions, by virtue of their amount
or relevance, between the company or its group of companies
and the company’s signifcant shareholders:
D.3 List any signifcant transactions, by virtue of their
amount or relevance, between the company or its group
of companies and the company’s directors or executives:
Not applicable.
Not applicable.
D.4 List any signifcant transactions undertaken by the company with other companies in its group
that are not eliminated in the process of drawing up the consolidated fnancial statements and whose
subject matter and terms set them apart from the company’s ordinary trading activities.
In any case, list any intragroup transactions carried out with entities in countries or territories considered to be tax havens.
Corporate name of
the group company
Banco Santander
(Brasil) S.A.
(Cayman Islands Branch)
Brief description of the transaction
This chart shows the transactions and the results obtained by the Bank (Banco Santander, S.A.) at 31
December 2018 with Group entities resident in countries or territories that were considered tax havens
Pursuant to Spanish legislation,at such date
These results, and the balances indicated below, were eliminated in the consolidation process. See note
53 to the 2018 Consolidated fnancial statements for more information on of-shore entities.
The amount shown on the right corresponds to positive results relating to contracting of derivatives
(includes branches in New York and London of Banco Santander, S.A.)
The referred derivatives had a net positive market value of EUR 96 million in the Company and covered
the following transactions:
• 104 Non Delivery Forwards.
• 150 Swaps.
• 134 Cross Currency Swaps.
• 5 Options.
• 62 Forex.
The amount shown on the right corresponds to negative results relating to
deposits with the New York branch of Banco Santander, S.A. (liability). These
deposits had a principal of EUR 1,484 million at 31 December 2018.
The amount shown on the right corresponds to positive results relating to
deposits with the London branch of Banco Santander, S.A. (asset). These
deposits had a principal of EUR 119 million at 31 December 2018.
The amount shown on the right corresponds to positive results relating to fxed income
securities – subordinated instruments (asset). This relates to the iinvestment in November 2018
in two subordinated instruments (Tier I Subordinated Perpetual Notes and Tier II Subordinated
Notes due 2028) with an amortised cost of EUR 2,205 million as at 31 December 2018.
The amount shown on the right corresponds to positive results relating to interests and commissions
concerning correspondent accounts (includes Hong Kong branch of Banco Santander, S.A.) (liability).
This relates to correspondent accounts with a credit balance of EUR 21 million at 31 December 2018.
Amount
(EUR
thousand)
49,652
32,155
6,605
21,432
4
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D.5 List any signifcant transactions, by virtue of their amount
or relevance, between the company or its group and other
related parties, not reported in the previous sections.
Not applicable.
D.7 Is more than one group company listed in Spain?
Yes
No
G. DEGREE OF COMPLIANCE WITH THE CORPORATE
GOVERNANCE RECOMMENDATIONS
Indicate the degree of the company’s compliance
with the recommendations of the good
governance code for listed companies.
Should the company not comply with any of the recommendations
or comply only in part, include a detailed explanation of the
reasons so that shareholders, investors and the market in
general have enough information to assess the company’s
behaviour. General explanations are not acceptable.
1. The bylaws of listed companies should not place an upper
limit on the votes that can be cast by a single shareholder,
or impose other obstacles to the takeover of the company
by means of share purchases on the market.
Complies
Explain
2. When a parent company and a subsidiary are both listed, the two
provide detailed disclosure on:
a) The activity they engage in and any business dealings between
them, as well as between the subsidiary and other group
companies.
b) The mechanisms in place to resolve possible conficts of interest.
Complies
Partially complies
Explain
Not applicable
3. During the AGM the chairman of the board should
verbally inform shareholders in sufcient detail of the most
relevant aspects of the company’s corporate governance,
supplementing the written information circulated in the
annual corporate governance report. In particular:
a) Changes taking place since the previous annual general meeting.
b) The specifc reasons for the company not following
a given Good Governance Code recommendation, and
any alternative procedures followed in its stead.
Complies
Partially complies
Explain
4. The company should draw up and implement a policy
of communication and contacts with shareholders,
institutional investors and proxy advisers that complies in
full with market abuse regulations and accords equitable
treatment to shareholders in the same position.
This policy should be disclosed on the company’s website,
complete with details of how it has been put into
practice and the identities of the relevant interlocutors
or those charged with its implementation.
Complies
Partially complies
Explain
5. The board of directors should not make a proposal
to the general meeting for the delegation of powers
to issue shares or convertible securities without pre-
emptive subscription rights for an amount exceeding
20% of capital at the time of such delegation.
And that whenever the board of directors approves an
issuance of shares or convertible securities without
pre-emptive rights the company immediately publishes
reports on its web page regarding said exclusions
as referenced in applicable mercantile law.
Complies
Partially complies
Explain
Our 2018 AGM, authorised our board to increase share capital
with the authority to exclude pre-emptive rights for shareholders,
with a limit of 20% of the share capital. This limit applies to capital
increases to convert bonds or other convertible securities, other
than contingent convertible preferred securities (which can only
be converted into newly-issued shares when the CET 1 ratio falls
below a pre-established threshold).
The Bank publishes in its website the reports relating to the
exclusion of pre-emptive rights when it makes use of this authority
in the terms established in the recommendation.
6. Listed companies drawing up the following reports
on a voluntary or compulsory basis should publish
them on their website well in advance of the AGM,
even if their distribution is not obligatory:
a) Report on auditor independence.
b) Reviews of the operation of the audit committee and
the appointments and remuneration committee.
c) Audit committee report on third-party transactions.
d) Report on corporate social responsibility policy.
Complies
Partially complies
Explain
7. The company should broadcast its general
meetings live on the corporate website.
Complies
Explain
8. The audit committee should strive to ensure that the board
of directors can present the Company’s accounts to the general
meeting without limitations or qualifcations in the auditor’s
222
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Other corporate governance
information
report. In the exceptional case that qualifcations exist, both the
chairman of the audit committee and the auditors should give
a clear account to shareholders of their scope and content.
its employees, suppliers, clients and other stakeholders,
as well as with the impact of its activities on the
broader community and the natural environment.
Complies
Partially complies
Explain
Complies
Partially complies
Explain
9. The company should disclose its conditions and procedures
for admitting share ownership, the right to attend general
meetings and the exercise or delegation of voting rights,
and display them permanently on its website.
13. The board of directors should have an optimal
size to promote its efcient functioning and
maximise participation. The recommended range is
accordingly between fve and ffteen members.
Such conditions and procedures should encourage
shareholders to attend and exercise their rights and
be applied in a non-discriminatory manner.
Complies
Partially complies
Explain
10. When a shareholder so entitled exercises the right
to supplement the agenda or submit new proposals
prior to the general meeting, the company should:
a) Immediately circulate the supplementary
items and new proposals.
b) Disclose the standard attendance card or proxy appointment
or remote voting form, duly modifed so that new agenda
items and alternative proposals can be voted on in the
same terms as those submitted by the board of directors.
c) Put all these items or alternative proposals to the vote
applying the same voting rules as for those submitted
by the board of directors, with particular regard to
presumptions or deductions about the direction of votes.
d) After the general meeting, disclose the breakdown of votes
on such supplementary items or alternative proposals.
Complies
Partially complies
Explain
Not applicable
11. In the event that a company plans to pay for
attendance at the general meeting, it should frst
establish a general, long-term policy in this respect.
Complies
Explain
14. The board of directors should approve
a director selection policy that:
a) Is concrete and verifable.
b) Ensures that appointment or re-election proposals
are based on a prior analysis of the board’s needs.
c) Favors a diversity of knowledge, experience and gender.
The results of the prior analysis of board needs should be
written up in the appointments committee’s explanatory report,
to be published when the general meeting is convened that
will ratify the appointment and re-election of each director.
The director selection policy should pursue the goal
of having at least 30% of total board places occupied
by women directors before the year 2020.
The appointments committee should carry an annual
verifcation on compliance with the director selection policy and
set out its fndings in the annual corporate governance report.
Complies
Partially complies
Explain
15. Proprietary and independent directors should constitute
an ample majority on the board of directors, while the
number of executive directors should be the minimum
practical bearing in mind the complexity of the corporate
group and the ownership interests they control.
Complies
Partially complies
Explain
Complies
Partially complies
Explain
Not applicable
12. The board of directors should perform its duties
with unity of purpose and independent judgement,
according the same treatment to all shareholders in the
same position. It should be guided at all times by the
company’s best interest, understood as the creation of a
proftable business that promotes its sustainable success
over time, while maximising its economic value.
In pursuing the corporate interest, it should not only abide
by laws and regulations and conduct itself according to
principles of good faith, ethics and respect for commonly
accepted customs and good practices, but also strive to
reconcile its own interests with the legitimate interests of
16. The percentage of proprietary directors out of all non-
executive directors should be no greater than the proportion
between the ownership stake of the shareholders they
represent and the remainder of the company’s capital.
This criterion can be relaxed:
a) In large cap companies where few or no equity stakes
attain the legal threshold for signifcant shareholdings.
b) In companies with a plurality of shareholders
represented on the board but not otherwise related.
Complies
Explain
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17. Independent directors should be at
least half of all board members.
However, when the company does not have a large
market capitalisation, or when a large cap company
has shareholders individually or concertedly controlling
over 30 percent of capital, independent directors
should occupy, at least, a third of board places.
Complies
Explain
18. Companies should disclose the following director particulars
on their websites and keep them regularly updated:
a) Background and professional experience.
b) Directorships held in other companies, listed or otherwise,
and other paid activities they engage in, of whatever nature.
c) Statement of the director class to which they belong,
in the case of proprietary directors indicating the
shareholder they represent or have links with.
d) Dates of their frst appointment as a board
member and subsequent re-elections.
e) Shares held in the company, and any options on the same.
Complies
Partially complies
Explain
19. Following verifcation by the appointments committee, the
annual corporate governance report should disclose the reasons
for the appointment of proprietary directors at the urging of
shareholders controlling less than 3 percent of capital; and
explain any rejection of a formal request for a board place from
shareholders whose equity stake is equal to or greater than that
of others applying successfully for a proprietary directorship.
Complies
Partially complies
Explain
Not applicable
20. Proprietary directors should resign when the shareholders
they represent dispose of their ownership interest in its
entirety. If such shareholders reduce their stakes, thereby
losing some of their entitlement to proprietary directors,
the number of the latter should be reduced accordingly.
Complies
Partially complies
Explain
Not applicable
21. The board of directors should not propose the removal
of independent directors before the expiry of their tenure as
mandated by the bylaws, except where they fnd just cause,
based on a proposal from the appointments committee.
In particular, just cause will be presumed when directors
take up new posts or responsibilities that prevent them
allocating sufcient time to the work of a board member,
or are in breach of their fduciary duties or come under
one of the disqualifying grounds for classifcation as
independent enumerated in the applicable legislation.
The removal of independent directors may also be
proposed when a takeover bid, merger or similar corporate
transaction alters the company’s capital structure,
provided the changes in board membership ensue from the
proportionality criterion set out in recommendation 16.
Complies
Explain
22. Companies should establish rules obliging directors to
disclose any circumstance that might harm the organisation’s
name or reputation, tendering their resignation as the case may
be, and, in particular, to inform the board of any criminal charges
brought against them and the progress of any subsequent trial.
The moment a director is indicted or tried for any of the
ofences stated in company legislation, the board of directors
should open an investigation and, in light of the particular
circumstances, decide whether or not he or she should be called
on to resign. The board should give a reasoned account of all
such determinations in the annual corporate governance report.
Complies
Partially complies
Explain
23. Directors should express their clear opposition when they
feel a proposal submitted for the board’s approval might
damage the corporate interest. In particular, independents
and other directors not subject to potential conficts of interest
should strenuously challenge any decision that could harm
the interests of shareholders lacking board representation.
When the board makes material or reiterated decisions about
which a director has expressed serious reservations, then
he or she must draw the pertinent conclusions. Directors
resigning for such causes should set out their reasons in
the letter referred to in the next recommendation.
The terms of this recommendation also apply to the
secretary of the board, even if he or she is not a director.
Complies
Partially complies
Explain
Not applicable
24. Directors who leave before their tenure expires,
through resignation or otherwise, should state their
reasons in a letter to be sent to all members of the
board. Whether or not such resignation is disclosed
as a material event, the motivating factors should be
explained in the annual corporate governance report.
Complies
Partially complies
Explain
Not applicable
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25. The appointments committee should ensure that
non-executive directors have sufcient time available
to discharge their responsibilities efectively.
32. Directors should be regularly informed of movements
in share ownership and of the views of major shareholders,
investors and rating agencies on the company and its group.
The board rules and regulations should lay down the maximum
number of company boards on which directors can serve.
Complies
Partially complies
Explain
Complies
Partially complies
Explain
26. The board should meet with the necessary frequency
to properly perform its functions, eight times a year
at least, in accordance with a calendar and agendas
set at the start of the year, to which each director may
propose the addition of initially unscheduled items.
Complies
Partially complies
Explain
27. Director absences should be kept to a strict minimum
and quantifed in the annual corporate governance report.
In the event of absence, directors should delegate their
powers of representation with the appropriate instructions.
Complies
Partially complies
Explain
28. When directors or the secretary express concerns
about some proposal or, in the case of directors, about
the company’s performance, and such concerns are not
resolved at the meeting, they should be recorded in the
minutes book if the person expressing them so requests.
33. The chairman, as the person responsible for the efcient
functioning of the board of directors, in addition to the functions
assigned by law and the company’s bylaws, should prepare and
submit to the board a schedule of meeting dates and agendas;
organise and coordinate regular evaluations of the board and,
where appropriate, of the company’s chief executive ofcer;
exercise leadership of the board and be accountable for its
proper functioning; ensure that sufcient time is given to the
discussion of strategic issues, and approve and review refresher
courses for each director, when circumstances so advise.
Complies
Partially complies
Explain
34. When a lead independent director has been appointed,
the bylaws or the Rules and regulations of the board of
directors should grant him or her the following powers over
and above those conferred by law: to chair the board of
directors in the absence of the chairman or vice chairman;
to give voice to the concerns of non-executive directors; to
maintain contact with investors and shareholders to hear
their views and develop a balanced understanding of their
concerns, especially those to do with the company’s corporate
governance; and to coordinate the chairman’s succession plan.
Complies
Partially complies
Explain
Complies
Partially complies
Explain
Not applicable
Not applicable
29. The company should provide suitable channels
for directors to obtain the advice they need to
carry out their duties, extending if necessary to
external assistance at the company’s expense.
35. The board secretary should strive to ensure
that the board’s actions and decisions are informed
by the governance recommendations of the Good
Governance Code of relevance to the company.
Complies
Partially complies
Explain
Complies
Explain
30. Regardless of the knowledge directors must possess
to carry out their duties, they should also be ofered
refresher programmes when circumstances so advise.
36. The board in full should conduct an annual
evaluation, adopting, where necessary, an action
plan to correct weakness detected in:
Complies
Explain
Not applicable
a) The quality and efciency of the board’s operation.
31. The agendas of board meetings should clearly
indicate on which points directors must arrive at a
decision, so they can study the matter beforehand or
obtain the information they consider appropriate.
For reasons of urgency, the chairman may wish to present
decisions or resolutions for board approval that were not
on the meeting agenda. In such exceptional circumstances,
their inclusion will require the express prior consent,
duly minuted, of the majority of directors present.
Complies
Partially complies
Explain
b) The performance and membership of its committees.
c) The diversity of board membership and competencies.
d) The performance of the chairman of the board of
directors and the company’s chief executive.
e) The performance and contribution of individual directors,
with particular attention to the chairmen of board committees.
The evaluation of board committees should start
from the reports they send to the board of directors,
while that of the board itself should start from
the report of the appointments committee.
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Every three years, the board of directors should
engage an external facilitator to aid in the evaluation
process. This facilitator’s independence should be
verifed by the appointments committee.
Any business dealings that the facilitator or members
of its corporate group maintain with the company or
members of its corporate group should be detailed
in the annual corporate governance report.
The process followed and areas evaluated should be
detailed in the annual corporate governance report.
Complies
Partially complies
Explain
37. When an executive committee exists, its membership
mix by director class should resemble that of the
board. The secretary of the board should also act
as secretary to the executive committee.
Complies
Partially complies
Explain
Not applicable
The secretary of the executive committee is the secretary of
the board. While the distribution of categories of directors
in the executive committee is not exactly the same as in the
board, the Bank considers it complies with the spirit of the
recommendation since the current composition refects all
categories of directors, including a majority of external director
and three independent directors, but retaining all executive
directors to maintain the efciency in the discharge of the
executive functions of the committee.
s
38. The board should be kept fully informed of the
matters discussed and decisions made by the executive
committee. To this end, all board members should
receive a copy of the committee’s minutes.
Complies
Partially complies
Explain
Not applicable
39. All members of the audit committee, particularly
its chairman, should be appointed with regard to their
knowledge and experience in accounting, auditing and
risk management matters. A majority of committee
seats should be held by independent directors.
Complies
Partially complies
Explain
40. Listed companies should have a unit in charge of the interna
audit function, under the supervision of the audit committee,
to monitor the efectiveness of reporting and control systems.
This unit should report functionally to the board’s non-
executive chairman or the chairman of the audit committee.
l
Complies
Partially complies
Explain
41. The head of the unit handling the internal audit
function should present an annual work programme
to the audit committee, inform it directly of any
incidents arising during its implementation and submit
an activities report at the end of each year.
Complies
Partially complies
Explain
Not applicable
42. The audit committee should have the following
functions over and above those legally assigned:
1. With respect to internal control and reporting systems:
a) Monitor the preparation and the integrity of the fnancial
information of the company and, where appropriate, the
Group, checking for compliance with legal provisions,
the accurate demarcation of the consolidation perimeter,
and the correct application of accounting principles.
b) Monitor the independence of the unit handling the internal
audit function; propose the selection, appointment, re-
election and removal of the head of the internal audit service;
propose the service’s budget; approve its priorities and work
programmes, ensuring that it focuses primarily on the main
risks the company is exposed to; receive regular report-backs
on its activities; and verify that senior management are
acting on the fndings and recommendations of its reports.
c) Establish and supervise a mechanism whereby
staf can report, confdentially and, if appropriate and
feasible, anonymously, any signifcant irregularities
that they detect in the course of their duties, in
particular fnancial or accounting irregularities.
2. With regard to the external auditor:
a) Investigate the issues giving rise to the resignation
of the external auditor, should this come about.
b) Ensure that the remuneration of the external auditor,
does not compromise its quality or independence.
c) Ensure that the company notifes any change of external
auditor to the CNMV as a material fact, accompanied by a
statement of any disagreements arising with the outgoing
auditor and if applicablen, the contents thereof.
d) Ensure that the external auditor has a yearly meeting with
the board in full to inform it of the work undertaken and
developments in the company’s risk and accounting positions.
e) Ensure that the company and the external auditor adhere
to current regulations on the provisions of non-audit services,
limits on the concentration of the auditor’s business and
other requirements concerning auditor independence.
Complies
Partially complies
Explain
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43. The audit committee should be empowered to meet with
any company employee or manager, even ordering their
appearance without the presence of another manager.
procuring theyhave the right balance of knowledge, skills and
experience for the functions they are called on to discharge. The
majority of their members should be independent directors.
Complies
Partially complies
Explain
Complies
Partially complies
Explain
44. The audit committee should be informed of any structural
changes or corporate transactions the company is planning,
so the committee can analyse the operation and report to the
board beforehand on its economic conditions and accounting
impact and, when applicable, the exchange ratio proposed.
Complies
Partially complies
Explain
Not applicable
45. The risk control and management
policy should identify at least:
a) The diferent types of risk, fnancial and non-fnancial
(including operational, technological, legal, social,
environmental, political and reputational risks), the company
is exposed to, with the inclusion under fnancial or economic,
risks of contingent liabilities and other of- balance-sheet risks.
b) The setting of the risk level that the
company deems acceptable.
c) Measures in place to mitigate the impact
of risk events should they occur.
d) The internal reporting and control systems to be
used to control and manage the above risks, including
contingent liabilities and of-balance-sheet risks.
Complies
Partially complies
Explain
46. Companies should establish a risk control and management
function in the charge of one of the company’s internal
department or units and under the direct supervision of
the audit committee or some other specialised board
committee. This internal department or unit should be
expressly charged with the following responsibilities:
a) Ensure that risk control and management
systems are functioning correctly and, specifcally,
that major risks the company is exposed to are
correctly identifed, managed and quantifed.
b) Participate actively in the preparation of risk strategies
and in key decisions about their management.
c) Ensure that risk control and management systems
are mitigating risks efectively in the frame of the
policy drawn up by the board of directors.
Complies
Partially complies
Explain
47. Members of the appointments and remuneration committee
- or of the appointments committee and remuneration
committee, if separately constituted - should be chosen
48. Large cap companies should have formed separate
appointments and remuneration committees.
Complies
Explain
Not applicable
49. The appointments committee should consult with
the company’s chairman and chief executive, especially
on matters relating to executive directors.
When there are vacancies on the board, any director
may approach the appointments committee to propose
candidates that it might consider suitable.
Complies
Partially complies
Explain
50. The remuneration committee should operate
independently and have the following functions
in addition to those assigned by law:
a) Propose to the board the standard
conditions for senior ofcer contracts.
b) Monitor compliance with the remuneration
policy set by the company.
c) Periodically review the remuneration policy for directors
and senior ofcers, including share-based remuneration
systems and their application, and ensure that their
individual compensation is proportionate to the amounts
paid to other directors and senior ofcers in the company.
d) Ensure that conficts of interest do not undermine the
independence of any external advice the committee engages.
e) Verify the information on director and senior ofcers’
pay contained in corporate documents, including
the annual directors’ remuneration statement.
Complies
Partially complies
Explain
51. The remuneration committee should consult with the
company’s chairman and chief executive, especially on
matters relating to executive directors and senior ofcers.
Complies
Partially complies
Explain
52. The rules regarding composition and functioning of
supervision and control committees should be set out in
the regulations of the board of directors and aligned with
those governing legally mandatory board committees
as specifed in the preceding sets of recommendations.
They should include at least the following terms:
a) Committees should be formed exclusively by non-
executive directors, with a majority of independents.
b) They should be chaired by independent directors.
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c) The board should appoint the members of such
committees with regard to the knowledge, skills and
experience of its directors and each committee’s terms
of reference; discuss their proposals and reports; and
provide report-backs on their activities and work at the
frst board plenary following each committee meeting.
54. The corporate social responsibility policy should state the
principles or commitments the company will voluntarily adhere
to in its dealings with stakeholder groups, specifying at least:
a) The goals of its corporate social responsibility policy
and the support instruments to be deployed.
d) They may engage external advice, when they feel
it necessary for the discharge of their functions.
b) The corporate strategy with regard to sustainability,
the environment and social issues.
e) Meeting proceedings should be minuted and a
copy made available to all board members.
Complies
Partially complies
Explain
Not applicable
53. The task of supervising compliance with corporate
governance rules, internal codes of conduct and corporate
social responsibility policy should be assigned to one board
committee or split between several, which could be the audit
committee, the appointments committee, the corporate
social responsibility committee, where one exists, or a special
committee established ad hoc by the board under its powers
of self-organisation, with at the least the following functions:
a) Monitor compliance with the company’s internal
codes of conduct and corporate governance rules.
b) Oversee the communication and relations
strategy with shareholders and investors, including
small and medium-sized shareholders.
c) Concrete practices in matters relating to: shareholders,
employees, clients, suppliers, social welfare issues, the
environment, diversity, fscal responsibility, respect for
human rights and the prevention of illegal conduct.
d) The methods or systems for monitoring the
results of the practices referred to above and
identifying and managing related risks.
e) The mechanisms for supervising non-fnancial
risk, ethics and business conduct.
f) Channels for stakeholder communication,
participation and dialogue.
g) Responsible communication practices that
prevent the manipulation of information and
protect the company’s honour and integrity.
Complies
Partially complies
Explain
c) Periodically evaluate the efectiveness of the company’s
corporate governance system, to confrm that it is fulflling
its mission to promote the corporate interest and catering, as
appropriate, to the legitimate interests of other stakeholders.
55. The company should report on corporate social responsibility
developments in its management’s report or in a separate
document, using an internationally accepted methodology.
Complies
Partially complies
Explain
d) Review the company’s corporate social responsibility
policy, ensuring that it is geared to value creation.
e) Monitor corporate social responsibility strategy and
practices and assess compliance in this respect.
56. Director remuneration should be sufcient to attract and
retain directors with the desired profle and compensate
the commitment, abilities and responsibility that the
post demands, but not so high as to compromise the
independent judgement of non-executive directors.
f) Monitor and evaluate the company’s
interaction with its stakeholders.
Complies
Explain
g) Evaluate all aspects of the non-fnancial risks the company
is exposed to, including operational, technological, legal,
social, environmental, political and reputational risks.
h) Coordinate non-fnancial and diversity
reporting processes in accordance with applicable
legislation and international benchmarks.
Complies
Partially complies
Explain
57. Variable remuneration linked to the company
and the director’s performance, the award of shares,
options or any other right to acquire shares or to be
remunerated on the basis of share price movements,
and membership of long-term savings schemes such as
pension plans, retirement accounts or any other retirement
plan should be confned to executive directors.
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information
The company may consider the share-based remuneration
of non-executive directors provided they retain such
shares until the end of their mandate. The above condition
will not apply to any shares that the director must
dispose of to defray costs related to their acquisition.
Complies
Partially complies
Explain
58. In the case of variable awards, remuneration policies
should include limits and technical safeguards to ensure they
refect the professional performance of the benefciaries
and not simply the general progress of the markets or
the company’s sector, or circumstances of that kind.
In particular, variable remuneration items
should meet the following conditions:
number of shares equivalent to twice their annual fxed
remuneration, or to exercise the share options or other
rights on shares for at least three years after their award.
The above condition will not apply to any shares that the director
must dispose of to defray costs related to their acquisition.
Complies
Partially complies
Explain
Not applicable
63. Contractual arrangements should include
provisions that permit the company to reclaim variable
components of remuneration when payment was out
of step with the director’s actual performance or based
on data subsequently found to be misstated.
Complies
Partially complies
Explain
a) Be subject to predetermined and measurable performance
criteria that factor the risk assumed to obtain a given outcome.
Not applicable
64. Termination payments should not exceed a fxed
amount equivalent to two years of the director’s
total annual remuneration, and should not be paid
until the company confrms that he or she has met
the predetermined performance criteria.
Complies
Partially complies
Explain
Not applicable
List whether any directors voted against or abstained
from voting on the approval of this Report.
Yes
No
I declare that the information included in this statistical annex are
the same and are consistent with the descriptions and information
included in the annual corporate governance report published by
the company.
b) Promote the long-term sustainability of the company and
include non-fnancial criteria that are relevant for the company’s
long-term value, such as compliance with its internal rules and
procedures and its risk control and management policies.
c) Be focused on achieving a balance between the achivement of
short, medium and long-term targets, such that performance-
related pay rewards ongoing achievement, maintained over
sufcient time to appreciate its contribution to long-term value
creation. This will ensure that performance measurement is not
based solely on one of, occasional or extraordinary events.
Complies
Partially complies
Explain
Not applicable
59. A major part of variable remuneration components
should be deferred for a long enough period to ensure that
predetermined performance criteria have efectively been met.
Complies
Partially complies
Explain
Not applicable
60. Remuneration linked to company earnings should
bear in mind any qualifcations stated in the external
auditor’s report that reduce their amount.
Complies
Partially complies
Explain
Not applicable
61. A major part of executive directors’ variable remuneration
should be linked to the award of shares or fnancial
instruments whose value is linked to the share price.
Complies
Partially complies
Explain
Not applicable
62. Following the award of shares, share options or
other rights on shares derived from the remuneration
system, directors should not be allowed to transfer a
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9.3 Cross-reference table for
comply or explain of corporate
governance recommendations
Recommendation Comply / Explain
1
2
3
4
5
Comply
Not applicable
Comply
Comply
Partially comply
Comply
Comply
Comply
Comply
Comply
Not applicable
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Partially comply
Comply
Comply
Comply
Comply
Comply
Comply
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
230
Information
See section 3.2.
See 'Group companies' in section 4.8.
See section 3.1.
See section 3.1.
Our 2018 AGM, authorised our board to increase share capital with the authority to exclude
pre-emptive rights for shareholders, with a limit of 20% of the share capital. This limit applies to
capital increases to convert bonds or other convertible securities, other than contingent convertible
preferred securities (which can only be converted into newly-issued shares when the CET 1 ratio falls
below a pre-established threshold).
The Bank publishes in its website the reports relating to the exclusion of pre-emptive rights when it
makes use of this authority in the terms established in the recommendation.
See section 2.2.
See sections 4.4, 4.5, 4.6, 4.8 and 'Responsible Banking' chapter.
See section 3.5.
See section 4.4.
See 'Participation of shareholders at the GSM' in section 3.2.
See section 3.2.
See section 3.5.
See section 4.3.
See 'Size' in section 4.2.
See 'Election, refreshment and succession of directors' and 'Diversity' in section 4.2.
See 'Composition by type of director'; 'Independent non-executive directors'
and 'Election, refreshment and succession of directors' in section 4.2.
See 'Composition by type of director' in section 4.2.
See 'Composition by type of director'; 'Independent non-executive directors'
and 'Election, refreshment and succession of directors' in section 4.2.
See 'Corporate website' in section 3.2 and section 4.1.
See 'Composition by type of director' and 'Tenure, committee
membership and equity ownership' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Election, refreshment and succession of directors' in section 4.2.
See 'Board and committees attendance' in section 4.3 and in section 4.5.
See 'Proceedings of the board' and 'Board and committees attendance' in section 4.3.
See 'Proceedings of the board' and 'Board and committees attendance' in section 4.3.
See 'Proceedings of the board' in section 4.3.
See 'Proceedings of the board' in section 4.3.
See 'Training of directors and induction programme for new directors' in section 4.3.
See 'Rules and regulations of the board' and 'Board and committees attendance' in section 4.3.
See section 3.1.
See 'Proceedings of the board', 'Training of director and induction program
for new directors' and 'Self-assessment of the board' in section 4.3.
See 'Lead independent director' in section 4.3.
See 'Secretary of the board' in section 4.3.
See 'Self-assessment of the board' in section 4.3.
The secretary of the executive committee is the secretary of the board. While the distribution
of categories of directors in the executive committee is not exactly the same as in the board,
the Bank considers it complies with the spirit of the recommendation since the current
composition refects all categories of directors, including a majority of external directors and
three independent directors, but retaining all executive directors to maintain the efciency in the
discharge of the executive functions of the committee. See ‘Executive committee’ in section 4.3.
See ‘Executive committee’ in section 4.3.
See 'Composition' and 'Duties and activities in 2018' in section 4.4.
See 'Duties and activities in 2018' in section 4.4.
See 'Duties and activities in 2018' in section 4.4.
See 'Duties and activities in 2018' in section 4.4.
See 'How the committee works' in section 4.4.
2018 Annual Report
Other corporate governance
information
Recommendation
Comply / Explain
Information
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
See 'Duties and activities in 2018' in section 4.4.
See 'Duties and activities in 2018' in section 4.4 and 'Duties and activities in 2018' in section 4.7.
See 'Duties and activities in 2018' in section 4.4 and 'Duties and activities in 2018' in section 4.7.
See 'Composition' in section 4.5 and 'Composition' in section 4.6.
See 'Board committees structure' in section 4.3.
See 'Duties and activities in 2018' in section 4.5.
See 'Duties and activities in 2018' in section 4.6.
See 'Duties and activities in 2018' in section 4.6.
See 'Rules and regulations of the board' in section 4.3 and sections 4.4, and 4.7.
See 'Responsible banking, sustainability and culture committee' in
section 4.3 and 'Duties and activities in 2018' in section 4.7.
See 'Responsible banking, sustainability and culture committee' in section 4.3.
See chapter 'Responsible banking'.
See sections 6.2 and 6.3.
See sections 6.2 and 6.3.
See section 6.3.
See section 6.3.
See section 6.3.
See section 6.3.
See section 6.3.
See section 6.3.
See sections 6.1 and 6.3.
9.4 Reconciliation to the CNMV’s
remuneration report model
Section in CNMV
model
Included in
statistical report
Further information elsewhere and comments
A. Remuneration policy for the present fscal year
No
No
No
A.1
No
• See section 6.4.
• See sections 4.6 and 6.5.
• See 'Summary of link between risk, performance and reward' in section 6.3.
See peer group in 'Remuneration of executive directors' in section 6.4.
See section 6.4.
See section 6.3.
A.2
A.3
A.4
B. Overall summuary of application of the remuneration policy over the last fscal year
B.1
B.2
B.3
B.4
B.5
B.6
B.7
B.8
B.9
B.10
B.11
B.12
B.13
B.14
B.15
B.16
C. Breakdown of the individual remuneration of directors
C
C.1 a) i)
See sections 6.1 and 6.3.
See 'Summary of link between risk, performance and reward' in section 6.3.
See sections 6.2 and 6.3.
See section 6.5.
See section 6.2.
See 'Gross annual salary' in section 6.3.
See 'Variable remuneration' in section 6.3.
Not applicable.
See 'Main features of the beneft plans' in section 6.3.
Not applicable.
See 'Terms and conditions of executive directors´ contracts' in section 6.4.
No remuneration for this component.
See note 5 to the consolidated fnancial statements.
See 'Insurance and other remuneration and benefts in kind' in section 6.4.
See 'Remuneration of board members as representatives of the Bank' in section 6.3.
No remuneration for this component.
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
See section 9.5.
See section 9.5.
Yes
Yes
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C.1 a) ii)
C.1 a) iii)
C.1 a) iii)
C.1 b) i)
C.1 b) ii)
C.1 b) iii)
C.1 b) iv)
C.1 c)
D. Other information of interest
D
Yes
Yes
Yes
Yes
No
No
No
Yes
No
See section 9.5.
See section 9.5.
See section 9.5.
See section 9.5.
Not awarded.
Not awarded.
Not awarded.
See section 9.5.
See section 4.6.
9.5 Statistical information on remuneration
required by CNMV
B. OVERALL SUMMARY OF HOW REMUNERATION POLICY
WAS APPLIED DURING THE YEAR ENDED
B.4 Report on the result of consultative vote at General
Shareholders´ Meeting on annual report on remuneration from
previous year, indicating the number of votes against, as the case
may be.
Votes cast
Number
10,406,887,327
% of total
99.91%
Votes against
Votes in favour
Abstentions
Number
389,585,931
9,834,835,228
182,466,168
% of votes cast
3.74%
94.42%
1.75%
C. ITEMISED INDIVIDUAL REMUNERATION
ACCRUED BY EACH DIRECTOR
Name
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
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
Ms Belén Romana García
Mr Juan Miguel Villar Mir
Mr Ramiro Mato García Ansorena
Mr Álvaro Cardoso de Souza
Type
Executive
Executive
Independent
Executive
Other external
Independent
Other external
Other external
Independent
Independent
Independent
Independent
Independent
Independent
Independent
232
Period of accrual in year 2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 01/01/2018 to 31/12/2018
From 23/03/2018 to 31/12/2018
2018 Annual Report
Other corporate governance
information
C.1 Complete the following tables on individual remuneration of
each director (including the remuneration for exercising executive
functions) accrued during the year.
a) Remuneration from the reporting company:
i) Remuneration in cash (thousand euros)
Name
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce
Carnegie-Brown
Mr Rodrigo
Echenique Gordillo
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
Ms Belén Romana
García
Mr Juan Miguel
Villar Mir
Mr Ramiro Mato
García Ansorena
Mr Álvaro Cardoso
de Souza
Mr Matías Rodríguez
Inciarte
Ms Isabel Tocino
Biscarolasaga
Fixed
remune-
Remuneration
for member-
Per diem ship of Board's
committees
ration allowances
Short-term
variable
remuneration
Long-term
variable
remuneration
Salary
Severance
pay Other grounds
Total year Total year
2017
2018
90
90
90
90
90
90
90
90
90
90
90
90
90
90
67
-
-
39
34
89
33
81
61
86
31
67
86
58
81
18
77
31
-
-
178
3,176
2,368
170
2,541
1,582
553
-
-
170
1,800
1,256
270
48
256
0
58
90
48
243
0
283
50
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
394
6,245
5,683
532
4,949
4,971
-
-
-
-
81
-
-
-
-
-
-
-
-
-
-
732
732
3,394
3,139
441
199
513
121
473
160
551
124
215
207
266
286
196
414
108
450
148
-
-
163
298
171
36
-
3,149
418
233
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
ii) Table of changes in share-based remuneration schemes and
gross proft from consolidated shares or fnancial instruments
Financial instruments
at start of year 2018
Financial instruments granted
at start of year 2018
Name
Name of Plan
2nd cycle of the performance
shares plan (2015)
No. of
instruments
No. of
equivalent
shares
187,080
187,080
Ms Ana Botín-
Sanz de Sautuola
y O’Shea
1st cycle of deferred variable remuneration
plan linked to multi-year targets (2016)
216,308
216,308
2nd cycle of deferred variable remuneration
plan linked to multi-year targets (2017)
206,775
206,775
No. of instruments
No. of equivalent
shares
–
–
–
–
–
–
3rd cycle of deferred variable remuneration
plan linked to multi-year targets (2018)
-
–
860,865
860,865
Financial instruments
at start of year 2018
Financial instruments granted
at start of year 2018
Name
Name of Plan
2nd cycle of the performance
shares plan (2015)
No. of
instruments
No. of
equivalent
shares
126,279
126,279
Mr José Antonio
Álvarez Álvarez
1st cycle of deferred variable remuneration
plan linked to multi-year targets (2016)
145,998
145,998
2nd cycle of deferred variable remuneration
plan linked to multi-year targets (2017)
138,283
138,283
No. of instruments
No. of equivalent
shares
–
–
–
–
–
–
3rd cycle of deferred variable remuneration
plan linked to multi-year targets (2018)
-
–
575,268
575,268
Financial instruments
at start of year 2018
Financial instruments granted
at start of year 2018
Name
Name of Plan
2nd cycle of the performance
shares plan (2015)
No. of
instruments
No. of
equivalent
shares
93,540
93,540
Mr Rodrigo
Echenique
Gordillo
1st cycle of deferred variable remuneration
plan linked to multi-year targets (2016)
108,134
108,134
2nd cycle of deferred variable remuneration
plan linked to multi-year targets (2017)
107,766
107,766
No. of instruments
No. of equivalent
shares
–
–
–
–
–
–
3rd cycle of deferred variable remuneration
plan linked to multi-year targets (2018)
-
–
456,840
456,840
234
2018 Annual Report Other corporate governance
information
Financial instruments consolidated during 2018
Instruments
matured but
not exercised
Financial instruments
at end of year 2018
No. of instruments
No. of equivalent
shares/
handed over
Price of the
consolidated
shares
Net proft
from shares
handed over or
consolidated
fnancial
instruments
(EUR thousand)
No. of instruments
No. of shares
No. of
equivalent
shares
122,855
122,855
4,298
528
64,225
-
-
-
-
-
-
-
-
550,952
550,952
4,298
2,368
–
–
–
216,308
216,308
206,775
206,775
309,913
309,913
Financial instruments consolidated during 2018
Instruments
matured but
not exercised
Financial instruments
at end of year 2018
No. of instruments
No. of equivalent
shares/
handed over
Price of the
consolidated
shares
Net proft
from shares
handed over or
consolidated
fnancial
instruments
(EUR thousand)
No. of instruments
No. of shares
No. of
equivalent
shares
82,927
82,927
4,298
357
43,352
-
-
-
-
-
-
-
-
368,171
368,171
4,298
1,582
–
–
–
145,998
145,998
138,283
138,283
207,097
207,097
Financial instruments consolidated during 2018
Instruments
matured but
not exercised
Financial instruments
at end of year 2018
No. of instruments
No. of equivalent
shares/
handed over
Price of the
consolidated
shares
Net proft
from shares
handed over or
consolidated
fnancial
instruments
(EUR thousand)
No. of instruments
No. of shares
No. of
equivalent
shares
61,428
61,428
4,298
264
32,112
-
-
-
-
-
-
-
-
292,376
292,376
4,298
1,257
–
–
–
108,134
108,134
107,766
107,766
164,464
164,464
235
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
iii) Long-term saving systems
Name
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Remuneration from
consolidation of rights
to savings system
1,234
1,050
-
Contribution over the year from the
company (EUR thousand)
Savings systems
with consolidated
economic rights
Savings systems
with unconsolidated
economic rights
Name
2018
2017
2018
2017
Amount of accumulated funds (EUR thousand)
2018
2017
Systems with
Systems with
consolidated unconsolidated
economic
rights
economic
rights
Systems with
Systems with
consolidated unconsolidated
economic
rights
economic
rights
Ms Ana Botín-Sanz de
Sautuola y O’Shea
1,234
2,707
Mr José Antonio
Álvarez Álvarez
Mr Rodrigo
Echenique Gordillo
1,050
2,456
-
-
-
-
-
-
-
-
46,093
16,630
13,614
-
-
-
45,798
16,151
13,957
-
-
-
iv) Details of other items (EUR thousand)
Name
Item
Ms Ana Botín-
Sanz de Sautuola
y O’Shea
Life and accident insurance
Fixed remuneration
supplement insurance
Other remuneration
Name
Component
Mr José Antonio
Álvarez Álvarez
Life and accident insurance
Fixed remuneration
supplement insurance
Other remuneration
Name
Component
Mr Rodrigo
Echenique Gordillo
Life and accident insurance
Other remuneration
Amount
remune
rated
237
31
368
Amount
remune
rated
397
76
590
Amount
remune
rated
121
104
236
2018 Annual Report
Other corporate governance
information
b) Remuneration of the company directors for seats on the
boards of other group companies:
i) Remuneration in cash (EUR thousand)
Fixed remu-
neration
Per diem
allowances
Remuner-
ation for
membership
of Board's
committees
Short-term
variable
remuneration
Long-term
variable
remuneration
Salary
Severance
pay
Other grounds
Total
year 2018
Total
year 2017
-
-
-
-
-
-
-
-
-
42
Name
Mr Matías
Rodríguez Inciarte
ii) Table of changes in share/based remunerations
schemes and gross proft from consolidated
shares or fnancial instruments
Not applicable
iii) Long term saving systems
Not applicable
iv) Detail of other items (EUR thousand)
Not applicable
237
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
c) Summary of remuneration (EUR thousand)
The summary should include the amounts corresponding to all
the items of remuneration included in this report that have been
accrued by the director, in thousand euros.
Remuneration accrued in the company
Remuneration accrued in group companies
n
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-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
42
-
42
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Name
Ms Ana Botín-Sanz de
Sautuola y O’Shea
Mr José Antonio
Álvarez Álvarez
Mr Bruce
Carnegie-Brown
Mr Rodrigo
Echenique Gordillo
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
Ms Belén Romana
García
Mr Juan Miguel
Villar Mir
Mr Ramiro Mato
García Ansorena
Mr Álvaro Cardoso
de Souza
Mr Matías Rodríguez
Inciarte
Ms Isabel Tocino
Biscarolasaga
6,245
2,896
1,234
636
11,011 10,582
4,949
1,939
1,050
1,063 9,001 8,893
732
-
3,349
1,521
441
199
513
121
215
266
196
414
108
450
148
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
732
731
225 5,095
4,281
-
-
-
-
-
-
-
-
-
-
-
-
-
441
199
473
159
513
550
121
124
215
207
266
285
196
162
414
297
108
170
450
36
148
-
-
-
4,266
418
Total
18,346
6,356
2,284
1,924 28,910 31,634
This annual report on remuneration has been approved by the
board of directors of the company, at its meeting on 26 February
2019.
State if any directors have voted against or abstained from
approving this report.
Sí
No
238
2018 Annual Report
Other corporate governance
information
9.6 Other information of interest
Since 2010, Banco Santander has adhered to the Code of Good Tax
Practice approved by the Large Companies Forum, a body which
involves large Spanish companies and the Spanish tax authority,
and it complies with the contents thereof. As in previous years, and
in accordance with its commitments under the aforementioned
code, and in application of its compliance programme and the
Group’s general Code of Conduct, the head of the tax department
has reported to the audit committee on the Group’s fscal policies.
On 3 November 2015, at the plenary session of the
abovementioned Large Companies Forum, the introduction of
an appendix to the Code of Best Tax Practices was agreed to
strengthen the cooperation between the Spanish tax agency
and those companies that adhere to this instrument of good tax
governance, through a series of actions promoting transparency
and legal security in compliance with tax obligations.
In the UK the Group adheres to the Code of Practice on Taxation
for Banks, since its approval in 2010 by the tax authority of said
country.
The Bank complies with the 'Guidelines for the release of
privileged information to third parties' published by the
National Securities Market Commission on 9 March 2009,
which expressly indicates that fnancial institutions and rating
agencies are recipients of that information. It also follows
the 'Recommendations regarding informational meetings
with analysts, institutional investors and other stock market
professionals' published by the National Securities Market
Commission on 22 December 2005.
Banco Santander has joined international sustainability initiatives
such as, among others, the Principles of the United Nation’s Global
Compact (since 2002), the Equator Principles (since 2009), the
Principles for Responsible Investment (since 2008), the Banking
Environment Initiative (BEI) (since 2010), the World Business
Council for Sustainable Development (since 2015), UNEP Finance
Initiative (since 2008) and the CDP, formerly the Carbon Disclosure
Project (since 2002).
On 26 November 2018 Banco Santander, together with 27 other
banks throughout the world, have published the draft of the
Principles for Responsible Banking, under the UN Environment
Finance Initiative (UNEP FI), to be open discuss before being
formally approved by the General Assembly of United Nations in
September 2019.
239
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Economic
and fnancial
review
%
1. Economic, regulatory and competitive context
2. Group selected data
3. Group fnancial performance
Situation of Santander
Results
Balance sheet
Liquidity and funding management
Capital management and adequacy. Solvency ratios
4. Business areas performance
Description of businesses
Summary income statement of the Group’s main business
areas
Geographic businesses
Corporate Centre
Global businesses
5. Research, development and innovation (R&D&I)
6. Signifcant events since year end
7. Trend information 2019
8. Alternative performance measures (APMs)
242
244
246
246
247
259
263
270
284
284
286
288
314
315
323
325
326
330
240
2018 Annual Report 241
Responsible bankingCorporate governanceEconomic and financial reviewRisk management 1. Economic, regulatory and
competitive context
Santander Group developed its business in 2018 in a generally
dynamic economic environment. However, as the year advanced
so it became clearer that the peak of the expansive cycle had been
reached and risk tended to increase, giving rise to instability in
the markets. The countries where the Group conducts its business
performed at a less even pace although they generally grew.
– United Kingdom (GDP: +1.4% estimated in 2018 vs +1.3% in
2017). The economy lost strength at the end of 2018 because of
the uncertainty over Brexit, whose ups and downs were refected
in pound sterling (0.9 GBP/EUR). Infation (2.1%) eased and the
unemployment rate of 4.0% was efectively full employment.
The Bank of England’s base rate ended the year at 0.75%.
Trade tensions, despite the agreement reached in the renegotiation
of NAFTA, and the tightening of US monetary policy were the main
causes of greater uncertainty, which triggered tensions of varying
intensity, particularly in developing markets such as Argentina and
Turkey and, to a lesser extent, in Brazil and Mexico, which were
also afected by the electoral cycle during most of the year.
– Brazil (GDP: +1.3% estimated in 2018 vs +1.1% in 2017). Growth
picked up a little, despite the impact of the transport strike.
Investment recovered after four years of falling and private
consumption and exports accelerated. Infation was 3.75% in
December 2018, below the central bank’s 4.5% target and the
Selic rate remained at an historic low (6.5%).
Other factors such as the Brexit negotiations and the shape of
Italy’s fscal policy also weighed on the tone of the markets:
– Eurozone (GDP: +1.8% estimated in 2018 vs +2.5% in 2017).
Economic activity could not maintain the strong rhythm of 2017.
Yet growth in 2018 was above the potential. The jobless rate
came down to 7.9%. After the hike in infation because of energy
prices, it eased at the end of the year (1.6%).
– Spain (GDP: +2.5% estimated in 2018 vs +3.0% in 2017). The
economy slowed in 2018, although Spain remained one of the
Eurozone’s most dynamic economies. Job creation was very
strong and the unemployment rate continued to fall. Infation
ended the year at 1.2%.
– Poland (GDP: +5.1% estimated in 2018 vs +4.8% in 2017). Notable
economic growth (mainly due to consumption) and lack of
imbalances. The unemployment rate was below 4% (an historic
low) and infation (1.0%) remained below the central bank’s 2.5%
target. The central bank held its key interest rate at 1.5%.
– Portugal (GDP: +2.2% estimated in 2018 vs +2.8% in 2017). The
economy slowed a little, but growth was still recorded at the end
of the year. Robust domestic demand was fuelled by consumption
and investment, while exports slowed down. The jobless rate was
below 7% and infation ended the year at 0.7%.
– Mexico (GDP: +2.0% estimated in 2018 vs +2.1% in 2017). The
economy grew spurred by a recovery in investment and exports.
The central bank raised its key rate by 100 bps in order to prevent
the efects of the peso’s depreciation and foster moderate
infation. Mexico, the US and Canada reached a new trade
agreement, which has yet to be ratifed.
– Chile (GDP: +4.0% estimated in 2018 vs +1.5% in 2017).
The economy was strong, spurred by private consumption,
investment and exports. Infation rose to 2.6% (below the 3%
target) and the central bank began to normalise its monetary
policy, with a rise of 25 bps in its key rate to 2.75%.
– Argentina (GDP: -2.4% estimated in 2018 vs +2.9% in 2017).
Thanks to fnancial aid from the IMF, the economy began to show
signs of stabilising, with an easing of infation, a signifcant fscal
consolidation and relative exchange rate stability. The economy
shrank 2.4% in 2018 and is expected to gradually improve in 2019.
- United States (GDP: +2.9% estimated in 2018 vs +2.2% in 2017).
GDP grew at a faster pace and the jobless rate was down to 3.7%
at the end of the year. Infationary pressures increased, aligning
underlying infation with the target of the Fed, which raised
interest rate by 100 bps during the year.
242
2018 Annual Report
Economic, regulatory and
competitive context
The following table shows the exchange rates against the euro of the
main currencies in which we operate in 2018 as compared to 2017:
Exchange rates: 1 euro / currency parity
In emerging markets interest rates and spreads are higher than
in mature economies, proftability remains high even in the less
favourable economic scenarios. Moreover, a strong banking sector
acted as a counterweight factor during episodes of instability
during the year.
Average
Period-end
2018
1.180
0.885
4.294
2017
1.127
0.876
3.594
2018
1.145
0.895
4.444
2017
1.199
0.887
3.973
The digital challenge, which is changing the way customers interact
with banks, competition and efciency processes, continues to
demand high investments and adaptation levels. The banking
sector must adapt itself to the ageing process of mature economies
and take advantage of the new technologies in order to increase
banking services access to the growing middle class in developing
economies.
US dollar
Pound sterling
Brazilian real
Mexican peso
22.688
21.291
2
2.492
23.661
Chilean peso
756.661
731.538
79
4.630
736.922
Argentine peso
31.164
18.566
43.121
22.637
Polish zloty
4.261
4.256
4.301
4.177
The regulatory agenda in 2018 showed an intensifcation of the
debate on Fintechs, taxes and progress on sustainability. After
closing Basel III in December 2017, analysis on the impact and
implementation of these new rules started in some jurisdictions.
In the current fnancial scenario, fnancial markets registered several
risk aversion episodes, causing certain tension on global fnancial
conditions, the dollar’s appreciation and falls in the stock market.
The US economy maintained a solid pace of growth, driven by the
fscal policy. The S&P 500 reached a historic peak in October, and
then declined until the gains of previous months were wiped out.
In the Eurozone, the ECB maintained its very expansive monetary
policy, with negative interest rates that enabled relaxed fnancial
conditions, despite the asset purchase programme ending in
December. The Zone’s economy slowed against a backdrop of
greater uncertainty, refected in a decline in German public debt
yields and falls in stock markets.
In the United Kingdom, the uncertainties generated by the process
of withdrawal from the European Union and the negotiations of the
exit conditions had a negative impact on the markets.
Latin American currencies had a heterogeneous evolution during
2018, mostly depreciations. Exchange rates refected, in some
cases, the uncertainty of election processes, domestic issues
in other cases and, in general terms, a threatening external
environment due to interest rate hikes in the US and the growing
trade tension globally.
The international banking environment continued to be marked
by the strengthening of balance sheets by improving solvency,
bolster the liquidity position and reduce unproductive assets,
which resulted in a better prepared sector to confront an eventual
economic downturn, such as that demonstrated by the stress tests
conducted by the various supervisory bodies.
Although proftability improved in most economies against a
backdrop of economic expansion, it continues to be one of the
sector’s main challenges, particularly in Europe, where institutions
should carry out structural reforms in order to bolster proftability
and the valuation that markets currently make of the banking
sector.
In Europe, negotiations continued on revising capital and resolution
frameworks while there is an ongoing debate on completing the
Banking Union. The European Stability Mechanism (ESM) will
provide the common backstop to the Single Resolution Fund (SRF)
and a roadmap should be drawn up for progressing on political
negotiations about the European Deposit Insurance Scheme.
Debates on the treatment of sovereign debt and non-performing
loans are also moving forward.
The fntechs debate intensifed and became more holistic.
International authorities are intensifying their agenda on fntechs,
including recommendations to reinforce competition policy, to
update legal frameworks and to increase the monitorisation of the
system, including systemic non-bank entities.
The aim of the authorities is to understand and monitor
developments in digital transformation in order to assess the
efects they might have on competition, fnancial stability,
consumer and data protection and risks such as cybersecurity and
terrorism fnancing.
The entrance of bigtechs into fnancial activities or their role as
technology providers for the fnancial sector has opened the
debate on their potential systemic signifcance and the competition
dynamics in the platforms ecosystem.
Taxes: in the context of a digital economy, there is an international,
European and even national debate in some countries as to how tax
systems should assure a fair contribution to society from all companies.
Additionally, in regards to the European Financial Transaction Tax
proposal, a fnal agreement was not reached among countries.
Lastly, in sustainable economy, the agenda is making very
signifcant progress. Authorities at an international and domestic
level are taking action to promote sustainable fnance. The fnancial
sector will play a signifcant role and so needs to be ready to support
the transition towards a green and sustainable economy.
The European Commission published in March 2018 its Action Plan
on Sustainable Finance, setting an ambitious agenda and goals to
2030. The action plan sets out a comprehensive strategy to further
connect fnance with sustainability.
243
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2. Group selected data
BALANCE SHEET (EUR million)
Total assets
Loans and advances to customers
Customer deposits
Total customer funds A
Total equity
INCOME STATEMENT (EUR million)
Net interest income
Total income
Net operating income
Proft before tax
Attributable proft to the parent
UNDERLYING INCOME STATEMENT D (EUR million)
Net interest income
Total income
Net operating income
Proft before tax
Attributable proft to the parent
EPS, PROFITABILITY AND EFFICIENCY (%)
EPS (euros) E
Underlying EPS (euros) D E
RoE
RoTE
Underlying RoTE D
RoA
RoRWA
Underlying RoRWA D
Efciency ratio D
244
2018
2017 %2018/2017
1,459,271
1,444,305
882,921
780,496
980,562
107,361
848,915
777,730
985,703
106,832
1.0
4.0
0.4
(0.5)
0.5
2016
1,339,125
790,470
691,111
873,618
102,699
2018
34,341
48,424
25,645
14,201
7,810
2018
34,341
48,424
25,645
14,776
8,064
2018
0.449
0.465
8.21
11.70
12.08
0.64
1.55
1.59
47.0
2017 %2018/2017 B
34,296
48,355
25,362
12,091
6,619
0.1
0.1
1.1
17.5
18.0
2017 %2018/2017 C
34,296
48,392
25,473
13,550
7,516
0.1
0.1
0.7
9.0
7.3
2017 %2018/2017
11.2
0.6
0.404
0.463
7.14
10.41
11.82
0.58
1.35
1.48
47.4
2016
31,089
44,232
23,131
10,768
6,204
2016
31,089
43,853
22,766
11,288
6,621
2016
0.401
0.429
6.99
10.38
11.08
0.56
1.29
1.36
48.1
2018 Annual Report
Group selected data
2018
11.30
11.47
3.73
67.4
2017
10.84
12.26
4.08
65.2
2018
2017 %2018/2017
4,131,489
4,029,630
16,237
3.973
64,508
0.23
4.19
0.95
2018
143,759
19,896
18,149
1,747
32,014
2.5
0.6
(27.5)
(27.0)
4.5
16,136
5.479
88,410
0.22
4.15
1.32
2017 %2018/2017
133,252
17,254
15,759
1,494
25,391
7.9
15.3
15.2
16.9
26.1
2016
10.55
12.53
3.93
73.8
2016
3,928,950
14,582
4.877
72,314
0.21
4.15
1.16
2016
124,882
15,220
13,864
1,356
20,917
2018
202,713
13,217
2017 %2018/2017
202,251
13,697
0.2
(3.5)
2016
188,492
12,235
SOLVENCY AND NPL RATIOS (%)
Fully loaded CET1 F
Phased-in CET1 F
NPL ratio
NPL coverage ratio
THE SHARE, MARKET CAPITALISATION AND DIVIDEND
Number of shareholders
Shares (millions)
Share price (euros) E
Market capitalisation (euros)
Dividend per share (EUR million)E G
Tangible book value per share (euros) E
Price / Tangible book value per share (X) E
CUSTOMERS (thousands)
Total customers
Loyal customers H
Loyal retail customers
Loyal SMEs & corporate customers
Digital customers I
OPERATING DATA
Number of employees
Number of branches
A. Includes customer deposits, mutual funds, pension funds and managed portfolios.
B. In constant euros: Net interest income: +8.7%; Total income: +9.0%; Net operating income: +11.2%; Attributable proft: +32.1%.
C. In constant euros: Net interest income: +8.7%; Total income: +8.9%; Net operating income: +10.6%; Attributable proft: +18.5%.
D. In addition to IFRS measures, we present non-IFRS measures including those which we refer to as underlying measures. These underlying measures allow in our view a
better year-on-year comparability as they exclude items outside the ordinary course performance of our business which are grouped in the ‘management adjustment’
line and are further detailed at the end of section 3.2 and in section 8 – Alternative Performance Measures – of this chapter.
E. 2016 data adjusted to capital increase of July 2017.
F. 2018 data applying the IFRS9 transitional arrangements.
G. Total dividend charged against the year. In 2018, subject to the Board and 2019 AGM approval.
H. Active customer who receive most of their fnancial services from the Group according to the commercial segment that they belong to. Various engaged customer levels
have been defned taking proftability into account.
I. Every consumer of a commercial bank’s services who has logged on to their personal online banking and/or mobile banking in the last 30 days.
245
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
3. Group fnancial performance
3.1 Situation of Santander
At December 2018, Santander was the largest banking group in
the Eurozone by market capitalisation (EUR 64,508 million) and the
16th in the world.
The Group engages in all types of activities, operations and
services that are typical of the banking business in general. Its
business model is focused on commercial banking products and
services with the aim of meeting the needs of its 144 million
customers, including individuals, private banking customers, SMEs,
businesses and corporates.
Santander’s strategy remained focus on customer loyalty. The
number of loyal customers (19.9 million) rose by 2.6 million in
the year (+15%), with individuals as well as companies rising. The
number of digital customers (32.0 million) rose by 6.6 million in
2018 (+26%), underscoring the strength of our digital strategy.
The Group operates through a global network of 13,217 branches,
the largest excluding Chinese banks and Sberbank Group, as well
as digital channels, in order to provide top-quality service and
fexibility. Santander is among the top three banks in customer
satisfaction in seven of its main countries.
Santander has EUR 1,459,271 million assets and manages EUR
980,562 million of total customer funds across all its customer
segments. It has more than four million shareholders and over
200,000 employees. Retail Banking business accounts for 87% of
the Group’s total income.
The Group is highly diversifed and operates mainly in 10 core
units, where it maintains signifcant market shares.
As described in Note 1.b to the consolidated fnancial statements,
our reported results are prepared in accordance with IFRS and
the analysis of our fnancial situation and performance in this
consolidated directors’ report is mainly based on those IFRS
results. However, to measure our performance we also use non-
IFRS measures and APMs or Alternative Performance Measures.
While section 8 – Alternative Pe rformance Measures of this
chapter provides a more detailed view of all those measures,
these are the main adjustments we make to our IFRS results when
providing non-IFRS measures:
- Underlying results measures. We present what we call
underlying results measures which in our view allow better year-
on-year comparisons as they exclude items outside the ordinary
course performance of our business which are grouped in the
management adjustments line, and are further detailed at the
end of section 3.2 of this chapter.
In addition, the results by business areas in section 4 below are
presented only on an underlying basis in accordance with IFRS8,
and reconciled on an aggregate basis to our IFRS consolidated
results in note 52.c to the consolidated fnancial statements.
- Local currency measures. We make use of certain fnancial
measures in local currency to help in the assessment of our
ongoing operating performance. These non-IFRS fnancial
measures include the results of operations of our subsidiary
banks located outside the Eurozone, excluding the impact of
foreign exchange. Because changes in foreign currency exchange
rates have a non-operating impact on the results, we believe that
evaluating their performance on a local currency basis provides
an additional and meaningful assessment of performance to
both management and the company’s investors. Section 8 –
Alternative Performance Measures of this chapter explains how
we exclude the exchange rate impact from fnancial measures in
local currency.
On the other hand, certain fgures contained in this consolidated
directors’ report, including fnancial information, have been subject
to rounding to enhance their presentation. Accordingly, in certain
instances, the sum of the numbers in a column or a row in tables
contained in this consolidated directors’ report may not conform
exactly to the total fgure given for that column or row.
246
2018 Annual Report
Group financial performance
3.2 Results
2018 Highlights
Attributable profit to the parent of EUR 7,810 million, up 18% from 2017, including EUR -254 million, of
management adjustments in 2018 (EUR -897 million in 2017). Excluding the FX impact it rose 32%, as follows:
• Total income increased 9% backed by the rise in loyal and digital customers, increased business volumes
(loans and deposits) and management of spreads.
• Operating expenses rose 7% because of higher inflation in some countries, investments in
transformation and digitalisation and integration of some entities. In real terms (excluding inflation and
the perimeter effect), costs decreased 0.5%.
• Our efficiency ratio (47%) continued to make us one of the most efficient global banks in the world, with
a slight year-on-year improvement.
Credit quality continued to improve: cost of credit of 1.00% and NPL ratio of 3.73%.
Seven of our ten core units grew their underlying profit year-on-year in local currency. Five of them at
double-digit rates.
The Group’s profitability continues to be one of the best among European banks with a RoTE of 11.7%. RoTE
and RoRWA improved year-on-year.
Earnings per share (EPS) were EUR 0.449, 11.2% higher than in 2017 (EUR 0.404).
Summarised income statement
EUR million
Net interest income
Net fee income (commission income minus commission expense)
Gains or losses on fnancial assets and liabilities
and exchange diferences (net)
Dividend income
Share of results of entities accounted for using the equity method
Other operating income / expenses
Total income
Operating expenses
Administrative expenses
Staf costs
Other general administrative expenses
Depreciation and amortisation
Impairment or reversal of impairment of fnancial assets
not measured at fair value through proft or loss (net)
o/w: net loan-loss provisions
Impairment on other assets (net)
Provisions or reversal of provisions
Gain or losses on non fnancial assets and investments, net
Negative goodwill recognised in results
Gains or losses on non-current assets held for sale
not classifed as discontinued operations
Proft or loss before tax from continuing operations
Tax expense or income from continuing operations
Proft from the period from continuing operations
Proft or loss after tax from discontinued operations
Proft for the period
Attributable proft to non-controlling interests
Attributable proft to the parent
Change
2017
Absolute
% % excl. FX
2018
34,341
11,485
1,797
370
737
(306)
48,424
34,296
11,597
1,665
384
704
(291)
48,355
(22,779)
(22,993)
(20,354)
(11,865)
(8,489)
(2,425)
(20,400)
(12,047)
(8,353)
(2,593)
(8,986)
(8,873)
(207)
(2,223)
28
67
(123)
14,201
(4,886)
9,315
—
9,315
1,505
7,810
(9,259)
(9,111)
(1,273)
(3,058)
522
—
(203)
12,091
(3,884)
8,207
—
8,207
1,588
6,619
45
(112)
132
(14)
33
(15)
69
214
46
182
(136)
168
273
238
1,066
835
(494)
67
80
2,110
(1,002)
1,108
—
1,108
(83)
1,191
0.1
(1.0)
7.9
(3.6)
4.7
5.2
0.1
(0.9)
(0.2)
(1.5)
1.6
(6.5)
(2.9)
(2.6)
(83.7)
(27.3)
(94.6)
—
(39.4)
17.5
25.8
13.5
—
13.5
(5.2)
18.0
8.7
8.5
20.9
(1.0)
14.2
19.8
9.0
6.6
7.6
5.6
10.6
(0.8)
6.8
7.2
(83.4)
(21.6)
(94.5)
—
(35.9)
30.3
40.0
25.8
—
25.8
0.8
32.1
2016
31,089
10,180
2,101
413
444
5
44,232
(21,101)
(18,737)
(11,004)
(7,733)
(2,364)
(9,626)
(9,518)
(140)
(2,508)
30
22
(141)
10,768
(3,282)
7,486
—
7,486
1,282
6,204
247
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Detail of the main income statement items
Total income
Total income amounted to EUR 48,424 million, virtually
unchanged in the year. Excluding the exchange rate impact it
rose 9%. Net interest income and fee income accounted for 95%
of total income, well above the average of our competitors,
enabling consistent and recurring growth while limiting the
impact that periods of high volatility can have on gains on
financial transactions.
Net interest income
Net interest income in 2018 amounted to EUR 34,341 million, very
similar compared to 2017. The following tables show the average
balance sheet balances for each year, obtained as the average of
the months in the period. We do not believe that monthly averages
present trends that are materially diferent from trends that daily
averages would show, as well as the interest generated.
They also include, by domicile of the Group entity at which
the relevant assets or liabilities are accounted for, our average
balances and average interest rates obtained in 2018 and 2017.
Domestic balances are those of Group entities domiciled in Spain,
which refect our domestic activity, and international balances are
those of Group entities domiciled outside of Spain, which refect
our foreign activity. Within the latter, mature markets include
Continental Europe (except Spain and Poland), the UK and the US.
On the other hand, developing markets include Latin America and
Poland.
The average balance of interest-earning assets was EUR 1,246,189
million in 2018, 3% higher year-on-year (EUR 1,204,847 million).
The increase was largely due to domestic activities, benefting
from the acquisition of Banco Popular in June 2017, and mature
markets, driven by the growth of Santander Consumer Finance and
the US. On the other hand, developing markets decreased because
of exchange rates.
Average balance sheet - assets and interest income
EUR million
Assets
Cash and deposits at central banks and loans
and advances to credit institutions
Domestic
International - Mature markets
International - Developing markets
Loans and advances to customers
Domestic
International - Mature markets
International - Developing markets
Debt securities
Domestic
International - Mature markets
International - Developing markets
Hedging income
Domestic
International - Mature markets
International - Developing markets
Other interest
Domestic
International - Mature markets
International - Developing markets
Total interest-earning assets
Domestic
International - Mature markets
International - Developing markets
Other assets
Assets from discontinued operations
Average total assets
248
2018
2017
Average
balance
Interest
Average
rate (%)
Average
balance
Interest
Average
rate (%)
192,669
2,875
1.49%
182,712
3,721
2.04%
75,250
66,326
51,093
861,327
240,845
451,034
169,448
192,193
70,746
55,173
66,274
188
342
2,345
0.25%
0.52%
4.59%
43,489
5,366
17,287
20,836
5.05%
2.23%
3.83%
12.30%
6,429
1,007
792
4,630
3.35%
1.42%
1.44%
6.99%
59,335
68,312
55,065
824,226
220,067
433,894
170,265
197,909
73,166
56,602
68,141
305
(37)
(37)
379
1,227
617
407
203
119
195
3,407
0.20%
0.29%
6.19%
43,640
4,828
17,153
21,659
5.29%
2.19%
3.95%
12.72%
3.61%
1.80%
1.45%
7.35%
7,141
1,315
821
5,005
507
2
(234)
739
1,032
432
330
270
1,246,189
386,841
572,533
286,815
196,672
—
1,442,861
54,325
7,141
18,791
28,393
4.36%
1.85%
3.28%
9.90%
54,325
1,204,847
352,568
558,808
293,471
202,834
—
1,407,681
56,041
6,696
18,265
31,080
4.65%
1.90%
3.27%
10.59%
56,041
2018 Annual Report
Group financial performance
The average return on total interest-earning assets declined 29
bps to 4.36%. The drop was largely due to the activities conducted
by our entities in developing markets, which fell 69 bps to 9.90%
during the period. All balance sheet items decreased (cash and
deposits from central banks and credit entities: -160 bps; Loans
and advances to customers: -42 bps; Debt securities: -36 bps).
The average return on total interest-earning assets from the
domestic activities fell 5 bps to 1.85% (cash and due from
central banks and credit entities: +5 bps; Loans and advances to
customers: +4 bps; Debt securities: -38 bps).
The average balance of interest-bearing liabilities was EUR
1,193,108 million in 2018, an increase of 4% year-on-year (EUR
1,147,616 million). As with the interest-earning assets, the increase
was largely due to domestic activities, heavily impacted by the
acquisition of Banco Popular and the mature markets. On the other
hand, balances in the developing markets were afected, as well as
the assets, by exchange rates.
The average cost of interest-bearing liabilities fell 22 bps to 1.67%.
The drop was also largely due to the activities carried out by our
international entities in the developing markets, whose average
cost declined 99 bps to 4.73%, mostly due to lower average
interest rates on customer deposits (-115 bps) and marketable debt
securities (-177 bps). The average cost of domestic activities fell
7 bps to 0.79% mainly due to the lower cost of customer deposits
(-17 bps).
Average balance sheet - liabilities and interest expense
EUR million
Liabilities and stockholders’ equity
Deposits from central banks and credit institutions
Domestic
International - Mature markets
International - Developing markets
Customer deposits
Domestic
International - Mature markets
International - Developing markets
Marketable debt securities
Domestic
International - Mature markets
International - Developing markets
Other interest-bearing liabilities
Domestic
International - Mature markets
International - Developing markets
Hedging expenses
Domestic
International - Mature markets
International - Developing markets
Other interest
Domestic
International - Mature markets
International - Developing markets
Total interest-bearing liabilities
Domestic
International - Mature markets
International - Developing markets
Other liabilities
Non-controlling interests
Shareholders´ equity
Liabilities from discontinued operations
Average total liabilities and stockholders´ equity
Average
balance
182,268
93,873
55,992
32,403
740,469
219,194
351,034
170,241
216,720
74,029
104,501
38,190
8,159
6,102
940
1,117
Average
balance
191,073
101,728
57,768
31,577
773,578
250,470
351,873
171,235
221,196
75,752
111,863
33,581
7,261
5,470
799
992
2018
Interest
Average
rate (%)
1.58%
0.50%
1.14%
5.86%
1.17%
0.35%
0.59%
3.56%
2.75%
2.05%
2.28%
5.86%
2.56%
1.66%
0.63%
9.07%
3,018
509
659
1,850
9,062
882
2,085
6,095
6,073
1,555
2,550
1,968
186
91
5
90
24
(83)
(108)
215
1,620
485
127
1,008
1,193,108
433,420
522,303
237,385
19,984
3,440
5,318
11,226
1.67%
0.79%
1.02%
4.73%
143,798
10,884
95,071
—
1,442,861
19,984
1,147,616
393,198
512,467
241,951
155,072
12,356
92,637
—
1,407,681
2017
Interest
Average
rate (%)
1.24%
0.28%
0.94%
4.54%
1.50%
0.52%
0.55%
4.71%
3.07%
2.01%
2.15%
7.63%
2.43%
1.64%
0.64%
8.24%
2,261
261
529
1,471
11,074
1,140
1,919
8,015
6,651
1,489
2,248
2,914
198
100
6
92
(234)
(27)
(256)
49
1,795
399
92
1,304
21,745
3,362
4,538
13,845
1.89%
0.86%
0.89%
5.72%
21,745
249
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
The change in interest income / (expense) shown in the table
below was calculated as follows:
• The change in volumes, which is obtained by applying the
previous period’s interest rates to the diference between the
average balances of the current and previous periods.
• Interest income declined EUR 1,716 million due to developing
markets, which ofset the increase in domestic activity and
mature markets.
• Interest expense fell EUR 1,761 million also due to developing
markets.
• The change in interest rate, which is obtained by applying to the
average balance for the previous year the diference between the
rates of the current and previous periods.
The performance of interest income and interest expense was the
following:
• As a result, net interest income increased EUR 45 million due to the
net impact of increased domestic and mature market’s volumes
and higher rates in developing countries, ofset by the fall in
volumes in developing markets (exchange rates) and low interest
rates in mature ones.
Volume and proftability analysis
EUR million
2018 / 2017
Increase (decrease) due to changes in
Rate
(715)
33
82
(830)
(1,644)
76
(1,000)
(720)
(519)
(266)
(13)
(240)
Net
variation
(846)
69
147
(1,062)
(151)
538
134
(823)
(712)
(308)
(29)
(375)
(202)
(39)
197
(360)
195
185
77
(67)
(2,878)
(157)
(931)
(1,790)
(1,716)
445
526
(2,687)
Interest income
Volume
(131)
36
65
(232)
1,493
462
1,134
(103)
(193)
(42)
(16)
(135)
(202)
(39)
197
(360)
195
185
77
(67)
1,162
602
1,457
(897)
Cash and deposits at central banks and loans and advances to credit institutions
Domestic
International - Mature markets
International - Developing markets
Loans and advances to customers
Domestic
International - Mature markets
International - Developing markets
Debt securities
Domestic
International - Mature markets
International - Developing markets
Hedging income
Domestic
International - Mature markets
International - Developing markets
Other interest
Domestic
International - Mature markets
International - Developing markets
Total interest-earning assets
Domestic
International - Mature markets
International - Developing markets
250
2018 Annual Report
Volume and costs analysis
EUR million
Interest expense
Deposits from central banks and credit institutions
Domestic
International - Mature markets
International - Developing markets
Customer deposits
Domestic
International - Mature markets
International - Developing markets
Marketable debt securities
Domestic
International - Mature markets
International - Developing markets
Other interest-bearing liabilities
Domestic
International - Mature markets
International - Developing markets
Hedging expenses
Domestic
International - Mature markets
International - Developing markets
Other interest
Domestic
International - Mature markets
International - Developing markets
Total interest-bearing liabilities
Domestic
International - Mature markets
International - Developing markets
Group financial performance
2018 / 2017
Increase (decrease) due to changes in
Volume
45
23
60
(38)
182
147
(12)
47
133
35
422
(324)
(23)
(10)
(2)
(11)
258
(56)
148
166
(175)
86
35
(296)
420
225
651
Rate
712
225
70
417
(2,194)
(405)
178
(1,967)
(711)
31
(120)
(622)
11
1
1
9
Net
variation
757
248
130
379
(2,012)
(258)
166
(1,920)
(578)
66
302
(946)
(12)
(9)
(1)
(2)
258
(56)
148
166
(175)
86
35
(296)
(2,181)
(1,761)
(147)
129
78
780
(456)
(2,163)
(2,619)
251
Responsible bankingCorporate governanceEconomic and financial reviewRisk management Net interest income. Summary of volume, proftability and costs analysis
EUR million
Interest income
Domestic
International - Mature markets
International - Developing markets
Interest expense
Domestic
International - Mature markets
International - Developing markets
Net interest income
Domestic
International - Mature markets
International - Developing markets
2018 / 2017
Increase (decrease) due to changes in
Volume
Rate
Net
variation
1,162
602
1,457
(897)
420
225
651
(2,878)
(1,716)
(157)
(931)
445
526
(1,790)
(2,687)
(2,181)
(1,761)
(147)
129
78
780
(456)
(2,163)
(2,619)
742
377
806
(441)
(697)
(10)
(1,060)
373
45
367
(254)
(68)
Net interest income remained stable, virtually unchanged in euros.
Excluding the exchange rate impact, net interest income rose 9%,
due to greater loans and advances to customers and customer
deposit volumes, mainly in developing countries, which grew at
double-digit rates in local currency volumes and spreads increased.
The performance by geographic areas excluding the exchange rate
impact was the following:
Banco Popular’s integration; Mexico (+13%) driven by increased
volumes and higher interest rates.
Growth also in the US (+1%) driven by greater volumes which
ofset lower spreads on loans in Santander Consumer USA and
the higher cost of funding from Santander Bank; and Argentina
(+52%), spurred by management of spreads in a scenario of
higher interest rates, volumes and infation.
• All countries grew except for the UK. Of note was: Spain (+15%),
with sustained improvement of spreads driven by our strategy
to reduce the cost of deposits and Banco Popular’s integration;
Brazil (+16%) due to higher volumes; Portugal (+9%) partly due to
• The UK decreased 4% due to pressure on spreads on new
mortgages lending and lower standard variable rate (SVR)
balances.
Net interest income
EUR million
Net fee income
EUR million
34,296
34,341
31,089
11,597
11,485
10,180
0%A
2018 vs 2017
-1%A
2018 vs 2017
2016
2017
2018
2016
2017
2018
A. Excluding exchange rate impact: +9%.
A. Excluding exchange rate impact: +9%.
252
2018 Annual Report
Net fee income
EUR million
Fees from services
Credit and debit cards
Account management
Bill discounting
Guarantees and other contingent liabilities
Other operations
Mutual and pension funds
Securities and custody services
Managed portfolio business
Insurance
Net fee income
Group financial performance
Change
2017
Absolute
% % excl. FX
2016
2018
7,037
2,156
1,371
323
414
2,774
1,108
794
305
7,350
2,124
1,490
357
501
2,879
815
841
251
2,241
2,340
11,485
11,597
(312)
32
(120)
(34)
(87)
(104)
293
(47)
54
(99)
(112)
(4.3)
1.5
(8.0)
(9.5)
(17.4)
(3.6)
35.9
(5.6)
21.5
(4.2)
(1.0)
6.3
12.6
8.7
3.9
(11.6)
3.9
41.0
1.7
34.5
4.3
8.5
6,261
1,755
1,191
284
435
2,597
757
712
201
2,249
10,180
Net fee income
Net fee income amounted to EUR 11,485 million, 1% below 2017.
Excluding the exchange rate impact, net fee income was 9%
higher, refecting greater activity and more loyal customers, as
well as the strategy of growth in services and higher value-added
products and in areas of low capital consumption.
By global businesses, excluding the exchange rate impact,
growth in net fee income from Retail Banking (+6%) and Wealth
Management (+63%), while that from Santander Corporate &
Investment Banking was stable (+0.3%) in the year.
By region, net fee income rose in all units, with two exceptions:
SCF (-9%) due to the adaptation of insurance business to the new
environment, and the US (-7%) driven by lower servicing fees at
Santander Consumer USA and the New York branch. The largest
increases were recorded in Argentina (+47%) spurred by greater
buying and selling foreign currency activity in a volatile exchange
rate environment and higher revenue from cash management;
Spain (+13%) thanks to increased transactions; Brazil (+15%) with
rises in almost all lines, particularly in cards, current accounts,
mutual funds and insurance; and Chile (+12%) driven by income
from insurance, mutual funds and cards.
Gains / (losses) on fnancial assets and liabilities and exchange
diferences (net)
Gains / (losses) on fnancial assets and liabilities and exchange
diferences (net), which account for less than 4% of total income,
increased 8% to EUR 1,797 million. Excluding the exchange rate
impact, they rose 21% driven by increases in Spain (sale of ALCO
portfolios), Argentina (favoured by market’s volatility), and the
Corporate Centre, the latter resulting from reduced hedging costs of
exchange rates.
In this line item, gains and losses on fnancial assets and liabilities
are due to the following: trading portfolio and derivative
instruments marked-to-market, including spot market foreign
exchange transactions, sales of investment securities and liquidation
of our corresponding hedge or other derivative positions.
For further details, see note 44 to the consolidated fnancial
statements.
Exchange rate diferences show basically the gains / (losses) on
currency dealings, the diferences that arise on translations of
monetary items in foreign currencies to the functional currency,
and those disclosed on non-monetary assets in foreign currency
at the time of their disposal. The Group manages the currencies to
which it is exposed together with the arrangement of derivative
instruments and, accordingly, the changes in this line item should
be analysed together with those recognised under Gains / (losses)
on fnancial assets and liabilities.
For further details, see note 45 to the consolidated fnancial
statements.
Dividend income
Dividend income was EUR 370 million in 2018, 4% less than in
2017 (EUR 384 million). Excluding the exchange rate impact, it was
1% lower.
Share of results of entities accounted for by the equity method
The share of results of entities accounted for by the equity method
were EUR 737 million in 2018, 5% higher than in 2017 (EUR 704
million). Excluding the exchange rate impact, they increased 14%,
mainly driven by Spain.
For further information, see notes 13 and 41 to the consolidated
fnancial statements.
Other operating income / (expenses)
Losses on net other operating income in 2018 were EUR 306
million (losses of EUR 291 million in 2017). Included in this item
are income and expenses from insurance activity, non-fnancial
services, other fees and contributions to the Deposit Guarantee
Fund and the Single Resolution Fund. The higher loss was due to
the increased contribution of EUR 47 million to these funds.
For further information, see note 46 to the consolidated fnancial
statements.
253
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Operating expenses
EUR million
Staf costs
Other administrative expenses
Information technology
Communications
Advertising
Buildings and premises
Printed and ofce material
Taxes (other than tax on profts)
Other expenses
Administrative expenses
Depreciation and amortisation
Operating expenses
2018
2017
Absolute
% % excl. FX
Change
11,865
12,047
(182)
8,489
1,550
527
646
8,353
1,257
529
757
1,846
1,798
122
557
133
583
3,240
3,296
20,354
20,400
2,425
2,593
22,779
22,993
(1.5)
1.6
23.4
(0.5)
136
294
(2)
(110)
(14.6)
48
(11)
(26)
(56)
(46)
(168)
(214)
2.7
(8.2)
(4.5)
(1.7)
(0.2)
(6.5)
(0.9)
2016
11,004
7,733
1,094
499
691
1,708
146
484
3,111
18,737
2,364
21,101
5.6
10.6
33.0
10.8
(8.1)
8.7
(1.3)
3.7
6.3
7.6
(0.8)
6.6
Operating expenses
Operating expenses totalled EUR 22,779 million, 1% lower year-
on-year. Administrative expenses remained almost stable, and
depreciation and amortisation decreased 6%.
We believe that the measures to optimise costs, as part of the
ongoing integration processes mainly in Spain, Portugal and Poland,
will be refected in greater synergies in the future. This evolution
is enabling us to combine the investments made to enhance the
customer experience with an operational efciency that continues to
be the sector’s reference.
Excluding the exchange rate impact, operating expenses rose 7%
as a result of higher infation in some countries, investments in
transformation and digitalisation, and various integration processes.
The efciency ratio (cost-to-income ratio) was 47.0% in 2018, better
than in 2017 (47.4%), enabling us to combine one of the sector’s
best efciency ratios and be among the top three banks in customer
satisfaction in seven of our core countries.
In real terms (excluding infation and perimeter), costs remained fat
for the second year running (-0.5% in 2018 and +0.3% in 2017). Of
note by units were the lower costs in the US, Spain, SCF and Portugal.
The latter three refecting the integration processes implemented.
The main rises were in Mexico and Chile, due to investments in
infrastructure, and in Poland, due to transformation projects and
pressure on salaries.
Efciency ratio (cost-to-income)
%
48.1
47.4
47.0
2016
2017
2018
-0.4 pp
2018 vs 2017
Impairment or reversal of impairment of fnancial assets not
measured at fair value through proft or loss (net)
Impairment or reversal of impairment of fnancial assets not
measured at fair value through proft or loss (net) were EUR 8,986
million in 2018, a 3% decrease (EUR 9,259 million in 2017).
In this item, net loan-loss provisions was 3% lower at EUR 8,873
million. Excluding the exchange rate impact, they rose 7%, with
the following detail by countries:
• The largest increases were in Spain due to the acquisition of
Banco Popular; SCF, because of higher releases and portfolio
sales in 2017, although its cost of credit remained below
the standards for this business; and Argentina due to higher
provisions for individual customers and the impact of the peso’s
depreciation on dollar balances.
• Lastly, the US and Mexico recorded falls in the year, growth in
Brazil although at a slower pace than the loan book, as well as
the UK and Portugal, which maintained a low cost of credit at
below 10 bps.
Credit quality ratios performed well in the last twelve months. The
NPL ratio improved to 3.73% from 4.08% in 2017, the coverage
ratio increased to 67% from 65% a year earlier, while the cost of
credit fell 7 bps to 1.00%. By countries, the NPL ratio improved in
eight of our 10 core units and coverage in six.
254
2018 Annual Report
Group financial performance
Impairment or reversal of impairment of fnancial assets not measured at fair value through proft or loss (net)
EUR million
Financial assets at fair value through other comprehensive income
Financial assets at amortised cost
Financial assets measured at cost
Financial assets available-for-sale
Loans and receivables
Held-to-maturity investments
Impairment or reversal of impairment of fnancial assets not
measured at fair value through proft or loss (net)
Impairment on other assets (net)
EUR million
Impairment of investments in subsidiaries, joint ventures and associates, net
Impairment on non-fnancial assets, net
Tangible assets
Intangible assets
Others
Impairment on other assets (net)
2018
1
8,985
2017
2016
8
10
9,241
—
52
(11)
9,557
28
8,986
9,259
9,626
2018
17
190
83
117
(10)
207
2017
13
1,260
72
1,073
115
1,273
2016
17
123
55
61
7
140
For further details, see the ‘Credit risk’ section in the Risk
management chapter.
For further details, see note 25 to the consolidated fnancial
statements.
Impairment on other assets (net)
Gains or losses on non-fnancial assets and investments (net)
Impairment on other assets in 2018 declined to EUR 207 million. In
2017, it was EUR 1,273 million, including impairment losses of EUR
1,073 million in intangible assets, of which EUR 799 million was
related to the goodwill of Santander Consumer USA.
Net gains on non-fnancial assets and investments were EUR 28
million in 2018, compared to EUR 522 million in 2017. The decrease
was mainly due to the fact that in 2017 we recorded capital gains
from the sale of Allfunds Bank (EUR 425 million).
Provisions or reversal of provisions
For further details, see note 49 to the consolidated fnancial
statements.
Provisions (net of reversal provisions) declined 27% in 2018, to EUR
2,223 million (EUR 3,058 million in 2017). Excluding the exchange
rate impact, 22% decrease mainly due to lower provisions for
legal and labour claims (trabalhistas) in Brazil and for potential
customer complaints in the UK.
Cost of credit
%
Net loan-loss provisions
EUR million
9,518
1.18
1.07
1.00
9,111
8,873
-0.07 pp
2018 vs 2017
-3% A
2018 vs 2017
2016
2016
2017
2017
2018
2018
2016
2017
2018
A. Excluding exchange rate impact: +7%.
255
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Attributable proft to the parent
EUR million
Earnings per share
Euros
7,810
6,204
6,619
0.401
0.404
0.449
+18%A
2018 vs 2017
+11%
2018 vs 2017
2016
2017
2018
2016 A
2017
2018
A. Excluding exchange rate impact: +32%.
A. Adjusted to capital increase of July 2017.
Negative goodwill recognised in results
Attributable proft to non-controlling interests
In 2018, EUR 67 million (no negative goodwill was recorded in
2017) due to the diference between the fair value of the net assets
acquired with the acquisition of Deutsche Bank Polska in Poland and
the transaction value.
The attributable proft to non-controlling interests was EUR 1,505
million, 5% lower than in 2017. Excluding the exchange rate
impact, it rose 1%.
Gains or losses on non-current assets held for sale not classifed
as discontinued operations
This item, which includes mainly impairment of foreclosed assets
recorded and the sale of properties acquired upon foreclosure, were
EUR -123 million in 2018, compared to EUR -203 million in 2017.
Proft before tax
Proft before tax was 17% higher, at EUR 14,201 million. Excluding
the exchange rate impact, it increased 30%, driven by strong
customer revenue (NII+fee income), controlled costs and the
improved cost of credit.
Income tax
Corporate income tax was EUR 4,886 million in 2018, a 26%
increase from EUR 3,884 million in 2017. The efective tax rate for
the Group as a whole was 34.4% compared to 32.1% in 2017.
For further details, see note 28 to the consolidated fnancial
statements.
Attributable proft to the parent
Attributable proft to the parent amounted to EUR 7,810 million,
18% higher compared to 2017 (EUR 6,619 million). Excluding the
exchange rate impact, attributable proft was 32% higher year-
on-year.
RoE was 8.21%, RoTE 11.70% and RoRWA 1.55% (7.14%, 10.41%
and 1.35% respectively in 2017).
Earnings per share was EUR 0.449, a 11.2% increase compared to
2017 (EUR 0.404).
RoRWA
%
10.38
10.41
11.70
1.29
1.35
1.55
2016
2017
2018
2016
2017
2018
RoTE
%
256
2018 Annual Report
Group financial performance
Underlying attributable proft to the parent
iii. Impairment of equity stakes and intangible assets held by the
The attributable proft to the parent recorded in 2018 and 2017
was afected by the following results (net of tax), that are outside
the ordinary course performance of our business and distort the
year-on-year comparison:
1. These results recorded in 2018 for EUR -254 million net of tax
were related to integrations (mainly restructuring costs; EUR
-280 million in Spain and EUR -40 million at the Corporate
Centre, both related to Popular), and positive results for
integration in Portugal (EUR 20 million) and the negative
goodwill adjustment in Poland (EUR 45 million).
2. These results in 2017 had a net impact of EUR -897 million on
proft, as follows:
i. Sale of Santander’s stake in Allfunds Bank. The capital gains
from the disposal of Santander’s 25% stake amounted to EUR
297 million (gross EUR 425 million recorded in gains/losses
on disposal of non-fnancial assets and investments).
ii. Restructuring costs: charge of EUR 300 million for the
integration of Banco Popular and an additional charge of EUR
85 million due to the integration of the commercial networks
in Germany.
Group of EUR 130 million.
iv. Impairment of goodwill in Santander Consumer USA of EUR
603 million.
v. Net impact of the tax reform, provisions for hurricanes and
other provisions in the US of EUR -76 million.
For further details, see note 52.c to the consolidated fnancial
statements.
Excluding these results from the diferent P&L lines where they
are recorded, and including them separately in the management
adjustments line, underlying attributable proft to the parent rose
7% to EUR 8,064 million (EUR 7,516 million in 2017). Excluding the
exchange rate impact, it was 18% higher.
By units, Spain, Portugal, Brazil, Mexico and the US recorded
double-digit growth, while SCF and Chile also rose. Poland
remained stable while the UK and Argentina decreased, the latter
afected by the high infation adjustment.
2018 Management adjustments
EUR million (net of tax)
2017 Management adjustments
EUR million (net of tax)
-320
-
254
40 Corporate Centre
integration costs
66
280 Spain integration costs
370
-897
73 US tax reform
297 Allfunds
capital gains
45 Poland badwill
20 Portugal integration
-1,267
130 equity stakes and
intangible assets
85 Germany integration costs
300 Popular integration costs
149 US (hurricanes and other
provisions)
603 goodwill (Santander
Consumer USA)
Positive
Net
Negative
Positive
Net
Negative
Attributable proft to the parent
EUR million
Underlying attributable proft to the parent
Management adjustments
Attributable proft to the parent
2018
8,064
(254)
7,810
Change
2017
Absolute
% % excl. FX
7,516
(897)
6,619
548
643
1,191
7.3
(71.7)
18.0
18.5
(71.6)
2016
6,621
(417)
32.1
6,204
257
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Underlying RoTE A
%
Underlying RoRWA A
%
11.82
12.08
11.08
1.59
1.48
1.36
2016
2017
2018
2016
2017
2018
A. Excluding management adjustments.
A. Excluding management adjustments.
As a result, the Group’s underlying RoTE was 12.08% compared
to 11.82% in 2017, and underlying RoRWA was 1.59% in 2018
compared to 1.48% a year earlier.
Below, the summarised income statement adjusted to the items
outside the ordinary course performance of our business (included
in the management adjustments line) as detailed in note 52.c of
the consolidated fnancial statements, where the reconciliation of
the aggregate underlying consolidated results of our segments
to the statutory consolidated results is presented.
Summarised underlying income statement
EUR million
Net interest income
Net fee income
Gains (losses) on fnancial transactions and exchange diferences
Other operating income
Total income
Administrative expenses and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses) and provisions
Proft before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Underlying attributable proft to the parent
2018
2017
Absolute
% % excl. FX
2016
Change
34,341
11,485
1,797
801
48,424
(22,779)
25,645
(8,873)
(1,996)
14,776
(5,230)
9,546
—
9,546
1,482
8,064
34,296
11,597
1,703
796
48,392
(22,918)
25,473
(9,111)
(2,812)
13,550
(4,587)
8,963
—
8,963
1,447
7,516
45
(112)
94
5
32
139
172
238
816
1,226
(643)
583
—
583
35
548
0.1
(1.0)
5.5
0.6
0.1
(0.6)
0.7
(2.6)
(29.0)
9.0
14.0
6.5
—
6.5
2.4
7.3
8.7
8.5
18.0
4.9
8.9
7.0
10.6
7.2
(22.1)
19.7
25.2
16.9
—
16.9
9.1
18.5
31,089
10,180
1,723
862
43,853
(21,088)
22,766
(9,518)
(1,960)
11,288
(3,396)
7,892
0
7,893
1,272
6,621
258
2018 Annual Report
Group financial performance
3.3 Balance sheet
Balance sheet A
EUR million
Assets
Cash, cash balances at central banks and other deposits on demand
Financial assets held for trading
Non-trading fnancial assets mandatorily at fair value through proft or loss
Financial assets designated at fair value through proft or loss
Financial assets at fair value through other comprehensive income
Financial assets available-for-sale
Financial assets at amortised cost
Loans and receivables
Investments held-to-maturity
Hedging derivatives
Changes in the fair value of hedged items in portfolio hedges of interest risk
Investments
Assets under insurance or reinsurance contracts
Tangible assets
Intangible assets
Tax assets
Other assets
Non-current assets held for sale
Total assets
Liabilities and equity
Financial liabilities held for trading
Financial liabilities designated at fair value through proft or loss
Financial liabilities at amortised cost
Hedging derivatives
Changes in the fair value of hedged items in portfolio hedges of interest rate risk
Liabilities under insurance or reinsurance contracts
Provisions
Tax liabilities
Other liabilities
Liabilities associated with non-current assets held for sale
Total liabilities
Shareholders' equity
Other comprehensive income
Minority interests
Total equity
Total liabilities and equity
2018
113,663
92,879
10,730
57,460
121,091
946,099
8,607
1,088
7,588
324
26,157
28,560
30,251
9,348
5,426
1,459,271
70,343
68,058
1,171,630
6,363
303
765
13,225
8,135
13,088
—
1,351,910
118,613
(22,141)
10,889
107,361
1,459,271
Change
2017
110,995
125,458
Absolute
2,668
(32,579)
%
2.4
(26.0)
2016
76,454
148,187
34,782
22,678
65.2
31,609
133,271
903,013
13,491
8,537
1,287
6,184
341
22,974
28,683
30,243
9,766
15,280
1,444,305
107,624
59,616
1,126,069
8,044
330
1,117
14,489
7,592
12,591
—
1,337,472
116,265
(21,776)
12,344
106,833
1,444,305
70
(199)
1,404
(17)
3,183
(123)
8
(418)
(9,854)
14,966
(37,281)
8,442
45,561
(1,681)
(27)
(352)
(1,264)
543
497
—
14,438
2,348
(365)
(1,455)
528
14,966
0.8
(15.5)
22.7
(5.0)
13.9
(0.4)
0.0
(4.3)
(64.5)
1.0
(34.6)
14.2
4.0
(20.9)
(8.2)
(31.5)
(8.7)
7.2
3.9
—
1.1
2.0
1.7
(11.8)
0.5
1.0
116,774
840,004
14,468
10,377
1,481
4,836
331
23,286
29,421
27,678
8,447
5,772
1,339,125
108,765
40,263
1,044,240
8,156
448
652
14,459
8,373
11,070
—
1,236,426
105,977
(15,039)
11,761
102,699
1,339,125
A. Due to the application of IFRS9 from 1 January 2018 and the decision to not restate the fnancial statements, as permitted in the regulation, the balance sheet of
December 2018 is not comparable with previous reporting periods in some items. Note 1.b to the consolidated fnancial statements includes a reconciliation of
balances as of 31 December 2017 under IAS39 and the corresponding balances as of 1 January 2018 under IFRS9 where the efect of the frst application of the rule is
broken down.
259
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2018 Highlights
Loans and advances to customers increased 4% year-on-year. The Group uses gross loans excluding reverse
repurchase agreements for the purpose of analysing the traditional retail banking loans.
• The latter, excluding the exchange rate impact, grew 4%, and in eight of the ten core units, particularly in
developing countries (+14%).
• The loan portfolio maintained a balanced structure: individuals (45%), consumer credit (17%), SMEs
and companies (27%) and SCIB (11%).
Customer deposits remained stable year-on-year. The Group uses customer deposits, excluding repos,
and mutual funds, excluding the exchange rate impact, for the purpose of analysing the traditional retail
banking funds:
• Customer funds rose 4%. with growth in eight of the ten core units (basically flat in the other two).
Demand and time deposits, in particular, grew while mutual funds remained virtually unchanged
because of the market environment.
• The customer funds structure is also clearly diversified by product: demand deposits (61%), time
deposits (22%) and investment funds (17%).
The net loan-to-deposit ratio was 113% (109% in 2017) reflecting the retail nature of our balance sheet.
Loans and advances to customers amounted EUR 882,921 million
in December 2018, a 4% increase compared to EUR 848,915 million
at the end of 2017.
Gross loans and advance to customers, excluding the exchange
rate impact and reverse repos, increased 4%, with the following
highlights:
The Group uses gross loans excluding reverse repurchase
agreements for the purpose of analysing the traditional
commercial banking loans. To facilitate the evaluation of the
management of the Group in the period reviewed, some comments
below do not take into account exchange rates, which have a
negative impact on the Group as a whole of two percentage points.
– Rises in eight of the ten core countries, notably all developing
markets which grew 14%: Argentina (+40%), due to balances
in pesos as well as the impact of the peso’s depreciation on
dollar balances, Poland (+30%) partly due to the integration
of the retail and SME businesses acquired from Deutsche Bank
Polska, Brazil (+13%), and Mexico and Chile (+10% each).
Loans and advances to customers
EUR million
Commercial bills
Secured loans
Other term loans
Finance leases
Receivable on demand
Credit cards receivable
Impaired assets
2018
2017
Absolute
Change
33,301
29,287
478,068
473,936
265,696
257,441
30,758
8,794
28,511
6,721
23,083
21,809
4,014
4,132
8,255
2,247
2,073
1,274
34,218
36,280
(2,062)
Gross loans and advances to customers (excl. reverse repos)
873,918
853,985
19,933
Reverse repos
Gross loans and advances to customers
Loan-loss allowances
32,310
18,864
13,446
906,228
872,849
33,379
23,307
23,934
(627)
(2.6)
24,393
Net loans and advances to customers
882,921
848,915
34,006
4.0
790,470
260
%
13.7
0.9
3.2
7.9
30.8
5.8
(5.7)
2.3
71.3
3.8
2016
23,894
454,677
232,288
25,357
8,102
21,363
32,573
798,254
16,609
814,863
2018 Annual Report
Gross loans and advances to customers
(excluding reverse repos)
EUR billion
798
854
874
Group financial performance
Gross loans and advances to customers
(excluding reverse repos)
% of operating areas. December 2018
Argentina: 1%
Chile: 4%
Brazil: 9%
Mexico: 4%
US: 10%
Other Americas: 1%
Spain: 24%
2016
2017
2018
A. Excluding exchange rate impact: +4%.
+2%A
2018 vs 2017
Other Europe: 2%
Poland: 3%
Portugal: 4%
SCF: 11%
United Kingdom: 27%
– More moderate growth in the mature markets (+1%), with growth
• In Spain, 70% of loans are linked to foating rates and 30% at
in the US (+6%) supported by higher origination volumes at
Santander Consumer USA, and growth in consumer, companies,
and SCIB at Santander Bank. The UK increased slightly (+1%).
– Portugal and Spain’s banking sector continued to deleverage
with a credit decrease around 3%. In this context, we recorded
declines. In Portugal, down 2%, because of the sale of non-
productive portfolios and in Spain by 4% because of lower
wholesale balances and institutions.
Gross loans and advance to customers excluding reverse repos
maintained a balanced structure: individuals (45%), consumer
credit (17%), SMEs and companies (27%) and SCIB (11%).
At 2018 year-end, 53% of total loans and advances to customers
maturing in over one year, were linked to foating interest rates,
while the remaining 47% was linked to fxed rates, with the
following detail by country:
fxed rates.
• Internationally, 48% of loans are at foating rates and 52% at
fxed rates.
For further information on the distribution of customer loans
and advances by business line, see note 10.b to the consolidated
fnancial statements.
Tangible assets amounted to EUR 26,157 million in December
2018, increasing EUR 3,183 million and 14% from December 2017
(EUR 22,974 million), driven by the increase recorded in the US
from assets associated with leasing business.
Intangible assets rose to EUR 28,560 million, of which EUR 25,466
million correspond to goodwill, which decreased EUR 303 million
in the year (-1%) as a net result of an increase mainly due to the
card business purchase from WiZink, S.A., ofset by the exchange
rate impact.
Loans and advances to customers facilities with maturities exceeding one year at year-end of 2018
EUR million
Fixed
Floating
TOTAL
Dome
stic
Interna
tional
Total
Weight
over the
total (%)
Weight
over the
total (%)
Amount
Amount
30%
255,354
52%
306,896
70%
235,646
48%
353,095
Weight
over the
total (%)
47%
53%
Amount
51,542
117,449
168,991
100%
491,000
100%
659,991
100%
261
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Total customer funds
EUR million
Demand deposits
Time deposits
Mutual funds A
Customer funds
Pension funds A
Managed portfolios A
Repos
Total customer funds
A. Including managed and marketed funds.
Change
2018
2017
Absolute
548,711
525,072
23,639
199,025
199,649
(624)
157,888
165,413
(7,525)
905,624
890,134
15,490
%
4.5
(0.3)
(4.5)
1.7
15,393
26,785
32,760
16,166
26,393
(773)
(4.8)
392
1.5
53,009
(20,249)
(38.2)
2016
467,261
181,089
147,416
795,766
11,298
23,793
42,761
980,562
985,702
(5,140)
(0.5)
873,618
On the liabilities side, customer deposits stood at EUR 780,496
million in December 2018, virtually unchanged (+0.4%) from
December 2017 (EUR 777,730 million).
The Group uses customer deposits, excluding repos, and including
mutual funds (customer funds) for the purposes of analysing the
traditional retail banking funds.
– By units, customer funds rose in eight of the ten core units,
notably in Argentina (+51%), Poland (+32%), Brazil (+15%) and
Portugal and Chile (+8% each). More moderate growth of around
3%-4% in Santander Consumer Finance, Mexico and the US.
Spain and the UK hardly changed, because of the sharp fall in
time deposits (and savings in the UK’s case), which cancelled out
the 8% growth in demand deposits in Spain and the 2% rise in
current accounts in the UK.
Customer funds increased 2%. Excluding the efect of exchange
rate movements, which had a negative impact on the Group as a
whole of two percentage points, customer funds rose 4%. The
main highlights were as follows:
The structure of customer funds is also clearly diferentiated
by product: 61% corresponds to demand deposits, 22% to time
deposits and 17% to investment funds.
– The strategy continued to focus on boosting loyalty. As a result,
demand deposits rose 6%, increasing in almost all units. On
the other hand, time deposits rose due to the Latin American
countries performance, particularly Brazil, which increased
29% as part of the strategy of replacing letras fnanceiras with
customer deposits in order to optimise the cost of funds. These
increases ofset the falls recorded in the UK and mainly in Spain.
Mutual funds remained virtually unchanged (-0.4%) impacted by
the fall in the markets.
The net loan-to-deposit ratio increased slightly to 113% in
December 2018, compared to 109% in December 2017.
In addition to attracting customer deposits, the Group applies a
strategy of maintaining a selective issuance policy in international
fxed income markets, endeavouring to adapt the frequency
and volume of market operations to both the structural liquidity
requirements of each unit and the receptivity of each market.
For more information on debt issues and maturities, see the
following section on liquidity and funding management.
Customer funds (excluding repos)
EUR billion
Customer funds (excluding repos)
% of operating areas. December 2018
796
147
648
890
906
165
725
158
748
+2%A
-5%
+3%
Total
Mutual funds B
Deposits excl. repos
2016
2017
2018
2018 vs 2017
Argentina: 1% Other Americas: 1%
Chile: 4%
Brazil: 12%
Mexico: 4%
US: 7%
Other Europe: 1%
Poland: 4%
Portugal: 4%
SCF: 4%
Spain: 35%
United Kingdom: 23%
A. Excluding exchange rate impact: +4%.
B. Including managed and marketed funds.
262
2018 Annual Report
Group financial performance
3.4 Liquidity and funding management
The Group’s liquidity remains at comfortable levels, well above regulatory requirements.
Recovery in lending in most countries where the Group operates.
Issuance activity prioritised medium- and long-term funding instruments expected to be TLAC/MREL
eligible.
The Group’s moderate encumbrance of assets continued in the structural funding sources of the balance
sheet.
First, we present the Group’s liquidity management, the
principles on which it is based and the framework in which it is
included.
The efective application of these principles by all institutions
comprising the Group required the development of a unique
management framework built upon three essential pillars:
We then look at the funding strategy developed by the Group
and its subsidiaries, with particular attention on the liquidity
evolution in 2018. We examine changes in the liquidity
management ratios and the business and market trends that gave
rise to these over the last year.
The section ends with a qualitative description of the outlook
for funding in 2019 for the Group and its main countries.
Liquidity management in Santander Group
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.
• Diversifcation of wholesale funding sources by instruments/
investors, markets/currencies and maturities.
• Limited recourse to short-term.
• 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 fnancial 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.
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 establishes 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 seeks to achieve:
• Availability of sufcient liquidity reserves, including standing
• a solid balance sheet structure, with a diversifed presence in
facilities/discount windows at central banks to be used in adverse
situations.
the wholesale markets;
• Compliance with regulatory liquidity requirements both at Group
and subsidiary level, as a new factor conditioning management.
• the use of liquidity bufers and limited encumbrance of assets;
• compliance with both regulatory metrics and other metrics
included in each entity’s risk appetite statement.
Over the course of the year, all dimensions of the plan are
monitored.
263
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
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.
As a result of the aforementioned process, a regulatory
requirement is that once a year the Group must send the supervisor
a document, approved 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
sufcient 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 identifcation,
management, monitoring and control of liquidity risks, established
through common frameworks, conservative principles, clearly
defned roles and responsibilities, a consistent committee
structure, efective local lines of defence and a well-coordinated
corporate supervision.
Additionally, frequent and detailed liquidity monitoring reports
are generated for management, control, informational and
steering 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 Group’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 sufcient both in terms of volumes as well as
timeframes to mitigate stress scenarios.
or practices. All of this enables us to face 2019 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:
• Maintain adequate and stable medium- and long-term wholesale
funding levels.
• Ensure a sufcient volume of assets which can be discounted in
central banks as part of the liquidity bufer.
• Liquidity generation from the commercial business.
All these developments, enable Santander to enjoy a very robust
funding structure today. The basic features of this are:
• 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) circa 90% of loans and advances
to customers as of December 2018. Moreover, these deposits are
highly stable due to the fact that they mainly arise from retail
client activity. This represents a slight decrease with respect to
the 2017 fgure of 92%. Further detail on this variation in the
liquidity evolution in 2018.
Santander Group liquidity balance sheet
%. December 2018
Loans and advances to
customers
76%
67% Customer deposits
Funding strategy and liquidity evolution in 2018
Fixed assets & other 8%
15% M/LT debt issuance
5% Securitisations and others
Financial assets 16%
11% Equity and other
2% ST funding
Assets
Liabilities
• Medium- and long-term wholesale funding accounts for more
than 19% of the Group’s net funding, compared with 18% at the
end of 2017, and comfortably covers the loans and advances to
customers not funded by customer deposits (commercial gap).
The outstanding balance of M/LT debt issuance was EUR
169,825 million in nominal terms in 2018, with a comfortable
maturity profle and well balanced by instruments and
markets, and a weighted average maturity of 4.6 years,
slightly less than the average 5.0 years as of end 2017.
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.
Santander has developed a funding model based on autonomous
subsidiaries responsible for covering their own liquidity needs.
This structure has made 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.
Over the last few years, it has been necessary to adapt funding
strategies to refect commercial business trends, market conditions
and new regulatory requirements.
In 2018, Santander continued to improve in specifc aspects, with
no signifcant changes in liquidity management or funding policies
264
2018 Annual Report
2016
8,515
11,981
89,568
39,513
149,578
Total
11,508
13,218
Group financial performance
The distribution of this funding by instrument over the
last three years and maturity profle is as follows:
Medium and long term debt issuance. Santander Group A
EUR million
Preferred
Subordinated
Senior debt
Covered bonds
Total
A. Excluding securitisations, agribusiness notes and real state credit notes.
Distribution by contractual maturity. December 2018. Santander Group A
2018
11,508
13,218
98,827
46,272
2017
10,365
12,049
85,962
45,585
169,825
153,961
EUR million
Preferred
Subordinated
Senior debt
Covered bonds
Total
0-1
12-24
month months months months months months
9-12
6-9
3-6
1-3
2-5 more than
5 years
years
—
—
—
580
1,704
2,879
495
100
—
—
3,852
1,538
—
—
3,944
1,759
—
—
1,480
1,000
—
—
—
1,403
11,508
11,234
25,119
39,026
20,823
98,827
6,798
16,950
17,632
46,272
2,199
3,559
5,390
5,703
2,480
31,917
57,380
61,197
169,825
A. If an issuance has a put option in favour of the holder, the maturity of the put is considered rather than the contractual maturity.
Note: there are no additional guarantees for any of the debt issued by the Group’s subsidiaries.
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 EUR
53,589 million with a maturity of 1.6 years.
The following charts show the similarity of the geographic
distribution of the Group’s loans and advances to customers
and its medium- and long-term wholesale funding. This
remained largely unchanged compared to 2017.
The outstanding balance at the end of 2018 was EUR 28,754
million distributed as follows: European Commercial Paper,
US Commercial Paper and domestic programmes issued by
the parent bank, 39%; various certifcates of deposit and
commercial paper programmes in the UK, 25%; commercial
paper programmes of Santander Consumer Finance,
24% and issuance programmes in other units, 12%.
Evolution of liquidity in 2018
The main aspects of liquidity in 2018 can be summarised as
follows:
Loans and advances to
customers
M/LT wholesale funding
i. Basic liquidity ratios remain at comfortable levels.
%. December 2018
%. December 2018
ii. We are continuing to achieve regulatory ratios ahead of
Other Latin
America
9%
Brazil
8%
Eurozone
41%
Other Latin
America
5%
Brazil
7%
Eurozone
43%
US
10%
Other Europe
3%
United Kingdom
29%
US
16%
Other
Europe
1%
United Kingdom
28%
Wholesale funding stemming from short-term issuance
programmes is a residual part of the Group’s funding structure,
related to treasury activities and comfortably covered by liquid
assets.
schedule.
iii. Moderate use of encumbered assets in funding operations.
i. Basic liquidity ratios remain at comfortable levels
At end 2018, Santander Group recorded:
• A stable credit to net assets ratio (total assets minus trading
derivatives and inter-bank balances) of 76%, similar to recent
years. This high level in comparison with European competitors
refects the retail nature of Santander Group balance sheet.
• Net loan-to-deposit ratio (LTD) of 113%, in a very comfortable
level (below 120%). This stability shows a balanced growth
between assets and liabilities.
• The ratio of customer deposits plus medium- and long-term
funding to net loans was stable at 114% at end December 2018.
• Limited recourse to short-term wholesale funding. The ratio
was around 2%, in line with previous years.
265
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
• 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 - fxed
assets and loans-) was an average stock of EUR 157,029 million in
the year.
As at 31 December 2018, the consolidated structural surplus
stood at EUR 156,048 million. This consists of fxed-income
assets (EUR 175,321 million), equities (EUR 12,570 million), partly
ofset by short-term wholesale funding (EUR -28,754 million)
and net interbank deposits (EUR -3,089 million). In relative
terms, the total volume was equivalent to 13% of the Group’s
net liabilities, below 2017 year-end.
The table shows the evolution of the basic monitoring liquidity
metrics at the Group level over the last few years:
Group’s liquidity monitoring metrics
%
Loans A / Total assets
Loans A to Deposit ratio (LTD)
Customer deposits and medium
and long term funding / Loans A
Short term wholesale
funding / Net liabilities
Structural liquidity surplus
(% / net liabilities)
A. Loans and advances to customers.
2018
76%
113%
2017
75%
109%
2016
75%
114%
114%
115%
114%
2%
2%
3%
13%
15%
14%
Having discussed the principal liquidity ratios at Group level, the
following table sets out the ratios for Santander’s main units as
at end 2018:
The key drivers behind the evolution of the Group’s liquidity and
that of its subsidiaries in 2018 (excluding the forex efect) were:
• Growth in lending in most countries where the Group operates.
Customer deposits also grew, except for the UK. As a result of this
combined performance, the commercial gap, excluding repurchase
agreement, barely generates liquidity needs.
• Debt issuance momentum continued, particularly in the
European units. In particular, issuances that are expected to be
Minimum Requirement for Eligible Liabilities (MREL) and Total
Loss Absorbing Capacity (TLAC) eligible have been prioritised.
In 2018, the Group as a whole captured EUR 60,053 million of
medium- and long-term funding, calculated using year-average
exchange rates.
In terms of instruments, medium and long-term fxed income (senior
debt, covered bonds, subordinated debt and preferred shares)
declined by almost 1% to EUR 37,505 million. Fewer issues of senior
debt and preferred shares were ofset by greater activity in covered
bonds and subordinated debt. Securitisation and structured fnance
activity increased 47% compared to 2017 to EUR 20,555 million. In
addition, the maturity of EUR 2,069 million of securitisations was
extended.
By country, the largest issuers of medium- and long-term debt
were the UK, Spain and Santander Consumer Finance. Compared
to 2017, Mexico and Poland increased the most in relative terms.
In absolute terms, the UK recorded the largest increase since it
did not resort to the Bank of England’s long-term programmes.
The largest declines were in Spain, the US and Portugal, which
had an unusual high issuance activity in 2017.
The main issuers of securitisations were Santander Consumer
Finance and Santander Consumer USA.
The charts below set out in greater detail their distribution by
instruments and geographic areas:
Distribution by instruments and geographies
%. December 2018
Main units’ liquidity metrics
%. December 2018
Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Brazil
Mexico
Chile
Argentina
United States
Group
A. Loans and advances to customers.
266
Deposits +
M/LT funding
/ Loans A
LTD ratio
Subordinated 3%
Preferred 3%
Covered bonds
11%
81%
261%
84%
95%
122%
104%
89%
146%
61%
149%
113%
156%
65%
123%
117%
106%
118%
120%
94%
172%
108%
114%
Securitisation and other
35%
Senior debt
48%
Other Latin America 5%
Other Europe 2%
Brazil 6%
United Kingdom
26%
Santander Consumer
Finance
13%
US
29%
Spain
19%
2018 Annual Report
Group financial performance
The weight of covered bonds issued in the year was 11% of total
issuances, slightly higher than last year’s 10%. However, in contrast
to 2017 when the main issuers were the UK and Portugal, in 2018
the main issuers were the UK and Spain. Of note was the return of
Spain’s mortgage covered bonds to public markets, absent since
2016, as it was focused on senior non-preferred issuances.
Liquidity Coverage Ratio
%
Parent bank
Santander Consumer Finance
Analysing the issuance activity over the course of the year in the
main geographies and comparing it to the information presented
to the market at the beginning of 2018, we can conclude the
following:
Poland
Portugal
United Kingdom
• Parent bank marketed around EUR 3.0 billion of hybrid securities,
in the upper range of forecasts; over EUR 6.0 billion senior non-
preferred, in the lower range of forecasts; and completed its
funding plan with senior preferred and mortgage covered bonds
of just over EUR 2.0 billion.
• Santander Consumer Finance issued senior debt of more than
EUR 5.0 billion, in line with forecasts.
• The UK issued more than EUR 8.0 billion of senior debt via its
holding company and the bank, in the upper range of forecasts.
The UK completed its funding plan by issuing around EUR 5.0
billion of covered bond securities via the bank, above forecasted
levels. It is noteworthy that the UK started to carry out in 2018
its issuance plan envisaged for 2019, in order to anticipate
possible tensions in the capital markets related to Brexit.
• The US issued slightly more than EUR 1.0 billion of senior
debt via its holding company, in the lower range of forecasted
volumes.
• In 2018, using year-average exchange rates, the Group issued
EUR 13,544 million of MREL/TLAC eligible securities, of which
EUR 10,284 million were senior non-preferred and eligible senior
debt, EUR 1,500 million were AT1, and EUR 1,760 million were
subordinated debt.
In short, Santander Group retained its comfortable access to the
diferent markets in which it operates, reinforced by new issuing
units and products. In 2018, we issued debt and securitisations in
16 diferent currencies, with participation from 20 relevant issuers
in 13 countries and with a weighted average maturity of 4 years,
slightly below the previous year.
ii. Compliance with regulatory ratios ahead of schedule
Under its liquidity management model, over the last few years
Santander Group has been managing the implementation,
monitoring and compliance with the new liquidity requirements
established under international fnancial regulations ahead of
schedule.
LCR (Liquidity Coverage Ratio)
The regulatory requirement for this ratio in 2018 was set at 100%.
As a result, the Group, both at a consolidated and subsidiary level,
increased its risk appetite from 100% in 2017 to 105% in 2018.
The 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. As at end 2018, the
Group’s LCR ratio stood at 158%, comfortably exceeding regulatory
requirements. The following table provides detail of the LCR ratio
by unit. All of them show a considerable excess over requirements:
December 2018
153%
269%
151%
152%
164%
133%
174%
152%
135%
158%
Brazil
Mexico
Chile
United States
Group
NSFR (Net Stable Funding Ratio)
The fnal defnition of the net stable funding ratio approved by the
Basel Committee in October 2014, has not yet come into efect.
The Basel requirement still needs to be written into the CRR,
which is expected to be published in 2019.
The NSFR constitutes a structural measure that aims at fostering
longer-term stability by incentivising banks to adequately
manage their maturity mismatches by funding long-term assets
with long-term liabilities.
The ratio is defned as the quotient between Available Stable
Funding (ASF) and Required Stable Funding (RSF).
The Available Stable Funding (ASF) comprises those sources of
funding – capital and other liabilities – which can be deemed
stable over a period of time of one year. The Required Stable
Funding (RSF) primarily encompasses those assets than can be
considered illiquid over the above-mentioned period of time,
hence needing to be matched with stable sources of funding.
The Group has defned a management limit of 100% at the
consolidated level and for almost all of its subsidiaries.
Net Stable Funding Ratio
%
Parent bank
Santander Consumer Finance
Poland
Portugal
United Kingdom
Brazil
Mexico
Chile
United States
Group
December 2018
105%
107%
131%
108%
128%
109%
130%
110%
114%
114%
267
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
With regards to this ratio, Santander benefts 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
funding. Taken together, this has enabled Santander to maintain
a balanced liquidity structure, refected in NSFR ratios higher than
100%, both at Group and individual levels as at end December
2018.
iii. Asset Encumbrance
Lastly, it is worth highlighting Santander’s moderate use of assets as
collateral in the structural funding sources of the balance sheet.
In line with the 2014 European Banking Authority (EBA) guidelines on
disclosure of encumbered and unencumbered assets, the concept of
asset encumbrance includes both on-balance sheet assets pledged as
collateral in operations to obtain liquidity as well as those of-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 the Group is required to
report to the EBA as at end 2018.
On-balance sheet encumbered assets amounted to EUR 322.2 billion,
67% of which are loans (mortgages, corporate, etc.). Of-balance
sheet asset encumbrance stood at EUR 69.9 billion, mainly relating
to debt securities received as collateral in reverse repurchase
agreements which were then re-used.
The total for the two categories was EUR 391.8 billion of
encumbered assets, giving rise to a volume of associated liabilities
of EUR 301.6 billion.
As at end 2018, total asset encumbrance in funding operations
represented 24.8% of the Group’s extended balance sheet under
Group. Disclosure on asset encumbrance as at December 2018
EUR billion
Assets
Loans and advances
Equity instruments
Debt instruments
Other assets
Carrying amount of
encumbered assets
Fair value of
encumbered assets
Carrying amount of
unencumbered assets
Fair value of
unencumbered assets
322.2
214.6
4.2
76.3
27.1
—
—
4.2
76.3
—
1,137.1
855.0
10.7
114.8
156.6
—
—
10.7
114.8
—
Group. Collateral received as at December 2018
EUR billion
Collateral received
Loans and advances
Equity instruments
Debt instruments
Other collateral received
Own debt securities issued other
than own covered bonds or ABSs
Fair value of
encumbered collateral
received or own debt
securities issued
Fair value of collateral
received or own
debt securities
issued available for
encumbrance
69.6
—
2.7
65.0
1.9
—
48.9
—
6.0
42.9
—
1.4
Group. Encumbered assets / collateral received and associated liabilities
EUR 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)
301.6
391.8
268
2018 Annual Report
EBA criteria (total assets plus guarantees received: EUR 1,578 billion
in 2018). This ratio is similar to the values reported by the Group
prior to the acquisition of Banco Popular in 2017.
Finally, a distinction needs to be made between the diferent
natures of the sources of encumbrance, as well as their role in the
Group’s funding:
• 51.5% of total asset encumbrance corresponds to collateral
pledged in medium- and long-term transactions (with a residual
maturity of more than one year) to fund the commercial activity
on the balance sheet. This results in a level of asset encumbrance
known as ‘structural’ at 12.8% of the extended balance sheet,
using EBA criteria.
• The other 48.5% corresponds to short-term market transactions
with a residual maturity of less than one year, or to collateral
pledged in derivative operations whose purpose is not to fnance
normal business activity of businesses but rather efcient short-
term liquidity management.
Rating agencies
The Group’s access to wholesale fnancing markets, as well as the
cost of its issuances, depends in part on the ratings granted by
rating agencies.
These agencies regularly review the Group’s ratings. The rating of
its debt depends on a series of factors that are endogenous to the
institution (business model, strategy, capital, income generation
capacity, liquidity and so on) and on other, exogenous factors related
to the overall economic environment, the situation in the sector, and
sovereign risk in the geographic areas where it operates.
In certain cases, the methodology applied by these agencies
limits the rating a bank can receive to the sovereign rating
assigned to the country in which it is headquartered.
In 2018, four rating agencies improved their rating for Banco
Santander long-term senior debt after the Spanish sovereign rating
was upgraded. On 6 April 2018, S&P upgraded its rating from A- to A.
On 12 April 2018, DBRS raised its rating from A to A (high), on 17 April
Moody’s upgraded its rating from A3 to A2, and on 17 July Fitch raised
the long-term senior debt rating from A- to A, maintaining the short-
and long-term issuer rating in A-/F2, respectively.
The Santander rating with all of these agencies (except Fitch)
is therefore higher than the sovereign rating for the country in
which it is headquartered, which clearly reflects the financial
strength and diversification of the Group.
On the other hand, in March and October the agencies Scope
and JCR confirmed Santander credit rating at AA- and A+,
respectively, and in November the agency Axesor assigned
Santander an unsolicited rating of A+.
At the end of 2018, the ratings with the main agencies were as follows:
Rating agencies
DBRS
Fitch Ratings
Moody's
Standard & Poor's
Scope
JCR Japan
Long
term
Short
term Outlook
A (high)
R-1 (middle)
A-
A2
A
AA-
A+
F2
P-1
A-1
S-1+
—
Stable
Stable
Stable
Stable
Stable
Stable
Group financial performance
Funding outlook for 2019
Santander starts 2019 with a comfortable liquidity position and
with good prospects for the year. However, some uncertainties
remain, namely those related to geopolitics and financial
regulation.
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.
For the Group as a whole, moderate commercial needs are
envisaged as, in most cases, the increase in lending is expected
to largely be counter-balanced by increases in customer
deposits. The greatest liquidity needs will stem from the largest
units: Spain, the UK, Brazil and Santander Consumer Finance.
In 2018, the Single Resolution Board informed Banco Santander
of the MREL 2018 requirement under the existing recovery
and resolution rules and which has to be met before 1 January
2020. Banco Santander already complies with this requirement.
Starting from 2019, the minimum requirement established in the
Capital Requirements Regulation (CRR) will apply to Santander,
however resolution authorities will be able to set higher levels
based on resolution considerations.
Once the buffers of liabilities with loss-absorbing capacity in
case of resolution have been established, whether they are
considered to be capital instruments or not, the Group focus
for the coming years will be on repaying the ECB and Bank
of England long-term funding programmes. Priority will be
given to pure funding instruments, taking into account the
diversification criteria and cost efficiency.
The funding plans carried out by the Group aims to ensure that
we meet regulatory requirements as well as those stemming
from its risk appetite framework at all times.
269
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
3.5 Capital management and adequacy. Solvency ratios1
The fully loaded CET1 ratio was 11.30%1 at the end of 2018 (+46 bps year-on-year), surpassing our public
target of 11% in 2018.
The fully loaded total capital ratio was 14.77% (+29 bps in the year).
We continued to strengthen our active capital management culture at all levels of the organisation.
Santander capital management and adequacy seeks to guarantee
solvency and maximise proftability, ensuring compliance with the
Group’s internal objectives as well as regulatory requirements.
includes strategies to use and assign capital efciently to
businesses as well as securitisations, asset sales and issuances
of capital instruments (capital hybrids and subordinated debt).
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, defning 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
efcient as possible both in terms of cost as well as compliance
with the regulatory requirements. Active capital management
• 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, promotes value creation
optimisation by selecting those activities that maximise the
return on capital. This is carried out under diferent economic
scenarios, both expected as well as unlikely but plausible, and
with the solvency level decided by the Group.
The Group considers the following magnitudes related to the capital concept:
Regulatory capital
• 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
needs.
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-
of rate” or “minimum return” to be achieved, enabling analysis of
the activity of business units and evaluation of their efciency.
Leverage ratio
This is a regulatory metric that monitors the soundness and
robustness of a fnancial institution by comparing the size of the
entity to its capital. This ratio is calculated dividing Tier 1 capital by
the leverage exposure, taking into account the size of the balance
sheet with adjustments for derivatives, funding of securities
operations and of-balance sheet items.
Return on risk adjusted capital (RoRAC)
This is the return (net of tax) on economic capital required
internally. Therefore, an increase in economic capital decreases
the RoRAC. For this reason, the Group 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 Group to manage its business more
efectively, assess the real returns on its business - adjusted for the
risk assumed - and to be more efcient 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 Group uses RoRWA to establish regulatory capital allocation
strategies, seeking that the maximum return.
Value creation
The proft generated in excess of the cost of economic capital.
The Group creates value when risk adjusted returns (measured
by RoRAC) exceed its cost of capital, and destroys value when the
reverse occurs. This measures risk adjusted returns in absolute
terms (monetary units), complementing the RoRAC approach.
Expected loss
This is the loss due to insolvency that the entity will sufer
on average over an economic cycle. Expected loss considers
insolvencies to be a cost that can be reduced by appropriate
selection of loans.
1. Data calculated using the IFRS9 transitional arrangements, unless otherwise indicated. Had the IFRS9 transitional arrangement not been applied, the total impact
on the fully loaded CET1 at year end would have been -27 bps.
270
2018 Annual Report
Group financial performance
Priorities and main activities in the Group’s capital
management
return on capital.
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 profle, and an efcient use of capital to
maximise shareholder value.
• 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.
• Assessing capital adequacy in order to ensure that the capital
plan is coherent with the Group’s risk profle 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.
• A greater weight of capital in incentives. To this end, certain
aspects related to capital and its proftability are taken into
account in the variable pay of senior management members:
– Among the metrics taken into account are the Group’s fully
loaded CET1, the contribution of capital and the return on risk
weighted assets (RoRWA).
– Among the qualitative aspects are adequate management of
regulatory changes in capital, efective capital management
in business decisions, generation of sustainable capital and
efective capital allocation.
At the same time, we are developing a programme 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 with this sphere more
efciently.
• Calculating capital metrics.
• Drawing up internal capital reports, as well as reports for the
supervisory authorities and for the market.
Fully loaded CET1
%
The main measures taken in 2018 are set out below:
9.65%
10.05%
10.55%
10.84%
11.30%
Issuances of fnancial instruments with the legal nature of
capital
In March 2018, Banco Santander, S.A. issued a contingent
convertible bond (CoCos) of EUR 1,500 million to strengthen its
AT1 (Additional Capital Tier 1).
As regards subordinated debt, during the year there were two
issuances: Banco Santander, S.A. issued EUR 1,250 million and
Santander Bank Polska S.A. issued EUR 229 million. These issuances
bolstered the total capital ratio as they count as Tier 2 capital.
Dividend policy2
The board of directors’ intention is to distribute EUR 0.23 charged
to 2018’s earnings in four dividends, three of them in cash and one
a scrip dividend (Santander Dividendo Elección).
Greater detail in section 3.3 ‘Dividend policy’ on the Corporate
governance chapter.
Strengthen active capital management culture
The continuous improvement in the capital ratios refects the
Group’s proftable growth strategy and a culture of active
management of capital at all levels of the organisation.
Of note:
• The strengthening of dedicated capital management teams and
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
2014 A
2015
2016
2017
2018
A. Pro-forma taking into account the January 2015 capital increase.
Evolution of capital ratios in 2018
The phased-in ratios are calculated by applying the CRR transitory
schedules, while the fully-loaded ratios are calculated without
applying any schedule (i.e. with the fnal regulations).
On 1 January 2018 the IFRS9 came into force, which implied
several accounting changes afecting the capital ratios. Santander
chose to apply the phase-in using transitional arrangements,
which means a fve-year transition period.
Applying this criteria, the fully loaded CET1 was 11.30% at the
end of December. The 46 bps increase was mainly due to proft
generation and RWAs management, which led to an organic
generation of 64 bps, together with the 21 bps from perimeter
(mainly Blackstone and WiZink), partially ofset by the net negative
impact between regulatory impacts / one-ofs (-25 bps, mainly
minority interests in Santander Consumer USA and restructuring
costs) as well as markets and others (-14 bps, mainly held to collect
and sell portfolios and intangible assets).
2. The fnal dividend against the 2018 results is subject to approval at the Group’s 2019 annual shareholders’ meeting.
271
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
2018
74,173
(10)
(42)
(826)
4,518
(659)
(1,010)
(5,815)
(2,367)
67,962
3,110
1,168
(258)
5,707
27
9,754
13,422
1,405
(3,823)
(22)
27
11,009
88,725
FL CET1 performance in 2018
Regulatory capital (phased-in). Flow statement
%
10.84
+0.64
+0.21
-0.39
EUR million
11.30
Capital Core Tier 1
+0.46
Dec’17
Organic
generation
Corporate
transactions
Market
& other
The total fully-loaded capital ratio was 14.77%, up 29 bps during
the year.
The fully loaded leverage ratio stood at 5.1% (5.0% in 2017). Tier
1 capital increased compared to 2017 while the exposure refects
the usual movements of balance sheet volumes from business
activity and from exchange rate changes.
The phased-in eligible capital was EUR 88,725 million. This
amount represents a total capital ratio of 14.98% and phased-in
common equity tier 1 (CET1) of 11.47%.
Main capital and solvency ratio
EUR million
Starting amount (31/12/2017)
Shares issued in the year and share premium
Treasury shares and own shares fnanced
Reserves
Attributable proft net of dividends
Other retained earnings
Dec’18
Minority interests
Decrease/(increase) in goodwill
and other intangible assets
Other deductions
Ending amount (31/12/2018)
Additional Capital Tier 1
Starting amount (31/12/2017)
AT1 eligible instruments
T1 excesses - subsidiaries
Residual value of intangible assets
Deductions
Ending amount (31/12/2018)
Capital Tier 2
Starting amount (31/12/2017)
T2 eligible instruments
Generic funds and surplus loan-loss provisions-IRB
Fully loaded
Phased-in
T2 excesses - subsidiaries
2018
2017
2018
2017
Deductions
Common equity (CET1)
66,904
65,563
67,962
74,173
Ending amount (31/12/2018)
Tier 1
75,838
73,293
77,716
77,283
Deductions from total capital
Total capital
87,506
87,588
88,725
90,706
Total capital ending amount (31/12/2018)
Risk-weighted assets
592,319
605,064
592,319
605,064
CET1 capital ratio
11.30%
10.84%
11.47%
12.26%
T1 capital ratio
12.80%
12.11%
13.12%
12.77%
Total capital ratio
14.77%
14.48%
14.98%
14.99%
Leverage ratio
5.10%
5.02%
5.22%
5.28%
272
2018 Annual Report
Group financial performance
Total risk weighted assets comprising the denominator of capital
requirements based on risk, are set out below, as well as its
distribution by geographic segment.
Risk weighted assets
EUR million
Credit risk (excluding CCR)
Of which standardised approach (SA)
Of which the foundation IRB (FIRB) approach
Of which the advanced IRB (AIRB) approach
Of which Equity IRB under the Simple risk-weight or the IMA
Counterparty Risk (CCR)
Of which IRB approach
Of which standardised approach
Of which risk exposure from contributions to default fund or central counterparties (CCP)
Of which credit valuation adjustment (CVA)
Settlement risk
Securitisation exposure in banking book (after cap)
Of which IRB approach
Of which IRB supervisory formula approach (SFA)
Of which standardised approach (SA)
Market risk
Of which standardised approach
Of which internal model approach (IMA)
Operational risk
Of which standardised approach
Amounts below the thresholds for deduction (subject to 250% risk weight)
Floor adjustment
Total
RWAs
2018
2017
469,074
480,221
277,394
280,082
37,479
37,207
150,373
158,777
3,828
11,987
7,867
1,795
233
2,092
1
5,014
4,276
1,915
738
25,012
11,858
13,154
60,043
60,043
21,188
—
4,155
14,668
8,529
3,586
313
2,240
1
3,678
2,482
708
1,196
24,161
9,702
14,459
61,217
61,217
21,118
—
Minimum capital
requirements
2018
37,526
22,191
2,998
12,030
306
959
629
144
19
167
-
401
342
153
59
2,001
949
1,052
4,803
4,803
1,695
—
592,319
605,064
47,386
273
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Capital requirements by geographical distribution
EUR million
TOTAL
38,155
14,809
66
737
8,505
1,148
1,488
3,051
82
319
382
1,667
22,191
1,146
40
33
-
-
470
5,585
8,244
3,178
730
185
38
-
22
18
2,503
1,155
212
849
94
330
144
19
167
-
401
342
59
2,001
949
1,052
4,803
4,803
1,695
-
United
Spain Kingdom
Other
Europe
9,887
5,604
2
167
3,587
410
976
959
82
120
279
408
3,160
484
-
-
-
-
130
562
610
308
165
-
-
-
21
-
880
1,123
212
817
94
136
35
15
86
-
215
213
2
1,037
498
539
1,034
1,034
906
-
5,488
3,617
3
130
1,310
289
192
1,832
-
171
1
171
1,871
-
-
-
-
-
9
930
536
51
13
11
34
-
1
-
285
-
-
-
-
59
20
4
35
-
52
47
5
207
21
186
689
689
11
-
7,532
2,953
-
179
1,492
214
242
253
-
28
100
900
4,579
11
4
3
-
-
55
1,233
2,149
705
139
9
4
-
-
17
251
-
-
-
-
39
34
-
5
-
90
61
29
21
21
-
852
852
131
-
Brazil
4,872
653
5
12
635
2
-
-
-
-
-
-
4,194
410
22
-
-
-
95
950
1,961
316
141
-
-
-
-
-
299
25
-
25
-
31
22
-
9
-
-
-
-
316
316
-
606
606
365
-
Other
Latam
United
States
Rest of
the world
4,580
984
7
126
848
180
78
2
-
-
-
1
3,589
231
13
14
-
-
57
886
1,074
843
128
152
-
-
-
-
192
7
-
7
-
45
18
-
26
-
33
21
13
411
84
326
714
714
200
-
5,043
411
-
54
356
17
-
1
-
-
-
-
4,631
6
1
16
-
-
122
997
1,791
954
142
11
-
-
-
-
591
-
-
-
-
12
11
-
1
-
10
-
10
9
9
-
909
909
80
-
753
586
48
68
277
36
-
5
-
-
1
187
167
4
-
-
-
-
2
27
124
-
1
2
-
-
-
-
6
-
-
-
-
7
2
-
4
-
-
-
-
-
-
-
-
-
2
-
47,386
13,214
6,507
8,665
6,190
5,983
6,063
762
Credit risk
Of which internal rating-based (IRB) approach A
- Central governments and Central BANKS
- Institutions
- Corporates – SME
- Corporates - Specialised Lending
- Corporates – Other
Retail - Secured by real estate SME
Retail - Secured by real estate non-SME
Retail - Qualifying revolving
Retail - Other SME
Retail - Other non-SME
Other non-credit-obligation assets
Of which standardised approach (SA)
Central governments or central banks
Regional governments or local authorities
Public sector entities
Multilateral Development Banks
International Organisations
Institutions
Corporates
Retail
Secured by mortgages on immovable property
Exposures in default
Items associated with particular high risk
Covered bonds
Claims on institutions and corporates
with a short-term credit assessment
Collective investments undertakings (CIU)
Equity exposures
Other items
Of which Equity IRB
Under the PD/LGD method
Under internal model
Under simple method
Counterparty credit risk
Of which mark to market method (Standardised)
Of which: Risk exposure amount for
contributions to the default fund of a CCP
Of which: CVA
Settlement risk
Securitisation exposures in
banking book (after cap)
Of which IRB ratings-based approach (RBA)
Of which Standardised approach (SA)
Market risk
Of which standardised approach (SA)
Of which internal model approaches (IMA)
Operational risk
Of which Standardised Approach
Amounts below the thresholds for deduction
and other non-deducted investments
(subject to 250% risk weight)
Floor adjustment
Total
A. Including counterparty credit risk.
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The following table presents the main changes to the capital
requirements by credit risk:
Economic capital
Credit risk capital requirements movements A
EUR million
Starting amount (31/12/2017)
Business movements
Perimeter movements
Foreign exchange movements
RWAs
517,133
1,255
(4,534)
(8,916)
Capital
requirements
41,371
100
(363)
(713)
Ending amount (31/12/2018)
504,938
40,395
A. Includes capital requirements of equity, securitisations and counterparty risk
(excluding CVA and CCP).
The changes to the capital requirements by credit risk are mainly
due to business growth in Brazil, Chile and Santander Consumer,
partially offset by decreases in the UK and Spain.
Regarding the changes to the perimeter requirements, of
note was the impact of the sale of Banco Popular’s real estate
business assets to an external fund.
The impact of exchange rates affected mainly Argentina and
Brazil.
With regards to regulatory ratios, Santander exceeds the 2019
minimum regulatory requirements by 178 bps, taking into account
the surplus and shortfall in AT1 and T2 respectively.
14.98%
T2
AT1
1.86%
1.65%
CET1
11.47%
13.20%
2.00%
T2
1.50%
0.20%
1.00%
AT1
CCyB c
G-SIB A
2.50%
CCoB B
1.50%
4.50%
Pillar 2
requirement
CET1
9.70%
Minimum
Pillar 1
Regulatory ratios
2018 (phased-in)
Regulatory requirement
2019
A. Global systemically important banks (G-SIB) bufer.
B. Capital conservation bufer.
C. Countercyclical bufer.
In short, from a qualitative point of view, Santander has solid
capital ratios, aligned with its business model, balance sheet
structure and risk profle.
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” (above the
Kingdom of Spain rating), which represents a confdence 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 signifcant 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 1). Furthermore, economic capital incorporates
the diversifcation efect which in Santander case is key, due to the
multinational nature of its activity covering many businesses, in
order to appropriately determine and understand the risk profle
and solvency of a group with global activity such as Santander.
The fact that Santander business activity is spread across various
countries via a structure of separate legal entities, with a variety
of customer and product segments, exposed to diferent types of
risks, means that the Group results are less vulnerable to adverse
situations in one of the particular markets, portfolios, customer
types or risks. The economic cycles, despite the current high level
of economic globalisation, are not the same nor are the diferent
countries afected 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 translate to lower
risk. In other words, Santander 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, the Group considers certain
intangible assets, such as deferred taxes, goodwill and software, to
retain value, even in the hypothetical case of resolution given the
geographic structure of the Group’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, Santander uses its economic model,
in the context of the Basel Pillar 2, 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
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, refecting
comparable activities and diferent types of risk in a single metric.
Given its relevance in internal management, the Group includes
several metrics derived from economic capital, both from the
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
standpoint of capital needs and risk-return, within a conservative
risk appetite framework established for the Group and for the
various geographies.
The distribution of economic capital among the main business
areas refects the diversifed nature of the Group’s business and
risk. Continental Europe represents 48% of the capital, Latin
America including Brazil 24%, the UK 13% and the US 15%.
The requirement for economic capital as of December 2018
amounts to EUR 69,443 million, which, compared to the available
economic capital base of EUR 99,566 million, imply the existence of
a capital surplus of EUR 30,123 million.
The main diference compared to regulatory CET1 lies in the
treatment of goodwill, other intangible assets and deferred tax
assets, which we consider as additional capital requirements rather
than a deduction from available capital.
Reconciliation of economic and regulatory capital
EUR million
Excluding 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 stemming from maintaining
stakes in subsidiaries abroad denominated in currencies other than
the euro).
The beneft of diversifcation included in the economic capital
model, including both the intra-risk diversifcation (similar to
geographic diversifcation) as well as inter-risks, amounted to
approximately 30%.
2018
59,046
57,939
2017
59,098
55,862
Distribution of economic capital needs by type of risk
Net capital and issuance premiums
Reserves and retained profts
Valuation adjustments
Minority interests
Prudential flters
Base economic capital available
Deductions
Goodwill
Other intangible assets
DTAs
Other
(23,606)
(23,108)
%
6,893
(706)
99,566
(32,662)
(25,630)
(3,014)
(3,754)
(264)
7,228
(453)
98,627
(33,064)
(25,585)
(2,952)
(3,820)
(707)
Base regulatory (CET1 FL)
capital available
66,904
65,563
Base economic capital available
Economic capital required A
Capital surplus
99,566
69,443
30,123
98,627
71,893
26,734
A. In order to enhance the comparison with regulatory capital, the diferences in
goodwill changes are included in the required economic capital.
The following charts sums up the Group’s economic capital needs
at the end of 2018, by geographic area and types of risk:
Market 10%
Interest (ALM) 3%
Operational 4%
Business 5%
Tangible assets 3%
Other 10%
Goodwill 28%
Lending 37%
Distribution of economic capital needs by geographic area and type of risk
EUR million. December 2018
Santander Group
Total requirements: 69,443
Corporate Centre
25,878
Continental Europe
20,974
United Kingdom
5,755
Latin America
10,326
United States
6,510
All risks:
Goodwill: 74%
Market: 13%
DTA: 12%
1%
Other:
All risks:
Credit: 57%
Market: 15%
Business: 7%
ALM: 6%
Other: 15%
All risks:
All risks:
All risks:
Credit: 51%
Pensions: 27%
7%
6%
Other: 9%
Operational:
ALM:
Credit: 65%
12%
6%
6%
11%
Business:
Operational:
ALM:
Other:
Credit: 61%
Tangible assets: 12%
Business: 7%
Intangible assets: 6%
Other: 14%
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Group financial performance
RoRAC and value creation
Santander has been using RoRAC methodology since 1993 in order
to:
• Calculate the consumption of economic capital and the return
on it of the Group’s business units, as well as for segments,
portfolios and customers, in order to facilitate optimum
allocation of capital.
The following chart shows the value creation and RoRAC at the end
of 2018 of the Group’s main business areas:
Value creation A and RoRAC
EUR million
2018
2017
• Measure management of the Group’s units through budgetary
Main segments
RoRAC
Value
creation
RoRAC
Value
creation
monitoring of capital consumption and RoRAC.
• Analyse and set prices for making 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.
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 proft generated above
the cost of economic capital (EC) employed, and is calculated as
follows:
Value creation = consolidated proft – (average economic capital
x cost of capital)
The proft used is obtained by making the necessary adjustments in
the consolidated proft to eliminate those factors that are outside
the ordinary course performance of our business, and obtain the
ordinary result that each unit obtains for its activity in the year.
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 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
2018 was 8.86% (compared to 8.60% in 2017).
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 specifc 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 profts, but it only creates shareholder value when
that return exceeds the cost of capital.
Continental
Europe
United Kingdom
Latin America
United States
Total Group
18.1%
17.3%
35.1%
10.7%
12.6%
2,083
662
2,905
39
2,835
17.3%
18.5%
31.9%
8.1%
12.4%
1,716
839
2,563
(120)
2,739
A. The value creation was calculated with the cost of capital of each unit.
The Group’s total RoRAC includes both the operative units and the Corporate
Centre, refecting the total economic capital of the Group and the generated
return.
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
efects defned in the projected scenarios to diferent elements that
infuence 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, Santander has a defned capital stress and planning
process not only to respond to various regulatory exercises but also
as a key tool integrated into the Group’s management and strategy.
The objective of the internal capital stress and planning process
is to ensure sufcient current and future capital, including in
unlikely but plausible economic scenarios. Based on the Group’s
initial situation (defned by its fnancial statements, its capital
base, risk parameters and regulatory as well as economic ratios),
the envisaged results are estimated for diferent 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 ofers a comprehensive view of the Group’s
capital for the analysed time period and in each of the defned
scenarios. The analysis incorporates the regulatory capital and
economic capital metrics.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
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 specifc risks facing the entity
Multi-year horizon
Reverse stress tests
Projection of volumes. Business strategy
Margins and funding costs
Fees and operating expenses
Market shocks and operational losses
Credit losses and provisions. PIT LGD and PD models
IFRS9 models and migration among stages
Forecasts of
capital requirements
Consistent with projected balance sheet
Risk parameters (PD, LGD and EAD)
Solvency analysis
Available capital base. Profts 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 Santander which:
• Ensures current and future solvency, including in adverse
economic scenarios.
• Ensures comprehensive capital management and incorporates an
analysis of specifc efects, facilitating their integration into the
Group’s strategic planning.
• Enables a more efcient 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 confgure 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 defned 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.
Specifcally, in order to calculate loan-loss provisions, 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 2018 EBA stress test, as well as in 2011, 2014 and 2016, and in
the stress test on the Spanish banking industry in 2012.
During 2018 this methodology was adapted in order to incorporate
the changes of the entry into force of the international fnancial
information IFRS9 regulation. The Group has models to calculate
balances by stages (S1, S2, S3) as well as the migration among
them and the loan-loss provisions in accordance with the new
standards.
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2018 Annual Report
Group financial performance
Lastly, the capital planning and stress analysis process culminates
with the analysis of solvency under diferent scenarios and over
a defned time period, in order to assess capital sufciency and
ensure the Group meets its internally defned 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 quantifed 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 diferent 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.
Santander has undergone seven 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 diversifcation, Banco Santander would still
be capable of generating profts for its shareholders and meeting
the most demanding regulatory requirements.
In the frst of them run in 2010 by the Committee of European
Banking Supervision, Santander was the bank with the least impact
on its solvency ratio, except for those banks that benefted from
not distributing 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 profts.
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 EUR 25 billion.
In the stress exercise conducted by the ECB in 2014, in co-operation
with the EBA, Santander was the group with the least impact in
the adverse scenario among its international competitors (capital
surplus of around EUR 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). Santander was the bank with the least capital destroyed
among its peers. Its fully loaded CET1 capital ratio declined 199
bps (compared to the peers’ average fall of 335 bps).
The results of the 2018 stress test published on 2 November,
underscored that Santander was once again the bank with the least
capital destroyed among its peers, improving its results compared
to 2016. The fully loaded1 CET1 declined 141 bps (compared to the
system’ average fall of 395 bps).
The results of the various stress tests showed that the Group’s
business model, based on retail banking and geographic
diversifcation, enables it to robustly confront the severest
international crisis scenarios.
As well as the regulatory stress tests, Santander has conducted
internal stress tests every year since 2008, within its capital
self-evaluation process (Pillar 2). In all of them, the Group’s
capacity to confront the most difcult exercises, both at the global
level as well as in the countries in which it operates, has been
demonstrated.
EBA/ECB transparency exercise 2018
As mentioned in the previous section, the EBA released in
November the results of the stress test conducted on 48 European
banks.
The 2018 stress test, like the previous one, did not incorporate
a minimum capital threshold. The fnal results are an additional
variable to be used by the ECB to defne the minimum capital
requirements for each bank (within the Supervisory Review and
Evaluation Process - SREP).
This stress exercise presented two macroeconomic scenarios
(baseline and adverse), taking as a starting point the banks’ balance
sheet at the end of 2017 and a three-year time horizon, with 2020
as the end point.
The adverse scenario, very unlikely to occur, sets out a strong
macroeconomic and fnancial markets downturn, both in Europe
and in other countries where Santander operates. For instance,
for the Eurozone as a whole, the scenario implies a negative
cumulative GPD growth of -2.7%, rising unemployment in 2020 to
9.7% and a cumulative fall in housing prices of 19.1% in 2020.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Under the adverse scenario, Santander was the bank with the least
capital destroyed among its peers and also compared to 2016.
The fully loaded CET1 declined 141 bps (compared to the systems’
average fall of 395 bps) from 10.61% in 2017 to 9.20% in 2020.
Under the baseline scenario, Santander is also the bank with the
strongest capital generation among peers3.
Fully loaded CET1 ratio - stress test adverse scenario
Fully loaded CET1 ratio - stress test baseline scenario
%
%
10.61%
9.20%
13.87%
10.61%
141 bps
-
+326 bps
2017
2020
2017
2020
2017 FL CET1 vs adverse 2020
2017 FL CET1 vs baseline 2020
bps
Santander
P 1
P 2
P 3
P 4
P 5
P 6
P 7
P 8
P 9
P 10
P 11
P 12
P 13
P 14
System: -395 bps
Peers average: -403 bps
-141
-193
-219
-265
-288
-334
-341
-363
-381
-437
-533
-576
-625
-657
-694
1,208
1,164
344
Proft after tax - stress test adverse scenario
EUR million
Santander
P 1
P 2
P 3
P 4
P 5
P 6
P 7
P 8
P 9
P 10
P 11
P 12
System: -2,636
Peers average: -5,727
-1,279
-2,891
-4,050
-4,754
-5,767
-6,416
-6,710
-7,000
-7,468
-11,244
-15,334
P 13
P 14 -15,715
bps
Santander
326
233
199
196
175
System: +126 bps
Peers average: +114 bps
P 1
P 2
P 3
P 4
P 5
P 6
P 7
P 8
P 9
P 10
P 11
P 12
P 13
P 14
-45
-52
113
108
102
102
82
62
59
43
Moreover, Santander is also the bank generating the most profts
among peers, which has not incurred a cumulative loss over the
three-year horizon.
In short, Santander showed the greatest resilience among European
peers due to the high generation of recurring revenue and profts,
underscored by its strong and diversifed business model.
3. Peers: BBVA, Intesa San Paolo, Nordea, BNP, Unicredit, Commerzbank, Société Générale, ING, Crédit Agricole, HSBC, Deutsche Bank, RBS, Barclays and Lloyds.
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2018 Annual Report Group financial performance
Recovery and Resolution Plans and Special Situations
Management Framework
(ii) Improve escalation procedures for the recovery indicators,
reducing the time frames.
This section summarises the main advances in the sphere of
the Group’s crisis management. Specifcally, the main principles
developed regarding Recovery Plans, Resolution Plans and the
management framework governing special situations.
Recovery plans
Context. The ninth version of the corporate recovery plan was
prepared in 2018. The most important part sets out the measures
that Banco Santander would have at its disposal to survive a very
severe crisis on its own.
(iii) Improve Early Warning Indicators (EWIs), which are almost
totally homogeneous thanks to the implementation of a
corporate policy on liquidity EWIs.
(iv) Analysis of Banco Popular and assessment of its implications.
The main conclusions extracted from analysing the contents of the
2018 corporate plan confrm that:
• There are no material interdependencies between the Group’s
diferent countries
The most important objectives are to test: the feasibility,
efectiveness and credibility of the recovery measures identifed
and 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.
• The measures available ensure an ample recovery capacity
in all the scenarios raised in the plan. Moreover, the Group’s
geographic diversifcation model is a point in its favour from the
recovery perspective.
To this end, the corporate recovery plan sets out diferent
macroeconomic and/or fnancial 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
Bank Recovery and Resolution Directive (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
the Group. The Plan is integrated with the following tools, among
others: the risk appetite framework (RAF); the risk appetite statement
(RAS); the risk identifcation assessment (RIA), the business continuity
management system (BCMS) and the internal processes for assessing
the sufciency of capital and liquidity (ICAAP and ILAAP). The Plan is
also integrated into the Group’s strategic plans.
Evolution in 2018. We continued the improvement work in line
with the European regulator’s requirements and expectations
and the industry’s best practices. Specifcally, the following were
included:
• Each subsidiary has sufcient 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 fnancial problems
or solvency, can be considered as sufciently relevant to surpass
the severest levels established for the recovery indicators and
which could result in activating the corporate plan.
• The Group has sufcient mitigation mechanisms to minimise
the negative economic impact from potential damage to its
reputation in diferent stress scenarios.
All of these factors underscore that the Group’s model and
geographic diversifcation 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 regulation4. The plan also follows
the non-binding recommendations made by international bodies
such as the Financial Stability Board (FSB5).
(i) Additional evaluation of recovery measures. Greater detail and
granularity regarding intra-group interconnections and the
impact these interdependencies could have on the sale of a
subsidiary.
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.
4. 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 signifcant 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.
5. FSB Elements key for efective resolution systems for fnancial institutions (15 October 2014, updating of the frst 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).
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The Group’s Plan comprises both the Corporate Plan (which
corresponds to Banco Santander S.A.) 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 S.A. approved the corporate
plan, though the content and relevant figures were previously
presented and discussed in the Group’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 Santander, as they must form part
of the Group’s plan (as they are annexed to the corporate plan).
2) Ensure that there are information systems that can quickly
provide high quality necessary information in the event of
resolution.
In 2018, we concluded automating the information on liabilities
that could be the object of a bail-in in the event of resolution.
Furthermore, we continued working on automating the rest of the
information that is delivered to the resolution authority and used
for drawing up the resolution plan.
The later is expected to be completed during 2019.
Progress was made in the ongoing projects launched to have data
repositories on:
1. Legal entities that belong to the Group.
Resolution plans
Santander continues to cooperate with the relevant authorities
in preparing resolution plans, providing all the information they
request.
2. Critical suppliers.
3. Critical infrastructure.
The authorities that form part of the Crisis Management Group
(CMG) maintained their decision on the strategy to follow for
the resolution of the Group: the Multiple Point of Entry (MPE)6.
This strategy is based on the legal and business structure with
which Santander operates, organised into nine “Resolution Groups”
which can be resolved independently without involving other parts
of the Group.
In May 2018, the Single Resolution Board (SRB) communicated the
preferred resolution strategy as well as the priorities of work for
improving the Group’s resolvability.
Regarding this, the Group continued to advance in the projects to
improve its resolvability, defning four lines of action:
1) Ensure the Group has a sufcient bufer of instruments with
loss absorption capacity.
During 2018, the Bank issued EUR 7.0 billion of senior non-
preferred debt 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 to said instrument.
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.
The frst stage of a survey of the main market infrastructures on which
the Group depends in order to understand their policies in the event
that one of the member entities of this infrastructure were to enter
into resolution was concluded. A second stage is underway to analyse
the infrastructure policies in the event of fnancial deterioration of the
entities before they enter into resolution.
Lastly, contingency plans are expected to be developed 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 Santander to the board
and the creation of a steering committee specialised in resolution
issues.
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.
6. Except for what has been stated, the drawing up of resolution plans in the US corresponds to the individual entities.
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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, diferent 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 deterioration of the entity’s or the Group’s fnancial
situation, as it would mean a signifcant distancing from the risk
appetite and defned limits.
The main elements of this framework are:
1. It defnes a series of common crisis indicators.
2. It defnes a trafc light code on the basis of the degree of deterioration
or risk of deterioration of the fnancial situation consistent with the
limits used in daily business as usual management.
3. It defnes a Crisis Manager director who coordinates the response
to a crisis situation.
4. It identifes personnel in charge of alerting and escalating crisis
events.
5. It creates a high level crisis committee backed by a technical
crisis committee.
In 2018, progress was made in implementing the framework in
order to attain a homogeneous level of development in the Group’s
main subsidiaries.
Moreover, progress was also made in developing instruments to
facilitate rapid and efective crisis management (e.g. automation
of communications in special situations, having specifc 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.
Total Loss Absorbing Capacity (TLAC) and Minimum
Required Eligible Liabilities (MREL)
On 9 November 2015, the FSB published its fnal principles and
term sheet containing an international standard to enhance the
loss absorbing capacity of G-SIBs.
The fnal standard consists of an elaboration of the principles on
loss absorbing and recapitalisation capacity of G-SIBs 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-SIBs. Once
implemented in the relevant jurisdictions, these principles and
terms will form a new minimum TLAC standard for G-SIBs, and
in the case of G-SIBs with more than one resolution group, each
resolution group within the G-SIB. 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-SIB 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 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 diferences
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-specifc and determined by the resolution authority.
Under these proposals, institutions such as Banco Santander would
continue to be subject to an institution-specifc MREL requirement
(i.e., a Pillar 2 add-on MREL Requirement), which may be higher
than the requirement of the TLAC standard (which would be
implemented as a Pillar 1 MREL requirement for G-SIBs).
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4. Business areas performance
4.1 Description of businesses
The segment reporting is based on fnancial information presented
to the chief operating decision maker, which excludes certain
items included in the statutory results that distort year-on-year
comparisons and are not considered for management reporting
purposes. This fnancial information (underlying basis) is computed
by adjusting reported results for the efects of certain gains and
losses (e.g.: capital gains, write-downs, impairment of goodwill,
etc.). These gains and losses are items that management and
investors ordinarily identify and consider separately to better
understand the underlying trends in the business (see also note
52.c to the Group fnancial statements).
The Group has aligned the information in this operating segment
section in a manner consistent with the underlying information
used internally for management reporting purposes and with that
presented throughout the Group’s other public documents.
The Group executive committee has been determined to be
the chief operating decision maker for the Group. The Group’s
operating segments refect the organisational and management
structures. The Group executive committee reviews the internal
reporting based on these segments in order to assess performance
and allocate resources.
The segments are diferentiated by the geographic area where
profts are earned, and by type of business. The fnancial
information of each reportable segment is prepared by aggregating
the fgures for the Group’s various geographic areas and business
units. The information relates to both the accounting data of
the units integrated in each segment and that provided by
management information systems. In all cases, the same general
principles as those used in the Group are applied.
The businesses included in each of the business areas in this
report and the accounting principles under which their results
are presented here may difer from the businesses included
and accounting principles applied in the fnancial information
separately prepared and disclosed by our subsidiaries (some
of which are publicly listed) which in name or geographical
description may seem to correspond to the business areas
covered in this report. Accordingly, the results of operations and
trends shown for our business areas in this document may difer
materially from those of such subsidiaries.
During 2018, certain changes took place in the organisational
structure of the Group, which led to a change in segment reporting:
• Banco Popular’s fnancial results and balance sheet have been
allocated to the corresponding segments. The afected segments
are Spain, Portugal and Real estate activity Spain.
• The Group acquired the stake of Santander Asset Management
that was not already owned by the Group. Following this change
in the consolidation perimeter, the Group decided to integrate the
acquired Asset Management business, the International Private
Banking business and the corporate unit of Private Banking,
which were previously reported within the Retail Banking
segment, into a new segment identifed as Wealth Management.
• Additionally, there has been an adjustment to the perimeter of
the Global Customer Relationship Model, between the Retail
Banking segment and the Santander Corporate & Investment
Banking segment, as well as other minor changes relating to the
Real estate activity Spain.
The Group restated the corresponding information of earlier
periods to refect these changes in the structure of its internal
organisation.
The operating business areas are structured in two levels:
Geographic businesses
This primary level of segmentation, which is based on the Group’s
management structure, comprises fve reportable segments: four
operating areas plus the Corporate Centre. The operating areas,
which include all the business activities carried on therein by the
Group, are:
• Continental Europe: which comprises all the business activities
carried out in the region. Detailed fnancial 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: includes the business activities carried out by
the various Group units and branches present in the UK.
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2018 Annual Report
Business areas performance
• Latin America: includes all the fnancial activities carried out
by the Group through its banks and subsidiary banks in the
region. Detailed information is provided on Brazil, Mexico, Chile,
Argentina, Uruguay, Peru and Colombia.
• The US: includes the holding company (SHUSA) and the
businesses of Santander Bank, Santander Consumer USA, Banco
Santander Puerto Rico, the specialised unit Banco Santander
International and the New York branch.
Global businesses
At this secondary level of segment reporting, the Group is
structured into Retail Banking, Corporate & Investment Banking,
Wealth Management and Real Estate Activity Spain.
• Retail Banking: this covers all customer banking businesses,
including consumer fnance, except those of corporate banking,
which are managed through SCIB, and asset management and
private banking, which are managed by Wealth Management. 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 Corporate & Investment Banking (SCIB) (formerly
Santander Global Corporate Banking): This business refects
revenue from global corporate banking, investment banking
and markets worldwide including treasuries managed globally
(always after the appropriate distribution with Retail Banking
customers), as well as equities business.
• Wealth Management: Includes the asset management business
(Santander Asset Management), the corporate unit of Private
Banking and International Private Banking in Miami and
Switzerland.
• Real estate activity Spain includes loans and advances to
customers and foreclosed assets of customers who are mainly
involved in real estate development and who have a specialised
management model and the assets of the former real estate fund
(Santander Banif Inmobiliario).
In addition to these operating units, which report by geographic
area and businesses, the Group continues to maintain the area of
Corporate Centre, that includes the centralised activities relating to
equity stakes in fnancial companies, fnancial 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 issuances.
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.
As described in section 3 above, the results of our business areas presented below are provided on the basis of underlying results only
and generally. Including the impact of foreign exchange rate fuctuations. However, for a better understanding of the actual changes in
the performance of our business areas, we also provide and discuss the year-on-year changes to our results excluding such impact.
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4.2 Summary income statement of the Group’s main business areas
2018. Main items of the underlying income statement
EUR million
Geographic businesses
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
Other
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
Other
US
Operating areas
Corporate Centre
Total Group
Global businesses
Retail Banking
Santander Corporate & Investment Banking
Wealth Management
Real estate activity Spain
Operating areas
Corporate Centre
Total Group
Net interest
income
10,107
4,360
3,723
996
858
170
4,136
15,654
9,758
2,763
1,944
768
421
5,391
35,288
(947)
34,341
32,522
2,378
420
(33)
35,288
(947)
34,341
Net fee
income
4,419
2,631
798
453
377
162
1,023
5,253
3,497
756
424
448
128
859
11,554
(69)
11,485
8,946
1,512
1,097
(0)
11,554
(69)
11,485
Total
income
Net operating
income
Proft
before tax
Underlying
attributable
proft to the
parent
15,881
7,894
4,610
1,488
1,344
545
5,420
21,201
13,345
3,527
2,535
1,209
585
6,949
49,452
(1,028)
48,424
42,832
5,087
1,543
(10)
49,452
(1,028)
48,424
7,604
3,414
2,625
851
702
11
2,426
13,204
8,863
2,064
1,491
460
326
3,934
27,168
(1,523)
25,645
23,577
2,982
813
(204)
27,168
(1,523)
25,645
5,501
2,325
2,140
555
688
(207)
1,926
7,971
5,203
1,230
1,121
185
232
1,117
16,515
(1,739)
14,776
13,408
2,657
797
(347)
16,515
(1,739)
14,776
3,642
1,738
1,296
298
480
(170)
1,362
4,228
2,605
760
614
84
165
552
9,785
(1,721)
8,064
7,793
1,705
528
(242)
9,785
(1,721)
8,064
Underlying attributable proft 2018. % distribution of operating areas A
Geographic businesses
Global businesses
Other
Argentina: 1% Americas: 2%
Chile: 6%
Spain: 17%
Brazil: 26%
United Kingdom: 13%
Wealth
Management:
5%
Santander
Corporate &
Investment
Banking:
17%
Mexico: 8%
SCF: 13%
US: 5%
Portugal: 5%
Poland: 3%
Other Europe: 1%
A. Excluding Corporate Centre and Real estate activity Spain.
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Retail Banking:
78%
2018 Annual Report
Business areas performance
2017. Main items of the underlying income statement
EUR million
Geographic businesses
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
Other
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
Other
US
Operating areas
Corporate Centre
Total Group
Global businesses
Retail Banking
Santander Corporate & Investment Banking
Wealth Management
Real estate activity Spain
Operating areas
Corporate Centre
Total Group
Net interest
income
9,230
3,784
3,571
928
788
160
4,363
15,984
10,078
2,601
1,907
985
413
5,569
35,146
(851)
34,296
32,339
2,442
404
(38)
35,146
(851)
34,296
Net fee
income
4,167
2,333
878
443
360
153
1,003
5,494
3,640
749
391
596
117
971
11,635
(38)
11,597
9,306
1,627
700
2
11,635
(38)
11,597
Total
income
Net operating
income
Proft
before tax
Underlying
attributable
proft to the
parent
14,417
6,860
4,484
1,419
1,245
409
5,716
22,519
14,273
3,460
2,523
1,747
516
6,959
49,611
(1,220)
48,392
6,754
2,820
2,506
814
630
(16)
2,855
13,799
9,193
2,078
1,498
777
252
3,761
27,170
(1,696)
25,473
42,904
23,228
5,503
1,212
(8)
49,611
(1,220)
48,392
3,474
684
(217)
27,170
(1,696)
25,473
4,899
2,002
2,083
581
574
(340)
2,184
7,497
4,612
1,134
1,059
526
165
892
15,473
(1,923)
13,550
12,555
2,712
667
(461)
15,473
(1,923)
13,550
3,202
1,439
1,254
300
435
(225)
1,498
4,297
2,544
710
586
359
97
408
9,405
(1,889)
7,516
7,456
1,780
478
(308)
9,405
(1,889)
7,516
Underlying attributable proft 2017. % distribution of operating areas A
Geographic businesses
Global businesses
Other
Argentina: 4% Americas: 1%
Chile: 6%
Spain: 15%
Brazil: 26%
United Kingdom: 16%
Wealth
Management:
5%
Santander
Corporate &
Investment
Banking:
18%
Mexico: 7%
US: 4%
Poland: 3%
SCF: 13%
Portugal: 5%
A. Excluding Corporate Centre and Real estate activity Spain.
Retail Banking:
77%
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4.3 Geographic businesses
Continental Europe
2018 Highlights
Focus on three main priorities: customer loyalty, digital transformation and operational
excellence.
