Banco Santander SA
Annual Report 2020

Plain-text annual report

2020 Annual report Unless otherwise specified, references in this annual report to other documents, including but not limited to other reports and websites, including our own, are for information 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, 'Banco Santander' means Banco Santander, S.A., and 'Santander', 'the Group' and 'Santander Group' mean Banco Santander, S.A. and subsidiaries. Consolidated directors' report 6 Business model and strategy 310 Economic and financial review 14 Responsible banking 16 Our approach 32 The new business environment 64 Inclusive and sustainable growth 112 Key metrics 123 Further information 312 Economic, regulatory and competitive context 315 Group selected data 317 Group financial performance 357 Financial information by segments 401 Research, development and innovation (R&D&I) 403 Significant events since year end 124 Non-financial information Law content index 404 Trend information 2021 129 UNEP FI Principles for Responsible Banking 412 Alternative performance measures (APM) reporting index 137 Global Reporting Initiative (GRI) content index 420 Risk management and compliance 160 Sustainability Accounting Standards Board (SASB) content index 164 Independent verification report 422 Risk management and compliance overview 428 Risk management and control model 437 Credit risk 168 Corporate Governance 461 Market, structural and liquidity risk 170 2020 Overview 177 Ownership structure 476 Capital risk 479 Operational risk 182 Shareholders. Engagement and general 486 Compliance and conduct risk meeting 190 Board of directors 238 Management team 241 Remuneration 264 Group structure and internal governance 267 Internal control over financial reporting (ICFR) 275 Other corporate governance information 492 Model risk profile 494 Strategic risk Auditor's report and consolidated financial statements 504 Auditor's report 496 Glossary 516 Consolidated annual accounts 840 General information 533 Notes to the consolidated annual accounts 796 Appendix Annual report 2020 Contents 2020 consolidated directors’ report This report was approved unanimously by our board of directors on 22 February 2021. Our approach to this document We changed the layout of our consolidated directors’ report in 2018 by including the contents previously provided in these documents which we ceased to prepare separately: – Annual report – Consolidated directors’ report – Annual corporate governance report (CNMV format document) – Report of the board committees – Sustainability report Auditors’ reviews As required by law, contents of our 2020 consolidated directors’ report has been subjected to three types of reviews by our independent statutory auditors, PricewaterhouseCoopers Auditores, S.L., summarized as follows: – PricewaterhouseCoopers Auditores, S.L. has verified that the information in this report is consistent with our consolidated financial statements, and that its contents comply with the applicable regulations. For more details, see ‘Other information: Consolidated management report section of the 'Auditor’s report' within 'Auditor's report and consolidated annual accounts'. – Annual report on our directors’ remuneration (CNMV format document) The consolidated directors’ report also includes all information required by Spanish Act 11/2018 on non-financial information and diversity. It can be found in the 'Responsible banking' chapter, which constitutes the consolidated non- financial information statement. This report's format presents information more clearly, avoiding repetition and raising the level of disclosure. – PricewaterhouseCoopers Auditores, S.L. has issued a verification report, with limited assurance, on the non- financial and diversity information required by Spanish Act 11/2018 included in this report. To read that report, see the 'Independent verification report' in the 'Responsible banking' chapter. – PricewaterhouseCoopers Auditores, S.L. has issued an independent reasonable assurance report on the design and effectiveness of Banco Santander's internal control over financial reporting, found in section 8.6 of the 'Corporate governance' chapter. Non-IFRS and alternative performance measures This report contains, in addition to financial information prepared in accordance with International Financial Reporting Standards (IFRS) and derived from our consolidated financial statements, alternative performance measures (APMs) as defined 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. These financial measures that qualify as APMs and non-IFRS measures have been calculated with information from Santander Group; however, those financial measures are not defined or detailed in the applicable financial reporting framework nor have been audited or 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 our management and investors to compare operating performance between accounting periods. Nonetheless, these APMs and non-IFRS measures should be considered supplemental information to, and are not meant to substitute IFRS measures. Furthermore, companies in our industry and others may calculate or use APMs and non-IFRS measures differently, thus making them less useful for comparison purposes. For more details on APMs and non-IFRS measures, see section 8 of the 'Economic and financial review'. 4 Responsible banking Corporate governance Economic and financial review Risk management and compliance Forward-looking statements Banco Santander advises that this annual report contains “forward-looking statements” as per the meaning of the US Private Securities Litigation Reform Act of 1995. These statements may be identified by words like expect, project, anticipate, should, intend, probability, risk, target, goal, objective, estimate, future and similar expressions. Found throughout this report, they include (but are not limited to) statements on our future business development, economic performance and shareholder remuneration policy. However, a number of risks, uncertainties and other important factors may cause actual developments and results to differ materially from our expectations. The following important factors, in addition to others discussed elsewhere in this annual report, could affect our future results and could cause materially different outcomes from those anticipated in forward-looking statements: – general economic or industry conditions of areas where we have significant operations or investments (such as a worse economic environment; higher volatility in capital markets; inflation or deflation; changes in demographics, consumer spending, investment or saving habits; and the effects of the covid-19 pandemic on the global economy); – exposure to various market risks (particularly interest rate risk, foreign exchange rate risk, equity price risk and risks associated with the replacement of benchmark indices); – potential losses from early repayments on our loan and investment portfolio, declines in value of collateral securing our loan portfolio, and counterparty risk; – political stability in Spain, the United Kingdom, other European countries, Latin America and the US; – changes in legislation, regulations, taxes, including regulatory capital and liquidity requirements, especially in view of the UK exit of the European Union and increased regulation in response to financial crisis; – our ability to integrate successfully our acquisitions and related challenges that result from the inherent diversion of management’s focus and resources from other strategic opportunities and operational matters; and – changes in our access to liquidity and funding on acceptable terms, in particular if resulting from credit spread shifts or downgrades in credit ratings for the entire group or significant subsidiaries. Numerous factors could affect our future results and could cause those results deviating from those anticipated in the forward-looking statements. Other unknown or unpredictable factors could cause actual results to differ materially from those in the forward-looking statements. Our forward-looking statements speak only as at date of approval of this annual report and are informed by the knowledge, information and views available as at the date of this report. Banco Santander is not required to update or revise any forward-looking statements, regardless of new information, future events or otherwise. Past performance is not indicative of future results Statements about historical performance or accretion must not be construed to indicate that future performance, share price or earnings (including earnings per share) in any future period will necessarily match or exceed those of any prior period. Nothing in this annual report should be taken as a profit forecast. XHTML electronic format and XBRL tags This annual report has been prepared in eXtensible HyperText Markup Language (XHTML) format, and the consolidated financial statements it includes have been tagged with eXtensible Business Reporting Language (XBRL), in accordance with Directive 2004/109/EC and Commission Delegated Regulation (EU) 2019/815. No offer Neither this annual report nor any of the information contained herein constitutes an offer to sell, or the solicitation of an offer to buy, any securities. Banco Santander has elected to follow these requirements for the 2020 financial year, albeit they will take effect for accounting periods from 1 January 2021. To view the XBRL tags, you must open this document using an appropriate viewer. You can find this document with an XBRL viewer on Banco Santander's corporate website. 5 Annual report 2020 Contents Business model and strategy The Santander Way remains unchanged... Our purpose Our aim as a bank Our how To help people and businesses prosper To be the best open financial services platform, by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities Everything we do should be Simple, Personal and Fair … continuing to deliver for all our stakeholders An engaged and motivated team… … generates customer loyalty… We create value for all our stakeholders … so we can support our communities …leading to strong financial results for our shareholders… For further information about our corporate culture, see chapter 1 'Responsible Banking'. In this chapter, data as of 2020, unless indicated otherwise. 6 Responsible banking Corporate governance Economic and financial review Risk management and compliance Helping people and businesses prosper whilst adopting ESG practices Environmental: supporting the green transition Helping customers go green Going green ourselves EUR 33.8 bn Green Finance since 2019 EUR 6.9 bn AUM Social Responsible Investment EUR 1 bn green bond issued (2nd since 2019) Carbon neutral in our own operations Social: building a more inclusive society Financially empowering people Supporting society 4.9 mn people 1 since 2019 EUR 469 mn Credit to microentrepreneurs in 2020 4.0 mn people helped since 2019 225 k scholarships granted since 2019 1. People financially empowered through Santander initiatives. Creation of a solidarity fund to face the covid-19 impact Communities We contribute more than ever to the wellbeing of society at large EUR 54 mn donated by employees and the bank to provide essential health equipment and materials EUR 30 mn through Santander Universities EUR 21 mn to support vulnerable communities Governance: doing business the right way A strong culture An independent, diverse Board 86% employees proud to work for Santander 40% women on Group board >60% Independent directors 7 Annual report 2020 Contents Our business model 1. Our scale Local scale and global reach → Local scale based on three geographic regions, where we maintain a leadership position in our core markets. → Global reach backed by our global businesses, enabling greater collaboration across the Group to generate higher revenue and efficiencies. A. Market share in lending as of Sep-20 including only private owned banks. UK benchmark covers mortgage market. 2. Customer focus → We serve 148 million customers, in markets with a total population of more than one billion people. Personal relationships that increase customer loyalty → We have over 100,000 people talking to our customers every day in our extensive branch network and contact centres. → Digital sales represented 44% of total. Increasing digital adoption (mobile customers +6.1 mn YoY) B. NPS – Customer Satisfaction internal benchmark of active customers’ experience and satisfaction audited by Stiga / Deloitte. 3. Diversification Our geographic and business diversification make us more resilient under adverse circumstances → Balanced geographic diversification between mature and emerging markets. → Business diversification between customers segments (individuals, SMEs, mid-market companies and large corporates). → Global businesses that strengthen our local franchises. Note. Underlying attributable profit contribution by region, excluding Santander Global Platform (which will upgrade to PagoNxt) and Corporate Centre. Resilient profit generation throughout the cycle In 2020, Grupo Santander delivered a resilient operating income within the environment arising from the covid-19 crisis, supported by a disciplined capital allocation in accordance with our strategic priorities Net operating income = Total income - Operating expenses. 8 Responsible banking Corporate governance Economic and financial review Risk management and compliance The Santander of Tomorrow – 3 priorities for profitable growth Building on our technology to further strengthen our customers’ loyalty and access new fee-based revenue pools 1 One Santander 2 PagoNxt 3 Digital Consumer Bank New operating model leveraging our global scale to deliver a better customer experience, supported by common culture and higher degrees of commonality, technology being one Our Group technology “backbone” solutions with payments at the core Openbank and Santander Consumer Finance driving profitable growth in Europe and new markets 9 Annual report 2020 Contents 1. One Santander: Creating a better bank for our customers with a new operating model… Improving our customer service… … strengthening our relationship with customers… … by creating a common operating model Simplify mass market value proposition New distribution model - Shared processes and best in-class technology Medium term goal: Medium term goal: Medium term goal: Top 3 NPS in 9 countries Digital sales/total >50% Efficiency ratio A c.40% …in order to drive customer growth and higher productivity and profitability B Europe North America → Focus on capital efficient growth opportunities → Leverage PagoNxt global solutions with particular focus on SMEs and merchants → Re-invent our branch network (Work Cafés), expand Santander Personal, deploy common mobile app → Expand collaboration to Commercial Banking, Auto and other retail segments → Build shared services South America → Expand Getnet and Superdigital to other countries → Common operating model for Consumer Finance → Focus on revenue growth opportunities (e.g. Agribusiness) Medium term goals: C Underlying RoTE : 10%-12% A Efficiency ratio : c.45% Underlying RoTE C D : 11-13% A Efficiency ratio : c.40% C Underlying RoTE : 19%-21% A Efficiency ratio : c.35% A. Medium term goals for the efficiency ratio do not represent guidance. The actual efficiency ratio may vary materially in the medium term. B. Excluding SCF+Openbank, which would have an efficiency ratio of c.39% and a RoTE of 13%-15%. Europe, including SCF+Openbank, would have an efficiency ratio of c.43% and a RoTE of 12%-13%. C. Medium term goals for underlying RoTE do not represent guidance. The actual underlying RoTE may vary materially in the medium term. D. Adjusted RoTE for excess capital in the US. We have integrated ESG criteria into our new strategic priorities: One Santander Europe has focused on 2020 on rebuilding after covid-19, supporting people (especially more vulnerable communities, in financial distress) and helping customers transition to the green economy. 10 Responsible banking Corporate governance Economic and financial review Risk management and compliance 2. PagoNxt: PagoNxt will help Santander banks deliver payment solutions seamlessly, faster and with better value Payments is a sizeable and fast growth market in which Santander already has significant scale Our key assets for growth acceleration We serve more customers than any other bank 148 mn Customers → Single, autonomous company providing payment solutions to merchants and consumers → Targeting Santander’s existing ecosystem and open market → Technology-focused to deliver differentiated user experiences → Strategic, close partner of Santander local banks Leveraging on Scale | Efficiency | Global reach Focused in 3 business verticals to accelerate growth, leveraging on scale, ‘being global’ and efficiency Goal To become a world leading acquirer providing end-to-end best-in-class solutions for in-store and online merchant payments 1 MERCHANT Our merchant payment services on one global platform are now being used across the Group as Getnet Market growth Santander’s scale +11% Expected annual growth in e-commerce EUR 80 bn Merchant acquiring global revenue pool >1.1 mn Active Merchant business customers c.60 mn Active credit and debit cards 2 TRADE Goal To deliver fast, efficient trade finance, supply chain and FX payments solutions for international SMEs that were once only accessible to corporates Market growth Santander’s scale Significant investments in 4 key assets: Ebury, One Trade, Mercury and PaymentsHub +3% Annual growth international trade EUR 350 bn International trade revenue pool >4 mn Group SME customers >200k Group SME customers trading int. 3 Goal To deliver simple, highly engaging payment solutions for individuals in order to become embedded in our customers’ daily lives CONSUMER Leveraging our Superdigital proposition Solution for the unbanked in Latin America With a high growth in active customers and transactions value in 2019 We have integrated ESG criteria into our new strategic priorities: Developed consumer solutions (such as Superdigital) within PagoNxt scope will benefit individual lives through financial inclusion and domestic and international payments for all. 11 Annual report 2020 Contents 3. Digital Consumer Bank: Combining the scale and leadership of SCF in Europe with the platform of Openbank. Our vision is to become the largest digital consumer bank in the world Openbank Santander Auto Global consumer financing business serving offline and e-commerce merchants Largest full-service global digital bank in the world + Auto loan and leasing business serving OEMS and dealers >55k Merchant POS c.EUR 20 bn Loans 1.2 mn Customers c.EUR 10 bn Deposits >75k Dealer & OEM POS c.EUR 85 bn Loans Digital Banking APIs (SaaS model) Openbank technology and data capabilities grow revenues by adding services and improving productivity A Our ambition: to grow revenues and x2 PAT in the medium term and build the most innovative consumer lending business in Europe Great potential… … to build a new paradigm… … and deliver strong financial results c.18 mn Active customers 4.5 Avg. products per customer → Common apps, data and systems infrastructure across regions Medium term goals → Single streamlined operating model across auto, consumer lending and retail in 15+ countries c.15% Underlying RoTE B → Simplified license and common compliance model 39% Efficiency ratio C → New auto, consumer lending and retail banking country launches A. Underlying. B. Medium term goals for underlying RoTE do not represent guidance. The actual underlying RoTE may vary materially in the medium term. C. Medium term goals for the efficiency ratio do not represent guidance. The actual efficiency ratio may vary materially in the medium term. We have integrated ESG criteria into our new strategic priorities: Digital Consumer Bank is developing business solutions with a positive environmental impact. We have developed green finance solutions for consumers, such as clean vehicles, solar panels or heating systems amongst others. 12 Responsible banking Corporate governance Economic and financial review Risk management and compliance [This page has been left blank intentionally] 13 Annual report 2020 Contents Responsible banking 2020 Consolidated non-financial information statement 14 Responsible banking Corporate governance Economic and financial review Risk management and compliance Our approach What our stakeholders tell us Challenges and opportunities Governance and priorities Our response to covid-19 2020 highlights The new business environment A strong and inclusive culture A talented and motivated team Acting responsibly towards customers Responsible procurement Shareholder value Inclusive and sustainable growth Meeting the needs of everyone in society Supporting the green transition Environmental and social risk analysis Financial inclusion and empowerment ESG investment in Wealth Management and Insurance Supporting communities Higher education Community investment Tax contribution Key metrics Further information Non-financial information law content index UNEP FI Principles for Responsible Banking reporting index Global Reporting Initiative (GRI) content index Sustainability Accounting Standards Board (SASB) content index Independent verification report 16 18 20 22 26 28 32 34 38 52 60 62 64 66 71 87 91 101 100 102 108 110 112 123 124 129 129 160 164 15 Annual report 2020 Contents Our approach By delivering on our purpose to help people and businesses prosper, we grow as a business and can help society address its challenges. "At Santander, we've always known we have a responsibility to support society – and I have no doubt that we'll continue to fulfil it. We are determined to help businesses and communities across the world build back better – and use this as an opportunity to address global challenges such as inequality and climate change. This is the right thing to do – the responsible thing to do, and the path to generate value for our shareholders. In 2020, the covid-19 pandemic forced us to face yet another challenge – an economic crisis that devastated millions. As we look ahead, governments and companies must come together to build back better, so that we emerge from this crisis stronger, supporting inclusive and sustainable growth around the world. Banks have a critical role to play. We are part of the solution. We have a crucial duty and an essential role: to support our employees, our customers, and to deliver sustainable returns to you, our shareholders". Ana Botín, Group executive chairman. By being responsible, we build loyalty People Customers … Santander treats me responsibly In our day-to-day business, we make sure we don't just meet our legal and regulatory requirements, but also exceed people's expectations by being Simple, Personal and Fair in all we do. Communities Shareholders I'm loyal to Santander because… … Santander acts responsibly in society We focus on areas where our activity can have a major impact on helping people and businesses prosper. 16 Responsible banking Corporate governance Economic and financial review Risk management and compliance How we helped people and businesses prosper in 2020 People EUR 10,783 million Staff costs A 95% of employees are full-time 53.7% of employees are women Customers EUR 916,199 million loans outstanding (net) EUR 497,987 million to households EUR 319,853 million to companies EUR 21,227 million to government agencies EUR 469 million to microenterprises via microfinance programmes EUR 77,132 million to others B Shareholders EUR 477 million Total shareholder remuneration C EUR 44,011 million market value at year end, second highest bank in the eurozone Communities EUR 204 million invested in communities EUR 110 million invested in universities EUR 94 million invested in community programmes and projects Suppliers EUR 5,230 million paid to suppliers D Tax contribution 4,592 suppliers selected under our global procurement model 94.7% D local suppliers EUR 6,443 million Total taxes paid by the group EUR 2,946 million corporate income tax EUR 3,497 million other taxes A. From group consolidated financial statements. B. Including financial business activities and customer prepayments. C. The maximum allowed in accordance with the limits set by the European Central Bank (ECB) in its recommendation last December. D. Data refers exclusively to purchases negotiated by Aquanima. 17 Annual report 2020 Contents What our stakeholders tell us To build a more responsible bank, understanding and responding to all our stakeholders is fundamental. Listening to our stakeholders and creating value Loyalty is key to lasting value. Earning and retaining it depends on our ability to understand all our stakeholders' concerns and respond to their needs. By listening to them and measuring their perceptions of Grupo Santander, we not only identify issues, but also find opportunities to add value. Grupo Santander has several approaches to gauging stakeholder opinion. We run surveys and speak-up channels for our employees. We engage our customers through interactive platforms. We also respond to demands from top analysts, investors and indexes interested in environmental, social and governance (ESG) matters. We keep pace with new regulations and best practices worldwide. We take part in consultations with authorities, sector associations and other organizations that influence sustainable development policymaking. We assess externalities to identify risks and opportunities to our business, appraise our impact on the community and create value for society and the environment. We are also involved in major local and international initiatives to support inclusive and sustainable growth (see ‘Joint initiatives to promote our agenda’ in ‘Governance and priorities’). 83% of employees think Santander provides the flexibility they need to be productive 86% of employees feel Santander's response to the pandemic is effective 22,500 employees surveyed in the 2020 global pulse survey 4,390 complaints through ethical channels People Customers 1,432 agreements with universities and academic institutions Key dialogue channels for stakeholders 2,283 partnerships with social institutions and entities 322 social media profiles and 23 million followers Communities Shareholders 3 millions of surveys to measure customer satisfaction 42,670 banked individuals surveyed about Santander being Simple, Personal and Fair 464,310 complaints received 15,260 shareholders surveyed about Santander being Simple, Personal and Fair 27,446 shareholders and investors participated in studies and qualitative surveys 132,857 queries handled by email, phone, WhatsApp and online 210 meetings with shareholders and 1,137 contacts with institutional investors 18 Responsible banking Corporate governance Economic and financial review Risk management and compliance Materiality assessment: Identifying the issues that matter Grupo Santander analyses the environmental, social and governance issues our stakeholders care about the most. Every year, we run quantitative and qualitative assessments of our value chain, gathering information from internal and external sources, including the dialogue channels mentioned above. We weight inputs on their level of materiality, which is revised every year to reflect reality. The matrix below, which shows the topics our stakeholders consider most relevant for Santander, helps us focus our priorities, initiatives and programmes across the Group. In 2020, we addressed these issues in order to strengthen our responsible business practices and ethical behaviour, tackle climate change, support the transition to a low-carbon economy, promote financial inclusion and create a diverse and talented team, while managing and developing it. Group material topics matrix A Analysis inputs → External • 2020 megatrends (WBCSD) • Customer satisfaction (Net Promoter Score drivers) • ESG analyst and index evaluations (including roadshows) • Public opinion (social media and digital press analysis) • Reporting trends in the banking sector (peers' material issues, RepRisk Rating and others) • Requirements of regulators and international institutions (World Bank, WEF, UNEP FI, ...) • ESG reporting standards requirements (GRI, SASB) → Internal • Santander’s strategic view (public commitments, internal communications, workshops, top risk analysis) • Responsible banking agenda (responsible banking, sustainability and culture committee; Culture, and Inclusive and Sustainable Banking steering groups, messages from the chairman and CEO) • Employee feedback (surveys) Changes in the analysis from 2019 We've redefined certain material topics: • Talent Management and Development includes incentives linked to ESG criteria. • Diversity, Inclusion and Wellbeing includes health and welfare-related aspects. • Financial Inclusion and Empowerment includes financial literacy. • Simple, Personal and Fair (SPF) products and services refers to responsible practices towards customers. • Climate Strategy covers the integration of climate change into the climate change risks & business opportunities strategy. We've added inputs to the materiality assessment: 2020 megatrends from the World Business Council for Sustainable Development (WBCSD), social media, Net Promoter Score (NPS) drivers for customers, new employee surveys and insights from Responsible Banking workshops. Three topics – Diversity, Inclusion and Wellbeing, ESG Products and Services, and Financial Inclusion and Empowerment – gained significance in 2020. A. Issues such as food waste, light and noise pollution, and biodiversity are not material to the group. 19 Annual report 2020 Contents Challenges and opportunities Grupo Santander operates in a fast-changing world, full of new challenges and opportunities. Our materiality assessment identified two core challenges: the new business environment, and inclusive and sustainable growth. By addressing these, we embed our approach to the environment, society and governance in all we do. Challenge 1 New business environment Adapting to an evolving world The economy is changing fast. Digital technology is transforming markets as well as business models. In this highly competitive environment, companies must work in new ways to ensure responsible business practices. Challenge 2 Inclusive and sustainable growth Helping society achieve its goals Growth should satisfy the needs of today without hampering future generations' ability to meet their own. A balance should always be struck between economic growth, social welfare and environmental protection. Financial institutions can contribute to this by managing their operations responsibly, and lending responsibly to help society achieve its goals. Santander, like all businesses, needs a motivated, diverse and skilled workforce that is able to deliver what customers want, while harnessing the power of new technology. We operate in a fast- moving highly regulated business environment. Our task is to exceed our stakeholders' expectations by doing 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. We can play a major role to promote inclusive and sustainable growth. 'Inclusive' means meeting customer needs, helping people open businesses and create jobs, promoting financial empowerment and getting people the education they need. 'Sustainable' means financing renewable energy and smart infrastructure and tech to tackle climate change. We take the social and environmental risks and rewards of our operations into account, contributing to greater balance in the economy and society. For more details on our strategy, see 'Challenge 1: New business environment' in this chapter. For more details on our strategy, see 'Challenge 2: Inclusive and sustainable growth' in this chapter. 20 Responsible banking Corporate governance Economic and financial review Risk management and compliance Integrating ESG issues that matter into our strategy to meet the two identified challenges. Challenge 1 New business environment Material issues Impact on our value chain Corporate governance Robust, diverse and transparent corporate governance leads to more responsible and sustainable strategies. Ethical behaviour A strong corporate culture and policies and procedures ensure we behave ethically and safeguard all our stakeholders' interests. Compliance and risk management Well-defined compliance and risk management procedures help reduce the risks an organization faces. The participation of all employees in risk management is crucial and reinforces the risk culture (Risk Pro). Talent management and career velopment The right talent management and career development programmes inspire loyalty and cement responsible banking practices. Diversity, inclusion and wellbeing A diverse workforce that reflects the make-up of society is critical to success in an ever-changing environment. Our employees wellbeing must be a priority. Innovation and digitalization Investing in technology puts us at the cutting edge of our industry and strengthens our value proposition. Customer satisfaction Focus on customer experience drives us to improve our services and builds loyalty. SPF products and services Responsible products and services tailored to customers in a way that is Simple, Personal and Fair promote inclusiveness and lasting loyalty. Cybersecurity and data protection Innovative and robust cybersecurity mechanisms protect customer data and boost confidence in our business. Human rights Preventing the risk of our activities having a negative impact on human rights is key to the development of a responsible business model. Challenge 2 Inclusive and sustainable growth Financial inclusion and empowerment Climate strategy A financial system that is accessible and understandable to all builds trust, bolsters the economy and creates new business opportunities, helping communities prosper. Banks play a key role in the transition to a low-carbon economy by managing their financial risks and helping finance the green agenda. Our contribution is vital under the Paris Agreement framework. ESG products and services Financial products and services with social and environmental value added criteria help us do business responsibly. Funding renewable energy and green initiatives better positions our bank and society to counter the effects of climate change. Environmental footprint Environmental footprint reduction helps us lead the transition towards a low- carbon economy. Community investment Our commitment to education and the wellbeing of the communities we serve contributes to growth and progress across broader society. 21 Annual report 2020 Contents Governance and priorities All our activity is guided by principles, frameworks and policies to ensure we behave responsibly in all we do. We revised and strengthened our responsible banking governance to help us tackle the two challenges we identified. Core policies that integrate ESG criteria into our business model, to make us a more responsible bank General code of conduct Corporate culture policy A General sustainability policy Human rights policy Brings together the ethical principles and rules of conduct all Group employees must follow, and is central to our compliance function. Establishes the guidelines and standards to ensure a consistent group culture. Sets out how we protect human rights, in line with the UN Guiding Principles on Business and Human Rights. Outlines our general sustainability principles and voluntary commitments aimed at generating long- term value for our stakeholders. Environmental, social & climate change risk management B policy Details how we identify and manage environmental, social and climate change risks, in oil and gas, energy, mining and metals, and in soft commodities. Sensitive sectors policy Provides guidelines for assessing and deciding on our participation in industries which carry reputational risk. Other policies that support our responsible banking strategy Consumer protection C policy Code of conduct in security markets Cybersecurity policy Third-party certification D policy Tax policy Conflicts of interest policy Financing of political parties policy Policy on contributions for social purpose Global mobility policy A. Includes the Group's Diversity & Inclusion Principles and the Corporate Volunteering Standard. B. It replaces the sectoral policies on energy, mining and metals and soft commodities. C. Includes financial consumer protection principles. D. Includes principles on the responsible behaviour of suppliers. The responsible banking function's core policies can be found on our corporate website. Policy changes in 2020 All local boards adopted our General sustainability, Corporate culture and Human rights policies. In addition to update them as every year, we merged the policies on oil and gas, energy, mining and metals, and soft commodities into the Environmental, social and climate change risks management policy. We published our Financing of political parties policy and the Policy on contributions for social purpose on our corporate website. 22 Responsible banking Corporate governance Economic and financial review Risk management and compliance Strategic framework Governance → The board of directors approves and supervises the general policies and strategies on our corporate culture, values, responsible business and sustainability. It also makes sure all the group‘s employees act ethically by following the laws, customs and good practices of the industries and countries where we operate. → The responsible banking, sustainability & culture committee assists the board with oversight of the group's responsible banking agenda and strategy. The committee is supported by two steering groups: • The Culture steering group promotes our culture, The Santander Way, is embedded in all we do and ensure consistency in corporate and local actions. • The Inclusive & Sustainable Banking steering group reviews initiatives on social and financial inclusion; promotes education and training; supports the transition to a low-carbon economy; and backs investments to benefit society. See section 4.9 ‘Responsible banking, sustainability and culture committee activities in 2020’ in the 'Corporate Governance' chapter. Responsible banking network → The corporate responsible banking unit coordinates and drives the responsible banking agenda. A senior advisor on responsible business practices supports this unit and reports directly to the executive chairman. → Our subsidiaries' sustainability and culture units execute their responsible banking agendas, ensuring they are aligned with our corporate strategy and policies.Their responsible banking governance is led by a senior manager, who is part of the group-wide Responsible banking network. → Guiding principles for subsidiaries and global business units ensure our responsible banking agenda is embedded across the group. → The Responsible Banking network meets every two months. In addition, the corporate responsible banking unit and local units hold regular bilateral meetings. In 2020, the network ran the second Responsible Banking workshop with responsible banking representatives from all businesses and geographies. → New working groups ensure we focus, and promote collaboration on financial education, sustainable finance, climate change, simplification and other areas. Strategic priorities: Embedding ESG in our busines model What? (E) Contribute to the Paris Agreement and a low- carbon economy How? → Pursuing a climate strategy that plays a part in achieving the Paris Agreement goals → Helping our customers transition to a low-carbon economy with value-added products and services to manage environmental and social risks → Minimizing our environmental footprint (S) Have a best-in-class, inclusive proposition to maximize our social impact → Cultivating a workplace that attracts and retains diverse talent → Providing value propositions to meet the needs of our broad customer base → Fostering financial inclusion and empowerment → Supporting society through Santander Universities and other community programmes (G) Do things the right way through robust and transparent processes → Promoting our strong culture, The Santander Way → Listening to our stakeholders → Applying best-in-class policies based on ethical behaviour → Ensuring sound corporate governance and risk management → Implementing Simple, Personal and Fair practices with customers and suppliers We have 11 targets that place responsible banking at the heart of our business strategy (see section '2020 highlights' in this chapter). 23 Annual report 2020 Contents Helping society tackle global challenges: 2030 agenda Our activity and investments contribute to several United Nations' Sustainable Development Goals and support the Paris Agreement's aim to fight climate change. We ran an analysis of the contribution of our agenda to SDGs. It also has revealed which goals are most relevant to Grupo Santander’s activity, commitments, strategic focus, and other external factors. SDGs where our activity and community investment carry the most weight We want to reduce poverty and boost the welfare and economy of the countries we operate in. Our financial inclusion products and services and community investment programmes empower millions each year. Our pioneering Santander Universities programme helps universities and students prosper, promoting education, entrepreneurship and employment. Also, Santander Scholarships is one of the world's largest private education grant funds. We promote an inclusive and diverse workplace, ensuring equal opportunity as a strategic priority. We also run initiatives to drive diversity. We're the global leader in renewable energy financing, and also finance energy efficiency projects; low-emission, electric and hybrid vehicles; and other cleaner transport solutions. Our skilled and committed team allows us to respond to customers' needs, help entrepreneurs create businesses and jobs, and strengthen local economies. Our products and services give society's most vulnerable better access to financial services, and we teach them the concepts and skills they need to manage their finances effectively. We finance sustainable infrastructure and promote access to affordable housing to guarantee basic services and inclusive economic growth. We tackle climate change by reducing our own carbon footprint and helping our customers transition to a sustainable economy. We promote transparency, the fight against corruption and the need for robust institutions for sustainable development. We have policies and codes of conduct that regulate our activity and behaviour, and frame our commitments towards more a more responsible banking system. We participate in prominent local and international initiatives and working groups. A. In the coming months we will publish a detailed analysis and results of this analysis on our corporate website. 24 Responsible banking Corporate governance Economic and financial review Risk management and compliance Joint initiatives to promote our agenda We drive our responsible banking agenda through a number of local and international initiatives and working groups, including: • UNEP Finance initiative. We are a founding signatory to the • CEO Partnership for Economic Inclusion. We're part of a United Nations Principles for Responsible Banking and signed up to the Collective Commitment to Climate Action (CCCA) to transition the financial sector to a low-carbon economy faster. In 2020, we participated in Phase II of the UNEP FI project on the TCFD's recommendations for banks, alongside 38 other financial institutions from six continents. We also reported on the progress made to accelerate the adoption of low-carbon and climate-resilient technologies and business models in society. • United Nations Global Compact. We've been part of the Global Compact network since 2002. In 2020, we joined the United Nations Global Compact's gender equality programme. We also joined the Target Gender Equality (TGE) programme, launched in 19 countries with the goal of increasing the number of women on company boards and in executive roles. • World Business Council for Sustainable Development (WBCSD). Our Group Executive Chairman, Ana Botín, sits on the WBCSD's executive committee. In 2020, we supported the Vision 2050 and Future of Work initiatives and signalled our intention to participate in the new Scaling Positive Agriculture project under the Food, Land & Water Programme. • Banking Environment Initiative (BEI). We continued to participate in the Bank 2030 initiative, aimed at building a roadmap for the banking industry to help society in the transition towards a low-carbon economy. private-sector alliance for financial inclusion, led by Queen Máxima of the Netherlands, Special Representative of the United Nations, to promote inclusive financing for development. Amid the covid-19 pandemic, we attended a meeting with participants' CEOs to explore ways to make low-income customers and small businesses more resilient to the crisis. • Equator Principles. We analyse the environmental and social risks of our lending according to the Equator Principles and help draw up common criteria. We joined the Green Recovery Alliance of the European Union and the Consultative Group of the Taskforce on Scaling Voluntary Carbon Markets. Santander Brasil drew up a comprehensive plan with Itaú Unibanco and Bradesco to promote the sustainable development of the Amazon. The plan includes ten measures targeting the three areas considered the top priority for the region: environmental conservation and the development of a bioeconomy; investment in sustainable infrastructure; and the guarantee of basic human rights. Santander US joined the Hispanic Promise, a non-legally binding sign of intention to create a more inclusive and equitable work environment for Hispanic workers. This initiative launched at the 2019 World Economic Forum and has been endorsed by more than 150 companies. Other international and local initiatives that Santander supports UN Women's Empowerment Principles International Wildlife Trade Financial Taskforce The Valuable 500 Round Table on Responsible Soy UN Principles for Responsible Investment Working group on Sustainable Livestock CDP (Carbon Disclosure Project) Climate Leadership Council UN Global Investors for Sustainable Development (GISD) Alliance The Wolfsberg Group 25 Annual report 2020 Contents Our response to covid-19 As a responsible bank, in 2020 we did all we could to protect the health of our teams and customers, while helping reduce the economic impact of the crisis. Contingency plans: Our Comprehensive Special Situation Corporate Framework centralizes governance in crises like covid-19 Ensuring business continuity: As an essential service, we guaranteed our operations would continue with the same standards of quality Special Situations Management Committee for conducting and monitoring the management of events. A Regular dry runs to raise awareness of, and prepare for, certain stress situations. Special measures in all our countries: • Social distancing and shift patterns • Designation of critical staff • Segregation of technology infrastructure People: Our priority was to keep our 191,000 employees healthy and safe Teleworking: more than 100,000 employees at the height of the pandemic, gradual returns to the workplace with safety measures, and more flexible work- life balance policies. Support measures: Salary advances and other financial provisions, office equipment and healthcare supplies delivered to homes, and psychological support. Health and safety protocols: Testing and health monitoring, as well as track and trace on mobile apps. #SafeTogether See section ‘A talented and engaged team’ in this chapter. Customers: We supported our customers in three areas: Preserving their health, guaranteeing uninterrupted service on all channels and promoting their financial resilience Stronger channels: Call centres New digital solutions Easy access to government-backed lines of credit. Branches: Special business hours, shifts, selective closures and spaces adapted to safety measures. Support for the most vulnerable: Liquidity and credit facilities; grace periods and payment holidays; reduced fees; and covid-19 cover in health insurance policies. See sections ‘Acting responsible towards our customers’, ‘Meeting the needs of everyone in society’ and ‘Financial inclusion and empowerment’ in this chapter. See section ‘3.3 covid-19 credit risk management’ in the 'Risk management and compliance' chapter. A. Both the Corporation and relevant Subsidiaries shall constitute this Committee. And shall be invoked by the top senior executive to strategically steer and manage a Special Situation 26 Responsible banking Corporate governance Economic and financial review Risk management and compliance We delivered a co-ordinated response across the Group, and created a common branding - All. Together. Now. Communities: We collaborated on global initiatives to tackle the pandemic, raising more than EUR 100 million Shareholders: We met our obligations towards shareholders. Together Solidarity Fund for healthcare supplies. Senior management commitment: Pay cut taken by the Group executive chairman, CEO, board directors and top two executive segments in the Group Support through Santander Universidades to projects facing health and educational challenges due to the crisis. Online scholarships #YoMeQuedoEnCasa for more than 20,000 young people Cooperation with the public sector: Tracing app in Mexico (with BBVA) and management of ICO loans. See section ‘Supporting communities’ in this chapter. We held a virtual April 2020 AGM. We adapted our dividend policy to ECB recommendations. We held a hybrid October 2020 AGM, where we approved a new remuneration proposal charged against the 2019 and 2020 results. more than 30,000 new shareholders since Dec. 2019 See section ‘Shareholder value’. See section 1.3 ‘Alignment of executive compensation with the Group objetives and the covid-19 crisis’ in the Corporate governance chapter. Euromoney recognized Santander's management of covid-19 and support for SMEs → Always informed: www.santander.com → Ask Ana: Regular talks and Q&As with employees hosted by the Group executive chairman. We held 10 meetings, which attracted 140,000 connections/ views → Work Café: 65 online events with more than 200,000 attendees → Esto lo superamos juntos (We'll get through this together): Local websites with helpful information and resources to navigate the crisis 27 Annual report 2020 Contents 2020 highlights Our 11 public commitments to build a more responsible bank Grupo Santander works to maintain a strong culture, developed by a skilled, motivated and diverse workforce, able to deliver the right solutions for our customers’ needs while improving the communities we serve. We offer financing our customers can afford and support education that increases their financial resilience. We also strive to foster the global transition to the green economy, while reducing our own environmental footprint. Our public commitments In 2019, we disclosed 11 public commitments which reflect our ambitions for the responsible banking agenda. Our pledges help us integrate ESG aspects into business management, and are set out to be SMART (Specific, Measurable, Achievable, Realistic and Time-bound) so we can fulfil the UN SDGs intrinsic to our operations, and make progress towards the targets set out in the Paris Agreement on climate change. In 2020, we made significant progress, achieving carbon neutrality and fulfilling four of our 2021 commitments one year early. 2018 2019 2020 2021 2025 Top 10 company to work for A 4 > > > > > 5 > > > > 6 ✔ 6 Women on the board 33% > > > 40% > > > 40% ✔ 40% - 60% B (%) Women in senior leadership positions 20% > > > 22.7% > 23.7% > > > > > > > > > > > 30% Equal pay gap C Financially empowered people D E (EUR) Green finance raised and facilitated 3% > > > > 2% > > > 1.5% > > > > > > > > > > > ~0% 2.0mn 4.9mn 19bn 33.8bn 10mn 120bn F Electricity used from renewable energy sources 43% > > > 50% > > > 57% > > 60% > > > > > > 100% G Becoming carbon neutral in our own operations > > > > > 0% ✔ Reduction of unnecessary single-use plastics in corporate buildings and branches Scholarships, internships and entrepreneurship programmes I H > > > > > > 75% > > > 98% > > > 100% 69k 225k ✔ 200k J People helped through our community programmes 1.6mn 4.0mn ✔ 4mn Cumulative target > > > > From… to… A. According to external indexes in each country (Great Place to Work, Top F. In countries where we can confirm electricity from renewable sources at Employer, Merco, etc.). properties occupied by Grupo Santander. B. Senior leadership positions make up 1% of the total workforce. C. Equal pay gap based on same jobs, levels and functions. D. Unbanked, underbanked or financially vulnerable individuals receive tailored finance solutions and can increase their knowledge and resilience through financial education. E. Includes Grupo Santander's contribution to green finance: project finance; syndicated loans; green bonds; capital finance; export finance, advisory services, structuring and other products, to help customers transition to a low-carbon economy. EUR 220bn committed from 2019 to 2030. G. In our core geographies (G10). H. The reported percentage takes our core geographies (G10) into account. Specific measures taken to cope with the covid-19 situation that might have involved use of plastics has not been penalized in the calculation of this percentage I. Beneficiaries of Santander Universities (students given a Santander scholarship will do a work placement in an SME or take part in entrepreneurship programmes Grupo Santander endorses). J. Beneficiaries of our community investment programmes (not including Santander Universities and financial education initiatives). 28 Responsible banking Corporate governance Economic and financial review Risk management and compliance We continue to tackle the new business environment... …and promote inclusive and sustainable growth • The corporate culture policy approved by the Group board in December 2019 was approved by all local boards in 2020. • Our new 5-year D&I strategy raises awareness and introduces new enablers to cultivate an inclusive workforce in terms of gender, LGBTI, people with disabilities, age, ethnicity, religion and educational background. • Our new, simple and easy-to-access escalation channel, Canal Abierto, is available in all our countries, offering full anonymity to users. • Our new global simplification network mapped all our simplification initiatives and introduced consistent plans, KPIs and qualitative ways of measuring progress and impact. • Our new pilot programme offers better assessment and onboarding for c. 400 core suppliers based on ESG criteria. • We updated our climate strategy, committing to: i) aligning our power generation portfolio with the Paris Agreement by 2030; ii) stop providing financial services to power generation customers with a revenue dependency on coal of over 10% in 2030; iii) reduce our worldwide exposure to coal mining production to zero by 2030; iv) and the ambition to be net zero carbon emissions by 2050. • Local boards approved the most recent sustainability and human rights policies. • Our second EUR 1 billion green bond launched under our Sustainable & Green Bonds framework. We also released an initial report on the first issuance. • We offset our all emissions from our operation, thus become carbon neutral. • We released our first reports for the UNEP FI Collective Commitment on Climate Action. • Salesforce remuneration scheme: we significantly • We joined the Green Recovery Alliance of the increased the weight of conduct/quality on variable remuneration (40% or more). Customer satisfaction and service quality are the basic pillars of this model. • Thematic reviews on overdrafts, packaged accounts and revolving cards. European Union and the Consultative Group of the Taskforce on Scaling Voluntary Carbon Markets. • We mapped solutions and products for our new Green Book. • Santander CIB created a new ESG team to expand our ESG solutions. • Santander Brasil partnered with Bradesco and Itaú Unibanco on sustainable development in the Amazon. • Our global financial education site further reinforced our financial empowerment objectives. 29 Annual report 2020 Contents Our efforts have been recognized the world over Member of Dow Jones Sustainability Index The Dow Jones Sustanibility Index (DJSI World) listed Grupo Santander for the 20th year in a row, with top marks in financial inclusion, crime prevention, tax strategy, customer relationship management, environmental reporting, operational eco-efficiency and social reporting. We also improved our FTSE4Good and Sustainalytics scores. Among top 10 in Bloomberg Gender- Equality Index Grupo Santander 7th in the Bloomberg Gender- Equality Index (BGEI) scoring above average in every category. Top score achieved in equal pay and gender pay parity. The BGEI is a golden seal for companies around the world that show a firm public commitment to equality and women in the workplace through policymaking, visibility and transparency. One of the world’s best places to work Great Place to Work put Grupo Santander among the world's 25 best workplaces for the second year, out of more than 10,000 organizations worldwide that ensure exceptional employee experiences and high-trust relationships rooted in fairness and equality. The institute also named us one of the Best Places to Work in Latin America. Top Employers 2020 Top Employers recognizes the excellent work environment of our bank in Spain, Poland, the UK and Chile, and of Santander Consumer Finance in Germany, the Netherlands, Austria, Italy, Poland and Belgium. As Santander has won awards in more than five European countries, it also received the Top Employers Europe certification. Best bank for diversity and inclusion, and for SMEs Euromoney gave Santander its global ‘Best Bank for Diversity and Inclusion’ award for the first time, in addition to our third global ‘Best Bank for SMEs’ award in five years. The magazine highlighted the breadth and ambition of our diversity and inclusion programmes. It also presented us with its "Excellence on Leadership" award for our covid-19 response in Europe. One of the 100 most valuable brands in the world Thanks to our work helping communities prosper in a way that is Simple, Personal and Fair, we have been recognized as the biggest bank in the eurozone and the sixth bank in Interbrand’s 2020 Best Global Brands ranking. 30 Responsible banking Corporate governance Economic and financial review Risk management and compliance Local Awards UK Argentina The Times listed Santander UK as one of the Top 50 employers for Women 2020. Great Place to Work named Santander Argentina one of the five best companies for women. Chile Brazil Santander Chile was named a Leading Company in Sustainability by ALAS20, as well as being made a member of DJSI Chile, DJSI MILA Pacific Alliance and DJSI Emerging Markets Santander Brasil was chosen by Great Place To Work as one of the 10 best companies for women and for the 11th year running featured in the Índice de Sustentabilidade Empresarial (ISE) portfolio. Mexico Poland Santander Mexico placed ninth in TOP Companies' Súper Empresas 2020 ranking. It is a member of the new S&P/ BMV Total Mexico ESG Index and DJSI MILA Pacific Alliance. It was also named by International Finance magazine as the Best Bank for Financial Inclusion in Mexico for the TUIIIO microfinance programme, which also received socially responsible company honours from Centro Mexicano para la Filantropía (Cemefi) and Alianza por la Responsabilidad Social Empresarial (AliaRSE). Santander Polska featured among Wprost magazine's “best employers in times of crisis”. Portugal Great Place To Work named Santander Portugal the “Best Bank to work for in Portugal” and we ranked third overall in its category for companies with over 1,000 employees. 31 Annual report 2020 Contents The new business environment To meet the challenge of the new business environment, we’re focusing on... 32 Responsible banking Corporate governance Economic and financial review Risk management and compliance Our strong and inclusive culture: The Santander Way A strong corporate culture is critical to succeeding in today's competitive, fast-moving environment. A talented and engaged team The more prepared and motivated our workforce is, the stronger its commitment to helping people and business prosper will be. Our team reflects the diversity of the communities where we operate. Acting responsibly towards our customers We develop our products and services responsibly, and aspire to deliver excellent customer service. Responsible procurement Our procurement processes apply ethical, social and environmental criteria to ensure we operate in a sustainable way. Shareholder value We have clear and robust governance that manages risks and opportunities prudently and devises long-term strategy to safeguard the interests of our shareholders and broader society. 33 Annual report 2020 Contents A strong and inclusive culture: The Santander Way The Santander Way is our purpose, our aim and how we do business. It's our bedrock for building a more responsible bank. Being more responsible requires a strong culture Santander's corporate culture is critical to building a more responsible bank. By fulfilling our purpose of helping people and businesses prosper, our business grows and creates value for everyone. The Santander Way Our purpose To help people and businesses prospers. Our "how" Our aim To be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. Our values Simple | Personal | Fair Corporate behaviours Show respect Truly listen Talk straight Keep promises Actively collaborate Bring passion Support people Embrace change Leadership commitments Being open and inclusive Encouraging the team to prosper Inspiring and executing transformation Leading by example To live The Santander Way and be Simple, Personal and Fair in everything we do, we have eight corporate behaviours embedded in every stage of the employee lifecycle, from recruitment and training to performance reviews and compensation. In addition, our principles on diversity and inclusion (D&I) strengthen our relations with our broad base of stakeholders, making sure we are fully inclusive. “Just as important as what we do is how we do it” Ana Botín, Group Executive Chairman 34 Responsible banking Corporate governance Economic and financial review Risk management and compliance Cultural transformation: an ongoing journey We understand a strong culture takes time to embed. Since The Santander Way launched in 2015, we've strived to ensure everything we do for our customers, employees, shareholders and communities is Simple, Personal and Fair. This ambition is reflected in the standards we uphold across Grupo Santander. By virtue of our talented and engaged workforce, guided by clear governance, we've made great strides to strengthen our culture and values. Our employee engagement scores have increased by 12 percentage points (pp) since 2014. 86% of employees said they felt proud to work for Santander (+8 pp since 2014). 81% would recommend working at Santander (+10 pp since 2014), and 84% (+13 pp vs 2014) said their job gives them purpose and motivation to build a bank that is even more Simple, Personal and Fair. Culture plan 2020: objectives and achievements Objectives Diversity and inclusion Drive our D&I strategy with enablers of an inclusive workplace Implement global minimum standards on parental leave Speaking up Implement ethical channels in our core markets Uphold customer protection principles Lay down corporate guidelines on vulnerable customers Acting responsibly towards our customers Responsible procurement Simplification Identify and map out projects that streamline processes Improve metrics about simplification Achievements • Women make up 23.7% of senior management (up from 22.7%) and 40% of the board of directors. • Cultural diversity increased from 50% to 66% among senior managersA . • The percentage of employees with disability rose from 1.8% to 1.9%. • The board approved a D&I strategy. • Among top 10 in the 2021 Bloomberg Gender- Equality Index and named the World's Best Bank for D&I by Euromoney. • Our ethical channels with global minimum standards were implemented across our footprint. • We mapped out initiatives and rolled out guidelines on vulnerable customers in our core countries. • Responsible Banking unit´s 3-year strategic plan incorporated progress indicators to measure responsible practices towards customers. • We implemented covid-19 measures for customers, sharing best practices. • We completed our 3-year plan to include customer satisfaction indicators within salesforce remuneration schemes. suppliers according to environmental, social and governance (ESG) criteria. • We improved our risk management model. • Our global simplification network mapped 115 projects. • Key performance indicators applied to 100% of projects. • 100% of the projects align with how we measure simplification through our Global Engagement survey or Net Promoted Score (NPS) results. • We developed a global project in Legal within 10 countries with more than 30 initiatives that managed to shorten some contracts in 50%, procedures in 20% and have also reduced the number of contractual models. Roll out an ESG pilot programme • Our pilot programme assessed c. 400 key for suppliers Enhance governance for critical suppliers A. Cultural diversity considers race and ethnicity, nationality, age, experience and career background locally and abroad. For more details on diversity and inclusion and speaking up, see the next section titled "A talented and engaged team". Further information on the Simple, Personal and Fair approach towards customers and suppliers can be found under the "Acting Responsible Towards Customers" and "Responsible procurement" sections respectively. 35 Annual report 2020 Contents Risk management: The bedrock of a responsible bank Grupo Santander's risk management and compliance model, driven by our core values, culture, ethical behaviours and responsible banking strategy, consists of three lines of defence: 1. Business and support units 2. Risk management and compliance 3. Internal audit The board of directors is in charge of controlling risks and setting risk appetite. It receives expert support from its risk supervision, regulation and compliance committee. Building a responsible bank rests on our analysis and handling of risks to our reputation, regulatory compliance, conduct, digitalization, society, the environment and climate change. In 2020, Grupo Santander continued efforts to identify, analyse and spread awareness on climate-change risks on the TCFD's recommendations (for more details, see the section on sustainable finance). For more details on environmental and social risks, see section 2.5 in the 'Risk Management and Control' chapter. For more details on our prevention of corruption, bribery, money laundering and terrorism financing, see section 7.2. 'Compliance and conduct risk management' in the 'Risk management and compliance' chapter. For more details on MyContribution model see 'Performance review and remuneration' in 'A talented and engaged team' section. Risk pro: Our risk culture Prudent risk management is essential to any responsible bank. This requires clear policies, processes and lines of accountability. Over the years, banks have been subject to greater scrutiny by the European Central Bank (ECB) and other regulators who pay close attention to how the financial institutions they oversee understand risk at all levels. Therefore, at Santander we make risk management everyone’s business. While risks and regulatory requirements for banks often change tune,Grupo Santander’s risk management has consistently ensured excellent, sustainable growth, owing to our robust risk culture called Risk pro (or I AM Risk in the UK and the US). In Risk pro, everyone is responsible for managing the risks they encounter,regardless of level or role. Therefore, 10% of our common performance management model, MyContribution, is based on daily risk management. As one of the common standards of our corporate culture policy, Risk pro instils prudence and vigour into our risk management, proving more effective than ever in the covid-19 crisis. Promoting and enhancing our risk culture In 2020, Grupo Santander's risk culture grew stronger. The Risk and the Compliance & Conduct divisions worked together to embed Risk pro in recruitment, onboarding, day-to-day operations and leadership across all businesses. Communications and mandatory training have acted as key levers that continue to drive the importance of ethical behaviours in our day-to-day work. We do this through such initiatives as Risk Pro Heroes (to recognize employees' efforts to escalate risk); the speak up channels in place across our footprint to encourage the reporting of reputational and business risks; and the Risk pro Week/Month. In 2020, we ran a joint Risk pro Week for the first time involving the UK, Mexico, Chile, Argentina, Peru, Colombia and the Corporate Centre in Spain, cultivating employees' appreciation for risk management in everyday functions with informative materials, messages, videos and webinars. To measure our progress in embedding Risk pro in Grupo Santander, we reviewed risk profile assessments (RPAs) completed by local teams and simplified the metrics of the Risk pro dashboard, which gave us better insight into local adoption of our risk culture across our footprint. We also improved group-wide cooperation and shared best practices thanks to six new working groups that devised an operating model based on local risk management. 36 Responsible banking Corporate governance Economic and financial review Risk management and compliance Cybersecurity Cybersecurity is critical in the digital age. Cyber attacks and fraud pose systemic risks to financial services. Customers expect their data to be secure and ethically processed. Cybersecurity is built into our culture to foster crucial behaviours that protect our bank and our customers' information. The group culture steering approved an initiative to include cyber security as part of the 10% risk objective of the employees' performance management. With global cyber threats on the rise, we gave training to payment operators, developers, executives and board members, and launched an updated version of our mandatory cybersecurity training course. Our awareness initiatives on digital channels help customers and our communities stay safe online. We started a global cybersecurity campaign under the UEFA Champions League and Copa Conmebol Libertadores sponsorship, using football analogies to share our five cyber tips. We continue raise cyber awareness for personal and business customers through our websites, social media and online workshops. Cybersecurity is the responsibility of everyone who works with Santander We work with public and private organizations to promote knowledge sharing and collaboration on cybersecurity. We lead efforts in key geographies to increase information exchanges with government agencies and financial institutions. We also champion the creation of international exchange mechanisms to help combat cyber crime. Our cybersecurity and IT conduct policy is fundamental in our cybersecurity endeavours to protect our bank and our customers. It outlines how Santander equipment and Information Technology (IT) services should be used. It highlights areas of risk and misconduct. It explains how our rules can avoid, mitigate and manage reputational and commercial risks. It also sets out how Grupo Santander and subsidiaries must handle the technology, work tools and information we provide employees with to prevent legal, reputational and cyber-related incidents. For more details on employees' cybersecurity training, see the section 'A talented and engaged team' in this chapter. For more details on our cybersecurity plan, see section '6.2 Operational risk management' in the 'Risk management and compliance' chapter. 93% of employees can identify risks in their job every day 91% of employees see cyber security as a top priority 75% of employees feel encouraged by managers to report important information, even bad news 79% of employees say they can report unethical conduct without fear of retaliation Source: Global Engagement survey 2019. Next survey expected in May 2021 37 Annual report 2020 Contents A talented and engaged team Our team reflects the diversity of our communities and adapts to the new business environment, inspiring customer loyalty and meeting society's needs. Our people, the cornerstone of our strategy Talent management Performance reviews and remuneration Robust talent management means attracting and retaining the best talent while encouraging our people to learn and develop. Our performance reviews and remuneration align with our culture. Diversity and inclusion Employee experience A diverse and inclusive workforce is pivotal to our cultural transformation and to delivering our strategy. A motivated workforce builds the best work environment that promotes wellbeing, flexible working schemes and speaking up. Our goal Achievement in 2020 Treating our employees responsibly builds stronger teams willing to go the extra mile for our customers and guarantees the returns our shareholders expect. This way, we can invest more in our communities while making our people proud to be part of Grupo Santander in a virtuous circle of loyalty that drives our success. Last year, we set out to be among the top 10 companies to work for in 6 of our geographies by 2021. A Top 10 company in 6 geographies B A. According to a leading external source in each country (Great Place to Work, Top Employer, B. Spain, Portugal, Argentina, Mexico, Uruguay and Chile, using Merco, etc.). 38 the latest publications at our disposal. In Portugal and Argentina the rankings used only consider companies with more than 1,000 employees. Responsible banking Corporate governance Economic and financial review Risk management and compliance Talent management Our talent management strategy helps us attract and retain the most talented and skilled employees. It also contributes to accelerating our transformation by fostering their continuous development. Several projects further this objective: • Strategic Workforce Planning (SWP) identifies employee challenges and gaps in skills and expertise. It helps us create action plans to make sure each area has the skills it requires. • Skill Model helps define common job profiles across the group. As the skills we require become increasingly similar across geographies, it is an opportunity to define common role requirements that can help our employees understand what is critical in their jobs and focus on new areas to drive our transformation. • Dojo tackles the transformational challenge of our training and career development. It brings all our global subsidiaries under one training platform that up-skills and re-skills employees faster. • Workday is our new global HR platform. It gives us an overview of people's skills and expertise, and allows us to collaborate and communicate more easily. These programmes are complemented by local initiatives to cultivate talent according to each geography's specific requirements. Talent attraction We must attract talent that will drive our transformation while boosting skills and streamlining processes. In 2020 we integrated our countries into our global career website, where applicants can now find our openings across the globe in just one place. We also relaunched a section in our intranet, Global Job Posting, which opens internal vacancies from our countries to all our employees. Our new search engine simplified employee experience and increased access to more than 800 job descriptions in various geographies, fostering the functional and geographical mobility that is key to talent development. We also explored innovative technology solutions to support our digital transformation, maximize efficiency in recruitment processes and enhance applicants' experience. Talent management figures A Total employees (thousand) % employees with a permanent contractA % employees working full timeA Employees joining/leaving (turnover) % of workforce promoted Average length of service (years)A % coverage of collective agreementsA A. At year end 2020 191 97.9 94.9 12.6 6.7 10.2 74.5 2019 196 97.9 94.9 17.6 8.3 10.2 74.5 For more details, see the ‘Key metrics’ section in this chapter. Attracting tech/digital professionals Our employee value proposition, The Santander Effect, drives the impact the tech and digital experts we recruit can have on our organization. Santander Global Technologies launched Be Tech! with Santander, an initiative to find and onboard 500 new employees with different digital backgrounds and degrees in STEM disciplines. The critical in-house knowledge and skills we are gaining, as well as new ways of thinking and problem- solving, is enriching our capabilities in Cloud, Data and Cybersecurity. In Poland, our SantanderTech programme offers a six-month work experience to students and recent graduates with projects that give them a unique advantage in their career development. 39 Annual report 2020 Contents Corporate mobility Mobility is vital to developing our employees and making our teams more diverse. Our main mobility programmes are: • Global Job Posting offers employees the chance to apply for jobs in other countries, companies and divisions of Grupo Santander. Since 2014, it has posted over 5,700 openings. • Division Talent Mobility Programmes: CIB, Accounting and Control, Internal Audit and other businesses and functions have international mobility programmes to expose employees to new realities and projects, boosting their career development. • Mundo Santander has been one of Grupo Santander's flagship talent programmes since 2008. It supports the development of +2,000 employees who have taken part in strategic assignments in other countries for 3 to 6 months. Due to current travel restrictions, Mundo Santander was re- designed in 2020, so participants could work virtually on international projects in the future to foster their career development under these new circumstances. "Mundo Santander was a fantastic opportunity to connect with colleagues from other countries, and learn different perspectives on how we do business" Styvenson Peña, Corporate Centre Furthermore, Santander México ranked ninth in TOP Companies' Súper Empresas 2020 ranking. The Times listed Santander UK as one of the Top 50 employers for Women 2020, and Santander Polska featured among Wprost magazine's best employers in times of crisis. Career development Santander’s transformation is boosted by our continuous learning approach. Our training and development programmes help employees acquire new skills, sharpen old ones, increase performance and productivity, and become better leaders. These are our main talent and career development programmes: • Talent reviews to assess our employees’ potential and support the professional growth of highly promising individuals. • Succession planning: Our strategic approach is critical to ensuring Santander’s future success by identifying potential replacements for key roles and provide them with valuable development opportunities. • Action Learning Programme Santander (ALPS) for senior managers. ALPS fosters business leadership and problem- solving in a collaborative environment. 2020 marked its third year, with 35 executives taking part. • Young Leaders engages 280 emerging leaders from 22 countries who possess outstanding expertise in digital and innovation, and uphold our Simple, Personal and Fair (SPF) culture. Participants work with senior managers to implement Santander’s strategy and share new ideas. • Top Talent focuses on accelerating the development of our most senior leaders. Participants reflect on their managerial style and are given individual feedback and support to create a development plan based on their key strengths and areas of improvement. Santander, a great company to work for In 2019, we set the target to be a top 10 employer in six of the countries we operate in by 2021. We changed our target from being a "top bank" to being a "top company to work for" to stay ahead of the competition in attracting the best talent. We featured in the Great Place To Work list of the 25 best companies to work for in the world for the second year in a row, out of more than 10,000 organizations from 92 countries. We are also the highest ranked bank worldwide. The ranking considered us one of the Best Places to Work in Latin America, as well as naming Santander Argentina one of the five best companies for women and Santander Brasil one of the ten best companies for women. We received the Top Employers 2020 certification in Chile, Spain, Poland, the UK and in our SCF units in Germany, the Netherlands, Austria, Italy, Poland and Belgium. This honour recognizes excellent working conditions and contributions to personal and professional development. Thanks to the achievements made in Europe, we obtained the Top Employers Europe 2020 certification. 40 Responsible banking Corporate governance Economic and financial review Risk management and compliance Learning and development We value continuous learning so our employees can adapt to a fast-paced, ever-changing environment. We have a global induction, training and development policy to: • transform our business. • manage talent, encourage innovation, share knowledge and identify key employees in various areas. • embed our culture in line with the governance standards of Grupo Santander, which include the corporate culture policy and the code of conduct. In 2019, we laid the groundwork for two transformational projects, Skill Model and Dojo, to support our Strategic Workforce Planning and enhance the skills required to future- proof the workforce. Skill Model identifies common job profiles across our markets to drive simplification and consistency, leveraging internal know-how and helping Santander track what their employees know to facilitate talent management. Dojo tackles transformational training and development challenges by creating common learning paths and learning objectives and bringing all our geographies under one global training platform through academies and badges (certifications) to up-skill and re-skill employees faster. In 2020, Dojo launched and, by October, it had reached 2,167 employees from Retail and Consumer in 11 geographies with a minimum viable product (MVP) that includes three initial academies (Agile, Engineering and Cloud), a Customer & Commercial Academy (to launch in the first quarter of 2021), and the first Badges (certifications) in Agile framework fundamentals, Agile for Teams, Agile Metrics, and Scaling Agile at Santander. Today, Dojo covers 243 skills with more than 38,000 learning activities. Global training Our main initiatives are: → The Risk Pro Banking School and Academy and other risk management centres help establish the best strategies for our employees and promote a strong, uniform risk culture. → The Global School of Internal Audit offers practical solutions designed to adapt to business and regulatory changes. → The Technology & Operations School has rolled out the Agile, Engineering Excellence and Cloud Academies at Dojo, as well as the first virtual Advanced Operations Programme and the Cybersecurity programmes for key roles within Grupo Santander. → Global mandatory online training strengthens our commitment to complying with financial regulation. Available in all of our countries, we integrate it into performance and incentive schemes. Courses cover topics such as cybersecurity, Risk pro, financial crime, data protection, conduct risk (i.e. Cyber Heroes, an online programme to reinforce the direct role we all play in protecting Santander, our people and our customers). Each local unit has other mandatory courses based on local regulations and requirements. In 2020, we trained employees in third-generation human rights issues, namely diversity and inclusion, health and safety, relations with customers and suppliers, the environment and the fight against corruption. Likewise, and as a result of the covid 19 pandemic, Banco Santander has promoted the use of digital channels to continue the training of its employees Main Group data Millions invested in training Investment per employee (euros) % employees trained Hours of training per employee Employee satisfaction (over 10) For more details, see the ‘Key metrics' section in this chapter. 2020 61.3 320.7 100.0 30.9 8.2 2019 102.6 522.3 100.0 40.7 9.3 → Leaders‘ Experience is an executive business and cultural transformation programme to help participants (849 senior leaders and 280 young leaders) acquire the tools and skills they need to accelerate the transformation of Grupo Santander. → The Faro Community has been created to leverage our global footprint and direct our executives’ focus to accelerate Grupo Santander's transformation.Grupo Santander → Through our Responsible Banking endeavours, we've designed a new e-Learning course that raises awareness about the damaging effects of climate change on the economy. We also began a series of virtual talks by leading experts about climate change and what it means for banks, to which all senior managers were invited. In addition, our board members received climate-related training. Some subsidiaries and global units had additional training on climate change, as well as on sustainability, sustainable finance, and diversity and inclusion. 41 Annual report 2020 Contents Sharing best practice We leveraged our global scale to improve our performance faster with these group-wide initiatives: → Risk Pro/I AM Risk Culture Workshop to discuss subsidiaries' progress and establish a global Risk Pro Culture collaboration model. → First Workshop to create global communities and promote a collaborative culture across Grupo Santander, adding value through knowledge sharing. The workshop was organized by the Compliance and Conduct Collaboration Community → Non-Financial Risk Workshops on topics pertaining to Santander Consumer Finance. → Managing Retail Credit Risk through the covid-19 crisis to share core lessons learned from the payment holidays offered to retail customers. Social dialogue and restructuring Grupo Santander promotes and upholds all employment regulation and trade union rights, including the International Labour Organization’s main standards, on freedom of association and the right to collective bargaining. We are in constant dialogue with employees’ legal representatives, with bilateral meetings and special committees where parties can share information, raise concerns and queries, and negotiate. Our restructuring processes are an example of how we promote social dialogue. In recent years, Grupo Santander has had to undergo restructuring in Spain, Argentina, Portugal, Poland, the UK and other core geographies, consistently implementing internal and external flexibility measures to lessen the impact on employees and support their transition to new employment: nd → 2 Responsible Banking Workshop to outline Grupo Santander’s future responsible banking strategy. Our Responsible Banking team also holds regular video conferences with country teams to introduce new initiatives and share best practices. → Our global D&I network, which shared their local good practices and voted on one initiative to implement globally. → Common Culture Workshop focused on setting priorities and learning from best practices. → Simplification network established to identify and share local initiatives globally, enabling us to set a common simplification methodology while tracking progress towards clear targets. → Customer Experience (CX) community created to support subsidiaries in achieving the public commitment to be in Top 3 NPS. It acts as a forum to share best practices towards customers, contents and tools. It also helps implement local customer experience plans. Assisting off-boarded employees Santander Poland executed a restructuring plan to adapt to the new landscape. To ease the transition to new employment and provide emotional support, we created a protection package to help leavers realise their potential. It gives them information on the job market and ways to search for opportunities, as well as encouraging them to contact prospective employers. We launched communication campaigns, with webinars, online consultations and new helplines. We also offered support to managers through a change experience framework, which they could draw on to outline their employees' journey. Restructuring External relocation programme When restructuring affects jobs, we always: → Negotiate with local trade unions and legal representatives to ensure employees' rights are upheld. → Pay severance above the amount required by law, in keeping with agreements with trade unions. → Help employees find new roles in Santander or other companies. → Consider employees' special circumstances (i.e. disability, children with severe disease, etc.) and offer special support. We restructured the organization in 2016 and 2018 alongside strategic partner Lee Hecht Harrison (LHH) to help those affected decide what to do after leaving the company. The A and programme committed to achieving 100% reassignment also assisted employees interested in retirement, starting up a business, specialized training and other options. The measures were available to all leavers and their closest relatives free of charge and for as long as it took them to find a new job. Due to the pandemic, in early 2020 the bank committed to not placing any employees on furlough (known as ERTE in Spain). In December, we announced further workforce restructuring, set for completion in 2021. Around 3,500 employees will leave organization and another 1,500 employees will be reassigned within the Group. A. In 2016 and 2018, 100% of active job seekers found employment through our outplacement programmes. 42 Responsible banking Corporate governance Economic and financial review Risk management and compliance Performance review and remuneration Our comprehensive remuneration framework combines fixed and variable schemes based on employees’ and company achievements. Short- and long-term variable remuneration reflects what we have accomplished (group-wide quantitative and qualitative targets, as well as individual and team targets) and how (e.g., behaviour, leadership, sustainability, commitment, growth and risk management), in addition to pension plans, banking products and services, life insurance and medical insurance and other competitive benefits our employees can choose. Fixed remuneration schemes reflect local market conditions. To set pay, we strictly apply the benchmarks and collective agreements in force in each country and community. To comply with EU regulations on compensation, we class 1,389 employees who make decisions that may have a material impact on Grupo Santander’s capital as identified staff. They are subject to a variable remuneration deferral policy that defers a significant amount of their variable pay (40%-60% depending on their responsibilities) for three to seven years in accordance with internal and local regulations. 50% is delivered in shares and subject to potential reduction (malus) or recovery (clawback). MyContribution MyContribution is our common performance management model. Performance management is key to enriching our culture and ensuring colleagues perform to the best of their abilities in keeping with their career goals. Our model applies to senior managers; employees who take risks deemed "critical" under policies on governance, regulations and remuneration; and employees at the Corporate Centre and in Spain, Brazil, Mexico and Santander Consumer Finance. We plan to implement it in other core markets in 2021. MyContribution has three components: • What: 50% is based on employees' individual goals set in line with group-wide strategy. Main initiatives in 2020: → Inclusion of our responsible banking targets (including being a "top-10" company to work for; women senior managers, financially empowered people; green finance; and ethical channel standards) as a qualitative metric in our executive remuneration bonus scorecard. → Mitigation of remuneration-related risks. → Increase awareness of fair pay practices in terms of equal pay and gender pay gap reduction. For more details on remuneration data, see the ‘Key metrics’ section of this chapter. For more details on board remuneration, see section 6 of the 'Corporate governance chapter'. • How: 40% is based on how employees deliver on objectives and foster the values of Simple, Personal and Fair, the eight corporate behaviours and the four leadership commitments, which combine to form The Santander Way. • Risk: 10% is based on how employees manage risk in their day-to-day role. MyContribution is updated regularly. It now highlights our risk culture with a separate category created in 2020 to assess it. 43 Annual report 2020 Contents Diversity and inclusion Our commitment to a diverse and inclusive work environment is a cornerstone of our corporate strategy. Our global D&I executive working group and D&I expert network of local representatives perform a vital role in driving and cascading the importance of diversity and inclusion across Grupo Santander. To recruit, manage and develop talent that reflects broader society, we developed a diversity and inclusion (D&I) strategy in 2020. It sets out to consolidate an inclusive workforce in terms of gender, LGBTI, people with disabilities, and cultural diversity (age, ethnicity and race, nationality, educational and professional background, and international experience) by: • encouraging leaders to get involved: their commitment to being open and inclusive and to promoting diversity will help consolidate our diverse and inclusive culture. • increasing awareness: promoting diversity and shaping our culture through global standards and actions such as FlexiWorking, parental leave, training, employee networks and the celebration of international days. • promoting balance: special focus on increasing the number of women in management and in development programmes. 53.7% 23.7% of employees are women of senior managers are A -1 pp vs 2019 ,+1 pp vs 2019 women 39.2 1.9% Average age of the workforce, + 0.6 pp vs 2019 Data at year end. A. Senior managers are 1% of total headcount B. Data from Mexico not included as it is confidential information. of employees have a B , +0.1 pp vs 2019 disability 86% of employees believe Santander treats employees fairly regardless of their age, family, marital status, gender identity, disability, race, colour, religion or sexual orientation. +1 pp vs 2018. C C. 2019 Global engagement survey. Next survey expected in May 2021 Euromoney gave Santander its first- ever global ‘Best Bank for Diversity and Inclusion’ award, highlighting the breadth and ambition of our diversity and inclusion programmes Initiatives and achievements in 2020 Gender Cultural LGTBI → 3-year roll-out of maternity and paternity leave minimum standards: Maternity standards improved in Argentina as well as in Mexico, where we also implemented secondary parent leave. In 5 geographies, our standards have been met or exceeded; roll-out will continue in other markets until 2022 → An objective to achieve gender balance in training and development programmes → GPTW named Santander one of the Best Workplaces for women 2020 in Brazil and Argentina → First global meeting of the Santander Women Network held with representatives from Spain, Argentina, Chile, the US, the UK, Santander Consumer Germany and Santander Consumer Nordics. Our objective is to extend the network to all subsidiaries to act as a counseling body regarding local gender initiatives → New communication guide in Argentina, which covers gender and includes a protocol against gender violence → Management skill programme for Women launched in Chile to incorporate more women managers → Our definition of cultural diversity expanded to include race, age and international background → Cultural diversity in senior managers increased from 50% to 66% → Black inclusion action plan rolled out in the UK to raise the number of Black senior managers → "Through our eyes" talks organized in the US for employees to share experiences, encouraging often hard conversations about racial and social injustice. This initiative was voted to be rolled out globally in 2021, adapted to local circumstances → Embrace network leaders from each geography met together in July to share best practices and set the first global LGBTI network objectives for 2021 → Survey conducted in Mexico to find out how LGBTI individuals feel in the bank, in addition to LGBTI inclusivity workshops → Collaboration with the Office of Ethics and Employee Relations in Poland to encourage speaking up People with disabilities Empowerment → Global mapping to share countries' best → Compulsory online diversity and practices for people with disabilities → Celebration of the People with disabilities week across the group → Paid work experience launched in UK, in addition to tailored career support programme for students with autism → Inclusive recruitment methodology applied in Portugal inclusion training for senior managers to promote inclusive leadership and raise awareness → Panels organized in Mexico on positive masculinity and inclusive leadership → Monthly seminars on D&I and gender diversity in Argentina For more details on our D&I initiatives, see the Diversity and Inclusion report in our corporate website. 44 Responsible banking Corporate governance Economic and financial review Risk management and compliance Gender equality Grupo Santander continues to prioritize equal opportunity for men and women. Although 53.7% of employees are women, we recognize the figure is lower in leadership roles and we're taking significant measures to bring in more women leaders at all levels. A In 2019, we set diversity targets for senior managers ; in 2020 our initiatives continued to promote gender equality, covering issues ranging from work-life balance and parental leave standards, to recruitment, career development, equal pay and awareness. Across our footprint, we applied the global minimum standards for parental leave approved at the end of 2019. They include initial paid maternity leave of at least 14 weeks in Argentina, Mexico and the US as well as secondary parental leave of at least 4 weeks in Brazil, Chile, Mexico, Poland and Uruguay. Grupo Santander is also taking measures to fight sexual harassment, which has been explicitly included within our global code of conduct. In Spain, we have an equality plan with protocols against sexual and gender-based harassment. A. Senior managers are 1% of total headcount. Grupo Santander is one of the leading companies in the Bloomberg Gender-Equality Index, achieving the top score in equal pay and gender pay parity. Equal pay Our strategy also prioritizes pay parity between men and women, which we measure in terms of the equal pay gap and the gender pay gap. Gender pay gap: 31.7% Equal pay gap: 1.5% What it measures: The equal pay gap gauges "equal pay for equal work" for women and men in the same job at the same level. Our comparison does not consider certain factors, such as tenure, years of service, previous experience or background. Our progress: Grupo Santander set up fair pay programmes to reduce the equal pay gap. They include systematic reviews tied to remuneration cycles (merit-based promotions and bonuses), work reorganization and career development plans to recruit, engage, and retain diverse talent. Our equal pay gap, which stood at 2% in 2019, declined this year as a result of our strong commitment and wide-ranging action plans across the organization. We will continue conducting robust reviews and analyses of pay data to detect, understand and act on any gaps. What it measures: The gender pay gap measures differences in compensation between women and men in an organization, business, industry or the broader economy, irrespective of the type of work. At Santander, fewer women hold senior and business management roles than men (something we are focussed on addressing), while more women work in retail banking and support roles. We calculate the gender pay gap as the difference of median of remuneration paid to male and female employees expressed as a percentage of the male remuneration. Our remuneration schemes factor in base salary and variable pay, but not corporate benefits/in-kind compensation or local allowances. Our progress: Santander addresses the gender pay gap with a methodology based on best practices and common guidelines for the group and local units. We are extremely committed to fostering a diverse and inclusive working environment. We maintain rigorous standards for promotions, recruitment, succession planning, implicit bias training and talent pipelines to strengthen diversity, with communications from executives as well as mentoring, networking and other actions aimed at achieving greater balance in the organization. Local units have action plans in place based on their own characteristics and conditions. The gender pay gap slightly increased from 31% in 2019, owing to a larger sample size coming from enhancements to our methodology and its comprehensiveness. 45 Annual report 2020 Contents People with disabilities Grupo Santander has plans in place to include, and increase accessibility for, people with disabilities, which we believe is a question of talent, ethics and responsibility. While their inclusion promotes their independence, freedom and dignity, it also enriches the teams they join. In 2020, these global initiatives increased the number of employees with disabilities in Grupo Santander from 1.8% in 2019 to 1.9%: • A global mapping to share countries' best practices across the group. Our D&I strategy sets two objectives to foster the inclusion of people with disabilities: • Recruitment of talent with disability benchmarks through trainee programmes. • To meet (or exceed) the legal quota for employees with • Volunteering and mentoring for people with disabilities. disabilities in a direct way, increasing the 2019 headcount of employees with disabilities by 1% in countries without a A . legal quota by 2025 • To comply with local accessibility laws, requiring the AA- level accessibility standards dictated by the Web Accessibility Initiative (WAI) for all new digital products. • Awareness campaigns. • AA-level digital accessibility criteria required in the validation of Grupo Santander websites and apps. Fundación Universia is a core partner in Grupo Santander's efforts to include people with disabilities. A. This measure exempts countries where it is not legal to collect disability data. Promoting the inclusion of people with disabilities Santander Argentina carried out a series of initiatives to raise awareness and promote the inclusion of people with disabilities: → We ran training for blind people and people with intellectual disabilities. → We included training about disability and ran sign language courses for employees on our education platform, Academia. → We implemented initiatives on adapted sports, sign language and inclusive design to celebrate the People with Disabilities Week. → We created a network for colleagues with disabilities and allies to share experiences, propose ideas and act as their own ambassadors. Differently abled Since 2018, the Differently abled programme has been preparing organizations to employ people with disabilities to promote inclusive and diverse workplaces. This year, the project focused on spreading awareness about the rights and needs, and benefits of employees with disabilities, in addition to tearing down barriers and creating an environment where they could feel free to talk about their disability. Differently abled's recruitment and other activities, which help strengthen our brand as a socially responsible employer, include: → workshops, webinars, guides and articles on the Intranet for employees and hiring managers (e.g., on how to recruit people with disabilities, best practices, rights of people with disabilities). → benefits for employees with disabilities (one-off financial support for health-related purposes. → assistance with disability certificate applications. → cooperation with universities, foundations and other external organizations to employ people with disabilities. → awareness campaigns to mark the International Day of Persons with Disabilities inside and outside Grupo Santander. 46 Responsible banking Corporate governance Economic and financial review Risk management and compliance Employee experience Our motivated workforce is vital to ensuring commitment and success in helping people and businesses prosper 1. Speaking up, active listening and taking action As a responsible bank, everyone should feel able to suggest better ways of doing things and alert management when things go wrong or they suspect misconduct. Promoting speak up without fear This means: Protect Innovate Engage What we do: Management of risks and ethical concerns, internal governance How we do it: Ethical channels and whistleblowing lines, committees and forums Ideas, solutions, simplification, improved processes Agile working, Validate (open innovation platform) Recognition, performance management, feedback StarMeUp, MyContribution; Employee pulse surveys Our listening strategy In line with our corporate behaviours, we truly listen to colleagues and encourage them to speak up and talk straight. We take action driven by feedback, data and experience, rather than process, with advanced reporting and network analysis to bring about change. The many large-scale internal listening exercises we undertake, such as all-employee surveys (our Global engagement survey is bi-annual), pulse surveys (global and local) and crowdsourcing initiatives (such as Validate, our open innovation platform) are supplemented by performance check-ins and appraisals, exit interviews, incident tracking and whistleblowing channels. We're also reviewed by Top Employer, Great Place To Work and other certifications that place importance on how we listen to our employees. In 2020, our listening approach covered financial crime, covid and other topics. Additionally, employees participated in a global pulse survey on our corporate purpose, employee Net Promoter Score (eNPS), simplification, collaboration and covid. Simplification and collaboration had been the two areas with the lowest scores on the 2019 Global engagement survey. According to the results of our global pulse survey, our employees are committed to our purpose to help people and business prosper, and believe Santander responded effectively to the pandemic's economic and business-related challenges, and the bank has been taking appropriate action to ensure employees stay safe and healthy. Our people also indicated a willingness to retain some mode of remote working in the future, which our global FlexiWorking framework will support. In terms of simplification and collaboration, the main areas of improvement were streamlining processes, improving IT capabilities, access on internal portals to find information and clearer guidelines and procedures. Amid the first wave of the pandemic in March, we held open, virtual Ask Ana meetings with Group Executive Chairman Ana Botín so everyone could remain up to date with current affairs at the bank and ask questions on pressing matters. Although most meetings highlighted the pandemic, they also looked at strategy, business, diversity and other topics. In 2020, we held 10 Ask Ana meetings, which attracted 140,000 connections/views. 86% of employees agree Santander's response to economic and business challenges has been effective during the pandemic 78% of employees say they're open to remaining under some type of remote working model + 22,500 employees surveyed, of which 51% responded A A. 2020 global pulse survey results 47 Annual report 2020 Contents Ethical channels We have Canal Abierto, our ethical channel model, in place in our core markets. In 2020, it was launched in Portugal and Argentina and at Openbank. Its purpose is to enable employees to report violations of the general code of conduct and actions that fail to uphold our corporate behaviours. It promotes eight minimum standards, including easy access, anonymity, third-party management and awareness. In 2020, we focused on implementing them across Grupo Santander, especially through: • support and sponsorship by the Group executive chairman and local CEOs for employees to use the channels to speak up about misconduct; • acceptance of complaints about non-ethical conduct that runs counter to Simple, Personal and Fair behaviour; • Enhanced measures to prevent conflicts of interest during investigations; and • the common minimum standards were part of the criteria on the Responsible Banking executive remuneration scorecard. For uniform channel management and reporting, Grupo Santander enacted the Canal Abierto policy in 2020. It includes common standards, management criteria, guarantees for users and local initiatives all channels must meet to promote the channel's use among employees. It also sets a taxonomy of cases that can be reported, including sexual harassment. Canal Abierto helped us hear and handle approximately 300 concerns from employees about covid-19 in 2020 (7% of total complaints). Overall, they were about hygiene Types of issues received measures, non-compliance with social distancing, quarantine, staff resources and managers' responses to the pandemic. 189 were deemed substantiated, and 25 led to disciplinary action. This improved our crisis management and other internal procedures. In 2020, we received 4,390 issues mainly related to labour relations (+3 pp vs 2019), including 28 that alleged workplace discrimination (six of which led to sanctions, including three dismissals); fraud and conflicts of Interest (-7 pp vs 2019) and products and financial services marketing (no change yoy). On average, issues were processed in 35 days. No cases of corruption or human rights violations were confirmed. Mexico In 2020, our Mexico team's Línea Ética (ethical channel) added a covid category for employees to report violations of internal health protocols, hygiene measures and potential infections. This was driven by a strong communications campaign, timely follow-ups on filed complaints, action plans and disciplinary measures. Approximately 147 complaints were received and resolved during the pandemic. The number of complaints fell significantly in the final months as a result of mitigating actions. Internal controls helped remind everyone of the company's and employees' obligations and disciplinary measures. In the most serious cases, those engaged in behaviours increasing the risk of contagion were warned, suspended or dismissed. Issues received Issues deemed well-founded for investigation Disciplinary actions which led to dismissal 2020 2019 4,390 4,473 3,787 3,534 1,083 315 920 294 n Labour relations n Fraud and Conflicts of Interest n Products and financial services marketing n AML and Terrorism financing n Corporate Behaviours n Others 48 68%12%9%7%3%1% Responsible banking Corporate governance Economic and financial review Risk management and compliance 2. Corporate benefits We offer several benefits for employees across all geographies. Each country establishes programmes adapted to local conditions. Benefits range from free services for employees and family members, to discounts on products and services. During the pandemic, we extended those services to guarantee our employees' wellbeing in all our countries to help our people stay physically and mentally healthy during lockdown. We adapted health cover to new circumstances and needs. In Spain, we reinforced our medical services and launched a new advice programme with health, social and legal experts. In Brazil, we had a 24-hour remote medical assistance service available for all employees and their relatives. For more details on our initiatives promoting employees' wellbeing, see "Our wellbeing" in this section 3. The way we work We promote our employees' work-life balance through flexible working and health and wellbeing programmes. FlexiWorking Our global FlexiWorking framework consists of formal and informal measures addressing where, when and how much we work: • "Where we work" incorporates home/remote working and other measures. • "When we work" considers compressed hours/days, flexible start/end and break times, and alternative working patterns. • "How much we work" is about part-time working, special leave, flexible holidays, job sharing and other measures. The agreements we have signed with major trade unions provide measures to improve employees’ work-life balance. We made a pledge to promote practical time management and the use of technology that helps our employees better organize work and upholds their right to ”disconnect digitally” when they are away from the workplace. As part of our covid-19 response in Spain, we implemented automated tools advising employees to avoid sending emails or hosting meetings outside working hours. FlexiWorking ultimately enabled over 100,000 employees to work remotely during the peak of the pandemic, while maintaining strong levels of wellbeing (as seen through our regular pulse surveys). Corporate benefits in Argentina Santander Argentina offers benefits to employees in different areas: → Family: Nursery subsidies, schools camps and scholarships for employees' children. → Health: Excellence plan for all employees, with permanent access to doctors, dentists, psychologists, social welfare officers and other health professionals. → Financial products: Reduced interest rates, credit cards without extra costs, access to mortgages with beneficial conditions, etc. During covid-19, they also offered discounts at supermarkets and petrol stations, favourable lending conditions to buy cars and motorcycles, discounts on internet bills and material to facilitate remote working. 83% of employees say Santander is providing the appropriate flexibility they need to be effective and productive. A A. 2020 global pulse survey results. To adapt the way we work and fulfil employee expectations, we are working on a project to review our global flexible working proposal according to subsidiaries' realities, gaining flexibility in the workplace and with new digital capabilities. Changes will be gradually implemented in 2021 and afterward. Agile methodologies We implement agile methodologies to foster collaboration, accelerate decision-making and drive change through remote teams in several countries. In 2020, we focused on implementing them in Brazil, Portugal and Poland. In Poland, 1,400 employees are now working in agile units. The significant improvements this brought about include greater cooperation between IT and business areas, higher engagement and transparency. 49 Annual report 2020 Contents 4. Volunteering Volunteering builds a strong team spirit and a sense of purpose, while helping the communities we serve. The corporate volunteering standard in our corporate culture policy entitles employees to spend a certain number of working hours each month or year volunteering. We hold two important group-wide volunteering events for employees each year: our Santander Week, observed in all our countries at the same time, and International Volunteering Day. Locally, the group’s subsidiaries organize multiple volunteering programmes as part of their community investment commitments. We continued supporting communities despite the pandemic Our collaboration and commitment to social organizations did not waver during the pandemic. Our volunteers in every market continued to devote their time to promote a more inclusive society. When we couldn't run our regular volunteering programmes face-to-face, we delivered them virtually. We also launched several social initiatives covering new needs. Santander also set up the Together solidarity fund to raise money for the most urgent needs generated by the pandemic, such as medical equipment and research. Employees in all our countries made personal contributions to this fund. For more details, see the 'Supporting Communities' section in this report. Volunteering initiatives during covid-19 Mães da Favela programme In 2020, more than 46,000 collaborators from Santander Brasil participated in the Mães da Favela project, organized by the NGO Central Única des Favelas (CUFA). They put together a 12-hour live festival to help single mothers from disadvantaged communities. More than 20 TV and radio channels streamed the event, which raised over R$3 million. Santander Brasil matched this amount to bring the total to R$7.2 million. The initiative benefited 11,000 women across the country. +26,000 employees participating in community activities +56,000 hours volunteered In Uruguay, we gave talks through Santander Universities to groups affected by the pandemic. They included a session on “How to do business during the covid-19 crisis”, where leading business school figures shared content and useful insights into how to cope in this new landscape. In Spain, the Minutos en compañía campaign (together with Adopta un abuelo and Fundación United Way) gave training to 75 volunteers who called elderly people living alone or in care homes or hospitals to lift their spirits (12,300 minutes in one month). In Poland, our people sewed over 15,000 protective masks and donated them to health centres, care homes and other institutions. The material used to make the masks was sent to employees' homes. In Chile, volunteers provided online guidance and support to students from disadvantaged communities to continue their education. In Argentina, volunteers provided assistance to the elderly, buying them food, and providing emotional support and assistance. Volunteers also gave talks on financial education to different audiences and mentored young people in social vulnerability situations. In the UK, over 2,500 employees volunteered with Alzheimer’s Society and Age UK to make social phone calls to lonely and vulnerable people, pledge social actions to support people affected by dementia, support local services , and help older people get online and develop their digital skills. 50 Responsible banking Corporate governance Economic and financial review Risk management and compliance 5. Our wellbeing Keeping our employees safe, healthy and well has always been a core priority for us – and especially in 2020. On top of the measures we took to protect our employees, we have collective bargaining and other sector and bank agreements that include provisions on employee health and occupational risk prevention such as check ups and testing on a regular basis or following prolonged absence. Our structure and resources are designed to mitigate work- related risks. We have appointed a global head of health and safety to coordinate and centralize all initiatives on employees' wellbeing. We also work with employee representatives to regularly revise our occupational risk prevention plans, which we implement through: • regular workplace assessments of health and safety risks and preventative measures to eliminate or control them. • considering health and safety issues when designing, contracting for or acquiring offices, furniture, equipment, products and IT equipment. • procedures to control and guarantee safe working conditions, which are developed by the Occupational Risks prevention area in collaboration with other units. They consist of the identification of risk factors affecting employees' health and safety; the assessment of risks that cannot be avoided; and the adoption and scheduling of preventive measures. • information and theoretical/practical learning for employees. • integration of occupational risk prevention into management to embed it in all operations that may impact on employees' health and safety. In 2020, to guarantee our employees' wellbeing during the covid-19 pandemic, our protocols and prevention measures consisted in: • delivering masks, gloves and protective screens to office and branch-based employees; applying strict personal hygiene protocols; and reorganizing spaces to ensure social distancing. In Spain, we committed EUR 15 million to sanitary material purchases and disinfection activities, and performed more than 70,000 tests. In addition, we provided employees and their families with less expensive tests and protective equipment. • offering information and training on covid-19 prevention, with a specific site on our corporate Intranet featuring coronavirus updates and Q&A sessions with our executive chairman. • executing a corporate de-escalation plan with prevention measures and guidelines for all geographies that fit local government indications and included monitoring of employees' health via apps, tests and surveys. BeHealthy We are committed to being one of the healthiest companies in the world. We offer employees health and wellness benefits, and raise awareness through our global BeHealthy wellness programme. BeHealthy has four key dimensions: Know Your Numbers, Eat Well, Move and Be Balanced. In response to covid-19, we created the BeHealthy at Home brand to empower and enable colleagues to be healthy and look after their families. Our teams gave advice on working and exercising at home and on nutrition. In the UK, we created a podcast series called The Wellbeing Podcast, which featured leaders discussing key topics during the pandemic. In Poland the CEO launched a challenge to burn more calories than him in a steps challenge. Our global partnership with Gympass saw the launch of Gympass W (a digital platform to access 1:2:1 live sessions with fitness trainers, cooking classes and much more). We also launched a series of videos based on the book by Chief Wellbeing Officer Dr MacGregor, with messages about wellbeing and encouraging action through experiments, quizzes and other activities. 87% of employees say Santander is taking appropriate steps to ensure employees stay safe and healthy A A. 2020 Global Pulse survey results 3.1% absenteeism A,B 10,305 thousand hours missed due to non- occupational illness and accidents B 0.07 Severity rate C For more details on absenteeism data, see the 'Key metrics' section in this chapter. A. Days missed due to work-related accidents and non-occupational illness or accidents for every 100 days worked. B. Santander UK does not count hours not worked due to covid-19 as absences so they will not affect the remuneration objectives set prior to the health crisis. C. Hours missed due to occupational accidents involving leave for every 100 hours worked. 51 Annual report 2020 Contents Acting responsibly towards our customers Being responsible means offering our customers products and services that are Simple, Personal and Fair. We need to do the basics brilliantly and solve problems fast, while learning from mistakes. As a responsible bank, our customers are at the centre of everything we do We focus on our customers We protect our customers We manage their complaints We listen to them and enhance their experience with us. By identifying vulnerabilities and avoiding product mis-selling. In case something goes wrong, we act and learn from it. • Community: Working as one team helps us serve our customers better. We created a global CX community to generate synergies and share best practices, knowledge and tools across Grupo Santander. • CX plans: We helped devise and execute local plans to improve customer experience. We also focused on improving customers' emotional experience through Emotional hub in Mexico, the C+ Santander model in Argentina and other initiatives. Transforming customer experience In 2020, we reinforced our customer experience (CX) strategy to ensure we offer the best service, always. The diverse CX initiatives we ran focused on active listening. We aim to become a leader in customer satisfaction (top 3 in NPS) in all our geographies. Supported by our new global multidisciplinary team, we prioritize projects with the greatest impact on NPS, and oversee improvements to the customer experience wherever we operate. We created that team based on four pillars: • Strategy: To unify Grupo Santander's CX vision, we started to create common CX guidelines that will boost customer journeys and touchpoints, ensuring customers remain at the centre of our efforts. • Analytics: To enhance the team's performance and bearing on our business, we evolved CX metrics in line with local initiatives to ensure all our plans are customer-centric, based on data and action-driven. 52 Responsible banking Corporate governance Economic and financial review Risk management and compliance Emotional hub C+Santander model The C+Santander (Customer+Santander) is a data-driven model for decision-making to create memorable customer experiences by transforming perceptions into data; data into knowledge; and knowledge into action. We measure every touch point via NPS to keep a close track of customer claims. We then correlate them with business performance indicators, generating a constant flow of data each area can use to focus on delivering customer strategies that can make the greatest difference. Thanks to this approach, we moved into the top 3 in NPS in 2020. We also developed experience guidelines on how to approach customers in personal and digital interactions. Poland, a case study on simplification As part of our Agile transformation, Santander Polska simplified products and processes. This significantly improved how we design and market our products and services, while solving customers' problems with easier processes. So far, we have: → developed new digital cash loans, reducing the time and steps to complete the transaction and vastly increasing new cash lending. → set up a new way to open accounts in branches that only takes 2.5 minutes (as opposed to the 33 minutes previously) and only requires a signature for completion, halving the number of clicks. → created 15-minute SME smart loans (down from 90 minutes) without a loan application. The process is omnichannel and can be completed in a single tool. The Emotional hub initiative seeks to listen to our customers to understand and improve their emotional experience. We combine customer and employee interviews with design- thinking to build an emotional map that helps us uncover sensitive issues which we can address. We identified much- needed enhancements for full service, customization, and product and process simplification. We listened to 600,000 customers and more than 1,000 employees, who gave us a holistic view of their emotional experience. We use interactive channels to listen to, and better understand, our customers. Our customer centres in Chile, Mexico, Spain and Portugal enable us to get to know more about what they think of our products and services and the way we do things. Meanwhile, our corporate Consumer Protection function shares best practices across Grupo Santander through CuVo (Customer Voice), a monthly global working group formed by all our customer-facing areas. In 2020, we continued to simplify our processes and product catalogue. In Portugal, we streamlined our product portfolio by reducing the number of accounts and bank cards from 141 in 2019 to 38 in 2020. We also created the Santander One account, which brought together several accounts into one and helped increase transparency, offering subscription- based plans and free, essential services to loyal customers; it was launched in Spain and will be progressively implemented in all our European units. Expanding our new branch models and promoting inclusiveness We are constantly adapting our branches to customer needs. In 2020, we opened Work Cafés in Poland and the US, and took steps to make our branches and channels more accessible and inclusive. In Spain and Portugal, we use universal design principles (induction loops, tactile paving, accessible toilets, etc.) to fit out our Smart Red branches and Work Cafés. Santander Polska’s Barrier-Free Service includes branch accessibility measures and sign- language video calls with customer service advisers. We are working tirelessly to adapt our ATMs for the visually impaired: 95% of Santander Brasil’s machines are braille- enabled; 1,286 have been adapted in Argentina; more than 2,000 in Portugal are equipped with voice command; and 1,300 in Poland are speaker-driven and braille-enabled. 53 Annual report 2020 Contents Customer satisfaction Our strategy sets out to inspire loyalty in our customers. We conduct more than a million customer surveys per year to monitor their opinions and experiences with Santander and see how we can adapt our products and services to improve their experience. To measure customer loyalty and satisfaction, Santander uses the Net Promoter Score (NPS). NPS is an indicator that summarizes our relationship with customers. It depends on three main drivers we care about and constantly work to improve: service, product and price, and image. It contributes to the variable remuneration schemes of most employees. In 2020, our NPS was in the top 3 in 6 out of 9 geographies. Loyal customers in 2020 are 22.8 million, up 6% from last year. Our customers' expectations changed largely because of covid-19. Therefore, we focused on improving our service at contact centres and digital channels (which have been the most widely used channels during the pandemic). We also worked on simplification, which we found to have a profound impact on NPS. Top 3 6 of 9 countries A A.Santander US has a different objective and does not account for the metric. South America Europe North America 2018 2019 2020 5º 4º 3º 3º 2º 2º 3º 2º 1º 2º 2º 3º 3º 3º 2º 5º 4º 5º 3º 3º 1º 1º 2º 6º 3º 4º 4º 9º 9º 9º Internal NPS benchmark to measure customer satisfaction, audited by Stiga / Deloitte Main peers by country: Argentina: Galicia, BBVA, ICBC, HSCB, Macro and Nación; Brazil: Itaú, CEF, Bradesco, Banco do Brasil; Chile: BCI, Banco de Chile, Itaú, BBVA, Banco Estado; Uruguay: Brou, Itaú, BBVA, Scotiabank; Spain: BBVA, Caixabank, Sabadell, Bankia; Poland : ING, Millenium, MBank, Bank Polski, Bank Pekao; Portugal: BPI, Millenium BCP, CGD, Novo Banco; UK: NationWide, Barclays,Halifax, Natwest, Lloyds, HSBC, TBS, RBS; Mexico: Scotiabank, Banorte, Bancomer, HSBC, Banamex; US: JP Morgan, Bank of America, Capital One, PNC, M&T Bank, TD Bank, Citigroup, Ctizens, Wells Fargo. We monitor all NPS drivers SERVICE Branch Channels Personal Simple General service, waiting time, branch assistance, layout Mobile, internet, ATM, CDM, contact centre, personal manager Personal attention, kindness, employee professionalism User-friendliness, speed and agility Communications Clear statements, information on offers and deals, coherent information Problems Others IMAGE Percieved issues Data protection Strong and sound, social responsible, innovative, trustworthy, transparent PRODUCT & PRICE Simple product and service proposition, fees and charges, benefits, credit cards Group NPS by channel A 56 Branch 45 Contact Center 60 Internet 68 Mobile Branch: Does not include Chile Internet: Does not include UK, Chile and Uruguay Mobile: Does not include Uruguay A.Based on the results of surveys made to customers 48h after their interaction with the Bank. It presents a pondered average of the Group's active customers. 54 Responsible banking Corporate governance Economic and financial review Risk management and compliance Protecting consumers and helping vulnerable customers with fees and ATM issues) and develop plans to tackle them. We plan to add artificial intelligence to the process to gain insights we can use to increase customer protection. Being responsible means offering our customers products and services that are Simple, Personal and Fair. Our daily operations must be brilliant, and we must go beyond legal minimums to give our customers an exceptional experience. Consumer protection policy and principles To further embed our customer focus, the Compliance & Conduct function implemented the consumer protection policy. It sets out principles we expect our teams to follow, ensuring high ethical standards in our relationship with customers. Consumer protection principles To apply our consumer protection principles to our day-to-day practices – reflecting our aspiration to be Simple, Personal and Fair in all we do – this year we implemented a reporting process in all geographies. By using customer voice and business indicators, it allows us to identify customer outcomes and local gaps (e.g., poor assistance, incidences Consumer protection principles The Compliance and Conduct function repeatedly identifies potential risks to customer protection from new regulations or problems with products or services. It carries out thematic reviews for the entire group, assesses the situation and makes decisions to improve and mitigate risks. In 2020, thematic reviews focused on responsible business practices in account packages, revolving cards, and overdrafts. Their findings and suggested best practices for transparency, disclosure to customers, sales, commissions, loan approval and credit conditions, were shared across geographies. Next year, we expect subsidiaries to close the gaps identified against the group's responsible business standards. In general, all subsidiaries are well positioned to fulfil those standards. We also ran awareness campaigns and workshops on product governance and consumer protection that matched strategic priorities. Treat customers 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 Vulnerable customers Our global vulnerable customers and over-indebtedness prevention guidelines, approved in 2019, aim to ensure a consistent group-wide approach in guaranteeing fair treatment to customers, with empathy according to their particular circumstances, and in avoiding over-indebtedness. For example, when validating a product or service, we must specify if we can offer it to a vulnerable customer. Although most countries have laws that state when a customer can be considered vulnerable, our definition is wider and covers circumstances beyond financial stress, mindful of the various personal factors that lead to a state of vulnerability. By the end of 2020, all subsidiaries had locally approved the vulnerable customers guidelines. This puts us in a good position to face regulatory trends as we continue to build a more solid vulnerable customer model. "Here & Now" for our elderly customers To support elderly customers during the covid-19 pandemic (especially those unfamiliar with digital channels), Santander Portugal launched Here & Now. This initiative is a personal contact and community programme and free service for employees to help elderly customers with digital channels, payments, and daily tasks like making purchases at the chemist. We contacted more than 55% of our customers over the age of 65 (more than 150,000 people), many of whom told us things like “You've called me more than two of my three children” and “I thought that this type of service was only given to rich people”. We also distributed 580 tablets and communication cards to care homes across the country, so residents could talk to their families during the Christmas holidays. 55 Annual report 2020 Contents Product governance Santander’s governance structure enables us to protect customers' interests. Our Product Governance and Consumer Protection function in our Compliance & Conduct division sets standards to manage products and consumer protection properly. Our product governance forum, which involves the Responsible Banking unit, ensures the products and services we market meet the needs of identified target segments, are available on the right channels and deliver the desired outcomes for customers. Our product validation assesses whether a product can be categorized as ESG and is considerate of vulnerable customers. Salesforce cultural transformation We include customer satisfaction indicators in our remuneration schemes so the first line of defence are incentivized to meet customers' rising expectations. Our three-year transformation plan (which started in 2018) continued to revise the remuneration of our salesforce. Corporate Compliance & Conduct, with the collaboration of HR and local teams, monitored the implementation of local action plans to confirm significant improvements. The action plan covers governance; variable/fixed remuneration ratios; linear business objectives that do not promote specific products; the weighting of quality components against adequate diversification of conduct metrics; and other topics. Conduct in collections and recoveries In 2020, our product governance focused on: • digital contracting and contents: This includes the scope, consistency, presentation format and access to information on digital channels (Online Banking/Mobile Banking). We paid special attention to pre-contractual information, withdrawal rights, complaints handling and post-sale information. • responsible consumer credit lending: To ensure credit terms are reasonable and prevent over-indebtedness, we focused on revolving cards and drafted an internal guide to regulate conduct standards that must be observed. In executing this plan (especially in 2020), we have significantly increased the weight of conduct/quality on variable remuneration (equal to or above 40%). Customer satisfaction and quality are the basic pillars of this model. Our employees' knowledge and skills are key to ensuring the highest quality customer service. As part of our continuous improvement process, in 2020, several group subsidiaries updated their conduct risk with customer training material (part of global mandatory employee training) and a specific course on conduct standards in collection and recovery. In the first half of 2020, we developed plans in all geographies to increase focus on collections and recoveries conduct. This improved our conduct in that regard, while strengthening controls over transparency, data protection, vulnerable customers, training and remuneration practices in collections and recoveries. • enhancing quality assurance and third party risk management to ensure a fair customer journey with qualitative conduct indicators. • providing specific conduct training to all employees involved in debt collection. Our plans focus on: • boosting controls to mitigate conduct risks (fair treatment to customers and end-to-end customer management). • re-designing communications with customers to make them more transparent and to enhance data protection controls. • identifying and referring vulnerable customers. Our efforts accelerated owing to covid-19. With the pandemic, defaults are likely to increase, making it even more important that our processes ensure our customers are treated fairly. For more details on product governance, consumer protection and conduct and collection & recovery, see section 7.2. 'Compliance and conduct risk management' in the 'Risk management and compliance' chapter. 56 Responsible banking Corporate governance Economic and financial review Risk management and compliance Data protection Grupo Santander is committed to collecting, storing and processing personal data safely and securely. Our compliance programme guarantees robust risk-related management of data. It includes: • corporate-based criteria as general lines of action to meet regulatory requirements. • local subsidiaries' responsibility to fulfil the General Data Protection Regulation (GDPR) and local regulation on data protection. • a solid governance model (available on the corporate website), consisting of: • corporate and local policies. • a data protection officer (DPO) and/or managers in each unit where necessary. We formally disclosed appointees to local authorities. • a corporate oversight programme based on a bi-annual monitoring forum chaired by the Group chief compliance officer, where subsidiaries report on compliance status, management indicators and half-year evaluations. Other items that bolster our commitment to personal data protection are: • a homogeneous group-wide monitoring model, which includes monthly reporting on performance indicators. • data protection integrated into the annual Internal Audit review programme. The number of units reviewed by internal audit since 2018 is 38 (and counting). • a corporate data protection management tool that records group-wide data protection activities (c. 6,000 treatments). • promotion of corporate initiatives and the exchange of best practices among units, including workshops and training courses. • special training for DPOs and privacy "champions". • constant monitoring of regulatory developments to update and consolidate criteria, methodologies and documentation. • employee training and awareness. Principles of action in our relationship with political parties In our goal to be a responsible bank, Grupo Santander maintains a good relationship with all its stakeholders. Grupo Santander is governed by principles of transparency, honesty and impartiality in its interactions with political parties and other entities with public and social purposes that are also political in nature. Since 2016, our policy on financing political parties (available on our corporate website), which our board’s executive committee approved, applies to all our subsidiaries worldwide. It prohibits making monetary or in-kind election donations and contributions. In the commercial relationship, Grupo Santander prohibits full or partial debt forgiveness for political parties and their affiliates, even though they can negotiate the terms of debt with our subsidiaries at interest that can never be below market rate. Furthermore, this policy applies to political parties’ electoral candidates to the extent local laws provide. Grupo Santander rejects any and all acts of corruption by employees and managers in our relations with political parties and any other entities with public and social purposes. According to our policy, in 2020 Grupo Santander did not make any donations or contributions to political parties. 57 Annual report 2020 Contents Delivering for customers during the covid-19 crisis Through this unprecedented crisis, Grupo Santander has worked hard to help our customers overcome financial challenges. In addition to facilitating regulatory and governmental assistance, the measures we took to maintain high-quality, accessible services and relieve financial distress included: • expanding the terms and scope of grace periods and payment holidays for all customers (beyond legal requirements). • helping channel government liquidity to SMEs and businesses. • expanding insurance cover for pandemic-related claims in line with payment holidays. • making sure we continued to deliver quality service to customers during lockdowns, mainly through better online channels (at call centres, ATMs and on new apps) and branch recalibration. Our Product Governance and Consumer Protection teams verified those measures locally to ensure transparency and avoid additional costs for customers, which special concern for our most vulnerable customers. Health and safety We implemented measures to guarantee our customers' health and safety at all times. We adapted our branches and encouraged the use of digital channels via "Stay at home" notices, tools, tutorials and cyber tips, plus coronavirus helplines for frequently asked questions. We undertook initiatives to support and protect elderly customers, people in rural areas, at-risk patients and other special groups. We set up priority services and business hours for elderly customers. We increased our call centres' capabilities through plans in all countries to facilitate working from home and channel deflection, optimize resource use and anticipate customers' needs. This increased our global service volume by 21% on average. Customer approach during covid-19 in the UK Santander UK provided product support such as payment holidays on mortgages, credit cards and personal loans; early access to savings with no penalties; and waivers and reduced rates on overdrafts. We also undertook these initiatives to ensure vulnerable customers could access services and to help relieve their financial challenges: → Reaching Out, a programme where branch employees made thousands of phone calls to customers who might be vulnerable or at risk of financial exclusion, check on their wellbeing and provide additional support. We provided these calls from April-November 2020, reaching over 81,500 customers. → A coronavirus helpline for customers unable to visit branches or access the Internet. → A new and improved online chat service on the Santander website, mobile app and online banking, providing easy-to- access information and keeping phone lines free for customers who needed to use them. → Access to cash for self-isolating customers, whereby an authorized third party could obtain cash on their behalf. → Guidance to identify the signs of domestic/financial abuse and inform customers on ways of reaching out for help. For more details, see 'Meeting the needs of everyone in society' and 'Financial inclusion and empowerment' in this chapter and 3.3 'Covid-19 credit risk management’ in the Risk chapter. 58 Responsible banking Corporate governance Economic and financial review Risk management and compliance Complaints management Our complaints management and analysis sets standards for all units to properly handle complaints, ensuring regulations are met and complaints and interaction logging is firmly embedded in all customer contact channels to provide the best possible service. More than this, we use complaints to improve our service and products, so that complaints do not arise in the first place. In 2020, we focused on resolving complaints at the first point of contact with customers and better complaints handling based on customer feedback. We also improved mitigation plans, governance and root-cause analysis to effectively identify opportunities for issue reduction and proactive resolution. We worked to boost the capability of not only our specialist teams, but all teams, to increase reporting. We took 267 corrective and preventive actions involving ATMs, fraud, web/ mobile app access and use, and more customer- centric debt collections. We closely monitored our subsidiaries to analyze complaints trends driven by the pandemic and, as relief measures expire, to take actions to ensure the best possible outcome for our customers. We closely monitored our subsidiaries to analyze complaints trends driven by the pandemic and, as relief measures expire, to take actions to ensure the best possible outcome for our customers. Our performance during the crisis proved successful. Covid-19-related complaints (2-4% of complaints group- wide) were very low compared with the number of relief measures we managed to implement in short timeframe. In addition to adjusting systems and tools, we closely monitored our subsidiaries to analyse complaint trends driven by the pandemic and take actions ensuring the best possible outcome for our customers once relief measures expired. For more details on complaints management, see section 7.2. 'Compliance and conduct risk management' in the `Risk management and compliance' chapter and our Culture report in our corporate website. Type of complaints A (%) Average resolution time A (%) Resolution A, B (%) Banking procedures Loans Investments Payments methods Others Insurance 1 - 5 days 15 - 30 days In favour of the Bank 5 - 10 days 10 - 15 days More than 30 days In favour of the customer A. Personal Protection Insurance (PPI) Complaints excluded from the volume, distribution by product, and resolution term figures. Regarding uphold ratio, UK has been fully excluded since PPIs represent about 80% of the formal complaints received. B. Complaints metric follows the criteria established by the Group, homogeneous in all geographies. Process enhancement Santander UK continued to improve customer issues resolution in 2020. Complaints and dissatisfaction inflow reduced 25% YoY. A dedicated knowledge tool that provides customer- facing employees with better access to information and enables them to solve customer problems faster, helped enhance customer experience via first-line contact in branches and telephone channels. The strategy followed cases escalated by customers to the Financial Ombudsman Service. An ongoing collaborative relationship with the Ombudsman resulted in an overturn reduction of 6% in H1'20 vs H2'19 to 24%. Inflows also declined by 14% to 5,200 cases in the same period. At Santander US, we monitored customer complaints closely, with bi-weekly reports issued to senior managers and regulatory agencies (OCC and CFPB) in order to assess customer impacts and implement service changes. Complaint volumes remained stable throughout the year, with fluctuations correlating with servicing changes. Santander prioritizes support for vulnerable populations and developed processes to manage complaints from service members, elderly customers and people with disabilities. Specialized training and partnerships with the legal team for response review were key to ensuring the correct resolution of complaints. 59 21.6%36.0%1.6%28.9%9.5%2.3%37.6%20.4%9.7%22.3%10.1%67.3%32.7% Annual report 2020 Contents Responsible procurement Our suppliers have an impact on society and the environment. That’s why we expect them to act responsibly and uphold ethical, social and sustainable standards just as we do. Being responsible also involves our suppliers Third-party certification policy Responsible behaviour principles for suppliers Risk control Whistleblowing channels Our third-party certification policy sets out a common methodology for all countries to select, approve and evaluate suppliers. In addition to price, quality of service and other traditional criteria, it includes ESG (environmental, social and governance) factors, such as diversity and inclusion, human rights and sustainability, which are covered by its responsible behaviour principles for suppliers. These principles apply to our 8,651 critical suppliers each year. A . 21.8% were certified for the first time in 2020 Grupo Santander works with 8,651 certified suppliers (-12% vs 2019) B (+5.1 pp vs 2019). Through Aquanima , we entered into 8,875 agreements (+ 2% vs 2019) with 4,592 suppliers (-3% vs 2019), of whom 94.7% are companies that operate in the same geographical area of service. 96.5% of our total services (+0.8 pp vs. in 2019) are locally sourced, reflecting our support for local economies. We are working to implement various controls and/or audits to make sure suppliers comply with our policy and corporate values. In 2020, to reinforce our commitment, we launched two pilot initiatives to assess ESG performance: • ESG criteria in third-party on-boarding: We assessed approximately 400 selected suppliers according to ESG criteria in Spain, Portugal, the UK, Poland, the US, Mexico, Brazil, Argentina and Chile. The questionnaire consisted of 18 new ESG questions including carbon footprint; gender and disability inclusion; flexible working; minimum wage; and good corporate governance practices. As a result of the pilot, ESG criteria will be implemented in critical suppliers' on-boarding from 2021. • ESG criteria in third-party negotiations: We used the questionnaires from bidding processes to collect information on suppliers' ESG impact in labour-intensive service categories (such as travel and energy). We have escalation channels for suppliers in our core markets, and plan to roll this out to all geographies in the coming period. During the covid-19 pandemic, we took actions to address the most urgent needs of our suppliers, particularly vulnerable suppliers. These included continuing to pay for basic services, providing liquidity through lines of credit, paying invoices early and reducing payment periods. We prepared recommendations for subsidiaries based on local best practices to make sure these efforts were consistent throughout the group. A. An internal audit in 2020 to condense the group's external suppliers led to a reduction in the percentage of approved suppliers against 2019. B. Aquanima is a Santander subsidiary specialized in procurement. 60 Responsible banking Corporate governance Economic and financial review Risk management and compliance Risk control → In 2020, we launched a new supplier risk management platform in our core markets. It is designed to streamline and integrate third-party management and key information. It allows us to combine all supplier B certification data. It currently collects data available on 10,252 third parties and18,789 services. It has 5,366 internal users. Collaborating with suppliers to tackle covid-19 During the pandemic, the measures Santander España took to support suppliers and communities included: → maintaining payments to suppliers even when the service could not be provided, to make sure their employees continued to receive wages. → We unified and grew our group-wide supplier risk assessment team. The team analyses the behaviour of our most important suppliers in Cybersecurity, Business Continuity, Physical Security, Facilities and Data Privacy. → continuing to purchase meals from our caterers (even though our employees were working remotely) and serving them to healthcare professionals at makeshift hospitals in Madrid. → We keep records of our key suppliers and service providers by geography based on those five risk areas. → using our internal transport services to take healthcare professionals from hotels to hospitals. → We closely monitor, and regularly report on, the status of our 'high-risk' suppliers to senior managers. B. Pending completion in the UK and US. Poland currently operates its own system. 61 Annual report 2020 Contents Shareholder value We build lasting loyalty among our four million shareholders by delivering profitable and sustainable growth Communication with shareholders Banco Santander shares We aim to align our interests with our shareholders', creating long-term value and maintaining their trust and the trust of broader society. We provide shareholders and investors with information that meets their expectations and upholds our values and corporate culture. We communicate with them continually, making sure their opinions are taken into account by the Board. Shareholder remuneration In December, shareholders received the new shares related to the share capital increase, equivalent to EUR 0.10 per share, as a complementary payment from 2019. Each shareholder received a free allotment right of new shares for each share they hold and had the option of either selling in the market or receiving new shares. As a result, total remuneration for 2019 rose to EUR 0.20 per share. With regard to the dividend payment against 2020, the board of directors intends to pay a cash dividend of EUR 2.75 cents per share, the maximum allowed in accordance with the limits set by the European Central Bank (ECB) in its recommendation last December. The board’s intention is to restore a payout of 40-50% of the underlying profit, in cash, in the medium term. With respect to the remuneration against the 2021 earnings, the intention is to resume payments once the European Central Bank recommendations so allow, in line with the announcement of April 2020. Banco Santander is listed on five markets: Spain, Mexico and Poland; the US (as American Depository Shares), and the UK (as CREST Depository Interest). >4 million shareholders (+30,000 vs 2019) For further details about Santander Group's communication with shareholders, see sections 1.4 'Active communication with shareholders during the pandemic' and 3.1 'Shareholder engagement' in the Corporate Governance chapter. For further details on Santander Group's shareholder remuneration, see section '3.3 Dividends' in the Corporate Governance chapter. Fot further details on Santander share, see section '2.6 "Stock market information'in the Corporate Governance chapter. Share capital ownership Geographical distribution of chare capital n Board A n Retail shareholders n Institutional investors n Americas n Europe n Rest of the world A. Shares owned or represented by directors. For more details on shares owned and represented by directors, see 'Tenure and equity ownership' in section 4.2 and subsection A.3 in section 9.2 'Statistical information on corporate governance required by the CNMV' of the 'Corporate Governance' chapter. For more information, see section 2.1. 'Share capital' in the Corporate Governance chapter. 62 1.05%40.85%58.10%22.32%76.03%1.65% Responsible banking Corporate governance Economic and financial review Risk management and compliance Engagement with shareholders, investors and analysts In 2020, the Shareholder and Investor Relations team prioritized: → digital transformation: simpler online platform to delegate and cast votes at general meetings; new electronic channels for participating in general meetings (such as telephone lines and digital platforms at branches); means provided/help for shareholders to exercise their rights at the October 2020 AGM in accordance with Directive (EU) 2017/828; new virtual forums and events to report on Grupo Santander's strategy and quarterly results, and improvements to virtual service channels and WhatsApp Business. → constant, clear communication with shareholders, investors, analysts and rating agencies. → reporting about the group and share performance. → offering personal attention to shareholders via online and face-to-face channels and gather their opinions with diverse surveys. → exclusive products and benefits on yosoyaccionista.santander.com. Grants for shareholders and relatives with disability (60 grants given in 2020) and other initiatives. → enhancement of Grupo Santander’s image in the markets. Shareholders and Investors Relations area dedication has been recognized by important publications of the sector, as IR Magazine and Institutional Investor. Our efforts in the integration of new channels (Whatsapp business) were recognized by AEERC and OZ. ESG indices and analysts Our sustainability performance is regularly assessed by renowned indices and ESG analysts. We use their findings internally to identify improvement opportunities. For 20 years in a row, Banco Santander has featured on the Dow Jones Sustainability World Index (DJSI World). In 2020, we are again among the 25 banks included in the index made up of 323 companies. Our score was 83 points out of 100, just six points below the leader, ranking us 14th score (100) in financial inclusion, anti-corruption policy and measures, fiscal strategy, customer relationship management, environmental reporting, and social reporting. . We obtained the top Sustainalytics improved our ESG risk rating score. From 32.7, considered high risk, to 27.1 medium risk. It recognized us for above average preparedness measures to address resilience, human capital, data privacy and security issues. In 2020, Santander improved CDP by two notches, from C to B, reaching "Management level" in the financial sector group, which implies a coordinated action on climate issues. th In 2021, Santander is leading among our global peers in the Bloomberg Gender-Equality Index (BGEI). We are 7th 5 above financial services scores (+16.93 pp), with top mark in equal pay and gender pay parity. among banks. This remains well above average (+18.67) and overall and We have, once again, been named a constituent of the FTSE4Good Index Series, raising our score to 4.3 out of 5. Furthermore, according to the ISS-ESG Corporate Rating, our ESG performance is above the sector-specific Prime threshold. We are also assessed by other ESG analysts such as MSCI and V.E (Vigeo Eiris. 27,446 opinions from shareholders, analysts and investors through studies and qualitative surveys 1,137 contacts with institutional investors (including 19 meetings with ESG investors and analysts, and 58 calls about corporate governance) 210 events with shareholders 132,857 queries managed by email, phone, WhatsApp and virtual meetings >1,300 communications using mainly digital channels For further details, see sections 1.4 'Active shareholder engagement during the pandemic’ and 3.1 'Shareholder engagement’ in the Corporate Governance chapter. ESG analyst valuations A Rating/Scoring 2020 Vs.last year S&P Global CSA 83 q 2019 86 Vs. Sector average 95th percentile, 14 out of 253 banks th B MSCI Sustainalytics V.E (Vigeo Eiris) ISS-ESG CDP BGEI BBB Average among 192 banks BBB = 27.1 p 32.7 30 th th percentile, 289 of 978 banks 74 of percentile, 8 31 diversified banks th 62 q 63 C B 85.13 = p q C C Decile rank of 2 out of 285 banks, equivalent to 80th percentile Among 28% of all banks scoring a B 90.39 st global bank and 5 1 from 126 financial institutions th A.Source:Most recent ratings for each ESG analyst in 2020. Sustainalytics has developed a new methodology for measuring risk. Thus, a higher score indicates higher risk. 1st percentile is the lowest risk. V.E (Vigeo Eiris) conducted an “ESG Performance Review” in which key ESG indicators are updated. A comprehensive assessment will take place in 2021. B. Please review page 123 for MSCI disclaimer For more details on communication with ESG analysts, see section 3.1 of the 'Corporate Governance' chapter. 63 Annual report 2020 Contents Inclusive and sustainable growth We play a major role in supporting inclusive and sustainable growth 64 Responsible banking Corporate governance Economic and financial review Risk management and compliance Supporting green transition We contribute to the transition towards a more sustainable economy by managing climate-related risks and opportunities, building a comprehensive sustainable and green finance proposition; and reducing our environmental footprint. ESG investment in Wealth Management and Insurance Working under the highest international ESG standards, we embed ESG in our decision-making, offering a sustainable value proposition for customers, and an active ESG engagement. Meeting the needs of everyone in society We develop innovative, simple and personalized solutions to respond to customer demands and meet the needs of everyone in society. Financial inclusion and empowerment We help people who are at risk of financial exclusion by giving them access to basic financial services, boosting entrepreneurship and employment, and providing them with the skills they need to manage their finances efficiently Tax contribution We pay our fair share in taxes everywhere we operate, contributing to the growth and progress of our communities. Environmental and social risk analysis We manage the environmental and social risks of our customers' activities in sensitive sectors such as energy, mining and metals, and soft commodities. Supporting communities We support education and social welfare in the communities where we operate, with a special focus on higher education as the driving force behind society's progress. We also run multiple social and cultural support programmes. 65 Annual report 2020 Contents Meeting the needs of everyone in society We want to increase loyalty through products and services that enable all our customers to manage their finances in the best possible way, while helping them make more sustainable decisions. Our value proposition aims to meet the broad needs of our customers Innovative, simple and personalized solutions + . Households SMEs Large companies Public sector Total customers 148 million Loyal customers 22.8 million Customer loans EUR 916 billion Customer deposits EUR 849 billion We bolstered our digital proposition for retail customers and corporates, focusing the lion's share of our efforts on expanding Openbank and our mobile payment services. Against the backdrop of the economic and social crisis caused by covid-19, we resolved to provide customers with solutions for them to continue pursuing their goals and navigate such testing times. We ran ambitious initiatives to protect our customers' health; to ensure that services continued; and to offer tailored financial solutions to provide liquidity to people and companies affected by the pandemic. We rapidly facilitated state-backed lines of credit and adapted various products and services to local circumstances. We also eased financing conditions with payment holidays of up to several months in most of our geographies. 66 Responsible banking Corporate governance Economic and financial review Risk management and compliance Covid-19: Supporting our customers The key during the crisis was to maintain financing levels to combat the effects of covid-19, meet our customers' most pressing needs and implement measures to protect our most vulnerable customers, which included: • providing liquidity and credit facilities with favourable terms and conditions; • suspending certain banking fees and commissions; • temporarily increasing credit card and overdraft limits; • granting mortgage payment holidays; and • proactively supporting vulnerable customers and opened a new helpline for all customers. By the end of the year, these initiatives had supported more than 6 million customers in all our geographies, including payment holidays to 4.8 million customers worth EUR 112 billion, which represents 12% of our lending portfolio. In 2020, loans and advances to customers fell 3% (excluding the exchange rate impact, loans were up 5% against 2019). By segment, household lending decreased 4.2% year on year; and lending to enterprises and entrepreneurs remained at 2019 levels. HouseholdsA Loans to customers at 31 December 2020, net of impairment losses Residential Consumer loans Other purposes Total Companies and entrepreneurs A Large companies SMEs and entrepreneurs Other purposes Total EUR million 324,152 157,118 16,717 497,987 EUR million 167,390 132,359 20,104 319,853 A. See note 10. 'Loans and advances to customers' of the Auditor's report and consolidated financial statements. For more details, see 'Financial inclusion and empowerment' in this chapter and 3.3 'Covid-19 credit risk management’ in the Risk chapter. Specific measures individual countries took as part of our covid-19 response Spain: Advanced pensions to retirees and lent nearly EUR 100 billion to entrepreneurs, sole traders, SMEs and companies through internal resources and ICO lines of credit (in which we have the biggest share). Poland: Pledged PLN 2 billion to support SMEs in fighting covid-19 and deferred selected fees and charges for customers who suspended their business operations. Portugal: Channelled EUR 120 million (31%) on the first covid-19 state-backed aid line "Capitalizar 2018", as well as EUR 4 billion in lending to SMEs for short- term treasury needs, with no changes to the spread or related fees. UK: Participated in the government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS), with no interest to be paid on either loan for the first 12 months. Argentina: Lent ARS 1 billion (EUR 14.2 million) to SMEs to support teleworking. Chile: Gave USD 6 billion in pre-approved lending for consumer, mortgage and business customers. Brazil: Launched A Gente Banca, a new product to provide newsstands with loans to renovate their premises. Mexico: Participated in government-backed lines of credit to help one million micro-enterprises, in addition to four-month loan repayment deferrals. US: Lent USD 25 million to Community Development Financial Institutions (CDFIs) to benefit small businesses. 67 Annual report 2020 Contents Working with multilateral institutions We continued our work with multilateral entities to offer our customers more lines of credit under better conditions. In Spain, we signed seven agreements worth a total of EUR 1.205 billion with the EIB Group (including the European Investment Fund, or “EIF”), combining senior loans with portfolio guarantees and synthetic securitization transactions. Those agreements allowed Santander to provide additional liquidity and investment capacity for SMEs and mid-caps to tackle the pandemic, renew their transport fleet or become more sustainable. In Portugal, a guarantee agreement with the EIF is allowing us to furnish agricultural and agro-industry companies and entrepreneurs with up to EUR 100 million in working capital and investment capacity in the processing, marketing and development of agricultural products, and to help young farmers invest in their business. The EIB Group also participated in the Banco Santander Consumer Portugal's first STS securitisation in the Portuguese market, providing EUR 587 million for SMEs and mid-caps to renew their transport fleets, including the acquisition of less-polluting vehicles. Digital solutions for better financial management We are constantly developing smarter and more accessible products and services for our customers, and enhancing existing ones, including our fully digital bank Openbank and our mobile payment services (Global Trade Services, Global Merchant Services, Superdigital, Pago FX). Openbank Openbank continued to grow in 2020 by broadening its proposition in Portugal, Germany and the Netherlands. Customers in those countries are now able to trade shares in 4,000 companies listed on 25 markets, as well as dealing in exchange-traded funds. They can also use the Digital Wealth Manager (for new and experienced investors), which includes funds that follow socially-responsible investment criteria. All Openbank cards are linked to charitable causes our customers can choose from among the bank's selected organizations. Every time customers pay with their Solidarity Card, they can round their payments up and donate the difference. In Brazil, a USD 100 million loan facility from the IFC supports projects that promote the use of renewable energy and energy efficiency, as well as Santander’s working capital lending programme to Brazilian SMEs, with at least 10% of the proceeds earmarked for female entrepreneurs. In Poland, a synthetic securitization agreement signed with the EIB Group is allowing us to provide around PLN 2.8 billion in new funding to SMEs and mid-caps against the backdrop of the covid-19 outbreak. In the last four years, Grupo Santander has signed agreements worth EUR 11.1 billion with the European Investment Bank Group (EIB), the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the Council of Europe Development Bank (CEB) and the Development Bank of Latin America (CAF). Global Trade Services Grupo Santander helps SMEs access trade finance, supply chain, payments, foreign exchange and other global services. In 2020, we strengthened our SME international trade operations by investing in Ebury, one of the world's leading payment, FX and cash management platforms for SMEs, providing them with the necessary tools for cross-border expansion. We also invested EUR 30 million to become the majority shareholder in Mercury TFS, an innovative company specializing in digital trade finance solutions, with 130 employees and operations in Spain, Mexico, Chile and Colombia. Global Merchant Services We also give online and offline retailers the ability to accept various forms of payment, helping them better manage and grow their businesses. These value-added services are based on Getnet, a leading platform in Latin America, giving merchants from micro-enterprises to multinationals a unique experience. 68 Responsible banking Corporate governance Economic and financial review Risk management and compliance Santander Cash Nexus: global connectivity for Banco Santander's largest multinational corporate customers Through Santander Cash Nexus, Santander Corporate & Investment Banking (SCIB) offers a standardized digital service in our core geographies. It helps customers be more efficient with greater control over their transactions. In 2020, it launched Santander Cash Nexus Sign, which gives access to Santander Cash Nexus on any mobile device so customers can sign for transactions safely, anywhere and anytime. We offer a simple, competitive solution that digitalizes and centralizes cash management for international businesses. Customers in more than 15 countries have a single point of entry to streamline their operations and make payments in the formats and channels that best fit their models. In March, Global Finance magazine named Santander Cash Nexus the "Best Payment Hub Solution" in its “Best Treasury & Cash Management Providers” category. Mouro Capital. Helping fintechs grow. Mouro Capital, the successor to Santander Innoventures, is an independent venture capital firm that invests in fintechs and adjacent businesses (artificial intelligence, payment solutions, access to credit and financial inclusion). With USD 400 million in allocated funds, it will manage the portfolio of Santander Innoventures, which since 2014 has invested in 36 startups in Europe and the Americas. The fund will continue to deploy capital and remain a key driver of our ambition to be the best banking partner to startups, generating tangible value through strategic collaborations. Today, 70% of the fund’s current portfolio companies work with Santander. 69 Annual report 2020 Contents Supporting the green transition Tackling climate change is a key objective at Grupo Santander. We support the climate change goals of the 2015 Paris Agreement. Our ambition is to achieve net zero by 2050 and we have set our first decarbonization targets. Main lines of action Aligning our portfolio to meet the Paris Agreement goals Supporting our customers in the green transition Reducing our environmental impact We have the ambition to achieve net zero by 2050 supported by first decarbonization targets: eliminate all exposure to thermal coal mining worldwide and align power generation portfolio by 2030. We are building a complete Sustainable and Green finance proposition across the group. We are a world leader in the financing of renewable energy projects. We are strongly committed to protecting the environment by reducing our footprint and have become carbon neutral. Target To help our customers make the transition to the green economy and to raise or facilitate the mobilization of EUR 120 bn between 2019 and 2025, and EUR 220 bn between 2019 and 2030, in green finance to help tackle climate change. A. Includes our overall contribution to green finance: project finance, A syndicated loans, green bonds, capital finance, export finance, advisory services, structuring and other products to help our customers in the transition to a low-carbon economy. Climate change is a global issue that the Paris Agreement of December 2015 seeks to combat by accelerating the actions and investments needed for a sustainable, low-carbon future. Progress Green finance Raised or facilitated B 33.8 bn 2019 120 bn 2025 B. 2020 SCIB's contribution to the green finance target includes: Project Finance (lending): 5.1 bn; Financial Advisory: 3.2 bn; Green bonds (DCM): 2.8 bn; Project Bonds (renewables): 0.9 bn; Export Finance (ECA): 0.8 bn; M&A: 2.3 bn; Equity Capital Markets: n/a. For a total of 15,2 bn. Information obtained from public sources, such as Dealogic, Inframation news, TXF or Mergermarket league tables. All roles undertaken by Banco Santander in the same project are accounted for. Other sustainable finance components, such as financial inclusion and entrepreneurship, are excluded. While climate risk is not new, it's an emerging driver of risk that impact banks' credit, market and operational risks, among others. The transition to a low-carbon economy presents banks with a big opportunity; according to the OECD, annual investment of USD 6.9 trillion to 2030 will be required to meet the Paris Agreement goals. 70 Responsible banking Corporate governance Economic and financial review Risk management and compliance Our approach Santander recognizes the actions we take this decade will be key to address the climate emergency. To contribute in a practical and tangible manner, we will focus on aligning our portfolio to Paris Agreement goals, starting with most material sectors as regards climate exposure. To drive alignment, we will continue working to better understand sectors and portfolio transition pathways, step by step towards our ambition of net zero by 2050. To achieve this we will support our customers in the green transition, engaging with them and developing financial products and services. Lastly, we will ensure that Santander’s own operations remain being carbon neutral, by continuing to reduce our own emissions, increasing the use of renewable energy and offsetting remaining emissions by using certified providers as we started to do in 2020. Our Strategy • We publicly support the Paris Agreement and joined the UN Collective Commitment to Climate Action (CCCA). Our ambition is to achieve net zero carbon emissions across the Group by 2050. Central to our climate strategy are: ◦ setting sector portfolio alignment targets to fulfill the CCCA. ◦ the green finance target: to raise or facilitate EUR 120bn in green finance between 2019 and 2025 and EUR 220bn by 2030. ◦ the pledge to be carbon neutral in 2020 and to source our entire electricity supply from renewable energies by 2025. ▪ We are now working on a roadmap to be Net zero by 2050 prioritizing the most climate material sectors where data and methods are available. We will share progress on this ambitious goal in our Climate Finance Report at the end of 1st half of 2021. • In 2020, we fine-tuned our internal risk taxonomy and updated our heat map, which plots each sector’s climate- related risks (transition and physical) on a five-point scale to measure the materiality of those sectors on the group's balance sheet. This enables us to manage the emergence and concentration of climate change risks by sector, and it has been a critical input when defining our strategy. For more details on the materiality assessment, please see the Risk management section below. We made strides to fulfil regulatory requirements by working to implement the European Banking Authority (EBA) guidelines and standards as well as supervisory expectations of the European Central Bank in particular their Guide on climate-related and environmental risks disclosed in 2020 Disclosing our approach is key to helping markets and other stakeholders assess how we incorporate climate within our processes and policies and report on our climate performance. We take the Task force on Climate-related Financial Disclosures (TCFD) as the guiding reference in this regards. Our Climate finance report 2019-June 2020 included information on, and expanded on, TCFD. Later in the year we will disclose our updated Climate finance report. See our latest update on the TCFD's four-pillar framework (Strategy, Governance, Risk management and Metrics & Targets ) below. Further details on our Climate Report 2019-June2020 available at our corporate website. • As part of the initial steps in building a roadmap towards our net zero ambition and to fulfil our CCCA, we have until September 2022 to (1) issue a statement indicating the sector(s) we are proposing to align with the Paris Agreement, and (2) set specific alignment targets. After analysing a number of inputs, based on the materiality A as an assessment and using the PACTA methodology initial approximation, we have committed to aligning our power generation portfolio with the Paris Agreement by 2030. To deliver on this commitment, we are devising a two-pronged coal phase-out strategy: (1) Stop providing financial services to power generation customers with a revenue dependency on thermal coal of over 10% by 2030; and (2) Reduce our exposure to thermal coal mining to zero by 2030. For more details, see the 'Aligning our portfolio to meet Paris Agreement Goals' section. • Going forward, we will continue to assess the alignment of the most concerning sectors regarding climate change (oil and gas, mining and Metals, and car manufacture within Transport) in view of the data and methodologies becoming available and robust. A. PACTA (Paris Agreement Capital Transition Assessment) from 2 Degrees Investing Initiative. 71 Annual report 2020 Contents ▪ In 2020, to help deliver on our green finance target we • In our own operations we have reduced CO2 emissions and raised or facilitated EUR 15.2 bn (EUR 33.8 bn since 2019) and harnessed climate finance opportunities by working on diverse initiatives. For more details see next section "Supporting our customers in the green transition." ◦ SCIB created an ESG solutions team to boost its sustainable finance proposition, reinforcing their long- standing leadership in renewables financing and advisory services. ◦ We set up a sustainable finance working group co-led by SCIB and Responsible Banking, aimed at providing key insights on four areas: green buildings, clean mobility, renewables and sustainable agro. ◦ We made great progress in developing an internal Green Book compiling all the green features of our products, as well as an internal classification system to identify ESG in general purpose lending. ◦ We issued our second EUR 1 billion green bond, which will be used to finance and refinance renewable wind and solar power. offset the emissions we have been unable to reduce, becoming carbon neutral in 2020. Furthermore, 57% of our electricity supply comes from renewables energies. Please see "Environmental Footprint" section below for more details. • We defined climate-related timescales and embedded them in our strategic process; short term is up to a year aligned with budget; medium term is 3-4 years aligned with financial planning; long term is 5-7 years aligned with strategic planning; and, for ad hoc analysis, longer term is over 7 years. ◦ Our three-year planning includes climate risks and opportunities to embed climate change in our long-term business strategy for the Group. 72 Responsible banking Corporate governance Economic and financial review Risk management and compliance Governance • The responsible banking, sustainability and culture committee (RBSCC) helps the board oversee the Responsible Banking strategy, which includes climate change. It meets every quarter and in 2020 was formed of eight board members: seven external directors (majority independent) and the executive chairman; its chair is an independent board member. All members are appointed in light of their knowledge and experience relating to the committee's mission. • In 2020, the RBSCC held four meetings, three of which included climate change as a topic (the minimum is two meetings covering climate). The committee also conducted reviews of climate-related financial risks and opportunities, roadmaps to fulfil TCFD and ECB expectations, our sustainable finance proposition (to ensure we help our customers transition to a low-carbon economy), plans for business lines and the progress of our carbon footprint and green finance commitments. The committee issues a yearly report on the actions taken and reviewed. For more details, see the 'Corporate governance' chapter. • The board took part in a second climate change training programme that included modules on the Paris Agreement and Net Zero. In Santander UK, the board and executive committee attended a climate change workshop delivered by external experts, which covered climate science, regulatory requirements and the TCFD recommendations. See below details on staff and management training. • The executive management of the Responsible Banking agenda lies with the Inclusive & Sustainable Banking Steering group (I&SBS), which promotes the transition to a low-carbon economy and fosters sustainable consumption. The I&SBS feeds into the RBSCC and meets every six weeks aprox. It is formed of nine permanent executive members and two rotating members (country heads). In 2020, the I&SBS held seven meetings and addressed topics such as ESG performance, TCFD progression, smart infrastructures, climate change, sustainable finance in specific geographies and carbon offsetting. • The management committee of the Group discuss twice a year on the progress of the Responsible Banking agenda (including climate change), with a focus on TCFD implementation and ESG business opportunities. • In 2020, the strategy committee of the Group approved the climate change project as one of the bank’s strategic projects, the progress of which will be reviewed twice a year according to the established roadmap. • We included responsible banking objectives as a qualitative metric in our 2020 executive remuneration scorecard, aligning it with our public commitments, including the Green Finance target. • Climate change is also part of our general sustainability policy, which we reviewed in 2020 and linked to the environmental, social & climate change risk management policy, where we set out the climate-specific lending criteria described further in the Risk management section. • The climate change agenda and governance, and the implementation of TCFD recommendations, are designated to specialist working groups (see box below). • The climate working group, co-led by SCIB, Risk and Responsible Banking, met regularly in 2020 to monitor and make headway with the climate project, based on a roadmap with defined milestones. With members from different functions and geographies, it receives feedback from executive directors as part of the I&SBS. • In Q1 2020, the Risk division completed a review of its governance in relation to climate change. The review considered the terms of reference of governing bodies, their forward-looking agendas and the risk framework. In the annual review, all policies and internal procedures were re- examined, and specific references to climate change risk management were introduced. For more details on the RBSCC, see section 4.9 'Operations of the responsible banking, sustainability and culture committee' in the Corporate governance chapter. For more details on our policies and governance, see the 'Governance and priorities' section of this chapter. Our General sustainability policy is available at our corporate website. 73 Annual report 2020 Contents Climate-related working groups Climate working group comprises key functions and geographies to support the implementation of the TCFD and CCCA roadmap. Public Policy Sustainability working group advises on regulatory developments and coordinates the group's response to public consultations. Risk division climate change working group involves different risk areas to develop and implement the risk-specific tasks set out in the TFCD roadmap. Santander UK climate change working group coordinates the plan to comply with the PRA's supervisory statement on climate change risk management. SCIB ESG working group has a broad agenda that includes climate-based business positioning and opportunities. Sustainable finance working group incorporates areas and countries to provide key insights on green buildings, clean mobility, renewable energies and sustainable agro. Sustainable bond steering group oversees the issuance, management and reporting of Grupo Santander´s sustainable bonds. Footprint working group looks at how we measure and reduce our internal carbon footprint, as well as offsetting our remaining CO2 emissions. Management and staff training To help the management team deliver on the challenges ahead and on our pledge to support customers in their transition towards a greener economy, we launched the “Climate Dialogues” programme for senior managers to discuss critical climate-related topics with renowned experts. In 2020, we held three sessions, with up to 940 participants in one single session, including 12 Promontorio executives. The programme will continue throughout 2021, with the first session held in January. Based on the Banking Environment Initiative's (BEI) Bank 2030 vision, Santander, BEI and the University of Cambridge organized a workshop on “How to accelerate the financing of the low-carbon economy”, attended by more than 100 people mainly from SCIB and Risk. The session provided a complete picture of the financial sector's role in the energy transition and encouraged participants to come up with ideas to make the most of the opportunities arising from a low- carbon economy. Furthermore, we released a climate change eLearning module, available to all geographies to raise awareness of the negative impact climate change has on the economy. To boost knowledge and expertise within the bank, we also created briefings on climate-related financial risks and opportunities for the power, oil and gas, mining, and steel industries. The aim is to support areas that make strategic climate change-related decisions, as well as identifying and exploring relevant topics regarding the impact on credit (including policy and regulation), the markets and technology. 74 Responsible banking Corporate governance Economic and financial review Risk management and compliance Risk management ▪ Grupo Santander's regularly updated framework for the identification, assessment, management and reporting of climate change-related financial risks helps increase our understanding of the risks and opportunities in our portfolios and enhances our forward-looking analysis. ▪ The correct assessment of environmental and climate change risks helps shape business strategy, deploy capital efficiently and meet the expectations of European regulators and supervisory authorities, as well as the Financial Stability Board and the United Nations. ▪ Our top risk identification and assessment includes climate change and is updated quarterly to reflect the environmental agenda. ▪ The general risk framework categorizes Grupo Santander's key risks, with environmental and climate-related financial risks (physical or transition-led) identified as factors that could impact the existing risks in the medium and long term. ▪ In 2020, we adapted our risk appetite and related policies to reflect the group's strategy in this regard. ▪ Our internal risk taxonomy identifies sectors that are exposed to climate change risks through physical and/or transition impacts, while our heat map assesses each sector’s climate-related vulnerability on a five-point scale. ▪ This risk classification, based on the main activity of our code) and A customers (according to the NACE complemented with exposure data for each of the sectors and geographies, is the basis for the quantitative and qualitative measurement of the most relevant climate change-related risks, and is used to develop relevant risk metrics and to inform decision making on climate change- related risks. ▪ Based on an in-depth review of our exposures to climate change-related transition risk, we conduct a quarterly materiality assessment focusing on the group's main portfolios. ▪ The assessment shows that the most concerning sectors exposed to climate change are conventional power, oil and gas, mining and metals, and transport, while SCIB represents approximately 90% of our total exposure to rated companies. See figure on the top right. ▪ Other sectors classified as medium risk in the assessment are manufacturing, construction, agriculture and water supply. In SCIB, its exposure amounts to ~EUR 57bn. SCIB exposure represent ~70% of the total exposure to rated corporates. ▪ Retail mortgages and real estate represent exposure of approximately EUR 350bn (of which EUR 308.5 bn are retail mortgages, mainly in the UK and Spain), and are classified as moderate risk. A. NACE: Statistical Classification of Economic Activities in the European Community. ▪ In 2020, Santander UK analysed the climate-related risks of its mortgage portfolio using scenarios from the UK Climate Programme. When assessing the most viable physical risk - flooding -, we found that 95% of our mortgage lending is on properties with negligible or very low risk of flooding. See table below. Flood Risk C High; >1:30 Medium: between 1:30 and 1:100 Low; >1:1000 Very low; >1:10,000 Negligible ; <1;10,000 Total Properties Number of properties 2,906 10,021 49,678 69,523 1,102,435 % 0.24 0.81 4.02 5.63 89.3 1,234,563 100.00 C. Flood Risk is expressed as a ratio, where 1 in 30 year (1:30) flood event refers to the likelihood of flooding occurring in a given year. ▪ Our Economic Research department analyses climate scenarios and the economic impact of climate change (current and future global warning) by reviewing external sources such as information published by the Network for Greening the Financial System, as well as its own assumptions. It uses Integrated Assessment Models and internal tools to create feasible scenarios and data including GDP, energy consumption and emissions. For more details on our risk management approach and progress, see section 2.6 'Environmental and social risk' of the Risk management and compliance chapter. Further details on our Climate Report 2019- June2020 available at our Corporate Website. 75 Annual report 2020 Contents Metrics and targets We produce climate-related metrics to disclose data regarding our business operations; our loan portfolio in relation to the most concerning sectors; our position in market rankings; green financing; and impact metrics such as the emissions we counteract in financing renewable energy. We now include metrics based on the results of our climate materiality assessment, disclosing our exposure to the most concerning sectors (see data above). Our report sets out metrics that track our performance and the achievement of our objectives, as well as how we manage climate-change related risks and opportunities. We continue to identify and develop new metrics for future disclosures. Regarding our own operations, we disclose performance data on scope 1, 2 and 3 emissions as mentioned in the Environmental Footprint section, along with other climate relevant metrics like energy consumption. We also report against our targets on renewables and carbon neutrality. In 2020, Santander became carbon neutral in its own operations, by continuing to reduce its own emissions, by increasing the use of renewable energy and by offsetting the remaining emissions. Aligning our portfolio to meet the Paris Agreement goals Santander publicly supports the Paris Agreement on climate change. We joined the UN Collective Commitment to Climate Action (CCCA) when it launched in 2019. Further to this we are now setting the ambition to be net zero by 2050. Later on the year, and in particular in our climate finance report which will be published after the first semester of 2021, we will provide further details on the roadmap towards this ambition which we will be improving in scope and detail as we progress on this journey. We aim to contribute in a practical and tangible manner to Paris by aligning our portfolio with Paris. Alignment means embedding climate into our strategy and governance, in how we manage risks and opportunities. We are committed to supporting people and businesses in their transition towards a green economy. Managing climate change risk and opportunity requires collaboration between internal functions and with external stakeholders to build and acquire knowledge. We are joining forces with financial authorities and sector associations by participating in formal consultations and industry forums. We also collaborate with peers and take part in debates to come up with financial solutions that support the UN Sustainable Development Goals and the Paris Agreement. Progress on the Collective Commitment to Climate Action To fulfil UNEP FI Collective Commitment to Climate Action (CCCA), we need to set and publish sector-specific, scenario- based targets to align our portfolio with the Paris Agreement goals. Santander has been working towards this aim and in September 2020 published its first CCCA progress report. 76 Concerning our business activity, the next section of this chapter provides information about our performance and support to our customers in their transition to a low carbon economy. It does also include progress against our commitments, namely regarding our green finance target. In 2020, to help deliver on our green finance target we raised or mobilized EUR 15.2 bn (33.8 bn EUR since 2019). Regarding our scope 3 emissions related to financing, in 2020 we engaged with data providers, methodology-setting organizations and peers to further our understanding towards developing useful metrics. We are adopting a granular approach and providing emissions intensity data for the power generation sector (see below), where we will focus our efforts initially. Further below we provide information about our second PACTA exercise and more details about decarbonization targets as part of our TCFD disclosures. We continue to apply the methodology from the PACTA (Paris Agreement Capital Transition Assessment) 2 Degrees Investing Initiative, which focuses on high climate impact sectors. We undertook a second exercise to analyse our SCIB power generation portfolio (a material sector within our portfolio from a climate risk perspective). For that second analysis, we focused on our SCIB loan book with our power generation corporate customers, excluding project finance. Our power generation project finance portfolio, which represents 32% of our total power generation portfolio, is made up of 92% renewable energy. Ultimately, we chose to focus on corporate customers as it's a key area for us to engage with customers and further support them in their transition to a low-carbon economy. Our power generation portfolio compares well against the A , with a larger share of renewables corporate economy (Santander 21% vs corporate economy 15%) and hydro (27% vs 19%) and a smaller percentage exposure to coal (12% vs 29%). Projecting our portfolio to 2025 (using the PACTA methodology), our position improves when compared to corporate economy with increased share in renewables (27% vs 18%) and also lower share in coal (9% vs 26%), which is fairly consistent with a Paris aligned pathway. Our first CCCA progress report is available at www.unepfi.org/wordpress/wp-content/ uploads/2020/09/Santander_CCCA- report_website092020.pdf A. Corporate economy: represents the aggregate/combined production of all assets in the Asset Resolution's database, which captures approximately 70% of total world CO2 emissions (CO2 is the largest greenhouse gas (GHG) contributor to human induced climate change). Considering the inclusion of other GHG (such as nitrous oxide and methane – relevant in agriculture), the database captures approximately 60% of total GHG emissions. Based on data from the 2018 World Energy Outlook from the International Energy Agency. Responsible banking Corporate governance Economic and financial review Risk management and compliance Power Generation Production capacity across technologies (%) 2020 2025 A. Corporate Economy: represents the aggregate/combined production of all assets in the Asset Resolution's database, which captures approximately 70% of total world CO2 emissions (CO2 is the largest greenhouse gas (GHG) contributor to human induced climate change). Considering the inclusion of other GHG (such as nitrous oxide and methane – relevant in agriculture), the database captures approximately 60% of total GHG emissions. Based on data from the 2018 World Energy Outlook from the International Energy Agency. Power Generation portfolio alignment Following our analysis and with the approval of the board: We committed to aligning our power generation portfolio with the Paris Agreement by 2030. As part of this, we're taking further steps by committing to: Stop providing financial services to power generation clients with a revenue dependency on thermal coal of over 10% in 2030. We will also work on a future pathway in line with the UNEP FI CCCA approach, where we will continue assessing alignment for our most concerning sectors with respect to climate, considering the data and methodologies available, and participating in working groups to further the development of alignment methodologies and approaches in the financial sector. The carbon intensity of our current power generation portfolio for corporate customers is of 309.6 grCO2/KWh B as a measure of physical intensity B. Includes top 20 companies representing 85% of power generation portfolio. S&P Trucost Limited © Trucost 2021 has been used as the primary source of information for 2019 emission and production metrics, complemented with public information obtained directly from companies’ annual reports. By comparison, the world average carbon intensity of electricity generation is of 475 gCO2/kWh according to the International Energy Agency Coal phase-out We took further steps to reduce our exposure to coal-related sectors and committed to cut our worldwide exposure to thermal coal mining to zero by 2030. Net Zero by 2050 Our ambition is to be net zero carbon emissions by 2050 in terms of its own operations (Scope 1 and 2, which are already carbon neutral) and Scope 3 emissions across our the Groups. Later on the year, and in particular in our climate finance report to be disclosed by end the first semester, we will provide further details on the roadmap towards this ambition. UNEP FI engagement on the TCFD Pilot project and the Collective Commitment to Climate Action We remain engaged with the UNEP FI on climate. Since 2018, we have participated in the TCFD recommendations pilots I & II, making headway with an internal methodology to assess climate change-related impacts on our credit risk exposures, and are very much looking forward to continuing our involvement in the next stages of the pilot. As part of the Collective Commitment to Climate Action, we participate in the working groups aimed at strengthening the initiative and further developing it. For more details, see 2.6 'Environmental and social risk' section of the Compliance and conduct risk management. 77 29%12%26%9%10%5%3%5%3%3%26%25%26%24%23%19%27%20%29%25%6%12%5%8%11%15%21%18%27%28%CoalOilGasHydroNuclearRenewableCorporateEconomy (A)SantanderCorporateEconomy (A)SantanderParis AlignedPathway Annual report 2020 Contents Supporting our customers Corporate and Investment Banking Santander Corporate and Investment Banking (SCIB) aims to become a reference point in sustainable finance by providing ESG solutions in all our markets. Santander Corporate and Investment Banking (SCIB) aims to become a reference in sustainable finance through ESG solutions. Leveraging a solid track record in renewable energies and strong product capabilities, SCIB is branching out to fully- integrated ESG advisory services across all sectors and products, serving an increasing appetite from corporates and investors. Strengthening our long-standing leadership in renewable energy financing and advisory services For the last 10 years, we have been the leading bank in financing renewable energies, and rank in the Top 3 by number of deals and Top 5 by deal value globally. Within this period, we have participated in 143 renewable energy finance deals, investing a total of more than USD 6 billion. Global Renewable Energy Project Finance Volume by MLA - FY 2020 A Rank Mandated Arranger 1 2 3 4 5 6 7 8 9 10 Banco Santander Bank 1 Bank 2 B Peer 1 Bank 3 Bank 4 Bank 5 Peer 2 Peer 3 Bank 6 Vol. (USDm) 6,284 5,638 5,511 3,779 3,737 3,436 2,962 2,601 2,589 2,313 Nº. %share 6.7 143 6.0 73 5.9 63 4.0 76 4.0 52 3.7 54 3.2 28 2.8 32 2.8 40 2.5 24 A. As indicated by Dealogic and Bloomberg New Energy Finance league tables for project financing within the Lead Arranger category. B. Peers are banks that due to their size and market capitalization are comparable to Santander, including BBVA, BNP Paribas, Citi, HSBC, ING, Itaú, Scotia Bank and UniCredit. Banco Santander issues second green bond worth EUR 1 billion In 2019, we created a Global Sustainable Bonds Framework and a Global Green Bonds Framework in line with the 2018 Green and Social Bond Principles. These frameworks are aligned with, and support, our Responsible Banking strategy, reflecting our intention to deploy additional capital for green, social and sustainable projects. In June 2020, we issued a second green bond; a seven-year, EUR 1 billion senior non-preferred issuance. The net proceeds will be divided between existing wind and solar assets on our balance sheet and new assets that will be added in our core markets (Europe, US and Latin America). The re-financing share will be less than 50% during the term of the bond. In October 2019, we set our global sustainable issuance plan in motion with a seven-year, EUR 1 billion green bond to fund wind and solar power projects, in line with UN Sustainable Development Goals 7 and 13. Banco Santander, S.A. Green Bonds Framework and the Banco Santander, S.A. Global Sustainable Bond Framework (updated in 2020) are available at our corporate website. 78 Responsible banking Corporate governance Economic and financial review Risk management and compliance Renewable energy projects In 2020, we helped finance greenfield renewable energy projects with a total installed capacity of 13,765 MW, A preventing the emission of 60 million tons of CO2 . We also contributed to the expansion, improvement and maintenance of existing renewable energy infrastructure projects (brownfield), with a total installed capacity of 8,106 MW (further details in the graphs below). Our renewable energy project finance portfolio (greenfield and brownfield) totalled EUR 11.6 billion at the end of the year, approximately half of our project finance portfolio and spread over 307 transactions. The renewables projects have a generation capacity equivalent to the yearly consumption of B 10.3 million households. A. Emissions which the MW financed in 2020 will prevent over the course of the projects’ useful lifespans. International Energy Agency emissions factors (source updated in 2019 with data from 2017) have been used. B. Calculated using data on final electricity consumption for the residential sector by country published by the International Energy Agency (source updated in 2020 with data from 2018). Financing of renewable  energy (greenfield) (MW financed) C Financing of renewable  energy (brownfield) (MW financed) C Breakdown of MW financed by type of renewable energy Wind energy 77% -- 2018 77% 35% 2019 77% 46% 2020 Solar energy 22% 100% 2018 22% 54% 2019 18% 33% 2020 D Others 1% -- 2018 1% 11% 2019 5% 21% 2020 Greenfield Brownfield E Breakdown of renewable MW financed by country in 2020 (greenfield and brownfield) 3,796 MW 681 MW USA 5,455 MW 630 MW United Kingdom 706 MW 2,169 MW Spain 882 MW 0 MW Chile 1,587 MW 17 MW Brazil 497 MW 0 MW France 242 MW 0 MW Poland 0 MW 3,510 MW Portugal 0 MW 306 MW Germany C. In 2020, the MW attributable to Banco Santander according to its share in each project was: 19% of total for greenfield and 23% for brownfield. D. Others greenfield: Taiwan (600 MW). Others brownfield: Italy (61 MW); Uruguay (52 MW); The Netherlands (600 MW); Sweden (80 MW) E. Includes biomass for 2018 and hydropower for 2019, and solar-wind energy for 2020. Renewable energy projects financed in 2020 We closed one of the largest deals in the Spanish renewable energy market worth EUR 567.8 million, under a hybrid structure format, including a bank loan and project bonds. We participated in the financing of an Offshore Wind Farm, which will become the world's biggest. It will generate 2.4 GW of green energy to supply c. 3.3% of the UK’s demand, powering four million homes per year. 79 6,6898,03613,7652018201920201,20016,7858,106201820192020 Annual report 2020 Contents Evolving our ESG product offering We demonstrate our commitment to inclusive and sustainable growth and to the transition to a low-carbon economy through various products and services. Incorporating ESG into financial instruments for sustainable projects has extended to traditional bank loans, revolving credit facilities, bonds and even derivatives. In 2020, we participated in 53 Green and ESG loan transactions in Europe, and ranked third in Refinitiv's European league table. Green and ESG Loans, Europe - 2020 YTD Rank 1 2 3 4 5 6 7 8 9 10 Lender Peer 1 Peer 2 Banco Santander Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Peer 3 Vol. (EUR m) Total Deals 99,308 72,532 70,622 70,293 64,691 56,151 53,997 52,648 50,503 49,790 81 56 53 50 30 32 24 33 34 47 In recent years, we have developed frameworks that are the building blocks of our ESG product offering: → Sustainable Guarantees Framework, with a second party opinion from VIGEO (2019) → Social Loans Framework in Argentina, with a second party opinion from Sustainalytics (2020) Our aim is to support our customers in defining and executing their strategy to transition towards sustainable models. As part of this, we have intensified and upgraded our dialogue and engagement on topics ranging from sustainability strategy to disclosure, financing needs, ESG ratings, specific solutions and new technologies. Landmark deals in 2020 First ESG-linked facility in the aerospace sector SCIB acted as ESG Coordinator, supporting the company in setting targets, developing pricing mechanisms, and on communication to banks and the wider market. First ever gender bond in Mexico SCIB acted as joint lead manager and bookrunner in the financing of a portfolio of new and existing loans targeting women as beneficiaries in three areas: financial inclusion, employment and entrepreneurship. First Polish sustainability bond and swap SCIB took on the roles of coordinator, lead arranger and bookrunner in financing a Polish group's transformation to zero-emission power generation. First sustainability linked bond in Brazil SCIB acted as a bookrunner for the first sustainability linked bond in Brazil, and second globally, for a pulp and paper producer aiming to reduce GHG emissions. 80 Responsible banking Corporate governance Economic and financial review Risk management and compliance Retail and commercial banking In 2020, we completed our internal Green Book, which compiles all products with specific green features of the Group according to international standards such as the Green Bond Principles. This initial classification will be enhanced with the EU Taxonomy and other global guidelines. Green book Products for individuals and/or SMEs /corporates Countries Green mortgages The Green Book products are specifically tailored to two main segments: individuals and SMEs/Corporates. Loan for energy efficiency This enables us to identify how much finance we direct towards green assets through products with specific green features, and to promote green finance to our retail customer base. In parallel, we are developing an internal classification system based on the EU Taxonomy and other international standards, to identify and manage the volumes of green financing in our standard credit. Loan/lease for renewable energy installations Loan/lease for clean transportation Loan for low carbon agriculture Loan to foster circular economy Eko leasing Product for electric and hybrid vehicles with benefits such as financing up to 36 months, 30% off the first lease fee, customer support, insurance, etc. CDC Sustentável Solar Financing for renovations and projects using renewable energy and energy efficient installations, as well as accessibility, ergonomic and air quality upgrades. AENOR sustainability seal for small and medium-sized companies Santander España created the first AENOR-assessed seal that gives Spanish SMEs' a sustainability rating to set them apart in the eyes of their customers and suppliers. Some of these green products include: Hipoteca Fija/ Variable Online Crédito Pessoal para energias renováveis Product that gives benefits for acquiring proprieties with an A or A+ energy efficiency certificate. Loan that incentivizes the acquisition of renewable energy generation or energy efficient equipment. Multilateral financing for energy efficiency and renewable energy projects In Spain, thanks to the EIF’s involvement in a synthetic securitization initiative, we aim to provide EUR 10 million in new climate-related investments. Similarly, we will allocate up to EUR 51 million to low-carbon and zero-emission vehicles in Portugal with the EIF's support. We are also helping renewable energy and energy efficiency projects in Brazil with a USD 50 million loan facility alongside the IFC. In 2020, we entered into three financing agreements with MDBs to contribute EUR 104 million to green financing projects. In the last four years, the Group has signed agreements with multilaterals such as the EIB (European Investment Bank), EBRD (European Bank for Reconstruction and Development, IFC (International Finance Corporation), MIGA (Multilateral Investment Guarantee Agency ), CEB (Council of Europe Development Bank) and the CAF- Development Bank of Latin America to provide over EUR 1,360 million in support of green finance in Spain, Poland, Portugal, Brazil and Peru. 81 Annual report 2020 Contents Embedding ESG in all key areas of the bank Leveraging on a solid track record in renewable energy and strong product capabilities across our platform, we are now moving towards fully-integrated ESG solutions, serving an increasing appetite from corporate and institutional customers. To better support our customers in achieving their own ESG objectives, in 2020 SCIB created a dedicated team to boost its sustainable finance proposition. This new global team works closely with product teams such as Global Transaction Banking, Project Finance and Markets, to provide strategic solutions as well as product and financing structures tailored to specific industries, geographies and market sectors, helping our customers in their transition towards a more sustainable business model. "The creation of this team further reinforces our contribution to Grupo Santander's responsible banking commitment to support inclusive and sustainable growth. We want to back our customers in their ESG transformation journey, helping them define and achieve their global sustainability objectives.” José M. Linares, SEVP (Senior Executive Vice President) and Global Head of Santander CIB Playing an active role in shaping the external environment → We shared insights on sustainable finance practice with the Banking Environment Initiative (BEI) to help with its Bank 2030 research report, which seeks to shed light on how banks can accelerate the transition to a low- carbon economy and to create a vision for the banks of 2030. → The report is a significant contribution to the banking sector as it identifies barriers and opportunities for banks in the transition, which requires asset and behavioural transformation. We also work with the BEI on the 'Soft Commodities' Compact and the fight against deforestation. → Grupo Santander participates in the Paris Agreement Capital Transition Assessment (PACTA) bank pilot led by the 2 Degrees Investing initiative (2Dii), which aims to provide information on the alignment of selected portfolios with regard to climate scenarios as proxies to the Paris Agreement. → Our Credit Risk team worked alongside SCIB and Responsible Banking to supply data for the project, and is actively collaborating with SCIB to use the results in a forward-looking assessment of climate-related risks and opportunities in wholesale portfolios. → We are an active member of the Global Investors for Sustainable Development Alliance (GISD Alliance), a working group created as part of the UN's strategy for Financing the 2030 Agenda for Sustainable Development. → SCIB collaborates on analysing how to invest in Colombia's clean energy, water and sewage sectors, as well as how to structure SDG-linked financing in the 4G road infrastructure programme. It is also involved in the call for action around covid bonds. → We participate in the EBF-UNEP FI working group created to develop voluntary guidelines for banks on applying the EU taxonomy to their lending portfolios. Additionally, SCIB hosted key panels related to sustainability to raise awareness among its customers and investor network at events: → January 2021: 25th Santander Latin American Conference - New frontiers for sustainable finance and ESG as an asset class → October 2020: Santander International Banking Conference - A sustainable and resilient Recovery, meeting the climate challenge while addressing economic and social needs → December 2020: Santander Chile ESG Webinar - Moving towards a sustainable capital market → February 2021: XXVII Santander Iberian Conference - ESG, An opportunity for industrial companies → February 2021: UN PRI Panel - Deforestation as a Credit Risk - with Santander invited speaker (Santander Global Head of E&S Risk) 82 Responsible banking Corporate governance Economic and financial review Risk management and compliance Environmental footprint We are strongly committed to protecting the environment by reducing our environmental footprint. Our environmental management strategy focuses on three main areas: • Reduce CO2 emissions and offset the emissions we have been unable to reduce. • Reduce and responsibly manage our waste. • Increase awareness of environmental issues among employees and other stakeholders. Since 2001, we've been measuring our environmental footprint through energy consumption, waste and emissions. And, since 2011, we've used strict criteria to draw up energy efficiency and sustainability plans to ensure we keep environmental impact to a minimum, yielding these results: • Energy consumption reduced by 21%. • Atmospheric emissions reduced by 61%. • Paper consumption reduced by 75%. We have also made two commitments involving all G10 countries: • From 2020 on, Grupo Santander will be carbon neutral by investing in projects to offset our emissions. • By 2025, 100% of the electricity we consume will come A . from renewable sources A. In those countries where it is possible to certify renewable sourced electricity for the properties occupied by the Group. Projects to offset CO2 emissions Becoming carbon neutral Grupo Santander's plan to become carbon neutral comprises five projects in five countries that provide us with the carbon credits we need to offset emissions. We drew up an internal plan and put out a call to tender to select the projects to obtain the required carbon credits. We then assigned to each country unit a project through which it could offset its emissions. Projects include renewable energies, reforestation and fuel switching and are certified under the sector's most recognized international standards, like the Gold Standard, the Verified Carbon Standard (VCS) or the Clean Development Mechanism (CDM). This collaborative, international initiative reflects our commitment to protecting the environment, fighting climate change and reducing our environmental footprint. Use of energy from renewables sources 57% of the energy used in our buildings is renewable, with 100% green energy in Germany, Spain, Portugal and the UK. We continue to work towards 60% target for 2021 and 100% by 2025. Thanks to the purchase of green energy, the emissions reduction due to electricity consumption was 21%. In terms of total emissions, this acquisition enabled us to reduce our emissions by 12%. Reforestation Wind energy Hydropower Planting of native species in over 1,000 hectares scorched by forest fires in Alcoroches (Guadalajara). Reduction of N2O emissions Eradication of the N2O produced at a nitric acid plant, reducing its impact on the atmosphere. Wind farm with 309 MW of installed capacity, including a social project to aid the development of local communities in Oaxaca. Recovering energy from greenhouse gases Capture of the methane produced at a landfill site in Spartanburg (South Carolina) to be converted into biogas for clean energy. Hydropower plant with a capacity of 182 MW that helps the community through job creation. 83 Annual report 2020 Contents Certified environmental management system A We measure and manage the direct environmental impact of our activities through environmental management systems implemented in most of our buildings, which are externally audited under ISO 14001. B We also have: ▪ LEED PLATINUM certification in three buildings in Poland (Atrium I, Warszawa Atrium II and Poznan Business Garden). ▪ LEED GOLD certification in ten buildings in: Germany (Santander Platz and An der Welle 5), Brazil (Torre Santander and the two Campinas Data Centres), Spain (Tripark, Abelias, Luca de Tena and the Santander North Data Centre) and Poland (Robotnicza, 11 Street). LED lighting In 2020, we replaced 4,500 fluorescent lamps with LED lights in our Alhambra and Montepríncipe corporate buildings in Spain, reducing our energy consumption reduction by 400,000 kWh. Single-use plastics The #Plasticfree project is part of Grupo Santander's public responsible banking commitments. It aims to eliminate unnecessary single-use plastics in our offices and buildings in 2021. At the end of 2020 we met 98% of our target, with all G10 countries working together. Environmental awareness The group organizes global and local awareness campaigns to involve employees in reducing consumption and waste. Via our internal Santander Today channel, we provide them with guides and other information to enable them to join the challenge of reducing the organization's environmental impact. We also participated for the eleventh consecutive year in Earth Hour, an international initiative to raise awareness of the impact we as people have on our environment, by turning off the lights in our most iconic buildings. A. Aspects such as light or noise pollution are not considered material. B. The bank has buildings with ISO 14001 certification in Argentina, Brazil, Chile, Spain, Mexico and the UK. 2020 environmental footprint C 3 2,064,113 M water consumed from the supply system 920 MILL. KWH total electricity 8,902 T total paper consumed 5,926,139 KG paper and cardboard waste Var. 2019-2020 (%) Var. 2019-2020 (%) -29.7 194,159 T CO2 teq total emissions (market based) -41.6 -13.5 Scope 1 24,818 T CO2 teq direct emissions 57% renewable energy 83% recycled or certified paper -46.0 -38.9 Scope 2 128,633 T CO2 indirect electricity emissions (market based) 282,216 T CO2 teq indirect electricity emissions (location based) 40,708 T CO2 teq indirect emissions from employees travelling to work 3,758,225 GJ total internal energy consumption -13.1 Scope 3 C. The environmental footprint table, with two-year historical data and the consumptions and emissions per employee, can be found in section ‘Key Metrics’ on this chapter. 84 Responsible banking Corporate governance Economic and financial review Risk management and compliance Environmental and social risk analysis We give great importance to managing the environmental and social risks that could arise from our customers' activities in sensitive sectors such as energy, mining and metals, and soft commodities. Environmental, social & climate change risk management policy The group's environmental, social & climate change risk management policy sets out the principles and criteria for identifying and analysing these risks in the oil and gas, electricity, and mining and metals sectors, as well as for soft commodity businesses. It also specifies activities within those sectors that we will not support (prohibited activities), as well as those which require detailed assessments of their environmental and social impact. The policy replaces our separate sector policies on energy, oil and gas, energy, mining and metals, and soft commodities, and is aligned with, and applied alongside, the Group's human rights and sustainability policies (available at our Corporate Website). We also have a defence sector policy outlining the criteria for the group's operations with companies that perform defence- related activities. In addition, the Group employs the precautionary principle in order to analyse and manage its main environmental risks throughout its value chain, considering both the direct impacts on the assets where it carries out its activity, as well as the indirect ones derived from it. E&S risk governance and management Grupo Santander has full-time E&S risk and green analysts whose work includes annual E&S reviews of Santander Corporate & Investment Banking (SCIB) customers in every market where we operate. The E&S risk management (ESRM) area has three functions: Project analysis under the Equator Principles: in 2020, we updated our socio-environmental project risk analysis procedure, which are based on three lines of defence and integrated into credit admission process. When an opportunity is identified, the business team uses a set of internal tools updated by the ESRM team to carry out a preliminary project screening that determines: • the risk level and a preliminary classification under the Equator Principles´ categorization system. • if socio-environmental due diligence is required, as well as its scope according to the potential risks the project entails. ◦ For medium-risk projects, the business unit uses a set of analytical tools designed by ESRM in accordance with applicable international guidelines like the IFC Performance Standards, which also oversees the process. ▪ High-risk projects are directed to the ESRM team for analysis in accordance with applicable international guidelines like the IFC Performance Standards. Annual customer analysis: We analyse SCIB customers under the scope of the E&S Risk Management Policy at the moment of onboarding and during the annual renewal of credit limits. The analysis is initiated by the business managers, supported by questionnaires designed by the ESRM team. The local green analyst then reviews the questionnaires and conducts any further analysis required, before issuing a recommendation. The E&S risk global team oversees this entire process. In 2020, these analyses included a detailed review of climate change-related items. In Argentina, Brazil, Peru and Uruguay, we conducted analyses on customers from sectors other than those covered under the environmental, social & climate change risk policy. Other operations: ESRM also supports the business and risk teams on the analysis of other operations that may entail environmental or social risks, such as mergers and acquisitions, trade finance in high-risk sectors and all other project finance operations that are not covered by the Equator Principles. In Brazil, the team also analyses operations related to guarantees, mortgages and customers' property portfolios. For more details on the policies and their governance, see the 'Risk management and compliance' chapter. The environmental, social & climate change risk management policy will be available on our corporate website. 85 Annual report 2020 Contents Equator Principles Project Finance Equator Principles In 2020, we continued adapting our tools and procedures to the Equator Principles IV, which entered into force in October. We trained our business teams on the changes that those new procedures may entail when analysing and evaluating project finance operations. We continue to contribute to the development of the Principles through participation in working groups. We analysed 68 projects that fell within the Equator Principles scope. Protecting human rights Grupo Santander's corporate culture respects and promotes human rights. We are a signatory to the United Nations Global Compact and the Equator Principles, as well as a founding member of the Wolfsberg Group. Our human rights policy is inspired by our general code of conduct, consumer protection policy, corporate culture policy and environmental, social & climate change risk management policy. It sets out principles and commitments on actions and operations with a potential impact on human rights, underscoring: • zero tolerance for discrimination against employees, customers and suppliers or for forced labour and child exploitation; • respect for employees’ freedom of association, collective bargaining, health and working conditions; and Category TOTAL Sector Infrastructure Oil & gas Energy  Region Americas United States Chile Brazil Europe Spain United Kingdom France Poland Asia Taiwan  Type Designated countries Non-designated countries A A 1 0 1 0 0 0 1 0 0 0 0 0 1 0 0 1 B 59 1 0 58 9 4 0 26 14 1 2 1 58 1 57 2 C 8 0 0 8 0 0 0 8 0 0 0 0 8 0 8 0 • support for our communities alongside government agencies, civilian organizations, international bodies and other institutions with a view to ensuring a healthy, clean and safe environment while fighting corruption. Yes No  Independent review Human rights protection in our financing operations When analysing the environmental and social risks of operations, we follow the best practices defined by the Equator Principles to identify any threats to, or impact on, human rights. According to the risk category projects must comply with the IFC Performance Standards, observing employment rights and impact management on local communities. For projects with an identified impact on human rights, specific mitigation measures must be implemented as a condition for accessing the finance, and regular reviews are carried out to ensure compliance. With the entry into force of the Equator Principles IV, we have aligned our due diligence processes with the United Nations Guiding Principles on Business and Human Rights. A. In accordance with the definition of designated countries included in the Equator Principles, i.e, those considered to have a solid framework of environmental and sociaI governance, legislation and institutional capacity to protect their inhabitants and the environment. Further details on how we manage human rights through our value chain, see 'Learning and development' and 'Ethical channels' in 'A talented and engaged team section'. You can also find out more in the 'Responsible procurement' section. For more details on our human rights policy, visit our corporate website. 86 Responsible banking Corporate governance Economic and financial review Risk management and compliance Ensuring full compliance with human rights in our operations Energy project in Southeast Asia Energy project in the Middle East The financing for the construction and operation of an energy generation plant was approved in January 2020. Before Financial Close and with the construction already started, several gaps were identified against local legislation and IFC Performance Standards related with contractor’s working conditions and labour rights. In order to correct this situation, Financial Close was conditioned to the commitment of the client to implement a Remedial Action Plan to address these issues within a reasonable timeline. This situation was closely monitored by ESRM during 2020 with the support of an Independent E&S Consultant that conducted on-site inspections. Most of the items in the Remedial Action Plan were fully implemented by the end of 2020. We finance this project as part of a syndicate. During its implementation, we detected working conditions in breach of both local legislation and the IFC Performance Standards (pay less than minimum wage, excessive overtime, lack of proper lodgings, etc.). The syndicate held a meeting with the company to draw up a remedial action plan (RAP), and the company created a team to conduct regular, systematic due diligence including contractors´ operations. On-site inspections were carried out in early 2020 and significant progress was noted. Protecting the Amazon Our environmental, social & climate change risk policy also details the following procedures to analyse and measure the potential impact of our customers on the environment, including the illegal deforestation of the Amazon in Brazil: • All loan requests by farmers and ranchers to Santander Brasil are checked for government-issued embargoes due to illegal deforestation. If the financing is granted, we then check for new deforestation-related embargoes daily. • The requests are screened to make sure that the properties do not overlap with officially-recognized indigenous peoples’ reserves and parks. • Annual ESG reviews of more than 2,000 customers, including meat processors, soy traders and farmers, as well as logging companies. • There is constant dialogue with major Brazilian companies on the challenges posed by deforestation. • Santander Brasil’s requirement for all lumber companies in the Amazon to carry the Forest Stewardship Certification (FSC) or an equivalent in order to be a customer, becoming the first bank to require it. • Involvement in forums that debate on, and propose, solutions to stop deforestation in Brazil. In July 2020, we announced a plan to promote sustainable development in the Amazon, including better controls over the value chain of meat processing firms and to enlist them to help end deforestation. Dubbed Plano Amazonia, it is a collaboration effort between the three largest private banks in Brazil, and it opened a constructive dialogue with the Government around this agenda. • The plan prioritizes three things: preserving the environment and promoting the bio-economy; investing in sustainable infrastructure; and guaranteeing the fundamental rights of those living in the Amazon. Following an update to the environmental, social & climate change risk management policy in 2020, special care must now be taken when financing retail customers carrying out farming and ranching activities within the Amazon biome. 87 Annual report 2020 Contents Financial inclusion and empowerment We help people get access to the financial system, set up and grow micro-businesses, and acquire the skills to manage their finances through financial education. Our aim is to financially empower 10 million people between 2019 and 2025. Santander Finance for All is Grupo Santander’s initiative to support financial inclusion and empowerment, comprising three areas: Access Finance Resilience We help people access and use basic financial services through simple payment platforms and cash-in/cash- out services in remote and small communities. 825,454 people financially empowered in 2020 We provide tailored finance to individuals and SMEs with difficulties obtaining credit or in financial distress. 2,023,411 people financially empowered in 2020 We help people improve their financial knowledge, making economic concepts more understandable and helping them make better decisions. 716,071 people financially empowered in 2020 Progress Target We believe we can help more people prosper and enjoy the benefits of growth by empowering them financially, giving them access to tailored financial products and services, and improving their financial resilience through education. We aim to financially empower 10 million people between 2019 and 2025. A. To assess our contribution to financial inclusion, we use a methodology that sets out the principles, definitions and criteria for counting people who have been Financially empowered people 4.9mn 2019 2020 B A 10 mn 2025 financially empowered through our initiatives, products and services. B. Accumulated figure since 2019. In 2020, the perimeter of the information was expanded to include information from Santander Consumer Finance Nordic and Santander Consumer Finance Portugal. In 2020, we focused on addressing the impact of the covid-19 pandemic, especially on the most vulnerable groups. Our strategy targets the unbanked and underserved; individuals and SMEs across Europe, Latin America and the US who face difficulties obtaining credit; have limited financial understanding; or are in financial distress. In Latin America, we focus on giving people access to the financial system. In mature markets, we seek to ensure that no one needs to leave the financial system. 88 Responsible banking Corporate governance Economic and financial review Risk management and compliance Access We aim to make sure everyone can access basic financial services by promoting the use of payment digital platforms that make transactions easier, giving access to financial propositions targeted at the base of the pyramid, providing cash in/cash out services in remote areas and small communities, and offering targeted financial support. Supporting access to the banking system and payment accounts. We help financially underserved people access the banking system through digital platforms so they can make payments, use basic, tailored financial services, overcome barriers, take greater control of their finances and enjoy faster and more secure transactions. 825 thousand people empowered through access initiatives in 2020 Superdigital - banking without a bank Superdigital is Grupo Santander’s flagship mobile platform for cash deposits, withdrawals and payments, driving sustainable financial inclusion among the unbanked and underserved in Brazil, Mexico and Chile. Developed with our own technology, building on growing smartphone ownership and better network coverage in Latin America, it helps communities through basic, user-friendly products that give customers a unique banking experience. Our aim is for it to have five million customers by 2023 in Latin America. So far, it has financially empowered 197,026 people, allowing those without a bank account to make online financial transactions, split bills with others and receive automated alerts about their finances. A Its largest market is Brazil, where users range from micro- entrepreneurs who can pay suppliers and receive payments from customers, to companies with sizeable headcounts that large banks tend not to serve. In 2020, Santander Brasil allocated BRL 7 million (more than EUR 1 million) to Superdigital to give support to 20,000 households. Find out more at Superdigital Brazil Superdigital Mexico and Superdigital Chile. A. Not all Superdigital customers are counted as financially empowered. Only those with a reported income below the country's minimum salary are considered. Other products and services that help us uplift those at the “base of the pyramid” Cuenta Life Empowering the base of the pyramid Since 2018, the Cuenta Life account has been opening up banking to everyone, serving 370,000 people. It drives financial inclusion through special products for the underserved, and its revamped value proposition features a life cycle that better suits young and elderly customers, with better prices and tailored customer content and perks. In 2020, Cuenta Life assisted more than 232,470 people. Santander Mexico's banking services financially empower the elderly and retirees with income of less than MXN 11,000 a month (EUR 190). It tailors products and services to their needs, including consumer credit with custom insurance, fraud monitoring, and a separate credit admission policy and sales channel, fostering the financial inclusion of more than 955 customers. 89 Annual report 2020 Contents Guaranteeing access to financial inclusion Grupo Santander seeks to provide access to basic products while making sure customers know how to use them. We have cash-in/cash-out services in place and offer financial support to special groups. Cash-in/cash-out services help achieve financial inclusion in remote and sparsely populated areas through our dedicated branches. Also, our agreements with private and state-run entities widen our footprint to ensure underserved communities can have bank accounts and get cash virtually anywhere. Branches in underbanked and remote regions Financial inclusion branches and remote agents Branches in sparsely populated regions Branches in small villages Our eight financial inclusion branches serve 23,000 people in underbanked neighbourhoods in Buenos Aires that previously had no banking services, including Santa María, Castelar Sur, La Juanita and Don Orione. These basic services now benefit 250,000 people daily, helping fight social exclusion. 694 agent offices, 504 branches and ATMs provide access to finance and fight social exclusion in communities with under 10,000 inhabitants. We have 79 branches in small towns. They provided financial services to 37,224 customers in 2020. 27 branches are in the Azores and Madeira archipelagos, serving 15,192 customers. Partnerships to reach unserved communities. Correos postal service Partnered retailers Our collaboration with Correos, the state-run postal service, sets up basic financial services at 4,675 rural post offices. From January 2021, customers can withdraw and deposit cash, and postal workers deliver money to any address in Spain. Through this service, Grupo Santander reaches 75% more branchless towns of fewer than 1,000 people and 66% more customers who previously didn't have cash services nearby. Santander's partnerships with retailers let customers carry out basic transactions in more than 26,769 convenience stores, such as 7 Eleven and Oxxo. Promotion and training in the use of digital channels Branch outbound calling Here & Now During the covid-19 pandemic, many elderly people became at risk financially by not being able to visit their branch or manage their finances as usual. In response, our employees reached out to make sure they could continue to look after their finances easily and securely from home. To increase digital literacy among the elderly, our employees assisted customers in using digital channels to make payments. 90 Responsible banking Corporate governance Economic and financial review Risk management and compliance Finance Grupo Santander seeks to provide tailored finance to those who have difficulty in accessing credit, and to offer solutions to individuals and SMEs who are in financial distress. In 2020, the great efforts Banco Santander has made to ease the covid-19 pandemic, which had a profound effect on society in 2020, have increased the number of customers benefitting from our initiatives. In Latin America, our microfinance proposals target micro- entrepreneurs, offering them a complete value proposition. In mature markets, we support low-income households by financing their basic needs, such as affordable housing. We also support SMEs and individuals through debt renegotiation and cash injections. 2.3 million people empowered by initiatives tailoring financial solutions to their needs since January 2019 Finance for SMEs and entrepreneurs with difficulties obtaining credit Since 2002, we've offered micro-finance services to help bridge Latin America's significant social divide and promote financial inclusion. We aspire to help low-income and underbanked entrepreneurs grow their businesses, which drive the economy and social mobility. Our extensive product line includes tailor-made micro-loans that help micro-entrepreneurs generate income and meet their working capital needs, as well as savings products, current accounts, cards and micro-insurance. A large part of our lending goes to women, who are less likely to obtain financial services in developing countries. Our micro-finance programmes in Latin America EUR 231 million outstanding credit to microentrepreneurs at the end of A 2020 (-17% vs. 2019) 1.1 million micro-entrepreneurs supported in 2020 (+27% vs 2019) 59% of microentrepreneurs supported are women A. The year-end total outstanding loan volume declined due to the exchange rate effect. Nonetheless, outstanding loans with each microfinance programme grew at year-end in local currency (e.g., 8.4% in Brazil and 7.7% in Mexico). 91 Annual report 2020 Contents Prospera Prospera Santander helps micro-businesses and other small enterprises grow, benefitting low-income communities. It grants income-generating loans to micro-entrepreneurs, who collectively share the obligation to repay them. A team of loan officers who live in the community provide financial advice to guide borrowers throughout the term of their loans. With 99 branches, it plans to open 30 more and take on 300 employees in the first months of 2021. All Prospera products have a digital component, making borrowers' operations more efficient while improving customer experience. For example, customers can get loan applications approved in under 10 minutes. In the first wave of covid-19, Prospera's programmes, such as eight-week payment deferrals (in March and April) and Seguro Responsa micro-insurance, gave customers extra support to cope with not being able to work. When businesses reopened in Q4, Prospera achieved a new accounts record (+18,000 in October), with over 540,000 active customers. It also granted BRL 2 billion in loans in 2020. More details at www.santander.com.br/ campanhas/microcredito Tuiio In Mexico, Tuiio offers low-income households and the underbanked digital services and products, including tailor- made loans, savings accounts and insurance. It has 85 branches and more than 72,000 customers in the communities it serves. In 2020, Tuiio launched a new medical assistance proposition to help build a culture of prevention is the best cure, and to facilitate access to specialist doctors. It also helped its customers mitigate the effects of the pandemic by granting grace periods of up to eight weeks and loan term extensions from the previous four months to eight months, as well as keeping life and health insurance premiums at low prices for 32 weeks. More details at www.tuiio.com.mx/ International Finance Magazine named Santander Best Bank for Financial Inclusion in Mexico for Tuiio Mercedes Cruz After the pandemic left her jobless, Mercedes Cruz, a cook, set up a kitchen with her mother-in-law to sell food door-to- door. Tuiio gave her a loan and financial education to start her venture, El Sazón de Ángel, and generate income to support her family. "What we like most about Tuiio is that they gave us a debit card so we can save, buy goods and keep making headway. Knowing I have money on the card, I don't have to worry. Without this loan, we couldn't have got business off the ground. We started from scratch with that money. I would like to thank you for helping us build something and move forward." 92 Responsible banking Corporate governance Economic and financial review Risk management and compliance Prosperá Prosperá was launched in Uruguay in 2019 as a pilot programme in the Salto region, offering loans and insurance to local entrepreneurs, and has since expanded throughout the country. Its value proposition features "Recommended Client", in which past Prosperá customers refer new entrepreneurs, thereby generating an interconnected entrepreneurship ecosystem. It also offers savings accounts, payment solutions and other products and services. Due to covid-19, Prosperá deferred fees and debt financing for entrepreneurs, and set up remote management services. Other local initiatives Small business administration loans Santander US' "Inclusive Communities" plan provides financial assistance to struggling communities. It will mobilize USD 11 billion in loans, investments and charity donations from 2017 through 2021. Its lines of action include the Small Business Administration Loans initiative to fund small businesses with less restrictive requirements. In 2020, Santander lent more than USD 1.2 billion through the Small Business Administration's Paycheck Protection Programme (PPP), which helped save over 126,000 jobs. Loans backed by MGIs for SMEs with limited means In Spain, Banco Santander works with mutual guarantee institutions (MGIs) to lend to SMEs and entrepreneurs with limited means and help them secure lines of credit. In 2020, each MGI ran covid-19 relief initiatives. Superclub Comprometidos, Via Bana, Formar and Potrero Digital In Argentina, Banco Santander empowers customers and non- customers financially through Superclub Comprometidos, a loyalty programme where customers can connect to sell social and environmentally-friendly products; Vía Bana social ice cream parlours that offer basic banking and financial services and financial education; and Formar and Potrero Digital, two digital financial education programmes aimed at young people in vulnerable communities. 93 Annual report 2020 Contents Financing basic needs for low-income households We offer products and services that enable low-income households to access housing and meet other basic financial needs. Affordable housing programmes Social housing fund Santander US's Inclusive Communities plan includes affordable housing and home improvement programmes that help over 39,000 people though low-interest mortgages, lender-paid mortgage insurance and investment in projects for low-income homebuyers. Banco Santander currently has 1,594 social homes for rent in Spain, of which 1,364 are allocated to the Fondo de Viviendas Sociales (Social Housing Fund). In addition, we have 624 homes available to rent at reduced rates. Special programmes for SMEs and individuals in financial distress Payment holidays Since 2012, we've undertaken more than 69,000 social and mortgage debtor protection actions; granted 12,163 mortgages under the Code of Good Practice (which includes debt restructuring and deed in lieu of foreclosure); renegotiated 27,457 mortgages under the loan repayment moratorium; and suspended 10,966 foreclosures (we haven't repossessed any homes since November 2012). During the 2020 crisis, we offered our customers solutions in a proactive way, often taking a more flexible approach than the authorities. We suspended payments on 207,000 loans (including 160,000 within the sector agreement). IRIS solutions to manage impairments Agreements with multilateral entities Our IRIS debt renegotiation programme analyses the situation of customers who are struggling financially and lends them a hand to meet their payment obligations. Since 2019, we've renegotiated the debt of 28,875 customers and supported 51,250 customers with our payment holiday solutions. In Brazil, Spain, Poland and Portugal, the bank has signed agreements with entities such as the EIB, EIF and IFC to offer lines of credit with advantageous conditions to help mitigate the effects of the pandemic (see more in 'Meeting the needs of society' in this chapter). Further collaboration: investing in fintechs Through Mouro Capital (formerly Santander Innoventures) we support the growth of startups whose business models target emerging markets and people without access to financial services. In recent years, we've invested in the following companies, among others: • PayJoy. Founded in 2015 in San Francisco (US), it provides access to smartphones and basic consumer financial services to reduce the number of underbanked and underserved communities in emerging markets. It aims to spread the use of digital tools and technology to remove the need for cash and to fight predatory lending. • ePesos. Founded in 2014 as a digital project of Mexican microfinance company Quantum Capital, it provides financial services to those most excluded by Mexico's banking system. It focuses on creating new payment methods for individuals and companies with few financial services, while offering low-cost lines of credit without the need for a bank account. In 2017, it offered the first salary advance, and since then has been helping Mexican companies take better care of their employees' finances. For more details, see 'Meeting the needs of everyone in society' in this chapter. 94 Responsible banking Corporate governance Economic and financial review Risk management and compliance Promoting financial education We believe education is part and parcel of financial inclusion and customer protection, which is why it’s at the core of our Responsible Banking agenda. In 2020, we committed more than EUR 3 million to 61 initiatives that helped financially empower 716,000 people in the countries where we operate. To fulfil our goals of making financial concepts easier to understand, protecting the most vulnerable through special tactics, and promoting market stability, our programmes include content on financial and money management, digital banking, training for SMEs, behavioural economics and other topics for all groups (especially children, young people, senior citizens and vulnerable customers). We run programmes through face to face education, websites, videos, simulators, contests and games. We are using apps and other channels to make financial education more accessible and to maximize the impact of our initiatives. In 2020, we launched a global financial education page on our corporate website. It showcases our learning initiatives from across the world under a common narrative and approach. It has a broad variety of contents and resources to help users make informed financial decisions and better their financial management. 716,000 people helped from financial education initiatives in 2020 61 initiatives supported in 2020 Content type → Basic financial concepts → Products and services → Personal finance management → Digital banking → Entrepreneurship/training for SMEs → Sustainable finance → Behavioural economics Target audience → General public → Children (up to 13 years old) → Adolescents and young adults (14-20 years old) → Elderly people (from 65 years old) → University students → Santander employees → Vulnerable customers → SMEs and entrepreneurs South America In South America, our initiatives – which aim to serve everyone – put special focus on vulnerable groups, university students and persons with disabilities. They include Fundación Techo in Chile and Vía Bana in Argentina. Mostly run online, their most popular topics include basic financial concepts and personal finance management. Europe In Europe, most initiatives cater for the general public, especially young people. Online initiatives increased amid covid-19, and many of them are now hybrid. Digital is one of the most popular topics, with special initiatives aimed at the elderly, such as Formación Pioneros in Spain and Go Digital in the UK. North America In North America, we focus on contents about personal finance management. Our initiatives, which prioritize vulnerable groups, include Tuiio for low-income households in Mexico and Santander US' volunteer service to boost financial empowerment. In 2020, we shifted to a virtual service model to run our initiatives in a safe environment. 95 Annual report 2020 Contents Best practices Pioneros This initiative in Spain trains customer service and branch employees online on teaching elderly customers at branches to use our app and go digital. Anti-fraud training workshops Santander Scam Avoidance School (SAS) is a unique programme in the UK designed to equip customers with the tools to detect and prevent common acts of fraud. Before moving online via webinars due to covid, it was run in- branch by trained employees, and covers scams, the digital footprint, online safety and other topics. Santander Life Santander Life is an innovative value proposition promoting good financial conduct among customers. It rewards correct answers about banking commitments with merits for customers to access payment deferrals, lower fees, payment date changes and other benefits. Tuiio Tuiio in Mexico runs several initiatives to promote customers' financial education. In 2020, it launched its own financial education website using content and materials developed in-house. Since the beginning of the pandemic, Tuiio has shared advice on financial management in times of crisis, health tips and audio stories for children, among others, through instant messaging platforms, social media and the website. Through this initiative, it has financially empowered almost 200,000 people. Visit tuiio.com.mx/educacion- financiera for more details. CAMPUS-Santander Akana SCF in Spain launched Akana, a tool for customers to check their finances easily. It analyses their transaction data and gives them tips to improve their finances, regardless of their bank. Avançar Avançar is an entrepreneurial programme with an exclusive value proposition for customers. Its web platform provides SMEs with contents and solutions relating to management and innovation, internationalization, team building and other relevant topics. Visit santandernegocioseempresas.c om.br/ for more details. Financial literacy blog Santander Portugal's new financial literacy blog offers articles and tips to help customers make more informed decisions about their finances. Topics include how to save better and how to draw up a budget. Visit www.akana.es/FRONT/#/ home for more details. Visit santander.pt/conta-em- ordem for more details. This site runs several financial education initiatives for customers in Argentina, including Cuenta Blanca for health workers, Duo for finance and business, and Nova on daily life skills. It also provides finance courses aimed at women, SMEs and students. Visit santander.com.ar/banco/ online/campus-santander for more details. 96 Responsible banking Corporate governance Economic and financial review Risk management and compliance Forging partnerships to boost financial inclusion Our global networks consist of partnerships to further embed financial inclusion across our footprint. Those partnerships are important for sharing knowledge, learning best practices, and developing innovative approaches to bridging the financial inclusion gap. Alongside the CEO Partnership for Financial Inclusion (CEOP), we made progress on a number of initiatives that can help expand financial services at scale. Santander BEST Africa Santander BEST (Building Equality through Sustainable Tourism) Africa, is the first development cooperation programme promoted by Fundación Santander. This initiative seeks to contribute to social and economic development in Africa by supporting women entrepreneurs and their local areas in the tourist industry, which has been severely impacted by the covid-19 crisis. Santander BEST Africa fosters a sustainable tourism network based on providing technical and financial assistance to entrepreneurship aimed at promoting and employing women, as well as environmental and social sustainability. The programme looked to secure the continuity of businesses and employment through the pandemic, and to encourage knowledge sharing and training between female entrepreneurs to strengthen the future economic sustainability of their industry. CEO Partnership for Economic Inclusion Founded by the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, Her Majesty Queen Máxima of the Netherlands, the CEOP brings together an influential group of CEOs from a variety of industries who work together to boost financial inclusion around the world. Many of the beneficiaries are vulnerable women who promote or participate in the entrepreneurship selected by Santander BEST Africa due to their contribution to the preservation of the environment and the inclusive development of the community. The programme is founded on two premises: the direct link between gender equality and sustainable development, and the potential of responsible tourism as a driver of economic and social progress in Africa post-covid-19. Since its launch in October 2020, 17 projects across Gambia, Senegal and Morocco have received economic and technical support from Santander BEST Africa. 97 Annual report 2020 Contents ESG investment in Wealth Management & Insurance Our aim is to become the best responsible wealth manager in Europe and Latin America based on a sustainable value proposition for customers, active engagement and the highest international ESG standards. In the past few years, ESG (environmental, social and governance) has become increasingly important in investment. More and more investors’ assessments of risk- adjusted medium- to long-term returns are taking environment and social issues into consideration, while interest in ESG solutions among clients, employees and other stakeholders is also growing. We have been embedding ESG factors into our decision- making for some time and, in 2020, reinforced our ESG strategy. Santander Asset Management (SAM) As a signatory to the UN Principles for Responsible Investment (PRI) and the Institutional Investors Group on Climate Change (IIGCC), we follow high-level international criteria and standards. We are also the only asset manager in Spain with a team exclusively dedicated to ESG in our investment unit. We have developed our own ESG methodology, which we extended to Private Banking and Insurance. This helps us assign most of our funds a rating, based on the data of 15,000 companies and 190 governments. We also embedded ESG criteria in our investment, voting and engagement policies. We offer a complete line of ESG products, holding around EUR 6.9 billion in assets under management in 21 ESG products and 50 mandates in six countries. Over the last six years, our solidarity funds have donated more than EUR 18 million. In addition, Santander GO, a collection of products managed by external investment managers through partnerships, includes the Santander Global Equities ESG sustainable fund (managed by Boston Partners - Robeco). Also, we’re working to apply ESG criteria to all our individual and collective pension funds and plans, which add up to EUR 20 billion. We also engage with several companies to improve their transparency and ESG performance. SAM ESG Product offering Best-in-class ESG products in our core geographies San Sostenible RF 1-3 San Sostenible Bonos San Respons Solidario Inveractivo Confianza San Sostenible 1 San Sostenible 2 San Sost. Acciones San Equality Acciones 7 Pension Funds 57 Mandates San Ethical Ações Go Global Equity ESG San Sustentàvel SAM RV Global ESG Go Global Equity ESG Acciones Global Desarrollado n Fixed income n Balanced n Equity n Portfolios In 2021, SAM signed up to Climate Action 100+, an investor-led initiative that aims to promote cooperative dialogue urging the world's largest corporate greenhouse gas emitters to take action on climate change. It is coordinated by five regional investor networks, including two to which SAM is a signatory: Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI). For more details, see www.santanderassetmanagement.es 98 Responsible banking Corporate governance Economic and financial review Risk management and compliance Private banking In private banking, we aim to embed ESG in our advisory services, as we have done with investment, risks and other areas. In 2020, our bankers and advisers across our footprint (over 1,100 experts), received special ESG training from our ESG dedicated team in SAM and Private Banking Global Team. Our wide range of ESG products includes funds, alternative products, and ETFs. We are working on adding new products across all asset classes while we are developing an impact investment offering, in order to round off our value proposition. In addition, Private Banking has launched Future Wealth, a joint initiative with SAM, our thematic investment approach focusing on the trends with the strongest tailwinds, with environment as one of the key elements. On this sense, Future Wealth, offers our clients a complement to traditional investing strategies by seeking to capture innovative sources for growth and performance based on sustainability plus innovation. It is important to note that SAM's ESG methodology allows us to also analyze 100% of the third- party funds we market. Furthermore, we are also providing tailored-made ESG reports to our clients, providing a powerful portfolio look through, including information about their investments CO2 and water consumption footprint, as well as how it performs according to our internal ESG methodology Insurance We focused our efforts on two main actions: working with our JVs to maximize the portion of our life-savings premiums invested under the ESG standards set by SAM; and working with our partners to adopt the UN’s Principles for Sustainable Insurance (PSI) and to develop specific strategies in financial education and inclusion-related issues in the geographies where we operate. For details on private banking, visit www.pb-santander.com 99 Annual report 2020 Contents Supporting communities In addition to support through business solutions, we also drive inclusive and sustainable growth through education, social entrepreneurship, employability and wellbeing initiatives in the communities we serve. Our commitment and progress Support higher education Community investment EUR110 million invested 156,748 scholarships and grants EUR94 million invested 2.4 million people helped Our 2019-2021 commitment Our 2019-2021 commitment → To finance 200,000 scholarships/internships and → To help four million people through various social programmes for entrepreneurs. action programmes. Covid-19 response in communities more than105 mn invested to help tackle the pandemic A As a bank, we commit to sustainable economic and social development to build more balanced and inclusive societies. Grupo Santander provides more support to higher education than any other private company in the world. Through Santander Universities, we have created a unique network of more than 1,300 universities to help students, researchers and entrepreneurs. We also promote and participate in numerous initiatives with the third sector (NGOs and other social organizations) and run the majority of them locally to adapt to the circumstances and reality of each region. As part of this work, and through contributions from the group's senior managers, employees and customers, we mobilized EUR 105 million worldwide to support initiatives in the fight against covid-19. A. This amount incorporates part of the bank's contribution to community investment and part of the bank's contribution to its commitment to higher education, plus contributions from third parties such as employees and customers. 100 Responsible banking Corporate governance Economic and financial review Risk management and compliance Over EUR 105 million to solidarity initiatives to help combat the covid-19 pandemic We mobilized over EUR 105 million worldwide to fund initiatives to combat covid-19. The funds are being used throughout our core markets to provide essential medical equipment and supplies, to support vulnerable communities and to support research into the virus through collaboration with universities and other bodies. All Together Fund to support the health crisis Santander raised EUR 54 million to provide essential materials to support the global effort to fight the pandemic. The funds came from senior managers' salary reductions and board compensation, direct donations from the bank and employee and customer donations. Spain Brazil Masks, non-invasive ventilators, blankets, protective clothing, etc. for various hospitals and government bodies. Five million rapid tests, CT scanners and 200 ventilators, with the support of two other banks. Mexico Alliance with five other companies and donation to the Héroes con Bata initiative (INER and Fundación Gigante). Portugal Poland Joined the Portuguese Banking Association initiative to donate 100 ventilators and 100 monitors to the national health service. Support to hospitals dedicated to treating covid-19 patients by purchasing equipment and material (ventilators, tests, masks, sanitizers, etc.). Chile Support to the Confederation of Production and Trade (CPC) through donations of medical supplies such as diagnosis tests, hospital equipment, etc. Further efforts to support vulnerable communities As part of their community support plans, our local units redirected EUR 21 million to support communities and vulnerable groups particularly affected by covid-19. For more details, see the 'Community investment' section. Santander Universities Through its agreements with more than 1,000 higher education institutions, Santander Universities allocated more than EUR 30 million of its annual budget to support their response to covid-19 (health, education and social issues); to promote online education; and to mobilize entrepreneurs to identify solutions to the challenges posed by the pandemic. For more details, see the 'Supporting higher education' section. Digital solutions We developed various platforms, digital repositories and apps to support and keep society safe and informed during the pandemic. Overcome Together An open space for individuals and companies with information and resources to support the fight against covid-19, as well as country-specific websites circulating local authority advice. Covid-19 platform An app and dashboard developed to help governments and companies make informed decisions in managing covid-19 contagion with real-time data. Adapted for the Mexican Government, Spanish regional governments and the general public. 101 Annual report 2020 Contents Supporting higher education Banco Santander is one of the private companies that most supports higher education in the world. We harness our efforts through Santander Universities, a unique and pioneering global programme with educational, entrepreneurial and vocational opportunities for students. 110 million euros to universities 1,432 partner universities and institutes in 31 countries 156,748 beneficiaries of scholarships, internships and entrepreneurial programmes We focus on three areas: Education Entrepreneurship Employability We support university students and graduates in developing their skills. 48,804 Santander Scholarship beneficiaries We help university entrepreneurs share solutions, give visibility to new projects, find investors, etc. 32,707 university students supported and around 224 programmes and awards We offer internships, training programmes and career guidance services to university students. 75,237 beneficiaries of internship grants Target Progress We believe that education is the bedrock of a fair society and strong economy. Through our world leading Universities programme, we aim to fund 200,000 scholarships, internships and entrepreneurship programmes between 2019 and 2021. Scholarships, internships and entrepreneurship programmes xxxxxxxxxxxxxxxxxxx 2019 A 225k 200k 2021 A. The sharp increase compared to 2019 is due to the impact of the covid-19 pandemic, which led to a change of focus in Santander Universities' 2020 roadmap. Traditional scholarships (face-to-face studies) and mobility grants were replaced by online scholarships, with much greater reach. 102 Responsible banking Corporate governance Economic and financial review Risk management and compliance Covid-19 response As covid-19 tested universities' ability to safely continue teaching and supporting students during the pandemic, we launched several initiatives to help them. So far, more than 100,000 people have benefited from the work carried out by Santander Universities, backed by EUR 30 million in funding. Fondo Supera covid-19 allocated EUR 8.5 million to projects on virus research and prevention, social impact and enhancing ICT capacity to reduce the digital divide between students. We also awarded 30,435 scholarships to vulnerable young people and to boost the employability and development of students and professionals affected by the pandemic. Santander Scholarships in response to covid-19 Some students’ courses were suspended and their job prospects affected. To overcome those challenges, we ran several initiatives in collaboration with universities. Boosting employability and development In 2020, we launched Santander Scholarships for the online training initiatives #YoMeQuedoEnCasa and #InvierteEnTi, benefiting 23,725 students and graduates. The aim was to support the development of digital skills, women leadership, languages and soft skills to heighten their future employability. It also helped professors deliver virtual lectures through the #YoMeQuedoEnCasa programme. Supporting students affected by the covid crisis Over 2,000 people received assistance from Santander Universities in Portugal thanks to the e Bolsas Santander Digitalizaçao to help those affected by the covid-19 crisis. Superamos Juntos supported more than 1,000 Brazilian students in financial difficulty. Through the Ponte la Verde ante la covid-19 initiative, we awarded 5,800 scholarships to 1,435 projects at 340 universities to tackle the health crisis and support the worst-hit communities. Entrepreneurship: post covid-19 solutions Santander X Tomorrow Challenge We committed EUR 400,000 in awards and other benefits to 20 entrepreneurial projects from many countries. They came up with innovative solutions to soften the pandemic's blow to society and the economy. The four challenges involved developing new job skills, creating jobs, adapting business models, reopening businesses and finding real market opportunities, including: → Re-Skill category: Edward Espinoza, CEO and co-founder of Arcux. E-learning in architecture, design and construction. → Re-Invent category: Sascha Kaczmarek, CCO and co- founder of Motion Miners. Analysis of manual process automation through sensors and artificial intelligence. For more information on the other two challenges, please see the 'Entrepreneurship' section below. IT and data reinforcement plans for universities In Spain, Fondo Supera helped supply around 5,000 computers and 10,000 Internet connectivity solutions and webcams to university students. In Argentina, around 30% of Santander Universities' funds were allocated to covid initiatives such as connectivity scholarships for students, programmes to provide teachers with remote tools and IT security, and research scholarships. In Chile, more than 46,226 people were helped with connectivity scholarships to continue their studies online from home. Besides, 2,400 computers and tablets were provided to students in disadvantaged areas. "We have supported not only teachers, so they can learn new educational approaches, but also students. Even if they're digital natives, they're unaware of how to enhance their technological knowledge to improve learning" Óscar Jerez, Director of the Centre for Teaching and Learning, School of Business and Economics, Universidad de Chile. Senior Advisor on Innovation in Higher Education, LASPAU affiliated to Harvard University. “It helped us position ourselves in our industry and in the entire entrepreneurial ecosystem, and we're confident this award will help us seize other opportunities to grow”. Edward Espinoza, co-founder/CEO of Arcux, winner of the Re-Skill category. “We're confident Santander will also be a great ally in the post-launch phase." Sascha Kaczmarek, co-founder/ CEO of Motion Miners, winner of the Re-Invent category 103 Annual report 2020 Contents Santander Scholarships Although many scholarship programmes have been disrupted by the pandemic, Santander Universities continued to fulfil (and even raise) its commitment to training university students and young professionals, facilitating their access to higher education and promoting excellence, equal opportunities and employability. The scholarships are divided into seven categories: → Santander Tech, to promote new technology-based learning, programming and innovation to gain an understanding of digital languages and technology such as blockchain, machine learning, cloud & DevOps and product design strategies. → Santander Skills, to promote the development of cross- cutting skills (soft and hard skills) that are essential to making headway in the job market. → Santander Women, to promote the professional development, leadership and negotiation skills of the next generation of women leaders. → Santander Studies, to help students complete their studies through grants to strike a balance between academic excellence and a lack of resources. → Santander Language, to strengthen the command of foreign languages in working environments. → Santander Internship, to drive students' employability through internships and offer recent graduates opportunities to find a good-quality first job. → Santander Research, to give undergraduates, postgraduates and PhD students the means to start or continue their research plans. Julia Prieto, Santander IE Digital DNA Scholarship, Spain "Who doesn't need basic information on how to go digital? I would recommend this a thousand times to all students who have an ambition to be part of the digital and technological revolution we're set to witness in the coming years". Scholarships platform The scholarships we offer, in collaboration with universities and higher education institutions, can be found at www.becas-santander.com. In 2020, there were 323,591 applications and 43,704,351 visits registered on the platform. Our programmes included: Bolsas Graduação One of Brazil's benchmark programmes, it provides financial support to university students in vulnerable situations, so they can continue their studies (tuition fees, educational materials, food, transportation, etc.). Santander Idiomas Scholarship | English Up Thanks to collaboration between Banco Santander and the British Council, 11,100 Spanish university students can enjoy the online and in-person programmes on offer at British universities. The aim of this initiative is to acknowledge academic excellence and foster the employability of students through English learning. Santander for MIT Leading Digital Transformation Scholarships In 2020, 2,500 scholarships were handed out to provide specialized training and develop digital skills in collaboration with the Massachusetts Institute of Technology (MIT), which is considered one of the world's best universities. Lisa Moutinho Teixeira, Bolsa Santander Ibero Americana, Portugal "Soft skills, resilience and self-confidence are key to creating teachers with strong values and greater problem-solving and team-working capacities, as a way of meeting our professional and daily objectives". 104 Responsible banking Corporate governance Economic and financial review Risk management and compliance Entrepreneurship Global initiatives Banco Santander upholds its commitment to high-impact student entrepreneurship through its international Santander X project. It sets out to guide and support young entrepreneurs on their journey. In 2020, it launched three global initiatives. Santander X Global Award The top award for student entrepreneurs received 500 submissions from five countries. Winners included high- impact projects that sought to accelerate growth and new solutions in the early stages of business development. The two winners were awarded USD 150,000 and USD 50,000, respectively, plus guidance from expert mentors. → Best ScaleUp category: Miguel Ángel Torrero, COO and co- founder of Rated Power. pvDesign software for designing utility-scale photovoltaic plants. → Best StartUp category: José Luis Ayala, CEO of BrainGuard. Digital solution for predicting migraine attacks “Our idea was long-term development, but this award has given us a great push to become the go-to software in the international photovoltaic industry”. Miguel Ángel Torrero, co-founder/COO of Rated Power, winner of Best ScaleUp. Young People with Solutions Explorer Lab This training programme helps potential entrepreneurs create a sustainable, viable and robust solution to problems addressed by the United Nations' SDGs. “We were very excited when we brought the team together, but we didn't know how to manage it. Everyone at Explorer helped us find our way with their support, closeness and care, making for an incredible experience". Carlos Garces García, co-founder/CEO of Shellock. Monitors maritime containers, in real time, through reusable geolocation stamps. Ecosystem Mapping workshops in collaboration with the MIT D-Lab In collaboration with the MIT D-Lab department and the Global Ecosystem Dynamics Initiative, Santander Universities took part in mapping the most promising start-ups in the local innovation ecosystems of six different countries. 105 Annual report 2020 Contents Local initiatives To promote innovative startups with high growth potential, we held five local award events in Argentina, Mexico, the UK, Chile and Uruguay, which had received more than 1,500 projects submitted by student entrepreneurs from over 300 universities. XVI Entrepreneur X Award XV Santander X Award for Business Innovation "Virtual reality was already here, but the pandemic caused us to move faster. My team and I now want to take it to the next level to help people improve their personal and working lives". Tomás Malio, CEO and co-founder of COVREL, a virtual reality training platform. “This award is a huge step that will give us invaluable resources to press ahead with our research and achieve our aims”. Arian Marín, CEO of Bifrost Biotech, which develops an artificial cornea for use in transplants. X Santander Universities Entrepreneurship Awards II Santander Ideas X award Jamie Bankhead, CEO of Konglomerate Games, development of healthcare-related video games “We are so pleased to have won the Santander Universities Entrepreneurship Award. It was such a fantastic competition, and the prize will enable us to focus on developing our project". Lewis Loane, founder of Torann, which is developing a device that provides the highest sound quality for musicians who play amplified instruments. "The support from the Santander Universities Emerging Entrepreneurs programme has allowed us to sharpen our business model and strengthen our business plan". David Jerez, founder and creator of X- Torch, technological solutions for individuals and companies "The funds we received from Santander X enabled us to maximize our online presence and reduce costs by 60%, all while enhancing the technology we use." Ricardo Flores ,CEO of Body Defense, an educational video game that integrates biological and pedagogical methodologies. “Our Ideas X mentor was pivotal to the process. The footing, sales and partnerships we've gained are all down to this programme”. 106 Responsible banking Corporate governance Economic and financial review Risk management and compliance Universia Founded 20 years ago, Universia is now the world's largest network of universities, involving 822 institutes from 21 countries. Academic guidance This online service gives students and professionals advice on their education and training. It's a one-stop shop for internships, job postings, specialist courses and information on universities and programmes the world over. Employment We strive to become the benchmark in managing young talent digitally by overseeing the relationship between universities and companies, opening up to international job options and providing support both online and through other means to smooth the transition into the world of work. We run several initiatives to achieve this: • Universia Jobs: a job posting and internship platform available in seven countries. • #jobstogether: a knowledge sharing movement to boost candidates' chances of landing a job through direct contact between students, universities and companies. Digitalization at universities It has taken just two years for MetaRed to become the largest network of university IT leads, involving over 1,500 professionals at more than 800 universities across Spain, Portugal and Latin America. The project has so far helped train over 500 middle-managers, held over 50 webinars and assessed the IT skills of more than 10,000 university lecturers. Universia launches new website with Spain's most sophisticated search function Banco Santander and the CRUE association's new university portal enables users to search for over 19,000 degrees, master's degrees, courses and internships. The site is Spain's biggest gateway to information on education and employment for undergraduates, graduates, lecturers and researchers. For more details, visist www.universia.net. Fundación Universia Fundación Universia is a not-for-profit organization that works to forge inter-university and job networks with a special focus on educational advice, diversity, equality and developing IT skills. It is a leading light in graduate employment and placing burgeoning, diverse talent in companies that champion inclusive and sustainable growth. It also promotes continuous, experiential, digital and global learning geared towards the transition to the job market. Its strategy centres around these three Sustainable Development Goals: Quality Education (SDG 4), Decent Work and Economic Growth (SDG 8) and Partnerships for the Goals (SDG 17). 619 scholarships to students with disabilities 70 persons with disability placed in companies 82 grants to sole traders on disability grounds For more details, visit www.universia.net. Diana de Arias, overcoming the odds At just 23, Diana de Arias suffered a stroke that resulted in an acquired brain injury. After gruelling rehabilitation, she created Decedario, a tool to help improve the lives of persons with disabilities. Thanks to Fundación Universia's aid programme for self-employed persons with disabilities, she's now boosting her company's digital footprint through an initiative featured in Forbes' list of alternative top 100 fortunes in Spain. Despite the daily efforts of people like Diana, the covid-19 pandemic has left many SMEs in dire straits. Launched in May 2020, the aid programme promotes sustainability and inclusivity in Spain with equal opportunity and diversity. So far, Fundacion Universia and Banco Santander have offered robust and innovative solutions to 80 self-employed men and women in Spain, aspiring to uplift one of the groups hit hardest by the pandemic. 107 Annual report 2020 Contents Community investment We foster inclusive and sustainable growth through initiatives that support access to education, social entrepreneurship, employability and welfare in the communities we serve. EUR 94 million 2,366 in community investment partnerships with NGOs and social welfare institutions 2.4 million people helped 22,630 A volunteers A. Refer to Challenge 1 for more details about volunteers and volunteering hours. Main lines of action Support for children’s education Support for social wellfare Support for the arts and culture We support various projects to provide equal opportunities and access to quality education, especially in Latin America. We promote and collaborate with numerous programmes that aim to impove the lives of people at risk of exclusion, poverty and vulnerability. We encourage culture and knowledge through programmes and initiatives that promote art, literature, education and talent. Target Progress We believe we can play a major role in improving lives in the communities where we operate, and aim to help four million people through our community programmes between 2019 and 2021. B B. The bank devised a methodology tailored to its requirements and specific model to contribute to society. Reviewed by an external auditor, it identifies a series of principles, definitions and criteria to consistently track those who have benefitted from the community investment programmes we promote. The number of people helped though art and culture programmes is excluded. People helped through community investment (millions) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 2019 C. Cumulative figure since 2019. In 2020, the scope was expanded by incorporating information from Santander Consumer Finance Benelux, Santander Consumer Finance Nordic and Santander Consumer Finance Portugal. C 4mn 4 mn 2021 108 Responsible banking Corporate governance Economic and financial review Risk management and compliance Key initiatives by country We maintained most of our programmes during the health crisis, while also allocating resources to new projects and adapting some initiatives to the new landscape. Commitment to child and youth education Education is at the core of our social investment strategy. In addition to supporting university and financial education, we run programmes that mainly focus on promoting equal opportunities and access to quality education for children and the youth. 