Underlying
attributable proft
EUR 3,642 Mn
Progress in the incorporation of the new strategic business: Banco Popular in Spain and Portugal,
and the retail and SME businesses acquired from Deutsche Bank Polska (DBP) in Poland.
Underlying attributable profit amounts to EUR 3,642 million, 14% higher in euros and
excluding the exchange rate impact, spurred by customer revenue, partly driven by Banco
Popular’s integration.
Strategy
In an environment of historically low interest rates, the Group
carried out a strategy that enabled us to improve customer
loyalty, increase activity, customer revenue growth, cost control
and enhance credit quality.
Additionally, 2018 was a key year in Continental Europe due to
the resizing that followed the new strategic business integration
into the Group.
In Portugal, the Bank completed the operational and
technological integration of Banco Popular Portugal. After this
acquisition, Santander Totta became the largest privately owned
bank in terms of assets and loans and advances to customers in
the domestic activity.
In Spain, we strengthened our position after the acquisition of
Banco Popular, whose integration is progressing as scheduled.
We completed the legal integration, and the central and
territorial services are already unifed. Of note, good performance
of the frst joint commercial ofer (1|2|3 Profesionales account)
which had accounted more than 160,000 customers by the end of
the year, well above the initial target.
On the other hand, progress in the management of Banco
Popular’s alliances in order to recover strategic business and ease
its integration, focusing on enhancing the customer experience.
Of note was the sale of 49% of WiZink stake to Värde Partners,
Inc and the recovering of Banco Popular card business. At the
same time, we recovered its ATM business.
Loyal customers
Digital customers
Thousands
Thousands
7,693
5,805
5,223
3,974
+31%
+33%
2017
2018
2017
2018
In Poland, the recently named Santander Bank Polska (former
BZ WBK) strengthened its position in the country following the
acquisition of the retail, SMEs and private banking business of DBP.
Lastly, Continental Europe benefted from the creation of the
Santander Wealth Management global unit at the end of 2017
(including Asset Management and Private Banking) in order to
ofer an improved and wider range of funds. In Private Banking,
we are developing a new proposition, which intends to be the
leader in Europe, supported by the collaboration of the countries
where the Group operates.
The Group continues to be immersed in its cultural
transformation in the region. Santander was awarded with the
Top Employers Europe 2018 certifcation.
As a result, the number of loyal customers and digital customers
rose (31% and 33% respectively), increasing in all countries of
this area.
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2018 Annual Report
Activity
Loans and advances to customers rose almost 1%. Excluding
reverse repurchase agreements and the exchange rate impact,
gross loans and advances to customers increased 2% mainly
driven by Santander Consumer Finance and Poland (partially
due to the integration of DBP). Spain and Portugal decreased
in a deleveraging market environment, where consumer loans
and SMEs recorded a better evolution than large companies and
institutions.
Customer deposits were 5% higher year-on-year, both in euros as
well as excluding repurchase agreements and the exchange rate
impact, due to the increase in demand deposits in all units, which
ofset lower time deposits.
Of note was the performance of Spain, where demand deposits
amounted to more than EUR 14,000 million (+8%, driven by the
1|2|3 loyalty strategy), while time deposits decreased more than
EUR 12,000 million (-20%) due to reduction of expensive deposits
(partially from Banco Popular), as part of our strategy to reduce
the cost of funding.
Including mutual funds (-5%), customer funds grew 3%.
Results
Underlying attributable proft amounted to EUR 3,642 million in
the year (39% of the Group’s operating areas). Underlying RoTE
was 10.64%.
Compared to 2017, underlying attributable proft rose 14%,
without having any exchange rate impact. The evolution of proft
and the main P&L lines were afected by the integration of Banco
Popular in Spain and Portugal in June 2017.
By lines:
• Total income increased 10%, driven by all the main items. Net
interest income rose 10% with a positive evolution in all units,
mainly Spain and Portugal. Net fee income was 6% higher,
especially in Spain due to transactionality. The only decrease
was recorded in Santander Consumer Finance due to lower
income from insurance. Gains on fnancial transactions rose
47% (accounting for just 6% of total income), mainly driven by
Spain’s performance.
• Administrative expenses and amortisations up 8%, as Spain was
very afected by Popular’s integration. The ongoing measures
to optimise costs, as part of the integration process, were
refected in the frst synergies.
• Net loan-loss provisions were 26% higher due to the perimeter,
as credit quality improved: the NPL ratio decreased 57 bps year-
on-year to 5.25%, with a positive performance in all commercial
units. The coverage ratio fell slightly to 52%.
• Other gains (losses) and provisions recorded a loss of EUR 704
million (EUR -746 million in 2017), with an uneven performance
by units.
Business areas performance
Continental Europe
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
%
% excl. FX
2018
10,107
4,419
2017
9,230
4,167
9.5
6.1
916
625
46.4
440
15,881
394
14,417
(8,278)
(7,662)
7,604
(1,399)
6,754
(1,109)
11.5
10.2
8.0
12.6
26.2
(704)
(746)
(5.7)
5,501
(1,461)
4,899
(1,315)
4,040
3,584
—
—
4,040
397
3,584
382
3,642
3,202
12.3
11.1
12.7
—
12.7
4.1
13.7
9.8
6.2
47.0
11.8
10.4
8.3
12.9
26.4
(5.6)
12.6
11.3
13.1
—
13.1
4.2
14.1
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
383,020
380,080
0.8
1.0
142,813
114,966
24.2
24.2
89,030
36,012
31,011
681,887
369,730
99,728
39,918
43,429
678,122
352,548
(10.7)
(9.8)
(28.6)
0.6
4.9
(10.6)
(9.8)
(28.6)
0.7
5.1
158,761
159,794
(0.6)
(0.8)
62,018
37,142
14,827
642,479
39,408
61,214
45,919
17,308
636,784
41,338
1.3
(19.1)
(14.3)
0.9
(4.7)
390,794
384,088
436,913
366,351
70,562
425,301
351,282
74,020
1.7
2.7
4.3
(4.7)
1.5
(19.1)
(14.2)
1.0
(4.4)
1.9
2.9
4.5
(4.5)
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
10.64
52.1
5.25
52.2
67,572
5,998
9.82
53.1
5.82
54.4
67,922
6,298
0.82
(1.0)
(0.57)
(2.2)
(0.5)
(4.8)
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Spain
Underlying
attributable proft
EUR 1,738 Mn
2018 Highlights
Banco Popular’s integration is progressing as scheduled: the legal integration was completed,
central services and regional teams unifed, a single technological platform put in place and
migration of customers has already started.
Progress was made on digital transformation and the customer relationship model (4.8 million
digital customers, launch of Work Café and reinforcement of Santander Personal).
Strong growth in SME and companies. New lending was 17% higher and the stock increased
by EUR 1,800 million year-on-year.
Underlying attributable proft rose 21% in 2018, with better efciency, a cost of credit at
around 30 bps and a positive impact from the incorporation of Banco Popular.
Strategy
In 2018, the integration of Banco Popular progressed as
scheduled, the central services and regional teams unifed and a
single technological platform put in place where we started the
migration of customers. Progress was also made in managing of
Banco Popular’s alliances in order to recover strategic businesses.
Loyal customers rose 40%, with double-digit rises in the main
transactional drivers: cards turnover rose 14% year-on-year;
points of sale, +11% with a market share gain of 253 bps year-on-
year; insurance, +30% in new protection insurance premiums and
growth via digital means due to the improved process of online
approvals.
The SMEs and companies segment was also very dynamic:
commercial activity increased 17%, largely from international
business (+10%), backed by trade corridors and more stafng.
In 2018 SCIB continued to be the leader in lending to large
companies in Spain, according to Dealogic. Of note were the
more than 80 syndicated loans. On the other hand, Santander
Private Banking continued to be the market leader and it was
named Best Private Bank in Spain by The Banker magazine.
channels rose to c.30% in December 2018. Regarding our digital
transformation, of note were the following initiatives:
– Implementation of Santander Personal, our tailored remote
management. We doubled our remote managers, we
commercialised all our products through this channel and
incorporated distinctive customer relation items, such as video
calls through the app or chat with the manager.
– Launch of Smartbank, new relationship model with the more
than 600,000 millennial customers, ofering them tailored
fnancial and non-fnancial proposals.
– Launch of SO:FIA, an investment platform for the integral
management of shares, mutual and pension funds.
– New web for companies, fully renovated as a diferential feature
in the sector: online global position, one click remittances, totally
integrated payment and transfer suite, international business,
pre-approved loans, etc., to strengthen our competitive advantage
in SMEs.
– Launch of Santander OnePay Fx, a blockchain-based
Digital customers increased 51%, backed by the digital
transformation, to 4.8 million and the weight of sales via digital
international payment service which cuts transfer time by the
same day or by the next day.
Loyal customers
Digital customers
Thousands
Thousands
2,669
1,900
4,756
3,158
+40%
+51%
2017
2018
2017
2018
290
Leaders in mobile
and website
functionalities
for retail banking
(Aqmetrix Ranking)
New relationship
model for the
millennials
2018 Annual Report
Business areas performance
– Boost in consumer credit thanks to increased sales in pre-
approved credit via ATMs, going from a pure servicing model to
a more commercial one.
Spain
EUR million
Regarding the improvements on customer experience and
attention, we continue to update the branch distribution network
with new models, such as Smart Red (556 branches), and we
opened the frst Work Café, which integrates co-working space, a
cofee shop and bank, focusing on the customer experience and
digital capabilities.
Lastly, in 2018 our contract centre was awarded the CRC ORO for
excellent Customer Service in Spain.
Activity
Loans and advances to customers decreased 6%. In gross terms,
excluding reverse repurchase agreements, they fell 4% in euros
compared to 2017 because of the fall in large companies and
institutions, which ofset the growth in retail banking due to
the rise in private banking (EUR 400 million) and SMEs and
companies loans (EUR 1,800 million).
Customer deposits increased 1% compared to 2017. Demand
deposits rose 8%, driven by the 1|2|3 account (up EUR 5,300
million in the year), which ofset the decrease in time deposits
down from 41 bps in the fourth quarter of 2017 to 20 bps in the
fourth quarter of 2018.
Customer funds remained stable including the 5% decrease in
mutual funds. In addition, EUR 14,142 million are managed in
pension funds, 6% lower than in 2017.
Results
Underlying attributable proft amounted to EUR 1,738 million
(17% of the Group’s total operating areas) and underlying RoTE
was 10.81%.
Compared to 2017, underlying attributable proft was 21% higher:
• Total income rose 15%, spurred by net interest income (+15%)
refecting a sustained improvement of customer spreads due
to the lower cost of funding. Net fee income was 13% higher,
thanks to increased transactions. Of note was income from
servicing, mutual funds and insurance. Gains on fnancial
transactions rose 28%, favoured by the management of ALCO
portfolios.
• Administrative expenses and amortisations were 11% higher.
However, the frst synergies from the optimisation measures
carried out as part of the integration process are starting to
materialise.
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses) and provisions
Proft before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
• Net loan-loss provisions rose 21%. Nevertheless, the NPL ratio
Number of employees
fell to 6.19% in December 2018 from 10.52% in June 2017,
when Banco Popular was incorporated, and the cost of credit
was just 33 bps.
• Other gains (losses) and provisions increased their losses in the
year, partly due to provisions related to foreclosed assets.
Year-on-year growth rates of proft and the main P&L lines were
impacted by the incorporation of Popular.
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
2018
4,360
2,631
560
343
7,894
2017
3,784
2,333
436
307
6,860
(4,480)
(4,040)
3,414
(728)
(362)
2,325
(586)
1,739
—
1,739
1
1,738
2,820
(603)
(215)
2,002
(546)
1,456
—
1,456
17
1,439
206,776
220,550
117,215
91,395
60,720
32,727
16,644
434,082
255,402
93,854
24,608
35,054
8,878
417,796
16,286
76,806
36,710
26,348
451,809
252,866
100,727
26,286
43,529
11,230
434,639
17,170
209,630
218,607
315,351
253,946
61,406
316,784
251,999
64,785
10.81
56.8
6.19
45.0
32,313
4,366
10.31
58.9
6.32
46.8
33,271
4,485
%
15.2
12.8
28.4
11.8
15.1
10.9
21.1
20.7
68.3
16.1
7.3
19.4
—
19.4
(96.8)
20.8
(6.2)
28.3
(20.9)
(10.9)
(36.8)
(3.9)
1.0
(6.8)
(6.4)
(19.5)
(20.9)
(3.9)
(5.1)
(4.1)
(0.5)
0.8
(5.2)
0.51
(2.1)
(0.13)
(1.8)
(2.9)
(2.7)
291
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Santander Consumer Finance
2018 Highlights
S
CF is the European leader in consumer fnance.
M
ain management focuses: to remain leader in auto fnance and increase consumer fnance,
s
trengthening digital channels.
U
nderlying attributable proft rose 3% in euros and 4% year-on-year excluding the exchange
r
ate impact. High proftability (underlying RoTE of 16%) and cost of credit at historic lows.
Underlying
attributable proft
EUR 1,296 Mn
Strategy
SCF is Europe’s consumer fnance market leader, with a presence in
15 European countries and more than 130,000 associated points-
of-sale (auto dealers and shops). It also has a signifcant number of
fnance agreements with auto and motorbike manufacturers and
retail distribution groups.
In 2018, SCF continued to gain market share, underpinned by a
solid business model: highly diversifed by countries with a critical
mass in key products, more efcient than competitors and a risk
control and recovery system that enables to maintain high credit
quality.
On the other hand, 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 fnal client.
Management focused on:
• Maximising efciency of capital, in a competitive environment
characterised by the entry of new competitors, an excess of
liquidity in markets and moderate GDP growth.
• Remaining the leaders in auto fnance and growing consumer
credit by extending agreements with the main dealers.
• Strengthening digital channels and helping our partners through
their digital transformation. SCF launched two core projects: the
e-commerce platform, to help our partners create, manage and
improve their business; and digital interaction, which optimises
the relationship between agents and the customers.
• The plan to integrate the retail networks of SC Germany
progressed as scheduled.
Of note, SCF was recognised as Top Employer Europe 2018 in
Austria, Belgium, Germany, Italy, The Netherlands and Poland.
Activity
The stock of loans and advances to customers rose 6% compared
to 2017. Gross loans excluding reverse repurchase agreements and
the impact of exchange rates, also grew 6%. Almost all country
units grew their business, more than 70% of lending is in countries
with the highest rating and Germany and the Nordics account for
52% of the portfolio.
Loans and advances to customers by geographic area
December 2018
7%
4%
17%
13%
292
9%
15%
35%
Germany
Spain
Italy
France
Nordic countries
Poland
Other
2018 Annual Report
Business areas performance
New lending increased 7% compared to 2017, growth in almost all
countries driven by commercial agreements in several of them. Of
note were the rises in France, Poland, the Nordics and Italy.
Santander Consumer Finance
EUR million
SCF is benefting from having banking licenses in most of the
countries in which it operates, enabling it to take deposits in many
of them. It also has a high diversifcation of funding sources, with a
good structure to access markets through securitisations and other
issues.
This enabled customer deposits to be a product that sets
Santander apart from its competitors (above EUR 36,000 million)
coupled with the high capacity to access wholesale funding.
Results
Underlying attributable proft was EUR 1,296 million in 2018 (13%
of the Group’s total operating areas) and underlying RoTE was
15.86%.
Compared to 2017, underlying attributable proft was 3% higher in
euros and 4% excluding the exchange rate impact, as follows:
• Total income rose 3%, driven by net interest income (+5%) due
to higher volumes and lower funding costs. Net fee income
declined 9%, largely due to the adaptation of insurance
business to the new environment.
• Administrative expenses and amortisations increased slightly
(+1%) and the efciency ratio improved to 43.1%.
• Net loan-loss provisions increased 36%, because of the
positive impact in 2017 of the sale of foreclosed portfolios and
other releases. The cost of credit remained low for this type
of business (0.38%), underscoring the good performance of
portfolios. The NPL ratio was 2.29%, 21 bps lower year-on-year,
and the coverage ratio increased to 106% (101% in December
2017).
• Other gains (losses) and provisions amounted to EUR -125
million in 2018, 21% lower than in 2017 (in that year SCF
recorded provisions for possible litigation and customers’
complaints).
• The largest contribution to the underlying attributable proft
came from Germany (EUR 349 million), the Nordic countries
(EUR 331 million) and Spain (EUR 246 million).
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
2018
3,723
798
55
34
4,610
2017
3,571
878
3
32
4,484
(1,985)
(1,978)
2,506
(266)
%
% excl. FX
4.3
(9.1)
—
6.8
2.8
0.4
4.8
35.4
4.9
(9.0)
—
8.3
3.3
0.9
5.3
36.1
2,625
(360)
(125)
2,140
(577)
1,564
—
1,564
268
1,296
(157)
(20.4)
(20.5)
2,083
(588)
1,495
—
1,495
241
1,254
2.8
(1.9)
4.6
—
4.6
10.9
3.4
3.3
(1.4)
5.2
—
5.2
10.9
4.1
95,366
90,091
5.9
6.1
6,096
4,895
24.5
24.9
3,325
31
2,890
107,708
36,579
3,220
22
3,508
101,735
35,443
3.2
44.8
(17.6)
5.9
3.2
4.0
45.2
(17.3)
6.2
3.5
24,966
23,342
7.0
7.2
31,281
771
3,520
97,117
10,591
28,694
996
3,637
92,112
9,623
9.0
(22.6)
(3.2)
5.4
10.1
9.3
(22.4)
(3.0)
5.7
10.5
97,707
92,431
5.7
6.0
36,531
36,531
—
35,398
35,396
2
3.2
3.2
(100.0)
3.5
3.5
(100.0)
15.86
43.1
2.29
106.4
14,865
438
16.44
44.1
2.50
101.4
15,131
546
(0.58)
(1.1)
(0.21)
5.0
(1.8)
(19.8)
293
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Poland
2018 Highlights
The Group strengthened its position in Poland with the integration of the retail and SMEs
businesses acquired from Deutsche Bank Polska (DBP). BZ WBK was renamed Santander Bank
Polska, S.A.
Strong growth in volumes refected in market share gains in a very competitive environment.
Underlying
attributable proft
EUR 298 Mn
Third bank in customer satisfaction in Poland.
Underlying attributable proft fell (-1%) both in euros and excluding the exchange rate impact,
due to the sale of portfolios in 2017, the cost of rebranding in 2018 and the charges associated
with the integration of DBP.
Strategy
The retail and SMEs businesses acquired from Deutsche Bank
Polska was successfully integrated into Santander Bank Polska
in November. Almost 400,000 customers were migrated. As a
result, Santander Bank Polska reinforced its position as one of
the largest fnancial entities in Poland. For the frst time in the
Polish banking system, the legal and operating merger, as well as
the branch rebranding were accomplished in just one weekend.
The Bank continued its strategy to become the bank of frst
choice, anticipating and responding to customer expectations.
The digital transformation continued during the year with the
launch of mSignature, a mobile app authorisation tool as an
inexpensive and secure alternative for SMS codes. The credit
card and loan after-sale services were digitised. The Santander
Internet service gives customers the option to amortise the entire
loan or a portion.
Following the implementation of Apple Pay, which joined Google
Pay, Garmin Pay, BLIK, HCE and Fitbit, already in place, Santander
Bank Polska S.A. now ofers six cashless payment methods.
At the end of 2017, the As I Want account was successfully
launched and we already have more than one million accounts
opened. It was recognised as the best account for young people
in the fnancial portal money.pl.
Santander Bank Polska S.A. made signifcant headway in the
implementation of agile methodology in the Retail Banking
division. The following four tribes were established at the end
of September 2018: Multichannel, Individual Customer, Risk
and Consumer Engineering. The second and third rounds are
underway in order to create the next tribes. This transformation
project aims to speed up the delivery of innovative solutions and
efectively analyse customer technology needs.
All these actions resulted in important awards for the Bank in
Poland, notably Bank of the Year in Poland by The Banker and
second place in the Banking Stars ranking (third in 2017). The
Bank was the best in two categories: efciency and stability.
Also, it obtained the maximum score in the loans to total assets
ratio, net loan to deposit ratio and fee income to total revenue
ratio. The Bank also recorded the largest proft, RoE and RoA.
Loyal customers
Digital customers
Thousands
Thousands
2,089
2,203
1,802
1,387
+30%
+5%
2017
2018
2017
2018
Santander Bank Polska branch, Poland
294
2018 Annual Report
Business areas performance
At the end of 2018, Santander Bank Polska had 1.8 million
loyal customers (+30%), and 2.2 million digital customers
(+5%) compared to 2017.
Poland
EUR million
Activity
The increased activity in an environment of volume growth
and the incorporation of DBP, resulted in higher loans and
advances to customers (+27%) compared to 2017 in euros. In
real terms and excluding reverse repos and the exchange rate
impact, loans rose 30% backed by the target segments: SMEs
(+59%), individuals (+37%, notably mortgages and cash loans),
companies (+14%) and SCIB (+10%).
Customer deposits increased 38% year-on-year in euros.
Excluding repos (repurchase agreements) and the exchange
rate impact, deposits rose 36%, with double-digit growth in
those from SMEs and companies as well as individuals, partly
in order to increase the liquidity bufer ahead of the acquisition
of Deutsche Bank Polska. Customer funds (including mutual
funds) increased 32%.
Moreover, Santander Bank Polska launched the frst European
Medium Term Notes (EMTN) programme with EUR 500 million
Eurobonds (three-year fxed price Mid Swap +77 bps). Santander
SCIB acted as sole arranger and bookrunner.
Results
Underlying attributable proft of EUR 298 million in the year (3%
of the Group’s total operating areas), and underlying RoTE of
10.29%.
Compared to 2017, underlying attributable proft decreased 1% in
euros as well as excluding the exchange rate impact, driven by:
• Total income increased 5%, driven by net interest income (+7%)
backed by larger volumes and price management in a low
interest rate environment. Net fee income rose 2%, mainly from
loans, cards and foreign currency, while the gain on fnancial
transactions fell 15%.
• Administrative expenses and amortisations rose 5% due to
transformation projects and pressure on salaries.
• Net loan-loss provisions were 17% higher, partly because of
the sale of a non-performing loan portfolio in the first half of
2017. The cost of credit was 0.65% (0.62% in 2017). The NPL
ratio improved to 4.28% (4.57% in December 2017).
• Other gains (losses) and provisions recorded the impact of
rebranding charges as well as those related to DBP’s acquisition.
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
2018
996
453
44
(4)
1,488
(636)
851
(161)
(135)
555
(131)
424
—
424
126
298
2017
928
443
%
% excl. FX
7.3
2.2
7.4
2.3
52
(15.4)
(15.3)
(3)
1,419
(605)
814
(137)
35.8
4.8
5.2
4.5
17.3
36.0
4.9
5.3
4.7
17.4
(96)
40.0
40.2
581
(148)
(4.4)
(11.3)
(4.3)
(11.2)
432
(2.0)
(1.9)
—
432
132
—
(2.0)
(4.8)
—
(1.9)
(4.7)
300
(0.7)
(0.6)
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
28,164
22,220
26.8
30.5
3,260
1,661
96.3
102.2
10,570
534
1,140
43,669
33,417
6,786
491
1,014
32,171
24,255
55.8
8.7
12.4
35.7
37.8
60.4
12.0
15.8
39.8
41.9
2,163
952
127.2
134.0
1,789
558
809
38,736
4,933
821
523
684
27,235
4,936
29,033
22,974
35,554
31,542
4,012
27,803
23,903
3,900
117.9
6.8
18.3
42.2
(0.1)
26.4
27.9
32.0
2.9
124.4
10.0
21.8
46.5
2.9
30.1
31.7
35.9
5.9
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
10.29
42.8
4.28
67.1
12,515
611
11.56
42.6
4.57
68.2
11,572
576
(1.27)
0.1
(0.29)
(1.1)
8.1
6.1
295
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Portugal
Underlying
attributable proft
EUR 480 Mn
2018 Highlights
The operational and technological integration of Banco Popular Portugal was completed in
October 2018.
Santander Totta strengthened its position as the country’s largest privately owned bank by
assets and domestic loans and advances to customers.
The digital and commercial transformation continued, increasing sales via digital channels and
boosting growth of loyal and digital customers.
Underlying attributable proft rose 10% year-on-year due to the improvement of the efciency ratio
and lower provisions. The NPL ratio improved signifcantly and cost of credit was just 9 bps.
Strategy
The ofer of products and services tailored to customer needs,
focused on boosting loyalty, continued in 2018.
The strategy to transform the business model spurred growth in
loyal and digital customers. Of note, in addition to World 1|2|3,
was the development of new digital platforms such as the app
Santander Empresas, mobile real-time push notifcations and
alerts for cards and accounts, card blocking services and credit
card payments in instalments (PagaSimples).
In personal lending, CrediSimples (loan contracting exclusively
through digital channels) already accounted for 28% of new
lending (with that to loyal companies gaining signifcant market
share).
Regarding customer funds, customer deposits grew above the
market, gaining market share. The Bank launched Conta SIM, a
simple and more digital account, with a basic ofer of products
and services for customers at the start of their working life or
with lower income.
As at December 2018, Santander Totta had 752,000 loyal
customers (+9% compared to 2017) and 734,000 digital
customers (+32% year-on-year).
Santander Totta continued to be recognised for its activity. Of
note: Best Bank in Portugal by Global Finance in 2018 and by
World Finance as the Best Retail Bank in Portugal. Recently, it
was also awarded Best Private Bank 2019 by Global Finance and
Euromoney.
This commercial activity was developed during the operational
and technological integration of Banco Popular, completed in
October 2018.
Moreover, credit rating agencies upgraded their ratings
throughout the year. In October, S&P upgraded its Stand Alone
Credit Profile to bbb- and Moody’s upgraded deposits and
long-term debt to Baa2/P-2 and Baa3/P-3, respectively. In
September S&P improved its outlook from stable to positive.
DBRS upgraded in April the Bank’s long-term debt to A with
stable outlook.
Loyal customers
Digital customers
Thousands
Thousands
686
752
734
558
Popular Portugal integration
+9%
+32%
2017
2018
2017
2018
296
2018 Annual Report
Activity
Loans and advances to customers remained strong in the year.
The market share of new lending to companies rose to 20% (+2.7
pp compared to 2017). Regarding SMEs lending, the Bank was the
market leader in PME Investe, Crescimento and Capitalizar, with
a market share of 23%. New mortgage lending was also very
dynamic with a market share of 22% (+0.9 pp compared to 2017).
Despite this strong activity, the stock of loans and advances to
customers was 1% lower, compared to 2017. Excluding reverse
repurchase agreements, they fell 2% year-on-year, impacted by
the sale of non-proftable portfolios.
Customer deposits increased 10% year-on-year driven by
demand deposits (+15%) and time deposits (+5%), which
produced above-market growth in deposits, particularly in
companies. On the other hand, mutual funds decreased 10% and,
consequently, customer funds rose 8%.
In addition, EUR 1,154 million are managed in pension funds, 2%
lower than in 2017.
Results
Underlying attributable proft amounted to EUR 480 million in
the year (5% of the Group’s total operating areas), and underlying
RoTE was 12.06%.
Compared to 2017, underlying attributable proft rose 10%. Its
performance, and that of the main P&L line items, was afected
by the impact of Banco Popular’s incorporation in June 2017, as
follows:
• Total income increased 8%, driven by net interest income (+9%).
Net fee income was 5% higher, particularly that from insurance
and mutual funds. Gains on fnancial transactions, on the other
hand, declined 1% because of fewer sales of ALCO portfolios in
the year.
• Administrative expenses and amortisations rose (+5%),
although at a slower pace than total income. As a result net
operating income increased 11% and the efciency ratio
improved to 48%.
Business areas performance
Portugal
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses) and provisions
Proft before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
• Net loan-loss provisions increased. However, the cost of credit
Customer deposits C
was just 0.09%. The NPL ratio improved to 5.94% from 7.51% in
December 2017 and the coverage ratio stood at 50%.
Mutual funds
• The efective tax rate was higher, partly because of the
regulatory rise in corporate tax.
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
2018
858
377
75
34
1,344
(642)
702
(32)
18
688
(205)
483
—
483
2
480
2017
788
360
76
21
1,245
(614)
630
(12)
(44)
574
(136)
438
—
438
2
435
35,470
35,678
3,454
3,015
12,303
1,877
1,904
55,007
37,217
8,007
4,259
257
1,197
50,937
4,070
11,803
1,828
2,804
55,127
33,986
10,024
5,413
327
1,257
51,008
4,119
36,568
37,494
39,143
37,217
1,926
36,115
33,986
2,130
12.06
47.8
5.94
50.5
6,705
572
11.65
49.3
7.51
62.1
6,822
681
%
8.9
4.7
(1.0)
61.4
8.0
4.5
11.3
160.6
—
19.8
50.5
10.3
—
10.3
9.5
10.3
(0.6)
14.5
4.2
2.6
(32.1)
(0.2)
9.5
(20.1)
(21.3)
(21.6)
(4.8)
(0.1)
(1.2)
(2.5)
8.4
9.5
(9.6)
0.41
(1.6)
(1.57)
(11.6)
(1.7)
(16.0)
297
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
United Kingdom
2018 Highlights
We continued with our strategy of selective growth in a competitive and uncertain operating
environment whilst actively managing costs in order to improve operational efciency and the
customer experience.
Underlying
attributable proft
EUR 1,362 Mn
Good business evolution: strongest mortgage growth in the last three years in a highly competitive
market, which was partially ofset by a reduction in commercial real estate exposure.
Our results refect income pressures and higher regulatory, risk and control costs, as well as
strategic investment in business transformation and digital enhancement. Cost of credit at just
7 bps.
Strategy
We remained focused on growing customer loyalty, operational
and digital excellence and steady and sustainable proft
growth, while being the best bank for our employees and the
communities in which we operate.
To this end, we continued to develop our digital proposition, and
in 2018 we retained 55% of refnanced mortgage loans online,
an increase of 6 pp year-on-year. We also opened 43% of current
accounts and 65% of credit cards through digital channels,
increases of 5 and 13 pp, respectively.
We enhanced our Investment Hub platform with a Digital
Investment Adviser, which ofers easy access to online investment
advice from GBP 20 per month. This enables customers to invest
up to a maximum of GBP 20,000 in less than 30 minutes, and also
receive a personal savings recommendation.
The number of digital customers reached 5.5 million, up 9% year-
on-year.
In addition, we launched our innovative 1I2I3 Business current
account in October 2018, which ofers standout value to UK SMEs
as we seek to shake up the business banking market. Also, we
further developed our international proposition with 3 trade
corridors established in the year.
We ranked second in retail customer satisfaction, as published
by the Financial Research Survey (FRS). And as reported by the
Charterhouse Business Banking Survey, our Corporate customer
satisfaction at 61% was 7 pp above the market average.
The number of loyal retail customers continued to grow,
although at a slower pace (+3%) given the high comptetition in
savings products. Loyal corporate customers increased 5%, with
our customer-focused and international proposition.
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 infuence customer interaction and possibly the competitive
landscape.
Loyal customers
Digital customers
Thousands
Thousands
Video mortgage appointment
4,239
4,387
5,033
5,500
+4%
+9%
2017
2018
2017
2018
298
2018 Annual Report
Business areas performance
In 2018, we completed our transition to a ring-fence compliant
structure, with the conclusion of the required transfers of
business from Santander UK to the Santander London Branch.
United Kingdom
EUR million
Activity
Loans and advances to customers increased 6% in euros
compared to 2017. Excluding reverse repurchase agreements
and the exchange rate impact, they rose 1%, due to growth in
mortgage loans, underpinned by our focus on customer service
and retention, ofset by managed reductions in commercial real
estate exposure.
Customer deposits declined 9% year-on-year in euros and were
1% lower excluding repurchase agreements and the exchange
rate impact. Current accounts rose 2%, ofset by the reduction
in savings and time deposits as part of a management pricing
strategy. Mutual funds down 11% predominately driven by
negative market movements and reduced net fows this year.
Results
Underlying attributable proft amounted to EUR 1,362 million in
2018 (13% of the Group’s total operating areas), and underlying
RoTE was 9.32%.
Compared to 2017, underlying attributable proft was 9% lower in
euros and 8% excluding the exchange rate impact, as follows:
• Total income declined 4% due to lower net interest income
(-4%) because of the competitive pressure on mortgage spreads
and continued SVR (Standard Variable Rate) volumes attrition.
Gains on fnancial transactions fell 29% largely due to capital
gains recorded in 2017. Net fee income, on the other hand, rose
3% backed by income from asset management, partly ofset by
lower fee income from SCIB.
• Administrative expenses and amortisations rose 6% because
of increased regulatory, risk and control costs and ongoing
strategic and digital transformation investments.
• Net loan-loss provisions declined 14%, with a cost of credit of
just 7 bps. The NPL ratio improved to 1.05% from 1.33% in 2017,
backed by our prudent approach to risk and the resilience of the
UK economy. The coverage ratio rose to 33% (32% in 2017).
• Other gains (losses) and provisions in the lower part of the
income statement had a positive impact in the year, largely due
to payment protection insurance charges in 2017 which were
not repeated this year.
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
2018
4,136
1,023
199
62
5,420
2017
4,363
1,003
%
% excl. FX
(5.2)
2.0
(4.3)
2.9
282
(29.4)
(28.7)
68
5,716
(7.9)
(5.2)
(7.0)
(4.3)
5.7
(2,995)
(2,861)
4.7
2,426
(173)
(327)
1,926
(539)
1,387
—
1,387
25
1,362
2,855
(205)
(15.0)
(15.3)
(14.2)
(14.5)
(466)
(30.0)
(29.3)
2,184
(662)
(11.8)
(18.6)
(11.0)
(17.8)
1,523
(8.9)
(8.0)
—
—
—
1,523
25
(8.9)
0.7
1,498
(9.1)
(8.0)
1.6
(8.2)
257,284
243,617
5.6
6.5
39,843
56,762
(29.8)
(29.2)
29,190
13,397
9,638
349,353
210,388
26,188
24,690
9,974
361,230
230,504
11.5
(45.7)
(3.4)
(3.3)
(8.7)
12.4
(45.3)
(2.6)
(2.5)
(8.0)
33,430
27,833
20.1
21.1
67,556
16,583
4,181
332,137
17,216
61,112
21,167
4,310
344,926
16,304
10.5
(21.7)
(3.0)
(3.7)
5.6
11.5
(21.0)
(2.2)
(2.9)
6.5
235,753
235,783
(0.0)
0.8
206,630
199,054
7,576
210,305
201,763
8,543
(1.7)
(1.3)
(11.3)
(0.9)
(0.5)
(10.6)
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
9.32
55.2
1.05
33.0
25,872
756
10.26
50.1
1.33
32.0
25,971
808
(0.94)
5.2
(0.28)
1.0
(0.4)
(6.4)
299
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Latin America
2018 Highlights
Loyal and digital customers increased at double-digit rates in the region, underpinned by
innovation, commercial transformation and enhanced loyalty.
Underlying
attributable proft
EUR 4,228 Mn
This strategy produced double-digit growth in volumes (excluding the exchange rate impact)
as well as sustainable increase in customer revenue and cost of credit improvement.
Underlying attributable proft of EUR 4,228 million, 2% down year-on-year in euros, impacted
by the high infation adjustment in Argentina and currency depreciation against the euro in
Latin American countries. Excluding the exchange rate impact, it rose 16%.
Strategy
Santander is a relevant player in the main markets of Latin
America. Digital technology is enabling fnancial inclusion in this
market, as there are millions of people without access to banking
services.
Thanks to our global network, we 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 US and Mexico.
We continue to invest in operating systems and digital
infrastructure in order to streamline processes and enhance the
customer experience, launching diferential propositions. The
actions conducted are detailed in each unit.
In 2018, loyal customers increased 21% and digital customers 30%
and both rose in all units.
The efort made in the commercial transformation helped soften
the impact of some instability bouts on results, stemming from
the election calendar in Mexico and Brazil, the impact of some
currency depreciation (mainly the Argentine peso), and the high
infation adjustment in Argentina.
The macroeconomic instability in Argentina during the year, caused
a strong depreciation of the peso (over 40%) and year-on-year
high infation (47% in December 2018). As a result, Argentina
renegotiated its agreement with the IMF and modifed its economic
programme, focusing on correcting the fscal defcit.
The agreement enables Argentina to cover its fnancing needs for
2018-2019. The new monetary and fscal policies should lead to
more stable exchange rates and lower infation. Santander carried
out an infation adjustment in accordance with regulation IAS29 of
EUR 239 million, as detailed on Argentina’s page.
The Group continues to be immersed in its cultural
transformation in the region, underscored by the several awards
it received. In 2018, Santander was among the top 3 best fnancial
entities to work for in Latin America in the ranking Great Place to
Work.
Other awards were: Bank of the Year in Latin America in 2017
and 2018 by The Banker, and Best Private Banking in 2019 by
Euromoney.
Loyal customers
Digital customers
Thousands
Thousands
17,872
13,793
9,928
8,216
+21%
+30%
2017
2018
2017
2018
300
2018 Annual Report
Activity
Loans and advances to customers rose 2% in euros compared to
2017. Gross loans and advances to customers, excluding reverse
repurchase agreements and the exchange rate impact, rose 12%,
with growth rates around or above 10% in all units.
Customer deposits remained stable in euros. Excluding repurchase
agreements and the exchange rate impact, deposits increased
15%, with rises across all units driven by both demand and time
deposits. Customer funds increased 12% including mutual funds
(+6%).
Results
Underlying attributable proft amounted to EUR 4,228 million in
the year (43% of the Group’s total operating areas), and underlying
RoTE was 19.12%.
Compared to 2017, underlying attributable proft was 2% lower
in euros. The performance was very afected by the high infation
adjustment in Argentina, and by currency depreciation against the
euro. Excluding the forex impact, proft rose 16%, as follows:
• Total income increased 12%, backed by the main P&L line
items. Good performance of the most commercial revenues,
underpinned by higher volumes, management of spreads and
increased loyalty. Net interest income was 15% higher and net
fee income 16%, with growth in all units. Gains on fnancial
transactions (which account for just 3% of total income), fell
28%, largely due to the evolution in Brazil, impacted by market
conditions.
• Administrative expenses and amortisations were 10% higher,
mostly due to expansion and commercial transformation plans,
as well as greater digitalisation of the retail network. Of note
was the rise in Mexico, because of the ongoing three-year
investment plan.
• Net loan-loss provisions rose 7%, well below the growth rate
in loans and advances to customers, and enabled the cost of
credit to improve 20 bps in the year, to 2.95%. Credit quality
was better: the NPL ratio improved to 4.34%, from 4.46% in
December 2017, and the coverage ratio increased to 97%, 85%
in December 2017.
• The negative impact of other income and provisions was
39% lower, thanks to reduced provisions for legal and labour
contingencies in Brazil.
Business areas performance
Latin America
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
2018
15,654
5,253
2017
15,984
5,494
%
% excl. FX
(2.1)
(4.4)
15.1
15.7
600
1,013
(40.8)
(28.5)
(306)
21,201
29
22,519
—
(5.9)
(7,996)
(8,721)
(8.3)
13,204
(4,567)
13,799
(4,972)
(4.3)
(8.2)
—
11.6
9.9
12.7
7.1
(666)
(1,329)
(49.9)
(38.8)
7,971
(2,904)
7,497
(2,386)
6.3
21.7
5,067
5,111
(0.8)
—
—
—
5,067
840
5,111
814
(0.8)
3.2
4,228
4,297
(1.6)
150,544
147,929
60,721
56,087
59,367
14,994
17,731
303,356
142,576
57,824
14,226
17,280
293,347
143,266
1.8
8.3
2.7
5.4
2.6
3.4
(0.5)
25.3
45.3
16.1
—
16.1
14.2
16.5
11.3
20.9
9.9
9.5
13.2
12.8
9.3
48,104
39,613
21.4
30.6
37,698
36,851
10,867
276,095
27,261
34,435
36,084
11,016
264,415
28,932
9.5
2.1
(1.4)
4.4
(5.8)
157,022
153,353
2.4
197,598
126,030
71,568
194,975
120,493
74,482
1.3
4.6
(3.9)
18.4
10.9
7.6
13.9
3.0
11.9
11.8
15.3
6.1
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
19.12
37.7
4.34
97.3
90,196
5,803
17.94
38.7
4.46
85.0
89,014
5,908
1.18
(1.0)
(0.12)
12.3
1.3
(1.8)
301
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Brazil
2018 Highlights
Santander Brasil is the third largest privately owned bank and the largest foreign bank in Brazil.
We are leaders in customer satisfaction. In less than four years, we have succeeded in
strategically repositioning retail banking, and there is still potential to improve further.
Prudent risk management underscored by the growth in loans and advances to customers.
Proftable market share gains, compatible with lower NPL ratio and cost of credit.
Underlying attributable proft rose 2%, up 22% excluding the exchange rate impact, and
proftability improved (underlying RoTE of 19.77%), refecting greater productivity and the best
efciency ratio of recent years.
Underlying
attributable proft
EUR 2,605 Mn
Strategy
Santander Brasil recorded, once again, historically noteworthy
results evolution in 2018, outperforming its main peers and
underpinned by increased business activity, higher operational
efciency and enhanced credit quality. This was possible by the
continued strengthening of our franchise, agile innovation and
enhanced services, in order to improve customer experience and
satisfaction.
The year’s main actions by segments included:
• Aligned with the digital strategy, we put on for the fourth year
running, Santander Black Week. We increased our sales through
all channels, mainly in mortgages and working capital. We also
launched Select Direct and the Meus Compromissos app.
• The average time for taking out a mortgage loan was cut. New
mortgage lending growth more than doubled the market’s and
the use of the digital channels for taking out loans increased
thanks to the Webcasas tool.
• New payroll lending increased 28%, notably through digital
channels that increased exponentially.
• We continued to be the leading bank in auto fnance, with a
market share of 23.7% (+64 bps year-on-year). In Webmotors,
we implemented the Cockpit tool, an innovative platform for
Loyal customers
Digital customers
Thousands
Thousands
the resale of vehicles, and launched Autopago, a more secure
purchase and sale solution for individuals. We also announced
the acquisition of a 51% stake in LOOP, which focuses on the auto
market. Moreover, Santander Brasil also created Santander Auto,
a fully digital insurer, a joint venture with HDI Seguros.
• In acquiring business, we maintained our focus on innovative
solutions and on integrating the segment ofer within the Bank.
We implemented the PoS digital, SuperGet remained strong and
revenue continued to grow notably (+32% year-on-year), with a
market share of 14.4% (+292 bps).
• In cards, increase in revenue (+20%) and in market share. The
Santander Way app continued to be one of the main tools for
digitalisation and customer relationship. It is considered the best
app in the fnancial market given its score in both the Apple Store
and Google Play.
• In companies, increased customer base and portfolio volumes.
In SMEs thanks to a specialised customer attention we have
reached one million customers and gained market share (+40
bps year-on-year) to 11.4%. In Corporate, boosted by the new
commercial strategy, and SCIB where we also have diversifed
revenue sources.
11,445
8,594
Fully digital
investment
platform
5,232
4,186
+25%
+33%
2017
2018
2017
2018
302
Employment
benefts
2018 Annual Report
Business areas performance
• Santander continues to hold an outstanding position in the
Prospera Santander Microcredit programme, with presence in 630
locations and a loan portfolio of BRL 642 million.
Brazil
EUR million
Moreover, in 2018 we strengthened our brand and culture, and
were named one of the best companies to work for by The Great
Place to Work (GPTW) ranking, for the third year running.
Activity
Loans and advances to customers increased 1% year-on-year in
euros, highly impacted by the real’s depreciation. In gross terms
(excluding reverse repos and the exchange rate impact), they
increased at double-digit rates (+13%). All segments recorded
growth, notably consumer fnance and SMEs.
Customer deposits fell 3% year-on-year in euros, but increased
23% excluding repos and the exchange rate impact, driven by
strong growth in demand deposits (+9%) and time deposits (+29%),
ofsetting the reduction in letras fnanceiras.
This evolution was refected in proftable market share gain on
customer funds, mainly in savings and agricultural credit notes.
Results
Underlying attributable proft of EUR 2,605 million in 2018 (26% of
the Group’s total operating areas), and underlying RoTE of 19.77%.
Compared to 2017, underlying attributable proft rose 2% in euros.
Excluding the exchange rate impact, it was 22% higher, with good
performance in the main lines, as follows:
• Total income increased 12%, driven by net interest income
(+16%) due to larger volumes, and net fee income (+15%),
with good performance of almost all revenue line items. Of
note was the growth in cards (+16%), current accounts (+11%),
mutual funds (+54%), and insurance (+13%). Gains on fnancial
transactions, which have very little weight (1%) on total revenue,
fell 68%, afected in part by the market environment.
• Administrative expenses and amortisations rose 5%, in line with
business growth. This rise, less than half of that in total income,
produced the best efciency ratio of the last fve years, at 33.6%.
• Net loan-loss provisions increased 4%, well below the growth
in loans. All credit quality ratios improved: the cost of credit
declined to 4.06% from 4.36% in 2017. The NPL ratio improved
to 5.25% from 5.29% a year earlier and the coverage ratio rose
to 107% from 93% in 2017.
• The negative impact of other gains (losses) and provisions was
30% less, due to lower provisions for legal and labour claims
(trabalhistas).
• Proft before tax was 35% higher. This increase, however, did
not feed through to underlying attributable proft because of
the higher tax (+57%), due to the rise in the efective tax rate
(end of some deductions).
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
2018
9,758
3,497
136
2017
10,078
3,640
%
% excl. FX
(3.2)
(3.9)
15.7
14.8
510
(73.4)
(68.2)
(46)
13,345
46
14,273
—
(6.5)
(4,482)
(5,080)
(11.8)
8,863
(2,963)
9,193
(3,395)
(3.6)
(12.7)
—
11.7
5.4
15.2
4.2
(697)
(1,186)
(41.2)
(29.7)
5,203
(2,264)
4,612
(1,725)
2,940
2,887
12.8
31.2
1.8
—
—
—
2,940
335
2,887
343
1.8
(2.2)
2,605
2,544
2.4
70,850
70,454
37,015
34,920
40,718
6,133
11,320
166,036
68,306
38,693
5,798
11,825
161,690
70,074
0.6
6.0
5.2
5.8
(4.3)
2.7
(2.5)
29,758
23,591
26.1
21,218
24,241
7,237
150,760
15,276
20,056
23,783
7,536
145,040
16,650
5.8
1.9
(4.0)
3.9
(8.3)
75,282
74,341
1.3
110,243
57,432
52,811
106,959
52,180
54,779
3.1
10.1
(3.6)
19.77
33.6
5.25
106.9
46,914
3,438
16.91
35.6
5.29
92.6
47,135
3,465
2.86
(2.0)
(0.04)
14.3
(0.5)
(0.8)
34.8
56.7
21.7
—
21.7
16.8
22.3
12.5
18.6
17.7
18.3
7.1
14.9
9.0
41.1
18.3
14.0
7.4
16.3
2.6
13.3
15.3
23.1
7.8
303
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Mexico
Underlying
attributable proft
EUR 760 Mn
2018 Highlights
Strategy focused on the commercial and technological transformation, refected in greater
customer attraction and increased loyalty.
Boost of digital channels and multichannel innovation, enhancing our value ofer with new
products and services.
In volume terms, growth in loans and advances to customers, notably to companies (+12%)
and SMEs (8%). In customer funds, growth continued to be driven by customer deposits from
individuals and SMEs.
Good trend in proft. Underlying attributable proft rose 7% year-on-year. Excluding the
exchange rate impact, it was 14% higher, driven by the good performance of net interest
income, fee income and loan-loss provisions.
Strategy
During the year, we continued with our three-year plan of
investment in systems and infrastructures as part of the
commercial transformation strategy, carried out to improve
multichanneling, strengthen our distribution model and launch
new commercial initiatives in order to attract customers and
increase loyalty with more products and services.
Regarding the distribution model, we are developing diferent
projects such as:
• Transformation and implementation of the new branch
distribution model, up to 314 transformed branches, surpassing
the target (300).
• We also launched the new sucursal Ágil model and the
Transformación Digital de Nómina programme in order to
improve the customer experience and cut waiting time.
Of note in digitalisation was the following:
• Launch of Campaña Libertad, in order to boost digital channels
and reduce transactions at the branches, freeing commercial time.
• We continued to strengthen mobile functionalities with Súper
Móvil, Súper Wallet and contactless payments.
Moreover, we developed several initiatives to consolidate our
position as the bank for SMEs. We launched the new electronic
banking system for SMEs and medium size companies, becoming
the frst bank in Mexico to ofer a digital account for SMEs with
SAS status (Sociedad por Acciones Simplifcadas) created by the
Ministry of Economy and we promoted loans to the agribusiness
sector.
Our commercial strategy was complemented with new products
and services, such as:
• The number of new generation full function ATMs reached 817,
above target. Also, the CRM was strengthened.
• The Santander Plus programme continued to add customer
benefts related to loans, insurance and commercial alliances.
Over 4.7 million customers, 55% of whom are new, have
already registered two years after its launching.
Loyal customers
Digital customers
Thousands
Thousands
2,515
1,993
1,948
2,879
+26%
+48%
2017
2018
2017
2018
304
2018 Annual Report
Business areas performance
• Hipoteca Plus, a very competitive scheme in which customers
beneft if they have a close relationship with the Bank.
Mexico
EUR million
• Súper Auto (launched in the second half of the year), for auto
and motorcycle fnance through a fully digital credit origination.
We have over 300 auto selling agencies afliated and a fnanced
portfolio of EUR 32 million.
• Select Me, a programme that supports women with solutions
that facilitate their day-to-day tasks and professional
development. It had over 5,400 active customers at the end of
the year.
• Launch of the new system IVR (Interactive Voice Response) at
the Contact Centre.
• The Tuiio programme ofers products and services specially
designed for low-income and non bankarised population.
These measures resulted in increased loyalty and digitalisation
of our customer base. Loyal customers rose 26% and digital ones
48%, notably mobile banking (+61%).
Activity
Loans and advances to customers increased 16% in euros,
compared to 2017. Gross loans and advances to customers rose
10%, excluding reverse repurchase agreements and the exchange
rate impact, with focus on proftability and growth in loans to
individuals (consumer credit +4%, credit cards +4% and mortgage
loans +9%) as well as SMEs, companies, and large companies.
Customer deposits rose 13%. Excluding repurchase agreements
and the exchange rate impact, demand deposits increased 5%
and time deposits 9%. Mutual funds fell 5%, and so customer
funds increased 3%.
Results
Underlying attributable proft amounted to EUR 760 million in
the year (8% of the Group’s total operating areas), and underlying
RoTE was 20.35%.
Compared to 2017, underlying attributable proft was 7%
higher in euros. Excluding the exchange rate impact underlying
attributable proft rose 14%, as follows:
• Total income increased 9%, driven by net interest income
(+13%), backed by larger volumes and higher interest rates. Net
fee income was 8% more, largely due to credit cards, mutual
funds and insurance. Gains on fnancial transactions, which
have very little weight in fee income, fell 28% impacted by the
volatile environment.
• Administrative expenses and amortisations were 13% higher, in
line with the ongoing investments.
• Net loan-loss provisions dropped 2%. The cost of credit
improved signifcantly to 2.75% compared to 3.08% a year ago
and the NPL ratio was also better at 2.43% (2.69% in 2017).
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
150.7
8.6
12.8
5.8
(2.2)
2018
2,763
756
101
(94)
3,527
2017
2,601
749
%
% excl. FX
6.2
0.9
13.2
7.5
150
(32.5)
(28.0)
(40)
3,460
135.3
1.9
(1,462)
(1,382)
5.8
2,064
(830)
2,078
(905)
(0.7)
(8.2)
(3)
(39)
(91.3)
(90.8)
1,230
(255)
1,134
(230)
8.5
10.9
975
—
975
215
760
904
—
904
194
710
7.9
—
7.9
11.1
7.0
15.6
18.2
14.9
—
14.9
18.4
14.0
30,632
26,462
15.8
10.0
12,403
9,956
24.6
14,142
5,683
3,016
65,876
34,327
13,676
5,627
2,481
58,203
30,392
9,536
8,247
6,194
8,281
2,168
60,507
5,369
5,168
7,680
1,779
53,267
4,936
31,192
26,962
38,630
28,705
9,925
35,548
25,629
9,919
3.4
1.0
21.6
13.2
12.9
15.6
19.9
7.8
21.9
13.6
8.8
15.7
8.7
12.0
0.1
20.35
41.5
2.43
119.7
19,859
1,418
19.50
39.9
2.69
97.5
18,557
1,401
0.85
1.5
(0.26)
22.2
7.0
1.2
18.4
(1.7)
(4.0)
15.5
7.6
7.4
9.9
13.9
2.5
15.9
8.0
3.4
10.0
3.3
6.5
(4.9)
305
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Chile
Underlying
attributable proft
EUR 614 Mn
Strategy
2018 Highlights
Santander is the leading privately owned bank by assets and customers in a country whose
economic growth accelerated in 2018.
We continued the transformation of the branch network, driving digitalisation and increasing
our value ofer with new products and services.
Growth in business volumes at a faster pace in several segments. Of note, the rise in loans to
companies and increase in fee-generating businesses in SCIB.
Underlying attributable proft rose 5% year-on-year. Excluding the exchange rate impact, it
was 8% higher, driven by net interest income and net fee income.
Santander is the largest privately owned bank in Chile by assets
and customers, with a marked retail and transactional focus.
• We launched Superdigital ofer and signed an alliance with
Amazon in order to be able to manage purchases on its platform
with Santander cards.
In 2018, the strategy continued to be focused on ofering an
attractive proftability in a stable country, one with low risk and
accelerated economic growth. GDP rose 4% (estimated) in the year
(1.5% in 2017).
• Promotion of Digital Onboarding, the frst fully digital platform, in
order to convert non-customers into customers, while improving
loyalty.
The focus was on our phygital transformation, a proposition
that combines the best of the digital and physical worlds, where
progress was made as follows:
Also, we continued ofering specialised propositions for each
segment, such as:
• Launch of OnePay FX for companies.
• We continued opening Work Café branches and launched Work
Café 2.0, a pilot project for smaller branches, and a new branch
model for Select and Private Banking segments.
• Under the digitalisation strategy, we launched the new 2.0 app,
signifcantly improved, and Santander Wallet, the frst app for
mobile payments in Chile.
• Consolidation of Santander Life, as a new way to interact with
the community and the customer via products aimed at the mass
consumer market. We launched Life 2.0 at the end of 2018, which
will provide additional benefts to customers that are already part
of the programme.
Improving the quality of service is still one of our main priorities,
and eforts made in this matter were refected in greater customer
satisfaction.
Loyal customers
Digital customers
Thousands
Thousands
1,086
1,012
622
668
+7%
+7%
2017
2018
2017
2018
306
2018 Annual Report
Business areas performance
As a result, loyal and digital customers both increased 7% year-on-
year.
Chile
EUR million
Santander Chile is continuously striving to become the best bank
for customers. Euromoney, The Banker and Latin fnance recognised
these eforts naming Santander as the Best Bank in Chile.
Activity
Loans and advances to customers increased 2%
year-on-year in euros. Excluding reverse repurchase
agreements and the exchange rate impact, they rose
10%, backed by those to individuals and companies.
Customer deposits fell 1% year-on-year in euros, and rose
7% excluding repurchase agreements and the exchange
rate impact, refecting the strategy to improve the mix
of customer funds, particularly demand deposits (+11%),
driven by the Select segment. Mutual funds rose 12%.
Results
Underlying attributable proft of EUR 614 million in 2018 (6% of the
Group’s total operating areas), and underlying RoTE of 18.39%.
Compared to 2017, underlying attributable proft rose 5% in euros.
Excluding the exchange rate impact it was 8% higher, as follows:
• Total income rose 4%, driven by net interest income (+5%),
backed by growth in volumes, higher interest rates and a better
mix of customer funds. Net fee income rose 12%, underpinned
by income from insurance, mutual funds and greater use of
cards. Gains on fnancial transactions, on the other hand, fell
28%, due to the lower contribution of SCIB business.
• Administrative expenses and amortisations increased 5%,
slightly more than total income, due to investments in IT
and innovation and the higher costs of the collective salary
agreement. The efciency ratio remained at around 41%.
• Net loan-loss provisions were 6% higher, below the growth in
lending and improvement the credit quality indicators. The cost
of credit remained stable (1.19% in 2018 compared to 1.21% in
2017), and the NPL ratio dropped to 4.66% (4.96% in December
2017). The coverage ratio rose to 61% (58% in 2017).
• Other gains (losses) and provisions amounted to EUR 103
million due to higher income from the sale of foreclosed assets
and reversal of provisions to specifc loan-loss funds.
• Lastly, tax was 14% higher, afected by increased tax pressure.
Proft before tax was up 9%.
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
(1,045)
(1,025)
2018
1,944
424
149
19
2,535
1,491
(473)
103
1,121
(220)
901
—
901
287
614
2017
1,907
391
%
% excl. FX
1.9
8.3
5.4
12.0
213
(30.1)
(27.7)
12
2,523
1,498
(462)
62.3
0.5
1.9
(0.5)
2.5
67.8
3.9
5.4
3.0
6.0
23
345.6
360.9
1,059
(200)
859
—
859
273
586
5.8
10.0
4.9
—
4.9
4.9
4.9
9.5
13.7
8.5
—
8.5
8.5
8.5
37,908
37,153
2.0
10.0
4,247
4,321
(1.7)
6.0
3,106
3,164
2,486
50,911
25,908
4,143
2,789
1,949
50,355
26,043
(25.0)
13.4
27.6
1.1
(0.5)
(19.2)
22.3
37.5
9.0
7.3
5,867
5,491
6.8
15.2
9,806
3,535
919
46,035
4,876
8,967
3,598
1,222
45,321
5,034
9.4
(1.8)
(24.8)
1.6
(3.1)
17.9
5.9
(18.9)
9.5
4.4
39,019
38,249
2.0
10.0
33,279
25,860
7,419
33,104
25,940
7,163
0.5
(0.3)
3.6
8.4
7.5
11.7
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
18.39
41.2
4.66
60.6
12,008
381
17.89
40.6
4.96
58.2
11,675
439
0.50
0.6
(0.30)
2.4
2.9
(13.2)
307
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Argentina
Underlying
attributable proft
EUR 84 Mn
Strategy
2018 Highlights
Santander Río continued to be the leading privately owned bank in Argentina by banking business.
The focus was on digital transformation, customer experience and key segments (Select and
Pymes Advance), resulting in more loyal and digital customers and greater digital penetration.
In 2018, the economy was afected by a shock in the balance of payments, producing a peso
depreciation against the euro, a 48% hike in infation, and a 2.4% fall in GDP. By year-end,
exchange rates and interest rates stabilised.
Underlying attributable proft was EUR 84 million, afected by the impact of the high infation
adjustment and the peso’s depreciation.
Santander Río consolidated its position as Argentina’s largest
privately owned bank in terms of banking business. It is also
one of the leading banks in loans, deposits, means of payment,
transactional services, cash management, payrolls, wealth
management and insurance.
The initiatives in 2018, focused on fulflling its four strategic pillars:
growth, risk control, operational excellence and the customer
experience, via customer loyalty and digitalisation, with new
products and services.
Customer value ofers were redefned with special focus on key
segments. Meanwhile, the transformation process continued
in order to fully digitalise our platforms and incorporate the
cutting-edge technologies in order to better know customers and
anticipate their needs.
This strategy enabled the launch of various initiatives such as:
• Development of efciency plans, such as the implementation
of digital improvements, robotics in operative processes,
digitalisation of attention channels, merger of the former
Citibank branches, technology insourcing and negotiation with
new suppliers.
• Launch of the new online banking, representing a renewal
towards a more digital innovation experience and closer to
customers, which was well accepted, while increasing the
functionalities of mobile banking.
• The Remote Attention Centre for Select customers has been
opened, enabling closer management of the highest value
portfolio.
• The frst fully digital customer journeys were implemented, which
enables the opening of saving accounts in only 7 minutes. This
will also be implemented in mortgages, SMEs and cards.
• Launch of Santander Work Café, based on the Group’s experience
in other countries.
• Improvement of SuperClub points programme platform, which
enables users to enjoy a more personalised experience and a
simple point redemption.
As a result of all the above, loyal customers rose 6% year-on-year
and digital ones 7%. They already account for 47% and 71% of
total active customers, respectively. On the other hand, mobile
banking customers account for 40% and digital sales rose by 64%.
Loyal customers
Digital customers
Thousands
Thousands
1,340
1,423
1,957
2,094
+6%
+7%
2017
2018
2017
2018
308
2018 Annual Report
Business areas performance
Moreover, Global Finance again chose us as the Best Digital Bank in
Argentina, The Banker and Global Finance named us the Best Bank
in Argentina and we were ranked one of the fve best companies to
work for by GPTW.
Argentina
EUR million
Underlying income statement
2018
Activity
Loans and advances to customers fell 32% year-on-year in euros.
Excluding reverse repurchase agreements and the exchange rate
impact, gross loans and advances to customers were 40% higher.
Customer deposits declined 14% compared to 2017 in euros.
Excluding repurchase agreements and the exchange rate impact,
deposits rose 64%.
The Bank recorded strong year-on-year growth in peso balances,
with loans increasing 18% (mainly mortgage loans, auto lending
and companies) and deposits 33%. Moreover, volumes were
positively impacted by dollar balances due to the impact of the
peso’s depreciation.
Results
Underlying attributable proft amounted to EUR 84 million in the
year (1% of the Group’s total operating areas), and underlying RoTE
of 11.83%.
Compared to 2017, underlying attributable proft was 77% lower in
euros, afected by the high infation adjustment of EUR 239 million,
(EUR -193 million for monetary adjustment and EUR -46 million for
the exchange rates).
The adjustment was made in accordance with IAS29, applied
when, among other factors, the cumulative three-year infation is
above or around 100%, which implies that, Argentina’s 2018 full
year results and balance sheet at December 2018 are adjusted to
high infation. Excluding the exchange rate impact proft fell 54%,
as follows:
• Total income increased 35%, spurred by net interest income
(+52%) driven by greater volumes in an environment of high
infation and high interest rates. Net fee income rose 47%,
driven by greater foreign currency activity in a volatile exchange
rate environment and income from cash management. Gains on
fnancial transactions increased 125%, benefting from a volatile
environment and markets.
• The growth in administrative expenses and amortisations
(+51%), refected investments in digitalisation projects, the
automatic revision of salary agreements because of the rise in
infation and the peso’s depreciation against the dollar.
• Net loan-loss provisions were higher (+184%) due to the
individuals’ portfolio, particularly in medium and low income
segments. The cost of credit increased to 3.45% (1.85% in
2017). The NPL ratio stood at 3.17% (2.50% in December 2017)
and the coverage ratio improved to 135% (100% in December
2017).
• Other gains (losses) and provisions fell 5%.
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
2017
985
596
147
%
% excl. FX
(22.0)
(24.8)
52.5
47.0
15.2
125.3
18
1,747
—
(30.8)
(970)
(22.8)
777
(159)
(40.8)
45.4
—
35.4
51.0
15.8
184.4
(92)
(51.5)
(5.2)
526
(165)
(64.9)
(39.0)
(31.4)
19.2
362
(76.7)
(54.4)
—
362
2
—
—
(76.7)
(71.9)
(54.4)
(45.2)
359
(76.7)
(54.5)
768
448
170
(177)
1,209
(749)
460
(231)
(45)
185
(100)
84
—
84
1
84
5,334
7,808
(31.7)
30.1
5,096
4,766
6.9
103.7
825
6
742
12,003
8,809
138
6
732
13,449
10,235
498.9
(9.7)
1.4
(10.8)
(13.9)
—
72.1
93.2
70.0
64.0
848
599
41.4
169.4
422
743
307
11,130
872
206
982
244
12,266
1,183
105.0
(24.3)
26.0
(9.3)
(26.3)
5,574
7,608
(26.7)
10,191
8,809
1,382
12,855
10,235
2,620
(20.7)
(13.9)
(47.3)
290.4
44.3
139.9
72.8
40.5
39.5
51.0
64.0
0.4
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
11.83
61.9
3.17
135.0
9,324
468
32.02
55.5
2.50
100.1
9,277
482
(20.19)
6.4
0.67
34.9
0.5
(2.9)
309
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Uruguay
Underlying
attributable proft
EUR 132 Mn
Strategy
2018 Highlights
Santander Uruguay is the leading privately owned bank in the country, focused on growing
retail banking and improving efciency and the quality of service.
Loans grew in target segments, products and currencies. Of note was consumer credit and
cards portfolio increase.
Underlying attributable proft rose 28%, 43% excluding the exchange rate impact, spurred by
customer revenue.
Santander continued to focus on increasing loyalty and
improving customer satisfaction, where we are ranked second.
We continued to advance in our digital transformation strategy:
the number of digital customers increased 30% and digital
penetration 58% (up from 49% in 2017). Consumer fnance
companies also increased placements via digital channels. At
Creditel they already account for 30% of new loans.
Santander holds a relevant position in the business of families
in the private sector (27% market share), and in mortgage loans
(over 30% market share), thanks to the specialised centre of auto
and home lending.
Santander Uruguay was named Best Bank to Work for in the
country and the seventh Best Company to Work for in 2018 by
GPTW consulting.
Activity
Loans and advances to customers grew 16% year-on-year in
euros. Excluding reverse repos and the exchange rate impact, they
rose 25% driven by growth in the target segments, products and
currencies: consumer credit and cards (+20%) and local currency
portfolio (+18%).
Customer deposits were 5% higher in euros compared to 2017.
Excluding the exchange rate impact, they increased 13%. Peso
deposits grew 12% and foreign currency ones the equivalent of 13%.
Results
In 2018, underlying attributable proft was EUR 132 million
and underlying RoTE of 27.0%. Compared to 2017, underlying
attributable proft increased 28% in euros and 43% excluding the
exchange rate impact. By line items:
Uruguay
EUR million
Underlying income statement
2018
Net interest income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Proft before tax
Underlying attributable
proft to the parent
Balance sheet
Total assets
Gross loans and advances
A
to customers
Customer funds
Customer deposits B
Mutual funds
A. Excluding reverse repos.
B. Excluding repos.
%
% excl. FX
2017
299
402
4.2
4.4
311
419
(187)
(195)
(4.0)
232
(69)
159
132
207
(54)
142
103
12.3
27.6
11.9
27.7
4,605
4,397
4.7
2,743
3,893
3,861
32
2,353
16.6
3,681
3,681
—
5.8
4.9
—
16.8
17.0
7.6
25.9
43.1
25.4
43.1
12.5
25.2
13.6
12.7
—
Loyal customers
Digital customers
Thousands
Thousands
367
282
• Total income grew 17% mainly driven by net interest income
and good performance of the main revenue line items. The
efciency ratio was 44.6%, 4 percentage points better than in
2017.
74
90
+22%
+30%
2017
2018
2017
2018
• Despite the rise in provisions because of the entry into force of
IFRS9 and other impacts, the NPL ratio remained low (3.38%)
and coverage was high (112%). The cost of credit stood at 2.80%.
310
2018 Annual Report
Peru
Business areas performance
Colombia
2018 Highlights
2018 Highlights
We continued to develop our activity focused on the
corporate segment, the country’s large companies and
the Group’s global customers.
The Bank’s rating is the highest of the country’s
fnancial system, following its recent upgrade.
Underlying attributable proft rose 3%, or 8% excluding
the exchange rate impact, spurred by net interest
income, fee income and gains on fnancial transactions.
The strategy remained focused on corporates, large
corporates, and SCIB customers.
Strong rise in volumes in euros: loans and advances to
customers rose 100% and customer deposits 41%.
Underlying attributable proft of EUR 9 million in the
year, 54% more than in 2017, 61% higher excluding the
exchange rate impact.
Underlying
attributable proft
EUR 41 Mn
Strategy
Underlying
attributable proft
EUR 9 Mn
Strategy
In 2018, Santander continued to develop its activity centred on
corporate banking and the country’s large companies, as well
as providing service for the Group’s global customers, boosting
growth on its auto fnance company.
We widened our product range and customer base in all
business segments, diversifed funding sources and expanded
treasury services for our customers through foreign exchange
transactions, forwards and other derivatives.
Moreover, we continued contributing to the development of public
infrastructure, through the structuring and fnancing of ports and
roads and refneries adequacy in order to comply with the highest
environmental standards. We also participated in an international
bond issuance of the Peruvian estate of USD 2.0 billion.
Santander Peru has the highest rating (A+) of the country’s
fnancial system, following the recent upgrade.
Activity
Loans and advances to customers increased 45% year-on-year
in euros (+43% on a gross basis, excluding the exchange rate
impact), and customer deposits rose 17% (+16% excluding the
exchange rate impact).
Results
Underlying attributable proft of EUR 41 million in euros in 2018
was 3% higher year-on-year.
Excluding the exchange rate impact, underlying attributable
proft increased 8%. Total income grew 19% driven by good
performance of net interest income, net fee income and gains
on fnancial transactions, which more than ofset the higher
administrative expenses and amortisations stemming from
investment in corporate projects. The efciency ratio stood at
33% and the coverage ratio remained high (224%).
Business activity in Colombia continued to focus on SCIB
customers, large corporates and corporates. The Group
continues to provide solutions in treasury, risk hedging,
foreign trade and confirming, as well as developing
investment banking products and supporting the country’s
infrastructure plan. In order to fulfil this offer, Santander
Securities Services Colombia already has all the authorisations
needed to begin to offer custody services in 2019.
We continued to concentrate on auto fnancing business. This
will enable us to have the critical mass needed to consolidate
ourselves in this market.
Activity
Loans and advances to customers increased 100% year-on-year
in euros. Excluding the exchange rate impact they rose 107%,
backed by the good performance of peso portfolios. Customer
deposits rose 41% in euros and 46% excluding the exchange
rate impact, driven by demand deposits and particularly time
deposits.
Results
Underlying attributable proft of EUR 9 million in the year, 54%
more than in 2017 in euros.
Excluding the exchange rate impact, underlying attributable
profit rose 61%, backed by total income (+67%) spurred by
net interest income, net fee income and gains on financial
transactions.
311
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
United States
Underlying
attributable proft
EUR 552 Mn
Strategy
2018 Highlights
The Federal Reserve terminated the 2015 Written Agreement with Santander Holdings USA,
refecting the continued regulatory improvements. SH USA also passed the Federal Reserve’s
capital stress test for the second consecutive year.
In volumes, loans and advances to customers increased year-on-year in dollars, both at
Santander Bank (+9%) and Santander Consumer USA (+5%).
Santander US’s underlying attributable proft amounted to EUR 552 million, 35% higher than
in 2017, 42% higher excluding the exchange rate impact, driven by higher income from leasing
and loans, lower costs and improved cost of credit.
Santander US includes Santander Holdings USA (SH USA, the
intermediate holding company) and its subsidiaries: Santander
Bank (SBNA), which is one of the largest banks in the north-
eastern United States, Santander Consumer USA, an auto fnance
business based in Dallas, TX; the international private banking
unit in Miami; the wholesale broker-dealer in New York and the
retail and commercial bank in Puerto Rico.
In 2018, Santander US achieved signifcant regulatory
milestones, strengthened business performance and continued
to demonstrate its commitment to the communities in which it
operates.
The Federal Reserve terminated its 2015 Written Agreement with
SH USA, refecting SH USA’s enhancements to board oversight,
governance, compliance, risk management, capital planning and
liquidity risk management. Also, in June 2018 SH USA passed
the Federal Reserve’s annual capital stress test for the second
consecutive year.
Regarding business performance, we maintained the following
strategic priorities:
Santander Bank:
• A continued focus on improving the customer experience and
product ofer across the digital and physical channels, led to
growth in loyal and digital customers. In Retail Banking, loyal
customers rose 12%. Digital customers increased 10%, backed
by continued enhancements to the Bank’s digital capabilities.
• Continued investments in Commercial Banking and SCIB
contributed to consistent growth in the Bank’s loans and
advances to customers booked in the year.
• Improved earning asset mix to drive margin improvements.
Santander Consumer USA:
• Focus on dealer experience and pricing, refected in the strong
growth in originations across all channels in 2018.
• In addition, Santander Consumer completed its USD 200 million
share repurchase programme in January 2019.
• As announced in June 2018, Santander Consumer USA is in
discussions with FCA (Fiat Chrysler Automobiles) regarding the
future of FCA’s US fnance operations after FCA had announced its
intention to establish a captive US auto fnance unit and indicated
Loyal customers A
Digital customers A
Thousands
Thousands
894
814
339
303
+12%
+10%
2017
2018
2017
2018
A. Santander Bank.
312
2018 Annual Report
that acquiring Santander Consumer USA’s FCA-related business
was one option it would consider. These discussions cover a
range of options on how to optimise the existing contract and
other longer-term arrangements. While discussions continue,
Santander Consumer USA and FCA continue to operate under the
existing arrangements.
Activity
Loans and advances to customers at Santander US increased 19% in
euros year-on-year in net terms. Excluding the exchange rate impact
and reverse repurchase agreements, gross loans and advances to
customers were 6% higher, due to:
• Higher origination volumes at Santander Consumer USA and
growth in consumer, companies, and SCIB at Santander Bank.
On the other hand, SBNA began originating auto loans through
Santander Consumer USA.
• Customer deposits rose 12% in euros year-on-year. Excluding
repurchase agreements and the exchange rate impact,
customer deposits were 5% higher, as demand deposits fell
due to the outfow of public sector balances and higher interest
rates, more than ofset by the increase in time deposits.
Results
Underlying attributable proft in the year was EUR 552 million
(5% of the Group’s total operating areas), and underlying RoTE
was 4.12%.
Compared to 2017, underlying attributable proft rose 35% in
euros and 42% excluding the exchange rate impact, driven by
strong growth in Santander Bank and Santander Consumer USA.
By line items:
• Total income increased 5%. Net interest income rose 1% due
to higher loan volume, despite lower spreads on loans in
Santander Consumer USA and higher cost of funding. Net fee
income decreased 7% due to lower fees at Santander Consumer
USA and the New York branch.
• Gains on fnancial transactions amounted to EUR 72 million
(they were close to zero in 2017). Other operating income
increased 60% due to higher income from leasing.
• The administrative expenses and amortisations trend continued
to improve (-1%) mainly due to lower technology depreciation.
• Net loan-loss provisions fell 1%. The cost of credit ratio
improved to 3.27% from 3.42% in December 2017. The NPL
ratio stood at 2.92% and coverage was 143%.
• Other gains (losses) and provisions increased losses due to
charges related to legal claims and the sale of branches in 2017.
Business areas performance
United States
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances
to customers
Cash, central banks and
credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and
credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Pro memoria:
Gross loans and advances
to customers B
Customer funds
Customer deposits C
Mutual funds
2018
5,391
859
72
628
6,949
2017
5,569
971
%
% excl. FX
(3.2)
(11.6)
1.3
(7.4)
9
669.2
705.0
410
6,959
(3,015)
(3,198)
3,934
(2,618)
3,761
(2,780)
53.1
(0.1)
(5.7)
4.6
(5.8)
60.3
4.5
(1.3)
9.5
(1.4)
(199)
1,117
(347)
770
—
770
218
552
(90)
122.1
132.5
892
(256)
636
—
636
228
25.2
35.5
21.1
—
21.1
(4.5)
408
35.4
31.0
41.9
26.7
—
26.7
(0.0)
41.7
85,564
71,963
18.9
13.5
16,442
13,300
23.6
13,160
4,291
15,585
135,043
57,568
13,843
3,368
11,914
114,388
51,189
(4.9)
27.4
30.8
18.1
12.5
18.0
(9.2)
21.6
24.9
12.7
7.4
16,505
15,884
3.9
(0.8)
37,564
3,098
3,798
118,532
16,511
26,176
2,503
3,437
99,189
15,199
43.5
23.8
10.5
19.5
8.6
83,696
75,389
11.0
64,239
56,064
8,176
59,329
50,962
8,367
8.3
10.0
(2.3)
37.0
18.2
5.5
14.1
3.7
6.0
3.4
5.0
(6.7)
Ratios (%) and operating data
Underlying RoTE
Efciency ratio
NPL ratio
NPL coverage
Number of employees
Number of branches
A. Includes exchange diferences.
B. Excluding reverse repos.
C. Excluding repos.
4.12
43.4
2.92
142.8
17,309
660
3.12
46.0
2.79
170.2
17,560
683
0.99
(2.6)
0.13
(27.4)
(1.4)
(3.4)
313
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
4.4 Corporate Centre
2018 Highlights
Underlying
attributable proft
EUR -1,721 Mn
The Corporate Centre’s objective is to aid the operating units by contributing value-added and
carrying out the corporate function of oversight and control. It also develops functions related
to fnancial and capital management.
The underlying attributable loss was 9% less year-on-year, due to lower hedging costs of
exchange rates.
Strategy and functions
The Corporate Centre contributes value to the Group in various ways:
• It makes the Group’s governance more solid, through global
control frameworks and supervision, and it fosters the exchange
of best practices in management of costs and economies of scale.
This enables us to be one of the most efcient banks in the sector.
• The Corporate Centre contributes to the Group’s revenue growth,
by sharing the best commercial practices, launching global
commercial initiatives and accelerating the digital transformation
simultaneously in a cross-cutting manner in all countries.
It also coordinates the relationship with the European regulators
and develops functions related to fnancial and capital
management, as follows.
Financial management functions:
• Structural management of liquidity risk associated with funding
the Group’s recurring activity, stakes of a fnancial nature and
management of net liquidity related to the needs of some business
units. The price at which these operations are made with
other Group units is the market rate (euribor or swap) plus the
premium which, in the 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 with high credit quality, higher liquidity and low
capital consumption.
• Strategic management of the exposure to exchange rates on equity
and dynamic on the countervalue of the units’ results in euros
for the next 12 months. Net investments in equity are currently
covered by EUR 23,025 million (mainly Brazil, UK, Mexico, Chile,
US, Poland and Norway) with diferent instruments (spot, fx,
forwards).
Separately from the fnancial management described here,
the Corporate Centre manages all capital and reserves and its
allocation to each of the units.
Results
Underlying attributable loss of EUR 1,721 million in 2018 down
from a loss of EUR 1,889 million in 2017. The improvement was
mainly due to higher gains on fnancial transactions (EUR 11 million
in 2018 compared to a loss of EUR 227 million in 2017) resulting
from lower costs of hedging of exchange rates.
Net interest income was hit by the volume of issuances made
under the funding plan, largely focused on eligible TLAC
instruments and costs related to the greater liquidity bufer
requirements.
Administrative expenses and amortisations increased 4% as a
result of two efects that ofset each other: the streamlining and
simplifcation measures and the investment in global projects for the
Group’s digital transformation.
Lastly, other gains (losses) and provisions recorded very
diferent kinds of charges: provisions, intangibles, the cost of the
government’s guarantee on deferred taxes, pensions, litigation,
impairment of fnancial assets, etc.
Corporate Centre
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions A
Other operating income
Total income
Administrative expenses and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses) and provisions
Proft before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
Balance sheet
Loans and advances to customers
Cash, central banks and credit institutions
Debt instruments
Other fnancial assets
Other asset accounts
Total assets
Customer deposits
Central banks and credit institutions
Marketable debt securities
Other fnancial liabilities
Other liabilities accounts
Total liabilities
Total equity
Resources
Number of employees
A. Includes exchange diferences.
2018
(947)
(69)
11
(23)
(1,028)
(495)
(1,523)
(115)
(101)
(1,739)
20
(1,718)
—
(1,718)
2
2017
%
(851)
(38)
(227)
(104)
(1,220)
(476)
(1,696)
(45)
(181)
(1,923)
32
(1,890)
—
(1,890)
(1)
11.3
82.4
—
(78.1)
(15.7)
3.9
(10.2)
154.9
(44.5)
(9.6)
(36.8)
(9.1)
—
(9.1)
—
(1,721)
(1,889)
(8.9)
6,508
6,141
377
2,113
124,494
139,634
234
1
41,783
1,333
8,206
51,557
88,077
5,326
400
1,768
2,116
122,489
132,099
223
279
35,030
1,626
8,092
45,248
86,850
22.2
—
(78.7)
(0.1)
1.6
5.7
5.3
(99.8)
19.3
(18.0)
1.4
13.9
1.4
1,764
1,784
(1.1)
314
2018 Annual Report
4.5 Global businesses
Retail Banking
Business areas performance
2018 Highlights
The Group continued to focus on customer loyalty and digital transformation, with new
products and services that cover the current needs of our customers.
At the end of 2018, the Group had close to 20 million loyal customers and 32 million digital
customers.
Underlying attributable proft of EUR 7,793 million, boosted by good dynamics of customer
revenue and efciency improvement.
Underlying
attributable proft
EUR 7,793 Mn
Commercial activity
As regards digital platforms and apps, of note were:
Santander is immersed in a digital transformation process
which rests on two main priorities to continue to deliver the best
customer service.
• In Poland, launch of Działalnosc.pl designed to support
businesspeople and mSignature, a mobile app authorisation
tool as an alternative for SMS code.
The frst priority is to deliver all our products and services
digitally, in order to continue strengthening the relationship with
our customers. The second one is to do this in the fastest and
most efcient way.
• In Brazil, the Santander Way app is regarded as the best
fnancial market app in the country.
• The UK installed a new digital clearing system that ofers
customers faster clearance of cheques.
To this end, our core banks are focused on 5 key areas:
• Transforming our front: to provide any product and service digitally,
end to end, and adopt changes quickly.
• In Mexico, Súper Wallet now incorporates payment of
purchases done with rewards points.
• Transforming the back: We are re-engineering, digitalising and
robotising so that eventually all processes will be automated for
speed and efciency.
• Evolving our IT architecture and systems: progressively evolve and
modernise our existing technology to provide greater fexibility to
our customers.
• Onboarding new technologies: analytics, robots and machine
learning to our day to day operations to understand the customer
needs in our front.
• Finally, we are becoming an agile and data-driven organisation.
We have created the Santander Agile Way to be able to deliver
products and services which better respond to customer needs,
with improved time to market and greater productivity. This year,
35% of our projects implemented the agile methodology.
Loyal customers
Digital customers
Thousands
Thousands
32,014
25,391
19,896
17,254
On the other hand, we are also developing new digital
businesses in order to support the core banks as well as to
ofer disruptive products and services:
• Openbank, Santander Group’s fully digital bank, initially
launched in Spain, began to be expanded to other countries.
• OnePay Fx, based on blockchain and which makes it possible
for retail customers in UK, Spain, Brazil and Poland to
complete international transfers in the same day or by the
next day.
• Superdigital, a low-cost fnancial solution alternative
to traditional banking, mainly focused on the unbanked
population of Latin America.
+15%
+26%
Thanks to these measures, digital customers increased 26% in
2018, which already amount to half of our active customers.
Loyal customers rose 15%, with an improved experience.
2017
2018
2017
2018
315
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Results
Underlying attributable proft amounted EUR 7,793 million in
2018 (78% of the Group’s operating areas).
Compared to 2017, underlying attributable proft increased 5% in
euros. This evolution was impacted by exchange rates. Excluding
this impact, proft rose 12% as follows:
• Total income increased 8%, mainly driven by net interest income
and net fee income. On the other hand, gains on fnancial
transactions, which have very little weight (2%) on total revenue,
rose 11%.
• Administrative expenses and amortisations were 6% higher due
to the ongoing commercial transformation and digitalisation
process.
• Net loan-loss provisions increased 13% driven by greater
volumes, as credit quality ratios improved and the NPL ratio had
a positive performance in almost all retail units.
• Other gains (losses) and provisions improved 21% mainly due to
lower provisions for legal and labour claims in Brazil.
• Higher tax on proft, mainly resulting from the increase in Brazil.
Retail Banking
EUR million
Underlying income statement
2018
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
A. Includes exchange diferences.
%
% excl. FX
32,522
8,946
2017
32,339
9,306
0.6
(3.9)
720
680
6.0
644
42,832
580
42,904
11.0
(0.2)
(19,255)
(19,677)
(2.1)
23,577
(8,461)
23,228
(8,278)
1.5
2.2
8.8
6.0
11.0
15.7
8.3
5.8
10.5
13.0
(1,707)
(2,394)
(28.7)
(20.7)
13,408
(4,329)
12,555
(3,843)
9,080
8,712
—
9,080
1,287
7,793
—
8,712
1,256
7,456
6.8
12.6
4.2
—
4.2
2.4
4.5
14.6
22.2
11.3
—
11.3
8.4
11.7
Smart Red branch, Spain
Regarding our branch network, the Group has a network of
13,217 branches, making it the international bank with the largest
commercial network.
The Group is making progress in digitalisation, but without losing
its essence as a bank. The branches will continue to be a relevant
channel for customers, focusing on selling products of greater
value and customer advice.
Most of these branches ofer full-service banking, although the
Group also has branches that ofer specialised customer care to
certain segments.
Because of our scale, we have unique insight into what our
customers want and we are driven to create personal banking
relationships thanks to our experienced team of 100,000 Santander
colleagues talking to our 144 million customers.
We are innovating in the way we interact with our customers,
including, for example, through the conversion of traditional
bank branches into new collaborative spaces focused on
customer experience and digital capacities, such as the
new Work Café branches (Chile, Brazil, Spain, Portugal and
Argentina), the SMART branches (Spain, the UK) and Santander
Ágil in Mexico.
During 2018, the number of branches declined by 480 branches,
mostly in Continental Europe due to integration processes in
Spain, Santander Consumer Finance and Portugal.
Activity
Loans and advances to customers increased 3% compared to
2017 in euros. Excluding reverse repurchase agreements and the
exchange rate impact, gross loans rose also 3%.
Customer deposits increased slightly (+0.3%) year-on-year in
euros. Excluding repurchase agreements and the exchange rate
impact, customer deposits increased 3%.
316
2018 Annual Report
Business areas performance
Santander Corporate & Investment Banking
2018 Highlights
Strategy focused on widening our product ofer, developing our franchises in the United
Kingdom and the US, consolidating Continental Europe as a single business unit and
implementing the Multinational Coverage Model (MNC).
Strong progress on the Global Infrastructure Programme (GIP) and completion of the structure
under the Banking Reform Act in the UK.
The integration with the retail banking network and the enhanced ofer of value-added
products to its customers, drove business growth (+21%).
Underlying attributable proft was 4% lower in euros at EUR 1,705 million, 8% higher excluding
the exchange rate impact, due to greater customer revenue and lower provisions.
Underlying
attributable proft
EUR 1,705 Mn
Strategy
Main actions carried out in the year by lines:
• Focus on capturing international business fows, increasing the
connectivity among the countries where the Group operates
and expanding the ofer of high value-added products (Nexus,
Mercados Américas, Private Debt Mobilisation, securitisations,
etc.).
• We continued to develop and integrate the factory of SCIB
• We are still immersed in transforming the technological and
risk infrastructures (GIP) into a simplifed, scalable and digital
platform.
• SCIB maintained its low capital consumption business model,
with a balance sheet rotation which enabled us to reduce the
volume of risk-weighted assets. Also, the implementation of
measures such as the Dynamic Credit Portfolio Management
helped reduce net loan-loss provisions.
products for retail banking customers. As a result, collaboration
revenue increased 21% in the year.
Activity
• Progress was made on strengthening our franchises in the UK
and the US, in order to accelerate their growth, by completing
the structure under the Banking Reform Act in the UK,
simplifying the corporate structure in the US and restructuring
the Division’s risk and credit units.
Main actions performed in the year by business line:
• Cash management: double-digit growth in transactional
business as well as in customer funds. Santander Cash Nexus
was consolidated as a solid and robust solution for our
customers’ regional business. We achieved a record one million
transactions per month, increasing our active customer base
exponentially, both in those managed by SCIB and Retail Banking.
Total income breakdown
Constant EUR million
Total
5,000
Capital & Other
Global Markets
Global Debt
Financing
Global Transaction
Banking
+2%A
+8%
-1%
-1%
+3%
5,087
539
1,544
1,333
1,671
2017
2018
A. In euros: -8%.
317
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
• Export fnance & agency fnance: Santander consolidated
its leadership as one of the world’s best banks by volume
of managed assets. We also worked during the year in new
origination in non-core markets where this business has a high
potential.
• Syndicated corporate loans: of note was the acquisition of
Gemalto by Thales and Westfeld by Unibail, as well as the
merger between Telecom Argentina and Cablevision. Also,
support for sustainable fnancing in restructuring the assets of
Enel Green Power and the loan to Generali.
• Trade & working capital solutions: strong growth year-on-year
due to increased international transactions among the countries
where the Group operates. We consolidated our strong position
in Spain, Brazil and Mexico, while expanding our business
towards new markets such as the US and Asia. This growth
was backed by an enhanced product range and digitalisation
through platforms intended for receivables and confrming.
• Debt capital markets: Santander held its signifcant position in
Latin America, notably placements of sovereign bonds in euros
in Mexico and Chile as well as corporate issuances and fnancial
institutions such as the Brazilian Development Bank. Of note
in Europe was the boost in sustainable fnancing and corporate
issuances.
• Structured fnancing: the Group remained the leader in Latin
America and Europe. We also topped the global ranking of
fnancial advice by number of operations.
• Global Markets: activity decreased slightly. Nevertheless,
positive evolution of sales continued, mainly in the corporate
sector, maintaining a greater contribution from management of
books in Argentina, the US and Asia.
Loans and advances to customers rose 6% in euros compared to
2017. Excluding reverse repurchase agreements and the exchange
rate impact, gross loans and advances to customers increased 12%.
Customer deposits decreased 1% in euros in 2018. Excluding
repurchase agreements and the exchange rate impact, they
grew 19%.
Ranking 2018
Source
Euromoney
Latin Finance
Global Finance
Area
SCIB
SCIB
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
PFI
The Banker
PFI
Global Debt Financing
Bank of the Year in Europe
Global Debt Financing
Deal of the Year – Bonds SSAs: Argentina’s USD 2.75 bn century bond
Global Debt Financing
Europe Wind Power Deal of the Year
Latin Finance
Global Debt Financing
Best Airport Financing: Grupo Aeroportuario de la Ciudad de México
(GAMC) (Green Bond)
Global Capital
Extel
FX
Extel
Global Markets
Global Markets
Global Markets
Global Markets
Best Liquidity Provider
N.1 Leading Brokerage Firm Spain & Portugal
Best Bank
N.1 Country Research: Brokerage Firm Spain & Portugal
Institutional Investor
Global Markets
#1 Corporate Access (Research) in Mexico
Institutional Investor
Global Markets
#1 Latin America Research Team- sector winners: Equity Strategy,
Electric Utilities, Transportation
Institutional Investor
Global Markets
#1 Equity Research in Iberian markets
TFR
BCR
Global Transaction Banking
Best Trade Bank in Latin America
Global Transaction Banking
Best Global Supply Chain and Receivable Finance Provider
Global Finance
Global Transaction Banking
Best Trade and Supply Chain Finance Provider in Latam
Global Transaction Banking
Best Trade Finance Bank in Latam
Global Transaction Banking
Overall ECA Finance Deal of the Year: KNPC Clean Fuels Proyect
Global Transaction Banking
Americas ECA Finance Deal of the Year: Zuma Energia – Parque Eólico
Reynosa Wind Farm
Global Transaction Banking
ECA-Backed Telecoms Deal of the Year: Verizon Communications
Global Transaction Banking
Women Leading Climate Finance
Corporate Finance
Corporate Finance
European M&A – HS1
Deal of the Year – Equities: CFE’s USD 759 mn IPO
GTR
TXF
TXF
TXF
MIGA
IJ Global
The Banker
318
2018 Annual Report
Business areas performance
Results
Santander Corporate & Investment Banking
Underlying attributable proft of EUR 1,705 million (17% of
the Groups’ total operating areas), driven by the strength and
diversifcation of SCIB customer revenue (89% of total revenue).
Compared to 2017, underlying attributable proft fell 4%.
Excluding the exchange rate impact, it rose 8%, as follows:
• Total income grew because of the 8% rise in net interest income
(good performance in the fourth quarter). On the other hand,
net fee income remained stable.
• Lower gains on fnancial transactions than in 2017 whose frst
quarter was excellent.
• Higher administrative expenses and amortisations associated
with transformation projects.
• Net loan-loss provisions were signifcantly lower, mainly in
Spain, the UK, Brazil and the US.
By segments, better results from global transactional banking
and global debt fnancing, while income from global markets
decreased.
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
A. Includes exchange diferences.
%
% excl. FX
2018
2,378
1,512
1,004
194
5,087
2017
2,442
1,627
(2.6)
(7.1)
1,212
(17.2)
222
5,503
(12.6)
(7.6)
(2,105)
(2,028)
3.8
7.6
0.3
(5.8)
(11.1)
1.7
10.7
2,982
(217)
(108)
2,657
(792)
1,865
—
1,865
160
1,705
3,474
(690)
(14.2)
(68.5)
(3.7)
(66.1)
(72)
49.2
64.8
2,712
(750)
(2.0)
5.6
1,962
(5.0)
—
—
1,962
182
(5.0)
(12.2)
1,780
(4.2)
11.1
21.8
7.2
—
7.2
(2.8)
8.2
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Wealth Management - Asset Management and Private Banking
2018 Highlights
New global business division.
Underlying
attributable proft
EUR 528 Mn
Santander Private Banking and Santander Asset Management continued strengthening their
position as the reference in Spain and Latin America.
Santander Private Banking, with EUR 181 billion under management, is the private banking
global platform built on our strong local presence in 10 markets.
Santander Asset Management, with EUR 172 billion, became the asset management priority
partner for the Group banks, and a specialist in Latin American assets.
Total contribution to proft (net proft + total fee income generated) amounted to EUR 1,015
million, 13% more than the estimated for 2017.
• Private Banking: development of a global and connected
proposition, taking advantage of Santander’s presence in
over 10 countries. As a result, business collaboration volumes
among countries increased 19% year-on-year, to EUR 3,727
million. Moreover, the Private Wealth (UHNW – Ultra High Net
Worth) segment was launched in 2018, ofering a diferential
service to the Group’s most valued customers.
• In 2018, Santander Private Banking received a record amount of
awards, 64 in total. Of note were Best Private Banking in Spain
by The Banker, and Best Private Banking in Latin America, Spain,
Portugal, Chile, Argentina and Mexico by Euromoney. We were
also recognised as the best customer service in Private Wealth,
as well as the best accessible technology for bankers and
customers in 4 countries and Latin America by Euromoney.
• Also noteworthy, Santander became the frst bank in Spain to
obtain the AENOR certifcate for excellence in advisory services.
Strategy
The Santander Wealth Management division is the combination of
two complementing businesses:
• Santander Private Banking includes the private banking activity of
our local banks and international private banks in order to create
a single global platform and to ofer our more than 170,000
Private Banking clients the Group’s products and services, in
a coordinated and homogeneous manner in all the countries
where Santander operates. The goal is for a local private banking
customer to become a customer in all the countries where we
operate.
• Santander Asset Management (SAM), the international asset
manager strongly rooted in Europe and Latin America. With
over 45 years history and present in more than 10 countries, it
is focused on creating and managing the best products (mutual
funds, pension funds, institutional mandates, alternative
investments, etc.) for Santander customers and third parties.
The Wealth Management division launched in its frst year the
following strategic initiatives:
Business performance A
EUR billion and % change in constant euros
329
203
172
Total Assets Under
Management
Funds and
investment B
-SAM
-Private
Banking
Custody of
customer funds
55
81
Customer deposits
45
Customer loans
14
s/2017
-2%
-2%
-1%
-2%
-6%
+6%
+12%
A. Total asset marketed and/or managed in 2018 and 2017.
B. Total adjusted for funds from private banking, customers managed by SAM.
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2018 Annual Report
Business areas performance
• Santander Asset Management (SAM) enhanced and expanded
Wealth Management
its product range. Of note was the investment strategy followed
in Spain and Latin America, with awards to the best manager of
equities in Spain by Citywire, and the best fxed income fund in
its class in Latin America (Latin American Corporate Bond Fund).
Also, launch of investment solutions in order to adapt to the
customer needs, given the current market scenario.
• Moreover, SAM is the leading entity in funds management
under ESG (Environmental Social and Government) criteria,
notably in Spain, with the launch of the new Santander
Sostenible Acciones fund, and the award to Santander
Responsabilidad Solidario as the best solidarity fund.
Santander Wealth Management is making progress in digital
transformation, keeping pace with the rest of the Group. Tools such
as Global Private Banking SPiRIT had been implemented in Mexico,
Brazil and Chile and the new Virginia customer front was launched
in International Private Banking. SAM started the migration of
its investment platform to the most diferential solution in the
market: Aladdin.
Activity
Total assets under management amounted to EUR 329 billion, 2%
lower than in 2017, afected by the instability in markets, which
generated depreciation of assets, particularly in custody, but also
in marketed investment products.
In Private Banking 6% growth in customer deposits and 12% in
loans and advances to customers, driven by development of
Private Wealth.
Results
Underlying attributable proft rose 11% year-on-year to EUR 528
million, up 17% excluding the exchange rate impact. By lines:
• Total income rose backed by higher net interest income (+12%)
and net fee income (+63%), spurred by the increase in value-
added volumes under management.
• Higher administrative expenses and amortisations, partly
because of the investment in the Private Wealth project.
• The rise in total income and expenses was afected by the larger
stake in Santander Asset Management.
By units, noteworthy growth in proft in Brazil (+16%) and
International Private Banking (+12%).
When the total fee income generated by this business is added to
net proft, the total contribution to the Group is EUR 1,015 million,
13% more than the estimated in 2017.
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial
transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses)
and provisions
Proft before tax
Tax on proft
Proft from continuing
operations
Net proft from discontinued
operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
A. Includes exchange diferences.
2018
420
1,097
62
(36)
1,543
(730)
813
(9)
(8)
797
(234)
563
—
563
35
528
%
% excl. FX
2017
404
700
4.0
56.7
38
64.5
70
1,212
—
27.3
(528)
38.3
684
(9)
18.8
(4.9)
(8)
(5.3)
667
(165)
502
—
502
24
478
19.5
41.9
12.1
—
12.1
42.0
10.6
Total proft contribution A
EUR 1,015 Mn
+13%
A.Including net proft and total fee income generated
by this business
11.9
62.7
74.2
—
34.1
45.6
25.3
(1.6)
(2.7)
26.0
49.5
18.3
—
18.3
54.0
16.5
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Real estate activity Spain
Underlying
attributable proft
EUR -242 Mn
2018 Highlights
Management continued to focus on reducing these assets.
Underlying attributable loss of EUR 242 million in 2018, compared to a loss of EUR 308 million
in 2017.
At the end of 2018, the gross exposure in the Real Estate
Activity Spain unit stood at EUR 9.3 billion and loan-losses
allowances of EUR 4.6 billion (coverage of 50%).
The net exposure was EUR 4.7 billion, representing just 1% of
our balance sheet in Spain.
Management continued to focus on reducing these assets,
particularly loans and foreclosed assets.
As announced after the acquisition of Banco Popular, and
in order to reduce the Group’s non-performing assets to
irrelevant levels, on 8 August 2017 Banco Popular signed
agreements with the Blackstone fund for the acquisition by
the fund of 51% of Banco Popular’s real estate business, and
thus control over it. This business consists of the foreclosed
real estate portfolio, non-performing loans stemming from
the real estate sector and other assets related to Banco
Popular’s activity and that of its subsidiaries.
The transaction was closed as expected, in the first quarter
of 2018, once the required regulatory authorisations were
obtained, which allowed Santander to focus on the integration
of Banco Popular and mitigate uncertainties regarding
possible additional losses related to real estate exposure.
Closing the transaction entailed the creation of a company
controlled by Blackstone fund, in which Santander has a
49% stake, to which Banco Popular transferred the business
comprising the aforementioned assets and 100% of the share
capital of Aliseda.
Additionally, during the third quarter of 2018, the Group
reached agreement with a subsidiary of Cerberus Capital
Management to sell 35,700 properties for EUR 1,535 million,
with no material impact on profit and capital expected. This
transaction is scheduled to be completed by the first quarter
of 2019.
This unit recorded an underlying attributable loss of EUR 242
million in 2018, compared to a loss of EUR 308 million in 2017.
This performance was largely due to lower net loan-loss
provisions (EUR -18 million) due to reduced provision needs
and the lower negative impact of other gains (losses) and
provisions (EUR -83 million), largely because of lower losses
from the sale of foreclosed assets.
Real estate activity Spain
EUR million
Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions A
Other operating income
Total income
Administrative expenses
and amortisations
Net operating income
Net loan-loss provisions
Other gains (losses) and provisions
Proft before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Underlying attributable
proft to the parent
A. Includes exchange diferences
2018
(33)
(0)
0
23
(10)
(194)
(204)
(70)
(73)
(347)
104
(243)
—
(243)
(2)
(242)
Real estate exposure net value A
EUR billion
Real estate assets
- Foreclosed
- Rentals
Non-performing real estate loans
Assets + non-performing real estate
A. Real estate activity Spain.
2017
(38)
2
(0)
29
(8)
%
(14.4)
—
—
(20.3)
28.8
(209)
(7.2)
(217)
(88)
(156)
(461)
138
(323)
—
(323)
(15)
(5.8)
(20.4)
(53.5)
(24.8)
(25.1)
(24.6)
—
(24.6)
(89.4)
(308)
(21.5)
Dec-2018
3.8
2.6
1.2
0.9
4.7
322
2018 Annual Report
Research, development and
innovation
5. Research, development and innovation (R&D&I)
Research, development and innovation activities
Innovation and technological development are a strategic pillar
of Santander. Our objective is to respond to the new challenges
that emanate from digital transformation, focusing on operational
excellence and the customer experience.
Moreover, the data and information that we obtain from our new
technological platforms will help us to better understand the
customer journey of our clients and so be able to design a better
digital profle that will enable us to generate greater confdence
and increased customer loyalty.
As well as the competition between banks, fnancial entities must
watch out for the new competitors that have entered the fnancial
system, competitors whose great competitive advantage, and thus
a diferentiating factor, is their use of new technologies.
Consequently, developing an adequate strategic technology plan
must allow for a greater capacity to adapt to customers’ needs
(products and tailored services, full availability and excellent service
in all channels); enhanced processes, which ensure that the Group’s
professionals attain greater reliability and productivity in the exercise
of their functions, and lastly, adequate management of risks,
endowing teams with the necessary infrastructure to provide support
for identifying and assessing all risks, be the business, operational and
reputational risks, or regulatory and compliance ones.
In addition, Santander as a global systemically important bank,
as well as its individual subsidiaries, is subjected to increasing
regulatory demands that impact the systems’ model and the
underlying technology. This makes further investments necessary
in order to guarantee their compliance and legal security.
The latest ranking by the European Commission (the 2018 EU
Industrial R&D Investment Scoreboard, based on 2017 data)
recognises, as did previous rankings, Santander’s technological
efort, placing it frst among Spanish companies and the frst global
bank in the study (and the only one of the 100 companies investing
the most) on the basis of investment in R&D.
Technological investment in 2018 in R&D&i amounted to EUR 1,468
million (3% of the Group’s total income).
Technological strategy
In order to respond to business needs, Santander must integrate
new digital capacities, such as the agile methodologies, public and
private cloud, the evolution of core systems, as well as develop
technological capacities (Application Programming Interface,
artifcial intelligence, robotics, blockchain, etc.) and data.
The Group’s technological strategy is aligned with the global
businesses, Santander Digital and the banks in the various
countries. It is a solid strategy, in the benefts it provides, fexible
in the face of new trends and open to the changes which they
represent. To this efect, we are supported by a committed
organisation experienced in relations with countries, a robust
and reliable technological infrastructure and, lastly, a system of
governance that articulates projects and initiatives that help to
crystallise this strategy in all the countries where we operate.
In order to supervise the strategy’s correct implementation, the
governance model includes an inter-organisational body known
as ARB (Architecture Review Board). It is responsible for sharing
local and global innovation collaboratively and efciently, as well
as reviewing the Group’s architecture. This forum guarantees
consistent architectures, strengthens the re-use of components
and bolsters the use of new technologies in order to meet changing
business needs.
The contribution of the T&O division is key for the Group’s
commercial and digital transformation. Evolving the model is
required in order to progress toward developing global products
and digital services. Technology matters today, and even more so
in the future.
This is why Isban Global and Produban Global were integrated
to create Santander Global Tech as part of the T&O division, with
some 2,000 T&O professionals work in Spain, the UK, Portugal,
United States, Mexico, Brazil and Chile. This integration will
produce a rapid organisation with a greater technological and
execution capacity. Teams will work in the portfolio of global
products agreed by countries (Santander Digital and the T&O
division), focusing, in particular, on quality and security.
Alhambra building, Boadilla del Monte, Spain.
323
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
The aim of these measures is to boost customer loyalty, as well
as greater confdence in the digital world. We are also taking
advantage of digital opportunities such as Openbank to convert us
into a supplier of an open fnancial services platform.
Fintech ecosystem
Lastly, Banco Santander is positioning itself in the Fintech
ecosystem (fnancial technology) as an innovative bank and
benchmark for the sector, which is enabling it to have an
observatory for anticipating and participating in the main digital
trends.
In order to develop this strategy, we have Santander InnoVentures,
a USD 200 million venture capital fund, tasked with identifying and
rating fntech companies that help Santander to innovate in order
to improve operational excellence and provide a better service to
customers.
The fund invests, via minority stakes, in start-ups and helps them,
in turn, to create commercial and/or strategic agreements within
the fnancial sector and access the Group’s whole experience. As
well as contributing capital, Santander InnoVentures provides the
start-ups in which it invests with scale and experience, helping
them to grow and so learn and promote the introduction of new
technologies for the Group’s businesses and customers.
At the end of 2018, Santander InnoVentures had invested in more
that 20 companies in the areas of payments, marketplace lending,
e-advisory, customer risk and analysis and artifcial intelligence,
among others.
Technological infrastructure
The Group has fve high quality data processing centres (DPCs),
interconnected by a redundant system of communications.
These fve pairs of DPCs are distributed in strategic countries to
support and develop the Group’s activity. These centres also have
traditional IT systems together with the capacities supplied by an
on-premises cloud, which facilitates integrated management of the
technology of the various business areas and accelerates the digital
transformation and adoption of new technologies.
Of note among the countries where the Group operates is Brazil
because of the speed with which it has adopted cloud.
Cybersecurity
Santander views cybersecurity as one of the Group’s main priorities
and a crucial element for supporting the Bank’s mision of ‘helping
people and businesses prosper’ as well as ofering excellent digital
services for our customers.
We continued in 2018 to develop measures to improve
cybersecurity in all the Group’s spheres. We launched training
measures for our professionals to improve how they handle
cyberrisk issues (set out in the chapter on Responsible banking).
The Risk Management Report also details the various steps taken
to measure, monitor and control risks related to cybersecurity, and
their respective mitigation plans.
For these reasons, we continue to invest in systems and platforms
that help us to improve in this sphere.
Digitalisation
As well as the new technological platform, the evolution of
infrastructure and the aforementioned cybersecurity measures, the
Group is driving its digital transformation through various projects
and initiatives developed in almost all countries.
For example, Superdigital and Portal Comercial in Brazil, One
Pay FX in Spain, Brazil, UK and Poland, Digital Mortgages in UK,
Digitalisation (Súper Net, Súper Móvil, Súper Wallet) in Mexico, GPI
Swift in Argentina and mobile payments in Spain. Details on all of
them can be found in section ‘Inclusive and sustainable growth’ on
the Responsible banking chapter.
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2018 Annual Report
Signifcant events since year end
6. Signifcant events since year end
The following signifcant event occurred between 1 January 2019
and the date of preparation of this consolidated directors’ report:
On 6 February the Group announced that it had completed the
placement of preferred securities contingently convertible into
newly issued ordinary shares of the Bank, excluding preemptive
subscription rights and for a nominal value of USD 1,200,000,000
(EUR 1,052,000,000) (the “Issue” and the “CCPS”).
The CCPS were issued at par and its remuneration has been set at
7.50% on an annual basis for the frst fve years. The payment of
the remuneration of the CCPS is subject to certain conditions and to
the discretion of the Bank. After that, it will be reviewed every fve
years by applying a margin of 498.9 bps on the 5-year Mid-Swap
Rate.
325
Responsible bankingCorporate governanceEconomic and financial reviewRisk management 7. Trend information 2019
The director’s report contains certain prospective information
refecting the plans, forecasts or estimates of the directors, based
on assumptions that the latter consider reasonable. Users of this
report should, however, take into account that such prospective
information is not to be considered a guarantee of the future
performance of the entity, inasmuch as said plans, forecasts or
estimates are subject to numerous risks and uncertainties that
mean that the entity’s future performance may not match the
performance initially expected. These risks and uncertainties are
described in the Risk management chapter of this report and in
note 54 of the consolidated fnancial statements.
The global economy slowed in 2018 and left behind the peak of this
expansion, although we expect a relatively dynamic environment
will be maintained. We forecast global economic growth at 3.5%
in 2019 (3.7% estimate for 2018), slightly above its potential,
although resulting from a less homogeneous performance by
regions.
Mature economies are estimated to grow 2.0% (2.3% estimate for
2018), thanks to demand policies and the strength of the labour
market. Growth in both the US and the Eurozone will ease, as well
as the UK in the context of Brexit.
Developing economies will grow by around 4.5%, slightly below
the 4.6% estimated for 2018. China’s expansive measures, adopted
at the expense of a more determined correction of the imbalances,
will enable the economy to gradually slow down.
In Latin America, the capacity to recover or secure the credibility
of economic policy will play a key role. However, we expect the
recovery begun in 2017 to consolidate, with growth of around 2%
in 2019, underpinned by the recovery in Brazil and Chile’s ongoing
dynamism. Argentina, meanwhile, is expected to gradually recover
following reforms and the improvement in market confdence.
Mexico will continue to grow moderately.
Mature markets are expected to withdraw monetary policy
stimulus measures very slightly and conditional on the economic
and fnancial performance in an uncertain environment. However,
any stimulus withdrawal process will be, in any case, very gradual.
Long-term interest rates are expected to increase moderately. Yield
curves show diverging trends, with some fattening in the US and a
greater slope in Europe expected.
Interest rates in developing markets will perform diferently,
particularly in Latin America where each country’s monetary
policies will depend on the cyclical situation and on the evolution
of actual and expected infation.
In any case, the fact that the recovery is moderate and infation
remains low, partly due to structural factors, suggests that interest
rate movements, upward or downward, will be limited.
The balance of risks in the short term is downward: the probability
of a geopolitical or economic policy shock, particularly in the
US and Europe, has increased, which if it happens will lead to a
potentially sharper downward revision. The situation in China or
unstable fnancial conditions are other risk factors. In this context,
we have seen increased volatility and risk aversion.
In this environment, Santander ended the year having met all of the
main targets set for 2015-2018: growth, proftability and strength.
The number of loyal and digital customers rose, and volumes in
local currency increased. Proftability was higher and RoTE and
efciency improved. Also, the capital position was strengthened,
while growing cash dividend per share.
Banco Santander’s solid position in 10 core markets is balanced
between mature and developing economies. It has 144 million
customers and the scale to continue growing, which puts the Bank
in a solid position to draw on the opportunities ofered by the
environment.
In 2019 we will rely on the same pillars that had guided the Group
in the last three years. Our aim as a bank is to be the best open
fnancial services platform by acting responsibly and earning
the lasting loyalty of our people, customers, shareholders and
communities.
The management priorities of the principal units for 2019 are set
out below:
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2018 Annual Report
Trend information 2019
Spain
Poland
The economy is forecast to grow by around 2.1% in 2019, higher
than that envisaged for the Eurozone, and infation will remain low.
Lending will gradually increase as the year progresses.
Economic growth is expected to be stronger in 2019 at around
4%, mainly underpinned by buoyant domestic demand driven by
domestic consumption and investment.
The priorities for this year are:
The goals to become the reference bank for individuals and
companies are:
• To keep our leadership by balance sheet in Spain and complete
Banco Popular’s integration, maintaining quality service and
customer relationship.
• Develop a new value proposition / product ofer and improve the
customer experience.
• Accelerate the Bank’s digital transformation towards a data-
• Solid corporate culture in order to strengthen employee
driven company in order to improve the customer experience.
engagement and motivation in order to become one of the best
banks to work for in Poland.
• Keep on growing SMEs and corporate segments backed by Banco
Popular’s capabilities, Santander’s high added-value services and
our competitive advantage in digital banking for companies.
• Increase customer revenue and obtain cost synergies related to
Banco Popular’s integration.
• Continue to reduce doubtful assets, leveraging on our capital light
model.
The Real estate activity Spain unit will continue its strategy to
reduce assets and lending exposure.
• Become a more agile organisation in order to increase customer
loyalty and retention, by accelerating the development and
launch of products and services to the market.
• Enhance our position in Private Banking and Asset Management.
Santander Consumer Finance (SCF)
Portugal
SCF seeks to take advantage of its growth potential, backed by
its position in the European consumer market. The main priorities
will be:
GDP growth will begin to ease in 2019 to around 2%, with
improved investment and exports and further deleveraging of the
private and public sectors. In this scenario, the Bank’s priorities are:
• Maintain the leadership position in new auto fnancing and boost
growth in consumer fnance through our new digital business
model and signing agreements with the main retailers.
• Keep on growing organically, gaining proftable market share,
reinforcing our position as the largest privately owned bank in
Portugal and leveraging our position in the companies segment.
• Proactive management of brand agreements and development of
• Focus on growing customer funds, particularly of-balance sheet
digital projects. Collaboration with fntechs.
funds.
• Help our partners with their transformation plans, both in the
digitalisation of auto purchase and fnancing as well as in other
strategic projects.
• Reorganise business in Germany under the same brand, in order
• Combine volume growth with low cost of credit.
• Improve efciency, obtaining additional synergies from Banco
Popular Portugal integration.
to improve efciency and ofer better customer attention.
• Progress in our digital transformation and streamlining workfow.
• Maintain high proftability and efciency.
327
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
United Kingdom
Mexico
The economy is expected to grow moderately in 2019 at around
1.5%, under an ordered exit from the EU. The uncertainty over
Brexit could afect growth, the value of pound sterling and
thus infation. The Bank of England will adjust monetary policy
regarding the impact of Brexit on demand, supply and exchange
rate.
Against this backdrop, Santander UK priorities are:
• Become the UK’s best open digital bank in order to deliver
operational excellence and maximise efciency and customer
satisfaction.
• Generate growth through increased loyalty across target
business segments.
• Achieve constant proftability with a solid balance sheet and
prudent risk management.
UK banking environment faces major regulatory changes. Open
Banking and PSD II (Payment Services Directive) introduced new
requirements in 2018, which will bring business opportunities but
they also introduced a new level of risk.
We expect GDP growth to drop below 2% in 2019 (2.0% estimated
for 2018), still hit by the shrinking of the oil sector and some
uncertainty over the economic policies.
Against this backdrop, Santander Mexico’s strategy will:
• Continue the retail banking transformation: attraction and
loyalty drivers, enhancing our attention model and expand new
businesses (Súper Auto, Private Wealth and fnancial inclusion).
• Drive digitalisation, remote attention models and the customer
experience, in addition to improving information systems and
analysis.
• Focus on attracting payrolls, drawing on our strong presence in
the SMEs, companies and corporate segments.
• Promote SCIB business in order to continue to be the reference in
the market in value-added products.
• All these measures should be refected in recurrent revenue and
volume growth.
Brazil
Chile
After returning to growth in 2017 and 2018, following one of the
biggest slumps in recent decades, the economy is expected to
consolidate its recovery in 2019 with growth of more than 2%,
above the 1.3% estimated for 2018.
The economy will remain strong in 2019 with growth forecast at
3.5%.
Santander Chile’s strategy will focus on:
In this environment Santander Brasil’s management focus for the
coming year will be:
• Become the transactional bank of excellence with the best digital
platform for companies.
• Increase customer satisfaction and loyalty across all business
• Continue improving quality of service indicators and grow loyal
segments.
and digital customers.
• Continuous evolution and wider ofer of disruptive products and
• Signifcant growth in loans and customer funds.
services, and develop digital channels.
• Improve our proftability, efciency and the cost of credit.
• Keep on gaining market share, with growth in loans though a
suitable ofer for each customer.
• Grow in a recurring and proftable way, with efciency and cost of
credit improvement.
328
2018 Annual Report
Trend information 2019
Argentina
Santander Corporate & Investment Banking
Growth is expected to stabilise in 2019 after falling in 2018, and
infation to ease, in an environment of fscal adjustment and a tight
monetary policy.
The management priorities at Santander Río will focus on:
This division will continue its business strategy:
• Leverage on our customer-centric model, to drive faster
penetration of our franchise and growth in retail banking business
(collaboration revenue).
• Continue improving our value ofer focusing on the select, SMEs
• Strengthen the global value proposition, focusing on boosting the
advance and mid-income segments.
US, the UK and Continental Europe businesses.
• Gradual transformation of the branch network to a technology-
centred model, focused on improving the customer experience.
• Launch Openbank, the Group’s fully digital bank.
• Continue the implementation of the Global Infrastructure
Programme (GIP), following the regulatory agenda, while
embracing the digital transformation.
• Maintain disciplined use of capital, while keeping strict cost
• Action plans to generate savings and improve efciency.
control.
• Opening of the new building which will house the central areas,
with new working spaces for boosting innovation, productivity
and team work.
United States
Wealth Management
Growth is expected to remain dynamic at around 2.5% (2.9% in
2018), driven by fscal expansion.
Santander will focus on:
• Continue resolving legacy regulatory issues which remain
pending.
• Improve the customer experience in order to increase the number
of active customers.
• Seize collaboration opportunities across our businesses in the
country in order to drive value.
• Cost management in order to continue improving efciency.
In 2019 we expect to generate substantial growth, including the
investments needed to continue improving our value ofer. The key
management drivers will be:
• Consolidate Private Wealth (UHNW) model and value ofer.
• Complete the construction of our private banking global platform
in order to reinforce our global proposition for greater connection,
taking advantage of our presence in over 10 countries.
• Consolidate the model and value ofer for institutional clients
in Santander Asset Management (SAM), in coordination with
Santander Corporate & Investment Banking, focusing on Latin
American products and infrastructures.
• Continue improving and ofering a wider range of products at
SAM, developing new solutions in alternative products (private
debt and private equity funds of funds) and completing the
ofer through strategic agreements with top level specialised
management frms.
• Improve digitalisation through the implementation of Global
Private Banker tools, the new front for customers, as well as the
investment platform Aladdin at SAM.
• In 2019, the insurance business will be included in this unit, which
will focus on capturing the potential of this business for the Group
in all segments where there is an opportunity. In 2018 this business
made a total contribution (proft after tax and generated fees) to
the Group’s proft of EUR 1.4 billion.
329
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
8. Alternative performance measures (APMs)
In addition to the fnancial information prepared under IFRS, this
consolidated directors’ report contains fnancial measures that
constitute alternative performance measures (‘APMs’) to comply
with the guidelines on alternative performance measures issued
by the European Securities and Markets Authority on 5 October
2015 and non-IFRS measures.
The fnancial measures contained in this consolidated directors’
report that qualify as APMs and non-IFRS measures have been
calculated using the fnancial information from Santander but
are not defned or detailed in the applicable fnancial information
framework or under IFRS and have neither been audited nor
reviewed by our auditors.
We use these APMs and non-IFRS measures when planning,
monitoring and evaluating our performance. We consider these APMs
and non-IFRS fnancial measures to be useful metrics for management
and investors to facilitate operating performance comparisons
from period to period. While we believe that these APMs and non-
IFRS fnancial measures are useful in evaluating our business, this
information should be considered as supplemental in nature and is not
meant as a substitute of IFRS measures. In addition, other companies,
including companies in our industry, may calculate such measures
diferently, which reduces their usefulness as comparative measures.
The APMs and non-IFRS measures we use in this document can be
categorised as follows:
Underlying results
In addition to IFRS results measures, we present some results
measures which are non-IFRS measures and which we refer to as
underlying measures. These underlying measures allow in our
view a better year-on-year comparability as they exclude items
outside the ordinary course performance of our business which are
grouped in the non-IFRS line management adjustments and are
further detailed at the end of section 3.2 of this chapter.
In addition, the results by business areas in section 4 are presented
only on an underlying basis in accordance with IFRS8. The use of
this information by the Group’s Governance bodies and reconciled
on an aggregate basis to our IFRS consolidated results can be
found in note 52.c to our consolidated fnancial statements.
Proftability and efciency ratios
The purpose of the proftability and efciency ratios is to measure
the ratio of proft to capital, to tangible capital, to assets and to
risk weighted assets, while the efciency ratio measures how
much general administrative expenses (personnel and other) and
amortisation costs are needed to generate revenue.
Ratio
Formula
Relevance of the metric
RoE
(Return on equity)
Attributable proft to the parent
Average stockholders’ equity A (excl. minority
interests)
This ratio measures the return that shareholders obtain on the
funds invested in the entity and as such measures the Bank’s
ability to pay shareholders.
RoTE
(Return on tangible equity)
Attributable proft to the parent
This is a very common indicator, used to evaluate the proftability
of the company as a percentage of a its tangible equity. It’s
Average stockholders’ equity A (excl. minority interests) measured as the return that shareholders receive as a percentage
- intangible assets
Underlying RoTE
Underlying attributable proft to the parent
Average stockholders’ equity A (excl. minority interests)
- intangible assets
RoA
(Return on assets)
Consolidated proft
Average total assets
of the funds invested in the Bank less intangible assets.
This indicator measures the proftability of the tangible equity of
a company arising from ordinary activities, i.e. excluding results
from operations outside the ordinary course performance of
our business
This metric, commonly used by analysts, measures the
proftability of a company as a percentage of its total assets. It is
an indicator that refects the efciency of the Bank’s total funds
in generating proft over a given period.
RoRWA
(Return on risk weighted
assets)
Underlying RoRWA
Consolidated proft
Average risk weighted assets
The return adjusted for risk is an derivative of the RoA metric.
The diference is that RoRWA measures proft in relation to the
Group’s risk weighted assets.
Underlying consolidated proft
Average risk weighted assets
This relates the underlying proft (excluding management
adjustments) to the Group’s risk weighted assets.
Efciency
(Cost-to-income)
Operating expenses B
Total income
One of the most commonly used indicators when comparing
productivity of diferent fnancial entities. It measures the
amount of resources used to generate the Bank’s operating
income.
A. Stockholders’ equity = Capital and Reserves + Accumulated other comprehensive income + Attributable proft to the parent + Dividends.
B. Operating expenses = Administrative expenses + amortisations.
330
2018 Annual Report
Alternative Performance
Measures
Proftability and efciency A B
RoE
Attributable proft to the parent
Average stockholders' equity (excluding minority interests)
RoTE
Attributable proft to the parent
Average stockholders' equity (excluding minority interests)
(-) Average intangible assets
Average stockholders' equity (excl. minority interests) - intangible assets
Underlying RoTE
Attributable proft to the parent
(-) Management adjustments
Underlying attributable proft to the parent
Average stockholders' equity (excl. minority interests) - intangible assets
RoA
Consolidated proft
Average total assets
RoRWA
Consolidated proft
Average risk weighted assets
Underlying RoRWA
Consolidated proft
(-) Management adjustments
Underlying consolidated proft
Average risk weighted assets
Efciency ratio (Cost-to-income)
Underlying operating expenses
Operating expenses
Management adjustments impact C
Underlying total income
Total income
Management adjustments impact C
2018
8.21%
7,810
95,071
11.70%
7,810
95,071
28,331
66,740
12.08%
7,810
(254)
8,064
66,740
2017
7.14%
6,619
92,638
10.41%
6,619
92,638
29,044
63,594
11.82%
6,619
(897)
7,516
63,594
2016
6.99%
6,204
88,744
10.38%
6,204
88,744
28,973
59,771
11.08%
6,204
(417)
6,621
59,771
0.64%
9,315
1,442,861
0.58%
8,207
1,407,681
0.56%
7,486
1,337,661
1.55%
9,315
598,741
1.59%
9,315
(231)
9,546
598,741
47.0%
22,779
22,779
—
48,424
48,424
—
1.35%
8,207
606,308
1.48%
8,207
(756)
8,963
606,308
47.4%
22,918
22,993
(75)
48,392
48,355
37
1.29%
7,486
580,777
1.36%
7,486
(406)
7,892
580,777
48.1%
21,088
21,101
(13)
43,853
44,232
(379)
A. Averages included in the RoE, RoTE, RoA and RoRWA denominators are calculated using 13 months’ (from December to December).
B. The risk weighted assets included in the denominator of the RoRWA metric are calculated in line with the criteria laid out in the CRR (Capital Requirements Regulation).
C. Following the adjustments in Note 52.c to the consolidated fnancial statements.
Efciency ratio by business areas
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
US
2018
Total
income
15,881
7,894
4,610
1,488
1,344
5,420
21,201
13,345
3,527
2,535
1,209
6,949
Operating
expenses
8,278
4,480
1,985
636
642
2,995
7,996
4,482
1,462
1,045
749
3,015
%
52.1
56.8
43.1
42.8
47.8
55.2
37.7
33.6
41.5
41.2
61.9
43.4
2017
Total
income
14,417
6,860
4,484
1,419
1,245
5,716
22,519
14,273
3,460
2,523
1,747
6,959
%
53.1
58.9
44.1
42.6
49.3
50.1
38.7
35.6
39.9
40.6
55.5
46.0
Operating
expenses
7,662
4,040
1,978
605
614
2,861
8,721
5,080
1,382
1,025
970
3,198
331
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Underlying RoTE by business areas
2018
2017
Average
stockholders'
equity (excl.
minority
interests) -
intangible
assets
Underlying
attributable
proft to the
parent
3,642
1,738
1,296
298
480
1,362
4,228
2,605
760
614
84
552
34,228
16,070
8,169
2,893
3,983
14,620
22,111
13,173
3,733
3,340
708
13,404
%
10.64
10.81
15.86
10.29
12.06
9.32
19.12
19.77
20.35
18.39
11.83
4.12
Average
stockholders'
equity (excl.
minority
interests) -
intangible
assets
Underlying
attributable
proft to the
parent
3,202
1,439
1,254
300
435
1,498
4,297
2,544
710
586
359
408
32,614
13,957
7,626
2,593
3,737
14,604
23,946
15,042
3,642
3,275
1,122
13,050
%
9.82
10.31
16.44
11.56
11.65
10.26
17.94
16.91
19.50
17.89
32.02
3.12
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
US
Credit risk indicators
The credit risk indicators measure the quality of the credit portfolio and the percentage of non-performing loans covered by provisions.
Ratio
Formula
Relevance of the metric
NPL ratio
(Non-performing loans
ratio)
Non-performing loans and advances
to customers, customer guarantees and
customer commitments granted
Total Risk A
The NPL ratio is an important variable regarding fnancial
institutions’ activity since it gives an indication of the level of risk
the entities are exposed to. It calculates risks that are, in accounting
terms, declared to be non-performing as a percentage of the total
outstanding amount of customer credit and contingent liabilities.
Coverage ratio
Cost of Credit
Provisions to cover impairment losses on loans
and advances to customers, customer guarantees
and customer commitments granted
Non-performing loans and advances
to customers, customer guarantees and
customer commitments granted
Loan-loss provisions
over the last 12 months
Average loans and advances to customers
over the last 12 months
The coverage ratio is a fundamental metric in the fnancial
sector. It refects the level of provisions as a percentage of
the non-performing assets (credit risk). Therefore it is a good
indicator of the entity’s solvency against client defaults both
present and future.
This ratio quantifes loan-loss provisions arising from credit risk
over a defned period of time for a given loan portfolio. As such,
it acts as an indicator of credit quality.
A. Total risk = Total loans & advances and guarantees to customers (performing and non-performing) + non-performing contingent liabilities.
Credit risk
NPL ratio
Non-performing loans and advances to customers, customer
guarantees and customer commitments granted
Total risk
Coverage ratio
Provisions to cover impairment losses on loans and advances to customers,
customer guarantees and customer commitments granted
Non-performing loans and advances to customers customer
guarantees and customer commitments granted
Cost of credit
Net loan-loss provisions over the last 12 months
Average loans and advances to customers over the last 12 months
332
2018
3.73%
35,692
958,153
2017
4.08%
37,596
920,968
2016
3.93%
33,643
855,510
67.4%
65.2%
73.8%
24,061
24,529
24,835
35,692
37,596
33,643
1.00%
8,873
887,028
1.07%
9,111
853,479
1.18%
9,518
806,595
2018 Annual Report
NPL ratio by business areas
Alternative Performance
Measures
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
US
Coverage ratio by business areas
Continental Europe
Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
Brazil
Mexico
Chile
Argentina
US
2018
Non-
performing
loans and
advances to
customers
customer
guarantees
and customer
commitments
granted
22,537
14,833
2,244
1,317
2,279
2,755
7,461
4,418
822
1,925
179
2,688
Total risk
429,454
239,479
97,922
30,783
38,340
262,196
171,898
84,212
33,764
41,268
5,631
92,152
2018
Provisions
to cover
impairment
losses on
loans and
advances to
customers,
customer
guarantees
and customer
commitments
granted
Non-
performing
loans and
advances to
customers
customer
guarantees
and customer
commitments
granted
11,754
6,682
2,387
883
1,151
908
7,263
4,724
984
1,166
241
3,838
22,537
14,833
2,244
1,317
2,279
2,755
7,461
4,418
822
1,925
179
2,688
%
5.25
6.19
2.29
4.28
5.94
1.05
4.34
5.25
2.43
4.66
3.17
2.92
%
52.2
45.0
106.4
67.1
50.5
33.0
97.3
106.9
119.7
60.6
135.0
142.8
%
5.82
6.32
2.50
4.57
7.51
1.33
4.46
5.29
2.69
4.96
2.50
2.79
%
54.4
46.8
101.4
68.2
62.1
32.0
85.0
92.6
97.5
58.2
100.1
170.2
2017
Non-
performing
loans and
advances to
customers
customer
guarantees
and customer
commitments
granted
24,674
15,880
2,319
1,114
2,959
3,295
7,464
4,391
779
2,004
202
2,156
Total risk
424,248
251,433
92,589
24,391
39,394
247,625
167,516
83,076
28,939
40,406
8,085
77,190
2017
Provisions
to cover
impairment
losses on
loans and
advances to
customers,
customer
guarantees
and customer
commitments
granted
Non-
performing
loans and
advances to
customers
customer
guarantees
and customer
commitments
granted
13,419
7,434
2,352
760
1,838
1,055
6,345
4,066
760
1,167
202
3,668
24,674
15,880
2,319
1,114
2,959
3,295
7,464
4,391
779
2,004
202
2,156
333
Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Other indicators
The market capitalisation indicator provides information on the
volume of tangible equity per share. The loan-to-deposit ratio
(LTD) identifes the relationship between net customer loans and
advances and customer deposits, assessing the proportion of loans
and advances granted by the Group that are funded by customer
deposits. The Group also uses gross customer loan magnitudes
excluding reverse repurchase agreements (repos) and customer
deposits excluding repos. In order to analyse the evolution of the
traditional commercial banking business of granting loans and
capturing deposits, repos and reverse repos are excluded, as they
are mainly treasury business products and highly volatile.
Ratio
Formula
Relevance of the metric
TNAV per share
(Tangible net asset value
per share)
Tangible book value A
Number of shares excluding treasury stock
Price / tangible book
value per share (X)
Share price
TNAV per share
This is a very commonly used ratio used to measure the
company’s accounting value per share having deducted the
intangible assets. It is useful in evaluating the amount each
shareholder would receive if the company were to enter into
liquidation and had to sell all the company’s tangible assets.
Is one of the most commonly used ratios by market participants
for the valuation of listed companies both in absolute terms and
relative to other entities. This ratio measures the relationship
between the price paid for a company and its accounting equity
value.
LtD
(Loan-to-deposit)
Net loans and advances to customers
Customer deposits
This is an indicator of the Bank’s liquidity. It measures the total
(net) loans and advances to customers as a percentage of
customer funds.
Loans and advances (excl.
reverse repos)
Gross loans and advances to customers excluding
reverse repos
Deposits (excl. repos)
Customer deposits excluding repos
In order to aid analysis of the commercial banking activity,
reverse repos are excluded as they are highly volatile treasury
products.
In order to aid analysis of the commercial banking activity, repos
are excluded as they are highly volatile treasury products.
PAT + After tax fees
paid to SAN (in Wealth
Management)
Net proft + Fees paid from Santander Asset
Management to Santander, net of taxes, excluding
Private Banking customers
Metric to assess Wealth Management’s total contribution to
Group’s profts
A. Tangible book value = Stockholders’ equity - intangible assets.
Other indicators
TNAV (tangible book value) per share
Tangible book value
Number of shares excl. treasury stock A (million)
Price / tangible book value per share (X)
Share price (euros) A
TNAV (tangible book value) per share
Loan-to-deposit ratio
Net loans and advances to customers
Customer deposits
PAT + After tax fees paid to SAN (in Wealth Management) (Constant EUR million)
Proft after taxes
Net fee income net of tax
A. 2016 data adjusted for the capital increase in July 2017, to enable like-on-like comparisons with 2017 and 2018 data.
334
2018
4.19
67,912
16,224
0.95
3.973
4.19
113%
882,921
780,496
1,015
563
452
2017
4.15
66,985
16,132
1.32
5.479
4.15
109%
848,914
777,730
902
476
426
2016
4.15
61,517
14,825
1.16
4.797
4.15
114%
790,470
691,111
n.a.
n.a.
n.a.
2018 Annual Report
Alternative Performance
Measures
Impact of exchange rate movements on proft and loss accounts
Impact of exchange rate movements on the balance sheet
The Group presents, at both the Group level as well as the business
unit level, the real changes in the income statement as well as
the changes excluding the exchange rate efect, as it considers the
latter facilitates analysis, since it enables businesses movements
to be identifed without taking into account the impact of
converting each local currency into euros.
Said variations, excluding the impact of exchange rate movements,
are calculated by converting P&L lines for the diferent business
units comprising the Group into our presentation currency, the
euro, applying the average exchange rate for 2018 to all periods
contemplated in the analysis. The average exchange rates for the
main currencies in which the Group operates are set out on section
Economic, regulatory and competitive context of this chapter.
The Group presents, at both the Group level as well as the business
unit level, the real changes in the balance sheet as well as the
changes excluding the exchange rate efect for loans and advances
to customers excluding reverse repos and customer funds (which
comprise deposits and mutual funds) excluding repos. As with the
income statement, the reason is to facilitate analysis by isolating
the changes in the balance sheet that are not caused by converting
each local currency into euros.
These changes excluding the impact of exchange rate movements
are calculated by converting loans and advances to customers
excluding reverse repos and customer funds excluding repos, into
our presentation currency, the euro, applying the closing exchange
rate on the last working day of 2018 to all periods contemplated
in the analysis. The end-of-period exchange rates for the main
currencies in which the Group operates are set out on section
Economic, regulatory and competitive context.
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management
Risk
management
1. Risk management and control model
338
5. Capital risk
1.1 Risk governance
1.2 Social and environmental risk
1.3 Management processes and tools
338
340
341
5.1 Introduction
5.2 Capital risk management
5.3 Key metrics
2. Risk map and risk profle
346
6. Operational risk
3. Credit risk
3.1 Introduction
3.2 Credit risk management
3.3 Key metrics
3.4 Detail of main geographies
3.5 Other credit risk aspects
4. T rading market risk, structural
and liquidity risk
4.1 Introduction
4.2 Trading market risk management
4.3 Key metrics (trading market risk)
4.4 Struct
ural balance sheet risks
management
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348
352
358
366
373
373
374
376
383
4.5 K ey metrics (structural balance
sheet risks)
385
388
4.6 Liquidity risk management
4.7 Key metrics (liquidity risk)
388
4.8 Pension and actuarial risk management 389
6.1 Introduction
6.2 Operational risk management
6.3 Key metrics
6.4 Other
aspects of control and
monitoring of operational risk
7. Compliance and conduct risk
7.1 Introduction
7.2 Governance
7.3 C ompliance and conduct risk
management
8. Model risk
8.1 Introduction
8.2 Model risk management
9. Strategic risk
9.1 Introduction
9.2 Strategic risk management
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393
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399
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Responsible bankingCorporate governanceEconomic and financial reviewRisk management 1. Risk management
and control model
Risk management and control is key in ensuring that we remain a
robust, safe and sustainable bank aligned with the interests of our
employees, customers, shareholders and society.
In Santander we prioritise the execution of a forward-looking risk
management. This has enabled the Group, since its foundation in
1857, to deal appropriately with changes in the economic, social
and regulatory environment and continue helping people and
businesses prosper.
5. Information and data management processes that allow
all risks to be identifed, assessed, managed and reported at
appropriate levels.
6. Risks are managed by the units that generate them.
Our risk management and control model is based on the principles
below, taking into account regulatory expectations, and market
best practices:
1. Advanced risk management with a forward-looking approach
that ensures a medium-low risk profle, based on our risk
appetite framework defned by the board.
These principles, combined with a series of interrelated tools and
processes in the Group’s strategic planning (risk appetite, risk
identifcation and assessment, scenario analysis, risk reporting
framework, annual planning and budget, etc.) provide a holistic
control framework across the Group.
1.1 Risk governance
2. Risk culture that applies to all employees throughout the Group.
3. Clearly defned three lines of defence model that enable us to
identify, manage, control, monitor and challenge all risks.
The Group has a strong governance framework, which pursues the
efective control of the risk profle within the risk appetite defned
by the board.
4. Autonomous subsidiaries model with robust governance based
on a clear structure that separates the risk management and the
risk control functions.
This governance framework is underpinned by the distribution
of roles among the three lines of defence, a robust structure
of committees dealing with a strong relationship between the
Group and its subsidiaries. Overlaid with our Group wide risk
culture Risk Pro/I am Risk.
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Lines of defence
At Santander, we follow a three lines of defence control model:
First line
Second line
Third line
All business functions and business
support functions that originate
risks and have primary responsibility
in the management of those risks.
The role of these functions is to
establish a management structure
for the risks generated as part of
their activity ensuring that these
remain within approved risk limits.
These are the Risk Control and
Compliance and Conduct function.
The role of these functions is to
provide independent oversight and
challenge to the risk management
activities of the first line of defence.
These functions ensure that risks are
managed in accordance with the risk
appetite, fostering a strong risk culture
across our organisation. They also
provide guidance, advice and expert
opinion in risk-related matters.
Internal Audit function. This function
controls and regularly checks that the
policies and procedures are adequate
and effectively implemented in the
management and control of all risks.
The Risk Control, Compliance and Conduct, and Internal Audit
functions are separated and independent and have direct access to
the board of directors and/or its committees.
decisions on risks assumed at the highest level, ensuring that they
are within the established risk appetite limits for the Group.
Risk committees structure
Ultimately, the board of directors is responsible for risk
management and control and, in particular, for approving and
periodically reviewing the Group’s risk culture and risk appetite
framework.
Except for specifc topics detailed in its bylaws, the board has the
capacity to delegate its faculties to other committees. This is the
case of the risk supervision, regulation and compliance committee
and the Group’s executive committee, which has specifc risk
related responsibilities.
For more information see the Corporate governance
chapter, section 4.7 ‘Risk supervision, regulation
and compliance committee activities in 2018’
The Group Chief Risk Ofcer (Group CRO) leads the risk function
within the Group, advises and challenges the executive line and
reports independently to the risk supervision, regulation and
compliance committee and to the board.
Other bodies that form the highest level of risk governance, with
authorities delegated by the board of directors, are the executive
risk committee and the risk control committee, detailed as follows:
Executive risk committee (ERC)
Purpose: this committee is responsible for managing all risks,
within the faculties delegated by the board. The committee makes
Chair: CEO.
Composition: nominated executive directors and other Group
senior management. The Risk, Finance and Compliance and
Conduct functions, among others, are represented. The Group CRO
has a veto right on the committee’s decisions.
Risk control committee (RCC):
Purpose: to control and oversee that risks are managed in
accordance with the risk appetite approved by the board, providing
a comprehensive overview of all risks. This includes identifying and
monitoring both current and potential risks, and evaluating their
potential impact on the Group’s risk profle.
Chair: Group CRO.
Composition: senior management members from the Risk,
Compliance and Conduct, Financial Accounting and Management
Control functions are represented, among others. Senior members
of the risk function (CROs) from the Group’s units regularly take
part in reporting their risk profles.
Additionally, each risk factor has it´s own fora, committees and
meetings to manage the risks under their control. Among others,
they have the following responsibilities:
• Advice the CRO and the risk control committee that risks are
managed in line with the Group’s risk appetite.
• Carry out and regular monitoring of each risk factor.
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• Oversee the measures adopted to comply with the expectations
of the supervisors and internal and external auditors.
For certain matters, the Group may establish specifc additional
governance. For example, following the UK Government decision
to leave the EU, the Group and Santander UK set up separate
steering committees and working groups to: i) monitor the Brexit
process; ii) develop contingency plans; and iii) escalate and take
decisions to minimise potential impacts on our business and
customers.
In the face of prolonged uncertainty, the Group and Santander UK
began, in 2018, to execute the agreed contingency plans to ensure
readiness for the withdrawal by the UK from the European Union.
The Group’s relationship with its subsidiaries
regarding risk management
Alignment of units with the Group
In all the subsidiaries, the management and control model follows
the frameworks established by the Group’s board of directors.
The local units adhere to them by their respective boards. The
Group reviews and validates any local adaptations as needed.
The Corporate centre participates in the relevant decision-making
through their validation.
This creates a recognisable and common risk management and
control model across the Group.
The ‘Group-subsidiary governance model and good governance
practices for subsidiaries’ sets up regular interaction and functional
reporting by each local CRO to the Group CRO, as well as the
participation of the Group in the process of appointing, setting
targets, evaluation and remuneration of local CRO’s, in order to
ensure risks are adequately controlled by the Group.
To strengthen the relationship between the Group and the units,
various initiatives have been taken in order to develop the risk
management model across the Group:
• Promote collaboration to accelerate share of best practices to
help solve local weaknesses strengthen current processes and
boost innovation.
• Talent identifcation within the risk teams, boosting international
mobility (Global Risk Talent Program).
• Advanced Risk Management (ARM): defnition and
implementation of the risk initiatives, both Group and local,
underpinning the transformation aspirations of the risk
management and control model of each unit.
Subsidiary committee structures
The ‘Group-subsidiary governance model and good governance
practices for subsidiaries’ recommends that each subsidiary should
have risk committees and other executive committees, consistent
with those already in place in the Group.
The subsidiary governance bodies are structured taking into
consideration local requirements, both regulatory and legal, as
well as their specifc dimension and complexity, in a manner that is
consistent with those of the parent company, as established in the
internal governance framework.
As part of our role to review the aggregated oversight of all risks,
the Group exercises a validation and challenge role with regard
to the transactions and management policies of the subsidiaries,
insofar as they afect the Group’s risk profle.
For more detail regarding the subsidiaries committees’
structure see chapter Corporate Governance, section
7 ‘Group structure and governance framework’.
Risk culture - Risk Pro
Santander has a strong risk culture known as Risk Pro
implemented across the Group, which defnes the way in which
we understand and manage risks on a day-to-day basis. It is
based on the principle that all employees are responsible for risk
management.
Further information is available in the Responsible
banking chapter, section ‘Risk culture’.
1.2 Social and environmental risk
Social and environmental policies
Santander contributes to sustainable economic growth by
promoting the protection and conservation of the environment,
and the protection of human rights. This principle of environmental
and social responsibility embedded across the Group and decision-
making processes. It is for example, refected in the environmental,
social and reputational risk assessments that Santander carries out
on its customers and transactions as part of its decision-making
processes across the whole Group.
The Group has board approved, sector specifc, environmental,
social and reputational risk policies covering energy (including
coal), mining and metals, soft commodities and defence that are
reviewed annually to ensure they follow the best international
practices and standards. The policies set out the activities where
the Group will not provide fnancial products and/or services and
those where Santander will conduct in-depth analysis to assess
their environmental, social and reputational impacts.
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2018 Annual Report
Advances to our social and environmental policies is overseen by
a working group chaired by the Group Chief Compliance Ofcer.
The working group also assesses any issues with customers and
transactions that fall within the scope of the policies and provides
an opinion on all relevant matters to corresponding approval
committees.
In addition to the above, and since 2009, the Group has applied the
Equator Principles to all project fnance transactions.
Equator Principles reporting by Santander
is available on the Responsible banking
chapter, in section ‘Evaluation of
environmental risk of fnancing activities’.
Climate change and the Task Force on
Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) of
the Financial Stability Board (FSB) has published a series
of recommendations for corporate governance, strategy, risk
management, metrics and targets in relation to climate change.
The implementation of these recommendations will signifcantly
transform how fnancial institutions identify investment
opportunities and manage the risks associated with the changes to
international economic activities that are required to address the
challenge of climate change.
As a result of the Paris Climate Agreement, governments and
regulators across the EU and other countries, where the Group is
present, are working on developing and implementing legal rules
that will help meet the agreed targets and facilitate the transition
to a lower emission economy. Santander is providing input into
these consultations and will actively work to implement them in
due course.
1.3 Management processes and tools
For risk management and control purposes, the Group has defned
several key processes that rely on a series of tools, as follows:
Risk
appetite
Risk Identifcation
and Assessment (RIA)
Stress
Test
Risk Reporting
Framework (RRF)
Risk appetite and structure of limits
In Santander we defne risk appetite as the amount and type of
risks that are considered prudent to assume for implementing
our business strategy in the event of unexpected circumstances.
Severe scenarios that could have a negative impact on the levels of
capital, liquidity, proftability and/or the share price are taken into
account.
The risk appetite is set by the board for the whole Group. Every
main business unit sets its own risk appetite according to the
adaptation of the Group methodology and its own circumstances.
The boards of the subsidiaries are responsible for approving their
respective risk appetite proposals once they have been reviewed
and validated by the Group.
The Group shares a common risk appetite model. It sets out the
requirements for processes, metrics, governance bodies, controls
and standards for implementation across the Group, cascading
down management policies and limits to lower levels.
a. Business model and fundamentals of the risk appetite
The risk appetite defnition is consistent with our risk culture and
business model. The main elements that defne the business
model and underpin the risk appetite are:
• Medium-low and predictable risk profle based on a diversifed
business model, focused on retail and commercial banking with
internationally diversifed activities and strong material market
share, as well as a wholesale business model that is centred on
customer relationships in the Group’s main markets.
• Stable and recurrent earnings and shareholder remuneration
policy, underpinned by sound capital and liquidity, and diversifed
sources of funding.
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• Autonomous subsidiaries that are self-sufcient in terms of
capital and liquidity, minimising the use of non-operational or
shell companies, and ensuring that no subsidiary has a risk profle
that could jeopardise the Group’s solvency.
• An independent Risk function with active involvement of senior
management to reinforce a strong risk culture and a sustainable
return on capital.
• Global and holistic view of all risks, through extensive control
and monitoring: All risks, all businesses and all countries.
• Focus on products that the Group knows sufciently well and has
the capacity to manage (systems, processes and resources).
c. Limits structure, monitoring and control
The risk appetite is formulated annually and includes a series of
metrics and limits to establish in quantitative and qualitative terms
the maximum risk exposure that every unit and the Group as a
whole is willing to assume.
Compliance with risk appetite limits is regularly monitored.
Specialised control functions report the risk profle adequacy to the
board and its committees, on quarterly basis.
Limit breaches and non-compliance with the risk appetite are
reported to the relevant governance bodies. An analysis of the
causes, an estimation of the duration of the breach and corrective
actions proposals are also submitted.
• A conduct model that protects customers and shareholders.
• Remuneration policy that aligns the individual interests
of employees and executives with the risk appetite, and is
consistent with the evolution of the Group’s long-term results.
b. Corporate risk appetite principles
The following principles govern the Group’s risk appetite in all its
units:
Linkage between the risk appetite limits and those of the business
units and portfolios is a key element for making the risk appetite
an efective risk management tool. The management policies and
structure of the limits used to manage the diferent types and
categories of risk have a direct relation with the principles and
limits defned in the risk appetite (described in greater detail in
this chapter, sections 3.2 ‘Credit risk management’, 4.2 ‘Trading
market risk management’ and 4.4 ‘Structural balance sheet risks
management’.
• Responsibility of the board and of senior management.
• Holistic risk view (Enterprise Wide Risk), risk profle
backtesting and challenge. The risk appetite must consider all
signifcant risks and facilitate an aggregate view of the risk profle
through the use of quantitative metrics and qualitative indicators.
Each risk and business area is responsible for verifying that the
risk appetite limits and controls used are properly embedded in
the day-to-day management. The Risk Control and Supervision
function validates the resulting assessment, ensuring that limits
conform to the risk appetite.
• Forward-looking view. The risk appetite must consider the
desirable risk profle for the short and medium term, taking into
account both the most plausible circumstances and adverse/
stress scenarios.
• Embedding and alignment with strategic and business plans.
The risk appetite is an integral part of the strategic and business
planning, and is embedded in the daily management through the
transfer of the aggregated limits to those set at portfolio level,
unit or business line, as well as through the key risk appetite
processes.
d. Risk appetite axes and key metrics
The risk appetite is expressed via limits on quantitative metrics and
qualitative indicators that measure the exposure or risk profle by
type of risk, portfolio and segment and business line, under both
current and stressed conditions. These metrics and risk appetite
limits are articulated in fve axes that defne the positioning that
Santander wants to adopt or maintain in the deployment of its
business model, which are described as follows:
• Volatility of results
To limit the potential negative volatility of the results in the
strategic and business plans under stressed conditions.
• Coherence across the various units and a common risk
language throughout the Group. The risk appetite of each unit of
the Group must be coherent with that across the Group.
This axis contains metrics which measure the behaviour and
evolution of real or potential losses in the business.
• Periodic review, backtesting and adoption of best practices and
regulatory requirements. Monitoring and control mechanisms
are established to ensure the risk profle is maintained, and the
necessary corrective and mitigating actions are taken in the event
of non-compliance.
The stress tests, measure the maximum fall in results under
adverse conditions with a reasonable probability of occurrence
and similar by risk type (thus allowing aggregation).
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• Solvency
Addresses the maintenance of the Entity’s equity, keeping capital
above regulatory requirements and market expectations.
It determines the minimum level of capital the Entity requires
in order to cope with potential losses under both normal and
stressed conditions.
This approach included in the risk appetite model is
supplementary to and consistent with the capital objective
approved within the Group’s capital planning process.
• Liquidity
The Group has developed a funding model based on autonomous
subsidiaries that are responsible for maintaining their own
liquidity needs.
On this basis, liquidity management is conducted by each
subsidiary within a corporate framework that develops its basic
principles (decentralisation, equilibrium in the medium and long
term funding, high weight of customer deposits, diversifcation
of wholesale sources, reduced exposure to short-term fnancing,
sufcient liquidity reserve) and revolves around three main pillars
(governance model, balance sheet analysis and measurement of
liquidity risk).
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 net stable funding ratio (NSFR), together with a
limit on the minimum liquidity coverage position.
• Concentration
Santander seeks to maintain a diversifed risk profle. This is
achieved by virtue of Santander’s business orientation to retail
banking with a high degree of international diversifcation.
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 commercial real estate and in portfolios
with a high risk profle. Customers with an internal rating lower
than investment grade or equivalent, or which have excessive
exposure of a certain degree, are also monitored.
• Non-fnancial transversal risks
This involves qualitative and quantitative metrics that help
monitor exposure to non-fnancial risks. These include specifc
indicators for fraud, technological risk, security and cyberrisk,
money laundering prevention, regulatory compliance, product
governance and customer protection.
Risk identifcation and assessment (RIA)
The Group carries out the identifcation and assessment of the
diferent risks that it is exposed to, involving the diferent lines of
defence, establishing management standards that not only meet
regulatory requirements but also refect best practices in the
market, and reinforce our risk culture.
In 2018, the approach centred on three main areas: standards control
environment review, perimeter completeness by integrating new
units, together with the risk performance indicators review and
their alignment with the risk appetite.
In addition, the RIA exercise analyses the evolution of risks and
identifes areas of improvement:
• Risk performance, enabling the understanding of residual risk by
risk type through a set of metrics and indicators calibrated using
international standards.
• Control environment assessment, measuring the degree of
implementation of the target operating model, as part of our
advanced risk management.
• Forward-looking analysis, based on stress metrics and
identifcation and/or assessment of the main threats to the
strategic plan (Top risks), enabling specifc action plans to be put
in place to mitigate potential impacts and monitoring these plans.
Based on the periodic RIA exercise, the Group’s risk profle as of
December 2018 remains as solid medium-low.
Scenario analysis
We analyse the impact triggered by diferent scenarios in the
environment, in which the Group operates. These scenarios are
expressed both in terms of macroeconomic variables, as well as
other variables that may impact our risk profle.
Scenario analysis is a robust and useful tool for management at
all levels. It enables the Group to assess its resilience in stressed
environments or scenarios, and identifes measures to reduce
exposure under these scenarios. The objective is to reinforce the
stability of income, capital and liquidity.
The robustness and consistency of the scenario analysis exercises
are based on the following pillars:
• Development and integration of models that estimate the future
performance of metrics (for example, credit losses), based on
both historic information (internal to the Group and external from
the market), and simulation models.
• Inclusion of expert judgement and portfolio manager’s know-
how.
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• Challenge and backtesting of model results to ensure they are
adequate.
• Robust governance of the whole process, covering models,
scenarios, assumptions and rationale for the results, and their
impact on management.
diferent frequencies and present diferent granularity levels. For
more detail see Risk appetite and structure of limits in section
1.3 ‘Management processes and tools’ above mentioned and
section 4.6. Liquidity risk management in this report.
• Recurrent risk management in diferent processes/exercises:
The application of these pillars in the European Banking Authority
(EBA) stress test, executed and reported bi-annually, has enabled
Santander to satisfactorily meet the defned requirements - both
quantitative and qualitative - and to contribute to the excellent
results obtained by the Group.
For further information on the Stress test result,
please refer to chapter Economic and fnancial review,
in section 3.5 ‘EBA/ECB transparency exercise 2018’.
Uses of scenario analysis
The EBA guidelines establish that scenario analysis should be
integrated in the risk management framework and in the Group’s
management processes. This requires a forward looking view in
risk and strategic management, capital and liquidity planning.
Scenario analysis is included in the Group’s control and
management framework, ensuring that any impact afecting
the Group’s solvency or liquidity can be rapidly identifed and
addressed. With this objective, a systematic review of exposure to
the diferent types of risk is included, not only under the baseline
scenario but also under various simulated adverse scenarios.
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 diferent regulatory and management exercises.
Scenario analysis forms an integral part of several key processes of
the Group:
• Regulatory uses: stress test scenarios using the guidelines set by
the European regulator or by each local supervisor.
• Internal capital adequacy assessment (ICAAP) or liquidity
assessment (ILAAP) in which, while the regulators can impose
certain requirements, the Group develops its own methodology
to assess its capital and liquidity levels under diferent stress
scenarios to support planning and adequately managing the
Group’s capital and liquidity.
• Risk appetite. Contains stressed metrics on which maximum
levels of losses (minimum liquidity levels) are established
that the Group does not want to exceed. These exercises are
related to those for capital and liquidity, although they have
• Budgetary and strategic planning process, in the development
of commercial risk admission policies, in the global risk analysis
for senior management or in the specifc analysis regarding
profle of activities or portfolios.
• Identifcation of Top risks on the basis of a systematic process
to identify and assess all the risks which the Group is exposed
to. The Top risks are selected and a macroeconomic or
idiosyncratic scenario is associated with each one, to assess
their impact on the Group.
• Recovery plan annually performed to establish the available
tools the Group will have, to survive in the event of an
extremely severe fnancial crisis. The plan sets out a series of
fnancial and macroeconomic stress scenarios, with difering
degrees of severity, that include idiosyncratic and/or systemic
events.
• IFRS9 from 1 January 2018, the processes, models and scenario
analysis methodology are included in the new regulatory
provision requirements.
For additional details regarding scenario analysis see sections
3.2 ‘Credit risk management, 4.2 ‘Trading market risk management’
and 4.6.’Liquidity risk management’.
In 2018 Santander participated in the United Nations Environmental
Program Financial Initiative (UNEP FI) pilot, along with 15 banks, to
implement the TCFD requirements. The initiative´s objective was
to develop scenarios, models and metrics to enable a scenario-
based, forward-looking assessment of climate-related risks and
opportunities, as well as contributing to the working group.
The Group specifcally focused on direct and indirect transition
risks and their impact on its transportation sector wholesale
portfolio, based on diferent scenarios provided within the UNEP
FI pilot. The scenarios covered Santander exposures across all
geographies, taking into consideration segmentation, sensitivities
and model calibration that were selected based on our knowledge
of clients.
The key fnding from the pilot exercise was that the Santander
wholesale portfolio clients are especially resilient to the stress
test, including climate-related transition impacts, and are able
to adapt to the technological change requirements with limited
impact on their credit quality.
The UNEP FI project has brought notable progress to climate risk
assessment, but there is still room for improvement in the metrics
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2018 Annual Report
calculation. Overall, the test highlighted that more granular
scenarios would need to be developed to address more sector-
specifc drivers and more diverse geographical assumptions (e.g.
Latin American countries). The model, as it currently stands,
is a deterministic model reliant on expert judgement, so its
methodology and calibration need to evolve to improve the results
and make them comparable between participating banks.
Risk Reporting Framework (RRF)
Our reporting model has strengthened by consolidating the
overall view of all risks, based on complete, precise and recurring
information that allows the Group’s senior management to assess
the risk profle and decide accordingly.
The risk reporting taxonomy contains three types of reports
received by senior management on a monthly basis: the Group
risk report, the risk reports of each unit, and the reports of each
of the risk factors identifed in the Group’s General risk corporate
framework.
This risk reporting taxonomy has the following features:
• It covers all signifcant risk areas. Reports maintain the due
balance between data, analysis and qualitative comments,
including forward-looking measures, risk appetite information,
limits and emerging risks, and they are distributed to senior
management.
• They are suitable for the Group’s subsidiaries structure,
combining a holistic view with a deeper analysis for each risk
factor.
• They allow a uniform view, as each subsidiary may defne its own
reports based on local criteria, in addition to an aggregate view
that enables for analysis of risks based on a common defnition.
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2. Risk map and risk profle
Credit risk
Credit risk with customersA by country
Other
21%
US
10%
Chile
4%
Brazil
9%
Spain
25%
Portugal
4%
UK
27%
3.73%
Non-performing
loan ratio
-35 bp in 2018
1.00%
Cost of creditB
-7 bp in 2018
Section 3
Adequate sector and geographic diversifcation
between mature and emerging markets.
Consolidation of the improvement trend in the
Group’s main credit indicators.
A. Includes gross lending to customers, guarantees and
documentary credits.
B. Cost of credit calculated as the percentage of loan- loss
provisions twelve months of the average lending.
Trading market risk, structural and liquidity risk
Section 4
— VaR
— 15 day moving average
— VaR, 3 year average
158%
Comfortable
short-term liquidity
coverage ratio (LCR)
+24 bp in 2018
VaR 2018 evolution
EUR Million. VaR at 99%.
20
18
16
14
12
10
8
6
4
2
0
Avg. VaR of the trading activity of SCIB
remains at moderately low levels, as it
is focused on customer services and has
geographic diversifcation.
Comfortable liquidity position, based
on our commercial strength and
autonomous subsidiaries model, with a
strong weighting of customer deposits
and robust liquid asset bufers.
An appropriate balance sheet structure
reduces the impact of interest rates
changes on net interest income and
equity.
n
a
J
b
e
F
r
a
M
r
p
A
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a
M
n
u
J
l
u
J
g
u
A
p
e
S
t
c
O
v
o
N
c
e
D
Capital risk
RWAC by risk type
Operational
10%
Market
4%
11.30%
CET fully LoadedD
+46 bp in 2018
CreditE
86%
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Section 5
The main capital requirements correspond to
credit risk, which is the core business of the
Group, with a medium-low risk profle.
In the adverse scenario of the EBA stress test of
November 2018, Santander is the bank with the
least CET1 fully loaded destroyed among our
European peers.
C. Risk Weighted Assets.
D. 2018 data calculated using the IFRS9
transitional arrangements.
E. Includes counterparty risk,
securitisations and amounts below
the thresholds for deduction.
2018 Annual Report
Operational risk
Net losses by operational risk categories
Process management
18%
Damage to
physical assets
2%
Section 6
Signifcant reduction in net losses compared to 2017,
particularly in the Practices with Customers category.
External fraud
18%
Employment practices
2%
Improved risk analysis due to: incorporation of new risk
appetite metrics, improvements in the process of determining
critical controls and greater integration of operational risk in
the Group’s strategic exercises.
Focus on: fraud risk mitigation, information security and
cybersecurity, and supplier control.
Customers and products,
and business practices
60%
Compliance and conduct risk
Section 7
Completion of the three-year strategic program, with the
implementation of a series of initiatives.
Deployment of the Regulatory Radar governance in the Group
and units to support the monitoring of the new regulations.
Digitalisation of the main processes of corporate operations,
annual compliance program, product governance, Code
of conduct in the securities market and operations with
reputational risk validation.
Promoting online collaboration with platforms and structured
spaces for the exchange of information, money laundering
and terrorism fnancing alert management optimisation.
Implementation of a specifc compliance program for GDPR
and MiFID II in the Group’s units.
Consolidation of the supervision model regarding market
abuse, reporting and escalation of events.
Model risk
Section 8 Strategic risk
Section 9
Supervisors and internal auditors focus on IRB and IMA
regulatory models.
The management model pursues a correct monitoring and
control of strategic across the Group and its subsidiaries.
A strategic project has been launched, model risk
management 2.0 (MRM 2.0), to reinforce our model risk
management.
Potential threats that may afect the strategic objectives are
identifed and assessed to take necessary mitigation actions.
The following sections detail the risk profle of the Group by risk
factor. This risk profle might be afected by the macroeconomic,
regulatory and competitive environment in which the Group
performs its activities.
Further information can be found in the Economic
and fnancial review chapter, section 1 ‘Economic,
regulatory and competitive environment’.
The fnancial information is based on the aggregation of fgures
for the diferent geographical areas and business units within the
Group. This information relates both to accounting data and those
provided by the management information systems. In all cases,
the same general principles are applied as those used in the Group.
The businesses included in each of our geographical segments and
the accounting principles applied may difer from those used in the
fnancial information prepared and disclosed by our subsidiaries
which, by name or geographical description, may appear to
correspond to the business areas contemplated in this report.
Therefore, the results and trends shown here for our business
areas may difer signifcantly from those of such subsidiaries.
The notes to the consolidated fnancial statements contain
additional information regarding the Group’s risks and other
relevant information regarding provisions, litigation and other
matters, including tax risks and litigation.
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3. Credit risk
3.1 Introduction
Credit risk is the risk of fnancial loss arising from the default or
credit quality deterioration of a customer or other third party, to
which the Group has either directly provided credit or for which it
has assumed a contractual obligation.
3.2 Credit risk management
The credit risk management process consists of identifying,
analysing, controlling and deciding on the credit risk incurred
by the Group’s transactions. It considers a holistic view of the
credit risk cycle including the transaction, customer and portfolio
view. Both business and risk areas, together with the senior
management participate in the management process.
The identifcation of credit risk is a key component for the active
management and efective control of portfolios. The identifcation
and classifcation of external and internal risks in each business
allows corrective and mitigating measures to be adopted.
Planning
Planning allows to set business targets and defne specifc action
plans, within the risk appetite established by the Group. These
targets are met by assigning the necessary means (models,
resources, systems).
Strategic commercial plans (SCPs) are a basic management and
control tool for the Group’s credit portfolios. The SCPs are prepared
jointly by the Commercial and Risk areas, and defne 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.
SCP management integration provides an updated view on the credit
portfolios quality, allows to measure credit risk, perform internal
controls and periodic monitoring of planned strategies, anticipate
deviations and identify signifcant changes in risk and its potential
impact, as well as corrective actions.
The SCPs approval corresponds to the risk executive committee or
equivalent body of each entity previous to its validation at Group
level in the corporate risk executive committee. The periodic
monitoring of SCPs is carried out by the same bodies that approve
and validate them.
The process pursues the SCPs alignment with the capital objectives
of the Group’s units.
Assessment of the risk and credit rating process
In order to assign a rating that refects the credit quality of the
customer, the Group uses valuation and parameter estimation
models in each of the segments where it operates: SCIB (Santander
Corporate & Investment Banking: sovereigns, fnancial institutions
and large corporates), commercial banking, institutions, SMEs and
individuals.
The decision models applied are based on credit rating drivers
which are monitored and controlled to calibrate and precisely
adjust the decisions and ratings they assign. Depending on the
segment, drivers may be:
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2018 Annual Report
1 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 SCIB, commercial banking,
institutions and SMEs (treated on an individual basis)
segments.
2 Scoring: an automatic assessment system for credit
applications. It automatically assigns an individual grade to
the customer for subsequent decision-making.
Parameter estimation models are obtained through econometric
statistical models, internally developed, based on historical loss
and default of the portfolios for which they are developed and
used to calculate the economic and regulatory capital, and the
IFRS9 provision of each portfolio.
Periodic model monitoring and evaluation is carried out, assessing
among others, the adequacy of its use, its predictive capacity,
correct performance, and level of granularity. In the same way, the
existence and compliance of the policies corresponding to each and
every segment is verifed (these policies enable the execution of
business plans defned under the approved risk appetite).
The resulting ratings are regularly reviewed, incorporating the
latest available fnancial and other information. The depth and
frequency of the reviews are increased in the case of customers
who require a more detailed monitoring or through automatic
warnings in the systems.
Limits, pre-classifcations and pre-approvals defnition
The connection between the credit risk appetite of the Group and
management of the credit portfolios is implemented through the
SCPs, which defne the portfolio and new originations limits to
anticipate the portfolio risk profle. The cascading down of the
Group’s risk appetite framework credit risk metrics, strengthens
the existing control over credit portfolios.
We have processes that determine the risk that the Group is able
to assume with each customer. These limits are set jointly by the
business and risk areas and have to be approved by the executive
risk committee (or committees to which it has delegated such
authority) and refect the expected results of the business in terms
of risk-return.
There are diferent limit models depending on the segment:
• Large corporate groups: we use a pre-classifcation model based
on a system for measuring and monitoring economic capital.
The result is the level of risk that the Group is willing to assume
with a customer/group, in terms of Capital at risk, nominal CAP,
and maximum periods according to the type of transaction (in
the case of fnancial entities, limits are managed through Credit
equivalent risk (CER). It includes the actual and expected risk with
a customer based on its usual transactions, always within the
limits defned in the risk appetite and established credit policies.
• Corporates and institutions that meet certain requirements
(deep knowledge, rating, etc.): we use a more simplifed pre-
classifcation model through an internal limit that establishes
a reference point in the level of risk to be assumed with the
customer. The criteria will include, among others, repayment
capacity, debt in the system and the banking pool distribution.
In both cases, transactions over certain thresholds or with specifc
characteristics might require the approval of a senior analyst or
committee.
• For individual customers and SMEs with low turnover, large
volumes of credit transactions can be managed more easily
with the use of automatic decision models for classifying the
customer/ transaction binomial.
In specifc situations where a series of requirements are met,
pre-approved transactions are granted to customers or potential
customers (campaigns).
Mitigation actions
As a general rule, from a risk admission point of view, the
concession criteria are linked to the payment capacity of the
borrower to comply with the total of the assumed fnancial
obligations – this does not imply an impediment to requiring a
higher level of real or personal guarantees.
The payment capacity will be evaluated based on the funds or
net cash fows from the customer´s businesses or usual sources
of income, without depending on guarantors or assets given as
collateral. Such guarantors or assets should always be considered,
when evaluating the approval of the transaction, as a second and
exceptional way of recovery in case the frst has failed.
In general, a guarantee is defned as a reinforcement measure
added to a credit transaction for the purpose of mitigating the loss
due to a breach of the payment obligation.
Mitigation techniques implementation follow 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.
In Santander we apply several credit risk mitigation techniques
on the basis, among other factors, of the type of customer and
product. Some are inherent to specifc transactions (e.g. real
estate guarantees) while others apply to a series of transactions
(e.g. derivatives netting and collateral). The diferent mitigation
techniques can be grouped into the following categories:
• Personal guarantees
• Guarantees from credit derivatives
• Real guarantees
Efective guarantees are those real and personal guarantees
for which its efectiveness as a credit risk mitigant is proved and
whose valuation complies with the established policies and
procedures. The analysis of the efectiveness of the guarantees
must take into account, among others, the necessary time for the
execution and ability to enforce the guarantees.
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Scenario analysis
As described in Scenario analysis in section 1.3 ‘Management
processes and tools’, credit risk scenario analysis enables senior
management to better understand the portfolio evolution in the
face of market conditions and changes in the environment. It is a
key tool for assessing the sufciency of capital provisions for stress
scenarios.
Scenario analysis is applied to all of the Group’s signifcant
portfolios, usually over a 3-year horizon. The process involves the
following main stages:
• Defnition of benchmark scenarios, either central or most
plausible scenarios (baseline), as well as less likely and more
adverse economic scenarios (stress scenarios). A global stress
scenario is a world crisis situation that impacts each of the
countries in which the Group operates. In addition, a local stress
scenario impacts in an isolated way some of the main units with a
greater degree of stress than the global stress scenario.
The entire process takes place within a corporate governance
framework, and is adapted to the growing importance of this
framework as well as market best practices, assisting the Group’s
senior management in gathering knowledge for decision-making.
Monitoring
Monitoring business performance on a regular basis, and
comparing performance against agreed plans is a key risk
management activity.
All customers must be monitored on an ongoing and holistic
manner that enables the earliest possible detection of any
incidents that may arise impacting the customer’s credit rating.
Monitoring is carried out through an ongoing review of all
customers, assigning a monitoring classifcation, establishing
pre-defned actions associated to each classifcation and executing
specifc measures (pre-defned or ad-hoc) to correct any deviations
that could have a negative impact for the Group.
These scenarios are defned by the Group’s Research department
in coordination with each unit, using fgures published by leading
international institutions as a benchmark.
In this monitoring, the consideration of forecasts and transactions
characteristics throughout its life, is assured. It also takes into
consideration any variations that may have occurred in the
classifcation and its adequacy in the moment of the review.
All scenarios are backed by a rationale and are verifed and
reviewed by all areas involved in the simulation process.
Monitoring is carried out by local and global Risk teams,
supplemented by Internal Audit. It is based on customer
segmentation:
• Determination of risk parameters value (probability of
default, loss given default, etc.) for the scenarios defned.
These parameters are established using internally developed
statistical-econometric models, based on default and historical
losses, in relation to historical data for macroeconomic variables
taking into consideration a complete economic cycle.
The forecasting models follow the same development, validation
and governance cycles as 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 projection methodology to IFRS9, with an
• In the SCIB segment, monitoring, in the frst instance, is a
direct function of both the commercial manager and the risk
analyst, who maintain the direct relationship with the customer
and manage the portfolio. This function allows that an up-to-
date view of the customers’ credit quality is always available
and allows anticipating situations of concern and taking the
necessary actions.
• In the commercial banking, institutions and SMEs with an analyst
assigned, the function consists in identifying and tracking
customers whose situations require closer monitoring, reviewing
ratings and continuously analysing indicators.
impact on the estimation of the expected loss in each of the IFRS9
stages, associated with each of the scenarios put forward, as
well as with other important credit risk metrics deriving from
the parameters obtained (non-performing loans, provisions,
allowances, etc.).
• In the individual customers, businesses and SMEs with low
turnover segments 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.
• Analysis and rationale for the credit risk profle evolution at
portfolio, segment, unit and Group levels, in diferent scenarios
and compared to previous years.
• Integration of management indicators to supplement the
analysis of the impact caused by macroeconomic factors on risk
metrics.
• Likewise, the process is completed with a set of controls
and backtesting that ensure the adequacy of metrics and
calculations.
During 2018, the Group’s Customer watch list policy was replaced
with a new Santander customer assessment note monitoring
system (SCAN) that will be implemented in the Group’s units
during 2019.
The Group’s SCAN system aims to establish the level of monitoring,
policies and specifc actions for all customers with individualised
treatment, based on their credit quality and their particular
circumstances. Each customer is assigned a level of monitoring,
and specifc risk management actions, in a dynamic manner, with a
specifc manager and an established periodicity.
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2018 Annual Report
In addition to customers’ credit quality monitoring, 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 establishes as main axes, the control by countries,
business areas, management models, products, among others,
facilitating early detection of specifc attention points, as well as
preparing action plans to correct any deteriorations.
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 profle and volumes within the
parameters set by the Group and in line with its risk appetite.
Recovery and collections management
Recovery activity is a signifcant element in the Group’s risk
management. This function is carried out by the Recoveries area,
which defnes 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 diferent countries, taking always into account the local
particularities that the recovery activity requires, such as economic
environment, business model or a mixture of both.
Recovery has been aligned with the socio-economic reality of the
Group’s countries and diferent risk management mechanisms are
used with adequate prudential criteria considering unpaid debt
conditions.
The Recoveries area directly manage customers, where sustained
value creation is based on efective and efcient collection
management. The new digital channels are becoming increasingly
important in recovery management, developing new forms of
customer relations.
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
profles and products is conducted through processes with a
high technological and digital component, while personalised
management focuses on customers who, because of their profle,
require a specifc manager and more customised management.
Recovery management is divided into four phases: in arrears,
non-performing loans recoveries, write-ofs recoveries and
management of foreclosed assets.
The management scope for the recovery function includes non-
productive assets (NPAs), corresponding to the forborne portfolios,
NPLs, write-of loans and foreclosed assets, where the Group may
use mechanisms to rapidly reduce these assets, such as portfolios
or foreclosed assets sales. Therefore, the Group is constantly
seeking alternative solutions to juridical processes for collecting
debt.
In the write-of loans category, debt instruments are included,
whether due or not, for which, after an individualised analysis,
their recovery is considered remote due to a notorious and
unrecoverable impairment of the solvency of the transaction or
the holder. Classifcation in this category involves full or partial
cancellation of the gross carrying amount of the loan and it’s
derecognition, which does not mean that the Group interrupts
negotiations and legal proceedings to recover its amount.
The Group employs specifc policies for recovery management that
include the principles of the diferent recovery strategies, while
always ensuring the required rating and provisions are maintained
and these policies have been updated with IFRS9 implementation,
where the most signifcant change relates to the classifcation of
transactions and the provisions calculation.
In countries with a high exposure to real estate risk, the Group has
efcient sales management instruments that enable to maximise
the recovery and reduce balance sheet stock.
Forborne portfolio
The Group has an internal Forbearance policy which acts as a
reference for the diferent local transpositions of all its subsidiaries
and shares the principles established by the regulation and the
applicable supervisory expectations. This policy includes the
requirements arising from the implementation of IFRS9.
This policy defnes forbearance as the modifcation of the payment
conditions of a transaction to allow a customer who is experiencing
fnancial difculties (current or foreseeable), to fulfl their payment
obligations. If the modifcation was not made, it would be
reasonably certain that the customer would not be able to meet
their fnancial obligations. The modifcation 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, classifcation and monitoring of such transactions,
ensuring the strictest possible care and diligence in their granting
and monitoring. Therefore, the forborne transaction must be
focused on recovery of the amounts due and the payment
obligations must be adapted to the customer’s actual situation
and, in addition 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 policy defnes the classifcation criteria for the
forborne transactions in order to ensure that the risks are suitably
recognised, bearing in mind that they must remain classifed as
non-performing or in watch-list for a prudential period of time
(aligned with Regulation EU 680/2014) to attain reasonable
certainty that repayment capacity can be recovered.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
2018 general performance
Risk is diversifed among the main regions where the Group
operates: Continental Europe (45%), United Kingdom (27%), Latin
America (18%) and the United States (10%), with an adequate
balance between mature and emerging markets.
The evolution up to December 2018, credit risk with customers
increased by 4% vs. 2017, considering the same perimeter, mainly
due to the United States, United Kingdom, and Mexico. Growth in
local currency was generalised across all units with the exception
of Spain and Portugal.
These levels of lending, together with lower non-performing loans
(NPLs) of EUR 35,692 million (-5.1% vs. 2017) reduced the Group’s
NPL ratio to 3.73% (-35 bp against 2017).
In order to cover potential losses arising from these NPLs, in
accordance with the new provision calculation in accordance with
IFRS9, the Group recorded allowances for loan loss of EUR 8,873
million (-2.6% vs. December 2017), after deducting post write-of
recoveries. This decrease is materialised in a reduction of the cost
of credit to 1.00 % (7 bp less than the previous year).
Total loan-loss allowances were EUR 24,061 million, bringing the
Group’s coverage ratio to 67%, taking into consideration that 62%
of the Group net customer loans are secured. It is important to
bear in mind that the coverage ratio is afected downwards by the
weight of mortgage portfolios (particularly in the UK and Spain), as
lower provisions are required due to the existing collateral, which
mitigates potential losses.
The forborne portfolio stood at EUR 41,234 million at the end of
December. In terms of credit quality, 49% is classifed as non-
performing loans, with average coverage of 53% (26% of the total
portfolio).
Key fgures of forborne portfolio
EUR million
Performing
Non-performing
Total Forborne
% CoverageA
2018
2017
2016
20,877
27,661
29,771
20,357
20,044
18,689
41,234
47,705
48,460
26%
24%
23%
A. Total loan-loss allowances/total forborne portfolio.
Regarding its evolution, the Group’s forborne portfolio decreased
by 13.6% in 2018, in line with the trend of previous years.
3.3 Key metrics
Changes in perimeter
Banco Popular
On 7 June 2017, the Group acquired Banco Popular (Popular) and
its results and balance sheet were disclosed in the Banco Popular
unit.
In this chapter, Popular results and balance sheets, both from 2017
and 2018, are allocated to the diferent geographical areas of the
Group (unless stated otherwise), mainly Spain, Portugal and Spain
real estate activity.
Deutsche Bank Polska
In Poland, a country with one of the highest growth rates in
Europe, we have concluded the acquisition of Deutsche Bank
Polska retail portfolio (of approximately EUR 4,500 million), thus
reinforcing our position as one of the main banks in the country.
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2018 Annual Report
The tables below show the main metrics performance related to
credit risk derived from our activity with customers:
Main credit risk performance metrics from our activity with customers
Dec. 2018 data
Credit risk with customersA
(EUR million)
Non-performing loans
(EUR million)
NPL ratio
(%)
Continental Europe
42
9,454
424,248
331,706
2
2,537
24,674
19,638
2018
2017
2016
2018
2017
2016
Spain
2
39,479
251,433
172,974
14,833
15,880
Santander Consumer Finance
97,922
92,589
88,061
Portugal
Poland
UK
3
8,340
39,394
30,540
30,783
24,391
21,902
2
62,196
247,625 255,049
Latin America
17
1,898
167,516
173,150
2,244
2,279
1,317
2,755
7,461
4,418
822
2,319
2,959
1,114
3,295
7,464
4,391
779
9,361
2,357
2,691
1,187
3,585
8,333
5,286
819
84,212
83,076
89,572
33,764
28,939
29,682
41,268
40,406
40,864
1,925
2,004
2,064
5,631
8,085
7,318
179
202
109
92,152
77,190
91,709
2,688
2,156
2,088
51,049
44,237
54,040
26,424
24,079
28,590
450
2,043
536
1,410
717
1,097
Brazil
Mexico
Chile
Argentina
US
SBNA
SC USA
Total Group
9
58,153
920,968 855,510
3
5,692
37,596
33,643
2018
5.25
6.19
2.29
5.94
4.28
1.05
4.34
5.25
2.43
4.66
3.17
2.92
0.88
7.73
3.73
2017
5.82
6.32
2.50
7.51
4.57
1.33
4.46
5.29
2.69
4.96
2.50
2.79
1.21
5.86
4.08
Continental Europe
Spain
Santander Consumer Finance
Portugal
Poland
UK
Latin America
Brazil
Mexico
Chile
Argentina
US
SBNA
SC USA
Total Group
Coverage ratio
(%)
Net ASRB provisions
(EUR million)
Cost of credit
(%/risk)C
2018
52.2
45.0
106.4
50.5
67.1
33.0
97.3
106.9
119.7
60.6
135.0
142.8
122.1
154.6
67.4
2017
54.4
46.8
101.4
62.1
68.2
32.0
85.0
92.6
97.5
58.2
2016
60.0
48.3
109.1
63.7
61.0
32.9
87.3
93.1
103.8
59.1
100.1
142.3
2018
1
,399
728
360
32
161
173
4
,567
2
,963
830
473
231
2017
1,109
603
266
12
137
205
4,972
3,395
905
462
159
2016
1,342
585
387
54
145
58
4,911
3,377
832
514
107
170.2
214.4
2
,618
2,780
3,208
102.2
212.9
65.2
99.6
328.0
73.8
108
2,501
8
,873
116
2,590
9,111
120
2,992
9,518
2018
0
.36
0
.33
0
.38
0
.09
0
.65
0
.07
2
.95
4
.06
2.75
1.19
3
.45
3
.27
0
.24
10
.01
1
.00
2017
0.31
0.30
0.30
0.04
0.62
0.08
3.15
4.36
3.08
1.21
1.85
3.42
0.25
9.84
1.07
A. Includes gross loans and advances to customers, guarantees and documentary credits.
B. Recovered write-of assets (EUR 1,558 million).
C. Cost of credit = loan-loss provisions twelve months/average lending.
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
1.33
3.84
3.93
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
0.23
10.72
1.18
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Key fgures reconciliation
The 2018 consolidated fnancial statements details the customer
loans portfolio, both gross and net of funds. Credit risk also
includes of-balance sheet risk. The following table shows the
relation between the concepts that comprise these fgures:
EUR million
GROSS CREDIT RISK
WITH CUSTOMERSA
958,153
Breakdown
Lending (loans and advances to customers)
906,215
Contingent liabilities
51,938
SECTION ON
CREDIT RISK
LENDING
(LOANS AND ADVANCES
TO CUSTOMERS)
LOANS AND ADVANCES
TO CUSTOMERS
(GROSS)
906,215
906,228B
+13
Other
Lending
880,628
Held for
trading
portfolio
202
Fair
value
25,398
BALANCE SHEET ITEMS FROM
CONSOLDIATED FINANCIAL STATEMENTS
Allowances
-23,307
Asset: lending:
loans and advances to customers
857,321
202
25,398
LOANS AND ADVANCES
TO CUSTOMERS (NET)
882,921
A. Includes gross loans and advances to customers, guarantees and documentary credits.
B. Before loan-loss allowances.
Geographical distribution and segmentation
The Group’s risk function is organised on the basis of three types of
customers:
• Individuals: 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 by customer
type.
Mortgages to individuals represent approximately 36% of the
Group net customer loans. These mortgages are focused in Spain
and the UK, and are mainly residential mortgages with a low risk
profle, low non-performing ratios and an appropriate coverage
ratio. This low risk profle produces low related losses.
• SMEs, commercial banking and institutions: includes companies
and individuals with business activity. It also includes public
sector activities in general and private sector non-proft entities.
29%
354
• Santander Corporate & Investment Banking (SCIB): consists
of corporate customers, fnancial institutions and sovereigns,
comprising a closed list that is revised annually. This list is
determined based on a full analysis of the company (business
type, level of geographic diversifcation, product types, volume of
revenues it represents for the Group, etc.).
The following chart shows the distribution of credit risk on the
basis of its management model (includes gross loans and advances
to customers, guarantees and documentary credits):
Credit risk distribution
15%
56%
85%
retail and
commercial
banking
Individuals
SMEs, commercial banking
and institutions
SCIB
2018 Annual Report
Taking into consideration the aforementioned segmentation, the
geographical distribution and situation of the portfolios is shown in
the following charts:
EUR million
Total
21%
25%
10%
4%
4%
TOTAL
958,153
9%
27%
Individuals
24%
15%
8%
TOTAL
533,552
9%
4%
4%
922,461
883,372
821,867
Performing
Non-performing loans
35,692
37,596
33,643
2018
2017
2016
516,309
510,951
469,450
Spain
Brazil
UK
Portugal
Chile
US
Other
Spain
Brazil
UK
Portugal
Chile
US
Other
36%
Performing
Non-performing loans
17,243
18,103
13,732
2018
2017A
2016
SMEs, Commercial Banking and Institutions
13%
40%
TOTAL
278,847
18%
8%
10%
6%
5%
SCIB
24%
32%
TOTAL
145,744
11%
2%
2%
14%
15%
Spain
Brazil
UK
Portugal
Chile
US
Other
Spain
Brazil
UK
Portugal
Chile
US
Other
262,272
244,749
228,303
Performing
Non-performing loans
16,575
17,025
17,304
2018
2017A
2016
143,870
127,672
124,113
Performing
Non-performing loans
1,874
2,468
2,607
2018
2017A
2016
A. Proxies applied for 2017 data.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
The key fgures by geographical area are commented below:
• In the United States4 the NPL ratio stood at 2.92% (+13% in the
year) with the coverage ratio remaining at high levels, at 143%.
• Continental Europe
• In Spain1, the NPL ratio dropped to 6.19% (-13 bp compared to
2017), due mainly to the better performance of the portfolio, the
normalisation of several restructured positions and portfolio
sales.
• In Portugal, recoveries and distressed portfolio sales allowed
for the reduction of the non-performing loans, placing the NPL
ratio at 5.94% (-157 bp vs. 2017).
• In Poland, the downward trend of the NPL ratio continued,
placing it at 4.28% (-29 bp vs. 2017), thanks to a proactive
management of the non-performing portfolio through portfolio
sales, as well as the incorporation of the new retail portfolio
from Deutsche Bank.
• In Santander Consumer the NPL ratio was 2.29% (-21 bp in
the year), due to good overall performance of the portfolios in
general, across all its geographies.
• United Kingdom2 reduced its NPL ratio, standing at 1.05% (-28
bp in the year) due to the good performance of all segments
in general, as well as the single names management in the
Corporates portfolio. The coverage ratio remained stable at 33%,
thanks to the signifcance proportion of secured loans with real
guarantees.
• Latin America:
• Brazil3, thanks to the robustness of its risk management model,
as well as the proactive policies applied in the retail portfolios,
the NPL ratio decreased to 5.25% (-4 bp compared to the end of
2017). The coverage ratio was 107% (+14 pp in the year), due to
the implementation of IFRS9.
• Chile reduced its NPL ratio to 4.66% (-30 bp in the year) thanks
to the good performance in non-performing loans, mainly in
individuals, together with a signifcant growth in exposure
that benefted from the country’s favourable macroeconomic
situation refected in the country’s main indicators.
• In Mexico the NPL ratio fell to 2.43% (-26 bp in the year),
mainly due to the normalisation of the Individuals segment
performance.
• In Argentina the NPL ratio increased up to 3.17% (+67 bp in the
year) due to the difcult economic situation of the country,
which is afecting especially the Individuals segment. An action
plan is already in place begin to show positive results. The
coverage ratio improves to 135% due to provisions increases
made in certain economic groups as a preventive measure
against the country´s macroeconomic deterioration.
• At Santander Bank N.A. the NPL ratio was 0.88% (-33 bp in the
year), due to the proactive management of certain exposures,
the favourable evolution of the macroeconomic environment,
is refected in the credit risk profle improvement of the
corporates portfolio and the good performance of the individual
portfolio.
• In SC USA the NPL ratio was 7.73%, mainly due to the maturity
of those loans that were forborne in 2017 which included the
support to customers afected by hurricane season.
Amounts past due (performing loans)
Amounts past due by three months or less represented 0.34% of
total credit risk with customers. The following table shows the
structure at 31 December 2018, classifed on the basis of the frst
maturity:
Amounts past due. Maturity detail
EUR million
Loans and advances to
credit institutions
Loans and advances
to customers
Public administrations
Other private sector
Debt instruments
TOTAL
Less than
1 month
1 to 2
2 to 3
months months
14
1
-
2,023
5
2,018
-
2,037
629
-
629
-
630
617
-
617
-
617
Impairment of fnancial assets
The main change in determining the fnancial assets hedge due
to their impairment is that the new accounting standard, IFRS9,
introduces the concept of expected loss compared to the previous
model of incurred loss.
The IFRS9 impairment model applies to fnancial 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.
The portfolio of fnancial instruments subject to IFRS9 is divided
into three categories, or stages, depending on the status of each
instrument in relation to its level of credit risk.
• Stage 1: fnancial instruments for which no signifcant increase
in risk is identifed since its initial recognition. In this case, the
impairment provision refects expected credit losses arising from
defaults over the following twelve months from the reporting date.
• Stage 2: if there has been a signifcant increase in risk since the
date of initial recognition but the impairment event has not
1. Does not include real estate activity. Further information is available in section 3.4 ‘Detail of main geographies’ - Spain.
2. More information available in section 3.4 ‘Detail of main geographies’ - United Kingdom.
3. More information available in section 3.4 ‘Detail of main geographies’ - Brazil.
4. More information available in section 3.4 ‘Detail of main geographies’ - United States.
356
2018 Annual Report 14,833
227,419
Allowances evolution according to constituent item
materialised, the fnancial instrument is classifed as Stage 2. In
this case, the impairment provision refects the expected losses
from defaults over the residual life of the fnancial instrument
2016 - 2018 NPL evolution
NPL (start of period)
37,094
33,643
37
,596
2016
2017
2018
• Stage 3: a fnancial instrument is catalogued in this stage when
Stage 3
it shows efective 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 refects the expected
losses for credit risk over the expected residual life of the
fnancial instrument.
The following table shows the credit risk exposure by each of these
stages exposure by geography:
Exposure by stage and by geography
EUR million
Stage 1
Stage 2
Stage 3
TotalA
Continental Europe
373,675
20,877
22,529
417,082
Spain
SCF
Portugal
Poland
UK
Latin America
Brazil
Mexico
Chile
Argentina
US
SBNA
SC USA
199,457
90,878
34,086
28,187
243,419
154,387
74,184
31,371
37,085
5,072
73,719
47,394
17,903
13,128
4,715
1,974
1,060
12,958
9,523
5,472
1,184
2,259
381
9,927
3,021
6,470
2,241
2,279
1,312
2,755
7,461
4,418
822
1,925
179
97,833
38,340
30,559
259,132
171,370
84,074
33,378
41,268
5,631
2,684
86,330
450
50,866
2,043
26,417
Total Group
845,200
53,285
35,670
934,155
A. Excluding EUR 23,998 million from balance not subject to impairment
accounting.
In addition, the amount due to the impairment provision refects
the expected credit risk losses over the expected residual life
in those fnancial instruments Purchased or Originated Credit
Impaired (POCI).
The evolution of the fnancial instruments with efective signs of
impairment (stage 3) are shown below:
Non-performing loans evolution
according to constituent item
NPL not subject to
impairment accounting
Net entries
Perimeter
FX and others
Write-of
-
-
7,362
734
1,211
-
-
3
7,571
25
8,269
10
,910
10,032
(826)
177
(318)
(12,758)
(13,522)
(12
,673)
NPL (end of period)
33,643
37,596
35
,692
Stage 3
NPL not subject to
impairment accounting
-
-
-
-
35
,670
22
EUR million
10,300
121
1,784
(12,673)
For other
assets
8,070
For impaired
assets
16,459
Stage 1 and 2
8,913
Stage 3
15,148
Allowances
2017
Provision
for other
assets
Gross
provision
for impaired
assets and
write-downs
FX and
other
Write-of Allowances
2018
2016 - 2018 allowances evolution
2016
2017
2018
Allowances (start of period)
27,121
24,835
24,529
For impaired assets
For other assets
Gross provision for impaired
assets and write-downs
Provision for other assets
FX and other
Write-of
17,706
15,466
16,459
9,414
9,369
8,070
11,045
11,607
10,300
52
(625)
(881)
2,490
121
1,784
(12,758)
(13,522)
(12,673)
EUR million
37,596
10,910
(141)
(12,673)
Allowances (end of period)
24,835
24,529
24,061
35,692
Stage 1 and 2
Stage 3
-
-
-
-
8,913
15,148
NPL
2017
Net entries
Perimeter
and FX
Write-of
NPL
2018A
A. Includes EUR 22 million of NPL not subject to impairment accounting.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
The methodology required for the quantifcation of expected loss
due to credit events will be based on an unbiased and weighted
consideration of the occurrence of up to fve possible future
scenarios that could impact the collection of contractual cash
fows, 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
its experience in developing internal models for calculating
parameters for regulatory and internal management purposes.
The Group is aware of the diferences between such models and
regulatory requirements for provisions. As a result, it has focused
on adapting the development of its IFRS9 impairment provisions
models to such requirements.
• Determination of signifcant increase in risk: for the purpose
of determining whether a fnancial instrument has increased
its credit risk since initial recognition, proceeding with its
classifcation into stage 2, the Group considers the following
criteria:
• Quantitative criteria: changes in the risk of a default occurring
through the expected life of the fnancial instrument are
analysed and quantifed with respect to its credit level in its
initial recognition.
For the purpose of determining if such changes are considered
as signifcant, with the consequent classifcation into stage 2,
each unit has defned the quantitative thresholds to consider in
each of its portfolios taking into account corporate guidelines
and ensuring a consistent interpretation across all geographies.
• 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, incorporating 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 fnancial 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 fnancial 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 efectiveness 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 proft and loss account while the
rest will be recorded in other comprehensive income.
3.4 Detail of main geographies
• Qualitative criteria: in addition to the quantitative criteria
United Kingdom
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
defned these qualitative criteria for each of its portfolios,
according to its particularities and policies that are currently in
force.
The use of these qualitative criteria is complemented with the
application of expert judgement.
• Default defnition: the defnition considered for impairment
provisioning purposes is consistent with that used in the
development of advanced models for regulatory capital
requirements calculations. The Group is currently working to adapt
the defnition of default under new standard (EBA Guidelines on
the application of the defnition of default under Article 178 of the
CRR), according to the scheduled plan.
Portfolio overview
Credit risk with customers in the UK amounted to EUR 262,196
million as of December 2018, which means an increase, of 6%
compared to year-end 2017 (increase of 7% in local currency), and
representing 27% of the Group’s total loans portfolio.
The NPL ratio fell to 1.05% at the end of December (-28 bp
compared to year-end 2017), thanks to the good macroeconomic
environment and the application of prudent policies, within the risk
appetite framework. Therefore, the amount of non-performing
loans decreased by 16%, following the trend observed in previous
years, thanks to the good performance of the portfolios and the
management of single names in the Companies segment.
358
2018 Annual Report
Santander UK portfolio is divided into the following segments:
The distribution of the portfolio by type of borrower is shown in
the chart below:
Portfolio segmentation
10%
11%
Mortgages, individuals
79%
Companies
Other
Mortgage portfolio loan type
EUR million
176,581
30,490
5%
32%
8%
34%
Due to its relevance, not only for Santander UK, but also for the
entire credit risk exposure of the Group, it is noteworthy the
portfolio of mortgage loans to individuals, detailed below.
Mortgage portfolio
This portfolio at the end of December 2018 amounted to EUR
176,581 million (2.1% growth in the year). It consists of residential
mortgages granted to new and existing customers, and all are
frst mortgages. There are no transactions that entail second or
successive liens on mortgaged properties.
44%
40%
19%
18%
Stock
New production
Buy to let
Re-mortgagers
Home movers
First-time buyers
A. First time buyer: customers who purchase a home for the frst time.
B. Home mover: customers who change houses, with or without changing
the bank granting the loan.
C. Remortgage: customers who switch the mortgage from another
The real estate market has shown strong resilience with over 1.3%
price growth in the year and a stable number of transactions.
fnancial entity.
D. Buy to let: houses bought for renting out.
Geographically, credit exposures are predominantly concentrated
in the south east area of the UK and, particularly, in the
metropolitan area of London.
Santander UK ofers a wide range of mortgage products that are
aligned with its policies and risk limits. The characteristics of some
of them are described below:
Geographical concentration
Dec. 18 data
11%
25%
London
Midlands & East Anglia
North
Nothern Ireland
Scotland
13%
South East excl. London
South West, Wales & Other
31%
4% 2%
14%
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 applicable legislation.
• Interest only loans (32%)5: the customer pays the interest
every month and repays the capital at maturity. An appropriate
repayment vehicle such as a pension plan, mutual fund, etc. is
required. This is a common product in the UK market for which
Santander UK applies restrictive policies in order to mitigate
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 (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 (5%): buy to let mortgages (purchase of a property to
rent out) account for a small percentage of the total portfolio,
with approval subject to strict risk policies. In December 2017,
these represented approximately 8% of total underwriting and
4% of the remaining portfolio.
The good performance of the mortgage portfolio is refected in
the NPL ratio, which remained moderate at 1.21% at the end of
December (+8 bp regarding the previous year). Thanks to the
application of prudent admission policies an afordability rate of
5. Percentage calculated for loans with total or some interest only component.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
the new production is maintained at 3.24 compared to 3.16 the
previous year, with a reduced volume of foreclosed properties,
which in December 2018 amounted to EUR 25.2 million, 0.02% of
total mortgage exposure.
These policies have also allowed the simple average LTV of the
portfolio to stand at 42% and the average weighted LTV at 39%.
The proportion of the portfolio with LTV between 85% and 100% is
at low levels, around 4%.
The following charts show the LTV structure for the stock of
residential mortgages as of December 2018:
Loan to ValueA
Credit risk by segmentA
Dec. 2018 data
2018
2017
2016
Var
18/17
Total credit riskA
239,479
251,433
172,974
(4.8%)
Household mortgages
60,908
62,039
46,213
(2%)
Other credit for
individuals
25,170
27,372
16,614
Business Portfolio
137,296
143,668
96,082
(8%)
(4%)
Public Administrations
16,105
18,353
14,065
(12%)
A. In 2017 and 2018 B.Popular is integrated.
B. Including guarantees and documentary credits.
4%
1%
9%
45%
The NPL ratio for the total portfolio was 6.19%, 13 bp less than in
2017. The decrease in lending (which increased the NPL ratio by 31
bp) was ofset by the better NPL fgure (which reduced the ratio by
44 bp). This improvement was mainly due to a better performance
of the credit portfolio, the cure of several restructured positions
and portfolio sales.
41%
<50% 50-75% 75-85% 85-100% >100%
NPL and coverage ratio
%
A. Loan to value: relation between the amount of the loan and the
48
48
appraised value of the property. Based on indices.
47
Coverage ratio
NPL
45
6.19
6.53
5.41
6.32
2015
2016
2017
2018
The more relevant portfolios are described in the following
subsections.
Residential mortgages
Residential mortgages in Santander Spain amounted to EUR 61,453
million, representing 26% of total credit risk. 99% of which have a
mortgage guarantee.
The credit risk policies currently used explicitly forbid loans
regarded as high risk (subprime mortgages) and establish strict
requirements for credit quality, both for transactions and for
customers. For example, since 2009 mortgages with a loan-to-
value of more than 100% have not been allowed.
Spain
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 239,479 million
(25% of the Group’s total), with an adequate level of diversifcation
by both product and customer segment.
In a context of lower economic and credit growth, new loans
continue to increase, especially in SMEs and Corporates. The total
credit risk decreased by 4.8% in annual terms, mainly due to the
lower fnancing to public administrations, wholesale banking
and an amortisation rate even higher than the growth of new
production in individuals. Within the commercial banking segment,
SMEs consolidate the growth trend initiated in previous years.
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2018 Annual Report
Residential mortgagesA
EUR million
Gross Amount
Debt to incomeA
Average 28.2%
Loan to valueB
%
2018
2017
2016
61,453
62,571
46,858
26%
6%
10%
25%
53%
Without mortgage guarantee
545
532
645
With mortgage guarantee
60,908
62,039
46,213
of which non-performing loans
2,425
2,511
1,796
Without mortgage guarantee
54
147
27
With mortgage guarantee
2,371
2,364
1,769
A. Excluding SC Spain mortgage portfolio (EUR 1,837 million in 2018 with
doubtful debt of EUR 68 million).
21%
DI < 30%
30% < DI < 40%
DI > 40%
29%
29%
LTV < 40%
40% - 60%
60% - 80%
80% - 100%
> 100%
The NPL ratio of mortgages granted to households to acquire a
home was 3.89%, remaining at levels similar to previous years
below 3.9%.
A. Debt to income: relation between the annual instalments and the
customer’s net income.
B. Loan to value: percentage indicating the total risk/latest available
house appraisal.
NPL ratio, residential mortgages
%
3.83
3.81
3.89
Business portfolio
Credit risk assumed directly with SMEs and corporates (EUR
137,296 million) represent the main lending segment in Santander
Spain (57% of the total).
Most of the portfolio corresponds to customers who have been
assigned an analyst to monitor them continuously throughout the
risk cycle.
2016
2017
2018
The portfolio is highly diversifed, with no signifcant
concentrations by activity sector.
The NPL ratio for this portfolio stood at 6.36% in 2018, 49 bp lower
than in 2017, due to better performance, normalisation of several
restructured positions and portfolio sales.
The portfolio of mortgages granted to acquire homes in Spain have
characteristics that maintain its medium-low risk profle which
limits the expectations of a potential additional deterioration:
• Principal is repaid on all mortgages from the start.
• Early repayment is common so the average life of the transaction
is well below that of the contract.
• High quality of collateral concentrated almost exclusively in
fnancing the frst home.
• Average afordability rate stood at 28%.
• 83% of the portfolio has a LTV below 80%, calculated as total
risk/latest available house appraisal.
• All customers applying for a residential mortgage are subject to a
rigorous assessment of credit risk and afordability. In evaluating
the payment capacity (afordability) of a potential customer, the
credit analyst must determine if the income of the customer is
sufcient to meet the payment of the loan instalments taking
into consideration other income that the customer may receive.
In addition, the analyst must assess if the customer’s income will
be stable over the term of the loan.
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Real estate activity
The Group manages the real estate activity in Spain in a separate
unit, which includes the loans from clients with activity mainly in
real estate development, and who have a specialised management
model, holdings in real estate companies and foreclosed assets.
United States
Credit risk at Santander US increased to EUR 92,1526 million at the
end of December (representing 10% of the Group’s total), is made
up of the following business units:
In recent years the Group’s strategy has been geared towards
reducing these assets, which at the end of 2018 stood at a total of
9,282 EUR billion, representing 2% of assets in Spain and less than
0.6% of Group assets. Assets decreased by 13% during 2018, with
the following evolution in credit exposures and foreclosed assets
(run-of):
28%
4%
3%
9%
56%
Santander Bank N.A. (SBNA)
Santander Consumer USA (SC USA)
Santander Investment Securities (SIS)
Banco Santander Puerto Rico (BSPR)
Banco Santander Internacional (BSI)
• Net credits amount to approximately EUR 900 million, with a 29%
reduction during 2018 and with a coverage ratio of 41%.
• Net real estate assets (foreclosed and rental assets) were EUR
2,617 billion, with a 9% reduction vs. 2017, and a coverage ratio of
59%.
Credit and foreclosed gross exposure followed the trend begun
in previous years and presents a decrease of 80% between 2008
and 2018. Additionally, the Group reached an agreement to sell
properties for EUR 1,535 million. This transaction is expected to be
fnalised by the frst quarter of 2019.
Real estate portfolio evolution
EUR million. Dec. 2018 data
Gross Value
Allowances
Net value
Foreclosed
Rental assets
Real estate loans
2018
9.282
4.638
4.644
2.617
1.154
873
2017
10.620
5.318
5.302
2.879
1.199
1.224
In 2018, Santander US credit lending continued to grow (+19%), after
the reduction of non-core portfolios. The most signifcant increases
are registered in the consumer portfolio (auto) of SBNA and SC USA,
as well as in the wholesale banking business of SBNA and SIS.
NPL ratio and cost of credit remain at moderate levels, 2.92%
(+13 bp in the year) and 3.27% (-15 bp in the year), respectively. The
performance details of Santander US main units are set out below.
Santander Bank N.A.
Santander Bank N.A. business is focused on retail and commercial
banking (83%), of which 35% is with individuals and approximately
65% with corporates. One of the main strategic goals is to continue
to enhance the wholesale banking business (17%).
Lending has increased by 15% over 2018, being wholesale banking
and consumer (auto) the segments with higher growth. The sale of
non-core assets continues and the proportion of secured lending
remains above 60%.
The NPL ratio continues to decline, standing at 0.88% (-33 bp in
the year) in December. This reduction is explained by a proactive
management of certain exposures and the favourable macro
development showed in the improvement of customer’s credit risk
profle in corporates and individuals portfolios. The cost of credit
remains at stable levels of 0.24% despite the increase in some
segment’s coverage ratios.
Non-Performing Loans Ratio (SBNA)
Coverage Ratio (SBNA)
Cost of credit (SBNA)
%
1.17
1.33
1.21
0.88
%
114
%
122
0.23
0.25
0.24
100
102
0.13
2015
2016
2017
2018
2015
2016
2017
2018
2015
2016
2017
2018
6. Includes EUR 9.5 million of SH USA investment.
362
2018 Annual Report
Santander Consumer USA
The risk indicators for SC USA are higher than those of the other
United States units and the Group, due to the nature of its business,
which focuses on auto fnancing through loans and leasing (97%),
seeking the optimisation of the returns associated to the risk
assumed. SC USA´s lending also includes a smaller personal lending
portfolio (3%).
exploratory discussions cover a range of options on how to optimize
the existing contract and other longer-term arrangements. While
a signifcant change in the business relationship could afect SC
USA’s and SH USA’s operations adversely, FCA has not delivered a
notice to exercise its equity option and SC USA and FCA continue to
operate under the existing arrangements.
In 2018, new loan and leasing production showed growth of more
than 20% and 60% regarding year-end 2017, mainly supported by
the commercial relationship with the Fiat Chrysler Automobiles
(FCA) group, the “Chrysler Agreement”, which dates back to 2013,
maintaining the quality standards for approval.
Under the Chrysler Agreement, FCA has the option to acquire, for
fair market value, an equity participation in the business ofering
and providing fnancial services contemplated by the Chrysler
Agreement
In June 2018, SC USA announced that it was in exploratory
discussions with FCA regarding the future of FCA’s U.S. fnance
operations after FCA had announced its intention to establish a
captive U.S. auto fnance unit and indicated that acquiring SC’s
FCA-related business was one option it would consider. These
The NPL rate, however, increased to 7.73%, mainly due to the
maturity of those loans forborne in 2017, which included the
support to customers afected by hurricane season. The cost
of credit, at the end of December stood at 10.01% (+17 bp in the
year), due to the average investment lower growth as a result of
the vintages amortisation from high production exercises (2015),
partially mitigated by the increase in recoveries efciency and the
positive evolution of the used car price. The coverage ratio remains
at high levels, 155%.
The leasing portfolio - business carried out exclusively under the
FCA agreement and focused on customers with high quality credit
profles- grew by 41% in the year, to EUR 13,309 million, providing
stable and recurring earnings. The management and mitigation
of the residual value7 remains a priority, at the end of December
the mark-to-market of this vehicles stood in line with the balance
sheet value.
Non-performing loans ratio (SC USA)
Coverage rati
o (SC USA)
Cost of credit (SC USA)
%
%
%
7.73
337
328
5.86
3.66
3.84
213
155
10.97
10.72
9.84
10.01
2015
2016
2017
2018
2015
201
6
2017
2018
2015
2016
2017
2018
7. Leasing residual value: diference between the estimated residual vehicle value at the contract signature and the real vehicle value at the end of the contract.
363
Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Brazil
Improvement in the macro indicators with respect to the
previous year, with a GDP growth owing to the increase in private
consumption and frm’s investment, driven in a great measure by
the reduction in interest rates (SELIC), with minimum historical
levels, and the boost from exports arising from the depreciation
of the Brazilian real. Additionally, expectations for the next years
are optimistic, and macro indicators are expected to continue
improving, with a gradual normalisation of interest rates.
Credit risk in Brazil amounts to EUR 84,212 million, representing
an increase of 1.4% vs. 2017 and largely due to the depreciation of
the Brazilian currency, excluding the exchange rate efect, recorded
growth is 13%. Santander Brazil therefore accounts for 9% of the
Group’s lending.
Santander Brazil is adequately diversifed and has an increasingly
marked retail profle, with more than 60% of loans extended to
individuals, consumer fnancing and SMEs.
This increase was more pronounced in retail segments with a
more conservative risk profle, within prudential framework of
risk growth assumption, but at the same time boosting customer
relationship and loyalty, as well as business attracted through
digital channels, where an important increase has been recorded
during the last year.
In the individuals’ loan segment, market share has increased in
proftable products. It is noteworthy the growth in payroll discount
loans through the Olé Consignado brand, in addition to credit cards
and the mortgage loan portfolio. At the same time, the Financiera
unit has reported a stronger position than its competitors, reaching
25% of market share.
In the SME segment it is noteworthy the increase of Adquirência,
and to a lower extent, rural loans, which have a low risk profle.
Lastly, the Corporate and SCIB portfolios, both with considerable
exposures in US dollars, led more conservative growth, due to the
impact of the Brazilian real deprecation against the US dollar.
The leading indicators for the credit risk profle of new
loans (vintages) are continuously tracked. These are shown
below, confrming the Group’s resilience and prudence in risk
management operates. 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
deterioration. This enables the Group to defne corrective actions if
any deviations from expected results are detected.
As it can be observed in the following chart, Over30 ratio vintages
have been kept at historically low levels, in spite of the strong
portfolio growth, thanks to proactive risk management as well as
the appropriate measures taken to improve performance.
Vintages. Over 30A ratio evolution at 3 and 6 months from each vintage
%
Individuals
3.9
3.2
3.1
2.7
3.9
3.7
3.3
3.5
3.5
3.1
3.0
2.7
2.7
2.7
2.6
1.5
1.6
1.2
1.3
1.9
1.6
1.8
1.6
1.4
1.3
1.4
1.3
1.2
1.1
1.2
1.3
1.4
1.3
SMEs
3.7
1.9
3.0
1.5
2.5
1.4
2.1
2.1
2.1
1.8
1.0
1.1
1.0
1.0
2.9
1.4
2.3
2.4
2.2
2.5
2.4
1.0
1.1
1.1
1.3
1.3
2.0
1.2
2.4
1.1
1.0
1.2
1.0
5
1
c
e
D
6
1
r
a
M
6
1
n
u
J
6
1
p
e
S
6
1
c
e
D
7
1
r
a
M
7
1
n
u
J
7
1
p
e
S
7
1
c
e
D
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
5
1
c
e
D
6
1
r
a
M
6
1
n
u
J
6
1
p
e
S
6
1
c
e
D
7
1
r
a
M
7
1
n
u
J
7
1
p
e
S
7
1
c
e
D
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
A. Ratio calculated as the total value of loans more than 30 days in arrears in the payment over the total vintage amount.
B. Months on Book.
Over30 Mob6B
Over30 Mob3B
364
2018 Annual Report
The NPL ratio stood at 5.25% as of December 2018 (-4 bp compared
to the year-end of 2017). This good performance was due to the
preventive risk management of the portfolio, the normalisation
of the corporates and SCIB portfolios, and due to a solid growth in
proftable segments.
Santander Brazil, thanks to a solid culture and advanced
risk management, continues improving its credit metrics. Its
impairment rate on the lending portfolio, known locally as ‘Over
90 ratio’, stood at 3.1% in December 2018 (-0.1 pp vs. year-end
2017), below the average for private Brazilian banks.
Over 90 ratio total
4.09%
3.88%
2.91%
3.20%
3.10%
2.90%
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
8
1
Q
1
8
1
Q
2
8
1
Q
3
8
1
Q
4
Santander
System
Private Banking
In general terms, and taking into account the evolution of recent
years, the downward trend in the cost of credit continues, which
stands at 4.06% at the end of December (-30 bp compared to
the end of 2017), thanks to the proactive risk management, the
improvements applied in the rating models in the SME portfolio,
and the good overall performance in all portfolios.
The coverage ratio stands at 107% (+14 pp vs. end of 2017), due to
the implementation of IFRS9, which is comfortable level.
Non-performing loans ratio
Coverage ratio
%
%
Cost of credit
%
5.98
5.90
5.05
5.29
5.25
95
107
93
93
84
4.84
4.89
4.50
4.36
4.06
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
365
Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
3.5 Other credit risk aspects
Credit risk by activity in the fnancial markets
This section covers credit risk generated in treasury activities
with customers, mainly with credit institutions. Transactions
are undertaken through money market fnancial products with
diferent fnancial institutions and through counterparty risk
products which serve the Group’s customer’s needs.
According to regulation (EU) 575/2013, counterparty credit risk
is the risk that a client in a transaction could default before
the defnitive settlement of the cash fows of the transaction.
It includes the following types of transactions: derivative
instruments, transactions with repurchase commitment, stock and
commodities lending, transactions with deferred settlement and
fnancing 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 Montecarlo 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 recoveries.
After markets close, exposures are re-calculated by adjusting all
transactions 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 of
Santander’s subsidiaries to be known at any time.
Exposures in counterparty risk: over the counter
(OTC) transactions and organised markets (OM)
As of December 2018, 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
14,699 million (net exposure of EUR 33,500 million).
Counterparty risk: exposure in terms of market value
and credit risk equivalent, including mitigation efectA
EUR million
2018
2017
2016
Market value, netting efectB
29,626
31,162
34,998
Collateral received
14,927
16,293
18,164
Market value with netting
efect and collateralC
Netting efectD
14,699
14,869
16,834
33,500
32,876
44,554
A. Figures under internal risk management criteria. Listed derivatives
have a market value of zero. No collateral is received for these types of
transactions.
B. Market value used to include the efects of mitigation agreements so as
to calculate exposure for counterparty risk.
C. Considering the mitigation of netting agreements and having deducted
the collateral received.
D. CRE (credit risk equivalent): net value of replacement plus the
maximum potential value, minus collateral received.
In the following table the distribution is shown, both in nominal
and market value terms, of the Group’s diferent products that
generate counterparty credit risk. This risk, is mainly concentrated
in interest and exchange rate hedging instruments:
366
2018 Annual Report
Counterparty risk: Distribution by nominal risk and gross market valueA
EUR million
2018
2017
2016
Nominal
Market value
Nominal
Market value
Nominal
Market value
Positive Negative
Positive Negative
Positive Negative
CDS protection boughtB
CDS protection sold
Total credit derivatives
Equity forwards
Equity options
Spot equities
Equity swaps
Equities - ETF
13,498
8,966
22,464
1,080
15,695
240
7
123
130
256
467
-
(187)
(5)
(192)
(43)
(443)
-
18,134
12,097
30,231
733
36
266
302
4
(95)
-
23,323
19,032
(95)
42,355
-
133
10,572
770
(2,841)
15,154
-
-
-
13,937
1,329
(227)
25,264
859
(554)
32,090
899
(1,127)
26,088
-
-
Total equity derivatives
63,042
2,951
(1,840)
62,657
1,633
(3,395)
Fixed income forwards
6,766
110
(45)
8,660
89
(13)
Fixed income options
Spot fxed income
Fixed income - ETF
3,161
-
-
11
-
Total fxed income derivatives
9,927
121
(14)
-
(59)
-
-
-
-
-
-
-
-
-
83
339
422
48
448
-
631
-
(383)
(33)
(416)
-
(426)
-
(461)
-
1,127
(888)
37
(83)
5
5
-
(2)
(2)
-
234
15,388
36,512
67,421
6,357
483
5,159
349
8,660
89
(13)
12,348
48
(88)
Spot and term exchange rates
167,729
2,854
(2,461)
128,914
2,604
(3,870)
150,095
3,250
(6,588)
Exchange rate options
46,288
296
(707)
37,140
Other exchange rate derivatives
719
9
(12)
963
256
23
(343)
(17)
31,362
606
479
7
(624)
(27)
Exchange rate swaps
562,719
18,584
(16,918)
488,671
18,264
(15,892)
510,405
25,753
(24,175)
Exchange rate -
organised markets
4,186
-
-
1,404
-
-
824
-
-
Total exchange rate derivatives
781,641
21,743
(20,098)
657,092
21,147
(20,122)
693,292
29,489
(31,413)
Asset swaps
Call money swaps
Interest rate structures
8,607
1,196
(1,475)
22,736
1,194
(817)
22,948
1,178
(758)
878,103
81,336
4,563
4,785
(5,708)
4,180
(4,477)
376,596
2,544
(2,301)
223,005
2,006
(1,581)
977
23
(594)
7,406
2,321
(39)
370,433
41
(593)
(106)
Forward rate agreements - FRAs
308,111
29
(28)
190,476
IRS
3,507,802
73,597
(73,237)
3,219,369
71,346
(75,391)
3,182,305
92,268
(92,873)
Other interest rate derivatives
143,029
1,906
(1,484)
185,925
2,816
(2,113)
210,061
3,762
(2,985)
Interest rate - ETF
73,418
3
(2)
127,288
-
-
117,080
-
-
Total interest rate derivatives
5,000,406
86,079
(86,411)
4,126,570
78,900
(81,255)
4,133,238
101,576
(98,896)
Commodities
Commodities - ETF
Total commodity derivatives
-
2
2
-
-
-
-
-
-
221
124
345
-
-
-
-
-
-
539
47
586
108
-
108
(5)
-
(5)
Total OTC derivatives
5,767,787
110,123
(107,471)
4,730,651
102,071
(104,880)
4,794,429
132,770
(131,706)
Total derivatives
organised marketsC
Repos
109,695
902
(1,129)
154,904
-
-
154,812
-
-
149,006
2,352
(2,466)
165,082
2,322
(2,363)
122,035
2,374
(2,435)
Securities lending
43,675
12,425
(22,272)
54,923
15,469
(16,580)
33,547
9,449
(4,124)
Total counterparty risk
6,070,163
125,802
(133,338)
5,105,560
119,862
(123,823)
5,104,823
144,593
(138,265)
A. Figures under internal risk management criteria.
B. Credit derivatives acquired including hedging of loans.
C. 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.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
The Group’s derivatives transactions focus on terms of less than
fve years, repos and securities loans maturing in less than one
year, as the following chart shows:
Counterparty risk: Distribution of nominal by maturityA
EUR millio. Dec. 2018 data
Credit derivativesB
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
Interest rate derivatives
Commodity derivatives
Total OTC derivatives
Total derivatives organised marketsC
Repos
Securities lending
Total counterparty risk
Up to 1 year
Up to 5 years
Up to 10 years
More than
10 years
35%
46%
88%
54%
31%
100%
34%
53%
92%
99%
36%
61%
46%
11%
28%
42%
0%
40%
43%
8%
1%
39%
3%
8%
1%
13%
19%
0%
18%
4%
0%
0%
17%
1%
0%
0%
5%
9%
0%
8%
0%
0%
0%
8%
Total
22,464
63,042
9,927
781,641
5,000,407
2
5,767,787
109,695
149,006
43,675
6,070,163
A. Figures under internal risk management criteria.
B. Credit derivatives acquired including hedging of loans.
C. 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 customer perspective, counterparty credit risk exposure
is concentrated in those clients with high credit quality (90.2%
counterparty risk with a rating equal or higher than A), and mainly
with fnancial institutions (25%) and clearing houses (69%).
Distribution of counterparty risk by
customer rating (in nominal terms)A
Dec. 2018 data
Rating
AAA
AA
A
BBB
BB
B
Other
%
0.80%
11.15%
78.20%
7.78%
2.03%
0.03%
0.01%
A. Ratings based on internally defned equivalences between internal
ratings and credit agency ratings.
Counterparty risk by customer segment
Dec. 2018 data
3% 2% 1%
25%
69%
Clearing houses
Financial Institutions
Corporates/Project Finance
Commercial banking/Individuals
Sovereign/supranational
Transactions with clearing houses and fnancial institutions are
carried out under netting and collateral agreements, and constant
eforts are made to ensure that all other transactions are covered
under this type of agreement. Generally, the collateral agreements
that the Group signs are bilateral with few exceptions, mainly
with multilateral institutions and securitisation funds, in which the
agreements are unilateral in favour of the customer.
Collateral is used for of reducing counterparty risk. These are
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 derivatives with
cross-risk between them. The transactions subject to the collateral
agreement are regularly valued (normally daily) applying the
parameters defned 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.
368
2018 Annual Report
The collateral received by the Group under the diferent types of
collateral agreements (CSA, OSLA, ISMA, GMRA, etc.) amounted
to EUR 14,927 million (of which EUR 11,588 million related to
collateral received by derivatives), mostly cash (78.7%), 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
Dec. 2018 data
2% 4%
3%
17%
74%
Spain
UK
Mexico
Brazil
Other
As a consequence of the risk associated with the credit exposure
that is taken on with each counterparty, the Group includes a
valuation adjustment for over the counter (OTC) derivatives due
to the risk associated with credit exposure assumed with each
counterparty, i.e. a Credit Valuation Adjustment (CVA), 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).
As of December 2018, there were CVAs of EUR 350.8 million (+8.8%
compared to December 2017) and DVAs of EUR 261.4 million (+19%
compared with 2017).
The defnition and methodology for calculating the CVA and
DVA are set out in ‘Credit Valuation Adjustment (CVA) and Debt
Valuation Adjustment (DVA)’ in this chapter.
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 transactions with OTC derivatives, repos and
securities lending, whether settled through clearing houses
or traded bilaterally. In recent years, there has been a gradual
standardisation of OTC transactions in order to conduct clearing
and settlement of all new trading transactions through clearing
houses, as required by the recent regulation and to foster internal
use of electronic execution systems.
Furthermore, the Group actively manages transactions not settled
through clearing houses and seeks to optimise their volume, given
the spread and capital requirements under new regulations.
With regards to organised markets, regulatory credit exposure has
been calculated for such transactions since 2014 and the entry into
force of the new CRD IV (Capital Requirements Directive) and CRR,
transposing the Basel III principles for calculating capital, even
though counterparty risk management does not consider credit
risk on such transactions.
The following tables show the weighting of trades settled
through clearing houses as a portion of total counterparty risk at
December 2018:
Distribution of counterparty risk by settlement channel and product typeA
Nominal in EUR million
Credit derivatives
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
Interest rate derivatives
Commodity derivatives
Repos
Securities lending
General total
CCPB
Organised marketsC
%
Nominal
Bilateral
Nominal
18,233
30,813
%
81.2%
48.9%
9,927
100.0%
744,713
974,732
-
95.3%
19.5%
-
Nominal
4,231
139
-
32,742
3,952,257
-
18.8%
0.2%
-
4.2%
79.0%
-
107,514
72.2%
41,492
27.8%
43,675
100.0%
-
-
1,929,607
4,030,861
109,695
%
-
-
-
32,090
50.9%
-
-
4,186
73,418
2
-
-
100.0%
-
-
Total
22,464
63,042
9,927
781,641
2
149,006
43,675
6,070,163
1.5%
5,000,406
A. Figures under internal risk management criteria.
B. Central counterparties (CCP).
C. 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.
369
Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Distribution of risk settled by CCP and
organised markets, by productA
Nominal in EUR million
The board, via the risk appetite framework, determines the
maximum levels of concentration, as detailed in Risk appetite and
structure of limits in section 1.3 ‘Management processes and tools’.
Credit derivatives
Equity derivatives
2018
4,231
2017
2,524
2016
3,916
32,229
26,088
36,568
Fixed income derivatives
-
-
Exchange rate derivatives
36,928
1,592
349
1,419
Interest rate derivatives
4,025,674
2,950,796
2,732,103
Commodity derivatives
2
124
47
Repos
Securities lending
General total
41,492
64,086
29,763
-
-
4
4,140,556 3,045,210 2,804,170
A. Figures under internal risk management criteria.
Of-balance sheet credit risk
The of-balance sheet risk corresponding to funding and guarantee
commitments with wholesale customers was EUR 96,007 million,
with the following distribution by products:
Of balance sheet exposure
EUR million. Dec. 2018 data
Product
FundingA
Technical
guarantees
Financial and
commercial
guarantees
Trade fnanceB
Maturity
< 1
year
1-3
years
3-5
years
>5
years
Total
12,639
20,849
28,715
4,222
66,425
7,680
2,384
1,742
4,838
16,644
6,084
3,033
1,606
1,178
11,901
861
139
31
6
1,037
General total
27,264 26,405 32,094
10,244
96,007
A. Mainly including committed bilateral and syndicated credit lines.
B. Including primarily stand-by letters of credit.
Credit derivatives activity
The Group uses credit derivatives to cover loans, our customer’s
business in fnancial markets and within its trading activities. The
volume of this activity is small compared to the total assets of the
Group and, moreover, is subject to a solid environment of internal
controls and operational risk minimisation.
Concentration risk
Concentration risk control is a vital part of management. The
Group continuously monitors the degree of concentration of its
credit risk portfolios using various criteria: geographical areas and
countries, economic sectors and groups of customers.
In line with these maximum levels and limits, the executive
risk committee establishes the risk policies and reviews the
appropriate exposure levels for the adequate management of the
degree of concentration in Santander’s credit risk portfolios.
As indicated in the key metrics section of this chapter, in
geographical terms, credit risk with customers is diversifed in the
main markets where the Group operates (United Kingdom 27%,
Spain 25%, United States 10%, Brazil 9%, etc.).
In terms of diversifcation by sector, approximately 56% 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 signifcant concentrations in
specifc sectors. The following chart shows the distribution at the
end of the year:
Diversifcation by economic sectorA
Agriculture, livestock,
forestry and fshing 2%
Extractive industries 2%
Manufacturing
industry 14%
Electricity, gas and
water production and
distribution 5%
Construction 9%
Trade and repairs 17%
Transport and
storage 5%
Hotels and
restaurants 3%
Information and
communications 3%
Financial and insurance
activities 8%
Real estate
activities 10%
Professional, scientifc
and technical
activities 4%
Administrative
activities 3%
Public administration 7%
Other social
services 3%
Other services 5%
A. Excluding individuals and reverse repos.
The Group is subject to the regulation on large risks contained in
the CRR, 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 exposures exceeding 25%
of its eligible capital with a single customer or group of linked
customers, after taking into account the credit risk reduction efect
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 4.47% of the outstanding credit
risk with customers (lending to customers plus of-balance sheet
risks) as of December 2018.
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2018 Annual Report
According to the management Group criteria, local sovereign
exposure in currencies other than the ofcial currency of the
country of issuance is not very signifcant (EUR 8,901 million,
3.5% of total sovereign risk), and exposure to non-local sovereign
issuers involving cross-border8 risk is even less signifcant (EUR
3,906 million, 1.5% of total sovereign risk).
Sovereign exposure in Latin America is mostly in local currency,
and is recognised in the local accounts and concentrated in short-
term maturities with lower interest rate risk and higher liquidity.
In general, over the past few years, total exposure to sovereign
risk has remained at adequate levels to support the regulatory and
strategic reasons driving 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 levels9:
AAA
AA
A
BBB
Lower than BBB
2018
11%
20%
31%
13%
25%
2017
13%
19%
29%
14%
25%
2016
16%
17%
29%
8%
30%
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.
Country risk
Country risk is a component of credit risk in all cross-border credit
transactions arising from circumstances other than the usual
business risks. The main elements involved are sovereign risk,
transfer risk and other risks that afect international fnancial
activity (wars, natural disasters, balance of payments crises, etc.).
The Group takes into account these three elements of country risk
in the calculation of provisions, through its loss forecasting models
and considering the additional risk arising from cross-border
transactions.
As of 31 December 2018, the provisionable exposure due to country
risk was EUR 285 million (EUR 184 million in 2017). At year-end
2018, total provisions stood at EUR 25 million, compared to EUR 37
million at the end of the previous period.
The variation of the exposure is mainly due to new investments for
institutional support, having calibrated the coverages under the
new national and international regulation.
The principles of country risk management continued to follow
criteria of maximum prudence; country risk is assumed very
selectively in transactions that are clearly proftable for the Group,
and which enhance the global relationship with our customers.
Sovereign risk including vis-à-vis the
rest of public administrations
As a general criteria in the Group, sovereign risk is that contracted
in transactions with a central bank (including the regulatory cash
reserve requirement), issuer risk with the Treasury (public debt
portfolio) and that arise from transactions 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.
These criteria, historically used by the Group, difer in some
respects from that applied by the European Banking Authority
(EBA) for its regular stress exercises. The main diferences 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, the EBA
does include public administrations in general (including regional
and local bodies), not only the central state sector.
8. Countries that are not considered as “low risk” by Bank of Spain.
9. Internal ratings are applied.
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Credit RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
During 2018 a new regulatory report was implemented, Sovereign
COREP, for which its perimeter is based on the regulatory
classifcation of counterparties. Exposure at year-end 2018 is
shown in the table below (EUR million):
2018
Portfolio
Financial assets held for
trading and Financial
assets designated as FV
with changes in results
Financial assets
at fair value
through other
comprehensive
income
Financial
assets at
amortised cost
Non-trading fnancial assets
mandatorily at fair value
through proft or loss
Total net direct
exposure
1,143
(43)
(204)
-
-
503
1,013
2,015
-
426
1,839
3,320
160
103
-
27,078
4,794
-
-
-
953
1,190
9,203
84
6,138
20,540
4,279
1,596
340
5,688
21,419
4,002
465
-
-
1,322
8,666
11
245
2,113
3,782
2,816
20
450
534
-
-
-
-
-
-
-
-
-
5
893
-
-
-
-
49,640
8,753
261
-
-
2,778
10,869
11,229
329
8,682
27,054
10,415
1,776
893
6,222
10,275
81,883
45,845
898
138,901
Spain
Portugal
Italy
Greece
Ireland
Rest Eurozone
UK
Poland
Rest of Europe
US
Brazil
Mexico
Chile
Rest of America
Rest of the world
Total
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2018 Annual Report
4. Trading market risk,
structural and liquidity risk
4.1 Introduction
The perimeter of activities subject to market risk involves
transactions 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 afected by market shifts.
This risk arises from changes in risk factors - interest rates,
infation rates, exchange rates, stock prices, credit spreads,
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 afect the value of a fnancial instrument, a
portfolio or the Group as a whole. It afects loans, deposits, debt
securities, most assets and liabilities in the trading books and
derivatives, among others.
• 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 afects 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 fxed income securities or in credit derivatives
to movements in credit spread curves or in recovery rates
associated with issuers and specifc types of debt. The spread is
the diference between fnancial instruments listed with a margin
over other benchmark instruments, mainly the interest rate risk
of Government bonds and interbank interest rates.
• Commodities price risk is the risk derived from the efect of
potential changes in commodities prices. The Group’s exposure
to this risk is not signifcant and is concentrated in derivative
transactions on commodities with customers.
• Infation rate risk is the possibility that changes in infation
• Volatility risk is the risk or sensitivity of the value of a portfolio
rates could adversely afect the value of a fnancial instrument, a
portfolio or the Group as a whole. It afects instruments such as
loans, debt securities and derivatives, where the return is linked
to infation 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 exposures afected by this risk are
the Group’s investments in subsidiaries in non-euro currencies, as
well as any foreign currency transactions.
to changes in the volatility of risk factors: interest rates, exchange
rates, shares, credit spreads and commodities. This risk is
incurred by all fnancial instruments where volatility is a variable
in the valuation model. The most signifcant case is the fnancial
options portfolio.
All these market risks can be partly or fully mitigated by using
options, futures, forwards and swaps.
373
Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
In addition, other types of market risk require more complex
hedging. For example:
4.2 Trading market risk management
• Correlation risk. Sensitivity of the portfolio to changes in the
relationship between risk factors (correlation), either of the same
type (for example, two exchange rates) or diferent types (for
example, an interest rate and the price of a commodity).
• Market liquidity risk. Risk when a Group entity or the Group as a
whole cannot reverse or close a position in time without having
an impact on the market price or the cost of the transaction.
Market liquidity risk can be caused by a reduction in the number
of market makers or institutional investors, the execution of a
large volume of transactions, or market instability. It increases as
a result of the concentration of certain products and currencies.
• Prepayment or cancellation risk. When the contractual
relationship in certain transactions explicitly or implicitly allows
the possibility of early cancellation without negotiation before
maturity, there is a risk that the cash fows may have to be
reinvested at a potentially lower interest rate. This mainly afects
mortgage loans and mortgage securities.
System for controlling limits
Setting trading market risk limits is a dynamic process, determined
by the Group’s predefned risk appetite levels (as described in
Risk appetite and structure of limits in section 1.3 ‘Management
processes and tools’). This process is part of an annual limits
plan defned by the Group’s senior management, involving every
Group’s entity.
The market risk limits are established based on diferent metrics
and are intended to cover all activities subject to market risk from
many perspectives, applying a conservative approach. The main
ones are:
• Value at Risk (VaR) and Stressed VaR limits.
• Limits of equivalent and/or nominal positions.
• Interest rate sensitivity limits.
• Vega limits.
• Underwriting risk. This occurs as a result of an entity’s
• Delivery risk limits for short positions in securities (fxed income
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 the above market risks, balance sheet liquidity risk
must also be considered. Unlike market liquidity risk, balance
sheet liquidity risk is defned 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 infows and outfows.
On the other hand, pension and actuarial risks also depend on
shifts in market factors, which are described in more detail, in this
chapter.
The Group has projects under way for compliance with obligations
related to the Basel Committee’s Fundamental Review of
the Trading Book, and for compliance with EBA guidelines on
balance sheet interest rate risk. The objective of these projects
is to have the best tools for control and management of market
risks available to both managers and control units, all within a
governance framework that is appropriate for the models used
and the reporting of risk metrics. These projects allow meeting the
requirements related to regulatory demands in these risk factors.
and securities).
• Limits to constrain the volume of efective losses, and protect
results generated during the period:
• Loss trigger.
• Stop loss.
• Credit limits:
• Total exposure limit.
• Jump to default by issuer limit.
• Others.
• Limits for origination transactions.
These general limits are complemented by other sub-limits to
establish a sufciently granular limits framework for the efective
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 and trading desks, so
as to identify any incidents that might need immediate correction,
and thus comply with the Volcker Rule.
Three categories of limits are established based on the scope of
approval and control: global approval and control limits, global
approval limits with local control, and local approval and local
control limits. The limits are requested by the business executive
374
2018 Annual Report
of each country/entity, considering the particular nature of the
business in order to achieve the established budget targets,
seeking consistency between the limits and the risk/return ratio.
The limits are approved by the corresponding risk bodies.
Business units must comply with the approved limits at all
times. In the event of a limit being exceeded, the local business
executives have to explain, in writing and on the same 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 defned limits or setting out the strategy that justifes
an increase in the limits.
If the business unit fails to respond to the breach within three days,
the global business executives will be asked to set out the actions
to be taken in order to make the adjustment to the existing limits.
If this situation lasts for ten days as of the frst excess, senior risk
management will be informed so that a decision can be taken: the
risk takers could be required to reduce the levels of risk assumed.
Methodologies
a) Value at Risk (VaR)
The standard methodology Santander applies to trading activities
is Value at Risk (VaR), which measures the maximum expected
loss with a certain confdence level and time frame. The standard
for historic simulation is a confdence level of 99% and a time
frame of one day. Statistical adjustments are applied enabling the
most recent developments afecting the levels of risk assumed
to be incorporated efciently 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 fgures are calculated every
day: one applying an exponential decay factor that allocates 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.
Simultaneously the Value at Earnings (VaE) is calculated, which
measures the maximum potential gain with a certain level of
confdence and time frame, applying the same methodology as
for VaR.
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 confdence,
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 specifed in the VaR model.
• VaR is a static analysis of the portfolio risk, and the situation
could change signifcantly 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 signifcant
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.
b) 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
signifcant positions in the books.
• Unlike VaR, stressed VaR is obtained using the percentile with
uniform weighting, not the higher of the percentiles with
exponential and uniform weightings.
Moreover, the expected shortfall is also calculated by 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 sub-additive metric10. The Basel Committee considers that
ES with a 97.5% confdence interval delivers a similar level of risk
to VaR at a 99% confdence interval. ES is calculated by applying
uniform weights to all observations.
10. According to the fnancial 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 benefts of diversifcation. Whilst VaR only
ofers this property for some distributions, ES always does so.
375
Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
c) Scenario analysis
The Group uses other metrics in addition to VaR, providing it
greater control over the risks it faces in the markets where it is
active. These measures include scenario analysis, which consists
in defning alternative behaviours for various fnancial 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.
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 fxed-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.
The potential impact on earnings of applying diferent stress
scenarios is regularly calculated and analysed, particularly for
trading portfolios, considering the same risk factor assumptions.
Three scenarios are defned, as a minimum: plausible, severe and
extreme. Taken together with VaR, these reveal a much more
complete spectrum of the risk profle.
f) Credit Valuation Adjustment (CVA) and
Debt Valuation Adjustment (DVA)
The Group incorporates CVA and DVA when calculating the results
of trading portfolios. The CVA is a valuation adjustment of over
the-counter (OTC) derivatives, as a result of the risk associated
with the credit exposure assumed by each counterparty.
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 notifed so they can take
appropriate action. The results of the global stress exercises, and
any breaches of the trigger thresholds, are reviewed regularly,
and reported to senior management, when this is considered
appropriate.
d) 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 local unit
and the currency used for standardising information. Changes in
positions are monitored on a daily basis to detect any incidents, so
they can be corrected immediately.
Measurements of market risk sensitivity estimate the variation
(sensitivity) of the market value of an instrument or portfolio
to any change in a risk factor. The sensitivity of the value of an
instrument to changes in market factors can be obtained using
analytical approximations through partial derivatives or through a
complete revaluation of the portfolio.
Furthermore, the daily formulation of the income statement by the
Risk area is an excellent indicator of existing risks, as it allows to
identify the impact of changes in fnancial variables on portfolios.
e) 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 specifc 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 and
prevailing regulations, a further metric is also calculated: the
incremental risk charge (IRC). This seeks to cover the risks of
It is calculated by taking into account the potential exposures with
each counterparty in each future maturity. The CVA for a particular
counterparty is the sum of the CVA for all maturities. For its
calculation, the following inputs are considered:
• Expected exposure: including, for each operation the current
market value (MTM) as well as the potential future risk (add-on)
to each maturity. Mitigating factors such as collateral and netting
agreements are taken into account, as well as a time decay factor
for derivatives with partial interim payments.
• Loss given default: the percentage of fnal loss assumed in case
of default/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 same sector companies with
listed CDSs for the same sector and the counterparty’s external
rating.
• Discount factor curve.
The Debt Valuation Adjustment (DVA) is a valuation adjustment
similar to the CVA, but in this case as a result of the Group’s risk
that counterparties assume in OTC derivatives.
4.3 Key metrics (trading market risk)
Risk levels in trading activity have stayed at historically low levels
in 2018, in a complex environment marked by uncertainty arising
from low interest rates and Brexit in Europe, and geopolitical risks
in Latin America units (elections in the main geographies during
the year). The exposure levels in trading portfolios are lower
compared to previous years in all risk factors.
Risks of trading activities arise mainly from activities with
customers in non-complex instruments, concentrated in hedging
of interest rate and exchange rate risks. Contribution to overall risk
of proprietary positions in trading portfolios is substantially lower
than in previous years.
376
2018 Annual Report
In 2018, a low level of consumption has been seen of limits
established for trading activities, which are set in a manner that is
consistent with the risk appetite defned in the Group for this type
of activity. Lower risk levels are also evident even under stressed
scenarios, as seen in the loss results in the stress tests regularly
carried out to assess any risks not refected in the usual metrics to
control and monitor trading risks.
VaR during 2018 fuctuated between EUR 16.6 million and EUR 6.4
million. The most signifcant changes were related to variations in
exchange and interest rate exposures and also market volatility.
The average VaR in 2018 was EUR 9.7 million, slightly lower than
in the two previous years (EUR 21.5 million in 2017 and EUR 18.3
million in 2016).
VaR analysis
During the year, the Group maintained its strategy of concentrating
its trading activity on customer business, minimising, where
possible, the exposure to directional risk in net terms and
maintaining geographic and risk factor diversifcation. This is
refected in the Value at Risk (VaR) of the SCIB trading book, which,
despite the volatility in the markets, particularly in interest rates
and exchange rates, decreased slightly from its average path over
the last three years, ending December at EUR 11.3 million11.
The following histogram shows the distribution of risk in VaR
terms from 2016 to 2018. The accumulation of days with levels of
between EUR 12 million and EUR 32 million (95%) is shown. Values
higher than EUR 32 million (3%) largely occur in periods afected by
temporary spikes in volatility, mainly in the Brazilian real against
the US dollar and also in Brazilian interest rates.
VaR histogram
VaR at 99% over a one day horizon. Number of days (%) in each range
from 2016 to 2018
VaR 2016-2018
EUR million. VaR at 99% over a one day horizon.
MAX (63.2)
— VaR
— 15 day moving average
— VaR, 3 year average
30.5%
26.1%
21.5%
11%
6.3%
2.6%
1.9%
7
<
2
1
7
1
2
2
7
2
2
3
7
3
2
4
7
4
7
4
>
0.0% 0.0% 0.1%
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
MIN (6.3)
VaR in EUR million.
6
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S
8
1
0
2
v
o
N
11. Value at Risk. The defnition and calculation methodology for VaR is set out in section 4.2 ‘Trading market risk management’. In addition to the trading activity of SCIB,
there are other positions catalogued for accounting purposes. The total VaR of trading of this accounting perimeter was EUR 11.1 million.
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Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
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 2018 and the expected shortfall at 97.5% at the close of
December 2018:
VaR statistics and Expected Shortfall by risk factor 12,13
EUR million, VaR at 99% and ES at 97.5% with one day time horizon
2018
VaR (99%)
ES (97.5%)
2017
VaR
2016
VaR
Min
Average
6.4
(3.3)
5.9
0.8
1.6
1.0
0.0
3.3
(3.2)
3.2
0.4
0.4
2.2
0.0
5.0
(0.7)
4.9
0.5
1.3
0.5
0.1
0.6
0.0
0.1
0.2
(0.0)
0.0
0.2
0.0
9.7
(9.3)
9.4
2.4
3.9
3.4
0.0
5.7
(6.3)
4.9
1.1
1.7
4.3
0.0
8.7
(5.0)
7.7
2.3
3.4
1.6
(0.5)
1.5
0.1
0.5
1.0
(0.3)
0.3
0.9
0.0
Max
16.6
(18.7)
15.5
6.3
11.4
13.0
0.4
11.5
(11.0)
8.7
2.1
6.5
12.6
0.0
20.9
(12.2)
12.8
5.6
12.1
3.2
(1.6)
3.1
0.8
1.7
1.8
(0.5)
0.6
1.8
0.1
Latest
Latest
Average
Latest
Average
Latest
11.3
(11.5)
9.7
2.8
6.2
4.1
0.0
6.3
(7.8)
5.7
1.2
2.1
5.1
0.0
12.0
(4.7)
8.0
2.7
5.3
1.8
(0.3)
1.8
0.0
0.3
0.5
(0.1)
0.1
0.5
0.1
12.4
(10.0)
9.5
3.0
5.7
4.2
0.0
6.4
(7.3)
5.5
1.0
2.1
5.0
0.0
11.1
(5.5)
7.9
3.0
5.0
1.8
(0.2)
1.7
0.0
0.3
0.5
(0.2)
0.1
0.5
0.1
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
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
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
Total
Diversifcation efect
g
n
i Interest rate
d
a
r
t
l Equities
a
t
o
T Exchange rate
Credit spread
Commodities
Total
Diversifcation efect
e Interest rate
p
o
r
u
E
Equities
Exchange rate
Credit spread
Commodities
Total
a
c Diversifcation efect
i
r
e
m Interest rate
A
i Equities
n
t
a
L Exchange rate
Total
i
a
s Diversifcation efect
A
d
n Interest rate
a
S
U Equities
Exchange rate
Total
s
e
i
t
v Diversifcation efect
i
i
t
c
a
l
a
b
o
l
G
Interest rate
Equities
Exchange rate
12.The VaR of global activities includes transactions that are not assigned to any particular country.
13. In Latin America, the United States and Asia, VaR levels are not shown separately for credit spreads and commodities, because
of their limited or zero materiality.
378
2018 Annual Report
At the end of December, VaR increased slightly by EUR 1.1 million
compared to year-end 2017, decreasing average VaR by EUR
11.8 million. By risk factor, average VaR decreased in all factors,
although the reduction of the credit spread was smaller. By
geographical area, it declined in all areas except in that of Global
Activities, where it slightly increased, although it remained at a
low level.
The Group calculates and evaluates three types of backtesting:
• ‘Clean’ backtesting: the daily VaR is compared with the results
obtained without taking into account the intraday results or
changes in the portfolio’s positions. This method compares
the efectiveness of the individual models used to assess and
measure the risks of positions.
• Backtesting on complete results: daily VaR is compared with the
day’s net results, including the results of intraday transactions
and those generated by fees and commissions.
• Backtesting on complete results without mark-ups or fees: the
daily VaR is compared to the day’s net results from intraday
transactions but excluding those generated by mark-ups and
fees. This method aims to give an idea of the intraday risk
assumed by Group treasuries.
For the frst case and for the total portfolio, there were three
exceptions of Value at Earnings (VaE) at 99% in 2018 (day on
which daily proft was higher than VaE) on 21 and 30 August and 8
October, caused by strong shifts in the exchange rates of emerging
economies. The defnition and calculation methodology for VaE
is set out in section 4.2 ‘Trading market risk management’ in this
chapter.
There were also three exceptions to VaR at 99% (day on which the
daily loss was higher than the VaR) on the 29 May, due to the rise in
market volatility caused by political instability in Europe, and on 15
and 29 October due to the strong variations in the exchange rates
and interest rates in Brazil and Mexico motivated by the general
elections volatility.
The number of exceptions which occurred is consistent with the
assumptions specifed in the VaR calculation model.
The evolution of VaR by risk factor has, in general, been stable over
the last few years, decreasing somewhat in 2018, in line with the
above fgures. The temporary rises in VaR for various factors are
due more too temporary increases in the volatility of market prices
than to signifcant changes in positions.
Historical VaR by risk factor
EUR million. VaR at 99% with one day time horizon (15-day moving average)
— VaR interest rate
30 — VaR credit spread
— VaR equity
— VaR commodities
— VaR exchange rate
25
20
15
10
5
0
6
1
0
2
n
a
J
6
1
0
2
r
p
A
6
1
0
2
l
u
J
6
1
0
2
t
c
O
7
1
0
2
n
a
J
7
1
0
2
r
p
A
7
1
0
2
l
u
J
7
1
0
2
t
c
O
8
1
0
2
n
a
J
8
1
0
2
r
p
A
8
1
0
2
l
u
J
8
1
0
2
t
c
O
Gauging and backtesting measures
Actual losses can difer from those forecast by VaR for various
reasons related to the limitations of this metric. This is set out
in detail in Methodologies in section 4.2 ‘Trading market risk
management’. The Group regularly analyses and contrasts the
accuracy of the VaR calculation model in order to confrm its
reliability.
The most important test consists of backtesting exercises,
analysed at the local and global levels and in all cases with the
same methodology. Backtesting consists of comparing forecast
VaR measurements, with a certain level of confdence and time
frame, with actual losses obtained in the 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.).
379
Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Backtesting of trading portfolios: daily results vs. VaR for previous day
EUR million
60
28
-5
-38
-70
— Clean P&L
— VaE 99%
— VaE 95%
— VaR 99%
— VaR 95%
6
1
0
2
n
a
J
6
1
0
2
b
e
F
6
1
0
2
r
a
M
6
1
0
2
r
p
A
6
1
0
2
y
a
M
6
1
0
2
n
u
J
6
1
0
2
l
u
J
6
1
0
2
g
u
A
6
1
0
2
p
e
S
6
1
0
2
t
c
O
6
1
0
2
v
o
N
6
1
0
2
c
e
D
7
1
0
2
n
a
J
7
1
0
2
b
e
F
7
1
0
2
r
a
M
7
1
0
2
r
p
A
7
1
0
2
y
a
M
7
1
0
2
n
u
J
7
1
0
2
l
u
J
7
1
0
2
g
u
A
7
1
0
2
p
e
S
7
1
0
2
t
c
O
7
1
0
2
v
o
N
7
1
0
2
c
e
D
8
1
0
2
n
a
J
8
1
0
2
b
e
F
8
1
0
2
r
a
M
8
1
0
2
r
p
A
8
1
0
2
y
a
M
8
1
0
2
n
u
J
8
1
0
2
l
u
J
8
1
0
2
g
u
A
8
1
0
2
p
e
S
8
1
0
2
t
c
O
8
1
0
2
v
o
N
8
1
0
2
c
e
D
Derivatives risk management
Derivatives activity is mainly focused on commercialisation of
investment products and on hedging risks for our customers.
Management is focused on ensuring that the net risk opened is the
lowest possible.
These transactions include options on equities, fxed income and
exchange rates. The units where this activity mainly takes place
are: Spain, Brazil, the UK and Mexico.
The following chart shows the VaR Vega14 performance of
structured derivatives business over the last three years. It
fuctuated at around an average of EUR 3 million. In general, the
periods with higher VaR levels are related to episodes of signifcant
rises in volatility in the markets.
During 2016, a number of diferent events pushed up market
volatility (Brexit, general elections in Spain and the United States,
political-economic situation in Brazil, constitutional referendum in
Italy). In 2017 and 2018 these events have been less volatile, other
than in a few isolated instances, which has meant lowered risk and
lower VaR Vega.
Change in risk over time (VaR) of structured derivatives
EUR million. 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
6
1
0
2
n
a
J
6
1
0
2
r
p
A
6
1
0
2
l
u
J
6
1
0
2
t
c
O
7
1
0
2
n
a
J
7
1
0
2
r
p
A
7
1
0
2
l
u
J
7
1
0
2
t
c
O
8
1
0
2
n
a
J
8
1
0
2
r
p
A
8
1
0
2
l
u
J
8
1
0
2
t
c
O
14. Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.
380
2018 Annual Report
Regarding the VaR by risk factor, on average, the exposure was
concentrated, in this order: equities, exchange rates and interest
rates. This is shown in the table below:
Financial derivatives. Risk (VaR) by risk factor
EUR million. VaR at a 99% over a one day horizon
Total VaR Vega
Diversifcation efect
VaR interest rate
VaR equities
VaR exchange rate
VaR commodities
2018
2017
2016
Minimum
Average Maximum
Latest
Average
Latest
Average
Latest
1.0
(0.7)
0.6
0.6
0.5
0.0
1.8
(1.4)
0.9
1.2
1.1
0.0
4.7
(2.8)
4.9
2.7
2.3
0.0
1.1
(1.4)
0.9
1.0
0.6
0.0
2.3
(1.5)
1.3
1.5
0.9
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
The average risk in 2018 (EUR 1.8 million) is lower than in 2017 and
2016, for the reasons explained above.
• The availability in the market of observable data (inputs) needed
to apply this valuation model.
The Group continues to have a very limited exposure to
instruments or complex structured assets, a management culture
for which prudence in risk management is one of its hallmarks
in risk management. In both cases, the exposure has reduced
comparing with the previous year, for which the Group has:
• Hedge funds: the total exposure is not signifcant (EUR 28
million at close of December 2018) 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 as of
December 2018 was EUR 24 million, all of it indirect, by virtue of
the guarantee provided by this type of entity for various fnancing
or traditional securitisation transactions. The exposure in this
case is to double default, as the primary underlying assets are of
high credit quality.
The Group’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 verifes:
• The existence of an appropriate valuation model to monitor
the value of each exposure: mark-to-market, mark-to-model or
mark-to-liquidity.
And provided these two conditions are always met:
• The availability of adequate systems, duly adapted to calculate
and monitor every day the results, positions and risks of new
transactions.
• The degree of liquidity of the product or underlying asset,
in order to make possible their coverage when deemed
appropriate.
Scenario analysis
Various stress scenarios were calculated and analysed regularly
in 2018 (at least monthly) at the local and global levels for all the
trading portfolios and using the same risk factor assumptions.
Maximum volatility scenario (worst case)
This scenario is given particular attention as it combines historic
movements of risk factors with an ad-hoc analysis in order to reject
very unlikely combinations of variations (for example, sharp falls
in stock markets together with a decline in volatility). A historic
volatility equivalent to six standard deviations is applied. The
scenario is defned by taking for each risk factor the movement
which represents the largest potential loss in the portfolio,
rejecting the most unlikely combinations in economic-fnancial
terms.
At the end of December, 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 as of the end of December 2018 are
shown in the following table:
381
Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Stress scenario: maximum volatility (worst case)
EUR million. Dec. 2018 data
Total trading
Europe
Latin America
US
Global activities
Asia
Interest rate
Equities Exchange rate Credit spread Commodities
(18.9)
(7.9)
(2.1)
(8.5)
(0.2)
(0.2)
(13.1)
(3.8)
(9.3)
-
-
-
(29.4)
(9.2)
(15.8)
(3.8)
(0.2)
(0.4)
(12.9)
(11.1)
(0.1)
-
(1.7)
-
-
-
-
-
-
-
Total
(74.3)
(32.0)
(27.3)
(12.3)
(2.1)
(0.6)
The stress test shows that the economic loss sufered by the
Group in its trading portfolios, in terms of the mark-to-market
(MtM) result, would be EUR 74.3 million, if the stress movements
defned in the scenario materialised in the market. This loss would
be concentrated in Europe (in the following order: credit spread,
exchange rate, interest rate and equities) and in Latin America
(in the following order: exchange rate, equities, interest rate and
credit spread).
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 appreciation of the US dollar against other currencies.
‘Plausible Forward Looking Scenario’: a hypothetical plausible
scenario defned 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 subsequently updated to the 2016-2018 time horizon.
It refects the systemic threats which are considered to be the
most serious threats to the stability of the banking sector in the
European Union.
Analysis of reverse stress tests, which are based on establishing
a predefned result (unfeasibility of a business model or possible
insolvency) and subsequently the risk factor scenarios and
movements which could cause that situation are identifed.
On a monthly basis, a stress test assessment report is performed
containing explanations of the main results variations for the
diferent 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 monthly global scenarios for the last three
years are shown in the following table:
Stress test results. Comparison of 2016-2018 scenarios (annual averages)
EUR million
2016
2017
2018
Worst case
Abrupt crisis
Plausible
Fwd Looking
Crisis
07-08 1d
Crisis
07-08 10d
EBA Adverse
100
50
0
-50
-100
-150
-200
-250
382
2018 Annual Report
Also, other stress scenarios are carried out on a quarterly basis,
such as the reverse stress test, scenarios of illiquidity and
concentration with regard to Additional valuation adjustments
(AVAs), and IRC.
Linkage with balance sheet items
Below are the balance sheet items in the Group’s consolidated
position that are subject to market risk, distinguishing the positions
whose main risk metric is the VaR from those where monitoring is
carried out with other metrics.
Relation of risk metrics with balances in Group’s consolidated position
EUR million. Dec. 2018 data
Assets subject to market risk
Cash, cash balances at central banks
and other deposits on demand
Financial assets held for trading
Non-trading financial assets mandatorily
at fair value through profit or loss
Financial assets designated at fair value through profit or loss
Financial assets at fair value through
other comprehensive income
Financial assets measured at amortised cost
Hedging derivatives
Changes in the fair value of hedged items
in portfolio hedges of interest risk
Other assets
Total assets
Liabilities subject to market risk
Financial liabilities held for trading
Financial liabilities designated at fair
value through profit or loss
Financial liabilities at amortised cost
Hedging derivatives
Changes in the fair value hedged items in
portfolio hedges of interest rate risk
Other liabilities
Total liabilities
Total equity
4.4 Structural balance sheet
risks management
System for controlling limits
As already stated for the market risk in trading, under the annual
limits plan framework, limits are set for balance sheet structural
risks, responding to the Group’s risk appetite level.
Main market
risk metrics
Balance sheet
amount
VaR
Other
Main risk factors
for 'Other' balance
113,663
92,879
10,730
57,460
121,091
946,099
92,140
9,327
56,584
113,663
739
1,403
876
121,091
946,099
Interest rate
Interest rate; credit spread
Interest rate; equities
Interest rate
Interest rate; credit spread
Interest rate
8,607
8,586
21
Interest rate; exchange rates
1,088
107,654
1,459,271
1,088
Interest rate
70,343
70,054
68,058
67,909
289
149
Interest rate; credit spread
Interest rate
1,171,630
1,171,630
Interest rate; credit spread
6
303
Interest rate; exchange rates
Interest rate
6,363
6,357
303
35,213
1,351,910
107,361
• Limit on the sensitivity of net interest income in 1 year.
• Limit on the sensitivity of equity value.
• Structural exchange rate risk:
• Net position in each currency (for results hedging positions).
The main limits are:
• Balance sheet structural interest rate risk:
In the event one of these limits or their sub limits is exceeded,
the risk management executives must explain the reasons and
facilitate the actions to correct it.
383
Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management Methodologies
a) 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 diferences in maturity dates and interest rate repricing gaps
in the various balance sheet items.
Taking into consideration the balance-sheet interest rate position
and the market situation and outlook, the necessary fnancial
actions are adopted to align this position with that desired by
the Group. These measures can range from opening positions
on markets to the defnition of the interest rate features of
commercialised products.
The metrics used by the Group to control interest rate risk in
these activities are the repricing gap, the sensitivity of net interest
margin and market value of equity to changes in interest rates,
the duration of capital and value at risk (VaR) for economic capital
calculation purposes.
b) Interest rate gap on assets and liabilities
This is the basic concept for identifying the Group’s interest rate
risk profle and it measures the diference between the volume
of sensitive assets and liabilities on and of 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.
f) Pre-payment treatment for certain assets
The pre-payment issue mainly afects fxed-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 modifcations, to assets without defned
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 diferential between fxed rates on the
mortgage and the market rate at which it could be refnanced, net
of cancellation and opening costs.
• Seasoning: refects the existing trend of lower prepayments at
the beginning of the transaction’s life-cycle, which then increase
and stabilises as time goes by.
• Seasonality: redemptions or early cancellations tend to take
place at specifc dates.
• Burnout: decreasing trend in the speed of pre-payment as the
instrument’s maturity approaches, which includes:
a) Age: defnes low rates of pre-payment.
c) Net interest income (NII) sensitivity
This is a key measure of the proftability of balance sheet
management. It is calculated as the diference 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.
b) Cash pooling: defnes 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 signifcantly lower pre-payment
probability.
d) 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 defned as the diference
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.
e) Treatment of liabilities without defned 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
relationship between balances and their own moving averages.
From this simplifed model, the monthly cash fows are obtained
and used to calculate NII and EVE sensitivities.
c) Other: geographic mobility, demographic, social and available
income factors, etc.
The series of econometric relationships 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.
g) Value at Risk (VaR)
For balance sheet activity and investment portfolios, this is defned
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 confdence 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.
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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The Group is working on implementing the guidelines published by
the EBA on management of interest rate risk in the banking book
(Irrbb), published in July 2018 and applicable in 2019.
Net interest income sensitivity
% of total
7%
h) Structural foreign exchange rate risk/hedging of results
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
29%
i) Structural equity risk
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
31%
Parent Bank
Poland
US
UK
Other
8%
4.5 Key metrics (structural
balance sheet risks)
The market risk profle inherent in the Group’s balance sheet, in
relation to its asset volumes and shareholders’ funds, as well as
the budgeted net interest income margin, remained moderate in
2018, in line with previous years.
The interest rate risk originated by commercial banking in each unit
is transferred to its management – through an internal risk transfer
system – to the local Financial division, which is responsible for the
subsidiary’s structural risk management generated by interest rate
fuctuations. The Group’s usual practice is to measure interest rate
risk by using statistical models, relying on mitigation strategies of
structural risk using interest rate instruments, such as fxed income
bond portfolios and derivative instruments to maintain the risk
profle at levels that are appropriate to the risk appetite approved
by senior management.
Structural interest rate risk
Europe and United States
The main balance sheets, the Parent, the UK and the US, 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 December 2018, risk on net interest income over one
year , measured as sensitivity to parallel changes in the worst case
scenario of ±100 basis points, was concentrated in the euro, at EUR
269 million, the pound sterling, at EUR 203 million, the US dollar,
with EUR 130 million, and the Polish zloty, at EUR 53 million.
25%
Other: Portugal and SCF.
At the same date, the most signifcant risk in economic value of
equity, measured as its sensitivity to parallel changes in the worst
case scenario of ±100 basis points, was concentrated in the euro
interest rate curve, at EUR 5,043 million, the pound sterling, with
EUR 605 million, the Polish zloty, at EUR 62 million and the US
dollar, at EUR 19 million.
Economic value of equity sensitivity
% of total
4%
4%
11%
Parent Bank
UK
US
Other
81%
Other: Poland, Portugal and SCF.
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 2018, exposure levels in all countries were moderate in relation
to the annual budget and capital levels.
At the end of December, risk on net interest income 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 45 million), Chile (EUR 35 million) and Mexico (EUR 12
million), as shown in the chart below:
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Trading market risk, structural and liquidity riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Net interest income sensitivity
% of total
12%
43%
Brazil
Chile
Mexico
Other
11%
34%
Other: Argentina, Peru and Uruguay.
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 419 million),
Chile (EUR 219 million) and Mexico (EUR 172 million).
Economic value of equity sensitivity
% of total
3%
21%
Brazil
Chile
Mexico
Other
50%
Balance sheet structural interest rate risk (VaR)A
EUR million. VaR at a 99% over a one day horizon
2018
Minimum
Average Maximum
Latest
Structural interest
rate VaRA
Diversifcation efect
Europe and US
Latin America
301.3
(49.5)
282.2
68.5
337.1
482.5
(113.2)
(182.5)
340.2
110.1
535.2
129.7
319.5
(71.5)
319.1
72.0
2017
Minimum
Average Maximum
Latest
Structural interest
rate VaRA
280.9
373.9
459.6
459.6
Diversifcation efect
(198.6)
(230.3)
(256.5)
(169.1)
Europe and US
Latin America
362.6
116.9
433.6
170.6
517.8
198.4
511.8
116.9
2016
Minimum
Average Maximum
Latest
Structural interest
rate VaRA
242.5
340.6
405.8
327.2
Diversifcation efect
(129.2)
(271.0)
(294.3)
(288.6)
Europe and US
Latin America
157.7
214.0
376.8
234.9
449.3
250.8
365.0
250.8
26%
A. Includes credit spread VaR on ALCO portfolios
Other: Argentina, Peru and Uruguay.
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),
the Group also uses other methods to monitor structural balance
sheet risk from interest rates movements: these include scenario
analysis and VaR calculations, applying a similar methodology to
that used for trading portfolios.
The table below shows the average, minimum, maximum and
year-end values of structural interest rate risk VaR over the last
three years:
Structural interest rate risk, measured in terms of VaR at one-day
and at 99%, averaged EUR 337.1 million in 2018. It is important to
note the high level of diversifcation between the balance sheets of
Europe and United States and those of Latin America.
Structural foreign exchange rate risk/hedging of results
Structural exchange rate risk arises from Group transactions
in foreign currencies, mainly related to permanent fnancial
investments, results and the hedging of both.
This management is dynamic and seeks to limit the impact on the
core capital ratio from foreign exchange rates movements. In 2018,
hedging levels of the core capital ratio for foreign exchange rate
risk were maintained near 100%.
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At the end of 2018, the largest exposures of permanent
investments (with their potential impact on equity) were, in the
following order, in Brazilian reais, US dollars, UK pounds sterling,
Chilean pesos, Mexican pesos and Polish zlotys. The Group hedges
some of these positions of a permanent nature with foreign
exchange-rate derivatives.
In addition, the fnancial area is responsible for managing foreign
exchange rate risk for the Group’s expected results and dividends
in units where the base currency is not the euro.
Structural equity risk
The Group maintains equity positions in its banking book in
addition to those of the trading portfolio. These positions are
maintained as equity instruments or as equity stakes, depending
on the percentage or control.
Among other sectors, to a lesser extent, are for example real
estate activities or public administrations.
Structural equity positions are exposed to market risk. VaR is
calculated for these positions using market price data series or
proxies. As of the end of December 2018, the VaR at 99% with a
one day time frame was EUR 180.1 million (EUR 261.6 and EUR 323
million at the end of 2017 and 2016, respectively).
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 SCIB (the VaR evolution for this activity is described in section
4.3 ‘Key metrics (trading market risk’), distinguishing between fxed
income (considering both interest rates and credit spreads on ALCO
portfolios), exchange rates and equities.
The equity portfolio available for the banking book at the end of
December 2018 was diversifed in securities in various countries,
mainly Spain, China, Morocco, Netherlands and Poland. Most of
the portfolio is invested in fnancial activities and insurance sectors.
In general, structural VaR is not high in terms of the Group’s
volume of assets or equity.
Structural VaR
EUR million. VaR at a 99% over a one day horizon
2018
2017
2016
Minimum
Average Maximum
568.5
799.4
Latest
556.8
Average
Latest
Average
Latest
878.0
815.7
869.3
922.1
Structural VaR
Diversifcation efect
VaR Interest RateA
VaR Exchange Rate
VaR Equities
485.0
(319.7)
301.3
323.3
180.1
A. Includes credit spread VaR on ALCO portfolios.
(325.0)
(355.4)
(267.7)
(337.3)
(376.8)
(323.4)
(316.6)
337.1
338.9
217.6
482.5
386.2
286.1
319.5
324.9
180.1
373.9
546.9
294.5
459.6
471.2
261.6
340.6
603.4
248.7
327.2
588.5
323.0
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4.6 Liquidity risk management
Methodologies
The Group measures liquidity risk using a range of tools and
metrics that account for the risk factors identifed within this risk.
Liquidity bufer
The bufer is a portion of the total liquidity available to an entity
to deal with potential withdrawals of funds (liquidity outfows)
that may arise as a result of periods of stress. Specifcally, a
bufer 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 bufer as a tool that forms part of the
calculation of most liquidity metrics and is also a metric in its own,
with specifed limits for each entity.
Liquidity coverage ratio (LCR)
LCR has a regulatory defnition. It is intended to reinforce the
short-term resistance of banks’ liquidity risk profle by ensuring
that they have available sufcient 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 fnancing outfows; it measures the number
of days the entity would survive using its liquid assets to cover that
loss of liquidity. The Group uses this fgure as an internal short-
term liquidity metric which also reduces the risk of dependence on
wholesale funding.
Net stable funding ratio (NSFR)
NSFR is one of the metrics used by the Group to measure
long-term liquidity risk. It is a regulatory metric defned as the
coefcient of the available amount of stable funding and the
required amount of stable funding. This metric requires banks to
maintain a stable funding profle in relation to the composition of
their assets and of-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
Group’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 obtaining 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 on the fve largest counterparties
from a liabilities point of view, or concentration of fnancing by
time to maturity.
Liquidity scenario analysis
The Group uses four standard scenarios as liquidity stress tests:
(i) an idiosyncratic scenario featuring events that adversely afect
the Group alone;
(ii) a local market scenario, which considers events having serious
adverse efects on the fnancial system or real economy of the
Group’s base country;
(iii) a global market scenario, which considers events having
serious adverse efects on the global fnancial system; and
(iv) a combined scenario, coupling idiosyncratic events with severe
(local and global) market events arising simultaneously and
interactively.
The Group 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 (EWIs)
The system of liquidity EWIs comprises quantitative and
qualitative indicators that enable us to foresee liquidity stress
situations and potential weaknesses in the Group entities’ funding
and liquidity structure. EWIs are both external (environmental),
relating to market fnancial variables, or internal, relating to the
Group’s own actions.
4.7 Key metrics (liquidity risk)
The Group has a strong liquidity and fnancing position based on a
decentralised liquidity model, where each of the Group’s units is
autonomous in managing its liquidity and maintains large bufers
of highly liquid assets.
As a rule, short-term liquidity metrics, LCR remains stable, with
regulatory ratios above the threshold (the minimum required in
2018 is 100%).
The Group has an efective management of its liquidity bufers
to face the challenge of maintaining a proper liquidity profle
(regulatory limits) while protecting the proftability of our balance
sheet. Furthermore, most of Santander’s units maintain sound
balance sheet structures, with a stable fnancing structure based
on a broad customer deposit base, which covers structural needs,
with low dependence on short-term funding and liquidity metrics
well above regulatory requirements, both locally and at Group
level, and within the limits defned on the risk appetite framework.
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A distinction is made between the following actuarial risks:
Risk of life liability: risk of loss in the value of life assurance
liabilities caused by fuctuations in risk factors that afect these
liabilities:
• Mortality/longevity risk: risk of loss due to changes in the
value of liabilities as a result of changes in the estimate of the
probability of death/survival of insureds.
• Morbidity risk: risk of loss due to changes in the value of
liabilities as a result of changes in the estimate of the probability
of disability/incapacity of insureds.
• Redemption/fall risk: risk of loss due to changes in the value of
liabilities as a result of the early termination of the contract or
changes in the policyholders’ exercise of rights with regard to
redemption, extraordinary contributions and/or paid up options.
• Expense risk: risk of loss due to changes in the value of liabilities
arising from adverse variances in expected expenses.
• Catastrophe risk: losses caused by the occurrence of catastrophic
events that increase the entity’s life liabilities.
Risk of non-life liability: risk of loss from the change in the value
of the non-life insurance liability caused by fuctuations in risk
factors that afect these liabilities:
• Premium risk: loss derived from the insufciency of premiums to
cover the disasters that might occur.
• Reserve risk: loss derived from the insufciency of reserves for
disasters, already incurred but not settled, including costs for
management of these disasters.
• Catastrophe risk: losses caused by catastrophic events that
increase the Group’s non-life liability.
Hence, for long-term liquidity, the regulatory metric NSFR remains
above 100% for the Group’s core units and for the consolidated
ratio.
As to structural assets encumbrance risk, i.e. the risk of facing an
excess of assets bearing charges or encumbrances in connection
with fnancing transactions and other market operations, the
Group-level risk is in line with our European peers, where the
main sources of encumbrance are collateralised debt issuances
(securitisations and covered bonds) and collateralised funding
facilities provided by central banks.
The soundness of Santander units’ balance sheets is also
demonstrated under 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 bufers alone.
For more detail regarding liquidity metrics, see
the Economic and fnancial review chapter, section
3.4 ‘Liquidity and funding management’.
4.8 Pension and actuarial risk management
Pension risk
In managing the risk associated with the defned beneft employee
pension funds, the Group assumes the fnancial, market, credit
and liquidity risks incurred in connection with the fund’s assets
and investments and the actuarial risks arising from the fund’s
liabilities, i.e. the pension obligations to its employees.
The aim pursued by the Group in pensions risk control and
management is primarily to identify, measure, follow up, control,
mitigate and report this risk. The Group’s priority is to therefore
identify and mitigate all clusters of pension’s risk.
This is why the methodology used by the Group estimates every
year the combined losses in assets and liabilities under a defned
stress scenario from changes in interest rates, infation, stocks
markets and real estate prices, as well as credit and operational
risk.
Actuarial risk
Actuarial risk arises due to biometric changes in the life expectancy
of those with life insurance, from the unexpected increase in the
compensation 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.
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5. Capital risk
Planning
3 year plan
Budget
Capital
adequacy
Implementation
and monitoring
Capital measurement
Reporting and disclosure
Supervision of capital planning and adequacy exercises
The review by the risk function of capital planning and adequacy
exercises ensure that capital is consistent with the established
risk appetite and risk profle. It has the following fundamental
objectives:
• Ensure that all relevant risks to which the Group is subject, in the
course of its activity, are monitored.
• Review the methodologies and assumptions used in these
planning processes are appropriate.
• Verify that results are reasonable and consistent with the
business strategy, the macroeconomic environment and the
variables of the system.
• Assess the consistency between diferent tests, especially those
which use base and stressed scenarios.
5.1 Introduction
The Group defnes capital risk as the risk of lacking sufcient
capital, in quantitative or qualitative terms, to fulfl its business
objectives, regulatory requirements, or market expectations.
5.2 Capital risk management
The capital risk function, as second line of defence carries out
the control and supervision of the capital activities developed by
the frst line of defence, which independently challenges mainly
through the following processes:
• Supervision of capital planning and adequacy exercises through
a review of all their components (balance sheet, proft and loss
account, risk-weighted assets and available capital).
• Ongoing supervision of measurement of the Group’s regulatory
capital by identifying the key metrics for the calculation, setting
tolerance levels for identifed metrics and reviewing their
consumption and the consistency of the calculations, including
single transactions with a capital impact.
The function is designed to carry out full and regular monitoring
of capital risk by verifying that capital is sufcient and adequately
covered in accordance with the Group’s risk profle.
Capital risk control is part of the general corporate risk framework,
which brings 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 below:
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This function is implemented in phases, according to the following
scheme:
If deemed necessary, a discussion of them will be proposed in the
relevant frst-line (capital committee) and second-line committees
(risk control committee).
Defnition
of scope
Qualitative
analysis
Quantitative
analysis
Conclusion
and
disclosure
Defnition of scope
The process of supervision of capital planning and adequacy
begins with the preparation of the materiality proposal, which will
identify the local units whose importance is representative for the
Group in terms of risk-weighted assets.
In addition, other units, businesses or portfolios may be included,
even if their materiality does not make them very representative,
if deemed appropriate to be analysed due to their impact on the
Group’s strategy, compliance with the global plan or due to their
timely relevance.
Ongoing supervision of capital measurement
Ongoing supervision of the measurement of the Group’s
regulatory capital, ensuring an appropriate capital risk profle, is
another capital risk control function.
For this purpose, the Group conducts qualitative analysis of the
regulatory and supervisory framework and an ongoing review of
capital metrics and specifed thresholds.
Moreover, ongoing monitoring of compliance with the capital
risk appetite is conducted aiming to maintain capital above the
regulatory requirements and market demands.
To fulfl this function, the following phases have been established,
in accordance with the process described below:
Qualitative analysis
In this phase, the overall quality of the qualitative forecasts
process is assessed, and includes a review of the following aspects:
Defnition of
metrics and
thresholds
Preliminary
analysis
Measurement
and assessment
Conclusions
and disclosure
• Models used in the generation of forecasts and scenarios, scope,
metrics covered and so on.
• Documentation available and provided in the generation process.
Defnition 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 view
are specifed on an annual basis.
• The quality of the information included in the forecasts, the
integrity of the data, the controls applied, the recommendations
issued by Internal Audit, etc.
The metrics consist of:
• Primary metrics: these cover capital ratios and its components in
numerator and denominator at the highest level, in addition to
the transformation ratio, the EAD and expected loss.
• Secondary metrics: these include a greater breakdown than the
above (credit RWA’s under the Basel category or the basis on
which market RWA’s are calculated).
• Supplementary metrics: these allow for a more detailed analysis
than the above.
Thresholds are set in certain metrics which, if breached, trigger
a more detailed analysis and an explanation of the causes of the
breach.
The metrics, their thresholds and the sources of information
used are outlined in the internal ‘Guidelines of Metrics of Capital
Measurement Control’.
• Governance of the process, committees in which the forecasts
have been presented and reviewed, approval by areas prior to
fnal approval.
Quantitative analysis
The defned metrics and components that afect projections of
risk weighted assets (RWA), available capital, pre-provision net
revenue (PPNR) and of provisions 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 phase 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
phases, the Group conducts a fnal assessment, at least
encompassing the scope of analysis, the weaknesses and the
areas for improvement detected in the course of the supervision
process, reporting to senior management in accordance with the
established governance.
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Preliminary analysis
At this phase of the control process, the qualitative issues, such as
process governance and regulatory framework are analysed.
In addition, the steps taken in connection with capital to fulfl
recommendations and instructions issued by supervisory
authorities and by internal audit function are examined.
Measurement assessment
Based on the information provided, the capital risk function
analyses the metrics defned in the process, according to the
following procedure:
• Review of primary and secondary metrics to detect variations
that exceed the defned thresholds, and where they do, perform
a detailed analysis of the causes and analysing supplementary
metrics.
• If the origin of the incidence lies in a specifc unit or corporate
area, more detailed information is requested.
• Incidences found must be duly explained in terms of their
causes (change in volumes, changes in the profle, one-ofs, BAU
initiatives, capital actions, etc.) and discussed with the unit or
corporate function involved, and with the regulatory capital and
pensions function.
Conclusions and disclosure
The report with the conclusions is discussed by the governance
body responsible for capital risk control and risk forecasting and is
distributed to the regulatory capital and pensions function.
If deemed necessary, the report will be proposed for discussion
in the relevant frst line (Capital committee) and second-line
committees (Risk control committee).
Oversight of signifcant risk transfer assessment
In addition, capital risk carries out the supervision of signifcant risk
transfer (SRT) of securitisations. This process is a prior step and a
fundamental requirement for the execution of securitisations that
have SRT.
5.3 Key metrics
For more detail see chapter Economic
and fnancial review, section 3.5 ‘Capital
management and adequacy. Solvency ratios’.
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6. Operational risk
6.1 Introduction
Following the Basel framework, the Group defnes operational
risk (OR) as the risk of losses arising from defects or failures in
its internal processes, people, systems or external events, thus
covering risk categories such as fraud, technological, cyber, legal
and conduct risk.
Mitigation plans have been promoted on aspects with special
relevance (fraud, data and cybersecurity and suppliers control,
among others), focused on both the implementation of corrective
actions and the adequate monitoring and management of projects
under development. In addition, contingency and business
continuity plans have been improved, as well as in terms of crisis
management.
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.
6.2 Operational risk management
In the Group, OR is managed in accordance with the following
phases:
The Group’s goal in terms of OR management and control is focused
on identifying, evaluating and mitigating sources of risk, regardless
of whether they have materialised or not. The analysis of OR
exposure contributes to the establish risk management priorities.
It is worth mentioning the risk analysis improvement carried
out in 2018 through different initiatives such as data quality
enrichment, the incorporation of additional risk appetite metrics
and improvements in the process of determining, identifying
and evaluating critical theoretical controls together with a
greater integration of operational risk within the Group’s
strategic planning.
Risk identifcation, measurement and assessment model
A series of quantitative and qualitative corporate techniques and
tools have been defned by the Group to identify, measure and
assess operational risk. These are combined to produce a diagnosis
on the basis of the risks identifed and an assessment of each area
or local unit, through their measurement and evaluation.
The quantitative analysis of this risk is carried out mainly with
tools that record and quantify the level of potential losses
associated with operational risk events. The qualitative analysis
seek to assess aspects of exposure and hedge (including the
control environment)
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The most important operational risk tools used by the Group are
the following:
• 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 includes
those events with impact on the fnancial statements or proft
and loss account and those with no such impact.
Internal databases are supplemented by the signifcant events
escalation process, which allows to inform and alert senior
management the key operational risk events arising across the
Group on a timely basis.
• Operational risk control self-assessment (RCSA). A qualitative
process that seeks, using the criteria 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 diferent functions on the Group.
The goal of RCSA is to identify and assess the material
operational risks that could prevent business or support units
from achieving their objective. Once they are assessed, mitigation
actions are identifed if the risk levels prove to be above the
tolerable profle.
The Group also elaborates risk assessments for specifc sources
of operational risk, enabling a more granular and transversal
identifcation of potential risks. 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 fnancing risks. The two latter areas,
together with the conduct risks factor, are set out in greater
detail in section 7.3 ‘Compliance and conduct risk management’,
in this chapter’.
• External event database15. The external database provides
quantitative and qualitative information, allowing for a more
detailed and structured analysis of relevant events that have
occurred in the sector, the comparison of the profle of losses
with the industry, both locally and globally and the appropriate
preparation for the RCSA exercise and scenario analysis.
• 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 Group. The potential efects are
assessed and extra controls and mitigating actions are identifed
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 diferent types of statistics
and parameters that provide information on an institution’s risk
exposure and control environment. The most signifcant indicators
regarding the level of risk of the diferent factors are part of the
metrics on which operational risk appetite is built.
• Internal Audit and regulatory recommendations. These provide
relevant information on inherent risk due to internal and external
factors, enabling weaknesses in the existing controls to be
identifed.
• 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
a detailed analysis, as set out in section 7.3 ‘Compliance and
conduct risk management’ in this chapter.
• Other specifc instruments. These enable a more detailed
analysis of technology risk, such as control of critical system
incidents and cybersecurity events.
• Internal data model. Application of statistical models is used
to capture the Group’s risk profle, mainly based on information
collected from the internal loss database, external data and
scenarios. The main application of the model is to help determine
economic capital and estimate expected and stressed losses, as a
tool for specifying operational risk appetite.
The risk profle is part of the non-fnancial risks risk appetite, and is
structured as follows:
• A general statement setting out that Santander is, on principle,
averse to operational risk events that could lead to fnancial
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
Internal Audit recommendations.
• An additional statement is included for the more relevant risk
factors, together with a number of forward-looking monitoring
metrics. Specifcally, on the following: internal and external
fraud, technological, cyber, legal, anti-money laundering,
commercialisation of products, regulatory compliance and
supplier management risk.
Model implementation and initiatives
Almost all the Group’s units are now incorporated into the OR
model with a high degree of homogeneity.
The main activities and global initiatives adopted in 2018 for
efective operational risk management are:
• Continuous enhancement of available information, especially
the internal loss database, key to ensure the integration of
all instruments and be able to perform an information cross-
analysis.
• Evolution and improvement of the objective qualifcation
methodology for the evaluation and reporting of the main risks
(Top risks) that include risk exposure, control and regulatory
15. Santander participates in international consortiums such as the ORX (Operational Risk Exchange).
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2018 Annual Report
environment and take into account the actual and forecasted
elements.
This methodology provides a more detailed process for
fnal determination of the risk level and trend. It encourages
prioritisation in risk management and the defnition of specifc
mitigation plans, while supporting periodic risk communication
to senior management.
• Incorporation of additional risk appetite metrics related to
internal fraud within the market operations scope and the
cybersecurity risk.
• Process improvements for the determination, identifcation
and assessment of critical theoretical controls, with the aim of
strengthening and homogenizing the control environment in
the Group.
• Greater integration of operational risk in the Group’s strategic
plan, by including information regarding the potential exposure
of operational risk for the next three years as well as the
estimated level of losses.
• Mitigation plans fostering for aspects of particular relevance
(fraud, information security and cybersecurity in the widest
sense, control of suppliers, among others): control of both,
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).
• Fostering the control of risk associated with technology
(control and supervision of the IT systems design, infrastructure
management and applications development).
For the suppliers control previously mentioned, the Group, as
part of its digitalisation strategy, aims to ofer its customers the
best solutions and products available in the market, which in
many cases entail an increase in the outsourcing activities or the
employment of third party services. This aspect, together with the
intensive use of new technologies such as the cloud, the increase
of cyber related risks and an increase in regulatory pressure in this
area, make it necessary to reinforce procedures and controls to
ensure that the risks arising from hiring suppliers are known and
managed appropriately.
In this regard, in 2018 a new version of the corporate reference
model was approved, and progress has been made in defning
and implementing policies, procedures and tools in the Group’s
entities in order to reinforce its implementation and to ensure
that adequate coverage is given to the current regulatory
requirements regarding the General data protection regulation
(GDPR) anticipating new requirements contemplated in the new
EBA regulations related to outsourcing as well as agreements with
third parties. In 2018, the eforts have been mainly aimed at:
• Establishment of the vendor risk assessment centre (VRAC)
function within the purchasing of the Group’s entity responsible
for purchases, with the aim of making suppliers’ evaluation
more efcient and homogenised. To ensure that related risks
are adequately covered, and homologation process is executed
before the service is provided. In addition, VRAC should help to
defne and monitor the mitigation plans, and to reinforce those
controls needed for the risks associated with services provider to
acceptable levels according to the Group’s risk appetite.
• Controls have been reinforced in the diferent phases of the
model to ensure that services that involve access or processing
of sensitive data, including personal data, are correctly identifed
and classifed. Specifcally:
• Policies have been developed to defne the criteria for data
classifcation according to its sensitivity level and to establish
the minimum protection requirements that must be observed
for each confdentiality level (including those established by
GDPR).
• Development of specifc questionnaires to evaluate supplier’s
controls against these requirements, and clauses that must
be included in contracts with suppliers that process or store
confdential information.
• Establishment of a specifc escalation and governance
procedure for services approval that involve the treatment or
storage, by the provider, of data considered to be particularly
sensitive.
• During 2018, progress has been made with those providers
identifed as critical in the recovery and resolution plans, aiming
to include clauses that ensure the continuity of the services
provided in case it was necessary to activate those plans.
• The escalation policy has been revised to ensure that the
essential outsourcing functions and the highest risk services are
reviewed and approved in the appropriate forums and that the
relevant incidents associated with suppliers that provide these
services are escalated in time and manner for its review and
decision-making.
• Indicators and dashboard defnition and monitoring concerning
the model implementation.
• Review and enhancing quality of data of inventories of relevant
services and associated suppliers.
• Progress in the implementation of a management system that
automates the diferent phases 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.
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The Group continues to work on the implementation and
consolidation of the model, reinforcing and standardising the
activities to be carried out throughout the management cycle of
suppliers and third parties.
Operational risk information system
The Group’s corporate information system for operational risk,
named Heracles, supports operational risk management tools,
providing information for reporting functions and needs at both
local and Group levels. Heracles main goal is to improve decision-
making in the OR management process throughout the Group.
This is achieved by ensuring that those responsible for risks in
every part of the Group have a complete view of the risk, and the
supporting information they need, when needed.
This complete and timely view of risk is obtained as a result of
the integration of several programs, such as risk and control
assessment, scenarios, events and metrics with a common set
of taxonomies, and methodological standards. The result of
this integration is a more precise risk profle and a signifcant
improvement in efciency by avoiding redundant eforts and
duplicities.
After the incorporation of the thematic evaluation and scenarios
modules, in 2018 improvements have been made to strengthen
the integration between the diferent modules and simplify
the system fow. Likewise, progress has been done to improve
reporting capabilities in complying with the Risk Data Aggregation
regulation.
In order to achieve the latter goal, a reference technological
architecture has been developed, providing solutions for
information gathering, single database feeding (golden source)
and the generation of operational risk reports.
The most signifcant mitigation actions have been focused on
improving the security of customers in their usual operations,
the management of external fraud, as well as continuous
improvements of processes and technology, sale of products
management and adequate provision of services.
Regarding the fraud reduction, the main specifc actions were the
following:
Card fraud:
• Generalisation of the use of Chip & Pin (operation with PIN-cards,
which require the signing of the transaction with a numeric
code), both in ATMs and in physical stores, with advanced
authentication mechanisms in the communication between the
ATM and the point-of-sale and the Group’s systems.
• Card protection against electronic commerce fraud attacks
(which is still the fastest-growing fraud pattern in the industry):
• Implementation of a secure e-commerce standard (3DSecure)
via two-step authentication based on one-time passwords.
• 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 fngerprint to sign of
their transactions.
• Integration of monitoring and fraud detection tools with other
systems, internally and externally, to enhance suspicious activity
detection capabilities.
In addition, further advances have been carried out by the Group
regarding data supply automation from the local units’ systems
of record.
• Reinforced ATM security by incorporating physical protection
elements and anti-skimming, as well as improvements in the
logical security of the devices.
Mitigation actions
In line with the model, the Group monitors those mitigation
actions related with the main risk sources which have been
identifed 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 has become even more important
in 2018, in which both the frst line of defence and the OR control
function intervene, establishing an additional control through
specialised business and support functions. Furthermore, the
Group has continued to promote the preventive implementation of
policies and procedures for OR management and control.
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 codes - 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 breached.
• Implementation of specifc protection measures for mobile
banking, such as identifcation and registration of customer
devices (Device Id).
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2018 Annual Report
• Monitor e-banking platform’s security to avoid attacks on the
systems.
Cybersecurity and data security plans:
Throughout the year, Santander continued paying full attention
to cybersecurity risks, which afect all companies and institutions,
including those in the fnancial sector. This situation is a cause
of concern for all entities and regulators, prompting the
implementation of preventive actions to be prepared for any attack
of this kind.
Santander has continued to develop its cybersecurity internal
regulation with the defnition of a set of policies that reinforce
the Global cybersecurity framework, aligned with international
best practices.
In relation to second line internal regulation, it should be noted
that in July 2018 the executive risk committee approved a new
version of the cyber supervision and control model, incorporating
the technological risk within its scope.
The Group is involved in an ambitious program to transform
cybersecurity in order to strengthen detection, response and
protection mechanisms. Innovation and continuous improvement
in cybersecurity is key to address current and emerging threats,
and it is a priority for Santander.
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 actions:
The Group has established mitigation actions in order to optimise
management processes according to our customer’s needs.
With regard to mitigation measures relating to customer practices,
products and business, Santander is involved in continuous
improvement and implementation of corporate policies on aspects
such as the selling of products and services and prevention of
money laundering and terrorism fnancing, as described in section
7.3 ‘Compliance and conduct risk management’, in this chapter.
Also related with the same category of operational risk, within the
continuous process carried out in Brazil to improve the internal
processes and products ofered, in order to provide a better service
to our customers and, thereby, reduce the volume of incidents and
legal claims, it is noteworthy the creation of joint and
multidisciplinary working groups for the identifcation, defnition
and implementation of mitigation actions, as well as monitoring of
their efectiveness.
Business continuity plan
The Group has a Business Continuity Management System (BCMS),
to guarantee the continuity of the business processes of its entities
in the event of a disaster or serious incident.
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The basic goal is to:
• Minimise the potential damage on people, and adverse fnancial
and business impacts for the Group, caused by the interruption of
normal business activities
• Reduce the operational efects of a disaster, providing pre-
defned and fexible 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
profts and planned growth.
• Protect the public image of, and confdence in, the Group.
• Meet the Group’s obligations to its employees, customers,
shareholders and other stakeholders.
In 2018, the Group continued to advance in implementing and
continuously improving its business continuity management
system. The new model has been implemented in all countries and
the defnition and implementation of cybersecurity scenarios has
been pursued.
Furthermore, several crisis simulation exercises have been carried
out, coordinated between the local units and the corporation,
involving the Group’s various crisis management committees and
senior management.
The Group has also updated the corporate application that is used
to register and store the Group’s continuity plans to allow for
associating the economic functions set by the European Banking
Union´s resolution authority, the SRB.
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Operational RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
6.3 Key metrics
Net losses (including both incurred loss and net provisions) by
Basel16 risk category over the last three years is as follows:
Distribution of net losses by operational risk category17
(% s/total)
80%
70%
60%
50%
40%
30%
20%
10%
0%
60%
2016
2017
2018
18%
18%
0%
I - Internal fraud
II - External fraud
2%
2%
0,3%
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
In relative terms, the losses in the category of customers, products
and business practices decrease regarding the previous year,
although for external fraud has increased.
The net losses by geography are presented in the following chart:
Net losses by country
Brazil
45%
Spain
15%
Mexico
5%
Others
9%
UK
14%
US
12%
Employee’s litigation in Brazil is managed as personnel expenses.
It is not included in the operational fgures since they are
considered, from a point of view of management view, as part of
the entity’s personnel cost. The Group’s governing bodies perform
a continuous monitoring of the levels of expenditure as well as
of the measures designed for their reduction. According to the
Basel Operational risk framework, these expenses are reporting
according to the applicable categorisation.
In 2018, the most signifcant losses by category and geography
correspond to litigation in Brazil where a set of actions is in place
to improve customer service (gathered in a complete mitigation
plan, as described in section 6.2 ‘Operational risk management’ in
this chapter). On the other hand, in 2018 the volume of losses in
the UK and the US has decreased due to the reduction in provisions
that cover cases of product commercialisation, regulatory
inspections and processes failures.
Regarding external fraud, the main concentration risk is still
related to the fraudulent use of debit and credit cards, with a
signifcant rise in fraud in non-physical card. The forecast for
next year is for this trend to continue, with an intensifcation of
the activity of fraudsters in payment transactions and electronic
commerce.
16. The Basel categories incorporate risks which are detailed in section 7”Compliance and conduct risk”.
17. Includes losses from the B. Popular and other perimeter changes.
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2018 Annual Report
6.4 Other aspects of control and
monitoring of operational risk
Analysis and monitoring of controls in market operations
Due to the specifc nature and complexity of fnancial 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, with a focus on:
• Adapting the control model to new regulatory requirements,
such as MiFID II, EMIR, PRIIPS, IFRS9 and GDPR, among others.
• Constant improvement with the monitoring of global standards
on controls related to market activity. These include those that
mitigate the risk of unauthorised trading and that are measured
periodically through a specifc risk appetite metric for this issue.
• Strengthening business continuity plans by incorporating
– among other improvements – new scenarios refecting new
risks in the industry.
• Reinforcing controls ensuring appropriate functional separation
in market operations systems.
• Improvements in the tool to control the communications that
occur in the treasury desks.
• Identifcation of all risks in the Group that can be hedged with
insurance, including identifcation of new insurance coverage for
risks already identifed 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.
• Analysis of coverage available in the insurance market, as well as
preliminary design of the conditions that best suit the identifed
and assessed needs.
• Technical assessment of the protection provided by the policy, its
costs and retention level that the Group is assuming (franchises
and other elements borne by the insured) in order to evaluate
and decide about its formalisation regarding those risks that
should be covered.
• Negotiating with suppliers and contract allocation in accordance
with the procedures established by the Group.
• Monitoring of incidents declared in the policies, as well as
of those not declared or not recovered due to an incorrect
declaration, establishing protocols for action and specifc
monitoring forums.
• Analysis of the adequacy of the Group’s policies for the risks
• Intensifed scrutiny of markets-related suppliers, given the critical
nature of this topic in view of market trends in online trading.
covered, taking appropriate corrective measures for any
shortcomings detected.
• Incorporation of new controls on algorithmic trading
following the best practices of the industry and the requirements
of MiFID II.
• Close cooperation between local operational risk executives
and local insurance coordinators to strengthen operational
risk mitigation.
For more information on issues relating to regulatory compliance
in markets, refer to section 7.3 ‘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. This will allow, among
other objectives, for reinforcing the control model and reduce the
operational risk associated with the business.
Insurance’s role in operational risk management
The Group regards insurance as a key element in the management
of operational risk. In 2018, we have continued to develop
procedures with the goal of achieving better coordination between
the diferent functions involved in the 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 goal is to
inform the diferent frst line risk management areas of adequate
guidelines for efective management of insurable risk. The
following activities are particularly important:
• Active involvement of both areas in the own insurance forum,
the Group’s highest technical body for defning 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.
Our own insurance area is a permanent member of diferent
forums/committees of the Group related to risk management
(damage to physical assets, fraud, scenarios, management of
special situations, etc.), thereby increasing its interaction with
other Group functions and its capacity to appropriately identify
and evaluate the insurable risks and optimise the protection of
the income statement.
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Operational RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
7. Compliance
and conduct risk
7.1 Introduction
The Compliance and Conduct function fosters the Group´s
adherence to the rules, supervisory requirements, and principles
and values of good conduct, by setting standards, advising and
reporting in the interest of employees, customers, shareholders
and the community as a whole.
This function addresses all matters related to:
• Regulatory compliance.
• Prevention of money laundering and terrorism fnancing.
• Governance of products and consumer protection.
• Reputational risk.
Under the current confguration of the three lines of defence at
the Group, compliance and conduct is an independent second-line
control function organisationally under the Group CRO, reporting
directly and regularly to the board of directors and its committees,
through the Group Chief Compliance Ofcer (Group CRO). This
confguration is aligned with the requirements of banking
regulation and with the expectations of supervisors.
centre, towards the end of 2018, thus achieving a Compliance
and Conduct function that is on par with the best standards in the
fnancial industry.
The Group sets out in its risk appetite framework its zero
tolerance for Compliance and Conduct risks, with the clear goal
of minimising the probability of any economic, regulatory or
reputational impact occurring within the Group. Compliance and
Conduct risk is manged through a homogeneous process in units,
by establishing a common methodology and taxonomy, according
to the standards of the Risk function, which consists of setting a
series of Compliance and Conduct risk indicators and assessment
matrices which are prepared for each local unit, as well as
qualitative statements.
During 2018, the Compliance and Conduct function has taken part
in the annual formulation of the risk appetite, with the objective
of verifying that the current model is suitable for measuring the
function’s risk appetite. The corporate thresholds of two of the
indicators were adjusted, reducing them, and the calculation of
another was reformulated in order to provide a more accurate
picture and align it with the strategy of the function and its risk
tolerance. The relevant committees approved the adjustments and
these were sent to the diferent local units.
The Group’s goal is to minimise the probability of non-compliance
events and to identify, assess, report and quickly resolve any
irregularities that may occur.
7.2 Governance
In accordance with the mandate entrusted to the Compliance
and Conduct function improvements were made, in 2018, in the
strategic compliance programme. In the two previous years,
the scope and objectives of the Compliance and Conduct target
operation model (TOM) were defned, and the initiative was
implemented in the Group’s local units and at the Corporate
The Group CRO reports to the Group’s governing and management
bodies. This is independent of the Risk function’s other reporting to
the governance and management bodies of all Group risks, which
also includes compliance and conduct risks.
The following are the compliance and conduct corporate
committees, each of which has a corresponding local replica:
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2018 Annual Report
Group Compliance & Conduct – committees landscape
Board of directors
Risk supervision, regulation
and compliance committee
See the Corporate governance chapter,
section 4.7 – Risk supervision, regulation and
compliance committee activities in 2018
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Compliance committee
(Monthly)
Regulatory
compliance
committee
Tier II
Commercialisation
committee
Monitoring and
consumer prot.
committee
Anti money
laundering
committee
Reputational
risk forum
(Quarterly)
(Monthly)
(Fortnightly)
(Quarterly)
(Quarterly)
Regulatory compliance
Governance of
products and consumer
protection
Anti-money laundering
and terrorism
financing
Reputational risk
Control and supervision
of regulatory
compliance risk events
related to employees,
organisational aspects,
international markets,
developing policies
and rules and ensuring
compliance by units.
Management, control
and supervision of
governance of products
and services in the
Group, and risks relating
to commercialisation
conduct with customers,
consumer protection, and
fiduciary risk for financial
instruments, developing
specific policies and
regulations in this regard.
Management, control
and supervision of the
application of the anti-
money laundering and
terrorism financing
framework, coordinating
analysis of local and Group
information to identify new
risks that that could result
in 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.
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).
The corporate compliance and conduct committee is the high-
level collegiate body of the compliance and conduct function,
bringing together the objectives of the committees referred to
below. Its main functions are as follows:
• Setting up and assessing corrective actions when risks of this
kind are detected in the Group, either due to weaknesses in
the existing management and controls management, or due to
emerging new risks.
• Proposing updates and modifcations to the General compliance
framework and corporate function frameworks for ultimate
approval by the board of directors.
• Monitoring new issued regulations or those modifed, and
establishing their scope of application in the Group, and, if
necessary, defning adaptation or mitigation actions.
• Reviewing signifcant compliance and conduct risk events and
situations, the measures adopted and their efectiveness, and
proposing that they be escalated or transferred, whenever the
case may be.
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Compliance and conduct RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
The regulatory compliance committee is a collegiate governance
body whose main functions are the following:
The anti-money laundering/terrorism fnancing committee
(AML/TF) is the collegiate body in this feld, and its main duties are
as follows:
• Specifying the Group CRO regulatory compliance risk control
model based on common regulations applicable to several
countries.
• Defning the AML/TF risk control model in the Group.
• Creating reference models for the development of the AML/TF
• Deciding on signifcant regulatory compliance issues that might
framework and its implementing regulation.
pose a risk to the Group.
• Interpreting the General Code of Conduct and specialised codes,
and making proposals for their improvement.
• Monitoring projects for improvement and transformation plans
for AML/TF and, where appropriate, setting in motion supporting
or corrective actions.
The corporate commercialisation committee is the collegiate
governance body for the approval of products and services. It has
the following key functions:
The reputational risk forum is the body created to support the
diferent governing bodies of the Group in the supervision and
control of reputational risk, ensuring its proper management and
understanding. Its main functions are:
• Validating new products or services proposed by the parent
company or by any subsidiary/Group local unit, prior to their
launch.
• Establishing the commercialisation risk control model, including
risk assessment indicators, and proposing the commercialisation
and consumer protection risk appetite to the Compliance
committee.
• Establishing interpretative criteria and approving the reference
models to develop the corporate commercialisation framework,
and its rules, and to validate the local adaptations of those
models.
• Assessing and deciding on signifcant commercialisation issues
that might pose a risk for the Group.
The monitoring and consumer protection committee is the
collegiate governance body for the monitoring of products and
services, and the assessment of customer protection issues. It has
the following key functions:
• Monitoring the commercialisation of products and services
by country and by product type, reviewing all the available
information and focusing on products and services under special
monitoring, and costs of conduct, compensation to customers,
sanctions, etc.
• Monitoring the common claim measurement and reporting
methodology, based on root cause analysis, and the quality and
sufciency of the information obtained.
• Establishing and assessing how efective corrective measures can
be when risks are detected in the governance of products and
consumer protection.
• Identifying, managing and reporting preventively on the
problems, events, signifcant situations and best practices in
commercialisation and consumer protection in a transversal
manner.
• Monitoring and continuous supervision of risks and reputational
events, verifying if the profle of this risk is within the limits of the
group’s appetite.
• Developing action plans to reduce the impact of this risk and
monitor them.
• Reviewing and preparing reports and other documentation of
reputational risk presented to the diferent governing bodies of
the Group.
7.3 Compliance and conduct
risk management
The frst line of defence has the primary responsibility for
managing compliance and conduct risks together 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 Compliance and Conduct function is responsible for setting up,
fostering and ensuring that the local units adhere to the corporate
frameworks, policies and standards applied throughout the
Group. Compliance and Conduct continue to make progress in the
development and design of the function’s regulatory tree and in
the supervision of local units’ degree of adherence to it.
The Corporate centre has the necessary components to ensure
ongoing control and oversight of the compliance and conduct
model, establishing robust systems of governance and systematic
reporting and interaction with the local units in accordance with
the Group’s subsidiary governance model.
Additional detail regarding the Group’s
governance model is available in the Corporate
governance chapter, section 7 ‘Group
structure and governance framework’.
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2018 Annual Report
Furthermore, Internal Audit - as third line of defence function -
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.
Corporate frameworks for the Compliance and Conduct function
are the following:
• General compliance framework.
• Assessment of AML/TF on the units considered as obliged
entities in this matter (or equivalent) in the Group. This annual
self-assessment exercise is carried out by the business units and
the local AML/TF prevention ofcers, under the supervision of the
Corporate centre AML/TF prevention function.
The common methodology adopted by the Group for the above
mentioned assessments can be broadly summarised in a three
phase process:
• Products and services commercialisation and consumer
1. Assessment of unit’s inherent risk (deriving from its activity).
protection framework.
2. Assessment of control environment (as a mitigating factor of the
• Anti-money laundering and terrorism fnancing framework.
inherent risk).
The General Code of Conduct (GCC) enshrines the ethical principles
and rules of conduct that govern the actions of all the Group’s
employees. It is supplemented in certain matters by the rules
found in other codes and their internal rules and regulations.
3. Calculation of net residual risk (derived from the combination
of the two previous point’s measures according to a predefned
scale). Where appropriate, and depending on the result
obtained, the corresponding action plans are defned.
In 2018, the main geographies consolidated the reputational risk
model that contains the main elements for risk management
and identifes the most signifcant sources of this type of risk. It
establishes a preventive approach for its correct management and
determines the functions involved in the management and control
of this risk and its governance bodies.
Transversal corporate projects
In accordance with the organisational principles defned in the
Group Compliance and Conduct TOM, transversal functions
support specialised vertical functions, providing them with
methodologies and resources, management systems and
information and support in executing multidisciplinary projects.
One of the key pillars of all the corporate functions is monitoring
the units’ deployment of models. For this purpose, a methodology
that enables the following has been defned:
• To acquire an objective knowledge of the TOM’s degree of
implementation in each one of the units.
• Regularly follow up on progress in deploying the TOM.
• Be used as a source for joint identifcation (Group-units) of the
annual work plans defned every year.
The Compliance and Conduct function oversees the efective
implementation and monitoring of the General Code of Conduct
under the supervision of the compliance committee and of the
risk supervision, regulation and compliance committee. The GCC
establishes the following:
• Compliance functions and responsibilities.
• The rules governing the consequences of non-compliance with it.
• A whistleblowing channel for the submission and processing of
reports of allegedly irregular conduct.
During 2018, the Compliance and Conduct function has carried out
several risk assessments in coordination with the Risk function,
notably:
• A regulatory compliance assessment focused on the Group’s
main local units. This exercise is carried out annually, following
a bottom-up process, where the frst line of defence of the local
units identify the inherent risk of those rules and regulations that
apply to them. First, an assessment is made on the consistency
of the controls that mitigate such inherent risk, and then the
residual risk in each of these obligations is determined. Action
plans are established and followed by both the local and
corporate compliance functions.
• Conduct assessment in products and services with a scope of 17
geographies of the Group and 26 legal entities, where the frst
line of defence functions evaluate the main risks of conduct in
commercialisation, the suitability of the controls that mitigate
said risks and establish action plans in those cases where risk
assessments exceed the defned risk appetite.
403
Compliance and conduct RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Horizontal teams support vertical teams by leading execution and
coordination of generalist activities, among them:
Group CCO
Key transversal functions
• Promote the relationship of Compliance and Conduct functions among
the Corporate centre and the diferent units.
• Coordinate the defnition and monitoring of the annual compliance
programs.
• Provide methodologies, resources, systems and management
information and support in the execution of multidisciplinary projects.
• Jointly with the vertical functions, follow-up of the deployment of the
models by the units.
• Lead the digitalisation of processes.
• Set up common report templates, combining qualitative and quantitative
metrics.
• Coordinates the creation of the regulations global repository and
manages the Regulatory Radar Governance aimed at assigning
regulatory implementation responsibilities.
• Promote thematic fora and workshops, identify and promote the
execution of the annual training programs, and prepare a biannual
magazine.
• Participate in the appointment and setting of the CCO´s objectives.
of controls in each local unit. Further, it has established a set
of risk indicators that will be regularly reported to both local
governing bodies and to Corporate centre teams.
• Concerning management information, a common compliance
and conduct risk reporting template was deployed in 2018 in the
Group’s units, with minimum content specifed by the Corporate
centre and common chapters, risk dimensions by family and
combining quantitative metrics and expert qualitative analysis,
to which units may add local information if relevant. At year-end
2018, virtually all of the Group’s main units have adopted this
new form of reporting.
• The Regulatory Radar function has consolidated its role, which
develops and coordinates the creation and administration
of the global repository of rules and regulations, through
a multidisciplinary process in which the diferent functions
participate, and manages the regulatory radar governance aimed
at assigning regulations implementation responsibilities and the
appropriate monitoring.
• The Group strengthened best practices sharing and cooperation
between the Corporate centre and the local units. Thematic
forums and workshops were organised on reputational risk,
corporate defence, the GDPR, product governance and consumer
protection, anti-money laundering and countering terrorism
fnancing.
• In addition to the traditional training – mandatory or not –
for which the function is responsible, a biannual review of
compliance and conduct and awareness-raising actions are now
carried out through the Group’s internal networks.
Regulatory
compliance••
Product
governance
and customer
protection
Reputational
risk
AML/ATF
Governance, planning and consolidation
Coordination with units
Compliance processes and information systems
• Digitalisation of processes and continuous improvement.
Having defned the function’s process map and documented its
main activities, the Group completed in 2018 the automation
of processes in fnancial intelligence, corporate actions, annual
compliance programme, product governance, the Code of
Conduct in Securities Markets, and acceptance of reputational
risk transactions. The design phases were also completed in
two new processes, namely management of committees and
internal governance bodies, and the development of regulatory
components.
• On-line collaboration with units is improving, favouring
platforms and structured spaces for information exchange, such
as the compliance portal and the Verum platform for assessing
the maturity of the compliance model.
• Access to external information sources to enhance compliance
control processes (regulatory sources, online media, stakeholder
perceptions, etc.).
• Management information and analytical environments,
leveraging 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 terrorism fnancing alerts.
• Global programme of MiFID II implementation. With the coming
into force of MiFID II regulation in January 2018, the Group
has provided the necessary support to local units afected by
the regulation. The project’s main focus of attention in 2018
has been the development and efective implementation of a
robust control model. Accordingly, the compliance and conduct
function in the Corporate centre has defned a theoretical control
framework and supervised the transposition and implementation
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2018 Annual Report
Regulatory Compliance
The Regulatory Compliance area is responsible for controlling and
supervising regulatory risk related to employees, organisational
aspects, international markets and securities markets, developing
policies and rules and ensuring compliance by units.
The internal procedure on the use and functioning of the Corporate
centre’s whistleblowing channel was updated in 2018, in order to:
• Allow employees to make anonymous reports if they wish.
• Reinforce the internal procedure for the anonymous
The following functions are in place for adequate control and
management of regulatory compliance risks:
communication of violations regarding anti-money laundering by
employees, senior management or agents.
• Application and interpretation of the General Code of Conduct
and other codes and rules and regulations that implement it,
including management of the corporate defence model and the
Group’s whistleblowing channel.
• Broadening the scope to include those accounting or audit
practices, in accordance with the Sarbanes-Oxley Act. The
compliance function reports periodically to the audit committee
on this type of complaints.
• Development and application of policies and rules aimed at
preventing market abuse.
Types of complaints received in 2018
• Control and supervision of application of regulation related to:
(i) markets, with respect to MiFID II, EMIR, Dodd-Frank Act and
the Volcker Rule and (ii) the organisation, in the competencies of
GDPR, FATCA and CRS.
195
93
290
44
289
2,968
Labour relations
Fraud
Confict of interest
and corruption
Products and fnancial
services commercialisation
AML and terrorism
fnancing and sanctions
Others
• Disclosure of relevant Group information (material facts).
The most relevant areas of the regulatory compliance function
are described below:
A. Employees
The objective - based on the General Code of Conduct - is
to establish standards for the prevention of criminal risks
and conficts of interest and from a regulatory perspective,
to cooperate with other areas in setting up guidelines for
remuneration and dealings with suppliers. The prevention of
criminal risks aims to minimise the impact of the potential criminal
responsibility of legal entities for any crimes committed on their
account or for their beneft by their directors or representatives and
by employees as a result of a lack of control.
The Group has in place a corporate defence model, which is
a specifc compliance programme designed to implement
awareness-raising activities as to the main criminal risks across the
Bank. The Group has 14 whistleblowing channels available to all
employees in all its main markets. They can access these through
email, web site and app.
Complaints that originated a disciplinary procedure
3,879
1,423
Complaints receivedA
Disciplinary measuresB
A. Consolidated data of the Top 10 local units and the Corporate centre,
which includes the complaints received in all their whistleblowing
channels, which are not comparable between each other.
B. This fgure does not include the disciplinary measures from UK, as it is
not available.
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Compliance and conduct RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
B. Market abuse
Regulatory Compliance activity in 2018 focused on the
implementation of corporate tools for market abuse risk
management in the main geographies:
Code of Conduct in Securities Markets (CCSM)
CodCon
tool
Monitoring of personal account
dealing and material non-public
information
Implemented in 2018
• Mexico
• Chile
Monitoring transactions of SCIB
Markets activity and ALM in
fnancial markets
Implemented in 2018:
Mexico, Chile, Brazil, Santander
London Branch and the UK.
Global
Surveillance
tool
Management and control in 2018
Management and control in 2018
• Approximately 13,200 person subject to the Code
of Conduct in Securities Markets.
• Approximately 11,000 personal account
transactions of senior managers and employees.
• Approximately 800 projects with potential
material and non-public information.
As a result of the analysis by the locals and
corporate teams of alerts generated by the tool,
cases of potential market abuse have already been
detected and properly escalated in accordance with
the governance established in each geography.
The implementation of corporate policies, procedures and tools in the Group’s main countries
has succeeded in establishing a global oversight model that allows a better understanding
of the situation of these units with regard to market abuse risk, mainly through indicators
reported by local compliance teams.
C. Market regulations
Regulatory compliance carries out the risk management of the
main market regulations that afect the Group. The most relevant
actions carried out during 2018 are detailed below:
Dodd-Frank
Title VII
An in-depth review of the
Swap Dealer Compliance
Programme regarding
the Dodd-Frank Tittle VII
regulation was carried
out in 2018, successfully
strengthening internal
controls and monitoring.
Relevant
information
Regulatory compliance is
responsible for disclosing
relevant Group information to
the markets. Banco Santander
made public 48 material facts
during the year, which are
available on the Group’s web
site and the CNMV’s web site.
Volcker Rule
With respect to the US
Volcker Rule, oversight has
continued of compliance
with this regulation, which
limits proprietary trading to
very specifc cases that the
Group controls by means of a
compliance programme.
This programme was
satisfactorily implemented
in 2018 in entities originating
from the acquisition of Banco
Popular.
MiFID II
During 2018, the Regulatory
Compliance function has
worked together with the
MiFID II Corporate’s PMO,
as well as with the diferent
units in the defnition and
implementation of a MiFID II
control framework for each
local unit, that will allow to
supervise compliance with
the regulation.
At the end of 2018, a country
supervision manual for
MiFID II was approved, which
establishes the relationship
model for the local units with
the Regulatory Compliance
function at a corporate level.
Its main aspects are: internal
policies and procedures,
control framework and KPI
reporting to the corporation,
second line of defence
testing exercise and training
programs.
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2018 Annual Report
D. Data management
The main actions carried out by regulatory compliance related to
data management by the Group during 2018 are detailed below:
GDPR
FATCA and CRS
The new requirements of the European GDPR were enforced on
25 May 2018.
The regulatory compliance function has performed a key role in
mobilizing and raising awareness among the Group units subject
to the regulation. It has led a number of corporate initiatives
aimed at ensuring the efective protection of the rights of data
subjects.
These initiatives include the approval of a new corporate
data protection policy, the design and implementation of a
governance model based on Data Protection Ofcers and a
control and oversight programme.
It has also raised awareness among the staf through diferent
training initiatives and other activities such as courses,
workshops and the publication of supporting documentation in
the form of guidelines and operating criteria.
Product governance and consumer protection
The product governance and customer protection mission is to
ensure that the Group acts in the best interest of its customers by
complying with regulations and the entity’s values and principles.
Ensures that decisions are made and action plans are
defned and monitored when necessary. Reports to
senior management and statutory bodies.
Oversees the design and execution
of controls throughout the
commercialisation and customer
relationship process.
Applies corporate risk assessment
methodologies, such as
management indicators and self-
assessments.
Identifes risks through: customer’s
voice, regulatory guidelines,
industry practices, supervisor and
auditor opinions, and learning from
internal/external events.
Ensure that customer service,
post sale systems and processes
facilitate fair treatment of customers,
as well as adequate detection
and management of possible
deterioration of products and
services.
Monitor
and report
Principles
Control
Assess
AGEMENT
N
A
M
C
U
L
T
U
R
E
Governance
Identify
Customers
Postsale
and
servicing
PROCESES
Sales
practices
Product
design
Oversee the sale process to the adequate target market,
with proper commercial treatment and transparency
of information, as well as that sales force training and
compensation systems encourage performance in the
best interest of the customer.
Further, and within the regulatory framework on automatic
exchange of tax information between countries (FATCA and CRS),
the following management areas stood out for their importance
in 2018:
• Fulflment of reporting obligations to the local authorities in
due time and form across all units.
• Periodic certifcation and certifcation of the preexisting
accounts of Group units.
• Approval of new corporate policies on this matter.
To establish the corporate framework for the
commercialisation of products and services and
consumer protection and the policies that develop
it, defning the principles of conduct and risk
management throughout the commercialisation
process and the relationship with the retail
customer.
To promote an appropriate culture
with a Simple, Personal and Fair
approach, for action in the customers´
best interest.
To establish and manage: i) the
Commercialisation committee;
ii) the Monitoring and customer
protection committee; iii) the
Fiduciary risk sub-committee; and
iv) the customer voice forums,
which ensure that appropriate
standards of conduct are applied.
Ensure that products are designed
to meet the characteristics and
needs of customers, with an
appropriate balance of risks, costs
and proftability.
407
Compliance and conduct RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Main product governance and consumer
protection activities in 2018
Governance strengthening
Product and services validation
• Implementation of corporate consumer
protection and fduciary risk management
policies in the Group’s units.
• Development together with the Santander
Digital team of a new “agile” procedure for
the approval of innovative concept tests
with impact on customers.
• Defnition of good practices regarding
sales force remuneration and monitoring
of the implementation.
• Supervision of the implementation of the
corporate custody procedure, having been
presented to the executive risk committee
for validation the new custody fles of
diferent Group units.
• Creation of the corporate forum for the
supervision of the analysis of the voice
of clients, root cause and defnition of
improvement plans.
Proposals analysed by the Ofce
of product governance: 359
Products validated in
Corporate Ofce 51
Structured
Prod. (Sna.
Internation.
Products
Plc.) 58
New
products
presented
at CCCA 141
Units enquiries 109
A. Of these proposals, one was not validated
and others were modifed in the process prior
to the celebration of the Committee.
Proposals analysed by fduciary
risk subcommittee: 743
Structured Other (policies, ETFs,
funds focus list…) 73
products Retail
Banking 37
Private
Banking
products 81
Savings/
Investment
insurance 26
Collective
investment
undertakings
and discretionary
profled
portfolios 526
Sales, post-sale
and servicing conduct monitoring
25 sessions in 2018 of the monitoring and
consumer protection committee, covering:
• The marketing of products and services
by country and type of product with focus
on: those in special monitoring, regulatory
and supervisory environment, events and
conduct costs and risk analysis through
indicators.
• Performance, exposure in portfolios and
results for customers and compliance with
mandates for products with fduciary risk
managed by the Group units or whose
management is delegated to third parties.
• Customer complaints, their management
(28 countries, 36 business units and 9 CIB
branches) and action plans to mitigate
customer detriment.
• The degree of control and volume of
the 51 providers (42 of them external
to Santander) that provide custody
services for the Group’s own positions or
customers positions.
Continuous improvement of products and
processes of action with customers
The conduct risk management model, and specially the customer’s
voice, allows the customer risk identifcation, measurement
and monitoring for the conduct risk mitigation and continuous
improvement (retro alimentation) of the product design, sale
processes and services delivery.
Events, sector
practices and
regulations
Data base
As a consequence of MiFID II,
improvements are implemented
in commercialisation models
beyond regulatory requirements.
Transformation plans in
remuneration of the sales
force following good practices
of regulators and the diferent
geographies of the Group.
Customer’s
voice
Business
monitoring
First line self
assessment
Risk and Control Self
Assessment
Innovation in investment
products: increased focus on
digital initiatives in the product
approval process and through
the follow-up of the customer’s
voice.
Investment products adequacy
in Europe: corporate project for
the implementation of a control
model in the frst and second line
of defence.
Management indicators
Early cancellation: increase in
disclosure requirements in the
cross sale and action plans to
improve the root cause analysis
through the retention channels.
Investment and pension
funds performance: review
of product defnition and/
or its investment policies in
case of detecting possible
management deterioration or
deviations regarding product
competitiveness.
Refusal of insurance claims:
the approval requires that the
documentation for customers
clearly includes the coverage
exclusion.
Customer complaints
Due to product cancellation
barriers: new products analysis
so that they can be cancelled
using the same channels as
the ones used for hiring new
products and, if this is not the
case, prioritise the necessary
developments so it becomes a
reality.
Due to interests in revolving
credit cards: analysis on the
approval of the applicable
interest rate and comparison with
a normal credit card and, in case it
is more expensive, establishment
of measures so that customers
use them as a revolving credit
card.
Launch of thematic reviews
on root cause of complaints:
fraud, mortgages and recovery
processes.
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2018 Annual Report
Anti-money laundering and countering terrorism fnancing
One of the Group’s strategic objectives is to maintain advanced and
efcient anti-money laundering and countering terrorism fnancing
systems, constantly adapted to international regulations, with
the capacity to confront the development of new techniques by
criminal organisations.
In addition, given that these standards and those adopted by
the Group are mandatory, their correct implementation and
application must be overseen. To do so, continuous work is carried
out on the diferent Group entities, including monitoring of the
training of Group employees.
The main activity data in 2018 is as follows:
As a part of the second line of defence, the AML/TF function
ensure that risks are managed in accordance with the risk appetite
defned by the Group and promote a strong risk culture through
the organisation. AML/TF Corporate function is responsible for
supervising and coordination the AML/TF systems of the Group
subsidiaries, branches and business areas, requiring the adoption
of the necessary programmes, measures and enhancements.
The Anti-money laundering and countering terrorism fnancing
policy in the Group is based on three main pillars: the highest
international standards, their adaptation and compliance through
global policies and technology systems that can enable such
compliance.
High international
standards (FATF, EU,
OFAC, Wolfsberg
Group, etc.)
AML/TF
Framework
and Policies
Technology
Systems
During 2018, the Group has actively worked in the review of its
internal regulations, strengthening management policies and
placing a special focus on optimisation of systems, enhancing their
efectiveness and considering and developing new technologies
that are becoming available.
From the AML/TF global function, a relevant transformation
projects have been addressed, highlighting the continuous
improvement of supporting tools and risk management platforms,
such as the one used for automation and improvement of adverse
media identifcation and management processes, extending its
scope to other units/areas within the Group (Banco Santander
México and SCIB Boadilla), or updating the corporate money
laundering and terrorism fnancing risks and controls self-
assessment (RCSA ML/TF), being aligned with the rest of the RCSA
methodologies in the Compliance function.
169
Subsidiaries reviewed
208,410
Investigations carried out
57,193
Disclosures to authorities
169,941
Employees trained
The Group has training plans in place at both local and corporate
level, in order to cover all employees. Specifc training plans are
also in place for the most sensitive areas from the perspective of
anti-money laundering and countering terrorism fnancing.
Reputational risk
In 2018, the Group made signifcant progress on implementing the
corporate reputational risk model, consolidating its main features
in the Group’s most signifcant geographies.
The specifc characteristics of reputational risk, which originate in
a vast number of sources, require a single approach and control
model that is diferent from those of other risks. The reputational
risk management requires for a global interaction with both
frst and second lines of defence functions responsible for the
relationship with stakeholders in order to ensure a consolidated
oversight of the risk, efciently 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 efective processes for identifcation and management of early
warnings of events and risks, and subsequent monitoring and
management of both events and detected risks.
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Compliance and conduct RiskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Key actions in 2018:
• Redesign of the Reputational risk forum with an executive
focus that ensures adequate procedures for the identifcation,
assessment, reporting and escalating of risks and reputational
events, with the presence of all the frst lines that manage
relevant stakeholders.
• Implementation consolidation of the model in the Group’s
various geographies.
• Review and consolidation of policies relating to specifc sectors
(mining, soft commodities, defence and energy).
• Coordination with all corporate and local units to implement
socio-environmental policies.
• In conjunction with the relevant functions, development of other
reputational risk-related policies, such as fnancing policy for
sensitive sectors.
• Defnition and reporting of risk appetite metrics.
The launch of a new process of identifcation, assessment,
reporting and subsequent monitoring of the main reputational
risks that afect the Group in diferent geographies. The frst
reporting processes have already been carried out with this new
methodology, which integrates other frst lines (such as the
Communications area) in a more tangible manner.
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2018 Annual Report
8. Model risk
8.1 Introduction
The Group has far-reaching experience in the use of models to help
making all kinds of decisions, with particular relevance for risk
management decisions.
A model is defned as a system, approach or quantitative method
that applies theories, techniques or statistical, economic, fnancial
or mathematical hypotheses to transform input data into
quantitative estimates. The models are simplifed representations
of real world relationships between characteristics, values and
observed assumptions. This simplifcation allows the Group to
focus attention on specifc aspects which are considered to be most
important for applying a given model.
The use of models entails model risk, defned as the potential
negative consequences arising from decisions based on the results
of wrong, inadequate or incorrectly used models.
According to this defnition, 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.
Model risk management and control functions are performed in
the Corporate centre and in each of the Group’s main subsidiaries.
To ensure adequate model risk management there are a set
of policies and procedures which establish the principles,
responsibilities and processes to follow during the model’s life
cycle detailing aspects related to organisation, governance, model
management and model validation, among others.
The supervision and control of model risk is proportional to the
importance of each model. In this sense, a concept of tiering is
defned as the attribute used to synthesise the model´s level of
importance or model signifcance, from which the intensity of the
risk management processes that must be followed is determined.
At the end of 2017, we launched a strategic plan, model risk
management 2.0 (MRM 2.0), as an anticipatory measure to
reinforce the model risk management, revising each of the model
governance phases and conveniently addressing new supervisors
expectations set out in the 2018 ECB Guide on internal models.
MRM 2.0, currently underway, involves 3 phases (2018, 2019 and
2020) and includes 10 initiatives organised around 4 pillars:
• Key elements: Initiatives related to governance, risk appetite,
management scope and risk policies.
• Incorrect use of the model.
• Processes: Initiatives related to the models life cycle phases.
The materialisation of model risk may cause fnancial losses,
erroneous commercial and strategic decision-making or damage to
the Group’s transactions
• Communication: Internal and external communication
(monitoring, reports, training, etc.).
• Model Risk Facilitators: infrastructure, tools and resources.
The Group has been working towards the defnition, management
and control of model risk for several years. In 2015, a specifc area
was established within the Risk division to control this risk.
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Model riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
8.2 Model risk management
Model risk management and control is structured around a set of
processes regarded as the model life cycle. The defnition of the
model life cycle phases in the Group is outlined as follows:
Identifcation
As soon as a model is identifed, it is necessary to ensure that it is
included in the model risk control perimeter.
One key feature for a proper model risk management is to have a
complete and 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 diferent business
units. The inventory contains all relevant information of each
model, which allows for a proper monitoring according to their
relevance and the tier criteria.
The inventory enables transversal analyses of information (by
geographic area, types of model, importance, etc.), thereby
facilitating strategic decision-making in connection with models.
The validation scope includes not only more theoretical or
methodological aspects, but also the IT systems and the data
quality that models rely upon for their efective functioning. In
general, it includes all relevant aspects of management in general
(controls, reporting, uses, senior management involvement etc.).
The internal corporate validation environment is fully aligned
with the internal validation criteria of advanced models produced
by the fnancial regulators with authority over the Group. This
maintains the criterion of a separation of functions between
units developing and using the models (frst line of defence),
internal validation units (second line of defence) and Internal
Audit (third line) which, as the last layer of control, is responsible
for reviewing the efectiveness of the function and its compliance
with internal and external policies and procedures, and issuing an
opinion on its level of efective independence.
The internal validation function is executed in a decentralised
manner through fve validation units. The coordination and
harmonisation of the validation practices and processes is ensured
through a specifc initiative, which has been reinforced within the
MRM 2.0 project.
Planning
It is an internal annual exercise, approved by the local units’
governance bodies and validated in the Corporate centre, which
aims to establish a strategic action plan for all models included in
the scope of management of the model risk function. It identifes
the needs for resources related to the models that are going to be
developed, revised and implemented during the year.
One of these pillars is the consistency analysis process carried
out by the validation units, which includes the review of the
issued recommendations, the severity thereof and the rating
assigned. In this way it acts as an important point of control
of the consistency and comparability of the validation works.
The validation works are only concluded once this phase of
consistency has been completed.
Development
This is the model’s construction phase, based on the needs
established in the model plan and with the information provided
by the specialists for that purpose.
The development must take place using common standards for the
Group, and which are defned by the Corporate centre. This ensures
the quality of the models used for decision-making purposes.
Internal validation
Independent 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 Group’s model risk.
Hence, there is a specialised unit, autonomous from developers
and users, which draws up technical opinions on the suitability
of internal models, and sets out conclusions concerning their
robustness, utility and efectiveness. The validation opinion is
expressed through a rating which summarises the model risk
associated with it.
The internal validation process covers all models within the
model risk control scope, ranging 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.) to models used in functions that
support decision-making.
Approval
Before being deployed and therefore used, each model must be
submitted for approval to the corresponding governance bodies.
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 noted,
above, this implementation phase is another possible source of
model risk. It is therefore essential that tests are conducted by
technical units and the model owners to certify that the model has
been implemented pursuant to the methodological defnition and
functions as expected.
Monitoring and control
Models have to be regularly reviewed to ensure their correct
performance and that they are suitable for their purpose.
Otherwise, they must be adapted or redesigned.
Also, control teams have to ensure that the model risk is managed
in accordance with the principles and rules set out in the model risk
framework and related internal regulations.
412
2018 Annual Report
9. Strategic risk
9.1 Introduction
9.2 Strategic risk management
Strategic risk is the risk of loss or harm arising from strategic
decisions or poor implementation of decisions afecting the long-
term interests of the Group’s main stakeholders, or inability to
adapt to changes in the environment.
The Group’s business model must be taken into account, as a
key factor on which strategic risk pivots. It has to be viable and
sustainable; therefore it has to be able to generate results in
accordance with the Group’s targets, every year and at least during
the following three years, as well as being consistent with the
long-term view.
Within strategic risk, three main components are diferentiated:
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 by the Group subsidiaries. This model
encompasses the procedure and necessary tools for the correct
risk monitoring and control:
• Long-term strategic plan and three-year plan: the strategic
risk function, with the support of diferent areas of the Risk
division, monitors and challenges, in an independent way, the
risk management activities performed by the strategy function,
adding an integrated section, although independent, to the
long-term strategic plan and three-year fnancial plan (Risk
assessment).
Business model risk: the risk associated with the Group’s
1 business model. This includes, among others, the risk of
it being obsolescent, irrelevant, and/or losing value, and
so not being able to deliver the expected results. This risk
is caused by both external and internal factors.
2 Strategy design risk: the risk associated with the
strategy set out in the Group’s fve-year strategic plan,
including the risk that the strategic plan may not be
adequate per sé, or due to its assumptions, and thus
the Group will not be able to deliver on its unexpected
results.
3 Strategy execution risk: the risk associated with
executing long-term strategic plans and three-year
plans. The risks to be taken into account include both
the internal and external factors described above, the
inability to react to changes in the business environment,
and, lastly, risks associated with corporate development
transactions.
• Corporate development transactions: the Strategic risk
function, with the support of diferent areas of the Risk division,
ensures that the corporate development transactions consider
an adequate risk assessment and its impact on both Santander’s
risk profle and risk appetite.
• Top risks: the Group identifes, evaluates and monitors those
risks that have a signifcant impact on its results, liquidity or
capital that might involve undesirable concentrations afecting
the entity’s fnancial health. It consists of two main categories: i)
macroeconomic and geopolitical and ii) idiosyncratic (competitive
environment and customers, regulatory environment and
internal factors).
• Strategic risk report: is a report executed jointly by the strategy
function and strategic risk, as a combined tool for the monitoring
and assessment of the Group’s strategy, as well as associated
risks. This report is presented to the board of directors and
contains: strategy execution, strategic projects, corporate
development transactions, business model performance, main
threats (top risks) and risk profle.
413
Strategic riskResponsible bankingCorporate governanceEconomic and financial reviewRisk management
Glossary
2018 AGM
2019 AGM
Our annual general shareholders’ meeting held on 23 March 2018
Our annual general shareholders’ meeting that has been called for 11 or 12 April 2019, at frst or second
call respectively
Active customer
Those customers who comply with balance, income and/or transactionality demanded minimums
defned according to the business area
AGM
ALCO
AML
AORM
ARM
ASF
ASR
AT1
ATF
ATM
AVAs
Annual General Shareholders´ meeting
Asset-Liability Committee
Anti -money laundering
Advance Operational Risk Management
Advance Risk Management
Available Stable Funding
Recovered write-of assets (Activos en suspenso recuperados)
Additional Tier 1
Anti-terrorist fnancing
Automated teller machine
Additional Valuation Adjustments
Banco Popular/Popular
Banco Popular Español, S.A., a bank whose share capital was acquired by Banco Santander, S.A. on 7
June 2017 and was merged into Santander in September 2018
BAU
Business as usual
Basel or Basel Committee
The Basel Committee on Banking Supervision
Business Continuity Management System
basis points
Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and
investment frms, as amended from time to time
Banco Santander International
Banco Santander Puerto Rico
Compliance and Conduct
Development Bank of Latin America
Compound annual growth rate
Maximum nominal amount of a risk operation, excluding market transactions
Chief Compliance Ofcer
Capital Conservation Bufer
Central Counterparties
Contingent Convertible Preferred Securities
Code of Conduct in Securities Markets
Credit Default Swaps
BCMS
bps
BRRD
BSI
BSPR
C&C
CAF
CAGR
CAP
CCO
CCoB
CCP
CCPS
CCSM
CDS
414
2018 Annual Report
CEB
CEO
CER
CET 1
CNMV
Council of Europe Development Bank
Chief Executive Ofcer
Credit equivalent risk
Core equity tier 1
Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores)
Corporate Centre
Our headquarters in Boadilla and business segment as described in section 4.1 ‘Description of
businesses’ in the Economic and fnancial review chapter.
Corporation
All the governing bodies, organisational structures and employees entrusted by Banco
Santander, S.A. to exercise oversight and control across the entire Group, including those functions
typically associated with the relationship between a parent company and its subsidiaries.