470 thousand children helped by education programmes Fundación Belén Educa Korky.tv Amigo do Valor Special Edition In Chile, we collaborate with Fundación Belén Educa on various initiatives that foster educational excellence for children and young people. Korki.tv is an educational TV programme aimed at final-year high school students. It was created to help young people prepare for exams during the pandemic, using advanced teaching methods. 65 projects to support children and adolescents. Due to the pandemic, the programme coined a new version, Amigo de Valor covid, aimed at supporting five hospitals in Säo Paulo and Río de Janeiro. Design the Future We promote a digital guidance platform that cross-references young people's profiles with training and academic courses to help them choose the best options. Social welfare support We run initiatives to improve the quality of life of those facing hardship due to age, ill-health, disability, financial difficulty, etc. 1.8 million people helped by social welfare programmes Santander Ayuda We launched a special edition to find 20 NGOs working with the most vulnerable groups during the crisis. Each NGO will receive EUR 5,000. Alzheimer Society and Age UK The Santander Foundation donated GBP 3m split equally between the Alzheimer’s Society and Age UK, enabling them to continue providing support for those in need during the pandemic. Fundación AMA - Familias vulnerables This programme aimed to help more than 15,500 people who were affected by the pandemic, providing them with personal hygiene kits and food supplies throughout June. Communities impacted by covid Santander US is committed to supporting our communities impacted by the covid-19 pandemic, mobilizing USD 15 million in donations to support non-profit partners that provide essential services. Promoting culture Banco Santander recognizes art and culture as essential elements to support people's all-round development. Fundación Banco Santander Works to build a more equitable, inclusive and sustainable society. With this premise, it develops projects that cover three main lines of action: culture, environment and research and social action. It launched Santander BEST Africa, a development cooperation programme to support African enterprises that promote the employment of women and contribute to community progression. More details at www.fundacionbancosantander.com Farol Santander Cultural and entrepreneurial centres in Sao Paulo and Porto Alegre. It promotes contemporary art exhibitions, some of which are interactive, to raise awareness of community issues, as well as discussion forums and events related to start-ups and innovation. More details at www.farolsantander.com.br Santander Argentina Foundation The foundation works on the promotion and development of art and culture, and to bring them closer to the community. In the so-called Arts District, the foundation runs a multidisciplinary programme with exhibitions and seminars. More details at www.santander.com.ar/ banco/online/fundacion-santander 109 Annual report 2020 Contents Tax contribution We pay our fair share of tax in the markets we operate in. For more details on Grupo Santander's tax strategy, visit our Corporate Website. Grupo Santander pays its fair share of taxes in the jurisdictions where we operate. Our board-approved tax strategy (available online) sets out the principles that apply to the entire organization. All the group’s entities must comply with its tax risk management and control system in accordance with the internal control model. Since 2010, we've abided by the Code of Good Tax Practices in Spain and by the Code of Practice on Taxation for Banks in the United Kingdom. Furthermore, we've participated in cooperative compliance initiatives led by various tax authorities. Since 2015, we've voluntarily submitted the annual Tax Transparency Report to Spain's Tax Authority. Tax contribution To contribute to the communities in our geographies, we pay all taxes borne directly by the group (taxes paid by the A ) and collect others' taxes originating from our group B ). business operations (taxes from third parties In 2020, our tax contribution totalled EUR 14,496 million, including EUR 6,443 million in taxes directly paid by the group. Core principles of Grupo Santander’s tax strategy → Satisfy our tax obligations based on a reasonable interpretation of tax laws, grounded on their spirit and intention. → Respect the rules on transfer pricing and pay taxes in each jurisdiction in accordance with our functions, assumed risks and profits. For every 100 euros in total income, EUR 33 are taxed, including: → Not give customers tax advice or planning strategies when marketing and selling financial products and services. • EUR 18 in taxes collected from third parties; • EUR 15 in taxes paid directly by Santander. → Communicate Santander's total tax contribution clearly, distinguishing between taxes borne by the group and by third parties for each jurisdiction. → Not create or acquire entities registered in offshore jurisdictions without board of directors' approval; and adequately monitor and gradually reduce the group's operations in such territories. C → Maintain a good working relationship with tax authorities based on the principles of transparency and mutual trust to avoid disputes and minimize litigation. A. Including net corporation tax payments, VAT and other non-recoverable indirect taxes, employer's social security contributions and other withholding taxes, as well as other charges and tariffs. B. Including net payments for salary withholdings and employees' social security contributions, recoverable VAT, tax deducted at source on capital, non-resident taxes and others. C. By the end of 2020, we had two subsidiaries and three branches in offshore jurisdictions, having liquidated a subsidiary in Jersey and closed a branch in the Cayman Islands. See detailed information on offshore entities in note 3 c) of the notes to the consolidated financial statements. 110 Responsible banking Corporate governance Economic and financial review Risk management and compliance The taxes recorded in our annual income statement mainly stem from corporation tax accrued during the accounting period (EUR 5,632 million in 2020 or, deducting the D extraordinary results, EUR 3,516 million ). They also include non-recoverable VAT, employers' social security contributions and other charges. These taxes are recorded as they are generated, irrespective of when payment is made. The taxes Grupo Santander pays directly (see the table below) are included in the cash flow statement. In addition to corporation tax, the total taxes the group pays include non- recoverable indirect taxes, contributions to social security services and taxes that are exclusively levied on banks and financial transactions (such as in Spain, the UK, Poland, Portugal, Brazil and Argentina, amongst others). Tax disclosure by jurisdiction EUR million The taxes we accrue and the amounts we pay do not usually match because the laws in some countries dictate a different payment date than when income was generated or an operation was taxed. We pay taxes in the jurisdictions where we earn a profit. Thus, the profits obtained, and the taxes accrued and paid, correspond to the countries where we operate. D. See notes 27 and 51c of the consolidated annual accounts. 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 3,035 1,092 610 623 332 638 6,330 2,530 1,223 660 2,625 131 35 7,204 951 11 Total taxes paid by the Group Third-party taxes Total contribution Corporate income tax 342 204 175 267 161 333 2020 Other taxes paid 1,210 453 184 207 54 250 1,482 2,358 764 189 365 104 30 22 374 239 64 285 71 5 1,552 1,483 657 359 474 215 583 3,840 1,138 428 429 389 101 27 435 251 149 117 55 2,490 1,392 795 231 2,236 30 8 1,474 1,038 2,512 4,692 (14) 4 99 2 85 6 866 5 2,946 3,497 6,443 8,053 14,496 111 Annual report 2020 Contents Key metricsA A. Indicators' regional distribution was modified in 2020 to adapt to the Group's regional distribution. As a consequence, the break-down of data is now Europe/North America and South America, instead of Continental Europe, United Kingdom and Latin America and other regions Employees 1. Employees by geographies and gender A Geographies Spain Brazil Chile Poland ArgentinaB Mexico Portugal UK USA SCF Others Total C employees 0 N 2020 29,504 42,767 10,491 10,388 9,058 21,572 6,015 20,945 15,677 13,359 11,413 191,189 2019 29,078 46,248 11,267 10,902 8,254 19,673 6,255 22,561 17,005 12,406 12,770 196,419 % men 2020 52 46 46 31 53 45 54 43 42 47 53 46 2019 52 43 46 31 49 45 54 41 43 47 51 45 % women 2020 48 54 54 69 47 55 46 57 58 53 47 54 2019 48 57 54 69 51 55 46 59 57 53 49 55 % graduates 2020 69 66 41 85 53 56 57 18 11 31 49 51 2019 70 72 56 82 40 61 55 16 15 34 46 53 A. Data at year end. 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. B. The number of Santander Argentina employees increased between 2019 and 2020 because it added new companies into its reporting perimeter. C.The number of Santander México employees increased between 2019 and 2020 because it added new companies into its reporting perimeter and included outsourcing among its own staff. 2.1 Functional distribution by gender 2019 A Senior managers Women Men Total Men Other managers Women Total Men Other employees Women Total Europe North America South America Group total 1,030 76.5% 316 23.5% 1,346 7,201 63.8% 4,078 36.2% 11,279 33,954 44.1% 43,095 55.9% 77,049 246 82.0% 54 18.0% 284 76.6% 87 23.5% 300 371 983 69.1% 439 30.9% 1,422 15,467 42.9% 20,593 57.1% 36,060 3,550 59.8% 2,389 40.2% 5,939 26,192 41.8% 36,461 58.2% 62,653 1,560 77.3% 457 22.7% 2,017 11,734 63.0% 6,906 37.1% 18,640 75,613 43.0% 100,149 57.0% 175,762 2.2 Functional distribution by gender 2020 A B Senior managers Women Men Total Men Other managers Women Total Men Other employees Women Total Europe North America South America Group total 1,115 75.3% 365 24.7% 1,480 7,350 63.1% 4,290 36.9% 11,640 32,937 44.0% 41,998 56.1% 74,935 228 82.0% 50 18.0% 319 76.0% 101 24.1% 278 420 956 67.9% 453 32.2% 1,409 15,816 43.1% 20,875 56.9% 36,691 3,247 59.0% 2,257 41.0% 5,504 26,614 45.2% 32,218 54.8% 58,832 1,662 76.3% 516 23.7% 2,178 11,553 62.3% 7,000 37.7% 18,553 75,367 44.2% 95,091 55.8% 170,458 A. Data at year end. B. The higher number of women classified as Senior Managers is the result of the progress made on the public commitment of Responsible Banking on women in leadership roles, which aims for 30% of senior managers to be women by 2025. 112   Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.1. Workforce distribution by age bracket 2019 Number and % of total A Europe North America South America Group total aged <= 25 aged 26 - 35 aged 36 - 45 aged 46 - 50 age over 50 6,195 4,203 6,129 16,527 6.91% 11.12% 8.89% 8.41% 18,696 15,714 32,324 66,734 20.85% 41.59% 46.87% 33.98% 32,609 8,932 20,494 62,035 36.36% 23.64% 29.72% 31.58% 13,492 3,290 4,756 21,538 15.05% 8.71% 6.90% 10.97% 18,682 5,643 5,260 29,585 20.83% 14.94% 7.63% 15.06% 3.2. Workforce distribution by age bracket 2020 Number and % of total A Europe North America South America Group total aged <= 25 aged 26 - 35 aged 36 - 45 aged 46 - 50 age over 50 4,871 4,704 4,141 13,716 5.53% 12.26% 6.39% 7.17% 17,996 15,597 29,498 63,091 20.44% 40.64% 45.55% 33,00% 31,827 9,317 20,796 61,940 36.14% 24.28% 32.11% 32.40% 13,484 3,279 5,072 21,835 15.31% 8.54% 7.83% 11.42% 19,877 5,481 5,249 30,607 22.57% 14.28% 8.11% 16.01% A. Data at year end.The under-25 age group declined between 2019 and 2020 because of few new hires and the higher average age. 4.1. Distribution by type of contract 2019 A Europe North America South America Group total Europe North America South America Group total Permanent / Full time Men Women 39,976 51.1% 16,479 44.6% 29,718 43.8% 86,173 47.1% 38,329 49.0% 20,476 55.4% 38,140 56.2% 96,945 52.9% Total 78,305 36,955 67,858 183,118 Permanent / Part-time Men 847 11.2% 158 22.4% 255 26.6% 1,260 13.6% Women 6,747 88.9% 547 77.6% 704 73.4% 7,998 86.4% Total 7,594 705 959 9,258 Temporary / Full time Temporary / Part-time Men 1,166 37.6% 57 46.7% 54 37.5% 1,277 37.9% Women 1,936 62.4% 65 53.3% 90 62.5% 2,091 62.1% Total Men 3,102 122 144 3,368 196 29.1% 0 0.0% 1 50.0% 197 29.2% Women 477 70.8% 0 0.0% 1 50.0% 478 70.8% Total 673 0 2 675 4.2. Distribution by type of contract 2020 A Europe North America South America Group total Europe United Kingdom South America Group total Permanent / Full time Men Women 39,325 50.9% 37,957 49.1% 16,681 44.9% 20,500 55.1% Total 77,282 37,181 Permanent / Part-time Men Women Total 874 11.7% 6,576 88.3% 7,450 135 24.9% 499 78.7% 29,927 46.9% 33,861 53.1% 63,788 232 25.6% 676 74.4% 85,933 48.2% 92,318 51.8% 178,251 1,241 13.8% 7,751 86.2% 8,992 Temporary / Full time Temporary / Part-time Men 992 37.4% 184 32.7% 21 35.0% 1,197 36.6% Women Total 1,658 62.6% 379 67.3% 39 65.0% 2,076 63.4% 2,650 563 60 3,273 Men 211 31.4% 0 0% 0 0% 211 31.4% Women 462 69.0% 0 0% 0 0% 462 69.0% Total 673 0 0 673 634 908 A. Data at year end. There were fewer temporary employment contracts in Latin America and elsewhere between 2019 and 2020 because of changes to hiring policies in Mexico requiring new contracts to be permanent, barring certain cases. 113     Annual report 2020 Contents 5. Annual rate of contracts by gender Employees with permanent /full time contract Employees with permanent/part-time contracts Employees with temporary/full-time contracts Employees with temporary/part-time contracts Group Total Men 2020 Women Total Men 2019 Women Total 85,796 94,435 180,231 87,111 97,701 184,813 1,155 1,441 211 7,717 2,291 470 8,872 3,732 681 1,251 1,813 225 8,075 2,761 526 9,326 4,574 752 88,603 104,913 193,516 90,401 109,064 199,465 6.1. Annual rate of contracts by age bracket 2019 Employees with permanent /full time contract Employees with permanent/part-time contracts Employees with temporary/full-time contracts Employees with temporary/part-time contracts Group Total aged <= 25 aged 26-35 12,787 60,831 aged 36-45 59,303 aged 46-50 20,586 1,200 1,294 247 2,635 3,854 269 2,534 745 151 902 174 32 aged over 50 31,307 2,056 325 53 Total 184,813 9,326 4,574 752 15,527 65,771 62,733 21,694 33,740 199,465 6.2. Annual rate of contracts by age bracket 2020 Employees with permanent /full time contract Employees with permanent/part-time contracts Employees with temporary/full-time contracts Employees with temporary/part-time contracts Group Total 7. Annual rate of contract by category aged <= 25 aged 26-35 10,668 58,474 aged 36-45 59,343 aged 46-50 20,825 1,099 1,001 209 2,360 1,621 252 2,426 652 143 887 159 26 aged over 50 30,922 2,100 298 51 12,977 62,707 62,564 21,898 33,370 Total 180,231 8,872 3,732 681 193,516 2020 2019 Employees with permanent /full time contract Employees with permanent/part-time contracts Employees with temporary/full-time contracts Employees with temporary/part-time contracts Total Grupo Senior Other Other Managers Managers employees 159,169 18,911 2,150 Other Total Managers Managers Employees Senior Other Total 180,231 2,022 18,418 164,373 184,813 7 13 154 83 8,711 3,636 8,872 3,732 0 2,170 16 19,164 665 172,182 681 193,516 4 12 0 227 88 165 9,095 4,474 9,326 4,574 587 752 2,038 18,898 178,528 199,465 8. Employees who work in their home country % A,B Europe North America South America Group total Managers 2020 88.45 91.01 91.19 89.30 2019 88.24 89.86 90.96 89.09 Other employees Total 2020 95.38 99.75 98.25 97.24 2019 96.13 98.92 98.03 97.34 2020 95.27 99.69 98.21 97.15 2019 96.02 98.85 98.00 97.26 A. Data at year end. B. Data from US is not included as it is confidential information. 114 Responsible banking Corporate governance Economic and financial review Risk management and compliance 9.1 Differently-abled employees ratio by region % Europe North America South America Group total A,B 9.2. Differently-abled employees Number of employees Spain Rest of the Group Total Group A,B 2020 1.64 0.21 3.27 1.90 2020 386 3,191 3,577 2019 1.63 0.20 3.19 1.84 2019 361 3,223 3,584 A. Data at year end. B. Data from Mexico not included as it is confidential information. 10. Coverage of the workforce by collective agreement A B Countries Spain Brazil Chile Poland Argentina MexicoC Portugal UK US SCF Other business units Total Group 2020 % 99.80 99.19 100.00 0.00 72.64 30.34 99.14 100.00 0.00 98,63 60.01 74.49 0 N Employees 29,444 42,422 10,491 0 6,580 6,544 5,963 20,945 0 13,176 6,849 142,414 2019 % 0 N Employees 96.20 98.80 100.00 0.00 99.20 22.50 99.10 94.40 0.00 94.00 66.20 73.70 27,961 45,674 11,267 0 8,188 4,429 6,197 21,294 0 11,663 8,459 144,800 A. Data at year end. B.The decrease in the variation between 2019 and 2020 in the number of employees covered by collective bargaining agreements in Santander Argentina is due to the inclusion of new companies in the perimeter that do not have collective bargaining agreements. C.The increase in the variation between 2019 and 2020 in the number of employees covered by collective bargaining agreements in Santander Mexico is due to the incorporation of new companies in the reporting perimeter, as well as the integration of outsourced personnel as part of the bank’s own staff. 11.1. Distribution of new hires by age bracket 2019 % of total Europe North America South America Group total 11.2. Distribution of new hires by age bracket 2020 % of total A Europe North America South America Group total aged <= 25 41.43 30.78 22.95 31.84 aged 26-35 35.42 36.64 54.73 42.62 aged 36-45 14.30 15.42 18.71 16.18 aged over 45 4.40 5.12 2.19 3.82 aged > 50 4.46 12.04 1.42 5.53 aged <= 25 25.93 36.49 19.67 28.84 aged 26-35 39.57 39.29 50.67 42.05 aged 36-45 23.55 14.75 22.18 19.58 aged over 45 6.13 4.50 3.97 4.95 aged > 50 4.82 4.97 3.51 4.58 A. New hires declined between 2019 and 2020 as a result of the covid-19 pandemic. 115     Annual report 2020 Contents 11.3. Distribution of new hires by gender Europe North America South America Group total 12. Distribution of dismissals by gender A B Men % 30 1.81% 470 4.07% 4,267 5.66% 4,767 5.38% Senior managers Other managers Other employees Total Group by age aged <=25 aged 26-35 aged 36-45 aged 46-50 aged >50 Total Group Men 7.79% 18.14% 9.03% 10.20% 2020 Women 6.24% 19.55% 3.98% 8.25% Total 6.97% 18.92% 6.34% 9.15% Men 10.56% 18.62% 15.76% 13.67% 2019 Women 9.50% 18.69% 10.48% 11.78% Total 9.98% 18.66% 12.78% 12.63% 2020 Women B % 4 0.78% 225 3.21% 5,466 5.75% 5,695 5.55% B Total % 34 1.56% 695 3.75% 9,733 5.71% 10,462 5.47% Men B % 2019 Women B % 45 2.88% 12 2.63% Total 57 752 6.4% 342 4.95% 1,094 6,945 9.19% 8,245 8.23% 15,190 B % 2.82% 5.86% 8.64% 7,742 8.71% 8,599 8% 16,341 8.32% 2020 Women 363 1,878 1,932 553 970 5,696 Men 342 1,502 1,286 499 1,137 4,766 Total 705 3,380 3,218 1,052 2,107 C 10.462 2019 Women 535 2,603 2,710 866 1,885 8,599 Men 451 1,963 1,878 696 2,754 7,742 Total 986 4,566 4,588 1,562 4,639 16,341 A. 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. B. Percentage expressing the number of dismissals over the total number of employees in each group. C. Dismissals declined between 2019 and 2020 because of Banco Santander’s commitment to maintaining employment during the coronavirus outbreak, barring certain cases with due justification. 13. External turnover rate by gender % of total A Europe North America South America Group total Men 8.71 19.92 14.54 12.77 2020 Women 9.46 16.88 14.11 12.51 Total 9.11 18.22 14.31 12.63B Men 16.61 23.27 18.16 18.38 2019 Women 16.23 21.76 15.38 16.99 Total 16.40 22.43 16.62 17.61 A. Excludes temporary leaves of absence and transfers to other Group companies. B. The rate of rotation was smaller between 2019 and 2020 because the covid-19 pandemic caused voluntary and involuntary rotation to decline in Banco Santander. A 2019 14.1 External turnover rate by age bracket % of total Europe North America South America Group total aged <= 25 39.37 38.64 16.30 30.39 aged 26-35 18.55 24.60 15.09 18.31 aged 36-45 10.43 15.73 14.91 12.75 aged 46-50 7.77 18.43 17.02 11.56 aged over 50 22.84 18.01 31.43 23.52 Total 16.40 22.43 16.62 17.61 A. Excludes temporary leaves of absence and transfers to other Group companies. 116 Responsible banking Corporate governance Economic and financial review Risk management and compliance A 2020 14.2. External turnover rate by age bracket % of total Europe North America South America Group total aged <= 25 26.36 32.53 15.50 25.20 aged 26-35 10.58 17.52 14.15 13.83 aged 36-45 6.17 14.91 12.96 9.76 aged 46-50 5.48 13.45 12.91 8.40 aged over 50 10.58 16.38 20.88 13.38 Total 9.11 18.22 14.31 12.63 A. Excludes temporary leaves of absence and transfers to other Group companies. 15. By function, gender and region A Senior managers B Other managers C Europe North America South America Group total Total remuneration (average)A Group Total 2019 Variation 2020 vs 2019 Europe North America South America Group total A Total remuneration (average) Group Total 2019 Variation 2020 vs 2019 By Age Brackets Total remuneration (average)A Group Total 2019 Variation 2020 vs 2019 GPG ratio D (Median) 19.00% 9.70% 29.00% 24.60% Men 118,418 184,548 70,366 117,441 Men 432,989 580,190 404,829 446,707 Women 323,492 460,619 221,953 318,957 415,975 408,598 1.8% Women 89,361 149,855 52,097 90,286 107,477 101,520 5.9% Other employees C Men 50,980 45,344 24,032 40,145 Women 38,524 33,125 19,153 30,295 Ratio GPG D (Median) 20.7% 17.6% 15.2% 26.3% 34,602 34,372 0.7 % Men 69,701 63,805 31,064 55,151 55,151 54,123 Women 44,070 38,437 20,628 34,476 34,476 34,273 GPG Ratio D (Median) 23.6% 21.6% 18.9% 31.7% 31.7 % 30.8 % 1.9 % 0.6 % aged <= 25 aged 26-35 aged 36-45 aged 46-50 aged over 50 16,140 17,597 (8.30) 26,943 27,563 (2.20) 47,253 47,221 0.10 64,868 62,574 3.70 69,482 66,216 4.90 A. Data at 2020 year-end. Employees' average total remuneration includes their annual base salary, pensions and variable remuneration paid in the year. B. Includes group sr. executive vp, executive vp and vice-president. C. The variation includes the effect of internal reclassification between employee categories in different geographies. D. GPG Ratio (median) includes annual base salary and variable remuneration paid in the year. 16. Average remuneration Senior officers Thousands euros Executive officers Non-executive officers Senior officers Men 6,247 239 3,610 2020 Women 7,239 207 2,288 Total 6,743 227 3,362 Men 6,571 354 3,693 2019 Women 9,952 251 3,902 GPG Ratio D (Median) 16.2% 15.6% 26.5% 17.2% Total employees 56,050 49,626 25,269 43,867 43,867 43,262 1.4 % Total 43,867 43,262 1.40 Total 7,698 292 3,740 117 Annual report 2020 Contents 16.1 Ratio between the Bank’s minimum annual salary and the legal minimum annual salary by country and gender 2019 % Legal Minimum Wage Germany Argentina Brazil Chile US Spain Mexico Poland Portugal UK Men 225.00% 338.00% 182.00% 175.00% 207.00% 176.00% 128.00% 100.00% 200.00% 130.00% Women 193.00% 338.00% 182.00% 136.00% 207.00% 176.00% 128.00% 100.00% 200.00% 130.00% % legal minimum wage 209.00% 338.00% 182.00% 155.43% 206.00% 176.00% 128.00% 100.00% 200.00% 130.00% 16.2 Ratio between the Bank’s minimum annual salary and the legal minimum annual salary by country and gender 2020 % Legal Minimum Wage Germany Argentina Brazil Chile US Spain Mexico Poland Portugal UK 17. Training A Total hours of training % employees trained Total attendees Hours of training per employee Total investment in training Investment per employee Cost per hour % female participants % of e-learning training attendees % of e-learning hours Employee satisfaction (up to 10) Men 100.32% 380.69% 178.62% 179.14% 236.45% 175.29% 160.09% 101.54% 188.98% 176.26% Women 100.32% 380.69% 178.62% 144.15% 236.45% 175.29% 160.09% 100.00% 188.98% 176.26% % legal minimum wage 100.32% 380.69% 178.62% 161.64% 236.45% 175.29% 160.09% 100.77% 188.98% 176.26% 2020 5,913,435.04 100.00 5,939,158 30.93 61,304,729 320.65 10.37 53.66 91.97 48.06 8.18 2019 8,002,784 100.0 6,024,981 40.70 102,586,146 522.28 12.82 54.2 84.6 48.1 9.3 A.There were fewer hours of training in 2020 than in 2019 because the covid-19 pandemic forced in-person courses (which accounted for most training hours until 2019) to be cancelled. 18. Hours of training by category Senior officers Managers Other employees Group total 2020 2019 Hours 65,274 940,619 4,907,542 5,913,435 Average 29.97 50.7 28.79 30.93 Hours 77,861 678,335 7,246,558 8,002,784 Average 38.6 36.39 41.23 40.74 118 Responsible banking Corporate governance Economic and financial review Risk management and compliance 19. Hours of training by gender Men Women Group total 2020 Average 31.76 30.21 30.93 2019 Average 41.49 40.13 40.74 20. Absenteeism by gender and region A,B ,C,D Europe North America South America Group total Men 2.60 0.81 2.07 2.08 2020 Women 5.00 1.56 3.99 3.97 Total 3.89 1.23 3.12 3.11 Men 2.55 0.71 1.62 1.90 2019 Women 5.44 1.88 3.26 4.00 Total 4.14 1.36 2.53 3.06 A.Days missed due to occupational accidents. non-work related illness and non-work related accident for every 100 days worked. B. Santander UK oes not count hours not worked due to covid-19 as absences so they will not affect the remuneration objectives set prior to the health crisis. C. The sick leave employees took because of covid-19 led to a higher rate of absences in 2020 than in 2019. D. Banco Santander Brazil only considers the accidents that after an internal specialist investigation were recognized as work-related and had a Communication of work-related accident ("CAT") registered in the Brazilian Social Security in 2020. Likewise, this indicator only considers the cases that had 15 or more days of absence due to non-work-related accidents or common illness. 21. Accident rate % A,B Europa Norteamérica Sudamérica Group total Men 0.04 0.01 0.02 0.03 2020 Women 0.12 0.02 0.05 0.07 Total 0.08 0.01 0.04 0.05 Men 0.08 0.01 0.27 0.14 2019 Women 0.20 0.02 0.48 0.27 Total 0.14 0.02 0.39 0.21 A. Hours missed due to occupational accident involving leave between the number of total hours worked. The hours worked are theoretical hours. This includes accidents in Itinere. B. Banco Santander Brazil only considers the accidents that after an internal specialist investigation were recognized as work-related and had a Communication of work-related accident ("CAT") registered in the Brazilian Social Security in 2020Banco Santander Brazil only considers the accidents that after an internal specialist investigation were recognized as work-related and had a Communication of work-related accident ("CAT") registered in the Brazilian Social Security in 2020 22. Occupational health and safety A,B,C D Frequency rate Severity rateE No. of fatal occupational accidents F Work related illness Men 1 0.03 1 0 2020 Women 2 0.1 0 0 Total 2 0.07 1 0 Men 1.61 0.14 0 0 2019 Women 2.41 0.27 1 0 Total 1.77 0.21 1 0 A.The 2019 figure is an estimation. The number of accidents and working hours will be reported in the next accounting period. B.Recordable work-related injuries are reported without distinguishing cases with major consequences. C. Banco Santander Brazil only considers the accidents that after an internal specialist investigation were recognized as work-related and had a Communication of work-related accident ("CAT") registered in the Brazilian Social Security in 2020. D. Days not worked due to accidents at work with and without leave for every 1,000 hours worked. The hours worked are theoretical hours. In itinere accidents are included. E. Days not worked due to work accident with leave for every 1,000 hours worked. The hours worked are theoretical hours. In itinere accidents are included. F. No member of the group's staff is exposed to occupational diseases, given that the activity carried out by Santander professionals and the sector in which they operate is not recognized in Royal Decree 1299/2006. 119 Annual report 2020 Contents Customers 23. Group customers A Europa España Portugal Reino UnidoB Polonia SCFC,D Resto Europa Norte América México Estados Unidos Sudamérica Brasil Chile Argentina Resto Sudamérica SGPE Total 2020 65,080,571 13,970,512 3,047,020 25,156,638 5,213,476 17,598,056 94,869 24,034,601 18,898,106 5,136,495 56,929,320 48,347,665 3,605,104 3,913,086 1,063,465 2,211,543 2019 66,278,825 13,711,173 3,062,608 25,078,945 5,047,909 19,286,148 92,042 23,395,482 18,134,468 5,261,014 53,933,059 46,089,431 3,415,807 3,548,366 879,455 1,187,935 148,256,035 144,795,301 var. (2)% 2% (1)% —% 3% (9)% 3% 3% 4% (2)% 6% 5% 6% 10% 21% 86% 2% A. Figures corresponding to total customers, understood as the first holder of at least one product or service with a current contract. Of the European countries listed, except for the United Kingdom, the customers of Santander Consumer Finance are included under "Rest of Europe". B. Includes SCF. C. SCF includes all European countries, except UK. D.The decrease in SCF customers is mainly due to three countries: -SC Spain reported that the decline in customers is due to the COVID-19 effect and the termination of Orange's direct product. -SC Poland: the decrease is mainly due to a change in methodology (terminated contracts not taken into account in 2020 onwards) and decrease in PLN portfolio causing a decrease in the number of active contracts. -SC Germany: the decrease is due to a reduction in auto and durables. E. The annual variation in SGP is due to the incorporation of Superdigital, which was previously in Brazil. 24. Dialogue by channel Branches Number of branches ATMs Nº ATMs Digital banking Users Visits Monetary transactions A B C 2020 2019 Var .2020/2019 %. 11,236 11,952 40,451 39,593 42.36 9,860 2,803 36.8 7,907 2,251 (6.0) % 2.2 % 15.1 % 24.7 % 24.5 % A. Santander Consumer Finance not included. B. Counts once for users of both Internet and mobile banking. C. Millions. 120 Responsible banking Corporate governance Economic and financial review Risk management and compliance 25. Total complaints received SpainA Portugal B C United Kindom Poland Brazil Mexico Chile ArgentinaE US SCF D 2020 150,298 4,036 22,625 6,057 146,067 80,031 8,328 3,512 4,292 39,064 2019 91,046 4,655 30,298 6,193 133,841 75,459 6,474 4,106 4,097 30,535 2018 85,519 4,298 33,797 4,480 111,829 60,740 6,171 5,464 4,160 29,067 Compliance metrics according to group-wide criteria, which may not match local criteria such as that of the UK's Financial Conduct Authority (FCA) or in Brazil. A. In December 2020, the number of claims increased significantly, affecting the total number of claims received throughout the year. This was due to a public notice that made reference to the publication by the Ministry of consumption that the deadline to claim the mortgage expenses ended on 21 January 2021. B. The fall was due to improvements to systems, customer reporting and controls that enable the close monitoring of customer issues. C. The decline was the result of initiatives to improve complaints handling (resolution at touch points, enhanced root cause analysis, etc.) as well as fewer transactions due to the pandemic. Personal protection insurance (SPP) claims are not included. D. In Chile, the rise in complaints was due to the effects of covid-19, particularly in loan restructuring and customers’ understanding of certain campaigns and relief measures. E. In Argentina, the drop owed mainly to root-cause action plans, including improvements to self- service complaints handling and resolution, and preventive system maintenance. F. The increase stemmed from finance industry issues in Italy and Poland relating to the refund of interest on early loan repayments. 121 Annual report 2020 Contents Environment and climate change 26. Environmental footprint 2019-2020 A Consumption B ) /employee) 3 Water (m Water (m3 Normal electricity (millions of kwh) Green electricity (millions of kwh) Total electricity (millions of kwh) C Total internal energy consumption (GJ) Total internal energy consumption (GJ/employee) Total paper (t) Recycled or certified paper (t) Total paper (t/employee) Waste 4 Paper and cardboard waste (kg) Paper and cardboard waste (kg/employee) Greenhouse gas emissions E,F Direct emissions (CO2 teq) G Indirect electricity emissions (CO2 teq)-MARKET BASED Indirect electricity emissions (CO2 teq)-LOCATION BASED Indirect emissions from displacement of employees (CO2 teq) Total emissions (CO2 teq)- MARKET BASED Total emissions (CO2 teq/employee) Average number of employees H, I 2020 2019 Var. 2019-2020 (%) 2,064,113 11.07 395 526 920 3,758,225 20.16 8,902 7,348 0.05 5,926,139 31.79 24,818 128,633 282,216 40,708 194,159 1.04 186,429 2,938,024 15.20 548 517 1,064 4,322,838 22.37 16,497 13,784 0.09 9,705,579 50.22 27,673 183,745 322,414 120,969 332,387 1.72 193,261 -29.7 -27.1 -27.9 1.8 -13.5 -13.1 -9.9 -46.0 -46.7 -44.1 — -2.1 -1.7 — -10.3 -30.0 -12.5 -66.3 -41.6 -39.4 -3.5 A. The scope of information includes the main countries of operation: Argentina, Brazil, Chile, Germany, Mexico, Poland, Portugal, Spain, United Kingdom and United States (excluding Puerto Rico and Miami). The decreases in consumption, waste generation and emissions data have been mainly caused by the pandemic covid-19 situation. B. Information is provided exclusively on water withdrawal from the public network. C. It is also reported that the external energy consumption resulting from employee travel and business trips has been: 579,155 GJ in 2020 and 1,721,139 GJ in 2019. D. The data for 2019 and 2020 do not include waste from the commercial network in Brazil. Also, the data for 2019 do not include waste for Argentina. E. These emissions include those derived from the direct consumption of energy (natural gas and diesel, and additionally, in the particular case of Mexico, gasoline and diesel for automobiles and LPG) and correspond to scope 1, defined by the GHG Protocol standard. To calculate these emissions, the emission factors DEFRA 2020 for 2020 and DEFRA 2019 for 2019 were applied F. These emissions include those derived from electricity consumption and correspond to the scope 2 defined by the GHG Protocol standard. In both 2020 and 2019 the IEA (International Energy Agency) emission factors for 2017 have been used. - Indirect Electricity Emissions - Market-based: zero emissions have been considered for green electricity consumed in Germany, Spain, Portugal and UK; also, it has been considered that in Argentina, Brazil, Chile, Poland and USA, part of electricity consumption is green energy. This altogether has meant a reduction of 153,582 tons of CO2 equivalent in 2020 and 138,660 in 2019. For the rest of the electrical energy consumed, the emission factor of the IEA corresponding to each country has been applied. - Indirect emissions of electricity - Location-based: the emission factor of the IEA corresponding to each country has been applied to the total electricity consumed, regardless of its source (renewable or non-renewable). G. The reduction in indirect electricity emissions has been mainly due to the increase in the purchase of green energy in 2020 in the countries that make up the G10 H. These emissions include emissions from employees travelling from central services in each country to their workplaces by individual car, collective vehicle and rail, and from employees' business travel by air and car. The distribution of employees by type of travel has been made on the basis of surveys or other estimates. The conversion factors DEFRA 2020 for 2020 and DEFRA 2019 for 2019 were used to calculate emissions from employee travel. - The number of employees travelling to work in their own vehicles was estimated taking into account only the number of parking spaces in the central services buildings in each country and the diesel/ petrol consumption mix of the vehicle fleet in each country. Data on employee travel by individual vehicle from Argentina, Poland and the United Kingdom are not reported, as the information is not available. - Employees' journeys in collective vehicles were calculated on the basis of the average distance travelled by the vehicles rented by Grupo Santander for collective transport of its employees in the following countries: Germany, Brazil, the US, Spain, Mexico, Poland, Consumer and Portugal, and within the central services of Spain (CGS) and Luca de Tena - Data on business trips by car from USA Consumer are not reported, as the information is not available. - Emissions derived from the use of courier services are not included, nor are those derived from the transport of funds, nor those from any other purchase of products or services, nor those indirect ones caused by the financial services provided. I. Indirect emissions from displacement of employees have suffered a significant decrease. The main factors for this decrease are the reduction in mobility because of the covid-19 pandemic, as well as the development of teleworking among employees at the most critical moments of the pandemic. 122 Responsible banking Corporate governance Economic and financial review Risk management and compliance Further information This Responsible banking chapter constitutes the traditional sustainability report that the Group prepares and is one of the main tools used by the Group to report on sustainability issues. 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) and the Financial Services sector disclosures of the GRI G4 guidelines. Furthermore, we also applied the 2018-10 industry standards of the Sustainabilty Accounting Standards Board (SASB) for the first time. 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-financial and diversity information. Scope This chapter is the eighteenth annual document that Santander Group has published, giving account of its sustainability commitments, and refers to the period from 1 January to 31 December 2020. This report has been verified by PricewaterhouseCoopers Auditores, S.L., and independent firm which also audited the Group´s annual financial 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 definition used by the Group for accounting purposes; the social and environmental information has been prepared according to the same definition, 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 financial statements and sections 3 and 4 of the economic and financial chapter). When the limitations and scope of the information, and the changes in criteria applied with respect to the to the 2019 sustainability report are significant, these are reflected 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 flagging 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 sufficient 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. In addition, as part of our commitment to transparency, we have committed to begin reporting under the International Business Council of the World Economic Forum's (IBC-WEF) Stakeholder Capitalism metrics for the 2021 annual report. The use by Banco Santander SA of any MSCI ESG RESEARCH LLC or its affiliates (“MSCI”) data, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement, recommendation, or promotion of Banco Santander SA by MSCI. MSCI services and data are the property of MSCI or its information providers, and are provided ‘as-is’ and without warranty. MSCI names and logos are trademarks or service marks of MSCI. 123 Annual report 2020 Contents Non-financial 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 Correspondence report where the info is available with GRI indicators GRI 102-1 GRI 102-2 GRI 102-3 GRI 102-4 GRI 102-6 GRI 102-7 GRI 102-14 GRI 102-15 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 affect its future performance). Business model and strategy, What our stakeholders tell us. A description of the policies that the Group applies, which will include: the due diligence procedures applied Governance and priorities. Environmental for the identification, assessment, prevention and mitigation of risks and significant impacts and of verification and control, including the measures in which they have been adopted): and social risk analysis The results of these policies, including key indicators of relevant non-financial 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. Challenge 2: Inclusive and sustainable growth. A talented and motivated team. Governance and priorities. Responsible business practices. GRI 103-2 GRI 103-3 GRI 103-2 GRI 103-3 0. General Information The main risks related to these matters associated with the Group's activities (business relationships, products or services) that may have a negative effect 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, offering 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. Supporting the green transition, Acting responsibly towards customers, Environmental and social risk analysis. Risk management and compliance chapter. GRI 102-15 GRI 102-30 Supporting the green transition Environmental footprint. Environmental and social risks analysis At the end of the 2020 financial year, no significant account is presented in the Consolidated Annual Accounts of the Group that should be included in this chapter regarding environmental provisions or guarantees. GRI 102-29 GRI 102-31 GRI 201-2 GRI 103-2 (GRI of environmental dimension) GRI 102-11 GRI 102-29 GRI 102-11 GRI 102-11 124 Responsible banking Corporate governance Economic and financial review Risk management and compliance Description of the metric/concept included in the 11/2018 Law to be disclosed Contamination: Measures to prevent, reduce or repair CO2 emissions that seriously affect the environment, taking into account any form of air pollution, including noise and light pollution. Circular economy and waste prevention and management: Chapters/section of the Consolidated report where the info is available directors Correspondence with GRI indicators Environmental footprint. GRI 103-2 (GRI 302 y 305) Waste prevention measures, waste recycling measures, waste reuse measures; other forms of waste recovery and reuse; actions against food waste. Environmental footprint. Sustainable use of resources: Use and supply of water according to local limitations Environmental footprint. Key metrics Consumption of raw materials and measures taken to improve the efficiency of its use. Environmental footprint. Key metrics 1. Environmental Information Energy: direct and indirect consumption, measures taken to improve energy efficiency, use of renewable energies Environmental footprint. Key metrics Climate change: Important elements of greenhouse gas emissions generated as a business activity (including goods and services produced) Environmental footprint. Key metrics Measures taken to adapt to the consequences of climate change Supporting the green transition., Environmental footprint. Reduction targets voluntarily established in the medium and long term to reduce greenhouse gas emissions and means implemented for this purpose. Environmental footprint. Protection of biodiversity: GRI 103-2 (GRI 306) GRI 301-2 GRI 306-1 GRI 303-5 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) Measures taken to preserve or restore biodiversity Impacts caused by the activities or operations of protected areas The impacts caused by the direct activities of Banco Santander on biodiversity are not material due to the financial activity carried out by the entity. - 125 Annual report 2020 Contents Description of the metric/concept included in the 11/2018 Law to be disclosed Employment: Chapters/section of the Consolidated directors report where the info is available Correspondence with GRI indicators 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 GRI 102-35 GRI 102-36 GRI 103-2 (GRI 405) GRI 103-2 (GRI 401) GRI 405-1 GRI 103-2 (GRI 401) GRI 403-9 GRI 103-2 (GRI 401) Total number and distribution of employees by gender, age, country and professional classification Key Metrics. Total number and distribution of contracts modes and annual average of undefined contracts, temporary contracts, and part-time contracts by: sex, age and professional classification. Key Metrics. Number of dismissals by: gender, age and professional classification. Average remuneration and its progression broken down by gender, age and professional classification Key Metrics. Key Metrics. Salary gap and remuneration of equal or average jobs in society A talented and motivated team, Diversity and Inclusion section. 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 staff and negotiate with them) Percentage of employees covered by collective bargaining agreements by country Balance of the collective bargaining agreements (particularly in the field of health and safety in the workplace) Training: Key Metrics. A talented and motivated team, 3. The way we work section. Key metrics. A talented and motivated team, section 5: Our wellbeing. A talented and motivated team, 3. The way we work section. Key Metrics. A talented and motivated team, section 5: Our wellbeing. A talented and motivated team, 3. The way we work section. A talented and motivated team, section 5: Our wellbeing. GRI 102-41 Key Metrics. A talented and motivated team, section 5: Our wellbeing. GRI 403-9 GRI 403-10 What our stakeholders tell us. A talented and motivated team, Social dialogue and restructuring section. Acting responsibly towards customers Key Metrics. GRI 103-2 (GRI 402) GRI 102-41 A talented and motivated team, section 5: Our wellbeing. GRI 403-6 GRI 403-9 The policies implemented in the field of training A talented and motivated team, Talent management section. Total number of hours of training by professional categories. Accessibility: Key Metrics. GRI 103-2 (GRI 404) GRI 404-2 GRI 404-1 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 effective 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 A talented and motivated team, People with disabilities section. Acting responsibly towards customers. Higher education. GRI 103-2 (GRI 405) A talented and motivated team, Diversity and Inclusion section. GRI 103-2 (GRI 405 and 406) Higher education. 2. Social 126 Responsible banking Corporate governance Economic and financial review Risk management and compliance 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 Application of due diligence procedures in the field of Human Rights Governance and priorities. Environmental and social risk analysis. Responsible Procurement. Correspondence with GRI indicators GRI 102-16 GRI 102-17 GRI 103-2 (GRI 412) Prevention of the risks of Human Rights violations and, where appropriate, measures to mitigate, manage and repair any possible abuses committed Governance and priorities. Environmental and social risk analysis. Responsible Procurement. GRI 410-1 GRI 412-1 GRI 412-3 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. A talented and motivated team, , 1. Speaking up, active listening and taking action. GRI 406-1 A talented and motivated team, Social dialogue and restructuring section GRI 103-2 (GRI 406) 3. Human Rights Measures taken to prevent corruption and bribery 4. Fight against corruption Measures to combat money laundering Governance and priorities. Risk management and compliance chapter, section 7.2 Compliance and conduct risk management Governance and priorities. Risk management and compliance chapter, section 7.2 Compliance and conduct risk management Contributions to non-profit foundations and entities Community investment. GRI 102-16 GRI 102-17 GRI 103-2 (GRI 205) GRI 205-1 GRI 205-2 GRI 205-3 GRI 413-1 127 Annual report 2020 Contents 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 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. Higher education. Community investment. Financial inclusion and empowerment. GRI 103-2 (GRI 203) GRI 203-1 GRI 203-2 GRI 413-1 GRI 103-2 (GRI 203) GRI 203-1 GRI 203-2 GRI 413-1 GRI 102-43 GRI 413-1 Higher education. Community investment. GRI 102-12 GRI 102-13 Higher education. Community investment. Financial inclusion and empowerment. Relations maintained with the representatives of local communities and the modalities of dialogue with them. What our stakeholders tell us. Association or sponsorship actions Outsourcing and suppliers: Inclusion of social, gender equality and environmental issues in the procurement policy Responsible procurement. 5.Information on the company Consideration in relations with suppliers and subcontractors of their responsibility Responsible procurement. Supervision and audit systems and resolution thereof Responsible procurement. Consumers: Measures for the health and safety of consumers Systems for complaints received and resolution thereof Tax information: The profits obtained country by country Taxes earned on benefits paid Public grants received Any other relevant information: Acting responsibly towards customers. Risk management and compliance chapter, section 7.2 Compliance and conduct risk management Acting responsibly towards customers. Key metrics. Risk management and complince chapter, section 7.2 Compliance and conduct risk management. GRI content index. Auditor's report and annual consolidate accounts. Tax contribution. GRI content index. GRI 103-2 (GRI 201) GRI 201-4 GRI 103-2 (GRI 204, 308 and 414) GRI 102-9 GRI 103-2 (GRI 204, 308 and 414) GRI 204-1 GRI 308-1 GRI 414-1 GRI 103-2 (GRI 204) GRI 103-2 (GRI 416, 417 and 418) GRI 416-1 GRI 417-1 G4-FS15 GRI 102-17 GRI 103-2 (GRI 416, 417 and 418) GRI 416-2 GRI 417-2 GRI 418-1 *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-financial 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, 207-1, 207-2, 207-3, 207-4, 302-1, 302-3, 303-1, 307-1, 308-2, 401-2, 402-1, 403-1, 403-2, 403-3, 403-4, 403-5, 403-8, 404-3, 405-2, 411-1, 414-2, 415-1, 417-3, 419-1. 128 Responsible banking Corporate governance Economic and financial review Risk management and compliance UNEP FI Principles for Responsible Banking reporting index Reporting and Self-Assessment Requirements High-level summary of bank’s response Reference(s)/ Link(s) to bank’s full response/ relevant information Principle 1: Alignment We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks. 1.1. Describe (high-level) your bank's business model, including the main customer segments served, types of products and services provided, the main sectors and types of activities, and where relevant the technologies financed across the main geographies in which your bank has operations or provides products and services. 1.2. Describe how your bank has aligned and/or is planning to align its strategy to be consistent with and contribute to society's goals, as expressed in the Sustainable Development Goals (SDGs), the Paris Climate Agreement, and relevant national and regional frameworks. Corporate website: www.santander.com • About us • Our approach 2020 Annual Report: • Our approach • Business model and strategy Other references: Corporate website: • Financial report 2020 • 2020 Earnings Presentation Santander is a retail bank operating in 3 geographies (Europe, North America and South America) and in 10 main markets. Furthermore, we have global businesses like Santander Corporate & Investment Banking; Wealth Management & Insurance; or Santander Global Platform. Our purpose as a company is to help people and businesses prosper. Our aim is to be the best open financial services platform, by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. To this end, we integrate environmental, social and corporate governance (ESG) criteria into our business model. Our business model is based on three pillars: ◦ Our scale provides potential for organic growth. ◦ Unique personal banking relationships strengthen customer loyalty. ◦ Our geographic and business diversification and our subsidiaries’ model, which make us more resilient under adverse circumstances. Building on our technology to further strengthen our customers’ loyalty and access new fee-based revenue pools. Our value proposition includes a broad variety of solutions. Products and services are tailored to meet the needs of our customers, taking advantage of global best practices, but adapted to local singularities. We strive to exceed our stakeholders´ expectations and carry out our activity in a responsible way. Our activity allow us to contribute to several of the UN Sustainable Development Goals and support the Paris Agreement to fight climate change. In order to contribute effectively to their achievement, we have carried out an analysis to identify and align our strategy with the SDGs on which Banco Santander has the greatest impact. This analysis has highlighted the most relevant goals for Grupo Santander, both in terms of its activity, commitments and strategic focus, as well as the different external factors considered. We have identified six SDGs in which the Group has the greatest impact (7, 8, 10, 11, 13 and 16) and four more to which we also make a very significant contribution through our activity and our social programmes (1, 4, 5, 17) 129 Annual report 2020 Contents Principle 2: Impact and Target Setting We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products and services. To this end, we will set and publish targets where we can have the most significant impacts. 2.1. Impact Analysis: Show that your bank has identified the areas in which it has its most significant (potential) positive and negative impact through an impact analysis that fulfills the following elements: a) Scope: The bank’s core business areas, products/ services across the main geographies that the bank operates in have been as described under 1.1. have been considered in the scope of the analysis. b) Scale of Exposure: In identifying its areas of most significant impact the bank has considered where its core business/its major activities lie in terms of industries, technologies and geographies. c) Context & Relevance: Your bank has taken into account the most relevant challenges and priorities related to sustainable development in the countries/ regions in which it operates. d) Scale and intensity/salience of impact: In identifying its areas of most significant impact, the bank has considered the scale and intensity/salience of the (potential) social, economic and environmental impacts resulting from the bank’s activities and provision of products and services. (your bank should have engaged with relevant stakeholders to help inform your analysis under elements c) and d)) Show that building on this analysis, the bank has: • -identified and disclosed its areas of most significant (potential) positive and negative impact. • - identified strategic business opportunities in relation to the increase of positive impacts / reduction of negative impacts. Grupo Santander runs a systematic analysis to identify the social, environmental and ethical aspects that are most relevant to its various stakeholders all along its value chain. This study consists of a detailed quantitative and qualitative analysis based both internal and external sources. • Internal sources: employee and senior management views. • External sources: shareholders, investors, customers, regulators, agencies and society in general In 2020, this assessment identified 15 material issues for the bank’s responsible banking agenda. It is worth highlighting: • Funding of activities with environmental and climate impact • Ethical behaviour and risk management • Diversity • Customer satisfaction metrics To address these issues, two main challenges have been identified: 1) Adapting to the new business environment. 2) Contributing to a more inclusive and sustainable growth, that allows to build more inclusive and equal economies and societies, while at the same supporting the transition to a low carbon economy. This annual report discloses information on progress and plans relating to addressing these two challenges. In particular, in 2020 we have focused on: incorporating responsible business practices; tackling climate change and supporting the ecological transition; enhancing financial empowerment and inclusion proposal and fostering a diverse and skilled team of professionals. In particular with regard to climate change, we have developed a climate risk heatmap including both transitional and physical risks on a five-point scale in order to measure the materiality of the sectors on the Group's balance sheet. In addition, aligning with the Group's control and management risk practices, potential threats that may affect the development of the strategic plan are identified, valued and controlled, through periodic evaluation of the top risks under different stress scenarios. The main strategic risks identified by the Group are regularly monitored by senior management, including their respective mitigation measures. 2020 Annual Report- Responsible banking chapter • What our stakeholders tell us • Challenges and opportunities • Supporting green transition • Environmental and social risk analysis 2019 Annual Report Risk management and compliance chapter • 1.2 Santander Top and emerging risks Other references: • Stakeholder engagement & material concerns report A A • Culture report • Financial empowerment A report • Climate finance B report A. (These reports are from 2019 and are available in our Corporate Website) B. (This report is produced after the Annual Report and will be available throughout the month of June 2021) Please provide your bank’s conclusion/statement if it has fulfilled the requirements regarding Impact Analysis. We will continue to improve our materiality analysis and while further exploring and integrating recognised impact methodologies as started this year for our infrastructure operations. 130 Responsible banking Corporate governance Economic and financial review Risk management and compliance 2020 Annual Report- Responsible Banking chapter -2020 highlights -Supporting the green transition -Environmental and social risk analysis 2.2. Target Setting Show that the bank has set and published a minimum of two Specific, Measurable (can be qualitative or quantitative), Achievable, Relevant and Time-bound (SMART) targets, which address at least two of the identified “areas of most significant impact”, resulting from the bank’s activities and provision of products and services. Show that these targets are linked to and drive alignment with and greater contribution to appropriate Sustainable Development Goals, the goals of the Paris Agreement, and other relevant international, national or regional frameworks. The bank should have identified a baseline (assessed against a particular year) and have set targets against this baseline. Show that the bank has analysed and acknowledged significant (potential) negative impacts of the set targets on other dimensions of the SDG/climate change/society’s goals and that it has set out relevant actions to mitigate those as far as feasible to maximize the net positive impact of the set targets. To meet the identified challenges, we have set 11 targets which reflect our commitment to building a more responsible bank. These objectives include, amongst others, the commitment to facilitate the mobilisation of €120 billion of green finance between 2019 and 2025, as well as to financially empower 10 million people in the same period, through increasing microfinance activities, financial education programmes and other tools that give access to financial services. Other commitments to highlight: • To have between 40-60% of women on our board by 2021 and to have at least 30% of women in senior leadership positions by 2025. • To eliminate the equal pay gap by 2025. • To use 100% of our electricity from renewable sources in all countries by 2025. • To fund 200,000 scholarships, internships and entrepreneur programmes between 2019 and 2021. • To help 4 million people through our community programmes between 2019 and 2021. Additionally we updated our climate strategy, committing to: i) aligning our power generation portfolio with the Paris Agreement by 2030; ii) stop providing financial services to power generation customers with a revenue dependency on coal of over 10% in 2030; iii) reduce our worldwide exposure to coal mining production to zero by 2030; iv) and the ambition to be net zero carbon emissions by 2050. Please provide your bank’s conclusion/statement if it has fulfilled the requirements regarding Target Setting. The Bank has established priority areas for improvement in the short and medium term, specific metrics have been defined for their monitoring, and progress is disclosed in our annual report. We will continue working on further understanding the impacts from our activities including those related to our targets and where relevant set mitigating actions. 2.3 Plans for Target Implementation and Monitoring Show that your bank has defined actions and milestones to meet the set targets. Show that your bank has put in place the means to measure and monitor progress against the set targets. Definitions of key performance indicators, any changes in these definitions, and any rebasing of baselines should be transparent. The Responsible Banking unit and its network, in collaboration with the remaining areas and local units, defines short, medium and long term action plans to achieve the objectives. These actions are described through the different sections of the Responsible Banking chapter. The monitoring and follow-up of these actions is carried out through the KPIs defined in these plans. Commitments are embedded and part of the Group financial planning, which a three year plan with yearly forecast. 2020 Annual Report- Responsible Banking chapter Please provide your bank’s conclusion/statement if it has fulfilled the requirements regarding Plans for Target Implementation and Monitoring. Grupo Santander has defined at corporate and local level, various action plans to boost our commitments. 131 Annual report 2020 Contents 2.4. Progress on Implementing Targets For each target separately: Show that your bank has implemented the actions it had previously defined to meet the set target. Or explain why actions could not be implemented / needed to be changed and how your bank is adapting its plan to meet its set target. Report on your bank’s progress over the last 12 months (up to 18 months in your first reporting after becoming a signatory) towards achieving each of the set targets and the impact your progress resulted in. (where feasible and appropriate, banks should include quantitative disclosures) 2020 Annual Report- Responsible Banking chapter - 2020 highlights Grupo Santander reports, annually, the achievements and scopes of its responsible banking strategy and targets. In 2020, we made significant progress, achieving carbon neutrality and fulfilling four of our 2021 commitments one year early. Here is a summary of the 2020 results of each of the 11 targets set: • To be one of the top 10 companies to work for in at least six of the core geographies where we operate by 2021. In 2020: Top 10 in 6 geographies. • To have between 40-60% women on our board by 2021. In 2020: 40% • To have 30% women in our senior leadership positions by 2025. In 2020: 23.7% • To eliminate the equal pay gap by 2025. In 2020: 1.5% • To financially empower 10 million people between 2019 and 2025. Since 2019: 4.9 million • To finance or facilitate mobilization of €120 billion between 2019 and 2025 to tackle climate change. Since 2019: 33,800 billion • To use 100% of our electricity from renewable sources in our buildings by 2025. In 2020: 57% • To eliminate unnecessary single use plastic in our branches and corporate buildings by 2021. In 2020: 98% of reduction. • Carbon neutral in our own operations in 2020 • To fund 200,000 scholarships, internships and entrepreneur programmes between 2019 and 2021. Since 2019: 225,000 scholarships • To help four million people through our community programmes between 2019 and 2021. Since 2019: 4 million Please provide your bank’s conclusion/statement if it has fulfilled the requirements regarding Progress on Implementing Targets In 2020 the Group has made positive progress in achieving the various commitments made 132 Responsible banking Corporate governance Economic and financial review Risk management and compliance Principle 3: Clients and Customers We will work responsibly with our clients and our customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations. Corporate website www.santander.com • Policies Annual report 2020 - Responsible banking chapter • What our stakeholders tell us • Governance and priorities • Acting responsible towards customers • Supporting the green transition • ESG investment in Wealth Management and Insurance • Financial inclusion and empowerment 3.1.Provide an overview of the policies and practices your bank has in place and/or is planning to put in place to promote responsible relationships with its customers. This should include high-level information on any programmes and actions implemented (and/or planned), their scale and, where possible, the results thereof. Being responsible means offering our customers products and services that are Simple, Personal and Fair. All our activity is guided by policies, principles and frameworks to ensure we behave responsibly in everything we do. As far as our customers are concerned: • The general sustainability policy sets out principles and commitments focused on adding value to our main stakeholders. • The consumer protection policy sets out the specific criteria to identify, organise and execute the principles of consumer protection for our customers. • The sector policies stipulate the criteria governing the Group's financial activity in the defence, energy, mining/ metals and agricultural raw materials (like palm oil, soya and wood) sectors. • The sensitive sectors policy establishes guidelines for the evaluation and decision making on participation of the Group in certain sectors, which could lead to reputational risks. Customers are at the heart of everything we do. We use all the interactive channels we have to listen and understand our customers better. Our Product Governance & Consumer Protection function, within our Compliance and Conduct area, is responsible for ensuring appropriate management and control in relation to products and services and consumer protection. Within this function, the Product Governance Forum protects customers by validating products and services and preventing the launch of inappropriate ones. Additionally, the Group has worked on standards and good practices when dealing with vulnerable customers. The Group also has a procedure for complaint management and analysis aimed at adequately handling any complaints submitted, ensuring compliance with the local and industry regulations applicable. We increasingly incorporate ESG criteria within our SCIB and commercial customer conversations and product offering. We develop various environmental and social value-added products and services. We are a leader in renewable energy financing, and have various microfinance and financial empowerment programmes. 3.2. Describe how your bank has worked with and/or is planning to work with its clients and customers to encourage sustainable practices and enable sustainable economic activities. This should include information on actions planned/ implemented, products and services developed, and, where possible, the impacts achieved. 133 Annual report 2020 Contents Principle 4: Stakeholders We will proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals. Annual report 2020 - Responsible banking chapter • Governance and priorities • What our stakeholders tell us Other references: - Stakeholder engagement & material concerns report A A. (These report is from 2019 and is available in our Corporate Website.) 4.1. Describe which stakeholders (or groups/types of stakeholders) your bank has consulted, engaged, collaborated or partnered with for the purpose of implementing these Principles and improving your bank’s impacts. This should include a high-level overview of how your bank has identified relevant stakeholders and what issues were addressed/results achieved. Our strategy is based on a virtuous circle centred on trust and loyalty of our employees, customers, shareholders and communities. To achieve this we promote the active listening of our stakeholders. Listening, analysing, assessing and responding to their opinions and concerns we not only identify issues, we also spot opportunities, which allows us to guarantee our activity and to maintain the right functioning of the entire value chain. In addition, we also regularly analyse the most relevant environmental, social and governance issues demands of analysts and investors. And we continuously monitor the emergence of new standards and good practice at international level. Actively participating in the consultation processes of both authorities and sectoral associations and other organizations that influence the development of relevant policies on the sustainable development agenda. We are also part of the main and most important local and global initiatives to support the inclusive and sustainable growth. Some examples are UNEP FI; World Business Council for Sustainable Development (WBCSD); Banking Environment Initiative (BEI); UN Global Compact, CEO Partnership for Financial Inclusion; or Equator Principles. 134 Responsible banking Corporate governance Economic and financial review Risk management and compliance Principle 5: Governance & Culture We will implement our commitment to these Principles through effective governance and a culture of responsible banking 5.1. Describe the relevant governance structures, policies and procedures your bank has in place/is planning to put in place to manage significant positive and negative (potential) impacts and support effective implementation of the Principles. 5.2. Describe the initiatives and measures your bank has implemented or is planning to implement to foster a culture of responsible banking among its employees. This should include a high-level overview of capacity building, inclusion in remuneration structures and performance management and leadership communication, amongst others. 5.3 Governance Structure for Implementation of the Principles Show that your bank has a governance structure in place for the implementation of the PRB, including: a) target-setting and actions to achieve targets set b) remedial action in the event of targets or milestones not being achieved or unexpected negative impacts being detected. All our activity is guided by policies, principles and frameworks to ensure we behave responsibly in everything we do. The responsible banking, sustainability and culture committee assists the board of directors in fulfilling its oversight responsibilities with respect to the Group's responsible banking strategy, sustainability and culture issues. The committee is supported by the culture steering group and the inclusive and sustainable banking steering group. The culture steering group ensures we embed our culture, the Santander Way across the organisation, coordinating corporate and local actions. Our inclusive and sustainable banking steering group promotes responsible products, services and procedures to support small businesses to create new jobs, improve financial empowerment, support funding the low carbon economy and to foster sustainable consumption. To complete this corporate governance and drive progress on the responsible banking agenda, there is a Responsible Banking unit supported by a senior advisor on responsible business practices reporting directly to the Group's executive chairman. The culture and sustainability local units coordinate and foster their sustainable banking agenda, ensuring that they are aligned with the corporate strategy and policies. Likewise, each subsidiary has appointed a senior responsible for the sustainable banking function. Our strong corporate culture, The Santander Way, is fully aligned to our corporate strategy. It includes our purpose, our aim, and how we conduct business. It is the bedrock of our bank, a responsible bank. Actively listening to our stakeholders and using the materiality assessment, we have identified two main challenges: adapting to the new business environment and contributing to an inclusive and sustainable growth. Corporate website: www.santander.com -About us -Our approach 2020 Annual Report- Responsible Banking chapter -What our stakeholders tell us -Challenges and Opportunities -Governance and priorities -A strong and inclusive culture 2020Annual Report- Corporate Governance chapter -Responsible Banking, sustainability and culture, Committee activities Other references: -2019 Stakeholder engagement & material concerns report -2019 Culture thematic report A A A. (These reports are from 2019 and are available in our corporate website: www.santander.com) Please provide your bank’s conclusion/ statement if it has fulfilled the requirements regarding Governance Structure for Implementation of the Principles. The Group has a solid and well-structured responsible banking governance model to meet future challenges and implement necessary measures that allow us to develop our activity in a responsible and sustainable way. 135 Annual report 2020 Contents Principle 6: Transparency & Accountability We will periodically review our individual and collective implementation of these Principles and be transparent about and accountable for our positive and negative impacts and our contribution to society’s goals. 6.1 Progress on Implementing the Principles for Responsible Banking Show that your bank has progressed on implementing the six Principles over the last 12 months (up to 18 months in your first reporting after becoming a signatory) in addition to the setting and implementation of targets in minimum two areas (see 2.1-2.4). Show that your bank has considered existing and emerging international/regional good practices relevant for the implementation of the six Principles for Responsible Banking. Based on this, it has defined priorities and ambitions to align with good practice. Show that your bank has implemented/is working on implementing changes in existing practices to reflect and be in line with existing and emerging international/regional good practices and has made progress on its implementation of these Principles. 2020 Annual Report- Responsible Banking chapter -Governance and priorities -Further information Other references: -2019 Stakeholder engagement & material concerns report A A. (These report is from 2019 and is available at our Corporate Website.) The Responsible Banking chapter of our 2020 Annual report is our consolidated non-financial information statement. This is the eighteenth annual document the Santander Group publishes to diclose its sustainability commitments. This chapter includes information for the period: from 1 January to 31 December 2020. This chapter has been verified by PricewaterhouseCoopers Auditores, S.L., the independent firm which also audited the Group´s annual financial statements for the year. Santander has relied on internationally recognized standards such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) in its preparation. 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 system 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-financial and diversity information. We actively participate and we are part of the main initiatives and working groups that foster responsible business practices at local and international level. Some examples are: • UNEP FInance initiative. We are one of the founding signatories to the he UN Principles for Responsible Banking. We have also continued our participation in the TCFD Pilot II following the first pilot which started back in 2017. • World Business Council for Sustainable Development (WBCSD). We are part of the Future of Work, which supports companies in adapting their own business and human resources strategy to evolve in line with the digital age. • Banking Environment Initiative (BEI). We participate in two initiatives related to climate, the Soft Commodities Compact and the new Bank 2030 initiative. • CEO Partnership for Financial Inclusion. We are part of the private sector partnership for financial inclusion. • Equator Principles. We analyse the environmental and social risks of all our funding transactions that fall under the scope of the Equator Principles. Please provide your bank’s conclusion/statement if it has fulfilled the requirements regarding Progress on Implementing the Principles for Responsible Banking Through the responsible banking chapter of the Annual Report we give accounts of all our commitments related sustainability and responsible banking. We participate actively and we are part of the main initiatives and working groups that foster responsible business practices at local and international level. 136 Responsible banking Corporate governance Economic and financial review Risk management and compliance Global Reporting Initiative (GRI) content index GRI Standards: GENERAL DISCLOSURES GRI Standard GRI 101: FOUNDATION GRI 102: GENERAL DISCLOSURES Disclosure Page Omission 102-1 Name of the organization Business model and strategy 102-2 Activities, brands, products, and services 102-3 Location of headquarters 102-4 Location of operations 102-5 Ownership and legal form 102-6 Markets served 102-7 Scale of the organization 102-8 Information on employees and other workers 102-9 Supply chain 102-10 Significant changes to the organization and its supply chain 102-11 Precautionary Principle or approach 102-12 External initiatives 102-13 Membership of associations Business model and strategy Business model and strategy Business model and strategy Business model and strategy Business model and strategy Business model and strategy. Key Metrics Key metrics Responsible procurement Responsible procurement Environmental and social risk analysis, Environmental and social risk management policy section Governance and priorities, Joint initiatives to promote our agenda section. Shareholder value, ESG indices and analysts section. Santander participates in industry associations representing financial activity in the countries where it operates, as the AEB in the case of Spain 102-14 Statement from senior decision- maker Chairman's letter. 102-15 Key impacts, risks, and opportunities 102-16 Values, principles, standards, and norms of behaviour 102-17 Mechanisms for advice and concerns about ethics A strong and inclusive culture: The Santander Way. What our stakeholders tell us. Supporting the green transition. Risk management and compliance chapter. Governance and priorities. A strong and inclusive culture: The Santander Way. Acting responsibly towards customers. A talented and engaged team, section 1. Speaking up, active listening and taking action. Acting responsibly towards customers. Risk management and compliance. - - - - - - - 1 - - - - - - - - - ORGANISATIONAL PROFILE STRATEGY ETHICS AND INTEGRITY 137 Annual report 2020 Contents GRI Standard Disclosure Page Omission 102-18 Governance structure Corporate Governance chapter of the annual report. 102-19 Delegating authority Corporate Governance chapter of the annual report. 102-20 Executive-level responsibility for economic, environmental, and social topics 102-21 Consulting stakeholders on economic, environmental, and social topics Corporate Governance chapter of the annual report. Corporate Governance chapter of the annual report. Auditor's report and annual consolidated accounts. What our stakeholders tell us. 102-22 Composition of the highest governance body and its committees 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 Conflicts of interest 102-26 Role of highest governance body in setting purpose, values, and strategy 102-27 Collective knowledge of highest governance body 102-28 Evaluating the highest governance body’s performance 102-29 Identifying and managing economic, environmental, and social impacts 102-30 Effectiveness of risk management processes What our stakeholders tell us. Shareholder value. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. What our stakeholders tell us. Shareholder value. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. What our stakeholders tell us. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. Shareholder value. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. Shareholder value. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. Shareholder value. Corporate Governance chapter of the annual report. Auditor's report and consolidated annual accounts. Auditor's report and consolidated annual accounts. Risk management and compliance. Supporting the green transition Challenge2: Inclusive and sustainable growth. Risk management and compliance chapter. 102-31 Omission of economic, environmental, and social topics Risk management and compliance chapter. Auditor's report and consolidated annual accounts. 102-32 Highest governance body’s role in sustainability reporting 102-33 Communicating critical concerns 102-34 Nature and total number of critical concerns 102-35 Remuneration policies 102-36 Process for determining remuneration 102-37 Stakeholders’ involvement in remuneration Santander´s Board approved this report on February, 23th 2021 related to the 2020 period, and the Corporate Governance Chapter of the Annual Report published in 2021. Auditor's report and consolidated annual accounts. Principles and governance. Acting responsibly towards customers. A talented and engaged team, Diversity and inclusion section, equal pay subsection. Corporate Governance chapter of the Annual Report. What our stakeholders tell us. Shareholder's value.Corporate Governance Chapter of the Annual Report. Report of the supervisory, risk and regulations committee. What our stakeholders tell us. Shareholder's value. Corporate Governance Chapter of the Annual Report. Report of the supervisory, risk and regulations committee. GOVERNANCE 102-38 Annual total compensation ratio 102-39 Percentage increase in annual total compensation ratio 102-40 List of stakeholder groups 102-41 Collective bargaining agreements 102-42 Identifying and selecting stakeholders 102-43 Approach to stakeholder engagement 102-44 Key topics and concerns raised A talented and engaged team. A talented and engaged team. What our stakeholders tell us. What our stakeholders tell us. What our stakeholders tell us. What our stakeholders tell us. What our stakeholders tell us. STAKEHOLDER ENGAGEMENT - - - - - - - - - - - - - - - - - - - - 2 2 - - - - - 138 Responsible banking Corporate governance Economic and financial review Risk management and compliance GRI Standard Disclosure Page Omission REPORTING PRACTICE 102-45 Entities included in the consolidated financial statements 102-46 Defining report content and topic Boundaries 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 102-53 Contact point for questions regarding the report 102-54 Claims of reporting in accordance with the GRI Standards 102-55 GRI content index Further information section of this chapter. Auditor's report and consolidated annual accounts. Our approach. Further information sections of this chapter. What our stakeholders tell us. Further information section of this chapter Further information section of this chapter Further information section of this chapter Further information section of this chapter Further information section of this chapter General information chapter. Further information section of this chapter GRI Content Index. 102-56 External assurance Further information section of this chapter. - - - - - - - - - - - - 139 Annual report 2020 Contents GRI Standards: Topic-specific diclosures Material aspect Identified material aspect boundary ECONOMIC STANDARDS ECONOMIC PERFORMANCE GRI Standard Disclosure Page Scope Omission 103-1 Explanation of What our stakeholders tell us. the material topic and "Material aspect boundary" of GRI its boundary Content Index 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 201: ECONOMIC PERFORMANCE 201-1 Direct economic value generated and distributed Principles and governance "Page" of the GRI 201: Economic Performance" Principles and governance "Page" of the GRI 201: Economic Performance" € million Economic value generated1 Gross income Net loss on discontinued operations Gains/(losses) on disposal of assets not classified as non-current held for sale Gains/(losses) on disposal of assets not classified as discontinued operations Economic value distributed Dividends Other administrative expenses (except taxes) Personnel expenses Income tax and other taxes CSR investment 2 Economic value retained (economic value generated less economic value distributed) 1. Gross income plus net gains on asset disposals. 2. Only includes income tax on profits accrued and taxes recognised during the period. The chapter on Community Investment provides additional information on the taxes paid. 2020 44,543 44,600 0 114 -171 24,156 0 7,537 10,783 5,632 204 20,387 - - - - - - Group - 140 Responsible banking Corporate governance Economic and financial review Risk management and compliance Group Group - - - Page Scope Omission Supporting the green transition. Key metrics Group GRI Standards: Topic-specific diclosures Material aspect boundary Identified material aspect GRI Standard Disclosure 201-2 Financial implications and other risks and opportunities due to climate change 201-3 Defined benefit plan obligations and other retirement plans 201-4 Financial assistance received from government The liability for provisions for pensions and similar obligations at 2020 year-end amounted to EUR 3,976 million. Endowments and contributions to the pension funds in the 2020 financial year have amounted to EUR 359 million. The detail may be consulted in Auditor´s report and annual consolidated accounts. The Bank has not received significant subsidies or public aids during 2020. The detail may be consulted in Auditor´s report and annual consolidated accounts. MARKET PRESENCE Attracting and retaining talent / Diversity / Community investment Internal INDIRECT ECONOMIC IMPACT Community investment External 103-1 Explanation of the material topic and its boundary What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. GRI 103: MANAGEMENT APPROACH 103-2 The management approach and its components A strong and inclusive culture: The Santander Way Column “Page” of the GRI 201: Economic Performance. A strong and inclusive culture: The Santander Way. Column “Page” of the GRI 201: Economic Performance. 103-3 Evaluation of the management approach 202-1 Ratios of standard entry level wage by gender compared to local minimum wage 202-2 Proportion of senior management hired from the local community GRI 202: MARKET PRESENCE Key metrics. Group Key metrics . The Group Corporate Human Resources Model aims to attract and retain the best professionals in the countries in which it operates. Group excluding USA 103-1 Explanation of the material topic and its boundary What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. GRI 103: MANAGEMENT APPROACH GRI 203: INDIRECT ECONOMIC IMPACT 103-2 The management approach and its components 103-3 Evaluation of the management approach 203-1 Infrastructure investments and services supported 203-2 Significant indirect economic impacts Financial inclusion and empowerment Community investment. Financial inclusion and empowerment Community investment. Higher education. Community investment. Higher education. Community investment. - - - Group Group - - - - - - - - - - - - - 141 Annual report 2020 Contents Disclosure Page Scope Omission Responsible procurement. Group 3 103-1 Explanation of the material topic and its boundary What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 103-2 The management approach and its components 103-3 Evaluation of the management approach 204-1 Proportion of spending on local suppliers Responsible procurement. Responsible procurement. 103-1 Explanation of the material topic and its boundary What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 2020 highlights. A strong and inclusive culture: The Santander Way 2020 highlights. A strong and inclusive culture: The Santander Way Risk management and compliance chapter Risk management and compliance chapter - - - - - - - - - Group Group - - - - - Risk management and compliance chapter Group 4 GRI Standards: Topic-specific diclosures Material aspect Identified material aspect boundary PROCUREMENT PRACTICES GRI Standard Ethical behaviour and risk management External GRI 103: MANAGEMENT APPROACH Ethical behaviour and risk management External GRI 204: PROCUREMENT PRACTICES 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 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 Confirmed incidents of corruption and actions taken 142 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material Material aspect aspect ANTI-COMPETITIVE BEHAVIOR boundary GRI Standard Disclosure Page Scope Omission GRI 103: MANAGEMENT APPROACH 103-1 Explanation of the material topic and its boundary 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 behaviour, anti- trust, and monopoly practices - - - - - - Group 5 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 2020 highlights. A strong and inclusive culture: The Santander Way, and column “Page” of the GRI 206: Anti-competitive Behaviour. 2020 highlights. A strong and inclusive culture: The Santander Way, and column “Page” of the GRI 206: Anti-competitive Behaviour. • The Italian Competition Authority (“ICA”) has imposed Banca PSA Italia a fine of EUR 6,077,606 as part of an investigation against the Captive Banks for running an unlawful cartel from 2003 to April 2017, aimed at exchanging sensitive commercial information in the car financing market in Italy, in order to restrict competition for the sale of financed cars, in violation of Article 101 TFEU. Decision was appealed before the administrative court in 2019. On 21 October 2020, the administrative court of Lazio has annulled in its entirety the ICA´s decision about the car financing cartel. As a result of this judgement, the decision is annulled in its entirety, and all charges against PSA and against SCF Italy are no longer valid. ICA has appealed before the Consiglio di Stato. The possible appeal decision would be issued by Q4 2021. • On 23rd September 2020 the UOKiK (office of competition and consumer protection in Poland) published its decision in which a clause used by Santander Bank Poland in annexes to agreements on residential mortgage loans indexed to foreign currencies, was declared abusive. The clause relates to FX exchange rate (method of its determination). Fine: EUR 5,2 million. The bank has appealed decision. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. 143 Annual report 2020 Contents Identified material aspect Material aspect boundary GRI Standard Disclosure Page Scope Omission Compliance and risk management / Ethical behaviour Internal and external GRI 103: MANAGEMENT APPROACH GRI 207: TAX ENVIRONMENTAL STANDARDS MATERIALS Internal environmental footprint Internal and external GRI 103: MANAGEMENT APPROACH Internal environmental footprint Internal and external GRI 301: MATERIALS 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 207-1 Approach to tax 207-2 Tax governance, control, and risk management 207-3 Stakeholder engagement and management of concerns related to tax 207-4 Country-by- country reporting 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 301-1 Materials used by weight or volume 301-2 Recycled input materials used 301-3 Reclaimed products and their packaging materials What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 2020 highlights. A strong and inclusive culture: The Santander Way,and column “Page” of the GRI 207: Tax. 2020 highlights. A strong and inclusive culture: The Santander Way,and column “Page” of the GRI 207: Tax. Tax contribution Tax contribution Tax contribution Information breakdown is not available, work is under way to present this information. What our stakeholders tell us, and column "Material aspect boundary" of GRI Content Index. Supporting the green transition. Environmental footprint. Supporting the green transition. Environmental footprint. - - - Group Group Group - - - - Environmental footprint. Key metrics. Group The percentage of the environmentally- friendly paper consumption with respect to the total consumption is 83%. This percentage includes both recycled and certified paper. Group - - - - - - - - - - 6 6 Not applicable due to the type of Group financial activity. Group - 144 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material aspect ENERGY Material aspect boundary GRI Standard Disclosure Page Scope Omission Internal environmental footprint Internal and external WATER Internal environmental footprint Internal and external GRI 103: MANAGEMENT APPROACH GRI 302: ENERGY GRI 103: MANAGEMENT APPROACH GRI 303: WATER AND EFFLUENTS 103-1 Explanation of the material topic and its boundary 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 302-3 Energy intensity 302-4 Reduction of energy consumption 302-5 Reductions in energy requirements of products and services 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 303-1 Interactions with water as a shared resource 303-2 Management of water discharge- related impacts 303-3 Water withdrawal 303-4 Water discharge 303-5 Water consumption What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Supporting the green transition. Environmental footprint. Supporting the green transition. Environmental footprint. - - - Environmental footprint. Key metrics. Group Key metrics. Key metrics. An specific analysis of cause and effect relation for the implemented measures and of the obtained reduction is not available. Group Group Group Not applicable due to the type of Group financial activity. Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Supporting the green transition. Environmental footprint. Supporting the green transition. Environmental footprint. Environmental footprint. Not applicable due to the type of Group financial activity. - - - Group Group Environmental footprint. Key metrics. Group Not applicable due to the type of Group financial activity. Environmental footprint. Group Group - - - 6 6 6 - - - - - - - 6 - - 145 Annual report 2020 Contents Identified material aspect BIODIVERSITY Material aspect boundary GRI Standard Disclosure Page Scope Omission 103-1 Explanation of the material topic and its boundary 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 Significant 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 affected by operations 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach Not material Not material Not material - - - Not material Group Not material Not material Not material What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Supporting the green transition. Environmental footprint. Supporting the green transition. Environmental footprint. Group Group Group - - - - - - - - - - - - - EMISSIONS Internal environmental footprint Internal and external GRI 103: MANAGEMENT APPROACH 146 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material Material aspect aspect boundary GRI Standard Internal environmental footprint Internal and external GRI 305: EMISSIONS EFFLUENTS AND WASTE Internal environmental footprint Internal and external GRI 103: MANAGEMENT APPROACH GRI 306: EFFLUENTS AND WASTE Disclosure 305-1 Direct (Scope 1) GHG emissions 305-2 Energy indirect (Scope 2) GHG emissions 305-3 Other indirect (Scope 3) GHG emissions 305-4 GHG emissions intensity 305-5 Reduction of GHG emissions 305-6 Emissions of ozone- depleting substances (ODS) 305-7 Nitrogen oxides (NOX), sulfur oxides (SOX), and other significant air emissions 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 306-1 Water discharge by quality and destination 306-2 Waste by type and disposal method Page Scope Omission Environmental footprint. Key metrics. Group Environmental footprint. Key metrics. Group Environmental footprint. Key metrics. Group Key metrics. An specific analysis of cause and effect relation for the implemented measures and of the obtained reduction is not available. Group Group Not applicable due to the type of Group financial activity. Group Not applicable due to the type of Group financial activity. Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Supporting the green transition. Environmental footprint. Supporting the green transition. Environmental footprint. - - - Not applicable due to the type of Group financial activity. Group 6 6 6 6 - - - - - - - Environmental footprint and Key metrics. Group 6 Not applicable due to the type of Group 306-3 Significant spills financial activity. 306-4 Transport of Not applicable due to the type of Group hazardous waste financial activity. 306-5 Water bodies affected by water discharges and/or runoff Not applicable due to the type of Group financial activity. Group Group Group ENVIRONMENTAL COMPLIANCE Ethical behaviour and risk management / Compliance and adapting to regulatory changes Internal and external 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 307-1 Non- compliance with environmental laws and regulations GRI 103: MANAGEMENT APPROACH GRI 307: ENVIRONMENTAL COMPLIANCE What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A strong and inclusive culture: The Santander Way A strong and inclusive culture: The Santander Way - - - The Bank has not received final sanctionsfor this concept. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. Group 5 147 - - - - - - Annual report 2020 Contents Identified material aspect SUPPLIER ENVIRONMENTAL ASSESSMENT Material aspect boundary GRI Standard Disclosure Page Scope Omission 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 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 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Responsible procurement. Responsible procurement. - - - - - - Responsible procurement. Group 3, 7 Responsible procurement. Group 3, 7 148 Responsible banking Corporate governance Economic and financial review Risk management and compliance Material aspect boundary Identified material aspect SOCIAL STANDARDS EMPLOYMENT GRI Standard Disclosure Page Scope Omission GRI 103: MANAGEMENT APPROACH GRI 401: EMPLOYMENT GRI 103: MANAGEMENT APPROACH GRI 402: LABOR/ MANAGEMENT RELATIONS 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 103-2 The management approach and its components 103-3 Evaluation of the management approach 401-1 New employee hires and employee turnover 401-2 Benefits provided to full- time employees that are not provided to temporary or part- time employees 401-3 Parental leave 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 402-1 Minimum notice periods regarding operational changes 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A talented and engaged team, talent management section. A talented and engaged team, talent management section. - - - A talented and engaged team, talent management section. Key metrics. Group Benefits detailed in "A talented and engaged team", section "Corporate benefits" are regarding only full-time employees. Information breakdown is not available, work is under way to present this information. Group Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Column "Page" of the GRI 402: Labour/ Management relations" Column "Page" of the GRI 402: Labour/ Management relations" - - - Santander Group has not established any minimum period to give prior notice relating to organisational changes different from those required by law in each country. Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A talented and engaged team. Column "Page" of the GRI 403: Occupational Safe and Safety. A talented and engaged team. Column "Page" of the GRI 403: Occupational Safe and Safety. - - - - - - - - - - - - - - - - 149 Contents Scope Omission Page Banco Santander has occupational health and safety management systems in place in all the geographies in which it operates, complying with the legal requirements of each country regarding occupational risk prevention. Group A talented and engaged team, section 5: Our wellbeing. Group A talented and engaged team, section 5: Our wellbeing. Group At Banco Santander SA, the percentage of Representation in the Security Committee is 100%. Banco Santander S.A. and SCF A talented and engaged team, section 5: Our wellbeing. A talented and engaged team, section 5: Our wellbeing. Group Group Not applicable due to the type of Group financial activity. Group 100% of Banco Santander employees are covered by health and safety management systems at work. A talented and engaged team, section 5: Our wellbeing. Key metrics. Key metrics. Group Group Group - - - - - - 1 1 1 Annual report 2020 Identified material Material aspect aspect boundary GRI Standard Attracting and retaining talent / Diversity Internal GRI 403: OCCUPATIONAL HEALTH AND SAFETY Disclosure 403-1 Occupational health and safety management system 403-2 Hazard identification, risk assessment, and incident investigation 403-3 Occupational health services 403-4 Worker participation, consultation, and communication on occupational health and safety 403-5 Worker training on occupational health and safety 403-6 Promotion of worker health 403-7 Prevention and mitigation of occupational health and safety impacts directly linked by business relationships 403-8 Workers covered by an occupational health and safety management system 403-9 Work- related injuries 403-10 Work- related ill health 150 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material Material aspect aspect TRAINING AND EDUCATION boundary GRI Standard Disclosure Page Scope Omission Attracting and retaining talent / Diversity Internal GRI 103: MANAGEMENT APPROACH GRI 404: TRAINING AND EDUCATION DIVERSITY AND EQUAL OPPORTUNITY Attracting and retaining talent / Diversity / Incentives tied to ESG criteria Internal GRI 103: MANAGEMENT APPROACH Attracting and retaining talent / Diversity / Incentives tied to ESG criteria Internal GRI 405: DIVERSITY AND EQUAL OPPORTUNITIES NON-DISCRIMINATION 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 103-2 The management approach and its components 103-3 Evaluation of the management approach 404-1 Average hours of training per year per employee 404-2 Programs for upgrading employee skills and transition assistance programs 404-3 Percentage of employees receiving regular performance and career development omissions. 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 405-1 Diversity of governance bodies and employees 405-2 Ratio of basic salary and remuneration of women to men 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A talented and engaged team. “Page” of the GRI 404: Training and education. A talented and engaged team. “Page” of the GRI 404: Training and education. - - - A talented and engaged team, "Talent management" section. Key metrics. Group Banco Santander offers management programmes and continuous training skills that foster the employees´ employability and that, sometimes, help them manage the end of their professional careers. A talented and engaged team. Key metrics. A talented and engaged team, "Talent management" section. Regular performance and career development are received by the 100% of the employees. Group Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A talented and engaged team. "Diversity and Inclusion" section. A talented and engaged team. "Diversity and Inclusion" section. - - - A talented and engaged team. "Diversity and Inclusion" section. Key metrics. Corporate governance chapter of the Annual Report. Group - - - - - - - - - - A talented and engaged team. "Diversity and Inclusion" section. Key metrics. Group 8 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. A talented and engaged team. "Diversity and Inclusion" section A talented and engaged team. "Diversity and Inclusion" section. - - - GRI 406: NON- DISCRMINATION 406-1 Incidents of discrimination and corrective actions taken A talented and engaged team, section 1: "Speaking up, active listening and taking action". Risk management and compliance chapter. Group - - - - 151 Annual report 2020 Contents Identified material Material aspect aspect FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING GRI Standard boundary Disclosure Page Scope Omission GRI 103: MANAGEMENT APPROACH 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach Not material Not material Not material Not material Not applicable - - - 407-1 Operations and suppliers in GRI 407: which the right to FREEDOM OF freedom of ASSOCIATION association and AND COLLECTIVE collective BARGAINING bargaining may be at risk Not material Group CHILD LABOR GRI 103: MANAGEMENT APPROACH Not material Not applicable 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach Not material Not material Not material GRI 408: CHILD LABOR 408-1 Operations and suppliers at significant risk for Not material incidents of child labor - - - Group - - - - - - - - Identified material Material aspect aspect FORCED OR COMPULSORY LABOR boundary GRI Standard Disclosure Page Scope Omission Not material Not applicable 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labor GRI 103: MANAGEMENT APPROACH GRI 409: FORCED OR COMPULSORY LABOR Not material Not material Not material - - - Not material Group - - - - 152 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material aspect SECURITY PRACTICES Material aspect boundary 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 GRI Standard Disclosure Page Scope Omission GRI 103: MANAGEMENT APPROACH GRI 410: SECUTIRY PRACTICES GRI 103: MANAGEMENT APPROACH 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 410-1 Security personnel trained in human rights policies or procedures 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach GRI 411: RIGHTS OF INIDGENOUS PEOPLE 411-1 Incidents of violations involving rights of indigenous people What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Column "Page" of the GRI 410: Security Practices. Column "Page" of the GRI 410: Security Practices. - - - Santander requires to its Safety Services suppliers during the hiring process compliance with Human Rights Regulations Banco Santander S.A. - - - What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Column "Page" of the GRI 411: Rights of Indigenous People Column “Page” of the GRI 411: Rights of Indigenous People. The Bank ensures, through social and environmental risk assessments in their financing operations under the Equator Principles, that no violations of the indigenous peoples’ rights occur in such operations. In 2020, a total of 68 operations were evaluated in this respect. - - - - - - - HUMAN RIGHTS ASSESSMENT Ethical behaviour and risk management / Compliance and adapting to regulatory changes External GRI 103: MANAGEMENT APPROACH 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 412-1 Operations that have been subject to human rights Omissions or impact assessments What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Column "Page" of the GRI 412: Human Rights assessment Column "Page" of the GRI 412: Human Rights assessment All the Bank’s financing operations under the Equator Principles are subject to social and environmental risk assessments (which includes human rights aspects). In 2020, a total of 68 operations were evaluated in this respect. Ethical behaviour and risk management / Compliance and adapting to regulatory changes External GRI 412: HUMAN RIGHTS procedures ASSESSMENT 412-2 Employee training on human A talented and engaged team, Learning rights policies or and development section. 412-3 Significant investment agreements and contracts that include human rights clauses or that underwent human rights screening The Third-party Certification policy was Last year, the third-party approval policy was updated. This policy includes an appendix with the "principles of responsible conduct for suppliers". These principles are mandatory for all Banco Santander suppliers and include human rights aspects, amongst others. Group 9 - - - - - - Group 9 Group 10 Group 10 153 Annual report 2020 Contents Identified material Material aspect aspect LOCAL COMMUNITIES boundary GRI Standard Disclosure Page Scope Omission GRI 103: MANAGEMENT APPROACH GRI 413: LOCAL COMMUNITIES GRI 103: MANAGEMENT APPROACH GRI 414: SUPPLIER SOCIAL ASSESSMENT 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 413-1 Operations with local community engagement, impact assessments, and development programs 413-2 Operations with significant actual and potential negative impacts on local communities 103-1 Explanation of the material topic and its boundary 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 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Financial inclusion and empowerment, Supporting higher education, Community investment and Supporting the green transition. Financial inclusion and empowerment, Supporting higher education, Community investment and Supporting the green transition. Financial inclusion and empowerment, Supporting higher education, Community investment 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 different products and services offering social and/or environmental added value adapted to each country where Santander develops its activities. Group Group Group Group Environmental and social risk analysis Group What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Responsible procurement. Responsible procurement. - - - - - - - - - - - Responsible procurement. Group 3, 7 Responsible procurement. Group 3, 7 Community investment External SUPPLIER SOCIAL ASSESSMENT Control and management of risks, ethics and compliance Internal and external 154 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material aspect PUBLIC POLICY Material aspect boundary GRI Standard Disclosure Page Scope Omission 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 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach GRI 415: PUBLIC 415-1 Political POLICY contributions What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 2020 highlights,A strong and inclusive culture: The Santander Way. A talented and engaged team. Government and priorities “Page” of the GRI 415: Public Policy. 2020 highlights,A strong and inclusive culture: The Santander Way. A talented and engaged team. Government and priorities “Page” of the GRI 415: Public Policy. The vinculation, membership or collaboration with political parties or with other kind of entities, institutions or 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 103-1 Explanation of the material topic and its boundary What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Acting responsibly towards our customers, protecting consumers and helping vulnerable customers section. Acting responsibly towards our customers, protecting consumers and helping vulnerable customers section 103-2 The management approach and its components 103-3 Evaluation of the management approach 416-1 Assessment Responsible business practices. The of the health and safety impacts of product and service categories 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.  GRI 103: MANAGEMENT APPROACH GRI 416: CUSTOMER HEALTH AND SAFETY - - - Group - - - Group - - - - - - - - MARKETING AND LABELING Products and services that are transparent and fair Internal and external GRI 103: MANAGEMENT APPROACH 416-2 Incidents of non-compliance concerning the health and safety impacts of products and services 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach The Bank has not received final sanctions for this concept. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. Group 5 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Acting responsibly towards our customers, protecting consumers and helping vulnerable customers section. Acting responsibly towards our customers, protecting consumers and helping vulnerable customers section. - - - - - - 155   Annual report 2020 Contents Identified material Material aspect aspect boundary GRI Standard Products and services that are transparent and fair Internal and external GRI 417: MARKETING AND LABELING Scope Omission Group - Group 5 Group 5 Disclosure 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 Page Responsible business practices. 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. 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 • Sanction procedure of the National Securities Market Commission for violation of the provisions foreseen in art 214 Law Securities Market, in relation to the information collected from retail clients for the evaluation of convenience. • Sanction procedure opened on 2015 by the Ministry of Economy and Competitiveness, for the violation of the Securities Market Law, by the former Banco Popular: (i) not to act with transparency and diligence and in the interest of the clients having charged commissions not adjusted to the rules (ii) recommend to clients financial instruments not adjusted to their investment objectives or to their experience and knowledge. Dismissed judgment of the National Court notified on September 30, 2019. Appeal filed before the Supreme Court has been dismissed. Fine: 900.000 euro • Sanctioning file of the Basque Consumer Institute (Kontsumobide) for the alleged abusiveness of the expense clause of the mortgage loan contracts. Firm sanction. Fine: 120.00 euros. • In December 2020, Santander Consumer Finance Oy (“SCF Finland”, a subsidiary of Santander Consumer Bank AS) received a request for information from the Finnish Competition and Consumer Authority (“FCCA”) related to a marketing campaign published by a distributor automobile / automobile partner of SCF Finland in a Finnish national newspaper. The FCCA considers that the advertisement does not comply with the regulatory requirements for transparency and protection, prior to the publication of the advertisement. SCF Finland is required to provide information in Q1 2021. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. 156 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material aspect CUSTOMER PRIVACY Material aspect boundary GRI Standard Disclosure Page Scope Omission Measures taken for customer satisfaction Internal and External SOCIOECONOMIC COMPLIANCE Products and services that are transparent and fair / Ethical behaviour and risk management Internal and external GRI 103: MANAGEMENT APPROACH GRI 418: CUSTOMER PRIVACY GRI 103: MANAGEMENT APPROACH GRI 419: SOCIOECONOMI C COMPLIANCE 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data 103-1 Explanation of the material topic and its boundary 103-2 The management approach and its components 103-3 Evaluation of the management approach 419-1 Non- compliance with laws and regulations in the social and economic area What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. Acting responsibly towards our customers, Responsible business practices - - - - - - The Bank has not received final sanctions for this concept. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. Group 5 What our stakeholders tell us and column "Material aspect boundary" of GRI Content Index. 2020 highlights,A strong and inclusive culture: The Santander Way. A talented and motivated team. Acting responsibly towards customers and column “Page” of the GRI 419: Socioeconomic Compliance. 2020 highlights,A strong and inclusive culture: The Santander Way. A talented and engaged team. Acting responsibly towards customers and column “Page” of the GRI 419: Socioeconomic Compliance. The Bank has not received final sanctions for this concept. In addition, information on litigation and other Group contingencies can be found in Auditor’s report and annual consolidated accounts. - - - - - - Group 5 157 Annual report 2020 Contents GRI Standards - financial services sector disclosures Identified material Material aspect aspect G4 Standard boundary FINANCIAL SERVICES SECTOR DISCLOSURES PRODUCT PORTFOLIO Disclosure Page Scope Omissi on FS1 FS2 FS3 FS4 FS5 FS6 FS7 FS8 Policies with specific environmental and Governance and priorities, Supporting the social components applied to business lines green transition and Environmental and social risks analysis. Procedures for assessing and screening environmental and social risks in business lines Governance and priorities, Supporting the green transition and Environmental and social risks analysis Processes for monitoring clients´ implementation of and compliance with Governance and priorities, Supporting the environmental and social requirements included in agreements of transactions green transition and Environmental and social risks analysis. Process(es) for improving staff competency to implement the environmental and social policies and procedures as applied to business lines Interactions with clients/ investees/ business partners regarding environmental and social risks and opportunities Supporting the green transition, Management and staff training section. 2020 highlights. Governance and priorities, Joint initiatives to promote our agenda section. Shareholder value. Risk management and compliance chapter. Percentage of the portfolio for business lines by specific region, size Meeting the needs of everyone in society. (e.g. micro/ SME/ large) and by sector Acting responsibly towards customers. Moneraty value of products and services designed to deliver a specific social benefit for each business line broken down by purpose Monetary value of products and servicies designed to deliver a specific environmental benefit foir each business line broken down by purpose Supporting the green transition. ESG investment in Wealth Management and Insurance. Supporting the green transition. ESG investment in Wealth Management and Insurance. Group Group Group - - - Group - Group Group Group Group - - - - Ethical behaviour and risk management / Compliance and adapting to regulatory changes / Products Internal and and services that are transparent and fair / Products and services offering social and environmental added value external 158 Responsible banking Corporate governance Economic and financial review Risk management and compliance Identified material aspect AUDIT Material aspect boundary G4 Standard Disclosure Page Ethical behaviour and risk management / Compliance and adapting to regulatory changes Internal and external FS9 ACTIVE OWNERSHIP Ethical behaviour and risk management / Compliance and adapting to regulatory changes / Products and services that are transparent and fair / Products and servicies offering social and environmental added value Internal FS10 FS11 FS12 FS13 FS14 FS15 FS16 Coverage and frequency of audits to assess implementation of environmental and social policies and risk assesment procedures Percentage and number of companies held in the instituition´s portfolio with which the reporting organization has interacted on environmental or social issues Percentage of assets subject to positive and negative environmental or social screening Voting policy(ies) applied to environmental or social issues for shares over which the reporting organization hold the right to vote shares or advises on voting Access points in low- populated or economically disadvantaged areas by type Initiatives to improve access to financial servicies for disadvantaged people Policies for the fair design and sale of financial products and servicies Initiatives to enhance financial literacy by type of beneficiary Scope Omissi on Group - The Group's Internal Audit area carries out a biennial review of the sustainability function to evaluate, among other aspects, the degree of compliance with social and environmental responsibility policies, which includes both the review of the Equator Principles and additional risk assessment procedures on specific sectors. In addition, during the previous year the first review of the governance and procedures applied by the corporate function of Responsible Banking was carried out. Environmental and social risks analysis Group 9 Environmental and social risks analysis Group 9 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 social and environmental aspects, for shareholder meetings of the entities over which it has voting rights Group Financial inclusion and empowerment Group Financial inclusion and empowerment, sustainable finance and Key metrics. Group Acting responsibly towards customers Group Acting responsibly towards customers Group - - - - - 1.Only information regarding owned employees is disclosed. 2. The indicator is not reported because it is confidential information. 3.  Data refers exclusively to centralised purchases data in Aquanima. 4.  Information is provided on the total number of complaints conflicts of interest and corruption 5. Information is provided for claims of any type and over €60,000 that may have a significant reputational impact on the Group and/or that there is an accounting provision because it may materialize in the short, medium or long term. 6.  The scope and limitations of this indicator are described on Key Metrics. 7.  Only total amount of approved suppliers is included.  8. Only the ratio for total compensation is reported.  9. Information is only provided on the number of project finance deals of Santander’s Bank, which have been analysed regarding social and environmental risks in Equator Principles’ frame.  10.  Only qualitative information is disclosed.  11.  Information is provided on programmes and their direct impacts of the ten main countries of the Group, instead on centres. 159 Annual report 2020 Contents Sustainability Accounting Standards Board (SASB) content index This is the first year in which Santander has decided to report in accordance with the Sustainability Accounting Standards Board (SASB), following its Industry Standards Version 2018-10 issue. The relevant standards disclosed in this section have been selected according to a materiality-driven analysis, focusing on the industries that are most closely aligned with our businesses within the “Financials sector”: Asset Management & Custody Activities (FN-AC), Commercial Banks (FN-CB), Consumer Finance (FN-CF), Investment Banking & Brokerage (FN-IB). Acknowledging that SASB has a US-based approach, we have done our best efforts for translating it to our European standards. Currently, we do not disclose all metrics included in the aforementioned industry standards, but we will continue to evaluate additional metrics in the future, enhancing our reporting under SASB framework for meeting the needs of our growing base of stakeholders and investors. Unless otherwise is noted, all data and descriptions are reported for the Santander Group, if applicable, on a consolidated basis, and not just the segments relevant to the particular industry. The information will refer to the 2020 fiscal year, unless otherwise is specified. Sustainability Accounting Metrics Topic Data Security Industry Commercial Banks Consumer Finance Accounting Metric (1) Number of data breaches, (2) percentage involving personally identifiable information (PII), (3) number of account holders affected. Code FN-CB-230a.1 FN-CF-230a.1 Response Refer to ‘Litigation and other matters‘ in the note 25 of the Consolidated accounts in the Auditor's report and consolidated financial statements. Commercial Banks Consumer Finance Description of approach to identifying and addressing data security risks. FN-CB-230a.2 FN-CF-230a.3 Refer to ‘Risk Pro’ in section 'A strong and inclusive culture' of this chapter; and to ‘Relevant mitigation actions’ in section 6.2 of 'Risk management and compliance chapter'. 160 Responsible banking Corporate governance Economic and financial review Risk management and compliance Financial Inclusion & Capacity Building Commercial Banks Commercial Banks Commercial Banks Commercial Banks (1) Number and (2) amount of loans outstanding qualified to programs designed to promote small business and community development. (1) Number and (2) amount of past due and nonaccrual loans qualified to programs designed to promote small business and community development. FN-CB-240a.1 Refer to ‘Meeting the needs of everyone in society‘ section of this chapter. For more detail see note 10. ‘Loans and advances to customers´ in the Auditor's report and consolidated financial statements. Additionally, all the information related to microfinance programmes are available on the ‘Financial inclusion and empowerment‘ section of this report. FN-CB-240a.2 Refer to ‘Amounts past due‘ and ‘Impairment of financial assets‘ in 3.4 'Key metrics' section of the Risk management and compliance chapter. Also refer to notes 2.g and 10.d of the consolidated accounts in the Auditor's report and consolidated financial statements. Number of no-cost retail FN-CB-240a.3 Refer to ‘Financial inclusion and empowerment‘ checking accounts provided to previously unbanked or underbanked customers. section of this chapter. Number of participants in financial literacy initiatives for unbanked, underbanked, or underserved customers. FN-CB-240a.4 In 2020, Grupo Santander has financially empowered 3.6 million people. For further information refer to ‘Financial inclusion and empowerment‘ section of this chapter. Incorporation of Environmental, Social, and Governance Factors in Credit Analysis Commercial Banks Commercial and industrial credit exposure, by industry. FN-CB-410a.1 Refer to ‘Concentration risk‘ in section 3.6 'Other credit risk details' of the Risk Management and compliance chapter. Commercial Banks Description of approach to incorporation of environmental, social,and governance (ESG) factors in credit analysis. FN-CB-410a.2 Refer to the ‘Environmental and social risk analysis’ section of this chapter, and the ‘Environmental and social risk‘ section of the Risk management and compliance chapter. For further information see our ‘General Sustainability Policyc and our ‘Environmental, social & climate change risk management Policy’, available both on our corporate website. Incorporation of Environmental, Social, and Governance Factors in investment Banking & Brokerage Activities Investment Banking & Brokerage Investment Banking & Brokerage (1) Number and (2) total FN-IB-410a.2 Refer to ‘Supporting the green transition’ value of investments and loans incorporating integration of environmental, social, and governance (ESG) factors, by industry. section of this chapter. Description of approach to incorporation of environmental, social, and governance (ESG) factors in investment banking and brokerage activities. FN-IB-410a.3 Refer to ‘Supporting the green transition‘ section of this chapter. For further information see our ‘General Sustainability Policy‘, and our ‘Environmental, social & climate change risk management policy‘, both available on our corporate website. 161 Annual report 2020 Contents Business Ethics Asset Management & Custody Activities Commercial Banks Investment Banking & Brokerage Total amount of monetary losses as a result of legal proceedings associated with fraud, insider trading, anti-trust, anti- competitive behavior,market manipulation, malpractice, or other related financial industry laws or regulations. FN-AC-510a.1 Refer to GRI 206-1 discloses legal actions for FN-CB-510a.1 anticompetitive behavior, anti-trust, and FN-IB-510a.1 monopoly practices. For further information, refer to ’Litigation and other matters’ section on the Auditor's report and consolidated financial statements. Description of Asset Management whistleblower policies & Custody Activities and procedures. FN-AC-510a.2 Refer to ‘Ethical Channels’ in the section 'A FN-CB-510a.2 FN-IB-510a.2 talented and engaged team' of this chapter. For further information, see our ‘General Code of Conduct’, available on our website. Commercial Banks Investment Banking & Brokerage Systemic Risk Management Commercial Banks Global Systemically Important Bank (G-SIB) score, by category FN-CB-550a.1. FN-IB-550a.1. Investment Banking & Brokerage According to the ‘2020 list of global systemically important banks (G-SIBs)’ released by the Financial Stability Board, Santander´s G- SIB buffer is 1.0 %. (G-SIBs as of November 2020) According to the G-SIB Scores Dashboard from the Basel Committee on Banking Supervision (BCBS), Santander Group´s scores are (end-2019 data): • Score: 199 • Complexity: 92 • Cross-jurisdictional: 480 • Interconnectedness: 169 • Size: 194 • Substitutability: 61 Commercial Banks Investment Banking & Brokerage Description of approach to incorporation of results of mandatory and voluntary stress tests into capital adequacy planning, long-term corporate strategy, and other business activities FN-CB-550a.2. FN-IB-550a.2. Refer to ‘Capital planning and stress tests’ in the section 3.5 'Capital management and adequacy. Solvency ratios' of the Economic and Financial Review. 162 Responsible banking Corporate governance Economic and financial review Risk management and compliance Employee Diversity & Inclusion FN-AC-330a.1 FN-IB-330a.1 Commercial Banks, Investment Banking & Brokerage Percentage of gender and racial/ethnic group representation for (1) executive management, (2) non-executive management, (3) professionals, and (4) all other employees Activity metrics Commercial Banks (1) Number and (2) value FN-CB-000.A of checking and savings accounts by segment: (a) personal and (b) small business. Refer to ‘Key metrics’ section of this chapter. For further information, refer to ‘Diversity & Inclusion’ section of ‘A talented and engaged team’ this chapter. For further information about our diversity and inclusion principles, see our ‘Corporate Culture Policy’, available on our corporate website. Refer to ‘Consolidated annual accounts‘ in Auditor's report and consolidated financial statements. Commercial Banks (1) Number and (2) value FN-CB-000.B of loans by segment: (a) personal, (b) small business, and (c) corporate. Refer to ‘Consolidated annual accounts‘ in Auditor's report and consolidated financial statements. 163 Annual report 2020 Contents Independent verification report 164 Responsible banking Corporate governance Economic and financial review Risk management and compliance 165 Annual report 2020 Contents 166 Responsible banking Corporate governance Economic and financial review Risk management and compliance [This page has been left blank intentionally] 167 Annual report 2020 Contents Corporate governance 168 Responsible banking Corporate governance Economic and financial review Risk management and compliance 1. 2020 Overview Statement from Bruce Carnegie-Brown 1.1 Board skills and diversity 1.2 Board effectiveness 1.3 Alignment of executive compensation with the Group objetives and the covid-19 crisis 1.4 Active shareholder engagement during the pandemic 1.5 Achievement of our 2020 goals 1.6 Priorities for 2021 2. Ownership structure 2.1 Share capital 2.2 Authority to increase capital 2.3 Significant shareholders 2.4 Shareholders' agreements 2.5 Treasury shares 2.6 Stock market information 3. Shareholders. Engagement and general meeting 3.1 Shareholder engagement 3.2 Shareholder rights 3.3 Dividends 3.4 April 2020 AGM 3.5 October 2020 AGM 3.6 Our coming 2021 AGM 4. Board of directors 4.1 Our directors 4.2 Board composition 4.3 Board functioning and effectiveness 4.4 Executive committee activities in 2020 4.5 Audit committee activities in 2020 4.6 Nomination committee activities in 2020 4.7 Remuneration committee activities in 2020 4.8 Risk supervision, regulation and compliance committee activities in 2020 4.9 Responsible banking, sustainability and culture committee activities in 2020 4.10 Innovation and technology committee activities in 2020 4.11 International advisory board 4.12 Related-party transactions and conflicts of interest 170 170 170 171 172 173 174 177 177 177 178 178 179 180 182 182 184 185 187 188 189 190 192 198 203 211 212 217 221 225 229 233 235 235 Structure of our corporate governance report On 12 June 2018, the CNMV (Spanish stock market authority) approved new models for annual reports on corporate governance and remuneration, allowing companies to draft them in an open format. Thus, our corporate governance report (comprising this chapter) follows since then an open format. This includes: → Legally-required content for the corporate governance report. → Reports on the activities of board committees. See sections 4.4 to 4.10. → Annual report on directors’ remuneration, which we are required to prepare and submit to a non-binding vote at our 2021 annual general meeting. See section 6 'Remuneration'. → Directors’ remuneration policy. See section 6.4 'Directors’ remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. 5. Management team 6. Remuneration 6.1 Principles of the remuneration policy 6.2 Remuneration of directors for supervisory and collective decision-making duties: policy applied in 2020 6.3 Remuneration of directors for executive duties 238 241 241 241 244 6.4 Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote 255 6.5 Preparatory work and decision-making process with a description of the participation of the remuneration committee 6.6 Remuneration of non-director members of senior management 6.7 Prudentially significant disclosures document 7. Group structure and internal governance 7.1 Corporate centre 7.2 Internal governance 8. Internal control over financial reporting (ICFR) 8.1 Control environment 8.2 Risk assessment in financial reporting 8.3 Control activities 8.4 Information and communication 8.5 Monitoring 8.6 External auditor report 9. Other corporate governance information 9.1 Reconciliation withw the CNMV's corporate governance report model 9.2 Statistical information on corporate governance required by the CNMV 9.3 Table on compliance with or explanations of recommendations on corporate governance 9.4 Reconciliation to the CNMV's remuneration report model 9.5 Statistical information on remuneration required by the CNMV 261 261 263 264 264 264 267 267 268 269 270 271 271 275 275 279 300 302 303 → Cross references to find the information for each section of the corporate governance and remuneration reports in the CNMV's required format in this and other chapters of the annual report. See sections 9.1 'Reconciliation with the CNMV’s corporate governance report model' and 9.4 'Reconciliation with the CNMV’s remuneration report model'. → Cross references to find the information supporting each response to all recommendations in the CNMV'S Good Governance Code for Listed Companies (Spanish Corporate Governance Code) in the 2020 corporate governance and other chapters of this annual report. See section 9.3 'Table on compliance with and explanations of recommendations on corporate governance'. 169           Annual report 2020 Contents 1. 2020 Overview 'Maintaining high standards of governance is critical to enabling our strategy and long- term success. The covid-19 global health crisis has resulted in economic and social distress on a scale that we have not seen in generations. The board acted swiftly and decisively from the outset of the pandemic in support our customers, maintain the strength of capital and liquidity position and ensure the effectiveness of the risk management and compliance processes. The response of the Group provided positive affirmation of its business and governance model in the face of extraordinary challenges Despite the crisis, we continued to progress our governance goals and preserve strong governance disciplines demonstrating effective oversight and control across the Group. Board refreshment continued during the year, strengthening our skills and diversity with the appointment of Luis Isasi, Sergio Rial, R. Martín Chávez and Gina Díez. On behalf of the board, I would like to thank Ignacio Benjumea, Esther Giménez-Salinas, Rodrigo Echenique and Guillermo de la Dehesa for their invaluable service to the board and the Group. As part of our commitments of maintaining high governance standards, this year we engaged an external independent expert to conduct the assessment of the board and its committees which has provided a fresh perspective on areas for improvement. Effective succession planning of our board directors and members of senior management remains a priority. This year we refreshed our senior managers succession policy and commissioned a review of our succession plans methodology from an external independent advisor who confirmed that our processes are aligned with best industry practice. We introduced new governance models for the One Santander in Europe initiative and for PagoNxt to promote key strategic goals and support our growth plans. We will remain committed to working together effectively to improve our governance, providing robust oversight of the Group to achieve our purpose'. Bruce Carnegie-Brown, Lead independent director 1.1 Board skills and diversity Appointments in 2020 In 2020 a number of changes were made to the board’s composition to further enhance its diversity and strengthen its skills, specifically those identified as desirable in prior board evaluations. As at December 2020, the board comprised 40% of women, meeting its target of 40-60% minimum and maximum representation of either gender, ahead of the 2021 timeline. The main board changes in 2020 were as follows: 170 • Luis Isasi was appointed external director at our annual general meeting held on 3 April 2020 (April 2020 AGM) to fill the vacancy left by Guillermo de la Dehesa. See section 3.4 'April 2020 AGM'. Mr Isasi has a strong track record in finance, retail and investment banking, and capital markets. He held executive roles at JP Morgan in New York and First National Bank of Chicago in London. In 1987, he joined Morgan Stanley, where he was managing director of investment banking for Europe and chairman and country head for Spain. He has vast experience in many sectors and Responsible banking Corporate governance Economic and financial review Risk management and compliance international markets, as well as a wide institutional network within Spain. See section 4.1 'Our directors'. • Sergio Rial was appointed executive director at the April 2020 AGM to fill the vacancy left by Ignacio Benjumea. See section 3.4 'April 2020 AGM'. Mr Rial joined Santander in 2015 as chairman of the board of directors of Banco Santander (Brasil), S.A. He is currently the regional head for South America as well as chief executive officer (CEO) and vice-chairman of Banco Santander (Brasil), S.A. He brings extensive executive experience in banking and finance, and has a deep understanding of Latin American markets, especially Brazil. His nationality and background in multinational groups across geographical areas and sectors, such as Cargill Inc., Seara Foods and Marfrig Global Foods, increase the board’s international diversity and experience and give it a valuable perspective on environmental and social issues. See section 4.1 'Our directors'. • R. Martín Chávez was appointed independent director at the annual general meeting held on 27 October 2020 (October 2020 AGM) to fill the vacancy left by Esther Giménez- Salinas. See section 3.5 'October 2020 AGM'. Mr Chávez was Chief technology officer (CTO) and co- founder of Quorum Software Systems, global head of energy derivatives at Credit Suisse Financial Products and CEO and co-founder of Kiodex. In 2005, he joined Goldman Sachs, where he was a partner from 2006 to 2019 and held various executive positions during his tenure. He brings extensive knowledge of the global financial and information technology (IT) sectors to enhance the board's digital capabilities. He also enhances the geographical and international diversity. See section 4.1 'Our directors'. • Gina Díez was co-opted as an independent director on 22 December 2020 to fill the vacancy left by external director Rodrigo Echenique. The board submitted her nomination to our annual general meeting called for 25 or 26 March 2021, at first or second call respectively (2021 AGM) for ratification. See section 3.6 'Our coming 2021 AGM'. Ms Díez is the founder and president of Grupo Diarq and Universidad Centro and served as an independent director of Banco Santander México. She contributes to the board’s gender and geographic diversity, and brings broad international experience. She has substantial knowledge of one of the group’s key strategic markets, Mexico. Her expertise spans numerous sectors (real estate, education, banking), and responsible business and sustainability. See section 4.1 'Our directors'. The above changes have enhanced the board’s financial, technological and digital capabilities and international diversity, bolstering experience in very significant markets for the group (such as Brazil, the US and Mexico) and ensuring the board is well placed to deliver on our current and future strategies. With the addition of Gina Díez, 40% of the board members are women, in line with the gender equality target set by the board for 2021, which was first achieved in 2019. The proportion of independent board members has risen to 66.67%. Renewal of the board Stepping down Guillermo de la Dehesa (external) Ignacio Benjumea (external) Esther Giménez-Salinas (independent) Taking up role Luis Isasi (external) Sergio Rial (executive) R.Martín Chávez (independent) Rodrigo Echenique (external) Gina Díez (independent) The board’s renewal is underpinned by a structured induction programme tailored for each newly appointed director to support them in assuming their new role in Banco Santander, whilst addressing any development needs identified, where applicable, during the recruitment process. See 'Training of directors and induction programmes for new directors' in section 4.3. Strong succession planning Succession planning is a key element of our good governance as it ensures orderly leadership transitions, as well as board continuity and stability. It is a yearly cycle with a well-defined methodology and timelines, and a clear allocation of responsibilities. We also use specific performance indicators and review them each year. The nomination committee and board provide input to the plans and review performance as part of regular updates. The strength of the pipeline for each position is based on the number of candidates and how immediately qualified they are, with development and training plans in place where required. We refreshed our succession policy for managerial roles throughout the group and our policy for the selection, suitability assessment and succession of directors. The changes aim to boost talent pipelines across functions, with diversity a priority. We also assessed succession plans for key geographies and implemented a new selection process for top executives. Given the importance that the Group places in succession planning, an external opinion was sought in relation to our succession policy and associated succession processes. The review concluded that succession arrangements and framework for the board and critical roles throughout the Group meet regulatory requirements and align with industry best practice. See section 1.5 ‘Achievement of our 2020 goals’. 1.2 Board effectiveness Covid-19 In 2020, the pandemic’s unprecedented effect on health and the global economy required a rapid, coordinated and sustained response from Grupo Santander to safeguard the interests of our business and broader stakeholders. The board and its committees, which continued their oversight of planned business initiatives, held extraordinary meetings to check on immediate, tactical crisis management efforts: 171 Annual report 2020 Contents at Banco Santander (Brasil), S.A. Homaira Akbari at Santander Consumer USA Holdings Inc. and Bruce Carnegie-Brown at Santander UK plc and Santander UK Group Holdings plc. See section 7. 'Group structure and internal governance'. Furthermore, and as in the previous year, the audit committee chairman held two virtual conventions with fellow committee members and subsidiary audit committee chairs: • On 15 July, the session covered group internal audit challenges, financial information process and internal Sarbanes-Oxley control, independent external audit challenges and reflections on 2021 priorities. • On 19 November, the session covered the membership and profile of group audit committees, risk provisioning and emerging trends for group audit committees. Similar meetings followed in previous years with subsidiary risk committee chairs in September 2018 and audit committee chairs in May 2019. Feedback from participants has reinforced the value of the meetings, confirming that they foster the group’s coordinated approach and cross-border collaboration on key issues. More meetings are planned for 2021 onwards. Action plan 2020 following the board's assessment The board undergoes a yearly performance review. Its 2019 assessment covered its composition and organization, dynamics and internal culture, and committees’ performance, as well as each director’s performance and contribution. The resulting action plan enhanced the board’s performance in 2020 with: • More expertise in finance, auditing, technology and coverage of Latin American markets in its composition. • Balanced focus on regulatory compliance and strategy in an increasingly demanding and uncertain economic and geopolitical environment. • The timeliness of circulating relevant documents submitted to the board for analysis on the board and the committees, facilitating effective challenge and debate. • Training and upskilling programmes for directors to ensure the proper performance of their duties and give opportunities to interact with executives. • Optimal contribution from each board committee. The action plan which was completed in 2020 was supervised by the nomination committee. The board was regularly informed about its progress. • The board approved the voluntary 50% reduction of the chairman and CEO maximum remuneration (salary and bonus) for 2020 in relation to their remuneration in 2019 and the 20% reduction in board of directors' annual allotment and attendance fees for the balance of 2020, with effect from 1 April 2020, with the amounts saved being allocated to finance relief efforts to address the impact of covid-19. See section 1.3 'Alignment of executive compensation with the Group objectives and the covid-19 crisis'. • The board cancelled the final dividend for 2019 and the dividend policy for 2020 on 2 April, on the European Central Bank (ECB)’s recommendation to financial institutions amid unparalleled uncertainty. • Shareholders gave their approval to resume dividend payments at the October 2020 AGM with a dividend for the equivalent of EUR 0.10 per share in newly issued shares against the 2019 results, as well as a payment in 2021 of up to EUR 0.10 per share as remuneration against 2020. The latter is contingent on the ECB's approval and recommendations, a common equity tier 1 (CET1) ratio maintained within or above our target range of 11-12%, and the total payment not exceeding 50% of our consolidated ordinary (underlying) profit. On 3 February 2021, Banco Santander made public its 2020 results and the board's intention to pay a cash dividend of €2.75 cents per share as shareholder remuneration for 2020, the maximum allowed in accordance with the limits set by the ECB recommendations. This dividend will be paid under the resolution of the October 2020 AGM mentioned above. See section 3.3 'Dividends'. • In June, the audit committee approved the internal audit covid-19 edition plan. It adds flexibility and rigour to oversight whilst recognizing the impact of covid-19 on group-wide internal audit. Digital transformation Given the impact of the new disruptive platforms on the transformation of many industries, Grupo Santander aims to become the best open financial services platform, acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities in a way that is Simple, Personal and Fair. During 2020, we ramped up our digital strategy through the approval of One Santander, which provides a common, group- wide business and operational platform with an initial focus on Europe; and with PagoNxt, which combines our most disruptive payment businesses into a single, autonomous company. Group and subsidiary board connectivity Strengthening the links between the group board of directors and the subsidiaries is key to effective governance oversight and common values, ethics, controls and key business matters. In 2020, the global pandemic heightened the need for effective cross-border collaboration, which our proven Group Subsidiary Governance Model (GSGM) supports. This governance model is strengthened by the fact that a number of Group non-executive directors also sit on the boards of our principal units: Luis Isasi at Santander España, Álvaro Cardoso 172 Responsible banking Corporate governance Economic and financial review Risk management and compliance 1.3 Alignment of executive compensation with the Group objectives and the covid-19 crisis In 2020, the board of directors worked to ensure that the Group’s financial position was secure, complying with the regulatory requirements for capital and risk, and at the same time directly supported the communities in which the Group is present. As regards compensation, the quantitative and qualitative metrics in our variable remuneration scorecard have allowed the Board of directors and the remuneration committee to fix variable remuneration that is aligned with the risks, capital, clients’ base and ordinary results situation of the Group. In addition, the Group has aligned its governance and practices in 2020 to ensure that compensation is managed in a conservative way. The board, upon recommendation from the remunerations committee, approved the voluntary 50% reduction of the chairman and CEO maximum remuneration (salary and bonus) for 2020 in relation to their remuneration in 2019 and the 20% reduction in board of directors' annual allotment and attendance fees for the balance of 2020, with effect from 1 April 2020, with the amounts saved being allocated to finance relief efforts to address the impact of covid-19. In addition, to ensure that remuneration aligns with the results delivered, budget targets and metrics were not adjusted for covid-19 conditions. This resulted in a 74% reduction of the executive chairman's variable remuneration and in a 79% reduction of the chief executive officer's variable remuneration, after the exceptional adjustment agreed by the board to comply with the reduction commitment mentioned above, and 32.6% reduction of bonus pools for the top two executive segments in the Group (c.250 employees). 1.4 Active shareholder engagement during the pandemic Since the beginning of the health crisis we have put in place mechanisms to enable the full exercise by shareholders of their rights while at the same time protecting their health and maintaining engagement with them. The pandemic struck hard in March, when we had already called our April 2020 AGM, forcing us to make exceptional decisions to adapt to the restrictions imposed by the authorities. Our board’s monitoring of the pandemic, and its speed in making the right call as restrictions on movement and meetings were imposed, was key to providing our shareholders with all necessary April 2020 AGM-related information. The strength and flexibility of our corporate governance, which has allowed remote attendance at the annual general meetings since 2005 through our software application, made it possible to hold the April 2020 AGM exclusively remotely, avoiding the damage that would have been caused by cancelling it, as well as complying with all our corporate obligations without detriment to the rights of our shareholders. Thanks to this, shareholders were able to request clarifications, take the floor and put forward proposals for items not included on the agenda at the April 2020 AGM. See section 3.4 'April 2020 AGM'. In October 2020, we held another general meeting to approve the application of the 2019 results. This item was removed from the April 2020 AGM agenda and deferred to a later general meeting on the recommendation of the ECB due to the health and economic crisis. See sections 3.3 'Dividends' and 3.5 'October 2020 AGM'. The October 2020 AGM was held in a context of restrictions on capacity, movement and non-essential activities in which authorities advised against moving around. Although some shareholders decided to attend in person, the option to do so remotely allowed them to participate remotely on this occasion as well with a real-time connection to the meeting location, as well as to exercise their rights as they saw fit. The protocol followed at the October 2020 AGM to deal with the covid-19 restrictions was certified by AENOR. In addition, shareholders were also able to participate in the April 2020 AGM and October 2020 AGM (2020 AGMs) through our channels of proxy-granting and distance voting by electronic means, which include our digital platform, mobile application and telephone line, as well as a live broadcast on our website. Our digital transformation and advances in IT over recent years in our remote assistance application and distance participation channels for the general meetings allowed us to react to the covid-19 crisis with maximum efficiency. In addition, during the pandemic we increased our communication to shareholders through all our information disclosure channels. The Shareholder and Investor Relations team organized meetings, virtual events and specific campaigns with our shareholders to maintain direct communication with them and encourage their informed participation in the 2020 AGMs, but at the same time mitigating their exposure to the health risks of the pandemic. This allowed us to retain shareholder confidence, as reflected in the voting on the proposals submitted to the 2020 AGMs. See sections 3.4 'April 2020 AGM' and 3.5 'October 2020 AGM'. 173 Annual report 2020 Contents 1.5 Achievement of our 2020 goals The 2019 annual report disclosed our corporate governance goals and priorities for 2020. The following chart describes how we delivered on each priority. 2020 goals Santander share With a view to creating long-term value for shareholders, the board will supervise and support the managers in applying our strategy to make sure total shareholder returns properly reflect the Group’s solvency, results, corporate culture and sustainable growth. Strong succession plans In 2020, succession planning will continue to be a key priority in order to ensure a reliable pipeline of candidates at all times. We will proactively identify successors, implement any training plans needed to handle any succession event effectively. Performance indicators in our succession plans will continue to help us deliver intended outcomes and supervise risks implied in the succession of directors and other key roles constantly. Regular reporting to the board keeps it informed about the process, its risks and its results at all times. How we have delivered The uncertainty caused by covid-19 had a short-term impact on our share price. But we delivered solid results thanks to our scale, our focus on customers and our diversification, highlighting our good credit quality, strong capital generation capacity and our work to help customers and communities cope with the crisis. Amid the pandemic, Banco Santander’s share price fell 29.0%, while the Stoxx Europe 600 Banks index fell 24.5%. Several vaccines announced since November brought a wave of optimism, causing investment capital to rotate towards more cyclical industries, particularly banking. In Q4, the Stoxx Europe 600 Banks index rose 30.9%, with Santander’s share price rising 65.6%. Succession planning remained a priority in 2020. We reinforced the strength of the pipeline of candidates to ensure effective and robust succession planning through the assessment of them in core geographies, refreshing succession plans for senior managers. In 2020, key governance bodies held functional succession meetings, building a strong pipeline of candidates with 24% more women identified as successors than in 2019. Succession plans were set for 340 roles across the group, up from 335 in 2019. 89% of the positions covered have a strong succession pipeline (an increase from 84% in 2019). We have at least two successors who could be immediately ready, or one successor who could be immediately ready and two successors who could be ready in one to two years. A review conducted on board and executive succession planning by an independent third party confirmed their alignment with regulatory requirements and industry best practice. Remuneration policies adapted to the new business environment The remuneration structures and schemes for our executives must consider environmental, social and governance- related performance indicators that are simple, transparent, measurable and aligned with our public responsible banking commitments. During 2020 we have maintained a strong governance of remuneration in light of covid-19 conditions (see section 1.3 ‘Alignment of executive compensation with the Group objectives and the covid-19 crisis’). In addition, the remuneration committee and the board of directors have taken into account responsible banking factors for setting the 2020 remuneration through the qualitative adjustments provided for in the remuneration policy. Likewise, we have simplified the executive compensation framework that will apply from 2021, by reducing the number of metrics used in the pool calculation from 7 to 4, combining simplicity with the acknowledgment of the most relevant aspects for clients, results, financial strength and the appropriate management of the risk of the entity. Remuneration policies that are effective and adapted to our culture and values as well as the expectations of investors and other stakeholders, are essential to our strategy for sustainable growth. 174 Responsible banking Corporate governance Economic and financial review Risk management and compliance How we have delivered 2020 goals Communication with shareholders and investors as part of their engagement with the Group Closer engagement and dialogue through the channels and engagement activities mentioned in our policy on communication and engagement with shareholders and investors will both encourage them to exercise their rights and give them the information they expect and provide them with new opportunities to be involved in our corporate governance in an effective and sustainable manner in the long term, in accordance with the laws transposing the EU directive on shareholders’ rights and related implementing regulations. The nomination committee oversaw communication with shareholders and proxy advisors, as well as the results of votes at the 2020 AGMs, to further improve our corporate governance system. Our corporate communication framework, which establishes the key processes on communication of economic-financial, non-financial and corporate information throughout Group, helps maximize the disclosure and quality of the information we make available to the market. See section 3.1 'Shareholder engagement'. The pandemic stood out in our communication and engagement with shareholders and investors in 2020. In application of our internal policy (updated in February 2020), we implemented specific actions to meet our retail and institutional shareholders’ expectations, facilitating their involvement in our corporate governance despite the circumstances. See section 1.4 'Active shareholder engagement during the pandemic'. If we maximise the disclosure and quality of the economic-financial information we publish in a transparent and effective manner, we can retain the long-term trust of our investors and society. Strategy to address climate-change risks and opportunities We will supervise the fulfilment of our public climate change commitments, add environmental criteria to the group’s governance and risk management, and report on our progress transparently. Transition towards a green economy by financing sustainable projects, namely renewable energy projects, that promote a low-carbon economy and by supporting the development of sustainable and smart infrastructures will be very important in the board’s agenda. At the forefront of the best national and international practices In 2020, we will continue to heed recommendations from supervisors and guidelines of national and international organizations so that the operations and internal regulations of our governing bodies always follow best practice. In particular, we will review any amendments to the Spanish Corporate Governance Code that may be approved. Its initial proposal is in line with our corporate governance framework in regard to communication and engagement with shareholders and investors, director diversity and suitability assessments, executive committee composition, board organization and sustainability. The responsible banking, sustainability and culture committee discussed climate change throughout 2020 to ensure we were upholding our climate commitments (see section 'Sustainable finance' in the 'Responsible banking' chapter). This includes embedding climate change considerations in our risk management policies and processes, as well as in developing products and engaging with our customers to support their journey towards a low-carbon economy. In particular, the responsible banking, sustainability and culture committee closely monitored how we were addressing our commitments regarding our own environmental footprint and green finance, and developing and implementing a strategy to fulfil the Collective Commitment to Climate Action to align our portfolios to the Paris Agreement on climate change. The responsible banking, sustainability and culture committee also oversaw the definition and implementation of a road map to act on the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and supervisors and regulators' expectations and requirements. See section 4.9 'Responsible banking, sustainability and culture committee activities in 2020' and the 'Responsible banking' chapter for more details. We closely followed the recommendations from supervisors and guidelines of national and international organizations. In particular, we complied with all ECB recommendations on dividend distribution. See section 3.3 'Dividends'. Likewise, we adapted our corporate governance framework to the revision of the Spanish Corporate Governance Code, made in June 2020. Among the salient actions we carried out were the revision of the Rules and regulations of the board, and modification of the composition of the responsible banking, sustainability and culture committee, now formed entirely by non-executive directors. See 'Rules and regulations of the board' in section 4.3. We also adapted our whistleblowing channel, now accessible from our website and to anyone related to Banco Santander. These actions allowed us to fully comply with 60 of the 61 recommendations of the Spanish Corporate Governance Code that apply to us, and partial compliance with the remaining recommendation. See section 9.3 'Table on compliance with or explanations of recommendations on corporate governance'. 175 Annual report 2020 Contents 1.6 Priorities for 2021 Our board’s priorities for 2021 are: • Long-term shareholder value Focusing on long-term shareholder value as well as supervising and supporting the management team in implementing our strategy, so that shareholder returns appropriately reflect the group's solvency, results, corporate culture and sustainable growth. • Covid-19 Overseeing our response to the pandemic and our risk management of the economic crisis. It will prioritize the wellbeing of our employees, customers and shareholders by supporting our communities and continuing to build trust, underpinned by the strength of our business model, our strategy and the robust leadership of our teams. • Strategic growth initiatives Working on the group’s strategic growth priorities, which are critical to becoming the world’s best open financial services platform. Our initiatives include: One Santander, which is a common operational and business model created to transform the way we serve our customers, providing a simpler and enhanced customer experience; PagoNxt, which is an autonomous global payment platform to combine our payments businesses and banks around the world, accelerating the deployment of payment solutions to our customers globally, and is critical to building One Santander; and the digital consumer bank, integrating our fast-growing consumer lending business, Santander Consumer Finance (SCF), with Openbank to transform our digital proposition. • Responsible Banking – embedding ESG in all we do Driving Santander’s efforts to deliver profit with a clear purpose, to help people and businesses prosper in the years ahead, and to build a more responsible bank. It will also oversee the implementation of its decisions to support the Paris Agreement targets and focus on delivering the targets we set for ourselves; to raise and facilitate EUR 120 billion in green finance, and to financially empower 10 million people, by 2025. • High governance standards Maintaining high standards of governance to fulfil our strategy and ensure long-term success. This will help ensure our ongoing effectiveness and alignment with best practice. In particular, it will continue to instil strong governance disciplines as a key enabler to effective oversight and control across the group, making sure our corporate governance framework takes into account supervisory body recommendations as well as national and international guidelines. 176 Responsible banking Corporate governance Economic and financial review Risk management and compliance 2. Ownership structure → Broad and balanced shareholder base → A single class of shares → Authorised capital in line with best practices providing the necessary flexibility 2.1 Share capital Our share capital is represented by ordinary shares, each with a par value of 0.50 euros. All shares belong to the same class and carry the same rights, including voting and dividends. There are no bonds or securities that can be converted into shares other than contingent convertible preferred securities (CCPS), which are mentioned in section 2.2 'Authority to increase capital'. At 31 December 2020, Banco Santander had a share capital of EUR 8,670,320,651 represented by 17,340,641,302 shares. The share capital was amended only once in 2020, through a capital increase on 3 December to allow for remuneration of EUR 0.10 per share in newly issued shares. This was announced by the board on 29 July after it had postponed in March the decision on the application of results for the 2019 financial year on the ECB’s 27 March recommendation in light of the covid-19 pandemic. With this increase, which had been approved at the October 2020 AGM, Banco Santander issued a total of 722,526,720 new shares representing 4.35% of the share capital. These new shares began trading on 11 December. See section 3.5 'October 2020 AGM'. We have a broad and balanced shareholder structure. At 31 December 2020, Banco Santander’s had 4,018,817 shareholders, distributed by type of investor, geographic region and number of shares as follows: Type of investor A Board Institutional Retail Total % of share capital 1.05 % 58.10 % 40.85 % 100 % A. Shares owned or represented by directors. For further details on shares owned and represented by directors, see 'Tenure and equity ownership' in section 4.2 and subsection A.3 in section 9.2 'Statistical information on corporate governance required by the CNMV'. Continent Europe Americas Rest of the world Total Number of shares 1-3,000 3,001-30,000 30,001-400,000 Over 400,000 Total % of share capital 76.03 % 22,32% 1.65 % 100 % % of share capital 8.76 % 17.71 % 12.55 % 60.98 % 100 % 2.2 Authority to increase capital Under Spanish law, only shareholders at the general meeting have the authority to increase share capital. However, they may delegate the authority to approve or execute capital increases to the board of directors. Our Bylaws are fully aligned with Spanish law and do not establish any different conditions for share capital increases. As of 31 December 2020, our board of directors had received authorisation from shareholders to approve or carry out the following capital increases: • Authorised capital to 2023: at our April 2020 AGM, the board was authorised to increase share capital on one or more occasions by up to EUR 4,154,528,645.50 (50% of capital at the time of the April 2020 AGM or approximately 8.3 billion shares representing 47.92% of the share capital at 31 December 2020). The board was granted this authorisation for three years (until 3 April 2023). Consequently, the board can issue shares for cash consideration with or without pre-emptive rights for shareholders, and for capital increases to back any convertible bonds or securities issued under its authority granted by the April 2020 AGM. Shares without pre-emptive rights under this authority can be issued up to EUR 830,905,729 (10% of capital at the time of the April 2020 AGM or approximately 1,661 million shares representing 9.58% of the share capital at 31 177       Annual report 2020 Contents December 2020). However, this limit on issuing shares without pre-emptive rights do not apply to capital increases to convert CCPS (which can only be converted into newly- issued shares when the CET1 ratio falls below a predetermined threshold). Thus far, the board has not used this authority up to date. • Capital increases approved for contingent conversion of CCPSs: we issued contingent convertible preferred securities that qualify as regulatory Additional Tier 1 (AT1) instruments and would be converted into newly-issued shares if the CET1 ratio fell below a predetermined threshold. Each issue is therefore backed by a capital increase approved under the authorisation granted to the board by shareholders. The chart below shows the outstanding CCPSs at the time of this report, with details about the capital increase resolutions that back them. These capital increases are therefore contingent and have been delegated to the board of directors. The board of directors is authorised to issue additional CCPSs and other convertible securities and instruments in accordance with the annual Issues of contingent convertible preferred securities general meeting held on 12 April 2019 (2019 AGM) resolution that allows convertible instruments and securities to be issued for up to EUR 10 billion or an equivalent amount in another currency (of which EUR 1.5 bn were issued on 14 January 2020 as shown in the table below). Any capital increase to allow any such CCPS or other convertible instruments or securities to be converted would be approved under the authority mentioned in this section under 'Authorised capital to 2023' or under a future renewal of such authority. • Scrip dividend authority: at our April 2020 AGM, shareholders approved a capital increase against reserves for a potential scrip issue (under the Santander Dividendo Elección scheme) as part of the shareholder remuneration against 2020 earnings, delegating the power to execute this increase to the board of directors within one year. As explained in section 3.3 'Dividends' the remuneration against 2020 earnings will be in cash. Thus, the board of directors intention is not to use this authorization and let it expire on 3 April 2021. Date of issuance Nominal amount 11/09/2014 25/04/2017 29/09/2017 19/03/2018 08/02/2019 14/01/2020 EUR 1,500 million EUR 750 million EUR 1,000 million EUR 1,500 million USD 1,200 million EUR 1,500 million Discretionary remuneration per annum 6.25% for the first seven years 6.75% for the first five years 5.25% for the first six years 4.75% for the first seven years 7.50% for the first five years 4.375% for the first six years Conversion If, at any time, the CET1 ratio of Banco Santander or the Group is less than 5.125% A Maximum number of shares in case of conversion 299,401,197 207,125,103 263,852,242 416,666,666 388,349,514 604,594,921 A. The figure corresponds to the maximum number of shares that could be required to cover the conversion of these CCPS, calculated as the quotient (rounded off by default) of the nominal amount of the CCPS issue divided by the minimum conversion price determined for each CCPS (subject to any antidilution adjustments and the resulting conversion ratio). 2.3 Significant shareholders At 31 December 2020, no shareholder held more than 3% of Banco Santander’s total share capital (which is the threshold generally provided under Spanish regulations for a significant holding in a listed company to be disclosed). Even though at 31 December 2020, certain custodians appeared in our shareholder registry 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 whom exceeded that threshold individually. These custodians were State Street Bank (13.54%),The Bank of New York Mellon Corporation (8.25%), Chase Nominees Limited (7.74%), EC Nominees Limited (3.55%), BNP Paribas (3.07%) and Caceis Bank (3.01%). On 24 October 2019 BlackRock Inc., asset manager, reported to the CNMV its significant holding of voting rights in Banco Santander (5.426%). It also specified that it was holding shares on behalf of a number of funds or other investment entities, none of which exceeded 3% individually. No changes have been communicated since then. There may be some overlap in the holdings declared by the above mentioned custodians and asset manager. 178 At 31 December 2020, neither our shareholder registry nor the CNMV's registry showed any shareholder residing in a tax haven with a shareholding equal to, or greater than, 1% of our share capital (which is the other threshold applicable under Spanish regulations). Our Bylaws and the Rules and regulations of the board of directors lay down an appropriate system for analysing and approving related-party transactions with significant shareholders. See section 4.12 'Related-party transactions and conflicts of interest'. 2.4 Shareholders’ agreements In February 2006, various persons linked to the Botín-Sanz de Sautuola y O’Shea family entered into a shareholders’ agreement that set up a syndicate for their shares in Banco Santander. CNMV was informed of this agreement and the subsequent amendments the parties made. This information can be found on the CNMV website. The main provisions of the agreement are: • Transfer restrictions: except when the transferee is also a party to the agreement or the Fundación Botín, any transfer of Banco Santander shares expressly included in the Responsible banking Corporate governance Economic and financial review Risk management and compliance agreement requires prior authorisation from the syndicate meeting, which can freely authorise or reject it. These transfer restrictions apply to the shares they expressly cover under the agreement and to shares subscribed for, or acquired by, syndicate members in exercising any subscription, bonus share, grouping or division, replacement, exchange or conversion rights that pertain or are attributed to, or derive from, those syndicated shares. • Syndicated voting: under the agreement, the parties will syndicate and pool the voting rights attached to all their shares in Banco Santander, so that syndicate members may exercise them and, in general, act towards Banco Santander in a concerted manner, in accordance with the instructions and indications and the voting criteria and orientation established by the syndicate. This covers the shares subject to the transfer restrictions mentioned above as well as any voting rights attached to any other Banco Santander shares held either directly or indirectly by the parties to the agreement, and any other voting rights assigned to them by virtue of usufruct, pledge or any other contractual title, 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 will be the chairman of the Fundación Botín (currently, Javier Botín, one of our directors and our Group executive chairman's brother). The agreement initially terminates on 1 January 2056, but will be automatically extended for additional 10-year periods unless one of the parties notifies of their intention not to extend six months before the initial term or extension period ends. The agreement may only be terminated early if all the syndicated shareholders agree unanimously. At 31 December 2020, the parties to the shareholders' agreement held 100,025,942 shares in Banco Santander (0.58% of its capital), which were therefore subject to the voting syndicate. They include 80.355.819 shares (0.46% of its capital) that are also subject to the transfer restrictions. Subsection A.7 of section 9.2 'Statistical information on corporate governance required by the CNMV' contains the list of parties to the shareholders´ agreement and the relevant information filed with CNMV. 2.5 Treasury shares Shareholder approval The acquisition of treasury shares was last authorized at our April 2020 AGM, for five years and subject to the following provisions: Treasury shares policy On 27 October 2020, the board approved the current treasury shares policy, which dictates that treasury share transactions may be carried out for these purposes: • Provide liquidity or supply of securities in the market for Banco Santander shares, which gives this market depth and minimizes any temporary imbalances in supply and demand. • Take advantage for the benefit of all shareholders of weakness in the share price in relation to its medium-term outlook. • Meet our obligations to deliver shares to our employees and directors. • Serve any other purpose authorized by the board within the limits set at the general meeting. Among other things, the policy also provides for: • The principles to uphold in treasury share trades, which include protecting financial markets' integrity and prohibiting market manipulation and insider trading. • The operating rules on how treasury share trades must be carried out, unless in exceptional circumstances as per the policy. These rules include: • Responsibility for execution of these trades, which falls on the Investments and Holdings department, kept separate from the rest of Santander. • Venues and types of trades. Trades must generally be carried out in the orders market of the mercado continuo (continuous market) of Spanish stock exchanges. • Volume limits, which in general must not exceed 15% of the average daily trading volume for Banco Santander shares in the previous 30 sessions in the mercado continuo. • Price limits. In general, (a) buy orders should not exceed the greater of the price of the last trade in the market between independent parties or the highest price in a buy order in the order book and (b) sell orders should not be lower than the lesser of the price of the last trade in the market by independent parties and the lowest price in a sell order in the order book. • Time limits, including a 15-day black-out period that applies before each quarterly results presentation. • Treasury shares held at any time cannot exceed 10% of • Disclosure to the markets of treasury shares trading. Banco Santander's share capital, which is the legal limit set under the Ley de Sociedades de Capital (Spanish Companies Act). • The purchase price cannot be lower than the nominal value of the shares nor exceed 3% of the last trading price in the Spanish market for any trades in which Banco Santander does not act on its own behalf. • The board may establish the purposes for and the procedures through which the authorization may apply. The policy applies to the discretionary trading of treasury shares. It does not apply to transactions in Banco Santander shares carried out to hedge market risks or provide brokerage or hedging for customers. The full treasury shares policy is at Banco Santander's corporate website. 179 Annual report 2020 Contents Activity in 2020 As of 31 December 2020, Banco Santander and its subsidiaries held 28,439,022 shares, which represented 0.164% of share capital (compared to 8,430,425 at 31 December 2019, then representing 0.051% of share capital). The chart below summarizes the monthly average proportion of treasury shares to share capital throughout 2020 and 2019. Monthly average of daily positions in treasury shares % of Banco Santander’s share capital at month end January February March April May June July August September October November December 2020 0.09% 0.06% 0.11% 0.17% 0.17% 0.15% 0.15% 0.17% 0.17% 0.18% 0.17% 0.16% 2019 0.07% 0.02% 0.01% 0.01% 0.02% 0.02% 0.02% 0.03% 0.04% 0.04% 0.05% 0.05% In 2020, the Group's treasury share trades consisted of the following values: Acquisitions and transfers of treasury shares in 2020 Acquisitions Transfers EUR (except number of shares) Discretionary trading Client induced A trading Number of shares Total par value Total cash amount Average purchase price Number of shares Total par value Total cash amount Average purchase price Profit (loss) net of taxes 51,678,265 25,839,133 143,415,000 2.83 31,669,373 15,834,687 104,550,000 3.30 1,193,000 250,301,349 125,150,675 614,843,000 Total 301,979,614 150,989,807 758,258,000 2.46 2.51 250,301,349 125,150,675 614,843,000 281,970,722 140,985,361 719,393,000 2.46 2.56 0 1,193,000 A. Transactions in Banco Santander shares carried out to hedge market risks or provide brokerage or hedging for customers. The chart below shows significant changes in treasury shares that required disclosure to the CNMV in the year. Companies must report to the CNMV when purchases of treasury shares exceed 1% of the total voting rights (without discounting sales or transfers) or there is a change in the number of total voting rights. Significant changes in treasury shares in 2020 A % of voting rights represented by shares held at reference date of notice transferred since last notice acquired since last notice 1.032% 1.002% 0.162% 0.89% 1.048% 0.184% 0.23% 0.185% 0.157% Reported on 25/03/2020 B 11/11/2020 21/12/2020 2.6 Stock market information Markets Banco Santander shares are listed on Spanish stock exchanges (Madrid, Barcelona, Bilbao and Valencia, under the trading symbol 'SAN'), the New York Stock Exchange (NYSE) as American Depositary Shares (ADS) under the trading symbol 'SAN' (each ADS represents one Banco Santander share), the London Stock Exchange as Crest Depositary Interests (CDI) under trading symbol 'BNC' (each CDI represents one Banco Santander share), the Mexican Stock Exchange under the trading symbol 'SAN', and the Warsaw Stock Exchange under the trading symbol 'SAN'. A. Percentages calculated with share capital at the date of disclosure. B. This notice was corrected by disclosures dated 26 March 2020 and 11 November 2020. Data shown as corrected. Share price performance Government measures to contain the health crisis ensuing from the rapid spread of covid-19 had a very severe economic effect that caused GDP to plummet in the first half of the year like never before. Monetary policies quickly adopted by 180 Responsible banking Corporate governance Economic and financial review Risk management and compliance central banks and the fiscal stimulus packages governments put in place countered the economic slowdown and reduced financial tensions. Relaxation of lockdowns helped market confidence and economic activity recover in the third quarter. Still, activity was slower than expected owing to new outbreaks and fears of new lockdown measures, which dragged the stock markets down. During the year, the main indices performed better than the banking sector, which was under the influence of recommendations the ECB, the Bank of England, the Federal Reserve and other central banks had issued at the start of the pandemic to limit dividend payouts and share buybacks. In this context, the Ibex 35 in Spain declined 15.5%; the DJ Stoxx 50 in Europe, 8.7%; DJ Banks, 24.5% and the MSCI World Banks,14.2%. Market capitalisation and trading By 31 December 2020, Santander’s market capitalization of EUR 44,011 million was the second largest in the eurozone and 32 largest in the world among the financial institutions. nd 19,080 million shares traded in the year for an effective value of EUR 45,034 million and a liquidity ratio of 115%. The Banco Santander share Shares (million) Price (EUR) Closing price A Change in the price Maximum for the period Date of maximum for the period A Minimum for the period Date of minimum for the period A A Average for the period End-of-period market capitalisation (EUR million) Trading 2020 2019 17,340.6 16,618.1 2.538 -29.0 % 3.575 -6.1 % 3.799 17/2/2020 1.439 24/9/2020 4.487 17/4/2019 3.244 9/3/2019 2.288 44,011 3.798 61,986 Total volume of shares traded (million) Average daily volume of shares traded (million) Total cash traded (EUR million) Average daily cash traded (EUR million) 19,334 19,334 74.2 75.8 45,034 77,789 175,2 305,1 A. Data adjusted to the December 2020 capital increase. 181 Annual report 2020 Contents 3. Shareholders. Engagement and general meeting → One share, one vote, one dividend → No takeover defences in our Bylaws → High participation and engagement of shareholders in our general meetings 3.1 Shareholder engagement Policy on communication and engagement with shareholders and investors Banco Santander aims to ensure its interests are in line with shareholders’, long-term share value and the long-term confidence of investors and society. We provide information to shareholders and investors that satisfies their expectations and upholds our culture and values. We also communicate and engage with them regularly so that their views will be considered by senior managers and governance bodies. On 27 February 2020, the board of directors approved a review of the policy on communication and engagement with shareholders and investors. The policy also applies to relations with the agents shareholders and investors seek for advice, recommendations or orientation, such as financial, environmental, social and governance analysts, proxy advisors and rating agencies, because they are essential to engaging with shareholders and investors. Banco Santander’s policy dictates the following principles for engagement and communication with shareholders and investors: • Protection of rights and lawful interests of all shareholders. We facilitate their rights to be exercised, provide them with information and give them opportunities to be involved in our corporate governance effectively. • Equal treatment and non-discrimination. We treat investors equally in accordance with status. • Fair disclosure. We make sure our disclosure of information in interactions with investors is transparent, truthful and symmetrical. Any inside or relevant information given to investors will have been previously disclosed except when applicable regulation provides otherwise. • Appropriate disclosure of information. We report the right information to meet our investor’s needs and expectations. We make sure to give investors clear, concise and reliable information in a way that is tailored to shareholders. • Compliance with our Bylaws and corporate governance rules, as well as the principles of cooperation and transparency with the competent regulators and supervisors, in accordance with internal guidelines. We 182 adhere closely to the laws and regulations on insider and price-sensitive information in addition to our own Code of Conduct in Securities Markets, the General Code of Conduct and the Rules and regulations of the board of directors. The policy further describes: • The roles and responsibilities of Banco Santander’s main bodies and functions involved in communication and engagement with shareholders and investors. • The channels for disclosing information and communicating with shareholders and investors. • The ways Banco Santander engages with shareholders and investors, which are covered below. Our policy on communication and engagement with shareholders and investors can be found in our corporate website. In addition, Banco Santander has board-approved frameworks on brand, sustainability and communications, and accounting and financial information and management. They set out the general principles, roles and key processes on the communication of economic-financial, non-financial and corporate information at group level, helping ensure that all our shareholders and other stakeholders are properly informed about our strategy, goals and results, as well as about our culture and values, maximizing the disclosure and quality of the information available to the market. Engagement with shareholders in 2020 In keeping with our policy, we engaged with our shareholders as follows: • The annual general meeting. Our annual general meeting is our most important annual event for our shareholders. We strive to encourage all our shareholders to be informed, attend and participate. See 'Participation of shareholders at general meetings' and 'Right to receive information' in section 3.2. At the annual general meeting, the chairman reports on the year’s most significant changes to the group’s corporate governance, supplementing the corporate governance report. She also addresses any questions raised by shareholders about the matters included in the agenda. Responsible banking Corporate governance Economic and financial review Risk management and compliance The chairmen of the audit, nomination and remuneration committees also report to the annual general meeting on their operations and elaborate on the related information provided in this chapter. Shareholders have the right to attend the annual general meeting in person or remotely. We broadcast our annual general meeting live on our corporate website. This allows shareholders not in attendance, investors and all stakeholders to be fully informed of debates and results. The outsanding quorum and voting results in our April 2020 AGM show the importance we put on shareholder engagement through the annual general meetings. See section 3.4 'April 2020 AGM'. In 2020 we held another annual general meeting. It also had a very high quorum and broad support for the proposed resolutions submitted for approval. See section 3.5 'October 2020 AGM'. Banco Santander's management system for the 2020 AGMs received AENOR certification for sustainable events in compliance with the UNE-ISO 20121:2013. • Quarterly results presentations. Every quarter we present our results on the same day we make them public. Our presentation can be followed live, via conference call or webcast. We release the related financial report and presentation material before market open. During the presentation, questions can be asked or emailed to: investor@gruposantander.com. Our most recent event was our 2020 Results Presentation on 3 January 2021. In 2020, we gave our first, second and third quarter results presentations on 28 April, 29 July and 27 October, respectively. • Investor and strategy days. We also organise investor and strategy days, where senior managers explain our strategy for investors and stakeholders in a broader context than in results presentations. Investors can also directly interact with senior managers and some directors, which is increasingly important and attests to our strong governance. As recommended by the CNMV, we publish announcements about meetings with analysts and investors and related documentation in advance. We held our last Investor Day on 3 April 2019 in London. The information made available during the investor day is not incorporated by reference in this annual report nor considered part of it. • Meetings and conferences. Our Shareholders and Investors Relations team discusses financial and other issues at meetings with investors at conferences organised by third parties. Notwithstanding the principle of equal treatment and non- discrimination, we have learned that one size does not fit all when engaging with investors. Therefore, we tailor the following engagements to meet the needs and expectations of especially our institutional investors, but also fixed- income investors, analysts and rating agencies, as well as retail shareholders: • Lead independent director engagement with key investors. Our lead independent director, Bruce Carnegie- Brown, is regularly in contact with investors in Europe and North America, particularly in the months prior to our annual general meeting. We gather their insights and form an opinion about their concerns, especially regarding our corporate governance. In 2020 and early 2021, he met with 43 investors, who accounted for 44.58% of share capital, in eight cities. In our annual board assessment, board members highly value Mr Carnegie-Brown's role in integrating new international best practices in corporate governance, fostering tailored relations with our institutional investors. The nomination committee considers the feedback received from investors. • Investor roadshows. Our Shareholders and Investors Relations department is constantly in direct contact with institutional investors and analysts to promote all-round discussion on shareholder value, better governance and remuneration structures, and sustainability matters. In 2020 Shareholder and Investor Relations had 1,137 interactions with 473 institutional investors in 139 locations, and 19 meetings focus in environmental, social and governance aspects. It engaged with 36.96% of share capital, which is over 65% of the capital held by institutional investors. We issued over 1,300 communications in 2020 to increase dialogue and transparency with shareholders and investors about the group’s performance, results and the Banco Santander share. • Interaction with retail shareholders. We also offer other special means of communication for retail shareholders regardless of the size of their stake. In 2020 the Shareholders and Investors Relations team organized 210 events with retail shareholders. The team also responded to 132,857 queries received via our shareholder and investor helplines, mailboxes, WhatsApp and bilateral meetings on the Virtual Customer Channel. Satisfaction surveys revealed 95% would recommend the attention service. Lastly, we received 27,446 shareholder and investor opinions through quality surveys and studies. Communication with proxy advisors and other analyst and influencers Lastly, we have always recognised the value our investors place on open and proactive dialogue with proxy advisors, ESG analysts, and other influential entities. We make sure they understand our corporate governance, responsible banking and sustainability priorities and messages in order to convey them properly to the investors. In particular, the dialogue with proxy advisors is significantly more important because they are increasingly setting corporate governance standards. Therefore, we ensure they have an in-depth understanding of our corporate governance and remuneration practices and our markets. In 2020, we had an appropriate communication and engagement with the main proxy advisors and took into account their opinions about corporate governance. We duly reported on and explained proposed resolutions submitted for the 2020 AGMs so they could make voting recommendations. 183 Annual report 2020 Contents Corporate website Our corporate website enables an effective communication with shareholders and all our global stakeholders. Its design enables us to be transparent and improves the experience of users in obtaining quality information about Santander. Our corporate website includes information on corporate governance as required by law. In particular, (i) the key internal regulations of Banco Santander (Bylaws, Rules and regulations of the board, Rules and regulations for the general meeting, etc.); (ii) information on the board of directors and its committees as well as directors’ professional biographies and (iii) information on general meetings. The address of our information on corporate governance is: https://www.santander.com/en/shareholders-and- investors/ corporate-governance. (It is included for reference purposes only. The content of our corporate website is not incorporated by reference in this annual report or otherwise considered part of it). 3.2 Shareholder rights Our Bylaws provide for only one class of share (ordinary shares) and grants all shareholders the same rights. Each Banco Santander share entitles holders to one vote. Banco Santander’s Bylaws do not have any defensive mechanisms and fully conform to the notion of one share, one vote, and one dividend. This section highlights certain key rights our shareholders have. No restrictions on voting rights or the free transfer of shares in our Bylaws The law and the Bylaws only place restrictions on voting rights as a result of violation of regulations, as indicated below. There are no non-voting or multiple-voting shares, shares giving preferential treatment in dividend pay-outs, shares limiting the number of votes a single shareholder can cast, or quorum requirements or qualified majorities other than those the law dictates. There are no restrictions on the free transfer of shares other than those the law dictates, as indicated further in this section. Neither our Bylaws nor any laws or regulations restrict the transferability of shares. Our Bylaws also do not restrict voting rights (except if they were acquired in violation the law or regulations). Furthermore, our Bylaws do not include any neutralisation provisions as defined in the Ley del Mercado de Valores (Spanish Securities Market Act), which would apply in tender offers or takeover bids. Please note that the shareholders’ agreement mentioned in section 2.4 'Shareholders' agreements' contains transfer and voting restrictions on shares that are subject to it. 184 Legal and regulatory restrictions on the acquisition of significant holdings There are legal and regulatory provisions applicable to the Banco Santander because the banking activity is a regulated sector, which involves that the acquisition of significant holdings or influence is subject to regulatory approval or non- objection. As Banco Santander is a listed company, a tender offer or a takeover bid for its shares must be launched to acquire control and for other similar transactions. The acquisition of significant 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 Market Act. • Act 10/2014, of 26 June, on the organization, 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 significant stake in Banco Santander may also require approval by (i) other domestic and foreign regulators with supervisory powers over Banco Santander or its subsidiaries' operations, shares listings or other actions concerning such regulators or subsidiaries and (ii) other authorities pursuant to foreign investment regulations (including those imposed due to covid-19) in Spain or other countries where we operate. Shareholder participation at general meetings All registered holders of shares found on record at least five days prior to the day of general meetings are entitled to attend. Banco Santander allows shareholders to exercise their rights to attend, delegate, vote and participate in general meetings using remote communications systems. The electronic shareholders’ forum is another communications channel available on Banco Santander’s website at the time of the meeting. Shareholders can post items they propose to add to the agenda in the meeting notice, requests for support for their proposals, initiatives to reach the percentage required to exercise minority shareholder rights legally, as well as offers or requests to act as a voluntary proxy. Supplement to the annual general meeting notice Shareholders representing at least 3% of share capital may request the publication of a supplement to the annual general meeting notice stating the names of shareholders exercising this right, the number of shares they hold, as well as any items to be added to the agenda with an explanation or substantiated proposal for resolutions and any other relevant documentation. Shareholders representing at least 3% of share capital may also propose reasoned resolutions about any matters that have been, or should be, added to the agenda of a called annual general meeting. Responsible banking Corporate governance Economic and financial review Risk management and compliance To exercise these rights, shareholders must send a certified notice to Banco Santander’s registered office within five days after the annual general meeting announcement notice is posted. Right to receive information From the time the general meeting notice is posted until the fifth day before the general meeting date on first call, shareholders can submit written requests for information or clarification, or any written questions they deem relevant to the items on the meeting agenda. In addition, within the same period, shareholders can submit written requests for clarification about price-sensitive information Banco Santander has furnished for the CNMV since the last general meeting or about auditor’s reports. Banco Santander posts any information or answers it provides on its corporate website. Shareholders may also exercise their right to receive information at the meeting. Even if it cannot be asserted in the course of the meeting, or requests are made by shareholders attending remotely, they will be given the appropriate information in writing within seven days after the general meeting. Quorum and majorities for passing resolutions at general meeting The quorum and majorities set out in our Bylaws and Rules and regulations for general meeting in order to hold a valid meeting and adopt corporate resolutions is according to Spanish law. On first call, shareholders representing at least 25% of subscribed share capital with voting rights must be in attendance (except for certain matters mentioned subsequently). If a sufficient quorum cannot be constituted,general meetings will be held on second call, which does not require a quorum. In accordance with our Rules and regulations for general meeting, shareholders voting by mail or electronically before the meeting are counted as present in order to determine the general meeting quorum. With the exception of certain matters mentioned below, general meeting resolutions pass when shareholders in attendance or by proxy cast more votes in favour than against. The quorum and majorities required to amend the Bylaws, issue shares and bonds, make structural changes and vote on other significant resolutions permitted by law are set out below. Furthermore, laws applying to credit institutions dictate that, if over 50% of the share capital is present at general meetings, a qualified two-thirds majority is required to raise the proportion of variable remuneration components to fixed components for executive directors and other top executives above 100% (up to 200%); otherwise, a three- quarters majority will be necessary. Our Bylaws do not require shareholder approval at general meetings for any decisions about acquiring core assets, selling them off or transferring them to another company or similar corporate transactions, unless it is required by law. Rules for amending our Bylaws The general meeting is the competent body to approve any amendment to the Bylaws. However, only the board can decide to change the registered office within Spain. The board or, where appropriate, the shareholders who have drafted a proposed amendment to the Bylaws must write it out completely, in addition to a report justifying it; and provide them to shareholders at the time the meeting to debate proposed amendment is announced. The general meeting notice must clearly state the items to be amended as well as the rights of all shareholders to examine the full text of a proposed amendment and the related report at Banco Santander’s registered office, and order these documents delivered or sent to them free of charge. If shareholders are convened to debate amendments to the Bylaws, the quorum on first call will be constituted if 50% of subscribed share capital with voting rights is present. If a sufficient quorum cannot be constituted, the general meeting will be held on second call, where 25% of subscribed share capital with voting rights must be present. When less than 50% of subscribed share capital with voting rights are present, resolutions on amendments to the Bylaws can only be validly adopted if two-thirds of shareholders attending the meeting in person or by proxy vote for them. However, when 50% or more of subscribed share capital with voting rights is present, resolutions may validly pass with an absolute majority. Resolutions to amend the Bylaws that involve new obligations for shareholders must be accepted by those affected. The Single Supervisory Mechanism (SSM) must authorise us to amend our Bylaws. However, amendments that are exempt from authorisation but must still be reported to the SSM include any to change the registered office within Spain, raise share capital, add imperative or prohibitive laws or regulations to the wording of the Bylaws, or change the wording in order to comply with court or administrative rulings and any others the SSM has declared exempt due to a lack of materiality in response to prior consultations. 3.3 Dividends Remuneration against the 2019 results • Precovid. In February 2019, the board of directors announced its plans for a mid-term payout ratio of 40-50% of underlying profit (up from 30-40%); an in-cash dividend rate not lower than in 2018; and two payments against the 2019 results (as announced at the 2018 annual general meeting). Consequently, the board in September 2019 approved an interim cash dividend of EUR 0.10 per share against the 2019 results, paid on 1 November 2019. Furthermore, in February 2020, it decided to put to a vote at the April 2020 AGM a second payment against the 2019 results of 0.13 euros per share, with a final cash dividend of 0.10 euros per share (Final Cash Dividend) and a scrip dividend (under the Santander Dividendo Elección (SDE) scheme) that would pay 185 Annual report 2020 Contents 0.03 euros per share in cash to opting-in shareholders (see 'Scrip dividend authority' in section 2.2 and section 3.4 'April 2020 AGM'). If that proposal had been carried out, 46.3% of the 2019 underlying attributable ordinary profit would have been paid out to shareholders, and the cash dividend rate would have been 89.6%, assuming 20% of cash options in the SDE scheme, in line with the objectives announced at the start of 2019. The cash dividend would have increased by 3% year- on-year, in contrast to the one paid against the 2018 results (EUR 0.195 per share in 2018 versus EUR 0.20 per share in 2019), even without considering the cash payout under the SDE scheme. • Covid-19 and the first ECB recommendation. On 27 March 2020 the ECB issued a recommendation for all European credit institutions under its supervision to refrain from paying out dividends against the 2019 and 2020 results until at least 1 October 2020 to preserve capital (ECB Recommendation I). Considering the ECB Recommendation I and in view of Santander’s mission to help people and businesses prosper, on 2 April 2020 the board of directors cancelled the payment of the 2019 final dividend and the dividend policy for 2020, removed the Final Cash Dividend and the SDE scheme proposals from the agenda for the already announced April 2020 AGM and deferred the decision on the application of the 2019 results to a meeting to be held no later than 31 October 2020. • Second ECB recommendation and October 2020 AGM. On 27 July 2020, the ECB issued a second recommendation extending the term of ECB Recommendation I. It asked the European credit institutions under its supervision to refrain from paying out dividends against the 2019 and 2020 results or from making irrevocable commitments to pay them until 1 January 2021 (ECB Recommendation II). In September 2020, the board of directors called the October 2020 AGM, proposing to the shareholders to (a) in accordance with ECB Recommendation II, allocate the entirety of Banco Santander’s 2019 results to increasing the voluntary reserve, except for the portion already applied to pay the interim dividend (which had been paid out before ECB Recommendation I) and (b) increase capital with a charge to reserves to permit a final remuneration for 2019, in addition to the interim dividend, for the equivalent of 0.10 euro per share in the form of newly-issued shares and without a cash alternative. Shareholders approved both proposals at the October 2020 AGM as indicated in section 3.5 'October 2020 AGM'. Thus, 50.6% of our underlying attributable profit in 2019 was paid out to shareholders, and the proportion of cash over the total dividend was 49.4%. Remuneration against the 2020 results • Precovid. The board of directors' originally set about for remuneration against the 2020 results to maintain the announced mid-term pay-out ratio target of 40-50% of underlying profit; make sure the in-cash dividend rate was no lower than in 2019; and to make two payments against the 2020 results. The board proposed to shareholders to, at 186 our April 2020 AGM, set shareholder remuneration with the same flexibility as 2019 by (a) retaining the option of using the SDE scheme (scrip dividend) (in view of its wide acceptance, especially among our retail shareholders) to take advantage of profitable growth opportunities in our markets and (b) renewing the authorization to acquire treasury shares with the option of running share buy-backs to reduce outstanding shares under favourable market conditions. See section 3.4 'April 2020 AGM'. • Covid-19 and ECB Recommendation I. As mentioned above, ECB Recommendation I led the board of directors to cancel the dividend policy for 2020 on 2 April 2020. • ECB Recommendation II and October 2020 AGM. Following ECB Recommendation II which extended the term of ECB Recommendation I to 1 January 2021, the board of directors proposed to shareholders at the October 2020 AGM a payment in 2021 of up to 0.10 euros per share against share premium as remuneration against 2020 results, contingent on the ECB's approval and recommendations, a CET1 ratio maintained within or above our target range of 11-12%, and the total distribution not exceeding 50% of our consolidated ordinary (underlying) profit. The proposal aimed to apply a 100% cash dividend policy and to make a payment to shareholders with respect to 2020 in line with the one announced in early 2020 (40-50% of the group’s consolidated ordinary (underlying) profit) as soon as market conditions normalized and subject to regulatory recommendations and approvals. Shareholders approved the proposal at the October 2020 AGM, as indicated in section 3.5 'October 2020 AGM'. • Third ECB recommendation. On 15 December 2020, the ECB recommended that all credit institutions under its supervision limit shareholder remuneration until 30 September 2021 to the lowest between 15% of the adjusted profit for 2020 (and 2019 but only for those entities that, as opposed to Banco Santander, did not make any dividend payments against the 2019 results) and the equivalent of 20 basis points of the CET1 ratio. On 3 February 2021, Banco Santander made public its 2020 results and the board's intention to pay a cash dividend of €2.75 cents per share as shareholder remuneration for 2020, the maximum allowed in accordance with the limits set by the last ECB recommendation. This dividend will be paid under the resolution of the October 2020 AGM for the distribution of share premium mentioned above. Remuneration against the 2021 results The board aims to restore a payout ratio of 40-50% of underlying profit, in cash, in the medium term. With respect to the remuneration against the 2021 earnings, the intention is to resume payments once the ECB recommendations so allow. The ECB has said it intends to repeal the recommendation in September 2021 in the absence of materially adverse developments. In the meantime, and in line with the announcement of April 2020, the dividend policy will remain suspended. Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.4 April 2020 AGM On 3 April 2020 we held our customary ordinary general shareholders' meeting which, due to covid-19, was the first shareholders' meeting of Banco Santander held exclusively by remote means (see section 1.4 'Active shareholder engagement during the pandemic'). The pandemic and the recommendations issued by the ECB as a consequence also meant that the board of directors had to withdraw, once the meeting had been called, points 2 (application of results) and 7A (share capital increase to implement a Santander Dividendo Elección scheme) from the agenda (see section 3.3 'Dividends'). The application of results for year 2019 was later submitted to the October 2020 AGM (see next section 3.5 'October 2020 AGM') Quorum and attendance The quorum (among shareholders present and represented) was 65.0% broken down as follows: Quorum breakdown In person and virtual attendance By proxy Cast by post or direct delivery By electronic means Remote voting Cast by post or direct delivery By electronic means Total 0.091 % 49.410 % 13.193 % 0.600 % 1.711 % 65.005 % Voting results and resolutions All items on the agenda (as amended as indicated above) were approved. Votes in favour of the board’s proposals averaged 98.2%. 99.68% of votes approved corporate management for 2019 and 93.77% of votes approved the 2019 annual report on directors' remuneration. None of the agenda items listed in the notice convening the meeting received more than 6.93% of votes against. The following chart summarizes the resolutions approved and voting results: 1. Annual accounts and corporate management 1A. Annual accounts and directors’ reports for 2019 1B. Consolidated statement of non-financial information for 2019 1C. Corporate management 2019 E 2. Application of results 3. Appointment, re-election or ratification of directors 3A. Setting of the number of directors 3B. Appointment of Luis Isasi Fernández de Bobadilla 3C. Appointment of Sergio Agapito Lires Rial 3D. Ratification of the appointment and re-election of Pamela Ann Walkden 3E. Re-election of Ana Patricia Botín-Sanz de Sautuola y O'Shea 3F. Re-election of Rodrigo Echenique Gordillo 3G. Re-election of Esther Giménez-Salinas i Colomer 3F. Re-election of Sol Daurella Comadrán 4. Re-election of the external auditor for Financial Year 2020 5. Authorization to acquire treasury shares 6. Authorization granted to the board to increase share capital E 7A. Increase in share capital. Offer to acquire bonus share rights at a guaranteed price 7B. Increase in share capital. Offer to acquire bonus share rights at a guaranteed price 8. Delegation to the board of the power to increase share capital to issue all kinds of fixed-income securities, preferred interests or similar, non-convertible similar debt instruments (including warrants) 9. Directors' remuneration policy 10. Maximum total annual remuneration of directors in their capacity as directors 11. Maximum ratio of fixed and variable components in executive directors' total remuneration 12. Remuneration plans that include that inclthe delivery of shares or share options: 12A. Deferred multiyear objectives variable remuneration plan 12B. Deferred conditional variable remuneration plan 12C. Digital Transformation Award 12D. Group buy-out policy VOTES A B C Blank Against B For C Abstention D Quorum 99.74 99.75 99.68 – 99.64 99.38 98.65 99.63 98.31 96.38 99.40 99.21 99.73 98.03 93.07 – 0.26 0.25 0.32 – 0.36 0.62 1.35 0.37 1.69 3.62 0.60 0.79 0.27 1.97 6.93 – 0.03 0.04 0.04 – 0.03 0.04 0.04 0.04 0.03 0.04 0.03 0.04 0.03 0.03 0.03 – 3.08 2.86 3.14 – 2.89 2.92 2.90 2.89 2.86 2.90 2.89 2.88 2.85 2.87 2.85 – 65.00 65.00 65.00 – 65.00 65.00 65.00 65.00 65.00 65.00 65.00 65.00 65.00 65.00 65.00 – 99.41 0.59 0.03 2.84 65.00 99.49 94.40 95.87 0.51 5.60 4.13 0.03 0.03 0.03 2.85 3.28 3.31 65.00 65.00 65.00 98.78 1.22 0.03 3.28 64.65 96.13 97.49 99.40 98.89 3.87 2.51 0.60 1.11 0.03 0.03 0.03 0.04 3.28 3.29 3.29 3.32 65.00 65.00 65.00 65.00 187 Annual report 2020 Contents 12E. 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 F 15. Corporate action to demand director liability 16 to 30. Dismissal and removal of directors G B For 99.26 99.70 93.77 0.00 0.00 VOTES A B Blank C Against Abstention C Quorum D 0.74 0.30 6.23 100.00 100.00 0.03 0.03 0.03 0.00 0.00 3.28 2.85 3.45 0.13 0.13 65.00 65.00 65.00 62.69 62.69 A. Each Banco Santander share grants one vote. B. Percentage of votes for and against. C. Percentage of share capital present and attending by proxy at the April 2020 AGM. D. Percentage of Banco Santander's share capital on the date of the April 2020 AGM. E. Item withdrawn from the agenda as indicated above. F. Item not included on the agenda. G. Items 16 to 30 (not included on the agenda) were put to a separate vote. Each item refers to the proposal to dismiss and remove each acting director at the April 2020 AGM. The full texts of the resolutions passed at the April 2020 AGM can be found on our corporate website and on the CNMV’s website, as they were filed as other relevant information on 3 April 2020. 3.5 October 2020 AGM Banco Santander held another ordinary general shareholders' meeting on 27 October 2020 to decide, among other matters, on the application of results obtained during financial year 2019 which had been deferred after the ECB Recommendation I (see section 3.3 'Dividends'). This meeting was hybrid, i.e. allowing attendance in person and by remote means (see section 1.4 'Active shareholder engagement during the pandemic'). Quorum and attendance The quorum (among shareholders present and represented) was 60.34% broken down as follows: Quorum breakdown In person and virtual attendance By proxy 0.167 % Cast by post or direct delivery By electronic means Remote voting Cast by post or direct delivery By electronic means Total Voting results and resolutions 7.441 % 35.845 % 0.589 % 16.300 % 60.342 % All items on the agenda were approved. Votes in favour of the board’s proposals averaged 99.15%. The following chart summarizes the resolutions approved and voting results: 1. Application of results 2. Appointment, re-election or ratification of directors 2A. Setting of the number of directors 2B. Appointment of R. Martín Chávez Márquez 3A. Examination and approval of the balance sheet as at 30 June 2020 3B. Increase in share capital with a charge to reserves 4. Conditional distribution of share premium reserve 5. Authorisation to implement the resolutions approved 6 to 20. Dismissal and removal of directors E B For 99.52 98.96 98.58 99.57 98.43 99.41 99.58 VOTES A B Blank C Against Abstention C Quorum D 0.48 0.06 3.26 60.34 1.04 1.42 0.43 1.57 0.59 0.42 0.09 0.10 0.08 0.06 0.03 0.08 0.00 3.42 3.42 3.37 3.26 3.18 3.29 0.30 60.34 60.34 60.34 60.34 60.34 60.34 43.45 0.00 100.00 A Each Banco Santander share affords one vote. B. Percentage of votes for and against. C. Percentage of share capital present and attending by proxy at the October 2020 AGM. D. Percentage of Banco Santander's share capital on the date of the October 2020 AGM. E. Items 6 to 20 (not included on the agenda) were put to a separate vote. Each item refers to the proposal to dismiss and remove each acting director at the October 2020 AGM. The full text of the resolutions passed at the October 2020 AGM can be found on our corporate website and on the CNMV’s website, as they were filed as other relevant information on 27 October 2020. 188 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.6 Our coming 2021 AGM The board of directors agreed to call the 2021 AGM for 25 or 26 March on first and second call respectively, with the following proposed resolutions. • Annual accounts and corporate management. For approval of: • The annual accounts and the directors’ reports of Banco Santander and its consolidated Group for the financial year ended on 31 December 2020. For further information, see 'Consolidated Annual Accounts'. • The consolidated non-financial statement for the financial year ended on 31 December 2020 is part of this consolidated directors' report. See the 'Responsible banking' chapter. • The corporate management for the financial year 2020. • The application of results obtained during financial year 2020. See section 3.3 'Dividends'. • Appointment of directors. • Setting the number of directors at 15, within the maximum and minimum limits set in the Bylaws. • Ratification of the appointment of Gina Díez as an independent director (see section 1.1 'Board skills and diversity') and re-electing Homaira Akbari, Álvaro Cardoso, Javier Botín, Ramiro Mato and Bruce Carnegie- Brown for a three-year period. See section 4.1 'Our directors'. • External auditor. Re-electing the firm PricewaterhouseCoopers Auditores, S.L. as external auditor for financial year 2021. See 'External auditor' in section 4.5. • Bylaws. Approve these main amendments: • To make the board of directors the competent body to issue non-convertible debt. • To make the board of directors the competent body to approve equity remuneration plans for employees, as permitted by the Spanish Companies Act since 2015. • To hold fully-virtual general meetings where permitted by law. • Rules and regulations of the general meeting. Approve the amendment of certain articles to coordinate them with the proposed Bylaw amendments and to incorporate technical improvements. • Authority to issue non-convertible securities. Delegating to the board of directors the authority to issue debentures, bonds, preferred interests and other similar debt instruments that cannot be converted into shares of Banco Santander. • Remuneration policy. Approving the director remuneration policy for 2021, 2022 and 2023. For further information, see section 6.4 'Directors’ remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote’. • Director remuneration. Approving director’s fixed annual remuneration. For further information, see section 6.4 'Directors’ remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote’. • Variable remuneration. Approving a maximum ratio of 200% of variable components to fixed components of total remuneration for executive directors and certain employees belonging to professional categories that have a material impact on the Group’s risk profile. For further information, see section 6.4 'Directors’ remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote’. • Remuneration plans. Approving remuneration plans that involve the delivery of shares or share options or are share- value based. For further information, see section 6.4 'Directors’ remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote’. • Annual directors’ remuneration report. Holding a non- binding vote on the annual directors’ remuneration report. For further information, see section 6. 'Remuneration'. The related documents and information will be available for consultation on our corporate website on the date the meeting notice is published. We will also broadcast our 2021 AGM live, as was done for the 2020 AGMs. Since attendance at the 2021 AGM is not paid, a general policy in this regard is not necessary. However, Banco Santander offers attendees a commemorative courtesy gift, as has been tradition for decades. 189 Annual report 2020 Contents 4. Board of directors A balanced and diverse board Effective governance → 15 directors, including 12 non-executive and 3 → Specialised committees advising the board executive → The responsible banking, sustainability and culture → Majority of independent directors (66.67%) committee shows the board's commitment to this matter → Balanced presence of men and women (40%-60%) → Complementary functions and power balance: executive chairman, CEO and lead independent director 190 Responsible banking Corporate governance Economic and financial review Risk management and compliance ò Executive committee ò Audit committee ¢ Nomination committee ¢ Remuneration committee p Risk supervision, regulation and compliance comittee p Innovation and technology committee Ÿ Responsible banking, sustainability and culture committee P Chairman of the committee R. Martín Chávez Member Non-executive director (independent) ¢¢ppP Belén Romana Member Non-executive director (independent) òòppŸ Ramiro Mato Member Non-executive director (independent) òòpŸP Henrique de Castro Member Non-executive director (independent) ò¢p Luis Isasi Member Non-executive director ò¢p Álvaro Cardoso Member Non-executive director (independent) pPŸ Pamela Walkden Member Non-executive director (independent) òP José Antonio Álvarez Vice chairman and CEO Executive director òp Homaira Akbari Member Non-executive director (independent) òpŸ Sergio Rial Member Executive director Sol Daurella Member Non-executive director (independent) ¢¢Ÿ Gina Díez Member Non-executive director (independent) Ana Botín Executive chairman Executive director òP p Bruce Carnegie-Brown Vice chairman and lead independent director Non-executive director (independent) ò¢P¢Pp Javier Botín Member Non-executive director Jaime Pérez Renovales General secretary and secretary of the board 191 Annual report 2020 Contents 4.1 Our directors Information is presented as at 31 December 2020. Ana Botín-Sanz de Sautuola y O’Shea GROUP EXECUTIVE CHAIRMAN Executive director Ms Botín 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: Ms Botín joined Banco Santander, S.A. after working at JP Morgan (New York, 1980-1988). In 1992, she was appointed senior executive vice-president. Between 1992 and 1998, she led Santander’s expansion into Latin America. In 2002, she was appointed executive chairman of Banco Español de Crédito, S.A. Between 2010 and 2014, she was chief executive officer of Santander UK. In 2014, she was appointed executive chairman of Santander. José Antonio Álvarez Álvarez VICE CHAIRMAN & CHIEF EXECUTIVE OFFICER Executive director Mr Álvarez joined the board in 2015. Nationality: Spanish. Born in 1960 in León, Spain. Education: Degree in Economics and Business Administration. MBA from the University of Chicago. Experience: José Antonio Álvarez joined Santander in 2002 and was appointed senior executive vice president of the Financial Management and Investor Relations division in 2004 (Group chief financial officer). He served as director at SAM Investments Holdings Limited, Santander Consumer Finance, S.A. and Santander Holdings US, Other positions of note: Ms Botín is a 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 the Empieza por Educar Foundation (the Spanish subsidiary of the international NGO, Teach for All), and sits on the advisory board of the Massachusetts Institute of Technology (MIT). In February 2021, she was appointed president of the European Banking Federation. Positions in other Group companies: Ms Botín is a non- executive director of Santander UK plc and Santander UK Group Holdings plc; a non-executive chairman of Universia España Red de Universidades, S.A. and Universia Holding, S.L; and a non- executive director of Santander Holding USA, Inc., Santander Bank, N.A. and PagoNxt, S.L. Membership of board committees: Executive committee (chairman), and innovation and technology committee. Skills and competencies: Extensive international experience in banking, having held the highest executive roles. She has also led the transformational, strategic and cultural change of Grupo Santander. Moreover, she has shown an ongoing commitment to sustainable and inclusive growth, as demonstrated by her philanthropic activities. Inc. He also sat on the supervisory boards of Santander Consumer AG, Santander Consumer Bank GmbH and Santander Bank Polska, S.A. He was a board member of Bolsas y Mercados Españoles, S.A. Other positions of note: None. Positions in other Group companies: Mr Álvarez is non- executive director of Banco Santander (Brasil), S.A. and PagoNxt, S.L. Membership of board committees: Executive committee, and innovation and technology committee. Skills and competencies: Mr Álvarez is a highly qualified and talented leader with a distinguished career in banking. He brings significant strategic and international management expertise, in particular financial planning, asset management and consumer finance. He has vast experience with, and a strong reputation among, key stakeholders such as regulators and investors. 192 Responsible banking Corporate governance Economic and financial review Risk management and compliance 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: Mr Carnegie-Brown was non-executive chairman of Moneysupermarket.com Group plc (2014-2019), non-executive director of Jardine Lloyd Thompson Group plc (2016-2017) and non-executive chair of AON UK Ltd (2012-2015). He was the founder and managing partner of the quoted private equity division of 3i Group plc, and president and chief executive officer of Marsh Europe, S.A. He was also lead independent director at Close Brothers Group plc (2006-2014) and Catlin Group Ltd (2010-2014). He previously worked at JP Morgan Chase for 18 years and Bank of America for four years. Other positions of note: Mr Carnegie-Brown is the non- executive chairman of Lloyd’s of London and Cuvva Limited. Positions in other Group companies: Mr Carnegie-Brown is non-executive director of Santander UK plc and Santander UK Group Holdings plc. Membership of board committees: Executive committee, nomination committee (chairman), remuneration committee (chairman), and innovation and technology committee. Skills and competencies: Mr Carnegie-Brown has a lengthy background in banking (particularly investment banking) and considerable expertise in insurance. He also possesses significant international experience in Europe (UK), the Middle East and Asia. His top-management insight provides the board with know-how in regard to remuneration, appointments and risk. As lead independent director, he has also gained an excellent understanding of investors’ expectations, as well as managing relations with them and financial entities. Homaira Akbari Non-executive director (independent) Ms Akbari joined the board in 2016. Nationality: American and French. Born in 1961 in Tehran, Iran. Education: PhD in Experimental Particle Physics from Tufts University and MBA from Carnegie Mellon University. Experience: Homaira Akbari was non-executive director of Gemalto NV and Veolia Environment, S.A. She was chairman and CEO of SkyBitz, Inc., managing director of TruePosition Inc., non-executive director of Covisint Corporation and US Pack Logistics LLC. She has also held various posts at Microsoft Corporation and Thales Group. Other positions of note: Ms Akbari is chief executive officer of AKnowledge Partners, LLC and an independent director of Landstar System, Inc. and Temenos, AG. Positions in other Group companies: Ms Akbari is non-executive director of Santander Consumer USA Holdings Inc. and PagoNxt, S.L. Membership of board committees: Audit committee, innovation and technology committee, and responsible banking, sustainability and culture committee. Skills and competencies: Ms Akbari brings significant executive experience from technology companies. Her knowledge about digital transformation challenges is an asset to the board. She also has extensive experience in various geographies and knowledge about water, energy and waste management and treatment, which are of particular value to the group. Javier Botín-Sanz de Sautuola y O’Shea Non-executive director Advisers, S.V., S.A. (2000-2008). Previously, he had been a legal adviser within the International Legal Department of Banco Santander, S.A. (1998-1999). Other positions of note: In addition to the financial sector, Mr Botín works with several not-for-profit organisations. He has been chairman of the Botín Foundation since 2014 and is also a trustee of the Princess of Girona Foundation. Mr Botín joined the board in 2004. Positions in other Group companies: None. Nationality: Spanish. Born in 1973 in Santander, Spain. Membership of board committees: None. Education: Degree in Law from the Complutense University of Madrid. Experience: Javier Botín founded JB Capital Markets, Sociedad de Valores, S.A.U in 2008 and has been its executive chairman ever since. He was co-founder and executive director of the equities division of M&B Capital Skills and competencies: Mr Botín brings international and managerial expertise to the board, particularly in finance and banking. He also brings a deep understanding of Grupo Santander, its operations and its strategy from his tenure as a non-executive director. 193 Annual report 2020 Contents Álvaro Cardoso de Souza Non-executive director (independent) Mr de Souza joined the board in 2018. Nationality: Portuguese. Born in 1948 in Guarda, Portugal. Education: Degree in Economics and Business Administration from Pontificia Universidade Católica de São Paulo, MBA-Management Program for Executives from the University of Pittsburgh, and a graduate of the Investment Banking Marketing Program at Wharton Business School. Experience: Álvaro Cardoso de Souza has held various roles in Citibank Group, including CEO of Citibank Brazil, as well as senior roles in the US relating to consumer finance, private banking and Latin America. Sol Daurella Comadrán Non-executive director (independent) Ms Daurella joined the board in 2015. Nationality: Spanish. Born in 1966 in Barcelona, Spain. Education: Degree in Business and MBA from ESADE. Experience: Sol Daurella Comadrán served on the board of the Círculo de Economía and was 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. Other positions of note: Ms Daurella is chairman of Henrique de Castro Non-executive director (independent) Joined the board in 2019. Nationality: Portuguese. Born in 1965 in Lisbon, Portugal. Education: Degree in Business Administration from the Lisbon School of Economics & Management (Portugal) and MBA from the University of Lausanne (Switzerland). Experience: Henrique de Castro was an independent director at First Data Corporation and chief operating officer at Yahoo. 194 He was a board member at AMBEV. S.A., Gol Linhas Aéreas, S.A. and Duratex, S.A. He was chairman of WorldWildlife Group (WWF) Brazil, a board member at 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: Mr de Souza is the 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: Mr de Souza possesses broad international experience in banking, particularly in Brazil. He has a solid understanding of strategy and risk management, which is key to his role as chairman of our risk supervision, regulation and compliance committee. In addition, his active involvement with several environmental foundations and NGOs brings with him very useful knowledge about sustainability. Coca-Cola European Partners plc and executive chairman of Olive Partners S.A. She also holds several roles at Cobega Group companies and is chairman of the board of trustees of the FERO Oncology Research Foundation. Positions in other Group companies: None. Membership of board committees: Nomination committee, remuneration committee, and responsible banking, sustainability and culture committee. Skills and competencies: Ms Daurella brings to the board excellent strategy and high-level management skills from her international top-executive experience at listed and large privately-held entities, particularly distributors. She has vast knowledge of corporate governance as the former chair of several boards. She also possesses audit experience, having served on several audit committees. In addition, as a trustee at various health, education and environmental foundations, Ms Daurella contributes responsible business and sustainability insight to the board. Previously, he had been the manager of worldwide devices, media and platforms at Google, European sales and business development manager at Dell Inc. and a consultant at McKinsey & Company. Other positions of note: Mr de Castro is an independent director of Fiserv Inc. Positions in other Group companies: Mr de Castro is a non- executive director of PagoNxt, S.L. Membership of board committees: Audit committee, remuneration committee, and innovation and technology committee. Skills and competencies: Due to his executive roles in the world’s top technology companies, Mr de Castro brings valuable experience in technological and digital strategy from a wide range of geographies. Responsible banking Corporate governance Economic and financial review Risk management and compliance Gina Díez Barroso Non-executive director (independent) Ms Díez joined the board in 2020. Nationality: Mexican. Born in 1955 in Mexico City, Mexico. Education: Degree in Design from Centro de Diseño, Mexico City. Experience: She has over 20 years' experience in the real estate and education sectors. Until April 2020, she was an independent director of Banco Santander México, S.A. and several Grupo Santander companies in Mexico. She has been member of the board of directors of Americas Luis Isasi Fernández de Bobadilla Non-executive director Mr Isasi joined the board in 2020. Nationality: Spanish. Born in 1956 in Jerez de la Frontera, Spain. Education: Degree in Economics and Business Administration and MBA from Columbia Business School. Experience: With broad experience in the financial and securities market sectors, Mr Isasi began his career at Abengoa, before holding various executive positions at JP Morgan in New York and First National Bank of Chicago in London. Ramiro Mato García-Ansorena Non-executive director (independent) Mr Mato joined the board in 2017. Nationality: Spanish. Born in 1952 in Madrid, Spain. Education: Degree in Economics from the Complutense University of Madrid and graduate of Harvard Business School’s Management Development Programme. Experience: Ramiro Mato held several roles in Banque BNP Paribas, including chairman of BNP Paribas Group in Spain. Previously, he had held several top roles in Argentaria. He was a member of the Spanish Banking Association (AEB), Society/Council of the Americas, Laurel Strategies and Qualitas of Life Foundation. Other positions of note: She is the founder and president of Grupo Diarq, S.A. de C.V. and Centro de Diseño y Comunicación, S.C. (Universidad Centro). In addition, she is a member of the board of Dalia Women, S.A.P.I de C.V. (Dalia Empower), member of Comité de 200 (C200) and represents Mexico at the W20, the G20 womens' initiative. She founded and is a trustee of the Pro- Educación Centro and Diarq foundations. Positions in other Group companies: None. Membership of board committees: None. Skills and competencies: Ms Díez possesses vast experience in the real estate and education sectors, and has extensive knowledge of responsible business and sustainability as a result of having been a charter member and trustee of foundations focusing on education, gender diversity and social support. In 1987, he joined Morgan Stanley as managing director of investment banking for Europe and, from 1997 to February 2020, held the role of chairman and country head for Spain. He is now a senior adviser there. He has also been director of Madrileña Red de Gas, S.A. and Sociedad Rectora de la Bolsa de Madrid, S.A., as well as an independent director of Grifols, S.A. Other positions of note: Mr Isasi is a non-executive chair of Santander España and an independent director of Compañía de Distribución Integral Logista Holdings, S.A. (Logista). Positions in other Group companies: None. Membership of board committees: Executive committee, remuneration committee, and risk supervision, regulation and compliance committee. Skills and competencies: Mr Isasi has vast experience in a wide range of sectors and international markets, as well as a strong institutional network within Spain. Bolsas y Mercados Españoles, S.A. (BME) and the board of trustees of the Fundación Española de Banca para Estudios Financieros (FEBEF). Other positions of note: Mr Mato is chairman of Ansorena, S.A. and vice-chairman of the board of trustees of Fundación Esperanza y Alegría. 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: Mr Mato has had an extensive career in banking and capital markets. He has held senior executive and non-executive roles and brings considerable expertise in top management, audit, risk and strategy, mainly within the financial sector. He has also been active on the boards of trustees of several education foundations. 195 Annual report 2020 Contents Ramón Martín Chávez Márquez Non-executive director (independent) Mr Chávez joined the board in 2020. Nationality: American. Born in 1964 in Alburquerque, New Mexico (US). Education: A.B. magna cum laude in Biochemical Sciences and Master of Computer Science from Harvard University. PhD in Medical Information Sciences from Stanford University. Experience: Mr Chávez was Chief technology officer (CTO) and co-founder of Quorum Software Systems (1989-1993), global head of energy derivatives at Credit Suisse Financial Products (1997-2000) and CEO and co-founder of Kiodex (2000-2004). In 2005, he joined Goldman Sachs, where he was a partner from 2006 to 2019 and where he held various executive positions, including global co-head of the securities division, Chief information officer (CIO) and CFO. He was also member of the management committee from 2012 until 2019, when he left the firm. Sergio Rial Executive director Mr Rial joined the board in 2020. Nationality: Spanish and brazilian. Born in 1960 in Rio de Janeiro, Brazil. Education: Degree in Law and Economics and postgraduate studies from the Instituto Brasileiro do Mercado de Capitais, Insead, Harvard Business School and Wharton Business School. Experience: Mr Rial joined the Group as chairman of the board of Banco Santander (Brasil), S.A. in 2015, becoming its CEO and vice-chairman in 2016. He has been a director of Banco Santander International since 2018 and, since April 2019, regional head for South America. He held various executive positions at ABN Amro group between 1982 and 2004, including CEO for Asia and member of the global ExCo. Furthermore, he has been director of PNM Resources, Inc., the International Swaps and Derivatives Association (ISDA) and the Santa Fe Opera, and a member of the board of trustees of amfAR (the Foundation for AIDS Research). Other positions of note: Mr Chávez is an independent director of Recursion Pharmaceuticals, Inc., Paige.AI, Inc. and Mount Sinai Genomics, Inc. DBA Sema4. He is also member of the Harvard University Board of Overseers, member of the board of trustees of the Institute for Advanced Study of Princeton (New Jersey) and of the Los Angeles Philharmonic, as well as a member of the Stanford University School of Medicine Board of Fellows. Positions in other Group companies: Mr Chávez is a non- executive director of PagoNxt, S.L. Membership of board committees: Nomination committee, remuneration committee, risk supervision, regulation and compliance committee and innovation and technology committee (chairman). Skills and competencies: Mr Chávez brings extensive experience in the global financial and IT sectors, which will enhance the board's digital capabilities. He also held various executive positions at Cargill Inc. between 2004 and 2012, including executive vice-chairman, member of the board of directors and global CFO. He has also been CEO at Seara Foods and Marfrig Global Foods and a director of Mosaic Fertilizers. Other positions of note: Mr Rial is an independent director of Delta Airlines Inc. and non-executive chairman of Ebury Partners Limited. Positions in other Group companies: Mr Rial is a non-executive director of Banco Santander International (USA), SAM Investment Holding Limited, PagoNxt, S.L. and Santander Global Trade Platforms Solutions, S.L., and non-executive chairman of Universia Brasil, S.A. Membership of board committees: None. Skills and competencies: Mr Rial brings extensive executive experience in banking and finance. He also has a deep understanding of Latin American markets, especially Brazil. His previous experience in multinational groups across geographical areas and sectors increases the board’s diversity and gives it a valuable perspective on environmental and social issues. 196 Responsible banking Corporate governance Economic and financial review Risk management and compliance Belén Romana García Non-executive director (independent) Belén Romana joined the board in 2015. Nationality: Spanish. Born in 1965 in Madrid, Spain. Education: Degree in Economics and Business Administration from Universidad Autónoma de Madrid and State Economist. Experience: Belén Romana was formerly senior executive vice-president of Economic Policy, director-general of the Treasury of the Spanish Ministry of Economy, and director at Banco de España and the CNMV. She was also a director at the Instituto de Crédito Oficial and other entities on behalf of the Spanish Ministry of Economy. She served as a non-executive director at Banco Español de Crédito, S.A. and as 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 independent director of SIX Group AG and Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A.U. Furthermore, she is a member of the board of trustees of the Rafael del Pino Foundation and co-chair of the Global Board of Trustees of the Digital Future Society, and member of the advisory board of GFI, España and TribalData. Positions in other Group companies: None. Membership of board committees: Executive committee, audit committee, risk supervision, regulation and compliance committee, innovation and technology committee, and responsible banking, sustainability and culture committee. Skills and competencies: Given her background as a government economist and overall executive and non-executive experience in finance (particularly from serving on the audit committees of listed companies), Ms Romana is a recognised financial expert. Having held important positions in Spanish credit institutions and in the field of capital markets, she can also provide strategic insights into banking, financial regulations and government relations. Pamela Walkden Non-executive director (independent) Mrs Walkden joined the board in 2019. Group Head of Asset and Liability Management and Regional Markets, Group Head of Internal Audit, Group Head of Corporate Affairs and Group Manager of Investor Relations. In addition, she served as an independent member of the UK Prudential Regulation Authority (PRA) Regulatory Reform Panel and as member of the European Banking Authority Stakeholder Group. Other positions of note: Mrs Walkden is a lay member of the Welfare and Ethics Committee of the Royal Veterinary College. Nationality: British. Born in 1960 in Worcester, England. Positions in other Group companies: None. Education: Master's Degree in Economics from Cambridge University. Membership of board committees: Audit committee (chairman). Experience: Pamela Walkden has had an extensive career in banking. She has served in a number of senior management positions at Standard Chartered Bank, including as Group Head of Human Resources, Chief Risk Officer, Group Treasurer, Skills and competencies: Ms Walkden is a recognised financial expert in view of her broad, international experience in banking and auditing. Jaime Pérez Renovales General secretary and secretary of the board Jaime Pérez Renovales joined the group in 2003. Nationality: Spanish. Born in 1968 in Valladolid, Spain. Education: Degree in Law and Business Administration from Universidad Pontificia de Comillas (ICADE E-3) and state attorney. Experience: Jaime Pérez Renovales was director of the office of the second deputy prime minister for Economic Affairs and Minister of Economy, deputy secretary to the Spanish Prime Minister, chairman of the Spanish State Official Gazette and the committee for Government Reform. Previously, he had been vice general counsel and vice-secretary of the board. He was also head of Grupo Santander’s legal department, general counsel and secretary of the board at Banco Español de Crédito, S.A. and deputy director of legal services at the CNMV. He sits on the jury for the Princess of Asturias Awards for Social Sciences and is chairman of the ICADE Business Club. Mr Pérez is the secretary of all board committees. 197 Annual report 2020 Contents Term of independent directors Other external directors • Javier Botín • Luis Isasi These directors cannot be classified as independent directors for the following reasons: • Mr Botín has been director for over 12 years. • Although the nomination committee and the board believe that Mr Isasi meets the requirements to be classed as an independent director - in view of his remuneration as non- executive chair of Santander España, his entitlements as a director and the special nature of this body as supervisor of a business unit without its own corporate identity separate to Banco Santander - under prudent criteria it is considered preferable to classify him as an external director. This aligns to sub-sections 2 to 4 of article 529 duodecies of the Spanish Companies Act and to article 6.2 of the Rules and regulations of the board. Our board composition 4.2 Board composition Size At 31 December 2020, the board of directors was made up of the 15 members whose profile and background are described in section 4.1 'Our directors'. The Bylaws allow it to have between 12 and 17 members. Composition by type of director The composition of the board of directors is balanced between executive and non-executive directors, most of whom are independent. Each director’s status has been verified by the nomination committee and submitted to the board. Executive directors • Ana Botín, Group executive chairman • José Antonio Álvarez, Group vice-chairman and chief executive officer Section 4.3 provides a more detailed description of their roles and duties under 'Group executive chairman and chief executive officer'. • Sergio Rial Independent directors • Bruce Carnegie-Brown (lead independent director) • Homaira Akbari • Álvaro Cardoso • R. Martín Chávez • Sol Daurella • Henrique de Castro • Gina Díez • Ramiro Mato • Belén Romana • Pamela Walkden Every year, the nomination committee verifies and informs the board about the category of independent directors. It takes all the circumstances of each case into account, particularly any possible significant business relationships that could affect their independence. This analysis is described further in section 4.6 'Nomination committee activities in 2020'. Independent non-executive directors account for 66.7% of board members. This conforms to best corporate governance practices as well as the board’s Rules and regulations, which require that the board be predominantly made up of non- executive directors with at least 50% independent directors. At the end of 2020, the average term of independent non- executive directors was 3.02 years. 198 7.33.03.43.013.563.423.022014201520162017201820192020Independentdirectors66.67%Executivedirectors20.00%Other externaldirectors13.33% Responsible banking Corporate governance Economic and financial review Risk management and compliance Tenure and equity ownership A Board of directors Executive chairman Vice chairman and chief executive officer Tenure C Banco Santander shareholding Date of first appointment Date of last appointment End date B Direct Indirect Shares represented Total % of share capital Ana Botín 04/02/1989 03/04/2020 03/04/2023 1,138,675 28,612,074 29,750,749 0.172% José Antonio Álvarez 25/11/2014 12/04/2019 12/04/2022 1,820,754 1,820,754 0.010% Vice chairman Bruce Carnegie-Brown 25/11/2014 12/04/2019 12/04/2022 59,940 59,940 0.000% Homaira Akbari 27/09/2016 23/03/2018 23/03/2021 67,826 45,913 113,739 0.001% Javier Botín 25/07/2004 12/04/2019 12/04/2022 5,502,083 19,466,853 123,904,169 D 148,873,105 0.858% Álvaro Cardoso 1/04/2018 01/04/2018 23/03/2021 R. Martín Chávez 27/10/2020 27/10/2020 27/10/2023 0 0 Sol Daurella 25/11/2014 03/04/2020 03/04/2023 149,483 476,837 Members Henrique de Castro 17/07/2019 17/07/2019 12/04/2022 2,982 Gina Díez Luis Isasi Ramiro Mato Sergio Rial 22/12/2020 22/12/2020 03/04/2023 19/05/2020 19/05/2020 03/04/2023 0 0 28/11/2017 12/04/2019 12/04/2022 156,860 30/05/2020 30/05/2020 03/04/2023 171,913 Belén Romana 22/12/2015 12/04/2019 12/04/2022 208 4 Pamela Walkden 29/10/2019 03/04/2020 03/04/2023 2,608 0 0 0.000% 0.000% 626,320 0.004% 2,982 0.000% 0 0 0.000% 0.000% 156,860 0.001% 171,913 0.001% 212 0.000% 2,608 0.000% Total 9,073,332 48,601,681 123,904,169 181,579,182 1.047% General secretary and secretary of the board Jaime Pérez Renovales A. Figures from 31 December 2020. B. For more details, see 'Election, renewal and succession' in section 4.2. The periods provided do not take into account the additional period that may apply under article 222 of the Spanish Companies Act nor the annual renewal of one-third of the board established in article 27.1 of the Bylaws. C. Banco Santander’ shareholding policy aims to align our executive directors and shareholders’ long-term interests. It includes the obligation for each executive director to maintain a significant investment in Banco Santander's shares while performing executive duties, equivalent to twice their annual salary. Executive directors have five years from the time they were appointed to reach the required level of investment. Until they do so, any shares they receive as remuneration are subject, in addition to the regulatory obligation not to sell them for one year from delivery, which applies to all cases, to a mandatory three-year holding period from their date of delivery, unless they already hold the mentioned investment equivalent. D. Includes shares owned by Fundación Botín (chaired by Javier Botín) and syndicated shares. It does not include shares corresponding to Ana Botín and Javier Botín because they are already included within their direct or indirect shareholdings. In subsection A.3 of section 9.2 'Statistical information on corporate governance required by the CNMV', we adapted this information to the CNMV’s format and, therefore, added all the syndicated shares as Javier Botín’s shareholdings. See 2.4 'Shareholders’ agreements'. For more details, see section 9.2 'Statistical information on corporate governance required by the CNMV'. Diversity A diverse board of directors is essential to its effectiveness. The combination of skills and experiences creates an environment with varied points of view that improves the quality of decision-making. Thus, we seek to achieve a sound balance of technical skills, expertise and perspectives. Our policy on the selection, suitability assessment and succession of directors helps make our board more diverse from different perspectives, for instance, in terms of gender, age, geographical provenance, experience and knowledge, without implicit bias that could lead to any form of discrimination based on gender, age, disability, race or ethnic origin. It was amended in July 2018 in line with European legislation on the disclosure of non-financial and diversity information and the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) joint guidelines on suitability assessments of board members and key functions holders. In 2019, the new gender equality target of 40%-60% representation of either gender in the board by 2021, was included. It was later amended in December 2020, after the CNMV amended the Spanish Corporate Governance Code in June 2020 to include age diversity as a factor to take into account. Banco Santander applies this policy to select candidates for any vacancy on the board. Our selection policy aims to diversify the board of directors in different terms. In particular, and without limiting the foregoing: • Country of origin or international education: selection considers cultural diversity and international education, especially in the Group's main geographies. 199 Annual report 2020 Contents further updated in October 2020 to disclose the board's diversity in terms of age, on the back of the CNMV's approval of the revised version of the Spanish Corporate Governance Code. This year's matrix follows the structure introduced last year: • We distinguish between thematic and horizontal skills. • We include a separate diversity section which details diversity in terms of gender, country of origin and/or education abroad and, as of this year, in terms of age. Finally, we also include a board tenure section. In line with last year, the skills matrix discloses the skills and competencies of each board member, showing our commitment to transparency in this matter. Section 4.1 'Our directors' includes a paragraph on skills and competencies for each director, to more clearly identify the background to this matrix. We also include an additional chart (entitled 'Committees skills and diversity matrix') that provides a clear view of the balance of skills, not only at board level as a whole, but for each board committee. This enables the overall effectiveness of the board committees to be evaluated by referring to the significant presence of skills relevant to the scope of each committee. • Gender equality: the nomination committee and the board of directors understand the importance of fostering equal opportunity between men and women as well as the need for women board members who possess the necessary skills, suitability and commitment to the role. They make a conscious effort to find women candidates with the required profile. Our policy fosters a selection of directors which maintains a balanced presence of women and men on the board. On 26 February 2019, the board changed its minority gender target, set at 30% in 2016 by the nomination committee, to a gender equality target in the board, which implies a minimum and maximum representation of either gender of 40% to 60% by 2021. By November 2019, the board met this target and, at year-end, women already accounted for 40% of board members. The board’s number of women members is well above the average for large listed companies in Spain and Europe. According to figures published by the CNMV in July 2020, based on the annual corporate governance reports for 2019, the percentage of female directors in IBEX 35 companies in Spain was on average 27.5%. Furthermore, according to data published by Eurostat (the European Commission's statistical office) in March 2019, the percentage of female directors in large listed companies was, on average, 27% for all European Union countries. • Age: the selection policy on the selection, suitability assessment and succession of directors also considers that selection processes must promote age diversity. There are no age limits for becoming a director or holding any role on the board, including the chairman and the chief executive officer. • Education and career: selection ensures that candidates are qualified and suitable to understand our Group’s businesses, structure and geographies individually and collectively; and that they fit within the Santander culture. The appointment process ensures that candidates will have banking and finance skills as well as expertise in other areas deemed important on our board skills and diversity matrix. Therefore, it takes into account education and work experience. • Our policy has no implicit bias that could lead to discrimination due to race, disability and/or ethnicity. Section 1.1 'Board skills and diversity' describes the result of these diversity standards in 2020. Board skills and diversity matrix The board’s skills matrix reflects the balance of the knowledge, skills, qualifications, diversity and experience required to pursue our long-term strategy in an ever- changing market. We updated it in 2018 to make it simpler, more transparent and comprehensive. It contains more information for our investors and other stakeholders, who demand that certain skills be more visible on our board. We also took into account recommendations from the EBA and ESMA guidelines on the suitability assessment of board members and key functions holders, which came into effect in June 2018. It has been 200 Resposible banking Corporate governance Economic and financial review Risk management and compliance Executive José Antonio Álvarez (vice chairman - CEO) Ana Botín (chairman) Sergio Rial Bruce Carnegie- Brown (vice chairman and lead independent director) Independent Other external Homaira Akbari R. Martín Chávez Sol Daurella Henrique de Castro Álvaro Cardoso Gina Díez Barroso Ramiro Mato Belén Romana Pamela Walkden Javier Botín Luis Isasi • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Continental Europe (80%) US/UK (93.3%) Latam (73.3%) Others (46.7%) Continental Europe (60%) US/UK (80%) Latam (20%) Others (6.7%) Less than 55 (13.3%) From 55 to 65 (73.4%) More than 65 (13.3%) Board skills and diversity matrix SKILLS AND EXPERIENCE THEMATIC SKILLS Banking (86.7%) Other financial services (66.7%) Accounting, auditing and financial literacy (100%) Retail (80%) Digital & information technology (53.4%) Risk management (86.7%) Business strategy (100%) Responsible business & sustainability (80%) Human resources, culture, talent & remuneration (93.3%) Legal and regulatory (13.3%) Governance and control (86.7%) International experience HORIZONTAL SKILLS Top management (100%) Government, regulatory and public policy (6.7%) Academia and education (46.7%) Significant tenure (86.7%) DIVERSITY Female (40%) Country of origin / international education Age (years old) BOARD TENURE 0 to 3 years (53.4%) 4 to 11 years (33.3%) 12 years or more (13.3%) 201 Annual report 2020 Contents Committees skills and diversity matrix SKILLS AND EXPERIENCE THEMATIC SKILLS Banking Other financial services Accounting, auditing and financial literacy Retail Digital and information technology Risk management Business strategy Responsible business and sustainability Human resources, culture, talent and remuneration Legal and regulatory Governance and control International experience HORIZONTAL SKILLS Top management Government, regulatory and public policy Academia and education Significant tenure DIVERSITY Female Country of origin / international education Age (years old) BOARD TENURE 0 to 3 years 4 to 11 years 12 years or more Continental Europe US/UK LatAm Others Continental Europe US/UK Latam Others Less than 55 From 55 to 65 More than 65 Executive committee Audit committee Nomination committee Remuneration committee Risk supervision, regulation and compliance committee Innovation and technology committee Responsible banking, sustainability and culture committee 100 % 100 % 100 % 100 % 66.7 % 100 % 100 % 83.3 % 100 % 16.7 % 100 % 100 % 100 % 66.7 % 33.3 % 100% 16.7% 50% 100% 33.3 % 83.3 % 100 % – – – 83.3 % 16.7 % 33.3 % 50 % 16.7 % 60 % 60 % 100 % 80 % 60 % 80 % 100 % 60 % 100 % 20 % 80 % 80 % 100 % 60 % 60 % 100 % 20 % 40 % 80 % 60 % 60 % 80 % – 20 % – 80 % 20 % 60 % 40 % – 100 % 33.3 % 100 % 66.7 % 66.7 % 100 % 100 % 100 % 100 % 33.3 % 100 % 100 % 100 % 33.3 % 100 % 100 % – 100 % 66.7 % 33.3 % 33.3 % 66.7 % – – 33.3 % 66.7 % – 33.3 % 66.7 % – 80 % 40 % 100 % 80 % 60 % 80 % 100 % 60 % 100 % 20 % 80 % 100 % 100 % 60 % 80 % 100 % – 60 % 80 % 20 % 60 % 60 % – – 20 % 80 % – 60 % 40 % – 100 % 60 % 100 % 80 % 40 % 100 % 100 % 80 % 100 % 40 % 100 % 80 % 100 % 80 % 40 % 100 % 20 % 40 % 80 % 20 % 60 % 100 % 20 % – – 60 % 40 % 80 % 20 % – 71.4 % 71.4 % 100 % 71.4 % 85.7 % 85.7 % 100 % 85.7 % 100 % 28.6 % 85.7 % 100 % 100 % 71.4 % 42.9 % 100 % 14.3 % 57.1 % 85.7 % 42.9 % 57.1 % 85.7 % – 14.3 % – 100 % – 28.6 % 57.1 % 14.3 % 80 % 60 % 100 % 80 % 40 % 100 % 100 % 100 % 100 % 20 % 100 % 80 % 100 % 60 % 40 % 100 % 20 % 60 % 100 % 60 % 60 % 80 % 20 % 20 % 20 % 40 % 40 % 40 % 60 % – 202 Responsible banking Corporate governance Economic and financial review Risk management and compliance Election, renewal and succession of directors Election of directors Our directors are appointed for three-year terms. However, one-third of board members are renewed each year in order of their tenure, based on when they were appointed. Outgoing directors may be re-elected. Each appointment, re- election and ratification is submitted to a separate vote at the general meeting. Procedures for appointing, re-electing, evaluating and removing directors Our internal policy for the selection, suitability assessment and succession of directors dictates standards for the board’s quantitative and qualitative composition, how it is revised and how new candidates are identified, selected and appointed. Shareholders appoint and re-elect directors at the general meeting. If directors step down during the term of office, the board of directors may provisionally designate another director by co-option until the general meeting confirm or revoke the appointment at the earliest subsequent meeting. The nomination committee must issue a report and a reasoned opinion in advance of any proposal the board will make to shareholders to appoint, re-elect and ratify any category of director, as well as in advance of any board resolution about co-option. Proposals must include a duly substantiated report prepared by the board containing an assessment of the qualifications, experience and merits of the proposed candidate. Re-election and ratification proposals will provide an assessment of the work and dedication to the position during the last period in which the proposed director held office. If the board disregards the nomination committee's opinion, it must explain its decision and record its reasons in meeting minutes. Directors must meet specific requirements dictated by laws for credit institutions and our Bylaws. Upon taking office, they must formally undertake to fulfil the obligations and duties prescribed therein and in the Rules and regulations of the board. Our directors must be of renowned business and professional integrity, and have the knowledge and experience needed to perform their role and exercise good governance. Director candidates will also be selected on the basis of their professional contribution to the entire board. For more details, see section 4.1 'Our directors' and the 'Board skills and diversity matrix' in section 4.2. The board of directors will endeavour to have significantly more external or non-executive directors than executive directors, and for the number of independent directors to make up at least half of all members. Our directors shall cease to hold office when the term for which they were appointed ends (unless they are re-elected); when the general meeting so resolves; or when they resign. When a director ceases to hold office prior to the end of his or her term (i.e. by general meeting resolution or by resignation), the director shall sufficiently explain the reasons for the resignation or, in the event of non-executive directors, their opinion on the reasons for their cessation in office by the general meeting in a letter to the other board members. In addition, when appropriate, Banco Santander will publicly disclose the cessation in office, including sufficient information on the director's reasons or circumstances provided by the director. Directors must tender their resignation to the board and formally resign from their position if the board, on recommendation of the nomination committee, deems it appropriate to do so in cases that may adversely affect to the board's functioning or to Banco Santander’s creditworthiness and reputation and, in particular, if they are find themselves in any of the circumstances of ineligibility or prohibition provided by law, irrespective of Royal Decree 84/2015, which implements Act 10/2014 on the organisation, supervision and solvency of credit institutions, on the honourability requirements for directors and the consequences of directors subsequently failing to meet such requirements. Directors must notify the board, as soon as possible, of any circumstances affecting them, whether or not related to their performance in Banco Santander, that might damage its creditworthiness or reputation, especially when under criminal investigation, and the progress of any criminal trial. When the board is informed or becomes aware in another way of any of the mentioned situations, the board shall examine the case as soon as possible and, attending to the particular circumstances, decide, following a report from the nomination committee, whether or not to adopt any measures, such as opening an internal investigation, calling on the director to resign or proposing his or her cessation in office. Proprietary non-executive directors must also tender their resignation when the shareholder they represent sells off or significantly reduces its equity holding. Finally, succession planning for the main board members is key to Banco Santander’s good governance. It ensures that leadership transitions are orderly and the board remains stable. The nomination committee and the board prioritize member succession planning, with sound and appropriate plans in place that are regularly revisited. 4.3 Board functioning and effectiveness The board is the highest decision-making body and focuses on supervision Banco Santander’s board of directors is our highest decision- making body, except in matters reserved to shareholders at the general meeting. It performs its duties with unity of purpose and independent judgement. The board’s policy is to designate executive bodies and managers to run Group’s day-to-day operations and apply its strategy. It focuses on general supervision and other 203 Annual report 2020 Contents functions it cannot delegate by law, under the Bylaws and the Rules and regulations of the board, including: • General policies and strategies (including capital and liquidity, new products, operations and services; corporate governance, culture and values including policies on responsible business and sustainability (in particular, on environmental and social matters); risk control; remuneration policy; and compliance). • In supervision and taking important decisions in the audit, nomination, remuneration and risk supervision, regulation and compliance committees. • A board secretary, who supports the board, its committees and our chairman, and is also general secretary of the group. Rules and regulations of the board • Financial reporting, and general information reported to shareholders, investors and the general public, as well as the processes and controls that ensure full disclosure. The board is governed by the rules set out in the Bylaws and the Rules and regulations of the board, both of which are available at our corporate website. • Policies on reporting and communication with shareholders, markets and public opinion, and supervision of the disclosure of information and communications about Group. • Internal audit plan and results. • Selection, succession and remuneration of directors. • Selection, succession and remuneration of senior management and other key positions. • Effectiveness of the group’s corporate and internal governance system. • Significant corporate transactions and investments. • Calling the general shareholders’ meeting. • Governance-related matters in general, including related-party transactions. • Banco Santander and Group’s corporate and internal governance, including the GSGM, corporate frameworks and internal regulations. Structure of the board The board’s governance structure ensures that it discharges its duties effectively. This section provides further details about this structure, which can be split into four dimensions: • Group executive chairman and chief executive officer, who are the most senior executives in Group’s strategic and ordinary management, which the board is responsible for overseeing, ensuring that their roles are clearly separated and complementary. • A lead independent director who is responsible for coordinating non-executive directors effectively and making sure they serve as an appropriate counter- balance to executive directors. • A board committee structure, which supports the board in: • Managing Group by exercising decision-making powers in the executive committee. • Formulating strategy for core areas in the responsible banking, sustainability and culture committee, and in the innovation and technology committee. 204 • Bylaws: dictate the basic rules that apply to the composition and operation of the board and its members' duties and are supplemented and implemented by the Rules and regulations of the board. They can be amended only by the general meeting. See ' Rules for amending our Bylaws' in section 3.2. • Rules and regulations of the board: set the rules for running and internally organizing the board of directors and its committees through the development of applicable laws and Bylaws' provisions. They set out the principles governing the actions of the board and its committees and the rules of conduct its members must follow. The board amended its Rules and regulations on 22 December 2020 to (i) adapt them to the Spanish Corporate Governance Code revised in June 2020, and to show our alignment with it; (ii) formally reflect specific Banco Santander’s long-standing good practices; and (iii) include specific technical improvements and other minor changes. The main amendments were: • Formally including the objective of gender equality in the board, agreed in 2019, as well as the promotion of age diversity in the qualitative composition of the board and in directors' selection procedures. • Stipulating that the responsible banking, sustainability and culture committee must be composed of non- executive directors only. • Amending the composition of the innovation and technology committee to allow non-executive directors to chair it. • Specifying that the risk management skills to be taken into account in the appointment of audit committee members and its chair include both financial and non- financial risks. • Regulating the coordination of the supervision of the whistleblowing channel by the audit committee and the risk supervision, regulation and compliance committee and extending its use to other persons linked to Banco Santander in addition to employees. • Including collaboration between the responsible banking, sustainability and culture committee and the audit committee in the supervision and evaluation of the process of preparing and presenting non-financial Responsible banking Corporate governance Economic and financial review Risk management and compliance information and attributing expressly the supervision and evaluation of the environmental and social policies to the responsible banking, sustainability and culture committee. • Expressly contemplating the board of director’s power to set up advisory boards – composed by members external to the Group – other than the international advisory board. • Amending the obligation for directors to notify the board of any criminal investigations which they are subject to, as well as their progress, and expressly contemplating its assessment by the board based on a report from the nomination committee and information, if any, in the annual corporate governance report. • Adapting the provisions on shareholders and investor relations in the context of the general meeting to our internal policy on communication and engagement with shareholders and investors, updated in February 2020, and setting out the obligation for the board to analyse the voting results at the general meeting and any significant opposition to a specific resolution. The Rules and regulations of the board adhere to all legal requirements as well as the principles set out in the Spanish Corporate Governance Code revised in June 2020; the Corporate Governance Principles for Banks of the Basel Committee on Banking Supervision of July 2015; and 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 the CNMV, on Audit Committees of Public Interest Entities. It also complies with the US regulations because our shares are listed as ADS on the NYSE, in particular, with Rule 10A-3 under the Securities Exchange Act (SEA) introduced by the Sarbanes-Oxley Act of 2002 (SOX) on requirements for companies’ audit committees. Our rules on the nomination and the remuneration committees also adhere to the recommendations and good operating practices set out in the CNMV’s Technical Guide 1/2019 on Nomination and Remuneration Committees. Group executive chairman and chief executive officer Our executive chairman is Ana Botín and our chief executive officer is José Antonio Álvarez. The roles of our Group executive chairman and chief executive officer are clearly separated, as follows: Roles of the executive chairman and the chief executive officer Executive chairman • The chairman is the highest-ranking officer in Grupo Chief executive officer • The chief executive officer is entrusted with the day-to-day Santander and its main representative with regulators, authorities and other major stakeholders. • The chairman´s direct reports are the chief executive officer and the senior managers in charge of long-term strategy of Grupo Santander (such as Corporate Development), the corporate functions (such as Communications and General secretariat) and control (including Risk and Internal Audit, without prejudice to their reporting to the audit and risk supervision, regulation and compliance committees) and those areas not directly related to the day-to-day management of the business. • The chairman also leads the appointment and succession planning of the senior management of Santander Group. The duties of the group executive chairman, the chief executive officer, the board, and its committees are clearly separated. Various checks and balances properly balance Grupo Santander’s corporate governance structure. In particular: • The board and its committees supervise both the group executive chairman and the chief executive officer. • The board of directors has delegated all its powers to the executive chairman and the chief executive officer, except for those that cannot be delegated by law and under the Bylaws and the Rules and regulations of the board. The board directly exercises those powers to perform its general supervisory function. management of the business. • Accordingly, the chief executive officer’s direct reports are the senior managers in charge of the businesses (heads of the regional -Europe, North America and South America- and global businesses) and of the functions supporting the business (such as Finance, Financial control and IT & operations). • The lead independent director leads for the group executive chairman’s appointment, succession planning and assessment, and plays a key role in our corporate governance, as detailed below. • The audit committee is chaired by an independent director who is considered a ‘financial expert’ as defined in Regulation S-K of the Securities and Exchange Commission (SEC). • The group executive chairman may not simultaneously act as Banco Santander’s chief executive officer. • The corporate risk, compliance and internal audit functions report as independent units to a committee or a member of the board of directors, and have direct, unfettered access to the board. 205 Annual report 2020 Contents Lead independent director The role of the lead independent director is key to our governance. The lead independent director coordinates non-executive directors and makes sure they serve as an appropriate counter-balance to the executive directors. The following chart illustrates the functions of the lead independent director: Duties of the lead independent director and activities during 2020 Duties Facilitate discussion and open dialogue among independent directors, even by coordinating meetings of non-executive directors; and engage with them to consider their views. Activities in 2020 Held three meetings with non-executive directors without executive directors present, where they were able to voice concerns and opinions. The meetings were also a valuable opportunity to discuss other matters such as board training topics, executive director performance and the operation of board committees. Direct the regular assessment of the chairman of the board of Leadership in the annual assessment of the chairman in order directors and coordinate her succession plan. to determine her variable pay. Engagement with shareholders and other investors with the purpose of gathering information on their concerns, in particular, with regard to Banco Santander´s corporate governance. Replace the chairman in the event of absence with key rights such as the ability to call board meetings under the terms set down in the Rules and regulations of the board. 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. See section 3.1'Shareholder engagement'. Although lead independent director did not replace the chair of the board in any meetings he was fully committed with its proper functioning. Whilst no such meetings where called by the lead independent director, he remained fully informed on board meeting content. Structure of board committees The board currently has seven committees and one international advisory board with the following characteristics: Mandatory committees (required by Law, under Bylaws or under the Rules and regulations of the board) Voluntary committees (permitted under Bylaws) Decision-making powers  Supervision, information advice and recommendations regarding functions in risk, financial reporting and audit, nomination and remuneration matters Audit committee Nomination committee Support and proposal in strategic areas Responsible banking, sustainability and culture committee Risk supervision, regulation and compliance committee Remuneration committee Innovation and technology committee International advisory board (members are non- directors) Board committees Executive committee External advisory board 206     Responsible banking Corporate governance Economic and financial review Risk management and compliance Secretary of the board Jaime Pérez Renovales is the secretary of the board. He assists the chairman and ensures the formal and substantial legality of all the board’s actions. He also makes sure good governance recommendations and procedures are observed and regularly reviewed. The board’s secretary is also general secretary of Banco Santander. He acts as the secretary of all board committees and thus facilitates a fluid and effective relationship between the committees and the different units of the Group that must collaborate with them. It is not necessary to be a director to be secretary. The nomination committee must issue an opinion before submitting proposals to appoint or remove the secretary to the board. The lead independent director is also authorised to request a board meeting or that new items be added to the agenda for a meeting that has already been called. Directors must attend meetings in person and make sure to limit absences to cases of absolute necessity. The nomination committee checks that no less than 75% of directors attend board and committee meetings. For further information, see 'Board and committee attendance' in this section 4.3. If directors are unable to be present at meeting, they can designate another director as their special proxy for each meeting in writing to act on their behalf. Proxies are granted with instructions. Non-executive directors may only be represented by other non-executive directors. One director can hold more than one proxy. The board also has a deputy secretary of the board, Óscar García Maceiras. He acts as the deputy secretary on all board committees. He also assists the secretary and substitutes him in the event of his absence, inability to act or illness. The board may meet in various rooms at the same time, provided that interactivity and communication among them in real time can be secured by audio-visual means or by telephone to hold the meeting concurrently. Board meetings The board of directors held 20 meetings in 2020, including 11 ordinary meetings and nine extraordinary meetings. The Rules and regulations of the board dictate that it must hold at least nine annual ordinary meetings and one quarterly meeting. Although board meetings follow an annually set calendar and a provisional agenda of items to discuss, new items can be added to the agenda and additional meetings can be called in accordance with new business needs. Directors may also propose items to be added to the agenda and are duly informed of changes to the calendar and meeting agendas. The board also keeps a formal list of matters only it can address. It prepares a plan to distribute them among the ordinary meetings scheduled in the provisional calendar it has approved. Directors are given relevant documents sufficiently in advance of each meeting of the board. This information sent to them via secure electronic means is specifically for preparing meetings and, in the board’s opinion, it is thorough and sent sufficiently in advance. The Rules and regulations of the board of directors also expressly recognise directors’ right to request and obtain information on anything related to Banco Santander and its domestic and foreign subsidiaries. They also recognise their right to inspect the books, files, documents and any other records of corporate transactions, in addition to premises and facilities. Furthermore, directors can request and obtain any information and advice they deem necessary from the secretary in order to perform their duties. The board meets at the chairman’s discretion or at the request of at least three directors. Board meetings are validly quorate when more than half of its members attend in person or by proxy. Resolutions are adopted by absolute majority of directors in attendance. The chairman has the casting vote in the event of a tie. The Bylaws and the Rules and regulations of the board only require qualified majorities according to the law. The board secretary keeps the board’s documents on file. He records the content of meetings in meeting minutes. Meeting minutes of the board and committees include statements members expressly request to be put on record. The board may hire legal, accounting or financial advisers and other experts at Banco Santander’s expense for assistance with their duties. The board should encourage communication between its committees, especially the risk supervision, regulation and compliance committee and the audit committee. It should also promote dialogue between the risk supervision, regulation and compliance committee and the remuneration committee and the responsible banking, sustainability and culture committee, given the relevance of their respective work with each other. Some committees hold joint meetings throughout the year. Although they cannot vote, any director can attend and participate in meetings of committees on which they do not serve if invited by the board chairman of the board and the chairman of the respective committee, after having asked the chairman of the board. Furthermore, all board members who are not executive committee members may attend executive committee meetings at least twice a year, for which they are to be called by the chairman. 