COSO
Committee of Sponsoring Organisations of the Tradeway Commission
CRD IV package
The prudential framework established by the CRD and CRR currently in force
CRE
CRO
CRR
CRS
CSA
CVA
D&I
DI
Credit Risk Equivalent
Chief Risk Ofcer
Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment frms, as
amended from time to time
The Common Reporting Standard approved by the OECD Council on 15 July 2014
Credit Support Annex
Credit Valuation Adjustment
Diversity & inclusion
Debt to Income
Digital customers
Every consumer of a commercial bank’s services who has logged on to their personal online banking
and/or mobile banking in the last 30 days.
Dodd-Frank Act
The US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DRA
DVA
EAD
EBA
EBRD
ECB
EIB
EMIR
EP
EPS
Documento de Registro de Acciones or Share Registration Document
Debt Valuation Adjustment
Exposure at Default
European Banking Authority
European Bank for Reconstruction and Development
European Central Bank
European Investment Bank
Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories, as amended
from time to time
Equator Principles
Earnings Per Share
415
Resposible BankingCorporate governance reportEconomic and financial reviewRisk Management Report ERC
ES
ESG
ESMA
ETF
EU
EVE
EWIs
FATCA
FATF
FCA
FED
Executive Risk Committee
Expected Shortfall
Environmental Social and Governance
European Securities and Markets Authority
Exchange Traded Funds
European Union
Economic Value of Equity
Early Warning Indicators
Foreign Account Tax Compliance Act
Financial Action Task Force
Fiat Chrysler Automobiles
Federal Reserve
FL CET1
Common Equity tier 1 fully loaded / Fully loaded CET1
Forward Rate Agreements
Foreign Exchange
Group Chief Compliance Ofcer
Group Chief Risk Ofcer
Gross Domestic Product
General Data Protection Regulation
Global Master Repurchase Agreement
Gender pay gap
Great Place to Work
Global Reporting Initiative
Global Systematically Important Banks
General shareholders’ meeting
Human Resource
Internal Capital Adequacy Assessment Process
Spanish Instituto de Contabilidad y Auditoría de Cuentas
Internal control over fnancial reporting
Internal control model
International Finance Corporation
International Financial Reporting Standards (IFRS) as adopted in the EU pursuant to Regulation (EC)
1606/2002 on the application of international accounting standards, as amended from time to time
International Financial Reporting Standards
FRA
FX
GCCO
GCRO
GDP
GDPR
GMRA
GPG
GPTW
GRI
G-SIB
GSM
HR
ICAAP
ICAC
ICFR
ICM
IFC
IFRS
IFRS9
416
2018 Annual Report ILAAP
IMF
IRC
IRRBB
ISMA
IT
LCR
LGD
Internal Liquidity Adequacy Assessment Process
International Monetary Fund
Incremental Risk Charge
Interest Rate Risk in the Banking Book
International Securities Market Association
Information technology
Liquidity Coverage Ratio
Loss Given Default
Loyal customers
Active customer who receive most of their fnancial services from the Group according to the commercial
segment that they belong to. Various engaged customer levels have been defned taking proftability
into account.
LTV
MiFID 2
MREL
MRM
MtM
NAFTA
NGO
NII
NPAs
NPLs
NSFR
NYSE
OFAC
OM
ONP
OR
ORX
OSLA
OTC
P&L
PD
Loan to Value
Markets in Financial Instruments Directive.
Minimum requirement for own funds and eligible liabilities which is required to be met under the BRRD
Model Risk Management
Mark-to-Markets
North American Free Trade Agreeement
Non-governmental organisation
Net Interest Income
Non-productive assets
Non-performing loans
Net stable funding ratio
New York Stock Exchange
Ofce of Foreign Assets Control
Organised Markets
Ordinary net proft
Operational risk
Operational Risk Exchange
Overseas Securities Lender’s Agreement
Over the counter
Proft and Loss
Probability of Default
417
Resposible BankingCorporate governance reportEconomic and financial reviewRisk Management Report
People supported in our
communities
The Bank has devised a corporate methodology tailored to Santander’s requirements and specifc model
for contributing to society. This methodology identifes a series of principles, defnitions and criteria to
allow the Bank to consistently keep track of those people who have benefted from the programmes,
services and products with a social and/or environmental component promoted by the Bank. This
methodology has been reviewed by an external auditor.
PMO
POCI
POS
PPNR
PRI
PRIIPS
PSD2
PwC
R&D&i
RAF
RAS
RBSCC
RCC
RCSA
RDA
RIA
RoA
RoE
RoRAC
RoRWA
RoTE
RSF
RRF
RWAs
S&P 500
SAM
Project management ofce
Purchased or Originated Credit Impaired
Point of sale
Pre-Provisions Net Revenue
Principles for responsible Investment
Regulation 1286/2014 on key information documents for packaged retail and insurance-based
investment products, as amended from time to time
Payment Services Directive II
PricewaterhouseCoopers Auditores, S.L.
Research, development and innovation
Risk appetite framework
Risk Appetite Statement
Responsible banking, sustainability and culture committee
Risk Control Committee
Risk control self-assessment
Risk Data Aggregation
Risk Identifcation and Assessment
Return on assets
Return on equity
Return on risk adjusted capital
Return on risk weighted assets
Return on tangible equity
Required Stable Funding
Risk Reporting Framework
Risk weighted assets
The S&P 500 index maintained by S&P Dow Jones Indices LLC
Santander Asset Management
Santander Consumer US
Santander Consumer USA Holdings Inc.
Santander Bank N.A.
Santander Customer Assessment Note
Santander Consumer Finance
Santander Corporate & Investment Banking
SBNA
SCAN
SCF
SCIB
418
2018 Annual Report SCPs
SCUSA
SDG
SEC
SHUSA
SIS
SMEs
SOX
Strategic commercial plans
Santander Consumer US
Sustainable Development Goals
Securities and Exchanges Commission
Santander Holdings USA, Inc.
Santander Investment Securities
Small or medium enterprises
Sarbanes-Oxley Act of 2002
Spanish Companies Act
Spanish companies act approved by Royal Decree Law 1/2010, as amended from time to time
Spanish Securities Markets
Spanish securities markets act approved by Royal Decree Law 4/2015, as amended from time to time
SPF
SRB
SREP
SRF
SRI
SRT
SSM
STEM
T2
TCFD
TLAC
TF
TNC
TOM
TSR
UHNW
UK
UN SDG
UNEP FI
US
VaE
VaR
Simple, Personal and Fair
European Single Resolution Board
Supervisory Review and Evaluation Proccess
Single Resolution Fund
Socially Responsible Investment
Signifcant Risk Transfer
Single Supervisory Mechanism, the system of banking supervision in Europe. It comprises the ECB and
the national supervisory authorities of the participating countries.
Science, Technology, Engineering and Mathematics
Tier 2
Task Force on Climate-related Financial Disclosures
The total loss absorption capacity requirement which is required to be met under the CRD V package
Terrorist fnancing
The Nature Conservancy
Target Operational Model
Total Shareholder Return
Ultra High Net Worth
United Kingdom
United Nations Sustainable Development Goals
United Nations Environmental Program Financial Initiative
United States of America
Value at Earnings
Value at Risk
Volcker Rule
Section 619 of the Dodd-Frank Act
VRAC
WBCSD
Wolfsberg group
Vendor Risk Assessment Centre
World Business Council for Sustainable Development
Association of thirteen global banks which aims to develop frameworks and guidance for the
management of fnancial crime risks
419
Resposible BankingCorporate governance reportEconomic and financial reviewRisk Management Report
Auditors’ report
and consolidated
annual accounts
Auditors’ report
Consolidated annual accounts
Consolidated balance sheets as of 31 december
2018, 2017 and 2016
Consolidated income statements for the years ended
31 december 2018, 2017 and 2016
Consolidated statements of recognised income
and expense for the years ended 31 december
2018, 2017 and 2016
Consolidated statements of changes in total
equity for the years ended 31 december
2018, 2017 and 2016
Consolidated statements of cash fows for the years
ended 31 december 2018, 2017 and 2016
Notes to the consolidated annual accounts
1. Introduction, basis of presentation of the
consolidated fnancial statements (consolidated
annual accounts) and other information
2. Accounting policies
3. Santander Group
4. Distribution of the Bank’s proft, shareholder
remuneration scheme and earnings per share
5. Remuneration and other benefts paid to the Bank’s
directors and senior managers
6. Loans and advances to central banks and credit
institutions
7. Debt instruments
8. Equity instruments
9. Trading Derivatives (assets and liabilities)
and short positions
10. Loans and advances to customers
11. Trading derivatives
12. Non-current assets
423
435
436
440
442
444
450
451
452
464
500
505
506
521
522
524
525
526
531
532
420
532
534
13. Investments
14. Insurance contracts linked to pensions
15. Liabilities and assets under insurance
contracts and reinsurance assets
534
535
16. Tangible assets
538
17. Intangible assets – Goodwill
540
18. Intangible assets - Other intangible assets
19. Other assets
541
20. Deposits from central banks and credit institutions 542
542
21. Customer deposits
543
22. Marketable debt securities
547
23. Subordinated liabilities
548
24. Other fnancial liabilities
549
25. Provisions
561
26. Other liabilities
561
27. Tax matters
567
28. Non-controlling interests
568
29. Other comprehensive income
572
30. Shareholders’ equity
572
31. Issued capital
574
32. Share premium
574
33. Accumulated retained earnings
575
34. Other equity instruments and own shares
575
35. Memorandum items
576
36. Hedging derivatives
590
37. Discontinued operations
590
38. Interest income
590
39. Interest expense
40. Dividend income
591
41. Income from companies accounted
for using the equity method
42. Commission income
43. Commission expense
44. Gains or losses on fnancial assets and liabilities
591
591
592
592
2018 Auditors’ report and consolidated annual accounts
45. Exchange diferences, net
46. Other operating income and expenses
47. Staf costs
48. Other general administrative expenses
49. Gains or losses on non fnancial assets, net
50. Gains or losses on non-current assets held
for sale not classifed as discontinued operations
51. Other disclosures
52. Geographical and business segment reporting
53. Related parties
54. Risk management
55. Explanation added for translation to English
Appendix
Appendix I. Subsidiaries of Banco Santander, S.A.
Appendix II. Societies of which the Group owns more
than 5%, entities associated with Grupo Santander
and jointly controlled entities
Appendix III. Issuing subsidiaries of shares
and preference shares
Appendix IV. Notifcations of acquisitions
and disposals of investments in 2018
Appendix V. Other information on the Group’s banks
Appendix VI. Annual banking report
593
594
594
599
600
600
601
613
627
628
658
659
660
686
694
694
695
701
421
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
422
2018 Auditors’ report and consolidated annual accounts Auditors’
report
423
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
424
2018 Auditors’ report and consolidated annual accounts 425
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 426
2018 Auditors’ report and consolidated annual accounts 427
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 428
2018 Auditors’ report and consolidated annual accounts 429
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 430
2018 Auditors’ report and consolidated annual accounts 431
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 432
2018 Auditors’ report and consolidated annual accounts 433
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 434
2018 Auditors’ report and consolidated annual accounts Consolidated
annual
accounts
435
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix Translation of the consolidated annual accounts originally issued in Spanish and prepared in accordance with the regulatory fnancial reporting
framework applicable to the Group in Spain (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails.
Santander Group
CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2018, 2017 AND 2016
Million of euros
Assets*
CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEPOSITS ON DEMAND
FINANCIAL ASSETS HELD FOR TRADING
Derivatives
Equity instruments
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
NON-TRADING FINANCIAL ASSETS MANDATORILY AT
FAIR VALUE THROUGH PROFIT OR LOSS
Equity instruments
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
Equity instruments
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
Equity instruments
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
FINANCIAL ASSETS AVAILABLE-FOR-SALE
Equity instruments
Debt instruments
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
2018
113,663
92,879
55,939
8,938
27,800
202
-
-
202
23,495
10,730
3,260
5,587
1,883
-
2
1,881
-
57,460
3,222
54,238
9,226
23,097
21,915
6,477
121,091
2,671
116,819
1,601
-
-
1,601
35,558
Note
9 and 11
8
7
6
6
10
8
7
6
6
10
8
7
6
6
10
8
7
6
6
10
8
7
2017**
110,995
125,458
57,243
21,353
36,351
10,511
-
1,696
8,815
50,891
2016**
76,454
148,187
72,043
14,497
48,922
12,725
-
3,221
9,504
38,145
34,782
933
3,485
30,364
-
9,889
20,475
5,766
31,609
546
3,398
27,665
-
10,069
17,596
2,025
133,271
4,790
128,481
43,079
116,774
5,487
111,287
23,980
436
2018 Auditors’ report and consolidated annual accounts
FINANCIAL ASSETS AT AMORTISED COST
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
LOANS AND RECEIVABLES
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
INVESTMENTS HELD-TO-MATURITY
Memorandum items: lent or delivered as guarantee with disposal or pledge rights
HEDGING DERIVATIVES
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN
PORTFOLIO HEDGES OF INTEREST RISK
INVESTMENTS
Joint ventures entities
Associated entities
ASSETS UNDER INSURANCE OR REINSURANCE CONTRACTS
TANGIBLE ASSETS
Property, plant and equipment
For own-use
Leased out under an operating lease
Investment property
Of which leased out under an operating lease
Memorandum items:acquired in lease
INTANGIBLE ASSETS
Goodwill
Other intangible assets
TAX ASSETS
Current tax assets
Deferred tax assets
OTHER ASSETS
Insurance contracts linked to pensions
Inventories
Other
NON-CURRENT ASSETS HELD FOR SALE
TOTAL ASSETS
Note
2018
2017**
2016**
946,099
37,696
908,403
15,601
35,480
857,322
18,271
8,607
1,088
7,588
979
6,609
324
26,157
24,594
8,150
16,444
1,563
1,195
98
28,560
25,466
3,094
30,251
6,993
23,258
9,348
210
147
8,991
5,426
7
6
6
10
7
6
6
10
7
36
36
13
15
16
16
17
18
27
14
19
12
903,013
840,004
17,543
13,237
885,470
826,767
26,278
39,567
27,973
35,424
819,625
763,370
8,147
13,491
6,996
8,537
1,287
6,184
1,987
4,197
341
22,974
20,650
8,279
12,371
2,324
1,332
96
28,683
25,769
2,914
30,243
7,033
23,210
9,766
239
1,964
7,563
15,280
7,994
14,468
2,489
10,377
1,481
4,836
1,594
3,242
331
23,286
20,770
7,860
12,910
2,516
1,567
115
29,421
26,724
2,697
27,678
6,414
21,264
8,447
269
1,116
7,062
5,772
1,459,271
1,444,305
1,339,125
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet as of 31 December 2018.
437
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2018, 2017 AND 2016
Million of euros
LIABILITIES*
FINANCIAL LIABILITIES HELD FOR TRADING
Derivatives
Short positions
Deposits
Central banks
Credit institutions
Customers
Marketable debt securities
Other fnancial liabilities
FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
Deposits
Central banks
Credit institutions
Customers
Marketable debt securities
Other fnancial liabilities
Memorandum items:subordinated liabilities
FINANCIAL LIABILITIES AT AMORTISED COST
Deposits
Central banks
Credit institutions
Customers
Marketable debt securities
Other fnancial liabilities
Memorandum items:subordinated liabilities
HEDGING DERIVATIVES
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN
PORTFOLIO HEDGES OF INTEREST RATE RISK
LIABILITIES UNDER INSURANCE OR REINSURANCE CONTRACTS
PROVISIONS
Pensions and other post-retirement obligations
Other long term employee benefts
Taxes and other legal contingencies
Contingent liabilities and commitments
Other provisions
TAX LIABILITIES
Current tax liabilities
Deferred tax liabilities
OTHER LIABILITIES
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE
Note
2018
2017**
2016**
70,343
107,624
108,765
9
9
20
20
21
22
24
20
20
21
22
24
23
20
20
21
22
24
23
36
36
15
25
27
26
55,341
15,002
-
-
-
-
-
-
68,058
65,304
14,816
10,891
39,597
2,305
449
-
57,892
20,979
28,753
282
292
74,369
23,005
11,391
1,351
44
28,179
9,996
-
-
-
-
59,616
40,263
55,971
8,860
18,166
37,472
9,112
5,015
28,945
23,345
3,056
589
-
2,791
-
-
1,171,630
1,126,069
1,044,240
903,101
883,320
791,646
72,523
89,679
71,414
44,112
91,300
89,764
740,899
720,606
657,770
244,314
214,910
226,078
24,215
23,820
6,363
303
765
27,839
21,510
8,044
330
1,117
26,516
19,902
8,156
448
652
13,225
14,489
14,459
5,558
1,239
3,174
779
2,475
8,135
2,567
5,568
6,345
1,686
3,181
617
2,660
7,592
2,755
4,837
13,088
12,591
-
-
6,576
1,712
2,994
459
2,718
8,373
2,679
5,694
11,070
-
TOTAL LIABILITIES
1,351,910
1,337,472
1,236,426
438
2018 Auditors’ report and consolidated annual accounts
SHAREHOLDERS´ EQUITY
CAPITAL
Called up paid capital
Unpaid capital which has been called up
Memorandum items: uncalled up capital
SHARE PREMIUM
EQUITY INSTRUMENTS ISSUED OTHER THAN CAPITAL
Equity component of the compound fnancial instrument
Other equity instruments issued
OTHER EQUITY
ACCUMULATED RETAINED EARNINGS
REVALUATION RESERVES
OTHER RESERVES
Reserves or accumulated losses in joint ventures investments
Others
(-) OWN SHARES
PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
(-) INTERIM DIVIDENDS
OTHER COMPREHENSIVE INCOME
ITEMS NOT RECLASSIFIED TO PROFIT OR LOSS
ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS
NON-CONTROLLING INTEREST
Other comprehensive income
Other items
EQUITY*
TOTAL LIABILITIES AND EQUITY
MEMORANDUM ITEMS: OFF BALANCE SHEET AMOUNTS
Loans commitment granted
Financial guarantees granted
Other commitments granted
Note
2018
2017**
2016**
30
31
118,613
116,265
105,977
8,118
8,118
-
-
8,068
8,068
-
-
7,291
7,291
-
-
32
50,993
51,053
44,912
565
-
565
234
525
-
525
216
-
-
-
240
56,756
53,437
49,953
-
-
(3,567)
(1,602)
917
724
-
(949)
466
(4,484)
(2,326)
(1,415)
(59)
7,810
(22)
6,619
(7)
6,204
34
33
33
33
34
4
(2,237)
(2,029)
(1,667)
29
29
28
35
(22,141)
(21,776)
(15,039)
(2,936)
(4,034)
(3,933)
(19,205)
(17,742)
(11,106)
10,889
(1,292)
12,181
12,344
(1,436)
13,780
11,761
(853)
12,614
107,361
106,833
102,699
1,459,271
1,444,305
1,339,125
218,083
207,671
202,097
11,723
74,389
14,499
64,917
17,244
57,055
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet as of 31 December 2018.
439
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros
*
Interest income
Financial assets at fair value through other comprehensive income
Financial assets at amortised cost
Other interest income
Interest expense
Interest income / (charges)
Dividend income
Income from companies accounted for using the equity method
Commission income
Commission expense
Gain or losses on fnancial assets and liabilities not measured
at fair value through proft or loss, net
Financial assets at amortised cost
Other fnancial assets and liabilities
Gain or losses on fnancial assets and liabilities held for trading, net
Reclassifcation of fnancial assets at fair value through other comprehensive income
Reclassifcation of fnancial assets at amortised cost
Other gains (losses)
Gains or losses on non-trading fnancial assets and liabilities
mandatorily at fair value through proft or loss
Reclassifcation of fnancial assets at fair value through other comprehensive income
Reclassifcation of fnancial assets at amortised cost
Other gains (losses)
Gain or losses on fnancial assets and liabilities measured
at fair value through proft or loss, net
Gain or losses from hedge accounting, net
Exchange diferences, net
Other operating income
Other operating expenses
Income from assets under insurance and reinsurance contracts
Expenses from liabilities under insurance and reinsurance contracts
Total income
Administrative expenses
Staf costs
Other general administrative expenses
Depreciation and amortisation cost
Provisions or reversal of provisions, net
Note
38
(Debit) Credit
2018
54,325
4,481
47,560
2,284
2017**
56,041
4,384
2016**
55,156
4,522
49,096
48,084
2,561
2,550
39
(19,984)
(21,745)
(24,067)
34,341
34,296
31,089
384
704
14,579
(2,982)
413
444
12,943
(2,763)
404
869
1,252
2,456
40
13 and 41
42
43
44
44
370
737
14,664
(3,179)
604
39
565
1,515
-
-
1,515
44
331
-
-
331
(57)
83
(679)
1,643
(85)
(11)
105
1,618
426
(23)
(1,627)
1,919
(2,000)
(1,966)
(1,977)
3,175
2,546
1,900
(3,124)
(2,489)
(1,837)
48,424
48,355
44,232
(20,354)
(20,400)
(18,737)
(11,865)
(12,047)
(11,004)
(8,489)
(2,425)
(2,223)
(8,353)
(2,593)
(3,058)
(7,733)
(2,364)
(2,508)
44
44
45
46
46
46
46
47
48
16 and 18
25
440
2018 Auditors’ report and consolidated annual accounts Impairment or reversal of impairment at fnancial assets not measured at
fair value through proft or loss and net gains and losses from changes
Financial assets at fair value through other comprehensive income
Financial assets at amortised cost
Financial assets measured at cost
Financial assets available-for-sale
Loans and receivables
Held-to-maturity investments
Impairment or reversal of impairment of investments in
subsidiaries, joint ventures and associates, net
Impairment or reversal of impairment on non-fnancial assets, net
Tangible assets
Intangible assets
Others
Gain or losses on non-fnancial assets and investments, net
Negative goodwill recognised in results
Gains or losses on non-current assets held for sale not classifed as discontinued operations
Operating proft/(loss) before tax
Tax expense or income from continuing operations
Proft from continuing operations
Proft or loss after tax from discontinued operations
Proft for the year
Proft attributable to non-controlling interests
Proft attributable to the parent
Earnings per share
Basic
Diluted
(Debit) Credit
Note
2018
2017**
2016**
(8,986)
(9,259)
(9,626)
(1)
10
(8,985)
(8)
(10)
(52)
11
(9,241)
(9,557)
-
(28)
10
17 and 18
16
17 and 18
49
50
(17)
(190)
(83)
(117)
10
28
67
(123)
14,201
(13)
(1,260)
(72)
(1,073)
(115)
522
-
(203)
12,091
27
(4,886)
(3,884)
9,315
8,207
37
28
4
4
-
9,315
1,505
7,810
0.449
0.448
-
8,207
1,588
6,619
0.404
0.403
* See further detail regarding the impacts of the entry into force of IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated income statement
for the year ended 31 December 2018.
(17)
(123)
(55)
(61)
(7)
30
22
(141)
10,768
(3,282)
7,486
-
7,486
1,282
6,204
0.401
0.399
441
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR
THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros
*
CONSOLIDATED PROFIT FOR THE YEAR
OTHER RECOGNISED INCOME AND EXPENSE
Items that will not be reclassifed to proft or loss
Actuarial gains and losses on defned beneft pension plans
Non-current assets held for sale
Other recognised income and expense of investments in
subsidiaries, joint ventures and associates
Changes in the fair value of equity instruments measured at
fair value through other comprehensive income
Gains or losses resulting from the accounting for hedges of equity instruments
measured at fair value through other comprehensive income, net
Changes in the fair value of equity instruments measured at fair
value through other comprehensive income (hedged item)
Changes in the fair value of equity instruments measured at fair value
through other comprehensive income (hedging instrument)
Changes in the fair value of fnancial liabilities at fair value through
proft or loss attributable to changes in credit risk
Income tax relating to items that will not be reclassifed
Items that may be reclassifed to proft or loss
Hedges of net investments in foreign operations (efective portion)
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Exchanges diferences
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Cash fow hedges (efective portion)
Revaluation gains (losses)
Amounts transferred to income statement
Transferred to initial carrying amount of hedged items
Other reclassifcations
Financial assets available-for-sale
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Hedging instruments (items not designated)
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Debt instruments at fair value with changes in other comprehensive income
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Non-current assets held for sale
Revaluation gains (losses)
Amounts transferred to income statement
Other reclassifcations
Share of other recognised income and expense of investments
Income tax relating to items that may be reclassifed to proft or loss
Total recognised income and expenses for the year
Attributable to non-controlling interests
Attributable to the parent
Note
29
2018
9,315
(1,899)
332
618
-
2017**
8,207
(7,320)
(88)
(157)
-
2016**
7,486
(303)
(806)
(1,172)
-
1
1
(1)
36
(174)
29
36
36
36
29
36
29
-
-
-
109
(222)
(2,231)
(2)
(2)
-
-
(1,874)
(1,874)
-
-
174
491
(317)
-
-
-
-
-
-
(591)
(29)
(562)
-
-
-
-
-
(77)
139
7,416
1,396
6,020
68
(7,232)
614
614
-
-
(8,014)
(8,014)
-
-
(441)
501
(942)
-
-
683
1,137
(454)
-
-
-
-
-
(70)
(4)
887
1,005
(118)
367
503
(1,329)
(1,330)
1
-
676
682
(6)
-
495
6,231
(5,736)
-
-
1,326
2,192
(866)
-
-
-
-
-
80
(745)
7,183
1,656
5,527
* See further detail regarding the impacts of the entry into force of IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of recognised income and expense for the year ended
31 December 2018.
442
2018 Auditors’ report and consolidated annual accounts
443
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros
Share
premium
Equity instruments
(not capital)
issued
Other equity
nstruments
i
A
ccumulated
retained
earnings
*
Balance as of 31-12-17**
Adjustments due to errors
Adjustments due to changes in accounting policies
Capital
8,068
-
-
51,053
-
-
Opening balance as of 01-01-18**
8,068
51,053
Total recognised income and expense
Other changes in equity
Issuance of ordinary shares
Issuance of preferred shares
Issuance of other fnancial instruments
Maturity of other fnancial instruments
Conversion of fnancial liabilities into equity
Capital reduction
Dividends
Purchase of equity instruments
Disposal of equity instruments
Transfer from equity to liabilities
Transfer from liabilities to equity
Transfers between equity items
Increases (decreases) due to business combinations
Share-based payment
Others increases or (-) decreases of the equity
-
50
50
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(60)
(60)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance as of 31-12-18
8,118
50,993
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
525
-
-
525
-
40
-
-
-
-
-
-
-
-
-
-
-
-
-
-
40
565
216
53,437
-
-
216
-
18
-
-
-
-
-
-
-
-
-
-
-
-
-
(74)
92
234
-
-
53,437
-
3,319
-
-
-
-
-
-
(968)
-
-
-
-
4,287
-
-
-
56,756
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December
2018.
444
2018 Auditors’ report and consolidated annual accounts
Revaluation
reserves
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Other
reserves
(1,602)
-
(1,473)
(3,075)
-
(492)
10
-
-
-
-
-
-
-
-
-
-
303
59
-
(864)
(3,567)
Proft
attributable
to shareholders
of the parent
(-) Own shares
(-) Interim
dividends
Other
comprehensive
income
Other
comprehensive
income
Others items
Total
(22)
6,619
(2,029)
(21,776)
(1,436)
13,780
106,833
Non-Controlling interest
-
-
(22)
-
(37)
-
-
-
-
-
-
-
(1,026)
989
-
-
-
-
-
-
-
-
6,619
7,810
(6,619)
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,029)
-
(208)
-
-
-
-
-
-
(2,237)
-
-
-
-
(6,619)
2,029
-
-
-
-
-
-
-
1,425
(20,351)
(1,790)
-
253
(1,183)
(109)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,545)
(1,340)
12,235
105,493
1,505
7,416
(1,559)
(5,548)
-
-
-
-
-
-
-
-
-
-
-
-
(687)
(3,892)
-
-
-
-
-
(660)
17
(229)
(1,026)
989
-
-
-
(601)
(57)
(961)
(59)
7,810
(2,237)
(22,141)
(1,292)
12,181
107,361
445
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros.
Share
premium
Equity instruments
(not capital)
issued
Other equity
nstruments
i
A
ccumulated
retained
earnings
*
Balance as of 31-12-16*
Adjustments due to errors
Adjustments due to changes in accounting policies
Capital
7,291
-
-
44,912
-
-
Opening balance as of 01-01-17*
7,291
44,912
Total recognised income and expense
Other changes in equity
Issuance of ordinary shares
Issuance of preferred shares
Issuance of other fnancial instruments
Maturity of other fnancial instruments
Conversion of fnancial liabilities into equity
Capital reduction
Dividends
Purchase of equity instruments
Disposal of equity instruments
Transfer from equity to liabilities
Transfer from liabilities to equity
Transfers between equity items
Increases (decreases) due to business combinations
Share-based payment
Others increases or (-) decreases of the equity
-
777
777
-
6,141
6,141
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
525
-
-
525
-
-
-
-
-
-
-
-
-
-
-
-
240
49,953
-
-
240
-
(24)
-
-
-
-
-
-
-
-
-
-
-
-
-
(72)
48
216
-
-
49,953
-
3,484
-
-
-
-
-
-
(802)
-
-
-
-
4,286
-
-
-
53,437
Balance as of 31-12-17*
8,068
51,053
525
* Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December
2018.
446
2018 Auditors’ report and consolidated annual accounts
Revaluation
reserves
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Other
reserves
(949)
-
-
(949)
-
(653)
6
-
-
-
-
-
-
-
26
-
-
251
-
-
(936)
(1,602)
Proft
attributable
to shareholders
of the parent
(-) Own shares
(-) Interim
dividends
Other
comprehensive
income
Other
comprehensive
income
Others items
Total
Non-Controlling interest
(7)
-
-
(7)
-
(15)
-
-
-
-
-
-
-
(1,309)
1,294
-
-
-
-
-
-
6,204
(1,667)
(15,039)
(853)
12,614
102,699
-
-
6,204
6,619
(6,204)
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,667)
-
(362)
-
-
-
-
-
-
(2,029)
-
-
-
-
(6,204)
1,667
-
-
-
-
-
-
-
-
(15,039)
(6,737)
-
-
(853)
(583)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,614
102,699
1,588
(422)
543
-
592
-
-
887
3,247
7,467
-
1,117
-
-
(10)
(10)
(665)
(3,496)
-
-
-
-
-
(1,309)
1,320
-
-
-
(39)
24
(39)
(48)
(867)
(1,755)
(22)
6,619
(2,029)
(21,776)
(1,436)
13,780
106,833
447
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros
Share
premium
Equity instruments
not capital)
issued (
Other equity
nstruments
i
A
ccumulated
retained
earnings
*
Balance as of 31-12-15*
Adjustments due to errors
Adjustments due to changes in accounting policies
Capital
7,217
-
-
45,001
-
-
Opening balance as of 01-01-16*
7,217
45,001
Total recognised income and expense
Other changes in equity
Issuance of ordinary shares
Issuance of preferred shares
Issuance of other fnancial instruments
Maturity of other fnancial instruments
Conversion of fnancial liabilities into equity
Capital reduction
Dividends
Purchase of equity instruments
Disposal of equity instruments
Transfer from equity to liabilities
Transfer from liabilities to equity
Transfers between equity items
Increases (decreases) due to business combinations
Share-based payment
Others increases or (-) decreases of the equity
-
74
74
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(89)
(89)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance as of 31-12-16*
7,291
44,912
* Presented for comparison purposes only (Note 1.d).
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
214
46,429
-
-
214
-
26
-
-
-
-
-
-
-
-
-
-
-
-
-
(79)
105
240
-
-
46,429
-
3,524
-
-
-
-
-
-
(722)
-
-
-
-
4,246
-
-
-
49,953
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December
2018.
448
2018 Auditors’ report and consolidated annual accounts
Revaluation
reserves
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Other
reserves
(669)
-
-
(669)
-
(280)
15
-
-
-
-
-
-
-
15
-
-
174
-
-
(484)
(949)
Proft
attributable
to shareholders
of the parent
(-) Own shares
(-) Interim
dividends
Other
comprehensive
income
Other
comprehensive
income
Others items
Total
(210)
5,966
(1,546)
(14,362)
(1,227)
11,940
98,753
Non-Controlling interest
-
-
-
-
(1,546)
(14,362)
-
-
(210)
-
203
-
-
-
-
-
-
-
(1,380)
1,583
-
-
-
-
-
-
-
-
5,966
6,204
(5,966)
-
-
-
-
-
-
-
-
-
-
-
-
(121)
-
-
-
-
-
-
(1,667)
-
-
-
-
(5,966)
1,546
-
-
-
-
-
-
-
-
(1,227)
374
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,940
98,753
1,282
7,183
(608)
(3,237)
534
534
-
-
-
-
-
-
-
-
(22)
(22)
(800)
(3,189)
-
-
-
-
-
(197)
-
(123)
(1,380)
1,598
-
-
-
(197)
(79)
(502)
(677)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7)
6,204
(1,667)
(15,039)
(853)
12,614
102,699
449
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2018, 2017 AND 2016
Million of euros
*
A. CASH FLOWS FROM OPERATING ACTIVITIES
Proft for the year
Adjustments made to obtain the cash fows from operating activities
Depreciation and amortisation cost
Other adjustments
Net increase/(decrease) in operating assets
Financial assets held-for-trading
Non-trading fnancial assets mandatorily at fair value through proft or loss
Financial assets at fair value through proft or loss
Financial assets at fair value through other comprehensive income
Financial assets available-for-sale
Financial assets at amortised cost
Loans and receivables
Other operating assets
Net increase/(decrease) in operating liabilities
Financial liabilities held-for-trading
Financial liabilities designated at fair value through proft or loss
Financial liabilities at amortised cost
Other operating liabilities
Income tax recovered/(paid)
B. CASH FLOWS FROM INVESTING ACTIVITIES
Payments
Tangible assets
Intangible assets
Investments
Subsidiaries and other business units
Non-current assets held for sale and associated liabilities
Held-to-maturity investments
Other payments related to investing activities
Proceeds
Tangible assets
Intangible assets
Investments
Subsidiaries and other business units
Non-current assets held for sale and associated liabilities
Held-to-maturity investments
Other proceeds related to investing activities
C. CASH FLOW FROM FINANCING ACTIVITIES
Payments
Dividends
Subordinated liabilities
Redemption of own equity instruments
Acquisition of own equity instruments
Other payments related to fnancing activities
Proceeds
Subordinated liabilities
Issuance of own equity instruments
Disposal of own equity instruments
Other proceeds related to fnancing activities
D. EFFECT OF FOREIGN EXCHANGE RATE DIFFERENCES
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
G. CASH AND CASH EQUIVALENTS AT END OF THE YEAR
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF THE YEAR
Cash
Cash equivalents at central banks
Other fnancial assets
Less: Bank overdrafts refundable on demand
TOTAL CASH AND CASH EQUIVALENTS AT END OF THE YEAR
In which: restricted cash
Note
16
18
13
16
18
13
12
4
23
23
2018
3,416
9,315
21,714
2,425
19,289
51,550
(31,656)
5,795
16,275
(2,091)
61,345
1,882
27,279
(36,315)
8,312
60,730
(5,448)
(3,342)
3,148
12,936
10,726
1,469
11
730
-
-
16,084
3,670
-
2,327
431
9,656
-
(3,301)
7,573
3,118
2,504
-
1,026
925
4,272
3,283
-
989
-
(595)
2,668
110,995
113,663
10,370
89,005
14,288
-
113,663
-
2017**
40,188
8,207
23,927
2,593
21,334
18,349
(18,114)
2016**
21,823
7,486
22,032
2,364
19,668
17,966
6,234
3,085
(12,882)
2,494
(7,688)
32,379
(1,495)
30,540
1,933
19,906
12,006
(3,305)
(4,137)
(4,008)
10,134
7,450
1,538
8
838
-
300
-
6,126
3,211
-
883
263
1,382
387
-
4,206
7,783
2,665
2,007
-
1,309
1,802
11,989
2,994
7,072
1,331
592
(5,845)
34,541
76,454
110,995
8,583
87,430
14,982
-
110,995
-
27,938
4,364
13,143
8,032
(13,450)
21,765
(3,204)
(2,872)
(13,764)
18,204
6,572
1,768
48
474
-
9,342
-
4,440
2,608
-
459
94
1,147
132
-
(5,745)
9,744
2,309
5,112
-
1,380
943
3,999
2,395
-
1,604
-
(3,611)
(1,297)
77,751
76,454
8,413
54,637
13,404
-
76,454
-
* See further detail regarding the impacts of the entry into force of IFRS9 as of 1 January 2018 (Note 1.b).
** Presented for comparison purposes only (Note 1.d).
The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of cash fows for the year ended 31 December 2018.
450
2018 Auditors’ report and consolidated annual accounts
Notes to the
consolidated
annual
accounts
451
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix Translation of the consolidated annual accounts originally issued in
Spanish and prepared in accordance with the regulatory fnancial
reporting framework applicable to the Group in Spain (see Notes 1
and 55). In the event of a discrepancy, the Spanish-language version
prevails.
Banco Santander, S.A. and Companies
composing Santander Group
Notes to the consolidated fnancial statements (consolidated
annual accounts) for the year ended 31 December 2018
1. Introduction, basis of presentation
of the consolidated fnancial
statements (consolidated annual
accounts) and other information
a) Introduction
Banco Santander, S.A. (“the Bank” or “Banco Santander”) is a
private-law entity subject to the rules and regulations applicable
to banks operating in Spain. The Bylaws and other public
information on the Bank can be consulted at its registered ofce at
Paseo de Pereda 9-12, Santander.
In addition to the operations carried on directly by it, the Bank is
the head of a group of subsidiaries that engage in various business
activities and which compose, together with it, Santander Group
(“the Group”). Therefore, the Bank is obliged to prepare, in addition
to its own separate fnancial statements, the Group’s consolidated
fnancial statements, which also include the interests in joint
ventures and investments in associates.
At 31 December 2018, the Group consisted of 719 subsidiaries
of Banco Santander, S.A. In addition, other 170 companies are
associates of the Group, joint ventures or companies of which the
Group holds more than 5% (excluding the Group companies of
negligible interest with respect to the fair presentation that the
annual accounts must express).
The Group’s consolidated fnancial statements for 2016 were
approved by the shareholders at the Bank’s annual general
meeting on 7 April 2017. The Group’s consolidated fnancial
statements for 2017 were approved by the shareholders at the
Bank’s annual general meeting on 23 March 2018. The 2018
consolidated fnancial statements of the Group, the fnancial
statements of the Bank and of substantially all the Group
companies have not been approved yet by their shareholders at the
respective annual general meetings. However, the Bank’s board of
directors considers that the aforementioned fnancial statements
will be approved without any signifcant changes.
b) Basis of presentation of the
consolidated annual accounts
Under Regulation (EC) no. 1606/2002 of the European Parliament
and of the Council of 19 July 2002 all companies governed by the
law of an EU Member State and whose securities are admitted to
trading on a regulated market of any Member State must prepare
their consolidated fnancial statements for the years beginning
on or after 1 January 2005 in conformity with the International
Financial Reporting Standards (“IFRSs”) previously adopted by the
European Union (“EU-IFRSs”).
In order to adapt the accounting system of Spanish credit
institutions to the new standards, the Bank of Spain issued Circular
4/2004, of 22 December on Public and Confdential Financial
Reporting Rules and Formats, which was repealed on 1 January
2018 by the Circular 4/2017 issued by the Bank of Spain on 27
November 2017 and subsequent modifcations.
The Group’s consolidated fnancial statements for 2018 were
authorised by the Bank’s directors (at the board meeting on
26 February 2019) in accordance with International Financial
Reporting Standards as adopted by the European Union and with
Bank of Spain Circular 4/2017 and subsequent modifcations,
and Spanish corporate and commercial law applicable to the
Group, using the basis of consolidation, accounting policies and
measurement bases set forth in Note 2, accordingly, they present
fairly the Group’s equity and fnancial position at 31 December 2018
and the consolidated results of its operations and the consolidated
cash fows in 2018. These consolidated fnancial statements
were prepared from the accounting records kept by the Bank
and by the other Group entities, and include the adjustments and
reclassifcations required to unify the accounting policies and
measurement bases applied by the Group.
The notes to the consolidated fnancial statements contain
supplementary information to that presented in the consolidated
balance sheet, consolidated income statement, consolidated
statement of recognised income and expense, consolidated
statement of changes in total equity and consolidated statement
of cash fows. The notes provide, in a clear, relevant, reliable and
comparable manner, narrative descriptions and breakdowns of
these statements.
Adoption of new standards and interpretations issued
The following modifcations came into force and were adopted by
the European Union in 2018:
• IFRS9 Financial instruments
On 1 January 2018, IFRS9 Financial instruments entered into
force. IFRS9 establishes the requirements for recognition and
measurement of both fnancial instruments and certain types
of non-fnancial-purchase contracts. The aforementioned
requirements should be applied retrospectively, adjusting the
opening balance at 1 January 2018, not requiring restatement of
the comparative fnancial statements.
The adoption of IFRS9 has resulted in changes in the Groups’
accounting policies for the recognition, classifcation and
measurement of fnancial assets and liabilities and fnancial
assets impairment. IFRS9 also signifcantly modifes other
standards related to fnancial instruments such as IFRS7
“Financial instruments: disclosure”.
Additionally, IFRS9 includes new hedge accounting requirements
which have a twofold objective: to simplify current requirements,
and to bring hedge accounting in line with risk management,
452
2018 Auditors’ report and consolidated annual accounts
allowing to be a greater variety of derivative fnancial
instruments which may be considered to be hedging instruments.
Furthermore, additional breakdowns are required providing
useful information regarding the efect which hedge accounting
has on fnancial statements and also on the entity’s risk
management strategy. The treatment of macro-hedges is being
developed as a separate project under IFRS9. Entities have the
option of continuing to apply IAS39 with respect to accounting
hedges until the project has been completed. According to the
analysis performed until now, the Group applies IAS39 in hedge
accounting.
For breakdowns of the notes, according to the regulations in
force, the amendments relating to IFRS7 have only been applied
to the current period. The breakdowns of the comparative
information period notes maintain the breakdowns made in the
previous period.
The following breakdowns relate to the impact of the adoption of
IFRS9 in the Group:
a) Classifcation and measurement of fnancial instruments
The following table shows a comparison between IAS39 as of 31
December 2017 and IFRS9 as of 1 January 2018 of the reclassifed
fnancial instruments in accordance with the new requirements
of IFRS9 regarding classifcation and measurement (without
impairment), as well as its book value:
IAS39
IFRS9
Balance
Portfolio
Equity
instruments
Financial assets available for sale
(including those that were
valued at cost at December)
Loans and receivables
Debt instruments
Financial assets available for sale
2,154
1,537
457
96
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Financial assets at fair value through
other comprehensive income
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Financial assets at fair value through
other comprehensive income
Non-trading fnancial assets mandatorily
at fair value through proft or loss
6,589
Financial assets at amortised cost
203
Financial assets held for trading
Financial assets at fair value
through proft or loss
199
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Investments held-to-maturity
13,491
Financial assets at amortised cost
Loans and
advances
Loans and receivables
Loans and receivables
Financial assets held for trading
Financial assets at fair value
through proft or loss
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Financial assets at fair value
through proft or loss
Financial assets at fair value through
other comprehensive income
10,179
1,069
43
1,152
Financial assets at amortised cost
Derivatives
Derivatives – hedging
accounting (liabilities)
10
Derivatives - fnancial liabilities
held for trading
Book value
(Million ofeuros)
Portfolio
Book value
(Million of euros)
1,651
533
1,497
486
96
6,704
203
199
13,491
611
9,577
1,107
1,102
10
453
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
b) Reconciliation of impairment provisions from IAS39 to IFRS9
The following table shows a comparison between IAS39 as of 31
December 2017 and IFRS9 as of 1 January 2018 of the impairment
provisions of the fnancial instruments in accordance with the new
requirements of IFRS9:
Million of euros
Financial assets at
amortised cost
Loans and advances
Debt instruments
Financial assets at fair
value through other
comprehensive income
Debt instruments
Commitments and
guarantees granted
Total
IAS39
31/12/2017
Impairment
impact
IFRS9
01-01-2018
24,682
23,952
730
-
-
617
25,299
1,974
2,002
(28)
2
2
197
2,173
26,656
25,954
702
2
2
814
27,472
Additionally, there is an impairment impact on Investments in joint ventures
and associates of EUR 34 million.
c) Balance sheet reconciliation from IAS39 to IFRS9
The following table shows in detail the reconciliation the
consolidated balance sheet under IAS39 as of 31 December 2017 to
IFRS9 as of 1 January 2018 distinguishing between the impacts due
to classifcation and measurement and due to impairment once
adopted IFRS9:
454
2018 Auditors’ report and consolidated annual accounts
ASSETS (Million of euros)
Cash, cash balances at central banks
and other deposits on demand
Financial assets held for trading
Derivatives
Equity instruments
Debt instruments
Loans and advances
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Equity instruments
Debt instruments
Loans and advances
Financial assets designated at fair
value through proft or loss
Equity instruments
Debt instruments
Loans and advances
Financial assets at fair value through
other comprehensive income
Equity instruments
Debt instruments
Loans and advances
Financial assets available-for-sale
Equity instruments
Debt instruments
Financial assets at amortised cost
Debt instruments
Loans and advances
Loans and receivables
Debt instruments
Loans and advances
Investments held to maturity
Investments
Other assets**
TOTAL ASSETS
IAS39
31/12/2017
Naming
modifcations*
Classifcation and
measurement
impact
Impairment
impact
IFRS9
01-01-2018
110,995
125,458
57,243
21,353
36,351
10,511
34,782
933
3,485
30,364
133,271
4,790
128,481
903,013
17,543
885,470
13,491
6,184
117,111
1,444,305
-
-
-
-
-
-
933
933
-
-
(933)
(933)
-
-
124,229
2,636
121,593
-
(124,229)
(2,636)
(121,593)
889,779 a
15,557 b
874,222
(889,779) a
(15,557)
(874,222)
-
-
-
-
-
160
-
-
203
(43)
4,054 c
1,651
1,792
611
8,226
-
(199)
8,425 a
2,126
533
486
1,107
(9,042)
(2,154) c
(6,888) b
21,297
20,195 b
1,102
(13,242)
(1,994) c
(11,248) a c
(13,491) b
-
6
94
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2)
-
(2)
-
-
-
-
(1,982)d
20
(2,002)
8
8
-
-
(34)
680 e
(1,330)
110,995
125,618
57,243
21,353
36,554
10,468
4,987
2,584
1,792
611
42,075
3,286
38,789
126,353
3,169
122,077
1,107
909,094
35,772
873,322
-
6,150
117,797
1,443,069
* Due to the entry into force of Bank of Spain Circular 4/2017.
** Includes Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Assets under insurance or reinsurance
contracts, Tangible assets, Intangible assets, Tax assets, Other assets and Non-current assets held for sale.
a. The amount of the item Loans and receivables at 31 December 2017 is reclassifed into Financial assets at amortised cost. Nevertheless, the Group
maintained a portfolio of loans and receivables for an approximate amount of EUR 8,600 million, which relate mainly to Brazil, which was designated
at amortised cost; as a result of the initial implementation of IFRS9 this portfolio has been designated as fair value and fnally it has been reclassifed as
‘Financial assets designated at fair value through proft or loss’.
b. Instruments classifed as Investments held to maturity at 31 December 2017 have been reclassifed into Financial assets available-for-sale because of the
initial implementation of IFRS9. Additionally, after the review of the business model of cash fow portfolio in diferent locations, the group has identifed
certain groups of assets classifed at 31 December 2017 as Financial assets available-for-sale, which relate mainly to Mexico, Brazil and Consumer Finance
business, whose management is oriented towards the maintenance of fnancial instruments in a portfolio until maturity end; because of that, this asset
group has been reclassifed as Financial assets at amortised cost.
c. The Group has reclassifed in Non-trading fnancial assets mandatory at fair value through proft or loss those fnancial instruments which have not comply
with the SPPI test (solely payments of principal and interest) classifed at 31 December 2017 mainly in Loans and receivables and Financial assets available
for sale, which relate mainly to the UK, Spain and Poland.
d. It corresponds to the increase in provisions for impairment of the value of the assets included in the item Financial assets at amortised cos derived from
the change in accounting policy.
e. This corresponds with increase on provisions for the tax efect referred in section d.
455
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
LIABILITIES (Million of euros)
Financial liabilities held for trading
Derivatives
Short positions
Deposits
Marketable debt securities
Other fnancial liabilities
Financial liabilities designated at fair
value through proft or loss
Deposits
Marketable debt securities
Other fnancial liabilities
Financial liabilities at amortised cost
Deposits
Marketable debt securities
Other fnancial liabilities
Hedging derivatives
Changes in the fair value of hedged items in
portfolio hedges of interest rate risk
Provisions
Contingent liabilities and commitments
Other provisions*
Other liabilities**
TOTAL LIABILITIES
IAS39
31/12/2017
Naming
modifcations
Classifcation
and
measurement
impact
Impairment
impact
IFRS9
01-01-2018
107,624
57,892
20,979
28,753
-
-
59,616
55,971
3,056
589
1,126,069
883,320
214,910
27,839
8,044
330
14,489
617
13,872
21,300
1,337,472
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
10
-
-
-
-
-
-
-
-
-
-
-
-
(10)
-
-
-
-
41
41
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
197
197
-
(3)
194
107,634
57,902
20,979
28,753
-
-
59,616
55,971
3,056
589
1,126,069
883,320
214,910
27,839
8,034
330
14,686
814
13,872
21,338
1,337,707
* Includes Pensions and other post-retirements obligations, Other long-term employee benefts, Taxes and other legal contingencies and Other provisions
(including guarantees and other contingent liabilities).
** Includes Liabilities under insurance or reinsurance contracts, Tax liabilities, Other liabilities and Liabilities associated with non-current assets held for sale.
456
2018 Auditors’ report and consolidated annual accounts
IAS39
31/12/2017
Naming
modifcations*
Classifcation
and
measurement
impact
Impairment
impact
IFRS9
01-01-2018
91
(1,401)
114,955
-
-
-
-
-
-
-
-
-
-
-
-
8,068
51,053
525
216
53,437
-
91
(1,401)
(2,912)
EQUITY (Million of euros)
Shareholders’ equity
Capital
Share premium
Equity instruments issued other than capital
Other equity
Accumulated retained earnings
Revaluation reserves
Other reserves
Own shares
Proft attributable to shareholders of the parent
Interim dividends
Other comprehensive income
Items not reclassifed to proft or loss
Actuarial gains or losses on defned beneft pension plans
Non-current assets held for sale
Share in other income and expenses recognised in
investments in joint ventures and associates
Other valuation adjustments
Changes in the fair value of equity instruments measured at
fair value with changes in other comprehensive income
Inefcacy of fair value hedges of equity instruments measured
at fair value with changes in other comprehensive income
Changes in the fair value of fnancial liabilities at fair value
through proft or loss attributable to changes in credit risk
Items that may be reclassifed to proft or loss
Hedge of net investment in foreign operations (efective portion)
Exchange diferences
Hedging derivatives. Cash fow hedges (efective portion)
Changes in the fair value of debt instruments measured at
fair value with changes in other comprehensive income
Hedging instruments (items not designated)
Financial assets available for sale
Debt instruments
Equity instruments
Non-current assets held for sale
Share in other income and expenses recognised in
investments in joint ventures and associates
Non controlling interests
Other comprehensive income
Other elements
EQUITY
TOTAL EQUITY AND LIABILITIES
* Due to the entry into force of Bank of Spain Circular 4/2017.
116,265
8,068
51,053
525
216
53,437
-
(1,602)
(22)
6,619
(2,029)
(21,776)
(4,034)
(4,033)
-
(1)
-
(17,742)
(4,311)
(15,430)
152
2,068
1,154
914
-
(221)
12,344
(1,436)
13,780
106,833
1,444,305
-
-
-
-
-
-
-
-
-
-
-
-
919
-
-
5
-
-
-
-
(53)
(152)
-
-
(5)
-
914
(141)
-
-
(919)
-
-
-
1,154
-
(2,068)
(1,154)
(914)
-
(5)
-
-
-
-
-
-
(6)
99
-
-
-
99
-
-
-
-
-
-
15
3
12
53
94
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(123)
-
(123)
(22)
6,619
(2,029)
(21,829)
(3,267)
(4,033)
-
(1)
773
-
(6)
(18,562)
(4,311)
(15,430)
152
1,253
-
-
(226)
12,236
(1,433)
13,669
(1,524)
105,362
(1,330)
1,443,069
457
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The Group has chosen to apply a progressive 5-year transition
period in accordance with Regulation (EU) 2017/2395 of the
European Parliament and of the Council amending Regulation
(EU) 575/2013 as regards transitional provisions to mitigate the
impact of the introduction of IFRS9 on shareholders’ equity. If the
transitional provision of IFRS 9 had not been applied, the total
impact of the fully loaded CET1 ratio on 31 December 2018 would
be -27 b.p.
• IFRS15 Revenue from Contracts with Customers (efective
for annual reporting periods beginning on or after 1 January
2018) - the new standard on the recognition of revenue from
contracts with customers. It supersedes the following standards
and interpretations previous in force: IAS18, Revenue; IAS11,
Construction Contracts; IFRIC 13, Customer Loyalty Programs;
IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18,
Transfers of Assets from Customers; and SIC-31, Revenue-Barter
Transactions Involving Advertising Services. Under IFRS15, an
entity recognises revenue in accordance with the core principle
of the standard by applying the following fve steps: identify the
contract(s) with a customer; identify the performance obligations
in the contract; determine the transaction price; allocate the
transaction price to the performance obligations identifed in the
contract; and recognise revenue when as the entity satisfes a
performance obligation.
• Clarifcations to IFRS15 income coming from contracts with
clients.
Given that IFRS15 does not apply to fnancial instruments and
other contractual rights or obligations under the scope of
IFRS9, no signifcant efects derived from the application of the
aforementioned Accounting Standard and its clarifcations in the
Group’s consolidated fnancial statements.
• Modifcation to IFRS4 “Insurance contracts” applying IFRS9
“Financial Instruments” (efective for annual reporting periods
beginning on or after 1 January 2018). The purpose of the
amendment is to give all companies that issue insurance
contracts the option to recognize in other comprehensive
income, instead of proft or loss, the volatility that could arise
when applying IFRS9, for new contracts before the adoption of
the insurance standard and give companies whose activities are
mostly insurance-related an optional temporary exemption from
the application of IFRS9 until the year 2021. Entities that defer the
application of IFRS9 will continue to apply the existing norm of
Financial Instruments IAS39.
The deferral of the aforementioned accounting standard did not
apply because of non-compliance with the conditions required
for it.
• Modifcation to the IFRS2 Classifcation and measurement of
share-based payment transactions – The amendments address
the following areas: (a) Accounting for the efects that the
requirements for the consolidation of the grant have in cash–
settled share-based payment transactions, (b) Classifcation
of share–based payment transactions with net settlement
features for the tax withholding obligations; and (c) Accounting
for modifcations of share-based payment transactions terms
and conditions from cash-settled to equity-settled payment
transactions.
• Modifcation of IAS40 Transfers of investment properties;
changes are made to the existing requirements or provide
with some additional guidance on the implementation of such
requirements.
• Improvements to IFRS Cycle 2014-2016 - introduce minor
amendments to IFRS1, referring to the elimination of short-term
exemptions for entities adopting IFRS for the frst time, and
IAS28, related to the valuation of an investment in an associated
or a joint venture at fair value. Minor amendments to IFRS12
regarding this cycle came into force for the years beginning on 1
January 2017.
• Interpretation to IFRIC 22 on Foreign currency transactions and
advance considerations – When an entity reports a payment
of advance consideration in order to recognise the profts
associated to the income statement, it shall recognise both the
consideration received as a non-monetary liability (deferred
income or contract liabilities) in the statement of fnancial
position at the exchange rate obtained according to the IAS21 The
efects of changes in foreign exchange rates. When the deferred
incomes are subsequently recognised in the income statement
as incomes, the issue is raised on whether its measurement
should refect: the amount at which the deferred income was
originally recognised, namely, when the consideration was
originally received; or the consideration amount received is
translated to the existing exchange rate on the date when the
non-monetary element is generated as income in the income
statement, generating an exchange gain or loss that refects the
diference between the amount of the consideration translated (i)
to the exchange rate in force in the moment of its receipt and (ii)
to the exchange rate I force when it is recognised in the income
statement as a proft or loss.
The application of the aforementioned accounting standards
did not have any material efects of the Group´s consolidated
fnancial statements.
Also, at the date of preparation of these consolidated fnancial
statements, the following amendments with an efective date
subsequent to 31 December 2018 were in force:
• IFRS16 Leases substitutes IAS17, IFRIC (International Financial
Reporting Interpretation Committee) 4, SIC (Standard
Interpretations Committee)-15 and SIC-27. It was adopted by the
European Union on 31 October 2017 through the Regulation (EU)
2017/1986.
• IFRS16 (efective for annual periods beginning on or after 1
January 2019, with an early adoption option that the Group
has not applied) establishes the principles for the recognition,
measurement, presentation and breakdown of lease contracts,
with the objective of reporting information that faithfully
represents the lease transactions. IFRS16 provides a single
458
2018 Auditors’ report and consolidated annual accounts
accounting model for the lessee, whereby the lessee must
recognise the assets by right of use and the corresponding lease
liabilities of all the lease contracts, unless the lease term is 12
months or less or the underlying asset is of low value.
Transition
The criteria established by the Standard for the registration of the
lease contracts will be applied in a retrospective modifed way
adjusting the opening balance on the frst day of application (1st
of January 2019). The Group, has decided to apply the practical
solution allowed by the Standard of not evaluating in the frst
application of the contracts are or contain a lease (under the new
defnition), and therefore, the IFRS16 will only apply to those
contracts that were previously identifed as lease contracts.
The Group has estimated an impact due to the frst standard
adoption on the ordinary capital ratio (Common Equity Tier 1 – CET
1) fully loaded of -20 b.p. Likewise, it is estimated that assets with
the right to use will be approximately recognised by an amount of
EUR 6.7 thousand million.
The main causes of this impact are the requirements of registration
of the asset with the right to use derived from all the lease
contracts active during the frst application. Thus, the impact being
greater for the Groups leased properties.
The following are the main policies, estimates and criteria for
the application of IFRS16 currently defned by the Group for its
practical adoption:
• Lease term: in general, the lease term of each contract will
adopted in a homogenous way in all the units of the Group, and at
the same time, to the particularities of each unit.
Thus, the Group has worked since 2017 in the analysis and
identifcation of the contracts afected by the Standard, as well
as the defnition of the main technical criteria that afects the
accounting of the lease contracts.
With respect to the structure of the project´s governance, the
Group has established a periodic meeting of the direction of the
project, and a team in charge of granting the participation of the
responsible teams and coordination with all the geographies.
Main steps and milestones of the project
In relation to the entry of this new Standard, the Group reported in
the interim condensed fnancial statements as of 30 June 2018 the
progress to that date of the implementation plan of the same.
The Group has prepared the accounting policy and a
methodological framework that has been the benchmark for the
development of the implementation carried out in the diferent
local units. The internal regulation has been approved under
the relevant corporate bodies before the entry into force of the
Standard.
Likewise, the corporate development of the control model over
the registration process of the lease contracts is complete, both in
transition and once the Standard is applied. The proposed model
includes a reference design of the controls to be employed in the
new developments made for the implementation of the Standard.
coincide with the initial term established. With regard to property
contracts, in certain cases the possible consideration of exercising
extension or early cancellation options has been evaluated,
based mainly on market factors specifc to each asset in each
geography.
• IFRIC 23: The uncertainty over income tax treatment; -
(mandatory for annual periods starting from January 1, 2019) it
applies to the tax gain or loss determination, tax bases, efects
of tax laws, taxes and interest rates, when there is uncertainty
about taxes treatment according to IAS12.
• Discount rate: taking into account that the Group has opted to
apply the modifed standard retrospectively, the discount rate
used in transition will be the lessee’s incremental borrowing rate
at this date. For these purposes, the entity has calculated this
incremental interest rate taking as a reference the quoted debt
instruments issued by the Group. In this regard, the Group has
estimated diferent interest rate curves based on the currency
and economic environment in which the contracts are located.
• Practical exemptions in transition: the Group has considered
the practical solutions defned in paragraph C10 of the standard
in the application of the modifed retrospective method. This
application was made on a contract-by-contract basis, and none
of the exemptions were generally applied.
Strategy of implementation of the IFRS16 and governance
The Group established a global project and multidisciplinary with
the objective of adapting its processes to the new Standard of
accounting of the lease contracts, granting that said processes are
• Modifcation of IFRS9 Financial instruments - (mandatory for
annual periods starting from January 1, 2019) a clarifcation has
been published on the treatment of certain prepayment options
in relation to the evaluation of contractual fows of principal and
interest of fnancial instruments.
• Modifcation of IAS28 Investments in associates and joint
ventures - (mandatory for annual periods starting from January
1, 2019). The amendments clarify the accounting for long-term
interests in an associate or joint venture, which in substance form
part of the net investment in the associate or joint venture, but to
which equity accounting is not applied. Entities must account for
such interests under IFRS9 Financial instruments before applying
the loss allocation and impairment requirements in IAS28
Investments in associates and joint ventures.
459
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Lastly, at the date of preparation of these consolidated fnancial
statements, the following standards which efectively come into
force after 31 December 2018 had not yet been adopted by the
European Union:
• IFRS17 Insurance contracts; it is a new integrated accounting
standard for insurance contracts, which includes recognition,
measurement, presentation and disclosure.
• Modifcation of IFRS Cycle 2015 - 2017- introduces minor
amendments to IFRS3, IFRS11, IAS12 and IAS23.
• Modifcation of IAS19 Benefts to employees – amendments,
reductions and agreements on defned beneft plans are
introduced.
• Modifcation of IFRS conceptual framework: The IFRS Framework,
which sets out the fundamental concepts of fnancial reporting,
is amended. The revised Framework includes: a new chapter
about measurement; guidance on fnancial reporting; improved
defnitions, in particular the defnition of liabilities; and
clarifcations such as management functions, prudence and
measurement uncertainty in fnancial reporting. It will apply from
1 January 2020.
• Modifcation of IFRS3 Business combinations - amendments are
introduced. The amendments are intended to assist entities to
determine whether a transaction should be accounted for as a
business combination or as an asset acquisition. IFRS3 continues
to adopt a market participant’s perspective to determine whether
an acquired set of activities and assets is a business.
The amendments are mainly due to: clarify the minimum
requirements for a business; remove the assessment of whether
market participants are capable of replacing any missing
elements; add guidance to help entities assess whether an
acquired process is substantive; narrow the defnitions of a
business and of outputs; and introduce an optional fair value
concentration test.
• Modifcation of IAS1 and IAS8 - A new defnition of material is
incorporated. The amendments clarify the accounting treatment
for sales or the contribution of assets between an investor and
its associates or joint ventures. They confrm that the accounting
treatment depends on whether the non-monetary assets sold
or contributed to an associate or joint venture constitute a
“business” (as defned in IFRS3, Business combination).
The Group is currently analysing the possible efects of these new
standards and interpretations.
All accounting policies and measurement bases with a material
efect on the consolidated fnancial statements for 2018 were
applied in their preparation.
c) Use of critical estimates
The consolidated results and the determination of consolidated
equity are sensitive to the accounting policies, measurement bases
and estimates used by the directors of the Bank in preparing the
consolidated fnancial statements. The main accounting policies
and measurement bases are set forth in Note 2.
In the consolidated fnancial statements estimates were
occasionally made by the senior management of the Bank and
of the consolidated entities in order to quantify certain of the
assets, liabilities, income, expenses and obligations reported
herein. These estimates, which were made on the basis of the best
information available, relate basically to the following:
• The impairment losses on certain assets: it applies to fnancial
assets at fair value through other comprehensive income,
fnancial assets at amortised cost, non-current assets held for
sale, investments, tangible assets and intangible assets (see
Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);
• The assumptions used in the actuarial calculation of the post-
employment beneft liabilities and commitments and other
obligations (see Note 25);
• The useful life of the tangible and intangible assets (see Notes 16
and 18);
• The measurement of goodwill arising on consolidation (see Note
17);
• The calculation of provisions and the consideration of contingent
liabilities (see Note 25);
• The fair value of certain unquoted assets and liabilities (see Notes
6, 7, 8, 9, 10, 11, 20, 21 and 22);
• The recoverability of deferred tax assets (see Note 27); and
• The fair value of the identifable assets acquired and the liabilities
assumed in business combinations (see Note 3).
Although these estimates were made on the basis of the best
information available at 2018 year-end, future events might make
it necessary to change these estimates (upwards or downwards) in
coming years. Changes in accounting estimates would be applied
prospectively, recognising the efects of the change in estimates in
the related consolidated income statement.
d) Information relating to 2017 and 2016
In July 2014, the IASB published IFRS9, which was adopted with
the subsequent amendments by the Group on 1 January 2018. As
permitted by the regulation itself, the Group has chosen not to re-
classify the comparative fnancial statements without having re-
classifed under these criteria the information relating to the years
ended 31 December 2017 and 2016 so that it is not comparative.
However, Note 1.b includes a reconciliation of balances as of 31
December 2017 under IAS39 and the corresponding balances as of
1 January 2018 under IFRS9 where the efect of the frst application
of the rule is broken down.
460
2018 Auditors’ report and consolidated annual accounts
Similarly, to adapt the accounting system of Spanish credit
institutions to the changes related to IFRS15 and IFRS9, on 6
December 2017, Circular 4/2017, of 27 November, of the Bank of
Spain, was published, which repeals Circular 4/2004, of December
22, for those years beginning as of 1 January 2018. The adoption
of this Circular has modifed the breakdown and presentation of
certain headings in the fnancial statements, to adapt them to the
aforementioned IFRS9. Information corresponding to the years
ended 31 December 2017 and 2016, has not been restated under
this Circular.
On 2018, the Group changed the accounting policy for recognition
of non-controlling interests in equity stake reduction transactions
without loss of control. In accordance with international
fnancial reporting standards, the goodwill associated with
these transactions must be kept on balance. The non-controlling
interests resulting from the equity stake reduction can be
accounted for by their participation in the identifable net assets
or by attributing the goodwill associated with the participation
sold. In this sense, the Group has chosen to account for the
non-controlling interests by its participation in net assets. The
application of the accounting policy change, without impact on net
equity, was made on 1 January 2018.
The information in Note 4 relating to the ordinary shares
outstanding of 2016 period has been recasted, in order to be
presented in a comparative manner due to the capital increase
described in Note 31.a.
Therefore, the information for the years 2017 and 2016 contained in
these notes to the consolidated fnancial statements is presented
with the information relating to 2018 for comparative purposes
only, except as mentioned above in relation to the application of
IFRS9, the application of the new requirements of IFRS7 (see note
1.b) and the non-recast of the aforementioned two years balances
due to Argentina’s hyperinfation efect (see note 1.h).
Additionally, the impact of the acquisition of Banco Popular
Español, S.A.U. (See Note 3) is not refected in the comparative of
the fgures, mainly in the balance sheet, corresponding to the year
2016.
In order to interpret the changes in the balances with respect to
31 December 2018, it is necessary to take into consideration the
exchange rate efect arising from the volume of foreign currency
balances held by the Group in view of its geographic diversity (see
Note 51.b) and the impact of the appreciation/depreciation of the
various currencies against the euro in 2018, based on the exchange
rates at the end of 2018: Mexican peso (5.20%), US dollar (4.74%),
Brazilian real (-10.60%), Argentine peso (-47.50%), sterling pound
(-0.82%), Chilean peso (-7.26%), and Polish zloty (-2.89%); as
well as the evolution of the comparable average exchange rates:
Mexican peso (-6.16%), US dollar (-4.46%), Brazilian real (-16.30%),
Argentine peso (-40.43%), sterling pound (-0.96%), Chilean peso
(-3.32%) and Polish zloty (-0.10%).
e) Capital management
i. Regulatory and economic capital
The Group’s capital management is performed at regulatory and
economic levels.
The aim is to secure the Group’s solvency and guarantee its
economic capital adequacy and its compliance with regulatory
requirements, as well as an efcient use of capital.
To this end, the regulatory and economic capital fgures and their
associated metrics RORWA (return on risk-weighted assets),
RORAC (return on risk-adjusted capital) and value creation of
each business unit- are generated, analysed and reported to the
relevant governing bodies on a regular basis.
Within the framework of the internal capital adequacy assessment
process (Pillar II of the Basel Capital Accord), the Group uses
an economic capital measurement model with the objective of
ensuring that there is sufcient capital available to support all
the risks of its activity in various economic scenarios, with the
solvency levels agreed upon by the Group; at the same time the
Group assesses, also in the various scenarios, whether it meets the
regulatory capital ratio requirements.
In order to adequately manage the Group’s capital, it is essential
to estimate and analyse future needs, in anticipation of the
various phases of the business cycle. Projections of regulatory and
economic capital are made based on the budgetary information
(balance sheet, income statement, etc.) and the macroeconomic
scenarios defned by the Group’s economic research service. These
estimates are used by the Group as a reference when planning
the management actions (issues, securitisations, etc.) required to
achieve its capital targets.
In addition, certain stress scenarios are simulated in order to assess
the availability of capital in adverse situations. These scenarios
are based on sharp fuctuations in macroeconomic variables (GDP,
interest rates, housing prices, etc.) that mirror historical crisis that
could happen again or plausible but unlikely stress situations.
Following is a brief description of the regulatory capital framework
to which the Group is subject.
On 26 June 2013 the Basel III legal framework was included in
European law through Directive 2013/36 (CRD IV), repealing
Directives 2006/48 and 2006/49, and through Regulation 575/2013
on prudential requirements for credit institutions and investment
frms (CRR).
The CRD IV was transposed into Spanish legislation through Law
10/2014 on the regulation, supervision and capital adequacy of
credit institutions, and its subsequent implementing regulations
contained in Royal Decree-Law 84/2015 and Bank of Spain Circular
2/2016, was completed the adaptation to the Spanish law.
The CRR came into force immediately, establishes a phase-in that
will permit a progressive adaptation to the new requirements
in the European Union. These phase-in arrangements were
incorporated into Spanish regulations through the approval of
Royal Decree-Law 14/2013 and Bank of Spain Circular 2/2014. They
461
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
afect both the new deductions and the issues and items of own
funds which cease to be eligible as such under this new regulation.
In March 2016, the European Central Bank published Regulation
2016/445/UE that modifes some of the phase-in dates applicable
to Group, especially deferred tax assets calendar. The capital
bufers provided for in CRD IV are also subject to phase-in; they are
applicable for the frst time in 2016 and must be fully implemented
by 2019.
The review of the existing capital regulatory framework (CRR/
CRD IV) by European governing bodies is being fnalised. The new
framework (CRR II/CRDV), which is expected to be approved at the
beginning of 2019, incorporates diferent Basel standards such
as the Fundamental Review of the Trading Book for Market Risk,
the Net Stable Funding Ratio for liquidity risk, the SA-CCR for the
calculation of the EAD for counterparty risk or the interest rate
risk in the Banking Book (IRRBB). It also introduces modifcations
related to the treatment of central counterparties, MDA, Pillar 2,
leverage ratio and Pillar 3 among others.
The most relevant initiative is the implementation of the TLAC
Term Sheet established at international level by the FSB (Financial
Stability Board) within the European capital framework, called
MREL (Minimum requirement of Eligible Liabilities) in such a way
that systemic entities will have to comply with the requirements
of MREL in Pillar 1. Within this package of modifcations, the
modifcation of the Resolution Directive (BRRD) is also included,
replacing it with the BRRD II where MREL requirements are
established for Pillar 2 for all resolution entities, whether systemic
or not, where the resolution authority will decide on a case-by-
case basis the requirements.
The Single Resolution Board’s MREL policy for 2017 was based
on a step-by-step approach to achieve the MREL target level
within several years, and non-compliance could result in the
consideration that the entity cannot be resolved. In relation to the
subordination requirement, the Single Resolution Board considered
that entities of global systemic importance (G-SIIs) have to meet,
as a minimum, a level of subordination equal to 13.5% of the RWA
plus the combined bufer requirement.
In 2018 the SRB has set target requirements for MREL at a
consolidated level based on the 2017 policy. These objectives are
established for each resolution group, either in MPE (Multiple Point
of Entry) strategies as in the case of the Group, or in SPE (Single
Point of Entry) strategies.
At 31 December 2018 the Group met the minimum capital
requirements established by current legislation (See Note 54).
ii. Plan for the roll-out of advanced approaches and
authorisation from the supervisory authorities
The Group continues adopting, over the next few years, the
advanced internal ratings-based (AIRB) approach under Basel II
for substantially all its banks, until the percentage of exposure
of the loan portfolio covered by this approach exceeds 90%. The
commitment assumed before the supervisor still implies the
adoption of advanced models within the ten key markets where
Santander Group operates.
Accordingly, the Group continued in 2018 with the project for the
progressive implementation of the technology platforms and
methodological improvements required for the roll-out of the AIRB
approach for regulatory capital calculation purposes at the various
Group units.
The Group has obtained authorisation from the supervisory
authorities to use the AIRB approach for the calculation of
regulatory capital requirements for credit risk for the Parent and
the main subsidiaries in Spain, the United Kingdom and Portugal,
as well as for certain portfolios in Germany, Mexico, Brazil, Chile,
the Nordic countries (Norway, Sweden and Finland), France and the
United States.
During 2018, approval was obtained for the sovereign portfolios,
Institutions (FIRB method) and specialised fnancing (Slotting)
in Chile, mortgages and most revolving portfolio of Santander
Consumer Germany as well as the portfolios of dealers of PSA
France and PSA UK (FIRB method).
As regards the other risks explicitly addressed under Basel Pillar I,
the Group is authorised to use its internal model for market risk for
its treasury trading activities in the UK, Spain, Chile, Portugal and
Mexico.
For the purpose of calculating regulatory capital for operational
risk, the Group uses the standardised approach provided for the
CRR. On 2018 the European Central Bank authorised the use of
the Alternative Standardised Approach to calculate the capital
requirements at consolidated level in Banco Santander México,
S.A., Institucion de Banca Múltiple, Grupo Financiero Santander
México, in addition to the approval obtained in 2016 in Brazil.
f) Environmental impact
In view of the business activities carried on by the Group entities,
the Group does not have any environmental liability, expenses,
assets, provisions or contingencies that might be material with
respect to its consolidated equity, fnancial position or results.
Therefore, no specifc disclosures relating to environmental issues
are included in these consolidated fnancial statements.
g) Events after the reporting period
On 6 February the Group announced that it had completed the
placement of preferred securities contingently convertible into
newly issued ordinary shares of the Bank, excluding preemptive
subscription rights and for a nominal value of USD 1,200,000,000
(EUR 1,052,000,000) (the “Issue” and the “CCPS”).
The CCPS were issued at par and its remuneration has been set at
7.50% on an annual basis for the frst fve years. The payment of
the remuneration of the CCPS is subject to certain conditions and
to the discretion of the Bank. After that, it will be reviewed every
fve years by applying a margin of 498.9 basis points on the 5-year
Mid-Swap Rate.
h) Other information
Argentina
The economic situation in Argentina in recent years, which led to
the signing of an agreement with the International Monetary Fund
for the granting of a loan of USD 57,000 million, has had an impact
462
2018 Auditors’ report and consolidated annual accounts
on the country’s main economic indicators, especially infation
data, which at the end of the year amounts to 47.64%, being
accumulated infation in the last three years 147%. In this sense,
the Group has reviewed the macroeconomic indicators that afect
Argentina’s economy and from this review has concluded the need
to apply to these consolidated fnancial statements the accounting
standard IAS29 for hyperinfationary economies to its activity in
Argentina. This fact has meant:
• Adjustment of the historical cost of non-monetary assets and
liabilities and the various items of equity of these companies
from their date of acquisition or inclusion in the consolidated
statement of fnancial position to the end of the year to refect the
changes in purchasing power of the currency caused by infation,
according to the ofcial indexes published by the “Federación
Argentina de Consejos Profesionales de Ciencias Económicas
(FCPCE)”. These indices result from combining the National
Consumer Price Index with the internal wholesale price index.
• The cumulative impact corresponding to previous years has been
refected in the equity at the beginning of 2018.
• All components of the fnancial statements of the Argentine
companies have been translated at the closing exchange rate,
which at 31 December, 2018 was 43.12 Argentine peso.
• The diferent components of the consolidated income statement
and consolidated statement of cash fows have been adjusted for
the infation index since their generation, with a balancing entry
in fnancial results and a reconciling item in the statement of cash
fows, respectively.
• At 1 January 2018, an amount of EUR 1,716 million corresponding
to the exchange losses in 2017 and prior years has been
reclassifed in the total statement of changes in equity from
Other comprehensive income - Exchange diferences to Other
reserves. At this date, a credit to Other reserves was registered
for EUR 131 million due to the non-monetary assets revaluation.
Also, EUR -398 million were recognised under Other reserves
during 2018, including EUR 104 million due to non-monetary
assets revaluation.
The comparative fgures for 2017 and 2016 have not been modifed,
in accordance with IAS21.
The impact on results, both by the adjustment of the fgures in the
consolidated income statement at the year-end exchange rate, and
by the adjustment of the fnancial loss corresponding to the impact
of the infation of the year on the net monetary assets, as well as
the efect on the CET1, is immaterial for the Group.
UK Referendum
On June 23, 2016, the UK held a referendum (the UK European
Union Referendum) on its membership of the European Union, in
which a majority voted for the UK to leave the European Union.
Immediately following the result, the UK and global stock and
foreign exchange markets commenced a period of signifcant
volatility, including a steep devaluation of the pound sterling.
There remains signifcant uncertainty relating to the UK’s exit from,
and future relationship with, the European Union and the basis of
the UK’s future trading relationship with the rest of the world.
On March 29, 2017, the UK Prime Minister gave notice under
Article 50(2) of the Treaty on European Union of the UK’s intention
to withdraw from the European Union. The delivery of the
Article 50(2) notice triggered a two year period of negotiation
to determine the terms on which the UK will exit the EU and the
framework for the UK’s future relationship with the European
Union. Unless extended, the UK’s European Union membership will
cease after this two year period. There is a possibility that the UK’s
European Union membership ends at such time without reaching
any agreement on the terms of its relationship with the European
Union going forward. Currently this agreement is pending to be
ratifed by the parliament of the United Kingdom.
The outcome of Brexit remains unclear, however, a UK exit
from the European Union with a no-deal continues to remain
a possibility and the consensus view is that this would have
a negative impact on the UK economy, afecting its growth
prospects. While the longer term efects of the UK’s imminent
departure from the European Union are difcult to predict, there is
short term political and economic uncertainty.
Santander UK is subject to substantial European Union-derived
regulation and oversight. Although legislation has now been
passed transferring the European Union acquis into UK law, there
remains signifcant uncertainty regarding the respective legal
and regulatory environments, in which Santander UK and its
subsidiaries will operate when the UK is no longer a member of
the European Union, and the basis on which cross-border fnancial
business will take place after the UK leaves the European Union.
Operationally, Santander UK and other fnancial institutions may
no longer be able to rely on the European passporting framework
for fnancial services, and it is unclear what alternative regime
may be in place following the UK’s departure from the European
Union. This uncertainty, and any actions taken as a result of
this uncertainty, as well as new or amended rules, may have
a signifcant impact on the operating results, proftability and
business of the Group.
The aforementioned political events in the UK, along with any
further changes in government structure and policies, may lead
to further market volatility and changes to the fscal, monetary
and regulatory landscape in which Santander UK operates and
could have a material adverse efect on us, including our ability
to access capital and liquidity on fnancial terms acceptable to us
and, more generally, on our operating results, fnancial condition
and prospects. The Group, with the best estimate at the date
of approval of these consolidated fnancial statements, has
considered such circumstances in its evaluation of the diferent
items afected in the consolidated fnancial statements, mainly
in the recoverability of the cash generating unit that underpins
Santander UK goodwill.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
2. Accounting policies
The accounting policies applied in preparing the consolidated
fnancial statements were as follows:
a) Foreign currency transactions
i. Presentation currency
The Bank’s functional and presentation currency is the euro. Also,
the presentation currency of the Group is the euro.
ii. Translation of foreign currency balances
Foreign currency balances are translated to euros in two
consecutive stages:
• Translation of foreign currency to the functional currency
(currency of the main economic environment in which the entity
operates); and
• Translation to euros of the balances held in the functional
currencies of entities whose functional currency is not the euro.
Translation of foreign currency to the functional currency
Foreign currency transactions performed by consolidated entities
(or entities accounted for using the equity method) not located
in European Monetary Union (“EMU”) countries are initially
recognised in their respective currencies. Monetary items in
foreign currency are subsequently translated to their functional
currencies using the closing rate.
Furthermore:
• Non-monetary items measured at historical cost are translated
to the functional currency at the exchange rate at the date of
acquisition.
• Non-monetary items measured at fair value are translated at the
exchange rate at the date when the fair value was determined.
• Income and expenses are translated at the average exchange
rates for the year for all the transactions performed during the
year. When applying this criterion, the Group considers whether
there have been signifcant changes in the exchange rates in
the year which, in view of their materiality with respect to the
consolidated fnancial statements taken as a whole, would make
it necessary to use the exchange rates at the transaction date
rather than the aforementioned average exchange rates.
• The balances arising from non-hedging forward foreign currency/
foreign currency and foreign currency/euro purchase and sale
transactions are translated at the closing rates prevailing in the
forward foreign currency market for the related maturity.
Translation of functional currencies to euros
The balances in the fnancial statements of consolidated entities
(or entities accounted for using the equity method) whose
functional currency is not the euro are translated to euros as
follows:
• Assets and liabilities, at the closing rates.
• Income and expenses, at the average exchange rates for the year.
• Equity items, at the historical exchange rates.
iii. Recognition of exchange diferences
The exchange diferences arising on the translation of foreign
currency balances to the functional currency are generally
recognised at their net amount under Exchange diferences in the
consolidated income statement, except for exchange diferences
arising on fnancial instruments at fair value through proft or
loss, which are recognised in the consolidated income statement
without distinguishing them from other changes in fair value, and
for exchange diferences arising on non-monetary items measured
at fair value through equity, which are recognised under Other
comprehensive income–Items that may be reclassifed to proft or
loss–Exchange diferences (See note 29).
The exchange diferences arising on the translation to euros of
the fnancial statements denominated in functional currencies
other than the euro are recognised in Other comprehensive
income–Items that may be reclassifed to proft or loss–Exchange
diferences in the consolidated balance sheet, whereas those
arising on the translation to euros of the fnancial statements of
entities accounted for using the equity method are recognised in
equity under Other comprehensive income–Items that may be
reclassifed to proft or loss and Items not reclassifed to proft
or loss–Other recognised income and expense of investments in
subsidiaries, joint ventures and associates (See note 29), until the
related item is derecognised, at which time they are recognised in
proft or loss.
Exchange diferences arising on actuarial gains or losses when
converting to euros the fnancial statements denominated in
the functional currencies of entities whose functional currency
is diferent from the euro are recognised under equity–Other
comprehensive income–Items not reclassifed to proft or loss–
Actuarial gains or (-) losses on defned beneft pension plans (See
note 29).
iv. Entities located in hyperinfationary economies
Exchange diferences arising on the translation to the Group´s
presentation currency of fnancial statements denominated
in functional currencies other than euro of countries with high
464
2018 Auditors’ report and consolidated annual accounts
infation rates are recorded in the consolidated statement of
changes in total equity - Other reserves.
Million of euros
At 31 December 2018 the economic situation in Argentina which led
to the review by the Group of the macroeconomic indicators that
afect Argentina’s economy and from this review the Group has
concluded the need to apply to these annual fnancial statements
the accounting standard IAS29 for hyperinfationary economies to
its activity in Argentina (See note 1.h).
v. Exposure to foreign currency risk
The Group hedges a portion of its long-term foreign currency
positions using foreign exchange derivative fnancial instruments
(see Note 36). Also, the Group manages foreign currency risk
dynamically by hedging its short-term position (with a potential
impact on proft or loss) in order to limit the impact of currency
depreciations while optimising the cost of fnancing the hedges.
The following tables show the sensitivity of the consolidated
income statement and consolidated equity to changes in exchange
positions arising from investments in Group companies with
currencies other than the euro and their results, due to percentage
changes of 1% in the various foreign currencies in which the Group
maintains signifcant balances.
The estimated efect on the consolidated equity attributable to the
Group and on consolidated proft of a 1% appreciation of the euro
against the corresponding currency is as follows:
Million of euros
Efect on consolidated
equity
Efect on
consolidated proft
Currency
US dollar
2018
2017
2016
2018
2017
2016
(162.3) (157.9)
(187.1)
(4.1)
(1.4)
(4.5)
Chilean peso
(22.9)
(29.0)
(27.9)
(5.1)
(1.8)
(4.2)
Pound sterling
(171.2) (176.6) (184.9)
(4.5)
(3.1)
(10.0)
Mexican peso
(18.3)
(16.0)
(16.2)
(1.7)
(1.2)
(5.4)
Brazilian real
(85.6)
(93.1) (122.3)
(5.6)
(6.5)
(6.3)
Polish zloty
(36.2)
(34.5)
(31.5)
(4.2)
(1.5)
(3.3)
Argentine peso
(7.8)
(7.4)
(9.0)
(0.6)
(3.5)
(3.3)
Similarly, the estimated efect on the Group’s consolidated equity
and on consolidated proft of a 1% depreciation of the euro against
the corresponding currency is as follows:
Efect on
consolidated equity
Efect on
consolidated proft
2018
2017
2016
2018
2017
2016
Currency
US dollar
165.6
161.1
190.8
Chilean peso
23.4
29.6
28.4
Pound sterling
174.7
180.2
188.7
Mexican peso
18.6
16.3
16.5
Brazilian real
87.4
95.0
124.7
Polish zloty
36.9
35.2
32.1
Argentine peso
8.0
7.6
9.2
4.2
5.2
4.6
1.8
5.7
4.2
0.6
1.5
1.8
3.2
1.2
6.6
1.5
3.6
4.5
4.3
10.2
5.5
6.5
3.3
3.3
The foregoing data were obtained as follows:
a) Efect on consolidated equity: in accordance with the accounting
policy detailed in Note 2.a.iii, the exchange diferences arising
on the translation to euros of the fnancial statements in the
functional currencies of the Group entities whose functional
currency is not the euro are recognised in consolidated equity.
The possible efect that a change in the exchange rates of the
related currency would have on the Group’s consolidated equity
was therefore determined by applying the aforementioned
change to the net value of each unit’s assets and liabilities
-including, where appropriate, the related goodwill- and by
taking into consideration the ofsetting efect of the hedges of
net investments in foreign operations.
b) Efect on consolidated proft: the efect was determined by
applying the fuctuations in the average exchange rates used
for the year, as indicated in Note 2.a.ii, to translate to euros
the income and expenses of the consolidated entities whose
functional currency is not the euro, taking into consideration,
where appropriate, the ofsetting efect of the various hedging
transactions in place.
The estimates used to obtain the foregoing data were performed
considering the efects of the exchange rate fuctuations in
isolation from the efect of the performance of other variables
whose changes would afect equity and proft or loss, such as
variations in the interest rates of the reference currencies or other
market factors. Accordingly, all variables other than the exchange
rate fuctuations were kept constant with respect to their positions
at 31 December 2018, 2017 and 2016.
b) Basis of consolidation
i. Subsidiaries
Subsidiaries are defned as entities over which the Bank has the
capacity to exercise control. The Bank controls an entity when it
is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to afect those returns
through its power over the investee.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The fnancial statements of the subsidiaries are fully consolidated
with those of the Bank. Accordingly, all balances and efects of the
transactions between consolidated companies are eliminated on
consolidation.
iii. Associates
Associates are entities over which the Bank is in a position to
exercise signifcant infuence, but not control or joint control. It is
presumed that the Bank exercises signifcant infuence if it holds
20% or more of the voting power of the investee.
On acquisition of control of a subsidiary, its assets, liabilities and
contingent liabilities are recognised at their acquisition-date fair
values. Any positive diferences between the acquisition cost
and the fair values of the identifable net assets acquired are
recognised as goodwill (See Note 17). Negative diferences are
recognised in proft or loss on the date of acquisition.
Additionally, the share of third parties of the Group’s equity is
presented under Non-controlling interests in the consolidated
balance sheet (See Note 28). Their share of the proft for the year is
presented under Proft attributable to non-controlling interests in
the consolidated income statement.
The results of subsidiaries acquired during the year are included
in the consolidated income statement from the date of acquisition
to year-end. Similarly, the results of subsidiaries for which control
is lost during the year are included in the consolidated income
statement from the beginning of the year to the date of disposal.
At 31 December 2018 the Group controlled the following company
in which it held an ownership interest of less than 50% of the share
capital, Luri 1, S.A. apart from structured consolidated entities. The
percentage ownership interest in the aforementioned company is
36% (See Appendix I). Although the Group holds less than half the
voting power, it manages and, as a result, exercises control over
this entity. The company´s corporate purpose for the entity is the
acquisition of real estate and other general operations relating
thereto, including rental, and the purchase and sale of properties;
the company object of the latter entity is the provision of payment
services. The impact of the consolidation of this company on the
Group’s consolidated fnancial statements is immaterial.
The Appendices contain signifcant information on the subsidiaries.
ii. Interests in joint ventures
Joint ventures are deemed to be entities that are not subsidiaries
but which are jointly controlled by two or more unrelated entities.
This is evidenced by contractual arrangements whereby two or
more parties have interests in entities so that decisions about the
relevant activities require the unanimous consent of all the parties
sharing control.
In the consolidated fnancial statements, investments in joint
ventures are accounted for using the equity method, i.e. at the
Group’s share of net assets of the investee, after taking into
account the dividends received therefrom and other equity
eliminations. The profts and losses resulting from transactions
with a joint venture are eliminated to the extent of the Group’s
interest therein.
The Appendices contain signifcant information on the joint
ventures.
In the consolidated fnancial statements, investments in associates
are accounted for using the equity method, i.e. at the Group’s
share of net assets of the investee, after taking into account the
dividends received therefrom and other equity eliminations. The
profts and losses resulting from transactions with an associate are
eliminated to the extent of the Group’s interest in the associate.
There are certain investments in entities which, although the
Group owns 20% or more of their voting power, are not considered
to be associates because the Group is not in a position to exercise
signifcant infuence over them. These investments are not
signifcant for the Group.
There are also certain investments in associates where the Group
owns less than 20% of the voting rights, as it is determined that
it has the capacity to exercise signifcant infuence over them.
The impact of these companies is immaterial in the Group’s
consolidated fnancial statements.
The Appendices contain signifcant information on the associates.
iv. Structured entities
When the Group incorporates entities, or holds ownership
interests therein, to enable its customers to access certain
investments, or for the transfer of risks or other purposes (also
called structured entities since the voting or similar power is
not a key factor in deciding who controls the entity), the Group
determines, using internal criteria and procedures and taking
into consideration the applicable legislation, whether control (as
defned above) exists and, therefore, whether these entities should
be consolidated. Specifcally, for those entities to which this policy
applies (mainly investment funds and pension funds), the Group
analyses the following factors:
• Percentage of ownership held by the Group; 20% is established
as the general threshold.
• Identifcation of the fund manager, and verifcation as to whether
it is a company controlled by the Group since this could afect the
Group’s ability to direct the relevant activities.
• Existence of agreements between investors that might require
decisions to be taken jointly by the investors, rather than by the
fund manager.
• Existence of currently exercisable removal rights (possibility of
removing the manager from his position), since the existence of
such rights might limit the manager’s power over the fund, and it
may be concluded that the manager is acting as an agent of the
investors.
466
2018 Auditors’ report and consolidated annual accounts
• Analysis of the fund manager’s remuneration regime, taking into
consideration that a remuneration regime that is proportionate
to the service rendered does not, generally, create exposure
of such importance as to indicate that the manager is acting
as the principal. Conversely, if the remuneration regime is not
proportionate to the service rendered, this might give rise to an
exposure that would lead the Group to a diferent conclusion.
vi. Changes in the levels of ownership interests in subsidiaries
Acquisitions and disposals not giving rise to a change in control are
recognised as equity transactions, and no gain or loss is recognised
in the income statement and the initially recognised goodwill is not
remeasured. The diference between the consideration transferred
or received and the decrease or increase in non-controlling
interests, respectively, is recognised in reserves.
These structured entities also include the securitisation special
purpose vehicles (“SPV”), which are consolidated in the case of the
SPVs over which, being exposed to variable yield, it is considered
that the Group continues to exercise control.
The exposure associated with unconsolidated structured entities
are not material with respect to the Group’s consolidated fnancial
statements.
v. Business combinations
A business combination is the bringing together of two or more
separate entities or economic units into one single entity or group
of entities.
Business combinations whereby the Group obtains control over
an entity or a business are recognised for accounting purposes as
follows:
• The Group measures the cost of the business combination,
which is normally the consideration transferred, defned as
the acquisition-date fair values of the assets transferred, the
liabilities incurred to the former owners of the acquiree and
the equity instruments issued, if any, by the acquirer. In cases
where the amount of the consideration to be transferred has
not been defnitively established at the acquisition date, but
rather depends on future events, any contingent consideration is
recognised as part of the consideration transferred and measured
at its acquisition-date fair value. Moreover, acquisition-related
costs do not for these purposes form part of the cost of the
business combination.
• The fair values of the assets, liabilities and contingent liabilities
of the acquired entity or business, including any intangible assets
identifed in the business combination which might not have
been recognised by the acquiree, are estimated and recognised
in the consolidated balance sheet; the Group also estimates the
amount of any non-controlling interests and the fair value of the
previously held equity interest in the acquiree.
• Any positive diference between the aforementioned items is
recognised as discussed in Note 2.m. Any negative diference
is recognised under negative goodwill recognised in the
consolidated income statement.
Goodwill is only calculated and recognised once, when control of a
business or an entity is obtained.
Similarly, when control over a subsidiary is lost, the assets,
liabilities and non-controlling interests and any other items
recognised in Other Comprehensive income of that company are
derecognised from the consolidated balance sheet, and the fair
value of the consideration received and of any remaining equity
interest is recognised. The diference between these amounts is
recognised in proft or loss.
vii. Acquisitions and disposals
Note 3 provides information on the most signifcant acquisitions
and disposals in the last three years.
c) Defnitions and classifcation of fnancial instruments
i. Defnitions
A fnancial instrument is any contract that gives rise to a fnancial
asset of one entity and a fnancial liability or equity instrument of
another entity.
An equity instrument is a contract that evidences a residual
interest in the assets of the issuing entity after deducting all of its
liabilities.
A fnancial derivative is a fnancial instrument whose value changes
in response to the change in an observable market variable (such
as an interest rate, foreign exchange rate, fnancial instrument
price, market index or credit rating), whose initial investment
is very small compared with other fnancial instruments with
a similar response to changes in market factors, and which is
generally settled at a future date.
Hybrid fnancial instruments are contracts that simultaneously
include a non-derivative host contract together with a derivative,
known as an embedded derivative, that is not separately
transferable and has the efect that some of the cash fows of the
hybrid contract vary in a way similar to a stand-alone derivative.
Compound fnancial instruments are contracts that simultaneously
create for their issuer a fnancial liability and an own equity
instrument (such as convertible bonds, which entitle their holders
to convert them into equity instruments of the issuer).
The preference shares contingently convertible into ordinary
shares eligible as Additional Tier 1 capital (“CCPSs”) -perpetual
shares, which may be repurchased by the issuer in certain
circumstances, the interest on which is discretionary, and would
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
convert into a variable number of newly issued ordinary shares if
the capital ratio of the Bank or its consolidated group falls below
a given percentage (trigger event), as those two terms are defned
in the related issue prospectuses- are recognised for accounting
purposes by the Group as compound instruments. The liability
component refects the issuer’s obligation to deliver a variable
number of shares and the equity component refects the issuer’s
discretion in relation to the payment of the related coupons. In
order to efect the initial allocation, the Group estimates the fair
value of the liability as the amount that would have to be delivered
if the trigger event were to occur immediately and, accordingly, the
equity component, calculated as the residual amount, is zero. In
view of the aforementioned discretionary nature of the payment of
the coupons, they are deducted directly from equity.
Capital perpetual preference shares (“CPPSs”), with the possibility
of purchase by the issuer in certain circumstances, whose
remuneration is discretionary, and which will be amortised
permanently, totally or partially, in the event that the Bank or its
consolidated group submits a capital ratio lesser than a certain
percentage (trigger event), as defned in the corresponding
prospectuses, are accounted for by the Group as equity
instruments.
The following transactions are not treated for accounting purposes
as fnancial instruments:
• Investments in associates and joint ventures (see Note 13).
• Rights and obligations under employee beneft plans (see
Note 25).
• Rights and obligations under insurance contracts (see Note 15).
• Contracts and obligations relating to employee remuneration
• The risks that afect the performance of the business model (and
the fnancial assets held in the business model) and, specifcally,
the way in which these risks are managed.
• How business managers are remunerated.
• The frequency and volume of sales in previous years, as well as
expectations of future sales.
The analysis of the characteristics of the contractual fows of
fnancial assets requires an assessment of the congruence of these
fows with a basic loan agreement. Contractual cash fows that are
only principal and interest payments on the outstanding principal
amount meet this requirement.
Depending on these factors, the asset can be measured at
amortised cost, at fair value with changes in other comprehensive
income, or at fair value with changes through proft and loss. IFRS9
also establishes an option to designate an instrument at fair value
with changes in proft or loss, under certain conditions. The Group
uses the following criteria for the classifcation of fnancial debt
instruments:
• Amortised cost: fnancial instruments under a business model
whose objective is to collect principal and interest fows, over
which there is no signifcant unjustifed sales and fair value
is not a key element in the management of these assets and
contractual conditions they give rise to cash fows on specifc
dates, which are only payments of principal and interest on the
outstanding principal amount. In this sense, unjustifed sales are
considered to be those other than those related to an increase in
the credit risk of the asset, unanticipated funding needs (stress
case scenarios). Additionally, the characteristics of its contractual
fows represent substantially a “basic fnancing agreement”.
based on own equity instruments (see Note 34).
• Fair value with changes in other comprehensive income: fnancial
ii. Classifcation of fnancial assets for measurement purposes
Financial assets are initially classifed into the various categories
used for management and measurement purposes, unless they
have to be presented as Non-current assets held for sale or they
relate to Cash, cash balances at central banks and other deposits
on demand, Changes in the fair value of hedged items in portfolio
hedges of interest rate risk (asset side), Hedging derivatives and
Investments, which are reported separately.
Classifcation of fnancial instruments: the classifcation criteria
for fnancial assets depends on the business model for their
management and the characteristics of their contractual fows.
The Group’s business models refer to the way in which it manages
its fnancial assets to generate cash fows. In defning these
models, the Group takes into account the following factors:
• How key management staf are assessed and reported on the
performance of the business model and the fnancial assets held
in the business model.
instruments held in a business model whose objective is to
collect principal and interest cash fows and the sale of these
assets, where fair value is a key factor in their management.
Additionally, the contractual cash fow characteristics
substantially represent a “basic fnancing agreement”.
• Fair value with changes in proft or loss: fnancial 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 of these assets, and fnancial instruments
whose contractual cash fow characteristics do not substantially
represent a “basic fnancing agreement”. In this section it can be
enclosed the portfolios classifed under “Financial assets held for
trading”, “Non-trading fnancial assets mandatorily at fair value
through proft or loss” and “Financial assets at fair value through
proft or loss”.
Equity instruments will be classifed at fair value under IFRS9,
with changes in proft or loss, unless the Group decides, for non-
trading assets, to classify them at fair value with changes in other
468
2018 Auditors’ report and consolidated annual accounts
comprehensive income (irrevocably) in the initial moment. The
Group has generally apllied this option to the equity instruments
classifed as “Available-for-sale” at 31 December 2017 under IAS39.
In general, the Group has aplied this option in the case of equity
instruments classifed under “Available for Sale” at 31 December
2017 under IAS39.
Until 31 December 2017, the Group applied IAS39, under which the
following three categories existed that are not applicable under
IFRS9 (See note 1.b):
• Financial assets available-for-sale: this category includes debt
instruments not classifed as Held-to-maturity investments,
Loans and receivables or Financial assets at fair value through
proft or loss, and equity instruments issued by entities other
than subsidiaries, associates and joint ventures, provided that
such instruments have not been classifed as Financial assets
held for trading or as Financial assets designated at fair value
through proft or loss.
• Credit institutions: credit of any nature, including deposits and
money market transactions, in the name of credit institutions.
• Customers: includes the remaining credit, including money
market transactions through central counterparties.
• Debt instruments: bonds and other securities that represent a
debt for their issuer, that generate an interest return, and that are
in the form of certifcates or book entries.
• Equity instruments: fnancial instruments issued by other entities,
such as shares, which have the nature of equity instruments for
the issuer, other than investments in subsidiaries, joint ventures
or associates. Investment fund units are included in this item.
• Derivatives: includes the fair value in favour of the Group
of derivatives which do not form part of hedge accounting,
including embedded derivatives separated from hybrid fnancial
instruments.
• Loans and receivables: this category includes the investment
• Changes in the fair value of hedged items in portfolio hedges of
arising from ordinary lending activities, such as the cash amounts
of loans drawn down and not yet repaid by customers or the
deposits placed with other institutions, whatever the legal
instrument, unquoted debt securities and receivables from the
purchasers of goods, or the users of services, constituting part of
the Group’s business.
• Investments held-to-maturity: this category includes debt
instruments with fxed maturity and with fxed or determinable
payments, for which the Group has both the intention and proven
ability to hold to maturity.
iii. Classifcation of fnancial assets for presentation purposes
Financial assets are classifed by nature into the following items in
the consolidated balance sheet:
• Cash, cash balances at Central Banks and other deposits on
demand: cash balances and balances receivable on demand
relating to deposits with central banks and credit institutions.
• Loans and advances: includes the debit balances of all credit
and loans granted by the Group, other than those represented
by securities, as well as fnance lease receivables and other
debit balances of a fnancial nature in favour of the Group, such
as cheques drawn on credit institutions, balances receivable
from clearing houses and settlement agencies for transactions
on the stock exchange and organised markets, bonds given in
cash, capital calls, fees and commissions receivable for fnancial
guarantees and debit balances arising from transactions not
originating in banking transactions and services, such as the
collection of rentals and similar items. They are classifed, on the
basis of the institutional sector to which the debtor belongs, into:
• Central banks: credit of any nature, including deposits and
money market transactions received from the Bank of Spain or
other central banks.
interest rate risk: this item is the balancing entry for the amounts
credited to the consolidated income statement in respect of the
measurement of the portfolios of fnancial instruments which are
efectively hedged against interest rate risk through fair value
hedging derivatives.
• Hedging derivatives: Includes the fair value in favour of the Group
of derivatives, including embedded derivatives separated from
hybrid fnancial instruments, designated as hedging instruments
in hedge accounting.
iv. Classifcation of fnancial liabilities
for measurement purposes
Financial liabilities are initially classifed into the various categories
used for management and measurement purposes, unless they
have to be presented as Liabilities associated with non-current
assets held for sale or they relate to Hedging derivatives or
Changes in the fair value of hedged items in portfolio hedges of
interest rate risk (liability side), which are reported separately.
IAS39 fnancial liabilities classifcation and measurement criteria
remains substantially unchanged under IFRS9. Nevertheless, in
most cases, the changes in the fair value of fnancial liabilities
designated at fair value with changes recognised through proft or
loss for the year, due to the entity credit risk, are classifed under
other comprehensive income.
Financial liabilities are included for measurement purposes in one
of the following categories:
• Financial liabilities held for trading (at fair value through proft or
loss): this category includes fnancial liabilities incurred for the
purpose of generating a proft in the near term from fuctuations
in their prices, fnancial derivatives not designated as hedging
469
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
instruments, and fnancial liabilities arising from the outright sale
of fnancial assets acquired under reverse repurchase agreements
(“reverse repos”) or borrowed (short positions).
• Financial liabilities designated at fair value through proft or
loss: fnancial liabilities are included in this category when
they provide more relevant information, either because this
eliminates or signifcantly reduces recognition or measurement
inconsistencies (accounting mismatches) that would otherwise
arise from measuring assets or liabilities or recognising the
gains or losses on them on diferent bases, or because a group of
fnancial liabilities or fnancial assets and liabilities is managed
and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment
strategy, and information about the group is provided on that
basis to the Group’s key management personnel. Liabilities may
only be included in this category on the date when they are
incurred or originated.
• Financial liabilities at amortised cost: fnancial liabilities,
irrespective of their instrumentation and maturity, not included
in any of the above-mentioned categories which arise from the
ordinary borrowing activities carried on by fnancial institutions.
v. Classifcation of fnancial liabilities
for presentation purposes
Financial liabilities are classifed by nature into the following items
in the consolidated balance sheet:
• Deposits: includes all repayable balances received in cash by the
Group, other than those instrumented as marketable securities
and those having the substance of subordinated liabilities
(amount of the loans received, which for credit priority purposes
are after common creditors), except for the debt instruments
. This item also includes cash bonds and cash consignments
received the amount of which may be invested without
restriction. Deposits are classifed on the basis of the creditor’s
institutional sector into:
• Central banks: deposits of any nature, including credit received
and money market transactions received from the Bank of Spain
or other central banks.
• Credit institutions: deposits of any nature, including credit
received and money market transactions in the name of credit
institutions.
• Customer: includes the remaining deposits, including money
market transactions through central counterparties.
• Marketable debt securities: includes the amount of bonds and
other debt represented by marketable securities, other than
those having the substance of subordinated liabilities (amount
of the loans received, which for credit priority purposes are after
common creditors, and includes the amount of the fnancial
instruments issued by the Group which, having the legal nature
of capital, do not meet the requirements to qualify as equity,
such as certain preferred shares issued). This item includes the
component that has the consideration of fnancial liability of the
securities issued that are compound fnancial instruments.
• Derivatives: includes the fair value, with a negative balance
for the Group, of derivatives, including embedded derivatives
separated from the host contract, which do not form part of
hedge accounting.
• Short positions: includes the amount of fnancial liabilities arising
from the outright sale of fnancial assets acquired under reverse
repurchase agreements or borrowed.
• Other fnancial liabilities: includes the amount of payment
obligations having the nature of fnancial liabilities not included
in other items, and liabilities under fnancial guarantee contracts,
unless they have been classifed as non-performing.
• Changes in the fair value of hedged items in portfolio hedges of
interest rate risk: this item is the balancing entry for the amounts
charged to the consolidated income statement in respect of the
measurement of the portfolios of fnancial instruments which are
efectively hedged against interest rate risk through fair value
hedging derivatives.
• Hedging derivatives: includes the fair value of the Group’s
liability in respect of derivatives, including embedded derivatives
separated from hybrid fnancial instruments, designated as
hedging instruments in hedge accounting.
d) Measurement of fnancial assets and liabilities
and recognition of fair value changes
In general, fnancial assets and liabilities are initially recognised
at fair value which, in the absence of evidence to the contrary,
is deemed to be the transaction price. Financial instruments not
measured at fair value through proft or loss are adjusted by the
transaction costs. Financial assets and liabilities are subsequently
measured at each year-end as follows:
i. Measurement of fnancial assets
Financial assets are measured at fair value are valued mainly at
their fair value without deducting any transaction cost for their
sale.
The fair value of a fnancial instrument on a given date is taken
to be the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
470
2018 Auditors’ report and consolidated annual accounts
The efective interest rate is the discount rate that exactly matches
the carrying amount of a fnancial instrument to all its estimated
cash fows of all kinds over its remaining life. For fxed rate
fnancial instruments, the efective interest rate coincides with the
contractual interest rate established on the acquisition date plus,
where applicable, the fees and transaction costs that, because
of their nature, form part of their fnancial return. In the case
of foating rate fnancial instruments, the efective interest rate
coincides with the rate of return prevailing in all connections until
the next benchmark interest reset date.
Equity instruments and contracts related with these instruments
are measured at fair value. However, in certain circumstances
the Group estimates cost value as a suitable estimate of the fair
value. This can happen if the recent event available information is
not enough to measure the fair value or if there is a broad range
of possible measures and the cost value represents the best
estimates of fair value within this range.
The amounts at which the fnancial assets are recognised
represent, in all material respects, the Group’s maximum exposure
to credit risk at each reporting date. Also, the Group has received
collateral and other credit enhancements to mitigate its exposure
to credit risk, which consist mainly of mortgage guarantees, cash
collateral, equity instruments and personal security, assets leased
out under fnance lease and full-service lease agreements, assets
acquired under repurchase agreements, securities loans and credit
derivatives.
ii. Measurement of fnancial liabilities
In general, fnancial liabilities are measured at amortised cost, as
defned above, except for those included under Financial liabilities
held for trading and Financial liabilities designated at fair value
through proft or loss and fnancial liabilities designated as hedged
items (or hedging instruments) in fair value hedges, which are
measured at fair value.
iii. Valuation techniques
The following table shows a summary of the fair values, at
the end of 2018, 2017 and 2016, of the fnancial assets and
liabilities indicated below, classifed on the basis of the various
measurement methods used by the Group to determine their fair
value:
participants. The most objective and common reference for the fair
value of a fnancial instrument is the price that would be paid for it
on an active, transparent and deep market (quoted price or market
price). At 31 December 2018 there were no signifcant investments
in quoted fnancial instruments that had ceased to be recognised
at their quoted price because their market could not be deemed to
be assets.
If there is no market price for a given fnancial instrument, its
fair value is estimated on the basis of the price established in
recent transactions involving similar instruments and, in the
absence thereof, of valuation techniques commonly used by the
international fnancial community, taking into account the specifc
features of the instrument to be measured and, particularly, the
various types of risk associated with it.
All derivatives are recognised in the balance sheet at fair value
from the trade date. If the fair value is positive, they are recognised
as an asset and if the fair value is negative, they are recognised
as a liability. The fair value on the trade date is deemed, in the
absence of evidence to the contrary, to be the transaction price.
The changes in the fair value of derivatives from the trade date are
recognised in Gains/losses on fnancial assets and liabilities held
for trading (net) in the consolidated income statement. Specifcally,
the fair value of fnancial derivatives traded in organised markets
included in the portfolios of fnancial assets or liabilities held
for trading is deemed to be their daily quoted price and if, for
exceptional reasons, the quoted price cannot be determined on a
given date, these fnancial derivatives are measured using methods
similar to those used to measure OTC derivatives.
The fair value of OTC derivatives is taken to be the sum of the
future cash fows arising from the instrument, discounted to
present value at the date of measurement (present value or
theoretical close) using valuation techniques commonly used
by the fnancial markets: net present value (NPV), option pricing
models and other methods.
The amount of debt securities and loans and advances under
a business model whose objective is to collect the principal
and interest fows are valued at their amortised cost, using the
efective interest rate method in their determination. Amortised
cost refers to the acquisition cost of a corrected fnancial asset
or liability (more or less, as the case may be) for repayments of
principal and the part systematically charged to the consolidated
income statement of the diference between the initial cost and
the corresponding reimbursement value at expiration. In the case
of fnancial assets, the amortised cost includes, in addition, the
corrections to their value due to the impairment. In the loans and
advances covered in fair value hedging transactions, the changes
that occur in their fair value related to the risk or the risks covered
in these hedging transactions are recorded.
471
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
Financial assets
held for trading
Non-trading fnancial
assets mandatorily at fair
value through proft or loss
Financial assets
designated at fair value
through proft or loss
Financial assets at fair
value through other
comprehensive income
Financial assets
available-for-sale**
Hedging derivatives
(assets)
Financial liabilities
held for trading
Financial liabilities
designated at fair value
through proft or loss
Hedging derivatives
(liabilities)
Liabilities under
insurance contracts
2018*
2017
2016
Published
price
quotations
in active
markets
(Level 1)
Internal
models
(Level 2
and 3)
Total
Published
price
quotations
in active
markets
(Level 1)
Internal
models
(Level 2
and 3)
Total
Published
price
quotations
in active
markets
(Level 1)
Internal
models
(Level 2
and 3)
Total
37,108
55,771
92,879
58,215
67,243
125,458
64,259
83,928
148,187
1,835
8,895
10,730
3,102
54,358
57,460
3,823
30,959
34,782
3,220
28,389
31,609
103,590
17,501
121,091
113,258
18,802 132,060
89,563
25,862
115,425
-
8,607
8,607
-
8,537
8,537
216
10,161
10,377
16,104
54,239
70,343
21,828
85,796
107,624
20,906
87,859
108,765
987
67,071
68,058
769
58,847
59,616
5
-
6,358
6,363
765
765
8
-
8,036
8,044
1,117
1,117
-
9
-
40,263
40,263
8,147
8,156
652
652
* See further detail regarding the impacts of the entry into force of IFRS9 as of 1 January 2018 (Note 1.b).
** In addition to the fnancial instruments measured at fair value shown in the foregoing table, at 31 December 2017 and 2016, the Group held equity
instruments classifed as Financial assets available-for-sale and carried at cost amounting to EUR 1,211 million and EUR 1,349 million, respectively (see
Note 51.c).
The fnancial instruments at fair value determined on the basis
of published price quotations in active markets (Level 1) include
government debt securities, private-sector debt securities,
derivatives traded in organised markets, securitised assets, shares,
short positions and fxed-income securities issued.
In cases where price quotations cannot be observed, management
makes its best estimate of the price that the market would set,
using its own internal models. In most cases, these internal
models use data based on observable market parameters as
signifcant inputs (Level 2) and, in cases, they use signifcant
inputs not observable in market data (Level 3). In order to make
these estimates, various techniques are employed, including the
extrapolation of observable market data. The best evidence of
the fair value of a fnancial instrument on initial recognition is the
transaction price, unless the fair value of the instrument can be
obtained from other market transactions performed with the same
or similar instruments or can be measured by using a valuation
technique in which the variables used include only observable
market data, mainly interest rates.
The Group has developed a formal process for the systematic
valuation and management of fnancial instruments, which has
been implemented worldwide across all the Group’s units. The
governance scheme for this process distributes responsibilities
between two independent divisions: Treasury (development,
marketing and daily management of fnancial products and market
data) and Risk (on a periodic basis, validation of pricing models
and market data, computation of risk metrics, new transaction
approval policies, management of market risk and implementation
of fair value adjustment policies).
The approval of new products follows a sequence of steps
(request, development, validation, integration in corporate
systems and quality assurance) before the product is brought into
production. This process ensures that pricing systems have been
properly reviewed and are stable before they are used.
The following subsections set forth the most important products
and families of derivatives, and the related valuation techniques
and inputs, by asset class:
472
2018 Auditors’ report and consolidated annual accounts
market quotes of European and American-style vanilla call and put
options. Various interpolation and extrapolation techniques are
used to obtain continuous volatility for illiquid stocks. Dividends
are usually estimated for the mid and long term. Correlations
are implied, when possible, from market quotes of correlation-
dependent products. In all other cases, proxies are used for
correlations between benchmark underlyings or correlations are
obtained from historical data.
The inputs of foreign exchange models include the yield curve
for each currency, the spot foreign exchange rate, the implied
volatilities and the correlation among assets of this class.
Volatilities are obtained from European call and put options
which are quoted in markets as of-the-money, risk reversal or
butterfy options. Illiquid currency pairs are usually handled by
using the data of the liquid pairs from which the illiquid currency
can be derived. For more exotic products, unobservable model
parameters may be estimated by ftting to reference prices
provided by other non-quoted market sources.
Credit
The most common instrument in this asset class is the credit
default swap (CDS), which is used to hedge credit exposure to
third parties. In addition, models for frst-to-default (FTD), n-to-
default (NTD) and single-tranche collateralised debt obligation
(CDO) products are also available. These products are valued
with standard industry models, which estimate the probability of
default of a single issuer (for CDS) or the joint probability of default
of more than one issuer for FTD, NTD and CDO.
Valuation inputs are the yield curve, the CDS spread curve and the
recovery rate. For indices and important individual issuers, the CDS
spread curve is obtained in the market. For less liquid issuers, this
spread curve is estimated using proxies or other credit-dependent
instruments. Recovery rates are usually set to standard values. For
listed single-tranche CDO, the correlation of joint default of several
issuers is implied from the market. For FTD, NTD and bespoke
CDO, the correlation is estimated from proxies or historical data
when no other option is available.
Valuation adjustment for counterparty risk or default risk
The Credit valuation adjustment (CVA) is a valuation adjustment
to OTC derivatives as a result of the risk associated with the credit
exposure assumed to each counterparty.
Fixed income and infation
The fxed income asset class includes basic instruments such as
interest rate forwards, interest rate swaps and cross currency
swaps, which are valued using the net present value of the
estimated future cash fows discounted taking into account basis
swap and cross currency spreads determined on the basis of the
payment frequency and currency of each leg of the derivative.
Vanilla options, including caps, foors and swaptions, are priced
using the Black-Scholes model, which is one of the benchmark
industry models. More exotic derivatives are priced using more
complex models which are generally accepted as standard across
institutions.
These pricing models are fed with observable market data such
as deposit interest rates, futures rates, cross currency swap and
constant maturity swap rates, and basis spreads, on the basis of
which diferent yield curves, depending on the payment frequency,
and discounting curves are calculated for each currency. In the
case of options, implied volatilities are also used as model inputs.
These volatilities are observable in the market for cap and foor
options and swaptions, and interpolation and extrapolation of
volatilities from the quoted ranges are carried out using generally
accepted industry models. The pricing of more exotic derivatives
may require the use of non-observable data or parameters, such as
correlation (among interest rates and cross-asset), mean reversion
rates and prepayment rates, which are usually defned from
historical data or through calibration.
Infation-related assets include zero-coupon or year-on-year
infation-linked bonds and swaps, valued with the present value
method using forward estimation and discounting. Derivatives
on infation indices are priced using standard or more complex
bespoke models, as appropriate. Valuation inputs of these models
consider infation-linked swap spreads observable in the market
and estimations of infation seasonality, on the basis of which
a forward infation curve is calculated. Also, implied volatilities
taken from zero-coupon and year-on-year infation options are
also inputs for the pricing of more complex derivatives.
Equity and foreign exchange
The most important products in these asset classes are forward
and futures contracts; they also include vanilla, listed and OTC
(Over-The-Counter) derivatives on single underlying assets and
baskets of assets. Vanilla options are priced using the standard
Black-Scholes model and more exotic derivatives involving forward
returns, average performance, or digital, barrier or callable
features are priced using generally accepted industry models or
bespoke models, as appropriate. For derivatives on illiquid stocks,
hedging takes into account the liquidity constraints in models.
The inputs of equity models consider yield curves, spot prices,
dividends, asset funding costs (repo margin spreads), implied
volatilities, correlation among equity stocks and indices, and
cross-asset correlation. Implied volatilities are obtained from
473
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The CVA is calculated taking into account potential exposure to
each counterparty in each future period. The CVA for a specifc
counterparty is equal to the sum of the CVA for all the periods. The
following inputs are used to calculate the CVA:
• Expected exposure: including for each transaction the mark-
to-market (MtM) value plus an add-on for the potential future
exposure for each period. Mitigating factors such as collateral
and netting agreements are taken into account, as well as
a temporary impairment factor for derivatives with interim
payments.
• Loss Given Default: percentage of fnal loss assumed in a
counterparty credit event/default.
• Probability of default: for cases where there is no market
information (the CDS quoted spread curve, etc.), proxies based
on companies holding exchange-listed CDS, in the same industry
and with the same external rating as the counterparty, are used.
• Discount factor curve.
The debit valuation adjustment (DVA) is a valuation adjustment
similar to the CVA but, in this case, it arises as a result of the
Group’s own risk assumed by its counterparties in OTC derivatives.
The CVA at 31 December 2018 amounted to EUR 351 million (8.8%
compared to 31 December 2017) and DVA amounted to EUR 261
million (18.9% compared to 31 December 2017). The variations are
due to the fact that credit spreads for the most liquid maturities
have been increased in percentages over 30%.
In addition, the Group amounts the funding fair value adjustment
(FFVA) is calculated by applying future market funding spreads
to the expected future funding exposure of any uncollateralised
component of the OTC derivative portfolio. This includes the
uncollateralised component of collateralised derivatives in
addition to derivatives that are fully uncollateralised. The
expected future funding exposure is calculated by a simulation
methodology, where available. The FFVA impact is not material for
the consolidated fnancial statements as of 31 December 2018, 2017
and 2016.
As a result of the frst application of IFRS9, the exposure at 1
January 2018, in level 3 fnancial instruments, has increased by
EUR 2,183 million, mainly for loans and receivables, arising from
new requirements regarding the classifcation and measurement
of amortised cost items at other fair value items whose value is
calculated using unobservable market inputs (see note 1.b).
In addition, the Group has reclassifed in 2018 to level 3 the
market value of certain transactions of bonds, long-term repos
and derivatives for an approximate amount of EUR 1,300 million,
the reason for this classifcation has been mainly due to lack
of liquidity in certain signifcant inputs in the fair value of the
aforementioned fnancial instruments.
In addition, during 2016 the Group carried out a review of its
fnancial instruments valuation processes with the purpose of
increasing the observability of certain inputs and parameters used
in its valuation techniques. As a result of this review, it started
to receive prices of interest rate derivatives with the option of a
clear type of discount for EUR and USD and correlations between
pairs of shares to services of consensus pricing, which has
allowed to incorporate the inputs obtained directly or inferred
from instrument prices, in their internal valuation processes. As a
consequence, those non-observable inputs (the parameter of the
reversion to the average of the interest rates and the correlations
between shares, respectively) used in the valuation of interest
rate derivatives with the option of cancelling type EUR and USD
and derivatives on Stock baskets had become measurable and
considered observable parameters, and therefore, these products
were reclassifed from Level 3 to Level 2.
During 2018, 2017 and 2016 the Group has not carried out
signifcant reclassifcations of fnancial instruments between levels
except the changes disclosed in the level 3 table.
Valuation adjustments due to model risk
The valuation models described above do not involve a signifcant
level of subjectivity, since they can be adjusted and recalibrated,
where appropriate, through internal calculation of the fair value
and subsequent comparison with the related actively traded price.
However, valuation adjustments may be necessary when market
quoted prices are not available for comparison purposes.
The sources of risk are associated with uncertain model
parameters, illiquid underlying issuers, and poor quality market
data or missing risk factors (sometimes the best available option
is to use limited models with controllable risk). In these situations,
the Group calculates and applies valuation adjustments in
accordance with common industry practice. The main sources of
model risk are described below:
• In the fxed income markets, the sources of model risk include
bond index correlations, basis spread modelling, the risk of
calibrating model parameters and the treatment of near-zero
or negative interest rates. Other sources of risk arise from the
estimation of market data, such as volatilities or yield curves,
whether used for estimation or cash fow discounting purposes.
• In the equity markets, the sources of model risk include
forward skew modelling, the impact of stochastic interest rates,
correlation and multi-curve modelling. Other sources of risk
arise from managing hedges of digital callable and barrier option
payments. Also worthy of consideration as sources of risk are the
estimation of market data such as dividends and correlation for
quanto and composite basket options.
474
2018 Auditors’ report and consolidated annual accounts
• For specifc fnancial instruments relating to home mortgage
loans secured by fnancial institutions in the UK (which are
regulated and partially fnanced by the Government) and
property asset derivatives, the main input is the Halifax House
Price Index (HPI). In these cases, risk assumptions include
estimations of the future growth and the volatility of the HPI, the
mortality rate and the implied credit spreads.
• Infation markets are exposed to model risk resulting from
uncertainty around modelling the correlation structure among
various CPI rates. Another source of risk may arise from the bid-
ofer spread of infation-linked swaps.
• The currency markets are exposed to model risk resulting from
forward skew modelling and the impact of stochastic interest
rate and correlation modelling for multi-asset instruments. Risk
may also arise from market data, due to the existence of specifc
illiquid foreign exchange pairs.
• The most important source of model risk for credit derivatives
relates to the estimation of the correlation between the
probabilities of default of diferent underlying issuers. For illiquid
underlying issuers, the CDS spread may not be well defned.
475
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Set forth below are the fnancial instruments at fair value whose
measurement was based on internal models (Levels 2 and 3) at 31
December 2018, 2017 and 2016:
Million of euros
Fair values calculated
using internal models
at 31/12/18**
*
ASSETS:
Financial assets held for trading
Credit institutions
Customers***
Debt and equity instruments
Derivatives
Swaps
Level 2
Level 3 Valuation techniques
Main assumptions
140,659
4,473
55,033
738
-
205
314
54,514
44,423
- Present value method
Yield curves, FX market prices
- Present value method
Yield curves, FX market prices
153 Present value method
Yield curves, HPI, FX market prices
585
185 Present value method,
Gaussian Copula****
Yield curves, FX market prices,
HPI, Basis, Liquidity
Exchange rate options
617
2 Black-Scholes Model
Yield curves, Volatility surfaces,
FX market prices, Liquidity
Interest rate options
Interest rate futures
Index and securities options
Other
Hedging derivatives
Swaps
Interest rate options
Other
3,778
-
1,118
4,578
8,586
7,704
20
862
149 Black's Model, multifactorial
advanced models interest rate
Yield curves, Volatility surfaces,
FX market prices, Liquidity
- Present value method
Yield curves, FX market prices
198 Black-Scholes Model
Yield curves, Volatility surfaces,
FX & EQ market prices, Dividends,
Correlation, Liquidity, HPI
51 Present value method,
Advanced stochastic
volatility models and other
Yield curves, Volatility surfaces, FX
and EQ market prices, Dividends,
Correlation, Liquidity, Others
21
21 Present value method
FX market prices, Yield curves, Basis
- Black's Model
- Present value method,
Advanced stochastic
volatility models and other
FX market prices, Yield curves,
Volatility surfaces
Yield curves, Volatility surfaces, FX
market prices, Credit, Liquidity, Others
Non-trading fnancial assets mandatorily
at fair value through proft or loss
7,492
1,403
Equity instruments
985
462 Present value method
Market price, Interest rates
curves, Dividends and Others
Debt instruments
Loans and receivables***
5,085
1,422
481 Present value method
Interest rates curves
460 Present value method,
swap asset model & CDS
Interest rates curves and Credit curves
Financial assets designated at fair
value through proft or loss
53,482
876
Central banks
Credit institutions
Customers
Debt instruments
9,226
22,897
21,355
- Present value method
Interest rates curves, FX market prices
201 Present value method
Interest rates curves, FX market prices
560 Present value method
Interest rates curves, FX market prices, HPI
4
115 Present value method
Interest rates curves, FX market prices
Financial assets at fair value through
other comprehensive income
16,066
1,435
Equity instruments
455
581 Present value method
Market price, Interest rates
curves, Dividends and Others
Debt instruments
Loans and receivables
Financial assets available for sale
Debt instruments
14,699
912
165 Present value method
Interest rates curves, FX market prices
689 Present value method
Interest rates curves, FX market
prices and Credit curves
476
2018 Auditors’ report and consolidated annual accounts
Million of euros
*
LIABILITIES
Financial liabilities held for trading
Central banks
Credit institutions
Customers
Derivatives
Swaps
Fair values calculated
using internal models
at 31/12/18**
Level 2
Level 3 Valuation techniques
Main assumptions
127,991
53,950
442
289
-
-
-
53,950
43,489
- Present value method
Yield curves, FX market prices
- Present value method
Yield curves, FX market prices
- Present value method
Yield curves, FX market prices
289
111 Present value method,
Gaussian Copula****
Yield curves, FX market prices,
Basis, Liquidity, HPI
Exchange rate options
610
7 Black-Scholes Model
Interest rate options
4,411
26 Black's Model,
multifactorial advanced
models interest rate
Yield curves, Volatility surfaces,
FX market prices, Liquidity
Yield curves, Volatility surfaces,
FX market prices, Liquidity
Index and securities options
1,233
143 Black-Scholes Model
Yield curves, FX market prices
Interest rate and equity futures
7
- Black's Model
Yield curves, Volatility surfaces,
FX & EQ market prices, Dividends,
Correlation, Liquidity, HPI
Other
4,200
2 Present value method,
Advanced stochastic
volatility models and other
Yield curves, Volatility surfaces,
FX & EQ market prices, Dividends,
Correlation, Liquidity, HPI
Short positions
-
- Present value method
Yield curves ,FX & EQ
market prices, Equity
Hedging derivatives
Swaps
Interest rate options
Other
6,352
5,868
158
326
6
6 Present value method
Yield curves ,FX & EQ market prices, Basis
- Black's Model
- Present value method,
Advanced stochastic
volatility models and other
Yield curves , Volatility surfaces,
FX market prices, Liquidity
Yield curves , Volatility surfaces, FX
market prices, Liquidity, Other
Financial liabilities designated at
fair value through proft or loss
66,924
147 Present value method
Yield curves, FX market prices
Liabilities under insurance contracts
765
-
477
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
ASSETS:
Financial assets held for trading
Credit institutions
Customers***
Debt and equity instruments
Derivatives
Swaps
Exchange rate options
Interest rate options
Interest rate futures
Index and securities options
Other
Hedging derivatives
Swaps
Interest rate options
Other
Financial assets designated at fair
value through proft or loss
Credit institutions
Customers*****
Debt and equity instruments
Financial assets available-for-sale
Debt and equity instruments
Fair values calculated
using internal models at
31/12/17**
Fair values calculated
using internal models at
31/12/16**
Level 2
Level 3
Level 2
Level 3 Valuation techniques
124,178
66,806
1,696
8,815
335
55,960
44,766
463
4,747
2
1,257
4,725
8,519
7,896
13
610
1,363
437
-
-
32
405
189
5
162
-
5
44
18
18
-
-
146,991
83,587
3,220
9,504
798
70,065
53,499
524
5,349
1,447
1,725
7,521
10,134
9,737
13
384
1,349
341
- Present value method
- Present value method
40 Present value method
301
55 Present value method,
Gaussian Copula****
2 Black-Scholes Model
173 Black's Model, Heath-
Jarrow- Morton Model
- Present value method
26 Black-Scholes Model
45 Present value method, Monte
Carlo simulation and others
27
27 Present value method
- Black's Model
- N/A
30,677
282
28,064
325
9,889
20,403
385
18,176
18,176
-
72
210
626
626
10,069
17,521
474
25,206
25,206
- Present value method
74 Present value method
251 Present value method
656
656 Present value method
478
2018 Auditors’ report and consolidated annual accounts Million of euros
LIABILITIES:
Financial liabilities held for trading
Central banks
Credit institutions
Customers
Derivatives
Swaps
Exchange rate options
Interest rate options
Index and securities options
Interest rate and equity futures
Other
Short positions
Hedging derivatives
Swaps
Interest rate options
Other
Financial liabilities designated at fair
value through proft or loss
Liabilities under insurance contracts
Fair values calculated
using internal models at
31/12/17**
Fair values calculated
using internal models at
31/12/16**
Level 2
Level 3
Level 2
Level 3 Valuation techniques
153,600
85,614
282
292
28,179
56,860
45,041
497
5,402
1,527
1
4,392
1
8,029
7,573
287
169
58,840
1,117
196
182
-
-
-
182
100
9
19
41
-
13
-
7
7
-
-
7
-
136,835
87,790
1,351
44
9,996
73,481
57,103
413
6,485
1,672
1,443
6,365
2,918
8,138
6,676
10
1,452
86
69
- Present value method
- Present value method
- Present value method
69
1 Present value method,
Gaussian Copula****
- Black-Scholes Model
21 Black’s Model, Heath-
Jarrow- Morton Model
46 Black-Scholes Model
- Método del valor presente
1 Present value method, Monte
Carlo simulation and others
- Present value method
9
9 Present value method
- Black’s Model
- N/A
40,255
8 Present value method
652
- See Note 15
*
**
See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (See Note 1.b)
Level 2 internal models use data based on observable market parameters, while level 3 internal models use signifcant non-observable inputs in
market data.
***
Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).
****
Includes credit risk derivatives with a net fair value of EUR 0 million at 31 December 2018 (31 December 2017 and 2016: net fair value of EUR 0 million
and EUR -1 million, respectively). These assets and liabilities are measured using the Standard Gaussian Copula Model.
***** Includes home mortgage loans to fnancial institutions in the UK (which are regulated and partly fnanced by the Government). The fair value of
these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated
by the UK Housing Association. Since the Government is involved in these fnancial institutions, the credit risk spreads have remained stable and are
homogeneous in this sector. The results arising from the valuation model are checked against current market transactions.
479
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Level 3 fnancial instruments
Set forth below are the Group’s main fnancial instruments
measured using unobservable market data as signifcant inputs of
the internal models (Level 3):
• Derivatives on volatility of long-term interest rates (more than
30 years) where volatility is not observable in the market at the
indicated term.
• Equity volatility derivatives, specifcally indices and equities,
• Instruments in Santander UK’s portfolio (loans, debt instruments
where volatility is not observable in the long term.
• HTC&S (Hold to collect and sale) syndicated loans classifed in
the fair value category with changes in other comprehensive
income, where the cost of liquidity is not directly observable in
the market, as well as the prepayment option in favour of the
borrower.
The measurements obtained using the internal models might have
been diferent if other methods or assumptions had been used
with respect to interest rate risk, to credit risk, market risk and
foreign currency risk spreads, or to their related correlations and
volatilities. Nevertheless, the Bank’s directors consider that the
fair value of the fnancial assets and liabilities recognised in the
consolidated balance sheet and the gains and losses arising from
these fnancial instruments are reasonable.
The net amount recognised in proft and loss in 2018 arising from
models whose signifcant inputs are unobservable market data
(Level 3) amounted to EUR 10 million proft (EUR 116 million loss in
2017 and EUR 60 million proft in 2016).
The table below shows the efect, at 31 December 2018 on the fair
value of the main fnancial instruments classifed as Level 3 of a
reasonable change in the assumptions used in the valuation. This
efect was determined by applying the probable valuation ranges
of the main unobservable inputs detailed in the following table:
and derivatives) linked to the House Price Index (HPI). Even if
the valuation techniques used for these instruments may be the
same as those used to value similar products (present value in
the case of loans and debt instruments, and the Black-Scholes
model for derivatives), the main factors used in the valuation of
these instruments are the HPI spot rate, the growth and volatility
thereof, and the mortality rates, which are not always observable
in the market and, accordingly, these instruments are considered
illiquid.
• HPI spot rate: for some instruments the NSA HPI spot rate,
which is directly observable and published on a monthly basis,
is used. For other instruments where regional HPI rates must
be used (published quarterly), adjustments are made to refect
the diferent composition of the rates and adapt them to the
regional composition of Santander UK’s portfolio.
• HPI growth rate: this is not always directly observable in
the market, especially for long maturities, and is estimated
in accordance with existing quoted prices. To refect the
uncertainty implicit in these estimates, adjustments are made
based on an analysis of the historical volatility of the HPI,
incorporating reversion to the mean.
• HPI volatility: the long-term volatility is not directly observable
in the market but is estimated on the basis of shorter-term
quoted prices and by making an adjustment to refect the
existing uncertainty, based on the standard deviation of
historical volatility over various time periods.
• Mortality rates: these are based on published ofcial tables
and adjusted to refect the composition of the customer
portfolio for this type of product at Santander UK.
• Callable interest rate derivatives (Bermudan-style options)
where the main unobservable input is mean reversion of interest
rates.
• Trading derivatives on interest rates, taking as an underlying
asset titling and with the amortization rate (CPR, Conditional
prepayment rate) as unobservable main entry.
• Derivatives from trading on infation in Spain, where volatility is
not observable in the market.
480
2018 Auditors’ report and consolidated annual accounts
Portfolio/Instrument*
Impacts (Million of euros)
(Level 3)
Valuation technique
Financial assets held for trading
Main unobservable
inputs
Range
Weighted
average
Unfavourable
scenario
Favourable
scenario
Trading derivatives
Present value method
Curves on TAB indices**
Long-term rates MXN
a
a
a
a
Present value method,
Modifed Black-Scholes Model
HPI forward growth rate
0%-5%
2.7%
Interest Rate Curves,
FX Market Prices
HPI spot rate
CPR
n/a
n/a
783***
n/a
(0.3)
-
(24.0)
(7.8)
(163.2)
0.3
-
20.7
7.8
(84.4)
Long-term FX volatility
11%-17%
14.75%
(34.4)
5.0
Financial assets at fair
value through other
comprehensive income
Debt instruments and equity holdings Present value method, others
Present value method, others
Present value method, others
Contingencies
for litigation
Late payment and
prepayment rate
capital cost long-term
proft growth rate
Interest Rate Curves,
FX Market Prices
and Credit Curves
0%-100%
29%
a
a
a
a
(23.8)
(6.6)
9.7
6.6
1.8
(1.8)
Local Volatility
Long term volatility
n/a
34.0%
244.9
(313.8)
Non-trading fnancial assets
mandatorily at fair value
through proft or loss
Credit to customers
Debt instruments and
equity instruments
Weighted average by
probability (according to
forecast mortality rates) of
European HPI options, using
the Black-Scholes model
HPI forward growth rate
HPI spot rate
TD Black
Spain volatility
Modelo Asset Swap & CDS
Cvx. Adj (SLN)
Model - Interest Rate
Curves and Credit
Long term volatility
n/a
n/a
n/a
n/a
4.7%
7.7%
8.0%
0%-5%
2.8%
(6.2)
5.0
783***
(11.2)
11.2
Financial liabilities held for trading
Trading derivatives
Present value method,
modifed Black-Scholes Model
HPI forward growth rate
0%-5%
2.6%
Discounted fows denominated
in diferent currencies
HPI spot rate
Curves on TAB indices**
Long-term rates MXN
722***
a
IRS TIIE 3bp
X-CCY MXN/
USD 4bp
n/a
a
Bid Ofer
Spread
IRS TIIE
2bp - 6bp
X-CCY USD/
MXN 3bp - 10bp
Hedging derivatives (liabilities)
Advanced models of local
and stochastic volatility
Correlation between
the price of shares
Advanced multi-factor
interest rate models
Mean reversion of
interest rates
55%-75%
65%
n/a
n/a
0.0001-0.03
0.01****
-
b
-
b
Financial liabilities designated at
fair value through proft or loss
-
-
-
-
*
See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** TAB: “Tasa Activa Bancaria” (Active Bank Rate). Average interest rates on 30, 90, 180 and 360-day deposits published by the Chilean Association of
Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for infation (in Chilean unit of account (Unidad de
Fomento - UF)).
*** There are national and regional HPIs. The HPI spot value is the weighted average of the indices that correspond to the positions of each portfolio. The
impact reported is in response to a 10% shift.
**** Theoretical average value of the parameter. The change made for the favourable scenario is from 0.0001 to 0.03. An unfavourable scenario was not
considered as there was no margin for downward movement from the parameter’s current level.
a. The exercise was performed for the unobservable inputs described in the column “Main unobservable inputs” under probable scenarios. The
weighted average range and value used is not shown because this exercise has been carried out jointly for diferent inputs or variants of them (for
example, the TAB input are vector-term curves, for which there are also nominal and indexed curves to infation), it is not possible to break down
the result in an isolated manner by type of input. In the case of the TAB curve, the result is reported before movements of +/- 100 bp for the joint
sensitivity of this index in CLP (Chilean peso) and UF. The same applies for interest rates in MXN (Mexican peso).
b. The Group calculates the potential impact on the measurement of each instrument on a joint basis, regardless of whether the individual value is
positive (assets) or negative (liabilities), and discloses the joint efect associated with the related instruments classifed on the asset side of the
consolidated balance sheet.
481
2.2
(11.5)
(19.8)
4.4
(121.2)
105.1
(5.4)
(4.9)
-
(1.2)
5.8
4.8
-
1.2
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
31/12/2018
Fair value
calculated
using
internal
models
(Level 3)
738
153
585
185
2
149
198
51
21
21
876
201
560
115
Level
reclassifcations Other
312
(20)
141
171
4
-
8
195
(36)
-
-
699
202
497
-
(4)
(16)
(4)
(1)
(2)
(7)
(2)
-
-
53
-
57
(4)
31
(36)
1,403
-
1
30
(59)
(2)
25
460
481
462
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(269)
(269)
147
1,189
(93)
(96)
1,435
4,473
-
-
-
-
-
-
-
-
-
-
-
161
161
28
-
10
128
(5)
-
-
-
161
(9)
(9)
(3)
-
(1)
(5)
-
-
-
-
(9)
289
289
111
7
26
143
2
6
6
147
442
Lastly, the changes in the fnancial instruments classifed as Level 3
in 2018, 2017 and 2016 were as follows:
01-01-2018*
Fair value
calculated
using
internal
models
(Level 3)
Purchases/
Issuances
Sales/
Amortization
Settlements
Changes
Changes in
fair value
recognised
in proft
or loss
Changes in
fair value
recognised in
proft or loss
Million of euros
Financial assets
held for trading
Debt instruments and
equity instruments
Trading derivatives
Swaps
Exchange rate options
Interest rate options
Index and securities
options
Other
Hedging derivatives
(Assets)
Swaps
Financial assets at
fair value through
proft or loss
Credit entities
Loans and advances
to customers
Debt instruments
Non-trading fnancial
assets mandatorily
at fair value through
proft or loss
Loans and advances
to customers
Debt instruments
Equity instruments
Financial assets at fair
value through other
comprehensive income
TOTAL ASSETS
Financial liabilities
held for trading
Trading derivatives
Swaps
Exchange rate options
Interest rate options
Index and securities
options
Others
Hedging derivatives
(Liabilities)
Swaps
Financial liabilities
designated at fair value
through proft or loss
TOTAL LIABILITIES
437
32
405
189
5
162
5
44
18
18
-
-
-
-
1,365
465
518
382
1,726
3,546
182
182
100
9
19
41
13
7
7
7
196
85
22
63
-
-
-
41
22
-
-
105
-
-
105
66
56
-
10
162
418
41
41
-
-
-
41
-
-
-
140
181
(26)
(6)
(20)
(8)
-
(3)
(1)
(8)
-
-
-
-
-
-
(30)
(22)
(7)
(1)
(238)
(294)
(95)
(95)
(7)
-
(1)
(87)
-
-
-
-
(95)
(34)
(34)
-
-
-
-
-
-
-
-
-
-
-
-
(5)
-
-
(5)
-
(39)
-
-
-
-
-
-
-
-
-
-
-
(16)
2
(18)
4
(2)
(16)
(35)
31
3
3
19
(1)
6
14
12
20
(29)
21
-
18
9
9
(7)
(2)
(1)
25
(6)
(1)
(1)
-
8
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
482
2018 Auditors’ report and consolidated annual accounts
2016
Fair value
calculated
using
internal
models
(Level 3)
341
40
301
55
2
173
26
45
27
27
325
74
237
14
45
(21)
-
45
1
5
-
-
39
-
-
-
-
-
-
(7)
(14)
(6)
-
-
(1)
(7)
(2)
(2)
(9)
(2)
(7)
-
656
1,349
1
46
(239)
(271)
69
69
1
-
21
46
1
9
9
8
86
33
33
-
21
-
-
12
-
-
-
33
(3)
(3)
-
-
-
(3)
-
-
-
-
(3)
Million of euros
Financial assets
held for trading
Debt and equity
instruments
Derivatives
Swaps
Exchange rate options
Interest rate options
Index and securities
options
Other
Hedging derivatives
(Assets)
Swaps
Financial assets
designated at fair
value through
proft or loss
Loans and advances
to customers
Debt instruments
Equity instruments
Financial assets
available-for-sale
TOTAL ASSETS
Financial liabilities
held for trading
Derivatives
Swaps
Exchange rate options
Interest rate options
Index and securities
options
Other
Hedging derivatives
(Liabilities)
Swaps
Financial liabilities
designated at fair
value through
proft or loss
TOTAL LIABILITIES
Changes
Purchases
Sales
Issuances
Settlements
Changes in
fair value
recognised
in proft
or loss
Changes in
fair value
recognised
in equity
Level
reclassifcations Other
2017
Fair value
calculated
using
internal
models
(Level 3)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5)
(5)
-
-
-
-
-
-
-
-
-
-
-
(129)
(1)
(128)
(59)
(2)
(11)
(18)
(38)
(7)
(7)
(20)
3
(21)
(2)
-
(156)
(38)
(38)
(26)
(11)
(2)
-
1
(2)
(2)
-
(40)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
59
59
-
-
-
-
-
-
-
-
-
-
-
200
-
200
200
-
-
-
-
-
-
-
-
-
-
(6)
194
126
126
126
-
-
-
-
-
-
1
-
1
(2)
-
-
(2)
5
-
-
(14)
(3)
(10)
(1)
160
147
(5)
(5)
(1)
(1)
-
(2)
(1)
-
-
-
126
(1)
(6)
437
32
405
189
5
162
5
44
18
18
282
72
199
11
626
1,363
182
182
100
9
19
41
13
7
7
7
196
483
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
2015
Fair value
calculated
using
internal
models
(Level 3) Purchases
Changes
Sales
Issuances
Changes in
fair value
recognised in
Settlements proft or loss
Changes in
fair value
recognised
in equity
Level
reclassifcations Other
950
43
907
54
-
619
120
114
18
18
514
81
283
150
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(157)
(5)
(152)
-
-
(52)
(30)
(70)
(4)
(4)
(7)
-
(7)
-
999
2,481
37
37
(263)
(431)
302
302
1
194
107
-
11
11
11
324
-
-
-
-
-
-
-
-
-
-
(34)
(34)
-
(19)
(15)
-
(3)
(3)
-
(37)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(104)
-
-
(104)
(28)
(132)
-
-
-
-
-
-
-
-
-
-
52
3
49
(3)
2
39
(3)
14
13
13
6
5
1
-
-
71
10
10
-
1
8
1
1
1
-
11
2016
Fair value
calculated
using
internal
models
(Level 3)
341
40
301
55
2
173
26
45
27
27
325
74
237
14
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(489)
(15)
-
(489)
-
-
(433)
(1)
(14)
4
-
-
(56)
-
(5)
(13)
-
-
-
-
(2)
(82)
-
-
(2)
(12)
(40)
(30)
(11)
(11)
(29)
(520)
(49)
(146)
656
1,349
-
-
-
-
-
-
-
-
-
-
(199)
(199)
-
(10)
(10)
-
(155)
-
(44)
-
(10)
-
-
-
-
-
-
(199)
(3)
(13)
69
69
1
21
46
1
9
9
8
86
Million of euros
Financial assets
held for trading
Debt and equity
instruments
Derivatives
Swaps
Exchange rate
options
Interest rate
options
Index and
securities options
Other
Hedging
derivatives
(Assets)
Swaps
Financial assets
designated at fair
value through
proft or loss
Loans and
advances to
customers
Debt instruments
Equity instruments
Financial assets
available-for-sale
TOTAL ASSETS
Financial liabilities
held for trading
Derivatives
Swaps
Interest rate
options
Index and
securities options
Other
Hedging
derivatives
(Liabilities)
Swaps
Financial liabilities
designated at fair
value through
proft or loss
TOTAL LIABILITIES
484
2018 Auditors’ report and consolidated annual accounts
iv. Recognition of fair value changes
As a general rule, changes in the carrying amount of fnancial
assets and liabilities are recognised in the consolidated
income statement. A distinction is made between the changes
resulting from the accrual of interest and similar items, (which
are recognised under Interest income or Interest expense, as
appropriate), and those arising for other reasons, which are
recognised at their net amount under Gains/losses on fnancial
assets and liabilities.
Adjustments due to changes in fair value arising from:
• Financial assets at fair value with changes in other
comprehensive income are recorded temporarily, in the case of
debt instruments in other comprehensive income - Elements that
can be reclassifed to proft or loss - Financial assets at fair value
with changes in other comprehensive income, while in the case of
equity instruments are recorded in other comprehensive income
- Elements that will not be reclassifed to line item - Changes
in the fair value of equity instruments valued at fair value with
changes in other comprehensive income. Exchange diferences
on debt instruments measured at fair value with changes in
other comprehensive income are recognised under Exchange
Diferences, net of the consolidated income statement. Exchange
diferences on equity instruments, in which the irrevocable
option of being measured at fair value with changes in other
comprehensive income has been chosen, are recognised in Other
comprehensive income - Items that will not be reclassifed to
proft or loss - Changes in the fair value of equity instruments
measured at fair value with changes in other comprehensive
income.
• Items charged or credited to Items that may be reclassifed
to proft or loss – Financial assets at fair value through other
comprehensive income and Other comprehensive income – Items
that may be reclassifed to proft or loss – Exchange diferences in
equity remain in the Group’s consolidated equity until the asset
giving rise to them is impaired or derecognised, at which time
they are recognised in the consolidated income statement.
• Unrealised gains on Financial assets classifed as Non-current
A derivative qualifes for hedge accounting if all the following
conditions are met:
1. The derivative hedges one of the following three types of
exposure:
a. Changes in the fair value of assets and liabilities due to
fuctuations, among others, in the interest rate and/or
exchange rate to which the position or balance to be hedged is
subject (fair value hedge);
b. Changes in the estimated cash fows arising from fnancial
assets and liabilities, commitments and highly probable
forecast transactions (cash fow hedge);
c. The net investment in a foreign operation (hedge of a net
investment in a foreign operation).
2. It is efective in ofsetting exposure inherent in the hedged item
or position throughout the expected term of the hedge, which
means that:
a. At the date of arrangement the hedge is expected, under
normal conditions, to be highly efective (prospective
efectiveness).
b. There is sufcient evidence that the hedge was actually
efective during the whole life of the hedged item or position
(retrospective efectiveness). To this end, the Group checks
that the results of the hedge were within a range of 80% to
125% of the results of the hedged item.
3. There must be adequate documentation evidencing the specifc
designation of the fnancial derivative to hedge certain balances
or transactions and how this hedge was expected to be achieved
and measured, provided that this is consistent with the Group’s
management of own risks.
The changes in value of fnancial instruments qualifying for
hedge accounting are recognised as follows:
assets held for sale because they form part of a disposal group or
a discontinued operation are recognised in Other comprehensive
income under Items that may be reclassifed to proft or loss –
Non-current assets held for sale.
a. In fair value hedges, the gains or losses arising on both the
hedging instruments and the hedged items attributable to
the type of risk being hedged are recognised directly in the
consolidated income statement.
v. Hedging transactions
The consolidated entities use fnancial derivatives for the following
purposes: i) to facilitate these instruments to customers who
request them in the management of their market and credit risks;
ii) to use these derivatives in the management of the risks of the
Group entities’ own positions and assets and liabilities (hedging
derivatives); and iii) to obtain gains from changes in the prices of
these derivatives (derivatives).
Financial derivatives that do not qualify for hedge accounting are
treated for accounting purposes as trading derivatives.
In fair value hedges of interest rate risk on a portfolio of
fnancial instruments, the gains or losses that arise on
measuring the hedging instruments are recognised directly
in the consolidated income statement, whereas the gains
or losses due to changes in the fair value of the hedged
amount (attributable to the hedged risk) are recognised in the
consolidated income statement with a balancing entry under
Changes in the fair value of hedged items in portfolio hedges
of interest rate risk on the asset or liability side of the balance
sheet, as appropriate.
485
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
b. In cash fow hedges, the efective portion of the change in
value of the hedging instrument is recognised temporarily
in Other comprehensive income – under Items that may be
reclassifed to proft or loss – Hedging derivatives – Cash fow
hedges (efective portion) until the forecast transactions occur,
when it is recognised in the consolidated income statement,
unless, if the forecast transactions result in the recognition of
non-fnancial assets or liabilities, it is included in the cost of the
non-fnancial asset or liability.
c. In hedges of a net investment in a foreign operation, the gains
or losses attributable to the portion of the hedging instruments
qualifying as an efective hedge are recognised temporarily
in Other comprehensive income under Items that may be
reclassifed to proft or loss – Hedges of net investments in
foreign operations until the gains or losses – on the hedged
item are recognised in proft or loss.
d. The inefective portion of the gains or losses on the hedging
instruments of cash fow hedges and hedges of a net
investment in a foreign operation is recognised directly under
Gains/losses on fnancial assets and liabilities (net) in the
consolidated income statement, in Gains or losses from hedge
accounting, net.
If a derivative designated as a hedge no longer meets the
requirements described above due to expiration, inefectiveness
or for any other reason, the derivative is classifed for accounting
purposes as a trading derivative.
When fair value hedge accounting is discontinued, the adjustments
previously recognised on the hedged item are amortised to proft
or loss at the efective interest rate recalculated at the date of
hedge discontinuation. The adjustments must be fully amortised at
maturity.
When cash fow hedge accounting is discontinued, any cumulative
gain or loss on the hedging instrument recognised in equity under
other comprehensive income - Items that may be reclassifed
to proft or loss (from the period when the hedge was efective)
remains in this equity item until the forecast transaction occurs, at
which time it is recognised in proft or loss, unless the transaction
is no longer expected to occur, in which case the cumulative gain or
loss is recognised immediately in proft or loss.
vi. Derivatives embedded in hybrid fnancial instruments
Derivatives embedded in other fnancial instruments or in other
host contracts are accounted for separately as derivatives if their
risks and characteristics are not closely related to those of the host
contracts, provided that the host contracts are not classifed as
fnancial assets/liabilities designated at fair value through proft or
loss or as Financial assets/liabilities held for trading.
e) Derecognition of fnancial assets and liabilities
The accounting treatment of transfers of fnancial assets depends
on the extent to which the risks and rewards associated with the
transferred assets are transferred to third parties:
1. If the Group transfers substantially all the risks and rewards
to third parties unconditional sale of fnancial assets, sale of
fnancial assets under an agreement to repurchase them at their
fair value at the date of repurchase, sale of fnancial assets with
a purchased call option or written put option that is deeply out
of the money, securitisation of assets in which the transferor
does not retain a subordinated debt or grant any credit
enhancement to the new holders, and other similar cases-, the
transferred fnancial asset is derecognised and any rights or
obligations retained or created in the transfer are recognised
simultaneously.
2. If the Group retains substantially all the risks and rewards
associated with the transferred fnancial asset -sale of fnancial
assets under an agreement to repurchase them at a fxed price
or at the sale price plus interest, a securities lending agreement
in which the borrower undertakes to return the same or similar
assets, and other similar cases-, the transferred fnancial asset
is not derecognised and continues to be measured by the
same criteria as those used before the transfer. However, the
following items are recognised:
a. An associated fnancial liability, which is recognised for
an amount equal to the consideration received and is
subsequently measured at amortised cost, unless it meets
the requirements for classifcation under Financial liabilities
designated at fair value through proft or loss.
b. The income from the transferred fnancial asset not
derecognised and any expense incurred on the new fnancial
liability, without ofsetting.
3. If the Group neither transfers nor retains substantially all the
risks and rewards associated with the transferred fnancial
asset -sale of fnancial assets with a purchased call option or
written put option that is not deeply in or out of the money,
securitisation of assets in which the transferor retains a
subordinated debt or other type of credit enhancement for a
portion of the transferred asset, and other similar cases- the
following distinction is made:
a. If the transferor does not retain control of the transferred
fnancial asset, the asset is derecognised and any rights or
obligations retained or created in the transfer are recognised.
b. If the transferor retains control of the transferred fnancial
asset, it continues to recognise it for an amount equal to
its exposure to changes in value and recognises a fnancial
liability associated with the transferred fnancial asset.
The net carrying amount of the transferred asset and the
associated liability is the amortised cost of the rights and
obligations retained, if the transferred asset is measured at
amortised cost, or the fair value of the rights and obligations
retained, if the transferred asset is measured at fair value.
Accordingly, fnancial assets are only derecognised when the rights
to the cash fows they generate have expired or when substantially
all the inherent risks and rewards have been transferred to third
parties. Similarly, fnancial liabilities are only derecognised when
the obligations they generate have been extinguished or when
they are acquired with the intention either to cancel them or to
resell them.
486
2018 Auditors’ report and consolidated annual accounts
f) Ofsetting of fnancial instruments
Financial asset and liability balances are ofset, i.e. reported in the
consolidated balance sheet at their net amount, only if the Group
entities currently have a legally enforceable right to set of the
recognised amounts and intend either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Following is the detail of fnancial assets and liabilities that were
ofset in the consolidated balance sheets as of 31 December 2018,
2017 and 2016:
Assets
Derivatives
Reverse
repurchase
agreements
Total
Assets
Derivatives
Reverse
repurchase
agreements
Total
Assets
Derivatives
Reverse
repurchase
agreements
Total
56,701
160,441
(7,145)
(45,105)
31 December 2016
Million of euros
31 December 2018
Million of euros
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
Gross amount
of fnancial
assets
31 December 2018
Million of euros
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
Liabilities
Gross amount
of fnancial
assets
107,055
(42,509)
64,546
Derivatives
104,213
(42,509)
61,704
79,114
(4,031)
75,083
Reverse
repurchase
agreements
82,201
(4,031)
186,169
(46,540)
139,629
Total
186,414
(46,540)
78,170
139,874
31 December 2017
Million of euros
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
Gross amount
of fnancial
assets
31 December 2017
Million of euros
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
Liabilities
Gross amount
of fnancial
assets
103,740
(37,960)
65,780
Derivatives
103,896
(37,960)
65,936
Reverse
repurchase
agreements
49,556
115,336
Total
110,953
214,849
(7,145)
(45,105)
103,808
169,744
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
Gross amount
of fnancial
assets
Liabilities
Gross amount
of fnancial
assets
31 December 2016
Million of euros
Gross amount
of fnancial
liabilities
ofset in the
balance sheet
Net amount
of fnancial
assets
presented in
the balance
sheet
127,679
(45,259)
82,420
Derivatives
127,784
(45,259)
82,525
53,159
(2,213)
50,946
Reverse
repurchase
agreements
180,838
(47,472)
133,366
Total
82,543
210,327
(2,213)
(47,472)
80,330
162,855
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Also, at 31 December 2018 the Group has ofset other items
amounting to EUR 1,445 million (31 December 2017 and 2016: EUR
1,645 million and EUR 1,742 million, respectively).
At 31 December 2018 the balance sheet shows the amounts EUR
128,637 million (2017: EUR 97,017 million and 2016: EUR 110,445
million) on derivatives and repos as assets and EUR 130,969 million
(2017: EUR 153,566 million and 2016: EUR 137,097 million) on
derivatives and repos as liabilities that are subject to netting and
collateral arrangements.
g) Impairment of fnancial assets
i. Defnition
The Group associates an impairment in the value to fnancial
assets measured at amortised cost, debt instruments measured
at fair value with changes in other comprehensive income, lease
receivables and commitments and guarantees granted that are not
measured at fair value.
The impairment for expected credit losses is recorded with a
charge to the consolidated income statement for the period
in which the impairment arises. In the event of occurrence,
the recoveries of previously recognised impairment losses are
recorded in the consolidated income statement for the period in
which the impairment no longer exists or is reduced.
In the case of purchased or originated credit-impaired assets,
the Group only recognizes at the reporting date the changes in
the expected credit losses during the life of the asset since the
initial recognition as a credit loss. In the case of assets measured
at fair value with changes in other comprehensive income, the
changes in the fair value due to expected credit losses are charged
in the consolidated income statement of the year where the
change happened, refecting the rest of the valuation in other
comprehensive income.
As a rule, the expected credit loss is estimated as the diference
between the contractual cash fows to be recovered and the
expected cash fows discounted using the original efective interest
rate. In the case of purchased or originated credit-impaired assets,
this diference is discounted using the efective interest rate
adjusted by credit rating.
Depending on the classifcation of fnancial instruments, which
is mentioned in the following sections, the expected credit
losses may be along 12 months or during the life of the fnancial
instrument:
• 12-month expected credit losses: arising from the potential
default events, as defned in the following sections that are
estimated to be likely to occur within the 12 months following
the reporting date. These losses will be associated with fnancial
assets classifed as “normal risk” as defned in the following
sections.
• Expected credit losses over the life of the fnancial instrument:
arising from the potential default events that are estimated to
be likely to occur throughout the life of the fnancial instruments.
These losses are associated with fnancial assets classifed as
“normal risk under watchlist” or “doubtful risk”.
With the purpose of estimating the expected life of the fnancial
instrument 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 fnancial instruments with an uncertain maturity period
and a component of undrawn commitment (e.g.: credit cards),
the expected life is estimated through quantitative analyses to
determine the period during which the entity is exposed to credit
risk, also considering the efectiveness of management procedures
that mitigate such exposure (e.g. the ability to unilaterally cancel
such fnancial instruments, etc.).
The following constitute efective guarantees:
a) Mortgage guarantees on housing as long as they are frst duly
constituted and registered in favour of the entity. The properties
include:
i. Buildings and building elements, distinguishing among:
• Houses;
• Ofces, stores and multi-purpose premises;
• Rest of buildings such as non-multi-purpose premises and
hotels.
ii. Urban and developable ordered land.
iii. Rest of properties that classify as: buildings and building
elements under construction, such as property development
in progress and halted development, and the rest of land
types, such as rustic lands.
b) Collateral guarantees on fnancial instruments in the form of
cash deposits and debt securities issued by creditworthy issuers.
c) Other types of real guarantees, including properties received in
guarantee and second and subsequent mortgages on properties,
as long as the entity demonstrates its efectiveness. When
assessing the efectiveness of the second and subsequent
mortgages on properties the entity will implement particularly
restrictive criteria. It will take into account, among others,
whether the previous charges are in favour of the entity itself or
not and the relationship between the risk guaranteed by them
and the property value.
d) Personal guarantees, as well as the incorporation of new
owners, covering the entire amount of the fnancial instruments
and implying direct and joint liability to the entity of persons or
other entities whose solvency is sufciently proven to ensure the
repayment of the loan on the agreed terms.
488
2018 Auditors’ report and consolidated annual accounts
ii. Financial instruments presentation
For the purposes of estimating the impairment amount, and
in accordance with its internal policies, the Group classifes
its fnancial instruments (fnancial assets, commitments and
guarantees) measured at amortised cost or fair value through
other comprehensive income in one of the following categories:
• Normal Risk (“Stage 1”): includes all instruments that do not meet
the requirements to be classifed in the rest of the categories.
• Normal risk under watchlist (“Stage 2”): includes all instruments
that, without meeting the criteria for classifcation as doubtful or
default risk, have experienced signifcant increases in credit risk
since initial recognition.
In order to determine whether a fnancial instrument has
increased its credit risk since initial recognition and is to be
classifed in Stage 2, the Group considers the following criteria:
balances for a client which overdue amount more than 90 days
past due is greater than 20% of the loan receivable balance.
These instruments may be reclassifed to other categories if, as
a result of the collection of part of the past due balances, the
reasons for their classifcation in Stage 3 do not remain and the
client does not have balances more than 90 days past due in
other loans.
• Doubtful risk for reasons other than non-performing loans: this
category includes doubtful recovery fnancial instruments that
are not more than 90 days past due.
The Group considers that a fnancial instrument to be doubtful
for reasons other than delinquency when one or more
combined events have occurred with a negative impact on the
estimated future cash fows of the fnancial instrument. To this
end, the following indicators, among others, are considered:
Quantitative
criteria
Qualitative
criteria
Changes in the risk of a default occurring through
the expected life of the fnancial instrument
are analysed and quantifed with respect to
its credit level in its initial recognition.
With the purpose of determining if such
changes are considered as signifcant, with
the consequent classifcation into stage 2,
each Group unit has defned the quantitative
thresholds to consider in each of its portfolios
taking into account corporate guidelines ensuring
a consistent interpretation in all units.
In addition to the quantitative criteria indicated,
various indicators are used that are aligned
with those used by the Group in the normal
management of credit risk. Irregular positions
of more than 30 days and renewals (see Note
54.c) are common criteria in all Group units. In
addition, each unit can defne other qualitative
indicators, for each of its portfolios, according
to the particularities and normal management
practices in line with the policies currently in
force (e.g. use of management alerts, etc.).
The use of these qualitative criteria is
complemented with the use of an expert
judgement, under the corresponding governance.
In the case of forbearances, instruments classifed as “normal
risk under watchlist” may be generally reclassifed to “normal
risk” in the following circumstances: at least two years have
elapsed from the date of reclassifcation to that category or from
its forbearance date, the client has paid the accrued principal and
interest balance, and the client has no other instruments with
more than 30 days past due balances.
• Doubtful Risk (“Stage 3”): includes fnancial instruments, overdue
or not, in which, without meeting the circumstances to classify
them in the category of default risk, there are reasonable doubts
about their total repayment (principal and interests) by the
client in the terms contractually agreed. Likewise, of-balance-
sheet exposures whose payment is probable and their recovery
doubtful are considered in Stage 3. Within this category, two
situations are diferentiated:
a) Negative net equity or decrease because of losses of the
client’s net equity by at least 50% during the last fnancial
year.
b) Continued losses or signifcant decrease in revenue or, in
general, in the client’s recurring cash fows.
c) Generalised delay in payments or insufcient cash fows to
service debts.
d) Signifcantly inadequate economic or fnancial structure or
inability to obtain additional fnancing by the client.
e) Existence of an internal or external credit rating showing that
the client is in default.
f) Existence of overdue customer commitments with a
signifcant amount to public institutions or employees.
These fnancial instruments may be reclassifed to other
categories if, as a result of an individualised study, reasonable
doubts do not remain about the total repayment under the
contractually agreed terms and the client does not have
balances with more than 90 days past due.
In the case of forbearances, instruments classifed as doubtful
risk may be reclassifed to the category of ‘normal risk under
watchlist’ when the following circumstances are present: a
minimum period of one year has elapsed from the forbearance
date, the client has paid the accrued principal and interest
amounts, and the client has no other loan balance with more
than 90 days past due.
• Default Risk: includes all fnancial assets, or part of them,
for which, after an individualised analysis, their recovery
is considered remote due to a notorious and irrecoverable
deterioration of their solvency.
• Doubtful risk for non-performing loans: fnancial instruments,
irrespective of the client and guarantee, with balances more
than 90 days past due for principal, interest or expenses
contractually agreed. This category also includes all loan
In any case, except in the case of fnancial instruments with
collateral covering more than 10% of the balance of the loan,
the Group considers as a general rule the following as a remote
recovery: the loans of clients who are in the liquidation phase
489
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
of bankruptcy proceedings, doubtful balances due to non-
performing loans older than four years in this category and
doubtful balances due to non-performing loans whose portion
not covered by collateral has been maintained with 100% credit
risk coverage for more than two years.
A fnancial asset amount is maintained in the balance sheet until
they are considered as a “default risk”, either all or a part of it,
and the write-of is registered against the balance sheet.
In the case of operations that have only been partially
derecognised, for forgiveness reasons or because part of the
total balance is considered unrecoverable, the remaining amount
shall be fully classifed in the category of “doubtful risk”, except
where duly justifed.
The classifcation of a fnancial asset, or part of it, as a ‘default
risk’ does not involve the disruption of negotiations and legal
proceedings to recover the amount.
iii. Impairment valuation assessment
The Group has policies, methods and procedures in place to
hedge its credit risk, both due to the insolvency attributable
to counterparties and its residence in a specifc country. These
policies, methods and procedures are applied in the concession,
study and documentation of fnancial assets, commitments and
guarantees, as well as in the identifcation of their impairment and
in the calculation of the amounts needed to cover their credit risk.
The asset impairment model in IFRS9 applies to fnancial assets
measured at amortised cost, debt instruments at fair value with
changes in other comprehensive income, lease receivables and
commitments and guarantees granted that are not measured at
fair value.
The impairment represents the best estimation of the fnancial
assets expected credit losses at the balance sheet date, assessed
both individually and collectively.
• Individually: for the purposes of estimating the provisions for
credit risk arising from the insolvency of a fnancial instrument,
the Group individually assesses impairment by estimating the
expected credit losses on those fnancial instruments that are
considered to be signifcant and with sufcient information to
make such an estimate.
Therefore, this classifcation mostly includes wholesale banking
customers - Corporations, specialised fnancing - as well as some
of the largest companies – Chartered and real estate developers -
from retail banking.
The individually assessed impairment estimate is equal to the
diference between the gross carrying amount of the fnancial
instrument and the estimated value of the expected cash fows
receivable discounted using the original efective interest rate
of the transaction. The estimate of these cash fows takes into
account all available information on the fnancial asset and the
efective guarantees associated with that asset.
• Collectively: the Group also assesses impairment by estimating
the expected credit losses collectively in cases where they are not
assessed on an individual basis. This includes, for example, loans
with individuals, sole proprietors or businesses in retail banking
subject to a standardised risk management.
For the purposes of the collective assessment of expected credit
losses, the Group has consistent and reliable internal models. For
the development of these models, instruments with similar credit
risk characteristics that are indicative of the debtors’ capacity to
pay are considered.
The credit risk characteristics used to group the instruments are,
among others: type of instrument, debtor’s sector of activity,
geographical area of activity, type of guarantee, aging of past due
balanes and any other factor relevant to estimating the future
cash fows.
The Group performs retrospective and monitoring tests to
evaluate the reasonableness of the collective estimate.
On the other hand, the methodology required to estimate the
expected credit loss due to credit events is based on an unbiased
and weighted consideration by the probability of occurrence of a
series of scenarios, considering a range of three to fve possible
future scenarios, depending on the characteristics of each unit,
which could have an impact on the collection of contractual cash
fows, always taking into account the time value of money, as well
as all available and relevant information on past events, current
conditions and forecasts of the evolution of macroeconomic
factors that are shown to be relevant for the estimation of this
amount (for example: GDP (Gross Domestic Product), housing
price, unemployment rate, etc.).
For the estimation of the parameters used in the estimation of
impairment provisions (EAD (Exposure at Default), PD (Probability
of Default), LGD (Loss Given Default)), the Group based its
experience in developing internal models for the estimation of
parameters both in the regulatory area and for management
purposes, adapting the development of the impairment provision
models under IFRS9.
• Exposure at default: is the amount of estimated risk incurred at
the time of the counterparty’s analysis.
• Probability of default: is the estimated probability that the
counterparty will default on its principal and/or interest payment
obligations.
• Loss given default: is the estimate of the severity of the loss
incurred in the event of non-compliance. It depends mainly on
the updating of the guarantees associated with the operation and
the future cash fows that are expected to be recovered.
The defnition of default implemented by the Group for the
purpose of calculating the impairment provision models is based
490
2018 Auditors’ report and consolidated annual accounts
on the defnition in Article 178 of Regulation 575/2013 of the
European Union (CRR), which is fully aligned with the requirements
of IFRS9, which considers that a “default” exists in relation to a
specifc customer/contract when at least one of the following
circumstances exists: the entity considers that there are reasonable
doubts about the payment of all its credit obligations or that the
customer/contract is in an irregular situation for more than 90 days
with respect to any signifcant credit obligation.
In addition, the Group considers the risk generated in all cross-
border transactions due to circumstances other than the usual
commercial risk of insolvency (sovereign risk, transfer risk or risks
arising from international fnancial activity, such as wars, natural
catastrophes, balance of payments crisis, etc.).
IFRS9 includes a series of practical solutions that can be
implemented by entities, with the aim of facilitating its
implementation. However, in order to achieve a complete and
high-level implementation of the standard, and following the best
practices of the industry, the Group does not apply these practical
solutions in a generalised manner:
• Rebuttable presumption that the credit risk has increased
signifcantly, when payments are more than 30 days past
due: this threshold is used as an additional, but not primary,
indicator of signifcant 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 signifcant risk
increase with this past due threshold.
• Assets with low credit risk at the reporting date: the Group
assesses the existence of signifcant risk increase in all its
fnancial instruments.
This information is provided in more detail in Note 54.c (Credit risk).
h) Repurchase agreements and reverse
repurchase agreements
Purchases (sales) of fnancial instruments under a non-optional
resale (repurchase) agreement at a fxed price (repos) are
recognised in the consolidated balance sheet as fnancing granted
(received), based on the nature of the debtor (creditor), under
Loans and advances with central banks, Loans and advances to
credit institutions or Loans and advances to customers (Deposits
from central banks, Deposits from credit institutions or Customer
deposits).
Diferences between the purchase and sale prices are recognised
as interest over the contract term.
i) Non-current assets and Liabilities associated
with non-current assets held for sale
Non-current assets held for sale includes the carrying amount
of individual items, disposal groups or items forming part of a
business unit earmarked for disposal (discontinued operations),
whose sale in their present condition is highly likely to be
completed within one year from the reporting date. Therefore, the
recovery of the carrying amount of these items -which can be of a
fnancial nature or otherwise- will foreseeably be efected through
the proceeds from their disposal.
Specifcally, property or other non-current assets received by the
consolidated entities as total or partial settlement of their debtors’
payment obligations to them are deemed to be Non-current
assets held for sale, unless the consolidated entities have decided
to make continuing use of these assets. In this connection, for
the purpose of its consideration in the initial recognition of these
assets, the Group obtains, at the foreclosure date, the fair value
of the related asset through a request for appraisal by external
appraisal agencies.
The Group has in place a corporate policy that ensures the
professional competence and the independence and objectivity of
the external appraisal agencies, in accordance with the regulations,
which require appraisal agencies to meet independence, neutrality
and credibility requirements, so that the use of their estimates
does not reduce the reliability of its valuations. This policy
establishes that all the appraisal companies and agencies with
which the Group works in Spain should be registered in the Ofcial
Register of the Bank of Spain and that the appraisals performed
by them should follow the methodology established in Ministry
of Economy Order ECO/805/2003, of 27 March. The main appraisal
companies and agencies with which the Group worked in Spain in
2018 are as follows: Eurovaloraciones, S.A., Ibertasa, S.A., Tinsa
Tasaciones Inmobiliarias, S.A.U., Krata, S.A. y Valtenic, S.A. Also,
this policy establishes that the various subsidiaries abroad work
with appraisal companies that have recent experience in the area
and the type of asset under appraisal and meet the independence
requirements established in the corporate policy. They should
verify, inter alia, that the appraisal company is not a party related
to the Group and that its billings to the Group in the last twelve
months do not exceed 15% of the appraisal company’s total
billings.
Liabilities associated with non-current assets held for sale includes
the balances payable arising from the assets held for sale or
disposal groups and from discontinued operations.
Non-current assets and disposal groups of items that have been
classifed as held for sale are generally recognised at the date of
their allocation to this category and are subsequently valued at
the lower of their fair value less costs to sell or its book value.
Non-current assets and disposal groups of items that are classifed
as held for sale are not amortised as long as they remain in this
category.
At 31 December 2018 the fair value less costs to sell of non-current
assets held for sale exceeded their carrying amount by EUR 471
million; however, in accordance with the accounting standards, this
unrealised gain could not be recognised.
The valuation of the portfolio of non-current assets held for
sale has been made in compliance with the requirements of
International Financial Reporting Standards in relation to the
estimate of the fair value of tangible assets and the value-in-use of
fnancial assets.
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The value of the portfolio is determined as the sum of the values
of the individual elements that compose the portfolio, without
considering any total or batch grouping in order to correct the
individual values.
In the case of real estate assets foreclosed in Spain, which
represent 86.5% of the Group’s total non-current assets held for
sale, the valuation of the portfolio is carried out by applying the
following models:
j) Assets under insurance or reinsurance contracts and
liabilities under insurance or reinsurance contracts
Insurance contracts involve the transfer of a certain quantifable
risk in exchange for a periodic or one-of premium. The efects on
the Group’s cash fows will arise from a deviation in the payments
forecast and/or an insufciency in the premium set.
The Group controls its insurance risk as follows:
• By applying a strict methodology in the launch of products and in
• Market Value Model used in the valuation of fnished residential
the assignment of value thereto.
properties (housing and parkings) and buildings of a tertiary
nature (ofces, commercial premises and multipurpose
buildings). The current market value of real estate is based
on automated valuations obtained by comparison of peers
distinguishing by location and typology of the property. In
addition, for individual signifcant assets, complete individual
valuations are performed. Valuations made using this method are
considered as Level 2.
• Market Value Model according to the Evolution of Market Values
issued in the valuation of property developments in progress. The
current market value of the properties is estimated on the basis
of complete individual valuations of third parties, calculated from
the values of feasibility studies and development costs of the
promotion, as well as selling expenses, distinguishing by location
and typology of the property. The valuation of real estate assets
under construction is made considering the current situation of
the property and not considering the fnal value of the property.
Valuations made using this method are considered as Level 3.
• Market Value Model according to the Statistical Evolution of
Lands Values (Methodology used in the valuation of lands). A
statistical update method is used, taking as reference the indexes
published by the Ministry of Development applied to the latest
individual valuations (appraisals) carried out by independent
valuation companies and agencies. Valuations made using this
method are considered as Level 2.
• By using deterministic and stochastic actuarial models for
measuring commitments.
• By using reinsurance as a risk mitigation technique as part of
the credit quality guidelines in line with the Group’s general risk
policy.
• By establishing an operating framework for credit risks.
• By actively managing asset and liability matching.
• By applying security measures in processes.
Reinsurance assets includes the amounts that the consolidated
entities are entitled to receive for reinsurance contracts with third
parties and, specifcally, the reinsurer’s share of the technical
provisions recorded by the consolidated insurance entities.
At least once a year these assets are reviewed to ascertain whether
they are impaired (i.e. there is objective evidence, as a result of
an event that occurred after initial recognition of the reinsurance
asset, that the Group may not receive all amounts due to it under
the terms of the contract and the amount that will not be received
can be reliably measured), and any impairment loss is recognised
in the consolidated income statement and the assets are written
down.
In addition, in relation to the previously mentioned valuations, less
costs to sell, are contrasted with the sales experience of each type
of asset in order to confrm that there is no signifcant diference
between the sale price and the valuation.
Liabilities under insurance contracts includes the technical
provisions recorded by the consolidated entities to cover claims
arising from insurance contracts in force at year-end.
Impairment losses on an asset or disposal group arising from
a reduction in its carrying amount to its fair value (less costs to
sell) are recognised under Gains or (losses) on non-current assets
held for sale not classifed as discontinued operations in the
consolidated income statement. The gains on a non-current asset
held for sale resulting from subsequent increases in fair value (less
costs to sell) increase its carrying amount and are recognised in
the consolidated income statement up to an amount equal to the
impairment losses previously recognised.
Insurers’ results relating to their insurance business are
recognised, according to their nature, under the related
consolidated income statement items.
In accordance with standard accounting practice in the insurance
industry, the consolidated insurance entities credit to the income
statement the amounts of the premiums written and charge to
income the cost of the claims incurred on fnal settlement thereof.
Insurance entities are therefore required to accrue at period-end
the unearned revenues credited to their income statements and
the accrued costs not charged to income.
At least at each reporting date the Group assesses whether the
insurance contract liabilities recognised in the consolidated
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balance sheet are adequate. For this purpose, it calculates the
diference between the following amounts:
• Current estimates of future cash fows under the insurance
contracts of the consolidated entities. These estimates include all
contractual cash fows and any related cash fows, such as claims
handling costs; and
• The carrying amount recognised in the consolidated balance
sheet of its insurance contract liabilities (See Note 15), less any
related deferred acquisition costs or related intangible assets,
such as the amount paid to acquire, in the event of purchase by
the entity, the economic rights held by a broker deriving from
policies in the entity’s portfolio.
If the calculation results in a positive amount, this defciency is
charged to the consolidated income statement. When unrealised
gains or losses on assets of the Group’s insurance companies afect
the measurement of liabilities under insurance contracts and/or
the related deferred acquisition costs and/or the related intangible
assets, these gains or losses are recognised directly in equity.
The corresponding adjustment in the liabilities under insurance
contracts (or in the deferred acquisition costs or in intangible
assets) is also recognised in equity.
The most signifcant items forming part of the technical provisions
(see Note 15) are detailed below:
• Non-life insurance provisions:
i) Provision for unearned premiums: relates to the portion of the
premiums received at year-end that is allocable to the period
from the reporting date to the end of the policy cover period.
ii) Provisions for unexpired risks: this supplements the provision
for unearned premiums to the extent that the amount of the
latter is not sufcient to refect all the assessed risks and
expenses to be covered by the insurance companies in the
policy period not elapsed at the reporting date.
• Life insurance provisions: represent the value of the net
obligations acquired vis-à-vis life insurance policyholders. These
provisions include:
i) Provision for unearned premiums and unexpired risks: this
relates to the portion of the premiums received at year-end
that is allocable to the period from the reporting date to the
end of the policy cover period.
• Provision for claims outstanding: this refects the total
obligations outstanding arising from claims incurred prior to
the reporting date. This provision is calculated as the diference
between the total estimated or certain cost of the claims not
yet reported, settled or paid and all the amounts already paid in
relation to such claims.
• Provision for bonuses and rebates: this provision includes the
amount of the bonuses accruing to policyholders, insureds
or benefciaries and that of any premiums to be returned to
policyholders or insureds, to the extent that such amounts have
not been assigned at the reporting date. These amounts are
calculated on the basis of the conditions of the related individual
policies.
• Technical provisions for life insurance policies where the
investment risk is borne by the policyholders: these provisions
are calculated on the basis of the indices established as a
reference to determine the economic value of the policyholders’
rights.
k) Tangible assets
Tangible assets includes the amount of buildings, land, furniture,
vehicles, computer hardware and other fxtures owned by the
consolidated entities or acquired under fnance leases. Tangible
assets are classifed by use as follows:
i. Property, plant and equipment for own use
Property, plant and equipment for own use – including tangible
assets received by the consolidated entities in full or partial
satisfaction of fnancial assets representing receivables from
third parties which are intended to be held for continuing use and
tangible assets acquired under fnance leases– are presented at
acquisition cost, less the related accumulated depreciation and
any estimated impairment losses (carrying amount higher than
recoverable amount).
Depreciation is calculated, using the straight-line method, on the
basis of the acquisition cost of the assets less their residual value.
The land on which the buildings and other structures stand has an
indefnite life and, therefore, is not depreciated.
The period tangible asset depreciation charge is recognised in
the consolidated income statement and is calculated using the
following depreciation rates (based on the average years of
estimated useful life of the various assets):
ii) Mathematical provisions: these relate to the value of the
Buildings for own use
insurance companies’ obligations, net of the policyholders’
obligations. These provisions are calculated on a policy-by-
policy basis using an individual capitalisation system, taking
as a basis for the calculation the premium accrued in the year,
and in accordance with the technical bases of each type of
insurance updated, where appropriate, by the local mortality
tables.
Furniture
Fixtures
Ofce and IT equipment
Leasehold improvements
Average
annual rate
2.0%
7.7%
7.0%
25.0%
7.0%
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The consolidated entities assess at the reporting date whether
there is any indication that an asset may be impaired (i.e. its
carrying amount exceeds its recoverable amount). If this is the
case, the carrying amount of the asset is reduced to its recoverable
amount and future depreciation charges are adjusted in proportion
to the revised carrying amount and to the new remaining useful
life (if the useful life has to be re-estimated).
Similarly, if there is an indication of a recovery in the value of a
tangible asset, the consolidated entities recognise the reversal
of the impairment loss recognised in prior periods and adjust the
future depreciation charges accordingly. In no circumstances may
the reversal of an impairment loss on an asset raise its carrying
amount above that which it would have if no impairment losses
had been recognised in prior years.
The estimated useful lives of the items of property, plant and
equipment for own use are reviewed at least at the end of the
reporting period with a view to detecting signifcant changes
therein. If changes are detected, the useful lives of the assets are
adjusted by correcting the depreciation charge to be recognised in
the consolidated income statement in future years on the basis of
the new useful lives.
Upkeep and maintenance expenses relating to property, plant and
equipment for own use are recognised as an expense in the period
in which they are incurred, since they do not increase the useful
lives of the assets.
on specifc information on actual transactions and frm ofers,
current prices are obtained for cash sales of those properties. The
valuations performed using this approach are considered as Level
2 valuations.
In the income capitalisation approach, the cash fows estimated
to be obtained over the useful life of the property are discounted
taking into account factors that may infuence the amount and
actual obtainment thereof, such as: (i) the payments that are
normally received on comparable properties; (ii) current and
probable future occupancy; (iii) the current or foreseeable default
rate on payments. The valuations performed using this approach
are considered as Level 3 valuations, since signifcant unobservable
inputs are used, such as current and probable future occupancy
and/or the current or foreseeable default rate on payments.
iii. Assets leased out under an operating lease
Property, plant and equipment - Leased out under an operating
lease refects the amount of the tangible assets, other than land
and buildings, leased out by the Group under an operating lease.
The criteria used to recognise the acquisition cost of assets
leased out under operating leases, to calculate their depreciation
and their respective estimated useful lives and to recognise the
impairment losses thereon are consistent with those described in
relation to property, plant and equipment for own use.
l) Accounting for leases
ii. Investment property
Investment property refects the net values of the land, buildings
and other structures held either to earn rentals or for obtaining
profts by sales due to future increase in market prices.
i. Finance leases
Finance leases are leases that transfer substantially all the risks
and rewards incidental to ownership of the leased asset to the
lessee.
The criteria used to recognise the acquisition cost of investment
property, to calculate its depreciation and its estimated useful life
and to recognise any impairment losses thereon are consistent
with those described in relation to property, plant and equipment
for own use.
In order to evaluate the possible impairment the Group determines
periodically the fair value of its investment property so that, at
the end of the reporting period, the fair value refects the market
conditions of the investment property at that date. This fair value
is determined annually, taking as benchmarks the valuations
performed by independent experts. The methodology used
to determine the fair value of investment property is selected
based on the status of the asset in question; thus, for properties
earmarked for lease, the valuations are performed using the
sales comparison approach, whereas for leased properties the
valuations are made primarily using the income capitalisation
approach and, exceptionally, the sales comparison approach.
In the sales comparison approach, the property market segment
for comparable properties is analysed, inter alia, and, based
When the consolidated entities act as the lessors of an asset, the
sum of the present value of the lease payments receivable from
the lessee, including the exercise price of the lessee’s purchase
option at the end of the lease term when such exercise price
is sufciently below fair value at the option date such that it is
reasonably certain that the option will be exercised, is recognised
as lending to third parties and is therefore included under Loans
and receivables in the consolidated balance sheet.
When the consolidated entities act as the lessees, they present the
cost of the leased assets in the consolidated balance sheet, based
on the nature of the leased asset, and, simultaneously, recognise
a liability for the same amount (which is the lower of the fair value
of the leased asset and the sum of the present value of the lease
payments payable to the lessor plus, if appropriate, the exercise
price of the purchase option). The depreciation policy for these
assets is consistent with that for property, plant and equipment for
own use.
In both cases, the fnance income and fnance charges arising under
fnance lease agreements are credited and debited, respectively,
to interest and similar income and Interest expense and similar
charges in the consolidated income statement so as to produce a
constant rate of return over the lease term.
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ii. Operating leases
In operating leases, ownership of the leased asset and
substantially all the risks and rewards incidental thereto remain
with the lessor.
When the consolidated entities act as the lessors, they present the
acquisition cost of the leased assets under Tangible assets (See
Note 16). The depreciation policy for these assets is consistent with
that for similar items of property, plant and equipment for own
use, and income from operating leases is recognised on a straight-
line basis under Other operating income in the consolidated
income statement.
When the consolidated entities act as the lessees, the lease
expenses, including any incentives granted by the lessor, are
charged on a straight-line basis to Other general administrative
expenses in their consolidated income statements.
The present value calculated applying IAS17 as of 31 December
2018 of the future payments committed by the Group for existing
non-cancellable operating lease agreements amounts to EUR
8,699 million, of which EUR 739 million is payable within one
year, EUR 2,472 million between one and fve years and EUR 5,488
million in more than fve years.
iii. Sale and leaseback transactions
In sale and leaseback transactions where the sale is at fair value
and the leaseback is an operating lease, any proft or loss is
recognised at the time of sale. In the case of fnance leasebacks,
any proft or loss is amortised over the lease term.
In accordance with IAS17, in determining whether a sale and
leaseback transaction results in an operating lease, the Group
should analyse, inter alia, whether at the inception of the lease
there are purchase options whose terms and conditions make
it reasonably certain that they will be exercised, and to whom
the gains or losses from the fuctuations in the fair value of the
residual value of the related asset will accrue.
m) Intangible assets
Intangible assets are identifable non-monetary assets (separable
from other assets) without physical substance which arise as a
result of a legal transaction or which are developed internally by
the consolidated entities. Only assets whose cost can be estimated
reliably and from which the consolidated entities consider it
probable that future economic benefts will be generated are
recognised.
Intangible assets are recognised initially at acquisition or
production cost and are subsequently measured at cost less any
accumulated amortisation and any accumulated impairment
losses.
i. Goodwill
Any excess of the cost of the investments in the consolidated
entities and entities accounted for using the equity method over
the corresponding underlying carrying amounts acquired, adjusted
at the date of frst-time consolidation, is allocated as follows:
• If it is attributable to specifc assets and liabilities of the
companies acquired, by increasing the value of the assets (or
reducing the value of the liabilities) whose fair values were
higher (lower) than the carrying amounts at which they had been
recognised in the acquired entities’ balance sheets.
• If it is attributable to specifc intangible assets, by recognising it
explicitly in the consolidated balance sheet provided that the fair
value of these assets within twelve months following the date of
acquisition can be measured reliably.
• The remaining amount is recognised as goodwill, which
is allocated to one or more cash-generating units (a cash-
generating unit is the smallest identifable group of assets that,
as a result of continuing operation, generates cash infows that
are largely independent of the cash infows from other assets
or groups of assets). The cash-generating units represent the
Group’s geographical and/or business segments.
Goodwill (only recognised when it has been acquired by
consideration) represents, therefore, a payment made by the
acquirer in anticipation of future economic benefts from assets
of the acquired entity that are not capable of being individually
identifed and separately recognised.
At the end of each annual reporting period or whenever there is
any indication of impairment goodwill is reviewed for impairment
(i.e. a reduction in its recoverable amount to below its carrying
amount) and, if there is any impairment, the goodwill is written
down with a charge to Impairment or reversal of impairment on
non-fnancial assets, net - Intangible assets in the consolidated
income statement.
An impairment loss recognised for goodwill is not reversed in a
subsequent period.
ii. Other intangible assets
Other intangible assets includes the amount of identifable
intangible assets (such as purchased customer lists and computer
software).
Other intangible assets can have an indefnite useful life -when,
based on an analysis of all the relevant factors, it is concluded that
there is no foreseeable limit to the period over which the asset
is expected to generate net cash infows for the consolidated
entities- or a fnite useful life, in all other cases.
Intangible assets with indefnite useful lives are not amortised,
but rather at the end of each reporting period or whenever there is
any indication of impairment the consolidated entities review the
remaining useful lives of the assets in order to determine whether
they continue to be indefnite and, if this is not the case, to take the
appropriate steps.
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Intangible assets with fnite useful lives are amortised over those
useful lives using methods similar to those used to depreciate
tangible assets.
The intangible asset amortisation charge is recognised under
Depreciation and amortisation cost in the consolidated income
statement.
In both cases the consolidated entities recognise any impairment
loss on the carrying amount of these assets with a charge to
Impairment or reversal of impairment on non-fnancial assets,
net - Intangible assets in the consolidated income statement.
The criteria used to recognise the impairment losses on these
assets and, where applicable, the reversal of impairment losses
recognised in prior years are similar to those used for tangible
assets (See Note 2.k).
Internally developed computer software
Internally developed computer software is recognised as an
intangible asset if, among other requisites (basically the Group’s
ability to use or sell it), it can be identifed and its ability to
generate future economic benefts can be demonstrated.
Expenditure on research activities is recognised as an expense
in the year in which it is incurred and cannot be subsequently
capitalised.
n) Other assets
Other assets in the consolidated balance sheet includes the
amount of assets not recorded in other items, the breakdown
being as follows:
• Inventories: this item includes the amount of assets, other than
fnancial instruments, that are held for sale in the ordinary course
of business, that are in the process of production, construction
or development for such purpose, or that are to be consumed in
the production process or in the provision of services. Inventories
include land and other property held for sale in the property
development business.
Inventories are measured at the lower of cost and net realisable
value, which is the estimated selling price of the inventories
in the ordinary course of business, less the estimated costs of
completion and the estimated costs required to make the sale.
Any write-downs of inventories -such as those due to damage,
obsolescence or reduction of selling price- to net realisable
value and other impairment losses are recognised as expenses
for the year in which the impairment or loss occurs. Subsequent
reversals are recognised in the consolidated income statement
for the year in which they occur.
The carrying amount of inventories is derecognised and
recognised as an expense in the period in which the revenue from
their sale is recognised.
• Other: this item includes the balance of all prepayments
and accrued income (excluding accrued interest, fees and
commissions), the net amount of the diference between pension
plan obligations and the value of the plan assets with a balance
in the entity’s favour, when this net amount is to be reported in
the consolidated balance sheet, and the amount of any other
assets not included in other items.
496
o) Other liabilities
Other liabilities includes the balance of all accrued expenses and
deferred income, excluding accrued interest, and the amount of
any other liabilities not included in other categories.
p) Provisions and contingent assets and liabilities
When preparing the fnancial statements of the consolidated
entities, the Bank’s directors made a distinction between:
• Provisions: credit balances covering present obligations at the
reporting date arising from past events which could give rise to a
loss for the consolidated entities, which is considered to be likely
to occur and certain as to its nature but uncertain as to its amount
and/or timing.
• Contingent liabilities: possible obligations that arise from past
events and whose existence will be confrmed only by the
occurrence or non-occurrence of one or more future events
not wholly within the control of the consolidated entities. They
include the present obligations of the consolidated entities
when it is not probable that an outfow of resources embodying
economic benefts will be required to settle them. The Group
does not recognise the contingent liability. The Group will
disclose a contingent liability, unless the possibility of an outfow
of resources embodying economic benefts is remote.
• Contingent assets: possible assets that arise from past events
and whose existence is conditional on, and will be confrmed
only by, the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the
Group. Contingent assets are not recognised in the consolidated
balance sheet or in the consolidated income statement, but
rather are disclosed in the notes, provided that it is probable that
these assets will give rise to an increase in resources embodying
economic benefts.
The Group’s consolidated fnancial statements include all the
material provisions with respect to which it is considered that it
is more likely than not the obligation will have to be settled. In
accordance with accounting standards, contingent liabilities must
not be recognised in the consolidated fnancial statements, but
must rather be disclosed in the notes.
Provisions, which are quantifed on the basis of the best
information available on the consequences of the event giving rise
to them and are reviewed and adjusted at the end of each year,
are used to cater for the specifc obligations for which they were
originally recognised. Provisions are fully or partially reversed
when such obligations cease to exist or are reduced.
Provisions are classifed according to the obligations covered as
follows (See Note 25):
• Provision for pensions and similar obligations: includes the
amount of all the provisions made to cover post-employment
benefts, including obligations to pre-retirees and similar
obligations.
• Provisions for contingent liabilities and commitments: include
the amount of the provisions made to cover contingent liabilities
-defned as those transactions in which the Group guarantees
2018 Auditors’ report and consolidated annual accounts
the obligations of a third party, arising as a result of fnancial
guarantees granted or contracts of another kind- and contingent
commitments -defned as irrevocable commitments that may
give rise to the recognition of fnancial assets.
• Provisions for taxes and other legal contingencies and Other
provisions: include the amount of the provisions recognised
to cover tax and legal contingencies and litigation and the
other provisions recognised by the consolidated entities. Other
provisions includes, inter alia, any provisions for restructuring
costs and environmental measures.
q) Court proceedings and/or claims in process
At the end of 2018 certain court proceedings and claims were in
process against the consolidated entities arising from the ordinary
course of their operations (see Note 25).
r) Own equity instruments
Own equity instruments are those meeting both of the following
conditions:
• The instruments do not include any contractual obligation
When the requirements stipulated in the remuneration agreement
include external market conditions (such as equity instruments
reaching a certain quoted price), the amount ultimately to be
recognised in equity will depend on the other conditions being
met by the employees (normally length of service requirements),
irrespective of whether the market conditions are satisfed. If
the conditions of the agreement are met but the external market
conditions are not satisfed, the amounts previously recognised in
equity are not reversed, even if the employees do not exercise their
right to receive the equity instruments.
t) Recognition of income and expenses
The most signifcant criteria used by the Group to recognise its
income and expenses are summarised as follows:
i. Interest income, interest expenses and similar items
Interest income, interest expenses and similar items are generally
recognised on an accrual basis using the efective interest method.
Dividends received from other companies are recognised as
income when the consolidated entities’ right to receive them
arises.
for the issuer: (i) to deliver cash or another fnancial asset to
a third party; or (ii) to exchange fnancial assets or fnancial
liabilities with a third party under conditions that are potentially
unfavourable to the issuer.
ii. Commissions, fees and similar items
Fee and commission income and expenses are recognised in the
consolidated income statement using criteria that vary according
to their nature. The main criteria are as follows:
• The instruments will or may be settled in the issuer’s own
equity instruments and are: (i) a non-derivative that includes no
contractual obligation for the issuer to deliver a variable number
of its own equity instruments; or (ii) a derivative that will be
settled by the issuer through the exchange of a fxed amount
of cash or another fnancial asset for a fxed number of its own
equity instruments.
• Fee and commission income and expenses relating to fnancial
assets and fnancial liabilities measured at fair value through
proft or loss are recognised when paid.
• Those arising from transactions or services that are performed
over a period of time are recognised over the life of these
transactions or services.
Transactions involving own equity instruments, including their
issuance and cancellation, are charged directly to equity.
• Those relating to services provided in a single act are recognised
when the single act is carried out.
Changes in the value of instruments classifed as own equity
instruments are not recognised in the consolidated fnancial
statements. Consideration received or paid in exchange for
such instruments, including the coupons on preference shares
contingently convertible into ordinary shares and the coupons
associated with CCPP, is directly added to or deducted from equity.
s) Equity-instrument-based employee remuneration
Own equity instruments delivered to employees in consideration
for their services, if the instruments are delivered once the specifc
period of service has ended, are recognised as an expense for
services (with the corresponding increase in equity) as the services
are rendered by employees during the service period. At the grant
date the services received (and the related increase in equity) are
measured at the fair value of the equity instruments granted. If
the equity instruments granted are vested immediately, the Group
recognises in full, at the grant date, the expense for the services
received.
iii. Non-fnance income and expenses
They are recognised for accounting purposes when the good is
delivered or the non-fnancial service is rendered. To determine the
amount and timing of recognition, a fve-step model is followed:
identifcation of the contract with the customer, identifcation of
the separate obligations of the contract, determination of the
transaction price, distribution of the transaction price among
the identifed obligations and fnally recording of income as the
obligations are satisfed.
iv. Deferred collections and payments
These are recognised for accounting purposes at the amount
resulting from discounting the expected cash fows at market
rates.
v. Loan arrangement fees
Loan arrangement fees, mainly loan origination, application and
information fees, are accrued and recognised in income over the
term of the loan.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
u) Financial guarantees
Financial guarantees are defned as contracts whereby an entity
undertakes to make specifc payments on behalf of a third party
if the latter fails to do so, irrespective of the various legal forms
they may have, such as guarantees, insurance policies or credit
derivatives.
The Group initially recognises the fnancial guarantees provided
on the liability side of the consolidated balance sheet at fair value,
which is generally the present value of the fees, commissions and
interest receivable from these contracts over the term thereof,
and simultaneously the Group recognises the amount of the fees,
commissions and similar interest received at the inception of the
transactions and a credit on the asset side of the consolidated
balance sheet for the present value of the fees, commissions and
interest outstanding.
Financial guarantees, regardless of the guarantor, instrumentation
or other circumstances, are reviewed periodically so as to
determine the credit risk to which they are exposed and, if
appropriate, to consider whether a provision is required. The
credit risk is determined by application of criteria similar to those
established for quantifying impairment losses on debt instruments
carried at amortised cost (described in Note 2.g above).
The provisions made for these transactions are recognised under
Provisions - Provisions for commitments and guarantees given in
the consolidated balance sheet (See Note 25). These provisions
are recognised and reversed with a charge or credit, respectively,
to Provisions or reversal of provisions, net, in the consolidated
income statement.
If a specifc provision is required for fnancial guarantees, the
related unearned commissions recognised under Financial
liabilities at amortised cost - Other fnancial liabilities in the
consolidated balance sheet are reclassifed to the appropriate
provision.
v) Assets under management and investment
and pension funds managed by the Group
Assets owned by third parties and managed by the consolidated
entities are not presented on the face of the consolidated balance
sheet. Management fees are included in Fee and commission
income in the consolidated income statement.
The investment funds and pension funds managed by the
consolidated entities are not presented on the face of the Group’s
consolidated balance sheet since the related assets are owned
by third parties. The fees and commissions earned in the year for
the services rendered by the Group entities to these funds (asset
management and custody services) are recognised under Fee and
commission income in the consolidated income statement.
Note 2.b.iv describes the internal criteria and procedures used
to determine whether control exists over the structured entities,
which include, inter alia, investment funds and pension funds.
w) Post-employment benefts
Under the collective agreements currently in force and other
arrangements, the Spanish banks included in the Group and certain
other Spanish and foreign consolidated entities have undertaken
to supplement the public social security system benefts accruing
to certain employees, and to their benefciary right holders,
for retirement, permanent disability or death, and the post-
employment welfare benefts.
The Group’s post-employment obligations to its employees are
deemed to be defned contribution plans when the Group makes
pre-determined contributions (recognised under Staf costs in
the consolidated income statement) to a separate entity and will
have no legal or efective obligation to make further contributions
if the separate entity cannot pay the employee benefts relating
to the service rendered in the current and prior periods. Post-
employment obligations that do not meet the aforementioned
conditions are classifed as defned beneft plans (See Note 25).
Defned contribution plans
The contributions made in this connection in each year are
recognised under Staf costs in the consolidated income statement.
The amounts not yet contributed at each year-end are recognised,
at their present value, under Provisions - Provision for pensions
and similar obligations on the liability side of the consolidated
balance sheet.
Defned beneft plans
The Group recognises under Provisions - Provision for pensions and
similar obligations on the liability side of the consolidated balance
sheet (or under Other assets on the asset side, as appropriate) the
present value of its defned beneft post-employment obligations,
net of the fair value of the plan assets.
Plan assets are defned as those that will be directly used to settle
obligations and that meet the following conditions:
• They are not owned by the consolidated entities, but by a legally
separate third party that is not a party related to the Group.
• They are only available to pay or fund post-employment benefts
and they cannot be returned to the consolidated entities unless
the assets remaining in the plan are sufcient to meet all the
beneft obligations of the plan and of the entity to current and
former employees, or they are returned to reimburse employee
benefts already paid by the Group.
If the Group can look to an insurer to pay part or all of the
expenditure required to settle a defned beneft obligation, and
it is practically certain that said insurer will reimburse some
or all of the expenditure required to settle that obligation, but
the insurance policy does not qualify as a plan asset, the Group
recognises its right to reimbursement -which, in all other respects,
is treated as a plan asset- under Insurance contracts linked to
pensions on the asset side of the consolidated balance sheet.
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2018 Auditors’ report and consolidated annual accounts
Post-employment benefts are recognised as follows:
• Current service cost, (the increase in the present value of the
obligations resulting from employee service in the current
period), is recognised under Staf costs.
• The past service cost, which arises from changes to existing
post-employment benefts or from the introduction of new
benefts and includes the cost of reductions, is recognised under
Provisions or reversal of provisions.
• Any gain or loss arising from a liquidation of the plan is included
in the Provisions or reversion of provisions.
• Net interest on the net defned beneft liability (asset), i.e. the
change during the period in the net defned beneft liability
(asset) that arises from the passage of time, is recognised under
Interest expense and similar charges (Interest and similar income
if it constitutes income) in the consolidated income statement.
The remeasurement of the net defned beneft liability (asset)
is recognised in Other comprehensive income under Items not
reclassifed to proft or loss and includes:
• Actuarial gains and losses generated in the year, arising from
the diferences between the previous actuarial assumptions and
what has actually occurred and from the efects of changes in
actuarial assumptions.
• The return on plan assets, excluding amounts included in net
interest on the net defned beneft liability (asset).
• Any change in the efect of the asset ceiling, excluding amounts
included in net interest on the net defned beneft liability (asset).
x) Other long-term employee benefts
Other long-term employee benefts, defned as obligations to
pre-retirees -taken to be those who have ceased to render services
at the entity but who, without being legally retired, continue to
have economic rights vis-à-vis the entity until they acquire the
legal status of retiree-, long-service bonuses, obligations for
death of spouse or disability before retirement that depend on
the employee’s length of service at the entity and other similar
items, are treated for accounting purposes, where applicable, as
established above for defned beneft post-employment plans,
except that actuarial gains and losses are recognised under
Provisions or reversal of provisions, net, in the consolidated income
statement (see Note 25).
y) Termination benefts
Termination benefts are recognised when there is a detailed
formal plan identifying the basic changes to be made, provided
that implementation of the plan has begun, its main features
have been publicly announced or objective facts concerning its
implementation have been disclosed.
z) Income tax
The expense for Spanish income tax and other similar taxes
applicable to the foreign consolidated entities is recognised in
the consolidated income statement, except when it results from
a transaction recognised directly in equity, in which case the tax
efect is also recognised in equity.
The current income tax expense is calculated as the sum of the
current tax resulting from application of the appropriate tax rate
to the taxable proft for the year (net of any deductions allowable
for tax purposes), and of the changes in deferred tax assets and
liabilities recognised in the consolidated income statement.
Deferred tax assets and liabilities include temporary diferences,
which are identifed as the amounts expected to be payable or
recoverable on diferences between the carrying amounts of
assets and liabilities and their related tax bases, and tax loss and
tax credit carryforwards. These amounts are measured at the tax
rates that are expected to apply in the period when the asset is
realised or the liability is settled.
Tax assets includes the amount of all tax assets, which are broken
down into current -amounts of tax to be recovered within the next
twelve months- and deferred -amounts of tax to be recovered
in future years, including those arising from tax loss or tax credit
carryforwards.
Tax liabilities includes the amount of all tax liabilities (except
provisions for taxes), which are broken down into current -the
amount payable in respect of the income tax on the taxable proft
for the year and other taxes in the next twelve months- and
deferred -the amount of income tax payable in future years.
Deferred tax liabilities are recognised in respect of taxable
temporary diferences associated with investments in subsidiaries,
associates or joint ventures, except when the Group is able to
control the timing of the reversal of the temporary diference and,
in addition, it is probable that the temporary diference will not
reverse in the foreseeable future.
Deferred tax assets are only recognised for temporary diferences
to the extent that it is considered probable that the consolidated
entities will have sufcient future taxable profts against which
the deferred tax assets can be utilised, and the deferred tax assets
do not arise from the initial recognition (except in a business
combination) of other assets and liabilities in a transaction
that afects neither taxable proft nor accounting proft. Other
deferred tax assets (tax loss and tax credit carryforwards) are
only recognised if it is considered probable that the consolidated
entities will have sufcient future taxable profts against which
they can be utilised.
Income and expenses recognised directly in equity are accounted
for as temporary diferences.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The deferred tax assets and liabilities are reassessed at the
reporting date in order to ascertain whether any adjustments need
to be made on the basis of the fndings of the analyses performed.
b. Income and expense recognised in the year: includes, in
aggregate form, the total of the aforementioned items
recognised in the consolidated statement of recognised income
and expense.
aa) Residual maturity periods and average interest rates
The analysis of the maturities of the balances of certain items in
the consolidated balance sheet and the average interest rates at
the end of the reporting periods is provided in Note 51.
ab) Consolidated statement of
recognised income and expense
This statement presents the income and expenses generated
by the Group as a result of its business activity in the year, and a
distinction is made between the income and expenses recognised
in the consolidated income statement for the year and the other
income and expenses recognised directly in consolidated equity.
Accordingly, this statement presents:
a. Consolidated proft for the year.
c. Other changes in equity: includes the remaining items
recognised in equity, including, inter alia, increases and
decreases in capital, distribution of proft, transactions involving
own equity instruments, equity-instrument-based payments,
transfers between equity items and any other increases or
decreases in consolidated equity.
ad) Consolidated statement of cash fows
The following terms are used in the consolidated statements of
cash fows with the meanings specifed:
• Cash fows: infows and outfows of cash and cash equivalents,
which are short-term, highly liquid investments that are subject
to an insignifcant risk of changes in value, irrespective of the
portfolio in which they are classifed.
b. The net amount of the income and expenses recognised in Other
comprehensive income under items that will not be reclassifed
to proft or loss.
The Group classifes as cash and cash equivalents the balances
recognised under Cash, cash balances at central banks and other
deposits on demand in the consolidated balance sheet.
c. The net amount of the income and expenses recognised in Other
comprehensive income under items that may be reclassifed
subsequently to proft or loss.
• Operating activities: the principal revenue-producing activities
of credit institutions and other activities that are not investing or
fnancing activities.
d. The income tax incurred in respect of the items indicated in b)
and c) above, except for the valuation adjustments arising from
investments in associates or joint ventures accounted for using
the equity method, which are presented net.
e. Total consolidated recognised income and expense, calculated
as the sum of a) to d) above, presenting separately the amount
attributable to the parent company and the amount relating to
non-controlling interests.
The statement presents the items separately by nature, grouping
together items that, in accordance with the applicable accounting
standards, will not be reclassifed subsequently to proft and
loss since the requirements established by the corresponding
accounting standards are met.
ac) Statement of changes in total equity
This statement presents all the changes in equity, including those
arising from changes in accounting policies and from the correction
of errors. Accordingly, this statement presents a reconciliation of
the carrying amount at the beginning and end of the year of all the
consolidated equity items, and the changes are grouped together
on the basis of their nature into the following items:
a. Adjustments due to changes in accounting policies and to
errors: include the changes in consolidated equity arising as a
result of the retrospective restatement of the balances in the
consolidated fnancial statements, distinguishing between those
resulting from changes in accounting policies and those relating
to the correction of errors.
• Investing activities: the acquisition and disposal of long-term
assets and other investments not included in cash and cash
equivalents.
• Financing activities: activities that result in changes in the
size and composition of the equity and liabilities that are not
operating activities.
During 2018 the Group received interest amounting to EUR 50,685
million and paid interest amounting to EUR 19,927 million.
Also, dividends received and paid by the Group are detailed in
Notes 4, 28 and 40, including dividends paid to minority interests
(non-controlling interests).
3. Santander Group
a) Banco Santander, S.A. and international Group structure
The growth of the Group in the last decades has led the Bank to
also act, in practice, as a holding entity of the shares of the various
companies in its Group, and its results are becoming progressively
less representative of the performance and earnings of the Group.
Therefore, each year the Bank determines the amount of the
dividends to be distributed to its shareholders on the basis of the
consolidated net proft, while maintaining the Group’s traditionally
high level of capitalisation and taking into account that the
transactions of the Bank and of the rest of the Group are managed
on a consolidated basis (notwithstanding the allocation to each
company of the related net worth efect).
500
2018 Auditors’ report and consolidated annual accounts
At the international level, the various banks and other subsidiaries,
joint ventures and associates of the Group are integrated in a
corporate structure comprising various holding companies which
are the ultimate shareholders of the banks and subsidiaries
abroad.
The purpose of this structure, all of which is controlled by the
Bank, is to optimise the international organisation from the
strategic, economic, fnancial and tax standpoints, since it makes it
possible to defne the most appropriate units to be entrusted with
acquiring, selling or holding stakes in other international entities,
the most appropriate fnancing method for these transactions and
the most appropriate means of remitting the profts obtained by
the Group’s various operating units to Spain.
The Appendices provide relevant data on the consolidated Group
companies and on the companies accounted for using the equity
method.
b) Acquisitions and disposals
Following is a summary of the main acquisitions and disposals of
ownership interests in the share capital of other entities and other
signifcant corporate transactions performed by the Group in the
last three years:
i. Sale of the 49% stake in Wizink
Once the relevant regulatory authorizations had been obtained, on
6 November 2018 the operations related to the agreement reached
with entities managed by Värde Partners, Inc (“Varde) and with
WiZink Bank, S.A. (“WiZink”) communicated by the Group on 26
March 2018 by virtue of which:
i. Banco Santander, S.A. sold its 49% stake in WiZink to Varde for
EUR 1,043 million, with no signifcant impact on the Group’s results
and,
ii. Banco Santander, S.A. and Banco Santander Totta, S.A. acquired
the business of credit and debit cards marketed by Grupo Banco
Popular in Spain and Portugal that WiZink had acquired in 2014
and 2016. As a result of this transaction, the Group paid a total
of EUR 681 million, receiving net assets worth EUR 306 million
(mainly customer loans worth EUR 315 million), with the business
combination generating a goodwill of EUR 375 million, which will
be managed by the businesses in Spain.
together with Banco Santander, S.A., had reached an agreement
with Deutsche Bank, A.G. for the acquisition (through a carve out)
of the retail and private banking business of Deutsche Bank Polska
S.A., excluding the foreign currency mortgage portfolio and the
CIB (Corporate & Investment Banking) business, and including the
asset management company DB Securities, S.A. (Poland).
In November 2018, once the regulatory authorisations had been
received and approved by the general shareholders’ meetings of
Santander Bank Polska S.A. and Deutsche Bank Polska S.A., the
acquisition of EUR 298 million in cash and newly issued shares
of Santander Bank Polska S.A. subscribed in full by Deutsche
Bank, A.G. was closed. As a result of this transaction, the Group
has acquired net assets worth EUR 365 million, mainly loans and
deposits to customers and credit institutions amounting to EUR
4,304 million and EUR 4,025 million, respectively, and negative
value adjustments amounting to 82 million euros (mainly under
line “Loans”).
The diference between the fair value of the net assets acquired
and the transaction value resulted in a gain of EUR 67 million which
was recognised under “Negative Goodwill Recognised in Income”
in the Group’s consolidated income statement.
iii. Acquisition of Banco Popular Español, S.A.U.
On 7 June 2017 (the acquisition date), as part of its growth strategy
in the markets where it is present, the Group communicated the
acquisition of 100% of the share capital of Banco Popular Español,
S.A.U. (merged with Banco Santander, see Note 3.b)v) as a result
of a competitive sale process organised in the framework of a
resolution scheme adopted by the Single Resolution Board (“SRB”)
and executed by the FROB, Spanish single resolution board,
in accordance with Regulation (EU) 806/2014 of the European
Parliament and of the Council of 15 May 2014, and Law 11/2015, of
June 18, for the recovery and resolution of credit institutions and
investment frms.
As part of the execution of the resolution:
• All the shares of Banco Popular outstanding at the closing of
market on 7 June 2017 and all the shares resulting from the
conversion of the regulatory capital instruments Additional Tier
1 issued by Banco Popular have been converted into undisposed
reserves.
With these transactions, the Group resumed Grupo Banco
Popular’s debit and credit card business, which improves the
commercial strategy and facilitates Grupo Banco Popular’s
integration process.
• All the regulatory capital instruments Tier 2 issued by Banco
Popular have been converted into newly issued shares of Banco
Popular, all of which have been acquired for a total consideration
of one euro by the Group.
ii. Acquisition of the retail banking and private
banking business of Deutsche Bank Polska S.A.
On 14 December 2017 the Group announced that its subsidiary
Santander Bank Polska S.A. (previously Bank Zachodni WBK S.A.)
The transaction was approved by all the applicable regulatory
and antitrust authorities in the territories where Banco Popular
operated.
501
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
In accordance with IFRS3, the Group measured the identifable
assets acquired and liabilities assumed at fair value. The detail
of this fair value of the identifable assets acquired and liabilities
assumed at the business combination date was as follows:
As of 7 June 2017
Cash and balances with central banks
Financial assets available-for-sale
Deposits from credit institutions
Loans and receivables*
Investments
Intangible assets*
Tax assets*
Non-current assets held for sale*
Other assets
Total assets
Deposits from central banks
Deposits from credit institutions
Customer deposits
Marketable debt securities and
other fnancial liabilities
Provisions***
Other liabilities
Total liabilities**
Net assets
Purchase consideration
Goodwill
Million of
euros
1,861
18,974
2,971
82,057
1,815
133
3,945
6,531
6,259
124,546
28,845
14,094
62,270
12,919
1,816
4,850
124,794
(248)
-
248
* The main fair value adjustments were the following:
• Loans and receivables: in the estimation of their fair value, impairment
have been considered for an approximate amount of EUR 3,239
million, considering, among others, the sale process carried out by the
Bank.
• Foreclosed assets: the valuation, considering the sale process carried
out by the company, has meant a reduction in the value of EUR 3,806
million, approximately.
• Intangible assets: includes value reductions amounting to
approximately of EUR 2,469 million, mainly recorded under the
“Intangible assets - goodwill”.
• Deferred tax assets: mainly corresponds to the reduction of the value
of negative tax bases and deductions for an approximate amount of
EUR 1,711 million.
** After the initial analysis and the conversion of the subordinated debt,
the best estimation is there is no signifcant impact between fair value
and previous carrying amount of the fnancial liabilities.
*** As a result of the resolution of Banco Popular, it includes the estimated
cost of EUR 680 million relating to the potential compensation to the
shareholders of Banco Popular of which EUR 535 million have been
applied to the fdelity action.
The Group during 2018, closed their assessment exercise of the
assets acquired and liabilities assumed at fair value, without any
modifcation with respect to what was recorded in 2017.
502
iv. Sale agreement of Banco Popular’s real estate business
In relation with Banco Popular’s real estate business, on 8 August
2017, the Group announced the agreement with a Blackstone fund
for the acquisition by the fund of 51% of, and hence the assignment
of control over, part of Banco Popular’s real estate business (the
“Business”), which comprises a portfolio of foreclosed properties,
real estate companies, non-performing loans relating to the
sector and other assets related to these activities owned by Banco
Popular and its afliates (including deferred tax assets allocated
to specifc real estate companies which are part of the transferred
portfolio) registered on certain specifed dates (31 March 2017 or 30
April 2017).
The agreements were entered following the European
Commission’s unconditional authorization of the acquisition of
Banco Popular Español, S.A.U. by Banco Santander, S.A. for the
purposes of competition law.
The transaction closed on 22 March 2018 following receipt of the
required regulatory authorizations and other usual conditions
in this type of transactions. The transaction has consisted of the
creation of various companies, being the parent company Project
Quasar Investments 2017, S.L., in which Banco Santander, S.A.
maintains 49% of the share capital and Blackstone the remaining
51%, and to which Banco Popular and some subsidiaries has
transferred the business constituted by the indicated assets, and
its participation in the capital of Aliseda Real Estate Management
Services, S.L. The value attributed to the contributed assets is
approximately 10,000 million euros, of which approximately 70%
was fnanced with third party bank debt. After the contribution to
the vehicle by its shareholders of the necessary liquidity for the
transaction of the business, the 49% stake in the capital of the
vehicles was recorded in the consolidated balance sheet of the
Group for EUR 1,701 million in the “Investments in joint ventures
and associates - entities” section, without signifcant impact in the
Group´s income statement.
v. Merger by absorption of Banco Santander,
S.A. with Banco Popular Español, S.A.U.
On 23 April 2018 the boards of directors of Banco Santander, S.A.
and Banco Popular Español, S.A.U. agreed to approve and sign the
merger project by absorption of Banco Popular Español, S.A.U. by
Banco Santander, S.A.
On 28 September 2018 the merger certifcate of Banco Popular
Español, S.A.U. by Banco Santander, S.A. was registered in
the Mercantile Registry of Cantabria. After the merger, Banco
Santander, S.A. has acquired, by universal succession, all the rights
and obligations of Banco Popular Español, S.A.U., including those
that have been acquired from Banco Pastor, S.A.U. and Popular
Banca Privada, S.A.U., by virtue of the merger of Banco Pastor,
S.A.U. and Popular Banca Privada, S.A.U. with Banco Popular
Español, S.A.U. that was also approved on 23 April 2018 by the
respective board of directors. This transaction has no impact on the
Group’s income statement.
vi. Agreement with Aegeon Group as partner
for several insurance services
On 3 July 2018, the Group announced that it had reached an
agreement with the Aegon Group, pursuant to which it will be
the partner in Spain for the life-insurance business and several
branches of general insurance. Given such agreement, and
the perimeter under which it will be materialised, are subject
to various conditions including the termination of the current
2018 Auditors’ report and consolidated annual accounts
alliance between Banco Popular and its current partner, it is not
possible to estimate when these transactions will be closed. These
transactions are not expected to have a signifcant impact on the
Group’s income statement.
vii. Agreement with Santander Asset Management
a) Acquisition 50% SAM Investment Holdings Limited
On 16 November 2016, after the agreement with Unicredit Group
on 27 July 2016 to integrate Santander Asset Management, and
Pioneer Investments was abandoned, the Group announced that
it had reached an agreement with Warburg Pincus (“WP”) and
General Atlantic (“GA”) under which Santander acquired 50% of
SAM Investment Holdings Limited., at 22 December 2017.
The Group disbursed a total amount of EUR 545 million and
assumed fnancing of EUR 439 million, with the business
combination generating a goodwill of EUR 1,173 million and EUR
320 million of “intangible assets - contracts and relationships with
customers” identifed in the purchase price allocation, without
other value adjustments to net assets of the business. Likewise,
the market valuation of the previous participation held did not
have an impact on the Group’s income statement.
Considering that the main activity of the business is asset
management, the main part of its activity are recorded of
balance sheet. The main net assets acquired, in addition to the
aforementioned intangible assets, were net deposits in credit
institutions (EUR 181 million) and net tax assets (EUR 176 million).
Given their nature, the fair value of these assets and liabilities do
not difer from the book value recorded.
The Group has closed its assessment exercise of assets acquired
and liabilities assumed at fair value during the year 2018 without
modifcation with respect to what was recorded at the end of 2017.
b) Sale participation Allfunds Bank, S.A.
As part of the transaction, which consists in the acquisition of
50% of SAM Investment Holdings Limited, that was not owned
by the Group, Santander, WP and GA agreed to explore diferent
alternatives for the sale of its stake in Allfunds Bank, S.A.
(“Allfunds Bank”), including a possible sale or a public ofering.
On 7 March 2017, the Bank announced that together with our
partners in Allfunds Bank we had reached an agreement for the
sale of 100% of Allfunds Bank to funds afliated with Hellman &
Friedman, a leading private equity investor, and GIC, Singapore’s
sovereign wealth fund.
On 21 November 2017 the Group announced the closing of the sale
by the Bank and its partners of 100% of Allfunds Bank’s capital,
obtaining an amount of EUR 501 million from the sale of its 25%
stake in Allfunds Bank, resulting in gains net of tax of EUR 297
million, which were recognised as “Gains or losses on disposal of
non-fnancial assets and investments, net”, within the statement of
proft or loss.
viii. Purchase of the shares to DDFS LLC in Santander
Consumer USA Holdings Inc. (SCUSA)
On 2 July 2015, the Group announced that it had reached an
agreement to purchase the 9.65% ownership interest held by DDFS
LLC in SCUSA.
On 15 November 2017, after having agreed on some modifcations
to the original agreement and having obtained the required
regulatory authorizations, the Group completed the acquisition
of the aforementioned 9.65% of SCUSA shares for a total sum of
USD 942 million (EUR 800 million), which have caused a decrease
of EUR 492 million in the non-controlling interests balance and
another reduction to reserves of EUR 307 million.
ix. Agreement with Banque PSA Finance
The Group, through its subsidiary Santander Consumer Finance,
S.A., and Banque PSA Finance, the vehicle fnancing unit of
the PSA Peugeot Citroën Group, entered into an agreement in
2014 for the transaction of the vehicle and insurance fnancing
business in twelve European countries. Pursuant to the terms
of the agreement, the Group will fnance this business, under
certain circumstances and conditions, from the date on which the
transaction is completed.
In January 2015 the related regulatory authorisations to commence
activities in France and the United Kingdom were obtained and,
accordingly, on 2 and 3 February 2015 the Group acquired 50%
of Société Financière de Banque – SOFIB ( actually PSA Banque
France) and PSA Finance UK Limited for EUR 462 million and EUR
148 million, respectively.
On 1 May 2015, PSA Insurance Europe Limited and PSA Life
Insurance Europe Limited (both insurance companies with
registered ofce in Malta) were incorporated, in which the Group
contributed 50% of the share capital, amounting to EUR 23 million.
On 3 August the Group acquired a full ownership interest in PSA
Gestão - Comércio E Aluguer de Veiculos, S.A. (actually Santander
Consumer Services,S.A. and a company with registered ofce
in Portugal) and the loan portfolio of the Portuguese branch
of Banque PSA Finance for EUR 10 million and EUR 25 million,
respectively. On 1 October, PSA Financial Services Spain, E.F.C.,
S.A. (a company with registered ofce in Spain) was incorporated,
in which the Group contributed EUR 181 million (50% of the share
capital). (This company owns the 100% of the share capital of PSA
Finanse Suisse which is domiciled in Switzerland).
During 2016, the agreement obtained the necessary
authorizations, by the regulators, to start activities in the rest of
the countries covered by the framework agreement (Italy, the
Netherlands, Austria, Belgium, Germany, Brazil and Poland). The
Group’s disbursement during 2016 amounted to EUR 464 million to
reach a 50% stake in the capital of each of the structures created in
each geography, with the exception of PSA fnance Arrendamento
Mercantil SA (actually Distribuidora de Títulos e Valores
Mobiliários S.A.) where 100% of capital is acquired.
During 2016 the new businesses acquired have contributed EUR 79
million to the Group’s proft. Had the business combination taken
place on 1 January 2016, the proft contributed to the Group in 2016
would have been approximately EUR 118 million.
x. Metrovacesa agreement - Merlin
On 21 June 2016, Banco Santander hereby reached an agreement
with Merlin Properties, SOCIMI, S.A., together with the other
shareholders of Metrovacesa, S.A., for the integration in Merlin
group, following the total spin-of of Metrovacesa, S.A., of
Metrovacesa, S.A. property rental asset business in Merlin
Properties, SOCIMI, S.A. and Metrovacesa, S.A. residential rental
business in Metrovacesa, S.A. current subsidiary, Testa Residencial
SOCIMI, S.A. (before, Testa Residencial, S.L.) The other assets of
503
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Metrovacesa, S.A. not integrated in Merlin group as a result of
the integration, consisting of a residual group of land assets for
development and subsequent lease, will be transferred to a newly
created company wholly owned by the current shareholders of
Metrovacesa, S.A.
On 15 September 2016, the general meeting of shareholders of
Merlin Properties, SOCIMI, S.A. and Metrovacesa, S.A. took place
and the transaction was approved.
Subsequently, on 20 October 2016, the deed of total division
of Metrovacesa, S.A. was granted in favour of the mentioned
companies, and such deed was fled in the Commercial Register on
26 October 2016.
As a result of the integration, Santander Group has increased its
participation to 21.95% of the equity capital of Merlin Properties,
SOCIMI, S.A., 46.21% of direct participation in the equity capital
of Testa Residential, SOCIMI, S.A. and 70.27% in Metrovacesa
Promoción y Arrendamiento, S.A.
The main impacts on the consolidated Group’s balance of this
division have been; decrease of EUR 3,800 million in real estate
investment (see Note 16), decrease of EUR 621 million under
minority interests (see Note 28) and an increase in the heading of
investments in joint ventures and associates participation of the
businesses received in the associates Merlín Properties and Testa
Residencial, of EUR: 1,168 and 307 million, respectively. (See Note
13.a).
c) Of-shore entities
According to current Spanish regulation, Santander has entities in
4 of-shore territories: Jersey, Guernsey, Isle of Man and Cayman
Islands. These four jurisdictions comply with OECD standards
in terms of transparency and exchange of information for tax
purposes. Santander have 4 subsidiaries and 4 operative branches
in of-shore territories: these are governed by the tax regimes of
those territories. Santander also has 4 subsidiaries in of-shore
territories, of which 3 are tax resident in the UK and 1 tax resident
in Spain, to whose tax regimes they are subjected. The Group has
no presence in any of the 5 territories included in the European
Union’s current blacklist according to the last update of November
2018, neither in non-cooperative territories for tax purposes as
defned by the OECD in July 2017.
I) Subsidiaries in of-shore territories.
At the reporting date, the Group has 4 subsidiaries resident in
of-shore territories, two in Jersey, Whitewick Limited (inactive
company) and Abbey National International Limited, and one in the
Isle of Man, ALIL Services Limited. These subsidiaries contributed a
proft of approximately EUR 0.2 million to the Group’s consolidated
proft in 2018. In addition, during 2018, a new company domiciled
in Jersey was created, named Santander International Limited,
subsidiary of Santander UK Group Holdings plc, in order to make
possible the separation of business imposed by the banking reform
in the United Kingdom (“Ring-fence”) that came into force on
January 1, 2019, although this company will be liquidated in the
near future.
II) Of-shore branches.
Also, the Group has 4 operative of-shore branches: 2 in the
Cayman Islands, 1 in the Isle of Man and 1 in Jersey. These branches
report to, consolidate their balance sheets and income statements
and are taxed with, their respective foreign headquarters (Cayman
Islands) or in the territories where they are located (Jersey and
Isle of Man). Additionally, as a result of complying with the Ring-
Fence regulation in the UK mentioned in the previous point, there
is another branch in Jersey of Santander UK plc, which is currently
not operative and will be closed in early 2019.
The aforementioned entities have a total of 144 employees as of
December 2018.
III) Subsidiaries in of-shore territories that
are tax resident in the UK and Spain.
As indicated, the Group also has 4 subsidiaries constituted in of-
shore territories that are not considered to be of-shore entities,
since 3 of them are tax residents in the UK and, therefore, subject
to UK tax law during the period and operate exclusively from the
UK (one of these subsidiaries is expected to be liquidated in 2019).
Also, since April 2018, the fourth subsidiary has ceased to be a
resident for tax purposes in the UK to become a tax resident in
Spain.
IV) Other of-shore investments.
The Group manages from Brazil a segregated portfolio company
called Santander Brazil Global Investment Fund SPC in the Cayman
Islands, and manages from the United Kingdom a protected cell
company in Guernsey called Guaranteed Investment Products 1
PCC Limited. The Group also has, directly or indirectly, few fnancial
investments located in tax havens including Olivant Limited in
Guernsey, entity whose liquidation or sale is expected to be carried
out soon.
V) OECD.
The Group has no presence in non-cooperative territories for
tax purposes as defned by the OECD in July 2017. In this sense it
should be noted that Jersey, Guernsey, Isle of Man and Cayman
Islands, comply with OECD standards in terms of transparency and
exchange of information for tax purposes.
VI) The European Union.
On 5 December, 2017, the European Commission published some
lists of non-cooperative jurisdictions for tax purposes (where there
is no member state of the European Union): blacklist, gray list and
territories which have received a grace period. Throughout 2018,
the European Commission has updated these lists.
Currently the EU blacklist is composed of 5 jurisdictions in
which the Group has no presence. These jurisdictions have not
committed, or have not done it sufciently, to comply with a series
of measures in relation to fscal transparency, corporate tax, or the
respect of the principles of the OECD to avoid the erosion of the
tax bases and the transfer of benefts (better known by the English
term anti-BEPS).
504
2018 Auditors’ report and consolidated annual accounts
On the contrary there are 63 jurisdictions in the gray list that have
committed, in a way considered sufcient, to correct their legal
frameworks to align them with international standards and whose
implementation will be monitored by the EU. Among others, this
list includes the 4 jurisdictions in which the Group has presence
and are of-shore territories in accordance with current Spanish
legislation (Jersey, Guernsey, Isle of Man and Cayman Islands).
Additionally, Hong Kong, Bahamas, Switzerland, Uruguay and
Panama are included in the gray list, although according to the
current Spanish legislation are not of-shore territories and, as
disclosed before, have committed to modify their legislation, as for
example implementing the Common Reporting Standards (CRS),
developed by the OECD, as an automatic information exchange
system between jurisdictions.
The Group has 2 subsidiaries and 1 branch located in Hong Kong, 6
subsidiaries (1 of them in liquidation and 1 tax resident in the USA)
and 2 branches in Bahamas (1 of them in process of closure), 6
subsidiaries in Switzerland, 12 subsidiaries in Uruguay (6 of which
are in liquidation) and 1 subsidiary in Panama with reduced activity
that has already received authorization from the Superintendency
of Banks of Panama for its voluntary liquidation.
At present, Spain has in force Double Taxation Agreements with
exchange of information clause with Hong Kong, Switzerland,
Uruguay and Panama, as well as Tax Information Exchange
Agreement with Bahamas.
VII) Impact of forthcoming changes to Spain’s tax law.
On October 23, 2018, the Spanish Government published the Draft
Law on measures to prevent and fght against tax fraud, which
expands the concept of tax haven, including not only the countries
and territories that were already considered as such, but also
other tax regimes that are determined as harmful in a regulatory
manner. In addition, new criteria are regulated for inclusion in the
list of tax havens. As long as the list of countries and territories
and harmful tax regimes that are considered tax havens are not
determined by regulation, the former list of tax havens established
in Royal Decree 1080/1991, of 5th July, will continue in force.
The Group has established appropriate procedures and controls
(risk management, supervision, verifcation and review plans and
periodic reports) to prevent reputational, tax and legal risk at these
entities. Also, the Group has continued to implement its policy of
reducing the number of these of-shore units.
The fnancial statements of the Group’s of-shore units are audited
by PwC (PricewaterhouseCoopers) member frms in 2018 and 2017.
4. Distribution of the Bank’s proft,
shareholder remuneration scheme
and earnings per share
a) Distribution of the Bank’s proft and
shareholder remuneration scheme
The distribution of the Bank’s net proft for 2018 that the board
of directors will propose for approval by the shareholders at the
annual general meeting is as follows:
Million of euros
First and third interim dividends and fnal dividend
3,160
Acquisition, with a waiver of exercise, of bonus
share rights from the shareholders which, under
the Santander Dividendo Elección scrip dividend
scheme, opted to receive in cash remuneration
equivalent to the second interim dividend
Of which:
Approved at 31 December 2018*
Final dividend
To voluntary reserves
Net proft for the year
132
3,292
2,237
1,055
9
3,301
* Recognised under Shareholders’ equity – Interim dividends.
In addition to the EUR 3,292 million indicated above, EUR
432 million in shares were allocated to the remuneration of
shareholders under the shareholder remuneration scheme
(Santander Dividendo Elección) approved by the shareholders
at the annual general meeting held on 23 March 2018, whereby
the Bank ofered shareholders the possibility to opt to receive
an amount equivalent to the second interim dividend out of 2018
proft in cash or new shares.
A remuneration of EUR 0.23 per share, charged to the 2018
annual period, will be proposed by the board of directors to the
shareholders at the annual general meeting.
b) Earnings per share from continuing
and discontinued operations
i. Basic earnings per share
Basic earnings per share are calculated by dividing the net proft
attributable to the Group (adjusted by the after-tax amount of
the remuneration of contingently convertible preference shares
recognised in equity - See Note 23) and the capital perpetual
preference shares, if applicable, by the weighted average number
of ordinary shares outstanding during the year, excluding the
average number of treasury shares held in the year.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Accordingly:
Proft attributable
to the parent
(million of euros)
Remuneration
of contingently
convertible
preference shares
(CCP) (million of
euros) (Note 23)
Of which:
Proft or
Loss from
discontinued
operations (non
controlling
interest net)
(million of
euros)
Proft or Loss
from continuing
operations (net of
non-controlling
interests and CCP)
(million of euros)
Weighted average
number of shares
outstanding
Adjusted number
of shares
Basic earnings per
share (euros)
Basic earnings
per share from
discontinued
operations (euros)
Basic earnings
per share from
continuing
operations (euros)
2018
2017
2016
7,810
6,619
6,204
(560)
7,250
(395)
6,224
(334)
5,870
-
-
-
7,250
6,224
5,870
16,150,090,739 15,394,458,789
14,656,359,963
16,150,090,739 15,394,458,789
14,656,359,963
0.449
0.404
0.401
0.000
0.000
0.000
0.449
0.404
0.401
ii. Diluted earnings per share
Diluted earnings per share are calculated by dividing the net proft
attributable to the Group (adjusted by the after-tax amount of
the remuneration of contingently convertible preference shares
recognised in equity - See Note 23) and the capital perpetual
preference shares, if applicable, by the weighted average number
of ordinary shares outstanding during the year, excluding the
average number of treasury shares and adjusted for all the dilutive
efects inherent to potential ordinary shares (share options, and
convertible debt instruments).
Accordingly, diluted earnings per share were determined as
follows:
Proft attributable
to the parent
(million of euros)
Remuneration
of contingently
convertible
preference shares
(CCP) (million of
euros) (Note 23)
Of which:
Proft
(Loss) from
discontinued
operations
(net of non-
controlling
interests)
(million of
euros)
Proft from
continuing
operations (net of
non-controlling
interests and CCP)
(million of euros)
Weighted average
number of shares
outstanding
Dilutive efect of
options/rights
on shares
Adjusted number
of shares
Diluted earnings
per share (euros)
Diluted earnings
per share from
discontinued
operations (euros)
Diluted earnings
per share from
continuing
operations (euros)
2018
2017
2016
7,810
6,619
6,204
(560)
7,250
(395)
6,224
(334)
5,870
-
-
-
7,250
6,224
5,870
16,15
0,090,739
15,394,458,789 14,656,359,963
4
2,873,078
50,962,887
45,754,981
16,1
92,963,817
15,445,421,676
14,702,114,944
0.448
0.403
0.399
0.000
0.000
0.000
0.448
0.403
0.399
The capital increase in 2017 (See Note 31.a) had an impact on the
basic and diluted earnings per share of the previous years due to
the alteration in the number of shares outstanding. Due to this
fact, the information relating to the 2016 period has been recasted
according to the applicable legislation.
5. Remuneration and other benefts paid to
the Bank’s directors and senior managers
The following section contains qualitative and quantitative
disclosures on the remuneration paid to the members of the Board
of Directors -both executive and non-executive directors- and
senior managers for 2018 and 2017:
506
2018 Auditors’ report and consolidated annual accounts
a) Remuneration of Directors
i. Bylaw-stipulated emoluments
The annual General Meeting held on 22 March, 2013 approved an
amendment to the Bylaws, whereby the remuneration of directors
in their capacity as board members became an annual fxed
amount determined by the annual General Meeting. This amount
shall remain in efect unless the shareholders resolve to change it
at a general meeting. However, the Board of Directors may elect
to reduce the amount in any years in which it deems such action
justifed. The remuneration established by the Annual General
Meeting for the years 2018 and 2017, was EUR 6 million, with two
components: (a) an annual emolument and (b) attendance fees.
The specifc amount payable for the above-mentioned items to
each of the directors is determined by the Board of Directors. For
such purpose, it takes into consideration the positions held by
each director on the Board, their membership of the Board and the
board committees and their attendance of the meetings thereof,
and any other objective circumstances considered by the Board.
The total bylaw-stipulated emoluments earned by the Directors in
2018 amounted to EUR 4.6 million (EUR 4.7 million in 2017).
Annual emolument
The amounts received individually by the directors in 2018 and
2017 based on the positions held by them on the board and their
membership of the Board committees were as follows:
Euros
2018
2017
Members of the board of directors
9
0,000
87,500
Members of the executive committee
17
0,000
170,000
Members of the audit committee
4
0,000
40,000
Members of the appointments committee
2
5,000
25,000
Members of the remuneration committee
2
5,000
25,000
Attendance fees
The directors receive fees for attending board and committee
meetings, excluding executive committee meetings, since no
attendance fees are received for this committee.
By resolution of the board of directors, at the proposal of the
remuneration committee, the fees for attending board and
committee meetings - excluding, as aforementioned, executive
committee meetings - were as follows:
Meeting attendance fees
Euros
Board of directors
2018
2017
2,600
2,600
Audit committee and risk supervision, regulation
and compliance oversight committee
1,700
1,700
Other committees (except the
executive committee)
1,500
1,500
ii. Salaries
The executive directors receive salaries. In accordance with the
policy approved by the annual general meeting, salaries are
composed of a fxed annual remuneration and a variable one
consisting of a unique incentive, which is based on a deferred
variable remuneration linked to multi-year objectives, which
establishes the following payment scheme:
• 40% of the variable remuneration amount, determined at year-
end on the basis of the achievement of the established objectives,
is paid immediately.
• The remaining 60% is deferred over fve years, as the case may
be, in fve portions provided that the conditions of permanence
of the Group and non-concurrence of the malus clauses are met,
taking into account the following accrual scheme.
Members of the risk supervision, regulation
and compliance oversight committee
4
0,000
40,000
and 2021) is not subject to the long-term objectives.
• The accrual of the frst and second portion (payment in 2020
Members of the responsible banking,
sustainability and culture committe
Chairman of the audit committee
5,000
1
-
7
0,000
50,000
Chairman of the appointments committee
5
0,000
50,000
Chairman of the remuneration committee
5
0,000
50,000
Chairman of the risk, regulation and
compliance oversight committee
Chairman of the responsible banking,
sustainability and culture committee
Lead director*
Non-executive deputy chairman
7
0,000
50,000
5
0,000
-
11
0,000
110,000
3
0,000
30,000
* Mr. Bruce Carnegie-Brown, for duties performed as part of the board
and board committees, specifcally as chairman of the appointments
and remuneration committees and as lead director, and for the time
and dedication required to perform these duties, has been allocated
minimum total annual remuneration of EUR 700,000 since 2015,
including the aforementioned annual allowances and attendance fees
corresponding to him.
• The accrual of the third, fourth, and ffth portion (payment in
2022, 2023 and 2024), is linked to certain objectives related to
the period 2018-2020 and the metrics and scales associated
with these objectives. The fulflment of the objective
determines the percentage to be paid of the deferred amount in
these three annuities, being the maximum amount determined
at the end of the 2018 when the total variable remuneration is
approved.
• In accordance with current remuneration policies, the amounts
already paid will be settled to a possible recovery (clawback)
by the Bank during the period set out in the policy in force each
moment.
The immediate payment (or short-term) as well as each deferred
payment, whether subject or not to long-term, goals will be
settled 50% in cash and the remaining 50% in Santander shares.
507
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
iii. Detail by director
The detail, by Bank director, of the short-term (immediate) and
deferred (not subject to long-term goals) remuneration for 2018
and 2017 is provided below:
Thousand of euros
Bylaw-stipulated emoluments
Annual emolument
2018
2017
Short-term and deferred (not
subject to long-term goals)
salaries of executive directors
n
o
i
t
a
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t
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o
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i
o
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n e
o
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i
eu
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s
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m a
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t
t
e
t
o
o
e
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T
l
l
a
t
o
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e
e
t
t
i
e
v
i
6
t
m
d u
r c
em
a
o x
o
B Ec
90
90
90
170
170
170
120
170
383
170
90
170
90
90
90
90
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25
25
-
-
-
25
25
13
25
-
25
-
25
40
25
25
-
160
85
40
90
90
115
85
-
-
-
-
170
-
-
-
-
40
40
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Ms. Ana Botín-
Sanz de Sautuola
y O’Shea
Mr. José Antonio
Álvarez Álvarez
Mr. Rodrigo
Echenique Gordillo
Mr. Guillermo de
la Dehesa Romero
Mr. Bruce
Carnegie-Brown
Mr. Ignacio
Benjumea
Cabeza de Vaca
Mr. Francisco Javier
Botín-Sanz de
Sautuola y O’Shea1
Ms. Sol Daurella
Comadrán
Mr. Carlos
Fernández
González
Ms. Esther
Giménez-Salinas
i Colomer
Ms. Belén
Romana García
Mr. Juan Miguel
Villar Mir
Ms. Homaira
Akbari
Mr. Ramiro Mato
García Ansorena2
Mr. Alvaro Cardoso
de Souza3
Mr. Matías
Rodríguez Inciarte4
Ms. Isabel Tocino
Biscarolasaga5
-
-
-
20
40
40
-
-
-
40
40
-
-
40
27
-
-
8
39 3,176
1,480
1,480
888
888
7,912
1,234
1,030
10,483
10,582
-
-
-
-
8
-
8
-
8
8
-
8
8
5
-
-
34 2,541
989
989
593
593
5,705
1,050
1,596
8,645
8,893
33 1,800
785
785
471
471
4,312
81
89
86
31
67
86
58
81
18
61
77
31
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
225
4,830
4,281
-
-
441
732
473
731
81
513
550
-
-
-
-
-
-
-
-
-
-
-
121
215
124
207
266
285
196
414
108
199
450
148
-
-
162
297
170
159
36
-
4,266
418
Total 2018
Total 2017
1,763
1,675
1,275
1,345
160
160
113
125
125
123
247
280
61
-
872 7,517
3,254
3,254
1,952
1,952
17,929 2,284 2,932
27,761
973 7,568
3,698
3,698 2,219
2,219
19,402 5,164 2,387
31,634
1. All the amounts received were repaid to the Fundación Marcelino Botín.
2. Director since 28 November 2017
3. Director since 23 March 2018
4. Ceased to be a member of the Board on 28 November, 2017. This table shows the remuneration information until his ceased as a member of the board. The
remuneration information for his performance as executive vice president since 28 November 2017 is included in the corresponding section.
5. Ceased to be a member of the board on 28 November, 2017.
6.Includes committee chairmanship and other roles emoluments.
7. Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors as well as a fxed supplement approved as part of the
beneft systems transformation of the Executive Directors Ms. Ana Botín and Mr. José Antonio Álvarez.
508
2018 Auditors’ report and consolidated annual accounts
on or after March 18, 2002 accrues to the Group. In 2018 and 2017
the Bank’s directors did not receive any remuneration in respect of
these representative duties.
Mr. Matías Rodríguez Inciarte received EUR 42 thousand as non-
executive director of U.C.I., S.A. in 2017.
c) Post-employment and other long-term benefts
The executive directors other than Mr. Rodrigo Echenique
participate in the defned beneft system created in 2012, which
covers the contingencies of retirement, disability and death.
The Bank makes annual contributions to the beneft plans of its
executive directors. In 2012, the contracts of the executive directors
(and the other members of the Bank’s senior management) with
defned beneft pension commitments were amended to transform
them into a defned contribution system. The new system gives
executive directors the right to receive benefts upon retirement,
regardless of whether or not they are active at the Bank at such
time, based on contributions to the system, and replaced their
previous right to receive a pension supplement in the event
of retirement1. In the event of pre-retirement and up until the
retirement date, Ms. Ana Botín and Mr. José Antonio Álvarez have
the right to receive an annual allotment.
The initial balance for each of the executive directors in the new
defned benefts system corresponded to the market value of the
assets from which the provisions corresponding to the respective
accrued obligations had materialised on the date on which the
old pension commitments were transferred into the new benefts
system2.
Since 2013, the Bank has made annual contributions to the benefts
system in favour of executive directors and senior executives,
in proportion to their respective pensionable bases, until they
leave the Group or until their retirement within the Group, death,
or disability (including, if applicable, during pre-retirement). No
contributions will be made with respect to executive directors
or senior executives who exercised the option to receive their
pension rights as capital prior to the transformation of the defned
benefts pension commitments into the current defned forecast
contribution system as set out in footnote 2 below.
Mr. Rodrigo Echenique’s contract does not provide for any charge
to Banco Santander regarding benefts, without prejudice to the
pension rights to which Mr. Echenique was entitled prior to his
appointment as executive director.
Following is the detail, by executive director, of the linked to
multiannual objectives salaries at their fair value, which will only
be received if the conditions of continued service, non-applicability
of “malus” clauses and, full achievement of the objectives
established (or, as the case may be, of the minimum thresholds
thereof, with the consequent reduction of the agreed-upon amount
in the end of the year) in the terms described in Note 47.
Thousand of euros
2018
2017
Variable subject to
Long-term objectives2
In cash
In shares
Total
Total2
932
623
495
-
932
1,864
1,726
623
1,246
1,154
495
990
900
-
-
880
Ms. Ana Botín-Sanz
de Sautuola y O’Shea
Mr. José Antonio
Álvarez Álvarez
Mr. Rodrigo
Echenique Gordillo
Mr. Matías
Rodríguez Inciarte1
Total
2,050
2,050
4,100
4,660
1. Ceased to be a member of the board on 28 November, 2017. The
remuneration information for his performance as executive vice president is
included in the corresponding section.
2. Corresponds with the fair value of the maximum amount they are
entitled to in a total of 3 years: 2022, 2023 and 2024, subject to conditions
of continued service, with the exceptions provided, and to the non-
applicability of “malus” clauses and achievement of the objectives
established.
The fair value has been determined at the grant date based on the
valuation report of an independent expert, Willis Towers Watson.
According to the design of the plan for 2018 and the levels of
achievement of similar plans in comparable entities, the expert
concludes that the reasonable range for estimating the initial
achievement ratio is around 60% - 80%. It has been considered
that the fair value is 70% of the maximum (see Note 47).
Note 5.e) below includes disclosures on the shares delivered
by virtue of the deferred remuneration schemes in place in
previous years the conditions for delivery which were met in the
corresponding years, and on the maximum number of shares
receivable in future years in connection with the aforementioned
2018 and 2017 variable remuneration plans.
b) Remuneration of the Board members
as representatives of the Bank
By resolution of the executive committee, all the remuneration
received by the Bank’s directors who represent the Bank on the
Boards of Directors of listed companies in which the Bank has a
stake, paid by those companies and relating to appointments made
1. As provided in the contracts of the executive directors prior to 2012, Mr. Matías Rodríguez Inciarte exercised the option to receive accrued pensions (or
similar amounts) in the form of capital, i.e., in a lump sum, which means that he ceased to accrue pensions from such time, with a fxed capital amount to
be received, which shall be updated at the agreed interest rate.
2. In the case of Mr. Matías Rodríguez Inciarte, the initial balance corresponded to the amount that was set when, as described above, he exercised the option
to receive a lump sum, and includes the interest accrued on this amount from that date.
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The beneft plan is outsourced to Santander Seguros y Reaseguros,
Compañía Aseguradora, S.A., and the economic rights of the
foregoing directors under this plan belong to them regardless
of whether or not they are active at the Bank at the time of their
retirement, death or disability. The contracts of these directors do
not provide for any severance payment in the event of termination
other than as may be required by law.
increased in the corresponding amount with no increase in total
costs for the Bank.
• The death and disability supplementary benefts have been
eliminated since 1 April 2018. A fxed remuneration supplement
(included in other remuneration in section a.iii in this note) was
implemented the same date
In accordance with the provisions of the remuneration regulations,
contributions made that are calculated on variable remuneration
are subject to the discretionary pension benefts regime. Under
this regime, these contributions are subject to malus clauses and
clawback according to the policy in force at any time and during
the same period in which the variable remuneration is deferred.
Likewise, they must be invested in Bank shares for a period of fve
years from the date of the termination of executive directors in the
Group, whether or not as a result of retirement. After that period,
the amount invested in shares will be invested together with the
remainder of the accumulated balance of the executive director,
or will be paid to him or her benefciaries had there been any
contingency covered by the forecasting system.
Until March 2018, the system also included a supplementary
benefts scheme for cases of death (death of spouse and death of
parent) and permanent disability of serving directors envisaged
in the contracts of Ms. Ana Botín and Mr. José Antonio Álvarez.
This beneft gave the widow/widower and any children under the
age of 25 in the event of death, or the director in case of disability,
the right to a pension supplemental to the pension they would
have been entitled to receive from social security up to an annual
maximum amount equal to their respective pensionable bases, as
indicated above in connection with pre-retirement (in Mr. Álvarez’s
case, referring to his fxed remuneration as chief executive ofcer),
with certain deductions.
As per the director´s remuneration policy approved at the 23 March
2018 general shareholder´s meeting, in 2018 the system has been
changed with a focus on:
• Aligning the annual contributions with practices of comparable
institutions.
• Reducing future liabilities by eliminating the supplementary
benefts scheme in the event of death (death of spouse or parent)
and permanent disability of serving directors.
• No increase in total costs for the Bank.
The changes to the system in 2018 are the following:
• Fixed and variable pension contributions have been reduced
to 22% of the respective pensionable bases. The gross annual
salaries and the benchmark variable remuneration have been
• The total amount insured for life and accident insurance has been
increased.
The provisions recognised in 2018 and 2017 for retirement pensions
and supplementary benefts (surviving spouse and child benefts,
and permanent disability) were as follows:
Thousand of euros
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez
2018
1,234
1,050
2,284
2017
2,707
2,456
5,163
Following is a detail of the balances relating to each of the
executive directors under the welfare system at 31 December 2018
and 2017:
Thousand of euros
Ms. Ana Botín-Sanz de Sautuola y O’Shea1
46,093
45,798
2018
2017
Mr. José Antonio Álvarez Álvarez
Mr. Rodrigo Echenique Gordillo2
Mr. Matías Rodríguez Inciarte3
16,630
16,151
13,614
13,957
-
-
76,337
75,906
1. Includes the amounts relating to the period of provision of services at
Banesto, externalised with another insurance company.
2. Executive director since 16 January, 2015 Mr. Rodrigo Echenique Gordillo
doesn´t participate in the pension system and the right to the bank
to make contributions in its favour in this regard. The amount at 31
December, 2018 and 2017, corresponds to him prior to his appointment as
executive director in January 2015.
3. Ceased to be a member of the Board on 28 November, 2017, retained
their pension rights as of 31 December, 2017 amounted to EUR 48,750
thousand.
The payments made during 2018 to the members of the Board
entitled to post-employment benefts amount to EUR 0.9 million
(EUR 0.9 million in 2017).
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2018 Auditors’ report and consolidated annual accounts
d) Insurance
The Group has taken out life insurance policies for the Bank’s
directors, who will be entitled to receive benefts if they are
declared disabled; in the event of death, the benefts will be
payable to their heirs. The premiums paid by the Group are
included in the Other remuneration column of the table shown in
Note 5.a.iii above. Also, the following table provides information
on the sums insured for the Bank’s executive directors:
Insured capital
Thousand of euros
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez
Mr. Rodrigo Echenique Gordillo
1
Mr. Matías Rodríguez Inciarte
2018
22,710
19,694
5,400
-
2017
7,500
6,000
4,500
-
47,804
18,000
1. Ceased to be member of the board on 28 November, 2017. The insured
capital at 31 December, 2017 amounted to EUR 5,131 thousand.
The insured capital has changed for in 2018 as Ms. Ana Botín and
Mr. José Antonio Alvarez as part of the pension transformation set
out in Note 5.c) above, that has encompassed the elimination of
the supplementary benefts and the increase of the life insurance
annuities.
During years 2018 and 2017, the Group has disbursed a total
amount of EUR 10.1 and 10.5 million, respectively, for the
payment of civil-liability insurance premiums. These premiums
correspond to several civil-liability insurance policies that hedge,
among others, directors, senior executives and other managers
and employees of the Group and the Bank itself as well as its
subsidiaries, in light of certain types of potential claims, for which
it is not possible to disaggregate or individualize the amount that
correspond to the directors and executives.
At December 31, 2018 and 2017, there were no obligations in this
connection to other directors.
e) Deferred variable remuneration systems
The following information relates to the maximum number
of shares to which the executive directors are entitled at the
beginning and end of 2018 and 2017 due to their participation in
the deferred variable remuneration systems, which instrumented
a portion of their variable remuneration relating to 2018 and prior
years, as well as on the deliveries, whether shares or cash, made to
them in 2018 and 2017 where the conditions for the receipt thereof
had been met (see Note 47):
i) Deferred conditional variable remuneration plan
From 2011 to 2015, the bonuses of executive directors and certain
executives (including senior management) and employees who
assume risk, who perform control functions or receive an overall
remuneration that puts them on the same remuneration level as
senior executives and employees who assume risk (all of whom
are referred to as identifed staf) have been approved by the Board
of Directors and instrumented, respectively, through various cycles
of the deferred conditional variable remuneration plan. Application
of these cycles, insofar as they entail the delivery of shares to the
plan benefciaries, was authorized by the related Annual General
Meetings.
The purpose of these plans is to defer a portion of the bonus of
the plan benefciaries (60% in the case of executive directors) over
a period of fve years (three years for the plans approved up to
2014) for it to be paid, where appropriate, in cash and in Santander
shares; the other portion of the bonus is also to be paid in cash
and Santander shares, upon commencement of the cycles, in
accordance with the rules set forth below.
In addition to the requirement that the benefciary remains
in Santander Group’s employ, the accrual of the deferred
remuneration is conditional upon none of the following
circumstances existing -in the opinion of the Board of Directors
following a proposal of the remuneration committee- in relation
to the corresponding year in the period prior to each of the
deliveries: (i) poor fnancial performance of the Group; (ii) breach
by the benefciary of internal regulations, including, in particular,
those relating to risks; (iii) material restatement of the Group’s
consolidated fnancial statements, except when it is required
pursuant to a change in accounting standards; or (iv) signifcant
changes in the Group’s economic capital or its risk profle. All
the foregoing shall in each case be governed by the rules of the
relevant plan cycle.
On each delivery, the benefciaries will be paid an amount in cash
equal to the dividends paid for the amount deferred in shares
and the interest on the amount deferred in cash. If the Santander
Dividendo Elección scrip dividend scheme is applied, payment will
based on the price ofered by the Bank for the bonus share rights
corresponding to those shares.
The maximum number of shares to be delivered is calculated
taking into account the daily volume-weighted average prices for
the 15 trading sessions prior to the date on which the Board of
Directors approves the bonus for the Bank’s Executive Directors for
each year.
This plan and the Performance Shares (ILP) plan described below
have been integrated for the executive directors and other senior
managers in the deferred variable compensation plan linked to
multiannual objectives, in the terms approved by the General
Meeting of Shareholders held on 18 March, 2016.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
ii) Performance shares plans (ILP)
The annual general meeting held on 27 March 2015 approved the
second cycle of the performance shares plan. The accrual of this
long-term incentive plan (LTI) and its amount are conditional on
the performance of certain metrics of Banco Santander between
2015 and 2017, as well as compliance with the remaining conditions
of the plan until the end of the accrual period (31 December 2018).
The maximum benchmark LTI in number of shares for executive
directors was set by the board at the end of 2015.
At year-end 2018, the corresponding amounts to be received by
each exclusive director in relation to LTI (the accrued LTI amount)
was established taking into account the performance of the
following indicators: (1) ranking of Santander´s earning per share
growth for the 2015-2017 period compared to a peer group of 17
credit institutions; (2) ROTE in 2017; (3) number of principal markets
in which Santander is in the Top 3 of the best banks to work for
in 2017; (4) number of principal markets in which Santander is in
the Top 3 of the best banks on the customer satisfaction index
in 2017; (5) retail loyal clients at 31 December 2017; and (6) SME
and corporate loyal clients at 31 December 2017. The overall
compliance of the plan was assessed by the Board at the 65.67%.
As a result of the aforementioned process and following a
proposal by the remuneration committee, the board of directors
approved the following number of shares to be paid in 2019:
Number of shares
Approved
maximum
LTI amount1
Final
number
of shares
Ratio
187,070
65.67%
122,849
126,279
65.67%
82,927
93,540
65.67%
61,428
Ms. Ana Botín-Sanz de
Sautuola y O’Shea
Mr. José Antonio
Álvarez Álvarez
Mr. Rodrigo
Echenique Gordillo
Total
406,899
267,204
1. 91.50% of the maximum established benchmark approved at the
AGM on 27 March 2015.
With regards to the ILP of 2014 (see Note 47), in both 2017 and
2018, the position achieved in the Total Return for the Shareholders
has not been such that determines the accrual of the second and
third thirds. Therefore, the plan has expired.
iii) Deferred variable compensation plan
linked to multiannual objectives
In 2016, with the aim of simplifying the remuneration structure,
improving risk adjustment before and increasing the incidence of
long-term objectives, the bonus plan (deferred and conditioned
variable compensation plan) and ILP were replaced by one single
plan, the deferred multiyear objectives variable remuneration
plan. The variable remuneration of executive directors and certain
executives (including senior management) corresponding to 2018
has been approved by the Board of Directors and implemented
through the third cycle of the deferred variable remuneration plan
linked to multi-year objectives. The application of the plan, thus
far as it entails the delivery of shares to the benefciaries, was
authorized by the annual General Meeting of Shareholders.
As indicated in section a.ii of this Note, 60% of the variable
remuneration amount is deferred for fve years (three years for
certain benefciaries, not including executive directors), for their
payment, where appropriate by ffth parties provided that the
conditions of permanence in the group and non-concurrence of the
clauses malus are met, according to the following accrual scheme:
• The accrual of the frst and second parts (instalments in 2020 and
2021) is not subject to the fulflment of long-term objectives.
• The accrual of the third, fourth and ffth parts is linked to the
fulflment of certain objectives related to the period 2018-2020
and the metrics and scales associated with those objectives.
These objectives are:
• the growth of consolidated earnings per share in 2020
compared to 2017;
• the relative performance of the Bank’s total shareholder return
(RTA) in the period 2018-2020 in relation to the weighted RTAs
of a reference group of 17 credit institutions;
• compliance with the fully loaded ordinary level 1 capital
objective for the year 2020;
Compliance with the above objectives determines the percentage
to be applied to the deferred amount in these three annuities, the
maximum being the amount determined at the end of the year
2018 when the total variable remuneration is approved.
Both the immediate (short-term) and each of the deferred (long-
term and conditioned) portions are paid 50% in cash and the
remaining 50% in Santander shares.
The accrual of deferred amounts (whether or not subject
to performance measures) is conditioned, in addition to the
permanence of the benefciary in the Group, to the fact that
during the period prior to each of the deliveries, none of the
circumstances giving rise to the malus clause as set out in the
Group’s remuneration policy in its chapter related to malus and
clawback. Likewise, the already paid amounts of the incentive will
be subject to its possible recovery (clawback) by the Bank in the
cases and during the term foreseen in said policy, always in the
terms and conditions that are foreseen in it.
The application of malus and clawback is activated in cases in
which there is poor fnancial performance of the entity as a whole
or of a specifc division or area of the entity or of the exposures
generated by the personnel, and at least the following factors
must be considered:
(i) Signifcant failures in risk management committed by the
entity, or by a business unit or risk control.
512
2018 Auditors’ report and consolidated annual accounts
(ii) The increase sufered by the entity or by a business unit of its
capital needs, not foreseen at the time of generation of the
exposures.
(iii) Regulatory sanctions or judicial sentences from events that
could be attributable to the unit or the personnel responsible
for those. Also, the breach of internal codes of conduct of the
entity.
(iv) Irregular conduct, whether individual or collective. The
negative efects derived from the marketing of inappropriate
products and the responsibilities of the people or bodies that
made those decisions will be specially considered.
The maximum number of shares to be delivered is calculated by
taking into account the weighted average daily volume of weighted
average prices for the ffteen trading sessions prior to the previous
Friday (excluded) the date on which the bonus is agreed by the
board of executive directors of the Bank.
iv) Shares assigned by deferred variable remuneration plans
The following table shows the number of Santander shares
assigned to each executive director and pending delivery as of 1
January, 2017, 31 December, 2017 and 2018, as well as the gross
shares that were delivered to them in 2017 and 2018, either in the
form of an immediate payment or a deferred payment. In this case
after having been appraised by the board, at the proposal of the
remuneration committee that the corresponding one-ffth (one
third until 2014) of each plan had accrued. They bring cause of each
of the plans through which the variable remunerations of deferred
conditional variable remuneration plans in 2013, 2014 and 2015 and
of the deferred conditional and linked to multiannual objectives
2018, 2017 and 2016.
In order to mitigate the dilutive efect (and, therefore, not linked
to the performance of the Group) of the capital increase with
preferential subscription rights of the Bank that took place on
July 2017 in certain cycles of the deferred compensation and long
term incentive plans, the increase in the number of shares to be
delivered to its benefciaries was approved, considering for this
a valuation of preferential subscription rights equivalent to their
theoretical value, EUR 0.1047 per right. The efect of increasing the
number of shares is detailed in the corresponding column of the
table below.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Share-based variable remuneration
Maximum
number of
shares to be
delivered at
anuary 1, 2017
J
Shares
delivered in
2017 (immediate
payment
2016 variable
remuneration)
Shares
delivered in
2017 (deferred
payment
2014 variable
remuneration)
Shares
delivered in
2017 (deferred
payment
2013 variable
remuneration)
Shares
delivered in
2017 (deferred
payment
2012 variable
remuneration)
Shares arising
from the capital
increase of
July 2017
(33,120)
(19,561)
(34,547)
(87,228)
(60,814)
(26,242)
(46,363)
(133,419)
33,120
19,561
34,547
87,228
121,630
52,484
92,725
266,839
317,300
210,914
156,233
216,671
901,118
592,043
399,607
295,972
352,455
(63,460)
(42,183)
(31,247)
(43,334)
(180,224)
(236,817)
(159,843)
(118,389)
(140,982)
1,640,077
(656,031)
905
390
690
1,985
3,777
2,511
1,860
2,579
10,727
5,286
3,568
2,643
3,147
14,644
2013 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez2
Mr. Matías Rodríguez Inciarte
2014 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez2
Mr. Matías Rodríguez Inciarte
3
2015 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez2
Mr. Rodrigo Echenique Gordillo
Mr. Matías Rodríguez Inciarte
2016 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez2
Mr. Rodrigo Echenique Gordillo
Mr. Matías Rodríguez Inciarte
2017 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez2
Mr. Rodrigo Echenique Gordillo
Mr. Matías Rodríguez Inciarte3
2018 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez
2
Mr. Rodrigo Echenique Gordillo
1. For each director, 40% of the shares indicated correspond to the short-term variable (or immediate payment). The remaining 60% is deferred for delivery,
where appropriate, by ffths in the next fve years, the last three being subject to the fulflment of multiannual objectives.
2. Maximum number of shares resulting from their participation in the corresponding plans during their stage as general manager.
3. Ceased to be a member of the Board on 28 November, 2017. The shares corresponding to his variable remuneration between 28 November 28, 2017 and 2
January, 2018 as executive vice president are included in Note 5.g.
4. In addition, Mr. Ignacio Benjumea Cabeza de Vaca maintains the right to a maximum of 106,113 shares arising from his participation in the corresponding plans
during his term as executive vice president.
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2018 Auditors’ report and consolidated annual accounts
Variable
remuneration
2017 (maximum
number of shares
to be delivered)
Maximum
number of
shares to be
delivered at
December
31, 2017
Shares delivered
in 2018
(immediate
payment
2016 variable
remuneration)
Shares delivered
in 2018 (deferred
payment
2015 variable
remuneration)
Shares delivered
in 2018 (deferred
payment
2014 variable
remuneration)
Shares delivered
in 2018 (deferred
payment
2013 variable
remuneration)
Variable
remuneration
2018 (maximum
number of
shares to be
delivered)1
Maximum
number of
shares
to be delivered
at December 31,
20184
(61,721)
(26,632)
(47,052)
(135,405)
(64,404)
(42,811)
(31,712)
(43,979)
(182,906)
61,721
26,632
47,052
135,405
257,617
171,242
126,846
175,916
731,621
360,512
243,332
180,226
214,620
998,690
574,375
384,118
299,346
292,771
574,375
384,118
299,346
292,771
(72,102)
(48,667)
(36,046)
(42,924)
(199,739)
(229,750)
(153,647)
(119,738)
(117,108)
1,550,610
1,550,610
(620,243)
193,213
128,431
95,134
131,937
548,715
288,410
194,665
144,180
171,696
798,951
344,625
230,471
179,608
175,662
930,366
860,865
575,268
456,840
860,865
575,268
456,840
1,892,973
1,892,973
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Also, the table below show the cash delivered in 2018 and 2017,
by way of either immediate payment or deferred payment, in the
latter case once the Board had determined, at the proposal of the
remuneration committee that one-third relating to each plan had
accrued:
Thousand of euros
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez1
Mr. Rodrigo Echenique Gordillo
Mr. Matías Rodríguez Inciarte2
2018
2017
Cash paid
(immediate
payment
2017 variable
remuneration)
Cash paid (deferred
payments from
2016, 2015 and
2014 variable
remuneration)
Cash paid
(immediate
payment
2016 variable
remuneration)
Cash paid (one-
third of deferred
payment 2015, 2014
and 2013 variable
remuneration)
1,370
916
714
-
3,000
947
574
305
-
1,826
1,205
814
603
718
3,339
825
461
124
690
2,099
1. Includes paid cash corresponding to his participation in the corresponding plans during the time as executive vice president.
2. Ceased to be a member of the Board on 28 November 2017. The cash paid corresponding to his variable remuneration between 28 November 2017 and 2
January 2018 as executive vice president is included in Note 5.g.
v) Information on former members of the Board of Directors
Following is information on the maximum number of shares to
which former members of the Board of Directors who ceased in
ofce prior to January 1, 2017 are entitled for their participation
in the various deferred variable remuneration systems, which
instrumented a portion of their variable remuneration relating
to the years in which they were Executive Directors. Also set
forth below is information on the deliveries, whether shares or
cash, made in 2018 and 2017 to former board members, upon
achievement of the conditions for the receipt thereof (see Note 47):
Maximum number of shares to be delivered1
Deferred conditional variable remuneration plan (2014)
Deferred conditional variable remuneration plan (2015)
Plan performance shares (ILP 2015)
Deferred conditional variable remuneration plan (2016)
Number of shares delivered
Deferred conditional variable remuneration plan (2013)
Deferred conditional variable remuneration plan (2014)
Deferred conditional variable remuneration plan (2015)
Deferred conditional variable remuneration plan (2016)
2018
-
50,604
33,785
-
2018
-
101,537
16,868
-
2017
101,537
67,472
51,447
-
2017
80,718
100,049
16,621
-
1. At the proposal of the remuneration committee, the board of directors approved adjusting the maximum number of shares to mitigate the dilutive efect of
the capital increase with pre-emptive subscription rights of July 2017 as described in iv) below. The actions derived from this adjustment are 3,233 shares.
At year-end 2018, the overall compliance of the 2015 LTI Plan was assessed by the Board at the 65.67%.
In addition, EUR 685 thousand and EUR 1,224 thousand relating to
the deferred portion payable in cash of the aforementioned plans
were paid each in 2018 and 2017.
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2018 Auditors’ report and consolidated annual accounts
f) Loans
The Group’s direct risk exposure to the Bank’s directors and
the guarantees provided for them are detailed below. These
transactions were made on terms equivalent to those that prevail
in arm’s-length transactions or the related compensation in kind
was recognised:
Thousand of euros
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Mr. José Antonio Álvarez Álvarez
Mr. Bruce Carnegie-Brown
Mr. Matías Rodríguez Inciarte1
Mr. Rodrigo Echenique Gordillo
Mr. Javier Botín-Sanz de Sautuola y O’Shea
Ms. Sol Daurella Comadran
Mr. Carlos Fernandez Gonzalez
Ms. Esther Gimenez-Salinas i Colomer
Mr. Ignacio Benjumea Cabeza de Vaca
Ms. Belén Romana García
Mr. Guillermo de la Dehesa Romero
2018
Loans and
2017
Loans and
credits Guarantees
Total
credits Guarantees
Total
18
8
-
-
29
15
53
12
1
-
21
21
178
-
-
-
-
-
-
-
-
-
-
-
-
-
18
8
-
-
29
15
53
12
1
-
21
21
178
10
9
-
-
22
17
27
-
-
-
3
-
88
-
-
-
-
-
-
-
-
-
-
-
-
-
10
9
-
-
22
17
27
-
-
-
3
-
88
1. Ceased to be a board director on 28 November 2017. On 31 December 2017, to loans and credits amounted to EUR 13 thousand.
g) Senior managers
The table below includes the amounts relating to the short-
term remuneration of the members of senior management at 31
December, 2018 and those at 31 December, 2017, excluding the
remuneration of the executive directors, which is detailed above::
Thousand of euros
Year
2018
2017
Number of
persons
18
19
Fixed
22,475
17,847
Short-term salaries and deferred remuneration
Variable remuneration
(bonus) - Immediate
payment
Deferred variable
remuneration
In cash
In shares2
In cash
In shares
Pensions
Other
remuneration1
Total3
8,374
8,879
8,374
8,879
3,791
4,052
3,791
4,052
6,193
13,511
7,263
60,261
7,348
64,568
1. Includes other remuneration items such as life insurance premiums and localization aids totalling EUR 1,641 thousand (2017: EUR 692 thousand).
2. The amount of the immediate payment in shares for 2018 relates to Santander shares 1,936,037 (2017:1,430,143 Santander shares and 225,564 shares of
Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México.
3. Additionally, and as a result of the incorporation and compensation agreements of long-term and deferred compensation lost in previous jobs,
compensations were agreed in 2017 for the amount of EUR 4,650 thousand and 648,457 shares of Banco Santander, S.A. These compensations are partially
subject to deferral and / or recovery in certain cases.
Also, the detail of the breakdown of the linked to multiannual
objective salaries of the members of senior management
at 31 December, 2018 and 2017 is provided below. These
remuneration payments shall be received, as the case may be,
in the corresponding deferral periods upon achievement of the
conditions stipulated for each payment (see Note 47):
517
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Thousand of euros
Number of shares delivered
Variable remuneration subject
to long-term objectives1
Year
2018
2017
Number
of people
Cash payment
Share
payment
Total
18
19
3,981
4,255
3,981
7,962
4,255
8,510
1. Relates in 2018 with the fair value of the maximum annual amounts for
years 2022, 2023 and 2024 of the third cycle of the deferred conditional
variable remuneration plan (2021, 2022 and 2023 for the frst cycle of the
deferred variable compensation plan linked to annual objectives for the
year 2017).
Also, executive vice presidents who retired in 2018 and, therefore,
were not members of senior management at year-end, received in
2018 salaries and other remuneration relating to their retirement
amounting to EUR 1.861 thousand (EUR 5,237 thousand in 2017),
however, the right to obtain variable remuneration subject to
long-term objectives has not been generated as part of the senior
management ( 2017: EUR 999 thousand).
Other than Executive directors the average total remuneration
awarded in 2018 to women senior managers is 0.7% higher than
the average remuneration of men senior managers.
Following is a detail of the maximum number of Santander shares
that the members of senior management at each plan grant
date (excluding executive directors) were entitled to receive at 31
December, 2018 and 2017 relating to the deferred portion under
the various plans then in force (see Note 47):
Maximum number of shares to be delivered1
Deferred conditional variable
remuneration plan (2014)
Deferred conditional variable
remuneration plan (2015)
2018
2017
-
323,424
705,075
1,296,424
Performance shares plan ILP (2015)
515,456
1,050,087
Deferred conditional variable
remuneration plan and linked
to objectives (2016)
Deferred conditional variable
remuneration plan and linked
to objectives (2017)
Deferred conditional variable
remuneration plan and linked
to objectives (2018)
1,079,654
1,854,495
1,434,047
1,779,302
2,192,901
-
1. At the proposal of the remuneration committee, the board of directors
approved adjusting the maximum number of shares to mitigate the
dilutive efect of the capital increase with pre-emptive subscription
rights of July 2017 as described in iv) below. The actions derived from
this adjustment are 66,339 shares.
In 2018 and 2017, since the conditions established in the
corresponding deferred share-based remuneration schemes for
prior years had been met, in addition to the payment of the related
cash amounts, the following number of Santander shares was
delivered to the executive vice presidents:
Deferred conditional variable
remuneration plan (2013)
Deferred conditional variable
remuneration plan (2014)
Deferred conditional variable
remuneration plan (2015)
2018
2017
-
226,766
248,963
318,690
261,109
349,725
Deferred conditional variable remuneration
plan and linked to objectives (2016)
258,350
-
As indicated in Note 5.c above, the senior managers participate
in the defned beneft system created in 2012, which covers the
contingencies of retirement, disability and death. The Bank makes
annual contributions to the beneft plans of its senior managers.
In 2012, the contracts of the senior managers with defned beneft
pension commitments were amended to transform them into a
defned contribution system. The system, which is outsourced
to Santander Seguros y Reaseguros, Compañía Aseguradora,
S.A., gives senior managers the right to receive benefts upon
retirement, regardless of whether or not they are active at the
Bank at such time, based on contributions to the system, and
replaced their previous right to receive a pension supplement
in the event of retirement. In the event of pre-retirement, and
up to the retirement date, senior managers appointed prior to
September 2015 are entitled to receive an annual allowance.
In addition, in application of the provisions of the remuneration
regulations, from 2016 (inclusive), a discretionary pension
beneft component of at least 15% of the total has been included
in contributions to the pension system. Under the regime
corresponding to these discretionary benefts, the contributions
made that are calculated on variable remunerations are subject
to malus and clawback clauses according to the policy in force at
each moment and during the same period in which the variable
remuneration is deferred.
Likewise, the annual contributions calculated on variable
remunerations must be invested in Bank shares for a period of fve
years from the date of the cessation of senior management in the
Group, whether or not as a result of retirement. After that period,
the amount invested in shares will be invested together with the
rest of the accumulated balance of the senior manager, or he will
be paid to him or her benefciaries if there were any contingency
covered by the forecasting system.
The contracts of certain senior managers have gone through the
changes set out in note 5.c. for executive directors. The changes,
aiming at aligning the annual contributions with practices
of comparable institutions and reducing future liabilities by
eliminating the supplementary benefts scheme in the event
of death (death of spouse or parent) and permanent disability
of certain with no increase in total costs for the Bank, are the
following:
• Contributions of the pensionable bases have been reduced. Gross
annual salaries have been increased in the corresponding amount
with no increases in total costs for the Bank.
518
2018 Auditors’ report and consolidated annual accounts
• The death and disability supplementary benefts have
been eliminated since 1 January 2018. A fxed remuneration
supplement (included in other remuneration in the table above)
was implemented on the same date.
i) Pre-retirement and retirement
The following executive directors will be entitled to take pre-
retirement in the event of termination, if they have not yet reached
the age of retirement, on the terms indicated below:
Ms. Ana Botín-Sanz de Sautuola y O’Shea will be entitled to take
pre-retirement in the event of termination for reasons other than
breach. In such case, she will be entitled to an annual emolument
equivalent to her fxed remuneration plus 30% of the average of
her latest amounts of variable remuneration, up to a maximum of
three. This emolument would be reduced by up to 8% in the event
of voluntary retirement before the age of 60. This assignment will
be subject to malus and clawback conditions in efect for a period
of 5 years. Mr. José Antonio Álvarez Álvarez will be entitled to
take pre-retirement in the event of termination for reasons other
than his own free will or breach. In such case, he will be entitled
to an annual emolument equivalent to the fxed remuneration
corresponding to him as executive vice president. This assignment
will be subject to malus and clawback conditions in efect for a
period of 5 years.
j) Contract termination
The executive directors and senior executives have indefnite-term
employment contracts. Executive directors or senior executives
whose contracts are terminated voluntarily or due to breach of
duties are not entitled to receive any economic compensation. If
the Bank terminates the contract for any other reason, they will
be entitled to the corresponding legally-stipulated termination
beneft, without prejudice to the compensation that corresponds to
the non-competition obligations, as detailed in the remuneration
policy of the directors.
If the Bank were to terminate her contract, Ms. Ana Botín-Sanz de
Sautuola y O’Shea would have to remain at the Bank’s disposal for
a period of four months in order to ensure an adequate transition,
and would receive her fxed salary during that period.
Other non-director members of the Group’s senior management,
other than those whose contracts were amended in 2012 as
indicated above, have contracts which entitle them, in certain
circumstances, to an extraordinary contribution to their welfare
system in the event of termination for reasons other than
voluntary redundancy, retirement, disability or serious breach
of duties. These benefts are recognised as a provision for
pensions and similar obligations and as a staf cost only when the
employment relationship between the Bank and its executives is
terminated before the normal retirement date.
• The sum insured for the life and accident insurance has been
increased.
All the above without an increase in total cost for the Bank.
The balance as of 31 December, 2018 in the pension system for
those who were part of senior management during the year
amounted to EUR: 66.5 million (EUR: 118.7 million in 31 December,
2017).
The net charge to income corresponding to pension and
supplementary benefts for widows, orphans and permanent
invalidity amounted to EUR 6.4 million in 2018 (EUR: 14.5 in 31
December, 2017).
In 2018 and 2017 there is no payments in the form of a single
payment of the annual voluntary pre-retirement allowance.
Additionally, the capital insured by life and accident insurance at 31
December, 2018 of this group amounts to EUR 133.3 million (EUR:
53.6 million at 31 December, 2017).
h) Post-employment benefts to former Directors
and former executive vice presidents
The post-employment benefts and settlements paid in 2018 to
former directors of the Bank, other than those detailed in note 5.c
amounted to EUR 13.8 million (2017: EUR 26.2 million). Also, the
post-employment benefts and settlements paid in 2018 to former
executive vice presidents amounted to EUR 63 million (2017: EUR
17.7 million).
Contributions to insurance policies that hedge pensions and
complementary widowhood, orphanhood and permanent
disability benefts to previous members of the Bank’s Management
Board, amounted to EUR 0.5 million in 2018 (EUR 0.5 million in
2017). Likewise, contributions to insurance policies that hedge
pensions and complementary widowhood, orphanhood and
permanent disability benefts for previous managing directors
amounted to EUR 5.4 million in 2018 (EUR 5.5 million in 2017).
In 2018 a period provision of EUR 0.08 million (release of EUR
0.5 million in 2017) was recognised in the consolidated income
statement in connection with the Group’s pension and similar
obligations to former directors of the Bank (including insurance
premiums for supplementary surviving spouse/child and
permanent disability benefts), and no period provision was
recognised in relation to former executive vice presidents (2017: a
period provision of EUR 5.6 million was recognised).
In addition, Provisions – Pension Fund and similar obligations in the
consolidated balance sheet as at 31 December, 2018 included EUR
70.2 million in respect of the post-employment beneft obligations
to former Directors of the Bank (31 December, 2017: EUR 81.8
million) and EUR 179 million corresponding to former executive
vice presidents (2017: EUR 195.8 million).
519
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
k) Information on investments held by the directors
in other companies and conficts of interest
None of the members of the board of directors or persons related
to them perform, as independent professionals or as employees,
activities that involve efective competition, be it present or
potential, with the activities of Banco Santander, S.A., or that, in
any other way, place the directors in an ongoing confict with the
interests of Banco Santander, S.A.
Without prejudice to the foregoing, following is a detail of the
declarations by the directors with respect to their equity interests
in companies not related to the Group whose object is banking,
fnancing or lending; and of the management or governing
functions, if any, that the directors discharge thereat.
Administrator
Ms. Ana Botín-Sanz de
Sautuola y O’Shea
Mr. Bruce Neil Carnegie-Brown
Denomination
Bankinter, S.A.1
Moneysupermarket.com Group plc
Lloyd’s of London Ltd
Mr. Rodrigo Echenique Gordillo
Mitsubishi UFJ Financial Group1
Number
of shares
Functions
5,000,000
-
30,000
-
17,500
President2
President2
-
-
Mr. Guillermo de la Dehesa Romero
Goldman, Sachs & Co. (The Goldman Sachs Group, Inc.)
19,546
Mr. Javier Botín-Sanz de
Sautuola y O’Shea
Bankinter, S.A.
JB Capital Markets Sociedad de Valores, S.A.
Ms. Esther Giménez-Salinas i Colomer Gawa Capital Partners, S.L.
Mr. Ramiro Mato García-Ansorena
BNP Paribas España, S.A.
6,929,853
2,077,198
-
President
- Manager ofcer2
13,806
-
committees or in Group companies or related to them; on 30
occasions it was about retributive aspects or the granting of loans
or credits; on 1 occasion when investment or fnancing proposals
or other risk operations were discussed in favour of companies
related to diferent directors and on 3 occasions the abstention
occurred in relation to the annual verifcation of the directors’
nature.
1. Indirect ownership.
2. Non-executive.
With regard to situations of confict of interest, as stipulated in
Article 40 of the rules and regulations of the Board, the directors
must notify the board of any direct or indirect confict with the
interests of the Bank in which they or persons related thereto may
be involved. The director involved shall refrain from taking part
in discussions or voting on any resolutions or decisions in which
the director or any persons related thereto may have a confict of
interest.
Accordingly, the related party transactions carried out during the
fnancial year met the conditions established in the regulations of
the board of directors so as not to require a prior favourable report
from the audit committee and subsequent authorisation from the
board of directors.
In addition, during the 2018 fnancial year there were 60 occasions
in which, in accordance with the provisions of article 36.1 (b) (iii)
of the Regulations of the Board, the directors have abstained
from intervening and voting in the deliberation of matters in
the sessions of the board of directors or its committees. The
breakdown of the 60 cases is as follows: on 26 occasions they were
due to proposals for the appointment, re-election or resignation
of directors, as well as the appointment of members of board
520
2018 Auditors’ report and consolidated annual accounts
6. Loans and advances to central
banks and credit institutions
The detail, by classifcation, type and currency, of Loans
and advances to central banks and credit institutions in the
consolidated balance sheets is as follows:
Million of euros
CENTRAL BANKS
Classifcation:
Financial assets held for trading
Non-trading fnancial assets mandatorily at fair value through proft or loss
Financial assets designated at fair value through proft or loss
Financial assets designated at fair value through other comprehensive income
Financial assets at amortised cost
Loans and receivables
Type:
Time deposits
Reverse repurchase agreements
Impaired assets
Valuation adjustments for impairment
CREDIT INSTITUTIONS
Classifcation:
Financial assets held for trading
Non-trading fnancial assets mandatorily at fair value through proft or loss
Financial assets designated at fair value through proft or loss
Financial assets designated at fair value through other comprehensive income
Financial assets at amortised cost
Loans and receivables
Type:
Time deposits
Reverse repurchase agreements
Non-loans advances
Impaired assets
Valuation adjustments for impairment
Currency:
Euro
Pound sterling
US dollar
Brazilian real
Other currencies
TOTAL
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
2018*
2017
2016
-
-
9,226
-
15,601
24,827
15,601
9,226
-
-
-
-
26,278
26,278
17,359
8,919
-
-
-
-
27,973
27,973
14,445
13,528
-
-
24,827
26,278
27,973
-
2
23,097
-
35,480
58,579
10,759
33,547
14,283
2
(12)
58,579
24,801
4,073
19,238
28,310
6,984
83,406
1,696
3,221
9,889
10,069
39,567
51,152
8,169
21,765
21,232
4
(18)
51,152
23,286
5,582
15,325
28,140
5,097
77,430
35,424
48,714
6,577
20,867
21,281
4
(15)
48,714
24,278
4,337
11,996
32,013
4,063
76,687
521
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The loans and advances classifed under Financial assets
designated at fair value through proft or loss consist of assets of
Spanish and foreign institutions acquired under reverse repurchase
agreements.
The loans and advances to credit institutions classifed under
Financial assets at amortised cost (IFRS9) and Loans and
receivables (IAS39) are mainly time accounts and deposits.
Note 51 contains a detail of the residual maturity periods
of Financial assets at amortised cost (IFRS9) and Loans and
receivables (IAS39) and of the related average interest rates.
At 31 December 2018 the exposure and the loan loss provision by
impairment stage of assets accounted for under IFRS9 amounts
to EUR 51,090 million and EUR 12 million in stage 1, EUR 1 million
without loan loss provision in stage 2, and EUR 2 million without
loan loss provision in stage 3.
7. Debt instruments
a) Detail
The detail, by classifcation, type and currency, of Debt instruments
in the consolidated balance sheets is as follows:
Million of euros
Classifcation:
Financial assets held for trading
Non-trading fnancial assets mandatorily at fair value through proft or loss
Financial assets designated at fair value through proft or loss
Financial assets designated at fair value through other comprehensive income
Financial assets available-for-sale
Financial assets at amortised cost
Loans and receivables
Held-to-maturity investments
Type:
Spanish government debt securities**
Foreign government debt securities
Issued by fnancial institutions
Other fxed-income securities
Impaired fnancial assets
Impairment losses
Currency:
Euro**
Pound sterling
US dollar
Brazilian real
Other currencies
Total gross
Impairment losses
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** The increase in 2017 corresponds mainly to Banco Popular acquisition.
522
2018*
2017
2016
27,800
5,587
3,222
116,819
37,696
191,124
50,488
99,959
10,574
29,868
870
(635)
191,124
76,513
19,153
22,864
40,871
32,358
191,759
(635)
191,124
36,351
48,922
3,485
3,398
128,481
111,287
17,543
13,491
199,351
59,186
99,424
12,155
28,299
1,017
(730)
199,351
93,250
16,203
25,191
39,233
26,204
200,081
(730)
199,351
13,237
14,468
191,312
45,696
103,070
16,874
25,397
773
(498)
191,312
73,791
16,106
31,401
43,370
27,142
191,810
(498)
191,312
2018 Auditors’ report and consolidated annual accounts
At 31 December 2018 the exposure by impairment stage of the
book assets under IFRS9 amounted to EUR 154,164 million in
stage 1, EUR 117 million in stage 2, and EUR 870 million in stage 3,
respectively.
b) Breakdown
The breakdown, by origin of the issuer, of Debt instruments at 31
December 2018, 2017 and 2016, net of impairment losses, is as
follows:
Million of euros
2018
2017
2016
Private
fxed-
income
Public
fxed-
income
Total
%
Private
fxed-
income
Public
fxed-
income
Total
%
Private
fxed-
income
Public
fxed-
income
Total
%
Spain
4,748
50,488
55,236
28.90%
5,272
59,186
64,458
32.33%
6,153
45,696
51,849
27.10%
United
Kingdom
5,615
9,512
15,127
7.91%
4,339
10,717
15,056
7.55%
3,531
11,910
15,441
8.07%
Portugal
3,663
6,943
10,606
5.55%
3,972
7,892
11,864
5.95%
4,068
7,689
11,757
6.15%
Italy*
857
3,134
3,991
2.09%
Ireland**
4,543
2
4,545
2.38%
1,287
3,147
2
3,149
1.58%
7,171
8,458
4.24%
1,035
3,547
4,582
2.40%
518
707
-
518
0.27%
6,265
6,972
3.64%
683
10,489
11,172
5.85%
772
6,619
7,391
3.71%
Poland
Other
European
countries
United
States
Brazil
Mexico
Chile
Other
American
countries
Rest of the
world
6,101
1,518
7,619
3.99%
7,195
1,733
8,928
4.48%
7,203
1,736
8,939
4.67%
6,833
10,362
17,195
9.00%
7,986
11,670
19,656
9.86%
10,559
13,058
23,617
12.34%
5,285
36,583
41,868
21.91%
4,729
34,940
39,669
19.90%
5,364
39,770
45,134
23.59%
520
11,325
11,845
6.20%
79
2,729
2,808
1.47%
461
62
9,478
9,939
4.99%
587
10,628
11,215
5.86%
4,071
4,133
2.07%
1,315
3,643
4,958
2.59%
1,111
1,375
2,486
1.30%
755
913
1,668
0.84%
782
1,262
2,044
1.07%
639
5,987
6,626
3.47%
764
4,218
4,982
2.50%
724
3,562
4,286
2.24%
40,677
150,447
191,124
100%
40,741
158,610
199,351
100%
42,546
148,766
191,312
100%
* Of the exposure in Italy, EUR 1,855 million corresponds to bonds sold in forward.
** Includes mainly UK securities issued by Irish vehicles with underlying risk UK.
The detail, by issuer rating, of Debt instruments at 31 December
2018, 2017 and 2016 is as follows:
Million of euros
2018
2017
2016
Private
fxed-
income
Public
fxed-
income
Total
%
Private
fxed-
income
Public
fxed-
income
Total
%
Private
fxed-
income
Public
fxed-
income
Total
%
18,901
834
19,735
10.33%
16,239
924
17,163
8.61%
18,916
1,008
19,924
10.41%
2,715
20,966
23,681
12.39%
2,714
23,522
26,236
13.16%
1,632
29,639
31,271
16.35%
3,464
69,392
72,856
38.12%
4,373
8,037
12,410
6.23%
2,928
3,285
6,213
3.25%
5,093
21,837
26,930
14.09%
6,449
91,012
97,461
48.89%
7,579
66,955
74,534 38.96%
AAA
AA
A
BBB
Below BBB
668
37,412
38,080
19.92%
2,393
35,109
37,502
18.81%
4,751
47,872
52,623
27.51%
Unrated
9,836
6
9,842
5.15%
8,573
6
8,579
4.30%
6,740
7
6,747
3.53%
40,677
150,447
191,124
100%
40,741
158,610
199,351
100%
42,546
148,766
191,312
100%
523
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The distribution of the exposure by rating level of the previous
table has been afected by the diferent ratings reviews of the
sovereign issuers that have occurred in recent years. Thus, the
principal changes in 2018 have been Spain and Poland which went
from BBB+ to A-. Likewise, the main revisions during 2017 were
Portugal that went from BB+ to BBB- and Chile from AA- to A+.
During 2016 United Kingdom went from AAA to AA, Poland went
from A to BBB, and Argentina that did not have a rating went to B-.
The detail, by type of fnancial instrument, of Private fxed-income
securities at 31 December 2018, 2017 and 2016, net of impairment
losses, is as follows:
Million of euros
At 31 December 2018 the loan loss provision by impairment stage
of the assets accounted for under IFRS9 amounted to EUR 30
million in stage 1, EUR 9 million in stage 2, and EUR 596 million in
stage 3.
8. Equity instruments
a) Breakdown
The detail, by classifcation and type, of Equity instruments in the
consolidated balance sheets is as follows:
Million of euros
2018*
2017
2016
2018
2017
2016
Classifcation:
Financial assets held for trading
8,938
21,353
14,497
Non-trading fnancial assets
mandatorily at fair value
through proft or loss
Financial assets designated at fair
value through proft or loss
3,260
933
546
Financial assets designated at fair value
through other comprehensive income
2,671
Financial assets available-for-sale
4,790
5,487
1
4,869
27,076
20,530
Type:
Shares of Spanish companies
3,448
4,199
3,098
Shares of foreign companies
9,107
20,448
15,342
Investment fund shares
2,314
2,429
2,090
1
4,869
27,076
20,530
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January
2018 (Note 1.b).
Note 29 contains a detail of the Other comprehensive income,
recognised in equity, on Financial assets designated at fair value
through other comprehensive income (IFRS9) and Financial assets
available-for-sale, and also the related impairment losses (IAS39).
Securitised mortgage bonds
2,942
2,458
1,584
Other asset-backed bonds
9,805
5,992
2,803
Floating rate debt
Fixed rate debt
Total
13,721
13,756
11,818
1
4,209
18,535
26,341
40,677
40,741 42,546
c) Impairment losses
The changes in the impairment losses on Debt instruments are
summarised below:
Million of euros
Balance at beginning of year
Net impairment losses
for the year**
Of which:
Impairment losses
charged to income
Impairment losses reversed
with a credit to income
Exchange diferences
and other items
Balance at end of year
Of which:
2018*
704
2017
498
2016
291
43
348
380
138
386
423
(95)
(38)
(43)
(112)
635
(116)
730
(172)
498
By geographical location of risk:
European Union
Latin America
22
613
30
700
40
458
** Of which:
Loans and advances
Financial assets at
amortised cost
Financial assets
available for sale
Financial assets designated
at fair value through other
comprehensive income
348
405
-
(25)
43
-
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January
2018 (Note 1.b).
524
2018 Auditors’ report and consolidated annual accounts b) Changes
The changes in Financial assets at fair value through other
comprehensive income (IFRS9), and Financial assets available-for-
sale (IAS39) were as follows:
9. Trading Derivatives (assets and
liabilities) and short positions
Million of euros
Balance at beginning of the year
Net additions (disposals)
Of which:
Visa Europe, Ltd.
Valuation adjustment
and other items
2018*
2017
2016
3,169
(324)
5,487
4,849
(331)
(294)
-
-
(263)
(174)
(366)
932
Balance at end of year
2,671
4,790
5,487
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January
2018 (Note 1.b).
Visa Europe, Ltd.
On 21 June 2016 the Group disposed its Visa Europe, Ltd. stake,
classifed as available for sale, obtaining a gain net of taxes of EUR
227 million (see Note 44 Gains or losses on fnancial assets and
liabilities not measured at fair value through proft or loss, net).
c) Notifcations of acquisitions of investments
The notifcations of the acquisitions and disposals of holdings in
investees made by the Bank in 2018, in compliance with Article 155
of the Spanish Limited Liability Companies Law and Article 125 of
Spanish Securities Market Law 24/1998, are listed in Appendix IV.
a) Trading Derivatives
The detail, by type of inherent risk, of the fair value of the trading
derivatives arranged by the Group is as follows (see Note 11):
Million of euros
2018
2017
2016
Debit
Debit
Credit
balance balance balance
Credit
Credit
balance balance balance
Debit
Interest
rate risk
Currency
risk
36,087
36,487
38,030
37,582
47,884
48,124
16,912
17,025
16,320
18,014
21,087
23,500
Price risk
2,828
1,673
2,167
2,040
2,599
2,402
Other
risks
112
156
726
256
473
343
55,939
55,341
57,243
57,892
72,043
74,369
b) Short positions
Following is a breakdown of the short positions (liabilities):
Million of euros
Borrowed securities:
Debt instruments
Of which:
Banco Santander México,
S.A., Institución de Banca
Múltiple, Grupo Financiero
Santander México
Santander UK plc
Equity instruments
Of which:
2018
2017
2016
1,213
2,447
2,250
1,213
-
1,087
890
1,557
1,671
930
1,319
1,142
991
103
Santander UK plc
Banco Santander, S.A.
-
1,500
987
98
Short sales:
Debt instruments
Of which:
12,702
16,861
19,613
Banco Santander, S.A.
5,336
8,621
7,472
Banco Santander México,
S.A., Institución de Banca
Múltiple, Grupo Financiero
Santander México
26
46
Banco Santander (Brasil) S.A.
7,300
8,188
1,872
9,197
15,002
20,979
23,005
525
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
10. Loans and advances to customers
Million of euros
a) Detail
The detail, by classifcation, of Loans and advances to customers in
the consolidated balance sheets is as follows:
Million of euros
Financial assets held for trading**
202
8,815
9,504
2018*
2017
2016
Non-trading fnancial assets
mandatorily at fair value
through proft or loss
Financial assets designated at
fair value through proft or loss
1,881
Loan type and status:
Commercial credit
Secured loans
2018
2017
2016
33,301
29,287
23,894
4
78,068
473,936
454,677
Reverse repurchase agreements
32,310
18,864
16,609
Other term loans
Finance leases
2
65,696
257,441
232,288
30,758
28,511
25,357
Receivable on demand
8,794
6,721
8,102
Credit cards receivables
23,083
21,809
21,363
21,915
20,475
17,596
Impaired assets
34,218
36,280
32,573
Financial assets at fair value through
other comprehensive income
1,601
Financial assets at amortised cost
857,322
Loans and receivables
819,625
763,370
Of which:
Impairment losses
(23,307)
(23,934)
(24,393)
882,921
848,915
790,470
Geographical area:
Spain
9
06,228
872,849
814,863
215,764
227,446
161,372
European Union (excluding Spain)
411,550
390,536
379,666
United States and Puerto Rico
89,325
75,777
87,318
Other OECD countries
82,607
74,463
74,157
Latin America (non-OECD)
87,406
88,302
93,207
Loans and advances to customers
disregarding impairment losses
906,228 872,849 814,863
Rest of the world
19,576
16,325
19,143
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1
January 2018 (Note 1.b).
** The decrease refects the run-down of UK’s trading business due to the
banking reform (Ring-fencing).
Interest rate formula:
Fixed rate
Floating rate
9
06,228
872,849
814,863
4
97,365
447,788
417,448
4
08,863
425,061
397,415
9
06,228
872,849
814,863
Note 51 contains a detail of the residual maturity periods of
fnancial assets at amortised cost (IFRS9) and loans and receivables
(IAS39) and of the related average interest rates.
Note 54 shows the Group’s total exposure, by origin of the issuer.
There are no loans and advances to customers for material
amounts without fxed maturity dates.
b) Breakdown
Following is a breakdown, by loan type and status, geographical
area of residence and interest rate formula, of the loans and
advances to customers of the Group, which refect the Group’s
exposure to credit risk in its core business, disregarding
impairment losses:
At 31 December 2018, 2017 and 2016 the Group had granted loans
amounting to EUR 13,615, 16,470 and 14,127 million to Spanish
public sector agencies which had a rating at 31 December 2018 of
A (ratings of BBB at 31 December 2017 and 2016), and EUR 10,952,
18,577 and 16,483 million to the public sector in other countries (at
31 December 2018, the breakdown of this amount by issuer rating
was as follows: 13.8% AAA, 12.2% AA, 3.2% A, 58.3% BBB and
12.5% below BBB).
Without considering the Public Administrations, the amount of the
loans and advances at 31 December 2018 amounts to EUR 881,661
million, of which, EUR 847,443 million euros are classifed as non-
performing.
The above-mentioned ratings were obtained by converting the
internal ratings awarded to customers by the Group (See Note 54)
into the external ratings classifcation established by Standard &
Poor’s, in order to make them more readily comparable.
526
2018 Auditors’ report and consolidated annual accounts Following is a detail, by activity, of the loans to customers at 31
December 2018, net of impairment losses:
Million of euros
Net exposure
Loan-to-value ratio***
Secured loans
Total
Without
collateral
Of which: Of which:
other
property
collateral
collateral
More
than
40% and
less than
or equal
to 60%
More
than 60%
and less
than or
equal to
80%
More
than 80%
and less
than or
equal to
100%
Less
than
or equal
to 40%
Public sector
22,659
21,480
279
900
114
86
125
699
More
than
100%
155
53,155
15,929
864
36,362
684
388
196
35,663
295
301,975
173,482
68,555
59,938
24,752
21,090
17,244
38,514
26,893
Other fnancial institutions
(fnancial business activity)
Non-fnancial corporations
and individual entrepreneurs
(non-fnancial business
activity) (broken
down by purpose)
Of which:
Construction and
property development
Civil engineering construction
Large companies
156,666
104,023
18,949
33,694
24,641
3,248
1,884
1,803
20,855
525
1,902
920
8,300
138
5,766
6,224
306
6,671
4,208
157
2,126
368
1,899
476
6,657
19,022
14,527
SMEs and individual
entrepreneurs
Households – other (broken
down by purpose)
Of which:
Residential
Consumer loans
Other purposes
117,420
65,772
28,226
23,422
10,548
7,889
6,222
16,998
9,991
487,695
115,997
321,119
50,579
83,889
104,266
103,496
46,296
33,751
314,017
1,682
311,513
822
77,643
97,815
98,240
32,361
6,276
156,116
109,810
17,562
4,505
2,387
7,219
43,919
5,838
3,406
2,840
4,709
1,742
3,225
2,031
8,766
26,200
5,169
1,275
Total*
865,484
326,888
390,817
147,779
109,439
125,830
121,061
121,172
61,094
Memorandum item
Refnanced and restructured
transactions**
30,527
6,278
14,032
10,217
3,328
3,422
3,210
3,541
10,748
*
In addition, the Group has granted advances to customers amounting to EUR 17,437 million, bringing the total of loans and advances to EUR 882,921
million.
** Includes the net balance of the impairment of the accumulated value or accumulated losses in the fair value due to credit risk.
*** The ratio is the carrying amount of the transactions at 31 December 2018 provided by the latest available appraisal value of the collateral.
Note 54 contains information relating to the restructured/
refnanced loan book.
Following is the movement of the gross exposure broken down by
impairment stage of loans and advances to customers recognised
under “Financial assets at amortised cost” and “Financial assets
527
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
at fair value through other comprehensive income” under IFRS9
during 2018:
Million of euros
Stage 1
Stage 2
Stage 3
Total
746,654
60,304
35,477 842,435
(31,234)
31,234
(3,980)
3,980
(13,998)
13,998
21,795
(21,795)
4,103
(4,103)
835
(835)
-
-
-
-
-
-
Balance at beginning of the year*
Impairment losses charged
to income for the year
Of which:
Impairment losses charged
to proft or loss
Impairment losses reversed
with a credit to proft or loss
Change of perimeter
Write-of of impaired
balances against recorded
impairment allowance
Exchange diferences
and other changes**
Balance at end of the year
Which correspond to:
Impaired assets
Other assets
Of which:
2018
2017
2016
25,936
24,393
26,517
10,501
10,513
10,734
17,850
19,006
17,081
(7,349)
-
(8,493)
-
(6,347)
(136)
(12,673)
(13,522)
(12,758)
(457)
23,307
2,550
23,934
36
24,393
14,906
8,401
16,207
7,727
15,331
9,062
Individually calculated
Collective calculated
4,905
18,402
5,311
18,623
6,097
18,296
79,727
(5,265)
(1,997)
72,465
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1
-
-
(12,673)
(12,673)
January 2018 (Note 1.b).
** In 2017, mainly includes the balances from the acquisition of Banco
(17,968)
(2,400)
(386)
(20,754)
Popular Español, S.A.U.
Million of euros
Balance at the
beginning of year
Movements
Transfers
Transfer to Stage
2 from Stage 1
Transfer to Stage
3 from Stage 1
Transfer to Stage
3 from Stage 2
Transfer to Stage
1 from Stage 2
Transfer to Stage
2 from Stage 3
Transfer to Stage
1 from Stage 3
Net changes on
fnancial assets
Write-ofs
Exchange diferences
and others
Exposure as of 31
December 2018
795,829
52,183
33,461 881,473
At 31 December 2018, the Group had EUR 757 million (1 January
2018: EUR 803 million) in purchased credit-impaired assets, which
relate mainly to the business combinations carried out by the
Group.
c) Impairment losses on loans and advances to
customers at amortised cost and at fair value
through other comprehensive income
The changes in the impairment losses on the assets making up
the balances of fnancial assets at amortised cost and at fair value
through other comprehensive income - Loans and advances -
Customers:
528
In addition, provisions for debt securities amounting to EUR 43
million (31 December 2017: EUR 348 million; 31 December 2016:
EUR 405 million) and written-of assets recoveries have been
recorded in the year amounting to EUR 1,558 million. (31 December
2017: EUR 1,620 million; 31 December 2016: EUR 1,582 million). With
this, the impairment recorded in Financial assets at amortised cost
amounts EUR 8,986 million (31 December 2017: EUR 9,241 million;
31 December 2016: EUR 9,557 million).
Following is the movement of loan loss provision broken down by
impairment stage of loans and advances to customers recognised
under “Financial assets at amortised cost” under IFRS9 during
2018:
Million of euros
Loss allowance as
of 1 January 2018
Transfers
Transfer from Stage
2 to Stage 1
Transfer from Stage
3 to Stage 1
Transfer from Stage
3 to Stage 2
Transfer from Stage
1 to Stage 2
Transfer from Stage
2 to Stage 3
Transfer from Stage
1 to Stage 3
Net changes of the
exposure and modifcations
in the credit risk
Write-ofs
FX and other movements
Carrying amount as of
31 December 2018
Stage 1
Stage 2 Stage 3
Total
4,350
5,079
16,507
25,936
(1,173)
3,854
2,681
(279)
1,264
985
(1,971)
4,529
2,558
438
(1,656)
(1,218)
435
(1,264)
(829)
84
(173)
(89)
304
(961)
7,070
6,413
-
-
(12,673)
(12,673)
(66)
(37)
(354)
(457)
3,658
4,743
14,906
23,307
2018 Auditors’ report and consolidated annual accounts d) Impaired assets and assets with
unpaid past-due amounts
The detail of the changes in the balance of the fnancial assets
classifed as Financial assets at amortised cost – Customers (IFRS9)
and Loans and receivables - Loans and advances to customers
(IAS39) considered to be impaired due to credit risk is as follows:
Million of euros
2018
2017
2016
Balance at beginning of year
36,280
32,573
36,133
Net additions
10,821
8,409
7,393
Written-of assets
(12,673)
(13,522)
(12,758)
Changes in the scope
of consolidation
Exchange diferences and other
177
(387)
9,618
(798)
661
1,144
Balance at end of year
34,218
36,280
32,573
This amount, after deducting the related allowances, represents
the Group’s best estimate of the discounted value of the fows that
are expected to be recovered from the impaired assets.
At 31 December 2018, the Group’s written-of assets totalled EUR
47,751 million (31 December 2017: EUR 43,508 million; 31 December
2016: EUR 40,473 million).
Following is a detail of the fnancial assets classifed as Financial
assets at amortised cost (IFRS9) and Loans and receivables to
costumers (IFRS39) and considered to be impaired due to credit risk
at 31 December 2018, classifed by geographical location of risk and
by age of the oldest past-due amount:
Million of euros
Spain
European Union (excluding Spain)
United States and Puerto Rico
Other OECD countries
Latin America (non-OECD)
With no
past-due
balances or
less than 90
days past due
5,671
2,940
1,906
1,414
1,221
13,152
780
1,213
531
498
1,145
4,167
With balances past due by
90 to 180
days
180 to 270
days
270 days
to 1 year
More than
1 year
551
577
30
143
782
656
519
31
162
561
8,724
2,662
178
520
803
Total
16,382
7,911
2,676
2,737
4,512
2,083
1,929
12,887
34,218
529
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The detail at 31 December 2017 is as follows:
Million of euros
Spain
European Union (excluding Spain)
United States and Puerto Rico
Other OECD countries
Latin America (non-OECD)
The detail at 31 December 2016 is as follows:
Million of euros
Spain
European Union (excluding Spain)
United States and Puerto Rico
Other OECD countries
Latin America (non-OECD)
With no
past-due
balances or
less than 90
days past due
6,012
2,023
1,221
1,523
945
11,724
With no
past-due
balances or
less than 90
days past due
4,845
2,648
805
1,601
1,242
11,141
Set forth below for each class of impaired asset are the gross
amount, associated allowances and information relating to
the collateral and/or other credit enhancements obtained at 31
December 2018:
Million of euros
Without associated
real collateral
With real estate collateral
Gross Allowance
recognised
amount
13,250
16,228
(8,636)
(4,408)
With other collateral
4,740
(1,862)
Total
34,218
(14,906)
Estimated
collateral
value
*
-
11,653
1,913
13,566
* Including the estimated value of the collateral associated with each loan.
Accordingly, any other cash fows that may be obtained, such as those
arising from borrowers’ personal guarantees, are not included.
530
With balances past due by
90 to 180
days
180 to 270
days
270 days
to 1 year
More than
1 year
938
1,526
641
563
1,309
4,977
793
811
42
166
709
814
558
50
128
578
9,643
3,829
192
378
888
Total
18,200
8,747
2,146
2,758
4,429
2,521
2,128
14,930
36,280
With balances past due by
90 to 180
days
180 to 270
days
270 days
to 1 year
More than
1 year
508
1,783
833
481
1,059
4,664
360
877
38
145
1,131
2,551
625
654
61
158
677
2,175
7,009
3,262
242
474
1,055
12,042
Total
13,347
9,224
1,979
2,859
5,164
32,573
When classifying assets in the previous table, the main factors
considered by the Group to determine whether an asset has
become impaired are the existence of amounts past due -assets
impaired due to arrears- or other circumstances may be arise which
will not result in all contractual cash fow being recovered, such as
a deterioration of the borrower’s fnancial situation, the worsening
of its capacity to generate funds or difculties experienced by it in
accessing credit.
Past-due amounts receivable
In addition, at 31 December 2018, there were assets with amounts
receivable that were past due by 90 days or less, the detail of
which, by age of the oldest past-due amount, is as follows:
Million of euros
Loans and advances
to customers
Of which Public Sector
Total
Less
than 1
month
2,023
5
2,023
1 to 2
months
2 to 3
months
629
-
629
617
-
617
e) Securitisation
Loans and advances to customers includes, inter alia, the
securitised loans transferred to third parties on which the Group
2018 Auditors’ report and consolidated annual accounts
securitisations performed, and the balance shown as derecognised
for those years relates to securitisations performed in prior years.
The loans derecognised include assets of Santander Bank, National
Association amounting to approximately EUR 35 million at 31
December 2018 (31 December 2017: EUR 113 million; 31 December
2016: EUR 324 million) that were sold, prior to this company’s
inclusion in the Group, on the secondary market for multifamily
loans, and over which control was transferred and substantially all
the associated risks and rewards were not retained.
The loans retained on the face of the balance sheet include
the loans associated with securitisations in which the Group
retains a subordinated debt and/or grants any manner of credit
enhancements to the new holders.
The loans transferred through securitisation are mainly mortgage
loans, loans to companies and consumer loans.
has retained the risks and rewards, albeit partially, and which
therefore, in accordance with the applicable accounting standards,
cannot be derecognised. The breakdown of the securitised loans,
by type of original fnancial instrument, and of the securitised
loans derecognised because the stipulated requirements were
met (See Note 2.e) is shown below. Note 22 details the liabilities
associated with these securitisation transactions.
Million of euros
Derecognised
Of which
2018
2017
2016
47
241
477
Securitised mortgage assets*
47
241
477
Retained on the balance sheet
88,767
91,208
100,675
Of which
Securitised mortgage assets
33,900
36,844
44,311
Of which: UK assets
13,519
15,694
20,969
Other securitised assets
54,867
54,364
56,364
Total
88,814
91,449
101,152
* Of which EUR 35 million correspond to the amount of Multifamily loans of
Santander Bank, National Association.
Securitisation is used as a tool for the management of regulatory
capital and as a means of diversifying the Group’s liquidity sources.
In 2018, 2017 and 2016 the Group did not derecognise any of the
11. Trading derivatives
The detail of the notional amounts and the market values of the
trading derivatives held by the Group in 2018, 2017 and 2016 is as
follows:
Million of euros
Trading derivatives:
Interest rate risk
Forward rate agreements
Interest rate swaps
Options, futures and other derivatives
Credit risk
Credit default swaps
Foreign currency risk
2018
2017
2016
Notional
amount
Market
value
Notional
amount
Market
value
Notional
amount
Market
value
308,340
4,197,246
543,138
(1)
115
190,553
3,312,025
(514)
540,424
(15)
974
(511)
370,244
3,092,360
(64)
804
565,635
(980)
18,889
33
25,136
68
38,827
37
Foreign currency purchases and sales
Foreign currency options
Currency swaps
Securities and commodities derivatives and other
Total
275,449
54,215
334,524
59,932
5,791,733
301
2
(416)
1,078
598
236,805
43,488
295,753
70,325
4,714,509
(29)
(37)
(1,628)
529
(649)
259,336
36,965
321,316
76,523
1,102
112
(3,627)
290
4,761,206
(2,326)
531
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
12. Non-current assets
13. Investments
The detail of Non-current assets held for sale in the consolidated
balance sheets is as follows:
a) Breakdown
The detail, by company, of Investments is as follows:
Million of euros
Tangible assets
Of which:
Million of euros
2018
2017
2016
2018
2017
2016
5,424
11,661
5,743
Associated entities
Project Quasar Investment 2017 S.L.
1,701
-
-
Foreclosed assets
5,334
11,566
5,640
Merlin Properties, SOCIMI, S.A.
1,358
1,242
1,168
Of which: property assets in Spain
4,488
10,533
4,902
Metrovacesa, S.A.
1,255
-
-
Other tangible assets held for sale
Other assets*
Total**
90
2
95
3,619
103
29
Testa Residencial, SOCIMI, S.A.
Companies Zurich Santander
961
988
1,011
5,426
15,280
5,772
Allianz Popular, S.L.
Companies Santander Insurance
Other companies
Joint Ventures entities
Wizink Bank, S.A.
-
431
392
511
651
438
358
520
307
-
325
431
6,609
4,197
3,242
-
1,017
-
Unión de Créditos Inmobiliarios, S.A., EFC
202
207
177
Santander Generales Seguros y
Reaseguros, S.A. y Santander Vida
Seguros y Reaseguros, S.A. (former
Aegon Santander Seguros)
SAM Investment Holdings Limited*
Other companies
163
186
-
-
614
577
197
525
695
979
1,987
1,594
* SAM Investment Holdings Limited became part of the Group in 2017.
Of the entities included above, at 31 December 2018, the entity
Merlin Properties, SOCIMI, S.A, Metrovacesa S.A. and Compañía
Española de Viviendas en Alquiler, S.A. are the only listed
companies.
* In 2017 include, mainly, Banco Popular Español, S.A.U. assets under the
sale of the real estate business to Blackstone (see Note 3).
** In March 2018, the agreement for the operation of Popular’s real estate
business with Blackstone has materialised (see Note 3).
At 31 December 2018, the allowances recognised for the total
non-current assets held for sale represented 49% (2017: 50%
without considering the assets of Banco Popular Español, S.A.U.
sold on March 2018 and 2016: 51%). The charges recorded in those
years amounted to EUR 320 million, EUR 347 million and EUR 241
million, respectively, and the recoveries during these exercises are
amounted to EUR 61 million, EUR 41 million and EUR 29 million,
respectively.
Without taking into consideration the Blackstone agreement
already mentioned in Note 2, during 2018 the Group sold, for EUR
1,578 million, foreclosed assets with a gross carrying amount of
EUR 2,190 million, for which provisions totalling EUR 736 million
had been recognised. These sales gave rise to gains of EUR 124
million.
In addition, other tangible assets were sold for EUR 117 million,
giving rise to a gain of EUR 12 million.
532
2018 Auditors’ report and consolidated annual accounts
b) Changes
The changes in the investments were as followed:
Million of euros
Following is a summary of the fnancial information for 2018 on the
main associates and joint ventures (obtained from the information
available at the date of preparation of the fnancial statements):
2018*
6,150
2017
4,836
2016
3,251
Million of euros
Balance at beginning of year
Acquisitions (disposals)
of companies and capital
increases (reductions)
Of which:
Wizink Bank, S.A.
Allianz Popular, S.L.
Changes in the consolidation
method (Note 3)
Of which:
Quasar
Metrovacesa
Efect of equity accounting
Dividends paid and
reimbursements of share premium
Exchange diferences
and other changes
Balance at end of year
(1,761)
1,893
(72)
(1,033)
-
1,017
438
-
-
2,967
(582)
1,457
1,701
1,255
737
-
-
-
-
704
444
(404)
(376)
(305)
(101)
7,588
(291)
6,184
61
4,836
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January
2018 (Note 1.b).
c) Impairment losses
In 2018, 2017 and 2016 there was no evidence of material
impairment on the Group’s investments.
d) Other information
Following is a summary of the fnancial information on the
companies accounted for using the equity method (obtained from
the information available at the date of preparation of the fnancial
statements):
Million of euros
Total assets
Total liabilities
Net assets
Group's share of net assets
Goodwill
Of which:
Companies Zurich Santander
Wizink Bank, S.A.
Allianz Popular, S.L.
Companies Santander Insurance
Total Group share
Total income
Total proft
Group's share of proft
2018
2017
2016
74,765
(58,153)
16,612
63,093
(51,242)
11,851
55,791
(45,623)
10,168
6,157
1,431
4,194
1,990
3,381
1,455
526
-
347
205
7,588
12,174
1,867
737
526
553
347
205
6,184
12,536
1,699
704
526
-
-
205
4,836
11,766
984
444
Total
assets
Total
liabilities
Total
income
Total
proft
21,934
20,324
4,301
334
12,105
11,701
351
7
Joint Ventures
entities
Of which:
Unión de Créditos
Inmobiliarios,
S.A., EFC
Santander
Generales
Seguros y
Reaseguros,
S.A. y Santander
Vida Seguros
y Reaseguros,
S.A. (former
Aegon Santander
Seguros)
Of which:
Companies
Santander Zurich
Allianz
Popular, S.L.
Companies
Santander
Insurance
Associated entities
52,831
37,829
7,873
132
84
122
15
1,533
402
113
13,805
12,915
4,143
3,238
3,028
113
2,276
1,899
822
77
Total
74,765
58,153
12,174
1,867
533
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
14. Insurance contracts linked to pensions
The detail of Insurance contracts linked to pensions in the
consolidated balance sheets is as follows:
Million of euros
Assets relating to insurance
contracts covering post-employment
beneft plan obligations:
Banco Santander, S.A.
2018
2017
2016
210
210
239
239
269
269
15. Liabilities and assets under insurance
contracts and reinsurance assets
The detail of Liabilities under insurance contracts and reinsurance
assets in the consolidated balance sheets (See Note 2.j) is as
follows:
reinsurance Reinsurance
Total
(balance
ceded payable)
2018
2017
2016
Direct
insurance
and
reinsurance
assumed
Reinsurance
ceded
Total
(balance
payable)
Direct
insurance
and
reinsurance
assumed
Reinsurance
ceded
Total
(balance
payable)
52
227
140
87
397
20
69
765
(47)
(163)
(127)
(36)
(86)
(9)
(19)
(324)
5
64
13
51
311
11
50
441
50
483
100
383
423
29
132
1.117
(41)
(151)
9
332
(96)
4
(55)
328
(115)
308
(11)
(23)
(341)
18
109
776
Direct
insurance
and
assumed
61
159
76
83
358
19
55
652
(46)
(138)
(76)
(62)
15
21
-
21
(98)
260
(8)
11
(41)
(331)
14
321
Million of euros
Technical
provisions for:
Unearned
premiums and
unexpired risks
Life insurance
Unearned
premiums
and risks
Mathematical
provisions
Claims
outstanding
Bonuses and
rebates
Other technical
provisions
534
2018 Auditors’ report and consolidated annual accounts
16. Tangible assets
a) Changes
The changes in Tangible assets in the consolidated balance sheets
were as follows:
Million of euros
For own
use
Leased
out under an
operating lease
Investment
property
Total
Cost:
Balances at 1 January 2016
Additions / disposals (net) due to change
in the scope of consolidation*
Additions / disposals (net)
Transfers, exchange diferences and other items
Balances at 31 December 2016
Additions / disposals (net) due to change
in the scope of consolidation
Additions / disposals (net)
Transfers, exchange diferences and other items
Balances at 31 December 2017
Additions / disposals (net) due to change
in the scope of consolidation
Additions / disposals (net)
Transfers, exchange diferences and other items
Balances at 31 December 2018
Accumulated depreciation:
Balances at 1 January 2016
Disposals due to change in the scope of Consolidation
Disposals
Charge for the year
Transfers, exchange diferences and other items
Balances at 31 December 2016
Disposals due to change in the scope of Consolidation
Disposals
Charge for the year
Transfers, exchange diferences and other items
Balances at 31 December 2017
Disposals due to change in the scope of consolidation
Disposals
Charge for the year
Transfers, exchange diferences and other items
Balances at 31 December 2018
17,442
(17)
763
(76)
18,112
1,740
781
(1,357)
19,276
34
589
(1,164)
18,735
14,921
287
2,380
650
18,238
205
2,445
(2,215)
18,673
44
5,545
825
25,087
(9,448)
(3,376)
5
311
(1,079)
-
(10,211)
-
478
(1,165)
(22)
(10,920)
(12)
629
(1,159)
938
(10,524)
(3)
457
-
(2,247)
(5,169)
-
639
-
(1,574)
(6,104)
(34)
413
-
(2,679)
(8,404)
7,345
39,708
(4,278)
(64)
462
3,465
-
(100)
(223)
3,142
(630)
(182)
48
2,378
(284)
121
29
(10)
(53)
(197)
-
8
(25)
25
(189)
-
17
(13)
(14)
(4,008)
3,079
1,036
39,815
1,945
3,126
(3,795)
41,091
(552)
5,952
(291)
46,200
(13,108)
123
797
(1,089)
(2,300)
(15,577)
-
1,125
(1,190)
(1,571)
(17,213)
(46)
1,059
(1,172)
(1,755)
(199)
(19,127)
535
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix Million of euros
Impairment losses:
Balances at 1 January 2016
Impairment charge for the year
Releases
Disposals due to change in the scope of Consolidation
Exchange diferences and other
Balances at 31 December 2016
Impairment charge for the year
Releases
Disposals due to change in the scope of Consolidation
Exchange diferences and other
Balances at 31 December 2017
Impairment charge for the year
Releases
Disposals due to change in the scope of Consolidation
Exchange diferences and other
Balances at 31 December 2018
Tangible assets, net:
Balances at 31 December 2016*
Balances at 31 December 2017
Balances at 31 December 2018
For own
use
Leased out
under an
operating
lease
Investment
property
(1,076)
(62)
60
309
17
(752)
(21)
3
(1)
142
(629)
(8)
5
-
16
Total
(1,280)
(117)
62
310
73
(952)
(79)
7
(3)
123
(904)
(94)
11
-
71
(159)
(43)
1
-
42
(159)
(42)
-
(2)
5
(198)
(56)
-
-
15
(239)
(616)
(916)
(45)
(12)
1
1
14
(41)
(16)
4
-
(24)
(77)
(30)
6
-
40
(61)
7,860
8,279
8,150
12,910
12,371
16,444
2,516
2,324
1,563
23,286
22,974
26,157
* The decreases in 2016 in Tangible assets - Investment property was due to the separation and deconsolidation of Metrovacesa, S.A. (See Note 3).
536
2018 Auditors’ report and consolidated annual accounts
Cost
5,713
5,225
6,963
211
18,112
5,892
5,608
7,213
563
19,276
6,127
5,605
6,686
317
18,735
Accumulated
depreciation
Impairment
losses
Carrying
amount
(1,967)
(4,161)
(4,023)
(60)
(10,211)
(2,014)
(4,422)
(4,391)
(93)
(10,920)
(2,056)
(4,455)
(3,946)
(67)
(10,524)
(41)
-
-
-
(41)
(77)
-
-
-
(77)
(61)
-
-
-
(61)
3,705
1,064
2,940
151
7,860
3,801
1,186
2,822
470
8,279
4,010
1,150
2,740
250
8,150
b) Tangible assets for own use
The detail, by class of asset, of Tangible assets - For own use in the
consolidated balance sheets is as follows:
Million of euros
Land and buildings
IT equipment and fxtures
Furniture and vehicles
Construction in progress and other items
Balances at 31 December 2016
Land and buildings
IT equipment and fxtures
Furniture and vehicles
Construction in progress and other items
Balances at 31 December 2017
Land and buildings
IT equipment and fxtures
Furniture and vehicles
Construction in progress and other items
Balances at 31 December 2018
The carrying amount at 31 December 2018 in the foregoing table
includes the following approximate amounts EUR 5,390 million (31
December 2017: EUR 5,455 million; 31 December 2016: EUR 5,906
million) relating to property, plant and equipment owned by Group
entities and branches located abroad.
c) Investment property
The fair value of investment property at 31 December 2018
amounted to EUR 1,825 million (2017: EUR 2,435 million; 2016:
EUR 2,583 million). A comparison of the fair value of investment
property at 31 December 2018, with the net book value shows
gross unrealised gains of EUR 262 million (2017: EUR 128 million
and 2016: EUR 67 million), attributed completely to the group.
The rental income earned from investment property and the direct
costs related both to investment properties that generated rental
income in 2018, 2017 and 2016 and to investment properties that
did not generate rental income in those years are not material in
the context of the consolidated fnancial statements.
537
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
17. Intangible assets – Goodwill
The detail of goodwill, based on the cash-generating units giving
rise thereto, is as follows:
Million of euros
Santander UK
Banco Santander (Brasil)
Santander Bank Polska
Santander Consumer USA
Santander Bank, National
Association
Santander Consumer Germany
SAM Investment Holdings Limited
Santander Portugal
Santander España*
Banco Santander - Chile
Santander Consumer Nordics
Grupo Financiero
Santander (Mexico)
Other companies
Total goodwill
2018
8,307
4,459
2,402
2,102
1,793
1,217
1,173
1,040
1,023
627
502
434
387
2017
2016
8,375
8,679
4,988
2,473
2,007
1,712
1,217
1,173
5,769
2,342
3,182
1,948
1,217
-
1,040
1,040
648
676
518
413
529
371
704
537
449
486
25,466
25,769
26,724
* Includes mainly goodwill arising from purchases of Popular’s network and
Wizink’s card business.
The changes in goodwill were as follows:
Million of euros
Balance at beginning of year
25,769
26,724
26,960
2018
2017
2016
The Group has goodwill generated by cash-generating units
located in non-euro currency countries (mainly the UK, Brazil,
the United States, Poland, Chile, Norway, Sweden and Mexico)
and, therefore, this gives rise to exchange diferences on the
translation to euros, at closing rates, of the amounts of goodwill
denominated in foreign currencies. Accordingly, in 2018 there was
an increase in goodwill, mainly due to the purchase of the card
businesses from Wizink Bank, S.A. (the increase in 2017 is due to
the purchase of Banco Popular Español, S.A.U) and a decreased by
EUR 556 million (EUR 1,704 and 185 million in 2017 y 2016) due to
exchange diferences which, pursuant to current standards, were
recognised with a debit to Other comprehensive income - Items
that may be reclassifed to proft or loss - Exchange diferences
in other comprehensive income in the consolidated statement of
recognised income and expense (see Note 29.d).
At least once per year (or whenever there is any indication of
impairment), the Group reviews goodwill for impairment (i.e. a
potential reduction in its recoverable value to below its carrying
amount). The frst step that must be taken in order to perform this
analysis is the identifcation of the cash-generating units, i.e. the
Group’s smallest identifable groups of assets that generate cash
infows that are largely independent of the cash infows from other
assets or groups of assets.
The amount to be recovered of each cash-generating unit is
determined taking into consideration the carrying amount
(including any fair value adjustment arising on the business
combination) of all the assets and liabilities of all the independent
legal entities composing the cash-generating unit, together with
the related goodwill.
The amount to be recovered of the cash-generating unit is
compared with its recoverable amount in order to determine
whether there is any impairment.
Additions (Note 3)
383
1,644
-
-
-
(50)
-
(2)
The Group’s directors assess the existence of any indication
that might be considered to be evidence of impairment of the
cash-generating unit by reviewing information including the
following: (i) certain macroeconomic variables that might afect
its investments (population data, political situation, economic
situation -including banking concentration level-, among
others) and (ii) various microeconomic variables comparing the
investments of the Group with the fnancial services industry of
the country in which the cash-generating unit carries on most of its
business activities (balance sheet composition, total funds under
management, results, efciency ratio, capital adequacy ratio,
return on equity, among others).
Regardless of whether there is any indication of impairment,
every year the Group calculates the recoverable amount of each
cash-generating unit to which goodwill has been allocated and, to
this end, it uses price quotations, if available, market references
(multiples), internal estimates and appraisals performed by
independent experts.
Of which:
SAM Investment
Holdings Limited
Santander España
Impairment losses
Of which:
Santander Consumer USA
Disposals or changes in
scope of consolidation
Exchange diferences
and other items
-
375
-
-
1,173
248
(899)
(799)
(130)
-
(556)
(1,700)
(184)
Balance at end of year
25,466
25,769
26,724
538
2018 Auditors’ report and consolidated annual accounts
Firstly, the Group determines the recoverable amount by
calculating the fair value of each cash-generating unit on the basis
of the quoted price of the cash-generating units, if available, and of
the Price Earnings Ratio of comparable local entities.
In addition, the Group performs estimates of the recoverable
amounts of certain cash-generating units by calculating their
value in use using discounted cash fow projections. The main
assumptions used in this calculation are: (i) earnings projections
based on the fnancial budgets approved by the Group’s directors
which cover between three and fve year period (unless a longer
time horizon can be justifed), (ii) discount rates determined as the
cost of capital taking into account the risk-free rate of return plus
a risk premium in line with the market and the business in which
the units operate and (iii) constant growth rates used in order
to extrapolate earnings in perpetuity which do not exceed the
long-term average growth rate for the market in which the cash-
generating unit in question operates.
The cash fow projections used by Group management to obtain
the values in use are based on the fnancial budgets approved by
both local management of the related local units and the Group’s
directors. The Group’s budgetary estimation process is common
for all the cash-generating units. The local management teams
prepare their budgets using the following key assumptions:
a) Microeconomic variables of the cash-generating unit:
management takes into consideration the current balance sheet
structure, the product mix on ofer and the business decisions
taken by local management in this regard.
b) Macroeconomic variables: growth is estimated on the basis of
the changing environment, taking into consideration expected
GDP growth in the unit’s geographical location and forecast
trends in interest and exchange rates. These data, which are
based on external information sources, are provided by the
Group’s economic research service.
Projected
period
Discount
rate*
Nominal
perpetual
growth rate
5 years
8.4%
2.5%
3 years
11.1%
1.5%
3 years
10.6%
3.8%
5 years
8.5%
2.5%
5 years
5 years
9.6%
9.6%
2.5%
2.0%
5 years
9.2%
2.5%
Santander UK
Santander
Consumer USA
Santander Bank,
National Association
Santander Consumer
Germany
SAM Investment
Holdings Limited
Santander Portugal
Santander Consumer
Nordics
* Post-tax discount rate.
Given the degree of uncertainty of these assumptions, the Group
performs a sensitivity analysis thereof using reasonable changes
in the key assumptions on which the recoverable amount of the
cash-generating units is based in order to confrm whether their
recoverable amount still exceeds their carrying amount. The
sensitivity analysis involved adjusting the discount rate by +/- 50
basis points and the perpetuity growth rate by +/-50 basis points.
Following the sensitivity analysis performed, the value in use of all
the cash-generating units still exceeds their recoverable amount,
albeit:
• In the case of Santander Consumer USA, the Group recognised in
2017 a goodwill impairment amounting to EUR (799) million. The
mentioned impairment was estimated considering the decrease
in the entity’s proft in contrast with the forecasts carried out
in the previous years, derived from a change in the long term
business strategy.
• As disclosed in note 1.h, the recent political events as
c) Past performance variables: in addition, management takes into
consideration in the projection the diference (both positive and
negative) between the cash-generating unit’s past performance
and that of the market.
consequence of UK intention to leave the European Union are
producing economic volatility that has unfavourably afected the
assumptions included in the Santander UK value in use estimate.
This value is close to the recoverable amount.
Following is a detail of the main assumptions used in determining
the recoverable amount, at 2018 year-end, of the most signifcant
cash-generating units which were valued using the discounted
cash fow method:
The recoverable amount of Santander Bank Polska (former Bank
Zachodni WBK S.A.), Banco Santander - Chile, Grupo Financiero
Santander (México) and Banco Santander (Brasil) was calculated
as the fair values of the aforementioned cash-generating units
obtained from the market prices of their shares at year-end. This
value exceeded the recoverable amount.