207 Annual report 2020 Contents Committee meetings Committee meetings follow a calendar, which includes at least four meetings (except for the innovation and technology committee, which holds at least three meetings) and an annual work plan established yearly. Each committee meets as often as is required to fulfil its duties. Committee meetings are quorate if more than half of its members are present in person or by proxy. Committee resolutions pass with a simple majority of votes. In the event of a tie, the committee chairman has the casting vote. Committee members may grant a proxy to another member; however, non-executive directors can only be represented by other non-executive directors. Committee members are given relevant documents sufficiently in advance of each meeting to ensure effectiveness. Committees have the authority to summon executives, who will appear at meetings at the invitation and under the terms dictated by the chairman. Furthermore, committees also may address, a request to the general secretary, for the hiring of legal, accounting or financial advisers or other experts at Banco Santander’s expense for assistance with their duties. The other committees may also do so with the board’s approval. The role of committee secretary is non-voting and falls on the general secretary and secretary of the board. This fosters a fluid and efficient relationship with the units that must work with, and report to, committees. Committee chairmen report on committees’ meetings and activities at all board meetings. Furthermore, all board members are given a copy of committees’ meeting minute and all documents provided for meetings. During the year, directors that are not members of the executive committee attended 11 of the total of 46 meetings held. Comparison of number of meetings held A Board Executive committee Audit committee Nomination committee Remuneration committee Risk supervision, regulation and compliance committee Santander 20 Average US UK Spain average average 7.7 7.9 11.0 46 15 13 13 10.1 8.5 6.7 6.7 — 8.2 4.5 5.9 — 5.7 4.1 5.1 13 13.8 NA 5.6 Source: Spencer Stuart Board Index 2020 (Spain, United States and United Kingdom). NA: Not available. The following chart shows the board’s approximate time allocation to each function in 2020. Approximate allocation of the board’s time in 2020 208 Internal andexternal auditand review ofthe financialinformation 3%Businessperformance29%Riskmanagement 20%Generalpolicies andgovernance 21%Capital& liquidity 6%Strategy 21% Responsible banking Corporate governance Economic and financial review Risk management and compliance Board and committee attendance The table below shows the attendance rate of board and committee meetings. Attendance to the board and committee meetings in 2020 Committees Directors Average attendance Individual attendance Ana Botín José Antonio Álvarez Bruce Carnegie-Brown Homaira Akbari A Ignacio Benjumea Javier Botín Álvaro Cardoso B R. Martin Chávez Sol Daurella Henrique de Castro C Guillermo de la Dehesa D Gina Díez Rodrigo Echenique Esther Giménez-SalinasE Luis IsasiF Ramiro Mato G Sergio Rial Belén Romana Pamela Walkden Board 98% Executive 94% Audit 97% Nomination 100% Remuneration 100% Risk supervision, regulation and compliance 97% Innovation and technology 93% Responsible banking, sustainability and culture 97% 20/20 20/20 20/20 20/20 10/10 20/20 18/20 3/3 20/20 20/20 7/7 1/1 20/20 17/17 10/10 18/20 10/10 20/20 20/20 44/46 46/46 42/46 _ _ _ _ 15/15 20/20 _ _ _ _ _ 13/13 _ _ _ 27/27 43/46 _ 39/46 _ _ _ _ _ _ 14/15 _ _ _ _ _ 14/15 _ 15/15 15/15 _ _ _ _ 13/13 13/13 _ _ _ _ _ 13/13 _ 3/3 _ 13/13 10/10 _ _ _ _ _ _ 6/6 _ _ 3/3 13/13 13/13 3/3 _ _ _ 8/8 _ _ _ _ _ _ _ _ 5/5 _ 12/13 3/3 _ _ _ _ _ 10/10 9/9 14/14 _ 12/13 _ 4/4 4/4 4/4 4/4 2/2 _ _ 1/1 _ 2/4 1/1 _ _ _ _ _ _ 4/4 _ 4/4 _ _ 4/4 2/2 _ 3/4 _ 4/4 _ _ _ _ 4/4 _ 4/4 _ 4/4 _ Note: The table details the attendance of directors whenever the latter have personally attended meetings of the board or its committees. For this purpose, absent directors who are represented are not counted as having attended. A. Left the board and all the committees where he was a member on 30 May 2020. B. Member of the board and member of the remuneration, risk supervision, regulation and compliance and innovation and technology committee since 27 October 2020. Member of the nomination committee since 22 December 2020. C. Left the board and all the committees where he was a member on 3 April 2020. D. Member of the board since 22 December 2020. E. Left the board and all the committees where she was a member on 27 October 2020. F. Member of the board and member of the executive committee, remuneration committee and risk supervision, regulation and compliance commitee since 19 May 2020. G. Member of the board since 30 May 2020. This table shows the average dedication of our directors to the board and committees: Average dedication of directors to the board and committees Meetings per year Board Executive committee Audit committee Nomination committee Remuneration committee Risk supervision regulation and compliance committee 20 46 15 13 13 13 Responsible banking sustainability and culture committee Innovation and technology committee 4 4 hours per A member 132B hours per B chair 264B 230 150 52 52 130 20 16 460 300 104 104 260 40 32 A. Includes hours of meeting preparation and attendance. B. Of the 11 ordinary meetings held. On average, each director dedicated approximately 58 days per year to their role (including their participation in committees), and 5 days to each board meeting, working 8 hours daily. Directors must report any professional activity or post for which they will be nominated to the nomination committee so it can assess the time commitment to the group and check for possible conflicts of interest. The annual suitability reassessment our nomination committee conducts every year (see in section 4.6 'Nomination committee activities in 2020') allows us to keep all information on the estimated time dedicated by directors to other roles and/or professional activities up to date and confirm their capacity to exercise good governance as directors of Banco Santander. 209 Annual report 2020 Contents Overall, Banco Santander is able to verify compliance with the maximum number of company boards on which the law allows our directors to serve at once (i.e., up to one executive and two non-executive roles, or four non-executive roles; roles in the same group are considered a single role and roles in not-for-profit or non-commercial organisations are not included). Training of directors and induction programmes for new directors The board promotes its directors’ continued development through an annual board training programme with contents the board chooses based on its performance reviews as well as economic, geopolitical and regulatory issues. In 2020, these workshops, which typically follow board meetings, were run for all directors: • Application Programming Interface development and use within Santander. • Machine Learning and its potential for Santander. • Cyber risk review covering core disciplines and new developments. • Financial crime regulatory requirements and best practice guidance for senior management including anti money laundering and sanctions. • Climate change and Santander’s response. • Risk Appetite Statement annual review covering material risks, calibration of limits and cascade across the Group and future enhancements proposed for 2021 Risk Appetite Statement development. In addition, the board has robust induction and development programmes so new directors can better understand the Grupo Sanander’s business and governance rules. They typically run between six to twelve months, from time a director is formally appointed by the board with regulatory approval. Key group managers provide detailed information on their areas of responsibility, addressing special needs found in director suitability assessments. In 2020, these directors completed induction programmes with additional areas of focus: • Pamela Walkden. who received additional deep-dive sessions with the audit committee chairs of certain subsidiaries and other key Grupo Santander positions given her transition to audit committee chair. • Luis Isasi, who received additional deep-dive sessions covering Santander España after being appointed non- executive chairman. • R. Martín Chávez and Gina Díez, who commenced their induction after being formally appointed and are expected to finish in 2021. These programmes had been tailored to their experience and particular induction needs found when their suitability was being assessed. 210 Board assessment in 2020 The board undergoes a yearly assessment of its performance and effectiveness, composition, quality of its work and individual performance of its members. The assessment includes its committees and is conducted at least every three years by an external independent consultant, whose independence is assessed by the nomination committee. In 2020, the assessment was conducted by an external independent expert. External consultant independence A robust selection process was undertaken to identify an external independent consultant to conduct the board assessment with a fresh perspective. A high degree of focus was placed on consultants with an in-depth understanding of Spanish and banking markets, and of the effectiveness of the boards of directors. On 29 September, the board appointed Egon Zehnder to conduct the board assessment, following a favourable report of the nomination committee, which assessed and verified the consultant's independence. Egon Zehnder, as a reference leader in its field, advised the Group in 2020 —occasionally and never exclusively— on processes related to the identification, selection and review of skills and potential of managers. The amounts paid to Egon Zehnder in 2020 for these services were: Country United Kingdom Argentina Brazil Chile B Spain Total Total amount in local currency GBP 52,500 ARS 5,602,905 BRL 228,125 CLP 48,871,337 EUR 1,137,781 A Total amount in EUR 58,029 54,246 35,703 55,751 1,137,781 EUR 1,341,510 A. The amounts in EUR have been calculated based on exchange rates as at 31 December 2020. B. Excluding the amounts received for the Banco Santander board of directors' 2020 review. The nomination committee does not consider the referred amounts material in the context of the overall budget for such services, nor that they represent a significant proportion of Egon Zehnder’s total fees. For more details, see 4.6 ‘Nomination committee activities in 2020’. Process, methodology and scope of the assessment The lead independent director and the executive chairman organized and coordinated the assessment alongside the nomination committee. The assessment methodology agreed with Egon Zehnder and endorsed by the nomination committee comprised: • An anonymous questionnaire completed by all board members. Responsible banking Corporate governance Economic and financial review Risk management and compliance • Structured, detailed and confidential interviews with individual board members and select members of the executive team, covering their qualitative and quantitative assessment of key areas. • Board and committee meeting observations to assess the quality of debate, dynamics and culture. The process focused on board and committee structure, composition, processes and behaviours, including: • The quality and efficiency of their functioning. • Their size, composition and diversity. • The performance of each director, general secretary and committee chairmen. • The frequency and duration of meetings; content of the agenda and time dedicated to each item; quality of the information received; and decision making. The objective of the exercise was to identify areas of continuous improvement therefore optimizing board impact in the future. Findings and action plan On 15 February 2021, Egon Zehnder shared the findings with the board, which included, among others, that: • The board is appropriately composed, engages in healthy debate and makes decisions effectively. • The committee structure, composition and operation is fit for purpose taking into account Banco Santander’s scale and complexity. • The executive chairman, CEO, lead independent director and general secretary performed positively and effectively. • The board´s governance and logistics are well covered. • A review of meeting frequency and agenda contents can help boost efficiency, striking a further balance between productivity and fulfilling regulatory expectations. The board discussed the assessment and associated findings at its meeting held on 15 February 2021, and concluded that it was satisfied with its and its committees' performance and effectiveness. Taking into account the Egon Zehnder findings, the board will develop and execute an action plan to address the identified areas of improvement, applicable to both the board and its committees. The action plan will specifically focus on improving efficiency of operation at both a board and committee level, at all times meeting regulatory and good governance expectations. In addition, committees will each be engaged on specific actions relevant to their ongoing effective and efficient operation. The agreed action plan will be executed during 2021 under the supervision of the nomination committee, with regular progress reports to the board. 4.4 Executive committee activities in 2020 Composition Position Chairman Ana Botín Category Executive Appointed on 11/12/1989 José Antonio Álvarez Executive 3/01/2015 Bruce Carnegie-Brown Independent 12/02/2015 Members Luis Isasi Other external 20/05/2020 Ramiro Mato Independent 28/11/2017 Belén Romana Independent 01/07/2018 Secretary Jaime Pérez Renovales A. Committee chair 10 September 2014. In 2020, Ignacio Benjumea and Guillermo de la Dehesa stepped down from the committee, with Luis Isasi appointed on 20 May. Functions The executive committee is a key governance body of the Group and is delegated to exercise all the board’s powers except those that cannot be delegated by law or under the Bylaws and the board’s rules and regulations. The executive committee meets every week to ensure that key decisions can be made timely and efficiently, allowing the board to focus on general supervision. The executive committee regularly reports to the board on its core matters, providing all directors with the minutes from its meetings and related documents. Committee performance The board of directors, supported by its nomination committee, sets the executive committee’s size and qualitative composition based on efficiency standards and guidelines for board composition. However, because the committee’s size must allow it to perform its functions expeditiously with all executive directors present, the executive committee does not have the same qualitative composition as the board of directors. It has a majority of external directors, including three independent directors. This composition ensures a balance of opinions, as well as internal and external perspectives. It also complies with Recommendation 37 of the Spanish Corporate Governance Code, which stipulates that there must be at least two non- executive directors, one of whom should be independent. The secretary of the board is also the secretary of the executive committee. The executive committee can meet as many times as its chairman (or, in her absence, vice-chairman) convenes it. However, it generally meets once a week. ‘Committee meetings' in section 4.3 further describes the general rules that apply to these sessions. Main activities in 2020 The executive committee handled several matters relating to the business of Santander, its main subsidiaries, risks and corporate transactions, in addition to the core issues it subsequently elevates to the full board of directors: 211 Annual report 2020 Contents • Earnings: the committee was kept up to date on group earnings and investors and analysts’ reactions to them. • Business performance: the committee received reports on management and specific subjects related to the performance of Santander’s business areas. • Information from the chairman: the board’s chairman presides over the executive committee and regularly reported on group management, strategy and institutional issues. • Information reported by the chief executive officer: the Group chief executive officer reported key aspects relating to Group performance, budget and strategic business plans. • Corporate transactions: the committee analysed and, where applicable, approved some corporate transactions (investments and divestments, joint ventures, capital transactions, etc.). • Covid-19: the committee was kept up to date on pandemic- related developments, actively participating in decision- making aimed at mitigating its impact on the Group, as well as on the global economy and health of employees, customers and the general public. • Risks: the committee was regularly informed about the Group’s risks. Under the risk governance model, it took decisions about transactions that it had to approve owing to their amount or significance. Due to covid-19, risk presentations specifically focused on providing updated information on health indicators, as well as on the estimation and close monitoring of the impacts of the pandemic on liquidity, provisions, risks, etc. • Subsidiaries: the committee received reports on the performance of the various units and business lines, with a specific focus on the impact of the pandemic on their credit portfolios. As per internal procedures, it authorised transactions and appointments of directors and key managers at subsidiaries. • Capital and liquidity: from time to time, the committee received reports on capital ratios and the measures taken to optimize them. It also revised regulatory plans. • Supervisors and regulators: the committee was frequently informed of regulatory developments, as well as projects to follow recommendations and new regulations. • Governance models: the committee discussed and, where relevant, approved new governance model proposals for initiatives such as PagoNxt, as well as more established units such as Santander Corporate and Investment Banking (SCIB) and Wealth Management and Insurance (WM&I). • Issues under board delegation: under the delegation conferred by the April 2020 AGM, and the subsequent sub- delegation of the board of directors' powers in its favour, the committee resolved to issue certain securities non- convertible in shares. The executive committee held 46 meetings in 2020. 'Board and committee attendance' in section 4.3 provides information on executive committee members’ attendance at meetings as well as the estimated average time each committee member spent on preparing for, and participating in, meetings. 212 4.5 Audit committee activities in 2020 'In a volatile and uncertain environment, it has been key for us, as a board audit committee, to continue doing the basics extremely well and to maintain our vigilance on new priorities. The covid-19 crisis has had a high impact on our 2020 agenda, but we have also remained focused on our fundamental responsibilities, including the oversight of the integrity of financial reporting and controls, the effectiveness of our internal audit function and the relationship with the external auditors. The committee has maintained the focus on transparency, particularly around the difficult decisions we had to make during the year. We have also reflected and acknowledged how critical it is, in the current circumstances, to enhance cross-country collaboration and work in partnership with the executives and the external auditor. Finally, I would like to thank Belén Romana for her service over the last four years as chair of the committee (of which she remains a member) until I took over in April'. Pamela Walkden Chairman of the audit committee This section is the report the audit committee prepared on its activities on19 February 2021. The board of directors approved it on 22 February 2021. Composition Position Chairman Pamela Walkden Members Homaira Akbari Henrique de Castro Ramiro Mato Belén Romana Secretary Jaime Pérez Renovales A. Committee chair since 26 April 2020. Category Appointed on Independent 29/10/2019A Independent 26/06/2017 21/10/2019 Independent Independent Independent 22/12/2015 28/11/2017 The board of directors appointed the committee’s members based on how their expertise, skills and experience fit within its purview. For more details, see section 4.1 'Our directors' and 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. Pamela Walkden was appointed chairman of the committee with effects from 26 April 2020 replacing Belén Romana, who Responsible banking Corporate governance Economic and financial review Risk management and compliance The committee assessed the auditor's independence based on their personal situation and the financial relationship that the auditor or persons performing the audit have with the Group, analysing possible threats and establishing the appropriate safeguarding measures. The committee also used the information found under the 'Duties and activities in 2020' section on the auditor’s remuneration for audit and other services as well as considering written confirmation from the external auditor regarding its independence from Banco Santander in accordance with European and Spanish law, SEC rules and the rules of the Public Company Accounting Oversight Board (PCAOB). Proposed re-election of the external auditor for 2021 As indicated in section 3.6 'Our coming 2021 AGM', the board of directors proposed re-electing PwC as external auditor for 2021 at the 2021 AGM on the recommendation of the audit committee. Time allocation In 2020, the audit committee held 15 meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing for, and participating in, meetings. The chart below shows the committee’s approximate time allocation to each function in 2020. stepped down at the end of the maximum period permitted under Spanish law. According to SEC Regulation S-K, new committee’s chairman, Pamela Walkden, is considered a financial expert based on her training and experience in accounting, auditing and risk management, as well as the various leadership positions she held at entities where knowledge of accounting and risk management was essential, not to mention her international experience - focussed on the UK and Asia. External auditor Our external auditor is PricewaterhouseCoopers Auditores, S.L. (PwC). Its registered office is at paseo de la Castellana, no. 259 B, Madrid, and its Tax ID Code is B-79031290. It is registered with the Registro Oficial de Auditores de Cuentas (Official Registry of Account Auditors) of the Instituto de Contabilidad y Auditoría de Cuentas (Accounting and Audit Institute or ICAC) of the Spanish Ministry of the Economy under number S0242. The lead partner is Alejandro Esnal, who has more than 25 years’experience in audits in the Spanish banking sector. He has also led a large number of projects in Spain, London and New York, both in connection with auditing and with internal control activities at financial institutions. Mr Alejandro Esnal participates actively in the committees and working groups of the audit sector and collaborates with regulators in matters relating to the improvement of the practices and regulations of financial institutions. Since the previous incumbent has reached the end of the maximum legal term of five years, Julián González will be the lead audit partner in 2021. Mr González has experience as a global group audit partner (mainly in Spain and the UK) and a strong track record in the Spanish financial sector. He also participates in various international banking supervisory and regulatory forums. Report on the independence of the external auditor The audit committee confirmed the independence of the external auditor on 19 February 2021, before the 2020 auditor’s report on the financial statements was issued, in accordance with section 4.f) of article 529 quaterdecies of the Spanish Companies Act, and article 17.4.c) (iii) of the Rules and regulations of the board. It found no objective reasons to doubt the independence of the external auditor. 213 Internal Audit52%FinancialStatements &ExternalAuditor28%Internal ControlSystems 13%Others7% Annual report 2020 Contents Duties and activities in 2020 This section summarises the audit committee’s activities in 2020. Duties Actions taken Financial statements and other financial and non-financial information Review the financial statements and other financial and non-financial information Report to the board about applied tax policies • Reviewed the individual and consolidated financial statements and directors´ reports for 2020 and endorsed their content, prior to their authorization for issue by the board. 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 effectiveness of the group’s system of internal control over financial reporting (ICFR). • Endorsed the quarterly financial statements dated 31 December 2019, 31 March, 30 June and 30 September 2020, respectively, before they were approved by the board and released to the markets and supervisors. • Analysed and endorsed other financial information such as the annual corporate governance report; shares registration document filed with the CNMV; Form 20-F filed with the SEC with 2019 financial information; the half-yearly financial information filed with the CNMV and in Form 6-K with the SEC; and Santander’s specific interim consolidated financial statements for Brazil. • Reviewed the balance sheet on the basis of the proposal of a capital increase to distribute of new shares equivalent to EUR 0.10 per share, as a complementary payment for 2019. • Analysed the goodwill attributed to Santander UK plc, Santander Bank Polska, S.A. and Santander Bank, N.A. and determined the need for an asset impairment in accordance with the applicable accounting rules. The committee acknowledged the effects of the pandemic, the uncertainty in the macroeconomic situation, expected returns and market premiums, amongst others. • Analysed the proposed EUR 1.6 billion overlay provisions based on the expected deterioration of the macroeconomic conditions due to the covid-19 health crisis. • Oversaw and assessed the preparation and reporting of non-financial information in accordance with applicable regulations and international benchmarks. In particular, reviewed the annual 'Green Bond Report' about the use of proceeds of each Green Bond issuance that was approved by the board. • Received information from the group’s tax advisory unit about applied tax policies in compliance with the Code of Good Tax Practices and submitted it to the board of directors, expressly stating that, as part of the cooperative relationship encouraged by this code, the Agencia Estatal de Administración Tributaria (AEAT) Tax transparency report for the financial year 2019 was submitted. Relationship with the external auditor Receive information on the audit plan • Obtained confirmation from the external auditor that it had full access to all information to conduct the audit. • Discussed improvements in financial reporting based on new accounting standards and best international practices. • Analysed detailed information on the planning, progress and execution of the audit plan. • Analysed the auditor’s reports about the annual financial statements before the external auditor submitted them to the board of directors. Relations with the external auditor • The external auditor attended all committee meetings in 2020, allowing the audit committee to act as a communication channel between the external auditor and the board. • The committee met twice in private session with the external auditor without Grupo Santander executives present. Assessment of the auditor’s performance • Evaluated the external auditor and its contribution to the integrity of financial reporting on account of its work and opinions from units and the chairpersons of audit committees of different group's companies. During this assessment, the auditor informed the committee of the findings of regulators’ inspections of PwC and the committee analysed those, as well as the information about any investigations involving PwC. 214 Responsible banking Corporate governance Economic and financial review Risk management and compliance Duties Independence PwC’s remuneration for audit and non- audit services Actions taken • Monitored PwC’s remuneration, including the following fees for audit and non-audit services provided to the group EUR million 2020 2019 2018 0.9 6.8 6.0 0.8 0.7 1.2 7.8 93.9 95.8 102.4 Audit Audit-related services Tax advisory services Other services Total 105.0 The 'Audit' heading mainly includes audit fees for the individual and consolidated financial statements of Banco Santander, S.A., and of some group companies; the integrated audits prepared in order to file Form 20-F for the annual report with the US SEC in relation to any entities currently required to do so; the internal control audit (SOX) for required group entities; the audit of the consolidated financial statements as of 30 June; and the regulatory auditor’s reports for Grupo Santander’s geographies. Tax advisory services provided by PwC (mainly on tax and compliance) totalled EUR 40,000 for Spain and EUR 780,000 for other group subsidiaries. The main fees under 'Audit-related services' include, amongst others, comfort letters, verifying financial and non-financial information (as required by regulators), and reviews of the documents to be submitted to domestic or foreign securities market authorities. The fees paid for non-audit services and their proportion to all fees invoiced to Banco Santander and/or its group are as follows: 103.8 113.2 2.3 3.4 Non-audit services. Assess threats to the independence and protective measures Group companies Total Company 487 Amount of non-audit work (thousands of EUR) Amount of non-audit work as a % amount of audit work In 2020, Santander arranged for services provided by audit firms other than PwC. EUR 172.4 million (EUR 227.6 and 173.9 million in 2019 and 2018, respectively). • Reviewed services rendered by PwC and confirmed its independence. For those purposes: 1,513 1.4 % 0.5% 2,000 1.9 % • Confirmed that all services rendered by Grupo Santander’s auditor (audit and audit-related services, tax advisory and other services detailed in the section above) met regulatory independence requirements. • Confirmed 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, which for 2020 stood at 1.9%. • Average non-audit and audit-related fees paid to auditors in 2020 amount to 11% of total audit fees according to available information on the leading listed companies in Spain. • Confirmed the ratio of fees paid for all items relating to the services provided to the group to total fees charged by PwC in 2020. This ratio is less than 0.3% of PwC’s total revenue worldwide. • Reviewed financial relations with companies related to PwC and persons who participate in audit works, concluding that financial relations could compromise PwC’s independence. • Since the publication of the (EU) Regulation 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities, Banco Santander meets the requirement that for a period of three or more consecutive years, total fees received for non-audit services do not exceed 70% of the average fees paid in the last three consecutive years for the audit of Group entities. External auditor independence report Re-election of the external auditor • After considering the information detailed above, the committee issued the 'Report on the independence of the external auditor', which is described at the beginning of this section 4.5. Re-election of the external auditor • Submitted proposal to the board (for subsequent submission to the 2021 AGM to re-elect of PwC as the external auditor of Banco Santander and its consolidated group in 2021. 215 Annual report 2020 Contents Duties Internal audit function Assess the performance of internal audit function Internal control systems Monitor internal control systems Actions taken • Regularly supervised the impact of covid-19 on core activities on a regular basis, closely monitoring the changes to the original 2020 internal audit plan. • Received reports on progress with the internal audit plan, allowing the committee to exert strict controls over internal audit recommendations and ratings of units and corporate divisions. The chief audit executives (CAE) of core units and corporate divisions reported to the committee at least once in 2020. • The CAE and representatives of the Internal Audit division attended all the audit committee meetings in 2020; one meeting was with the CAE without other executives or the external auditor present. • Proposed the 2020 internal audit budget, making sure the function had the necessary material and human resources. In particular, the committee was kept informed of the creation of audit hubs and their associated schedule, as well as on digital initiatives related to the Internal Audit division. • Reviewed the annual audit plan for 2020-2023 based on a comprehensive risk assessment and submitted it to the board for approval. • Received regular information about internal audit activities in 2020. The overall distribution of audit ratings improved owing in part to continued efforts to build a stronger control environment. All issued audit reports were subject to additional scrutiny by the committee and certain business areas were required to present their action plans to it. • Reviewed the application of the measures in the 2020-2023 strategic internal audit plan. • Assessed the internal audit function’s success in fulfilling its purpose and the CAE’s performance in 2020, and reported its findings to the remuneration committee to set his variable pay. • Received information on the evaluation of the group’s 2019 Internal Control Model (ICM) and analysed its effectiveness according to regulations from the CNMV (ICFR) and the SEC (SOX). To fulfil its main objective of reducing risks associated with risk control, it put specific remediation plans in place and regularly updated the committee. • Reviewed the effectiveness of Grupo Santander's internal controls over the preparation of the financial statements filed in the US with Form 20-F for 2019 pursuant to the SOX. In its opinion, Grupo Santander's internal controls over said financial information were effective in all significant aspects. Whistleblowing channel • Received information from the Compliance and Conduct division about the whistleblowing channel (Canal Abierto), particularly regarding questionable financial and accounting practices, financial reporting, auditing and internal controls. It confirmed that no claim regarding these issues had been filed through this channel. • The committee was informed about the changes made to the whistleblowing channel that enable communications from employees and from other people not related to Banco Santander, such as shareholders, customers, suppliers and other third parties guaranteeing their confidentiality and allowing anonymous communications. See section 8.1. Coordination with Risk • Took action to make sure the internal audit plan is properly coordinated with the oversight of significant group Other activities risks and attended joint meetings with board’s risk supervision, regulation and compliance committee to report on model risk, group's risk management, complaints submitted to Canal Abierto, vendor risk management, legal risk, internal auditing in the Risk and Compliance division, and other matters. • Took part in the appointment of new CAE for the subsidiaries in accordance with the group's internal regulations upholding the correct supervision and control of such appointments in conjunction with the nomination committee was ensured. Related-party and corporate transactions Creation of special- purpose vehicles or entities based in countries considered tax havens Approval of related party transactions • The head of Tax informed the committee about the group’s offshore entities in accordance with Spanish regulations. See note 3.c in the 'Notes to the consolidated annual accounts'. • Confirmed if related-party transactions required or not the approval from the governing bodies according to the law and the board’s rules and regulations. • No board member direct or indirectly carried out any transactions with Banco Santander that were deemed significant or under unusual market conditions. The committee examined the related-party transactions disclosed in the financial statements. See section 4.12 'Related-party transactions and conflicts of interest'. Transactions involving structural or corporate changes • Reviewed the transactions involving structural or corporate modifications planned by the group during 2020 prior to the submission to the board of directors, analysing their economic conditions and the accounting and internal audit impact. Information for general meetings and corporate documentation Reporting to shareholders • At our April 2020 AGM, Belén Romana, as committee chairman, reported to shareholders on the matters and activities within the committee’s scope. Corporate documents for 2020 • Drafted this committee report for 2020, which includes a section dedicated to the activities carried out during the year, an analysis and assessment of the fulfilment of the functions entrusted to it, and the priorities for 2021 identified following the assessment carried out by the board and its committees. 216 Responsible banking Corporate governance Economic and financial review Risk management and compliance Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see ‘Board assessment in 2020’ in section 4.3. The committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Appointed a new committee chair in line with robust succession planning, ensuring a smooth transition and continued focus on committee effectiveness. • Strengthened the coordination and sharing of information with the main units and divisions through committee chair participation in country audit committee meetings, reciprocated by country reporting and attendance of country audit committee chairs at the group audit committee, as well as holding two audit committee conventions to facilitate coordination, raise awareness of global initiatives and expectations, and to discuss relevant topics. • Remained focused on, and debated, critical areas such as internal control, risk assessment, digital transformation and relationships with suppliers. 2021 priorities The committee identified these priorities for 2021: • Continue to evolve the communication between Group audit committees to ensure there is effective sharing of knowledge and concerns. • Monitor the execution of the internal audit plan, taking into consideration planned adjustments as well as tracking risks caused by covid-19 and reviewing management’s of those risks. • Continue to promote the involvement of the first line of defence and review internal audit recommendations. • Support the further improvement of the internal risk assessment and controls, with particularly focus on the Group's key strategic projects. • Ensure proper coordination with other board committees, especially the risk supervision, regulation and compliance committee. 4.6 Nomination committee activities in 2020 'The committee has continued its work on overseeing the process on key appointments to the board and senior management roles, supported by its work on robust succession planning. Focus has remained on the collective skills and experience of the board and ensuring that gender and broader diversity remain front of mind in our succession planning. In addition, we have continued our work on improving our overall effectiveness through commissioning an external evaluation of the board and its committees. Corporate and internal governance of the subsidiary governance has been a key feature in the year, driving continuous improvement across the Group and ensuring adequate oversight and control of subsidiary operations. The committee has tracked governance developments (trends, regulation, and best practices) and the implications for the Group, and kept these under continuous review. There have been four changes to the membership of the committee during the year: Guillermo de la Dehesa, Esther Giménez-Salinas and Rodrigo Echenique left the committee upon their resignation from the board and R. Martín Chávez became a member in December 2020. I would like to take this opportunity to thank Guillermo, Esther and Rodrigo, on behalf of the committee, for their hard work and commitment to our discussions and to welcome Marty who brings relevant skills and experience to the committee, including technology and digital expertise'. Bruce Carnegie-Brown Chairman of the nomination committee This section is the report the nomination committee prepared on its activities on 19 February 2021. The board of directors approved it on 22 February 2021. • Ensure the effectiveness of the committee, taking into account any areas of continuous improvement and allowing sufficient time for quality debate on key topics and internal audit issues. Composition Position Category Chairman Bruce Carnegie-Brown Independent Appointed on 12/02/2015A 2/12/2020 R. Martín Chávez Independent Members Sol Daurella Independent 23/02/2015 Secretary Jaime Pérez Renovales A. Committee chair since 12 February 2015. 217 Annual report 2020 Contents The chart below shows the committee’s approximate time allocation to each function. The board of directors appointed the committee’s members based on how their expertise, skills and experience fit within its purview. Further information can be found in section 4.1 'Our directors' and 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. In 2020, Guillermo de la Dehesa, Esther Giménez-Salinas and Rodrigo Echenique stepped down from the committee, with R. Martín Chávez appointed in 22 December. Time allocation In 2020, the nomination committee held 13 meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing for, and participating in, meetings. Duties and activities in 2020 This section summarizes the nomination committee’s activities in 2020. Duties Composition of the board and its committees Actions taken Selection, suitability assessment and succession policy and renewal of the board and its committees • Reviewed the selection, suitability and succession practices with an external consultant and implemented findings through the updated selection, suitability assessment and succession of directors policy. The review concluded that these activities were conducted in line with industry best practices. • Ensured that board member selection guaranteed the individual and collective suitability of directors, fostered diversity of gender, experience and expertise, and assessed the skills, time and dedication needed for the role. • Continued to oversee the appointment of board and committee members and top executives, and planning their succession. • Assessed board committee composition to balance members’ skills and experience appropriately. • Checked board members’ general skills and competence to cover Santander’s strategic markets in addition to their experience and expertise in technology, digital strategy, banking, finance, regulations and other areas. • Oversaw appointments to key roles and regularly reviewed succession plans from a strategy perspective. • Made sure that nominations, interviews and appointments of directors consider diversity. • Checked that the overall composition and skills of the board and its committees were appropriate, and identified necessary areas of expertise and experience based on the skills matrix in order to select members. • Assessed candidates, as well as their credentials, and evaluated their skills and suitability for the position, in accordance with the procedure outlined in the selection, suitability assessment and succession of directors policy. • Recommended to the board, for subsequent submission to the general meeting the appointment of Luis Isasi, Sergio Rial, R. Martín Chávez and Gina Díez as new board members (these appointments would make the board more diverse in terms of skills and background) and the re-election as directors of the directors whose term of office expired. • Recommended to the board changing the composition of committees to further enhance their performance and support to the board in their respective areas, in accordance with best international practices and the board’s rules and regulations. • Acknowledged the resignation of Guillermo de la Dehesa, Esther Giménez-Salinas and Rodrigo Echenique before the end of their tenure, and the reasons given in a letter to the board, namely personal issues related to the length of time they had been directors and to board renewal. • Submitted a proposal to the board, upon completion of one year of their term of office and in accordance with the Bylaws, the re-election of the members of the international advisory board. See section 4.11 'International advisory board'. • Received and analyzed information on succession planning for executive directors, senior management and key positions throughout the Group. Ensured plans are in place for the orderly succession of senior managers and that there is a structured, rigorous and transparent procedure based on merit and objective criteria, promoting diversity in its broadest sense. • Reviewed an external expert’s report on this topic, which concluded that Santander’s overall succession arrangements and framework for the executive directors, senior management and key positions throughout the Group meet regulatory requirements and align with best industry practices. • Analyzed proposals to update the selection, suitability assessment and succession policy for directors approved by the board on 27 February 2020 and 22 December 2020. Appointment, re-election, confirmation and removal of directors and committee members Succession planning Succession planning for executive directors and senior managers 218 Appointments andsuitabilityassessments24%Board and boardcommitteescomposition,successionplanning andeffectiveness33%Governance18%Seniormanagement,successionplanning andrelated activities25% Responsible banking Corporate governance Economic and financial review Risk management and compliance Duties Director status verification Annual director status confirmation Regular assessment Annual suitability assessment of directors and key roles Actions taken • Confirmed each director’s status (as executive, independent and other external) and submitted its recommendation to the board of directors in order to confirm or revise it in the annual corporate governance report and at the annual general meeting. See section 4.2 'Board composition'. • Evaluated directors’ independence and confirmed that the Group had no significant business relations with companies where they are or were significant shareholders or directors, particularly in terms of financing extended to them by the Group. Ultimately, the committee found no significant relations because (i) financing transactions (a) did not make these companies financially dependent since they could substitute it with funding from other banks and entities, and (b) are aligned with Grupo Santander’s share of the relevant market, and (ii) relations did not reach comparable price-sensitive thresholds used in other jurisdictions as a reference (e.g. NYSE, Nasdaq and the Canadian Bank Act). • Assessed the suitability of board members and senior managers, as well as holders of internal control functions and key roles in the Group, and confirmed their business and professional integrity, suitable skills and experience to perform their duties, and ability to make decisions independently for the Group’s benefit. • Furthermore, the committee found that directors are suitable to exercise good governance at Banco Santander. It noted that, on average, directors attend approximately 98.65% of the meetings of the board and committees on which they serve, and that the committee has not been compelled to take any action regarding attendance because no director’s attendance is below the 75% minimum. • In 2020, the committee was not informed by any director of Banco Santander, and had no awareness to the best of its knowledge, of any circumstance or situation that could harm the Group creditworthiness and reputation, whether or not related to their performance in Santander, or criminal cases in which they are investigated, that should be assessed by the committee for its report to the board. Conflicts of interest and other directors' professional activities • Examined the information provided by the directors regarding other professional activities or positions to which they had been proposed and the time to be dedicated to them, concluding that such obligations did not interfere with the dedication required as directors and that there was no conflict of interest that could affect the performance of their duties. Board self-assessment • In coordination with the executive chairman and the lead independent director, the committee tracked the Senior Management Appointment of key positions Talent and director training execution of the action plan defined in the 2019 self-assessment, which was performed internally. • Led by the executive chairman and the lead independent director, the committee monitored the 2020 board evaluation review, conducted by an independent external consultant, whose independence was verified by the committee upon analyzing its business relations with the Group and, in particular, the services rendered and the amounts received. The scope of the assessment included the board and all its committees, as well as its members and the general secretary. See 'Assessment of the board' in section 4.3. • Updated the board skills and diversity matrix and submitted it to the board for approval. See section 'Board skills and diversity matrix' in section 4.2. • Issued favourable opinions on the following appointees, approved by the board: • António Simões as new regional head of Europe. • Alexandra Brandão as the new global head of Human Resources, replacing Jaime Pérez Renovales, who continues as general and board secretary, and Roberto di Bernardini, who was appointed chief talent officer. • Also issued favourable opinions on director and senior manager appointments within the core subsidiaries of Grupo Santander. • Received information about the global knowledge and talent strategy, aimed at transforming our workforce to ensure it is ready for digital transformation, and conducted activities on the Group’s cultural transformation. • Reviewed the director induction, information, training, development and knowledge refreshment programmes in line with the Rules and regulations of the board, EBA Guidelines, Spanish Corporate Governance Code and supervisory body requests, making sure that these programmes take into account each director's circumstances and needs. Corporate governance and Internal governance Corporate governance • Supervised the internal governance system, evaluated the corporate governance system to ensure that it fulfils its mission of promoting the corporate interest and takes into account the legitimate interests of the other stakeholders, and verified the information on corporate governance that was made public. • Analyzed new governance regulations, emerging trends and best governance practices and analyzed their implications for the Group, and reported on the adaptation of the Rules and regulations of the board and other internal regulations to the Spanish Corporate Governance Code revised in June by the CNMV. • Supervised the strategy on communication and engagement with shareholders and investors and other stakeholders, receiving information on the meetings held between them and the lead director and Shareholders and Investors Relations team, as well as on their opinion of Banco Santander and its group’s corporate governance. • Received an overview of the highlights and outcomes of the 2020 AGMs, focusing on their format as virtual (April 2020 AGM) and hybrid (in-person and virtual, October 2020 AGM) meetings due to covid-19 measures and restrictions, ensuring shareholders' rights at all stages: delegation, voting, attendance, information, participate and proposed resolutions. 219 Annual report 2020 Contents Duties Internal governance oversight Actions taken • Assessed the suitability for certain appointments and re-elections at subsidiaries subject to Grupo Santander’s appointments and suitability procedure, and checked that the composition of subsidiaries’ boards of directors was appropriate. • Checked subsidiaries’ application of the GSGM in regard to the structuring of their boards and board committees, as well as the alignment of their functions with best practices. • Issued favourable opinions on the appointment of subsidiary board members that properly represent Banco Santander with a full understanding of their functions and duties. Information for the general meeting and corporate documentation Reporting to shareholders • At our April 2020 AGM, Bruce Carnegie-Brown, as committee chairman, reported to shareholders on the matters and activities within the committee’s scope. Corporate documents for 2020 • Drafted this report on the committee’s activities in 2020, which includes an analysis of its performance and the priorities identified for 2021 following the effectiveness assessment of the board and its committees. • Revised the annual corporate governance report. 2021 priorities The committee identified the following priorities for 2021: • Continued review of succession plans, having regard to the current and future strategy of the Group and potential challenges the business may face when identifying future leadership needs and the development of internal succession. • Continue to ensure that gender and broader diversity remains a key priority in our succession planning and appointments, acknowledging that building a more diverse and inclusive workforce is a critical component to developing a sustainable and successful business. • Continue to monitor board members’ skills and experience, in particular training needs and ongoing training and development for the whole board. • Ensure that the review findings, suggested actions and the lessons learned from the external board effectiveness review are embedded and closely monitor progress against the action plan. • Keep the corporate governance framework under constant review and monitor compliance, ensuring that the interests of all stakeholders are considered. For this purpose, the committee will closely monitor the engagement with shareholders and, together with the lead independent director, will receive and embed their feedback and insights. Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see ‘Board assessment in 2020’ in section 4.3. The committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Remained focused on driving continuous corporate governance improvement across the Group, facilitated through the appointment of Luis Isasi, Sergio Rial, Gina Díez and R. Martín Chávez to the board, bolstering its skills and experience. Those appointments also enabled the refreshment of certain committees and increased the number of female board members to 40%. • Received regular updates on how the units within the group are meeting governance expectations, as well as overseeing key governance matters applicable to the entire Group. This included the review of subsidiary board composition and the adaptation to regulatory developments. • Continued its focus on effective succession planning (board members and senior managers). This included a refresh of the senior manager succession policy and a review of the succession planning methodology with an external advisor, which concluded that these activities were conducted in line with industry best practices. • Played an active role in commissioning the annual board and committee’s effectiveness review, led by an external firm. • Received information about the global knowledge and talent strategy, focused on leading the workforce transformation of Santander to ensure it is ready for the challenges of digitalization. 220 Responsible banking Corporate governance Economic and financial review Risk management and compliance The board of directors appointed the committee’s members based on their skills and expertise pertaining to matters within its purview. For more details, see 4.1 'Our directors' as well as the 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. Ignacio Benjumea and Guillermo de la Dehesa stepped down from the committee in 2020. Furthermore, Luis Isasi and R. Martín Chávez were appointed to the committee on 19 May and 27 October 2020, respectively. Time allocation In 2020, the remuneration committee held 13 meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing for, and participating in, meetings . The chart below shows the committee’s approximate time allocation to each function in 2020. 4.7 Remuneration committee activities in 2020 'During 2020, we have maintained oversight of the application and implementation of remuneration policies and frameworks for the group and have been focused on simplifying executive remuneration within the regulatory parameters that apply. This has included shaping compensation schemes consistent with the Group’s values of Simple, Personal and Fair. In addition, and in the light of the pandemic, we supported a reduction to executive and non-executive directors’ compensation to help finance contributions to a fund created to provide medical equipment and supplies to help limit the spread of the virus in the countries in which the Group operates. There have been several changes to the membership of the Committee during the year: Guillermo de la Dehesa and Ignacio Benjumea left the Committee upon their resignation from the board and Luis Isasi and R. Martín Chávez became members in May and October 2020, respectively. I would like to take this opportunity to thank Guillermo and Ignacio, on behalf of the committee, for their hard work and commitment to our discussions and to welcome Luis and Marty.' Bruce Carnegie-Brown Chairman of the remuneration committee This section is the report the remuneration committee prepared on its activities on 19 February 2021. The board of directors approved it on 22 February 2021. Composition Position Category Chairman Bruce Carnegie-Brown Independent R. Martín Chávez Independent Appointed on 12/02/2015A 27/10/2020 Members Sol Daurella Independent 23/02/2015 Henrique de Castro Independent 29/10/2019 Luis Isasi Other external 19/05/2020 Secretary Jaime Pérez Renovales A. Committee chair since 12 February 2015. 221 Governance / Others21%Remunerationof the boardmembers13%Remunerationof seniormanagementand other keyexecutives45%Remunerationschemes andpolicies21% Annual report 2020 Contents Duties and activities in 2020 This section summarises the remuneration committee’s activities in 2020. Duties Remuneration of directors and senior management Action taken Individual remuneration of directors in their capacity as such • Analyzed the individual remuneration of directors in their capacity as such, based on the positions they held on the collective decision-making body, their membership on, and attendance at, the various committees, and any other objective circumstances evaluated by the board. • Submitted a proposal to the board to reduce the board's 20% annual allotment and attendance fees cut for the balance of 2020, with effect from 1 April 2020, with a view to contributing to the financing of the fund set up to provide medical equipment and supplies to help limit the spread of the covid-19. Individual remuneration for executive directors • Proposed to the board the individual remuneration for executive directors, based on the proposal of the 50% reduction of the chairman and chief executive officer's salary and bonus. • The committee has also applied the same prudence approach in the current situation to propose that the fixed components of the remuneration be maintained for the following year. Individual variable remuneration for executive directors • Proposed to the board immediately payable and deferred amounts of variable remuneration of the preceding year. A portion of deferred variable pay is capped and contingent on executive directors' long-term objectives. In light of customer, risk, capital and earnings metrics set by the board, the proposed variable remuneration was less than in the previous year. Its value also decreased further on account of the executive chairman and chief executive officer’s waiver of half of their fixed pay and bonus for the year. • Submitted a proposal, as part of the directors´ remuneration policy for the annual performance indicators and targets used to calculate the annual variable remuneration for 2021, subject to board approval. In addition, it also proposed the achievement scales for annual and multi-year performance targets and their associated weightings. • Informed favourably the board and submitted a proposal regarding the executive chairman and the chief executive officer's contracts which have been updated to ensure they are aligned with the recommended limitations, payments arising from the termination of its contracts (including the unconsolidated amounts of long-term savings systems and those received for non-compete commitments). This was to fully comply with new recommendation 64 of the revised Spanish Corporate Governance Code. By virtue of these amendments, pre-retirement in these contracts will disappear. Share plans • Submitted a proposal to the board, for subsequent vote at the April 2020 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; a plan for employees of Santander UK Group Holdings plc and other Group companies in the UK). • Analyzed and submitted to the board a proposal for the Digital Transformation Award, which was designed and implemented to provide the Group with a tool to attract and retain key talent to drive long-term share value creation through the achievement of key digital milestones. • Authorised to increase the mandatory share holding period for executive directors from one to three years to fully comply with new recommendation 62 of the revised Spanish Corporate Governance Code, while this retention period only applies as long as they do not hold shares equivalent to two years of fixed salary, this is imperative in accordance with Group's policy. This new period will be included in the 2020 directors’ remuneration annual report and also included in the Group's new Policy on directors’ remuneration in 2021, 2022 and 2023 submitted to shareholders for a binding vote. • Drafted and proposed to the board the annual directors' remuneration report for it to be put to a non-binding vote at the April 2020 AGM. • Assisted the board of directors in monitoring compliance with the director remuneration policy. • Received information from the lead independent director about contact with key shareholders and proxy advisers on executive director remuneration issues. • Held a joint session with the risk supervision, regulation and compliance committee to verify that remuneration schemes factor in risk, capital and liquidity, and do not offer incentives to assume risk that exceeds the level tolerated by Banco Santander, therefore promoting and being compatible with adequate and effective risk management. Propose the annual directors' remuneration report to the board 222 Responsible banking Corporate governance Economic and financial review Risk management and compliance Remuneration policy for senior management and other key executives • Encouraged on simplify the executive remuneration by configuring compensation plans in line with our values of Simple, Personal and Fair. • Submitted to the board for approval proposals for the determination or modification of fixed and variable annual remuneration of certain members of senior management, in accordance with Group policies and applicable regulations. • Determined the global annual variable remuneration for 2019 -payable immediately- and the deferred remuneration of the main executive segments, in line with the achievement of the quantitative and qualitative targets set, for this purpose, a joint meeting was held with the risk supervision, regulation and compliance committee to ensure that the management of the various risks is adequately considered. In addition, proposed to the board the remuneration of senior management, based on their individual achievement of the annual performance targets and their weightings outlined by the board and. in particular, determined the variable remuneration of (i) the CAE, once the audit committee assessed its performance and communicated its conclusions to that effect to it; and (ii) the chief risk officer (CRO) and the chief compliance officer (CCO), after assessing their performance at the joint meeting with the risk supervision, regulation and compliance committee. • Analysed and discussed the Group's general remuneration policy, including that of senior manager, presented by the Compensation function on the basis of applicable legal or regulatory requirements, recommendations from regulators and the inputs received from stakeholders, providing their comments on the matter for consideration when it is updated. • Proposed to the board the annual performance indicators used for the calculation of variable remuneration for 2021 to be approved by the board, with the aim of simplifying to the extent possible the bonus pool scorecard. • Established, 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 significant impact on the Group’s risk profile (Identified Staff) Remuneration for other executives who are Identified Staff but not senior management • Reviewed the fixed and variable remuneration ratios for control functions to ensure alignment with regulation and overall consistency with their control objectives. • Set key remuneration elements for Identified Staff. • Reviewed and updated the composition of Identified Staff to recognize employees who qualify for inclusion in Assist the board of directors in supervising compliance with remuneration policies Gender pay Internal governance Governance this category. • Submitted a proposal to the board, for subsequent submission to the 2020 AGM, regarding the approval for maximum variable remuneration of up to 200% of the fixed component for group employees whose activities have a material impact on the Banco Santander or Group’s risk profile, this includes executive directors. • Reviewed certain compensation schemes to support the attraction and retention of key talent to help drive digitalization, as well as the application of different incentives implemented across the Group, and the level of achievement of the long term metrics associated with past deferred remuneration. • Reviewed director remuneration programmes to align with the Group’s results, culture and risk appetite; and that no incentives are offered to assume risk above the tolerated level by the Banco Santander, therefore promoting effective risk management. • Reported to the board on an external adviser’s remuneration policy assessment in view of Act 10/2014, which dictates that a credit institution’s remuneration policy will be subject, at least once a year, to an independent internal review to confirm compliance with remuneration guidelines and procedures adopted by the board of directors. • Continued the implementation of the diversity and inclusion strategy on remuneration, including progress against gender targets to support reducing the gender pay gap. Reviewed gender and equal pay data within the Group, comparing year-on-year data and against the set targets, promoting measures to improve them. The gender pay gap (average pay comparison between men and women) and the equal pay gap (comparison of pay for the same job, level, and/or area: 'equal pay for equal work'), remain key areas of focus within the Group's strategy. See section 'A talented and engaged team' in the 'Responsible banking' chapter, for additional information. • Supervised the alignment of the Group's companies with Banco Santander's commitment during the covid-19 in remuneration practises and in remuneration on local boards reduction. • Assessed the impact of compensation regulation changes, in particular, the definition, impact and expected timeline of the European Union agreement to revise executive remuneration rules (compensation chapter of Capital Requirement Directive “CRD V”, updating "CRD IV"). Information for the general shareholders' meeting and corporate documentation Reporting to shareholders • At our April 2020 AGM, Bruce Carnegie-Brown acting as the committee’s chair, reported to the shareholders on the matters and activities within the purview of the committee during 2019. Corporate documents for 2020 • Drafted this report on the committee’s activities in 2020, which includes an analysis of its performance and the priorities identified for 2021 following the effectiveness assessment of the board and its committees. 223 Annual report 2020 Contents Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see 'Board assessment in 2020’ in section 4.3. The committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Remained focused on leading remuneration practices and how these were applied across the Group. This included compensation schemes that support the attraction and retention of critical skillsets needed to drive Santander’s strategy, as well as simplifying executive remuneration to ensure that structures were Simple, Personal and Fair, and consider ESG factors. Insights provided by the lead independent director about his contact with key shareholders and proxy advisors on remuneration aided the committee’s work in this regard. • Supported executive and non-executive director pay cuts to contribute to the fight against the covid-19. This also led to certain subsidiaries reducing board fees in light of Banco Santander’s commitment during the pandemic. • Addressed the importance of the gender pay gap and equal pay by overseeing the implementation of the diversity and inclusion strategy on remuneration, including progress against gender targets. Based on its analysis and supervision of the remuneration policy, the remuneration committee believes that the director remuneration policy for 2021, 2022 and 2023 (found in section 6.4 below) conforms to the principles of Banco Santander’s remuneration policy and the remuneration system set out in the Bylaws. This policy now considers, among others, the simplification of the executive framework, by reducing the number of metrics used in the pool calculation from 7 to 4 (NPS, CET1, ROTE and Cost of Credit), combining simplicity with the acknowledgment of the most relevant aspects for clients, results, financial strength and the appropriate management of the risk of the entity, as well as compliance with ESG goals. 2021 priorities The committee identified the following priorities for 2021: • Keep incentive measures under continuous review to ensure they continue to align with our strategic aims and drive the right culture and behaviours; balancing the needs of our people, customers, communities, shareholders and regulators. • Continue to enhance our employee value proposition with a view to attracting and retaining key talent for the Group. • Ongoing constant coordination with the remuneration committees of the Group subsidiaries: monitoring the implementation and application of the corporate policies regarding remuneration to ensure a consistent approach in this respect. The director remuneration policy report • Manage and improve pay equality across the Group. Pursuant to section 2 of article 529 novodecies of the Spanish Companies Act, the remuneration committee issues this report in respect of the proposed director remuneration policy for 2021, 2022 and 2023. It will be submitted by the board of directors at the next 2021 AGM as a separate item on the agenda and is an integral part of this report. See section 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. This remuneration policy is prepared by the Compensation function of Banco Santander with the input received during the year from the remunerations committee and the board of directors on the matters covered by it. Each January a first draft of this policy is submitted to the remuneration committee for analysis and discussion. This meeting considers the inputs received, through its chairman and lead director, from shareholders and other stakeholders in the dialogue held with them during the year, in order to obtain their opinion on our corporate governance and, in particular, our remuneration structures. Regulatory recommendations and legal or regulatory requirements that may have been established since the last time the director remuneration policy was submitted for approval by the annual general meeting are also taken into account. In addition, the committee oversees that the policy is aligned with the Group's culture and values in accordance with our Simple, Personal and Fair values. After that, the Compensation function prepares the final draft policy for its final report by the remuneration committee and approval by the board of directors in February. 224 Responsible banking Corporate governance Economic and financial review Risk management and compliance 4.8 Risk supervision, regulation and compliance committee activities in 2020 'During 2020, the committee has supported and advised the board of directors in defining and assessing risk policies affecting the Group and in determining the current and future risk appetite and the strategy and culture in this area, the identification of the various types of financial and non-financial risk, and the measures planned to mitigate the impact of identified risks in the event that they materialise. This year, the committee has been deeply involved in the monitoring of the actions and risks derived from the covid-19 situation and has received updates in this regard. The committee has continued discharging its core role as set out in the Rules and regulations of the board, focused not only on the day to day risks, but also on the more strategic non- traditional risks whilst doing so in full coordination with the board and its committees. In this regard, the committee held a strategic session in October 2020, fully focused on strategic risks, supported by external speakers. This approach will continue in 2021. There have been two changes to the membership of the committee during the year: Luis Isasi and R. Martin Chávez joined the committee in May 2020 and October 2020 respectively, acknowledging the fact that Ignacio Benjumea and Esther Giménez- Salinas left the committee upon their resignation from the board. I would like to take this opportunity to thank Ignacio and Esther, on behalf of the committee, for their hard work and contribution and to welcome Luis and R. Martin, who bring a diverse range of skills and experience to the committee.' Álvaro Cardoso de Souza Chairman of the risk supervision, regulation and compliance committee This section is the report on the activities of the risk supervision, regulation and compliance committee. It was prepared by the committee on 19 February 2021 and approved by the board of directors on 22 February 2021. Composition Position Category Chairman Álvaro Cardoso Independent R. Martín Chávez Independent Appointed on 23/04/2018A 27/10/2020 Members Luis Isasi Other external 19/05/2020 Ramiro Mato Independent 28/11/2017 Belén Romana Independent 28/10/2016 Secretary Jaime Pérez Renovales A. Committee chair since 1 October 2020. The board of directors appointed the committee's members based on their skills and expertise pertaining to matters within its purview. Further information can be found in section 4.1 'Our directors' and 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. In 2020 Ignacio Benjumea and Esther Giménez-Salinas stepped down from the committee. Luis Isasi and R. Martín Chávez became members on May and October 2020, respectively, to fill their vacancies. Time allocation In 2020, the committee held 13 meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing and participating in meetings. The chart below shows the committee’s approximate time allocation to each function in 2020A. A. All topics about regulatory and supervisory relations discussed in 2020 are included in each task provided in the chart. 225 Capital& Liquidity9%Complianceand Conduct21%Governance4%Risk66% Annual report 2020 Contents Duties and activities in 2020 This section summarizes the risk supervision, regulation and compliance committee’s activities in 2020. Duties Risk Assist the board in (i) defining the Group’s risk policies, (ii) determining the risk appetite strategy and culture and (iii) supervising their alignment with the Group’s corporate values Covid-19 Risk management and control Actions taken • Carried out an overview of the Group's risks, conducted specific analyses by unit and risk type and assessed proposals, issues and projects relating to risk management and control. The Group's main subsidiaries and businesses presented an update on their risks to this committee. • Submitted to the board the approval of the risk appetite statement, including proposals for new metrics. Carried out quarterly reviews on compliance with the risk appetite limits. • Coordinated with the responsible banking, sustainability and culture committee the supervision and evaluation of the alignment of risk appetite and limits with corporate culture and values. • Received information on the proper management and control of risks within the Santander Group , particularly the risk profile assessment (RPA) and the risk control self-assessment (RCSA), two of the main tools for controlling these risks. As part of the overall risk strategy, the RPA continued to evolve with a focus on the control environment component, mainly in non-financial risks. The RCSA discussion provided an overview of the main risks identified for the Group and reported on the progress and next steps of the integration between RCSA, control certification and other risk assessments. • Oversaw the update of our social and environmental policies (in coordination with the responsible banking, sustainability and culture committee), which set out the financing criteria and prohibited actions in specific sectors such as energy, mining and soft commodities. • Monitored, in full coordination with the innovation and technology committee, risks stemming from technological obsolescence and cybersecurity, including data leakage, incident and vulnerability detection, patch management, network security and access control, amongst others. Received reports on major IT developments and projects. • Supervised the risks associated with the main corporate transformation programs analysed by Banco Santander and the measures proposed to mitigate them. In particular, it monitored the risks associated with PagoNxt (the new payments platform of Banco Santander), One FCC (the strategic project to address FCC risk) and our enhanced internal model risk management. • Reviewed the 2020 recovery plan, assessed the group's resilience in severe stress scenarios and submitted it to the board of directors for approval. • Reviewed the risks associated with the 5-year strategic plan, S25 (until 2025) and the 3-year strategic financial plan, P-23 (from 2021 to 2023), which analyses the Group’s priorities and projects and quantifies a financial plan for the next three years. It also reviewed the alignment of these plans with the Group's risk appetite. • Reviewed the macroeconomic landscape and the impact on 2020 provisions due to covid-19. • Received regular updates on the most affected portfolios and those under moratoria programmes and holiday payments across the different subsidiaries. Oversaw the monitoring carried out to proactively identify customers with credit issues in the areas of recoveries and collections, ensuring that prudent practices were in place to mitigate compliance and conduct and reputational risks associated to recoveries whilst providing support to our clients. • Received regular updates on the top risks being managed and the adequacy of mitigating controls. • Analysed the emerging risks and how they affect to the different geographies and risk areas. Held a strategic session attended by the chair of the responsible banking, sustainability and culture committee to discuss Banco Santander' top emerging risks with deep dives into climate change and demographics. • Received, along with other board members, a specific training session on climate change which contributed to the committee's work in this regard in full coordination with the responsible banking, sustainability and culture committee. • Supported the board in conducting stress tests of Banco Santander. It assessed the scenarios and assumptions to be used in such test, analyzing the results and the measures proposed by the Risk function. Ensured that Banco Santander' stress test programme aligned with EBA Guidelines 2018/04. • Special focus continued on non-performing loans and non-performing assets. • Received periodic information about market and structural risk of Banco Santander and reviewed counterparty risk. • Monitored non-financial risks, including legal, vendor and climate-related risks, which remained key areas of focus. • Continuously examined the Brexit situation, including its impact on risk to Santander UK and the Group and our preparedness to reduce and mitigate such risks. Supervise the Risk function • Ensured the independence and effectiveness of the Risk function and that sufficient human resources were duly provided. • Assessed the Risk function and the performance of the CRO in joint session with the remuneration committee, to inform the board in order to establish his variable pay. • Reviewed new appointments to key positions in the Santander Group' Risk function. 226 Responsible banking Corporate governance Economic and financial review Risk management and compliance Duties Collaboration to establish rational remuneration policies and practices Capital and liquidity Assist the board in approving capital and liquidity strategies and supervising their implementation Compliance and conduct Supervise the Compliance and Conduct function Actions taken • Held a joint session with the remuneration committee to confirm that remuneration schemes factor in risk, capital, and liquidity and that offered no incentives to assume risks above the level tolerated by Banco Santander in line with adequate and effective risk management. • Analyzed with the remuneration committee the factors used to determine the ex-ante risk adjustment of total variable pay assigned to the units based on how previously assessed risks materialised. • Revised the 2020 bonus pool and results of the annual exercise to identify employees whose work had a material impact on the group’s risk profile. • Reviewed the internal capital adequacy assessment process (ICAAP) prepared by the finance department and reviewed by the risk function, in accordance with industry best practices and supervisory guidelines, and submitted it to the board for approval. Moreover, reviewed a capital plan based on the scenarios envisaged over a three-year period. • Endorsed the Pillar III disclosures report, which was submitted to, and finally approved by, the board. The report describes various aspects of the Group’s capital and risk management and provides an overview of the function, base capital and prescribed capital requirements, policies for managing the risks undertaken by Banco Santander from a capital consumption standpoint, the composition of the Group’s portfolio and its credit quality, measured in terms of capital, and the roll-out of advanced internal models. • Reviewed the internal liquidity adequacy assessment process (ILAAP) and assessed the liquidity plan in view of the Group’s business model, and submitted it to the board for approval. • Continuously monitored capital levels and capital management, including the 2020 securitizations plan. • Reviewed and approved the 2020 Compliance program (Group and local units) and new SCIB Compliance and Conduct operating model. • Acknowledged, challenged and endorsed the new Compliance and Conduct strategy (One Compliance). • Endorsed the appointment of the Group's new CCOs (among others, the new CCO of the project One Santander in Europe) prior to its final submission to and approval by the nomination committee. • Received monthly reports on conduct and compliance matters as part of the risk and compliance monthly report, covering regulatory issues, product governance and consumer protection, reputational risk, internal and external events, notifications and inspections by supervisors, covid-19 updates, among others. • Assessed the Compliance and Conduct function (including its staffing and resourcing suitability) as well as the Group chief compliance officer’s performance in a joint session with the remuneration committee, with the purpose of informing the board to set her variable pay. Regulatory compliance • Monitored compliance with regulatory requirements regarding: • The Dodd Frank Title VII update. • Adaptation to the Volcker Rule compliance programme in line with recent amendments, continuing the oversight of this regulation in 2020. Regulatory compliance - Supervise the whistleblower channel (Canal Abierto) • Received an annual update on the Canal Abierto (the model of whistleblowing channel in Grupo Santander) and was informed of its changes, aimed at permitting the communication of irregularities not only by employees but also by other persons related to Banco Santander, such as directors, shareholders, suppliers, contractors and subcontractors, guaranteeing confidentiality and allowing for anonymous communications. • Helped to ensure that the Group’s culture is embedded through increasing awareness on the importance of Financial crime compliance (FCC) Product governance and consumer protection Speaking Up. • Reviewed the measures taken in the different countries on the back of incidents reported through whistleblowing channels, in particular in relation to breaches of regulatory requirements, codes of conduct and implementing regulations as well as breaches of corporate values and irregularities of potential significance of any nature, other than whose power is attributed to the audit committee. • Oversaw the Group’s observance with FCC regulations as well as the activities carried out by the function. In particular: • Received an overview of its strategy, including the Group' priorities and associated peer benchmarking. • Received monthly updates on the most relevant FCC risks and other matters relevant to its four main pillars of the function (Governance, Know Your Customer, Transaction Monitoring and Sanctions). • Obtained monthly quantitative information on risk appetite metrics and other indicators considered critical to its performance, being aware of the indicators that were in excess of the proposed thresholds and the corresponding action plans. • Received the recommendations and observations stemming from the annual independent expert report about Banco Santander in accordance with the Spanish Law 10/2010 and Royal Decree 304/2014 (on anti- money laundering and terrorism financing). • Held on a bi-annual basis specific sessions on the status of the FCC function. • Received an update on the status of customer complaints in 24 countries and 9 SCIB branches, as well as on the associated action plans to address deficiencies and mitigate detriment to customers. • In a joint session with the remuneration committee, learned about the progress of the local action plans regarding internal sales force remuneration and received an overview of the assessment on the external sales force regarding its potential conduct risk impact. • Received information on the main risks identified, concerns, priorities, actions taken by the product governance and consumer protection unit to mitigate conduct risks with retail customers, including product governance activity and monitoring. 227 Annual report 2020 Contents Duties Governance Corporate governance and internal governance Regulators and supervisors Regulatory and supervisory relations Actions taken • Received quarterly updates from the chairman of the responsible banking, sustainability and culture committee on the matters discussed by such committee. • Worked alongside the audit committee, with which it held a joint meeting to share information on common issues, including the Group's risk management, risk model, complaints submitted to Canal Abierto, vendor risk management, legal risk, and internal auditing in the Risk and Compliance division. • Received regular updates on regulatory and supervisory relations and maintained focus on the most relevant developments related to the SSM, the Single Resolution Board (SRB), the supervisors of all the Group’s subsidiaries and the Supervisory Review and Evaluation Process (SREP). Information for the general shareholders' meeting and corporate documentation Corporate documents for 2020 • Drafted the report on its activities in 2020, which includes an analysis of its performance and the priorities identified for 2021 following the assessment of the board and its committees. Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see ‘Board assessment in 2020’ in section 4.3. In 2020, the committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Monitored the Group’s risks and risk indicators, especially relevant to monitor the impacts of the pandemic, and ensured that risk profiles remained within the risk appetite limits set by the board. In particular, it devoted additional efforts to the analysis of the potential risks derived from the macro-economic situation in the different geographies where the Group operates, backed up by regular country reporting on key risks relevant to their jurisdiction. • Focused on the analysis of Banco Santander's emerging risks and held a strategic session (attended by external speakers) to review top strategic risks. • Coordinated with other board committees, to ensure full alignment and to share matters of mutual interest. • Ensured that the Risk and Compliance and conduct functions remained effective and appropriately resourced. 2021 Priorities The committee has identified the following priorities for 2021: • Continuing focus on Group’s top risks, early warning indicators, impacts and mitigation actions in order to assure that risks are appropriately managed with risks profiles remaining within the risk appetite limits approved by the board. • Remaining alert to emerging and non-traditional risks to enable key strategic changes in the business environment to be anticipated. These risks will be discussed at at least one strategic meeting of the committee in 2021. • Proactively support economic recovery after the covid-19 crisis, in particular by overseeing the Group's credit-related policies to help our customers and foster their economic resilience during the crisis, while maintaining the strength of Banco Santander’s capital and liquidity. • Ongoing focus on the main business units, geographies and new businesses (including new digital platforms), with an additional focus on emerging business strategically relevant for the Group. • Continuing close coordination with other board committees to ensure they are all aware of and leverage areas of mutual interest. • Continuing working on the committee’s effectiveness to make sure that its role is discharged in the most tangible and effective manner, following the recommendations of the institutional effectiveness assessment. 228 Responsible banking Corporate governance Economic and financial review Risk management and compliance This section is the report on the activities of the responsible banking, sustainability and culture committee. It was prepared by the committee on 16 February 2021 and approved by the board on 22 February 2021. Composition Position Category Chairman Ramiro Mato Independent Appointed on A 01/07/2018 Homaira Akbari Independent 01/07/2018 Members Álvaro Cardoso Independent 24/07/2018 Sol Daurella Independent 01/01/2018 Belén Romana Independent 01/07/2018 Secretary Jaime Pérez Renovales A. Committee chair since 1 July 2018. The board of directors appointed the committee’s members based on their skills and expertise pertaining to matters within its purview. Further information can be found in section 4.1 'Our directors' and 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. Ignacio Benjumea and Esther Giménez-Salinas stepped down from the committee in 2020. Furthermore, Ana Botín stepped down from the committee in December 2020, in line with best corporate governance practices, which recommend that the committee is made up solely of non-executive directors. Time allocation In 2020, the responsible banking, sustainability and culture committee held four meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing for, and participating in, meetings. The chart below shows the committee’s approximate time allocation to each ESG criteria in 2020. 4.9 Responsible banking, sustainability and culture committee activities in 2020 'During 2020, the committee has continued assisting the board of directors in fulfilling its oversight responsibilities with respect to the responsible business strategy and sustainability issues. The committee has had a special focus this year on the sustainable finance and green agenda across the main regions and businesses of the Group, climate change strategy, culture (maintaining our commitment on our Simple, Personal and Fair way of doing business), proactively being part of the solution and monitoring responsible business practices in relation to the covid-19 pandemic (including, among others, the interaction with customers, monitoring the practices associated with the government programs and recoveries and collection activities, as well as with other different stakeholders, such as investors, vendors, shareholders, employees, and the public opinion in general). The committee has continued its coordination activities, not only with the board of directors, but also with the main committees such as the risk supervision, regulation and compliance committee, remuneration committee, audit committee and nomination committee. During 2020, Ignacio Benjumea and Esther Giménez- Salinas left the committee upon their resignation from the board. I would like to take this opportunity to thank Ignacio and Esther, on behalf of the committee, for their contributions. Finally, the executive chairman has left the membership of the committee due to the adaptation of the Rules and regulations of the board to fully comply with the revised Spanish Corporate Governance Code, which recommends that the committee shall be composed solely of non-executive directors. I would like to take this opportunity to also thank Ana Botín for her invaluable contribution as a member of this committee'. Ramiro Mato Chairman of the responsible banking, sustainability and culture committee 229 Governance (G)43%Environmental (E)33%Social (S)24% Annual report 2020 Contents Duties and activities in 2020 This section summarizes the responsible banking, sustainability and culture committee’s activities in 2020 based on ESG criteria. Duties Environmental (E) Sustainable banking Environmental and climate change Actions taken • Engaged on the group’s climate change strategy, as well as on the plan and associated actions, in line with our external commitments, and provided feedback to members of the senior management and the board of directors. • Reviewed climate-related risks and opportunities and analyzed new climate change regulations • Reviewed and discussed the materiality assessment identifying sector exposures to potential climate transition and physical risks and reviewed roadmap to embed climate in banking processes. • The chair engaged in the annual strategy session of the risk supervision, regulation and compliance committee on, among other issues, climate change in which the latest developments of the industry, regulators and in the Group were discussed. • Received, along with other board members, a training session on climate change covering the latest industry developments and our group’s strategy, climate-related business risks and opportunities, commitments related to climate change, next steps to fulfil the United Nations Collective Commitment to Climate Action supporting the transition to a net zero economy. Sustainable finance • Reviewed sustainable finance, which refers to that of activities that have a positive impact on the environment including climate finance which includes that of assets or technologies that entail a reduction in CO2 emissions (e.g. renewable energy, refurbishment to increase energy efficiency, clean technologies and CO2 capture and storage). • Reviewed Banco Santander´s current sustainable finance proposal and the opportunities identified to present a vision across the Group, after working with countries, global businesses and corporate areas. • Reviewed the proposal of the new global sustainable framework to issue green, social and sustainable bonds, the rationale for issuing them and the key features of the same. • Reviewed and discussed (i) the direct environmental impact of the group’s operations and the implementation status of its new energy efficiency and sustainability plan to reduce the carbon footprint; and (ii) the proposed new initiatives. • Reviewed the 2020 emissions’ offsetting corporate plan, which will allow the Group to fulfil the goal of becoming a carbon-neutral organization, in regards to its own operations. Santander environmental footprint Social (S) Inclusive banking Sustainable finance and financial inclusion • Reviewed strategies and plans on responsible banking with a focus on sustainable finance (including financial inclusion) for the regions of North and South America, and the global businesses of SCF, WM&I and SCIB. Support for higher education • Reviewed the current and future contribution to the group’s responsible banking strategy of Santander Universidades, which is one of its key strategic components along with sustainable finance and financial inclusion. Governance (G) Responsible banking strategy Policies • Monitored, supervised and evaluated the policies on responsible business and sustainability and, in particular, on environmental and social matters with the purpose of fulfilling their mission of promoting corporate interest and taking into account, as appropriate, the legitimate interests of the other stakeholders. • Participated, together with the risk supervision, regulation and compliance committee in the update of the environmental and social risk management policy, evaluating and making proposals to the board as to advisable changes. This policy establishes how the environmental and social risks are identified in the oil and gas, energy, mining and metals and in soft commodities sectors. • Coordinated with the other committees on issues relating to culture and values, responsible banking practices and sustainability in order to ensure that adequate and effective control processes were in place and that risks and opportunities relating to sustainability and responsibility were identified and managed in accordance with the responsible banking principles approved by the board. • Received regular updates from corporate functions, global businesses and regional units of the different initiatives to drive the responsible banking agenda, enhancing communication and sharing best practices and concerns. • The chair maintained close communication with the chair of the risk supervision, regulation and compliance committee and the members of both committees had access to the materials presented to each, as well as to regular reports of both committees to the board of directors to obtain a global overview of key risks and opportunities relating to responsible banking matters. An example of this collaboration has been the participation of committee members and the representatives of the responsible banking function in the annual strategy session of the risk supervision, regulation and compliance committee, to review the potential risks and opportunities of climate change. Governance 230 Responsible banking Corporate governance Economic and financial review Risk management and compliance Duties Responsible banking initiatives and challenges Commitment to sustainability goals Culture and values Culture Actions taken • Reviewed the responsible banking approach in response to key stakeholders (customers, suppliers and communities) in the context of covid-19 and challenges ahead and discussed the alignment of Banco Santander’s activities and priorities with the expectations of society and how Banco Santander can help rebuild a more resilient and inclusive economy moving forward. • Received reports from the compliance and conduct function regarding its oversight of potential reputational impacts arising from environmental and social matters. In particular, the status of the emerging conduct and reputational risks due to covid-19 were considered, as well as the level of implementation of corporate recommendations related to conduct with customers and other initiatives impacting the perception of other stakeholders (shareholders, regulators, employees and communities). • Received reports on initiatives for facing the challenges relating to the new banking environment and inclusive and sustainable growth. • Reviewed metrics and targets, the progress made on priorities, the agenda and proposed commitments relating to responsible banking and the disclosure of such information to the public. • Assisted the board in making sure responsible banking targets, metrics and commitments were embedded across the Group and measured effectively. • Received reports on the progress made on the implementation plans relating to responsible banking priorities approved for 2020 and the priorities defined with local units for 2020 to 2022. • Discussed and validated the scorecard to be proposed to the remuneration committee and the board with specific metrics of responsible banking, which have been taken into account to make specific qualitative adjustments on the quantitative variables of the 2020 bonus pool. • Monitored public commitments relating to sustainability goals, including climate change objectives for 2021-2025, in order to adapt to the new business environment and support inclusive and sustainable growth. • Coordinated with the remuneration committee in its review of the alignment of remuneration schemes with corporate culture and values. • Coordinated, through its chairman and other committee members, with the risk supervision, regulation and compliance committee in the supervision and evaluation of (i) the alignment of risk appetite and limits with corporate culture and values; and (ii) the non-financial risks. • Reviewed The Santander Way, which is our global culture approved by the board in January 2015, aligned with the group’s strategy and complementing Santander's ambition to build a more responsible banking. Since 2015, a common language and behaviour has resulted in our values Simple, Personal and Fair ( Simple, Personal and Fair (SPF) permeating all units. Our corporate policy is an important factor in developing coherent initiatives and enabling us to measure our values SPF progress and impact through a strengthened group culture governance, centralized culture coordination within the responsible banking unit and improved measurement. Significant progress continues both globally and locally, resulting in positive tangible results for our people, customers, shareholders and communities. • Assisted the board in promoting and embedding corporate culture and values across the Group, monitoring its level of adherence and ensuring that the corporate culture is aligned with the purpose and values of the Group. SPF with employees • Engaged on the global 2020 diversity and inclusion strategy and the actions proposed to drive continued improvement in this regard; and drove actions associated with the inclusion of individuals with disabilities in order to progress towards 2025 targets. Diversity and inclusion are key elements of the entire corporate strategy that affects Santander’s relationship with all its stakeholders. • Updated on The Santander Way, which contained Santander´s public commitments to build a more responsible bank. Our activities and investments help us address a number of the United Nations' Sustainable Development Goals and support the Paris Agreement’s objective of combatting climate change and adapting to its effects. • Reviewed and discussed the evolution of the former whistleblowing channel to the Canal Abierto model as a means of boosting the group´s cultural transformation, promoting an environment in which our employees feel free to speak up without fear. The Canal Abierto was launched in 2019 within the Top 10 subsidiaries of the group and there are currently anonymous channels available in most of the group’s units. SPF with customers • Engaged on the group’s ten consumer protection principles for promoting our values SPF with customers, as well as the methodology used to measure them and standards for engaging vulnerable customers. • Reviewed responsible business practices towards customers, which was a priority of the responsible banking agenda for 2020. The aim of contributing to an increased in customer satisfaction and support loyalty was discussed in connection with two key levers: (i) increasing standards of remuneration practices and awareness across first and second lines of defence; and (ii) training our sales force. The committee reviewed the implementation status of the action plans associated with these two levers. • Reviewed the status of the reputational risks due to covid-19. SPF with suppliers • Reviewed details of a pilot program during 2020 to introduce further ESG criteria within our processes of supplier certification and offer review and contracting. The results of the pilot program will be used to assess the risk appetite in connection with introducing greater ESG criteria within our supply chain management in the future. SPF with general society • Reviewed progress of responsible banking and non-financial information communications and marketing. 231 Annual report 2020 Contents Duties Stakeholders engagement Non-financial information Indexes and ratings Shareholders and other stakeholders Actions taken • Coordinated with the audit committee in its supervision and evaluation of the process of preparing and presenting the non-financial information, in accordance with the applicable regulations and leading international standards. • Reviewed the 2020 Group’s statement of non-financial information, including the independent expert’s report, which are set out in the ‘Responsible banking’ chapter of this annual report. • Analyzed global and national awards, rankings and indexes relating to sustainability. • Reviewed the reports of the relevant ESG analysts and its ratings and indexes, our position within them compared to our peers, and discussed our action plan to maintain our position in selected ESG ratings and indexes. • Reviewed key metrics. • Supervised and monitored corporate reputation and engagement with stakeholders, and helped measure related initiatives. • Worked with the nomination committee in the supervision and evaluation of the communication and engagement with shareholders and other stakeholders, ensuring the dissemination and the quality of the information available to them. Information for the general shareholders' meeting and corporate documentation Corporate documents for 2020 • Drafted this report on the committee’s activities in 2020, which includes an analysis of its performance and the priorities identified for 2021 following the effectiveness assessment of the board and its committees. Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see ‘Board assessment in 2020’ in section 4.3. The committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Continued to focus on embedding the responsible banking agenda throughout the Group, with emphasis on sustainable financing and inclusive banking; monitored the risks and opportunities of climate change, further integrating them into Banco Santander’s strategy and governance through feedback to senior managers and the board; and collaborated on the review of Banco Santander’s commitments regarding coal power generation. • Closely followed issues related to Banco Santander's reputation through the risk, compliance and conduct and communication functions. In particular, the potential impacts of the pandemic on vulnerable customers, together with how Banco Santander committed to be part of the solution as a responsible bank, attracted the attention of the committee. • Continued to coordinate with other committees, such as the remuneration committee on the alignment of remuneration schemes with our corporate culture and values. 2021 Priorities The committee identified the following priorities for 2021: • Assisting the board in setting our climate change strategy, managing the risks this entails and harnessing opportunities and developing sustainable finance proposals towards a lower carbon economy. • Monitoring responses to the covid-19 crisis, including the status of payment holidays upon expiry, vulnerable customers and the recovery and collection functions, to ensure responsible banking practices are embedded in our customer-centric strategy. • Monitoring proposed initiatives, targets and metrics to achieve the commitments on diversity and inclusion, financial inclusion, talent management and ethical behaviour. • Promoting diversity and inclusion and overseeing how our culture, including SPF values, are embedded in the Group. • Promoting the communication of progress and achievements of the Group to further develop Santander´s reputation as one of the world’s most sustainable banks. 232 Responsible banking Corporate governance Economic and financial review Risk management and compliance The board of directors appointed the committee’s members based on their skills and expertise pertaining to matters within its purview. Further information can be found in section 4.1 'Our directors' and 'Board skills and diversity matrix' and 'Committees skills and diversity matrix' in section 4.2. Ignacio Benjumea and Guillermo de la Dehesa stepped down from the committee in 2020. R. Martín Chávez became a member of the committee on 27 October 2020, and chairs the committee since 22 December 2020. Time allocation In 2020, the innovation and technology committee held four meetings. 'Board and committee attendance' in section 4.3 provides information on committee members’ attendance and the estimated average time they spent on preparing for, and participating in, meetings. The chart below shows the committee’s approximate time allocation to each function in 2020. 4.10 Innovation and technology committee activities in 2020 'Through 2020, the committee has reviewed the IT strategy (based on the pillars of agile, cloud, core system evolution, deep technology skills –e.g. API and artificial intelligence– and data) and its execution progress towards the ambition of becoming the leading global financial services open platform. Additionally, the committee received periodic progress updates on group digital priorities and cybersecurity. Given the additional risks of the pandemic, those reviews acquired additional relevance in 2020. There have been some changes to the membership of the committee during the year: Guillermo de la Dehesa and Ignacio Benjumea left the committee upon their resignation from the board and I became board member and the chair of this committee in October and December, respectively, replacing Ana Botín who remains a member of this committee. I would like to take this opportunity to thank Ignacio, Guillermo and Ana, on behalf of the committee, for their contributions'. R. Martín Chávez Chairman of the innovation and technology committee This section is the report on the activities of the innovation and technology committee. It was prepared by the committee on 27 January 2021 and approved by the board of directors on 22 February 2021. Composition Position Category Chairman R. Martín Chávez Independent Appointed on A 27/10/2020 Ana Botín Executive 23/04/2007 Homaira Akbari Independent 27/09/2016 Members José Antonio Álvarez Executive 23/02/2015 Bruce Carnegie-Brown Independent 23/02/2015 Henrique de Castro Independent 23/07/2019 Belén Romana Independent 19/12/2017 Secretary Jaime Pérez Renovales A. Committee chair since 22 December 2020. 233 Digital &innovation27%Cybersecurity9%Technology (incl.operations)46%Datamanagement12%Others6% Annual report 2020 Contents Duties and activities in 2020 This section summarizes the innovation and technology committee’s activities in 2020. Duties Innovation Innovation Cybersecurity Cybersecurity Digital Digital Technology and operations Technology and operations Data management Data management Actions taken • Oversaw the implementation of the group’s innovation agenda, reported to the board on plans and activities relating to innovation and identified major challenges and capabilities relating to innovation. • Identified opportunities to accelerate innovation and increase the rate of success of new business models, technologies, systems and platforms in the Group, for which the strategy for the creation of PagoNxt was reviewed. • Identified other group initiatives to accelerate digital transformation, such as coaching programs, greater links with start-ups, innovation labs and the creation of a testing environment for new projects (sandbox). • Built up mechanisms to combat increasing threats, such as controls and automated security. • Analyzed the main data loss incidents in other major entities. • Supervised the group’s cybersecurity threat level and global cybersecurity transformation plan for 2020. • Monitored together with the board of directors and the risk supervision, regulation and compliance committee the group’s cybersecurity risks (internal data leakage and potential external threats, e.g. ransomware and third party management of customer data), IT strategy (the evolution of the core banking system) and the situation of the compliance systems for financial crime prevention. • Reviewed the implementation of the Group’s global cybersecurity plan, in addition to major risks and controls to mitigate them. • Received updates on employee’s cybersecurity training and awareness and identified key areas for future plans. • Received an update on the digital strategy (Santander Digital and PagoNxt), forward-looking commitments for 2021 and its execution plans. • Checked on the collaboration between local units and business units to undertake digital initiatives, monitoring its execution. • Monitored metrics for the digital transformation in terms of return on investments, evolution of the unit cost per product/service/data storage, time-to-market and customer attraction. • Reviewed primary digital strategies for transforming and accelerating the growth of new businesses. • Reviewed the global technology strategy plan, and its implementation, and reported to the board on plans and activities relating to technology and operations. • Informed on the group’s main strategic technological priorities, particularly in regard to the implementation of agile, cloud, core system evolution, deep technology skills (e.g. API and AI) and data, partnering global businesses, support functions and retail and small and medium enterprises (SMEs) units (local and regional) while, at the same time, improving cost efficiency and reducing IT risk. • Made sure the technology and operations strategy properly addressed relevant issues and the group’s priorities. • Received reports about the international advisory board’s deliberations about technology and innovation. • Received updates on the new model and data unit, which resulted from combining Santander Analytics (models) and the former data unit teams in order to have a single point of contact and leverage all existing talent with an end-to-end and cross-functional view of the models and the data value chain. • Ensured that the data function’s resources were sufficient, validating the adequacy and readiness of the same. Information for the general shareholders' meeting and corporate documentation Corporate documents for 2020 • Drafted this report on its activities in 2020, which includes an analysis of its performance and the priorities identified for 2021 following the effectiveness assessment of the board and its committees. Annual assessment of the committee and its achievement of 2020 objectives The committee's effectiveness review for 2020 was part of an external independent consultant's review of the board. It covered the committee's structure, composition, processes and behaviours, concluding that it is fit for purpose and effective. For more details about the findings resulting from the assessment see ‘Board assessment in 2020’ in section 4.3. The committee addressed all the priorities that were identified for 2020. Among the salient actions, it: • Refreshed its composition, which includes the addition of R. Martín Chávez initially as a member and, with effect from 22 December 2020, as committee chair. • Contributed to highlight the importance of the group’s IT strategy and its execution, acknowledging the ambition to become the leading open global financial services platform. • Supervised the implementation of the policies and actions to mitigate the cybersecurity risks, data management and analytical capabilities of the Group's businesses, taking into account the recommendations and opinions of the international advisory board. 234 Responsible banking Corporate governance Economic and financial review Risk management and compliance 2021 Priorities The committee identified the following priorities for 2021: • Supporting the board on the group’s innovation strategy, monitoring and responding to trends resulting from new business models, technologies, currencies and products. • Focusing on the execution of the technology and operations transformation model, implementing a business-led evolution, and cybersecurity monitoring. • Prioritizing digital strategy and monitoring its delivery, as well as providing recommendations on cross-sectional projects for the Group. • Supervising that data management is effective and that the new model and data unit run smoothly and has appropriate resources. • Optimizing the committee’s role, functioning and scope in view of the work carried out by the international advisory board. 4.11 International advisory board Members The members are all external and not members of the board. Composition Chairman Larry Summers Sheila C. Bair Mike Rhodin Positions Former Secretary of the US Treasury and president emeritus of Harvard University Former chairman of the Federal Deposit Insurance Corporation. Former president of Washington College Board member of TomTom, Syncsort and HzO. Former IBM senior Vice President Marjorie Scardino Former CEO of Pearson and director of Twitter Members Francisco D’Souza CEO of Cognizant and director of General Electric James Whitehurst Chairman and CEO of Red Hat George Kurtz CEO and co-founder of CrowdStrike Blythe Masters Former CEO of Digital Asset Holdings Nadia Schadlow Former deputy National Security Advisor for Strategy and Assistant to the President of the United States Secretary Jaime Pérez Renovales Functions Banco Santander’s international advisory board was formed in 2016 to provide strategic insight into future challenges and opportunities for the group’s businesses, particularly in respect of innovation, digital transformation, cybersecurity and new technologies, capital markets, corporate governance, brand and reputation and regulation and compliance. Its members are prominent and respected leaders who possess extensive experience with strategic challenges and opportunities, particularly in terms of innovation, digital transformation and the US market. Meetings The international advisory board meets at least twice a year. In 2020, it met in the spring and autumn. Rationale The international advisory board affords the Group structured and recurrent insights from international leaders who, due to other commitments, are not able to support it as board members. 4.12 Related-party transactions and conflicts of interest Related-party transactions Directors, senior managers and significant shareholders This subsection includes the report on related-party transactions mentioned under recommendation six of the Spanish Corporate Governance Code. As per the Rules and regulations of the board, the board of directors must analyze transactions between Banco Santander or Group companies and directors; shareholders holding a significant individual interest or with others, including shareholders represented as board members in Banco Santander or other Group companies; or people related to them. Related-party transactions are subject to a favourable opinion issued by the audit committee and approval by the board, except in cases where the law requires that they should be approved at a general meeting. In cases of emergency, they may be authorised exceptionally by the executive committee and subsequently confirmed by the board. Related-party transactions are to be assessed for its authorization according to the principle of equal treatment and market conditions. Nonetheless, the board is not required to authorize transactions that simultaneously meet the following three conditions: • Are carried out under agreements with basic standard terms that usually apply to customers contracting the product or service in question. • Are entered into prices or rates set by the party acting as supplier of the goods or service in question, or arm’s length terms and conditions for commercial relations with similar customers, where the goods or services are not subject to set rates that already exist. • Equal an amount that does not exceed 1% of Banco Santander’s annual income. 235 Annual report 2020 Contents In 2020, following due enquiry, no board member, person represented by a director or shareholders that own, whether individually or together with others, a significant interest, or persons related to them carried out transactions with Banco Santander that were considered significant or under non- market conditions. The audit committee confirmed that all related-party transactions completed during the year fully complied with the abovementioned conditions so as not to require approval from the governing bodies as mentioned in the audit committee activities report under section 4.5 'Audit committee activities in 2020'. Banco Santander also has a policy for the admission, authorization and monitoring of loans, credits and guarantees for directors and senior managers. It sets out the procedure in place for risk transactions of which they or their related parties like spouse or other person with similar relationship; minor children or those of legal age who are economically dependent; or companies controlled by directors or senior managers whose activity is limited to the mere holding of assets and the management of personal or family assets. Furthermore, it outlines general rules in terms of maximum borrowing, interest rates and other similar conditions to those that apply to other employees. In accordance with this policy and with banking regulations, the policy provides that loans, credits or guarantees to be granted to Banco Santander's directors and senior managers or to their related parties must be authorized by the board and subsequently by the ECB, except in the cases listed below: • Transactions are subject to a collective agreement signed by Banco Santander, with similar conditions to those of transactions granted to any employee. • Transactions are carried out under agreements with standard conditions that generally apply to a large number of customers, provided that the amount granted to the beneficiary or its related parties does not exceed EUR 200,000. Note 5.f of the 'consolidated financial statements' lists the Santander Group's direct risks in the form of loans, credits and guarantees extended to directors and senior managers in the ordinary course of business as of 31 December 2020. The terms and conditions of these transactions are the same as those performed under market conditions or applied to other employees, and the corresponding benefits in kind are imputed to them, where applicable. Intra-group transactions Intra-group transactions are performed under the same rules, approvals and procedures as transactions with customers in addition to mechanisms to ensure they are subject to market prices and conditions Note 52 ('Related parties') in the 'Consolidated financial statements' and note 47 ('Related parties') in the individual financial statements specify the amounts of the transactions with other group entities (subsidiaries, associates and jointly- held entities), directors, senior managers and related parties. Conflicts of interest Banco Santander has standards and procedures to prevent conflicts of interest resulting from our activities and functions, or between us and our directors and senior managers. We also have an internal policy that provides the Santander Group’s employees, directors and entities with criteria to prevent and manage conflicts of interest resulting from their activities. Directors and senior managers Our directors must adopt the necessary measures to avoid situations in which their direct or indirect interests may enter into conflict with corporate interests or their obligation towards Banco Santander. Directors’ duty to avoid conflicts of interest requires them to fulfil certain obligations, and they must refrain from using the Banco Santander name or their role to exert undue influence on private transactions. They cannot use corporate assets and confidential information for private purposes, nor take advantage of Banco Santander’s business opportunities. Moreover, they are barred from obtaining benefits or remuneration (other than courtesies) from third parties in connection with their role; or carrying out activities, on their own behalf or that of others, that place them in a situation of effective or potential competition or permanent conflict with Banco Santander. Directors must report direct or indirect conflicts of interest they or their related parties may have with Banco Santander to the board. Such conflicts will be disclosed in the financial statements. In 2020, no director reported having any conflict of interest with the Group, despite abstaining on 43 occasions from deliberations and votes on matters at board and committee meetings. On 20 occasions, directors abstained owing to proposals to appoint, re-elect or remove directors, or appoint them to board committees or to the boards of Grupo Santander companies. On 10 occasions, the matter under consideration related to remuneration, loans or credits and on 1 occasion, the matter was a risk transaction between Banco Santander and a company related to a director. Lastly, on 12 occasions, directors abstained in respect of the annual verification of their status and suitability. As directors and senior managers are subject to the Policy on conflicts of interest and the Code of Conduct in Securities Markets, they must provide Compliance function with a statement on any relations they hold, which they must keep up to date. Directors and senior managers must also report any potential conflict of interest owing to their relations or any other reason to the Compliance function. Furthermore, where a conflict does exist, they must abstain from making decisions or casting votes, in addition to notifying anyone who is to take the respective decision. The chief officer of the area in question is responsible for resolving conflicts of interest. Conflicts that involve several areas must be resolved by the common senior officer. However, if none of the foregoing rules apply, the Compliance function will designate someone to resolve the conflict. In the event of doubt, the Compliance function should be consulted. 236 Responsible banking Corporate governance Economic and financial review Risk management and compliance The Code of Conduct in Securities Markets describes control mechanisms and bodies for resolving conflicts of interest related to securities markets. This code can be found on the Santander Group’s corporate website. It dictates that directors, senior managers or related parties may not carry out (i) counter-transactions on Santander Group’s securities within 30 days from the time they are acquired or sold; or (ii) transactions on Santander Group securities 30 days before the quarterly, half-year or annual results are announced and until they are published. Group companies Because Banco Santander is the only group company listed in Spain, no mechanisms must be in place to resolve conflicts of interest with subsidiaries listed in Spain. If such conflicts do arise, Banco Santander, as the parent company, must consider the interests of all its subsidiaries and how they contribute to the long-term interest of the entire group. Subsidiaries should also consider the interests of Grupo Santander examine how the decisions they take may affect the Group. Banco Santander, as the parent company of Santander Group, structures the governance of the Santander Group through a system of rules that guarantees the existence of rules of governance and an adequate control system, as described in section 7. 'Group structure and internal governance'. 237 Annual report 2020 Contents 5. Management team The table below shows the profiles (Senior Executive Vice President —SEVP—) of the Banco Santander’s senior managers (other than the executive directors described in section 4.1 ‘Our directors’) as of 31 December 2020. Rami Aboukhair COUNTRY HEAD – SANTANDER SPAIN Lindsey Argalas HEAD OF SANTANDER DIGITAL Alexandra Brandão GLOBAL HEAD OF HUMAN RESOURCES (*) Juan Manuel Cendoya GROUP HEAD OF COMMUNICATIONS, CORPORATE MARKETING AND RESEARCH José Doncel GROUP HEAD OF ACCOUNTING AND FINANCIAL CONTROL Keiran Foad GROUP CHIEF RISK OFFICER Born in 1967, Rami Aboukhair joined Grupo Santander in 2008 as a director of Santander Insurance and head of Products and Marketing. He had also served as managing director of products, marketing and customers at Banco Español de Crédito, S.A. (Banesto) and managing director and head of Retail Banking at Santander UK. In 2015, Mr Aboukhair was appointed country head of Santander España. In 2017, he was named chief executive officer of Banco Popular Español, S.A. until it merged with Banco Santander, S.A. He is currently country head of Santander España. Born in 1974, Lindsey Argalas joined the group in 2017 as senior executive vice-president and group head of Santander Digital. Previously, she had served as principal of The Boston Consulting Group (BCG) (1998-2008) and as senior vice-president and chief of staff to the CEO of Intuit Inc. (2008-2017). Born in 1978, Alexandra Brandão joined Grupo Santander in 2003 as head of Products and Services for Individuals at Santander Totta. From 2012 to 2016, she was global head of Knowledge and Development at the Grupo Santander Corporate Centre; head of Human Resources from 2016 to 2018; and head of Commercial Management and Segments at Santander Portugal from 2019 to 2020. Ms Brandão is member of the board of directors of Banco Santander Uruguay. Born in 1967, Juan Manuel Cendoya joined Banco Santander in July 2001 as group senior executive vice-president and head of the Communications, Corporate Marketing and Research division. In 2016, Mr Cendoya was appointed vice-chairman of the board of directors and head of Institutional and Media Relations of Santander España. He is also a member of the board of directors of Universia España Red de Universidades, S.A. Previously, he had been head of the legal and tax department of Bankinter, S.A. He is a government lawyer and a non-executive director at Arena Communications Network, S.L. Born in 1961, José Doncel joined Grupo Santander in 1989 as head of Accounting. Previously, he had served as head of accounting and financial management at Banco Español de Crédito, S.A. (Banesto) (1994-2013). Mr Doncel was appointed senior executive vice- president and head of the Internal Audit division in 2013 and group head of Accounting and Financial Control in 2014. He currently serves as the Group’s chief accounting officer. Born in 1968, Keiran Foad joined Grupo Santander in 2012 as deputy chief risk officer at Santander UK. Previously, he held risk and corporate leadership roles at Barclays Bank plc (1985-2011) and served as chief risk officer at Northern Rock plc. In 2016, he was appointed senior executive vice-president and deputy chief risk officer of Banco Santander, before being appointed the group chief risk officer in 2018. 238 Responsible banking Corporate governance Economic and financial review Risk management and compliance José Antonio García Cantera GROUP CHIEF FINANCIAL OFFICER Born in 1966, José Antonio García joined Grupo Santander in 2003 as senior executive vice-president of Global Wholesale Banking of Banco Español de Crédito, S.A. (Banesto). In 2006, he was appointed chief executive officer of Banesto. Previously, Mr García had served on the executive committee of Citigroup EMEA, as well as 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. He currently serves as the group chief financial officer. Juan Guitard GROUP CHIEF AUDIT EXECUTIVE Born in 1960, Juan Guitard joined Grupo Santander in 1997 as head José María Linares GLOBAL HEAD OF CORPORATE & INVESTMENT BANKING Mónica López-Monís GROUP HEAD OF SUPERVISORY AND REGULATORY RELATIONS Javier Maldonado GROUP HEAD OF COSTS of Human Resources at Santander Investment, S.A. Previously, he had been general counsel and secretary of the board of Santander Investment, S.A. and Banco Santander de Negocios, S.A. In 2013, Mr Guitard was head of Banco Santander’s Risk division. In November 2014, he was appointed head of the Internal Audit division. Currently, he serves as the group chief audit executive. He is also a state attorney. Born in 1971, José María Linares joined Grupo Santander in 2017 as senior executive vice-president and global head of Corporate and Investment Banking. Previously, he served as an equity analyst at 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), as well as senior director Latin America TMT equity analyst at Société Générale, New York & São Paolo (1997-1999). Mr Linares joined JP Morgan in 1999 and was subsequently appointed 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 Grupo Santander and global head of Corporate and Investment Banking. Born in 1969, Mónica López-Monís joined Grupo Santander in 2009 as general counsel and secretary of the board of Banco Español de Crédito, S.A. (Banesto). Previously, she had been general counsel at Aldeasa, S.A. and Bankinter, S.A., as well as independent director at Abertis Infraestructuras, S.A. In 2015, Ms López-Monís was appointed senior executive vice-president of Santander and group chief compliance officer. She has been the group’s head of Supervisory and Regulatory Relations since September 2019 and is a state attorney. Born in 1962, Javier Maldonado joined Grupo Santander in 1995 as head of the International Legal division of Banco Santander de Negocios, S.A. Mr Maldonado held several roles at Santander UK and in 2014 was appointed senior executive vice-president of Santander and head of Coordination and Control of Regulatory Projects. He currently serves as group senior executive vice-president and head of Costs. Dirk Marzluf GROUP HEAD OF TECHNOLOGY Born in 1970, Dirk Marzluf joined Grupo Santander in 2018 as senior AND OPERATIONS executive vice-president and head of IT and Operations. Previously, he had served as CIO at AXA Group since 2013, leading the insurance group’s technology and information security transformation and co- sponsoring its digital strategy. Mr Marzluf also held global roles at Accenture, Daimler Chrysler and Winterthur Group. Víctor Matarranz GLOBAL HEAD OF WEALTH MANAGEMENT & INSURANCE Born in 1976, Víctor Matarranz joined Grupo Santander in 2012 as head of Strategy and Innovation at Santander UK. In 2014, he was appointed senior executive vice-president and head of the Executive Chairman’s Office and Strategy. Previously, Mr Matarranz had held several roles at McKinsey & Company, where he had become partner. He currently serves as global head of Wealth Management & Insurance. 239 Annual report 2020 Contents José Luis de Mora GROUP HEAD OF STRATEGY AND CORPORATE DEVELOPMENT AND OF CONSUMER FINANCE (SANTANDER CONSUMER FINANCE) Jaime Pérez Renovales Javier San Félix GROUP HEAD OF GENERAL SECRETARIAT AND HUMAN RESOURCES (*) HEAD OF SANTANDER GLOBAL PAYMENTS António Simões REGIONAL HEAD OF EUROPE Marjolein van Hellemondt- GROUP CHIEF COMPLIANCE Gerdingh OFFICER Born in 1966, José Luis de Mora joined Grupo Santander in 2003. Since then, he has been in charge of the group’s Strategic Plan Development and Acquisitions. In 2015, he was appointed group senior executive vice-president and group head of Financial Planning and Corporate Development. He was appointed head of Santander Consumer Finance on 1 January 2020 and CEO of the same entity on 17 December 2020. See profile in section 4.1 'Our directors'. Born in 1967, Javier San Félix joined Grupo Santander in 2004 as head of strategic planning in the Consumer Finance division. He was appointed director and executive vice-president of Santander Consumer Finance in Spain in 2005 and chief operating officer of the Santander Consumer Finance division in 2006. From 2012 to 2013, he was the chief executive officer of Banco Español de Crédito, S.A. (Banesto). In 2013, he was appointed senior executive vice-president of Banco Santander, S.A. and head of the Commercial Banking division. From 2016 to 2018, he served as senior executive vice- president and head of retail and commercial banking at Santander UK. He currently serves as head of Santander Global Payments. Born in 1975, António Simões joined Grupo Santander in 2020 as regional head of Europe. He was previously at HSBC, where he held roles including chief executive officer of global private banking, member of the group management board and group executive committee, and chief executive of HSBC Bank plc and chief executive of Europe, encompassing all UK and European operations for HSBC Group. Born in 1964, Marjolien van Hellemondt-Gerdingh joined Santander Group in 2019 as senior executive vice-president and chief compliance officer. Previously, she had been chief compliance officer of several banking and financial entities such as NN Group, Zurich Insurance Company and De Lage Landen International B.V. (*) Jaime Pérez Renovales continued as head of Human Resources supporting Alexandra Brandão until February 2021, when he leaved the Human Resources function. 240 Responsible banking Corporate governance Economic and financial review Risk management and compliance 6. Remuneration Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.7, 9.4 and 9.5 comprise the annual report on directors’ remuneration that must be prepared and submitted to the consultative vote of the general shareholders' meeting. In addition, section 6.4 sets out the directors' remuneration policy for 2021, 2022 and 2023, which is to be put to a vote at the general shareholders' meeting. The annual report on directors' remuneration and the directors' remuneration policy for 2021, 2022 and 2023 were approved by our board of directors on 22 February 2021, without any votes against or abstentions. The current remuneration policy for directors is available on our corporate website. 6.1 Principles of the remuneration policy The remuneration committee and the board enlisted the assistance of Willis Towers Watson to: • Compare relevant data with that on markets and comparable entities on account of the group’s size, characteristics and operations. • Analyse and confirm compliance with certain quantitative metrics required to evaluate accomplishment of objectives. • Estimate the fair value of variable remuneration linked to long-term objectives. 6.2 Remuneration of directors for supervisory and collective decision-making duties: policy applied in 2020 Director remuneration in their capacity as such A. Composition and limits The board of directors sets the individual remuneration of directors (including executive directors) for the performance of supervisory and collective decision-making duties within the amount fixed by shareholders and commensurately with the roles they perform on the collective decision-making body, their committee membership and attendance, and other objective circumstances the board might consider. Remuneration of directors for executive duties Banco Santander’s remuneration policy for executive duties dictates that: 1. Remuneration must be in line with shareholders' interests, conducive to creating long-term value and compatible with our rigorous risk management, long-term strategy and values. 2. Fixed remuneration must make up a significant proportion of total compensation. 3. Variable remuneration must reward individuals for their role in achieving set goals within the framework of prudent risk management. 4. The global remuneration package and its structure must be competitive in order to attract and retain talent. 5. Remuneration decisions must avert conflicts of interest and discrimination. According to our Bylaws, the remuneration of directors in their condition as such consists of a fixed annual amount set at the general shareholders' meeting. This amount remains in effect until shareholders vote to amend it, even though the board may reduce it in the years it deems appropriate. At the annual general shareholders' meeting, remuneration for 2020 was set at EUR 6 million, which included (a) annual allotment and (b) attendance fees. Santander has taken out a civil liability insurance policy for directors subject to usual terms proportionate to its circumstances. Directors can receive shares, share options or share-linked compensation, subject to prior approval at the general shareholders' meeting. Directors can also 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 Banco Santander, whether they are the duties of an executive director or otherwise in addition to their oversight and collective decision-making as board members. Lastly, non-executive directors do not have the right to receive any benefit on the occasion of their removal from office. 241 Annual report 2020 Contents B. Annual allotment Each director received the amounts for serving on the board and its committees included in the chart below for 2019 and 2020. As a gesture of responsibility in view of the situation created by the health emergency the board of directors agreed on 5 May 2020 to reduce their allotments by 20% for the balance of 2020, with effect from 1 April 2020, and propose that amounts saved thereby be used to finance the initiatives of Banco Santander to fight against the covid-19 pandemic. Accordingly, the applicable amounts in 2020 and 2019 were: Amount per director in euros Members of the board of directors Members of the executive committee Members of the audit committee Members of the appointments committee Members of the remuneration committee Members of the risk supervision, regulation and compliance committee Members of the responsible banking, sustainability and culture committee Chairman of the audit committee Chairman of the appointments committee Chairman of the remuneration committee Chairman of the risk supervision, regulation and compliance committee Chairman of the responsible banking, sustainability and culture committee Lead director Non-executive vice chairmen 2020 1 Apr to 31 Dec 1 Jan to 31 Mar 49,500 93,500 22,000 13,750 13,750 22,000 8,250 38,500 27,500 27,500 38,500 27,500 60,500 16,500 22,500 42,500 10,000 6,250 6,250 10,000 3,750 17,500 12,500 12,500 17,500 12,500 27,500 7,500 2019 90,000 170,000 40,000 25,000 25,000 40,000 15,000 70,000 50,000 50,000 70,000 50,000 110,000 30,000 A. Since 2015, Bruce Carnegie-Brown has been allocated EUR 700,000 in minimum total annual pay (including annual allowances and attendance fees) for services to the board and its committees, particularly as chairman of the appointments and remuneration committees and lead independent director; and for the required time and dedication to perform these roles. However, in line with the board of directors' decision to reduce their allotments and fees with effects from 1 April 2020 explained above, which is shared by Mr. Bruce Carnegie-Brown, the same reduction shall be applied to this amount. Accordingly, the amount assigned for 2020 will be EUR 595,000. C. Attendance fees Pursuant to resolutions approved by the board on the remuneration committee’s recommendations, attendance fees for board and committees meetings (not including the executive committee, for which no fees are set) totalled the amounts included in the chart below for the last two years. The amounts applied until 31 March 2020 were the same as in 2019. On 5 May 2020, as a gesture of responsibility in view of the situation created by the health emergency, the board of directors agreed to reduce their attendance fees by 20% for the balance of 2020, with effect from 1 April 2020, and propose that the amounts saved thereby be used to finance the initiatives of Banco Santander to fight against the covid-19 pandemic. Attendance fees per director per meeting in euros 1 Apr to 31 Dec 1 Jan to 31 Mar 2020 Board of directors Audit committee and risk supervision, regulation and compliance committee Other committees (excluding executive committee) 2,080 1,360 1,200 242 2019 2,600 2,600 1,700 1,700 1,500 1,500 Responsible banking Corporate governance Economic and financial review Risk management and compliance D. Breakdown of bylaw-stipulated emoluments Total director bylaw-stipulated emoluments and attendance fees received in 2020 amounted to EUR 4.1 million (EUR 4.9 million in 2019). This is 31% less than the amount approved at the general meeting. Each director earned the following amounts for these items: Exec utive Non- executi ve N Board Amount in euros 2020 Annual allotment EC AC ASC RC RSRCC RBSCC Total 2019 Board and committee attendance fees ipula emoluments and attendance fees — — I I N I I I I I N I — I I N N N I I 76,500 144,500 76,500 144,500 — — — — — — 326,380 144,500 — 21,250 21,250 — 12,750 233,750 55,220 288,970 333,800 — — — 221,000 48,620 269,620 312,800 — 513,380 81,620 595,000 700,000 76,500 — 34,000 — — — 12,750 123,250 79,040 202,290 225,900 76,500 — — — — — — 76,500 44,720 121,220 136,800 136,000 8,086 76,500 — — — — — — 34,000 12,750 182,750 60,420 243,170 275,500 — 548 5,269 8,430 — 22,333 15,120 37,453 — — 21,250 21,250 — 12,750 131,750 81,920 213,670 239,700 76,500 — 34,000 — 21,250 — 131,750 85,040 216,790 86,746 1,973 — 44,389 83,847 — — — — — 1,973 2,080 4,053 — 12,361 19,790 — 160,387 42,640 203,027 — — — — 119,000 144,500 34,000 42,000 — — 98,044 144,500 34,000 114,454 — 34,000 — — — — 74,724 — — 20,757 — — — — — 34,000 12,750 344,250 86,160 430,410 500,300 — — 42,000 20,800 62,800 — 34,000 12,750 323,294 93,980 417,274 524,600 — — — 148,454 66,140 214,594 33,915 — 95,481 60,020 155,501 219,134 34,500 65,167 — — 9,583 15,333 5,750 130,333 43,140 173,473 432,700 23,100 43,633 — 6,417 6,417 — — 79,567 28,180 107,747 398,800 63,532 — — — — 17,648 — 28,236 10,589 120,005 71,400 191,405 228,768 — — — — — — — — 213,249 1,545,182 915,147 170,000 87,870 97,380 173,789 92,839 3,082,207 1,066,260 4,148,467 4,862,712 Directors Ms Ana Botín- Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Bruce Carnegie-Brown Ms Homaira Akbari Mr Francisco Javier Botín-Sanz de Sautuola y A O’Shea Mr Álvaro Antonio Cardoso de B Souza que Mr Ramón Martín Chávez MárquezC Ms Sol Daurella Comadrán Manuel Drummond Borges Cirne de D C Ms Gina Díez E Barroso Mr Luis Isasi Fernández de F Bobadilla Mr Ramiro Mato García-Ansorena Mr Sergio RialG Ms Belén Romana García Mrs Pamela Ann WalkdenH Mr Rodrigo Echenique I Gordillo Mr Ignacio Benjumea Cabeza J de Vaca Mr Guillermo de la Dehesa Romero K Ms Esther Giménez-Salinas i L Colomer Mr Carlos Fernández M González Total A. All amounts received were reimbursed to Fundación Botín. B. Director since 1 April 2018. C. Director since 27 October 2020. D. Director since 17 July 2019. E. Director since 22 December 2020. F. Director since 19 May 2020 G. Executive director since 30 May 2020 H. Director since 29 October 2019. I. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020 J. Stepped down as director on 5 May 2020. K. Stepped down as director on 3 April 2020. L. Stepped down as director on 27 October 2020 M. Stepped down as director on 28 October 2019 N Includes emoluments for chairing committees and other roles. 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. 243 Annual report 2020 Contents 6.3 Remuneration of directors for executive duties The policy on directors’ remuneration for executive duties in 2020 was approved by the board of directors and put to a binding vote at the general shareholders' meeting on 3 April 2020, with 94,40% of the votes in favour. The table below summarises the policy and its implementation for Ana Botín and José Antonio Álvarez. In the case of Sergio Rial, who was appointed director on April 2020, he has not received any remuneration for executive duties in Banco Santander, S.A. during 2020, but he qualifies as an executive director pursuant to section 529 duodecies of the Spanish Companies Act (Ley de Sociedades de Capital), because of his role as CEO and vice-president of Banco Santander (Brasil) S.A. (Santander Brasil). Component Gross annual salary Variable remuneration Type Fixed Variable Implementation in 2020 • Ana Botin: EUR 3,176 thousand. • José Antonio Álvarez: EUR 2,541 thousand. • See section 6.3 B ii) for details on annual metrics and assessment. • See section 6.3 B iv) for details on long-term metrics. • See section 6.3 B iii) for details on individual variable pay. Policy • Paid in cash on a monthly basis. • Individual benchmark reference. • Calculated against annual quantitative metrics and a qualitative assessment on account of individual performance. • 50% of each payment is shares withheld for three years, unless the director already holds shares for an amount equivalent to twice their fixed remuneration. The number of shares is set at the time of the award. • 40% paid in 2021; • 60% deferred in five years. ◦ 24% paid in equal parts in 2022 and 2023. ◦ 36% paid in equal parts in 2024, 2025 and 2026, provided certain long-term objectives are met (2020-2022). Fixed Pension scheme Variable • Annual contribution of 22% of base salary. • No change since 2018 • Annual contribution of 22% of 30% of the average of variable remuneration in the last three years • See section 6.3 C for details on annual contributions and pension balance. Fixed Other remuneration Shareholding policy N/A • Includes life, accident and medical insurance, and • No change for Ana Botín or José Antonio Álvarez other in-kind compensation. since 2018. • Includes a fixed remuneration supplement in cash (not considered salary or pensionable) since supplementary death and disability benefits were eliminated. • Payment for non-compete commitment • N/A. • Policy updated during 2020 to assure compliance with recommendation 62 to the Good Governance Code for Listed Companies of the CNMV • In addition to the regulatory obligation to hold shares for one year from their grant date, executive directors also have the obligation to hold them for three years from their award date, unless the director already holds shares for an amount equivalent to 200% of their fix annual remuneration. • Ana Botín and José Antonio Alvarez have the obligation to accumulate this 200% within a period of five years since 2016 to demonstrate the shareholding. A. Gross annual salary The board resolved to maintain the same gross annual salary for Ana Botín and José Antonio Álvarez for 2020 as in 2019. Executive directors’ gross annual salary and fixed annual contribution to pension for 2020 and 2019 were as follows: It also maintained the fixed pension contribution of 22% of gross annual salary it had declared in 2019 for 2020. 244 Responsible banking Corporate governance Economic and financial review Risk management and compliance EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique GordilloA Total Gross annual salary 3,176 2,541 — 5,717 2020 Fixed annual pension contribution 699 559 — 1,258 Total 3,875 3,100 — 6,975 Gross annual salary 3,176 2,541 600 6,317 2019 Fixed annual pension contribution 699 559 — 1,258 Total 3,875 3,100 600 7,575 A. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. Figure includes his gross annual salary until he ceased to be an executive director. B. Variable remuneration i) General policy for 2020 The board approved the executive directors’ variable remuneration on the remuneration committee’s recommendation, according to its policy: • Variable components (including the variable part of the contributions to the benefit systems) of executive directors’ total remuneration in 2020 should amount to less than 200% of fixed components, as established by resolution of the annual general shareholders' meeting on 3 April 2020. • At the beginning of 2021, on the remuneration committee’s recommendation, the board approved the final amount of the 2020 incentive, based on the set bonus pool in accordance with the directors' remuneration policy approved at the general shareholders' meeting of 3 April 2020, in consideration of: • A group of short-term quantitative metrics measured against annual objectives. • A qualitative assessment that cannot adjust the quantitative result by more than 25 percentage points upwards or downwards. • Any exceptional adjustment that must be supported by evidence. • The final figure is adjusted to executive directors’ individual variable remuneration benchmark in accordance with the current model as well as (i) their individual objectives, which generally match the group’s and cover financial, risk management, client satisfaction and social impact metrics, such as being among the Top 10 companies to work for in the group’s main geographies or financial empowerment objectives; and (ii) how they achieve them, with consideration for how they manage employees and have adhered to corporate values. A. Any exceptional adjustment supported by evidence Quantitative metrics and qualitative assessment aspects are described below. • Payment of the approved incentive is split equally into cash and shares. 40% is paid in 2021, once the final amount has been set. The remaining 60% will be deferred in equal parts over five years (subject to long-term metrics) as follows: • The deferred amount payable in 2022 and 2023, (24% of the total) will be paid if none of the malus clauses described below are triggered. • The deferred amount payable in 2024, 2025 and 2026, (36% of the total) will be paid if the malus clauses are not triggered and the multi-year targets described below are reached. These targets can only reduce these amounts and the number of deferred shares (which can be lower but not higher). • When the deferred amount is paid in cash, the beneficiary may be paid the amount adjusted for inflation up to the date of payment. • All payments in shares will be withheld for three years after being delivered, unless the director already holds shares for an amount equivalent to twice his/her annual salary. • 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 time they are received. 245 Annual report 2020 Contents The payment schedule of the incentive is illustrated below. All deferred payments can be subject to malus, even if they are not subject to long-term objectives. Similarly, Santander can claw back paid incentives in the scenarios and for the period dictated in the group’s malus and clawback policy. ii) Quantitative metrics and qualitative assessment for 2020 Executive directors’ variable remuneration for 2020 has been based on the corporate centre executives' common bonus pool, which calculation comes from the quantitative and qualitative metrics approved by the board at the beginning of 2020 on the remuneration committee’s recommendation. This also takes into account the input received from the human resources committee, which for these purpose counts on the participation of the senior management in charge of the group's risk, compliance, audit, human resources and general secretariat and financial accounting and control functions, who among others provided input on risk, solvency, liquidity, results' quality and recurrence, and other compliance and control aspects. The quantitative and qualitative results for the bonus pool resulting from the process above, which are considered by the board, upon recommendation from the remunerations committee, are included in the chart below. It is worth noting that none of the metrics and targets below have been modified in any manner, despite the exceptional crisis circumstances created by the covid-19 pandemic: 246 Responsible banking Corporate governance Economic and financial review Risk management and compliance Category and (weight) Customers (20%) Metrics Net Promoter Score (NPS) C Quantitative metrics Qualitative % Achievement over target Assessment 81.3 % Target: TOP3 in 6 countries. Achieved: TOP3 in 6 countries D Weighted A assessment Component 8.13 % Evaluation of the robustness of the governance, culture and management of conduct risk with our clients Number of loyal D customers Target: 22,719,800 Achieved: 22.838.300 100.5 % 10.05 % Risks (10%) Non- performing loans ratio % Target: 3.08% % Achieved: 3.21% 95.6 % 4.78 % Assessment of the control environment and appropriate management of risk appetite and excesses recognised. Cost of Credit Ratio (IFRS9) % Target: 1.02% % Achieved: 1.28% 0.0 % 0.00 % Capital (20%) Capital ratio (CET1) % Target: 11.90% % Achieved: 12.10% 180.0 % 36.00 % Efficient capital management. Return (50%) Ordinary net profit (ONP) E Target: €8,243.2 million Result: €4,581.15 million G 0.0 % % Target: 11,34% % Achieved: 6.71% G 0.0 % RoTE - Return on Tangible Equity 0.00 % Suitability of business growth compared to the previous year, considering the market environment and competitors. 0.00 % Sustainability and solidity of results. Efficient cost management and achievement of efficiency goals. Progress in the commitments assumed to promote the Group's Responsible Banking agenda and incorporate it into its business strategy (additional indicator in 2020) Total weighted B score 20.33 % 6.23 % 39.10 % 5.41 % Assessment +2.15% - Strength in governance, especially in the approval of products, and relevant improvements in remuneration models, while some aspects of culture and management by the first line of defense are still under development. + 1.45% - Improvement of the control environment, key in managing the risks derived from the health and economic crisis. No relevant non- compliance in risk appetite. + 3.10% - Reinforced capital ratio and above the target, despite the significant increase in provisions due to the context of the year +1.83% - Solid and sustainable results despite global crisis context, with focus this year on on new origination and protecting spreads, managing costs in an efficient manner. + 0.30% - Sustainable growth in a global crisis environment, with more efficient use of capital in term of profitability. + 3.28% - Progress exceeding forecasts in most of the Group's responsible banking agenda commitments. Exceptional adjustment Elements (non-exhaustive) under consideration: macro- economic environment, general control environment, compliance with internal and external regulations, prudent and efficient liquidity and capital planning management. TOTAL The underlying business performance resulted in a final bonus calculation of 71.08% of the target bonus. The board of directors, upon recommendation from the remuneration committee, exercised its discretion to reduce this target bonus to 67.32%, which was the original target submitted to the board in December 2020 and resolved that the amount saved would be contributed to the Santander fund set up to support the fight against Covid-19 (3.75) % 67.32 % A. The weighted assessment is the result of multiplying each objective’s assessment by its weighting per category. Each category has same weighting, except as described under Note E below. B. Result of adding or subtracting the qualitative assessment to/from the weighted assessment. C. The net promoter core (NPS) measures customers' willingness to recommend Santander. The assessment is based on the number of the group's core markets where Santander’s NPS scores in the top 3, as well as on its performance against competitors. In 2020. D. The achievement amount is calculated by adding the weight each country where the target is met has over the total of Santander Group clients. E. For this purpose, ONP is attributed ordinary net profit, adjusted upwards or downwards for transactions the board believes have an impact not connected to the performance of evaluated directors, for which extraordinary profit, corporate transactions, special allowances, or accounting or legal adjustments that may occur in the year are evaluated. The specific weight of ONP in the total scorecard is 20% and RoTE is 30%. F. 2020 underlying profit attributable to the Group is €5,081 million, but restructuring costs have been applied to it for the purpose of calculating scorecard results, reducing this figure to €4,581 million G. 2020 ordinary RoTE is 7.44%, but restructuring costs have been applied to it for the purpose of calculating scorecard results, reducing this figure to 6.71%. 247 Annual report 2020 Contents The following section details the individual variable remuneration approved by the board. iii) Determination of the individual variable remuneration for executive directors set in 2020 The board approved executive directors’ variable remuneration on the remuneration committee’s recommendation based on the policy mentioned in the paragraphs above and the result of the quantitative metrics and qualitative assessment described above, and taking into account the commitment made by Ana Botín and José Antonio Alvarez on 23 March 2020 to reduce the total on their salary and variable remuneration in 50% described below. The board also verified that none of the following circumstances have occurred: 1 • The Group’s ONP for 2020 was not more than 50% less than for 2019. Otherwise, variable remuneration would not have been greater than 50% of the benchmark incentive. • The group’s ONP was not negative. Otherwise, the incentive would have been zero. The board voted to maintain the same benchmark incentive for Ana Botín and José Antonio Álvarez in 2020 as in 2019. Variable contributions to pensions were not modified in 2020, so the amounts are the 22% of the 30% of the last three assigned bonus' average. Voluntary Reduction of Executive Remuneration (Chairman and CEO) On 23 March 2020, given the health crisis created by the covid-19 pandemic, Ana Botín and José Antonio Álvarez proposed to reduce their 2020 total compensation (salary and bonus) by 50% and use the amounts saved to finance the Santander covid-19 relief fund. This proposal was supported by the remuneration committee and approved by the board of directors. To achieve the 50% reduction compared to 2019, the board of directors decided to apply an additional adjustment to Ana Botín’s and José Antonio Alvarez’s variable compensation, reducing the variable compensation by 74% in the case of Ana Botín and 79% in the case of José Antonio Álvarez. Ana Botín’s total salary and bonus for 2019 was EUR 9,688 thousand, with EUR 3,176 thousand salary and EUR 6,512 thousand bonus (of which EUR 4,168 thousand was the sum of immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 2,344 thousand was deferred variable remuneration linked to long-term objectives at face value). Accordingly, the total of her salary and bonus for 2020 has been established at EUR 4,844 thousand, with EUR 3,176 thousand salary and EUR 1,668 thousand bonus (of which EUR 1,068 thousand is the sum immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 600 thousand is deferred variable remuneration linked to long-term objectives at face value). José Antonio Álvarez’s total salary and bonus for 2019 was EUR 6,893 thousand, with EUR 2,541 thousand salary and EUR 4,352 thousand bonus (of which EUR 2,786 thousand was the sum of immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 1,566 thousand was deferred variable remuneration linked to long-term objectives at face value). Accordingly, the total of his salary and bonus for 2020 has been established at EUR 3,446.5 thousand, with EUR 2,541 thousand salary and EUR 906 thousand bonus (of which EUR 580 thousand is immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 326 thousand is deferred variable remuneration linked to long-term objectives at face value). The chart below shows the comparison between the amounts received in 2019 and those received in 2020: 2019 2020 Salary Bonus Total Salary Bonus Total Chairman CEO 3,176 6,512 9,688 3,176 1,668 4,844 2,541 4,352 6,893 2,541 906 3,447 % Var. 2020 vs 2019 (50) % (50) % Additionally, Ana Botin has made a personal decision to donate the full amount of the cash bonus paid this year for 2020 to Banco Santander's Euros de tu nómina program, through which employees can give up part of their pay to projects sponsored by a group of charities voted for by employees and Banco Santander matches the employees donation, and to Empieza por Educar, the Spanish affiliate of Teach for All. Breakdown of immediately payable and deferred remuneration The immediately payable variable remuneration in deferred amounts not contingent on long-term metrics and variable remuneration deferred and contingent on long-term objectives approved by the board of directors, following a proposal by the remuneration committee resulting from the aforementioned process are: 1 For this purpose, ONP is attributed ordinary net profit, adjusted upwards or downwards for transactions the board believes have an impact not connected to the performance of evaluated directors, for which extraordinary profit, corporate transactions, impairments, or accounting or legal adjustments that may occur during the year are evaluated. The exclusion in the calculation for these purposes of goodwill impairments is aligned with the supervisors' criteria on their recommendations on dividend distributions. 248 Responsible banking Corporate governance Economic and financial review Risk management and compliance Immediately payable and deferred (not 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 Total In cash 534 290 — 824 2020 In shares 534 290 — 824 Total 1,068 580 — 1,648 In cash 2,084 1,393 640 4,117 2019 In shares 2,084 1,393 640 4,117 Total 4,168 2,786 1,280 8,234 A. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. Immediate and deferred variable remuneration not contingent on long-term objectives included until he stepped down. B. The share amounts in the foregoing table correspond to a total of 307 thousand shares in Banco Santander (1,122 thousand shares in 2019). The following chart states deferred variable remuneration at fair value, which will only be received in 2024, 2025 and 2026, provided that long-term multi-year targets are met (see section 6.3 B iv)), beneficiaries continue to be employed at Santander Group, in accordance with the terms approved in the 2 : general shareholders' meeting, and no circumstances triggering malus clauses occur Deferred variable remuneration linked to long-term objectives (fair value) EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique Gordillo Total 2020 2019 In cash In shares Total In cash In shares 210 114 — 324 210 114 — 324 420 228 — 648 821 548 252 821 548 252 1,621 1,621 Total 1,642 1,096 504 3,242 A. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. Variable remuneration contingent on long- term objectives included until he stepped down. B. The number of shares in the table total 121 thousand shares in Banco Santander (442 thousand shares in 2019). Fair value has been determined on the grant date based on the valuation report of an independent expert, Willis Towers Watson. Based on the design of the plan for 2020 and success levels of similar plans at peer entities, the expert found a range of 60%-80% reasonable to estimate the initial success ratio. Therefore, fair value was considered to be 70% of the maximum value. The maximum number of shares to be delivered under the plan (480 thousand shares not adjusted for fair value) is within the limit of 4,283 thousand shares authorised in the annual general meeting on 3 April 2020 for executive directors. This limit was calculated with the weighted average daily volume of weighted average listing prices of Santander shares in the 15 trading sessions prior to the Friday (not inclusive) before 2 February 2021 (the date on which the board approved the 2020 bonus for executive directors), which was EUR 2.685 per share. iv) Multi-year targets linked to the payment of deferred amounts in 2024, 2025 and 2026 The multi-year targets linked to the payment of the deferred amounts payable in 2024, 2025 and 2026 are: A B C Metrics Earnings per share (EPS) growth in 2022 vs 2019 A Relative Total Shareholder Return (TSR) in 2020-2022 within a peer group Fully loaded target common equity Tier 1 B ratio (CET1) for 2022 33 % Weight Target and compliance scales (metrics ratios) If EPS growth ≥ 15%, then metric ratio is 1.5 C If EPS growth ≥ 10% but < 15%, then metric ratio is 1 – 1.5 C If EPS growth ≥ 5% but < 10%, then metric ratio is 0 – 1 If EPS growth < 5%, 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 – 1 If ranking of Santander below percentile 33, then metric ratio is 0 If CET1 is ≥ 12%, then metric ratio is 1 E If CET1 is ≥ 11% but < 12%, then metric ratio is 0 – 1 If CET1 is < 11%, then metric ratio is 0 33 % 33 % D A. TSR refers to the difference (%) between the final and initial values of capital invested in ordinary shares of Banco Santander. The final value is calculated based on the dividends or other similar concepts (such as the Santander Scrip Dividend programme) shareholders receive for this investment during the corresponding period -as if they had invested in more shares of the same type at the first date on which the dividend or similar concept was payable to shareholders- and the weighted 2 Corresponds to the fair value of the maximum amount to be received over a total of 3 years, subject to continued service -with certain exceptions-, non- applicability of malus clauses and compliance with set goals. Fair value was estimated at the plan award date on account of several scenarios for the variables in the plan during the measurement periods. 249   Annual report 2020 Contents average share price at that date. To calculate TSR, the weighted average daily volumes of the weighted average listing prices for the fifteen trading sessions prior to 1 January 2020 (exclusive) is considered (to calculate the initial value) and the fifteen trading sessions prior to 1 January 2023 (exclusive) (to calculate the final value). The peer group consists of BBVA, BNP Paribas, Citi, Crédit Agricole, HSBC, ING, Itaú, Scotia Bank and Unicredit. B. To check success in terms of this objective, possible increases in CET1 resulting from capital increases will be disregarded (except in relation to the Santander Scrip Dividend programme). Furthermore, the CET1 ratio at 31 December 2022 could be adjusted to factor out the impact of any new regulations on its calculation up to that date. C. Linear increase in the EPS ratio based on the specific EPS growth rate in 2022 in respect of 2019 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 ratio as a function of the CET1 ratio in 2022 within this bracket of the scale. To determine the annual amount of the deferred portion linked to objectives corresponding to each board member in 2024, 2025 and 2026, 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 pay set in early 2021). • 'A' is the EPS ratio according to the scale in the table above, based on EPS growth in 2022 vs 2019. • 'B' is the TSR ratio according to the scale in the table above, according to the relative performance of Banco Santander’s TSR within its peer group in 2020-2022. • In any event, if the result of (1/3 x A + 1/3 x B + 1/3 x C) is greater than 1, the multiplier will be 1. • v) Malus and clawback Deferred amounts (whether or not contingent on multi-year targets) will be earned if the beneficiariy continues to work 3 with the group , and none of the circumstances triggering the malus clause arise before each payment, according to the section on malus and clawback clauses in the remuneration policy. Similarly, Banco Santander can clawback any paid variable amounts in the scenarios and for the period dictated by the terms and conditions in the said policy. Variable remuneration for 2020 can be clawed back until the beginning of 2027. Malus and clawback clauses are triggered if the financial performance of the Banco Santander, a specific division or area, or exposures generated by staff is poor on account of: Category Risk Capital Regulation and internal codes Factors Significant failures in risk management by Banco Santander, or by a business or risk control unit. An increase in capital requirements at the Banco Santander 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 staff responsible for them. In addition, failure to comply with Banco Santander’s internal codes of conduct. Improper conduct, whether individual or collective. Negative effects deriving from the marketing of unsuitable products and the liability of persons or bodies making such decisions will be considered especially significant. The application of malus or clawback clauses for executive directors shall be determined by the board of directors, at the proposal of the remuneration committe, and cannot be proposed once the retention period for the final payment in shares under the plan has elapsed in early 2027. Therefore, on the remuneration committee’s recommendation and depending on the level of compliance with the conditions for applying malus clauses, the board determines the specific deferred incentive amount to be paid as well as any amount that could be subject to clawback. C. Main features of the benefit plans Executive directors participate in the defined contribution pension scheme created in 2012, which covers contingencies due to retirement, disability and death. • 'C' is the CET1 ratio according to compliance with the CET1 Conduct target for 2022 described in the table above. 3 When the beneficiary’s relationship with Banco Santander or another group entity terminates because of retirement, early retirement or pre-retirement; a dismissal ruled by the courts to be wrongful; unilateral withdrawal for good cause by an employee (which includes 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; mandatory redundancy; or because an employer other than Banco Santander ceases to belong to Santander Group, the right to receive shares and deferred amounts in cash and any amounts of the deferred amounts in cash adjusted for inflation will remain under the same conditions in force as if none of such circumstances had occurred. In the case of death, the right will pass to the beneficiary’s heirs. In cases of justified temporary leave due to temporary disability, suspension of contract due to maternity or paternity leave, or leave to care for children or a relative, there will be no change in the beneficiary’s rights. If the beneficiary goes to another group company (even through international assignment and/or expatriation), these rights will likewise not change. If the relationship terminates by mutual agreement or because the beneficiary obtains a leave not mentioned above, the terms of the termination or temporary leave agreement will apply. None of those circumstances attach the right to receive the deferred amount in advance. If beneficiaries or their heirs maintain the right to receive deferred pay in shares and cash and any deferred amounts in cash adjusted for inflation, it will be delivered within the periods and under the terms dictated by the rules for the plans. None of the above circumstances shall give the right to receive the deferred amount in advance. If the beneficiary 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 inflation of the deferred amounts in cash, it shall be delivered within the periods and under the terms provided in the rules for the plans. 250 Responsible banking Corporate governance Economic and financial review Risk management and compliance In the event of pre-retirement and up until the retirement date, executive directors have the right to receive an annual allowance. Ana Botín’s maximum allotment is the sum of her fixed remuneration and 30% of the average of her last three variable remuneration amounts. José Antonio Álvarez’s allotment is his fixed remuneration paid as senior vice president. According to the 2012 system, contracts for executive directors (and other senior managers) with defined benefit pension obligations were transformed into a defined contribution system. The new system gives executive directors the right to receive benefits upon retirement, even if they are not active at Banco Santander at the time, based on contributions to the system. It also replaces their previous right to receive a pension supplement in the event of retirement. The initial amount for each executive director in the new defined contribution pension scheme corresponded to the market value of the assets for which the provisions for due obligations were recognised when the previous pension commitments had been transferred to the new pension scheme. Every year since 2013, Banco Santander has been contributing to the pension scheme for executive directors and senior executives in proportion to their pensionable bases until their departure from the group, retirement, death or disability (even during pre-retirement). The pensionable base for executive directors is the sum of fixed remuneration plus 30% of the average of their last three variable remuneration amounts (in the event of José Antonio Álvarez’s pre- retirement, it will be his fixed remuneration as a senior executive vice-president). Contributions will be 22% of pensionable bases in all cases. Pursuant to remuneration regulations, contributions calculated on the basis of variable remuneration are subject to the discretionary pension benefits scheme. Therefore, under the policy, malus and clawback clauses can be enforced on them in place at any given time and during the same period in which variable remuneration is deferred. Furthermore, these contributions must be invested in shares in Banco Santander for five years from the date of the executive director's retirement, or from the date on which executive directors leave the group. Once that period has elapsed, the amount invested in shares will be paid to them or their beneficiaries if some contingency covered by the pension scheme was happened or will be added to the remainder of their cumulative balance until their retirement age when the total amount will be paid. The benefit plan is outsourced to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. The economic rights of the directors previously mentioned belong to them even if they are not active at Banco Santander at the time of their retirement, death or disability. Their contracts do not stipulate any severance payment outside the extent of the law for termination of contract or the aforementioned annual allowance for pre-retirement. Pursuant to the director's remuneration policy approved at the annual general meeting on 23 March 2018, the system contributes 22% of the respective pensionable base. The provisions recognised in 2020 for retirement pensions a amounted to 2,019 thousand euros (2,003 thousand euros in 2019), as broken down below. EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Total 2020 1,155 864 2019 1,145 858 2,019 2,003 These are the amounts corresponding to each executive director as of 31 December 2020 and 2019 in the pension scheme: EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique Gordillo Total 2020 49,444 18,082 — 67,526 2019 48,104 17,404 13,268 78,776 A. Rodrigo Echenique has not participated in the defined contribution pension scheme described in the preceding paragraphs. However, for reference purposes, this year’s table details his rights before he was named an executive director. Rodrigo Echenique's accrued obligation as of December 2020 is zero, since he received the benefit in the form of capital in 2020. Therefore, there is no pending commitment in this regard in respect of Rodrigo Echenique. D. Other remuneration Santander Group also takes out insurance policies for life, health and other contingencies for its executive directors. This other remuneration component includes the fixed supplement approved for Ana Botín and José Antonio Álvarez to replace the supplementary benefits from the pension scheme eliminated in 2018, in addition to the cost for insuring death or disability until they retire. Executive directors are also covered under the group’s civil liability insurance policy. Rodrigo Echenique received 1,800 thousand euros as first payment for his compensation for his two-year non-compete commitment from the date he stepped down as executive director (30 April 2019). In May 2020 he received the same amount for the payment that was pending in connection with this commitment. Note 5 to the group’s consolidated financial statements describes other benefits received by executive directors in detail. E. Shareholdings In 2016, on the remuneration committee’s recommendation, the board of directors approved a shareholding policy to better align executive directors with shareholders’ long-term interests. According to this policy, in addition to the executive directors’ commitment to maintaining a significant holding of shares in the group for as long as they have their role, executive directors active on 1 January 2016 would have five years to demonstrate that their personal assets include shares in Banco Santander that amount to twice their nett annual salary on that date. Executive directors have complied with this policy. 251 Annual report 2020 Contents Likewise, in addition to the regulatory obligation for executive directors not to sell the shares they receive as remuneration for a year from their award, which is included in the shareholding policy, and will apply to all cases, this policy has also been updated to include the obligation for executive directors not to sell the shares they receive as remuneration for a period of three years from their award date, unless the executive director already holds Banco Santander shares for an amount equivalent to twice his/her fix annual remuneration. F. Remuneration of Sergio Rial in Santander Brasil Sergio Rial has received the following remuneration In his role as CEO of Santander Brasil: However, in 2020 Alvaro Cardoso de Souza was paid BRL 1,947 thousand (EUR 335 thousand) as non-executive chairman of Banco Santander Brasil, S.A., Homaira Akbari was paid USD 190 thousand (EUR 156 thousand) as member of the board of Santander Consumer USA (SCUSA) and EUR 17,200 as member of the Board of PagoNxt), and Henrique Manuel Drummond Borges Cirne de Castro and Ramón Martín Chávez Márquez were each paid the same EUR 17,200 as members of the board of PagoNxt. Likewise, Luis Isasi was paid EUR 740 thousand as chairman of the board of Santander Spain (amount included in the chart below as "other remuneration" as it is paid by Banco Santander, S.A.) 2020 Base salary Other fixed benefits Pensions Variable remuneration Total BRL thousand EUR thousand H. Individual remuneration of directors for all items in 2020 12,645 39 5,041 30,240 47,965 2,175 7 867 5,201 8,250 Below is a breakdown of each director’s short-term salary (payable immediately) and deferred remuneration not based on long-term performance for 2020 and 2019. Note 5 to the group’s consolidated financial statements contains disclosures on shares delivered in 2020 under the deferred remuneration schemes of previous years where conditions for their delivery were met in the related years. His variable remuneration is subject to the same policy principles, deferrals, multi year targets linked to the payment of deferred amounts and malus and clawback principles described in B herein, though referred to the subsidiary where he is the CEO. G. Remuneration of board members as representatives of Banco Santander The executive committee has resolved that the remuneration received by directors who represent Banco Santander on boards of companies where it owns equity and were appointed after 18 March 2002 will accrue to the group. No executive director received remuneration for this type of representation in 2020 or 2019. 252 Responsible banking Corporate governance Economic and financial review Risk management and compliance Bylaw-stipulated emoluments Board and board committees annual allotment Board and committee attendance fees 234 221 513 123 77 183 22 132 132 2 160 344 42 323 148 95 130 80 55 49 82 79 45 60 15 82 85 2 43 86 21 94 66 60 43 28 EUR thousand 2020 Salary and bonus of executive directors Immediate Deferred payment bonus (50% in shares) payment bonus (50% in shares) 667 362 — — 400 217 — — Fixed Salary 3,176 2,541 — — Total 4,243 3,120 — — 2019 Pension Contribut ion Other remuneration Total Total 1,155 864 — — 1,131 1,764 — — 6,818 6,018 595 202 9,954 8,270 700 226 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 740 — — — — 1,800 102 — 122 243 37 214 217 4 943 430 63 417 214 1,955 275 108 137 276 — 240 86 — — 500 — 525 34 4,874 524 399 120 — 3,081 3,770 71 — 1,066 1,094 — — 5,717 6,317 — — 1,029 5,146 — — 617 — — 7,363 3,087 14,550 — — 2,019 2,003 — — 191 — 5,537 19,066 — 5,770 228 214 — 27,187 Directors Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Bruce Carnegie-Brown Ms Homaira Akbari Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea A Mr Álvaro Antonio Cardoso de Souza B Mr Ramón Martín Chávez Márquez C Ms Sol Daurella Comadrán Mr Henrique Manuel Drummond Borges Cirne de Castro E Ms Gina Díez Barroso D Mr Luis Isasi Fernández de F Bobadilla Mr Ramiro Mato García-Ansorena Mr Sergio Rial G Ms Belén Romana García Mrs Pamela Ann Walkden H I Mr Rodrigo Echenique Gordillo Mr Ignacio Benjumea Cabeza de J Vaca Mr Guillermo de la Dehesa Romero K Ms Esther Giménez-Salinas i L Colomer Mr Carlos Fernández González M Total 2020 Total 2019 A. All amounts received were reimbursed to Fundación Botín. B. Director since 1 April 2018. C. Director since 27 October 2020. D. Director since 17 July 2019. E. Director since 22 December 2020. F. Director since 19 May 2020 G. Executive director since 30 May 2020 H. Director since 29 October 2019. I.Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020 J. Stepped down as director on 5 May 2020. K. Stepped down as director on 3 April 2020. L. Stepped down as director on 27 October 2020. M. Stepped down as director on 28 October 2019. The following table provides each executive director’s salary contingent on multi-year targets. It is only paid if they remain active in the group, malus clauses do not apply and set multi-year targets (or their minimum thresholds, with the corresponding deduction arranged at the end of the year) are achieved. Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez B Mr Rodrigo Echenique Gordillo Total EUR thousand 2020 A (50% in shares) 420 228 — 648 2019 A (50% in shares) 1,642 1,096 504 3,242 A. Fair value of the maximum amount receivable over a total of 3 years (2024, 2025 and 2026), which was estimated when the plan was granted, based on several scenarios relating to variables in the plan during the measurement periods. B. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. 253 Annual report 2020 Contents J. Comparative analysis of directors' remuneration, company performance and average remuneration of employees This chart summarises directors’ compensation (short-term remuneration, deferred variable remuneration and/or deferred variable remuneration linked to multi-year targets) for executive duties in relation to underlying attributable profit. Ratio of executive directors’ total remuneration to underlying attributable profit I. Ratio of variable to fixed pay components in 2020 At the April 2020 AGM, shareholders approved a maximum ratio of 200% of variable to fixed components in executive directors’ pay. The table below shows the ratio of variable components to fixed components for each executive director’s total pay in 2020. This ratio decreased by 90 p.p. for Ana Botín and by 66 p.p. for José Antonio Álvarez in respect of 2019 owing to the decrease in their variable pay mentioned in subsection B.iii. Executive directors Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Sergio Rial Variable Components / fixed components (%) 40 % 24 % 167 % For these purposes: • Variable components include all items of this nature, such as any contributions to the pension scheme calculated on directors’ variable pay. • Fixed components consist of the other items each director receives for executive duties, including contributions to pension schemes calculated on the basis of fixed remuneration and other benefits, as well as all bylaw- stipulated emoluments that the director is entitled to receive in his or her capacity as such. The following chart shows the comparative analysis between the directors' remuneration, the company performance (underlying profit attributable to the Group, Ordinary ROTE) and the average remuneration of Santander employees in the last 5 years: 1 Directors' remuneration • Executive Directors Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez A Mr Sergio Rial 2 • Non-Executive Directors Mr Bruce Carnegie-Brown B Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea Ms Sol Daurella Comadrán C Ms Belén Romana García D Ms Homaira Akbari E Mr Ramiro Mato García-Ansorena F Mr Álvaro Cardoso de Souza Mr Henrique Manuel Drummond Borges Cirne de Castro Mrs Pamela Ann Walkden H G I Mr Luis Isasi Fernández de Bobadilla J Mr Ramón Martín Chávez Márquez K Ms Gina Díez Barroso Company’s performance Underlying profit attributable to the Group Ordinary RoTE Employees' average remuneration 2020 2019 2018 2017 2016 6,818 6,018 63 9,954 8,270 — 10,483 8,645 — 10,582 8,893 — 9,800 8,255 — 595 122 214 417 202 430 243 217 214 943 37 4 700 137 240 525 226 500 276 86 34 — — — 732 121 215 414 199 450 148 — — — — — 731 124 207 297 159 36 — — — — — — 721 115 191 219 32 — — — — — — — 5.081 7,44% 43.867 8.252 11,79% 43.262 8.064 12,08% 41.522 7.516 11,82% 40.519 6.621 11,08% n.a. 1. Deferred variable remuneration linked to long-term objectives not included. 2. Non-executive directors' remuneration fluctuations are caused by joining or leaving the Board of Directors and the difference in the amount of meetings they assist during the year. Hence there is no correlation between their remuneration and the company performance. A. Executive director since 30 May 2020. B. All amounts received were reimbursed to Fundación Botín. C. Director since 22 December 2015. D. Director since 27 September 2016. E. Director since 28 November 2017. F. Director since 23 March 2018. G. Director since 17 July 2019. H. Director since 29 Octobre 2019. I. Director since 19 May 2020. J. Director since 27 October 2020. K.Director since 22 December 2020. 254 Responsible banking Corporate governance Economic and financial review Risk management and compliance J. Summary of link between risk, performance and remuneration Banco Santander's remuneration policy and its application in 2020 have promoted sound and effective risk management while the fulfilment of business objectives. The key elements of the remuneration policy for executive directors making alignment between risk, performance and reward in 2020 were as follows: Key words Metrics balance Financial thresholds Long-term objectives Individual performance Variable remuneration cap Control functions involvement Malus and clawback Payment in shares Aspect aligning risk, performance and remuneration The balance of quantitative metrics and qualitative assessments, including customer, risk, capital and profitability in relation to risk, used to determine the executive directors’ variable remuneration. The adjustment to variable remuneration if certain financial 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. The long-term objectives linked to the last three portions of the deferred variable remuneration. These objectives are directly associated with return to shareholders relative to a peer group, earnings per share and maintaining a sound capital base. The discretion of the board to consider the performance of each executive director in the award of their individual variable remuneration. 200% of fixed remuneration. The work undertaken by the human resources committee aided by senior managers Control functions leading control functions in relation to the analysis of quantitative metrics information and undertaking qualitative analysis. Malus can be applied to unvested deferred pay and clawback can be applied to vested or paid compensation under the conditions dictated by the group’s remuneration policy. At least 50% of variable pay is in shares withheld for a period of time upon delivery. 6.4 Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote Remuneration policy principles and remuneration system A. Directors’ remuneration in their capacity as such Director’s remuneration is regulated by article 58 of the Banco Santander’s bylaws and article 33 of the Rules and regulations of the board of directors. For 2021, 2022 and 2023, no changes to the principles and composition of directors’ remuneration for supervisory and collective decision-making duties are planned with respect of those in 2020. They are described in sections 6.1 and 6.2. B. Executive directors' remuneration Executive directors are entitled to be paid the remuneration (e.g., salaries, incentives, bonuses, severance payments for early termination from such duties, and amounts to be paid by Banco Santander for insurance premiums or contributions to savings schemes) deemed appropriate for performing executive functions following a proposal from the remunerations committee and by resolution of the board of directors, subject to the limits set by law. For 2021, 2022 and 2023, no changes to the principles of executive directors’ remuneration for executive duties are planned. They are described in sections 6.1 and 6.3. Every year, Banco Santander conducts a comparative analysis of total compensation for executive directors and other senior executives. For 2021, the analysis will consist of a 'peer group' made up by BBVA, BNP Paribas, Citi, Crédit Agricole, HSBC, ING, Itaú, Scotia Bank and Unicredit. Directors’ remuneration for 2021 A. Directors remuneration in their capacity as such In 2021, directors, in their capacity as such, will receive remuneration for supervisory and collective decision-making duties for a total of up to 6 million euros as authorised by the shareholders at the April 2020 AGM (which will again be put to a vote at the 2021 AGM). It consists of: • annual allocation; and • attendance fees. The amounts agreed for 2021 are the same as those initially established for 2020 disclosed in section 6.2.B and C above, with the exception of the IT and innovation committee, whose members will receive an annual allotment of EUR 25,000, with an additional EUR 70,000 in the case of its chairman, and the same attendance fees as other committees (with the exception of the executive committee, the audit committee and the risk supervision, regulation and compliance committee). The specific amounts and the form of payment are determined by the board of directors in the manner described in section 6.2 above, based on the objective circumstances of each director. As per the description of the director remuneration system, Banco Santander will pay the premium for the civil liability insurance of its directors in 2021, which it took out under customary market terms and proportionally to the circumstances of Banco Santander. 255 Annual report 2020 Contents B. Executive directors' remuneration for the performance of executive duties no malus clauses described under section 6.3 B vi) are triggered. i) Fixed remuneration components A) Gross annual salary On the remuneration committee’s recommendation, the board resolved that Ana Botín and José Antonio Álvarez’s gross annual salaries would be the same for 2021 as in 2020. Their gross annual salary amounts could increase owing to adjustments made to the fixed remuneration mix based on standards approved by the remuneration committee, as long as it will not increase the group’s costs. As regional head for South America, Sergio Rial will receive, subject to the approval of the 2021 AGM, a gross annual salary amount of EUR 750 thousand. B) Other fixed remuneration components • Benefit systems: defined contribution schemes as set out in section 'Pre-retirement and benefit schemes'. • Supplement to fixed salary: Ana Botín will receive EUR 525,000 and José Antonio Álvarez, EUR 710,000 as a supplement to their fixed pay in 2021. This had been approved in 2018 when the supplementary death and disability pension schemes were eliminated. • Social welfare benefits: executive directors will also receive social welfare benefits such as life insurance premiums, medical insurance and the allocation of remuneration to employee loans, in accordance with Banco Santander’s general policy for senior management, and in the same terms as the rest of employees. Additional information can be found under the 'Pre-retirement and benefit plans' section. • The amount deferred over the next three years (36% of the total) will be paid in 2025, 2026 and 2027, on the condition that no malus clauses are triggered and long- term targets –described in section D) Deferred incentive subject to long-term performance objectives– are met. The Group can claw back incentives already paid in the cases and during the term set out in its malus and clawback policy, described under section 6.3 B vi). Exceptionally, when a new executive director joins Banco Santander, his/her variable pay may include a sign-on bonus and/or buyouts. Variable components in executive directors’ total remuneration for 2021 cannot exceed the limit of 200% of fixed components, submitted for approval to the 2021 AGM. However, under EU regulations on remuneration, certain variable components can excluded. A. Variable remuneration benchmark Variable remuneration for executive directors in 2021 will be set based on a standard benchmark contingent upon the full achievement of set targets. The board of directors may revise the variable pay benchmark on the remuneration committee’s recommendation and following market and internal contribution criteria. B. Setting of final variable remuneration based on yearly results Based on that standard benchmark, 2021 variable remuneration for executive directors will be based on the corporate bonus pool, and set according to: ii) Variable remuneration components • A set of short-term quantitative metrics measured against annual objectives. • A qualitative assessment that cannot raise or lower the quantitative result by more than 25%. • An exceptional adjustment that must be supported by duly substantiated evidence and may involve changes owing to control and/or risk defficiencies, negative assessments from supervisors or unexpected material events. In an effort to further simplify the executive compensation framework, upon recommendation from the remuneration committee, the board of directors has approved a simplification of the metrics based on yearly results, which number has been reduced from the seven metrics used in 2020 and previous years to four. The board approved the policy on executive directors’ variable remuneration for 2021 on the remuneration committee recommendation, based on the remuneration policy principles described under section 6.3. In the case of Sergio Rial, although it is not expected that he will receive any variable remuneration from Banco Santander, S.A. in 2021, the same principles apply to his variable remuneration in Santander Brasil, though referred to the metrics and targets for the region and country where he carries out his executive duties. Executive directors’ variable remuneration consists of a single incentive scheme, linked to the achievement of short-and long-term objectives. It is structured as follows: • The final amount of variable remuneration will be set at the start of the following year (2022) based on the benchmark amount and subject to compliance with the annual objectives described under section B) below. • 40% of the incentive will be paid immediately once the final amount has been set, and 60% will be deferred in equal parts paid out over five years and subject to long-term metrics: • The amount deferred over the first two years (24% of the total) will be paid in 2023 and 2024 on the condition that 256 Responsible banking Corporate governance Economic and financial review Risk management and compliance The scorecard below provides the detailed quantitative metrics, qualitative assessment factors and weightings: The final three payments will also be subject to long-term objectives described in section D) below. Category and weighting Quantitative metrics Customers (20%) A NPS Risks - Cost of Credit Ratio (10%) Qualitative assessment Accomplishment of objectives in the rules on risk conduct with customers. Appropriate management of risk appetite and excesses recognised. Adequate management of operational risk. Capital - Capital Ratio (CET1)(20%) B Efficient capital management The portion paid in shares cannot be sold until one year has elapsed since they were delivered. D) Deferred variable pay subject to long-term objectives As indicated above, the amounts deferred in 2025, 2026 and 2027 will be paid on the condition that the group achieves its long-term targets for 2021-2023, in addition to the terms described in section E). The long term metrics and related targets are: a. Banco Santander’s consolidated underlying EPS growth target in 2023 vs 2020. The EPS ratio for this target is obtained as follows: Shareholders (80%) Return - RoTE: return on tangible equityB (50%) Suitable business growth in respect of the previous year, considering the market and competitors. Sustainable and robust earnings. Progress against the 11 public commitments for responsible banking included in the responsible banking report. Efficient cost management and achievement of efficiency goals. A. Net promoter score. B. For this purpose, these metrics may be adjusted upwards or downwards by the board,following a proposal from the remuneration committee, when inorganic transactions, material changes to the Group’s composition or size or other extraordinary circumstances (such as impairments, legal changes or restructuring procedures) have occurred which affect the suitability of the metric and achievement scale established in each case and resulting in an impact not related to the performance of the executive directors and executives being evaluated. Lastly, as additional conditions for determining the incentive, the following circumstances must be confirmed to set variable pay: • If the group’s ONP for 2021 were 50% less than in 2020, variable pay would in no case exceed 50% of the benchmark incentive for 2021. • If the group’s ONP were negative, the incentive would be zero. When setting individual bonuses, the board will also consider restrictions to the dividend policy imposed by supervisors. C) Forms of payment of the incentive Variable remuneration is 50% in cash and 50% in shares. One portion is paid in 2022 and the other is deferred for five years and subject to long-term metrics: a) 40% of variable pay is paid in 2022, net of tax, with half in cash and half in shares. b) 60% paid, if applicable, in five equal parts in 2023, 2024, 2025, 2026 and 2027, net of tax, with half in cash and half in shares, under the conditions stipulated in section D). EPS growth in 2023 (% vs. 2020) ≥ 125% ≥ 100% but < 125% ≥ 70% but < 100% < 70% ‘EPS Ratio' 1.5 A 1 – 1.5 A 0 - 1 0 A. Straight-line increase in the EPS ratio based on the underlying EPS growth rate in 2023 in respect of 2020 within this bracket of the scale. To verify compliance with this objective, the board, following a proposal from the remuneration committee, may adjust it to remove the effects of any regulatory change to its calculation rules or any extraordinary circumstances (such as impairments, corporate transactions or restructuring procedures) that have occurred which affect the suitability of the metric and achievement scale established in each case and resulting in an impact not related to the performance of the executive directors and executives being evaluated. (b)Relative performance of Banco Santander's total shareholder return (TSR) in 2021-2023 in respect of the weighted TSR of a peer group comprising 9 credit institutions, with the appropriate TSR ratio based on the group’s TSR among its peers. Ranking of Santander TSR percentile th Above the 66 Between the 33 (both inclusive) rd Below the 33 rd A and 66th percentile 0 – 1 percentile 0 'TRS Ratio' 1 A. Increase in the TSR ratio proportional to the number of positions moved up in the ranking. TSR measures the return on shareholders’ investment. It is the sum of the change in share price plus dividends and other similar items (including the Santander Scrip Dividend programme) shareholders can receive during the period. The peer group comprises the following entities: BBVA, BNP Paribas, Citi, Credit Agricole, HSBC, ING, Itaú, Scotiabank and Unicredit. 257 Annual report 2020 Contents (c) Compliance with the Santander Group’s consolidated fully loaded target common equity tier 1 ratio (CET1) for 2023. The CET1 ratio relating to this target is obtained as described below: CET1 in 2023 ≥ 12% ≥ 11% pero < 12% < 11% CET1 ratio 1 0 – 1 0 A A. Linear increase in the CET1 ratio based on the CET1 ratio for 2022 within this range of the scale. To verify compliance with this objective, the CET1 ratio deriving from share capital increases (other than those implemented under the Santander Dividendo Elección scrip dividend scheme) will be disregarded. Moreover, the CET1 ratio at 31 December 2023 may be adjusted by the board, following a proposal of the remuneration committee, to remove the effects of any regulatory change to its calculation rules or any extraordinary circumstance (such as impairments, corporate transactions or restructuring procedures) not related to the performance of the executive directors and executives being evaluated, that may arise in relation to its calculation until such date. The following formula will be used to set the annual amount of performance-based deferred variable remuneration in 2025, 2026 and 2027 ('Final annuity'), without prejudice to any adjustment deriving from the application of the malus policy (see section 6.3 B vi): Final annuity = Amt. x (1/3 x A + 1/3 x B + 1/3 x C) where: • 'Amt.' is one third of variable remuneration deferred conditional on performance (i.e. Amt. will be 12% of the total incentive set in early 2022). • 'A' is the EPS ratio according to the scale in the table above, based on EPS growth in 2023 vs 2020. • 'B' is the TSR ratio according to the scale in the table above, according to the relative performance of Banco Santander’s TSR within its peer group in 2021-2023. • 'C' is the CET1 ratio according to compliance with the CET1 target for 2023 described in section (c) above. • In any event, if the result of (1/3 x A + 1/3 x B + 1/3 x C) is greater than 1, the multiplier will be 1. The estimated maximum amount to be delivered in shares to executive directors is 11.5 million euros. E) Other terms of the incentive Directors will be paid deferred amounts (including those linked to long-term targets) if they remain in the group and none of the circumstances triggering malus clauses arise (as per the malus and clawback section in the group’s remuneration policy) under terms similar to those indicated for 2020. Furthermore, the group can claw back paid incentives under the scenarios, period and terms and conditions set out in the remuneration policy. 258 Hedging Santander shares received during the retention and deferral periods is expressly prohibited. The effect of inflation on the deferred amounts in cash may be offset. Selling shares is also prohibited for at least one year since they are received. The remuneration committee may propose to the board adjustments in variable remuneration under exceptional circumstances owing to internal or external factors, such as requirements, orders or recommendations issued by regulatory or supervisory bodies. Such adjustments will be described in detail in the report on the remuneration committee and the annual report on directors’ remuneration put to a non-binding vote at the annual general meeting. iv. Shareholdings As described in section 6.3.E, in addition to the regulatory obligation not to sell shares they receive as remuneration for a year since from their award date, in order to comply with recommendation 62 of the Spanish Corporate Governance Code, the policy on shareholdings has been updated to include the obligation for executive directors not to sell the shares they receive as variable remuneration for a period of three years from their award date, unless the executive director already holds Banco Santander shares for an amount equivalent to twice his/her annual salary. v. Principle of equal pay Executive directors, as well as any other Santander employee, are subject to the principle of equal pay included in Santander Group's Remuneration Policy, which does not allow for any kind of discrimination, and fosters for remuneration management to assure equal pay for men and women. Directors’ remuneration for 2022 and 2023 A. Directors’ remuneration For 2022 and 2023, no changes to directors’ remuneration are planned in respect of the remuneration described for 2021, although shareholders at the 2022 or 2023 annual general meeting could approve an amount higher than the six million euros currently in force, or the board could approve an alternative allocation of that amount to directors. B. Directors' remuneration for the performance of executive duties Executive directors’ remuneration will conform to principles similar to those applied in 2021, with the following changes. i. Fixed components of remuneration A. Gross annual salary Executive directors’ annual gross fixed pay may be adjusted each year based on the criteria approved by the remuneration committee at any given time. For 2022 and 2023, it may not increase above 5% of their annual gross salary in the previous year. It could also increase owing to adjustments made to the fixed remuneration mix based on standards approved by the remuneration committee, as long as it will not increase the Group’s costs. Responsible banking Corporate governance Economic and financial review Risk management and compliance The 5% increase mentioned above 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 This should not increase executive directors’ total remuneration. Otherwise, it must be disclosed in the report on the remuneration committee and the annual report on director's remuneration put to a non-binding vote at annual general meeting. B) Other fixed remuneration components No changes planned in respect of the terms for 2021. ii) Variable remuneration components The policy on executive directors’ variable remuneration for 2022 and 2023 will be based on the same principles as in 2021, following the same single-incentive scheme described above, and subject to the same rules of operation and limitations. A) Setting variable remuneration Executive directors’ variable remuneration for 2022 and 2023 will be set based on the corporate bonus pool and a benchmark approved for each year which takes into account: • a set of short-term quantitative metrics measured against annual objectives and aligned with the group’s strategic plan. These metrics will also cover, at least, shareholder return targets, capital and customers. They can be measured at group level and, where applicable, at division level, for a specific business division headed by an executive director. The results of each metric can be contrasted with the budget for the financial year, as well as with growth from the previous year. • a qualitative assessment that cannot raise or lower the quantitative result by more than 25%. It will be conducted for the same categories as the quantitative metrics, including shareholder returns, risk and capital management and customers. • an exceptional adjustment that must be duly substantiated and may involve changes owing to control and/or risk shortfalls, negative assessments from supervisors or unexpected material events. The quantitative metrics, qualitative assessment and potential extraordinary adjustments will ensure main objectives are considered from the perspective of the various stakeholders and that the importance of risk and capital management is factored in. Once the corporate bonus pool is fixed according to the criteria above, the board of directors, further to a proposal from the remunerations committee, decides on the individual bonus, taking into consideration the level of achievement of their individual objectives, which in general terms coincide with the bonus pool metrics (60%) and their compliance with corporate values (40%). Lastly, the following circumstances must be confirmed to set variable remuneration: • If ONP does not reach a certain compliance threshold, the incentive cannot exceed 50% of the year’s incentive benchmark. • If the group’s ONP were negative, the incentive would be zero. • When setting individual variable pay, the board will also consider restrictions to the dividend policy imposed by supervisors. B. Forms of payment of the incentive No changes to pay forms are planned in respect of the terms in place for 2021. C. Deferred variable remuneration subject to long-term objectives The last three annual payments of each deferred variable remuneration amount will be made in accordance with the terms described under section E) above and if the group fulfils long-term objectives for at least three years. This may only confirm or reduce payment amounts and number of deferred shares. Long-term metrics will, at least, cover value creation and shareholder returns as well as capital and sustainability over a minimum period of three years. They will be aligned with the group’s strategic plan and main priorities towards its stakeholders. They can be measured for the entire group or by country or business, when appropriate, and subsequently compared to a group of peers. The portion paid in shares cannot be sold until one year has elapsed since they were delivered. D. Other terms of the incentive No changes to the continuity, malus and clawback clauses of the remuneration policy for 2021 described in section E are expected. Furthermore, no changes are planned in respect of the clauses on hedging shares or the deferred amounts in cash adjusted for inflation. iii) Shareholdings The policy on shareholdings approved in 2016, with the amendment introduced in 2020 relating to not selling the shares they receive as variable remuneration for a period of three years detailed in section 6.3.E above will apply in 2022 and 2023, unless the remuneration committee proposes it be amended to the board in light of exceptional circumstances (regulations, orders or recommendations from regulators or supervisors). Such amendments would be described in detail in the report on the remuneration committee and the annual report on director’s remuneration put to a non-binding vote at the annual general meeting. iv) Principle of equal pay The same principle of equal pay that applies for executive directors and any other Santander employee described in respect of 2021 applies for 2022 and 2023. Terms and conditions of executive directors’ contracts Executive directors’ terms of service are governed by board- approved contracts they sign with Banco Santander. The basic terms and conditions, besides those relating to the 259 Annual report 2020 Contents They both participate in the defined contribution scheme created in 2012, which covers the contingencies of retirement, disability and death. Banco Santander makes annual contributions to executive directors’ benefit plans schemes. Annual contributions are calculated in proportion to executive directors’ pensionable bases, and the group will continue to make them until the executive directors’ leave the group or until their early retirement within the group, their death or disability (including during pre-retirement). The pensionable base of executive directors’ annual contributions is their fixed remuneration plus 30% of the average of their last three variable remuneration amounts. Contributions will be 22% of pensionable bases. The pension amount that corresponds to contributions linked to variable remuneration will be invested in Santander shares for five years from the earlier of the date of retirement or cessation. It will be paid in cash after the five years have elapsed or on the retirement date (if later). Moreover, the malus and clawback clauses for variable remuneration contributions will apply for the same period as the related bonus or incentive. This benefit plan is outsourced to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Executive directors’ economic rights under the scheme belong to them even if they are not active in the group at the time of their retirement, death or disability. Their contracts do not provide for any severance pay upon termination apart from what the law provides and in the case of pre-retirement, the aforementioned annual allotment. E.  Insurance and other remuneration and benefits in kind Ana Botín and José Antonio Álvarez will receive the supplement to their fixed remuneration approved when the supplementary life and health benefits were eliminated in 2018. It will be paid in 2021, 2022 and 2023 in the same amount and continue to be paid until they reach retirement age (even if they are still active). The group has life and health insurance policies taken out for directors. Insurance premiums for 2021 include standard life insurance and the life insurance cover with the supplement to their fixed remuneration mentioned above. In 2022 and 2023, premiums could vary if directors’ fixed pay or actuarial circumstances change. Furthermore, executive directors are covered by Banco Santander’s civil liability insurance policy and may receive other benefits in kind (such as employee loans) pursuant to the group’s general policy and subject to the corresponding tax treatment. F. Confidentiality and return of documents Directors are bound to a strict duty of confidentiality during their relationship and subsequent to termination. Executive directors are required to return any documents and items relating to their activities and in their possession to Banco Santander. remuneration mentioned above, are the ones described herebelow. A. Exclusivity and non-competition Executive directors may not contract with other companies or entities to perform services, unless expressly authorised by the board of directors. In all cases, they are bound by a duty of non-competition in relation to companies and activities similar in nature to Banco Santander and its consolidated group. In addition, executive director contracts impose prohibitions on competing and attracting customers, employees and suppliers, which can be enforced for two years after their termination in their executive duties for reasons other than a breach by Banco Santander. In regard to Ana Botín and José Antonio Álvarez, the compensation to be paid by Banco Santander for this duty of non-competition is 80% of the fixed 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. However, it is envisaged that in 2021, subject to approval at the 2021 AGM, their contracts shall be amended so that the compensation for the duty of non-competition shall be twice the amount of the fixed remuneration. B. Code of Conduct Executive directors are obliged to adhere strictly to the group’s General Code and the Code of Conduct in Securities Markets, especially in terms of confidentiality, professional ethics and conflicts of interest. C. Termination The length of executive directors' contract s is indefinite. Contracts do not provide for any severance payment upon termination apart from what the law provides. If Ana Botín’s contract is terminated by Banco Santander, she must remain available to the group for four months in order to ensure proper transition (6 months from the moment pre- retirement provisions are taken out). During this period, she would continue to receive her gross annual salary. D. Pre-retirement and benefit plans The board of directors has approved, subject to the condition that the remuneration policy be approved at the annual general shareholders' meeting, an amendment to the contracts of the executive directors whereby: • Ana Botín ceases to have the right to pre-retire if she leaves Banco Santander out of her own volition, keeping this right in case of termination by Banco Santander until 31 August 2022. After this date, she does not have the right to pre- retire. While she keeps this right she will be entitled to an annual allotment equal to the sum of her fixed remuneration and 30% of the average amount of her last variable remuneration, to a maximum of three. This allotment is subject to the malus and clawback provisions in place for a period of five years. • José Antonio Álvarez ceases to have the right to pre-retire in case of termination of his contract. 260 Responsible banking Corporate governance Economic and financial review Risk management and compliance G. Other terms and conditions Executive directors’ contracts stipulate the following notice periods: By decision of the Banco Santander (months) By decision of the director (months) Ms Ana Botin-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 6* 6 4 — * From the moment she ceases to have the right to pre-retire Contracts do not provide pay in lieu of notice clauses. Terms and conditions of Sergio Rial's contracts The contract between Sergio Rial and Banco Santander, S.A. for his role as Santander Regional Head of South America, whose EUR 750 thousand remuneration is being submitted to the approval of the 2021 AGM as part of this remuneration policy, includes his confirmation that this role is compatible with his role as CEO and vice-president of Santander Brasil, and is subject to an indefinite term, and to customary exclusivity and non-competition, code of conduct, termination (without including any payment for termination) and confidentiality and return of documents conditions. Likewise, the terms and conditions of the remuneration he receives in his condition as CEO and vicechairman of Santander Brasil are fixed by this subsidiary, in accordance with Group policies, the subsidiary's policies, and applicable local regulations. 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 at Banco Santander, notwithstanding the possibility of amending specific terms of agreements so that, overall, they contain conditions similar to those previously described. Directors’ total remuneration for executive duties cannot exceed the highest remuneration received by the group’s current executive directors under the remuneration policy approved by shareholders. The same rules apply if a director assumes new duties or becomes an executive director. If a director takes up executive functions in a specific division or local unit, the board of directors, on the remuneration committee's recommendation, can adapt the metrics for setting and paying incentives to take that division or local unit into account in addition to the group. Remuneration paid to directors in that capacity will be included within the maximum amount set by shareholders to be distributed by the board of directors in the terms described above. A new director coming from an entity outside Santander Group could be paid a buyout to offset any variable remuneration foregone for having accepted a contract with the group; and/or a sign-on bonus for leaving to join Banco Santander. This compensation could be paid fully or partly in shares, depending on the delivery limits approved at the annual general shareholders' meeting. Authorisation is expected to be sought at the next general shareholders’ meeting in order to deliver a maximum number of shares to any new executive directors or employees to whom buyout regulations apply. Furthermore, sign-on bonuses can only be paid once to new executive directors, in cash or in shares, and in each case they will not exceed the sum of the maximum variable remuneration awarded for all executive directors. 6.5 Preparatory work and decision-making process with a description of the participation of the remuneration committee Section 4.7 'Remuneration committee activities for 2020', (the report on the remuneration committee) states: • Pursuant to Banco Santander’s bylaws and the Rules and regulations of the board of directors, the duties relating to the remuneration of directors performed by the remuneration committee. • How the remuneration committee is composed on the date the report is approved. • The number of meetings it had in 2020, including joint sessions with the risk, compliance and regulation supervision committee. • The date of the meeting in which the report was approved. • The 2019 annual report on directors’ remuneration was approved by the board of directors and put to a binding vote at the April 2020 AGM, with 93.77% of the votes in favour. The tally of the votes was: Votes cast Votes against Votes in favour Abstentions Number 10,429,789,366 Number 649,059,435 9,777,014,101 372,790,860 % of total A 96.55 % % of totalA 6.01 % 90.51 % 3.45 % A. Percentage on total valid votes and abstentions. 6.6 Remuneration of non-director members of senior management Variable remuneration was approved by the board of directors on 2 February 2021 in view of the recommendation the remuneration committee had voted to submit on 26 January 2021. It was set according to Banco Santander’s general remuneration policy as well as specific details pertaining to senior management. In general, senior management variable remuneration packages were calculated with the quantitative metrics and qualitative assessment used for executive directors (see section 6.3 B ii). 261 Annual report 2020 Contents As detailed in 6.3.ii above, the underlying business performance resulted in a final bonus calculation of 71.08% of the target bonus. The board of directors, upon recommendation from the remuneration committee, exercised its discretion to reduce this target bonus to 67.32%, which was the original target submitted to the board in December 2020 and resolved that the amounts saved be contributed to support the fight against covid-19. This resulted in an amount of EUR 1,570 thousand for the top two executive segments in the Group's Corporate Headquarters (c.80 employees). Ana Botín and José Antonio Alvarez, with a pension scheme of 22% of their pensionable bases, the elimination of supplementary benefits, an increase of the insured sum of life insurance and a supplement to fixed remuneration in cash which is included under "Other remuneration". The following table shows the amounts of short term remuneration (immediately payable) and deferred remuneration (not linked to multi year targets) for senior management as of 31 December 2020 and 2019, excluding those of executive directors: Some senior managers’ contracts were amended in 2018 in the same manner described under 6.3.C and D in respect of Short-term and deferred salary remuneration EUR thousand Year 2020 2019 Number of people 18 18 Fixed 21,642 22,904 Immediately receivable variable remuneration A (50% in shares) 11,479 15,337 Deferred variable remuneration B (50% in shares) Pension contributions Other C remuneration 4,941 6,673 6,039 6,282 6,312 15,337 D Total 50,413 66,532 A. The amount immediately payable in shares in 2020 was 2,136 thousand Santander shares (2,091 thousand Santander shares in 2019). B. The amount of deferred shares in 2020 was 919 thousand Santander shares (910 thousand Santander shares in 2019). C. Includes life insurance premiums, health insurance and relocation packages and other remuneration items. This table breaks down remuneration linked to multi-year targets for senior management at 31 December 2020 and 2019, which they will only receive if they meet the terms of continued service; non-applicability of malus clauses; and long-term goals are met during deferral periods. Thousands of euros Year 2020 2019 Number of people 18 18 Deferred variable remuneration subject to long-term B metricsA (50% in shares) 5,188 7,007 A. In 2020, this corresponds to the fair value of maximum annual payments for 2024, 2025 and 2026 in the fifth cycle of the plan for deferred variable remuneration linked to multi-year targets. In 2019, this corresponds to the estimated fair value of maximum annual payments for 2023, 2024 and 2025 in the fourth cycle of the plan for deferred variable pay linked to multi-year targets. Fair value in the plan was determined on the authorisation date based on the valuation report of independent expert Willis Towers Watson. Based on the plan for 2020 and success levels of similar plans at peer entities, the expert found a range of 60%-80% reasonable to estimate the initial success ratio. Therefore, fair value was considered to be 70% of the maximum value. B. The number of shares in Santander as deferred variable pay subject to long- term metrics shown in the table above was 965 thousand in 2020 (955 thousand shares in Santander in 2019). The long-term goals are the same as those for executive directors. They are described in section 6.3 B iv). Senior executives who stepped down from their roles in 2020 consolidated salary remuneration and other remuneration relating to the cessation of their duties for a total amount of EUR 5.984 thousand during the year (EUR 6,789 thousand for those who stepped down from their roles in 2019). They also have the right to receive, in total,133 thousand euros in variable pay subject to long-term targets (EUR 922 thousand for those who stepped down from their roles in 2019). 262 At our April 2020 AGM, shareholders approved the 2020 Digital Transformation Incentive, a variable remuneration scheme that delivers Santander shares and share options if the group hits major milestones on its digital roadmap. 3 senior executives are included within this plan (aimed at a group of up to 250 employees whose functions are deemed essential to Santander Group’s growth and digital transformation) and, thus, can receive a total of EUR 1,700 thousand to be paid in thirds on the third, fourth and fifth anniversary of the authorisation date (2024, 2025 and 2026). This amount is implemented in 316,574 Santander shares and 944,445 options over Santander shares, using for these purposes the fair value of the options at the moment of their grant (EUR 0.90). Of the EUR 30,000 thousand approved by our April 2020 AGM as maximum amount for the 2020 Digital Transformation Award, a total overall cost of EUR 17,800 thousand has been approved, based on the final number of participants and the level of achievement of milestones. The milestones for the 2020 Digital Transformation Award were: (i) rolling out the global merchant services (GMS) platform in 3 new geographies, enhancing the platform functionality and achieving volume targets for transactions and participating merchants; (ii) doing the commercial rollout of the global trade services (GTS) platform in 8 new geographies, enhancing platform functionality, and achieving volume targets for on-boarded clients and monthly active users; (iii) launching OpenBank in a new market and migrating the retail banking infrastructure to “new-mode” bank; (iv) launch the global platform SuperDigital in at least 4 countries, driving target active user growth; (v) deploying machine learning across pre-defined markets for 4 priority use cases, rolling out Conversion Rate Optimization (Digital Responsible banking Corporate governance Economic and financial review Risk management and compliance marketing) for at least 40 sales programs, delivering profit targets, and driving reduction of agent handled calls in contact centers; (vi) successfully implementating initiatives related to on-board and identity services, common API (application programming interface) layer, payment hubs, mobile app for SMEs and virtual assistant services; and (vii) launching the PagoFX global platform in at least 4 countries. The 2019 Digital Transformation Incentive, which terms are substantially the same as those of the 2020 one, included three senior executives, who may receive a total of EUR 2,100 thousand. See Note 46 to the 2020 Group's consolidated financial statements for further information on the Digital Transformation Incentive. In 2020, the ratio of variable to fixed pay components was 80% of the total for senior managers, well within the maximum limit of 200% set by shareholders. See note 5 of the group’s 2020 consolidated financial statements for further details. 6.7 Prudentially significant disclosures document On the remuneration committee’s recommendation, the board approves the key remuneration elements 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. These are typically those whose professional activities may have an important impact on the Group's risk profile (all of these, together with the senior management and Banco Santander's board of directors form the so called 'Identified Staff' or 'Material Risk Takers') Every year, the remuneration committee reviews and, if applicable, updates identified staff in order to include individuals within the organisation who qualify as such. The Remuneration Policies chapter in the 2020 Pillar III 4 of Banco Santander, S.A. explains the disclosures report criteria and regulations followed to identify such staff. At the end of 2020, 1,394 group executives (including executive directors and non-director senior managers) were considered identified staff (1,359 in 2019), which accounts for 0.73% of the total workforce (0.69% in 2019). Identified staff have the same remuneration standards as executive directors (see sections 6.1 and 6.3), but not: • Category-based deferral percentages and terms. • The possibility of certain manager categories of only having deferred variable pay subject to malus and clawback clauses (and not to long-term targets). 4 The 2020 Pillar III disclosures report can be found on our corporate website. • The portion of variable remuneration paid or deferred as shares for group executives in Brazil, Chile, Mexico, Poland and Santander Consumer US can be delivered in shares or similar instruments of their own listed entities (as in previous years). In 2021, the board will maintain its flexibility in determining total or partial payment in shares or similar instruments of Banco Santander and/or subsidiaries in the proportion it considers appropriate in accordance with the maximum number of Santander shares to be delivered set by shareholders at the annual general shareholders' meeting and any regulatory restrictions applicable in each jurisdiction). The aggregate amount of variable remuneration for identified staff in 2020, the amounts deferred in cash and shares, and the ratio of the variable to fixed remuneration components are explained in the remuneration policies chapter of Banco Santander’s Pillar III disclosures report for 2020. 263 Annual report 2020 Contents 7. Group structure and internal governance Grupo Santander is structured into legally independent subsidiaries whose parent company is Banco Santander, S.A. Its registered office is in Santander (Cantabria, Spain), while its corporate centre is located in Boadilla del Monte (Madrid, Spain). It has a Group-Subsidiary Governance Model (GSGM) and good governance practices in place for its core subsidiaries. Any references to subsidiaries in this section are to the group’s most prominent entities. The key features of the GSGM are: • The subsidiaries’ governing bodies must ensure their rigorous and prudent management and economic solvency while pursuing the interests of their shareholders and other stakeholders. • The subsidiaries are managed locally by teams that possess extensive knowledge on, and experience with, their customers and markets, while benefiting from the synergies and advantages of belonging to the Group. • The subsidiaries are subject to local authority regulation and supervision, although the ECB supervises the Group overall. • Making the group’s units more efficient through cost management synergies, economies of scale and a common brand. • Sharing best practices in global connectivity, commercial initiatives and digitalization. 7.2 Internal governance Grupo Santander’s internal governance model outlines a set of principles that regulate three types of relationships with its subsidiaries: • The subsidiaries’ governing bodies are subject to the group’s rules and procedures for structuring, forming and running boards of directors and audit, nomination, remuneration and risk committees, according to international standards and good governance practices. This includes embedding other group rules and regulations on the suitability, appointment, remuneration and succession plans of governing body members, which fully comply with local regulations and supervisory standards. • The relationship between regional and country heads and • Customer funds are secured by the deposit guarantee the group CEO. schemes in the subsidiaries’ countries and are subject to local laws. The subsidiaries finance their own capital and liquidity. The group’s capital and liquidity are coordinated by corporate committees. Intra-group risk transactions are limited, transparent and carried out under market conditions. Grupo Santander retains a controlling interest in subsidiaries listed in certain countries. Each subsidiary runs independently and has its own recovery plan, limiting the contagion of risk between them and reducing systemic risk. 7.1 Corporate Centre Banco Santander’s GSGM is supported by a corporate centre, which brings control and support units together with functions such as strategy, risk, compliance, auditing, finance, accounting, technology and operations, human resources, legal services, internal governance, communications and marketing. It adds value to the Group by: • Enhancing governance under robust corporate frameworks, models, policies and procedures to implement strategies and ensure effective Group oversight. • The relationship between local and global heads of key control positions, following a three lines of defence model: chief officers for risk (CRO), compliance (CCO), audit (CAE), finance (CFO) and accounting (CAO), as well as other key support and business functions (Technology and Operations, HR, General Counsel, Legal Services, Marketing, Communications, Strategy, SCIB, Wealth Management & Insurance, Digitalization and Innovation). The group has three regional heads who report to the group CEO and are responsible for consolidating and streamlining the management and coordination of its core countries in the three geographic areas where it operates: Europe, South America and North America. Their key responsibilities must be undertaken in compliance with European Union and country- specific laws and regulations, ensuring that the country heads' role and accountability (including regulatory responsibilities) are not compromised. In 2020, the Europe region (Spain, Portugal, Poland and the UK) received a mandate to execute a pan-European operating model to deliver benefits of scale and efficiency that leverage common product and regional management structures in the countries. Specific coordination elements and organizational structures were defined to ensure the effective discharge of the Europe regional head's responsibilities, fully respecting 264 Responsible banking Corporate governance Economic and financial review Risk management and compliance local governance. Business and functional roles were also created to support and control those responsibilities. The GSGM dictates rules for appointing those officers, setting their objectives (weighted 50% local and 50% group/regional) and variable pay, assessing their performance and planning their succession. It also explains how group officers should coordinate and interact with their subsidiary counterparts. Grupo Santander has corporate frameworks for matters considered to have a material impact on its risk profile, covering risk, capital, liquidity, compliance, financial crime, technology, auditing, accounting, finance, strategy, human resources, outsourcing, cybersecurity, special situations management, and communications and brand. They also specify: • How the Group should supervise and exert control over subsidiaries; and • The group’s involvement in subsidiaries’ decision-making (and vice versa). Banco Santander board of directors approves the GSGM and corporate frameworks for the subsidiary governing bodies to formally adhere to them. They take local requirements for subsidiaries into account, and are revised each year by the group’s board and adapted to new legislation and international best practices. The functions draw on corporate frameworks to prepare internal regulatory documents that are given to subsidiaries as a reference for implementing those frameworks effectively, cohesively and in compliance with local laws and supervisory requirements. This approach ensures consistency throughout the Group. The group’s internal governance office and subsidiary general counsels are responsible for embedding the governance model and corporate frameworks. Every year, the group assesses their performance in reports sent to governing bodies. In 2019, a new policy for the governance of non-GSGM subsidiaries was approved, completing and enhancing the governance and control system that has been applied to those companies thus far. In 2020, a new governance model was approved for PagoNxt, a wholly-owned subsidiary of Banco Santander that is structured as a dedicated holding company with a set of key initiatives on digitalizing the group's financial services, with payments at the core. This model defines an organizational and governance framework for PagoNxt and its subsidiaries in the context of the group-wide arrangements. It specifically covers the scope, principles, roles and responsibilities, key processes and governance bodies that should be in place to ensure that PagoNxt is managed in alignment with group, legal and supervisory expectations. Also in 2020, new governance models for Santander Corporate and Investment Banking (SCIB) and Wealth Management and Insurance were developed to ensure proper, group-wide oversight of those businesses, as set out in the GSGM. 265 Annual report 2020 Contents The following charts show the three levels of the GSGM, as well as the main actions to ensure an effective relationship and solid internal governance system for the Group. Group Subsidiaries Board of directors Group executive chairmanA Group CEO B Regional heads C Control management and business functions 4D Board of directors CEO / Country head Control management and business functions D The GSGM enhances control and oversight through: Presence of Group Santander on the subsidiaries' boards of directors, establishing guidelines for board dynamics and effectiveness. Reporting of the CEO/country heads to the Group CEO / regional heads and group executive committee. Interaction between the Group and subsidiaries control, management and business functions. A. First executive. B. Second executive. C. Europe, North America and South America, reporting to Group CEO. D. Audit, Risk, Compliance, Finance, Financial Accounting & Control, IT & Operations, Human Resources, General Secretariat, Marketing, Communications, Strategy, Santander Corporate & Investment Banking, Wealth Management & Insurance, Digital & Innovation and Global Platforms. Best practices and talent sharing across the whole Group and between subsidiaries is key to our success. Multiple point of entry structure that has proved to be a key resilience instrument and is a result of our diversification strategy. Continuous collaboration and daily interaction between local and corporate teams. A common set of corporate frameworks and policies across the Group adapted to local market conditions. Enabling the identification of synergies and economies of scale across the Group. Definition and implementation of new group-wide and local initiatives to keep developing our management and control model. 266 Responsible banking Corporate governance Economic and financial review Risk management and compliance 8. Internal control over financial reporting (ICFR) This section describes the key aspects of Grupo Santander's internal control and risk management systems in respect of financial reporting, including: • Control activities and control environment. • Risk assessment in financial reporting. • Reporting and communication. • System monitoring. • The external auditor’s report. 8.1 Control environment Governance and control bodies The board of directors approves the financial reports Banco Santander must publicly disclose as a listed company. It is the body that oversees and guarantees the integrity of the Group’s systems for internal communication, operational and financial control, accounting, financial reporting and legal compliance. The board of directors has an audit committee that assists with supervising the group’s financial reporting and internal control systems (see section 4.5 'Audit committee activities in 2020'). The audit committee works with the external auditor to address material deficiencies in the internal control system detected in audits. It also makes sure the external auditor issues a report on the group’s system for ICFR. Responsibilities, General Code of Conduct, whistleblowing channel and training Responsibility functions Grupo Santander, through its corporate organization functions, in countries and businesses, defines, implements and maintains the unit's organizational structures, catalogue of roles and size. The corporate organization function defines and documents the corporate model for managing structures and templates which is used as a reference across the group. The organizational units are in charge of identifying and defining the main functions under the responsibility of each structural unit, ensuring that the organization has a solid ICFRS model. Grupo Santander has a responsibility scheme to identify potential risks and their mitigating controls under a three- pronged defence model that establishes lines of authority and accountibility including: The head of the financial accounting and control function (the CAO), which has the following functions, amongst others: • Integrating the group's corporate policies into its management and adapting them to local needs. • Ensuring that appropriate organizational structures are in place to carry out the tasks assigned, as well as suitable hierarchical-functional structure. • Running critical procedures (control models), based on corporate technology. • Implementing the corporate accounting and management information systems and adapting them to the specific needs of each unit. In order to preserve its independence, each controller reports hierarchically to the head of the entity or country in which it exercises its responsibilities (country head) and functionally to the head of the group's Financial Accounting and Control division. The non-financial risk control function is responsible for: • Establishing and circulating the methodology for documenting the group's Internal Control Model (ICM) and ICM evaluation and certification, which covers the ICFRS, amongst other regulatory and regulatory requirements. Grupo Santander's ICM means the process carried out by the board of directors, senior managers and other group staff to provide reasonable assurance that their objectives will be achieved. • Encouraging documentation maintenance to adapt it to organizational and regulatory changes and, along with the Financial Accounting and Control division, and, where applicable, representatives of the divisions and/or companies involved, to present the ICM evaluation outcome to the audit committee. Similar functions in each unit that reports to the corporate non-financial risk control area. General Code of Conduct (GCC) The group’s GCC sets out the guidelines, principles and rules approved by the board of directors to govern Grupo Santander employees’ conduct and ethics. Furthermore, it dictates 267 Annual report 2020 Contents guidelines in relation to accounting standards and financial reporting. The GCC can be viewed on our corporate website. All of the group’s employees, including members of its governance bodies, sign the Code of Conduct, even though some are also bound to the Code of Conduct in Securities Markets and other codes of conduct specific to the area or business in which they work. Employees have access to e- learning courses on the Code and can consult the compliance and conduct function to address any queries about its application. The GCC is a fundamental resource of the compliance function. It explains the duties of the group’s governance bodies, units and areas required to implement it together with the compliance function. If anyone violates the code, the human resources function adopts disciplinary measures and recommends corrective action (including work sanctions), irrespective of any related administrative or criminal sanctions. Whistleblowing channel Banco Santander’s whistleblowing channel is called Canal Abierto. It is a confidential and anonymous means for employees to report unlawful acts, violations of the GCC and other behaviour contrary to corporate values. We adapted the channel in 2020 to enable communications by other people related to Banco Santander other than employees, such as shareholders, customers, suppliers and other third parties, ensuring that they are treated confidentially and anonymously. It can also be used to report claims of accounting or auditing irregularities under SOX to the compliance and conduct function, which will elevate them to the audit committee for appropriate measures to be taken. The channel does not require whistleblowers to give personal information in order to keep reports confidential before they the audit committee can review them. Only certain compliance and conduct function officers analyse reports to determine if matters pertain to accounting or auditing in order to submit them to the audit committee. Canal Abierto is supervised jointly by the audit committee and the risk supervision, regulation and compliance committee depending on the subject of the complaint. The SOX attributes the authority to supervise the whistleblowing channel in matters that fall under the remit of the audit committee (specifically financial and accounting, including those related to the audit), while the supervision of reports of breaches of regulatory requirements for corporate behaviours or the internal governance system are the responsibility of the risk, regulation and compliance committee. The channell can be viewed on our corporate website. For more information on the number of complaints filed on the channel and their typology, see section 'A talented and engaged team' in the Responsible banking chapter, for additional information. 268 Training Group employees who help prepare or analyse financial information take part in training programmes and regular refresher courses specifically designed to teach them the concepts and skills they require to discharge their duties properly. The Financial Accounting and Control division promotes, designs and oversees these programmes and courses. It has with support from the corporate learning and career development unit under the Human Resources division. Training takes the form of both e-learning and on-site sessions monitored and overseen by the corporate learning and career development unit to guarantee that employees duly complete them and assimilate concepts properly. Training programmes and refresher courses taught in 2020 wwfocused on matters directly and indirectly related to the financial reporting. These subjects include: (i) risk analysis and management; (ii) accounting and financial statement analysis; (iii) the business, banking and the financial environment; (iv) financial management, costs and budgeting; (v) numerical skills; and (vi) calculations and statistics. 30,246 employees in the all of the group’s markets were involved in training programmes. Over 615,000 training hours were spent at the corporate centre in Spain and remotely via e-learning. Furthermore, local units develop their own training programmes based on the parent’s. 8.2 Risk assessment in financial reporting The Group has a specific process to identify the companies that must be included in its scope of consolidation. The Financial Accounting and Control division and the General Secretariat and Human Resources division oversee this approach. This process enables us to identify the entities the Grupo Santander controls through the voting rights that grant direct or indirect ownership of its capital and other entities controlled by others such as mutual funds, securitization funds and structured entities; analyses whether the group has control over an entity, whether it has rights to the variable returns of the entity or is exposed to them, and whether it can influence the amount of such variable returns. If the group is considered to have control, the entity is included in the scope of consolidation and is consolidated using the global integration method. Otherwise, we analyse whether there is significant influence or joint control. If so, the entity is also included in the scope of consolidation and it is measured using the equity method. For entities with the greatest impact on the preparation of the group's financial information, we implement an ICM using a homogeneous methodology to make sure that relevant controls are included and all significant risks to financial reporting are covered. The group's ICM complies with the strictest international standards, particularly the guidelines of the Committee of Sponsoring Organisations of the Treadway Commission (COSO) within its last published framework in 2013 which Responsible banking Corporate governance Economic and financial review Risk management and compliance covers control targets for the effective and efficient operations, reliable financial reporting and regulatory compliance. The risk identification process takes into account all the group's activities, the scope of which is greater than all the risks directly related to the preparation of the group's financial information. The identification of potential risks that must necessarily be covered by the ICM is based on management's knowledge and understanding of the business and its operations relative to the importance and qualitative criteria associated with the type, complexity or structure of the business. Banco Santander ensures there are controls to cover risks of errors and fraud in financial reporting, such as (i) the existence of assets, liabilities and transactions at the relevant date; (ii) the items are assets or rights or liabilities and obligations of the group; (iii) timely and correct recording and adequate valuation of assets, liabilities and transactions; and (iv) correct application of accounting principles and rules, as well as appropriate breakdowns. The main features of the group's ICM are as follows: • It is a corporate model that involves the entire organizational structure through a direct set of individual responsibilities. • Management of the ICM documents is decentralized to the various units, while coordination and monitoring falls to the non-financial risk control area, which provides general criteria and guidelines to standardize procedure documents, control assessment, criteria for classifying potential deficiencies and regulatory adaptations. • It is a global model primarily aimed at documenting activities to produce consolidated financial information and other procedures carried out by each entity's support areas that, without having a direct impact on the accounts, could lead to possible losses or contingencies in the event of incidents, errors, breaches of regulations and/or fraud. 8.3 Control activities Revision and approval of financial information The audit committee and the board of directors oversee the preparation and submission of the financial information required of Banco Santander and the Group, which includes the non-financial information and its integrity. They also review compliance with regulatory requirements, the scope of consolidation and the correct application of accounting criteria, ensuring that this information is permanently updated on the Banco Santander corporate's website. The production, revision and approval of financial information and the description of ICFR is documented in a corporate tool that integrates the control model into risk management, including a description of activities, risks, tasks and controls associated with all operations that may have a significant effect on the financial statements. This documentation covers recurrent banking operations and one-off transactions (sale of investments, fixed assets transactions, etc.) and aspects related to judgements and estimates, to correctly record, evaluate, present and breakdown financial information. The audit committee is responsible for reporting to the board on the financial information that the group must regularly publish, ensuring that it is prepared in accordance with the same principles and practices as the annual accounts and is as equally reliable as the financial statements for the board to adopt the corresponding resolutions. The most significant aspects when closing and reviewing relevant judgements, estimates, measurements and projections are: • Impairment losses on certain assets. • The assumptions used in the actuarial calculation of post- employment benefit liabilities and other obligations. • The useful life of tangible and intangible fixed assets. • The valuation of consolidation goodwill. • It is dynamic and constantly updated in order to reflect the • The calculation of provisions and of contingent liabilities. reality of the group's business, risks and controls to mitigate them. • It produces comprehensive documents on the processes within its scope and includes detailed descriptions of operations, assessment criteria and reviews. All ICM documents of the Group's companies are compiled on a corporate IT application that is used by employees of different levels of responsibility in the assessment and certification of the group's internal control system. The audit committee is responsible for supervising Banco Santander and the group's regulated financial information procedures and the internal control systems. • The fair value of certain unquoted assets and liabilities. • The recoverability of the tax assets. • The fair value of acquired identifiable assets and the liabilities assumed in business combinations. The group CAO presents the financial information to the audit committee for validation at least quarterly, giving explanations of the main criteria used to make estimates, assessments and significant judgements. The information provided to directors prior to meetings, including relevant judgements, estimates and projections is specifically prepared for these sessions. The group also has a corporate accounting and financial management information committee, which is responsible for governing and supervising accounting, financial management and control, and ensuring that these matters are disclosed in 269 Annual report 2020 Contents accordance with law and such disclosure is fair, accurate and not misleading. To verify that the ICM operates correctly, the group conducts an annual pyramid assessment and certification, identifying and analysing the criticality of risks and the effectiveness of controls. This begins with an assessment of control activities by those responsible for them, which is then challenged and ratified through the organization's different hierarchy, so that, the CEO, the CFO and the CAO can certify the effectiveness of the ICM. The Non-Financial Risk Control area prepares a report that includes the main conclusions from the units' certifications reflecting the main deficiencies identified during the year and indicating whether they have been appropriately resolved or what plans are in place for satisfactory resolution as well as supporting evidence for the signatures of the CEO, CFO and CAO. The Non-Financial Risk Control area presents the conclusions of these assessments to the audit committee alongside with the Financial Accounting and Control division and, where applicable, the representatives of the divisions and/or companies in question, prior to submission to the risk supervision, regulation and compliance committee. In 2020, the group created a new meeting within its governance structure called the Internal Control Monitoring Meeting, in which the main participants in the group's ICM, monitored the progress of the main internal control weaknesses and the ICM strategy and performance. Internal control policies and procedures for IT systems The Technology and Operations division draws up the group’s corporate policies on IT systems involved directly or indirectly with the financial statements. These systems implement special internal controls to prepare and post financial information correctly. The internal control policies on the following aspects are of particular importance: • Updated and divulged internal policies and procedures for system security and access to applications and computer systems according to functions and ratings of each unit/ role. • The group's methodology, under which new applications are developed and existing applications are maintained or adapted through a circuit that formulates, develops and tests them so as to treat financial information reliably. ◦ Once applications are developed according to regularly defined requirements (detailed documentation of processes to be implemented), they are run through comprehensive tests by a specialist development laboratory. ◦ Before they are rolled out, a complete software testing cycle is run in a pre-production computerized environment that simulates real situations. Testing includes technical and functional tests, performance tests, user-acceptance tests and pilot and prototype tests, which are defined by the entities. 270 • The group’s continuity plans for key functions in disasters or other events that could suspend or disrupt operations, as well as highly automated back-up systems that support critical systems and require little manual intervention owing to redundant systems, high availability systems and redundant communication lines. Internal control policies and procedures for outsourced activities and valuation services from independent experts The group’s action framework and specific policies and procedures fittingly cover outsourcing risks. All group companies must adhere to this framework, which meets the EBA's requirements for outsourcing and risk management with third parties. It consists of: • Tasks to initiate, record, process, settle, report and accounting for transactions and asset valuations. • IT support in terms of software development, infrastructure maintenance, incident management, security and processing. • Other material support services not directly related to financial reporting, such as supplier management, property management, HR management, etc. Key control procedures include: • Documenting relations between group companies with comprehensive service agreements. • Documentation and validation by the group’s service providers of processes and controls for the services they perform. • The external suppliers must undergo an approval process to ensure that the relevant risks associated with the services they provide remain within acceptable levels, in accordance with the group's risk appetite. The group reviews estimates internally according to its control model guidelines. It will hire the services of a third party to help with specific matters upon confirming their expertise and independence and approving their methods and rationale of its assumptions though relevant procedures. Furthermore, the group’s controls make sure information for external suppliers of services that could affect the financial statements is accurately and comprehensively detailed in service level agreements. 8.4 Information and communication Responsible for accounting policies The Financial Accounting and Control division has an area called 'accounting policies', whose manager reports directly to the head of the division, and has the following exclusive responsibilities: • To define the accounting treatment of the transactions that constitute Banco Santander's activity, in accordance with their economic nature and the regulations governing the financial system. Responsible banking Corporate governance Economic and financial review Risk management and compliance • To define and keep up-to-date the group's accounting • The reliability and integrity of financial and operational policies and resolve any doubts or conflicts arising from their interpretation. • Improve and standardize the group's accounting practices. The corporate accounting and financial reporting and management framework sets out the principles and guidelines to prepare accounting, financial and management information that must apply to all Grupo Santander entities as a key element of their good governance. The group's structure makes it necessary to establish these principles and standard guidelines for their application, and for each of the group entities to have effective consolidation methods and employ homogeneous accounting policies. The framework's principles described in this framework are adequately reflected in the group's accounting policies. Accounting policies should be understood as a complement to local financial and accounting rules. Their overarching aims are (i) that statements and financial information made available to the management bodies, supervisors or other third parties, provide accurate and reliable information for decision-making in relation to the group, and (ii) timely compliance by all group entities with their legal obligations. Accounting policies are revised at least once a year and when relevant regulations are amended. Every month, the Accounting Policies area publishes an internal bulletin on new accounting regulation and their most significant interpretations. The Group entities, through their operations or accounting heads, maintain open communication with the financial regulation and accounting processes area, as well as with the other areas of the Financial Accounting and Control division. 8.5 Monitoring 2020 ICFR monitoring activities and results The board of directors approved an Internal Audit framework for Grupo Santander that defines the function and how it should conduct its work. Internal Audit is a permanent, independent function that guarantees the quality and effectiveness of internal control, risk management (current or emerging) and governance processes and systems, thus contributing to the protection of the organization's value, solvency and reputation as well as the board of directors and senior managers. The internal audit function reports to the audit committee and periodically, at least twice a year, to the board of directors. As an independent unit, it also has direct access to the board when required. Internal audit assesses: information. • Asset integrity. • Internal audit is the third line of defence, independent of the other two. Its scope of action includes: • All entities over which the group exercises effective control. • Separated assets (for example, mutual funds) managed by the entities mentioned in the previous section. • Any entity (or separated assets) not included in the above points, with which the group has entered into an agreement to provide Internal Audit functions. This subjective scope includes, in any case, the activities, businesses and processes carried out (either directly or through outsourcing), the organization and, where applicable, commercial networks. Internal Audit may also conduct audits for other investees that are not included in the preceding points when the group has reserved this right as a shareholder, as well as on outsourced activities in accordance with the established agreements. The audit committee supervises the group's internal audit function. See section 4.5 'Audit committee activities in 2020'. As at 2020 year-end, Internal Audit had 1,264 employees, all exclusively dedicated to this service. Of these, 279 were based at Corporate Centre and 985 in the local units located in the main geographies where the group is present, all with exclusive dedication. Every year, Internal Audit prepares an audit plan based on a risk self-assessment and is solely responsible for executing the plan. Reviews may lead to audit recommendations, which are prioritized in accordance with their relative importance, and are continuously monitored until fully implemented. At its meeting of 19 February 2021, the audit committee reviewed the 2021 audit plan, which was reported to and approved by the board at its meeting of 22 February 2021. Internal audit reports mainly aimed to: • Verify compliance with the provisions contained in sections 302, 404, 406, 407 and 806 of the SOX Act. • Check corporate governance with regard to information relating to the internal control system for financial reporting. • Review the functions performed by the internal control departments and by other departments, areas or divisions involved in ensuring compliance with the SOX Act. • Make sure the supporting documentation relating to the SOX Act is up to date. • The efficiency and effectiveness of the processes and systems referred to above. • Confirm the effectiveness of a sample of controls based on an internal audit risk assessment methodology. • The compliance with applicable regulations and supervisory requirements. • Assess the accuracy of the unit's certifications, especially their consistency of the certifications with respect to the 271 Annual report 2020 Contents observations and recommendations made by Internal Audit, the external auditors of the annual accounts or supervisors. 8.6 External auditor report The external auditor issued an independent reasonable assurance report on the design and effectiveness 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 following pages. • Ratify the implementation of recommendations made in the audit plan. In 2020, the audit committee and the board of directors were informed of the Internal Audit unit's work, in accordance with its annual plan, and of other matters related to this function. See Section 4.5. 'Audit committee activities in 2020'. Detection and management of deficiencies The audit committee oversees to supervise the financial reporting process and the internal control systems. It is responsible for any control deficiencies that could affect the reliability and accuracy of the annual accounts. It may refer to the areas of the Group involved in the process to obtain the necessary information and clarifications. The committee also assesses the potential impact of any errors detected in the financial information. The audit committee is responsible for discussing any significant weaknesses detected in the audit with the external auditor. As part of its oversight, the audit committee assesses the results of the work of the internal audit unit, and may take the necessary measures to correct any deficiencies identified in the financial information. In 2020, the audit committee was informed of the ICM evaluation and certification for the 2019 financial year. See section 4.5 'Audit committee activities in 2020'. 272 Responsible banking Corporate governance Economic and financial review Risk management and compliance 273 Annual report 2020 Contents 274 Responsible banking Corporate governance Economic and financial review Risk management and compliance 9. Other corporate governance information CNMV Circular 2/2018 of 12 June 2018 allows the annual corporate governance and directors’ remuneration reports Spanish listed companies must submit to be drafted in a free format, which is what we selected for our corporate governance and directors’ remuneration reports since 2018. The CNMV requires any issuer opting for a free format to provide certain information in a format it dictates 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 the CNMV', which also covers the section 'comply with the recommendations in the Spanish Corporate Governance Code or explain', and (ii) for remuneration matters, under section 9.5 'Statistical information on remuneration required by the CNMV'. Some shareholders or other stakeholders may be used to the formats of the corporate governance and directors' remuneration reports set the by the CNMV. Therefore, each section under this format in sections 9.1 'Reconciliation with the CNMV’s corporate governance report model' and 9.4 'Reconciliation to the CNMV’s remuneration report model'include a cross reference indicating where this information may be found in the 2020 annual corporate governance report (drafted in a free format) and elsewhere in this annual report. We have normally completed the 'comply or explain' section for all recommendations in the Spanish Corporate Governance Code to clearly show the ones we complied with, and explain the ones we partially complied or failed to comply with. In section 9.3 'Table on compliance with or explanations of recommendations in corporate governance', we have included a chart with cross-references showing where information supporting each response can be found in this corporate governance chapter and elsewhere in this annual report. 9.1 Reconciliation with the CNMV’s corporate governance report model Section in the CNMV model Included in statistical report Comments A. OWNERSHIP STRUCTURE A.1 Yes 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 Yes Yes No No No Yes Yes Yes No Yes No No Yes See sections 2.1 'Share capital' and 3.2 'Shareholder rights'. See section 2.3 'Significant shareholders' where we explain there are no significant shareholders on their own account. See 'Tenure and equity ownership' in section 4.2 and sections 6 'Remuneration' and 9.2 'Statistical information on corporate governance as required by the CNMV'. See section 2.3 'Significant shareholders' where we explain there are no significant shareholders on their own account so this section does not apply. See section 2.3 'Significant shareholders' where we explain there are no significant shareholders on their own account so this section does not apply. See section 2.3 'Significant shareholders' where we explain there are no significant shareholders on their own account so this section does not apply. See sections 2.4 'Shareholders' agreements'. and 9.2 'Statistical information on corporate governance as required by the CNMV'. Not applicable. See section 2.5 'Treasury shares' and 9.2 'Statistical information on corporate governance as required by the CNMV'. See section 2.5 'Treasury shares'. See section 9.2 'Statistical information on corporate governance as required by the CNMV'. See section 3.2 'Shareholder rights'. See section 3.2 'Shareholder rights'. See section 2.6 'Stock market information'. 275 Annual report 2020 Contents Section in the CNMV model Included in statistical report Comments B. GENERAL SHAREHOLDERS’ MEETING B.1 No B.2 B.3 B.4 B.5 B.6 B.7 B.8 No No Yes Yes Yes No No C. MANAGEMENT STRUCTURE C.1 Board of directors 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 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.1.27 276 See 'Quorum and majorities for passing resolutions at general meeting' in section 3.2. See 'Quorum and majorities for passing resolutions at general meeting' in section 3.2. See 'Rules for amending our Bylaws' in section 3.2. See 'Quorum and attendance' in sections 3.4 and 3.5, in relation to financial year 2020, and section 9.2 'Statistical information on corporate governance as required by the CNMV', in relation to the remaining financial years . See 'Voting results and resolutions' in sections 3.4 and 3.5. See 'Shareholder participation at general meetings' in section 3.2 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Quorum and majorities for passing resolutions at general meeting' in section 3.2. See 'Corporate website' in section 3.1. See 'Size' in section 4.2. See 'Tenure and equity ownership' in section 4.2, 'Duties and activities in 2020' in section 4.6 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See sections 2.4 'Shareholders' agreements', 4.1 'Our directors', 'Composition by type of director' in section 4.2, 'Duties and activities in 2020' in section 4.6 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Diversity' and 'Board skills and diversity matrix' in section 4.2, in relation to financial year 2020, and section 9.2 'Statistical information on corporate governance as required by the CNMV', in relation to the remaining financial years. See 'Diversity' in section 4.2 and 'Duties and activities in 2020' in section 4.6. See 'Strong succession plans' in section 1.5, 'Diversity' in section 4.2, 'Duties and activities in 2020' in section 4.6 and, regarding top executive positions, see 'Responsible banking' chapter. See 'Diversity' in section 4.2. and 'Duties and activities in 2020' in section 4.6. Not applicable, since there are no proprietary directors. See 'Composition by type of director' in section 4.2. See 'Group executive chairman and chief executive officer' in section 4.3 and 'Functions' in section 4.4. See section 4.1 'Our directors'. See sections 4.1 'Our directors' and 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Board and committees attendance' in section 4.3. See sections 6 'Remuneration' and 9.2 'Statistical information on corporate governance as required by the CNMV'. Additionally, see note 5 c) to our 'consolidated financial statements'. See sections 5 'Management team' and 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Rules and regulations of the board' in section 4.3. See 'Election, renewal and succession of directors' in section 4.2. See 'Board assessment in 2020' in section 4.3 and 'Duties and activities in 2020' in section 4.6. See 'Board assessment in in 2020' in section 4.3. See 'Director election, renewal and succession' in section 4.2. See 'Board meetings' in section 4.3. Not applicable. See 'Diversity' in section 4.2. See 'Election, renewal and succession of directors' in section 4.2 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Board meetings' in section 4.3. See 'Lead independent director' and 'Board and committees attendance' in section 4.3, 'Duties and activities in 2020' in sections 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 and 4.10 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Board and committees attendance' in section 4.3. and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See section 9.2 'Statistical information on corporate governance as required by the CNMV'. Responsible banking Corporate governance Economic and financial review Risk management and compliance Section in the CNMV model C.1.28 Included in statistical report No Comments See 'Duties and activities in 2020' in section 4.5. C.1.29 C.1.30 C.1.31 C.1.32 C.1.33 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 No Yes Yes Yes Yes Yes No No No Yes Yes Yes No See section 4.1 'Our directors' and section 'Secretary of the board' in section 4.3. See section 3.1 'Shareholders' engagement' and 'Duties and activities in 2020' in section 4.5 See 'External auditor' in section 4.5 and section 9.2 'Statistical information on corporate governance as required by the CNMV's. See 'Duties and activities in 2020' in section 4.5 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. Not applicable. See section 9.2 'Statistical information on corporate governance as required by the CNMV'. See ‘Board meetings' and ‘Committee meetings' in section 4.3. See 'Election, renewal and succession of directors' in section 4.2. Not applicable. See 'Duties and activities in 2020' in section 4.6. Not applicable. See sections 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote', 6.7 'Prudentially significant disclosure document' and 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Committee structure' and 'Committee meetings' in section 4.3, 'Duties and activities in 2020' in sections 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 and 4.10 and section 9.2 'Statistical information on corporate governance as required by the CNMV'. See section 9.2 'Statistical information on corporate governance as required by the CNMV'. See 'Committee structure' and 'Committee meetings' in section 4.3 and 'Duties and activities in 2020" in sections 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 and 4.10. D. RELATED PARTY AND INTRAGROUP TRANSACTIONS D.1 No See 'Related-party transactions' in section 4.12. D.2 D.3 D.4 D.5 D.6 D.7 Yes Yes Yes Yes No Yes Not applicable. See 'Related-party transactions' in section 4.12. Not applicable. See 'Related-party transactions' in section 4.12. See section 9.2 'Statistical information on corporate governance as required by the CNMV'. Not applicable. See 'Related-party transactions' in section 4.12. See 'Conflicts of interests' in section 4.12 Not applicable. See section 2.3 'Significant shareholders' and 'Conflicts of interests' in section 4.12. E. CONTROL AND RISK MANAGEMENT SYSTEMS No E.1 See chapter 'Risk management and compliance', in particular section 2.'Risk management and control model' and sections 'A strong and inclusive culture: The Santander Way' and 'Tax contribution' in the Responsible banking chapter. E.2 E.3 E.4 E.5 E.6 F. ICFRS F.1 F.2 F.3 F.4 No No No No No No No No No See note 53 to our consolidated financial statements, section 2.3 'Risk governance' in the Risk management and compliance chapter, and sections 'A strong and inclusive culture: The Santander Way' and 'Tax contribution' in the Responsible banking chapter. See sections 2.2'Risk factors', 3. 'Credit risk', 4. 'Market, structural and liquidity risk', 5. 'Credit risk', 6. 'Operational risk', 7. 'Compliance and conduct risk', 8 'Model risk' and 9. 'Strategic risk' in the Risk management and compliance chapter. See also the 'Responsible banking' chapter and, for our capital needs, see section 3.5 'Capital management and adequacy. Solvency ratios' of the Economic and financial review chapter. See section 2.4. 'Management processes and tools' in the Risk management and compliance chapter and sections 'A strong and inclusive culture: The Santander Way' and 'Tax contribution' in the Responsible banking chapter. See 3. 'Credit risk', 4. 'Market, structural and liquidity risk', 5. 'Credit risk', 6. 'Operational risk', 7 'Compliance and conduct risk', 8 'Model risk' and 9 'Strategic risk' in the Risk management and compliance chapter. Additionally, see note 25e) to our consolidated financial statements. See sections 2.'Risk management and control model', 3. 'Credit risk', 4. 'Market, structural and liquidity risk', 5. 'Credit risk', 6. 'Operational risk', 7. 'Compliance and conduct risk', 8. 'Model risk' and 9. 'Strategic risk' in the Risk management and compliance chapter. See section 8.1 'Control environment'. See section 8.2 'Risk assessment in financial reporting'. See section 8.3 'Control activities'. See section 8.4 'Information and communication'. 277 Annual report 2020 Contents Section in the CNMV model F.5 Included in statistical report No F.6 F7 No No Comments 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 'Table on compliance with or explanations of recommendations on corporate governance'. H. OTHER INFORMATION OF INTEREST H No See sections 'Tax contribution' and 'Governance and priorities', in particular, 'Joint initiatives to promote our agenda', in the Responsible banking chapter. 