Based on the above, and in accordance with the estimates,
forecasts and sensibility analysis available for the managers of
the Bank, during 2018 the Group has not recognised goodwill
impairment losses within Impairment losses on other assets (net)
- Goodwill and other intangible assets caption (EUR 899 and 50
million during 2017 and 2016, respectively).
539
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
18. Intangible assets - Other
intangible assets
The detail of Intangible assets - Other intangible assets in the
consolidated balance sheets and of the changes therein in 2018,
2017, and 2016 is as follows:
Estimated
useful life
31 December
2017
Net
additions
and
disposals
Change in
scope of
consolidation
Amortisation
and impairment
Application of
amortisation
and impairment
Exchange
diferences
and other
31 December
2018
35
-
6,945
1,560
(5,386)
(4,721)
(665)
(240)
-
-
1,468
1
-
-
-
-
-
-
-
1
12
(1)
(1)
-
-
-
-
(1,253)
(1,153)
(100)
(117)
(118)
1
2,914
1,469
12
(1,370)
-
1
36
(1,102)
(50)
1,035
985
50
117
-
-
-
(178)
(13)
173
147
26
86
-
-
69
7,134
1,510
(5,432)
(4,743)
(689)
(154)
-
-
3,094
Estimated
useful life
31 December
2016
Net
additions
and
disposals
Change in
scope of
consolidation
Amortisation
and impairment
Application of
amortisation
and impairment
Exchange
diferences
and other
31 December
2017
39
-
-
6,558
1,245
(4,848)
(4,240)
(608)
(297)
-
1,470
68
-
-
-
-
-
42
436
(64)
(14)
(50)
-
-
2,697
1,538
414
-
-
-
(1,403)
(1,310)
(93)
(174)
(174)
(1,577)
-
(4)
35
(679)
(126)
694
627
67
111
-
-
(446)
(63)
235
216
19
120
-
(158)
6,945
1,560
(5,386)
(4,721)
(665)
(240)
-
2,914
IT developments
3-7 years
Million of euros
With indefnite
useful life:
Brand names
With fnite
useful life:
Other
Accumulated
amortisation
Development
Other
Impairment
losses
Of which:
addition
liberation
Million of euros
With indefnite
useful life:
Brand names
With fnite
useful life:
IT developments
3-7 years
Other
Accumulated
amortisation
Development
Other
Impairment
losses
Of which:
addition
540
2018 Auditors’ report and consolidated annual accounts
Million of euros
With indefnite
useful life:
Brand names
With fnite
useful life:
IT developments
3-7 years
Other
Accumulated
amortisation
Development
Other
Impairment
losses
Of which:
addition
Estimated
useful life
31 December
2015
Net
additions
and
disposals
Change in
scope of
Application of
amortisation
Amortisation
consolidation and impairment and impairment
Exchange
diferences
and other
31 December
2016
49
1
5,411
1,306
(3,873)
(3,353)
(520)
(423)
-
1,726
41
-
-
-
-
-
-
-
(124)
-
-
-
-
-
-
-
-
(1,275)
(1,168)
(107)
(11)
(11)
2,470
1,768
(124)
(1,286)
(11)
-
39
(890)
-
716
716
-
185
-
-
311
22
(416)
(435)
19
(48)
-
(131)
6,558
1,245
(4,848)
(4,240)
(608)
(297)
-
2,697
In 2018, 2017 and 2016, impairment losses of EUR 117, EUR 174 and
EUR 11 million, respectively, were recognised under Impairment
or reversal of impairment on non-fnancial assets, net – intangible
assets. This impairment losses related mainly to the decline in
or loss of the recoverable value of certain computer systems and
applications as a result of the processes initiated by the Group
to adapt to the various regulatory changes and to transform or
integrate businesses.
19. Other assets
The detail of Other assets is as follows:
Million of euros
Transactions in transit
Net pension plan assets (Note 25)
2018
143
1,015
2017
2016
206
604
431
521
Prepayments and accrued income
3,089
2,326
2,232
Other
4,744
4,427
3,878
8,991
7,563
7,062
541
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
20. Deposits from central banks
and credit institutions
Note 51 contains a detail of the residual maturity periods of
fnancial liabilities at amortised cost and of the related average
interest rates.
The detail, by classifcation, counterparty, type and currency, of
Deposits from central banks and Deposits from credit institutions
in the consolidated balance sheets is as follows:
21. Customer deposits
2018
2017
2016
The detail, by classifcation, geographical area and type, of
Customer deposits is as follows:
Million of euros
CENTRAL BANKS
Classifcation:
Financial liabilities
held for trading
-
282
1,351
Financial liabilities designated at
fair value through proft or loss
14,816
8,860
9,112
Financial liabilities at
amortised cost
Type:
72,523
71,414
44,112
87,339
80,556
54,575
Deposits on demand
5
5
5
Time deposits
82,797
78,801
46,278
Reverse repurchase agreements
4,537
1,750
8,292
87,339
80,556
54,575
Million of euros
Classifcation:
Financial liabilities
held for trading*
2018
2017
2016
-
28,179
9,996
Financial liabilities designated at
fair value through proft or loss.
39,597
28,945
23,345
Financial liabilities at
amortised cost
Geographical area:
Spain
740,899
720,606
657,770
780,496
777,730
691,111
267,210
260,181
181,888
European Union (excluding Spain)
309,615
318,580
295,059
United States and Puerto Rico
53,843
50,771
63,429
Other OECD countries
67,462
62,980
62,761
Latin America (non-OECD)
82,343
84,752
87,519
CREDIT INSTITUTIONS
Classifcation:
Financial liabilities
held for trading
Financial liabilities designated at
fair value through proft or loss
Financial liabilities at
amortised cost
Type:
-
292
44
Rest of the world
23
466
455
780,496
777,730
691,111
10,891
18,166
5,015
Type:
89,679
91,300
89,764
100,570
109,758
94,823
Demand deposits-
Current accounts
Savings accounts
346,345
328,217
279,494
196,493
189,845
180,611
Other demand deposits
5,873
7,010
7,156
Deposits on demand
6,154
6,444
4,220
Time deposits
53,421
54,159
61,321
Reverse repurchase agreements
40,873
49,049
29,277
Time deposits-
Fixed-term deposits and
other term deposits
Subordinated deposits
122
106
5
Home-purchase savings accounts
100,570
109,758
94,823
Discount deposits
195,540
195,285
176,581
40
3
45
3
50
448
Currency:
Euro
Pound sterling
US dollar
Brazilian real
Other currencies
TOTAL
97,323
119,606
74,746
19,301
14,820
12,237
45,848
33,259
40,514
18,657
16,485
16,537
Hybrid fnancial liabilities
3,419
4,295
3,986
Subordinated liabilities
23
21
24
Repurchase agreements
32,760
53,009
42,761
780,496
777,730
691,111
* The decrease refects the run-down of UK’s trading business due to the
6,780
6,144
5,364
banking reform (Ring-fencing).
187,909
190,314
149,398
Note 51 contains a detail of the residual maturity periods of
fnancial liabilities at amortised cost and of the related average
interest rates.
The increase in Deposits from central banks measured at
amortised cost mainly relates to the Grupo Banco Popular
acquisition in 2017 and the Group’s participation in the last years
in the European Central Bank’s targeted longer-term refnancing
operations (LTRO (Long-Term Refnancing Operation) and TLTROs
(Targeted Long-Term Refnancing Operation)) which amounts to
EUR 55,382 million at 31 December 2018.
542
2018 Auditors’ report and consolidated annual accounts
22. Marketable debt securities
a) Breakdown
The detail, by classifcation and type, of Marketable debt securities
is as follows:
Million of euros
Classifcation:
2018
2017
2016
Financial liabilities held for trading
-
-
-
Financial liabilities designated at
fair value through proft or loss
Financial liabilities at
amortised cost
Type:
Bonds and debentures
outstanding
Subordinated
Notes and other securities
2,305
3,056
2,791
244,314
214,910
226,078
246,619
217,966
228,869
195,498
176,719
183,278
23,676
21,382
27,445
19,865
19,873
25,718
246,619
217,966
228,869
The breakdown of book value by maturity of the subordinated
liabilities and Bonds and debentures outstanding at 31 December
2018:
Million of euros
Subordinated Liabilities
Covered bonds
Other bonds and debentures
Total bonds and debentures outstanding
Total bonds and debentures outstanding
and subordinated liabilities
Within 1 year
1 to 3 years
3 to 5 years
580
16,009
21,492
37,501
129
29,105
41,858
70,963
1,341
12,287
24,873
37,160
More than
5 years
21,626
28,035
21,839
Total
23,676
85,436
110,062
49,874
195,498
38,081
71,092
38,501
71,500
219,174
Note 51 contains a detail of the residual maturity periods of
fnancial liabilities at amortised cost and of the related average
interest rates in those years.
b) Bonds and debentures outstanding
The detail, by currency of issue, of Bonds and debentures
outstanding is as follows:
Currency of issue
Euro
US dollar
Pound sterling
Brazilian real
Chilean peso
Other currencies
Balance at end of year
Million of euros
2017
83,321
48,688
13,279
17,309
5,876
8,246
176,719
2018
85,479
62,021
16,616
15,778
6,460
9,144
195,498
31 December 2018
Outstanding issue amount
in foreign currency
(Million)
Annual
interest
rate (%)
85,479
71,014
1.25%
3.14%
14,864
2.40%
70,117
5.53%
5,133,310
5.00%
2016
77,231
48,134
15,098
27,152
6,592
9,070
183,278
543
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The changes in Bonds and debentures outstanding were as
follows:
Million of euros
Balance at beginning of year
Net inclusion of entities in the Group
Of which:
Banco Santander, S.A. (Group Banco Popular)
Banca PSA Italia S.P.A.
PSA Bank Deutschland GmbH
Issues
Of which:
Banco Santander (Brasil) S.A.
Santander Consumer USA Holdings Inc.
Grupo Santander UK
Banco Santander, S.A. *
Santander Consumer Finance, S.A.
Banco Santander - Chile.
Santander Consumer Bank A.S.
Santander Holdings USA, Inc.
PSA Banque France
Banco Santander México, S.A., Institución de Banca
Múltiple, Grupo Financiero Santander México
Santander Consumer Bank AG
PSA Financial Services Spain, EFC, SA
SCF Rahoituspalvelut KIMI VI DAC
Auto ABS French Lease Master Compartiment 2016
Banco Santander Totta, S.A.
Redemptions and repurchases
Of which:
Banco Santander (Brasil) S.A.
Santander Consumer USA Holdings Inc.
Santander Group UK
Banco Santander, S.A.*
Santander Consumer Finance, S.A.
Santander Consumer Bank AS
Santander Holdings USA, Inc.
Banca PSA Italia S.p.A.
Banco Santander México, S.A., Institución de Banca
Múltiple, Grupo Financiero Santander México
Santander International Products, Plc.
Banco Santander- Chile
Banco Santander Totta, S.A.
Santander Bank, National Association
Exchange diferences and other movements
Balance at year-end
* As of 31 December 2017 and 2016, issuer entities were included.
544
2018
176,719
-
-
-
-
2017
183,278
11,426
11,426
-
-
2016
182,073
1,009
-
500
497
68,306
62,260
57,012
16,422
15,627
14,984
7,683
3,605
1,483
1,342
1,210
716
560
-
-
-
-
-
16,732
11,242
7,625
10,712
2,508
579
1,117
4,133
1,032
118
749
-
635
-
1,999
7,699
11,699
12,815
6,385
4,567
3,363
1,537
2,798
-
1,840
-
726
-
635
-
(48,319)
(66,871)
(59,036)
(14,802)
(11,939)
(6,800)
(4,752)
(2,366)
(1,268)
(903)
(600)
(579)
(491)
(204)
(41)
-
(1,208)
195,498
(23,187)
(10,264)
(13,303)
(9,956)
(1,618)
(337)
(759)
-
(224)
(310)
(1,442)
(998)
(886)
(13,374)
176,719
(7,579)
(11,166)
(13,163)
(12,837)
(4,117)
(710)
(1,786)
-
(1,453)
(332)
(516)
(856)
-
2,219
183,278
2018 Auditors’ report and consolidated annual accounts
c) Notes and other securities
These notes were issued basically by Santander Consumer Finance,
S.A.; Santander UK plc; Banco Santander México, S.A. Institución
de Banca Múltiple, Grupo Financiero Santander México and Banco
Santander, S.A.
The fair value of the guarantees received by the Group (fnancial
and non-fnancial assets) which the Group is authorised to sell
or pledge even if the owner of the guarantee has not defaulted
is scantly material taking into account the Consolidated fnancial
statements as a whole.
d) Guarantees
Set forth below is information on the liabilities secured by fnancial
assets:
Million of euros
2018
2017
2016
Asset-backed securities
38,140
32,505
38,825
Of which, mortgage-
backed securities
5,197
4,034
8,561
Other mortgage securities
46,026
52,497
44,616
Of which: mortgage-backed bonds
22,023
23,907
16,965
Territorial covered bond
1,270
1,270
592
85,436
86,272
84,033
The main characteristics of the assets securing the aforementioned
fnancial liabilities are as follows:
1. Asset-backed securities:
a. Mortgage-backed securities- these securities are secured
by securitised mortgage assets (see Note 10.e) with average
maturities of more than ten years that must: be a frst
mortgage for acquisition of principal or second residence,
be current in payments, have a loan-to-value ratio below
80% and have a liability insurance policy in force covering at
least the appraisal value. The value of the fnancial liabilities
broken down in the foregoing table is lower than the balance
of the assets securing them - securitised assets retained on
the balance sheet - mainly because the Group repurchases
a portion of the bonds issued, and in such cases they are not
recognised on the liability side of the consolidated balance
sheet.
b. Other asset - backed securities - including asset-backed
securities and notes issued by special-purpose vehicles
secured mainly by mortgage loans that do not meet the
foregoing requirements and other loans (mainly personal
loans with average maturities of fve years and loans to SMEs
with average maturities of seven years).
2. Other mortgage securities include mainly: (i) mortgage-backed
bonds with average maturities of more than ten years that are
secured by a portfolio of mortgage loans and credits (included
in secured loans - see Note 10.b) which must: not be classifed
as of procedural stage; have available appraisals performed
by specialised entities; have a loan-to-value (LTV) ratio below
80% in the case of home loans and below 60% for loans for
other assets and have sufcient liability insurance, (ii) other debt
securities issued as part of the Group’s liquidity strategy in the
UK, mainly covered bonds in the UK secured by mortgage loans
and other assets.
e) Spanish mortgage-market issues
The members of the board of directors hereby state that the Group
entities operating in the Spanish mortgage-market issues area
have established and implemented specifc policies and procedures
to cover all activities carried on and guarantee strict compliance
with mortgage-market regulations applicable to these activities as
provided for in Royal Decree 716/2009, of 24 April implementing
certain provisions of Mortgage Market Law 2/1981, of 25 March,
and, by application thereof, in Bank of Spain Circulars 7/2010 and
5/2011, and other fnancial and mortgage system regulations. Also,
fnancial management defnes the Group entities’ funding strategy.
The risk policies applicable to mortgage market transactions
envisage maximum loan-to-value (LTV) ratios, and specifc policies
are also in place adapted to each mortgage product, which
occasionally require the application of stricter limits.
The Bank’s general policies in this respect require the repayment
capacity of each potential customer (the efort ratio in loan
approval) to be analysed using specifc indicators that must be met.
This analysis must determine whether each customer’s income
is sufcient to meet the repayments of the loan requested. In
addition, the analysis of each customer must include a conclusion
on the stability over time of the customer’s income considered with
respect to the life of the loan. The aforementioned indicator used
to measure the repayment capacity (efort ratio) of each potential
customer takes into account mainly the relationship between the
potential debt and the income generated, considering on the one
hand the monthly repayments of the loan requested and other
transactions and, on the other, the monthly salary income and duly
supported income.
The Group entities have specialised document comparison
procedures and tools for verifying customer information and
solvency (see Note 54).
The Group entities’ procedures envisage that each mortgage
originated in the mortgage market must be individually valued by
an appraisal company not related to the Group.
In accordance with Article 5 of Mortgage Market Law 41/2007,
any appraisal company approved by the Bank of Spain may issue
valid appraisal reports. However, as permitted by this same
article, the Group entities perform several checks and select,
from among these companies, a small group with which they
enter into cooperation agreements with special conditions
and automated control mechanisms. The Group’s internal
regulations specify, in detail, each of the internally approved
companies, as well as the approval requirements and procedures
and the controls established to uphold them. In this connection,
the regulations establish the functions of an appraisal company
committee on which the various areas of the Group related to
these companies are represented. The aim of the committee is
545
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
to regulate and adapt the internal regulations and the activities
of the appraisal companies to the current market and business
situation (See note 2.i).
Basically, the companies wishing to cooperate with the Group must
have a signifcant level of activity in the mortgage market in the
area in which they operate, they must pass a preliminary screening
process based on criteria of independence, technical capacity and
solvency -in order to ascertain the continuity of their business- and,
lastly, they must pass a series of tests prior to obtaining defnitive
approval.
In order to comply in full with the legislation, any appraisal
provided by the customer is reviewed, irrespective of which
appraisal company issues it, to check that the requirements,
procedures and methods used to prepare it are formally adapted to
the valued asset pursuant to current legislation and that the values
reported are customary in the market.
The information required by Bank of Spain Circulars 7/2010 and
5/2011, by application of Royal Decree 716/2009, of April 24 is as
follows:
Million of euros
2018
2017
2016
Face value of the outstanding
mortgage loans and credits that
support the issuance of mortgage-
backed and mortgage bonds
pursuant to Royal Decree 716/2009
(excluding securitised bonds)
Of which:
Loans eligible to cover issues of
mortgage-backed securities
Transfers of assets retained
on balance sheet: mortgage-
backed certifcates and other
securitised mortgage assets
85,610
91,094
56,871
60,195
59,422
38,426
15,807
18,202
19,509
Mortgage-backed bonds
The mortgage-backed bonds (“cédulas hipotecarias”) issued by
the Group entities are securities the principal and interest of which
are specifcally secured by mortgages, there being no need for
registration in the property register, by mortgage on all those
that at any time are recorded in favour of the issuer and are not
afected by the issuance of mortgage bonds and / or are subject to
mortgage participations, and / or mortgage transfer certifcates,
and, if they exist, by substitution assets eligible to be hedged
and for the economic fows generated by derivative fnancial
instruments linked to each issue, and without prejudice to the
issuer’s unlimited liability.
The mortgage bonds include the credit right of its holder against
the issuing entity, guaranteeing in the manner provided for in the
previous paragraph, and involve the execution to claim from the
issuer the payment after due date. The holders of these securities
are recognised as preferred creditors, singularly privileged, with
the preference, included in number 3º of article 1,923 of the
Spanish Civil Code against any other creditor, in relation with the
entire group of loans and mortgage loans registered in favour of
the issuer, except those that act as coverage for mortgage bonds
and / or are subject to mortgage participations and / or mortgage
transfer certifcates.
In the event of insolvency, the holders of mortgage-backed
bonds will enjoy the special privilege established in Article 90.1.1
of Insolvency Law 22/2003, of 9 July. Without prejudice to the
foregoing, in accordance with Article 84.2.7 of the Insolvency Law,
during the insolvency proceedings, the payments relating to the
repayment of the principal and interest of the bonds issued and
outstanding at the date of the insolvency fling will be settled up
to the amount of the income received by the insolvent party from
the mortgage loans and credits and, where appropriate, from the
replacement assets backing the bonds and from the cash fows
generated by the fnancial instruments associated with the issues
(Final Provision 19 of the Insolvency Law).
If, due to a timing mismatch, the income received by the insolvent
party is insufcient to meet the payments described in the
preceding paragraph, the insolvency managers must settle them
by realising the replacement assets set aside to cover the issue
and, if this is not sufcient, they must obtain fnancing to meet
the mandated payments to the holders of the mortgage-backed
bonds, and the fnance provider must be subrogated to the position
of the bond-holders.
In the event that the measure indicated in Article 155.3 of the
Insolvency Law were to be adopted, the payments to all holders of
the mortgage-backed bonds issued would be made on a pro-rata
basis, irrespective of the issue dates of the bonds.
The outstanding mortgage-backed bonds issued by the Group
totalled EUR 22,023 million at 31 December 2018 (all of which
were denominated in euros), of which EUR 21,523 million were
issued by Banco Santander, S.A. and EUR 500 million were issued
by Santander Consumer Finance, S.A. The issues outstanding at
31 December 2018 and 2017 are detailed in the separate fnancial
statements of each of these companies.
Mortgage-backed bond issuers have an early redemption option
solely for the purpose of complying with the limits on the volume
of outstanding mortgage-backed bonds stipulated by mortgage
market regulations.
None of the mortgage-backed bonds issued by the Group entities
had replacement assets assigned to them.
546
2018 Auditors’ report and consolidated annual accounts
23. Subordinated liabilities
a) Breakdown
The detail, by currency of issue, of Subordinated liabilities in the
consolidated balance sheets is as follows:
Currency of issue
Euro
US dollar
Pound sterling
Brazilian real
Other currencies
Balance at end of year
Of which, preference shares
Of which, preference participations
31 December 2018
Outstanding
issue amount in
foreign currency
(million)
Annual interest
rate (%)
14,001
8,946
562
-
3.89%
5.30%
8.92%
-
Million of euros
2017
11,240
8,008
874
131
1,257
21,510
404
8,369
2018
14,001
7,813
628
-
1,378
23,820
345
9,717
2016
8,044
9,349
949
136
1,424
19,902
413
6,916
Note 51 contains a detail of the residual maturity periods of
subordinated liabilities at each year-end and of the related average
interest rates in each year.
b) Changes
The changes in Subordinated liabilities in the last three years were
as follows:
Million of euros
Balance at beginning of year
Net inclusion of entities
in the Group (Note 3)
Of which: Banco Santander,
S.A. (Grupo Banco Popular)
Placements
Of which:
Banco Santander, S.A.*
Banco Santander México,
S.A., Institución de Banca
Múltiple, Grupo Financiero
Santander México
Santander Bank Polska S.A.
PSA Banque France
Net redemptions and repurchases**
Of which:
Banco Santander, S.A.*
Santander UK plc
Santander Holdings USA, Inc.
Santander Bank,
National Association
Banco Santander México,
S.A., Institución de Banca
Múltiple, Grupo Financiero
Santander México
Banco Santander (Brasil) S.A.
Santander Consumer Finance, S.A.
Exchange diferences and
other movements
Balance at end of year
2018
2017
2016
21,510
19,902
21,153
-
11
-
-
3,283
11
2,994
-
2,395
2,750
2,894
2,328
281
235
-
(1,259)
(401)
(313)
(195)
-
-
78
(870)
(453)
(60)
(72)
59
-
-
(2,812)
(1,976)
(51)
-
(163)
(285)
-
(125)
(62)
-
-
-
-
-
(716)
(70)
286
23,820
(527)
21,510
(834)
19,902
* As of 31 December 2017 and 2016, issuer entities were included.
** The balance relating to issuances, redemptions and repurchases (EUR
2,024 million), together with the interest paid in remuneration of these
issuances including PPCC (EUR 1,245 million), is included in the cash fow
from fnancing activities.
c) Other disclosures
This item includes the preference shares (participaciones
preferentes) and other fnancial instruments issued by the
consolidated companies which, although equity for legal
purposes, do not meet the requirements for classifcation as equity
(preference shares).
The preference shares do not carry any voting rights and are non-
cumulative. They were subscribed to by non-Group third parties
and, except for the shares of Santander UK plc referred to below,
are redeemable at the discretion of the issuer, based on the terms
and conditions of each issue.
At 31 December 2018, Santander UK plc had a GBP 2,041 million
subordinated issue which is convertible (having acquired the Group
GBP 900 million), at Santander UK plc’s option, into preference
shares of Santander UK plc, at a price of GBP 1 per share.
For the purposes of payment priority, preference shares
(participaciones preferentes) are junior to all general creditors and
to subordinated deposits. The remuneration of these securities,
which have no voting rights, is conditional upon the obtainment
of sufcient distributable proft and upon the limits imposed
by Spanish banking regulations on equity. The other issues are
subordinated and, therefore, for the purposes of payment priority,
they are junior to all general creditors of the issuers.
At 31 December 2018, the following issues were convertible into
Bank shares:
On 5 March, 8 May and 2 September 2014, Banco Santander, S.A.
announced that its executive committee had resolved to launch
three issues of preference shares contingently convertible into
newly issued ordinary shares of the Bank (“CCPSs”) for a nominal
amount of EUR 1,500 million, USD 1,500 million and EUR 1,500
million, respectively. The interest on the CCPSs, payment of which
is subject to certain conditions and is discretionary, was set at
6.25% per annum for the frst fve years (to be repriced thereafter
by applying a 541 basis-point spread to the 5-year Mid-Swap Rate)
for the March issue, at 6.375% per annum for the frst fve years (to
be repriced thereafter by applying a 478.8 basis-point spread to the
5-year Mid-Swap Rate) for the May issue and at 6.25% per annum
547
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
On 20 April 2018, Santander Bank Polska S.A. carried out an issue
of subordinated obligations for a term of ten years and with an
option to amortize the ffth anniversary of the issue date, for an
amount of EUR 1,000 million Polish zlotys. The issue accrues
a foating interest of Wibor (6M) + 160 basic points payable
semiannually.
On 1 October 2018, Banco Santander México, S.A., Institución de
Banca Múltiple, Grupo Financiero Santander México it issued a
subordinated debt for a term of ten years for a nominal amount of
1,300 million US dollars and at an interest rate of 5.95%, the group
having acquired 75% of the issue.
The accrued interests from the subordinated liabilities during 2018
amounted to EUR 770 million (EUR 966 million and EUR 945 million
during 2017 and 2016, respectively). Interests from the “CCPS”
during 2018 amounted to EUR 560 million (EUR 395 million and
EUR 334 million in 2017 and 2016, respectively).
24. Other fnancial liabilities
The detail of Other fnancial liabilities in the consolidated balance
sheets is as follows:
Million of euros
Trade payables
Clearing houses
Tax collection accounts:
2018
1,323
434
2017
1,559
767
2016
1,230
676
Public Institutions
3,968
3,212
2,790
Factoring accounts payable
263
290
180
Unsettled fnancial transactions
3,373
6,375
7,418
Other fnancial liabilities
15,303
16,225
14,222
24,664
28,428
26,516
Note 51 contains a detail of the residual maturity periods of other
fnancial liabilities at each year-end.
for the frst seven years (to be repriced every fve years thereafter
by applying a 564 basis-point spread to the 5-year Mid-Swap Rate)
for the September issue.
On 25 March, 28 May, and 30 September 2014, the Bank of Spain
confrmed that the CCPSs were eligible as Additional Tier 1 capital
under the new European capital requirements of Regulation (EU)
No 575/2013. The CCPSs are perpetual, although they may be
redeemed early in certain circumstances and would convert into
newly issued ordinary shares of Banco Santander if the Common
Equity Tier 1 ratio of the Bank or its consolidated group fell below
5.125%, calculated in accordance with Regulation (EU) No 575/2013.
The CCPSs are traded on the Global Exchange Market of the Irish
Stock Exchange.
Furthermore, on 29 January 2014 Banco Santander (Brasil) S.A.
launched an issue of Tier 1 perpetual subordinated notes for a
nominal amount of USD 1,248 million, of which the Group has
acquired 89.6%. The notes are perpetual and would convert into
ordinary shares of Banco Santander (Brasil) S.A. if the common
equity Tier 1 ratio, calculated as established by the Central Bank of
Brazil, were to fall below 5.125%.
On 30 December 2016 Grupo Financiero Santander México,
S.A.B. of C.V. made an issue of perpetual subordinated notes for
a nominal amount of USD 500 million of which the Group has
acquired 88.2%. Perpetual obligations are automatically converted
into shares when the Regulatory Capital Index (CET1) is equal to or
less than 5.125% at the conversion price.
On 25 April, and 29 September 2017, Banco Santander, S.A.
issued preferred shares contingently convertible in newly issued
common shares of the Bank (the “CCPP”), for a nominal amount
of 750 million euros, and 1,000 million euros, respectively. The
remuneration of the CCPPs, whose payment is subject to certain
conditions and is also discretionary, was fxed at 6.75% annually
for the frst fve years (being reviewed thereafter by applying a
margin of 680.3 basis points over the 5-year Mid-Swap Rate) for
the issue paid out in April, and at 5.25% annually for the frst six
years (reviewed thereafter by applying a margin of 499.9 basis
points over the 5-year Mid-Swap Rate) for the issue paid out in
September.
On 8 February 2018, Banco Santander, S.A. carried out an issue
of subordinated obligations for a term of ten years, amounting to
EUR1,250 million. The issue accrues an annual interest of 2.125%
payable annually.
On 19 March, 2018, Banco Santander, S.A. carried out an issue of
contingently convertible preferred shares in common shares of
the newly issued Bank (the “PPCC”), for a nominal amount of EUR
1,500 million. The remuneration of the CCPPs, whose payment is
subject to certain conditions and is also discretionary, was fxed at
an annual 4.75%, payable quarterly, for the frst seven years (being
revised thereafter applying a margin of 410 basis points over the
type Mid-swap).
548
2018 Auditors’ report and consolidated annual accounts
25. Provisions
a) Breakdown
The detail of Provisions in the consolidated balance sheets is as
follows:
Million of euros
Provision for pensions and other obligations post-employments
Other long term employee benefts
Provisions for taxes and other legal contingencies
Provisions for contingent liabilities and commitments (Note 2)
Other provisions
Provisions
b) Changes
The changes in Provisions in the last three years were as follows:
Million of euros
2018
5,558
1,239
3,174
779
2,475
13,225
2017
6,345
1,686
3,181
617
2,660
14,489
2016
6,576
1,712
2,994
459
2,718
14,459
2018
2017
2016
i
p
s
e*
s
i
t
t
i
ln
be
m
a
i
l
g
s
nt
of
le
n
r
-
s
t e
e
n h
s
b
oa
t
pl e
o
e
r
r
ot oy
fn o
f
t
e s
m
sp
s
s
n
nm n
n
n
e
m
igm
o
oy o
o
io i
e
sno r
s
s
s
c ei
l m i
i
i
i
v
v v
v
p
t
ho
ond
o o
m
r
on
r re
r
r
Pe Pt Pca Op
r
o
f
t
i
t
l
i
l
g
s
nt
of
e
n
r
-
s
e
t
e
n
s
h
b
o
a
t
pl
o
e
p
e
r
r
r
ot oy o
n
f
f
e s
s
m
n
n
oy o
so
l
i
l
v
p
a
t om
o
T
s
n
o
s
c ei
v
o
r
r
Pe Pt Pca Op
o
l
p
m
e
s
vm vt
o
r
re
s
e
s
i
t
t
i
ln
be
m
a
i
l
t
f i
t
m
s
n
n
e
igm
o
sno r
ond
on
r
h
t
i
i
i
i
i
i
i
l
s
n
a
l
p
g
s
n
t
of
e
n
r
-
e
t
e
s
h
b
o
t
p
o
e
e
r
r
r
ot oy o
f
f
s
s
s
n
n
n
oy o
o
so
s
l
i
ei
l
v
v
p
a
ho
t o
rm
o
r
Pe Pt Pca Op
T
s
e
s
i
t
t
i
ln
be
m
a
i
l
t
f i
t
s m
n
n
e
gm
o
sno r
c
i
vt
ond
on
r
o
l
p
m
e
s
i
m i
v
o
r
r
e
n
e
m
t
i
i
i
i
i
l
a
t
o
T
6,3
45 1
,6
86
814
5,841 14,68
6
6,576
1,712
459
5,712 14,459
6,356
1,916
618 5,604 14,494
-
-
-
(30
)
(3
0)
59
184
146
1,365
1,754
11
8
(4)
13
28
38
251
(49)
2,25
3
2,4
93
237
293
(49)
2,863
3,344
227
368
(40)
2,235 2,790
165
78
21
6
-
-
-
-
18
6
84
175
82
(2
05)
7
(2
12)
224
227
(3)
(49)
455
(504)
2,25
3
2,2
23
(20)
4,61
2
5,3
01
(2,359
) (3,07
8)
2
(22)
-
-
-
-
198
88
(49)
606
2,863
3,058
3,855
4,727
(655)
(992)
(1,669)
170
73
(16)
24
(40)
31
8
329
377
(48)
-
-
-
-
201
81
(40)
2,235 2,508
226
3,024
3,651
(266)
(789)
(1,143)
(7)
(4
82)
-
-
(3
32)
(6
25)
-
(2)
(3
68)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(
7)
(7)
(48
2)
369
(95
7)
(355)
(498)
-
(260)
(
2)
-
(36
8)
(273)
-
-
-
-
-
-
-
-
-
-
-
-
(7)
(3)
369
1,275
-
-
(853)
(367)
(603)
(260)
(20)
-
(1)
(273)
(852)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3)
1,275
(970)
(20)
(1)
(852)
(2)
(2,149)
(2,151)
(3)
(2,548
)
(2,55
1)
-
(3)
(2,997)
(3,000)
-
23
6
264
264
-
-
-
-
-
-
-
Balances at
beginning of year
Incorporation of
Group companies, net
Additions charged
to income:
Interest
expense(Note 39)
Staf costs (Note 47)
Provisions or
reversion of
provisions
Addition
Release
Other additions
arising from
insurance contracts
linked to pensions
Changes in value
recognised in equity
Payments to
pensioners and pre-
retirees with a charge
to internal provisions
Benefts paid due
to settlements
Insurance
premiums paid
Payments to
external funds
Amounts used
Transfer, exchange
diferences and
other changes
Balances at
end of year
66
3
(73)
17
133
4
43
(1)
(5)
64
(1,102)
(1,044)
(50)
23
(113)
9
(131)
5,5
58
,239
1
779
5,6
49
13,225
6,345
1,686
617
5,841 14,489
6,576
1,712
459
5,712 14,459
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
549
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
c) Provision for pensions and other obligations post –
employments and Other long term employee benefts
The detail of Provisions for pensions and similar obligations is as
follows:
Million of euros
Provisions for post-employment
plans - Spanish entities
Provisions for other similar
obligations - Spanish entities
2018
2017
2016
3,930
4,274
4,701
1,189
1,643
1,664
Of which: pre-retirements
1,172
1,630
1,644
Provisions for post-employment
plans – United Kingdom
Provisions for post-employment
plans - Other subsidiaries
Provisions for other similar
obligations - Other subsidiaries
Provision for pensions and other
obligations post –employments and
Other long term employee benefts
130
323
306
1,498
1,748
1,569
50
43
48
6,797
8,031
8,288
Of which: defned benefts
6,791
8,026
8,277
i. Spanish entities - Post-employment
plans and other similar obligations
At 31 December 2018, 2017 and 2016, the Spanish entities had
post-employment beneft obligations under defned contribution
and defned beneft plans. In addition, in various years some of
the consolidated entities ofered certain of their employees the
possibility of taking pre-retirement and, therefore, provisions are
recognised each year for the obligations to employees taking pre-
retirement -in terms of salaries and other employee beneft costs-
from the date of their pre-retirement to the agreed end date. In
2017, in parallel and simultaneously, Banco Santander and Banco
Popular Español, S.A.U. reached an agreement with the workers’
representatives to implement a pre-retirement and incentivised
retirement plan, which welcomed 1,715 employees during 2018,
being the provision set up to cover these commitments of EUR
209 million. In 2017 and 2016 the provisions accounted for beneft
plans and contribution commitments were EUR 248 and 361 million
respectively.
In October 2017, the Bank and the workers’ representatives
reached an agreement for the elimination and compensation of
certain passive rights arising from extra-covenant improvement
agreements. The efect of the settlement of the mentioned
commitments is shown in the tables included below in the “beneft
paid for settlement” line.
The expenses incurred by the Spanish companies in respect of
contributions to defned contribution plans amounted to EUR 87
million in 2018 (2017: EUR 90 million; 2016: EUR 93 million).
The amount of the defned beneft obligations was determined on
the basis of the work performed by independent actuaries using
the following actuarial techniques:
1. Valuation method: projected unit credit method, which sees each
period of service as giving rise to an additional unit of beneft
entitlement and measures each unit separately.
2. Actuarial assumptions used: unbiased and mutually compatible.
Specifcally, the most signifcant actuarial assumptions used in
the calculations were as follows:
Post-employment plans
Other similar obligations
Annual discount rate
2018
1.55%
2017
1.40% and
1.38% B.
Popular
2016
1.50%
2018
1.55%
2017
1.40%
2016
1.50%
Mortality tables
PERM/F-2000
PERM/F-2000
PERM/F-2000
PERM/F-2000
PERM/F-2000
PERM/F-2000
Cumulative annual
CPI growth
Annual salary increase rate
Annual social security
pension increase rate
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
2.00%* B. Popular 1.75%
in 2018 and Rest
B. Santander
1.25%
2.00%*
N/A
N/A
N/A
1.00%
1.00%
1.00%
N/A
N/A
N/A
Annual beneft increase rate
N/A
N/A
N/A
From 0%
to 1.50%
From 0%
to 1.50%
From 0%
to 1.50%
* Corresponds to the Group’s defned-beneft obligations.
550
2018 Auditors’ report and consolidated annual accounts
The discount rate used for the fows was determined by reference
to high-quality corporate bonds (at least AA in euros) with terms
consistent with those of the obligations.
Any changes in the main assumptions could afect the calculation
of the obligations. At 31 December 2018, if the discount rate used
had been decreased or increased by 50 basis points, there would
have been an increase or decrease in the present value of the
post-employment obligations of +5.33% (-50 b.p) to -4.88% (+50
b.p.), respectively, and an increase or decrease in the present
value of the long-term obligations of +1.11% (-50 b.p.) to -1.09%
(+50 b.p.), respectively. These changes would be ofset in part
by increases or decreases in the fair value of the assets and
insurance contracts linked to pensions.
3. The estimated retirement age of each employee is the frst at
which the employee is entitled to retire or the agreed-upon age,
as appropriate.
The fair value of insurance contracts was determined as the
present value of the related payment obligations, taking into
account the following assumptions:
Expected rate of return on
plan assets
Expected rate of return on
reimbursement rights
Post-employment plans
Other similar obligations
2018
2017
2016
2018
2017
2016
1.55%
1.40%
1.55%
1.40%
1.50%
1.50%
1.55%
1.40%
N/A
N/A
N/A
N/A
The funding status of the defned beneft obligations in 2018 and
the four preceding years is as follows:
Million of euros
Post-employment plans
Other similar obligations
2018
2017
2016
2015
2014
2018
2017
2016
2015
2014
Present value of the obligations:
To current employees
Vested obligations to
retired employees
To pre-retirees employees
Long-service bonuses
and other benefts
60
138
50
48
62
5,332
5,662
4,423
4,551
4,708
-
-
-
-
-
-
-
-
-
-
Other
35
112
383
380
307
-
-
-
-
-
-
-
-
-
-
1,187
1,647
1,644
1,801
2,220
17
-
13
-
13
-
12
-
13
4
Less - Fair value of plan assets
1,500
1,640
157
157
167
15
17
-
-
-
Provisions - Provisions for pensions
3,927
4,272
4,699
4,822
4,910
1,189
1,643
1,657
1,813
2,237
5,427
5,912
4,856
4,979
5,077
1,204
1,660
1,657
1,813
2,237
Of which:
Internal provisions for pensions
3,720
4,036
4,432
4,524
4,565
1,189
1,642
1,657
1,813
2,237
Insurance contracts linked
to pensions (Note 14)
Unrecognised net assets
for pensions
210
238
269
299
345
(3)
(2)
(2)
(1)
-
-
-
1
-
-
-
-
-
-
-
551
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The amounts recognised in the consolidated income statements in
relation to the aforementioned defned beneft obligations are as
follows:
Million of euros
Current service cost
Interest cost (net)
Expected return on insurance
contracts linked to pensions
Provisions or reversion of provisions
Actuarial (gains)/losses recognised in the year
Past service cost
Pre-retirement cost
Other
Post-employment plans
Other similar obligations
2018
2017
2016
2018
2017
2016
18
73
(4)
-
3
1
(4)
87
16
79
(4)
-
-
-
(2)
89
11
91
(5)
-
6
6
(21)
88
1
18
-
7
5
208
-
239
1
21
-
13
-
248
-
283
1
27
-
6
-
355
(1)
388
In addition, in 2018 Other comprehensive income – Items not
reclassifed to proft or loss – Actuarial gains or (-) losses on defned
beneft pension plans decreased by EUR 65 million with respect
to defned beneft obligations (increased 2017: EUR 41 million;
increased 2016: EUR 141 million).
The changes in the present value of the accrued defned beneft
obligations were as follows:
Million of euros
Present value of the obligations at beginning of year
Incorporation of Group companies, net
Current service cost
Interest cost
Pre-retirement cost
Efect of curtailment/settlement
Benefts paid
Benefts paid due to settlements
Past service cost
Actuarial (gains)/losses
Demographic actuarial (gains)/losses
Financial actuarial (gains)/losses
Exchange diferences and other items
Present value of the obligations at end of year
Post-employment plans
Other similar obligations
2018
5,912
(36)
18
99
1
(4)
(423)
-
3
(145)
(21)
(124)
2
5,427
2017
4,856
1,563
16
94
-
(2)
(388)
(260)
-
57
(7)
64
(24)
5,912
2016
4,979
-
11
95
6
(21)
(353)
-
6
136
15
121
(3)
4,856
2018
1,660
-
1
18
208
-
(617)
-
5
6
(3)
9
(77)
1,204
2017
1,657
202
1
21
248
-
2016
1,813
-
1
27
355
-
(490)
(570)
-
-
13
10
3
8
-
-
6
(1)
7
25
1,660
1,657
552
2018 Auditors’ report and consolidated annual accounts
The changes in the fair value of plan assets and of insurance
contracts linked to pensions were as follows:
Plan assets
Million of euros
Post-employment plans
Other similar obligations
Fair value of plan assets at beginning of year
Incorporation of Group companies, net
Expected return on plan assets
Benefts paid
Contributions/(surrenders)
Actuarial gains/(losses)
Exchange diferences and other items
2018
1,640
-
26
(115)
21
(73)
1
2017
157
1,507
15
(58)
3
24
(8)
Fair value of plan assets at end of year
1,500
1,640
Insurance contracts linked to pensions
Million of euros
2016
157
-
4
(8)
9
(2)
(3)
157
2018
2017
2016
17
-
-
(2)
-
(1)
1
15
-
18
-
(1)
-
-
-
17
-
-
-
-
-
-
-
-
Fair value of insurance contracts linked
to pensions at beginning of year
Incorporation of Group companies, net
Expected return on insurance
contracts linked to pensions
Benefts paid
Paid premiums
Actuarial gains/(losses)
Fair value of insurance contracts linked
to pensions at end of year
Post-employment plans
Other similar obligations
2018
2017
2016
2018
2017
2016
238
269
299
-
4
(27)
2
(7)
210
-
4
(29)
1
(7)
238
-
5
(32)
-
(3)
269
1
-
-
(1)
-
-
-
-
2
-
(1)
-
-
1
-
-
-
-
-
-
-
In view of the conversion of the defned-beneft obligations to
defned-contribution obligations, the Group has not made material
current contributions in Spain in 2018 to fund its defned-beneft
pension obligations.
The plan assets and the insurance contracts linked to pensions are
instrumented mainly through insurance policies.
ii. United Kingdom
At the end of each of the last three years, the businesses in the
United Kingdom had post-employment beneft obligations under
defned contribution and defned beneft plans. The expenses
incurred in respect of contributions to defned contribution plans
amounted to EUR 93 million in 2018 (2017: EUR 82 million; 2016:
EUR 81 million).
The following table shows the estimated benefts payable at 31
December 2018 for the next ten years:
Million of euros
2019
2020
2021
2022
2023
2024 to 2028
792
662
569
486
425
1,604
The amount of the defned beneft obligations was determined on
the basis of the work performed by independent actuaries using
the following actuarial techniques:
1. Valuation method: projected unit credit method, which sees each
period of service as giving rise to an additional unit of beneft
entitlement and measures each unit separately.
553
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
2. Actuarial assumptions used: unbiased and mutually compatible.
Specifcally, the most signifcant actuarial assumptions used in
the calculations were as follows:
The amounts recognised in the consolidated income statements in
relation to the aforementioned defned beneft obligations are as
follows:
2018
2017
2016
Million of euros
Annual discount rate
2.90%
2.49%
2.79%
Mortality tables
108/86
S2 Light
108/86
S2 Light
116/98 S1
Light TMC
Current service cost
Interest cost (net)
2018
2017
2016
31
(6)
25
36
(6)
30
31
(22)
9
Cumulative annual CPI growth
Annual salary increase rate
Annual pension increase rate
3.22%
1.00%
2.94%
3.15%
1.00%
2.94%
3.12%
1.00%
2.92%
The discount rate used for the fows was determined by reference
to high-quality corporate bonds (at least AA in pounds sterling)
that coincide with the terms of the obligations.
Any changes in the main assumptions could afect the calculation
of the obligations. At 31 December 2018, if the discount rate used
had been decreased or increased by 50 basis points, there would
have been an increase or decrease in the present value of the
obligations of +9.80% (-50 b.p.) and -8.74% (+50 b.p.), respectively.
If the infation assumption had been increased or decreased by 50
basis points, there would have been an increase or decrease in the
present value of the obligations of +6.57% (+50 b.p.) and -6.31%
(-50 b.p.), respectively. These changes would be ofset in part by
increases or decreases in the fair value of the assets.
The funding status of the defned beneft obligations in 2018 and
the four preceding years is as follows:
In addition, in 2018 Other comprehensive income – Items not
reclassifed to proft or loss – Actuarial gains or (-) losses on defned
beneft pension plans decreased by EUR 481 million with respect to
defned beneft obligations (2017: increase of EUR 121 million; 2016:
increase of EUR 621 million).
The changes in the present value of the accrued defned beneft
obligations were as follows:
Million of euros
Present value of the obligations
at beginning of year
Current service cost
Interest cost
Benefts paid
Contributions made by employees
Past service cost
2018
2017
2016
13,056
12,955
12,271
31
320
36
347
31
407
(489)
(445)
(332)
24
-
20
-
20
-
Million of euros
Present value of
the obligations
Less-
2018
2017
2016
2015
2014
Demographic actuarial (gains)/losses
(21)
(184)
(59)
Actuarial (gains)/losses
(766)
602
2,315
12,079 13,056 12,955
12,271
11,959
Financial actuarial (gains)/losses
(745)
786
2,374
Exchange diferences and other items
(97)
(459)
(1,757)
Present value of the
obligations at end of year
12,079
13,056
12,955
Fair value of plan assets
12,887 13,239
13,118 12,880
12,108
Provisions - Provisions
for pensions
Of which:
Internal provisions
for pensions
(808)
(183)
(163)
(609)
(149)
The changes in the fair value of the plan assets were as follows:
130
323
306
150
256
Million of euros
Net assets for pensions
(938)
(506)
(469)
(759)
(405)
Fair value of plan assets
at beginning of year
2018
2017
2016
13,239
13,118
12,880
Expected return on plan assets
326
353
429
Benefts paid
Contributions
Actuarial gains/(losses)
(489)
(445)
(332)
209
208
304
(285)
481
1,694
Exchange diferences and other items
(113)
(476)
(1,857)
Fair value of plan assets at end of year
12,887
13,239
13,118
554
2018 Auditors’ report and consolidated annual accounts
In 2019 the Group expects to make current contributions to fund
these obligations for amounts similar to those made in 2018.
The main categories of plan assets as a percentage of total plan
assets are as follows:
Equity instruments
Debt instruments
Properties
Other
2018
17%
50%
10%
23%
2017
20%
46%
13%
21%
2016
25%
49%
12%
14%
The following table shows the estimated benefts payable at 31
December 2018 for the next ten years:
Million of euros
2019
2020
2021
2022
2023
2024 to 2028
297
301
321
345
363
2,127
iii. Other foreign subsidiaries
Certain of the consolidated foreign entities have acquired
commitments to their employees similar to post-employment
benefts.
At 31 December 2018, 2017 and 2016, these entities had defned-
contribution and defned-beneft post-employment beneft
obligations. The expenses incurred in respect of contributions to
defned contribution plans amounted to EUR 107 million in 2018
(2017: EUR 99 million; 2016: EUR 92 million).
The actuarial assumptions used by these entities (discount rates,
mortality tables and cumulative annual CPI growth) are consistent
with the economic and social conditions prevailing in the countries
in which they are located.
Specifcally, the discount rate used for the fows was determined
by reference to high-quality corporate bonds, except in the case
of Brazil where there is no extensive corporate bond market and,
accordingly the discount rate was determined by reference to the
series B bonds issued by the Brazilian National Treasury Secretariat
for a term coinciding with that of the obligations. In Brazil the
discount rate used was between 9.11% and 9.26%, the CPI 4% and
the mortality table the AT-2000.
Any changes in the main assumptions could afect the calculation
of the obligations. At 31 December 2018, if the discount rate used
had been decreased or increased by 50 basis points, there would
have been an increase or decrease in the present value of the
obligations of +5.25% (-50 b.p.) and -4.80% (+50 b.p.), respectively.
These changes would be ofset in part by increases or decreases in
the fair value of the assets.
The funding status of the obligations similar to post-employment
benefts and other long-term benefts in 2018 and the four
preceding years is as follows:
Million of euros
Present value of the obligations
Less-
Of which: with a charge to the participants
Fair value of plan assets
Provisions - Provisions for pensions
Of which:
Internal provisions for pensions
Net assets for pensions
Unrecognised net assets for pensions
2018
9,116
167
7,743
1,206
1,541
(77)
(258)
Of which:
business in Brazil
6,649
167
6,046
436
756
(62)
(258)
2017
9,534
193
7,927
1,414
1,787
(98)
(275)
2016
9,876
153
8,445
1,278
1,613
(52)
(283)
2015
8,337
133
7,008
1,196
1,478
(28)
(254)
2014
10,324
151
8,458
1,715
1,999
(8)
(276)
555
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The amounts recognised in the consolidated income statements in
relation to these obligations are as follows:
The changes in the present value of the accrued obligations were
as follows:
Million of euros
Million of euros
Present value of the obligations
at beginning of year
Incorporation of Group companies, net
Current service cost
Interest cost
Pre-retirement cost
2018
2017
2016
9,534
9,876
8,337
36
34
646
(6)
165
35
807
-
171
38
802
(9)
(37)
Efect of curtailment/settlement
(199)
(19)
Benefts paid
(634)
(716)
(690)
Benefts paid due to settlements
Contributions made by employees
Past service cost
Actuarial (gains)/losses
Demographic actuarial (gains)/losses
Financial actuarial (gains)/losses
-
5
3
390
(59)
449
(24)
(1,352)
6
3
8
18
404
1,269
(140)
544
439
830
Exchange diferences and other items
(693)
(1,003)
1,321
Present value of the
obligations at end of year
9,116
9,534
9,876
The changes in the fair value of the plan assets were as follows:
Million of euros
Fair value of plan assets
at beginning of year
Incorporation of Group companies, net
Expected return on plan assets
Benefts paid
2018
2017
2016
7,927
8,445
7,008
-
573
166
732
154
732
(602)
(683)
(637)
Benefts paid due to settlements
-
(24)
(1,328)
Contributions
Actuarial gains/(losses)
199
308
94
203
559
687
Exchange diferences and other items
(662)
(1,006)
1,270
Fair value of plan assets at end of year
7,743
7,927
8,445
In 2019 the Group expects to make contributions to fund these
obligations for amounts similar to those made in 2018.
Current service cost
Interest cost (net)
Provisions or reversion of provisions
Actuarial (gains)/losses
recognised in the year
Past service cost
Pre-retirement cost
Other
2018
2017
2016
34
101
5
3
(6)
(203)
(66)
35
104
1
3
-
(19)
124
38
105
(9)
18
(9)
(37)
106
In addition, in 2018 Other comprehensive income – Items not
reclassifed to proft or loss – Actuarial gains or (-) losses on defned
beneft pension plans increased by EUR 64 million with respect
to defned beneft obligations (increased EUR 207 million and
increased EUR 513 million in 2017 and 2016, respectively).
In December 2011, the fnancial entities of Portugal, including
Banco Santander Totta, S.A. made a partial transfer of the
pension commitments to the Social Security. Consequently, Banco
Santander Totta, S.A. carried out the transfer of the corresponding
assets and liabilities and the current value of the net commitments
of the fair value of the corresponding assets of the plan, as of
31 December 2011, under Provisions - Funds for pensions and
similar obligations. In 2016, the collective bargaining agreement
of the banking sector was approved, consolidating the sharing of
responsibility for the pension commitments between the State and
the banks.
On the other hand, in 2016 the Group in Brazil updated the
recognition of its obligations of certain health benefts in the
terms stipulated in the regulation that develops them and that
establishes the coverage of this beneft in equal proportion
between the sponsor and partners. The efect of this liquidation,
together with that of the businesses in Portugal, is shown in
the following tables under the heading “benefts paid due to
settlements”.
In June 2018, the Group in Brazil reached an agreement with the
labour unions to modify the scheme of contributions to certain
health benefts, which implied a reduction in commitments
amounting to 186 million euros, shown in the following tables
under the heading “Efect to curtailment/settlement”.
556
2018 Auditors’ report and consolidated annual accounts
The main categories of plan assets as a percentage of total plan
assets are as follows:
legal contingencies and Other provisions. The types of provision
were determined by grouping together items of a similar nature:
Equity instruments
Debt instruments
Properties
Other
2018
7%
83%
1%
9%
2017
6%
84%
3%
7%
2016
7%
88%
1%
4%
Million of euros
Provisions for taxes
Provisions for employment-
related proceedings (Brazil)
2018
2017
2016
864
1,006
1,074
859
868
915
Provisions for other legal proceedings
1,451
1,307
1,005
Provision for customer remediation
652
885
685
The following table shows the estimated benefts payable at 31
December 2018 for the next ten years:
Million of euros
2019
2020
2021
2022
2023
2024 to 2028
593
603
612
629
644
3,429
d) Provisions for taxes and other legal
contingencies and Other provisions
Provisions - Provisions for taxes and other legal contingencies and
Provisions - Other provisions, which include, inter alia, provisions
for restructuring costs and tax-related and non-tax-related
proceedings, were estimated using prudent calculation procedures
in keeping with the uncertainty inherent to the obligations
covered. The defnitive date of the outfow of resources embodying
economic benefts for the Group depends on each obligation. In
certain cases, these obligations have no fxed settlement period
and, in other cases, depend on the legal proceedings in progress.
The detail, by geographical area, of Provisions for taxes and other
legal contingencies and Other provisions is as follows:
Million of euros
Regulatory framework-
related provisions
Provision for restructuring
Other
105
492
101
360
253
472
1,226
1,314
1,308
5,649
5,841
5,712
Relevant information is set forth below in relation to each type of
provision shown in the preceding table:
The provisions for taxes include provisions for tax-related
proceedings.
The provisions for employment-related proceedings (Brazil) relate
to claims fled by trade unions, associations, the prosecutor’s
ofce and ex-employees claiming employment rights to which, in
their view, they are entitled, particularly the payment of overtime
and other employment rights, including litigation concerning
retirement benefts. The number and nature of these proceedings,
which are common for banks in Brazil, justify the classifcation of
these provisions in a separate category or as a separate type from
the rest. The Group calculates the provisions associated with these
claims in accordance with past experience of payments made in
relation to claims for similar items. When claims do not fall within
these categories, a case-by-case assessment is performed and the
amount of the provision is calculated in accordance with the status
of each proceeding and the risk assessment carried out by the legal
advisers.
2018
2017
2016
Recognised by Spanish companies
1,647
1,666
1,148
Recognised by other EU companies
1,044
1,127
1,300
Recognised by other companies
2,958
3,048
3,264
The provisions for other legal proceedings include provisions
for court, arbitration or administrative proceedings (other than
those included in other categories or types of provisions disclosed
separately) brought against Santander Group companies.
Of which:
Brazil
2,496
2,504
2,715
5,649
5,841
5,712
The provisions for customer remediation include mainly the
estimated cost of payments to remedy errors relating to the sale
of certain products in the UK and the estimated amount related
Set forth below is the detail, by type of provision, of the balance at
31 December 2018, 2017 and 2016 of Provisions for taxes and other
557
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix to the foor clauses of Banco Popular Español, S.A.U. To calculate
the provision for customer remediation, the best estimate of the
provision made by management is used, which is based on the
estimated number of claims to be received and, of these, the
number that will be accepted, as well as the estimated average
payment per case.
The regulatory framework-related provisions include mainly the
provisions relating to the FSCS (Financial Services Compensation
Scheme), the Bank Levy in the UK and in Poland the provision
related to the Banking Tax.
The provisions for restructuring include only the costs arising
from restructuring processes carried out by the various Group
companies.
Qualitative information on the main litigation is provided in Note
25.e to the consolidated fnancial statements.
Our general policy is to record provisions for tax and legal
proceedings in which we assess the chances of loss to be probable
and we do not record provisions when the chances of loss are
possible or remote. We determine the amounts to be provided
for as our best estimate of the expenditure required to settle the
corresponding claim based, among other factors, on a case-by-
case analysis of the facts and the legal opinion of internal and
external counsel or by considering the historical average amount of
the loss incurred in claims of the same nature. The defnitive date
of the outfow of resources embodying economic benefts for the
Group depends on each obligation. In certain cases, the obligations
do not have a fxed settlement term and, in others, they depend on
legal proceedings in progress.
The main movements during the 2018 of the breakdown provisions
are shown below:
Regarding the provisions arising from civil contingencies and legal
nature, Brazil provides in the period EUR 359 million (2017: EUR 355
million, 2016: EUR 201 million) due to civil contingencies and EUR
288 million (2017: EUR 505 million, 2016: EUR 395 million) arising
from employment related claims. This increase was partially ofset
by the use of available provisions of which EUR 299 million (2017:
EUR 388 million, 2016: EUR 284 million) were related to payments
of employment-related claims and EUR 191 million (2017: EUR 203
million, 2016: EUR 239 million) due to civil contingencies.
Regarding the provisions arising for customer remediation, EUR 16
million (2017: EUR 164 million, 2016: EUR 179 million) are released,
and EUR 128 million (2017: EUR 106 million, 2016: EUR 173 million)
are used in United Kingdom. On the other hand, in Banco Popular.
S.A.U., an amount of EUR 119 million (2017: EUR 223 million) has
been used in the year from foor clauses.
Regarding the provisions constituted by regulatory framework,
EUR 73 million have been charged (2017: EUR 106 million; 2016: EUR
173 million) and EUR 88 million have been used during 2018 (2017:
EUR 151 million; 2016: EUR 169 million) in United Kingdom (Bank
Levy and FSCS). In addition, EUR 100 million have been provisioned
and paid in Poland.
Regarding the provisions for restructuring process, a further
provision of EUR 290 million (2017: EUR 425 million; 2016: EUR 244
million) was registered in Spain. This increase was partially ofset
by the use of EUR 179 million (2017: EUR 162 million; 2016: EUR 206
million).
e) Litigation and other matters
i. Tax-related litigation
At 31 December 2018 the main tax-related proceedings concerning
the Group were as follows:
• Legal actions fled by Banco Santander (Brasil) S.A. and certain
Group companies in Brazil challenging the increase in the rate
of Brazilian social contribution tax on net income from 9% to
15% stipulated by Interim Measure 413/2008, ratifed by Law
11.727/2008, a provision having been recognised for the amount
of the estimated loss. Due to recent unfavourable decisions of the
courts, the Group in Brazil has withdrawn their actions and paid
the amount claimed, using the existing provision.
• Legal actions fled by Banco Santander (Brasil) S.A. and other
Group entities to avoid the application of Law 9.718/98,
which modifes the basis to calculate PIS and COFINS social
contribution, extending it to all the entities income, and not
only to the income from the provision of services. In relation of
Banco Santander (Brasil) S.A. process, in May 2015 the Federal
Supreme Court (FSC) admitted the extraordinary appeal fled by
the Federal Union regarding PIS, and dismissed the extraordinary
appeal lodged by the Brazilian Public Prosecutor’s Ofce
regarding COFINS contribution, confrming the decision of Federal
Regional Court favourable to Banco Santander (Brasil) S.A.. The
appeals fled by the other entities before the Federal Supreme
Court, both for PIS and COFINS, are still pending. The risk is
classifed as possible and there is a provision for the amount of
the estimated loss.
• Banco Santander (Brasil) S.A. and other Group companies in
Brazil have appealed against the assessments issued by the
Brazilian tax authorities questioning the deduction of loan losses
in their income tax returns (IRPJ and CSLL) in relation to diferent
administrative processes of the years 1998, 2001, 2005 and
2006 on the ground that the requirements under the applicable
legislation were not met. The appeals are pending decision
in CARF. No provision was recognised in connection with the
amount considered to be a contingent liability.
• Banco Santander (Brasil) S.A. and other Group companies in
Brazil are involved in administrative and legal proceedings
against several municipalities that demand payment of the
Service Tax on certain items of income from transactions not
classifed as provisions of services. There are several cases
in diferent judicial instances. No provision was recognised
in connection with the amount considered to be a contingent
liability.”
558
2018 Auditors’ report and consolidated annual accounts
• Banco Santander (Brasil) S.A. and other Group companies in
Brazil are involved in administrative and legal proceedings
against the tax authorities in connection with the taxation
for social security purposes of certain items which are not
considered to be employee remuneration. There are several
cases in diferent judicial instances. A provision was recognised in
connection with the amount of the estimated loss.
• In May 2003 the Brazilian tax authorities issued separate
infringement notices against Santander Distribuidora de Títulos
e Valores Mobiliarios Ltda. (DTVM, currently Santander Brasil
Tecnologia S.A.) and Banco Santander (Brasil) S.A. in relation to
the Provisional Tax on Financial Movements (CPMF) of the years
2000, 2001 and part of 2002. In July 2015, after the unfavourable
decision of CARF, both entities appealed at Federal Justice in
a single proceeding. There is a provision recognised for the
estimated loss.
• In December 2010 the Brazilian tax authorities issued an
infringement notice against Santander Seguros S.A. (Brazil),
currently Zurich Santander Brasil Seguros e Previdência
S.A., as the successor by merger to ABN AMRO Brasil dois
Participações S.A., in relation to income tax (IRPJ and CSLL) for
2005, questioning the tax treatment applied to a sale of shares
of Real Seguros, S.A. Actually it is appealed before the CARF.
As the former parent of Santander Seguros S.A. (Brasil), Banco
Santander (Brasil) S.A. is liable in the event of any adverse
outcome of this proceeding. No provision was recognised in
connection with this proceeding as it is considered to be a
contingent liability.
• In November 2014 the Brazilian tax authorities issued an
infringement notice against Banco Santander (Brasil) S.A.
in relation to corporate income tax (IRPJ and CSLL) for 2009
questioning the tax-deductibility of the amortization of the
goodwill of Banco ABN AMRO Real S.A. performed prior to the
absorption of this bank by Banco Santander (Brasil) S.A., but
accepting the amortization performed after the merger. Actually
it is appealed before the Higher Chamber of CARF. No provision
was recognised in connection with this proceeding as it was
considered to be a contingent liability.
• Banco Santander (Brasil) S.A. has also appealed against
infringement notices issued by the tax authorities questioning the
tax deductibility of the amortization of the goodwill arising on
the acquisition of Banco Comercial e de Investimento Sudameris
S.A from years 2007 to 2012. No provision was recognised
in connection with this matter as it was considered to be a
contingent liability.
• Banco Santander (Brazil) S.A. and other companies of the
Group in Brazil are undergoing administrative and judicial
procedures against Brazilian tax authorities for not admitting
tax compensation with credits derived from other tax concepts,
not having registered a provision for such amount since it is
considered to be a contingent liability.
• Banco Santander (Brasil) S.A. is involved in appeals in relation to
infringement notices initiated by tax authorities regarding the
ofsetting of tax losses in the CSLL (‘Social Contribution on Net
Income’) of year 2009. The appeal is pending decision in CARF. A
provision was recognised in connection with the amount of the
estimated loss.
• Legal action brought by Sovereign Bancorp, Inc. (currently
Santander Holdings USA, Inc.) claiming its right to take a foreign
tax credit for taxes paid outside the United States in fscal years
2003 to 2005 as well as the related issuance and fnancing
costs. On 17 July 2018, the District Court fnally ruled against
Santander Holdings USA, Inc. Final resolution is anticipated
within the coming months, with no efect on income, as it is fully
provisioned.
• Banco Santander has appealed before European Courts the
Decisions 2011/5/CE of 28 October 2009, and 2011/282/UE of
12 January 2011 of the European Commission, ruling that the
deduction regulated pursuant to Article 12.5 of the Corporate
Income Tax Law constituted illegal State aid. On November
2018 the General Court confrmed these Decisions but these
judgements have been appealed at the Court of justice of the
European Union. The Group has not recognised provisions for
these suits since they are considered to be a contingent liability.
At the date of approval of these consolidated fnancial
statements certain other less signifcant tax-related proceedings
were also in progress.
ii. Non-tax-related proceedings
At 31 December 2018, the main non-tax-related proceedings
concerning the Group were as follows:
• Payment Protection Insurance (PPI): claims associated with the
sale by Santander UK plc of payment protection insurance or
PPI to its customers. As of 31 December 2018, the remaining
provision for PPI redress and related costs amounted to GBP 246
million (EUR 275 million) and GBP 356 million (EUR 406 million)
as of 31 December 2017. This provision represents management’s
best estimate of Santander UK plc future liability in respect
of mis-selling of PPI policies and is based on recent claims
experience and consideration of the FCA Consultation paper
CP18/33 (Regular premium PPI complaints and recurring non-
disclosure of commission – feedback on CP18/18, fnal guidance,
and consultation on proposed mailing requirements) issued on
7 November 2018. It has been calculated using key assumptions
such as the estimated number of customer complaints received,
the number of rejected misselling claims that will be in scope for
Plevin v Paragon Personal Finance Limited [2014] UKSC 61 redress,
and the determination of liability with respect to a specifc
portfolio of claims. The provision will be subject to continuous
review, taking into account the impact of any further claims
received and FCA guidance.
• Delforca: dispute arising from equity swaps entered into by
Gaesco (now Delforca 2008, S.A.) on shares of Inmobiliaria
Colonial. The bank is claiming to Delforca a total of EUR 66 million
from the liquidation of the swaps. Two arbitration proceedings
were instigated before the Spanish Court of Arbitration with an
outcome of two awards in favour of the Bank. However, these
two arbitration awards were annulled for procedural issues.
Mobiliaria Monesa (Delforca’s parent company) has commenced
a civil proceeding against the Bank claiming damages which,
as of date have not been determined. The proceeding has been
stayed because the jurisdiction of the Court has been challenged.
Within insolvency proceedings before the Commercial Court, both
559
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Delforca and Mobiliaria Monesa have instigated a claim against
the Bank seeking the recovery of EUR 56.8 million that the Bank
received from the liquidation of the swap. The Bank has not
recognised any provisions in this connection.
• Former employees of Banco do Estado de São Paulo S.A.,
Santander Banespa, Cia. de Arrendamiento Mercantil: the
claim was fled in 1998 by the association of retired Banespa
employees (AFABESP) requesting the payment of a half-yearly
bonus envisaged in the entity’s Bylaws in the event that the entity
obtained a proft and that the distribution of this proft were
approved by the Board of Directors. The bonus was not paid in
1994 and 1995 since the bank did not make a proft and partial
payments were made from 1996 to 2000, as agreed by the Board
of Directors and the relevant clause was eliminated in 2001. The
Regional and the High Employment Court ordered the bank to
pay this half-yearly bonus since the event until nowadays. The
Bank fled an appeal which awaits judgment before the Federal
Supreme Court (STF). The Bank has not recognised any provisions
in this connection.
• “Planos Económicos”: like the rest of the banking system in Brasil,
Santander Brasil has been the target of customer complaints and
collective civil suits stemming from legislative changes and its
application to bank deposits, fundamentally (‘economic plans’).
At the end of 2017, there was an agreement between regulatory
entities and the Brazilian Federation of Banks (Febraban), already
homologated by the Supremo Tribunal Federal, with the purpose
of closing the lawsuits. Discussions focused on specifying the
amount to be paid to each afected client according to the balance
in their notebook at the time of the Plan. Finally, the total value of
the payments will depend on the number of endorsements they
have made and the number of savers who have demonstrated the
existence of the account and its balance on the date the indexes
were changed. In November 2018, the STF ordered the suspension
of all economic plan processes for two years from February 2018.
The provisions recorded for the economic plan processes are
considered sufcient.
• CNMC: after an administrative investigation on several fnancial
entities, including Banco Santander, S.A., in relation to possible
collusive practices or price-fxing agreements, as well as
exchange of commercially sensitive information in relation to
fnancial derivative instruments used as hedge of interest rate
risk for syndicated loans, on 13 February 2018, the Competition
Directorate of the Spanish “National Commission for Antitrust and
Markets” (CNMC) published its decision, by which it fned the Bank
and another three fnancial institutions with EUR 91 million (EUR
23.9 million for the Bank) for ofering interest rate derivatives
in breach of Articles 1 of the Spanish Act 15/2007 on Defence of
Competition and 101 of the Treaty of Functioning of the European
Union. According to the CNMC, there is evidence that there was
coordination between the hedging banks/lenders to coordinate
the price of the derivatives and ofer clients, in each case, a price
diferent from the “market price”. This decision has been appealed
before the Spanish National Court by the Bank, that has already
paid the fne.
• Floor clauses (“cláusulas suelo”): As a consequence of the
acquisition of Banco Popular, S.A.U, the Group has been exposed
to a material number of transactions with foor clauses. The
so-called “foor clauses” or minimum clauses are those under
which the borrower accepts a minimum interest rate to be paid
to the lender, regardless of the applicable reference interest
rate. Banco Popular Español, S.A.U. included “foor clauses” in
certain asset transactions with customers. In relation to this type
of clauses, and after several rulings made by the Court of Justice
of the European Union and the Spanish Supreme Court, and the
extrajudicial process established by the Spanish Royal Decree-
Law 1/2017, of January 2, Banco Popular Español, S.A.U. made
extraordinary provisions that were updated in order to cover the
efect of the potential return of the excess interest charged for
the application of the foor clauses between the contract date
of the corresponding mortgage loans and May 2013. The Group
considered that the maximum risk associated with the foor
clauses applied in its contracts with consumers, in the most severe
and not probable scenario, would amount to approximately EUR
900 million, as initially measured and without considering the
returns performed. For this matter, after the purchase of Banco
Popular Español, S.A.U., EUR 357 million provisions have been
used by the Group (EUR 238 million in 2017 and EUR 119 million
in 2018) mainly for refunds as a result of the extrajudicial process
mentioned above. As of December 31, 2018, the amount of the
Group’s provisions in relation to this matter amounts to EUR 104
million which covers the probable risk.
• Banco Popular´s acquisition: considering the declaration
setting out the resolution of Banco Popular Español, S.A.U.,
the redemption and conversion of its capital instruments and
the subsequent transfer to Banco Santander, S.A. of the shares
resulting from this conversion in exercise of the resolution
instrument involving the sale of the institution’s business, in the
application accordance with the single resolution framework
regulation referred to in Note 3, some investors have fled
claims against the EU’s Single Resolution Board decision, the
FROB’s resolution executed in accordance to the aforementioned
decision, and claims have been fled and may be fled in the
future against Banco Popular Español, S.A.U., Banco Santander,
S.A. or other Santander Group companies deriving from or
related to the acquisition of Banco Popular Español, S.A.U. There
are also criminal investigations in progress led by the Spanish
National Court in connection with Banco Popular Español, S.A.U.,
although not with its acquisition. On 15 January 2019, the Spanish
National Court, applying article 130.2 of the Spanish Criminal
Code, declared the Bank the successor entity to Banco Popular
Español, S.A.U. (following the merger of the Bank and Banco
Popular Español, S.A.U.on 28 September 2018), and, as a result,
determined that the Bank assumed the role of the party being
investigated in the criminal proceeding. The Bank has resorted this
decision.
At this time it is not possible to foresee the total number of
demands and additional claims that could be put forth by
the former shareholders, nor their economic implications
(particularly considering that the resolution decision in
application of the new laws is unprecedented in Spain or any
other Member State of the European Union and that possible
future claims might not specify any specifc amount, allege new
legal interpretations or involve a large number of parties). The
estimated cost of the potential compensation to the shareholders
of Banco Popular Español, S.A.U. has been accounted for as
disclosed in Note 3 of the consolidated fnancial statements.
560
2018 Auditors’ report and consolidated annual accounts
• German shares investigation: the Cologne Public Prosecution
Ofce is conducting an investigation against the Bank, and other
group entities based in UK - Santander UK plc, Abbey National
Treasury Services plc and Cater Allen International Limited -, in
relation to a particular type of tax dividend linked transactions
known as cum-ex transactions. The Group is cooperating with
the German authorities. As the investigations are at preliminary
stage, the results and the efects for the Group, which may
potentially include the imposition of fnancial penalties, cannot
be anticipated. The Bank has not recognised any provisions in this
connection.
• Attorneys General Investigation of auto loan securitisation
transactions and fair lending practices: in October 2014, May
2015, July 2015 and February 2017, Santander Consumer USA
Inc. (SC) received subpoenas and/or Civil Investigative Demands
(CIDs) from the Attorneys General of the U.S. states of California,
Illinois, Oregon, New Jersey, Maryland and Washington under
the authority of each state’s consumer protection statutes. SC
was informed that these states serve on behalf of a group of 32
state Attorneys General. The subpoenas contain broad requests
for information and the production of documents related to
SC’s underwriting, securitization, the recovery eforts servicing
and collection of nonprime vehicle loans. SC has responded to
these requests within the deadlines specifed in the CIDs and has
otherwise cooperated with the Attorneys General with respect
to this matter. The provisions recorded for this investigation are
considered sufcient.
• Financial Industry Regulatory Authority (“FINRA”) Puerto Rico
Arbitrations: as of 31 December 2018, Santander Securities LLC
(SSLLC) had received 589 FINRA arbitration cases related to
Puerto Rico bonds and Puerto Rico closed-end funds (CEFs).
The statements of claims allege, among other things, fraud,
negligence, breach of fduciary duty, breach of contract of the
acquirers, unsuitability, over-concentration of the investments
and defect to supervise. There were 420 arbitration cases that
remained pending as of 31 December 2018. The provisions
recorded for these matters are considered sufcient.
As a result of various legal, economic and market factors
impacting or that could impact of the value Puerto Rico bonds
and CEFs, it is possible that additional arbitration claims and/or
increased claim amounts may be asserted against SSLLC in future
periods.
The Bank and the other Group companies are subject to claims
and, therefore, are party to certain legal proceedings incidental to
the normal course of their business (including those in connection
with lending activities, relationships with employees and other
commercial or tax matters).
With the information available to it, the Group considers that, at 31
December 2018, it had reliably estimated the obligations associated
with each proceeding and had recognised, where necessary,
sufcient provisions to cover reasonably any liabilities that may
arise as a result of these tax and legal risks. It also believes that
any liability arising from such claims and proceedings will not have,
overall, a material adverse efect on the Group’s business, fnancial
position or results of operations.
26. Other liabilities
The detail of Other liabilities in the consolidated balance sheets is
as follows:
Million of euros
Transactions in transit
Accrued expenses and
deferred income
Other
27. Tax matters
2018
803
6,621
5,664
13,088
2017
811
6,790
4,990
12,591
2016
994
6,507
3,569
11,070
a) Consolidated Tax Group
Pursuant to current legislation, the Consolidated Tax Group
includes Banco Santander, S.A. (as the parent) and the Spanish
subsidiaries that meet the requirements provided for in Spanish
legislation regulating the taxation of the consolidated profts of
corporate groups (as the controlled entities). On 1 January 2018
those entities that were part of the Consolidated Tax Group which
parent company was Banco Popular Español, S.A.U., and that meet
the requirements have been integrated in the aforementioned
Consolidate Tax Group.
The other Group companies fle income tax returns in accordance
with the tax regulations applicable to them.
b) Years open for review by the tax authorities
In 2018 the conformity and non-conformity acts relating to the
fnancial years 2009 to 2011 were formalised. The adjustments
signed in conformity had no signifcant impact on results and, in
relation to the concepts signed in disconformity both in this year
and in previous years that have been appealed, Banco Santander,
S.A., as the Parent of the Consolidated Tax Group, considers,
in accordance with the advice of its external lawyers, that the
adjustments made should not have a signifcant impact on the
consolidated fnancial statements, and there are sound arguments
as proof in the appeals pending or to be fled against them.
Consequently, no provision has been recorded for this concept.
Following the completion of these actions for 2009 to 2011,
subsequent years up to and including 2018 are subject to review.
At the date of approval of these accounts, the beginning of VAT
proceedings for periods not yet prescribed up to and including 2016
have been notifed.
Likewise, in 2018 the partial actions relating to corporate income
tax for 2016 of the Consolidated Tax Group of which Banco Popular
Español, S.A.U. was the parent were completed, and a certifcate
of conformity was drawn up confrming the tax return fled by the
taxpayer. In relation to this Consolidated Tax Group, the years 2010
to 2017 inclusive are subject to review.
The other entities have the corresponding years open for review,
pursuant to their respective tax regulations.
561
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
d) Tax recognised in equity
In addition to the income tax recognised in the consolidated
income statement, the Group recognised the following amounts in
consolidated equity in 2018, 2017 and 2016:
Million of euros
Other comprehensive income
Items not reclassifed
to proft or loss
Actuarial gains or (-) losses on
defned beneft pension plans
Changes in the fair value of
equity instruments measured
at fair value through other
comprehensive income
Financial liabilities at fair value
with changes in results attributed
to changes in credit risk
Items that may be reclassifed
to proft or loss
Cash fow hedges
Changes in the fair value of
debt instruments through other
comprehensive income
Financial assets available for sale
Debt instruments
Equity instruments
Other recognised income
and expense of investments
in subsidiaries, joint
ventures and associates
2018*
2017
2016
(225)
(199)
60
60
364
364
-
(26)
124
(50)
167
-
(694)
108
(136)
(97)
(366)
269
(552)
(368)
(184)
7
(101)
(11)
60
(6)
(330)
e) Deferred taxes
Tax assets in the consolidated balance sheets includes debit
balances with the Public Treasury relating to deferred tax assets.
Tax liabilities includes the liability for the Group’s various deferred
tax liabilities.
On 26 June 2013, the Basel III legal framework was included in
European law through Directive 2013/36 (CRD IV) and Regulation
575/2013 on prudential requirements for credit institutions and
investment frms (CRR), directly applicable in every member
state as from 1 January 2014, albeit with a gradual timetable
with respect to the application of, and compliance with, various
requirements.
This legislation establishes that deferred tax assets, the use of
which relies on future profts being obtained, must be deducted
from regulatory capital.
Because of the possible diferent interpretations which can be
made of the tax regulations, the outcome of the tax audits of the
years reviewed and of the open years might give rise to contingent
tax liabilities which cannot be objectively quantifed. However,
the Group’s tax advisers consider that it is unlikely that such tax
liabilities will arise, and that in any event the tax charge arising
therefrom would not materially afect the Group’s consolidated
fnancial statements.
c) Reconciliation
The reconciliation of the income tax expense calculated at the
tax rate applicable in Spain (30%) to the income tax expense
recognised and the detail of the efective tax rate are as follows:
Million of euros
2018
2017
2016
Consolidated proft (loss) before tax:
From continuing operations
14,201
12,091
10,768
From discontinued operations
-
-
-
Income tax at tax rate
applicable in Spain (30%)
By the efect of application
of the various tax rates
applicable in each country*
Of which:
Brazil
United Kingdom
United States
Chile
14,201
12,091
10,768
4,260
3,628
3,230
509
539
312
719
(99)
(57)
(35)
656
(78)
68
(48)
396
(63)
94
(54)
Efect of deduction of
goodwill in Brazil
Efect of reassessment
of deferred taxes
Permanent diferences**
-
-
338
(282)
374
(20)
77
Current income tax
4,886
3,884
3,282
Efective tax rate
Of which:
34,40%
32,12% 30,48%
Continuing operations
4,886
3,884
3,282
Discontinued operations (Note 37)
-
-
-
Of which:
Current taxes
Deferred taxes
4,763
3,777
123
107
1,493
1,789
Taxes paid in the year
3,342
4,137
2,872
* Calculated by applying the diference between the tax rate applicable
in Spain and the tax rate applicable in each jurisdiction to the proft or
loss contributed to the Group by the entities which operate in each
jurisdiction.
** Including the recognition of tax credits in Portugal in 2018.
562
Efect of proft or loss of
associates and joint ventures
(221)
(211)
(133)
Total
(164)
(184)
2018 (Note 1.b).
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January
2018 Auditors’ report and consolidated annual accounts
In this regard, pursuant to Basel III, in recent years several
countries have amended their tax regimes with respect to certain
deferred tax assets so that they may continue to be considered
regulatory capital since their use does not rely on the future profts
of the entities that generate them (referred to hereinafter as
“monetizable tax assets”).
Italy had a very similar regime to that described above, which
was introduced by Decree-Law no. 225, of 29 December 2010, and
amended by Law no. 10, of 26 February 2011.
In addition, in 2013 in Brazil, by means of Provisional Measure no.
608, of 28 February 2013 and, in Spain, through Royal Decree-
Law 14/2013, of 29 November confrmed by Law 27/2014, of 27
November tax regimes were established whereby certain deferred
tax assets (arising from provisions to allowances for loan losses in
Brazil and provisions to allowances for loan losses, provisions to
allowances for foreclosed assets and provisions for pension and
pre-retirement obligations in Spain) may be converted into tax
receivables in specifc circumstances. As a result, their use does not
rely on the entities obtaining future profts and, accordingly, they
are exempt from deduction from regulatory capital.
In 2015 Spain completed its regulations on monetizable tax assets
with the introduction of a fnancial contribution which will involve
the payment of 1.5% for maintaining the right to monetise which
will be applied to the portion of the deferred tax assets that qualify
under the legal requirements as monetizable assets generated
prior to 2016.
In a similar manner, Italy, by decree of 3 May 2016 has introduced
a fee of 1.5% annually to maintain the monetizable of part of the
deferred tax assets.
The detail of deferred tax assets, by classifcation as monetizable
or non-monetizable assets, and of deferred tax liabilities at 31
December 2018, 2017 and 2016 is as follows:
Million of euros
Tax assets:
Tax losses and tax credits
Temporary diferences
Of which:
Non-deductible provisions
Valuation of fnancial instruments
Loan losses
Pensions
Valuation of tangible and
intangible assets
Tax liabilities:
Temporary diferences
Of which:
Valuation of fnancial instruments
Valuation of tangible and
intangible assets
Investments in Group companies
* Not deductible from regulatory capital.
2018
2017
2016
Monetizable* **
Other
Monetizable* **
Other
Monetizable *
10,866
12,392
11,046
12,164
-
10,866
4,276
8,116
-
4,457
11,046
7,707
-
-
7,279
3,587
-
-
-
-
-
-
2,613
609
1,308
632
1,215
5,568
5,568
1,168
1,503
880
-
-
2,336
530
7,461
1,159
3,585
723
-
-
-
-
-
-
1,077
4,837
4,837
1,207
1,256
808
9,649
-
9,649
-
-
6,082
3,567
-
-
-
-
-
-
Other
11,615
4,934
6,681
1,645
1,042
940
641
537
5,694
5,694
1,105
1,916
1,265
** Banco Popular Español, S.A.U. requested the conversion of part of its monetizable assets in 2017 (EUR 486 million which were approved in 2018) and in
2018 (EUR 995 million pending resolution) given the circumstances of the aforementioned regulations are applied.
563
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The Group only recognises deferred tax assets for temporary
diferences or tax loss and tax credit carryforwards where it is
considered probable that the consolidated entities that generated
them will have sufcient future taxable profts against which they
can be utilised.
Brazil
The deferred tax assets recognised in Brazil total EUR 5,869
million, of which EUR 3,249 million were for monetizable
temporary diferences, EUR 2,392 million for other temporary
diferences and EUR 228 million for tax losses and credits.
The deferred tax assets and liabilities are reassessed at the
reporting date in order to ascertain whether any adjustments need
to be made on the basis of the fndings of the analyses performed.
The Group estimates that the recognised deferred tax assets for
temporary diferences, tax losses and credits will be recovered in
approximately 10 years.
United States
The deferred tax assets recognised in the United States total
EUR 1,209 million, of which EUR 512 million were for temporary
diferences and EUR 697 million for tax losses and credits.
The Group estimates that the recognised deferred tax assets
for temporary diferences will be recovered before 2028. The
recognised tax loss and tax credit carryforwards will be recovered
before 2029.
These analyses take into account, inter alia: (i) the results
generated by the various entities in prior years, (ii) each entity or
tax group’s projected earnings, (iii) the estimated reversal of the
various temporary diferences, based on their nature, and (iv) the
period and limits established by the legislation of each country for
the recovery of the various deferred tax assets, thereby concluding
on each entity or tax group’s ability to recover its recognised
deferred tax assets.
The projected earnings used in these analyses are based on the
fnancial budgets approved by the Group’s directors for the various
entities applying constant growth rates not exceeding the average
long-term growth rate for the market in which the consolidated
entities operate, in order to estimate the earnings for subsequent
years considered in the analyses.
Relevant information is set forth below for the main countries
which have recognised deferred tax assets:
Spain
The deferred tax assets recognised at the Consolidated Tax Group
total EUR 12,987 million, of which EUR 7,422 million were for
monetizable temporary diferences with the right to conversion
into a credit against the Public Finance, EUR 2,465 million for other
temporary diferences and EUR 3,100 million for tax losses and
credits.
The Group estimates that the recognised deferred tax assets for
temporary diferences will be recovered in a maximum period
of 15 years. This period would also apply to the recovery of the
recognised tax loss and tax credit carryforwards.
564
2018 Auditors’ report and consolidated annual accounts
The changes in Tax assets - Deferred and Tax liabilities - Deferred
in the last three years were as follows:
Million of euros
Deferred tax assets
Tax losses and tax credits
Temporary diferences
Of which: monetizable
Deferred tax liabilities
Temporary diferences
Million of euros
Deferred tax assets
Tax losses and tax credits
Temporary diferences
Of which: monetizable
Deferred tax liabilities
Temporary diferences
Million of euros
Deferred tax assets
Tax losses and tax credits
Temporary diferences
Of which: monetizable
Deferred tax liabilities
Temporary diferences
Balances at
31
December
2017
IFRS9
Adoption
impact
(Balance at
1 January
2018)
23,210
4,457
18,753
11,046
(4,837)
(4,837)
18,373
680
-
680
273
-
-
680
Foreign
currency
balance
translation
diferences
and other
(Charge)/
credit to
asset and
liability
valuation
items adjustments
(807)
1
(808)
(843)
(114)
(114)
(921)
149
-
149
-
(315)
(315)
(166)
(Charge)/
credit to
income
241
(128)
369
390
(364)
(364)
(123)
Acquisitions
Balances
at 31
for the December
2018
year (net)
(215)
(54)
(161)
-
62
62
23,258
4,276
18,982
10,866
(5,568)
(5,568)
(153)
17,690
Balances at
31
December
2016
(Charge)/
credit to
income
Foreign
currency
balance
translation
diferences
and other
(Charge)/
credit to
asset and
liability
valuation
items adjustments
21,264
4,934
16,330
9,649
(5,694)
(5,694)
15,570
(675)
(279)
(396)
(185)
568
568
(107)
(756)
(205)
(551)
(455)
414
414
(342)
(1)
-
(1)
-
19
19
18
Acquisitions
for the
year (net)
Balances
at 31
December
2017
3,378
23,210
7
3,371
2,037
(144)
(144)
3,234
4,457
18,753
11,046
(4,837)
(4,837)
18,373
Balances at
31
December
2015
(Charge)/
credit to
income
Foreign
currency
balance
translation
diferences
and other
(Charge)/
credit to
asset and
liability
valuation
items adjustments
Acquisitions
for the
year (net)
Balances
at 31
December
2016
22,045
4,808
17,237
8,887
(5,565)
(5,565)
16,480
(1,311)
194
(1,505)
49
(478)
(478)
1,355
110
1,245
713
98
98
(1,789)
1,453
(551)
-
(551)
-
(26)
(26)
(577)
(274)
(178)
(96)
-
277
277
3
21,264
4,934
16,330
9,649
(5,694)
(5,694)
15,570
565
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Also, the Group did not recognise deferred tax assets relating
to tax losses, tax credits for investments and other incentives
amounting to approximately EUR 5,500 million, the use of which
EUR 450 million is subject, among other requirements, to time
limits.
of credits for monetizable deferred tax assets; And negative tax
bases and (iv) the limitation of the application of deductions to
avoid double taxation, all this makes provision for an increase in
the amount of taxes payable in Spain in the coming years by the
consolidated tax group.
f) Tax reforms
The following signifcant tax reforms were approved in 2018 and
previous years:
The Tax Cuts and Jobs Act (the 2017 Act) was approved in the United
States on 22 December 2017. The main amendments introduced
in this tax regulation afected the US corporate tax rates, some
business-related exclusions and deductions and credits. Likewise,
this amendment entailed an international tax impact for many
companies that operate internationally. The main impact is derived
from the decrease in the federal tax rate that was reduced from
35% to 21%, which afected both the amount and estimation of the
recoverability of deferred tax assets and liabilities during 2017 as
well as the proft after tax from 2018. The estimated impact on the
Group, arisen from the afected subsidiaries, which was already
recorded as of 31 December 2017, did not represent a signifcant
amount in the attributable proft.
On 29 December 2017, Law No. 27430 on the reform of the
Argentine tax system was published, whose main measures
entered into force on 1 January 2018, therefore it had no efect
on the Group’s accounts in 2017. Among other measures, it is
established a gradual reduction of the income tax from the 35%
applicable until 2017, to 30% in 2018 and 2019, and up to 25% in
2020 and ahead, which is complemented by a dividend withholding
of 7% for those distributed with a charge to 2018 and 2019 fnancial
years, and 13% if distributed with a charge to 2020 onwards.
On December 2016, the Royal Decree-Law 3-2016 was approved
in Spain under which the following tax measures were adopted,
among others,: (i) The limit for the integration of deferred
monetizable tax assets, as well as for set-of for the negative tax
was reduced( the limit was reduced from 70% to 25% of the tax
base), (ii) this regulation set out a new limit of 50% of the tax rate
for the application of deductions in order to avoid double taxation,
(iii) this regulation also set out the compulsory impairment
reversion for deductible participations in previous years by one
ffths independently from the recovery of the participated, and
(iv) the regulation included the non-deductibility of the losses
generated from the transmission of participations performed from
1 January 2017.
The efects of this reform for the consolidated tax Group were: (i)
the consolidation in 2016 of deferred tax assets for impairment
of non-deductible participations, in a non signifcant amount; (ii)
the integration in 2016 tax base and the next four fscal years of a
minimum reversal of the impairment of investments in shares that
were tax deductible in years prior to 2013, that has no an adverse
efect on the accounts, since there are no legal restrictions on
the availability of shares; (iii) the slowdown in the consumption
In the United Kingdom, a progressive reduction was approved
in 2016 regarding the tax rate of the Corporate Tax, from 20% to
17%. The applicable rate from 1 April 2017 is of 19%, and it will
be 17% from 1 April 2020. Also in 2015, a surcharge of 8% on the
standard income tax rate for bank profts was approved. This
surcharge applies from 1 January 2016. In addition, from 2015
customer remediation payments are no longer considered to be
tax-deductible.
In Poland, the introduction of a tax on certain bank assets at a
monthly rate of 0.0366%, which comes into force in 2016, was
approved.
In Brazil, in 2015, there was also an increase for insurance
and fnancial companies and in the rate of the Brazilian social
contribution tax on net income (CSL) from 15% to 20% (applicable
from 1 September 2015 to 31 December 2018).Since 1 January 2019,
the tax rate is 15% again, as a result of which the income tax rate
(25%) plus the CSL rate total 40% for those companies.
As a result of the tax reform approved in Chile in 2012, the
applicable tax rate gradually increased from 20% to 27% from 2018
onwards.
g) Other information
In compliance with the disclosure requirement established in
the Listing Rules Instrument 2005 published by the UK Financial
Conduct Authority, it is hereby stated that shareholders of the
Bank resident in the United Kingdom will be entitled to a tax credit
for taxes paid abroad in respect of withholdings that the Bank has
to pay on the dividends to be paid to such shareholders if the total
income of the dividend exceeds the amount of exempt dividends
of GBP 2,000 for the year 2018/19. The shareholders of the Bank
resident in the United Kingdom who hold their ownership interest
in the Bank through Santander Nominee Service will be informed
directly of the amount thus withheld and of any other data they
may require to complete their tax returns in the United Kingdom.
The other shareholders of the Bank resident in the United Kingdom
should contact their bank or securities broker.
Banco Santander, S.A. is part of the Large Business Forum and has
adhered since 2010 to the Code of Good Tax Practices in Spain.
Also Santander UK is a member of the HMRC’s Code of Practice on
Taxation in the United Kingdom, actively participating in both cases
in the cooperative compliance programs being developed by these
Tax Administrations.
566
2018 Auditors’ report and consolidated annual accounts
28. Non-controlling interests
Non-controlling interests include the net amount of the equity of
subsidiaries attributable to equity instruments that do not belong,
directly or indirectly, to the Bank, including the portion attributed
to them of proft for the year.
a) Breakdown
The detail, by Group company, of Equity - Non-controlling interests
is as follows:
Million of euros
2018
2017
2016
Santander Consumer USA Holdings Inc.
1,652
1,479
1,963
Santander Bank Polska S.A.
1,538
1,901
1,653
Grupo PSA
1,409
1,305
1,149
Banco Santander (Brasil) S.A.
1,114
1,489
1,784
Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo
Financiero Santander México
1,093
1,056
1,069
Banco Santander - Chile
1,085
1,209
1,204
Grupo Metrovacesa
Other companies*
-
836
449
1,493
1,481
1,208
9,384
10,756
10,479
Proft/(Loss) for the year attributable
to non-controlling interests
1,505
1,588
1,282
Of which:
Banco Santander (Brasil) S.A.
Banco Santander (Chile) S.A.
Grupo PSA
Santander Consumer
USA Holdings Inc.
Banco Santander México, S.A.
Institución de Banca Múltiple, Grupo
Financiero Santander México
Santander Bank Polska S.A.
Other companies
292
279
232
288
264
206
194
215
171
218
368
256
216
173
95
194
160
108
190
148
108
10,889
12,344
11,761
* Includes a Santander UK plc issuance of perpetual equity instruments of
EUR 1,280 million in 2018 (EUR 1,290 million and EUR 753 million in 2017
and 2016, respectively).
b) Changes
The changes in Non-controlling interests are summarised as
follows:
Million of euros
2018*
2017
2016
Balance at the end of the previous year
12,344
11,761
10,713
Efect of changes in accounting policies**
(1,292)
-
-
Balance at beginning of year
11,052
11,761
10,713
Other comprehensive income
Exchange diferences
Cash fow hedge
Available for sale equity
Available for sale fxed income
Changes in the fair value
of equity instruments
Changes in the fair value
of debt instruments
Other
Other
(109)
(583)
(135)
(653)
(1)
(12)
40
(1)
(11)
(2)
71
12
(54)
1,166
374
360
45
(30)
38
(39)
674
Proft attributable to non-
controlling interests
1,505
1,588
1,282
Modifcation of participation rates
(65)
(819)
(28)
Change of perimeter
(660)
(39)
(197)
Dividends paid to minority
shareholders
(687)
(665)
(800)
Changes in capital and others concepts
(147)
1,101
417
Balance at end of year
10,889
12,344
11,761
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1
January 2018 (Note 1.b).
** See change in consolidated statements of changes in total equity.
During 2016, there was a decrease of EUR 621 million in Non -
controlling interests due to the transaction of Metrovacesa, S.A.
(See Note 3).
Additionally, during the year 2016, the Group incorporated the
remaining geographies included in the PSA framework agreement
(Netherlands, Belgium, Italy, Germany, Brazil and Poland) (see
Note 3), generating an increase in the balance of Non - controlling
interests of EUR 410 million.
During the year 2017, the Group completed the acquisition of 9.65%
of shares of Santander Consumer USA Holdings Inc (See Note 3),
which resulted in a reduction of EUR 492 million in the balance of
Non - controlling interests.
567
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
In 2018 there was a loss of control over Metrovacesa, S.A. in the
Group, which has led to a decrease of EUR 826 million in the
balance of Minority interests (see Note 3).
The foregoing changes are shown in the consolidated statement of
changes in total equity.
c) Other information
The fnancial information on the subsidiaries with signifcant non-
controlling interests at 31 December 2018 is summarised below:
Million of euros*
Total assets
Total liabilities
Net assets
Total income
Total proft
Banco Santander
(Brasil) S.A.
Banco Santander
- Chile
Grupo Financiero
Santander México,
S.A.B de C.V.
Santander Bank
Polska S.A.
Santander
Consumer USA
Holdings Inc.
166,036
150,760
15,276
13,345
2,940
50,911
46,035
4,876
2,535
901
65,876
60,507
5,369
3,527
975
43,669
38,736
4,933
1,488
424
38,526
32,340
6,186
4,215
710
* Information prepared in accordance with the segment reporting criteria described in Note 52 and, therefore, it may not coincide with the information
published separately by each entity.
• Other reclassifcations: includes the amount of the transfers
made in the year between the various valuation adjustment
items.
The amounts of these items are recognised gross, including the
amount of the Other comprehensive income relating to non-
controlling interests, and the corresponding tax efect is presented
under a separate item, except in the case of entities accounted for
using the equity method, the amounts for which are presented net
of the tax efect.
29. Other comprehensive income
The balances of Other comprehensive income include the
amounts, net of the related tax efect, of the adjustments to
assets and liabilities recognised in equity through the consolidated
statement of recognised income and expense. The amounts arising
from subsidiaries are presented, on a line by line basis, in the
appropriate items according to their nature.
Respect to items that may be reclassifed to proft or loss, the
consolidated statement of recognised income and expense
includes changes in other comprehensive income as follows:
• Revaluation gains (losses): includes the amount of the income,
net of the expenses incurred in the year, recognised directly in
equity. The amounts recognised in equity in the year remain
under this item, even if in the same year they are transferred to
the income statement or to the initial carrying amount of the
assets or liabilities or are reclassifed to another line item.
• Amounts transferred to income statement: includes the amount
of the revaluation gains and losses previously recognised in
equity, even in the same year, which are recognised in the income
statement.
• Amounts transferred to initial carrying amount of hedged
items: includes the amount of the revaluation gains and losses
previously recognised in equity, even in the same year, which are
recognised in the initial carrying amount of assets or liabilities as
a result of cash fow hedges.
568
2018 Auditors’ report and consolidated annual accounts
a) Breakdown of Other comprehensive income
- Items that will not be reclassifed in results
and Items that can be classifed in results
Million of euros
Other comprehensive income
Items that will not be reclassifed to proft or loss
Actuarial gains and losses on defned beneft pension plans
Non-current assets held for sale
Share in other income and expenses recognised in
investments, joint ventures and associates
Other valuation adjustments
Changes in the fair value of equity instruments measured at fair
value with changes in other comprehensive income
Inefciency of fair value hedges of equity instruments measured at
fair value with changes in other comprehensive income
Changes in the fair value of equity instruments measured at fair value
with changes in other comprehensive income (hedged item)
Changes in the fair value of equity instruments measured at fair value
with changes in other comprehensive income (hedging instrument)
Changes in the fair value of fnancial liabilities measured at fair value
through proft or loss attributable to changes in credit risk
Items that may be reclassifed to proft or loss
Hedges of net investments in foreign operations (efective portion)
Exchange diferences
Cash fow hedges (efective portion)
Changes in the fair value of debt instruments measured at fair
value with changes in other comprehensive income
Hedging instruments (items not designated)
Financial assets available for sale
Debt instruments
Equity instruments
Non-current assets held for sale
Share in other income and expenses recognised in
investments, joint ventures and associates
31/12/2018
(IFRS9)*
31/12/2017
(IAS39)
31/12/2016
(IAS39)
(22,141)
(2,936)
(3,609)
-
1
-
597
-
-
-
75
(19,205)
(4,312)
(15,730)
277
828
-
-
(268)
(21,776)
(4,034)
(4,033)
-
(1)
-
(15,039)
(3,933)
(3,931)
-
(2)
-
(17,742)
(4,311)
(15,430)
152
2,068
1,154
914
-
(221)
(11,106)
(4,925)
(8,070)
469
1,571
423
1,148
-
(151)
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
b) Other comprehensive income- Items not
reclassifed to proft or loss – Actuarial gains or
(-) losses on defned beneft pension plans
Other comprehensive income – Items not reclassifed to proft
or loss – Actuarial gains or (-) losses on defned beneft pension
plans include the actuarial gains and losses and the return on plan
assets, less the administrative expenses and taxes inherent to the
plan, and any change in the efect of the asset ceiling, excluding
amounts included in net interest on the net defned beneft liability
(asset).
Its variation is shown in the consolidated statement of income and
expense.
The provisions against equity in 2018 amounted to EUR 618 million
- See Note 25.b -, with the following breakdown:
• Decrease of EUR 65 million in the accumulates actuarial losses
relating to the Group´s entities in Spain, mainly due to the
evolution experienced by the discount rate - increase from 1.40%
to 1.55%.
• Decrease of EUR 481 million in the cumulative actuarial losses
relating to the Group´s businesses in the UK, mainly due to the
evolution experienced by the discount rate - increase from 2.49%
to 2.90%.
• Increase of EUR 95 million in accumulated actuarial losses
corresponding to the Group’s business in Brazil, mainly due to
the reduction in the discount rate (from 9.53% to 9.11% in pension
benefts and 9.65% to 9.26% in medical benefts), as well as
variations in the other hypotheses.
569
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The other modifcation in accumulated actuarial proft or losses is a
decrease of EUR 167 million as a result of exchange rate and other
efects, mainly in Brazil (depreciation of the real).
c) Other comprehensive income - Items that will
not be reclassifed in results - Changes in the fair
value of equity instruments measured at fair value
with changes in other comprehensive income
Includes the net amount of unrealised fair value changes of equity
instruments at fair value with changes in other comprehensive
income.
The following is a breakdown of the composition of the balance as
of 31 December 2018 (IFRS9) under “Other comprehensive income”
- Items that will not be reclassifed to proft or loss - Changes in
the fair value of equity instruments measured at fair value with
changes in other global result depending on the geographical
origin of the issuer:
Million of euros
Equity instruments
Domestic
Spain
International
Rest of Europe
United States
Latin America and rest
Of which:
Publicly listed
Non publicly listed
Capital gains
by valuation
Capital losses
by valuation
Net gains/losses
by valuation
Fair value
31/12/18*
20
160
9
708
897
818
79
(216)
(76)
-
(8)
(300)
(18)
(282)
(196)
84
9
700
597
800
(203)
417
652
42
1,560
2,671
1,943
728
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
d) Other comprehensive income - Items that
may be reclassifed to proft or loss - Hedge of
net investments in foreign operations (efective
portion) and exchange diferences
The changes in 2018 refect the negative efect of the depreciation
of large part of the currencies, mainly the Brazilian real and pound
sterling, whereas the changes in 2017 refect the negative efect of
the sharp depreciation of the Brazilian real and the US dollar.
Of the change in the balance in these years, a loss of EUR 556, 1,704
and 185 million in 2018, 2017 and 2016 relate to the measurement
of goodwill.
The detail, by country is as follows:
Million of euros
Net balance at end of year
(20,042)
(19,741)
(12,995)
2018
2017
2016
Of which:
Brazilian Real
Pound Sterling
Mexican Peso
Argentine Peso*
Chilean Peso
US Dollar
Other
(12,950)
(11,056)
(8,435)
(3,924)
(3,732)
(2,996)
(2,312)
(2,230)
(1,908)
-
(1,684)
(1,309)
(1,238)
1,330
(948)
(866)
555
(728)
(614)
2,849
(582)
* In 2018, due to the application of IAS29 for hyperinfationary economies,
they have been transferred to Other Reserves (see Note 33).
570
2018 Auditors’ report and consolidated annual accounts
e) Other comprehensive income -Items that may be
reclassifed to proft or loss - Hedging derivatives
– Cash fow hedges (Efective portion)
Other comprehensive income – Items that may be reclassifed
to proft or loss - Cash fow hedges includes the gains or losses
attributable to hedging instruments that qualify as efective
hedges. These amounts will remain under this heading until they
are recognised in the consolidated income statement in the periods
in which the hedged items af1ect it (See Note 11).
f) Other comprehensive income - Items that
may be reclassifed to proft or loss – Changes in
the fair value of debt instruments measured at
fair value with changes in other comprehensive
income (IFRS9) and available-for-sale (IAS39)
Includes the net amount of unrealised changes in the fair value of
assets classifed as Changes in the fair value of debt instruments
measured at fair value with changes in other comprehensive
income (IFRS9) and Financial assets available-for-sale (IAS39) (See
Notes 7 and 8).
The breakdown, by type of instrument and geographical origin
of the issuer, of Other comprehensive income – Items that may
be reclassifed to proft or loss - Changes in the fair value of
debt instruments measured at fair value with changes in other
comprehensive income (IFRS9) and Financial assets available-for-
sale (IAS39) at 31 December 2018, 2017 and 2016 is as follows:
Million of euros
31 December 2018*
31 December 2017
31 December 2016
n
o
i
t
a
u
l
a
v
e
R
i
s
n
a
g
n
o
i
t
a
u
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a
v
e
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s
e
s
s
o
l
n
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i
t
a
u
l
a
v
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r
t
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)
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e
s
s
o
l
(
/
s
n
a
g
i
n
o
i
t
a
u
l
a
v
e
R
i
s
n
a
g
n
o
i
t
a
u
l
a
v
e
R
s
e
s
s
o
l
e
u
l
a
v
r
i
a
F
n
o
i
t
a
u
l
a
v
e
r
t
e
N
)
s
e
s
s
o
l
(
/
s
n
a
g
i
n
o
i
t
a
u
l
a
v
e
R
i
s
n
a
g
n
o
i
t
a
u
l
a
v
e
R
s
e
s
s
o
l
e
u
l
a
v
r
i
a
F
n
o
i
t
a
u
l
a
v
e
r
t
e
N
)
s
e
s
s
o
l
(
/
s
n
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i
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u
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a
v
r
i
a
F
326
373
(3)
(55)
323
318
38,550
17,494
660
306
(25)
(24)
635
282
48,217
20,244
610
50
(26)
(170)
584
32,729
(120)
16,879
448
(117)
331
42,599
404
(129)
275
39,132
167
(163)
4
35,996
37
(178)
(141)
19,777
90
(128)
(38)
20,888
1,184
(353)
831
118,420
1,460
(306)
1,154
128,481
117
944
(162)
(521)
(45)
25,683
423
111,287
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5
166
14
744
929
828
101
(2)
(2)
(5)
(6)
(15)
(5)
(10)
3
1,373
48
(5)
43
1,309
164
9
738
914
823
91
979
560
1,878
4,790
2,900
1,890
284
21
811
1,164
999
165
(4)
-
(7)
(16)
(11)
(5)
280
21
1,016
772
804
2,390
1,148
5,487
988
160
3,200
2,287
2,389
(321)
2,068
133,271
2,108
(537)
1,571
116,774
Debt instruments
Government debt
securities and debt
Instruments issued
by central banks
Spain
Rest of Europe
Latin America and
rest of the world
Private-sector
debt securities
Equity instruments
Domestic
Spain
International
Rest of Europe
United States
Latin America and
rest of the world
Of which:
Listed
Unlisted
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
571
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
At the end of 2017 and 2016 the Group assessed whether there is
any objective evidence that the instruments classifed Changes
in the fair value of debt and equity instruments measured at fair
value with changes in other comprehensive income and Financial
assets available-for-sale (IAS39) (debt securities and equity
instruments) were impaired.
This assessment included but was not limited to an analysis of
the following information: i) the issuer’s economic and fnancial
position, the existence of default or late payment, analysis of
the issuer’s solvency, the evolution of its business, short-term
projections, trends observed with respect to its earnings and,
if applicable, its dividend distribution policy; ii) market-related
information such as changes in the general economic situation,
changes in the issuer’s sector which might afect its ability to pay;
iii) changes in the fair value of the security analysed, analysis of the
origins of such changes - whether they are intrinsic or the result
of the general uncertainty concerning the economy or the country
- and iv) independent analysts’ reports and forecasts and other
independent market information.
As of 1 January 2018, with the entry into force of IFRS9, the Group
estimates the expected losses on debt instruments measured at
fair value with changes in other comprehensive income. These
losses are recorded with a charge to the consolidated income
statement for the period.
At the end of the years 2018, 2017 and 2016, the Group recorded
under Impairment or reversal of impairment on fnancial assets
not measured at fair value through proft or loss, net due to
modifcation of the consolidated income statement, in the line of
fnancial assets at fair value with changes in other comprehensive
income (IFRS9) a provision of EUR 1 million in 2018, and in the line
of available-for-sale fnancial assets (IAS39) a provision of EUR 10
million in equity instruments in 2017, and a reversal of provision of
EUR 25 million and a provision of EUR 14 million in debt and equity
instruments, respectively, in 2016.
Until 31 December 2017, in the case of quoted equity instruments,
when the changes in the fair value of the instrument under analysis
were assessed, the duration and signifcance of the fall in its
market price below cost for the Group was taken into account. As a
general rule, for these purposes the Group considers a signifcant
fall to be a 40% drop in the value of the asset or a continued fall
over a period of 18 months. Nevertheless, it should be noted that
the Group assessed, on a case-by-case basis, each of the securities
that have sufered losses, and monitors the performance of their
prices, recognising an impairment loss as soon as it is considered
that the recoverable amount could be afected, even though the
price may not have fallen by the percentage or for the duration
mentioned above.
If, after the above assessment has been carried out, the Group
considers that the presence of one or more of these factors could
afect recovery of the cost of the asset, an impairment loss was
recognised in the income statement for the amount of the loss
registered in equity under Other comprehensive income – Items
that may be reclassifed to proft or loss – Items not reclassifed
to proft or loss – Other Valuation adjustments. Also, where the
Group was not intend and/or is not able to hold the investment for
a sufcient amount of time to recover the cost, the instrument was
written down to its fair value.
As of January 1 2018, with the entry into force of IFRS9, no
impairment analysis is performed of equity instruments
recognised under Other comprehensive income. IFRS9 eliminates
the need to carry out the impairment estimate on this class of
equity instruments and the reclassifcation to proft and loss on the
disposal of these assets.
g) Other comprehensive income - Items that may be
reclassifed to proft or loss and Items not reclassifed to
proft or loss - Other recognised income and expense of
investments in subsidiaries, joint ventures and associates
The changes in other comprehensive income - Entities accounted
for using the equity method were as follows:
Million of euros
Balance at beginning of year
Revaluation gains/(losses)
Net amounts transferred
to proft or loss
2018
(222)
(65)
2017
(153)
(84)
2016
(232)
79
20
15
-
Balance at end of year
(267)
(222)
(153)
Of which:
Zurich Santander
Insurance América, S.L.
(159)
(145)
(84)
30. Shareholders’ equity
The changes in Shareholders’ equity are presented in the
consolidated statement of changes in total equity. Signifcant
information on certain items of Shareholders’ equity and the
changes therein in 2018 is set forth below.
31. Issued capital
a) Changes
At 31 December 2015 the Bank’s share capital consisted of
14,434,492,579 shares with a total par value of EUR 7,217 million.
On 4 November 2016, a capital increase of EUR 74 million was
made, through which the Santander Dividendo Elección scrip
dividend scheme took place, whereby 147,848,122 shares were
issued (1.02% of the share capital).
At 31 December 2016 the Bank’s share capital consisted of
14,582,340,701 shares with a total par value of EUR 7,291 million.
As a result of the acquisition of Banco Popular Español, S.A.U.
described in Note 3, and in order to strengthen and optimize
the Bank’s equity structure to provide adequate coverage of the
acquisition, the Group, on 3 July 2017, reported on the agreement
of the executive committee of Banco Santander, S.A. to increase
the capital of the Bank by EUR 729 million by issuing and putting
into circulation 1,458,232,745 new ordinary shares of the same
572
2018 Auditors’ report and consolidated annual accounts class and series as the shares currently in circulation and with
preferential subscription rights for the shareholders.
The issue of new shares was carried out at a nominal value of ffty
euro cents (EUR 0.50) plus a premium of EUR 4.35 per share, so the
total issue rate of the new shares was EUR 4.85 per share and the
total efective amount of the capital increase (including nominal
and premium) of EUR 7,072 million.
Each outstanding share had been granted a preferential
subscription right during the preferential subscription period
that took place from 6 to 20 July 2017, where 10 preferential
subscription rights were required to subscribe 1 new share.
On 7 November 2017, a capital increase of EUR 48 million was
made, through which the Santander Dividendo Elección scrip
dividend scheme took place, whereby 95,580,136 shares were
issued (0.6% of the share capital).
At 31 December 2017 the Bank’s share capital consisted of
16,136,153,582 shares with a total par value of EUR 8,068 million.
On 7 November 2018, a capital increase of EUR 50 million was
made, through which the Santander Dividendo Elección scrip
dividend scheme took place, whereby 100,420,360 shares were
issued (0.62% of the share capital).
Therefore, the Bank’s new capital consists of EUR 8,118 million at 31
December 2018, represented by 16,236,573,942 shares of EUR 0.50
of nominal value each one and all of them from a unique class and
series.
The Bank’s shares are listed on the Spanish Stock Market
Interconnection System and on the New York, London, Mexico
and Warsaw Stock Exchanges, and all of them have the same
features and rights. Santander shares are listed on the London
Stock Exchange under Crest Depository Interest (CDI’s), each CDI
representing one Bank’s share. They are also listed on the New
York Stock Exchange under American Depositary Receipts (BDRs),
each BDR representing one share. During 2018 and the beginning
of 2019 the number of markets where the Bank is listed has been
reduced; the Bank’s shares has been delisted from Buenos Aires,
Milan, Lisboa and Sao Paulo’s markets.
At 31 December 2018, the only shareholders listed in the Bank’s
shareholders register with ownership interests of more than
3%1 were State Street Bank & Trust Company (13.09%), The Bank
of New York Mellon Corporation (8.85%), Chase Nominees Ltd.
(6.69%), EC Nominees Limited (3.96%) and BNP Paribas (3.79%).
However, the Bank considers that these ownership interests are
held in custody on behalf of third parties and that none of them, as
far as the Bank is aware, has an ownership interest of more than
3% of the Bank’s share capital2 or voting power.
As of 31 December 2018, the shareholders of the Bank did not have
owners of shares resident in tax havens with a participation of
more than 1% of the share capital.
(1) The threshold stipulated in Royal Decree 1362/2007 of 19 October, which
implemented the Spanish Securities Market Act 24/1988 of 28 July
defning the concept of signifcant holding.
(2) The website of the Comisión Nacional del Mercado de Valores (www.
cnmv.es) contains a notice of signifcant holding published by Blackrock,
Inc. on 09 August 2017, in which it notifes an indirect holding in the voting
rights attributable to Bank shares of 5.585%, plus a further stake of
0.158% held through fnancial instruments. During 2018, Blackrock Inc.
informed the Spanish CNMV of the following movements regarding its
voting rights in the Bank: 23 April 2018, reduction below 5%, and 8 May
2018, increase above 5%. 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 2018.
b) Other considerations
The shareholders at the annual general meeting of 18 March 2016
also resolved to increase the Bank’s capital by a par value of EUR
500 million and granted the board the broadest powers to set
the date and establish the terms and conditions of this capital
increase within one year from the date of the aforementioned
annual general meeting. If the board does not exercise the powers
delegated to it within the period established by the annual general
meeting, these powers will be rendered null and void.
In addition, the ordinary general meeting of shareholders of 7 April
2017 also agreed to delegate to the board of directors the broadest
powers so that, within one year from the date of the meeting, it
can indicate the date and set the conditions for a capital increase
with the issuance of new shares, for an amount of EUR 500 million.
The capital increase will have no value or efect if, within the period
of one year, the board of directors does not exercise the powers
delegated to it.
Likewise, the additional capital authorised by the ordinary
general meeting of shareholders on 7 April 2017 is not more than
EUR 3,645,585,175. The term available to the Bank’s administrators
to execute and carry out capital increases up to that limit ends on
7 April 2020. The agreement grants the board the power to totally
or partially exclude the pre-emptive subscription right under the
terms of article 506 of the Capital Companies Law, although this
power is limited to EUR 1,458,234,070.
At 23 March 2018, the ordinary general meeting of shareholders
also agreed to delegate to the board of directors the broadest
power to execute the capital increase agreement adopted by
the shareholders meeting and the authorization to the Board of
directors to increase it.
At 31 December 2018 the shares of the following companies were
listed on ofcial stock markets: Banco Santander Río, S.A.; Grupo
Financiero Santander México, S.A. de C.V.; Banco Santander - Chile;
Cartera Mobiliaria, S.A., SICAV; Santander Chile Holding S.A.; Banco
Santander (Brasil) S.A., Santander Bank Polska S.A. (former Bank
Zachodni WBK S.A.) and Santander Consumer USA Holdings Inc.
At 31 December 2018 the number of Bank shares owned by third
parties and managed by Group management companies (mainly
portfolio, collective investment undertaking and pension fund
managers) or jointly managed was 63 million shares, which
represented 0.39% of the Bank’s share capital. In addition, the
573
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
number of Bank shares owned by third parties and received as
security was 212 million shares (equal to 1.30% of the Bank’s share
capital).
b) Breakdown
The detail of Accumulated retained earnings and Reserves of
entities accounted for using the equity method is as follows:
At 31 December 2018 the capital increases in progress at Group
companies and the additional capital authorised by their
shareholders at the respective general meetings were not material
at Group level (See Appendix V).
32. Share premium
Share premium includes the amount paid up by the Bank’s
shareholders in capital issues in excess of the par value.
The Spanish Limited Liability Companies Law expressly permits
the use of the share premium account balance to increase capital
at the entities at which it is recognised and does not establish any
specifc restrictions as to its use.
The reduction of EUR 74 million in 2016 is the result for the capital
increases arising from the Santander Dividendo Elección scrip
dividend scheme. The increase in the balance of Share premium
in 2017 is the result of the capital increase of EUR 6,343 million
approved on 3 July 2017 (See note 31.a) and the reduction of EUR 48
million is due the capital increases charge to reserve arising from
the Santander Diviendo Elección program.
The decrease produced in 2018 is a consequence of the reduction
of EUR 50 million to cope with the capital increase as a result of the
Santander Dividendo Elección program.
Also, in 2018, 2017 and 2016 an amount of EUR 10 million was
transferred from the Share premium account to the Legal reserve
(2017: EUR 154 million; 2016: EUR 15 million) (See note 33.b.i).
33. Accumulated retained earnings
a) Defnitions
The balance of Equity - Accumulated gains and Other reserves
includes the net amount of the accumulated results (profts or
losses) recognised in previous years through the consolidated
income statement which in the proft distribution were allocated
in equity, the expenses of own equity instrument issues, the
diferences between the amount for which the treasury shares
are sold and their acquisition price, as well as the net amount
of the results accumulated in previous years, generated by the
result of non-current assets held for sale, recognised through the
consolidated income statement.
Million of euros
Restricted reserves
Legal reserve
Own shares
Revaluation reserve Royal
Decree-Law 7/1996
Reserve for retired capital
Unrestricted reserves
Voluntary reserves*
Consolidation reserves
attributable to the Bank
Reserves of subsidiaries
Reserves of entities accounted
for using the equity method
2018
2017
2016
2
,580
2,880
2,686
1,624
902
1,614
1,212
1,459
1,173
43
11
43
11
43
11
12
,100
11,368
11,285
5,737
6,904
7,192
6
,363
4,464
4,093
37
,593
36,862
34,568
917
725
465
53,190
51,835
49,004
* In accordance with the commercial regulations in force in Spain.
i. Legal reserve
Under the Consolidated Spanish Limited Liability Companies Law,
10% of net proft for each year must be transferred to the legal
reserve. These transfers must be made until the balance of this
reserve reaches 20% of the share capital. The legal reserve can
be used to increase capital provided that the remaining reserve
balance does not fall below 10% of the increased share capital
amount.
In 2018 the Bank transferred EUR 10 million from the Share
premium account to the Legal reserve (2017: EUR 154 million; 2016:
EUR 15 million).
Consequently, once again, after the capital increases described
in Note 31 had been carried out, the balance of the Legal reserve
reached 20% of the share capital, and at 31 December 2018 the
Legal reserve was of the stipulated level.
ii. Reserve for treasury shares
Pursuant to the Consolidated Spanish Limited Liability Companies
Law, a restricted reserve has been recognised for an amount equal
to the carrying amount of the Bank shares owned by subsidiaries.
The balance of this reserve will become unrestricted when the
circumstances that made it necessary to record it cease to exist.
Additionally, this reserve covers the outstanding balance of loans
granted by the Group secured by Bank shares and the amount
equivalent to loans granted by Group companies to third parties
for the acquisition of treasury shares plus the own treasury shares
amount.
iii. Revaluation reserve Royal Decree Law 7/1996, of 7 June
The balance of Revaluation reserve Royal Decree-Law 7/1996 can
be used, free of tax, to increase share capital. From 1 January 2007,
the balance of this account can be taken to unrestricted reserves,
provided that the monetary surplus has been realised. The surplus
will be deemed to have been realised in respect of the portion on
574
2018 Auditors’ report and consolidated annual accounts
which depreciation has been taken for accounting purposes or
when the revalued assets have been transferred or derecognised.
b) Own shares
Shareholders’ equity - Own shares includes the amount of own
equity instruments held by all the Group entities.
If the balance of this reserve were used in a manner other than
that provided for in Royal Decree-Law 7/1996, of 7 June, it would be
subject to taxation.
iv. Reserves of subsidiaries
The detail, by company, of Reserves of subsidiaries, based on the
companies’ contribution to the Group (considering the efect of
consolidation adjustments) is as follows:
Million of euros
Banco Santander (Brasil)
S.A. (Grupo Consolidado)
Grupo Santander UK
Grupo Santander Holdings USA
Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo
Financiero Santander México
Banco Santander - Chile
Grupo Santander Consumer Finance
Banco Santander Totta, S.A.
(Grupo Consolidado)
Santander Bank Polska S.A.
Santander Seguros y Reaseguros,
Compañía Aseguradora, S.A.
Banco Santander (Suisse) SA
Santander Investment, S.A.
Banco Santander Río S.A.
Cartera Mobiliaria, S.A., SICAV
Exchange diferences, consolidation
adjustments and other companies*
Of wich, restricted
2018
2017
2016
10,755
9,874
8,993
8,207
4,260
7,724
4,150
6,887
4,091
3,436
2,963
2,841
2,729
1,387
714
369
208
(82)
-
3,229
2,764
2,465
2,821
1,093
638
381
202
1,639
-
3,255
2,630
2,027
2,593
967
824
354
349
1,326
377
(194)
(118)
(105)
37,593
36,862
34,568
2,964
2,777
2,730
* Includes the charge relating to cumulative exchange diferences in the
transition to International Financial Reporting Standards.
34. Other equity instruments
and own shares
a) Equity instruments issued not capital
and other equity instruments
Other equity instruments includes the equity component of
compound fnancial instruments, the increase in equity due to
personnel remuneration, and other items not recognised in other
“Shareholders’ equity” items.
On 8 September 2017, Banco Santander issued contingent
redeemable perpetual bonds (the “Fidelity Bonds”) amounting
to EUR 981 million nominal value - EUR 686 million fair value- of
those in the power of third parties an amount amounting to EUR
549 million. On 31 December 2018 amounted to EUR 565 million.
Aditionally, at 31 December 2018 the Group had other equity
instruments amounting to EUR 234 million.
Transactions involving own equity instruments, including their
issuance and cancellation, are recognised directly in equity, and no
proft or loss may be recognised on these transactions. The costs
of any transaction involving own equity instruments are deducted
directly from equity, net of any related tax efect.
On 21 October 2013 and 23 October 2014 the Bank’s board of
directors amended the regulation of its treasury share policy in
order to take into account the criteria recommended by the CNMV,
establishing limits on average daily purchase trading and time
limits. Also, a maximum price per share was set for purchase
orders and a minimum price per share for sale orders.
The Bank’s shares owned by the consolidated companies
accounted for 0.075% of issued share capital at 31 December 2018
(31 December 2017: 0.024%; 31 December 2016: 0.010%).
The average purchase price of the Bank’s shares in 2018 was EUR
4.96 per share and the average selling price was EUR 4.98 per
share.
The efect on equity, net of tax, arising from the purchase and sale
of Bank shares was of EUR 0 million in 2018 (2017: EUR 26 million;
2016: EUR 15 million).
35. Memorandum items
Memorandum items relates to balances representing rights,
obligations and other legal situations that in the future may have
an impact on net assets, as well as any other balances needed
to refect all transactions performed by the consolidated entities
although they may not impinge on their net assets.
a) Guarantees and contingent commitments granted
Contingent liabilities includes all transactions under which an
entity guarantees the obligations of a third party and which result
from fnancial guarantees granted by the entity or from other types
of contract. The detail is as follows:
Million of euros
31/12/18
31/12/17
31/12/16
Loans commitment granted
218,083
207,671
202,097
Of which doubtful
298
81
8
Financial guarantees granted
11,723
14,499
17,244
Of which doubtful
181
254
1,070
Financial guarantees
11,557
14,287
17,244
Credit derivatives sold
166
212
-
Other commitments granted
74,389
64,917
57,055
Of which doubtful
983
992
-
Technical guarantees
35,154
30,273
23,684
Other
39,235
34,644
33,371
575
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
ii) Non-managed marketed funds
At 31 December 2018 there are non-managed marketed funds
totalling EUR 42,211 million (31 December 2017: EUR 41,398 million;
31 December 2016: EUR 23,247 million).
c) Third-party securities held in custody
At 31 December 2018 the Group held in custody debt securities and
equity instruments totalling EUR 940,650 million (31 December
2017: EUR 997,061 million; 31 December 2016 EUR 965,648 million)
entrusted to it by third parties.
36. Hedging derivatives
The Group, within its fnancial risk management strategy, and in
order to reduce asymmetries in the accounting treatment of its
operations, enters into hedging derivatives on interest, exchange
rate, credit risk or variation of stock prices, depending on the
nature of the risk covered.
Based on its objective, the Group classifes its hedges in the
following categories:
• Cash fow hedges: cover the exposure to the variation of the
cash fows associated with an asset, liability or a highly probable
forecast transaction. This cover the variable-rate issues in foreign
currencies, fxed-rate issues in non-local currency, variable-rate
interbank fnancing and variable-rate assets (bonds, commercial
loans, mortgages, etc.).
• Fair value hedges: cover the exposure to the variation in the fair
value of assets or liabilities, attributable to an identifed and
hedged risk. This covers the interest risk of assets or liabilities
(bonds, loans, bills, issues, deposits, etc.) with coupons or fxed
interest rates, interests in entities, issues in foreign currencies
and deposits or other fxed rate liabilities.
• Hedging of net investments abroad: cover the exchange rate risk
of the investments in subsidiaries domiciled in a country with a
diferent currency from the functional one of the Group.
The following table contains details of the hedging instruments
used in the Group’s hedging strategies as of 31 December 2018:
The breakdown as at 31 December 2018 of the exposures and the
provision fund (see note 25) out of balance sheet by impairment
stage under IFRS9 is EUR 297,409 million and EUR 382 million
in stage 1, EUR 5,324 million and EUR 132 million in stage 2 and
EUR 1,462 million and EUR 265 million in stage 3, respectively.
Additionally, the Group had provisions for guarantees and
commitments granted for an amount of EUR 617 and 459 million
and a doubtful exposure amounting to EUR 1,327 and 1,078 million,
as at 31 December 2017 and 2016, respectively.
A signifcant portion of these guarantees will expire without any
payment obligation materialising for the consolidated entities and,
therefore, the aggregate balance of these commitments cannot be
considered as an actual future need for fnancing or liquidity to be
provided by the Group to third parties.
Income from guarantee instruments is recognised under Fee and
commission income in the consolidated income statements and is
calculated by applying the rate established in the related contract
to the nominal amount of the guarantee.
i. Loan commitments granted
Loan commitments granted: frm commitments of grating of credit
under predefned terms and conditions, except for those that
comply with the defnition of derivatives as these can be settled
in cash or through the delivery of issuance of another fnancial
instrument. They include stand-by credit lines and long-term
deposits.
ii. Financial guarantees granted
Financial guarantees includes, inter alia, fnancial guarantee
contracts such as fnancial bank guarantees, credit derivatives sold,
and risks arising from derivatives arranged for the account of third
parties.
iii. Other commitments granted
Other contingent liabilities include all commitments that could
give rise to the recognition of fnancial assets not included in the
above items, such as technical guarantees and guarantees for the
import and export of goods and services.
b) Memorandum items
i) Of-balance-sheet funds under management
The detail of of-balance-sheet funds managed by the Group and
by joint ventures is as follows:
Million of euros
Investment funds
Pension funds
2018
2017
2016
127,564
135,749
129,930
11,160
11,566
11,298
Assets under management
19,131
19,259
18,032
157,855
166,574
159,260
576
2018 Auditors’ report and consolidated annual accounts
Million of euros
Fair value hedges:
Interest rate risk
Equity swap
Future interest rate
Interest rate swap
Call money swap
Currency swap
Infation swap
Swaption
Collar
Floor
Exchange rate risk
Fx forward
Interest rate and exchange rate risk
Interest rate swap
Call money swap
Currency swap
Infation risk
Call money swap
Currency swap
Credit risk
CDS
Cash fow hedges:
Interest rate risk
Fx forward
Future interest rate
Interest rate swap
Currency swap
Floor
Exchange rate risk
Future FX and c/v term FV
FX forward
Future interest rate
Interest rate swap
Currency swap
Floor
Deposits borrowed
Interest rate and exchange rate risk
Interest rate swap
Currency swap
Infation risk
FX forward
Currency swap
Equity risk
Option
Other risk
Future FX and c/v term RF
Hedges of net investments in foreign operations:
Exchange rate risk
FX forward
2018
Carrying amount
Changes in fair
value used for
calculating
hedge
Notional Value
Assets
Liabilities
inefectiveness Balance sheet line items
3,451
2,648
(5,114)
(4,616)
-
-
(2)
-
2,345
(4,168)
178,719
163,241
109
7,702
129,217
19,579
4,957
-
51
15
1,611
3,019
3,019
12,237
3,022
20
9,195
168
64
104
54
54
170
121
-
6
1
5
11
11
792
143
-
649
-
-
-
-
-
118,400
38,229
4,865
307
49
127
33,956
2,350
1,747
38,457
4,955
3,283
4,946
1,055
23,904
314
-
34,383
12,572
21,811
6,318
414
5,904
77
77
936
936
21,688
21,688
21,688
-
-
240
57
10
971
-
186
-
10
775
-
-
3,542
20
3,522
45
-
45
-
-
-
-
291
291
291
(250)
(45)
-
(6)
-
(145)
(1)
(1)
(493)
(20)
-
(473)
(4)
(3)
(1)
-
-
(976)
(229)
(1)
-
(202)
(26)
-
(568)
-
(15)
-
(5)
(548)
-
-
(124)
(97)
(27)
(30)
(9)
(21)
(4)
(4)
(21)
(21)
(273)
(273)
(273)
96
56
- Hedging derivatives
(126) Hedging derivatives
321 Hedging derivatives
(32) Hedging derivatives
(17) Hedging derivatives
9 Hedging derivatives
- Hedging derivatives
- Hedging derivatives
(99) Hedging derivatives
3
3 Hedging derivatives
42
(15) Hedging derivatives
- Hedging derivatives
57 Hedging derivatives
(5)
(3) Hedging derivatives
(2) Hedging derivatives
-
- Hedging derivatives
(28)
203
(1) Hedging derivatives
29 Hedging derivatives
159 Hedging derivatives
11 Hedging derivatives
5 Hedging derivatives
(878)
(697) Hedging derivatives
(36) Hedging derivatives
(12) Hedging derivatives
8 Hedging derivatives
(142) Hedging derivatives
- Hedging derivatives
1 Deposits
665
(7) Hedging derivatives
672 Hedging derivatives
11
(1) Hedging derivatives
12 Hedging derivatives
(8)
(8) Hedging derivatives
(21)
(21) Hedging derivatives
(1)
(1)
(1) Hedging derivatives
318,807
8,607
(6,363)
67
577
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Considering the main contributions of hedging within the Group,
the main types of hedgings that are being carried are in Santander
UK Group, Banco Santander, S.A., Consumer Group, Banco
Santander Mexico and Banco Santander Brazil that are detailed
below.
Santander UK Group enters into derivatives to provide customers
with risk management solutions and to manage and hedge the
Group’s own risks.
Within fair value hedges, Santander UK Group has portfolios of
assets and liabilities at fxed rate that are exposed to changes
in fair value due to changes in market interest rates. These
positions are managed by contracting mainly Interest Rate Swaps.
Efectiveness is assessed by comparing the changes in the fair
value of these portfolios generated by the hedged risk with the
changes in the fair value of the derivatives contracted.
Santander UK Group also has access to international markets to
obtain fnancing by issuing fxed-rate debt in its functional currency
and other currencies. As such, they are exposed to changes in
interest rates and exchange rates, mainly in EUR and USD. This
risk is mitigated with Cross Currency Swaps and Interest Rate
Swaps in which they pay a fxed rate and receive a variable rate.
Efectiveness is evaluated using linear regression techniques
to compare changes in the fair value of the debt at interest and
exchange rates with changes in the fair value of Interest Rate
Swaps or Cross Currency Swaps.
Within the cash fow hedges, Santander UK Group has portfolios of
assets and liabilities at variable rates, normally at SONIA or LIBOR.
To mitigate this risk of variability in market rates, it contracts
Interest Rate Swaps.
As Santander UK Group obtains fnancing in the international
markets, it assumes a signifcant exposure to currency risk mainly
USD and EUR. In addition, it also has debt securities for liquidity
purposes that assume exposure in foreign moneys, mainly JPY. To
manage this exchange rate risk, Spot, Forward and Cross Currency
Swap are contracted to match the cash fow profle and the
maturity of the estimated interest and principal repayments of the
hedged item.
Efectiveness, is assessed by comparing changes in the fair value
of the derivatives with changes in the fair value of the hedged
item attributable to the hedged risk by applying a hypothetical
derivative method using linear regression techniques.
In addition, within the hedges that cover equity risk, Santander UK
Group ofers employees the opportunity to purchase shares of the
Bank at a discount under the Sharesave scheme, exposing the bank
to share price risk. As such, options are purchased allowing them
to purchase shares at a pre-set price.
Banco Santander, S.A. covers the risks of its balance sheet in
a variety of ways. On the one hand, documented as fair value
hedges, it covers the interest rate, foreign currency and credit risk
of fxed-income portfolios at a fxed rate (REPOs are included in this
category). Resulting, in an exposure to changes in their fair value
due to variations in market conditions based on the various risks
hedged, which has an impact on the Bank’s income statement. To
mitigate these risks, the Bank contracts derivatives, mainly Interest
rate Swaps, Cap&Floors, Forex Forward and Credit Default Swaps.
On the other hand, the interest and exchange rate risk of loans
granted to corporate clients at a fxed rate is generally covered.
These coverages, are carried out through Interest Rate Swaps and
Cross Currency Swaps.
In addition, the Bank manages the interest and exchange risk of
debt issues in their various categories (issuing covered bonds,
perpetual, subordinated and senior bond) and in diferent
currencies, denominated at fxed rates, and therefore subject
to changes in their fair value. These issues are covered through
Interest Rate Swaps and Cross Currency Swaps.
The Bank’s methodology for measuring the efectiveness of this
type of coverage is based on comparing the markets value of the
hedged items (based on the objective risk of the hedge) and of
the hedging instruments in order to analyse whether the changes
in the market value of the hedged items are ofset by the market
value of the hedging instruments, thereby mitigating the hedged
risk. Prospectively, the same analysis is performed, measuring the
theoretical market values in the event of parallel variations in the
market curves of a positive basis point.
Finally, the Bank also manages and hedges the interest rate risk
of its mortgage portfolio and various variable rate issues in cash
fow hedges, which hedge the exposure of fows due to the risk
of variations in interest curves, which may have an impact on
the income statement. These hedges are made through mainly
Interest Rate Swaps.
The hypothetical derivative methodology is used to measure the
efectiveness of these cash fow hedges, in order to determine
the level of risk compensation based on the comparison of the
discounted net cash fows of the hedging instruments and the
hedged items.
Consumer Group entities mainly have loans portfolios at fxed
interest rates and are therefore, exposed to changes in fair value
due to movements in market interest rates. The entities manage
this risk by contracting Interest Rate Swaps in which they pay a
fxed rate and receive a variable rate. Interest rate risk is the only
one hedged and, therefore, other risks, such as credit risk, are
managed but not hedged by the entities. The interest rate risk
component is determined as the change in fair value of fxed rate
loans arising solely from changes in a reference rate. This strategy
is designated as a fair value hedge and its efectiveness is assessed
by comparing changes in the fair value of loans attributable to
changes in reference interest rates with changes in the fair value of
interest rate swaps.
In addition, in order to access international markets with the
aim of obtaining sources of fnancing, some Consumer Group´s
entities issue fxed rate debt in their own currency and in other
currencies that difer from their functional currency. Therefore,
they are exposed to changes in both interest rates and exchange
rates, which they mitigate with derivatives (Interest Rate Swaps, Fx
Forward and Cross Currency Swaps) in which they receive a fxed
interest rate and pay a variable interest rate, implemented with a
fair value hedge.
578
2018 Auditors’ report and consolidated annual accounts
The cash fow hedges of the Santander Group´s entities hedge the
foreign currency risk of loans and fnancing.
Its efectiveness is assessed by comparing through lineal
regression the changes in the fair value of the bonds to the
changes in fair value of the derivatives.
Finally, it has hedges of net investments abroad to hedge the
foreign exchange risk of the shareholding in NOK and CNY
currencies.
Banco Santander Mexico has mainly long-term loan portfolios
at fxed interest rates, portfolios of short-term deposits in local
currency, portfolios of Mexican Government bonds and corporate
bonds in currencies other than the local currency and are therefore
exposed to changes in fair value due to movements in market
interest rates, as well as these latter portfolios also to variations
in exchange rates. The entity manages this risk by contracting
derivatives (Interest Rate Swaps or Cross Currency Swaps) in which
they pay a fxed rate and receive a variable rate. The interest rate is
hedged and the exchange risk, if applicable, too. Thus, other risks,
such as credit risk, are managed but not hedged by the entities.
The interest rate risk component is determined as the change in
the fair value of fxed rate loans arising solely from changes in a
reference rate. This strategy is designated as a fair value hedge
and its efectiveness is assessed by comparing changes in the fair
value of loans attributable to changes in benchmark interest rates
with changes in the fair value of interest rate swaps.
Regarding cash fow hedges, Banco Santander Mexico has a
portfolio of unsecured bonds issued at a variable rate in its local
currency, which it manages with an Interest Rate Swap in which it
receives a variable rate and pays a fxed rate. On the other hand, it
also has diferent items in currencies other than the local currency:
unsecured foating rate bonds, commercial bank loans at variable
rates, fxed rate issues, Mexican and Brazilian government bonds
at fxed rates and loans received in USD from other banks. In all
these portfolios, the Bank is exposed to exchange rate variations,
which it mitigates by contracting Cross Currency Swaps or FX
Forward.
Banco Santander Brazil has, on the one hand, fxed-rate
government bond portfolios and, therefore, they are exposed to
changes in fair value due to movements in market interest rates.
The entity manages this risk by contracting derivatives (Interest
Rate Swaps or Futures) in which they pay a fxed rate and receive
a variable rate. The interest rate risk is the only one hedged and
consequently other risks, such as credit risk, are managed but not
hedged by the entity. This strategy is designated as a fair value
hedge and its efectiveness is evaluated by comparing by linear
regression the changes in the fair value of the bonds with the
changes in the fair value of the derivatives. On the other hand,
as part of the fair value hedge strategy, it has corporate loans in
diferent currencies than the local one and is therefore exposed to
changes in fair value due to exchange rates. This risk is mitigated
by contracting Cross Currency Swaps. Its efectiveness is evaluated
by comparing changes in the fair value of loans attributable to
changes in benchmark interest rates with changes in the fair value
of derivatives.
Finally, it also has a portfolio of long-term Corporate Bonds
with infation-indexed rates. With reference to what it has been
mentioned before, they are exposed to variations in market value
due to variations in market infation rates. In order to achieve its
mitigation, they contract futures in which they pay the indexed
infation and receive variable interest rates.
In the hedge of cash fows, Banco Santander Brazil has portfolios
of loans and government bonds in diferent currency than the
entity´s functional currency and, therefore, it is subject to the
risk of changes in currency rates. This exposure will be mitigated
by hiring cross currency swaps and futures. Its efectiveness is
assessed by comparing changes in fair value of loans and bonds to
changes in fair value of such derivatives.
Finally, they have a portfolio of variable rate government bonds, so
they are exposed to changes in the value due to changes in interest
rates. In order to mitigate these changes, a future is hired in which
a variable rate is paid and a fxed rate is received. Its efectiveness
is assessed by comparing changes in the fair value loans and bonds
to changes in the fair value of the futures.
In any case, in the event of inefectiveness in fair value or cash fow
hedges, the entity mainly considers the following causes:
• Possible economic events afecting the entity (e.g.: default),
• For movements and possible market-related diferences in the
collateralized and non-collateralized curves used in the valuation
of derivatives and hedged items, respectively.
• Possible diferences between the nominal value, settlement/
price dates and credit risk of the hedged item and the hedging
element.
Regarding net foreign investments hedges, basically, they are
allocated in Banco Santander, S.A. and Santander Consumer
Finance Group. The Group assumes, as a priority objective in risk
management, to minimize – up to a determined limit set up by
the responsible for the fnancial management of the Group- the
impact on the calculation of the capital ratio of their permanent
investments included within the consolidation perimeter of the
Group, and whose shares are legally named in a diferent currency
than the holding has. For this purpose, fnancial instruments
(generally derivatives) on exchange rates are hired, that allow
mitigating the impact on the capital ratio of changes in the forward
exchange rate. The Group hedges the risk, mainly, for the following
currencies: BRL, CLP, MXN, CAD, COP, CNY, GBP, CHF, NOK, USD and
PLN. The instruments used to hedge the risk of these investments
are Forex Swaps, Forex Forward and buys/sells of spot currencies.
In the case of this type of hedge, the inefectiveness scenarios
are considered to be of low probability, given that the hedging
instrument is designated considering the determined position and
the spot rate at which it is found.
579
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The following table sets out the maturity profle of the hedging
instruments used in the Group’s non-dynamic hedging strategies:
Million of euros
Up to one
month
One to three
months
Three months
to one year
One year to
fve years
More than
fve years
31 December 2018
Fair value hedges:
Interest rate risk
Equity swap
Future interest rate
Interest rate swap
Call money swap
Currency swap
Swaption
Collar
Floor
Exchange rate risk
Fx forward
Interest rate and exchange rate risk
Interest rate swap
Call money swap
Currency swap
Infation risk
Call money swap
Currency swap
Credit risk
CDS
Cash fow hedges:
Interest rate risk
Fx forward
Future interest rate
Interest rate swap
Currency swap
Floor
Exchange rate risk
Future FX and c/v term FV
FX forward
Future interest rate
Interest rate swap
Currency swap
Floor
Interest rate and exchange rate risk
Interest rate swap
Currency swap
Infation risk
FX forward
Currency swap
Equity risk
Option
Other risk
Future FX and c/v term RF
Hedges of net investments
in foreign operations:
Exchange rate risk
FX forward
580
9,377
8,436
-
668
7,672
96
-
-
-
-
17
17
924
445
-
479
-
-
-
-
-
18,684
2,079
49
2
2,028
-
-
16,166
4,955
1,423
4,946
-
4,842
-
-
-
-
439
-
439
-
-
-
-
555
555
555
17,989
12,519
27
2,012
10,213
267
-
-
-
-
1,855
1,855
3,615
1,462
-
2,153
-
-
-
-
-
6,994
2,607
-
-
2,161
446
-
3,478
-
-
-
-
3,478
-
8
8
-
524
121
403
-
-
377
377
777
777
777
28,616
25,760
23,773
21,987
46
981
18,423
1,823
714
-
-
-
1,147
1,147
639
35
-
604
-
-
-
-
-
16,954
6,971
-
-
5,957
839
175
5,896
-
47
-
-
5,535
314
2,921
898
2,023
566
156
410
41
41
559
559
11,067
11,067
11,067
51,794
Total
178,719
163,241
109
7,702
129,217
19,579
4,957
51
15
1,611
3,019
3,019
12,237
3,022
20
9,195
168
64
104
54
54
118,400
38,229
49
127
33,956
2,350
1,747
38,457
4,955
3,283
4,946
1,055
23,904
314
34,383
12,572
21,811
6,318
414
5,904
77
77
936
936
49,039
46,310
-
1,391
32,407
10,426
1,875
-
15
196
-
-
2,556
370
20
2,166
168
64
104
5
5
12,821
552
-
-
217
335
-
933
-
-
-
-
933
-
9,524
3,210
6,314
1,812
-
1,812
-
-
-
-
78,541
73,989
36
2,650
60,502
6,967
2,368
51
-
1,415
-
-
4,503
710
-
3,793
-
-
-
49
49
62,947
26,020
-
125
23,593
730
1,572
11,984
-
1,813
-
1,055
9,116
-
21,930
8,456
13,474
2,977
137
2,840
36
36
-
-
9,289
9,289
9,289
-
-
-
21,688
21,688
21,688
150,777
61,860
318,807
2018 Auditors’ report and consolidated annual accounts
Additionally, the profle information of maturities and the price/
average rate for the most representative geographies is shown:
Santander UK Group
31 December 2018
Million of euros
Up to one
month
One to three
months
Three
months to
one year
One year to
fve years
More than
fve years
Total
16,333
44,166
17,498
94,288
Fair value hedges
Interest rate risk
Interest rate instruments
Nominal
Average fxed interest rate (%) GBP
Average fxed interest rate (%) USD
Average fxed interest rate (%) EUR
Interest rate and foreign exchange rate risk
Exchange rate instruments
Nominal
Average GBP/EUR exchange rate
Average GBP/USD exchange rate
Average fxed interest rate (%) USD
Average fxed interest rate (%) EUR
Cash fow hedges
Interest rate risk
Interest rate instruments
Nominal
Average fxed interest rate (%) GBP
Foreign exchange risk
Exchange rate instruments
Nominal
Average GBP/JPY exchange rate
Average GBP/EUR exchange rate
Average GBP/USD exchange rate
Interest rate and foreign exchange rate risk
Exchange rate instruments
Nominal
Average GBP/EUR exchange rate
Average GBP/USD exchange rate
Average fxed interest rate (%) GBP
6,888
0.633
(0.223)
1.513
877
-
1.580
-
3.615
9,403
0.788
0.670
1.314
2,894
-
1.332
-
2.500
1.057
0.911
1.337
-
-
-
-
-
1.586
1.085
2.684
1,331
1.183
1.511
3.888
2.375
-
-
1,917
0.726
2,225
0.733
3,466
1.334
4,378
-
-
1.304
-
-
-
-
2,853
147.215
-
1.307
-
-
-
-
3,310
7,132
146.372
145.319
1.280
1.310
2,859
1.252
1.633
2.340
1.135
1.305
21,288
1.271
1.545
2.660
2.849
1.261
2.179
585
1.168
-
3.923
7.950
-
-
-
-
-
-
5,687
7,608
17,673
9,495
33,642
1.217
1.511
2.900
581
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Banco Santander, S.A.
Fair value hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) GBP
Average fixed interest rate (%) EUR
Average fixed interest rate (%) CHF
Average fixed interest rate (%) USD
Foreign exchange risk
Exchange rate instruments
Nominal
Interest rate and foreign exchange rate risk
Exchange rate instruments
Nominal
Average fixed interest rate (%) AUD/EUR
Average fixed interest rate (%)CZK/EUR
Average fixed interest rate (%)EUR/COP
Average fixed interest rate (%)HKD/EUR
Average fixed interest rate (%)JPY/EUR
Average fixed interest rate (%)NOK/EUR
Average fixed interest rate (%)USD/COP
Average AUD/EUR exchange rate
Average CZK/EUR exchange rate
Average EUR/GBP exchange rate
Average EUR/COP exchange rate
Average EUR/MXN exchange rate
Average HKD/EUR exchange rate
Average JPY/EUR exchange rate
Average MXN/EUR exchange rate
Average NOK/EUR exchange rate
Average USD/BRL exchange rate
Average USD/COP exchange rate
Credit Risk
Credit risk instruments
Nominal
Cash flow hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) EUR
Hedges of net investments in foreign operations
Exchange rate instruments
Exchange rate instruments
Nominal
Average BRL/EUR exchange rate
Average CLP/EUR exchange rate
Average CNY/EUR exchange rate
Average COP/EUR exchange rate
Average GBP/EUR exchange rate
Average MXN/EUR exchange rate
Average PLN/EUR exchange rate
582
31 December 2018
Million of euros
Up to one
month
Three
One to three months to
one year
months
One year
to five
years
More than
five years
Total
500
-
3.75
-
-
665
-
0.63
-
-
425
-
2.06
-
1.38
12,987
-
1.81
0.76
3.43
22,030
7.08
3.20
1.04
4.11
36,602
-
1,825
771
-
-
2,596
41
-
-
-
-
-
-
6.13
-
-
-
-
-
-
-
-
-
-
-
-
1,942
-
373
4.46
-
-
-
-
22.98
-
461
-
-
-
-
-
-
6.71
-
-
1.145
-
-
-
-
-
-
-
0.0003
-
-
-
120
-
-
7.54
-
-
-
-
-
-
-
0.0003
-
-
-
-
-
0.269
0.0003
-
-
-
3,656
2,085
4.00
0.86
-
2.52
0.64
-
9.47
1.499
25.407
-
-
-
8.718
132.014
14.696
-
-
-
951
4.80
-
-
-
1.28
3.61
-
1.499
26.030
-
-
-
-
125.883
-
9.606
-
0.0003
49
5
54
6,130
0.51
20
0.55
8,092
20,746
497
-
766.01
-
3,728.01
0.91
-
-
10,587
4.46
768.25
8.14
3,685.80
0.89
24.51
4.38
9,289
4.73
795.10
-
-
-
24,50
4,26
-
-
-
-
-
-
-
-
2018 Auditors’ report and consolidated annual accounts
Consumer Group
Fair value hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) EUR
Average fixed interest rate (%) CHF
Foreign exchange risk
Exchange rate instruments
Nominal
Average DKK/EUR exchange rate
Average NOK/EUR exchange rate
Average CHF/EUR exchange rate
Interest rate and foreign exchange rate risk
Exchange rate instruments
Nominal
Average SEK/EUR exchange rate
Average DKK/EUR exchange rate
Average fixed interest rate (%) SEK
Average fixed interest rate (%) DKK
Cash flow hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) EUR
Foreign exchange risk
Exchange rate instruments
Nominal
Average SEK/EUR exchange rate
Average NOK/EUR exchange rate
Average CHF/EUR exchange rate
Average CAD/EUR exchange rate
Average DKK/EUR exchange rate
Average PLN/EUR exchange rate
Average USD/EUR exchange rate
Average JPY/EUR exchange rate
31 December 2018
Million of euros
Up to one
month
Three
One to three months to
one year
months
One year
to five More than
five years
years
253
(0.197)
(0.659)
17
134.135
-
-
-
-
-
-
-
85
0.183
339
0.101
0.108
0.896
0.654
0.134
-
-
-
672
(0.125)
(0.696)
3,488
(0.036)
(0.679)
6,883
(0.065)
(0.561)
30
-
-
376
134.109
103.232
878.624
887.218
240
-
0.134
-
0.002
339
0.104
0.134
0.008
0.003
-
-
-
-
448
-
0.134
-
0.004
99
0.183
313
0.183
423
0.183
557
0.098
0.108
0.859
0.658
0.134
-
-
-
2,368
0.099
0.108
0.870
0.652
0.134
0.234
0.897
0.008
1,061
0.099
0.108
0.900
0.656
-
0.233
-
0.008
-
-
-
63
(0.113)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
11,359
423
1,027
920
4,325
943
583
Hedges of net investments in foreign operations
Foreign exchange risk
Exchange rate instruments
Nominal
181
282
480
Average NOK/EUR exchange rate
103.751
103.538
102.963
Average CNY/EUR exchange rate
-
-
121.796
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Banco Santander México
Fair value hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) MXN
Average fixed interest rate (%) USD
Interest rate and foreign exchange rate
Exchange and interest rate instruments
Nominal
Average EUR/MXN exchange rate
Average GBP/MXN exchange rate
Average USD/MXN exchange rate
Average MXV/MXN exchange rate
Average fixed interest rate (%) USD
Average fixed interest rate (%) EUR
Average fixed interest rate (%) GBP
Cash flow hedges
Interest rate risk
Interest rate instruments
Nominal
Average fixed interest rate (%) MXN
Foreign exchange risk
Exchange rate instruments
Nominal
Average EUR/MXN exchange rate
Average GBP/MXN exchange rate
Average USD/MXN exchange rate
Average BRL/MXN exchange rate
31 December 2018
Million of euros
Up to one
month
Three
One to three months to
one year
months
One year
to five More than
five years
years
-
-
-
-
-
-
-
-
-
-
-
-
-
1
5.180
-
-
-
-
-
-
-
-
-
-
-
346
6.907
1.465
41
-
-
13.920
5.059
8.000
-
-
-
-
1,415
-
-
18.729
5.863
44
-
-
20.289
-
56
16.679
-
17.918
5.732
80
5.593
1.465
282
20.470
24.870
13.920
5.059
3.980
2.420
-
178
7.258
2,719
18.932
23.127
16.443
5.736
-
-
-
1,009
21.890
25.310
18.390
5.059
4.125
2.750
6.750
-
-
103
18.688
25.947
18.508
-
Total
427
1,332
178
4,337
584
2018 Auditors’ report and consolidated annual accounts
Banco Santander Brazil
Fair value hedges
Interest rate risk
Interest rate instruments
Nominal
Average fxed interest rate (%) BRL
Foreign exchange rate risk and other
Exchange rate instruments
Nominal
Average USD/BRL exchange rate
Cash fow hedges
Interest rate risk
Interest rate instruments
Nominal
Average fxed interest rate (%) BRL
Foreign exchange risk and other
Exchange rate instruments
Nominal
Average USD/BRL exchange rate
31 December 2018
Million of euros
Up to one
month
Three
One to three months to
one year
months
One year
to fve More than
fve years
years
668
9.500
6
3.247
2,045
6.967
-
6.937
3,529
10.055
1,378
10.030
15
3.303
36
3.551
316
3.642
38
3.265
3,877
6.500
2,997
6.500
3,030
6.500
119
6.500
-
-
-
-
8
26
3.716
3.648
-
-
238
3.135
Total
7,620
411
10,023
272
585
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The following table contains details of the hedged exposures
covered by the Group’s hedging strategies of 31 December 2018:
Million of euros
31 December 2018
Carrying amount
of hedged items
Accumulated
amount of
fair value
adjustments on
the hedged item
Change in
fair value Cash flow hedge/currency
of hedged
item for
translation reserve
ineffectiveness Continuing Discontinued
hedges
assessment
hedges
(20)
(74)
(39)
(35)
18
(186)
35
3
170
(40)
(3)
8
(11)
53
16
(31)
67
1
-
4
1
3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Assets Liabilities
Assets Liabilities Balance sheet line item
Cash flow hedges:
110,669
46,830
1,915
(1,765)
Interest rate risk
104,393
39,251
1,886
(1,478)
Deposits
5,922
1,195
Bond
Repo
Loans of securities
Liquidity facilities
Issuances assurance
Securitisation
Equity instruments
Exchange rate risk
Deposits
Bonds
Interest and Exchange
rate risk
Borrowed deposits
Bonds
Securitisation
Repos
CLO
Inflation risk
Deposits
Bonds
Credit risk
Bonds
27,235
21,759
13,874
53,397
3,965
-
-
-
3,378
1,614
1,764
2,776
751
1,591
-
434
-
68
-
68
54
54
561
175
232
2,013
13,316
-
-
-
-
7,474
-
3,571
3,358
99
446
105
105
-
-
-
279
792
25
742
48
-
-
-
5
9
(4)
21
19
2
-
-
-
3
-
3
-
-
1 Deposits and loans
and advances
(791) Debt instruments
(16) Other assets
-
Loans and advances
(2)
Loans and advances
(12) Other assets/liabilities
(658) Other assets/liabilities
- Equity instruments
-
- Deposits and loans
and advances
- Debt instruments
(287)
- Deposits and loans
and advances
(26) Debt instruments
(262) Other assets/liabilities
1 Other assets/liabilities
- Other assets/liabilities
1
1 Deposits and loans
and advances
- Debt instruments
-
- Debt instruments
586
2018 Auditors’ report and consolidated annual accounts
Million of euros
31 December 2018
Carrying amount
of hedged items
Accumulated
amount of
fair value
adjustments on
the hedged item
Assets Liabilities
Assets Liabilities Balance sheet line item
Change in
fair value
of hedged
item for
inefectiveness
assessment
Cash fow hedge/currency
translation reserve
Continuing
hedges
Discontinued
hedges
Cash fow hedges
Interest rate risk
Firm commitment
Deposits
Government bonds
Liquidity facilities
Seconday market loans
Senior securitization
Exchange rate risk
Deposits
Bonds
Secondary market loans
Senior titulisation
CLO
Interest and Exchange
rate risk
Deposits
Bonds
Securitisation
Infation risk
Deposits
Bonds
Liquidity facilities
Equity risk
Highly likely scheduled
transactions
Other risks
Bonds
Net foreign investments
hedges
Exchange rate risk
Firm commitment
Equity instruments
Other assets/liabilities
Deposits and loans
and advances
Debt instruments
Loans and advances
Other assets/liabilities
Other assets/liabilities
Other assets/liabilities
Deposits and loans
and advances
Loans and advances
Other assets/liabilities
Other assets/liabilities
Deposits and loans
and advances
Debt instruments
Other assets/liabilities
Deposits and loans
and advances
Debt instruments
Loans and advances
Other assets/liabilities
Other assets/liabilities
792
792
13
779
-
-
-
-
10
10
-
10
-
-
- Other assets/liabilities
- Equity instruments
(432)
(52)
(24)
(26)
(13)
8
4
(1)
(416)
83
(309)
(179)
(11)
-
4
7
(13)
10
15
25
(3)
(7)
17
17
-
-
-
-
-
-
447
131
(75)
47
92
65
2
-
(23)
(8)
(16)
(21)
21
1
341
2
(9)
348
22
25
(3)
-
(4)
(4)
(20)
(20)
-
-
-
-
(10)
(12)
-
-
-
(12)
-
-
2
-
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
111,461
46,830
1,925
(1,765)
(452)
447
(10)
The cumulative amount of adjustments of the fair value hedging
instruments that remain in the balance for covered items that
are no longer adjusted by proft and loss of coverage as of 31
December 2018 is EUR 71 million euros.
587
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The net impact of the coverages are shown in the following table:
Million of euros
2018
Reclassified amount of reserves to
the income statement due to:
Cover transaction
affecting the Line of the income statement
that includes reclassified items
income statement
553
39
(24)
Interest margin
(4)
Interest margin
17 Interest margin/ Gains or losses
of financial assets/liabilities
47 Interest margin/ Gains or losses
of financial assets/liabilities
3 Interest margin
- Interest margin
-
Ineffective
coverage
Earnings/
(losses)
recognised
in another recognised Line of the income
cumulative
overall
result
statement of cash flows
the ineffectiveness
income
in the statement that includes
75
(18)
(24) Gains or losses of financial
assets/liabilities
(61) Gains or losses of financial
assets/liabilities
1 Gains or losses of financial
assets/liabilities
46 Gains or losses of financial
assets/liabilities
12 Gains or losses of financial
assets/liabilities
8 Gains or losses of financial
assets/liabilities
95
39 Gains or losses of financial
assets/liabilities
8 Gains or losses of financial
assets/liabilities
49 Gains or losses of financial
assets/liabilities
(1) Gains or losses of financial
assets/liabilities
(2)
(2) Gains or losses of financial
assets/liabilities
8
(4)
- Gains or losses of financial
assets/liabilities
(21) Gains or losses of financial
assets/liabilities
2 Gains or losses of financial
assets/liabilities
16 Gains or losses of financial
assets/liabilities
- Gains or losses of financial
assets/liabilities
- Gains or losses of financial
assets/liabilities
(1) Gains or losses of financial
assets/liabilities
200
193
(2)
50
104
85
2
(46)
-
Fair value hedges
Interest rate risk
Deposits
Bonds
Repo
Loans of fixed-
income securities
Liquidity lines
Securitisations
Risk of interest rate
and exchange rate
Deposits
Bonds
Securitisations
CLO
Other Risks
Securitisations
Cash flow hedges
Risk of interest rate
Firm Commitment
Deposits
Bonds
Loans secondary markets
Liquidity lines
Repo
Securitisations
588
2018 Auditors’ report and consolidated annual accounts
Earnings/
(losses)
recognised
in another
cumulative
overall
result
(20)
(25)
(25)
-
5
24
1
45
1
(4)
48
11
14
(3)
(8)
(8)
(21)
(21)
-
-
-
-
Risk of Exchange rate
Deposits
Asset bonds
Repo
Loans secondary markets
Securitisations
CLO
Risk of interest rate
and exchange rate
Deposits
Bonds
Securitisations
Risk of infation
Deposits
Asset bonds
Risk of equity
Highly probable
planned transactions
Other risks
Bonds
Coverage of net
investment abroad
Risk of Exchange rate
Equity instruments
Million of euros
2018
Reclassifed amount of reserves to
the income statement due to:
Line of the income
statement that includes
the inefectiveness
of cash fows
Cover transaction
afecting the
income statement
Line of the income statement
that includes reclassifed items
Inefective
coverage
recognised
in the
income
statement
(688)
(698) Gains or losses of fnancial
assets/liabilities
43 Gains or losses of fnancial
assets/liabilities
- Gains or losses of fnancial
assets/liabilities
4 Gains or losses of fnancial
assets/liabilities
(37) Gains or losses of fnancial
assets/liabilities
- Gains or losses of fnancial
assets/liabilities
(457)
(563)
Interest margin/ Gains or losses
of fnancial assets/liabilities
89
Interest margin/ Gains or losses
of fnancial assets/liabilities
(3) Gains or losses of fnancial
assets/liabilities
48
Interest margin/ Gains or losses
of fnancial assets/liabilities
(36)
Interest margin/ Gains or losses
of fnancial assets/liabilities
8
Interest margin/ Gains or losses
of fnancial assets/liabilities
700
967
743 Gains or losses of fnancial
assets/liabilities
447 Gains or losses of fnancial
assets/liabilities
778
Interest margin
571
Interest margin/ Gains or losses
of fnancial assets/liabilities
(490) Gains or losses of fnancial
assets/liabilities
(382)
Interest margin/ Gains or losses
of fnancial assets/liabilities
-
- Gains or losses of fnancial
assets/liabilities
- Gains or losses of fnancial
assets/liabilities
-
- Gains or losses of fnancial
assets/liabilities
-
- Gains or losses of fnancial
assets/liabilities
-
-
-
- Gains or losses of fnancial
assets/liabilities
4
3
Interest margin
1
Interest margin
-
-
-
-
-
-
-
-
200
83
553
589
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The following table shows a reconciliation of each component of
equity and an analysis of other comprehensive income in relation
to hedge accounting:
Million of euros
Balance at beginning of year
Cash fow hedges
Risks of interest rate
Amounts transferred to income statements
Other reclassifcations
Risks of exchange rate
Amounts transferred to income statements
Other reclassifcations
Risks of interest rate and exchange rate
Amounts transferred to income statements
Other reclassifcations
Risk of infation
Amounts transferred to income statements
Other reclassifcations
Risk of equity
Amounts transferred to income statements
Other reclassifcations
Other risks
Amounts transferred to income statements
Other reclassifcations
Minorities
Taxes
Balance at end of year
37. Discontinued operations
No operations were discontinued in 2018, 2017 or 2016.
2018
152
193
(37)
230
(20)
457
(477)
45
(967)
1,012
11
(4)
15
(8)
-
(8)
(21)
-
(21)
(25)
(50)
277
38. Interest income
Interest and similar income in the consolidated income statement
comprises the interest accruing in the year on all fnancial
assets with an implicit or explicit return, calculated by applying
the efective interest method, irrespective of measurement at
fair value; and the rectifcations of income as a result of hedge
accounting. Interest is recognised gross, without deducting any tax
withheld at source.
The detail of the main interest and similar income items earned in
2018, 2017 and 2016 is as follows:
Million of euros
Loans and advances, central banks
Loans and advances,
credit institutions
Debt instruments
2018
1,320
2017
2016
1,881
2,090
1,555
1,840
2,388
6,429
7,141
6,927
Loans and advances, customers
43,489
43,640
42,578
Other interest
1,532
1,539
1,173
54,325
56,041
55,156
Most of the interest and similar income was generated by the
Group’s fnancial assets that are measured either at amortised cost
or at fair value through Other comprehensive income.
39. Interest expense
Interest expense and similar charges in the consolidated income
statement includes the interest accruing in the year on all fnancial
liabilities with an implicit or explicit return, including remuneration
in kind, calculated by applying the efective interest method,
irrespective of measurement at fair value; the rectifcations of cost
as a result of hedge accounting; and the interest cost attributable
to provisions recorded for pensions.
The detail of the main items of interest expense and similar
charges accrued in 2018, 2017 and 2016 is as follows:
Million of euros
Central banks deposits
2018
2017
2016
421
216
127
Credit institution deposits
2,597
2,045
1,988
Customer deposits
9,062
11,074
12,886
Debt securities issued and
subordinated liabilities
6,073
6,651
7,767
Marketable debt securities
5,303
5,685
6,822
Subordinated liabilities (Note 23)
Provisions for pensions (Note 25)
Other interest
770
186
966
198
945
201
1,645
1,561
1,098
19,984
21,745
24,067
Most of the interest expense and similar charges was generated
by the Group’s fnancial liabilities that are measured at amortised
cost.
590
2018 Auditors’ report and consolidated annual accounts 40. Dividend income
42. Commission income
Dividend income includes the dividends and payments on equity
instruments out of profts generated by investees after the
acquisition of the equity interest.