278 Responsible banking Corporate governance Economic and financial review Risk management and compliance 9.2 Statistical information on corporate governance required by the CNMV Unless otherwise indicated all data as of 31 December 2020. A. OWNERSHIP STRUCTURE A.1 Complete the following table on the company’s share capital: Date of last modification 03/12/2020 Share capital (euros) 8,670,320,651 Number of shares 17,340,641,302 Number of voting rights 17,340,641,302 Indicate whether different types of shares exist with different associated rights: Yes o No þ A.2 List the direct and indirect holders of significant ownership interests at year-end, excluding directors: Name or corporate name of sharerholder BlackRock Inc. Details of the indirect shares: % of voting rights attributed to shares % of voting rights through financial instruments Direct 0 Indirect 5.08% Direct Total % of Indirect voting rights 0 3.46% 5.43% Name or corporate name of the indirect shareholder BlackRock Inc. Name or corporate name of the % of voting rights direct shareholder Subsidiaries of BlackRock Inc. 5.08% attributed to shares % of voting rights through financial instruments 3.46% Total % of voting rights 5.43% A.3 Complete the following tables on company directors holding voting rights through company shares: Name or corporate name of director Ana Botín-Sanz de Sautuola y O’Shea José Antonio Álvarez Álvarez Bruce Carnegie-Brown Homaira Akbari Javier Botín-Sanz de Sautuola y O’Shea Álvaro Cardoso de Souza R. Martin Chávez Márquez Sol Daurella Comadrán Henrique de Castro Gina Díez Barroso Luis Isasi Fernández de Bobadilla Ramiro Mato García-Ansorena Sergio Rial Belén Romana García Pamela Walkden % total voting rights held by the board of directors 0.76 % % of voting rights attributed to shares % of voting rights through financial instruments Direct Indirect Direct Indirect Total % of voting rights % of voting rights that may be transferred through financial instruments Direct Indirect 0.00 0.01 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.17 0.00 0.00 0.00 0.55 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 0.00 0.00 0.17 0.01 0.00 0.00 0.58 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 0.00 0.00 279       Annual report 2020 Contents A.7 Indicate whether the company has been notified 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 þ No o Parties to the shareholders’ agreement Javier Botín-Sanz de Sautuola y O’Shea (directly and indirectly through Agropecuaria El Castaño, S.L.U.) Emilio Botín-Sanz de Sautuola y O’Shea, Puente San Miguel, S.L.U. Ana Botín-Sanz de Sautuola y O’Shea, CRONJE, S.L.U. Nueva Azil, S.L. Carmen Botín-Sanz de Sautuola y O’Shea Paloma Botín-Sanz de Sautuola y O’Shea Bright Sky 2012, S.L. % of share capital affected 0.58% Brief description of agreement Transfer restrictions and syndication of voting rights as described under section 2.4 'Shareholders’ agreements' of the 'Corporate governance' chapter in the annual report. The communications to CNMV relating to this shareholders' agreement can be found in material facts with entry numbers 64179, 171949, 177432, 194069, 211556, 218392, 223703, 226968 and 285567 filed in CNMV on 17 February 2006, 3 August 2012, 19 November 2012, 17 October, 2013, 3 October 2014, 6 February 2015, 29 May 2015, 29 July 2015 and 31 December 2019, respectively. Expiry date, if applicable 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 þ No o Participants in the concerted action Javier Botín-Sanz de Sautuola y O’Shea (directly and indirectly through Agropecuaria El Castaño, S.L.U.) Emilio Botín-Sanz de Sautuola y O’Shea, Puente San Miguel, S.L.U. Ana Botín-Sanz de Sautuola y O’Shea, CRONJE, S.L.U. Nueva Azil, S.L. Carmen Botín-Sanz de Sautuola y O’Shea Paloma Botín-Sanz de Sautuola y O’Shea Bright Sky 2012, S.L. % of share capital affected 0.58% Brief description of concerted action Transfer restrictions and syndication of voting rights as described under section 2.4 'Shareholders’ agreements' of the 'Corporate governance' chapter in the annual report. The communications to CNMV relating to this shareholders' agreement can be found in material facts with entry numbers 64179, 171949, 177432, 194069, 211556, 218392, 223703, 226968 and 285567 filed in CNMV on 17 February 2006, 3 August 2012, 19 November 2012, 17 October, 2013, 3 October 2014, 6 February 2015, 29 May 2015, 29 July 2015 and 31 December 2019, respectively. Expiry date, if applicable 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 o No þ A.9 Complete the following tables on the company’s treasury shares: At year end: Number of shares held directly 0 Number of shares held indirectly* 28,439,022 % of total share capital 0.16% (*)Through: Name or corporate name of the direct shareholder Pereda Gestión, S.A. Banco Santander Río, S.A. Banco Santander México, S.A. Total: A.11 Estimated free float: Estimated free float Number of shares held directly 26,700,000 981,853 757,169 28,439,022 % 93.64% A.14 Indicate whether the company has issued securities not traded in a regulated market of the European Union. Yes þ No o 280       Responsible banking Corporate governance Economic and financial review Risk management and compliance B. GENERAL SHAREHOLDERS’ MEETING B.4 Indicate the attendance figures for the general shareholders’ meetings held during the fiscal year to which this report relates and in the two preceding fiscal years: Date of General Meeting 23/03/2018 of which free float: Date of General Meeting 12/04/2019 of which free float: Date of General Meeting 23/07/2019 of which free float: Date of General Meeting 03/04/2020 of which free float: Date of General Meeting 27/10/2020 of which free float: Attendance data % attending in person % by proxy % remote voting Electronic means 0.82% 0.18% 47.61% 47.61% 0.38% 0.38% Attendance data % attending in person % by proxy % remote voting Electronic means 0.77% 0.63% 65.30% 64.30% 0.57% 0.57% Attendance data % attending in person % by proxy % remote voting Electronic means 0.65% 0.58% 41.82% 41.82% 0.30% 0.30% Attendance data % attending in person % by proxy % remote voting Electronic means 0.09% 0.01% 62.60% 61.58% 1.71% 1.71% Attendance data % attending in person % by proxy % remote voting Electronic means 0.17% 0.11% 43.29% 42.16% 0.59% 0.59% Other 15.74% 15.74% Other 1.86% 1.86% Other 16.45% 16.45% Other 0.60% 0.60% Other 16.30% 16.30% Total 64.55% 63.91% Total 68.49% 67.36% Total 59.22% 58.15% Total 65.00% 63.90% Total 60.34% 59.16% B.5 Indicate whether in the general shareholders’ meetings held during the fiscal 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 o No þ 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 o No þ 281                               Annual report 2020 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 fixed by GSM Contents 17 12 15 C.1.2 Complete the following table with the directors’ details: Name or corporate name of director Ana Botín-Sanz de Sautuola y O’Shea Representative N/A Category of director Executive Position in the board Chairman Date of first appointment 04/02/1989 Date of last appointment 03/04/2020 José Antonio Álvarez Álvarez N/A Executive Chief executive officer 25/11/2014 12/04/2019 Bruce Carnegie-Brown Homaira Akbari Javier Botín-Sanz de Sautuola y O’Shea Álvaro Cardoso de Souza N/A N/A N/A N/A R. Martin Chávez Márquez N/A Sol Daurella Comadrán Henrique de Castro Gina Díez Barroso N/A N/A N/A Non-executive independent Lead independent director 25/11/2014 12/04/2019 Non-executive independent Director 27/09/2016 23/03/2018 Other external Director 25/07/2004 12/04/2019 Non-executive independent Non-executive independent Non-executive independent Non-executive independent Non-executive independent Director 01/04/2018 01/04/2018 Director 27/10/2020 27/10/2020 Director 25/11/2014 03/04/2020 Director 07/07/2019 07/07/2019 Director 22/12/2020 22/12/2020 Luis Isasi Fernández de Bobadilla N/A Other external Director 19/05/2020 19/05/2020 Ramiro Mato García-Ansorena N/A Non-executive independent Director 28/11/2017 12/04/2019 Sergio Rial Belén Romana García Pamela Walkden N/A N/A N/A Executive Director 30/5/2020 30/05/2020 Non-executive independent Non-executive independent Director 22/12/2015 12/04/2019 Director 29/10/2019 03/04/2020 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 Co-option 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 15 282         Responsible banking Corporate governance Economic and financial review Risk management and compliance Indicate any directors who have left during the fiscal year to which this report relates, regardless of the reason (whether for resignation or by agreement of the general meeting or any other): Name or corporate name of director Ignacio Benjumea Cabeza de Vaca Category of director at Date of last the time he/her left Other external appointment 23/03/2018 Date of leave 07/05/2020 Guillermo de la Dehesa Romero Other external 23/03/2018 03/04/2020 Esther Giménez- Salinas i Colomer Non-executive independent 03/04/2020 27/10/2020 his or her term NO Indicate whether he or she Board committees he or she has left before the expiry of was a member of Executive committee, Remuneration committee, Risk supervision, regulation and compliance committee, Responsible banking, sustainability and culture committee and Innovation and technology committee Executive committee, Nomination committee and Innovation technology committee Nomination committee, Risk supervision, regulation and compliance committee and Responsible banking, sustainability and culture committee YES YES Rodrigo Echenique Gordillo Other external 03/04/2020 22/12/2020 Nomination committee YES 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 Ana Botín-Sanz de Sautuola y O’Shea Group executive chairman José Antonio Álvarez Álvarez CEO Sergio Rial Santander Head Regional for South America Profile See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. Total number of executive directors % of the Board Proprietary non-executive directors Name or corporate name of director N/A Name or corporate name of significant shareholder represented or having proposed his or her appointment N/A Profile N/A Total number of proprietary non-executive directors % of the Board 3 20.00% 0 0% 283   Annual report 2020 Contents Independent non-executive directors Name or corporate name of director Bruce Carnegie-Brown Homaira Akbari Álvaro Cardoso de Souza R. Martín Chávez Márquez Sol Daurella Comadrán Henrique de Castro Gina Díez Barroso Ramiro Mato García-Ansorena Belén Romana Garcia Pamela Walkden Total number of independent directors % of the Board Profile See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. See section 4.1 'Our directors' in the 'Corporate governance' chapter in the annual report. 10 66.67% 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 fiscal 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 principal 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) will be included. Name or corporate name of director Homaira Akbari Business Description of the  relationship Sol Daurella Financing Henrique de Castro Business Gina Díez Financing Belén Romana Business 284 Reasoned statement When conducting the annual verification of the independence of directors of this status, the nomination committee analysed the business relationships between Grupo Santander and the companies in which they are or have previously been principal shareholders, directors or senior managers. The committee concluded that the business relationships maintained between Grupo Santander and the company in which Homaira Akbari was a director in 2020 were not significant because, among other reasons, they did not reach certain comparable materiality thresholds used in other jurisdictions, e.g. NYSE and Nasdaq. When conducting the annual verification of the independence of directors of this status, the nomination committee analysed the business relationships between Grupo Santander and the companies in which they are or have previously been principal shareholders, directors or senior managers. The committee concluded that the funding Grupo Santander granted to companies in which Sol Daurella was a principal shareholder or director in 2020 was not significant because, among other reasons: (i) it did not generate economic dependence on the companies involved in view of the substitutability of this funding by other sources, whether banks or others, (ii) it aligned with Grupo Santander's share in the corresponding market, and (iii) it did not reach certain comparable materiality thresholds used in other jurisdictions, e.g. NYSE, Nasdaq and the Canadian Bank Act. When conducting the annual verification of the independence of directors of this status, the nomination committee analysed the business relationships between Grupo Santander and the companies in which they are or have previously been principal shareholders, directors or senior managers. The committee concluded that the business relationships maintained between Grupo Santander and the company in which Henrique de Castro was a director in 2020 were not significant because, among other reasons, they did not reach certain comparable materiality thresholds used in other jurisdictions, e.g. NYSE and Nasdaq. When conducting the annual verification of the independence of directors of this status, the nomination committee analysed the business relationships between Grupo Santander and the companies in which they are or have previously been principal shareholders, directors or senior managers. The committee concluded that the funding granted by Grupo Santander to the company in which Gina Díez was a principal shareholder and director in 2020 was not significant because, among other reasons: (i) it did not generate a situation of economic dependence on the company involved in view of the substitutability of this funding by other sources, whether banks or others, (ii) it aligned with Grupo Santander's share in the corresponding market, and (iii) it did not reach certain comparable materiality thresholds used in other jurisdictions, e.g. NYSE, Nasdaq and the Canadian Bank Act. When conducting the annual verification of the independence of directors of this status, the nomination committee analysed the business relationships between Grupo Santander and the companies in which they are or have previously been principal shareholders, directors or senior managers. The committee concluded that the business relationships maintained between Grupo Santander and the companies in which Belén Romana was a director in 2020 were not significant because, among other reasons, they did not reach certain comparable materiality thresholds used in other jurisdictions, e.g. NYSE and Nasdaq. Responsible banking Corporate governance Economic and financial review Risk management and compliance 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 Javier Botín-Sanz de Sautuola y O’Shea Reasons for not qualifying under other category Because the requirements established in paragraph 3 of article 529 duodecies LSC are not met, and 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. Luis Isasi Fernández de Bobadilla Because the requirements established in paragraphs 2 to 4 of article 529 duodecies LSC are not met. Banco Santander, S.A. Total number of other non- executive directors % of the Board Profile See section 4.1 'Our directors' in the Corporate governance chapter in the annual report. See section 4.1 'Our directors' in the Corporate governance chapter in the annual report. 2 13.33 % 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 N/A Date of change Previous category Current category 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 Executive Proprietary Independent Other external Total: FY 2020 1 — 5 — 6 FY 2019 1 — 5 — 6 FY 2018 1 — 4 — 5 FY 2017 1 — 4 — 5 % of total directors of each category FY 2020 33.33 % 0.00 % 50.00 % 0.00 % 40.00 % FY 2019 50.00 % 0.00 % 55.55 % 0.00 % 40.00 % FY 2018 33.33 % 0.00 % 44.44 % 0.00 % 33.33 % FY 2017 33.33 % 0.00 % 50.00 % 0.00 % 35.71 % 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 regulated 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 Ana Botín-Sanz de Sautuola y O’Shea Homaira Akbari Sol Daurella Comadrán Henrique de Castro Luis Isasi Fernández de Bobadilla Sergio Rial Belén Romana García Position Name  of the  listed company Director The Coca-Cola Company Director Landstar System, Inc. Director Temenos AG Chairman Coca-Cola European Partners plc. Fiserv Inc. Director Compañía de Distribución Integral Logista, S.A.U. Director Director Delta Airlines Inc Director Aviva plc. Director Six Group AG (SIX) 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 þ No o The maximum number of directorships 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. C.1.13 Identify the following items of the total remuneration of the board of directors: Board remuneration accrued in the fiscal year (EUR thousand) Amount of accumulated pension rights of current directors (EUR thousand) Amount of accumulated pension rights of former directors (EUR thousand) 19,066 67,526 51,723 285   Annual report 2020 Contents 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 fiscal year: Name or corporate name Rami Aboukhair Hurtado Lindsey Tyler Argalas Alexandra Brandão Juan Manuel Cendoya Méndez de Vigo José Fransisco Doncel Razola Keiran Paul Foad José Antonio García Cantera Juan Guitard Marín José Maria Linares Perou Mónica Lopez-Mónís Gallego Javier Maldonado Trinchant Dirk Marzluf Víctor Matarranz Sanz de Madrid José Luis de Mora Gil-Gallardo Jaime Pérez Renovales Javier San Félix García Antonio Simões Position (s) Country head - Santander Spain Head of Santander Digital Head of Human Resources Group head of Communications, Corporate Marketing and Research Group head of Accounting and Financial Control Group Chief Risk Officer Group Chief Financial Officer Group Chief Audit Executive Global head of Corporate & Investment Banking Group head of Supervisory and Regulatory Relations Group head of Costs Group head of Technology and Operations Global head of Wealth Management Group head of Strategy and Corporate Development and Head of Consumer Finance (Santander Consumer Finance) Group head of General Secretariat and Human Resources Head of Santander Global Payments Services Head regional of Europe Marjolein van Hellemondt-Gerdingh Group Chief Compliance Officer Number of women in senior management Percentage of total senior management Total remuneration accrued by the senior management (EUR thousand) 4 22.22% 52,113 C.1.15 Indicate whether any changes have been made to the board Rules and regulations during the fiscal year: Yes þ No o C.1.21 Indicate whether there are any specific requirements, other than those applying to directors generally, to be appointed chairman. Yes o No þ C.1.23 Indicate whether the bylaws or the board Rules and regulations set a limited term of office (or other requirements which are stricter than those provided for in the law) for independent directors different than the one provided for in the law. Yes o No þ C.1.25 Indicate the number of board meetings held during the fiscal year and how many times the board has met without the chairman’s attendance. Attendance will also include proxies appointed with specific 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 20 0 3 286 Responsible banking Corporate governance Economic and financial review Risk management and compliance Indicate the number of meetings of the various board committees held during the fiscal 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 nomination 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 C.1.26 Indicate the number of board meetings held during the fiscal year and data about the attendance of the directors. Number of meetings with at least 80% of directors being present % of votes cast by members present over total votes in the fiscal year Number of board meetings with all directors being present (or represented having given specific instructions) % of votes cast by members present at the meeting or represented with specific instructions over total votes in the fiscal year 15 4 4 13 13 13 46 20 98.56% 18 99.27% C.1.27 Indicate whether the company´s consolidated and individual financial statements are certified before they are submitted to the board for their formulation. Yes þ No o Identify, where applicable, the person(s) who certified the company’s individual and consolidated financial statements prior to their formulation by the board: Name José Francisco Doncel Razola Position Group head of Accounting and Financial Control C.1.29 Is the secretary of the board also a director? Yes o No þ If the secretary of the board is not a director fill in the following table: Name or corporate name of the secretary Jaime Pérez Renovales Representative N/A C.1.31 Indicate whether the company has changed its external audit firm during the fiscal year. If so, identify the incoming audit firm and the outgoing audit firm: Yes o No þ C.1.32 Indicate whether the audit firm performs non-audit work for the company and/or its group. If so, state the amount of fees paid for such work and express this amount as a percentage they represent of all fees invoiced to the company and/or its group. Yes þ No o Amount of non-audit work (EUR thousand) Amount of non-audit work as a % of amount of audit work Company 487 0.5% Group companies 1,513 1.4% Total 2,000 1.9% C.1.33 Indicate whether the audit report on the previous year’s financial statements contains a qualified opinion or 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 qualified opinion or reservations. Yes o No þ 287 Annual report 2020 Contents C.1.34 Indicate the number of consecutive years during which the current audit firm has been auditing the financial statements of the company and/or its group. Likewise, indicate for how many years the current firm has been auditing the financial statements as a percentage of the total number of years over which the financial statements have been audited: Number of consecutive years Number of years audited by current audit firm/Number of years the company’s or its Group financial statements have been audited (%) Individual financial statements Consolidated financial statements 5 5 Company Group 13.15% 13.15% C.1.35 Indicate and if applicable explain whether there are procedures for directors to receive the information they need in sufficient time to prepare for meetings of the governing bodies: Yes þ No o 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 sufficiently in advance of the meeting date, thereby ensuring the confidentiality of the information. 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 indemnification, 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 beneficiaries Type of beneficiary Employees 19 Description of the agreement: 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 first 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: Body authorising clauses Is the general shareholders’ meeting informed of such clauses? Board of directors √ General Shareholders’ Meeting YES √ NO 288 Responsible banking Corporate governance Economic and financial review Risk management and compliance 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 Ana Botín-Sanz de Sautuola y O’Shea José Antonio Álvarez Álvarez Bruce Carnegie-Brown Luis Isasi Fernández de Bobadilla Ramiro Mato García-Ansorena Belén Romana García % of executive directors % of proprietary directors % of independent directors % of other non-executive directors Audit committee Name Pamela Walkden Homaira Akbari Henrique de Castro Ramiro Mato García-Ansorena Belén Romana García % of executive directors % of proprietary directors % of independent directors % of other non-executive directors Position Chairman Member Member Member Member Member Position Chairman Member Member Member Member Type Executive director Executive director External independent director Other external director External independent director External independent director Type External independent director External independent director External independent director External independent director External independent director 33.33% 0.00% 50.00% 16.67% 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 Pamela Walkden Belén Romana García Homaira Akbari Ramiro Mato García-Ansorena Henrique de Castro Date of appointment of the committee Chairman for that position 26 April 2020 Nomination committee Name Bruce Carnegie-Brown R. Martin Chávez Márquez Sol Daurella Comadrán % of executive directors % of proprietary directors % of independent directors % of other executive directors Position Chairman Member Member Type External independent director External independent director External independent director 0% 0% 100% 0% 289 Annual report 2020 Contents Remuneration committee Name Bruce Carnegie-Brown R. Martin Chávez Márquez Sol Daurella Comadrán Henrique de Castro Luis Isasi Fernández de Bobadilla % of executive directors % of proprietary directors % of independent directors % of other external directors Position Chairman Member Member Member Member Type External independent director External independent director External independent director External independent director Other external director Risk supervision, regulation and compliance committee Name Álvaro Cardoso de Souza R. Martin Chávez Márquez Luis Isasi Fernández de Bobadilla Ramiro Mato García-Ansorena Belén Romana García Position Chairman Member Member Member Member Type External independent director External independent director Other external director External independent director External independent director % of executive directors % of proprietary directors % of independent directors % of other external directors Responsible banking, sustainability and culture committee Name Ramiro Mato García-Ansorena Homaira Akbari Álvaro Cardoso de Souza Sol Daurella Comadrán Belén Romana García Position Chairman Member Member Member Member Type External independent director External independent director External independent director External independent director External independent director % of executive directors % of proprietary directors % of independent directors % of other external directors Innovation and technology committee Name R. Martín Chávez Márquez Ana Botín-Sanz de Sautuola y O'Shea José Antonio Álvarez Álvarez Bruce Carnegie-Brown Homaira Akbari Henrique de Castro Belén Romana García Position Chairman Member Member Member Member Member Member % of executive directors % of proprietary directors % of independent directors % of other external directors 290 Type External independent director Executive director Executive director External independent director External independent director External independent director External independent director 0% 0% 80% 20% 0% 0% 80% 20% 0% 0% 100% 0% 28.58% 0.00% 71.42% 0.00% Responsible banking Corporate governance Economic and financial review Risk management and compliance C.2.2 Complete the following table on the number of female directors on the various board committees over the past four years. Audit committee Responsible banking, sustainability and culture committee Innovation and technology committee Nomination committee Remuneration committee Risk supervision, regulation and compliance committee Executive committee Number of female directors FY 2020 FY 2019 FY 2018 FY 2017 Number 3 3 3 1 1 1 2 % 60.00% 60.00% 42.85% 33.33% 20.00% 20.00% 33.33% Number 3 5 3 2 1 2 2 % 60.00% 62.50% 37.50% 40.00% 20.00% 40.00% 28.50% Number 2 5 3 1 1 2 2 % 50.00% 62.50% 42.85% 25.00% 20.00% 33.30% 25.00% Number 2 % 50.00% — 0.00% 4 1 1 2 1 44.40% 20.00% 20.00% 33.30% 14.29% D. RELATED-PARTY AND INTRAGROUP TRANSACTIONS D.2 List any significant transactions, by virtue of their amount or relevance, between the company or its group of companies and the company’s significant shareholders: Not applicable. D.3 List any significant 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. D.4 List any significant transactions undertaken by the company with other companies in its group that are not eliminated in the process of drawing up the consolidated financial 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 at 31 December 2020 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 3 to the 2020 Consolidated financial statements for more information on offshore 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 125 million in the Bank and covered the following transactions: - 68 Non Delivery Forwards. - 207 Swaps. - 71 Cross Currency Swaps. - 5 Options. - 111 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) which were cancelled at 31 December 2020. The amount shown on the right corresponds to positive results relating to deposits with the London branch of Banco Santander, S.A. (asset) which were cancelled at 31 December 2020. The amount shown on the right corresponds to positive results relating to fixed income securities- subordinated instruments (asset). This relates to the investment 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 2.057 million as at 31 December 2020. The amount shown on the right corresponds to negative 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 42 million at 31 December 2020. Amount (EUR thousand) 84,870 1,503 769 146,552 85 D.5 List any significant 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. 291 Annual report 2020 Contents 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 þ Explain o 2. When the listed company is controlled, pursuant to the meaning established in Article 42 of the Commercial Code, by another listed or non-listed entity, and has, directly or through its subsidiaries, business relationships with that entity or any of its subsidiaries (other than those of the listed company) or carries out activities related to the activities of any of them, this is reported publicly, with specific information about: a) The respective areas of activity and possible business relationships between, on the one hand, the listed company or its subsidiaries and, on the other, the parent company or its subsidiaries. b) The mechanisms established to resolve any conflicts of interest that may arise. Complies o Partially complies o Explain o Not applicable þ 3. During the AGM the chairman of the board should verbally inform shareholders in sufficient 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: Further, without prejudice to the legal obligations of disclosure of inside information and other regulated information, the company should also have a general policy for the communication of economic-financial, non-financial and corporate information through the channels it considers appropriate (media, social media or other channels) that helps maximise the dissemination and quality of the information available to the market, investors and other stakeholders. Complies þ Partially complies o Explain o 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 o Partially complies þ Explain o Our April 2020 AGM authorised the board to increase share capital with the authority to exclude pre-emptive rights for shareholders, with a limit of 10% of the share capital. As an exception, these limits for the issuance without pre-emptive rights do not apply to capital increases to allow the potential conversion of contingent convertible preferred securities (which can only be converted into newly-issued shares when the CET1 ratio falls below a pre-established threshold). Banco Santander 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 'Authority to increase capital'. 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) Changes taking place since the previous annual general meeting. a) Report on auditor independence. b) The specific reasons for the company not following a given Good Governance Code recommendation, and any alternative procedures followed in its stead. b) Reviews of the operation of the audit committee and the nomination and remuneration committees. c) Audit committee report on third-party transactions. Complies þ Partially complies o Explain o Complies þ Partially complies o Explain o 4. The company should define and promote a policy for communication and contact with shareholders and institutional investors within the framework of their involvement in the company, as well as with proxy advisors, that complies in full with the rules on market abuse and gives equal treatment to shareholders who are in the same position. The company should make said policy public through its website, including information regarding the way in which it has been implemented and the parties involved or those responsible its implementation. 7. The company should broadcast its general meetings live on the corporate website. The company should have mechanisms that allow the delegation and exercise of votes by electronic means and even, in the case of large-cap companies and, to the extent that it is proportionate, attendance and active participation in the general shareholders’ meeting. Complies þ Explain o 8. The audit committee should strive to ensure that the financial statements that the board of directors presents to the general shareholders’ meeting are drawn up in accordance to accounting legislation. And in those cases 292 Responsible banking Corporate governance Economic and financial review Risk management and compliance where the auditors includes any qualification in its report, the chairman of the audit committee should give a clear explanation at the general meeting of their opinion regarding the scope and content, making a summary of that opinion available to the shareholders at the time of the publication of the notice of the meeting, along with the rest of proposals and reports of the board. Complies þ Partially complies o Explain o 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. Such conditions and procedures should encourage shareholders to attend and exercise their rights and be applied in a non-discriminatory manner. Complies þ Partially complies o Explain o 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 modified 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 þ Partially complies o Explain o Not applicable o 11. In the event that a company plans to pay for attendance at the general meeting, it should first establish a general, long- term policy in this respect. Complies o Partially complies o Explain o Not applicable þ 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 profitable 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 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 þ Partially complies o Explain o 13. The board of directors should have an optimal size to promote its efficient functioning and maximise participation. The recommended range is accordingly between five and fifteen members. Complies þ Explain o 14. The board of directors should approve a policy aimed at promoting an appro­priate composition of the board that: a) is concrete and verifiable; b) ensures that appointment or re-election proposals are based on a prior analysis of the competences required by the board; and c) favours diversity of knowledge, experience, age and gender. Therefore, measures that encourage the company to have a significant number of female senior managers are considered to favour gender diversity. The results of the prior analysis of competences required by the board should be written up in the nomination committee’s explanatory report, to be pub­lished when the general shareholders’ meeting is convened that will ratify the appointment and re-election of each director. The nomination committee should run an annual check on compliance with this policy and set out its findings in the annual corporate governance report. Complies þ Partially complies o Explain o 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. Further, the number of female directors should account for at least 40% of the members of the board of directors before the end of 2022 and thereafter, and not less than 30% previous to that. Complies þ Partially complies o Explain o 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 significant shareholdings. b) In companies with a plurality of shareholders represented on the board but not otherwise related. Complies þ Explain o 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 þ Explain o 293 Annual report 2020 Contents 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 first appointment as a board member and subsequent re-elections. e) Shares held in the company, and any options on the same. Complies þ Partially complies o Explain o 19. Following verification by the nomination 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 o Partially complies o Explain o Not applicable þ 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 þ Partially complies o Explain o Not applicable o 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 find just cause, based on a proposal from the nomination committee. In particular, just cause will be presumed when directors take up new posts or responsibilities that prevent them allocating sufficient time to the work of a board member, or are in breach of their fiduciary duties or come under one of the disqualifying grounds for classification 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 þ Explain o 22. Companies should establish rules obliging directors to disclose any circum­stance that might harm the organisation’s name or reputation, related or not to their actions within the company, and 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. When the board is informed or becomes aware of any of the situations men­tioned in the previous paragraph, the board of 294 directors should examine the case as soon as possible and, attending to the particular circumstances, de­cide, based on a report from the nomination and remuneration committee, whether or not to adopt any measures such as opening of an internal investigation, calling on the director to resign or proposing his or her dismissal. The board should give a reasoned account of all such determinations in the annual corporate governance report, unless there are special circumstances that justify otherwise, which must be recorded in the minutes. This is without prejudice to the information that the company must disclose, if appropriate, at the time it adopts the corresponding measures. Complies þ Partially complies o Explain o 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 conflicts 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 þ Partially complies o Explain o Not applicable o 24. Directors who give up their position before their tenure expires, through resignation or resolution of the general meeting, should state the reasons for this decision, or in the case of non-executive directors, their opinion of the reasons for the general meeting resolution, in a letter to be sent to all members of the board. This should all be reported in the annual corporate governance report, and if it is relevant for investors, the company should publish an announcement of the departure as rapidly as possible, with sufficient reference to the reasons or circumstances provided by the director. Complies þ Partially complies o Explain o Not applicable o 25. The nomination committee should ensure that non- executive directors have sufficient time available to discharge their responsibilities effectively. The board rules and regulations should lay down the maximum number of company boards on which directors can serve. Complies þ Partially complies o Explain o 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 þ Partially complies o Explain o Responsible banking Corporate governance Economic and financial review Risk management and compliance 27. Director absences should be kept to a strict minimum and quantified in the annual corporate governance report. In the event of absence, directors should delegate their powers of representation with the appropriate instructions. 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 þ Partially complies o Explain o 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. Complies þ Partially complies o Explain o Not applicable o 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. Complies þ Partially complies o Explain o 30. Regardless of the knowledge directors must possess to carry out their duties, they should also be offered refresher programmes when circumstances so advise. Complies þ Explain o Not applicable o 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 þ Partially complies o Explain o 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. Complies þ Partially complies o Explain o 33. The chairman, as the person responsible for the efficient 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 officer; exercise leadership of the board and be accountable for its proper functioning; ensure that sufficient time is given to the discussion of strategic issues, and approve and review refresher courses for each director, when circumstances so advise. Complies þ Partially complies o Explain o 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 Complies þ Partially complies o Explain o Not applicable o 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 þ Explain o 36. The board in full should conduct an annual evaluation, adopting, where necessary, an action plan to correct weakness detected in: a) The quality and efficiency of the board’s operation. 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 nomination committee. Every three years, the board of directors should engage an external facilitator to aid in the evaluation process. This facilitator’s independence should be verified by the nomination 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 þ Partially complies o Explain o 37. When there is an executive committee, there should be at least two non-executive members, at least one of whom should be independent; and its secretary should be the secretary of the board of directors. Complies þ Partially complies o Explain o Not applicable o 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 þ Partially complies o Explain o Not applicable o 295 Annual report 2020 Contents 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, both financial and non-financial. Complies þ Partially complies o Explain o 40. Listed companies should have a unit in charge of the internal audit function, under the supervision of the audit committee, to monitor the effectiveness of reporting and control systems. This unit should report functionally to the board’s non-executive chairman or the chairman of the audit committee. Complies þ Partially complies o Explain o 41. The head of the unit handling the internal audit function should present an annual work programme to the audit committee, for approval by this committee or the board, inform it directly of any incidents or scope limitations arising during its implementation, the results and monitoring of its recommendations, and submit an activities report at the end of each year. Complies þ Partially complies o Explain o Not applicable o 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 and evaluate the preparation process and the integrity of the financial and non-financial information, as well as the con­trol and management systems for financial and non-financial risks related to the company and, where appropriate, to the group – including operating, technological, legal, social, environmental, political and reputational risks or those related to corruption – reviewing compliance with regulatory requirements, 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 and removal of the head of the internal audit service; propose the service’s budget; approve or make a proposal for approval to the board of the prior­ities and annual work programme of the internal audit unit, ensur­ing that it focuses primarily on the main risks the company is ex­posed to (including reputational risk); receive regular report-backs on its activities; and verify that senior management are acting on the findings and recommendations of its reports. c) Establish and supervise a mechanism that allows employees and other persons related to the company, such as directors, sharehold­ers, suppliers, contractors or subcontractors, to report irregulari­ties of potential significance, including financial and accounting irregularities, or those of any other nature, related to the company, that they notice within the company or its group. This mechanism must guarantee confidentiality and enable communications to be made anonymously, respecting the rights of both the complainant and the accused party. d) In general, ensure that the internal control policies and systems established are applied effectively in practice. 2. With regard to the external auditor: 296 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 notifies any change of external auditor through the CNMV, accompanied by a statement of any disagreements arising with the outgoing auditor and the reasons for the same. 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 þ Partially complies o Explain o 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. Complies þ Partially complies o Explain o 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 þ Partially complies o Explain o Not applicable o 45. Risk control and management policy should identify or establish at least: a) The different types of financial and non-financial risk the company is exposed to (including operational, technological, financial, legal, social, environmental, political and reputational risks, and risks relating to corruption), with the inclusion under financial or economic risks of con­tingent liabilities and other off-balance-sheet risks. b) A risk control and management model based on different levels, of which a specialised risk committee will form part when sector regula­tions provide or the company deems it appropriate. c) The level of risk that the company considers acceptable. d) The measures in place to mitigate the impact of identified risk events should they occur. e) The internal control and reporting systems to be used to control and manage the above risks, including contingent liabilities and off-balance-sheet risks. Complies þ Partially complies o Explain o 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: Responsible banking Corporate governance Economic and financial review Risk management and compliance a) Ensure that risk control and management systems are functioning correctly and, specifically, that major risks the company is exposed to are correctly identified, managed and quantified. regulations of the board of directors and aligned with those governing legally mandatory board committees as specified in the preceding sets of recommendations. They should include at least the following terms: b) Participate actively in the preparation of risk strategies and in key decisions about their management. a) Committees should be formed exclusively by non-executive directors, with a majority of independents. c) Ensure that risk control and management systems are mitigating risks effectively in the frame of the policy drawn up by the board of directors. Complies þ Partially complies o Explain o 47. Members of the nomination and remuneration committee-or of the nomination committee and remuneration committee, if separately constituted - should be chosen procuring they have 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 þ Partially complies o Explain o 48. Large cap companies should have formed separate nomination and remuneration committees. Complies þ Explain o Not applicable o 49. The nomination 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 nomination committee to propose candidates that it might consider suitable. Complies þ Partially complies o Explain o 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 officer contracts. b) Monitor compliance with the remuneration policy set by the company. c) Periodically review the remuneration policy for directors and senior officers, 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 officers in the company. d) Ensure that conflicts of interest do not undermine the independence of any external advice the committee engages. e) Verify the information on director and senior officers’ pay contained in corporate documents, including the annual directors’ remuneration statement. Complies þ Partially complies o Explain o 51. The remuneration committee should consult with the company’s chairman and chief executive, especially on matters relating to executive directors and senior officers. b) They should be chaired by independent directors. 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 first board plenary following each committee meeting. d) They may engage external advice, when they feel it necessary for the discharge of their functions. e) Meeting proceedings should be minuted and a copy made available to all board members. Complies þ Partially complies o Explain o Not applicable o 53. The task of supervising compliance with the policies and rules of the company in the environmental, social and corporate governance areas, and internal rules of conduct, should be assigned to one board committee or split between several, which could be the audit committee, the nomination committee, a committee specialised in sustainability or corporate social responsibility, or a dedicated committee established by the board under its powers of self- organisation. Such a committee should be made up solely of non-executive directors, the majority being independent and specifically assigned the following minimum functions. Complies þ Partially complies o Explain o 54. The minimum functions referred to in the previous recommendation are as follows: a) Monitor compliance with the company’s internal codes of conduct and corporate governance rules, and ensure that the corporate culture is aligned with its purpose and values. b) Monitor the implementation of the general policy regarding the disclosure of economic-financial, non-financial and corporate information, as well as communication with shareholders and investors, proxy advisors and other stakeholders. Similarly, the way in which the entity communicates and relates with small and medium-sized shareholders should be monitored. c) Periodically evaluate the effectiveness of the company’s corporate governance system and environmental and social policy, to confirm that it is fulfilling its mission to promote the corporate interest and catering, as appropriate, to the legitimate interests of remaining stakeholders. d) Ensure the company’s environmental and social practices are in accordance with the established strategy and policy. e) Monitor and evaluate the company’s interaction with its stakeholder groups. Complies þ Partially complies o Explain o Complies þ Partially complies o Explain o 52. The rules regarding composition and functioning of supervision and control committees should be set out in the 55. Environmental and social sustainability policies should identify and include at least: 297 Annual report 2020 Contents a) The principles, commitments, objectives and strategy regarding shareholders, employees, clients, suppliers, social welfare issues, the environment, diversity, fiscal responsibility, respect for human rights and the prevention of corruption and other illegal conducts. b) The methods or systems for monitoring compliance with policies, associated risks and their management. c) The mechanisms for supervising non-financial risk, including that related to ethical aspects and business conduct. d) Channels for stakeholder communication, participation and dialogue. e) Responsible communication practices that prevent the manipulation of information and protect the company’s honour and integrity. Complies þ Partially complies o Explain o 56. Director remuneration should be sufficient to attract and retain directors with the desired profile 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. Complies þ Explain o 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 confined to executive directors. 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 þ Partially complies o Explain o 58. In the case of variable awards, remuneration policies should include limits and technical safeguards to ensure they reflect the professional performance of the beneficiaries 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: a) Be subject to predetermined and measurable performance criteria that factor the risk assumed to obtain a given outcome. b) Promote the long-term sustainability of the company and include non-financial 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 sufficient time to appreciate its contribution to long-term value creation. This will ensure that 298 performance measurement is not based solely on one off, occasional or extraordinary events. Complies þ Partially complies o Explain o Not applicable o 59. The payment of the variable components of remuneration is subject to sufficient verification that previously established performance, or other, conditions have been effectively met. Entities should include in their annual directors’ remuneration report the criteria relating to the time required and methods for such verification, depending on the nature and characteristics of each variable component. Additionally, entities should consider establishing a reduction clause (‘malus’) based on deferral for a sufficient period of the payment of part of the variable components that implies total or partial loss of this remuneration in the event that prior to the time of payment an event occurs that makes this advisable. Complies þ Partially complies o Explain o Not applicable o 60. Remuneration linked to company earnings should bear in mind any qualifications stated in the external auditor’s report that reduce their amount. Complies þ Partially complies o Explain o Not applicable o 61. A major part of executive directors’ variable remuneration should be linked to the award of shares or financial instruments whose value is linked to the share price. Complies þ Partially complies o Explain o Not applicable o 62. Following the award of shares, options or financial instruments corresponding to the remuneration schemes, executive directors should not be able to transfer their ownership or exercise them until a period of at least three years has elapsed. Except for the case in which the director maintains, at the time of the transfer or exercise, a net economic exposure to the variation in the price of the shares for a market value equivalent to an amount of at least twice his or her fixed annual remuneration through the ownership of shares, options or other financial instruments. The foregoing shall not apply to the shares that the director needs to dispose of to meet the costs related to their acquisition or, upon favourable assessment of the nomination and remuneration committee to address an extraordinary situation. Complies þ Partially complies o Explain o Not applicable o 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 þ Partially complies o Explain o Not applicable o Responsible banking Corporate governance Economic and financial review Risk management and compliance 64. Termination payments should not exceed a fixed amount equivalent to two years of the director’s total annual remuneration and should not be paid until the company confirms that he or she has met the predetermined performance criteria. For the purposes of this recommendation, payments for contractual termination include any payments whose accrual or payment obligation arises as a consequence of or on the occasion of the termination of the contractual relationship that linked the director with the company, including previously unconsolidated amounts for long-term savings schemes and the amounts paid under post-contractual non- compete agreements. Complies þ Partially complies o Explain o Not applicable o List whether any directors voted against or abstained from voting on the approval of this Report. Yes o No þ 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. 299 Annual report 2020 Contents 9.3 Table on compliance with or explanations of recommendations on corporate governance Recommendation 1 Comply / Explain Comply Information See section 3.2 'Shareholder rights'. Not applicable See 'Conflicts of interest' in section 4.12. and section 2.3 'Significant shareholders'. Comply Comply See section 3.1 'Shareholder engagement'. See section 3.1 'Shareholder engagement'. Partially comply Comply Comply Comply Comply Comply At our April 2020 AGM, the board was authorised to increase share capital without pre-emptive rights for shareholders, with a limit of 10% of the share capital then in issue. However, this limit on issuing shares without pre-emptive rights do not apply to capital increases to convert contingent convertible preferred securities (which can only be converted into newly-issued shares when the CET1 ratio falls below a pre-established threshold). Banco Santander 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 'Authority to increase capital'. See sections 4.5 'Audit committee activities in 2020', 4.6 'Nomination committee activities in 2020', 4.7 'Remuneration committee activities in 2020', 4.8 'Risk supervision, regulation and compliance committee activities in 2020', 4.9 'Responsible banking, sustainability and culture committee activities in 2020', 4.10 'Innovation and technology committee activities in 2020' and 4.12 'Related-party transactions and conflicts of interest'. See 'Engagement with shareholders in 2020' in section 3.1, 'Shareholder participation at general meetings' in section 3.2 and section 3.6 'Our coming 2021 AGM'. See 'Rules and regulations of the board' in section 4.3 and section 4.5 'Audit committee activities in 2020'. See 'Participation of shareholders at the general meeting' in section 3.2. See 'Supplement to the annual general meeting notice' in section 3.2. Not applicable See section 3.6 'Our coming 2021 AGM'. Comply Comply Comply Comply Comply Comply See section 4.3 'Board functioning and effectiveness'. See 'Size' in section 4.2. See 'Diversity' and 'Election, renewal and succession of directors' in section 4.2, 'Rules and regulations of the board' in section 4.3, 'Duties and activities in 2020' in section 4.6, section 5 'Management team' and 'Responsible banking' chapter. See section 4.2 'Board composition'. See 'Composition by type of director' in section 4.2. See 'Composition by type of director' and 'Election, renewal and succession of directors' in section 4.2. Comply See 'Corporate website' in section 3.1 and section 4.1 'Our directors'. Not applicable See 'Composition by type of director' and 'Tenure and equity ownership' in section 4.2. Comply Comply Comply Comply Comply Comply Comply Comply Comply Comply Comply Comply Comply Comply See 'Election, renewal and succession of directors' in section 4.2. See 'Election, renewal and succession of directors' in section 4.2. See 'Election, renewal and succession of directors' in section 4.2, 'Rules and regulations of the board' in section 4.3 and 'Duties and activities in 2020' in section 4.6. See 'Election, renewal and succession of directors' in section 4.2. See 'Election, renewal and succession of directors' in section 4.2, 'Rules and regulations of the board' in section 4.3 and 'Duties and activities in 2020' in section 4.6. See 'Board and committees attendance' in section 4.3 and 'Duties and activities in 2020' in section 4.6. See 'Board meetings' and 'Board and committee attendance' in section 4.3. See 'Board meetings' and 'Board and committee attendance' in section 4.3. See 'Board meetings' in section 4.3. See 'Board meetings' in section 4.3. See 'Training of directors and induction programmes for new directors' in section 4.3. See 'Board meetings' in section 4.3. See section 3.1 'Shareholder engagement' and 'Duties and activities in 2020' in section 4.6. See section 4.3 'Board functioning and effectiveness'. 2 3 4 5 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 33 300 Responsible banking Corporate governance Economic and financial review Risk management and compliance Recommendation 34 Comply / Explain Comply Information See 'Lead independent director' in section 4.3. 35 36 37 38 39 40 41 42 43 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 Comply Comply Comply Comply Comply Comply Comply Comply Comply See 'Secretary of the board' in section 4.3. See 'Board assessment in 2020' in section 4.3. See 'Rules and regulations of the board' in section 4.3 and 'Composition' in section 4.4. See 'Committee meetings' in section 4.3 and section 4.4 'Executive committee activities in 2020'. See 'Rules and regulations of the board' in section 4.3 and 'Composition' in section 4.5. See 'Duties and activities in 2020' in section 4.5 and section 8.5 'Monitoring'. See 'Rules and regulations of the board' in section 4.3 and 'Duties and activities in 2020' in section 4.5. See 'Rules and regulations of the board' in section 4.3 and 'Duties and activities in 2020' in section 4.5. See 'Committee meetings' in section 4.3. See 'Duties and activities in 2020' in section 4.5. See 'Rules and regulations of the board' in section 4.3, 'Duties and activities in 2020' in section 4.5, 'Duties and activities in 2020' in section 4.8 and the 'Risk management and compliance' chapter. See 'Duties and activities in 2020' in section 4.5,'Duties and activities in 2020' in section 4.8 and the 'Risk management and compliance' chapter. See 'Composition' in section 4.6 and 'Composition' in section 4.7. See 'Structure of board committees' in section 4.3. See 'Duties and activities in 2020' in section 4.6. See 'Duties and activities in 2020' in section 4.7. See 'Duties and activities in 2020' in section 4.7. See 'Rules and regulations of the board' and 'Committee meetings' in section 4.3 and sections 4.8 'Risk supervision, regulation and compliance committee activities in 2020' and 4.9 'Responsible banking, sustainability and culture committee activities in 2020'. See 'Rules and regulations of the board' in section 4.3, 'Duties and activities in 2020' in section 4.6, 'Duties and activities in 2020' in section 4.8 and 'Duties and activities in 2020' in section 4.9. See 'Rules and regulations of the board' in section 4.3, 'Duties and activities in 2020' in section 4.6, 'Duties and activities in 2020' in section 4.8 and 'Duties and activities in 2020' in section 4.9. See 'Duties and activities in 2020' in section 4.9 and 'Responsible Banking' chapter. See sections 6.2 'Remuneration of directors for supervisory and collective decision-making duties: policy applied in 2020', 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See sections 6.2 'Remuneration of directors for supervisory and collective decision-making duties: policy applied in 2020', 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See section 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See section 6.3 'Remuneration of directors for executive duties'. See section 6.3 'Remuneration of directors for executive duties'. See section 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See 'Duties and activities in 2020' in section 4.7, section 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See section 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. See 'Duties and activities in 2020' in section 4.7 and sections 6.1 'Principles of the remuneration policy', 6.3 'Remuneration of directors for executive duties' and 6.4 'Directors' remuneration policy for 2021, 2022 and 2023 submitted to a binding shareholder vote'. 301 Annual report 2020 Contents 9.4 Reconciliation to the CNMV’s remuneration report model Included in Section in the statistical CNMV model A. Remuneration policy for the present fiscal year A.1 report No Further information elsewhere and comments • See section 6.4. • See sections 4.7 and 6.5. • See 'Summary of link between risk, performance and reward' in section 6.3. No No No See section 6.4. See section 6.4. See section 6.5. No No No No No No No No No No No No No No No No A.2 A.3 A.4 B. Overall summary of application of the remuneration policy over the last fiscal year See sections 6.1, 6.2. and 6.3. B.1 See 'Summary of link between risk, performance and reward' in section 6.3. B.2 See sections 6.2 and 6.3. B.3 See section 6.5. B.4 See section 6.2 and 6.3 B.5 See 'Gross annual salary' in section 6.3. B.6 See 'Variable remuneration' in section 6.3. B.7 Not applicable. B.8 See 'Main features of the benefit plans' in section 6.3. B.9 See 'Other remuneration' in section 6.3. B.10 See 'Terms and conditions of executive directors´ contracts' in section 6.4. B.11 No remuneration for this component. B.12 See note 5 to the consolidated financial statements. B.13 See 'Insurance and other remuneration and benefits in kind' in section 6.4. B.14 See 'Remuneration of board members as representatives of the Bank' in section 6.3. B.15 B.16 No remuneration for this component. C. Breakdown of the individual remuneration of directors Yes C Yes C.1 a) i) Yes C.1 a) ii) Yes C.1 a) iii) Yes C.1 a) iii) Yes C.1 b) i) No C.1 b) ii) No C.1 b) iii) No C.1 b) iv) Yes C.1 c) D. Other information of interest No D See section 9.5. See section 9.5. 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 4.7 302 Responsible banking Corporate governance Economic and financial review Risk management and compliance 9.5 Statistical information on remuneration required by the CNMV B. OVERALL SUMMARY OF HOW REMUNERATION POLICY WAS APPLIED DURING THE YEAR ENDED B.4 Report on the result of non-binding 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 Votes against Votes in favour Abstentions Number 10,429,789,366 Number 649,059,435 9,777,014,101 372,790,860 % of total 96.55 % % of total 6.01 % 90.51 % 3.45 % C. ITEMISED INDIVIDUAL REMUNERATION ACCRUED BY EACH DIRECTOR Directors Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Bruce Carnegie-Brown Ms Homaira Akbari Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea Mr Álvaro Antonio Cardoso de Souza Mr Ramón Martín Chávez Márquez Ms Sol Daurella Comadrán Mr Henrique Manuel Drummond Borges Cirne de Castro Ms Gina Díez Barroso Mr Luis Isasi Fernández de Bobadilla Mr Ramiro Mato García-Ansorena Mr Sergio Rial Ms Belén Romana García Mrs Pamela Ann Walkden Mr Rodrigo Echenique Gordillo Mr Ignacio Benjumea Cabeza de Vaca Mr Guillermo de la Dehesa Romero Ms Esther Giménez-Salinas i Colomer Type Executive Executive Independent Independent Other external Independent Independent Independent Independent Independent Independent Independent Executive Independent Independent Other external Other external Other external Independent Period of accrual in year 2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 27/10/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 22/12/2020 to 31/12/2020 From 19/05/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 30/05/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 31/12/2020 From 01/01/2020 to 22/12/2020 From 01/01/2020 to 05/05/2020 From 01/01/2020 to 03/04/2020 From 01/01/2020 to 27/10/2020 303 Annual report 2020 Contents 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) Fixed remune ration Per diem allowances Remuneration for membership of Board's committees Short-term variable remuneration Salary Long-term variable remuneration 1 Severance pay Other grounds Total year 2020 Total year 2019 157 3,176 144 2,541 534 290 828 559 Name Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Bruce Carnegie- Brown Ms Homaira Akbari Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea Mr Álvaro Antonio Cardoso de Souza Mr Ramón Martín Chávez Márquez Ms Sol Daurella Comadrán Mr Henrique Manuel Drummond Borges Cirne de Castro Ms Gina Díez Barroso Mr Luis Isasi Fernández de Bobadilla Mr Ramiro Mato García-Ansorena Mr Sergio Rial Ms Belén Romana García Mrs Pamela Ann Walkden Mr Rodrigo Echenique Gordillo Mr Ignacio Benjumea Cabeza de Vaca Mr Guillermo de la Dehesa Romero Ms Esther Giménez- Salinas i Colomer Mr Carlos Fernández González 77 77 326 77 77 136 8 77 77 2 44 119 42 98 114 75 35 23 64 — 55 49 82 79 45 60 15 82 85 2 43 86 21 94 66 60 43 28 71 — 187 46 — 47 14 55 55 — 116 225 — 225 34 20 95 57 56 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 525 5,352 6,119 710 4,370 4,957 — — — — — — — — 595 202 700 226 122 137 243 276 37 — 214 240 217 4 86 — 740 943 — — — — — 430 63 500 — 417 525 214 34 — — — — — — — — — — — — — 414 1,800 — 2,369 3,926 — — — — — — — — 102 275 524 — — — 108 399 191 228 — 214 Comments 1. Includes deferred amounts from the 2016 deferred and conditional variable remuneration plan subject to long term metrics for Ana Botín, José Antonio Álvarez and Rodrigo Echenique, of which only a third was paid in 2020. 304 Resposible banking Corporate governance report Economic and financial review Risk management and compliance II) Table of changes in share-based remuneration schemes and gross profit from consolidated shares or financial instruments Name Ms Ana Botín- Sanz de Sautuola y O’Shea Name of Plan 1st cycle of deferred variable remuneration plan linked to multi-year targets (2016) 2nd cycle of deferred variable remuneration plan linked to multi-year targets (2017) 3rd cycle of deferred variable remuneration plan linked to multi-year targets (2018) 4th cycle of deferred variable remuneration plan linked to multi-year targets (2019) 5th cycle of deferred variable remuneration plan linked to multi-year targets (2020) Name Mr José Antonio Álvarez Álvarez Name of Plan 1st cycle of deferred variable remuneration plan linked to multi-year targets (2016) 2nd cycle of deferred variable remuneration plan linked to multi-year targets (2017) 3rd cycle of deferred variable remuneration plan linked to multi-year targets (2018) 4th cycle of deferred variable remuneration plan linked to multi-year targets (2019) 5th cycle of deferred variable remuneration plan linked to multi-year targets (2020) Financial instruments at start of year 2020 Financial instruments granted at start of year 2020 Financial instruments consolidated during 2020 Instruments matured but not exercised Financial instruments at end of year 2020 No. of instruments No. of equivalent shares No. of instruments No. of equivalent shares 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 instruments No of equivalent shares 165,043 165,043 2.685 443 51,265 — — 216,308 216,308 206,775 206,775 309,911 309,911 319,390 319,390 — — — — — — — — — — — — — — — — — — — — — — 310,615 310,615 198,792 198,792 2.685 534 — — — — 206,775 206,775 309,911 309,911 319,390 319,390 111,823 111,823 Financial instruments at start of year 2020 Financial instruments granted at start of year 2020 Financial instruments consolidated during 2020 Instruments matured but not exercised Financial instruments at end of year 2020 No. of instruments No. of equivalent shares No. of instruments No. of equivalent shares 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 instruments No of equivalent shares 111,396 111,396 2.685 299 34,602 — — 145,998 145,998 138,283 138,283 207,097 207,097 213,449 213,449 — — — — — — — — — — — — — — — — — — — — — — 168,715 168,715 107,976 107,976 2.685 290 — — — — 138,283 138,283 207,097 207,097 213,449 213,449 60,739 60,739 305 Annual Report 2020 Contents Name Mr Rodrigo Echenique Gordillo Name of Plan 1st cycle of deferred variable remuneration plan linked to multi-year targets (2016) 2nd cycle of deferred variable remuneration plan linked to multi-year targets (2017) 3rd cycle of deferred variable remuneration plan linked to multi-year targets (2018) 4th cycle of deferred variable remuneration plan linked to multi-year targets (2019) Financial instruments at start of year 2020 Financial instruments granted at start of year 2020 Financial instruments consolidated during 2020 Instruments matured but not exercised Financial instruments at end of year 2020 No. of instruments No. of equivalent shares No. of instruments No. of equivalent shares 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 instruments No of equivalent shares 108,134 108,134 107,764 107,764 164,462 164,462 98,092 98,092 — — — — — — — — Comments 82,506 82,506 2.685 222 25,628 — — — — — — — — — — — — — — — — — 107,764 107,764 164,462 164,462 98,092 98,092 After reviewing the results of the 1st cycle of the deferred variable remuneration plan linked to multi-year targets (2016), the board of directors confirmed in 2020, upon recommendation from the remunerations committee, a 76.3% achievement of the long-term metrics of the plan, and the amounts of the pending deliveries for each executive director, payable in February 2020, 2021 and 2022 in connection with this plan. 306 Responsible banking Corporate governance Economic and financial review Risk management and compliance III) Long-term saving systems Name Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Remuneration from consolidation of rights to savings system 1,155 864 Contribution over the year from the company (EUR thousand) Savings systems with consolidated economic rights Savings systems with unconsolidated economic rights Amount of accumulated funds (EUR thousand) 2020 2019 Name Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique Gordillo 2020 1,155 864 — 2019 1,145 858 — iv) Details of other items (Thousands of EUR) Name Ms Ana Botín- Sanz de Sautuola y O’Shea Item Life and accident insurance and fixed remuneration supplement insurance Other remuneration Name Mr José Antonio Álvarez Álvarez Item Life and accident insurance and fixed remuneration supplement insurance 2020 2019 Systems with consolidated economic rights Systems with unconsolidat ed economic rights Systems with consolidated economic rights Systems with unconsolidat ed economic rights — — — — — — 49,444 18,082 — — — — 48,104 17,404 13,268 — — — Amount remunerated 584 22 Amount remunerated 1,045 Other remuneration 9 b) Remuneration of the company directors for seats on the boards of other group companies: i) Remuneration in cash (Thousands of EUR) Name Ms Homaira Akbari Mr Álvaro Antonio Cardoso de Souza Mr Ramón Martín Chávez Márquez Mr Henrique Manuel Drummond Borges Cirne de Castro Ms Gina Díez Barroso Mr Sergio Rial Fixed remuneration Per diem allowances Remuneration for membership of Board's committees Short-term variable remuneration Long-term variable remuneration Salary Severance pay Other grounds 184 310 17 17 14 — — — — — — — — — — — — — — — — — — — — — — — 2,175 1,664 — — — — — — — — — — — — — 25 — — — 17 17 14 181 4,020 Total year 2020 184 Total year 2019 — 335 325 — — — — 307 Annual report 2020 Contents ii) Table of changes in share/based remunerations schemes and gross profit from consolidated shares of financial instruments Financial instruments at start of year 2020 Financial instruments granted at start of year 2020 Financial instruments consolidated during 2020 Instruments matured but not exercised Financial instruments at end of year 2020 No. of instru ments No. of equiva lent shares No. of instruments No. of equivalent shares No. of instruments No. of equivalent shares / handed over Price of the consolida ted shares Net proft from shares handed over or consolidated fnancial instruments (EUR thousand) No. of instruments No. of instruments No of equivalent shares — — 355,263 355,263 227,367 227,367 7.32 1,664 — 127,896 127,896 Name Name of Plan Mr Sergio Rial 5th cycle of deferred variable remuneration plan linked to multi-year targets (2020) iii) Long term saving systems Name Mr Sergio Rial Remuneration from consolidation of rights to savings system 693 Contribution over the year from the company (EUR thousand) Savings systems with consolidated economic rights Savings systems with unconsolidated economic rights Name Mr Sergio Rial 2020 693 2019 — 2020 — 2019 — iv) Detail of other items (Thousands of EUR) Name Mr Sergio Rial Item Fundo de Pensão do Governo Other remuneration Amount Remunerated 2020 174 7 Amount of accumulated funds (EUR thousand) 2020 2019 Systems with Systems with consolidated unconsolidat ed economic rights economic rights Systems with Systems with consolidated unconsolidat ed economic rights economic rights — — — — 308 Responsible banking Corporate governance Economic and financial review Risk management and compliance c) Summary of remuneration (Thousands of EUR) 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 Gross profit on consolidated shares or financial instruments1 Total cash remuner 1 ation Contribut ions to the long- Remunerat ion for other items Total 2020 term savings plan Total cash remunera tion Total 2019 Gross profit on consolidated shares or financial instruments Contribut ions to the long- term savings plan Remuner ation for other items 243 276 335 Name Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 4,370 589 864 1,054 6,877 8,270 5,352 977 1,155 606 8,090 9,954 Mr Bruce Carnegie-Brown Ms Homaira Akbari Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea 595 202 122 Mr Álvaro Antonio Cardoso de Souza 243 Mr Ramón Martín Chávez Márquez Ms Sol Daurella Comadrán Mr Henrique Manuel Drummond Borges Cirne de Castro Ms Gina Díez Barroso Mr Luis Isasi Fernández de Bobadilla Mr Ramiro Mato García-Ansorena Mr Sergio Rial Ms Belén Romana García Mrs Pamela Ann Walkden 37 214 217 4 943 430 63 417 214 — — — — — — — — — — — — — Mr Rodrigo Echenique Gordillo 2,369 222 Mr Ignacio Benjumea Cabeza de Vaca Mr Guillermo de la Dehesa Romero Ms Esther Giménez-Salinas i Colomer Mr Carlos Fernández González 275 108 191 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 4 — — — — 595 202 122 700 226 137 37 — 214 240 217 4 943 430 63 417 214 86 — — 500 525 34 2,595 4,874 275 108 191 — 524 399 228 214 — — — 184 — 17 — 17 14 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 4,020 1,664 693 181 6,558 — — — — — — — — — — — — — — — — — — — — — — — Total 2020 Total 2019 — — — 184 — — — — — — 335 325 17 — 17 14 — — — — — — — — — — — — — — — — Total 16,366 1,788 2,019 1,664 21,837 27,187 4,587 1,664 693 181 7,125 325 1. Includes deferred amounts from the 2016 deferred and conditional variable remuneration plan subject to long term metrics for Ana Botín, José Antonio Álvarez and Rodrigo Echenique, of which only a third was paid in 2020. Comments This annual report on remuneration has been approved by the board of directors of the company, at its meeting on 22 February 2021. State if any directors have voted against or abstained from approving this report. Yes o No þ 309 Annual report 2020 Contents Author: Santi Alvite Economic and financial review 310 Responsible banking Corporate governance Economic and financial review Risk management and compliance 1. Economic, regulatory and competitive context 2. Group selected data 3. Group financial performance 3.1 Situation of Santander 3.2 Results 3.3 Balance sheet 3.4 Liquidity and funding management 3.5 Capital management and adequacy. Solvency ratios 4. Financial information by segments 4.1 Description of segments 4.2 Summary income statement of the Group's main business areas 4.3 Primary segments 4.4 Corporate Centre 4.5 Secondary segments 5. Research, development and innovation (R&D&I) 6. Significant events since year end 7. Trend information 2021 8. Alternative performance measures (APM) 312 315 317 317 320 333 337 345 357 357 359 361 389 391 401 403 404 412 311 Annual report 2020 Contents 1. Economic, regulatory and competitive context In 2020, Santander operated in an extraordinarily complex environment characterized by the pandemic and the measures to alleviate its economic impact. The crisis has been global, severe and abrupt, and has generated enormous uncertainty given the impossibility of predicting its scope and duration. Most of the economies in which the bank operates responded with tough policies and notable coordination between their fiscal, financial and monetary counterparts to limit permanent damage from lockdown measures. Nonetheless, hopes raised by better treatments, more targeted outbreak responses and the effective vaccines announced in the final months of the year contained the situation towards the end of the year and led to better expectations that were reflected in financial markets. Economic performance by geography was as follows: • Eurozone (GDP: -6.8% estimated in 2020). The economic contraction led to a strong policy response. The European Central Bank (ECB) eased funding conditions through expansionary measures, complemented with temporary regulatory and supervisory measures to boost lending. The European Union (EU) supported countries adopting expansionary fiscal policies and set up funds to provide liquidity. • Spain (GDP: -11 in 2020). The recession in Spain was more severe compared against the euro area average, owing to its greater exposure to the tourist industry and the stronger impact of the first wave of the pandemic. Unemployment rose to 16.1% in Q4'20. Inflation was negative at the end of the year (-0.5% year-on-year in December), due to contracting demand and lower energy prices. • United Kingdom (GDP: -9.9% in 2020). The pandemic hit the British economy hard (particularly the service sector), which for some time overshadowed post-Brexit relationships with the EU. Inflation was low (0.6% in December) and unemployment (5% in October) remained under control thanks to government employment protection schemes. The UK's official interest rate has been 0.1% since March. • Portugal (GDP: -7.6% in 2020). The covid-19 crisis affected the service sector the most, which had a direct impact on tourism. Unemployment (7.1% in Q4'20) will continue to rise. There was no inflation, standing at -0.2% in December. Portugal's fiscal deficit amounted to 3.6% of GDP through Q3'20. • Poland (GDP: -2.8% in 2020). The recession was less severe than in surrounding countries due to better private consumption and external demand. Unemployment rose to 3.4% in Q3'20, although inflation remained high (2.4% in December). Poland's official interest rate has been at 0.1% since May. • United States (GDP: -3.5% in 2020). Overall fiscal stimulus packages and softer restrictions caused the economy to shrink less than in other regions. As a result, after peaking at 14.7%, recovery enabled unemployment to fall to 6.7% in December. The shock exerted downward pressure on inflation. After cutting interest rates to 0-0.25%, the Federal Reserve activated a range of facilities to stabilize markets and encourage lending. • Mexico (GDP: -8.5% preliminary in 2020). The pandemic and ensuing restrictions led to a sharp slump in the Mexican economy. Recovery began in Q3'20 on the back of manufacturing and exports, despite weak domestic demand. After a temporary rebound, inflation moderated at year-end (3.2%). Mexico's central bank lowered the official interest interest rate to 4.25% (from 7.25% at the end of 2019). • Brazil (GDP: -4.1% estimated in 2020). The fall in economic activity stemming from the pandemic was more moderate elsewhere in the region due to fiscal support measures that mitigated the fall in Q2'20 and boosted recovery in Q3'20. Inflation rebounded at the end of the year (4.5% in December) while underlying inflation remained low (2.8%). Brazil's central bank cut the official interest rate by 250 bps to a record low of 2.0%. • Chile (GDP: -6.0% estimated in 2020). The lockdowns and the economic shutdown lasted longer than in other countries, resulting in a late recovery. External demand, measures to boost liquidity and further fiscal stimulus have increased dynamism in recent months. The year ended with inflation at 3% and Chile's central bank cut interest rates by 125 bps to 0.5%. • Argentina (GDP: -10.4% estimated in 2020). Argentina successfully restructured its foreign debt (99% acceptance), extending maturities and reducing the interest burden. GDP contracted for the third consecutive year. Inflation, which had slowed down in mid-2020, rebounded at year end to monthly rates greater than 3.5%. 312 Responsible banking Corporate governance Economic and financial review Risk management and compliance The table below shows exchange rates against the euro of our main currencies in 2020 and 2019: Exchange rates: 1 euro / currency parity Average 2020 2019 1.140 0.889 5.814 1.119 0.877 4.410 Period-end 2020 2019 1.227 0.898 6.373 1.123 0.851 4.516 24.364 21.549 24.438 21.220 902.072 785.558 871.819 845.673 US dollar Pound sterling Brazilian real Mexican peso Chilean peso Argentine peso 79.555 52.572 103.159 67.258 Polish zloty 4.441 4.297 4.559 4.257 Though financial markets saw several risk averse episodes that coincided with periods of greater uncertainty, they ended 2020 on a more positive note. As covid-19 spread globally, governments began closing their economies to promote social distancing and combat the pandemic. This spurred on a worldwide recession, which initially caused volatility to skyrocket across all asset classes. Central banks reacted swiftly. The US Federal Reserve stepped in to support capital markets with interest rate cuts and balance-sheet expansion programmes, providing the liquidity needed to support the system, while bringing long- term government bond yields to historic lows. In Europe, the ECB also adopted monetary stimulus measures and relaxed its collateral policy, reducing peripheral sovereign risk. Meanwhile, Member State governments used fiscal policy to simultaneously deploy unprecedented amounts of liquidity to prop up economies. The combination and scale of those measures laid the foundation for a gradual return of risk appetite, while the resolution of the US presidential election and, most importantly, news about effective covid-19 vaccines helped invigorate financial markets. The international banking environment was also affected by the pandemic. The banking sector has been part of the solution, as banks have been channelling significant amounts of support from government policies while adopting measures to help households and businesses cope with the impact to their income. Several stress exercises carried out by international organizations indicate that international banks' strong solvency and liquidity should prevent a banking crisis even if economic conditions worsen. Banks will have the added challenge of a foreseeable increase in defaults. In fact, profitability was already lagging in 2020 owing to higher provisions. Increasing profitability amid lower-for- longer interest rates, high indebtedness and non-performing loans remains a difficult task, particularly in Europe, where institutional progress and regulatory harmonization is important in order to increase the sector's efficiency and improve current market valuations. In developing countries, profitability remains high and bank solvency is at historically high levels. Nevertheless, a sharp macroeconomic deterioration could affect the banking sector. During the pandemic, the digital transformation has accelerated with a sharp increase in customer interaction through digital channels. Competition and efficiency continue to demand high levels of investment. In addition, the banking sector needs to adapt to the ageing of developed economies and should use new technologies to their advantage to increase access to banking services to the growing middle classes in emerging economies. Regarding the regulatory framework in 2020, of note was: A. 2020 prudential framework: key aspects on solvency and resolution. The financial institutions must meet a set of minimum capital and liquidity requirements. These minimum requirements are regulated by the European capital requirements regulation, better known as CRR, and in the Capital Requirements Directive (CRD). In June 2019 these regulations were significantly modified, so that references to CRR2 and CRDV are understood as such regulations with the latest modifications incorporated respectively. Among the amendments to the CRR2, it is worth highlighting the introduction of the minimum requirement of TLAC (Total Loss Absorbing Capacity) applicable only to entities of global systemic importance (G-SIBs). This requirement is a minimum requirement for own funds and eligible liabilities (in terms of a percentage of the total risk exposure amount, currently 16% and, after the transitional period, 18%; in terms of a percentage of the total exposure measure, currently 6% and, after the transitional period, 6.75%). The CRDV, as a directive, must be transposed into the national legal system to be applicable in the Member States. In Spain, the transposition is expected to be developed during 2021. The CRDV includes relevant amendments such as the regulation of Pillar 2 Guidance requirements. Regarding to the resolution regulations, financial institutions must have an adequate financing structure that allows them, in the event of financial difficulties, to recover their situation or to resolve it, ensuring the protection of depositors and the financial stability. 313 Annual report 2020 Contents Although these guidelines were initially expected to apply to moratoria granted before 30 June 2020, the EBA decided on 2 December 2020 that these guidelines would apply to moratoria requested before 31 March 2021. Other measures adopted to provide flexibility in complying with these requirements have been the approval and entry into force of the 'quick fix' of the CRR (urgent and extraordinary regulatory measures aimed at making the regulatory framework more flexible in response to covid-19), which modifies CRR2. Among the amendments introduced by the quick fix, it is worth highlighting the extension of the transitional period granted before the pandemic due to the entry into force of IFRS 9, as a result of the sudden and significant increase in provisions for expected credit losses that must be recognized. Additionally, the application of certain provisions of CRR2 has been delayed, such as those relating to the leverage ratio buffer (whose application date is postponed until 1 January 2023), and includes the possibility to exclude from the calculation of such ratio exposures to central banks. Similarly, the date of application of other favourable provisions for entities, such as the support factor for small and medium enterprises (SMEs) and the support factor for infrastructure has been extended. C. Other regulations: Sustainability With regard to the integration of sustainable finance in the financial sector, the Taxonomy Regulation (Regulation 2020/852) has been published, which establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable and also lays down disclosure obligations for the financial services sector to be applied on 2022. This taxonomy supplements the rules on sustainability- related disclosures in the financial services sector laid down in Regulation (EU) 2019/2088. In addition, the ECB and Banco de España (Spain's central bank) supervisory expectations will gradually incorporate into the supervisory dialogue the management and disclosure of climate and environmental risks. The directive that regulates the aforementioned resolution framework is the Restructuring and Resolution Directive, BRRD. Like CRR2 and CRDV, BRRD was amended in June 2019. BRRD2 refers BRRD as amended. The transposition of this directive in Spain is also planned for 2021. The BRRD2 has introduced important modifications to the minimum requirement for own funds and eligible liabilities (MREL). Thus, for example, the aforementioned TLAC requirement is now considered a Pillar 1 resolution requirement for G-SIBs. For large banks (which are defined as those whose total assets exceed EUR 100 billion euros) or those that the resolution authority otherwise considers systemic, the BRRD2 establishes a minimum subordination requirement of 13.5% of risk-weighted assets, or 5% of the exposure of the leverage ratio, whichever is higher. Other entities' subordination requirement will be determined on a case-by-case basis by the resolution authority. B. Regulatory response to the impacts of covid-19 The severe economic disruption caused by the covid-19 pandemic in 2020 has revealed the importance of institutions' funding functions in contributing to recovery. The competent authorities (national, European and international) have acted by reducing liquidity, capital and operational requirements so financial institutions can continue to provide financing to the economy, while ensuring that such institutions continue to act prudently as they can also be negatively affected by the deterioration of the economic situation. As part of these measures, the European Central Bank issued a recommendation in March 2020 urging European banks to refrain from paying dividends against 2019 and 2020 financial years. On 27 July, the ECB extended that recommendation to 1 January 2021. On 15 December 2020, the ECB issued its recommendation 2020/35, repealing previous referred recommendations, and by which it recommended that banks under the scope of its direct supervision exercise extreme prudence on dividends and share buy-backs. The ECB asks the banks to consider not distributing any cash dividends or conducting share buy- backs, or to limit such distributions until 30 September 2021. Given the persisting uncertainty over the economic impact of the covid-19 pandemic, the ECB also considers that it would not be prudent for credit institutions to consider making a distribution and share buy-backs amounting to more than 15% of their accumulated profit for the financial years 2019 and 2020, or more than 20 basis points in terms of the CET1 ratio, whichever is lower. For further details, see section 3.3 'Dividends' in the 'Corporate Governance' chapter. The national governments have taken measures to address the economic and social impact of covid-19, specifically in the form of legislative moratoria that were aimed at containing non-performing loans (NPLs) and helping the population to meet liquidity needs. Throughout 2020, the European Banking Authority (EBA) adopted a series of guidelines, including the Guidelines on legislative and non-legislative moratoria applied in the context of the covid-19 crisis on 2 April 2020. These guidelines clarify the requirements for public and private moratoria to avoid classification of exposures affected by moratoria as forborne exposures. 314 Responsible banking Corporate governance Economic and financial review Risk management and compliance 2. Group selected data BALANCE SHEET (EUR million) Total assets Loans and advances to customers Customer deposits A Total funds Total equity INCOME STATEMENT (EUR million) Net interest income Total income Net operating income Profit before tax Attributable profit to the parent EPS, PROFITABILITY AND EFFICIENCY (%) C EPS (euro) RoE RoTE RoA RoRWA Efficiency ratio D D (EUR million) UNDERLYING INCOME STATEMENT Net interest income Total income Net operating income Profit before tax Attributable profit to the parent D (%) UNDERLYING EPS AND PROFITABILITY Underlying EPS (euro) C Underlying RoE Underlying RoTE Underlying RoA Underlying RoRWA 2020 2019 % 2020 vs 2019 2018 1,508,250 1,522,695 916,199 849,310 942,218 824,365 1,056,127 1,050,765 91,322 110,659 (0.9) (2.8) 3.0 0.5 (17.5) 1,459,271 882,921 780,496 980,562 107,361 2020 31,994 44,279 23,149 (2,076) (8,771) 2020 (0.538) (9.80) 1.95 (0.50) (1.33) 47.0 2020 31,994 44,600 23,633 9,674 5,081 2020 0.262 5.68 7.44 0.40 1.06 B 2019 % 2020 vs 2019 35,283 49,229 25,949 12,543 6,515 (9.3) (10.1) (10.8) — — 2019 % 2020 vs 2019 — 0.347 6.62 11.44 0.54 1.33 47.0 E 2019 % 2020 vs 2019 35,283 49,494 26,214 14,929 8,252 (9.3) (9.9) (9.8) (35.2) (38.4) 2019 % 2020 vs 2019 (41.7) 0.449 8.38 11.79 0.65 1.61 2018 34,341 48,424 25,645 14,201 7,810 2018 0.430 8.21 11.63 0.64 1.55 47.0 2018 34,341 48,424 25,645 14,776 8,064 2018 0.446 8.48 12.08 0.66 1.59 315 Annual report 2020 SOLVENCY AND NPLs (%) F Phased-in CET1 Phased-in total capital ratio F NPL ratio Coverage ratio 2020 12.34 16.18 3.21 76 2019 11.65 15.05 3.32 68 Contents 2018 11.47 14.98 3.73 67 THE SHARE, MARKET CAPITALIZATION AND DIVIDEND 2020 2019 % 2020 vs 2019 2018 Number of shareholders Shares (millions) Share price (euros) Market capitalization (EUR million) C Dividend per share (euros) C G Tangible book value per share (euros) Price / Tangible book value per share (X) C CUSTOMERS (thousands) Total customers Loyal customers H Loyal retail customers Loyal SME & corporate customers I Digital customers OPERATING DATA Number of employees Number of branches 4,018,817 3,986,093 17,341 2.538 44,011 0.0275 3.79 0.67 16,618 3.575 61,986 0.1917 4.18 0.86 0.8 4.3 (29.0) (29.0) (85.7) 2020 2019 % 2020 vs 2019 148,256 144,795 22,838 20,901 1,938 42,362 21,556 19,762 1,794 36,817 2.4 5.9 5.8 8.0 15.1 2020 191,189 11,236 2019 196,419 11,952 % 2020 vs 2019 (2.7) (6.0) 4,131,489 16,237 3.807 64,508 0.2204 4.01 0.95 2018 139,450 19,832 18,095 1,736 32,014 2018 202,713 13,217 A. Includes customer deposits, mutual funds, pension funds and managed portfolios. B. In constant euros: Net interest income: +1.3%; Total income: +0.2%; Net operating income: +1.5%; Attributable profit: +/-. C. 2018 and 2019 data adjusted for the capital increase in December 2020. 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 of our business which are grouped in the ‘net capital gains and provisions’ line and are further detailed at the end of section 3.2 'Results' and in section 8 'Alternative Performance Measures' – of this chapter. E. In constant euros: Net interest income: +1.3%; Total income: +0.3%; Net operating income: +2.5%; Attributable profit: -29.5%. F. The phased-in ratio includes the transitory treatment of IFRS 9, calculated in accordance with article 473 bis of the Regulation on Capital Requirements (CRR) and subsequent amendments introduced by Regulation 2020/873 of the European Union. Additionally, the total phased-in capital ratio includes the transitory treatment according to chapter 2, title 1, part 10 of the aforementioned CRR. G. The board of directors intends for the final remuneration charged to 2020 to be EUR 0.0275 per share in cash. This is the maximum allowed according to the limits established by the European Central Bank (ECB) in its recommendation 2020/63 on 15 December. H. Active customers who receive most of their financial services from the Group according to the commercial segment to which they belong. Various engaged customer levels have been defined taking profitability into account. I. Every physical or legal person, that, being part of a commercial bank, has logged in its personal area of internet banking ormobile phone or both in the last 30 days. 316 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3. Group financial performance Grupo Santander follows IFRS to report our results (see note 1.b to the consolidated financial statements). While the results generally guide the overview of our financial situation provided in this consolidated directors’ report, we also use non-IFRS measures and Alternative Performance Measures (APMs) to asses our performance (see section 8 'Alternative Performance Measures' of this chapter). Thus, main adjustments to our IFRS results consist of: • Underlying results measures. We present what we call underlying results measures which, in our view, provide a better year-on-year comparison because they exclude items outside the ordinary performance of our business that are grouped in the net capital gains and provisions line, and are further detailed at the end of section 3.2 'Results' of this chapter. We also present results by business area in section 4 'Financial information by segment' on an underlying basis in accordance with IFRS 8 and reconcile them in aggregate terms to our IFRS consolidated results in note 51.c to the consolidated financial statements. • Local currency measures. We use certain non-IFRS financial indicators in local currency to asses the ongoing operating performance of our business, which includes the results from our subsidiary banks outside the eurozone (excluding the FX impact). Because changes in exchange rates have a non-operating impact on results, we believe that evaluating performance in local currency provides an additional and meaningful assessment of performance to both management and investors. Section 8 'Alternative Performance Measures' of this chapter explains how we exclude the exchange rate impact from financial measures in local currency. We have rounded certain figures in this consolidated directors’ report to present them more clearly. Accordingly, in certain instances, the amounts given in the totals columns and rows of tables may not conform exactly to the total figure given for that column or row. 3.1 Situation of Santander Santander is one of the largest banks in the eurozone. As of December 2020, we had EUR 1,508,250 million of assets and EUR 1,056,127 million of total funds. Our market capitalization had reached EUR 44,011 million. Our purpose is to help people and businesses prosper in a way that is Simple, Personal and Fair. We do not merely meet our legal and regulatory obligations, but also aspire to exceed expectations. We focus on areas where our activity can have the greatest impact, helping economic growth in an inclusive and sustainable way. We engage in all types of typical banking activities, operations and services. Our scale, business model and diversification drive our aim to be the best open digital financial services platform, acting responsibly and earning the lasting loyalty of our stakeholders (customers, shareholders, people and communities). In 2020, against the backdrop of the pandemic, our commitment to our stakeholders was even stronger: • Our priority was to safeguard the health and safety of our 191,189 employees, by implementing measures such as redefining our way of working, with more than 100,000 employees working from home at the peak of the pandemic, and gradual returns to the workplaces amid de- escalation. We followed local governments' recommendations at all times and based our procedures on three pillars: developing and implementing of health and safety protocols, prioritizing the health of our employees, and tracking and tracing (through health apps). • For our 148 million customers, we strengthened our proposition, and implemented support measures to ensure the necessary financial assistance through pre-approved lines of credit, payment deferrals and special policies, as well as facilitating the granting of state-guaranteed business loans in all countries. • For our shareholders, we kept all channels open to increase their trust, which was reflected in an increase of more than 30,000 shareholders in the year to 4,018,817. 317 Annual report 2020 Contents • In line with our commitment, we contributed to the well- being of society. We implemented actions and mobilized resources together with governments and institutions to help combat the health crisis, with more than EUR 105 million dedicated to solidarity initiatives. As the global pandemic intensified, we accelerated our digital transformation, focusing on our multi-channel strategy and digitalization of processes and businesses. As a result, loyal and digital customers and activity continued to grow. The number of loyal customers reached 23 million (+6% in the year), picking up in individuals and corporates. Digital customers rose 15% to more than 42 million. On average, our customers accessed digital touchpoints close to 190 million times per week and 44% of total sales were digital (36% in 2019). We also aim to be one of the top three banks for customer satisfaction in our main markets. Besides digital channels, we interact with our customers through our global network of 11,236 branches, which we are optimizing and adapting to our customers' needs including universal offices and specialist centres for certain customer segments. We also have new collaborative spaces with increased digital capabilities (Work Café, SmartBank and Ágil branches). In the year, both businesses performed strongly, growing revenue, net operating income and profit. Both businesses together accounted for 46% of Grupo Santander's total net fee income and 38% of profit. We launched three strategic initiatives in 2020 to reinvent the bank and deliver sustainable and profitable growth based on greater customer loyalty: 1. One Santander: We want to create a better bank for our customers that delivers sustainable value for shareholders, through a global project that we first launched in Europe, by: • better serving our customers and simplifying our mass market value proposition to continue to enhance customer experience; • making progress with our omnichannel strategy, redefining how we interact with our customers, accelerating our digital agenda and maintaining strong personal relationships through our teams; • creating a common operating model in each region, to serve the business with shared technology platforms and automated operations, leveraging shared services opportunities. Additionally, we have contact centres which have won several awards for their service quality. This transformation should deliver faster and more profitable growth, as well as higher productivity. Santander has also two transversal global businesses which add value to our local businesses: Santander Corporate and Investment Banking (SCIB) and Wealth Management and Insurance (WM&I). SCIB attends to corporate and institutional customers who require a tailored service and value-added wholesale products that suit their complexity and sophistication. This highly profitable business model yields returns through the economic cycle. Our long-term strategy remains focused on becoming our clients' strategic advisor of choice. Furthermore, SCIB aims to maintain its leadership position in South America and also to turn the US franchise into a fierce competitor in North America. WM&I consists of asset management, private banking and insurance businesses and is a very capital efficient business with significant growth potential and high returns. As a part of our strategy to become the best responsible wealth manager in Europe and Latin America, we are implementing several private banking, asset management and insurance initiatives. The first focus of One Santander's strategy is Europe, where we announced a new organization in September, based on a pan-European operating model with a regional, business- centric management structure, which will enable us to boost innovation, reduce costs and simplify our operations. Our medium-term strategy will build on three drivers: • focusing on capital-efficient growth opportunities; • leveraging PagoNxt global solutions with particular focus on SMEs and merchants; • redesigning our branch network through the expansion of Santander Personal, deploying common mobile apps and increasing the number of Work Cafés. We will see the first steps of this deep transformation in 2021. Particular focus will be on changing how we manage our business with the creation of the new regional business owners role, responsible for managing region-wide businesses, defining the vision and end-to-end value proposition for each customer area and delivering through agile teams in all countries. 318 Responsible banking Corporate governance Economic and financial review Risk management and compliance We also want deploy this model in our other two regions: In North America: • increase collaboration to Commercial Banking, Auto and other retail segments; and • continue to build shared services in both countries, In South America: • expand Getnet and Superdigital • implement a common operating model for Consumer Finance; and • focus on revenue growth opportunities (e.g. Agribusiness). 2. Digital Consumer Bank: our vision is to build a global digital consumer lender on the shoulders of the existing Santander Consumer Finance footprint and the technology of Openbank’s digital platform. This approach will be a win-win from three perspectives: customer, technology and financial. • Customers: consumer finance acquires millions of new customers each year through car and consumer loans. Openbank has a full set of banking services, with a single, highly scalable and efficient software stack. Combining these gives our consumer finance customer base access to a full suite of additional banking services. • Technology: Openbank's technology gives instant access to API services to offer payments and lending (or leasing) capabilities directly to their customers and provides a common data platform to access the rich set of data unique to online consumer models. • Financial: Openbank accounts and robo-wealth management services will be the backbone to generate a greater deposit base to fund Santander Consumer Finance’s (SCF) lending activities. 3. PagoNxt: combining our most disruptive payments businesses into a single, autonomous company, providing world-class technology solutions for our banks and new open market customers. This new area is an upgrade to Santander Global Platform and is made up of three global businesses: • Global merchant solutions: merchant solutions offered under our Getnet brand, which is already a market leader in Brazil and one of the top 3 acquirers in Latin America. We rolled it out in several countries in 2020, and platform developments continued to incorporate additional functionalities. We also acquired Wirecard assets. • Global trade solutions: solutions for SMEs and corporates to trade internationally. We have leveraged our experience in trade services to develop a new global technology platform that incorporates innovative new services, bringing Santander’s international flows into a single platform and operating under the global brand of OneTrade. In 2020 we connected the platform to our customers in six countries, whilst completing acquisitions of majority stakes in two companies, Mercury and Ebury, which help strengthen our trade offering. • Consumer digital services: simple and accessible digital payments solutions for individuals, building on our Superdigital proposition, our solution in Latin America which targets the underbanked; and PagoFX, our open market international money transfer service. These consumer solutions will serve to create two-sided payments networks of merchants and individuals which will boost customer growth. In 2020, we further developed our global Superdigital platform and PagoFX completed the construction of its international payments platform. 319 Annual report 2020 Contents 3.2 Results 2020 Highlights → Grupo Santander's results in the year were affected by the health crisis caused by the spread of covid-19, which is reflected in a weaker economic environment, lower interest rates and a sharp depreciation of some currencies. → Total income fell in the year from lower activity and exchange rates. Excluding their impact, total income remained in line with 2019, as the decrease in activity and lower interest rates were offset by higher volumes, sound market volatility management and the lower cost of deposits. → Cost reduction through the optimization plans implemented in recent years, along with additional savings measures adopted since the start of the crisis. This was reflected in the fall in real terms in the majority of our markets. → Greater loan-loss provisions due to credit growth and the worsening of economic conditions arising from the pandemic and the consequent expected impact on credit quality. Cost of credit ended the year at 1.28%, in line with our expectations. → We adjusted the goodwill ascribed to some units and to deferred tax assets in the second quarter as a result of the worsening economic outlook, totalling EUR 12,600 million, resulting in an attributable profit to the Group of -EUR 8,771 million in 2020. → Excluding the above adjustments and other costs and provisions that are outside the ordinary course of our business, underlying attributable profit to the parent was EUR 5,081 million, with net operating income of EUR 23,633 million, 2% more in constant euros than in 2019. Summarized income statement EUR million Net interest income Net fee income (commission income minus commission expense) Gains or losses on financial assets and liabilities and exchange differences (net) Dividend income Share of results of entities accounted for using the equity method Other operating income / expenses Total income Operating expenses Administrative expenses Staff costs Other general administrative expenses Depreciation and amortization Provisions or reversal of provisions Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss (net) Impairment on other assets (net) Gain or losses on non-financial assets and investments (net) Negative goodwill recognized in results Gains or losses on non-current assets held for sale not classified as discontinued operations Profit or loss before tax from continuing operations Tax expense or income from continuing operations Profit from the period from continuing operations Profit or loss after tax from discontinued operations Profit for the period Attributable profit to non-controlling interests Attributable profit to the parent 320 Change 2020 31,994 2019 35,283 Absolute (3,289) % % excl. FX 1.3 (9.3) 2018 34,341 10,015 11,779 (1,764) (15.0) (4.5) 11,485 2,187 1,531 391 (96) (212) 533 324 (221) 44,279 49,229 (21,130) (23,280) (18,320) (20,279) (10,783) (12,141) (7,537) (2,810) (2,378) (12,382) (10,416) 114 8 (171) (2,076) (5,632) (7,708) — (7,708) (1,063) (8,771) (8,138) (3,001) (3,490) (9,352) (1,623) 1,291 — (232) 12,543 (4,427) 8,116 — 8,116 (1,601) 6,515 656 (142) (420) 9 (4,950) 2,150 1,959 1,358 601 191 42.8 (26.6) — (4.1) (10.1) (9.2) (9.7) (11.2) (7.4) (6.4) 55.9 (26.1) — 1,797 370 737 125.1 (306) 0.2 (1.2) (1.6) (4.1) 2.2 1.6 48,424 (22,779) (20,354) (11,865) (8,489) (2,425) (2,223) 1,112 (31.9) (26.5) (3,030) (8,793) (1,177) 32.4 — 49.2 (8,986) — (207) (91.2) (91.2) 8 — — 28 67 61 (14,619) (1,205) (15,824) — (15,824) 538 (15,286) (26.3) (28.6) (123) — 27.2 — — — — 14,201 45.6 (4,886) — — — 9,315 — 9,315 (33.6) (25.5) (1,505) — — 7,810 Responsible banking Corporate governance Economic and financial review Risk management and compliance Main income statement items Total income Total income amounted to EUR 44,279 million in 2020, down 10% year-on-year. If the FX impact is removed, total income remained resilient, in line with last year, due to the strength of our geographical and business diversification. Net interest income and net fee income accounted for 95% of total income. By line: Net interest income Net interest income amounted to EUR 31,994 million, 9% less than in 2019. The following tables show the average balances for each year, calculated as the monthly average over the period, which, in our opinion, should not materially differ from those obtained using daily balances, as well as the interest generated. Average balance sheet - assets and interest income EUR million Assets Cash and deposits on demand and loans and advances to central banks and credit institutions A 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 They also include our average balances and average interest rates obtained in 2020 and 2019, based on the domicile of the entities at which the relevant assets or liabilities are accounted for. Domestic balances relate to our entities domiciled in Spain, reflecting our domestic activity. International balances relate to those entities domiciled outside of Spain (reflecting our foreign activity), divided into mature markets - Europe (except Spain and Poland) and the US-, and developing markets - South America, Mexico and Poland. The balance of interest-earning assets in 2020 averaged 2% higher than in 2019, driven by 4% growth in domestic and mature markets (mainly loans and advances to customers). Developing markets dropped 5% affected by exchange rates, as local currency volumes increased in almost all countries. 2020 2019 Average balance Interest Average rate Average balance Interest Average rate 223,096 2,232 97,511 79,703 45,882 650 512 1,070 930,563 38,788 251,536 4,913 509,016 17,136 170,011 16,739 172,940 5,022 46,390 49,667 76,883 341 619 4,062 (343) 21 (116) (248) 42 10 21 11 1.00 % 0.67 % 0.64 % 2.33 % 4.17 % 1.95 % 3.37 % 9.85 % 2.90 % 0.74 % 1.25 % 5.28 % 203,809 3,920 84,412 66,093 53,304 598 910 2,412 910,327 46,180 236,132 5,420 491,479 18,426 182,716 22,334 190,128 6,378 61,498 56,935 71,695 599 829 4,950 1.92 % 0.71% 1.38% 4.52% 5.07 % 2.30% 3.75% 12.22% 3.35 % 0.97% 1.46% 6.90% 232 59 161 12 75 23 31 21 1,326,599 45,741 395,437 5,935 638,386 18,172 292,776 21,634 3.45 % 1.50 % 2.85 % 7.39 % 1,304,264 56,785 382,042 6,699 614,507 20,357 307,715 29,729 4.35 % 1.75% 3.31% 9.66% 210,953 — 203,903 — 1,537,552 45,741 1,508,167 56,785 A. Interest includes income from liabilities reported in "Deposits from Central Banks and credit institutions" related to funding from the European Central Bank. 321 Annual report 2020 Contents The average return on interest-earning assets decreased from 4.35% in 2019 to 3.45% in 2020, with broad based decreases across markets (domestic: -25 bps, mature international: -46 bps; developing international: -227 bps) and balance sheet items (cash, demand deposits and loans and advances to central banks and credit institutions: -92 bps; loans and advances to customers: -90 bps; debt securities: -45 bps), primarily driven by lower interest rates across our regions. The average balance of interest-bearing liabilities in 2020 was 2% higher year-on-year, also spurred by domestic markets (+5%, from marketable debt securities and, to a lesser degree, customer deposits) and mature international activity (+3%, through customer deposits and central banks and credit institutions deposits). Developing markets fell 3%, dampened by the exchange rate impact in Latin American countries. Average balance sheet - liabilities and interest expense EUR million Liabilities and stockholders’ equity A Deposits from central banks and credit institutions Average balance 2020 Interest 187,128 2,147 Domestic International - Mature markets International - Developing markets Customer deposits Domestic International - Mature markets International - Developing markets Marketable debt securities B 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 equity Average rate 1.15 % 0.43 % 0.72 % 3.79 % 0.67 % 0.12 % 0.43 % 1.99 % 2.07 % 1.55 % 2.06 % 3.77 % 2.64 % 1.85 % 1.25 % 6.56 % Average rate 1.79 % 0.57 % 1.49 % 5.21 % 1.25 % 0.25 % 0.73 % 3.74 % 2.71 % 1.88 % 2.41 % 5.66 % 3.14 % 2.43 % 1.17 % 7.54 % Average balance 2019 Interest 181,651 3,248 86,635 59,155 35,861 496 884 1,868 811,151 10,137 263,016 366,003 182,132 246,133 84,217 125,022 36,894 13,293 8,774 2,131 2,388 665 2,659 6,813 6,679 1,580 3,011 2,088 418 213 25 180 0 (21) 25 (4) 1,020 222 150 648 90,747 61,877 34,504 837,397 269,979 385,956 181,462 247,284 99,466 116,411 31,407 10,650 6,331 2,245 2,074 394 445 1,308 5,599 332 1,662 3,605 5,119 1,539 2,395 1,185 281 117 28 136 (294) (37) (205) (52) 895 313 95 487 1,282,459 13,747 2,658 4,420 6,669 466,523 566,489 249,447 155,714 9,920 89,459 — 1.07 % 0.57 % 0.78 % 2.67 % 1,252,228 21,502 442,642 552,311 3,155 6,754 257,275 11,593 1.72 % 0.71 % 1.22 % 4.51 % 146,386 11,096 98,457 — 1,537,552 13,747 1,508,167 21,502 A. Interest includes expenses from assets reported in "Cash and deposits on demand and loans and advances to central banks and credit institutions" related to liquidity placed in the European Central Bank. B. Does not include contingently convertible preference shares and perpetual subordinated notes because they do not accrue interests. We include them under “Other liabilities”. 322   Responsible banking Corporate governance Economic and financial review Risk management and compliance The average cost of interest-bearing liabilities fell 65 bps to 1.07%, which reflected a general decrease across markets (domestic: -14 bps, mature international: -44 bps; developing international: -184 bps) and balance sheet item (central banks and credit institutions deposits: -68 bps; customer deposits: -58 bps; debt securities: -64 bps). The change in interest income / (expense) shown in the table below was calculated as follows: • The change in volumes is obtained by applying the interest rate of the previous period to the difference between the average balances of the current and previous periods. • The change in interest rate is obtained by applying the difference between the rates of the current and previous periods to the average balance of the previous year. Lower interest rates led to less interest income and expense, despite a slightly positive impact from volumes. Broad-based decreases across markets, particularly in developing markets, due to the exchange rates. Thus, net interest income was down 9% but increased slightly (+1%) stripping out the FX effect. Volume and profitability analysis EUR million Interest income Cash and deposits on demand and loans and advances to central banks and 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 2020 vs. 2019 Increase (decrease) due to changes in Volume 253 89 464 (300) 628 338 1,763 (1,473) (221) (170) (149) 98 (575) (38) (277) (260) (33) (13) (10) (10) Rate (1,941) Net change (1,688) (37) (862) 52 (398) (1,042) (1,342) (8,020) (845) (3,053) (4,122) (7,392) (507) (1,290) (5,595) (1,135) (1,356) (88) (61) (986) — — — — — — — — (258) (210) (888) (575) (38) (277) (260) (33) (13) (10) (10) 52 206 1,791 (1,945) (11,096) (970) (3,976) (6,150) (11,044) (764) (2,185) (8,095) 323 Annual report 2020 Contents 2020 vs. 2019 Increase (decrease) due to changes in Volume 62 Rate (1,163) (125) Net change (1,101) (102) 23 107 (68) 339 17 347 (25) (155) 261 (137) (279) (61) (52) 13 (22) (294) (16) (230) (48) (125) 91 (55) (161) (234) 324 45 (603) (546) (492) (4,877) (350) (1,344) (3,183) (1,405) (302) (479) (624) (76) (44) (10) (22) — — — — — — — — (439) (560) (4,538) (333) (997) (3,208) (1,560) (41) (616) (903) (137) (96) 3 (44) (294) (16) (230) (48) (125) 91 (55) (161) (7,521) (821) (2,379) (4,321) (7,755) (497) (2,334) (4,924) Volume and cost 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 324 Responsible banking Corporate governance Economic and financial review Risk management and compliance Net interest income. Summary of volume, profitability and cost 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 2020 vs 2019 Increase (decrease) due to changes in Volume 52 Rate (11,096) (970) Net change (11,044) (764) 206 1,791 (1,945) (234) 324 45 (603) 286 (118) 1,746 (1,342) (3,976) (6,150) (7,521) (821) (2,379) (4,321) (3,575) (149) (1,597) (1,829) (2,185) (8,095) (7,755) (497) (2,334) (4,924) (3,289) (267) 149 (3,171) This 1% increase in constant euros was due to the net effect of higher revenue from greater lending and deposit volumes and the lower cost of the latter, and the reduction dampened by lower interest rates and regulatory impacts (mainly Brazil and Poland). On a positive note, higher volumes led to growth in Mexico and SCF, Chile grew due to higher volumes and better funding costs, and Argentina due to the placement of excess liquidity. There was a turnaround in the UK's trend, becoming positive thanks to the sharp reduction in the cost of deposits in the second half of the year. Spain increased slightly and the US and Brazil remained broadly stable. The only decreases were recorded in Portugal and Poland, due to lower interest rates. Net interest income EUR million Net fee income EUR million 9 % A - 2020 vs 2019 15 % A - 2020 vs 2019 A. Excluding exchange rate impact: +1%. A. Excluding exchange rate impact: -5%. 325 34,34135,28331,99420182019202011,48511,77910,015201820192020 Annual report 2020 Contents 2020 3,416 1,737 951 1,649 594 500 295 253 620 2019 3,815 2,242 931 1,675 633 612 522 316 1,033 10,015 11,779 Change Absolute (399) % % excl. FX (1.3) (10.4) (505) (22.5) 19 (26) (39) (112) (226) (63) (413) (1,764) 2.1 (1.5) (6.1) (18.3) (43.4) (20.0) (40.0) (15.0) (8.8) 12.1 11.7 9.7 (4.0) (36.3) 0.6 (41.1) (4.5) 2018 3,654 2,156 794 1,662 613 546 672 323 1,066 11,485 Exchange rate differences primarily show gains and losses from foreign exchange and the differences that arise in the conversion of monetary items in foreign currencies to the functional currency, and from selling non-monetary assets denominated in foreign currency at the time of their disposal. Because Grupo Santander manages the currencies it is exposed to with derivative instruments, the changes in this line item should be analyzed together with Gains / (losses) on financial assets and liabilities. For further details, see note 44 to the consolidated financial statements. Dividend income Dividend income was 27% lower year-on-year at EUR 391 million in 2020 (-26% excluding the exchange rate impact) affected by the delay or cancellation of dividend payments by several companies. Share of results of entities accounted for by the equity method The share of results of entities accounted for by the equity method was -EUR 96 million in 2020 (EUR 324 million in 2019) owing to the lower contribution from group entities, mainly real estate equity in Spain. Other operating income / (expenses) No material change was recorded as the higher results from insurance were somewhat mitigated by the greater contribution to the Single Resolution Fund (SRF) in the second quarter and to the Deposit Guarantee Fund (DGF) in the fourth. For further information, see note 45 to the consolidated financial statements. Net fee income EUR million Asset management business, funds and insurance Credit and debit cards Securities and custody services Account management and availability fees Cheques and payment orders Foreign exchange Charges for past-due/unpaid balances and guarantees Bill discounting Other Net fee income Net fee income Grupo Santander's net fee income decreased 15% versus 2019. Excluding the exchange rate effect it was down 5%, the line most affected by the health crisis, reflecting lower customer transactionality. Our strategy remains focused on increasing customer loyalty and growth in higher value-added services and products. By business, of note was 12% growth in Santander Corporate & Investment Banking (Global Debt Financing and markets) while Wealth Management & Insurance (including those ceded to the branch network) was virtually flat. Overall, together businesses accounted for 46% of the Group’s total (SCIB: 15%; WM&I: 31%). By region, North America recorded no material change, affected by the fall in the US, as Mexico grew 5%, while South America fell 2%, and Europe -9%, with generalized declines in all markets (except Poland) due to lower activity, along with regulatory changes affecting net fee income in Santander Consumer Finance and the UK. On the other hand, 'Other Europe', which includes the wholesale banking business in the region, increased net fee income by 41%. Gains / (losses) on financial assets and liabilities and exchange differences (net) Gains / (losses) on financial assets and liabilities and exchange differences (net) accounts for 5% of total income and was 43% higher at EUR 2,187 million (+56% excluding the exchange rate impact) over the previous year. This was mainly because of the positive impact of FX hedging, portfolio sales and market volatility management. Gains and losses on financial assets and liabilities result from valuing trading portfolio and marked-to-market derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our hedging and other derivative positions. For further details, see note 43 to the consolidated financial statements. 326 Responsible banking Corporate governance Economic and financial review Risk management and compliance Operating expenses EUR million Staff costs Other administrative expenses Information technology Communications Advertising Buildings and premises Printed and office material Taxes (other than tax on profits) Other expenses Administrative expenses Depreciation and amortization Operating expenses Change 2020 2019 Absolute % % excl. FX 2018 10,783 12,141 (1,358) (11.2) (4.1) 11,865 7,537 2,075 8,138 2,161 473 517 725 100 534 518 685 859 116 522 (601) (86) (45) (168) (134) (16) 12 2,980 18,320 2,810 21,130 3,277 20,279 3,001 23,280 (297) (1,959) (191) (2,150) (7.4) (4.0) (8.7) (24.5) (15.6) (13.8) 2.3 (9.1) (9.7) (6.4) (9.2) 2.2 3.1 2.4 (16.7) (8.1) (3.3) 13.4 0.3 (1.6) 1.6 (1.2) 8,489 1,550 527 646 1,846 122 557 3,240 20,354 2,425 22,779 Operating expenses Operating expenses were 9% lower year-on-year. Excluding the exchange rate impact, costs fell 1%, because of our successful management over the last three years, as well as additional savings measures adopted since the beginning of the crisis feeding through. We remained one of the most efficient global banks in the world in 2020, with an efficiency ratio of 47.0%, in line with last year. The trends by region and market were as follows: • In Europe, costs strongly reflected the synergies from recent integrations and additional savings, decreasing 6%. There were decreases across all markets: Spain (-10%), Poland (-6%) and Portugal (-5%) due to optimization efforts, -6% in the UK due to the savings from our transformation programme, and -2% in Santander Consumer Finance driven by efficiency projects carried out in several countries. Grupo Santander still aims to improve its operational capacity with efficient cost management and a strategy tailored to each region. Our cost reduction plan greatly exceeded the total expected savings for the year in the region and the efficiency ratio improved 21 bps in the year to 52.4%. Efficiency ratio (cost to income) EUR million • In North America, nominal costs fell 2% in nominal terms impacted by inflation. In the US, they dropped 5% through disciplined expense management while expenses in Mexico rose 5%, mainly from technology and amortizations, and higher inflation (in real terms, overall costs rose 2%). The efficiency ratio in the region improved 75 bps to 42.1%. • Lastly, in South America, higher costs were significantly distorted by soaring inflation in Argentina. Without this, increase of 1.5% (Brazil +1% and Chile was flat). Efficiency improved in all markets, 35.8% for the region as a whole (36.1% in 2019). 0.0 pp 2020 vs 2019 We believe that this regional management together with the lessons learnt from the pandemic will lead to a faster transformation, allowing us to continue increasing productivity while improving customer experience. 327 47.047.047.0201820192020 Annual report 2020 Contents Provisions or reversal of provisions Provisions (net of provisions reversals) amounted to EUR 2,378 million (EUR 3,490 million in 2019) including restructuring costs. For further details, see note 25 to the consolidated financial statements. Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss (net) Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss (net) was EUR 12,382 million, up 32% year-on-year in euros and 49% in constant euros, mainly from additional provisions based on the IFRS 9 forward-looking view and the collective and individual assessments to reflect expected credit losses arising from covid-19, together with growth in volumes in local currency. Both impacts were seen across the board in all countries. For further details, see section 3 'Credit risk' in the 'Risk management and compliance' chapter. Impairment on other assets (net) Every year, usually during the last quarter, the Grupo Santander evaluates whether an adjustment to the goodwill generated in the acquisition of the subsidiaries is necessary. The accounting rules require this analysis to be carried out earlier should any trigger events occur, which happened in the second quarter of this year, given that the global economic environment has been significantly affected by the covid-19 crisis. Specifically, the trigger events for this exercise were: • Changes in the economic environment where a decrease of the GDP is expected in all countries in the year and where recovery will take 2 or 3 years. • A generalized reduction in interest rates, which is expected to last longer than anticipated pre-crisis. • The increase of discount rates reflecting greater volatility and risk premiums. This analysis resulted in a negative adjustment in the valuation of goodwill in the second quarter of 2020 of EUR 10,100 million (Santander UK: EUR 6,101 million; Santander US: EUR 2,330 million; Santander Bank Polska: EUR 1,192 million; Santander Consumer Nordics: EUR 277 million and Other: EUR 200 million). This does not affect cash generation and has no impact on the group’s CET1 ratio or tangible net value per share (TNAV). Consequently, the impairment of other assets (net) in 2020 amounted to EUR 10,416 million. In 2019, this line was EUR 1,623 million. Gains or losses on non-financial assets and investments (net) Net gains on non-financial assets and investments were EUR 114 million in 2020, compared to EUR 1,291 million in 2019, when capital gains from the sale of 51% of Prisma Medios de Pago S.A., and the revaluation of our remaining 49%, and capital gains from the agreement with Crédit Agricole S.A. to absorb custody businesses were recorded. For further information, see note 48 to the consolidated financial statements. Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss (net) EUR million Financial assets at fair value through other comprehensive income Financial assets at amortised cost Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss and net gains and losses from changes 2020 19 12,363 2019 12 9,340 2018 1 8,985 12,382 9,352 8,986 Impairment on other assets (net) EUR million Impairment of investments in subsidiaries, joint ventures and associates, net Impairment on non-financial assets, net Tangible assets Intangible assets Others Impairment on other assets (net) 2020 — 10,416 174 10,242 — 10,416 2019 — 1,623 45 1,564 14 1,623 2018 17 190 83 117 (10) 207 328 Responsible banking Corporate governance Economic and financial review Risk management and compliance Attributable profit to the parent EUR million Earnings per share EUR A +/- 2020 vs 2019 +/- 2020 vs 2019 A. 2018 and 2019 data adjusted for the capital increase in December 2020. Gains or losses on non-current assets held for sale not classified as discontinued operations This item, which mainly includes impairment of foreclosed assets recorded and the sale of properties acquired upon foreclosure, totalled -EUR 171 million in 2020, compared to -EUR 232 million in 2019. Attributable profit to non-controlling interests The attributable profit to non-controlling interests was down 34% year-on-year (-26% excluding the exchange rate impact), due to lower profit obtained by group companies, on top of the share buyback in Mexico last year and the increased stake in Santander Consumer USA in 2020. Profit before tax Profit before tax was -EUR 2,076 million in 2020, affected by the adjustment in the valuation of goodwill, compared to EUR 12,543 million posted in 2019. Income tax As with goodwill, and due to the impact that the covid-19 crisis may have on the current and future performance of our businesses, an adjustment of -EUR 2,500 million was made to the deferred tax assets of the Spanish consolidated fiscal group in the second quarter of 2020. As a result, the total corporate income tax was EUR 5,632 million in 2020 compared to EUR 4,427 million in 2019. For further details, see note 28 to the consolidated financial statements. Attributable profit to the parent Profit attributable to the parent amounted to -EUR 8,771 million in 2020, compared with EUR 6,515 million in 2019. RoTE stood at 1.95%, RoRWA was -1.33% and earnings per share stood at -EUR 0.538. RoTE % RoRWA % 329 7,8106,515-8,7712018201920200.4300.347-0.53820182019202011.6311.441.952018201920201.551.33-1.33201820192020 Annual report 2020 Contents Below is the summarized P&L adjusted to items beyond ordinary course of our business (included under the net capital gains and provisions line) as described in note 51.c of the consolidated financial statements, where the aggregate underlying consolidated results of our segments are reconciled to the statutory consolidated results. Summarized underlying income statement EUR million Net interest income Net fee income Gains (losses) on financial transactions and exchange differences Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Management adjustments Attributable profit to the parent Underlying attributable profit to the parent A A. Excluding net capital gains and provisions. Underlying attributable profit to the parent The attributable profit to the parent in 2020 and 2019 was affected by the following results (net of tax), that are outside the ordinary course of our business and distort the year-on- year comparison: • In 2020, -EUR 13,852 million: valuation adjustment of goodwill ascribed to various Group country units of -EUR 10,100 million in the second quarter, as previously detailed in Impairment on other assets (net), the valuation adjustment to deferred tax assets of the Spanish consolidated fiscal group with an impact of -EUR 2,500 million, restructuring costs of -EUR 1,114 million (mainly in Spain -EUR 700 million), and others (loss on a non- performing portfolio sale in Spain, cancellation of pension obligations, etc.) for a net charge of -EUR 138 million. 2020 31,994 10,015 2,187 404 2019 35,283 11,779 1,531 901 44,600 49,494 (20,967) (23,280) 23,633 26,214 (12,173) (1,786) (9,321) (1,964) 9,674 14,929 (3,516) (5,103) 6,158 9,826 — 6,158 (1,077) (13,852) (8,771) 5,081 — 9,826 (1,574) (1,737) 6,515 8,252 Absolute (3,289) (1,764) 656 (497) (4,894) 2,313 (2,581) (2,852) 178 (5,255) 1,587 (3,668) — (3,668) 497 (12,115) (15,286) (3,171) Change % % excl. FX 1.3 (4.5) 55.9 (58.4) 0.3 (2.0) 2.5 47.3 1.8 (25.8) (20.6) (28.6) — (28.6) (23.8) 608.2 — (29.5) (9.3) (15.0) 42.8 (55.2) (9.9) (9.9) (9.8) 30.6 (9.1) (35.2) (31.1) (37.3) — (37.3) (31.6) 697.5 — (38.4) 2018 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) (254) 7,810 8,064 • In 2019, the net result of net capital gains and provisions and restructuring costs incurred, led to a total amount of -EUR 1,737 million. For further detail, see note 51.c to the consolidated financial statements. If we eliminate these results from their P&L lines and add them separately to net capital gains and provisions, the adjusted or underlying attributable profit to the parent was EUR 5,081 million in 2020 and EUR 8,252 million in 2019, 38% lower year-on-year (-29% excluding the FX impact). 330 Responsible banking Corporate governance Economic and financial review Risk management and compliance A Underlying attributable profit to the parent EUR million Underlying earnings per share EUR A B B -38% - 2020 vs 2019 -42% - 2020 vs 2019 A. Excluding management adjustments. B. Excluding exchange rate impact: -29%. A. Excluding net capital gains and provisions. B. 2018 and 2019 data adjusted for the capital increase in December 2020. This performance was strongly conditioned by the rise in net loan-loss provisions, which amounted to EUR 12,173 million, up 31% compared to 2019. Excluding the exchange rate impact, growth was 47%, mainly from additional provisions based on the IFRS 9 forward-looking view and the collective and individual assessments to reflect expected credit losses arising from covid-19, together with growth in volumes. Both impacts were seen across the board in all countries. The Group’s cost of credit stood at 1.28%, in line with the expectations announced in the third quarter. Net loan-loss provisions EUR million Cost of credit % +31 % A 2020 vs 2019 +0.28 pp 2020 vs 2019 A. Excluding exchange rate impact: +47%. 331 8,0648,2525,0812018201920200.4460.4490.2622018201920208,8739,32112,1732018201920201.001.001.28201820192020 Annual report 2020 Contents Before recording loan-loss provisions, Grupo Santander's net operating income (total income less operating expenses) was EUR 23,633 million, 10% lower year-on-year, but a 2% increase excluding the FX impact, as follows: By line: Total income remained unchanged as higher gains on financial transactions and the slight increase in net interest income (+1%) offset the fall in net fee income and other operating income (lower dividends and results of entities accounted for by the equity method and greater contribution to the SRF and DGF). Costs were 2% lower, with declines across Europe and the US, and remained broadly stable in Brazil and Chile. By region: In Europe, operating income decreased 5% with falls in most markets (except SCF and 'Other Europe', mainly SCIB). In North America, net operating income was 1% higher. By country, the US increased 1% and Mexico 2%. In South America, 5% growth with rises of 3% in Brazil, 4% in Chile and 37% in Argentina. In 2020, the Grupo Santander’s underlying RoTE was 7.44%, underlying RoRWA was 1.06% and underlying earnings per share EUR 0.262 (11.79%, 1.61% and EUR 0.449 respectively in 2019). Underying RoTEA % A Underlying RoRWA % A. Excluding net capital gains and provisions. A. Excluding net capital gains and provisions. 332 12.0811.797.442018201920201.591.611.06201820192020 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.3 Balance sheet Balance sheet EUR million Assets 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 at amortized cost 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 profit or loss Financial liabilities at amortized 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 Non-controlling interests Total equity Total liabilities and equity Change 2020 153,839 2019 101,067 Absolute 52,772 114,945 108,230 6,715 % 52.2 6.2 2018 113,663 92,879 4,486 4,911 (425) (8.7) 10,730 48,717 62,069 (13,352) (21.5) 57,460 120,953 125,708 (4,755) (3.8) 121,091 958,378 995,482 (37,104) (3.7) 946,099 8,325 1,980 7,622 261 32,735 15,908 24,586 11,070 4,445 7,216 1,702 8,772 292 35,235 27,687 29,585 10,138 4,601 1,508,250 1,522,695 1,109 278 (1,150) (31) 15.4 16.3 (13.1) (10.6) 8,607 1,088 7,588 324 (2,500) (7.1) 26,157 (11,779) (4,999) 932 (156) (14,445) (42.5) (16.9) 9.2 28,560 30,251 9,348 (3.4) 5,426 (0.9) 1,459,271 81,167 48,038 77,139 60,995 4,028 5.2 70,343 (12,957) (21.2) 68,058 1,248,188 1,230,745 17,443 1.4 1,171,630 6,869 6,048 286 910 269 739 821 17 171 13.6 6.3 23.1 10,852 13,987 8,282 9,322 (3,135) (1,040) (22.4) (11.2) 6,363 303 765 13,225 8,135 12,336 12,792 (456) (3.6) 13,088 — — — — — 1,416,928 1,412,036 114,620 124,239 (33,144) (24,168) 4,892 (9,619) (8,976) 0.3 1,351,910 (7.7) 120,597 37.1 (24,125) 9,846 10,588 (742) (7.0) 10,889 91,322 110,659 (19,337) (17.5) 107,361 1,508,250 1,522,695 (14,445) (0.9) 1,459,271 333 Annual report 2020 Contents 2020 Highlights → Loans and advances to customers decreased 3% year-on-year. Grupo Santander uses gross loans excluding reverse repurchase agreements (repos) to analyze traditional retail banking loans. • Traditional lending, excluding the exchange rate effect, rose 5% with growth in Europe (+4%) and North America (+2%). The largest increase was recorded in South America (+15%). • The loan portfolio remained balanced: individuals (45%), consumer credit (17%), SMEs and corporates (25%) and SCIB (13%). → Customer deposits were 3% higher year-on-year. We use customer deposits, excluding repos, and mutual funds to analyze traditional retail banking funds: • Customer funds, excluding the exchange rate impact, rose 9%, with our three regions and ten core markets growing. There were increases in demand deposits and, to a lesser extent, in mutual funds. • Customer funds are well diversified by product: demand deposits (66%), time deposits (17%) and investment funds (17%). → The net loan-to-deposit ratio was 108% (114% in 2019) a sign of the retail nature of our balance sheet. Loans and advances to customers totalled EUR 916,199 million in December 2020, a 3% decrease compared to December 2019. Grupo Santander uses gross loans excluding reverse repurchase agreements (repos) to analyze traditional retail banking loans. To better assess management in the period, the comments below do not take into account the exchange rate impact, as usual. Gross loans and advances to customers, excluding the exchange rate effect and reverse repos, increased 5%, with the following performance by region: • In Europe, 4% growth with all markets increasing. Portugal rose 8%, notably in corporates and mortgages, the UK grew 3%, driven by strong residential mortgage activity and the government programmes for corporates. Spain increased 5% strongly backed by the Instituto de Crédito Oficial (ICO) programmes, though negatively impacted by a mortgage portfolio sale in the third quarter. SCF was stable, with rises in the Nordics, Germany and France, which absorbed falls in other markets. Poland was up 1% and 'Other Europe' increased owing mainly to SCIB (+17%). Loans and advances to customers EUR million Commercial bills Secured loans Other term loans Finance leases Receivable on demand Credit cards receivable Impaired assets Gross loans and advances to customers (excl. reverse repos) Reverse repos Gross loans and advances to customers Loan-loss allowances Net loans and advances to customers 334 Change 2020 37,459 2019 37,753 Absolute (294) % (0.8) 2018 33,301 503,014 513,929 (10,915) (2.1) 478,068 269,143 267,154 1,989 36,251 35,788 7,903 19,507 30,815 7,714 23,876 32,543 904,092 918,757 35,702 45,703 939,794 23,595 964,460 22,242 916,199 942,218 463 189 0.7 1.3 2.5 265,696 30,758 8,794 (4,369) (18.3) 23,083 (1,728) (14,665) (10,001) (24,666) 1,353 (26,019) (5.3) 34,218 (1.6) 873,918 (21.9) 32,310 (2.6) 906,228 6.1 23,307 (2.8) 882,921 Responsible banking Corporate governance Economic and financial review Risk management and compliance Gross loans and advances to customers (excluding reverse repos) EUR billion Gross loans and advances to customers (excluding reverse repos) % of operating areas. December 2020 -2 % A 2020 vs 2019 A. Excluding exchange rate impact: +5%. • In North America, growth was 2%. The US grew 3% propelled by auto, corporate and SCIB loans though affected by the sale of Puerto Rico in the third quarter. Mexico remained flat. Tangible assets amounted to EUR 32,735 million in December 2020, decreasing EUR 2,500 million and 7% compared to December 2019, largely driven by the decline recorded in property, plant and equipment for own use. Intangible assets stood at EUR 15,908 million, of which EUR 12,471 million corresponds to goodwill, which decreased EUR 11,775 million in the year (-49%) reflecting the adjustment made in the second quarter in the valuation of goodwill ascribed to several subsidiaries, further detailed in section 3.2 'Results'. • We grew 15% in South America, with Argentina growing 35% driven by SMEs and cards, Brazil +19% owing to a positive performance in all segments and Chile +6% due to corporates and large corporates. Uruguay rose 12%. Our loans and advances to customers excluding reverse repos maintained a balanced structure: individuals (45%), consumer credit (17%), SMEs and corporates (25%) and SCIB (13%). By the end of 2020, 45% of loans and advances to customers maturing in more than a year had floating interest rates, while the remaining 55% were fixed: • In Spain, 58% of loans and advances to customers had floating rates and 42% were fixed. • Elsewhere, 41% of loans and advances to customers had floating rates and 59% had fixed. For further information on the distribution of loans and advances to customers by business, see note 10.b to the consolidated financial statements. Loans and advances to customers facilities with maturities exceeding one year at year-end of 2020 EUR million Fixed Variable TOTAL Domestic International TOTAL Amount 70,480 99,023 169,503 Weight over the total 42 % 58 % 100 % Amount 311,467 217,048 528,515 Weight over the total 59 % 41 % 100 % Amount 381,947 316,071 698,018 Weight over the total 55 % 45 % 100 % 335 874919904201820192020 Annual report 2020 Contents Total customer funds EUR million A EUR million Demand deposits Time deposits Mutual funds Customer funds A Pension funds Managed portfolios Repos Total funds A A. Including managed and marketed funds. In terms of liabilities, customer deposits amounted to EUR 849,310 million in December 2020, 3% higher than December 2019 (EUR 824,365 million). Grupo Santander uses customer deposits including mutual funds but excluding repos (customer funds) to analyze traditional retail banking funds. Customer funds, excluding the effect of exchange rate movements, rose 9% as follows: – Deposits excluding repos rose 10%. Demand deposits (+14%) increased in all our core markets and time deposits fell 4% as the decreases in the US, Chile and all European markets were nearly offset by growth in Mexico, Brazil, Argentina and Uruguay. Mutual funds rose 3%, heavily conditioned by market volatility in the first quarter of 2020 and part of the second. – By market, customer funds rose in all of them. Rises in all countries in the Americas with growth rates over 10% (the US: +16%; Mexico: +14%; Brazil: +16%; Chile +11%; Change 2020 642,897 2019 588,533 Absolute 54,364 171,939 196,921 (24,982) 164,802 180,405 (15,603) 979,638 965,859 13,779 15,577 26,438 34,474 15,878 30,117 38,911 1,056,127 1,050,765 (301) (3,679) (4,437) 5,362 % 9.2 (12.7) (8.6) 1.4 (1.9) (12.2) (11.4) 0.5 2018 548,711 199,025 157,888 905,624 15,393 26,785 32,760 980,562 Argentina: +67% and Uruguay: +28%). In Europe (+6%), growth ranged between +1% in SCF and +10% in Poland. Customer funds are well diversified by product. The weight of demand deposits rose 5 pp in the last 12 months to 66%, resulting in a better cost of deposits. Time deposits accounted for 17% of the total and mutual funds 17%. The net loan-to- deposit ratio stood at 108%, compared to 114% in December 2019. In addition to deposit-taking, Grupo Santander puts strategic value on following a selective issuance policy in international fixed income markets and adapts trade frequency and volume to each country unit's structural liquidity requirements, as well as to the receptiveness of each market. For more information on debt issuances and maturities, see the following section 3.4 'Liquidity and funding management'. Customer funds (excluding repos) EUR billion Customer funds (excluding repos) % of operating areas. December 2020 A +1 % -9 % +4 % • Total • Mutual funds • Deposits B excl. repos 2019 vs 2018 A. Excluding exchange rate impact: +9%. B. Including managed and marketed funds. 336 906906966966980980748785815158180165201820192020 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.4 Liquidity and funding management → Grupo Santander’s liquidity remains at comfortable levels, well above regulatory requirements. → Lending recovering in most markets where the we operate. → Medium- and long-term funding prioritized diversification and cost optimization. → Structural funding sources of our balance sheet resulted in moderate asset encumbrance. First, we present Grupo Santander’s liquidity management, its principles and framework. Next, we will look at the funding strategy for our group and subsidiaries, particularly liquidity in 2020, by examining changes in liquidity management ratios as well as the related business and market trends over the last year. To conclude, we provide a qualitative description of the outlook for funding in 2021. on the local asset and liability committees (ALCOs), which coordinate with the global ALCO. The global ALCO is the body empowered by the board of directors under the corporate Asset and Liability Management (ALM) framework. This improved governance model is included within our Risk Appetite Framework, which meets regulators and market players’ demands for stronger risk management and control systems, in response to the financial crisis. Liquidity management in Grupo Santander Our structural liquidity management aims to optimize maturities and costs, and avoid undesired liquidity risks in funding Grupo Santander’s recurrent activity. • In-depth balance sheet analysis and liquidity risk measurement that support the taking and control of decisions to ensure the necessary liquidity levels to cover short- and long-term needs with stable funding sources, as well as minimizing the impact of their costs on earnings. It follows these principles: • Decentralized liquidity model. • Medium- and long-term (M/LT) 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. • Wholesale funding sources diversified by: instrument and investor; market and currency; and maturity. • Limited recourse to short-term funding. • Sufficient liquidity reserves, including standing facilities/ discount windows at central banks to be used in adverse situations. • Group-wide and subsidiary compliance with regulatory liquidity requirements, as a new factor conditioning management. To effectively apply these principles across our group, we require a unique management framework built on three fundamental pillars: • A solid organizational and governance model that involves subsidiaries’ senior managers in decision-making and integrates them into our global strategy. Decision-making on structural risks, including liquidity and funding risk, falls We have proper liquidity risk management within a conservative risk appetite framework for each geographic area based on its commercial strategy. The framework sets limits within which the subsidiaries must operate to achieve their strategic objectives. • Liquidity management adapted to the needs of each business. Every year, we develop a liquidity plan to achieve: – a solid balance sheet structure, with a diversified footprint in wholesale markets; – stable liquidity buffers and limited asset encumbrance; – compliance with both regulatory and other metrics included in each entity’s risk appetite statement. We monitor all dimensions of the plan throughout the year. Grupo Santander continues to develop the Internal Liquidity Adequacy Assessment Process (ILAAP). It is integrated into our other risk management and strategic processes to evaluate liquidity in ordinary and stressed scenarios. We consider both quantitative and qualitative matters which are also inputs for the Supervisory Review and Evaluation Process (SREP). 337 Annual report 2020 Contents Once a year, supervisors require us to prepare and submit an ILAAP assessment approved by the board of directors. It must conclude our funding and liquidity structure remains solid in all scenarios and that our internal processes ensure sufficient liquidity based on an analysis each subsidiary conducts following our local liquidity management model. Our robust governance structure is suited to identify, manage, monitor and control liquidity risks. It rests on common frameworks, conservative principles, clearly defined roles and responsibilities, a consistent committee structure, effective local lines of defence and well-coordinated corporate supervision. We generate frequent, detailed liquidity monitoring reports for management, control, reporting and steering purposes. We also send the most relevant information regularly to senior managers, the executive committee and the board of directors. Over the last few years, Grupo Santander and each subsidiary have developed a comprehensive special situations management framework which centralizes the our governance for such scenarios and contains contingency funding plans, that are integrated within our governance model, with feasible, pre-assessed actions that follow a defined timeline. They are categorized and prioritized, and provide for sufficient liquidity and execution time to mitigate stress scenarios. Funding strategy and liquidity in 2020 Funding strategy and structure Our funding strategy in recent years has focused on extending our management model to all subsidiaries, including new additions. It is based on a model of autonomous subsidiaries that are responsible for covering their own liquidity needs. This structure has enabled us to use our solid retail banking model to maintain comfortable liquidity positions in the group and our core country units, even amid market stress. We have had to adapt funding strategies to commercial business trends, market conditions and new regulatory requirements. In 2020, we improved on specific aspects, without significant changes in liquidity management or funding policies and practices. This will enable us to face 2021 from a strong starting point, with no growth restrictions. In general, our subsidiaries continue to apply the same funding and liquidity management strategies: • maintaining sufficient and stable medium- and long-term wholesale funding levels. • ensuring the right volume of assets which can be discounted in central banks as part of the liquidity buffer. • generating liquidity from the retail business. All these developments have afforded Grupo Santander its robust funding structure: • Customer deposits are our main source of funding. They represent just over two-thirds of net liabilities (i.e., of the liquidity balance sheet) and nearly 93% of loans and advances to customers at the end of December 2020. Moreover, they are highly stable because they mainly arise from retail customer activity. Their weight as a percentage of loans and advances to customers grew compared to end 2019. More details can be found in the section on ‘Liquidity in 2020’. Santander liquidity balance sheet %. December 2020 ■ Loans and advances to customers ■ Fixed assets & other ■ Financial assets ■ Customer deposits ■ Securitizations and others ■ M/LT debt issuance ■ Equity and other ■ ST funding • Medium- and long-term funding accounted for nearly 18% of net liabilities at the end of December 2020, similar to 2019. It amply covers the loans and advances to customers not funded by customer deposits (retail funding gap). The outstanding balance of M/LT debt issued in the market (to non-group third parties) at the end of the year was EUR 167,351 million. Our maturity profile is comfortable and well balanced by instruments and markets with a weighted average maturity of 4.7 years (slightly above the weighted average maturity of 4.4 years at the end of 2019). The following tables show our funding by instrument over the last three years and by maturity profile: 338 2%9%17%14%6%4%77%71%AssetsLiabilities Responsible banking Corporate governance Economic and financial review Risk management and compliance Medium- and long-term debt issuance. Grupo Santander EUR million A Preferred Subordinated Senior debt Covered bonds Total A. Placed in markets. Excluding securitizations, agribusiness notes and real estate credit notes. Distribution by contractual maturity. December 2020. Grupo Santander EUR million A 2020 8,925 13,831 95,208 49,388 167,351 2019 9,411 12,640 107,166 50,847 180,064 2018 11,508 13,218 98,827 46,272 169,825 0-1 12-24 month months months months months months 9-12 6-9 3-6 1-3 Preferred Subordinated Senior debt Covered bonds Total — — — — 2,003 2,061 — — 2,003 2,061 — — 4,252 4,903 9,155 — — 2,758 2,766 5,524 — — — 129 2-5 more than 5 years years — 4,066 8,925 9,636 Total 8,925 13,831 3,453 15,250 42,017 23,414 95,208 397 6,899 14,455 19,967 49,388 3,850 22,278 60,538 61,942 167,351 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 medium- and long- term wholesale debt issuances, Grupo Santander has securitizations placed in the market as well as collateralized and other specialist funding totalling EUR 44,196 million (which includes EUR 6,085 million of debt instruments placed with private banking clients in Brazil). The average maturity is around 1.5 years. The following charts show the similarity of the geographic distribution of our loans and advances to customers and medium- and long-term wholesale funding across our footprint. This has remained largely unchanged since 2019, except for an increase in the weight of the eurozone, in loans and advances and M/LT wholesale funding, with the corresponding decreases across the other regions. Loans and advances to customers %. December 2020 M/LT wholesale funding %. December 2020 Wholesale funding from short-term issuance programmes is a residual part of Grupo Santander’s funding structure, which is related to treasury activities and comfortably covered by liquid assets. The outstanding wholesale funding balance at the end of 2020 was EUR 23,210 million. 40% was in European Commercial Paper, US Commercial Paper and domestic programmes issued by the parent bank; 27% was in certificates of deposit and commercial paper programmes in the UK; 18% was in Santander Consumer Finance (SCF) commercial paper programmes; and 15% was in issuance programmes in other country units. Liquidity in 2020 The key liquidity takeaways in 2020 are: • Basic liquidity ratios remain at comfortable levels. • Regulatory ratios are well above minimums and we are well positioned for the NSFR’s entry into force. • Our use of encumbered assets in funding operations is moderate. We will discuss these points in the following sections, but first we would like to reflect on the actions taken by Grupo Santander, regulators, governments and central banks in the months following the World Health Organization’s declaration of covid-19 as an epidemic and subsequently pandemic. When the health crisis began, there were moments of initial uncertainty and concern from the markets, banks and regulators regarding potential stress situations. The long-term debt markets closed in the beginning of March and there was a significant peak in the drawdown of committed wholesale credit lines. There was also tension in the short-term markets which manifested in high price and 339 Eurozone: 43%UK: 29%Other Europe: 3%North America: 13%Brazil: 7%Other SouthAmerica: 5%Eurozone: 53%UK: 22%Other Europe: 1%North America: 16%Brazil: 4%Other SouthAmerica: 4%   Annual report 2020 Contents exchange rate volatility and wider spreads, reflecting policy uncertainty (fiscal and monetary). In this environment, our priority was to preserve our solid liquidity position at group and subsidiary level and so established a series of management measures and actions. In addition, decisions were taken quickly by governments and central banks to increase the liquidity available in the market. Some of these measures were: PELTROs (Pandemic Emergency Longer-Term Refinancing Operations) announced in April, modification of the conditions of the third TLTRO programme (Targeted longer-term refinancing operation), introduction of the TFSME (Term funding SMEs) announced in March in the United Kingdom, reduction of liquidity reserve requirements, the temporary lowering of the Liquidity Coverage Ratio (LCR) requirements below 100% and the extension of the dollar liquidity lines offered by the Federal Reserve, among others. All these measures helped calm markets and avoid episodes of stress. These measures continued throughout 2020, most recently increasing the number of auctions and volumes and extending the better TLTRO III conditions for banks lending to the real economy announced in December 2020 by the European Central Bank. Among the measures we adopted, of note was the enhanced the daily liquidity monitoring which was regularly presented to the special situations committees and at the meetings held by the executive committee and the board of directors. In addition, daily monitoring meetings were held with the ECB during the first few weeks. Although most country units had sufficient liquidity buffers to cover a horizon of 90 days or more under an aggressive scenario, we implemented several mitigation measures, including: • Collateral generation in all geographic areas to maximize access to central bank facilities if necessary. i. Basic liquidity ratios at comfortable levels At the end of December 2020, Grupo Santander 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 compared to our competitors in Europe speaks to the retail nature of our balance sheet. • a net loan-to-deposit ratio (LTD) of 108%, at a very comfortable level (below 120%) and well below the 114% in 2019. This improvement reflects the pandemic’s effect postponing consumption and investment decisions and causing a sharp increase in savings. Most central banks and governments in our footprint implemented support programmes for their economies in 2020, such as income policies, in the form of state-guaranteed financing facilities for companies via banks or direct loans to corporates. This allowed our lending (in constant euros) to grow moderately but was more than offset by deposit growth. • a customer deposits plus M/LT funding to net loans and advances ratio of 116% versus 113% in 2019, for the reasons explained above. • limited recourse to short-term wholesale funding, 2% of total funding, in line with previous years. • lastly, our structural surplus defined as the excess of structural funding sources (deposits, M/LT funding and capital) against structural liquidity needs (fixed assets and loans) had an average balance of EUR 170,483 million in the year. As at end-2020, our consolidated structural surplus stood at EUR 181,904 million. Fixed-income assets (EUR 162,830 million), equities (EUR 14,719 million) and net interbank deposits (EUR 27,565 million) were partly offset by short- term wholesale funding (-EUR 23,210 million). This totalled around 15% of our net liabilities, similar to 2019 year-end. • Increased use of ECB facilities via the TLTRO programme and Bank of England funding via its TFSME programme. The table shows Grupo Santander’s basic liquidity monitoring metrics over the last few years: • The strengthening of the USD liquidity position in Mexico and South America. Group’s liquidity monitoring metrics % • The optimization of resources and capacity to use central bank programmes. A Loans A / Total assets to deposit ratio (LTD) Loans Customer deposits and medium A and long term funding / Loans Short term wholesale funding / Net liabilities Structural liquidity surplus (% of net liabilities) A. Loans and advances to customers. 2020 76 % 108 % 2019 77 % 114 % 2018 76 % 113 % 116 % 113 % 114 % 2 % 3 % 2 % 15 % 13 % 13 % • Close collaboration with the authorities to ensure the effective implementation of public support. As a result of these measures, our liquidity position remained solid at all times. Moreover, our commercial activity, which we will discuss later, positively contributed liquidity in the year. 340 Responsible banking Corporate governance Economic and financial review Risk management and compliance The table below shows the principal liquidity ratios of our main country units as at end-2020: Main country units’ liquidity metrics December 2020 Parent bank Santander Consumer Finance United Kingdom Portugal Poland United States Mexico Brazil Chile Argentina Group A. Loans and advances to customers. Deposits + M/ LT funding / A Loans 170 % 70 % 107 % 111 % 130 % 107 % 132 % 122 % 94 % 173 % 116 % LTD ratio 77 % 256 % 112 % 95 % 80 % 135 % 83 % 91 % 139 % 58 % 108 % In 2020, the key drivers of Grupo Santander and our subsidiaries' liquidity (excluding the FX effect) were: • recovery in credit in all our markets (except for SCF, which was heavily affected by the postponement of consumption decisions and the temporary closure of dealers). Customer deposits also grew and as such, the retail funding gap significantly contributed liquidity during the year. • issuances continued to be less intense than in previous years and below our funding plan due to commercial dynamics and the favourable conditions of funding programmes implemented by central banks in response to the pandemic (especially the ECB and the Bank of England). We therefore issued mainly to ensure our regular presence in the relevant capital markets and comply with regulatory requirements. In 2020, Grupo Santander issued EUR 47,328 million in M/LT funding (at year-average exchange rates) and extended contractual maturity on EUR 2,029 million in securitizations. By instrument, the stock of M/LT fixed income debt (covered bonds, senior debt, subordinated debt and capital hybrid instruments) decreased by around 7% to EUR 30,410 million at the end of the year. The greater activity in senior TLAC eligible bonds and hybrids (preferred and subordinated) partially offset the lower covered bond and preferred senior debt issuances. As a sign of our commitment to sustainability, these figures include a EUR 1 billion green senior non- preferred bond issuance. Securitization and structured finance activities amounted to EUR 16,919 million in 2020, down 12% on 2019. By country unit, Banco Santander, S.A. and Santander UK issued the most M/LT fixed income debt (excluding securitizations), followed by SCF. In the year, the greatest absolute increases were recorded in by our units in the UK, Spain and Mexico. The main year-on-year decreases were in SCF due to the commercial environment and in the US as issuances in 2019 were very high. SCF and SC USA were the main issuers of securitizations. The charts below provide greater detail on issuances by instrument and region: Distribution by instrument and region %. December 2020 Covered bonds issued in 2020 were 14% of total issuances, less than the 17% last year. As in 2019, the main issuing units were Spain and the UK. Senior debt accounted for 42% of total issuances, down from 44% in 2019. In qualitative terms, the weight of TLAC eligible senior debt in 2020 compared to senior preferred was greater than in 2019. In 2020, Grupo Santander issued EUR 13,974 million of subordinated instruments, including EUR 9,809 million of senior non-preferred debt from Banco Santander, S.A. and senior preferred from the holdings in the UK and the US; EUR 2,664 million of subordinated debt; and EUR 1,500 million of AT1 eligible hybrid instruments issued by the parent bank. In summary, Grupo Santander retained its comfortable access to the markets it operates in. In 2020, we issued and securitized debt in 11 currencies, involving 21 major issuers from 13 countries, with an average maturity of 4.8 years, slightly higher than last year. 341 Senior debt: 42%Securitisation andother: 36%Covered bonds: 14%Preferred: 3%Subordinated: 6%Spain: 32%SCF: 18%UK: 14%North America: 32%Brazil: 2%Other SouthAmerica: 2% Annual report 2020 Contents ii. Compliance with regulatory ratios Within the liquidity management model, over the last few years Grupo Santander has been managing the implementation, monitoring and compliance with the liquidity requirements established under international financial regulations ahead of schedule. The commercial dynamics in the year, combined with market access and our active liquidity management, enabled us to use government and central bank funding mechanisms. This greatly strengthened our regulatory ratios, both immediate liquidity (LCR) as well as structural (NSFR), as we will see now. Liquidity Coverage Ratio (LCR) Since 2018, the regulatory LCR requirement has been at the maximum level (100%). As a result, we have set a risk appetite of 110% at both the group and subsidiary level. Our strong short-term liquidity base and our core subsidiaries’ autonomous management led to compliance levels above 100% (both at group and local level) throughout the year. Our LCR in December 2020 was 168%, comfortably exceeding regulatory requirement. The following table shows that all our subsidiaries substantially exceeded the required minimum over the last year. Santander UK’s figures only include activities that the Financial Services and Markets Act 2000 leaves within the Ring-Fenced Bank. Liquidity Coverage Ratio (LCR) % Parent bank Santander Consumer Finance United Kingdom Portugal Poland United States Mexico Brazil Chile Argentina Group December 2020 December 2019 143 % 248 % 145 % 134 % 149 % 133 % 133 % 122 % 143 % 196 % 147 % 175 % 314 % 152 % 122 % 187 % 129 % 207 % 167 % 155 % 222 % 168 % NSFR (Net Stable Funding Ratio) The final definition of the net stable funding ratio (NSFR) was approved by the Basel Committee in October 2014. It was transposed to EU law in June 2019 when the Official Journal of the European Union published the Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012. Accordingly, entities must have a net stable funding ratio, greater than 100% from June 2021. The NSFR is a structural measurement that gives banks an incentive to ensure long-term stability and proper management of maturity mismatches by funding long-term assets with long-term liabilities. It is defined as the quotient of available stable funding (ASF) and required stable funding (RSF). ASF comprises those sources of funding (capital and other liabilities) deemed stable over one year. RSF primarily refers to any asset considered illiquid over one year, thus needing to be matched with stable sources of funding. In 2020, Grupo Santander had a consolidated and subsidiary management limit of 100%. A more demanding level has been established for 2021 to coincide with the regulatory entry into force of the metric. We benefit 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. This helped maintain our balanced liquidity structure as reflected in our year-end consolidated and subsidiary NSFRs above 100%. The following table provides details by main subsidiary as well as a comparison with 2019. Santander UK’s figures only include activities that the Financial Services and Markets Act 2000 leaves within the Ring-Fenced Bank. 342 Responsible banking Corporate governance Economic and financial review Risk management and compliance Net Stable Funding Ratio % Parent bank Santander Consumer Finance United Kingdom Portugal Poland United States Mexico Brazil Chile Argentina Group III. Asset Encumbrance Grupo Santander’s use of assets as collateral in structural funding sources of the balance sheet is moderate. In keeping 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 Group. Disclosure on asset encumbrance as at December 2020 EUR billion December 2020 116 % 114 % 129 % 123 % 150 % 120 % 132 % 119 % 120 % 174 % 120 % December 2019 103 % 106 % 124 % 104 % 130 % 111 % 121 % 112 % 108 % 154 % 112 % obtain liquidity, off-balance-sheet assets received and reused for a similar purpose, and other assets with liabilities for reasons other than funding. The following tables show the asset encumbrance data Grupo Santander must present to the EBA as at end 2020: Assets Loans and advances Equity instruments Debt instruments Other assets Carrying amount of encumbered assets 350.4 249.5 5.8 61.9 33.2 Fair value of encumbered assets Carrying amount of unencumbered assets Fair value of unencumbered assets — — 5.8 60.7 — 1,157.9 884.7 9.9 114.6 148.7 — — 9.9 115.4 — Group. Collateral received as at December 2020 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 84.7 — 3.5 80.2 0.9 — 43.0 — 5.9 37.1 — 0.9 Group. Encumbered assets / collateral received and associated liabilities as at December 2020 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) 306.3 435.1 343 Annual report 2020 Contents On-balance-sheet encumbered assets amounted to EUR 350.4 billion; 71% are loans and advances (mortgages, corporate loans, etc.). Off-balance-sheet encumbrance stood at EUR 84.7 billion and mainly corresponds to debt securities received as collateral in reverse repurchase agreements and rehypothecated ("reused"). Both types of encumbered assets amount to EUR 435.1 billion, giving rise to associated liabilities of EUR 306.3 billion. As the end of 2020, total asset encumbrance in funding operations was 26.6% of our extended balance sheet under EBA criteria (total assets plus guarantees received: EUR 1,635.9 billion). It increased from 24.1% in 2019 due to our use of funding programmes implemented by central banks in response to the pandemic. Rating agencies Rating agencies influence Grupo Santander’s access to wholesale financing markets and the cost of its issuances. The agencies listed below regularly review our ratings. Debt ratings depend on several endogenous factors (business model, strategy, capital, income generation capacity, liquidity, etc.) and exogenous factors related to the economic environment, the industry and sovereign risk across our footprint. While sometimes the methodology applied by the agencies limits a bank's rating to the sovereign rating assigned to the country where it is headquartered, Banco Santander, S.A. is still rated above the sovereign debt rating of the Kingdom of Spain (where it is headquartered) by Moody’s and DBRS and on par with it by Fitch and S&P, a testament of our financial strength and diversification. At the end of 2020, the ratings from the main agencies were: Funding outlook for 2021 Despite lingering uncertainties, namely in geopolitics, financial regulation and development of the pandemic, Santander has begun 2021 with a comfortable liquidity position and a positive funding outlook for the year. We expect a moderate increase in lending in all our core country markets, as well as a good performance in deposits leading to limited demand for liquidity from the retail business. The largest liquidity needs will come from our largest country units: Spain, Brazil and Global Consumer Bank (new entity comprising Santander Consumer Finance and Openbank). The maturities in the coming quarters are manageable. They are aided by limited recourse to short-term funding and an expected medium- and long-term issuance dynamic in line with last year. We will manage each country, optimizing liquidity to maintain a solid balance sheet structure across our footprint. For example, Banco Santander, S.A.'s 2021 funding plan is designed to cover the greater TLAC/MREL requirements and pre-finance issuances that lose loss-absorbing capacity, and, where applicable, cover the needs arising from potential increases in RWAs, as they form base for both ratios. As such, the plan does not incorporate secured instruments. It includes between EUR 8 billion and EUR 10 billion of senior preferred and non-preferred debt and a limited volume of hybrid instruments, the latter depending on RWA growth to ensure the continued fulfilment of the AT1 and T2 buffers (1.5% and 2%, respectively). Our funding plans are designed to ensure Grupo Santander and each subsidiary always comply with regulatory requirements and those stemming from its risk appetite framework. Rating agencies DBRS Fitch Ratings Moody's Standard & Poor's Scope JCR Japan Long term A (High) Short term R-1 (Middle) A-(SeniorA) F2 (Senior F1) P-1 A-1 S-1+ A2 A AA- A+ — Outlook Stable Negative Stable Negative Stable Stable In 2020, there were no modifications to these ratings which were confirmed by DBRS, Fitch, Moody’s, S&P and JCR Japan. Regarding the outlook, Fitch and S&P changed from stable to negative due to the economic consequences of the covid-19 crisis on the long-term rating. 344 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3.5 Capital management and adequacy. Solvency ratios → At year-end, the phased-in CET1 ratio reached 12.34% after increasing 69 bps in the year (including 104 bps of organic generation). → The total phased-in capital ratio was 16.18% (+113 bps in the year). → Our active capital management culture strengthened throughout the organization. Grupo Santander’s capital management aims to guarantee solvency and maximize profitability, while complying with internal objectives and regulatory requirements. It is a key strategic tool for local and corporate decision making, enabling us to set a common framework of actions, criteria, policies, functions, metrics and processes. We manage two types of capital: • Regulatory capital: to manage regulatory capital, we analyze our capital base, regulatory solvency ratios under the prevailing regulatory criteria and capital planning scenarios to make our capital structure as efficient as possible both in terms of cost and compliance with the regulatory requirements. Our active capital management applies strategies on efficient capital allocation to business lines, and considers securitizations, asset sales and issuances of capital instruments (capital hybrids and subordinated debt). • Economic capital: our economic capital model aims to ensure our capital allocation is right for the risks inherent in our operations and risk appetite to optimize economic value added for our group and business units. To optimize economic value added, we measure the real economic capital an activity requires and its return, and select those activities that maximize returns. We do this under both expected as well as unlikely but plausible economic scenarios, and with the solvency level decided by the Group. Grupo Santander considers the following concepts: → Regulatory capital → Return on risk adjusted capital (RoRAC) • Capital requirements: the minimum volume of own funds required by the regulator to ensure solvency based on credit, market and operational risks. • Eligible capital: the amount of own funds considered eligible by the regulator to meet capital requirements, principally accounting capital and reserves. → Economic capital • Self-imposed capital requirement: the minimum volume of own funds Grupo Santander requires, for a given level of probability, to absorb unexpected losses resulting from its current exposure to risks (including risks not considered in regulatory capital). • Available capital: the volume of own funds Grupo Santander deems eligible under management criteria to meet its capital needs. → Cost of capital The minimum return investors (shareholders) require as compensation for the opportunity cost and risk of investing in Santander. It represents a 'cut-off rate' or 'minimum return', which allows analysts to compare business units’ performance and analyze efficiency. This is the return (net of tax) on economic capital required internally. Because a higher level of economic capital decreases the RoRAC, we require higher returns on transactions and business units with high capital consumption. This considers the investment risk and is therefore a risk-adjusted returns measure. The RoRAC improves management, allowing us to assess the risk-adjusted returns on our business and take more efficient investment decisions. → Return on risk-weighted assets (RoRWA) This is the return (net of tax) on risk-weighted assets (RWAs) for a particular business. Grupo Santander uses RoRWA to establish strategies to allocate regulatory capital for maximum returns. → Economic value added (EVA) This is measured by profit generated in excess of the cost of economic capital. Grupo Santander adds economic value when the RoRAC exceeds its cost of capital; otherwise, value is destroyed. EVA measures absolute risk-adjusted returns (in monetary units), which complements the RoRAC approach. → Leverage ratio → Expected loss This regulatory metric compares a bank's size to its capital to measure how sound and robust it is, dividing Tier 1 capital by the leverage exposure. This takes into account balance sheet size with some adjustments for derivatives, funding of securities operations and off-balance sheet items. Loss due to insolvency that an entity will suffer on average over an economic cycle. It considers insolvency a cost that can be reduced by proper loan approval. 345 Annual report 2020 Contents Capital management priorities and activities Grupo Santander’s core capital management activities are: • setting solvency and capital contribution objectives in line with the minimum regulatory requirements and internal policies to guarantee a solid level of capital, matching our risk profile, and an efficient use of capital to maximize shareholder value. • developing a capital plan to meet the strategic objectives. Capital planning is an essential part of executing the three- year strategic plan. • assessing capital adequacy to ensure the capital plan is coherent with our risk profile and risk appetite framework, particularly in stress scenarios. • preparing our annual capital budget as part of the group’s budgetary process. Regarding the dividend against 2020 results, the board of directors intends for the final remuneration to be EUR 0.0275 per share in cash. This is the maximum allowed according to the limits established by the European Central Bank (ECB) in its recommendation 2020/63 on 15 December. The board’s intention is to restore in the mid-term a cash dividend payout of 40-50% of the underlying profit. With respect to the remuneration against 2021 results, the intention is, in line with the announcement made in April 2020, to maintain the suspension of the dividend policy while the above mentioned ECB recommendation applies. For more details, see section 3.3 ‘Dividends’ on the Corporate governance chapter. Strengthen capital management culture Grupo Santander aims to have a CET1 ratio of 11-12% in the medium term. • monitoring and controlling budgetary implementation in the group and country units and drawing up action plans to correct budget deviations. The continuous improvement in the capital ratios attests to our profitable growth strategy and active capital management culture across the organization. • integrating capital metrics in management of businesses, ensuring alignment with group-wide objectives. • drawing up reports on internal capital and for supervisory authorities and market players. In particular: • We reinforced our dedicated capital management teams and improved coordination between the Corporate Centre and local teams. • planning and managing other loss-absorbing instruments (MREL and TLAC). • All country and business units developed individual capital plans focused on maximizing their return on capital. • We increased the weight of capital on incentives having incorporated capital management and profitability standards in senior managers' variable pay: – The metrics we consider include our CET1 ratio, the country units' contributions to the group capital ratio or their return on equity (RoTE) and profits after tax. – Some of the qualitative items we consider include proper management of regulatory changes in capital, effective capital management in decision-making, generation of sustainable capital and effective capital allocation. We're also developing a programme for better infrastructure, processes and methodologies that give support to capital areas to further enhance capital management, respond more quickly to the numerous and increasing regulatory requirements and carry out all related activities more efficiently. The main measures we took in 2020 were: Issuances of capital hybrid and other loss-absorbing instruments In 2020, Banco Santander, S.A. issued a total of EUR 3,814 million in subordinated debt. This comprised EUR 2,314 million of T2 subordinated debt and EUR 1,500 million in contingently convertible preferred shares (CoCos). The purpose of the CoCo issuance was to replace the euro issuance in the same amount. In addition, Banco Santander, S.A. issued EUR 6,913 million in senior non-preferred debt. Dividend policy On 2 April 2020, Banco Santander's board of directors, taking into account the ECB’s recommendation, decided to cancel the final 2019 dividend payment and suspend the 2020 dividend policy. It therefore withdrew from the following day’s AGM agenda the proposal for the distribution of 2019 dividends and postponed its decision to a meeting In October. The shareholders at the AGM held on 27 October approved a fully-paid capital increase for the distribution of new shares equivalent to EUR 0.10 per share as a complementary payment from 2019. This, together with the dividend paid in November 2019, resulted in a total remuneration for 2019 of EUR 0.20 per share. 346 Responsible banking Corporate governance Economic and financial review Risk management and compliance Regulatory CET1 ratio (phased in % A ) Main regulatory capital and solvency ratios (phased-in A ) EUR million Common equity (CET1) Tier1 Eligible capital Risk-weighted assets CET1 capital ratio T1 capital ratio Total capital ratio Leverage ratio 2020 69,399 78,501 91,015 562,580 12.34 % 13.95 % 16.18 % 5.33 % Regulatory capital (phased-in). Flow statement EUR million Core Tier 1 Capital Starting amount (31/12/2019) Shares issued in the year and share premium Treasury shares and own shares financed Reserves Attributable profit net of dividends Other retained earnings Minority interests in goodwill and other Decrease/(increase) intangible assets Other Ending amount (31/12/2020) Additional Tier 1 Capital Starting amount (31/12/2019) AT1 eligible instruments T1 excesses - subsidiaries Residual value of intangible assets Deductions Ending amount (31/12/2020) Tier 2 Capital Starting amount (31/12/2019) T2 eligible instruments Generic funds and surplus loan-loss provisions-IRB T2 excesses - subsidiaries Deductions Ending amount (31/12/2020) Deductions from total capital Total capital ending amount (31/12/2020) 2019 70,497 79,536 91,067 605,244 11.65 % 13.14 % 15.05 % 5.15 % 2020 70,497 (72) (63) 4,306 (9,249) (12,004) 228 12,767 2,988 69,399 9,039 (355) 418 — — 9,102 11,531 990 — (7) — 12,514 — 91,015 Capital ratios in 2020 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 final regulations). At the end of the year, the total phased-in capital ratio stood at 16.18% and the CET1 ratio (phased-in) at 12.34%. We have a strong capital base, comfortably meeting the minimum levels required by the European Central Bank on a consolidated basis (13.01% for the total capital ratio and 8.85% for the CET1 ratio). This resulted in a CET1 management buffer of 349 bps, compared to the pre- covid-19 buffer of 189 bps. In the year, the CET1 ratio (phased-in) increased 69 bps. Of note was the strong underlying capital generation of 104 bps, partially offset by the impact of restructuring costs, corporate transactions and market performance. It also includes 9 bps related to an accrual for 2020 dividend payments, based on the limit established by recommendation 2020/63 of the ECB on 15 December 2020, which allows a maximum payment of EUR 0.0275 per share. Had the IFRS 9 transitional arrangement not been applied, the total impact on the CET1 ratio was 45 bps, leading to a fully- loaded CET1 ratio of 11.89%, 48 bps higher than 2019. The fully-loaded total capital ratio was 15.73%, up 95 bps during the year. The phased-in leverage ratio stood at 5.3% and the fully- loaded ratio at 5.1%. A. The phased-in ratios include the transitory treatment of IFRS 9, calculated in accordance with article 473 bis of the Regulation on Capital Requirements (CRR) and subsequent amendments introduced by Regulation 2020/873 of the European Union. Additionally, the Tier 1 and total phased-in capital ratios include the transitory treatment according to chapter 2, title 1, part 10 of the aforementioned CRR. 347 11.47%11.65%12.34%201820192020 Annual report 2020 Contents Regulatory CET1 ratio (phased-in ) performance in 2020 % Total risk weighted assets comprising the denominator of capital requirements based on risk, are set out below, as well as their distribution by geographic segment. Risk weighted assets EUR million RWAs 2020 447,927 246,284 30,797 168,096 2,750 10,239 7,083 2,195 241 720 0 8,159 0 4,731 1,821 1,607 0 18,008 5,071 12,936 55,865 55,865 22,382 — 562,580 2019 483,341 283,385 35,583 161,548 2,825 11,070 7,549 2,274 259 988 2 6,629 2,374 2,030 1,014 866 346 21,807 7,596 14,211 59,661 59,661 22,734 — 605,244 Minimum capital requirements 2020 35,834 19,703 2,464 13,448 220 819 567 176 19 58 — 653 0 378 146 129 0 1,441 406 1,035 4,469 4,469 1,791 — 45,006 Credit risk (excluding CCR) Of which standardized approach (SA) Of which the foundation IRB (FIRB) approach A 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 standardized approach Of which risk exposure from contributions to default fund or central counterparties (CCP) Of which credit valuation adjustment (CVA) Settlement risk Securitization exposure in banking book (after cap) Of which IRB approach Of which SEC-IRBA approach Of which SEC-SA approach Of which SEC-ERBA approach Of which standardized approach (SA) Market risk Of which standardized approach Of which internal model approach (IMA) Operational risk Of which standardized approach Amounts below the thresholds for deduction (subject to 250% risk weight) Floor adjustment Total A. Includes equity under the PD/LGD approach. 348 Responsible banking Corporate governance Economic and financial review Risk management and compliance Capital requirements by geographical distribution EUR million A Credit risk Of which internal rating-based (IRB) approach Central governments and central banks Institutions Corporates – SME Of which Corporates - Specialized Lending Of which 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 standardized approach (SA) Central governments and central banks Regional governments or local authorities Public sector entities Multilateral Development Banks International Organizations 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 simple method Counterparty credit risk Of which mark to market method (Standardized) Of which Risk exposure amount for contributions to the default fund of a CCP Of which CVA Settlement risk Securitization exposures in banking book (after cap) Market risk Of which standardized approach (SA) Of which internal model approaches (IMA) Operational risk Of which standardized approach Amounts below the thresholds for deduction and other non-deducted investments (subject to 250% risk weight) Floor adjustment SOUTH AMERICA o/w: Brazil Rest of the world TOTAL EUROPE 36,401 22,492 15,884 12,574 1 286 6,876 999 1,700 64 3,226 321 328 1,472 — 31 509 9,760 1,283 1,813 65 3,238 321 329 1,631 — 19,703 1,197 17 31 — — 350 3,623 7,584 2,570 524 156 13 6 21 23 9,104 758 9 4 — — 118 1,922 2,886 872 262 28 13 2 22 18 o/w: Spain o/w: United Kingdom NORTH AMERICA 9,977 5,891 1 72 3,946 350 1,424 64 939 112 201 556 — 3,271 741 6 — — — 70 358 296 190 127 — — 2 7 — 5,047 3,663 — 73 1,242 381 87 — 2,050 148 1 149 — 1,384 — — — — — 9 471 508 37 16 13 13 — — — 6,342 1,168 1 110 1,052 167 75 1 2 — — 2 — 5,174 83 — 14 — — 119 695 2,507 802 77 16 — 3 — — o/w: US 4,863 481 — 52 425 33 1 1 1 — — — — 4,382 — — 14 — — 109 648 2,206 615 51 16 — — — — 6,860 1,536 15 35 1,484 67 38 — 1 — — 1 — 5,324 353 8 13 — — 107 994 2,111 895 185 112 — 2 — 5 4,340 1,271 3 4 1,262 — 36 — — — — — — 3,069 317 8 — — — 87 362 1,589 256 84 13 — — — — 3,588 2,191 1,475 317 859 722 537 353 814 594 220 253 176 19 58 — 814 594 220 153 94 19 41 — 653 450 1,441 1,002 406 274 1,035 4,469 4,469 728 2,349 2,349 814 594 220 79 25 16 37 — 174 973 245 728 854 854 — — — 37 32 2 2 — 141 14 14 — — — — 58 53 — 5 — 188 207 8 199 566 566 1,078 1,078 — — — 48 47 — 1 — 157 7 7 — 830 830 — — — 41 29 — 12 — 13 232 123 108 1,042 1,042 1,791 1,242 1,128 — — — 20 — 77 — — — 470 — — — — 24 20 — 4 — 13 116 116 — 565 565 399 — 706 605 15 78 348 50 1 — 8 — — 155 — 101 2 — — — — 6 11 81 — — — — — — — 1 — — — — — — — — 2 — — — — — 2 — Total 45,006 27,688 13,184 5,825 7,950 5,904 8,657 5,455 711 A. Including counterparty credit risk. 349 Annual report 2020 Contents Economic capital Economic capital is required to cover risks from our activity with a certain level of solvency. We measure it with an internally developed model. To calculate the required capital, we determine our solvency level based on our objective long- term rating of 'A' (above the rating for the Kingdom of Spain); this represents a confidence level of 99.95% (higher than the regulatory level of 99.90%). Our economic capital model measurements cover all significant risks incurred in our activity (concentration risk, structural interest rate risk, business risk, pensions risk, deferred tax assets (DTAs), goodwill and others that are beyond the scope of regulatory Pillar 1). It also takes diversification into account, which is key to determining and understanding our risk profile and solvency in view of our multinational operations and businesses. Our total risk and related economic capital are less than the sum of the risk and capital of all individual units combined. Because our business spreads across various countries via a structure of separate legal entities with different customer and product segments and types of risks, our earnings are less vulnerable to adverse situations for any given market, portfolio, customer type or risk. Despite increasing economic globalization, economic cycles are not the same and countries are affected differently. This was clearly evident during the current covid-19 crisis. Groups with a global presence have more stable results and are more resistant to the eventual market or portfolio crises. This translates into lower risk. In contrast to regulatory criteria, we consider certain intangible assets, such as DTAs or goodwill, retain value, even in a hypothetical resolution, owing to the geographic structure of our subsidiaries. Thus, assets can be valued and their unexpected loss and capital impact can be estimated. Economic capital is a key tool for internal management and the development of Grupo Santander’s strategy, for assessing solvency and managing risk of portfolios and businesses. With regard to Basel Pillar 2, we use our economic model for the internal capital adequacy assessment process (ICAAP). We plan business progression and capital needs under a central scenario and alternative stress scenarios to make sure we meet our solvency objectives even in adverse scenarios. Economic capital derived metrics help us assess risk-return objectives, how to price operations based on risk, how economically viable projects are, and how to value country units and business lines, so we can fulfil our overriding objective of maximizing shareholder value. The following table presents the main changes to the capital requirements by credit risk: Credit risk capital movements EUR million A Starting amount (31/12/2019) Asset size Model updates Regulatory Acquisitions and disposals Foreign exchange movements Other Ending amount (31/12/2020) RWAs 522,527 12,298 2,790 (4,057) (721) (38,002) (7,089) 487,745 Capital  requirements 41,802 984 223 (325) (58) (3,040) (567) 39,020 A. Includes capital requirements of equity, securitisations and counterparty risk (excluding CVA and CCP). The changes in RWAs in 2020 (-EUR 34,782 million) were impacted by the generalized devaluation of currencies, especially the BRL, USD and GBP. Volumes increased in South America in the year (particularly in Brazil) and in the US. These increases offset the decline observed in Europe, mainly in Spain. Other includes the securitizations in the year, particularly in Spain and Santander Consumer Finance. With regards to regulatory ratios, Santander exceeded the 2020 minimum regulatory requirements by 317 bps, taking into account the shortfalls in AT1 and T2. A. Countercyclical buffer. B. Global systemically important banks (G-SIB) buffer. C. Capital conservation buffer. In short, from a qualitative point of view, Santander has solid capital ratios, aligned with its business model, balance sheet structure and risk profile. 350 Responsible banking Corporate governance Economic and financial review Risk management and compliance As a homogeneous risk measure, we can use economic capital to explain how risk is distributed throughout the Grupo Santander, bringing together different activities and types of risk under a single metric. The main difference compared to regulatory CET1 is how goodwill, other intangible assets and DTAs are treated; we consider them additional capital requirements rather than a deduction from available capital. Given its relevance, internal management considers several economic capital derived metrics from both a capital needs and a risk-return point of view, within a conservative risk appetite framework established at both group and country unit level. Required economic capital in December 2020 amounted to EUR 60,386 million. Compared to the available economic capital base of EUR 86,316 million, this implies a capital surplus of EUR 25,931 million. Reconciliation of economic and regulatory capital EUR million Net capital and issuance premiums Reserves and retained profits Valuation adjustments Minority interests Prudential filters A Other Base economic capital available Deductions Goodwill Other intangible assets DTAs Other Base regulatory (CET1) capital B available Base economic capital available Economic capital required Capital surplus C 2020 60,557 52,902 2019 60,692 59,016 (35,345) (23,249) 6,669 (592) 2,126 86,316 (16,337) (13,621) (2,090) (627) (580) 6,441 (639) (2,136) 100,124 (31,398) (25,068) (3,410) (2,920) 1,772 69,399 70,497 86,316 60,386 25,931 100,124 72,879 27,245 The charts below sum up Grupo Santander’s economic capital needs as at 31 December 2020, by region and risk type. Distribution of economic capital needs by type of risk % The distribution of economic capital among core business areas reflects our business and risk diversification. Europe accounted for 57% of capital; North America, 24%; and South America, 19%. Outside our operating areas, the Corporate Centre mainly takes on goodwill risk and structural exchange rate risk (risk from maintaining stakes in foreign subsidiaries that is denominated in currencies other than the euro). The benefit from diversification included in the economic capital model, including intra-risks (largely similar to geographic diversification) and inter-risk diversification amounted to approximately 25-30%. A. Includes: Comparative of Provisions over Economic Expected loss, Pension Assets and Other adjustments. All figures according to EC 2020 methodology. B. Including IFRS 9 transitional arrangements. C. In order to enhance the comparison with regulatory capital, the differences in goodwill due to fx changes are included in the required economic capital. All figures according to EC 2020 methodology. Distribution of economic capital needs by geographic area and type of risk EUR million. December 2020 Grupo Santander. Total requirements: 60,386 Corporate Centre 16,514 A Europe 25,190 North America 10,315 South America 8,367 All risks: Goodwill Market DTAs Other 53 % 30 % 14 % 4 % All risks: Credit Market Pensions ALM Others All risks: Credit Fixed Assets Business Operational Others 54 % 10 % 9 % 8 % 19 % 63 % 12 % 8 % 4 % 13 % Credit ALM Operational Business Others A. Including Santander Global Platform All risks: 63 % 7 % 7 % 6 % 17 % 351 Credit: 42%Goodwill: 14%Market: 13%DTAs: 5%Business: 5%ALM: 5%Operational: 4%Other: 10% Annual report 2020 Contents RoRAC and Economic Value Added Since 1993, Grupo Santander has been using RoRAC methodology to: • calculate economic capital consumption and return for business units, segments, portfolios and customers, so as to optimize capital allocation. • measure the management of units through budgetary monitoring of capital consumption and RoRAC. • analyze and set prices to make decisions on operations (approvals) and customers (monitoring). The RoRAC methodology helps us compare the return on operations, customers, portfolios and businesses on a like- for-like basis. We can identify what is obtaining a risk- adjusted return higher than its cost of capital and thus align risk and business management to maximize economic value added (EVA), which is senior management’s ultimate goal. Main segments Europe North America South America Total Group The following table shows economic value added and RoRAC at the end of December 2020 of the Group’s main geographical segments. These figures are clearly affected by the economic situation resulting from the covid-19 crisis, which led to lower profit due to greater provisions and an increase in the cost of capital, resulting in a value for 2020 greater than the structural cost of capital for the group: Economic Value Added EUR million A and RoRAC 2020 2019 RoRAC 10.5 % 15.0 % 26.1 % 8.5 % EVA (429) 187 883 (2,529) RoRAC 17.7 % 20.2 % 36.0 % 12.9 % EVA 2,682 1,019 2,641 3,509 A. The economic value added is calculated with the cost of capital of each unit. The Group’s total RoRAC includes the operative units, the Corporate Centre and SGP, reflecting the Group's economic capital and its return. Capital planning and stress tests Capital stress test exercises are a key tool in banks' dynamic evaluations of their risks and solvency. These forward-looking evaluations are based on unlikely but plausible macroeconomic and idiosyncratic scenarios. They require robust planning models that can translate the effects defined in the projected scenarios to elements that affect solvency. The ultimate aim of capital stress exercises is to thoroughly assess risks and solvency to determine capital requirements if a bank fails to meet its regulatory and internal capital objectives. Internally, Grupo Santander has a defined capital stress and planning process to respond to various regulatory exercises and is a key tool integrated into management and strategy. Internal capital stress and planning aims to ensure sufficient current and future capital, even in unlikely but plausible economic scenarios. Based on our initial situation (defined by our financial statements, capital base, risk parameters, and regulatory and economic ratios), we estimate results in various business environments (including severe recessions as well as expected macroeconomic environments), to determine our solvency ratios, usually for a three-year period. Planning offers a comprehensive view of our capital for the analyzed period and in each of the defined scenarios based on regulatory capital and economic capital metrics. We regularly assess the level and progression of EVA and the risk-adjusted return (RoRAC) across Grupo Santander. EVA is calculated as profit generated above the cost of economic capital employed, and is calculated as follows: Economic Value Added = underlying consolidated profit – (average economic capital x cost of capital) We calculate profit by making the necessary adjustments to consolidated profit to eliminate factors outside the ordinary course of our business and thus obtain each country unit’s underlying result in the year. Additionally, for internal management purposes, we analyze the impact of items not covered by our economic capital model but affect reserves without being included in the income statement. We compare the expected credit loss of the various portfolios against provisions, similar to the regulatory capital approach. This became more significant in 2020 owing to the exceptional increase in provisions required to tackle the covid-19 crisis. The minimum return on capital a transaction must obtain is determined by the cost of capital, the minimum compensation required by shareholders. We calculate it by adding the premium shareholders require to invest in Santander, to the risk-free return. The premium depends essentially on the degree of volatility in our share price with respect to the market’s performance. The cost of capital defined for Grupo Santander in 2020 was 12.00%, impacted by higher volatility in the covid-19 crisis (vs. 8.30% the previous year, which shows a more structural value). As well as annually reviewing the cost of capital, Grupo Santander’s internal managers also estimate a cost of capital for each business unit based on its features (under the philosophy that subsidiaries manage capital and liquidity autonomously) to determine whether each business is capable of creating standalone value. If a transaction or portfolio obtains a positive return, it contributes to our profits, but only adds economic value when that return exceeds the cost of capital. 352 Responsible banking Corporate governance Economic and financial review Risk management and compliance This chart describes the structure in place: 1 2 3 4 5 Macroeconomic scenario Balance sheet and income statement forecasts Capital requirements forecasts Solvency analysis • Central and recession • Idiosyncratic: based on specific 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 • IFRS 9 models and migration among stages • Consistent with projected balance sheet • Regulatiry and economic risk parameters (PD, LGD and EAD) • Available capital base. Profits and dividends • Regulatory and legislative impacts • Capital and solvency ratios • Compliance with capital objectives • Regulatory and economic view Action plan • In the event of failure to comply with internal objectives or regulatory requirements This structure supports the ultimate objective of capital planning, by making it an important strategic element that: • ensures current and future solvency, even in adverse economic scenarios. To calculate loan-loss provisions of the credit portfolio, we use a methodology that ensures provisions cover loan losses projected by its internal expected loss models, based on exposure at default (EAD), probability of default (PD) and loss given default (LGD parameters), at all times. • ensures comprehensive capital management, analyzes specific effects and integrates them into strategic planning. • enables a more efficient use of capital. • helps formulate capital management strategy. • facilitates communication with the market and supervisors. Our capital planning has the full involvement and close supervision of senior managers, under a framework that ensures suitable governance and that is subject to the right levels of challenge, review and analysis. A key element in capital planning and stress analysis exercises is calculating the provisions needed under these scenarios, especially to cover losses on credit portfolios; it is particularly important for income statement forecasts under defined adverse scenarios. In 2018, we adapted this methodology to incorporate changes in the new IFRS 9 regulations, with models to calculate balances by stages (S1, S2, S3) as well as the movements between them and the loan-loss provisions in accordance with the new standards. Our capital planning and stress analysis culminate with an analysis of solvency under various scenarios over a set period to measure capital adequacy and ensure we meet internal all capital and regulatory requirements. If we were to fail to meet our capital objectives, we would draw up an action plan with the measures needed to attain the minimum capital desired. We analyze and quantify these measures as part of internal exercises even if we will not need to utilize them as we exceed the minimum capital thresholds. Grupo Santander carries out its internal stress and capital planning transversally throughout the group, at the consolidated and local level. Our country units use it as an internal management tool, particularly to respond to local regulatory requirements. 353 Annual report 2020 Contents Since the beginning of the economic crisis in 2008, we have undergone seven external stress tests. All of them proved our strength and solvency in the most extreme and severe macroeconomic scenarios showing that, owing to our business model and geographic diversification, we would still be capable of generating profit for shareholders while satisfying the most demanding regulatory requirements. We have also conducted internal stress tests every year since 2008 as part of our ICAAP process (Basel Pillar 2). Every test has proven our capacity to confront the most difficult exercises on a global and local level. During 2020, due to the special situation resulting from the coronavirus crisis, capital planning capacities and stress tests allowed us to analyze various scenarios for the evolution of the pandemic and ensure capital adequacy under the various possible scenarios derived from the covid-19 crisis. Recovery and Resolution Plans and Special Situations Management Framework This section summarizes our progress in crisis management, particularly the main principles of recovery plans, resolution plans and the management framework governing special situations. Recovery plans Context. Grupo Santander prepared its eleventh corporate recovery plan in 2020. The most important part sets out measures we have at our disposal to survive a very severe crisis on our own. Its aims primarily to test the feasibility, effectiveness and credibility of recovery measures as well as the suitability of the recovery indicators and their respective thresholds, above which decision-making will be escalated to cope with stress situations. It sets out macroeconomic and/or financial crisis scenarios which incorporate idiosyncratic and/or systemic events relevant to the group that could lead to its activation. It has been designed with the premise of no extraordinary public aid, in accordance with article 5.3 of the BRRD. The recovery plan should not be interpreted as an instrument independent of our structural mechanisms to measure, manage and supervise risk. Integrated into the plan are: the risk appetite framework (RAF), the risk appetite statement (RAS), the risk identification assessment (RIA), the business continuity management system (BCMS), the internal assessments of capital and liquidity (ICAAP and ILAAP) and other tools. It is also integrated into our strategic plans. Progress in 2020. In April, as a result of the crisis caused by the covid-19 pandemic, the ECB announced that banks could submit recovery plans for 2020 only covering essential elements and improvements made to rectify any key deficiencies the ECB had identified in its feedback letters on their 2019 recovery plans. It also announced that the macroeconomic and/or financial crisis scenarios used in past years, in which idiosyncratic and/ or systemic events are incorporated, would be replaced with a single covid-19 stress scenario. Despite this easing of requirements and the ECB not identifying any key weaknesses in our 2019 recovery plan, we decided to prepare a comprehensive plan in 2020. It comprised all chapters and most of the improvements suggested by the ECB. Specifically: • further details on the roles and responsibilities of Silver/ Gold forums outside of crisis periods. • more details about non-financial indicators and on our approach to early warning indicators for non-financial events. • greater detail on external interconnections, standardizing criteria between subsidiaries. • a recovery strategy adapted to the covid-19 scenario, and an improved chapter on global stressed recovery capacity with more details, macro charts developed by the in-house research team and tables to demonstrate the impact of the measures on the LCR. • the impact of recovery measures in March, to show how all our recovery options can be executed in a crisis, in addition to more details about the assumptions underlying impact calculations, including stress scenarios. The key takeaways from our analysis of the 2020 corporate plan were: • no material interdependencies between country units. • ample recovery capacity ensured in all scenarios by available measures, with an advantage in a recovery situation afforded by our geographic diversification model. • sufficient capacity in each subsidiary to emerge from a recovery situation on its own, strengthening our autonomous subsidiaries model (in terms of capital and liquidity). 354 Responsible banking Corporate governance Economic and financial review Risk management and compliance • sufficient mitigation mechanisms to minimize the negative economic impact of potential reputational damage in stress scenarios. In November 2020, the Single Resolution Board (SRB) announced its preferred resolution strategy and work priorities to improve our resolvability. • in a serious financial or solvency event, no one subsidiary is important enough to trigger the corporate plan by causing the severest recovery indicator levels to be surpassed. These factors prove our business model and geographic diversification strategy, based on autonomous subsidiaries, will continue to be strong in a recovery situation. Regulation and governance. Grupo Santander’s recovery plan complies with the EU regulations and follows the non-binding recommendations of the Financial Stability Board (FSB) and other international bodies. We submitted our latest plan to the Single Supervisory Mechanism in October 2020, after which the EBA has six months to make formal considerations. It comprises the corporate plan (Banco Santander, S.A.) and local plans for the UK, Brazil, Mexico, the US, Germany, Argentina, Chile, Poland and Portugal. Except for Santander Chile, all country units must draw up a local plan in compliance with local regulations as well as corporate requirements. Though the board of Banco Santander, S.A. approves the corporate plan, relevant content and figures are previously submitted to and discussed by the capital committee, the global ALCO and the risk supervision, regulation and compliance committee. On the other hand, local plans are approved by local bodies, always in coordination with the parent as they are included in the corporate plan. Resolution plans Grupo Santander cooperates with the relevant authorities to prepare resolution plans, providing them with the information they request. Those that form part of the Crisis Management Group (CMG) upheld their decision on our Multiple Point of Entry (MPE) strategy1 to be used in the hypothetical case of resolution. This is based on our legal and business structure, organized into nine resolution groups that can be resolved independently without involving other parts of the organization. We continued to make progress with projects to improve resolvability, defining these lines of action: 1) Ensure a sufficient buffer of instruments with loss absorption capacity. In 2020, Grupo Santander issued debt instruments that meet the MREL eligibility requirements. To avoid legal uncertainty surrounding the execution of the resolution authority’s bail-in power, all our issuances governed by laws other than Spanish law include a contractual recognition clause, obliging the creditor to accept any reduction of principal or outstanding amounts, or the conversion or cancellation by virtue of the said bail-in power. 2) Ensure information systems can quickly provide the high- quality information required in resolution. We continue to make our governance of information provided to the resolution authority for drawing up resolution plans stronger and more systematic. We made further progress with ongoing projects to create data repositories on: 1. legal entities that belong to the group. 2. critical suppliers. 3. critical infrastructure. 4. financial contracts in accordance with article 71.7 of the BRRD. 3) Guarantee operational continuity in resolution situations. Grupo Santander is strengthening operational continuity with new clauses in contracts with internal and external suppliers, which stipulate that resolution is not considered an event which could trigger termination of services. This clause features in any new contracts or renewals according to a corporate template we've created. We conducted an analysis on services provided by market infrastructure to confirm service continuity in a resolution scenario and understand their policies in the case of financial deterioration prior to resolution. 1. With the exception of Santander US whose resolution plans correspond to the individual entities. 355 Annual report 2020 Contents We are also developing contingency plans for cases where a main market infrastructure's own resolution disrupts service. They will include actions to mitigate the associated risk such as (i) identifying and justifying potential substitutes/ alternatives and (ii) assessing possible financial or operative measures that would mitigate risk from losing the service. The phase-in calendar for developing countries extends the deadline for implementing the term sheet to 2025. In Europe, the final texts of CRR 2 and BRRD 2, which modify the resolution framework, were published in June 2019. One of the main objectives of this revision was to implement the TLAC requirement in Europe. 4) Foster a culture of resolvability. Grupo Santander continued to involve more senior managers by elevating resolvability matters to the board and other high-level committees. Special situations management framework We hold regular simulation exercises, which serve as a tool for raising awareness and preparing for certain stress situations. The CRR 2, which came into force in June 2019, dictates the 16%/18% minimum requirement for G-SIBs as set in the TLAC term sheet. It must be made up of subordinated liabilities (with the exception of a percentage of senior debt - 2.5%/3.5%). It also sets the subordination requirement for large banks (with total assets exceeding EUR 100 billion) at 13.5% of RWAs or 5% of the tier 1 Basel III leverage ratio exposure (whichever is greater). The BRRD 2 will be transposed into law in Spain in 2021. Contingency plans are classified as mitigation tools within the Comprehensive Special Situations Framework (CSSF), in line with their more global nature. G-SIBs also have a Pillar 2 requirement in addition to the minimum CRR requirement, owing to the MREL methodology in the BRRD 2. In November 2019, Banco de España formally communicated the (binding) MREL for the Banco Santander, S.A. Resolution Group (sub-consolidated), which needed be met from 1 January 2020. It was set at 16.81% of total liabilities and own funds based on December 2017 data, equivalent to 28.60% of the Resolution Group’s RWAs. Of this, 11.48% of the total liabilities and own funds must be met by subordinated instruments, taking into account a concession of 2.5% of total RWAs which can be non- subordinated. As of 31 December 2020, Banco Santander, S.A. meets its MREL requirements having issued eligible instruments during the year. The framework comprises two additional key stages in managing them: (i) special situations preparation in BAU and (ii) facilitating resolution. This has given us flexibility to activate the special corporate situations committees in order to respond preventively to the situation generated by covid-19, and to coordinate the responses of the country units. In the pandemic, we continued to actively interact with our main subsidiaries to promote and share best practices, and ensure appropriate crisis governance through local crisis committees. As reflected in our management of covid-19, one key feature has been to have a tried and tested technological infrastructure to guarantee the agile and swift activation of special situations protocols and procedures. Total Loss Absorbing Capacity (TLAC) and Minimum Required Eligible Liabilities (MREL) In November 2015, the FSB published the TLAC term sheet based on the previously published principles for crisis management frameworks. It aims to ensure global systemically important banks (G- SIBs) have the capacity to absorb losses and recapitalize as required to maintain critical functions during and immediately after resolution proceedings without compromising customer funds, public funds or financial stability. The TLAC term sheet requires each G-SIB to have an individually set minimum TLAC level which is the greater of (a) 16% of risk weighted assets from 1 January 2019 and 18% from 1 January 2022, or (b) 6% of the Basel III Tier 1 leverage ratio exposure measure from 1 January 2019, and 6.75% from 1 January 2022. Some jurisdictions have already transposed the TLAC term sheet into law (as is the case in Europe via the CRR 2 and BRRD 2, and in the US). Other jurisdictions where we operate, including Brazil and Mexico, have yet to implement this requirement. 356 Responsible banking Corporate governance Economic and financial review Risk management and compliance 4. Financial information by segment 4.1 Description of segments We base segment reporting on financial information presented to the chief operating decision maker, which excludes certain statutory results items that distort year-on- year comparisons and are not considered for management reporting. This financial information (underlying basis) is computed by adjusting reported results for the effects 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 51.c to the Grupo Santander financial statements). Grupo Santander has aligned the information in this chapter with the underlying information used internally for management reporting and with that presented in Grupo Santander's other public documents. Grupo Santander executive committee has been selected to be its chief operating decision maker. Grupo Santander's operating segments reflect its organizational and managerial structures. The executive committee reviews internal reporting based on these segments to assess performance and allocate resources. The segments are split by geographic area in which profits are earned and type of business. We prepare the information by aggregating the figures for Grupo Santander’s various geographic areas and business units, relating it to both the accounting data of the business units integrated in each segment and that provided by management information systems.The same general principles as those used in Grupo Santander are applied. In 2020, we maintain the general criteria applied in 2019, as well as the business segments with the following exceptions, which only affect the secondary segments: 1. Following the creation of the reporting segment Santander Global Platform in 2019, which comprises our global digital services under a single business unit, and its incorporation in both primary and secondary segments, in 2020 for better monitoring of its evolution and contribution to the Group's results, at the secondary segment level in addition to the results generated by the platforms, 50% of the results generated by countries in products linked to these platforms are considered. These results were previously included in Retail Banking. 2. Annual adjustment of the perimeter of the Global Customer Relationship Model between Retail Banking and Santander Corporate & Investment Banking and between Retail Banking and Wealth Management & Insurance. These changes in the secondary segments have no impact on the primary segments and do not affect the Group’s figures. To allow better comparability of the secondary segments, 2019 data has been provided on a new basis. After these changes, the operating business areas are structured in two levels: Primary segments This primary level of segmentation, which is based on the Group’s management structure, comprises five reportable segments: four operating areas plus the Corporate Centre. The operating areas are: Europe: which comprises all the business activities carried out in the region. Detailed financial information is provided on Spain, Portugal, Poland, Santander Consumer Finance (which incorporates all the region’s business, including the three countries mentioned herewith) and the UK. North America: which comprises all the business activities carried out in Mexico and the US, which includes the holding company (SHUSA) and the businesses of Santander Bank, Santander Consumer USA, the specialized business unit Banco Santander International, Santander Investment Securities (SIS) and the New York branch. The sale of Banco Santander Puerto Rico was completed in September 2020, which was previously included in the US. South America: includes all the financial activities carried out by Grupo Santander through its banks and subsidiary banks in the region. Detailed information is provided on Brazil, Chile, Argentina, Uruguay, Peru and Colombia. Santander Global Platform: which comprises our global digital services under a single business unit, includes Global Payments Services (Global Trade Services, Global Merchant Services, Superdigital, Pago FX), our fully digital bank Openbank and Open Digital Services, and Digital Assets (Centres of Digital Expertise, InnoVentures and Digital Assets). 357 Annual report 2020 Contents Secondary segments At this secondary level, Grupo Santander is structured into Retail Banking, Santander Corporate & Investment Banking, Wealth Management & Insurance and Santander Global Platform. Santander Global Platform: which comprises our global digital services under a single business unit (breakdown in the primary segment definition), as well as 50% of the results generated by these services in the commercial network. Retail Banking: this covers all customer banking businesses, including consumer finance, except those of corporate banking which are managed through Santander Corporate & Investment Banking, asset management, private banking and insurance, which are managed by Wealth Management & Insurance and 50% of the countries’ results generated by digital services, which are included in Santander Global Platform. 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): this business reflects 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 equity business. Wealth Management & Insurance: includes the asset management business (Santander Asset Management), the corporate unit of Private Banking and International Private Banking in Miami and Switzerland and the insurance business (Santander Insurance). In addition to these operating units, which report by geographic area and businesses, Grupo Santander continues to maintain the area of Corporate Centre, that includes the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position, assumed within the sphere of Grupo Santander’s assets and liabilities committee, as well as management of liquidity and of shareholders’ equity via issuances. As Grupo Santander’s holding entity, this area manages all capital and reserves and allocations of capital and liquidity with the rest of businesses. It also incorporates amortization of goodwill but not the costs related to the Group’s central services (charged to the areas), except for corporate and institutional expenses related to the Group’s functioning. The businesses included in each of the primary segments in this report and the accounting principles under which their results are presented here may differ from the businesses included and accounting principles applied in the financial 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 differ materially from those of such subsidiaries. As described in section 3 'Group financial performance' 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 fluctuations. However, for a better understanding of the changes in the performance of our business areas, we also provide and discuss the year-on-year changes to our results excluding such exchange rate impacts. The statements included in this section regarding Grupo Santander's competitiveness and that of its subsidiaries have been produced by Santander based on public information (corporate websites of competing entities and information published by national banking institutions). 358 Responsible banking Corporate governance Economic and financial review Risk management and compliance 4.2 Summary income statement of the Group’s main business areas 2020 Main items of the underlying income statement EUR million Primary segments EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland Other NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina Other SANTANDER GLOBAL PLATFORM CORPORATE CENTRE TOTAL GROUP Secondary segments RETAIL BANKING CORPORATE & INVESTMENT BANKING WEALTH MANAGEMENT & INSURANCE SANTANDER GLOBAL PLATFORM CORPORATE CENTRE TOTAL GROUP Net interest income 14,046 3,957 3,832 3,808 787 1,037 626 8,469 5,645 2,825 10,723 7,625 1,787 912 398 129 (1,374) 31,994 29,544 2,953 454 416 (1,374) 31,994 Net fee income 4,737 2,314 750 506 388 452 328 1,661 889 772 3,566 2,824 335 273 134 81 (29) 10,015 6,850 1,550 1,194 449 (29) 10,015 Total income 19,693 6,782 4,685 4,339 1,296 1,524 1,067 11,011 7,360 3,651 14,845 10,866 2,263 1,128 588 192 (1,141) 44,600 37,215 5,397 2,135 994 (1,141) 44,600 Net operating income 9,379 3,175 2,703 1,697 706 895 203 6,379 4,281 2,098 9,533 7,325 1,363 496 349 (190) (1,470) 23,633 Profit before tax 4,167 715 1,869 697 483 370 32 2,332 1,250 1,082 5,291 4,045 785 200 262 (204) (1,912) 9,674 20,368 3,328 1,229 178 (1,470) 23,633 7,531 2,726 1,199 130 (1,912) 9,674 Underlying attributable profit to the parent 2,656 517 1,085 530 338 162 24 1,492 731 762 2,927 2,113 432 179 203 (150) (1,844) 5,081 4,196 1,823 868 39 (1,844) 5,081 Underlying attributable profit to the parent by primary segment distribution 2020 A Underlying attributable profit to the parent 2020. Core markets EUR million. % change YoY in constant euros A. As a % of operating areas. Excluding Corporate Centre and Santander Global Platform. 359 Annual report 2020 2019 Main items of the underlying income statement EUR million Primary segments EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland Other NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina Other SANTANDER GLOBAL PLATFORM CORPORATE CENTRE TOTAL GROUP Secondary segments RETAIL BANKING CORPORATE & INVESTMENT BANKING WEALTH MANAGEMENT & INSURANCE SANTANDER GLOBAL PLATFORM CORPORATE CENTRE TOTAL GROUP Net interest income 14,201 3,919 3,848 3,788 856 1,171 620 8,926 5,769 3,157 13,316 10,072 1,867 940 437 92 (1,252) 35,283 32,862 2,728 570 375 (1,252) 35,283 Contents Underlying attributable profit to the parent 4,878 1,585 1,314 1,077 525 349 28 1,667 717 950 3,924 2,939 630 144 212 (120) (2,097) 8,252 7,580 1,713 929 127 (2,097) 8,252 Net fee income 5,260 2,481 823 866 390 467 234 1,776 947 829 4,787 3,798 404 446 138 6 (50) 11,779 8,561 1,520 1,199 549 (50) 11,779 Total income 21,001 7,506 4,710 4,727 1,375 1,717 966 11,604 7,605 3,998 18,425 13,951 2,539 1,316 619 81 (1,617) 49,494 42,599 5,227 2,226 1,061 (1,617) 49,494 Net operating income 9,957 3,485 2,672 1,892 751 1,024 133 6,636 4,309 2,327 11,769 9,345 1,508 554 362 (159) (1,990) 26,214 Profit before tax 7,350 2,174 2,215 1,455 750 681 76 2,776 1,317 1,459 7,232 5,606 1,129 217 280 (166) (2,262) 14,929 23,672 2,945 1,271 315 (1,990) 26,214 12,953 2,699 1,281 258 (2,262) 14,929 360 Responsible banking Corporate governance Economic and financial review Risk management and compliance 4.3 Primary segments EUROPE 2020 Highlights Underlying attributable profit EUR 2,656 Mn → One Santander, whose first focus is Europe, is accelerating our business transformation in the region, to achieve superior growth and a more efficient operating model. → Excluding the exchange rate impact, volumes grew in all markets in the year: loans grew +4% and deposits +6%, with significant recovery in activity since April’s lows. → Underlying attributable profit of EUR 2,656 million, 46% lower year-on-year (-45% in constant euros), affected by the extraordinary provisions recorded. → Customer revenue showed the resilience and strength of our model in a low activity environment, with a recovery in recent months which drove the fourth quarter to be the highest of the past two years. Strong cost control across all markets mitigating the negative impact on net operating income (-5%). This transformation aims to deliver revenue growth and notable cost savings, resulting in positive operating jaws. in October, we committed to deliver EUR 1 billion additional cost savings over the next two years after we achieved our previous target early. In 2021 we will see the first steps of this deep transformation. Particular focus will be on changing how we manage our business with new regional business owners, who will define the vision and end-to-end value proposition for each customer area and deliver through agile teams in all countries. Strategy With One Santander we want to create a better bank in Europe, where our customers and our employees feel a deep connection with Santander while delivering sustainable shareholder value, by: • Growing our business by better serving our customers, through capital efficient growth opportunities including SCIB and WM&I, simplifying our mass market value proposition, improving customer experience and connecting to PagoNxt. • Continuing to develop our omnichannel strategy, to redefine how we interact with our customers, accelerate our digital agenda and maintain the personal relationships through our teams. • Creating a common operating model in Europe, to serve the business with common platforms and automated operations. We will leverage shared services to move to a more flexible organization with one aligned team across the continent. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 10,021 15,187 36 % /active customers +10 % YoY 361 Annual report 2020 Contents Business performance Loans and advances to customers remained virtually unchanged year-on-year. In gross terms, excluding reverse repurchase agreements and the exchange rate impact, they rose 4%, with broad-based growth in all countries. Of note were the UK (mortgages), Spain (mainly corporates due to ICO-guaranteed loans) and Portugal (mortgages and corporates), as well as a positive performance in SCIB (mainly in Other Europe, but in the other countries as well). Customer deposits increased by 4% compared to 2019. Excluding repurchase agreements and the FX impact, they were up 6% with rises in all countries. Mutual funds grew 4% (+5% excluding FX impact), predominantly driven by Portugal (+6%) and Other Europe (+56%), boosting customer funds by 4% (+6% excluding the exchange rate impact). Results Underlying attributable profit in 2020 was EUR 2,656 million (37% of the Group's total operating areas), and underlying RoTE was 5.5%. Compared to 2019, underlying attributable profit, was down 45% in constant euros (-46% in euros), as follows: • Total income declined 5% dampened by the health crisis, low interest rates, lower income from real estate stakes in Spain and the higher contribution to the DGF. Net interest income remained stable benefiting from higher volumes, interest rate management and the positive TLTRO impact. • Administrative expenses and amortizations decreased 6% stemming from optimizations in recent years and the efficiencies generated since the pandemic began. • Net loan-loss provisions, which to some extent anticipate potential future impacts, increased sharply amid the covid-19 health crisis. However, the NPL ratio improved 10 bps to 3.15% due to risk management and other initiatives such as non-performing portfolio sales. • Other gains (losses) and provisions increased their loss during the year, mainly in the UK and Poland for potential legal contingencies and other provisions. EUROPE EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances B to customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches 2020 14,046 4,737 2019 14,201 5,260 % excl. FX 0.0 (9.4) % (1.1) (9.9) 884 26 1,035 (14.6) (14.2) 505 (94.9) (6.2) (94.9) (5.4) 19,693 21,001 (10,314) 9,379 (4,299) (11,044) (5.8) (4.8) (1,839) 133.8 136.3 (6.6) (5.8) 9,957 (914) 4,167 (768) 7,350 (1,132) (1,979) 18.9 (43.3) (42.8) 20.1 (42.7) (42.3) 3,035 5,371 (43.5) (42.9) — 3,035 (379) — 5,371 (493) — (43.5) (23.2) — (42.9) (22.1) 2,656 4,878 (45.6) (45.0) 675,895 676,904 (0.1) 2.6 224,793 180,389 24.6 26.2 86,925 104,382 (16.7) (15.2) 48,266 53,893 (10.4) (10.2) 41,658 41,471 1,077,537 1,057,038 622,826 600,380 0.5 1.9 3.7 2.2 4.2 6.4 208,408 189,792 9.8 11.2 120,166 133,544 (10.0) 55,919 15,635 60,807 16,383 1,022,954 1,000,906 54,583 56,133 (8.0) (4.6) 2.2 (2.8) (7.4) (7.7) (2.6) 4.5 (0.1) 658,471 650,552 696,427 671,032 603,450 581,395 92,977 89,637 1.2 3.8 3.8 3.7 3.9 6.1 6.4 4.6 5.48 52.4 3.15 57.3 10.00 (4.51) 52.6 3.25 49.8 (0.2) (0.10) 7.5 (3.0) (9.2) 83,976 86,574 4,846 5,336 A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 362 Responsible banking Corporate governance Economic and financial review Risk management and compliance Spain 2020 Highlights Underlying attributable profit EUR 517 Mn → Santander España has worked to be a part of the solution to the crisis through initiatives to support households, the self-employed and businesses. Among others, we remained at the forefront of mobilizing ICO funding and granting payment holidays in mortgages, consumer finance and cards. → We made further progress in transforming our distribution model with the launch of our new app and website, among other initiatives, and in accelerating our digitalization. → Significant cost reduction efforts (-10% year-on-year), while improving customer satisfaction and our net promoter score (NPS) positioning. → Underlying attributable profit was EUR 517 million in 2020, down 67% compared to 2019, predominantly affected by higher provisions amid the uncertain climate. Strategy Commercial activity was strongly affected in 2020, particularly during the worst months of the pandemic. Since the outbreak, Santander España has run initiatives to support our stakeholders: • Protecting our employees: we introduced remote working measures, encouraged the use of digital channels and implemented health protection measures at our facilities. • Supporting our customers: we channelled EUR 30.8 billion in ICO-backed loans (approved loans and credit lines) to the self-employed, SME and corporates (reaching a 27% market share) and granted more than 180,000 payment holidays to households. • Contributing to society: we launched the Together in Solidarity Fund, with more than EUR 25 million invested in solidarity initiatives. As regards the main loyalty drivers and performance by segment in 2020: • For SMEs and corporates, we simplified our value proposition with Santander One, a pioneering model in Spain's financial industry, that provides subscription- based, personalized financial services, centred on customer loyalty. • In Insurance, the performance of our agreements with Aegon and Mapfre to provide a complete insurance offering, which boosted growth in non-credit related premiums by more than 27% year-on-year. • In Private Banking, we remained market leaders, being named Best Private Banking Overall in Spain by Euromoney and Global Finance. • In SCIB, we obtained solid results, maintaining our leadership in the main league tables despite the uncertain market environment and the covid-19 impacts. We continued to ramp up our digitalization, leading to an 11% increase in digital customers in the year and more than 100 million accesses to digital channels per month. Our app and website led the Aqmetix ranking. Our strategic agreement with Correos increases our network services at more than 4,600 offices and bolsters our financial services in Spain's rural areas. We reaffirmed our Responsible Banking commitment, with sustainable growth initiatives, as well as leading SRI Funds with a 44% market share. Lastly, Santander España was named Best Company to Work For by Top Employers. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 2,643 5,234 34 % /active customers +11 % YoY 363 Annual report 2020 Contents Business performance Loans and advances to customers rose 5%. In gross terms, excluding reverse repurchase agreements, they increased by EUR 9,455 million (+5%) strongly driven by the self- employed, SMEs and corporates. Mortgage completions and consumer lending remained below 2019 levels, in line with the economic slowdown. Customer deposits increased 5% compared to 2019. Excluding repos, growth was also 5% boosted by demand deposits (+9% year-on-year). Regarding mutual funds, assets under management increased 1% despite the initial impact of the pandemic, as net inflows were positive in the last seven months. Results Underlying attributable profit amounted to EUR 517 million (7% of the Group’s total operating areas) with an underlying RoTE of 3%. Compared to 2019, underlying attributable profit was 67% lower. By line: • Total income declined 10% impacted primarily by lower net fee income from reduced transaction volumes and market performance, and lower income from real estate stakes. Conversely, net interest income had no material change after absorbing the impact of negative interest rates and smaller ALCO portfolio. • Administrative expenses and amortizations fell at double-digit rates (-10% year-on-year) through the development of our distribution model. • Higher loan-loss provisions for potential future impacts of the uncertainty caused by the covid-19 crisis. Despite the economic recession, the NPL ratio improved 71 bps year- on-year, mainly due to the high level of corporate loans and a non-performing portfolio sale for EUR 1.5 billion. Coverage ratio increased 6 pp. • Other gains (losses) and provisions, where provisions related to foreclosed assets and increased operational risk are recorded, had no material change. 364 Spain EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 3,957 2,314 781 (269) 6,782 (3,607) 3,175 (2,001) (459) 715 (199) 516 — 516 0 2019 3,919 2,481 1,046 61 7,506 (4,021) 3,485 (856) (455) 2,174 (589) % 1.0 (6.7) (25.4) 0.0 (9.6) (10.3) (8.9) 133.7 0.9 (67.1) (66.2) 1,585 (67.4) — 1,585 0 — (67.4) 0.0 517 1,585 (67.4) 194,239 185,179 4.9 113,518 21,654 2,671 22,438 354,521 251,375 48,305 26,068 9,344 4,112 339,203 15,318 78,334 34,288 1,393 23,908 323,102 240,427 25,231 26,855 8,971 5,222 306,706 16,396 200,735 320,879 191,280 308,747 251,375 240,126 69,503 68,621 3.30 53.2 6.23 47.1 26,961 2,939 10.48 53.6 6.94 41.1 27,630 3,235 44.9 (36.8) 91.8 (6.1) 9.7 4.6 91.4 (2.9) 4.2 (21.3) 10.6 (6.6) 4.9 3.9 4.7 1.3 (7.18) (0.4) (0.71) 6.0 (2.4) (9.1) Responsible banking Corporate governance Economic and financial review Risk management and compliance Santander Consumer Finance Underlying attributable profit EUR 1,085 Mn 2020 Highlights → During 2020, SCF prioritized the management of the covid-19 impact. This was reflected in the protection of our employees’ health, in ensuring business continuity and service and in supporting our customers and business partners (car manufacturers, dealers and retailers). → New business volumes were affected by the health crisis, particularly from March to May, with strong signs of recovery in H2, as the impact of second wave at the end of the year was much less severe. → Underlying attributable profit was EUR 1,085 million, with an underlying RoTE that remained at double-digits (13%), RoRWA of 1.9% and a cost of credit which is low for this type of business. → We announced the creation of the Digital Consumer Bank, a new business with the aim of building a global digital consumer finance business based on SCF and Openbank's digital platform technology. We also maintained our leadership position in profitability, more than doubling the RoA of pan-European competitors, and in efficiency we were the only player who improved. We signed new agreements with retail distributors and manufacturers, to assist them in their commercial transformation and increase the value proposition for the end customer. We struck two main strategic deals to strengthen our presence in Europe, maintain our auto finance leadership position and boost digital channels: the acquisition of 46% of Sixt Leasing and the joint consumer finance operation with Telecom Italia Mobile. SCF was once again named Top Employer 2020 in Austria, Belgium, Germany, Italy, the Netherlands and Poland. Looking forward, we announced the creation of Santander Digital Consumer Bank, a new business with the aim of building a global digital consumer finance business based on SCF and Openbank's digital platform technology. Openbank is our 100% digital bank and is the largest digital bank in Europe. It has a complete set of banking services that come on top of its unique, scalable and efficient software package. Together, they will form a very potent business. Strategy Santander Consumer Finance (SCF) is Europe's consumer finance leader, present in 15 countries with more than 130,000 associated points of sale (auto dealers and shops). It also has numerous finance agreements with auto and motorcycle manufacturers and retail distribution groups. In 2020 management focused on: • strengthening leadership position in the retail auto finance market, while optimizing capital consumption and driving growth in consumer finance; • proactively managing brand agreements and developing digital projects, helping our partners with their digitalization and transformation plans; • executing the 2019 strategic operations as a key element to maintain high profitability and best-in-class efficiency: – the agreement with Hyundai Kia in Germany to acquire 51% of its auto financing company, and – the agreement with Ford Motor Company to acquire Forso AB (Fords' financial entity) in the Nordic countries. As a result of these priorities, SCF continued to gain market share amid the health crisis, underpinned by its business model: highly diversified by countries with a critical mass in key products. Loans and advances to customers by geographic area December 2020 Germany Nordic countries Spain France Italy Poland Other 365 35%17%14%14%9%4%7% Annual report 2020 Contents Business performance Most of SCF’s markets were significantly affected in 2020 by the isolation measures related to covid-19, which was reflected in a 12% fall in new lending (significantly better than 24% fall in European new car sales), despite recovering pre-crisis levels in the second half of the year. The largest falls were in Southern Europe, which was most affected by isolation measures, whereas Northern European markets were stronger. In order to compensate lost revenue, several measures are being carried out to reduce risk, including expense reductions, income initiatives in pricing and cost of funding. The stock of loans and advances fell 1% year-on year. In gross terms, excluding the exchange rate impact and reverse repos, it was in line with 2019. Customer deposits were flat (+1% excluding the exchange rate impact). Our recourse to wholesale funding markets remained strong, obtaining EUR 10 billion in 2020. Additionally, we increased funding from the ECB (+85%) to take advantage of the favourable conditions. Results Underlying attributable profit in 2020 was EUR 1,085 million, (15% of the Group’s total operating areas) and underlying RoTE was 13%. Compared to 2019, underlying profit was down 16% in constant euros (-17% in euros), as follows: • Total income increased 1% driven by net interest income (greater stock of loans and revenue actions), while fees fell due to the reduction in new business. Income was partially offset by the European Court of Justice ruling regarding early repayment of loans and interest rate limitations. • Administrative expenses and amortizations were down 2% mainly due to covid-19 mitigation actions and continued efficiency projects, resulting in a 99 bp efficiency improvement to 42.3% and in a 3% growth in net operating income. • Net loan-loss provisions rose significantly affected mainly by covid-related provisions and positive one-offs recorded in 2019. Cost of credit stood at 0.88%, NPL ratio at 2.36% and coverage rose to 111%. • Other gains (losses) and provisions improved, in part due to greater releases and lower impairments of intangible assets (software) which offset regulatory impacts in Poland. • As a result, net profit before minority interests was EUR 1,364 million in 2020, decreased 14% compared to 2019. • The largest contribution to the underlying attributable profit came from Germany (EUR 360 million), the Nordics (EUR 206 million), Spain (EUR 118 million) and France (EUR 100 million). 366 Santander Consumer Finance EUR million 2020 3,832 750 21 82 2019 3,848 823 (8) 47 4,685 4,710 % excl. FX 1.2 (8.4) % (0.4) (8.8) — 74.4 (0.5) — 77.2 0.9 (1,981) (2,038) (2.8) (1.5) 2,703 2,672 1.2 (899) (477) 88.6 2.8 92.3 65 1,869 (505) 2,215 20 217.7 199.4 (14.4) (14.6) (15.6) (598) (15.6) 1,364 1,618 (15.6) (14.3) — — 1,364 1,618 (280) (303) — (15.6) (7.8) — (14.3) (7.6) 1,085 1,314 (17.4) (15.9) 101,043 102,262 (1.2) (0.2) 11,297 5,658 8,258 3,197 36.8 77.0 38.4 82.3 29 33 (12.5) (11.6) 4,961 4,001 24.0 25.2 122,987 117,750 4.4 39,488 39,602 (0.3) 5.6 1.1 32,729 25,159 30.1 31.2 34,554 36,776 (6.0) (5.3) 1,175 3,763 1,413 (16.9) (16.1) 3,865 (2.7) (1.9) 111,709 106,815 11,279 10,935 4.6 3.1 5.7 4.8 103,734 104,783 39,488 39,602 39,488 39,602 — — (1.0) (0.3) (0.3) — 0.0 1.1 1.1 — 12.52 15.26 (2.74) 42.3 2.36 43.3 2.30 111.0 14,376 106.1 14,448 (1.0) 0.06 4.9 (0.5) 352 416 (15.4) Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. Responsible banking Corporate governance Economic and financial review Risk management and compliance United Kingdom 2020 Highlights Underlying attributable profit EUR 530 Mn → Supporting our customers, people and communities remained our top priority. Although covid-19 materially impacted our results, the decisive management actions and extraordinary work of our colleagues helped deliver a remarkably resilient performance despite the challenging environment. → Our multi-year transformation programme, focused on improved customer experience, digitalization and organizational simplification, is an integral part of the One Santander strategy. → Underlying attributable profit fell 51% in euros year-on-year to EUR 530 million (-50% in constant euros). Net interest income rose amid ongoing focus on business efficiency partially offset by the covid-19 impact. Strategy We are delivering on our strategy with a focus on greater customer loyalty. We continue to enhance our operating model, structures and productivity while simplifying, digitalizing and automating the business. We are applying learnings from the covid-19 pandemic, including accelerated customer digital adoption, property strategy, digitalization and automation. Our strategy, combined with the decisive management actions and the resilience of our balance sheet will deliver on our purpose to help people and business prosper. We have continued to focus on our core mortgage business, having granted over GBP 4.4 billion in new mortgage loans, a strong rebound in application volumes following the Q2 lockdown. We also supported over 150,000 businesses, by granting GBP 4.6 billion under government schemes. We are continuing to develop our international proposition; we held 80 virtual trade events and increased the number of trade corridors, up by 3 to 20. We have helped 373,000 retail customers with payment holidays, including mortgages and consumer loans, a huge operational effort. In order to deliver excellent customer experience, we further developed our digital proposition. The number of digital customers reached 6.3 million, up 8% year-on-year. We retained 68% of refinanced mortgage loans online, an increase of 8 pp year-on-year. We also opened 82% of current accounts and 90% of credit cards through digital channels, up 30 pp and 28 pp year-on-year respectively. To support this increased digitalization, we introduced Chat, a new digital channel providing 24/7 service via a chatbot and access to colleagues via Live Chat. Since April, we have seen over 3.7 million conversations, with volumes growing from 1,000 per day to over 25,000. To ensure sufficient capacity, we trained 4,000 colleagues and introduced a continuous optimization model for chatbot. We also turned our branch fraud and scam workshops into virtual events for customers, colleagues and communities, open for all to attend. Following a June trial, we incorporated feedback for phase two and held 69 events with 1,700 attendees and a satisfaction score of 89%. Finally, our multi-year transformation programme continues, with GBP 330 million invested and GBP 244 million of savings since it commenced in 2019. This programme is an integral part of One Santander strategy. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 4,450 6,267 31 % /active customers +8 % YoY 367 Annual report 2020 Contents Business performance Loans and advances to customers decreased 5% in euros compared to 2019. In gross terms, excluding reverse repurchase agreements and the exchange rate impact, they rose 3%. Growth was driven by new mortgage loans from the pent up demand and stamp duty relief, and flows in corporates almost exclusively via government schemes. Customer deposits rose 2% in euros and were 8% higher excluding repurchase agreements and the exchange rate impact. Demand deposits increased 11%, while time deposits fell 16%. Mutual funds were up 2%. Results Underlying attributable profit was EUR 530 million in 2020 (8% of the Group’s total operating areas), and underlying RoTE was 3.9%. Compared to 2019, underlying attributable profit was 51% lower in euros and 50% lower in constant euros. By line: • Total income declined 7%, particularly due to a 41% reduction in net fee income (lower customer activity and regulatory changes to overdrafts), asset repricing following the Bank of England base rate reduction, and, to a lesser extent, lower gains on financial transactions. Conversely, net interest income picked up strongly in the second half of the year resulting in a 2% increase, due to liability repricing actions, in particular the 1I2I3 Current Account, and stronger volumes. • Administrative expenses and amortizations declined 6% reflecting realized efficiency savings from our transformation programme and lower costs related to commercial activity. This was partially offset by covid-19 related costs. • Net loan-loss provisions increased significantly due to covid-related charges for expected credit losses, however from very low levels. Cost of credit remained low (28 bps) and the NPL ratio was 1.21%. The coverage ratio rose 11 pp to 48%. • The negative impact from other gains (losses) and provisions increased 47%, in part due to potential legal contingencies. 368 United Kingdom EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 3,808 506 2019 3,788 % excl. FX 1.9 % 0.5 866 (41.6) (40.8) (26) 51 12 62 4,339 4,727 0.0 0.0 (17.1) (8.2) (16.0) (7.0) (2,642) 1,697 (733) (2,835) 1,892 (6.8) (10.3) (253) 190.0 (5.6) (9.1) 194.0 (267) (184) 697 1,455 (146) (355) 44.9 (52.1) (58.9) 46.8 (51.4) (58.4) 551 1,100 (49.9) (49.2) — 551 (21) — 1,100 (22) — (49.9) (4.9) — (49.2) (3.7) 530 1,077 (50.8) (50.2) 261,062 273,528 (4.6) 0.7 54,576 39,314 38.8 46.5 11,527 20,187 (42.9) (39.7) 712 943 (24.4) (20.3) 9,173 8,498 337,050 342,470 232,923 229,361 7.9 (1.6) 1.6 13.9 3.9 7.2 29,302 25,075 16.9 23.3 52,562 64,340 (18.3) (13.8) 2,448 4,624 2,671 4,409 321,860 325,856 15,189 16,614 (8.3) 4.9 (1.2) (8.6) (3.2) 10.7 4.3 (3.5) 242,090 249,214 (2.9) 223,270 218,944 215,332 210,727 2.0 2.2 7,938 8,218 (3.4) 2.5 7.6 7.9 2.0 3.85 60.9 1.21 7.28 (3.43) 60.0 1.01 0.9 0.20 11.4 (6.4) (8.4) 47.9 22,931 36.5 24,490 564 616 Responsible banking Corporate governance Economic and financial review Risk management and compliance Portugal 2020 Highlights Underlying attributable profit EUR 338 Mn → Santander Portugal's priority was to support its customers and the economy by actively mobilizing state-backed lines of credit for businesses as well as through capital and interest payment holidays on mortgages, consumer loans and business loans. → We strengthened our position as the country’s largest bank in terms of assets and domestic loans and advances to customers, with market shares of 18% in new lending to corporates and 25% in mortgages. → Commercial and digital transformation was a significant growth driver, mainly for service quality improvement, resulting in Portugal's best NPS. → Underlying attributable profit decreased 36% year-on-year to EUR 338 million, weighed down by the impact of the crisis on income and provisions, which was only partly mitigated by cost reductions. Strategy In 2020, amid the pandemic, Santander Portugal maintained its product and service proposition adapted to customer needs by: • Commercial simplification and the proactive approach of our commercial network, enabled us to achieve the best NPS in Portugal for our service quality. • Continued support through the commercial network, • We are the leading digital payments bank, offering services using ApplePay and smartwatches and wearables (Apple, Garmin and Fitbit), in addition to the Santander Wallet App. • In 2020, we continued to be recognized for our activity, named the Best Bank in Portugal and Best Private Banking in Portugal in 2019 by Euromoney and Global Finance, as well as Best Retail Bank by World Finance. • We remained among Great Place to Work's top 3 best companies to work for in Portugal. • We maintained the highest risk ratings, aligned with or above the sovereign’s. focusing primarily on increasing the use of digital channels. As a result, digital sales were higher (and now account for 43% of the total) and the number of digital customers increased 20% year-on-year. • Supporting our customers, giving them the option to take payment holidays and offering government lines of credit set up to support businesses. We also monitored changing customer needs given the complex environment. We continued to implement our commercial and digital transformation strategy, adapting it to the changes accelerated by the pandemic, which became one of the main growth drivers in customers, loyalty and improving service quality: • As at December 2020, loyal customers rose 4% to 812,000. We opened Boutique Santander, the first virtual marketplace in the country, with instant personal loans and real-time loan simulations. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 812 930 48 % /active customers +20 % YoY 369 Annual report 2020 Contents Business performance Loans and advances to customers increased 7%. Excluding reverse repos, gross loans and advances to customers rose 8% year-on-year, backed by steady growth in corporate loans (underpinned by the state-backed lines of credit) and mortgages. Customer funds (excluding repos) rose 2% mostly due to demand deposits (+17% year-on-year). In the fourth quarter, mutual funds picked up (+9% compared to September), leading to a 6% year-on-year increase. Results Underlying attributable profit was EUR 338 million in the year (5% of the Group’s total operating areas), and underlying RoTE was 9%. Compared to 2019, underlying attributable profit dropped 36%. By line: • Total income decreased 6%, weighed down by the impact of the pandemic in net interest income (lower interest rates) and net fee income (lower volumes and suspension of fees for digital payments and payment holidays in loans). Gains on financial transactions remained flat, but were offset by reduced insurance activity and the higher contribution to the SRF. • Administrative expenses and amortizations fell 5% driven by the ongoing transformation process, resulting in a efficiency ratio around 45.5%. • Higher net loan-loss provisions for possible future impacts of the pandemic, raising the cost of credit to 0.51%. The NPL ratio fell to 3.89%. • Other gains (losses) and provisions remained insignificant. However, the increased in the year driven by foreclosed assets. 370 Portugal EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 2019 787 388 111 10 856 390 111 17 1,296 1,375 (590) 706 (193) (29) 483 (145) 339 — 339 0 338 (623) 751 8 (9) 750 (223) 527 — 527 (2) 525 % (8.1) (0.6) 0.2 (41.8) (5.7) (5.3) (6.1) — 213.4 (35.5) (35.2) (35.7) — (35.7) (76.4) (35.5) 38,058 35,406 7.5 5,819 4,675 11,569 12,580 1,487 1,475 58,408 39,881 9,974 2,520 249 1,643 1,695 1,769 56,125 39,258 8,003 3,384 276 1,516 54,267 52,438 4,141 3,688 39,054 43,133 39,881 3,252 36,321 42,324 39,258 3,066 8.73 45.5 3.89 66.5 6,336 477 12.80 45.3 4.83 52.8 6,582 542 24.5 (8.0) (12.3) (16.6) 4.1 1.6 24.6 (25.5) (9.8) 8.4 3.5 12.3 7.5 1.9 1.6 6.1 (4.07) 0.2 (0.94) 13.7 (3.7) (12.0) Responsible banking Corporate governance Economic and financial review Risk management and compliance Poland 2020 Highlights Underlying attributable profit EUR 162 Mn → Santander Bank Polska strengthened its position as Poland's third largest bank in terms of assets and continued to be recognized as an industry leader in traditional and digital banking. → Management mainly focused on customer relationships and maximizing business income. → Accelerated digitalization and Smart omni-channel approach. → Underlying attributable profit in 2020 was EUR 162 million (-54% year-on-year in euros, -52% in constant euros), impacted by interest rate cuts, provisions recorded due to regulatory changes after the European Court of Justice rulings and covid-19 related impairment charges. Strategy In an environment heavily impacted by the pandemic, our digital growth strategy focused on end-to-end digitalization and accelerated significantly in all key products: personal loans, new account openings and insurance sales, together with SME loans and mortgages. Santander Bank Polska continued its aim to become the bank of first choice, anticipating and responding to customer expectations. Digital transformation mainly centred on new services, such as a single login for individuals and businesses, a facility to customize customer login settings for internet and mobile banking and strong customer authentication (SCA). Retail and SME banking activity was hit hard by the pandemic, which reduced customer and branch activity, as well as sales. We focused on revenue recovery and cost optimization, while improving our products and processes to maximize self-service and increase digital sales. We also introduced new customer experience and loyalty solutions, by: • Adjusting the credit policy of consumer loans to customer risk. • Increasing our life insurance proposition for mortgages and creating new bancassurance sales processes. • Launching new mortgage-related products (personal accounts, credit cards, life and property insurance). • Promoting the use of remote channels for SME loans. • Enabling the opening of personal accounts through a selfie. In Q4'20, we launched iBiznes24 to support our corporate clients' financial management through a new design with more functionalities. This new system provides full online access to company accounts under the best user experience standards. CIB maintained its leading position in corporate finance advisory services in Poland, especially in the equity capital markets, and was involved in: • The largest initial public offering in the history of the Warsaw Stock Exchange (Allegro, market cap of EUR 17 bn during the offer). • The second largest public tender offer in the history of the Warsaw Stock Exchange for a telecommunications client. • The third largest public tender offer in the history of the Warsaw Stock Exchange for a hospitality client. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 2,115 2,756 55 % /active customers +10 % YoY 371 Annual report 2020 Contents Business performance Loans and advances to customers were down 7% in euros compared to December 2019. In gross terms and excluding reverse repurchase agreements and the exchange rate impact, loans increased modestly year-on-year in constant euros (+1%). By segment, volumes grew in individuals (+2%) and SMEs (+3%). Corporates fell 5% due to excess liquidity in the market. Customer deposits increased 4% year-on-year in euros. Excluding repurchase agreements and at constant exchange rates, deposits grew 12% year-on-year, boosted by SMEs (+36%) and corporates (+22%). CIB’s deposit base showed an annual decrease of 33%. We continued to actively manage deposits to optimize the cost of funding. Total customer funds, including mutual funds, were 10% higher (excluding the exchange rate impact). Results Underlying attributable profit in 2020 was EUR 162 million (2% of the Group's total operating areas), and underlying RoTE was 5%. Compared to 2019, underlying profit fell 54% in euros and 52% excluding the exchange rate impact. By line: • Total income fell 8% due to lower net interest income (8%), impacted by interest rate cuts (-140 bps during the year) and a higher Deposit Guarantee Fund (BFG) contribution. Net fee income saw no material change. • Administrative expenses and amortizations dropped 6% year-on-year driven by personnel expenses and general and administrative expenses. • Net loan-loss provisions increased 57% year-on-year due to higher charges in the SME and CIB segments, and, to a lesser extent, higher provisions for individuals. All of them affected by covid-19. • Other gains (losses) and provisions increased 60% due to higher provisions for potential legal claims. 372 Poland EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 1,037 452 90 (55) 1,524 2019 1,171 % (11.4) % excl. FX (8.5) 467 (3.1) 0.2 93 (3.3) 0.0 (13) 327.6 (11.3) 1,717 341.9 (8.3) (629) (693) 895 1,024 (330) (217) (9.3) (12.6) 52.2 (6.2) (9.7) 57.3 (195) 370 (130) (127) 681 (170) 54.4 (45.7) (23.5) 59.5 (43.9) (21.0) 240 511 (53.1) (51.5) — 240 (78) 162 — 511 (162) — (53.1) (52.0) — (51.5) (50.4) 349 (53.5) (52.0) 28,025 30,034 (6.7) (0.1) 2,539 3,398 (25.3) (20.0) 14,006 9,285 980 630 1,341 1,341 46,890 44,688 34,868 33,485 50.8 55.7 0.0 4.9 4.1 2,613 2,110 993 1,232 2,319 12.7 2,171 (2.8) 762 923 30.3 33.5 5.4 0.9 41,816 39,659 5,074 5,029 61.6 66.7 7.1 12.4 11.5 20.7 4.1 39.6 43.0 12.9 8.1 29,055 30,925 (6.0) 38,889 37,929 34,865 33,485 2.5 4.1 0.6 9.8 11.5 4,023 4,444 (9.5) (3.0) 11.23 (6.17) 5.05 41.3 4.74 40.4 4.31 70.7 10,582 66.8 11,049 502 515 0.9 0.43 3.9 (4.2) (2.5) Responsible banking Corporate governance Economic and financial review Risk management and compliance NORTH AMERICA 2020 Highlights Underlying attributable profit EUR 1,492 Mn → The US and Mexico are managed according to their local priorities, while increasing coordination and cooperation between them, creating a joint value proposition, leveraging experience and avoiding duplication. → Strong volume growth, mainly in customer funds, boosted by higher deposits in SBNA, Mexico and the New York branch. → Underlying attributable profit was EUR 1,492 million in the year, 10% lower than 2019 due to the increase in pandemic-related provisions. Excluding the FX impact, profit fell only 3% as revenue remained stable and and net operating income increased by 1%. Strategy In line with Grupo Santander's strategy to increase the weight of the most profitable areas, we increased our ownership in Santander Consumer USA (SC USA) to 80.25% through a share buyback programme in 2020. As for the regional strategy, coordination increased further as we continued to run joint initiatives that included: • Continued development of the USMX trade corridor. SCIB and Commercial Banking are working to deepen relationships with existing customers and gain new customers in both countries, which is reflected in corridor revenue growth (SCIB: +29%; Commercial Banking: +30%). • Commission-free remittance service from Santander US branches to any bank in Mexico. At the same time, ongoing development of payment alternatives for the USMX trade corridor, such as PagoFX. • Technology programmes such as operations know-how, digitalization, hubs, front-office and back-office, and addressing common challenges. • Sharing best practices, such as the success in implementing loyalty programmes in Mexico and the Consumer Banking transformation plan at Santander Bank (SBNA). In addition, in terms of their local strategic priorities: • Santander US remains focused on customer experience and growing core customers and deposits through commercial, operational and digital transformation initiatives. It continues to leverage its deposit base to support and expand its CRE and CIB businesses and strengthen its auto finance partnership. The auto business is ideally positioned to benefit from the renewed demand for used vehicles through rigorous risk- adjusted originations via its dealer network, enhancing its partnership with Fiat Chrysler, and disciplined servicing. • In Mexico, we geared our commercial transformation towards the improvement of multi-channel systems, the renewal of infrastructure and systems, strengthening the distribution model and launching new commercial initiatives. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 3,942 6,011 36 % /active customers +16 % YoY 373 Annual report 2020 Contents Business performance Loans and advances to customers decreased 10%. Gross loans and advances to customers excluding reverse repurchase agreements and the exchange rate impact rose 2% (+4% excluding the impact from Puerto Rico's sale) driven by the US, notably SC USA (+9%). Mexico remained stable, as corporate loans began to normalize following the uptick at the beginning of the pandemic. Solid trend in customer deposits, increasing 4% year-on-year. Excluding repurchase agreements and the exchange rate impact, they were 16% higher reflecting growth in demand deposits in SBNA, corporate deposits in the New York branch and deposits in Mexico. This strong growth demonstrates the high level of liquidity in the system and the positive performance of our customer attraction and loyalty strategy. Results Underlying attributable profit in 2020 was EUR 1,492 million (21% of the Group's total operating areas), with an underlying RoTE of 7.1% (10.7% excluding the excess of capital). Compared to 2019, underlying attributable profit decreased 10% in euros. Excluding the exchange rate impact, it dropped 3%. By line: • Total income remained stable, as well as net interest income, driven by volume growth. Net fee income was stable despite the lower activity in consumer banking. • Administrative expenses and amortizations were 2% lower, despite the increase in amortizations and technology investments, enabling the efficiency ratio to improve to 42.1% and net operating income to rise 1%. • Net loan-loss provisions grew mainly due to covid-19 related provisions. The NPL ratio improved 3 bps to 2.23% and coverage was higher at 183% (+30 pp in the year). The cost of credit stood at 2.92% (+16 bps year-on-year). • Other gains (losses) and provisions reduced its loss by 35%. • Non-controlling interests were lower due to our increased equity stake in Mexico and SC USA. 374 NORTH AMERICA EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 8,469 1,661 251 630 2019 8,926 1,776 230 672 11,011 11,604 (4,631) (4,968) 6,379 6,636 (3,916) (3,656) % excl. FX 0.2 (0.1) % (5.1) (6.5) 9.2 16.2 (6.3) (5.1) (6.8) (3.9) 7.1 (5.7) 0.1 (1.7) 1.5 11.8 (131) 2,332 (578) 2,776 (205) (36.0) (16.0) (683) (15.4) (34.7) (9.7) (9.7) 1,754 2,092 (16.2) (9.7) — 1,754 (262) 2,092 — — (16.2) (426) (38.4) — (9.7) (34.2) 1,492 1,667 (10.5) (3.3) 120,557 133,726 (9.8) (0.2) 28,469 22,885 38,399 33,746 15,363 10,759 20,526 22,741 223,313 223,856 102,907 98,915 24.4 13.8 42.8 (9.7) (0.2) 4.0 39.0 27.6 60.9 (0.5) 10.8 15.8 37,966 38,942 (2.5) 8.5 36,583 44,097 (17.0) (8.6) 16,159 11,763 37.4 5,997 6,237 199,613 199,954 23,700 23,902 (3.8) (0.2) (0.8) 55.2 6.9 10.9 9.8 120,650 130,592 (7.6) 117,530 113,407 96,298 92,231 21,233 21,175 3.6 4.4 0.3 2.3 15.3 16.0 12.6 7.12 42.1 2.23 8.52 (1.41) 42.8 2.20 (0.8) 0.03 29.5 1.3 182.5 38,371 153.0 37,866 1,958 2,043 (4.2) Responsible banking Corporate governance Economic and financial review Risk management and compliance United States 2020 Highlights Underlying attributable profit EUR 731 Mn → Santander US focused on supporting its customers through the pandemic while preserving the strength of its balance sheet and its upward trend in profitability during the year. → Leveraging its resilient origination capabilities and network, Santander US improved its year-on-year trend in customer loans and deposits (excluding repos) preserving net interest income despite historically low rates and the uncertain operating environment caused by covid-19. → We continued to build on recent success with underlying profit increasing 2% in euros year-on-year to EUR 731 million. In constant euros, it rose 4% due to resilient net interest income performance, cost reduction and lower weight of non-controlling interests. Strategy Santander US includes Santander Holdings USA (SHUSA, our intermediate holding company) and its subsidiaries: Santander Bank (SBNA), one of the largest banks in north- eastern US, the international private banking unit in Miami, the Bank's branch in New York, Santander Investment Securities (SIS) and Santander Consumer USA (SC USA), an auto finance business based in Dallas (TX). We sold our retail and commercial bank in Puerto Rico in Q3'20. Santander US has businesses aligned with the Group’s global strategy: • In auto finance we are a leading lender in the US with proven asset origination and servicing capabilities positioned to break ground as a full-spectrum independent operator through our combined capabilities. • The auto business is ideally positioned to benefit from fresh demand for used vehicles with rigorous risk-adjusted originations through its dealer network, enhancing its partnership with Fiat Chrysler, and disciplined servicing. • Consumer is accelerating its digital and branch transformation to enhance customer experience, as well as making the most of its stable deposit base to improve loan mix and profitability. • Commercial continues to deepen client relationships by leveraging its enhanced service and international value proposition while managing the growth of a leading commercial real estate (CRE) franchise with high quality credit structuring. • Global Corporate & Investment Bank generates significant value from the interconnectivity across the global business, particularly in North America, while continuing to increase its presence in the US. • International wealth management benefits from leading brand recognition and the ability to increase fee growth by expanding its US capabilities. Santander US continued to strengthen its regulatory foundation and improve its financial performance while continuing to demonstrate its commitment to the communities where it operates. In line with Grupo Santander’s strategy to deploy capital in the most profitable country units, SC USA continued its share buyback programme and SHUSA upped its stake in SC USA to 80.25%. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 347 1,011 22 % /active customers +6 % YoY Excluding Puerto Rico disposal impact 375 Annual report 2020 Business performance Loans and advances to customers at Santander US fell 8% in euros in 2020. Excluding the exchange rate impact and reverse repurchase agreements, gross loans and advances to customers grew 3% year-on-year, driven by lending growth in auto, CIB and originations through the Paycheck Protection Program (excluding the impact from the sale of the retail and commercial bank in Puerto Rico, growth was 6%). Auto originations continued to improve during the second half of the year as shelter-in-place mandates were lifted and dealerships returned to normal. Prime loans remained up on the previous year due to Fiat Chrysler Automobiles (FCA) incentive programmes and Santander US's ability to leverage its strong deposit base. Customer deposits rose 6% in euros year-on-year. Excluding repurchase agreements and the exchange rate impact, customer deposits were 16% higher, boosted by strong growth in demand deposits and corporate deposits. Mutual funds increased 16% excluding the exchange rate impact. As a result, customer funds rose 6% (+16% excluding the exchange rate impact). Results Underlying attributable profit in the year was EUR 731 million (10% of the Group’s total operating areas), and underlying RoTE was 4.7% (8.4% adjusted for excess capital). Underlying attributable profit was 2% higher in euros. Excluding the exchange rate impact, growth was 4%, underpinned largely by SC USA. By line: • Net interest income was flat as lower rates offset increased volumes. Net fee income was lower, impacted by covid-19, although partially compensated by gradually improving leasing income. As a result, total income was down 1%. • Administrative expenses and amortizations were down significantly, particularly at SBNA, due to disciplined cost control, as reflected in a 1% increase in net operating income. • Net loan-loss provisions rose 7% given the crisis which drove the need for a reinforced coverage ratio. Asset quality ratios improved or were stable: cost of credit flat at 2.86%, NPL ratio down 16 bps to 2.04% and coverage increased to 210% (+49 pp). • Other gains (losses) and provisions improved 52% due to lower provisions for legal claims. • Positive impact from lower non-controlling interests following the SC USA share buyback programme. 376 United States EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. Contents % excl. FX (0.3) (4.3) % (2.2) (6.1) 2020 5,645 889 118 709 2019 5,769 947 131 759 7,360 7,605 (10.0) (6.5) (3.2) (3,079) (3,297) 4,281 4,309 (2,937) (2,792) (6.6) (0.6) 5.2 (8.3) (4.8) (1.4) (4.8) 1.2 7.2 (93) 1,250 (318) 1,317 (200) (53.2) (5.0) (370) (13.8) (52.3) (3.2) (12.2) 932 — 932 (201) 947 (1.6) — — (1.6) (230) (12.4) 947 0.3 — 0.3 (10.7) 731 717 1.9 3.8 90,992 98,707 (7.8) 0.7 16,614 12,829 29.5 41.5 14,084 16,677 (15.5) (7.8) 4,381 4,320 1.4 10.8 17,003 18,882 143,074 151,415 67,450 63,371 (10.0) (5.5) 6.4 (1.6) 3.2 16.3 20,989 25,126 (16.5) (8.8) 29,737 37,132 (19.9) (12.5) 4,329 3,369 4,146 4,093 125,874 133,868 17,200 17,547 4.4 14.0 (17.7) (6.0) (2.0) (10.1) 2.7 7.1 90,459 95,742 (5.5) 76,972 72,604 66,385 62,608 10,586 9,996 6.0 6.0 5.9 3.2 15.8 15.8 15.7 4.66 41.8 2.04 4.78 (0.13) 43.3 (1.5) 2.20 (0.16) 210.4 16,125 161.8 17,372 585 621 48.6 (7.2) (5.8) Responsible banking Corporate governance Economic and financial review Risk management and compliance Mexico 2020 Highlights Underlying attributable profit EUR 762 Mn → Our multichannel innovation and focus on digital channels enhanced our value proposition with new products and services, enabling us to make a headway with our customer attraction and loyalty strategy. → Gross loans and advances to customers (excluding reverse repos) remained flat year-on-year, as corporate loans began to normalize following the uptick at the beginning of the pandemic. With respect to individuals, of note were mortgages and auto loans. Customer funds rose 14%. → Underlying attributable profit was EUR 762 million, 20% lower than 2019 in euros, and down 9% in constant euros, impacted by higher provisions and costs (amortizations and technology). Positive performance in customer revenue (+3%) driven by net interest income, net fee income and gains on financial transactions. Strategy The major challenges posed in 2020 required a swift response from Santander México. We effectively implemented our strategy to support customers while achieving a better-than-expected portfolio performance. We helped more than 600,000 customers through our support programme (individuals and SMEs) which deferred loan payments for up to four months. We geared our commercial transformation strategy towards improving multi-channel systems, renewing infrastructures and systems, strengthening the distribution model and launching commercial initiatives to increase customer attraction and loyalty through innovative products and services. In line with our goal to enhance customer experience, we continued to run projects such as the transformation of 576 branches and increasing the number of full function ATMs to 1,375. Regarding our digital strategy, we ran initiatives such as: • The strategy to boost the use of digital channels, which resulted in a 51% increase in digital transactions and a 60% increase in digital sales, thus increasing digital adoption by our customers. We also complemented our commercial strategy with new products and services, for example: • We maintained a dynamic mortgage offering: we lowered the Hipoteca Plus interest rate to 7.75%, one of the lowest in the market, and introduced Hipoteca Free, Mexico's first commission- and insurance-free mortgage. In 2020, we posted the largest mortgage origination in the Mexican banking system and increased market share. • In auto financing, we teamed up with Mazda to become its only financial partner, and Tesla, to become its main financing partner and promote green financing for the purchase of hybrid cars. These alliances, together with those already in place, align with our goal to become a major player in this segment, reaching a market share of more than 5% compared to 1% in 2019. • New features for SuperMóvil, including Mis Metas, a tool to help customers meet their savings goals. • The consolidation of Hipoteca Online platform. • We launched a numberless credit card, the first bank in Mexico to do so, that does not reveal sensitive data and provides greater security for our customers. Virtually 100% our credit card base uses this new system. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 3,595 5,000 39 % /active customers +20 % YoY 377 Annual report 2020 Contents • We rolled out e-SPUG, an innovative system to help stores and private sellers practice simple, agile and secure distance selling. Mexico EUR million • Santander Plus, our main loyalty programme, continued to perform well, reaching more than 7.5 million customers at year-end (54% new). • We were named the Best Bank for Financial Inclusion in Mexico by the International Finance Magazine (IFM) for our Tuiio initiative, which promotes financial inclusion and empowerment to more than 171,000 customers, generating a measurable social impact. Business performance Loans and advances to customers decreased 16% in euros, compared to 2019. Gross loans and advances to customers, excluding reverse repurchase agreements and the exchange rate impact, remained stable year-on-year, as corporate loans began to normalize following the uptick at the beginning of the pandemic. Of note was the growth in mortgages. Customer deposits saw no material change in euros. Excluding repurchase agreements and the exchange rate impact, they were up 16%. The focus on reducing the cost of deposits resulted in a 18% rise in demand deposits, notably from individuals (+24%) and 13% growth in time deposits. Mutual funds rose 10%, and customer funds 14%. Results Underlying attributable profit was EUR 762 million in the year (11% of the Group’s total operating areas), with an underlying RoTE was 14.4%. Compared to 2019, underlying attributable profit was 20% lower. Excluding the exchange rate impact, underlying attributable profit fell 9%. By line: • Total income increased 3% spurred on by net fee income (+5%) mainly from transactional fees. Net interest income was up 1% underpinned by higher volumes, and gains on financial transactions increased 52% driven by volatility management. • Administrative expenses and amortizations were up 5%, mainly driven by the increase in amortizations and technology investment. • Net loan-loss provisions increased 28% due to covid-19 related charges and a one-off provision recorded for a corporate customer. Cost of credit was 3.03%, the NPL ratio reached 2.81% and coverage stood at 121%. • At Banco Santander's extraordinary general meeting on 23 July 2019, shareholders approved a capital increase to acquire shares Santander México from minority interests. Consequently, minority interests in the H1'19 were higher than in 2020, thus dampening results growth in 2019 more than in 2020. 378 Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 3,651 3,998 (87) (8.6) (8.7) 2020 2,825 772 134 (79) (1,552) 2,098 (979) (37) 1,082 (259) 2019 3,157 % (10.5) % excl. FX 1.2 829 (7.0) 5.2 99 34.4 52.0 3.3 3.2 5.0 2.0 28.3 (1,671) 2,327 (7.1) (9.8) (863) 13.4 1,459 (5) 637.1 733.4 (16.2) (6.5) (25.8) (314) (17.3) 823 1,145 (28.2) (18.8) — 823 (61) 1,145 — — (28.2) (196) (68.9) — (18.8) (64.9) 762 950 (19.8) (9.3) 29,565 35,019 (15.6) (2.8) 11,854 10,056 24,315 17,069 10,982 3,523 6,439 3,859 17.9 42.5 70.6 (8.7) 80,239 72,441 10.8 35,457 35,544 (0.2) 16,977 13,816 22.9 6,847 11,830 2,628 6,965 7,617 2,144 73,739 66,086 6,500 6,355 (1.7) 55.3 22.5 11.6 2.3 35.8 64.1 96.4 5.1 27.6 14.9 41.5 13.2 78.9 41.1 28.5 17.8 30,191 34,850 (13.4) (0.2) 40,558 40,803 (0.6) 29,912 29,624 1.0 10,646 11,179 (4.8) 14.5 16.3 9.7 14.38 20.61 (6.23) 42.5 2.81 41.8 2.19 120.8 22,246 128.3 20,494 0.7 0.62 (7.5) 8.5 1,373 1,422 (3.4) Responsible banking Corporate governance Economic and financial review Risk management and compliance SOUTH AMERICA 2020 Highlights Underlying attributable profit EUR 2,927 Mn → We implemented work protocols in all countries to protect our employees, while supporting our customers through products and services to mitigate the impact of the pandemic, and ensuring activity continuity across the region. → We continued to focus on delivering profitable growth backed by operational excellence as well as cost and risk control. → Double-digit growth in loans and advances to customers and customer deposits, with volumes and transactionality gradually recovering in H2, reflecting the countries' capacity to adapt to the new environment. → Underlying attributable profit fell 25% in euros to EUR 2,927 million, and dropped just 4% in constant euros, affected by additional covid-19 related provisions, as net operating income rose 5% backed by net interest income and gains on financial transactions. Strategy Our extensive experience in the region enabled us to maintain profitable and sustainable business growth. We remain confident in its great growth potential and focused on increasing our presence in the region by leveraging the scarce banking penetration. We have innovative ways to reach potential customers and offer existing ones solutions to cover their different needs. For instance, we prioritized support programmes for individuals, corporates and society, providing liquidity through initiatives such as state-guaranteed loans to SMEs, lines of credit at special rates, extending terms and modifying maturity profiles. We continued to identify growth opportunities across business units to capture synergies and foster collaboration: • In consumer finance, Santander Brasil exported its new and used vehicle financing platform to other South American countries, Argentina launched the Santander Consumer company, Santander Chile increased car insurance sales despite reduced financing activity. In Peru, we continued to specialize in consumer credit and used vehicle financing. In Colombia, the priority was to make the auto finance business profitable and to increase customer loyalty through insurance and digitalization. • In line with our strategy to expand our acquiring business, we rolled out Getnet in Argentina and Chile, based on the successful model of Brazil. • We continued our digital transformation and innovation of our products and services, helping to enhance customer service. In Chile, we posted record account openings and prepaid card sales through Santander Life and Superdigital. Santander Argentina made progress in its digital transformation by launching new products and digital recoveries. In Uruguay, we focused on modernizing our technological infrastructure to offer our customers more stable and efficient platforms, with initiatives such as the launch of its digital branch, SUMO. • We continued to promote inclusive and sustainable businesses, such as Prospera, which continued its expansion in Uruguay and was implemented in Peru and through the granting of green loans in Brazil and Chile. • Collaboration between countries continued to increase, with projects such as the joint SCIB business initiative, that seeks to consolidate and deepen relationships with multinational clients, leveraged on Santander's infrastructure. All these initiatives led to strong year-on-year increases in both loyal (+9%) and digital customers (+17%). Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 8,614 20,200 27 % /active customers +17 % YoY 379 Annual report 2020 Contents Business performance Loans and advances to customers declined 9%. Excluding reverse repos and the exchange rate impact, gross loans were 15% higher, with double-digit rises in all country units except Chile, which grew 6%. Customer deposits fell 3% in euros compared to 2019. Excluding repurchase agreements and exchange rate impact, they rose 30% and also increased at double digit rates across all country units except Chile (+8%), mainly due to the strong performance of demand deposits (+39%) and to a lesser extent, time deposits (+25%). Mutual funds dropped 2% dampened by the fall recorded in Brazil. Results Underlying attributable profit in the year was EUR 2,927 million (42% of the Group's total operating areas), with an underlying RoTE of 18.1%. Compared to 2019, underlying attributable profit decreased 25% in euros. Excluding the exchange rate impact, it was down 4%. By line: • Total income increased 5% underpinned by net interest income and gains on financial transactions, which broadly offset weak net fee income performance. Net interest income rose 5%, with growth across countries, notably Argentina. Gains on financial transactions were 68% higher, with rises in all country units except Chile. Conversely, net fee income dropped 2% with falls recorded in all countries except Uruguay and Peru, mainly due to the sharp fall of transactional fee income in H1'20, together with regulatory impacts in Brazil and Argentina. • Administrative expenses and amortizations increased 4%, largely due to higher costs in Argentina (inflation and peso depreciation). Of note was cost management in Brazil, which recorded only a slight increase (+1%) and Chile, which remained flat. The efficiency ratio stood at 35.8%. • Net loan-loss provisions grew by 35% driven by covid-19 related provisions. In credit quality, the NPL ratio fell to 4.39%, coverage was 97% (+9 pp in the year) and the cost of credit was 3.32%. • Other income and provisions decreased its negative impact 42%, due to the lower charge for potential legal contingencies in Brazil. 380 SOUTH AMERICA EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 68.1 24.0 4.7 4.0 5.1 35.1 2020 2019 10,723 13,316 % (19.5) % excl. FX 4.6 3,566 4,787 (25.5) (2.1) 766 (209) 14,845 565 35.6 (243) (13.9) (19.4) 18,425 (5,312) 9,533 (3,923) (319) 5,291 (1,927) 11,769 (6,656) (20.2) (19.0) 3.5 (3,789) (748) (57.4) (26.8) (2,644) (27.1) 7,232 (42.0) (5.8) (5.0) 3,364 4,588 (26.7) (6.2) — 3,364 (437) 4,588 — — (26.7) (664) (34.2) — (6.2) (18.5) 2,927 3,924 (25.4) (4.1) 113,731 125,122 (9.1) 14.6 42,957 51,360 (16.4) 49,300 45,619 8.1 17,266 14,802 16.6 15,009 16,901 238,263 253,804 111,791 114,817 (11.2) (6.1) (2.6) 11.8 46.3 37.5 17.0 21.1 26.0 41,990 41,989 0.0 30.3 21,280 29,840 (28.7) (11.2) 35,433 34,062 4.0 8,302 10,613 218,796 231,321 19,466 22,483 (21.8) (5.4) (13.4) 33.1 5.5 21.9 12.6 118,769 131,048 (9.4) 153,224 170,707 (10.2) 103,302 101,575 1.7 14.5 17.6 30.3 49,922 69,131 (27.8) (2.2) 18.07 20.58 (2.51) 35.8 4.39 36.1 (0.3) 4.86 (0.47) 97.4 65,252 88.4 69,508 4,431 4,572 9.0 (6.1) (3.1) Responsible banking Corporate governance Economic and financial review Risk management and compliance Brazil 2020 Highlights Underlying attributable profit EUR 2,113 Mn → Commercial activity in H2'20 exceeded pre-covid-19 levels, boosting revenue growth for the year. Likewise, our continuous cost control efforts through process transformation resulted in a new improvement of the efficiency ratio. → Credit quality indicators remained at controlled levels, backed by loan expansion towards lower risk products, mainly with guarantees, and the effectiveness of our risk models. → Underlying attributable profit was EUR 2,113 million, -28% year-on-year in euros and -5% excluding the exchange rate impact, affected by covid-19 related provisions. Net operating income was 3% higher, receiving an uplift from total income and cost control. Strategy In the year, we once again demonstrated our capacity to innovate and adapt to the new needs of our customers, offering the best customer service and ensuring continuous support to our communities. This enabled us to quickly provide our customers with the necessary liquidity, deferring payments and granting state- backed loans, mainly to SMEs and corporates. As social responsibility is embedded in our identity and covers all businesses, we also launched campaigns to raise funds and donate medical supplies. We continued to make headway with our commercial strategy: • In mortgages, we were on the cutting edge for digital portability and we were the first privately-owned bank to grant BRL 2 billion per month. In home equity, we reached 30% market share in new lending. • In payroll loans, we continued to digitalize, enabling online loan completion to reach 86% of the total. • In auto, maintained market share leadership (25%) in individuals and introduced Troca+Troco, in collaboration with Webmotors. In addition, our consumer finance unit performed very positively. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 6,382 15,556 23 % /active customers +16 % YoY • In cards, we continued to focus on segments and channels with a better risk profile and greater profitability. • We expanded to strategic regions in the country, ending the year with 40 specialized Agro shops and 100 Santander Prospera Microcrédito shops. • In digitalization, we launched GENTE, a virtual assistant capable of answering more than 10,000 questions, reaching more than 37 million interactions. We also rolled out the SX credit card, which benefits the most transactional customers, with more than 723,000 cards issued. • In SMEs, we dispensed BRL 12,505 million in loans through state-backed programmes and we made progress in our digital channels, with full functionality. For large corporates, we increased transactionality and expanded to new markets, contributing to the diversification of our products and services. In H2'19 and in 2020 we also created several companies that are delivering outstanding results: • Sim, which offers loans though a digital platform and has a BRL 700 million portfolio. • EmDia, our user-friendly debt renegotiation platform, which recovered BRL 646 million in loans in 2020 and has 4 million customers. 1. Combined business. Pending regulatory approvals. 381 Annual report 2020 Contents • Santander Auto, a digital insurance company which continues to be boosted by Santander Financiamentos. Brazil EUR million • Ben, which aims to transform the employee benefits industry (meal voucher and related activities), and already includes 1,400 corporate customers. • The acquisition of Toro, with experience in equity and which, together with Pi and its wide range of fixed income products, makes for a solid investment platform. We were named Bank of the Year in Brazil and in the Americas by The Banker and, for the 11th year running, we are part of the portfolio of the B3 Corporate Sustainability Index (ISE). We were also recognized as one of the Best Companies to Work for in the country, according to the GPTW survey, with emphasis on the ethnic-racial diversity and women categories, and received the Notáveis CNN 2020 award in the social responsibility category. Business performance Loans and advances to customers decreased 15% in euros year-on-year. In gross terms, excluding reverse repos and the exchange rate impact, they rose 19%. We saw positive performances across segments, particularly in SMEs, corporates and SCIB. Customer deposits fell 6% in euros with respect to 2019. Excluding repos and the exchange rate impact, growth was 41% driven by the increase in demand deposits (+33%) and time deposits (+44%). On the other hand, mutual funds decreased. Results Underlying attributable profit was EUR 2,113 million in 2020 (30% of the Group's total operating areas), with an underlying RoTE of 19.2%. Compared to 2019, underlying attributable profit declined 28% in euros. Excluding the exchange rate impact, it was 5% lower. By line: • Total income rose 3% boosted by gains on financial transactions. Net interest income remained practically flat as larger volumes offset margin pressures from interest rate cuts. Net fee income fell 2% affected by reduced transactionality amid the pandemic. • Administrative expenses and amortizations increased just 1% and declined in real terms, due to our continued work on efficiency improvement. This increase was lower than revenue growth, which enabled efficiency to improve by 42 bps to 32.6%, the best in the last seven years. • Net loan-loss provisions increased 31%, due to higher provisions related to the pandemic. Cost of credit was 4.35%, the NPL ratio was 4.59% and coverage was high at 113%, after increasing 13 pp in the year. • The negative impact of other gains (losses) and provisions reduced by 51%, due to lower provisions for legal claims. 382 Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2020 2019 7,625 10,072 % (24.3) % excl. FX (0.2) 2,824 3,798 (25.6) (2.0) 467 (51) 10,866 (3,541) 7,325 (3,018) (263) 4,045 (1,693) 167 180.6 270.0 (86) (41.1) (22.1) 13,951 (4,606) (23.1) (21.6) (0.6) (3,036) 9,345 (22.4) 2.7 1.4 3.3 31.1 (704) (62.7) (27.8) (2,295) (26.2) 5,606 (50.8) (4.9) (2.7) 2,352 3,311 (29.0) (6.4) — 2,352 (238) 3,311 — — (29.0) (373) (36.0) — (6.4) (15.7) 2,113 2,939 (28.1) (5.2) 63,974 75,618 (15.4) 19.4 31,466 37,470 (16.0) 37,655 39,611 (4.9) 6,877 6,790 1.3 10,600 12,545 150,573 172,033 70,083 74,745 (15.5) (12.5) (6.2) 18.5 34.2 42.9 19.3 23.5 32.3 26,350 30,334 (13.1) 22.6 11,901 18,952 (37.2) (11.4) 23,536 23,589 (0.2) 40.8 6,157 8,631 138,026 156,251 12,547 15,782 (28.7) (11.7) (20.5) 0.7 24.7 12.2 67,424 80,150 (15.9) 100,351 121,752 (17.6) 61,627 61,789 (0.3) 18.7 16.3 40.8 38,725 59,964 (35.4) (8.9) 19.16 21.16 (2.00) 32.6 4.59 33.0 (0.4) 5.32 (0.73) 113.2 43,258 99.8 46,682 3,571 3,656 13.4 (7.3) (2.3) Responsible banking Corporate governance Economic and financial review Risk management and compliance Chile 2020 Highlights Underlying attributable profit EUR 432 Mn → Santander Chile remains the country's leading privately-owned bank by assets and customers and is ranked first in Net Promoter Score, demonstrating the strength of our digital channels. → Positive business performance: +42% in demand deposits, with growth in all segments, and +6% year-on-year in gross loans and advances to customers (excluding reverse repos), boosted by the state-guaranteed programme for SMEs (Fogape). → Record growth in account openings underscored by Cuenta Life and Superdigital, and backed by the technological developments that made digital relationship with customers easier. → Underlying attributable profit was EUR 432 million, 31% lower year-on-year in euros and down 21% excluding the exchange rate impact, weighed heavily by covid-19 related charges. Net operating income grew 4% driven by the positive performance of net interest income and cost control. We also introduced our green product range which includes: the choice for customers to offset their carbon footprint by contributing to environmental projects or purchasing green bonds; the first ESG mutual fund in Chile, which enables investment in companies in different geographical areas with a strong sustainable focus; a green mortgage for new homes and sustainable projects with a preferential interest rate; and benefits for purchases from environmentally friendly brands. We continued our "phygital" transformation to bring together the best of the digital and physical worlds, making progress in: • Branch network transformation towards more digital models, through the opening of new Work Café branches. • Opening of the new marketplace Tienda.Santander.cl, which offers exclusive benefits for customers. These initiatives led to an increase in the number of loyal and digital customers in the year (+9% and 24%, respectively). Lastly, our efforts to be the best bank for our customers propelled us to first in NPS, and our responsible banking strategy was recognized through ESG and sustainability rankings and awards. Strategy Santander is the largest privately-owned bank in Chile by assets and customers, and has a marked retail (individuals and SMEs) and transactional focus. In 2020, we continued to pursue our strategy to offer high returns in a low-risk country, launching several measures: • In line with our commitment to be more responsible, we were the first bank in the country to be included in the DJSI for Emerging Markets, and the Sustainable Leaders Agenda 2020 (ALAS20) recognized us as the leading company for sustainability in Chile. • Santander Life, our financial education proposition, gained momentum through Cuenta Life, our fully digital account that rewards good savings behaviour, welcoming close to 300,000 new customers in the year (+545%). • Since its launch in April, our financial inclusion programme Superdigital, reached close to 130,000 customers, driven by its high transactionality and access to the digital economy. These initiatives led to an high growth in new accounts (current and demand) during the year (+20% in current accounts), with net current account openings of around 272,000 (compared to 80,450 in the Chilean market, according to the information available as at November 2020). As a result, market share in current account openings rose to 25.3% from 21.7%in 2019. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 764 1,547 44 % /active customers +24 % YoY 383 Annual report 2020 Contents Business performance Loans and advances to customers increased 2% year-on-year in euros. Excluding reverse repurchase agreements and the exchange rate impact, gross loans and advances to customers rose 6%, underpinned by large corporates and the state- backed scheme for SMEs. Customer deposits rose 4% year-on-year, up 8% excluding repurchase agreements and the exchange rate impact, reflecting the positive performance of demand deposits (+42%). Current accounts continued to rise strongly across all segments driven by openings through digital channels. Mutual funds rose 22% and customer funds were 11% higher. Results Underlying attributable profit was EUR 432 million in 2020 (6% of the Group’s total operating areas), with an underlying RoTE of 13.2%. Compared to 2019, underlying attributable profit fell 31% in euros. Excluding the exchange rate impact it was 21% lower. By line: • Total income rose 2%, as the climb in net interest income (+10%) was partially offset by the fall in gains on financial transactions and net fee income, dampened by reduced transactionality and economic activity. • Administrative expenses and amortizations remained broadly stable, as higher IT expenses were closely matched by lower costs related to commercial activity. As a result, the efficiency ratio improved to 39.8% and net operating income was 4% higher. • Net loan-loss provisions were 54% higher due to covid-19 related charges, placing the cost of credit at 1.50%. The NPL ratio stood at 4.79% and coverage was 61%. • Other gains (losses) and provisions stood at EUR 16 million (EUR 63 million in 2019). 384 Chile EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. 2,263 2,539 2 0.0 (10.9) (900) 1,363 (594) (1,031) (12.7) (9.6) (443) 34.1 1,508 2019 1,867 % excl. FX 9.9 % (4.3) 404 (17.2) (5.0) 266 (34.7) (25.0) 0.0 2.4 0.3 3.8 54.0 (71.5) (20.2) (15.0) 1,129 63 (75.2) (30.5) (210) (25.9) 919 (31.5) (21.4) — — (31.5) (289) (31.8) 919 — (21.4) (21.7) 2020 1,787 335 174 (32) 16 785 (155) 629 — 629 (197) 432 630 (31.4) (21.2) 39,381 38,584 2.1 5.2 7,557 (22.8) (20.4) 5,836 8,365 10,221 3,076 5,062 7,856 3,091 66,880 62,151 28,362 27,344 65.2 30.1 (0.5) 7.6 3.7 70.3 34.1 2.6 10.9 6.9 11,611 8,224 41.2 45.6 9,247 10,722 (13.8) (11.1) 11,162 1,519 9,662 1,294 61,902 57,246 4,978 4,905 15.5 17.4 8.1 1.5 40,593 39,640 37,873 35,095 28,330 27,060 2.4 7.9 4.7 9,543 8,035 18.8 19.1 21.1 11.5 4.6 5.6 11.3 7.9 22.4 13.19 18.08 (4.89) 39.8 4.79 61.4 40.6 4.64 56.0 10,835 11,580 346 375 (0.8) 0.15 5.4 (6.4) (7.7) Responsible banking Corporate governance Economic and financial review Risk management and compliance Argentina 2020 Highlights Underlying attributable profit EUR 179 Mn → As a leader in the country's financial system, Santander Argentina has worked to be part of the solution to the crisis caused by the global pandemic. → We continued to focus on our four strategic pillars: operational excellence, profitable growth, being customer- centric and culture and talent. → Underlying attributable profit soared to EUR 179 million, growing both in euros and at constant exchange rates (+25% and +91%, respectively), boosted by higher net interest income and improved efficiency. Strategy Amid the pandemic, Santander Argentina implemented measures to look after the health of its customers and employees, enhancing digital channels and ensuring service quality in our branches. To combat the crisis, we continued to grant loans and set up corporate credit lines to buy medical equipment through Cuenta Blanca and introduced Academia Salud (alongside Swiss Medical Group), a fully digital training platform for health workers that can be accessed from any device, at any time and free of charge. The commercial strategy focused on transactional business and customer service, through innovation, an enhanced customer care model and the digital transformation of the main processes and products. We launched various initiatives: • We made headway in building an open financial services platform. We rolled-out Getnet in Argentina, created a USD 20 million investment plan for Santander's collection and services solution, and will create 200 jobs in the next two years. The aim is to encourage digitalization, reduce the use of cash and boost financial inclusion. • We set up Santander Consumer, a company specialized in consumer financing and secured loans, providing an agile customer experience. • Openbank Argentina, Santander's fully digital bank, obtained its banking licence. • Around 356,000 accounts were opened through fully digital means and the issuance of electronic cheques increased. We also implemented a new digital business model aimed at foreign trade products. Digital customers increased 21% in the year. • Together with 21 banks, we launched MODO, a systematic payment solution to boost digital payments and financial inclusion. Thanks to all these initiatives, The Banker named Santander Argentina as the Best Digital Bank in the country, highlighting the acceleration of its digital transformation in the current environment, new technical staff, positioning in consumer loans and deposits, and the new products and services launched for female entrepreneurs and young customers. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 1,356 2,650 44 % /active customers +21 % YoY 385 Annual report 2020 Business performance Loans and advances to customers fell 13% year-on-year in euros. Excluding reverse repurchase agreements and the exchange rate impact, gross loans and advances to customers were 35% higher driven by SME loans and cards. Dollar balances declined in the currency of origin. Customer deposits increased 3% compared to 2019 in euros. Excluding repurchase agreements and the exchange rate impact, deposits rose 57%, spurred on by local currency deposits (demand and time deposits), as foreign currency balances declined. Santander maintained a high dollar liquidity ratio and the excess liquidity in pesos was placed in central bank notes. Results Underlying attributable profit was EUR 179 million in the year (3% of the Group’s total operating areas), with an underlying RoTE of 26.2%. Compared to 2019, underlying attributable profit was 25% higher in euros. Excluding the exchange rate impact, growth was 91%. Both year’s results were affected by the high inflation adjustment. As regards business activity, excluding the exchange rate impact: • Total income grew 31%. Net interest income rose 49%, underpinned by liquidity management and the lower cost of funds. Net fee income fell 6%, dampened by regulatory impacts and lower economic activity. Gains on financial transactions rose 18%. • Administrative expenses and amortizations increased 27%, at a slower pace than total income and inflation, improving the efficiency ratio by 187 bps to 56.0%. Net operating income rose 37%. • Net loan-loss provisions were higher (+47%) due to covid-19 related provisions. The NPL ratio improved 128 bps to 2.11% and coverage was 275%, after increasing 151 pp in the year. • Other gains (losses) and provisions recorded no material change. 386 Argentina EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Pro memoria: Gross loans and advances to B customers Customer funds Customer deposits Mutual funds C Ratios (%) and operating data Underlying RoTE Efficiency ratio NPL ratio NPL coverage Number of employees Number of branches A. Includes exchange differences. B. Excluding reverse repos. C. Excluding repos. Contents % excl. FX 48.8 % (3.0) (38.8) (6.1) 18.2 21.5 31.5 27.2 37.3 47.3 6.5 40.8 (59.1) — 90.5 34.7 2020 2019 940 446 80 (22.9) (119) 1,128 (150) (20.8) (14.3) 1,316 (762) (17.0) (10.5) (3.9) (235) 554 (101) (30.5) (8.2) (72) (73.3) 217 912 273 62 (632) 496 (226) (70) 200 (19) 180 — 180 145 24.2 90.5 — — 145 24.2 (1) (2) (12.2) 179 144 24.6 91.1 4,151 4,792 (13.4) 32.9 9,988 10,054 7,179 7,002 3,048 1,897 59 832 840 20 657 359 3,911 (22.1) 19.5 429 342.5 578.7 87 (31.8) 836 (0.5) (0.7) 2.5 4.5 52.7 52.4 57.2 1,033 (18.6) 24.8 71 (71.5) (56.3) 747 392 (11.9) (8.4) (2.0) 15.0 35.1 40.5 50.3 76.3 9,056 9,244 931 810 4,395 8,795 7,179 1,616 4,993 (12.0) 8,099 7,002 8.6 2.5 35.0 66.6 57.2 1,097 47.3 126.0 26.24 22.20 4.04 56.0 2.11 275.1 9,159 408 57.9 (1.9) 3.39 (1.28) 124.0 151.1 9,178 438 (0.2) (6.8) Responsible banking Corporate governance Economic and financial review Risk management and compliance Uruguay 2020 Highlights Underlying attributable profit EUR 134 Mn → Santander Uruguay is the country’s leading privately-owned bank, strengthening its position and market share, while continuing to develop a technological and digital strategy that enables us to enrich service quality. → Activity rebounded in H2'20, adapting to the new normal. We gave support to 11% of Santander Uruguay's portfolio and 30% of its financial entities. → Underlying attributable profit was EUR 134 million, down 11% in euros compared to 2019, but up 8% excluding the exchange rate impact, spurred on by total income and improved efficiency. Strategy Results In a year blighted by the pandemic, we focused on mitigating its impact, preparing our teams for remote work, protecting our employees and adapting our products to customers' needs. We continued to make progress in o technological transformation, signing an agreement with IBM to provide Santander Uruguay greater technological support. To add new digital capabilities, we launched A Sola Selfie for online loans, and SUMO, the country's first fully mobile branch. We further expanded Prosperá as an inclusive offering, as well as Santander Locker. The efforts to consolidate our value proposition enabled us to gain market share and grow our customer base, increasing loyal and digital customers by 2% and 14%, respectively. Business performance Loans and advances to customers dropped 9% year-on-year in euros. Excluding reverse repurchase agreements and the exchange rate impact, gross loans and advances to customers rose 12%. Customer deposits were 4% higher in euros compared to 2019. Excluding the exchange rate impact and repurchase agreements, they increased 28%. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 111 448 23 % /active customers +14 % YoY In 2020, underlying attributable profit was EUR 134 million with an underlying RoTE of 27.9%. Compared to 2019, underlying attributable profit decreased 11% in euros and rose 8% excluding the exchange rate impact. By line: • Total income grew 3% mainly driven by net fee income (+17%) and gains on financial transactions (+38%). • Administrative expenses and amortizations rose 2%, at a slower pace than total income, improving the efficiency ratio to 41.4% (-62 bps year-on-year). • Net loan-loss provisions increased 17%. The cost of credit stood at 2.30% and coverage remained high (104%). Uruguay EUR million Underlying income statement Net interest income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Profit before tax Underlying attributable profit to the parent Balance sheet Total assets Gross loans and advances A to customers Customer funds Customer deposits Mutual funds B A. Excluding reverse repos. B. Excluding repos. 2020 2019 267 380 333 447 % (19.8) (14.8) (157) (188) (16.1) % excl. FX (2.8) 3.3 1.8 4.4 223 (61) 161 134 259 (63) 189 (13.9) (3.8) 16.6 (14.8) 3.3 150 (10.6) 8.4 5,102 5,051 1.0 24.6 2,552 4,356 4,318 38 2,804 4,197 4,162 36 (9.0) 3.8 3.8 7.1 12.3 28.1 28.0 32.1 387 Annual report 2020 Contents Peru Underlying attributable profit EUR 53 Mn Colombia Underlying attributable profit EUR 19 Mn 2020 Highlights 2020 Highlights → We continued to focus on the corporate segment, large enterprises and Grupo Santander's global customers. → Underlying attributable profit rose 12% year-on- year to EUR 53 million, +19% excluding the exchange rate impact, spurred on by revenue growth. → The strategy focused on companies, large corporates and SCIB customers. → We formed new alliances in auto finance to strengthen our position in the market with digital propositions. → Underlying attributable profit of EUR 19 million in the year, up 22% on 2019 in euros, 40% higher excluding the exchange rate impact. Strategy Strategy The strategy remained focused on the corporate segment, the country’s large companies and Grupo Santander’s global customers, by providing support to customers, as well as greater liquidity and flexibility. We also boosted the distribution of derivative instruments to reduce our customers' financial risks and increased deposit taking. The auto loan financial entity continued to expand its business as a part of Grupo Santander's strategy to increase presence in this business, underpinned by local teams and our best practices in South America. We continued to drive the digitalization of our services and internal processes to improve customer experience and operational efficiency. 60% of transactions were made digitally through our office banking platform. Business performance Loans and advances to customers decreased 1% year-on- year in euros (+19% on a gross basis, excluding reverse repurchase agreements and the exchange rate impact), and customer deposits surged 16% (+39% excluding the exchange rate impact and repurchase agreements). Results Underlying attributable profit of EUR 53 million in 2020 was 12% higher year-on-year, equivalent to an RoTE of 21.9%. Excluding the exchange rate impact, underlying attributable profit increased 19%. By line: • Total income grew 30% mainly due to the positive performance of customer revenue and gains on financial transactions, reflecting greater customer and market activity. • The efficiency ratio improved to 29.2% (-3.7 pp year-on- year). • Net loan-loss provisions increased sharply due to covid-19 related charges. • The NPL ratio was 0.80% and coverage was very high (149%). 388 We remained focused on SCIB clients, large corporates and companies, contributing solutions in treasury, risk hedging, foreign trade, confirming, custody and investment banking products to support the country’s infrastructure plan. In consumer finance, our priority was to make the auto business profitable through value propositions for customers and manufacturers, increased customer loyalty and digitalization. We signed two major agreements in the automotive sector, reaching a market share of 3.4% (+110 bps) in loan origination. Despite the reactivation of this sector in Q4'20, we recorded a c.30% year-on-year reduction in vehicle sales due to the pandemic. Santander Colombia acted as joint bookrunner in an international bond issuance for the Republic of Colombia with 10- and 30-year terms, and as lead arranger in the first fast track facility transaction guaranteed by MIGA for BANCOLDEX worth USD 400 million, mainly to support SMEs affected by covid-19. Great Place to Work recognized us as a company with an outstanding working environment. Business performance Loans and advances to customers rose 28% year-on-year in euros. In gross terms, excluding reverse repurchase agreements and the exchange rate impact growth was 45%, notably in consumer finance, corporates and CIB. Customer deposits rose 22% in euros and 39% excluding the exchange rate impact and repurchase agreements, driven by time deposits. Results Underlying attributable profit of EUR 19 million in the year was 22% higher than 2019 in euros with an underlying RoTE of 13.6%. Excluding the exchange rate impact, underlying attributable profit rose 40%, backed by total income (+26%) spurred by growth in net interest income (+55%), and gains on financial transactions (+24%). Administrative expenses and amortizations grew less than total income, enabling the efficiency ratio to improve 2.1 pp to 47.9%. Cost of credit was 0.56%. Responsible banking Corporate governance Economic and financial review Risk management and compliance 4.4 CORPORATE CENTRE Corporate Centre 2020 Highlights Underlying attributable profit EUR -1,844 Mn → The Corporate Centre aims to aid the operating units by adding value and through oversight and control. It also performs financial and capital management functions. → Underlying attributable loss decreased 12% compared to 2019, mainly due to higher gains on financial transactions related to FX hedging and lower costs driven by ongoing measures. Strategy and functions The Corporate Centre adds value to Grupo Santander in various ways: • More solid governance, through global control frameworks and supervision. • It fosters the exchange of best practices in cost management and generating economies of scale, enabling us to be one of the most efficient banks. • It contributes to the launch of global business projects that leverage our worldwide presence to develop solutions once that can be used by all business units, generating economies of scale. It also coordinates our relationship with European regulators and performs the following financial and capital management functions: • Financial management: – Structural management of the liquidity risk associated with funding our recurring activity, financial stakes and management of net liquidity related to the needs of some business units. – This is carried out by the different funding sources (issuances and other), maintaining an adequate profile in volumes, maturities and costs. The price of these operations with other group country units is the market rate plus a premium, which in liquidity terms, we support by immobilizing funds during the operation's term. – Interest rate risk is actively managed to soften the impact of interest rate changes on net interest income, conducted via high credit quality, and very liquid and low capital consumption derivatives. – Strategic management of exposure to exchange rates in equity and dynamic in the countervalue of the country units’ annual results in euros. At year-end, net investments in equity are currently hedged by EUR 21,326 million (mainly Brazil, the UK, Mexico, Chile, the US, Poland and Norway) by various instruments (spot, fx, forwards). • Management of total capital and reserves: efficient capital allocation to each country unit in order to maximize shareholder return. Global Headquarters. Boadilla del Monte Global Headquarters. Boadilla del Monte 389 Annual report 2020 Contents Results In 2020, underlying attributable loss of EUR 1,844 million was 12% lower than in 2019 and driven by: • Greater negative impact of net interest income, from -EUR 1,252 million in 2019 to -EUR 1,374 million, impacted by the increase in the liquidity buffer. • Growth of EUR 583 million in gains on financial transactions mainly due to foreign currency hedging, the negative counterpart of which is in the conversion of results to euros in certain countries. • Administrative expenses and amortizations improved 12% on the back of streamlining and simplification measures. • Lower net loan-loss provisions, down from EUR 36 million in 2019 to EUR 31 million in 2020. • Other gains (losses) and provisions includes provisions, intangible assets, cost of the state guarantee on deferred tax assets, pensions, litigation, one-off provisions for stakes whose value was affected by the crisis, etc. The net impact went from -EUR 237 million in 2019 to -EUR 412 million in 2020. Pereda building. Global Headquarters in Boadilla del Monte (Madrid) CORPORATE CENTRE EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent Balance sheet Loans and advances to customers Cash, central banks and credit institutions Debt instruments Other financial assets Other asset accounts Total assets Customer deposits Central banks and credit institutions Marketable debt securities Other financial liabilities Other liabilities accounts Total liabilities Total equity Operating data Number of employees A. Includes exchange differences. 2020 2019 (1,374) (1,252) % 9.7 (29) (50) (41.6) 287 (297) — (25) (1,141) (329) (1,470) (31) (412) (1,912) (18) (1,617) 34.3 (29.4) (373) (1,990) (11.8) (26.1) (36) (13.8) (237) (2,262) 74.0 (15.5) 69 157 (56.2) (1,844) (2,105) (12.4) — (1,844) 0 — (2,105) — (12.4) 9 — (1,844) (2,097) (12.0) 5,044 5,764 (12.5) 61,173 32,803 86.5 1,918 1,645 840 128.4 2,406 (31.6) 112,807 126,539 (10.9) 182,587 168,352 825 793 8.5 4.0 38,555 57,240 493 9,443 106,556 76,031 12,254 214.6 54,495 5.0 636 (22.5) 9,810 (3.7) 77,989 90,362 36.6 (15.9) 1,692 1,651 2.5 390 Responsible banking Corporate governance Economic and financial review Risk management and compliance 4.5 Secondary segments Retail banking 2020 Highlights Underlying attributable profit EUR 4,196 Mn → We supported our customers, corporates and governments in all our countries through a series of extraordinary measures to ensure necessary financial support amid the global health crisis, while still providing our usual products and services. → We remained committed to our digital transformation and multi-channel strategy. By the end of December, we exceeded 148 million customers, of which 23 million are loyal, 42 million are digital customers and more than 35 million are mobile customers. → Underlying attributable profit of EUR 4,196 million, strongly affected by covid-19-related provisions. Strategy As our commitment to society became even more important against the backdrop of the global pandemic, we strengthened our offering by implementing a series of measures to ensure the necessary financial support through pre-approved lines of credit, payment holidays and special policies. The crisis has strengthened and accelerated our digital transformation, focusing on our multi-channel strategy and the digitalization of processes and businesses. As a result, the number of digital transactions rose 27%, sales through digital channels represented 44% of total sales and digital customers surged 15%, underpinned by: • strategic transformation through digital acceleration in the UK. In 2020 we opened 82% of current accounts and 90% of credit cards through digital channels. • the opening of Boutique Santander in Portugal, the country's first virtual marketplace. • our digital channels in Spain, which led the Aqmetrix ranking. • new solutions in Poland to boost customer experience and loyalty, such as a chatbot on the santander.pl website. Loyal customers Digital customers December 2020. Thousands December 2020. Thousands 22,838 42,362 32 % /active customers +15 % YoY • new functionalities for SuperMóvil and Hipoteca Online, a digital platform, in Mexico. • the introduction of GENTE in Brazil, a virtual assistant capable of answering more than 10,000 questions, reaching more than 37 million interactions. • a record rise in account openings and prepaid card sales in Chile through Santander Life and Superdigital. • Openbank Argentina obtaining its banking licence. • the launch of SUMO in Uruguay, its digital branch and A Sola Selfie for online loans. We continued to launch commercial initiatives, with specialized products and services for each segment: • In individuals, we introduced Hipoteca Free in Mexico, the country's first commission-free mortgage. In Brazil, we launched the SX credit card, which benefits our most transactional customers. In Argentina, we rolled out Getnet and set up Santander Consumer, specialized in consumer financing and secured loans. In Spain, we have a new commercial proposition for individuals, Santander One, a pioneering subscription-based financial service model, centred on customer loyalty and personalized services. • In auto finance, SCF continued to focus on remaining the leader in auto finance, acquiring 46% stake in Sixt Leasing. In Poland, we ran a promotional offer to finance electric and hybrid vehicles. In Brazil, we retained the highest market share and introduced Troca+Troco, in collaboration with Webmotors. The auto business in the US is ideally positioned, and we strengthened our partnership with Fiat Chrysler. In Colombia, we remained focused on improving profitability in the auto business. 391 Annual report 2020 Contents Results Underlying attributable profit was EUR 4,196 million (61% of the Group’s operating areas). Compared to 2019, underlying attributable profit fell 45% in euros. Excluding the exchange rate impact, it was 39% lower, as follows: • Total income fell 3% impacted by the fall in net fee income (-10%). Net interest income remained flat and gains on financial transactions were up 8%. • Administrative expenses and amortizations decreased 3% benefiting from positive cost management in most countries. • Loan-loss provisions soared 44% strongly affected by covid-19 related provisions. • Other gains (losses) and provisions improved 13% primarily driven by Brazil and the US. RETAIL BANKING EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial transactions A Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent A. Includes exchange differences. 2020 2019 % % excl. FX 29,544 32,862 (10.1) 0.1 6,850 8,561 (20.0) (9.6) 961 (141) 871 304 37,215 42,599 10.3 8.0 0.0 (12.6) 0.0 (3.1) (16,847) (18,926) 20,368 23,672 (11.0) (14.0) (2.6) (3.5) (11,608) (9,101) 27.5 44.1 (1,229) (1,619) 7,531 12,953 (24.1) (13.2) (41.9) (35.2) (2,452) (4,048) (39.4) (30.7) 5,078 8,905 (43.0) (37.2) — — 5,078 8,905 — — (43.0) (37.2) (883) (1,325) (33.4) (26.7) 4,196 7,580 (44.6) (39.0) • In the corporate segment, all countries granted state- guaranteed loans to corporates. In SMEs, we continued to move forward with products such as Prospera, our micro- credit programme for entrepreneurs in Brazil and Uruguay, which was implemented in Peru in 2020. We launched new value-added products in Poland, such as a medical service for SME customers alongside MasterCard and Luxmed. Regarding our branch network transformation, we remain committed to boosting our multi-channel proposition. In addition to digital channels, we have 11,236 branches and are working on optimizing and adapting them to our customers' needs. Our aim is to improve customer experience and offer advice on everything they need through the channel that best suits their preferences and requirements. Smart Red branch, Spain These measures helped us to gain market recognition, with several awards in the countries and segments where we operate: • We were named the World’s Best Bank for SMEs by Euromoney and also won Euromoney’s Best Bank for Diversity and Inclusion global award for the first time. We were named best bank in Spain and Portugal and best investment bank in Portugal. • Santander also received the Bank of the Year award in Spain and the Americas, including Brazil and Argentina. Business performance Loans and advances to customers decreased 3% year-on- year. Excluding reverse repurchase agreements and the exchange rate impact, gross loans rose 4%. Customer deposits were 2% higher in euros compared to 2019. Excluding repurchase agreements and the exchange rate impact, they were 9% higher, driven by growth in demand deposits (+13%). 392 Responsible banking Corporate governance Economic and financial review Risk management and compliance Santander Corporate & Investment Banking Underlying attributable profit EUR 1,823 Mn 2020 Highlights → The covid-19 health crisis strongly influenced SCIB's performance in the year, as we continued to support our global clients, covering their funding needs and helping them access global capital markets. → The creation of the global Environmental, Social and Governance (ESG) solutions team will increase the support SCIB gives to our clients in their transition towards more sustainable business models. → Underlying attributable profit was 6% higher year-on-year in euros (23% in constant euros) at EUR 1,823 million, driven by double-digit revenue growth and cost reduction, which enabled us to absorb the increase in provisions. Strategy SCIB is our global business for corporate clients and institutions that require tailored services and wholesale value-added products adapted to their complexity and sophistication. Our long-term strategy remains focused on becoming our clients' strategic advisor of choice. The transformation we started three years ago continues to bear fruit, delivering sound results. The key areas we are focusing on are: • accelerating balance sheet rotation through efficient capital management to maximize the return on risk-weighted assets. To this end, SCIB focused on strengthening its distribution teams, which resulted in greater origination capacity to distribute and run profitable transactions. • increasing diversification, by countries, customers and products: – by country, through the promotion of our business in the US, the UK and Continental Europe, as well as strengthening our franchises in Peru and Colombia, completing our value proposition in Latin America. – as for the diversification of our customer base, we are increasing business with institutional and financial entities, offering a wide range of products throughout our markets. – we continued to expand our product range by introducing new, more complex and tailored products to fully cover our clients' needs. • continuing to strengthen our environment and control mechanism, investing in strategic projects to make our processes more robust and to respond to regulatory requirements. • becoming the leader in advising on sustainable and responsible financing (ESG) to support our clients in the transition towards a more sustainable and low-carbon economy. In 2020, SCIB created a global team to provide solutions and support our clients in their search for strategic solutions. • digitalizing our business, exploring market opportunities that allow us to improve processes, offer new products and services to clients, add new technologies, etc. Total income breakdown Constant EUR million TOTAL* Capital & Other +15 % +2 % Global Markets +27 % Global Debt Financing +12 % Global Transaction Banking +11 % (*) In euros: +3% 393 4,6884,6885,3975,3971,7831,5071,75435320192020 Annual report 2020 Contents In line with Grupo Santander's strategy, SCIB aims to be one of the leading wholesale banks in Europe by creating a pan- European platform that simplifies our structure and will enable us to better serve our clients' needs and to support our business growth initiatives. Furthermore, SCIB aims to maintain its leadership position in South America and also to turn the US franchise into a fierce competitor in North America. Business performance In the complex humanitarian and macroeconomic environment arising from covid-19, the year's activity was strongly conditioned by the effort to protect our employees and ensure the continuity of our and our clients' businesses. Our strong relationship with our global clients (corporates, governments, corporations, institutions, etc.) enabled us to act quickly and decisively, providing them with strategic advice, tailored financing solutions and helping them access the capital markets to cover their capital needs and maintain high levels of liquidity during the worst months of the pandemic. Main actions performed in the year by business line: • Global markets: significant business growth in all countries despite high volatility, and strong overall activity due to an increase in our clients' funding and coverage needs. Positive both corporate and institutional sales performance, particularly in Asia, Argentina, the UK, Mexico and Brazil, as well as book management, notably in Brazil, Spain, Portugal, the US, the UK and Mexico. • Debt Capital Markets: sharp growth boosted by the positive performance in the US and Europe, while Latin American markets remained tepid. We continued to focus on sustainable financing, and are a reference for the issuance of green and social bonds, particularly those aimed at softening the effects of the pandemic. • Syndicated Corporate Loans: we supported our clients during the year, meeting their funding and liquidity needs by increasing loan volumes and participating in operations backed by government programmes across Europe. We upheld our responsible banking strategy by increasing our range of sustainable finance products via green loans or loans linked to sustainable metrics. • Structured Financing: Santander consolidated its leadership position in Project Finance, ranking first globally (by number of transactions as at December 2020), in Europe, Middle East and Asia (EMEA) and Latin America. We remained at the forefront of financing of renewable energy projects (one of the main priorities of our ESG strategy) also ranking first globally, in EMEA and Latin America. As for financial advisory services, we continued to be a global reference in 2020: first in Latin America, and fifth in the world. • Cash management: in this challenging year, reacting rapidly to the issues arising from the pandemic, the digitalization of our products and the close relationship with our clients were key to delivering sustained growth in the transactional business and becoming our clients' transactional bank of choice. • Export & Agency Finance: we continued to support our clients in their export and import activities through structured financing solutions backed by export credit agencies. We were particularly active in programmes to mitigate the impact of covid-19 implemented by the CESCE (Spanish Export Credit Insurance Company) and the World Bank through guaranteed loans in Latin America. We maintained our leadership position with solid growth, especially in the UK, Mexico and Brazil. • Trade & Working Capital Solutions: strong business growth across markets, especially in Europe, the US, Brazil and Asia. We continued to support our clients, strengthening our capabilities in the global confirming and receivables platforms, which allowed us to maintain our leadership in these products. Likewise, commercial activity increased in structured trade, especially in Brazil, helping to gain market share and diversify into new sources of income. • Corporate Finance: some sectors succeeded in maintaining greater dynamism, in terms of the number of transactions and business and asset valuations, particularly those related to energy transition and renewable energy. In M&A, regarding regulated electricity grids businesses, of note was the transaction announced by State Grid, the largest in the history of Chile's electricity sector and the second largest in Latin America, where Santander acted as the buyer's financial advisor. In 2020, CIB reached a record high for income from share placement operations for the second year running, holding leading positions in Europe and Latin America. The year's most significant operations include our participation in the two largest European initial public offerings (JD Peets for EUR 2.6 billion and Allegro for EUR 2.4 billion), as well as leadership in the Soltec operation. In Latin America, Santander led more than 20 IPOs and capital increases in Brazil. 394 Responsible banking Corporate governance Economic and financial review Risk management and compliance Ranking 2020 Award / ranking Best Supply Chain Finance Provider for Western Europe Best Trade Finance Bank in Latin America (Regional) Source Global Trade Finance Magazine Global Trade Finance Magazine World´s Best Payment Hub Solution for 2020 (Globally) Global Trade Finance Magazine Global Advisor of the year Offshore Wind Deal of the Year Deal of the Year Bonds; Corporates: Enel $1.5bn SDG-linked bond and E2.5bn SDG-linked bond issuance Loans: Carrefour E3.9bn sustainability-linked loans South American ECA - backed Finance Deal of the Year Award European ECA - backed Finance Deal of the Year Award (ESG) Asia - Pacific ECA - backed Finance Deal of the Year Award (ESG) Best Project & Infrastructure Financing Bank: Brazil Best Trade Finance Bank in Latin America Most Impressive Bank for Latin America Bonds Best Transaction of the year (Project Meno) Issuer of the year PFI PFI PFI The Banker The Banker TXF TXF TXF Latin Finance GTR Global Capital Area GTB / T&WC GTB / T&WC GTB / Cash Management GDF GDF GDF GDF (DCM) GDF (DCM) GTB (E&AF) GTB (E&AF) GTB (E&AF) GDF (PF) GTB (T&WC) GDF (DCM) SCI Capital Relief Trades Awards 2020 GDF (PDM) SCI Capital Relief Trades Awards 2020 GDF (PDM) Best Bank for Latin American Currencies FX Markets Results Underlying attributable profit in 2020 was up 6% in euros. Excluding the exchange rate impact, growth was 23%, backed by double-digit hikes in our core businesses, particularly Global Markets and Global Debt Finance. • Total income growth was spurred on by the strong increase in all revenue lines: net fee income (+12%), gains on financial transactions (+23%) and net interest income (+20%). • Administrative expenses and amortizations fell 3%, which enabled efficiency to improve 5 pp and net operating income to grow 30%. • Sound revenue performance and prudent cost management was enough to fully absorb net loan-loss provisions growth, derived from the general macroeconomic deterioration, and significantly increase underlying attributable profit. SANTANDER CORPORATE & INVESTMENT BANKING EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent A. Includes exchange differences. 2020 2019 2,953 2,728 1,550 1,520 % excl. FX % 8.3 2.0 20.4 12.5 690 203 689 289 0.1 22.9 (29.8) (31.0) 5,397 5,227 3.3 15.1 (2,069) (2,281) (9.3) (2.7) 3,328 2,945 13.0 29.8 (467) (155) 200.4 209.9 (135) (91) 48.7 2,726 2,699 1.0 (783) (815) (3.9) 60.2 17.1 12.0 1,944 1,884 3.1 19.3 — — 1,944 1,884 — 3.1 — 19.3 (121) (171) (29.5) (15.9) 1,823 1,713 6.4 22.7 395 Annual report 2020 Contents Wealth Management & Insurance Underlying attributable profit EUR 868 Mn 2020 Highlights → In 2020, despite the challenges we faced and the prioritization of everyone's health and safety, we implemented various improvements in terms of processes, agility, close relationships with our clients and flexibility in our teams. The continued monitoring of, and interaction with, clients during the crisis enhanced communication through remote and digital channels. → As a result, underlying attributable profit was up 2% compared to 2019 in constant euros. → Total fee income generated, including that ceded to the branch network, amounted to EUR 3,108 million, in line with the previous year, and accounted for 31% of the Group's total (30% in 2019). → Assets under management reached EUR 370 billion, in line with 2019 in constant euros, affected by custody valuation differences. Customer funds rose 8% in Private Banking and 1% in Santander Asset Management (SAM), which has recorded positive cumulative net sales since May. We made further headway in our ESG strategy, becoming a member of the Principles for Responsible Investment (PRI) as well as the International Investors Group on Climate Change (IIGCC), which places us at the heart of a global community seeking to build a more sustainable financial system. We currently have over 20 ESG products and assets under management of EUR 6.9 billion (+90% vs. 2019). • In Insurance,our main growth driver continued to be the non- credit-related business, which has a longer portfolio duration. We continued to increase the number of insurance policies distributed through our digital channels, which now account for 10% of the total sales volume. In Latin America we continued to successfully develop our auto-related business, working with various insurance companies and new mobility products. In Chile, we launched Grupo Santander's first On/Off insurance through Klare, our fully digital insurance broker, which allows customers to activate coverage on a daily basis. In Argentina, we improved the end-to-end digital sales process for personal protection insurance (customers and non-customers). In Europe, we introduced a new multi-risk insurance proposal for SMEs in Spain and Portugal through our joint venture with Mapfre. In the UK, we enhanced the digital experience for our tailored Home & Life insurance, optimizing the use of data to offer personalized products and simplify purchasing. In Poland, we have a new fully-digital life insurance offer, which had a great response from customers as it enables them to build their own tailored coverage. Strategy Within our strategy developed with the aim of becoming the best responsible wealth manager in Europe and Latin America, of note were: • Positive net sales and business growth rates in Private Banking, despite the market situation and the cuts in interest rates in the US, Latin America and the UK. Our goal was to complete the value proposition in all our countries, particularly in advisory services. Regarding alternative funds, our value proposition is centred on selecting a range of funds from leading national and international management companies, notably the launches made through our international platform in Ireland. We continued to expand the ESG investment range via SAM and third party products, supported by the continuous training of our managers and advisers. Launch of Future Wealth, a joint initiative with SAM, consisting of a platform to invest in leading innovation companies grouped into 18 disruptive themes (such as health, energy transition technology and smart cities) with the SAM Future Wealth fund as the core product. We received numerous awards in 2020 from prestigious publications (Professional Wealth Manager, Euromoney, The Banker and Global Finance) for our technology, various business segments and local private banks in several countries. The total volume of shared business across our markets reached EUR 6.8 billion, 34% more than 2019, mainly driven by operations in Mexico, Chile, Miami and Switzerland. • In Santander Asset Management, we continued to improve and complete our product offering. Of note was growth in the the Santander GO range, with a volume of more than EUR 2.3 billion and the positive performance of our platform in Luxembourg, reaching EUR 8.2 billion. We are also working on the implementation of an alternative product offering with infrastructure funds and leasing, with the launch of the Alternative Leasing fund for SME machinery and equipment. We continued our operational and technological transformation which involved the implementation of the Aladdin platform, which has already been successfully rolled- out in six countries and virtually implemented in another three in Latin America. 396 Responsible banking Corporate governance Economic and financial review Risk management and compliance Business performance Results Total assets under management amounted to EUR 370 billion, in line with December 2019 in constant euros. In the quarter, growth was 4% and 10% compared to March 2020. Underlying attributable profit was EUR 868 million in 2020, down 7%. Excluding the exchange rate effect, it was 2% higher: Business performance: SAM and Private Banking December 2020. EUR billion and % change in constant euros vs Dec-19 0 % +3 % +1 % +8 % -6 % +2 % +10 % Note: Total assets marketed and/or managed in 2020 and 2019. (*) Total adjusted customer funds of private banking managed by SAM. 2019 data Pro forma including Popular asset management Joint Ventures, fully integrated in 2020. • In Private Banking, the volume of customer assets and liabilities grew 1% year-on-year to EUR 230 billion. This was mainly due to the impact of covid-19 on markets which particularly affected the custody business. However, quarter-on-quarter growth in Q4 was 7% induced by market improvement and strong commercial activity. Underlying attributable profit in 2020 was EUR 414 million, down 2% compared to 2019 (excluding the exchange rate impact). Of note were Mexico, Poland, Brazil and Miami. • In SAM, total assets under management increased 1% compared to 2019, despite the negative impact of markets driven by the covid-19 crisis. Cumulative net sales remained in positive figures since May, mainly in Chile, Luxembourg, Argentina and Mexico. Underlying attributable profit was EUR 120 million, 16% lower year-on-year, due to lower average volumes and margins. Of note was the performance in Mexico, Portugal and Argentina. Total contribution to the Group's profit (including ceded fee income) was EUR 494 million. • In Insurance, the volume of gross written premiums amounted to EUR 7.9 billion (-3% year-on-year), affected by lower loans and savings activity amid the crisis. Of note was the 9% growth in fee income generated by the non- credit related protection business. Despite lower activity, the underlying attributable profit generated in 2020 by the insurance business amounted to EUR 333 million, 18% higher than in 2019. Total contribution to profit (including ceded fee income) amounted to EUR 1,220 million. • Total income increased mainly driven by net fee income (+7%) due to the greater contribution from private banking and insurance. • Total fee income generated, including fees ceded to the branch network amounted to EUR 3,108 million and represented 31% of the Group's total. • Administrative expenses and amortizations were in line with 2019, due to the optimization measures that absorbed the impact of investments. • As a result, net operating income increased 6%. The total contribution to the Group (including net profit and total fees generated net of taxes) was EUR 2,145 million, 2% lower than in 2019 in constant euros. Total contribution to profit EUR million and % change in constant euros 2,145 WEALTH MANAGEMENT & INSURANCE EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent A. Includes exchange differences. 2020 2019 % excl. FX % 454 570 (20.4) (15.3) 1,194 1,199 (0.4) 6.5 103 383 117 339 2,135 2,226 (12.0) (4.5) 13.0 (4.1) 26.9 3.3 (906) (955) 1,229 1,271 (28) 23 (1) (12) 1,199 1,281 (5.1) (3.3) — (92.8) (6.4) (291) (302) (3.7) (0.4) 6.2 — (92.3) 2.6 4.2 909 979 (7.2) 2.1 — 909 (41) — 979 — (7.2) — 2.1 (50) (18.3) (0.6) 868 929 (6.6) 2.3 397 37022518168875817Total Assets UnderManagementFunds andinvestment *· SAM· Private BankingCustody customerfundsCustomer depositsCustomer loans Annual report 2020 Contents Santander Global Platform (SGP) Underlying attributable profit EUR 39 Mn 2020 Highlights → The development of global payments and financial solutions for enterprises and individuals in high-growth and large addressable markets continues to be a top priority for Grupo Santander. → Despite the covid-19 environment, we delivered significant progress on our plan, expanding our global payments technology platforms by adding new services and functionalities, and reaching new customers. → We continued to focus on accelerating growth in three business areas: Merchant Solutions, Trade Solutions and Consumer Solutions. Strategy Grupo Santander is recognized as one of the best global payments providers, and we aspire to continue offering faster and better solutions to all our customers, which we develop based on customer experience and to drive loyalty. We offer these solutions to both our banks (B2C) and third parties (B2B2C), generating significant new revenue opportunities and expanding our customer base to new customers and geographies. The three business areas made significant progress against the plan in last quarter: Merchant solutions (Global Merchant Services), our initiative to create a global acquiring business under the Getnet global brand based on a single open platform, provides end-to-end payments solutions for merchants, ranging from accepting payments to value-added services. Trade solutions (Global Trade Services), the group's strategic initiative to develop the global platform OneTrade, provides the services needed to trade internationally including international payments, FX, international treasury management and foreign trade. In Q4, Getnet Brasil achieved record growth of 200% year-on- year in online transactions on Black Friday, reaching a 30% market share. Getnet platform developments continued to incorporate additional functionalities. In Q4, we connected our customers in Portugal and Colombia to the OneTrade platform, adding to those from Brazil, Spain, the UK and Chile. With the latest roll outs, more than 150,000 companies now have access. At the end of 2020, Getnet reached an agreement to acquire several highly-specialized technology assets and teams from Wirecard's European merchant payments business. This acquisition will further reinforce and accelerate Getnet´s growth plans in the region. Regarding new services added to the OneTrade platform, we tested and deployed an internal FX and liquidity model for transactions between the UK and Spain. This service will be rolled out to other countries and currencies in the next two quarters. 398 Responsible banking Corporate governance Economic and financial review Risk management and compliance Consumer solutions (Superdigital), our financial inclusion platform for individuals, offers simple and flexible basic financial services to meet the financial needs of the underbanked in Latin America. In Q4, we began rolling out our new global Superdigital platform, which efficiently supports operations in different countries, across Latin America, starting with Brazil and then to Argentina, Uruguay, Colombia, Peru, Chile and Mexico. Superdigital Brazil's active customers increased almost 25% and the value of transactions rose by about 60% in the year. Looking towards our future strategy, back in October we announced the creation of PagoNxt, an upgrade to Santander Global Platform, which will enable us to combine our payment businesses into an autonomous company, providing world-class technology solutions for our banks and new open market customers. As previously mentioned in other sections of this report, Openbank and SCF will be combined into the new Digital Consumer Bank. Other activities Openbank, our full-service digital bank offers the current accounts and cards of neobanks, but also successfully sells loans and mortgages, as well as providing a state-of-the-art robo-advisory and open platform brokerage services. Openbank is currently active in Spain, the Netherlands, Germany and Portugal. In July, it was granted a banking licence to operate in Argentina and plans to start operations in the first half of 2021. In 2020, Openbank increased its loan book of digital mortgages and unsecured personal loans by 31.2%, deposits by 15.4% and new customers by 107% year-on-year. Customers with investment products increased by 31% and the number of securities transactions rose by 131%. Loyal customers keep showing a leading industry benchmark engagement ratio of 4.5 products per customer. As a result of the strong business results, fee income increased 38% year- on-year. 399 Contents % % sin TC 25.7 11.0 (18.2) (1.7) (2.4) 28.2 (6.2) 9.5 (43.5) (24.2) 76.8 (49.7) (38.4) 4.8 34.3 8.7 20.6 (25.0) (17.1) 68.9 (29.8) (12.4) SANTANDER GLOBAL PLATFORM EUR million Underlying income statement Net interest income Net fee income Gains (losses) on financial A transactions Other operating income Total income Administrative expenses and amortizations Net operating income Net loan-loss provisions Other gains (losses) and provisions Profit before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Underlying attributable profit to the parent A. Includes exchange differences. 2020 2019 416 449 146 (17) 994 375 549 149 (13) 1,061 (816) (745) 315 (52) (5) 258 (95) 178 (39) (9) 130 (59) 71 0 71 (32) 163 (56.3) (39.7) 0 163 (36) — (56.3) (11.1) — (39.7) 1.7 39 127 (69.3) (54.9) Annual report 2020 Results Looking at SGP's activity in 2020 in a broad sense, i.e. in addition to considering the results generated by the digital platforms, including 50% of the results generated by the country units for the platform-related products, SGP's total income as a secondary segment was EUR 994 million in 2020 and pro forma underlying attributable profit was positive at EUR 39 million. This is the net result of two components; the investment in building the platforms and 50% of the profit obtained from commercial relationships with our customers: • Total income rose 9% in constant euros to almost EUR 1 billion, backed by net interest income. • Administrative expenses and amortizations rose 21% year-on-year, with most of the spend concentrated on building the platforms. We are making progress in technology development and process improvements, as well as designing new services to be offered via our platforms and rolling them out. • Net loan-loss provisions fell 17% vs 2019, with no material impact on the P&L. • Other gains (losses) and provisions remained insignificant at -EUR 9 million. We regularly assess the market valuations of the businesses included in SGP, based on multiples of comparable companies, to ensure our investments in digital are creating value. 400 Responsible banking Corporate governance Economic and financial review Risk management and compliance 5. Research, development and innovation (R&D&I) Research, development and innovation activities Technological strategy Innovation and technological development are strategic pillars of Grupo Santander. We aim to respond to fresh challenges that emanate from digital transformation, focusing on operational excellence and customer experience. Moreover, the information from our new technological platforms will help us better understand our customers' journey and enable us to design a more accurate digital profile to generate more confidence and increase customer loyalty. As well as competition from other banks, financial entities must watch out for new financial system entrants, whose differentiating factor and competitive advantage is their use of new technology. Developing a competent strategic technology plan must provide: • greater capacity to adapt to customers’ needs (customized products and services, full availability and excellent service across all channels). • enhanced processes for Grupo Santander’s professionals to ensure greater reliability and productivity; and • proper risk management, supplying teams with the necessary infrastructures to support the identification and assessment of all business, operational reputational, regulatory and compliance risks. As a global systemically important bank, Santander and its subsidiaries face increasing regulatory demands that impact system models and their underlying technology. This requires additional investments to guarantee compliance and legal security. As in previous years, the latest European Commission ranking (2020 EU Industrial R&D Investment Scoreboard, based on 2019 data) ranked our technological effort first among Spanish companies and we are the second global bank for investment in R&D. The equivalent investment in R&D&I to that considered in this ranking amounted to EUR 1,123 million. See note 18 to the consolidated financial statements. To meet business and customer needs, we must integrate new digital capabilities such as agile methodologies, public- and private-Cloud-based products and core systems development. We must also broaden our data and technological capabilities (APIs - Application Programming Interface, artificial intelligence, robotics, blockchain, etc.). Our technological strategy aligns with the three pillars of the group's strategy: One Santander, PagoNxt and Digital Consumer Bank. Our technological pillars (Cloud, Agile, Data, Core evolution and Deep tech skills), a flexible and common architecture and a global operating model, as well as better management of risk and associated costs, help us achieve this. Our governance model includes an inter-organizational forum called the Santander Architecture Review Board (SARB) to oversee the correct implementation of the technological strategy through its projection in technical architectures. The SARB brings together the technological architecture heads of the group entities on a monthly basis and is responsible for efficiently and collaboratively sharing local and global innovation, as well as reviewing Grupo Santander’s architecture. It also guarantees consistent architectures, strengthens the recycling of components and bolsters the use of new technologies to meet changing business needs. Our implementation of this strategy is based on our set of rules, a committed and experienced organization in relationships with our country units, and a governance model that articulates projects and initiatives that help crystallize the strategy in all our markets. The development of our technology and operations (T&O) model will help us cultivate new business, focusing on global products and digital services. Almost 2,700 Santander Global Tech professionals in Spain, the UK, Portugal, the US, Mexico, Brazil and Chile are gradually incorporating the global product portfolio agreed by the country units, our global businesses and the T&O division, guaranteeing the quality of digital services and products, and also their security. 401 Annual report 2020 Contents Technological infrastructure Grupo Santander has a network of high-quality data centres (CPDs) interconnected by a redundant communications system. The CPDs are spread across strategic countries to support and develop Grupo Santander’s activity and combine traditional information technology (IT) systems with the capabilities supplied by an on-premise private Cloud, which thanks to its swift adoption enables integrated management of the business areas’ technology, accelerates the digital transformation and allows significant cost savings. The gradual implementation of the Cloud strategy will enable the public Cloud to support other strategic group projects. Thanks to the Local Cloud Centres of Excellence (local CCoEs), coordinated under the Global CCoE, we can guarantee consistent and rigorous adoption of the Cloud across our entities. This minimizes risks in accordance with the Public Cloud policy. Cybersecurity Cybersecurity is one of Grupo Santander’s main priorities and a crucial element in supporting our mission of ‘helping people and businesses prosper’, as well as offering excellent digital services to our customers. Cybersecurity attacks and defence technologies continue to evolve rapidly. We are constantly updating our defence against current and emerging cybersecurity threats and our 24/7, 350-employee cybersecurity centre in Madrid serves all group entities. In 2020, our Cybersecurity team was a key component of the group's response to the covid-19 crisis, through four key areas: the increase in remote access capacity to enable employees to maintain the bank's services safely and efficiently; constant monitoring of new cyber-threats and suspicious activities; increased communication with employees and customers on how to stay "cyber-safe" online and when working remotely; and the constant analysis of new risks and implementation of additional controls. For further information on the different actions for measuring, monitoring and controlling risks related to cybersecurity, and their respective mitigation plans, see section 6.2 'Operational risk management' of the Risk management and compliance chapter. Digitalization and fintech ecosystem In addition to the technological strategy, infrastructure development and cybersecurity initiatives, and to make headway in our digital transformation, in November we announced the creation PagoNxt, the new brand to grow our payments business in the digital age and enhance Santander Global Platform. Further details are given in section 4 'Financial information by segment' of this chapter and examples of digital and innovative products and services for individuals and corporates, as well as references to cybersecurity policies are given in section 2 ‘Inclusive and sustainable growth’ of the Responsible Banking chapter. Data centre Cantabria Alhambra building. Boadilla del Monte 402 Responsible banking Corporate governance Economic and financial review Risk management and compliance 6. Significant events since year end No significant events occurred between 1 January 2021 and the date of preparation of this consolidated directors’ report. 403 Annual report 2020 Contents 7. Trend information 2021 This director’s report contains certain prospective information on the directors’ plans, forecasts and estimates, based on what they consider to be reasonable assumptions. Readers of this report should take into account that such prospective information must not be considered a guarantee of our future performance. As the plans, forecasts and estimates are subject to numerous risks and uncertainties, our future performance may not match initial expectations. These risks and uncertainties are described in the Risk management chapter of this report and in note 53 of the consolidated financial statements. The announcement of a number of highly effective vaccines in the prevention of covid-19 has led to a substantial improvement in expectations for 2021, and in particular, reduced the probability of the most adverse scenarios. However, the resurgence of the virus in early 2021 and the consequent containment measures may have tangible impacts on the economy in the first months of the year, even if experience in the second wave shows that the public and private sectors have learnt to better manage the pandemic and contain its economic effects. The expected acceleration on the pace of vaccination, particularly among high-risk populations, in our core markets and that expansive economic policies will be maintained suggests that economies will see a marked recovery. However, in general, we do not expect to regain pre-crisis levels until 2022. The macroeconomic forecast for 2021 by country/region is as follows: Euro area We expect that economic expansion will be linked to vaccine dissemination and the degree of implementation of the EU Recovery Plan. The consensus expects that vaccination will have reached a sufficiently high percentage of the population around the middle of the year to normalize much of the economic activity. Some sectors will take time to achieve full recovery (depending on how dependant they are on international mobility as it will still be affected). We believe that monetary policy will continue to be expansionary, but the exit from the crisis will depend more heavily on fiscal policy and economic reforms. The EU recovery plan, which depends largely on the countries’ proposed fiscal expansion, should be the basis for modernizing the economies, strengthening potential growth, sustainability and digitalization. Spain Economic recovery projections by international bodies are in the range of 5%-7%, which could be greater due to European funds from the recovery plan. Spain is one of the countries that can receive the most funds and it plans to concentrate most of the investments in the first few years. There is some uncertainty around the performance of the unemployment rate, as employment support policies dampened its rise in 2020 but this could prevent it from falling in 2021. Inflation could return to positive territory, accompanied by the estimated improvement in domestic demand, although we expect it to remain below the ECB target (2%). United Kingdom The UK economy is expected to grow around 4.5%. Covid-19 vaccinations support a faster projected normalization by gradually eliminating many containment measures that curb activity. However, 2021 will be a year of adaptation to the new situation outside the European Union, which will undoubtedly generate some friction that will affect investment and monetary policy, which we expect to continue to be accommodative. Portugal Economic growth is forecast around 2.0% in 2021, with a recovery that will not begin at least until Q2'21 due to the strong outbreak of the pandemic early in the year. and the task of reviewing the production model (which will be supported by European funds), as the most labour-intensive sectors, such as tourism, will continue to be a drag on the economy. Unemployment could reach 10% and inflation unchanged. We expect the fiscal deficit to ease . Poland The Polish economy, having contracted 2.8% in 2020, is expected to grow around 4%. Uncertainties remain regarding the first quarter covid-19 related problems, but hopes are that a vaccine in the second quarter will lead to normalization of activity. Private consumption is expected to be the growth driver with positive contributions from investment, on the back of the European recovery plan, and net exports. 404 Responsible banking Corporate governance Economic and financial review Risk management and compliance United States àFinancial markets The presence of covid-19 will make the start of the year difficult. Vaccination, other pandemic control tools and virus seasonality could allow normalization to commence and have positive effects on growth from the second quarter. The new fiscal stimulus packages will also drive GDP growth in 2021 of around 5%. Inflation is expected to uptick but still at moderate rates (2.2% vs. 1.4% in 2020). The Federal Reserve is expected to maintain an expansive monetary policy. Mexico We expect the economy to continue its recovery in 2021, with growth of around 4% driven by exports, in particular to the US. However, we expect domestic demand growth to be modest and it will take several years to recover pre-pandemic GDP levels. Monetary policy could become more expansive in a context of inflation in line with targets. Brazil GDP is expected to continue to recover with growth projected around 3.5%. The withdrawal of the broad fiscal stimuli implemented in 2020 will be one of the main challenges, although controlled inflation, expansive monetary policy and progress on the reform agenda will contribute to a favourable climate that supports economic growth. Chile Economic growth (between 5% and 6%) is expected to be supported by a more favourable international environment, the maintenance of part of the fiscal stimulus programmes approved in recent years, and expansive monetary policy with low interest rates. Argentina The economy is expected to grow around 4.5% after following the normalization of its relationships with international creditors and its new economic programme that will have the technical and financial support of the International Monetary Fund. We believe that the cyclical recovery expected in 2021 will guide financial markets' performance. We believe that the unprecedented liquidity injection from central banks will continue to support risk weighted assets, together with the favourable conclusion of some risk sources: i) the arrival of a vaccine has reduced global uncertainty regarding economic recovery, mitigating the fact that increasing covid-19 cases and pressure on health care systems are still leading to tighter lockdown measures. ii) the control of both Houses of Congress by the Democrats in the US could give the new administration greater discretion in implementing its fiscal stimulus plans, iii) the UK's negotiated withdrawal from the EU prevented a hard exit in January and normalized relationships between the two regions. In this environment, risk-free rates are expected to rise slowly in line with the continued improvement in economic and inflation expectations, particularly in the long-term, leading to a steepening of the yield curve. Some Federal Reserve members are starting to discuss the possibility of carrying out a balance sheet reduction later this year, but official rates will remain unchanged for a long time. The dollar, which depreciated against the euro at year-end, is expected to recover in 2021, followed by an early rebound in the US backed by greater fiscal stimulus. We believe that this year, the banking and economic environment, are going to be conditioned by the pandemic's evolution, the speed of vaccination and the withdrawal of public sector aids to families and businesses. The ending of financial support measures and payment holidays will drive an increase in delinquency rates, which will depend on the level of economic normalization and will affect economic sectors unevenly, having a greater impact in those that suffered greater permanent impacts. In general, the banking sector is in a stronger position to face this NPL increase than in previous crises, as demonstrated in the stress tests carried out by agencies such as the International Monetary Fund. However, difficulties cannot be ruled out in some entities, in both mature and developing banking systems. In an environment of very low rates and business growth, digitalization and pressure on profitability will continue to boost banking consolidation, especially in the more fragmented systems, as well as adjustments to improve efficiency. 405 Annual report 2020 Contents With regard to resolution legislation, the transposition of the Bank Recovery and Resolution Directive (BRRD 2) will be completed in 2021. In this regard, in response to covid-19, the Single Resolution Board has stated its intention to adopt a prospective approach to existing MREL requirements. It also stated that, for the 2020 resolution cycle, it considered the 2022-2024 transitional periods that were established in BRRD2. In 2021, the following particularly relevant EBA guidelines will apply: • The loan approval and monitoring guidelines (EBA/ GL/2020/06) will apply from June 2021. This guide covers processes from governance to loan approvals, pricing for new transactions, collateral valuation (personal property and real estate) and monitoring and reporting frameworks. • The guidelines on the application of the definition of default according to Article 178 of Regulation (EU) No 575/2013 are also of particular relevance. With effect from January 2021, guidelines state that institutions must include the EBA’s requirements in their internal procedures and IT. àFinancial regulation In 2021, financial and prudential regulation will continue to reflect the materialization of various multi-year initiatives in the area of solvency and resolution, combined with the measures that authorities will continue to take or maintain in force to manage the difficult effects of the pandemic. Supervisors and regulators believe policy response should be adapted to the specific needs of this new phase. They also consider that banks must face medium-term challenges, particularly their low profitability at both the European and national level. In its 2020 transparency report, the European Banking Authority (EBA) concluded that banks' capital and liquidity positions are solid but warned of asset quality performance and structurally low profitability. The European Central Bank itself emphasised that uncertainty surrounding the evolution of the pandemic and vaccine distribution remains high. It extended the relaxation of eligibility criteria adopted in April 2020 until June 2022 to ensure all banks in all countries can obtain the necessary liquidity to provide credit to all sectors of the economy. The ECB has also extended the range of Eurosystem eligible marketable assets with the decision to accept bonds with coupon structures linked to certain sustainability objectives as collateral from 1 January 2021. This demonstrates the Eurosystem’s support for innovation in the area of sustainable finance. Regarding the regulation of own funds requirements, the Capital Requirements Regulation (CRR2) is expected to come into force in general during 2021, including most of the points that were not yet in place in 2019 and 2020. The Commission’s proposal for CRR3 is expected to be adopted in 2021. This milestone marks the end of the implementation of the Basel framework in Europe, which, amongst other things, significantly modifies the credit risk framework. A CRR fix quick fix relating to the securitizations framework will enter into force at the beginning of the year, which would include the STS (simple, transparent and standardised) treatment for synthetic securitisations. 406 Responsible banking Corporate governance Economic and financial review Risk management and compliance The management priorities of the principal geographic areas for 2021 are set out below: EUROPE With the aim of accelerating transformation, increasing volumes and having a more efficient business model, the priorities for the region in 2021 are to: • Transform how we manage our mass-market business, simplifying our value proposition and improving customer experience, through the creation of Regional Business Owners. • Leverage our global businesses (SCIB and WM&I) and the connection with PagoNxt to accelerate profitable growth in the region. • Accelerate our digital agenda, with a common mobile experience across the region. • Deliver a significant share of the EUR 1 billion additional cost savings commitment for the next two years, transforming our operating model. • Excel in risk management, maintaining and reinforcing our balance sheet strength. In Spain, the covid-19 health crisis entailed significant changes in the macroeconomic and competitive environment. This required us to adapt our strategic priorities for the short- and medium-term: • Continue to develop our distribution, operational and organizational model in order to reduce costs and accelerate progress in our digital transformation. • Boost revenue by focusing on developing the corporate segment and moving towards a simple and complete offer for individuals, with continuous customer experience improvement. In addition, strengthen our leadership position in Private Banking and CIB. • Adapt the risk management model and policies, strengthening the recovery management model and mitigating operational risks. • Optimize the use of capital, focusing on value- added segments and higher profitability products. • Foster a responsible banking culture across the organization. In Portugal, the priorities for the year are to: • Further the digital and commercial transformation, to make it simpler, more agile and closer to customers. • Grow organically in terms of profitable market share, improving our lending leadership position and leveraging our position in the corporate and, especially, the SME segments. • Improve efficiency backed by our digital capabilities to better serve our customers. • Maintain an appropriate risk policy, with improved monitoring, to maintain a low cost of credit. • Maintain a strong capital and liquidity position in the current economic environment. Santander UK’s priorities remain largely unchanged, with a 2021 specific focus on managing margins and simplifying the business to improve efficiency and returns: • Deliver growth through customer loyalty and outstanding customer experience. • Simplify and digitalize the business. • Engage, motivate and develop a talented and diverse team. • Be a responsible and sustainable business. In Poland our strategy focuses on five key initiatives: • Simplify the structure, based on the One Purpose - One Process approach of One Santander. • Improve customer satisfaction to be among the Top 3 in NPS. • Increase profitability through effective net interest income management, higher fee income and cost control. • Progress in the responsible banking agenda. • Strengthen our employees' skills to support the transformation of Santander Bank Polska. 407 Annual report 2020 Contents NORTH AMERICA While focusing on further developing the USMX trade corridor, the priorities in the region will be to: • Boost the execution of our regional collaboration strategy, increasing our common value proposition and profitability, while we continue to leverage our global presence. • Consolidate regional IT under a single leadership. • Continue to reduce duplications in the operating model, platform and architecture. • Optimize expenses, in part through third party cost optimization. • Continue to boost our remittance service to drive new customer acquisition. In the US, management will remain focused on improving profitability by: • Digital and branch transformation initiatives to improve customer experience and the profitability of consumer banking business. • Continuing to leverage our auto finance capabilities and the interconnectivity of our CIB and Wealth Management businesses. • Adapting the business strategy to mitigate revenue impact from lower rates. • Cost management to continue improving efficiency. In Mexico, we developed a strategic agenda with the aim of becoming the best bank for our customers, with the following goals: • To become the leading bank in terms of customer experience, leveraging new tools and process improvement. • Make headway in our transformation, adapting to new customers' needs and habits arising from the pandemic. • Maintain strong growth rates in loyal customers through initiatives to attract payrolls and high-value collectives, as well as increase presence in high-potential businesses. • Strengthen our corporate business to maintain our position as market leaders in value-added products. • Accelerate technological transformation and digitalization, by implementing a multi-year plan that will increase our capabilities to improve the operating model, IT performance and information security. 408 Responsible banking Corporate governance Economic and financial review Risk management and compliance SOUTH AMERICA The Group’s priorities in the region are to: • Accelerate profitable growth, with a strategy that seeks to boost conectivity across South America through regional projects. • Continue to progress in digital transformation through the development of digital platforms and a more efficient model. • Maintain the strong growth of loyal and digital customers. • Conduct strict risk controls regarding the impact of covid-19. Santander Chile's strategy will focus on: • Maintaining our leadership position in local banking in an increasingly dynamic economic environment. • Continuing to progress in our technological developments in order to improve efficiency. • The expansion of our digital platforms such as Life and Superdigital, improving our customer service indicators, and increasing the number of loyal and digital customers. Santander Brasil's management priorities for 2021 are to: • Anticipate trends through our capacity to capture business opportunities in different potential scenarios. • Increase our customer base maximizing transactionality across our new businesses while we improve and redefine the banking experience. • Grow the high credit quality portfolio, mainly in secured products, through the expansion of the core business and the consolidation of new businesses. • Improve operational efficiency, enhancing the high productivity culture. • Maintain profitability levels by adapting and innovating rapidly in the current environment. In Argentina, the strategy will focus on: In Uruguay, the priorities for 2021 are to: • Increasing our customer base, and loyalty and ensuring the best customer service. • Continue to invest in technology and process automation to further improve efficiency. • Further developing new businesses. • Accelerate digitalization. • Continuing our process of efficiency and simplification through digital transformation. • Continue to increase our presence and market share. • Boosting profitable growth, focusing on the transactional business and optimizing the use of capital. • Combine and coordinate the implementation of local and regional projects. In the Andean region, strategy will focus on: • In Peru, increasing Corporate Finance's activity, continuing to boost advisory services in investment banking, corporate issuances and public infrastructures,and expanding our auto and consumer finance entity by widening our product range, improving distribution channels and diversifying funding sources while we maintain customer satisfaction. • In Colombia, implementing different regional initiatives such as Cockpit and Pioneer, in line with the strategy of One Santander. • Launch of Prospera and Superdigital 409 Annual report 2020 Contents DIGITAL CONSUMER BANK The main priorities for 2021 are to: • Secure leadership by focusing on growth and transformation to achieve our aim of building a global digital consumer lending business: – Strengthen Auto leadership and gain leadership in consumer lending, by leveraging the global insurance model and expanding into new markets. – Transformation driven by simplification, redefinition of our distribution model, streamlining IT (leveraging Openbank’s platform) and increased automatization. • Help our partners with digitalization and transformation, proactively manage brand agreements and develop digital projects in all business lines. • Execute the strategic operations initiated in 2020 (Sixt Leasing in Auto, the joint consumer finance operation with Telecom Italia Mobile and Openbank expansion to Argentina) to maintain high profitability and best-in- class efficiency. • Accelerate combined business digitalization to drive sustainable long-term growth, especially following a sustained period of rapid growth in digital channel use during the pandemic. • Define and begin executing the path to convert creditors into full customers taking advantage of SCF’s lead generation power and Openbank’s digital retail banking platform. 410 Responsible banking Corporate governance Economic and financial review Risk management and compliance SECONDARY SEGMENTS In 2021, we will continue to focus on: In 2021, the key management drivers will be: • Expanding our content and product offerings to continue to become our clients' strategic advisors, while accelerating the digitalization of our businesses. • Developing a powerful ESG platform to support our clients in their transition towards more sustainable business models. • Creating a pan-European platform with the aim of becoming the benchmark wholesale bank in the region and offering a more differentiated service to our clients. • Accelerating business growth in the US under a robust control environment by exploring new business opportunities. • Consolidate our leadership position in South America, strengthening our franchises in Peru and Colombia. In 2021, PagoNxt will expand its product offering and global platforms, leveraging the group's scale and reaching out to new customers. The main priorities by business are as follows: • In global merchant solutions, Getnet will focus on enhancing our global acquiring platform, leveraging the Wirecard asset acquisition, and on expanding the platform into new countries in Latin America and Europe. • In global trade solutions, the priorities are to connect the OneTrade platform to serve additional Santander customers covering our entire footprint, deploy new core functionalities on a quarterly basis, and reach customers beyond our current base. • In global consumer solutions, Superdigital will continue to promote financial inclusion, focusing on rolling out the global multi-country platform in all our footprint in Latin America, and launching additional banking services on the platform. Pago FX will continue to improve its simple, low cost and secure international payment solution, rolling it out in new countries. • In Private Banking, we want to continue to strengthen the leadership of our global platform All Access, following the 34% increase in cross-country volumes in 2020. To this end, we will complete our value proposition in all Private Banking countries, particularly in advisory services, alternative products and the Future Wealth investment platform, our joint initiative with SAM. We will also continue to drive Private Wealth, our business for high net worth clients. • In Santander Asset Management, we will continue to develop value-added products through our global and open product platform, also boosting the institutional business and strengthening our alternative product offering. We will continue with Santander GO's open architecture strategy, which has already reached more than EUR 2 billion, and once our ESG strategy has been developed, we will continue to promote the sustainable range in which we are experiencing very significant demand. On the other hand, we will continue to expand our GMAS systematic investment team and consolidate our presence in two hubs, one in Europe and the other in Latin America. • In insurance, we have the opportunity to continue to increase penetration in our customer base. With 20 million clients and around 30 million insurance policies, we believe we have high growth potential in non- credit related business, such as auto, SMEs, as well as more traditional segments. In pensions, we have also made headways in several countries, where macroeconomic trends foresee significant growth. • The digital transformation of our business, with investments in digital platforms and developments such as online and mobile private banking. 411 Annual report 2020 Contents 8. Alternative performance measures (APMs) In addition to the financial information prepared under IFRS, this consolidated directors’ report contains financial 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 financial measures contained in this consolidated directors’ report that qualify as APMs and non-IFRS measures have been calculated using our financial information but are not defined or detailed in the applicable financial 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 financial 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 financial 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, the way in which Santander defines and calculates these APMs and non-IFRS measures may differ from the calculations used by other companies with similar measures and, therefore, may not be comparable. 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 'Results' of this chapter. In addition, the results by business areas in section 4 'Financial information by segment' are presented only on an underlying basis in accordance with IFRS 8. 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 51.c to our consolidated financial statements. 412 Responsible banking Corporate governance Economic and financial review Risk management and compliance Profitability and efficiency ratios The purpose of the profitability and efficiency ratios is to measure the ratio of profit to capital, to tangible capital, to assets and to risk weighted assets, while the efficiency 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) Underlying RoE RoTE (Return on Tangible Equity) Underlying RoTE Attributable profit to the parent Average stockholders’ equity A interests) (excl. minority This ratio measures the return that shareholders obtain on the funds invested in the Bank and as such measures the Bank’s ability to pay shareholders. Underlying attributable profit to the parent Average stockholders’ equity A (excl. minority interests) Attributable profit to the parent B Average stockholders’ equity (excl. minority A interests) This ratio measures the return that shareholders obtain on the funds invested in the Bank excluding results from operations outside the ordinary course of our business. This is a very common indicator, used to evaluate the profitability of the company as a percentage of a its tangible equity. It’s measured as the return that shareholders receive as a percentage of the funds invested in the Bank less intangible assets. Underlying attributable profit to the parent Average stockholders’ equity A (excl. minority interests) - intangible assets This indicator measures the profitability of the tangible equity of a company arising from ordinary activities, i.e. excluding results from operations outside the ordinary course of our business. RoA (Return on Assets) Consolidated profit Average total assets Underlying RoA Underlying consolidated profit Average total assets This metric measures the profitability of a company as a percentage of its total assets. It is an indicator that reflects the efficiency of the Bank’s total assets in generating profit over a given period. This metric measures the profitability of a company as a percentage of its total assets excluding results from operations outside the ordinary course of our business. It is an indicator that reflects the efficiency of the Bank’s total assets in generating profit over a given period. RoRWA (Return on Risk Weighted Assets) Underlying RoRWA RoRAC (Return on Risk-Adjusted Capital) Consolidated profit Average risk weighted assets The return adjusted for risk is an derivative of the RoA metric. The difference is that RoRWA measures profit in relation to the Group’s risk weighted assets. Underlying consolidated profit Average risk weighted assets This relates the underlying consolidated profit (excluding results from operations outside the ordinary course of our business) to the Group’s risk weighted assets. Underlying consolidated profit Average economic capital This is the return on economic capital required internally (necessary to support all risks inherent in our activity). Economic Value Added Underlying consolidated profit – (average economic capital x cost of capital) Efficiency (Cost-to-income) Operating expenses C Total income Economic value added is the profit generated in excess of the cost of economic capital employed. This measures risk adjusted returns in absolute terms, complementing the RoRAC approach. One of the most commonly used indicators when comparing productivity of different financial 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 profit to the parent + Dividends. B. Excluding the adjustment to the valuation of goodwill. C. Operating expenses = Administrative expenses + amortizations. 413 Annual report 2020 Profitability and efficiency RoE A B (EUR million and %) Attributable profit to the parent Average stockholders' equity (excluding minority interests) Underlying RoE Attributable profit to the parent (-) Net capital gains and provisions Underlying attributable profit to the parent Average stockholders' equity (excluding minority interests) RoTE Attributable profit to the parent (-) Goodwill impairment Attributable profit to the parent (excluding goodwill impairment) Average stockholders' equity (excluding minority interests) (-) Average intangible assets Average stockholders' equity (excl. minority interests) - intangible assets Underlying RoTE Attributable profit to the parent (-) Net capital gains and provisions Underlying attributable profit to the parent Average stockholders' equity (excl. minority interests) - intangible assets RoA Consolidated profit Average total assets Underlying RoA Consolidated profit (-) Net capital gains and provisions Underlying consolidated profit Average total assets RoRWA Consolidated profit Average risk weighted assets Underlying RoRWA Consolidated profit (-) Net capital gains and provisions Underlying consolidated profit Average risk weighted assets RoRAC Consolidated profit (-) Net capital gains and provisions Underlying consolidated profit Average economic capital Economic value added Underlying consolidated profit (-) Average economic capital x cost of capital Average economic capital Cost of capital Efficiency ratio Underlying operating expenses Operating expenses Net capital gains and provisions impact in operating expenses C Underlying total income Total income Net capital gains and provisions impact in total income C Contents 2018 8.21 % 7,810 95,071 8.48 % 7,810 -254 8,064 95,071 11.63 % 7,810 46 7,764 95,071 28,331 66,740 12.08 % 7,810 -254 8,064 66,740 0.64 % 9,315 1,442,861 0.66 % 9,315 -231 9,546 1,442,861 1.55 % 9,315 598,741 1.59 % 9,315 -231 9,546 598,741 12.60 % 9,315 -231 9,546 75,755 2,835 9,546 -6,711 75,755 8.86 % 47.0 % 22,779 22,779 — 48,424 48,424 — 2020 -9.80 % -8,771 89,459 5.68 % -8,771 -13,852 5,081 89,459 1.95 % -8,771 -10,100 1,329 89,459 21,153 68,306 7.44 % -8,771 -13,852 5,081 68,306 -0.50 % -7,708 1,537,552 0.40 % -7,708 -13,866 6,158 1,537,552 -1.33 % -7,708 578,517 1.06 % -7,708 -13,866 6,158 578,517 8.51 % -7,708 -13,866 6,158 72,389 -2,529 6,158 -8,687 72,389 12.00 % 47.0 % 20,967 21,130 -163 44,600 44,279 321 2019 6.62 % 6,515 98,457 8.38 % 6,515 -1,737 8,252 98,457 11.44 % 6,515 -1,491 8,006 98,457 28,484 69,973 11.79 % 6,515 -1,737 8,252 69,973 0.54 % 8,116 1,508,167 0.65 % 8,116 -1,710 9,826 1,508,167 1.33 % 8,116 609,170 1.61 % 8,116 -1,710 9,826 609,170 12.91 % 8,116 -1,710 9,826 76,105 3,509 9,826 -6,317 76,105 8.30 % 47.0 % 23,280 23,280 — 49,494 49,229 265 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 51.c to the consolidated financial statements. 414 Responsible banking Corporate governance Economic and financial review Risk management and compliance Efficiency ratio by business area (EUR million and %) EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina 2020 2019 % 52.4 53.2 42.3 60.9 45.5 41.3 42.1 41.8 42.5 35.8 32.6 39.8 56.0 Total income 19,693 6,782 4,685 4,339 1,296 1,524 11,011 7,360 3,651 14,845 10,866 2,263 1,128 Operating expenses 10,314 3,607 1,981 2,642 590 629 4,631 3,079 1,552 5,312 3,541 900 632 % 52.6 53.6 43.3 60.0 45.3 40.4 42.8 43.3 41.8 36.1 33.0 40.6 57.9 Total income 21,001 7,506 4,710 4,727 1,375 1,717 11,604 7,605 3,998 18,425 13,951 2,539 1,316 Operating expenses 11,044 4,021 2,038 2,835 623 693 4,968 3,297 1,671 6,656 4,606 1,031 762 Underlying RoTE by business area (EUR million and %) 2020 2019 Average stockholders' equity (excl. minority interests) - intangible assets Underlying attributable profit to the parent 2,656 517 1,085 530 338 162 1,492 731 762 2,927 2,113 432 179 48,424 15,674 8,663 13,755 3,875 3,204 20,971 15,690 5,298 16,198 11,027 3,278 681 % 5.48 3.30 12.52 3.85 8.73 5.05 7.12 4.66 14.38 18.07 19.16 13.19 26.24 % 10.00 10.48 15.26 7.28 12.80 11.23 8.52 4.78 20.61 20.58 21.16 18.08 22.20 EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina Average stockholders' equity (excl. minority interests) - intangible assets Underlying attributable profit to the parent 4,878 1,585 1,314 1,077 525 349 1,667 717 950 3,924 2,939 630 144 48,794 15,124 8,611 14,795 4,101 3,104 19,556 14,997 4,607 19,065 13,888 3,485 647 415 Annual report 2020 Contents 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 financial 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 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 The coverage ratio is a fundamental metric in the financial sector. It reflects 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. Cost of Credit Allowances for loan-loss provisions over the last 12 months Average loans and advances to customers over the last 12 months This ratio quantifies loan-loss provisions arising from credit risk over a defined 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 (EUR million and %) 2020 2019 2018 NPL ratio Non-performing loans and advances to customers, customer guarantees and customer commitments granted Total risk 3.21 % 3.32 % 3.73 % 31,767 989,456 33,799 1,016,507 35,692 958,153 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 Underlying allowances for loan-loss provisions over the last 12 months Allowances for loan-loss provisions over the last 12 months Net capital gains and provisions impact in allowances for loan-loss provisions Average loans and advances to customers over the last 12 months 76 % 68 % 67 % 24,272 22,965 24,061 31,767 33,799 35,692 1.28 % 12,173 12,431 -258 952,358 1.00 % 9,321 9,321 — 935,488 1.00 % 8,873 8,873 — 887,028 416 Responsible banking Corporate governance Economic and financial review Risk management and compliance NPL ratio by business areas (EUR million and %) EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina 2020 Non- performing loans and advances to customers customer guarantees and customer commitments granted 22,792 13,796 2,455 3,202 1,584 1,496 2,938 2,025 913 5,688 3,429 2,051 93 % 3.15 6.23 2.36 1.21 3.89 4.74 2.23 2.04 2.81 4.39 4.59 4.79 2.11 Total risk 722,429 221,341 104,032 263,671 40,693 31,578 131,611 99,135 32,476 129,575 74,712 42,826 4,418 2019 Non- performing loans and advances to customers customer guarantees and customer commitments granted 23,519 14,824 2,416 2,786 1,834 1,447 3,165 2,331 834 6,972 4,727 1,947 171 % 3.25 6.94 2.30 1.01 4.83 4.31 2.20 2.20 2.19 4.86 5.32 4.64 3.39 Total risk 722,661 213,668 105,048 275,941 37,978 33,566 143,839 105,792 38,047 143,428 88,893 42,000 5,044 Coverage ratio by business areas (EUR million and %) 2020 2019 Provisions to cover impairment losses on loans and advances to customers, customer Non- performing loans and advances to customers customer guarantees and guarantees and customer commitments granted 22,792 customer commitments granted 13,056 6,495 2,726 1,535 1,053 1,058 5,363 4,261 1,103 5,540 3,880 1,260 257 13,796 2,455 3,202 1,584 1,496 2,938 2,025 913 5,688 3,429 2,051 93 EUROPE Spain Santander Consumer Finance United Kingdom Portugal Poland NORTH AMERICA US Mexico SOUTH AMERICA Brazil Chile Argentina % 57.3 47.1 111.0 47.9 66.5 70.7 182.5 210.4 120.8 97.4 113.2 61.4 275.1 % 49.8 41.1 106.1 36.5 52.8 66.8 153.0 161.8 128.3 88.4 99.8 56.0 124.0 Provisions to cover impairment losses on loans and advances to customers, customer Non- performing loans and advances to customers customer guarantees and guarantees and customer commitments granted 23,519 customer commitments granted 11,714 6,098 2,563 1,018 969 967 4,842 3,773 1,069 6,164 4,717 1,090 212 14,824 2,416 2,786 1,834 1,447 3,165 2,331 834 6,972 4,727 1,947 171 417 Annual report 2020 Contents Other indicators The market capitalisation indicator provides information on the volume of tangible equity per share. The loan-to-deposit ratio (LTD) identifies 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 Number of shares excluding treasury stock A Price / tangible book value per share (X) Share price TNAV per share LtD (Loan-to-deposit) Net loans and advances to customers Customer deposits Loans and advances (excl. reverse repos) Gross loans and advances to customers excluding reverse repos Deposits (excl. repos) Customer deposits excluding repos 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. 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. 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 & Insurance) Net profit + Fees paid from Santander Asset Management and Santander Insurance to Santander, net of taxes, excluding Private Banking customers Metric to assess Wealth Management & Insurance’s total contribution to Group’s profits A Tangible book value = Stockholders’ equity - intangible assets. Other indicators (EUR million and %) TNAV (tangible book value) per share B Tangible book value Number of shares excl. treasury stock (million) B Price / tangible book value per share (X) Share price (euros) B TNAV (tangible book value) per share B Loan-to-deposit ratio Net loans and advances to customers Customer deposits PAT + After tax fees paid to SAN (in WM&I) (Constant EUR million) Profit after taxes Net fee income net of tax B. 2018 and 2019 data adjusted for the capital increase in December 2020. 418 2018 4.01 67,912 16,930 0.95 3.807 4.01 113% 882,921 780,496 2020 3.79 65,568 17,312 0.67 2.538 3.79 108% 916,199 849,310 2,145 909 1,236 2019 4.18 72,384 17,332 0.86 3.575 4.18 114% 942,218 824,365 2,179 889 1,289 Responsible banking Corporate governance Economic and financial review Risk management and compliance Impact of exchange rate movements on profit 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 effect, as it considers the latter facilitates analysis, since it enables businesses movements to be identified 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 different business units comprising the Group into our presentation currency, the euro, applying the average exchange rate for 2020 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 1 '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 effect 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 2020 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 1 'Economic, regulatory and competitive context'. 419 Annual report 2020 Contents Risk management and compliance 420 Responsible banking Corporate governance Economic and financial review Risk management and compliance 1. Risk management and compliance overview 1.1 Executive summary and 2020 highlights 1.2 2020 achievements 1.3 Santander's top and emerging risks 2. Risk management and control model 2.1 Risk principles and culture 2.2 Risk factors 2.3 Risk governance 2.4 Management processes and tools 2.5 Models & Data unit 2.6 Environmental and social risk 3. Credit risk 3.1 Introduction 3.2 Credit risk management 3.3 Covid-19 credit risk management 3.4 Key metrics 3.5 Details of main geographies 3.6 Other credit risk details 422 422 425 426 428 428 428 429 431 434 434 5. Capital risk 5.1 Introduction 5.2 Capital risk management 5.3 Key metrics 6. Operational risk 6.1 Introduction 6.2 Operational risk management 6.3 Key metrics 7. Compliance and conduct risk 7.1 Introduction 7.2 Compliance and conduct risk management 437 8. Model risk 437 437 439 443 449 454 8.1 Introduction 8.2 Model risk management 9. Strategic risk 9.1 Introduction 9.2 Strategic risk management 4. Market, structural and liquidity risk 461 4.1 Introduction 4.2 Market risk management 4.3 Market risk key metrics 4.4 Structural balance sheet risk management 4.5 Structural balance sheet risk key metrics 4.6 Liquidity risk management 4.7 Liquidity risk key metrics 4.8 Pension and actuarial risk management 461 462 464 470 471 474 475 475 476 476 477 478 479 479 479 484 486 486 486 492 492 492 494 494 494 421 Annual report 2020 Contents 1. Risk management and compliance overview Santander’s Risk Management and Compliance function is key to making sure we remain a robust, safe and sustainable bank that helps people and businesses prosper In 2020, our priority was safeguarding the health and interests of our stakeholders and mitigating the economic and financial impact of the covid-19 crisis. Santander supported 6 million customers across our markets by providing liquidity, credit facilities and payment deferrals through government and internal programmes aimed to relieve the economic consequences of the pandemic. Santander’s risk management, compliance and control model contributes to sustainable growth, the conservation of the environment and the protection of human rights. 1.1 Executive summary and 2020 highlights This section provides an overview of Santander’s risk management and risk profile in 2020 based on key risk factors, indicators and developments. More details on each factor and our analysis of top and emerging risks can be found in the sections of this chapter using the links provided. Credit Risk Section 3 Our strong risk culture, a proven track record in crisis management and diversification make us more resilient. In a complex environment, impact on credit quality indicators was limited, owing to good performance of customer relief programmes and collections and recoveries planning. Total risk by region 6 5 Europe 73% N. America 13% S. America 13% Total risk by segment Non-performing Loans Loan growth in constant euros and customer support programmes drove the rate down. 3.32% ▼ 3.21% 2019 2020 Cost of credit 7 Cost of credit improved on estimates made at the beginning of the pandemic. Individuals 55% Companies 29% SCIB 16% 2019 2020 1.00% ▲ 1.28% 5 Includes gross lending to customers, guarantees and documentary credits. 6 Others' not included represent 1% (Santander Global Platform and Corporate Centre). 7 Cost of credit is the ratio of 12-month loan-loss provisions to average lending on the same period. 422 Responsible banking Corporate governance Economic and financial review Risk management and compliance Market, structural and liquidity risk Section 4 Low market risk: SCIB’s trading is mainly interest-rate driven and focused on serving clients’ needs. 2020 Avg. Value at Risk (VaR) EUR million ▲168% Ample short-term Group liquidity ratio (LCR) +21 pp in 2020 Santander maintained a comfortable liquidity position. Ratios remained well above regulatory limits, thanks to customer deposits and robust, diversified buffers. Our balance sheet kept its prudent structure and mitigated the potential effect of changing interest rates on net interest income and equity. Section 5 EUR 605bn EUR 563bn VaR was stable despite market volatility in Q1’20 caused by the covid-19 pandemic. Capital risk RWA by risk type 8 Credit risk, which is our core business, stands out among RWA. 9 RWA by region Diversified and balanced distribution. Operational 10% Market 3% 2019 57% 19% 22% Europe N.America S. America 2020 59% 18% 20% ▲12.34% ▲69 bps in 2020, placing management. CET1 above our 11-12% target The CET1 ratio increased due to strong organic capital generation based on underlying profits and efficient RWA The strength of our diversified retail banking business model is demonstrated by our positive performance in all 7 regulatory stress tests performed since 2008. ▼8.5% ▼4 pp in 2020 RoRAC allows to compare the return on loans, customers, portfolios and businesses on a like-for-like basis, helping to identify those that obtain a risk-adjusted return above the cost of capital. 11% 15% 26% 11.65 12.34 Credit 10 87% CET1 phased-in 2020 11 2019 2020 12 RoRAC Europe N. America S. America 2020 8 Risk weighted assets. 9 'Others' not included, represent 3% (Santander Global Platform & Corporate Centre). 10 Includes counterparty risk, securitizations and amounts below deduction thresholds. Phased-in IFRS 9 ratios include the temporary treatment on the impact of IFRS 9, calculated in accordance with Article 473 bis of the Capital Requirements Regulation (CRR), and subsequent amendments introduced by the Regulation (EU) 2020/873 (known as the "CRR Quick Fix"). The Group’s total RoRAC includes the operative units, the Corporate Centre and SGP, reflecting the Group's economic capital and its return. 12 11 423 Annual report 2020 Operational risk Our operational risk profile remained stable despite the current backdrop. To reinforce controls, we focused on: Contents Section 6 Effective operational risk management Successful deployment of business continuity plans. Customer service Availability and performance, especially in online banking and at call centres. New operating guidelines in all our subsidiaries. Processing of new loans granted through customer support programmes. Cyber and data security plans Cyber threats and risks stemming from increased remote working. Fraud management Stronger detection, response and protection mechanisms. Reinforced fraud control (data protection, patching, browsing control). Monitoring as a fundamental preventive measure. Operational losses by Basel category 2020 Customers 65% Compliance and conduct risk Initiatives in 2020: Damage to physical assets 1% External fraud 21% Processes Employees & systems 1% 11% Internal fraud 1% Section 7 • Compliance & Conduct worked to be part of the solution to the crisis. With special focus on customers facing hardship, it implemented and monitored measures relating to covid-19 relief programmes. • Our core subsidiaries applied the common standards of the single channel model called Canal Abierto. • One FCC, our strategic transformation plan that includes homogenous sanctions controls (embargoes or restrictions on international activity). • We revised our policies on data protection. Our subsidiaries applied new guidelines and operating criteria according to supervisory guidance. Model risk Section 8 • Our strategic Model Risk Management plan, MRM 2.0, • Further digitalization enhanced real-time decision-making. made further progress. We accomplished two objectives: better internal model management and compliance with supervisory expectations. Strategic risk • In 2020, our focus was the uncertain economic outlook brought on by covid-19, which acted as a catalyst for previously identified risks. Section 9 • The main tasks we carried out were challenging strategic plans, identifying and monitoring top risks, assessing and validating new products and coordinating the risk assessment of corporate development transactions. 424 Responsible banking Corporate governance Economic and financial review Risk management and compliance The notes to the consolidated financial statements contain additional information on Grupo Santander’s provisions, legal proceedings, taxes and other risks. For additional information on segments, please see '4.1 Description of segments' of the Economic and financial review chapter. Grupo Santander's risk profile could be affected by the macroeconomic environment, regulations and competition. This financial information, prepared with the same Group- wide principles, aggregates figures for our various markets and business subsidiaries, based on accounting data and management system reporting. The segments shown are differentiated by the geographical area where profits are earned and by type of business. The financial information of each reportable segment is prepared by aggregating the figures for the Group’s various geographical 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. 1.2 2020 key achievements We delivered simple, innovative processes that empowered our people to make better and faster decisions for our customers and created sustainable value for our shareholders. Covid-19 crisis management Unprecedented response: EUR 112bn in customer support measures Continuous adapted reporting to the board and committees Clearer segmentation to Preparedness for identify vulnerable industries/customers collections and recoveries Impact estimation under various scenarios to determine provision needs Operational excellence Our target operating model prepared us for a turn in the cycle with pre-approvals and early markets warnings Digitalisation reduced time to yes and time to cash in core mortgage Cybersecurity risk challenge and oversight helped monitor automation, data gathering and reporting IT, cyber, third-party, internal control and fraud risk operating models were reinforced Creating value Capital accuracy strengthened key models according to ECB of our top risks Model Simplification Plan Capabilities improved to Our strategic One FCC handle climate risk, one and Conduct Risk transformation projects set common standards New ways of working One Santander: global models & data hub and SCIB hub New regional CRO and More efficient, integrated risk leads: Europe, N. compliance processes America and S. America Our risk culture is key to managing the covid-19 crisis successfully 425 Annual report 2020 Contents 1.3 Santander's top and emerging risks Our forward-looking risk management and control practices detect, examine and monitor threats to our strategic plan through regular analysis of top and emerging risks under various scenarios. The aim is to identify and understand relevant internal and external threats that could undermine our profitability, solvency and strategy. Top risk detection is a bottom-up process. It considers risks in our subsidiaries and across Grupo Santander; these are identified in our first line of defence and then challenged by the second line of defence. We also use those risks as inputs for idiosyncratic scenarios in our ICAAP, ILAAP and the Group’s recovery plan. The pandemic caused an unprecedented downturn in the global economy while accelerating changes long underway. It acted as a catalyst for previously identified threats (detailed below), whose severity varies with the duration and shape of our recovery scenarios. It is already changing market dynamics and consumer behaviours, and accelerating the digitalization of the economy. Regulatory capital requirements: Despite the temporary flexibility of central banks and regulatory bodies to aid the financial system, we remain mindful of risks stemming from ever intense requirements of new Basel IV guidelines and the Targeted Reviews on Internal Models (TRIM). Our key mitigating actions were: • Risk contribution to capital optimization: models enhancement and management, market and operational risk initiatives, and Credit Valuation Adjustment (CVA) improvement. • Managing capital to offset the effects of covid-19. • Adapting risk models to upcoming regulatory requirements. Greater cyber-risk exposure: The new environment, with more people working remotely as a consequence of covid-19, heightens exposure to cyberattacks, phishing and malware. Espionage, data leaks, system failures and other digital risks are gaining importance in finance, much less the entire economy. Our top management monitors and takes mitigating actions against major strategic risks such as: Our key mitigating actions were: A longer and more severe (“L” shaped) economic recession: the worldwide spread of the coronavirus and the measures taken to contain it brought on an economic downturn unlike any other. If the pandemic grows more intense, it may lead to a deeper, more protracted economic recession, political instability and global protectionism in core markets. Particularly, in the eurozone, under persistently low interest rates and potential tensions on trade and financial relations with the UK after Brexit, as well as in Latin American markets, also affected by uncertainty. Balanced diversification between mature and developing markets and our product mix make Santander resilient to macroeconomic risks. Several mitigating actions we took this year helped reduce the severity of our exposure. These include: • Robust risk policies, procedures and proactive risk management, which keep our risk profile within the parameters of our risk appetite statement. Amid the pandemic, Grupo Santander shared with subsidiaries guidelines on treating affected assets, credit risks models, loan moratoria and other topics. This promoted the exchange of best practices and proved to be key in managing the crisis. • Strengthened disciplined risk management and recovery and collection plans. • Frequent follow-up meetings to monitor the liquidity risk profile, contingency plans and commercial, market and macroeconomic dynamics. • Continuous monitoring of the political and social situation in countries where we hold material exposures. Where necessary, we adjusted limits and exposures to our risk appetite. • Expanding Global Cybersecurity alerts and monitoring to prevent attacks. • Making defence capabilities more agile, sustainable and risk-based to further standardize and strengthen internal defences, controls and insider threat protections. Digital transformation and new competitive environment: In this new environment spurred on by covid-19, competition from existing players and new entrants increased, redefining business, customer experience and market expectations and accelerating the digitalization of companies. Regulation plays a key role, and can sometimes create asymmetries between new and traditional competitors. Our key mitigating actions were: • Digitalising the bank to become a global platform. This has become paramount in this environment, and our partnerships and joint ventures are playing an important role in our transformation. • Prioritizing e-commerce lending, SMEs initiatives, collections reinforcement and other projects to mitigate the effects of covid-19. • Continuously embedding a group-wide culture of rapid experimentation, sharing best practises and business solutions. Risks related to climate change: The initiatives governments, international organizations, supervisors and regulators are launching to assess the impact of climate change on the financial sector demand greater transparency and reporting of the risks it might pose to banks performance, resilience and business strategies. Proactive climate risk management is vital so banks can identify, and respond to, risks in a timely manner. 426 Responsible banking Corporate governance Economic and financial review Risk management and compliance Climate-related risks fall into two categories: (1) risks relating to the transition to a low-carbon economy and (2) risks from the physical impacts of climate change. In an interconnected world where global problems demand global solutions, the pandemic highlighted the importance of coordination and cooperation to combat the health crisis and its economic consequences and therefore, the need to address climate change risks under that approach to avoid its potential consequences. Our key mitigating actions were: • Direct involvement of our top management through the established governance. • A climate project jointly led by Responsible Banking, SCIB and Risk to develop risk measurement methodologies, climate related metrics, strategy, policies and products. The project also progresses in implementing the recommendations of the Task Force for Climate-related Financial Disclosures, the European Central Bank and other authorities on climate-related and environmental • Continue disclosing our progress in integrating climate initiatives into our processes and policies. • Working together with customers to support them in their transition to reduce carbon emissions. Supporting inclusive, sustainable growth and the transition to a low-carbon economy by financing renewable energy and smart infrastructures, always mindful of social and environmental risks and rewards. • Taking an active role in international forums and working groups to promote the energy transition scheme, including the United Nations Environment Programme Finance Initiative (UNEP FI) pilot to develop scenarios, models and metrics to assess climate-related risks and opportunities in the future. Additionally, we identified "game changers" that could shape our long-term strategy and transformation plan, such as: asymmetry on natural resource availability, new consumer behaviours, the changing geopolitical landscape, political fragmentation, social and demographic changes, legal loopholes and others. 427 Annual report 2020 Contents 2. Risk management and control model Our risk management and control model is underpinned by common principles, a strong risk culture, a solid governance structure and advanced risk management processes and tools 2.1 Risk principles and culture Our risk principles below are compulsory. They comply with regulatory requirements and are inspired by best market practices: 1. All employees are risk managers. Employees must understand the risks inherent in their jobs, avoiding them wherever the impact is unknown or exceeds our risk appetite. 2. Engagement of top management, who must act and communicate to manage risks consistently, supervise our risk culture and make sure we keep our risk profile within our risk appetite. 3. Independent risk management and control functions, consistent with our model of three lines of defence, which is further explained in section 2.3 'Risk and Compliance governance' of this chapter. 4. A forward-looking, comprehensive approach to risk management and control for all businesses and risk types. 5. Detailed, timely information to detect, assess, manage and report risks to the appropriate level of management. Grupo Santander’s holistic control structure stands on these principles, plus a series of strategic tools and procedures embedded in our risk appetite statement, such as: our risk profile assessment, scenario analysis, our risk reporting structure and the annual planning and budget process. Risk culture - Risk Pro Our strong risk culture, called Risk Pro, is based on the principle that all employees are risk managers. It is part of The Santander Way and covers all risks to promote socially responsible management that supports long-term sustainability. More details available in the 'Risk pro: our risk culture' section of the Responsible Banking chapter. 428 2.2 Risk factors Grupo Santander's classification of risks ensures effective risk management, control and reporting. Our risk framework distinguishes these key risk types: Credit risk relates to financial loss arising from the default or 1 credit quality deterioration of a customer or counterparty, to which Santander has directly provided credit or assumed a contractual obligation. Market risk results from changes in interest rates, exchange 2 rates, equities, commodities and other market factors, and from their effect on profits or capital. Liquidity risk occurs if liquid financial resources are not 3 enough to meet due obligations or can only be obtained at a high cost. Structural risk relates to the changing value or margin of 4 assets or liabilities in the banking book owing to changes in market factors and balance sheet behaviour. It includes risks from insurance, pension activities or an inadequate quantity or quality of capital to fulfil internal business objectives, regulatory requirements or market expectations. Operational risk is the possibility of losses from inadequate 5 or failed internal processes, people and systems, or from external events. It includes legal risk and conduct risk. Regulatory compliance risk is the risk of not fulfilling legal 6 and regulatory requirements and supervisors’ expectations, and may lead to fines, financial penalties or other sanctions. Model risk involves potential losses resulting from 7 inaccurate predictions that lead to sub-optimal decision- making, or from a misuse or inadequate implementation of a model. Reputational risk consists of potential losses from damage 8 to its reputation amongst employees, customers, shareholders/investors and the wider community. Strategic risk relates to losses or damage to the medium- 9 and long-term interests of key stakeholders owing to strategic decision-making, poor execution of strategy or failure to adapt to external developments. We also consider environmental and climate-related risk drivers (whether physical or transition-led) as factors that could impact the exiting risks in the medium and long-term. Responsible banking Corporate governance Economic and financial review Risk management and compliance 2.3 Risk and Compliance governance Grupo Santander’s robust risk and compliance governance structure allows us to conduct effective oversight in line with our risk appetite. It stands on three lines of defence, a structure of committees and strong Group-subsidiary relations, guided by our risk culture, Risk Pro. Lines of defence Our model of three lines of defence effectively manages and controls risks: First line Second line Third line Businesses and functions that originate risks make up the first line of defence, which identifies, measures, controls, monitors and reports risks. It adheres to all risk management policies and procedures, making sure risks fit within risk appetite and other limits. The Risk and Compliance & Conduct functions form the second line of defence to provide independent oversight and challenge to risk management decisions from the first line. The second line of defence ensures risks are managed according to risk appetite, strenghtening our risk culture across Grupo Santander. The Internal Audit function is independent to assure senior management about the quality and effectiveness of internal controls, risk management. governance and systems, helping to safeguard our value, solvency and reputation. The Risk, Compliance & Conduct and Internal Audit functions are separate and independent. Each has its own direct access to the board of directors and its committees. Risk and Compliance committees structure The board of directors' duties include risk and compliance management and control. It regularly revises and approves risk appetite and frameworks, strengthening and promoting our risk culture. In its duties, the board is supported by the risk supervision, regulation and compliance committee and the Grupo Santander executive committee. For more details, see section 4.8 ‘Risk supervision, regulation and compliance committee activities in 2020’ of the chapter on Corporate governance. The Group chief risk officer (Group CRO) is responsible for devising risk strategy, overseeing all risks, and challenging and advising business lines on their risk management. The Group chief compliance officer (Group CCO) promotes the adherence to rules, supervisory requirements, principles of good conduct and values. This role determines the compliance and conduct strategy, and independently oversees and challenges the compliance and conduct risk management of the first line of defence. Both the Group CRO and CCO have direct access, and report to, the risk supervision, regulation and compliance committee and the board of directors. The executive risk, risk control and general compliance committees are also at the top of our risk and compliance governance, with authority delegated by the board of directors. Further detail is provided in the table below: 429 Annual report 2020 Contents Duties: Executive risk committee (ERC) Risk control committee (RCC) General compliance committee This committee is responsible for risk management duties delegated by the board, being authorized to accept, modify or scale those actions or transactions that may expose the entity to a relevant risk as well as the most significant models. It takes the highest-level risk- related decisions within the group’s risk appetite. This committee is responsible for risk control and for providing a holistic view of all risks. It determines if the risks business lines are being managed according to risk appetite. It also identifies, monitors and evaluates the impact of current and emerging risks on the group's risk profile. The committee is responsible for reviewing significant compliance and conduct risk events, and evaluating related measures. It devises and assesses corrective actions for compliance risks owing to shortcomings in management and control or new risks. Chair: CEO Group CRO Group CCO Composition: Nominated executive directors and other senior managers from the Risk, Finance and Compliance & Conduct functions (the Group CRO has veto power over committee resolutions). Senior managers from the Risk, Compliance & Conduct, Finance, Accounting and Management Control functions (CRO from subsidiaries regularly report on their own risk profiles). Senior managers from the Compliance & Conduct, Risk, Accounting and Management functions. The committee chair has a casting vote over committee resolutions. Risk functions have forums and regular meetings to manage and control the risks under their scope. Their responsibilities include: • Reporting to the Group CRO, Group CCO, the risk control committee and general compliance committee on risk management according to risk appetite. • Monitoring each risk factor regularly. • Overseeing measures to meet supervisor and auditor expectations. Grupo Santander may set up additional governance for special cases: • Amid the covid-19 pandemic, coordination and communication with our subsidiaries is essential to making sure our actions were effective, underpinned by written communication, meetings, reporting and enhanced governance. In early March, we implemented specific weekly reporting mechanisms so all units could provide detailed, standardized information. We monitored the pandemic intensively through special situation forums such as the credit risk war room, in addition to our regular governance framework. Close coordination between our subsidiaries and Group-wide and local contingency plans (including scenario analysis) strengthened resources and governance. As the crisis developed, it became a multidisciplinary task force composed of members from relevant functions to steer units in managing credit risk with these special work streams in place: i) monitoring and reporting; ii) sectorial intelligence; iii) portfolio management; iv) credit strategy; v) regulatory assurance; vi) credit forecasting and vii) collections and recoveries. • Furthermore, in view of Brexit, Grupo Santander and Santander UK set up steering committees and separate working groups to monitor the transition; develop contingency plans; and escalate and make decisions to minimise impact on our business and customers. The Group’s relationship with its subsidiaries Our subsidiaries’ risk and compliance management and control models are aligned with frameworks established by the group’s board of directors. Their own boards enforce them in consideration of local market conditions and regulations. As part of the aggregate supervision function for all risks, Grupo Santander challenges and validates subsidiaries’ policies and transactions.This creates a common risk management and control model across the group. In 2020, a new approach was taken in the relationship with our subsidiaries with the creation of three regions (Europe, North America and South America) and the appointment of three risk regional leaders.The aim is to enhance the identification of synergies under a common operating model and common platforms, leveraging the Group's global and regional scale, as well as simplifying processes and strengthening control mechanisms to support business growth while optimizing capital allocation and better serving our customers. In this sense, each local CRO must regularly interact with, and report to, the risk regional leaders, the Group CRO and the Group CCO. Additionally, periodic follow-up meetings are held between the different risk areas and the local counterparts. Furthermore, the Group CRO, the Group CCO, and Risk Regional Leaders take part in appointments, target setting 430 Responsible banking Corporate governance Economic and financial review Risk management and compliance and local CRO evaluations and remuneration to make sure risks are appropriately controlled. We undertook various initiatives to enhance the relationship between the Group and its subsidiaries and apply an advanced risk management model: • It is worth highlighting, the close collaboration in relation to covid-19 to share best practices, experiences, provide support in scenario analysis, additional provision estimations, etc. • Development of organizational structures, subsidiary benchmarks and a strategic vision of the Risk and Compliance function to promote the most advanced and efficient risk management infrastructures and practices. • Cooperation to share best practices, strengthen processes and drive innovation for a quantitative impact. • Identification of talent in the Risk and Compliance teams, encouraging international mobility through the global risk talent programme. • Risk Subject Matter Experts to bring together a community of specialists. For more details on our relationship with our subsidiaries, see section 7 ‘Group structure and internal governance’ of the chapter on Corporate Governance. 2.4 Risk management processes and tools Grupo Santander has these effective risk management processes and tools: Risk appetite and structure of limits Risk appetite is the volume and type of risks deemed prudent to assume for our business strategy, even under unexpected circumstances. It considers adverse scenarios that could have a negative impact on capital and liquidity, profitability and/or the share price. The board sets the group's risk appetite statement (RAS) every year. The boards of our subsidiaries also set their own risk appetites annually, in line with the consolidated Group- wide RAS. Each of those risk appetites cascades down into specific, detailed limits and policies based on risk type, portfolio and segment. Business model and risk appetite fundamentals Grupo Santander's risk appetite is consistent with our risk culture and our unique business model built on customer focus, scale and diversification. At the core of our risk appetite are: • a medium-low target risk profile that is predictable, centred on retail and commercial banking, internationally diversified operations and strong market share; • stable, recurrent earnings and shareholder remuneration, sustained by sound capital, liquidity and sources of funding; • self-run subsidiaries with their own sources of capital and liquidity and risk profiles that do not compromise Grupo Santander’s solvency; • an independent risk function with active senior management that embeds a strong risk culture and drives a sustainable return on capital; • a global, holistic view through extensive control and monitoring of risks, businesses and markets; • a focus on products we know well; • a conduct model that protects our customers; • a remuneration policy that reconciles employees and executives' interests to risk appetite and long-term results. Santander's risk appetite principles The principles informing our risk appetite are: • the board and senior management's responsibility for risk appetite. • an enterprise-wide view, risk profile back-testing and challenge, using quantitative metrics and qualitative indicators. • a forward-looking approach based on plausible assumptions and adverse/stress scenarios to reflect our desired risk profile in the short and medium term. • strategic and business plans embedded in daily management by policies and limits. • common standards aligning each subsidiary with Grupo Santander. 431 Annual report 2020 Contents • regular reviews, regulatory requirements and best practices with mechanisms in place to keep the risk profile stable and mitigate non-compliance. Limits structure, monitoring and control Our risk appetite is expressed in qualitative terms and limits structured on these five core elements. 1 Earnings volatility The maximum loss Grupo Santander can tolerate in an acute stress scenario. 2 Solvency • The minimum capital position Grupo Santander can tolerate in an acute stress scenario. • The maximum leverage we can accept in an acute scenario. 3 Liquidity • Minimum structural liquidity position. • Minimum liquidity horizon Grupo Santander is willing to accept in an acute stress scenario. • Minimum liquidity coverage position. Concentration 4 • Concentration in single names, sectors and portfolios. • Concentration in non-investment grade counterparties. • Concentration in large exposures. Non-financial risks 5 • Maximum operational risk losses. • Maximum risk profile. • Non-financial risk indicators: ◦ Fraud ◦ Technological ◦ Security and cyberrisk ◦ Reputational ◦ Others While risk appetite limits are regularly monitored, specialized control functions report on risk profile and compliance with limits to the board and its committees every month. Risk appetite limits cascade down to business units, risk types and portfolios. This makes risk appetite an effective tool for managing risks. Management policies and limits are directly based on the principles and limits in the risk appetite statement (see sections 3.2 ‘Credit risk management’, 4.2 ‘Market risk management’ and 4.4 ‘Structural balance sheet risk management’ of this chapter). Key 2020 developments Grupo Santander thoroughly reviewed the impact of covid-19 and the adequacy of our risk appetite to cope with the new environment. Risk appetite limits remained broadly unchanged despite extraordinarily challenging conditions. Management focused on enhancing control over market volatility, better representation and visibility of emerging risks such as cyber security and other non-financial risks. Our risk appetite statement also strengthened our commitment to corporate social responsibility, the environment and the Paris Agreement's transition to a low- carbon and climate-resilient economy. Risk profile assessment In Grupo Santander we routinely identify risk types to systematically and objectively evaluate our risk profile. This helps address major threats to our business plan and strategic objectives. 432 Risk identification results inform our risk profile assessment (RPA), which involves all lines of defence. It reinforces our risk culture in analysing how risks evolve and identifying improvement areas. Our RPA methodology covers these areas: • Risk performance, to understand residual risks by type with international standard and indicators. • Control environment, to measure the target-operating model of our advanced risk management according to regulatory requirements and best market practices. • Forward-looking, based on stress metrics and top risks to our strategic plan. In 2020, we upgraded our control environment standards and reviewed risk performance metrics, focusing on strategic, compliance and conduct metrics. The inclusion of the "control score" in the non-financial risks control environment enabled us to better capture our risk profile. Covid-19 had a negative impact on Grupo Santander's risk performance. In triggering all scenarios we consider (including those most severe), it led to a higher risk profile, driven by higher provisions and budgetary deviations with respect to profits. Non-financial risk profile remained stable, with operational losses below 2019 figures, and better liquidity performance. The impact of covid-19 as a catalyst for relevant and emerging risks was also key in the deterioration of our risk profile in 2020. This deterioration has been contained by a solid control environment, especially in credit risk, driven by ATOMiC and collections and recovery preparation plans. All of this has allowed us to maintain our risk profile at a 'medium- low' level. For more detail on Collections & Recoveries preparedness plans, please go to 3.2 'Credit risk management'. Scenario analysis The scenarios we analyse include macroeconomic and other variables that can affect our risk profile in those markets in which we operate. Scenario analysis is a useful tool for managing risks at all levels, so we can gauge our resilience under stressed conditions and formulate mitigating actions on income, capital and liquidity if needed. For this, our Research and Public Policy team is key in defining scenarios, as well as our governance and control, including the review of our top management and the three lines of defence. Our scenario analyses are consistent and robust because we: • create and run models that estimate how metrics such as credit losses will perform in the future. • back-test and regularly challenge model results. • rely on expert opinions and a vast understanding of our portfolios. • exert robust control over models, scenarios, assumptions, results and mitigating management actions. Responsible banking Corporate governance Economic and financial review Risk management and compliance Grupo Santander has recurrently achieved excellent quantitative and qualitative results in the European Banking Authority (EBA) stress tests. ◦ Credit and market risk stress test exercises not only as a response to regulatory exercises but also as a key tool integrated in Grupo Santander’s risk management. The global economic uncertainty caused by the covid-19 crisis made it exceptionally difficult for businesses to plan ahead. Our scenario analyses were key in identifying new action points, developing business responses, adjusting our risk strategy and preserving our strength and solvency. Scenario analysis applications Grupo Santander run scenario analysis at all levels under a forward-looking approach that helps us anticipate potential impacts on our solvency or liquidity. We run a systematic review of our risk exposure under a baseline scenario and various adverse and favourable scenarios. These exercises are fundamental to several core processes: • Regulatory exercises under the guidelines of the EU supervisor and national supervisors. • Internal capital adequacy assessment (ICAAP) and liquidity assessment (ILAAP), for which Grupo Santander follows its own methodology to assess capital and liquidity under stress scenarios and support planning and management. • Risk appetite, which includes stressed metrics to set the maximum risk we can assume. The risk appetite and capital and liquidity scenario exercises are closely interrelated but have different frequencies and granularity. • Climate change analyses to identify scenarios of risks and opportunities. Pilot analyses are covering the wholesale portfolio. For more details, see 'Climate change and risk management' in this section located in 2.6 ‘Environmental and social risk’ of this report For more details on scenario analysis, see sections 3.2 ‘Credit risk management', 4.2 ‘Market risk management’ and 4.6 'Liquidity risk management' in this report Amid the covid-19 pandemic and following supervisory guidelines, our Research department created a set of additional macroeconomic scenarios under a long-term stable outlook approach to account for the observed worsening in most indicators and assess expected losses. Grupo Santander developed the scenarios through a robust process with great effort from the teams involved, ensuring their consistency. For more details on scenario analysis during the covid-19 pandemic, see section 3.3 'Covid - 19 Credit risk management' in this report Risk reporting structure Our reporting continues to streamline processes, controls and reports to senior management. The Enterprise Wide Risk Management team updates and compiles the risk profile overview under a forward-looking approach so senior management can assess actual and future risks and take appropriate actions. There are three main types of risk reports: the weekly and monthly risk reports distributed to senior management; subsidiaries’ risk reports; and reports on each risk factor identified in the risk framework. Our strong risk reporting structure is characterized by: • balancing data, analysis and qualitative comments, including forward-looking measures, risk appetite alerts, limits and emerging risks. • Recurrent risk management in: • covering all risk factors in our risk framework. ◦ budget and strategic planning: when implementing a new risk approval policy, in Grupo Santander’s risk profile assessment by senior management or when monitoring specific portfolios or lines of business ◦ the systematic process of identifying and analysing our top risks, each of which is associated with a macroeconomic or idiosyncratic scenario to assess their potential impact. ◦ the recovery plan, which is drawn up every year to determine Grupo Santander’s tools to overcome an extremely severe financial crisis. The plan provides financial and macroeconomic stress scenarios with degrees of severity as well as idiosyncratic and systemic events. ◦ IFRS 9. Since 1 January 2018, regulatory provision requirements have included scenario analyses in related processes, models and methodologies. • combining a holistic and reliable view with deeper analysis of each risk factor, our subsidiaries and markets. • following the same structure and criteria and provides a consolidated view to analyse all risks. • following risk data aggregation (RDA) criteria to report on metrics, ensuring data quality and consistency. To respond to the covid-19 crisis, the reporting function, as acknowledged by the ECB's Single Supervisory Mechanism (SSM), increased the frequency, customized reports and produced new ones for the board and committees. It focused on critical topics such as macroeconomic conditions, health indicators, customer support measures and risk areas to enable close monitoring and easier decision-making. 433 Annual report 2020 Contents 2.5 Models & Data Unit Grupo Santander created the Models & Data Unit on May 2020. Because of the close link between models and data, we merged Santander Analytics and the Data Unit. However, Internal Validation remains a separate team, allowing full independence between the first and second lines of defence. The Models & Data Unit sets about having an end-to-end view of the models and the data value chain for better data governance, quality, and a cross-functional scope of risk and business models. The unit's main priority is to develop regulatory models. In particular, it focuses on internal rating based (IRB) implementation, fostering excellence in risk modelling with best-in-class analytics and quality data to ensure compliance, accuracy, stability and robustness. The new unit oversees all of our regulatory models and services our needs, paying special attention to machine learning and other digital transformation initiatives at the top of the agenda. The Models & Data Unit's role is crucial in Grupo Santander. It boosts analytical capabilities to help us better understand our customers, tailor our value proposition to them and inspire their loyalty, which is at the core of our strategy. This unit also supports subsidiary and parent businesses through successful initiatives in place. These include the use of machine learning on customer experience, operational process automation with cognitive robots and financial crime detection. The Models & Data Unit also helps Grupo Santander in developing new data-driven business models aligned with our digital strategy. Since the outbreak of covid-19, Grupo Santander's risk models have taken our payment holidays and other support measures into account. They are assessed with the best analytical tools to improve risk monitoring. Our priority is to make sure our risk models remain predictable and give management and regulatory processes the right support. We updated model ratings based on a long-term outlook and reinforced monitoring. In calculating IFRS 9 provisions and other processes, model outputs were sometimes supplemented with expert opinions to fully capture the expected impact of the pandemic. Grupo Santander commits to using data and artificial intelligence responsibly and following international standards and regulations. In fact, our advanced analytics global tools developed internally have engrained a number of functionalities ensuring non-discrimination, transparency and accountability. 2.6 Environmental and social risk Grupo Santander’s risk management and control model contributes to our sustainable growth by promoting the conservation of the environment, the protection of human rights and the transition to a low-carbon economy. The board has approved environmental and social policies that describe those activities in oil, gas, power generation, mining and metals, and soft commodities sectors to which the group cannot provide financial products or services as 434 well as other activities that require an in-depth analysis of potential impacts on the environment and society. The annual review of these policies is led by the global environmental and social risk management (ESRM) function who, in consultation with our credit risk, responsible banking and reputational risk functions and business areas, proposes updates to the board to make sure the policies continue to meet international practices and standards and are aligned to the group’s sustainability strategy. In 2020, we have continued to evolve our criteria and, in January 2021, the board approved additional prohibitions on the financing of projects involved in the exploration, development, construction or expansion of unconventional oil & gas (e.g. tar sands/fracking/coal bed methane); the construction or development of infrastructure associated to coal-fired power plants or coal mines; and new clients with coal mining operations. In addition, the three previous policies were merged into a single document. Grupo Santander's environmental and social policy can be found at the corporate website To ensure the application of these criteria, Santander relies on environmental and social (E&S) risk assessments of customers and transactions, especially in the Santander Corporate and Investment Banking (SCIB) division, which holds most customers and exposures outlined in the policies. In a detailed questionnaire, SCIB clients are first reviewed by our business areas; then a dedicated team of 'green analysts' provide overall assessments on E&S risks. In 2020, and continuing into 2021, the questionnaires are being enhanced with the inclusion of climate change related customer information. Additionally, we have applied the Equator Principles to our project finance since 2009 and continue to promote them through the Equator Principles Association working groups. To support the changes introduced by the Equator Principles IV, over 150 front office and support staff were trained in the new questionnaires to review and classify transactions. Equator Principles reporting from Santander is available in section ‘Environmental and social risk analysis’ of the Responsible Banking chapter. Climate change and risk management 2020 has been a landmark year in the advancement of climate change as a key risk topic. The risk division continued to actively deliver on internal projects and external initiatives related to climate change risk management, continuing to embed this risk within our risk evaluation. As described in Grupo Santander's general risk framework, we consider environmental and climate-related risk drivers (whether physical or transition-led) as factors that could impact the existing risks in the medium and long-term. The main risk management processes and tools described in the previous sections of this document have been progressively embedding climate risk in their scope during the last years, including: Responsible banking Corporate governance Economic and financial review Risk management and compliance • Our risk appetite statement (RAS) strengthened our commitment to socially responsible activities, the environment, and the Paris Agreement's transition to a low carbon, climate-resilient economy. It will continue to evolve during 2021 and beyond, to accompany the group strategy, the evolution of the available climate measurement methodologies, and the guidance from regulators and supervisors. • The top and emerging risk assessment process continuously evaluates, along with other sources, climate- risk potential implications in our strategy. It is a joint process between headquarters and our subsidiaries. • The result of the top risk assessment is also an input for idiosyncratic scenarios in our ICAAP, ILAAP and the group’s recovery plan. As climate change data and methodologies (including scenario analysis and stress testing) become more available and tested, the input will evolve from predominantly qualitative to more quantitative. Key developments in the first half of the year were reported in our annual climate finance report. In summary, these include the publication of an internal heat map for sectors particularly vulnerable to physical and transition risk, as well as detailed climate change sector briefings for the highly emitting sectors of oil & gas, power, steel and mining and metals. For Grupo Santander's climate change report, visit our corporate website. During the second half of 2020, we focused our risk management on four main initiatives. First, the in-depth review of our materiality assessment of consolidated exposures to climate change-related transition and physical risk, based on our internal classification of sector taxonomy and heatmaps, following climate change scenarios that map the pathways aligned with limiting global warming to well below 2ºC. This quarterly materiality analysis has focused on the more relevant portfolios in SCIB, commercial banking and retail mortgages. During our 2020 materiality assessment, we confirmed that approximately 90% of our exposure to the most concerning sectors related to transition risk is mainly in SCIB. As part of our risk taxonomy, we have colour coded the sectors based on their climate impact. Conventional power and oil & gas are the sectors most at risk, with lower impacts expected on mining & metals (including steel manufacturing) and transportation. The table below provides a breakdown of SCIB exposures as of 31 December 2020: Conventional Power 15 Renewables Project Finance Oil & Gas Mining & Metals Transportation Total most concerning sectors EUR billion 13 % of total 14 Loans 23 9 18 8 27 76 2 % 1 % 2 % 1 % 3 % 8 % Further information on the output of the PACTA pilot is available in section 'Tackling climate change' of the Responsible Banking chapter. Other sectors classified as medium risk in the assessment are manufacturing, construction, agriculture and water supply. In SCIB its exposure amounts to ~ EUR 57 billion, which represents ~70% of the total exposure to rated corporates in these sectors. The mortgage portfolio amounts to EUR 308.5 billion, mainly in the UK and Spain. We are closely following methodological developments for the measurement of physical and transition impacts, including pilot exercises involving physical risks in the mortgage book. Santander continues to analyze the physical and transition risk of all sectors and segments. Second, guided by the materiality analysis, and supported by the updated E&S questionnaires aforementioned, we completed qualitative climate change risk assessments on the SCIB top 20 customers in the oil & gas sector that were presented to the relevant credit risk approval bodies for consideration at the annual customer limit review. A similar approach is being applied to the power and mining and metals sectors for the annual 2021 review. This granular customer-based assessment is shared with SCIB business as an additional source of information on customers and their level of awareness and preparation for a transition to a low- carbon economy. Third, through our continued participation in the United Nations Environment Programme Finance (UNEP FI) phase II working group, we keep advancing in the definition of an internal methodology to enable us to calculate climate change related impacts on our credit risk exposures by modelling changes to probabilities of default, loss given defaults and expected losses. In collaboration with our Research and Methodology functions we have deepened our understanding of climate change scenarios, in particular those published by the Network for Greening the Financial System (NGFS), and of the various risk factor pathways that apply to our most relevant sectors included in the transition risk methodology. During 2021 our focus will be on applying this methodology. We will 13 Total exposure to corporates and project finance in climate concerning sectors. Exposure defined as committed facilities (drawn and undrawn), drawn uncommitted facilities on and off balance sheet (loans + guarantees + derivatives Potential Future Exposure). 14 15 Gross Loans and advances to customers. Companies with power generation diversified across fuel sources - coal, gas, nuclear or renewables. It also includes power distribution networks. 435 Annual report 2020 Contents continue developing the transition and physical risk portfolio assessment tools for SCIB and the mortgage portfolios. Fourth, we actively engaged with external providers of climate-related risk assessment models and data for transition and physical risk, and we are testing a number of options to combine with our internal progress described above. In addition to these four initiatives, the Group has participated in several regulatory or industry-led work streams, including: • The implementation of the environmental and climate change sections of the European Banking Authority’s (EBA) guidelines on loan origination and monitoring. We are embedding the guidelines through a series of internal credit assessment guides to support credit analysts in the climate change risk analysis of our corporate customers. • The risk function is also co-sponsor of the global project to implement the European Central Bank Guide on climate- related and environmental risks. A comprehensive multi- year project plan has been actioned, bringing together the deliverables required to meet supervisory expectations, disclosures aligned to the Task Force for Climate Related Financial Disclosures (TCFD) recommendations, and the commitments arising from our participation in the Collective Commitment to Climate Action. • ‘EBA Climate Risk Sensitivity Exercise’, a pilot which is proving very useful for testing the applicability of the EU taxonomy to the financial industry portfolios, including the availability of data, the usefulness for risk management purposes, the potential disclosure issues, etc. • We also continue to actively participate in industry working groups, and we remain a principal contributor to the public policy consultations that have taken place both in EU and in other markets of the group. This includes, among other regulatory pieces, providing feedback to the ‘EBA Discussion Paper on Environmental, Social and Governance (ESG) risks management and supervision’, which will be a cornerstone for the future development of a risk related regulatory framework. Further information is available in the Responsible Banking chapter. 436 Responsible banking Corporate governance Economic and financial review Risk management and compliance 3. Credit risk 3.1 Introduction Credit risk refers to a potential financial loss from the default or credit quality deterioration of a customer or other third party with whom Grupo Santander has a contractual obligation. It is our most important risk in terms of exposure and capital consumption. It also includes counterparty risk, country risk and sovereign risk. See section 3.3 'Covid- 19 Credit risk management' for more details on Grupo Santander's main initiatives to manage credit risk during the covid-19 crisis. 3.2 Credit risk management We identify, analyse, control and decide on credit risk based on holistic view of the credit risk cycle, which includes the transaction, the customer and the portfolio. Business and risk areas and top managers are part of this process. Credit risk identification is key to managing and controlling our portfolios effectively. We classify external and internal risks in each business and adopt corrective and mitigating measures when needed through these processes: 1. Planning Our planning helps us set business targets and define specific action plans within our risk appetite framework. Strategic commercial plans (SCP) are a management and control tool defined by the business and risk areas for our credit portfolios. They determine commercial strategies, risk policies, resources and infrastructure, ensuring a holistic view of the portfolios. They provide managers with an updated view of credit portfolio quality to measure credit risk, run internal controls over the defined strategy coupled with regular monitoring, detect significant deviations in risk and potential impacts, and take corrective actions when necessary. They also align with our risk appetite and our subsidiaries’ capital targets, and are approved and monitored by senior managers at each subsidiary before being reviewed and validated by Grupo Santander. 2. Risk assessment and credit rating To analyse customers’ ability to meet contractual obligations, we use valuation and parameter estimation models in each of our segments. Our credit quality valuation models are based on credit rating drivers, which we monitor to calibrate and adjust the decisions and ratings they assign. Depending on each segment, drivers can be: 1 Rating: from mathematical algorithms that have a quantitative model based on balance sheet ratios or macroeconomic variables, and a qualitative module supplemented by the credit analyst’s expert judgement. It is used for SCIB, corporate, institutional and SME segments (with individualised treatment). Scoring: an automatic system to evaluate credit 2 applications that assigns an individual score to customers for subsequent decision-making, generally in the retail and smaller SME segments. Our parameter estimation models follow econometric models built on our portfolios' historical defaults and losses. We use them to calculate economic and regulatory capital as well as IFRS 9 provisions for each portfolio. We regularly monitor and evaluate models' appropriateness, predictive capacity, performance, granularity, compliance with policies and other related factors. We review ratings with the latest available financial and other relevant information. We have also increased the reviews for customers who are under closer observation or have automatic warnings in the risk management systems. 3. Credit risk mitigation techniques Risk approval criteria are generally based on the borrowers’ ability to pay in fulfilment of financial obligations, notwithstanding any additional collateral or personal guarantees we can require from them. To determine this, we analyse funds or net cash flows from their businesses or income with no guarantors or the assets pledged as collateral. We always consider guarantors and collateral when deciding to approve a loan as a secondary means of recourse if the first channel fails. In general, a guarantee is as a reinforcement measure added to a credit transaction to mitigate a loss due to a failure to meet a payment obligation. Grupo Santander has credit risk mitigation techniques for various types of customer and products. Some are for specific transactions (e.g., property) while others apply to a series of transactions (e.g., derivatives netting and collateral). They can be grouped into personal guarantees, guarantees in the form of credit derivatives or collateral. 4. Limits, pre-classifications and pre-approvals We use SCPs to manage credit portfolios, defining limits for each of them and for new originations, in line with our credit risk appetite and our target risk profile. Transposing our risk appetite to portfolio management strengthens controls over our credit portfolios. 437 Annual report 2020 Contents Our limits, pre-classifications and pre-approvals processes determine the risk we can assume with each customer. The business and risk areas set risk limits that are approved by the executive risk committee (or delegated committees) and should reflect a transaction’s expected risk-return. • For SCIB, monitoring is initially a function of business managers and risk analysts who maintain direct relationships with customers, manage portfolios and provide us with an up-to-date view of customers’ credit quality to anticipate concerning situations. We apply various limits models to each segment: • Large corporates are subject to a pre-classification model based on a system for measuring and monitoring economic capital. Pre-classification models express the level of risk we are willing to assume in transactions with customers/ groups in terms of capital at risk, nominal cap and maximum tenors. To manage limits with financial entities, we use Credit Equivalent Risk (CER), which includes actual and expected risks with customers according to risk appetite and credit policies. • Corporates and institutions that meet certain requirements (strong relationships, rating, etc.): we use simpler pre-classification model with an internal limit. It establishes a reference point in a customer's level of risk based on repayment capacity, overall indebtedness and a pool of banks. Transactions with large corporates, corporates and institutions above certain limits or with special characteristics could require approval from a senior credit analyst or a committee. • For individual customers and SMEs with low turnover, we manage large volumes of credit transactions with automatic decision models to classify customers and transactions. 5. Scenario analysis In line with section 2.4 ‘Management processes and tools’ in this chapter, our scenario analyses determine the potential risks in our credit portfolios and provide a better understanding of our portfolios' performance under various macroeconomic conditions. They allow us to anticipate management strategies that will avoid future deviations from defined plans and targets. They simulate the impact of alternative scenarios in portfolios’ credit parameters (PD, LGD) and expected credit losses. We compare findings with portfolios’ credit profile indicators to find the right measures for managers to take. Credit risk management of portfolios and SCPs incorporate scenario analyses. For more details on scenario analysis and covid-19, please see section 3.3 'Covid-19 credit risk management'below. 6. Monitoring Regularly monitoring business performance and comparing it to pre-defined plans is key to our management of risk. Our holistic monitoring of customers helps early detection of impacts on risk performance and credit quality. We assign customers a monitoring classification with a pre-defined course of action and ad hoc measures to correct any deviations. Monitoring, which considers transaction forecasts and characteristics, in addition to changes in classification, is performed by local and global risk teams supported by the Internal Audit unit and is based on customer segmentation: 438 • For commercial banking, institutions and SMEs with assigned credit analyst, we track customers requiring closer monitoring and review their ratings based on relevant indicators. • For individual customers, businesses and smaller SMEs, our monitoring follows a system of automatic alerts to detect shifts in portfolios’ performance. Monitoring uses the Santander Customer Assessment Note (SCAN) tool. We fully rolled it out in our subsidiaries in 2019. It helps set individual monitoring levels and frequencies, policies, and actions for customers based on credit quality and particular circumstances. In addition to monitoring customer credit quality, we define control procedures to analyse portfolios and performance, as well as any deviations from planning or approved alert levels. 7. Collections and recoveries The Collections & Recoveries area is key to risk management. It defines a global, enterprise-wide management strategy with guidelines and general lines of action for our subsidiaries based on the economic environment, business model and other local recovery conditions. Recovery management follows regulatory requirements set out in the EBA Guidelines on the management of non-performing and forborne exposures. The Collections & Recoveries areas directly manage customers. As sustained value creation is based on effective and efficient collections, digital channels that develop new customer relations are gaining importance. Our diverse customer base requires segmentation to manage recoveries appropriately. The highly technological and digital processes we follow help us attend to large groups of customers with similar profiles and products. Our personalized management, however, focuses on customer profiles that require a special manager and approach. We split recovery management into four phases: arrears, non-performing loans, write-offs and foreclosed assets. We may use mechanisms to rapidly reduce assets like sales of foreclosed assets or non-performing loans pool sales. We constantly seek alternatives to legal action in order to collect debt. We include debt instruments in the write-off loans category, (even if they are not past-due) if an individual analysis of the solvency of a transaction and the borrower leads us to believe recovery is remote due to a notorious and unrecoverable impairment. Though this may lead to full or partial cancellation and de-recognition of the gross carrying amount of debt, it does not mean we interrupt negotiations and legal proceedings to recover debt. In countries with high exposure to real estate risk, we have efficient sales management instruments that help maximize recovery and optimize balance sheet stocks. Responsible banking Corporate governance Economic and financial review Risk management and compliance For more details on Collections and Recoveries in covid-19 management, see section 3.3 'Covid-19 credit risk management' below. Forborne portfolio Grupo Santander's internal forbearance policy acts as a reference for our subsidiaries locally. It shares the principles of regulations and supervisory expectations. It includes the requirements of the EBA guidelines on management of non- performing and forborne exposures. It defines forbearance as the modification of the payment conditions of a transaction to allow a customer experiencing financial difficulties (current or foreseeable) to fulfil their payment obligations. If forbearance is not allowed, there would be reasonable certainty that the customer would not be able to meet their financial obligations. In addition, our policy also sets down rigorous criteria for evaluating, classifying and monitoring forbearances to ensure the strictest possible care and diligence in recovering due amounts. Thus, it dictates that we must adapt payment obligations to customers' current circumstances. Our forbearance policy also defines classification criteria to ensure we recognize risks appropriately. They must remain classified as non-performing or in watch-list for a prudential period for reasonable certainty of repayment. Forbearances may never be used to delay the immediate recognition of losses or hinder the appropriate recognition of risk of default. Thus, we must recognize losses as soon as we deem any amounts irrecoverable. The forborne portfolio stood at EUR 29,159 million at the end of December 2020. 51% of the loans qualify as non- performing, with average coverage of 43%. Key figures of forborne portfolio EUR million Performing Non-performing Total forborne % Coverage A 2020 14,164 14,995 29,159 28% 2019 15,199 17,276 32,475 28% 2018 20,877 20,357 41,234 26% A. Total loan-loss allowances/total forborne portfolio. Our forborne portfolio decreased by 10% as of December 2020, in line with the trend observed in previous years. Credit risk target operating model (ATOMiC) ATOMiC (Advanced Target Operating Model in Collaboration) launched in 2019 to enhance local credit risk Target Operating Models (TOM) as part of our risk strategy. It aims to strengthen our competitive position in the industry against any downturn. It sets high credit standards based on best practices within Grupo Santander and across the industry, local expertise and support from headquarters. In 2020, our progress led to the completion of several initiatives, as others advanced further into 2021. Due to covid-19, we revised the ATOMiC goal to prioritize collections and recoveries, automation and digitalization of lending, anticipation and forward-looking (including risk playbooks) and risk-based pricing and profitability. This enabled us to take highly effective, early actions to mitigate the impact of ensuing crisis, such as: • Enhanced customer monitoring, which supported our response to government aid programmes (e.g., RADAR early warning system and preapproval for ICO loans in Spain). • Digital collections for omnichannel solutions (in Poland). • Digital on-boarding and new platforms and technologies to transform collections and recoveries with a significant economic impact on provisions (in Brazil). • Risk playbooks to define actions with commercial areas ahead of a potential macroeconomic deterioration (in Mexico). • The advanced RORAC tool for risk-based pricing in the corporates segment across the group. • Automated mortgage approvals on digital channels, which had major impact on new originations (in Portugal and Mexico). Moreover, ATOMiC addressed the regulatory requirements for pricing, monitoring and scenario analysis in EBA Guidelines on Loan Origination and Monitoring. 3.3. Covid-19 credit risk management During the covid-19 pandemic, to help our customers and foster their economic resilience, the credit-related actions we took include: • providing liquidity and credit facilities to customers facing hardship. Grupo Santander increased lending to customers through usual loan approval procedures and based on internal ratings, while facilitating government aid programmes. • granting payment deferrals on outstanding loans within our geographies, under the guidelines on legislative and non-legislative moratoria on loan repayments the EBA had issued in light of the covid-19 crisis along with other regulators statements. Accordingly, these moratoria are not considered to be automatic indicators for identifying these measures as forbearance. Likewise, moratoria have not been considered by themselves as an automatic trigger to conclude that a significant increase in credit risk has occurred. Nevertheless, we set up a robust control and reporting framework for loans under moratoria to monitor measures and loan performance before and after the expiration of granted repayment extensions. • The severity of the pandemic's effects varied significantly in industries. Consequently, Santander set out to identify ones that could be more affected to focus credit risk management. 439 Annual report 2020 Contents • We prepared Collections & Recoveries across our footprint to deal with the expected impact on portfolios once support measures expired. • Credit risk management specifically focused on quantifying expected credit losses as a result of the macroeconomic shock, running analyses of the deterioration of our customers' credit quality and other potential collective measurements. The sub-sections below provide additional details on our actions. Customer support programmes Grupo Santander applied measures to all subsidiaries to provide liquidity and credit facilities, and grant payment deferrals to people and businesses facing hardship. They supported 6 million customers across our footprint. By the end of December, the payment moratoria we had granted to 4.8 million customers amounted to EUR 112 billion, which is 12% of our lending portfolio. The table below shows the distribution of payment moratoria by business line: # clients (mn) Total amount (EURbn) o/w government programmes 0.7 0.5 3.9 1 0.2 0.1 4.8 1.6 Mortgages Consumer SME & Corporates Total 22% o/w government % lending programmes portfolio 70 57 20 4 22 9 112 70 12% 9% 7% At the end of 2020, 79% of total moratoria had expired and only 3% of those were in stage 3. In spite of the macroeconomic deterioration, performance was positive because (a) our customers’ financial expenses were reduced with payment deferrals; (b) covid-19 government measures helped our customers maintain a steady stream of income; and (c) government programmes provided additional liquidity to firms so they could keep repaying financial debt. 440 Responsible banking Corporate governance Economic and financial review Risk management and compliance The table below shows the distribution by business line and region: Total moratoria (EUR bn) % loan book o/w: expired (EUR bn) Expired as % of Total Expired % Stage 1 % Stage 2 % Stage 3 Total Group 112 Mortgages Consumer SMEs & Corporates Europe North America South America 70 20 22 73 21 18 12% 22% 9% 7% 11% 18% 15% 89 55 18 16 53 20 16 Over 60% of outstanding loans under moratoria are mortgages. These tables show how they are distributed by business line and region: Distribution of loans subject to moratoria by product Dec. 2020 data (EUR bn) 79% 79% 88% 72% 73% 91% 90% 82% 87% 77% 74% 84% 75% 87% 15% 11% 17% 24% 14% 20% 9% 3% 2% 7% 3% 2% 5% 4% The UK, Portugal, Spain and Chile account for almost 83% of outstanding loans under moratoria, of which 83% are secured. As of the end of December, total loans granted under government liquidity programmes amounted to EUR 38 billion, with an average government guarantee coverage of 81%. 441 Annual report 2020 Contents Government Liquidity Programs by geography Dec. 2020 data (EUR bn) Spain accounted for 67% of total exposures to government liquidity programmes at year-end and also had the longest maturities (in both SME and corporates segments). The UK was 13% of total exposures, mainly in Bounce Back Loans (BBLS) (which are 100% covered by the UK government's guarantee scheme). Vulnerable sectors identification To focus credit risk management on the most vulnerable sectors, we analysed various identification inputs to have a full view of: • potential impacts on financial markets by sector and geography (shareholders return). • external advisory. • opinions from our sector analysts to consider particular details of our exposures and relationship with our customers. As a conclusion of all these analysis, the following are the sectors considered most affected by Covid-19 (internal management information as of December), with their respective exposures (excluding individual exposures): Sector Automotive Exposure (EUR bn) % Stage 1 % Stage 2 % Stage 3 1.4 % 92.7 % 5.9 % 34.6 A Hotels, leisure, cruises & restaurants Transport Oil & Gas Retail Non Food Construction B 17.7 74.4 % 18.3 % 7.3 % 18.3 20.9 21.5 12.5 88.5 % 97.7 % 88.2 % 82.1 % 7.3 % 1.6 % 6.6 % 10.7 % 4.2 % 0.7 % 5.2 % 7.2 % A. Catering and other not included. B. Excludes real estate development. Total exposure to these sectors was EUR 125.6 bn at year-end 2020. Focusing on the ones more impacted in the short term (Hotels & Leisure & Cruises & Restaurants; Oil & Gas; Retail non food and passenger transport) total exposure was EUR 66.2 bn. 442 This identification proved consistent with similar analyses by the ECB, Banco de España and rating agencies. We closely monitored those industries and reported on them regularly to senior management bodies. Covid-19 Collections & Recovery Preparedness plan In the early stages of the pandemic, we asked all our subsidiaries to develop collections and recoveries plans to prepare for expected impacts on portfolios. Plans needed to focus on: • dynamic assessments of the expected impact size and timing and continuous development of insights. • articulation of measures to add any needed resources. • the ability to accelerate technological (digital) solutions. • development of a robust project and process to track progress. The plans help ensure any business channel can collect debt while offering both standardized and case-by-case solutions; complying with regulatory changes; paying special attention to conduct risk and vulnerable customers; implementing moratoria and other new support alternatives promptly; identifying affected groups; and measuring impacts. Their structures incorporated such key aspects as capacity; planning and governance; strategy and execution; organization; policy and control; and forecasting and financial planning. Our subsidiaries update them dynamically. Their performance is subject to regular review by senior management at subsidiaries and the headquarters. The preparedness project set a number of milestones in regard to those key aspects. Our subsidiaries regularly report to executive committees on the progress against them with findings from the preparedness assessments of the global Collections & Recoveries function undertake. This project has been strengthening the Collections & Recoveries functions in our hardest hit geographies with help from the headquarters to implement the global and local plans. Covid-19 overlay quantification Many international organizations and supervisors have underlined the importance of responsibly adapting and applying the accounting and prudential policies to temporary and exceptional containment measures to combat the covid-19 health crisis. Some policies disclosed by supervisors include the Bank of England measures to respond to the economic shock from Covid-19; EBA's Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of Covid-19 measures; and the Federal Reserve's SR 20-4/CA 20-3 - Supervisory Practices Regarding Financial Institutions Affected by Coronavirus. In light of these statements, we accounted for deviations in local books based on stable long-term macroeconomic forecasts with a post model adjustment and a collective and/ or individual assessment to reflect reality and recognize expected credit losses on assets deemed subject to a Responsible banking Corporate governance Economic and financial review Risk management and compliance In the third quarter, new business levels in the individuals segment in more regions continued to recover to pre-covid levels. This was supported by improvements in digitalization. Our subsidiaries adapted to new demand and introduced measures for referral to other channels and self-service in retail banking. Meanwhile, activity with large corporates and companies normalized as the need for liquidity decreased. In this quarter, loan-loss provisions were still affected by covid-19 and loan growth. As of December 2020, credit risk with customers decreased by 2.7% from 2019, based on the same perimeter. This was mainly due to currency depreciation in our core markets. All our subsidiaries saw growth in local currency with the exception of Santander México and Santander Bank N.A. (SBNA). Despite all major shocks stemming from the health crisis, our credit risk remained diversified, with a suitable balance between mature and emerging markets: Europe (73%, including SCF), South America (13%) and North America (13%). 16 Loan book growth and the decline of non-performing loans (NPLs) to EUR 31,767 million (-6% vs end of 2019) reduced our NPL ratio to 3.21% (-11 bps vs 2019). In accordance with IFRS 9, Grupo Santander recorded loan- loss provisions of EUR 12,173 million (+31% vs December 2019) driven by the expected economic deterioration resulting from the pandemic and its impact on credit quality as well as by the aforementioned lending growth. Grupo Santander total loan-loss allowances amounted to EUR 24,272 million. This brought our NPL coverage ratio to 76.4% from 67.9% in December 2019. 65% of the Group's net customer loans are secured. significant increase in credit risk, without the need to identify individual financial instruments. We considered the overlay the best option to recognize the increase in expected loss. A mechanistic application of the Expected Credit Loss (ECL) methodology could currently have led to unpredictable results. The additional provisions associated to different macroeconomic scenarios were calculated using internal models, however an overlay over the monthly IFRS9 calculation was considered, in order to enhance the oversight and control of the ECL estimation accuracy. We specially prepared those scenarios to support the overlay calculation for a long-run approach, following the recommendations of many international organizations and supervisors, with a high degree of complexity. Amid maximum uncertainty, this long-term approach is to avoid undesirable volatility in provisions as a result of the sharp economic downturn, on account of the exceptional nature of the overlay and the battery of support economic measures taken by central banks and governments. Accordingly, Grupo Santander followed all regulatory, supervisory and accounting guidelines to assess and estimate the projected macroeconomic impact of the pandemic on expected losses and our customers' credit quality. These process were subject to the established governance and monitoring at both the Group's and our subsidiaries levels. For more details on expected losses and provisions during 2020, see the next section. 3.4 Key metrics 2020 general performance In 2020, Grupo Santander's performance was affected by the spread of covid-19, the ensuing health crisis, a weaker economic environment and volatility in new business. In March, we observed the pandemic's initial impact on new business and balances. Growth in corporates and large corporates offset the declines in individuals and consumer credit. Impacts of covid-19 had not yet materialized on credit quality indicators. In compliance with the accounting standard, IFRS 9, we recorded a provisions overlay in the quarter of EUR 1.6 billion based on the expected macroeconomic deterioration. At the end of the second quarter, recovery of new business levels in the individuals segment (mortgages and consumer finance) began reaching pre-covid-19 levels, mainly in Europe and the US. Activity in large corporates stood at more regular levels, following the increase recorded in March. SME and corporates exposure grew primarily due to government liquidity programmes. Main credit indicators reflected a robust credit quality supported by mitigation measures and volume increases. In the first half of 2020, provisions reached 7,027 million euros. This represented an increase of 78% in constant euros y-o-y, distributing the total adjustment made among the different business units. 16 'Others' not included represent 1% (Santander Global Platform and Corporate Centre). 443 Annual report 2020 Contents The tables below show the performance of the main credit risk metrics: Main credit risk metrics Dec. 2020 data Europe Spain S. Consumer Finance UK Portugal Poland North America US SBNA SC USA Mexico South America Brazil Chile Argentina Santander Global Platform Corporate Centre Total Group Europe Spain S. Consumer Finance UK Portugal Poland North America US SBNA SC USA Mexico South America Brazil Chile Argentina Santander Global Platform Corporate Centre Total Group 2020 A Credit risk with customers (EUR million) 2019 722,661 213,668 105,048 275,941 37,978 33,566 143,839 105,792 56,640 29,021 38,047 143,428 88,893 42,000 5,044 706 5,872 979 2018 688,810 227,401 97,922 252,919 38,340 30,783 125,916 92,152 51,049 26,424 33,764 138,134 84,212 41,268 5,631 340 4,953 722,429 221,341 104,032 263,671 40,693 31,578 131,611 99,135 49,862 29,050 32,476 129,575 74,712 42,826 4,418 4,862 2020 22,792 13,796 2,455 3,202 1,584 1,496 2,938 2,025 Non-performing loans (EUR million) 2019 23,519 14,824 2,416 2,786 1,834 1,447 3,165 2,331 389 1,787 834 6,972 4,727 1,947 171 4 138 2018 25,287 16,651 2,244 2,739 2,279 1,317 3,510 2,688 450 2,043 822 6,639 4,418 1,925 179 4 252 93 5 913 405 344 5,688 3,429 2,051 1,529 989,456 1,016,507 958,153 31,767 33,799 35,692 NPL ratio (%) 2019 2020 2018 3.15 6.23 2.36 1.21 3.89 4.74 2.23 2.04 0.81 5.26 2.81 4.39 4.59 4.79 2.11 0.51 7.08 3.21 3.25 6.94 2.30 1.01 4.83 4.31 2.20 2.20 0.69 6.16 2.19 4.86 5.32 4.64 3.39 0.63 2.34 3.32 3.67 7.32 2.29 1.08 5.94 4.28 2.79 2.92 0.88 7.73 2.43 4.81 5.25 4.66 3.17 1.21 5.09 3.73 Coverage ratio (%) 2019 2020 Net ASR provisions B (EUR million) 2019 2018 2020 2018 2020 Cost of credit c (%/risk) 2019 2018 57.3 47.1 111.0 47.9 66.5 70.7 182.5 210.4 174.0 230.2 120.8 97.4 113.2 61.4 275.1 116.8 89.0 76.4 49.8 41.1 106.1 36.5 52.8 66.8 153.0 161.8 140.6 175.0 128.3 88.4 99.8 56.0 124.0 85.3 174.5 67.9 50.1 43.7 106.4 32.9 50.5 67.1 137.4 142.8 122.1 154.6 119.7 94.6 106.9 60.6 135.0 78.9 — 67.4 4,299 2,001 899 733 193 330 3,916 2,937 443 2,413 979 3,923 3,018 594 226 3 31 1,839 1,572 856 477 253 (8) 217 3,656 2,792 186 789 360 171 32 161 3,449 2,618 108 2,614 2,501 863 3,789 3,036 443 235 1 36 830 3,736 2,963 473 231 — 115 12,173 9,321 8,873 0.62 1.01 0.88 0.28 0.51 1.10 2.92 2.86 0.85 8.09 3.03 3.32 4.35 1.50 5.93 0.41 0.54 1.28 0.28 0.43 0.48 0.10 (0.02) 0.72 2.76 2.85 0.35 9.42 2.49 2.92 3.93 1.08 5.09 0.22 0.57 1.00 0.24 0.38 0.38 0.07 0.09 0.65 3.12 3.27 0.24 10.01 2.75 2.99 4.06 1.19 3.45 0.14 1.65 1.00 A. Includes gross loans and advances to customers, guarantees and documentary credits. B. Post write-off recoveries (EUR 1,221million). C. Cost of credit is the ratio of 12-month loan-loss provisions to average lending of the same period. 444     Responsible banking Corporate governance Economic and financial review Risk management and compliance Reconciliation of key figures Grupo Santander’s 2020 consolidated financial statements disclose loans and advances to customers before and after provision allowances. Credit risk also includes off-balance sheet risk. This table shows the relationship between those concepts: A. Includes gross loans and advances to customers, guarantees and documentary credits. B. Before loan-loss allowances. Santander's credit risk (including gross loans and advances to customers, guarantees and documentary credits) is distributed as follows: Credit risk distribution Geographical distribution and segmentation Grupo Santander’s risk function is organized around three main groups of customers: • Individuals: this segment comprises salaried individuals, subdivided by income level to manage risk by customer type. Mortgages to individuals represented approximately 38% of net customer loans at the end of 2020. They are mainly in Spain and the UK and primarily consist of residential mortgages with low risk profiles and NPL ratios as well as robust coverage levels. Low risk profiles produce low losses. • SME, commercial banking and institutions: this segment includes companies and self-employed individuals, public entities and private not-for-profit entities. • Santander Corporate and Investment Banking (SCIB): this segment consists of corporate customers, financial institutions and sovereigns in a closed list that is revised annually based on a full analysis of the customer (business type, level of geographic diversification, product types, and the volume of revenues it represents for Santander, among others). 445 Individuals55%Companies29%SCIB16% Annual report 2020 Contents Our credit risk portfolios’ geographical distribution and performance (i.e., performing and non-performing loans) are as follows: Total Individuals SME, Commercial Banking and Institutions SCIB Others' include Santander Global Platform and Corporate Centre. Performing and non-performing exposure for 2019 and 2018 has been redistributed across segments. 446 Responsible banking Corporate governance Economic and financial review Risk management and compliance • Europe: the NPL ratio fell 10 bps to 3.15% from 2019 due to a significant reduction in non-performing loans in Spain and Portugal, offsetting the increase observed in the UK. • North America: the NPL ratio slightly increased 3 bps to 2.23% from 2019, due to the decline in total lending both in Mexico and SBNA, although the ratio declined in Santander US by 16 bps due to good performance in SC USA. In terms of NPL stock, a decrease of 7.2% was observed in the year. • South America: the NPL ratio decreased by 47 bps to 4.39%. In Brazil and Argentina, they dropped 73 bps and 128 bps respectively from 2019. However, they slightly increased in Chile (+15 bps vs 2019). For more details, see section 3.5. 'Details of main geographies'. credit risk over the expected residual life of the financial instrument. The following table shows the credit risk exposure for each of these stages and by geography: Exposure by stage and by geography EUR million Europe Spain SCF UK Portugal Poland Stage 1 Stage 2 Stage 3 A Total 639,872 42,252 22,786 704,911 186,557 13,325 13,796 213,677 241,376 18,451 3,202 263,029 34,778 4,331 1,584 40,693 28,338 1,597 1,496 31,432 96,999 4,548 2,454 104,001 Amounts past due (performing loans) North America 107,628 15,686 2,938 126,252 0.19% of total credit risk with customers was past due by three months or less. The table below shows the breakdown of those loans as of 31 December 2020, according to the first missed payment: Amounts past due. Maturity information EUR million Loans and advances to credit institutions Loans and advances to customers Public administrations Other private sector Debt instruments Total Less than 2 to 3 1 to 2 1 month months months 5 1,232 1 1,231 — 1,238 — 337 — 337 — 337 — 311 — 311 — 311 Impairment of financial assets The IFRS 9 impairment model applies to financial assets valued at amortized cost, debt instruments valued at fair value with changes in other comprehensive income, lease receivables, and commitments and guarantees granted not valued at fair value. The portfolio of financial instruments subject to IFRS 9 is divided into three categories (or stages) depending on the status of each instrument's level of credit risk. • Stage 1: financial instruments with no significant increase in risk since its initial recognition – the impairment provision reflects expected credit losses from defaults over twelve months from the reporting date. • Stage 2: financial instruments with a significant increase in credit risk since the date of initial recognition but no materialised impairment event – the impairment provision reflects expected losses from defaults over the residual life of the financial instrument. • Stage 3: financial instruments with true signs of impairment as a result of one or more events resulting in a loss – the impairment provision reflects expected losses for US SBNA SC USA Mexico 79,410 12,767 2,025 94,202 44,277 4,955 405 49,637 19,723 7,795 1,529 29,046 28,218 2,919 913 32,050 South America 113,799 10,073 5,688 129,559 Brazil Chile 65,122 6,152 3,429 74,702 37,555 3,218 2,051 42,825 Argentina 3,966 360 93 4,418 Santander Global Platform 973 1 5 979 Corporate Centre 1,883 564 341 2,787 Total Group 864,155 68,575 31,758 964,488 A. Excluding EUR 24,968 million from balances not subject to impairment accounting. Impairment provisions include expected credit risk losses over the expected residual life of Purchased or Originated Impaired (POCI) financial instruments. 447       Annual report 2020 Contents Financial instruments with effective signs of impairment (stage 3) performed as follows: Non-performing loans evolution according to constituent item EUR million 2018 - 2020 NPL evolution EUR million NPL (start of period) Stage 3 NPL not subject to impairment accounting Net entries Perimeter FX and others Write-off NPL (End of period) Stage 3 NPL not subject to impairment accounting 2018 37,596 37,571 2019 35,692 35,670 2020 33,799 33,783 25 22 16 10,910 10,544 10,277 177 (318) — 156 (44) (3,335) (12,673) (12,593) (8,930) 35,692 35,670 33,799 33,783 31,767 31,758 22 16 9 Allowances evolution according to constituent item EUR million 448 2018 - 2020 allowances EUR million Allowances (start of period) 24,529 24,061 22,965 2018 2019 2020 For impairment assets For other assets Stage 1 and 2 Stage 3 Gross provision for impaired assets and write-downs Provision for other assets FX and other Write-off Allowances (end of period) Stage 1 and 2 Stage 3 16,459 8,070 8,913 8,872 15,148 14,093 10,300 10,905 13,263 121 1,784 6 139 586 (3,166) (12,673) (12,593) (8,930) 24,061 22,965 24,272 8,913 8,872 10,492 15,148 14,093 13,780 The methodology for quantifying expected losses from credit events is based on an unbiased and weighted consideration of up to five future scenarios that could affect our ability to collect contractual cash flows. They consider the time-value of money, information from past events, and current conditions and projections of important macroeconomic factors (e.g., GDP, house pricing, unemployment rate, among others). We developed parameters to calculate impairment losses (mainly EAD, PD, LGD and discount rate) on the infrastructure of internal models and the experience gained from the regulatory environment and management. However, far from being a simple adaptation, we expressly built and validated them according to specific requirements of IFRS 9 and other guidelines issued by regulators, supervisors and other international organizations (EBA, NCAs, BIS, GPPC, etc.), which include forward-looking information, point-in-time (PIT) vision, multiple scenarios, calculation of losses for the entire life of the operation through lifetime PD's, among others. • Establishing a significant increase in credit risk: when classifying financial instruments under stage 2, we consider: ◦ Quantitative criteria: changes in the risk of default during their expected life are quantified with respect to their credit risk level on initial recognition. To consider significant changes so instruments can be classified in stage 2, each subsidiary defined the quantitative thresholds for its portfolios based on Grupo Santander's guidelines for consistent interpretation across all our geographies. ◦ Qualitative criteria: several indicators aligned with ordinary credit risk management indicators (e.g., past due for over 30 days, forbearance, etc.). Each subsidiary defined these criteria for its portfolios. The use of these qualitative criteria is reinforced with expert opinions. Responsible banking Corporate governance Economic and financial review Risk management and compliance • Definition of default: we use the same definition for impairment provisioning as for developing advanced models for calculating regulatory capital requirements. We are adapting our definition of default to the EBA guidelines on the application of the new definition of default under Article 178 of the CRR, according to the scheduled plan. • Past, present and future information: to estimate expected losses, we require a great deal of expert analysis and support from past, present and future data and expectations. Our expected loss estimates, which are based on multiple macroeconomic scenarios, measure probability of loss considering past events, the current situation and future trends, in addition to macroeconomic indicators such as GDP and unemployment. We use forward-looking information in internal management and regulatory processes under several scenarios, building on our experience with such information to make sure processes are consistent. • Expected life of financial instruments: we estimate the expected life of financial instruments based on their contractual terms (e.g., pre-payments, duration, purchase options, etc.). The contractual period (including extension options) is the maximum timeframe for measuring the expected credit loss. In the case of financial instruments with an uncertain maturity period and an undrawn commitment component (e.g. credit cards), expected life is estimated on the basis of the period for which the entity is exposed to credit risk and the effectiveness of management practices to mitigate exposure. 3.5 Details of main geographies United Kingdom General overview Credit risk with customers in the UK (including Santander Consumer UK) decreased by 4.4% (+0.9% in local currency) year-on-year to EUR 263,671 million. Mortgage lending and loans to SME, supported by government-backed covid-19 measures were the key drivers of this YoY increase. UK portfolio accounts for 27% of Santander's loan portfolio. More than 320,000 customers (excluding SCF UK) benefited from payment holidays, in line with the guidance issued by the Financial Conduct Authority (FCA). Customers applied for this facility generally for a three-month period, with the option of extending it for a further three months, if needed. The NPL ratio increased in 2020, to 1.21% (+20 bps vs year- end 2019), driven by the corporate and commercial banking segment to account for covid-19 effects. The Santander UK portfolio is divided into these segments: Portfolio segmentation A Dec.20 data A. Excluding SCF UK and London Branch Mortgage portfolio performance We closely monitor Santander UK’s mortgage portfolio due to its size for the entity and Grupo Santander. As of December 2020, it amounted to EUR 189,076 million, growing by 2.7% in local currency. It consists of first lien residential mortgages (no mortgages involve second or successive liens on properties). Mortgage lending growth was resilient after the market reopened in May. In the third quarter, the mortgage market was particularly active, due to pent up demand from the covid-19 lockdown and the temporary reduced stamp duty rates, which have led to improved new mortgage pricing. In accordance with Grupo Santander's risk management principles, all properties are appraised independently before new mortgages are approved. Property values used as collateral for granted mortgages are updated quarterly by an independent agency with an automatic appraisal system in line with market practices and legislation. 449 1.39%1.32%1.08%1.01%1.21%33%32%33%37%48%0.03%0.09%0.07%0.10%0.28%Non-pefoming loans ratioNon-performing coverage ratioCost of credit20162017201820192020Mortgages75%Other Individuals3%SME & Commercialbanking 20%SCIB 3% Annual report 2020 Contents Geographically, credit exposures are predominantly in the South East of the UK and the London metropolitan area. Geographical distribution Dec.20 data London Midlands and East Anglia North Northern Ireland Scotland South East (excl. London) South West, Wales and Other (LTV) ratio of 50% entails more stringent approval criteria and assessment of ability to pay, simulating the repayment of both interest and capital. • Flexible loans (6%): loan agreements allow borrowers to modify monthly payments or draw down additional funds up to a set limit under various conditions. • Buy-to-let (7%): buy-to-let mortgages account for a small percentage of the total portfolio, with approval subject to strict risk policies. The NPL ratio reflects the mortgage portfolio’s strength, stable at 0.99% in December 2020 (-5 bps year-on-year). Payment deferrals granted to customers reduced the level of new arrears. Later stage arrears increased because all legal proceedings relating to recoveries were temporarily suspended. Prudent approval policies put the portfolio’s simple average LTV at 42%. 4% of the portfolio has an LTV of between 85% and 100%. These policies resulted in no sign of risk quality deterioration in new business. The chart below shows the LTV structure of residential mortgages as of December 2020: The distribution of the portfolio by type of borrower is shown in the chart below: Loan to value Dec.20 data Mortgage portfolio loan type EUR million <50% 50-75% 75-85% 85-100% >100% Loan to value: relation between the amount of the loan and the appraised value of the property. Based on indices. Our credit risk policies explicitly forbid loans regarded as high risk (subprime mortgages) and establish strict credit quality requirements for transactions and customers. Spain General overview Santander España’s credit risk totalled EUR 221,341 million (22% of Grupo Santander’s total). It is appropriately diversified in terms of products and customer segments. In a backdrop of lower economic and credit growth, with a significant deterioration in macroeconomic figures after the covid-19 lockdown from March to May, new lending to consumers, SMEs and corporates increased, helped by financing lines and other liquidity programmes (Instituto de Crédito Oficial - ICO). Total credit risk increased by 3.6% compared to December 2019, including ICO loans by EUR 25,510 million. A. First time buyer: customers who purchase a home for the first 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 financial entity. D. Buy to let: houses bought for renting out. Santander UK's wide range of mortgage products include: • Interest-only loans (23%): customers pay interest every month and repay the principal at maturity. An appropriate repayment vehicle, such as a pension plan or an investment fund, is required. This is a common product in the UK. Santander UK applies restrictive policies to mitigate inherent risks. For instance, a maximum loan-to-value 450 25%13%14%2%4%32%10%42% Home movers41%31% Remortgagers27%20% 1st-time buyers21%7% Buy-to-let11%StockNew production44%41%11%4%0% Responsible banking Corporate governance Economic and financial review Risk management and compliance The total portfolio’s NPL ratio was 6.23%, 71 bps less than in December 2019, Fewer defaults reduced the ratio by 48 bps, due to overall better performance driven by customer support programmes, the cure of several restructured debts and portfolio sales. Additionally, this positive effect was helped by the aforementioned growth in the loan portfolio, which decreased the ratio by 21 bps. Additional provisions related to covid-19 increased the non- performing coverage rate to 47% (+6 pp vs. December 2019). Moreover, NPL reduction was mostly with loans with higher expected loss. Cost of credit reflects the higher provisions due to the pandemic. Residential mortgages performance Santander España’s residential mortgages portfolio amounted to EUR 58,079 million. Residential mortgages account for 26% of total credit risk in Spain. 99.3% have a mortgage guarantee. Residential mortgagesA EUR million Gross Amount Without mortgage guarantee With mortgage guarantee 2020 2019 2018 58,079 60,557 61,453 387 306 545 57,692 60,251 60,908 of which non-performing loans 1,784 2,581 2,425 Without mortgage guarantee With mortgage guarantee 75 14 54 1,709 2,567 2,371 A. Excluding SC España mortgage portfolio (EUR 1,526 million in December 2020 with doubtful loans for EUR 66 million). The NPL ratio for residential mortgages granted to households was 2.96%. It fell 130 bps from December 2019, mainly owing to non-performing portfolio sales. *Includes Santander España and Banco Popular. Santander España's portfolio is divided into these segments: Portfolio segmentation Dec.20 data The residential mortgage portfolio in Spain maintained a medium-low risk profile with limited expectations of additional impairment: • Principal is repaid on all mortgages from the start. • Early repayment is common, so the average life of transactions is shorter than the contract’s duration. • High quality of collateral, concentrated almost exclusively in financing for first homes. • The average affordability rate stood at 27%. • 87% of the portfolio has an LTV below 80%, calculated as the ratio of total risk to the latest available home appraisal. • All customers applying for a residential mortgage are subject to a rigorous assessment of credit risk and affordability, in which credit analysts must determine if their income is sufficient to pay loan instalments and will be stable throughout the term of the loan. 451 8.18%7.70%7.32%6.94%6.23%51%46%44%41%47%0.51%0.37%0.38%0.43%1.01%Non-pefoming loans ratio *Non-performing coverage ratioCost of credit20162017201820192020Mortgages26%Other Individuals6%Companies55%SCIB13%NPL ratio, residential mortgages (%)3.89%4.26%2.96%201820192020 Annual report 2020 Contents Business units segmentation Dec.20 data DI < 30% 30% < DI < 40% DI > 40% Average 27% LTV < 40% 40% - 60% 60% - 80% 80% - 100% > 100% (*) Debt to income: relation between the annual instalments and the customer’s net income. (**) Loan to value: percentage indicating the total risk/latest available home appraisal. Businesses portfolio Credit risk with SME and corporates, which is Santander España's core lending segment, amounted to EUR 149,646 million and accounting for 68% of total credit risk. Most of the portfolio is customers with an assigned credit analyst to monitor their loans throughout the risk cycle. The portfolio is highly diversified and not concentrated in any sector. Its NPL ratio stood at 7.04% in December 2020 and, even though total risk decreased, fell by 21 bps from December 2019 owning to better repayment performance driven by customer support programmes, the cure of several restructured exposures in corporates and portfolio sales. 2020 growth was mainly in liquidity support programmes (ICO). United States General overview Santander US’s credit risk increased to EUR 99,135 million by the end of 2020. It represents 10% of Grupo Santander's total credit risk and includes these subsidiaries: 452 SBNA: Santander Bank N.A SC USA: Santander Consumer USA NYB - SIS: Santander Investment Securities BSIBSI: Banco Santander International The US economy in 2020 went from the worst contraction recorded in history to one of the fastest recoveries. States eased covid-19 lockdown restrictions in the spring and summer. Unprecedented fiscal and monetary stimulus packages were put in place. Unemployment declined (6.7% in December) but remained more than double the pre-pandemic rate of 3.5%, with job gains showing a more gradual recovery. As of December 2020, Santander US’s credit lending decreased by 6% compared to December 2019, particularly in the individual's portfolio and the corporate business of SBNA. Excluding the exchange rate effect, growth was 2.4%. In 2020, the sale of the banking franchise in Puerto Rico was also completed in the third quarter of the year. During the covid-19 crisis, Santander US has continued to support its customers, employees and communities while pursuing its strategic priorities. The NPL ratio remained at moderate levels, 2.04% (-16 bps in the year). However, cost of credit rose slightly to 2.86% (+1 bp in the year) as the uncertain macroeconomic environment drove the need for higher provisions. The performance of Santander US units is described below. Business units performance Santander Bank N.A. Santander Bank N.A.’s business is mainly retail and commercial banking. It accounts for 84% of Santander US's total credit risk, of which 39% is with individuals and approximately 61% with corporates. Its primary goals include increasing the SCIB business (16% of the portfolio) by enhancing customer experience and growing core customers and deposits through digital, branch and commercial transformation initiatives; leveraging its deposit base to support its commercial real estate businesses; and strengthening its auto finance partnership. The 12% decrease in lending in 2020 affected all segments. Excluding the exchange rate effect, the drop was lower, standing at 4%. Debt to income*53%21%26%Loan to value(%)**26%31%30%9%51%29%16%4% Responsible banking Corporate governance Economic and financial review Risk management and compliance The NPL ratio increased to 0.81% (+12 bps in the year) as of December 2020 and credit increased to 0.85% due to provisions stemming from the covid-19 pandemic. Santander Consumer USA SCUSA presents higher risk indicators than other Santander US units due to the nature of its business. Its automobile financing business through loans and leases represents 97% of its revenues. It also has a smaller personal lending portfolio (3%). SCUSA's focus remains on managing the relationship between profitability and risk through pricing while improving the dealer experience. In 2020, loan originations grew by more than 20% from 2019, mainly in the prime segment on the back of the commercial relationship we have had with Fiat Chrysler Automobiles (FCA Group) since 2013( renewed in July 2019). Auto originations improved particularly in the third quarter as covid-19 restrictions were lifted and dealership activity returned to normal. Prime loans remained elevated from the prior year due to FCA Group incentive programmes. The NPL ratio dropped to 5.26% (-90 bps in the year). Cost of credit at the end of December stood at 8.09% (-133 bps in the year). Annual net credit losses decreased from last year due to the lower charge-offs resulting from covid-19 loan extensions, federal stimulus and higher recoveries driven by the higher auction prices. Furthermore, due to the decrease in NPL, the non-performing coverage ratio grew to 230% (+55 pp in the year). Leases carried out exclusively under the FCA Group agreement, primarily with highly creditworthy customers, decreased by 6% to EUR 13,903 million, providing stable and recurring earnings. The management and mitigation of residual value remains a priority. Brazil General overview Economic growth had one of the most moderate declines in Latin America between March and April. Recovery started in May, owing to relaxed confinement measures, the reopening of businesses, fiscal and monetary stimuli, low inflation (4.5% in December vs 4% target), and an expansive monetary policy, with the official rate of interest at 2% from 4.50% at the end of 2019. Santander Brasil's credit risk amounted to EUR 74,712 million. It decreased by 16% from 2019. Minus the exchange rate effect, it grew by 19%. As of December 2020, Santander Brasil accounts for 8% of Grupo Santander's loan book. In line with strategy, growth was prominent in retail segments with a more conservative risk profile, driven by customer engagement and loyalty and by new business on digital channels, which significantly increased last year. The profitability of the SME portfolio increased significantly, boosted by an active loan origination under government programmes (EUR 1.79 billion) to combat the pandemic that provided SMEs with liquidity to adapt to the new environment. A proactive credit risk management approach was key to achieving a profitable increase in market share, while credit quality indicators remained at moderate levels. Net loan-loss provisions stood almost flat at EUR 3,018 million (-0.6% compared to 2019), favoured by the exchange rate effect. In local currency, provisions grew by 31% mainly driven by additional provisions related to covid-19. Cost of credit rose to 4.35% from 3.93% at the end of 2019, driven by the current convid-19 pandemic context, as well as the provisions evolution aforementioned. 453 1.33%1.21%0.88%0.69%0.81%100%102%122%141%174%0.23%0.25%0.24%0.35%0.85%Non-pefoming loans ratioNon-performing coverage ratioCost of credit201620172018201920203.84%5.86%7.73%6.16%5.26%328%213%155%175%230%10.62%9.84%10.01%9.42%8.09%Non-pefoming loans ratioNon-performing coverage ratioCost of credit20162017201820192020 Annual report 2020 Contents To monitor the credit quality of our loan book and prevent deterioration, one of the main credit risk performance indicators we track is the ‘Over 90' impairment ratio. It continues to indicate that Grupo Santander is outperforming its local peers, having stood at 2.1% at the end 2020 (-80 bps vs 2019 year-end), below the average of its competitors. Over 90 total (%) - PDTE Dec. 20 data Santander Brasil's loan book is distributed as follows: Portfolio segmentation Dec.20 data It is diversified and has an increasing retail profile, with 76% of loans extended to individuals, consumer financing and companies. Portfolio performance In 2020 moratorium campaigns had a strong influence on the portfolio. The NPL ratio fell to 4.59% from 5.32% at December 2019, and the coverage ratio increased to 113% from 100%. In the individuals segment, growth in local currency was strong. Market share of payroll loans, mortgages and other low-risk products increased. SME lending performed beyond expectations and started to show signs of recovery. All ratios returned to pre-crisis levels. The portfolio was also well provisioned and saw continuous improvement in its risk profile. We must pay close attention to the maturities of government programmes and other payment deferrals to confirm the recovery of the SME market. 454 3.6 Other credit risk details Credit risk due to our activity in financial markets This section covers credit risk generated in treasury activities with customers (particularly credit institutions) through money market financing and counterparty risk products, to satisfy their needs. According to Regulation (EU) 575/2013, counterparty credit risk, which includes derivative instruments, transactions with a repurchase obligation, stock and commodities lending, transactions with deferred repayment and financing of guarantees, arises from the likelihood that a counterparty will default before the final settlement of the transaction's cash flows. We follow two methodologies to measure exposure: mark-to-market (MtM) (replacement value of derivatives) with the potential future exposure ‘add-on’; and the Montecarlo simulation to calculate exposures for some countries and products. We also calculate capital at risk and unexpected loss, which is the difference between the economic capital, net of guarantees and recoveries, and expected loss. After market close, we recalculate exposures by adjusting transactions to their new time frame, adapting potential future exposure and applying mitigation measures (netting, collateral, etc.) to control exposures directly against the limits approved by senior management. We run risk control with an integrated system in real time that enables us to know the exposure limit with any counterparty, product and maturity and in any of Santander’s subsidiaries at any time. 5.90%5.29%5.25%5.32%4.59%93%93%107%100%113%4.89%4.36%4.06%3.93%4.35%Non-pefoming loans ratioNon-performing coverage ratioCost of credit20162017201820192020Individuals37%Consumer Finance10%Companies29%SCIB24%2.9%3.0%2.4%2.1%2.1%3.4%3.5%3.2%2.6%2.7%3.3%3.7%3.0%2.3%2.2%SantanderPeer 1Peer 24Q191Q202Q203Q204Q20 Responsible banking Corporate governance Economic and financial review Risk management and compliance Exposures to counterparty risk: over the counter (OTC) transactions and organised markets (OM) At December 2020, according to management criteria for positive market value after applying netting agreements and collateral for counterparty risk activities, total exposure was EUR 5,235 million (net exposure of EUR 30,139 million). Counterparty risk: exposure in terms of market value and credit risk equivalent, including the mitigation effect EUR million A B Market value, netting effect C Collateral received Market value with netting effect and collateral Netting effectE D 2020 37,204 31,970 2019 37,365 30,100 2018 29,626 19,885 5,235 7,265 9,741 30,139 32,552 33,289 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 effects of mitigation agreements to calculate exposure for counterparty risk. C. Included variation margin, initial margin and secured finance transactions collateral. D. Including the mitigation of netting agreements and deducting the collateral received. E. CRE (credit risk equivalent): net value of replacement plus the maximum potential value, less collateral received. This table shows how the nominal value and market value of products that generate counterparty credit risk are distributed. Counterparty risk is primarily in interest and exchange rate hedging instruments: Counterparty risk: Distribution by nominal risk and gross market value EUR million A 2020 2019 Nominal Market value Nominal Market value Nominal Positive Negative 145 (215) 2,973 (1,848) 47 (386) 14,530 53,821 11,370 Positive Negative 29,805 71,401 23,136 312 2,481 119 (1,357) (1,836) (177) 24,994 63,042 9,927 2018 Market value Positive Negative 130 (875) 2,951 (1,840) 121 (59) 863,001 25,341 (27,071) 897,886 21,053 (23,260) 781,641 21,743 (20,098) 4,917,944 143,679 (139,261) 5,089,817 112,128 (108,651) 5,000,406 86,079 (86,411) 3,732 83 5,695,339 170,911 (15) 56 (167,650) 5,944,977 135,194 735 (27) (134,392) 2 — 5,770,317 111,025 — (109,282) 169,059 1,357 (1,147) 167,803 955 (917) 109,695 902 (1,129) 146,984 3,978 46,418 12,500 6,057,800 188,746 (7,311) (26,072) 17,490 (202,180) 6,304,729 157,973 48,786 143,163 4,334 (2,722) (23,652) (161,682) 149,006 2,352 43,675 12,425 6,072,693 126,704 (2,466) (22,272) (135,150) B Credit derivatives Equity derivatives Fixed income derivatives Exchange rate derivatives Interest rate derivatives Commodity derivatives Total OTC derivatives C Derivatives organised markets Repos Securities lending Total counterparty risk D 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. D. Spot transaction not included. 455 Annual report 2020 Contents Grupo Santander derivatives transactions focus on terms of less than five years, repos and securities loans maturing in less than one year, as the following chart shows: Counterparty risk: Distribution of nominal risk by maturity EUR million. Dec.20 data A B Credit derivatives Equity derivatives Fixed income derivatives Exchange rate derivatives Interest rate derivatives Commodity derivatives Total OTC derivatives C Derivatives organised markets Repos Securities lending Total counterparty risk Up to 1 year Up to 5 years Up to 10 years More than 10 years 26% 59% 80% 50% 34% 67% 35% 65% 93% 99% 38% 66% 39% 20% 29% 39% 29% 38% 34% 7% 1% 36% 3% 2% 0% 15% 18% 2% 18% 1% 0% 0% 17% 6% 0% 0% 6% 10% 1% 9% 0% 0% 0% 9% TOTAL 14,530 53,821 11,370 863,001 4,917,944 3,732 5,695,339 169,059 146,984 46,418 6,057,800 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. Despite the decline in the credit quality of some counterparties, counterparty credit risk is mainly in highly creditworthy customers (86.4% of counterparty risk rated A or higher), particularly financial institutions (23%) and clearing houses (70%). Distribution of counterparty risk by customer rating (in nominal terms)A Dec.20 data Rating AAA AA A BBB BB B Other % 0.20% 3.48% 82.73% 11.94% 1.57% 0.05% 0.02% A. Ratings based on internally defined equivalences between internal ratings and credit agency ratings. Transactions with clearing houses and financial institutions are subject to netting and collateral agreements. We make constant efforts to make sure other transactions are covered under these agreements. Most collateral agreements Grupo Santander signs are bilateral, with a few exceptions with multilateral institutions and securitisation funds (in which case agreements are unilateral in the customer’s favour). Counterparty risk by customer segment 2020 data Clearing houses Financial Institutions Corporates/Project Finance Sovereign/ supranational Commercial banking/ Individuals Collateral, which we use to reduce counterparty risk, consists of instruments that have certain economic value and high liquidity. One counterparty deposits or transfers it in favour of another to guarantee (or reduce) any counterparty credit risk resulting from portfolios of derivatives with cross-risk. We regularly appraise transactions subject to collateral agreements (usually daily). We apply contractual parameters to quantify the collateral (usually cash or securities) to be paid or received from the counterparty. 456 2%23%1%70%4% Responsible banking Corporate governance Economic and financial review Risk management and compliance Amid the hardships caused by the pandemic in 2020, the processes to correctly manage collateral in Grupo Santander were notably effective, having become more frequent at the beginning of the year. The collateral received by Grupo Santander under CSA, OSLA, ISMA, GMRA and other collateral agreements amounted to EUR 31,970 million, including EUR 17,295 million in mostly cash collateral for derivatives (77%). Other collateral is subject to strict quality policies on issuer type and rating, debt seniority and haircuts. with each counterparty. It also includes a debt valuation adjustment (DVA) for counterparties’ risk relating to Grupo Santander itself on OTC derivatives. At the end of December 2020, CVA adjustments amounted to EUR 272,1 million (a decrease of 22.4% compared to the end of 2019) and DVA adjustments were EUR 171 million (a decrease of 34.6%). This caused credit spreads to fall by approximately 40% in the most liquid periods. The definition and methodology for calculating the CVA and DVA are set out in the section 4.2 ‘Market risk management'. Received collateral is geographically distributed as follows: Counterparty risk, organised markets and clearing houses Collateral received. Geographic distribution Dec.20 data Spain UK Mexico Brazil Chile Grupo Santander includes a credit valuation adjustment (CVA) for over-the-counter (OTC) derivatives when calculating the results of trading portfolios to account for credit exposure risk The tables below show the weighting of trades settled through clearing houses as a portion of total counterparty risk at December 2020: Where possible, Grupo Santander’s policies aim to anticipate new regulations on OTC derivatives, repos and securities lending settled through clearing houses or traded bilaterally. Gradual standardization of OTC trading in recent years has allowed for the clearance or settlements of new trades by clearing houses (according to recent regulation) and for increased internal use of electronic execution systems. We actively manage trades not settled through clearing houses to optimize volumes in view of new regulatory requirements on margins and capital. Even though counterparty risk management does not consider credit risk on these trades, we have been calculating regulatory credit exposure for organized market trades since 2014, when CRD IV (Capital Requirements Directive) and CRR took effect, transposing the Basel III principles for calculating capital. Distribution of counterparty risk by settlement channel and product type A Nominal in EUR million Credit derivatives Equity derivatives Fixed income derivatives Exchange rate derivatives Interest rate derivatives Commodity derivatives Repos Securities lending Total C Organised markets Nominal Bilateral B CCP Nominal 8,285 15,545 11,370 827,299 770,923 3,641 107,587 46,418 % 59.8% 29.8% 100% 95.9% 15.7% 97.6% 73.2% 100% Nominal 6,245 62 — 31,043 4,020,927 — 39,397 — % 40.2% 0.1% 0.0% 3.6% 81.8% 0.0% 26.8% 0.0% — 38,214 — 4,660 126,094 91 — — 1,791,067 4,097,674 169,059 % 0.0% 71.0% 0.0% 0.5% 2.6% 2.4% 0.0% 0.0% Total 14,530 53,821 11,370 863,001 4,917,944 3,732 146,984 46,418 6,057,800 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. 457 75%16%4%1%4% Annual report 2020 Contents Distribution of risk settled by CCP and organised markets, by product A Nominal in EUR million Credit derivatives Equity derivatives Fixed income derivatives Exchange rate derivatives Interest rate derivatives Commodity derivatives Repos Securities lending Total 2020 6,245 62 — 2019 11,556 370 — 2018 4,231 32,229 — 31,043 43,358 36,928 4,020,927 4,087,255 4,025,674 — 0 2 39,397 23,933 41,492 — — — 4,097,674 4,166,472 4,140,556 A. Figures under internal risk management criteria. Credit derivatives Santander uses credit derivatives to cover loans, customer business in financial markets and trading. Trading volume is small in terms of our notional (0.4% of total counterparty risk notional) and is subject to a solid set of internal controls and procedures to minimize operational risk. Concentration risk Concentration risk control is key for our management. We continuously monitor the degree of concentration of our credit risk portfolios using regions and countries, economic sectors, groups of customers and other criteria. According to risk appetite, the board sets the maximum levels of concentration, as described in the risk appetite framework and structure of limits in section 2.4 ‘Management processes and tools’. In line with them, the executive risk committee establishes risk policies and reviews the appropriate exposure levels for the effective management of the degree of concentration in our credit risk portfolios. As indicated in the key metrics section of this chapter, in geographical terms, our credit risk with customers is diversified among our core markets (United Kingdom 27%, Spain 22%, United States 10%, Brazil 8%, etc.). In terms of sector diversification, approximately 55% of our credit risk is with individuals, who are inherently highly diverse. Our lending portfolio is also well distributed, with no significant concentrations in specific sectors. The chart below shows the distribution at December 2020: Diversification by economic sector A n Agriculture, livestock, forestry and fishing n Extractive industries n Manufacturing industry Electricity, gas and water production and distribution n n Construction Information and communications Financial and insurance n n activities n Real estate activities n Professional, scientific and technical activities n Administrative activities n Trade and repairs n Public administration n Transport and storage n Other social services n Hotels and restaurants n Other services A. Excluding individuals and reverse repos. Grupo Santander must adhere to CRR stipulations on large risks. Thus, the exposure we contracted with a customer or group of associated customers will be a large exposure provided its value is equal to, or greater than, 10% of eligible capital. To limit large exposures, no entity may assume ones exceeding 25% of eligible capital with a single customer or group of associated customers, having factored in the credit risk reduction effect contained in the regulation. The application of risk mitigation techniques, resulted in no groups triggering these thresholds as of the end of December. Regulatory credit exposure with the 20 largest groups within the scope of large risks represented 5% of outstanding credit risk (lending to customers and off-balance sheet risks) as of December 2020. Our Risk division closely works with the Finance division to manage credit portfolios. Activities include reducing the concentration of exposures through credit derivatives, securitizations and other techniques to optimize the risk- reward of the entire portfolio. 458 Responsible banking Corporate governance Economic and financial review Risk management and compliance Our sovereign exposure in Latin America is mostly in local currency and recognized in local accounts with predominantly short-term maturities. Over the past few years, total exposure to sovereign risk has remained in line with regulatory requirements and our strategy to manage this portfolio. The shifts in our sovereign risk in our countries is due to our liquidity management strategy and the hedging of interest and exchange rates risks. Santander's exposure spreads among countries with varied macroeconomic outlooks and dissimilar growth, interest and exchange rate scenarios. Our investment strategy for sovereign risk considers countries' credit quality to set the maximum exposure limits. The following table shows the percentage of exposure by rating level18 : AAA AA A BBB Lower than BBB 2020 18% 25% 25% 14% 18% 2019 20% 24% 18% 15% 23% 2018 11% 20% 31% 13% 25% Country risk Country risk is a component of credit risk arising in transactions with clients resident in a particular country due to circumstances other than usual business risks. It consists of sovereign risk, transfer risk and others that might affect international financing transactions (wars, natural disasters, current account balance crises, among others). It is embedded in our provisioning models and processes, in compliance with the applicable regulation. Our country risk management continued to follow a standard of maximum prudence. We assume country risk very selectively in transactions that enhance the global relationship with our customers. Sovereign risk and risk with government agencies Sovereign risk occurs in transactions with a central bank. It includes the regulatory cash reserve, issuer risk with the Treasury (public debt portfolio) and risk from transactions with government institutions whose funding only come from the state’s budgetary revenue and not commercial operations. Our historic criteria can differ from regular EBA stress test standards. Though the EBA does include national, regional and local government institutions, it does not include deposits with central banks, exposures with insurance companies, indirect exposures via guarantees and other instruments. According to our management criteria, local sovereign exposure in currencies other than the official currency of the country of issuance is not significant (EUR 12,080 million, 3.8% of total sovereign risk). Furthermore, exposure to non- local sovereign issuers involving cross-border risk is even less significant (EUR 7,168 million, 1.8% of total sovereign risk). 17 17 18 Countries that are not considered low risk by Banco de España Internal ratings are applied 459 Annual report 2020 Sovereign exposure at the end of December 2020 is shown in the table below (data in million euros): 2020 Portfolio Contents 2019 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 financial assets mandatorily at fair value through profit or loss Total net direct exposure Total net direct exposure Spain Portugal Italy Greece Ireland Rest Eurozone UK Poland Rest of Europe US Brazil Mexico Chile Rest of America Rest of the World Total 4,100 (380) 249 — — (29) (1,672) 16 7 589 5,127 8,005 148 19 — 7,048 4,148 2,468 — — 1,687 612 10,263 121 9,501 17,281 10,256 6,732 397 3,776 13,097 4,962 1,298 — — 2,396 963 668 942 5,458 5,309 2,768 75 542 976 16,179 74,290 39,454 — — — — — — — — — — — — — — — — 24,245 8,730 4,015 — — 4,054 (97) 10,947 1,070 15,548 27,717 21,029 6,955 958 4,752 35,366 8,689 2,735 — — 1,809 10,363 8,366 777 16,299 28,998 13,673 3,460 1,029 4,813 129,923 136,377 460     Responsible banking Corporate governance Economic and financial review Risk management and compliance 4. Market, structural and liquidity risk 4.1 Introduction This section refers to the management and control of Grupo Santander’s market risk in 2020. It covers trading as well as structural and liquidity risks. It also includes a brief description about our methodologies and metrics. Activities exposed to market risk encompass transactions where risk is assumed as a consequence of potential changes in interest rates, inflation rates, exchange rates, stock prices, credit spreads, commodity prices, volatility and other market factors; the liquidity risk from our products and markets, and the balance sheet liquidity risk. Therefore, they include trading risks and structural risks. • Interest rate risk arises from changes in interest rates that could adversely affect the value of a financial instrument, a portfolio or the group as a whole. It affects loans, deposits, debt securities and most assets and liabilities in trading books and derivatives. • Inflation rate risk originates from changes in inflation rates that could adversely affect the value of a financial instrument, a portfolio or the entire group. It affects instruments such as loans, debt securities and derivatives, where returns are linked to future inflation values or a change in the current rate. • Exchange rate risk is the sensitivity of a value of a position not denominated in the base currency to shifts in exchange rates. A long or open position in a foreign currency may produce a loss if it depreciates against the base currency. Exposures affected by this risk include non-euro investments in subsidiaries and transactions in foreign currency. • Equity risk is the sensitivity of the value of open positions in equities to adverse movements in their market prices or expectations about future dividends. This affects positions in shares, stock market indices, convertible bonds and derivatives with shares as the underlying asset (put, call, equity swaps, etc.). • Credit spread risk is the sensitivity of the value of open positions in fixed income securities or credit derivatives to movements in the credit spread curves or recovery rates associated with specific issuers and types of debt. The spread is the difference between financial instruments with a quoted margin over other benchmark instruments, mainly the internal rate of return (IRR) of government bonds and interbank interest rates. • Commodity price risk is the risk from changes in commodity prices. Our exposure to this risk is not significant, mainly coming from our customers’ derivative transactions in commodities. • Volatility risk is the sensitivity of the value of a portfolio to changes in the volatility of interest rates, exchange rates, shares, credit spreads and other risk factors. It is incurred by financial instruments in which volatility affects valuation. The most significant case is the financial options portfolio. These market risks can be partly or fully mitigated with derivatives such as options, futures, forwards and swaps. However, there are other types of market risk that require more complex hedging: • Correlation risk is the sensitivity of the portfolio to changes in the relationship between risk factors (correlation) of the same type (e.g., two exchange rates) or different types (e.g., an interest rate and the price of a commodity). • Market liquidity risk originates when Grupo Santander or a subsidiary cannot reverse or close a position without an impact on the market price or the transaction cost. Market liquidity risk can arise from a reduction in market makers or institutional investors, the execution of a large volume of transactions or market instability. It could also increase depending on how exposures are distributed among products and currencies. • Pre-payment or cancellation risk originates when mortgages, deposits and other on-balance-sheet instruments give holders the option to buy or sell them, thus altering future cash flows. Potential mismatches on the balance sheet pose a risk since cash flows may have to be reinvested at an interest rate that is potentially lower (assets) or higher (liabilities). • Underwriting risk arises when an entity underwrites or places securities and other types of debt and assumes the risk of having to acquire issued securities partially if buyers have not taken them up. • Balance sheet liquidity risk (unlike market liquidity risk) is the possibility of meeting payment obligations late or at an excessive cost. Losses may be caused by forced sales of assets or margin impacts due to the mismatch between expected cash inflows and outflows. • Pension and actuarial risks also depend on shifts in market factors. Further details are at the end of this section. We make sure we comply with the Basel Committee’s Fundamental Review of the Trading Book and the EBA guidelines on balance-sheet interest-rate risk. Through 461 Annual report 2020 Contents several projects, we aim to provide risk managers and control teams with the best tools to manage market risks under the right governance framework for the models we use, to report risk metrics, and help satisfy requirements on these risks. IBOR Reform Since 2015, central banks and regulators in several major jurisdictions have promoted the transition to suitable replacements for some existing IBOR (Interbank Offered Rates) benchmarks such as Euro Overnight Index Average (EONIA) and London Interbank Offered Rates (LIBORs). In order to monitor and address the challenges of the transition, Santander launched the IBOR Transition Programme in 2019. This programme has a group wide scope and reports on a regular basis to our top management involving statutory committees. Its main objective is to ensure a smooth operational transition and to anticipate and address any potential customer and conduct related issues. It also aims to ensure that all impacted areas, business units and geographies understand the risks associated with the transition in a homogeneous way and can take appropriate measures to mitigate them. The programme is aligned with the recommendations, guidance and milestones defined by regulators and working groups of different jurisdictions. Santander is engaged with the related public and private sector initiatives and participates in the WG Risk Free Rate Groups of different jurisdictions in Europe and America. We provide active feedback on the multiple consultations issued by industry forums, market and bank associations and other public organisms on this issue. For more details on IBOR reform, see Notes to the consolidated annual accounts nº 53 section 'c) Trading market risk management'. 4.2 Market risk management Limits management and control system The covid-19 pandemic significantly affected financial markets in the first half of 2020. Greater uncertainty and higher risks set in as stock prices plummeted, volatility spiralled, treasury bond yields reached record lows, credit- default-swap indices surged and fair values changed significantly. Pricing feeds split across almost all asset classes and market liquidity declined, while bid-offer spreads, intraday fluctuations and market volatility (both realized and implied) increased. In those challenging market conditions and complex environment, our risk management showed strength, and reliability and the right controls. Our low risk profile saw open positions in our trading portfolios fall, despite spikes in daily VaR levels in March and April (mainly resulting from the Weighted VaR methodology, which puts greater weight on recent market scenarios). Market risk functions' daily monitoring makes sure market risk positions remain within approved limits. It assesses the performance of, and major changes in, market risk metrics, and distributes regular reports to senior management and other internal and external stakeholders so market risk activities can be properly monitored. 462 Setting market risk limits is a dynamic process that follows predefined risk appetite levels (see 'Risk appetite and structure of limits' paragraph in section 2.4 ‘Management processes and tools’). It is part of senior management's annual limits plan that extends to all subsidiaries. It is a prudent approach based on these metrics to cover market risk from various standpoints: • Value at Risk (VaR) and Stressed VaR limits. • Limits of equivalent and/or nominal positions. • Interest rate sensitivity limits. • Vega limits. • Delivery risk limits for short positions in securities (fixed income and securities). • Limits on the volume of effective losses to protect earnings from the period: ◦ Loss trigger. ◦ Stop loss. • Credit limits: ◦ Total exposure limit. ◦ Jump to default by issuer limit. ◦ Others. • Limits for origination transactions. Those general limits include sub-limits. They establish a sufficiently granular structure to control market risk factors Grupo Santander is exposed to in trading. We monitor subsidiaries’ positions daily, mindful of changes in portfolios and trading desks to find events in need of immediate correction and comply with the Volcker Rule. We establish global approval and control limits, global approval limits with local control, and local approval and local control limits. The head of each country unit or subsidiary requests them based on business type and budget targets, seeking consistency with the risk/return ratio. Limits are approved by the risk bodies in accordance with governance processes. Subsidiaries must comply with the approved limits. Local executives must explain breached limits and an action plan to correct them in writing and on the day of the breach. Actions could involve reducing a position within the limits or formulating a strategy that justifies a limit increase. Methodologies and key aspects a) Value at Risk Value at Risk (VaR), our standard methodology for risk management and control in trading, measures the maximum expected loss with a specific level of confidence and time frame. The standard for historical simulation is a confidence level of 99% over one day. We apply statistical adjustments efficiently to incorporate recent developments affecting our levels of risk. Our time frame is two years or at least 520 days from the reference date of the VaR calculation. Responsible banking Corporate governance Economic and financial review Risk management and compliance We report the higher of two VaR figures we calculate daily. One applies an exponential decay factor that allocates less weight to the oldest observations; the other has the same weight for all observations. We also simultaneously calculate Value at Earnings (VaE). It measures the maximum potential gain with a certain level of confidence and specific time frame under the same methodology for VaR. VaR by historical simulation has many advantages as a risk metric. It sums up the portfolio’s market risk in a single number. It is based on actual market movements without assuming functions, forms or correlations between market factors. However, the VaR metric has some limitations, regardless of the methodology to calculate it. In particular: • As VaR calculation has a certain level of confidence, it does not indicate the levels of potential losses beyond it. • The liquidity horizon of some products in the portfolio is greater than the VaR model’s. • VaR is a static analysis of portfolios’ risk, subject to significant (albeit unlikely) changes in the following day. The historical simulation methodology also has limitations: • High sensitivity to the time frame used. • Inability to capture plausible high-impact events if these do not occur during the time frame used. • Valuation parameters with no market input (such as correlations, dividends and recovery rates). • Slow adjustment to new volatilities and correlation, if the newest and oldest data receive the same weight. Using stressed VaR and expected shortfall (ES) help overcome some of these limitations. We calculate VaR with exponential decay, apply conservative valuation adjustments, and regularly conduct analyses and backtesting to assess the accuracy of the VaR calculation model. b) Stressed VaR (sVaR) and expected shortfall (ES) We calculate sVaR daily for our main portfolios with the same methodology as for VaR, with these exceptions: • We use a window of 260 observations (as opposed to 520 for VaR) over a continuous period of stress on a portfolio. We do the calculation for each major portfolio by analysing the history of a subset of selected market risk factors based on expert judgement and the most significant positions in the books. • Unlike VaR, we obtain sVaR by using the percentile with uniform weighting, and not with the higher of the percentiles with exponential and uniform weightings. To calculate expected shortfall (ES), we estimate the value of a potential loss that is higher than the level set by VaR. We also apply uniform weights to all observations. Unlike VaR, ES has the advantage of capturing the risk of large losses with a low probability (tail risk) and being a sub-additive metric. According to the Basel Committee, an ES with a 97.5% confidence interval delivers a level of risk similar to VaR at a 99% confidence interval. c) Scenario analysis Risk measures used in Grupo Santander are based on daily risk management and decision-making assumptions. They include normal market conditions, continuous prices and adequate liquidity. However, they many not fully anticipate extreme movements or unexpected strong changes in the market. We also run scenario analyses of unexpected events involving a variety of risks that indicate how much capital they would require to absorb losses. These stress scenarios are important to estimate future risk; overcome the limitations of models and historical data; support liquidity and capital stock plans; report on risk tolerance levels; and develop risk reduction and contingency plans under stress conditions. We regularly calculate and analyse stress scenarios for our subsidiaries with trading activities, which include historical scenarios, hypothetical scenarios and reverse stress test scenarios. d) Gauging and backtesting measures Regulations dictate that the VaR model should accurately capture material risks. VaR uses statistical techniques under normal conditions. Therefore, for a certain confidence level and for a defined time horizon, the estimated maximum loss can differ from real losses. Grupo Santander regularly analyses the VaR calculation model to confirm its accuracy. Market risk functions run internal backtesting, VaR contrast measures and hypothetical portfolio analyses for subsidiaries the internal market risk model covers. For subsidiaries with an approved internal model, they also perform regulatory backtesting to count overshooting (when the daily loss or profit exceeds VaR or VaE) affecting the calculation of market risk regulatory capital requirements. Our backtesting assesses the general quality and effectiveness of the risk measurement model and compares the daily VaR/VaE obtained on D-1 with these P&Ls obtained on D: • Economic P&L is calculated on the basis of end-of-day mark-to-market or mark-to-model values. This test checks whether the VaR/VaE methodology used to measure and aggregate risk is adequate. • Actual P&L is calculated daily based on the difference between the portfolio's end-of-day value and actual value at the end of the subsequent day. It includes the profit and loss stemming from intraday operations, minus fees, commissions and net interest income. It is used to count regulatory overshootings. • Hypothetical P&L is calculated daily by comparing the portfolio's end-of-day value and its value at the end of subsequent day, assuming unchanged positions. It doesn't account for the time effect to be consistent with VaR. This backtesting helps us make sure portfolios are regularly subject to an intraday risk not reflected in closing positions 463 Annual report 2020 Contents and, therefore, not reflected in VaR. We also use it to count regulatory overshootings. over a one-year horizon. We follow the Montecarlo methodology, applying one million simulations. • Theoretical P&L is calculated with the market risk calculation engine, without intraday results, changes in portfolio positions or time (theta). We use it exclusively to test the quality of our internal VaR model. We run regulatory backtesting on our subsidiaries every day. We also run internal (not regulatory) backtesting daily, weekly and monthly based on the granularity of a given portfolio level. The number (or proportion) of overshootings we register is one of the most intuitive indicators of a model’s goodness of fit. We calculate regulatory backtesting for one year (250 days) and at a VaR confidence level of 99%. We can expect between two and three overshootings per year. To calculate 19 market risk regulatory capital, we obtain the regulatory K based on the number of overshootings between actual and hypothetical backtestings. e) Analysis of positions, sensitivities and results Grupo Santander uses positions to quantify the market values of transactions in the portfolio, grouped by main risk factor and considering the delta value of any futures or options. Risk positions can be in the base currency of the subsidiary and the currency used for standardizing information. We monitor positions daily to detect incidents and correct them immediately. Measurements of market risk sensitivity estimate the variation of an instrument or portfolio’s market to changes in a risk factor with analytical approximations given through partial derivatives or a complete revaluation of the portfolio. The risk area’s daily income statement is an excellent indicator of risks and helps identify the impact of changes in financial variables on portfolios. f) Derivatives activities and credit management We run controls over derivative activities and credit management daily with specific measures due to their atypical nature. Firstly, we control and monitor underlying assets’ sensitivity to price movements (Delta and Gamma), volatility (vega 20 systematically review such measurements as sensitivity to the spread, jump-to-default and concentrations of positions by rating. ) and time (theta). Secondly, we For credit risk in trading portfolios, we also calculate incremental risk charge (IRC), an additional metric recommended by the Basel Committee and current regulations. IRC covers default risks and ratings migration not adequately captured in VaR through variations in credit spreads. We apply this metric to public and private fixed-income bonds, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset backed securities, etc.). We calculate IRC using direct measurements of loss distribution tails at an appropriate percentile (99.9%) g) Credit valuation adjustment and debit valuation adjustment Grupo Santander calculates trading portfolio results with credit valuation adjustment (CVA) and debit valuation adjustment (DVA). The CVA is for over the-counter (OTC) derivatives and results from the risk associated with the credit exposure assumed with each counterparty. The CVA for a particular counterparty is the total CVA for all its maturities. To calculate it, we consider such inputs as expected exposure, loss given default, probability of default and a discount factor curve. DVA is similar to CVA but results of the risk our counterparties assume in OTC derivatives. 4.3 Market risk key metrics In 2020, market risk levels remained low in a complex environment marked by uncertainty from the impact of the health crisis, trade disputes, low interest rates and Brexit negotiations. Our exposure in trading portfolios was lower in all risk factors compared to previous years. Risks arose from trading with customers in non-complex instruments. They were mainly focused on hedges of interest rate and exchange rate risks. The contribution of proprietary positions in trading portfolios to overall risk also was substantially lower than in previous years. In 2020, consumption of trading limits was generally low. Limits are set based on the Group’s risk appetite for this type of activity. Lower risk levels are also evident even under stressed scenarios, as seen in the losses given by stress tests regularly carried out to assess any risks not reflected in usual metrics for controlling and monitoring trading risks. Market risk capital requirements We determine required capital for market risk using both internal and standardized models. In 2019, the ECB authorized Grupo Santander to use internal market risk models to calculate regulatory capital in our trading books in Spain, Chile and Mexico. It also extended Spain’s internal model to the Santander London Branch. We aim to gradually extend this approval to other subsidiaries and are working closely with the ECB to analyse the requirements in recently published Basel Committee documents to strengthen banks’ capital positions. Grupo Santander launched the global Market Risk Advanced Platform (MRAP) initiative. It sets out to make our current market risk infrastructure stronger according to the new market risk regulatory framework (FRTB). It also adapts our market risk internal models to the latest TRIM (Targeted Review of Internal Models) guidelines and supervisory expectations. It follows a multi-disciplinary and multi- geographical approach, involving our entities with market- 19 20 K: Parameter used for calculating the consumption of regulatory capital due to market risk. Vega, a Greek term, is the sensitivity of the value of a portfolio to changes in the price of market volatility 464 Responsible banking Corporate governance Economic and financial review Risk management and compliance risk operations, Market Risk, IT, Front Office, Finance and Regulatory Affairs and other important stakeholders. stressed VaR and IRC (incremental risk charge) as fundamental metrics, in keeping with new requirements under the Basel Accords, particularly the CRR. In 2020, it significantly enhanced our functional and IT architecture and operating models and generated synergies between initiatives and resources. VaR analysis Grupo Santander’s consolidated regulatory capital under the internal market risk model computes the total regulatory capital of subsidiaries with necessary approval from the ECB. This is a conservative standard for consolidating our capital because we do not contemplate capital savings arising from geographic diversification. As a result of this approval, we calculate regulatory capital for trading perimeter with advanced approaches. We use VaR, VaR 2018-2020 EUR million. VaR at 99% over a one day horizon Grupo Santander focused our strategy on customers’ trading, minimizing net directional risk exposures and keeping trades diversified by geography and risk factor. This is reflected in the VaR of the SCIB trading book. Despite high market volatility, particularly with interest and exchange rates, it was mostly below the average trend of the last three years except for the spike caused in March and April, ending December at EUR 8.3 million. In 2020, VaR fluctuated between EUR 54.8 million and EUR 6.5 million. The average VaR was EUR 12.5 million, slightly higher than in 2019 and 2018 (EUR 12.1 million and EUR 9.7 million, respectively). 465 Annual report 2020 Contents Risk per factor This table displays the latest and average VaR values at 99% by risk factor over the last three years, the lowest and highest values in 2020 and the ES at 97.5% as of the end of December 2020: VaR statistics and Expected Shortfall by risk factorA EUR million. VaR at 99% and ES at 97.5% with one day time horizon 2020 VaR (99%) Min Average Max Latest ES (97.5%) Latest 2019 VaR 2018 VaR Average Latest Average Latest 6.5 (6.0) 4.7 2.1 2.6 3.1 — 5.0 (4.6) 3.2 2.1 1.3 3.1 — 2.8 0.7 1.6 0.0 0.5 2.4 (0.8) 2.3 0.2 0.8 12.5 (13.1) 9.2 4.4 5.9 5.5 0.5 10.5 (10.6) 7.9 4.3 3.5 5.5 — 6.6 (2.2) 3.4 0.3 5.1 5.6 (3.4) 5.2 1.0 2.7 54.8 (15.8) 29.2 14.7 12.9 11.4 2.5 39.1 (21.9) 24.0 15.0 10.7 11.4 — 13.7 (5.3) 7.1 1.2 10.7 26.4 (13.8) 26.3 6.3 7.6 8.3 (11.8) 8.1 (12.6) 5.4 3.1 6.0 4.5 1.1 8.0 (8.9) 6.5 3.0 2.9 4.5 — 2.9 (1.1) 3.3 0.1 0.5 4.5 (4.3) 4.1 0.5 4.2 5.9 3.7 5.5 4.5 1.0 9.3 (8.8) 7.2 3.6 2.7 4.5 — 2.7 (0.9) 3.0 0.1 0.5 5.0 (3.7) 4.2 0.5 4.2 12.1 (8.2) 10.0 2.9 3.9 3.4 — 6.3 (6.9) 6.0 1.9 1.9 3.4 — 3.5 (1.3) 2.6 0.2 2.0 9.5 (2.9) 7.8 2.0 2.6 10.3 (9.9) 9.2 4.8 2.6 3.5 — 10.1 (8.3) 8.2 4.9 1.9 3.5 — 3.8 (21.0) 3.4 0.1 2.4 6.0 (3.8) 5.9 1.7 2.1 9.7 (9.3) 9.4 2.4 3.9 3.4 — 5.0 (6.7) 5.0 1.1 1.7 3.9 — 7.2 (4.8) 6.2 0.1 5.5 7.2 (3.5) 6.4 2.5 1.9 11.3 (11.5) 9.7 2.8 6.2 4.1 — 5.5 (8.2) 5.8 1.2 2.1 4.6 — 8.3 (2.7) 7.7 0.0 3.3 10.0 (2.3) 6.6 2.9 2.9 Total Trading Diversification effect Interest rate Equities Exchange rate Credit spread Commodities Total Europe Diversification effect Interest rate Equities Exchange rate Credit spread Commodities Total North America Diversification effect Interest rate Equities Exchange rate Total South America Diversification effect Interest rate Equities Exchange rate A. In the Americas, VaR levels of credit spreads and commodities are not shown separately due to their low or null materiality. By the end of December, VaR had decreased by EUR 2 million from the end of 2019. Average VaR increased slightly by EUR 0.4 million. By risk factor, average VaR increased in most factors due to higher market volatility along the year. By geographic area, average VaR rose in Europe and North America but remained at low levels. VaR by risk factor has generally remained stable over the last few years. Temporary rises were due more to temporary increases in the volatility of market prices than significant changes in positions. Backtesting Actual losses can differ from those forecast by VaR due to its limitations. Grupo Santander regularly analyses the accuracy of the VaR calculation model (see the Methodologies section 4.2 ‘Market risk management’). The most important tests consist of backtesting exercises: • For hypothetical P&L backtesting and for the total portfolio, we observed overshootings in VaR at 99% on 9 and 12 March and on 7 July and on 30 December. • In the case of VaE at 99%, overshootings were observed on 20 March. • Most overshootings were due to the strong market variations caused by the health crisis. • The overshootings we observed in 2020 are consistent with the assumptions in the VaR calculation model. 466 Responsible banking Corporate governance Economic and financial review Risk management and compliance Backtesting of trading portfolios: daily results vs. VaR for previous day EUR million Change in risk over time (VaR) of structure derivatives EUR million. VaR Vega at a 99% over a one day horizon Derivatives risk management Our derivatives business primarily sells investment products and hedges risks for customers. Our risk management aims to keep net open risk as low as possible. Transactions include options on equities, fixed income and exchange rates, mainly in Spain, Brazil, UK and Mexico. 21 of structured The following chart shows the VaR Vega derivatives over the last three years. It fluctuated at an average of about EUR 1.8 million. Higher VaR levels generally related to significant rises in market volatility owing to the beginning of the current health crisis, the US’s trade disputes with China and Europe and political uncertainty in some of our geographies. 21 Vega, a Greek term, understood as the sensitivity of the value of a portfolio to changes in the price of market volatility. 467 Annual report 2020 Contents The VaR average was driven by interest rates, equities and exchange rates. Average risk in 2020 (EUR 1.9 million) was slightly higher than in 2019 and 2018. This is depicted in the table below: Financial derivatives. Risk (VaR) by risk factor EUR million. VaR at a 99% over a one day horizon c Minimum Average Maximum Latest Average Latest Average 2020 2019 2018 Total VaR Vega Diversification effect VaR interest rate VaR equities VaR exchange rate VaR commodities 1.1 (0.5) 0.6 0.7 0.3 — 1.9 (1.3) 1.0 1.3 0.9 — 5.9 (7.4) 2.5 5.0 5.8 — 2.3 (1.7) 1.8 1.4 0.8 — 1.5 (1.1) 1.1 0.8 0.6 — 2.6 (1.3) 2.7 0.8 0.4 — 1.8 (1.4) 0.9 1.2 1.1 — Latest 1.1 (1.4) 0.9 1.0 0.6 — Grupo Santander's exposure to complex structured instruments and assets is very limited, this is a reflection of our risk culture and prudent risk management. At the end of December 2020, our exposures in this area were: • Hedge funds: exposure was EUR 344 million (all indirect), acting as counterparty in derivatives transactions. We analyse the risk related to this type of counterparty on a case by case basis, establishing percentages of collateralization based on each fund’s features and assets. • Monolines: no exposure at the end of December 2020. Grupo Santander's policy for approving new transactions in these products remains extremely prudent and conservative. It is strictly supervised by top management. Scenario analysis We regularly calculate and analyse several stress test scenarios for all trading portfolios, including: Historical scenarios Historical scenarios study the behaviour of trading portfolios in crisis conditions or significant market events that have occurred in the past, trying to estimate the maximum losses under the assumption that such events occur again. • Subprime Crisis: historical scenario based on the events that occurred in the 2007-2008 period, which began as a result of the US subprime mortgage crisis. This financial crisis led to a sharp increase in volatility and a sharp reduction in liquidity in all financial markets worldwide. The worst 1-day and 10-day market shocks are identified for each market risk factor. • Covid-19 crisis: historical scenario included in 2020 within our stress testing program, based on the sharp movements in the financial markets as a result of the covid-19 crisis. Its calculation is based on the identification of the 10-day period with higher losses in trading portfolios during the first two quarters of 2020. In this period, all risk factors were affected: stock markets felt sharply, volatility increased across all risk factors, emerging market currencies depreciated, government bond yields reached record lows and credit spreads widened significantly. 468 Hypothetical scenarios Hypothetical scenarios use extreme scenarios of shocks in market risk factors that do not necessarily correspond to historical events. They have an ex-ante approach (unlike historical scenarios, which have an ex-post overview). • Abrupt Crisis: ad-hoc scenario with sharp movements in all risk factors: rise in interest rate curves, sharp falls in stock markets, strong appreciation of USD against other currencies, increase in volatility and credit spreads and default of main debt and equity positions. • Worst Case scenario: hypothetical scenario which combines movements in risk factors with their respective volatilities. The construction of this scenarios is based on historical volatilities, assuming a variation tors of +/-3 and +/-6 daily standard deviations, Irrespective of the historical correlation between them. Its aim is to analyse the risk profile and potential maximum losses of trading portfolios, identifying the most unfavourable scenario. • EBA Adverse scenario: hypothetical scenario based on the adverse macroeconomic scenario to be applied to all market risk factors, as proposed by the EBA to perform the "EU wide stress test” exercise every two years. • Forward Looking scenario: plausible hypothetical scenario based on current portfolios and expert judgement regarding the short term expected movements in market risk factors that may negatively affect trading positions. Reverse stress test scenarios Reverse stress test scenarios identify market variable shifts that can lead to a loss that will endanger our survival. They complement traditional stress scenarios and help signal business vulnerabilities, hidden risks and interactions between risk factors. They begin with a known stress result (such as failure to achieve determined capital, liquidity or solvency ratios) and identify extreme scenarios. Other stress test scenarios We run other stress tests on a quarterly basis to identify potential losses or significant capital impacts resulting from extreme market movements: • IRC scenarios: designed to stress default risk and the credit rating migration risk in the trading portfolios. Responsible banking Corporate governance Economic and financial review Risk management and compliance • Stress proxies scenario: specifically defined to measure the effect of an incorrect selection of proxies in the VaR calculation. • Illiquidity and concentration scenarios: defined to capture impact from illiquidity of markets in stressed market conditions, gapping of prices and concentration risk. The results for the Worst case scenario as of the end of December 2020 are shown in the following table: Stress scenario: maximum volatility (worst case) EUR million. Dec. 2020 data Total trading Europe North America South America Interest rate (40.6) (21.0) (1.6) (18.0) Equities (25.1) (24.5) (0.1) (0.5) Exchange rate (7.3) Credit spread (4.9) (3.0) (1.0) (3.3) (4.6) — (0.3) Commodities — — — — Total (77.9) (53.1) (2.7) (22.1) The stress tests reveal that the economic loss in trading portfolios would be EUR 78 million (market price) if the stress movements in the worst case scenario materialized in the market. The loss would mainly affect Europe (in this order: equities, interest rates, credit spread and exchange rates). 469 Annual report 2020 Contents Association with balance sheet items Grupo Santander's consolidated balance sheet items subject to market risk are shown below, distinguishing between positions for which the main risk metric is VaR and others for which risk monitoring is carried out using other metrics. Risk metric values on the consolidated balance sheet Million euros. Dec. 2020 data Assets subject to market risk Balance sheet amount Cash, cash balances at central banks and other deposits on demand 153,839 Main market risk metrics VaR Other 153,839 Financial assets held for trading 114,945 114,945 Non-trading financial assets mandatorily at fair value through profit or loss 4,486 3,234 1,252 Main risk factors for 'Other' balance Interest rate Interest rate, spread Interest rate, Equity market Financial assets designated at fair value through profit or loss 48,717 35,337 13,380 Interest rate 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 120,953 958,378 8,325 1,980 96,627 1,508,250 81,167 48,038 1,248,188 6,869 286 32,380 1,416,928 91,322 118,170 Interest rate, spread 958,378 Interest rate 8,325 Interest rate, exchange 1,980 Interest rate 81,167 14,641 Interest rate, spread 33,397 Interest rate 1,248,188 Interest rate, spread 6,869 Interest rate, exchange 286 Interest rate 4.4 Structural balance sheet risk management Limits management and control systems Policies set by top management define structural risk control and oversight mechanisms according to regulatory requirements and our risk appetite statement. Control mechanisms consider structural risk sub-types and their implications, contingencies and interrelations. In the covid-19 crisis, our risk controls and mechanisms proved appropriate to maintain risk levels under our appetite limits, requiring no additional management actions. The second line of defence’s structural risk function ensures that this risk is understood, monitored and reported to top management according to governance procedures by: • defining interest rate risk metrics and reviewing and challenging liquidity risk appetite and limits proposals by the first line of defence; • overseeing interest rate risk management by the first line of defence and verifying compliance with interest rate risk limits; • reporting regularly to top managers on the risk profile and providing guidelines to business lines on measures to be taken; • issuing opinions and challenging business proposals, providing top management and business units with the tools to understand the interest rate risk in businesses and operations; and 470 Responsible banking Corporate governance Economic and financial review Risk management and compliance • confirming adequate interest rate risk procedures, and • Economic value of equity sensitivity setting and monitoring models and policies. Like with market risk, annual limits planning sets limits for balance sheet structural risks based on risk appetite. The main limits we use are: • Balance-sheet structural interest-rate risk: ◦ Limit on net interest income (NII) sensitivity over a 1 year horizon. ◦ Limit on the sensitivity of economic value of equity (EVE). ◦ Limit on the market value of ALCO portfolios under stress scenarios. • Structural exchange rate risk: ◦ Limit on net permanent position of the Core Capital Ratio. ◦ Limit on the individual hedge that must be maintained by currency. Risk management executives from lines of business must explain why limit or sub-limit breaches and provide action plans to correct them. Methodologies and key aspects a) Structural interest-rate risk Grupo Santander analyses the potential impact of changes in interest rate levels on EVE and NII. Depending on the changes in rates, impacts will be different and therefore various subtypes of interest rate risk need to be monitored and managed, such as repricing, curve or basis risk. Based on the balance-sheet interest rate position and the market situation and outlook, financial actions (such as transacting positions or setting interest rates for products we market) may be needed to attain the desired risk profile determined by the group. The suite of metrics used to monitor interest rate risks includes the sensitivity of NII and EVE to changes in interest rates, and value at risk (VaR) for calculating economic capital, among others: • Net interest income sensitivity NII is the difference between income from interest on assets and the interest cost of liabilities in the banking book over 1 year. NII sensitivity is the difference between the NII calculated under a selected scenario and the NII calculated under a base scenario. There can be as many NII sensitivities as scenarios. This metric helps identify short-term risks and is complementary to EVE sensitivity. Risk appetite uses sensitivity to parallel changes in the worst case scenario from -100 basis to + 100 bps (hereinafter, figures show the exposure under these scenarios). Economic value of equity (EVE) is the difference between the net current value of assets and the net current value of outstanding in the banking book at a certain point in time. EVE sensitivity is the difference in EVE calculated under a selected scenario and under a base scenario. There can be as many EVE sensitivities as scenarios. This metric helps identify long-term risks, and it is complementary to NII. Risk appetite uses sensitivity to parallel changes in the worst case scenario from -100 to +100 bp. b) Interest rate models Interest rate risk metrics consider the behaviour of financial products under stressed scenarios where uncertainty is common and contractual terms may not be met. We have developed methodologies to help explain products' behaviour. Key interest rate risk models are: • treatment of liabilities with no defined maturity Under Grupo Santander's model, account balances with no maturity use stable and unstable volumes; velocity of run off the volume over time; the relationship between customer rates and market rates; and other variables. • pre-payment treatment for certain assets Pre-payment risk mainly affects fixed-rate mortgages in subsidiaries where contractual rates are low relative to market levels. They model this risk and include it in risk appetite metrics. c) Structural foreign exchange rate risk/hedging of results We monitor these activities daily via position measurements, VaR and results. d) Structural equity risk We monitor these activities monthly via position measurements, VaR and results. 4.5 Structural balance sheet risk key metrics Our market risk profile inherent in asset volumes, shareholders’ equity and net interest income on our balance sheet remained moderate in 2020, in line with previous years. Each subsidiary’s finance division manages its interest rate risk from commercial banking. It is responsible for managing structural risk caused by fluctuating interest rates. Grupo Santander measures interest rate risk with statistical models. It relies on mitigation strategies for structural risk with interest rate instruments, such as fixed income bond portfolios and derivative instruments to keep the risk profile within risk appetite. Structural interest rate risk Europe The EVE and NII sensitivities of our main balance sheets (Santander Spain and Santander UK) are usually positive. 471 Annual report 2020 Contents Net interest income (NII) sensitivity % of total Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December 2020, considering the scenarios previously mentioned, the most significant risk of NII sensitivity was in the euro, at EUR 191 million; the Polish zloty, at EUR 66 million; the British pound yield curve at EUR 25 million; and the US dollar, at EUR 19 million, all relating to the risk of rate cuts. Net interest income (NII) sensitivity % of total The most significant risk to the economic value of equity was also in the US (EUR 1,035 million). Economic value of equity (EVE) sensitivity % of total South America The economic value and net interest income in our South American balance sheets are usually positioned for interest rate cuts. Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December, the most significant risk to net interest income was mainly located in Chile (EUR 80 million) and Brazil (EUR 68 million). Net interest income (NII) sensitivity % of total * Other: Argentina, Peru and Uruguay. The most significant risk to the economic value of equity was also mainly in Chile (EUR 313 million) and Brazil (EUR 278 million). * Other: Portugal and SCF. The most significant risk in economic value of equity was in the euro interest rate curve, at EUR 2,236 million; the British pound at EUR 643 million; the US dollar at EUR 142 million; and the Polish zloty at EUR 22 million, all relating to the risk of rate cuts. Economic value of equity (EVE) sensitivity % of total * Other: Poland, Portugal and SCF. North America The EVE and NII of our North American balance sheets (excluding the EVE of Mexico) usually show positive sensitivities to interest rates. Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December, the most significant risk to net interest income was mainly in the US (EUR 61 million). 472 51%10%25%14%ParentUnited KingdomPolandOthers*69%24%7%ParentUnited KingdomOther*82%18%USMexico97%3%USMexico44%52%4%BrazilChileOther * Responsible banking Corporate governance Economic and financial review Risk management and compliance Economic value of equity sensitivity % of total * Other: Argentina, Peru and Uruguay. Structural foreign exchange rate risk/results hedging Our structural exchange rate risk is driven by transactions in foreign currencies related to permanent financial investments, their results and related hedges. Our dynamic management of this risk seeks to limit the impact on the core capital ratio of foreign exchange rate movements. In 2020, hedging of the core capital ratio for foreign exchange rate risk was kept close to 100%. In December 2020, the largest exposures of permanent investments (with their potential impact on equity) were (in order) in US dollars, British pounds sterling, Brazilian real, Mexican pesos, Chilean pesos and Polish zlotys. We hedge some positions (which are permanent in nature) with foreign exchange-rate derivatives. The Finance Division is also responsible for foreign exchange rate risk management, hedging expected results and dividends in subsidiaries whose base currency is not the euro. Structural VaR EUR million. VaR at a 99% over a one day horizon Structural equity risk Grupo Santander maintains equity positions in its banking book and its trading portfolio as equity instruments or equity stakes depending on the percentage owned or control. We diversified the equity portfolio in the banking book at the end of December 2020 between securities in Spain, China, Morocco, Poland and other countries. Most of the portfolio invests in the finance and insurance industries. Other industries with lower exposure allocations include real estate. Structural equity positions have market risk exposure. We calculate VaR for these positions with market price data series or proxies. By the end of December 2020, the VaR at 99% over a one day time horizon was EUR 319 million (EUR 170 million and EUR 180 million at the end of 2019 and 2018, respectively). Structural VaR A standardized metric such as VaR can be used for monitoring total market risk for the banking book (excluding the trading activity of SCIB, as described in section 4.3 ‘Market risk key metrics’). We distinguish fixed income considering interest rates and credit spreads on ALCO portfolios, exchange rates and equities. In general, structural VaR is not material in terms of our volume of total assets or equity. Structural VaR Diversification effect A VaR Interest Rate VaR Exchange Rate VaR Equities 2020 2019 2018 Minimum Average Maximum 611.4 911.0 1,192.1 Latest 903.1 Average 511.4 Latest 729.1 Average 568.5 Latest 556.8 (227.2) (349.8) (261.0) (263.4) (304.2) (402.0) (325.0) (267.7) 345.5 317.8 175.3 465.1 499.9 295.9 581.9 547.0 324.2 345.5 502.6 318.5 345.6 308.1 161.9 629.7 331.7 169.8 337.1 338.9 217.6 319.5 324.9 180.1 A. Includes credit spread VaR on ALCO portfolios. 473 46%51%3%BrazilChileOther * Annual report 2020 Contents 4.6 Liquidity risk management The liquidity risk function in the second line of defence is responsible for ensuring that liquidity risk is understood, monitored and reported to top management and across the group according to our governance framework by: • defining liquidity risk and provides detailed assessments of current and emerging material liquidity risks. • defining liquidity risk metrics, and reviewing and challenging liquidity risk appetite and limits proposals by the first line of defence. • overseeing liquidity risk management by the first line of defence, assessing whether businesses remain within risk appetite limits and verifying compliance with liquidity risk limits. • reporting to governance bodies on risk, risk appetite and breaches. • issuing an opinion, challenging business proposals, and providing top management and business units with the tools to understand liquidity risk in businesses and operations. • providing a consolidated view of liquidity risk exposures and the liquidity risk profile. • confirming appropriate liquidity procedures to manage businesses within risk appetite limits. Our liquidity framework has helped us manage the covid-19 crisis, with the daily analyses of liquidity position for committees and the regulator. We have enhanced the control framework by: ◦ increasing reporting frequency with daily monitoring of LCR metrics. ◦ focusing on monitoring committed lines in our geographies. ◦ reporting to senior management weekly. ◦ reviewing liquidity stress scenarios based on observations of the covid-19 crisis. Methodologies and key aspects Grupo Santander measures liquidity risk with tools and metrics that account for the appropriate risk factors. a) Liquidity buffer The liquidity buffer is a portion of total liquidity with funds withdrawals (liquidity outflows) resulting from periods of stress. It consists of a set of unencumbered liquid resources we can immediately use to generate liquidity promptly without incurring any loss or excessive discount. We use it as a tool to calculate most liquidity metrics. It is also a metric in its own right, with specified limits for each subsidiary. b) Liquidity coverage ratio (LCR) LCR is a regulatory metric to reinforce the short-term resistance of a bank’s liquidity risk profile by ensuring available sufficient high-quality liquid assets to withstand a stress scenario (idiosyncratic stress or market stress) of considerable severity for thirty calendar days. c) Wholesale gap metric The wholesale gap metric measures the days the group would survive on liquid assets to cover the liquidity losses assuming non-renewable wholesale financing outflows for a determined liquidity horizon. We also use it as an internal short-term liquidity metric to reduce the risk of dependence on wholesale funding. d) Net stable funding ratio Net stable funding ratio (NSFR) is a regulatory metric we use to measure long-term liquidity risk. It is the coefficient of available stable funding and required stable funding. It requires banks to maintain a solid balance sheet where assets and off-balance sheet activities are funded with stable liabilities. e) Asset encumbrance metrics Grupo Santander uses two types of metrics to measure asset encumbrance risk: the asset encumbrance ratio, which calculates the proportion of total encumbered assets to the entity’s total assets; and the structural asset encumbrance ratio, which measures the proportion of encumbered assets from structural funding transactions (mainly long-term collateralised issuances and funding from central banks). f) Other liquidity indicators Aside from traditional liquidity risk measurement tools for short-term risk and long-term or funding risk, Grupo Santander has created additional liquidity indicators that measure other liquidity risk factors. They include top one and five funding providers, distribution of funding by maturity date and other concentration metrics. g) Liquidity scenario analysis Grupo Santander uses four standard scenarios as liquidity stress tests: i. An idiosyncratic scenario of events that adversely affect the group alone; ii. A local market scenario of events that have serious adverse effects on the financial system or real economy of our base country; iii. A global market scenario of events that have serious adverse effects on the global financial system; and iv. A combined scenario, coupling idiosyncratic events with severe (local and global) market events arising simultaneously and interactively. Santander uses outcomes from stress scenarios with other tools to determine risk appetite and support business decision-making. h) Liquidity early warning indicators (EWI) The system of liquidity EWI comprises quantitative and qualitative indicators to foresee liquidity stress situations and weaknesses in group entities’ funding and liquidity structure. EWI are both external (environmental) and internal, respectively relating to market financial variables and to our own actions. 474 Responsible banking Corporate governance Economic and financial review Risk management and compliance i) Intraday liquidity metrics Grupo Santander uses the Basel regulatory definition and calculates a set of metrics and stress scenarios regarding the intraday liquidity risk, in order to maintain a high-level management and control. 4.7 Liquidity risk key metrics Grupo Santander's strong liquidity and financing position is based on a decentralized liquidity model. Each subsidiary manages liquidity independently and maintains large buffers of highly liquid assets. In general, LCR remained stable and regulatory ratios are above the threshold. The regulatory minimum required in 2020 was 100% and our risk appetite limit was 110%. Grupo Santander has an effective management of its liquidity buffers to maintain a proper liquidity profile (regulatory limits) and keep our balance sheet profitable. Most subsidiaries also maintain sound balance sheet structures. They have stable financing structures, based on a broad customer deposit base, which covers structural needs, with low dependence on short-term funding and liquidity metrics well above local and group regulatory requirements and within risk appetite limits. The regulatory NSFR metric remained above 100% for our core units as well as for the consolidated ratio. We anticipate full compliance with the regulatory minimum requirement in 2021. Our structural assets' encumbrance risk levels are in line with our European peers’. The main sources of encumbrance are collateralized debt issuances (securitisations and covered bonds) and collateralized funding facilities provided by central banks. Our subsidiaries’ balance sheets have also proved sound under stress scenarios constructed in accordance with uniform corporate criteria. All subsidiaries would survive the worst case scenario for at least 45 days, meeting liquidity requirements with their liquid asset buffers alone. For more details on liquidity metrics, see section 3.4 ‘Liquidity and funding management’ of the chapter on Economic and financial review. 4.8 Pension and actuarial risk management Pension risk Grupo Santander assumes the financial, market, credit and liquidity risks in the assets and investments of benefit employee pension funds, as well as the actuarial, market and credit risks from pension obligations with its employees. Our main goal in the pension risk control and management is to identify, measure, monitor, mitigate and disclose all sources of pension risk. We annually estimate combined losses in assets and liabilities under a stress scenario that includes changes in interest rates, exchange rates, inflation, stock markets, real estate prices and credit spread. Varying financial assumptions and market conditions in the covid-19 crisis has had an impact on pension and actuarial risk. It is too early to know the effects of mortality risk among pension holders. In the first half of 2020 the higher credit spreads and interest rates in our main geographies had a positive effect on pension risk. During the second half, their decline had a negative impact, which inflation partiallyoffset. Grupo Santander took de-risking actions in core subsidiaries to reduce the exposure to pension and actuarial risks. As a result, the pension obligation decreased. Actuarial risk Actuarial risk stems from biometric changes in the life expectancy of pension scheme beneficiaries; from life insurance holders; unforeseen non-life insurance payments; and unexpected changes in holders’ behaviour when filing claims covered in insurance contracts. We distinguish these actuarial risks: • Life liability risk: risk of a loss if fluctuations in risk factors changes the value of pension liabilities: ◦ Mortality/longevity risk: risk of loss if variations in insured parties' estimated probability of death/survival parties changes the value of liabilities. ◦ Morbidity risk: risk of loss if insured parties' estimated probability of disability/incapacity changes the value of liabilities. ◦ Surrender/lapse risk: risk of loss if early termination or variation in policyholders’ rights to surrender, extraordinary contributions and/or paid up options changes in the value of liabilities because of. ◦ Expense risk: risk of loss if an adverse deviation in expected expenses changes the value of liabilities. ◦ Catastrophe risk: losses if catastrophic events increase pension liabilities. • Non-life liability risk: risk of losses from changes in the value of Santander's non-life benefit liabilities with employees, caused by fluctuations in related risk factors: ◦ Premium risk: loss from insufficient premiums to pay for claims that might be made in the future ◦ Reserve risk: losses from insufficient reserves for unsettled claims, including related costs. ◦ Catastrophe risk: losses if catastrophic events increase non-life liabilities. 475 Annual report 2020 Contents 5. Capital risk 5.1 Introduction Grupo Santander includes risk from inadequate quantity or quality of capital to fulfil internal business objectives, regulatory requirements and market expectations within structural risk. In 2020, the Capital Risk function continued to work on improving the Target Operating Model (TOM), a key milestone of which was its deployment and monitoring in subsidiaries through these tasks: Our Capital Risk function, which is part of the second line of defence, controls and oversees capital management in the first line. It checks that our capital adequacy and coverage match our risk profile. It also validates and monitors transactions that could be considered significant risk transfers (SRT). • Revising and updating local capital risk procedures. • Unifying capital reporting under our common guidelines while adapting to local market regulations and circumstances. • Following up regularly on local progress made on the It brings together capital planning, budget execution and monitoring, the ongoing measurement of capital and the reporting and disclosure of capital data (described below). TOM. Key initiatives 2020 Capital risk management focused on protecting solvency amid the current covid-19 pandemic. We prioritized measuring items we found that could affect capital ratios and continuously monitored key metrics. In capital planning, the Capital Risk function regularly evaluates potential deviations in capital forecasts to set budget uncertainty levels. In 2020, the Capital Risk function closely followed the evolution of solvency levels amid growing concerns about covid-19's and especially its impact on our organic generation and securitizations plan, the impact of model reviews by the regulator and the effect of new regulations resulting from this context. The impact of market variables on capital levels was also monitored. The Group implemented hedging policies to mitigate the volatility on our CET1 ratio. This year, smaller ALCO portfolios also contributed to a significant reduction in volatility. At year end, the group-wide CET1 ratio amounted to 12.34%. It increased by 69 bps from the previous year, above our target ratio and comfortably meeting the levels required by the regulator of 8.85% (from 9.69%). In the first quarter of the year, regulators enacted new capital requirements. These included reducing Pillar 2 and countercyclical buffers, which drove minimum CET1 down to 8.85% (from 9.69%). Nevertheless, Grupo Santander kept solvency appetite limits, above which capital ratios remained throughout the year. Despite the persisting uncertainties, organic capital generation grew 104 bps in the year on the back of sound underlying profits and the management of RWA influenced by securitizations. The Capital Risk function oversees the first line of defence's capital activities. They are grouped into four distinct workflows and ensure the right monitoring for our risk profile: • Capital planning: internal process to set capital levels and returns consistently with our group-wide strategy. Because we must ensure solvency and efficiency of capital, we identify capital actions to achieve our capital ratios and our return on capital targets. • Capital adequacy: assessment of capital levels to cover our types of risk. It is based on Grupo's Santander risk identification and measurement (RPA), strategy and risk appetite. For more details, see section 2.4 'Management processes and tools' - Risk profile assessment and Risk appetite and structure of limits. • Capital risk measurement: process to cover activities required to measure capital metrics, based on a set methodology for obtaining final figures. It also supports the stages of capital management, monitoring, oversight and control. • Origination: process to evaluate portfolios' capital efficiency to reduce capital through securitizations, risk mitigation techniques, asset sales and other initiatives. 476 Responsible banking Corporate governance Economic and financial review Risk management and compliance For more details, see the section 3.5 ‘Capital management and adequacy. Solvency ratios' in the Economic and financial review. 5.2 Capital risk management In the second line of defence, capital risk management can independently challenge business and first-line activities by: • reviewing key items affecting capital ratios to supervise capital planning and adequacy exercises. • identifying key metrics to calculate regulatory capital; setting tolerance levels; and analysing significant variations and single transactions that impact on capital. • reviewing and challenging proposed capital actions according to capital planning and risk appetite. Supervision of capital planning and adequacy exercises The Capital Risk function reviews capital planning and adequacy exercises to make sure capital is consistent with risk appetite and the risk profile. Its core objectives are: • ensuring that Grupo Santander's significant risks are monitored in the course of its operations. • checking that planning methodologies and assumptions are appropriate. • confirming that results are reasonable and consistent with business strategy, the macroeconomic environment and system variables. • assessing the consistency of exercises, especially ones that use baseline and stressed scenarios. Capital planning and adequacy supervision follows these phases: Definition of scope Supervising capital planning and adequacy begins with proposed materiality based on the level of importance of subsidiaries' risk-weighted assets to the group. It may include other units, businesses and portfolios (even if they are not significantly material) whose impact on strategy, compliance with the global plan or timely relevance might require analysis. Qualitative analysis We run a qualitative review of forecasting to ensure the right governance. Quantitative analysis Metrics and components affecting RWA and available capital projections are quantitatively assessed. This phase requires the appropriate involvement and coordination of subsidiaries to analyse local projections, which underpin group-wide projections. Conclusions and disclosure Based on the outcomes from the capital planning and adequacy phases, Grupo Santander conducts a final assessment that covers the scope of analysis, detected weaknesses and areas for improvement. We report to senior management according to governance procedures, ensuring effective and constructive challenge of proposed capital plans from the second line of defence. Continuous monitoring of capital measurement Continuous monitoring of Grupo Santander's regulatory capital measurement is an additional capital risk control function to ensure the right capital risk profile. We conduct a qualitative analysis of the regulatory and supervisory framework and a review of capital metrics and specific thresholds. We also monitor compliance with capital risk appetite to maintain capital levels above regulatory requirements and market expectations. This function follows these phases and procedures: Definition of metrics and thresholds The function sets metrics and thresholds used in supervision every year to monitor and control capital risk. They consist of: • Primary metrics, which cover capital ratios and numerator and denominator components at the highest level. • Secondary metrics, which include a more extensive breakdown (for example, credit RWA or the basis for measuring market RWA). • Supplementary metrics for more detailed analyses. Thresholds for certain metrics trigger a more detailed analysis and an explanation. The internal ‘Capital measurement control metrics guidelines’ outline these metrics, thresholds and sources of information. Preliminary analysis This phase of the control process analyses process governance, regulatory framework and other qualitative issues. We examine capital management steps to fulfil recommendations and instructions from supervisory authorities and the Internal Audit function. Assessment and measurement Based on preliminary findings, the Capital Risk function reviews primary and secondary metrics in the process to detect variations that might exceed defined thresholds, in addition to a detailed analysis of supplementary metrics. If a subsidiary or global area is the cause of a threshold breach, it must provide the Capital Risk function with additional information on volume variations, one-off events, capital actions and other items. 477 Annual report 2020 Contents Conclusions and disclosure The body responsible for capital risk control analyses the report and conclusions and, if needed, will submit them to the second-line (capital committee) or first-line (risk control committee) committees for deliberation. Oversight of securitizations The Capital Risk function oversees securitizations that might be "significant risk transfers" (SRT) originated by Santander, in accordance with EBA guidelines on SRT by virtue of Articles 243 to 245 of Regulation (EU) 2017/2401 and 2017/2402. Oversight is an essential prerequisite for executing both synthetic and traditional securitizations. It applies to securitizations with the potential to reduce RWA to make sure they: • can effectively transfer risk. • comply with all prudential regulation requirements. • have risk parameters that follow our methodology. • have an economic rationale that meets group-wide standards. SRT supervision is split into these stages: • ECB pre-notification: Capital Risk issues an assessment before notifying the ECB of an intended securitization that may be an SRT. • Validation: Capital and risk committees review the securitization based on the capital risk function's assessment to validate it. • ECB notification: Submission of final securitization documents package to the ECB take places no later than fifteen days after the securitization's closing date. • Monitoring: the Capital Risk function regularly monitors executed securitizations. 5.3 Key metrics Grupo Santander’s capital position is strong and consistent with our business model, balance sheet structure, risk profile and regulatory requirements. Our strong balance sheet and profitability enables us to finance growth and continue to accumulate capital. Our model of subsidiaries with autonomy over liquidity and capital allows us to mitigate the risk that one subsidiary experiencing difficulties could affect others. Our capital metrics are stable, and ratios remain comfortably above the regulatory requirements and consistent with risk appetite. For more details, see the section 3.5 ‘Capital management and adequacy. Solvency ratios' in the Economic and financial review. 478 Responsible banking Corporate governance Economic and financial review Risk management and compliance 6. Operational risk 6.1 Introduction In accordance with the Basel framework, Grupo Santander defines operational risk (OR) as the risk of losses from defects or failures in internal processes, people, systems or external events. It covers risk categories such as fraud, technological, cyber-risk, legal and conduct risk. 22 Operational risk is inherent to all products, activities, processes and systems. It is generated in all business and support areas. All employees are responsible for managing and controlling the operational risks generated by their activities. Our OR management and control model is based on a continual process of identifying, evaluating and mitigating sources of risk, regardless of whether they have materialized or not, ensuring that risk management priorities are established appropriately. OR focus in 2020 was on adequately managing the risks due to the covid-19 outbreak, as well as maintaining the OR model. Grupo Santander adapted to the new environment in a timely manner, providing all services to customers, taking care of employees, and demonstrating our resilience in an extremely disruptive situation. Our specific operational risk management measures are detailed in the following sections. 6.2 Operational risk management Operational risk management in Grupo Santander is underpinned by the following items: Management and control model Santander’s operational risk model defines the necessary elements of suitable management and control of operational risk, aligned with advanced regulatory standards and best practices for operational risk management. The operational risk cycle includes the following phases: strategy and planning; risk identification and assessment; risk monitoring; the application and monitoring of mitigation measures; and the availability of information, appropriate reporting and escalation of important matters. 22 Legal processes with an operational risk root cause. The most important operational risk tools we use throughout the management cycle are: • Internal events database, which registers financial events (including all losses regardless of the amount) and non-financial events (such as customer, regulatory events and services). This information's goal is to operational risk management through root cause analyses and increase awareness of the risks. The internal database also supports timely escalation of significant operational risk events to senior management, regulatory reporting and the economic capital model integrated within the ICAAP process. • Operational risk and control self-assessment (RCSA), which is a qualitative process based on the criteria and experience of a pool of experts in each function to determine related operational risks, the status of the control environment and the allocation of these related operational risk to the functions within Grupo Santander. It aims to identify and assess material operational risks that could prevent business or support units achieving objectives. Once these operational risks are assessed, the different units and the second line identify mitigation actions if the risk levels prove to be above tolerable thresholds. Our RCSA's specific reviews allow for a transversal identification of technological risks, fraud, third-party risk, information security, and other factors that could lead to regulatory non-compliance in areas exposed to conduct risk and financial crime (this last is set out in greater detail in this chapter in section 7.2 ‘Compliance and conduct risk management’. • External event database, which provides quantitative and qualitative information, allowing for a more detailed and structured analysis of events in the industry, the benchmarking of the losses profile and the appropriate preparation for the RCSA, insurance and scenario analysis exercises. • OR scenarios analyses, which aim to identify highly unlikely events resulting in significant losses for Grupo Santander, and establish mitigating actions. Expert opinion comes from business lines and risk and control managers. • Key risk indicators, which provide quantitative information on Grupo Santander's risk exposure and the control environment. The most significant indicators associated with the main risk exposures are part of operational risk appetite. 479 Annual report 2020 Contents • Risk appetite framework, which is structured as follows: ◦ A general operational risk appetite statement, associated to two global metrics based on losses (expected losses and stressed losses). ◦ Specific statements on internal and external fraud, IT risk, cyber-risk, anti-money laundering, products commercialization, regulatory compliance and procurement risk, associated to their own forward- looking monitoring metrics. • Internal audit, external audit and regulatory recommendations, which provide information on inherent and residual risks and identify areas of improvement in processes and controls. • Capital model or a loss distribution approach (LDA) model that captures Grupo Santander’s operational risk profile, with information collected from the internal loss database, external data and scenarios. It is mainly used to determine operational risk’s economic capital and estimate expected and stressed losses for operational risk appetite. • Other instruments to analyse and manage operational risk, assess new products and services, manage business continuity plans (BCP), revise perimeters and run quality assurance. Our management and reporting system for operational risk, Heracles, supports operational risk programmes and tools with a Governance, Risk and Compliance (GRC) approach. It provides information for management and reporting at subsidiaries and throughout the group. It aims to improve OR decision-making and prevent duplicated efforts. To achieve this, we make sure people responsible for risks can have a timely, full and precise view of their risks, using a common set of taxonomies and methodological standards. Model implementation and initiatives strengthening and standardizing our risk and control environment. • Improving the assessment methodology of the global cybersecurity transformation plan to identify the risk reduction impact of technical security developments. • Improving the contingency, business continuity and crisis management plans together with recovery and resolution plans, while hedging emerging risks. • Applying the transformation risk analysis methodology, with the approval of a target operating model (TOM). Business continuity plan (BCP) Grupo Santander’s business continuity management system (BCMS) guarantees group-wide business continuity in the event of a disaster or another serious incident. Our BCM is a holistic process that identifies the potential impacts threatening our organization and resources, and applies the correct protocols and governance to respond effectively. Its main objectives are: • safeguarding people's safety in a contingency situation; • guaranteeing that core functions are performed and service is delivered to our customer; • fulfilling our obligations towards employees, customers, shareholders and other stakeholders; • complying with regulations; • minimizing potential losses to Grupo Santander as well as the impact on business activities; • protecting our brand image, credibility and trust; • reducing operational effects under efficient procedures, priorities and a strategy to recover and restore business operations in a post-contingency scenario; Our main initiatives in 2020 to improve the operational risk management model were: • helping stabilize the financial system. • Evolving appetite framework with new metrics (a new cyber primary metric will be included in RAS 2021), ensuring better measurement and stressing thresholds. • Developing models to perform independent assessments of the risk and control profiles that help subsidiaries' oversight and challenge the accuracy of local assessments. • Further integrating risk assessments by embedding financial crime compliance and regulatory risk assessments in the RCSA module. In 2020, the pandemic challenged our subsidiaries' BCP frameworks and strategies. We had to adapt some protocols, but this crisis has proved that Grupo Santander has a robust BCM programme in place. Some protocols were integrated into business-as-usual activities, and several lessons learned are being taking into account to improve the current BCM programme: • New process classification (criticality taxonomy). • Review of the scope of critical processes (with an end to end process view) considering a prolonged contingency. • Fostering technology risk control by defining Reference • Expand the scope of the processes included in the Risks to be assessed during RCSA by business owners and specialised control functions. • Improving processes to determine, identify and assess risk references and standard controls with a view to business continuity strategy. • A risk and a cost-benefit analysis will be applied to select the continuity strategies required for each contingency scenario. 480 Responsible banking Corporate governance Economic and financial review Risk management and compliance • Robotics, digitized documents and other flexible solutions proved vital to provide a rapid response to customers and business units' needs during the pandemic. Several processes proved so efficient that they are being incorporated into business-as-usual activities. Operational risk management during covid-19 The pandemic increased inherent operational risk exposure, although by implementing new controls and reinforcing existing ones, we maintained pre-pandemic operational risk levels: guidelines on prevention, health and business continuity measures. For certain suppliers, we offered additional infrastructure (for example, customer service and anti- fraud approval controls). Suppliers' operations and finances were closely monitored throughout the pandemic. • Continual monitoring of operations and potential impacts was essential, especially at peaks in the pandemic, through daily dashboards to supervise operational and other risks. Metrics were based on critical staff, IT incidents and losses. • We effectively deployed business continuity plans to support our employees, customers and businesses. Relevant mitigation actions • We enhanced control environment for cyber threats (i.e. patching, browsing control, data protection controls, etc.) in view of the pandemic and the direct impact of remote working on operational risk. • We increased and improved technological support to ensure available and adequate services, especially in online banking and at call centres. • We implemented additional controls to minimize incidents resulting from the higher processing risk due to the volume of new loans and changes in existing portfolios, derived from government aid programmes and internal policies. More specifically, in our geographies, we implemented several initiatives to review and mitigate risks arising from the covid-19, including these: • Most employees went from working in an office environment to working from home (WFH) by quickly increasing the capacity for staff to work remotely and improving connectivity. To support WFH arrangements, Santander applied such controls and mitigants as enhanced monitoring of staff transactions, distribution of office equipment, mandatory remote working training, ongoing health trackers and feedback surveys. • Some important business and support processes were subject to changes or redefined, which led to assessments of potential operational risks that could be faced by the units. • Another important focus was implementing adequate controls to ensure confidentiality and avoid data leaks in critical activities. At Santander México, SCIB quickly distributed employees at work centres to ensure the functioning of VPNs and equipment, reinforcing access control monitoring and establishing weekly reviews of possible incidents. • We also strengthened contact centres' controls to protect information without compromising customer service. We reassigned contact centre staff to other work centres, analysed risk of fraud and data leaks with each transaction and made sure the group's prevention capabilities were not affected. • Critical suppliers' follow-up was a priority in all units (as explained in the following section). The Group established communication plans to vendors, with Apart from those covid-19-related actions, Grupo Santander continuously implements and monitors mitigation actions for major sources of risk identified by internal OR management tools and other external sources of information. Fraud The transformation and digitalization of the business entails new threats such as more payment scams and fraud in origination (borrowing). To mitigate those risks, we designed and revised new products and control mechanisms. Strong customer authentication processes in line with the European Payment Service Directive (PSD2), biometric validation (i.e. facial recognition) in customer on-boarding, enhancing alerts on fraud in origination, etc., is becoming increasingly widespread to mitigate those risks. To reduce fraud, Grupo Santander's special actions include: • Card fraud: ◦ Generalized use of chip and PINs (transactions with PIN-cards, which must be signed off with a numeric code) in ATMs and stores, with advanced authentication mechanisms linked to our systems. ◦ Improved card protection against electronic commerce fraud, with a secure standard (3DSecure) via two-step authentication based on one-time passwords, mobile applications that let users deactivate cards for e- commerce use, and virtual cards issuance with dynamic authentication passwords. ◦ Use of a new biometric authentication system in ATMs and branch cashier desks in Santander Brasil. Customers can use it to withdraw cash from ATMs and sign for transactions with their fingerprint. ◦ Integration of monitoring and fraud detection tools with other systems, internally and externally, to better detect suspicious activity. ◦ Reinforced ATM security with new physical protection elements and anti-skimming, as well as improved logical security of devices. • Online/mobile banking fraud: ◦ Confirmation of online banking transactions with a second security factor of one-time-use passwords; the 481 Annual report 2020 Contents evolution of technology, depending on the geography (for example, based on QR codes generated from transaction data). ◦ Enhanced online banking security with a new transaction risk scoring system that requests further authentication when a given security threshold is breached. ◦ Implementation of specific mobile banking protections, such as identification and registration of customer devices (Device ID). ◦ Monitoring of e-banking platform security to avoid systems attacks. • Forgery & ID theft fraud: ◦ Enhanced fraud controls, which will verify the applicant’s identity and the device used to submit the request. ◦ Implementation of biometrics for customers and employees. ◦ Transfer of the fraud prevention function to the credit area to improve mitigation in fraud in origination (borrowing). ◦ Enhanced alerts on fraud in origination. ◦ New confirmation and management platforms. Cyber risk In 2020, cyber threats were more frequent and stronger. Hackers continue to enhance their capabilities. This trend is expected to continue in coming years, and financial sector will remain a primary target. Given Santander's increasing reliance on digital systems, cyber threats make cyber security one of Santander’s top non-financial business risks. Therefore, we aim to make Santander a cyber resilient organization that can withstand, detect and rapidly react to cyberattacks, while constantly evolving and improving its defences. Santander has matured its cybersecurity controls and regulations in line with its global cybersecurity framework and international best practices. Our ambitious programme to transform cybersecurity and strengthen detection, response and protection mechanisms made significant progress. In 2020, cybersecurity team set its focus on strengthening internal controls against insider threats with data leakage protection (DLP), internal vulnerability management and network segregation, insider monitoring and third-party risk management. In the second line of defence, the cybersecurity risk team developed a programme to strengthen control and oversight of cyber risk and assess how effectively the global cybersecurity transformation plan reduces risk. A major point of focus in 2020 was addressing short-term priorities and setting strategy: • Definition of an operating model that drives and steers the cyber-risk function of the second line of defence (2LoD) as a structured approach that enables effective risk management (including definition of 2LoD cyber risk 482 mission and guidelines principles, processes, tools and skills needed). • Definition of cyber risk and control taxonomies and re- alignment of processes ensuring integration with non- financial risk and broader Enterprise wide risk management. Progress made in this area helped create a consistent 2LoD methodology to aggregate a range of risk inputs and provide actionable insights into overall risk profile. • A consistent, group-wide, quarterly 2LoD process to assess control environment and risks. The 2LoD added a challenge and back-testing process to ensure independent view of controls effectiveness and risk reduction. • Simplification and automation of existing processes to improve operating performance. Creation of an automated tool enabling cyber risk data correlation, analysis and reporting, significantly reducing information gathering and consolidation to prioritize risk management activities. Additionally, in the covid-19 crisis, most of Santander subsidiaries activated their contingency plans and transitioned their workforce to WFH, having a direct impact on cyber threats and risks. In coordination with Global Cyber Security team, OR area was performed an assessment of major cyber threats and risks stemming from the pandemic. It provides each entity's second line of defence with a reference on risks to monitor and key controls to revise and implement to reduce risks. Further information regarding cyber security is available in chapter Economic and financial review, section 5 'Research, development and innovation (R&D&I)'. IT risk Santander's digital transformation requires continual improvement as well as assessment of IT risk and controls. Covid-19 has accelerated our digitalization and tested our ability to adapt systems and solutions to continue services to our customers and cover the new requirements of the government aid programmes. We ran close monitoring of the IT risks, focusing particularly on boosting the resilience and capacity of our online channels, contact centres and remote working infrastructure (e.g., VPNs, end user devices, collaboration tools, etc.). Despite complexities stemming from covid-19 that challenged our IT change management to quickly adapt the technological systems to customers' demands, major technological incidents were kept under control and even in figures lower than in previous years. As EBA guidelines on “ICT & Security Risk Management” entered into force in June 2020, we ran a GAP analysis to identify opportunities to adapt current frameworks to requirements. Thus, we revised our IT risk taxonomies, reference risks and standards of control. We also adopted a risk-based approach to prioritize required resources and remediation measures based on critical assets. Responsible banking Corporate governance Economic and financial review Risk management and compliance An initiative to identify and differentiate key assets in our operations and services to our customers launched, with specific risk monitoring metrics to ensure related technological risks, especially levels of availability, obsolescence and patching, remain within our appetite limits. We made significant progress to reduce the obsolescence of relevant IT assets across the group this year. Supplier management Our digitalization strategy sets out to offer our customers the best solutions and products in the market. This can entail an increase in third-party services and the use of new technologies such as the cloud. In light of the increase in cyber risks and regulatory pressure, we had to update our procurement management framework to properly assess and manage risks in outsourcing and third-party agreements. In 2020, due to the current pandemic, we reinforced monitoring to ensure the operational continuity of the services we receive from critical vendors. Our efforts were mainly identifying them for each subsidiary to ensure that: • vendors had business continuity plans in place; • they had action plans to mitigate the impact on their services, in light of WFH and other measures; • any incident in a critical service could be detected, escalated and managed; • they had the required operational continuity arrangements and right controls to handle data protection, fraud, cyberattacks and other risks stemming from the new ways of working (remote working); • suppliers’ financial positions and the possible deterioration thereof due to covid-19 could be monitored; • service level agreements (SLAs) could be monitored. In addition, Grupo Santander developed a set of best practices to apply a common approach across all our geographies for vendors deemed vulnerable due to the pandemic, including suppliers whose activity declined, suppliers whose billing was highly dependent on the services provided to the bank and small vendors suffering economic deterioration. Other relevant mitigating actions Grupo Santander’s mitigation measures relating to customer practices, products and businesses constantly improve. We enforce policies on products and services, management and analysis of customer complaints, financial crime, and compliance with new regulations. For more details on mitigating compliance risk actions, see section 7.2 'Compliance and conduct risk'. Insurance in operational risk management Insurance is key to operational risk management. In 2020, we further enhanced insurable risk management and developed a more consistent and coordinated approach for the functions involved by: • enhancing relations between the own insurance, operational risk and first line areas to manage insurable risk more effectively in the insurance forums and others established by the operational risk function (i.e. fraud forum); • reviewing risks to analyse suitability for coverage and taking corrective measures; • monitoring insurable losses and events identified in insurance policies, establishing action protocols and specific monitoring forums in each market. The Own Insurance function continues to safeguard our bottom line mainly by: • defining and applying criteria to quantify insurable risk based on the losses and scenarios it analyses to determine exposures; • reviewing our approach to the insurance market and our global programmes structure, in light of the hardening environment of the insurance industry, with specific focus on cyber-related cover; • recovering insured losses and optimizing hedges through policies in 2020; • participating in the group’s risk management forums and committees and increasing interaction with other functions to better identify and evaluate insurable risks and disseminate policies and capitalization procedures to other areas. Analysis and monitoring of controls in Santander Corporate & Investment Banking At Santander Corporate & Investment Banking (SCIB), operational control procedures are subject to continuous improvements owing to the nature and complexity of financial markets. In 2020, SCIB kept up its activity and a robust control environment without major issue. • In relation to covid-19: ◦ At the beginning of the pandemic, SCIB's global approach effectively anticipated actions and shared lessons learned based on the experiences of all subsidiaries. ◦ SCIB's operational preparedness was key to facing the challenges of the new circumstances, with Special focus on trading activity, settlements, liquidity and regulatory reporting and other core processes, with no major impacts detected. ◦ Several initiatives reinforced the control framework, especially on markets activity. ◦ Focus remains on improving solutions to face "new normal". • Other relevant improvements in 2020: 483 Annual report 2020 Contents ◦ SCIB finished a global infrastructure programme whose objectives include strengthening the control model and reducing operational risk. ◦ The control mode was adapted to MiFID II, Dodd Frank Act, EMIR, IFRS 9, GDPR and other regulatory requirements. ◦ In regards to the trading control environment: – SCIB strengthened its control framework across its geographies and incorporated a new MI tool for holistic market monitoring. Additionally, it implemented a new communication surveillance tool with special focus on conduct risk. – It continues to monitor the risk of unauthorized trading through a specific risk appetite metric, covering regular assessments of main controls in place to mitigate the risk. It updated global guidelines with new requirements. For more details on regulatory compliance in markets activities, see section 7.2 'Compliance and conduct risk' - Regulatory compliance. 6.3 Key metrics Grupo Santander gathered the information on operational risk losses relating to covid-19 and on expenses incurred to restore the position as it was before operational risk events. Few such events occurred, bearing a low economic impact. We are implementing the criteria in the EBA Guidelines on the Implementation of Selected Covid-19 Policies 23 . Net losses by operational risk categoryA (% o/total) A. Excluding employee litigation from Brazil Net losses (including incurred loss and net provisions) distributed under Basel years were as follows: risk categories for the last three 24 23 24 Guidelines updated on December 2020. The Basel categories incorporate risks which are detailed in section 7 'Compliance and conduct risk'. 484 Responsible banking Corporate governance Economic and financial review Risk management and compliance Losses due to customers, products and business practices, and errors in processes, were lower than in the previous year. However, external fraud losses increased. The chart below shows net losses by country: A Net losses by country (% o/total) A. Excluding Trabalhistas events from Brazil Santander considers employee litigation with Santander Brasil a staff expense. Our governing bodies continuously monitor expense levels with specific appetite metrics and take special actions to reduce them. These expenses are reported under the categorization defined by the Basel operational risk framework. In 2020, the most significant losses by category and geography relate to litigation in Santander Brasil (with ongoing root cause analyses of the main products involved) and Santander España (due to legacy cases). Additionally, the amount of losses in the UK and the US continues to decrease due to lower provisions for product marketing and legacy cases. 485 Brazil29%UK11%Spain30%US7%Mexico4%Other20% Annual report 2020 Contents 7. Compliance and conduct risk 7.1 Introduction The compliance and conduct risk function, which promotes our adherence to rules, supervisory requirements, principles of good conduct and values, acts as a second line of defence. It sets standards, challenges, advises and reports in the best interests of employees, customers, shareholders and broader society. The compliance and conduct risk function is responsible for monitoring and overseeing compliance and conduct risks. It assesses their impact on our risk appetite and risk profile. It also covers matters related to the following management domains: regulatory compliance, product governance and customer protection, financial crime compliance and reputational risks. Under Grupo Santander's current model of three lines of defence, compliance and conduct risk is an independent second-line control function. It reports directly and regularly to the board of directors and its committees through the Group Chief Compliance Officer (Group CCO). The compliance programme is a key process in the compliance and conduct risk function. It sets out the main activities for the year. The parent and each subsidiary execute a compliance programme according to its size and complexity. Structured around the previously mentioned four management domains, it is a key tool for overseeing our subsidiaries and the control environment for compliance and conduct risks. 7.2 Compliance and conduct risk management The compliance and conduct risk function seeks to ensure the general code of conduct (GCC) is followed under the supervision of the compliance and the risk supervision, regulation and compliance committees. The GCC catalogues ethical principles and rules of conduct that govern the activities of our employees. It must be understood and applied along with other internal implementing regulations. The GCC sets out: • compliance functions and responsibilities in applying the general code of conduct; • general ethical principles; • general standards of conduct; 486 • the consequences of violating it; • the Canal Abierto ethical channel to report alleged misconduct and inappropriate behaviour confidentially and anonymously. Regulatory Compliance The regulatory compliance function supervises regulatory risks concerning employees, data management and securities markets (these last with SCIB's Compliance team). Its core areas are: A. Employees This function, which promotes the ethical and compliance culture among staff, sets internal standards to prevent criminal risks, conflicts of interest and anti-competitive behaviours based on the GCC. It also manages Canal Abierto. The Group in its firm commitment against any form of corruption, whether in the public or private sectors, has an Anti-Corruption policy whose purpose is to establish the guidelines to be applied, assign the relevant roles and responsibilities and establish certain anti-corruption elements for its governance. This policy, which can be supplemented by any additional stricter controls derived from more demanding local regulations or obligations and their specific training, includes elements aimed at mitigating and preventing corruption and bribery within the Group, such as: • Guidelines regarding gifts and invitations extended to public officials. • Guidelines regarding the conduct of agents, intermediaries, advisors and business partners. • Control and prevention measures regarding third parties (agents, intermediaries, advisors and business partners) with whom the Group operates: due diligence processes for third parties who are not first-line or of renowned prestige; anti-corruption clauses; payment controls; accounting controls. • Guidelines regarding the acceptance by Group employees of gifts or invitations. Responsible banking Corporate governance Economic and financial review Risk management and compliance Employees compliance functions - Making ethics real Canal Abierto Training and awareness • Enable a channel through which employees can report non-ethical conduct or violations of internal regulations. • Manage reported issues and take part in investigations. • Promote the Speak Up and Truly Listen culture. • Implement training programmes and carry out employee awareness initiatives on corporate defense and employees compliance. • Spread ethical messages across Grupo Santander through relationships built on trust. Disciplinary proceeding Policies and procedures • Investigate conduct that run counter to ethical and compliance principles. • Take part in the assessment of applicable disciplinary measures in case of breaches or non-ethical conducts. • Ensure compliance with the General Code of Conduct and apply its guidelines through specific policies or procedures. • Report regularly to governance bodies. Appointments Ethical queries • Assess the suitability of nominated directors and senior managers*. Competition • Manage the competition compliance programme In 2020, Grupo Santander's main subsidiaries implemented the common standards of the single channel, Canal Abierto. To ensure homogeneous, robust procedures in all subsidiaries to manage issues received through their channels, a global policy was approved to be applied in 2021. For more details on Canal Abierto and its management during covid-19, see section Employee experience' of the Responsible Banking chapter. • Manage queries from employees and governance bodies on ethical issues and internal regulations • Give ethics advice on controversies. * This activity is carried out by the compliance function at Headquarters B. Market abuse In 2020, in focusing on the crisis caused by the pandemic, the market abuse team observed two types of risks: people working from home (trades executed through alternative and new communication channels); and market volatility resulting in a significant increase of personal account transactions and breaches. 487 Annual report 2020 Contents C. Regulatory compliance is responsible for: • disclosing material information about Grupo Santander to the markets. We released a great deal of material facts in 2020, which can be found on the websites of Santander and the Comisión Nacional del Mercado de Valores (CNMV), and; • filing notices on treasury shares (CNMV) and significant holdings of Banco Santander, as well as the significant holdings and remuneration systems of directors and senior management (CNMV and other regulatory bodies of those markets where Santander´s share is listed). D. Data management In 2020, the regulatory compliance data management function focused on: GDPR • implementing the control framework in our subsidiaries: follow-up on key performance indicators (KPIs), semi- annual monitoring programme and risk self-assessment; • supporting such initiatives on covid-19 as the “Mi vuelta” app, employee health data processing and new protocols; • fostering cooperation and the exchange of best practices with subsidiaries. FATCA and CRS The oversight of the automatic exchange of tax information between countries (FATCA and CRS) is centred around (i) local reporting obligations; (ii) enhancing the control framework (KPI's and controls) and revision of corporate policies; (iii) training initiatives on regulatory updates and new requirements. E. SCIB markets regulation The SCIB compliance team carries out the risk management of the main international markets regulations that affect Grupo Santander. Its most relevant actions during 2020 are detailed below: MiFID II Dodd-Frank Title VII Volcker Rule Swap dealer compliance programme grew stronger in 2020. It monitored potential impacts of covid-19 closely, with no major issue. Due to amendments to the rule, it implemented the moderate compliance programme in 2020. It approved new policies and procedures and is already implementing the new set of controls. In 2020 the SCIB Compliance function continued to improve the control framework to monitor compliance with the regulation across all geographies. It focused especially on potential impacts of covid-19; on decreases in the algorithmic trading activity for market making due to high volatility; on enhancing transaction reporting; and on implementing new data accuracy and quality controls. Product governance and consumer protection Our product governance and customer protection activities guarantee our actions take into account our customers’ interests while keeping with regulations, our values and principles by: Culture • designing the conduct and management principles for marketing and engaging with retail customers and promoting governance culture; • promoting a culture with a Simple, Personal and Fair approach. Processes • making sure products meet customer needs under the right balance of risks, costs and profitability; • overseeing sales to target markets properly and with transparent information, as well as sales force training and remuneration systems centred on meeting customers’ expectations; • ensuring Simple, Personal and Fair customer service, post-sale systems and processes, as well as detecting potential deterioration in products and services. 488 Responsible banking Corporate governance Economic and financial review Risk management and compliance Management • making decisions, enforcing action plans and keeping senior managers and statutory bodies properly informed; • overseeing the design and execution of controls when marketing to, and engaging with, customers and assessing the capacity and maturity model of the 2LoD; • identifying risks by analysing our customers' feedback, regulatory guidelines, industry practices, supervisor and auditor opinions; and learning from internal/external events; • applying group risk assessment methodologies, such as management indicators, thematic evaluations and self- assessments. Product Governance Our product approval governance operates on two levels. All subsidiaries have their own approval bodies to ensure new products and services meet the needs of their target market, are sold by appropriate channels and processes, and have fair and transparent terms and conditions. They are then escalated to the corporate product governance forum (CPGF) to be approved before being marketed. This two-tier approval system helps us share best practices and manage the risk of products and services in line with risk appetite. The fiduciary risk function meets regularly to ensure investment products comply with investment mandates and corporate guidelines. In 2020 it mainly focused on: (i) designing a new onboarding process and improving customer experience with more products/services on digital channels; (ii) preventing over-indebtedness; and (iii) defining suitability controls to respond to the increasing demand of high risk and illiquid products as a result of market conditions. For more details on how we've been delivering to our customers amid covid-19, see section 'Santander response to covid-19' in the Responsible Banking chapter. In this time of crisis, the product governance and consumer protection function has worked to be part of the solution for our customers. During the second quarter of the year, we issued recommendations to subsidiaries and monitored their implementation to align: • Financial measures: Grupo Santander implemented all government measures and designed others to adapt solutions to customers' needs and relieve financial distress. They were free of extra charges and aligned with local sectorial practices. • Insurance cover: all our banks jointly with joint ventures agreed to adapt existing policies to extend the terms and grace periods of restructured mortgages and loans and expand health cover to include pandemic-related claims without any cost to customers. • Sales force remuneration: main subsidiaries adapted sales force incentives to the situation to promote a fair approach for employees and focus on current customers' needs. • Investment monitoring and management: Santander Asset Management and Private Banking monitor investment products closely. After managing temporary increases in redemption requests and enhancing the liquidity conditions of some products, the situation remained stable without any special cause for concern. • Complaints: we are closely monitoring our subsidiaries to analyse complaint trends relating to the pandemic and make sure relief measures provide the best possible outcome for our customers. In 2020, there were not significant inflows of complaints relating to covid-19. • Collections & Recoveries: Grupo Santander designed a “Preparedness” plan comprising 5 dimensions for the entire crisis, including one related to regulatory/conduct risk to reinforce conduct standards. • Controls: Subsidiaries reinforced controls regarding credit and loan applications and sales: transparency in customer communications, recordkeeping, eligibility checks, and prevention of cross-selling of insurance relating to loan moratoria and government lines of credit. 489 Annual report 2020 Contents Other product governance and consumer protection initiatives and priorities Culture and customers Approve a definition of vulnerable customer for each geography and create initiatives on the treatment of vulnerable customers Update global mandatory training materials on conduct risk Implement customer voice reports and consumer protection indicators 1LoD awareness and accountability Management and control environment Increase weight, quality and diversification of conduct metrics in sales-force variable remuneration Reinforce conduct risk governance though product-based 1LoD forums Conduct risk control self-assessment Strengthen control model framework for marketing products and services Custody controls: supplier certifications and revaluations, monitoring and ensuing gap reduction Thematic reviews (overdrafts, package accounts, renewals and impact in customers derived from digitalization) Financial Crime Compliance (FCC) For Grupo Santander, advanced and efficient financial crime compliance systems that constantly adapt to international regulations and confront the evolving techniques of criminal organizations is a strategic objective. We are fully committed to the fight against financial crime and do not tolerate failures to meet international financial crime regulations and those of the countries where we operate. The FCC function in the second line of defence is responsible for ensuring that risks of financial crime are managed in accordance with risk appetite. To promote a strong risk culture, it supervises and coordinates the implementation of the FCC framework across majority- owned subsidiaries, branches and business areas through the appropriate programmes, measures and enhancements. Our FCC corporate framework sets the core requirements for how Grupo Santander responds to risks relating to financial crime in line with international standards and best practices. Its purpose is (i) to establish the principles and standards Santander entities must follow to prevent financial crime and comply with international sanction programmes; (ii) to define the area's roles and responsibilities within the three lines of defence; (iii) to establish group-wide policies and procedures; and (iv) to define the essential features of FCC governance. In 2020, the FCC function executed a series of initiatives that increased its overall effectiveness, including: • An end-to-end review of policies and procedures, which consolidated and simplified them with clear core requirements and necessary key processes according to recent regulatory changes and guidance, in addition to detailed implementation standards and protocols to assist with adaption in operation areas. • Strengthening subsidiary oversight via a more robust and challenging oversight methodology that improves 490 collaboration and communication between subsidiaries and Grupo Santander. • Updating key risk indicators (KRIs) to monitor the core components of risks relating to financial crime. KRIs are tracked locally but also reported globally to top management in relation to risk appetite. • Improving FCC new product approval with greater focus on systems optimization and innovative technologies for digital initiatives. • Reforming the group-wide FCC risk assessment methodology to better identify key FCC risks and evaluate control effectiveness,based on changes in regulatory guidance and industrial best practices. In 2020, the FCC function initiated a strategic transformation plan for better monitoring and technical due diligence controls over customer lifecycle across Grupo Santander that aimed to centralize controls, enhance our ability to harmonize standards, gain efficiencies and mitigate execution risk. It included the use of artificial intelligence and machine-learning techniques to complement rules-based scenarios and increase the leverage on high quality leads for investigation. The benefits to Grupo Santander of applying artificial intelligence measures have included: • better detection of unusual and potentially suspicious behaviour based on various customer behaviour dimensions; • flexible and fast responses to new challenges in detection and analysis, running multiple investigation approaches while consuming large amounts of data; • significant research improvements in executing discrete queries and incorporating new datasets to enhance detection under a single platform; Responsible banking Corporate governance Economic and financial review Risk management and compliance • the use of a simulation environment to test proposed • Thematic reputational risk training sessions with first and enhancements in pre-production; • traceability and full explanations – our platforms maintain clear logs and registries that meet group-wide standards. Main activity data in 2020 are as follows: • 215 subsidiary reviews (+11% vs 2019) • 91,755 disclosures to authorities (+46% vs 2019) • 258,893 investigations conducted • 173,098 trained employees The function maintains group-wide requirements on training content and testing for all employees, include senior management. In 2020, in addition to the core FCC training modules, which are subject to continuous improvement, it held group-wide awareness sessions that focused on FCC challenges in digital innovation, financial inclusion, classifications and approaches to identify non- traditional financial crimes in child sexual abuse and exploitation, human trafficking, environmental crime and other areas. In addition, targeted training sessions were given to specific country teams on compliance with specific sanctions and other critical areas. It also ran a tailored session the group’s board of directors on the latest trends in financial crime and the threats Grupo Santander faces across our footprint. Santander continues to fulfil its role as a member of the Wolfsberg Group, the United For Wildlife’s Financial Taskforce, the European Banking Federation, Europol and in public-private partnerships and industry associations. Reputational risk Grupo Santander classifies reputational risk as a current or potential negative economic impact stemming from how we are perceived by employees, customers, shareholders, investors and broader society. It may come from various sources or even other risks relating to business and support operations; the economic, social and political climate; and events involving our competitors. Our reputational risk model is based on a preventive risk management and control approach, with effective handling of early warnings and monitoring of events and detected risks. Key actions in 2020: • New operating procedure, approved by the group and subsidiaries to analyse reputational risk in a broader scope of activities. • Revision of group-wide policies on the defence industry and other sensitive industries. • New guidelines for supplier reputation assessments, to be deployed in all geographies in 2021 (pilot in Santander España in 2020). • Definition of a group-wide criteria for social contributions related to covid-19. second lines of defence on sensitive transactions and customers and general awareness for all employees across our footprint. • More importance of risk appetite metrics in the group and core subsidiaries. • New reputational risk tool that assesses media perception against our peers. • Creation of the reputational risk approach for global risk profile assessments. • Better subsidiary oversight in terms of governance and challenge with subsidiaries. 491 Annual report 2020 Contents 8. Model risk 8.1 Introduction A model is a system, approach or quantitative method that applies statistical, economic, financial or mathematical theories, techniques or hypotheses to transform input data into quantitative estimates. It involves simplified representations of real world relationships between characteristics, values and observed assumptions that allows Grupo Santander to focus on specific aspects. We use models for approval (scoring/rating), capital calculation, behaviour, provisions, market, operational risk, compliance and liquidity. Models entail model risk, which is the negative consequence of decisions based on their inaccurate, improper or incorrect use. Sources of model risk can be: • incorrect or incomplete data in the model itself or the modelling method used in systems; • incorrect use or implementation of the model. Model risk can cause financial loss, erroneous commercial and strategic decision-making or damage to Grupo Santander’s transactions. We have been defining, managing and controlling model risk for several years. After years of work, the Model Risk function has been enhanced and consolidated across the Group. These functions are performed at the corporate centre and the main subsidiaries. To ensure adequate model risk management, Grupo Santander has a set of policies and procedures that establish the principles, responsibilities and processes in the model life cycle that describe organization, governance, model management and model validation. Supervision and control of model risk is proportional to the importance of each model. A concept of Tiering is the main attribute used to synthesize a model’s level of importance and defines how intense risk management must be. Our multiyear strategic plan, Model Risk Management 2.0 (MRM 2.0), was launched to enhance model risk management across Grupo Santander. The governance phase of each model has been reviewed and adapted to the 2018 ECB guide on internal models. MRM 2.0 is currently underway, and a high number of initiatives have already been closed. Specifically during 2020 the project has covered different initiatives focused on the following themes: • Key elements: Several initiatives related to governance reinforcement, definition of risk appetite, management scope and simplification of risk policies have been undertaken, with the main focus on enhancing our framework for regulatory models. 492 • Processes: Different actions related to the improvement of the model life cycle phases have been performed, with focus on increasing the automation of our main processes. • Reporting: The Senior Management awareness of Model Risk topics has been reinforced, we have a robust forward looking agenda where the relevant topics are regularly reviewed and potentially escalated. • Model Risk Facilitators: Continuous enhancement of our infrastructure and tools as well as contributing to extend the model culture in the Group. High digitalization level allow us to support our decisions on real-time information. We have continued making steady progress on our MRM 2.0 strategic plan, making sure all the upcoming regulatory requirements are thoroughly covered. In addition to MRM 2.0, we have two specific projects underway with our regulatory credit and market risk models under scope.Both projects have the target to follow up on the TRIM (Targeted Review of Internal Models) actions, and to ensure the fulfilment of the new regulatory requirements for the coming years. The main focus in 2021 will be to continue strengthening our regulatory model landscape, in order to fulfil ECB requirements by 2022. A high number of model changes will be delivered to the ECB, which will require formal approval before implementation. 8.2 Model risk management Model risk management and control are structured processes known as the model life cycle. The model life cycle phases in Santander are: Identification Identified models must be included in the model risk control perimeter. One key feature for proper model risk management is to have a complete inventory of used models. Grupo Santander has a centralized inventory, based on a uniform taxonomy for all models used at business units. The inventory contains detailed information on each model allowing for close monitoring according to model significance and tier criteria. Responsible banking Corporate governance Economic and financial review Risk management and compliance Planning Approval This is an internal annual exercise, approved by our subsidiaries’ governance bodies and validated by the headquarters team. It establishes a strategic action plan for models included in the model risk function’s scope of management. It identifies the resources needs related to the models that are going to be developed, revised and implemented during the year. Development Development is the construction phase in the model's lifecycle. It is based on econometrics and carried out by specialists in methodology. Models are developed according to the needs of the business unit, as specified in the annual model plan. To ensure the quality and consistency of the models, the development must follow common, group-wide methodological standards, as defined by the headquarters team. The recent creation of the Models & Data Unit aims at a better, more efficient and centralized execution of model builds, whilst exploiting the synergies of combining models and data. More detail in section 2.5 Models & Data Unit of this chapter. Internal validation The independent validation of models is a regulatory requirement and a key feature of our management and control of model risk. An independent specialized unit, which is part of Model Risk function, analyzes and issues technical opinions on the suitability of internal models. The validation opinion for each model is expressed through a rating that summarizes the model risk associated to it. Internal validation covers all the models within the model risk control scope, the intensity and the frequencies of the validations tasks are perfectly defined and follow a Risk-based approach. The validation scope includes theory, methodology, the IT systems and the data quality that models rely upon for their effective functioning. It also includes detailed analysis of the model performance, as well as other risk management aspects (controls, reporting, uses, and involvement of senior management, among others). A key task in internal validation is the consistency analysis carried out by validators, which reviews issued recommendations, severity and assigned ratings. It acts as an important point of control to ensure the homogeneity and comparability of validation tasks. The validation tasks are only concluded once this phase of consistency has been completed. In addition, the Single Validation Office plays a key role ensuring the highest consistency of the validations across the models in the Group. Before deployment and use, each model must be submitted to internal governance bodies for approval. A governance path for our models inventory is in place, which varies according to the model's tiering. Deployment and use In this phase, we implement newly developed models in IT systems. This phase is another possible source of model risk. Therefore, technical units and model owners must conduct tests to certify model implementation is according to methodology as intended and expected. Monitoring and control We must regularly review models to make sure they perform correctly and are suitable to their intended purpose. Otherwise, they must be adapted or redesigned. Additionally, control teams have to ensure that model risk is managed in accordance with the principles and rules set out in the model risk framework and related internal regulations. 493 Annual report 2020 Contents 9. Strategic risk 9.1 Introduction Strategic risk is the threat of loss or damage from strategic decisions, the poor implementation thereof or the inability to adapt to external developments. Grupo Santander’s business model must be considered as a key factor that is pivotal to strategic risk. It has to be viable, sustainable and should generate results in accordance with the yearly group’s targets (particularly the next three years) and long-term view. Strategic risk has three components: 1 Business model risk, which includes the risk that the group's model will become obsolete or irrelevant, and/or that it will lose the ability to generate expected results. 2 Strategy design risk, which relates to the strategy set out in Grupo Santander’s long-term plan (including the risk that the plan will not be adequate) or due to its assumptions, resulting in a failure to deliver expected results. 3 Strategy execution risk, which involves the three-year financial plan (including internal and external impacts), the inability to react to changes in the business environment, and risks associated with corporate development transactions. 9.2 Strategic risk management Grupo Santander views strategic risk as transversal. We have a target operating model that our subsidiaries use as a reference. It covers the governance, procedures and necessary tools for robust monitoring and control. We constantly monitor changes in the landscape (competition, regulation, market conditions, etc.) or in our own entity to determine if it is necessary to revise strategy and if mitigating factors and/or remediation plans are in place. The strategic risk function involves key areas from the first and second line of defence to make sure potential measures are ready to be implemented. In 2020, the strategy mainly focused on the covid-19 pandemic and the extremely uncertain economic outlook. Although our strategy remains valid in the long term, the current backdrop might delay our achievement of some strategic targets. The health crisis's effects on the global economy have driven our strategic risk profile to mid-high, primarily triggered by pressure on margins, profitability and the impact assessment of the aforementioned potential threats. 494 Brexit governance remained in force in 2020. It built on existing working groups and the crisis management office so we could detect issues and keep senior managers duly informed. The strategic risk function's key actions in 2020 were: • Challenge to strategic plans: Supported by specialized functions within the Risk division, it challenged the three- year strategic plan (including a specific chapter in the final plan), identifying potential threats and changes in the environment that might jeopardize strategic objectives. The 2020 challenge focused on economic outlook uncertainty, since the intensity and duration of the covid-19 crisis remain unknown, and a tough environment for value creation where digital projects, such as One Santander, PagoNxt and building a global native digital consumer bank, are crucial in boosting profit growth. • Top risks: Under stressed assumptions, Grupo Santander identifies, assesses, monitors and manages risks that will have a significant impact on results, liquidity or capital. Covid-19 has been a catalyst for previously identified threats, such as cyber-attacks,and macro and geopolitical threats; it is already changing market dynamics, consumer behaviour and accelerating the digitization of the economy. Climate change-related risk has also take on a more holistic view, beyond the regulatory scope. • Strategic risk report: Prepared jointly with the corporate development and strategy function as a tool for monitoring and assessing the strategy and related risks, it is presented to senior managers and covers strategy execution, strategic projects, corporate development transactions, business model performance, top risks and risk profile. • Marketing of new products: The strategic risk function participated in assessing and validating new product and service proposals before Grupo Santander and its subsidiaries launch them, ensuring full alignment with the approved strategy. • Corporate development transactions: The strategic risk function received support from other Risk division areas to ensure risk assessments of transactions' impact on our risk profile and risk appetite. Responsible banking Corporate governance Economic and financial review Risk management and compliance [This page has been left blank intentionally] 495 Annual report 2020 Contents Glossary 1LoD 2019 AGM 2020 AGMs 2021 AGM 2Dii 2LoD Active customer First Line of Defence Annual general meeting held on 12 April 2019 April 2020 AGM and October 2020 AGM Annual general meeting called for 25 or 26 March 2021, at first or second call respectively 2 Degree Investing Initiative Second Line of Defence Those customers who comply with balance, income and/or transactionality demanded minimums defined according to the business area American Depositary Shares Agencia Estatal de Administración Tributaria Artificial Intelligence Asset-Liability Committee Asset and Liability Management Anti-money laundering Alternative Performance Measure Annual general meeting held on 3 April 2020 Available Stable Funding Recovered write-off assets (Activos en suspenso recuperados) Additional Tier 1 Automated teller machine Advanced Target Operating Models in Collaboration Business to business to customer Business to customer ADS AEAT AI ALCO ALM AML APM April 2020 AGM ASF ASR AT1 ATM ATOMIC B2B2C B2C 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 The Basel Committee on Banking Supervision Business as usual Bounce Back Loans Business Continuity Management System Business continuity plans Bank for International Settlements Billion (1,000,000,000) basis points Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms, as amended from time to time Banco Santander Internacional Chief audit executive Development Bank of Latin America Chief accounting officer Conselho Administrativo de Recursos Fiscais Chief compliance officer Central Counterparties Contingent convertible preferred securities Crest Depositary Interests Basel or Basel Committee BAU BBLS BCMS BCP BIS Bn bps BRRD BSI CAE CAF CAO CARF CCO CCP CCPS CDI 496 Responsible banking Corporate governance Economic and financial review Risk management and compliance CDS CEB CEO CER CET1 CFO CIO CNMV COFINS Corporate Centre Corporation COSO CPGF CRD IV CRD V CRE CRO CRR CRS CSA CSLL CTO CVA D&I DI Digital customers Credit Default Swaps Council of Europe Development Bank Chief executive officer Credit equivalent risk Common equity tier 1 Chief financial officer Chief information officer Spanish stock market authority (Comisión Nacional del Mercado de Valores) Contribuiçao para Financiamento da Seguridade Social Our headquarters in Boadilla and business segment as described in section 4.1 ‘Description of segments’ in the Economic and financial review chapter. 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. Committee of Sponsoring Organisations of the Tradeway Commission Corporate Products Governance Forum The prudential framework established by the CRD and CRR currently in force Amendment to the CRD IV package Credit Risk Equivalent Chief risk officer Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms, as amended from time to time The Common Reporting Standard approved by the OECD Council on 15 July 2014 Credit Support Annex Social Contribution on Net Income Chief technology officer Credit Valuation Adjustment Diversity & inclusion Debt to Income 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. Data Leakage Protection The US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Deferred Tax Asset Debt Valuation Adjustment Environmental and social Exposure at Default European Banking Authority European Bank for Reconstruction and Development European Central Bank DLP Dodd-Frank Act DTA DVA E&S EAD EBA EBRD ECB ECB Recommendation I The recommendation issued by the ECB on 27 March 2020 for all European credit institutions under its supervision to refrain from paying out dividends against the 2019 and 2020 results until at least 1 October 2020 to preserve capital ECB Recommendation II The recommendation issued by the ECB on 27 July 2020 extending the term of ECB Recommendation ECL EIB EMIR EONIA I. It asked the European credit institutions under its supervision to refrain from paying out dividends against the 2019 and 2020 results or from making irrevocable commitments to pay them until 1 January 2021 Expected credit loss European Investment Bank Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories, as amended from time to time Euro Overnight Index Average 497 Annual report 2020 Contents Earnings Per Share Executive risk committee Expected Shortfall Environmental, Social and Governance European Securities and Markets Authority Environmental and social risk management Exchange Traded Funds European Union Economic Value of Equity Early Warning Indicators Foreign Account Tax Compliance Act Financial Conduct Authority Fiat Chrysler Automobiles Financial Crime Compliance Fundación Española de Banca para Estudios Financieros Federal Reserve The final cash dividend of 0.10 euros per share put to a vote by the board in February 2020 at the April 2020 AGM Fondo de Reestructuración Ordenada Bancaria Fundamental Review of the Trading Book Financial Stability Board Foreign Exchange Global Systematically Important Bank Pound sterling General Code of Conduct Gross Domestic Product General Data Protection Regulation Global master repurchase agreement Global Merchant Services Global Public Policy Committee Great Place to Work Governance, risk and compliance Global Reporting Initiative Group-Subsidiary Governance Model Global Trade Services Human Resources International Accounting Standards Interbank offered rates Internal Capital Adequacy Assessment Process Accounting and Audit Institute (Instituto de Contabilidad y Auditoría de Cuentas) Internal control over financial reporting Internal control model Instituto de Crédito Oficial Information and Communication Technology Other executives whose activities may have a significant impact on the Group's risk profile International Finance Corporation Instituciones financieras internacionales 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 EPS ERC ES ESG ESMA ESRM ETF EU EVE EWIs FATCA FCA FCA Group FCC FEBEF FED Final Cash Dividend FROB FRTB FSB FX G-SIB GBP GCC GDP GDPR GMRA GMS GPPC GPTW GRC GRI GSGM GTS HR IAS IBORs ICAAP ICAC ICFR ICM ICO ICT Identified Staff IFC IFI IFRS 498 Responsible banking Corporate governance Economic and financial review Risk management and compliance ILAAP IMF IRB IRC IRPJ IRR IRS ISMA IT IT KPI KRI LCR LDA LGD LIBOR Loyal customers LTD LTV M/LT MiFID II Mn MRAP MREL MRM MtM MXN NCAs NGFS NGO NII Nominal cap NPLs NPS NSFR NYSE o/w October 2020 AGM OECD OM ONP OR OSLA OTC P&L PACTA PCAOB Internal Liquidity Adequacy Assessment Process International Monetary Fund Internal Rating Based Incremental Risk Charge Imposto de Renda Pessoa Jurídica Internal rate of return Internal Revenue Service International Securities Market Association Information technology Information Technology (tecnología de la información) Key performance indicator Key Risk Indicators Liquidity Coverage Ratio Loss Distribution Approach Loss Given Default London Interbank Offer Rate Active customers who receive most of their financial services from the Group according to the commercial segment to which they belong. Various engaged customer levels have been defined taking profitability into account. Loan to Deposit ratio Loan to Value Medium and long-term Markets in Financial Instruments Directive. Million Market Risk Advanced Platform Minimum requirement for own funds and eligible liabilities which is required to be met under the BRRD Model Risk Management Mark-to-Market Mexican peso National competent authority Network for Greening the Financial System Non-governmental organisation Net Interest Income Maximum nominal amount of a risk operation, excluding market transactions Non-performing loans Net promoter score Net stable funding ratio New York Stock Exchange Of which Annual meeting held on 27 October 2020 Organisation for Economic Co-operation and Development Organised Markets Ordinary net profit Operational risk Overseas Securities Lender’s Agreement Over the counter Profit and Loss Paris Agreement Capital Transition Assessment Public Company Accounting Oversight Board 499 Annual report 2020 Contents PD Probability of Default The Bank has devised a corporate methodology tailored to Santander’s requirements and specific model for contributing to society. This methodology identifies a series of principles, definitions and criteria to allow the Bank to consistently keep track of those people who have benefited 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. Potential Future Exposure (posible exposición futura) Programa de Integraçao Social Point in time Point-in-time Polish Zloty Purchased or Originated Credit Impaired Point of sale percentage point Payment protection insurance UK Prudential Regulatory Authority Principles for responsible Investment Payment Services Directive II PricewaterhouseCoopers Auditores, S.L. Research, development and innovation Risk appetite framework Risk appetite statement Risk control committee Risk control self-assessment Risk Data Aggregation Risk Identification and Assessment Return on assets Return on equity Return on risk adjusted capital Return on risk weighted assets Return on tangible equity Risk profile assessment Risk Reporting Structure Required Stable Funding Rules and regulations of the board of directors of Banco Santander, S.A. Rules and regulations of the general meeting of Banco Santander, S.A. Risk weighted assets The S&P 500 index maintained by S&P Dow Jones Indices LLC Santander Asset Management Santander Consumer USA Holdings Inc. Santander Bank N.A. Santander Consumer US Santander Customer Assessment Note Santander Consumer Finance Santander Corporate & Investment Banking Strategic commercial plans Santander Dividendo Elección Sustainable Development Goals People supported in our communities PFE PIS PIT PIT PLN POCI POS pp PPI PRA PRI PSD2 PwC R&D&i RAF RAS RCC RCSA RDA RIA RoA RoE RoRAC RoRWA RoTE RPA RRS RSF Rules and regulations of the board Rules and regulations of the general meeting RWAs S&P 500 SAM Santander Consumer US SBNA SC USA SCAN SCF SCIB SCPs SDE SDG 500 Responsible banking Corporate governance Economic and financial review Risk management and compliance SEA SEC SHUSA SICR SIS SLA SMEs SOX Spanish Companies Act Consolidated text of the Spanish Companies Act approved by Royal Legislative Decree 1/2010, of 2 Securities Exchange Act Securities and Exchange Commission Santander Holdings USA, Inc. Aumento significativo del riesgo crediticio Santander Investment Securities Service Level Agreement Small and medium enterprises Sarbanes-Oxley Act of 2002 Spanish Corporate Governance Code Spanish Securities Markets Act SPF SRB SREP SRF SRI SRT SSM ST STEM STF SVaR T&O T2 TCFD TLAC TLTRO TOM TRIM TSR UK UN SDG UNEP FI US USD VaE VaR VAT Volcker Rule VPN WBCSD WFH WM&I Wolfsberg group July CNMV's Good Governance Code for Listed Companies Consolidated text of the Spanish Securities Markets Act approved by Royal Legislative Decree 4/2015, of 23 October Simple, Personal and Fair European Single Resolution Board Supervisory Review and Evaluation Process Single Resolution Fund Socially Responsible Investment Significant 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. Short-term Science, Technology, Engineering and Mathematics Supreme Federal Court of Brazil Stressed value at risk Technology and operations Tier 2 Task Force on Climate-related Financial Disclosures The total loss-absorbing capacity requirement which is required to be met under the CRD V package Targeted longer-term refinancing operations Target Operational Model Targeted Review of Internal Models Total Shareholder Return United Kingdom United Nations Sustainable Development Goals United Nations Environmental Program Financial Initiative United States of America United States dollar Value at Earnings Value at Risk Value Added Tax Section 619 of the Dodd-Frank Act Virtual Private Network World Business Council for Sustainable Development Working From Home Wealth Management and Insurance Association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks YoY Year over year 501 Annual report 2020 Contents Auditor's report and consolidated financial statements 502 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Auditor’s report Consolidated annual accounts Consolidated balance sheets as of 31 December 2020, 2019 and 2018 Consolidated income statements for the years ended 31 December 2020, 2019 and 2018 Consolidated statements of recognised income and expense for the years ended 31 December 2020, 2019 and 2018 Consolidated statements of changes in total equity for the years ended 31 December 2020, 2019 and 2018 Consolidated statements of cash flows for the years ended 31 December 2020, 2019 and 2018 Notes to the consolidated annual accounts 1. Introduction, basis of presentation of the consolidated financial statements (consolidated annual accounts) and other information 2. Accounting policies 3. Santander Group 4. Distribution of the Bank’s profit, shareholder remuneration scheme and earnings per share 5. Remuneration and other benefits 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 13. Investments 14. Insurance contracts linked to pensions 15. Liabilities and assets under insurance contracts and reinsurance assets 16. Tangible assets 17. Intangible assets – Goodwill 18. Intangible assets - Other intangible assets 19. Other assets 20. Deposits from central banks and credit institutions 21. Customer deposits 22. Marketable debt securities 23. Subordinated liabilities 24. Other financial liabilities 504 517 517 521 523 525 531 533 534 541 582 585 588 603 604 606 607 607 615 615 616 618 618 619 622 625 626 627 627 628 633 635 25. Provisions 26. Other liabilities 27. Tax matters 28. Non-controlling interests 29. Other comprehensive income 30. Shareholders’ equity 31. Issued capital 32. Share premium 33. Accumulated retained earnings 34. Other equity instruments and own shares 35. Memorandum items 36. Hedging derivatives 37. Discontinued operations 38. Interest income 39. Interest expense 40. Dividend income 41. Commission income 42. Commission expense 43. Gains or losses on financial assets and liabilities 44. Exchange differences, net 45. Other operating income and expenses 46. Staff costs 47. Other general administrative expenses 48. Gains or losses on non financial assets, net 49. Gains or losses on non-current assets held for sale not classified as discontinued operations 50. Other disclosures 51. Main and secondary segments reporting 52. Related parties 53. Risk management 54. 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. Notifications of acquisitions and disposals of investments in 2019 Appendix V. Other information on the Group’s banks Appendix VI. Annual banking report 636 651 651 657 658 663 663 663 664 665 665 666 706 706 706 707 707 708 708 709 709 710 716 717 717 718 734 748 783 795 796 797 819 826 827 828 835 503 Annual report 2020 Contents Auditor's report Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 505 Annual report 2020 Contents 506 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 507 Annual report 2020 Contents 508 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 509 Annual report 2020 Contents 510 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 511 Annual report 2020 Contents 512 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 513 Annual report 2020 Contents 514 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 515 Annual report 2020 Contents Consolidated annual accounts 516 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Translation of the consolidated annual accounts originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 1 and 54). In the event of a discrepancy, the Spanish- version prevails. Grupo Santander CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2020, 2019 AND 2018 EUR million 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 NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS Equity instruments Debt instruments Loans and advances Central banks Credit institutions Customers FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Debt instruments Loans and advances Central banks Credit institutions Customers FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Equity instruments Debt instruments Loans and advances Central banks Credit institutions Customers FINANCIAL ASSETS AT AMORTIZED COST Debt instruments Loans and advances Central banks Credit institutions Customers HEDGING DERIVATIVES CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK INVESTMENTS Note 9 and 11 8  7  6  6  10  8 7 6 6 10 7  6  6  10  8 7 6 6 10 7 6 6 10 36 36 13 2020 153,839 114,945 67,137 9,615 37,894 2019* 101,067 108,230 63,397 12,437 32,041 2018* 113,663 92,879 55,939 8,938 27,800 299 — 3 296 4,486 3,234 700 552 — — 552 48,717 2,979 45,738 9,481 12,136 24,121 355 — — 355 4,911 3,350 1,175 386 — — 386 62,069 3,186 58,883 6,473 21,649 30,761 202 — — 202 10,730 3,260 5,587 1,883 — 2 1,881 57,460 3,222 54,238 9,226 23,097 21,915 120,953 125,708 121,091 2,783 2,863 2,671 108,903 118,405 116,819 9,267 4,440 1,601 — — — — — — 9,267 4,440 1,601 958,378 995,482 946,099 26,078 29,789 37,696 932,300 965,693 908,403 12,499 37,838 18,474 40,943 15,601 35,480 881,963 906,276 857,322 8,325 7,216 8,607 1,980 7,622 1,702 8,772 1,088 7,588 517 Annual report 2020 Contents CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2020, 2019 AND 2018 EUR million ASSETS Joint venture 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 properties Of which leased out under an operating 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 15 16 16 17 18 27 14 19 12 2020 1,492 6,130 261 32,735 31,772 13,213 18,559 963 793 15,908 12,471 3,437 24,586 5,340 19,246 11,070 174 5 10,891 4,445 2019* 1,325 7,447 292 35,235 34,262 15,041 19,221 973 823 27,687 24,246 3,441 29,585 6,827 22,758 10,138 192 5 9,941 4,601 2018* 979 6,609 324 26,157 24,594 8,150 16,444 1,563 1,195 28,560 25,466 3,094 30,251 6,993 23,258 9,348 210 147 8,991 5,426 1,508,250 1,522,695 1,459,271 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated balance sheet as of 31 December 2020. 518 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2020, 2019 AND 2018 EUR million LIABILITIES FINANCIAL LIABILITIES HELD FOR TRADING Derivatives Short positions Deposits Central banks Credit institutions Customers Marketable debt securities Other financial liabilities FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Deposits Central banks Credit institutions Customers Marketable debt securities Other financial liabilities Memorandum items: subordinated liabilities FINANCIAL LIABILITIES AT AMORTIZED COST Deposits Central banks Credit institutions Customers Marketable debt securities Other financial 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 benefits 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 TOTAL LIABILITIES Note 2020 2019* 2018* 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 81,167 64,469 16,698 77,139 63,016 14,123 70,343 55,341 15,002 — — — — — — — — — — — — 48,038 43,598 2,490 6,765 60,995 57,111 12,854 9,340 34,343 34,917 4,440 3,758 — — 126 — — — — — — — 68,058 65,304 14,816 10,891 39,597 2,305 449 — 1,248,188 1,230,745 1,171,630 990,391 942,417 903,101 112,804 62,620 62,468 90,501 72,523 89,679 814,967 789,448 740,899 230,829 258,219 244,314 26,968 21,880 30,109 21,062 24,215 23,820 6,869 6,048 6,363 286 910 269 739 303 765 10,852 13,987 13,225 3,976 1,751 2,200 700 2,225 8,282 2,349 5,933 6,358 1,382 3,057 739 2,451 9,322 2,800 6,522 5,558 1,239 3,174 779 2,475 8,135 2,567 5,568 12,336 12,792 13,088 — — — 1,416,928 1,412,036 1,351,910 519 Annual report 2020 Contents CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2020, 2019 AND 2018 EUR million EQUITY SHAREHOLDERS´ EQUITY CAPITAL Called up paid capital Unpaid capital which has been called up SHARE PREMIUM EQUITY INSTRUMENTS ISSUED OTHER THAN CAPITAL Equity component of the compound financial instrument Other equity instruments issued OTHER EQUITY ACCUMULATED RETAINED EARNINGS REVALUATION RESERVES OTHER RESERVES Reserves or accumulated losses in joint venture investments Others (-) OWN SHARES PROFIT OR LOSS ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT (-) INTERIM DIVIDENDS OTHER COMPREHENSIVE INCOME OR LOSS ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS NON-CONTROLLING INTEREST Other comprehensive income or loss Other items TOTAL EQUITY TOTAL LIABILITIES AND EQUITY MEMORANDUM ITEMS: OFF BALANCE SHEET AMOUNTS Loan commitments granted Financial guarantees granted Other commitments granted Note 2020 2019* 2018* 30 31 114,620 124,239 120,597 8,670 8,670 — 8,309 8,309 — 8,118 8,118 — 32 52,013 52,446 50,993 34 33 33 33 34 4 29 29 28 35 627 — 627 163 598 — 598 146 565 — 565 234 65,583 61,028 56,756 — — — (3,596) (3,110) (1,583) 1,504 1,210 972 (5,100) (4,320) (2,555) (69) (8,771) (31) (59) 6,515 7,810 — (1,662) (2,237) (33,144) (24,168) (24,125) (5,328) (4,288) (2,936) (27,816) (19,880) (21,189) 9,846 10,588 10,889 (1,800) (982) (1,292) 11,646 11,570 12,181 91,322 110,659 107,361 1,508,250 1,522,695 1,459,271 241,230 241,179 218,083 12,377 64,538 13,650 68,895 11,723 74,389 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated balance sheet as of 31 December 2020. 520 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million Interest income Financial assets at fair value through other comprehensive income Financial assets at amortized 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 financial assets and liabilities not measured at fair value through profit or loss, net Financial assets at amortized cost Other financial assets and liabilities Gain or losses on financial assets and liabilities held for trading, net Reclassification of financial assets at fair value through other comprehensive income Reclassification of financial assets at amortized cost Other gains (losses) Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss Reclassification of financial assets at fair value through other comprehensive income Reclassification of financial assets at amortized cost Other gains (losses) Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net Gain or losses from hedge accounting, net Exchange differences, 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 Staff costs Note 38 (Debit) Credit 2020 2019* 45,741 2,840 40,365 2,536 56,785 3,571 48,552 4,662 2018* 54,325 4,481 47,560 2,284 39 (13,747) (21,502) (19,984) 31,994 35,283 34,341 391 (96) 13,024 (3,009) 1,107 (31) 1,138 3,211 — — 533 324 15,349 (3,570) 1,136 308 828 370 737 14,664 (3,179) 604 39 565 1,349 1,515 — — — — 3,211 1,349 1,515 82 — — 82 (171) 51 (2,093) 1,920 (2,342) 1,452 (1,242) 292 — — 292 (286) (28) (932) 1,797 (2,138) 2,534 (2,414) 44,279 49,229 (18,320) (20,279) 46 (10,783) (12,141) 40 13 41 42 43 43 43 43 43 44 45 45 45 45 331 — — 331 (57) 83 (679) 1,643 (2,000) 3,175 (3,124) 48,424 (20,354) (11,865) 521 Annual report 2020 Contents CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million Other general administrative expenses Depreciation and amortisation cost Provisions or reversal of provisions, net Impairment or reversal of impairment at financial assets not measured at fair value through profit or loss and net gains and losses from changes Financial assets at fair value through other comprehensive income Financial assets at amortized cost Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates, net Impairment or reversal of impairment on non-financial assets, net Tangible assets Intangible assets Others Gain or losses on non-financial assets and investments, net Negative goodwill recognized in results Gains or losses on non-current assets held for sale not classified as discontinued operations Operating profit/(loss) before tax Tax expense or income from continuing operations Profit/(loss) from continuing operations Profit/(loss) after tax from discontinued operations Profit/(loss) for the year Profit/(loss) attributable to non-controlling interests Profit/(loss) attributable to the parent Earnings/(losses) per share Basic Diluted Note 47 16 and 18 25 (Debit) Credit 2020 2019* (7,537) (2,810) (2,378) (8,138) (3,001) (3,490) 2018* (8,489) (2,425) (2,223) (12,382) (9,352) (8,986) (19) (12) (1) 10 (12,363) (9,340) (8,985) 17 and 18 — — (10,416) (1,623) 16 17 and 18 (174) (45) (10,242) (1,564) (17) (190) (83) (117) 10 28 67 (14) 1,291 — (232) (123) 12,543 14,201 (4,427) 8,116 — 8,116 1,601 6,515 0.347 0.346 (4,886) 9,315 — 9,315 1,505 7,810 0.430 0.429 — 114 8 (171) (2,076) (5,632) (7,708) — (7,708) 1,063 (8,771) (0.538) (0.538) 48 49 27 37 28 4 4 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated income statement for the year ended 31 December 2020. 522 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million CONSOLIDATED PROFIT/(LOSS) FOR THE YEAR OTHER RECOGNISED INCOME AND EXPENSE Items that will not be reclassified to profit or loss Actuarial gains and losses on defined benefit 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 financial liabilities at fair value through profit or loss attributable to changes in credit risk Income tax relating to items that will not be reclassified Items that may be reclassified to profit or loss Hedges of net investments in foreign operations (effective portion) Revaluation gains (losses) Amounts transferred to income statement Other reclassifications Exchanges differences Revaluation gains (losses) Amounts transferred to income statement Other reclassifications Cash flow hedges (effective portion) Revaluation gains (losses) Amounts transferred to income statement Transferred to initial carrying amount of hedged items Other reclassifications Hedging instruments (items not designated) Revaluation gains (losses) Note 29 2020 (7,708) (9,794) (1,018) (25) — (4) 2019* 8,116 267 (1,351) (1,677) — 1 2018* 9,315 (2,298) 332 618 — 1 36 (917) (29) (174) — 4 (4) 31 (103) (8,776) 2,340 2,340 — — (11,040) (11,040) — — (53) 799 (852) — — — — — 44 (44) (156) 510 1,618 (1,151) (1,151) — — 1,232 1,232 — — 8 (1,104) 1,112 — — — — 29 36 36 36 — — — 109 (222) (2,630) (2) (2) — — (2,253) (2,253) — — 174 491 (317) — — — — 523 Annual report 2020 CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 Amounts transferred to income statement Other reclassifications Debt instruments at fair value with changes in other comprehensive income Revaluation gains (losses) Amounts transferred to income statement Other reclassifications Non-current assets held for sale Revaluation gains (losses) Amounts transferred to income statement Other reclassifications Share of other recognised income and expense of investments Income tax relating to items that may be reclassified to profit or loss Total recognised income and expenses for the year Attributable to non-controlling interests Attributable to the parent 29 — — (100) 692 (1,165) 373 — — — — (151) 228 (17,502) 245 (17,747) — — 2,414 2,588 (792) 618 — — — — (15) (870) 8,383 1,911 6,472 Contents — — (591) (29) (562) — — — — — (97) 139 7,017 1,396 5,621 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated statement of recognised income and expense for the year ended 31 December 2020. 524 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million Balance at 31 December 2019* Adjustments due to errors Adjustments due to changes in accounting policies Opening balance at 1 January 2020* Total recognised income and expense Other changes in equity Issuance of ordinary shares Issuance of preferred shares Issuance of other financial instruments Maturity of other financial instruments Conversion of financial 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 Balance at 31 December 2020 Capital 8,309 — — Share premium 52,446 — — 8,309 52,446 — 361 361 — — — — — — — — — — — — — — — (433) (72) — — — — — (361) — — — — — — — — 8,670 52,013 Equity instruments issued (not capital) Other equity instruments 598 — — 598 — 29 — — — — — — — — — — — — — — 29 627 146 — — 146 — 17 — — — — — — — — — — — — — (53) 70 163 Accumulated retained earnings 61,028 — — 61,028 — 4,555 — — — — — — — — — — — 4,555 — — — 65,583 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2020. 525 Annual report 2020 Contents Other reserves (3,110) (-) Own shares (31) Profit attributable to shareholders of the parent 6,515 — — 6,515 (8,771) (6,515) — — — — — — — — — — — — — — — — (31) — (38) — — — — — — — (758) 720 — — — — — — (69) (8,771) Non-controlling interest (-) Interim dividends (1,662) Other comprehensive income (24,168) Other comprehensive income Others items Total (982) 11,570 110,659 — — (1,662) — 1,662 — — — — — — — — — — — — — — — — — (24,168) (8,976) — — (982) (818) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 11,570 1,063 (987) 5 — — — — — (465) — — — — — (54) — (473) (33,144) (1,800) 11,646 — — 110,659 (17,502) (1,835) 364 — — — — — (826) (758) 721 — — — (54) (53) (1,229) 91,322 (6,515) 1,662 — — (3,110) — (486) 70 — — — — — — — 1 — — 298 — — (855) (3,596) Revaluation reserves — — — — — — — — — — — — — — — — — — — — — — 526   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million Balance at 31 December 2018* Adjustments due to errors Adjustments due to changes in accounting policies Opening balance at 1 January 2019* Total recognised income and expense Other changes in equity Issuance of ordinary shares Issuance of preferred shares Issuance of other financial instruments Maturity of other financial instruments Conversion of financial 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 Balance at 31 December 2019* Capital 8,118 — — Share premium 50,993 — — 8,118 50,993 — 191 191 — 1,453 1,453 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 8,309 52,446 Equity instruments issued (not capital) Other equity instruments 565 — — 565 — 33 — — — — — — — — — — — — — — 33 598 234 — — 234 — (88) — — — — — — — — — — — — — (88) — 146 Accumulated retained earnings 56,756 — — 56,756 — 4,272 — — — — — — (1,055) — — — — 5,327 — — — 61,028 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2020. 527 Annual report 2020 Other reserves (1,583) (-) Own shares (59) Contents Total 107,361 — (391) Profit attributable to shareholders of the parent 7,810 — — 7,810 6,515 (7,810) — — — — — — — — — — — — — (59) — 28 — — — — — — — (928) 956 — — — — — — Non-controlling interest (-) Interim dividends (2,237) Other comprehensive income (24,125) Other comprehensive income Others items (1,292) 12,181 — — (2,237) — 575 — — — — — — (1,662) — — — — — — (24,125) (43) — — (1,292) 310 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 12,181 106,970 1,601 (2,212) 1 — — — — (2) (895) — — — — — 110 — 8,383 (4,694) 1,673 — — — — (2) (3,612) (928) 950 — — — 110 (88) (1,426) (2,797) (7,810) 2,237 — — — — — — (31) 6,515 (1,662) (24,168) (982) 11,570 110,659 — (391) (1,974) — (1,136) 28 — — — — — — — (6) — — 246 — — (1,404) (3,110) Revaluation reserves — — — — — — — — — — — — — — — — — — — — — — 528   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2020, 2019 AND 2018 EUR million Balance at 31 December 2017* Adjustments due to errors Adjustments due to changes in accounting policies Opening balance at 1 January 2018* Total recognised income and expense Other changes in equity Issuance of ordinary shares Issuance of preferred shares Issuance of other financial instruments Maturity of other financial instruments Conversion of financial 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 Balance at 31 December 2018* Capital 8,068 — — Share premium 51,053 — — 8,068 51,053 — 50 50 — — — — — — — — — — — — — — — (60) (60) — — — — — — — — — — — — — — 8,118 50,993 Equity instruments issued (not capital) Other equity instruments 525 — — 525 — 40 — — — — — — — — — — — — — — 40 565 216 — — 216 — 18 — — — — — — — — — — — — — (74) 92 234 Accumulated retained earnings 53,437 — — 53,437 — 3,319 — — — — — — (968) — — — — 4,287 — — — 56,756 * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2020. 529 Annual report 2020 Other reserves (1,602) (-) Own shares (22) Contents Total 106,833 — Profit attributable to shareholders of the parent 6,619 — — 6,619 7,810 (6,619) — — — — — — — — — — — — — (22) — (37) — — — — — — — (1,026) 989 — — — — — — Non-Controlling interest (-) Interim dividends (2,029) Other comprehensive income (21,776) Other comprehensive income Others items (1,436) 13,780 — — (2,029) — (208) — — — — — — (2,237) — — — — — (160) (21,936) (2,189) — 253 (1,183) (109) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (1,545) (1,340) 12,235 105,493 1,505 (1,559) 7,017 (5,149) — — — — — — (687) — — — — — (660) 17 (229) — — — — — — (3,892) (1,026) 989 — — — (601) (57) (562) (6,619) 2,029 — — — — — — (59) 7,810 (2,237) (24,125) (1,292) 12,181 107,361 — 112 (1,490) — (93) 10 — — — — — — — — — — 303 59 — (465) (1,583) Revaluation reserves — — — — — — — — — — — — — — — — — — — — — — 530   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 2020, 2019 Y 2018 EUR million A. CASH FLOWS FROM OPERATING ACTIVITIES Profit or loss for the year Adjustments made to obtain the cash flows from operating activities Depreciation and amortisation cost Other adjustments Net increase/(decrease) in operating assets Financial assets held-for-trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortized cost Other operating assets Net increase/(decrease) in operating liabilities Financial liabilities held-for-trading Financial liabilities designated at fair value through profit or loss Financial liabilities at amortized 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 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 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 financing activities Proceeds Subordinated liabilities Issuance of own equity instruments Disposal of own equity instruments Other proceeds related to financing activities Note 2020 66,153 (7,708) 37,836 2,810 35,026 51,385 12,390 2019* 3,389 8,116 23,990 3,001 20,989 64,593 15,450 (275) (6,098) (10,314) 6,549 43,541 (506) 90,356 7,880 (10,907) 96,561 (3,178) (2,946) (7,220) 11,976 7,386 1,134 525 2,931 — — 4,756 2,014 — 182 1,775 785 — (1,909) 6,978 — 3,780 — 758 2,440 5,069 4,095 — 721 253 4,464 1,693 49,541 (457) 38,469 6,968 (8,858) 47,622 (7,263) (2,593) (7,229) 14,289 12,766 1,377 63 83 — — 7,060 4,091 — 686 218 2,065 — (10,122) 12,159 3,773 5,123 — 928 2,335 2,037 1,090 — 947 — 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 — 531 Annual report 2020 Contents CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 2020, 2019 Y 2018 EUR million Note 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 financial assets Less, bank overdrafts refundable on demand TOTAL CASH AND CASH EQUIVALENTS AT END OF THE YEAR In which, restricted cash 2020 (4,252) 52,772 101,067 153,839 7,817 137,047 8,975 — 2019* 1,366 (12,596) 113,663 101,067 2018* (595) 2,668 110,995 113,663 8,764 75,353 16,950 — 10,370 89,005 14,288 — 153,839 101,067 113,663 — — — * Presented for comparison purposes only (note 1.d). The accompanying notes 1 to 54 and appendices are an integral part of the consolidated statement of cash flows for the year ended 31 December 2020. 532 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Notes to the consolidated annual accounts 533 Annual report 2020 Contents Banco Santander, S.A., and Companies composing Santander Group b) Basis of presentation of the consolidated financial statements Notes to the consolidated financial statements (consolidated annual accounts) for the year ended 31 December 2020 1. Introduction, basis of presentation of the consolidated financial statements (consolidated annual accounts) and other information a) Introduction Banco Santander, S.A. ('the parent' or 'Banco Santander'), is a private-law entity subject to the rules and regulations applicable to banks operating in Spain, where it was constituted and currently maintains its legal domicile, which is paseo de Pereda, numbers 9 to 12 (39004, Santander, Spain). The principal headquarters of Banco Santander are located in Ciudad Grupo Santander, avenida Cantabria s/n (28660, Boadilla del Monte, Madrid, Spain). The corporate purpose of Banco Santander, S.A., mainly entails carrying out all kinds of activities, operations and services inherent to the banking business in general and permitted by current legislation, and the acquisition, holding, enjoyment and disposal of all kinds of securities. In addition to the operations carried on directly by it, Banco Santander is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Grupo Santander ('Santander' or 'the Group'). Therefore, Banco Santander is obliged to prepare, in addition to its own separate financial statements, the Group's consolidated financial statements, which also include the interests in joint ventures and investments in associates. At 31 December 2020, Grupo Santander consisted of 711 subsidiaries of Banco Santander, S.A.. In addition, other 164 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). Grupo Santander consolidated financial statements for 2018 were approved by the shareholders at the group´s annual general meeting on 12 April 2019. Grupo Santander consolidated financial statements for 2019 were approved by the shareholders at the group´s annual general meeting on 3 April 2020. The Group's 2020 consolidated financial statements, the financial statements of the parent and of substantially all the Group companies have not been approved yet by their shareholders at the respective annual general meetings. However, Banco Santander board of directors considers that the aforementioned financial statements will be approved without any significant changes. 534 Under Regulation (EC) n.º 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 financial statements for the years beginning on or after 1 January, 2005 in conformity with the International Financial Reporting Standards ('IFRS') previously adopted by the European Union ('EU-IFRS'). In order to adapt the accounting system of Spanish credit institutions with the principles and criteria established by the IFRS adopted by the European Union ('EU-IFRS'), the Bank of Spain published circular 4/2017, dated 27 November 2017, on Public and Confidential Financial Reporting Standards and Financial Statement Formats. During 2020, the Bank of Spain has published circulars 2/2020 and 3/2020, of June 11 amending Circular 4/2017, of November 27 to credit institutions on Public and Confidential Financial Reporting Rules and Formats. Grupo Santander consolidated financial statements for 2020 were authorised by the Bank's directors (at the board meeting on 22 February 2021) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain circular 4/2017 and subsequent modifications, 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 financial position at 31 December 2020, 2019 and 2018 and the consolidated results of its operations and the consolidated cash flows in 2020, 2019 and 2018. These consolidated financial statements were prepared from the accounting records kept by the Bank and by the other Group entities, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group. These consolidated annual accounts have been prepared on the basis of the accounting records held by the Bank and by each of the other companies of the Group, and include the adjustments and reclassifications required to standardise the accounting policies and valuation criteria applied by Grupo Santander. The notes to the consolidated financial statements contain additional 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 flows. 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 modifications came into force and were adopted by the European Union in 2020: • Modification of the IFRS Conceptual Framework: Amendments to the IFRS Conceptual Framework, which sets out the fundamental concepts of financial reporting. The revised Framework includes: a new chapter about Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Group in applying the amendments to IAS 39 are detailed below: – For cash flow hedges, the Group has assumed that the cash flows covered (which are based on the benchmark index) are not modified as a result of the aforementioned reform, and therefore continue to comply with the highly probable future transaction requirement. – To determine the prospective effectiveness of hedges, the Group has assessed that the economic relationship between the hedged item and the hedging instrument continues to exist since the interest rate benchmark on which the hedged item and the hedging instrument are based is not changed as a result of the IBOR reform. • Amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases, on Reference Interest Rates - Phase 2: The amendments allow for the temporary application of certain exceptions to the requirements of (i) assessment of derecognition of financial assets, financial liabilities and lease liabilities in the event of changes in the financial assets, financial liabilities and lease liabilities, and (ii) exemptions from hedge accounting requirements directly affected by the IBOR reform, requiring additional disclosures, (iii) exemptions for lease modifications that allow the liability to be measured using the reformed interest rate curves against the right-of-use. These new exemptions require additional disclosures. The amendments will become effective as of 1 January 2021, with the possibility of early application and will cease to be applicable when the uncertainties about the hedged risks, cash flows of the financial instruments affected or the hedging relationship is terminated. In this regard, the Group has chosen to apply the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 in the preparation of the financial statements for the year ending 31 December 2020. The additional breakdowns required by the amendments to IFRS 7 relating to hedging relationships are included in note 36. A description of the Grupo Santander's management of the transition to alternative reference rates, as well as the changes in risk management strategy is included in note 53. measurement; guidance on financial reporting; improved definitions, in particular the definition of liabilities; and clarifications such as management functions, prudence and measurement uncertainty in financial reporting. • Modification of IAS 1, Presentation of Financial Statements and IAS 8 Accounting Policies: changes in accounting estimates and errors, which use a consistent definition of materiality for the purpose of making material judgements and deciding on the information to be included in the financial statements. • Modification of IFRS 3 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. IFRS 3 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 definitions of a business and of outputs; and introduce an optional fair value concentration test. • Covid-19-Related Rent Concessions - Amendments to IFRS 16 Leases: As a result of the covid-19 pandemic, IFRS 16 is amended to allow the lessee to apply a practical alternative and not to consider rental concessions as a modification of the lease agreement when the following requirements are met: the revised consideration is the same or less than the consideration before the change, the affected payments are prior to 30 June 2021, and there are no substantial changes to the remaining lease terms. • Amendment to IFRS 9, IAS 39 and IFRS 7 on Reference Interest Rates (IBOR Reform - Phase 1). The Group applies IAS 39 for hedge accounting and, therefore, the amendments to IFRS 9 referred to in this section are not applicable to it. The contractual cash flows of the accounting hedges, both of the hedged items and of the hedging instruments, which are based on a reference interest rate that currently exists, will be modified by the substitution of said rate by an alternative interest rate or modification of its calculation methodology, in order to adapt it to the new regulatory requirements. The amendments to the standard permit the temporary application of certain exceptions to comply with hedge accounting requirements that may be directly affected by the IBOR reform. Additional disclosures required by the amendments to IFRS 7 relating to hedging relationships are included in note 36. These exceptions will no longer be applicable when cash flow uncertainties disappear or the hedging relationship is discontinued. The amendments to IAS 39 are applicable from 1 January 2020, with the possibility of early application. In this regard, the Group chose early application in the financial statements for the year ended 31 December 2019. The main assumptions or judgements made by the 535 Annual report 2020 Contents Following is a detail of the carrying amount at 31 December 2020 of financial assets, financial liabilities, derivatives and loan commitments that continue to be referenced to the indices subject to the IBOR Reform: EUR million Gross Carrying amount Referenced to EONIA of which maturing after 2021 Referenced to LIBOR of which USD of which GBP TOTAL Loans and advances 102 — 64,604 39,517 20,611 64,706 Debt securities acquired (Assets) 68 68 2,648 711 1,934 Debt securities issued (Liabilities) 284 284 10,806 7,734 2,756 Deposits 2,510 7 10,994 8,843 1,638 Derivatives (Assets) 213 213 24,070 13,967 9,786 Derivatives (Liabilities) 419 406 22,452 9,437 11,314 Loan Commitments 2 — 38,385 24,907 13,308 2,716 13,504 11,090 24,283 22,871 38,387 The application of the aforementioned amendments to accounting standards and interpretations did not have any material effects on Grupo Santander consolidated financial statements. At the date of approved of these consolidated annual accounts, the following amendments with an effective date subsequent to 31 December 2020 were in force: • Amendment to IFRS 4 Insurance Contracts, which is aimed at extending the expiry date of the temporary exemption from applying IFRS 9 by two years (from 1 January 2021 to 1 January 2023) for entities whose activities are predominantly insurance-related. This achieves alignment with the effective date of IFRS 17 Insurance Contracts (1 January 2023). It will apply from 1 January 2021. • Amendment to IAS 37 Provisions, Contingent Liabilities and Contingent Assets: clarifies that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts. Before recognising a separate provision for an onerous contract, the entity recognises any impairment loss that has occurred on assets used in fulfilling the contract. It will apply from 1 January 2022. • Amendment to IFRS Cycle (2018-2020): introduces minor amendments, to be applied from 1 January 2022, with early application permitted, to the following standards: • IFRS 9 Financial Instruments: clarifies which rates must be included in the 10% test for derecognition of financial liabilities. Lastly, at the date of formulation of these consolidated annual accounts, the following standards which effectively come into force after 31 December 2020 had not yet been adopted by the European Union: • IFRS 16 Leases: amendment to remove possible confusion regarding the treatment of leasing incentives in the application of IFRS 16 Leases, as illustrated in example 13. • Amendment to IFRS 3 Business Combinations: to update • IFRS 1, in relation to the first-time adoption of the references to the Conceptual Framework for Financial Reporting and add an exception for the recognition of liabilities and contingent liabilities within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 21 Levies. The amendments also confirm that an acquirer should not recognize contingent assets acquired in a business combination. It will apply from 1 January 2022. • Amendment to IAS 16 Property, Plant and Equipment: prevents an entity from deducting from the cost of an item of property, plant and equipment any revenue from the sale of finished goods while the entity is preparing the item for its intended use. It is also clear that an entity is "testing whether the asset is functioning properly" when evaluating the technical and physical performance of the asset. The financial performance of the asset should not be taken into account for this evaluation. Additionally, entities should disclose separately the amounts of income and expenses related to finished goods that are not the product of the entity's ordinary activities. It will apply from 1 January 2022. International Financial Reporting Standards, allows entities that have measured their assets and liabilities at the carrying amounts recorded in their parent's books to also measure any cumulative translation differences using the amounts reported by the parent. This amendment also applies to associates and joint ventures that have adopted the same exemption from IFRS 1. • Classification of Liabilities, amendments to IAS 1 Presentation of Financial Statements, considering non- current liabilities those in which the entity has the possibility of deferring payment for more than 12 months from the closing date of the reporting period. They must be applied retrospectively in accordance with the normal requirements in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It will apply from 1 January 2023. 536 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • IFRS 17 Insurance Contracts: new general accounting standard for insurance contracts, which includes the recognition, measurement, presentation and disclosure of information. Insurance contracts combine financial and service provision features that, in many cases, generate variable long-term cash flows. To properly reflect these characteristics, IFRS 17 combines the measurement of future cash flows with the recording of the result of the contract during the period in which the service is provided, presents separately the financial results from the results for the provision of the service and allows entities, through the choice of an accounting policy option, to recognize the financial results in the income statement or in other comprehensive income. It will apply from 1 January 2023. Grupo Santander is currently analysing the possible effects of these new standards and interpretations. All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2020 were applied in the preparation of these consolidated annual accounts. 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 financial statements. The main accounting policies and measurement bases are set forth in note 2. In the consolidated financial statements estimates were occasionally made by the senior management of Grupo Santander 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 financial assets at fair value through other comprehensive income, financial assets at amortised cost, non-current assets held for sale, investments, tangible assets and intangible assets (see notes 6, 7, 10, 12, 13, 16, 17, 18 and 53). • The assumptions used in the actuarial calculation of the post-employment benefit 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 and the income tax expense (see note 27). • The fair value of the identifiable assets acquired and the liabilities assumed in business combinations (see note 3). To update the estimates described above, the Group's Management has taken into account the current situation as a result of covid-19, classified as a pandemic by the World Health Organization, which significantly affects the economic activity worldwide and, as a result, the Group's operations and financial results, and which generates uncertainty in the Group's estimates. Therefore, the Group's Management has made an assessment of the current situation according to the best information available to date, disclosing in the notes the main estimates made and the potential impacts of covid-19 on them for the period ended 31 December 2020 (see notes 17, 27 and 53). Although these estimates have been made on the basis of the best information available at the end of the year 2020, and considering information updated at the date of preparation of these consolidated annual accounts, it is possible that events that may take place in the future may make it necessary to modify them (upwards or downwards) in the coming years, which would be done, if appropriate, in a prospective manner, recognising the effects of the change in estimate in the corresponding consolidated income statement. d) Information relating to 2019 and 2018 In July 2016, the IASB published IFRS 16, Leases, which was adopted by the Group in accordance with the standard on 1 January 2019. IFRS 16 establishes the principles for the recognition, measurement, presentation and breakdown of lease contracts, with the objective of ensuring reporting information that faithfully represents the lease transactions. The adoption of IFRS 16 has led to changes in the Group's accounting policies for the recognition, measurement, presentation and breakdown of lease contracts. The main aspects contained in the new regulations and the breakdowns relating to the impact of the adoption of IFRS 16 in the Group are included below: i) Lease accounting policy Since 1 January 2019, when the Group acts as lessee, it recognises a right-of-use asset representing its right to use the underlying leased asset with a corresponding lease liability on the date on which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and the finance charge. The finance charge is allocated to the income statement during the term of the lease in such a way as to produce a constant periodic interest rate on the remaining balance of the liability for each year. The right-of-use asset is depreciated over the useful life of the asset or the lease term, whichever is shorter, on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of- use asset is amortized over the useful life of the underlying asset. Assets and liabilities arising from a lease are initially measured at present value. Lease liabilities include the net present value of the following lease payments: 537 Annual report 2020 Contents - Fixed payments (including inflation-linked payments), less - Any lease payment made at or before the commencement any lease incentive receivable date less any lease incentive received. - Variable lease payments that depend on an index or rate. - Any initial direct costs. - The amounts expected to be paid by the lessee under - Restoration costs. residual value guarantees. - The exercise price of a purchase option if the lessee is reasonably certain that it will exercise that option. - Lease termination penalty payments, if the term of the lease reflects the lessee's exercise of that option. Lease payments are discounted using the interest rate implicit in the lease. Given in certain situations this interest rate cannot be obtained, the discount rate used in this cases, is the lessee's incremental borrowing rate at the related date. For this purpose, the entity has calculated this incremental borrowing rate taking as reference the listed debt instruments issued by the Group; in this regard, the Group has estimated different interest rate curves depending on the currency and economic environment in which the contracts are located. In order to construct the incremental borrowing rate, a methodology has been developed at the corporate level. This methodology is based on the need for each entity to consider its economic and financial situation, for which the following factors must be considered: - Economic and political situation (country risk). - Credit risk of the company. - Monetary policy. - Volume and seniority of the company’s debt instrument issues. The incremental borrowing rate is defined as the interest rate that a lessee would have to pay for borrowing, given a similar period to the duration of the lease and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. The Group entities have a wide stock and variety of financing instruments issued in different currencies to that of the euro (pound, dollar, etc.) that provide sufficient information to be able to determine an "all in rate" (reference rate plus adjustment for credit spread at different terms and in different currencies). In circumstances, where the leasing company has its own financing, this has been used as the starting point for determining the incremental borrowing rate. On the other hand, for those Grupo Santander entities that do not have their own financing, the information from the financing of the consolidated subgroup to which they belong was used as the starting point for estimating the entity's curve, analysing other factors to assess whether it is necessary to make any type of negative or positive adjustment to the initially estimated credit spread. Right-of-use assets are valued at cost which includes the following: - The amount of the initial measurement of the lease liability. 538 The Group recognises the payments associated with short- term leases and leases of low-value assets on a straight-line basis as an expense in the income statement. Short-term leases are leases with a lease term less than or equal to 12 months (a lease that contains a purchase option is not a short term lease). ii. Recognised effects on the adoption of the standard With the adoption of IFRS 16, Grupo Santander recognised lease liabilities in relation to leases previously classified as "operating leases" under the principles of IAS 17 Leases, in force at 31 December 2018. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate at 1 January 2019. At the date of first application, the weighted average discount rate was 4.5%, mainly due to the contribution of rented properties in Spain. For leases previously classified as finance leases, the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and lease liability on the initial effective date. The measurement principles in IFRS 16 apply only after that date. Grupo Santander considered the practical expedients defined in paragraph C10 of the standard in the application of the modified retrospective method. Such application was made on a contract-by-contract basis, and not on a generalised basis. A reconciliation between the operating lease commitments at 31 December 2018 and the lease liability recognised at 1 January 2019 is detailed below: Operating lease commitments at 31 December 2018 Amount of operating lease commitments discounted by the Group rate (+) Liabilities under finance leases at 31 December 2018 (-) Short-term leases recognised as expenses on a straight-line basis (-) Low-value leases recognised as expenses on a straight-line basis (-) Contracts revalued as service contracts (+)/(-) Adjustments resulting from different treatment of extension and termination options (+)/(-) Adjustments related to changes in the index or rate affecting variable payments Lease liability at 1 January 2019 EUR million 8,699 6,550 96 (20) (2) — 556 — 7,180 As a result of the adoption of IFRS 16, the impact of the first application recorded by Grupo Santander corresponds, mainly, to the recognition of right-of-use for an amount of Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR 6,693 million, financial liabilities for an amount of EUR 7,084 million and a negative impact on the Group's equity of EUR 391 million. The impact of the first application of IFRS 16 on the ordinary capital ratio (Common Equity Tier 1 - CET 1) was -20 bp. As indicated in that standard, Grupo Santander chose not to restate the comparative financial statements, and the information relating to the year ended 31 December 2018 was not restated under those criteria, so that it is not comparative. In 2018, Grupo Santander changed the accounting policy for recognition of non-controlling interests in equity stake reduction transactions without loss of control. In accordance with international financial 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 identifiable net assets or by attributing the goodwill associated with the participation sold. In this sense, Grupo Santander opted 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. Additionally, the segment information corresponding to the year ended 31 December 2019 and 2018 were restated for comparative purposes in accordance with the Group's new organizational structure, as required by IFRS 8 (see note 51). In addition, in July 2014, the IASB published IFRS 9 which, together with subsequent amendments, has been adopted by the Group effective 1 January 2018. IFRS 9 establishes requirements for the recognition and measurement of both financial instruments and certain types of non-financial purchase and sale contracts. The aforementioned requirements must be applied retrospectively, adjusting the opening balance at 1 January 2018, without the need to restate the 2017 comparative financial statements, including the breakdown in the statement of changes in equity, so that this information is not comparative. Therefore, the information contained in these consolidated annual accounts for 2019 and 2018 is presented solely and exclusively for the purposes of comparison with the information relating to the year ended 31 December 2020 (see note 2.a.iv). Finally, based on the meeting held on 3 March 2020 by the International Financial Reporting Standards Committee (IFRIC), the Group has changed its accounting policy in relation to the presentation of exchange differences and the effects of hyperinflation of the operations generated in Argentina with retroactive effect (see note 2.a.iv). In addition to the above, the information in note 4.a relating to the shares outstanding in 2019 and 2018 has been restated due to the capital increase described in note 31.a in accordance with IAS 33 Earnings per Share. In order to interpret the changes in the balances with respect to 31 December 2020, it is necessary to take into consideration the exchange rate effect arising from the volume of foreign currency balances held by Grupo Santander 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 2020, based on the exchange rates at the end of 2020: Mexican peso (-13.17%), US dollar (-8.45%) , Brazilian real (-29.15%) , Argentine peso (-34.80%), Sterling pound (-5.26%), Chilean peso (-3.00%), and Polish zloty (-6.63%); as well as the evolution of the comparable average rates: Mexican peso (-11.56%), US dollar (-1.85%), Brazilian real (-24.16%), Sterling pound (-1.33%), Chilean peso (-12.92%) and Polish zloty (-3.24%). e) Capital management i. Regulatory and economic capital The financial institutions must meet a set of minimum capital and liquidity requirements. These minimum requirements are regulated in the European capital requirements regulation, better known as CRR, and in the capital requirements directive, known as CRD. In June 2019 these regulations were significantly modified, so that CRR2 and CRDV will be understood as said regulations with the latest modifications incorporated. Among the amendments to the CRR2, it is worth highlighting the introduction of the minimum requirement of TLAC (Total Loss Absorbing Capacity) applicable only to entities of global systemic importance (G-SIB). This requirement is a minimum requirement for own funds and eligible liabilities (currently 16% and, after the transitional period, 18%). The CRDV, as a directive, must be transposed into the national legal system to be applicable in the member States. In Spain, the transposition is expected to be developed during 2021. The CRDV includes relevant amendments such as the regulation of Pillar 2 Guidance requirements. Regarding to the Resolution regulations, the institutions must have an adequate financing structure that allows, in the event of financial difficulties, to recover their situation or to resolve it, ensuring the protection of depositors and the financial stability. The directive that regulates the aforementioned resolution framework is the Restructuring and Resolution Directive, BRRD. Like CRR2 and CRDV, BRRD was amended in June 2019, so BRRD2 refers to all of these amendments. The transposition of this directive in Spain is also planned for 2021. The BRRD2 has introduced important modifications to the minimum requirement for own funds and eligible liabilities (MREL). Thus, for example, the aforementioned TLAC requirement is now considered a Pillar 1 resolution requirement for G-SIB. For large banks (which are defined as those whose total assets exceed 100,000 million euros) or those that, without being large, the resolution authority considers that they may be systemic, the BRRD2 establishes a minimum subordination requirement of 13.5% of risk- weighted assets, or 5% of the exposure of the leverage ratio, whichever is higher. For the rest of the entities, the subordination requirement will be determined case by case by the resolution authority. The severe economic disruption caused by the covid-19 pandemic in 2020 has revealed the importance of institutions' funding functions in contributing to recovery. The competent 539 Annual report 2020 Contents authorities (national, European and international) have acted by reducing the liquidity, capital and operational requirements so the financial institutions can continue to provide financing to the economy, while ensuring that institutions continue to act prudently because these can also be affected by the deterioration of the economic situation. As part of the measures of the European Central Bank, it was issued a recommendation in March 2020 urging European banks to refrain from paying dividends out of the 2019 and 2020 financial years. On 27 July, the ECB extended its recommendation until 1 January 2021. The national governments have taken measures to address the economic and social impact of the vine population, in particular legislative moratoria that were aimed at containing NPLs and helping the population to meet liquidity needs. Throughout 2020, the EBA adopted a series of guidelines, including the Guidelines on legislative and non-legislative moratoria applied in the context of the Cov19 crisis on 2 April 2020 (EBA/GL/2020/08). These guidelines clarify the requirements for public and private moratoria to avoid classification of exposures affected by moratoria as forborne exposures. Although these guidelines were initially going to apply to moratoria granted before 30 June 2020, the EBA decided on 2 December 2020 to reactivate the application of these guidelines (EBA/GL/2020/02) for moratoria requested before 31 March 2021. Other measures adopted to provide flexibility in complying with the requirements have been the approval and entry into force of the 'quick fix' of the CRR (urgent and extraordinary regulatory measures aimed at making the regulatory framework more flexible in response to the covid 19), regulation by which modifies CRR2. Among the amendments introduced by the quick fix, it is worth highlighting the extension of the transitional period granted before the pandemic due to the entry into force of IFRS 9, due to the sudden and significant increase in provisions for expected credit losses that must be recognized. Additionally, the application of certain provisions of CRR2 has been delayed, such as those relating to the leverage ratio buffer (whose application date is postponed until 1 January 2023), and the possibility has been included to exclude from the calculation of said ratio exposures to central banks. In the same way, the date of application of other favourable provisions for entities such as the support factor for smes and the support factor for infrastructures has been brought forward, as well as the new treatment of software assets (applicable since the day following the publication of the Delegated Regulation where it is developed). At 31 December 2020 Grupo Santander met the minimum capital requirements established by current legislation (see note 53). ii. Plan for the roll-out of advanced approaches and authorisation from the supervisory authorities Grupo Santander continues adopting, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks. 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 2020 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 , all in the context of the current supervisory focus on the robustness and correct adaptation of the available models, as well as the simplification strategy recently agreed with the ECB, of which a practical example carried out is the recent supervisory approval for the reversion to the standard of the sovereign model in foreign currency. Grupo Santander 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 2020, the authorization of the Atacado portfolio in Brazil was achieved for the use of the AIRB 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., Institución 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, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these consolidated financial statements. 540 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix g) Events after the reporting period No significant events occurred from 1 January 2021 to the date on which these consolidated financial statements were authorized for issue. h) Other information The UK's withdrawal from the European Union could have a material adverse effect on our operations, financial condition and prospects On 31 January 2020 the UK ceased to be a member of the EU, on withdrawal terms which established a transition period until 31 December 2020, during which the UK continued to be treated as an EU member state and applicable EU legislation continued to be in force. A trade deal was agreed between the UK and the EU prior to the end of the transition period and the new regulations came into force on 1 January 2021. The trade deal, however, did not include agreements on certain areas, such as financial services and data adequacy, although a further transitional period has been agreed with respect to rules on the transfer of personal data between the EU and the UK until the end of June 2021. Without equivalence decisions or other agreements that provide market access on a stable and widespread basis, Santander UK has, and will continue to have, a limited ability to provide cross-border services to EU customers and to trade with EU counterparties. It is uncertain whether equivalence decisions will be granted or whether a trade agreement with respect to financial services between the EU and the UK will be reached. The impact of any such trade agreement, equivalence decisions or any other cooperation mechanisms on financial markets generally, the extent of legislative and regulatory convergence and regulatory cooperation that would be required between the UK and the EU member states, as well as the level of access that may be granted to financial services firms across EU and UK markets is uncertain. The wider impact of Brexit on financial markets through market fragmentation, reduced access to finance and funding, and lack of access to certain financial market infrastructure, may affect our operations, financial condition and prospects and those of our customers and clients. Uncertainty also remains around the effect of the current trade deal on economic growth in the UK given that it does not address services. The effect of the additional non-tariff trade barriers imposed on products is equally unknown. It is likely that growth will initially be disrupted as businesses adapt to the new cross-border procedures and rules applicable in the UK and in the EU to their activities, products, customers and suppliers. While the longer term effects of the UK’s withdrawal from the EU are difficult to predict, there is ongoing political and economic uncertainty, which is likely to continue in the medium term and which could negatively impact Santander UK’s customers and clients and counterparties. There are also other potential longer term impacts resulting from Brexit which could impact the UK economy and Grupo Santander’s business in the UK such as: • Increased calls for a second referendum on Scottish independence from the UK; and • Instability in Northern Ireland, if the current arrangements regarding the borders between the Republic of Ireland, Northern Ireland and Great Britain are called into further question. If one or more of these risks were to materialise it could have a material adverse effect on our operations, financial condition and prospects. We considered these circumstances in our assessment of the recoverability of the cash-generating unit that supports Santander UK's goodwill, which was impaired during 2020 and 2019 (see note 17). 2. Accounting policies The accounting policies applied in preparing the consolidated financial statements were as follows: a) Foreign currency transactions i. Presentation currency Banco Santander’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). ▪ 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 significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial 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. 541 Annual report 2020 Contents ▪ 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. iv. Entities located in hyperinflationary economies When a subsidiary operates in a country with hyperinflationary economy, IAS 29 Financial Information in Hyperinflationary Economies is applied, which means that: Translation of functional currencies to euros The balances in the financial 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 differences The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognised at their net amount under 'Exchange differences' in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognised in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognised under 'Other comprehensive income–Items that may be reclassified to profit or loss–Exchange differences' (except for exchange differences on equity instruments, where the option to irrevocably elect to be measured at fair value through changes in accumulated other comprehensive income, which are recognised in accumulated 'Other Comprehensive Income - Items not to be reclassified to profit or loss - Changes in fair value of equity instruments measured at fair value' through other comprehensive income (see note 29). The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognised in 'Other comprehensive income–Items that may be reclassified to profit or loss–Exchange differences' in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognised in equity under 'Other comprehensive income–Items that may be reclassified to profit or loss and Items not reclassified to profit 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 profit or loss. Exchange differences arising on actuarial gains or losses when converting to euros the financial statements denominated in the functional currencies of entities whose functional currency is different from the euro are recognised under equity 'Other comprehensive income–Items not reclassified to profit or loss–Actuarial gains or (-) losses' on defined benefit pension plans (see note 29). 542 – Historical cost of non-monetary assets and liabilities and of the various items of equity have to be adjusted to reflect the changes in the purchasing power of the currency due to inflation from their date of acquisition or incorporation into the consolidated balance sheet. – The different items of the income statement are adjusted by the inflationary index since their generation, with a balancing entry in 'Other comprehensive income'. – The loss on the net monetary position is recorded in the income for the year against 'Accumulated Other comprehensive income'. – All components of the financial statements of the subsidiary are translated at the closing exchange rate. The deterioration of the economic situation in Argentina over the last years caused, among other impacts, a significant increase in inflation, which by the end of 2018 had reached 48% per year (147% accumulated in three years). This led the Group to conclude that it was necessary to apply IAS 29 Financial Information in Hyperinflationary Economies to its activities in the country in question in its consolidated financial statements from that year on. At that moment, according with Group’s accounting policies, exchange differences arising on the translation to the Group´s presentation currency of financial statements denominated in functional currencies other than euro for subsidiaries located in countries with high inflation rates were recorded in the consolidated statement of changes in total 'Equity-Other reserves'. As a result, at 1 January 2018 an amount of EUR 1,716 million corresponding to exchange rate losses for 2017 and previous years was reclassified in the statement of changes in 'Equity' from the heading 'Accumulated Other Comprehensive Income - Conversion Differences' to 'Other Reserves'. Also at that date, the adjustment of the historical cost of non-monetary assets and liabilities and of the various items of equity of the companies in Argentina recognized with a credit to 'Other reserves' for an amount of EUR 131 million. However, on the basis of the meeting held on 3 March 2020 by the International Financial Reporting Standards Committee (IFRIC), in 2020 Grupo Santander has changed its accounting policy with regard to the presentation of exchange differences and the effects of hyperinflation in the operations generated in Argentina, which at 1 January 2019 and 2018 resulted in a reclassification of EUR -1,984 million and EUR -1,585 million respectively, from the heading "Other reserves" to "Accumulated other comprehensive income", (at 31 December 2019 and 2018 the Grupo Santander restated EUR -2,136 and EUR -1,984 million, respectively, for comparability purposes), from "Other reserves" to "Accumulated other comprehensive income", corresponding to the accumulated amount of exchange differences related to foreign operations in a hyperinflationary economy and the amount corresponding to the adjustment of the historical cost of the Argentine companies reflecting the changes in the purchasing Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix power of the currency derived from inflation. This change in accounting policy and its consequent restatement between different equity items has no impact on the total equity of Grupo Santander. In accordance with the provisions of the Argentine Federation of Professional Councils in Economic Sciences (Fcpce), which is the organization that issues the professional accounting standards in said country, the inflation indexes applied are the wholesale internal price index (WPI) until 30 November 2016 and the National Consumer Price Index published by the National Institute of Statistics and Censues (Indec) from 1 December 2016 on. Inflation during 2020 was 36.1% for the year. The exchange rate at 31 December 2020 has been of Argentine pesos 103.16 per euro (Argentine pesos 67.26 per euro at 31 December 2019). The net impact on Other Comprehensive Income in 2020 of the effects derived from the exchange differences arising on the translation to the Group´s presentation currency of financial statements of the subsidiaries located in Argentina and the application of IAS 29 was a loss of EUR 202 million. At 31 December 2020, no other country in which the consolidated and associated entities of Grupo Santander are located is considered to have a hyperinflationary economy in accordance with the criteria established in this regard by the International Financial Reporting Standards adopted by the European Union. v. Exposure to foreign currency risk The Group hedges a portion of its long-term foreign currency positions using foreign exchange derivative financial instruments (see note 36). Also, the Group manages foreign exchange risk dynamically by hedging its short-term position (with a potential impact on profit or loss) in order to limit the impact of currency depreciations while optimising the cost of financing the hedges. The following tables show the sensitivity of the consolidated income statement and consolidated equity to percentage changes of ± 1% in the foreign exchange rate positions arising from investments in Grupo Santander companies with currencies other than the euro (with its hedges) and in their results (with its hedges), in which the Group maintains significant balances. The estimated effect on the consolidated equity attributable to Grupo Santander and on consolidated profit of a 1% appreciation of the euro against the corresponding currency is as follows: EUR million Currency US dollar Chilean peso Pound sterling Mexican peso Brazilian real Polish zloty Argentine peso Effect on  consolidated equity 2019 2020 2018 Effect on  consolidated profit 2020 2019 2018 (123.6) (161.3) (162.3) (4.1) (3.5) (4.1) (20.4) (21.8) (22.9) (4.4) (2.3) (5.1) (107.9) (189.2) (171.2) (1.2) (3.9) (4.5) (21.7) (22.6) (18.3) (2.0) (3.3) (1.7) (75.0) (71.6) (85.6) (12.6) (10.4) (5.6) (26.7) (38.3) (36.2) (2.2) (1.2) (4.2) (7.9) (6.9) (7.8) (1.8) (1.2) (0.6) Similarly, the estimated effect on the Group’s consolidated equity and on consolidated profit of a 1% depreciation of the euro against the corresponding currency is as follows: EUR million Currency US dollar Chilean peso Pound sterling Mexican peso Brazilian real Polish zloty Argentine peso Effect on  consolidated equity Effect on  consolidated profit 2020 2019 2018 2020 2019 2018 126.1 164.6 165.6 20.8 22.2 23.4 110.1 193.0 174.7 22.1 76.5 27.2 8.0 23.1 73.1 39.0 7.0 18.6 87.4 36.9 8.0 4.2 4.5 1.2 2.0 3.5 2.4 4.0 3.4 12.8 10.6 2.2 1.8 1.2 1.3 4.2 5.2 4.6 1.8 5.7 4.2 0.6 The above data were obtained as follows: a) Effect on consolidated equity: in accordance with the accounting policy detailed in note 2.a.iii, foreign exchange rate impact arising on the translation to euros of the financial statements in the functional currencies of the Group entities whose functional currency is not the euro are recognised in consolidated equity. The potential effect 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 offsetting effect of the hedges of net investments in foreign operations. b) Effect on consolidated profit: the effect was determined by applying the up and down movements in the average exchange rates of the year, as indicated in note 2.a.ii (except in the case of Argentina, which is a hyperinflationary economy and has applied the closing exchange rate), 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 offsetting effect of the various hedging transactions in place. The estimates used to obtain the foregoing data were performed considering the effects of the changes in the exchange rate in standalone basis not considering the effect of the performance of other variables whose changes would affect equity and profit 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 variations were kept constant with respect to their positions at 31 December 2020, 2019 and 2018. b) Basis of consolidation i. Subsidiaries Subsidiaries are defined 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 affect those returns through its power over the investee. 543 Annual report 2020 Contents The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions between consolidated companies are eliminated on consolidation. On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognised at their acquisition- date fair values. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognised as goodwill (see note 17). Negative differences are recognised in profit or loss on the date of acquisition. Additionally, the share of third parties of Grupo Santander equity is presented under 'Non-controlling interests' in the consolidated balance sheet (see note 28). Their share of the profit for the year is presented under 'Profit 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 2020 Grupo Santander controls a company in which it holds an ownership interest of less than 50% of the share capital, Luri 1, S.A. apart from the structured consolidated entities. The percentage ownership interest in the aforementioned company is 46% (see appendix I). Although Grupo Santander 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 financial statements is immaterial. The appendices contain significant 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 financial 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 profits and losses resulting from transactions with a joint venture are eliminated to the extent of the Group’s interest therein. The appendices contain relevant information on the joint ventures. 544 iii. Associates Associates are entities over which Banco Santander is in a position to exercise significant influence, but not control or joint control. It is presumed that Banco Santander exercises significant influence if it holds 20% or more of the voting power of the investee. In the consolidated financial 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 profits 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 Grupo Santander owns 20% or more of their voting power, are not considered to be associates because the Group is not in a position to exercise significant influence over them. At 31 December 2020, this was the situation of the investment in Project Quasar Investments 2017, S.L., despite maintaining a 49% interest in its share capital (see appendix II). The remaining investments are not significant 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 significant influence over them. The impact of these companies is immaterial in the Group's consolidated financial statements. The appendices contain significant information on the associates. iv. Structured entities When Grupo Santander 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, when control (as defined above) exists and, therefore, whether these entities should be consolidated. Specifically, 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 Grupo Santander; 20% is established as the general threshold. ▪ Identification of the fund manager, and verification as to whether it is a company controlled by the Group since this could affect Grupo Santander 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. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix ▪ 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 different conclusion. These structured entities also include the securitisation special purpose vehicles, which are consolidated in the case of the Special Purpose Vehicles (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 financial 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 Grupo Santander obtains control over an entity or a business are recognised for accounting purposes as follows: ▪ Grupo Santander measures the cost of the business combination, which is normally the consideration transferred, defined 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 definitively 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 identified 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 difference between the aforementioned items is recognised as discussed in note 2.m. Any negative difference 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. 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 difference between the consideration transferred or received and the decrease or increase in non-controlling interests, respectively, is recognised in reserves. 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 difference between these amounts is recognised in profit or loss. vii. Acquisitions and sales Note 3 provides information on the most significant acquisitions and sales in the last three years. c) Definitions and classification of financial instruments i. Definitions A financial instrument is any contract that gives rise to a financial asset of one entity and a financial 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 financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date. Hybrid financial 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 effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative. Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer). 545 Annual report 2020 Contents 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 convert into 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 defined in the related issue prospectuses- are recognised for accounting purposes by the Group as compound instruments. The liability component reflects the issuer’s obligation to deliver a variable number of shares and the equity component reflects the issuer’s discretion in relation to the payment of the related coupons. In order to effect 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 (CPPS), 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 defined in the corresponding prospectuses, are accounted for by the Group as equity instruments.The following transactions are not treated for accounting purposes as financial instruments: ▪ Investments in associates and joint ventures (see note 13). ▪ Rights and obligations under employee benefit plans (see note 25). ▪ Rights and obligations under insurance contracts (see note 15). ▪ Contracts and obligations relating to employee remuneration based on own equity instruments (see note 34). ii. Classification of financial assets for measurement purposes Financial assets are initially classified 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. Classification of financial instruments: the classification criteria for financial assets depends on the business model for their management and the characteristics of their contractual flows. Grupo Santander business models refer to the way in which it manages its financial assets to generate cash flows. In defining these models, the Group takes into account the following factors: • How key management staff are assessed and reported on the performance of the business model and the financial assets held in the business model. • The risks that affect the performance of the business model (and the financial assets held in the business model) and, specifically, 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 flows of financial assets requires an assessment of the congruence of these flows with a basic loan agreement. The Group determines if the contractual cash flows of its financial assets that are only principal and interest payments on the outstanding principal amount at the beginning of the transaction. This analysis takes into consideration four factors (performance, clauses, contractually linked products and currencies). Furthermore, among the most significant judgements used by the Group in carrying out this analysis, the following ones are included: • The return on the financial asset, in particular in cases of periodic interest rate adjustments where the term of the reference rate does not coincide with the frequency of the adjustment. In these cases, an assessment is made to determine whether or not the contractual cash flows differ significantly from the flows without this change in the time value of money, establishing a tolerance level of 2%. • The contractual clauses that may modify the cash flows of the financial asset, for which the structure of the cash flows before and after the activation of such clauses is analysed. • Financial assets whose cash flows have different priority for payment due to a contractual link to underlying assets (e.g. securitisations) require a look-through analysis by the Group so as to review that both the financial asset and the underlying assets are only principal and interest payments and that the exposure to credit risk of the set of underlying assets belonging to the tranche analysed is less than or equal to the exposure to credit risk of the set of underlying assets of the instrument. 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 profit and loss. IFRS 9 also establishes an option to designate an instrument at fair value with changes in profit or loss, when doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'accounting asymmetry') that would otherwise arise from measuring assets or liabilities or recognising gains and losses on different bases. Grupo Santander uses the following criteria for the classification of financial debt instruments: 546 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • Amortised cost: financial instruments under a business model whose objective is to collect principal and interest flows, over which there is no significant unjustified sales and fair value is not a key element in the management of these assets and contractual conditions they give rise to cash flows on specific dates, which are only payments of principal and interest on the outstanding principal amount. In this sense, unjustified 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 flows represent substantially a “basic financing agreement”. • Fair value with changes in other comprehensive income: financial instruments held in a business model whose objective is to collect principal and interest cash flows and the sale of these assets, where fair value is a key factor in their management. Additionally, the contractual cash flow characteristics substantially represent a “basic financing agreement”. • Fair value with changes in profit or loss: financial instruments included in a business model whose objective is not obtained through the above mentioned models, where fair value is a key factor in managing of these assets, and financial instruments whose contractual cash flow characteristics do not substantially represent a 'basic financing agreement'. In this section it can be enclosed the portfolios classified under 'Financial assets held for trading', 'Non-trading financial assets mandatorily at fair value through profit or loss' and 'Financial assets at fair value through profit or loss'. In this regard, the most of the financial assets presented in the category of 'Financial assets designated at value reasonable with change in results' are instruments financial services that, not being part of the portfolio of negotiation, are contracted jointly with other financial instruments that are recorded in the category of 'held for trading', and that by both are recorded at fair value with changes in results, so your record in any other category would produce accounting asymmetries. Equity instruments will be classified at fair value under IFRS 9, with changes in profit or loss, unless the Group decides, for non-trading assets, to classify them at fair value with changes in other comprehensive income (irrevocably) at initial recognition. iii. Classification of financial assets for presentation purposes Financial assets are classified 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 finance lease receivables and other debit balances of a financial 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 financial 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 classified, 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. – 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 certificates or book entries. ▪ Equity instruments: financial 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 financial instruments. ▪ Changes in the fair value of hedged items in portfolio hedges of 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 financial instruments which are effectively 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 financial instruments, designated as hedging instruments in hedge accounting. iv. Classification of financial liabilities for measurement purposes Financial liabilities are initially classified 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. In most cases, changes in the fair value of financial liabilities designated at fair value through profit or loss, caused by the entity's credit risk, are recognized in other comprehensive income. Financial liabilities are included for measurement purposes in one of the following categories: 547 Annual report 2020 Contents ▪ Financial liabilities held for trading (at fair value through profit or loss): this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements (“reverse repos”) or borrowed (short positions). ▪ Financial liabilities designated at fair value through profit or loss: financial liabilities are included in this category when they provide more relevant information, either because this eliminates or significantly 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 different bases, or because a group of financial liabilities or financial 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. Liabilities may only be included in this portfolio at the date of issue or origination. ▪ Financial liabilities at amortised cost: financial 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 financial institutions. v. Classification of financial liabilities for presentation purposes Financial liabilities are classified by nature into the following items in the consolidated balance sheet: ▪ Deposits: includes all repayable balances received in cash by Grupo Santander, 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 classified 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. On 6 June 2019 the European Central Bank announced a new programme of Targeted Longer-Term Refinancing Operations (TLTRO III), additionally, the conditions of the initial programme were amended on 30 April 2020, reducing the 548 interest rate by 25 bp to -0.5% from June 2020 to June 2021 and providing that for banks meeting a certain eligible lending volume, the interest rate may be -1% for the period from June 2020 to June 2021. These conditions were extended on 10 December 2020 for operations contracted between 1 October 2020 and 31 December 2021, including the option to cancel or reduce the amount of financing before maturity in windows that coincide with the interest rate review and adjustment periods. The accounting policy states that in recording amortised cost an entity "shall use a shorter period when fees, basis points paid or received, transaction costs, premiums or discounts relate to it, which is the case when the variable to which the fees, basis points paid or received, transaction costs, discounts or premiums relate is adjusted to market rates before the expected maturity of the financial instrument. In this case, the appropriate amortisation period is the period to the next reset date. In this case, the applicable interest rate of 1% from June 2020 to June 2021 (arising from the March 2020 programme amendment) and from June 2021 to June 2022 (arising from the December 2020 programme amendment) corresponds to a specific period after which the funding is adjusted to market rates (namely the average rate applied in the Eurosystem's OPLs) and should therefore be accrued until the next adjustment date. The early amortisation windows of this funding programme are substantive conditions, given that at that moment of adjustment of the cost of the funding to the market, the entity can choose to renew or cancel it and obtain new funding at more favourable conditions. Grupo Santander has opted to accrue interest in accordance with the specific periods of adjustment to market rates, so that interest for the period from June 2020 to June 2022 will be recorded in the income statement, the interest corresponding to that period, 1% assuming compliance with the threshold of eligible loans that gives rise to the extra rate, which takes as a reference the budget for 2021 and the entity's historical information. ▪ 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 financial 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 financial liability of the securities issued that are compound financial 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 financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed. ▪ Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items (includes, among others, the Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix balance of lease liabilities that have started to be recorded in 2019 as a result of the application of IFRS 16), and liabilities under financial guarantee contracts, unless they have been classified 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 financial instruments which are effectively 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 financial instruments, designated as hedging instruments in hedge accounting. d) Measurement of financial assets and liabilities and recognition of fair value changes In general, financial 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. In this regard, IFRS 9 states that regular way purchases or sales of financial assets shall be recognised and derecognised on the trade date or on the settlement date. Grupo Santander has opted to make such recognition on the trading date or settlement date, depending on the convention of each of the markets in which the transactions are carried out. For example, in relation to the purchase or sale of debt securities or equity instruments traded in the Spanish market, securities market regulations stipulate their effective transfer at the time of settlement and, therefore, the same time has been established for the accounting record to be made. The fair value of instruments not measured at fair value through profit and loss is adjusted by transaction costs. Subsequently, and on the occasion of each accounting close, they are valued in accordance with the following criteria: i. Measurement of financial 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 financial 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 participants. The most objective and common reference for the fair value of a financial 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 2020, there were no significant investments in quoted financial instruments that had ceased to be recognised at their quoted price because their market could not be deemed to be active. If there is no market price for a given financial 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 financial community, taking into account the specific 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 financial assets and liabilities held for trading (net)' in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organised markets included in the portfolios of financial 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 financial derivatives are measured using methods similar to those used to measure derivatives. The fair value of derivatives is taken to be the sum of the future cash flows 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 financial markets: net present value, 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 flows are valued at their amortised cost, as long as they comply with the 'SPPI' (Solely Payments of Principal and Interest) test, using the effective interest rate method in their determination. Amortised cost refers to the acquisition cost of a corrected financial 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 difference between the initial cost and the corresponding reimbursement value at expiration. In the case of financial 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. The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective 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 financial return. In the case of floating rate financial instruments, the effective 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. 549 Annual report 2020 Contents The amounts at which the financial assets are recognised represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, Grupo Santander 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 finance lease and full-service lease agreements, assets acquired under repurchase agreements, securities loans and credit derivatives. ii. Measurement of financial liabilities In general, financial liabilities are measured at amortised cost, as defined above, except for those included under 'Financial liabilities held for trading' and 'Financial liabilities designated at fair value through profit or loss' and financial liabilities EUR million designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value. The changes in credit risk arising from financial liabilities designated at fair value through profit or loss are recognised in accumulated other comprehensive income, unless they generate or increase an accounting mismatch, in which case changes in the fair value of the financial liability in all respects are recognised in the income statement. iii. Valuation techniques The following table shows a summary of the fair values, at the end of 2020, 2019 and 2018, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value: Published price quotations in active markets (level 1) 2020 Internal Models (level 2 and 3) Published price quotations in active markets (level 1) 2019 Internal Models (level 2 and 3) Total 2018 Published price quotations in active markets (level 1) Internal Models (level 2 and 3) Total Total Financial assets held for trading 46,379 68,566 114,945 44,581 63,649 108,230 37,108 55,771 92,879 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 Hedging derivatives (assets) Financial liabilities held for trading Financial liabilities designated at fair value through profit or loss Hedging derivatives (liabilities) Liabilities under insurance or reinsurance contracts 1,756 2,730 4,486 1,530 3,381 4,911 1,835 8,895 10,730 2,509 46,208 48,717 2,572 59,497 62,069 3,102 54,358 57,460 91,771 29,182 120,953 103,089 22,619 125,708 103,590 17,501 121,091 — 8,325 8,325 — 7,216 7,216 — 8,607 8,607 9,863 71,304 81,167 9,781 67,358 77,139 16,104 54,239 70,343 2,118 45,920 48,038 1,484 59,511 60,995 987 67,071 68,058 — — 6,869 6,869 910 910 — — 6,048 6,048 5 6,358 6,363 739 739 — 765 765 The financial 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 fixed-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 significant inputs (level 2) and, in cases, they use significant 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 financial 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. Grupo Santander has developed a formal process for the systematic valuation and management of financial 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 financial 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: 550 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Fixed income and inflation The fixed 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 flows 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, floors 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 different 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 floor 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 defined from historical data or through calibration. Inflation-related assets include zero-coupon or year-on-year inflation-linked bonds and swaps, valued with the present value method using forward estimation and discounting. Derivatives on inflation indices are priced using standard or more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality, on the basis of which a forward inflation curve is calculated. Also, implied volatilities taken from zero-coupon and year-on-year inflation 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 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 butterfly 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 fitting 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 first-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 over the counter (OTC) derivatives as a result of the risk associated with the credit exposure assumed to each counterparty. The CVA is calculated taking into account potential exposure to each counterparty in each future period. The CVA for a specific 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. • Severity: percentage of final 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. 551 Annual report 2020 Contents Valuation adjustments due to model risk The valuation models described above do not involve a significant 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 fixed 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 flow discounting purposes. • In the stock 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. • For specific financial instruments relating to home mortgage loans secured by financial institutions in the UK (which are regulated and partially financed 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. • Inflation markets are exposed to model risk resulting from uncertainty around modelling the correlation structure among various Consumer Price Index (CPI) rates. Another source of risk may arise from the bid-offer spread of inflation-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 specific 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 different underlying issuers. For illiquid underlying issuers, the CDS spread may not be well defined. 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 2020 amounted to EUR 408 million (resulting in an increase of 49.8% compared to 31 December 2019) and DVA amounted to EUR 233 million (resulting in an increase of 36% compared to 31 December 2019). These impacts are due to the fact that credit spread levels are at levels above 25% compared to 2019 due to the covid-19 pandemic. During the last semester there has been a significant drop in spreads, however the markets continue to reflect levels higher than those existing prior to the start of the pandemic. The CVA at 31 December 2019 amounted to EUR 272 million (decrease of 22.5% compared to 31 December 2018) and DVA amounted EUR 171 million (decrease of 34.6% compared to 31 December 2018). The decrease is mainly due to improvements in the credit quality of counterparties, which has led to reductions in credit spreads in percentages of around 40% in the most liquid maturities. The CVA at 31 December 2018 amounted to EUR 351 million (increase of 8.8% compared to 31 December 2017) and DVA amounted EUR 261 million (increase of 18.9% compared to 31 December 2017). The changes were due to the increase in credit spreads of more than 30% in the most liquid terms 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 financial statements as of 31 December 2020, 2019 and 2018. As a result of the first application of IFRS 9, the exposure at 1 January 2018, in level 3 financial instruments, increased by EUR 2,183 million, mainly for loans and receivables, arising from new requirements regarding the classification and measurement of amortised cost items at other fair value items whose value is calculated using unobservable market inputs. Grupo Santander has not carried out significant reclassifications of financial instruments between levels other than those disclosed in level 3 movement table during 2020. In 2019, the Group reclassified between levels 2 and 3 financial instruments for a net amount of EUR 708 million (mainly due to reclassifications to level 2 of positions, both derivatives as debt instruments, with maturities for that there were already observable assessment inputs or on which new sources of information have been recurring prices, and at level 3 certain bonds in Brazil that, based on the criteria of observability of the Group, did not meet the requirements to be considered as observable inputs). In 2018, the Group reclassified at level 3 the market value of certain transactions of bonds, long-term repos and derivatives for approximately EUR 1,300 million, due to the lack of liquidity in certain significant inputs used in the calculation of the fair value. 552 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Set forth below are the financial instruments at fair value whose measurement was based on internal models (levels 2 and 3) at 31 December 2020, 2019 and 2018: EUR million Fair values calculated using internal models at 2020* Level 2 Level 3 Valuation techniques Main assumptions ASSETS Financial assets held for trading Credit institutions Customers** Debt and equity instruments Derivatives Swaps 146,468 67,826 3 296 1,453 66,074 54,488 8,543 740 — Present value method — Present value method 10 Present value method 730 272 Present value method, Gaussian Copula*** Exchange rate options 696 22 Black-Scholes Model Interest rate options 3,129 241 Black's Model, multifactorial advanced models interest rate Yield curves, FX market prices Yield curves, FX market prices Yield curves, FX market prices Yield curves, FX market prices, HPI, Basis, Liquidity Yield curves, Volatility surfaces, FX market prices, Liquidity Yield curves, Volatility surfaces, FX market prices, Liquidity Interest rate futures Index and securities options Other Hedging derivatives Swaps Interest rate options Other Non-trading financial assets mandatorily at fair value through profit or loss Equity instruments Debt instruments Loans and receivables** Financial assets designated at fair value through profit or loss Central banks Credit institutions Customers**** Debt instruments Equity instruments Financial assets at fair value through other comprehensive income Equity instruments Debt instruments Loans and receivables 1,069 554 — Present value method Yield curves, FX market prices 94 Black's Model, multifactorial advanced models interest rate Yield curves, Volatility surfaces, FX & EQ market prices, Dividends, Liquidity 6,138 101 Present value method, Advanced stochastic volatility models and other Yield curves, Volatility surfaces, FX and EQ market prices, Dividends, Correlation, HPI, Credit, Others 8,325 6,998 25 1,302 — — Present value method — Black's Model — Present value method, Advanced stochastic volatility models and other 1,796 934 Yield curves, FX market prices, Basis Yield curves, FX market prices, Volatility surfaces Yield curves, Volatility surfaces, FX market prices, Credit, Liquidity, Others 984 555 257 505 Present value method Present value method 134 295 Present value method, swap asset model & CDS Market price, Interest rates curves, Dividends and Others Yield curves Yield curves and Credit curves 45,559 649 9,481 11,973 24,102 3 — — Present value method 163 Present value method 19 Present value method Yield curves, FX market prices Yield curves, FX market prices Yield curves, FX market prices, HPI 467 Present value method Yield curves, FX market prices — 22,962 6,220 75 1,223 Present value method 18,410 4,477 206 Present value method 4,791 Present value method Market price, Yield curves, Dividends and Others Yield curves, FX market prices Yield curves, FX market prices and Credit curves 553 Annual report 2020 Contents Yield curves, FX market prices, Basis, Liquidity, HPI Yield curves, Volatility surfaces, FX market prices, Liquidity Yield curves, Volatility surfaces, FX market prices, Liquidity Yield curves, FX market prices Yield curves, Volatility surfaces, FX & EQ market prices, Dividends, Correlation, Liquidity, HPI, Credit, Others Yield curves, Volatility surfaces, FX & EQ market prices, Dividends, Correlation, Liquidity, HPI, Credit, Others Yield curves ,FX & EQ market prices, Equity Yield curves ,FX & EQ market prices, Basis Yield curves , Volatility surfaces, FX market prices, Liquidity Yield curves , Volatility surfaces, FX market prices, Credit, Liquidity, Other EUR million LIABILITIES Financial liabilities held for trading Derivatives Swaps Exchange rate options Interest rate options Index and securities options Interest rate and equity futures Fair values calculated using internal models at 2020* Level 2 Level 3 Valuation techniques Main assumptions 124,098 71,009 63,920 51,584 724 4,226 456 1,054 905 295 295 81 Present value method, Gaussian Copula*** 1 Black-Scholes Model 49 Black's Model, multifactorial advanced models interest rate 97 Black-Scholes Model 2 Present value method Other 5,876 65 Present value method, Short positions Hedging derivatives Swaps Interest rate options Other 7,089 6,869 5,821 13 1,035 Advanced stochastic volatility models — Present value method — — Present value method — Black's Model — Present value method, Advanced stochastic volatility models and other Financial liabilities designated at fair value through profit or loss Liabilities under insurance contracts 45,310 610 Present value method Yield curves, FX market prices 910 — Present Value Method with actuarial techniques Mortality tables and interest rate curves 554 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 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 Non-trading financial assets mandatorily at fair value through profit or loss Equity instruments Debt securities issued Loans and receivables** Financial assets designated at fair value through profit or loss Central banks Credit institutions Customers**** Debt instruments Financial assets at fair value through other comprehensive income Equity instruments Debt instruments Loans and receivables Fair values calculated using internal models at 2019* Fair values calculated using internal models at 2018* Level 2 149,711 63,051 — 355 760 61,936 51,594 469 3,073 190 1,164 5,446 7,216 6,485 25 706 Level 3 6,651 598 — — 65 533 182 8 177 — 95 71 — — — — Level 2 140,659 55,033 — 205 314 54,514 44,423 617 3,778 — 1,118 4,578 8,586 7,704 20 862 Level 3 Valuation techniques 4,473 738 — — 153 585 185 2 149 — 198 51 Present Value method Present Value method Present Value method Present Value method, Gaussian Copula*** Black-Scholes Model Black's Model, Heath-Jarrow- Morton Model Present Value method Black-Scholes Model Present Value method, Monte Carlo simulation and others 21 21 Present Value method — Black’s Model — N/A 1,780 1,601 7,492 1,403 1,272 498 10 58,833 6,474 21,598 30,729 32 18,831 98 17,486 1,247 550 675 376 664 — 50 32 582 3,788 407 188 3,193 985 5,085 1,422 462 Present Value method 481 Present Value method 460 Present Value method, swap asset model & CDS 53,482 876 9,226 22,897 21,355 4 — Present Value method 201 Present Value method 560 Present Value method 115 Present Value method 16,066 1,435 455 14,699 912 581 Present Value method 165 Present Value method 689 Present Value method 555 Annual report 2020 Contents EUR million 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 profit or loss Liabilities under insurance contracts Fair values calculated using internal models at Fair values calculated using internal models at 2019* 2018* Level 2 132,582 67,068 — — — 61,789 49,927 658 4,291 1,309 20 5,584 5,279 6,048 4,737 10 Level 3 1,074 290 — — — 290 115 1 34 88 2 50 — — — — Level 2 Level 3 Valuation techniques 127,991 53,950 442 289 0 0 0 53,950 43,489 610 4,411 1,233 7 4,200 0 6,352 5,868 158 — Present Value method — Present Value method — Present Value method 289 111 Present Value method, Gaussian Copula*** 7 Black-Scholes Model 26 Black's Model, Heath-Jarrow- Morton Model 143 Black-Scholes Model — Present Value method Present Value method, Monte Carlo simulation and others 2 — Present Value method 6 6 Present Value method — Black’s Model 1,301 — 326 — Present Value method, Advanced stochastic volatility models and other 58,727 784 66,924 147 Present Value method 739 — 765 Present Value method with — actuarial techniques * ** *** **** Level 2 internal models use data based on observable market parameters, while level 3 internal models use significant 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 -4 million at 31 December 2020 (31 December 2019 and 2018: net fair value of EUR 6 million and EUR 0 million, respectively). These assets and liabilities are measured using the Standard Gaussian Copula Model. Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed 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 financial 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. 556 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Financial Instruments (level 3) Set forth below are the Group’s main financial instruments measured using unobservable market data as significant inputs of the internal models (level 3): • Instruments in Santander UK’s portfolio (loans, debt instruments 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 reflect the different 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 reflect 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 reflect the existing uncertainty, based on the standard deviation of historical volatility over various time periods. – Mortality rates: these are based on published official tables and adjusted to reflect 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 inflation in Spain, where volatility is not observable in the market. • 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, specifically indices and equities, where volatility is not observable in the long term. • Derivatives on long-term interest rate and FX in some Latam units (mainly Brazil), where for certain underlyings it is not possible to demonstrate observability to these terms. • Debt instruments in Latam units linked to certain illiquid interest rates, for which there is no reasonable market observability. • Illiquid equity in non-trading portfolios, classified at fair value through profit or loss and at fair value through equity. • HTC&S (Hold to collect and sale) syndicated loans classified 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 different 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 financial assets and liabilities recognised in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable. The net amount recognised in profit and loss in 2020 arising from models whose significant inputs are unobservable market data (level 3) amounted to EUR 193 million profit (EUR 185 million profit in 2019 and EUR 10 million profit in 2018). The table below shows the effect, at 31 December 2020 on the fair value of the main financial instruments classified as level 3 of a reasonable change in the assumptions used in the valuation. This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table: 557 Annual report 2020 Contents Valuation technique Main unobservable inputs Range Impacts (EUR million) Weighted average Unfavourable scenario Favourable scenario 2020 Portfolio/ Instrument (Level 3) Financial assets held for trading Derivatives Cap&Floor CCS Convertibility curve - NDFs Offshore EQ Options FRAs FX Forward FX Options Inflation Derivatives Inflation Derivatives IR Futures IR Options IRS IRS IRS IRS Volatility option model Discounted Cash Flows Volatility Interest rate Forward stimation EQ option pricing model Asset Swap model Discounted Cash Flows FX option pricing model Asset Swap model Volatility option model Asset Swap model IR option pricing model Asset Swap model Discounted Cash Flows Discounted Cash Flows Prepayment modelling Price Volatility Interest rate Swap Rate Volatility Inflation Swap Rate Volatility Interest rate Volatility Interest rate Swap Rate Credit spread Prepayment rate 10% - 90% (0.30)% - 0.66% 0% - 2% 7.86% - 93.67% 0% - 5% (0.02)% - 0.30% 0% - 50% (100)% - 50% 0% - 50% 0% - 15% 0% - 100% (6)% - 12.50% 5.90% - 6.31% 78.97bps - 202.37bps 2.47% - 6.22% Property derivatives Swaptions Option pricing model IR option pricing model HPI Forward growth rate and HPI Spot rate Volatility 0% - 5% 0% - 50% Financial assets designated at fair value through profit or loss Loans and advances to customers Repos / Reverse repos Mortgage portfolio Other loans Debt securities Asset Swap Repo Model Black Scholes model Present value method Long-term repo spread HPI Forward growth rate Credit spreads Government debt Other debt securities Discounted Cash Flows Price based Interest rate Market Price n/a 0% - 5% 0.07% - 1.55% 0% - 10% 90% - 110% Property securities Probability weighting HPI Forward growth rate and HPI Spot rate 0% - 5% Non-trading financial assets mandatorily at fair value through profit or loss Equity instruments 31.55% 0.66% 0.61% 48.37% 2.22% 0.11% 32.14% 83.33% 16.67% 0.94% 19.05% 10% 2.26% 9.82bps 0.06% 2.50% 33.33% n/a 2.50% 0.74% 8.33% 10% 2.50% (0.07) — (0.72) (1.46) (0.78) — (0.39) (0.63) (0.47) (0.94) (0.27) (0.08) (0.01) (2.81) (0.12) 0.05 0.20 0.31 1.81 0.63 — 0.70 0.31 0.23 0.06 0.06 0.13 0.02 1.29 0.05 (17.82) (0.16) 17.82 0.31 (0.18) (2.23) (0.35) (0.78) (0.15) 0.23 2.23 0.35 3.91 0.15 (7.24) 7.24 Equities Price Based Price 90% - 110% 10% (50.47) 50.47 Financial assets at fair value through other comprehensive income Loans and advances to customers Loans Loans Other loans Debt securities Government debt Equity instruments Discounted Cash Flows Discounted Cash Flows Present value method Credit spread Interest rate curve Credit spreads n/a (0.15)% - 0.15% 0.15% - 0.53% n/a 0.15% 0.19% (6.72) (0.09) (0.04) — 0.09 0.04 Discounted Cash Flows Interest rate 1.10% - 1.30% 0.10% — — Equities Price Based Price 90% - 110% 10% (122.14) 122.14 Financial liabilities held for trading Derivatives Cap&Floor Volatility option model Volatility 10% - 90% 34.61% (0.02) 0.01 EQ Options Option pricing model HPI Forward growth rate and HPI Spot rate 0% - 5% 2.50% (6.35) 6.35 558 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Lastly, the changes in the financial instruments classified as Level 3 in 2020, 2019 and 2018 were as follows: 01/01/2020 Fair value calculated using internal models (Level 3) Purchases/ Issuances Changes Changes in fair value recognised in profit or loss Changes in fair value recognised in equity Sales/ Settlements (98) (27) — (71) (8) — (12) (43) (8) (45) — (15) (30) (292) (136) (144) (12) 52 7 3 42 — — 15 25 2 280 164 — 116 120 104 — 16 8,795 9,247 (7,616) (8,051) 40 40 8 — 11 21 — — 4 44 (14) (14) — — (2) (8) — (4) (3) (17) Level reclassifications (45) Other (97) — — (45) (8) — — (38) 1 (91) (50) — (39) — (58) (10) (1) — (30) (17) (176) — (1) (41) (175) (119) (340) (30) (31) 2 (336) (91) 27 — — — — — — — — — — — — — — — — — (390) (390) 571 316 1,072 459 — — — — — — — — — — (96) (96) (26) — — (55) (55) (9) (2) — (70) (29) — — — (15) (32) (128) (131) (186) 330 1 — 329 116 15 61 85 52 17 (1) 3 15 (36) 12 (63) 15 — 311 130 130 (7) 2 6 95 — 34 (12) 118 598 65 — 533 182 8 177 95 71 664 50 32 582 1,601 376 675 550 3,788 6,651 290 290 115 1 34 88 2 50 784 1,074 EUR million Financial assets held for trading Debt instruments Equity instruments Trading derivatives Swaps Exchange rate options Interest rate options Index and securities options Other Financial assets at fair value through profit or loss Credit entities Loans and advances to customers Debt instruments Non-trading financial assets mandatorily at fair value through profit 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 Securities and interest rate futures Others Financial liabilities designated at fair value through profit or loss TOTAL LIABILITIES 31/12/2020 Fair value calculated using internal models (level 3) 740 7 3 730 272 22 241 94 101 649 163 19 467 934 295 134 505 6,220 8,543 295 295 81 1 49 97 2 65 610 905 559 Annual report 2020 01/01/2019 Fair value calculated using internal models (level 3) Purchases /Issuances Changes Changes in fair value recognized in profit or loss Changes in fair value recognized in equity Contents 31/12/2019 Fair value calculated using internal models (level 3) 598 65 533 182 8 177 95 71 — — 664 50 32 582 1,601 376 675 550 3,788 6,651 290 290 115 1 34 88 2 50 — — Level reclassifications Other (317) — (88) — (229) — (20) — — (182) (1) — — (1) (27) 2 (21) — (21) — (261) (55) (151) — (496) (42) 386 (13) — — — — 16 21 12 (17) (190) (190) (252) (851) 69 30 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (164) (164) 20 (4) (4) — (7) — — (177) — (1) — (1) — (2) (6) — (6) — 313 143 — (4) 784 1,074 Sales/ Settlements (80) (38) (42) (14) — (5) (18) (5) — — (16) — (9) (7) (325) (252) (7) (66) 142 34 108 10 — — 48 50 — — 55 — 20 35 426 126 199 101 4,424 5,047 (1,698) (2,119) 136 136 6 1 — 79 3 47 — — 298 434 (12) (12) (5) — — (7) — — — — (5) (17) 738 153 585 185 2 149 198 51 21 21 876 201 560 115 1,403 460 481 462 1,435 4,473 289 289 111 7 26 143 — 2 6 6 147 442 115 4 111 22 6 33 50 — — — 65 — (1) 66 81 21 (10) 70 — 261 45 45 (17) — 8 51 — 3 — — 31 76 EUR million 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 profit or loss Credit entities Loans and advances to customers Debt instruments Non-trading financial assets mandatorily at fair value through profit 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 Securities and interest rate futures Others Hedging derivatives (Liabilities) Swaps Financial liabilities designated at fair value through profit or loss TOTAL LIABILITIES 560 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 01/01/2018 Fair value calculated using internal models (level 3) Purchases/ Issuances 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 Changes in fair value recognised in profit or loss (16) Sales/ Settlements (60) (40) (20) (8) — (3) (1) (8) — — — — — — (35) (22) (7) (6) (238) (333) (95) (95) (7) — (1) (87) — — — — (95) 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 EUR million 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 designated at fair value through profit or loss Credit entities Loans and advances to customers Debt instruments Non-trading financial assets mandatorily at fair value through profit 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 Other Hedging derivatives (Liabilities) Swaps Financial liabilities designated at fair value through profit or loss TOTAL LIABILITIES Changes in fair value recognised in equity — — — — — — — — — — — — — — — — — — Level reclassifications Other (20) 312 141 171 (4) (16) 4 — 8 195 (36) — — 699 202 497 — (4) (1) (2) (7) (2) — — 53 — 57 (4) 31 — 1 30 (36) (59) (2) 25 (269) (269) 147 1,189 (93) (96) — — — — — — — — — — — 161 161 28 — 10 128 (9) (9) (3) — (1) (5) (5) — — — — 161 — — — (9) 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 1,403 460 481 462 1,435 4,473 289 289 111 7 26 143 2 6 6 147 442 561 Annual report 2020 Contents iv. Recognition of fair value changes As a general rule, changes in the carrying amount of financial 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 financial 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 reclassified to profit 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 reclassified to line item - Changes in the fair value of equity instruments valued at fair value with changes in other comprehensive income'. Exchange differences on debt instruments measured at fair value with changes in other comprehensive income are recognised under 'Exchange Differences, net' of the consolidated income statement. Exchange differences 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 reclassified to profit 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 reclassified to profit or loss – Financial assets at fair value through other comprehensive income' and 'Other comprehensive income – Items that may be reclassified to profit or loss – Exchange differences 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 classified as Non- current 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 reclassified to profit or loss – Non-current assets held for sale. v. Hedging transactions The consolidated entities use financial 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. A derivative qualifies 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 fluctuations, 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 flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge). c. The net investment in a foreign operation (hedge of a net investment in a foreign operation). 2. It is effective in offsetting 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 effective (prospective effectiveness). b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). 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 specific designation of the financial 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 financial instruments qualifying for hedge accounting are recognised as follows: 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. In fair value hedges of interest rate risk on a portfolio of financial 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. 562 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix b. In cash flow hedges, the effective portion of the change 1. If the Group transfers substantially all the risks and in value of the hedging instrument is recognised temporarily in Other comprehensive income – under Items that may be reclassified to profit or loss – Hedging derivatives – Cash flow hedges (effective 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- financial assets or liabilities, it is included in the cost of the non-financial 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 effective hedge are recognised temporarily in Other comprehensive income under Items that may be reclassified to profit or loss – Hedges of net investments in foreign operations until the gains or losses – on the hedged item are recognised in profit or loss. d. The ineffective portion of the gains or losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation is recognised directly under Gains/losses on financial 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, ineffectiveness or for any other reason, the derivative is classified 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 profit or loss at the effective interest rate recalculated at the date of hedge discontinuation. The adjustments must be fully amortised at maturity. When cash flow hedge accounting is discontinued, any cumulative gain or loss on the hedging instrument recognised in equity under other comprehensive income - Items that may be reclassified to profit or loss (from the period when the hedge was effective) remains in this equity item until the forecast transaction occurs, at which time it is recognised in profit or loss, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognised immediately in profit or loss. vi. Derivatives embedded in hybrid financial instruments Derivatives embedded in other financial 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 classified as financial assets/liabilities designated at fair value through profit or loss or as Financial assets/liabilities held for trading. e) Derecognition of financial assets and liabilities The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties: rewards to third parties unconditional -sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial 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 financial 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 financial asset -sale of financial assets under an agreement to repurchase them at a fixed 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 financial 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 financial 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 classification under 'Financial liabilities designated at fair value through profit or loss'. b. The income from the transferred financial asset not derecognised and any expense incurred on the new financial liability, without offsetting. 3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial 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 financial 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 financial asset, it continues to recognise it for an amount equal to its exposure to changes in value and recognises a financial liability associated with the transferred financial 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. 563 Annual report 2020 Contents Accordingly, financial assets are only derecognised when the rights to the cash flows they generate have expired or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial 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. Regarding contractual modifications of financial assets, Grupo Santander has differentiated them into two main categories in relation to the conditions under which a modification leads to a derecognition or disposal of the financial asset (and the recognition of a new financial asset) and those under which the accounting of the original financial instrument with the modified terms is maintained: • Contractual modifications for commercial or market reasons, which are generally carried out at the request of the debtor to apply current market conditions to the debt. The new contract is considered a new transaction and, consequently, it is necessary to derecognize the original financial asset and recognize a new financial asset subject to the classification and measurement requirements established by IFRS 9. Also, the new financial asset will be recorded at fair value and, if applicable, the difference between the carrying amount of the asset derecognized and the fair value of the new asset will be recognized in profit or loss. • Modifications due to refinancing or restructuring, in which the payment conditions are modified to allow a customer that is experiencing financial difficulties (current or foreseeable) to meet its payment obligations and that, if such modification had not been made, it would be reasonably certain that it would not be able to meet such payment obligations. In this case, the modification does not result in the derecognition of the financial asset, but rather the original financial asset is maintained and does not require a new assessment of its classification and measurement. When assessing credit impairment, the current credit risk (considering the modified cash flows) should be compared with the credit risk at initial recognition. Finally, the gross carrying amount of the financial asset (the present value of the renegotiated or modified contractual cash flows that are discounted at the original effective interest rate of the financial asset) should be recalculated, with a gain or loss recognized in profit or loss for the difference. 564 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix f) Offsetting of financial instruments Financial asset and liability balances are offset, 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 off 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 financial assets and liabilities that were offset in the consolidated balance sheets as of 31 December 2020, 2019 and 2018: 31 December 2020 EUR million Gross amount of financial assets Gross amount of financial assets offset in the balance sheet Net amount of financial assets presented in the balance sheet 136,437 (60,975) 75,462 82,865 219,302 (16,078) (77,053) 66,787 142,249 31 December 2019 EUR million Gross amount of financial assets Gross amount of financial assets offset in the balance sheet Net amount of financial assets presented in the balance sheet 126,389 (55,776) 70,613 89,465 215,854 (5,168) (60,944) 84,297 154,910 31 December 2018 EUR million Gross amount of financial assets Gross amount of financial assets offset in the balance sheet Net amount of financial assets presented in the balance sheet 107,055 (42,509) 64,546 79,114 186,169 (4,031) (46,540) 75,083 139,629 Assets Derivatives Reverse repurchase agreements Total Assets Derivatives Reverse repurchase agreements Total Assets Derivatives Reverse repurchase agreements Total 31 December 2020 EUR million Gross amount of financial liabilities Gross amount of financial liabilities offset in the balance sheet Net amount of financial liabilities presented in the balance sheet 132,313 (60,975) 71,338 77,925 210,238 (16,078) (77,053) 61,847 133,185 31 December 2019 EUR million Gross amount of financial liabilities Gross amount of financial liabilities offset in the balance sheet Net amount of financial liabilities presented in the balance sheet 124,840 (55,776) 69,064 81,087 205,927 (5,168) (60,944) 75,919 144,983 31 December 2018 EUR million Gross amount of financial liabilities Gross amount of financial liabilities offset in the balance sheet Net amount of financial liabilities presented in the balance sheet 104,213 (42,509) 61,704 82,201 186,414 (4,031) (46,540) 78,170 139,874 Liabilities Derivatives Reverse repurchase agreements Total Liabilities Derivatives Reverse repurchase agreements Total Liabilities Derivatives Reverse repurchase agreements Total 565 Annual report 2020 Contents With the purpose of estimating the expected life of the financial 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 financial 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 effectiveness of management procedures that mitigate such exposure (e.g. the ability to unilaterally cancel such financial instruments, etc.). The following constitute effective guarantees: a) Mortgage guarantees on housing as long as they are first duly constituted and registered in favour of the entity. The properties include: i. Buildings and building elements, distinguishing among: • Houses. • Offices, 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 financial 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 effectiveness. When assessing the effectiveness 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 financial instruments and implying direct and joint liability to the entity of persons or other entities whose solvency is sufficiently proven to ensure the repayment of the loan on the agreed terms. The different aspects that the Group considers for the evaluation of effective guarantees are set out below in relation to the individual analysis. At 31 December 2020, Grupo Santander has offset other items amounting to EUR 1,194 million (EUR 1,366 million and EUR 1,445 million at 31 December 2019 and 2018, respectively). At 31 December 2020 the balance sheet shows the amounts EUR 130,653 million (EUR 141,201 million and EUR 128,637 million at 31 December 2019 and 2018) on derivatives and repos as assets and EUR 122,416 million (EUR 134,694 million and EUR 130,969 million at 31 December 2019 and 2018) on derivatives and repos as liabilities that are subject to netting and collateral arrangements. g) Impairment of financial assets i. Definition Grupo Santander associates an impairment in the value to financial 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, reflecting the rest of the valuation in other comprehensive income. As a rule, the expected credit loss is estimated as the difference between the contractual cash flows to be recovered and the expected cash flows discounted using the original effective interest rate. In the case of purchased or originated credit-impaired assets, this difference is discounted using the effective interest rate adjusted by credit rating. Depending on the classification of financial instruments, which is mentioned in the following sections, the expected credit losses may be along 12 months or during the life of the financial instrument: • 12-month expected credit losses: arising from the potential default events, as defined 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 financial assets classified as "normal risk" as defined in the following sections. • Expected credit losses over the life of the financial instrument: arising from the potential default events that are estimated to be likely to occur throughout the life of the financial instruments. These losses are associated with financial assets classified as "normal risk under watchlist" or 'doubtful risk'. 566 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix ii. Financial instruments presentation For the purposes of estimating the impairment amount, and in accordance with its internal policies, the Group classifies its financial instruments (financial 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 classified in the rest of the categories. • Normal risk under watchlist ('stage 2'): includes all instruments that, without meeting the criteria for classification as doubtful or default risk, have experienced significant increases in credit risk since initial recognition. In order to determine whether a financial instrument has increased its credit risk since initial recognition and is to be classified in stage 2, the Group considers the following criteria: Changes in the risk of a default occurring through the expected life of the financial instrument are analysed and quantified with respect to its credit level in its initial recognition. With the purpose of determining if such changes are considered as significant, with the consequent classification into stage 2, each Group unit has defined the quantitative thresholds to consider in each of its portfolios taking into account corporate guidelines ensuring a consistent interpretation in all units. Within the quantitative thresholds, two types are considered: A relative threshold is those that compare current credit quality with credit quality at the time of origination in percentage terms of change. In addition, an absolute threshold compares both references in total terms, calculating the difference between the two. These absolute/relative concepts are used homogeneously (with different values) in all geographies. The use of one type of threshold or another (or both) is determined in accordance with the process described in note 54, below, and is marked by the type of portfolio and characteristics such as the starting point of the average credit quality of the portfolio. 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 are common criteria in all Group units. In addition, each unit can define other qualitative indicators, for each of its portfolios, according to the particularities and normal management practices in line with the policies currently in force (i.e. use of management alerts, etc.). The use of these qualitative criteria is complemented with the use of an expert judgement, under the corresponding governance. Quantitative criteria Qualitative criteria In the case of forbearances, instruments classified as 'normal risk under watchlist' may be generally reclassified to 'normal risk' in the following circumstances: at least two years have elapsed from the date of reclassification 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 financial 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, off-balance-sheet exposures whose payment is probable and their recovery doubtful are considered in stage 3. Within this category, two situations are differentiated: – Doubtful risk for non-performing loans: financial 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 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 reclassified to other categories if, as a result of the collection of part of the past due balances, the reasons for their classification in this category 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 financial instruments that are not more than 90 days past due. Grupo Santander considers that a financial 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 flows of the financial instrument. To this end, the following indicators, among others, are considered: a) Negative net equity or decrease because of losses of the client's net equity by at least 50% during the last financial year. b) Continued losses or significant decrease in revenue or, in general, in the client's recurring cash flows. c) Generalised delay in payments or insufficient cash flows to service debts. d) Significantly inadequate economic or financial structure or inability to obtain additional financing 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 significant amount to public institutions or employees. 567 Annual report 2020 Contents These financial instruments may be reclassified 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 classified as doubtful risk may be reclassified 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 financial 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. In any event, except in the case of financial instruments with effective collateral covering a substantial portion of the transaction amount, the Group generally consider as remote the following: - Those operations that, after an individualized analysis, are categorized as unsustainable debt, assuming an irrecoverability of such debt. - Transactions classified as doubtful due to non- performing loans with recovery costs that exceed the amounts receivable. - The operations on which the award is executed. The queue of these operations shall be included under default risk, as the recovery of the flows, provided that no further guarantees associated with the operation remain after the award of the property. - Those operations on which a deduction is made, the portion of the operation corresponding to that deduction, will be given as a balance at the time of signature. A financial 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-off 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 classified in the category of "doubtful risk", except where duly justified. The classification of a financial 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 Grupo Santander 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 specific country. 568 These policies, methods and procedures are applied in the concession, study and documentation of financial assets, commitments and guarantees, as well as in the identification of their impairment and in the calculation of the amounts needed to cover their credit risk. The asset impairment model in IFRS 9 applies to financial 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 financial 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 financial instrument, the Group individually assesses impairment by estimating the expected credit losses on those financial instruments that are considered to be significant and with sufficient information to make such an estimate. Therefore, this classification mostly includes wholesale banking customers —Corporations, specialised financing— as well as some of the largest companies —Chartered and real estate developers— from retail banking. The determination of the perimeter in which the individualised estimate is applied is detailed in a later section. The individually assessed impairment estimate is equal to the difference between the gross carrying amount of the financial instrument and the estimated value of the expected cash flows receivable discounted using the original effective interest rate of the transaction. The estimate of these cash flows takes into account all available information on the financial asset and the effective guarantees associated with that asset. This estimation process is detailed below. • 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 balances and any other factor relevant to estimating the future cash flows. Grupo Santander performs retrospective and monitoring tests to evaluate the reasonableness of the collective estimate. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 five possible future scenarios, depending on the characteristics of each unit, which could have an impact on the collection of contractual cash flows, 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.). The estimation of expected losses requires expert judgment and the support of historical, current and future information. The probability of loss is measured considering past events, the present situation and future trends of macroeconomic factors. Grupo Santander uses forward-looking information in both internal risk management and prudential regulation processes, so that for the calculation of the impairment loss allowance, various scenarios are incorporated that take advantage of the experience with such information, thus ensuring consistency in obtaining the expected loss. The challenge of the exercise has focused on the uncertainty of the economic outlook caused by the covid-19 crisis, coupled with a complex environment for value creation. Grupo Santander has internally ensured the criteria to be followed for guarantees received from government bodies, both through credit lines and other public guarantees, so that when they are adequately reflected in each of the contracts, they are recognised as mitigating factors of the potential expected losses, and therefore of the provisions to be recognised, based on the provisions of the applicable standard (IFRS 9 Par. B5.5.55). Furthermore, where applicable, these guarantees are appropriately reflected in the mitigation of the significant increase in risk, considering their nature as personal guarantees. 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 IFRS 9. • 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. In any case, when estimating the flows expected to be recovered, portfolio sales are included. It should be noted that due to the Group's recovery policy and the experience observed in relation to the prices of past sales of assets classified as stage 3 and/or default risk, there is no substantial divergence between the flows obtained from recoveries after performing recovery management of the assets with those obtained from the sale of portfolios of assets discounting structural expenses and other costs incurred. The definition of default implemented by the Group for the purpose of calculating the impairment provision models is based on the definition in Article 178 of Regulation 575/2013 of the European Union (CRR), which is fully aligned with the requirements of IFRS 9, which considers that a "default" exists in relation to a specific 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 significant 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 financial activity, such as wars, natural catastrophes, balance of payments crisis, etc.). IFRS 9 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 significantly, when payments are more than 30 days past due: this threshold is used as an additional, but not primary, indicator of significant risk increase. Additionally, there may be cases in the Group where its use has been rebutted as a result of studies that show a low correlation of the significant risk increase with this past due threshold. The volume rebutted does not exceed 0.1% of the Group's total exposure. – Assets with low credit risk at the reporting date: the Group assesses the existence of significant risk increase in all its financial instruments. This information is provided in more detail in note 53 b. iv. Detail of individual estimate of impairment For the individual estimate of the assessment for impairment of the financial asset, the Group has a specific methodology to estimate the value of the cash flows expected to be collected: • 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 flows that are expected to be recovered. • Recovery through the debtor's ordinary activities (going concern approach). • Recovery through the execution and sale of the collateral guaranteeing the operations (going concern approach). 569 Annual report 2020 Contents Going concern approach: • The rest of the guarantees are valued based of current a. Evaluation of the effectiveness of guarantees Grupo Santander assesses the effectiveness of all the guarantees associated considering the following: • The time required to execute these guarantees. • Grupo Santander's ability to enforce or assert these guarantees in its favour. market values. c. Adjustments to the value of guarantees and estimation of future cash flow inflows and outflows Grupo Santander applies a series of adjustments to the value of the guarantees in order to improve the reference values: • Adjustments based on the historical sales experience of local units for certain types of assets. • Individual expert adjustments based on additional • The existence of limitations imposed by each local unit´s management information. regulation on the foreclosure of collateral. Under no circumstances the Group considers that a guarantee is effective if its effectiveness depends substantially on the solvency of the debtor, as could be the case: • Promises of shares or other securities of the debtor himself when their valuation may be significantly affected by a debtor's default. • Personal cross-collateralisation: when the guarantor of a transaction is, at the same time, guaranteed by the holder of that transaction. On the basis of the foregoing, the following types of guarantees are considered to be effective: • Mortgage guarantees on properties, which are first charge, duly constituted and registered. Real estate includes: – Buildings and finished building elements. – Urban and developable land in order. – Other real estate, including buildings under construction, developments in progress or at a standstill, and other land, such as rural properties. • Pledges on financial instruments such as cash deposits, debt securities of reputables issuers or equity instruments. • Other types of security interests, including movable property received as security and second and subsequent mortgages on real state , provided that they are proven to be effective under particularly restrictive criteria. • Personal guarantees, including new holders, covering the entire amount and involving direct and joint liability to the entity, from persons or entities whose equity solvency ensures repayment of the transaction under the agreed terms. b. Valuation of guarantees Grupo Santander assesses the guarantees on the basis of their nature in accordance with the following: • Mortgage guarantees on properties associated with financial instruments, using a complete individual valuations carried out by independent valuation experts and under generally accepted valuation standards. If this is not possible, alternative valuations are used with duly documented and approved internal valuation models. • Personal guarantees are valued individually on the basis of the guarantor´s updated information. 570 Likewise, to adjust the value of the guarantees, the time value of money is taken into account based on the historical experience of each of the units, estimating: • Period of adjudication. • Estimated time of sale of the asset. In addition, the Group takes into account all those cash inflows and outflows linked to that guarantee until it is sold: • Possible future income commitments in favour of the borrower which will available after the asset is awarded. • Estimated foreclosure costs. • Asset maintenance costs, taxes and community costs. • Estimated marketing or sales costs. Finally, since it is considered that the guarantee will be sold in the future, the Group applies an additional adjustment ('index forward') in order to adjust the value of the guarantees to future valuation expectations. v. Scope of application of the individual estimate of the assessment for impairment Grupo Santander determines the perimeter over which it makes an estimate of the assessment for impairment on an individual basis based on a relevance threshold set by each of the geographical areas and the stage in which the operations are located. In general, the Group applies the individualised calculation of expected losses to the significant exposures classified in stage 3, although Banco Santander, S.A. has also extended its analyses to some of the exposures classified in stage 2. It should be noted that, in any case and irrespective of the stage in which their transactions are carried out, for customers who do not receive standardised treatment, a relational risk management model is applied, with individualised treatment and monitoring by the assigned risk analyst. In addition to wholesale customers (Santander Corporate & Investment Banking or SCIB) and large companies, this relational management model also includes other segments of smaller companies for which there is information and capacity for more personalised and expert analysis and monitoring. As indicated in the Group's wholesale credit model, the individual treatment of the client facilitates the continuous updating of information. The risk assumed must be followed and monitored throughout its life cycle, enabling anticipation and action to be taken in the event of possible impairments. In this way, the customer's credit quality is analysed individually, taking into account specific aspects such as his competitive position, financial Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix performance, management, etc. In the wholesale risk management model, every customer with a credit risk position is assigned a rating, which has an associated probability of customer default. Thus, individual analysis of the debtor triggers a specific rating for each customer, which determines the appropriate parameters for calculating the expected loss, so that it is the rating itself that initially modulates the necessary coverage, adjusting the severity of the possible loss to the guarantees and other mitigating factors that the customer may have available. In addition, if as a result of this individualised monitoring of the customer, the analyst finally considers that his coverage is not sufficient, he has the necessary mechanisms to adjust it under his expert judgement, always under the appropriate governance. h) Repurchase agreements and reverse repurchase agreements Purchases (sales) of financial instruments under a non- optional resale (repurchase) agreement at a fixed price (repos) are recognised in the consolidated balance sheet as financing 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). Differences 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 financial nature or otherwise- will foreseeably be effected through the proceeds from their disposal. Specifically, 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. Grupo Santander 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 Official 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 1. The assets in a situation of "stopped development" are included under "land". appraisal companies and agencies with which the Group worked in Spain in 2020 are as follows: Gloval Valuation, S.A.U.,Tinsa Tasaciones Inmobiliarias, S.A.U., Gesvalt Sociedad de Tasación, S.A. and Sociedad de tasación, 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 classified 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 classified as held for sale are not amortised as long as they remain in this category. At 31 December 2020 the fair value less costs to sell of non- current assets held for sale exceeded their carrying amount by EUR 560 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 financial assets. 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. Banco Santander, in compliance with Bank of Spain Circular 4/2017, and further modifications, on public and private financial reporting standards and financial statement models, has developed a methodology that enables it to estimate the fair value and costs of sale of assets foreclosed or received in payment of debts. This methodology is based on the classification of the portfolio of foreclosed assets into different segments. Segmentation enables the intrinsic characteristics of Banco Santander's portfolio of foreclosed assets to be differentiated, so that assets with homogeneous characteristics are grouped by segment. Thus, the portfolio is segmented into (i) finished assets of a residential and tertiary nature, (ii) developments in progress 1 . and (iii) land In determining the critical segments in the overall portfolio, assets are classified on the basis of the nature of the asset and its stage of development. This segmentation is made in order to seek the liquidation of the asset (which should be carried out in the shortest possible time). 571 Annual report 2020 Contents When making decisions, the situation and/or characteristics of the asset are fundamentally taken into account, as well as the evaluation of all the determining factors that favour the recovery of the debt. For them, the following aspects are analyzed, among others: • The time that has elapsed since the adjudication. • The transferability and contingencies of the foreclosed asset. • The economic viability from the real estate point of view with the necessary investment estimate. • The expenses that may arise from the marketing process. • The offers received, as well as the difficulties in finding buyers. In the case of real estate assets foreclosed in Spain, which represent 89% of the Group’s total non-current assets held for sale, the valuation of the portfolio is carried out by applying the following models: • Market Value Model used in the valuation of finished properties of a residential nature (mainly homes and car parks) and properties of a tertiary nature (offices, commercial premises and multipurpose buildings). For the valuation of finished assets whose availability for sale is immediate, a market sale value provided by a third party external to Banco Santander is considered, calculated under the AVM methodology by the comparable properties method adjusted by our experience in selling similar assets, given the term, price, volume, trend in the value of these assets and the time elapsing until their sale and discounting the estimated costs of sale. The market value is determined on the basis of the definition established by the International Valuation Standards drawn up by the IVSC (International Valuation Standards Council), understood as the estimated amount for which an asset or a liability should be exchanged on the measurement date between a willing buyer and a willing seller, in an arm's length transaction, after appropriate marketing, and in which the parties have acted with sufficient information, prudently and without coercion. The current market value of the properties is estimated on the basis of automated valuations obtained by taking comparable properties as a reference; simulating the procedure carried out by an appraiser in a physical valuation according to Order ECO 805/2003: selection of properties and obtaining the unit value by applying homogenisation adjustments. The selection of the properties is carried out by location within the same real estate cluster and according to the characteristics of the 2 properties, filtering by type , surface area range and age. The model enables a distinction to be made within the municipality under study as to which areas are similar and comparable and therefore have a similar value in the property market, discriminating between which properties are good comparators and which are not. Adjustments to homogenize the properties are made according to: (i) the age of the property according to the age of the property to be valued, (ii) the deviation of the built area from the common area with respect to the property to be valued and (iii) by age of the date of capture of the property according to the price evolution index of the real estate market. In addition, for individually significant assets, complete individual valuations are carried out, including a visit to the asset, market analysis (data relating to supply, demand, current sale or rental price ranges and supply-demand and revaluation expectations) and an estimate of expected income and costs. For this segmentation of assets, when they are completed, the real costs are known and the actual expenses for the marketing and sale of the asset must be taken into account. Therefore, Banco Santander uses the actual costs in its calculation engine or, failing that, those estimated on the basis of its observed experience. • Market Value Model according to Evolution of Market Values used to update the valuation of developments in progress. The valuation model estimates the current market value of the properties based on complete individual valuations by third parties, calculated from the values of the feasibility studies and development costs of the promotion, as well as the selling costs, distinguishing by location, size and type of property. The inputs used in the valuation model for residential assets under construction are actual revenues and costs. For this purpose, in order to calculate the investment flows, Banco Santander considers, on the basis of the feasibility studies, the expenditure required for construction, the professional fees relating to the project and to project management, the premiums for mandatory building insurance, the developer's administrative expenses, licences, taxes on new construction and fees, and urban development charges. With respect to the calculation of income flows, Banco Santander takes into account the square metres built, the number of homes under construction and the estimated selling price over 1.5 years. The market value will be the result of the difference between the income flows and the investment flows estimated at each moment. 2. Assets qualified as protected housing are taken into account. The maximum legal value of these assets is determined by the VPO module, obtained from the result of multiplying the State Basic Module (MBE) by a zone coefficient determined by each autonomous community. To carry out the valuation of a protected property, the useful surface area is used in accordance with current regulations 572 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • Land Valuation model. The methodology followed by the Group regarding land valuation consists of updating the individual reference valuation of each of the land on an annual basis, through updated valuation valuations carried out by independent professionals and following the methodology established in the OM (Ministerial Order) ECO/805/2003, of 27 March, whose main verifications in the case of land valuation, regardless of the degree of urbanisation of the land, correspond to: – Visual verification of the assessed property. – Registry description. – Urban planning. – Visible easements. – Visible state of occupation, possession, use and exploitation. – Protection regime. – Apparent state of preservation. – Correspondence with cadastral property. – Existence of expropriation procedure, expropriation plan or project, administrative resolution or file that may lead to expropriation. – Expiry of the urbanization or building deadlines. – Existence of a procedure for failure to comply with obligations. – Verification of surfaces. Discount on reference value = % discount on sales + % marketing costs being: – % discount on Sales: = 100 - (sales price / updated appraisal value). – marketing costs: calculated on the basis of our historical experience in sales and in accordance with the marketing management fees negotiated with our suppliers of this type of service. In this way the Group obtains the corrected market value, an amount that we compare with the net cost of each piece of land to determine its correct valuation and conclude with our valuation process. 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 confirm that there is no significant difference between the sale price and the valuation. 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 classified 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. j) 'Assets under insurance or reinsurance contracts' and 'Liabilities under insurance or reinsurance contracts' For the purposes of valuation, the land will be classified in the following levels: – Level I: It will include all the lands that do not belong to level II. Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flows will arise from a deviation in the payments forecast and/or an insufficiency in the premium set. – Level II: It shall include land classified as undeveloped The Group controls its insurance risk as follows: where building is not allowed for uses other than agriculture, forestry, livestock or linked to an economic exploitation permitted by the regulations in force. Also included are lands classified as developable that are not included in a development area of urban planning or that, in such an area, the conditions for its development have not been defined. In those cases where the Group does not have an updated reference value through an ECO valuation for the current year, we use as a reference value the latest available ECO valuation reduced or corrected by the average annual coverage ratio of the land on which we have obtained an updated reference value, through an ECO valuation. Grupo Santander applies a discount to the aforementioned reference values that takes into account both the discount on the reference value in the sales process and the estimated costs of marketing or selling the land: • By applying a strict methodology in the launch of products and in the assignment of value thereto. • 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, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities. 573 Annual report 2020 Contents 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 Grupo Santander 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. '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. 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 final 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 balance sheet are adequate. For this purpose, it calculates the difference between the following amounts: • Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs. • 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 deficiency is charged to the consolidated income statement. When unrealised gains or losses on assets of the Group’s insurance companies affect 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 significant 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 sufficient to reflect 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. ii) Mathematical provisions: these relate to the value of the 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. • Provision for claims outstanding: this reflects the total obligations outstanding arising from claims incurred prior to the reporting date. This provision is calculated as the difference 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 beneficiaries 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 fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows: 574 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance 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 indefinite 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): Buildings for own use Furniture Fixtures Office and IT equipment Lease use rights Average annual rate 2.4% 8.3% 8.3% 23.0% Less than the lease term or the useful life of the underlying asset At the end of each reporting period, consolidated entities assess whether there is any indication that the carrying amount of an asset exceeds its recoverable amount, in which case they write down the carrying amount of the asset to its recoverable amount and adjust future depreciation charges in proportion to its adjusted carrying amount and to its new remaining useful life, if the useful life needs 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 significant 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. ii. Investment property 'Investment property' reflects the net values of the land, buildings and other structures held either to earn rentals or for obtaining profits by sales due to future increase in market prices. 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 Grupo Santander determines periodically the fair value of its investment property so that, at the end of the reporting period, the fair value reflects 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 on specific information on actual transactions and firm offers, 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 flows estimated to be obtained over the useful life of the property are discounted taking into account factors that may influence 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 significant 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 reflects 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 On 1 January 2019, Grupo Santander changed the accounting policy for leases when acting as a lessee (see note 1.d). Until 31 December 2018, the accounting policy applied by the Group when acting as lessee was the following: 575 Annual report 2020 Contents 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. 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 sufficiently 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 finance income and finance charges arising under finance 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. 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. . .. R . 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 profit or loss is recognised at the time of sale. In the case of finance leasebacks, any profit or loss is amortised over the lease term. 576 In accordance with IAS 17, 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 fluctuations in the fair value of the residual value of the related asset will accrue. m) Intangible assets Intangible assets are identifiable 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 benefits 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 first-time consolidation, is allocated as follows: • If it is attributable to specific 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 specific 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 identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows 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 benefits from assets of the acquired entity that are not capable of being individually identified 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-financial assets, net - Intangible assets' in the consolidated income statement. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix An impairment loss recognised for goodwill is not reversed in a subsequent period. ii. Other intangible assets Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software). Other intangible assets can have an indefinite 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 inflows for the consolidated entities- or a finite useful life, in all other cases. Intangible assets with indefinite 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 indefinite and, if this is not the case, to take the appropriate steps. Intangible assets with finite 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 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-financial 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 identified and its ability to generate future economic benefits 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 into the carrying amount of the intangible asset. 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 financial 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 difference 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. Additionally, Other Assets at 31 December 2019 included the right of collection acquired from Enagás Transporte charged to the gas system conferred by Royal Decree Law 13/2004 (for which urgent measures were adopted in relation to with the gas system and due to the extraordinary and urgent need to find a solution to the complex technical situation existing in the underground storage of natural gas Castor, especially after the resignation of the concession presented by its owner). In the aforementioned Royal Decree Law, it was agreed the hibernation of the Castor gas submarine storage facilities and the assignation of the operations required for its maintenance and operability to Enagás Transporte. It also recognised the value of the investment at EUR 1,350 million and an obligation to pay this amount to the holder of the extinguished concession by Enagás Transporte, recognising a collection right, charged to the monthly billing for access tolls and gas system fees during 30 years, for the amount paid to the holder of the extinguished concession plus the financial remuneration recognised by the Royal Decree Law. Banco Santander acquired, along with other financial entities, the collection right for its nominal redemption value under a contract with full legal effectiveness and protected, in good faith, in the full constitutionality of the Royal Decree Law that created it, set its amount, established the legal mechanism for its payment from the gas system and allowed its transfer with full effect against it. On 21 December 2017 the Constitutional Court gave a judgement declaring unconstitutional certain provisions of Royal Decree Law 13/2014 and cancelling them due to procedural defect, considering that the urgency reasons for which said provisions had to be excluded from the ordinary legislative procedure were not proven. Among others, the recognition of the costs accrued until the entry into force of the Royal Decree by the concessionaire waiving the investment and, therefore, the compensation of EUR 1,350 million, and the recognition of Enagás Transporte's right of 577 Annual report 2020 Contents customers including Money Service Businesses. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any financial penalty. ▪ Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed 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 benefits. Grupo Santander’s consolidated financial 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 financial statements, but must rather be disclosed in the Notes. Provisions (which are quantified 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 specific obligations for which they were originally recognised. Provisions are fully or partially reversed when such obligations cease to exist or are reduced. Provisions are classified 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 benefits, 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 -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments - defined as irrevocable commitments that may give rise to the recognition of financial 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 2020 certain court proceedings and claims were in process against the consolidated entities arising from the ordinary course of their operations (see note 25). collection from the gas system for the amount of this compensation were cancelled. Due to the termination of the payment of the collection right and the obligation to reimburse the amounts received as a result of the declaration of unconstitutionality of the Royal DL, Banco Santander initiated in 2018 the administrative and judicial proceedings that considered appropriate to defend its rights. Regarding the claim for liability of the legislating State (the most relevant by amount) was resolved favourably for the parent by Supreme Court Ruling of 27 October 2020. In execution of this sentence, on 31 December 2020, a payment of EUR 740.7 million was received from the Public Treasury (comprising the principal amount of the claim plus the appropriate legal interest), while proceedings for an aggregate amount of nearly EUR 56 million corresponding to interest collected by Banco Santander and returned to the administration, and which, in view of the decision of the Supreme Court, is expected to be resolved in an equally favourable manner for Banco Santander. This compensation asset, since it does not arise as a consequence of a contract, but rather from the liability of the State legislator, does not meet the definition of a financial asset. Consequently, and since it has the characteristic of certain, it also does not meet the definition of a contingent asset, it was classified as a non-financial asset. 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 financial statements of the consolidated entities, Banco Santander’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 confirmed 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 outflow of resources embodying economic benefits 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 outflow of resources embodying economic benefits is remote. Santander UK plc is cooperating with an FCA civil regulatory investigation which commenced in July 2017 into its compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. The FCA’s investigation focuses primarily on the period 2012 to 2017 and includes consideration of high risk 578 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix r) Own equity instruments t) Recognition of income and expenses Own equity instruments are those meeting both of the following conditions: ▪ The instruments do not include any contractual obligation for the issuer (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavourable to the issuer. ▪ 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 fixed amount of cash or another financial asset for a fixed number of its own equity instruments. Transactions involving own equity instruments, including their issuance and cancellation, are charged directly to equity. Changes in the value of instruments classified as own equity instruments are not recognised in the consolidated financial 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 specific 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, Grupo Santander recognises in full, at the grant date, the expense for the services received. 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 satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognised in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments. The most significant criteria used by Grupo Santander 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 effective interest method. Dividends received from other companies are recognised as income when the consolidated entities’ right to receive them arises. 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: ▪ Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit 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. ▪ Those relating to services provided in a single act are recognised when the single act is carried out. iii. Non-finance income and expenses They are recognised for accounting purposes when the good is delivered or the non-financial service is rendered. To determine the amount and timing of recognition, a five-step model is followed: identification of the contract with the customer, identification of the separate obligations of the contract, determination of the transaction price, distribution of the transaction price among the identified obligations and finally recording of income as the obligations are satisfied. iv. Deferred collections and payments These are recognised for accounting purposes at the amount resulting from discounting the expected cash flows 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. u) Financial guarantees Financial guarantees are defined as contracts whereby an entity undertakes to make specific 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. 579 Annual report 2020 Contents Grupo Santander initially recognises the financial 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 specific provision is required for financial guarantees, the related unearned commissions recognised under 'Financial liabilities at amortised cost - Other financial liabilities in the consolidated balance sheet', are reclassified 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 benefits 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 benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, and the post-employment welfare benefits. 580 Grupo Santander's post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognised under Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post- employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see note 25). Defined contribution plans The contributions made in this connection in each year are recognised under Personnel expenses 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. Defined benefit plans Grupo Santander 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 defined benefit post-employment obligations, net of the fair value of the plan assets. Plan assets are defined 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 benefits and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the entity to current and former employees, or they are returned to reimburse employee benefits already paid by Grupo Santander. If Grupo Santander can look to an insurer to pay part or all of the expenditure required to settle a defined benefit 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. Grupo Santander will recognise the following items in the income statement: • Current service cost, (the increase in the present value of the obligations resulting from employee service in the current period), is recognised under 'Staff costs'. • The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognised under 'Provisions or reversal of provisions'. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • 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 defined benefit liability (asset), i.e. the change during the period in the net defined benefit 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 defined benefit liability (asset) is recognised in Other comprehensive income under Items not reclassified to profit or loss and includes: ▪ Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. ▪ The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset). ▪ Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). x) Other long-term employee benefits Other long-term employee benefits, defined 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 defined benefit 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 benefits Termination benefits 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 they arise from a transaction whose results are recognised directly in equity, in which case the related tax effect is recognised in equity - Amendment to IFRS Cycle 2015-2017. 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 profit 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 differences, which are identified as the amounts expected to be payable or recoverable on differences 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' include 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 profit 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 differences 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 difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future. In this regard, no deferred tax liabilities of EUR 568.8 million were recognised in relation to the taxation that would arise from the undistributed earnings of certain Group holding companies, in accordance with the legislation applicable in those jurisdictions. Deferred tax assets are only recognised for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits 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 affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognised if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilised. Income and expenses recognised directly in equity are accounted for as temporary differences. 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 findings of the analyses performed. 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 50. 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 581 Annual report 2020 Contents 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 profit for the year. b. The net amount of the income and expenses recognised in 'Other comprehensive income' under items that will not be reclassified to profit or loss. c. The net amount of the income and expenses recognised in Other comprehensive income under items that may be reclassified subsequently to profit or loss. 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 reclassified subsequently to profit 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 financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors. 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'. c. Other changes in equity: includes the remaining items recognised in equity, including, inter alia, increases and decreases in capital, distribution of profit, 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 flows The following terms are used in the consolidated statements of cash flows with the meanings specified: • Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified. Grupo Santander classifies 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. • Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities. • Investing activities: the acquisition and disposal of long- term assets and other investments not included in cash and cash equivalents. • Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities. During 2020 Grupo Santander received interest amounting to EUR 43,953 million (EUR 55,269 million and EUR 50,685 million in 2019 and 2018, respectively) and paid interest amounting to EUR 13,690 million (EUR 20,671 and EUR 19,927 million in 2019 and 2018, respectively). 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. Grupo Santander a) Banco Santander, S.A., and international Group structure The growth of Grupo Santander in the last decades has led Banco Santander 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 profit, while maintaining the Group’s objectives 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 effect). 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. 582 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The purpose of this structure, all of which is controlled Banco Santander, is to optimise the international organisation from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits 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 significant corporate transactions performed by the Group in the last three years: i. Agreement for the acquisition of a significant stake in Ebury On 28 April 2020, the investment in Ebury, a payments and currencies platform for SMEs, announced on 4 November 2019, was completed. The transaction involved a total outlay of GBP 357 million (EUR 409 million) of which GBP 70 million (approximately EUR 80 million) was for new shares. At 2019 year-end the Group had already acquired 6.4% of the company for GBP 40 million (approximately EUR 45 million). Following the disbursement made in April 2020, the Group is entitled to receive 50.38% of the dividends distributed by the company. This interest is recognized under 'Investments in Joint Ventures and Associates - Associates' in the consolidated balance sheet. ii. Reorganization of the banking insurance business, asset management and pension plans in Spain On 24 June 2019, Banco Santander, S.A., reached an agreement with the Allianz Group to terminate the agreement that Banco Popular Español, S.A.U. ('Banco Popular') held in Spain with the Allianz Group for the exclusive distribution of certain life insurance products, non- life insurance products, collective investment institutions (IIC), and pension plans through the Banco Popular network (the 'Agreement'). Under this Agreement, the Group held a 40% stake in the capital of Popular Spain Holding de Inversiones, S.L.U., classified as investments in joint ventures and associated entities for an overall amount of EUR 409 million on 31 December 2019. The Agreement was executed on 15 January 2020 for the non-life business and on 31 January 2020 for the remaining businesses, once the regulatory authorisations were obtained in the first half of 2020. The execution of the Termination Agreement entailed the payment by Banco Santander of a total consideration of EUR 859 million (after deducting the dividends paid until the end of the operation) and the acquisition of the remaining 60% of the capital of Popular Spain Holding de Inversiones, S.L.U. On 10 July, 51% of the life-risk insurance business held by Banco Santander and the 51% of the new General Insurance business from Banco Popular's network not transferred to Mapfre (in accordance with the agreement indicated below) was acquired by Aegon, valuing these businesses at a total of approximately EUR 557 million. The total amount of the life-savings business, collective investment institutions and pension plans is EUR 711 million and has resulted in the recognition of EUR 271 million of goodwill. In addition, under the agreement reached between Banco Santander and Mapfre on 21 January 2019, 50.01% of the car, commercial multi-risk, SME multi-risk and corporate liability insurance business in the whole network of Banco Santander in Spain was acquired by Mapfre on 25 June 2019 amounting to EUR 82 million. iii. Agreement with Crédit Agricole S.A. on the depositary and custody business On 17 April 2019, Banco Santander, S.A., announced that it had signed a memorandum of understanding with Crédit Agricole S.A. with the purpose of combining CACEIS and its subsidiaries (the 'CACEIS Group'), which is wholly-owned by Crédit Agricole S.A., with Santander Securities Services, S.A.U. and its subsidiaries (the 'S3 Group'), which is wholly-owned by Banco Santander, S.A. The operation consisted of the contribution by the Santander Group to the CACEIS Group of 100% of the S3 Group in Spain and 50% of the S3 Group's business in Latin America in exchange for a 30.5% stake in the CACEIS Group Capital and voting rights. The remaining 69.5% remained the property of Crédit Agricole, SA. The S3 Group's Latin American business is under the joint control of the CACEIS Group and the Santander Group. On 27 June 2019, the signing of the final contracts took place after having carried out the precise prior consultations with the representative bodies of Crédit Agricole, SA employees and the CACEIS Group. The closing of the operation took place on 20 December, 2019 once the relevant regulatory authorizations were obtained. The operation generated a net capital gain of EUR 693 million recorded for its gross amount under the heading of `'Non- classified assets as non-current assets for sale' of the consolidated profit and loss account, of which EUR 219 million correspond to the recognition at fair value of the investment of 49.99% retained by the Group in S3 Latin America. The 30.5% interest in the CACEIS Group was recorded under the heading of 'Investments - Associates' of the consolidated balance sheet for an amount of EUR 1,010 million. iv. Offer to acquire shares of Banco Santander Mexico, S.A., Institución de Banca Multiple, Grupo Financiero Santander México. On 12 April 2019, Banco Santander, S.A., announced its intention to make an offer to acquire all the shares of Banco Santander Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México ('Santander México') which are not owned by Grupo Santander, representing approximately 25% of the share capital of Santander México. The shareholders who have accepted the offer have received 0.337 newly issued shares of Banco Santander, S.A., per share of Santander México and 1.685 American Depositary Shares 583 Annual report 2020 Contents (ADSs) of Banco Santander, S.A., per ADS of Santander México. The offer was accepted by holders of shares representing 16.69% of the capital stock of Santander Mexico, so the Group's participation in Santander Mexico became 91.65% of its share capital. To meet the exchange, the Bank proceeded to issue, in execution of the agreement adopted by the extraordinary general meeting held on 23 July 2019, 381,540,640 shares, which represented approximately 2.35% of the Bank's share capital in the date of issue. This operation meant an increase of EUR 191 million in Capital, EUR 1,491 million in issue premium and a decrease of EUR 670 million in Reserves and EUR 1,012 million in minority interests. v. Sale of the 49% stake in WiZink Once the relevant regulatory authorizations were 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 significant 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, managed by the businesses in Spain. With these transactions, the Group resumed Grupo Banco Popular's debit and credit card business, which improves the commercial strategy. vi. 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.) 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 EUR 82 million (mainly under line 'Loans and advances'). 584 The difference 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. vii. Sale agreement of Banco Popular, S.A.U.’s real estate business In relation with Banco Popular Español, S.A.U.’s ('Banco Popular') real estate business, on 8 August 2017, Banco Santander, S.A., 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 affiliates (including deferred tax assets allocated to specific real estate companies which are part of the transferred portfolio) registered on certain specified dates (31 March 2017 or 30 April 2017). The signing took place after the European Commission authorized, without imposing any restrictions, the acquisition of Banco Popular Español, S.A.U., by Banco Santander, S.A., for the purposes of competition law. The Group closed its valuation exercise of the assets and liabilities assumed at fair value during 2018 without any change with respect to what was recorded at the end of 2017. 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 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 transferred the business constituted by the indicated assets, and its participation in the capital of Aliseda Servicios de Gestión Inmobiliaria, S.L. The value attributed to the contributed assets is approximately EUR 10,000 million euros, of which approximately 70% was financed 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 impact in the Group´s income statement. viii. 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 certificate 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. acquired, by universal succession, all the rights and obligations of Banco Popular Español, S.A.U., including those that had been acquired from Banco Pastor, S.A.U. and Popular Banca Privada, S.A.U., by virtue of the merger of Banco Pastor and Popular Banca Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Privada with Banco Popular Español, S.A.U., that was also approved on 23 April 2018 by the respective board of directors. This transaction had no impact on the Group's income statement. c) Offshore entities According to current Spanish regulation (Royal Decree 1080/1991, of 5 July), Santander has two subsidiaries and three branches in the offshore territories of Jersey, the Isle of Man and the Cayman Islands. Santander also has three other offshore subsidiaries that are tax resident in the UK and subject to British tax law. I) Offshore subsidiaries A subsidiary resident in Jersey was liquidated in 2020 so at the reporting date, Grupo Santander has two subsidiaries resident in these territories: Abbey National International Limited in Jersey and ALIL Services Limited (in liquidation) on the Isle of Man. In 2020, those subsidiaries’ contribution to Santander’s consolidated profit was insubstantial. II) Offshore branches Grupo Santander also has three operative offshore branches. One is found in the Cayman Islands, one is on the Isle of Man and another is in Jersey. They report to, and consolidate balance sheets and income statements with, their foreign headquarters. They are taxed either with their headquarters (the Cayman Islands branch in Brazil) or in the territories they are located in (the Jersey and Isle of Man branches pertain to the UK). There was a fourth branch in the Cayman Islands, pertain to the US, which was closed in 2020. The entities mentioned in Sections I and II had 141 employees as of December 2020. III) Offshore subsidiaries that are tax resident in other jurisdictions Grupo Santander also has three subsidiaries that were incorporated in offshore territories but are not deemed offshore entities. They only operate from, and are tax resident in, the UK and, thus, are subject to British tax law (one is expected to be wound up in 2021). In 2020, a subsidiary incorporated in Jersey but tax resident in Spain transferred legal residence to Spain. IV) Other offshore holdings From Brazil, Grupo Santander manages Santander Brazil Global Investment Fund SPC, a segregated portfolio company located in the Cayman Islands. From the UK, it manages Guaranteed Investment Products 1 PCC Limited, a protected cell company found in Guernsey. It also has two small holdings in entities located in the Cayman Islands. Organization for Economic Cooperation and Development (OECD) Grupo Santander is not in any of the uncooperative tax havens the OECD released in December 2020. Furthermore, Jersey, the Isle of Man and the Cayman Islands satisfy OECD standards on transparency and exchange of information for tax purposes. The European Union (EU) As of October 2020, the EU’s blacklist comprises 12 jurisdictions where Santander is not present. Santander is also not present in the 10 jurisdictions on the EU’s grey list, which have sufficiently committed to adapt legislation to international standards, subject to monitoring by the EU. The Group's presence in offshore territories at the end of 2020 is as follows: Presence of the Group in Tax Havens/Non- cooperative jurisdictions Jersey Isle of Man Guernsey* Bermuda* Cayman Islands 2020 2019** Spanish legislation OECD European Commission Blacklist Sub. Branch Sub. 1 1 1 1 Branch Sub. Branch 1 3 4 2 3 — — — — — 1 — 2 * Additionally, there are 2 entities constituted in Guernsey and 1 in Bermuda, but resident for tax purposes in the United Kingdom. ** Since December 31st 2019, the number of subsidiaries has been decreased in Jersey (1) and Panama (1), this last territory is currently included in the EU blacklist. Additionally, the Cayman Islands (1 operative branch and 1 branch closed in 2020) left the EU blacklist in October 2020. Forthcoming changes to Spain's tax law On 23 October 2020, the Draft Law on measures to prevent and fight against tax fraud was published in the Official Bulletin of the Spanish Parliament. The law expands the meaning of tax havens, which it renames “non-cooperative jurisdictions”. It also allows government to update the non- cooperative jurisdictions list. Nonetheless, until that list conforms to the new criteria, the former list set out in Royal Decree 1080/1991 of 5 July will remain in effect. Grupo Santander has the right mechanisms (risk management, supervision, verification and review plans, and regular reporting) to prevent reputational, tax and legal risk with those entities. Grupo Santander also maintains its policy of reducing the number of these units. PwC (PricewaterhouseCoopers) member firms audited the financial statements of Grupo Santander’s offshore units in 2020, 2019 and 2018. 