The detail of Income from dividends as follows:
Million of euros
Commission income comprises the amount of all fees and
commissions accruing in favour of the Group in the year, except
those that form an integral part of the efective interest rate on
fnancial instruments.
The detail of Fee and commission income is as follows:
2018*
2017
2016
Million of euros
Dividend income classifed as:
Financial assets held for trading
241
234
217
Coming from collection and
payment services:
Non-trading fnancial assets
mandatorily at fair value
through proft or loss
23
Financial assets available-for-sale
150
196
Financial assets at fair
value through other
comprehensive income
106
370
384
413
* See further detail regarding the impacts of the entry into force of IFRS9 as
of 1 January 2018 (Note 1.b).
Bills
Demand accounts
Cards
Orders
Cheques and other
Coming from non-banking
fnancial products:
Investment funds
Pension funds
Insurance
41. Income from companies accounted
for using the equity method
Income from companies accounted for using the equity method
comprises the amount of proft or loss attributable to the Group
generated during the year by associates and joint ventures.
The detail of Income from companies accounted for using the
equity method is as follows:
Million of euros
Coming from Securities services:
Securities underwriting and placement
Securities trading
Administration and custody
Asset management
Other:
Foreign exchange
2018
2017
2016
Financial guarantees
2018
2017
2016
334
368
,371
1
1,490
295
1,191
,514
3
3,515
2,972
475
138
449
154
431
133
,832
5
5,976
5,022
,024
1
124
751
92
696
86
2
,433
2,517
2,428
,581
3
3,360
3,210
283
251
458
305
374
302
359
251
282
287
297
201
,297
1
1,286
1,067
546
549
291
471
559
283
353
505
286
Zurich Santander Insurance América, S.L.
Wizink Bank, S.A.
Allianz Popular, S.L.
Companhia de Crédito, Financiamento
e Investimento RCI Brasil
SAM Investment Holdings Limited
Other entities
194
56
45
21
-
421
737
241
36
15
19
87
306
704
223
Commitment fees
Other fees and commissions
2
,568
2,644
2,500
3,954
3,957
3,644
14,664
14,579
12,943
-
-
12
79
130
444
591
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix 43. Commission expense
Commission expense shows the amount of all fees and
commissions paid or payable by the Group in the year, except those
that form an integral part of the efective interest rate on fnancial
instruments.
a) Breakdown
The detail, by origin, of Gains/losses on fnancial assets and
liability:
Million of euros
2018*
2017
2016
42
49
47
Of which: debt instruments
Gains or losses on fnancial assets and
liabilities not measured at fair value
through proft or loss, net (IFRS9)
Financial assets at amortised cost
Other fnancial assets and liabilities
Of which: debt instruments
Of which: equity instruments
Gains or losses on fnancial assets and
liabilities not measured at fair value
through proft or loss, net (IAS39)
Of which fnancial assets
available for sale
Of which: equity instruments
Gains or losses on fnancial assets
and liabilities held for trading, net**
604
39
565
563
404
869
472
316
156
861
464
397
1,515
1,252
2,456
Gains or losses on non-trading fnancial
assets and liabilities mandatory at
fair value through proft or loss
331
Gains or losses on fnancial assets
and liabilities measured at fair
value through proft or loss, net**
Gains or losses from hedge
accounting, net
(57)
(85)
426
83
(11)
(23)
2,476
1,560
3,728
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1
January 2018 (Note 1.b).
** Includes the net result obtained by transactions with debt securities,
equity instruments, derivatives and short positions included in this
portfolio when the Group jointly manages its risk in these instruments.
As explained in Note 45, the above breakdown should be analysed
in conjunction with the exchange diferences, net:
Million of euros
Exchange diferences, net
2018
(679)
2017
105
2016
(1,627)
The detail of Fee and commission expense is as follows:
Million of euros
Commissions assigned
to third parties
Cards
By collection and return of efects
Other fees assigned
Other commissions paid
Brokerage fees on lending
and deposit transactions
Sales of insurance and
pension funds
Other fees and commissions
2018
2017
2016
1,972
1,358
11
603
1,207
1,831
1,391
12
428
1,151
1,639
1,217
11
411
1,124
232
933
205
897
204
873
3,179
2,982
2,763
44. Gains or losses on fnancial
assets and liabilities
Gains/losses on fnancial assets and liabilities includes the amount
of the Other comprehensive income of fnancial instruments,
except those attributable to interest accrued as a result of
application of the efective interest method and to allowances, and
the gains or losses obtained from the sale and purchase thereof.
592
2018 Auditors’ report and consolidated annual accounts
b) Financial assets and liabilities at fair
value through proft or loss
The detail of the amount of the asset balances is as follows:
At 31 December 2018, the amount of the change in the fair value of
fnancial liabilities at fair value through proft or loss attributable to
changes in their credit risk during the year is not material.
Million of euros
2018
2017
2016
45. Exchange diferences, net
Exchange diferences shows basically the gains or losses on
currency dealings, the diferences that arise on translations of
monetary items in foreign currencies to the functional currency,
and those disclosed on non-monetary assets in foreign currency at
the time of their disposal.
The Group manages the currencies to which it is exposed together
with the arrangement of derivative instruments and, accordingly,
the changes in this line item should be analysed together with
those recognised under Gains/losses on fnancial assets and
liabilities (see Note 44).
Loans and receivables:
56,323
40,875
40,390
Central banks
9,226
-
-
Credit institutions
23,099
11,585
13,290
Customers
Debt instruments
Equity instruments
Derivatives
23,998
29,290
27,100
36,609
39,836
52,320
12,198
22,286
15,043
55,939
57,243
72,043
161,069
160,240
179,796
The Group mitigates and reduces this exposure as follows:
• With respect to derivatives, the Group has entered into
framework agreements with a large number of credit institutions
and customers for the netting-of of asset positions and the
provision of collateral for non-payment.
At 31 December 2018 the actual credit risk exposure of the
derivatives was EUR 33,289 million.
• Loans and advances to credit institutions and Loans and advances
to customers included reverse repos amounting to EUR 33,837
million at 31 December 2018.
Also, mortgage-backed assets totalled EUR 1,334 million.
• Debt instruments include EUR 27,720 million of Spanish and
foreign government securities.
At 31 December 2018 the amount of the change in the year in
the fair value of fnancial assets at fair value through proft or
loss attributable to variations in their credit risk (spread) was not
material.
The detail of the amount of the liability balances is as follows:
Million of euros
Deposits
65,304
84,724
48,863
2018
2017
2016
Central banks
Credit institutions
Customer
Marketable debt securities
Short positions
Derivatives
Other fnancial liabilities
14,816
10,891
39,597
2,305
15,002
55,341
449
9,142
10,463
18,458
57,124
3,056
5,059
33,341
2,791
20,979
23,005
57,892
74,369
589
-
138,401
167,240
149,028
593
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
46. Other operating income and expenses
47. Staf costs
Other operating income and Other operating expenses in the
consolidated income statements include:
a) Breakdown
The detail of Staf costs is as follows:
Million of euros
Million of euros
2018
2017
2016
Insurance activity
51
57
63
Wages and salaries
Income from insurance and
reinsurance contracts issued
Of which:
3,175
2,546
1,900
Social Security costs
Additions to provisions for defned
beneft pension plans (Note 25)
Insurance and reinsurance
premium income
3,011
2,350
1,709
Contributions to defned
contribution pension funds
Reinsurance income (Note 15)
164
196
191
Other staf costs
2018
2017
8,824
8,879
1,412
1,440
2016
8,133
1,291
84
88
81
287
271
266
1,258
1,369
1,233
11,865
12,047
11,004
b) Headcount
The average number of employees in the Group, by professional
category, was as follows:
Average number of employees
2018
2017
2016
The Bank:
Senior management*
22
64
Other line personnel
30,339
21,327
Clerical staf**
General services
personnel**
Rest of Spain
Santander UK plc
Banco Santander
(Brasil) S.A.
Other companies***
-
-
30,421
7,944
18,757
46,645
98,062
76
20,291
1,904
13
22,284
6,925
19,428
-
-
21,391
12,703
19,079
46,210
48,052
96,349
94,946
201,829
195,732
191,635
* During 2018, categories of deputy assistant executive vice president and
above were erased.
** During 2017, clerical staf and general services personnel categories
were erased considering all the staf in the aforementioned categories
on the other line personnel category.
*** Does not include staf afected by discontinued operations.
The number of employees, at the end of 2018, 2017 and 2016, was
202,713, 202,251 and 188,492, respectively.
Expenses of insurance and
reinsurance contracts
Of which:
Claims paid,other insurance-
related expenses and net
provisions for insurance
contract liabilities
Reinsurance premiums paid
Other operating income
Non- fnancial services
Other operating income
(3,124)
(2,489)
(1,837)
(2,883)
(2,249)
(1,574)
(241)
1,643
367
1,276
(240)
1,618
472
1,146
(263)
1,919
698
1,221
Other operating expense
(2,000)
(1,966)
(1,977)
Non-fnancial services
(270)
(302)
(518)
Other operating expense:
(1,730)
(1,664)
(1,459)
Of which, credit institutions
deposit guarantee fund and
single resolution fund
(895)
(306)
(848)
(291)
(711)
5
Most of the Bank’s insurance activity is carried on in life insurance.
594
2018 Auditors’ report and consolidated annual accounts
The functional breakdown (fnal employment), by gender, at 31
December 2018 is as follows:
Functional breakdown by gender
Continental Europe
Latin America and Others
United Kingdom
Senior executives
Other executives
Other personnel
Men
913
523
107
1,543
Women
260
100
39
399
Men
6,735
6,427
1,309
14,471
Women
3,711
4,256
640
8,607
Men
26,173
40,729
9,218
76,120
Women
32,759
54,952
13,862
101,573
The same information, expressed in percentage terms at 31
December 2018, is as follows:
Functional breakdown by gender
Continental Europe
Latin America and Others
United Kingdom
Senior executives
Other executives
Other personnel
Men
78%
84%
73%
79%
Women
22%
16%
27%
21%
Men
64%
60%
67%
63%
Women
36%
40%
33%
37%
Men
44%
43%
40%
43%
Women
56%
57%
60%
57%
The labour relations between employees and the various Group
companies are governed by the related collective agreements or
similar regulations.
c) Share-based payments
The main share-based payments granted by the Group in force at
31 December 2018, 2017 and 2016 are described below.
The number of employees in the Group with disabilities,
distributed by professional categories, at 31 December 2018, is as
follows:
Average number of employees*
Senior management
Other management
Other staf
2018
6
64
3,366
3,436
* An employee with disabilities is considered to be a person who is
recognised by the State or the company in each jurisdiction where
the Group operates and that entitles them to receive direct monetary
assistance, or other types of aid such as, for example, reduction of
their taxes. In the case of Spain, employees with disabilities have been
considered to be those with a degree of disabilities greater than or equal
to 33%. The amount does not include employees in the United States.
The number of Group employees with disabilities at 2017 and 2016,
was 3,289 and 2,941, respectively, (not including the United States).
Likewise, the average number of employees of Banco Santander,
S.A. with disabilities, equal to or greater than 33%, during 2018 was
241 (209 and 216 employees during 2017 and 2016). At the end of
fscal year 2018, there were 304 employees (211 and 213 employees
at 31 December 2017 and 2016).
i. Bank
The variable remuneration policy for the Bank’s executive
directors and certain executive personnel of the Bank and of
other Group companies includes Bank share-based payments,
the implementation of which requires, in conformity with the law
and the Bank’s Bylaws, specifc resolutions to be adopted by the
general meeting.
Were it necessary or advisable for legal, regulatory or other
similar reasons, the delivery mechanisms described below may be
adapted in specifc cases without altering the maximum number
of shares linked to the plan or the essential conditions to which
the delivery thereof is subject. These adaptations may involve
replacing the delivery of shares with the delivery of cash amounts
of an equal value.
The plans that include share-based payments are as follows: (i)
deferred conditional delivery share plan; (ii) deferred conditional
variable remuneration plan, (iii) performance share plan and
(iv) Deferred variable compensation plan linked to multiannual
objectives. The characteristics of the plans are set forth below:
595
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Description
Plan`s benefciaries Conditions
Calculation Base
The purpose of this
plan is to defer a
portion of the variable
remuneration of the
benefciaries over a
period of three years
for it to be paid in
Santander shares.
Group executives
or employees
whose variable
remuneration or
annual bonus for
2013 exceeded, in
general, EUR 0.3
million (gross)
In addittion to that of the benefciary
remaining in the Group’s employ, that none
of the following circumstances should occur
in the period prior to each deliveries:
(i) Poor fnancial performance of the Group;
(ii) breach by the benefciary of internal regulations,
including, in particular, those relating to risks;
material restatement of the Group’s consolidated
fnancial statements, except when it is required
pursuant to a change in accounting standards; or
(iii)
(iv) Signifcant changes in the Group’s
economic capital or risk profle.
The amount in shares is calculated based
on the tranches of the following scale::
• 300 thousand euros or less 0% deferred
• 300 to 600 thousand euros 20% deferred
• More than 600 thousand
euros 30% deferred.
Deferral period: 3 years.
The purpose of these
cycles is to defer a
portion of the variable
remuneration of the
benefciaries over a
period of three years
for the third (2013),
fourth (2014), sixth
(2016) cycles, and over
three or fve years for
the ffth (2015), seventh
(2017) and eigth (2018)
cycles, for it to be paid,
where appropriate, in
cash and in Santander
shares; the other
portion of the variable
remuneration is also
to be paid in cash and
Santander shares,
upon commencement
of the cycles, in
accordance with the
rules set forth below.
Executive
directors and
certain executives
(including senior
management) and
employees who
assume risk, who
perform control
functions or
receive an overall
remuneration which
puts them on the
same remuneration
level as senior
executives and
employees who
assume risks
(Fifth, fourth and
third cycle)
In the case of the
seventh, sixth
and eigth cycle,
the benefciares
are Material Risk
Takers (Identifed
staf) that are not
benefciaries of the
Deferred Multiyear
Objectives Variable
Remuneration Plan.
For the third, fourth, ffth and sixth cycles (2013
to 2016), the accrual of deferred compensation is
conditioned, in addition to the requirement that the
benefciary remains in the Group’s employ, with the
exceptions included in the plan regulations upon none
of the following circumstances existing during the
period prior to each of the deliveries, pursuant to the
provisions set forth in each case in the plan regulations:
(i)
(ii) breach by the benefciary of internal regulations,
including, in particular, those relating to risks;
material restatement of the Group’s consolidated
fnancial statements, except when it is required
pursuant to a change in accounting standards; or
Poor fnancial performance of the Group;
(iii)
(iv) Signifcant changes in the Group’s
economic capital or risk profle
In the case of the seventh and eight cycles (2017
and 2018), the accrual of deferred compensation is
conditioned, in addition to the permanence of the
benefciary in the Group, with the exceptions contained
in the plan’s regulations, to no assumptions in which
there is a poor performance of the entity as a whole
or of a specifc division or area of the entity or of
the exposures generated by the personnel, and at
least the following factors must be considered:
signifcant failures in risk management
(i)
committed by the entity , or by a
business unit or risk control unit;
the increase sufered by the entity or by a
business unit of its capital needs, not foreseen
at the time of generation of the exposures;
(iii) Regulatory sanctions or judicial sentences for
(ii)
events that could be attributable to the unit or the
personnel responsible for those. Also, the breach
of internal codes of conduct of the entity; and
(iv) Irregular behaviours, whether individual or
collective, considering in particular the negative
efects derived from the marketing of inappropriat
products and the responsibilities of the persons
or bodies that made those decisions.
e
Paid half in cash and half in shares
Third cycle (2013), 3 years deferral:
• Executive directors: 40% and
60% immediate and deferred
payments, respectively.
• Division directors and other executives
of the Group with a similar profle:
50% and 50% immediate and
deferred payments, respectively.
• Other Executives part of the Identifed
Staf: 40% and 60%, immediate and
deferred payments, respectively.
Fourth and ffth cycles (2014
and 2015, respectively):
• Executive directors and members
of the Identifed Staf with total
variable remuneration higher
than 2.6 million euros: 40% paid
immediately and 60% deferred over
5 years (3 years in fourth cycle).
• Division managers, country heads, other
executives of the Group with a similar
profle and members of the Identifed
Staf with total variable remuneration
between 1.7 million euros (1.8 million in
fourth cycle) and 2.6 million euros: 50%
paid immediately and 50% deferred
over5 years (3 years in fourth cycle)
• Other benefciaries: 60%
paid immediately and 40%
deferred over 3 years.
Sixth cycle (2016):
• 60% of bonus will be paid
immediately and 40% deferred
over a three year period.
Seventh and eight cycle (2017 and 2018):
• Executive Directors and members of
identifed staf with target total variable
remuneration higher or equal to 2.7
million euros: 40% paid immediately
and 60% deferred over 5 years
• Executive Directors and members
of identifed staf with total Variable
remuneration between 1.7 million
euros and 2.7 million euros: 50% paid
immediately and 50% paid over 5 years.
• Other benefciaries: 60%
paid immediately and 40%
deferred over 3 years.
Deferred variable
remuneration
systems
(i) Deferred
and conditional
variable
remuneration
plan (2013)
(ii) Deferred
conditional
variable
remuneration
plan (2013, 2014,
2015, 2016, 2017
and 2018)
596
2018 Auditors’ report and consolidated annual accounts
Deferred variable
remuneration
systems
(iii) Performance
share plan (2014
and 2015)
(iv) Deferred
Multiyear
Objectives
Variable
Remuneration
Plan (2016, 2017
and 2018)
Description
Plan`s benefciaries Conditions
Calculation Base
The purpose is to
instrument a portion
of the variable
remuneration of the
executive directors
and other members
of the Identifed Staf,
consisting of a long-
term incentive (ILP) in
shares based on the
Bank’s performance
over a multiannual
period. In addition, the
second cycle (2015) also
applies to other Bank
employees not included
in the Identifed Staf
or Material Risk Takers,
in respect of whom it
is deemed appropriate
that the potential
delivery of Bank
shares be included in
their remuneration
package in order
to better align the
employee’s interests
with those of the Bank.
The aim is simplifying
the remuneration
structure, improving the
ex ante risk adjustment
and increasing the
impact of the long-
term objectives on
the Group’s most
relevant roles.
The purpose of these
cycles is to defer a
portion of the variable
remuneration of the
benefciaries over a
period of three or fve
years, for it to be paid,
where appropriate, in
cash and in Santander
shares; the other
portion of the variable
remuneration is also
to be paid in cash and
Santander shares, upon
commencement of the
cycles, in accordance
with the rules set forth
below. The accrual of
the last third of the
deferral (in the case
of 3 years deferral) of
the last three ffths
(in the case of 5 years
deferral) is also subject
to long-term objectives.
Executive Directors
and senior managers
Other Material
Risk Takers or
Identifed Staf
Other benefciaries
in the case only of
the second cycle.
In addition to the requirement that the benefciary
remains in the Group’s employ, with the exceptions
included in the plan regulations, the delivery of
shares to be paid on the ILP payment date based on
compliance with the related multiannual target is
conditional upon none of the following circumstances
existing during the period prior to each of the:
(i) Poor fnancial performance of the Group;
(ii) breach by the benefciary of internal regulations,
including, in particular, those relating to risks;
(iii) material restatement of the Group’s consolidated
fnancial statements, except when it is required
pursuant to a change in accounting standards; or
(iv) signifcant changes in the Group’s
economic capital or risk profle
For the second cycle (2015), based on the maximum
benchmark value (20%), at the proposal of the
remuneration committee, the Board of Directors will
set the maximum number of shares, the value in euros
of which is called the “Agreed-upon Amount of the ILP”,
taking into account (i) the Group’s earnings per share
(EPS) and (ii) the Group’s return on tangible equity (RoTE
for 2015 with respect to those budgeted for the year.
First cycle (2014):
• Relative Total Shareholder Return
(TSR) measured against a group
of 15 comparable institutions (the
“peer group”) in the periods 2014-
2015; 2014-2016; and 2014-2017.
Second cycle (2015), the basis of calculation
is the fulflment of the following objectives:
• Relative performance of the earning
per share growth (EPS) growth of
the Santander Group for the 2015-
2017 period compared to a peer
group of 17 credit institutions.
• ROTE
• of the Santander Group for
fnancial year 2017
• Employee satisfaction, measured by
whether or not the corresponding
Group company is included in the “Top
3” of the best banks to work for.
) • number of principal markets in which
Santander is in the Top 3 of the best banks
on the customer satisfaction index in 2017
• retail loyal clients
• SME and corporate loyal clients
Executive directors
and certain
executives (Including
top management) of
the Group’s frst lines
of responsibility.
In 2016 (frst cycle), the accrual is conditioned, in
addition to the permanence of the benefciary in the
Group, with the exceptions contained in the plan’s
regulations tha none of The following circumstances
during the period prior to each of the deliveries in the
terms set forth in each case in the plan’s regulations:
(i) Poor performance of the Group;
(ii) breach by the benefciary of the internal regulations,
including in particular that relating to risks;
(iii) material restatement of the Group’s consolidated
fnancial statements, except when appropriate
under a change in accounting regulations; Or
(iv) Signifcant changes in the Group’s
economic capital or risk profle.
In 2017 and 2018 (second and third cycles), the accrual is
conditioned, in addition to the benefciary permanence
in the Group, with the exceptions contained in the
plan’s regulations, to the non-occurrence of instances
of poor fnancial performance from the entity as
a whole or of a specifc division or area thereof or
of the exposures generated by the personnel, at
least the following factors must be considered:
(i) Signifcant failures in risk management committed
(ii)
by the entity, or by a business unit or risk control unit;
the increase sufered by the entity or by a
business unit of its capital needs, not foreseen
at the time of generation of the exposures;
(iii) Regulatory sanctions or court rulings for events
that could be attributable to the unit or the
personnel responsible for those. Also, the breach
of internal codes of conduct of the entity; and
(iv) Irregular behaviours, whether individual or
collective, considering in particular negative
efects derived from the marketing of
inappropriate products and responsibilities of
persons or bodies that made those decisions.
Paid half in cash and half in shares.
The maximum number of shares to be delivered
is calculated by taking into account the weighted
average daily volume of weighted average prices for
the ffteen trading sessions prior to the previous Friday
(excluding) on the date on which the board decides
the bonus for the Executive directors of the Bank.
First cycle (2016):
• Executive directors and members of
the Identifed Staf with total variable
remuneration higher than or equal to
2.7 million euros: 40% paid immediately
and 60% deferred over a 5 year period.
• Senior managers, country heads of
contries representing at least 1% of the
Group´s capital and other members of
the identifed sfaf whose total variable
remuneration is between 1.7 million and
2.7 million euros: 50% paid immediately
and 50% deferred over a5 year period.
• Other benefciaries: 60% paid
immediately and 40% deferred
over a 3 year period.
The second and third cycles (2017
and 2018, respectively) are under
the same deferral rules, save for the
variable remuneration considered is
target and not the actual award.
In 2016 the metrics for the deferred portion
subject to long-term objectives are:
• Earnings per share (EPS)
growth in 2018 over 2015.
• Relative Total Shareholder
Return (TSR) measured against a
group of credit institutions.
• Compliance with the fully-loaded
common equity tier 1 (“CET1”) ratio
target for fnancial year 2018.
• Compliance with Santander Group’s
underlying return on risk-weighted assets
(“RoRWA”) growth target for fnancial year
2018 compared to fnancial year 2015.
In 2017 (second cycle) and 2018 (third
cycle) the metrics for the deferred portion
subject to long-term objectives are:
• EPS growth in 2019 over 2016 and in 2020
over 2017, for each respective cycle
• Relative Total Shareholder Return
(TSR) measured against a group of 17
credit institutions.in the periods 2017-
2019 and 2018.-2019, respectively.
• Compliance with the fully-loaded
common equity tier 1 (“CET1”)
ratio target for fnancial years
2019 and 2020, respectively.
597
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
ii. Santander UK plc
The long-term incentive plans on shares of the Bank granted by
management of Santander UK plc to its employees are as follows:
Number of
shares (in
thousand)
Exercise
price in
pounds
sterling*
Year
granted
Employee
group
Number of
persons**
Date of
commencement
of exercise
period
Date of
expiry of
exercise
period
Plans outstanding at 01/01/16
Options granted (Sharesave)
Options exercised
24,762
17,296
(338)
Options cancelled (net) or not exercised
(12,804)
Plans outstanding at 31/12/16
Options granted (Sharesave)
Options exercised
Options cancelled (net) or not exercised
Plans outstanding at 31/12/17
Options granted (Sharesave)
Options exercised
Options cancelled (net) or not exercised
Plans outstanding at 31/12/18
28,916
3,916
(1,918)
(3,713)
27,201
6,210
(3,340)
(3,233)
26,838
4.91 2016
Employments
7,024 01/11/16
01/11/16
3.67
3.51
4.02 2017
Employments
4,260 01/11/17
01/11/17
3.77
3.40
01/11/19
01/11/21
01/11/20
01/11/22
3.46
2018 Employments
4,880
01/11/18
01/11/21
01/11/18
01/11/23
3.16
3.76
* At December 31, 2018, 2017, 2016 and 2015, the euro/pound sterling exchange rate was EUR 1.11790 GBP 1; EUR 1.12710 GBP 1, EUR 1.16798 GBP 1 and EUR
1.36249 GBP 1, respectively.
** Number of accounts/contracts. A single employee may have more than one account/contract.
In 2008 the Group launched a voluntary savings scheme for
Santander UK employees (Sharesave Scheme) whereby employees
who join the scheme in 2016, 2017 and 2018 see deducted between
GBP 5 and GBP 500 from their net monthly pay over a period of
three or fve years. When this period has ended, the employees
may use the amount saved to exercise options on shares of the
Bank at an exercise price calculated by reducing by up to 20% the
average purchase and sale prices of the Bank shares in the three
trading sessions prior to the approval of the scheme by the UK
tax authorities (HMRC). This approval must be received within 21
to 41 days following the publication of the Group’s results for the
frst half of the year. This scheme was approved by the Board of
Directors, at the proposal of the appointments and remuneration
committee, and, since it involved the delivery of Bank shares,
its application was authorized by the Annual General Meeting
held on 21 June 2008. Also, the scheme was authorized by the
UK tax authorities (HMRC) and commenced in September 2008.
In subsequent years, at the Annual General Meetings held on 19
June, 2009, 11 June, 2010, 17 June, 2011, 28 March, 2012, 22 March,
2013, 28 March, 2014, 27 March, 2015, 18 March, 2016, 7 April, 2017,
and 23 March, 2018, respectively, the shareholders approved the
application of schemes previously approved by the board and with
similar features to the scheme approved in 2008.
iii. Fair value
The fair value of the performance share plans was calculated as
follows:
a) Deferred variable compensation plan linked to multi-year
objectives 2016, 2017 and 2018:
The fair value of the plan has been determined, at the grant date,
based on the valuation report of an independent expert, Willis
Towers Watson. According to the design of the plan for 2016,
2017 and 2018 and the levels of achievement of similar plans in
comparable entities, the expert concludes that the reasonable
range for estimating the initial achievement ratio is around 60%
- 80%. It has been considered that the fair value is 70% of the
maximum.
b) 2015 Performance share plan:
The fair value of this plan was calculated at the grant date based
on a valuation report by an independent expert. On the basis of
the design of the plan for 2015 and the levels of achievement of
similar plans at comparable entities, the expert concluded that the
reasonable range for estimating the initial achievement coefcient
was approximately 60% to 80% and, accordingly, the fair value
was considered to be 70% of the maximum. Therefore, as the
maximum level was determined as being 91.50%, the fair value is
64.05% of the maximum amount.
598
2018 Auditors’ report and consolidated annual accounts
c) Performance share plans 2014:
48. Other general administrative expenses
• It was assumed that the benefciaries will not leave the Group’s
employ during the term of each plan.
a) Breakdown
The detail of Other general administrative expenses is as follows:
Million of euros
Property, fxtures and supplies
Technology and systems
Technical reports
Advertising
Taxes other than income tax
Communications
Surveillance and cash
courier services
Per diems and travel expenses
Insurance premiums
Other administrative expenses
2018
1,968
1,550
707
646
557
527
405
225
76
2017
1,931
1,257
759
757
583
529
443
217
78
1,828
8,489
1,799
8,353
2016
1,853
1,095
768
691
484
499
389
232
69
1,653
7,733
b) Technical reports and other
Technical reports includes the fees paid by the various Group
companies (detailed in the accompanying Appendices) for the
services provided by their respective auditors, the detail being as
follows:
Million of euros
Audit fees
Audit-related fees
Tax fees
2017
2016
All other fees
2018
90.0
6.5
0.9
3.4
2017
88.1
6.7
1.3
3.1
2016
73.7
7.2
0.9
3.6
• The fair value of the Bank’s relative TSR position was calculated,
on the grant date, on the basis of the report of an independent
expert whose assessment was carried out using a Monte Carlo
valuation model to perform 10,000 simulations to determine
the TSR of each of the companies in the benchmark group,
taking into account the variables set forth below. The results
(each of which represents the delivery of a number of shares)
are classifed in decreasing order by calculating the weighted
average and discounting the amount at the risk-free interest
rate.
Expected volatility*
Annual dividend yield based on last few years
Risk-free interest rate (Treasury Bond yield
(zero coupon) over the period of the plan)
PI14
51.35%
6.06%
4.073%
* Calculated on the basis of historical volatility over the corresponding
period (three years).
The application of the simulation model resulted in a percentage
value of 55.39% for Plan l-14. Since this valuation refers to a market
condition, it cannot be adjusted after the grant date.
d) Santander UK Sharesave plans:
The fair value of each option granted by Santander UK was
estimated at the grant date using a European/American Partial
Diferential Equation model with the following assumptions:
Risk-free interest rate
Dividend increase
2018
1.27%-
1.40%
5.6%-
6.12%
0.89%-
1.08%
5.48%-
5.51%
0.31%-
0.41%
5.92%-
6.21%
Implied volatility of
underlying shares based on
expected life of the options
23.99%-
24.17%
26.16%-
26.31%
31.39%-
32.00%
Expected life of
options granted
3 and 5
years
3 and 5
years
3 and 5
years
Total
100.8
99.2
85.4
The Audit fees heading includes audit fees for the Banco
Santander, S.A. individual and consolidated fnancial statements,
as the case may be, of the companies forming part of the Group,
the integrated audits prepared for the annual report flling in
the Form 20-F required by the U.S. Securities and Exchange
Commission (SEC) for those entities currently required to do so, the
internal control audit (SOX) for those required entities, the audit
of the consolidated fnancial statements as of 30 June and limited
quarterly consolidated reviews for the Brazilian regulator as of
31 March, 30 June and 30 September and the regulatory reports
required by the auditor corresponding to the diferent locations of
the Santander Group.
The main concepts included in Audit-related fees correspond to
aspects such as the issuance of Comfort letters, or other reviews
required by diferent regulations in relation to aspects such as, for
example, Securitization.
The services commissioned from the Group’s auditors meet the
independence requirements stipulated by the Audit Law, the US
SEC rules and the Public Company Accounting Oversight Board
(PCAOB), applicable to the Group, and they did not involve in any
599
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
50. Gains or losses on non-current
assets held for sale not classifed
as discontinued operations
The detail of Gains/(losses) on non-current assets held for sale not
classifed as discontinued operations is as follows:
Million of euros
Net balance
Tangible assets
Impairment (Note 12)
Gain (loss) on sale (Note 12)
Other gains and other losses
2018
(123)
2017
(195)
(259)
(306)
136
-
111
(8)
2016
(141)
(212)
71
-
(123)
(203)
(141)
case the performance of any work that is incompatible with the
audit function.
Lastly, the Group commissioned services from audit frms other
than PwC amounting to EUR 173.9 million in 2018 (2017: EUR 115.6
million; 2016: EUR 127.9 million, respectively).
The “Audit Fees” caption includes the fees corresponding to the
audit for the year, regardless of the date on which the audit was
completed. In the event of subsequent adjustments, which will not
be signifcant in any case, and for purposes of comparison, they are
presented in this note in the year to which the audit relates. The
rest of the services are presented according to the date of their
approval by the Audit Committee.
c) Number of branches
The number of ofces at 31 December 2018 and 2017 is as follow:
Number of branches
Spain
Group
Group
2018
4,427
8,790
13,217
2017
4,546
9,151
13,697
49. Gains or losses on non
fnancial assets, net
The detail of Gains/(losses) on disposal of assets not classifed as
non-current assets held for sale is as follow:
Million of euros
Gains:
Tangible and intangible assets
Investments
Of which:
Allfunds Bank, S.A. (Note 3)
Losses:
Tangible and intangible assets
Investments
2018
2017
2016
124
2
-
126
(92)
(6)
(98)
28
134
443
425
577
(43)
(12)
(55)
522
131
30
-
161
(116)
(15)
(131)
30
600
2018 Auditors’ report and consolidated annual accounts
51. Other disclosures
a) Residual maturity periods and average interest rates
The detail, by maturity, of the balances of certain items in the
consolidated balance sheet is as follows:
31 December 2018*
Million of euros
On
demand
Within 1
month
1 to 3
months
3 to 12
months
1 to 3
years
3 to 5
years
More
than 5
years
Average
interest
rate
Total
113,663
-
-
-
-
-
-
113,663
0.61%
1,886
487
1,399
1,399
6,023
6,022
1
1
3,329
3,328
1
1
12,873
19,432
10,705
64,172
118,420
12,830
19,415
10,661
64,076
116,819
3.13%
43
43
17
17
44
44
96
96
1,601
1,601
1.41%
46,247
56,818
71,627
102,036
134,697
107,921
426,753
946,099
16
1,534
1,319
6,646
2,474
1,783
23,924
37,696
3.33%
Assets:
Cash, cash balances at
Central Banks and other
deposits on demand
Financial assets at fair
value through other
comprehensive income
Debt instruments
Loans and advances
Customers
Financial assets at
amortised cost
Debt instruments
Loans and advances
46,231
55,284
70,308
95,390
132,223
106,138
402,829
908,403
Central banks
Credits institutions
Customers
Liabilities:
Financial liabilities at
amortised cost
Deposits
Central banks
-
23
-
4
-
-
15,574
15,601
5,389
6,711
6,003
5,314
947
1,024
35,480
4.63%
1.66%
49,872
63,597
89,383
126,909
105,191
386,231
857,322
4.97%
10,092
36,139
161,796
62,841
74,956
114,909
154,129
118,626
490,925
1,178,182
4.20%
545,284
87,782
93,293
127,522
182,670
56,927
78,152
1,171,630
536,134
74,440
67,406
91,958
107,459
18,833
6,871
903,101
Credit institutions
15,341
13,413
24,724
16,384
8,759
Customer deposits
520,489
58,897
40,053
75,067
34,267
304
2,130
2,629
507
64,433
2,520
6,412
9,901
-
72,523
0.39%
4,646
89,679
2,225
740,899
2.19%
1.19%
Marketable debt securities**
Other fnancial liabilities
237
8,913
11,347
1,995
18,817
7,070
33,536
71,805
37,919
70,653
244,314
2.59%
2,028
3,406
175
628
24,215
545,284
87,782
93,293
127,522
182,670
56,927
78,152
1,171,630
1.48%
Diference (assets
less liabilities)
(383,488)
(24,941)
(18,337)
(12,613)
(28,541)
61,699
412,773
6,552
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** Includes promissory notes, certifcates of deposit and other short-term debt issues.
The Group’s net borrowing position with the ECB was EUR 11,882
million at 31 December 2018, mainly because in last period the
Group borrowed funds under the ECB’s targeted longer-term
refnancing operations (LTRO, TLTRO) programme. (See note 20).
601
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
31 December 2017
Million of euros
On
demand
Within 1
month
1 to 3
months
3 to 12
months
1 to 3
years
3 to 5
years
More
than 5
years
Average
interest
rate
Total
110,995
-
-
-
-
-
-
110,995
0.53%
326
326
2,467
2,467
1,646
1,646
11,497
22,447
11,497
22,447
11,164
11,164
78,934
128,481
78,934
128,481
4.34%
Assets:
Cash, cash balances at
central banks and other
deposits on demand
Financial assets
available-for-sale
Debt instruments
Loans and receivables
57,000
58,686
53,218
96,689
119,541
112,786
405,093
903,013
Debt instruments
249
1,381
997
2,073
2,317
1,656
8,870
17,543
3.06%
Loans and advances
56,751
57,305
52,221
94,616
117,224
111,130
396,223
885,470
Central banks
Credits institutions
Customers
Held-to-maturity investments
-
18,242
38,509
-
3,948
4,198
1,446
3,445
4,811
5,708
-
5,694
-
939
16,073
1,341
26,278
39,567
49,159
47,330
84,097
111,530
110,191
378,809
819,625
-
-
1,902
122
294
11,173
13,491
168,321
61,153
54,864
110,088
142,110
124,244
495,200
1,155,980
Liabilities:
Financial liabilities at
amortised cost
Deposits
Central banks
Credit institutions
Customer deposits
Marketable debt securities*
Other financial liabilities
Difference (assets
less liabilities)
537,604
527,499
450
20,870
506,179
105
10,000
537,604
681
13,350
52,636
11,638
9,634
2,015
15,263
42,047
11,927
3,909
75,161
75,161
87,939
130,672
136,487
59,325
66,667
100,658
81,169
83,542
39,719
22,565
5,247
11,907
74,664
1,126,069
8,283
883,320
-
4,663
3,620
71,414
91,300
720,606
2,715
42,988
25,406
6,501
72,537
31,680
29,286
54,202
43,395
64,357
214,910
728
1,116
428
2,024
27,839
87,939
130,672
136,487
83,542
74,664
1,126,069
1.98%
(369,283)
(14,008)
(33,075)
(20,584)
5,623
40,702
420,536
29,911
5.10%
1.26%
5.44%
1.52%
4.61%
0.24%
2.40%
2.00%
2.56%
* Includes promissory notes, certificates of deposit and other short-term debt issues.
602
2018 Auditors’ report and consolidated annual accounts 31 December 2016
Million of euros
On
demand
Within 1
month
1 to 3
months
3 to 12
months
1 to 3
years
3 to 5
years
More
than 5
years
Average
interest
rate
Total
76,454
-
-
-
-
-
-
76,454
0.98%
200
200
5,986
5,986
2,007
2,007
5,442
23,574
5,442
23,574
13,900
13,900
60,178
111,287
60,178
111,287
4.33%
Assets:
Cash, cash balances at
central banks and other
deposits on demand
Financial assets
available-for-sale
Debt instruments
Loans and receivables
52,512
48,420
56,725
85,521
113,387
93,816
389,623
840,004
Debt instruments
248
1,628
708
2,246
2,125
1,918
4,364
13,237
6.31%
Loans and advances
52,264
46,792
56,017
83,275
111,262
91,898
385,259
826,767
Central banks
Credits institutions
Customers
Held-to-maturity investments
-
941
11,499
1,117
-
23
14,393
27,973
16,632
35,632
-
4,938
2,210
2,220
4,435
1,268
3,721
35,424
40,913
42,308
79,938
106,827
90,607
367,145
763,370
-
-
123
2,075
342
11,928
14,468
129,166
54,406
58,732
91,086
139,036
108,058
461,729
1,042,213
Liabilities:
Financial liabilities at
amortised cost
Deposits
Central banks
480,075
95,583
67,282
125,774
115,591
69,467
90,468
1,044,240
471,494
79,446
42,583
86,006
69,775
34,505
7,837
791,646
422
2,007
633
101
20,027
20,922
-
44,112
Credit institutions
16,649
16,357
10,603
23,313
13,540
Customer deposits
454,423
61,082
Marketable debt securities*
Other fnancial liabilities
642
7,939
12,861
3,276
31,347
14,225
10,474
62,592
36,208
5,560
8,023
3,742
89,764
4,095
657,770
39,465
43,985
34,520
80,380
226,078
303
1,831
442
2,251
26,516
6.54%
1.96%
5.79%
1.70%
5.12%
0.26%
3.97%
2.25%
3.68%
Diference (assets
less liabilities)
(350,909)
(41,177)
(8,550)
(34,688)
23,445
38,591
371,261
(2,027)
480,075
95,583
67,282
125,774
115,591
69,467
90,468
1,044,240
2.57%
* Includes promissory notes, certifcates of deposit and other short-term debt issues.
603
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The detail of the undiscounted contractual maturities of the
existing financial liabilities at amortised cost at 31 December 2018
is as follows:
Financial liabilities at amortised cost
Deposits
Central banks
Credit institutions
Customer
Marketable debt securities
Other financial liabilities
31 December 2018*
Million of euros
On
demand
Within 1
month
1 to 3
3 to 12
months months
1 to 3
years
3 to 5
years
More
than 5
years
Total
532,915
304
15,257
517,354
296
8,913
74,320
2,126
13,413
58,781
11,243
1,995
67,169
91,766
106,935
18,439
6,540
898,084
2,624
896
64,424
24,698
16,288
8,552
39,847
74,582
33,959
2,520
6,085
9,834
-
4,427
2,113
17,359
33,443
7,070
2,028
71,431
3,406
37,409
69,352
175
628
72,894
88,720
736,470
240,533
24,215
542,124
87,558
91,598
127,237
181,772
56,023
76,520
1,162,832
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
31 December 2017
Million of euros
On
demand
Within 1
month
1 to 3
3 to 12
months months
1 to 3
years
3 to 5
years
Financial liabilities at amortised cost
Deposits
Central banks
Credit institutions
Customer
Marketable debt securities
Other financial liabilities
526,059
451
20,378
505,230
1,486
10,001
537,546
57,490
2,018
14,903
40,569
11,735
3,908
73,133
89,249
99,780
64,977
23,801
2,719
13,035
24,807
27,138
6,348
52,413
72,254
31,491
32,365
15,385
5,123
11,857
-
4,553
3,604
11,387
28,412
52,989
42,888
63,648
9,634
728
1,116
428
2,024
71,512
89,147
717,418
212,545
27,839
110,270
128,920
119,082
75,681
73,829
1,118,461
31 December 2016
Million of euros
On
demand
Within 1
month
1 to 3
3 to 12
months months
1 to 3
years
3 to 5
years
Financial liabilities at amortised cost
Deposits
Central banks
Credit institutions
Customer
Marketable debt securities
Other financial liabilities
467,529
422
16,676
450,431
623
7,939
95,231
2,006
15,789
77,436
13,582
3,645
49,246
68,830
66,255
633
101
20,021
15,500
20,057
12,364
33,113
48,672
33,870
34,781
20,916
5,517
8,348
-
3,736
4,029
12,705
38,119
42,201
34,022
78,094
10,097
305
1,837
442
2,251
44,099
89,639
655,899
219,346
26,516
476,091
112,458
72,048
107,254
110,293
69,245
88,110
1,035,499
604
More
than 5
years
Total
8,157
878,077
More
than 5
years
Total
7,765
789,637
2018 Auditors’ report and consolidated annual accounts
Below is a breakdown of contractual maturities for the rest of
fnancial assets and liabilities as of 31 December 2018:
Million of euros at 31 December 2018*
FINANCIAL ASSETS
Financial assets held for trading
Derivatives
Equity instruments
Debt instruments
Loans and advances
Credits institutions
Customers
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Debt instruments
Loans and advances
Central banks
Credit institutions
Customers
Financial assets designated at fair
value through proft or loss
Equity instruments
Debt instruments
Loans and advances
Central banks
Credits institutions
Customers
Financial assets at fair value through
other comprehensive income
Equity instruments
Hedging derivatives
Within 1
1 to 3
months months
3 to 12
months
1 to 3 years
3 to 5 years
More than
5 years
Total
4,512
3,564
2,691
3,165
-
-
6,793
899
-
22,084
15,189
-
19,350
14,098
-
1,821
399
5,894
6,895
5,252
-
-
-
-
-
-
21,598
13,045
604
7
20,994
13,038
1,211
5,433
14,587
4,131
5,196
3,474
3,215
346
-
1,876
1,339
-
2
-
20
326
-
-
1,337
326
-
-
-
-
-
-
-
5,625
304
5,321
2,582
778
1,961
17
-
-
17
-
-
17
-
-
-
-
-
5,215
727
4,488
-
1,327
3,161
125
-
-
125
-
-
125
-
-
609
166
474
2,167
36,576
19,897
8,938
7,539
202
-
202
7,912
1,232
6,680
-
1,695
4,985
7,025
3,260
3,689
76
-
-
76
2,671
2,671
4,234
92,879
55,939
8,938
27,800
202
-
202
57,460
3,222
54,238
9,226
23,097
21,915
10,730
3,260
5,587
1,883
-
2
1,881
2,671
2,671
8,607
868
1,088
-
-
-
4,065
348
3,717
-
579
3,138
2
-
2
-
-
-
-
-
-
957
59
Changes in the fair value of hedged items
in portfolio hedges of interest rate risk
106
7
20
28
TOTAL FINANCIAL ASSETS
30,040
17,128
12,929
29,619
24,433
59,286
173,435
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
605
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros at 31 December 2018*
FINANCIAL LIABILITIES
Financial liabilities held for trading
Derivatives
Shorts positions
Deposits
Central banks
Credits institutions
Customers
Marketable debt securities
Other financial liabilities
Financial liabilities designated at
fair value through profit or loss
Deposits
Central banks
Credits institutions
Customers
Marketable debt securities
Other financial liabilities
Hedging derivatives
Changes in the fair value of hedged items
in portfolio hedges of interest rate risk
Within 1
months
1 to 3
months
3 to 12
months
1 to 3 years
3 to 5 More than
5 years
years
Total
10,473
2,897
7,576
3,351
2,874
477
1,104
822
282
16,123
14,323
1,800
16,457
14,956
1,501
22,835
19,469
3,366
70,343
55,341
15,002
-
-
-
-
-
-
29,574
29,522
9,804
8,809
10,909
13
39
485
3
-
-
-
-
-
-
7,017
6,947
4,940
949
1,058
70
-
144
5
-
-
-
-
-
-
864
627
72
271
284
237
-
321
23
-
-
-
-
-
-
1,497
531
-
188
343
556
410
362
64
-
-
-
-
-
-
999
455
-
229
226
544
-
651
-
-
-
-
-
-
28,107
27,222
-
445
26,777
885
-
4,400
-
-
-
-
-
-
68,058
65,304
14,816
10,891
39,597
2,305
449
6,363
60
148
303
TOTAL FINANCIAL LIABILITIES
40,535
10,517
2,312
18,046
18,167
55,490
145,067
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
Million of euros at 31 December 2018*
Within 1
1 to 3
months months
3 to 12
months
1 to 3 years
3 to 5 years
More than
5 years
Total
Memorandum items
Loans commitment granted
Financial guarantees granted
Other commitments granted
71,860
12,436
22,749
2,100
58,431
1,737
1,486
4,437
6,174
35,632
1,728
2,650
MEMORANDUM ITEMS
132,391
15,659
33,360
40,010
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
43,205
1,029
3,503
47,737
32,201
218,083
692
2,145
11,723
74,389
35,038
304,195
In the Group’s experience, no outflows of cash or other financial
assets take place prior to the contractual maturity date that might
affect the information broken down above.
606
2018 Auditors’ report and consolidated annual accounts b) Equivalent euro value of assets and liabilities
The detail of the main foreign currency balances in the
consolidated balance sheet, based on the nature of the related
items, is as follows:
Equivalent value in million of euros
Cash, cash balances at central banks
and other deposits on demand
Financial assets/liabilities held for trading
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Other fnancial assets/liabilities at
fair value through proft or loss
Financial assets/liabilities available-for-sale
Financial assets at fair value through
other comprehensive income
Financial assets at amortised cost
Loans and receivables
Investments held-to-maturity
Investments
Tangible assets
Intangible assets
Financial liabilities at amortised cost
Liabilities under insurance contracts
Other
2018*
2017
2016
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
61,372
56,217
8,231
-
40,989
-
32,244
35,997
67,926
598,629
1,189
19,903
23,016
-
-
24,506
893,233
-
-
-
-
-
694,362
29
20,567
791,944
67,025
82,004
-
76,459
60,423
100,083
-
70,958
7,322
65,691
553,301
11,490
1,121
15,971
23,499
-
-
23,695
851,119
21,766
-
-
-
-
-
-
6,965
68,370
571,829
12,272
1,308
16,957
26,338
16,667
-
-
-
-
-
-
638,680
58
20,989
757,952
-
-
678,542
61
27,961
23,169
892,506
789,397
* See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
c) Fair value of fnancial assets and
liabilities not measured at fair value
The fnancial assets owned by the Group are measured at fair value
in the accompanying consolidated balance sheet, except for cash,
cash balances at central banks and other deposits on demand,
loans and advances at amortised cost (IFRS9) and the loans and
receivables, held-to-maturity investments, equity instruments
whose market value cannot be estimated reliably and derivatives
that have these instruments as their underlyings and are settled by
delivery thereof (IAS39).
Similarly, the Group’s fnancial liabilities -except for fnancial
liabilities held for trading, those measured at fair value and
derivatives other than those having as their underlying equity
instruments whose market value cannot be estimated reliably- are
measured at amortised cost in the accompanying consolidated
balance sheet.
607
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Following is a comparison of the carrying amounts of the Group’s
fnancial instruments measured at other than fair value and their
respective fair values at year-end:
i) Financial assets measured at other than fair value
Million of euros
2018
2017
2016
Assets
Loans and
advances
Debt
instruments
i
g
t
n
n
u
y
ro
r
m
a
Ca
e
u
r
il
a
a
F
v
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
i
t
n
u
g
n
y
ro
r
r
a
a
Ca F
e
u
m il
a
v
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
i
g
t
n
n
u
e
y
o
u
r
r
r
m il
a
a
a
Ca F
v
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
908,403
914,013
-
88,091 825,922
885,470 895,645
-
141,839 753,806
826,767 833,819
-
127,224 706,595
37,696
38,095
20,898
11,246
5,951
31,034
31,094
10,994
13,688
6,412
27,705
27,417
11,529
11,678
4,210
946,099 952,108 20,898 99,337 831,873
916,504 926,739 10,994
155,527 760,218
854,472 861,236
11,529 138,902 710,805
ii) Financial liabilities measured at other than fair value
Million of euros
2018
2017
2016
i
g
t
n
n
u
y
ro
r
m
a
Ca
e
u
r
il
a
a
F
v
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
Liabilities
i
t
n
u
g
n
e
y
ro u
r
m il
a
a
Ca
v
r
a
F
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
i
g
t
n
n
u
y
ro
r
am
Ca
e
u
r
il
a
a
F
v
1
l
e
v
e
L
2
l
e
v
e
L
3
l
e
v
e
L
Deposits
903,101 902,680
-
302,414 600,266
883,320 883,880
-
177,147
706,733
791,646
792,172
-
90,271
701,901
Debt
instruments
and other
fnancial
liabilities
268,529
271,226
72,945
143,153
55,128
242,749
248,891 52,896
139,301
56,694
252,594
255,758 43,306 186,356
26,096
1,171,630 1,173,906
72,945 445,567 655,394 1,126,069 1,132,771 52,896 316,448 763,427
1,044,240 1,047,930 43,306 276,627 727,997
The main valuation methods and inputs used in the estimates at
31 December 2018 of the fair values of the fnancial assets and
liabilities in the foregoing table were as follows:
• Loans and receivables: the fair value was estimated using the
present value method. The estimates were made considering
factors such as the expected maturity of the portfolio, market
interest rates, spreads on newly approved transactions or market
spreads -when available-.
• Held-to-maturity investments: the fair value was calculated
based on market prices for these instruments.
• Financial liabilities at amortised cost:
i) Deposits: the fair value of short term deposits was taken to be
their carrying amount. Factors such as the expected maturity
of the transactions and the Group’s current cost of funding in
similar transactions are consider for the estimation of long
term deposits fair value. It had been used also current rates
ofered for deposits of similar remaining maturities.
ii) Marketable debt securities and subordinated liabilities: the
fair value was calculated based on market prices for these
instruments -when available- or by the present value method
using market interest rates and spreads, as well as using any
signifcant input which is not observable with market data if
applicable.
The fair value of cash, cash balances at central banks and other
deposits on demand was taken to be their carrying amount since
they are mainly short-term balances.
In addition, at 31 December 2017 and 2016, equity instruments
amounting to EUR 1,211 million and EUR 1,349 million, respectively,
(See note 2.d) recognised as Financial assets available-for-sale
(IAS39) were measured at cost in the consolidated balance sheet
because it was not possible to estimate their fair value reliably,
since they related to investments in entities not listed on organised
markets and, consequently, the non-observable inputs were
signifcant.
608
2018 Auditors’ report and consolidated annual accounts
d) Exposure of the Group to Europe’s peripheral countries
The detail at 31 December 2018, 2017 and 2016, by type of fnancial
instrument, of the Group’s sovereign risk exposure to Europe’s
peripheral countries and of the short positions held with them,
taking into consideration the criteria established by the European
Banking Authority (EBA) (See note 54) is as follows:
Sovereign risk by country of issuer/borrower at 31 December 2018**
Million of euros*
Debt instruments
MtM Derivatives****
Financial assets
held for trading
and fnancial assets
designated at fair
value through
proft or loss
Financial assets
at fair value
through other
Short comprehensive
income
positions
Non-trading
fnancial assets
mandatorily at
fair value through
proft or loss
Financial
assets at
amortised
Loans and
advances to
cost customers***
Total net
direct
exposure
Direct
Indirect
risk risk (CDS)s
Spain
Portugal
Italy
Ireland
3,601
(2,458)
72
477
-
(115)
(681)
-
27,078
4,794
-
-
-
-
-
-
7,804
13,615
49,640
407
277
385
-
3,725
8,753
80
-
261
-
-
87
2
-
-
-
-
*
**
See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
Information prepared under EBA standards. Also, there are government debt instruments on insurance companies balance sheets amounting to EUR
13,364 million (of which EUR 11,529 million, EUR 1,415 million, EUR 418 million and EUR 2 million relate to Spain, Portugal, Italy and Ireland, respectively)
and of-balance-sheet exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 5,622 million (of which EUR 4,870
million, EUR 366 million and EUR 386 million to Spain, Portugal and Italy, respectively).
*** Presented without taking into account the valuation adjustments recognised (EUR 34 million).
**** “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs”
refers to the exposure to CDSs based on the location of the underlying.
Sovereign risk by country of issuer/borrower at 31 December 2017*
Million of euros
Debt instruments
Financial
assets at
fair value
through other
Short comprehensive
income
positions
Non-trading
fnancial
assets
mandatorily
at fair value
through
proft or loss
Financial assets held
for trading and fnancial
assets designated
at fair value through
proft or loss
Financial
assets at
amortised
Total net
direct
cost customers*** exposure****
Loans and
advances to
MtM Derivatives***
Direct
Indirect
risk risk (CDS)s
Spain
Portugal
Italy
6,940
(2,012)
208
1,962
(155)
(483)
37,748
5,220
4,613
1,585
232
-
1,906
3
-
16,470
3,309
16
62,637
(21)
8,817
6,108
-
(5)
-
-
5
*
Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR
11,673 million (of which EUR 10,079 million, EUR 1,163 million and EUR 431 million relate to Spain, Portugal and Italy, respectively) and of-balance-sheet
exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 3,596 million (EUR 3,010 million, EUR 146 million and EUR
440 million to Spain, Portugal and Italy, respectively).
** Presented without taking into account the Other comprehensive income recognised (EUR 31 million).
*** “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs”
refers to the exposure to CDSs based on the location of the underlying.
**** EUR 19,601 million were included within the direct exposures of the balance sheet mainly from debt securities of Grupo Banco Popular.
609
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Sovereign risk by country of issuer/borrower at 31 December 2016*
Million of euros
Debt instruments
MtM Derivatives***
Financial assets held
for trading and fnancial
assets designated
at fair value through
Short
proft or loss positions
Spain
Portugal
Italy
8,943
(4,086)
154
2,211
(212)
(758)
Financial
assets
available-
for-sale
23,415
5,982
492
Loans and
receivables
1,516
214
-
Held-to-
maturity
Loans and Total net
direct
investments customers** exposure
advances to
Other
than
CDSs
Indirect risk
(CDS)s
1,978
14,127
45,893
(176)
4
-
930
7
7,072
1,952
-
(2)
-
-
2
*
Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR
10,502 million (of which EUR 9,456 million, EUR 717 million and EUR 329 million relate to Spain, Portugal and Italy, respectively) and of-balance-sheet
exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 5,449 million (EUR 5,349 million, EUR 91 million and EUR 9
million to Spain, Portugal and Italy, respectively).
** Presented without taking into account the Other comprehensive income recognised (EUR 27 million).
*** Other than CDSs refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. CDSs
refers to the exposure to CDSs based on the location of the underlying.
The detail of the Group’s other exposure to other counterparties
(private sector, central banks and other public entities that are not
considered to be sovereign risks) in the aforementioned countries
at 31 December 2018, 2017 and 2016 is as follows:
Exposure to other counterparties by country of issuer/borrower at 31 December 2018****
Million of euros*
Debt instruments
MtM Derivatives***
Financial
assets
held for
Balances
with
central
banks
42,655
1,369
51
-
-
Spain
Portugal
Italy
Greece
Ireland
trading and Financial assets
at fair value
fnancial
through other
assets
repurchase designated comprehensive
income
agreements
at FVTPL
Reverse
8,117
-
6,296
-
-
412
11
84
-
21
1,760
90
635
-
1,093
Non-trading
fnancial assets
mandatorily
at fair value
through proft
or loss
320
-
-
-
16
Financial
assets at
Loans and Total net
amortised advances to
cost customers** exposure
direct Other than
CDSs
CDSs
202,149 258,075
3,880
(6)
33,596
38,887
1,132
10,830
17,896
80
80
25
10,633
11,788
253
28
127
-
-
-
-
2,662
3,821
-
-
*
See reconciliation of IAS39 as of 31 December 2017 to IFRS9 as of 1 January 2018 (Note 1.b).
** Also, the Group has of-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 76,691 million, EUR
8,158 million, EUR 5,193 million, EUR 200 million and EUR 850 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.
*** Presented without taking into account valuation adjustments or impairment corrections (EUR 9,385 million).
**** “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs”
refers to the exposure to CDSs based on the location of the underlying.
610
2018 Auditors’ report and consolidated annual accounts
Exposure to other counterparties by country of issuer/borrower at 31 December 2017*
Million of euros
Debt instruments
Balances
with
central
banks
36,091
761
17
-
-
Spain
Portugal
Italy
Greece
Ireland
Financial
assets held for
trading and
fnancial assets
Reverse designated at fair
value through
proft or loss
repurchase
agreements
Financial
assets
available-
for-sale
Loans and
receivables
Investments
held-to-
maturity
Loans and
advances to
customers*
Total net
direct
Other
exposure**** than CDSs
CDSs
Derivatives***
6,932
178
2,416
-
-
623
160
438
-
20
4,784
764
1,010
-
476
2,880
4,007
-
-
584
-
210,976
262,286
2,299
106
-
-
-
35,650
10,015
56
1,981
41,626
13,896
56
3,061
1,416
211
30
79
2
-
5
-
-
*
Also, the Group has of-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 81,072 million, EUR
8,936 million, EUR 4,310 million, EUR 200 million and EUR 714 million, of which Grupo Banco Popular EUR 15,460 million, to counterparties in Spain,
Portugal, Italy, Greece and Ireland, respectively.
** Presented excluding Other comprehensive income and impairment losses recognised (EUR 10,653 million of which around EUR 3,986 of Grupo Banco
Popular).
*** “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs”
refers to the exposure to CDSs based on the location of the underlying.
**** EUR 83,625 million were included within the direct exposures of the balance sheet mainly from debt securities of Grupo Banco Popular.
Exposure to other counterparties by country of issuer/borrower at 31 December 2016*
Million of euros
Debt instruments
Financial
assets held for
trading and
fnancial assets
Reverse designated at fair
value through
proft or loss
repurchase
agreements
Financial
assets
available-
for-sale
Balances
with
central
banks
9,640
8,550
1,223
4,663
655
26
-
-
-
-
-
-
84
818
-
45
426
732
-
396
Spain
Portugal
Italy
Greece
Ireland
Derivatives***
Loans and
receivables
Investments
held-to-
maturity
Loans and
advances to
customers**
Total net
direct
exposure
Other
than
CDSs
711
3,936
-
-
77
-
240
-
-
-
147,246
172,033
2,977
28,809
34,150
1,600
6,992
8,568
161
34
47
1,503
690
47
985
CDSs
(16)
-
6
-
-
* Also, the Group has of-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 64,522 million, EUR
6,993 million, EUR 3,364 million, EUR 268 million and EUR 369 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.
** Presented excluding Other comprehensive income and impairment losses recognised (EUR 8,692 million).
*** “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs”
refers to the exposure to CDSs based on the location of the underlying.
611
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Following is certain information on the notional amount of the
CDSs at 31 December 2018, 2017 and 2016 detailed in the foregoing
tables:
Notional amount
Bought
-
151
26
-
-
205
Sold
-
382
26
-
265
75
Notional amount
Bought
-
324
25
1
25
225
Sold
-
499
128
1
450
201
Notional amount
Bought
-
534
28
-
78
317
Sold
-
751
290
6
503
362
Net
-
(231)
-
-
(265)
130
Net
-
(175)
(103)
-
(425)
24
Net
-
(217)
(262)
(6)
(425)
(45)
Fair value
Bought
-
(2)
-
-
-
(5)
Sold
-
(4)
-
-
-
5
Net
-
(6)
-
-
-
-
Fair value
Bought
Sold
Net
-
(3)
(1)
-
-
(3)
Fair value
Bought
-
(3)
1
-
-
(1)
-
5
1
-
5
8
Sold
-
(13)
(1)
-
2
7
-
2
-
-
5
5
Net
-
(16)
-
-
2
6
31/12/18
Million of euros
Spain
Sovereign
Other
Portugal
Sovereign
Other
Italy
Sovereign
Other
31/12/17
Million of euros
Spain
Sovereign
Other
Portugal
Sovereign
Other
Italy
Sovereign
Other
31/12/16
Million of euros
Spain
Sovereign
Other
Portugal
Sovereign
Other
Italy
Sovereign
Other
612
2018 Auditors’ report and consolidated annual accounts The Continental Europe area encompasses all the business
activities carried on in the region. The United Kingdom area
includes the business activities carried on by the various Group
units and branches with a presence in the UK. The Latin America
area includes all the fnancial activities carried on by the Group
through its banks and subsidiaries in the region. The United States
area includes the holding company (SHUSA) and the businesses
of Santander Bank, National Association, Santander Consumer
USA Holdings Inc., Banco Santander Puerto Rico, Banco Santander
International’s specialised unit and the New York branch. The
Group has considered the aggregation criteria of IFRS8 for
purposes of identifying these reportable geographical segments.
The corporate centre segment includes the centralised
management business relating to fnancial investments, fnancial
management of the structural currency position, within the
remit of the Group’s corporate asset and liability management
committee, and management of liquidity and equity through
issues.
With regard to the balance sheet, due to the required segregation
of the various business units (included in a single consolidated
balance sheet), the amounts lent and borrowed between the
units are shown as increases in the assets and liabilities of each
business. These amounts relating to intra-Group liquidity are
eliminated and are shown in the Intra-Group eliminations column
in the table below in order to reconcile the amounts contributed by
each business unit to the consolidated Group’s balance sheet.
There are no customers located in any of the areas that generate
income exceeding 10% of Total income.
52. Geographical and business
segment reporting
The segment reporting is based on fnancial information presented
to the chief operating decision maker, which excludes certain
items included in the statutory results that distort year-on-year
comparisons and are not considered for management reporting
purposes. This fnancial information (“underlying basis”) is
computed by adjusting reported results for the efects of certain
gains and losses (e.g.: capital gains, write-downs, etc.) These
gains and losses are items that management and investors
ordinarily identify and consider separately to understand better the
underlying trends in the business.
The Group has aligned the information in this operating segment
Note in a manner consistent with the underlying information used
internally for management reporting purposes and with that
presented throughout the Group’s other public documents.
The Group executive committee has been determined to be
the chief operating decision maker for the Group. The Group’s
operating segments refect its organisational and management
structures. The Group executive committee reviews the Group’s
internal reporting based around these segments in order to assess
performance and allocate resources.
The segments are diferentiated by the geographical area
where profts are earned and by type of business. The fnancial
information of each reportable segment is prepared by
aggregating the fgures for the Group’s various geographic areas
and business units.
a) Geographical segments
This primary level of segmentation, which is based on the Group’s
management structure, comprises fve reportable segments: four
operating areas plus the corporate centre. The operating areas,
which include all the business activities carried on therein by the
Group, are: Continental Europe, the United Kingdom, Latin America
and the United States, based on the location of the Group’s assets.
613
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The condensed balance sheets and income statements of the
various geographical segments are as follows:
Million of euros
(Condensed) balance sheet
Total Assets
Loans and advances to customers
Cash, balances at central banks
and credit institutions and
other deposits on demand
Debt instruments
Other financial assets*
Other asset accounts**
Total Liabilities
Customer deposits
Central banks and credit institutions
Marketable debt securities
Other financial liabilities***
Other liabilities accounts****
Total Equity
Other customer funds
under management
Investment funds
Pension funds
Assets under management
Other non-managed marketed
Customer funds
2018
Continental
Europe
United
Kingdom
Latin
America
United
States
Corporate
centre
Intra-Group
eliminations
Total
681,887
383,020
349,353
257,284
303,356
135,043
139,634
(150,002)
1,459,271
150,544
85,564
6,509
-
882,921
142,813
89,030
36,012
31,012
642,479
369,730
158,762
62,018
37,142
14,827
39,408
69,219
48,030
11,062
10,127
28,555
39,843
29,190
13,398
9,638
332,137
210,388
33,429
67,556
16,583
4,181
17,216
7,672
7,576
-
96
-
60,721
59,367
14,994
17,730
16,442
13,160
4,292
15,585
276,095
118,532
142,576
48,103
37,698
36,851
10,867
27,261
78,194
71,439
98
6,657
57,568
16,504
37,564
3,098
3,798
16,511
2,763
512
-
2,251
128
13,528
6,141
377
2,112
124,495
51,557
234
1
41,783
1,333
8,206
88,077
7
7
-
-
-
(68,891)
197,069
-
-
(81,111)
191,124
70,808
117,349
(68,890)
1,351,910
-
780,496
(68,890)
187,909
-
-
-
246,619
95,007
41,879
(81,112)
107,361
-
-
-
-
-
157,855
127,564
11,160
19,131
42,211
*
**
Including Trading derivatives and Equity instruments.
Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Non-current assets held for sale, Assets
under insurance or reinsurance contracts, tangible assets, intangible assets, tax assets, other assets and non-current assets held for sale.
*** Including Trading derivatives, Short positions and Other financial liabilities.
**** Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Liabilities under insurance or reinsurance
contracts, provisions, tax liabilities, other liabilities and liabilities associated with non-current assets held for sale.
614
2018 Auditors’ report and consolidated annual accounts Million of euros
2017
(Condensed) balance sheet
Continental
Europe
United
Kingdom
Latin
America
United
States
Corporate
centre
Intra-Group
eliminations
Total
Total Assets
678,122
361,230
293,347
114,388
132,099
(134,881)
1,444,305
Loans and advances to customers
380,081
243,616
147,929
71,963
5,326
-
848,915
Cash, balances at central banks and credit
institutions and other deposits on demand
Debt instruments
Other fnancial assets*
Other asset accounts**
Total Liabilities
Customer deposits
114,965
99,728
39,918
43,430
56,762
26,188
24,690
9,974
56,087
57,824
14,226
17,281
13,300
13,843
3,368
11,914
636,784
344,926
264,415
99,189
352,549
230,504
143,266
400
1,768
2,117
122,488
45,247
222
279
35,029
1,625
8,092
(53,089)
188,425
-
199,351
84,319
(81,792)
123,295
(53,089)
1,337,472
-
777,730
(53,089)
190,314
-
-
-
217,966
107,299
44,163
39,613
34,435
36,085
11,016
51,189
15,884
26,176
2,503
3,437
28,932
15,199
86,852
(81,792)
106,833
80,732
74,435
-
2,871
452
-
6,297
2,419
47
13,561
-
-
-
-
-
-
-
-
-
-
166,574
135,749
11,566
19,259
41,398
Central banks and credit institutions
159,794
Marketable debt securities
Other fnancial liabilities***
Other liabilities accounts****
Total Equity
Other customer funds
under management
Investment funds
Pension funds
Assets under management
Other non-managed marketed
Customer funds
61,214
45,919
17,308
41,338
74,314
52,319
11,566
10,429
27,790
27,833
61,112
21,167
4,310
16,304
8,657
8,543
-
114
-
*
**
Including Trading derivatives and Equity instruments.
Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Non-current assets held for sale, Assets
under insurance or reinsurance contracts, tangible assets, intangible assets, tax assets, other assets and non-current assets held for sale.
*** Including Trading derivatives, Short positions and Other fnancial liabilities.
**** Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Liabilities under insurance or reinsurance
contracts, provisions, tax liabilities, other liabilities and liabilities associated with non-current assets held for sale.
615
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
2016
(Condensed) balance sheet
Continental
Europe
United
Kingdom
Latin
America
United
States
Corporate
centre
Intra-Group
eliminations
Total
Total Assets
520,134
354,960
320,768
137,391
132,154
(126,282)
1,339,125
Loans and advances to customers
297,214
251,251
152,187
85,389
4,429
-
790,470
Cash, balances at central banks
and credit institutions and
other deposits on demand
Debt instruments
Other fnancial assets*
Other asset accounts**
Total Liabilities
Customer deposits
Central banks and credit institutions
Marketable debt securities
Other fnancial liabilities***
Other liabilities accounts****
Total Equity
Other customer funds
under management
Investment funds
Pension funds
Assets under management
Other non-managed marketed
Customer funds
77,232
80,639
40,689
24,360
36,643
28,045
26,819
12,202
67,400
63,314
18,696
19,171
16,970
17,940
3,566
13,526
486,644
337,945
291,454
120,741
2,640
1,374
2,803
120,908
47,387
857
552
30,921
2,633
12,424
(47,744)
-
-
153,141
191,312
92,573
(78,538)
111,629
(47,745)
1,236,426
-
691,111
(47,745)
149,398
-
-
-
228,869
123,890
43,158
143,747
64,460
47,585
47,436
41,395
11,291
22,264
26,340
2,907
4,770
29,314
16,650
84,767
(78,537)
102,699
81,034
74,554
-
3,828
701
-
6,480
3,127
-
-
-
-
448
14,999
10
-
-
-
-
-
159,260
129,930
11,298
18,032
23,247
269,934
105,152
53,064
49,042
9,452
33,490
65,834
46,229
11,298
8,307
7,790
212,113
21,590
71,108
27,913
5,221
17,015
8,564
8,446
-
118
-
*
**
Including Trading derivatives and Equity instruments.
Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Non-current assets held for sale, Assets
under insurance or reinsurance contracts, tangible assets, intangible assets, tax assets, other assets and non-current assets held for sale.
*** Including Trading derivatives, Short positions and Other fnancial liabilities.
**** Including Hedging derivatives, Changes in the fair value of hedged items in portfolio hedges of interest risk, Liabilities under insurance or reinsurance
contracts, provisions, tax liabilities, other liabilities and liabilities associated with non-current assets held for sale.
616
2018 Auditors’ report and consolidated annual accounts
The condensed income statements for the geographical segments
are as follows:
Million of euros
(Condensed) Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
Continental
Europe
10,107
4,419
915
441
2018
United
Kingdom
4,136
1,023
199
62
Latin
America United States
Corporate
centre
15,654
5,391
(947)
5,253
600
(306)
859
72
627
(69)
11
(23)
Total
34,341
11,485
1,797
801
15,882
5,420
21,201
6,949
(1,028)
48,424
(8,279)
7,603
(1,399)
(703)
5,501
(1,461)
4,040
-
4,040
397
3,643
(2,995)
2,425
(173)
(326)
1,926
(539)
1,387
-
1,387
25
1,362
(7,995)
13,206
(4,567)
(667)
7,972
(2,904)
5,068
-
5,068
840
4,228
(3,015)
3,934
(2,618)
(199)
1,117
(347)
770
-
770
218
552
(495)
(1,523)
(116)
(100)
(1,739)
21
(1,718)
-
(1,718)
3
(1,721)
(22,779)
25,645
(8,873)
(1,995)
14,777
(5,230)
9,547
-
9,547
1,483
8,064
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 113 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release EUR 113 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
617
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
2017
(Condensed) Underlying income statement
Continental
Europe
United
Kingdom
Latin
America United States
Corporate
centre
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
9,230
4,167
626
394
14,417
(7,661)
6,756
(1,109)
(746)
4,901
(1,316)
3,585
-
3,585
383
3,202
4,364
1,003
282
67
15,984
5,569
5,494
1,014
30
971
9
410
(851)
(38)
(227)
(104)
Total
34,296
11,597
1,704
797
5,716
22,522
6,959
(1,220)
48,394
(2,862)
2,854
(205)
(465)
2,184
(661)
1,523
-
1,523
25
1,498
(8,720)
13,802
(4,972)
(1,330)
7,500
(2,386)
5,114
-
5,114
817
4,297
(3,198)
3,761
(2,780)
(90)
891
(256)
635
-
635
227
408
(476)
(1,696)
(45)
(182)
(1,923)
31
(1,892)
-
(1,892)
(3)
(1,889)
(22,917)
25,477
(9,111)
(2,813)
13,553
(4,588)
8,965
-
8,965
1,449
7,516
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** NeNet loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 50 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of EUR 50 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
618
2018 Auditors’ report and consolidated annual accounts
Million of euros
2016
(Condensed) Underlying income statement
Continental
Europe
United
Kingdom
Latin
America United States
Corporate
centre
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
8,161
3,497
818
330
4,405
1,031
319
61
13,345
4,581
806
32
12,806
5,816
18,764
(6,781)
6,025
(1,342)
(671)
4,012
(1,083)
2,929
-
2,929
330
2,599
(2,967)
2,849
(58)
(340)
2,451
(735)
1,716
-
1,716
36
1,680
(7,692)
11,072
(4,911)
(785)
5,376
(1,362)
4,014
-
4,014
628
3,386
5,917
1,102
22
492
7,533
(3,197)
4,336
(3,208)
(90)
1,038
(357)
681
-
681
286
395
(739)
(31)
(242)
(53)
Total
31,089
10,180
1,723
862
(1,065)
43,854
(450)
(1,515)
1
(74)
(1,588)
141
(1,447)
-
(1,447)
(8)
(1,439)
(21,087)
22,767
(9,518)
(1,960)
11,289
(3,396)
7,893
-
7,893
1,272
6,621
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 108 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of EUR 108 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
619
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Santander Corporate and Investment Banking (SCIB): This business
refects the revenues from global corporate banking, investment
banking and markets worldwide including treasuries managed
globally (always after the appropriate distribution with Retail
Banking customers), as well as equities business.
Wealth Management: Includes the asset management business
(Santander Asset Management, S.A., S.G.I.I.C.), the corporate unit
of Private Banking and International Private Banking in Miami and
Switzerland.
The Real Estate Activity Spain includes the loans and foreclosed
assets of customers who are mainly involved in real estate
development and who have a specialised management model
and the assets of the former real estate fund (Santander Banif
inmobiliario).
Although the Real Estate Operations in Spain and the Wealth
Management business segments do not meet the quantitative
thresholds defned in IFRS8, such segments are considered
reportable by the Group and separately disclosed because the
Group management believes that information about these
segments is useful to users of the fnancial statements.
There are no customers in any of the business segments that
generate income exceeding 10% of Total income.
b) Business segments
At this secondary level of segment reporting, the Group is
structured into Retail Banking, Santander Corporate and
Investment Banking, Wealth Management and Real Estate Activity
Spain; the sum of these segments is equal to that of the primary
geographical reportable segments and total fgures for the Group
are obtained by adding the data for the corporate centre.
During the year 2018, certain changes took place in the
organizational structure of the Group, which led to a change in the
secondary level of segment reporting:
• The Group acquired the remaining stake of SAM Investment
Holdings Limited that was not owned by the Group, as
explained in Note 3. Following this change in the consolidation
perimeter, the Group has decided to integrate the acquired
asset management business, the International Private Banking
business and the corporate unit of Private Banking, which were
previously reported within the Commercial Banking segment,
into a new segment identifed as Wealth Management. The
Group has restated the corresponding information for earlier
periods to refect these changes in the structure of its internal
organization and reporting.
• Additionally, there has been an adjustment into the Global
Customer Relationship Model’s perimeter between the Retail
Banking segment and the Corporate and Investment Banking
segment and other minor changes relating to the Real Estate
Activity Spain.
Finally the Group has decided to rename certain of its business
segments. Accordingly, the Commercial Banking unit is now called
Retail Banking; and the segment previously reported as Santander
Global Corporate Banking is now called Santander Corporate &
Investment Banking.
Considering the aforementioned information, the business
segments are now conformed as follows:
Retail Banking (formerly Commercial Banking): This covers all
customer banking businesses, including consumer fnance, except
those of corporate banking, which are managed through the SCIB,
and asset management and private banking, which are managed
by Wealth Management. The results of the hedging positions in
each country are also included, conducted within the sphere of
each one’s Assets and Liabilities Committee.
620
2018 Auditors’ report and consolidated annual accounts
The condensed income statements are as follows:
Million of euros
(Condensed) Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
Retail
Banking
32,523
8,945
720
645
42,833
(19,256)
23,577
(8,461)
(1,707)
13,409
(4,329)
9,080
-
9,080
1,287
7,793
2018
Corporate &
Investment
Banking
Wealth
Real Estate
Management Activity in Spain
Corporate
centre
(33)
(947)
2,378
1,512
1,004
193
5,087
(2,105)
2,982
(217)
(108)
2,657
(792)
1,865
-
1,865
160
1,705
420
1,097
62
(37)
1,542
(729)
813
(9)
(7)
797
(234)
563
-
563
35
528
Total
34,341
11,485
1,797
801
(69)
11
(23)
(1,028)
48,424
(495)
(22,779)
(1,523)
(116)
(100)
25,645
(8,873)
(1,995)
(1,739)
14,777
21
(5,230)
(1,718)
9,547
-
(1,718)
3
-
9,547
1,483
(1,721)
8,064
-
-
23
(10)
(194)
(204)
(70)
(73)
(347)
104
(243)
-
(243)
(2)
(241)
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and net
gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 112 million mainly corresponding to
the results by commitments and contingent risks included in the line provisions or reversal of provisions,net of the statutory income statement.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of EUR 112 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
621
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
(Condensed) Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
2017
Corporate &
Investment
Banking
M
2,442
1,627
1,212
222
5,503
Retail
Banking
32,339
9,306
681
580
42,906
(19,677)
(2,028)
23,229
(8,278)
(2,395)
12,556
(3,843)
8,713
-
8,713
1,258
7,455
3,475
(690)
(72)
2,713
(750)
1,963
-
1,963
183
1,780
Wealth
anagement Activ
Real Estate
ity in Spain
404
700
38
70
1,212
(528)
684
(9)
(8)
667
(165)
502
-
502
24
478
(38)
2
-
29
(7)
(208)
(215)
(88)
(157)
(460)
139
(321)
-
(321)
(13)
(308)
Corporate
centre
(851)
(38)
(227)
(104)
Total
34,296
11,597
1,704
797
(1,220)
48,394
(476)
(22,917)
(1,696)
(46)
(181)
(1,923)
25,477
(9,111)
(2,813)
13,553
31
(4,588)
(1,892)
8,965
-
(1,892)
(3)
(1,889)
-
8,965
1,449
7,516
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and net
gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 50 million mainly corresponding to
the results by commitments and contingent risks included in the line provisions or reversal of provisions,net of the statutory income statement.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of EUR 50 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
622
2018 Auditors’ report and consolidated annual accounts
Million of euros
(Condensed) Underlying income statement
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses,
depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft from continuing operations
Net proft from discontinued operations
Consolidated proft
Non-controlling interests
Attributable proft to the parent
2016
Corporate &
Investment
Banking
2,528
1,407
1,256
289
5,480
Retail
Banking
28,914
8,206
668
536
38,324
(18,036)
(1,917)
20,288
(8,673)
(1,682)
9,933
(2,734)
7,199
-
7,199
1,089
6,110
3,563
(658)
(76)
2,829
(787)
2,042
-
2,042
174
1,868
Wealth
Management
Real Estate
Activity in
Spain
Corporate
centre
429
597
32
18
1,076
(473)
603
(22)
(5)
576
(153)
423
-
423
14
409
(1,065)
43,854
(450)
(21,087)
(43)
1
9
72
39
(211)
(172)
(167)
(122)
(461)
137
(324)
-
(739)
(31)
(242)
(53)
(1,515)
2
(75)
(1,588)
141
(1,447)
-
(324)
(1,447)
3
(8)
(327)
(1,439)
Total
31,089
10,180
1,723
862
22,767
(9,518)
(1,960)
11,289
(3,396)
7,893
-
7,893
1,272
6,621
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and net
gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 108 million mainly corresponding to
the results by commitments and contingent risks included in the line provisions or reversal of provisions,net of the statutory income statement.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of EUR 108 million mainly corresponding to the results by
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
623
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
c) Reconciliations of reportable segment results
The tables below reconcile the underlying basis results to the
statutory results for each of the periods presented as required
by IFRS8. For the purposes of these reconciliations, all material
reconciling items are separately identifed and described.
The Group’s assets and liabilities for management reporting
purposes do not difer from the statutory reported fgures and
therefore are not reconciled.
Million of euros
Reconciliation of underlying results to statutory results
Underlying results
Adjustments
Statutory results
2018
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses, depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Consolidated proft
Non-controlling interests
Attributable proft to the parent
34,341
11,485
1,797
801
48,424
(22,779)
25,645
(8,873)
(1,995)
14,777
(5,230)
9,547
1,483
8,064
-
-
-
-
-
-
-
-
(576)
(576)
344
(232)
22
(254)
34,341
11,485
1,797
801
48,424
(22,779)
25,645
(8,873)
(2,571)
14,201
(4,886)
9,315
1,505
7,810
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 113 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except for a release of 113 million euros mainly corresponding to results
from commitments and contingent risks, Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net;
Gains or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not
classifed as discontinued operations.
Explanation of adjustments:
• Restructuring costs: The net impact of EUR -300 million on
• Negative goodwill in Poland: The negative goodwill of EUR 45
Proft attributable to the Parent, relates to restructuring costs in
connection with the integration of Banco Popular Español, S.A.U.,
as follows EUR -280 million in Spain, EUR -40 million in corporate
centre and EUR 20 million in Portugal. The corresponding gross
impacts are refected on the “Other gains (losses) and provisions”
line above.
million, relates to the acquisition of the the banking and private
banking business of Deutsche Bank Polska, S.A.
624
2018 Auditors’ report and consolidated annual accounts
Million of euros
2017
Reconciliation of underlying results to statutory results
Underlying results
Adjustments
Statutory results
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses, depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Proft for the period
Non-controlling interests
Proft attributable to the parent
34,296
11,597
1,704
797
48,394
(22,917)
25,477
(9,111)
(2,813)
13,553
(4,588)
8,965
1,449
7,516
-
-
(39)
-
(39)
(76)
(115)
(98)
(1,249)
(1,462)
704
(758)
139
(897)
34,296
11,597
1,665
797
48,355
(22,993)
25,362
(9,209)
(4,062)
12,091
(3,884)
8,207
1,588
6,619
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 50 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except for a release of 50 million euros mainly corresponding to results from
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
Explanation of adjustments
• Allfunds Bank, S.A. sale: corresponds to the sale by the Bank
and its partners of 100% of Allfunds Bank, S.A. capital, obtaining
an amount of EUR 501 million from the sale of its 25% stake
in Allfunds Bank, S.A., resulting in gains of EUR 425 million
recognised in “Other gains (losses) and provisions” and of EUR
297 million net of tax.
• Restructuring Costs and equity impairments: relates to the charge
of EUR -425 million on “Other gains (losses) and provisions” (EUR
-300 million net of tax) for the integration of Banco Popular
Español, S.A.U. into the group and an additional charge of EUR
-125 million on “Other gains (losses) and provisions” (EUR -85
million after tax efect) mainly related to commercial networks
in Germany. During 2017, an additional impairment on equity
investment and intangible assets held by the Group has been
accounted for a value of EUR -130 million on “Other gains (losses)
and provisions”, with no tax efect.
• Goodwill Impairment: impairment of goodwill associated with
Santander Consumer USA Holdings, inc. This impairment had a
gross impact of EUR -899 million on “Other gains (losses) and
provisions” line (EUR -603 million in Proft attributable to the
parent).
• US Tax Reform and other impairments: the adjustment primarily
corresponds to net impacts of the tax reform in the United States
together with other expenses related to provisions for hurricanes
and other provisions in the year 2017. The net impact of these
adjustments in Proft attributable to the parent adds EUR -76
million.
625
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
2016
Reconciliation of underlying results to statutory results
Underlying results
Adjustments
Statutory results
Net interest income
Net fee income
Gains (losses) on fnancial transactions*
Other operating income**
Total income
Administrative expenses, depreciation and amortisation
Net operating income***
Net loan-loss provisions****
Other gains (losses) and provisions*****
Operating proft/(loss) before tax
Tax on proft
Consolidated proft
Non-controlling interests
Attributable proft to the parent
31,089
10,180
1,723
862
43,854
(21,087)
22,767
(9,518)
(1,960)
11,289
(3,396)
7,893
1,272
6,621
-
-
378
-
378
(14)
364
-
(885)
(521)
114
(407)
10
(417)
31,089
10,180
2,101
862
44,232
(21,101)
23,131
(9,518)
(2,845)
10,768
(3,282)
7,486
1,282
6,204
*
**
Gains (losses) on fnancial transactions includes the following line items in the statutory income statement, which are presented net for internal
reporting and management reporting purposes: Gain or losses on fnancial assets and liabilities not measured at fair value through proft or loss, net,
Gain or losses on fnancial assets and liabilities held for trading, net, Gains or losses on non-trading fnancial assets and liabilities mandatorily at fair
value through proft or loss, net, Gain or losses on fnancial assets and liabilities measured at fair value through proft or loss, net, Gain or losses from
hedge accounting, net and Exchange diferences, net.
Other operating income includes the following line items in the statutory income statement, which are presented net for internal reporting and
management reporting purposes: Dividend income; Income from companies accounted for using the equity method, Other operating income, Other
operating expenses, Income from assets under insurance or reinsurance contracts and Expenses from liabilities under insurance or reinsurance
contracts.
*** Net Operating Income is used for the Group’s internal reporting and management reporting purposes but is not a line item in the statutory
consolidated income statement.
**** Net loan-loss provisions refers to Impairment or reversal of impairment at fnancial assets not measured at fair value through proft or loss and
net gains and losses from changes line item in the statutory income statement – reclassifcation of fnancial assets at amortised cost. Additionally,
includes a release of EUR 108 million mainly corresponding to the results by commitments and contingent risks includes in the line of the statutory
income statement of provisions or reversal of provisions.
***** Other gains (losses) and provisions includes the following line items in the statutory income statement, which are presented net for internal reporting
and management reporting purposes: Provisions or reversal of provisions except a release of 108 million euros mainly corresponding to results from
commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-fnancial assets, net; Gains
or losses on non-fnancial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classifed as
discontinued operations.
• VISA Europe Equity Gains: on 21 June 2016 the Group disposed its
Visa Europe, Ltd. stake, classifed as available for sale, obtaining a
gross gain of EUR 380 million recognised in “Other gains (losses)
and provisions” (impact of EUR 227 million net of taxes).
Explanation of adjustments
• PPI United Kingdom: during 2016, the group accounted for
provisions to cover eventual claims related to payment protection
insurance (PPI). These provisions had an impact of EUR -139
million on “Other gains (losses) and provisions” (EUR -137 million
in Proft attributable to the parent).
• Restructuring costs: refects the impacts of the restructuring
costs faced by the Group during the year 2016, mainly relating
to the acceptance of pre-retirement and voluntary redundancy
ofers in Spain with an impact of EUR -662 million on “Other gains
(losses) and provisions” (EUR -475 million in Proft attributable to
the parent).
626
2018 Auditors’ report and consolidated annual accounts
53. Related parties
The parties related to the Group are deemed to include, in addition
to its subsidiaries, associates and joint ventures, the Bank’s key
management personnel (the members of its board of directors
and the executive vice presidents, together with their close family
members) and the entities over which the key management
personnel may exercise signifcant infuence or control.
Following below is the balance sheet balances and amounts of the
Group’s income statement corresponding to operations with the
parties related to it, distinguishing between associates and joint
ventures, members of the Bank’s board of directors, the Bank’s
executive vice presidents, and other related parties. Related-party
transactions were made on terms equivalent to those that prevail
in arm’s-length transactions or, when this was not the case, the
related compensation in kind was recognise.
Million of euros
2018
2017
2016
s
f
f
o
o
s
d
s
e
t
r s
n
r
t
r
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t
u
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bc
od
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hi
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a
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td
v
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t
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e
i
v
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ie
t
r
u
p
c
e
e
c
x
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t
a
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s
e
t
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t
s
n
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ai
s
io
r
e
c u
ei od
t
t
h
s n
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n
t
a
s
e
a
Op A
v
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f
o
s
r
e
bo
m
e
M
f
o
d
s
r
ar
o
t
bc
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r
hi
td
s
t
n
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d
e
i
v
s
ie
t
r
u
p
c
e
e
c
x
i
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d
e
t
a
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r
s
e
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r
t
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e
c
u
ei od
t
t
h
s n
r
n
t
a
s
e
a
Op A
v
j
30
256
6,048
-
-
472
21
300
5,884
-
-
223
30
256
21
279
Assets:
Loans and
advances: credit
institutions
Loans and
advances:
customers
Debt instruments
Others
Liabilities:
Financial liabilities:
credit institutions
Financial liabilities:
customers
Marketable debt
securities
Others
Income statement:
Interest income
Interest expense
Gains/losses on
fnancial assets
and liabilities
and others
Commission
income
Commission
expense
Other:
Contingent
liabilities and
others
Contingent
commitments
Derivative fnancial
instruments
7,202
704
6,142
295
61
1,650
8
1,596
8
38
993
73
(3)
82
853
(12)
4,707
21
393
4,293
-
-
-
-
-
19
-
19
-
-
-
-
-
-
-
-
9
7
1
1
-
-
12
-
12
-
-
-
-
-
-
-
-
3
1
2
-
-
-
363
-
363
-
-
31
14
(1)
-
18
-
5,081
473
22
748
309
414
4
21
1,020
57
(3)
302
735
(71)
In addition to the detail provided above, there were insurance
contracts linked to pensions amounting to EUR 210 million at 31
December 2018 (31 December 2017: EUR 239 million; 31 December
2016: EUR 269 million).
-
-
-
-
-
19
-
19
-
-
-
-
-
-
-
-
7
6
1
-
-
-
14
-
14
-
-
-
-
-
-
-
-
3
1
2
-
782
3,881
508
64
210
6
301
3,574
597
4,146
352
60
185
19
17
4,110
5,209
452
-
824
155
669
-
-
609
67
(15)
15
561
(19)
21
-
63
-
63
-
-
14
8
-
-
6
-
f
f
o
o
d
s
rs
r
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bo
t
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hi
M
td
-
-
-
-
-
27
-
27
-
-
-
-
-
-
-
-
1
-
1
-
s
t
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d
e
i
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x
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t
a
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r
s
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r
ei
t
h
r
t
a
Op
22
307
-
-
22
286
-
-
21
-
10
124
-
-
10
124
-
-
-
-
-
-
-
-
3
-
3
-
-
-
13
10
(1)
-
4
-
846
139
417
290
627
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
54. Risk management
In addition, the Group considers the following risks:
a) Cornerstones of the risk function
The risk management and control model is based on the principles
below:
• Operational risk: is defned as the risk of loss due to the
inadequacy or failure of internal processes, people and systems,
or due to external events. This defnition includes legal risk.
• Advanced risk management policy, with a forward-looking
• Compliance risk and conduct: is that which arises from practices,
approach that allows the Group to maintain a medium-low risk
profle, through a risk appetite defned by the board.
processes or behaviours that are not adequate or that do
not comply with internal regulations, legality or supervisory
requirements.
• Risk culture that applies to all employees throughout the Group.
• Clearly defned three lines of defence model that enable us to
identify, manage, control, monitor and challenge all risks.
• Autonomous subsidiaries model with robust governance based
on a clear structure that separates the risk management and the
risk control functions.
• Information and data management processes that allow all risks
to be identifed, assessed, managed and reported at appropriate
levels.
• Risks are managed by the units that generate them.
• Reputational risk: is defned as the risk of a current or potential
negative economic impact due to a reduction in the perception of
the Group by employees, customers, shareholders/investors and
society in general.
• Model risk: is the risk of loss arising from inaccurate predictions
that may lead the Group to make sub-optimal decisions, or from
the inappropriate use of a model.
• Strategic risk: the risk of loss or damage arising from strategic
decisions or their poor implementation, which afect the long-
term interests of our main stakeholders, or of an inability to
adapt to the changing environment
These principles are aligned with the Group’s strategy and business
model, taking into account the requirements of regulators and
supervisors, as well as the best market practices.
2. Risk governance
The Group has a strong governance framework, which pursues the
efective control of the risk profle, within the risk appetite defned
by the board.
The Board is responsible for approving the general risk control and
management policy, including tax risks.
1. Main risks of the group’s fnancial instruments
The main risk categories in which the Group has its most
signifcant current and/or potential exposures, thus facilitating the
identifcation thereof, includes the following:
• Credit risk: risk of fnancial 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 afect the value of positions in the trading book.
• Trading risk
• Structural risk.
• Liquidity risk: risk of the Group does not have the liquid fnancial
assets necessary to meet its obligations at maturity, or can only
obtain them at a high cost.
• 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.
This governance framework is underpinned by the distribution
of roles among the three lines of defence, a robust structure of
committees and a strong relationship between the Group and its
subsidiaries.
2.1. Lines of defence
At Banco Santander, we follow a three lines of defence control
model:
• The frst line of defence is all business functions and business
support functions that originate risks and have primary
responsibility in the management of those risks. The role of these
functions is to establish a management structure for the risks
generated as part of their activity ensuring that these remain
within approved risk limits.
• The second line of defence is risk Control and Compliance and
Conduct function. The role of these functions is to provide
independent oversight and challenge to the risk management
activities of the frst line of defence.
• The third line of defence: Internal Audit function. This function
controls and regularly checks that the policies, and procedures
are adequate and efectively implemented in the management
and control of all risks
The risk control, compliance and conduct, and internal audit
functions are have direct access to the board of directors and/or its
committees.
628
2018 Auditors’ report and consolidated annual accounts
2.2. Risk committee structure
Ultimately, the board of directors is responsible for risk
management and control and, in particular, for approving and
periodically reviewing the Group’s risk culture and risk appetite
framework.
Except for specifc topics detailed in its bylaws, the board has the
capacity to delegate its faculties to other committees. This is the
case of the risk supervision, regulation and compliance committee
and the Group’s Executive committee, which has specifc risk
related responsibilities.
The Group Chief Risk Ofcer (Group CRO) leads the risk function
within the Group, advises and challenges the executive line and
reports independently to the risk supervision, regulation and
compliance committee and to the board.
Other bodies that form the highest level of risk governance, with
authorities delegated by the board of directors, are the executive
risk committee and the risk control committee, detailed below:
Risk control committee (CCR):
To control and ensure that risks are managed in accordance
with the risk appetite approved by the board, providing a
comprehensive overview of all risks. This includes identifying and
monitoring both current and potential risks, and evaluating their
potential impact on the Group’s risk profle.
This committee is chaired by the Group Chief Risk Ofcer (Group
CRO).
Additionally, each risk factor has its own fora, committees and
meetings to manage the risks under their control. Among others,
they have the following responsibilities:
• Advice the CRO and the risk control committee that risks are
managed in line with the Group’s risk appetite.
• Carrying out complete and regular monitoring of each risk factor.
• Oversee the measures adopted to comply with the expectations
of the supervisors and internal and external auditors.
Executive risk committee (ERC):
This committee is responsible for managing all risks, within the
powers delegated by the board. The committee makes decisions
on risks assumed at the highest level, ensuring that they are within
the established risk appetite limits for the Group.
This committee is chaired by the Chief executive ofcer and it is
composed with nominated executive directors and other Group´s
senior management. The Risk, Finance and Compliance and
Conduct functions, among others, are represented. The Group CRO
has a veto right on the committee’s decisions.
2.3. The Group’s relationship with subsidiaries
regarding risk management
Alignment of units with the Group
In all the subsidiaries, the management and control model follows
the frameworks established by the Group’s board of directors. The
local units adhere to them by their respective boards. The Group
reviews and validates any local adaptations as needed. Corporate
centre participates in the relevant decision-making through their
validation.
Subsidiary committee structures
The “Group-subsidiary governance model and good governance
practices for subsidiaries” recommends that each subsidiary should
have Risk committees and other executive committees, consistent
with those already in place in the Group.
The subsidiary governance bodies are structured taking into
consideration local requirements, both regulatory and legal, as
well as their specifc dimension and complexity, in a manner that is
consistent with those of the parent company, as established in the
internal governance framework.
3. Management processes and tools
3.1. Risk appetite and structure of limits
The Group defnes the risk appetite as the amount and type of
risks that are considered prudent to assume for implementing
our business strategy in the event of unexpected circumstances.
Severe scenarios that could have a negative impact on the levels of
capital, liquidity, proftability and/or the share price are taken into
account.
The risk appetite is set by the board for the whole Group. Every
main business unit sets its own risk appetite according to the
adaptation of the Group methodology and its own circumstances.
The boards of the subsidiaries are responsible for approving their
respective risk appetite proposals once they have been reviewed
and validated by the Group.
The Group shares a common risk appetite model. It sets out the
requirements for processes, metrics, governance bodies, controls
and standards for implementation across the Group, cascading
down management policies and limits to lower levels.
Corporate risk appetite principles
The following principles govern the Santander Group’s risk
appetite in all its units:
• Responsibility of the board and of senior management.
• Holistic risk view (Enterprise Wide Risk), risk profle backtesting
and challenge. The risk appetite must consider all signifcant risks
and facilitate an aggregate view of the risk profle through the
use of quantitative metrics and qualitative indicators.
629
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
• Forward-looking view. The risk appetite must consider the
• The maximum levels of concentration that the Group considers
desirable risk profle for the short and medium term, taking into
account both the most plausible circumstances and adverse/
stress scenarios.
reasonable to admit.
• Non-fnancial transversal risks
• Embedding and alignment with strategic and business plans.
The risk appetite is an integral part of the strategic and business
planning, and is embedded in the daily management through the
transfer of the aggregated limits to those set at portfolio level,
unit or business line, as well as through the key risk appetite
processes.
3.2. Risk identifcation and assessment (RIA)
The Group carries out the identifcation and assessment of the
diferent risks that is exposed to, involving the diferent lines of
defence, establishing management standards that not only meet
regulatory requirements but also refect best practices in the
market, and reinforce our risk culture.
• Coherence across the various units and a common risk language
throughout the Group. The risk appetite of each unit of the Group
must be coherent with that across the Group.
• Periodic review, backtesting and adoption of best practices and
regulatory requirements. Monitoring and control mechanisms
are established to ensure the risk profle is maintained, and the
necessary corrective and mitigating actions are taken in the event
of non-compliance.
Limits, monitoring and control structure
The risk appetite is formulated annually and includes a series of
metrics and limits to establish in quantitative and qualitative terms
the maximum risk exposure that every unit and the Group as a
whole is willing to assume.
Compliance with risk appetite limits is regularly monitored.
Specialised control functions report the risk profle adequacy to the
board and its committees, on quarterly basis.
Limit breaches and non-compliance with the risk appetite are
reported to the relevant governance bodies. An analysis of the
causes, an estimation of the duration of the breach and corrective
actions proposals are also submitted.
Linkage between the risk appetite limits and those of the business
units and portfolios is a key element for making the risk appetite
an efective risk management tool.
Pillars of the risk appetite
The risk appetite is expressed via limits on quantitative metrics and
qualitative indicators that measure the exposure or risk profle by
type of risk, portfolio and, segment and business line, under both
current and stressed conditions. These metrics and risk appetite
limits are articulated in fve axes that defne the positioning that
Santander wants to adopt or maintain in the deployment of its
business model, described as follows:
• 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.
In 2018, the approach centred on three main areas: standards
control environment review, perimeter completeness by
integrating new units, together with the risk performance
indicators review and their alignment with the risk appetite.
In addition the RIA exercise analyses the evolution of risks and
identifes areas of improvement:
• Risk performance, enabling the understanding of residual risk by
risk type through a set of metrics and indicators calibrated using
international standards.
• Control environment assessment, measuring the degree of
implementation of the target operating model, as part of our
advanced risk management.
• Forward-looking analysis, based on stress metrics and
identifcation and/or assessment of the main threats to the
strategic plan (Top risks), enabling specifc action plans to be
put in place to mitigate potential impacts and monitoring these
plans.
Based on the periodic RIA exercise, the Group’s risk profle as of
December 2018 remains as solid medium-low.
3.3. Scenario analysis
We analyse the impact triggered by diferent scenarios in the
environment, in which the Group operates. These scenarios are
expressed both in terms of macroeconomic variables, as well as
other variables that may impact our risk profle.
Scenario analysis is a robust and useful tool for management at
all levels. It enables the Group to assess its resilience in stressed
environments or scenarios, and identifes measures to reduce
exposure under these scenarios. The objective is to reinforce the
stability of income, capital and liquidity.
The robustness and consistency of the scenario analysis exercises
are based on the following pillars:
• Development and integration of models that estimate the future
performance of metrics (for example, credit losses), based on
both historic information (internal to the Group and external from
the market), and simulation models.
630
2018 Auditors’ report and consolidated annual accounts
• Inclusion of expert judgement and portfolio manager’s know-
how.
• Challenge and backtesting of model results to ensure they are
adequate.
• Robust governance of the whole process, covering models,
scenarios, assumptions and rationale for the results, and their
impact on management.
Scenario analysis forms an integral part of several key processes of
the Group:
The risk reporting taxonomy, contains three types of reports
received by senior management on a monthly basis: the Group risk
report, the risk reports of each unit, and the reports of each of the
risk factors identifed in the Group’s risk map.
b) Credit risk
1. Introduction to the credit risk treatment
Credit risk is the risk of fnancial loss arising from the default or
credit quality deterioration of a customer or other third party, to
which the Group has either directly provided credit or for which it
has assumed a contractual obligation.
• Regulatory uses: stress test scenarios using the guidelines set by
There are diferent limit models depending on the segment:
• Large corporate groups: we use a pre-classifcation model based
on a system for measuring and monitoring economic capital.
The result is the level of risk that the Group is willing to assume
with a customer/group, in terms of Capital at Risk, nominal CAP,
and maximum periods according to the type of transaction (in
the case of fnancial entities, limits are managed through Credit
Equivalent Risk (CER). It includes the actual and expected risk
with a customer based on its usual operations, always within the
limits defned in the risk appetite and established credit policies.
• Corporates and institutions that meet certain requirements
(deep knowledge, rating, etc.): we use a more simplifed pre-
classifcation model through an internal limit that establishes a
reference of the level of risk to be assumed with the customer.
The criteria will include, among others, repayment capacity, debt
in the system and the banking pool distribution.
In both cases, transactions over certain thresholds or with
specifc characteristics might require the approval of an analyst or
committee.
• For individual customers and SMEs with low turnover, large
volumes of credit transactions can be managed more easily
with the use of automatic decision models for classifying the
customer/ transaction binomial.
In specifc situations where a series of requirements are met,
pre-approved transactions are granted to customers or potential
customers (campaigns).
the European regulator or by each local supervisor.
• Internal capital adequacy assessment (ICAAP) or liquidity
assessment (ILAAP) in which, while the regulators can impose
certain requirements, the Group develops its own methodology
to assess its capital and liquidity levels under diferent stress
scenarios to support planning and adequately managing the
Group’s capital and liquidity.
• Risk appetite. Contains stressed metrics on which maximum
levels of losses (minimum liquidity levels) are established that
the Group does not want to exceed. These exercises are related
to those for capital and liquidity, although they have diferent
frequencies and present diferent granularity levels.
• Recurrent risk management in diferent processes/exercises:
• Budgetary and strategic planning process, in the development
of business policies for risk approval, in the global risk analysis
made by senior management and in specifc analysis regarding
the profle of activities or portfolios.
• Identifcation of Top risks on the basis of, a systematic process
to identify and assess all the risks which the Group is exposed
to. The Top risks are selected and a macroeconomic or
idiosyncratic scenario is associated with each one, to assess
their impact on the Group.
• Recovery plan annually to establish the available tools the
Group will have, to survive in the event of an extremely severe
fnancial crisis. The plan sets out a series of fnancial and
macroeconomic stress scenarios, with difering degrees of
severity, that include idiosyncratic and/or systemic events.
• IFRS9 from 1 January 2018, the processes, models and scenario
analysis methodology are included in the new regulatory
provision requirements.
3.4. Risk Reporting Framework (RRF)
Our reporting model has strengthened by consolidating the
overall view of all risks, based on complete, precise and recurring
information that allows the Group’s senior management to assess
the risk profle and decide accordingly.
631
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
2. Main aggregates and variations
Following are the main aggregates relating to credit risk arising on
customer business:
Main credit risk aggregates arising on customer business
(Management information data)
Credit risk with customers*
(million of euros)
Non-performing loans
NPL ratio (%)
2018
2017
2016
2018
2017
2016
2018
2017
2016
Continental Europe
Spain
Santander Consumer Finance
Portugal
Poland
UK
Latin América
Brazil
Mexico
Chile
Argentina
US
Santander Bank, National Association
Santander Consumer USA
Group Total
429,454
239,479
97,922
38,340
30,783
262,196
171,898
84,212
33,764
41,268
5,631
92,152
51,049
26,424
424,248
331,706
22,537 24,674
19,638
251,433
172,974
14,833
15,880
92,589
32,816
24,391
88,061
30,540
21,902
2,244
2,319
2,279
2,959
1,317
1,114
247,625
255,049
2,755
3,295
167,516
173,150
83,076
28,939
89,572
29,682
7,461
4,418
822
7,464
4,391
9,361
2,357
2,691
1,187
3,585
8,333
5,286
779
819
40,406
40,864
1,925
2,004
2,064
8,085
77,190
44,237
24,079
7,318
91,709
54,040
28,590
179
202
109
2,688
2,156
2,088
450
536
717
2,043
1,410
1,097
958,153
920,968
855,510
35,692 37,596 33,643
5.25
6.19
2.29
5.94
4.28
1.05
4.34
5.25
2.43
4.66
3.17
2.92
0.88
7.73
3.73
5.82
6.32
2.50
7.51
4.57
1.33
4.46
5.29
2.69
4.96
2.50
2.79
1.21
5.86
4.08
5.92
5.41
2.68
8.81
5.42
1.41
4.81
5.90
2.76
5.05
1.49
2.28
1.33
3.84
3.93
* Includes gross lending to customers, guarantees and documentary credits.
Risk is diversifed among the main regions where the Group
operates: Continental Europe (45%), United Kingdom (27%), Latin
America (18%) and the United States (10%), with an adequate
balance between mature and emerging markets.
The evolution up to December 2018, credit risk with customers
increased by 4% vs. 2017, considering the same perimeter, mainly
due to the United States, United Kingdom, and Mexico. Growth in
local currency was generalised across all units with the exception
of Spain and Portugal.
These levels of lending, together with lower non-performing loans
(NPLs) of EUR 35,692 million (-5.1% vs. 2017) reduced the Group’s
NPL ratio to 3.73% (-35 bp against 2017).
In order to cover potential losses arising from these NPLs, in
accordance with the new provision calculation in accordance with
IFRS9, the Group recorded allowances for loan loss of EUR 8,873
million (-2.6% vs. December 2017), after deducting post write-of
recoveries. This decrease is materialised in a reduction of the cost
of credit to 1.00 % (7 bp less than the previous year).
Information on the estimation of impairment losses
The Group estimates the impairment losses by calculating the
expected loss at 12 months or for the entire life of the transaction,
based on the stage in which each fnancial asset is classifed in
accordance with IFRS9.
Then, considering the most relevant units of the group (United
Kingdom, Spain, United States, Brazil, as well as Chile, Mexico,
Portugal, Poland, Argentina and the Group Santander Consumer
Finance) representing about 95% of the total of the Group’s
provisions, the detail of the exhibition and the impairment losses
associated with each of the stages as of 31 December 2018 is
shown. In addition, depending on the current credit quality of the
transactions, the exposure is divided into three grades (investment,
speculation and default):
Exposure and impairment losses by stage
Million of euros
Credit Quality*
Stage 1
Stage 2
Stage 3
Total
Investment grade
685,507
7,176
Speculation grade
222,495
47,439
-
-
692,683
269,935
Default
-
-
30,795
30,795
Total Risk**
908,002
54,616
30,795
993,412
Impairment losses
3,823
4,644
12,504
20,970
* Detail of credit quality ratings calculated for Group management
purposes.
** Amortised cost assets + Loans and advances + loan commitments
granted.
632
2018 Auditors’ report and consolidated annual accounts
The other units up to the total Group amounts contributed EUR
151,906, 700 and 1,743 million of exposure, and impairment losses
of EUR 152, 163 and 1,145 million, in stage 1, stage 2 and stage 3,
respectively.
The rest of the balance, considering the fnancial instruments not
included before, amounts to EUR 242,867 million, mostly classifed
in stage 1.
In addition, at 31 December 2018, the Group had EUR 757 million
(1 January 2018: EUR 803 million) of purchased credit-impaired
assets, which relate mainly to the business combinations carried
out by the Group.
The Group monitors the evolution of credit risk provisions,
in collaboration with the main geographies, by carrying out
sensitivity analyses considering variations in the scenarios
macroeconomic variables and their main variables (such as interest
rate, house price growth, unemployment rate or GDP growth)
that have an impact on the distribution of fnancial assets in the
diferent stages and the calculation of credit risk provisions.
Aditionally, based on similar macroeconomic scenarios, the Group
also performs stress tests and sensitivity analysis in a current
basis, such as ICAAP, strategic plans, budgets and recovery and
resolution plans. In this sense, a prospective view of the sensitivity
of each of the Group’s loan portfolio is created in relation to the
possible desviation from base scenario, considering both the
macroeconomic developments in diferent scenarios and the three
year evolution of the business. These tests include potentially
adverse and favourable scenarios.
The classifcation of transactions into the diferent stages of
IFRS9 is carried out in accordance with the provisions of the risk
management policies of the diferent Group´s units, which are
consistent with the risk management policies prepared by Banco
Santander Group. In order to determine the classifcation in stage
2, the Group assesses whether there has been a signifcant increase
in credit risk (SICR) since the initial recognition of transactions,
considering a series of common principles throughout the Group
that guarantee that all fnancial instruments are subject to this
assessment, which considers the particularities of each portfolio
and type of product on the basis of various quantitative and
qualitative indicators. Furthermore, transactions are subject to the
expert judgment of analysts, which is implemented in accordance
with approved governance.
3. Detail of the main geographical areas
Following is the risk information related to the most relevant
geographies in exposure and credit risk allowances.
In addition, for the Santander Corporate & Investment Banking
perimeter, transactions and balances are included in each
geography.
3.1. United Kingdom
Credit risk with customers in the UK amounted to EUR 262,196
million as of December 2018, which means an increase, in local
currency, of 6% compared to year end 2017 (and 7% in local
currency), and representing 27% of the Group’s total loan portfolio.
Mortgage portfolio
This portfolio at the end of December amounted to EUR 176,581
million. It consists of residential mortgages granted to new and
existing customers, and all are frst mortgages. There are no
transactions that entail second or successive liens on mortgaged
properties.
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 applicable legislation.
Information on the estimation of impairment losses
Following is the detail of the Santander UK exposure and
impairment losses associated with each of the stages at 31
December 2018. In addition, depending on the current credit
quality of the operations, the exposure is divided into three grades
(investment, speculation and default):
Exposure and impairment losses by stage
Million of euros
Credit Quality*
Stage 1
Stage 2
Stage 3
Total
Investment grade
225,929
1,900
Speculation grade
34,655
11,514
-
-
227,829
46,169
Default
-
-
2,795
2,795
Total Exposure**
260,584
13,415
2,795
276,793
Impairment losses
224
335
335
894
* Detail of credit quality ratings calculated for Group management
purposes.
** Amortised cost assets + Loans and advances + loan commitments
granted.
633
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
For the estimation of expected losses, prospective information
is taken into account. Specifcally, Santander UK considers fve
prospective macroeconomic scenarios, which are updated
periodically over a 5-year time horizon. The evolution projected for
the next fve years of the main macroeconomic indicators used by
Santander UK to estimate expected losses is presented below:
Pessimistic
scenario 2
Pessimistic
scenario 1
Base scenario
Optimistic
scenario 1
Optimistic
scenario 2
2019 -2023
Magnitudes
Interest rate
Unemployment rate
Housing price change
GDP growth
2.3%
8.6%
-9.5%
0.3%
Each of the macroeconomic scenarios is associated with a given
probability of occurrence. In terms of allocation, Santander UK
associates the highest weighting with the Base Scenario, while it
associates the lowest weightings with the most extreme or acid
scenarios. In addition, at 31 December 2018, the weights used by
Santander UK refect the future prospects of the British economy in
relation to its current political and economic position so that higher
weights are assigned for negative scenarios:
1.5%
4.3%
2.0%
1.6%
1.3%
3.8%
2.3%
2.1%
1.0%
2.8%
3.4%
2.5%
2.5%
6.9%
-2.0%
0.7%
3.2. Spain
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 239,479 million
(25% of the Group’s total), with an adequate level of diversifcation
by both product and customer segment.
Pessimistic scenario 2
Pessimistic scenario 1
Base scenario
Optimistic scenario 1
Optimistic scenario 2
10%
30%
40%
15%
5%
The NPL ratio for the total portfolio was 6.19%, 13 bp less than
in 2017. The decrease in lending (which increased the NPL ratio
by 13 bp) was ofset by the improved NPL fgure (which reduced
the ratio by 22 bp). This improvement was mainly due to an
improved performance of the credit portfolio, the cure of several
restructured loans and the sale of loan portfolios.
The coverage rate stood at 45%.
In relation to the determination of classifcation in Stage 2,
the quantitative criteria applied by Santander UK is based on
identifying whether any increase in PD for the expected life of
the transaction is greater than both an absolute and a relative
threshold. The relative threshold established is common to all
portfolios and a transaction is considered to exceed this threshold
when the PD for the entire life of the transaction doubles with
respect to the PD at the time of initial recognition. The absolute
threshold, on the other hand, is diferent for each portfolio
depending on the characteristics of the transactions.
In addition, for each portfolio, a series of specifc qualitative
criteria is defned to indicate that the exposure has had a signifcant
increase in credit risk, regardless of the evolution of its PD since
the time of initial recognition. Santander UK, among other criteria,
considers that an operation presents a signifcant increase in risk
when it presents irregular positions for more than 30 days. These
criteria depend on the risk management practices of each portfolio.
Information on the estimation of impairment losses
Following is the detail of the Santander Spain exposure and
impairment losses associated with each of the stages at 31
December 2018. In addition, depending on the current credit
quality of the operations, the exposure is divided into three grades
(Investment, speculation and default):
Exposure and impairment losses per stage
Million of euros
Credit Quality*
Stage 1
Stage 2
Stage 3
Total
Investment grade
171,266
289
Speculation grade
25,108
12,603
-
-
171,555
37,711
Default
-
-
14,941
14,941
Total Exposure**
196,374
12,892
14,941
224,207
Impairment losses
366
768
5,565
6,699
* Detail of credit quality calculated for the purposes of Grupo Santander’s
management.
** Amortised cost assets + Loans and advances + loan commitments
granted.
634
2018 Auditors’ report and consolidated annual accounts
The remaining business units to reach the entire portfolio in Spain
contribute another EUR 125,544, EUR 66 and EUR 1,657 million of
exposure, and impairment losses in the amount of EUR 132, EUR 48
and EUR 957 million, in stage 1, stage 2 and stage 3, respectively.
For the estimation of the expected losses, the prospective
information is taken into account. Specifcally, Santander Spain
considers three prospective macroeconomic scenarios, which are
updated periodically, during a time horizon of 5 years. The projected
evolution for the next fve years of the main macroeconomic
indicators used by Santander Spain for estimating expected losses
is presented below:
Magnitudes
Interest rate
Unemployment
rate
Housing price
change
GDP growth
2019-2023
Pessimistic
scenario
Base
scenario
Optimistic
scenario
0.3%
0.7%
1.2%
15.3%
12.3%
10.8%
0.5%
1.1%
2.2%
1.8%
3.8%
2.6%
Portfolio of home purchase loans to families
Residential mortgages in Spain, including Santander Consumer
Finance business, amounted to EUR 63,290 million, representing
25% of total credit risk. 99.14% of which have a mortgage
guarantee.
Million of euros
Home purchase
loans to families
Without mortgage guarantee
With mortgage guarantee
31/12/18
Gross amount
Of which:
non-performing
63,290
545
62,745
2,493
54
2,439
The portfolio of mortgages granted to acquire homes in Spain have
characteristics that maintain its medium-low risk profle which
limits the expectations of a potential additional deterioration:
• Principal is repaid on all mortgages from the start.
• Early repayment is common so the average life of the transaction
is well below that of the contract.
Each one of the macroeconomic scenarios is associated with a
given probability of occurrence. As for its allocation, Santander
Spain associates the Base scenario with the highest weight, while
associating the lower weights to the most extreme scenarios:
• High quality of collateral concentrated almost exclusively in
fnancing the frst home.
• Average afordability rate stood at 28%.
• 83% of the portfolio has a LTV below 80%, calculated as total
risk/latest available house appraisal.
Breakdown of the credit with mortgage guarantee to households
for house acquisition, according to the percentage that the total
risk represents on the amount of the latest available valuation
(loan to value).
Pessimistic scenario
Base scenario
Optimistic scenario
30%
40%
30%
In relation to the determination of the classifcation in stage 2,
the quantitative criteria applied by Santander Spain are based on
identifying whether any increase in PD for the entire expected
life of the operation is greater than an absolute threshold. The
threshold established for each portfolio is diferent depending
on the characteristics of the transactions, and a transaction is
considered to exceed this threshold when the PD for the entire life
of the transaction increases by up to a quarter with respect to the
PD it had at the time of initial recognition.
In addition, for each portfolio, a series of specifc qualitative criteria
are defned that indicate that the exposure has had a signifcant
increase in credit risk, regardless of the evolution of its PD since
the time of initial recognition. Santander Spain, among other
criteria, considers that an operation presents a signifcant increase
in risk when it presents positions past due for more than 30 days.
These criteria depend on the risk management practices of each
portfolio.
635
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million of euros
Gross amount
Of which: watchlist /non-performing
More than
60% and
equal to 40% less than 60% less than 80%
More than
40% and
Less than or
More than
80% and
less than or More than
100%
equal to 100%
15,393
239
18,448
366
18,484
584
6,408
479
4,012
771
Total
62,745
2,439
31/12/18
Loan to value ratio
Credit policies limit the maximum loan to value to 80% for first
residence mortgages and 79.77% in the case of second home
mortgages.
Companies portfolio
Credit risk assumed directly with SMEs and Corporates (EUR
147,634 million) is the main lending segment in Spain, including
Santander Consumer Finance business (60% of the total).
Most of the portfolio (90%) corresponds to customers who
have been assigned an analyst to monitor them continuously
throughout the risk cycle.
The portfolio is broadly diversified without significant
concentrations by activity sector.
Real estate activity
The Group manages the real estate activity in Spain in a separate
unit, which includes the loans from clients with activity mainly in
real estate development, and who have a specialised management
model, holdings in real estate companies and foreclosed assets.
The NPL ratio of this portfolio ended the year at 27.58% (compared
with 29.96% at December 2017) due to the decrease of non-
performing assets in the troubled loan portfolio and, in particular,
to the sharp reduction in lending in this segment. The table below
shows the distribution of the portfolio. The coverage ratio of the
real estate doubtful exposure in Spain stands at 35.27%.
Million of euros
Financing for
construction and
property development
recognised by
the Group’s
credit institutions
(including land)
(business in Spain)
Of which:watchlist/
non-performing
Memorandum items:
Written-off assets
31/12/18
Gross
amount
Excess over
collateral value
Specific
allowance
4,812
1,327
3,675
834
393
532
468
In recent years the Group’s strategy has been geared towards
reducing these assets. The changes in gross property development
loans to customers were as follows:
Memorandum items: data from the public
consolidated balance sheet
Million of euros
Million of euros
Balance at beginning
of year
Foreclosed assets
Banco Popular (perimeter)
Reductions*
Written-off assets
Balance at end of year
31/12/18
31/12/17
31/12/16
6,472
(100)
-
5,515
(27)
2,934
7,388
(28)
-
(1,267)
(1,620)
(1,415)
(293)
4,812
(330)
6,472
(430)
5,515
* Includes portfolio sales, cash recoveries and third-party subrogations and
new production.
Total loans and advances to customers excluding
the Public sector (business in Spain)
Total consolidated assets (Total
business) (Book value)
Impairment losses and credit risk allowances.
Coverage for unimpaired assets (business in Spain)
31/12/18
Carrying
amount
223,921
1,459,271
1,244
636
2018 Auditors’ report and consolidated annual accounts At year-end, the concentration of this portfolio was as follows:
Million of euros
1. Without mortgage guarantee
2. With mortgage guarantee
2.1 Completed buildings
2.1.1 Residential
2.1.2 Other
2.2 Buildings and other constructions
under construction
2.2.1 Residential
2.2.2 Other
2.3 Land
2.3.1 Developed consolidated land
2.3.2 Other land
Total
Loans: gross
amount
31/12/18
379
4,433
2,691
1,328
1,363
1,071
609
462
671
480
191
4,812
Policies and strategies in place for the
management of these risks
The policies in force for the management of this portfolio, which
are reviewed and approved on a regular basis by the Group’s senior
management, are currently geared towards reducing and securing
the outstanding exposure, albeit without neglecting any viable
new business that may be identifed.
In order to manage this credit exposure, the Group has specialised
teams that not only form part of the risk areas but also supplement
the management of this exposure and cover the entire life cycle
of these transactions: commercial management, legal procedures
and potential recovery management.
As has already been disclosed in this section, the Group’s
anticipatory management of these risks enabled it to signifcantly
reduce its exposure, and it has a granular, geographically
diversifed portfolio in which the fnancing of second residences
accounts for a very small proportion of the total.
Mortgage lending on non-urban land represents a low percentage
of mortgage exposure to land, while the remainder relates to land
already classifed as urban or approved for development.
The signifcant reduction of exposure in the case of residential
fnancing projects in which the construction work has already
been completed was based on various actions. As well as the
specialised marketing channels already in existence, campaigns
were carried out with the support of specifc teams of managers
for this function who, in the case of the Santander network,
were directly supervised by the recoveries business area. These
campaigns, which involved the direct management of the projects
with property developers and purchasers, reducing sale prices
and adapting the lending conditions to the buyers’ needs, enabled
loans already in force to be subrogated. These subrogations enable
the Group to diversify its risk in a business segment that displays a
clearly lower non-performing loans ratio.
In the case of construction-phase projects that are experiencing
difculties of any kind, the policy adopted is to ensure completion
of the construction work so as to obtain completed buildings
that can be sold in the market. To achieve this aim, the projects
are analysed on a case-by-case basis in order to adopt the most
efective series of measures for each case (structured payments to
suppliers to ensure completion of the work, specifc schedules for
drawing down amounts, etc.).
The loan approval processes are managed by specialist teams
which, working in direct coordination with the sales teams, have a
set of clearly defned policies and criteria:
• Property developers with a robust solvency profle and a proven
track record in the market.
• Medium-high level projects, conducting to contracted demand
and signifcant cities.
• Strict criteria regarding the specifc parameters of the
transactions: exclusive fnancing for the construction cost, high
percentages of accredited sales, principal residence fnancing,
etc.
• Support of fnancing of government-subsidised housing, with
accredited sales percentages.
• Restricted fnancing of land purchases dealt with exceptional
nature.
In addition to the permanent control performed by its risk
monitoring teams, the Group has a specialist technical unit that
monitors and controls this portfolio with regard to the stage of
completion of construction work, planning compliance and sales
control, and validates and controls progress billing payments.
The Group has created a set of specifc tools for this function. All
mortgage distributions, amounts drawn down of any kind, changes
made to the grace periods, etc. are authorised on a centralised
basis.
Foreclosed properties
At 31 December 2018, the net balance of these assets amounted to
EUR 5,226 million (gross amount: EUR 10,333 million; recognised
allowance: EUR 5,107 million, of which EUR 3,142 million related to
impairment after the foreclosure date).
637
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
In addition, the Group holds an ownership interest in Project
Quasar investments 2017, S.L. (See Note 3.b) for EUR 1,701 million.
The changes in foreclosed properties were as follows:
The following table shows the detail of the assets foreclosed by
the businesses in Spain at the end of 2018:
Million of euros
Property assets arising from fnancing provided to
construction and property development companies
Of which:
Completed buildings
Residential
Other
Buildings under construction
Residential
Other
Land
Developed land
Other land
Property assets from home purchase mortgage loans to households
Other foreclosed property assets
Total property assets
In recent years, the Group has considered foreclosure to be a
more efcient method for resolving cases of default than legal
proceedings. The Group initially recognises foreclosed assets at
the lower of the carrying amount of the debt (net of provisions)
and the fair value of the foreclosed asset (less estimated costs to
sell).Subsequent to initial recognition, the assets are measured at
the lower of fair value (less costs to sell) and the amount initially
recognised.
The fair value of this type of assets is determined by the Group’s
directors based on evidence obtained from qualifed valuers or
evidence of recent transactions.
The management of real estate assets on the balance sheet is
carried out through companies specializing in the sale of real
estate that is complemented by the structure of the commercial
network. The sale is realised with levels of price reduction in line
with the market situation.
3. Includes EUR 9,5 million of Santander Consumer USA Holdings Inc.
638
1,992
796
1,196
168
159
9
1,616
619
997
1,165
285
5,226
2016
1.3
(1.3)
-
31/12/18
Gross carrying
amount
Valuation
adjustments
Of which:
impairment losses
on assets since
time of foreclosure
Carrying
amount
7,909
4,133
2,733
3,776
3,194
1,247
1,947
299
287
12
4,416
1,616
2,800
2,016
408
10,333
1,202
451
751
131
128
3
2,800
997
1,803
851
123
5,107
706
211
495
81
81
-
1,946
597
1,349
357
52
3,142
Gross additions
Disposals
Diference
Thousand of
Million of euros
2018
0.8
(1.8)
(1.0)
2017*
1.4
(1.9)
(0.5)
* Without considering the Blackstone transaction (See Note 3).
3.3. United States
Credit risk at Santander Consumer Holding USA, Inc, increased to
EUR 92,1523 million at the end of December (representing 10% of
the Group’s total), is made up of the following business units:
Santander Bank, National Association
Business is focused on retail and commercial banking (83%),
of which 35% is with individuals and approximately 65% with
corporates. One of the main strategic goals is to continue to
enhance the wholesale banking business (17%).
The NPL ratio continues to decline, standing at 0.88% (-33 bp in
the year) in December. This reduction is explained by a proactive
management of certain exposures and the favourable macro
development showed in the improvement of customer’s credit risk
profle in corporates and individuals portfolios. The cost of credit
remains at stable levels of 0.24% despite the increase in some
segment’s coverage ratios.
2018 Auditors’ report and consolidated annual accounts
In relation to the determination of Stage 2 classifcation, the
quantitative criteria applied at Santander Bank, National
Association are based on identifying whether any increase in PD
for the expected life of the transaction is greater than a series
of absolute thresholds. Each portfolio has a set of thresholds in
accordance with the characteristics and credit risk profle of the
products composing it, and a transaction is considered to exceed
these thresholds when the PD for the entire life of the transaction
increases by up to double with respect to that which it had at the
time of initial recognition. In addition, Santander Bank, National
Association also assesses the risk of its operations by comparing
the FICO (Fair Isaac Corporation) rating of each of them at the
present time with respect to the one they had at the time of their
recognition, establishing a diferent absolute threshold for each
portfolio according to their characteristics.
Additionally, for each portfolio, a series of specifc qualitative
criteria are defned, which indicate that the exposure has had
a signifcant increase in credit risk, regardless of the evolution
of its PD since the initial recognition. Santander Bank, National
Association, among other criteria, considers that a transaction
presents a signifcant increase in risk when it has irregular
positions for more than 30 days. These criteria depend on the risk
management practices of each portfolio
Santander Consumer USA Holdings Inc. (SC USA)
The risk indicators for Santander Consumer USA Holdings Inc.
are higher than those of the other United States units, due to the
nature of its business, which focuses on auto fnancing through
loans and leasing (97%), seeking the optimisation of the returns
associated to the risk assumed. Santander Consumer USA
Holdings Inc.´s lending also includes a smaller personal lending
portfolio (3%).
The NPL rate, however, increased to 7.73%, mainly due to the
maturity of those loans forborne in 2017 (hurricanes). The cost
of credit, at the end of December stood at 10.01% (+17 bp in the
year), due to the average investment lower growth as a result of
the vintages amortisation from high production exercises (2015),
partially mitigated by the increase in recoveries efciency and the
positive evolution of the used car price. The coverage ratio remains
at high levels, 155%.
Information on the estimation of impairment losses
Following is a detail of the exposure and impairment losses
associated with each of the stages at 31 December 2018 of
Santnader Bank, National Association. In addition, depending on
the current credit quality of the operations, the exposure is divided
into three grades (Investment, speculation and default):
Exposure and impairment loss by stage
Million of euros
Credit quality*
Stage 1
Stage 2
Stage 3
Investment grade
5,149
-
Speculation grade
60,391
3,784
Default
-
-
Total Exposure**
65,540
3,784
Impairment losses
233
204
-
-
448
448
105
Total
5,149
64,175
448
69,772
542
* Detail of credit quality ratings calculated for Group management
purposes.
** Amortised cost assets + Loans and advances + loan commitments
granted.
For the estimation of expected losses, prospective information
is taken into account. Specifcally, Santander Bank, National
Association considers three prospective macroeconomic
scenarios, which are updated periodically over a 5-year time
horizon. The evolution projected for the next fve years of the
main macroeconomic indicators used Santander Bank, National
Association to estimate expected losses is presented below:
Magnitudes
Interest rate
Unemployment rate
House price change
GDP growth
2019-2023
Unfavourable
scenario Base scenario
Favourable
scenario
1.3%
6.9%
2.2%
1.5%
2.8%
4.2%
3.9%
2.1%
3.6%
3.9%
3.9%
2.8%
Each of the macroeconomic scenarios is associated with a given
probability of occurrence. As for its allocation, Santander Bank,
National Association associates the highest weighting to the Base
scenario, while associates the lowest weightings to the most
extreme scenarios:
Unfavourable scenario
Base scenario
Favourable scenario
20%
60%
20%
639
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Information on the estimation of impairment losses
Following is the detail of Santander Consumer USA Holdings
Inc. exposure and impairment losses associated with each of the
stages at 31 December 2018. In addition, depending on the current
credit quality of the operations, the exposure is divided into three
grades (Investment, speculation and default):
Exposure and impairment losses by stage
Million of euros
Credit Quality*
Stage 1
Stage 2
Stage 3
Investment grade
224
-
Speculation
grade
Default
20,313
6,600
-
-
Total Exposure**
20,537
6,600
-
-
2,218
2,218
Total
224
26,913
2,218
29,355
Impairment
losses
824
1,720
667
3,211
* Detail of credit quality ratings calculated for Group management
purposes.
** Amortised cost assets + Loans and advances + loan commitments
granted.
In relation to the methodology used to calculate impairment
losses, Santander Consumer USA Holdings Inc. uses a method for
calculating expected losses based on the use of risk parameters:
EAD (Exposure at Default), PD (Probability of Default) and LGD
(Loss Given Default). The expected loss of an operation is the result
of adding the estimated monthly expected losses of the same
during its entire life, unless the operation is classifed in Stage 1
(on those used for the Santander Corporate Investment Banking
portfolios see section 3.5) which will correspond to the sum of
the estimated monthly expected losses during the following 12
months.
In general, there is an inverse relationship between credit quality
of transactions and projections of impairment losses so that
transactions with better credit quality require a lower expected
loss. Credit quality of transactions, refected in the internal rating
associated with each transaction or the client, shown in the
likelihood of default of the transactions.
For the estimation of expected losses, prospective information
should be taken into account. Specifcally, Santander Consumer
USA Holdings Inc. considers three prospective macroeconomic
scenarios, periodically updated over a 5-year time horizon.
The evolution projected for the next fve years of the main
macroeconomic indicators used by in Santander Consumer USA
Holdings Inc in the estimation of expected losses is shown below:
Magnitudes
Interest rate
Unemployment rate
House price change
GDP Growth
2019-2023
Unfavourable
scenario
Base scenario
Favourable
scenario
1.3%
6.9%
2.2%
1.5%
2.8%
4.2%
3.9%
2.1%
3.6%
3.9%
3.9%
2.8%
Each of the macroeconomic scenarios is associated with a given
probability of occurrence. Santander Consumer USA Holdings Inc.
associates the highest weighting to the Base scenario, whereas
it associates the lowest weightings to the most extreme or acid
scenarios:
Unfavourable scenario
Base scenario
Favourable scenario
20%
60%
20%
In relation to the classifcation measurement in Stage 2, the
quantitative criteria applied by the entity are based on identifying
whether any increase in PD for the expected life of the transaction
exceeds a series of absolute thresholds. Each portfolio has a set
of thresholds in accordance with the characteristics and credit
risk profle of the products in the portfolio, considering that one
transaction exceeds these thresholds when the PD for the entire
life of the transaction doubles it in comparison to the one that had
at the beginning. In addition, the entity also assesses the risk of its
transactions by comparing the FICO (Fair Isaac Corporation) rating
of each of them at the current period, in comparison to what they
had at the beginning, establishing diferent absolute thresholds for
each portfolio depending on its characteristics.
Additionally, for each portfolio, a series of specifc qualitative
criteria are defned, which indicate that the exposure has had a
signifcant increase in credit risk, regardless of the evolution of its
PD since the initial recognition. The entity among other criteria,
considers that a transaction presents a signifcant increase in
risk when it has irregular positions for more than 30 days. These
criteria depend on the risk management practices of each portfolio.
3.4. Brazil
Credit risk in Brazil amounts to EUR 82,212 million, representing an
increase of 1.4% vs. 2017 due to the depreciation of the Brazilian
currency, excluding the exchange rate efect, recorded growth is
13%. Santander Brazil therefore accounts for 9% of the Group’s
credit lending.
Santander Brazil is adequately diversifed and has an increasingly
marked retail profle, with more than 60% of loans extended to
individuals, consumer fnancing and SMEs.
640
2018 Auditors’ report and consolidated annual accounts
Information on the estimation of impairment losses
The Santander Brazil exposure’s detail and impairment losses
associated with each of the stages at 31 December 2018 is
presented. In addition, depending on the current credit quality
of the operations, the exposure is divided into three grades
(Investment, speculation and default):
Exposure and impairment losses
Million of euros
Credit Quality*
Stage 1
Stage 2
Stage 3
Total
Investment grade
51,150
472
Speculation grade
56,884
5,334
-
-
51,622
62,218
Default
-
-
4,223
4,223
Total Exposure**
108,034
5,806
4,223
118,063
Impairment losses
997
768
2,889
4,654
* Detail of credit quality ratings calculated for Group management
purposes.
** Amortised cost assets + Loans and advances + loan commitments
granted.
For the estimation of expected losses, prospective information is
taken into account. Particularly, Santander Brazil considers three
prospective macroeconomic scenarios, periodically updated, over
a time horizon of 5 years. The evolution projected for the next fve
years of the main macroeconomic indicators used to estimate the
expected losses in Santander Brazil is as follows:
Magnitudes
Interest rate
Unemployment rate
Housing price
growth rate
GDP Growth
2019-2023
Pessimistic
scenario
Base
scenario
Optimistic
scenario
11.0%
16.3%
-1.4%
-1.2%
7.7%
9.9%
4.2%
2.4%
6.0%
8.6%
5.9%
3.5%
Each macroeconomic scenario is associated with a determined
likehood of occurrence. Regarding its assignation, Brazil links the
highest weight to the base scenario whilst links the lowest weights
to the most extreme scenarios:
Pessimistic scenario
Base scenario
Optimistic scenario
10%
80%
10%
With respect to the determination of the classifcation in Stage 2,
the quantitative criteria that are applied are based on identifying
whether any increase in the PD for all the expected life of the
operation is higher than an absolute threshold. Santander
Brazil, for the purposes of a better integration in its portfolio
management, has adapted the rating of the operations to PD
thresholds, setting out diferent thresholds for each portfolio
according to the characteristics of the operations.
In addition, for every portfolio, a set of specifc qualitative
criteria are defned to indicate that the exposure to credit risk
has signifcantly risen, regardless of the evolution of its PD since
the initial recognition. Santander Brazil, among other criteria,
considers that an operations involves a signifcant increase in risk
when it presents irregular positions for more than 30 days, but in
Real State, Consigned and Financial portfolios, where, due to their
particular attributes, they use a 60 days threshold. Such criteria
depend upon each portfolio’s risk management practices.
3.5. Santander Corporate & Investment Banking
The detail of exposure and impairment losses presented for the
main geographies includes the portfolios of Santander Corporate
& Investment Banking. In this sense, due to the type of customers
managed in these portfolios, large multinational companies, the
Group uses its own credit risk models. These models are common
to diferent geographies using their own macroeconomic scenarios.
The average projected evolution for the next years of the GDP
projected for the next few years is presented, which has been
used for the estimation of the expected losses, together with the
weighting of each scenario:
Pessimistic
scenario
Base
scenario
Optimistic
scenario
Global GDP Growth
2.7%
3.6%
4.2%
Each macroeconomic scenarios is associated with a determined
likehood of occurrence. As for its allocation, Santander Corporate
& Investment Banking associates the highest weight with the
Base Scenario, while associating the lower weights with the more
extreme scenarios.
Escenario desfavourable
Escenario base
Escenario favourable
20%
60%
20%
641
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The board, via the risk appetite framework, determines the
maximum levels of concentration. In line with these maximum
levels and limits, the executive risk committee establishes the
risk policies and reviews the appropriate exposure levels for
the adequate management of the degree of concentration in
Santander’s credit risk portfolios.
The Group is subject to the regulation on large risks contained in
the CRR, 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 exposures exceeding 25%
of its eligible capital with a single customer or group of linked
customers, after taking into account the credit risk reduction efect
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 4.47% of the outstanding credit
risk with customers (lending to customers plus of-balance sheet
risks) as of December 2018.
The detail, by activity and geographical area of the counterparty,
of the concentration of the Group’s risk at 31 December 2018 is as
follows:
4. Other credit risk aspects
4.1. Credit risk by activity in the fnancial markets
This section covers credit risk generated in treasury activities
with customers, mainly with credit institutions. Transactions
are undertaken through money market fnancial products with
diferent fnancial institutions and through counterparty risk
products which serve the Group’s customer’s needs.
According to regulation (EU) 575/2013, counterparty credit risk
is the risk that a client in a transaction could default before
the defnitive settlement of the cash fows of the transaction.
It includes the following types of transactions: derivative
instruments, transactions with repurchase commitment, stock and
commodities lending, operations with deferred settlement and
fnancing 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 recoveries.
After markets close, exposures are re-calculated by adjusting
all transactions 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 of Santander’s subsidiaries to be known at any
time.
4.2. Concentration risk
Concentration risk control is a vital part of management. The
Group continuously monitors the degree of concentration of its
credit risk portfolios using various criteria: geographical areas and
countries, economic sectors and groups of customers.
642
2018 Auditors’ report and consolidated annual accounts
Million of euros
Central banks and Credit institutions
Public sector
Of which:
Central government
Other central government
Other fnancial institutions (fnancial business activity)
Non-fnancial companies and individual entrepeneurs
(non-fnancial business activity) (broken down by purpose)
Of which:
Construction and property development
Civil engineering construction
Large companies
SMEs and individual entrepreneurs
Households – other (broken down by purpose)
Of which:
Residential
Consumer loans
Other purposes
Total*
31/12/18
Other EU
countries
94,532
38,112
34,497
3,615
54,473
Spain
60,562
64,528
53,060
11,468
16,378
Total
244,523
177,207
157,656
19,551
102,985
America
75,460
67,943
63,490
4,453
25,751
Rest of the
world
13,969
6,624
6,609
15
6,383
383,708
126,503
117,261
126,098
13,846
27,699
5,606
220,192
130,211
491,836
314,048
156,806
20,982
5,578
3,352
56,547
61,026
89,407
62,232
18,065
9,110
4,674
1,642
72,406
38,539
17,311
595
78,850
29,342
276,667
116,686
210,218
64,258
2,191
40,696
68,872
7,118
136
17
12,389
1,304
9,076
902
5,611
2,563
1,400,259
357,378
581,045
411,938
49,898
* For the purposes of this table, the defnition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions,
Loans and advances to Central Banks, Loans and advances to Customers, Debt Instruments, Equity Instruments, trading Derivatives, Hedging derivatives,
Investments and fnancial guarantees given.
4.3. Sovereign risk and exposure to other public sector entities
As a general criteria in the Group, sovereign risk is that related
to transactions with a central bank (including the regulatory
cash reserve requirement), Treasury issuances risk (public debt
portfolio) and that related to transactions 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.
These criteria, historically used by the Group, difer in some
respects from that applied by the European Banking Authority
(EBA) for its regular stress exercises. The main diferences 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, the EBA
does include public administrations in general (including regional
and local bodies), not only the central state sector.
According to the management Group criteria, local sovereign
exposure in currencies other than the ofcial currency of the
country of issuance is not very signifcant (EUR 8,901 million,
3.5% of total sovereign risk), and exposure to non-local sovereign
issuers involving cross-border risk is even less signifcant (EUR
3,906 million, 1.5% of total sovereign risk).
Sovereign exposure in Latin America is mostly in local currency,
and is recognised in the local accounts and concentrated in short-
term maturities with lower interest rate risk and higher liquidity.
643
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The exposure in the table below is disclosed following the latest
amendments of the regulatory reporting framework carried out by
the EBA, which entered into force in 2018:
Million of euros
31/12/2018
Portfolio
Financial assets at
amortised cost
Non-trading fnancial
assets mandatorily
at fair value through
proft or loss
21,419
4,002
465
-
-
1,322
8,666
11
245
2,113
3,782
2,816
20
450
534
-
-
-
-
-
-
-
-
-
5
893
-
-
-
-
Total
net direct
exposure
49,640
8,753
261
-
-
2,778
10,869
11,229
329
8,682
27,054
10,415
1,776
893
6,222
45,845
898
138,901
prepared jointly by the commercial and risks areas, and defne 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.
SCP management integration provides at all times an updated
view on the credit portfolios quality, allows to measure credit
risk, perform internal controls and periodic monitoring of planned
strategies, anticipate deviations and identify signifcant changes in
risk and its potential impact, as well as the application of corrective
actions.
The SCPs approval corresponds to the risk executive committee or
equivalent body of each entity previous to its validation at Group
level in the corporate risk executive committee. The periodic
monitoring of SCPs is carried out by the same bodies that approve
and validate them.
The process pursues the SCPs alignment with the capital objectives
of the Group’s units.
Country
Spain
Portugal
Italy
Greece
Ireland
Rest of eurozone
United Kingdom
Poland
Rest of Europe
United States
Brazil
Mexico
Chile
Other American countries
Rest of the world
Total
Financial assets
designated at fair
Financial assets at
fair value through
value through other comprehensive
income
proft or loss
1,143
(43)
(204)
-
-
503
1,013
2,015
-
426
1,839
3,320
160
103
-
10,275
27,078
4,794
-
-
-
953
1,190
9,203
84
6,138
20,540
4,279
1,596
340
5,688
81,883
5. Credit risk management
The credit risk management process consists of identifying,
analysing, controlling and deciding on the credit risk incurred by
the Group’s operations. It considers a holistic view of the credit
risk cycle including transaction, customer and portfolio view. Both
business and risk areas, together with the senior management
participate in the management process.
The identifcation of credit risk is a key component for the active
management and efective control of portfolios. The identifcation
and classifcation of external and internal risks in each business
allows corrective and mitigating measures to be adopted.
5.1. Planning
Identifcation
Planning allows to set business targets and defne specifc action
plans, within the risk appetite established by the Group. These
targets are met by assigning the necessary means (models,
resources, systems).
Strategic commercial plans
Strategic commercial plans (SCPs) are a basic management
and control tool for the Group’s credit portfolios. The SCPs are
644
2018 Auditors’ report and consolidated annual accounts
Scenario analysis
Credit risk scenario analysis enables senior management to better
understand the portfolio evolution in the face of market conditions
and changes in the environment. It is a key tool for assessing the
sufciency of capital provisions for stress scenarios.
Scenario analysis is applied to all of the Group’s signifcant
portfolios, usually over a 3-year horizon. The process involves the
following main stages:
• Defnition of benchmark scenarios, either central or most
plausible scenarios (baseline), as well as less likely and more
adverse economic scenarios (stress scenarios). A global stress
scenario is a world crisis situation that impacts each of the
countries in which the Group operates. In addition, a local stress
scenario impacts in an isolated way some of the main units with a
greater degree of stress than the global stress scenario.
• Determination of risk parameters value (probability of default,
loss given default, etc.) for the scenarios defned. These
parameters are established using internally developed statistical-
econometric models, based on default and historical losses, in
relation to historical data for macroeconomic variables taking
into consideration a complete economic cycle.
• Adaptation of the projection methodology to IFRS9, with an
impact on the estimation of the expected loss in each of the
IFRS9 stages, associated with each of the scenarios put forward,
as well as with other important credit risk metrics deriving from
the parameters obtained (non-performing loans, provisions,
allowances, etc.).
• Analysis and rationale for the credit risk profle evolution at
portfolio, segment, unit and Group levels, in diferent scenarios
and compared to previous years.
• Integration of management indicators to supplement the analysis
of the impact caused by macroeconomic factors on risk metrics.
• Likewise, the process is completed with a set of controls and
backtesting that ensure the adequacy of metrics and calculations.
In order to assign a rating that refects the credit quality of the
customer, the Group uses valuation and parameter estimation
models in each of the segments where it operates: SCIB (Santander
Corporate & Investment Banking: sovereigns, fnancial institutions
and large corporates), commercial banking, institutions, SMEs and
individuals.
The decision models applied are based on credit rating drivers
which are monitored and controlled in order 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
SCIB, commercial banking, institutions and SMEs (treated on an
individual basis) segments.
• Scoring: an automatic assessment system for credit applications.
It automatically assigns an individual grade to the customer for
subsequent decision making.
Parameter estimation models are obtained through econometric
statistical models, internally developed, based on historical loss
and default of the portfolios for which they are developed and
used to calculate the economic and regulatory capital of each
portfolio.
Periodic model monitoring and evaluation is carried out, assessing
among others, the adequacy of its use, its predictive capacity,
correct performance, and level of granularity. In the same way, the
existence and compliance of the policies corresponding to each and
every segment is verifed (these policies enable the execution of
business plans defned under the approved risk appetite).
The resulting ratings are regularly reviewed, incorporating the
latest available fnancial information and experience in the
development of banking relations. The depth and frequency of the
reviews are increased in the case of customers who require a more
detailed monitoring or through automatic warnings in the systems.
The entire process takes place within a corporate governance
framework, and is adapted to the growing importance of this
framework as well as market best practices, assisting the Group’s
senior management in gathering knowledge for decision making.
5.2 Assessment of the risk and credit rating process
The connection between the credit risk appetite of the Group and
management of the credit portfolios is implemented through the
SCPs, which defne the portfolio and new originations limits in
order to anticipate the portfolio risk profle. The transposition and
cascading down of the Group’s risk appetite framework credit risk
metrics, strengthens the existing control over credit portfolios.
5.3. Limits, pre-classifcations and pre-approvals defnition
There are diferent limit models depending on the segment:
• Large corporate groups: we use a pre-classifcation model based
on a system for measuring and monitoring economic capital.
The result is the level of risk that the Group is willing to assume
with a customer/group, in terms of Capital at Risk, nominal CAP,
and maximum periods according to the type of transaction (in
the case of fnancial entities, limits are managed through Credit
Equivalent Risk (CER). It includes the actual and expected risk
with a customer based on its usual operations, always within the
limits defned in the risk appetite and established credit policies.
The Group has processes that determine 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
risk committee (or committees in which it has delegated such
authority) and refect the expected results of the business in terms
of risk-return.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
• Corporates and institutions that meet certain requirements
(deep knowledge, rating, etc.): we use a more simplifed pre-
classifcation model through an internal limit that establishes a
reference of the level of risk to be assumed with the customer.
The criteria will include, among others, repayment capacity, debt
in the system and the banking pool distribution.
Efective guarantees are those real and personal guarantees
for which its efectiveness as a credit risk mitigant is proved and
whose valuation complies with the established policies and
procedures. The analysis of the efectiveness of the guarantees
must take into account, among others, the necessary time for the
execution and ability to enforce the guarantees.
In both cases, transactions over certain thresholds or with
specifc characteristics might require the approval of an analyst or
committee.
5.5. Monitoring / Anticipation
Monitoring business performance on a regular basis, and
comparing performance against agreed plans is a key risk
management activity.
• For individual customers and SMEs with low turnover, large
volumes of credit transactions can be managed more easily
with the use of automatic decision models for classifying the
customer/ transaction binomial.
In specifc situations where a series of requirements are met,
pre-approved transactions are granted to customers or potential
customers (campaigns).
5.4. Transaction decision-making
As a general rule, from a risk admission point of view, the
concession criteria are linked to the payment capacity of the
borrower to comply, in time and form, with the total of the
assumed fnancial obligations – this does not imply an impediment
to requiring a higher level of real or personal guarantees.
The payment capacity will be evaluated based on the funds or
net cash fows from the customer´s businesses or usual sources
of income, without depending on guarantors or assets given as
collateral. Such guarantors or assets should always be considered,
when evaluating the approval of the transaction, as a second and
exceptional way of recovery in case the frst has failed.
In general, a guarantee is defned as a reinforcement measure
added to a credit transaction for the purpose of mitigating the loss
due to a breach of the payment obligation.
Mitigation techniques implementation 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.
In Santander we apply several credit risk mitigation techniques
on the basis, among other factors, of the type of customer and
product. Some are inherent to specifc transactions (e.g. real
estate guarantees) while others apply to a series of transactions
(e.g. derivatives netting and collateral). The diferent mitigation
techniques can be grouped into the following categories:
• Personal guarantees
• Guarantees from credit derivatives
• Real guarantees
All customers must be monitored on an ongoing and holistic
manner that enables the earliest possible detection of any
incidents that may arise impacting the customer’s credit rating.
Monitoring is carried out through an ongoing review of all
customers, assigning a monitoring classifcation, establishing
pre-defned actions associated to each classifcation and executing
specifc measures (pre-defned or ad-hoc) to correct any deviations
that could have a negative impact for the Group.
In this monitoring, the consideration of forecasts and transactions
characteristics throughout its life, is assured. It also takes into
consideration any variations that may have occurred in the
classifcation and its adequacy in the moment of the review.
Monitoring is carried out by local and global Risk teams,
supplemented by Internal Audit. It is based on customer
segmentation:
• In the SCIB segment, monitoring, in the frst instance, is a direct
function of both the commercial manager and the risk analyst,
who maintain the direct relationship with the customer and
manage the portfolio. This function ensures that an up-to-
date view of the customers’ credit quality is always available
and allows anticipating situations of concern and taking the
necessary actions.
• In the commercial banking, institutions and SMEs with an analyst
assigned, the function consists in identifying and tracking
customers whose situations require closer monitoring, reviewing
ratings and continuously analysing indicators.
• In the individual customers, businesses and SMEs with low
turnover segments 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.
5.6. Recovery and collections management
Recovery activity is a signifcant element in the Group’s risk
management. This function is carried out by the Recoveries area,
which defnes 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 diferent countries, taking always into account the local
particularities that the recovery activity requires, such as economic
environment, business model or a mixture of both.
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2018 Auditors’ report and consolidated annual accounts
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 policy defnes the classifcation criteria for the
forborne transactions in order to ensure that the risks are suitably
recognised, bearing in mind that they must remain classifed as
non-performing or in watch-list for a prudential period of time
(aligned with Regulation EU 680/2014) to attain reasonable
certainty that repayment capacity can be recovered.
The forborne portfolio stood at EUR 41,234 million at the end of
December. In terms of credit quality, 49% is classifed as non-
performing loans, with average coverage of 53% (26% of the total
portfolio).
The following terms are used in Bank of Spain Circular 4/2017 of
Bank of Spain with the meanings specifed:
• Refnancing transaction: transaction that is granted or used, for
reasons relating to current or foreseeable fnancial difculties of
the borrower, to repay one or more of the transactions granted
to it, or through which the payments on such transactions are
brought fully or partially up to date, in order to enable the
borrowers of the cancelled or refnanced transactions to repay
their debt (principal and interest) because they are unable, or
might foreseeably become unable, to comply with the conditions
thereof in due time and form.
• Restructured transaction: transaction with respect to which, for
economic or legal reasons relating to current or foreseeable
fnancial difculties of the borrower, the fnancial terms and
conditions are modifed in order to facilitate the payment of the
debt (principal and interest) because the borrower is unable,
or might foreseeably become unable, to comply with the
aforementioned terms and conditions in due time and form, even
if such modifcation is envisaged in the agreement.
Recovery has been aligned with the socio-economic reality of the
Group’s countries and diferent risk management mechanisms are
used with adequate prudential criteria considering unpaid debt
conditions.
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
profles and products is conducted through processes with a
high technological and digital component, while personalised
management focuses on customers who, because of their profle,
require a specifc manager and more customised management.
Recovery management is divided into four stages: irregularity or
early non-payment, non-performing loans recoveries, write-ofs
recoveries and management of foreclosed assets.
The management scope for the recovery function includes non-
productive assets (NPAs), corresponding to the forborne portfolios,
NPLs, write-of loans and foreclosed assets, where the Group may
use mechanisms to rapidly reduce these assets, such as portfolios
or foreclosed assets sales. Therefore, the Group is constantly
seeking alternative solutions to juridical processes for collecting
debt.
In the write-of loans category, debt instruments are included,
whether due or not, for which, after an individualised analysis,
their recovery is considered remote due to a notorious and
unrecoverable impairment of the solvency of the transaction or the
holder. Classifcation in this category involves full cancellation of
the gross carrying amount of the loan and it’s derecognition, which
does not mean that the Group interrupts negotiations and legal
proceedings to recover its amount.
Forborne loan portfolio
The Group has a corporate forbearance policy which acts
as a reference for the diferent local transpositions of all its
subsidiaries. These share the general principles established by the
Bank of Spain and the EBA. This policy includes the requirements
arising from the implementation of IFRS9.
This policy defnes forbearance as the modifcation of the payment
conditions of a transaction to allow a customer who is experiencing
fnancial difculties (current or foreseeable), to fulfl their payment
obligations. If the modifcation was not made, it would be
reasonably certain that the customer would not be able to meet
their fnancial obligations. The modifcation 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, classifcation and monitoring of such transactions,
ensuring the strictest possible care and diligence in their granting
and follow up. 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
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CURRENT REFINANCING AND RESTRUCTURING BALANCES
Amounts in million of euros, except number of transactions that are in units
Without real guarantee
With real guarantee
Total
Maximum amount of
the actual collateral that
can be considered
Number of
transactions
Gross
amount
Number of
transactions
Gross
amount
Real estate
guarantee
Rest of real
guarantees
-
37
265
-
76
11
-
16
135
-
18
38
-
11
16
-
4
15
187,192
7,383
44,452
13,039
8,116
1,321
426
1,578,622
313
3,476
1,889
824,591
1,932
17,193
1,600
7,905
1,766,116
10,946
869,194
30,288
16,048
30
4,016
5,356
Impairment of
accumulated value
or accumulated
losses in fair value
due to credit risk
-
6
10
6,339
620
4,352
10,707
-
-
-
-
-
-
-
Credit entities
Public sector
Other fnancial institutions
and: individual shareholder
Non-fnancial institutions
and individual shareholder
Of which: fnancing
for constructions and
property development
Other warehouses
Total
Financing classifed as non-
current assets and disposable
groups of items that have
been classifed as held for sale
The transactions presented in the foregoing tables were classifed
at 31 December 2018 by nature, as follows:
The table below shows the changes in 2018 in the forborne loan
portfolio:
• Non-performing: Operations that rest on an inadequate
payment scheme will be classifed within the non-performing
category, regardless they include contract clauses that delay
the repayment of the operation throughout regular payments
or present amounts written of the balance sheet for being
considered irrecoverable.
• Performing: Operations not classifable as non-performing
will be classifed within this category. Operations will also will
be classifed as normal if they have been reclassifed from the
non-performing category for complying with the specifc criteria
detailed below:
Million of euros
Beginning balance
Refnancing and restructuring
of the period
Memorandum item: impact
recorded in the income
statement for the period
Debt repayment
Foreclosure
Derecognised from the
consolidated balance sheet
a) A period of a year must have expired from the refnancing or
Others variations
restructuring date.
Balance at end of year
2018
36,164
2017
37,365
10,191
12,675
2,659
(11,126)
(731)
(3,660)
(311)
30,527
2,406
(9,107)
(950)
(5,334)
1,515
36,164
b) The owner must have paid for the accrued amounts of the
capital and interests, thus reducing the rearranged capital
amount, from the date when the restructuring of refnancing
operation was formalised.
c) The owner must not have any other operation with amounts
past due by more than 90 days on the date of the reclassifcation
to the normal risk category.
51% of the forborne loan transactions are classifed as other than
non-performing. Particularly noteworthy are the level of existing
guarantees (52% of transactions are secured by collateral) and the
coverage provided by specifc allowances (representing 26% of
the total forborne loan portfolio and 42% of the non-performing
portfolio).
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2018
Without real guarantee
With real guarantee
Of which: Non-performing/Doubtful
Maximum amount of the actual
collateral that can be considered
Number of
transactions
Gross amount
Number of
transactions
Gross amount
Real estate
guarantee
Rest of real
guarantees
-
13
110
-
7
3
-
9
75
-
4
16
-
4
9
-
-
-
121,445
4,669
26,122
8,156
5,058
689
328
874,840
996,408
245
1,668
6,347
1,369
181,469
207,675
1,329
5,834
14,010
1,038
3,505
8,576
28
823
1,512
Impairment of
accumulated value or
accumulated losses in fair
value due to credit risk
-
2
9
5,851
594
2,772
8,634
-
-
-
-
-
-
-
c) Trading market risk, structural and liquidity risk
• Infation rate risk is the possibility that changes in infation rates
1. Activities subject to market risk and types of market risk
The perimeter of activities subject to market risk involves
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 afected by market shifts.
This risk arises from changes in risk factors - interest rates,
infation rates, exchange rates, stock prices, credit spreads,
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 afect the value of a fnancial instrument, a
portfolio or the Group as a whole. It afects loans, deposits, debt
securities, most assets and liabilities in the trading books and
derivatives, among others.
could adversely afect the value of a fnancial instrument, a
portfolio or the Group as a whole. It afects instruments such as
loans, debt securities and derivatives, where the return is linked
to infation 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 exposures afected 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 afects
positions in shares, stock market indices, convertible bonds
and derivatives using shares as the underlying asset (put, call,
equity swaps, etc.).
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• Credit spread risk is the risk or sensitivity of the value of positions
in fxed income securities or in credit derivatives to movements in
credit spread curves or in recovery rates associated with issuers
and specifc types of debt. The spread is the diference between
fnancial instruments listed with a margin over other benchmark
instruments, mainly the interest rate risk of Government bonds
and interbank interest rates.
• Commodities price risk is the risk derived from the efect of
potential changes in commodities prices. The Group’s exposure
to this risk is not signifcant and is concentrated in derivative
transactions 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 fnancial instruments where volatility is a variable
in the valuation model. The most signifcant case is the fnancial
options portfolio.
All these market risks can be partly or fully mitigated by using
options, futures, forwards and swaps.
In addition to the above market risks, balance sheet liquidity risk
must also be considered. Unlike market liquidity risk, balance
sheet liquidity risk is defned 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 infows and outfows.
1. Trading market risk management
The Group’s trading risk profle remained moderately low in 2018,
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 diversifcation and risk factors.
The standard methodology Santander Group applies to trading
activities is Value at Risk (VaR), which measures the maximum
expected loss with a certain confdence level and time frame. The
standard for historic simulation is a confdence level of 99% and a
time frame of one day. Statistical adjustments are applied enabling
the most recent developments afecting the levels of risk assumed
to be incorporated efciently 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 fgures 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.
The detail of the metrics risk related to the Group’s balance sheet
items as of 31 December 2018 is as follows:
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2018 Auditors’ report and consolidated annual accounts
Assets subject to market risk
Cash, cash balances at central banks
and other deposits on demand
Financial assets held for trading
Non-trading fnancial assets mandatorily
at fair value through proft or loss
Financial assets designated at fair
value through proft or loss
Financial assets designated at fair value
through other comprehensive income
Financial assets at amortised cost
Main market risk metric
Balance sheet
amount
VaR
Others Main risk factor for “Other” balance
113,663
92,879
-
113,663
Interest rate
92,140
739
Interest rate, spread
10,730
9,327
1,403
Interest rate, Equity market
57,460
56,584
876
Interest rate
121,091
946,099
-
-
121,091
Interest rate, spread
946,099
Interest rate
Hedging derivatives
8,607
8,586
21
Interest rate, exchange rate
Changes in the fair value of hedged items
in portfolio hedges of interest risk
Other assets
Total Assets
Liabilities subject to market risk
Financial liabilities held for trading
Financial liabilities designated at fair
value through proft or loss
1,088
107,654
1,459,271
-
-
1,088
Interest rate
-
-
70,343
70,054
289
Interest rate, spread
68,058
67,909
149
Interest rate
Financial liabilities at amortised cost
1,171,630
-
1,171,630
Interest rate, spread
Hedging derivatives
6,363
6,357
6
Interest rate, exchange rate
Changes in the fair value of hedged items
in portfolio hedges of interest rate risk
Other liabilities
Total liabilities
Equity
303
35,213
1,351,910
107,361
-
-
303
Interest rate
-
VaR during 2018 fuctuated between EUR 16.6 million and EUR 6.4
million (2017: 9.7 and 63.2). The most signifcant changes were
related to variations in exchange and interest rate exposures and
also market volatility.
The average VaR in 2018 was EUR 9.7 million, slightly lower than in
the two previous years (EUR 21.5 million in 2017).
The following table shows the average and latest values of Var at
99% by risk factor in the last three years as well as the minimum
and maximum values.
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Total VaR trading (Derivatives: VaR risk per factor of risk)
Million of euros. Structural VaR 99% with a temporary horizon one day
Total
Diversifcation efect
Interest rate
Equities
Exchange rate
Credit spread
Commodities
2018
Average
9.7
(9.3)
9.4
2.4
3.9
3.4
0.0
Max
16.6
(18.7)
15.5
6.3
11.4
13.0
0.4
Latest
11.3
(11.5)
9.7
2.8
6.2
4.1
0.0
Min
6.4
(3.3)
5.9
0.8
1.6
1.0
0.0
2017
2016
Average
Latest
Average
Latest
21.5
(8.0)
16.2
3.0
6.6
3.6
0.0
10.2
(7.6)
7.9
1.9
3.3
4.6
0.0
18.3
(10.3)
15.5
1.9
6.9
4.2
0.1
17.9
(9.6)
17.9
1.4
4.8
3.3
0.1
The Group continues to have a very limited exposure to
instruments or complex structured assets, a management culture
for which prudence in risk management is one of its hallmarks
in risk management. In both cases, the exposure has reduced
comparing with the previous year, for which the Group has:
• Hedge funds: the total exposure is not signifcant (EUR 28
million at close of December 2018) 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 as of
December 2018 was EUR 24 million, all of it indirect, by virtue of
the guarantee provided by this type of entity for various fnancing
or traditional securitisation transactions. The exposure in this
case is to double default, as the primary underlying assets are of
high credit quality.
The Group’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 verifes:
• 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 conditions are met:
• The availability of adequate systems, duly adapted to calculate
and monitor every day the results, positions and risks of new
transactions.
• The degree of liquidity of the product or underlying asset,
in order to make possible their coverage when deemed
appropriate.
Calibration and test measures
Actual losses can difer from those forecast by VaR for various
reasons related to the limitations of this metric which are detailed
later in the section of methodologies. The Group regularly
analyses and contrasts the accuracy of the VaR calculation model
in order to confrm its reliability.
The most important test consists of backtesting exercises,
analysed at the local and global levels and in all cases with the
same methodology. Backtesting consists of comparing forecast
VaR measurements, with a certain level of confdence and time
frame, with actual losses obtained in the 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.).
The Group calculates and evaluates three types of backtesting:
• “Clean” backtesting: the daily VaR is compared with the results
obtained without taking into account intraday results or
changes in the portfolio’s positions. This method compares the
efectiveness of the individual models used to assess and measure
the risks of positions.
• Backtesting on complete results: daily VaR is compared with the
day’s net results, including the results of intraday transactions and
those generated by fees and commissions.
• Backtesting on complete results without mark-ups or fees: the
daily VaR is compared to the day’s net results from intraday
transactions but excluding those generated by mark-ups and fees.
This method aims to give an idea of the intraday risk assumed by
Group treasuries.
For the frst case and for the total portfolio, there were three
exceptions of Value at Earnings (VaE) at 99% in 2018 (day on
which daily proft was higher than VaE) on 21 and 30 August and 8
October, caused by strong shifts in the exchange rates of emerging
economies.
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2018 Auditors’ report and consolidated annual accounts
There were also one exception to VaR at 99% (day on which the
daily loss was higher than the VaR) on the 29 May, due to the rise in
market volatility caused by political instability in Europe, and on 15
and 29 October due to the strong variations in the exchange rates
and interest rates in Brazil and Mexico motivated by the general
elections volatility.
The number of exceptions which occurred is consistent with the
assumptions specifed in the VaR calculation model.
2. Structural balance sheet risks
2.1. Main aggregates and variations
The market risk profle inherent in Grupo Santander’s balance
sheet, in relation to its asset volumes and shareholders’ funds, as
well as the budgeted fnancial margin, remained moderate in 2018,
in line with previous years.
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 SCIB, distinguishing between fxed income (considering both
interest rates and credit spreads on ALCO portfolios), exchange
rates and equities.
In general the structural VaR is not signifcant according to the
assets amounts or capital of the Group:
Structural VaR
Million of euros. Structural VaR 99% with a temporary horizon one day
2018
2017
2016
Structural VaR
Min
Average
485.0
568.5
Max
799.4
Latest
556.8
Average
878.0
Latest
815.7
Average
869.3
Latest
922.1
Diversifcation efect
(319.7)
(325.0)
(355.4)
(267.7)
(337.3)
(376.8)
(323.4)
(316.6)
VaR interest rate*
VaR exchange rate
VaR equities
301.3
323.3
180.1
337.1
338.9
217.6
482.5
386.2
286.1
319.5
324.9
180.1
373.9
546.9
294.5
459.6
471.2
261.6
340.6
603.4
248.7
327.2
588.5
323.0
* Includes credit spread VaR on ALCO portfolios.
Structural interest rate risk
• Latin America
• 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 December 2018, risk on net interest income over one
year , measured as sensitivity to parallel changes in the worst
case scenario of ±100 basis points, was concentrated in the euro,
at EUR 269 million, the pound sterling, at EUR 203 million, the US
dollar, with EUR 130million, and the Polish zloty, at EUR 53 million.
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 2018, exposure levels in all countries were moderate in relation
to the annual budget and capital levels.
At the end of December, risk on net interest income 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 45 million), Chile (EUR 35 million) and
Mexico (EUR 12 million).
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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 419 million),
Chile (EUR 219 million) and Mexico (EUR 172 million).
• VaR of on-balance-sheet structural interest rate risk
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), the Group also uses other methods to monitor structural
balance sheet risk from interest rates movements: these include
scenario analysis and VaR calculations, applying a similar
methodology to that used for trading portfolios.
Structural interest rate risk, measured in terms of VaR at one-day
and at 99%, averaged EUR 352.5 million in September 2018. It is
important to note the high level of diversifcation between the
balance sheets of Europe and United States and those of Latin
America.
Structural foreign currency risk/hedges of results
Structural exchange rate risk arises from Group transactions
in foreign currencies, mainly related to permanent fnancial
investments, results and the hedging of both.
This management is dynamic and seeks to limit the impact on
the core capital ratio from exchange rates movements. In 2018,
hedging levels of the core capital ratio for foreign exchange rate
risk were maintained near 100%.
At the end of 2018, the largest exposures of permanent
investments (with their potential impact on equity) were, in the
following order, in Brazilian real, US dollars, UK pounds sterling,
Chilean pesos, Mexican pesos and Polish zlotys. The Group hedges
some of these positions of a permanent nature with foreign
exchange-rate derivatives.
In addition, the fnancial area is responsible for managing foreign
exchange rate risk for the Group’s expected results and dividends
in units where the base currency is not the euro.
Structural equity risk
The Group maintains equity positions in its banking book in
addition to those of the trading portfolio. These positions are
maintained as equity instruments or as investments, depending on
the percentage or control.
The equity portfolio available for the banking book at the end of
December 2018 was diversifed in securities in various countries,
mainly Spain, China, Morocco, Netherlands and Poland. Most of
the portfolio is invested in fnancial activities and insurance sectors.
Among other sectors, to a lesser extent, are for example real
estate activities or public administration.
Structural equity positions are exposed to market risk. VaR is
calculated for these positions using market price data series or
proxies. As of the end of December 2018, the VaR at 99% with a
one day time frame was EUR 180.1 million (EUR 261.6 and EUR 323
million at the end of 2017 and 2016, respectively).
2.2. Methodologies
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 diferences in maturity dates and interest rate repricing gaps
in the various balance sheet items.
Taking into consideration the balance-sheet interest rate position
and the market situation and outlook, the necessary fnancial
actions are adopted to align this position with that desired by
the Group. These measures can range from opening positions
on markets to the defnition of the interest rate features of
commercialised products.
The metrics used by the Group to control interest rate risk in
these activities are the repricing gap, the sensitivity of net interest
margin and market value of equity to changes in interest rates,
the duration of capital and value at risk (VaR) for economic capital
calculation purposes.
Structural exchange-rate risk/hedging of results
These activities are monitored via position measurements, VaR and
results, on a daily basis.
Structural equity risk
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
3. Liquidity risk
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.
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2018 Auditors’ report and consolidated annual accounts
• High contribution from customer deposits due to the retail nature
• A solid balance sheet structure, with a diversifed presence in the
of the balance sheet.
wholesale markets;
• Diversifcation of wholesale funding sources by instruments/
• The use of liquidity bufers and limited encumbrance of assets;
investors, markets/currencies and maturities.
• Limited recourse to short-term.
• Compliance with both regulatory metrics and other metrics
included in each entity’s risk appetite statement.
• Availability of sufcient liquidity reserves, including standing
facilities/discount windows at central banks to be used in adverse
situations.
Over the course of the year, all dimensions of the plan are
monitored.
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.
iii. Asset encumbrance
It is important to note the Group’s moderate use of assets as
security for structural balance-sheet funding sources.
Following the guidelines laid down by the European Banking
Authority (EBA) in 2014, the concept of asset encumbrance includes
both on-balance-sheet assets provided as security in transactions
to obtain liquidity and of-balance-sheet assets that have been
received and re-used for the same purpose, as well as other assets
associated with liabilities for reasons other than funding.
• Compliance with regulatory liquidity requirements both at Group
and subsidiary level, as a new factor conditioning management.
The efective application of these principles by all institutions
comprising the Group required the development of a unique
management framework built upon three essential pillars:
A solid organisational and governance model that ensures the
involvement of the 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 fnancial 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.
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 establishes 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 seeks to achieve:
655
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
The residual maturities of the liabilities associated with the assets
and guarantees received and committed are presented below, as
of 31 of December of 2018 (thousand of million of euros).
Residual
maturities of
the liabilities
Committed
assets
Guarantees
received
>3months
Unmatured <=1month <=3months <=12months
>1month
>1year
<=2years
>2years
<=3years
3years
<=5years
5years
<=10years
>10years
TOTAL
28.5
53.7
24.6
15.8
11.9
10.7
29.0
78.6
55.4
28.1
20.4
16.5
322.2
10.3
1.8
1.8
1.7
1.8
1.1
69.6
The reported Group information as required by the EBA at 2018
year-end is as follows:
On-balance-sheet encumbered assets
Thousand of million of euros
Loans and advances
Equity instruments
Debt securities
Other assets
Total assets
Carrying amount of
encumbered assets
Fair Value of
encumbered assets
Fair Value of non-
encumbered assets
Carrying amount of
non-encumbered
assets
214.6
4.2
76.3
27.1
322.2
4.2
76.3
855.0
10.7
114.8
156.6
1,137.1
10.7
114.8
Encumbrance of collateral received
Thousand of million of euros
Encumbered assets and collateral
received and matching liabilities
Thousand of million of euros
Fair value of
encumbered
collateral
received or own
debt securities
issued
Fair value
of collateral
received or own
debt securities
issued
available for
encumbrance
69.6
-
2.7
65.0
1.9
48.9
-
6.0
42.9
-
-
1.4
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)
301.6
391.8
On-balance-sheet encumbered assets amounted to EUR 322.2
thousand million, of which 67% are loans (mortgage loans,
corporate loans, etc.). Of-balance-sheet encumbered assets
amounted to EUR 69.6 thousand million, relating mostly to debt
securities received as security in asset purchase transactions and
re-used. Taken together, these two categories represent a total of
EUR 391.8 thousand million of encumbered assets, which give rise
to EUR 301.6 thousand million matching liabilities.
Collateral received
Loans and advances
Equity instruments
Debt securities
Other collateral received
Own debt securities
issued other than own
covered bonds or ABSs
656
2018 Auditors’ report and consolidated annual accounts
As of December 2018, total asset encumbrance in funding
operations represented 24.8% of the Group’s extended balance
sheet under EBA criteria (total assets plus guarantees received:
EUR 1.5878 thousand million as of December 2018). This
percentage is similar to the values presented by the Group before
the acquisition of Banco Popular Español, S.A.U. in 2017.
Regulatory capital
In 2018, the solvency target set was achieved. Santander’s
CET1 fully loaded ratio stood at 11.30% at the close of the year,
demonstrating its organic capacity to generate capital. The key
regulatory capital fgures are indicated below:
Reconciliation of accounting capital with regulatory capital
Lastly, regard should be had to the diferent sources of
encumbrance and the role they play in the Group’s funding:
Million of euros
• 51.5 % of total encumbered assets relate to security provided
in medium- and long-term fnancing transactions (with residual
maturity of more than one year) to fund the commercial balance-
sheet activity. This places the level of asset encumbrance in
“structural” funding transactions at 12.8 % of the expanded
balance sheet under EBA standards.
• The other 48.5 % relate to transactions in the short-term market
(with residual maturity of less than one year) or to security
provided in derivative transactions whose purpose is not to fund
the ordinary business activity but rather to ensure efcient short-
term liquidity management.
d) Capital risk
The capital risk function, as second line of defence carries out
the control and supervision of the capital activities developed by
the frst line of defence, which independently challenges mainly
through the following processes:
• Supervision of capital planning and adequacy exercises through
a review of all their components (balance sheet, proft and loss
account, risk-weighted assets and available capital).
• Ongoing supervision of measurement of the Group’s regulatory
capital by identifying the key metrics for the calculation, setting
tolerance levels for identifed metrics and reviewing their
consumption and the consistency of the calculations, including
single transactions with a capital impact.
The function is designed to carry out full and regular monitoring
of capital risk by verifying that capital is sufcient and adequately
covered in accordance with the Group’s risk profle.
The Group commands a sound solvency position, above the levels
required by regulators and by the European Central bank.
At 1 March 2019, at a consolidated level, the Group must maintain
a minimum capital ratio of 9.70% of CET1 fully loaded (4.5%
being the requirement for Pillar I, 1.5% being the requirement for
Pillar 2R (requirement), 2.5% being the requirement for capital
conservation bufer, 1% being the requirement for G-SIB and 0.20%
being the requirement for anti-cyclical capital bufer). Santander
Group must also maintain a minimum capital ratio of 1.5% of Tier 1
fully loaded and a minimum total ratio of 13.20% fully loaded.
Subscribed capital
Share premium account
Reserves
Treasury shares
Attributable proft
Approved dividend
Shareholders’ equity on
public balance sheet
Valuation adjustments
Non- controlling interests
2018
8,118
50,993
53,988
(59)
7,810
2017
8,068
51,053
52,577
(22)
6,619
(2,237)
(2,029)
118,613
116,265
(22,141)
(21,777)
10,889
12,344
Total Equity on public balance sheet
107,361
106,832
Goodwill and intangible assets
(28,644)
(28,537)
Eligible preference shares and
participating securities
Accrued dividend
Other adjustments*
Tier 1 (Phase-in)
9,754
(1,055)
7,635
(968)
(9,700)
(7,679)
77,716
77,283
* Fundamentally for non-computable non-controlling interests and
deductions and reasonable flters in compliance with CRR.
The following table shows the Phase-in capital coefcients and a
detail of the eligible internal resources of the Group:
Capital coefcients
Level 1 ordinary eligible capital
(million of euros)
Level 1 additional eligible
capital (million of euros)
2018
2017
67,962
74,173
9,754
3,110
Level 2 eligible capital (million of euros)
11,009
13,422
Risk-weighted assets (million of euros)
592,319
605,064
Level 1 ordinary capital coefcient (CET 1)
11.47%
12.26%
Level 1 additional capital coefcient (AT1)
1.65%
0.51%
Level 1 capital coefcient (Tier 1)
Level 2 capital coefcient (Tier 2)
Total capital coefcient
13.12%
12.77%
1.86%
2.22%
14.98%
14.99%
657
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Eligible capital
Million of euros
Eligible capital
Common Equity Tier 1
Capital
(-) Treasure shares and own shares fnanced
Share Premium
Reserves
Other retained earnings
Minority interests
Proft net of dividends
Deductions
Goodwill and intangible assets
Others
Additional Tier 1
Eligible instruments AT1
T1- excesses-subsidiaries
Residual value of dividends
Others
Tier 2
Elegible instruments T2
Gen. funds and surplus loans loss prov. IRB
T2-excesses- subsidiaries
Others
2018
2017
67,962
8,118
(64)
50,993
55,036
74,173
8,068
(22)
51,053
52,241
(23,022)
(22,363)
6,981
4,518
7,991
3,621
(34,598)
(26,416)
(28,644)
(22,829)
(5,954)
(3,586)
9,754
9,666
88
-
-
11,009
11,306
-
(297)
-
3,110
8,498
347
(5,707)
(27)
13,422
9,901
3,823
(275)
(27)
Total eligible capital
88,725
90,706
Note: Santander Bank and its afliates had not taken part in any State aid
programmes.
Leverage ratio
The leverage ratio has been defned within the regulatory
framework of Basel III as a measure of the capital required by
fnancial institutions not sensitive to risk. The Group performs the
calculation as stipulated in CRD IV and its subsequent amendment
in EU Regulation no. 573/2013 of 17 January 2015, which was aimed
at harmonising calculation criteria with those specifed in the BCBS
“Basel III leverage ratio framework” and “Disclosure requirements”
documents.
• Inclusion of net value of derivatives (gains and losses are netted
with the same counterparty, minus collaterals if they comply
with certain criteria) plus a charge for the future potential
exposure.
• A charge for the potential risk of security funding transactions.
• Lastly, it includes a charge for the risk of credit derivative swaps
(CDS).
The European Commission’s proposals to modify CRR and CRD IV
on 23 November 2016, foresee a mandatory requirement of a 3%
leverage ratio for Tier 1 capital, which would be added to the own
funds requirements in the article 92 of the CRR. The proposals
for the Commission’s modifcation also point to the possibility of
introducing a bufer of leverage ratio for global systemic entities in
the future.
Million of euros
Leverage
Level 1 Capital
Exposure
Leverage Ratio
31/12/2018
31/12/2017
77,716
77,283
1,489,094
1,463,090
5.22%
5.28%
Global systemically important banks
The Group is one of 30 banks designated as global systemically
important banks (G-SIBs).
The designation as a systemically important entity is based on the
measurement set by regulators (the FSB and BCBS), based on 5
criteria (size, cross-jurisdictional activity, interconnectedness with
other fnancial institutions, substitutability and complexity).
This defnition means it has to fulfl certain additional
requirements, which consist mainly of a capital bufer (1%), in
TLAC requirements (total loss absorbing capacity), that we have
to publish relevant information more frequently than other banks,
greater regulatory requirements for internal control bodies, special
supervision and drawing up of special reports to be submitted to
supervisors.
The fact that Grupo Santander has to comply with these
requirements makes it a more solid bank than its domestic rivals.
This ratio is calculated as Tier 1 capital divided by leverage
exposure. Exposure is calculated as the sum of the following items:
55. Explanation added for
translation to English
• Accounting assets, excluding derivatives and items treated as
deductions from Tier 1 capital (for example, the balance of loans
is included, but not that of goodwill).
These consolidated fnancial statements are presented on the basis
of the regulatory fnancial reporting framework applicable to the
Group in Spain (see Note 1.b).
• Of-balance-sheet items (mainly guarantees, unused credit
limits granted and documentary credits) weighted using credit
conversion factors.
658
2018 Auditors’ report and consolidated annual accounts
Appendix
659
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix % of ownership
held by the Bank
% of voting powerk
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
0.00%
100.00%
100.00%
100.00% Real estate
53
A & L CF (Guernsey) Limited n Guernsey
0.00%
100.00%
100.00%
100.00% Leasing
Appendix I
Subsidiaries of Banco Santander, S.A.1
Company
2 & 3 Triton Limited
Location
United
Kingdom
A & L CF December
(1) Limited j
A & L CF June (2) Limited e
A & L CF June (3) Limited e
A & L CF March (5) Limited d
A & L CF September
(4) Limited f
Abbey Business Services
(India) Private Limited d
Abbey Covered Bonds
(Holdings) Limited
Abbey Covered Bonds
(LM) Limited
Abbey Covered Bonds LLP
Abbey National Beta
Investments Limited
Abbey National Business
Ofce Equipment
Leasing Limited
Abbey National
International Limited
Abbey National
Nominees Limited
Abbey National PLP
(UK) Limited
Abbey National Property
Investments
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
India
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Abbey National Treasury
Services Investments Limited
United
Kingdom
Abbey National Treasury
Services Overseas Holdings
Abbey National Treasury
Services plc
Abbey National UK
Investments
Abbey Stockbrokers
(Nominees) Limited
Abbey Stockbrokers Limited
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Holding
company
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
-
b
-
- Securitisation
(291)
35
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Leasing
Jersey
0.00%
100.00%
100.00%
100.00% Banking
0.00%
100.00%
100.00%
100.00% Securities
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Banking
366
0.00%
100.00%
100.00%
100.00% Finance
0.00%
100.00%
100.00%
0.00%
100.00%
100.00%
company
100.00% Securities
company
100.00% Securities
company
0
0
0
0
0
0
9
2
19
0
0
0
0
0
5
0
0
522
0
0
7
0
0
0
(1)
0
0
0
0
0
0
0
0
0
0
5
0
12
21
0
0
0
11
0
0
0
0
0
0
0
0
0
0
0
0
6
0
0
155
0
0
376
0
0
0
Ablasa Participaciones, S.L.
Spain
18.94%
81.06%
100.00%
100.00% Holding
299
(115)
454
company
Administración de
Bancos Latinoamericanos
Santander, S.L.
Spain
24.11%
75.89%
100.00%
100.00% Holding
2,542
(9)
1,863
company
Aevis Europa, S.L.
AFB SAM Holdings, S.L.
Spain
Spain
96.34%
0.00%
96.34%
96.34% Cards
1.00%
99.00%
100.00%
100.00% Holding
1
116
0
0
1
113
company
660
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Afsa S.A.
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Chile
0.00%
100.00%
100.00%
100.00% Fund
management
company
ALIL Services Limited
Isle of Man
0.00%
100.00%
100.00%
100.00% Services
Aliseda Participaciones
Inmobiliarias, S.L. i
Spain
0.00%
0.00%
0.00%
100.00% Real estate
Aliseda Real Estate, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Real estate
Aljardi SGPS, Lda.
Portugal
0.00%
100.00%
100.00%
100.00% Holding
Million eurosa
Capital +
reserves Net results
Carrying
amount
4
3
-
0
0
-
5
3
-
48
1,209
(20)
(6)
32
1,148
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0
0
0
0
0
0
0.00%
100.00%
100.00%
100.00% Finance
(227)
company
0
0
0
0
0
0
0
Spain
100.00%
0.00%
100.00%
100.00% Real estate
36
(97)
Alliance & Leicester Cash
Solutions Limited
Alliance & Leicester
Commercial Bank Limited
Alliance & Leicester
Investments
(Derivatives) Limited
Alliance & Leicester
Investments (No.2) Limited
Alliance & Leicester
Investments Limited
Alliance & Leicester Limited
Alliance & Leicester
Personal Finance Limited
Altamira Santander
Real Estate, S.A.
Amazonia Trade Limited
AN (123) Limited
United
Kingdom
United
Kingdom
100.00%
0.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Holding
company
Andaluza de Inversiones, S.A. Spain
0.00%
100.00%
100.00%
100.00% Holding
company
ANITCO Limited
Aquanima Brasil Ltda.
Aquanima Chile S.A.
Aquanima México S.
de R.L. de C.V.
United
Kingdom
Brazil
Chile
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% E-commerce
0.00%
100.00%
100.00%
100.00% Services
Mexico
0.00%
100.00%
100.00%
100.00% E-commerce
Aquanima S.A.
Argentina
0.00%
100.00%
100.00%
100.00% Services
Arcaz - Sociedade Imobiliária Portugal
Portuguesa, Lda. r
0.00%
99.90%
100.00%
100.00%
Inactive
Argenline S.A. j o
Uruguay
0.00%
100.00%
100.00%
Asto Digital Limited
Athena Corporation Limited
Atlantes Azor No. 1
Atlantes Azor No. 2
Atlantes Mortgage No. 2
Atlantes Mortgage No. 3
Atlantes Mortgage No. 4
Atlantes Mortgage No. 5
Atlantes Mortgage No. 7
United
Kingdom
United
Kingdom
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Atlantes Mortgage No.1 FTC
Portugal
Atlantes Mortgage No.1 plc
Ireland
0.00%
100.00%
100.00%
0.00%
100.00%
100.00%
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
100.00% Finance
company
100.00% Finance
company
- Financial
services
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
0
0
92
0
3
2
2
0
3
0
40
0
0
0
0
0
0
0
0
25
0
0
0
0
0
0
1
0
1
0
0
(13)
(2)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
27
0
0
0
2
0
0
0
27
0
0
0
0
0
0
0
0
0
0
661
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Atual Serviços de
Recuperação de Créditos
e Meios Digitais S.A.
Brazil
0.00%
89.85%
100.00%
100.00% Financial
services
61
-
-
-
-
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
0.00%
79.52%
100.00%
100.00% Technology
services
99.99%
99.99%
99.99%
0.01%
100.00%
100.00% Renting
0.01%
100.00%
100.00% Renting
0.01%
100.00%
100.00% Renting
100.00%
0.00%
100.00%
100.00% Renting
France
France
Italy
Spain
Spain
Switzerland
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Brazil
Spain
Spain
Spain
Spain
Spain
99.97%
0.03%
100.00%
100.00% Renting
99.00%
1.00%
100.00%
100.00% Air transport
100.00%
0.00%
100.00%
100.00% Renting
99.99%
99.99%
0.01%
100.00%
100.00% Renting
0.01%
100.00%
100.00% Renting
99.00%
1.00%
100.00%
- Renting
99.99%
0.01%
100.00%
100.00% Renting
99.00%
1.00%
100.00%
100.00% Air transport
99.99%
0.01%
100.00%
100.00% Renting
0
0
0
0
0
0
0
0
0
0
0
0
1
3
44
10
36
8
82
4
0
13
10
2
43
2
26
4
0
0
0
0
0
0
0
0
0
0
0
0
(6)
0
4
5
2
0
0
(1)
0
3
1
0
0
2
3
54
0
0
0
0
0
0
0
0
0
0
0
0
0
3
28
6
25
8
63
4
1
9
11
2
26
3
19
0.00%
89.85%
100.00%
100.00% Finance
312
204
443
company
0.00%
50.00%
50.00%
50.00% Banking
0.00%
89.85%
100.00%
100.00% Banking
100.00%
0.00%
100.00%
100.00% Banking
Paraguay
0.00%
99.33%
99.33%
99.33% Banking
297
942
14
0
37
45
0
0
123
848
9
0
Portugal
0.00%
100.00%
100.00%
100.00% Banking
1,088
(4)
1,085
Auto ABS DFP Master
Compartment France 2013
Auto ABS French Lease
Master Compartiment 2016
France
France
Auto ABS French Leases 2018 France
Auto ABS French
Loans Master
Auto ABS French LT
Leases Master
Auto ABS Italian Loans
2018-1 S.R.L.
Auto ABS Spanish Loans
2016, Fondo de Titulización
Auto ABS Spanish Loans
2018-1, Fondo de Titulización
Auto ABS Swiss Leases
2013 Gmbh
Auto ABS UK Loans 2017
Holdings Limited
Auto ABS UK Loans 2017 Plc
Auto ABS UK Loans
Holdings Limited
Auto ABS UK Loans PLC
Auttar HUT Processamento
de Dados Ltda.
Aviación Antares, A.I.E.
Aviación Británica, A.I.E.
Aviación Centaurus, A.I.E.
Aviación Comillas,
S.L. Unipersonal
Aviación Intercontinental,
A.I.E.
Aviación Laredo, S.L.
Aviación Oyambre,
S.L. Unipersonal
Aviación RC II, A.I.E.
Aviación Real, A.I.E.
Aviación Santillana S.L.
Aviación Scorpius, A.I.E.
Aviación Suances, S.L.
Aviación Tritón, A.I.E.
Aymoré Crédito,
Financiamento e
Investimento S.A.
Banca PSA Italia S.p.A.
Banco Bandepe S.A.
Banco de Albacete, S.A.
Banco de Asunción, S.A. en
liquidación voluntaria j
Banco Madesant - Sociedade
Unipessoal, S.A.
662
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Brazil
Italy
Brazil
Spain
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Banco Olé Bonsucesso
Consignado S.A.
Brazil
0.00%
53.91%
60.00%
60.00% Banking
Banco PSA Finance Brasil S.A. Brazil
0.00%
44.93%
50.00%
50.00% Finance
company
Banco S3 México, S.A.,
Institución de Banca Múltiple
Mexico
0.00%
100.00%
100.00%
100.00% Credit
institution
Banco Santander - Chile
Chile
0.00%
67.12%
67.18%
67.18% Banking
Banco Santander (Brasil) S.A. Brazil
13.94%
75.92%
90.44%
90.24% Banking
Banco Santander (México),
S.A., Institución de
Banca Múltiple, Grupo
Financiero Santander
México como Fiduciaria
del Fideicomiso 100740
Banco Santander (México),
S.A., Institución de
Banca Múltiple, Grupo
Financiero Santander
México como Fiduciaria
del Fideicomiso 2002114
Banco Santander (México),
S.A., Institución de
Banca Múltiple, Grupo
Financiero Santander
México como Fiduciaria
del Fideicomiso GFSSLPT
Banco Santander
(Panamá), S.A. j
Mexico
0.00%
75.13%
100.00%
100.00% Finance
company
Mexico
0.00%
76.48%
100.00%
100.00% Holding
company
Mexico
0.00%
77.83%
100.00%
100.00% Finance
company
Panama
0.00%
100.00%
100.00%
100.00% Banking
Banco Santander (Suisse) SA
Switzerland
0.00%
100.00%
100.00%
100.00% Banking
Portugal
0.00%
100.00%
100.00%
100.00% Banking
Colombia
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Banking
Banco Santander
Consumer Portugal, S.A.
Banco Santander de
Negocios Colombia S.A.
Banco Santander
International
Banco Santander México,
S.A., Institución de Banca
Múltiple, Grupo Financiero
Santander México
United
States
Mexico
Million eurosa
Capital +
reserves Net results
Carrying
amount
183
66
49
3,555
12,858
38
13
5
37
1,093
166
95
874
78
153
8
7
31
72
745
2,738
14
3,220
10,112
39
1
1
0
36
24
2
98
8
5
31
820
128
101
972
0.00%
75.13%
75.17%
99.99% Banking
4,727
853
4,193
Banco Santander Perú S.A.
Peru
99.00%
1.00%
100.00%
100.00% Banking
Banco Santander Puerto Rico Puerto Rico
0.00%
100.00%
100.00%
100.00% Banking
Banco Santander Río S.A.
Argentina
0.00%
99.30%
99.25%
99.20% Banking
Banco Santander Totta, S.A.
Portugal
0.00%
99.86%
99.96%
99.96% Banking
Banco Santander, S.A.
Uruguay
97.75%
2.25%
100.00%
100.00% Banking
Banif International Bank, Ltd j Bahamas
0.00%
99.86%
100.00%
100.00% Banking
Bansa Santander S.A.
Chile
0.00%
100.00%
100.00%
100.00% Real estate
BCLF 2013-1 B.V.
The
Netherlands
-
b
-
- Securitisation
BEN Benefícios e Serviços S.A. Brazil
0.00%
89.85%
100.00%
Besaya ECA Designated
Activity Company i
Bilkreditt 3 Designated
Activity Company j
Bilkreditt 4 Designated
Activity Company j
Bilkreditt 5 Designated
Activity Companyj
Bilkreditt 6 Designated
Activity Company
Ireland
0.00%
0.00%
0.00%
Ireland
Ireland
Ireland
Ireland
-
-
-
-
b
b
b
b
-
-
-
-
- Payment
services
- Finance
company
- Securitisation
- Securitisation
- Securitisation
- Securitisation
160
787
761
2,922
346
0
22
0
10
-
0
0
0
0
22
50
247
467
72
0
3
0
0
-
0
0
0
0
121
836
411
3,415
191
0
25
0
9
-
0
0
0
0
663
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Bilkreditt 7 Designated
Activity Company
Location
Ireland
Direct
Indirect
Year 2018
Year 2017 Activity
-
b
-
- Securitisation
BPE Financiaciones, S.A.
Spain
90.00%
10.00%
100.00%
100.00% Finance
company
BPE Representaçoes y
Participaçoes, Ltda. j
BPP Asesores S.A. j
BPV Promotora de Vendas
e Cobrança Ltda.
Brazil
100.00%
0.00%
100.00%
100.00% Finance
company
Argentina
100.00%
0.00%
100.00%
100.00% Finance
company
Brazil
0.00%
53.91%
100.00%
100.00% Finance
company
BRS Investments S.A.
Argentina
0.00%
100.00%
100.00%
100.00% Finance
company
Caja de Emisiones con
Garantía de Anualidades
Debidas por el Estado, S.A.
Spain
62.87%
0.00%
62.87%
62.87% Finance
company
Cántabra de Inversiones, S.A. Spain
100.00%
0.00%
100.00%
100.00% Holding
company
Cántabro Catalana de
Inversiones, S.A.
Capital Street Delaware LP
Capital Street Holdings, LLC
Capital Street REIT
Holdings, LLC
United
States
United
States
United
States
Spain
100.00%
0.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Holding
company
Capital Street S.A.
Luxembourg
0.00%
100.00%
100.00%
100.00% Finance
Carfax (Guernsey) Limited n
Guernsey
0.00%
100.00%
100.00%
100.00%
company
Insurance
brokerage
Carfnco Financial Group Inc.
Canada
96.42%
0.00%
96.42%
96.42% Holding
company
Carfnco Inc.
Canada
0.00%
96.42%
100.00%
100.00% Finance
Casa de Bolsa Santander,
S.A. de C.V., Grupo Financiero
Santander México
Mexico
0.00%
99.97%
99.97%
company
99.97% Securities
company
Cater Allen Holdings Limited United
0.00%
100.00%
100.00%
100.00% Holding
0.00%
100.00%
100.00%
company
100.00% Securities
company
Million eurosa
Capital +
reserves Net results
Carrying
amount
0
1
0
0
2
23
0
30
306
0
14
0
0
0
0
1
16
0
0
1
0
0
1
73
0
(15)
38
3
0
0
267
0
14
0
0
57
42
50
0
0
0
0
0
6
3
0
0
0
0
75
42
53
0
0
0.00%
100.00%
100.00%
100.00% Holding
1,151
21
1.172
company
0.00%
100.00%
100.00%
100.00% Banking
485
67
249
0.00%
100.00%
100.00%
100.00% Holding
0.00%
100.00%
100.00%
company
100.00% Advisory
services
0.00%
69.71%
100.00%
100.00% Leasing
0.00%
75.13%
100.00%
100.00% Non proft
institute
0.00%
100.00%
100.00%
100.00% Aircraft rental
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
-
b
-
- Securitisation
0
0
14
1
(54)
(21)
(18)
0
21
0
0
(12)
0
(7)
35
24
0
(13)
0
0
1
1
0
0
0
0
0
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
States
Mexico
Spain
United
States
United
States
United
States
United
States
Cater Allen International
Limited
Cater Allen Limited
Cater Allen Lloyd's
Holdings Limited
Cater Allen Syndicate
Management Limited
CCAP Auto Lease Ltd.
Centro de Capacitación
Santander, A.C.
Certidesa, S.L.
Chrysler Capital Auto
Funding I LLC
Chrysler Capital Auto
Funding II LLC
Chrysler Capital Auto
Receivables LLC
Chrysler Capital Auto
Receivables Trust 2016-A
664
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Chrysler Capital Master Auto United
States
Receivables Funding 2 LLC
Chrysler Capital Master Auto United
States
Receivables Funding LLC
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
France
0.00%
50.00%
100.00%
100.00% Banking
France
0.00%
50.00%
100.00%
100.00% Finance
company
Argentina
0.00%
100.00%
100.00%
- Services
Spain
0.00%
100.00%
100.00%
- Services
Million eurosa
Capital +
reserves Net results
Carrying
amount
106
90
363
20
0
0
(171)
(3)
141
11
0
0
Portugal
86.28%
13.72%
100.00%
100.00% Real estate
132
(132)
United
States
0.00%
69.71%
100.00%
100.00% Securitisation
Uruguay
100.00%
0.00%
100.00%
100.00% Services
Ireland
100.00%
0.00%
100.00%
100.00% Reinsurances
Digital Procurement
Holdings N.V.
The
Netherlands
0.00%
100.00%
100.00%
100.00% Holding
company
Diners Club Spain, S.A.
Spain
75.00%
0.00%
75.00%
75.00% Cards
Dirección Estratega, S.C.
Mexico
0.00%
100.00%
100.00%
100.00% Services
0.00%
100.00%
100.00%
100.00% Real estate
0
0
9
5
10
0
(10)
(2)
14
(15)
(20)
(31)
(57)
(63)
(83)
(69)
development
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
(130)
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
(68)
(66)
0
0
0
0
0
0
0
2
0
0
8
15
9
15
15
34
48
55
50
97
42
48
(34)
(81)
(96)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Compagnie Generale de
Credit Aux Particuliers
- Credipar S.A.
Compagnie Pour la Location
de Vehicules - CLV
Comunidad Laboral
Trabajando Argentina S.A.
Comunidad Laboral
Trabajando Iberica,
S.L. Unipersonal
Consulteam Consultores
de Gestão, Lda.
Consumer Lending
Receivables LLC
Crawfall S.A. g j
Darep Designated
Activity Company
Dirgenfn, S.L., en liquidación j Spain
Drive Auto Receivables
Trust 2015-A
Drive Auto Receivables
Trust 2015-B
Drive Auto Receivables
Trust 2015-C
Drive Auto Receivables
Trust 2015-D
Drive Auto Receivables
Trust 2016-A
Drive Auto Receivables
Trust 2016-B
Drive Auto Receivables
Trust 2016-C
Drive Auto Receivables
Trust 2017-1
Drive Auto Receivables
Trust 2017-2
Drive Auto Receivables
Trust 2017-3
Drive Auto Receivables
Trust 2017-A
Drive Auto Receivables
Trust 2017-B
Drive Auto Receivables
Trust 2018-1
Drive Auto Receivables
Trust 2018-2
Drive Auto Receivables
Trust 2018-3
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
0
0
428
26
0
0
2
0
0
7
1
9
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
665
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Drive Auto Receivables
Trust 2018-4
Drive Auto Receivables
Trust 2018-5
Drive Auto Receivables
Trust 2019-1
EDT FTPYME Pastor 3 Fondo
de Titulización de Activos
United
States
United
States
United
States
Spain
-
-
-
-
b
b
b
b
-
-
-
-
- Securitisation
- Securitisation
-
Inactive
- Securitisation
Electrolyser, S.A. de C.V.
Mexico
0.00%
75.13%
100.00%
100.00% Services
Entidad de Desarrollo a la
Pequeña y Micro Empresa
Santander Consumo Perú S.A.
Peru
55.00%
0.00%
55.00%
55.00% Finance
company
Erestone S.A.S.
Esfera Fidelidade S.A.
Evidence Previdência S.A.
France
Brazil
Brazil
0.00%
90.00%
90.00%
90.00% Real estate
0.00%
89.85%
100.00%
- Services
0.00%
89.85%
100.00%
100.00% Holding
company
Million eurosa
Capital +
reserves Net results
Carrying
amount
0
0
0
0
0
20
1
2
64
2
9
(116)
24
0
0
0
3
0
0
(17)
1
2
0
0
0
0
0
13
1
2
42
2
4
Finance Professional
Services, S.A.S.
Financeira El Corte Inglés,
Portugal, S.F.C., S.A.
Financiera El Corte
Inglés, E.F.C., S.A.
France
0.00%
100.00%
100.00%
100.00% Services
Portugal
0.00%
51.00%
100.00%
100.00% Finance
company
Spain
0.00%
51.00%
51.00%
51.00% Finance
214
66
140
company
Finsantusa, S.L. Unipersonal
Spain
0.00%
100.00%
100.00%
100.00% Holding
3,785
(9)
1,020
0.00%
100.00%
100.00%
100.00% Leasing
company
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Advisory
services
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Finance
0.00%
100.00%
100.00%
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
company
-
Investment
fund
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
0
0
0
0
0
0
5
27
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
4
0
0
0
0
0
0
0
0
0
First National Motor
Business Limited
First National Motor
Contracts Limited
First National Motor
Facilities Limited
First National Motor
Finance Limited
First National Motor
Leasing Limited
First National Motor plc
First National Tricity
Finance Limited
Fondo de Inversión Privado
Renta Terrenos I j
Fondo de Titulización de
Activos PYMES Santander 9
Fondo de Titulización de
Activos RMBS Santander 1
Fondo de Titulización de
Activos RMBS Santander 2
Fondo de Titulización de
Activos RMBS Santander 3
Fondo de Titulización de
Activos Santander 2
Fondo de Titulización de
Activos Santander Consumer
Spain Auto 2014-1
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Chile
Spain
Spain
Spain
Spain
Spain
Spain
Fondo de Titulización de
Activos Santander Empresas 1
Spain
Fondo de Titulización de
Activos Santander Empresas 2
Spain
666
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Fondo de Titulización de
Activos Santander Empresas 3
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Fondo de Titulización
de Activos Santander
Hipotecario 7
Fondo de Titulización
de Activos Santander
Hipotecario 8
Fondo de Titulización
de Activos Santander
Hipotecario 9
Fondo de Titulización
PYMES Santander 13
Fondo de Titulización
PYMES Santander 14
Fondo de Titulización
RMBS Santander 4
Fondo de Titulización
RMBS Santander 5
Fondo de Titulización
Santander Consumer
Spain Auto 2016-1
Fondo de Titulización
Santander Consumer
Spain Auto 2016-2
Fondo de Titulización
Santander Consumo 2
Fondo de Titulización
Santander Financiación 1
Fondos Santander, S.A.
Administradora de Fondos de
Inversión (en liquidación) j
-
-
-
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
Uruguay
0.00%
100.00%
100.00%
100.00% Fund
management
company
Fortensky Trading, Ltd.
Ireland
0.00%
100.00%
100.00%
100.00% Finance
Fosse (Master Issuer)
Holdings Limited
United
Kingdom
-
b
-
- Securitisation
company
Fosse Funding (No.1) Limited United
0.00%
100.00%
100.00%
100.00% Securitisation
Fosse Master Issuer PLC
Fosse PECOH Limited
Fosse Trustee (UK) Limited
FTPYME Banesto 2, Fondo
de Titulización de Activos
FTPYME Santander 2 Fondo
de Titulización de Activos
Fundo de Investimentos
em Direitos Creditórios
Multisegmentos NPL Ipanema
V – Não padronizado s
Fundo de Investimentos
em Direitos Creditórios
Multisegmentos NPL Ipanema
VI – Não padronizado s
Gamma, Sociedade
Financeira de Titularização
de Créditos, S.A.
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Spain
Spain
Brazil
Brazil
0.00%
100.00%
100.00%
100.00% Securitisation
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
-
-
-
-
b
b
b
b
-
-
-
-
- Securitisation
- Securitisation
-
-
Investment
fund
Investment
fund
Portugal
0.00%
99.86%
100.00%
100.00% Securitisation
GC FTPYME Pastor 4 Fondo
de Titulización de Activos
Spain
-
b
-
- Securitisation
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(5)
(2)
0
0
0
0
0
18
7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(1)
4
0
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
8
0
667
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million eurosa
Capital +
reserves Net results
Carrying
amount
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Location
Mexico
Direct
Indirect
Year 2018
Year 2017 Activity
0.00%
100.00%
100.00%
100.00% Services
Chile
0.00%
100.00%
100.00%
100.00%
Internet
Company
Gesban México Servicios
Administrativos
Globales, S.A. de C.V.
Gesban Santander
Servicios Profesionales
Contables Limitada
Gesban Servicios
Administrativos Globales, S.L.
Spain
Gesban UK Limited
United
Kingdom
99.99%
0.01%
100.00%
100.00% Services
0.00%
100.00%
100.00%
100.00% Payments and
collections
services
Spain
0.00%
100.00%
100.00%
100.00% Electricity
production
Peru
0.00%
100.00%
100.00%
100.00% Holding
company
Spain
96.34%
0.00%
96.34%
96.34% Securities and
real estate
management
35.00%
65.00%
100.00%
100.00% Real estate
1
0
4
1
1
0
5
3
0.00%
79.52%
88.50%
88.50% Payment
services
379
0.00%
100.00%
100.00%
-
Inactive
-
-
-
-
-
b
b
b
b
b
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
0.00%
100.00%
100.00%
100.00% Holding
company
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
1
0
0
0
12
16
1
109
5
388
0
0
0
0
0
0
0
0
0
0
0
0
0
0
99.11%
0.89%
100.00%
100.00% Holding
2,669
269
2,817
Mexico
100.00%
0.00%
100.00%
company
- Holding
company
3,902
335
4,001
United
States
United
States
Spain
Portugal
Ireland
Portugal
Ireland
Portugal
Spain
0.00%
56.88%
56.88%
81.90% Holding
company
0.00%
56.88%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Automotive
-
-
-
-
-
b
b
b
b
b
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
0.00%
100.00%
100.00%
100.00% Renting
32
32
2
(48)
1
(39)
(4)
0
1
110
65
(1)
(1)
0
2
(5)
(2)
(3)
0
0
(9)
(6)
29
17
2
0
0
0
0
0
1
511
719
Holbah II Limited
Bahamas
0.00%
100.00%
100.00%
100.00% Holding
company
Holbah Santander,
S.L. Unipersonal
Spain
0.00%
100.00%
100.00%
100.00% Holding
company
668
Spain
Brazil
Spain
Italy
Italy
Italy
Italy
Italy
Spain
Spain
Gestión de Instalaciones
Fotovoltaicas, S.L.
Unipersonal
Gestora de Procesos
S.A. en liquidación j
Gestora Patrimonial Calle
Francisco Sancha 12, S.L.
Gestora Popular, S.A.
Getnet Adquirência e
Serviços para Meios
de Pagamento S.A.
Global Galantis, S.A.
Golden Bar
(Securitisation) S.r.l.
Golden Bar Stand
Alone 2014-1
Golden Bar Stand
Alone 2015-1
Golden Bar Stand
Alone 2016-1
Golden Bar Stand
Alone 2018-1
Green Energy Holding
Company, S.L.
Grupo Empresarial
Santander, S.L.
Grupo Financiero Santander
México, S.A. de C.V.
GTS El Centro Equity
Holdings, LLC c
GTS El Centro Project
Holdings, LLC c
Guaranty Car, S.A.
Unipersonal
Hipototta No. 4 FTC
Hipototta No. 4 plc
Hipototta No. 5 FTC
Hipototta No. 5 plc
Hipototta No.13
Hispamer Renting,
S.A. Unipersonal
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
Company
Holmes Funding Limited
Holmes Holdings Limited
Holmes Master Issuer plc
Holmes Trustees Limited
Holneth B.V.
HQ Mobile Limited g
Ibérica de Compras
Corporativas, S.L.
Location
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
The
Netherlands
United
Kingdom
Spain
Independence Community
Bank Corp.
Ingeniería de Software
Bancario HUB Chile Limitada
Inmo Francia 2, S.A.
Inmobiliaria Viagracia, S.A.
Insurance Funding
Solutions Limited
Integry Tecnologia e
Serviços A H U Ltda.
United
States
Chile
Spain
Spain
United
Kingdom
Brazil
% of ownership
held by the Bank
% of voting powerk
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
0.00%
100.00%
100.00%
100.00% Securitisation
(41)
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
0
3
0
0.00%
100.00%
100.00%
100.00% Holding
401
3,710
66
3,775
0.00%
100.00%
100.00%
company
-
Internet
technology
97.17%
2.83%
100.00%
100.00% E-commerce
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00%
It services
100.00%
0.00%
100.00%
100.00% Real estate
100.00%
0.00%
100.00%
100.00% Real estate
0.00%
100.00%
100.00%
0.00%
79.52%
100.00%
100.00% Finance
company
100.00% Technology
services
100.00% Holding
company
Interfnance Holanda B.V.
The
Netherlands
100.00%
0.00%
100.00%
Intermediacion y Servicios
Tecnológicos, S.A.
Inversiones Capital Global,
S.A. Unipersonal
Inversiones Inmobiliarias
Alprosa, S.L.
Inversiones Inmobiliarias
Cedaceros, S.A.
Inversiones Inmobiliarias
Gercebio, S.A.
Inversiones Inmobiliarias
Inagua, S.A. i
Inversiones Inverjota, SICAV,
S.A., en liquidación j i
Inversiones Marítimas
del Mediterráneo, S.A.
Investigaciones
Pedreña, A.I.E.
Spain
99.50%
0.50%
100.00%
100.00% Services
Spain
100.00%
0.00%
100.00%
100.00% Holding
company
Spain
94.33%
5.67%
100.00%
100.00% Real estate
Spain
99.50%
0.50%
100.00%
100.00% Real estate
Spain
97.80%
2.20%
100.00%
100.00% Real estate
Spain
Spain
0.00%
0.00%
0.00%
100.00% Real estate
0.00%
0.00%
0.00%
-
Investment
company
Spain
100.00%
0.00%
100.00%
100.00%
Inactive
Spain
99.00%
1.00%
100.00%
- Research and
development
Isban México, S.A. de C.V.
Mexico
0.00%
75.13%
100.00%
100.00%
It services
Isla de los Buques, S.A.
Spain
99.98%
0.02%
100.00%
100.00% Finance
company
Spain
76.79%
19.55%
96.35%
96.35% Chemistry
La Unión Resinera Española,
S.A., en liquidación j
Langton Funding
(No.1) Limited
Langton Mortgages
Trustee (UK) Limited
Langton PECOH Limited
Langton Securities
(2008-1) plc
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
0.00%
100.00%
100.00%
100.00% Securitisation
(20)
(43)
0.00%
100.00%
100.00%
100.00% Securitisation
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
0
0
0
0
0
1
3
0
(5)
0
4
0
(2)
0
0
0
0
316
10
6
1
0
7
0
0
0
1
20
54
63
0
13
0
2
(10)
365
(1)
393
0
0
-
-
(2)
0
4
0
0
0
0
-
-
4
0
30
1
0
0
0
0
0
669
2
7
26
54
85
0
16
0
2
328
415
(29)
(11)
-
-
15
0
36
1
0
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Langton Securities
(2010-1) PLC
Langton Securities
(2010-2) PLC
Langton Securities
Holdings Limited
Location
United
Kingdom
United
Kingdom
United
Kingdom
Direct
Indirect
Year 2018
Year 2017 Activity
0.00%
100.00%
100.00%
100.00% Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
-
b
-
- Securitisation
Laparanza, S.A.
Spain
61.59%
0.00%
61.59%
61.59% Agricultural
Liquidity Limited
Luri 1, S.A. m
Luri 4, S.A. Unipersonal,
en liquidación j i
United
Kingdom
Spain
Spain
0.00%
100.00%
100.00%
100.00% Factoring
holding
36.00%
0.00%
0.00%
0.00%
36.00%
31.00% Real estate
0.00%
100.00% Real estate
Million eurosa
Capital +
reserves Net results
Carrying
amount
0
0
0
28
1
15
-
1
0
0
0
0
(3)
-
0
0
0
16
0
5
-
Luri 6, S.A. Unipersonal
Spain
100.00%
0.00%
100.00%
100.00% Real estate
investment
1,315
10
1,405
MAC No. 1 Limited
Manberor, S.A.
Master Red Europa, S.L.
Mata Alta, S.L.
Merciver, S.L.
United
Kingdom
Spain
Spain
Spain
Spain
-
b
-
- Mortgage credit
0
company
97.80%
2.20%
100.00%
100.00% Real estate
(90)
96.34%
0.00%
96.34%
96.34% Cards
0.00%
61.59%
100.00%
100.00% Real estate
99.90%
0.10%
100.00%
100.00% Financial
advisory
0
0
0
0
0
3
0
(1)
0
0
0
0
0
0
(2)
0
3
1
2
0
0
0
0
(1)
9
0
0
1
0
1
0
0
0
0
0
0
0
0
0
0
0
49
21
17
3
4
1
0
93
274
1
0
1
33
0
0
0
0
0
0
0
0
0
0
16
22
20
3
4
1
1
94
336
Merlion Aviation One
Designated Activity Company
Ireland
51.00%
0.00%
51.00%
51.00% Renting
Moneybit, S.L.
Spain
100.00%
0.00%
100.00%
100.00% Services
Mortgage Engine Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Financial
services
Motor 2015-1 Holdings Limited United
-
b
-
- Securitisation
Motor 2015-1 PLC
Motor 2016-1
Holdings Limited
Motor 2016-1 PLC
Motor 2016-1M Ltd j
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Motor 2017-1 Holdings Limited United
Motor 2017-1 PLC
Kingdom
United
Kingdom
0.00%
100.00%
100.00%
100.00% Securitisation
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
-
-
b
b
-
-
- Securitisation
- Securitisation
0.00%
100.00%
100.00%
100.00% Securitisation
Naviera Mirambel, S.L.
Spain
0.00%
100.00%
100.00%
100.00% Finance
company
Naviera Trans Gas, A.I.E.
Naviera Trans Iron, S.L.
Naviera Trans Ore, A.I.E.
Naviera Trans Wind, S.L.
Spain
Spain
Spain
Spain
99.99%
0.01%
100.00%
100.00% Renting
100.00%
0.00%
100.00%
100.00% Leasing
99.99%
99.99%
0.01%
100.00%
100.00% Renting
0.01%
100.00%
100.00% Renting
Naviera Transcantábrica, S.L. Spain
100.00%
0.00%
100.00%
100.00% Leasing
Naviera Transchem,
S.L. Unipersonal
Newcomar, S.L., en
liquidación j
Spain
100.00%
0.00%
100.00%
100.00% Leasing
Spain
40.00%
40.00%
80.00%
80.00% Real estate
Norbest AS
Norway
7.94%
92.06%
100.00%
100.00% Securities
Novimovest – Fundo de
Investimento Imobiliário
Portugal
0.00%
79.65%
79.76%
79.51%
investment
Investment
fund
670
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
NW Services CO.
Olé Tecnologia Ltda.
Open Bank, S.A.
Open Digital Market, S.L.
Open Digital Services, S.L.
Operadora de Carteras
Gamma, S.A.P.I. de C.V.
Optimal Investment
Services SA
Location
Direct
Indirect
Year 2018
Year 2017 Activity
United
States
Brazil
Spain
Spain
Spain
0.00%
100.00%
100.00%
100.00% E-commerce
0.00%
53.91%
100.00%
100.00%
It services
100.00%
0.00%
100.00%
100.00% Banking
0.00%
100.00%
100.00%
- Services
99.97%
0.03%
100.00%
100.00% Services
Mexico
100.00%
0.00%
100.00%
100.00% Holding
company
Switzerland
100.00%
0.00%
100.00%
100.00% Fund
management
company
0.00%
54.18%
51.25%
51.25% Fund
Optimal Multiadvisors Ireland Ireland
Plc / Optimal Strategic US
Equity Ireland Euro Fund i
Optimal Multiadvisors Ireland Ireland
Plc / Optimal Strategic US
Equity Ireland US Dollar Fund i
0.00%
44.08%
51.57%
Optimal Multiadvisors Ltd /
Optimal Strategic US Equity
Series (consolidado) i
Bahamas
0.00%
55.86%
56.34%
Parasant SA
Switzerland
100.00%
0.00%
100.00%
management
company
51.62% Fund
management
company
56.10% Fund
management
company
100.00% Holding
company
Million eurosa
Capital +
reserves Net results
Carrying
amount
4
0
206
0
38
7
24
4
5
45
0
1
5
0
(58)
0
(1)
0
0
1
2
0
210
0
0
22
23
0
0
0
1,097
(89)
904
Pastor Vida, S.A. de
Seguros y Reaseguros i
PBD Germany Auto 2018
UG (haftungsbeschränkt)
PBE Companies, LLC
PECOH Limited
United
States
United
Kingdom
Spain
0.00%
0.00%
0.00%
100.00%
Insurance
Germany
-
b
-
- Securitisation
-
0
0.00%
100.00%
100.00%
100.00% Real estate
109
0.00%
100.00%
100.00%
100.00% Securitisation
Pereda Gestión, S.A.
Spain
99.99%
0.01%
100.00%
100.00% Holding
company
Phoenix C1 Aviation
Designated Activity Company
Ireland
51.00%
0.00%
51.00%
51.00% Renting
Pingham International, S.A.
Uruguay
0.00%
100.00%
100.00%
100.00% Services
Popular Bolsa S.V., S.A.
Spain
100.00%
0.00%
100.00%
Popular Capital, S.A.
Spain
90.00%
10.00%
100.00%
100.00% Securities
company
100.00% Finance
company
Popular de Participaciones
Financieras, S.A. i
Spain
0.00%
0.00%
0.00%
100.00% Venture capital
Popular de Renting, S.A. i
Spain
0.00%
0.00%
0.00%
100.00% Renting
Popular Gestão de
Activos, S.A.
Popular Gestión Privada
S.G.I.I.C., S.A.
Portugal
100.00%
0.00%
100.00%
Spain
0.00%
100.00%
100.00%
100.00% Management
of funds and
portfolios
100.00% Management
of funds and
portfolios
Popular Operaciones, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Finance
company
Popular Seguros - Companhia Portugal
de Seguros S.A.
0.00%
99.90%
100.00%
84.07%
Insurance
Portal Universia
Argentina S.A.
Portal Universia Portugal,
Prestação de Serviços
de Informática, S.A.
Argentina
0.00%
75.75%
75.75%
75.75%
Internet
Portugal
0.00%
100.00%
100.00%
100.00%
Internet
Premier Credit S.A.S.
Colombia
0.00%
100.00%
100.00%
100.00% Financial
advisory
0
51
3
0
6
(2)
-
-
1
7
0
9
0
0
1
-
0
1
0
(9)
2
0
1
0
-
-
0
1
0
0
0
(1)
0
-
0
110
0
4
0
0
6
0
-
-
1
7
0
7
0
0
1
671
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Prime 16 – Fundo de
Investimentos Imobiliário
Brazil
0.00%
89.85%
100.00%
100.00%
Investment
fund
Primestar Servicing, S.A.
Portugal
20.00%
79.89%
100.00%
80.00% Real estate
Produban Brasil
Tecnologia Ltda.
Brazil
0.00%
100.00%
100.00%
- Technology
services
PSA Bank Deutschland GmbH Germany
0.00%
50.00%
50.00%
50.00% Banking
PSA Banque France
PSA Consumer Finance
Polska Sp. z o.o.
France
Poland
0.00%
50.00%
50.00%
50.00% Banking
0.00%
40.24%
100.00%
100.00% Finance
company
PSA Finance Belux S.A.
Belgium
0.00%
50.00%
50.00%
50.00% Finance
company
PSA Finance Polska Sp. z o.o. Poland
0.00%
40.24%
50.00%
50.00% Finance
company
PSA Finance Suisse, S.A.
Switzerland
0.00%
50.00%
100.00%
100.00% Leasing
PSA Finance UK Limited
PSA Financial Services
Nederland B.V.
PSA Financial Services
Spain, E.F.C., S.A.
United
Kingdom
The
Netherlands
0.00%
50.00%
50.00%
50.00% Finance
company
0.00%
50.00%
50.00%
50.00% Finance
company
Spain
0.00%
50.00%
50.00%
50.00% Finance
company
PSA Renting Italia S.p.A.
Italy
0.00%
50.00%
100.00%
- Renting
PSRT 2018-A
Punta Lima, LLC
Recovery Team, S.L.
Unipersonal
Retop S.A. f
United
States
United
States
Spain
-
b
-
- Securitisation
0.00%
100.00%
100.00%
100.00% Leasing
100.00%
0.00%
100.00%
100.00% Finance
company
Uruguay
100.00%
0.00%
100.00%
100.00% Finance
company
Return Capital Serviços de
Recuperação de Créditos S.A.
Brazil
0.00%
62.90%
70.00%
70.00% Collection
services
Return Gestão de
Recursos S.A.
Riobank International
(Uruguay) SAIFE j
Roc Aviation One Designated
Activity Company
Roc Shipping One Designated
Activity Company
Brazil
0.00%
62.90%
100.00%
100.00% Fund
management
company
Uruguay
0.00%
100.00%
100.00%
100.00% Banking
Ireland
100.00%
0.00%
100.00%
100.00% Renting
Ireland
51.00%
0.00%
51.00%
51.00% Renting
Rojo Entretenimento S.A.
Brazil
0.00%
85.00%
94.60%
94.60% Services
SAM Asset Management, S.A.
de C.V., Sociedad Operadora
de Fondos de Inversión
Mexico
0.00%
100.00%
100.00%
100.00% Fund
management
company
SAM Brasil Participações S.A. Brazil
1.00%
99.00%
100.00%
100.00% Holding
company
SAM Finance Lux S.à r.l.
Luxembourg
0.00%
100.00%
100.00%
100.00% Management
SAM Investment
Holdings Limited u
SAM UK Investment
Holdings Limited
Sancap Investimentos
e Participações S.A.
Saninv - Gestão e
Investimentos, Sociedade
Unipessoal, S.A.
Jersey
0.00%
100.00%
100.00%
100.00% Holding
company
United
Kingdom
Brazil
0.00%
89.85%
100.00%
100.00% Holding
company
company
Portugal
0.00%
100.00%
100.00%
100.00% Portfolio
management
Santander (CF Trustee
Property Nominee) Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Services
672
Million eurosa
Capital +
reserves Net results
Carrying
amount
99
1
3
428
1,093
1
100
30
34
288
60
410
6
0
19
5
11
0
0
0
(2)
(1)
28
3
33
4
982
(8)
80
0
1
44
116
0
17
4
7
55
13
55
2
57
(2)
9
21
1
0
0
(1)
(1)
1
16
3
0
2
1
219
463
0
42
11
15
123
20
174
3
0
17
11
63
1
0
0
0
0
25
161
38
2
105
1,551
117
0
0
11
0
0
88
0
0
92.38%
7.62%
100.00%
100.00% Holding
1,093
511
1,665
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
Company
Santander (CF
Trustee) Limited d
Location
United
Kingdom
Santander (UK) Group Pension
Schemes Trustees Limited d
United
Kingdom
% of ownership
held by the Bank
% of voting powerk
Direct
Indirect
Year 2018
Year 2017 Activity
0.00%
100.00%
100.00%
100.00% Asset
management
0.00%
100.00%
100.00%
100.00% Asset
Million eurosa
Capital +
reserves Net results
Carrying
amount
Santander Agente de
Valores Limitada
Santander Ahorro
Inmobiliario 1, S.A.
Santander Ahorro
Inmobiliario 2, S.A.
Chile
0.00%
67.44%
100.00%
Spain
97.95%
0.58%
98.53%
Spain
99.13%
0.78%
99.91%
management
100.00% Securities
company
98.54% Real estate
investment
99.91% Real estate
investment
Santander Asset Finance
(December) Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Leasing
Santander Asset Finance plc United
0.00%
100.00%
100.00%
100.00% Leasing
Kingdom
Santander Asset
Management - Sociedade
Gestora de Fundos de
Investimento Mobiliário, S.A.
Santander Asset
Management Chile S.A.
Santander Asset Management
Luxembourg, S.A.
Santander Asset Management
S.A. Administradora
General de Fondos
Portugal
100.00%
0.00%
100.00%
100.00% Fund
management
company
Chile
0.01%
99.94%
100.00%
100.00% Securities
investment
Luxembourg
0.00%
100.00%
100.00%
100.00% Fund
management
company
Chile
0.00%
100.00%
100.00%
100.00% Fund
management
company
Santander Asset Management
UK Holdings Limited
United
Kingdom
Santander Asset
Management UK Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Holding
278
0.00%
100.00%
100.00%
company
100.00% Management
of funds and
portfolios
Santander Asset
Management, LLC
Santander Asset
Management, S.A., S.G.I.I.C.
Santander Back-Ofces
Globales Mayoristas, S.A.
Santander Banca de
Inversión Colombia, S.A.S.
Puerto Rico
0.00%
100.00%
100.00%
100.00% Management
Spain
0.00%
100.00%
100.00%
100.00% Fund
management
company
Spain
100.00%
0.00%
100.00%
100.00% Services
Colombia
0.00%
100.00%
100.00%
100.00% Financial
services
0
0
51
23
23
54
216
27
(6)
4
27
37
3
22
4
1
0
0
13
(1)
0
9
19
1
0
1
0
0
43
21
23
0
162
27
0
0
10
132
14
25
2
55
1
0
186
201
5
167
1
1
Santander BanCorp
Puerto Rico
0.00%
100.00%
100.00%
100.00% Holding
927
56
983
company
Santander Bank & Trust Ltd.
Bahamas
0.00%
100.00%
100.00%
100.00% Banking
Santander Bank Polska S.A.
Poland
67.47%
0.00%
67.47%
69.34% Banking
Santander Bank,
National Association
Santander Brasil
Administradora de
Consórcio Ltda.
Santander Brasil Asset
Management Distribuidora
de Títulos e Valores
Mobiliários S.A.
Santander Brasil Gestão
de Recursos Ltda.
Santander Brasil
Tecnologia S.A.
United
States
Brazil
0.00%
100.00%
100.00%
100.00% Banking
0.00%
89.85%
100.00%
100.00% Services
Brazil
0.00%
100.00%
100.00%
100.00% Securities
investment
Brazil
0.00%
100.00%
100.00%
100.00% Real estate
investment
Brazil
0.00%
89.85%
100.00%
100.00%
It services
Santander Brasil, EFC, S.A.
Spain
0.00%
89.85%
100.00%
100.00% Finance
company
Santander Capital Desarrollo,
SGEIC, S.A. Unipersonal
Spain
100.00%
0.00%
100.00%
100.00% Venture capital
796
5,043
11,364
39
33
465
32
763
11
(5)
504
346
403
4,312
11,708
32
64
2
35
66
(2)
9
(1)
576
27
714
8
673
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Santander Capital
Structuring, S.A. de C.V.
Location
Mexico
Direct
Indirect
Year 2018
Year 2017 Activity
0.00%
100.00%
100.00%
100.00% Trade
Santander Capitalização S.A. Brazil
0.00%
89.85%
100.00%
100.00%
Insurance
Santander Cards
Ireland Limited
Santander Cards Limited
Santander Cards UK Limited
Ireland
0.00%
100.00%
100.00%
100.00% Cards
United
Kingdom
United
Kingdom
0.00%
100.00%
100.00%
100.00% Cards
0.00%
100.00%
100.00%
100.00% Finance
company
Million eurosa
Capital +
reserves Net results
Carrying
amount
8
46
(8)
93
149
2
29
0
0
(1)
0
65
0
93
106
Santander Chile Holding S.A. Chile
22.11%
77.72%
99.84%
99.84% Holding
1,390
265
1,393
company
Santander Consulting
(Beijing) Co., Ltd.
China
0.00%
100.00%
100.00%
100.00% Advisory
Santander Consumer (UK) plc United
0.00%
100.00%
100.00%
100.00% Finance
Kingdom
company
7
465
(63)
(35)
1
4
106
291
(42)
69
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
16
(31)
company
0.00%
69.71%
100.00%
100.00% Finance
323
73
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
61
20
24
46
50
(14)
(18)
(29)
(17)
30
23
8
0
1
(2)
23
29
8
19
9
11
31
21
10
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
Santander Consumer
ABS Funding 3 LLC
Santander Consumer
Auto Receivables
Funding 2013-B2 LLC
Santander Consumer
Auto Receivables
Funding 2013-B3 LLC
Santander Consumer
Auto Receivables
Funding 2013-L1 LLC
Santander Consumer
Auto Receivables
Funding 2014-L1 LLC
Santander Consumer
Auto Receivables
Funding 2015-L1 LLC
Santander Consumer
Auto Receivables
Funding 2015-L2 LLC
Santander Consumer
Auto Receivables
Funding 2015-L3 LLC
Santander Consumer
Auto Receivables
Funding 2015-L4 LLC
Santander Consumer
Auto Receivables
Funding 2016-B1 LLC
Santander Consumer
Auto Receivables
Funding 2016-B2 LLC
Santander Consumer
Auto Receivables
Funding 2016-B3 LLC
Santander Consumer
Auto Receivables
Funding 2016-B4 LLC
Santander Consumer
Auto Receivables
Funding 2016-L1 LLC
Santander Consumer
Auto Receivables
Funding 2016-L2 LLC
Santander Consumer
Auto Receivables
Funding 2016-L3 LLC
674
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Santander Consumer
Auto Receivables
Funding 2016-L4 LLC
Santander Consumer
Auto Receivables
Funding 2017-L1 LLC
Santander Consumer
Auto Receivables
Funding 2017-L2 LLC
Santander Consumer
Auto Receivables
Funding 2017-L3 LLC
Santander Consumer
Auto Receivables
Funding 2017-L4 LLC
Santander Consumer
Auto Receivables
Funding 2018-L1 LLC
Santander Consumer
Auto Receivables
Funding 2018-L2 LLC
Santander Consumer
Auto Receivables
Funding 2018-L3 LLC
Santander Consumer
Auto Receivables
Funding 2018-L4 LLC
Santander Consumer
Auto Receivables
Funding 2018-L5 LLC
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
9
8
3
2
0.00%
69.71%
100.00%
100.00% Finance
54
company
0.00%
69.71%
100.00%
100.00% Finance
0.00%
69.71%
100.00%
0.00%
69.71%
100.00%
0.00%
69.71%
100.00%
0.00%
69.71%
100.00%
company
- Finance
company
- Finance
company
- Finance
company
- Finance
company
Santander Consumer Bank
Belgium
0.00%
100.00%
100.00%
100.00% Banking
Santander Consumer Bank AG Germany
0.00%
100.00%
100.00%
100.00% Banking
Santander Consumer Bank AS Norway
0.00%
100.00%
100.00%
100.00% Finance
company
Santander Consumer
Bank GmbH
Santander Consumer
Bank S.A.
Santander Consumer
Bank S.p.A.
Santander Consumer
Banque S.A.
Santander Consumer
Chile S.A.
Austria
0.00%
100.00%
100.00%
100.00% Banking
Poland
0.00%
80.48%
100.00%
100.00% Banking
Italy
0.00%
100.00%
100.00%
100.00% Banking
France
0.00%
100.00%
100.00%
100.00% Banking
Chile
51.00%
0.00%
51.00%
51.00% Finance
company
Santander Consumer
Credit Services Limited
Santander Consumer
Finance Benelux B.V.
United
Kingdom
The
Netherlands
Santander Consumer Finance
Global Services, S.L.
Spain
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Technology
services
Finland
0.00%
100.00%
100.00%
100.00% Finance
company
0
0
0
0
0
1,166
3,063
1,910
334
637
737
491
59
(35)
126
5
205
10
11
8
12
11
71
19
28
24
19
0
0
0
0
0
0
0
0
0
0
28
463
262
1,170
4,820
1,996
43
363
130
506
79
26
14
0
24
0
55
603
490
15
0
190
5
130
Santander Consumer
Finance Oy
Santander Consumer
Finance, S.A.
Santander Consumer
Finanse Sp. z o.o.
Santander Consumer
Holding Austria GmbH
Santander Consumer
Holding GmbH
Spain
75.00%
25.00%
100.00%
100.00% Banking
10,154
560
7,327
Poland
0.00%
80.48%
100.00%
100.00% Services
Austria
0.00%
100.00%
100.00%
100.00% Holding
company
15
364
0
21
13
518
Germany
0.00%
100.00%
100.00%
100.00% Holding
4,784
284
5,827
company
675
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Santander Consumer
International Puerto Rico LLC
Santander Consumer
Leasing GmbH
Santander Consumer
Mediación Operador de
Banca-Seguros Vinculado, S.L.
Santander Consumer
Multirent Sp. z o.o.
Santander Consumer
Operations Services GmbH
Santander Consumer
Receivables 10 LLC
Santander Consumer
Receivables 11 LLC
Santander Consumer
Receivables 3 LLC
Santander Consumer
Receivables 7 LLC
Santander Consumer
Receivables Funding LLC
Santander Consumer
Renting, S.L.
Santander Consumer
Services GmbH
Santander Consumer
Services, S.A.
Santander Consumer
Technology Services GmbH
Puerto Rico
0.00%
69.71%
100.00%
100.00% Services
Germany
0.00%
100.00%
100.00%
100.00% Leasing
Spain
0.00%
94.61%
100.00%
100.00%
Insurance
intermediary
Poland
0.00%
80.48%
100.00%
100.00% Leasing
Germany
0.00%
100.00%
100.00%
100.00% Services
United
States
United
States
United
States
United
States
United
States
Spain
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
69.71%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Leasing
Austria
0.00%
100.00%
100.00%
100.00% Services
Portugal
0.00%
100.00%
100.00%
100.00% Finance
company
Germany
0.00%
100.00%
100.00%
100.00%
It services
Million eurosa
Capital +
reserves Net results
Carrying
amount
6
20
1
23
9
712
233
213
301
0
36
0
6
12
2
40
0
2
0
27
(2)
60
68
0
1
0
2
2
5
101
0
5
18
0
0
0
0
0
39
0
5
24
Santander Consumer
USA Holdings Inc.
United
States
Santander Consumer USA Inc. United
States
0.00%
69.71%
69.71%
68.12% Holding
5,330
800
4,805
company
0.00%
69.71%
100.00%
100.00% Finance
4,860
(85)
3,329
company
Spain
0.00%
100.00%
100.00%
100.00% Finance
company
Mexico
0.00%
75.13%
100.00%
100.00% Cards
Chile
Chile
0.00%
67.20%
100.00%
100.00%
Insurance
brokerage
0.00%
83.23%
100.00%
Brazil
0.00%
89.85%
100.00%
100.00% Securities
company
100.00% Securities
company
488
597
84
54
127
90
505
155
566
2
2
58
46
15
120
Brazil
0.00%
89.85%
100.00%
100.00% Holding
497
82
518
company
Spain
81.00%
19.00%
100.00%
100.00% Fund
management
company
United
States
United
States
United
States
United
States
0.00%
69.71%
100.00%
100.00% Finance
-
-
-
b
b
b
-
-
-
company
- Securitisation
- Securitisation
- Securitisation
5
1
71
50
66
2
0
20
16
25
2
0
0
0
0
Santander Consumer,
EFC, S.A.
Santander Consumo, S.A. de
C.V., S.O.F.O.M., E.R., Grupo
Financiero Santander México
Santander Corredora
de Seguros Limitada
Santander Corredores
de Bolsa Limitada
Santander Corretora
de Câmbio e Valores
Mobiliários S.A.
Santander Corretora de
Seguros, Investimentos
e Serviços S.A.
Santander de Titulización
S.G.F.T., S.A.
Santander Drive Auto
Receivables LLC
Santander Drive Auto
Receivables Trust 2014-4
Santander Drive Auto
Receivables Trust 2014-5
Santander Drive Auto
Receivables Trust 2015-1
676
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Santander Drive Auto
Receivables Trust 2015-2
Santander Drive Auto
Receivables Trust 2015-3
Santander Drive Auto
Receivables Trust 2015-4
Santander Drive Auto
Receivables Trust 2015-5
Santander Drive Auto
Receivables Trust 2016-1
Santander Drive Auto
Receivables Trust 2016-2
Santander Drive Auto
Receivables Trust 2016-3
Santander Drive Auto
Receivables Trust 2017-1
Santander Drive Auto
Receivables Trust 2017-2
Santander Drive Auto
Receivables Trust 2017-3
Santander Drive Auto
Receivables Trust 2018-1
Santander Drive Auto
Receivables Trust 2018-2
Santander Drive Auto
Receivables Trust 2018-3
Santander Drive Auto
Receivables Trust 2018-4
Santander Drive Auto
Receivables Trust 2018-5
Santander Energías
Renovables I, S.C.R., S.A.
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
United
States
Spain
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
59.66%
0.00%
59.66%
59.66% Venture capital
Santander Equity
Investments Limited
United
Kingdom
0.00%
100.00%
100.00%
Spain
100.00%
0.00%
100.00%
100.00% Finance
company
100.00% Payment
services
Santander España Merchant
Services, Entidad de
Pago, S.L. Unipersonal
Santander Estates Limited
Santander F24 S.A.
United
Kingdom
Poland
0.00%
100.00%
100.00%
100.00% Real estate
0.00%
67.47%
100.00%
100.00% Finance
company
Santander Factoring S.A.
Chile
0.00%
99.84%
100.00%
100.00% Factoring
Santander Factoring Sp. z o.o. Poland
0.00%
67.47%
100.00%
100.00% Financial
services
Santander Factoring y
Confrming, S.A., E.F.C.
Spain
100.00%
0.00%
100.00%
100.00% Factoring
Santander FI Hedge Strategies Ireland
0.00%
89.85%
100.00%
100.00%
Investment
company
Santander Finance 2012-1 LLC United
States
0.00%
100.00%
100.00%
Santander Financial
Exchanges Limited
Santander Financial
Services, Inc.
United
Kingdom
100.00%
0.00%
100.00%
Puerto Rico
0.00%
100.00%
100.00%
Santander Finanse Sp. z o.o.
Poland
0.00%
67.47%
100.00%
Santander Fintech Limited
United
Kingdom
100.00%
0.00%
100.00%
100.00% Financial
services
100.00% Finance
company
100.00% Finance
company
100.00% Financial
services
100.00% Finance
company
53
35
24
26
(2)
(9)
(29)
(52)
(74)
(86)
0
0
0
0
0
11
43
204
4
0
42
14
220
473
2
0
166
49
84
24
22
28
25
30
43
59
55
69
71
(41)
(58)
(69)
(66)
(88)
0
6
4
0
0
1
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
6
45
180
0
0
43
1
96
126
(197)
247
0
0
(4)
8
68
2
0
162
20
87
677
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Spain
0.00%
100.00%
100.00%
100.00% Fund
5
(2)
3
Santander Fund
Administration, S.A.
Unipersonal
Santander Fundo de
Investimento Amazonas
Multimercado Crédito Privado
Investimento no Exterior o
Santander Fundo de
Investimento Diamantina
Multimercado Crédito Privado
Investimento no Exterior g
Santander Fundo de
Investimento Financial
Curto Prazo e
Santander Fundo de
Investimento Guarujá
Multimercado Crédito Privado
Investimento no Exterior d
Santander Fundo de
Investimento SBAC
Referenciado di
Crédito Privado h
Santander Fundo
de Investimento
Unix Multimercado
Crédito Privado o
Santander GBM Secured
Financing Designated
Activity Company i
Santander Gestión
de Recaudación y
Cobranzas Ltda.
Brazil
0.00%
89.85%
100.00%
100.00%
Brazil
0.00%
89.85%
100.00%
100.00%
Brazil
0.00%
89.85%
100.00%
100.00%
Brazil
0.00%
89.85%
100.00%
100.00%
Brazil
0.00%
85.75%
100.00%
100.00%
Brazil
0.00%
89.85%
100.00%
100.00%
management
company
Investment
fund
Investment
fund
Investment
fund
Investment
fund
Investment
fund
Investment
fund
Ireland
0.00%
0.00%
0.00%
- Securitisation
Chile
0.00%
99.84%
100.00%
100.00% Financial
services
Santander Global Consumer
Finance Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Finance
company
Santander Global
Facilities, S.A. de C.V.
Santander Global
Facilities, S.L.
Santander Global
Operations, S.A.
Santander Global
Property, S.L.
Santander Global
Services, S.A. j
Mexico
100.00%
0.00%
100.00%
100.00% Real estate
management
Spain
100.00%
0.00%
100.00%
100.00% Real estate
Spain
100.00%
0.00%
100.00%
100.00% Services
Spain
97.34%
2.66%
100.00%
100.00% Securities
investment
Uruguay
0.00%
100.00%
100.00%
100.00% Services
Santander Global Sport, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Sports activity
Spain
100.00%
0.00%
100.00%
-
It services
United
Kingdom
Brazil
Spain
Spain
Spain
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
89.85%
100.00%
-
-
-
b
b
b
-
-
-
-
Investment
fund
- Securitisation
- Securitisation
- Securitisation
Santander Global
Technology, S.L.
Santander Guarantee
Company
Santander Hermes
Multimercado Crédito
Privado Infraestructura
Fundo de Investimento t
Santander Hipotecario
1 Fondo de Titulización
de Activos
Santander Hipotecario
2 Fondo de Titulización
de Activos
Santander Hipotecario
3 Fondo de Titulización
de Activos
678
123
17
141
406
23
392
1,124
155
0
69
18
104
712
33
694
77
-
5
6
95
268
34
258
0
24
391
4
-
0
0
0
7
-
1
1
2
79
-
5
6
96
(25)
250
29
(5)
0
(6)
83
0
-
0
0
0
24
255
0
19
346
3
-
0
0
0
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Santander Holding
Imobiliária S.A.
Santander Holding
Internacional, S.A.
Brazil
0.00%
89.85%
100.00%
100.00% Real estate
5
(1)
4
Spain
99.95%
0.05%
100.00%
100.00% Holding
3,651
1
2,463
company
Santander Holdings USA, Inc. United
States
100.00%
0.00%
100.00%
100.00% Holding
17,842
618
12,392
company
Santander Inclusión
Financiera, S.A. de C.V.,
S.O.F.O.M., E.R., Grupo
Financiero Santander México
Santander Insurance
Agency, Inc.
Santander Insurance
Agency, U.S., LLC
Santander Insurance
Services UK Limited
Santander Intermediación
Correduría de Seguros, S.A.
Santander International
Limited
Santander International
Products, Plc. u
Mexico
0.00%
75.13%
100.00%
100.00% Finance
12
(5)
Puerto Rico
0.00%
100.00%
100.00%
100.00%
company
Insurance
brokerage
United
States
United
Kingdom
0.00%
100.00%
100.00%
100.00%
Insurance
100.00%
0.00%
100.00%
100.00% Asset
Spain
100.00%
0.00%
100.00%
100.00%
management
Insurance
brokerage
Jersey
0.00%
100.00%
100.00%
- Finance
company
Ireland
99.99%
0.01%
100.00%
100.00% Finance
company
7
1
39
19
0
1
1
0
1
1
0
0
5
8
1
40
18
0
0
Santander Inversiones S.A.
Chile
0.00%
100.00%
100.00%
100.00% Holding
1,448
204
1,032
Santander Investment
Bank Limited
Santander Investment
Chile Limitada
Bahamas
0.00%
100.00%
100.00%
100.00% Banking
company
Chile
0.00%
100.00%
100.00%
Santander Investment I, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Finance
company
100.00% Holding
company
Santander Investment Limited Bahamas
0.00%
100.00%
100.00%
100.00%
Inactive
Santander Investment
Securities Inc.
United
States
0.00%
100.00%
100.00%
100.00% Securities
company
Santander Investment, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Banking
Santander Inwestycje
Sp. z o.o.
Santander ISA
Managers Limited
Poland
0.00%
67.47%
100.00%
United
Kingdom
0.00%
100.00%
100.00%
100.00% Securities
company
100.00% Management
of funds and
portfolios
Santander Lease, S.A., E.F.C.
Spain
70.00%
30.00%
100.00%
100.00% Leasing
Ireland
-
b
-
- Securitisation
Santander Leasing Poland
Securitization 01 Designated
Activity Company
Santander Leasing S.A.
Santander Leasing S.A.
Arrendamento Mercantil
Santander Leasing, LLC
Santander Lending Limited
Santander Mediación
Operador de Banca-
Seguros Vinculado, S.A.
Poland
Brazil
United
States
United
Kingdom
0.00%
67.47%
100.00%
100.00% Leasing
0.00%
89.85%
99.99%
99.99% Leasing
0.00%
100.00%
100.00%
100.00% Leasing
0.00%
100.00%
100.00%
100.00% Mortgage credit
221
Spain
96.70%
3.30%
100.00%
100.00%
company
Insurance
intermediary
Santander Merchant S.A.
Argentina
0.00%
100.00%
100.00%
100.00% Finance
Santander Mortgage
Holdings Limited
United
Kingdom
0.00%
100.00%
100.00%
company
- Financial
services
Santander Operaciones
España, S.L.
Spain
100.00%
0.00%
100.00%
100.00% Services
954
543
219
0
402
191
9
14
90
0
130
1,305
13
5
0
0
18
(8)
899
16
0
0
14
0
0
8
14
0
4
73
(7)
5
5
0
0
0
321
27
0
416
186
7
6
35
0
30
1,163
7
225
2
2
0
18
679
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Santander Paraty Qif PLC
Ireland
0.00%
89.85%
100.00%
100.00%
Investment
fund
Santander Pensiones,
S.A., E.G.F.P.
Santander Pensões -
Sociedade Gestora de
Fundos de Pensões, S.A.
Spain
0.00%
100.00%
100.00%
Portugal
100.00%
0.00%
100.00%
Santander Prime Auto
Issuance Notes 2018-A
Designated Activity Company
Ireland
Santander Prime Auto
Issuance Notes 2018-B
Designated Activity Company
Ireland
Santander Prime Auto
Issuance Notes 2018-C
Designated Activity Company
Ireland
Santander Prime Auto
Issuance Notes 2018-D
Designated Activity Company
Ireland
Santander Prime Auto
Issuance Notes 2018-E
Designated Activity Company
Ireland
-
-
-
-
-
b
b
b
b
b
-
-
-
-
-
100.00% Pension fund
management
company
100.00% Pension fund
management
company
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
Santander Private Banking
Gestión, S.A., S.G.I.I.C.
Santander Private Banking
s.p.a. in Liquidazione j
Spain
100.00%
0.00%
100.00%
100.00% Fund
management
company
Italy
100.00%
0.00%
100.00%
100.00% Finance
company
Santander Private
Banking UK Limited
United
Kingdom
Santander Private Real Estate
Advisory & Management, S.A.
Spain
0.00%
100.00%
100.00%
100.00% Real estate
99.99%
0.01%
100.00%
100.00% Real estate
Santander Private Real
Estate Advisory, S.A.
Santander Real Estate,
S.G.I.I.C., S.A.
Santander Retail Auto
Lease Funding LLC
Santander Retail Auto
Lease Trust 2017-A
Santander Retail Auto
Lease Trust 2018-A
Santander Río Asset
Management Gerente
de Fondos Comunes
de Inversión S.A.
Spain
100.00%
0.00%
100.00%
100.00% Real estate
Spain
100.00%
0.00%
100.00%
100.00% Fund
management
company
United
States
United
States
United
States
0.00%
69.71%
100.00%
100.00% Securitisation
-
-
b
b
-
-
- Securitisation
- Securitisation
Argentina
0.00%
100.00%
100.00%
100.00% Fund
management
company
100.00% Advisory
services
Santander Río Servicios S.A.
Argentina
0.00%
99.97%
100.00%
Santander Río Trust S.A.
Argentina
0.00%
99.97%
100.00%
100.00% Services
Santander Río Valores S.A.
Argentina
0.00%
99.34%
100.00%
100.00% Securities
company
Santander S.A. Sociedad
Securitizadora
Santander Secretariat
Services Limited
Santander Securities LLC
United
Kingdom
United
States
Chile
0.00%
67.24%
100.00%
100.00% Fund
management
company
0.00%
100.00%
100.00%
100.00% Holding
0.00%
100.00%
100.00%
Santander Securities S.A.
Poland
0.00%
67.47%
100.00%
680
Million eurosa
Capital +
reserves Net results
Carrying
amount
473
(197)
248
14
19
118
4
0
0
0
0
0
52
39
285
5
11
118
0
55
0
1
0
0
3
1
0
0
29
17
4
7
2
9
(6)
1
0
1
0
0
16
59
3
0
0
1
0
0
4
0
0
0
0
0
35
33
389
4
12
118
0
0
0
3
0
0
4
1
0
company
100.00% Securities
company
- Securities
company
136
10
(110)
0
26
3
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Santander Securities Services
Brasil Distribuidora de Títulos
e Valores Mobiliários S.A.
Brazil
0.00%
100.00%
100.00%
100.00% Securities
207
19
213
investment
Santander Securities Services
Brasil Participações S.A.
Brazil
0.00%
100.00%
100.00%
100.00% Holding
company
Colombia
0.00%
100.00%
100.00%
100.00% Finance
company
223
10
21
(1)
272
11
Santander Securities
Services Colombia S.A.
Sociedad Fiduciaria
Santander Securities
Services, S.A. Unipersonal
Santander Seguros y
Reaseguros, Compañía
Aseguradora, S.A.
Santander Servicios
Corporativos, S.A. de C.V.
Santander Servicios
Especializados, S.A. de C.V.
Santander Speedboats
Holding Company, S.L.
Santander Technology
USA, LLC
Santander Tecnología
Argentina S.A.
Santander Tecnología
España, S.L.
Santander Totta Seguros,
Companhia de Seguros
de Vida, S.A.
Spain
0.00%
100.00%
100.00%
100.00% Banking
512
52
372
Spain
100.00%
0.00%
100.00%
100.00%
Insurance
1,169
132
1,188
Mexico
0.00%
75.14%
100.00%
100.00% Services
Mexico
0.00%
75.13%
100.00%
Spain
99.97%
0.03%
100.00%
100.00% Financial
services
- Holding
company
5
2
0
1
0
0
5
1
0
United
States
0.00%
100.00%
100.00%
100.00%
It services
138
(29)
109
Argentina
0.00%
99.34%
100.00%
100.00%
It services
Spain
100.00%
0.00%
100.00%
100.00%
It services
Portugal
0.00%
99.90%
100.00%
100.00%
Insurance
2
35
93
1
5
18
3
35
47
Santander Totta, SGPS, S.A.
Portugal
0.00%
99.90%
99.90%
99.90% Holding
3,357
630
3,923
Poland
50.00%
33.74%
100.00%
100.00% Fund
company
management
company
Hong-Kong
0.00%
100.00%
100.00%
100.00%
Inactive
4
17
0
44
39
0
0
16
0
-
b
-
- Charitable
services
77.67%
22.33%
100.00%
100.00% Finance
13,492
1,400
20,327
company
100.00%
0.00%
100.00%
100.00% Finance
company
0.00%
100.00%
100.00%
100.00% Services
49
17
0
3
45
17
0.00%
100.00%
100.00%
100.00% Banking
14,361
2,291
14,559
0.00%
100.00%
100.00%
100.00%
It services
0.00%
75.13%
100.00%
100.00% Finance
company
6
330
Mexico
-
b
-
- Securitisation
5
10
22
0
6
260
0
Santander Towarzystwo
Funduszy Inwestycyjnych S.A.
Santander Trade
Services Limited
Santander UK
Foundation Limited
Santander UK Group
Holdings plc
Santander UK Investments
Santander UK
Operations Limited
Santander UK plc
Santander UK
Technology Limited
Santander Vivienda, S.A. de
C.V., S.O.F.O.M., E.R., Grupo
Financiero Santander México
Santander Vivienda, S.A.
de C.V., S.O.F.O.M., E.R.,
Grupo Financiero Santander
México como Fiduciaria
del Fideicomiso Bursa
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
Mexico
Santusa Holding, S.L.
Spain
69.76%
30.24%
100.00%
100.00% Holding
6,903
718
6,460
SC Austria Finance 2013-1 S.A. Luxembourg
SC Germany Auto 2013-2
UG (haftungsbeschränkt) j
Germany
-
-
b
b
-
-
company
- Securitisation
- Securitisation
0
0
0
0
0
0
681
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
% of ownership
held by the Bank
% of voting powerk
Direct
Indirect
Year 2018
Year 2017 Activity
Million eurosa
Capital +
reserves Net results
Carrying
amount
Subsidiaries of Banco Santander, S.A.1
Company
SC Germany Auto 2014-1
UG (haftungsbeschränkt) j
SC Germany Auto 2014-2
UG (haftungsbeschränkt)
SC Germany Auto 2016-1
UG (haftungsbeschränkt)
SC Germany Auto 2016-2
UG (haftungsbeschränkt)
SC Germany Auto 2017-1
UG (haftungsbeschränkt)
SC Germany Auto 2018-1
UG (haftungsbeschränkt)
Location
Germany
Germany
Germany
Germany
Germany
Germany
SC Germany Consumer 2013-1
UG (haftungsbeschränkt) j
Germany
SC Germany Consumer 2014-1
UG (haftungsbeschränkt)
Germany
SC Germany Consumer 2015-1
UG (haftungsbeschränkt)
Germany
SC Germany Consumer 2016-1
UG (haftungsbeschränkt)
Germany
SC Germany Consumer 2017-1
UG (haftungsbeschränkt)
Germany
SC Germany Consumer 2018-1
UG (haftungsbeschränkt)
Germany
SC Germany Vehicles 2013-1
UG (haftungsbeschränkt)
Germany
SC Germany Vehicles 2015-1
UG (haftungsbeschränkt)
Germany
SC Poland Consumer
15-1 Sp. z.o.o.
SC Poland Consumer
16-1 Sp. z o.o.
SCF Ajoneuvohallinto
I Limited
SCF Ajoneuvohallinto
II Limited
SCF Ajoneuvohallinto
KIMI VI Limited
SCF Ajoneuvohallinto
VII Limited
Poland
Poland
Ireland
Ireland
Ireland
Ireland
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
SCF Eastside Locks GP Limited United
0.00%
100.00%
100.00%
100.00% Real estate
SCF Rahoituspalvelut I
Designated Activity Company
Kingdom
Ireland
SCF Rahoituspalvelut II
Designated Activity Company
Ireland
SCF Rahoituspalvelut KIMI VI
Designated Activity Company
Ireland
SCF Rahoituspalvelut VII
Designated Activity Company
Ireland
SCFI Ajoneuvohallinto
Limited j
Ireland
SCFI Rahoituspalvelut
Designated Activity Company j
Ireland
Secucor Finance
2013-I Designated
Activity Company q
Ireland
-
-
-
-
-
-
-
b
b
b
b
b
b
b
-
-
-
-
-
-
-
management
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
(1)
Services and Promotions
Delaware Corp.
United
States
0.00%
100.00%
100.00%
100.00% Holding
company
682
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
59
0
0
0
0
0
0
0
0
0
0
0
(16)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
62
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Services and Promotions
Miami LLC
Servicio de Alarmas
Controladas por
Ordenador, S.A.
Servicios Corporativos
Seguros Serfn, S.A. de C.V. j
Servicios de Cobranza,
Recuperación y
Seguimiento, S.A. de C.V.
United
States
Spain
0.00%
100.00%
100.00%
100.00% Real estate
99.99%
0.01%
100.00%
100.00% Security
Mexico
0.00%
85.30%
100.00%
100.00% Services
Mexico
0.00%
85.00%
85.00%
85.00% Finance
company
Sheppards Moneybrokers
Limited
United
Kingdom
0.00%
100.00%
100.00%
100.00% Advisory
services
Million eurosa
Capital +
reserves Net results
Carrying
amount
50
1
0
30
0
88
(6)
-
1
36
32
0
36
125
127
3
0
0
1
0
8
53
1
0
7
0
307
(7)
73
0
-
2
27
(1)
0
1
3
4
0
-
1
59
17
0
37
128
130
49
0
0
0
49
0
31
8
0
5
0
0
56
4
0
0
1
0
2
0
10
10
0
0
0
0
0
Shiloh III Wind Project, LLC
SI Distribuidora de Títulos
e Valores Mobiliários S.A.
Silk Finance No. 4
Sobrinos de José Pastor
Inversiones, S.A. i
Sociedad Integral
de Valoraciones
Automatizadas, S.A.
Socur, S.A. f
Sol Orchard Imperial 1 LLC c
Solarlaser Limited
Sovereign Community
Development Company
Sovereign Delaware
Investment Corporation
United
States
Brazil
Portugal
Spain
United
States
United
Kingdom
United
States
United
States
Sovereign Lease Holdings, LLC United
States
Sovereign REIT Holdings, Inc. United
States
Sovereign Securities
Corporation, LLC
United
States
0.00%
100.00%
100.00%
100.00% Electricity
298
production
0.00%
89.85%
100.00%
100.00% Leasing
-
b
-
- Securitisation
0.00%
0.00%
0.00%
100.00% Holding
company
Spain
100.00%
0.00%
100.00%
100.00% Appraisals
Uruguay
100.00%
0.00%
100.00%
100.00% Finance
company
0.00%
56.88%
100.00%
100.00% Electricity
production
0.00%
100.00%
100.00%
100.00% Real estate
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Holding
0.00%
100.00%
100.00%
company
100.00% Financial
services
0.00%
100.00%
100.00%
100.00%
Inactive
company
0.00%
100.00%
100.00%
100.00% Holding
7,006
154
7,160
Sovereign Spirit Limited n
Bermudas
0.00%
100.00%
100.00%
100.00% Leasing
Sterrebeeck B.V.
The
Netherlands
100.00%
0.00%
100.00%
100.00% Holding
4,481
643
11,093
company
Suleyado 2003, S.L.
Unipersonal
Super Pagamentos e
Administração de Meios
Eletrônicos S.A.
Superdigital Holding
Company, S.L.
Suzuki Servicios
Financieros, S.L.
Spain
0.00%
100.00%
100.00%
100.00% Securities
Brazil
0.00%
89.85%
100.00%
Spain
99.97%
0.03%
100.00%
investment
100.00% Payment
services
- Holding
company
Spain
0.00%
51.00%
51.00%
51.00%
Intermediation
Svensk Autofnans WH 1
Designated Activity Company
Ireland
-
b
-
- Securitisation
Swesant SA
Switzerland
0.00%
100.00%
100.00%
100.00% Holding
company
Portugal
0.00%
99.86%
100.00%
100.00% Holding
company
Taxagest Sociedade Gestora
de Participações Sociais, S.A.
Teatinos Siglo XXI
Inversiones S.A.
Chile
50.00%
50.00%
100.00%
100.00% Holding
3,090
273
2,524
company
683
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
The Alliance & Leicester
Corporation Limited
The Best Specialty Cofee,
S.L. Unipersonal
Tikgi Aviation One Designated
Activity Company
Location
United
Kingdom
Direct
Indirect
Year 2018
Year 2017 Activity
0.00%
100.00%
100.00%
100.00% Real estate
Spain
100.00%
0.00%
100.00%
100.00% Restaurants
Ireland
100.00%
0.00%
100.00%
- Renting
Time Retail Finance Limited j United
Kingdom
Tonopah Solar I, LLC
TOPSAM, S.A de C.V.
United
States
Mexico
0.00%
100.00%
100.00%
100.00% Services
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00% Fund
Toque Fale Serviços de
Telemarketing Ltda.
Tornquist Asesores
de Seguros S.A. j
Totta (Ireland), PLC h
Totta Urbe - Empresa
de Administração e
Construções, S.A.
Trabajando.com Colombia
Consultoría S.A.S.
Trabajando.com
México, S.A. de C.V.
management
company
Brazil
0.00%
79.52%
100.00%
100.00% Telemarketing
Argentina
0.00%
99.99%
99.99%
99.99% Advisory
services
Ireland
0.00%
99.86%
100.00%
100.00% Finance
company
Portugal
0.00%
99.86%
100.00%
100.00% Real estate
Colombia
0.00%
100.00%
100.00%
- Services
Mexico
0.00%
100.00%
100.00%
- Services
Trabajando.com Perú S.A.C.
Peru
0.00%
100.00%
100.00%
Brazil
0.00%
100.00%
100.00%
- Services
- Services
Portugal
0.00%
100.00%
100.00%
- Services
Trade Maps 3 Ireland Limited
Ireland
Trans Rotor Limited
United
Kingdom
Hong-Kong
-
-
b
b
-
-
- Securitisation
- Securitisation
100.00%
0.00%
100.00%
100.00% Renting
Transolver Finance EFC, S.A.
Spain
0.00%
51.00%
51.00%
51.00% Leasing
Tuttle and Son Limited
Universia Brasil S.A.
Universia Chile S.A.
United
Kingdom
Brazil
Chile
0.00%
100.00%
100.00%
100.00% Payments and
collections
services
0.00%
100.00%
100.00%
100.00%
Internet
0.00%
86.84%
86.84%
86.72%
Internet
Universia Colombia S.A.S.
Colombia
0.00%
100.00%
100.00%
100.00%
Internet
Universia España Red de
Universidades, S.A.
Spain
0.00%
89.45%
89.45%
89.45%
Internet
Trabalhando.com Brasil
Consultoria Ltda.
Trabalhandopontocom
Portugal - Sociedade
Unipessoal, Lda. c j
Trade Maps 3 Hong
Kong Limited
Million eurosa
Capital +
reserves Net results
Carrying
amount
13
1
0
0
32
2
1
0
450
30
1
0
0
3
0
0
0
16
45
0
0
0
0
1
0
0
(1)
0
13
0
0
0
(22)
10
1
0
0
7
(4)
0
0
0
0
0
0
0
2
7
0
0
0
0
0
1
1
0
450
0
0
0
0
0
0
0
0
15
17
0
0
0
0
2
Universia Holding, S.L.
Spain
100.00%
0.00%
100.00%
100.00% Holding
22
(7)
21
company
Universia México, S.A. de C.V. Mexico
0.00%
100.00%
100.00%
100.00%
Internet
Universia Perú, S.A.
Universia Uruguay, S.A.
W.N.P.H. Gestão e
Investimentos Sociedade
Unipessoal, S.A.
Peru
Uruguay
Portugal
0.00%
96.51%
96.51%
96.51%
Internet
0.00%
100.00%
100.00%
100.00%
Internet
0.00%
100.00%
100.00%
100.00% Portfolio
management
0
0
0
0
Wallcesa, S.A.
Spain
100.00%
0.00%
100.00%
100.00% Securities
(942)
Wave Holdco, S.L.
Spain
100.00%
0.00%
100.00%
investment
- Holding
company
41
0
0
0
0
0
0
0
0
0
0
0
33
684
2018 Auditors’ report and consolidated annual accounts
Subsidiaries of Banco Santander, S.A.1
% of ownership
held by the Bank
% of voting powerk
Company
Location
Direct
Indirect
Year 2018
Year 2017 Activity
Wave SME Holdings Limited United
0.00%
100.00%
100.00%
100.00% Holding
Wave SME Technology
Limited
Waypoint Insurance
Group, Inc.
Whitewick Limited
Kingdom
United
Kingdom
United
States
Jersey
WIM Servicios Corporativos, Mexico
S.A. de C.V.
company
0.00%
100.00%
100.00%
100.00% Technology
services
0.00%
100.00%
100.00%
100.00% Holding
company
0.00%
100.00%
100.00%
100.00%
Inactive
0.00%
100.00%
100.00%
100.00% Advisory
WTW Shipping Designated
Activity Company
Ireland
100.00%
0.00%
100.00%
100.00% Leasing
Million eurosa
Capital +
reserves Net results
Carrying
amount
0
0
9
0
0
11
0
0
0
0
0
1
0
0
9
0
0
9
a. Amount per provisional books of each company as of the date of publication of these annexes, generally referred to 31 December 2018 without
considering, where appropriate, the interest dividends that has been made in the year. In the carrying amount (net cost of provision), the Group´s
ownership percentage has been applied to the number of each of the holders, without considering the impairment of goodwill incurred in the
consolidation process. The Data from foreign companies are converted in to euros at the exchange rate at the end of the period.
b. Companies over which efective control is exercised.
c. Data from the latest approved fnancial statement as at 31 December 2017.
d. Data from the latest approved fnancial statement as at 31 March 2018.
e. Data from the latest approved fnancial statement as at 30 June 2018.
f. Data from the latest approved fnancial statement as at 30 September 2018.
g. Data from the latest approved fnancial statement as at 31 July 2018.
h. Data from the latest approved fnancial statement as at 30 November 2018.
i. Company in process of merger or liquidation. Pending of being registered.
j. Company in liquidation at 31 December 2018.
k. Pursuant to Article 3 of Royal Decree 1159/2010, of 17 September approving the rules for the preparation of consolidated fnancial statements, in order
to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group companies
was added to the voting power directly held by the Parent. For these purposes, the number of votes corresponding to the Parent in relation to
companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such
companies.
l. Data from the latest fnancial statement as at 31 December 2016.
m. See note 2.b.i
n. Company resident in the UK for tax purposes.
o. Data from the latest approved fnancial statement as at 28 February 2018.
p. Data from the latest approved fnancial statement as at 31 May 2018.
q. Data from the latest approved fnancial statement as at 31 January 2018.
r. Data from the latest available approved fnancial statement as at 31 December 2004.
s. Data from the latest approved fnancial statement as at 31 October 2018.
t. Newly incorporated society, without approval of the fnancial statements.
u. Company resident in Spain for tax purposes.
1. Companies issuing shares and preference shares are listed in annex III, together with other relevant information.
685
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Appendix II
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
3E1 Sp. z o.o b
Poland
0.00% 12.89% 21.60% 21.60% Electricity
production
Type of
company
-
Administrador
Financiero de
Transantiago S.A.
Aegon Santander
Portugal Não Vida
- Companhia de
Seguros, S.A.
Aegon Santander
Portugal Vida -
Companhia de
Seguros Vida, S.A.
Chile
0.00% 13.42% 20.00% 20.00% Payments and
Associated
collections
services
Portugal
0.00% 48.95% 49.00% 49.00% Insurance
Portugal
0.00% 48.95% 49.00% 49.00% Insurance
Jointly
controlled
Jointly
controlled
Million eurosa
Capital +
Assets reserves Net results
0
70
33
(2)
19
14
2
4
3
99
19
12
Aeroplan - Sociedade Portugal
Construtora de
Aeroportos, Lda. e
0.00% 19.97% 20.00% 20.00% Inactive
-
0
0
Spain
36.78% 0.00% 36.78% 36.78% Food
Associated
24
(40)
Aguas de
Fuensanta, S.A. e
Alawwal Bank
(consolidado) b
Alcuter 2, S.L. k
Allianz Popular, S.L.
(Consolidado)
Anekis, S.A.
Spain
Spain
Spain
Arena Communications Spain
Network, S.L. b
Attijariwafa Bank
Société Anonyme
(consolidado) b
Autopistas del
Sol S.A. b
Aviva Powszechne
Towarzystwo
Emerytalne Aviva
Santander S.A. b
Aviva Towarzystwo
Ubezpieczeń na
Życie S.A. b
Banco Hyundai
Capital Brasil S.A.
Saudi Arabia
0.00% 11.16%
11.16%
11.16% Banking
23,746
2,916
318
-
-
37.23% 0.00%
37.23% 37.23% Technical services
-
40.00% 0.00% 40.00% 40.00% Insurance
Associated
3,238
24.75% 24.75% 49.50% 49.50% Advertising
Associated
20.00% 0.00% 20.00% 20.00% Advertising
Associated
2
10
-
98
2
4
-
113
(1)
10
Morocco
0.00%
5.11%
5.11%
5.26% Banking
Argentina
0.00% 14.17%
14.17%
14.17% Motorway
concession
Poland
0.00% 6.75% 10.00% 10.00% Pension fund
management
company
Poland
0.00% 6.75% 10.00% 10.00% Insurance
-
-
-
-
43,401
4,035
601
28
120
2
114
5
24
3,716
350
132
Brazil
0.00% 44.93% 50.00%
- Finance company
Banco RCI Brasil S.A.
Brazil
0.00% 35.84% 39.89% 39.89% Leasing
Jointly
controlled
Jointly
controlled
48
22
2,572
234
Bank of Beijing
Consumer Finance
Company
China
0.00% 20.00% 20.00% 20.00% Finance company
Associated
584
94
Bank of Shanghai Co., China
Ltd. (consolidado) b
6.50% 0.00%
6.50%
6.48% Banking
-
229,555
16,775
1,948
Benim - Sociedade
Imobiliária, S.A. b
Portugal
0.00% 25.77%
25.81% 25.81% Real estate
Associated
Câmara Interbancária Brazil
de Pagamentos - CIP
0.00% 15.82%
17.61%
- Payments and
collections
services
-
11
122
Cantabria Capital,
SGEIC, S.A.
Spain
50.00% 0.00% 50.00% 50.00% Management of
Associated
0
venture capital
7
54
0
0
23
0
686
0
0
0
50
7
2018 Auditors’ report and consolidated annual accounts Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
Portugal
0.00% 49.98%
49.98%
49.98% Real estate
services
Chile
0.00% 22.37%
33.33%
33.33% Payments and
Associated
collections
services
Spain
0.00% 49.00%
49.00% 49.00% Technology
Associated
Type of
company
Jointly
controlled
Million eurosa
Capital +
Assets reserves Net results
1
9
3
0
6
2
0
1
0
CCPT - ComprarCasa,
Rede Serviços
Imobiliários, S.A.
Centro de
Compensación
Automatizado S.A.
Centro para
el Desarrollo,
Investigación y
Aplicación de Nuevas
Tecnologías, S.A. b
CNP Santander
Insurance Europe
Designated Activity
Company
CNP Santander
Insurance Life
Designated Activity
Company
CNP Santander
Insurance Services
Ireland Limited
Cobranza Amigable,
S.A.P.I. de C.V.
Comder Contraparte
Central S.A
Companhia
Promotora UCI
Compañia Española
de Financiación de
Desarrollo, Cofdes,
S.A., SME b
Compañía Española
de Seguros de Crédito
a la Exportación,
S.A., Compañía de
Seguros y Reaseguros
(consolidado) b
Compañía Española
de Viviendas en
Alquiler, S.A.
Compañía para
los Desarrollos
Inmobiliarios de la
Ciudad de Hispalis,
S.L., en liquidación l e
Ireland
49.00%
0.00%
49.00% 49.00% Insurance
brokerage
Associated
886
96
31
Ireland
49.00%
0.00%
49.00% 49.00% Insurance
brokerage
Associated
1,426
203
45
Ireland
49.00%
0.00%
49.00% 49.00% Services
Associated
Mexico
0.00% 33.78%
39.74%
39.74% Collection services Jointly
controlled
8
7
Chile
0.00%
7.54%
11.23%
11.23% Financial services Associated
28
Brazil
0.00% 25.00%
25.00%
25.00% Financial services
Jointly
controlled
1
2
0
14
(1)
Spain
20.18%
0.00%
20.18%
- Finance company
-
129
116
1
0
1
0
9
Spain
23.33%
0.55%
23.88%
21.08% Credit insurance
-
803
361
23
Spain
24.07%
0.00%
24.07%
24.07% Real estate
Associated
466
271
33
Spain
21.98%
0.00%
21.98%
21.98% Real estate
development
38
(238)
(86)
-
-
-
-
-
Condesa Tubos, S.L. b
Spain
36.21%
0.00%
36.21%
30.61% Services
Corkfoc Cortiças, S.A. b Portugal
0.00% 27.54%
27.58%
- Cork industry
Corridor Texas
Holdings LLC
(consolidado) b
United
States
0.00% 29.47%
29.47%
32.61% Holding company
Eko Energy Sp. z o.o b Poland
0.00%
13.13%
22.00%
22.00% Electricity
production
162
3
205
0
Euro Automatic Cash
Entidad de Pago, S.L.
FAFER-
Empreendimentos
Urbanísticos e de
Construção, S.A. b e
Spain
50.00%
0.00%
50.00% 50.00% Payment services Associated
99
Portugal
0.00% 36.57%
36.62%
36.62% Real estate
-
0
32
20
197
4
74
1
(6)
0
(3)
(4)
(18)
0
687
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Million eurosa
Capital +
Assets reserves Net results
0
0
0
87,042
4,007
297
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
FC2Egestión, S.L.
Spain
50.00%
0.00%
50.00% 50.00% Environmental
management
Federal Home Loan
Bank of Pittsburgh b
Federal Reserve
Bank of Boston b
FIDC RCI Brasil
I – Financiamento
de Veículos c
FIDC RN Brasil –
Financiamento
de Veículos
United
States
United
States
Brazil
Brazil
Fondo de Titulización Spain
de Activos UCI 11
Fondo de Titulización Spain
de Activos UCI 14
Fondo de Titulización Spain
de Activos UCI 15
Fondo de Titulización Spain
de Activos UCI 16
Fondo de Titulización Spain
de Activos UCI 17
Fondo de Titulización Spain
de Activos,
RMBS Prado I
Fondo de Titulización Spain
Hipotecaria UCI 10
Fondo de Titulización Spain
Hipotecaria UCI 12
Fondo de Titulización, Spain
RMBS Prado II
Fondo de Titulización, Spain
RMBS Prado III
Fondo de Titulización, Spain
RMBS Prado IV
Fondo de Titulización, Spain
RMBS Prado V
Fondo de Titulización, Spain
RMBS Prado VI
0.00%
6.33%
6.33%
6.33% Banking
0.00% 30.09%
30.09%
30.44% Banking
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
(h)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
- Securitisation
Fortune Auto
Finance Co., Ltd
China
0.00% 50.00%
50.00% 50.00% Finance company
Type of
company
Jointly
controlled
-
-
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
87,860
1,516
142
38
166
71
180
487
576
800
676
366
105
255
454
375
369
398
427
0
0
0
0
0
0
0
0
0
0
0
0
0
2,083
219
Friedrichstrasse, S.L.
Spain
35.00%
0.00%
35.00%
35.00% Real estate
Associated
Gestora de Inteligência Brazil
de Crédito S.A.
0.00%
17.97%
20.00%
20.00% Collection services Jointly
controlled
0
76
Gire S.A.
Argentina
0.00% 57.92%
58.33%
58.33% Payments and
Associated
118
0
73
14
collections
services
Grupo Financiero
Ve Por Más, S.A. de
C.V. (consolidado)
Mexico
24.99%
0.00%
24.99%
24.99% Financial services Associated
2,589
211
HCUK Auto Funding
2016-1 Ltd e
United
Kingdom
HCUK Auto Funding
2017-1 Ltd
United
Kingdom
-
-
(h)
(h)
-
-
- Securitisation
- Securitisation
Jointly
controlled
Jointly
controlled
0
168
0
0
688
22
9
11
0
0
0
0
0
0
0
0
0
0
0
0
0
49
0
(6)
17
2
0
0
2018 Auditors’ report and consolidated annual accounts
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
-
(h)
-
- Securitisation
0.00% 22.37%
22.37%
- Real estate
-
Type of
company
Jointly
controlled
Million eurosa
Capital +
Assets reserves Net results
615
15
0
15
0
0
HCUK Auto Funding
2017-2 Ltd
United
Kingdom
Healthy
Neighborhoods
Equity Fund I LP b
United
States
Hyundai Capital
UK Limited
United
Kingdom
0.00% 50.01%
50.01%
50.01% Finance company
Jointly
controlled
3,206
155
36
Imperial Holding
S.C.A. e i
Luxembourg
0.00% 36.36%
36.36%
36.36% Securities
investment
Imperial Management Luxembourg
S.à r.l. m e
0.00% 40.20%
40.20% 40.20% Holding company
Inbond Inversiones
2014, S.L. b
Spain
40.00%
0.00%
40.00% 40.00% Financial studies
Indice Iberoamericano Spain
de Investigación y
Conocimiento, A.I.E.
0.00% 51.00%
51.00%
51.00% Information
system
-
-
Jointly
controlled
Jointly
controlled
0
0
(113)
0
225
225
0
0
1
2
(3)
(1)
Inmo Alemania
Gestión de Activos
Inmobiliarios, S.A.
Spain
0.00% 20.00%
20.00%
20.00% Holding company
-
40
19
Inverlur Aguilas I, S.L. Spain
50.00%
0.00%
50.00% 50.00% Real estate
Inverlur Aguilas II, S.L. Spain
50.00%
0.00%
50.00% 50.00% Real estate
Jointly
controlled
Jointly
controlled
Inversiones en Resorts Spain
Mediterráneos, S.L. e
0.00% 43.28%
43.28%
43.28% Real estate
Associated
Spain
25.42%
0.00%
25.42%
25.42% Venture capital
-
0
1
0
26
0
1
(2)
22
0.00% 49.00%
49.00% 49.00% Securities and real Associated
326
326
estate investment
0.00% 49.00%
49.00% 49.00% Securities and real Associated
429
319
estate investment
0.00%
14.23%
21.09%
21.09% Trade
0.00%
10.60%
4.99%
4.99% Holding company
0.00% 69.40%
4.43%
4.43% Holding company
Canada
0.00%
7.67%
4.99%
4.99% Holding company
Mauritania
0.00% 69.52%
4.43%
4.43% Holding company
Canada
Brazil
0.00% 96.45%
4.99%
4.99% Holding company
0.00% 32.08%
35.70%
- Business services
-
-
-
-
-
-
Jointly
controlled
Jointly
controlled
2
2
82
68
1
129
8
1
(4)
2
74
60
2
133
7
0
Luri 3, S.A.
Spain
10.00%
0.00%
10.00%
10.00% Real estate
Lusimovest Fundo
de Investimento
Imobiliário
Portugal
0.00% 25.73%
25.77%
25.77% Investment fund
Associated
106
98
Chile
Chile
Poland
United
States
Canada
Inversiones
Ibersuizas, S.A. b
Inversiones ZS
América Dos Ltda
Inversiones ZS
América SpA
Invico S.A. b
J.C. Flowers I L.P. b
J.C. Flowers II-A L.P.
(consolidado) b
JCF AIV P L.P. b
JCF BIN II-A d
Jupiter III L.P. b
Loop Gestão de
Pátios S.A.
Massachusetts
United
Business Development States
Corp. (consolidado) b
MB Capital Fund
IV, LLC b
Merlin Properties,
SOCIMI, S.A.
(consolidado) b
United
States
Spain
0.00% 21.60%
21.60%
21.60% Finance company
-
0.00% 23.94%
23.94%
23.94% Finance company
-
66
15
9
9
16.88%
5.60%
22.48%
22.57% Real estate
Associated
12,005
4,623
1,100
689
3
0
0
(1)
4
62
65
0
(1)
8
9
(1)
(4)
(1)
0
2
(1)
1
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Metrovacesa, S.A.
(consolidado) b
New PEL S.à r.l. b
NIB Special
Investors IV-A LP b
NIB Special Investors
IV-B LP b
Niuco 15, S.L. k
Norchem Holdings
e Negócios S.A.
Nowotna Farma
Wiatrowa Sp. z o.o b
Odc Ambievo
Tecnologia e Inovacao
Ambiental, Industria e
Comercio de Insumos
Naturais S.A.
Olivant Limited
(consolidado) m
POLFUND -
Fundusz Poręczeń
Kredytowych S.A.
Prisma Medios
de Pago S.A.
Procapital -
Investimentos
Imobiliários, S.A. b e
69
49
15
-
28
18
98
4
68
42
13
-
21
11
11
4
0
0
19
0
1
20
60
13
0
7
2
-
1
0
0
0
0
0
0
4
0
1
1
24
0
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
Type of
company
Million eurosa
Capital +
Assets reserves Net results
Spain
31.94%
17.46%
49.40%
71.45% Real estate
Associated
2,547
2,397
(39)
development
Luxembourg
0.00%
7.67%
0.00%
0.00% Holding company
Canada
0.00% 99.55%
4.99%
4.99% Holding company
Canada
0.00% 93.42%
4.99%
4.99% Holding company
-
-
-
Spain
Brazil
37.23%
0.00%
37.23%
- Technical services -
0.00%
19.54%
29.00%
29.00% Holding company Associated
Norchem Participações Brazil
e Consultoria S.A.
0.00% 44.93%
50.00% 50.00% Securities
company
Jointly
controlled
Poland
0.00%
12.96%
21.73%
21.60% Electricity
production
Brazil
0.00%
18.14%
20.19%
20.19% Technology
-
-
Guernsey
0.00%
10.39%
10.39%
10.39% Holding company
-
18
14
Operadora de Activos Mexico
Alfa, S.A. De C.V. e
Operadora de Activos Mexico
Beta, S.A. de C.V.
Operadora de Tarjetas Chile
de Crédito Nexus S.A.
0.00% 49.98%
49.98%
49.98% Finance company Associated
0.00% 49.99%
49.99%
49.99% Finance company Associated
0.00%
8.66%
12.90%
12.90% Cards
Associated
Parque Solar
Páramo, S.L.
Spain
92.00%
0.00%
25.00%
25.00% Electricity
production
Jointly
controlled
Payever GmbH
Germany
0.00%
10.00%
10.00%
10.00% Software
Associated
Poland
0.00% 33.74%
50.00% 50.00% Management
Associated
0
0
44
30
2
25
Argentina
0.00%
18.39%
18.52%
17.47% Business services Associated
440
Portugal
0.00% 39.96%
40.00% 40.00% Real estate
-
4
Project Quasar
Investments 2017, S.L.
Spain
49.00%
0.00%
49.00%
- Finance company Associated
11,571
2,926
1,023
PSA Corretora
de Seguros e
Serviços Ltda.
PSA Insurance
Europe Limited
PSA Life Insurance
Europe Limited
Brazil
0.00% 44.93%
50.00% 50.00% Insurance
Malta
0.00% 50.00%
50.00% 50.00% Insurance
Malta
0.00% 50.00%
50.00% 50.00% Insurance
Jointly
controlled
Jointly
controlled
Jointly
controlled
PSA UK Number 1 plc United
0.00% 50.00%
50.00% 50.00% Leasing
Associated
Kingdom
Chile
Spain
0.00% 22.44%
33.43%
33.43% Services
20.00%
0.08%
20.08%
20.00% Cards
Spain
0.00% 50.00%
50.00% 50.00% Services
Associated
Associated
Jointly
controlled
Redbanc S.A.
Redsys Servicios de
Procesamiento, S.L.b
Retama Real
Estate, S.A.
690
1
0
158
51
72
5
26
137
9
5
10
41
0
12
8
0
1
9
45
(40)
(2)
2018 Auditors’ report and consolidated annual accounts
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
Type of
company
Million eurosa
Capital +
Assets reserves Net results
Rías Redbanc, S.A.
Uruguay
0.00% 25.00%
25.00%
25.00% Services
-
Saite, S.A.
Spain
50.00%
0.00%
50.00% 50.00% Real estate
Jointly
controlled
Santander Auto S.A.
Brazil
0.00% 44.93%
50.00%
- Insurance
Associated
3
29
3
Poland
0.00% 33.06%
49.00% 49.00% Insurance
Associated
239
Santander Aviva
Towarzystwo
Ubezpieczeń na
Życie S.A.
Santander Aviva
Towarzystwo
Ubezpieczeń S.A.
Santander
Generales Seguros
y Reaseguros, S.A.
Santander
Vida Seguros y
Reaseguros, S.A.
Saturn Japan II
Sub C.V. b
Saturn Japan
III Sub C.V. b
Sepacon 31, S.L. k
Servicios de
Infraestructura de
Mercado OTC S.A
SIBS SGPS, S.A. b
Sistemas Técnicos
de Encofrados, S.A.
(consolidado) b
Sociedad Conjunta
para la Emisión y
Gestión de Medios
de Pago, E.F.C., S.A.
Sociedad de Garantía
Recíproca de
Santander, S.G.R. b
Sociedad de Gestión
de Activos Procedentes
de la Reestructuración
Bancaria, S.A. b
Sociedad Española
de Sistemas de
Pago, S.L. b
Sociedad Interbancaria
de Depósitos de
Valores S.A.
Solar Energy Capital
Europe S.à r.l.
(consolidado) b
Poland
0.00% 33.06%
49.00% 49.00% Insurance
Associated
142
37
Spain
0.00% 49.00%
49.00% 49.00% Insurance
Spain
0.00% 49.00%
49.00% 49.00% Insurance
355
74
322
89
29
The
Netherlands
The
Netherlands
Spain
Chile
0.00% 69.30%
0.00%
0.00% Holding company
0.00% 72.72%
0.00%
0.00% Holding company
37.23%
0.00%
37.23%
37.23% Technical services -
0.00%
7.55%
11.25%
11.25% Services
Associated
36
35
171
171
-
32
-
14
Jointly
controlled
Jointly
controlled
-
-
Portugal
0.00%
16.54%
16.56%
16.56% Portfolio
-
176
95
management
Sistema de Tarjetas y
Medios de Pago, S.A.
Spain
18.11%
0.00%
18.11%
- Payment services Associated
377
Spain
27.15%
0.00%
27.15%
25.15% Building materials -
66
Spain
42.50%
0.00%
42.50%
42.50% Payment services
Jointly
controlled
105
29
Spain
25.50%
0.23%
25.73%
25.50% Financial services
-
16
11
Spain
22.21%
0.00%
22.21%
22.22% Financial services
-
40,145
2,620
(565)
Spain
22.24%
0.00%
22.24%
22.24% Payment services
-
Chile
0.00%
19.66%
29.29%
29.29% Custody
Associated
Luxembourg
0.00% 33.33%
33.33%
33.33% Holding company
Jointly
controlled
10
6
11
6
5
1
Stephens Ranch Wind
Energy Holdco LLC
(consolidado) b
United
States
Syntheo Limited
United
Kingdom
0.00% 28.80%
28.80%
28.80% Electricity
-
248
246
production
0.00% 50.00%
50.00% 50.00% Payment services
Jointly
controlled
3
4
1
18
3
12
4
2
0
2
0
13
16
8
1
0
-
1
25
0
(16)
1
0
1
1
0
(5)
(1)
691
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
Type of
company
Million eurosa
Capital +
Assets reserves Net results
Tbforte Segurança
e Transporte de
Valores Ltda.
Tbnet Comércio,
Locação e
Administração Ltda.
Tecnologia
Bancária S.A.
Teka Industrial, S.A.
(consolidado) b
Testa Residencial,
SOCIMI, S.A.
(consolidado) b
The OneLife Holding
S.à r.l. (consolidado) b
Brazil
0.00%
17.80%
19.81%
19.81% Security
Associated
87
84
(16)
Brazil
0.00%
17.80%
19.81%
19.81% Telecommunications Associated
71
86
(16)
Brazil
0.00%
17.80%
19.81%
19.81% Atm
Associated
433
106
(13)
Spain
0.00%
9.42%
9.42%
9.42% Household
appliances
-
571
154
Spain
0.79%
17.64%
18.43%
38.74% Real estate
Associated
2,356
1,324
Luxembourg
0.00%
5.90%
0.00%
0.00% Holding company
-
5,398
44
(5)
70
6
Tonopah Solar
Energy Holdings I,
LLC (consolidado)
United
States
0.00% 26.80%
26.80%
26.80% Holding company
Jointly
controlled
547
190
(49)
Chile
0.00% 33.33%
33.33%
33.33% Services
Associated
2
0.00%
16.78%
25.00%
25.00% Cards
Associated
1,138
50.00%
0.00%
50.00% 50.00% Holding company
Grecia
0.00% 50.00%
50.00% 50.00% Financial services
UCI Holding Brasil Ltda Brazil
0.00% 50.00%
50.00% 50.00% Holding company
Portugal
0.00% 50.00%
50.00% 50.00% Insurance
brokerage
Spain
0.00% 50.00%
50.00% 50.00% Real estate
services
Portugal
0.00% 21.83%
21.86%
21.86% Finance company Associated
347
87
Unión de Créditos
Inmobiliarios, S.A., EFC
Spain
Uro Property Holdings Spain
SOCIMI, S.A. b
0.00% 50.00%
50.00% 50.00% Mortgage credit
company
Jointly
controlled
12,343
386
14.95%
0.00%
14.95%
14.95% Real estate
-
1,636
201
VCFS Germany GmbH Germany
0.00% 50.00%
50.00% 50.00% Marketing
Venda de Veículos
Fundo de Investimento
em Direitos
Creditórios c
Brazil
-
(h)
-
- Securitisation
Webmotors S.A.
Brazil
0.00% 62.90%
70.00%
70.00% Services
Jointly
controlled
Jointly
controlled
Jointly
controlled
0
136
0
62
44
24
10
Brazil
0.00% 48.79%
48.79%
48.79% Insurance
Associated
12,455
605
232
Brazil
0.00% 48.79%
48.79%
48.79% Insurance
Associated
176
(2)
Spain
0.00% 49.00%
49.00% 49.00% Holding company Associated
1,096
936
42
159
Zurich Santander
Brasil Seguros e
Previdência S.A.
Zurich Santander
Brasil Seguros S.A.
Zurich Santander
Holding (Spain), S.L.
692
Trabajando.com
Chile S.A.
Transbank S.A.
U.C.I., S.A.
UCI Hellas
Credit and Loan
Receivables Servicing
Company S.A.
Chile
Spain
UCI Mediação
de Seguros
Unipessoal, Lda.
UCI Servicios para
Profesionales
Inmobiliarios, S.A.
Unicre-Instituição
Financeira de
Crédito, S.A.
(1)
73
72
0
0
0
0
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
Jointly
controlled
291
1
2
0
2
0
16
(2)
0
0
0
0
20
11
23
0
5
2018 Auditors’ report and consolidated annual accounts
Societies of which the Group owns more than 5%g, entities associated
with Grupo Santander and jointly controlled entities
% of ownership
held by the Bank
% of voting
powerk
Company
Location
Direct
Indirect Year 2018 Year 2017 Activity
Type of
company
Million eurosa
Capital +
Assets reserves Net results
Zurich Santander
Holding Dos
(Spain), S.L.
Spain
0.00% 49.00%
49.00% 49.00% Holding company Associated
547
384
163
Zurich Santander
Insurance América, S.L.
Spain
49.00%
0.00%
49.00% 49.00% Holding company Associated
1,874
1,510
361
Zurich Santander
Seguros Argentina
S.A. j
Zurich Santander
Seguros de Vida
Chile S.A.
Zurich Santander
Seguros Generales
Chile S.A.
Zurich Santander
Seguros México, S.A.
Zurich Santander
Seguros Uruguay, S.A.
Argentina
0.00% 49.00%
49.00% 49.00% Insurance
Associated
36
7
9
Chile
0.00% 49.00%
49.00% 49.00% Insurance
Associated
249
33
46
Chile
0.00% 49.00%
49.00% 49.00% Insurance
Associated
184
37
Mexico
0.00% 49.00%
49.00% 49.00% Insurance
Associated 498
Uruguay
0.00% 49.00%
49.00% 49.00% Insurance
Associated 18
38
9
13
92
2
a. Amount per provisional books of each company as of the date of publication of these annexes, generally referred to 31 December 2018, unless
stated otherwise because the Annual Accounts are pending to be formulated. The data from foreign companies are converted into euros at the
exchange rate at the end of the period.
b. Data from the latest approved fnancial statements as at 31 December 2017.
c. Data from the latest approved fnancial statements as at 31 May 2018.
d. Data from the latest available approved fnancial statements as at 30 September 2017.
e. Company in liquidation to 31 December 2018.
f. Pursuant to Article 3 of Royal Decree 1159/2010, of 17 September approving the rules for the preparation of consolidated fnancial statements, in
order to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group
companies was added to the voting power directly held by the Parent, For these purposes, the number of votes corresponding to the Parent in
relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in
such companies.
g. Excluding the Group companies listed in Appendix I and those of negligible interest with respect to the fair presentation that the consolidated
fnancial statements must express (pursuant to Article 48 of the Spanish Commercial Code and Article 260 of the Spanish Limited Liability
Companies Law).
h. Companies over which the non-subsidiary investee of the Group exercises efective control
i. Data from the latest available approved fnancial statements as at 31 October 2016.
j. Data from the latest available approved fnancial statements as at 30 June 2018.
k. Recent create company without approved fnancial statements available.
l. Data from the latest approved fnancial statements as at 30 November 2016.
m. Data from the latest approved fnancial statements as at 31 December 2016.
693
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Appendix III
Issuing subsidiaries of shares and preference shares
% of ownership
held by the Bank
Million of eurosa
Direct
Indirect Activity
Capital Reservations
Cost of
preferred
Net
results
Company
Emisora Santander Spain,
S.A. Unipersonal
Location
Spain
100.00%
0.00% Finance
company
Santander UK (Structured
Solutions) Limited
United
Kingdom
0.00%
100.00% Finance
company
2
0
0
0
0
0
75
0
0
40
Sovereign Real Estate
Investment Trust
United States
0.00%
100.00% Finance
5,005
(3,115)
company
a. Amounts per provisional books of each company as at 31 December 2018, converted into euros (in the case of foreign companies) at the year-end
exchange rates.
Appendix IV
Notifcations of acquisitions and
disposals of investments in 2018
(Article 155 of the Spanish Limited Liability Companies Law and
Article 125 of the Spanish Securities Market Law).
COMMUNICATION OF SIGNIFICANT SHARES MADE TO CNMV
DURING 2018:
On the 29-01-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV. They informed that the Group´s
shares in NYESA VALORES CORPORACIÓN had decreased to
6.407% (<10%) on the 18.01.2018.
NOTE: After the increase in share capital executed by NYESA,
the percentage of Banco Santander, S.A. (given Banco Popular
Español, S.A.U) in this company has fallen from 13.223% to 6.407%,
exceeding the 10% threshold.
On the 12-02-2018, the communication made by Banco Santander,
S.A., was registered in the CNMV, where they informed that the
Group’s shares in METROVACESA, S.A. had increase to 53.311%
(51.497% of the voting rights attributed to shares and 1.814% of
the voting rights through fnancial instruments) (>50%) on the
06.02.2018 as a result of the company’s admission to the Stock
Exchange.
On the 23-03-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, where they informed that the
Group’s shares in METROVACESA, S.A. dropped to 49.362% (<50%)
on the 22.03.2018.
On the 28-03-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, where they informed that the
Group’s shares in NYESA VALORES CORPORACIÓN had decreased
to 4.468% (<5%) on the 21.03.2018.
694
On the 02-04-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, where they informed that the
Group’s shares in NYESA VALORES CORPORACIÓN had decreased
to 2.939% (<3%) on the 28.03.2018.
On the 04-10-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, in which it was reported that the
purpose of this communication was to update the information
referring to the Banco Santander’s, S.A stock options in ABENGOA,
S.A., after the merger by absorption of Banco Popular Español,
S.A.U. by Banco Santander, S.A. As a result of the merger, the
shares held by Banco Popular Español, S.A.U. became direct shares
of Banco Santander, S.A. Therefore, Banco Santander’s shares in
ABENGOA, S.A. amounted to 4.975% on the 28.09.2018.
On the 04-10-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, informing that the purpose of
this communication was to update the information referring to
the Banco Santander’s, S.A stock options in METROVACESA, S.A.,
after the merger by absorption of Banco Popular Español, S.A.U.
by Banco Santander, S.A. As a result of the merger, the shares
held by Banco Popular Español, S.A.U. became direct shares of
Banco Santander, S.A. Therefore, Banco Santander’s shares in
METROVACESA, S.A. amounted to 49.362% on the 28.09.2018.
On the 04-10-2018, the communication made by Banco Santander,
S.A. was registered in the CNMV, informing that the purpose of
this communication was to update the information referring to
the Banco Santander’s, S.A stock options in COMPAÑIA ESPAÑOLA
DE VIVIENDAS EN ALQUILER, S.A. (CEVASA), after the merger by
absorption of Banco Popular Español, S.A.U. by Banco Santander,
S.A. As a result of the merger, the shares held by Banco Popular
Español, S.A.U. became direct shares of Banco Santander, S.A.
Therefore, Banco Santander’s shares in CEVASA, S.A. amounted to
24.068% on the 28.09.2018.
On the 30-10-2018, the communication made by Banco Santander,
S.A., BANCO BILBAO VIZCAYA ARGENTARIA, S.A., BANKIA, S.A.,
CAIXABANK, S.A., KUTXABANK, S.A., LIBERBANK, S.A., and BANCO
DE SABADELL, S.A., (concerted action) in which it was reported
2018 Auditors’ report and consolidated annual accounts
that Group Santander’s S.A stake in GENERAL DE ALQUILER DE
MAQUINARIA, S.A., was 63.045% on the 28.09.2018.
NOTE: Update of the information on a concerted action of the
Entities included in this Parasocial Agreement, with the sole
purpose of updating the information existing in the CNMV on the
participation of the Entities members of the Concerted Action in
GAM as a result of the merger by absorption of BANCO POPULAR
ESPAÑOL, S.A.U by Banco Santander, S.A.
Appendix V
Other information on the Group’s banks
A) Following is certain information on the share capital
of the Group’s main banks based on their total assets.
1. Santander UK plc
a) Number of fnancial equity instruments held by the Group.
At 31 December 2018, the Company was a subsidiary of Banco
Santander, S.A. and Santusa Holding, S.L.
On 12 November 2004 Banco Santander, S.A. acquired the then
entire issued ordinary share capital of 1,485,893,636 Ordinary
shares of 10p. each. On 12 October 2008 a further 10 billion
Ordinary shares of 10p. each were issued to Banco Santander, S.A.
and an additional 12,631,375,230 Ordinary shares of 10p. each were
issued to Banco Santander, S.A. on 9 January on 2009. On 3 August
2010, 6,934,500,000 ordinary shares of 10p. each were issued to
Santusa Holding, S.L. With efect from 10 January 2014, Santander
UK Group Holdings Limited, a subsidiary of Banco Santander,
S.A. and Santusa Holding S.L., became the benefcial owner of
31,051,768,866 of 10p. each, being the entire issued Ordinary
share capital of the Company, by virtue of a share exchange
agreement between Santander UK Group Holdings Limited, Banco
Santander, S.A. and Santusa Holding, S.L. Santander UK Group
Holdings Limited became the legal owner of the entire issued
Ordinary share capital of the Company on 1 April 2014 and on 25
March 2015 became a public limited company and changed its
name from Santander UK Group Holdings Limited to Santander
UK Group Holdings plc. In addition to this, there are 325,000,000
Non-Cumulative Non-Redeemable 10.375% and 8.625% Sterling
Preference Shares of GBP 1.00 each and 13,780 Series A Fixed
(6.222%)/Floating Rate Non-Cumulative Callable Preference
Shares of GBP 1.00 each. The legal and benefcial title to the entire
issued Preference share capital is held by third parties and is not
held by Banco Santander, S.A.
b) Capital increases in progress
At 31 December 2018, there were no approved capital increases.
c) Share capital authorised by the
shareholders at the general meeting
The shareholders at the Annual General Meeting held on 28 March
2018 resolved to unconditionally authorise the company to carry
out the following repurchases of share capital:
(1) To buy back its own 8.625% Sterling
Preference shares on the following terms:
(a) The Company may buy back up to 125,000,000 8.625% Sterling
Preference shares;
(b) The lowest price which the Company can pay for 8.625%
Sterling Preference shares is 75% of the average of the market
values of the preference shares for fve business days before
the purchase is made; and
(c) The highest price (not including expenses) which the Company
can pay for each 8.625% Sterling Preference share is 125% of
the average of the market values of the preference shares for
fve business days before the purchase is made.
This authority began on 28 March 2018 and will end on the
conclusion of the next Annual General Meeting of the Company.
The Company may agree, before this authorisation ends, to buy
back its own 8.625% Sterling Preference shares even though the
purchase may be completed after this authorisation ends.
(2) To buy back its own 10.375% Sterling
Preference shares on the following terms:
(a) The Company may buy up to 200,000,000 10.375% Sterling
Preference shares;
(b) The lowest price which the Company can pay for 10.375%
Sterling Preference shares is 75% of the average of the market
values of the preference shares for fve business days before
the purchase is made; and
(c) The highest price (not including expenses) which the Company
can pay for each 10.375% Sterling Preference share is 125% of
the average of the market values of the preference shares for
fve business days before the purchase is made.
This authority began on 28 March 2018 and will end on the
conclusion of the next Annual General Meeting of the Company.
The Company may agree, before this authorisation ends, to buy
back its own 10.375% Sterling Preference shares even though the
purchase may be completed after this authorisation ends.
(3) To buy back its own Series A Fixed (6.222%)/
Floating Rate Non-Cumulative Callable
Preference Shares on the following terms:
(a) The Company may buy up to 13.780 Series A Fixed(6.222%)/
Floating Rate Non-Cumulative Callable Preference Shares;
(b) The lowest price which the Company can pay for Series
A Fixed(6.222%)/Floating Rate Non-Cumulative Callable
Preference Shares is 75% of the average of the market values
of the preference shares for fve business days before the
purchase is made; and
(c) The highest price (not including expenses) which the Company
can pay for each Series A Fixed (6.222%)/Floating Rate Non-
Cumulative Callable Preference Shares is 125% of the average
of the market values of the preference shares for fve business
days before the purchase is made.
This authority began on 28 March 2018 and will end on the
conclusion of the next Annual General Meeting of the Company.
The Company may agree, before this authorisation ends, to buy
back its own Series A Fixed (6.222%)/Floating Rate Non-Cumulative
695
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
Callable Preference Shares even though the purchase may be
completed after this authorisation ends.
g) Quoted equity instruments
Not applicable.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
3. Banco Santander (Brasil) S.A.
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Not applicable.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
The preference share capital of Santander UK plc is traded on the
London Stock Exchange under the following details:
• 10.375% Sterling Preference – ISIN: GB0000064393
a) Number of fnancial equity instruments held by the Group
The Group holds 3,440,170,512 ordinary shares and 3,273,507,089
preference shares through Banco Santander, S.A. and its
subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander,
S.L., Banco Santander, S.A. and Banco Madesant – Sociedade
Unipessoal, S.A.
The shares composing the share capital of Banco Santander (Brasil)
S.A. have no par value and there are no pending payments. At
2018 year-end, the bank’s treasury shares consisted of 13,316,502
ordinary shares and 13,316,502 preferred shares, with a total of
26,633,004 shares.
In accordance with current Bylaws (Article 5.7), the preference
shares do not confer voting rights on their holders, except under
the following circumstances:
• 8.625% Sterling Preference – ISIN: GB0000044221
a) In the event of transformation, merger, consolidation or spin-of
• Series A Fixed (6.222%) / Floating Rate Non-Cumulative Callable
Preference Shares – ISIN: XS0502105454
2. Abbey National Treasury Services plc
a) Number of fnancial equity instruments held by the Group
The Group holds ordinary shares amounting to GBP 249,998,000
through Santander UK Group Holdings plc (249,998,000 ordinary
shares with a par value of GBP 1 each).
The Group also holds 1,000 tracker shares (shares without voting
rights but with preferential dividend rights) amounting to GBP
1,000 and 1,000 B tracker shares amounting to GBP 1,000 through
Santander UK Group Holdings plc, both with a par value of GBP 1
each.
b) Capital increases in progress
No approved capital increases are in progress.
c) Capital authorised by the shareholders
at the general meeting
Not applicable.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Not applicable.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
of the company.
b) In the event of approval of agreements between the company
and the shareholders, either directly, through third parties
or other companies in which the shareholders hold a stake,
provided that, due to legal or bylaw provisions, they are
submitted to a general meeting.
c) In the event of an assessment of the assets used to increase the
company’s share capital.
The General Assembly may, at any moment decide to convert the
preference shares into ordinary shares, establishing a reason for
the conversion.
However, the preference shares do have the following advantages
(Article 5.6):
a) Their dividends are 10% higher than those distributed to ordinary
shares.
b) Priority in the dividends distribution.
c) Participation, on the same terms as ordinary shares, in capital
increases resulting from the reserves and profts capitalization
and in the distribution of bonus shares arising from the
capitalization of retained earnings, reserves or any other funds.
d) Priority in the reimbursement of capital in the event company’s
dissolution.
e) In the event of a public ofering due to a change in control of the
company, the holders of preferred shares are guaranteed the
right to sell the shares at the same price paid for the block of
shares transferred as part of the change of control, i.e. they are
treated the same as shareholders with voting rights.
696
2018 Auditors’ report and consolidated annual accounts
b) Capital increases in progress
No approved capital increases are in progress.
b) Capital increases in progress
At 31 December 2018 there were no approved capital increases.
c) Capital authorised by the shareholders
at the general meeting
The company is authorised to increase share capital, subject to
approval by the Board of Directors, up to a limit of 9,090,909,090
ordinary shares or preferred shares, and without need to maintain
any ratio between any of the diferent classes of shares, provided
they remain within the limits of the maximum number of preferred
shares provided in Law.
As of 31 December 2018, the share capital consists of 7,498,531,051
shares (3,818,695,031 ordinary shares and 3,679,836,020 preferred
shares).
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
At the general meeting held on 21 December 2016 the shareholders
approved the rules relating to the deferred remuneration plans for
the directors, management and other employees of the company
and of companies under its control. Shares delivery is linked to
achievement of certain targets.
e) Specifc circumstances that restrict reserves availability
The only restriction on the availability of Banco Santander (Brasil)
S.A.’s reserves is connected to the requirement for the legal
reserve formation (restricted reserves), which can only be used to
ofset losses or to increase capital.
The legal reserve requirement is set-forth in Article 193 of
the Brazilian Corporations Law, which establishes that before
allocating profts to any other purpose, 5% of profts must be
transferred to the legal reserve, which must not exceed 20% of the
company’s share capital.
c) Capital authorised by the shareholders
at the general meeting
Not applicable.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Not applicable.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
Not applicable.
5. Banco Santander México, S.A., Institución de Banca
Múltiple, Grupo Financiero Santander México
a) Number of fnancial instruments of
capital held by the group.
In 2018 the merger process of Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo Financiero Santander México,
as merging Company, with GRUPO FINANCIERO SANTANDER
MEXICO, S.A.B. DE C.V., as merged Company was fnalised, as well
as the Constitution of the new GRUPO FINANCIERO SANTANDER
MEXICO, S.A. DE C.V.; the parent group through Grupo Financiero
Santander Mexico, S.A. de C.V. (the ‘fnancial group’) and Santander
Global Facilities, S.A. de C.V. (Mexico), own 5,087,801,602 shares
which constitute the 74.97% of the share capital of the Bank.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
b) Capital increases in course.
There aren´t any.
g) Listed capital instruments
All the shares are listed on the São Paulo Stock Exchange
(BM&FBOVESPA; B3 – Brasil, Bolsa, Balcão) and the shares deposit
certifcates (American Depositary Receipts - ADR) are listed on the
New York Stock Exchange (NYSE).
4. Santander Bank, National Association
a) Number of fnancial equity instruments held by the Group
At 31 December 2018, the Group held 530,391,043 ordinary shares
that carry the same voting and dividend acquisition rights over
Santander Holdings USA, Inc. (SHUSA). This holding company and
Independence Community Bank Corp. (ICBC) hold 1,237 ordinary
shares with a par value of USD 1 each, which carry the same voting
rights. These shares constitute all the share capital of Santander
Bank, National Association (SBNA). SHUSA holds an 80.84%
ownership interest in SBNA, and the remaining 19.16% belongs to
ICBC. ICBC is wholly owned by SHUSA. There is no shareholders’
meeting for the ordinary shares of SBNA.
c) Capital authorised by the Shareholders Meeting.
The a capital stock of the Society is 28,117,661,554.00 mexican
pesos (twenty eight thousand one hundred seventeen million six
hundred sixty one thousand fve hundred ffty four Mexican pesos)
represented by a total of 7,436,994,357 (seven thousand four
hundred thirty six million nine hundred ninety four thousand three
hundred ffty seven) stocks with a nominal value of 3.780782962
mexican pesos (three Mexican pesos 780782962/1000000000)
each one; divided in 3,796,120,213 (three thousand seven hundred
ninety six million one hundred and twenty thousand two hundred
and thirteen) stocks of “F” Series and 3,640,874,144 (three
thousand six hundred and forty million eight hundred seventy four
thousand on hundred forty four) stocks of “B” Series. The capital
stock is constituted as follows:
697
Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
• Paid-in and subscribed capital of the Society is 25,660,152,629.00
mexican pesos (twenty fve thousand six hundred sixty million
one hundred ffty two thousand six hundred twenty nine Mexican
pesos) represented by a total of 6,786,994,357 (six thousand
seven hundred eighty six million nine hundred ninety four
thousand three hundred and ffty seven) stocks with a nominal
value of 3.780782962 mexican pesos (three Mexican pesos
780782962/1000000000) each one; divided in 3,464,309,145
(three thousand four hundred sixty four million three hundred
and nine thousand one hundred forty fve) stocks of “F” Series
and 3,322,685,212 (three thousand three hundred twenty two
million six hundred eighty fve thousand two hundred and
twelve) stocks of “B” Series.
• The authorised capital stock of the Society is 2,457,508,925.00
mexican pesos., Two thousand four hundred ffty seven million
fve hundred and eight thousand nine hundred and twenty
fve Mexican pesos), represented by a total of 650,000,000
(six hundred and ffty million) stocks with a nominal value
of 3.780782962 mexican pesos (three Mexican pesos
780782962/1000000000) each one; divided in 331,811,068 (three
hundred thirty one million eight hundred eleven thousand and
sixty eight) would correspond to the “F” series and 318,188,932
(three hundred eighteen million one hundred eighty eight
thousand nine hundred and thirty two) to “B” Series are kept in
the treasury of the Society.
d) Rights incorporated into parts of founder, bonds or debt,
convertible obligations and securities or similar rights.
(i) The Board of Directors on its meeting held on October 22, 2015,
was updated regarding the situation of the debt issuance of
Banco Santander Mexico, S.A. Institución de Banca Múltiple,
Grupo Financiero Santander Mexico, which had been previously
ratifed in the session held on October 17, 2013, in order to
issue debt for the amount of 6,500 million dollars in local or
international markets, for a maximum period of 15 years, senior
or subordinated debt and includes debt instruments qualifying
for purposes of capital in accordance with the legislation
in force, which can be implemented individually or through
several issue programs.
The approved debt issuance of Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo Financiero Santander México
is currently composed as follows:
Instrument
Type
Term
Amount
Available
Broadcast program of bank bonds and
certifcates of deposit of money in term
Revolving
19-feb-21
55,000 million Mexican pesos
Private banking structured bonds Act
Not Revolving*
19-apr-32
20,000 million Mexican pesos
Structured bonds without public ofering
16-feb-32
Senior Bonds
Not Revolving
09-nov-22
Not Revolving
30-jan-24
10,000 million me
Mexican xican pesos
1.000 thousand million
american dollars
77.09 thousand million
American dollars
**Carry out the call at
30 January 2019.
Not Revolving
perpetual
500 million American dollars
Not Revolving
1-oct-2028
1,300 millon American dollars
Capital Notes
(Tier 2 capital)**
Capital Notes AT1
Capital Notes
(Tier 2 capital)
* The issuance of structured private banking bonds isn’t revolving. Once placed the amount laid down in the corresponding brochure a new certifcate is
issued by the authorised amount.
698
$35,514 million
mexican pesos
Con t.c. fx according to
Banxico 10/jan/ 2019
$4,936 million
mexican pesos
$10,000 million
mexican pesos
N/A
N/A
N/A
N/A
2018 Auditors’ report and consolidated annual accounts
(ii) The Board of Directors on its meeting held on January 27, 2011
approved the general conditions for the senior debt issue in
international markets. On October 18, 2012 such issue was
approved for the amount of 500 and 1000 million american
dollars, for a term of 5 to 10 years. The issue was approved
with the objective of obtaining resources to fnance the
increase in business assets and the liquidity of the Bank. Under
these agreements adopted by the Board of Directors, the debt
was issued for an amount of 1,000 million american dollars on
November 9, 2012.
(iii) On December 27, 2013 Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo Financiero Santander
México issued subordinated notes (subordinated notes
2013) for a total amount of 1.300.000.000 american dollars,
in accordance with the capital requirements established in
the Basilea III criteria for complementary capital/ Tier 2 at a
rate of 5,95% with redemption date of January, 30 2024. The
controlling shareholder, Banco Santander, S.A., agreed to buy
975.000.000 american dollars of such notes which correspond
to the 75% of the notes.
Such notes were ofered through a private ofering only to qualifed
institutional buyers, in accordance with Rule 144A of the U.S.
Securities Act of 1933 and it´s modifcations, and outside the U.S.
under the Regulation S of the Market Law.
The issue was approved with the objective of increase the
efciency of the capital of the Institution, and to adequate its
capital profle to its main peers, as well as to increase the cost
efectiveness of resources with the same capital strength and
capacity for growth in risk-weighted assets.
(iv) On the General Shareholder´s meeting, held on May 14, 2012,
it was approved to ratify the agreement adopted by the
Extraordinary Shareholder´s meeting held on 17 March 2009,
in which it was agreed to create a collective credit for the
amount of 1,000,000,000 american dollars through the issue
of subordinated, non-preferential, non-guaranteed and non-
convertible obligations. So far the issue has not been made.
(v) The Board of Director on its meeting held on October 27, 2016
approved the issuance in Mexico of debt up to 500 million
of American dollars or its equivalent in Mexican pesos. The
Ordinary and Extraordinary Shareholder´s meeting held on
December 5, 2016, approved to issue a fnancial instrument that
comply with the requirements of regulatory capital established
in Basilea III, which was considered as not fundamental basic
capital, for up to 500 million american dollars.
On December 29, 2016 Banco Santander México, S.A.,
Institución de Banca Múltiple, Grupo Financiero Santander
México, made an overseas private ofering of subordinate, non-
preferred, perpetual and convertible obligations representing
the share capital by a total amount of 500,000,000 american
dollars, which had the character of a ‘ mirror emission ‘(back-
to-back), as a guarantee of liquidity of subordinate obligations
not preferential, perpetual and convertible into shares, issued
by Grupo Financiero Santander Mexico.
(vi) As a result of the corporate restructure which included among
others the merger of Banco Santander México, S.A., Institución
de Banca Múltiple, Grupo Financiero Santander México, as a
merging party with Grupo Financiero Santander Mexico as
merged Company the subordinated obligations referred to in
paragraph (v), were acquired in its entirety by Banco Santander
México, S.A., Institución de Banca Múltiple, Grupo Financiero
Santander México; therefore the subordinate obligations
of Banco Santander Mexico became extinct by confusion of
rights and obligations, since the Bank as a merging party met
the quality of debtor and creditor in these instruments at the
moment that the merger was fnalised.
Based on the above the subordinate obligations issued by
Grupo Financiero Santander Mexico, which were acquired by
various investors, will continue to be in force on behalf of its
owners and managed by Banco Santander Mexico, preserving
substantially the terms and conditions in which they were
issued.
(vii) On September 20, 2018 Banco Santander México, S.A.,
Institución de Banca Múltiple Grupo Financiero Santander
México. issued and placed equity instruments, subordinated,
preferential, and not convertible into shares, governed by
foreign law representative of the complementary part of the
net capital of Banco Santander (Tier 2 subordinated preferred
capital notes), for the amount of 1,300,000,000.00 american
dollars (the “instruments”), whose resources were used mainly
for the acquisition of the 94.07% of the 2013 subordinated
notes.
The amount issued of 1,300,000,000.00 american dollars covers
in full the sum of the repurchase of the subordinated notes
2013, for 1,222,907,000.00 american dollars. With respect to the
77,093,000.00 american dollars that remained in force, shall be
paid in advance of January 30, 2019, which has been authorised by
the Bank of Mexico. **
Regarding, the acquisition of the subordinated notes 2013: (a) the
acquired total amount was 1,222,907,000.00 american dollars
(nominal value), at a price of 1,010.50 american dollars and (b) the
amount acquired Banco Santander, S.A. (Spain), was a nominal
1,078,094,000.00 american dollars.
With respect of the issue of the instruments the total amount
distributed to Banco Santander, S.A. (Spain), was 75% of
the emission; which means that the settled amount is was
975,000,000.00 american dollars.
The General Extraordinary Shareholder´s Meeting was held
on September 10, 2018 where among other subjects, it was
approved to ratify the limit for the issuance of up to 6,500 million
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
American dollars debt to a maximum period of 15 years, senior
or subordinate, in local markets and/or international markets,
instrumented individually or through broadcast programs, which
was previously authorised by the Board of Directors on its meeting
held on April 26 of 2018.
e) Specifc circumstances that restrict
the availability of reserves.
According to the Law of Financial Institutions, general dispositions
applicable to fnancial institutions, General Corporations law
and the bylaws, the Bank has to constitute or increase its capital
reserves to ensure the solvency to protect the payments system
and the public savings.
The Bank increases its legal reserve annually accordingly to the
results obtained in the fscal year (benefts).
The Bank must constitute the diferent reserves established in
the legal provisions applicable to fnancial institutions, which are
determined according to the qualifcation granted to credits and
they are released when the credit rating improves, or when it is
settled.
f) Entities outside the Group which own,
directly or through subsidiaries, a stake equal
to or greater than 10% of the equity.
Not applicable.
g) Equity instruments admitted to trading.
Not applicable.
6. Banco Santander Totta, S.A
a) Number of equity instruments held by the Group
The Group holds 1,256,179,958 ordinary shares through its
subsidiaries: Santander Totta, SGPS, S.A. with 1,241,172,043
shares, Taxagest Sociedade Gestora de Participações Sociais,
S.A. with 14,593,315 shares, and Banco Santander Totta, S.A. with
407,130 treasury shares, all of which have a par value of EUR 1
each and identical voting and dividend rights and are subscribed
and paid in full.
b) Capital increases in progress
At 31 December 2018, there were no approved capital increases.
c) Capital authorised by the shareholders
at the general meeting
Not applicable.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Under Article 296 of the Portuguese Companies’ Code, the legal
and merger reserves can only be used to ofset losses or to
increase capital.
Non-current asset revaluation reserves are regulated by Decree-
Law 31/98, under which losses can be ofset or capital increased
by the amounts for which the underlying asset is depreciated,
amortised or sold.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
Not applicable.
7. Santander Consumer Bank AG
a) Number of fnancial equity instruments held by the Group
At 31 December 2018, through Santander Consumer Holding
GmbH, the Group held 30,002 ordinary shares with a par value of
EUR 1,000 each, all of which carry the same voting rights.
b) Capital increases in progress
Not applicable.
c) Capital authorised by the shareholders
at the general meeting
Not applicable.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Not applicable.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
Not applicable.
8. Banco Santander - Chile
a) Number of equity instruments held by the Group
The Group holds a 67.18% ownership interest in its subsidiary
in Chile corresponding to 126,593,017,845 ordinary shares of
Banco Santander - Chile through its subsidiaries: Santander Chile
Holding S.A. with 66,822,519,695 ordinary shares, Teatinos Siglo
XXI Inversiones S.A., with 59,770,481,573 ordinary shares and
Santander Inversiones S.A. with 16,577 fully subscribed and paid
ordinary shares that carry the same voting and dividend rights.
b) Capital increases in progress
At 31 December 2018, there were no approved capital increases.
700
2018 Auditors’ report and consolidated annual accounts
c) Capital authorised by the shareholders
at the general meeting
Share capital at 31 December 2018 amounted to CLP
891,302,881,691.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
Not applicable.
e) Specifc circumstances that restrict
the availability of reserves
Remittances to foreign investors in relation to investments made
under the Statute of Foreign Investment (Decree-Law 600/1974)
and the amendments thereto require the prior authorisation of the
foreign investment committee.
f) Non-Group entities which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
All the shares are listed on the Chilean stock exchanges and,
through American Depositary Receipts (ADRs), on the New York
Stock Exchange (NYSE).
9. Santander Bank Polska S.A. (formerly
Bank Zachodni WBK S.A.)
a) Number of fnancial equity instruments held by the Group
At 31 December, 2018, Banco Santander, S.A. held 68,880,774
ordinary shares with a par value of PLN 10 each, all of which carry
the same voting rights.
b) Capital increases in progress
At 31 December, 2018, there were no approved capital increases.
c) Capital authorised by the shareholders
at the general meeting
At the extraordinary general meeting held on 29 May 2018 passed
the resolution regarding the demerger of Deutsche Bank Polska
S.A. As a result of this demerger share capital of Santander Bank
Polska was increased by PLN 27,548,240 through issuance of
2,754,824 ordinary bearer shares series N with a nominal value of
PLN 10 (ten zlotys) each. The share capital increase took place on 9
November 2018.
d) Rights on founder’s shares, “rights” bonds, convertible
debentures and similar securities or rights
At the general meeting held on 17 May 2017, the shareholders
resolved to approve the “Incentive Scheme VI” as an initiative to
attract, motivate and retain the bank’s employees. Delivery of the
shares is tied to the achievement of certain targets in the years
from 2017 to 2019. The bank considers that the exercise of these
rights might give rise to the issuance of no more than 250,000
shares.
e) Specifc circumstances that restrict
the availability of reserves
Not applicable.
f) Non-Group entities, which hold, directly or
through subsidiaries, 10% or more of equity
Not applicable.
g) Quoted equity instruments
All the shares of Santander Bank Polska S.A. are listed on the
Warsaw Stock Exchange.
B) The restrictions on the ability to access or use the assets and
settle the liabilities of the Group, as required under paragraph 13
of IFRS12, are described below.
In certain jurisdictions, restrictions have been established on the
distribution of dividends on the basis of the new, much more
stringent capital adequacy regulations. However, there is currently
no evidence of any practical or legal impediment to the transfer of
funds by Group subsidiaries to the Parent in the form of dividends,
loans or advances, repatriation of capital or any other means.
Appendix VI
Annual banking report
The Group’s total tax contribution in 2018 (taxes incurred directly
by the Group and the collection of taxes incurred by third parties
generated in the course of its economic activities) exceeded EUR
16,600 million of which more than EUR 7,000 million correspond to
own taxes (Corporate income tax, non-recoverable VAT and other
indirect taxes, payments to the Social Security on behalf of the
employer and other taxes on payroll and other taxes and levies).
This annual banking report was prepared in compliance with
Article 89 of 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 frms, and its transposition into Spanish law
pursuant to Article 87 of Law 10/2014, of 26 June on the regulation,
supervision and capital adequacy of credit institutions.
Following is a detail of the criteria used to prepare the annual
banking report for 2018:
a) Name(s), nature of activities and geographical location
The aforementioned information is available in Appendices I and
III to the Group’s consolidated fnancial statements, which contain
details of the companies operating in each jurisdiction, including,
among other information, their name(s), geographical location and
the nature of their activities.
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Auditors’ reportConsolidated annual accountsNotes to the consolidated annual accountsAppendix
As can be seen in the aforementioned Appendices, the main
activity carried on by the Group in the various jurisdictions in which
it operates is commercial banking. The Group operates mainly in
ten markets through a model of subsidiaries that are autonomous
in capital and liquidity terms, which has clear strategic and
regulatory advantages, since it limits the risk of contagion
between Group units, imposes a double layer of global and local
oversight and facilitates crisis management and resolution. The
number of Group ofces totals 13,217 (the largest commercial
network of any international bank) and these ofces provide our
customers with all their basic fnancial needs.
b) Turnover and income before tax
For the purposes of this report, turnover is considered to be gross
income, and gross proft or loss before tax, both as defned and
presented in the consolidated income statement that forms part of
the Group’s consolidated fnancial statements.
c) Number of employees on a full time equivalent basis
The data on employees on a full time equivalent basis were
obtained from the average headcount of each jurisdiction.
The foregoing amounts form part of the cash fow statement
and therefore difer from the income tax expense recognised in
the consolidated income statement (EUR 4,886 million in 2018,
representing an efective rate of 34.4% or, if extraordinary results
are discounted, EUR 5,230 million which represents an efective
rate of 35.4% (see note 52.c)). This is so because the tax regulations
of each country establish:
• The time at which taxes must be paid and, normally, there is a
timing mismatch between the dates of payment and the date of
generation of the income bearing the tax.
• Its own criteria for calculating the tax and establishes temporary
or permanent restrictions on expense deduction, exemptions,
relief or deferrals of certain income, thereby generating the
related diferences between the accounting proft (or loss) and
taxable proft (or tax loss) which is ultimately taxed; tax loss
carryforwards from prior years, tax credits and/or relief, etc. must
also be added to this. Also, in certain cases special regimes are
established, such as the tax consolidation of companies in the
same jurisdiction, etc.
d) Tax on proft or loss
In the absence of specifc criteria, the amount of taxes actually paid
in respect of those taxes whose efect is recognised under “Income
Tax” in the consolidated income statement (EUR 3,458 million in
2018, with an efective tax rate of 24.4%) has been included.
e) Public subsidies received
In the context of the disclosures required by current legislation,
this term was interpreted to mean any aid or subsidy in line with
the European Commission’s State Aid Guide and, in such context,
the Group companies did not receive public subsidies in 2018.
Taxes efectively paid in the year by each of the companies in each
jurisdiction include:
• Supplementary payments relating to income tax returns,
normally for prior years.
• Advances, prepayments, withholdings made or borne in
respect of tax on proft or loss for the year. Given their scantly
representative amount, it was decided that taxes borne abroad
would be included in the jurisdiction of the company that bore
them.
• Refunds collected in the year with respect to returns for prior
years that resulted in a refund.
• Where appropriate, the tax payable arising from tax assessments
and litigation relating to these taxes.
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2018 Auditors’ report and consolidated annual accounts
The detail of the information for 2018 is as follows:
2018
Turnover
(million of euros)
Employees
Gross proft or
loss before tax
(million of euros)
Tax on proft or loss
(million of euros)
Jurisdiction
Germany
Argentina
Austria
Bahamas
Belgium
Brazil1
Canada
Chile
China
Colombia
Spain2
United States
Denmark
Finland
France
Ireland
Isle of Man
Cayman Islands
Italy
Jersey
Luxemburg
Malta
Mexico3
Norway
The Netherlands
Panama
Paraguay
Peru
Poland
Portugal4
Puerto Rico
United Kingdom
Singapore
Sweden
Switzerland
Uruguay
1,377
1,203
171
9
104
13,211
52
2,568
95
26
7,644
6,764
177
112
575
108
1
(1)
421
1
39
10
4,562
8,939
349
44
212
44,151
200
11,565
219
169
38,227
15,616
236
171
939
2
57
-
830
76
-
-
3,584
19,295
317
96
1
-
70
1,885
1,398
247
5,472
4
161
106
416
508
295
6
-
166
14,930
7,294
963
24,772
10
324
233
1,609
196,969
457
190
83
(1)
64
5,343
10
1,198
28
2
106
1,144
89
69
343
(20)
1
(1)
183
1
33
10
1,218
171
42
-
-
42
817
376
(20)
1,922
1
106
29
165
14,201
119
118
33
-
15
998
3
202
3
3
464
29
5
14
63
-
-
-
63
1
-
-
322
55
78
-
-
8
228
25
9
537
-
21
7
35
3,458
Consolidated Group total
48,424
1.Including the information relating to a branch in the Cayman Islands the profts of which are taxed in full in Brazil. The contribution of this branch proft
before tax from continuing operations 2018 is EUR 613 million.
2. Includes the corporate centre. In Tax on proft or loss, it includes EUR 116 million of monetizable deferred taxes converted form Banco Popular
Español, S.A.U.
3. Including the information on a branch in the Bahamas the profts of which are taxed in full in Mexico. In 2018 the contribution of this branch to operating
proft before tax from continuing operations was EUR - 2 million.
4. Including the information relating to the branch, closed on 31 December, in the UK and is taxed both in the UK and in Portugal. In 2018 the contribution of
this branch to proft before tax from continuing operations was EUR 32 million.
At 31 December 2018, the Group’s return on assets (ROA) was 0.64%.
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General
information
Corporate information
Banco Santander, S.A. is a Spanish bank, incorporated as
sociedad anónima in Spain and is the parent company of
Grupo Santander. Banco Santander, S.A. operates under the
commercial name Santander.
The Bank’s Legal Entity Identifer (LEI) is
5493006QMFDDMYWIAM13 and its Spanish tax identifcation
number is A-390000013. The Bank is registered with the
Companies Registry of Cantabria, and its Bylaws have been
adapted to the Spanish Companies Act by means of the notarial
deed instrument executed in Santander on 29 July 2011 before
the notary Juan de Dios Valenzuela García, under number 1209
of his book and fled with the Companies Registry of Cantabria
in volume 1006 of the archive, folio 28, page number S-1960,
entry 2038.
The Bank is also registered in the Ofcial registry of entities of
Bank of Spain with code number 0049.
The Bank’s registered ofce is at:
Paseo de Pereda, 9-12
39004 Santander
Spain
The Bank’s principal executive ofces are located at:
Santander Group City
Avda. de Cantabria s/n
28660 Boadilla del Monte
Madrid
Spain
Telephone: (+34) 91 259 65 20
Corporate history
The Bank was established in the city of Santander by public deed
before the notary José Dou Martínez on 3 March 1856, which
was later ratifed and amended in part by a second public deed
dated 21 March 1857 executed before the notary José María
Olarán. The Bank commenced operations upon incorporation
on 20 August 1857 and, according to article 4 of the Bylaws, its
duration shall be for an indefnite period. It was transformed into
a credit corporation (sociedad anónima de crédito) by public deed,
executed before notary Ignacio Pérez, on 14 January 1875 and
registered in the Companies Registry Book of the Government’s
Trade Promotion Section in the province of Santander. The Bank
amended its Bylaws to conform to the Spanish public companies
act of 1989 by means of a public deed executed in Santander
on 8 June 1992 before the notary José María de Prada Díez and
recorded in his notarial record book under number 1316.
On 15 January 1999, the boards of directors of Santander
and Banco Central Hispanoamericano, S.A. agreed to merge
Banco Central Hispanoamericano, S.A. into Santander, and to
change Banco Santander’s name to Banco Santander Central
Hispano, S.A. The shareholders of Santander and Banco Central
Hispanoamericano, S.A. approved the merger on 6 March 1999,
at their respective general meetings and the merger became
efective in April 1999.
The Bank’s general shareholders’ meeting held on 23 June 2007
approved the proposal to change back the name of the Bank to
Banco Santander, S.A.
As indicated above, the Bank brought its Bylaws into line with the
Spanish Companies Act by means of a public deed executed in
Santander on 29 July 2011.
The Bank’s general shareholders’ meeting held on 22 March 2013
approved the merger by absorption of Banco Español de Crédito, S.A.
On 7 June 2017, Santander acquired the entire share capital of
Banco Popular Español, S.A. in an auction in connection with a
resolution plan adopted by the European Single Resolution Board
(the European banking resolution authority) and executed by
the FROB (the Spanish banking resolution authority) following
a determination by the European Central Bank that Banco
Popular was failing or likely to fail, in accordance with Regulation
(EU) 806/2014 establishing a framework for the recovery and
resolution of credit institutions and investment frms. On 24 April
2018, the Bank announced that the boards of directors of Banco
Santander, S.A. and Banco Popular Español, S.A.U. had agreed to
an absorption of Banco Popular by Banco Santander. The legal
absorption was efective on 28 September 2018.
Annual Report 2018
Shareholder and investor relations
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
Hard copies of the Bank’s annual report can be
requested by shareholders free of charge at the
address and phone number indicated above.
Media enquiries
Santander Group City
Arrecife, 2ª planta
Avda. de Cantabria, s/n
28660 Boadilla del Monte
Madrid
Spain
Telephone: (+34) 91 289 52 11
comunicacion@gruposantander.com
Customer service department
Calle Princesa, 25
Edifcio Hexágono, 2ª planta
28008 Madrid
Spain
Telephone: (+34) 91 759 48 36
atenclie@gruposantander.com
Banking Ombudsman in Spain
(Defensor del cliente en España)
Mr José Luis Gómez-Dégano
Apartado de Correos 14019
28080 Madrid
Spain
©February 2019, Banco Santander, S.A. All rights reserved.
Photographs:
Miguel Sánchez Moñita, Lucía M. Diz, Javier Vázquez and Jaime Boira
Production:
MRM-Mccann
Sprintfnal
Legal deposit:
M-7729-2019
All customers, shareholders and the general
public can use Santander’s ofcial social network
channels in all the countries in which the Group
operates.
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