4. Distribution of Banco Santander's profit, shareholder remuneration scheme and earnings per share a) Distribution of Banco Santander's profit and shareholder remuneration scheme The board of directors proposes to the shareholders to approve at the 2021 general shareholders' meeting the application of the results of Banco Santander, S.A., for 2020, which consisted in losses amounting to EUR 3,557 million, by charging them against: i) To share premium account to the extent that the indicated charge against the share premium reserve is approved by the European Central Bank under Articles 77 and 78 of 585 Annual report 2020 Contents Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013. ii) The voluntary reserve account, to the amount by which the referred losses are not applied in accordance with the provisions of paragraph (i) above. or above and on the condition that the payment does not exceed 50% of the consolidated ordinary (underlying) profit. The proposal was approved at the general shareholders' meeting in October 2020. • On 15 December 2020, the ECB recommended that banks under its supervision limit shareholder remuneration until 30 September 2021 to an amount not exceeding either 15% of adjusted profits earned in 2020 (and in 2019, but only for those banks that, unlike Banco Santander, S.A., had not paid dividends in 2019) or the equivalent of 20 basis points of the CET 1 ratio. • On 3 February 2021, Banco Santander made public its 2020 results and the board's intention to pay a cash dividend of EUR 2.75 cents per share as shareholder remuneration for 2020, the maximum allowed in accordance with the limits set by the last ECB recommendation. This payment will be made in execution of the share premium distribution agreement approved at the aforementioned October 2020 general meeting. The board aims to restore a payout ratio of 40—50% of underlying profit, in cash, in the medium term. With respect to the remuneration against the 2021 earnings, the intention is to resume payments once the ECB recommendations so allow. The ECB has said it intends to repeal the recommendation in September 2021 in the absence of materially adverse developments. In the meantime, and in line with the announcement of April 2020, the dividend policy will remain suspended. • In September 2019, the board of directors approved an interim cash dividend against 2019 results in the amount of 0.10 euros per share (EUR 1,662 million), which was paid on 1 November. • On 27 March 2020, the ECB issued a recommendation urging all European banks under its supervision to abstain from paying dividends out of 2019 and 2020 results at least until 1 October 2020 in order to preserve capital (ECB Recommendation I). Taking into consideration ECB Recommendation I and in line with Santander's mission to help people and companies to progress, on 2 April 2020 the Board of Directors decided to cancel the payment of the 2019 final dividend and the dividend policy for 2020, to withdraw the proposals relating to the Final Cash Dividend and the SDE Program from the agenda of the aforementioned General Meeting of April 2020, which had already been convened, and to postpone the decision on the application of the results obtained in the financial year 2019 to a meeting to be held no later than 31 October 2020. • On 27 July 2020, the ECB issued a second recommendation in which it extended the effects of ECB Recommendation I requiring all European credit institutions under its supervision to abstain, until 1 January 2021, from distributing dividends out of the results of the financial years 2019 and 2020 or from entering into irrevocable commitments to distribute them (ECB Recommendation II). In September 2020, the board of directors convened the general shareholders' meeting of October 2020, at which it proposed (a) in compliance with ECB Recommendation II, to allocate all of the profit obtained by Banco Santander in 2019 to increase the Voluntary Reserve, except for the amount already allocated to the payment of the interim dividend that had been paid prior to the issuance of ECB Recommendation I, and (b) to increase the capital charged to reserves to allow the payment of a total remuneration for the 2019 financial year, in addition to the interim dividend, for an amount equivalent to 0.10 euros per share through the delivery of new shares and with no cash alternative. Both proposals were approved at the general shareholders' meeting in October 2020. • Following the ECB Recommendation II extending the effects of the previous recommendation until 1 January 2021, the board of directors decided to propose to the annual general meeting in October 2020 a resolution allowing the payment in 2021 of up to 0.10 per share as remuneration out of the results of the financial year 2020 from the share premium reserve and conditional on the ECB's recommendations permitting it and obtaining its authorization, on the condition that after the payment the CET 1 capital ratio remains within the target of 11—12% 586 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 2020 2019 2018 2020 2019 2018 b) Earnings/loss per share from continuing and discontinued operations i. Basic earnings / loss per share Basic earnings/loss per share are calculated by dividing the net profit 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 that period, excluding the average number of own shares held through that period. Accordingly: Profit (Loss) attributable to the Parent (EUR million) Remuneration of contingently convertible preference shares (CCP) (EUR million) (Note 23) Of which: Profit (Loss) from discontinued operations (non controlling interest net) (EUR million) Profit (Loss) from continuing operations (PPC net) (EUR million) Weighted average number of shares outstanding Impact factor correction* Adjusted number of shares Basic earnings (Loss) per share (euros) Of which, from discounted operations (euros) Basic earnings (Loss) per share from continuing operations (euros) (8,771) 6,515 7,810 (552) (9,323) (595) 5,920 (560) 7,250 — — — (9,323) 5,920 7,250 17,316,288,908 16,348,415,883 16,150,090,739 Not applicable 710,800,691 702,177,858 17,316,288,908 17,059,216,574 16,852,268,597 (0.538) 0.347 0.430 — — — (0.538) 0.347 0.430 * Correction factor for the capital increase released on 3 December 2020 (see notes 1.d and 31.a). ii. Diluted earnings / loss per share Diluted earnings/loss per share are calculated by dividing the net profit 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 effects inherent to potential ordinary shares (share options, and convertible debt instruments). Accordingly, diluted earnings/loss per share were determined as follows: Profit (Loss) attributable to the Parent (EUR million) Remuneration of contingently convertible preference shares (CCP) (EUR million) (Note 23) Dilutive effect of changes in profit for the period arising from potential conversion of ordinary shares Of which: Profit (Loss) from discontinued operations (net of non-controlling interests) (EUR million) Profit (Loss) from continuing operations (net of non-controlling interests and CCP) (EUR million) Weighted average number of shares outstanding Dilutive effect of options/rights on shares Impact factor correction* Adjusted number of shares Diluted earnings (Loss) per share (euros) Of which, from discounted operations (euros) Diluted earnings (Loss) per share from continuing operations (euros) (8,771) 6,515 7,810 (552) (595) (560) — (9,323) — 5,920 — 7,250 — — — (9,323) 5,920 7,250 17,316,288,908 16,348,415,883 16,150,090,739 Not applicable 35,891,644 42,873,078 Not applicable 712,361,197 704,041,905 17,316,288,908 17,096,668,724 16,897,005,722 (0.538) 0.346 0.429 — — — (0.538) 0.346 0.429 * Correction factor for the capital increase released on 3 December 2020 (see notes 1.d and 31.a). 587 Annual report 2020 Contents 5. Remuneration and other benefits 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 2020 and 2019: 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 fixed amount determined by the annual General Meeting. This amount shall remain in effect 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 justified. The remuneration established by the Annual General Meeting was EUR 6 million in 2020 (same amount as in 2019), with two components: (a) an annual emolument and (b) attendance fees. As a gesture of responsibility in view of the situation created by the health emergency the board of directors agreed on 5 May 2020 to reduce their allotments by 20% for the balance of 2020, with effect from 1 April 2020, and propose that amounts saved thereby be used to finance the initiatives of the Bank to fight against the covid-19 pandemic. The specific 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 to the meetings thereof, and any other objective circumstances considered by the Board. The total bylaw-stipulated emoluments earned by the Directors in 2020 amounted to EUR 4.1 million (4.9 million in 2019). Annual emolument The annual amounts received individually by the directors in 2020 and 2019 based on the positions held by them on the board and their membership of the board committees were as follows: Amount per director in euros Members of the board of directors Members of the executive committee Members of the audit committee Members of the appointments committee Members of the remuneration committee Members of the risk supervision, regulation and compliance committee Members of the responsible banking, sustainability and culture committee Chairman of the audit committee Chairman of the appointments committee Chairman of the remuneration committee Chairman of the risk supervision, regulation and compliance committee Chairman of the responsible banking, sustainability and culture committee Lead director Non-executive vice chairmen 2020 2019 1 Apr to 31 Dec 1 Jan to 31 Mar 49,500 22,500 90,000 93,500 42,500 170,000 22,000 10,000 40,000 13,750 6,250 25,000 13,750 6,250 25,000 22,000 10,000 40,000 8,250 3,750 15,000 38,500 17,500 70,000 27,500 12,500 50,000 27,500 12,500 50,000 38,500 17,500 70,000 27,500 12,500 50,000 60,500 27,500 110,000 16,500 7,500 30,000 * Mr. Bruce Carnegie-Brown, in view of the positions held on the board and its committees, in particular as chairman of the appointments and remuneration committees and as coordinating director, and the time and dedication required to properly perform such positions, has been assigned a minimum total annual remuneration of EUR 700,000 since 2015, including the annual allowance for the items corresponding to him of those indicated above and attendance fees. However, in line with the decision taken by the board of directors to reduce his fees by 20% with effect from April 1, 2020, which is shared by Mr. Bruce Carnegie-Brown, the same reduction shall be applied to this amount. Accordingly, the amount assigned for 2020 will be EUR 595,000. 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 mentioned above, executive committee meetings— for 2020 were set at the same amounts as in 2019. However, on 5 May 2020, as a gesture of responsibility in view of the situation created by the health emergency, the board of directors agreed to reduce their attendance fees by 20% for the balance of 2020, with effect from 1 April 2020, and propose that the amounts saved thereby be used to finance the initiatives of the Bank to fight against the covid-19 pandemic. 588 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The fees for 2019 and 2020 are 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) 2020 2019 1 Apr to 31 Dec 1 Jan to 31 Mar 2,080 2,600 2,600 1,360 1,700 1,700 1,200 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 fixed annual remuneration and a variable one, which consists in a unique incentive, which is a deferred variable remuneration plan 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 five years, to be paid in five portions, provided that the conditions of permanence in the Group and non-concurrence of the malus clauses are met, and subject to long term metrics, taking into account the following accrual scheme: – The accrual of the first and second portion (payment in 2022 and 2023) will be conditional on none of the malus clauses being triggered. – The accrual of the third, fourth, and fifth portion (payment in 2024, 2025 and 2026), is linked to objectives related to the period 2020—2022 and the metrics and scales associated with these objectives. The fulfilment of the objectives determines the percentage to be paid of the deferred amount in these three annuities, which, accordingly, might not be paid, where the maximum amount is the amount determined at closing of 2020, when the total variable remuneration is approved. • In accordance with current remuneration policies, the amounts already paid will be subject to a possible recovery (clawback) by the Bank during the period set out in the policy in force at each moment. The immediate payment (or short-term), as well as each deferred payment (linked to long term metrics and not linked to long-term metrics) will be settled 50% in cash and the remaining 50% in Santander shares. In the case of Sergio Rial, who was appointed director on April 2020, he has not received any remuneration for executive duties in Banco Santander, S.A. during 2020, but he qualifies as an executive director pursuant to section 529 duodecies of the Spanish Companies Act (Ley de Sociedades de Capital), because of his role as CEO and vice-president of Banco Santander (Brasil) S.A., the principles herein are the same for his remuneration as CEO and vice-president of Banco Santander (Brasil) S.A. The same policy and principles above apply to Sergio Rial's remuneration as CEO in Santander Brasil. Voluntary Reduction of Executive Remuneration (Chairman and CEO) On 23 March 2020, given the health crisis created by the covid-19 pandemic, Ana Botín and José Antonio Álvarez proposed to reduce their 2020 total compensation (salary and bonus) by 50% and use the amounts saved to finance the Santander covid-19 relief fund. This proposal was supported by the remuneration committee and approved by the board of directors. To achieve the 50% reduction compared to 2019, the board of directors decided to apply an additional adjustment to Ana Botín’s and José Antonio Alvarez’s variable compensation, reducing the variable compensation by 74% in the case of Ana Botín and 79% in the case of José Antonio Álvarez. Ana Botín’s total salary and bonus for 2019 was EUR 9,688 thousand, with EUR 3,176 thousand salary and EUR 6,512 thousand bonus (of which EUR 4,168 thousand was the sum of immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 2,344 thousand was deferred variable remuneration linked to long-term objectives at face value). Accordingly, the total of her salary and bonus for 2020 has been established at EUR 4,844 thousand, with EUR 3,176 thousand salary and EUR 1,668 thousand bonus (of which EUR 1,068 thousand is the sum immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 600 thousand is deferred variable remuneration linked to long-term objectives at face value). José Antonio Álvarez’s total salary and bonus for 2019 was EUR 6,893 thousand, with EUR 2,541 thousand salary and EUR 4,352 thousand bonus (of which EUR 2,786 thousand was the sum of immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 1,566 thousand was deferred variable remuneration linked to long-term objectives at face value). Accordingly, the total of his salary and bonus for 2020 has been established at EUR 3,446.5 thousand, with EUR 2,541 thousand salary and EUR 906 thousand bonus (of which EUR 580 thousand is immediately payable and deferred -not linked to long-term objectives- variable remuneration, and EUR 326 thousand is deferred variable remuneration linked to long-term objectives at face value). The chart below shows the comparison between the amounts received in 2019 and those received in 2020: 2019 Bonus Salary Total Salary 2020 Bonus Total Chairman CEO 3,176 6,512 9,688 3,176 1,668 4,844 2,541 4,352 6,893 2,541 906 3,447 % Var. 2020 vs 2019 (50) % (50) % Additionally, Ana Botin has made a personal decision to donate the full amount of the cash bonus paid this year for 2020 to Banco Santander's Euros de tu nómina program, through which employees can give up part of their pay to projects sponsored by a group of charities voted for by employees and the bank matches the employee's donation, and to Empieza por Educar, the Spanish affiliate of Teach for All. 589 Annual report 2020 Contents iii. Detail by director The detail, by bank director, of the short-term (immediate) and deferred (not subject to long-term goals) remuneration for 2020 and 2019 is provided below: EUR thousand 2020 Bylaw-stipulated emoluments Annual emolument N Board Executive committee Audit committee Appointments committee Remuneration committee Risk supervision, regulation and compliance oversight committee Responsible banking, sustainability and culture committee Attendance fees and commissions — — — — — 34 8 — — — 20 34 — 34 — — 15 — 28 — 173 200 13 — — 13 — 13 — 13 — — — 13 — 13 — — 6 — 11 — 95 120 55 49 82 79 45 60 15 82 85 2 43 86 21 94 66 60 43 28 71 — 1,066 1,094 Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Bruce Carnegie-Brown Ms Homaira Akbari Mr Francisco Javier Botín- Sanz de Sautuola y O’Shea A Mr Álvaro Antonio Cardoso de Souza B C Mr Ramón Martín Chávez Márquez Ms Sol Daurella Comadrán Mr Henrique Manuel Drummond Borges Cirne de Castro D E Ms Gina Díez Barroso Mr Luis Isasi Fernández de F Bobadilla Mr Ramiro Mato García- Ansorena G Mr Sergio Rial Ms Belén Romana García Mrs Pamela Ann Walkden H Mr Rodrigo Echenique I Gordillo Mr Ignacio Benjumea J Cabeza de Vaca Mr Guillermo de la Dehesa Romero K Ms Esther Giménez- L Salinas i Colomer Mr Carlos Fernández M González Total 2020 Total 2019 77 77 326 77 77 136 8 77 77 2 44 119 42 98 114 75 35 23 64 — 1,548 1,794 145 145 145 — — — — — — — 84 145 — 145 — — 65 44 — — — — 34 — — — — 34 — — 34 — 34 34 — — — — — 918 1,247 — 170 168 — — 21 — — — 1 21 — — — — — — — 21 — 6 18 — 88 117 — — 21 — — — 5 21 21 — 12 — — — — — 10 6 — — 96 125 A. All amounts received were reimbursed to Fundación Botín. B. Director since 1 April 2018. C. Director since 27 October 2020. D. Director since 17 July 2019. E. Director since 22 December 2020. F. Director since 19 May 2020. G. Executive director since 30 May 2020. H. Director since 29 October 2019. I. Stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. J. Stepped down as director on 5 May 2020. K. Stepped down as director on 3 April 2020. L. Stepped down as director on 27 October 2020. M. Stepped down as director on 28 October 2019. N Includes emoluments for chairing committees and other roles. 590 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 2020 2019 Short-term and deferred (not subject to long-term goals) salaries of executive directors Variable - immediate payment Deferred variable Fixed 3,176 2,541 — — — — — — — — — — — — — — — — — — 5,717 6,317 In cash In shares In cash In shares Total Pension contribution Other 7 remuneration Total Total 333 181 — — — — — — — — — — — — — — — — — 334 181 — — — — — — — — — — — — — — — — — 200 108 — — — — — — — — — — — — — — — — — — 514 2,572 — 515 2,572 — 308 1,543 200 109 — — 4,243 3,120 — — 1,155 1,131 6,819 9,954 864 — — 1,764 — — 6,019 595 203 8,270 700 226 — — — — — — — — — — — — — — — — 309 — — — — — — — — — — — — — — — — 7,363 1,543 14,547 — — — — — — — — — — — — — — — — 2,019 2,003 — — — — — — — — — 122 137 243 276 37 214 217 4 740 943 — — — — 431 63 418 214 — 240 86 — — 500 — 525 34 1,800 1,956 4,874 102 276 524 107 399 192 228 5,537 19,073 — 214 — 5,772 — 27,187 591 Annual report 2020 Contents Following is the detail, by executive director, of the salaries linked to multi-year objectives at their fair value, which will only be received if the conditions of permanence in the group, non-applicability of malus clauses and achievement of the established objectives are met (or, as the case may be, of the minimum thresholds thereof, with the consequent reduction of amount agreed-upon at the end of the year) in the terms described in note 46. EUR thousand 2020 2019 Variable subject to Long-term objectives1 In cash In shares Total Total 210 210 420 1,642 114 114 228 1,096 — 324 — — 504 324 648 3,242 Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique Gordillo Total 1. Corresponds with the fair value of the maximum amount they are entitled to in a total of 3 years: 2024, 2025 and 2026, 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. Based on the design of the plan for 2020 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%. Accordingly, it has been considered that the fair value is 70% of the maximum (see note 46). Note 5.e below includes disclosures on the shares delivered from the deferred remuneration schemes in place in previous years and for which delivery conditions were met, as well as on the maximum number of shares that may be received in future years in connection with the aforementioned 2020 and 2019 variable remuneration plans. In the case of Sergio Rial, as mentioned above, he has not received any remuneration for executive duties in Banco Santander, S.A. during 2020. The remuneration he has received in his role as CEO and vice-president of Banco Santander (Brasil) (Santander Brasil) is: 2020 Base salary Other fixed benefits Pensions Variable remuneration Total BRL thousand EUR thousand 12,645 39 5,041 30,240 47,965 2,175 7 867 5,201 8,250 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 on or after 18 March, 2002, accrues to the Group. In 2020 and 2019 the Bank’s directors did not receive any remuneration in respect of these representative duties. On the other hand, Mr. Álvaro Cardoso de Souza, in his role as non-executive Chairman of Banco Santander (Brasil) S.A., received a remuneration in 2020 of 1,947 thousand Brazilian reales (EUR 335 thousand), Ms. Homaira Akbari was paid USD 190 thousand (EUR 156 thousand) as member of the board of Santander Consumer USA (SCUSA) and EUR 17,200 as member of the Board of PagoNxt), and Mr. Henrique Manuel Drummond Borges Cirne de Castro and Mr. Ramón Martín Chávez Márquez, were also each paid paid EUR 17,200 as members of the board of PagoNxt. Likewise, Luis Isasi was paid EUR 740 thousand as chairman of the board of Santander Spain (amount included in the chart below as "other remuneration" as it is paid by Banco Santander, S.A.) c) Post-employment and other long-term benefits In 2012, the contracts of Ms. Ana Botín and Mr. José Antonio Alvarez (and other members of the Bank's senior management) with defined benefit pension commitments were modified to transform these commitments into a defined contribution system, which covers the contingencies of retirement, disability and death. From that moment on, the Bank makes annual contributions to their pension system for their benefit. This system gives them the right to receive benefits 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 until the retirement date, Ms Ana Botín and Mr José Antonio Alvarez, have the right to receive an annual allotment. The initial balance for each of them in the new defined benefits 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 benefits system. Since 2013, the Bank has made annual contributions to the benefits system for executive directors and senior executives, in proportion to their respective pensionable bases, until they leave Grupo Santander or until their retirement within the Group, death, or disability (including, if applicable, during pre- retirement). 592 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The benefit plan system 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. In accordance with the provisions of the remuneration regulations, contributions made calculated on variable remuneration are subject to the discretionary pension benefits regime. Under this regime, contributions are subject to malus clauses and clawback according to the policy in force at any given time and during the same period in which the variable remuneration is deferred. Furthermore, they must be invested in bank shares for a period of five years from the date when 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 beneficiaries in the event of a contingency covered by the benefits system. Until March 2018, the system also included a supplementary benefits 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, the system was changed with a focus on: • Aligning the annual contributions with practices of comparable institutions. • Reducing future liabilities by eliminating the supplementary benefits scheme in the event of death (death of spouse or parent) and permanent disability of serving directors. • Not increasing total costs for the Bank. The changes to the system were the following: • Fixed and variable pension contributions were reduced to 22% of the respective pensionable bases. The gross annual salaries and the benchmark variable remuneration were increased in the corresponding amount with no increase in total costs for the Bank. The pensionable base for the purposes of the annual contributions for the executive directors is the sum of fixed 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 fixed remuneration as a senior executive vice president). • The death and disability supplementary benefits were eliminated since 1 April 2018. A fixed remuneration supplement (included in other remuneration in section a.iii in this note) was implemented the same date. • The total amount insured for life and accident insurance was increased. The provisions recognised in 2020 and 2019 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability) were as follows: EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez Total 2020 2019 1,155 1,145 864 858 2,019 2,003 Following is a detail of the balances relating to each of the executive directors under the welfare system as of 31 December 2020 and 2019: EUR thousand Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 1 Mr Rodrigo Echenique Gordillo Total 2020 2019 49,444 48,104 18,082 17,404 — 13,268 67,526 78,776 1. Mr Rodrigo Echenique has not participated in the defined contribution pension scheme described in the preceding paragraphs. However, for reference purposes, this year’s table details his rights before he was named an executive director. Mr. Rodrigo Echenique's accrued obligation as of December 2020 is zero, since he received the benefit in the form of capital in 2020. Therefore, there is no pending commitment in this regard in respect of Rodrigo Echenique. d) Insurance The Group pays for life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits 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 EUR thousand 2020 2019 Ms Ana Botín-Sanz de Sautuola y O’Shea 21,984 22,475 Mr José Antonio Álvarez Álvarez Mr Rodrigo Echenique Gordillo Total 18,703 19,373 — 5,400 40,687 47,248 The insured capital has been modified in 2018 for Ms Ana Botín and Mr José Antonio Alvarez as part of the pension systems transformation set out in note 5.c) above, which has encompassed the elimination of the supplementary benefits systems (death of spouse and death of parent) and the increase of the life insurance annuities. During 2020 and 2019, the Group has disbursed a total amount of 19.5 million euros and 11.6 million euros, 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 593 Annual report 2020 Contents this reason, it is not possible to disaggregate or individualize the amount that correspond to the directors and executives. As of 31 December 2020 and 2019, no life insurance commitments exist for the Group in respect of any 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 2020 and 2019 due to their participation in the deferred variable remuneration systems, which instrumented a portion of their variable remuneration relating to 2020 and prior years, as well as on the deliveries, in shares or in cash, made to them in 2020 and 2019 once the conditions for the receipt thereof had been met (see note 46): 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 identified staff) 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 beneficiaries, was authorized by the related Annual General Meetings. The purpose of these plans is to defer a portion of the bonus of the plan beneficiaries (60% in the case of executive directors) over a period of five years (three years for the plans approved up to 2014) for it to be paid, where appropriate, in cash and in Santander shares. The remaining 40% portion of the bonus is paid in cash and Santander shares (in equal parts), upon commencement of this plan, in accordance with the rules set forth below. In addition to the requirement that the beneficiary 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 financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s consolidated financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or its risk profile. All the foregoing shall be subject in each case to the regulations of the relevant plan cycle. On each delivery, the beneficiaries 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 be based on the price offered by the Bank for the bonus share rights corresponding to those shares. 594 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 March 18, 2016. In the case of Sergio Rial, who does not receive any remuneration for executive duties in Banco Santander, S.A., the same policy principles, deferrals, multi year targets linked to the payment of deferred amounts and malus and clawback principles described herein apply to his variable remuneration in the subsidiary where he is the CEO. ii) Deferred variable compensation plan linked to multiannual objectives In the annual shareholders meeting of 12 March 2016, with the aim of simplifying the remuneration structure, improving the ex-ante risk adjustment 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 2020 has been approved by the Board of Directors and implemented through the fifth cycle of the deferred variable remuneration plan linked to multi-year objectives. The application of the plan was authorised by the annual general meeting of shareholders, as it entails the delivery of shares to the beneficiaries. As indicated in section a.ii of this note, 60% of the variable remuneration amount is deferred over five years (three years for certain beneficiaries, not including executive directors), to be paid, where appropriate, in five portions, provided that the conditions of permanence in the group and non-concurrence of malus clauses are met, and subject to long term metrics, according to the following accrual scheme: • The accrual of the first and second parts (instalments in 2022 and 2023) is conditional on none of the malus clauses being triggered. • The accrual of the third, fourth and fifth parts (instalments in 2024, 2025 and 2026) is linked to the fulfilment of certain objectives related to the 2020‑2022 period and the metrics and scales associated with those objectives, as well as to non-concurrence of malus clauses. These objectives are: – The growth of consolidated earnings per share in 2022 compared to 2019; – the relative performance of the Bank’s total shareholder return (RTA) in the 2020-2022 period in relation to the weighted RTAs of a reference group of 9 credit institutions; Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix – compliance with the fully loaded ordinary level 1 capital (iv) Irregular conduct, whether individual or collective. In this objective for the year 2022. The degree of 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 2020 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 beneficiary in the Group, to non- occurrence, during the period prior to each of the deliveries, of any the circumstances giving rise to the application of malus as set out in the Group’s remuneration policy in its chapter related to malus and clawback. Likewise, the amounts already paid of the incentive will be subject to clawback by the Bank in the cases and during the term foreseen in said policy, and in accordance with the terms and conditions foreseen in it. The application of malus and clawback is activated in cases in which there is poor financial performance of the entity as a whole or of a specific division or area of the entity or of the exposures generated by the personnel, and at least the following factors must be considered: (i) Significant failures in risk management committed by the entity, or by a business unit or risk control. (ii) The increase suffered 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. regard, the negative effects 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 average weighted daily volume of the average weighted listing prices corresponding to the fifteen trading sessions prior to the previous Friday (excluded) to the date on which the bonus is agreed by the board of executive directors of the Bank. In the case of Mr. Sergio Rial, although as stated above he does not receive any remuneration for executive duties in Banco Santander, S.A., he is included as CEO of Santander Brasil in the deferred variable compensation plan linked to multiannual objectives and thus subject to the same conditions and principles of deferral, multiannual objectives, deferrals and malus and clawback herein in respect of the remuneration he receives in his role as CEO of this subsidiary. iii) 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 2019, 31 December 2019 and 31 December 2020, as well as the gross shares that were delivered to them in 2019 and 2020, 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-fifth of each plan had accrued. They come from each of the plans through which the variable remunerations of deferred conditional variable remuneration plans in 2015 and of the deferred conditional and linked to multiannual objectives in 2016, 2017, 2018, 2019 and 2020. 595 Annual report 2020 Contents Share-based variable remuneration 4 2015 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 3 Mr Rodrigo Echenique Gordillo 2016 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 3 Mr Rodrigo Echenique Gordillo 2017 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 3 Mr Rodrigo Echenique Gordillo 2018 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 3 Mr Rodrigo Echenique Gordillo 2019 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 3 Mr Rodrigo Echenique Gordillo 1 2020 variable remuneration Ms Ana Botín-Sanz de Sautuola y O’Shea Mr José Antonio Álvarez Álvarez 2 Mr Sergio Rial Maximum number of shares to be delivered at January 1,2019 Shares delivered in 2019 (immediate payment 2018 variable remuneration) Shares delivered in 2019 (deferred payment 2017 variable remuneration) Shares delivered in 2019 (deferred payment 2016 variable remuneration) Shares delivered in 2019 (deferred payment 2015 variable remuneration) Variable remuneration 2019 (Maximum number of shares to be delivered) 193,213 128,431 95,134 416,778 288,410 194,665 144,180 627,255 344,625 230,471 179,608 754,704 — — — — — — — — — — — — — — — (68,925) (46,094) (35,922) (150,941) 860,865 575,268 456,840 1,892,973 (344,346) (230,107) (182,736) (757,189) — — — — — — — — — — — — — — — — — — — — — — — — (64,404) (42,811) (31,712) (138,927) (72,102) (48,667) (36,046) (156,815) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 887,193 592,915 272,480 1,752,588 — — — 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 fifths in the next five years, the last three being subject to the fulfilment of multiannual objectives. 2. Mr. Sergio Rial's share-based variable remuneration awarded in shares of Banco Santander (Brasil). He has the right to a maximum of 51,483 Santander shares and 269,148 options over Santander shares for his participation in the 2019 Digital Transformation Award. 3. Mr. Rodrigo Echenique stepped down as executive director on 30 April 2019. Non-executive director from 1 May 2019 to 22 December 2020. 4. In addition, Mr. Ignacio Benjumea Cabeza de Vaca received 35,372 shares during 2020 and maintains the right to a maximum of 35,369 shares arising from his participation in the corresponding plans during his term as executive vice president. 596 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Maximum number of shares to be delivered at December 31, 2019 Instruments matured but not consolidated at January 1, 2020 Shares delivered in 2020 (immediate payment 2019 variable remuneration) Shares delivered in 2020 (deferred payment 2018 variable remuneration) Shares delivered in 2020 (deferred payment 2017 variable remuneration) Shares delivered in 2020 (deferred payment 2016 variable remuneration) Shares delivered in 2020 (deferred payment 2015 variable remuneration) Variable remuneration 2020 (Maximum number of shares to be delivered) Maximum number of shares to be delivered at December 31, 2020 128,809 85,620 63,422 277,851 216,308 145,998 108,134 470,440 275,700 184,377 143,686 603,763 516,519 345,161 274,104 1,135,784 887,193 592,915 272,480 1,752,588 — — — — — — (51,265) (34,602) (25,628) (111,495) — — — — — — — — — — — — — — — — — — — — — — — — (354,877) (237,166) (108,992) (701,035) — — — — — — — — — — — — — — — — — — (68,925) (46,094) (35,922) (150,941) (103,304) (69,032) (54,821) (227,157) — — — — — — — — — — — — — — — — — — (64,404) (42,811) (31,712) (138,927) (55,014) (37,133) (27,503) (119,650) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 310,615 168,715 355,263 834,593 64,405 42,809 31,710 138,924 110,029 74,263 55,003 239,295 206,775 138,283 107,764 452,822 413,215 276,129 219,283 908,627 532,316 355,749 163,488 1,051,553 310,615 168,715 355,263 834,593 597 Annual report 2020 Contents In addition, the table below shows the cash delivered in 2020 and 2019, 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-fifth relating to each plan had accrued: EUR thousand 2020 2019 Cash paid (immediate Cash paid (deferred payments from 2017, payment 2018 variable 2016 and 2015 variable remuneration) 1,025 686 519 2,230 remuneration) 1,480 989 785 3,254 2020 60,847 65,502 47,956 2020 60,847 0 32,751 35,132 2019 121,694 98,253 140,531 2019 60,847 129,612 42,924 35,132 Ms. Ana Botín-Sanz de Sautuola y O’Shea Mr. José Antonio Álvarez Álvarez Mr. Rodrigo Echenique Gordillo Cash paid (immediate payment 2019 variable remuneration) 1,302 870 400 2,572 Cash paid (deferred payments from 2018, 2017, 2016 and 2015 variable remuneration) 1,383 925 712 3,020 iv) Information on former members of the Board of Directors The chart below includes information on the maximum number of shares to which former members of the Board of Directors who ceased in office prior to 1 January 2019 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 in shares or in cash, made in 2020 and 2019 to former board members, upon achievement of the conditions for the receipt thereof (see note 46): Maximum number of shares to be delivered Deferred conditional variable remuneration plan (2015) Deferred conditional variable remuneration plan and linked to objectives (2016) Deferred conditional variable remuneration plan and linked to objectives (2017) Number of shares delivered Deferred conditional variable remuneration plan (2015) Performance shares plan ILP (2015) Deferred conditional variable remuneration plan and linked to objectives (2016) Deferred conditional variable remuneration plan and linked to objectives (2017) In addition, EUR 612 thousand and EUR 663 thousand relating to the deferred portion payable in cash of the aforementioned plans were paid each in 2020 and 2019. 598 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix f) Loans Grupo Santander’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 recognized: EUR thousand 2020 2019 Loans and credits Guarantees Total Loans and credits Guarantees Total Mrs. Ana Patricia Botín Mr. José Antonio Álvarez Álvarez Mr. Bruce Carnegie-Brown Mr. Rodrigo Echenique Gordillo** Mr. Javier Botín-Sáenz de Sautuola Mrs. Sol Daurella Comadrán Mrs. Esther Gimenéz-Salinas i Colomer**** Mr. Ignacio Benjumea Cabeza de Vaca* Mrs. Belén Romana García Mr. Guillermo de la Dehesa Romero*** Mr. Ramiro Mato García-Ansorena Mrs. Homaira Akbari Mr. Álvaro Antonio Cardoso de Souza Mr. Henrique Manuel Drummond Borges Cirne de Castro Mrs. Pamela Ann Walkden Mr. Luis Isasi Fernández de Bobadilla Mr. Sergio Agapito Lires Rial Mr. R. Martín Chávez Mrs. Gina Lorenza Díez Barroso Arcárraga 14 5 — — 2 22 — — — — — — — — — — — — 6 49 — — — — — — — — — — — — — — — — — — — — 14 5 — — 2 22 — — — — — — — — — — — — 6 18 27 — 33 21 55 1 1 21 56 — — — — — — — — — 49 233 — — — — — — — — — — — — — — — — — — — — * ** *** **** Mr. Ignacio Benjumea Cabeza de Vaca resigns as a member of the Board in June 2020. Mr. Rodrigo Echenique Gordillo resigns as a member of the Board in December 2020. Mr. Guillermo de la Dehesa resigns as a member of the Board in June 2020. Ms. Esther Gimenez-Salinas i Colomer resigns as a member of the Board in December 2020. 18 27 — 33 21 55 1 1 21 56 — — — — — — — — — 233 599 Annual report 2020 Contents g) Senior managers The table below includes the amounts relating to the short- term remuneration of the members of senior management at 31 December 2020 and those at 31 December 2019, excluding the remuneration of the executive directors, which is detailed above: EUR thousand Short-term salaries and deferred remuneration Variable remuneration (bonus) - Immediate payment Deferred variable remuneration Year 2020 2019 Number of persons 18 18 Fixed 21,642 22,904 In cash 5,739 7,668 In shares 2 5,740 7,669 In cash 2,470 3,336 In shares 2,471 3,337 Pensions 6,039 6,282 Other 1 remuneration 6,312 15,337 3 Total 50,413 66,532 1. Includes other remuneration items such as life and medical insurance premiums and localization aids. 2. The amount of immediate payment in shares for 2020 is 2,135,700 shares (2,090,536 Santander shares in 2019). 3. The deferred amount in shares not linked to long-term objectives for 2020 is 919,308 shares (909,534 Santander shares in 2019). (application programming interface) layer, payment hubs, mobile app for SMEs and virtual assistant services; and (vii) launching the PagoFX global platform in at least 4 countries. The 2019 Digital Transformation Incentive, which terms are substantially the same as those of the 2020 one, included three senior executives, who may receive up to a total of EUR 2,100 thousand. See note 46 to the 2020 Group's consolidated financial statements for further information on the Digital Transformation Incentive. In 2020, the ratio of variable to fixed pay components was 80% of the total for senior managers, well within the maximum limit of 200% set by shareholders. Also, the detail of the breakdown of the remuneration linked to long-term objectives of the members of senior management at 31 December 2020 and 31 December 2019 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 46): EUR thousand Variable remuneration subject to long-term objectives 1 Year Number of  people Cash  payment 2020 2019 18 18 2,594 3,503 Share payment 2,594 3,504 Total 5,188 7,007 1. Relates to the fair value of the maximum annual amounts for years 2024, 2025 and 2026 of the fifth cycle of the deferred conditional variable remuneration plan (2022, 2024 and 2025 for the fourth cycle of the deferred variable compensation plan linked to annual objectives for the year 2019). At the annual general meeting on 3 April 2020, shareholders approved the 2020 Digital Transformation Incentive, a variable remuneration scheme that delivers Santander shares and share options if the group hits major milestones on its digital roadmap. Three senior executives are included within this plan (aimed at a group of up to 250 employees whose functions are deemed essential to Santander Group’s growth and digital transformation) and, thus, can receive a total of EUR 1,700 thousand to be paid in thirds on the third, fourth and fifth anniversary of the authorisation date (2024, 2025 and 2026). This amount is implemented in 316,574 Santander shares and 944,445 options over Santander shares, using for these purposes the fair value of the options at the moment of their grant (EUR 0.90). Of the EUR 30,000 thousand approved by the 2020 general meeting as maximum amount for the 2020 Digital Transformation Award, a total overall cost of EUR 17,800 thousand has been approved, based on the final number of participants and the level of achievement of milestones. The milestones for the 2020 Digital Transformation Award were: (i) rolling out the global merchant services (GMS) platform in 3 new geographies, enhancing the platform functionality and achieving volume targets for transactions and participating merchants; (ii) doing the commercial rollout of the global trade services (GTS) platform in 8 new geographies, enhancing platform functionality, and achieving volume targets for on-boarded clients and monthly active users; (iii) launching OpenBank in a new market and migrating the retail banking infrastructure to “new-mode” bank; (iv) launch the global platform SuperDigital in at least 4 countries, driving target active user growth; (v) deploying machine learning across pre-defined markets for 4 priority use cases, rolling out Conversion Rate Optimization (Digital marketing) for at least 40 sales programs, delivering profit targets, and driving reduction of agent handled calls in contact centers; (vi) successfully implementating initiatives related to on-board and identity services, common API 600 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Senior executive vice presidents who retired in 2020 and, therefore, were not members of senior management at year- end, received in 2020 salaries and other remuneration relating to their termination amounting to EUR 5984000 (EUR 6,789 thousand in 2019). Likewise, these same individuals have generated as senior managers the right to obtain variable remuneration linked to long-term objectives for a total amount of EUR 133 thousand (this right has been generated in 2019 for a total amount of EUR 615 thousand). The average total remuneration awarded to women who were part of the senior management during 2020, excluding executive directors, is 37% lower than the average remuneration of men senior managers. The maximum number of Santander shares that the members of senior management at each plan grant date (excluding executive directors) were entitled to receive as of 31 December 2020 and 31 December 2019 relating to the deferred portion under the various plans then in force is the following (see note 46): Maximum number of shares to be delivered Deferred conditional variable remuneration plan (2015) Deferred conditional variable remuneration plan (2017) Deferred conditional variable remuneration plan (2018) remuneration plan and linked to objectives (2016) remuneration plan and linked to objectives (2017) remuneration plan and linked to objectives (2018) remuneration plan and linked to objectives (2019) 2020 2019 179,617 391,074 2,786 6,949 — — 417,818 660,205 791,360 1,115,570 1,512,992 1,986,754 2,154,312 2,273,859 Since the conditions established in the corresponding deferred share-based remuneration schemes for prior years had been met, the following number of Santander shares was delivered in 2020 and 2019 to the senior management, in addition to the payment of the related cash amounts: Number of shares delivered Deferred conditional variable remuneration plan (2015) Performance shares plan ILP (2015) Deferred conditional variable remuneration plan (2017) Deferred conditional variable remuneration plan (2018) 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) 2020 2019 179,614 257,187 — 515,456 2,786 3,474 — — 170,185 215,868 219,363 245,575 342,884 — As indicated in note 5.c above, senior management participate in the benefit system created in 2012, which covers the contingencies of retirement, disability and death. Banco Santander makes annual contributions to the benefit plans of its senior managers. In 2012, the contracts of the senior managers with benefit pension commitments were amended to transform them into a contribution system. The system, which is outsourced to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A., gives senior managers the right to receive benefits upon retirement, regardless of whether or not they are active at Banco Santander at such time, based on contributions to the system. This new system 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, further to applicable remuneration regulations, from 2016 (inclusive), a discretionary pension benefit component of at least 15% of total remuneration in contributions to the pension system has been included. Under the regime corresponding to these discretionary benefits, the contributions that are calculated on variable remunerations are subject to malus and clawback clauses, subject to policies applicable at each time, 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 five years from the date that the senior manager 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 senior manager, or it will be paid to the senior manager or to their beneficiaries in the event of a contingency covered by the benefits system. The contracts of some senior executives were modified at the beginning of 2018 with the same objective and changes indicated in section c of this note for Ms Ana Botín and Mr José Antonio Álvarez. The modifications, which are aimed at aligning the annual contributions with the practices of comparable institutions and reducing the risk of future obligations by eliminating the supplementary scheme for death (widowhood and orphanhood) and permanent disability in service without increasing the costs to the bank, are as follows • Contributions to the pensionable bases were reduced. Gross annual salaries were increased in the corresponding amount. • The death and disability supplementary benefits were eliminated since January 1, 2018. A fixed remuneration supplement reflected in other remuneration in the table above was implemented on the same date. • The amounts insured for life and accident insurance were increased. All of the above was done without an increase in total cost for the Bank. The balance as of 31 December 2020 in the pension system for those who were part of senior management during the year amounted to EUR: 59.4 million (EUR 69.8 million at 31 December 2019). The net charge to income corresponding to pension and supplementary benefits for widows, orphans and permanent invalidity amounted to EUR 6.4 million in 2020 (EUR 6.3 million in 31 December 2019). 601 Annual report 2020 Contents j) Contract termination The executive directors and senior managers have indefinite- term employment contracts. Executive directors or senior managers whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If Banco Santander terminates the contract for any other reason, they will be entitled to the corresponding legally-stipulated termination benefit, without prejudice to any compensation that may for non-competition obligations, as detailed in the directors' remuneration policy. If Banco Santander were to terminate her contract, Ms. Ana Botín-Sanz de Sautuola y O'Shea would have to remain at Banco Santander’s disposal for a period of 4 months in order to ensure an adequate transition, and would receive her fixed salary during that period. k) Information on investments held by the directors in other companies and conflicts of interest None of the members of the board of directors have declared that they or persons related to them may have a direct or indirect conflict of interest with the interests of Banco Santander, S.A., as set forth in Article 229 of the Corporate Enterprises Act. In 2020 and 2019 there have been 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 2020 of this group amounts to EUR 135.1 million (EUR 134.1 million at 31 December 2019). h) Post-employment benefits to former Directors and former senior executive vice presidents The post-employment benefits and settlements paid in 2020 to former directors of the Bank, other than those detailed in note 5.c amounted to EUR 11.2 million and EUR 6.3 million in 2019, respectively. Also, the post-employment benefits and settlements paid in 2020 to former executive vice presidents amounted to EUR 10.26 million and EUR 6.5 million in 2019, respectively. Contributions to insurance policies that hedge pensions and complementary widowhood, orphanhood and permanent disability benefits to previous members of the Bank’s board of directors, amounted to EUR 0.17 million in 2020 (EUR 0.2 million in 2019). Likewise, contributions to insurance policies that hedge pensions and complementary widowhood, orphanhood and permanent disability benefits for previous senior managers amounted to EUR 5.8 million in 2020 (EUR 5.5 million in 2019). During the 2020 financial year, a release of 5 million euros was recorded in the consolidated income statement for pension commitments and similar obligations held by the Group with previous former members of the bank's board of directors (in 2019, no provisions/releases were recorded), and no provisions/releases has been recorded in respect of former senior managers in 2020 and 2019. In addition, 'Provisions - Pension Fund and similar obligations' in the consolidated balance sheet as at 31 December 2020 included EUR 52 million in respect of the post-employment benefit obligations to former Directors of the Bank (EUR 65.7 million at 31 December 2019) and EUR 159 million corresponding to former senior managers (EUR 172 million at 31 December 2019). i) Pre-retirement and retirement The board of directors has approved, subject to the condition that the remuneration policy be approved at the annual general shareholders' meeting, an amendment to the contracts of the executive directors whereby: • Ms Ana Botín ceases to have the right to pre-retire if she leaves the Bank out of her own volition, keeping this right in case of termination by the Bank until 1 September 2022. After this date, she does not have the right to pre-retire. While she keeps this right she will be entitled to an annual allotment equal to the sum of her fixed remuneration and 30% of the average amount of her last variable remuneration, to a maximum of three. This allotment is subject to the malus and clawback provisions in place for a period of five years. • Mr. José Antonio Álvarez ceases to have the right to pre- retire in case of termination of his contract. 602 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 6. Loans and advances to central banks and credit institutions The detail, by classification, type and currency, of Loans and advances to central banks and credit institutions in the consolidated balance sheets is as follows: EUR million CENTRAL BANKS Classification 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 designated at fair value through other comprehensive income Financial assets at amortised cost Type Time deposits Reverse repurchase agreements Impaired assets Valuation adjustments for impairment CREDIT INSTITUTIONS Classification 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 designated at fair value through other comprehensive income Financial assets at amortised cost 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 2020 2019 2018 — — 9,481 — 12,499 21,980 11,757 10,223 — — 21,980 3 — — — 6,473 — 18,474 24,947 17,533 7,414 — — 24,947 — — — — 9,226 — 15,601 24,827 15,601 9,226 — — 24,827 — 2 12,136 21,649 23,097 — 37,838 49,977 7,338 20,862 21,784 1 (8) 49,977 22,260 4,127 13,209 26,437 5,924 71,957 — 40,943 62,592 9,699 31,180 21,726 1 (14) 62,592 32,248 3,659 14,442 30,919 6,271 87,539 — 35,480 58,579 10,759 33,547 14,283 2 (12) 58,579 24,801 4,073 19,238 28,310 6,984 83,406 603 Annual report 2020 Contents At 31 December 2020 the exposure by impairment stage of the assets accounted for amounts to EUR 50,344, EUR 0 and EUR 1 million (EUR 59,430, EUR 0 and EUR 1 million in 2019 and EUR 51,090, EUR 1 and EUR 2 million in 2018), and the loan loss provision by impairment stage amounts to EUR 8, EUR 0 and EUR 0 million (EUR 14, EUR 0 and EUR 0 million in 2019 and EUR 12, EUR 0 and EUR 0 million in 2018) in stage 1, stage 2 and stage 3, respectively. The loans and advances classified under 'Financial assets designated at fair value through profit or loss' consist of assets of Spanish and foreign institutions acquired under reverse repurchase agreements. The loans and advances to credit institutions classified under 'Financial assets at amortised' cost are mainly time accounts and deposits. Note 50 contains a detail of the residual maturity periods of 'Financial assets at amortised cost' and of the related average interest rates. 7. Debt instruments a) Detail The detail, by classification, type and currency, of Debt instruments in the consolidated balance sheets is as follows: EUR million Classification 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 designated at fair value through other comprehensive income Financial assets at amortised cost Type Spanish government debt securities Foreign government debt securities Issued by financial institutions Other fixed-income securities Impaired financial assets Impairment losses Currency Euro Pound sterling US dollar Brazilian real Other currencies Total gross Impairment losses 2020 2019 2018 37,894 700 2,979 108,903 26,078 176,554 30,397 110,570 10,133 25,337 401 (284) 32,041 1,175 3,186 118,405 29,789 184,596 42,054 107,434 9,670 25,265 647 (474) 27,800 5,587 3,222 116,819 37,696 191,124 50,488 99,959 10,574 29,868 870 (635) 176,554 184,596 191,124 58,850 7,372 29,009 35,139 46,468 176,838 (284) 176,554 70,357 15,713 29,846 38,316 30,838 76,513 19,153 22,864 40,871 32,358 185,070 191,759 (474) (635) 184,596 191,124 In the last quarter of 2019, debt securities were transferred from the 'Financial asset at amortised cost' to the 'Financial asset at fair value through other comprehensive income'. The fair value of these assets at the date of the transfer being EUR 6,359 million. As established in IFRS 9, the aforementioned transfer was made prospectively, recognising the difference between the previous amortised cost of the transferred financial assets and their fair value in 'Other comprehensive income'. In application of this standard, the effective interest rate and the measurement of expected credit losses were not adjusted as a result of the reclassification. The context of adapting the Group´s commercial strategy to the changes in business models, in order to favour a greater alignment of the sensitivity of the Bank's balance sheet masses to interest rates, has led to a change in the assets related to these liabilities from a business model whose objective is to collect the principal and interest flows to a business model whose objective is achieved through the collection of the principal and interest flows and the sale of these assets. 604 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix At 31 December 2020, 2019 and 2018 the exposure by impairment stage of the book assets under IFRS 9 amounted to EUR 134,792 million, EUR 147,575 million and EUR 154,164 million in stage 1; EUR 72 million, EUR 446 million and EUR 117 million in stage 2, and EUR 401 million, EUR 647 million and EUR 870 million in stage 3, respectively. b) Breakdown The breakdown, by origin of the issuer, of debt instruments at 31 December 2020, 2019 and 2018, net of impairment losses, is as follows: EUR million Spain United Kingdom Portugal Italy Ireland Poland Other European countries United States Brazil Mexico Chile Other American countries Rest of the world 2020 2019 2018 Private fixed- income Public fixed- income Total % Private fixed- income Public fixed- income Total % Private fixed- income Public fixed- income Total % 1,588 30,397 31,985 18.12% 3,634 42,054 45,688 24.75% 4,748 50,488 55,236 28.90% 3,099 3,095 1,047 2,924 2,795 6,462 4,688 5,894 3.34% 3,806 11,479 15,285 8.28% 9,557 5.41% 2,979 7,563 10,542 5.71% 5,615 3,663 9,512 15,127 7.91% 6,943 10,606 5.55% 5,735 3.25% 1,384 3,620 5,004 2.71% 857 3,134 3,991 2.09% 2 2,926 1.66% 2,387 2 2,389 1.29% 4,543 2 4,545 2.38% 3,126 11,400 14,526 8.23% 460 9,361 9,821 5.32% 683 10,489 11,172 5.85% 8,211 2,891 11,102 6.29% 7,186 1,784 8,970 4.86% 6,101 1,518 7,619 3.99% 6,386 14,645 21,031 11.91% 5,915 15,609 21,524 11.66% 6,833 10,362 17,195 9.00% 5,179 33,316 38,495 21.80% 5,808 35,036 40,844 22.13% 5,285 36,583 41,868 21.91% 435 19,053 19,488 11.04% 708 13,234 13,942 7.55% 520 11,325 11,845 6.20% 41 8,082 8,123 4.60% 50 4,819 4,869 2.64% 79 2,729 2,808 1.47% 274 182 3,098 4,138 3,372 1.91% 4,320 2.44% 605 186 1,095 3,832 1,700 0.92% 1,111 4,018 2.18% 639 1,375 5,987 2,486 1.30% 6,626 3.47% 35,587 140,967 176,554 100% 35,108 149,488 184,596 100% 40,677 150,447 191,124 100% The detail, by issuer rating, of Debt instruments at 31 December 2020, 2019 and 2018 is as follows: EUR million AAA AA A BBB Below BBB Unrated 2020 Private fixed- income Public fixed- income Total % 2019 Private fixed- income Public fixed- income Total % 2018 Private fixed- income Public fixed- income Total % 14,088 2,099 16,187 9.17% 14,737 1,085 15,822 8.57% 18,901 834 19,735 10.33% 1,714 18,784 20,498 11.61% 5,133 28,325 33,458 18.13% 2,715 20,966 23,681 12.39% 6,228 53,655 59,883 33.92% 3,238 59,744 62,982 34.12% 3,464 69,392 72,856 38.12% 6,515 31,204 37,719 21.36% 4,889 24,766 29,655 16.06% 5,093 21,837 26,930 14.09% 3,431 35,164 38,595 21.86% 1,244 35,466 36,710 19.89% 668 37,412 38,080 19.92% 3,611 61 3,672 2.08% 5,867 102 5,969 3.23% 9,836 6 9,842 5.15% 35,587 140,967 176,554 100% 35,108 149,488 184,596 100% 40,677 150,447 191,124 100% 605 Annual report 2020 Contents During 2020 and 2019, the distribution of the exposure by rating level of the previous table has not been affected by ratings reviews of the sovereign issuers. In 2018, Spain and Poland went from BBB to A. 8. Equity instruments a) Breakdown The detail, by type of financial instrument, of private fixed- income securities at 31 December 2020, 2019 and 2018, net of impairment losses, is as follows: EUR million Securitised mortgage bonds Other asset-backed bonds Floating rate debt Fixed rate debt Total c) Impairment losses 2020 5,926 5,479 7,829 2019 5,494 6,388 2018 7,803 9,805 10,348 13,721 16,353 12,878 9,348 35,587 35,108 40,677 The changes in the impairment losses on debt instruments are summarised below: EUR million 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 differences and other items Balance at end of year Of which: By geographical location of risk: 2020 474 2019 635 2018 704 79 (170) 43 91 77 138 (12) (247) (95) (269) 284 9 474 (112) 635 European Union Latin America 21 263 14 460 22 613 * Of the EUR 79 million corresponding to net provisions for the year ended 31 December 2020 (EUR -170 million and EUR 43 million at 31 December 2019 and 2018, respectively), EUR 77 million relates to financial assets at amortized cost (EUR -176 million and EUR 43 million at 31 December 2019 and 2018, respectively) and EUR 2 million relates to financial assets designated at fair value through other comprehensive income (EUR 6 million and EUR 0 million at 31 December 2019 and 2018, respectively). At 31 December 2020, 2019 and 2018 the loan loss provision by impairment stage of the assets accounted for under IFRS9 amounted to EUR 25 million, EUR 22 million and EUR 30 million in stage 1, EUR 2 million, EUR 6 million and EUR 9 million in stage 2, and EUR 257 million, EUR 446 million and EUR 596 million in stage 3, respectively. The detail, by classification and type, of Equity instruments in the consolidated balance sheets is as follows: EUR million Classification Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through other comprehensive income Type 2020 2019 2018 9,615 12,437 8,938 3,234 3,350 3,260 2,783 2,863 2,671 15,632 18,650 14,869 Shares of Spanish companies 3,364 3,711 Shares of foreign companies 10,437 12,682 Shares of investment funds 1,831 2,257 3,448 9,107 2,314 15,632 18,650 14,869 Note 29 contains a detail of the 'Other comprehensive income', recognised in equity, on 'Financial assets designated at fair value through other comprehensive income'. b) Changes The changes in 'Financial assets at fair value through other comprehensive income' were as follows: EUR million Balance at beginning of the year Net additions (disposals) Valuation adjustment and other items Balance at end of year 2020 2019 2018 2,863 2,671 3,169 837 221 (324) (917) (29) (174) 2,783 2,863 2,671 c) Notifications of acquisitions of investments The notifications of the acquisitions and disposals of holdings in investees made by the Bank in 2020, 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. 606 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 9. Trading Derivatives (assets and liabilities) and short positions 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): EUR million Interest rate risk Currency risk Price risk Other risks 2020 2019 2018 Debit Credit balance balance balance balance balance balance Credit Credit Debit Debit 43,832 41,085 42,614 40,956 36,087 36,487 21,162 22,028 18,085 19,870 16,912 17,025 1,931 944 2,329 1,772 2,828 1,673 212 412 369 418 112 156 67,137 64,469 63,397 63,016 55,939 55,341 b) Short positions Following is a breakdown of the short positions (liabilities): 10. Loans and advances to customers a) Detail The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows: EUR million 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 2020 296 2019 355 2018 202 552 386 1,881 24,121 30,761 21,915 Financial assets at fair value through other comprehensive income 1,601 Financial assets at amortized cost 881,963 906,276 857,322 4,440 9,267 Of which: Impairment losses (23,595) (22,242) (23,307) 916,199 942,218 882,921 Loans and advances to customers disregarding impairment losses 939,794 964,460 906,228 EUR million Borrowed securities Debt instruments Of which: Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Equity instruments Of which: 2020 2019 2018 Note 50 contains a detail of the residual maturity periods of 'Financial assets at amortised cost' and of the related average interest rates. 625 390 1,213 Note 53 shows the Group’s total exposure, by geographical origin of the issuer. There are no loans and advances to customers for material amounts without fixed maturity dates. 625 289 390 393 1,213 1,087 Banco Santander, S.A. 289 308 987 Short sales Debt instruments Of which: 15,784 13,340 12,702 Banco Santander, S.A. 8,645 7,980 5,336 Banco Santander (Brasil) S.A. 7,085 5,194 7,300 16,698 14,123 15,002 607 Annual report 2020 Contents b) Breakdown Following is a breakdown of the loans and advances granted to the Group's customers, which reflect the Group's exposure to credit risk in its main activity, without considering the balance of value adjustments for impairment, taking into account the type and situation of the transactions, the geographical area of their residence and the type of interest rate on the transactions: EUR million Loan type and status Commercial credit Secured loans Reverse repurchase agreements Other term loans Finance leases Receivable on demand Credit cards receivables Impaired assets Geographical area Spain European Union (excluding Spain)* United States and Puerto Rico Other OECD countries* South America (non - OECD) Rest of the world Interest rate formula Fixed rate Floating rate 2020 2019 2018 37,459 37,753 33,301 503,014 513,929 478,068 35,702 45,703 32,310 269,143 267,154 265,696 36,251 35,788 30,758 7,903 7,714 8,794 19,507 23,876 23,083 30,815 32,543 34,218 939,794 964,460 906,228 215,330 204,810 215,764 192,988 460,338 411,550 93,405 100,152 89,325 338,362 86,327 82,607 79,629 92,145 87,406 20,080 20,688 19,576 939,794 964,460 906,228 550,883 546,619 497,365 388,911 417,841 408,863 939,794 964,460 906,228 * The amounts referring to the year 2020 for the United Kingdom have been considered in the line Other OECD countries, instead of in the line European Union (excluding Spain) due to the leaving of the United Kingdom from the European Union (see Note 1.h). At 31 December 2020, 2019 and 2018 the Group had granted loans amounting to EUR 12,104, 9,993 and 13,615 million to spanish public sector agencies which had a rating at 31 December 2020 of A (ratings of A at 31 December 2019 and 31 December 2018), and EUR 10,779, 12,218, and 10,952 million to the public sector in other countries (at 31 December 2020, the breakdown of this amount by issuer rating was as follows: 0.9% AAA, 15.0% AA, 4.3% A, 69.5% BBB and 10.3% below BBB). Without considering the public administrations, the amount of the loans and advances at 31 December 2020, 2019 and 2018 amounts to EUR 916,911 million, EUR 942,249 million and EUR 881,661 million, of which, EUR 886,118 million, EUR 909,741 million and EUR 847,443 million are classified as performing, respectively. 608 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Following is a detail, by activity, of the loans to customers at 31 December 2020, net of impairment losses: EUR million Net exposure Loan-to-value ratio*** Secured loans Total Without collateral Of which property collateral Of which other collatera Less than or equal to 40% 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% More than 100% 21,227 20,510 216 501 95 78 41 483 20 62,827 20,795 1,291 40,741 845 842 427 39,371 547 319,853 182,861 63,463 73,529 25,175 24,194 21,678 45,270 20,675 16,804 3,300 2,620 1,963 9,375 280 4,809 1,057 5,340 4,713 1,538 1,180 1,413 113 230 162 731 101 167,390 110,387 20,994 36,009 8,775 7,358 9,025 23,111 8,734 132,359 67,891 32,814 31,654 10,947 11,893 10,953 20,248 10,427 497,987 92,157 331,210 74,620 84,449 104,187 116,586 61,532 39,076 324,152 1,563 322,100 489 77,764 98,134 108,699 33,426 4,566 157,118 88,232 1,621 67,265 16,717 2,362 7,489 6,866 3,401 3,284 3,529 2,524 4,837 23,897 33,222 3,050 4,209 1,288 901,894 316,323 396,180 189,391 110,564 129,301 138,732 146,656 60,318 20,997 5,278 12,327 3,392 2,965 2,640 2,430 2,560 5,124 Public sector Other financial institutions (financial business activity) Non-financial corporations and individual entrepreneurs (non-financial 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* Memorandum item Refinanced and restructured transactions** * ** *** In addition, the Group has granted advances to customers amounting to EUR 14,305 million, bringing the total of loans and advances to EUR 916,199 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 2020 provided by the latest available appraisal value of the collateral. Note 53 contains information relating to the refinanced/ restructured loan book. 609 Annual report 2020 Contents 2018 EUR million 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 financial assets Write-offs Exchange differences and others Balance at the end of the year 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) — — — — — — 79,727 (5,265) (1,997) 72,465 — — (12,673) (12,673) (17,968) (2,400) (386) (20,754) 795,829 52,183 33,461 881,473 In addition, at 31 December 2020, the Group had EUR 497 million (EUR 706 million at 31 December 2019 and EUR 757 million at 31 December 2018) in purchased credit-impaired assets, which relate mainly to the business combinations carried out by Grupo Santander. 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 at fair value through other comprehensive income” during 2020, 2019 and 2018: Stage 1 Stage 2 Stage 3 Total 849,939 50,476 31,837 932,252 (43,170) 43,170 (5,120) 5,120 (8,734) 8,734 13,459 (13,459) 1,831 (1,831) 578 (578) — — — — — — 53,555 (2,951) (659) 49,945 — — (8,930) (8,930) (51,335) (4,229) (3,375) (58,939) 817,906 66,104 30,318 914,328 Stage 1 Stage 2 Stage 3 Total 795,829 52,183 33,461 881,473 (28,369) 28,369 (4,101) 4,101 (13,240) 13,240 12,436 (12,436) 2,439 (2,439) 488 (488) — — — — — — 61,581 (8,092) (3,608) 49,881 — — (12,593) (12,593) 12,075 1,253 163 13,491 849,939 50,476 31,837 932,252 2020 EUR million 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 financial assets Write-offs Exchange differences and others Balance at the end of the year 2019 EUR million 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 financial assets Write-offs Exchange differences and others Balance at the end of the year 610 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix c) Impairment losses on loans and advances to customers at amortised cost and at fair value through other comprehensive income 2020 EUR million The changes in the impairment losses on the assets making up the balances of financial assets at amortised cost and at fair value through other comprehensive income - Loans and advances - Customers: EUR million Amount at beginning of the year 22,242 23,307 25,936 2020 2019 2018 Impairment losses charged to income for the year Of which: Impairment losses charged to profit or loss Impairment losses reversed with a credit to profit or loss Change of perimeter Write-off of impaired balances against recorded impairment allowance Exchange differences and other changes 13,385 11,108 10,501 20,909 19,192 17,850 (7,524) (8,084) (7,349) (82) — — (8,930) (12,593) (12,673) (3,020) 420 (457) Amount at end of the year 23,595 22,242 23,307 Loss allowance at the beginning of the year 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 of the exposure and modifications in the credit risk Write-offs FX and other movements Loss allowance at the end of the year Which correspond to: Impaired assets Other assets Of which: Individually calculated Collective calculated 13,658 13,933 14,906 9,937 8,309 8,401 2019 EUR million 2,679 3,555 4,905 Loss allowance at the beginning of the year 20,916 18,687 18,402 Transfers In addition, additions with a debit to fixed-income results amounting to EUR 79 million were recorded in the year (releases amounting to EUR 170 million and additions amounting EUR 43 million as of 31 December 2019 and 2018, respectively), written-off assets recoveries have been recorded in the year amounting to EUR 1,221 million (EUR 1,586 million and EUR 1,558 million at 31 December 2019 and 2018, respectively) and EUR 139 million were recorded in the account for losses on renegotiation or contractual modification at 31 December 2020 (with no amount recorded at 31 December 2019 and 2018). With this, the impairment recorded in Impairment or reversal of impairment at financial assets not measured at fair value through profit or loss and net gains and losses from changes: 'Financial assets at fair value through other comprehensive income' and 'Financial assets at amortised cost'; amounts EUR 12,382 million (EUR 9,352 million and EUR 8,986 million at 31 December 2019 and 2018, respectively). Following is the movement of the loan loss provision broken down by impairment stage of loans and advances to customers during 2020, 2019 and 2018: 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 of the exposure and modifications in the credit risk Write-offs FX and other movements Loss allowance at the end of the year Stage 1 Stage 2 Stage 3 Total 3,835 4,474 13,933 22,242 (1,040) 2,880 1,840 (255) 2,386 2,131 (971) 2,066 1,095 294 (976) (682) 303 (727) (424) 53 (138) (85) 1,966 535 7,009 9,510 — — (8,930) (8,930) (588) (573) (1,941) (3,102) 4,265 5,672 13,658 23,595 Stage 1 Stage 2 Stage 3 Total 3,658 4,743 14,906 23,307 (964) 3,235 2,271 (214) 1,296 1,082 (3,065) 5,612 2,547 301 (1,048) (747) 381 (817) (436) 29 (123) (94) 1,119 (182) 5,548 6,485 — — (12,593) (12,593) (94) 410 104 420 3,835 4,474 13,933 22,242 611 Annual report 2020 Contents 2018 EUR million Loss allowance at the beginning of the year 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 of the exposure and modifications in the credit risk Write-offs FX and other movements Loss allowance at the end of the year Stage 1 Stage 2 Stage 3 Total 4,349 5,079 16,507 25,935 (1,173) 3,854 2,681 (279) 1,264 985 (1,971) 4,528 2,557 438 (1,656) (1,218) 435 (1,264) (829) 84 (173) (89) 304 — (961) 7,070 6,413 — (12,673) (12,673) (65) (37) (353) (455) 3,658 4,743 14,906 23,307 d) Impaired assets and assets with unpaid past-due amounts The detail of the changes in the balance of the financial assets classified as 'Financial assets Loans to customers' considered to be impaired due to credit risk is as follows: EUR million Balance at beginning of year Net additions Written-off assets Changes in the scope of consolidation 2020 2019 2018 32,543 34,218 36,280 10,577 10,755 10,821 (8,930) (12,593) (12,673) (39) — 177 Exchange differences and other Balance at end of year (3,336) 163 (387) 30,815 32,543 34,218 This amount, after deducting the related allowances, represents the Group’s best estimate of the discounted value of the flows that are expected to be recovered from the impaired assets. At 31 December 2020, the Group’s written-off assets totalled EUR 39,087 million (EUR 46,209 million and EUR 47,751 million at 31 December 2019 and 2018, respectively). 612 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Following is a detail of the financial assets classified as 'Financial assets at amortised cost' and considered to be impaired due to credit risk at 31 December 2020, classified by geographical location of risk and by age of the first maturity of each operation: EUR million With no past- due balances or less than 90 days past due With balances past due by 90 to 180 days 180 to 270 days 270 days to 1 year More than 1 year Spain European Union (excluding Spain)* United States and Puerto Rico Other OECD countries* Latin America (non-OECD) 4,520 1,766 1,306 3,084 1,766 12,442 719 353 524 1,038 701 3,335 542 202 18 554 444 679 317 31 140 314 8,145 2,136 144 1,097 275 Total 14,605 4,774 2,023 5,913 3,500 1,760 1,481 11,797 30,815 * The amounts referring to the year 2020 for the United Kingdom have been considered in the line Other OECD countries, instead of in the line European Union (excluding Spain) due to the leaving of the United Kingdom from the European Union (see note 1.h). The detail at 31 December 2019 is as follows: EUR million 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 4,018 2,659 1,725 1,426 1,948 With balances past due by 90 to 180 days 180 to 270 days 270 days to 1 year More than 1 year 914 1,169 403 574 932 686 723 34 172 724 668 622 21 124 592 8,608 2,567 125 494 615 Total 14,894 7,740 2,308 2,790 4,811 11,776 3,992 2,339 2,027 12,409 32,543 The detail at 31 December 2018 is as follows: EUR million With no past- due balances or less than 90 days past due With balances past due by 90 to 180 days 180 to 270 days 270 days to 1 year More than 1 year Spain European Union (excluding Spain) United States and Puerto Rico Other OECD countries Latin America (non-OECD) . 5,671 2,940 1,906 1,414 1,221 13,152 780 1,213 531 498 1,145 4,167 551 577 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 34,218 613             Annual report 2020 Contents Securitisation is used as a tool for the management of regulatory capital and as a means of diversifying the Group's liquidity sources. The breakdown of securitized loans held on the balance sheet, according to the nature of the financial instrument in which they are originated, is shown below: EUR million Retained on the balance sheet 88,662 93,553 88,767 2020 2019 2018 Of which Securitised mortgage assets 30,145 31,868 33,900 Of which: UK assets 9,034 13,002 13,519 Other securitised assets 58,517 61,685 54,867 Total* 88,662 93,553 88,767 * Note 22 details the liabilities associated with these securitisation transactions. Additionally at 31 December 2020, there are EUR 599 million (EUR 676 million and EUR 797 million in 2019 and 2018, respectively) of off-balance sheet securitised assets that mainly come from the business combination of Banco Popular Español, S.A.U. and that were never recorded on the Group's balance sheet. At 31 December 2020, Grupo Santander had loans that had been fully derecognised and for which it retained servicing amounting to EUR 13,999 million (EUR 16,786 million and EUR 17,645 million at 31 December 2019 and 2018, respectively). 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 2020: EUR million Without associated real collateral With real estate collateral Gross Allowance amount recognised Estimated collateral value* 11,611 14,659 7,852 — 3,687 10,348 With other collateral 4,545 2,119 1,759 Total 30,815 13,658 12,107 * Including the estimated value of the collateral associated with each loan. Accordingly, any other cash flows that may be obtained, such as those arising from borrowers’ personal guarantees, are not included. 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 flow being recovered, such as a deterioration of the borrower’s financial situation, the worsening of its capacity to generate funds or difficulties experienced by it in accessing credit. Past-due amounts receivable In addition, at 31 December 2020, there were 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: EUR million Loans and advances to customers Of which public sector Total e) Transferred credits Less than 1 2 to 3 1 to 2 month months months 1,232 1 1,232 337 — 337 311 — 311 'Loans and advances to customers' includes, inter alia, the securitised loans transferred to third parties on which the Group has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognised. This is mainly due to mortgage loans, loans to companies and consumer loans in which the group retains subordinate financing and/or grants some kind of credit enhancement to new holders. 614 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 11. Trading derivatives The detail of the notional amounts and the market values of the trading derivatives held by the Group in 2020, 2019 and 2018 is as follows: EUR million Trading derivatives Interest rate risk 2020 2019 2018 Notional amount Market value Notional amount Market value Notional amount Market value Forward rate agreements Interest rate swaps Options, futures and other derivatives 515,889 3,789,169 698,500 — 218,252 (8) 308,340 3,638 4,322,199 2,573 4,197,246 (891) 794,140 (907) 543,138 Credit risk Credit default swaps Foreign currency risk 12,378 (133) 23,701 (71) 18,889 Foreign currency purchases and sales Foreign currency options Currency swaps Securities and commodities derivatives and other Total 304,280 45,074 394,178 70,861 (45) (7) (814) 920 325,720 44,763 379,176 61,966 5,830,329 2,668 6,169,917 (441) (182) 275,449 54,215 (1,162) 334,524 579 381 59,932 5,791,733 (1) 115 (514) 33 301 2 (416) 1,078 598 12. Non-current assets The detail of Non-current assets held for sale in the consolidated balance sheets is as follows: EUR million Tangible assets Of which: 2020 2019 2018 4,445 4,588 5,424 Foreclosed assets 4,081 4,485 5,334 Of which property assets in Spain* Other tangible assets held for sale Other assets Total 3,485 3,667 4,488 364 — 103 13 90 2 4,445 4,601 5,426 * During 2019, the sale of real estate assets to Cerberus from foreclosures materialized, generating losses of EUR 180 million. At 31 December 2020, the allowances recognised for the total non-current assets held for sale represented 48% (EUR 48% in 2019 and EUR 49% in 2018). The charges recorded in those years amounted to EUR 250 million, EUR 279 million and EUR 320 million, respectively, and the recoveries during these exercises are amounted to EUR 35 million, EUR 133 million and EUR 61 million, respectively. 615                                     Annual report 2020 Contents 13. Investments a) Breakdown b) Changes The changes in the investments were as followed: The detail, by company, of Investments is as follows: EUR million 2020 2019 2018 EUR million Balance at beginning of year 8,772 7,588 6,150 Acquisitions (disposals) of companies and capital increases (reductions) Of which: 676 (123) (1,761) Ebury Partners Limited (note 3) Santander Vida Seguros y Reaseguros (note 3) WiZink Bank, S.A. 409 219 — — — — — — (1,033) Changes in the consolidation method (note 3) Of which: Project Quasar Investments 2017, S.L. Popular Spain Holding de Inversiones, S.L.U. (former Allianz Popular, S.L.) Caceis Metrovacesa, S.A. Santander CACEIS Latam Holding 1, S.L. - Consolidado (former Santander Securities Services Latam Holding, S.L.) Effect of equity accounting Dividends paid and reimbursements of share premium Exchange differences and other changes Balance at end of year (1,359) 1,368 2,967 (956) — 1,701 (409) — 1,010 — — — 1,255 — — — (96) 349 324 — 737 (186) (407) (404) (185) 22 (101) 7,622 8,772 7,588 In 2020, 2019 and 2018 there was no evidence of material impairment on the Group’s investments. c) Impairment adjustments During the years 2020, 2019 and 2018 there was no evidence of significant impairment in the Group's associated interests. Associated entities Merlin Properties, SOCIMI, S.A. Metrovacesa, S.A. Caceis (note 3) Zurich Santander Insurance America, S.L. - Consolidated Companies Santander Insurance - Consolidated Ebury Partners Limited (note 3) Popular Spain Holding de Inversiones, S.L.U. (former Allianz Popular, S.L.) (note 3) Project Quasar Investment 2017 S.L.* Other companies Joint Ventures entities Santander Vida Seguros y Reaseguros (note 3) Santander CACEIS Latam Holding 1, S.L. - Consolidated (former Santander Securities Services Latam Holding, S.L.) U.C.I., S.A. - Consolidated Other companies 2020 2019 2018 1,581 1,511 1,358 1,157 1,226 1,255 1,077 1,010 — 955 1,009 961 439 388 402 392 — — — 409 431 — 1,351 1,701 533 529 511 6,130 7,447 6,609 381 170 163 326 168 617 349 206 600 1,492 1,325 — 202 614 979 * At 31 December 2020, the Group does not hold significant influence over this company, despite holding a 49% interest in it, since it does not meet any of the requirements established in the Standard by which an entity is considered to exercise significant influence over another. Of the entities included above, at 31 December 2020, the entities Merlin Properties, SOCIMI, S.A, Metrovacesa S.A., Compañía Española de Viviendas en Alquiler, S.A. and Unicre - Instituição Financeira de Crédito, S.A. are the only listed companies. 616 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix d) Other information Following is a summary of the financial information on the associated entities and joint ventures (obtained from the information available at the date of preparation of the financial statements): EUR million Total assets Total liabilities Net assets 2020 2019 2018 183,735 164,215 74,765 (167,209) (144,602) (58,153) 16,526 19,613 16,612 Investments in Group joint ventures and associates in the net assets of associates Goodwill Of which: Zurich Santander Insurance America, S.L. - Consolidated Caceis Santander Vida Seguros y Reaseguros, S.A. - Consolidated Sociedades Santander Insurance - Consolidated Popular Spain Holding de Inversiones, S.L.U. (former Allianz Popular, S.L.) Total Group share Total income Total profit 5,760 1,862 6,729 2,043 6,157 1,431 526 337 255 205 526 466 526 — 73 — 205 205 — 347 347 7,622 8,772 7,588 12,758 14,172 12,174 703 1,375 1,867 A summary of the financial information at the end of December 2020 of the main associates and joint ventures (obtained from the information available at the date of preparation of the consolidated financial statements) is shown below: EUR million Joint ventures entities 25,179 23,045 4,127 231 Total assets Total liabilities Total income Total  profit Of which: U.C.I., S.A. - Consolidated Santander Vida Seguros y Reaseguros, S.A. - Consolidated Santander Caceis Latam Holding, S.L. - Consolidated Associated entities Of which: Caceis Zurich Santander Insurance América, S.L. - Consolidated Sociedades Santander Insurance - Consolidated Total 12,032 11,696 248 (33) 3,901 3,645 1,998 81 517 128 81 158,556 144,164 8,631 10 472 119,533 117,109 1,990 189 13,021 12,144 4,566 315 2,408 1,933 722 183,735 167,209 12,758 80 703 617     Annual report 2020 Contents 14. Insurance contracts linked to pensions The detail of Insurance contracts linked to pensions in the consolidated balance sheets is as follows: EUR million Assets relating to insurance contracts covering post- employment benefit plan obligations: Banco Santander, S.A. 2020 2019 2018 174 174 192 192 210 210 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: EUR million 2020 2019 2018 Direct insurance and assumed Total (balance ceded payable) Direct insurance and assumed Total (balance ceded payable) Direct insurance and assumed reinsurance Reinsurance reinsurance Reinsurance reinsurance Reinsurance Total (balance ceded payable) 51 189 126 63 561 23 86 910 (45) (137) (122) (15) (59) (11) (9) (261) 6 52 4 48 502 12 77 649 59 206 139 67 399 22 53 739 (52) (151) (132) (19) (55) (10) (24) (292) 7 55 7 48 344 12 29 447 52 227 140 87 397 20 69 765 (47) (163) (127) (36) (86) (9) (19) (324) 5 64 13 51 311 11 50 441 Technical provisions for: Unearned premiums and unexpired risks Life insurance Unearned premiums and risks Mathematical provisions Claims outstanding Bonuses and rebates Other technical provisions 618   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 16. Tangible assets a) Changes The changes in Tangible assets in the consolidated balance sheets were as follows: EUR million Tangible assets Leased out under an operating lease Investment property For own use Total For own use Of which: Right-of-use for operating lease Leased out under an operating lease Investment property Total Cost: Balances at 1 January 2018 Additions / disposals (net) due to change in the scope of consolidation Additions / disposals (net) Transfers, exchange differences and other items Balance at 31 December 2018 IFRS 16 Adoption impact Balances at 1 January 2019 Additions / disposals (net) due to change in the scope of consolidation Additions / disposals (net) Transfers, exchange differences and other items Balance at 31 December 2019 Additions / disposals (net) due to change in the scope of consolidation Additions / disposals (net) Transfers, exchange differences and other items Balance at 31 December 2020 Accumulated depreciation: Balances at 1 January 2018 Disposals due to change in the scope of consolidation Disposals Charge for the year Transfers, exchange differences and other items Balance at 31 December 2018 IFRS 16 Adoption impact Balances at 1 January 2019 Disposals due to change in the scope of consolidation Disposals Charge for the year Transfers, exchange differences and other items Balance at 31 December 2019 Disposals due to change in the scope of consolidation Disposals Charge for the year Transfers, exchange differences and other items Balance at 31 December 2020 19,276 18,673 3,142 41,091 34 589 44 5,545 (630) (182) (552) 5,952 (1,164) 18,735 6,693 25,428 (5) 1,863 825 48 (291) 25,087 2,378 46,200 — — 6,693 25,087 2,378 52,893 6,693 6,693 — 3,148 (15) (20) (310) 4,701 — (997) * (178) (3,781) (603) (4,562) (10) 27,108 24,454 1,450 53,012 5,686 (16) 827 1,082 512 7 1,073 (29) 1,310 (37) (1,339) * (3,023) (1,844) 32 (4,835) (362) 24,896 24,204 1,460 50,560 3,948 (10,920) (6,104) (189) (17,213) (12) 629 (1,159) (34) 413 — — 17 (46) 1,059 (13) (1,172) 938 (10,524) (2,679) (8,404) (14) (1,755) (199) (19,127) — — — — (10,524) (8,404) (199) (19,127) — — — 37 3 356 (2,021) — 2,149 — 6 32 9 2,537 (14) (2,035) (807) 212 (11,974) 1,045 (5,210) 31 1,288 (144) (17,328) (40) 527 (1,906) — 2,387 — — 11 (40) 2,925 (8) (1,914) 5 (765) (3) 167 (706) 1,850 (11,543) (2,762) (5,585) 8 (904) (133) (17,261) 90 (1,217) * Includes contract extensions on operating leases and repurchases. — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 6,693 6,693 — (997) (10) 5,686 (37) (1,339) (362) 3,948 — — — 37 (807) 5 (765) (3) 167 (706) 90 (1,217) 619 Annual report 2020 Contents EIR million Impairment losses: Balances at 1 January 2018 Impairment charge for the year Releases Disposals due to change in the scope of consolidation Exchange differences and other Balances at 31 December 2018 IFRS 16 Adoption impact Balances at 1 January 2019 Impairment charge for the year Releases Disposals due to change in the scope of consolidation Exchange differences and other Balances at 31 December 2019 Impairment charge for the year Releases Disposals due to change in the scope of consolidation Disposals Exchange differences and other Balances at 31 December 2020 Tangible assets, net: Balances at 31 December 2018 IFRS 16 Adoption impact Balances at 1 January 2019 Balances at 31 December 2019 Balances at 31 December 2020 Tangible assets Leased out under an operating lease Investment property For own use Total For own use Of which: Right-of-use for operating lease Leased out under an operating lease Investment property Total (77) (30) 6 — 40 (61) — (61) (14) 8 — (26) (93) (104) 4 — 20 33 (140) (198) (629) (904) (56) — — 15 (239) — (239) (12) 6 — 222 (23) (70) 2 — — 31 (60) (8) 5 — 16 (616) — (94) 11 — 71 (916) — (616) (916) (36) 3 — 316 (333) (11) 5 — 3 (62) 17 — 512 (449) (185) 11 — 23 (28) (364) 36 (564) — — — — — — — (4) 1 — — (6) (9) 8,150 6,693 14,843 15,041 13,213 16,444 1,563 26,157 — 16,444 19,221 18,559 — 6,693 1,563 32,850 973 963 35,235 32,735 6,693 6,693 4,921 2,722 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (4) 1 — — (6) (9) 6,693 6,693 4,921 2,722 620 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix b) Tangible assets - For own use i. Property, plant and equipment owned The detail, by class of asset, of 'Property, plant and equipment' which is owned by the Group in the consolidated balance sheets is as follows: EUR million Land and buildings IT equipment and fixtures Furniture and vehicles Construction in progress and other items Balances at 31 December 2018 Land and buildings IT equipment and fixtures Furniture and vehicles Construction in progress and other items Balances at 31 December 2019 Land and buildings IT equipment and fixtures Furniture and vehicles Construction in progress and other items Balances at 31 December 2020 The carrying amount at 31 December 2020 in the foregoing table includes the following approximate amounts EUR 6,299 million (EUR 7,737 million at 31 December 2019 and EUR 5,390 million at 31 December 2018) relating to property, plant and equipment owned by group entities and branches located abroad. c) Tangible assets - Leased out under an operating lease Grupo Santander has assets leased out under operating leases where the company is the lessor and do not meet the accounting requirements to be classified as finance leases. The net cost of these leases is recorded as an asset and depreciated on a straight-line basis over the contractual term of the lease to the expected residual value. The expected residual value and, consequently, the monthly depreciation expense may change during the term of the lease. The Group estimates expected residual values using independent data sources and internal statistical models. It also assesses the estimate of the residual value of these leases and adjusts the depreciation rate in line with the change in the expected value of the asset at the end of the lease. Grupo Santander periodically assesses its investment in operating leases for impairment in certain circumstances, such as a systemic and material decrease in the values of used vehicles. If assets leased out under operating leases are deemed to be impaired, impairment is measured as the Tangible assets for own use Accumulated Cost depreciation Impairment losses Of which: Carrying Right-of-use for operating lease amount 6,127 5,605 6,686 317 (2,056) (4,455) (3,946) (67) (61) — — — 18,735 (10,524) (61) 4,010 1,150 2,740 250 8,150 13,972 5,995 6,952 189 (2,889) (4,808) (4,216) (61) (93) 10,990 4,908 — — — 1,187 2,736 128 2 11 — 27,108 (11,974) (93) 15,041 4,921 13,081 5,562 6,085 168 (3,215) (4,416) (3,854) (58) (133) — — (7) 9,733 1,146 2,231 103 2,716 1 5 — 24,896 (11,543) (140) 13,213 2,722 amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. In 2020, 2019 and 2018 the Group did not recognise any material impairment in this respect. Of the EUR 18,559 million that the Group had assigned to operating leases at 31 December 2020 (EUR 19,221 million and EUR 16,444 million at 31 December 2019 and 2018, respectively), EUR 13,455 million (EUR 14,799 million at 31 December 2019) relate to vehicles of Santander Consumer USA Holdings Inc.. The variable lease payments of various items of this entity are not representative. In addition, the maturity analysis of the payments for assets leased out under operating leases from Santander Consumer USA Holdings Inc. is as follows: EUR million Maturity Analysis 2021 2022 2023 2024 2020 3,841 4,288 4,344 1,593 621 Annual report 2020 Contents d) Tangible assets - Investment property The changes in goodwill were as follows: The fair value of investment property at 31 December 2020 amounted to EUR 1,055 million (EUR 1,076 million at 31 December 2019 and EUR 1,825 million at 31 December 2018). A comparison of the fair value of investment property at 31 December 2020, with the net book value shows gross unrealised gains of EUR 92 million (EUR 103 million in 2019 and EUR 262 in 2018), attributed completely to the group. EUR million Balance at beginning of year 24,246 25,466 25,769 2020 2019 2018 Additions (note 3) Of which: SAM Investment Holdings Limited The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2020, 2019 and 2018 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements. Santander España Impairment losses Of which: Santander UK 17. Intangible assets – Goodwill The detail of goodwill, based on the cash-generating units giving rise thereto, is as follows: EUR million 2020 2019 2018 Banco Santander (Brasil) 3,109 4,388 4,459 Santander Bank Polska Santander Bank, National Association Santander Consumer USA Santander Consumer Nordics Disposals or changes in scope of consolidation Exchange differences and other items 429 41 383 271 — — 4 (10,100) (1,491) (6,101) (1,491) (1,192) (1,177) (1,153) (277) — — — — — — — 375 — — — — — — (130) (2,104) 230 (556) SAM Investment Holdings Limited 1,444 1,173 1,173 Balance at end of year 12,471 24,246 25,466 Santander Consumer Germany 1,314 1,236 1,217 Santander Bank Polska 1,104 2,427 2,402 Santander Portugal Santander España 1,040 1,040 1,040 1,027 1,027 1,023 Santander Consumer USA 904 2,143 2,102 Santander Bank, National Association 594 1,828 1,793 Santander UK Banco Santander - Chile Grupo Financiero Santander (México) Santander Consumer Nordics Other companies Total Goodwill 592 7,147 8,307 571 399 216 157 589 460 496 292 627 434 502 387 12,471 24,246 25,466 622 Grupo Santander has goodwill generated by cash-generating units located in non-euro currency countries (mainly Brazil, Poland, the United States, the United Kingdom, Chile, Mexico, Norway and Sweden) and, therefore, this gives rise to exchange differences on the translation to euros, at closing rates, of the amounts of goodwill denominated in foreign currencies. Accordingly, in 2020 there was a decrease of EUR 2,104 million (an increase of EUR 230 million in 2019 and a decrease of EUR 556 million in 2018), due to exchange differences and other items which, pursuant to current standards, were recognised with a change to 'Other comprehensive income - Items that may be reclassified to profit or loss - Exchange differences 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), Grupo Santander performs an analysis of the potential impairment of its recorded goodwill with respect to its recoverable amount.The first step that must be taken in order to perform this analysis is the identification of the cash- generating units, which are the Group's smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash flows of 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. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix c) Past performance variables: in addition, management takes into consideration in the projection the difference (both positive and negative) between the cash- generating unit’s past performance and budgets. During the second quarter 2020, considering the worsening of the macroeconomic environment caused by covid-19, an impairment test was conducted for certain CGU. This test took into account the negative evolution forecast by various national and international organisations of magnitudes such as GDP (which could take between two and three years to recover in most countries), the unemployment rate, the growth of credit portfolios, etc. As a result, the Group recognised goodwill impairment of EUR 10,100 million. The impairment was the result of a combination of factors, mainly due to the new macroeconomic outlook mentioned above, which caused the Group to project lower earnings in some units, in addition to reducing the assumptions on perpetual growth rates and increasing the discount rates used to estimate the value in use of these CGU. These goodwill impairment losses were recognized within 'Impairment or reversal of impairment on non-financial assets, net - Intangible assets caption', of which EUR 6,101 million correspond to Santander UK (EUR 1,491 million in 2019), EUR 1,192 million to Santander Bank Polska, EUR 1,177 million to Santander Bank, National Association, EUR 1,153 million to Santander Consumer USA, and EUR 277 million to Santander Consumer Nordics. The recoverable amount of the above cash-generating units is sensitive to changes in cash flow projections, discount rates and nominal perpetual growth rates; therefore, changes in these assumptions could result in additional impairment losses. It should be noted that goodwill is deducted from the CET1 for regulatory purposes, therefore an impairment of this intangible asset has no impact on the Group's capital ratios. Grupo Santander'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 affect 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 financial 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, efficiency 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, market references (multiples), internal estimates and valuations performed by internal and external experts. 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. In addition, the Group performs estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections. The main assumptions used in this calculation are (i) earnings projections based on the financial budgets approved by the Group’s directors which cover between three and five year periods (unless a longer time horizon can be justified), (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 flow projections used by Group management to obtain the values in use are based on the financial 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 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. 623 Annual report 2020 Contents Following is a detail of the main assumptions taken into account in determining the recoverable amount, at 2020 year-end, of the most significant cash-generating units which were valued using the discounted cash flow method: Santander UK Santander Bank Polska Santander Consumer USA Santander Bank, National Association** Santander Consumer Germany SAM Investment Holdings Limited Santander Portugal Santander Consumer Nordics 2020 Discount rate* Nominal perpetual growth rate 9.5% 10.0% 10.7% 11.6% 9.0% 10.1% 9.8% 10.1% 2.3% 3.5% 1.5% 2.5% 1.8% 2.5% 1.8% 2.0% Projected period 5 years 5 years 3 years 5 years 5 years 5 years 5 years 5 years Post-tax discount rate. * ** Weighted information of the main assumptions of the segments to which goodwill has been allocated. The assumptions taken into account to determine the recoverable amount in the second quarter of 2020 did not vary significantly from the measurement made at the end of 2020 and no additional impairment was recognized at 31 December 2020. The discount and nominal perpetual growth rates taken into account in 2019 and 2018 are presented below for comparison purposes: Santander UK Santander Bank Polska** Santander Consumer USA Santander Bank, National Association*** Santander Consumer Germany SAM Investment Holdings Limited Santander Portugal Santander Consumer Nordics Discount rate* 2018 8.4% n.a. 11.1% 10.6% 8.5% 9.6% 9.6% 9.2% 2019 8.5% 9.2% 9.5% 9.6% 8.2% 10.0% 8.9% 8.6% Nominal perpetual growth rate 2018 2.5% n.a. 1.5% 3.8% 2.5% 2.5% 2.0% 2.5% 2019 2.5% 3.5% 1.5% 3.6% 2.5% 2.5% 2.0% 2.5% Post-tax discount rate. * ** The recoverable amount has been calculated using the market price in previous years. *** Weighted information of the main assumptions of the segments to which goodwill has been allocated. 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 confirm 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 the cash-generating units not reflecting an impairment charge in 2020 still exceeds their recoverable amount. The recoverable amount of 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 quoted market prices of their shares at year-end. This value exceeded the amount to be recovered. A significant reduction in the quoted market prices of these cash generating unit could result in an indication of impairment which in turn may lead to a goodwill impairment charge in the future. 624   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 2020, 2019, and 2018 is as follows: EUR million With indefinite useful life: Brand names With finite useful life: IT developments Other Accumulated amortisation Development Other Impairment losses Of which addition Liberation EUR million With indefinite useful life: Brand names With finite useful life: IT developments Other Accumulated amortisation Development Other Impairment losses Of which addition liberation 31 Estimated December 2019 useful life Net  additions and Application of Change in Amortization amortization scope of disposals consolidation and impairment Exchange 31 and differences December 2020 and other impairment 3 -7 years 42 — 7,945 1,276 (5,686) (5,139) (547) (136) — — 1,123 328 35 — 35 — — — 3,441 1,486 — (34) 1 49 49 — — — — 16 (896) (792) (104) (142) (142) — (1,038) — (5) 37 (224) (17) 105 88 17 136 — — — (910) (149) 584 487 97 12 — — (468) 7,900 1,439 (5,809) (5,307) (502) (130) — — 3,437 31 Estimated December 2018 useful life Application of Change in Amortization amortization Net  additions and scope of disposals consolidation and impairment Exchange 31 and differences December 2019 and other impairment 3-7 years 36 2 7,134 1,510 (5,432) (4,743) (689) (154) — — 1,374 1 — — — — — — 3,094 1,377 2 (19) (24) 8 4 4 — — — (33) (966) (874) (92) (73) (75) 2 (1,039) — (639) (248) 806 570 236 81 — — — 2 95 37 (102) (96) (6) 10 — — 42 42 7,945 1,276 (5,686) (5,139) (547) (136) — — 3,441 625         Annual report 2020 Contents EUR million 31 Estimated December 2017 useful life Net  additions and Application of Change in Amortization amortization scope of disposals consolidation and impairment Exchange 31 and differences December 2018 and other impairment With indefinite useful life: Brand names With finite useful life: IT developments 3-7 years Other Accumulated amortisation Development Other Impairment losses Of which addition Liberation 35 — 6,945 1,560 (5,386) (4,721) (665) (240) — — 1,468 1 — — — — — — 2,914 1,469 — 1 12 (1) (1) — — — — 12 — 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 (1,253) (1,153) (100) (117) (118) 1 (1,370) In 2020, 2019 and 2018, impairment losses of EUR 142 million, EUR 73 million and EUR 117 million, respectively, were recognised under Impairment or reversal of impairment on non-financial assets, net – intangible assets. This impairment losses are 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: EUR million Transactions in transit 2020 2019 2018 88 157 143 Net pension plan assets (Note 25) 635 903 1,015 Prepayments and accrued income 2,806 3,129 3,089 Other (Note 2.n) 7,362 5,752 4,744 10,891 9,941 8,991 626     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 20. Deposits from central banks and credit institutions The detail, by classification, 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 The detail, by classification, geographical area and type, of Customer deposits is as follows: EUR million Classification 2020 2019 2018 2020 2019 2018 Financial liabilities held for trading — — — Financial liabilities designated at fair value through profit or loss 34,343 34,917 39,597 EUR million CENTRAL BANKS Classification Financial liabilities held for trading Financial liabilities designated at fair value through profit or loss Financial liabilities at amortized cost Type Deposits on demand Time deposits — — — 2,490 12,854 14,816 112,804 62,468 72,523 115,294 75,322 87,339 10 5 5 108,090 67,424 82,797 Financial liabilities at amortized cost Geographical area Spain European Union (excluding Spain)* United States and Puerto Rico Other OECD countries* South America Rest of the world Reverse repurchase agreements 7,194 7,893 4,537 115,294 75,322 87,339 Type 6,765 9,340 10,891 Time deposits- Demand deposits- Current accounts Savings accounts Other demand deposits Fixed-term deposits and other term deposits Home-purchase savings accounts Discount deposits Hybrid financial liabilities Subordinated liabilities Repurchase agreements CREDIT INSTITUTIONS Classification Financial liabilities held for trading — — — Financial liabilities designated at fair value through profit or loss Financial liabilities at amortized cost Type Deposits on demand Time deposits 62,620 90,501 89,679 69,385 99,841 100,570 5,727 9,136 6,154 43,308 61,406 53,422 Reverse repurchase agreements 20,179 29,115 40,873 Subordinated deposits 171 184 121 Currency: Euro Pound sterling US dollar Brazilian real Other currencies TOTAL 69,385 99,841 100,570 104,499 79,008 97,323 23,339 18,129 19,301 26,581 53,403 45,848 12,356 13,022 18,657 17,904 11,601 6,780 184,679 175,163 187,909 At 31 December 2020, the European Central Bank's targeted longer-term refinancing operations (TLTRO (Targeted Long- Term Refinancing Operation)) amounted to EUR 77,732 million, of which EUR 77,460 million correspond to TLRTO III (EUR 46,201 million at 31 December 2019 and EUR 55,382 million at 31 December 2018). Total net reliance on European Central Bank amounts to EUR 13,494 million. In December 2020, the income recognized in the consolidated consolidated income statement corresponding to TLTRO III amounts to EUR 391 million. Note 50 contains a detail of the residual maturity periods of financial liabilities at amortised cost and of the related average interest rates. * The amounts referring to the year 2020 for the United Kingdom have been considered in the line Other OECD countries, instead of in the line European Union (excluding Spain) due to the leaving of the United Kingdom from the European Union (see note 1.h). 627 814,967 789,448 740,899 849,310 824,365 780,496 294,516 271,103 267,210 106,013 334,542 309,615 59,057 60,011 53,843 306,243 71,235 67,462 83,481 87,474 82,343 — — 23 849,310 824,365 780,496 642,897 588,533 548,711 418,752 373,146 346,345 216,500 208,701 196,493 7,645 6,686 5,873 171,939 196,921 199,025 170,127 194,163 195,540 43 3 44 3 40 3 1,743 2,711 3,419 23 — 23 34,474 38,911 32,760 849,310 824,365 780,496 Annual report 2020 Contents 22. Marketable debt securities a) Breakdown The detail, by classification and type, of Marketable debt securities is as follows: EUR million Classification Financial liabilities held for trading Financial liabilities designated at fair value through profit or loss Financial liabilities at amortized cost Type Bonds and debentures outstanding Subordinated Notes and other securities 2020 2019 2018 — — — 4,440 3,758 2,305 230,829 258,219 244,314 235,269 261,977 246,619 191,577 208,455 195,498 21,686 20,878 23,676 22,006 32,644 27,445 235,269 261,977 246,619 The distribution of the book value of debt securities issued by contractual maturity is shown below: EUR million Subordinated debt Senior unsecured debt Senior secured debt Promissory notes and other securities Debt securities issued On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total — — — — — — 2,259 9,068 — 1,985 6,668 — 741 3,505 17,440 21,686 14,476 34,814 29,037 22,959 105,530 9,025 25,116 15,508 20,662 86,047 3,942 9,975 8,089 — — — 22,006 15,269 18,628 31,590 60,671 48,050 61,061 235,269 The distribution by contractual maturity of the notional amounts of these debt securities issued is as follows: EUR million Subordinated debt Senior unsecured debt Senior secured debt Promissory notes and other securities Debt securities issued On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total — — — — — — 2,168 8,982 — 1,905 6,605 — 732 3,463 17,233 21,428 13,895 33,415 27,871 22,039 101,293 8,939 24,878 15,361 20,466 85,231 4,158 10,521 8,531 — — — 23,210 15,308 19,031 31,365 59,025 46,695 59,738 231,162 628     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 EUR million 2019 89,008 64,952 20,178 15,292 6,848 12,177 2020 89,031 61,174 16,569 8,398 5,624 10,781 2018 85,479 62,021 16,616 15,778 6,460 9,144 2020 Outstanding issue amount in foreign currency (Million) Annual interest rate (%) 89,031 75,064 14,880 53,522 4,903,110 1.08 % 2.92 % 2.16 % 2.99 % 4.67 % Balance at end of year 191,577 208,455 195,498 629 Annual report 2020 Contents The changes in 'Bonds and debentures outstanding' were as follows: EUR million Balance at beginning of year Net inclusion of entities in the Group Issues Of which: Santander Consumer USA Holdings Inc. Banco Santander (Brasil) S.A. Banco Santander, S.A. Santander UK Group Holdings plc group Santander Consumer Finance, S.A. SC Germany S.A., Compartment Consumer 2020-1 Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Santander International Products, Plc. Santander Holdings USA, Inc. Santander Consumer Bank AS Banco Santander - Chile SCF Rahoituspalvelut IX DAC PSA Financial Services Spain, E.F.C., S.A. Santander Consumer Bank AG PSA Banque France PSA Bank Deutschland GmbH SCF Rahoituspalvelut VIII DAC Redemptions and repurchases Of which: Banco Santander (Brasil) S.A. Santander UK Group Holdings plc group Santander Consumer USA Holdings Inc. Banco Santander, S.A. Santander Consumer Finance, S.A. Banco Santander - Chile Santander Holdings USA, Inc. Santander Consumer Bank AS Banco Santander Totta, S.A. PSA Banque France Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Santander International Products, Plc. PSA Bank Deutschland GmbH Banca PSA Italia S.p.A. Exchange differences and other movements Balance at year-end 2020 208,455 2019 195,498 2018 176,719 785 54,905 — 64,184 — 68,306 12,246 11,036 10,220 6,320 2,394 1,800 1,770 1,588 1,269 773 766 650 605 500 385 — 15,631 13,227 12,066 4,547 5,150 — 577 848 2,778 1,572 1,644 — — 750 1,132 1,104 15,627 16,422 7,683 14,984 3,605 — 560 249 1,210 1,342 1,483 — — — 716 600 — (62,699) 799 (52,462) — (48,319) (14,211) (12,817) (14,802) (14,102) (9,115) (6,800) (13,959) (14,517) (11,939) (5,991) (4,371) (1,974) (1,201) (936) (784) (684) (415) (324) — — (3,303) (2,550) (848) (1,990) (1,551) (739) — (159) (722) (902) — (4,752) (2,366) (204) (903) (1,268) (41) — (579) (491) (488) (600) (9,869) 1,235 (1,208) 191,577 208,455 195,498 630 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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, Banco Santander, S.A., Santander Consumer Bank AG, PSA Banque France and Banco Santander - Chile. covered bonds in the UK secured by mortgage loans and other assets. The fair value of the guarantees received by the Group (financial and non-financial 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 financial statements as a whole. d) Guarantees Set forth below is information on the liabilities secured by assets: EUR million 2020 2019 2018 Asset-backed securities 35,753 38,616 38,140 Of which, mortgage-backed securities 2,274 3,819 5,197 Other mortgage securities 49,425 50,269 46,026 Of which: mortgage-backed bonds 24,736 24,736 22,023 Territorial covered bond 869 1,270 1,270 86,047 90,155 85,436 The main characteristics of the assets securing the aforementioned financial liabilities are as follows: 1. Asset-backed securities a. Mortgage-backed securities- these securities are secured by mortgage assets (see Note 10.e) with average maturities of more than ten years that must: be a first 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 financial 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: includes asset-backed securities, notes issued by securitization funds collateralized mainly by mortgage loans that do not meet the above requirements and other loans (mainly personal loans with an average maturity of five years and loans to SMEs with average maturities of seven years) and private issues of Santander Consumer Usa Holdings Inc collateralized by vehicles assigned under operating leases. 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 classified 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 sufficient liability insurance, (ii) other debt securities issued as part of the Group’s liquidity strategy in the UK, mainly 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 specific 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 financial and mortgage system regulations. Also, financial management defines the Grupo Santander's funding strategy. The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, and specific policies are also in place adapted to each mortgage product, which occasionally require the application of stricter limits. Grupo Santander’s general policies in this respect require the repayment capacity of each potential customer (the effort ratio in loan approval) to be analysed using specific indicators that must be met. This analysis must determine whether each customer’s income is sufficient 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 (effort 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. Grupo Santander entities have specialised document comparison procedures and tools for verifying customer information and solvency (see note 53). Grupo Santander 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 3 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 631 Annual report 2020 Contents and / or are subject to mortgage participations and / or mortgage transfer certificates. In the event of insolvency, the holders of mortgage-backed bonds, as long as they are not considered 'person especially related' to the issuing entity in accordance with Royal Legislative Decree 1/2020, of 5 May, approving the revised text of the Bankruptcy Law and Law 22/2003, of 9 July, on Bankruptcy (the Insolvency Law'), will enjoy the special privilege established in Article 270.1.1 of the aforementioned Insolvency Law. Without prejudice to the foregoing, in accordance with Article 242.10 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 filing 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 flows generated by the financial instruments associated with the issues (Article 14 of Law 2/1981 of 25 March 1981 regulating the mortgage market). If, due to a timing mismatch, the income received by the insolvent party is insufficient 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 sufficient, they must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders. In the event that it would be necessary to proceed in accordance with the terms of Article 212.1 and, in accordance with the requirements of Article 413 of the Insolvency Law, 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. If the same credit or loan is subject to the payment of bonds and a mortgage bond issue, it will be paid first to the holders of the bonds. The outstanding mortgage-backed bonds issued by Grupo Santander totalled EUR 24,736 million at 31 December 2020 (all of which were denominated in euros), of which EUR 24,286 million were issued by Banco Santander, S.A., and EUR 450 million were issued by Santander Consumer Finance, S.A. The issues outstanding at 31 December 2020 and 2019 are detailed in the separate financial statements of each of these companies. Mortgage-backed bond issuers have an early redemption option for the purpose of complying with the limits on the volume of outstanding mortgage-backed bonds stipulated by mortgage market regulations. In addition, the issuing entity may advance the mortgage-backed bonds, if this has been expressly established in the final conditions of the issue in question and under the conditions set out therein. None of the mortgage-backed bonds issued by the Group entities had replacement assets assigned to them. committee on which the various areas of the Group related to these companies are represented. The aim of the committee is 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 significant 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 definitive 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 24 April is as follows: EUR million 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 certificates and other securitised mortgage assets 2020 2019 2018 76,554 84,720 85,610 57,382 59,517 60,195 17,610 14,569 15,807 Mortgage-backed bonds The mortgage-backed bonds ('cédulas hipotecarias') issued by the Group entities are securities the principal and interest of which are specifically 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 affected by the issuance of mortgage bonds and / or are subject to mortgage participations, and / or mortgage transfer certificates, and, if they exist, by substitution assets eligible to be hedged and for the economic flows generated by derivative financial 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 632 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 23. Subordinated liabilities a) Breakdown The detail, by currency of issue, of Subordinated liabilities, deposits and markatable debt securities, 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 Note 50 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. 2020 Outstanding issue amount in foreign currency (million) 13,570 7,351 507 — Annual interest rate (%) 3.86 % 5.16 % 8.89 % — EUR million 2019 12,542 6,506 655 — 2020 13,570 5,991 565 — 2018 14,001 7,813 628 — 1,754 1,359 1,378 21,880 21,062 23,820 196 7,425 321 7,709 345 9,717 633 Annual report 2020 Contents b) Changes The changes in Subordinated markatable debt securities in the last three years were as follows: EUR million Balance at beginning of year Net inclusion of entities in the Group (Note 3) Placements Of which: Banco Santander, S.A. Banco Santander - Chile Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Santander Bank Polska S.A. Net redemptions and repurchases* Of which: 2020 2019 2018 20,878 23,676 21,382 — — — 4,075 1,056 3,266 3,722 1,056 2,750 353 — — — — — — 281 235 (2,838) (4,009) (1,259) Banco Santander, S.A. Santander UK plc Santander UK Group Holdings plc Santander Bank, National Association Banco Santander (Brasil) S.A. (1,671) (3,782) (740) (316) (16) — (401) (313) — (111) (19) (163) — (124) (61) Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Santander Holdings USA, Inc. Exchange differences and other movements Balance at end of year — — (69) — (125) (195) (429) 155 287 21,686 20,878 23,676 * The balance relating to issuances, redemptions and repurchases (EUR 1,237 million), together with the interest paid in remuneration of these issuances including PPCC (EUR 942 million), is included in the cash flow from financing activities. c) Other disclosures This caption includes contingent convertible or redeemable preferred participations, as well as other subordinated financial instruments issued by consolidated companies, which do not qualify as equity (preferred shares). Preferred shares do not have voting rights and are non- cumulative. They have been subscribed by third parties outside the Group, and except for the issues of Santander UK plc mentioned below, the rest are redeemable by decision of the issuer, according to the terms of each issue. Banco Santander's contingently convertible preferred participations are subordinated debentures and rank after common creditors and any other subordinated credit that by law and/or by their terms, to the extent permitted by Spanish law, ranks higher than the contingently convertible preferred participations. Their remuneration is conditioned to the obtainment of sufficient distributable profits, and to the limitations imposed by the regulations on shareholders' equity, and they have no voting rights. The other issues of Banco Santander S.A. mentioned in this caption are also subordinated debentures and, for credit ranking purposes, they rank behind all the common creditors of the issuing entities and ahead of any other subordinated credit that ranks 634 pari passu with the Bank's contingently convertible preferred participations. The main issues of subordinated debt securities issued, broken down by company, are detailed below: Issues by Banco Santander, S.A. In December 2020, Banco Santander, S.A. issued subordinated debentures with a ten-year term of USD 1,500 million. The issue bears interest at an annual rate of 2.749%, payable semiannually. In October 2020, it carried out a ten-year subordinated debenture issue for an amount of EUR 1,000 million. The issue bears interest at an annual rate of 1.625%, payable annually. In March 2020, it proceeded to redeem early and voluntarily the entire outstanding issue of Tier 1 Contingently Convertible Preferred Participations Series I/2014, for a total nominal amount of EUR 1,500 million. In January 2020, it carried out a placement of contingently convertible preferred participations into newly issued ordinary shares of the Bank (the 'PPCCs'), excluding the pre- emptive subscription rights of its shareholders and for a nominal amount of EUR 1.5 billion (the 'Issue' and the 'PPCCs'). The Issue was made at par and the remuneration of the PPCCs, the payment of which is subject to certain conditions and is also discretionary, was set at 4.375% per annum for the first six years, revised every five years thereafter by applying a margin of 453.4 basis points over the 5-year Mid- Swap Rate (5-year Mid-Swap Rate). On March 5, May 8 and September 2, 2014, three issues of contingently convertible preferred participations into newly issued ordinary shares of the Bank (the PPCC) were made, for a nominal amount of EUR 1,500 million, USD 1,500 million and EUR 1,500 million respectively, the payment of which is subject to certain conditions and is also discretionary. The remuneration of the issues was set at 6.25% p.a. for the first five years (revised thereafter by applying a margin of 541 basis points over the 5-year Mid-Swap Rate) for the March issue, at 6.375% p.a. for the first five years revised thereafter by applying a margin of 478.8 basis points over the 5 year Mid-Swap Rate)- for the May issue and at 6.25% p.a. for the first seven years (reviewed every five years thereafter by applying a margin of 564 basis points over the 5 year Mid- Swap Rate) for the September issue. In April 2019, the voluntary early redemption of the preferred shares relating to the second issue made on 8 May 2014 was communicated for an amount of USD 1,500 million at the redemption date. At 8 February 2019, Banco Santander, S.A, carried out an issue of PPCC for a nominal amount of USD 1,200 million (EUR 1,056 million). The remuneration of the issues whose payment is subject to certain conditions and is also discretionary was set at 7.50% per annum, payable quarterly, for the first seven years (revised thereafter by applying a margin of 489.9 points over the mid-swap rate). Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix At 19 March 2018, a "PPCC" issue was carried out, for a nominal amount of EUR 1,500 million. The remuneration of the issue, the payment of which is subject to certain conditions and is also discretionary, was set at 4.75% per annum, payable quarterly, for the first seven years (revised thereafter by applying a margin of 410 basis points over the Mid-swap rate). option on the fifth anniversary of the issue date in the amount of PLN 1 billion. The issue bears floating interest at Wibor (6M) + .0160 basis points payable semi-annually. The accrued interests from the subordinated liabilities during 2020 amounted to EUR 571 million (EUR 645 million and EUR 770 million during 2019 and 2018, respectively). At 8 February 2018, a ten-year subordinated debenture issue of EUR 1,250 million was carried out. The issue bears interest at an annual rate of 2.125% payable annually. Interests from the PPCC during 2020 amounted to EUR 552 million (EUR 595 million and EUR 560 million in 2019 and 2018, respectively). At 25 April and 29 September 2017, Banco Santander, S.A. carried out issues of PPCC, for a nominal amount of EUR 750 million, and EUR 1,000 million respectively. The remuneration of the PPCC, the payment of which is subject to certain conditions and is also discretionary, was set at 6.75% per annum for the first five years (revised thereafter by applying a margin of 680.3 basis points over the 5-year Mid-Swap Rate) for the issue disbursed in April, at 5.25% per annum for the first six years (revised thereafter by applying a margin of 499.9 basis points over the 5 year Mid-Swap Rate) for the issue disbursed in September. Issues by Banco Santander - Chile In June 2020, Banco Santander Chile issued subordinated debentures for a term of fifteen years, in the amount of UF 5 million (equivalent to USD 185 million). The issue bears annual interest at 3.5%. In April 2020, Banco Santander Chile issued two subordinated debentures, the first for a term of fourteen years, for an amount of UF 3 million (equivalent to USD 100 million), bearing annual interest at 3%, and the second for a term of nineteen years, for an amount of UF 3 million (equivalent to USD 100 million), bearing annual interest at 3.15%. Issues Banco Santander (Brasil) S.A. On 29 January 2014 Banco Santander (Brasil) S.A. issued Tier 1 perpetual subordinated notes for a nominal amount of USD 1,248 million and the Group acquired 89.6% of the issue. The notes are perpetual and would be converted into common shares of Banco Santander (Brasil) S.A. if the common equity Tier 1 ratio, calculated as established by the Central Bank of Brazil, were lower than 5.125%. This issue was fully redeemed in fiscal year 2019. At 1 October 2018, a ten-year subordinated debenture issue was made by by Banco Santander México, S.A. Institución de Banca Múltiple, Grupo Financiero Santander México for a nominal amount of USD 1,300 millions and at an interest rate of 5.95%, with the group having acquired 75% of the issue. Additionally, at 30 December 2016, a nominal amount of USD 500 million was made, with the Group having acquired 88.2% of the issue. The perpetual debentures are automatically converted into shares when the Regulatory Capital Ratio (CET1) is equal to or less than 5.125% at the conversion price. Issues by Santander Bank Polska S.A. At 20 April 2018, Santander Bank Polska S.A. carried out a ten-year subordinated debenture issue with a redemption 24. Other financial liabilities The detail of Other financial liabilities in the consolidated balance sheets is as follows: EUR million Trade payables Clearing houses Tax collection accounts: Public Institutions 2020 2019 2018 1,177 1,279 1,323 599 165 434 4,122 4,122 3,968 Factoring accounts payable 222 409 263 Unsettled financial transactions 5,080 3,693 3,373 Lease liabilities (note 2.l) 3,049 5,108 190 Other financial liabilities 12,719 15,459 15,113 26,968 30,235 24,664 Note 50 contains a detail of the residual maturity periods of other financial liabilities at each year-end. Lease liabilities The cash outflow of leases in 2020 was EUR 789 million (EUR 946 million in 2019). The analysis of the maturities of lease liabilities as of 31 December 2020 is shown below: EUR million Maturity Analysis - Discounted payments Between 3 and 5 years Later than 5 years Total discounted payments at the end of the year 2020 2019 594 981 637 837 766 1,254 875 2,213 3,049 5,108 During 2020 and 2019, there were no significant variable lease payments not included in the valuation of lease liabilities. 635 Issues by Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Within 1 year Between 1 and 3 years Annual report 2020 Contents 25. Provisions a) Breakdown The detail of Provisions in the consolidated balance sheets is as follows: EUR million Provision for pensions and other obligations post- employments Other long term employee benefits Provisions for taxes and other legal contingencies Provisions for contingent liabilities and commitments (note 2) Other provisions Provisions b) Changes 2020 2019 2018 3,976 6,358 5,558 1,751 1,382 1,239 2,200 3,057 3,174 700 2,225 739 2,451 779 2,475 10,852 13,987 13,225 The changes in 'Provisions' in the last three years were as follows: EUR million Post employment plans Long term employee benefits Contingent liabilities and commitments Other provisions 2020 Balances at beginning of year Incorporation of Group companies, net Additions charged to income Interest expense (note 39) Staff 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 Benefits paid due to settlements Insurance premiums paid Payments to external funds Amounts used Transfer, exchange differences and other changes Balances at end of year 6,358 (5) (217) 84 69 (370) 6 (376) 2 547 (303) (1,551) (1) (333) — (521) 3,976 1,382 — 782 11 7 764 787 (23) — — (408) — — — — (5) 1,751 739 (1) 50 — — 50 490 (440) — — — — — — — (88) 700 5,508 (2) 1,934 — — 1,934 2,258 (324) — — — — — — (2,485) (530) 4,425 Total 13,987 (8) 2,549 95 76 2,378 3,541 (1,163) 2 547 (711) (1,551) (1) (333) (2,485) (1,144) 10,852 636 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 2019 2018 Post employment plans Long term employee benefits Contingent liabilities and commitments Other provisions Total Post employment plans Long term employee benefits Contingent liabilities and commitments Other provisions Total Balances at beginning of year 5,558 1,239 779 5,649 13,225 6,345 1,686 814 5,841 14,686 Incorporation of Group companies, net Additions charged to income Interest expense (note 39) Staff costs (note 47) Provisions or reversion of provisions Addition Release — 173 128 65 (20) 10 (30) Other additions arising from insurance contracts linked to pensions Changes in value recognised in equity 4 1,520 (1) 729 17 7 705 713 (8) — — Payments to pensioners and pre- retirees with a charge to internal provisions Benefits paid due to settlements Insurance premiums paid Payments to external funds Amounts used Transfer, exchange differences and other changes Balances at end of year (331) (612) — (1) (455) — (110) — — — — 27 — (31) — — (31) 422 — (1) 2,836 3,707 — — 145 72 2,836 3,490 4,276 5,421 (453) (1,440) (1,931) — — — — — — — — — — — — — 4 1,520 — (1) (455) (2,907) (2,907) — 38 165 78 (205) 7 (212) (7) (482) — 251 21 6 224 227 (3) — — — (2) (368) — — — — — (943) (332) (625) 6,358 1,382 739 5,508 13,987 5,558 1,239 (9) (70) (162) 366 (73) c) Provision for pensions and other obligations post – employments and Other long term employee benefits The detail of Provisions for pensions and similar obligations is as follows: EUR million Provisions for post-employment plans - Spanish entities Provisions for other similar obligations - Spanish entities Of which pre-retirements 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 benefits Of which defined benefits 2020 2019 2018 1,881 3,951 3,930 1,695 1,676 1,321 1,303 1,189 1,172 449 329 130 1,646 2,078 1,498 56 61 50 5,727 5,719 7,740 7,731 6,797 6,791 — (49) — — (49) 455 (30) (30) 2,253 2,493 — — 186 84 2,253 2,223 4,612 5,301 (504) (2,359) (3,078) — — — — — — — — — — — — (7) (482) (957) — (2) (368) (3) (2,548) (2,551) 17 779 133 443 5,649 13,225 637 Annual report 2020 Contents i. Spanish entities - Post-employment plans and other similar obligations At 31 December 2020, 2019 and 2018, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. In addition, in various years some of the consolidated entities offered 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 benefit costs- from the date of their pre-retirement to the agreed end date. In 2020, 443 employees benefited from the pre- retirement and incentivised retirement plan, being the provision set up to cover these commitments of EUR 84 million. In 2019 and 2018 the provisions accounted for benefit plans and contribution commitments were EUR 688 million and 209 million respectively. In December 2020, Banco Santander reached an agreement with the workers' representatives to implement an early retirement and voluntary redundancy plan to which 3,572 employees are expected to apply during 2021; additionally, a total of 64 people are expected to apply for early retirement and voluntary redundancy offers in other societies in Spain. The provision set up to cover these commitments amounts to EUR 688 million. In December 2019 Banco Santander reached an agreement with the workers' representatives to offer during 2020 to part of its passive personnel, the possibility of receiving the pensionable rights derived from the collective bargaining agreement in the form of a single consideration or divided into a maximum of 5 equal annuities. The proposal was also extended to personnel with pensionable rights recognized under individual contracts or agreements. The number of beneficiaries who exercised the voluntary option of accepting the substitution of the life annuity for the payment of a lump sum in the form of a capital sum or in instalments of a maximum of 5 annuities amounted to 15,613 people. The effect of the reduction of the aforementioned commitments is shown in the tables below under the headings 'Benefits paid in settlement' in the amount of EUR 1,551 million and 'Effect of reduction/settlement' in the amount of EUR 362 million. The expenses incurred by the Spanish companies in 2020, 2019 and 2018 in respect of contributions to defined contribution plans amounted to EUR 89 million, EUR 89 million and EUR 87 million, respectively. The amount of the defined benefit 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 benefit entitlement and measures each unit separately. 2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: Annual discount rate Mortality tables Cumulative annual CPI growth Annual salary increase rate Annual social security pension increase rate Annual benefit increase rate Post-employment plans Other similar obligations 2020 0.60% 2019 0.80% 2018 1.55% PE2020 M/F Col. Order 1 PERM/F-2000 PERM/F-2000 2020 0.60% PE2020 M/F Col. Order 1 2019 0.80% 2018 1.55% PERM/F-2000 PERM/F-2000 1.00% 1,25%* 1.00% N/A 1.00% 1.25%* 1.00% N/A 1.00% 2.00%* 1.00% N/A 1.00% N/A N/A 0% 1.00% N/A 1.00% N/A N/A N/A 0% From 0% to 1.50% * Corresponds to the group’s defined-benefit obligations. 638 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The discount rate used for the flows was determined by reference to high-quality corporate bonds (at least AA in euros) matching the durations of the commitments. From the bond portfolio considered, callable, putable and sinkable bonds, which could distort the rates, are excluded. Any changes in the main assumptions could affect the calculation of the obligations. At 31 December 2020, if the discount rate used had been decreased or increased by 50 basis points (bp), there would have been an increase or decrease in the present value of the post-employment obligations of 5.43% (-50 bp) to -5.10% (+50 bp),respectively, and an increase or decrease in the present value of the long-term obligations of 1.11% (-50 bp) to -1.08% (+50 bp), respectively. Expected rate of return on plan assets Expected rate of return on reimbursement rights The funding status of the defined benefit obligations in 2020 and the two preceding years is as follows: EUR million Present value of the obligations To current employees Vested obligations to retired employees To pre-retirees employees Long-service bonuses and other benefits Other Less - Fair value of plan assets Provisions - Provisions for pensions Of which: Internal provisions for pensions Insurance contracts linked to pensions (note 14) Unrecognised net assets for pensions The amounts recognised in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows: EUR million 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* *Including reduction/settlement effect These changes would be offset 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 first 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: Post-employment plans Other similar obligations 2020 2019 2018 2020 2019 2018 0.60% 0.60% 0.80% 0.80% 1.55% 1.55% 0.60% N/A 0.80% N/A 1.55% N/A Post-employment plans 2020 2019 2018 Other similar obligations 2020 2019 2018 60 59 60 3,318 5,393 5,332 — — 41 3,419 1,542 1,877 — — 42 5,494 1,547 3,947 — — 35 5,427 1,500 3,927 — — — — — — 1,688 1,317 1,187 18 1 18 — 17 — 1,707 1,335 1,204 12 14 15 1,695 1,321 1,189 1,707 3,759 3,720 1,695 1,321 1,189 174 (4) 192 (4) 210 (3) — — — — — — Post-employment plans 2020 2019 2018 Other similar obligations 2020 2019 2018 10 26 (1) — 2 — (372) (335) 12 53 (2) — 3 1 (29) 38 18 73 (4) — 3 1 (4) 87 1 9 — (3) — 772 (15) 764 1 15 — 7 1 687 (2) 709 1 18 — 7 5 208 — 239 639   Annual report 2020 Contents In addition, in 2020 'Other comprehensive income – Items not reclassified to profit or loss – Actuarial gains or (-) losses on defined benefit pension plans' has increased by EUR 84 million with respect to defined benefit obligations (increased of EUR 278 million and decreased of EUR 65 million in 2019 and 2018, respectively). The changes in the present value of the accrued defined benefit obligations were as follows: EUR million Present value of the obligations at beginning of year Incorporation of Group companies, net Current service cost Interest cost Pre-retirement cost Effect of curtailment/settlement Benefits paid Benefits paid due to settlements Past service cost Actuarial (gains)/losses Demographic actuarial (gains)/losses Financial actuarial (gains)/losses Exchange differences and other items Present value of the obligations at end of year Post-employment plans Other similar obligations 2020 5,494 2019 5,427 2018 5,912 — 10 39 — (372) (359) (1,551) 2 163 91 72 (7) — 12 72 1 (29) (400) — 3 407 15 392 1 3,419 5,494 (36) 18 99 1 (4) (423) — 3 (145) (21) (124) 2 5,427 2020 1,335 — 1 9 772 (15) (392) — — (3) (8) 5 — 2019 1,204 (1) 1 15 687 (2) (599) — 1 7 (9) 16 22 1,707 1,335 2018 1,660 — 1 18 208 — (617) — 5 6 (3) 9 (77) 1,204 The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows: 640 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Plan Assets EUR million Fair value of plan assets at beginning of year Incorporation of Group companies, net Expected return on plan assets Benefits paid Contributions/(surrenders) Actuarial gains/(losses) Exchange differences and other items Fair value of plan assets at end of year Insurance Contracts linked to pensions EUR million 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 Benefits paid Paid premiums Actuarial gains/(losses) Fair value of insurance contracts linked to pensions at end of year Post-employment plans Other similar obligations 2020 2019 2018 2020 2019 2018 1,547 1,500 1,640 — 13 (94) 5 76 (5) 1,542 — 19 (108) 8 128 — 1,547 — 26 (115) 21 (73) 1 1,500 14 — — (2) — — — 12 15 — — (2) — — 1 14 17 — — (2) — (1) 1 15 Post-employment plans Other similar obligations 2020 2019 2018 2020 2019 2018 192 — 1 (21) — 2 174 210 — 2 (24) — 4 192 238 — 4 (27) 2 (7) 210 — — — — — — — — — — — — — — 1 — — (1) — — — In view of the conversion of the defined-benefit obligations to defined-contribution obligations, the Group has not made material current contributions in Spain in 2020 to fund its defined-benefit 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 benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 91 million in 2020 (EUR 93 million in 2019 and EUR 93 million in 2018). The following table shows the estimated benefits payable at 31 December 2020 for the next ten years: EUR million 2021 2022 2023 2024 2025 2026 to 2030 1,038 771 660 548 464 1,619 The amount of the defined benefit 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 benefit entitlement and measures each unit separately. 641 Annual report 2020 Contents 2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: The amounts recognised in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows: 2020 2019 2018 EUR million Annual discount rate Mortality tables Cumulative annual CPI growth Annual salary increase rate Annual pension increase rate 1.28 % The S3 Middle tables weighted at 84% of the CMI_2018 projection with 2.11 % The S3 Middle tables weighted at 84% of the CMI_2018 projection with an initial addition an initial addition of 0.15%, smoothing parameter 7 and parameter 7 and improving 1.25%. of 0.15%, smoothing improving 1.25%. 108/86 S2 Light 2.90 % Current service cost Interest cost (net) Provisions or reversal of provisions, net Cost of services provided Others 2020 2019 2018 30 27 (12) (24) (1) — (1) 17 — — — 3 31 (6) — — — 25 2.95 % 1.00 % 3.01 % 3.22 % 1.00% 1.00 % In addition, in 2020 'Other comprehensive income – Items not reclassified to profit or loss – Actuarial gains or (-) losses on defined benefit pension plans' increase by EUR 568 million with respect to defined benefit obligations (2019: increased of EUR 601 million; 2018: decreased of EUR 481 million). 2.85 % 2.91% 2.94 % The changes in the present value of the accrued defined benefit obligations were as follows: EUR million Present value of the obligations at beginning of year Current service cost Interest cost Benefits paid Contributions made by employees Past service cost 2020 2019 2018 14,297 12,079 13,056 30 27 31 284 352 320 (445) (441) (489) 17 — 18 — 24 — Actuarial (gains)/losses 2,060 1,594 (766) Demographic actuarial (gains)/losses 34 48 (21) Financial actuarial (gains)/losses 2,026 1,546 (745) Exchange differences and other items (771) 668 (97) Present value of the obligations at end of year 15,472 14,297 12,079 The discount rate used for the flows 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 affect the calculation of the obligations. At 31 December 2020, 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 10.25% (-50 bp) and -9.32% (+50 bp), respectively.If the inflation 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 5.35% (+50 bp) and -6.73% (-50 bp), respectively. These changes would be offset in part by increases or decreases in the fair value of the assets. The funding status of the defined benefit obligations in 2020 and the two preceding years is as follows: EUR million Present value of the obligations 15,472 14,297 12,079 2020 2019 2018 Less- Fair value of plan assets Provisions - Provisions for pensions Of which: 15,575 (103) 14,755 (458) 12,887 (808) Internal provisions for pensions Net assets for pensions 449 329 130 (552) (787) (938) 642 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The changes in the fair value of the plan assets were as follows: EUR million Fair value of plan assets at beginning of year 14,755 12,887 13,239 Expected return on plan assets 296 376 326 2020 2019 2018 Benefits paid Contributions Actuarial gains/(losses) (443) (441) (489) 274 1,492 244 993 209 (285) Brazilian National Treasury Secretariat for a term coinciding with that of the obligations. In Brazil the discount rate used was between 6.82% and 7.14%, the CPI 3.25% and the mortality table the AT-2000. Any changes in the main assumptions could affect the calculation of the obligations. At 31 December 2020, 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 5.59% and -5.10%, respectively.These changes would be offset in part by increases or decreases in the fair value of the assets. Exchange differences and other items (113) Fair value of plan assets at end of year 15,575 14,755 12,887 (799) 696 In 2021 the Group expects to make current contributions to fund these obligations for amounts similar to those made in 2020. The main categories of plan assets as a percentage of total plan assets are as follows: Equity instruments Debt instruments Properties Other 2020 2019 2018 9% 55% 10% 26% 12% 46% 11% 31% 17% 50% 10% 23% The following table shows the estimated benefits payable at 31 December 2020 for the next ten years: EUR million 2021 2022 2023 2024 2025 2026 to 2030 400 343 368 382 405 2,320 iii. Other foreign subsidiaries Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits. At 31 December 2020, 2019 and 2018, these entities had defined-contribution and defined-benefit post-employment benefit obligations. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 103 million in 2020 (EUR 110 million at 31 December 2019 and EUR 107 million at 31 December 2018). 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. Specifically, the discount rate used for the flows 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 643 Annual report 2020 The funding status of the obligations similar to post- employment benefits and other long-term benefits in 2020 and the two preceding years is as follows: EUR million 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 2020 8,434 112 7,182 1,140 1,694 (83) (471) Contents 2018 9,116 167 7,743 1,206 Of which business in Brazil 2019 5,541 10,717 112 5,340 89 617 (57) (471) 176 8,826 1,715 2,129 1,541 (116) (298) (77) (258) 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: EUR million EUR million 2020 2019 2018 32 101 34 101 Present value of the obligations at beginning of year Incorporation of Group companies, net 2020 2019 2018 10,717 9,116 9,534 (84) 35 465 — (5) — 32 36 34 651 646 — (1) (6) (199) (544) (666) (634) — 3 5 — 5 6 — 5 3 176 1,652 390 Current service cost Interest cost Pre-retirement cost Effect of curtailment/settlement Benefits paid Benefits paid due to settlements Contributions made by employees Past service cost Actuarial (gains)/losses Demographic actuarial (gains)/losses 23 3 (59) Financial actuarial (gains)/losses 153 1,649 449 Exchange differences and other items (2,334) (78) (693) Present value of the obligations at end of year 8,434 10,717 9,116 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 35 72 11 5 — 12 6 — 5 3 (6) (5) (1) 118 150 (203) (66) In addition, in 2020 'Other comprehensive income – Items not reclassified to profit or loss – Actuarial gains or (-) losses on defined benefit pension plans' decreased by EUR 105 million with respect to defined benefit obligations (increased EUR 641 million and increased EUR 64 million in 2019 and 2018, respectively). In June 2018, the Group in Brazil reached an agreement with the labour unions to modify the scheme of contributions to certain health benefits, which implied a reduction in commitments amounting to EUR 186 million, shown in the following tables under the heading 'Effect to curtailment/ settlement'. 644 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The changes in the fair value of the plan assets were as follows: The detail, by geographical area, of Provisions for taxes and other legal contingencies and Other provisions is as follows: EUR million EUR million 2020 2019 2018 2020 2019 2018 2019 2018 Provisions for taxes Fair value of plan assets at beginning of year Incorporation of Group companies, net 8,826 7,743 7,927 (86) — — Expected return on plan assets 410 573 573 Benefits paid Benefits paid due to settlements Contributions Actuarial gains/(losses) (488) (613) (602) — 63 — 214 536 1,021 — 199 308 Exchange differences and other items (662) Fair value of plan assets at end of year 7,182 8,826 7,743 (2,079) (112) In 2021 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2020. The main categories of plan assets as a percentage of total plan assets are as follows: Equity instruments Debt instruments Properties Other 2020 11% 84% 1% 4% 8% 84% 1% 7% 7% 83% 1% 9% The following table shows the estimated benefits payable at 31 December 2020 for the next ten years: EUR million 2021 2022 2023 2024 2025 2026 to 2030 482 488 494 502 509 2,639 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 definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, these obligations have no fixed settlement period and, in other cases, depend on the legal proceedings in progress. Recognised by Spanish companies 1,647 1,381 1,647 Recognised by other EU companies 539 1,100 1,044 Recognised by other companies 2,239 3,027 2,958 Of which: Brazil 1,475 2,484 2,496 4,425 5,508 5,649 Set forth below is the detail, by type of provision, of the balance at 31 December 2020, 2019 and 2018 of Provisions for taxes and other legal contingencies and Other provisions. The types of provision were determined by grouping together items of a similar nature: EUR million Provisions for employment-related proceedings (Brazil) Provisions for other legal proceedings Provision for customer remediation Regulatory framework-related provisions Provision for restructuring Other 2020 2019 2018 600 759 864 437 776 859 1,163 1,522 1,451 395 725 652 69 810 67 641 105 492 951 1,018 1,226 4,425 5,508 5,649 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 filed by trade unions, associations, the prosecutor’s office 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 benefits. The number and nature of these proceedings, which are common for banks in Brazil, justify the classification 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. 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. 645 Annual report 2020 Contents 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 to the floor 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 financial statements. The group's 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 definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, the obligations do not have a fixed settlement term and, in others, they depend on legal proceedings in progress. The main movements during the 2020 of the breakdown provisions are shown below: With respect to provisions for labor and other legal proceedings, in Brazil, provisions of EUR 176 million and EUR 178 million were recorded, making payments of EUR 318 million and EUR 138 million, respectively. The remaining variation is mainly due to currency depreciation. With respect to provisions for customer compensation, the decline is mainly due to the exchange rate effect and utilizations in the United Kingdom of EUR 147 million. In addition, EUR 21 million was provided in Poland to cover the CHF mortgage portfolio in the year. On the regulatory framework side, EUR 99 million was provisioned in the United Kingdom and a utilization of EUR 97 million was made in the year (Bank Levy and FSCS). In addition, in Poland, EUR 124 million were provided for under the regulatory framework and paid during the year. In addition, restructuring provisions amounted to EUR 299 million in Spain, EUR 182 million in the United Kingdom, EUR 41 million in Poland, EUR 66 million in Portugal and EUR 51 million in the Consumer Unit. This increase is partially offset by the use of EUR 158 million in the United Kingdom, EUR 99 million in Spain, EUR 61 million in Consumer and EUR 32 million in Portugal. 646 e) Litigation and other matters i. Tax-related litigation At 31 December 2020 the main tax-related proceedings concerning the Group were as follows: •  Legal actions filed by Banco Santander (Brasil) S.A. and other Group entities to avoid the application of Law 9.718/98, which modifies 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 filed by the Federal Union regarding PIS, and dismissed the extraordinary appeal lodged by the Brazilian Public Prosecutor's Office regarding COFINS contribution, confirming the decision of Federal Regional Court favourable to Banco Santander (Brasil) S.A. of August 2007. The appeals filed by the other entities before the Federal Supreme Court, both for PIS and COFINS, are still pending. These claims are fully provisioned. • 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 different administrative processes of various years 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 classified as provisions of services. There are several cases in different judicial instances. A provision was recognised in connection with the amount of the estimated loss. • 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 different 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, actually Santander Brasil Tecnología S.A.) and Banco Santander (Brasil) S.A. in relation to the Provisional Tax on Financial Movements (CPMF) of the years 2000 to 2002. The administrative discussion ended unfavourably for both companies, and on July 3, 2015, filed a lawsuit requesting the cancellation of both tax assessments. The lawsuit was judged unfavorably in first instance. Therefore, both plaintiffs appealed to the court of second instance. On December 2020, the appeal was decided unfavorably and is pending a motion of clarification, which could be appealed to higher courts. There is a provision recognized for the estimated loss. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • 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. The administrative discussion ended unfavourably, and the CARF decision has been appealed at the Federal Justice. 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 amortisation 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 amortisation 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 amortisation 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 (Brasil) 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 offsetting of tax losses in the CSLL (‘Social Contribution on Net Income’) of year 2009. The appeal is pending decision in CARF. No provision was recognised in connection with this matter as it is considered to be a contingent liability. • Brazilian tax authorities have issued infringement notices against Getnet Adquirência e Serviços para Meios de Pagamentos S.A and Banco Santander (Brasil) S.A. as jointly liable in relation to corporate income tax (IRPJ and CSLL) for 2014 to 2018 questioning the tax-deductibility of the amortization of the goodwill from the acquisition of Getnet Tecnologia Proces S.A., considering that the company would not have complied with the legal requirements for such amortization. A defense against the tax assessment notices was submitted. The notice related to the fiscal years 2014 and 2015 has already been appealed at the CARF, meanwhile the one related to the fiscal years of 2016 to 2018 is pending on judgment. No provision was recognized as it is considered to be a contingent liability. The total amount for the aforementioned Brazil lawsuits that are fully provisioned is EUR 821 million, and for lawsuits that qualify as contingent liabilities is EUR 2,972 million. • 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 fiscal years 2003 to 2005 as well as the related issuance and financing costs. On 17 July 2018, the District Court finally ruled against Santander Holdings USA, Inc. On September 5, 2019 the Federal District Court in Massachusetts entered a judgement resolving the Company’s tax liability for fiscal years 2003 to 2005, which had no effect on income. The Company has agreed to resolve the treatment of the same transactions for 2006 and 2007, consistent with the September 5, 2019 judgment. The Congressional Joint Committee on Taxation has completed its review of the proposed resolution of the 2006 and 2007 tax years, with no objection. The Company and the IRS are now finalizing that resolution, which will have no impact on net income • 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 of the financial goodwill regulated pursuant to Article 12.5 of the Corporate Income Tax Law constituted illegal State aid. On November 2018 the General Court confirmed these Decisions but these judgements have been appealed at the Court of justice of the European Union. The Advocate-General has issued his conclusions proposing the dismissal of the appeal. The dismissal of this appeal would not have effect on equity. At the date of approval of these consolidated financial statements certain other less significant tax-related proceedings were also in progress. ii. Non-tax-related proceedings At 31 December 2020 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. At 31 December 2020, the remaining provision for PPI redress and related costs was GBP 76 million – EUR 85 million - (GBP 189 million – EUR 222 million at 31 December 2019). There was no additional provision in 2020. Cumulative complaints from the inception of the PPI complaints process to 31 December 2020, regardless of the likelihood of Santander UK incurring in liability, were 4.6 million. At 31 December 2020, there are an estimated 3,500 complaints still requiring assessment and, Santander UK has also entered into a commercial negotiation with the Official Receiver. Although the deadline for bringing complaints has passed, customers can still commence litigation for PPI mis-selling. Provision has been made for the best estimate of any obligation to pay compensation in respect of current stock and estimated future claims. There are ongoing factual issues to be resolved regarding such litigation which may have legal consequences including the volume and quality of future litigation claims. As a result, the extent of the 647 Annual report 2020 Contents potential liability and amount of any compensation to be paid remains uncertain. In relation to a specific PPI portfolio of complaints, there is a legal dispute regarding allocation of liability for pre-2005 PPI policies underwritten by two affiliates (Axa France) that Axa Group acquired from Genworth Financial International Holdings, Inc. in September 2015. The dispute involves a Santander Cards UK Limited (formerly known as GE Capital Bank Limited which was acquired by Banco Santander, S.A. from GE Capital group in 2008) which was distributor of the refer pre-2005 PPI policies and Santander Insurance Services UK Limited (the Santander Entities). In July 2017, Santander UK plc notified Axa France that the Santander Entities did not accept liability for losses on PPI policies relating to this period, but entered in a Complaints Handling Agreement –that included a standstill agreement- agreeing to handle complaints on Axa affiliates behalf, paying these latter companies redress assessed to be due to relevant policyholders on a without prejudice basis. After the termination of the Complaints Handling Agreement, on 30 December 2020 Axa France has provided written notice to the Santander Entities to terminate the standstill agreement, and that the Santander Entities are liable to reimburse AXA France for pre-2005 PPI mis-selling losses currently estimated at GBP 631 million (EUR 706 million). This dispute is at an early stage and there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is not currently practicable to reliably predict the resolution of the matter including timing or the significance of the possible impact. The provision for this dispute includes the best estimate of Santander UK’s liability to the specific portfolio. • Delforca: dispute arising from equity swaps entered into by Gaesco (now Delforca 2008, S.A.) on shares of Inmobiliaria Colonial, S.A. Banco Santander, S.A. is claiming to Delforca before the Court of Barcelona in charge of the bankruptcy proceedings, a total of EUR 66 million from the liquidation resulting from the early termination of financial transactions due to Delforca's non-payment of the equity swaps. In the same bankruptcy proceedings, Delforca and Mobiliaria Monesa have in turn claim the Bank to repay EUR 56.8 million, which the Bank received for the enforcement of the agreed guarantee, as a result of the aforementioned liquidation. In 2009, Mobiliaria Monesa, S.A. (parent of Delforca) filed a civil procedure with the Courts of Santander against the Bank claiming damages that have not been specified to date. The procedure is suspended. • Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) requesting the payment of a half-yearly bonus contemplated in the by-laws of Banespa in the event that Banespa obtained a profit and that the distribution of this profit were approved by the Board of Directors. The bonus was not paid in 1994 and 1995 since Banespa had not made a profit during those years. Partial payments were made from 1996 to 2000, as approved by the Board of Directors. The relevant clause was eliminated in 2001. The Regional Labor Court and the High Employment Court ordered Santander Brasil, as successor 648 to Banespa, to pay this half-yearly bonus for the period from 1996 to the present. On 20 March 2019, the Supreme Federal Court (STF) rejected the extraordinary appeal filed by Banco Santander Brasil. The Bank filed a rescission action to nullify the decisions of the main proceedings and suspend the execution of the judgment, which was deemed inadmissible, and its execution has been suspended until the publication of the decision. At the moment we have the legal opinion of the bank's external advisers, who have classified the risk as probable. The recorded provisions are considered sufficient to cover the risks associated with the legal claims that are being substantiated as of today. • “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 approved by the Supremo Tribunal Federal, with the purpose of closing the lawsuits. Discussions focused on specifying the amount to be paid to each affected 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 May 2018. On 29 May 2020, the Supremo Tribunal Federal approved the extension of the agreement for 5 additional years starting from 3 June 2020. Condition for this extension was to include in the agreement actions related to the “Collor I Plan”. The provisions recorded for the economic plan processes are considered to be sufficient. • Floor clauses: in consequence of the acquisition of Banco Popular, S.A.U, the Group has been exposed to a material number of transactions with floor clauses. The so-called "floor 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 "floor 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 2 January, Banco Popular Español, S.A.U. made extraordinary provisions that were updated in order to cover the effect of the potential return of the excess interest charged for the application of the floor clauses between the contract date of the corresponding mortgage loans and May 2013. Grupo Santander considered that the maximum risk associated with the floor 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. At 31 December 2020, after having processed most of the customer requests, the potential residual loss associated with ongoing court proceedings is estimated at EUR 51 million, amount which is fully covered by provisions. • Banco Popular´s acquisition: considering the declaration setting out the resolution of Banco Popular Español, S.A.U., Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 of the 2018 consolidated annual accounts, some investors have filed claims against the EU’s Single Resolution Board decision, the FROB's resolution executed in accordance to the aforementioned decision, and claims have been filed and may be filed in the future against Banco Santander, S.A. or other Santander Group companies deriving from or related to the acquisition of Banco Popular Español, S.A.U.. At this stage, it is not possible to foresee the total number of claims that could be filed by the former holders of shares and capital instruments (arising from the acquisition by investors of such shares and capital instruments of Banco Popular prior to resolution, including in particular, without limitation, the shares acquired in the context of the capital increase with pre-emptive subscription rights carried out in 2016), and their economic implications (especially considering that the decision to resolve in application of the new regulation has no precedent, and that it may be possible that future claims do not specify a specific amount, put forward new legal interpretations or involve a large number of parties). In this respect, on 2 September 2020, the Provincial Court of La Coruña has referred a preliminary ruling to the Court of Justice of the European Union (“CJEU”) asking for the correct interpretation of Article 60(2) of Directive 2014/59/EU of the European Parliament and of the Councill, dated 15 May 2014, which establishes a framework for the restructuring and resolution of credit institutions and investment firms. This article establishes that, in cases of redemption of capital instruments in a bank resolution, no liability shall remain in relation to the amount of the instrument that has been redeemed. The judgement given by the CJEU in this case is likely to condition the outcome on the judicial proceedings that are currently open. The estimated cost of any compensation to shareholders and bondholders of Banco Popular recognized in the 2017 accounts amounted to EUR 680 million, of which EUR 535 million were applied to the commercial loyalty program. The provisions recorded are considered sufficient to cover the risks associated with the court claims currently being dealt with. However, if additional amounts have to be paid for claims already raised with an undetermined economic interest or for new claims, this could have a significant adverse effect on the Santander Group's results and financial situation. Likewise, the Central Court of Instruction 4 is currently conducting preliminary proceedings 42/2017, in which, amongst other things, is being investigated the following: (i) the accuracy of the prospectus for the capital increase with pre-emptive subscription rights carried out by Banco Popular in 2016; and (ii) the alleged manipulation of the share price of Banco Popular until the resolution of the bank, in June 2017. During the course of the proceedings, on 30 April 2019, the Spanish National Court, ruled in favour of Banco Santander, S.A. declaring that Banco Santander, S.A. cannot inherit Banco Popular’s potential criminal liability. This ruling was appealed before the Supreme Court who have rejected the appeal. In this procedure, Banco Santander has the status of possible subsidiary civil liability. • German shares investigation: the Cologne Public Prosecution Office 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. Grupo Santander is cooperating with the German authorities. According to the state of the investigations, the results and the effects for the Group, which may potentially include the imposition of financial penalties, cannot be anticipated. For this reason, the Bank has not recognized any provisions in relation to the potential imposition of financial penalties. • 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. These states served on behalf of a group of 33 state Attorneys General. The subpoenas and CIDs contained broad requests for information and the production of documents related to SC’s underwriting, securitization, the recovery efforts servicing and collection of nonprime vehicle loans. SC responded to these requests within the deadlines specified and has otherwise cooperated with the Attorneys General with respect to this matter. On 19 May 2020, SC entered into settlements with all the attorneys general resolving this investigation. The agreement had no significant impact for the Group. • Financial Industry Regulatory Authority (FINRA) Puerto Rico Arbitrations: as of 31 December 2020, Santander Securities LLC (SSLLC) had received 770 FINRA arbitration cases related to Puerto Rico Bonds issued by public and public related entities, as well as Puerto Rico closed-end funds (CEFs). The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration of the investments and failure to supervise. There were 141 arbitration cases that remained pending as of 31 December 2020. 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 provisions recorded for these matters are considered sufficient. • IRPH Index: a portion of our Spanish mortgage loan portfolio bears interest at a rate indexed to the 'Índice de Referencia de Préstamos Hipotecarios' known as 'IRPH', which, at the time the contracts were entered into, served as reference rate for many mortgage loan agreements in Spain and was published by the Bank of Spain. Consumers in Spain have brought lawsuits against most of the Spanish 649 Annual report 2020 Contents banking sector alleging that the use and related disclosures of such rate did not comply with the transparency requirements of European regulation. On 14 December 2017, the Supreme Court of Spain ruled that these clauses were valid, as the IRPH is an official rate and therefore non- subject to transparency requirements. The matter was referred to the Court of Justice of the European Union through a preliminary ruling procedure. On 3 March 2020 the CJEU rendered its decision. The CJEU ruled that, being the IRPH a valid index, national courts are entitled to examine its use on each particular contract in order to verify whether the transparency requirements have been met. When carrying out the transparency control, national courts have to take into account all the circumstances surrounding the conclusion of the particular contract, including whether essential information relating to the calculation of that rate was easily accessible and the provision of data relating to past fluctuations of the index. Finally, with regards to the effects of nullity of an IRPH index clause, the CJUE entitles national courts to substitute it with another statutory index, thus not declaring the nullity of the whole contract. On 12 November 2020, the Supreme Court has issued four judgments applying the doctrine established by the CJUE that resolve individual appeals in which the validity of the IRPH clauses was questioned. The Court understands that in those cases there is a lack of transparency because the financial institutions had not been able to prove the delivery to the client of the information on the evolution of the index in the two years prior to the contract. However, the Supreme Court reminds that the lack of transparency does not automatically imply the invalidity of the clause, but rather it is necessary to analyze whether this lack of transparency generates abusiveness. The Supreme Court resolves that in the case of the IRPH, that specific lack of transparency does not mean that the clause is abusive to the detriment of the client, so the clause is valid and fully applicable. Currently, the balance of the relevant mortgage indexed to IRPH loans held by the Group, equals approximately EUR 3.1 billion. • Banco Santander, S.A. has been sued in a legal proceeding in which the plaintiff alleges that a contract was concluded whereby he would be entrusted with the functions of CEO of the Bank. In the complaint, the claimant mainly requests a declaratory ruling that affirms the validity and conclusion of such contract and its enforcement together with the payment of certain amounts. If the main request is not granted, the claimant seeks compensation for a total amount of approximately EUR 112 million or, an alternative relief for other minor amounts. Banco Santander, S.A. has answered to the complaint. In this answer, it is stated that the conditions to which the appointment was subject to were not met and that the contract required by law was not concluded. Trial will take place on 10 March 2021. 650 • CHF Polish Mortgage Loans: On 3 October 2019, the Court of Justice of the European Union (CJEU) rendered its decision in relation to a lawsuit against an unrelated bank in Poland, with regards to unfair contractual clauses in consumer agreements, specifically the consequences of potentially unfair contractual clauses in CHF-indexed loan agreements. The CJEU has left to Polish courts the decision on whether the whole contract can be maintained once the abusive terms have been removed, which should in turn decide whether the effects of the annulment of the contract are prejudicial to the consumer. In that case, the court may only integrate the contract with default provisions of national law and decide, in accordance with those provisions, on the applicable rate. On March 2021, the Supreme Court is expected to take a position regarding the key issues in disputes concerning loans based on foreign currency, clarifying the discrepancies and unifying the court jurisprudence. In December 2020, the Chairman of the Financial Supervision Authority announced a high-level proposal for voluntary settlements between banks and borrowers under which active loans based on Swiss francs would be converted into PLN loans with interest at the WIBOR rate and an appropriate margin. No details of the proposal, or legal or tax considerations, were provided as at the date of publication of these financial statements. This proposal is currently under analysis within the Bank, as well as by representatives of the financial sector in consultation with the competent authorities. Depending on the results of this analysis, the Bank will decide whether to adhere to this proposal and will proceed to include additional scenarios in the models for calculating provisions and reflect the estimated impact on their level. The Group considers that the maximum risk associated to this proposal, assuming that 100% of customers choose to convert their active loans as proposed, would amount to approximately PLN 3.5bn (EUR 768 million). While these two events could lead to significant changes in the level of expected provisions, in the opinion of the Management Board, as at the date of these financial statements it is not possible to reliably estimate the value of their impact on the financial position of the Group. As of 31 December 2020, Santander Bank Polska and Santander Consumer Bank Poland have a portfolio of mortgage loans denominated in, or indexed to, CHF of approximately PLN 9,853 million (EUR 2,161 million). At the same date, the provision registered is PLN 603 million (EUR 132 million). This provision represents the best estimate to date given the difficulty to predict the financial impact, as it is for national courts to decide the relevant issues and the process of analysing and deciding on the proposal described above has not yet been completed. Santander Bank Polska and Santander Consumer Bank Poland will continue to monitor and assess appropriateness of those provisions in the upcoming reporting 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. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Likewise, relating the Consolidated Tax Group of which Banco Popular Español, S.A.U. was the parent, in 2018 a certificate of conformity was drawn up in a partial proceeding, confirming the 2016 Corporate Income Tax return. During 2019, a certificate of disconformity was drawn up for 2017 corporate income tax, with no impact on profit, and the final assessment has been appealed. In relation to this Consolidated Tax Group, the years 2010 to 2017 inclusive are subject to review. On 1 January 2018 those entities that were part of the aforementioned Consolidated Tax Group were integrated in the Consolidate Tax Group which parent company is Banco Santander. The other entities have the corresponding years open for review, pursuant to their respective tax regulations. Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the rest of years subject to review might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such tax liabilities will materialize, and that in any event the tax charge arising therefrom would not materially affect the Group’s consolidated financial statements. With the information available to it, Grupo Santander considers that, at 31 December 2020, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal risks. Subject to the qualifications made, it also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the group’s business, financial position or results of operations. 26. Other liabilities The detail of Other liabilities in the consolidated balance sheets is as follows: EUR million 2020 2019 2018 498 663 803 6,309 6,909 6,621 5,529 5,220 5,664 12,336 12,792 13,088 Transactions in transit Accrued expenses and deferred income Other 27. Tax matters 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 profits of corporate groups (as the controlled entities). The other Group companies file income tax return 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 corporate income tax financial years 2009 to 2011 were formalised. The adjustments signed in conformity had no significant impact on results and, in relation to the concepts signed in disconformity both in this year and in previous years (corporate income tax 2003 to 2007), 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 significant impact on the consolidated financial statements, as there are sound arguments as proof in the appeals filed against them pending at the National Appellate Court (tax years 2003 to 2007) and the Economic Administrative Court (tax years 2009-2011). 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 2020 are subject to review. At the date of approval of these accounts, the Corporate Income Tax proceedings for periods not yet prescribed up to and including 2015, and the proceedings relate to other taxes up to and including 2016 are on going. 651 Annual report 2020 Contents c) Reconciliation d) Tax recognised in equity 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 effective tax rate are as follows: In addition to the income tax recognised in the consolidated income statement, the Group recognised the following amounts in consolidated equity in 2020, 2019 and 2018: EUR million Consolidated profit (loss) before tax: From continuing operations From discontinued operations Income tax at tax rate applicable in Spain (30%) By the effect of application of the various tax rates applicable in each country* Of which: Brazil United Kingdom United States Chile Effect of profit or loss of associates and joint ventures Effect of reassessment of deferred taxes Permanent differences and other ** Current income tax Effective tax rate Of which: Continuing operations Discontinued operations (note 37) Of which: Current taxes Deferred taxes Income tax (receipts)/payments 2020 2019 2018 (2,076) 12,543 14,201 — — — (2,076) 12,543 14,201 (623) 3,763 4,260 362 243 509 560 (43) (71) (24) 502 (80) (71) (35) 719 (99) (57) (35) 29 (97) (221) 2,500 (612) — 3,364 5,632 1,130 4,427 338 4,886 — 35.29% 34.40% 5,632 4,427 4,886 — — — 4,214 1,418 2,946 3,962 4,763 465 123 2,593 3,342 * Calculated by applying the difference between the tax rate applicable in Spain and the tax rate applicable in each jurisdiction to the profit or loss contributed to the Group by the entities which operate in each jurisdiction. ** In 2020 and 2019 it includes mainly the impairment of goodwill and in 2018 the recognition of tax credits in Portugal. EUR million Other comprehensive income Items not reclassified to profit or loss Actuarial gains or (-) losses on defined benefit 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 attributable to changes in credit risk Items that may be reclassified to profit or loss Cash flow hedges Changes in the fair value of debt instruments through other comprehensive income Other recognised income and expense of investments in subsidiaries, joint ventures and associates Total e) Deferred taxes 2020 2019 2018 (82) 500 (225) (165) 499 (199) 92 (42) — (9) 43 (26) 208 5 (832) (17) 124 (50) 195 (811) 167 8 126 (4) (332) 7 (101) '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 firms (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. 652 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix In 2015 Spain completed its regulations on monetizable tax assets with the introduction of a financial 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 classification as monetizable or non-monetizable assets, and of deferred tax liabilities at 31 December 2020, 2019 and 2018 is as follows: This legislation establishes that deferred tax assets, the use of which relies on future profits being obtained, must be deducted from regulatory capital. 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 profits 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, that become Ordinary Law 12838/2013, and, in Spain, through Royal Decree Law 14/2013, of 29 November confirmed 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 specific circumstances. As a result, their use does not rely on the entities obtaining future profits and, accordingly, they are exempt from deduction from regulatory capital. EUR million Tax assets: Tax losses and tax credits Temporary differences Of which: Non-deductible provisions Valuation of financial instruments Loan losses Pensions Valuation of tangible and intangible assets Tax liabilities: Temporary differences Of which: Valuation of financial instruments Valuation of tangible and intangible assets Investments in Group companies 2020 2019 2018 Monetizable* ** Other Monetizable* ** Other Monetizable* ** Other 10,721 — 10,721 — — 7,134 3,587 — — — — — — 8,525 1,093 7,432 2,139 483 1,007 875 1,373 5,933 5,933 1,791 2,311 440 11,233 11,525 10,866 12,392 — 11,233 — — 7,645 3,587 — — — — — — 3,428 8,097 2,751 400 1,086 1,009 1,317 6,522 6,522 2,073 1,962 831 — 10,866 — — 7,279 3,587 — — — — — — 4,276 8,116 2,613 609 1,308 632 1,215 5,568 5,568 1,168 1,503 880 Not deductible from regulatory capital. * ** Banco Popular Español, S.A.U. considered that part of its monetizable assets were converted into credit against the Tax Administration in 2017 income tax return, as the circumstances of the aforementioned regulations were met at the end of that year (EUR 995 million). The Spanish tax authorities have expressly confirmed the nature of these assets as monetizable, but they consider that conditions for conversion are not met at the end of 2017, without prejudice to the conversion in future years. 653 Annual report 2020 Contents to the deferred tax assets recognised in the Group on the basis of the results of the analyses performed, except in Spain, where the Group considers that the changes in the key assumptions on which the projected results of its tax group are based, arising from the impact of covid-19, have resulted in the recognition of an impairment of EUR 2,500 million of deferred tax assets under 'Income Tax' in the income statement. Finally, and given the degree of uncertainty of these assumption on the referred variables, the Group conducts a sensitivity analysis of the most significant assumptions considered in the deferred tax assets’ recoverability analysis, considering any reasonable change in the key assumptions on which the projections of results of each entity or fiscal group and the estimation of the reversal of the different temporary differences are based. In relation to Spain, the sensitivity analysis has consisted of adjusting 50 basis points for growth (gross domestic product) and adjusting 50 basis points for inflation. Following the sensitivity analysis performed, the Group estimate that the maximum recovery period of the deferred tax assets recognized as of 31 December 2020 would be 15 years. 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 10,026 million, of which EUR 7,420 million were for monetizable temporary differences with the right to conversion into a credit against the Public Finance, EUR 2,226 million for other temporary differences and EUR 380 million for tax losses and credits. The Group estimates that the recognised deferred tax assets for temporary differences 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. Brazil The deferred tax assets recognised in Brazil total EUR 5,310 million, of which EUR 3,131 million were for monetizable temporary differences, EUR 1,781 million for other temporary differences and EUR 398 million for tax losses and credits. Grupo Santander estimates that the recognised deferred tax assets for temporary differences, tax losses and credits will be recovered in approximately 10 years. United States The deferred tax assets recognised in the United States total EUR 1,254 million, of which EUR 966 million were for temporary differences and EUR 288 million for tax losses and credits. The Group estimates that the recognised deferred tax assets for temporary differences, tax losses and credits will be recovered in a period of 15 years. Grupo Santander only recognises deferred tax assets for temporary differences or tax loss and tax credit carryforwards where it is considered probable that the consolidated entities that generated them will have sufficient future taxable profits against which they can be utilised. 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 findings of the analyses performed. These analyses take into consideration all evidence, both positive and negative, of the recoverability of such deferred tax assets, among which we can find, (i) the results generated by the different entities in previous years, (ii) the projections of results of each entity or fiscal group, (iii) the estimation of the reversal of the different temporary differences according to their nature and (iv) the period and limits established under the applicable legislation of each country for the recovery of the different deferred tax assets, thus concluding on the ability of each entity or fiscal group to recover the deferred tax assets registered. The projections of results used in this analysis are based on the financial budgets approved by both the local directions of the corresponding units and by the Group's administrators. The Group's budget estimation process is common for all units. The Group's management prepares its financial budgets based on the following key assumptions:  a) Microeconomic variables of the entities that make up the fiscal group in each location: the existing balance structure, the mix of products offered and the commercial strategy at each moment defined by local directions are taken into account, based on the competition, regulatory and market environment. b) Macroeconomic variables: estimated growths are based on the evolution of the economic environment considering the expected evolution in the gross domestic product of each location, and the forecasts of interest rates, inflation and exchange rates fluctuations. These data is provided by the Group’s Studies Service, based on external sources of information.  Additionally, the Group performs retrospective contrasts (backtesting) on the variables projected in the past. The differential behavior of these variables with respect to the real market data is considered in the projections estimated in each fiscal year. Thus, and in relation to Spain, the deviations identified by the Directors in recent past years are due to non- recurring events outside the operation of the business, such as the impacts due to the first application of new regulations, the costs assumed for the acceleration of the restructuring plans and the changing effect of the current macroeconomic environment.  During 2020, taking into account the uncertainties about the economic impacts derived from the covid-19 health crisis, the Group has reassessed the ability to generate future taxable income in relation to the recoverability of deferred tax assets recorded in the main Group companies. Management considers that the recovery period of these assets would not be affected and that it is not necessary to make adjustments 654 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The changes in Tax assets - Deferred and Tax liabilities - Deferred in the last three years were as follows: EUR million Deferred tax assets Tax losses and tax credits Temporary differences Of which monetizable Deferred tax liabilities Temporary differences EUR million Deferred tax assets Tax losses and tax credits Temporary differences Of which monetizable Deferred tax liabilities Temporary differences EUR million Deferred tax assets Tax losses and tax credits Temporary differences Of which monetizable Deferred tax liabilities Temporary differences Foreign currency balance translation differences and other items (2,465) (266) (2,199) (1,125) 851 851 (Charge)/Credit to income (1,016) (2,065) 1,049 613 (402) (402) (1,418) (1,614) Balances at 31 December 2019 22,758 3,427 19,331 11,233 (6,522) (6,522) 16,236 (Charge)/Credit to asset and liability valuation adjustments 38 — 38 — 156 156 194 Acquisition for the year (net) (69) (3) (66) — (16) (16) (85) Balances at 31 December 2020 19,246 1,093 18,153 10,721 (5,933) (5,933) 13,313 Balance at 31 December 2018 (Charge)/Credit to income 23,258 4,276 18,982 10,866 (5,568) (5,568) 17,690 215 (301) 516 427 (680) (680) (465) Foreign currency balance translation differences and other items (610) (548) (62) (60) 92 92 (518) (Charge)/Credit to asset and liability valuation adjustments (92) Acquisition for the year (net) (13) — (92) — (366) (366) (458) — (13) — — — (13) Balance at 31 December 2019 22,758 3,427 19,331 11,233 (6,522) (6,522) 16,236 IFRS 9 Adoption impact 31 (Balance at 1 January 2018) Balances at December 2017 23,210 4,457 18,753 11,046 (4,837) (4,837) 18,373 680 — 680 273 — — 680 Foreign currency balance translation differences and other items (Charge)/ Credit to asset and liability valuation adjustments (807) 1 (808) (844) (114) (114) (921) 149 — 149 — (315) (315) (166) (Charge)/ Credit to income 241 (128) 369 391 (364) (364) (123) Acquisition Balance at 31 for the year December 2018 (net) (215) (54) (161) — 62 62 23,258 4,276 18,982 10,866 (5,568) (5,568) (153) 17,690 655 Also, the Group did not recognise deferred tax assets relating to tax losses, tax credits for investments and other incentives amounting to approximately EUR 9,800 million, the use of which EUR 400 million is subject, among other requirements, to time limits. Annual report 2020 Contents On 27 November 2019 entered into force the Protocol amending the Convention between the United States of America and the kingdom of Spain for the Avoidance of Double Taxation (DTT). The revision of the Convention introduces substantial reductions in the withholding rates that apply to different types of income, highlighting the reduction of the withholding rate on dividends to 5% for shareholdings of more than 10%, the elimination of withholding for shareholdings greater than 80% and elimination of withholding at source on interests and royalties. In Chile, Law n.º 21,210 on modernization of Chilean tax law was enacted in 2020. It includes several modifications to different tax laws in force in Chile. Among the aspects included, it is worth highlighting the substitute tax that on a temporary basis until 30 April 2022 allows taxing at 30% (instead of the generally applicable 35%) with a credit of the first category tax paid, the tax profits generated up to the 31 December 2016, reducing the fiscal cost of its distribution and other measures about asset depreciation and indirect taxes. 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 2020/21. 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. f) Tax reforms The following significant tax reforms were approved in 2020 and previous years: In Spain, Royal Decree-Law 3-2016 was approved in December 2016, which meant the reduction of the limits both for the integration of deferred monetizable tax assets, as well as for the set-off of negative tax and deductions in order to avoid double taxation. This regulation also set out the compulsory impairment reversion for deductible participations in previous years by one fifths independently from the recovery of the participated, and the non­ deductibility of the losses generated from the transmission of participations performed from 1 January 2017. On the other hand, in 2020 the General State Budget Law for 2021 was approved. This law establishes, among other tax measures, in Corporation Tax the reduction of the exemption on dividends and capital gains to 95% (previously 100%) from January 1st 2021, considering that a 5% as participation management expenses is not exempt, and additionally the elimination of the exemption on dividends and capital gains from investments below 5% equity but whose acquisition value is over EUR 20 million, although in this case, investments previous to January 1st 2021 will benefit from a grandfather ruling until 2026. 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 was to be 17% from 1 April 2020. However, a change in policy in March 2020 has meant that the 19% rate remains applicable for the foreseeable future. Also in 2015, a surcharge of 8% on the standard income tax rate for bank profits 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 Brazil, Constitutional Amendment 103/19 modifying the social security system approved in 2019, included, among other measures, an increase in the CSLL tax rate for credit institutions from 15% to 20%, effective 1 March 2020. This increase lifted the aggregate tax rate -sum of CSLL and the corporate income tax (Imposto de Renda Pessoa Jurídica; IRPJ)- for credit institutions from 40% to 45%. In the IOF (Tax on financial operations) on credit operations, and as a measure to prevent impacts of covid-19, the applicable rate is reduced from 0.38% to 0% from 04/03/2020 to 26/11/2020. In Argentina, the Law n.º 27541 (B.O.E. of 23 December 2019), on Social Solidarity and Production Reactivation in the Context of the Public Emergency, have introduced various modifications to the Argentinean tax system to increase tax receipts. The main amendments are the delay of previously approved lowering of the corporate tax rate from 30% to 25% (scheduled to take effect on 1 January 2020), as well as increasing in dividend withholdings from 7% to 13% (pushed back to 1 January 2021). Additionally the adjustment for tax inflation that was to be applied on a transitional basis in 1/3 of 2019, with the remaining two-thirds pending application in equal parts in 2020 and 2021, has been lowered to 1/6 in 2019, with the rest being deferred over the next five years. The same deferral rule will apply if there is an inflation adjustment in 2020. 656 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 28. Non-controlling interests b) Changes 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 profit for the year. a) Breakdown The detail, by Group company, of 'Equity - Non-controlling interests' is as follows: EUR million Santander Bank Polska S.A. Grupo PSA Banco Santander - Chile Banco Santander (Brasil) S.A. Santander Consumer USA Holdings Inc. Banco Santander México, S.A. Institución de Banca Múltiple, Grupo Financiero Santander México Other companies* 2020 2019 2018 1,676 1,597 1,538 1,622 1,569 1,409 1,218 1,101 1,085 1,014 1,167 1,114 986 1,565 1,652 461 333 1,093 1,806 1,655 1,493 8,783 8,987 9,384 Profit/(Loss) for the year attributable to non-controlling interests 1,063 1,601 1,505 Of which: Grupo PSA Banco Santander (Brasil) S.A. Santander Consumer USA Holdings Inc. Banco Santander - Chile Santander Bank Polska S.A. Banco Santander México, S.A. Institución de Banca Múltiple, Grupo Financiero Santander México Other companies TOTAL 255 233 201 198 81 266 373 230 283 162 232 292 218 279 173 61 34 195 92 216 95 9,846 10,588 10,889 * Includes a Santander UK plc issuance of perpetual convertible equity instruments, at the option of Santander UK plc, into preference shares of Santander UK itself for a nominal amount of GBP 2,250 million (the Group having acquired GBP 1,100 million). Carrying amount of EUR 1,275 million in 2020 (EUR 1,346 million and EUR 1,280 million in 2019 and 2018, respectively). The changes in Non-controlling interests are summarised as follows: EUR million Balance at the end of the previous year Effect of changes in accounting policies* Balance at beginning of year Other comprehensive income** Other Profit attributable to non- controlling interests Modification of participation rates Change of perimeter Dividends paid to minority shareholders Changes in capital and others concepts Balance at end of year 2020 2019 2018 10,588 10,889 12,344 — — (1,292) 10,588 10,889 11,052 (818) 310 (109) 76 (611) (54) 1,063 1,601 1,505 (632) (1,623) (54) 110 (65) (660) (465) (895) (687) 164 196 (147) 9,846 10,588 10,889 * See change in consolidated statements of changes in total equity. ** Mainly due to exchange differences. On 6 September 2019, the period for acceptance of the offer by Banco Santander, S.A., to acquire shares of Banco Santander México, SA, Institución de Banca Múltiple, Grupo Financiero Santander México ended (see note 3). The offer was accepted by securities representing 16.69% of the share capital of Banco Santander México and, consequently, the Group's interest in Banco Santander México was reduced to 91.65% of its share capital, which meant a decrease of EUR 1,012 million in minority interests, as reported in the table above under Changes in percentage of ownership. 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 financial information on the subsidiaries with significant non-controlling interests at 31 December 2020 is summarised below: EUR million* Total assets Total liabilities Net assets Total income Total profit Banco Santander (Brasil) S.A. Banco Santander (Chile), S.A. Grupo Financiero Santander México, S.A.B. de C.V. Santander Bank Polska S.A. Santander Consumer USA 150,573 138,026 12,547 10,866 2,352 66,880 61,902 4,978 2,263 629 80,239 73,739 6,500 3,651 823 46,890 41,816 5,074 1,524 240 43,706 37,097 6,609 4,575 806 * Information prepared in accordance with the segment reporting criteria described in note 51 and, therefore, it may not coincide with the information published separately by each entity. 657 Annual report 2020 Contents 29. Other comprehensive income The balances of 'Other comprehensive income' include the amounts, net of the related tax effect, 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 reclassified to profit 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 reclassified 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 flow hedges. • Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items. 658 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix a) Breakdown of Other comprehensive income - Items that will not be reclassified in results and Items that can be classified in results EUR million Other comprehensive income Items that will not be reclassified to profit or loss Actuarial gains and losses on defined benefit 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 Inefficiency 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 financial liabilities measured at fair value through profit or loss attributable to changes in credit risk Items that may be reclassified to profit or loss Hedges of net investments in foreign operations (Effective portion) Exchange differences Hedging derivatives. Cash flow hedges (Effective portion) Changes in the fair value of debt instruments measured at fair value with changes in other comprehensive income Hedging instruments (items not designated) Non-current assets classified as held for sale Share in other income and expenses recognised in investments, joint ventures and associates 2020 (33,144) (5,328) 2019 (24,168) (4,288) 2018 (24,125) (2,936) (5,002) (4,764) (3,609) — (2) — — 1 — — 1 — (308) 514 597 — 159 — 44 (159) (44) (16) (27,816) (3,124) (26,911) 295 (39) (19,880) (5,464) (16,701) 300 2,411 2,321 — — — — — — — 75 (21,189) (4,312) (17,661) 277 828 — — (487) (336) (321) • Decreased of EUR 194 million in accumulated actuarial losses corresponding to the Group’s business in Brazil, mainly due to the revaluation of the asset portfolio, which offset losses in the value of the obligations as a result of the decrease in the discount rate - from 7.05% to 6.82% in pension benefits and 7.22% to 7.14% in medical benefits-, as well as to inflation and variations in the other hypotheses. The other modification in accumulated actuarial profit or losses is a decreased of the losses of EUR 433 million as a result of the evolution of exchange rates and other effects, mainly in Brazil and the United Kingdom (depreciation of the brazilian real and the pound sterling). b) Other comprehensive income- Items not reclassified to profit or loss – Actuarial gains or (-) losses on defined benefit pension plans 'Other comprehensive income  —Items not reclassified to profit or loss—  Actuarial gains or (-) losses on defined benefit 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 effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). Its variation is shown in the consolidated statement of recognised income. The provisions against equity in 2020 amounted to EUR 25 million - see Consolidated statement of recognised income and Note 25.b -, with the following breakdown: • Increase of EUR 84 million in the accumulates actuarial losses relating to the Group´s entities in Spain, mainly due to the evolution experienced by the discount rate - reduction from 0.80% to 0.60%- and the change in the mortality tables. • Increase of EUR 568 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– reduction from 2.11% to 1.28%. 659 Annual report 2020 Contents c) Other comprehensive income - Items that will not be reclassified in results - Changes in the fair value of equity instruments measured at fair value with changes in other comprehensive income Since the year started on 1 January 2018, with the entry into force of IFRS 9, no impairment analysis is performed of equity instruments recognised under 'Other comprehensive income'. IFRS 9 eliminates the need to carry out the impairment estimate on this class of equity instruments and the reclassification to profit and loss on the disposal of these assets, being recognised at fair value with changes in equity. The following is a breakdown of the composition of the balance as of 31 December 2020 under 'Other comprehensive income - Items that will not be reclassified to profit 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: Capital gains by valuation Capital losses by valuation Net gains/losses by valuation Fair Value 2020 28 65 7 525 625 525 100 (849) (76) (4) (4) (933) (31) (902) 2019 (821) (11) 3 521 (308) 494 (802) 1,032 314 25 1,412 2,783 1,424 1,359 Capital gains by valuation Capital losses by valuation Net gains/losses by valuation Fair Value 21 68 15 934 1,038 936 102 (445) (72) (3) (4) (524) (14) (510) (424) (4) 12 930 514 922 (408) 184 379 44 2,256 2,863 2,283 580 EUR million Equity instruments Domestic Spain International Rest of Europe United States Latin America and rest Of which: Publicly listed Non publicly listed EUR million Equity instruments Domestic Spain International Rest of Europe United States Latin America and rest Of which: Publicly listed Non publicly listed 660 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 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 2018 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 1943 728 d) Other comprehensive income - Items that may be reclassified to profit or loss - Hedge of net investments in foreign operations (effective portion) and exchange differences The change in 2020 reflects the negative effect of the generalized depreciation of the main currencies, especially the brazilian real, the pound sterling and the US dollar, whereas the change in 2019 reflected the positive effect of the appreciation of the pound sterling and the US dollar and the negative effect of the depreciation of the brazilian real. The change in 2018 showed the negative effect of the generalised depreciation of a large part of the currencies, mainly the brazilian real and the pound sterling. Of the change in the balance in these years, a loss of EUR 2,104 million, a profit of EUR 230 million and a loss of EUR 556 million in 2020, 2019 and 2018, respectively relate to the measurement of goodwill. The detail, by country is as follows: e) Other comprehensive income -Items that may be reclassified to profit or loss - Hedging derivatives – Cash flow hedges (Effective portion) Other comprehensive income – Items that may be reclassified to profit or loss - Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective 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 affect it (see note 11). f) Other comprehensive income - Items that may be reclassified to profit or loss – Changes in the fair value of debt instruments measured at fair value with changes in other comprehensive income Includes the net amount of unrealised changes in the fair value of assets classified as Changes in the fair value of debt instruments measured at fair value with changes in other comprehensive income (see note 7). Net balance at end of year* (30,035) (22,165) (21,973) 2020 2019 2018 Of which: Brazilian real Pound sterling Mexican peso Argentine peso* Chilean peso US dollar Polish zloty Other (17,417) (13,579) (12,950) (4,205) (3,091) (2,288) (1,776) 387 (788) (857) (3,135) (3,924) (2,439) (2,312) (2,094) (1,930) (1,560) (1,238) 1,654 1,330 (501) (511) (491) (458) * Grupo Santander has changed its accounting policy in relation to the presentation of exchange differences and the effects of hyperinflation of the operations generated in Argentina, reclassifying at 1 January 2019 and 2018 an amount of EUR -1,984 million and -1,585 million from the heading 'Other reserves' to 'Accumulated other comprehensive income' (see note 2.a and 33.b). 661 Annual report 2020 Contents The breakdown, by type of instrument and geographical origin of the issuer, of 'Other comprehensive income – Items that may be reclassified to profit or loss - Changes in the fair value of debt instruments measured at fair value with changes in other comprehensive income' at 31 December 2020, 2019 and 2018 is as follows: EUR million Debt instruments Government debt securities and debt Instruments issued by central banks Spain (note 7) Rest of Europe Latin America and rest of the world Private-sector debt securities EUR million Debt instruments Government debt securities and debt Instruments issued by central banks Spain (note 7) Rest of Europe Latin America and rest of the world Private-sector debt securities EUR million Debt instruments Government debt securities and debt Instruments issued by central banks Spain (note 7) Rest of Europe Latin America and rest of the world Private-sector debt securities As of 1 January 2018, with the entry into force of IFRS 9, 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 2020, 2019 and 2018, the Group recorded under 'Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss', net due to modification of the consolidated income statement, in the line of financial assets at fair value with changes in other comprehensive income a provision of EUR 19 million, EUR 12 million and EUR 1 million in 2020, 2019 and 2018, respectively. 662 Revaluation gains Revaluation losses Net revaluation gains/ (losses) Fair value 31 December 2020 693 915 785 181 2,574 — (69) (73) (21) (163) 693 846 712 160 2,411 19,314 23,116 51,026 24,714 118,170 Revaluation gains Revaluation losses Net revaluation gains/ (losses) Fair value 31 December 2019 947 664 839 81 2,531 (2) (38) (121) (49) (210) 945 626 718 32 2,321 32,413 19,052 51,284 20,096 122,845 Revaluation gains Revaluation losses Net revaluation gains/ (losses) Fair value 31 December 2018 326 373 448 37 1,184 (3) (55) (117) (178) (353) 323 318 331 (141) 831 38,550 17,494 42,599 19,777 118,420 g) Other comprehensive income - Items that may be reclassified to profit or loss and Items not reclassified to profit 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: EUR million Balance at beginning of year Revaluation gains/(losses) Net amounts transferred to profit or loss Balance at end of year Of which: 2020 2019 2018 (335) (320) (170) (22) 16 7 (222) (118) 20 (489) (335) (320) Zurich Santander Insurance América, S.L. (298) (171) (183) Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 30. Shareholders’ equity The changes in Shareholders' equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders' equity and the changes therein in 2020 is set forth below. 31. Issued capital a) Changes At 31 December 2017, Banco Santander’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). At 31 December 2018, Banco Santander’s share capital consisted of 16,236,573,942 shares with a total par value of EUR 8,118 million. On 10 September 2019, a capital increase of EUR 191 million was carried out with the issuance of 381,540,640 shares (2.35% of the Bank's share capital). to meet the takeover bid for 16.69% of the share capital of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México. (see Note 3.a). Therefore, Banco Santander’s new capital consisted of EUR 8,309 million at 31 December 2019, represented by 16,618,114,582 shares of EUR 0.50 of nominal value each one and all of them from a unique class and series. On 3 December 2020, a capital increase of EUR 361 million was made, with a charge to the share premium, through the issue of 722,526,720 shares (4.35% of the share capital). Therefore, Banco Santander's share capital at 31 December 2020 was consisted of EUR 8,670 million, represented by 17,340,641,302 shares of EUR 0.50 of nominal value each and all of them of a unique class and series. Banco Santander’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), each CDI representing one Bank’s share. They are also listed on the New York Stock Exchange under American Depositary Receipts (BDR), each BDR representing one share. During 2019 and 2018 the number of markets where the Bank is listed was reduced; the Bank's shares was delisted from Buenos Aires, Milan, Lisboa and São Paulo's markets. At 31 December 2020, no shareholder held more than 3% of Banco Santander’s total share capital (which is the threshold generally provided under Spanish regulations for a significant holding in a listed company to be disclosed). Even though at 31 December 2020, certain custodians appeared in our shareholder registry 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 whom exceeded that threshold individually. These custodians were State Street Bank (13.54%),The Bank of New York Mellon Corporation (8.25%), Chase Nominees Limited (7.74%), EC Nominees Limited (3.55%), BNP Paribas (3.07%) and Caceis Bank (3.01%). On 24 October 2019, BlackRock Inc. reported to the CNMV its significant holding of voting rights in Banco Santander (5.426%). It also specified that it was holding shares on behalf of a number of funds or other investment entities, none of which exceeded 3% individually. No changes have been communicated since then. There may be some overlap in the holdings declared by the above mentioned custodians and asset manager. At 31 December 2020, neither our shareholder registry nor the CNMV's registry showed any shareholder residing in a tax haven with a shareholding equal to, or greater than, 1% of our share capital (which is the other threshold applicable under Spanish regulations). b) Other considerations Under Spanish law, only shareholders at the general meeting have the authority to increase share capital. However, they may delegate the authority to approve or execute capital increases to the board of directors. Grupo Santander´s Bylaws are fully aligned with Spanish law and do not establish any different conditions for share capital increases. At 31 December 2020 the shares of the following companies were listed on official stock markets: Banco Santander Río S.A.; Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México; Banco Santander - Chile; 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 2020 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 39 million shares, which represented 0.22% of the Bank’s share capital (40 and 63 million shares, representing 0.24% and 0.39% of the share capital in 2019 and 2018, respectively). In addition, the number of Bank shares owned by third parties and received as security was 237 million shares (equal to 1.37% of the Bank’s share capital). At 31 December 2020 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 Corporate Enterprises Act 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 specific restrictions as to its use. The change in the balance of share premium corresponds to the capital increases detailed in note 31.a). 663 Annual report 2020 Contents i. Legal reserve Under the Consolidated Spanish Corporate Enterprises Act, 10% of net profit 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 2020 Banco Santander transferred EUR 72 million from the Share premium account to the Legal reserve (EUR 38 million and EUR 10 million in 2019 and 2018, respectively). 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 2020 the Legal reserve was of the stipulated level. ii. Reserve for treasury shares According to the Consolidated Text of the Corporate Enterprises Act, an unavailable reserve equivalent to the amount for which Banco Santander's shares owned by subsidiaries are recorded. This reservation shall be freely available when the circumstances which have obliged its constitution disappear. In addition, this reserve covers the outstanding balance of loans granted by the Group with Banco Santander's share guarantee and the amount equivalent to the credits granted by the Group companies to third parties for the acquisition of own shares. 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 which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognised. 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. The decrease produced in 2018 was a consequence of the decrease of EUR 50 million to cope with the capital increase due to Santander Dividendo Elección program. The increased produced in 2019 is a consequence of the increase of EUR 1,491 million to cope with the capital increase for the acquisition of Banco Santander México, S.A, Institución de Banca Múltiple, Grupo Financiero Santander México shares on 10 September 2019. The decrease in 2020 is due to the reduction of EUR 361 million to cover the capital increase on 3 December (see note 31). Also, in 2020, and an amount of EUR 72 million was transferred from the Share premium account to the Legal reserve (EUR 38 million and EUR 10 million in 2019 and 2018, respectively) (see note 33.b.i). 33. Accumulated retained earnings a) Definitions The balance of 'Equity - Accumulated gains and Other reserves' includes the net amount of the accumulated results (profits or losses) recognised in previous years through the consolidated income statement which in the profit distribution were allocated in equity, the expenses of own equity instrument issues, the differences 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. b) Breakdown The detail of Accumulated retained earnings and Reserves of entities accounted for using the equity method is as follows: EUR million 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 2020 2019 2018 2,460 2,595 2,580 1,734 1,662 1,624 672 879 902 43 11 43 11 43 11 10,422 10,664 12,099 6,128 4,603 5,737 4,294 6,061 6,362 Reserves of subsidiaries 47,601 43,449 39,522 Reserves of entities accounted for using the equity method 1,504 1,210 972 61,987 57,918 55,173 * In accordance with the commercial regulations in force in Spain. 664 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix iv. Reserves of subsidiaries The detail, by company, of Reserves of subsidiaries, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows: 2020 2019 2018 14,067 12,400 10,755 8,447 8,079 8,207 4,793 4,528 4,260 4,230 3,810 3,436 4,186 4,012 2,841 3,404 3,116 2,963 2,960 2,823 2,729 2,161 1,895 1,847 1,748 1,738 1,387 1,335 146 208 695 823 714 EUR million Banco Santander (Brasil) S.A. (Consolidated Group) Santander UK Group Group Santander Holdings USA Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Santander Consumer Finance Group Banco Santander - Chile Banco Santander Totta, S.A. (Consolidated Group) Banco Santander Río S.A. Santander Bank Polska S.A. Santander Investment, S.A. Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. Banco Santander Internacional SA (former Banco Santander (Suisse) SA) Other companies and consolidation adjustments* Of which, restricted equity instruments are deducted directly from equity, net of any related tax effect. The Bank’s shares owned by the consolidated companies accounted for 0.164% of issued share capital at 31 December 2020 ( 0.051% and 0.075% at 31 December 2019 and 2018, respectively). The average purchase price of the Bank’s shares in 2020 was EUR 2.51 per share and the average selling price was EUR 2.56 per share. The effect on equity, net of tax, arising from the purchase and sale of Bank shares is of EUR 1 million profit in 2020 (EUR 6 million loss and EUR 0 million profit in 2019 and 2018, respectively). 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 reflect all transactions performed by the consolidated entities although they may not impinge on their net assets. 247 348 369 a) Guarantees and contingent commitments granted (672) (269) (194) 47,601 43,449 39,522 3,155 3,193 2,964 Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows: * Includes the charge relating to cumulative exchange differences 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 financial 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, S.A. issued contingent redeemable perpetual bonds (the fidelity bonds) amounting to EUR 981 million nominal value -EUR 686 million fair value. On 31 December 2020 amounted to EUR 627 million. Additionally, at 31 December 2020 the Group had other equity instruments amounting to EUR 163 million. b) Own shares 'Shareholders’ equity - Own shares' includes the amount of own equity instruments held by all the Group entities. Transactions involving own equity instruments, including their issuance and cancellation, are recognised directly in equity, and no profit or loss may be recognised on these transactions. The costs of any transaction involving own 2020 2019 2018 Loans commitment granted 241,230 241,179 218,083 Of which doubtful 274 352 298 Financial guarantees granted 12,377 13,650 11,723 Of which doubtful Financial guarantees Credit derivatives sold 124 154 181 12,358 13,619 11,557 19 31 166 Other commitments granted 64,538 68,895 74,389 Of which doubtful Technical guarantees Other 548 747 983 33,526 33,890 35,154 31,012 35,005 39,235 The breakdown as at 31 December 2020 of the exposures and the provision fund (see note 25) out of balance sheet by impairment stage is EUR 310,435 million and EUR 377 million (EUR 316,116 million and EUR 417 million in 2019 and EUR 297,409 million and EUR 382 million in 2018) in stage 1, EUR 6,764 million and EUR 182 million (EUR 6,355 million and EUR 145 million in 2019 and EUR 5,324 million and EUR 145 million in 2018) in stage 2 and EUR 946 million and EUR 141 million (EUR 1,253 million and EUR 177 million in 2019 and EUR 1,462 million and EUR 265 million in 2018) in stage 3, respectively. Income from guarantee instruments is recognised under 'Fee and commission income' in the consolidated income statements and is calculated by applying the rate established 665 Annual report 2020 Contents in the related contract to the nominal amount of the guarantee. 36. Hedging derivatives Grupo Santander, within its financial 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, Grupo Santander classifies its hedges in the following categories: • Cash flow hedges: cover the exposure to the variation of the cash flows associated with an asset, liability or a highly probable forecast transaction. This cover the variable-rate issues in foreign currencies, fixed-rate issues in non-local currency, variable-rate interbank financing 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 identified and hedged risk. This covers the interest risk of assets or liabilities (bonds, loans, bills, issues, deposits, etc.) with coupons or fixed interest rates, interests in entities, issues in foreign currencies and deposits or other fixed rate liabilities. • Hedging of net investments abroad: cover the exchange rate risk of the investments in subsidiaries domiciled in a country with a different currency from the functional one of the Group. Due to the replacement of the current rates by the alternative rates defined in the note 1 of this report, in the section 'Amendments to IFRS 9, IAS 9 and IFRS 7 on reference interest rates (IBOR Reform Phase I and II)',the nominal amount of hedging instruments corresponding to the hedging relationships directly affected by the uncertainties related to the IBOR reforms is shown below. The percentage of the nominal amount of derivatives affected with a maturity date after the transition date of the reform represents 16.66% of the total hedging derivatives: i. Loan commitments granted Loan commitments granted: firm commitments of grating of credit under predefined terms and conditions, except for those that comply with the definition of derivatives as these can be settled in cash or through the delivery of issuance of another financial instrument. They include stand-by credit lines and long-term deposits. ii. Financial guarantees granted Financial guarantees includes, inter alia, financial guarantee contracts such as financial 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 financial 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. Off-balance-sheet funds under management The detail of off-balance-sheet funds managed by the Group and by joint ventures is as follows: EUR million Investment funds Pension funds 2020 2019 2018 131,965 142,988 127,564 15,577 11,843 11,160 Assets under management 20,712 22,079 19,131 168,254 176,910 157,855 ii. Non-managed marketed funds At 31 December 2020 there are non-managed marketed funds totalling EUR 38,563 million (EUR 49,490 million and EUR 42,211 million at 31 December 2019 and 2018, respectively). c) Third-party securities held in custody At 31 December 2020 the Group held in custody debt securities and equity instruments totalling EUR 209,269 million (EUR 229,381 million and EUR 940,650 million at 31 December 2019 and 2018, respectively) entrusted to it by third parties. The decrease in 2019 is due to the agreement to sell the deposit and custody business to Crédit Agricole S.A. (see note 3). 666 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million Total hedging instruments affected Fair value hedges Interest rate risk Interest rate and foreign exchange risk Cash flow hedges Interest rate risk Interest rate and foreign exchange risk Exchange rate risk Post-transition date agreement Fair value hedges Interest rate risk Interest rate and foreign exchange risk Cash flow hedges Interest rate risk Interest rate and foreign exchange risk Exchange rate risk GBP LIBOR USD LIBOR 2020 CHF LIBOR Others* Total 38,304 37,450 854 18,768 1,741 16,528 499 57,072 16,036 15,608 428 13,883 980 12,405 498 29,919 16,163 14,600 1,563 18,508 12,772 4,484 1,252 34,671 14,381 13,563 818 10,912 8,023 2,853 36 25,293 1,315 464 851 1,462 — 378 1,084 2,777 1,267 416 851 1,371 — 308 1,063 2,638 1,899 1,899 — 395 — 395 — 2,294 1,834 1,834 — 395 — 395 — 2,229 57,681 54,413 3,268 39,133 14,513 21,785 2,835 96,814 33,518 31,421 2,097 26,561 9,003 15,961 1,597 60,079 * Includes mainly JPY Libor and EONIA. As for the hedged items directly affected by the uncertainties related to the IBOR reforms, their nominal amount is shown below, which represents 11.75% of the total notional amount hedged: EUR million Total hedge items directly affected Fair value hedges Interest rate risk Interest rate and foreign exchange risk Exchange rate risk Cash flow hedges Interest rate risk Interest rate and foreign exchange risk Exchange rate risk Post-transition date agreement Fair value hedges Interest rate risk Interest rate and foreign exchange risk Cash flow hedges Interest rate risk Interest rate and foreign exchange risk Exchange rate risk * Includes mainly JPY Libor and EONIA. GBP LIBOR USD LIBOR 2020 CHF LIBOR Others* Total 33,544 33,266 278 — 5,633 1,741 3,892 — 411 384 — 27 12,614 12,578 — 36 39,177 13,025 27,508 27,508 — 3624 980 2,644 — 31,132 384 384 — 7947 7,911 — 36 8,331 — — — — 1,347 — 169 1,178 1,347 — — — 1191 — 100 1,091 1,191 1,717 1,109 608 — — — — — 1,717 1,717 1,109 608 0 — — — 35,672 34,759 886 27 19,594 14,319 4,061 1,214 55,266 29,609 29,001 608 12762 8,891 2,744 1,127 1,717 42,371 667 Annual report 2020 Contents The following tables contains details of the hedging instruments used in the Group's hedging strategies as of 31 December 2020, 2019 and 2018: Million euros 2020 Carrying amount Assets 4,199 3,528 — — 2,985 184 338 11 1 9 293 210 83 378 8 — 370 — — Liabilities 4,671 3,850 — — 2,747 886 205 11 — 1 47 47 — 771 1 13 757 3 3 3,436 1,739 478 — — 237 204 15 22 555 265 — 7 283 2,362 262 2,100 — 36 10 26 — 5 5 690 690 690 — 522 322 — 108 7 85 — 802 195 — 7 600 275 — 264 11 140 4 136 — — — 459 459 459 — Nominal value 199,260 181,582 47 9,282 94,713 69,740 7,404 51 15 330 9,037 8,422 615 8,434 426 304 7,704 207 207 139,156 74,731 7,492 3,640 46,547 12,123 2,057 2,872 23,483 9,151 499 408 13,425 27,021 5,218 19,682 2,121 13,907 3,701 10,206 — 14 14 22,210 22,210 22,210 — 360,626 8,325 6,869 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 futures Interest rate and exchange rate risk Interest rate swap Call money swap Currency swap Credit risk CDS Cash flow hedges Interest rate risk Futures Fx forward Future interest rate Interest rate swap Currency swap Floor Exchange rate risk FX forward Future interest rate Interest rate swap Currency swap Interest rate and exchange rate risk Interest rate swap Currency swap Call money swap Inflation risk FX forward Currency swap Call money swap Equity risk Option Hedges of net investments in foreign operations Exchange rate risk FX forward Deposits taken 668 Changes in fair value used for calculating hedge ineffectiveness (451) (456) Balance sheet line items 1 Hedging derivatives (48) Hedging derivatives (27) Hedging derivatives (486) Hedging derivatives Hedging derivatives Hedging derivatives Hedging derivatives Hedging derivatives 104 — — — 11 11 — (11) Hedging derivatives Hedging derivatives Hedging derivatives 1 (8) Hedging derivatives (4) Hedging derivatives Hedging derivatives 5 5 232 75 135 (208) Hedging derivatives (10) Hedging derivatives Hedging derivatives Hedging derivatives Hedging derivatives Hedging derivatives 145 — 13 (401) (155) Hedging derivatives (143) Hedging derivatives Hedging derivatives (103) Hedging derivatives — 679 129 550 — (129) Hedging derivatives Hedging derivatives Hedging derivatives (1) Hedging derivatives (132) Hedging derivatives Hedging derivatives 4 8 8 3 3 — 3 (216) Hedging derivatives Hedging derivatives Deposits     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 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 Curency swap Fx forward Interest rate and exchange rate risk Interest rate swap Call money swap Currency swap Inflation risk Call money swap Credit risk CDS Cash flow hedges Interest rate risk Futures Future interest rate Interest rate swap Call money swap Currency swap Floor Exchange rate risk FX forward Future interest rate Interest rate swap Currency swap Deposits borrowed Interest rate and exchange rate risk Interest rate swap Currency swap Call money swap Inflation risk FX forward Currency swap Call money swap Equity risk Option Hedges of net investments in foreign operations Exchange rate risk FX forward 2019 Carrying amount Nominal value Assets Liabilities Changes in fair value used for calculating hedge ineffectiveness Balance sheet line items (1,522) (1,346) 1 Hedging derivatives (476) Hedging derivatives (429) Hedging derivatives (295) Hedging derivatives (126) Hedging derivatives — Hedging derivatives — Hedging derivatives (21) Hedging derivatives (60) — Hedging derivatives (60) Hedging derivatives (116) (45) Hedging derivatives (4) Hedging derivatives (67) Hedging derivatives 5 5 Hedging derivatives (5) (5) Hedging derivatives 3,649 3,160 1 32 2,297 472 349 9 — — 55 1 54 428 1 4 423 — — 6 6 1,618 (1,540) 261 147 — 97 12 5 — 660 216 — 11 433 — 640 5 622 13 53 4 42 7 4 4 781 781 781 (267) (93) Hedging derivatives (64) Hedging derivatives (105) Hedging derivatives 8 Hedging derivatives (17) Hedging derivatives 4 Hedging derivatives (405) (145) Hedging derivatives 113 Hedging derivatives (6) Hedging derivatives (365) Hedging derivatives (2) Deposits (826) 201 Hedging derivatives (1,020) Hedging derivatives (7) Hedging derivatives (44) 4 Hedging derivatives (44) Hedging derivatives (4) Hedging derivatives 2 2 Hedging derivatives — — — Hedging derivatives 202,548 183,586 78 12,325 117,439 44,791 8,728 50 15 160 10,006 284 9,722 8,698 869 277 7,552 — — 258 258 135,439 55,810 21,655 771 21,492 6,164 2,345 3,383 31,803 10,595 9,290 888 11,030 — 38,938 7,347 27,044 4,547 8,830 2,230 6,511 89 58 58 24,477 24,477 24,477 3,570 3,032 — — 2,651 91 272 9 1 8 73 24 49 465 16 — 449 — — — — 3,398 277 33 — 99 30 98 17 463 237 — 12 214 — 2,625 133 2,492 — 33 5 28 — — — 248 248 248 362,464 7,216 6,048 (3,062) 669       Annual report 2020 Contents EUR million Fair value hedges Interest rate risk Equity swap Future interest rate Interest rate swap Call money swap Currency swap Inflation swap Swaption Collar Floor Exchange rate risk Fx forward Interest rate and exchange rate risk Interest rate swap Call money swap Currency swap Inflation risk Call money swap Currency swap Credit risk CDS Cash flow 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 Inflation 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 670 2018 Carrying amount Assets 3,451 2,642 — — 2,339 170 121 — 6 1 5 17 17 792 143 — 649 — — — — — 4,865 307 — — 240 57 10 971 — 186 — 10 775 — — 3,542 20 3,522 45 — 45 — — — — 291 291 291 Liabilities 5,114 4,620 2 — 4,172 250 45 — 6 — 145 (3) (3) 493 20 — 473 4 3 1 — — 976 250 22 — 202 26 — 568 — 15 — 5 548 — — 124 97 27 30 9 21 4 4 — — 273 273 273 Nominal value 178,719 163,069 109 7,702 129,045 19,579 4,957 — 51 15 1,611 3,191 3,191 12,237 3,022 20 9,195 168 64 104 54 54 118,400 39,165 985 127 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 — — 21,688 21,688 21,688 318,807 8,607 6,363 Balance sheet line items Changes in fair value used for calculating hedge ineffectiveness 96 16 — Hedging derivatives (126) Hedging derivatives 281 Hedging derivatives (32) Hedging derivatives (17) Hedging derivatives 9 Hedging derivatives — Hedging derivatives — Hedging derivatives (99) Hedging derivatives 43 43 Hedging derivatives 42 (15) Hedging derivatives — Hedging derivatives 57 Hedging derivatives (5) (3) Hedging derivatives (2) Hedging derivatives — — Hedging derivatives (28) 182 (22) 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 — — Hedging derivatives (1) (1) (1) Hedging derivatives 67       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Considering within the Group the main entities or groups by the weight of their hedges, the following are the main types of hedges being carried out in Santander UK Group Holdings plc group, Banco Santander, S.A., Grupo Consumer, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Banco Santander (Brasil) S.A. Santander UK Group Holdings plc group enters into fair value and cash flow hedging derivatives depending on the exposure of the underlying. Only designated risks are hedged and therefore other risks, such as credit risk, are managed but not hedged. Within fair value hedges, Santander UK Group Holdings plc group has portfolios of assets and liabilities at fixed 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. Effectiveness 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 Holdings plc group also has access to international markets to obtain financing by issuing fixed-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 e interest rate swaps in which they pay a fixed rate and receive a variable rate. Effectiveness 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 o loss cross currency swaps. Within the cash flow hedges, Santander UK Group Holdings plc 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 Holdings plc group obtains financing in the international markets, it assumes a significant exposure to currency risk mainly USD and EUR. In addition, it also holds debt securities for liquidity purposes which assume exposure mainly in JPY. To manage this exchange rate risk, spot, forward y cross currency swap are contracted to match the cash flow profile and the maturity of the estimated interest and principal repayments of the hedged item. Effectiveness 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 Holdings plc group offers 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. At 31 December 2020, outgoing cash flow is no longer expected to occur due to changes in Banco Santander's share 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 fixed-income portfolios at a fixed 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 Banco Santander's income statement. To mitigate these risks, Banco Santander contracts derivatives, mainly interest rate Swaps, Cross Currency Swaps, Cap&Floors, Forex Forward y Credit Default Swaps. On the other hand, the interest and exchange rate risk of loans granted to corporate clients at a fixed rate is generally covered. These coverages, are carried out through interest rate swaps, cross currency swaps, cap&floors, forex forward y credit default swaps. In addition, Banco Santander manages the interest and exchange risk of debt issues in their various categories (issuing covered bonds, perpetual, subordinated and senior bond) and in different currencies, denominated at fixed rates, and therefore subject to changes in their fair value. These issues are covered through Interest Rate Swaps, Cross Currency Swaps or a combination of both by applying differentiated fair value hedging strategies for interest rate risk and cash flow hedging strategies to cover foreign exchange risk. The methodology used by Banco Santander, S.A. to measure the effectiveness of fair value hedges is based on comparing the market values 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 offset by the market value of the hedging instruments, thereby mitigating the hedged risk and minimizing volatility in the income statement. 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. There is a macro hedge of structured loans in which the interest rate risk of fixed-rate loans (mortgage, personal or with other guarantees) granted to legal entities in commercial or corporate banking and Wealth clients in the medium-long term is hedged. This hedge is instrumented as a macro hedge of fair value, the main hedging instruments being Interest Rate Swap and Cap&Floors. In case of total or partial cancellation or early repayment, the customer is obliged to pay/receive the cost/receipt of the cancellation of the interest rate risk hedge managed by the Bank. Regarding cash flow hedges, the objective is to hedge the cash flow exposure to changes in interest rates and exchange rates. For retrospective purposes, the 'Hypothetical Derivative' methodology is used to measure effectiveness. By means of this methodology, the hedged risk is modeled as a derivative instrument -not real-, created exclusively for the purpose of measuring the effectiveness of the hedge, and which must comply with the fact that its main characteristics coincide with the critical terms of the hedged item throughout the period for which the hedging relationship is designated. This hypothetical derivative does not incorporate characteristics that are exclusive to the hedging instrument. Additionally, it is worth mentioning that any risk component not associated with the hedged objective risk and effectively documented at the beginning of the hedge is excluded for the purpose of 671 Annual report 2020 Contents calculating the effectiveness. The market value of the hypothetical derivative that replicates the hedged item is compared with the market value of the hedging instrument, verifying that the hedged risk is effectively mitigated and that the impact on the income statement due to potential ineffectiveness is residual. Prospectively, the variations in the market values of the hedging instrument and the hedged item (represented by the hypothetical derivative) are measured in the event of parallel shifts of a positive basis point in the affected market curves. There is another macro-hedge, this time of cash flows, the purpose of which is to actively manage the risk-free interest rate risk (excluding credit risk) of a portion of the floating rate assets of Banco Santander, S.A., through the arrangement of interest rate derivatives whereby the bank exchanges floating rate interest flows for others at a fixed rate agreed at the time the transactions are arranged. The items affected by the Macro-hedging have been designated as those in which their cash flows are exposed to interest rate risk, specifically the floating rate mortgages of the Banco Santander, S.A. network referenced to Euribor 12 Months or Euribor Mortgage, with annual renewal of rates, classified as sound risk and which do not have a contractual floor (or, if not, this floor is not activated). The hedged position affecting the Macro Cash Flow Hedge at the present time is EUR 30,000 million. Consumer Group entities mainly have loans portfolios at fixed 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 fixed 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 fixed rate loans arising solely from changes in a reference rate. This strategy is designated as a fair value hedge and its effectiveness 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 financing, some Consumer Group ´s entities issue fixed rate debt in their own currency and in other currencies that differ 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 fixed interest rate and pay a variable interest rate, implemented with a fair value hedge. The cash flow hedges of the Santander Group´s entities hedge the foreign currency risk of loans and financing. Finally, it has hedges of net investments abroad to hedge the foreign exchange risk of the shareholding in NOK and CNY currencies. Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México has mainly long-term loan portfolios at fixed 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 fixed rate and receive a variable rate. Only the interest rate and exchange rate risk is hedged, if applicable, and therefore other risks, such as credit risk, are managed but not hedged by the entity. The interest rate risk component is determined as the change in the fair value of fixed rate loans arising solely from changes in a reference rate. This strategy is designated as a fair value hedge and its effectiveness 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 flow hedges, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México 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 fixed rate. On the other hand, it also has different items in currencies other than the local currency: unsecured floating rate bonds, commercial bank loans at variable rates, fixed rate issues, Mexican and Brazilian government bonds at fixed rates. 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 (Brasil) S.A. has, on the one hand, fixed-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 fixed 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 effectiveness 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 different 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 effectiveness is evaluated by comparing changes in the fair value of loans attributable to changes subject of hedge with changes in the fair value of derivatives. 672 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Finally, it also has a portfolio of long-term Corporate Bonds with inflation-indexed rates. With reference to what it has been mentioned before, they are exposed to variations in market value due to variations in market inflation rates. In order to achieve its mitigation, they contract futures in which they pay the indexed inflation and receive variable interest rates. Its effectiveness 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. In the hedge of cash flows, Banco Santander (Brasil) S.A. has portfolios of loans and government bonds in different 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 effectiveness is assessed by comparing changes in fair value of loans and bonds, caused by the hedge risk, 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 fixed rate is received. Its effectiveness is assessed by comparing changes in the fair value loans and bonds to changes in the fair value of the futures. Regarding net foreign investments hedges, basically, they are allocated in Banco Santander, S.A. and Santander Consumer Finance Group. Grupo Santander assumes as a priority risk management objective to minimize -to the limit determined by the Group's Financial Management- the impact on the calculation of the capital ratio of its permanent investments included within the Group's consolidable perimeter, and whose shares or equity interests are legally denominated in a currency other than that of the Group's parent company. For this purpose, financial instruments (generally derivatives) are contracted to hedge the impact on the capital ratio of changes in forward exchange rates. Grupo Santander mainly hedges the risk 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 spot currency purchases/sales. In the case of this type of hedges, ineffectiveness scenarios are considered to be of low probability, given that the hedging instrument is designated considering the position determined and the spot rate at which the position is located. The following table sets out the maturity profile of the hedging instruments used in Grupo Santander non-dynamic hedging strategies: 673 Annual report 2020 Contents 31 December 2020 Up to one month 7,132 One to three months 14,221 Three months  to one year 44,897 One year to five years 95,343 More than five years Total 37,667 199,260 5,616 — 430 3,943 1,021 157 — — 65 1,516 901 615 — — — — — — 10,489 6,019 5,213 — 806 — — — 1,746 1,532 — — 214 1,691 816 875 — 1,033 1,000 33 — — 2,435 2,435 2,435 9,667 39,921 90,913 35,465 181,582 11 — 4,804 4,662 190 — — — 4,264 4,264 — 282 — — 282 8 8 11,629 6,707 — — 4,626 1,502 253 326 2,336 2,243 — — 93 972 — 972 — 1,614 1,433 181 — — 5,086 5,086 5,086 20 3,128 24,807 11,241 674 51 — — 3,257 3,257 — 1,711 — — 1,711 8 8 44,127 33,070 — — 29,511 1,550 338 1,671 4,616 3,040 — — 1,576 5,634 981 4,653 — 807 578 229 — — 12,831 12,831 12,831 16 4,255 33,333 49,624 3,619 — 15 51 — — — 4,239 370 262 3,607 191 191 61,186 26,959 2,279 3,640 11,219 7,890 1,056 875 13,071 2,336 499 408 9,828 15,687 2,402 11,164 2,121 5,456 690 4,766 13 13 1,858 1,858 1,858 — 47 1,469 9,282 27,826 94,713 3,192 69,740 2,764 7,404 — — 214 — — — 51 15 330 9,037 8,422 615 2,202 8,434 56 42 2,104 — — 426 304 7,704 207 207 11,725 139,156 1,976 74,731 — — 7,492 3,640 385 46,547 1,181 12,123 410 — 2,057 2,872 1,714 23,483 — — — 9,151 499 408 1,714 13,425 3,037 27,021 1,019 5,218 2,018 19,682 — 2,121 4,997 — 13,907 3,701 4,997 10,206 1 1 — — — 14 14 22,210 22,210 22,210 20,056 30,936 101,855 158,387 49,392 360,626 EUR million 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 Future interest rate Interest rate and exchange rate risk Interest rate swap Call money swap Currency swap Credit risk CDS Cash flow hedges Interest rate risk Futuros FX y c/v plazo FX Future interest rate Interest rate swap Call money swap Currency swap Floor Exchange rate risk FX forward Future interest rate Interest rate swap Currency swap Interest rate and exchange rate risk Interest rate swap Currency swap Call money swap Inflation risk FX forward Currency swap Equity risk Option Hedges of net investments in foreign operations: Exchange rate risk FX forward 674           Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 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 Currency swap Fx forward Interest rate and exchange rate risk Interest rate swap Call money swap Currency swap Credit risk CDS Cash flow hedges Interest rate risk Futures Future interest rate Interest rate swap Call money swap Currency swap Floor Exchange rate risk FX forward Future interest rate Interest rate swap Currency swap Interest rate and exchange rate risk Interest rate swap Currency swap Call money swap Inflation risk FX forward Currency swap Call money swap Equity risk Option Hedges of net investments in foreign operations Exchange rate risk FX forward Up to one month 5,816 5,468 — 16 734 4,674 44 — — — 333 4 329 15 — — 15 — — 16,506 13,023 12,304 — 460 — 259 — 2,300 2,173 — — 127 1,086 — 1,086 — 97 — 97 — — 2,735 2,735 2,735 31 December 2019 One to three months 14,591 Three months to one year 43,236 One year to five years 90,707 More than five years 48,198 9,055 37,627 11 — 3,532 5,318 194 — — — 4,090 — 4,090 1,432 — — 1,432 14 14 5,912 2,179 385 — 864 398 354 178 2,572 1,746 — — 826 308 — 308 — 853 117 736 — — — 4,191 4,191 4,191 25 606 24,382 12,085 529 — — — 5,172 90 5,082 437 — — 437 — — 38,678 13,011 3,196 — 7,441 1,253 231 890 14,324 3,404 9,290 — 1,630 9,221 1,917 5,553 1,751 2,114 1,205 909 — 8 8 14,192 14,192 14,192 96,106 86,119 42 6,066 62,474 14,653 2,819 50 15 — 411 190 221 3,933 869 21 3,043 244 244 62,119 26,332 5,770 771 12,585 3,925 966 2,315 11,753 3,272 — 888 7,593 20,782 2,880 15,106 2,796 3,204 908 2,207 89 48 48 3,359 3,359 3,359 45,317 — 5,637 26,317 8,061 5,142 — — 160 — — — 2,881 — 256 2,625 — — 12,224 1,265 — — 142 588 535 — 854 — — — 854 7,541 2,550 4,991 — 2,562 — 2,562 — 2 2 — — — Total 202,548 183,586 78 12,325 117,439 44,791 8,728 50 15 160 10,006 284 9,722 8,698 869 277 7,552 258 258 135,439 55,810 21,655 771 21,492 6,164 2,345 3,383 31,803 10,595 9,290 888 11,030 38,938 7,347 27,044 4,547 8,830 2,230 6,511 89 58 58 24,477 24,477 24,477 156,185 60,422 362,464 675 25,057 24,694           31 December 2018 Up to one month 9,377 One to three months 17,989 Three months to one year 23,773 One year to five years 78,541 More than five years 49,039 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 12,519 27 2,012 10,213 267 — — — — 1,855 1,855 3,615 1,462 — 2,153 — — — — — 6,994 2,984 377 — 2,161 446 — 3,478 — — — — 3,478 — 8 8 — 524 121 403 — — 777 777 777 28,616 25,760 21,987 46 981 18,423 1,823 714 — — — 1,147 1,147 639 35 — 604 — — — — — 16,954 7,530 559 — 5,957 839 175 5,896 — 47 — — 5,535 314 2,921 898 2,023 566 156 410 41 41 11,067 11,067 11,067 51,794 73,817 36 2,650 60,330 6,967 2,368 51 — 1,415 172 172 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 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 — — — — — 150,777 61,860 318,807 Contents Total 178,719 163,069 109 7,702 129,045 19,579 4,957 51 15 1,611 3,191 3,191 12,237 3,022 20 9,195 168 64 104 54 54 118,400 39,165 985 127 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 21,688 21,688 21,688 Annual report 2020 EUR million 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 Inflation risk Call money swap Currency swap Credit risk CDS Cash flow 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 Inflation risk FX forward Currency swap Equity risk Option Hedges of net investments in foreign operations Exchange rate risk FX forward 676           Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Additionally, the profile information of maturities and the price/average rate for the most representative geographies is shown: Santander UK Group Holdings plc group Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Average fixed interest rate (%) EUR Average fixed interest rate (%) USD Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average GBP/EUR exchange rate Average fixed interest rate (%) EUR Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Foreign exchange risk Exchange and interest 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 and interest rate instruments Nominal Average GBP/EUR exchange rate Average GBP/USD exchange rate Average fixed interest rate (%) GBP 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 2,704 0.690 1.180 1.870 — — — — 1,602 — — 1.293 1,630 — 1.465 2.010 8,481 0.650 0.230 1.720 — — 30,946 53,170 0.820 3.020 2.890 147 1.141 4.640 0.730 0.980 2.490 776 1.170 1.780 104,351 1,183 9,050 3.720 2.340 4.160 260 1.167 3.560 999 0.460 2,815 0.570 8,869 1.450 1,180 1.330 13,863 2,244 137.977 — 1.316 4,317 135.607 — 1.323 — — — — 3,858 1.354 — 3.180 8,328 132.271 1.163 1.304 11,816 1.253 1.609 2.480 1,246 17,737 — 1.179 — 2,792 1.197 1.381 3.390 20,096 677       Annual report 2020 Contents Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Average fixed interest rate (%) EUR Average fixed interest rate (%) USD Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average GBP/EUR exchange rate Average GBP/USD exchange rate Average fixed interest rate (%) EUR Average fixed interest rate (%) USD Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Foreign exchange risk Exchange and interest 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 and interest rate instruments Nominal Average GBP/EUR exchange rate Average GBP/USD exchange rate Average fixed interest rate (%) GBP 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 5,118 0.770 (0.410) — — — — — — — — 1,395 — — 1.286 954 1.274 — 2.490 6,822 0.900 0.290 1.540 887 — 1.511 — 2.380 32,210 51,307 15,397 110,854 0.880 2.210 1.990 — — — — — 1.330 1.360 2.690 394 1.178 — 3.520 — 3.000 2.360 4.560 738 1.160 — 2.120 — 2,019 398 0.760 1,253 0.820 5,490 1.460 588 0.400 7,729 2,491 145.928 1.144 1.252 4,417 143.086 1.117 1.293 — — — — 7,626 1.169 1.536 2.160 7,019 140.815 1.153 1.299 15,089 1.311 1.581 2.870 15,322 30,960 — — — — 7,291 1.209 1.450 2.960 678     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2018 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 16,333 44,166 17,498 94,288 Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Average fixed interest rate (%) USD Average fixed interest rate (%) EUR Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average GBP/EUR exchange rate Average GBP/USD exchange rate Average fixed interest rate (%) USD Average fixed interest rate (%) EUR Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) GBP Foreign exchange risk Exchange and interest 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 and interest rate instruments Nominal Average GBP/EUR exchange rate Average GBP/USD exchange rate Average fixed 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 2,853 3,310 — — 1.304 — — — — 147.215 146.372 — 1.307 — — — — 1.280 1.310 2,859 1.252 1.633 2.340 7,132 145.319 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 33,642 9,495 1.217 1.511 2.900 679       Annual report 2020 Contents 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 (%) JPY Average fixed interest rate (%) USD Average fixed interest rate (%) RON Foreign exchange risk Exchange and interest rate instruments Nominal Average fixed interest rate (%) GBP/EUR Average fixed interest rate (%) USD/EUR Average COP/USD exchange rate Average CNY/EUR exchange rate Average SAR/EUR exchange rate Average PEN/USD exchange rate Average AUD/EUR exchange rate Average JPY/EUR exchange rate Interest rate and foreign exchange rate risk Exchange and interest 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 (%) RON/EUR Average fixed interest rate (%) HKD/EUR Average fixed interest rate (%) JPY/EUR Average fixed interest rate (%) NOK/EUR Average fixed interest rate (%) CHF/EUR Average fixed interest rate (%) USD/COP Average fixed interest rate (%) COP/USD Average fixed interest rate (%) USD/CLP Average AUD/EUR exchange rate Average COP/USD exchange rate Average CZK/EUR exchange rate Average EUR/GBP exchange rate Average EUR/COP exchange rate Average EUR/USD exchange rate Average HKD/EUR exchange rate Average JPY/EUR exchange rate Average MXN/EUR exchange rate Average NOK/EUR exchange rate Average RON/EUR exchange rate Average CHF/EUR exchange rate Average USD/COP exchange rate Average USD/CLP exchange rate Average USD/MXN exchange rate 680 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 2,073 — 0.647 — — 0.698 — 833 — 1.165 409 — 0.551 — — 0.570 — 4,149 0.901 1.171 3,628.140 3,603.595 8.108 4.484 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 8.102 4.514 3.609 1.609 124.612 282 — — — — — — — — — — — — — — 1.113 — — — — — — — — — — — 2,165 — 0.388 — — 2.031 — 3,008 0.916 1.178 — 7.997 — — — — 818 — — 4.380 — — 2.195 — — 8.030 6.000 0.930 — 3,437.200 — — 0.0002 — — 113.370 — — — — 0.0003 0.001 0.050 17,430 14,294 36,371 7,990 4,804 1.375 0.820 0.800 0.465 3.004 3.610 — — — — — — — — — 2,621 4.000 0.860 — 4.849 2.580 0.568 — — 6.659 — — 1.499 — 25.539 — — 0.891 8.782 133.840 14.696 — 4.727 1.092 0.0003 — — 4.072 1.927 0.403 — 3.562 — — — — — — — — — — 1,083 4.660 — — — — 1.281 3.605 1.243 7.231 — — 1.508 — — — — — — 125.883 — 9.606 — 1.105 0.0003 — —     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 8 8 191 — 207 Credit risk Credit risk instruments Nominal Cash flow hedges Interest rate and foreign exchange rate risk Interest rate and foreign exchange rate instruments Nominal Average EUR/GBP exchange rate Average EUR/USD exchange rate Average AUD/EUR exchange rate Average RON/EUR exchange rate Average JPY/EUR exchange rate Average CHF/EUR exchange rate Interest rate risk Bond Forward instruments Nominal Average fixed interest rate (%) EUR Hedges of net investments in foreign operations Exchange rate risk Exchange and interest rate instruments Nominal Average BRL/EUR exchange rate Average CLP/EUR exchange rate Average COP/EUR exchange rate Average GBP/EUR exchange rate Average MXN/EUR exchange rate Average PLN/EUR exchange rate — — — — — — — — — — — — — — — 1,247 1.080 — — — — — 3,242 1.102 0.882 1.625 4.810 120.568 — 3,164 — 5,000 (0.2580) 23,000 (0.2498) 4,279 (0.2359) 2,229 5.270 4,554 5.308 11,570 6.332 1,858 — 869.633 861.546 864.339 932.215 — 0.909 23.121 4.427 — 4,471.305 0.916 25.456 4.420 0.907 26.788 4.516 — — — — 208 4,697 — — — — — 1.102 — — — — — — — — — 35,443 20,211 681     Annual report 2020 Contents 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to More than five years five years Total 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 (%) JPY Average fixed interest rate (%) USD Foreign exchange risk Exchange and interest rate instruments Nominal Average fixed interest rate (%) GBP/EUR Average fixed interest rate (%) USD/EUR Average fixed interest rate (%) USD/CLP Average CNY/EUR exchange rate Average SAR/EUR exchange rate Interest rate and foreign exchange rate risk Exchange and interest 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 (%) RON/EUR Average fixed interest rate (%) HKD/EUR Average fixed interest rate (%) JPY/EUR Average fixed interest rate (%) NOK/EUR Average fixed interest rate (%) CHF/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 HKD/EUR exchange rate Average JPY/EUR exchange rate Average MXN/EUR exchange rate Average NOK/EUR exchange rate Average RON/EUR exchange rate Average CHF/EUR exchange rate Average USD/COP exchange rate Average USD/MXN exchange rate Credit Risk Credit risk instruments Nominal Cash flow hedges 16,707 10,219 28,446 8,891 4,197 1.43 0.79 0.80 0.46 3.12 — — — — — — 2,599 4.00 0.86 — 4.85 2.58 0.66 — — 7.62 1.4989 25.407 — — 8.7820 6.82 2.58 0.40 — 3.93 — — — — — — 949 4.66 — — — — 1.28 3.61 1.24 7.22 1.508 26.030 — — — 8 — 5.30 — — — 211 — — 106 — 2.41 — — — 3,903 0.86 1.12 1,406 — 3.20 — — 2.05 4,777 0.87 1.12 747.72 747.90 746.70 8.01 — 346 — — 6.16 — 2.52 0.54 — — 5.67 — — — 0.0003 8.7185 — 4.16 14 — — — — — — — — 7.54 — — — — — — — — — — 0.0003 — 7.91 4.18 289 — — — — — — — — — — — 1.1711 — — — — — — — — — 130.4700 132.4608 125.8830 — — — — 0.0003 — 14.6960 — — 9.6060 4.7271 1.0924 0.0003 0.0520 — 0.0003 — — 13 — 244 — 257 Interest rate and foreign exchange rate risk Interest rate and foreign exchange rate instruments Nominal Interest rate risk Bond Forward instruments Nominal — — 353 4,410 207 4,970 11,626 — 1,792 5,443 — 18,861 682     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Hedges of net investments in foreign operations Exchange rate risk Exchange and interest rate instruments Nominal Average BRL/EUR exchange rate Average CLP/EUR exchange rate Average COP/EUR exchange rate Average GBP/EUR exchange rate Average MAD/EUR exchange rate Average MXN/EUR exchange rate Average PLN/EUR exchange rate 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to More than five years five years Total 2,592 4.59 3,838 4.74 822.13 822.32 13,595 4.74 811.64 3,359 4.88 824.36 — 0.89 — 23.49 4.37 — 3,828.61 0.91 10.77 23.10 4.38 0.94 10.87 23.27 4.39 — — — — — 23,384 — — — — — — — — 683     Annual report 2020 Contents 31 December 2018 EUR million Up to one month One to three months Three months to one year One year to More than five years five years Total 500 — 3.75 — — 665 — 0.63 — — 425 — 2.06 1.38 12,987 22,025 36,602 — 1.81 0.76 3.43 7.08 3.20 1.04 4.11 — 1,825 771 — — 2,596 41 — — — — — — 6.13 — — — — — — — — — — — — 1,942 — 373 4.46 — — — — 22.98 — 3,656 461 — — — — — — 6.71 — — 1.15 — — — — — — — 0.0003 120 — — 7.54 — — — — — — — 0.0003 — — — — — 0.269 0.0003 2,083 4.00 0.86 — 2.52 0.64 — 9.47 1.50 951 4.80 — — — 1.28 3.61 — 1.50 25.407 26.030 — — — 8.718 132.014 14.696 — — — — — — — 125.883 — 9.606 — 0.0003 — — 49 5 54 — — — — 6,130 0.0051 20 0.0055 8,092 20,746 497 — 766.01 — 3728.01 0.91 — — 10,587 4.46 768.25 8.14 3685.8 0.89 24.51 4.38 9,289 4.73 795.1 — — — 24.5 4.26 — — — — — — — — 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 and interest rate instruments Nominal Interest rate and foreign exchange rate risk Exchange and interest 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 risk Exchange and interest 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 684     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Santander Consumer Finance 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 and interest rate instruments Nominal Average DKK/EUR exchange rate Average PLN/EUR exchange rate Average CHF/EUR exchange rate Average SEK/EUR exchange rate Interest rate and foreign exchange rate risk Interest rate and exchange rate instruments Nominal Average fixed interest rate (%) DKK Average DKK/EUR exchange rate Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) EUR Foreign exchange risk Nominal exchange rate instruments Nominal Average NOK/EUR exchange rate Average CHF/EUR exchange rate Average CAD/EUR exchange rate Average JPY/EUR exchange rate Interest rate and foreign exchange rate risk Interest rate and 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 JPY/EUR exchange rate Average fixed interest rate (%) EUR Average fixed interest rate (%) CHF Hedges of net investments in foreign operations Foreign exchange risk Exchange and interest rate instruments Nominal Average NOK/EUR exchange rate Average CNY/EUR exchange rate 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 241 — 501 0.004 (0.590) (0.547) 2,052 (0.009) (0.570) 4,744 (0.045) (0.553) 68 — — 88 — — 1.075 10.341 1.072 10.426 249 10.075 1.582 1.075 — — — — — — — — — — — — — — — 652 7.454 0.006 71 0.135 125 0.172 612 0.175 1,481 0.181 11 — — 151.400 — 92 — 1.084 — — 112 — 1.116 1.501 815 — 1.123 1.525 116.990 125.071 60 510 700 426 10.302 10.556 10.381 10.446 — — — — — — — — 1.088 — — — 7.456 7.473 — — — — — — 206 10.141 — 501 10.962 7.639 1,260 10.861 — 9.281 1.089 — — 4.287 0.890 0.150 — — — 519 (0.005) 8,057 — — — — — — — — — — — 405 652 2,289 48 1,078 10.590 — — — — — — — — — — — — — — — 1,696 1,967 685       Annual report 2020 Contents 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total Average SEK/EUR exchange rate — 10.687 Interest rate and foreign exchange rate risk Interest rate and exchange rate instruments Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) EUR Average fixed interest rate (%) CHF Foreign exchange risk Exchange and interest rate instruments Nominal Average DKK/EUR exchange rate Average PLN/EUR exchange rate Average CHF/EUR exchange rate Nominal Average fixed interest rate (%) DKK Average DKK/EUR exchange rate Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) EUR Foreign exchange risk Nominal exchange rate instruments Nominal Average SEK/EUR exchange rate Average CHF/EUR exchange rate Average CAD/EUR exchange rate Average DKK/EUR exchange rate Average JPY/EUR exchange rate Interest rate and foreign exchange rate risk Interest rate and 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 JPY/EUR exchange rate Average fixed interest rate (%) EUR Average fixed interest rate (%) CHF Hedges of net investments in foreign operations Foreign exchange risk Exchange and interest rate instruments Nominal Average NOK/EUR exchange rate Average CNY/EUR exchange rate 686 159 (0.164) (0.700) 1,394 (0.027) (0.700) 2,154 (0.119) (0.630) 5,669 (0.110) (0.560) 118 7.458 4.382 1.093 187 7.465 4.302 1.096 — — — 249 7.462 0.004 304 7.458 4.347 — — — — — — — — — — 499 7.443 0.006 54 0.212 152 0.212 379 0.212 562 0.212 18 9,394 (0.123) — — — — — — — — — — — 609 748 1,147 254 953 72 1,318 10.461 10.529 10.456 14 — — 25 — — 1.539 1.500 — — — — 130 175 10.415 10.362 9.241 1.085 — 7.466 — — — — — — 7.468 — — — 143 9.920 — 1.094 1.528 7.474 1.121 1.491 — 131.960 123.116 1,025 10.448 9.082 1.090 — 7.460 — — — 452 10.318 9.281 1.089 — 7.457 4.287 0.410 0.330 352 9.878 7.968 597 10.186 — — — — — — — — — — — — — — — — — — — — 1,782 1,092       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2018 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) EUR Average fixed interest rate (%) CHF Foreign exchange risk Exchange and interest 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 and interest 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 and interest 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 253 (0.197) (0.659) 17 7.455 — — — — — — — 85 0.183 339 0.101 0.108 0.896 0.654 0.134 — — — Hedges of net investments in foreign operations Foreign exchange risk Exchange rate instruments Nominal Average NOK/EUR exchange rate Average CNY/EUR exchange rate 181 282 103.751 103.538 — — 480 102.963 121.796 672 (0.125) (0.696) 3,488 (0.036) (0.679) 6,883 (0.065) (0.561) 30 — — 1.138 240 — 0.134 — 0.002 99 0.183 557 0.098 0.108 0.859 0.658 0.134 — — — 376 7.456 9.687 1.127 339 0.104 0.134 0.008 0.003 — — — — 448 — 0.134 — 0.004 313 0.183 423 0.183 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 11,359 (0.113) — — — — — — — — — — — — — — — — — — — — — — — — 423 1,027 920 4,325 943 687       Annual report 2020 Contents Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) MXN 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 Average fixed interest rate (%) MXN Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) MXN Foreign exchange risk Exchange and interest rate instruments Nominal Average BRL/USD exchange rate Average EUR/MXN exchange rate Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average EUR/MXN exchange rate Average GBP/MXN exchange rate Average USD/MXN exchange rate Average fixed interest rate (%) USD Average fixed interest rate (%) EUR Average fixed interest rate (%) GBP 9 — — — — — — — — — — — — 132 — 0.250 — — — — — — — 2 — — — — — — — — — — — — — — — — — — — — — — 49 — 11 — — — — — — — — 164 0.073 100 0.117 — — — — — — — — 48 — 1,954 — 2,062 559 859 1,429 — — — — — — — — 299 0.072 2,513 0.126 0.167 104 0.192 0.260 — — 0.026 0.068 — — — — — — — — — — — — — 37 — — 0.182 0.041 — — 463 2,745 141 688       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) MXN 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 Average fixed interest rate (%) MXN Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) MXN Foreign exchange risk Exchange and interest rate instruments Nominal Average BRL/MXN exchange rate Interest rate and foreign exchange rate risk 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 6 5.005 140 8.475 1 21.230 — — — — 0.500 — — — — 890 3.550 2 — — — — — 1.510 — 5 — — 13.300 — 3.930 — — — — — — — 133 — — — — 7.930 — — 174 8.420 66 — — — 4.680 — — — 2.500 — — 103 4.320 163 — 23.130 16.220 — 2.628 — 1.083 121 7.126 2,262 6.584 423 20.992 25.196 13.300 — 2.460 2.076 6.750 — 533 7.182 2,793 5.210 208 — 25.196 12.725 — 3.441 2.600 6.750 1,195 21.755 — 19.278 4.680 7.077 3.012 — 4.500 — — — — 43 — — 18.227 — 4.125 0.151 — 2,703 1,690 533 3,786 549 689       Annual report 2020 Contents 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 and interest 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 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total — — — — — — — — — — — — — 1,415 — — 18.729 5.863 1 5.180 — — — — — — — — — — — 44 — — 20.289 — 346 6.907 1.465 41 — — 13.920 5.059 8.000 — — — — 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 — 427 1,332 178 4,337 690       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Banco Santander (Brasil) S.A. Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange risk Exchange and interest rate instruments Nominal Average USD/BRL exchange rate Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average USD/BRL exchange rate Average fixed interest rate (%) BRL Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange risk and others Exchange rate instruments Nominal Average USD/BRL exchange rate Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average USD/BRL exchange rate Average fixed interest rate (%) BRL 31 December 2020 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 430 2.000 614 6.260 — — — — — — — — — — — — — — — — — — — — — — — — 3,129 2.000 4,254 2.000 1,469 2.000 9,282 — — — — — — — — — 231 6.260 — — — 367 6.260 — 3,640 2.000 499 6.260 — — — — — — — — — — — — — — — 614 367 3,640 499 231 691       Annual report 2020 Contents Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange risk Exchange and interest rate instruments Nominal Average USD/BRL exchange rate Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average EUR/MXN exchange rate Average fixed interest rate (%) BRL Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange risk and others Exchange rate instruments Nominal Average USD/BRL exchange rate Interest rate and foreign exchange rate risk Exchange and interest rate instruments Nominal Average EUR/MXN exchange rate Average fixed interest rate (%) BRL 31 December 2019 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 16 7.920 — — 606 9.250 6,065 6.880 5,638 0.040 12,325 — — — — — — — — — — — — 1 3.730 90 3.750 193 3.830 — — — — — — — — — — 7 — 4.570 — — — — — 772 4.500 9,290 4.570 — — — — — 389 4.570 — 284 7 772 9,290 389 — — — — — — — — — — — — 692       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Fair value hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange rate risk and other Exchange and interest rate instruments Nominal Average USD/BRL exchange rate Cash flow hedges Interest rate risk Interest rate instruments Nominal Average fixed interest rate (%) BRL Foreign exchange risk and other Exchange and interest rate instruments Nominal Average USD/BRL exchange rate 31 December 2018 EUR million Up to one month One to three months Three months to one year One year to five years More than five years Total 668 9.500 6 3.247 3,877 6.500 — — 2,045 6.967 15 3.303 2,997 6.500 8 3.716 — 6.937 36 3.551 3,030 6.500 26 3.648 3,529 10.055 1,378 10.030 316 3.642 38 3.265 7,620 411 119 6.500 — — 10,023 — — 238 3.135 272 693       Annual report 2020 Contents The following table contains details of the hedged exposures covered by the Group's hedging strategies at 31 December 2020, 2019 and 2018: Change in fair value of hedged item for ineffectiveness assessment 553 Cash flow reserves or conversion reserves Continuing hedges — Discontinued hedges — 469 132 (20) 372 (1) 174 (21) (167) (13) 1 (13) (1) 100 86 57 (40) (3) (3) (3) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — EUR million 31 December 2020 Carrying amount of hedged items Accumulated amount of fair value adjustments on the hedged item Assets Liabilities 52,055 141,608 Assets Liabilities Balance sheet line item 3,369 2,914 128,279 48,137 3,183 2,727 Fair value hedges Interest rate risk Deposits Bond 19,000 4,406 25,430 24,317 656 975 Securities loans Repo 61,898 15,723 62 574 1,153 19 Liquidity facilities 6,228 4,450 380 Issuances assurance — 3,190 Securitization — 11,138 Exchange rate risk Liquidity facilities Deposits Bonds 8,718 118 1,889 6,711 — — — — — — 40 5 22 13 15 Loans and advances/ Deposits 1,638 Debt instruments/ Debt instruments issued — Loans and advances 16 Loans and advances/ Deposits (16) Loans and advances/ Deposits 25 Debt instruments/ Debt instruments issued 1,049 Debt instruments/ Debt instruments issued — — Loans and advances/ Deposits — Loans and advances/ Deposits — Loans and advances/ Deposits Interest and Exchange rate risk 4,391 3,918 143 187 Borrowed deposits 1,229 — 13 — Loans and advances/ Deposits Bonds 2,333 3,130 130 84 Debt instruments Securitization Repos Credit risk Bonds — 829 220 220 689 99 — — — — 3 3 101 Debt instruments 2 Loans and advances/ Deposits — — Debt instruments 694     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 31 December 2020 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 ineffectiveness assessment 532 Cash flow reserves or conversion reserves Continuing hedges 420 (87) Discontinued hedges (43) (11) Cash flow hedges Interest rate risk Firm commitment Deposits Government bonds Liquidity facilities Secondary market loans Equity portfolio Highly likely scheduled transactions Exchange rate risk Deposits Bonds Issuances assurance Secondary market loans Senior securitization Highly likely scheduled transactions Interest and Exchange rate risk Deposits Bonds Securitization Inflation risk Deposits Bonds Equity risk Highly likely scheduled transactions Other assets/liabilities Deposits and loans and advances Debt instruments Loans and advances Loans and advances Equity portfolio Other assets/liabilities Deposits and loans and advances Debt instruments Loans and advances Debt instruments Other assets/liabilities Deposits and loans and advances Debt instruments Debt instruments Deposits and loans and advances Debt instruments Highly likely scheduled transactions 314 6 (28) 382 (47) (1) 2 — 204 72 (228) 14 298 48 — 52 30 (169) 105 64 41 (4) (4) — — — 139 21 (377) 126 — — 4 (68) (57) 46 (3) (4) (50) — (4) 108 576 (111) (86) (25) 6 6 (11) (11) (11) 409 (87) 680 — 4 (4) (11) — — — 0 — — — — — — — — — — (32) (32) — 0 — 14 14 14 (29) 695 Net foreign investments hedges Exchange rate risk Equity instruments 22,150 22,150 22,150 — — — — — — — — — Equity instruments 163,758 52,055 3,369 2,914 1,085     Annual report 2020 Contents EUR million 31 December 2019 Carrying amount of hedged items Accumulated amount of fair value adjustments on the hedged item Assets Liabilities 60,487 134,958 Assets Liabilities Balance sheet line item 2,768 2,298 122,560 55,538 66,087 8,814 2,764 1,584 33,202 24,145 1,150 2,099 (5) Loans and advances/ Deposits 1,302 Debt instruments/ Debt instruments issued Change in fair value of hedged item for ineffectiveness assessment 1,583 Cash flow reserves or conversion reserves Continuing hedges — Discontinued hedges — 1,370 578 825 — 177 (4) (206) 58 3 37 18 154 — 4 152 (2) (4) (1) (3) 5 5 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 18 Loans and advances/ Deposits (219) Loans and advances/ Deposits 12 Debt instruments/ Debt instruments issued 991 Debt instruments/ Debt instruments issued — — Loans and advances/ Deposits — Loans and advances/ Deposits — Debt instruments 199 — Loans and advances/ Deposits 51 Loans and advances/ Deposits 150 Debt instruments (2) Loans and advances/ Deposits — — Loans and advances/ Deposits — Debt instruments — — Debt instruments Fair value hedges Interest rate risk Deposits Bond Repo 22,057 589 Liquidity facilities 1,214 4,531 Issuances assurance — 3,171 Securitization — 14,288 Exchange rate risk Liquidity facilities Deposits Bonds Interest and Exchange rate risk 8,613 57 2,912 5,644 3,532 — — — — 4,949 Borrowed deposits 460 — 27 3 — — 19 3 1 15 (21) — Bonds 2,262 3,366 (16) Securitization Repos Inflation risk Deposits Bonds Credit risk Bonds — 810 — — — 253 253 1,483 100 — — — — — — (5) — — — 6 6 696     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 31 December 2019 Carrying amount of hedged items Accumulated amount of fair value adjustments on the hedged item Assets Liabilities Assets Liabilities Balance sheet line item Cash flow hedges Interest rate risk Firm commitment Deposits Government bonds Liquidity facilities Secondary market loans Highly likely scheduled transactions Exchange rate risk Deposits Bonds Issuances assurance Secondary market loans Senior securitization Highly likely scheduled transactions Interest and Exchange rate risk Deposits Bonds Securitization Inflation risk Deposits Bonds Liquidity facilities Equity risk Highly likely scheduled transactions Other risks Bonds Net foreign investments hedges Exchange rate risk Equity instruments 1,070 1,070 1,070 — — — — — — Other assets/liabilities Deposits and loans and advances Debt instruments Loans and advances Loans and advances Other assets/liabilities Deposits and loans and advances Deposits and loans and advances Loans and advances Debt instruments Other assets/liabilities Deposits and loans and advances Debt instruments Debt instruments Deposits and loans and advances Debt instruments Loans and advances Other assets/liabilities Other assets/liabilities — — — Equity instruments Cash flow reserves or conversion reserves Change in fair value of hedged item for ineffectiveness assessment (204) (128) 18 1 (24) (121) (2) — (32) (3) (237) — 194 15 (1) Continuing hedges 522 4 (11) (5) (22) 27 3 12 130 140 4 (3) (9) (4) 2 (169) 510 54 29 (252) 20 23 (3) — 7 7 98 98 — — — (6) (25) 541 (22) (24) 2 — (2) (2) (98) (98) — — — Discontinued hedges (79) (74) — 14 (63) (25) — — (4) — (4) — — — — — — — — 0 — — — (1) (1) — — — — — (79) 697 136,028 60,487 2,768 2,298 1,379 522                                                                                                                                                                                                                                                                                                                             Annual report 2020 Contents EUR million 31 December 2018 Accumulated amount of fair value adjustments on the hedged item Assets Liabilities Balance sheet line item 1,915 1,765 25 — 48 — — — 5 9 (4) 21 19 2 — — — 3 — 3 — — Change in fair value of hedged item for ineffectiveness assessment (20) (74) (265) (35) 18 — 35 3 170 — (3) 8 (11) 53 16 (31) 67 1 — 4 1 3 — — (432) (52) (24) (26) (13) 8 4 (1) Cash flow reserves or conversion reserves Continuing hedges — Discontinued hedges — — — — — — — — — — — — — — — — — — — — — — — — 447 111 (75) 47 72 65 2 — — — — — — — — — — — — — — — — — — — — — — — — (10) (12) — — — (12) — — 1,478 (1) Deposits and loans and advances 791 Debt instruments 16 Other assets — Loans and advances 2 Loans and advances 12 Other assets/liabilities 658 Debt instruments — Equity instruments — — Debt instruments — Debt instruments 287 — Deposits and loans and advances 26 Debt instruments 262 Debt instruments (1) Other assets/liabilities — Other assets/liabilities 0 — Deposits and loans and advances — Debt instruments — — Debt instruments Other assets/liabilities Deposits and loans and advances Debt instruments Loans and advances Other assets/liabilities Debt instruments 1,886 1,021 27,235 21,759 792 Carrying amount of hedged items Assets Liabilities 46,830 110,669 104,393 39,251 59,319 1,370 13,874 — 3,965 — — — 3,378 1,614 1,764 2,776 561 — 232 2,013 13,316 — — — — 7,474 Fair value hedges Interest rate risk Deposits Bond Repo Loans of securities Liquidity facilities Issuances assurance Securitization Equity instruments Exchange rate risk Deposits Bonds Interest and Exchange rate risk Borrowed deposits 751 — 1,591 — 434 — 68 — 68 54 54 3,571 3,358 99 446 105 105 — — — Bonds Securitization Repos CLO Inflation risk Deposits Bonds Credit risk Bonds Cash flow hedges Interest rate risk Firm commitment Deposits Government bonds Liquidity facilities Secondary market loans Senior securitization 698     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Exchange rate risk Deposits Bonds Secondary market loans Senior securitization CLO Interest and Exchange rate risk Deposits Bonds Securitization Inflation risk Deposits Bonds Liquidity facilities Equity risk Highly likely scheduled transactions Other risks Bonds Other assets/liabilities Deposits and loans and advances Loans and advances Debt instruments Other assets/liabilities Deposits and loans and advances Debt instruments Debt instruments Deposits and loans and advances Debt instruments Loans and advances Other assets/liabilities Other assets/liabilities Net foreign investments hedges Exchange rate risk Firm commitment Equity instruments 792 792 13 779 — — — — 10 10 — 10 — — — Other assets/liabilities — Equity instruments (416) 83 (309) (179) (11) — 4 7 (13) 10 15 25 (3) (7) 17 17 — — — — — — (23) (8) (16) (21) 21 1 341 2 (9) 348 22 25 (3) — (4) (4) — — — — — — 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 profit and loss of coverage as at 31 December 2020 is EUR 729 million (EUR 340 million in 2019 and EUR 71 million in 2018). 699 Annual report 2020 Contents The net impact of the coverages are shown in the following table: EUR million 31 December 2020 Ineffective recognised in the Line of the income statement income that includes the statement ineffectiveness of cash flows 104 9 (7) Gains or losses of financial assets/liabilities (27) Gains or losses of financial assets/liabilities (3) Gains or losses of financial assets/liabilities 24 Gains or losses of financial assets/liabilities 5 Gains or losses of financial assets/liabilities 16 Gains or losses of financial assets/liabilities 1 Gains or losses of financial assets/liabilities 1 1 Gains or losses of financial assets/liabilities 92 72 Gains or losses of financial assets/liabilities (25) Gains or losses of financial assets/liabilities 41 Gains or losses of financial assets/liabilities 4 Gains or losses of financial assets/liabilities 2 2 Gains or losses of financial assets/liabilities (53) 7 — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities 7 Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities Reclassified amount of reserves to the income statement due to: Cover transaction Line of the income affecting the income statement that includes statement reclassified items 851 118 81 — Interest income/ (charges) 51 (15) Interest income/ (charges) Interest income/ (charges) Interest income/ (charges) 1 — Earnings/ (losses) recognised in another cumulative overall result (67) 69 149 15 (197) 111 — (9) Fair value hedges Interest rate risk Deposits Bonds Repo Fixed-income securities loans Liquidity lines Securitizations Equity instruments Exchange rate risk Fixed-income securities loans Interest rate and exchange rate risk Deposits Bonds Securitizations Repo Credit risk Bonds Cash flow hedges Interest rate risk Firm Commitment Deposits Bonds Liquidity lines Loans secondary markets Highly likely scheduled transactions 700 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Exchange rate risk Deposits Bonds Repo Loans secondary markets Securitizations CLO Highly likely scheduled transactions Interest rate and exchange rate risk Deposits Bonds Securitizations Inflation risk Deposits Asset bonds Equity risk Highly probable planned transactions Net foreign investments hedges Exchange rate risk Equity instruments Earnings/ (losses) recognised in another cumulative overall result (194) Ineffective recognised income statement 9 EUR million 31 December 2020 Reclassified amount of reserves to the income statement due to: in the Line of the income statement Cover transaction Line of the income that includes the ineffectiveness of cash flows affecting the income statement (132) statement that includes reclassified items (197) 11 47 — 4 — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities 3 Gains or losses of financial assets/liabilities (48) — Gains or losses of financial assets/liabilities — — 170 3 133 34 (121) (94) (27) 9 9 3 3 3 — Gains or losses of financial assets/liabilities (5) Gains or losses of financial assets/liabilities (62) — Gains or losses of financial assets/liabilities (8) (54) Gains or losses of financial assets/liabilities (7) (6) Gains or losses of financial assets/liabilities (1) Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — — — Gains or losses of financial assets/liabilities (64) 51 7 Interest income/ (charges) / Gains or losses of financial assets/liabilities (39) Interest income/ 17 (129) 48 14 (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities (50) Interest income/ (charges) / Gains or losses of financial assets/liabilities 844 125 (39) Interest income/ (charges) Interest income/ (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities 758 21 23 Interest income/ (charges) (2) Interest income/ (charges) — — — — — 851 701 Annual report 2020 Contents EUR million 31 December 2019 Earnings/ (losses) recognised in another cumulative overall result Ineffective coverage recognised in the Line of the income statement income that includes the statement ineffectiveness of cash flows Reclassified amount of reserves to the income statement due to: Cover transaction Line of the income affecting the income statement that includes statement reclassified items Fair value hedges Interest rate risk Deposits Bonds Securitizationss Equity instruments 58 5 7 Gains or losses of financial assets/liabilities 5 Gains or losses of financial assets/liabilities (7) Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities Risk of Exchange rate (3) Deposits Bonds Risk of interest rate and exchange rate Deposits Securitizations Inflation risks Deposits Bonds Cash flow hedges Interest rate risk Firm Commitment Deposits Bonds Liquidity lines Loans secondary markets Highly likely scheduled transactions (1) Gains or losses of financial assets/liabilities (2) Gains or losses of financial assets/liabilities 56 1 Gains or losses of financial assets/liabilities 55 Gains or losses of financial assets/liabilities — (1) Gains or losses of financial assets/liabilities 1 Gains or losses of financial assets/liabilities (86) 1 — 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 — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities 8 (263) 65 (37) (254) (48) (1) 12 (1,112) 8 (37) Interest income/ (charges) 7 Interest income/ (charges) (26) Interest income/ (charges) 61 Interest income/ (charges) 3 Interest income/ (charges) — Interest income/ (charges) 702                                              Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 31 December 2019 Reclassified amount of reserves to the income statement due to: in the Line of the income statement Cover transaction Line of the income that includes the ineffectiveness of cash flows affecting the income statement (364) statement that includes reclassified items Earnings/ (losses) recognised in another cumulative overall result 145 148 Ineffective coverage recognised income statement (34) Exchange rate risk Deposits Bonds Repo (31) Gains or losses of financial assets/liabilities 11 — — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities Loans secondary markets 12 2 Gains or losses of financial assets/liabilities Securitizations CLO Highly likely scheduled transactions (27) (1) 2 (4) Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities (1) Gains or losses of financial assets/liabilities Interest rate and exchange rate risk 168 (53) Deposits Bonds Securitizations Inflation risk Deposits Asset bonds Equity risk Highly probable planned transactions Other risks Bonds Net foreign investments hedges Exchange rate risk Equity instruments (8) (16) 192 (44) (49) 5 2 2 — — — — — 8 — Gains or losses of financial assets/liabilities (4) Gains or losses of financial assets/liabilities (49) Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — — — Gains or losses of financial assets/liabilities (28) (39) Interest income/ 154 (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities (4) Interest income/ (charges) / Gains or losses of financial assets/liabilities 8 Interest income/ (charges) / Gains or losses of financial assets/liabilities (166) Interest income/ (charges) / Gains or losses of financial assets/liabilities (13) Interest income/ (charges) / Gains or losses of financial assets/liabilities (304) Interest income/ (charges) / Gains or losses of financial assets/liabilities (769) (10) Interest income/ (charges) 57 Interest income/ (charges) (816) Interest income/ (charges) / Gains or losses of financial assets/liabilities Interest income/ (charges) Interest income/ (charges) 13 9 4 — — — — — — — (1,112) 703 Annual report 2020 Contents EUR million 31 December 2018 Reclassified amount of reserves to the income statement due to: in the Line of the income statement that includes the ineffectiveness of cash flows Cover transaction Line of the income affecting the income statement statement that includes reclassified items Ineffective coverage recognised income statement 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 16 Gains or losses of financial assets/liabilities 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 317 57 (24) Interest income/ (charges) Interest income/ (charges) Interest income/ (charges)/ Gains or losses of financial assets/liabilities Interest income/ (charges)/ Gains or losses of financial assets/liabilities Interest income/ (charges) Interest income/ (charges) 16 15 47 3 — — Earnings/ (losses) recognised in another cumulative overall result 200 193 (2) 50 104 85 2 (46) — Fair value hedges Interest rate risk Deposits Bonds Repo Loans of fixed-income securities Liquidity lines Securitizations Interest rate and exchange rate risk Deposits Bonds Securitizations CLO Other risks Securitizations Cash flow hedges Interest rate risk Firm Commitment Deposits Bonds Loans secondary markets Liquidity lines Repo Securitizations 704 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 31 December 2018 Reclassified amount of reserves to the income statement due to: in the Line of the income statement Cover transaction Line of the income that includes the ineffectiveness of cash flows affecting the income statement (631) statement that includes reclassified items Earnings/ (losses) recognised in another cumulative overall result (20) Ineffective coverage recognised income statement (688) (25) (698) Exchange rate risk Deposits Asset bonds (25) 43 Repo — — Loans secondary markets 5 4 Gains or losses of financial assets/liabilities Gains or losses of financial assets/liabilities Gains or losses of financial assets/liabilities Gains or losses of financial assets/liabilities Securitizations CLO Interest rate and exchange rate risk Deposits Bonds Securitizations Inflation risk Deposits Asset bonds Equity risk Highly probable planned transactions Other risks Bonds Net foreign investments hedges Exchange rate risk Equity instruments 24 1 45 1 (4) 48 11 14 (3) (8) (8) (21) (21) — — — (37) Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities 700 743 Gains or losses of financial assets/liabilities 447 Gains or losses of financial assets/liabilities (490) Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — — Gains or losses of financial assets/liabilities — — — Gains or losses of financial assets/liabilities 200 83 (563) Interest income/ (charges)/ Gains or losses of financial assets/liabilities (168) Interest income/ (charges)/ Gains or losses of financial assets/liabilities — Gains or losses of financial assets/ liabilities (75) Interest income/ 150 (charges)/ Gains or losses of financial assets/liabilities Interest income/ (charges) / Gains or losses of financial assets/liabilities 25 Interest income/ (charges) / Gains or losses of financial assets/liabilities 887 35 Interest income/ (charges) 581 271 Interest income/ (charges)/ Gains or losses of financial assets/liabilities Interest income/ (charges)/ Gains or losses of financial assets/liabilities Interest income/ (charges) Interest income/ (charges) 4 3 1 — — — — — — — 317 705 Annual report 2020 Contents The following table shows the movement in the impact of equity for the year: The detail of the main interest and similar income items earned in 2020, 2019 and 2018 is as follows: EUR million EUR million Balance at beginning of year Cash flow hedges Interest rate risk Amounts transferred to income statements Gain or loss in value CFE - recognized in equity Exchange rate risk Amounts transferred to income statements Gain or loss in value CFE - recognized in equity 2020 2019 2018 300 277 152 Loans and advances, central banks 431 1,314 1,320 Loans and advances, credit institutions 894 1,785 1,555 2020 2019 2018 67 (264) 172 Debt instruments 5,022 6,378 6,429 (118) (8) (57) 185 (194) (256) 146 229 (20) 132 364 631 (326) (218) (651) Loans and advances, customers 38,788 46,180 43,489 Other interest 606 1,128 1,532 45,741 56,785 54,325 Most of the interest and similar income was generated by the Group’s financial assets that are measured either at amortised cost or at fair value through Other comprehensive income. Interest rate and exchange rate risk 170 168 45 Amounts transferred to income statements Gain or loss in value CFE - recognized in equity Inflation risk Amounts transferred to income statements Gain or loss in value CFE - recognized in equity Equity risk Amounts transferred to income statements Gain or loss in value CFE - recognized in equity Net foreign investments hedges Exchange rate risk Amounts transferred to income statements Gain or loss in value CFE - recognized in equity Non-controlling interest Taxes Balance at end of year (844) 769 (887) 1,014 (121) (601) (44) 932 11 (21) (13) (4) (100) (31) 9 — 9 3 — 3 56 5 2 — 2 — — — 32 (17) 15 (8) — (8) — — — (25) (50) 295 300 277 37. Discontinued operations No operations were discontinued in 2020, 2019 or 2018. 38. Interest income Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognised gross, without deducting any tax withheld at source. 39. Interest expense Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications 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 2020, 2019 and 2018 is as follows: EUR million Central banks deposits 2020 2019 2018 366 468 421 Credit institution deposits 1,652 2,576 2,588 Customer deposits Debt securities issued and subordinated liabilities 5,599 10,137 9,062 5,119 6,679 6,073 Marketable debt securities 4,548 6,034 5,303 Subordinated liabilities (note 23) Provisions for pensions (note 25) Lease Liabilities 571 95 186 645 145 273 770 186 9 Other interest expense 730 1,224 1,645 13,747 21,502 19,984 Most of the interest expense and similar charges was generated by the Group’s financial liabilities that are measured at amortised cost. 706   40. Dividend income 41. Commission income Dividend income includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest. The detail of Income from dividends as follows: 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 effective interest rate on financial instruments. The detail of fee and commission income is as follows: EUR million Dividend income classified as Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets at fair value through other comprehensive income 2020 2019 2018 EUR million 272 388 241 31 34 23 88 391 111 533 106 370 Coming from collection and payment services Bills Demand accounts Cards Orders Cheques and other Coming from non-banking financial products Investment funds Pension funds Insurance Coming from Securities services Securities underwriting and placement Securities trading Administration and custody Asset management Other Foreign exchange Financial guarantees Commitment fees Other fees and commissions 2020 2019 2018 265 328 334 1,284 1,382 1,371 2,986 3,858 3,514 484 110 478 155 475 138 5,129 6,201 5,832 888 170 943 180 1,024 124 2,289 2,631 2,433 3,347 3,754 3,581 394 316 336 316 364 281 485 293 283 251 458 305 1,362 1,423 1,297 500 409 366 612 521 293 546 549 291 1,911 2,545 2,568 3,186 3,971 3,954 13,024 15,349 14,664 707 Annual report 2020 Contents As explained in note 44, the above breakdown should be analysed in conjunction with the 'Exchange differences, net': EUR million Exchange differences, net (2,093) (932) (679) 2020 2019 2018 b) Financial assets and liabilities at fair value through profit or loss The detail of the amount of the asset balances is as follows: EUR million Loans and receivables: 46,589 59,624 56,323 2020 2019 2018 Central banks Credit institutions Customers Debt instruments Equity instruments Derivatives 9,481 6,473 9,226 12,139 21,649 23,099 24,969 31,502 23,998 41,573 36,402 36,609 12,849 15,787 12,198 67,137 63,397 55,939 168,148 175,210 161,069 Grupo Santander 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-off of asset positions and the provision of collateral for non-payment. At 31 December 2020 the exposure to credit risk of the derivatives presented in the balance sheet is not significant because they are subject to netting and collateral agreements (see note 2.f). • Loans and advances to credit institutions and Loans and advances to customers included reverse repos amounting to EUR 25,856 million at 31 December 2020. Also, mortgage-backed assets totalled EUR 1,656 million. • Debt instruments include EUR 35,789 million of Spanish and foreign government securities. At 31 December 2020 the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material. 42. 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 effective interest rate on financial instruments. The detail of commission expense is as follows: EUR million Commissions assigned to third parties Cards By collection and return of effects Other fees assigned Other commissions paid Brokerage fees on lending and deposit transactions Sales of insurance and pension funds Other fees and commissions 2020 2019 2018 1,856 2,350 1,972 1,249 1,616 1,358 12 595 12 722 11 603 1,153 1,220 1,207 26 248 879 27 232 961 42 232 933 3,009 3,570 3,179 43. Gains or losses on financial assets and liabilities Gains/losses on financial assets and liabilities includes the amount of the 'Other comprehensive income of financial instruments', except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof. a) Breakdown The detail, by origin, of Gains/losses on financial assets and liabilities: EUR million Gains or losses on financial assets and liabilities not measured at fair value through profit or loss, net Financial assets at amortized cost Other financial assets and liabilities Of which debt instruments Gains or losses on financial assets and liabilities held for trading, net* Gains or losses on non-trading financial assets and liabilities mandatory at fair value through profit or loss Gains or losses on financial assets and liabilities measured at fair value through profit or loss, net* Gains or losses from hedge accounting, net 2020 2019 2018 1,107 1,136 (31) 1,138 1,179 308 828 804 604 39 565 563 3,211 1,349 1,515 82 292 331 (171) (286) (57) 51 (28) 83 4,280 2,463 2,476 * 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. 708 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The detail of the amount of the liability balances is as follows: 45. Other operating income and expenses EUR million Deposits Central banks Credit institutions Customer 2020 2019 2018 43,598 57,111 65,304 2,490 12,854 14,816 6,765 9,340 10,891 34,343 34,917 39,597 Marketable debt securities 4,440 3,758 2,305 Short positions Derivatives 16,698 14,123 15,002 64,469 63,016 55,341 Other financial liabilities — 126 449 129,205 138,134 138,401 At 31 December 2020, the amount of the change in the fair value of financial liabilities at fair value through profit or loss attributable to changes in their credit risk during the year is not material. In relation to liabilities designated at fair value through profit or loss where it has been determined at initial recognition that the credit risk is recorded in accumulated 'Other comprehensive income' (see 'Statement of recognised income and expense') the amount that the Group would be contractually obliged to pay on maturity of these liabilities at 31 December 2020 is EUR 119 million lower than their carrying amount (EUR 26 million at 31 December 2019 and EUR 32 million at 31 December 2018). 44. Exchange differences, net Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency. 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 financial assets and liabilities' (see note 43). Other operating income and Other operating expenses in the consolidated income statements include: EUR million Insurance activity Income from insurance and reinsurance contracts issued Of which: Insurance and reinsurance premium income 2020 2019 2018 210 120 51 1,452 2,534 3,175 1,349 2,404 3,011 Reinsurance income (note 15) 103 130 164 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- financial services Other operating income Other operating expense Non-financial services Other operating expense: Of which, credit institutions deposit guarantee fund and single resolution fund (1,242) (2,414) (3,124) (1,063) (2,183) (2,883) (179) (231) (241) 1,920 1,797 1,643 362 1,558 379 367 1,418 1,276 (2,342) (2,138) (2,000) (350) (351) (270) (1,992) (1,787) (1,730) (1,005) (212) (911) (221) (895) (306) Most of Banco Santander’s insurance activity is carried on in life insurance. The amount of the Group recognises in relation to income from sub-leases of rights of use is not material. 709 Annual report 2020 Contents 46. Staff costs a) Breakdown The detail of Staff costs is as follows: EUR million Wages and salaries Social Security costs Additions to provisions for defined benefit pension plans (note 25) Contributions to defined contribution pension funds Other Staff costs 2020 2019 2018 8,095 9,020 8,824 1,277 1,426 1,412 76 72 84 283 292 287 1,052 1,331 1,258 10,783 12,141 11,865 b) Headcount The average number of employees in the Group and Banco Santander, S.A., by professional category, was as follows: Average number of employees Banco Santander, S.A.: Senior management Other line personnel Rest of Spain Santander UK plc Santander Brasil Other companies* 2020 2019 2018 21 20 22 26,527 29,147 30,399 26,548 29,167 30,421 8,878 8,269 7,944 16,790 17,961 18,757 44,554 47,253 46,645 97,121 98,464 98,062 193,891 201,114 201,829 * Does not include staff affected by discontinued operations. The number of employees, at the end of 2020, 2019 and 2018, was 191,189, 196,419 and 202,713, respectively. 710 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The functional breakdown (final employment), by gender, at 31 December, 2020 is as follows: Functional breakdown by gender Europe North America South America Senior executives Other executives Other personnel Men 1,115 228 320 1,663 Women 365 50 101 516 Men 7,350 956 3,246 11,552 Women 4,290 453 2,257 7,000 Men 32,937 15,816 26,614 75,367 Women 41,998 20,875 32,218 95,091 The same information, expressed in percentage terms at 31 December, 2020 is as follows: Functional breakdown by gender Europe North America South America Senior executives Other executives Other personnel Men 75% 82% 76% 76% Women 25% 18% 24% 24% Men 63% 68% 59% 62% Women 37% 32% 41% 38% Men 44% 43% 45% 44% Women 56% 57% 55% 56% The labour relations between employees and the various Group companies are governed by the related collective agreements or similar regulations. The number of employees in the Group with disabilities, distributed by professional categories, at 31 December 2020, is as follows: c) Share-based payments The main share-based payments granted by the Group in force at 31 December, 2020, 2019 and 2018 are described below. i. Bank Number of employees* Senior management Management Collaborators 2020 7 110 3,460 3,577 * 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 Mexico. The number of Group employees with disabilities at 2019 and 2018, was 3,584 and 3,436, respectively, (not including Mexico in 2019 and the United States in 2018). Likewise, the average number of employees of Banco Santander, S.A. with disabilities, equal to or greater than 33%, during 2020 was 319 (318 and 241 employees during 2019 and 2018). At the end of fiscal year 2020, there were 317 employees (295 and 304 employees at 31 December, 2019 and 2018, respectively). 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, specific 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 specific 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 and Conditional Variable Remuneration Plan; (ii) Performance Shares Plan (iii) Deferred Multiyear Objectives Variable Remuneration Plan; (iv) Digital Transformation Award. The characteristics of the plans are set forth below: 711 Annual report 2020 Contents Description and plan beneficiaries Conditions Calculation Base Fifth cycles (2015): • Executive directors and members of the Identified Staff with total variable remuneration higher than 2.6 million euros: 40% paid immediately and 60% deferred over 3 years (fourth cycle) or 5 years (fifth cycle). • Division managers, country heads, other executives of the Group with a similar profile and members of the Identified Staff 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 over 3 years (fourth cycle) or 5 years (fifth cycle) • Other beneficiaries: 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, eight, ninth and tenth cycle (2017, 2018, 2019 and 2020): • Beneficiaries of these plans with target total variable remuneration higher or equal to 2.7 million euros: 40% paid immediately and 60% deferred over 5 years • Beneficiaries of these plans with target total variable remuneration between 1.7 million euros and 2.7 million euros: 50% paid immediately and 50% paid over 5 years • Other beneficiaries of these plans: 60% paid immediately and 40% deferred over 3 years. For the second cycle (2015), the basis of calculation is the fulfilment 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 financial 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 op 3 top the best banks on the customer satisfaction index in 2017 Retail loyal clients SME and corporate loyal clients As a result of the process described above the board of directors approved, further to a proposal from the remuneration committee, a 65.67% achievement for the plan. This plan terminated in 2019. Deferred variable remuneration systems (i) Deferred and conditional variable remuneration plan (2015, 2016, 2017, 2018, 2019 and 2020) The purpose of these cycles is to defer a portion of the variable remuneration of the beneficiaries over a period of three years for the sixth cycles, and over three or five years for the fifth, seventh, eighth, ninth and tenth 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. Beneficiaries: • 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 cycle) • In the case of the sixth, seventh, eighth, ninth and tenth cycle, the beneficiaries are Material Risk Takers (Identified staff) that are not beneficiaries of the Deferred Multiyear Objectives Variable Remuneration Plan. For the fifth and sixth cycles (2015 to 2016), the accrual of deferred compensation is conditioned, in addition to the requirement that the beneficiary 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. Poor financial performance of the Group.  breach by the beneficiary of internal regulations, including, in particular, those relating to risks. iii. material restatement of the Group's consolidated financial statements, except when it is required pursuant to a change in accounting standards. iv. Significant changes in the Group’s economic capital or risk profile In the case of the seventh, eight, ninth and tenth cycles (2017 to 2020), the accrual of deferred compensation is conditioned, in addition to the permanence of the beneficiary 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 specific division or area of the entity or of the exposures generated by the personnel, and at least the following factors must be considered: v. significant failures in risk management committed by the entity , or by a business unit or risk control unit. the increase suffered by the entity or by a business unit of its capital needs, not foreseen at the time of generation of the exposures. vi. vii. Regulatory sanctions or judicial sentences 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. viii. Irregular behaviours, whether individual or collective, considering in particular the negative effects derived from the marketing of inappropriate products and the responsibilities of the persons or bodies that made those decisions. In addition to the requirement that the beneficiary 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, in the opinion of the board of directors, subject to a proposal of the remuneration committee, during the period prior to each delivery: i. ii. Poor financial performance of the Group;  breach by the beneficiary of internal regulations, including, in particular, those relating to risks. iii. material restatement of the Group's consolidated financial statements, except when it is required pursuant to a change in accounting standards. iv. significant changes in the Group's economic capital or risk profile. 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. (ii) Performance shares plans (2014 and 2015) The purpose is to instrument a portion of the variable remuneration of the executive directors and other members of the Identified Staff, consisting of a long-term incentive (ILP) in shares based on the Bank's performance over a multiannual period. In addition, the second cycle also applies to other Bank employees not included in the Identified Staff 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. Beneficiaries i. Executive Directors and senior managers ii. Other Material Risk Takers or Identified Staff iii. Other beneficiaries 712 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Deferred variable remuneration systems (iii)Deferred Multiyear Objectives Variable Remuneration Plan (2016, 2017, 2018, 2019 and 2020) Description and plan beneficiaries Conditions Calculation Base 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 beneficiaries over a period of three or five 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 fifths (in the case of 5 years deferral) is also subject to long-term objectives. Beneficiaries Executive directors, senior managers and certain executives of the Group’s first lines of responsibility. In 2016 the accrual is conditioned, in addition to the permanence of the beneficiary in the Group, with the exceptions contained in the plan’s regulations that 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. ii. breach by the beneficiary of the internal regulations, including in particular that relating to risks. Poor performance of the Group. iii. material restatement of the Group’s consolidated financial statements, except when appropriate under a change in accounting regulations. iv. Significant changes in the Group’s economic capital or risk profile. In 2017, 2018, 2019 and 2020 the accrual is conditioned, in addition to the beneficiary permanence in the Group, with the exceptions contained in the plan’s regulations, to the non- occurrence of instances of poor financial performance from the entity as a whole or of a specific division or area thereof or of the exposures generated by the personnel, at least the following factors must be considered: v. Significant failures in risk management committed by the entity, or by a business unit or risk control unit. the increase suffered by the entity or by a business unit of its capital needs, not foreseen at the time of generation of the exposures. vi. vii. 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. viii. Irregular behaviours, whether individual or collective, considering in particular negative effects 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 fifteen 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 Identified Staff 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 countries representing at least 1% of the Group´s capital and other members of the identified staff 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 beneficiaries: 60% paid immediately and 40% deferred over a 3 year period. The second, third and fourth cycles (2017, 2018 and 2019, respectively) are under the aforementioned deferral rules, except that the variable remuneration considered is the target for each executive and not the actual award. In 2016 the metrics for the deferred portion subject to long-term objectives (last third or last three fifths, respectively, for the cases of three year and five year deferrals) are: • Earnings per share (EPS) growth in 2018 over 2015. • Relative Total Shareholder Return (TSR) in the 2016-2018 period measured against a group of credit institutions. • Compliance with the fully-loaded common equity tier 1 (“CET1”) ratio target for financial year 2018. • Compliance with Santander Group’s underlying return on risk-weighted assets (“RoRWA”) growth target for financial year 2018 compared to financial year 2015. In the second, third and fourth cycle (2017, 2018 and 2019) the metrics for the deferred portion subject to long-term objectives (last third or last three fifths, respectively, for the cases of three year and five year deferrals) are: • EPS growth in 2019, 2020, 2021 and 2022 (over 2016, 2017, 2018 and 2019, for each respective cycle) • Relative Total Shareholder Return (TSR) measured against a group of 17 credit institutions (second and third cycles) in the periods 2017-2019 and 2018.-2019, respectively, and against a group of 9 entities (fourth and fifth cycle) for the 2019-2021 and 2020-2022 period. • Compliance with the fully-loaded common equity tier 1 (“CET1”) ratio target for financial years 2019, 2020, 2021 and 2022, respectively. 713 Annual report 2020 Contents Description and plan beneficiaries Conditions Calculation Base The Digital Incentive is structured 50% in Santander shares and 50% in options over Santander shares, taking into account the fair value of the option at the moment in which they are granted. For Material Risk Takers subject to five year deferrals, the Digital Incentive (shares and options over shares) shall be delivered in thirds, on the third, fourth and fifth anniversary from their granting. For Material Risk Takers subject to three year deferrals and employees not subject to deferrals, delivery shall be done on the third anniversary from their granting. Vested share options can be exercised until maturity, with all options lapsing after ten years and eight years from granting for the 2019 and 2020 incentive, respectively. The 2019 and 2020 Digital Transformation Incentive (the “Digital Incentive”) is a variable remuneration system that includes the delivery of Santander shares and share options. The aim of the Digital Incentive is to attract and retain the critical skill sets to support and accelerate the digital transformation of the Group. By means of this program, the Group offers a remuneration element which is competitive with the remuneration systems offered by other market operators who also compete for digital talent. The number of beneficiaries is limited to a maximum of 250 employees and the total amount of the incentive is limited to 30 million euros. The funding of this incentive is subject to meeting important milestones that are aligned with the Group´s digital roadmap and have been approved by the board of directors, taking into account the digitalization strategy of the Group, with the aim of becoming the best open, responsible global financial services platform. Performance of incentive shall be measured based on achievement of the following milestones: 1. Launch of a Global Trade Services (GTS) platform. platform. 2. Launch of a Global Merchant Services (GMS) 3. Migration of our fully digital bank, OpenBank, to a "next generation" platform and launch in 3 markets. 4. Extension of SuperDigital in Brazil to at least one other country. 5. Launch of our international payments app based on blockchain Pago FX to non-Santander customers. The milestones for the 2020 Digital Transformation Award were: (i) rolling out the global merchant services (GMS) platform in 3 new geographies, enhancing the platform functionality and achieving volume targets for transactions and participating merchants; (ii) doing the commercial rollout of the global trade services (GTS) platform in 8 new geographies, enhancing platform functionality, and achieving volume targets for on- boarded clients and monthly active users; (iii) launching OpenBank in a new market and migrating the retail banking infrastructure to “new-mode” bank; (iv) launch the global platform SuperDigital in at least 4 countries, driving target active user growth; (v) deploying machine learning across pre-defined markets for 4 priority use cases, rolling out Conversion Rate Optimization (Digital marketing) for at least 40 sales programs, delivering profit targets, and driving reduction of agent handled calls in contact centers; (vi) successfully implementating initiatives related to on-board and identity services, common API (application programming interface) layer, payment hubs, mobile app for SMEs and virtual assistant services; and (vii) launching the PagoFX global platform in at least 4 countries. Any delivery of shares, either directly or via exercise of options overs shares, will be subject generally to the Group’s general malus & clawback provisions as described in the Group’s remuneration policy and to the continuity of the beneficiary within the Santander Group. In this regard, the board may define specific rules for non- Identified Staff Deferred variable remuneration systems (iv) Digital Transformation Award (2019 y 2020) 714 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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: Plans outstanding at 01/01/2018 Options granted (sharesave) Options exercised Options cancelled (net) or not exercised Plans outstanding at 31/12/2018 Options granted (sharesave) Options exercised Options cancelled (net) or not exercised Plans outstanding at 31/12/2019 Options granted (sharesave) Options exercised Options cancelled (net) or not exercised Plans outstanding at 31/12/2020 Exercise price  in pounds sterling* Year granted Employee group Number of persons** Date of commencement of exercise period Date of expiry of exercise period 3.46 2018 Employees 4,880 01/11/18 01/11/21 01/11/18 01/11/23 3.16 3.76 2.83 2019 Employees 5,606 01/11/19 01/11/22 01/11/19 01/11/24 2.83 3.42 1.65 2020 Employees 5,012 11/01/20 11/01/23 11/01/20 11/01/25 2.75 2.96 Number of shares (in thousand) 27.201 6,210 (3,340) (3,233) 26,838 9,594 (7,978) (5,081) 23,373 11,642 (860) (12,993) 21,162 * At 31 December, 2020, 2019 and 2018, the euro/pound sterling exchange rate was EUR 1.1168 GBP 1, EUR 1.1754 GBP 1; EUR 1.1179 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 see deducted between GBP 5 and GBP 500 from their net monthly pay over a period of three or five years. At the end of the chosen period, the employee may choose between collecting the amount contributed, the interest accrued and a bonus (tax-exempt in the United Kingdom) or exercising options on shares of the Bank in an amount equal to the sum of such three amounts at a fixed price. The exercise price will be the result of 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 21to 41 days following the publication of the Group’s results for the first 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 June 21, 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 June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012, March 22, 2013, March 28, 2014, March 27, 2015, March 18, 2016, April 7, 2017, March 23, 2018, April 12, 2019, and April 3, 2020 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 2018, 2019 and 2020: The Group calculates at the grant date the fair value of the plan based on the valuation report of an independent expert, Willis Towers Watson. According to the design of the plan for 2018, 2019 and 2020 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) Santander UK sharesave plans: The fair value of each option at the date of grant is estimated using a partial differentiation equation model. This model uses assumptions on the share price, the EUR/GBP FX rate, the risk free interest rate, dividend yields, the expected volatility of the underlying shares and the expected lives of options granted. The weighted average grant-date fair value of options granted during the year was GBP 0.21 (GBP 0.49 and GBP 0.53 in 2019 and 2018, respectively). 715 Annual report 2020 Contents 47. Other general administrative expenses a) Breakdown The detail of Other general administrative expenses is as follows: EUR million Property, fixtures and supplies (note 2.k) 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 2020 2019 2018 827 975 1,968 2,119 2,161 1,550 672 523 537 473 325 73 88 677 685 522 518 416 226 86 707 646 557 527 405 225 76 1,900 1,872 1,828 7,537 8,138 8,489 The payments associated with short-term leases (leases less than or equal to 12 months) and leases of low-value assets, that the Group recognises as an expense in the income statement is not material. 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 case the performance of any work that is incompatible with the audit function. Lastly, the Group commissioned services from audit firms other than PwC amounting to EUR 172.4 million in 2020 (EUR 227.6 million and EUR 173.9 million in 2019 and 2018, respectively). The Audit fees and Audit-related 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 are not significant 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 their approval by the Audit Committee. c) Number of branches The number of offices at 31 December 2020, 2019 and 2018 is as follows: Number of branches Group 2020 2019 2018 2,989 3,286 4,427 8,247 8,666 8,790 11,236 11,952 13,217 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: Spain Group EUR million Audit fees Audit-related fees Tax fees All other fees Total 2020 2019 2018 95.8 102.4 93.9 6.0 0.8 1.2 7.8 0.7 2.3 6.8 0.9 3.4 103.8 113.2 105.0 The 'Audit fees' heading includes mainly, audit fees for the Banco Santander, S.A. individual and consolidated financial statements, as the case may be, of the companies forming part of the Group, the integrated audits prepared for the annual report filling 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 financial statements as of 30 June and, the regulatory reports required by the auditor corresponding to the different locations of Grupo Santander. The main concepts included in 'Audit-related fees' correspond to aspects such as the issuance of Comfort letters, or other reviews required by different regulations in relation to aspects such as, for example, Securitization. 716 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 48. Gains or losses on non financial assets, net The detail of Gains/ (losses) on disposal of assets not classified as non-current assets held for sale is as follow: EUR million Gains: Tangible and intangible assets Investments Of which: Custody Business (note 3) Prisma Losses: Tangible and intangible assets Investments 2020 2019 2018 89 60 — — 131 124 1,219 989 194 2 — — 149 1,350 126 (34) (1) (35) (55) (4) (59) 114 1,291 (92) (6) (98) 28 49. Gains or losses on non-current assets held for sale not classified as discontinued operations The detail of Gains/(losses) on non-current assets held for sale not classified as discontinued operations is as follows: EUR million Net balance Tangible assets Impairment Gain (loss) on sale Other gains and other losses 2020 2019 2018 (171) (232) (123) (215) (146) (259) 44 (86) 136 — (171) — (232) — (123) 717 Annual report 2020 Contents 50. Other disclosures a) Residual maturity periods and interest rates The detail, by maturity, of the balances of certain items in the consolidated balance sheet and the interest rate of the outstanding balances at year-end is presented below: 31 December 2020 EUR million On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total Interest rate 153,839 — — — — — — 153,839 (0.06) % — — — — 6,664 6,664 — — 4,420 4,244 176 176 7,738 7,019 719 719 19,923 18,365 1,558 1,558 21,302 19,969 1,333 1,333 58,123 52,642 5,481 5,481 118,170 108,903 9,267 9,267 2.96 % 2.05 % 51,513 57,047 60,288 109,561 150,399 120,376 409,194 958,378 1,327 5,760 3,059 5,257 7,818 26,078 2.53 % — 51,513 — 21,337 30,176 2,857 54,190 10,762 4,405 58,961 103,801 147,340 115,119 401,376 932,300 — — 4,545 3,910 673 3,207 — 34 1,064 400 12,499 37,838 39,023 54,416 99,891 143,460 115,085 399,912 881,963 205,352 63,711 64,708 117,299 170,322 141,678 467,317 1,230,387 640,613 632,305 150 14,370 84,875 64,630 5,204 7,158 617,785 52,268 90,394 67,707 5,295 15,227 47,185 93,296 175,238 61,142 109,856 3,216 9,940 83,112 5,618 80,041 32,464 15,827 5,934 83,731 1,248,188 22,287 990,391 — 112,804 4,373 62,620 47,986 21,126 10,703 17,914 814,967 — 14,981 18,276 30,994 59,526 47,143 59,909 230,829 8,308 5,264 4,411 1,160 5,856 434 1,535 26,968 2.32 % 2.14 % 3.67 % 3.04 % (0.44) % 1.62 % 0.64 % 1.94 % 640,613 84,875 90,394 93,296 175,238 80,041 83,731 1,248,188 0.82 % (435,261) (21,164) (25,686) 24,003 (4,916) 61,637 383,586 (17,801) 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 amortized cost Debt instruments Loans and advances Central banks Credits institutions Customers Liabilities Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer deposits Marketable debt securities* ** Other financial liabilities Difference (assets less liabilities) * ** Includes promissory notes, certificates of deposit and other short-term debt issues. See breakdown by type of debt (subordinated debt, senior unsecured debt, senior secured debt, notes and other securities) (see note 22). Grupo Santander’s net borrowing position with the European Central Bank (ECB) was EUR 13,494 million at 31 December 2020, mainly because in last period the Group borrowed funds under the ECB's targeted longer-term refinancing operations (LTRO, TLTRO) programme. (see note 20). Grupo Santander has accounted as "On demand", those financial liabilities assumed, in which the counterparty may require the payments. In addition, when Grupo Santander is committed to have amounts available in different maturity periods, these amounts have been accounted for in the first year, in which they may be required. Additionally, for issued financial guarantee contracts, the Group has recorded the maximum amount of the financial guarantee issued, in the first year in which the guarantee could be executed. 718   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2019 EUR million On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total Interest rate 101,067 — — — — — — 101,067 0.37 % — — — — 6,933 6,879 54 54 2,704 2,699 5 5 7,689 7,554 135 135 19,101 17,489 1,612 1,612 17,989 17,063 926 926 68,429 66,721 1,708 1,708 122,845 118,405 4,440 4,440 3.07 % 1.84 % 51,702 73,890 76,229 116,511 150,365 103,584 423,201 995,482 — 51,702 — 17,665 34,037 152,769 619,003 607,051 99 23,526 583,426 1,563 72,327 17,086 6,223 49,018 80,823 99,203 76,101 462 14,494 61,145 1,847 3,073 2,549 3,642 17,115 29,789 3.23 % 74,382 113,438 147,816 99,942 406,086 965,693 — — — 4,602 7,435 3,963 — 428 1,388 627 18,474 40,943 69,780 106,003 143,853 99,514 404,071 906,276 78,933 124,200 169,466 121,573 491,630 1,219,394 4.78 % 1.04 % 4.85 % 4.12 % 88,546 159,120 134,799 61,627 111,190 64 18,922 42,641 33,229 14,245 63,716 64,781 28,424 9,327 27,030 61,282 14,224 190 5,668 8,366 68,792 1,230,745 7,443 942,417 — 4,319 3,124 62,468 90,501 789,448 (0.12) % 2.97 % 0.91 % 2.38 % 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 amortized cost Debt instruments Loans and advances Central banks Credits institutions Customers Liabilities Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer deposits Marketable debt securities* — 16,008 22,569 47,808 65,545 46,577 59,712 258,219 Other financial liabilities 11,952 7,094 4,350 122 4,473 481 1,637 30,109 619,003 99,203 88,546 159,120 134,799 61,282 68,792 1,230,745 1.29 % Difference (assets less liabilities) (466,234) (18,380) (9,613) (34,920) 34,667 60,291 422,838 (11,351) * Includes promissory notes, certificates of deposit and other short-term debt issues. 719                                         Annual report 2020 Contents 31 December 2018 EUR million On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total Average interest rate 113,663 — — — — — — 113,663 0.11 % 1,886 487 1,399 1,399 6,023 6,022 3,329 3,328 12,873 12,830 19,432 19,415 10,705 10,661 64,172 64,076 118,420 116,819 1 1 1 1 43 43 17 17 44 44 96 96 1,601 1,601 3.11 % 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 3.30 % 46,231 55,284 70,308 95,390 132,223 106,138 402,829 908,403 — 4 — 6,711 6,003 5,314 — 947 15,574 1,024 15,601 35,480 63,597 89,383 126,909 105,191 386,231 857,322 74,956 114,909 154,129 118,626 490,925 1,178,182 6.07 % 1.66 % 4.96 % 4.17 % 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 amortized cost Debt instruments Loans and advances Central banks Credit institutions Customers Liabilities Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer deposits Marketable debt securities* — 10,092 36,139 161,796 545,284 536,134 304 15,341 520,489 23 5,389 49,872 62,841 87,782 74,440 2,130 13,413 58,897 93,293 127,522 182,670 67,406 91,958 107,459 2,629 24,724 40,053 507 64,433 16,384 75,067 8,759 34,267 56,927 18,833 2,520 6,412 9,901 78,152 1,171,630 6,871 903,101 — 4,646 2,225 72,523 89,679 740,899 (0.22) % 2.19 % 0.90 % 2.59 % 237 11,347 18,817 33,536 71,805 37,919 70,653 244,314 Other financial liabilities 8,913 1,995 7,070 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 1.27 % Difference (assets less liabilities) (383,488) (24,941) (18,337) (12,613) (28,541) 61,699 412,773 6,552 * Includes promissory notes, certificates of deposit and other short-term debt issues. 720                                              Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The detail of the undiscounted contractual maturities of the existing financial liabilities at amortised cost at 31 December 2020, 2019 and 2018 is as follows: 31 December 2020 EUR million Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer Marketable debt securities Other financial liabilities On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 629,043 62,872 67,567 60,465 108,326 150 14,334 614,559 — 8,308 5,204 7,158 50,510 15,298 5,264 5,293 15,209 47,065 19,009 4,411 3,217 9,606 47,642 31,103 1,160 82,803 5,031 20,492 58,645 5,856 32,260 15,827 5,903 10,530 46,118 22,228 982,761 — 112,494 4,333 61,574 17,895 808,693 56,730 226,903 434 1,535 26,968 637,351 83,434 90,987 92,728 172,827 78,812 80,493 1,236,632 Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer Marketable debt securities Other financial liabilities . 31 December 2019 EUR million On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 603,126 75,899 61,107 109,747 99 23,348 579,679 — 11,952 454 14,491 60,954 16,252 7,094 41 18,810 42,256 22,912 4,350 32,805 14,134 62,808 48,030 122 63,013 28,255 8,519 26,239 64,650 4,473 14,027 7,228 934,147 190 5,478 8,359 — 4,113 3,115 61,844 88,893 783,410 45,830 58,215 255,889 481 1,637 30,109 615,078 99,245 88,369 157,899 132,136 60,338 67,080 1,220,145 31 December 2018 EUR million Financial liabilities at amortized cost Deposits Central banks Credit institutions Customer Marketable debt securities Other financial liabilities On demand Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 532,915 74,320 67,169 91,766 106,935 18,439 6,540 898,084 304 15,257 517,354 296 8,913 2,126 13,413 58,781 11,243 1,995 2,624 24,698 39,847 17,359 7,070 896 64,424 16,288 74,582 33,443 2,028 8,552 33,959 71,431 3,406 2,520 6,085 9,834 — 4,427 2,113 72,894 88,720 736,470 37,409 69,352 240,533 175 628 24,215 542,124 87,558 91,598 127,237 181,772 56,023 76,520 1,162,832 721                                                                                       Annual report 2020 Contents Below is a breakdown of contractual maturities for the rest of financial assets and liabilities as of 31 December 2020, 2019 and 2018: 31 December 2020 EUR million Within 1 months 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total FINANCIAL ASSETS Financial assets held for trading Derivatives Equity instruments Debt instruments Loans and advances Credits institutions Customers Financial assets designated at fair value through profit or loss Debt instruments Loans and advances Central banks Credit institutions Customers Non-trading financial assets mandatorily at fair value through profit 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 Changes in the fair value of hedged items in portfolio hedges of interest rate risk 5,760 4,288 — 6,734 5,268 — 27,753 10,044 — 22,473 15,526 — 18,014 13,681 — 1,472 1,466 17,709 6,947 4,310 34,211 114,945 18,330 67,137 — — — — — — 12,500 14,834 181 78 12,319 14,756 343 6,935 5,041 9,138 1,514 4,104 275 — 85 190 — — 190 — — — — — — — — — — — — — — 7,205 162 7,043 — 2,728 4,315 — — — — — — — — — — — — 3,680 407 3,273 — 590 23 3 20 3,933 719 3,214 — 12 — — — — — — — — — 69 — — 69 — — 69 — — 1,534 469 1,293 1,107 1,083 2,683 3,202 4,776 9,615 5,990 276 — 276 6,565 1,432 5,133 — 357 4,142 3,234 615 293 — — 293 2,783 2,783 2,839 9,615 37,894 299 3 296 48,717 2,979 45,738 9,481 12,136 24,121 4,486 3,234 700 552 — — 552 2,783 2,783 8,325 173 8 132 205 381 1,081 1,980 TOTAL FINANCIAL ASSETS 20,242 22,045 36,383 27,465 23,480 51,621 181,236 722        Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 31 December 2020 EUR million Within 1 months 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years 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 16,754 1,132 15,622 3,727 3,206 521 6,286 5,800 486 — — — — — — 13,468 13,459 841 3,673 8,945 9 — 2,619 3 — — — — — — — — — — — — 1,732 1,709 2,228 1,954 866 112 731 23 — 200 6 783 935 236 274 — 588 40 17,635 17,566 16,036 16,036 20,729 20,729 69 — — — — — — 2,893 2,497 — 1,493 1,004 396 — 748 74 — — — — — — — 1,121 518 — 171 347 603 — 641 64 — — — — — — — 26,596 23,461 — 381 23,080 3,135 — Total 81,167 64,469 16,698 — — — — — — 48,038 43,598 2,490 6,765 34,343 4,440 — 2,073 6,869 99 286 TOTAL FINANCIAL LIABILITIES 32,844 5,665 9,142 21,350 17,862 49,497 136,360 * Includes promissory notes, certificates of deposit and other short-term debt issues (see note 22). Memorandum items Loans commitment granted Financial guarantees granted Other commitments granted MEMORANDUM ITEMS 31 December 2020 EUR million Within 1 months 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 104,725 1,809 39,205 9,496 852 4,529 145,739 14,877 28,207 3,732 10,497 42,436 47,876 40,458 10,468 241,230 4,134 5,101 1,169 3,207 681 1,999 12,377 64,538 57,111 44,834 13,148 318,145 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. 723          Annual report 2020 Contents 31 December 2019 EUR million Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 4,864 3,329 — 3,522 2,233 — 19,740 6,552 — 21,603 15,855 — 18,083 14,925 — 1,531 1,289 13,188 5,748 3,141 40,418 108,230 FINANCIAL ASSETS Financial assets held for trading Derivatives Equity instruments Debt instruments Loans and advances Credits institutions Customers Financial assets designated at fair value through profit or loss Debt instruments Loans and advances Central banks Credit institutions Customers Non-trading financial assets mandatorily at fair value through profit 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 Changes in the fair value of hedged items in portfolio hedges of interest rate risk 20,503 12,437 7,144 334 — 334 8,137 1,605 6,532 — 959 4,507 3,350 1,047 110 — — 110 2,863 2,863 3,172 63,397 12,437 32,041 355 — 355 62,069 3,186 58,883 6,473 21,649 30,761 4,911 3,350 1,175 386 — — 386 2,863 2,863 7,216 3,488 5,573 4 — 4 — — — — — — 24,110 13,167 7,602 457 10 81 23,653 13,157 7,521 1,744 13,186 8,723 4,729 4,946 3,482 — 1,534 5,987 4 — — 4 — — 4 — — 272 — — 272 — — 272 — — 807 267 — — — — — — — — — 86 1 — — — 5,175 652 4,523 — 1,015 3,508 11 — 11 — — — — — — 17 — 17 3,878 381 3,497 — 9 117 — 117 — — — — — — 601 1,646 904 24 112 265 1,033 1,702 TOTAL FINANCIAL ASSETS 30,320 16,776 27,971 28,547 23,247 60,130 186,991 724   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 31 December 2019 EUR million Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years 10,851 2,672 8,179 3,427 1,973 1,454 7,130 6,591 539 17,244 16,965 279 16,905 16,023 882 21,582 18,792 2,790 — — — — — — 21,929 21,904 8,831 4,133 8,940 14 11 1,997 3 — — — — — — 2,259 2,225 1,228 521 476 34 — 337 6 — — — — — — 5,307 4,909 2,795 1,857 257 398 — 848 26 — — — — — — 3,565 2,429 — 2,132 297 1,021 115 678 53 — — — — — — 1,450 780 — 11 769 670 — 528 59 — — — — — — 26,485 24,864 — 686 24,178 1,621 — 1,660 122 Total 77,139 63,016 14,123 — — — — — — 60,995 57,111 12,854 9,340 34,917 3,758 126 6,048 269 TOTAL FINANCIAL LIABILITIES 34,780 6,029 13,311 21,540 18,942 49,849 144,451 Memorandum items Loans commitment granted Financial guarantees granted Other commitments granted MEMORANDUM ITEMS 31 December 2019 EUR million Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 98,630 2,176 44,950 16,529 30,370 37,097 48,072 10,481 241,179 1,791 3,052 5,626 9,957 1,933 4,606 1,364 4,132 760 2,198 13,650 68,895 145,756 21,372 45,953 43,636 53,568 13,439 323,724 725     Annual report 2020 Contents FINANCIAL ASSETS Financial assets held for trading Derivatives Equity instruments Debt instruments Loans and advances Credits institutions Customers Financial assets designated at fair value through profit or loss Debt instruments Loans and advances Central banks Credit institutions Customers Non-trading financial assets mandatorily at fair value through profit 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 Changes in the fair value of hedged items in portfolio hedges of interest rate risk TOTAL FINANCIAL ASSETS Within 1 month 1 to 3 months 4,512 2,691 — 1,821 — — — 3,564 3,165 — 399 — — — 21,598 13,045 604 20,994 1,211 14,587 5,196 3,215 — 1,876 1,339 — 2 1,337 — — 609 106 7 13,038 5,433 4,131 3,474 346 — 20 326 — — 326 — — 166 7 31 December 2018 EUR million 1 to 3 years 3 to 12 months 3 to 5 More than 5 years years Total 6,793 899 — 5,894 — — — 5,625 304 5,321 2,582 778 1,961 17 — — 17 — — 17 — — 22,084 15,189 — 6,895 — — — 5,215 727 4,488 — 1,327 3,161 125 — — 125 — — 125 — — 474 2,167 20 28 19,350 14,098 — 5,252 — — — 4,065 348 3,717 — 579 3,138 2 — 2 — — — — — — 957 59 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 30,040 17,128 12,929 29,619 24,433 59,286 173,435 726   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 31 December 2018 EUR million Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years 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 — — — — — — 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 60 — — — — — — 28,107 27,222 — 445 26,777 885 — 4,400 148 Total 70,343 55,341 15,002 — — — — — — 68,058 65,304 14,816 10,891 39,597 2,305 449 6,363 303 TOTAL FINANCIAL LIABILITIES 40,535 10,517 2,312 18,046 18,167 55,490 145,067 Memorandum items Loans commitment granted Financial guarantees granted Other commitments granted MEMORANDUM ITEMS 31 December 2018 EUR million Within 1 month 1 to 3 months 3 to 12 months 1 to 3 years 3 to 5 More than 5 years years Total 71,860 2,100 58,431 12,436 22,749 35,632 43,205 32,201 218,083 1,737 1,486 4,437 6,174 1,728 2,650 1,029 3,503 692 2,145 11,723 74,389 132,391 15,659 33,360 40,010 47,737 35,038 304,195 727     Annual report 2020 Contents 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 EUR million Cash, cash balances at central banks and other deposits on demand Financial assets/liabilities held for trading Non-trading financial assets mandatorily at fair value through profit or loss Other financial assets/liabilities at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortized cost Investments Tangible assets Intangible assets Financial liabilities at amortized cost Liabilities under insurance contracts Other 2020 2019 2018 Assets Liabilities Assets Liabilities Assets Liabilities 76,882 — 65,205 — 61,372 — 66,448 50,494 60,526 45,262 56,217 40,989 2,248 — 2,611 — 8,231 — 24,015 18,347 25,938 29,593 32,244 35,997 79,688 610,152 1,671 21,617 9,609 — — — — — 76,402 656,564 1,355 24,662 21,942 — — — — — 67,926 598,629 1,189 19,903 23,016 — — — — — — — 726,516 13 — — 752,188 13 — — 694,362 29 26,433 22,801 25,410 23,428 24,506 20,567 918,763 818,171 960,615 850,484 893,233 791,944 728 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix c) Fair value of financial assets and liabilities not measured at fair value The financial 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. Similarly, the Group’s financial liabilities -except for financial 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. Following is a comparison of the carrying amounts of the Group’s financial instruments measured at other than fair value and their respective fair values at year-end: i) Financial assets measured at other than fair value EUR million Assets Loans and advances Debt instruments 2020 2019 2018 Carrying amount Fair value Level 1 Level 2 Level 3 Carrying amount Fair value Level 1 Level 2 Level 3 Carrying amount Fair value Level 1 Level 2 Level 3 932,300 940,258 — 65,755 874,503 26,078 26,532 6,753 11,899 7,880 965,693 975,523 — 82,045 893,478 908,403 914,013 — 88,091 825,922 29,789 30,031 10,907 9,971 9,153 37,696 38,095 20,898 11,246 5,951 958,378 966,790 6,753 77,654 882,383 995,482 1,005,554 10,907 92,016 902,631 946,099 952,108 20,898 99,337 831,873 ii) Financial liabilities measured at other than fair value EUR million Liabilities* Carrying amount Fair value Level 1 Level 2 Level 3 Carrying amount Fair value Level 1 Level 2 Level 3 Carrying amount Fair value Level 1 Level 2 Level 3 2020 2019 2018 Deposits 990,391 990,807 — 263,517 727,290 Debt instruments 230,829 241,174 91,771 125,031 24,372 942,417 942,397 — 245,143 697,254 903,101 902,680 — 302,414 600,266 258,219 266,784 84,793 149,516 32,475 244,314 247,029 72,945 143,153 30,931 1,221,220 1,231,981 91,771 388,548 751,662 1,200,636 1,209,181 84,793 394,659 729,729 1,147,415 1,149,709 72,945 445,567 631,197 * At 31 December 2020, the Group had other financial liabilities that amounted to EUR 26,968 million, EUR 30,109 million in 2019 and EUR 24,215 million in 2018. The main valuation methods and inputs used in the estimates at 31 December 2020 of the fair values of the financial assets and liabilities in the foregoing table were as follows: • Financial assets at amortised cost: 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-. • 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 offered for de posits 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 significant input which is not observable with market data if applicable. iii) 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. 729 Annual report 2020 Contents d) Exposure of the Group to Europe’s peripheral countries The detail at 31 December 2020, 2019 and 2018, by type of financial 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 2020* EUR million Debt instruments MtM Derivatives*** Financial assets held for trading and financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Non-trading financial assets mandatorily at fair value through profit or loss Short positions Spain Portugal Italy Ireland 9,765 (5,665) 202 556 — (582) (307) — 7,048 4,148 2,468 — — — — — Financial assets at amortized cost 993 631 1,277 — Loans and advances to customers** Total net direct exposure Direct risk Indirect risk (CDS)s 12,104 24,245 546 4,331 21 — 8,730 4,015 — — 1 — — — (1) — * ** *** Information prepared under EBA standards. Also, there are government debt instruments on insurance companies balance sheets amounting to EUR 14,241 million (of which EUR 12,571 million, EUR 1,281 million, EUR 387 million and EUR 2 million relate to Spain, Portugal, Italy and Ireland, respectively) and off- balance-sheet exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 6,134 million (of which EUR 5,509 million, EUR 345 million and EUR 280 million to Spain, Portugal and Italy, respectively). Presented without taking into account the valuation adjustments recognised (EUR 23 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. CDS refers to the exposure to CDS based on the location of the underlying. Sovereign risk by country of issuer/borrower at 31 December 2019* EUR million Debt instruments MtM Derivatives*** Financial assets held for trading and financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Non-trading financial assets mandatorily at fair value through profit or loss Financial assets at amortized cost Short positions Loans and advances to customers** Total net direct exposure Direct risk Indirect risk (CDS) Spain Portugal Italy Ireland 9,090 (3,886) 19,961 31 1,095 — (777) (452) — 5,450 1,631 — — — — — 208 577 442 — 9,993 35,366 474 3,408 19 — 8,689 2,735 — — 5 — — — (5) — * ** *** Information prepared under EBA standards. Also, there are government debt securities on insurance companies' balance sheets amounting to EUR 14,517 million (of which EUR 12,756 million, EUR 1,306 million, EUR 453 million and EUR 2 million relate to Spain, Portugal, Italy and Ireland, respectively) and off- balance-sheet exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 6,299 million (of which EUR 5,808 million, EUR 224 million and EUR 267 million to Spain, Portugal and Italy, respectively). Presented without taking into account the valuation adjustments recognised (EUR 17 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. CDS refers to the exposure to CDS based on the location of the underlying. 730     Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Sovereign risk by country of issuer/borrower at 31 December 2018* EUR million Debt instruments MtM Derivatives*** Financial assets held for trading and financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Non-trading financial assets mandatorily at fair value through profit or loss Financial assets at amortized cost Short positions Loans and advances to customers** Total net direct exposure Direct risk Indirect risk (CDS) 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 — — — — * ** ** Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 13,364 million (of which EUR 11,529 million, EUR 1,415 million and EUR 418 million and EUR 2 million relate to Spain, Portugal, Italy and Ireland, respectively) and off-balance-sheet exposure other than derivatives – contingent liabilities and commitments– amounting to EUR 5,622 million (EUR 4,870 million, EUR 366 million and EUR 386 million to Spain, Portugal and Italy, respectively). Presented without taking into account the Other comprehensive income recognised (EUR 34 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. CDS refers to the exposure to CDS 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 2020, 2019 and 2018 is as follows: Exposure to other counterparties by country of issuer/borrower at 31 December 2020*** Million euros Debt instruments Financial  assets held  for trading and financial assets designated at fair value through profit or loss 619 140 425 — 22 Financial  assets  at fair value through other comprehensive income Non-trading financial assets  mandatorily at fair value through profit or loss 943 22 493 — 2 — — — 2,337 556 Balances with  central banks 62,023 3,937 10 — — Reverse repurchase agreements 3,837 — 7,098 — — Spain Portugal Italy Greece Ireland MtM Derivatives** Financial  assets at amortized cost Loans and advances to customers* Total net direct exposure 24 203,226 270,674 Other  than CDS 2,581 685 2,933 129 — 9 34,935 41,967 13,437 21,592 1,001 14 14 10,523 13,447 — 153 CDS (4) — (4) — — * ** *** Also, the Group has off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 76,377 million, EUR 8,591 million, EUR 4,173 million, EUR 200 million and EUR 797 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively. Presented without taking into account valuation adjustments or impairment corrections (EUR 8,129 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. 'CDS' refers to the exposure to CDS based on the location of the underlying. 731               Annual report 2020 Contents Exposure to other counterparties by country of issuer/borrower at 31 December 2019*** EUR million Debt instruments Financial  assets held  for trading and financial assets designated at fair value through profit or loss 656 190 625 — 55 Financial  assets  at fair value through other comprehensive income Non-trading financial assets  mandatorily at fair value through profit or loss 1,195 32 606 — 1,718 321 — — — 592 MtM Derivatives** Financial  assets at amortized cost 1,501 2,956 153 — 22 Loans and advances to customers* Total net direct exposure 194,817 227,813 33,403 39,804 12,284 20,093 12 12 11,875 14,262 Other  than CDS 2,417 931 512 — 232 CDS 2 — — — — Balances with  central banks 21,696 2,814 182 — — Reverse repurchase agreements 7,627 409 6,243 — — Spain Portugal Italy Greece Ireland * ** *** Also, the Group has off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 77,468 million, EUR 7,749 million, EUR 4,948 million, EUR 201 million and EUR 996 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively. Presented without taking into account valuation adjustments or impairment corrections (EUR 7,322 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. 'CDS' refers to the exposure to CDS based on the location of the underlying. Exposure to other counterparties by country of issuer/borrower at 31 December 2018* EUR million Debt instruments Financial  assets held  for trading and financial assets designated at fair value through profit or loss 412 11 84 — 21 Financial  assets  at fair value through other comprehensive income Non-trading financial assets  mandatorily at fair value through profit or loss 1,760 90 635 — 1,093 320 — — — 16 Derivatives*** Financial  assets at amortized cost 2,662 3,821 — — 25 Loans and advances to customers Total net direct exposure **** 202,149 258,075 33,596 38,887 10,830 17,896 80 80 10,633 11,788 Other  than CDS 3,880 1,132 253 28 127 CDS (6) — — — — Balances with  central banks 42,655 1,369 51 — — Reverse repurchase agreements 8,117 — 6,296 — — Spain Portugal Italy Greece Ireland * ** *** Also, the Group has off-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 excluding Other comprehensive income and impairment losses recognised (EUR 9,385 million). Other than CDS refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. 'CDS' refers to the exposure to CDS based on the location of the underlying. 732                         Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Following is certain information on the notional amount of the CDS at 31 December 2020, 2019 and 2018 detailed in the foregoing tables: 2020 EUR million Spain Portugal Italy 2019 EUR million Spain Portugal Italy 2018 EUR million Spain Portugal Italy Sovereign Other Sovereign Other Sovereign Other Sovereign Other Sovereign Other Sovereign Other Sovereign Other Sovereign Other Sovereign Other Notional amount Fair value Bought — 546 — 52 326 220 Sold — 273 — — 206 11 Net — 273 — 52 120 209 Bought Sold Net — (13) — — (3) (4) — 9 — — 2 — — (4) — — (1) (4) Notional amount Fair value Bought — 127 27 — 314 60 Sold — 340 27 — 9 60 Notional amount Bought — 151 26 — — 205 Sold — 382 26 — 265 75 Net — (213) — — 305 — Net — (231) — — (265) 130 Bought Sold Net — (2) — — (5) (2) — 4 — — — 2 Fair value Bought Sold — (2) — — — (5) — (4) — — — 5 — 2 — — (5) — Net — (6) — — — — 733 Annual report 2020 Contents 51. Main and secondary segments reporting We base segment reporting on financial information presented to the chief operating decision maker, which excludes certain statutory results items that distort year-on- year comparisons and are not considered for management reporting. This financial information (underlying basis) is computed by adjusting reported results for the effects 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. Grupo Santander has aligned the information in this note with the underlying information used internally for management reporting and with that presented in Grupo Santander's other public documents. Grupo Santander executive committee has been determined to be its chief operating decision maker. Grupo Santander's operating segments reflect its organizational and managerial structures. Grupo Santander 's executive committee reviews internal reporting based on these segments to assess performance and allocate resources. The segments are split by geographic area in which profits are earned and type of business. We prepare the information by aggregating the figures for Grupo Santander’s various geographic areas and business units, relating it to both the accounting data of the units integrated in each segment and that provided by management information systems.The same general principles as those used in Grupo Santander are applied. In 2020, we maintain the general criteria applied in 2019, as well as the business segments with the following exceptions, which only affect the secondary segments: 1. Following the creation of the reporting segment Santander Global Platform in 2019, which comprises our global digital services under a single unit, and its incorporation in both primary and secondary segments, in 2020 for better monitoring of its evolution and contribution to the Group's results, at the secondary segment level in addition to the results generated by the platforms, 50% of the results generated by countries in products linked to these platforms are considered. These results were previously included in Retail Banking. 2. Annual adjustment of the perimeter of the Global Customer Relationship Model between Retail Banking and Santander Corporate & Investment Banking and between Retail Banking and Wealth Management & Insurance. These changes in the secondary segments have no impact on the primary segments and do not affect the Group’s figures. a) Main segments This main level of segmentation, which is based on the Group's management structure, comprises five reportable segments: four operating areas plus the Corporate Center. The operating areas are: • Europe: which comprises all the business activities carried out in the region, mainly in Spain, Santander Consumer Finance, the United Kingdom, Portugal and Poland • North America: which comprises all the business activities carried out in Mexico and the US, which includes the holding company (SHUSA) and the businesses of Santander Bank, Santander Consumer USA, the specialized unit Banco Santander International, Santander Investment Securities (SIS) and the New York branch. The sale of Banco Santander Puerto Rico was completed in September 2020, which was previously included in the US. • South America: includes all the financial activities carried out by Grupo Santander through its banks and subsidiary banks in the region, mainly in Brazil, Chile and Argentina. • Santander Global Platform: which comprises our global digital services under a single unit, includes Global Payments Services (global trade services, global merchant services, superdigital, pagoFX), our fully digital bank Openbank, S.A. and Open Digital Services, and Digital Assets (Centres of Digital Expertise, InnoVentures and Digital Assets). In addition to these operating units, which report by geographic area and businesses, Grupo Santander continues to maintain the area of Corporate Centre, that includes the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position, assumed within the sphere of Grupo Santander’s assets and liabilities committee, as well as management of liquidity and of shareholders’ equity via issuances. As Grupo Santander’s holding entity, this area manages all capital and reserves and allocations of capital and liquidity with the rest of businesses. It also incorporates amortization 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. 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. To allow better comparability of the secondary segments, 2019 data has been provided on a new basis. There are no customers located in any of the areas that generate income exceeding 10% of Total income. After these changes, the operating business areas are structured in two levels: 734 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The condensed balance sheets and income statements of the various main segments are as follows: EUR million Balance sheet (condensed) 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 Europe North America South America 2020 Santander Global Platform Corporate Centre 1,077,537 223,313 238,263 12,901 182,587 Intra-Group eliminations Total (226,351) 1,508,250 675,894 120,557 113,731 973 5,044 — 916,199 224,793 86,925 48,266 41,659 28,469 38,398 15,363 20,526 42,957 49,300 17,266 15,009 1,022,954 199,611 218,797 622,826 102,906 111,791 208,408 120,166 55,919 15,635 54,583 86,899 71,238 15,487 174 37,966 36,583 16,159 5,997 23,702 16,505 10,864 90 5,551 41,989 21,280 35,434 8,303 19,466 49,851 49,851 — — 10,917 61,173 (142,513) 225,796 13 230 768 11,521 10,961 274 — 130 156 1,918 1,644 112,808 106,558 826 38,555 57,240 493 9,444 1,380 76,029 — — — — 12 12 — — — — — 176,554 82,769 (83,838) 106,932 (142,513) 1,416,928 — 849,310 (142,513) 184,679 — — — (83,838) — — — — — 235,269 108,135 39,535 91,322 153,267 131,965 15,577 5,725 53,549 34,789 11,915 6,187 658 * ** *** **** 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. 735 Annual report 2020 Contents EUR million Balance sheet (condensed) 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 Europe North America South America 2019 Santander Global Platform Corporate Centre 1,057,038 223,857 253,804 10,234 168,352 Intra-Group eliminations Total (190,590) 1,522,695 676,904 133,726 125,122 702 5,764 — 942,218 180,389 22,885 51,360 9,063 32,803 (107,894) 188,606 104,381 53,893 41,471 33,746 10,759 22,741 45,619 14,802 16,901 1,000,905 199,955 231,321 600,380 189,791 133,544 60,807 16,383 56,133 86,558 62,203 11,746 12,609 98,915 38,942 44,098 11,763 6,237 23,902 14,319 11,703 98 2,518 114,817 41,989 29,840 34,062 10,613 22,483 76,023 69,071 — 6,952 10 187 272 9,760 9,460 82 — 106 112 474 — — — — 840 2,406 126,539 77,989 793 — — 184,596 82,047 (82,696) 125,228 (107,894) 1,412,036 — 824,365 12,253 (107,894) 175,163 54,495 636 9,812 90,363 — — — (82,696) 11 11 — — — — — — — — 261,977 107,374 43,157 110,659 176,911 142,988 11,844 22,079 49,489 Other non-managed marketed customer funds 33,107 15,872 60 450 * ** *** **** 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. 736 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million Balance sheet (condensed) 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 Europe North America South America 2018 Santander Global Platform Corporate Centre 1,020,737 200,919 237,480 8,781 170,614 Intra-Group eliminations Total (179,260) 1,459,271 639,966 116,196 119,912 337 6,509 1 882,921 172,298 118,221 49,263 40,989 28,845 27,302 9,974 18,602 48,318 45,224 9,311 14,715 966,727 179,046 215,605 571,834 192,685 129,574 53,687 18,947 54,010 76,524 55,239 11,062 10,223 91,895 26,048 43,758 11,379 5,966 21,873 12,785 10,436 98 2,251 108,248 38,584 31,504 28,570 8,699 21,875 68,172 61,515 — 6,657 128 8,168 39,840 (100,400) 197,069 — 146 130 8,492 8,284 111 — 38 59 289 367 367 — — — 377 2,113 — 1 191,124 70,808 121,775 82,439 (78,862) 117,349 (100,399) 1,351,910 235 — 780,496 30,879 (100,398) 187,909 41,783 1,334 8,208 88,175 — (1) — (78,861) 7 7 — — — — — — — — 246,619 95,007 41,879 107,361 157,855 127,564 11,160 19,131 42,211 Other non-managed marketed customer funds 28,555 13,528 * ** *** **** 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. 737 Annual report 2020 The condensed income statements for the main segments are as follows: EUR million Underlying income statement (condesed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Attributable profit to the parent 2020 Europe North America South America 14,047 4,736 885 25 8,469 1,661 251 630 10,723 3,566 765 (209) 19,693 11,011 14,845 (10,314) 9,379 (4,300) (913) 4,166 (1,131) 3,035 — 3,035 379 2,656 (4,631) 6,380 (3,917) (130) 2,333 (579) 1,754 — 1,754 262 1,492 (5,312) 9,533 (3,923) (319) 5,291 (1,927) 3,364 — 3,364 437 2,927 Santander Global Platform 129 81 (1) (17) 192 (381) (189) (3) (11) (203) 52 (151) — (151) (1) (150) Corporate centre (1,374) (29) 287 (25) (1,141) (329) (1,470) (31) (412) (1,913) 69 (1,844) — (1,844) — (1,844) Contents Total 31,994 10,015 2,187 404 44,600 (20,967) 23,633 (12,174) (1,785) 9,674 (3,516) 6,158 — 6,158 1,077 5,081 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit 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 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 50 million mainly corresponding to the results by commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non- financial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 738 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million Underlying income statement (condesed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Attributable profit to the parent Europe 14,201 5,260 1,036 504 North America 8,926 1,776 230 672 2019 South America 13,316 4,787 565 (243) 21,001 11,604 18,425 (11,044) 9,957 (1,839) (768) 7,350 (1,979) 5,371 — 5,371 493 4,878 (4,967) 6,637 (3,656) (205) 2,776 (683) 2,093 — 2,093 426 1,667 (6,656) 11,769 (3,789) (748) 7,232 (2,644) 4,588 — 4,588 664 3,924 Santander Global Platform 92 6 (3) (14) 81 (240) (159) (1) (6) (166) 46 (120) — (120) — (120) Corporate Centre (1,252) (50) (297) (18) (1,617) (373) (1,990) (36) (237) (2,263) 157 (2,106) — (2,106) (9) (2,097) Total 35,283 11,779 1,531 901 49,494 (23,280) 26,214 (9,321) (1,964) 14,929 (5,103) 9,826 — 9,826 1,574 8,252 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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. 'Loan loss provisions' refers to Impairment or reversal of impairment at financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 31 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 31 million mainly corresponding to the results by commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 739 Annual report 2020 EUR million Underlying income statement (condesed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit from continuing operations Net profit from discontinued operations Consolidated profit Non-controlling interests Attributable profit to the parent Europe 14,204 5,434 1,114 505 North America 8,154 1,615 173 534 2018 South America 12,891 4,497 498 (212) 21,257 10,476 17,674 (11,166) 10,091 (1,572) (1,027) 7,492 (2,020) 5,472 — 5,472 424 5,048 (4,488) 5,988 (3,449) (202) 2,337 (599) 1,738 — 1,738 434 1,304 (6,557) 11,117 (3,737) (663) 6,717 (2,642) 4,075 — 4,075 624 3,451 Santander Global Platform 79 7 — (12) 74 (142) (68) — (2) (70) 17 (53) — (53) 1 (54) Corporate Centre (987) (68) 12 (14) (1,057) (426) (1,483) (115) (101) (1,699) 14 (1,685) — (1,685) — (1,685) Contents Total 34,341 11,485 1,797 801 48,424 (22,779) 25,645 (8,873) (1,995) 14,777 (5,230) 9,547 — 9,547 1,483 8,064 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. 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 of 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-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognised in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 740 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix b) Secondary segments At this secondary level, Grupo Santander is structured into Retail Banking, Santander Corporate & Investment Banking, Wealth Management & Insurance and Santander Global Platform. • Retail Banking: this covers all customer banking businesses, including consumer finance, except those of corporate banking which are managed through Santander Corporate & Investment Banking, asset management, private banking and insurance, which are managed by Wealth Management & Insurance and 50% of the countries’ results generated by digital services, which are included in Santander Global Platform. 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): this business reflects 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 equity business. • Wealth Management & Insurance: includes the asset management business (Santander Asset Management), the corporate unit of Private Banking and International Private Banking in Miami and Switzerland and the insurance business (Santander Insurance). • Santander Global Platform: which comprises our global digital services under a single unit (breakdown in the primary segment definition), as well as 50% of the results generated by these services in the commercial network. Although Santander Global Platform and Wealth Management & Insurance do not meet the quantitative thresholds defined in IFRS 8, these segments are considered reportable by Grupo Santander and are disclosed separately because Grupo Santander's management believes that information about these segments is useful to users of the financial statements. There are no customers located in a place different from the location of the Group's assets that generate revenues in excess of 10% of ordinary revenues. The condensed income statements are as follows: 741 Annual report 2020 Contents EUR million Underlying income statement (condensed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit/(loss) from continuing operations Net profit/(loss) from discontinued operations Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent 2020 Santander Corporate & Investment Banking Wealth Management & Insurance Santander Global Platform 2,953 1,551 690 204 5,398 (2,069) 3,329 (467) (135) 2,727 (783) 1,944 — 1,944 121 1,823 455 1,194 103 383 2,135 (907) 1,228 (28) (1) 1,199 (291) 908 — 908 41 867 416 449 145 (17) 993 (816) 177 (39) (9) 129 (58) 71 — 71 32 39 Retail Banking 29,544 6,850 962 (141) 37,215 (16,846) 20,369 (11,609) (1,228) 7,532 (2,453) 5,079 — 5,079 883 4,196 Corporate centre (1,374) (29) 287 (25) (1,141) Total 31,994 10,015 2,187 404 44,600 (329) (1,470) (20,967) 23,633 (31) (12,174) (412) (1,913) 69 (1,844) — (1,844) — (1,844) (1,785) 9,674 (3,516) 6,158 — 6,158 1,077 5,081 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes an addition 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 an addition 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-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 742 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million Underlying income statement (condensed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit/(loss) from continuing operations Net profit/(loss) from discontinued operations Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent 2019 Santander Corporate & Wealth Investment Management & Insurance Banking (SCIB) Santander Global Platform 2,728 1,520 689 289 5,226 570 1,199 117 340 375 549 149 (13) 2,226 1,060 Retail Banking 32,862 8,561 872 303 42,598 Corporate Centre (1,252) (50) (296) (18) (1,616) Total 35,283 11,779 1,531 901 49,494 (18,926) (2,281) (955) (745) (373) (23,280) 23,672 (9,101) (1,619) 12,952 (4,047) 8,905 — 8,905 1,325 7,580 2,945 (155) (91) 2,699 (815) 1,884 — 1,884 171 1,713 1,271 23 (12) 1,282 (302) 980 — 980 51 929 315 (52) (5) 258 (95) 163 — 163 36 127 (1,989) 26,214 (36) (237) (2,262) 156 (2,106) — (2,106) (9) (2,097) (9,321) (1,964) 14,929 (5,103) 9,826 — 9,826 1,574 8,252 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 31 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 31 million mainly corresponding to the results by commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 743 Annual report 2020 Contents EUR million Underlying income statement (condensed) Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Profit/(loss) from continuing operations Net profit/(loss) from discontinued operations Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent 2018 Santander Corporate & Wealth Investment Management & Insurance Banking (SCIB) Santander Global Platform 2,461 1,534 898 184 5,077 (2,101) 2,976 (199) (97) 2,680 (832) 1,848 — 1,848 157 1,691 527 1,142 131 299 364 546 147 (11) 2,099 1,046 (873) 1,226 (10) (4) 1,212 (285) 927 — 927 52 875 (623) 423 (21) (4) 398 (125) 273 — 273 43 230 Retail Banking 31,976 8,331 609 343 41,259 (18,756) 22,503 (8,528) (1,789) 12,186 (4,002) 8,184 — 8,184 1,230 6,954 Corporate Centre (987) (68) 12 (14) (1,057) (426) (1,483) (115) (101) (1,699) 14 (1,685) — (1,685) 1 (1,686) Total 34,341 11,485 1,797 801 48,424 (22,779) 25,645 (8,873) (1,995) 14,777 (5,230) 9,547 — 9,547 1,483 8,064 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 113 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 113 million mainly corresponding to the results by commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. 744 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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 IFRS 8. For the purposes of these reconciliations, all material reconciling items are separately identified and described. Grupo Santander assets and liabilities for management reporting purposes do not differ from the statutory reported figures and therefore are not reconciled. EUR million 2020 Reconciliation of underlying results to statutory results Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Adjusted profit for the year from continuing operations Profit from discontinued operations (net) Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent Underlying results Adjustments Statutory results 31,994 10,015 2,187 404 44,600 (20,967) 23,633 (12,174) (1,785) 9,674 (3,516) 6,158 — 6,158 1,077 5,081 — — — (321) (321) (163) (484) (258) (11,008) (11,750) (2,116) (13,866) — (13,866) (14) (13,852) 31,994 10,015 2,187 83 44,279 (21,130) 23,149 (12,432) (12,793) (2,076) (5,632) (7,708) — (7,708) 1,063 (8,771) * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes an addition 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 an addition of EUR 50 million mainly corresponding to results from commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. Explanation of adjustments: • Adjustment to the valuation of goodwill arising from the Group's acquisitions in the amount of EUR -10,100 million, which is included in the line 'Other gains (losses) and provisions'. • Adjustment to the valuation of the deferred tax assets of the consolidated tax group in Spain in the amount of EUR -2,500 million, which is included in the 'Tax on profit' line. • Restructuring costs with a net impact of EUR -1,114 million, which are included for their gross amount mainly in the line 'Other gains (losses) and provisions'. • Other charges of EUR -138 million (related to sales of non- performing loans in Spain, cancellation of pension commitment costs and other expenses), which are recorded gross in 'Other gains (losses) and provisions', 'Net loan-loss provision' and 'Administrative expenses and depreciation and amortization'. 745 Annual report 2020 Contents EUR million 2019 Reconciliation of underlying results to statutory results Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent Underlying results Adjustments Statutory results 35,283 11,779 1,531 901 49,494 (23,280) 26,214 (9,321) (1,964) 14,929 (5,103) 9,826 1,574 8,252 — — — (265) (265) — (265) — (2,121) (2,386) 676 (1,710) 27 (1,737) 35,283 11,779 1,531 636 49,229 (23,280) 25,949 (9,321) (4,085) 12,543 (4,427) 8,116 1,601 6,515 * ** *** **** ***** Gains (losses) on financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. Additionally, includes a release of EUR 31 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 EUR 31 million mainly corresponding to results from commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations Explanation of adjustments: • Impairment of the goodwill assigned to Santander UK and • Provisions related to intangible assets and others, provisions for PPI in the UK, with a net impact of EUR -1,491 million and EUR -183 million, respectively, reflected in the line 'Other gains (losses) and provisions'. amounting to EUR -174 million, which are included for their gross amount in the line 'Other gains (losses) and provisions'. • Restructuring costs with a net impact of EUR -864 million, which are included in the line 'Other gains (losses) and provisions'. • Losses related to real estate assets and holdings in Spain with a net impact of EUR -405 million, which are included in the 'Other operating income' and 'Other gains (losses) and provisions' lines. • Capital gains on the sale of holdings in Prisma and on the integration of the custody business, with a net impact of EUR 136 million and EUR 693 million respectively, which are reflected at their gross amount in the line 'Other gains (losses) and provisions'. • Positive impact due to changes in tax regulations in Brazil for a net amount of EUR 551 million, which is included in the line "Tax on profit'. 746 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million 2018 Reconciliation of underlying results to statutory results Net interest income Net fee income Gains (losses) on financial transactions* Other operating income** Total income Administrative expenses, depreciation and amortisation Net operating income*** Net loan-loss provisions**** Other gains (losses) and provisions***** Operating profit/(loss) before tax Tax on profit Consolidated profit/(loss) Non-controlling interests Attributable profit/(loss) to the parent Underlying results Adjustments Statutory results 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 financial 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 financial assets and liabilities not measured at fair value through profit or loss, net, Gain or losses on financial assets and liabilities held for trading, net, Gains or losses on non-trading financial assets and liabilities mandatorily at fair value through profit or loss, net, Gain or losses on financial assets and liabilities measured at fair value through profit or loss, net, Gain or losses from hedge accounting, net and Exchange differences, 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 financial assets not measured at fair value through profit or loss and net gains and losses from changes line item in the statutory income statement. 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 of EUR 113 million mainly corresponding to results from commitments and contingent risks; Impairment of investments in joint ventures and associates, net; Impairment on non-financial assets, net; Gains or losses on non-financial assets, net; Negative goodwill recognized in results and Gains or losses on non-current assets held for sale not classified as discontinued operations. Explanation of adjustments: • Restructuring costs: The net impact of EUR -300 million on Profit attributable to the Parent, relates to restructuring costs in connection with the integration of Banco Popular, S.A.U., as follows EUR -280 million in Spain, EUR -40 million in corporate center and EUR 20 million in Portugal. The corresponding gross impacts are reflected on the “Other gains (losses) and provisions” line above. • Negative goodwill in Poland: The negative goodwill of EUR 45 million, relates to the acquisition of the banking and private banking business of Deutsche Bank Polska, S.A. 747 Annual report 2020 Contents 52. 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 significant influence 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 recognized. EUR million Assets Cash, cash balances at central banks and other deposits on demand 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 financial assets and liabilities and others Commission income Commission expense Other Financial guarantees granted and Others Loan commitments and Other commitments granted Derivative financial instruments 2020 Associates and joint ventures Members of the board of directors Executive vicepresident Other related parties 8,473 151 562 6,934 423 403 3,593 944 2,557 12 80 1,269 106 (8) 49 1,154 (32) 4,097 14 253 3,830 — — — — — — 4 — 4 — — — — — — — — 1 — 1 — 24 — — 24 — — 16 — 16 — — — — — — — — 1 — 1 — 95 — — 95 — — 159 — 159 — — 3 2 — — 1 — 52 3 13 36 748 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix EUR million Assets Cash, cash balances at central banks and other deposits on demand 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 financial assets and liabilities and others Commission income Commission expense Other Financial guarantees granted and Others Loan commitments and Other commitments granted Derivative financial instruments EUR million Assets Cash, cash balances at central banks and other deposits on demand 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 financial assets and liabilities and others Commission income Commission expense Other Financial guarantees granted and Others Loan commitments and Other commitments granted Derivative financial instruments 2019 Associates and joint ventures Members of the board of directors Executive vicepresident Other related parties 9,659 740 961 6,950 848 160 2,689 563 2,064 — 62 1,386 111 (15) 47 1,269 (26) 4,219 17 197 4,005 — — — — — — 41 — 41 — — — — — — — — 7 5 1 1 26 — — 26 — — 12 — 12 — — — — — — — — 3 2 1 — 104 — — 104 — — 57 — 57 — — 2 1 — — 1 — 49 38 6 5 2018 Associates and joint ventures Members of the board of directors Executive vicepresident Other related parties 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 30 — — 30 — — 12 — 12 — — — — — — — — 3 1 2 — 256 — — 256 — — 363 — 363 — — 31 14 (1) — 18 — 782 508 64 210 749 The remaining required information is detailed in notes 5, 14 and 46.c. Annual report 2020 Contents 53. Risk management a) Cornerstones of the risk function Grupo Santander´s risk principles below are compulsory. They comply with regulatory requirements and are inspired by best market practices: 1. All employees are risk managers. Employees must understand the risks inherent in their jobs, avoiding them wherever the impact is unknown or exceeds our risk appetite. 2. Engagement of top management, who must act and communicate to manage risks consistently, supervise our risk culture and make sure we keep our risk profile within our risk appetite. 3. Independent risk management and control functions, consistent with our model of three lines of defence. 4. A forward-looking, comprehensive approach to risk management and control for all businesses and risk types. 5. Detailed, timely information to detect, assess, manage and report risks to the appropriate level of management. Grupo Santander’s holistic control structure stands on these principles, plus a series of strategic tools and procedures embedded in group´s risk appetite statement, such as the risk profile assessment, scenario analysis, the risk reporting structure and the annual planning and budget process. 1. Main risks of the group's financial instruments Grupo Santander's classification of risks ensures effective risk management, control and reporting. Our risk framework distinguishes these key risk types: • Credit risk relates to financial loss arising from the default or credit quality deterioration of a customer or counterparty, to which Santander has directly provided credit or assumed a contractual obligation. • Market risk results from changes in interest rates, exchange rates, equities, commodities and other market factors, and from their effect on profit or capital. • Liquidity risk occurs if liquid financial resources are not enough to meet due obligations or can only be obtained at a high cost. • Structural risk relates to the changing value or margin of assets or liabilities in the banking book owing to changes in market factors and balance sheet behaviour. It includes risks from insurance, pension activities or an inadequate quantity or quality of capital to fulfil internal business objectives, regulatory requirements or market expectations. • Operational risk is the possibility of losses from inadequate or failed internal processes, people and systems or from external events. It includes legal risk and conduct risk. 750 • Regulatory compliance risk is the risk of not fulfilling legal and regulatory requirements and supervisors´expectations, and may lead to fines, financial penalties or other sanctions. • Model risk involves potential losses resulting from inaccurate predictions that lead to sub-optimal decision- making, or from a misuse or inadequate implementation of a model. • Reputational risk consists of potential losses from damage to its reputation amongst employees, customers, shareholders/investors and the wider community. • Strategic risk relates to losses or damage to the medium- and long-term interests of key stakeholders owing to strategic decision-making, poor execution of strategy or failure to adapt to external developments. Grupo Santander also considers environmental and climate- related risk drivers (whether physical or transition-led) as factors that could impact the exiting risks in the medium and long-term. 2. Risk governance Grupo Santander has a robust risk governance structure, aimed at ensuring the effective control of its risk profile in accordance with the risk appetite defined by the board of directors. The board of directors is responsible for approving the general framework for risk management and control. This governance structure 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. All led by the Group-wide risk culture, Risk Pro. 2.1 Lines of defense At Santander, we follow a three lines of defence model to ensure effective risk management and control: • First line: Businesses and functions that originate risks make up the first line of defence, which identifies, measures, controls, monitors and reports risks. It adheres to all risk management policies and procedures, making sure risks fit within risk appetite and other limits. • Second line: The Risk and Compliance & Conduct functions form the second line of defence to provide independent oversight and challenge to risk management decisions from the first line. The second line of defence ensures risks are managed according to risk appetite, strenghtening our risk culture across Grupo Santander. • Third line: The Internal Audit function is independent to assure senior management about the quality and effectiveness of internal controls, risk management. governance and systems, helping to safeguard our value, solvency and reputation. The Risk, Compliance & Conduct and Internal Audit functions are separate and independent. Each has its own direct access to the board of directors and its committees. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 2.2 Risk and Compliance committee structure The board of directors' duties include risk and compliance management and control. It regularly revises and approves risk appetite and frameworks, strengthening and promoting our risk culture. In its duties, the board is supported by the risk supervision, regulation and compliance committee and the Grupo Santander executive committee. The Group chief risk officer (Group CRO) is responsible for devising risk strategy, overseeing all risks, and challenging and advising business lines on their risk management. The Group chief compliance officer (Group CCO) promotes the adherence to rules, supervisory requirements, principles of good conduct and values. This role determines the compliance and conduct strategy, and independently oversees and challenges the compliance and conduct risk management of the first line of defence. Both the Group CRO and CCO have direct access, and report to, the risk supervision, regulation and compliance committee and the board of directors. The executive risk, risk control and general compliance committees are also at the top of Grupo Santander's risk and compliance governance, with authority delegated by the board of directors. Further detail is provided in the table below: Executive risk committee (ERC) Risk control committee (RCC) General compliance committee Duties: This committee is responsible for risk management duties delegated by the board, being authorized to accept, modify or scale those actions or transactions that may expose the entity to a relevant risk as well as the most significant models. It takes the highest-level risk-related decisions within the group’s risk appetite. This committee is responsible for risk control and for providing a holistic view of all risks. It determines if the risks business lines are being managed according to risk appetite. It also identifies, monitors and evaluates the impact of current and emerging risks on the group's risk profile. The committee is responsible for reviewing significant compliance and conduct risk events, and evaluating related measures. It devises and assesses corrective actions for compliance risks owing to shortcomings in management and control or new risks. Chair: CEO Composition: Group CRO Group CCO Nominated executive directors and other senior managers from the Risk, Finance and Compliance & Conduct functions (the Group CRO has veto power over committee resolutions). Senior managers from the Risk, Compliance & Conduct, Finance, Accounting and Management Control functions (CRO from subsidiaries regularly report on their own risk profiles). Senior managers from the Compliance & Conduct, Risk, Accounting and Management functions. The committee chair has a casting vote over committee resolutions. Risk functions have forums and regular meetings to manage and control the risks under their scope. Their responsibilities include: • Reporting to the Group CRO, Group CCO, the risk control committee and general compliance committee on risk management according to risk appetite. • Amid the covid-19 pandemic, coordination and communication with our subsidiaries is essential to making sure our actions were effective, underpinned by written communication, meetings, reporting and enhanced governance. In early March, we implemented specific weekly reporting mechanisms so all units could provide detailed, standardized information. • Monitoring each risk factor regularly. • Overseeing measures to meet supervisor and auditor expectations. Grupo Santander may set up additional governance for special cases. Grupo Santander monitored the pandemic intensively through special situation forums such as the credit risk war room, in addition to our regular governance framework. Close coordination between our subsidiaries and Group- wide and local contingency plans (including scenario analysis) strengthened resources and governance. As the crisis developed, it became a multidisciplinary task force composed of members from relevant functions to steer units in managing credit risk with these special work streams in place: i) monitoring and reporting; ii) sectorial intelligence; iii) portfolio management; iv) credit strategy; v) regulatory assurance; vi) credit forecasting and vii) collections and recoveries. 751 Annual report 2020 Contents • Furthermore, in view of Brexit, Grupo Santander and Santander UK set up steering committees and separate working groups to monitor the transition; develop contingency plans; and escalate and make decisions to minimise impact on our business and customers. 2.3 The Group’s relationship with subsidiaries regarding risk management In all Grupo Santander's subsidiaries, the risk and compliance management and control models are aligned with the frameworks established by the group’s board of directors. The local units adhere to them through their respective boards and adapt them to their own market conditions and regulation. As part of the aggregate supervision function for all risks, Grupo Santander challenges and validates subsidiaries’ policies and transactions. This creates a common risk management and control model across the group. In 2020, a new approach was taken in the relationship with the Group´s subsidiaries with the creation of three regions (Europe, North America and South America) and the appointment of three risk regional leaders. The aim is to enhance the identification of synergies under a common operating model and common platforms, leveraging the Group's global and regional scale, as well as simplifying processes and strengthening control mechanisms to support business growth while optimizing capital allocation and better serving Group´s customers. In this sense, each local CRO must regularly interact with, and report to, the risk regional leaders, the Group CRO and the Group CCO. Additionally, periodic follow-up meetings are held between the different risk areas and the local counterparts. Furthermore, the Group CRO, the Group CCO, and Risk Regional Leaders take part in appointments, target setting and local CRO evaluations and remuneration to make sure risks are appropriately controlled. Grupo Santander undertook various initiatives to enhance the relationship between the Group and its subsidiaries and apply an advanced risk management mode: • It is worth highlighting, the close collaboration in relation to covid-19 to share best practices, experiences, provide support in scenario analysis, additional provision estimations, etc. • Development of organizational structures, subsidiary benchmarks and a strategic vision of the Risk and Compliance function to promote the most advanced and efficient risk management infrastructures and practices. • Cooperation to share best practices, strengthen processes and drive innovation for a quantitative impact. • Identification of talent in the Risk and Compliance teams, encouraging international mobility through the global risk talent programme. • Risk Subject Matter Experts to bring together a community of specialists. 752 3. Management processes and tools Grupo Santander has these effective risk management processes and tools: 3.1 Risk appetite and structure of limits Risk appetite is the volume and type of risks deemed prudent to assume for the business strategy of the Group, even under unexpected circumstances. It considers adverse scenarios that could have a negative impact on capital and liquidity, profitability and/or the share price. The board sets the group's risk appetite statement (RAS) every year. The boards of Grupo Santander's subsidiaries also set their own risk appetites annually, in line with the consolidated Group-wide RAS. Each of those risk appetites cascades down into specific, detailed limits and policies based on risk type, portfolio and segment. Business model and risk appetite fundamentals Grupo Santander's risk appetite is consistent with the risk culture and its unique business model built on customer focus, scale and diversification. At the core of our risk appetite are: • A medium-low target risk profile that is predictable, centred on retail and commercial banking, internationally diversified operations and strong market share; • stable, recurrent earnings and shareholder remuneration, sustained by sound capital, liquidity and sources of funding; • self-run subsidiaries with their own sources of capital and liquidity and risk profiles that do not compromise Grupo Santander’s solvency; • an independent risk function with active senior management that embeds a strong risk culture and drives a sustainable return on capital; • a global, holistic view through extensive control and monitoring of risks, businesses and markets; • a focus on products the Group knows well; • A conduct model that protects Grupo Santander's customers; • A remuneration policy that reconciles employees and executives' interests to risk appetite and long-term results. Santander risk appetite principles The principles informing our risk appetite are: • The board and senior management's responsibility for risk appetite. • An enterprise-wide view, risk profile back-testing and challenge, using quantitative metrics and qualitative indicators. • A forward-looking approach based on plausible assumptions and adverse/stress scenarios to reflect our desired risk profile in the short and medium term. • Strategic and business plans embedded in daily management by policies and limits. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • Common standards aligning each subsidiary with Grupo 3.2. Risk profile assessment (RPA) Santander. • Regular reviews, regulatory requirements and best practices with mechanisms in place to keep the risk profile stable and mitigate non-compliance. Limits structure, monitoring and control Grupo Santander risk appetite is expressed in qualitative terms and limits structured on these five core elements. 1 Earnings volatility The maximum loss Grupo Santander can tolerate in an acute stress scenario. 2 Solvency • The minimum capital position Grupo Santander can tolerate in an acute stress scenario. • The maximum leverage we can accept in an acute scenario. 3 Liquidity • Minimum structural liquidity position. • Minimum liquidity horizon Grupo Santander is willing to accept in an acute stress scenario. • Minimum liquidity coverage position. Concentration 4 • Concentration in single names, sectors and portfolios. • Concentration in non-investment grade counterparties. • Concentration in large exposures. Non-financial risks 5 • Maximum operational risk losses. • Maximum risk profile. • Qualitative non-financial risk indicators: ◦ Fraud ◦ Technological ◦ Security and cyberrisk ◦ Reputational ◦ Others While risk appetite limits are regularly monitored, specialized control functions report on risk profile and compliance with limits to the board and its committees every month. Risk appetite limits cascade down to business units, risk types and portfolios. This makes risk appetite an effective tool for managing risks. Management policies and limits are directly based on the principles and limits in the risk appetite statement. Key 2020 developments Grupo Santander thoroughly reviewed the impact of covid-19 and the adequacy of our risk appetite to cope with the new environment. Risk appetite limits remained broadly unchanged despite extraordinarily challenging conditions. Management focused on enhancing control over market volatility, better representation and visibility of emerging risks such as cyber security and other non-financial risks. Grupo Santander´s risk appetite statement also strengthened its commitment to corporate social responsibility (CSR), the environment and the Paris Agreement's transition to a low- carbon and climate-resilient economy. Grupo Santander routinely identifies risk types to systematically and objectively evaluate its risk profile. This helps address major threats to is business plan and strategic objectives. Risk identification results inform Group´s risk profile assessment (RPA), which involves all lines of defence. It reinforces Group´s risk culture in analysing how risks evolve and identifying improvement areas. Grupo Santander´s RPA methodology covers these areas: • Risk performance, to understand residual risks by type with international standard and indicators. • Control environment, to measure the target-operating model of Grupo Santander's advanced risk management according to regulatory requirements and best market practices. • Forward-looking, based on stress metrics and top risks to the strategic plan. In 2020, Grupo Santander upgraded its control environment standards and reviewed risk performance metrics, focusing on strategic, compliance and conduct metrics. The inclusion of the 'control score' in the non-financial risks control environment enabled the Group to better capture its risk profile. Covid-19 had a negative impact on Grupo Santander's risk performance. In triggering all scenarios the Group consider (including those most severe), it led to a higher risk profile, driven by higher provisions and budgetary deviations with respect to profits. Non-financial risk profile remained stable, with operational losses below 2019 figures, and better liquidity performance. The impact of covid-19 as a catalyst for relevant and emerging risks was also key in the deterioration of our risk profile in 2020. This deterioration has been contained by a solid control environment, especially in credit risk, driven by ATOMiC and collections and recovery preparation plans. All of this has allowed us to maintain our risk profile at a 'medium- low' level. 3.3. Scenario analysis The scenarios that Grupo Santander analyse include macroeconomic and other variables that can affect the risk profile in those markets in which Grupo Santander operate. Scenario analysis is a useful tool for managing risks at all levels, so Grupo Santander can gauge our resilience under stressed conditions and formulate mitigating actions on income, capital and liquidity if needed. For this, the Research and Public Policy team is key in defining scenarios, as well as our governance and control, including the review of our top management and the three lines of defence. Grupo Santander's scenario analyses are consistent and robust because the Group: • Creates and runs models that estimate how metrics such as credit losses will perform in the future. • Back-tests and regularly challenges model results. 753 Annual report 2020 Contents • Relies on expert opinions and a vast understanding of our portfolios. • Exerts robust control over models, scenarios, assumptions, results and mitigating management actions. Grupo Santander has recurrently achieved excellent quantitative and qualitative results in the European Banking Authority (EBA) stress tests. The global economic uncertainty caused by the covid-19 crisis made it exceptionally difficult for businesses to plan ahead. Our scenario analyses were key in identifying new action points, developing business responses, adjusting our risk strategy and preserving our strength and solvency. - IFRS 9. Since 1 January 2018, regulatory provision requirements have included scenario analyses in related processes, models and methodologies. - Credit and market risk stress test exercises not only as a response to regulatory exercises but also as a key tool integrated in Grupo Santander’s risk management. Amid the covid-19 pandemic and following supervisory guidelines, the Research department created a set of additional macroeconomic scenarios under a long-term stable outlook approach to account for the observed worsening in most indicators and assess expected losses. Grupo Santander developed the scenarios through a robust process with great effort from the teams involved, ensuring their consistency. Applications of scenario analysis 3.4. Risk Reporting Structure (RRS) Grupo Santander run scenario analysis at all levels under a forward-looking approach that helps Grupo Santander anticipate potential impacts on its solvency or liquidity. Grupo Santander run a systematic review of our risk exposure under a baseline scenario and various adverse and favourable scenarios. Grupo Santander´s reporting continues to streamline processes, controls and reports to senior management. The Enterprise Wide Risk Management team updates and compiles the risk profile overview under a forward-looking approach so senior management can assess actual and future risks and take appropriate actions. Scenario analysis forms an integral part of several key Group processes: • Regulatory exercises under the guidelines of the EU supervisor and national supervisors. • Internal capital adequacy assessment (ICAAP) and liquidity assessment (ILAAP), for which Grupo Santander follows its own methodology to assess capital and liquidity under stress scenarios and support planning and management. There are three main types of risk reports: the weekly and monthly risk reports distributed to senior management; subsidiaries’ risk reports; and reports on each risk factor identified in the risk framework. Grupo Santander's strong risk reporting structure is characterized by: • Balancing data, analysis and qualitative comments, including forward-looking measures, risk appetite alerts, limits and emerging risks. • Risk appetite, which includes stressed metrics to set the • Covering all risk factors in the risk framework. • Combining a holistic and reliable view with deeper analysis of each risk factor, our subsidiaries and markets. • Following the same structure and criteria and provides a consolidated view to analyse all risks. • Following risk data aggregation (RDA) criteria to report on metrics, ensuring data quality and consistency. To respond to the covid-19 crisis, the reporting function, as acknowledged by the ECB's Single Supervisory Mechanism (SSM), increased the frequency, customized reports and produced new ones for the board and senior committees. It focused on critical topics such as macroeconomic conditions, health indicators, customer support measures and risk areas to enable close monitoring and easier decision-making. maximum risk we can assume. The risk appetite and capital and liquidity scenario exercises are closely interrelated but have different frequencies and granularity. • Climate change analyses to identify scenarios of risks and opportunities. Pilot analyses are covering the wholesale portfolio. • Recurrent risk management: - Budget and strategic planning: when implementing a new risk approval policy, in Grupo Santander’s risk profile assessment by senior management or when monitoring specific portfolios or lines of business - The systematic process of identifying and analysing our top risks, each of which is associated with a macroeconomic or idiosyncratic scenario to assess their potential impact. - The recovery plan, which is drawn up every year to determine Grupo Santander’s tools to overcome an extremely severe financial crisis. The plan provides financial and macroeconomic stress scenarios with degrees of severity as well as idiosyncratic and systemic events. 754 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix b) Credit risk 1. Introduction to the credit risk treatment Credit risk refers to a potential financial loss from the default or credit quality deterioration of a customer or other third party with whom Grupo Santander has a contractual obligation. It is our most important risk, both in terms of exposure and capital consumption. It also includes counterparty risk, country risk and sovereign risk. Credit risk management Grupo Santander identifies, analyses, controls and decides on credit risk based on holistic view of the credit risk cycle, which includes the transaction, the customer and the portfolio. Business and risk areas and top managers are part of this process. Credit risk identification is key to managing and controlling Grupo Santander's portfolios effectively. Grupo Santander classify external and internal risks in each business and adopt corrective and mitigating measures when needed through these processes: 1.1. Planning Grupo Santander´s planning helps to set business targets and define specific action plans within our risk appetite framework. Strategic commercial plans (SCP) are a management and control tool the business and risk areas prepare for Grupo Santander's credit portfolios. They determine commercial strategies, risk policies, resources and infrastructure, ensuring a holistic view of the portfolios. They provide managers with an updated view of credit portfolio quality to measure credit risk, run internal controls over the defined strategy coupled with regular monitoring, detect significant deviations in risk and potential impacts, and take corrective actions when necessary. They also align with Grupo Santander's risk appetite and its subsidiaries’ capital targets, and are approved and monitored by senior managers at each subsidiary before being reviewed and validated by Grupo Santander. 1.2. Risk assessment and credit rating To analyse customers’ ability to meet contractual obligations, Grupo Santander uses valuation and parameter estimation models in each of the segments. Grupo Santander's credit quality valuation models are based on credit rating drivers, which Grupo Santander monitors to calibrate and adjust the decisions and ratings they assign. Depending on each segment, drivers can be: • Rating: from mathematical algorithms that have a quantitative model based on balance sheet ratios or macroeconomic variables, and a qualitative module supplemented by the credit analyst’s expert judgement. It is used for SCIB, corporate, institutional and SME segments (with individualised treatment). • Scoring: an automatic system to evaluate credit applications that assigns an individual score to customers for subsequent decision-making, generally in the retail and smaller SME segments. Grupo Santander's parameter estimation models follow econometric models built on Grupo Santander's portfolios' historical defaults and losses. Grupo Santander uses them to calculate economic and regulatory capital as well as IFRS 9 provisions for each portfolio. Grupo Santander regularly monitoring and evaluate models' appropriateness, predictive capacity, performance, granularity, compliance with policies and other related factors. Grupo Santander reviews ratings with the latest available financial and economic information. Grupo Santander has also increased the reviews for customers who are under closer observation or have automatic warnings in the risk management systems. 1.3. Credit risk mitigation techniques We approve risks generally on the basis of borrowers’ ability to pay in fulfilment of financial obligations, notwithstanding any additional collateral or personal guarantees we can require from them. To determine this, we analyse funds or net cash flows from their businesses or income with no guarantors or the assets pledged as collateral. We always consider guarantors and collateral when deciding to approve a loan as a secondary means of recourse if the first channel fails. In general, a guarantee is as a reinforcement measure added to a credit transaction to mitigate a loss due to a failure to meet a payment obligation. Grupo Santander has credit risk mitigation techniques for various types of customer and products. Some are for specific transactions (e.g., property) while others apply to a series of transactions (e.g., derivatives netting and collateral). Grupo Santander can be grouped into personal guarantees, guarantees in the form of credit derivatives or collateral. 1.4. Definition of limits, pre-classifications and pre-approvals Grupo Santander uses SCPs to manage credit portfolios, defining limits for each of them and for new originations, in line with the Group´s credit risk appetite and its target risk profile. Transposing the risk appetite to portfolio management strengthens controls over our credit portfolios. Grupo Santander´s limits, pre-classifications and pre- approvals processes determine the risk we can assume with each customer. The business and risk areas set risk limits that are approved by the executive risk committee (or delegated committees) and should reflect a transaction’s expected risk- return Grupo Santander applies various limits models to each segment: • Large corporate groups: are subject to a pre-classification model based on a system for measuring and monitoring economic capital. Pre-classification models express the level of risk Grupo Santander is willing to assume in transactions with customers/groups in terms of capital at risk, nominal cap and maximum tenors. To manage limits with financial entities, Grupo Santander uses Credit Equivalent Risk (CER), which includes actual and expected 755 Annual report 2020 Contents subsidiaries in 2019. It helps set individual monitoring levels and frequencies, policies, and actions for customers based on credit quality and particular circumstances. In addition to monitoring customer credit quality, Grupo Santander defines control procedures to analyse portfolios and performance, as well as any deviations from planning or approved alert levels. 1.7. Recovery and collections management The Collections & Recoveries area carries out recoveries, which are important to risk management. It defines a global, enterprise-wide management strategy with guidelines and general lines of action for Grupo Santander's subsidiaries based on the economic environment. business model and other local recovery conditions. Recovery management follows regulatory requirements set out in the EBA Guidelines on the management of non-performing and forborne exposures. In addition, Grupo Santander applies specific policies on recovery management that include the principles of the different strategies. The Collections & Recoveries areas directly manage customers. As sustained value creation is based on effective and efficient collections, digital channels that develop new customer relations are gaining importance. Grupo Santander diverse customer base requires segmentation to manage recoveries appropriately. The highly technological and digital processes Grupo Santander follows help us attend to large groups of customers with similar profiles and products. Grupo Santander's personalized management, however, focuses on customer profiles that require a special manager and approach. Grupo Santander splits recovery management into four phases: arrears, non-performing loans, write-offs and foreclosed assets. Grupo Santander may uses mechanisms to rapidly reduce assets like sales of foreclosed assets or non- performing loans pool sales. Grupo Santander constantly seeks alternatives to legal action in order to collect debt. Grupo Santander includes debt instruments as written-off loans (even if they are not past-due) if an individual analysis of the solvency of a transaction and the borrower leads us to believe recovery is remote due to a notorious and unrecoverable impairment. Though this may lead to full or partial cancellation and de-recognition of the gross carrying amount of debt, it does not mean we interrupt negotiations and legal proceedings to recover debt. In countries with high exposure to real estate risk, we have efficient sales management instruments that help maximize recovery and optimize balance sheet stocks. risks with customers according to risk appetite and credit policies. • Corporates and institutions: that meet certain requirements (strong relationships, rating, etc.): Grupo Santander uses simpler pre-classification model with an internal limit. It establishes a reference point in a customer's level of risk based on repayment capacity, overall indebtedness and a pool of banks. Transactions with large corporates, corporates and institutions above certain limits or with special characteristics could require approval from a senior credit analyst or a committee. • For individual customers and SMEs with low turnover, Grupo Santander manages large volumes of credit transactions with automatic decision models to classify customers and transactions. 1.5. Scenario analysis Grupo Santander´s scenario analyses determine the potential risks in its credit portfolios and provide a better understanding of our portfolios' performance under various macroeconomic conditions. They allow us to anticipate management strategies that will avoid future deviations from defined plans and targets. They simulate the impact of alternative scenarios in portfolios’ credit parameters (PD, LGD) and expected credit losses. We compare findings with portfolios’ credit profile indicators to find the right measures for managers to take. Credit risk management of portfolios and SCPs incorporate scenario analyses. 1.6. Monitoring Regularly monitoring business performance and comparing it to pre-defined plans is key to our management of risk. Grupo Santander's holistic monitoring of customers helps detect impacts on risk performance and credit quality early. Grupo Santander assigns customers a classification with a pre- defined course of action and ad hoc measures to correct any deviations. Monitoring, which considers transaction forecasts and characteristics, in addition to changes in classification, is performed by local and global risk teams supported by the Internal Audit unit and is based on customer segmentation: • For SCIB, monitoring is initially a function of business managers and risk analysts who maintain direct relationships with customers, manage portfolios and provide Grupo Santander with an up-to-date view of customers’ credit quality to anticipate concerning situations. • For commercial banking, institutions and SMEs assigned a credit analyst, Grupo Santander tracks customers requiring closer monitoring and review their ratings based on relevant indicators. • Monitoring of individual customers, businesses and smaller SMEs follows a system of automatic alerts to detect shifts in portfolios’ performance. Monitoring uses the Santander Customer Assessment Note (SCAN) tool. Grupo Santander fully rolled it out in our 756 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 2. Main aggregates and variations Following are the main aggregates relating to credit risk from our activities with customers: Main credit risk performance metrics from activity with customers December 2020 data Non-performing loans (EUR million) 2019 2020 2018 22,792 13,796 23,519 25,287 14,824 16,651 2,455 3,202 1,584 1,496 2,938 2,025 405 1,529 913 5,688 3,429 2,051 93 5 344 2,416 2,786 1,834 1,447 3,165 2,331 389 2,244 2,739 2,279 1,317 3,510 2,688 450 1,787 2,043 834 6,972 4,727 1,947 171 4 138 822 6,639 4,418 1,925 179 4 252 Credit risk with customers * (EUR million) 2019 2018 2020 Europe Spain SCF UK Portugal Poland 722,429 221,341 104,032 263,671 40,693 31,578 722,661 688,810 213,668 105,048 275,941 37,978 33,566 227,401 97,922 252,919 38,340 30,783 North America 131,611 143,839 125,916 US SBNA SC USA Mexico 99,135 49,862 29,050 32,476 105,792 56,640 29,021 38,047 92,152 51,049 26,424 33,764 South America 129,575 143,428 138,134 Brazil Chile Argentina Santander Global Platform Corporte Centre Total Group 74,712 42,826 4,418 979 4,862 88,893 42,000 5,044 706 5,872 84,212 41,268 5,631 340 4,953 * Includes gross lending to customers, guarantees and documentary credits. Key figures by geographic region are described below: • Europe: the NPL ratio fell 10 bps to 3.15% from 2019 due to a significant reduction in non-performing loans in Spain and Portugal, offsetting the increase observed in the UK. • North America: the NPL ratio slightly increased 3 bps to 2.23% from 2019, due to the decline in total lending both in Mexico and SBNA, although the ratio declined in Santander US by 16 bps due to good performance in SC USA. In terms of NPL stock, a decrease of 7.2% was observed in the year. • South America: the NPL ratio decreased by 47 bps to 4.39%. In Brazil and Argentina, they dropped 73 bps and 128 bps respectively from 2019. However, they slightly increased in Chile (+15 bps vs 2019). 989,456 1,016,507 958,153 31,767 33,799 35,692 NPL ratio (%) 2019 2018 2020 3.15 6.23 2.36 1.21 3.89 4.74 2.23 2.04 0.81 5.26 2.81 4.39 4.59 4.79 2.11 0.51 7.08 3.21 3.25 6.94 2.30 1.01 4.83 4.31 2.20 2.20 0.69 6.16 2.19 4.86 5.32 4.64 3.39 0.63 2.34 3.32 3.67 7.32 2.29 1.08 5.94 4.28 2.79 2.92 0.88 7.73 2.43 4.81 5.25 4.66 3.17 1.21 5.09 3.73 757 Annual report 2020 Contents Information on the estimation of impairment losses Estimation of expected credit losses: The covid-19 health crisis has been unexpected, unpredictable and severe, but it is estimated to be of a temporary nature. Grupo Santander priority in these circumstances has been to look after the health of its employees, customers and shareholders, but also to help reduce the economic impact of the pandemic. This includes trying to offer the best solutions to help customers. Conceptually, the phases in managing the effects of covid-19 have been: – Identification of customers or groups affected or potentially affected by the pandemic. – Early relief of temporary financial difficulties caused by covid-19 through measures promoted by governments, central banks, and financial institutions. – Monitoring the evolution of customers, to ensure that they continue to be provided with the best solution for their situation, and also to guarantee that their potential impairment is correctly reflected in the risk management and accounting. This point is particularly relevant at the expiry of any moratorium or liquidity support measures to which customers may have availed themselves. – Monitoring is accompanied by recovery management activities when necessary. These conceptual phases do not occur sequentially but overlap in time. Additionally, the continuous interaction and coordination between the different subsidiaries is proving to be a fundamental asset in the management of this crisis. The experience obtained in the fight against the health crisis and its financial consequences in our different geographies, and the different speeds at which it has been developing in each of them, allow us to share the best practices identified and to implement in an agile and efficient manner those strategies and concrete actions that have been most successful, always adapted to the local reality of each market. Measures to support the economy In accordance with the comments made earlier regarding the relief of our clients' temporary financial difficulties caused by the pandemic, Grupo Santander has adopted measures to foster the economic resilience of our clients during the crisis in all regions. The most outstanding of these include the following: – Providing liquidity and credit facilities to companies facing difficulties. – Facilitate grace periods or moratoriums in many of their markets. – Optional, temporary increase of the limit on credit cards and overdrafts. – Support customers with potential difficulties (elderly, SMEs, etc.) by being proactive and trying to cover their needs. 758 – Temporary reduction or suspension of commissions (when withdrawing money from ATMs, on interest- free online purchases, on bank transfers...). – Guaranteeing covid-19 coverage in health insurance. – Advising clients in financial difficulties through specialised teams. Regarding the covid-19 pandemic, Grupo Santander has implemented measures in all its subsidiaries to provide liquidity and credit facilities, as well as to facilitate payment deferrals for people and businesses facing hardship. In relation to the specific liquidity measures, shortages or moratoriums, a series of support programmes have been implemented in accordance with the guidelines set by regulatory and supervisory authorities, as well as by governments, central banks and supranational entities. The main objective is to mitigate the temporary impact on the activity of customers. The absence of appropriate measures and their adequate prudential and accounting treatment could worsen the economic consequences of the crisis, generating procyclical effects that would lengthen its duration and impact. The different measures offered can be grouped into the following categories: – Government liquidity measures: Generally speaking, these are lending facilities provided by the bank to legal entities, which have government guarantees on a specific percentage of the exposure generated in the event of default. Examples of this type of measure include ICO (Instituto de Crédito Oficial) loans in Spain or the Paycheck Protection Program (PPP) in the United States. – Government moratorium measures: In this case, the government authorities define a series of requirements, which, in the event that they are met by the beneficiary, involve the granting of moratoriums by the bank on the payment of capital and/or interest on the various credit operations that customers may have contracted. The general expiration of the moratorium measures is short term. Some governments and institutions have re-extended the terms of the initial moratoriums, especially those that were launched in the very short term in the initial phase, with less visibility of the potential duration of the crisis, but re- extensions are also being short term. The specific characteristics of these programs vary depending on how they are defined by the national governments of the countries in which Grupo Santander operates. The criteria used to grant these loans also depend on the requirements established by the authorities of each country in accordance with the legislation in force in each case. – Internal/sectoral moratorium measures: This is, broadly speaking, the granting of moratoriums by the bank on the payment of capital and/or interest on the various credit operations that customers may have contracted. In this case, the specific characteristics of these measures, in terms of terms, amounts, etc., vary Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix according to each geography, product or customer segment in order to adapt them as best as possible to the reality of the local market and its regulation, as well as to the needs of the customer and the product contracted. In many cases, the general conditions of application have been agreed on a sectoral basis, for example through the national banking associations. – Other internal measures: This category includes all those measures not included in the previous sections. As regards the moratorium measures granted, it should be noted, as detailed below, that the amount amounted to EUR 112,000 million. Of these, around 63% corresponded to residential mortgages, mainly in the UK where the portfolio has a low average loan to value (<50%). The moratoriums granted on consumer loans (EUR 20bn; 18% of total) are mainly car loans . The granting of new moratoriums has slowed down in the second half of the year. The 79% of total moratoriums (EUR 89,000 million) have already expired by the end of December 2020, showing a good performance, with only 3% of them classified as stage 3 in accordance with IFRS 9. Estimation of expected loss In the context described in the previous sections, many regulators and supervisors have highlighted the uncertainties surrounding the economic impacts of the health crisis. This is also evident in the frequent updates of macroeconomic forecasts, with different perspectives and views on the depth and duration of the crisis. Thus, the guidance (including IASB, ESMA, EBA and ECB) does not set a mechanistic approach to estimating expected credit losses under IFRS 9, in order to prevent this variability in economic conditions from translating into volatility in results, with its potential pro-cyclical effects on the economy. Thus, Grupo Santander analyses losses under IFRS 9 on the basis of three types of elements: 1. Continuous monitoring of customers Monitoring the credit quality of customers may be more complex in the current circumstances, in the absence of certain contractual payments on transactions subject to a moratorium, however, the total amount of loans still subject to these measures has been significantly reduced during the year. This amount was around EUR 23,000 million at the end of December 2020, of which approximately 78% is secured. For such monitoring, and in addition to the application of internal customer monitoring policies, all available information should be used. The availability of information and its relevance is different in the various portfolios of the different countries in which Grupo Santander operates, but it may include, but is not limited to the following: – The payment of interest in the case of principal-only shortfalls. – The payment of other operations of the same client in the institution (not subject to moratorium). – Information on payment of loans in other entities (through credit bureaus). – Customer financial information: average balances in current accounts, availability/use of limits, etc. – Available behavioural elements (variables that feed the behavioural scores, etc.). – Information gathered from customer contacts (surveys, calls, questionnaires, etc.). This may include: customers who have taken up furlough programs, direct government aid, etc. 2. Forward-looking vision As reflected by the IASB, macroeconomic uncertainty makes the usual application of IFRS 9 expected loss calculation models difficult but does not exempt the incorporation of the prospective feature of the standard. To this end, the European Central Bank has recommended the use of a stable, long-term view (long-run) of the macroeconomic forecasts, which takes into account in the assessment the multiple support measures explained above. 3. Additional elements Additional elements will be required when necessary because they have not been captured under the two previous elements. This includes, among others, the analysis of sectors most affected by the pandemic if their impacts are not sufficiently captured by the macroeconomic scenarios. Also collective analysis techniques, when the potential impairment in a group of clients cannot be identified individually. With the elements indicated above, Grupo Santander evaluates in each of the geographical areas the evolution of the credit quality of its customers, for the purposes of their classification in Grupo Santander financial statements. In terms of classification, Grupo Santander has generally maintained the criteria and thresholds for classification during the pandemic, incorporating the regulatory interpretations of the effect of moratoria on classification (in particular, the European Banking Authority's 'Guidelines on legislative and non-legislative moratoria on loan repayments applied in covid-19 crisis'). In this way, moratoriums that meet the specifications of these guidelines are not considered as automatic indicators for identifying these contractual changes as forbearances or classifying them in stage 2. However, this does not exempt the rigorous application of IFRS 9 in the monitoring of customer credit quality and, using individual or collective analysis techniques, the timely detection of significant increases in risk in certain transactions or groups of transactions. Sound and accurate assessment of SICR has been one of the key areas of focus of the Group to identify and record any material increase in credit risk at an early stage. With that purpose, the SICR framework has not been relaxed due to covid-19 crisis. Not relying solely on conventional qualitative and quantitative triggers (e.g. days past due as a trigger), the determination of SICR has also been strengthened through collective assessments. This was done with the aim to responsibly anticipate the expected additional deterioration inherent to specific sector and client clusters, whose credit risk deemed to have increased, without the need to identify which individual client has suffered a SICR, avoiding “wait and see” approaches and ensuring that risks are adequately assessed, 759 Annual report 2020 Contents In addition, depending on the transactions credit quality, the exposure is divided into three categories according to Standard and Poor's ratings: Exposure and impairment losses by stage EUR million 2020 Credit quality ** Stage 1 Stage 2 Stage 3 Total From AAA to BB 489,518 9,124 — 498,642 From BB- to CCC 276,516 55,838 — 332,354 Default — — 30,436 30,436 Total exposure ** 766,034 64,962 30,436 861,432 Impairment losses*** 4,458 5,461 13,503 23,422 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees,technical guarantees and letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses by stage EUR million 2019 Credit quality ** Stage 1 Stage 2 Stage 3 Total From AAA to BB 552,763 5,532 — 558,295 From BB- to CCC 306,880 47,365 — 354,245 Default — — 31,363 31,363 Total exposure ** 859,643 52,897 31,363 943,903 Impairment losses*** 3,980 4,311 13,276 21,567 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees,technical guarantees and letters of credit), (including temporary asset acquisitions).+ loan commitments granted. Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses by stage EUR million 2018 Credit quality ** Stage 1 Stage 2 Stage 3 Total From AAA to BB 685,507 7,176 — 692,683 From BB- to CCC 222,495 47,439 — 269,935 Default — — 30,795 30,795 Total exposure ** 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. classified and measured in the balance sheet. Different assessments have been carried out for this purpose: (i) Top- down Unlikeliness to Pay analysis; (ii) Identification of high risk segments or vulnerable sectors; (iii) Stress on payment holidays; (iv) Surveys on payment capacity and (v) Stress of roll rates based on past delinquency indicators. Regarding moratoria measures, a rigorous identification and regular monitoring of customer credit quality and payment behavior have been performed and through specific individual or collective assessment, the timely detection of SICR have been assured. Grupo Santander, within its governance processes, deployed guidelines across all our subsidiaries to assure a coherent and homogeneous criteria and governance to manage the new treatment and specific impacts on provisions derived from the pandemic. Directions were provided regarding the calculation of the macroeconomic impact of the crisis through an overlay and potential collective assessments, considering incurred deterioration, as result of the covid-19 contingency. These documents also include monitoring guide in order to ensure the adequacy of the overlay and to anticipate any update if required. Details of the exposure by stage can be found in Notes 6, 7, 10, as well as in this note of these consolidated annual accounts. These Notes shows the levels of provisions for the year, which amount to EUR 12,173 million, including the provisions to cover the impact to date on expected losses resulting from the pandemic. Grupo Santander 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 financial asset is classified in accordance with IFRS 9. Then, considering the most relevant units of the Group (United Kingdom, Spain, United States, Brazil, also Chile, Mexico, Portugal, Poland, Argentina and Santander Consumer Finance), which represent approximately 96% of the total Group's provisions. The table below shows the impairment losses associated with each stage as of 31 December 2020, 2019 and 2018. 760                   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The remaining units that form the totality of the Group exposure, contributed EUR 98,121 million in stage 1, EUR 3,613 million in stage 2, and EUR 1,322 in stage 3 (In 2019 EUR 38,174 million in stage 1, EUR 442 million in stage 2, and EUR 1,056 million in stage 3 and in 2018 EUR 151,906 million in stage 1, EUR 700 million in stage 2, and EUR 1,743 million in stage 3), and impairment losses of EUR 180 million in stage 1, EUR 393 million for stage 2, and EUR 277 million in stage 3 (In 2019 EUR 264 million, EUR 306 million and EUR 91 and in 2018 EUR 152 million, EUR 163 million and EUR 1,145 million in stage 1, stage 2 and stage 3, respectively). The rest of the exposure, including all financial instruments not included before, amounts to EUR 478,093 (EUR 507,479 million in 2019), as this includes all undrawn authorized lines (loan commitments). In 2018, the rest of the exposure amounted to EUR 242,867 million, due to the fact that the undrawn authorized lines were included in the "Total Risk" reported in the previous tables. The reporting criterion was updated in 2019 with regards to the undrawn authorized lines in order to align the exposure figures reported in this section to the rest of the report. As of 31 December 2020, the Group had EUR 497 million net of provisions (EUR 706 million and EUR 757 million at 31 December 2019 and 2018, respectively) of purchased credit- impaired assets, which relate mainly to the business combinations carried out by the Group. Regarding the evolution of credit risk provisions, the Group, in collaboration with the main geographical areas, monitors them by carrying out sensitivity analyses considering changes in macroeconomic scenarios and main variables that have an impact on the financial assets distribution in the different stages and calculating credit risk provisions. Additionally, based on similar macroeconomic scenarios, the Group also performs stress tests and sensitivity analysis in a regular 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 deviation from the base scenario, considering both the macroeconomic developments in different scenarios and the three year evolution of the business. These tests include potentially adverse and favourable scenarios. The transactions classification into the different IFRS 9 stages is carried out in accordance with the regulation through the risk management policies of our subsidiaries, which are consistent with the risk management policies defined by the Group. In order to determine the classification in stage 2, the Group assesses whether there has been a significant increase in credit risk (SICR) since the initial recognition of the transactions, considering a series of common principles throughout the Group that guarantee that all financial 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 judgement of the analysts, who set the thresholds under an effective integration in management. All is implemented according to the approved governance. The establishment of judgements and criteria thresholds used by the Group are based on a series of principles, and develop a set of techniques. The principles are as follows: • Universality: all financial instruments subject to a credit rating must be assessed for their possible Significant Increment Credit Risk (SICR). • Proportionality: the definition of the SICR must take into account the particularities of each portfolio. • Materiality: its implementation must be also consistent with the relevance of each portfolio so as not to inclur in unnecessary costs or efforts. • Holistic vision: the approach selected must be a combination of the most relevant credit risk aspects (e.g. quantitative and qualitative). • Application of IFRS 9: the approach must take into consideration IFRS 9 characteristics, focusing on a comparison with credit risk at initial recognition, as well as considering forward-looking information. • Risk management integration: the criteria must be consistent with those metrics considered in the day-to-day risk management. • Documentation: Appropriate documentation must be prepared. The techniques are summarised below: • Stability of stage 2: in the absence of significant changes in the portfolios credit quality, the volume of assets in stage 2 should maintain a certain stability as a whole. • Economic reasonableness: at transaction level, stage 2 is expected to be a transitional rating for exposures that could eventually move to a deteriorating credit status at some point or stage 3, as well as for exposures that have suffered credit deterioration and whose credit quality is improving. . • Predictive power: it is expected that the SICR definition avoids, as fas as possible, direct migrations from stage 1 to stage 3 without having been previously classified in stage 2. • Time in stage 2: it is expected that the exposures do not remain categorized as stage 2 for an excessive time. The application of the aforementioned techniques, conclude in the setting of one or several thresholds for each portfolio in each geography. Likewise, these thresholds are subject to a regular review by means of calibration tests, which may entail updating the thresholds types or their values. Covid-19 credit risk management and customer support programmes In the context of the general response of Santander to the covid-19 pandemic, and specifically with the purpose to help the customers from the credit perspective and foster their economic resilience during the crisis, Grupo Santander implemented several actions in addition to those listed above, the following: 761 Annual report 2020 Contents Some policies disclosed by supervisors include the Bank of England measures to respond to the economic shock from Covid-19; EBA's Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of Covid-19 measures; and the Federal Reserve's SR 20-4 / CA 20-3 - Supervisory Practices Regarding Financial Institutions Affected by Coronavirus. In light of these statements, we accounted for deviations in local books based on stable long-term macroeconomic forecasts with a post model adjustment and a collective and/ or individual assessment to reflect reality and recognize expected credit losses on assets deemed subject to a significant increase in credit risk, without the need to identify individual financial instruments. The overlay was considered as the best option to recognize the increase in expected loss, as a mechanistic application of the Expected Credit Loss (ECL) methodology, which in the current context may have led to unpredictable results. The additional provisions associated to different macroeconomic scenarios were calculated using internal models; however an overlay over the monthly IFRS 9 calculation was considered, in order to enhance the oversight and control of the ECL estimation accuracy. In addition, the aforementioned scenarios considered to support the overlay calculation were based on a long-run approach, following the indications of numerous international organizations and supervisors. Amid maximum uncertainty, this long-term approach is to avoid volatility in provisions as a result of the sharp economic downturn, on account of the exceptional nature of the overlay and the battery of support economic measures taken by central banks and governments. In this regard, at the end of 2020, the Group has recorded an additional provision for impairment of financial assets at amortized cost the allowance for credit losses of EUR 3,105 million due to the effect of the covid-19 pandemic (EUR 622 million in stage 1, EUR 1,663 million in stage 2 and EUR 820 million in stage 3). • The severity of the pandemic's effects was significantly different depending on the economic sector. Consequently, Santander launched a process to identify those that could be more affected in order to focus credit risk management on them. • Due to the covid-19 crisis, great focus was placed on collections & recoveries readiness across Grupo Santander to deal with the impact expected on its portfolios once the support measures granted have expired. At 31 December 2020, Grupo Santander had granted payment moratoria to 4.8 million customers for an overall amount of EUR 112,000 million, which represents 12% of the lending portfolio. The payment moratoria distribution by business line can be observed in the following table: Clients (Million) Of which government programmes 0.7 0.5 3.9 1.0 0.2 0.1 4.8 1.6 Total amount (EUR million) Of which government programmes 69,938 56,936 19,951 4,060 21,948 9,182 111,837 70,178 % Lending portfolio 22 % 9 % 7 % 12 % Mortgages Consumer SME & Corporates Total At the end of 2020, 79% of total moratoria granted by the Group had expired and only 3% of the total was classified in stage 3. The following table shows the distribution by business line: EUR million Individuals Mortgages Consumer SME & corporates Total* Total moratoria 89,889 69,938 19,951 21,948 111,837 Total portfolio 543,321 312,949 230,372 336,489 879,810 Of which expired 72,662 55,020 17,642 15,847 88,509 * Total portfolio includes segmented exposure and excludes off-balance Over 60% of the outstanding loans under moratoria are mortgages. Total loans granted under government liquidity programmes amounted to EUR 38,314 million, with an average government guarantee coverage of 81%. Covid-19 overlay quantification Numerous international organizations and supervisors have underlined the importance of responsibly adapting and applying the accounting and prudential policies to the containment measures put in place to combat the effects of the covid-19 health crisis, which are of a temporary and exceptional nature. 762 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 3.Detail of the main geographical areas Following is the risk information related to the most relevant geographies in exposure and credit risk allowances. This information includes sensitivity analysis, consisting on simulations of +/-100 bp in the main macroeconomic variables. A set of specific and complete scenarios is used in each geography, where different shocks that affect both the reference variable as well as the rest of the parameters is simulated. These shocks may be originated by productivity, tax, wages or exchange and interest rates factors. Sensitivity is measured as the average variation on expected loss corresponding to the aforementioned scenarios. Following a conservative approach, the negative movements take into account one additional standard deviation in order to reflect the potential higher variability of losses. 763 Annual report 2020 Contents 3.1. United Kingdom Credit risk with customers in the UK (including Santander Consumer UK) decreased by 4.4% (+0.9% in local currency) year-on-year to EUR 263,671 million. Mortgage lending and loans to SME, supported by government-backed covid-19 measures were the key drivers of this YoY increase. UK portfolio accounts for 27% of Santander's loan portfolio. More than 320,000 customers (not including SCF UK) benefited from payment holidays, in line with the guidance issued by the Financial Conduct Authority (FCA). Customers applied for this facility generally for a three-month period, with the option of extending it for a further three months, if needed. The NPL ratio increased in 2020, to 1.21% (+20 bps vs year- end 2019), driven by adjustments made in the corporate and commercial banking segment to account for covid-19. Mortgage portfolio Because of its size, we closely monitor Santander UK’s mortgage portfolio for the entity itself and Grupo Santander. As of December 2020, it amounted to EUR 189,076 million, growing by +2.7% in local currency. It consists of first lien residential mortgages (no mortgages involve second or successive liens on properties). Mortgage lending growth was resilient after the market reopened in May. In the third quarter, the mortgage market was particularly active, due to pent up demand from the covid-19 lockdown and the temporary reduced stamp duty rates, which have led to improved new mortgage pricing. In accordance with Grupo Santander's risk management principles, all properties are appraised independently before new mortgages are approved. Property values used as collateral for granted mortgages are updated quarterly by an independent agency with an automatic appraisal system in line with market practices and legislation. Geographically, credit exposures are predominantly in the South East of the UK and the London metropolitan area. Information on the estimation of impairment losses The detail of Santander's UK exposure and impairment losses associated with each of the stages at 31 December, 2020, 2019 and 2018, is shown below. In addition, depending on the current operations credit quality, the exposure is divided in three categories according to Standard and Poor's ratings: Exposure and impairment losses by stage EUR million Credit quality * From AAA to BB From BB- to CCC Default Total exposure ** Impairment losses*** 2020 Stage 1 Stage 2 Stage 3 Total 184,065 2,227 34,965 16,814 — — 186,292 51,779 — — 3,229 3,229 219,030 19,041 3,229 241,300 223 557 668 1,448 * Detail of credit quality ratings calculated for Group management purposes. ** Credit to Customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Exposure and impairment losses by stage EUR million Credit quality * From AAA to BB From BB- to CCC Default Total exposure ** Impairment losses*** 2019 Stage 1 Stage 2 Stage 3 Total 238,985 2,032 40,281 12,543 — — 241,017 52,824 — — 2,821 2,821 279,266 14,575 2,821 296,662 117 470 588 1,175 * ** *** Detail of credit quality ratings calculated for Group management purposes. Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions and undrawn exposure) + loan commitments granted. Includes provisions for undrawn authorized lines (loan commitments). Exposure and impairment losses by stage EUR million 2018 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 225,929 1,900 From BB- to CCC 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. 764                   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The Government support measures taken in the United Kingdom in response to the covid-19 pandemic are detailed below: • The moratoriums granted initially had a term of 3 months. • In June the majority of the moratoriums started to expire and between June and July there were extensions of another 3 months worth some 11 billion euros so that from August onwards almost all that remained in force were extensions. • The government approved in October that moratoriums could continue to be applied for until March 31, 2021, as long as a client had not already exceeded 6 months of moratoriums in total. • The moratoriums granted entailed a deferral of principal and interest. At 31 December 2020, moratoriums had been granted to 323,265 customers, for a total amount of EUR 43,944 million, equivalent to 19.05% of the loan portfolio. The distribution of moratoriums by portfolio is shown below: EUR million Individuals Mortgages Consumer SME & corporates Total* Total moratoria 41,626 41,274 352 2,318 43,944 Total portfolio 194,783 188,255 6,528 28,918 223,701 Of which expired 38,850 38,544 306 2,253 41,103 * Total portfolio includes segmented exposure and excludes off-balance Of the total moratoriums expired at December 31, 2020, EUR 34,365 million were classified in stage 1, EUR 6,052 million in stage 2 and EUR 686 million in stage 3. At the end of 2020, 93.54% of total moratoria granted by the Group had expired and only 1.67% of those was classified in stage 3. Total loans granted under government liquidity programmes amounted to EUR 5,515 million, at 31 December 2020. The UK represents 13% of the total exposure in Bounce Back Loans (BBLS) that are 100% covered by the government's guarantee scheme. In relation to the overlay calculated to recognize the increase in expected loss due to the current situation of uncertainty, it has been calculated taking into account the adequate and accurate identification of those significant increases in risk (SICR) that may have occurred, not only based on quantitative and qualitative indicators but also through collective assessments as explained above in the section on estimation of expected loss in Grupo Santander. Of the total impairment credit losses, mainly EUR 505 million corresponds to the overlay calculated as of December 31, 2020 (EUR 17 million in stage 1, EUR 275 million in stage 2 and EUR 213 million in stage 3). 765 Annual report 2020 Contents For the estimation of expected losses, prospective information is taken into account. Specifically, Santander UK considers five macroeconomic scenarios, which are updated periodically. The evolution forecasted in 2020 for the next five years of the main macroeconomic indicators used by Santander UK to estimate expected losses is presented below: Variables Interest rate Unemployment rate Housing price change GDP growth 2021 - 2025 Pessimistic scenario 3 -0.10 % 8.42 % 0.86 % 0.28 % Pessimistic scenario 2 2.10 % 7.20 % 0.89 % 1.79 % Pessimistic scenario 1 0.26 % 5.98 % 1.00 % 1.71 % Base scenario 0.26 % 6.04 % 1.14 % 3.62 % Optimistic scenario 1 1.20 % 4.79 % 1.08 % 3.07 % The five-year projected development generated in 2019 to estimate the expected loss is shown below: Variables Interest rate Unemployment rate Housing price change GDP growth Pessimistic scenario 2 2.60 % 7.29 % -0.07 % 0.01 % Pessimistic scenario 1 1.80 % 5.08 % -0.01 % 0.01 % 2020 - 2024 Base scenario 0.85 % 4.03 % 0.02 % 0.02 % Optimistic scenario 1 1.75 % 3.14 % 0.04 % 0.02 % Optimistic scenario 2 1.90 % 2.57 % 0.06 % 0.03 % Each of the macroeconomic scenarios is associated with a given probability of occurrence. In terms of allocation, Santander UK associates the highest weighting to the base scenario, while it associates the lowest weightings to the most extreme or severe scenarios. In addition, at 31 December 2020, the weights used by Santander UK reflect 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: Pessimistic scenario 3 Pessimistic scenario 2 Pessimistic scenario 1 Base scenario Optimistic scenario 1 Optimistic scenario 2 2020 10 % 25 % 15 % 45 % 5 % — % 2019 0 % 15 % 30 % 40 % 10 % 5 % 2018 0 % 10 % 30 % 40 % 15 % 5 % In the case of Santander UK, the additional provisions for covid-19 were calculated using the own model. The sensitivity analysis of the main portfolios expected loss to variations of +/-100 bp for the macroeconomic variables used in the construction of the scenarios is as follows: GDP Growth -100 bp 100 bp Housing price change -100 bp 100 bp Unemployment rate -100 bp 100 bp Change in provision Mortgages Corporates 15.31 % -2.06 % 7.48 % -9.59 % 15.84 % -2.72 % 10.16 % -9.88 % -5.79 % 28.93 % -9.64 % 10.02 % With regards to the determination of classification in stage 2, the quantitative criteria applied by Santander UK are 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 PD used in that assessment are adjusted to the transaction's remaining term and also annualised in order to facilitate that the thresholds defined cover the whole range of the transactions maturity dates). 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 increases by 100% with respect to the PD at the time of initial recognition. The absolute threshold, on the other hand, is different for each portfolio depending on the characteristics of the transactions, ranging between 360 bp and 30 bp. 766 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix In addition, for each portfolio, a series of specific qualitative criteria is defined to indicate that the exposure has had a significant 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 significant increase in risk when it presents irregular positions for more than 30 days. These criteria depend on the risk management practices of each portfolio. 3.2. Spain Portfolio overview Santander España’s credit risk totalled EUR 221,341 million (22% of Grupo Santander’s total). It is appropriately diversified in terms of products and customer segments. In a backdrop of lower economic and credit growth, with a significant deterioration in macroeconomic figures after the covid-19 lockdown from March to May, new lending to consumers, SMEs and corporates increased, helped by Instituto de Crédito Oficial (ICO) financing lines and other liquidity programmes. Total credit risk increased by +3.6% compared to December 2019, including ICO loans by EUR 25.510 million. The total portfolio’s NPL ratio was 6.23%, 71 bp less than in December 2019, Fewer defaults reduced the ratio by 48 bp, due to overall better performance driven by customer support programmes, the cure of several restructured debts and portfolio sales. Additionally, this positive effect was helped by the aforementioned growth in the loan portfolio, which decreased the ratio by 21 bps. Additional provisions related to covid-19 increased the coverage rate to 47% (+6 p.p. vs. December 2019). Moreover, NPL reduction was mostly with loans with higher expected loss. Cost of credit reflects the higher provisions due to the pandemic. Information on the estimation of impairment losses The detail of Santander Spain exposure and impairment losses associated with each of the stages at 31 December, 2020, 2019 and 2018, is shown below. In addition, depending on the current credit quality of the operations, the exposure is divided in three categories according to Standard and Poor's ratings: Exposure and impairment losses per stage EUR million 2020 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 146,992 1,517 — 148,509 From BB- to CCC 40,630 11,541 — 52,171 Default — — 13,762 13,762 Total exposure ** 187,622 13,058 13,762 214,442 Impairment losses*** 479 732 5,277 6,488 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to Customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses per stage EUR million 2019 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 139,673 From BB- to CCC 42,603 1,315 9,115 — 140,988 — 51,718 Default — — 14,587 14,587 Total exposure ** 182,276 10,430 14,587 207,293 Impairment losses*** 296 503 5,195 5,994 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to Customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses per stage EUR million 2018 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 171,266 289 — 171,555 From BB- to CCC 25,108 12,603 — 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. The remaining legal entities to reach the entire portfolio in Spain contribute another EUR 5,693 million, EUR 445 million and EUR 237 million of exposure in 2019 and, EUR 125,544, EUR 66 and EUR 1,657 million in 2018 of exposure in stage 1, stage 2 and stage 3 respectively, and impairment losses in the amount of EUR 55 million, EUR 41 million and EUR 8 million in 2019 and EUR 132 million, EUR 48 million and EUR 957 million in 2018, in stage 1, stage 2 and stage 3, respectively. The real estate unit in Spain (UAI) was consolidated within Santander Spain in 2019, (this process was completed in 767       Annual report 2020 Contents 2020). Consequently, unlike in 2019 and 2018, in 2020 the perimeter is aligned. The Government support measures taken in Spain in response to the covid-19 pandemic are detailed below: • Moratoriums on mortgages were granted with moratoriums of up to 12 months, 25% of which were legislative moratoriums of 3 months, some of which were extended in the last quarter of the year. • The legal moratoriums granted entailed a deferral of principal and interest, unlike the sectoral moratoriums which only involved a deferral for principal. • In the consumer portfolio, moratoriums of up to 6 months were granted. For the estimation of the expected losses, the prospective information is taken into account. Specifically, Santander Spain considers three macroeconomic scenarios, which are updated periodically. The projected evolution for a period of five years of the main macroeconomic indicators used by Santander Spain for estimating expected losses is presented below: Variables Interest rate Unemployment rate Housing price change GDP growth 2020 - 2024 Pessimistic scenario Base scenario Optimistic scenario -0.12 % -0.12 % 13.71 % -0.26 % 11.65 % 1.62 % 0.77 % 1.61 % 0.80 % 9.59 % 3.22 % 2.34 % At 31 December 2020, moratoriums had been granted to 248,336 customers, for a total amount of EUR 9,438 million, equivalent to 4.70% of the loan portfolio. The distribution of moratoriums by portfolio is shown below: In the case of Santander Spain, the previously projected macroeconomic scenarios up to 2024 have been complemented with an additional scenario, the 'long-run' scenario, as indicated below. EUR million Individuals Mortgages Consumer SME & corporates Total* Total moratoria 9,267 7,828 1,439 171 9,438 Total portfolio 71,577 43,919 17,658 126,568 198,145 Of which expired 2,476 1,346 1,130 12 2,488 * Total portfolio includes segmented exposure and excludes off-balance Of the total moratoriums expired at 31 December 2020, EUR 1,921 million were classified in stage 1, EUR 374 million in stage 2 and EUR 193 million in stage 3. At the end of 2020, 26.36% of total moratoria granted by the Group had expired and only 7.74% of these was classified in stage 3. Total loans granted under government liquidity programmes amounted to EUR 25,510 million. Spain represents 67% of the Group's total exposure to government liquidity programs. It has the longest maturities (in both the SME and corporate segments) due to the nature of these legislative programs. In relation to the overlay calculated to recognize the increase in expected loss due to the current situation of uncertainty, it has been calculated taking into account the adequate and accurate identification of those significant increases in risk (SICR) that may have occurred, not only based on quantitative and qualitative indicators but also through collective assessments as explained above in the section on estimation of expected loss in Grupo Santander. Of the total impairment credit losses, EUR 466 million corresponds to the overlay calculated as of December 31, 2020 (EUR 37 million in stage 1, EUR 261 million in stage 2 and EUR 168 million in stage 3). Each 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: Pessimistic scenario Base scenario Optimistic scenario 2020 30 % 40 % 30 % 2019 30 % 40 % 30 % 2018 30 % 40 % 30 % Regarding the the long-run scenario used to calculate the post-model adjustment, the projected evolution of the main macroeconomic indicators for a period of five years is shown below: Variables Interest rate Unemployment rate Housing price change GDP growth Long-run scenario -0.29 % 14.35 % 1.20 % 0.79 % The sensitivity analysis of the main portfolios expected loss to variations of +/-100 bp for the macroeconomic variables used in the construction of the scenarios is as follows: GDP Growth -100 bp 100 bp Housing price change -100 bp 100 bp Change in provision Mortgages Corporate Rest 6.24 % 8.17 % 8.63 % -2.63 % -4.50 % -5.48 % 1.42 % 8.14 % 7.73 % -1.12 % -3.12 % -3.74 % 768 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix With regards to the stage 2 classification determination, the quantitative criteria applied in Santander Spain are based on identifying whether any increase in the PD for the expected lifetime of the transaction is greater than an absolute threshold. The threshold established is different for each portfolio based on the transactions characteristics, considering that a transaction is above this threshold when the PD for the life of the transaction increases by a certain quantity over the initial recognized PD. The values of these thresholds depend on their calibration, carried out periodically as indicated in the preceding paragraphs, which currently ranges from 25% to 1%, depending on the type of product and estimated sensitivity. In the case of non-retail portfolios, Santander Spain uses the transaction's rating as a reference for its PD, taking into account its rating at the time of origination and its current rating, setting absolute thresholds for the different rating bands that depend on each portfolio characteristics. A SICR implies changes in the rating value between 0.1 and 4, depending on the portfolio and the estimated sensitivity (from lower to higher credit quality, the rating range goes from 1 to 9.3). In addition, for each portfolio, a series of specific qualitative criteria are defined indicating that the exposure has had a significant 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 significant increase in risk when positions have been past due for more than 30 days. These criteria depend on the risk management practices of each portfolio. Residential mortgage portfolio Residential mortgages in Spain, including Santander Consumer Finance business, amounted to EUR 59,605 million in 2020 (EUR 62,236 million and EUR 63,290 million in 2019 and 2018,respectively), 99.35% of which have a mortgage guarantee (99.51% and 99.14% in 2019 and 2018, respectively). EUR million Home purchase loans to families Without mortgage guarantee With mortgage guarantee EUR million Home purchase loans to families Without mortgage guarantee With mortgage guarantee EUR million Home purchase loans to families Without mortgage guarantee With mortgage guarantee 2020 Gross amount Of which, non - performing 59,605 387 59,218 1,850 75 1,775 2019 Gross amount Of which, non - performing 62,236 306 61,930 2,649 14 2,635 2018 Gross amount Of which, non - performing 63,290 545 62,745 2,493 54 2,439 The mortgage portfolio for the acquisition of homes in Spain is characterised by its medium-low risk profile, which limits expectations of any potential additional impairment: • 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 financing for first homes. • The average affordability rate stood at 27% (26% and 28% in 2019 and 2018, respectively). • The 86% of the portfolio has a LTV below 80% calculated as total risk/latest available house appraisal. 769 Annual report 2020 Contents 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): 2020 Loan to value ratio EUR million Gross amount Of which, watchlist /non-performing Businesses portfolio More than More than 40% More than 60% 80% and less than or equal to 100% and less than 80% and less than 60% Less than or equal to 40% 15,570 170 18,028 222 17,585 318 5,205 305 More than 100% 2,830 760 Total 59,218 1,775 Credit risk with SME and corporates amounted to EUR 149,646 million. Accounting for 68% of total credit risk, this is Santander Spain's main lending segment. Most of the portfolio corresponds to customers with an assigned credit analyst to monitor their loans throughout the risk cycle. The portfolio is highly diversified and not concentrated in any sector. The NPL ratio of this portfolio ended the year at 6.13% (compared with 9.73% and 27.58% at December 2019 and 2018, respectively) 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 32.95% (35.31% and 35.27% in 2019 and 2018, respectively). 2020 Excess of gross exposure over maximum recoverable amount of effective collateral Specific allowance 397 20 70 58 EUR million 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 Gross amount 2,871 176 924 Memorandum items: Data from the public consolidated balance sheet EUR million Total loans and advances to customers excluding the Public sector (business in Spain) (Book value) Total consolidated assets (Total business) (Book value) Impairment losses and credit risk allowances. Coverage for unimpaired assets (business in Spain) 2020 Carrying amount 237,165 1,508,250 1,591 The portfolio’s NPL ratio stood at 7.04% in December 2020. Even though total risk decreased, the NPL ratio fell by 21 bp compared to December 2019 owning to better performance driven by customer support programmes, the cure of several restructured exposures in corporates and portfolio sales. 2020 growth was mainly focused in liquidity support programs (ICO). Real estate activity The Real Estate Unit in Spain (UAI) was consolidated within Santander Spain in 2019, (this process was completed in 2020). The part of the portfolio resulting from the past financial crisis and the new business that is identified as viable should be differentiated. In both cases, Santander has specialized teams that are not only part of the Risk function but that supplement the management of this exposure and cover the whole life-cycle of these transactions: commercial management, legal treatment and eventually, collections and recoveries. 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: EUR million Balance at beginning of year Foreclosed assets Reductions* Written-off assets Balance at end of year 2020 2019 2018 2,939 4,812 6,472 (100) (29) (6) (24) (38) 2,871 (1,685) (1,267) (159) 2,939 (293) 4,812 * Includes portfolio sales, cash recoveries and third-party subrogations and new production. 770   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix At year-end, the concentration of this portfolio was as follows: EUR million 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 2020 164 2,707 1,454 844 610 1,185 1,124 61 68 44 24 2,871 In the case of construction-phase projects that are experiencing difficulties 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 effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.). For the new post-crisis real estate business production, the admission processes are managed by specialized teams that work in direct coordination with the commercial teams, with clearly defined policies and criteria: The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria: • Property developers with a robust solvency profile and a proven track record in the market. • Medium-high level projects, conducting to contracted demand and significant cities. 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 senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified. • Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc. • Support of financing of government-subsidised housing, with accredited sales percentages. As has already been disclosed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing 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 classified as urban or approved for development. The significant reduction of exposure in the case of residential financing 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 specific 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. • Restricted financing 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 specific 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 2020, the net balance of these assets amounted to EUR 3,962 million (gross amount: EUR 7,937 million; recognised allowance: EUR 3,975 million, of which EUR 2,834 million related to impairment after the foreclosure date). 771 Annual report 2020 Contents 2020 Gross carrying amount Valuation adjustments Of which impairment losses on assets since time of foreclosure Carrying amount 6,810 3,568 2,563 3,242 2,140 527 1,613 178 178 — 4,492 1,656 2,836 892 235 7,937 846 171 675 70 70 — 2,652 888 1,764 305 102 3,975 644 130 514 36 36 — 1,883 559 1,324 200 71 2,834 1,294 356 938 108 108 — 1,840 768 1,072 587 133 3,962 The following table shows the detail of the assets foreclosed by the businesses in Spain at the end of 2020: EUR million Property assets arising from financing 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 addition, the Group has shareholdings in entities holding foreclosed assets amounting to EUR 961 million (mainly Project Quasar Investment 2017, S.L.), and equity instruments foreclosed or received in payment of debts amounting to EUR 66 million. In recent years, the Group has considered foreclosure to be a more efficient 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 qualified 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. 772 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The gross movement in foreclosed properties were as follows (EUR billion): EUR billion Exposure and impairment losses by stage EUR million 2019 2020 2019 2018 Credit quality * Stage 1 Stage 2 Stage 3 Total Gross additions Disposals Difference 3.3. United States 0.5 (0.9) (0.4) 0.7 (2.7) (2.0) 0.8 (1.8) (1.0) Santander US’s credit risk increased to EUR 99,135 million by the end of 2020. It represents 10% of Grupo Santander's total credit risk and includes these subsidiaries: Santander Bank National Association (SBNA) Santander Bank N.A.’s business is mainly retail and commercial banking. It accounts for 84% of Santander US's total credit risk, of which 39% is with individuals and approximately 61% with corporates. Its primary goals include increasing the SCIB business (16% of the portfolio) by enhancing customer experience and growing core customers and deposits through digital, branch and commercial transformation initiatives; leveraging its deposit base to support its commercial real estate businesses; and strengthening its auto finance partnership. The 12% decrease in lending in 2020 affected all segments. Minus the exchange rate effect, the drop was lower, standing at 4%. The NPL ratio increased to 0.81% (12 bp in the year) as of December 2020 and credit increased to 0.85% due to provisions stemming from the covid-19 pandemic. Information on the estimation of impairment losses The detail of Santander Bank, National Association exposure and impairment losses associated with each of the stages at 31 December, 2020, 2019 and 2018, is shown below. In addition, depending on the current credit quality of the operations, the exposure is divided in three categories according to Standard and Poor's ratings: Exposure and impairment losses by stage EUR million 2020 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB From BB- to CCC Default 18,105 24,380 — 1,778 2,977 — Total exposure** 42,485 4,755 — — 403 403 19,883 27,357 403 47,643 Impairment losses*** 344 316 42 702 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) +off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Excludes portfolio not segmented by rating (0.9%) Includes provisions for undrawn authorized lines (loan commitments). *** From AAA to BB 27,078 763 From BB- to CCC 32,273 3,964 Default — — Total exposure** 59,351 4,727 — — 419 419 27,841 36,237 419 64,497 Impairment losses*** 265 208 71 544 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) +off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions and undrawn exposures) + loan commitments granted. Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses by stage EUR million 2018 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 5,149 — From BB- to CCC 60,391 3,784 Default — — Total exposure** 65,540 3,784 — — 448 448 5,149 64,175 448 69,772 Impairment losses 233 204 105 542 * Detail of credit quality ratings calculated for Group management purposes. ** Amortised cost assets + loans and advances + loan commitments granted. The Government support measures taken in the United States in response to the covid-19 pandemic are detailed below: • There were no legislative moratoriums, all were sectoral. Mortgage moratoriums were granted for up to 12 months, while consumer moratoriums were granted for 1-3 months. • Once the latter expired, a new round of moratoriums of 1-3 months was granted. • The moratoriums granted entailed a deferral of principal and interest. As of 31 December 2020, SBNA had granted moratoriums to 39,235 customers, for a total amount of EUR 5,333 million, equivalent to 11.09% of the loan portfolio. The distribution of moratoriums by portfolio is shown below: EUR million Individuals Mortgages Consumer SME & corporates Total* Total moratoria 1,618 850 768 3,715 5,333 Total portfolio 16,332 7,466 8,866 29,411 45,743 Of which expired 1,369 677 692 3,428 4,797 * Total portfolio includes segmented exposure and excludes off-balance. 773 Annual report 2020 Contents Of the total moratoriums expired at December 31, 2020, EUR 2,980 million were classified in stage 1, EUR 1,694 million in stage 2 and EUR 123 million in stage 3. At the end of 2020, 89.96% of total moratoria granted by the Group had expired and only 2.56% of these was classified in stage 3. Total loans granted under government liquidity programmes in SBNA amounted to EUR 967 million. In relation to the overlay calculated to recognize the increase in expected loss due to the current situation of uncertainty, it has been calculated taking into account the adequate and accurate identification of those significant increases in risk (SICR) that may have occurred, not only based on quantitative and qualitative indicators but also through collective assessments as explained above in the section on estimation of expected loss in Grupo Santander. Of the total impairment credit losses, EUR 220 million corresponds to the overlay calculated as of December 31, 2020 (EUR 175 million in stage 1, EUR 30 million in stage 2 and EUR 15 million in stage 3). For the estimation of expected losses, prospective information is taken into account. Specifically, Santander Bank, National Association considers four macroeconomic scenarios, which are updated periodically. The evolution projected in 2020 for a period of five years of the main macroeconomic indicators used Santander Bank, National Association to estimate expected losses is presented below: Variables Interest rate (annual averaged) Unemployment rate House price change GDP growth The five-year projected development generated in 2019 to estimate the expected loss is shown below: Variables Interest rate (annual averaged) Unemployment rate House price change GDP growth 774 2021 - 2025 Unfavourable scenario 2 Unfavourable scenario 1 Base scenario Favourable scenario 0.78 % 5.83 % 2.67 % 3.05 % 0.27 % 7.34 % 2.17 % 2.76 % 0.63 % 5.21 % 3.40 % 2.60 % 0.99 % 4.36 % 3.79 % 3.40 % 2020 - 2024 Unfavourable scenario 2 Unfavourable scenario 1 Base scenario Favourable scenario 1.06 % 7.71 % 2.60 % 1.60 % 2.22 % 2.68 % 3.68 % 2.05 % 2.29 % -0.87 % 4.53 % 2.07 % 2.70 % -2.10 % 4.69 % 2.75 % Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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: 2020 2019 Pessimistic scenario 2 17.5 % 17.5 % Pessimistic scenario 1* 20 % 20 % Base scenario Optimistic scenario 32.5 % 32.5 % 30 % 30 % 2018 20 % n.a. 60 % 20 % * The exercise carried out in 2019 includes two adverse scenarios compared to one in 2018, due to the evolution of the local methodology. In the case of SBNA, no additional 'long-run' scenario was generated for the calculation of the post model adjustment, but the additional provisions for covid-19 were calculated using the own model. In relation to the Stage 2 classification determination, the quantitative criteria applied at SBNA for retail portfolios uses the FICO (Fair Isaac Corporation) score at the time of origination and its current value, establishing different absolute threshold for each portfolio according to their characteristics. A SICR implies changes in that score ranging from 120 b.p. to 20 bp In the case of some portfolios, the behaviour score supplements this criterion. In the case of non-retail portfolios, SBNA uses the transaction's rating as a reference for its PD, taking into account its rating at the time of origination and its current rating, setting absolute thresholds for the different rating bands that depend on each portfolio characteristics. A SICR implies changes in the rating value between 2 and 0.1, depending on the portfolio and the estimated sensitivity (from lower to higher credit quality, the rating range goes from 1 to 9.3). Additionally, for each portfolio, a series of specific qualitative criteria are defined, which indicate that the exposure has had a significant 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 significant increase in risk when it has arrears positions for more than 30 days. These criteria depend on the risk management practices of each portfolio. Santander Consumer USA SC USA presents higher risk indicators than other Santander US units due to the nature of its business. Its automobile financing business through loans and leases represents 97% of its revenues. It also has a smaller personal lending portfolio (3%). SC USA's focus remains on managing the relationship between profitability and risk through pricing while improving the dealer experience. In 2020, loan originations grew by more than 20% from 2019, mainly in the prime segment on the back of the commercial relationship we have had with Fiat Chrysler Automobiles (FCA Group) since 2013 (renewed in July 2019). Auto originations improved particularly in the third quarter as covid-19 restrictions were lifted and dealership activity returned to normal. Prime loans remained elevated from the prior year due to FCA Group incentive programmes. The NPL ratio dropped to 5.26% (-90 bp in the year). Cost of credit at the end of December stood at 8.09% (-133 bp in the year). Annual net credit losses decreased from last year due to the lower charge-offs resulting from covid-19 loan extensions, federal stimulus and higher recoveries driven by the higher auction prices. Furthermore, due to the decrease in NPL, the coverage ratio grew to 230% (+55 bp in the year). Leases carried out exclusively under the FCA Group agreement, primarily with highly creditworthy customers, decreased by 6% to EUR 13,903 million, providing stable and recurring earnings. The management and mitigation of residual value remains a priority. Information on the estimation of impairment losses The detail of Santander Consumer USA Holding Inc. exposure and impairment losses associated with each of the stages at 31 December 2020, 2019 and 2018, is shown below. In addition, depending on the current credit quality of the operations, the exposure is divided in three categories according to Standard and Poor's ratings: Exposure and impairment losses by stage EUR million 2020 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB From BB- to CCC Default Total exposure ** Impairment losses*** 1,689 12 21,491 4,831 — — 23,180 4,843 — — 1,019 1,019 1,701 26,322 1,019 29,042 911 1,820 726 3,457 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and Letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses by stage EUR million 2019 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB From BB- to CCC Default Total exposure ** Impairment losses*** 1,029 14 20,083 6,277 — — 21,112 6,291 — — 1,600 1,600 1,043 26,360 1,600 29,003 859 1,503 731 3,093 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and Letters of credit), (including temporary asset acquisitions) + loan commitments granted. Includes provisions for undrawn authorized lines (loan commitments). *** 775             Annual report 2020 Contents In SC USA, better performance than initially expected has been observed in the used car price indices (Manheim index) and customer impairment resulting from government assistance programs, thus counteracting this effect through an overlay reflecting possible reductions in the Manheim index and a levelling effect of impairment by applying historical levels of distribution by stage, which incorporates migrations of exposure and their respective reserves from stage 1 to stage 2 and stage 3. In relation to the methodology used to calculate impairment losses, Santander Consumer USA 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 is calculated by adding the estimated monthly expected losses for the entire life of the operation, unless the operation is classified 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 the transactions credit quality and the impairment losses projections so that transactions with better credit quality require a lower expected loss. Transactions credit quality, which is reflected in the internal rating associated to each transaction or client, is shown in the probability of default odf the transactions. For the expected losses estimation, prospective information should be taken into account. Specifically, Santander Consumer USA Holdings Inc. considers four macroeconomic scenarios, periodically updated over a 5-year time horizon. Exposure and impairment losses by stage EUR million 2018 Credit quality * Stage 1 Stage 2 Stage 3 From AAA to BB From BB- to CCC 224 — 20,313 6,600 Default Total exposure ** Impairment losses — 20,537 824 — 6,600 1,720 Total 224 26,913 2,218 29,355 — — 2,218 2,218 667 3,211 * Detail of credit quality ratings calculated for Group management purposes. ** Amortised cost assets + loans and advances + loan commitments granted. As of December 31, 2020, SC USA had granted moratoriums to 600,899 customers, for a total amount of EUR 8,912 million, equivalent to 30.68% of the loan portfolio. The distribution of moratoriums by portfolio is shown below: EUR million Individuals Mortgages Consumer SME & corporates Total Total moratoria 8,912 — Total portfolio 29,050 — 8,912 29,050 — — 8,912 29,050 Of which expired 8,005 — 8,005 — 8,005 Of the total moratoriums expired at December 31, 2020, EUR 6,280 million were classified in stage 1, EUR 1,770 million in stage 2 and EUR 554 million in stage 3. At the end of 2020, 89.82% of total moratoria granted by the SC USA had expired and only 6.92% of these was classified in stage 3. Given the nature of its business focused on auto financing for individuals, no loans were granted by liquidity programs in SC USA. In relation to the overlay calculated to recognize the increase in expected loss due to the current situation of uncertainty, it has been calculated on the basis of a macroeconomic effect, and taking into account the adequate and accurate identification of those significant increases in risk (SICR) that may have occurred, not only based on quantitative and qualitative indicators but also through collective assessments as explained above in the section on estimation of expected loss in Grupo Santander. Of the total impairment credit losses, EUR 702 million corresponds to the overlay calculated as of December 31, 2020 (EUR -104 million in stage 1, EUR 578 million in stage 2 and EUR 228 million in stage 3). 776       Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The evolution forecasted in 2020 for a period of five years of the main macroeconomic indicators used by in Santander Consumer USA Holdings Inc in the estimation of expected losses is shown below: Variables Interest rate (year averaged) Unemployment rate Housing price growth GDP Growth ManheimA index A. US used vehicle price car index. The five-year projected development generated in 2019 to estimate the expected loss is shown below: Variables Interest rate (year averaged) Unemployment rate Housing price growth GDP Growth ManheimA index A. US used vehicle price car index Unfavourable scenario 1 Unfavourable scenario 2 Base scenario Favourable scenario 2021 - 2025 0.78% 5.83% 2.67% 3.05% 1.60% 0.27% 7.34% 2.17% 2.76% 1.57% 0.63% 5.21% 3.40% 2.60% 1.61% 0.99% 4.36% 3.79% 3.40% 1.64% 2020 - 2024 Unfavourable scenario 1 Unfavourable scenario 2 Base scenario Favourable scenario 1.06 % 7.71 % 2.60 % 1.60 % -1.20 % 2.22 % 2.68 % 3.68 % 2.05 % 0.50 % 2.29 % -0.87 % 4.53 % 2.07 % 1.60 % 2.70 % -2.10 % 4.69 % 2.75 % 3.10 % Each of the macroeconomic scenarios is associated with a given probability of occurrence. Santander Consumer USA Inc. associates the highest weighting to the Base scenario, whereas it associates the lowest weightings to the most extreme or acid scenarios: 2020 2019 2018 The sensitivity analysis of the main portfolios expected loss to variations of +/-100 bp for the macroeconomic variables used in the construction of the scenarios is as follows: Change in provision SC Auto Pessimistic scenario 2 17.5% 17.5% 20.0% Manheim index Pessimistic scenario 1* 20.0% 20.0% n.a. Base scenario Optimistic scenario 32.5% 32.5% 60.0% 30.0% 30.0% 20.0% * The exercise carried out in 2019 includes two adverse scenarios compared to one in 2018, due to the evolution of the local methodology. In the case of SC USA, no additional 'long-run' scenario was generated for the calculation of the post model adjustment, but the additional provisions for covid-19 were calculated using the own model. -0.01 0.01 Unemployment Rate -0.01 0.01 House Price Change -0.01 0.01 GDP growth -0.01 0.01 1.91 % -1.21 % -4.29 % 6.48 % 3.22 % -2.06 % 3.11 % -1.94 % In relation to the stage 2 classification determination, the quantitative criteria applied at SC USA uses the FICO (Fair Isaac Corporation) score at the time of origination and its current value, establishing different absolute threshold for each portfolio according to their characteristics. A SICR implies changes in that score ranging from 100 bp to 60 bp. 777 Annual report 2020 Contents Additionally, for each portfolio, a series of specific qualitative criteria are defined, which indicate that the exposure has had a significant increase in credit risk, regardless of the evolution of its PD since the initial recognition. Santander Consumer USA Holdings Inc. among other criteria, considers that a transaction presents a significant 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. Banco Santander (Brasil) S.A. Economic growth had one of the most moderate declines in Latin America between March and April. Recovery started in May, owing to relaxed confinement measures, the reopening of businesses, fiscal and monetary stimuli, low inflation (4.5% in December vs 4% target), and an expansive monetary policy, with the official rate of interest at 2% from 4.50% at the end of 2019. Santander Brasil's credit risk amounted to EUR 74,712 million. It decreased by 16% from 2019. Minus the exchange rate effect, it grew by 19%. As of December 2020, Santander Brasil accounts for 8% of Grupo Santander's loan book. In line with strategy, growth was prominent in retail segments with a more conservative risk profile, driven by customer engagement and loyalty and by new business on digital channels, which significantly increased last year. The profitability of the SME portfolio increased significantly, boosted by an active loan origination under government programmes (EUR 1,790 million) to combat the pandemic that provided SMEs with liquidity to adapt to the new environment. A proactive credit risk management approach was key to achieving a profitable increase in market share, while credit quality indicators remained at moderate levels. Net loan-loss provisions stood almost flat at EUR 3,018 million (-0.6% compared to 2019), favoured by the exchange rate effect. In local currency, provisions grew +31% mainly driven by additional provisions related to covid-19. Cost of credit rose to 4.35% from 3.93% at the end of 2019, driven by the current convid-19 pandemic context, as well as the aforementioned provisions performance. 778 Information on the estimation of impairment losses The detail of Banco Santander (Brasil) S.Al exposure and impairment losses associated with each of the stages at 31December, 2020, 2019 and 2018, is shown below. In addition, depending on the current credit quality of the operations, the exposure is divided in three categories according to Standard and Poor's ratings: Exposure and impairment losses EUR million 2020 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 38,686 210 From BB- to CCC 26,166 5,942 — — 38,896 32,108 Default — — 3,428 3,428 Total exposure ** 64,852 6,152 3,428 74,432 Impairment losses*** 971 777 2,132 3,880 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses EUR million 2019 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 45,765 308 From BB- to CCC 32,698 5,393 — — 46,072 38,091 Default — — 4,727 4,727 Total exposure ** 78,463 5,701 4,727 88,891 Impairment losses*** 1,054 732 2,931 4,717 Detail of credit quality ratings calculated for Group management purposes. * ** Credit to customers (amortized cost and FV through OCI) + off balance sheet with customers (financial guarantees, technical guarantees and letters of credit), (including temporary asset acquisitions). Includes provisions for undrawn authorized lines (loan commitments). *** Exposure and impairment losses EUR million 2018 Credit quality * Stage 1 Stage 2 Stage 3 Total From AAA to BB 51,150 472 From BB- to CCC 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. The Government support measures taken in the Brazil in response to the covid-19 pandemic are detailed below: • The moratoriums for individuals were granted for a term of 2 months with an additional extension of one month.                   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix • In the case of legal entities, the moratoriums were for up to 6 months in line with BNDES (Banco Nacional de Desenvolvimento Econômico e Social) programs. These were granted slightly later than those granted to individuals. • The moratoriums granted entailed a deferral of principal and interest. As of 31 December 2020, moratoriums had been granted to 1,728,197 customers, for a total amount of EUR 6,369 million, equivalent to 9.45% of the loan portfolio. The distribution of moratoriums by portfolio is shown below: EUR million Individuals Mortgages Consumer SME & Corporates Total* Total moratoria Total portfolio of which: Expired 4,518 2,177 2,341 1,851 35,182 7,196 27,987 29,874 6,369 65,056 4,451 2,129 2,321 1,437 5,888 * Total portfolio includes segmented exposure and excludes off-balance Of the total moratoriums expired at 31 December 2020, EUR 4,448 million were in stage 1, EUR 1,037 million in stage 2 and EUR 403 million in stage 3. At the end of 2020, 92.44% of the total moratoriums granted by Brazil had expired and only 6.84% of these was classified in stage 3. Total loans granted by liquidity programmes in Brazil amounted to EUR 2,019 million as of 31 December 2020. In relation to the overlay calculated to recognize the increase in expected loss due to the current situation of uncertainty, it has been calculated on the basis of a macroeconomic effect, and taking into account the adequate and accurate identification of those significant increases in risk (SICR) that may have occurred, not only based on quantitative and qualitative indicators but also through collective assessments as explained above in the section on estimation of expected loss in Grupo Santander. Of the total impairment losses, EUR 523 million related to the overlay calculated at 31 December 2020 (EUR 243 million in stage 1, EUR 193 million in stage 2 and EUR 87 million in stage 3). For the expected losses estimation, prospective information is taken into account. Particularly, Santander Brazil considers three macroeconomic scenarios, periodically updated. The evolution for a period of five years of the main macroeconomic indicators used to estimate the expected losses in Santander Brazil is as follows: Variables Interest rate Unemployment rate Housing price change GDP Growth Burden income 2020 - 2024 Pessimistic scenario Base scenario Optimistic scenario 8.70 % 16.48 % -1.24 % -1.40 % 21.70 % 5.60 % 9.58 % 2.69 % 2.38 % 4.45 % 8.04 % 6.39 % 4.41 % 20.39 % 19.02 % In the case of Santander Brazil, the scenarios projected up to 2024 have been complemented with an additional scenario that counts with the appropriate extension to reflect loss materialization, taking into account the loan portfolios shorter average terms and the expected deterioration in the following periods. Each macroeconomic scenario is associated with a determined likelihood 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 2020 10 % 80 % 10 % 2019 10 % 80 % 10 % 2018 10 % 80 % 10 % Regarding the the additional scenario used to calculate the post-model adjustment, the projected evolution of the main macroeconomic indicators for a period of five years is shown below: Variables Interest rate Unemployment rate Housing price change GDP Growth Burden income 2020-2024 Pessimistic scenario Base scenario Optimistic scenario 5.97 % 18.00 % -0.88 % -1.62 % 22.30 % 4.25 % 12.34 % 1.84 % 1.40 % 20.80 % 4.25 % 12.34 % 1.84 % 1.40 % 20.80 % 779 Annual report 2020 Contents The sensitivity analysis of the main portfolios expected loss to variations of +/-100 bp for the macroeconomic variables used in the construction of the scenarios is as follows: Change in provision Consumer Corporate Rest The average evolution forecasted in 2020 for a period of five 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: GDP Growth -100 bp 100 bp Burden income -100 bp 100 bp Interest rate (Selic) -100 bp 100 bp 2021 - 2025 Pessimistic scenario Base Optimistic scenario scenario 0.89 % 1.66 % 0.75 % Variable -0.91 % -1.49 % -0.41 % Global GDP growth 3.03 % 3.39 % 3.56 % -0.82 % 1.61 % 1.56 % 0.69 % -0.43 % 1.49 % -1.43 % 2.11 % 0.55 % 8.42 % -0.29 % 1.54 % The five-year projected development generated in 2019 to estimate the expected loss is shown below: 2020 - 2024 Variable Pessimistic scenario Base Optimistic scenario scenario Global GDP growth 3.04 % 3.55 % 3.83 % Regarding the stage 2 classification determination, Santander Brazil uses the transaction's rating as a reference for its PD, taking into account its rating at the time of origination and its current rating, setting different thresholds that depend on each portfolio characteristics. SICR is determined by observing the rating's evolution, considering that a significant reduction has occurred when this decrease reaches values between 3.2 and 1, depending on the rating's value at the time of origination. In addition, for every portfolio, a set of specific qualitative criteria are defined to indicate that the exposure to credit risk has significantly risen, regardless of the evolution of its PD since the initial recognition. Santander Brazil, among other criteria, considers that an operations involves a significant 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. Regarding the the long-run scenario used to calculate the post-model adjustment, the projected evolution of the main macroeconomic indicators for the next five years is shown below: Variable Global GDP growth Long-run scenario 1.54 % Each macroeconomic scenarios is associated with a determined likelihood 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. Pessimistic scenario Base scenario Optimistic scenario 2020 30 % 40 % 30 % 2019 30 % 40 % 30 % 2018 20 % 60 % 20 % 3.5. Santander Corporate & Investment Banking The exposure detail and impairment losses presented for the main geographies includes the Santander Corporate & Investment Banking portfolios. 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 different geographies using their own macroeconomic scenarios. With regards to the stage 2 classification determination, SCIB uses the customer's rating as a reference for its PD, taking into account its rating at the time of origination and its current rating for each transaction, setting absolute thresholds for the different rating bands. A SICR implies changes in the rating value between 3.6 and 0.1, depending on the estimated sensitivity of each rating band (from lower to higher credit quality, the rating range goes from 1 to 9.3). 4. Other credit risk aspects 4.1. Credit risk by activity in the financial markets This section covers credit risk generated in treasury activities with customers, mainly with credit institutions. Transactions are undertaken through money market financial products with different financial institutions and through counterparty risk products, which serve the Group’s customer needs. According to regulation (EU) n.º 575/2013, counterparty credit risk, which includes derivative instruments, transactions with a repurchase obligation, stock and commodities lending, transactions with deferred repayment and financing of guarantees, arises from the likelihood that a 780 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix counterparty will default before the final settlement of the transaction's cash flows. 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 the Montecarlo simulation to calculate exposures for some countries and products. We also calculate capital at risk and unexpected loss, which is the difference between the economic capital, net of guarantees and recoveries, and expected loss. After market close, the exposures are recalculated by adjusting transactions to their new time frame, adapting potential future exposure and applying mitigation measures (netting, collateral, etc.) to control exposures directly against the limits approved by senior management. Grupo Santander runs risk control with an integrated system in real time that enables us to know the exposure limit with any counterparty, product and maturity and in any of Santander’s subsidiaries at any time. 4.2. Concentration risk Concentration risk control is a vital part of our management. The Group continuously monitors the degree of concentration of its credit risk portfolios using various criteria: geographic areas and countries, economic sectors and groups of customers. 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 effective management of the degree of concentration in Santander’s credit risk portfolios. Grupo Santander must adhere 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 associated customers will be considered a large exposure when its value is equal to or greater than 10% of eligible capital. In addition, in order to limit large exposures, no entity may assume exposures exceeding 25% of its eligible capital with a single customer or group of associated customers, having factored in the credit risk mitigation effect contained in the regulation. At the end of December, after applying risk mitigation techniques, no group reaches the above-mentioned thresholds. Regulatory credit exposure with the 20 largest groups within the scope of large risks represented 4.65% of the outstanding credit risk with customers (lending to customers plus off- balance sheet risks) as of December 2020. The detail, by activity and geographical area of the Group's risk concentration at 31 December 2020 is as follows: EUR million Central banks and Credit institutions Public sector Of which: Central government Other central government Other financial institutions (financial business activity) Non-financial companies and individual entrepeneurs (non-financial 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 December 2020 Spain 69,467 43,121 32,070 11,051 14,882 Other EU countries 49,359 30,571 28,988 1,583 37,661 America 75,831 83,960 74,032 9,928 27,883 Rest of the world 83,686 8,462 7,913 549 33,143 Total 278,343 166,114 143,003 23,111 113,569 400,329 125,608 85,897 131,578 57,246 19,105 5,723 232,469 143,032 501,901 324,193 160,037 17,671 3,921 2,924 59,037 59,726 86,076 60,556 17,881 7,639 3,531 1,864 48,120 32,382 93,301 34,102 57,033 2,166 5,631 798 86,515 38,634 6,022 137 38,797 12,290 112,954 209,570 38,762 69,263 4,929 190,773 15,860 2,937 392,107 1,460,256 339,154 296,789 432,206 * For the purposes of this table, the definition 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 financial guarantees given'. 781 Annual report 2020 Contents 4.3. Sovereign risk and exposure to other public sector entities Sovereign risk occurs in transactions with a central bank. It includes the regulatory cash reserve, issuer risk with the Treasury (public debt portfolio) and risk from transactions with government institutions whose funding only come from the state’s budgetary revenue and not commercial operations. The historic criteria of Grupo Santander can differ from regular EBA stress test standards. Though the EBA does include national, regional and local government institutions, it does not include deposits with central banks, exposures with insurance companies, indirect exposures via guarantees and other instruments. According to our management criteria, local sovereign exposure in currencies other than the official currency of the country of issuance is not significant (EUR 12,080 million, 3.8% of total sovereign risk). Furthermore, exposure to non- local sovereign issuers involving cross-border risk is even less significant (EUR 7,168 million, 1.8% of total sovereign risk). 25 Sovereign exposure in Latin America is mostly in local currency, and is recognised in the local accounts and concentrated in short- term maturities. Over the past few years, total exposure to sovereign risk has remained in line with regulatory requirements and our strategy to manage this portfolio. 2020 Portfolio The shifts in our sovereign risk in our countries is due to our liquidity management strategy and the hedging of interest and exchange rates risks. Santander's exposure spreads among countries with varied macroeconomic outlooks and dissimilar growth, interest and exchange rate scenarios. The shifts observed in the different countries exposure is due to our liquidity management strategy and the hedging of interest and exchange rates risks. Santander's exposure spreads among countries with varied macroeconomic outlooks and dissimilar scenarios in terms of growth, interest and exchange rates. Our investment strategy for sovereign risk considers country’s credit quality to set the maximum exposure limits: AAA AA A BBB Less than BBB 2018 2020 2019 18% 25% 25% 14% 18% 20% 24% 18% 15% 23% 11% 20% 31% 13% 25% 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 2020: Financial assets Financial assets at fair value through other comprehensive designated at fair value through profit or loss Non-trading financial assets Financial mandatorily at fair value through assets at profit or loss income amortized cost 4,100 (380) 249 — — (29) (1,672) 16 7 589 5,127 8,005 148 19 — 7,048 4,148 2,468 — — 1,687 612 10,263 121 9,501 17,281 10,256 6,732 397 3,776 13,097 4,962 1,298 — — 2,396 963 668 942 5,458 5,309 2,768 75 542 976 — — — — — — — — — — — — — — — Country Spain Portugal Italy Greece Ireland Rest Eurozone UK Poland Rest of Europe US Brazil Mexico Chile Rest of America Rest of the world Total 2019 2018 Total net direct exposure 35,366 49,640 8,689 2,735 — — 1,809 10,363 8,366 777 16,299 28,998 13,673 3,460 1,029 4,813 8,753 261 — — 2,778 10,869 11,229 329 8,682 27,054 10,415 1,776 893 6,222 Total net direct exposure 24,245 8,730 4,015 — — 4,054 (97) 10,947 1,070 15,548 27,717 21,029 6,955 958 4,752 16,179 74,290 39,454 — 129,923 136,377 138,901 25 Countries that are not considered low risk by Banco de España. 782 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 5. Forborne loan portfolio Grupo Santander's internal forbearance policy acts as a reference for our subsidiaries locally. It shares the principles of regulations and supervisory expectations. It includes the requirements of the EBA guidelines on management of non performing and forborne exposures. It defines forbearance as the modification of the payment conditions of a transaction to allow a customer experiencing financial difficulties (current or foreseeable) to fulfil their payment obligations. If forbearance is not allowed, there would be reasonable certainty that the customer would not be able to meet their financial obligations. In addition, this policy also sets down rigorous criteria for evaluating, classifying and monitoring forbearances to ensure the strictest possible care and diligence in recovering due amounts. Thus, it dictates that we must adapt payment obligations to customers' current circumstances. Our forbearance policy also defines classification criteria to ensure we recognize risks appropriately. They must remain classified as non-performing or in watch-list for a prudential period for reasonable certainty of repayment. Forbearances may never be used to delay the immediate recognition of losses or hinder the appropriate recognition of risk of default. Thus, we must recognize losses as soon as we deem any amounts irrecoverable. The forborne portfolio stood at EUR 29,159 million at the end of December 2020. In terms of credit quality, 51% of the loans are classified as non-performing loans, with average coverage of 43%. The following terms are used in Bank of Spain Circular 4/2017 of Bank of Spain with the meanings specified: • Refinancing transaction: transaction that is granted or used, for reasons relating to current or foreseeable financial difficulties 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 refinanced 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 financial difficulties of the borrower, the financial terms and conditions are modified 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 modification is envisaged in the agreement. 783 Annual report 2020 Contents CURRENT REFINANCING AND RESTRUCTURING BALANCES Amounts in EUR million, except number of transactions that are in units Without real guarantee Total With real guarantee 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 Impairment of accumulated value or accumulated losses in fair value due to credit risk — 40 615 — 21 22 — 17 565 — 9 123 — 7 38 — — 55 — 1 29 176,310 4,936 45,872 9,872 6,444 828 4,475 6,395 2,569,758 2,746,723 131 4,059 9,038 1,557 427,282 473,736 802 10,117 20,121 599 6,239 12,728 38 1,561 2,444 246 3,657 8,162 — — — — — — — Credit entities Public sector Other financial institutions and: individual shareholder Non-financial institutions and individual shareholder Of which financing for constructions and property development Other warehouses Total Financing classified as non- current assets and disposable groups of items that have been classified as held for sale In 2020, the amortised cost of financial assets whose contractual cash flows were modified during the year when the corresponding loss adjustment was valued at an amount equal to the expected credit losses over the life of the asset amounted to EUR 4,454 million, without these modifications having a material impact on the income statement. Also, during 2020, the total of financial assets that have been modified since the initial recognition, and whose correction for expected loss has gone from being valued during the entire life of the asset to the following twelve months, amounts to EUR 1,478 million. The transactions presented in the foregoing tables were classified at 31 December 2020 by nature, as follows: • Non-performing: Operations that rest on an inadequate payment scheme will be classified within the non- performing category, regardless they include contract clauses that delay the repayment of the operation throughout regular payments or present amounts written off the balance sheet for being considered irrecoverable. • Performing: Operations not classifiable as non-performing will be classified within this category. Operations will also will be classified as normal if they have been reclassified from the non-performing category for complying with the specific criteria detailed below: a) A period of a year must have expired from the refinancing or restructuring date. 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 refinancing 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 reclassification to the normal risk category. Attending to the credit attention 49% of the forborne loan transactions are classified 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 specific allowances (representing 28% of the total forborne loan portfolio and 43% of the non- performing portfolio) The table below shows the changes in 2020 in the forborne loan portfolio (net of provisions): EUR million Beginning balance Refinancing 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 Others variations Balance at end of year 2020 23,430 8,351 2,249 (5,449) (293) (1,314) (3,728) 20,997 784 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 2020 Without real guarantee Of which, non-performing/Doubtful With real guarantee Maximum amount of the actual collateral that can be considered Number of transactions Gross amount Number of transactions Real estate guarantee Rest of real guarantees — 19 323 — 1 12 — 9 358 — 3 79 — 3 26 103,692 3,160 31,861 6,147 3,944 3,838 1,299,317 1,403,351 — 50 1,762 4,935 — 1,023 148,862 181,090 509 3,831 10,060 — — 255 2,703 6,676 — — — 49 355 14 241 645 — Impairment of accumulated value or accumulated losses in fair value due to credit risk — 1 27 4,091 225 2,272 6,391 — c) Market, structural and liquidity risk 1. Activities subject to market risk and types of market risk Activities subject to market risk encompass transactions where risk is assumed as a consequence of potential changes in interest rates, inflation rates, exchange rates, stock prices, credit spreads, commodity prices, volatility and other market factors; the liquidity risk from our products and markets, and the balance sheet liquidity risk. Therefore, they include trading risks and structural risks. • Interest rate risk arises from changes in interest rates that could adversely affect the value of a financial instrument, a portfolio or the group as a whole. It affects loans, deposits, debt securities and most assets and liabilities in trading books and derivatives. • Inflation rate risk originates from changes in inflation rates that could adversely affect the value of a financial instrument, a portfolio or the entire group. It affects instruments such as loans, debt securities and derivatives, where returns are linked to future inflation values or a change in the current rate. • Exchange rate risk is the sensitivity to movements in exchange rates of a position’s value not denominated in the base currency. A long or open position in a foreign currency may produce a loss if it depreciates against the base currency. Exposures affected by this risk include non-euro investments in subsidiaries and transactions in foreign currency. • Equity risk is the sensitivity of the value of an open positions in equities to adverse movements in their market prices or future dividend expectations. This affects positions in shares, stock market indexes, convertible bonds and derivatives with shares as the underlying asset (put, call, equity swaps, etc.). • Credit spread risk is the sensitivity of the value of an open positions in fixed income securities or credit derivatives to movements in the credit spread curves or recovery rates associated with specific issuers and types of debt. The spread is the difference between financial instruments with a quoted margin over other benchmark instruments, mainly the internal rate of return (IRR) of government bonds and interbank interest rates. 785 Annual report 2020 Contents 1. Trading market risk management Setting market risk limits is a dynamic process that follows predefined risk appetite levels. It is part of senior management's annual limits plan that extends to all subsidiaries. The standard methodology for risk management and control in trading, measures the maximum expected loss with a specific level of confidence and time frame. The standard for historical simulation is a confidence level of 99% over one day. We apply statistical adjustments efficiently to incorporate recent developments affecting our levels of risk. Our time frame is two years or at least 520 days from the reference date of the VaR calculation. • Commodity price risk is the risk from changes in commodity prices. Our exposure to this risk is not significant, mainly coming from our customers’ derivative transactions in commodities. • Volatility risk is the sensitivity of the value of a portfolio to changes in the volatility of risk factors such as interest rates, exchange rates, shares and credit spreads. This risk is incurred by all financial instruments, in which volatility is a variable in valuation. The most significant case is the financial options portfolio. All these market risks can be partly or fully mitigated with derivatives such as options, futures, forwards and swaps. There are other types of market risk that require more complex hedging: • Correlation risk is the sensitivity of the portfolio to changes in the relationship between risk factors (correlation) of the same type (e.g., two exchange rates) or different types (e.g., an interest rate and the price of a commodity). • Market liquidity risk originates when Grupo Santander or a subsidiary cannot reverse or close a position without an impact on the market price or the transaction cost. 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. This risk could also increase depending on how exposures are distributed among products and currencies. • Pre-payment or cancellation risk originates when on- balance- sheet instruments (such as mortgages or deposits) may have options that allow holders to buy or sell them or alter future cash flows. Potential mismatches on the balance sheet pose a risk since cash flows may have to be reinvested at an interest rate that is potentially lower (assets) or higher (liabilities). • Underwriting risk arises from an entity’s involvement in underwriting or placing securities or other types of debt when it assumes the risk of having to acquire issued securities partially if they have not fully been taken up by potential buyers. • Balance sheet liquidity risk must also be considered. Unlike market liquidity risk, it is defined as the possibility of meeting payment obligations late or at an excessive cost. Losses may be caused by forced sales of assets or margin impacts due to the mismatch between expected cash inflows and outflows. • Pension and actuarial risks also depend on potential shifts in market factors. Further details are provided at the end of this section. Grupo Santander ensures make sure we comply with the Basel Committee’s Fundamental Review of the Trading Book and the EBA guidelines on balance-sheet interest-rate risk. Through several projects, Santander aims to provide risk managers and control teams with the best tools to manage market risks under the right governance framework for the models used, to report risk metrics, and help satisfy requirements on these risks. 786 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The balance sheet items in the Group’s consolidated position that are subject to market risk are shown below, distinguishing those positions for which the main risk metric is VaR from those for which risk monitoring is carried out using other metrics: Main market risk metric Balance sheet amount VaR Other Main risk factor for 'Other' balance 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 designated at fair value through other comprehensive income Financial assets at amortized 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 amortized cost Hedging derivatives Changes in the fair value of hedged items in portfolio hedges of interest rate risk Other liabilities Total liabilities Equity The following table displays the latest and average VaR values at 99% by risk factor over the last three years, the lowest and highest values in 2020 and the ES at 97.5% as of the end of December 2020: 153,839 114,945 4,486 48,717 120,953 958,378 8,325 1,980 96,627 1,508,250 81,167 48,038 1,248,188 6,869 286 32,380 1,416,928 91,322 114,945 3,234 35,337 2,783 153,839 1,252 13,380 Interest rate Interest rate, spread Interest rate, Equity market Interest rate 118,170 958,378 8,325 Interest rate, spread Interest rate Interest rate, exchange 1,980 Interest rate 81,167 14,641 33,397 1,248,188 6,869 Interest rate, spread Interest rate Interest rate, spread Interest rate, exchange 286 Interest rate 787 Annual report 2020 Contents VaR statistics and expected shortfall by risk factor EUR million. VaR at 99% and ES at 97.5% with one day time horizon A 2020 VaR (99%) Min Average Max Latest ES (97.5%) Latest 2019 VaR 2018 VaR Average Latest Average Latest 6.5 (6.0) 4.7 2.1 2.6 3.1 0.0 5.0 (4.6) 3.2 2.1 1.3 3.1 0.0 2.8 0.7 1.6 0.0 0.5 2.4 (0.8) 2.3 0.2 0.8 12.5 (13.1) 9.2 4.4 5.9 5.5 0.5 10.5 (10.6) 7.9 4.3 3.5 5.5 0.0 6.6 (2.2) 3.4 0.3 5.1 5.6 (3.4) 5.2 1.0 2.7 54.8 (15.8) 29.2 14.7 12.9 11.4 2.5 39.1 (21.9) 24.0 15.0 10.7 11.4 0.0 13.7 (5.3) 7.1 1.2 10.7 26.4 (13.8) 26.3 6.3 7.6 8.3 (11.8) 8.1 (12.6) 5.4 3.1 6.0 4.5 1.1 8.0 (8.9) 6.5 3.0 2.9 4.5 0.0 2.9 (1.1) 3.3 0.1 0.5 4.5 (4.3) 4.1 0.5 4.2 5.9 3.7 5.5 4.5 1.0 9.3 (8.8) 7.2 3.6 2.7 4.5 0.0 2.7 (0.9) 3.0 0.1 0.5 5.0 (3.7) 4.2 0.5 4.2 12.1 (8.2) 10.0 2.9 3.9 3.4 0.0 6.3 (6.9) 6.0 1.9 1.9 3.4 0.0 3.5 (1.3) 2.6 0.2 2.0 9.5 (2.9) 7.8 2.0 2.6 10.3 (9.9) 9.2 4.8 2.6 3.5 0.0 10.1 (8.3) 8.2 4.9 1.9 3.5 0.0 3.8 (2.1) 3.4 0.1 2.4 6.0 (3.8) 5.9 1.7 2.1 9.7 (9.3) 9.4 2.4 3.9 3.4 — 5.0 (6.7) 5.0 1.1 1.7 3.9 — 7.2 (4.8) 6.4 0.1 5.5 7.2 (3.5) 6.4 2.5 1.9 11.3 (11.5) 9.7 2.8 6.2 4.1 — 5.5 (8.2) 5.8 1.2 2.1 4.6 — 8.3 (2.7) 7.7 — 3.3 10.0 (2.3) 6.6 2.9 2.9 Total Trading Diversification effect Interest rate Equities Exchange rate Credit spread Commodities Total Europe Diversification effect Interest rate Equities Exchange rate Credit spread Commodities Total North America Diversification effect Interest rate Equities Exchange rate Total South America Diversification effect Interest rate Equities Exchange rate A. In South America and North America, VaR levels of credit spreads and commodities are not shown separately due to their low or null materiality. By the end of December, VaR had decreased by EUR 2 million vs. the end of 2019. Average VaR increased slightly by EUR 0.4 million. By risk factor, average VaR increased in most factors due to higher market volatility along the year. By geographic area, average VaR rose in Europe and North America but remained at low levels. VaR by risk factor has generally remained stable over the last few years. Temporary rises are due more to temporary increases in the volatility of market prices than to significant changes in positions. Grupo Santander's exposure to complex structured instruments and assets is very limited, this is a reflection of our risk culture and prudent risk management. At the end of December 2020, the exposures in this area were: • Hedge funds: exposure was EUR 344 million (all indirect), acting as counterparty in derivatives transactions. We analyse the risk related to this type of counterparty on a case by case basis, establishing percentages of collateralization based on each fund’s features and assets. • Monolines: no exposure at the end of December 2020. Grupo Santander's policy for approving new transactions in these products remains extremely prudent and conservative. It is strictly supervised by top management. Backtesting Actual losses can differ from those forecast by VaR due to the aforementioned limitations of this metric. Grupo Santander regularly analyses the accuracy of the VaR calculation model to confirm its reliability. The most important tests have backtesting: • For hypothetical P&L backtesting and for the total portfolio, we observed overshootings in VaR at 99% on 9 and 12 March and on 7 July and on 30 December. • In the case of VaE at 99%, overshootings was observed on 20 March. • Most of overshootings were due to the strong market variations caused by the health crisis. • The overshootings we observed in 2020 are consistent with the assumptions in the VaR calculation model. 788 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix IBOR Reform Since 2015, central banks and regulators in several major jurisdictions have convened Working Groups (WGs) to find and implement the transition to suitable replacements for some existing ‘IBOR’ benchmarks, such as Euro Overnight Index Average (EONIA) and London Interbank Offered Rates (LIBORs). On 27 July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the FCA), which regulates the LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmarks after 2021. This announcement indicates that the continuation of LIBORs on the current basis cannot be guaranteed after 2021. Therefore, after 2021 LIBORs may cease to be calculated. Additionally, on 13 September 2018 the WG euro RFR recommended that the Euro Short Term Rate (€STR) shall replace EONIA. Since 2 October 2019, the date on which the €STR became available, EONIA changed its methodology to be calculated as the €STR plus a spread of 8.5 basis points. This change in EONIA’s methodology is intended to facilitate the market’s transition from EONIA to €STR, with the former expected to be discontinued by the 3 January 2022. On October 2020, the International Swaps and Derivatives Association (ISDA) launched the IBOR Fallbacks Protocol, which will become effective on 25 January 2021, and will provide derivatives market participants with new IBOR fallbacks for legacy and new derivatives contracts. Banco Santander S.A. and several subsidiaries have adhered to this protocol. On December 2020, ICE Benchmark Administration (IBA), the FCA-regulated and authorized administrator of LIBOR, announced its intention that one week and two months USD LIBOR settings will cease at end-2021, while the rest of USD LIBOR tenors (Overnight and 1, 3, 6 and 12 months) will cease at end-June 2023. On December 2020, the European Union Council endorsed new rules amending of the EU Benchmark Regulation (BMR). The aim of the amendments to the Benchmark Regulation is to make sure that a statutory replacement benchmark can be established by the regulators by the time a systemically important benchmark is no longer in use, and thus protect financial stability on EU markets. It is likely that the regulators decide to use these powers in order to mitigate, as much as possible, systemic risks that might result from the phasing out of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. The new rules give the Commission the power to replace so-called 'critical benchmarks', which could affect the stability of financial markets in Europe, and other relevant benchmarks, if their termination would result in a significant disruption in the functioning of financial markets in the EU. The Commission will also be able to replace third- country benchmarks if their cessation would result in a significant disruption in the functioning of financial markets or pose a systemic risk for the financial system in the EU.. Interest rate benchmarks have an extended footprint in a significant number of contracts that Santander Group is holding and are used in multiple processes. The most relevant interest rate benchmarks for Santander are EURIBOR, EONIA, USD-LIBOR, GBP-LIBOR, and CHF-LIBOR. Santander Group uses these benchmarks as the reference rate not only for derivatives, but also for loans, discounting products, deposits, collateral agreements and floating rate notes, among others. The main risks to which Santander is exposed arising from financial instruments because of the transition are: (i) legal risks arising from potential changes required to documentation for new and existing transactions; (ii) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (iii) business risk of a decrease in revenues of products linked to indices that will be replaced; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period and (vii)litigation risks regarding our existing products and services, which could adversely impact our profitability. In order to monitor the risks and address the challenges of the transition, Santander launched the IBOR Transition Programme in 2019. This programme has a group wide scope and reports on a regular basis to Executive Management involving statutory committees. Its main objective is to ensure a smooth operational transition and to anticipate and address any potential customer and conduct related issues that could arise from the IBOR transition. It also aims to ensure that all impacted areas, business units and geographies understand the risks associated with the transition in a homogeneous way and can take appropriate measures to mitigate them. Santander’s IBOR Transition Programme is aligned with the recommendations, guidance and milestones defined by regulators and working groups of different jurisdictions and is structured around the following areas: Technology & Operations, Legal, Client Outreach, Risk Management & Models, Conduct & Communications and Accounting & Finance. Santander is engaged with the public and private sector initiatives in connection with IBOR transition. As part of this involvement, Santander participates in the WG Risk Free Rate Groups of different jurisdictions in Europe and America. Santander provides active feedback on the multiple consultations issued by industry forums, market associations, bank associations and other public organisms on this issue. 789 Annual report 2020 Contents 2. Structural balance sheet risks 2.1. Main aggregates and variations The market risk profile inherent to the Group’s balance sheet, in relation to its asset volumes and shareholders’ equity, as well as the budgeted net interest income margin, remained moderate in 2020, in line with previous years. Structural VaR A standardized metric such as VaR can be used for monitoring total market risk for the banking book (excluding the trading activity of SCIB). Santander distinguishes fixed income considering interest rates and credit spreads on ALCO portfolios, exchange rates and equities. In general, structural VaR is not material in terms of our volume of total assets or equity. Structural VaR EUR million. Structural VaR 99% with a temporary horizon of one day. Structural VaR Diversification effect VaR interest rate* VaR exchange rate VaR equities 2020 2019 2018 Min Average Max 611.4 911.0 1,192.1 Latest 903.1 Average 511.4 Latest 729.1 Average 568.5 Latest 556.8 (227.2) (349.8) (261.0) (263.4) (304.2) (402.0) (325.0) (267.7) 345.5 317.8 175.3 465.1 499.9 295.9 581.9 547.0 324.2 345.5 502.6 318.5 345.6 308.1 161.9 629.7 331.7 169.8 337.1 338.9 217.6 319.5 324.9 180.1 * Includes credit spread VaR on ALCO portfolios. Structural interest rate risk • Europe The most significant risk to the economic value of equity was also in the US (EUR 1,035 million). The EVE and NII sensitivities of our main balance sheets (Santander Spain and Santander UK) are usually positive. • South America Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December 2020, considering the scenarios previously mentioned, the most significant risk of NII sensitivity was in the euro, at EUR 191 million; the Polish zloty, at EUR 66 million; the British pound yield curve at EUR 25 million; and the US dollar, at EUR 19 million, all relating to the risk of rate cuts. The most significant risk in economic value of equity was in the euro interest rate curve, at EUR 2,236 million; the British pound at EUR 643 million ; the US dollar at EUR 142 million; and the Polish zloty at EUR 22 million, all relating to the risk of rate cuts. • North America The EVE and NII of our North American balance sheets (excluding the EVE of Mexico) usually show positive sensitivities to interest rates. Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December, the most significant risk to net interest income was mainly in the US (EUR 61 million). The economic value and net interest income in our South American balance sheets are usually positioned for interest rate cuts. Exposure in all countries was moderate in relation to the annual budget and capital levels in 2020. By the end of December, the most significant risk to net interest income was mainly located in Chile (EUR 80 million) and Brazil (EUR 68 million). The most significant risk to the economic value of equity was also mainly in Chile (EUR 313 million) and Brazil (EUR 278 million). Structural foreign currency rate risk/results hedging The structural exchange rate risk is driven by transactions in foreign currencies related to permanent financial investments, their results and related hedges. The dynamic management of this risk seeks to limit the impact on the core capital ratio of foreign exchange rate movements. In 2020, hedging of the core capital ratio for foreign exchange rate risk was kept close to 100%. In December 2020, the largest exposures of permanent investments (with their potential impact on equity) were (in order) in US dollars, British pounds sterling, Brazilian real, Mexican pesos, Chilean pesos and Polish zlotys. Santander 790 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix hedges some positions (which are permanent in nature) with foreign exchange-rate derivatives. The Finance Division is also responsible for foreign exchange rate risk management, hedging expected results and dividends in subsidiaries whose base currency is not the euro. • High contribution from customer deposits due to the retail nature of the balance sheet. • Diversification of wholesale funding sources by instruments/ investors, markets/currencies and maturities. Structural equity risk • Limited recourse to short-term funding. Grupo Santander maintains equity positions in its banking book as well as in its trading portfolio. These positions are maintained as equity instruments or equity stakes depending on the percentage owned or control. The equity portfolio in the banking book at the end of December 2020 was diversified between securities in various countries, e.g. Spain, China, Morocco and Poland. Most of the portfolio is invested in the finance and insurance sectors. Among other sectors with lower exposure allocations real estate is included. Structural equity positions are exposed to market risk. VaR is calculated for these positions with market price data series or proxies. By the end of September 2020, the VaR at 99% over a one day time horizon was EUR 319 million (EUR 170 million and EUR 180 million at the end of 2019 and 2018, respectively). 2.2. Methodologies Structural interest rate risk Grupo Santander analyses the potential impact of changes in interest rate levels on EVE and NII. Depending on the changes in rates, impacts will be different and therefore various subtypes of interest rate risk need to be monitored and managed, such as repricing, curve or basis risk. Based on the balance-sheet interest rate position and the market situation and outlook, financial actions (such as transacting positions or setting interest rates for products marketed) may be needed to attain the desired risk profile determined by Grupo Santander. The suite of metrics used to monitor interest rate risks includes the sensitivity of NII and EVE to changes in interest rates, and value at risk (VaR) for calculating economic capital. Structural exchange-rate risk/hedging of results These activities are monitored daily via position measurements, VaR and results. 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. • Availability of sufficient liquidity reserves, including standing facilities/discount windows at central banks to be used in adverse situations. • Compliance with regulatory liquidity requirements both at Group and subsidiary level, as a new factor conditioning management. The effective application of these principles by all institutions comprising the Group required the development of a unique management framework built upon three fundamental 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 (ALCOs) in coordination with the global ALCO, which is the body empowered by the Bank'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 Santander's Risk Appetite Framework. This framework meets demands from regulators and market players emanating from the financial crisis to strengthen banks’ risk management and control systems. • In-depth balance sheet analysis and measurement of liquidity risk, supporting decision-taking and its control. The objective is to ensure the Group maintains adequate liquidity levels necessary to cover its short- and long-term needs with stable funding sources, optimising the impact of their costs on the income statement. Grupo Santander’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: • a solid balance sheet structure, with a diversified presence in the wholesale markets; • the use of liquidity buffers and limited encumbrance of assets; • compliance with both regulatory metrics and other metrics included in each entity’s risk appetite statement. • Medium- and long-term (M/LT) funding needs must be covered by medium- and long-term instruments. Over the course of the year, all dimensions of the plan are monitored. 791 Annual report 2020 Contents The Group continues to develop 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 In accordance with the guidelines established by the European Banking Authority (EBA) in 2014 on committed and uncommitted assets, the concept of assets committed in financing transactions (asset encumbrance) includes both on- balance sheet assets provided as collateral in transactions to obtain liquidity and off-balance sheet assets that have been received and reused for similar purposes, as well as other assets associated with liabilities for reasons other than financing. The residual maturities of the liabilities associated with the assets and guarantees received and committed are presented below, as of 31 of December of 2020 (thousand of million of euros): Residual >1 month maturities of the liabilities Unmatured <=1month <=3 months >3 months <=12 months >1 year <=2 years >2 years <=3 years 3 years 5 years <=5 years <=10 years >10 years Total Committed assets Guarantees received 35.7 29.7 40.2 30.6 10.2 35.5 32.4 106.4 50.5 23.9 15.6 350.4 3.9 16.9 1.4 0.5 1.6 — 0.1 84.7 The reported Group information as required by the EBA at 2020 year-end is as follows: On-balance-sheet encumbered assets EUR billion Loans and advances Equity instruments Debt securities Other assets Total assets Encumbrance of collateral received EUR billion Carrying amount of encumbered assets Fair value of encumbered assets Fair value of non- Carrying amount of non- encumbered assets encumbered assets 249.5 5.8 61.9 33.2 350.4 5.8 60.7 884.7 9.9 114.6 148.7 1,157.9 9.9 115.4 Encumbered assets and collateral received and matching liabilities Fair value of encumbered collateral received or own debt securities issued Fair value of collateral received or own debt securities issued available for encumbrance EUR billion Collateral received Loans and advances Equity instruments Debt securities Other collateral received Own debt securities issued other than own covered bonds or ABSs 84.7 — 3.5 80.3 0.9 — 43.0 — 5.9 37.1 — 0.9 792 Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered Matching liabilities, contingent liabilities or securities lent Total sources of encumbrance (carrying amount) 306.3 435.1 On-balance-sheet encumbered assets amounted to EUR 350,400 million, of which 71% are loans (mortgage loans, corporate loans, etc.). Off-balance-sheet encumbered assets amounted to EUR 84,700 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 435,100 million of encumbered assets, which give rise to EUR 306,300 million matching liabilities. As of December 2020, total asset encumbrance in funding operations represented 26.6% of the Group’s extended balance sheet under EBA criteria (total assets plus guarantees received: EUR 1,635,900 million as of December 2020). This Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix percentage has been increased from 24.1% that presented the Group as of December 2019. This increase was mainly due to Grupo Santander's use of the financing programmes launched by central banks in response to the pandemic. d) Capital risk In the second line of defence, capital risk management can independently challenge business and first-line activities by: • Supervising capital planning and adequacy exercises through a review of the main components affecting the capital ratios. • Identifying key metrics to calculate the Group’s regulatory capital, setting tolerance levels and analysing significant variations, as well as single transactions with impact on capital. • Reviewing and challenging the execution of capital actions proposed in line with capital planning and risk appetite. Grupo Santander commands a sound solvency position, above the levels required by regulators and by the European Central bank. Regulatory capital At 1 January 2021, at a consolidated level, the Group must maintain a minimum capital ratio of 8.85% of CET1 (4.50% being the requirement for Pillar I, 0.84% being the requirement for Pillar 2R (requirement), 2.50% being the requirement for capital conservation buffer, 1.00% being the requirement for G-SIB and 0.01% being the requirement for anti-cyclical capital buffer). In 2020, the solvency target set was achieved. Santander’s CET1 ratio stood at 12.34% (figures calculated by applying the transitional provisions of IFRS 9) at the close of the year, demonstrating its organic capacity to generate capital. The key regulatory capital figures are indicated below: Reconciliation of accounting capital with regulatory capital EUR million Subscribed capital Share premium account Reserves Treasury shares Attributable profit Approved dividend Shareholders’ equity on public balance sheet Valuation adjustments Non-controlling interests Total Equity on public balance sheet Goodwill and intangible assets Eligible preference shares and participating securities Accrued dividend Other adjustments* Tier 1* ** 2020 8,670 52,013 62,777 2019 8,309 52,446 56,526 2018 8,118 50,993 53,988 (69) (31) (59) (8,771) 6,515 7,810 — (1,662) (2,237) 114,620 122,103 118,613 (33,144) (22,032) (22,141) 9,846 10,588 10,889 91,322 110,659 107,361 (15,711) (28,478) (28,644) 9,102 (478) (5,734) 9,039 (1,761) (9,923) 9,754 (1,055) (9,700) 78,501 79,536 77,716 * Fundamentally for non-computable non-controlling interests and deductions and reasonable filters in compliance with CRR. * Figures calculated by applying the transitional provisions of IFRS 9. Grupo Santander must also maintain a minimum capital ratio of 10.63% of tier 1 and a minimum total ratio of 13.01%. The following table shows the capital coefficients and a detail of the eligible internal resources of the Group: Capital coefficients Level 1 ordinary eligible capital (EUR million) Level 1 additional eligible capital (EUR million) Level 2 eligible capital (EUR million) Risk-weighted assets (EUR million) Level 1 ordinary capital coefficient (CET 1) Level 1 additional capital coefficient (AT1) Level 1 capital coefficient (TIER1) Level 2 capital coefficient (TIER 2) 2020 2019 2018 69,399 70,497 67,962 9,102 9,039 9,754 12,514 11,531 11,009 562,580 605,244 592,319 12.34% 11.65% 11.47% 1.61% 1.49% 1.65% 13.95% 13.14% 13.12% 2.23% 1.91% 1.86% Total capital coefficient 16.18% 15.05% 14.98% 793 Annual report 2020 Contents Eligible capital EUR million Eligible capital 2020 2019 2018 Common Equity Tier I 69,399 70,497 67,962 8,670 8,309 8,118 Capital (-) Treasure shares and own shares financed Share Premium Reserves (126) (63) (64) swaps (CDS). 52,013 52,446 50,993 64,766 57,368 55,036 • 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 With the publication of Regulation (EU) 2019/876 of 20 May, 2019, amending Regulation (EU) n.º 575/2013 as regards the leverage ratio, the final calibration of the ratio is set at 3% for all entities and, for systemic entities G-SIB, an additional surcharge is also established which will be 50% of the cushion ratio applicable to the EISM. In addition, modifications are included in its calculation, including the exclusion of certain exposures from the total exposure measure: public loans, transfer loans and officially guaranteed export credits. Banks will have to implement the final definition of the leverage ratio by June 2021 and comply with the new calibration of the ratio (the surcharge for G-SIB) from January 2023. EUR million Leverage Level 1 Capital Exposure Leverage Ratio 2020 2019 2017 78,501 79,536 77,716 1,471,480 1,544,614 1,489,094 5.33% 5.15% 5.22% Global systemically important banks Grupo Santander 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 financial institutions, substitutability and complexity). This definition means it has to fulfil certain additional requirements, which consist mainly of a capital buffer -1%, in TLAC requirements (total loss absorbing capacity), that we have to publish relevant information more frequently than other banks, greater regulatory requirements for internal control bodies, special supervision and drawing up of special reports to be submitted to supervisors. The fact that Grupo Santander has to comply with these requirements makes it a more solid bank than its domestic rivals. Other retained earnings (34,937) (22,933) (23,022) Minority interests Profit net of dividends 6,669 (9,249) 6,441 3,092 6,981 4,518 Deductions (18,407) (34,163) (34,598) Goodwill and intangible assets Others Additional Tier I Eligible instruments AT1 T1-excesses-subsidiaries Residual value of dividends Others Tier II (15,711) (28,478) (28,644) (2,696) (5,685) (5,954) 9,102 8,854 248 — — 9,039 9,209 (170) — — 9,754 9,666 88 — — 12,514 11,531 11,009 Eligible instruments T2 13,351 12,360 11,306 Gen. funds and surplus loans loss prov. IRB — — — T2-excesses - subsidiaries (837) (829) (297) Others — — — Total eligible capital 91,015 91,067 88,725 Note: Banco Santander and its affiliates had not taken part in any State aid programmes. Leverage ratio The leverage ratio has been defined within the regulatory framework of Basel III as a measure of the capital required by financial institutions not sensitive to risk. The Group performs the calculation as stipulated in CRD IV and its subsequent amendment in EU Regulation no. 573/2013 of 17 January 2015, which was aimed at harmonising calculation criteria with those specified in the BCBS 'Basel III leverage ratio framework' and 'Disclosure requirements' documents. This ratio is calculated as tier 1 capital divided by leverage exposure. Exposure is calculated as the sum of the following items: • 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). • Off-balance-sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors. 794   Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 54. Explanation added for translation to English These accompanying Consolidated Financial Statements, translation of the Consolidated Financial Statements originally issued in Spanish, are presented on the basis of the regulatory financial reporting framework applicable to the Group in Spain (see note 1.b). 795 Annual report 2020 Contents Appendix 796 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Appendix I Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) EUR million Indirect Direct 0.00% 100.00% Year 2020 100.00% Year 2019 100.00% Real estate Activity Capital + reserves 66 Net Carrying results amount 11 6 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% Leasing 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) - - Securitization 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization 0.00% 100.00% 100.00% 100.00% Finance company 0.00% 100.00% 100.00% 100.00% Leasing Company 2 & 3 Triton Limited A & L CF (Guernsey) Limited (n) 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 Office Equipment Leasing Limited Abbey National International Limited Abbey National Nominees Limited Abbey National PLP (UK) Limited Abbey National Property Investments Abbey National Treasury Services Investments Limited Abbey National Treasury Services Overseas Holdings Abbey National UK Investments Abbey Stockbrokers (Nominees) Limited Abbey Stockbrokers Limited Ablasa Participaciones, S.L. Administración de Bancos Latinoamericanos Santander, S.L. Aduro S.A. Location United Kingdom Guernsey United Kingdom United Kingdom United Kingdom United Kingdom India United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Jersey United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Spain 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 18.94% 81.06% 100.00% Spain 24.11% 75.89% 100.00% Uruguay 0.00% 100.00% 100.00% Aevis Europa, S.L. AFB SAM Holdings, S.L. Afisa S.A. Spain Spain Chile 96.34% 0.00% 96.34% 96.34% Cards 1.00% 99.00% 100.00% 100.00% Holding company 0.00% 100.00% 100.00% 100.00% Fund ALIL Services Limited (j) Aljardi SGPS, Lda. Isle of Man Portugal 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Alliance & Leicester Cash Solutions Limited United Kingdom 0.00% 100.00% 100.00% 100.00% Financial services 100.00% Securities company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Holding company 100.00% Finance company 100.00% Securities company 100.00% Securities company 100.00% Holding company 100.00% Holding company - Payments and collections services management company 100.00% Services 100.00% Holding company 100.00% Finance company 1 0 6 1 19 0 0 0 8 0 0 4 0 0 531 0 0 0 0 0 (1) 0 (1) 0 0 0 0 0 63 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 154 0 0 0 0 0 335 (125) 714 2,547 (9) 1,864 0 1 0 4 0 1,202 0 0 0 0 0 0 (7) 0 0 1 0 4 0 1,148 0 797 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Company Alliance & Leicester Commercial Bank Limited Alliance & Leicester Investments (Derivatives) Limited Location United Kingdom United Kingdom Alliance & Leicester Investments (No.2) Limited United Kingdom Alliance & Leicester Investments Limited Alliance & Leicester Limited Alliance & Leicester Personal Finance Limited Altamira Santander Real Estate, S.A. Alternative Leasing, FIL Amazonia Trade Limited AN (123) Limited Andaluza de Inversiones, S.A. ANITCO Limited Aquanima Brasil Ltda. Aquanima Chile S.A. Aquanima México S. de R.L. de C.V. Aquanima S.A. Arcaz - Sociedade Imobiliária Portuguesa, Lda. (r) Argenline S.A. (j) (p) 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 Atual - Fundo de Invest Multimercado Crédito Privado Investimento no Exterior Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. Auto ABS Belgium Loans 2019, SA/NV Auto ABS DFP Master Compartment France 2013 Auto ABS French Lease Master Compartiment 2016 Auto ABS French Leases 2018 Auto ABS French Loans Master Auto ABS French LT Leases Master Auto ABS Italian Balloon 2019-1 S.R.L. Auto ABS Italian Loans 2018-1 S.R.L. Auto ABS Italian Rainbow Loans 2020-1 S.R.L. 798 100.00% 0.00% 100.00% 100.00% Real estate (151) (219) % of ownership held by Banco Santander % of voting power (d) Indirect Direct 0.00% 100.00% Year 2020 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Year Activity 2019 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 99.99% 0.00% 99.99% - Investment fund 100.00% 0.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% Holding company 100.00% Holding company 100.00% Holding company 100.00% Holding company 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 99.91% 100.00% 100.00% E-commerce 100.00% Services 100.00% E-commerce 100.00% Services Inactive 100.00% EUR million Capital + reserves 0 Net results 0 Carrying amount 0 0 0 0 0 (226) 0 0 0 0 0 63 0 0 92 0 2 2 2 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 63 0 0 27 0 0 0 2 0 0 0 United Kingdom United Kingdom United Kingdom Spain Spain United Kingdom United Kingdom Spain United Kingdom Brazil Chile Mexico Argentina Portugal Uruguay 0.00% 100.00% 100.00% United Kingdom United Kingdom Portugal Portugal Portugal Portugal Portugal Portugal Portugal Brazil 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% - - - - - - - (b) (b) (b) (b) (b) (b) (b) - - - - - - - 0.00% 89.99% 100.00% 100.00% Finance company 100.00% Finance company 100.00% Financial services - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Investment fund 53 (17) 38 (3) (5) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 198 10 187 Brazil 0.00% 89.99% 100.00% 100.00% Financial services 262 14 246 Belgium France France France France France Italy Italy Italy - - - - - - - - - (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 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 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Auto ABS Spanish Loans 2016, Fondo de Titulización Location Spain Direct Year 2020 Year 2019 Activity EUR million Capital + reserves 0 Net Carrying results amount 0 0 Spain Spain Switzerland United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Spain Germany Brazil Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Brazil Ireland Italy Brazil Spain Brazil Portugal Brazil Chile Brazil Mexico Auto ABS Spanish Loans 2018-1, Fondo de Titulización Auto ABS Spanish Loans 2020-1, 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 2019 Holdings Limited Auto ABS UK Loans 2019 Plc Auto ABS UK Loans Holdings Limited Auto ABS UK Loans PLC Autodescuento, S.L. Autohaus24 GmbH 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 Real, A.I.E. Aviación Santillana, S.L. Aviación Suances, S.L. Aviación Tritón, A.I.E. Aymoré Crédito, Financiamento e Investimento S.A. Azor Mortgages PLC Banca PSA Italia S.p.A. Banco Bandepe S.A. Banco de Albacete, S.A. Banco Hyundai Capital Brasil S.A. Banco Madesant - Sociedade Unipessoal, S.A. Banco PSA Finance Brasil S.A. Banco Santander - Chile Banco Santander (Brasil) S.A. 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 - Securitization (1) (3) Indirect (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - - - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 0.00% 93.89% 93.89% 93.89% Vehicles purchase 0.00% 46.95% 100.00% - Renting 0.00% 89.99% 100.00% 100.00% IT services 99.99% 0.01% 100.00% 99.99% 0.01% 100.00% 99.99% 0.01% 100.00% 100.00% 0.00% 100.00% 99.97% 0.03% 100.00% 99.00% 1.00% 100.00% 100.00% 0.00% 100.00% 99.99% 0.01% 100.00% 99.00% 1.00% 100.00% 99.00% 1.00% 100.00% 99.99% 0.01% 100.00% 0.00% 89.99% 100.00% 100.00% Renting 100.00% Renting 100.00% Renting 100.00% Renting 100.00% Renting 100.00% Air transport 100.00% Renting 100.00% Renting 100.00% Renting 100.00% Air transport 100.00% Renting 100.00% Finance company - (b) - - Securitization 0.00% 50.00% 50.00% 0.00% 89.99% 100.00% 100.00% 0.00% 100.00% 0.00% 44.99% 50.00% 0.00% 100.00% 100.00% 50.00% Banking 100.00% Banking 100.00% Banking 50.00% Banking 100.00% Banking 0.00% 44.99% 50.00% 0.00% 67.12% 67.18% 0.04% 89.95% 90.58% 0.00% 91.79% 100.00% 50.00% Banking 67.18% Banking 90.52% Banking 100.00% Finance company 0 0 0 0 (2) 0 0 0 0 0 0 0 0 (12) 1 (3) 3 49 19 34 7 77 3 1 13 1 2 23 153 0 442 828 14 47 0 2 0 0 1 4 4 (26) 0 (11) 0 0 (3) 0 0 (1) 117 0 57 14 0 4 0 0 0 0 0 0 0 0 0 18 0 4 28 6 0 8 63 3 1 10 2 3 19 218 0 153 759 9 23 1,083 (7) 1,076 39 4 19 3,677 594 3,226 10,219 2,206 11,070 74 14 81 Mexico 0.00% 92.47% 100.00% Mexico 0.00% 92.68% 100.00% 100.00% Holding company 100.00% Finance company 6 8 0 0 6 8 799 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Location Portugal Indirect Direct 0.00% 100.00% Year 2020 100.00% Year Activity 2019 100.00% Banking EUR million Capital + reserves 185 Net results 1 Carrying amount 128 Colombia 0.00% 100.00% 100.00% 100.00% Banking 142 4 140 0.00% 100.00% 100.00% 100.00% Banking 958 98 1,057 0.00% 100.00% 100.00% 16.68% 75.11% 91.80% 100.00% Banking 91.77% Banking 1,065 5,663 (1) 793 832 6,547 Company Banco Santander Consumer Portugal, S.A. Banco Santander de Negocios Colombia S.A. Banco Santander International Banco Santander International SA Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México Banco Santander Perú S.A. Banco Santander Río S.A. Banco Santander S.A. Banco Santander Totta, S.A. Bansa Santander S.A. BEN Benefícios e Serviços S.A. Bilkreditt 6 Designated Activity Company (j) Bilkreditt 7 Designated Activity Company BRS Investments S.A. United States Switzerland Mexico Peru Argentina Uruguay Portugal Chile Brazil Ireland Ireland 99.00% 1.00% 100.00% 0.00% 99.31% 99.26% 97.75% 2.25% 100.00% 0.00% 99.86% 99.96% 0.00% 100.00% 100.00% 0.00% 89.99% 100.00% 100.00% Banking 99.25% Banking 100.00% Banking 99.96% Banking 100.00% Real estate 100.00% Payment services - - (b) (b) - - - Securitization - Securitization 0.00% 98.00% 98.00% 98.00% Real estate Argentina 0.00% 100.00% 100.00% Cántabra de Inversiones, S.A. Spain 100.00% 0.00% 100.00% Cántabro Catalana de Inversiones, S.A. Spain 100.00% 0.00% 100.00% Canyon Multifamily Impact Fund IV LLC (c) Capital Street Delaware LP Capital Street Holdings, LLC Capital Street REIT Holdings, LLC Capital Street S.A. United States United States United States 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% United States Luxembourg 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% Finance company 100.00% Holding company 100.00% Holding company 100.00% Holding company 100.00% Holding company 100.00% Holding company 100.00% Finance company Insurance brokerage Carfax (Guernsey) Limited (n) Guernsey 0.00% 100.00% 100.00% 100.00% Carfinco Financial Group Inc. Carfinco Inc. Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México Cater Allen Holdings Limited Cater Allen International Limited Cater Allen Limited Cater Allen Lloyd's Holdings Limited Cater Allen Syndicate Management Limited CCAP Auto Lease Ltd. United States Centro de Capacitación Santander, A.C. Mexico Canada Canada Mexico United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom 96.42% 0.00% 96.42% 0.00% 96.42% 100.00% 0.00% 99.97% 99.97% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 80.24% 100.00% 96.42% Holding company 100.00% Finance company 99.97% Securities company 100.00% Holding company 100.00% Securities company 100.00% Banking 100.00% Holding company 100.00% Advisory services 100.00% Leasing 0.00% 91.79% 100.00% 100.00% Non-profit institute 1 0 Certidesa, S.L. Spain 0.00% 100.00% 100.00% 100.00% Aircraft rental (66) (7) 800 172 1,100 317 3,715 22 11 0 0 27 122 78 275 0 0 0 0 29 18 61 (178) 121 527 191 3,415 23 10 0 0 34 0 312 (34) 267 21 0 13 1,116 0 0 58 48 49 0 0 (1) 0 0 3 0 0 0 8 3 0 0 22 0 13 1,119 0 0 72 42 52 0 0 607 33 248 0 0 0 0 0 0 (20) 42 18 1 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 Company Chrysler Capital Auto Funding I LLC Chrysler Capital Auto Funding II LLC Chrysler Capital Auto Receivables LLC Chrysler Capital Master Auto Receivables Funding 2 LLC Chrysler Capital Master Auto Receivables Funding 4 LLC Chrysler Capital Master Auto Receivables Funding LLC Cobranza Amigable, S.A.P.I. de C.V. Community Development and Affordable Housing Fund LLC (o) 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, en liquidación (j) Consulteam Consultores de Gestão, Lda. Consumer Lending Receivables LLC Crawfall S.A. (g) (j) Darep Designated Activity Company Decarome, S.A.P.I. de C.V. % of ownership held by Banco Santander % of voting power (d) Direct 0.00% Indirect 80.24% Year 2020 100.00% 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% 0.00% 85.00% 100.00% 0.00% 96.00% 96.00% Year Activity 2019 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Finance company 100.00% Collection services - Asset management EUR million Capital + reserves 11 Net Carrying results amount 0 17 4 0 0 0 (157) (43) 32 (35) (40) (25) 3 - 0 - 0 0 0 0 0 3 - 0.00% 50.00% 100.00% 100.00% Banking 363 79 428 Location United States United States United States United States United States United States Mexico United States France France 0.00% 50.00% 100.00% 100.00% Banking 20 Argentina 0.00% 100.00% 100.00% 100.00% Services Spain 0.00% 100.00% 100.00% 100.00% Services Portugal 100.00% 0.00% 100.00% 100.00% Real estate United States Uruguay Ireland Mexico 0.00% 80.24% 100.00% 100.00% Securitization 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% Services 100.00% Reinsurances 100.00% Finance company Deva Capital Advisory Company, S.L. Spain 0.00% 100.00% 100.00% Deva Capital Holding Company, S.L. Spain 100.00% 0.00% 100.00% Deva Capital Investment Company, S.L. Spain 0.00% 100.00% 100.00% Deva Capital Management Company, S.L. Deva Capital Servicer Company, S.L. Spain Spain 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Digital Procurement Holdings N.V. Netherlands 0.00% 100.00% 100.00% Diners Club Spain, S.A. Dirección Estratega, S.C. Dirgenfin, S.L., en liquidación (j) 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 Spain Mexico Spain United States United States United States United States United States United States United States 75.00% 0.00% 75.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% - - - - - - - (b) (b) (b) (b) (b) (b) (b) - - - - - - - 100.00% Advisory services 100.00% Holding company 100.00% Holding company 100.00% Advisory services 100.00% Holding company 100.00% Holding company 75.00% Cards 100.00% Services 100.00% Real estate development - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 2 0 0 0 0 0 0 0 0 26 0 0 0 0 0 7 16 1 0 0 0 0 0 8 16 1 140 (12) 140 49 12 72 4 12 0 (8) (9) (20) (11) (15) (18) (9) (20) 0 (8) 2 0 (3) 0 1 31 35 32 50 28 28 43 48 4 74 1 8 0 0 0 0 0 0 0 0 0 801 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Drive Auto Receivables Trust 2018-2 Direct Location United States Year 2020 Year 2019 Activity - Securitization EUR million Capital + reserves (74) Net Carrying results amount 0 68 Indirect (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - - - - - - - - - - - - - - Securitization (99) - Securitization (100) - Securitization - Securitization (87) (88) - Securitization (124) - Securitization (160) 70 62 53 61 78 97 - Securitization (185) 100 - Securitization - Securitization - Securitization 100.00% Services 100.00% Finance company Inactive 90.00% 100.00% Services Insurance 100.00% 100.00% Finance company 51.00% Finance company 100.00% Holding company 0 0 0 0 23 1 16 130 11 244 (112) (124) 0 0 4 0 42 3 0 52 0 0 0 0 0 0 0 0 0 0 0 28 1 52 112 4 140 Mexico Peru 0.00% 91.79% 100.00% 100.00% 0.00% 100.00% 0.00% 90.00% 90.00% 0.00% 89.99% 100.00% 0.00% 89.99% 100.00% 0.00% 51.00% 100.00% 0.00% 51.00% 51.00% 0.00% 100.00% 100.00% Drive Auto Receivables Trust 2018-3 Drive Auto Receivables Trust 2018-4 Drive Auto Receivables Trust 2018-5 Drive Auto Receivables Trust 2019-1 Drive Auto Receivables Trust 2019-2 Drive Auto Receivables Trust 2019-3 Drive Auto Receivables Trust 2019-4 Drive Auto Receivables Trust 2020-1 Drive Auto Receivables Trust 2020-2 EDT FTPYME Pastor 3 Fondo de Titulización de Activos Electrolyser, S.A. de C.V. Entidad de Desarrollo a la Pequeña y Micro Empresa Santander Consumo Perú S.A. Erestone S.A.S. Esfera Fidelidade S.A. Evidence Previdência S.A. Financeira El Corte Inglés, Portugal, S.F.C., S.A. Financiera El Corte Inglés, E.F.C., S.A. Finsantusa, S.L. Unipersonal First National Motor Business Limited United States United States United States United States United States United States United States United States United States Spain France Brazil Brazil Portugal Spain Spain United Kingdom 0.00% 100.00% 100.00% 100.00% Leasing First National Motor Contracts Limited United Kingdom 0.00% 100.00% 100.00% 100.00% Leasing First National Motor Facilities Limited First National Motor Finance Limited First National Motor Leasing Limited First National Motor plc First National Tricity Finance Limited Fondation Holding Auto ABS Belgium Loans 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 Consumer Spain Auto 2014-1 Fondo de Titulización de Activos Santander Hipotecario 7 United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Belgium Spain Spain Spain Spain Spain 0.00% 100.00% 100.00% 100.00% Leasing 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% Advisory services 100.00% Leasing 0.00% 100.00% 100.00% 100.00% Leasing 0.00% 100.00% 100.00% 100.00% Finance company - - - - - - (b) (b) (b) (b) (b) (b) - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 802 1,269 (10) 1,020 0 0 0 0 0 0 6 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 6 0 0 0 0 0 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Location Spain Direct EUR million Capital + reserves 0 Net Carrying results amount 0 0 Indirect (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - Year 2020 Year 2019 Activity - - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization Company 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 PYMES Santander 15 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 Financiación 1 Fondos Santander, S.A. Administradora de Fondos de Inversión (en liquidación) (j) Fortensky Trading, Ltd. Fosse Funding (No.1) Limited Fosse Master Issuer PLC Fosse PECOH Limited Fosse Trustee (UK) Limited FTPYME Banesto 2, Fondo de Titulización de Activos Fundo de Investimento em Direitos Creditórios Atacado- Não Padronizado Fundo de Investimentos em Direitos Creditórios Multisegmentos NPL Ipanema V – Não padronizado (i) Fundo de Investimentos em Direitos Creditórios Multisegmentos NPL Ipanema VI – Não padronizado Gamma, Sociedade Financeira de Titularização de Créditos, S.A. GC FTPYME Pastor 4 Fondo de Titulización de Activos Gesban México Servicios Administrativos Globales, S.A. de C.V. Gesban Santander Servicios Profesionales Contables Limitada Gesban Servicios Administrativos Globales, S.L. Gesban UK Limited Spain Spain Spain Spain Spain Spain Spain Spain Spain Uruguay United Kingdom United Kingdom United Kingdom United Kingdom Spain Brazil Brazil Brazil Chile Spain United Kingdom Gestión de Instalaciones Fotovoltaicas, S.L. Unipersonal Gestión de Inversiones JILT, S.A. Gestora de Procesos S.A. en liquidación (j) Spain Spain Peru 0.00% 100.00% 100.00% 100.00% Fund management company 100.00% Finance company Ireland 0.00% 100.00% 100.00% Fosse (Master Issuer) Holdings Limited United Kingdom - (b) - - Securitization 0.00% 100.00% 100.00% 100.00% Securitization (124) (2) 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization 0.00% 100.00% 100.00% 100.00% Securitization - - - - (b) (b) (b) (b) - - - - - Securitization - Investment fund 126 - Investment fund 0 - Investment fund 63 16 Portugal 0.00% 99.86% 100.00% 100.00% Securitization Spain - (b) - - Securitization Mexico 0.00% 100.00% 100.00% 100.00% Services 0.00% 100.00% 100.00% 99.99% 0.01% 100.00% 100.00% Accounting services 100.00% Services 0.00% 100.00% 100.00% 100.00% Payments and 0.00% 100.00% 100.00% collections services 100.00% Electricity production 100.00% 0.00% 100.00% 100.00% Services 0.00% 100.00% 100.00% 100.00% Holding company 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 1 0 7 0 1 1 4 1 1 5 0 0 0 0 0 1 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 0 0 1 0 0 5 0 803 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Grupo Empresarial Santander, S.L. Spain 99.11% 0.89% 100.00% Company Getnet Adquirência e Serviços para Meios de Pagamento S.A. Global Vosgos, S.L. Unipersonal Golden Bar (Securitisation) S.R.L. Golden Bar Stand Alone 2016-1 Golden Bar Stand Alone 2018-1 Golden Bar Stand Alone 2019-1 Golden Bar Stand Alone 2020-1 Golden Bar Stand Alone 2020-2 Grupo Financiero Santander México, S.A. de C.V. GTS El Centro Equity Holdings, LLC (c) United States GTS El Centro Project Holdings, LLC (c) United States Spain Portugal Portugal Ireland Portugal Ireland Spain Bahamas Guaranty Car, S.A. Unipersonal Hipototta No. 13 Hipototta No. 4 FTC Hipototta No. 4 plc Hipototta No. 5 FTC Hipototta No. 5 plc Hispamer Renting, S.A. Unipersonal Holbah II Limited % of ownership held by Banco Santander % of voting power (d) Location Brazil Direct 0.00% Indirect 89.99% Year 2020 100.00% Activity Year 2019 100.00% Payment services Spain 100.00% 0.00% 100.00% Italy Italy Italy Italy Italy Italy - - - - - - (b) (b) (b) (b) (b) (b) - - - - - - Mexico 100.00% 0.00% 100.00% 0.00% 58.40% 58.40% 0.00% 58.40% 100.00% - Holding company - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 100.00% Holding company 100.00% Holding company 57.40% Holding company 100.00% Holding company 0.00% 100.00% 100.00% 100.00% Automotive - - - - - (b) (b) (b) (b) (b) - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization 0.00% 100.00% 100.00% 100.00% Renting 0.00% 100.00% 100.00% 100.00% Holding company 100.00% Holding company Holbah Santander, S.L. Unipersonal Spain 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization (10) 0 8 0 0.00% 100.00% 100.00% 100.00% Securitization (6) (4) United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Germany Spain United States Spain Spain 0.00% 100.00% 100.00% 100.00% Securitization 0.00% 100.00% 100.00% 100.00% Internet technology 0.00% 51.00% 51.00% 97.17% 2.83% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 51.00% Banking 100.00% E-commerce 100.00% Holding company 100.00% Finance company 100.00% Holding company 100.00% 0.00% 100.00% 100.00% Holding 0.00% 100.00% 100.00% 100.00% company Inactive United Kingdom Netherlands 100.00% Luxembourg - (b) - - Securitization Holmes Funding Limited Holmes Holdings Limited Holmes Master Issuer plc Holmes Trustees Limited HQ Mobile Limited Hyundai Capital Bank Europe GmbH Ibérica de Compras Corporativas, S.L. Independence Community Bank Corp. Insurance Funding Solutions Limited Interfinance Holanda B.V. Inversiones Capital Global, S.A. Unipersonal Inversiones Marítimas del Mediterráneo, S.A. Isar Valley S.A. 804 EUR million Capital + reserves 280 Net Carrying results amount 293 45 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,484 33 2,483 4,297 626 4,195 27 28 2 0 (48) (5) (40) (11) 1 404 (1) (1) 0 0 0 1 0 1 0 27 27 2 0 0 0 0 0 1 60 533 72 141 750 0 0 0 0 8 391 6 0 0 705 6 0 2 (5) 1 3,567 (277) 3,290 0 0 0 0 0 0 148 (41) 120 3 0 2 0 0 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Isla de los Buques, S.A. Location Spain Direct 99.98% Indirect 0.02% Klare Corredora de Seguros S.A. Chile 0.00% 33.63% Landcompany 2020, S.L. Spain 17.22% 82.78% Year 2020 Year 2019 Activity 100.00% 100.00% Finance 50.10% company Insurance brokerage 100.00% 100.00% Real estate 50.10% management 100.00% 100.00% Securitization EUR million Capital + reserves 1 Net Carrying results amount 1 0 9 (2) 2 1,739 (35) 1,702 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization 0.00% 100.00% 100.00% 100.00% Securitization 0.00% 100.00% 100.00% 100.00% Securitization 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization 61.59% 0.00% 61.59% 61.59% Agricultural holding 0.00% 100.00% 100.00% 100.00% Factoring 46.00% 100.00% 0.00% 0.00% 46.00% Real estate 46.00% 100.00% 100.00% Real estate investment - (b) - - Mortgage credit company 96.34% 0.00% 0.00% 61.59% 99.90% 0.10% 96.34% 100.00% 100.00% Real estate 96.34% Cards 100.00% 100.00% Financial advisory - IT services 100.00% 0.00% 50.10% 50.10% - IT services 0.00% 50.10% 100.00% - IT services - (b) - - Renting 0.00% 100.00% 100.00% 100.00% Services 0.00% 100.00% 100.00% 100.00% Financial services - - (b) (b) - - - Securitization - Securitization 0.00% 100.00% 100.00% 100.00% Securitization - (b) - - Securitization Mexico 0.00% 50.10% Langton Funding (No.1) Limited Langton Mortgages Trustee (UK) Limited Langton PECOH Limited Langton Securities (2008-1) plc Langton Securities (2010-1) PLC Langton Securities (2010-2) PLC United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Langton Securities Holdings Limited United Laparanza, S.A. Liquidity Limited Luri 1, S.A., en liquidación (j) (m) Luri 6, S.A. Unipersonal MAC No. 1 Limited Master Red Europa, S.L. Mata Alta, S.L. Merciver, S.L. Mercury Trade Finance Solutions, S.A. de C.V. Mercury Trade Finance Solutions, S.L. Mercury Trade Finance Solutions, S.p.A. Merlion Aviation One Designated Activity Company Moneybit, S.L. Mortgage Engine Limited Motor 2015-1 Holdings Limited Motor 2016-1 Holdings Limited Motor 2016-1 PLC Motor 2017-1 Holdings Limited Motor 2017-1 PLC Motor Securities 2018-1 Designated Activity Company Mouro Capital I LP Multiplica SpA Kingdom Spain United Kingdom Spain Spain United Kingdom Spain Spain Spain Spain Chile Ireland Spain United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Ireland United Kingdom Chile 0.00% 100.00% 100.00% 100.00% Securitization (5) - (b) - - Securitization 0.00% 100.00% 100.00% - Investment fund 0.00% 100.00% 100.00% 100.00% Payment services 100.00% 100.00% Finance company Naviera Mirambel, S.L. Spain 0.00% 100.00% (25) 0 0 1 1 0 0 28 (1) 0 1,358 0 1 0 1 0 11 0 17 31 (3) 0 0 0 0 0 0 5 0 5 0 0 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 0 0 0 0 0 16 0 0 1,371 0 1 0 1 0 (1) 30 0 5 (6) (4) 0 0 0 0 (1) (1) 22 0 0 0 0 25 0 0 0 0 0 0 0 0 5 0 805 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Company Naviera Trans Gas, A.I.E. Naviera Trans Iron, S.L. Naviera Trans Ore, A.I.E. Naviera Trans Wind, S.L. (j) Naviera Transcantábrica, S.L. Location Spain Spain Spain Spain Spain Naviera Transchem, S.L. Unipersonal Spain Peru NeoAuto S.A.C. Newcomar, S.L., en liquidación (j) Norbest AS Spain Norway % of ownership held by Banco Santander % of voting power (d) Direct 99.99% Indirect 0.01% 100.00% 99.99% 99.99% 100.00% 0.00% 0.01% 0.01% 0.00% Year 2020 Year 2019 Activity 100.00% 100.00% Renting 100.00% 100.00% Leasing 100.00% 100.00% Renting 100.00% 100.00% Renting 100.00% 100.00% Leasing 100.00% 0.00% 100.00% 100.00% Leasing 0.00% 55.00% 55.00% - Vehicles purchase by internet 40.00% 40.00% 80.00% 80.00% Real estate 7.94% 92.06% 100.00% 100.00% Securities Novimovest – Fundo de Investimento Imobiliário NW Services CO. Open Bank Argentina S.A. 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 Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland Euro Fund (c) Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland US Dollar Fund (c) PagoFX Europe S.A. Portugal 0.00% 78.63% 78.74% 78.74% investment Investment fund United States Argentina Spain Spain Spain Mexico 0.00% 100.00% 100.00% 100.00% E-commerce 0.00% 99.66% 100.00% 0.00% 0.00% 100.00% 99.97% 100.00% 0.03% 0.00% - Banking 100.00% 100.00% 100.00% Banking 100.00% 100.00% Services 100.00% 100.00% Services 100.00% 100.00% Holding company Switzerland 100.00% 0.00% 100.00% 100.00% Fund management company Ireland Ireland 0.00% 57.20% 54.10% 54.10% Fund management company 0.00% 44.49% 51.93% 51.57% Fund management company Belgium 0.00% 100.00% PagoFX HoldCo, S.L. Spain 0.00% 100.00% PagoFX UK Ltd PagoNxt Merchant Solutions, S.L. PagoNxt, S.L. Parasant SA United Kingdom Spain 0.00% 100.00% 0.00% 100.00% Spain 99.99% 0.01% Switzerland 100.00% 0.00% 100.00% 100.00% Payment services 100.00% 100.00% Payment services 100.00% 100.00% Payment services 100.00% 100.00% Holding company 100.00% 100.00% Holding company 100.00% 100.00% Holding company PBD Germany Auto 2018 UG (Haftungsbeschränkt) PBD Germany Auto Lease Master 2019 PBE Companies, LLC PECOH Limited Pereda Gestión, S.A. Phoenix C1 Aviation Designated Activity Company PI Distribuidora de Títulos e Valores Mobiliários S.A. Pingham International, S.A. Popular Spain Holding de Inversiones, S.L.U. Portal Universia Argentina S.A. 806 United States United Kingdom Spain Ireland Uruguay Spain Germany Luxembourg - - (b) (b) - - - Securitization - Securitization 0 0 0.00% 100.00% 100.00% 100.00% Real estate 102 0.00% 100.00% 100.00% 100.00% Securitization 99.99% 0.01% 100.00% 100.00% Holding company - (b) - - Renting Brazil 0.00% 89.99% 100.00% 100.00% Leasing 0.00% 100.00% 100.00% 100.00% Services 100.00% 0.00% 100.00% 40.00% Insurance 726 (225) Argentina 0.00% 75.75% 75.75% 75.75% Internet 0 0 0 EUR million Capital + reserves 15 Net results (2) Carrying amount 44 22 24 3 5 1 1 1 93 304 5 10 217 0 0 1 0 0 0 0 0 (1) 0 0 (2) 5 0 129 (114) 7 25 4 5 2 0 7 0 0 (1) 65 (23) 3 (1) 21 17 3 4 1 1 0 92 239 2 9 221 0 0 4 23 0 0 1 42 2 302 (32) 269 1,081 (133) 901 1,051 59 917 0 0 0 0 2 5 (8) 0 0 0 102 0 4 0 38 0 502 0 44 7 51 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Portal Universia Portugal, Prestação de Serviços de Informática, S.A. Location Portugal Indirect Direct 0.00% 100.00% Year 2020 Year 2019 Activity Internet 100.00% 100.00% EUR million Capital + reserves 0 Net Carrying results amount 0 0 Brazil 0.00% 89.99% 100.00% 100.00% Investment fund 34 (1) 28 Prime 16 – Fundo de Investimentos Imobiliário PSA Bank Deutschland GmbH PSA Banque France PSA Consumer Finance Polska Sp. z o.o. PSA Finance Belux S.A. Germany France Poland 0.00% 50.00% 0.00% 50.00% 0.00% 40.22% 50.00% 50.00% Banking 50.00% Banking 50.00% 100.00% 100.00% Finance company Belgium 0.00% 50.00% 50.00% PSA Finance Polska Sp. z o.o. Poland 0.00% 40.22% 50.00% PSA Finance UK Limited PSA Financial Services Nederland B.V. PSA Financial Services Spain, E.F.C., S.A. PSA Renting Italia S.p.A. PSRT 2018-A PSRT 2019-A Punta Lima Wind Farm, LLC (c) Punta Lima, LLC Retop S.A. (f) Return Capital Serviços de Recuperação de Créditos S.A. Return Gestão de Recursos S.A. United Kingdom Netherlands Spain Italy United States United States United States United States Uruguay Brazil Brazil 0.00% 50.00% 50.00% 0.00% 50.00% 50.00% 0.00% 50.00% 50.00% 50.00% Finance company 50.00% Finance company 50.00% Finance company 50.00% Finance company 50.00% Finance company 0.00% 50.00% 100.00% 100.00% Renting - - (b) (b) - - - Securitization - Securitization 0.00% 100.00% 100.00% 100.00% Electricity production 0.00% 100.00% 100.00% 100.00% Leasing 100.00% 0.00% 0.00% 89.99% 100.00% 100.00% Finance company 100.00% 100.00% Collection services 0.00% 89.99% 100.00% 100.00% Fund management company Inactive Riobank International (Uruguay) SAIFE (j) Roc Aviation One Designated Activity Company Roc Shipping One Designated Activity Company Rojo Entretenimento S.A. SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión SAM Investment Holdings, S.L. Uruguay 0.00% 100.00% 100.00% 100.00% Ireland Ireland Brazil Mexico - - (b) (b) - - - Renting - Renting 0.00% 85.13% 94.60% 94.60% Services 0.00% 100.00% 100.00% 100.00% Fund management company SAM UK Investment Holdings Limited (j) SANB Promotora de Vendas e Cobrança Ltda. Sancap Investimentos e Participações S.A. United Kingdom Brazil 92.37% 7.63% 0.00% 89.99% Brazil 0.00% 89.99% 0.00% 100.00% 100.00% 100.00% Holding company 100.00% 100.00% Finance company 100.00% 100.00% Holding company 100.00% 100.00% Services Santander (CF Trustee Property Nominee) Limited Santander (CF Trustee) Limited (d) United Kingdom United Kingdom Santander (UK) Group Pension Schemes Trustees Limited (d) Santander Ahorro Inmobiliario 1, S.A. Spain United Kingdom - (b) - - Asset management 0.00% 100.00% 100.00% 100.00% Asset management 98.53% 0.00% 98.53% 98.53% Real estate rental 99.91% Real estate rental Santander Ahorro Inmobiliario 2, S.A. Spain 99.91% 0.00% 99.91% 517 1,113 1 116 36 332 76 50 82 1 17 5 42 15 229 463 0 42 10 122 14 289 101 174 7 76 40 19 44 9 0 0 0 (2) (3) 21 3 6 41 14 (9) (4) 16 3 0 0 0 (1) 0 18 3 0 0 41 41 63 3 0 0 0 0 18 161 0 2 0 0 0 1 147 38 147 0 0 0 1 1 0 0 0 0 0 0 0 0 1 1 807 Spain 92.37% 7.62% 100.00% 100.00% Fund management 1,389 (13) 1,597 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Company Santander Alternatives SICAV RAIF (c) Santander Asesorías Financieras Limitada Santander Asset Finance (December) Limited Santander Asset Finance plc Santander Asset Management - S.G.O.I.C., S.A. % of ownership held by Banco Santander % of voting power (d) Location Luxembourg Indirect Direct 0.00% 100.00% Chile 0.00% 67.44% Year 2020 100.00% Year 2019 Activity - Investment company 100.00% 100.00% Securities company United Kingdom United Kingdom Portugal 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% Fund management company Santander Asset Management Chile S.A. Chile 0.01% 99.94% 100.00% 100.00% Securities investment Santander Asset Management Luxembourg, S.A. Luxembourg Santander Asset Management S.A. Administradora General de Fondos Chile Santander Asset Management UK Holdings Limited Santander Asset Management UK Limited United Kingdom United Kingdom Santander Asset Management, LLC Santander Asset Management, S.A., S.G.I.I.C. Puerto Rico Spain 0.00% 100.00% 100.00% 100.00% Fund management company 0.00% 100.00% 100.00% 100.00% Fund management company 0.00% 100.00% 100.00% 100.00% Holding company 0.00% 100.00% 100.00% 100.00% Management of 46 funds and portfolios 0.00% 100.00% 100.00% 100.00% Management 0.00% 100.00% 100.00% 100.00% Fund Spain 100.00% 0.00% management company 100.00% 100.00% Services Colombia 0.00% 100.00% 100.00% 100.00% Advisory EUR million Capital + reserves 0 Net results 0 Carrying amount 4 59 64 257 4 (6) 6 14 195 2 263 4 2 (1) 4 11 3 0 1 9 18 2 0 50 (2) 0 39 0 162 12 0 0 132 186 201 1 393 1 1 Santander Back-Offices Globales Mayoristas, S.A. Santander Banca de Inversión Colombia, S.A.S. Santander Bank & Trust Ltd. Santander Bank Polska S.A. Santander Bank, National Association Santander Brasil Administradora de Consórcio Ltda. Santander Brasil Gestão de Recursos Brazil Ltda. Santander Brasil Tecnologia S.A. United States Brazil Santander Capital Desarrollo, SGEIC, S.A. Unipersonal Santander Capital Structuring, S.A. de C.V. Santander Capitalização S.A. Santander Cards Ireland Limited Santander Cards Limited Santander Cards UK Limited Santander Chile Holding S.A. Santander Consulting (Beijing) Co., Ltd. Santander Consumer (UK) plc Santander Consumer Auto Receivables Funding 2013-B2 LLC Santander Consumer Auto Receivables Funding 2013-B3 LLC Santander Consumer Auto Receivables Funding 2018-L1 LLC 808 Bahamas Poland 0.00% 100.00% 67.41% 0.00% 0.00% 100.00% 100.00% 100.00% Banking 67.47% Banking 67.41% 100.00% 100.00% Banking 51 5,414 15 172 11,160 (1,444) 22 4,288 9,712 0.00% 89.99% 100.00% 100.00% Services 0.00% 100.00% 0.00% 89.99% 100.00% 0.00% 100.00% 100.00% Securities investment IT services 100.00% 100.00% 100.00% 100.00% Venture capital Brazil Spain Brazil Ireland United Kingdom United Kingdom Chile Mexico 0.00% 100.00% 100.00% 100.00% 0.00% 89.99% 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cards 100.00% 100.00% Cards Investment company Insurance 0.00% 100.00% 100.00% 100.00% Finance company 22.11% 77.73% 99.84% 99.84% Holding company 100.00% 100.00% Advisory China 0.00% 100.00% United Kingdom United States United States United States 0.00% 100.00% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 67 337 20 5 10 15 (8) 93 151 40 47 9 0 1 43 0 0 1 96 487 26 3 0 52 0 94 108 1,499 223 1,434 8 0 4 681 116 290 (256) (4) (13) 107 90 78 0 0 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 Company Santander Consumer Auto Receivables Funding 2018-L3 LLC Location United States Santander Consumer Auto Receivables Funding 2018-L4 LLC Santander Consumer Auto Receivables Funding 2018-L5 LLC Santander Consumer Auto Receivables Funding 2019-B1 LLC Santander Consumer Auto Receivables Funding 2019-L2 LLC Santander Consumer Auto Receivables Funding 2019-L3 LLC Santander Consumer Auto Receivables Funding 2020-B1 LLC Santander Consumer Auto Receivables Funding 2020-L1 LLC Santander Consumer Auto Receivables Funding 2020-L2 LLC  Santander Consumer Auto Receivables Grantor Trust 2021-A Santander Consumer Auto Receivables Grantor Trust 2021-B Santander Consumer Auto Receivables Trust 2021-A Santander Consumer Auto Receivables Trust 2021-B Santander Consumer Bank AG Santander Consumer Bank AS Santander Consumer Bank GmbH Santander Consumer Bank S.A. Santander Consumer Bank S.A. Santander Consumer Bank S.p.A. Santander Consumer Banque 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 Germany Norway Austria Poland Belgium Italy France Santander Consumer Credit Services Limited Santander Consumer Finance Benelux B.V. United Kingdom Netherlands % of ownership held by Banco Santander % of voting power (d) Direct 0.00% Indirect 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% Year 2020 Year 2019 Activity 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% 0.00% 80.24% 100.00% - Finance company - Finance company - Finance company - Inactive - Inactive - Inactive - Inactive - - - - - - - - (b) (b) (b) (b) 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 0.00% 80.44% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Banking 100.00% 100.00% Finance company 100.00% 100.00% Finance company IT 100.00% 100.00% Finance company 100.00% 100.00% Finance company Santander Consumer Finance Global Services, S.L. Santander Consumer Finance Limitada Santander Consumer Finance Oy Santander Consumer Finance Schweiz AG Santander Consumer Finance, S.A. Santander Consumer Financial Solutions Sp. z o.o. Santander Consumer Finanse Sp. z o.o. (j) 0.00% 100.00% 100.00% 100.00% Spain Chile 49.00% 34.23% Finland 0.00% 100.00% Switzerland 0.00% 100.00% 100.00% 100.00% Leasing Spain Poland 100.00% 0.00% 0.00% 80.44% 100.00% 100.00% Banking - Leasing 100.00% Poland 0.00% 80.44% 100.00% 100.00% Services Santander Consumer Holding Austria GmbH Santander Consumer Holding GmbH Germany Austria Santander Consumer International Puerto Rico LLC Santander Consumer Leasing GmbH Germany Puerto Rico 0.00% 100.00% 0.00% 100.00% 0.00% 80.24% 100.00% 100.00% Holding company 100.00% 100.00% Holding company 100.00% 100.00% Services 0.00% 100.00% 100.00% 100.00% Leasing Santander Consumer Mediación Operador de Banca-Seguros Vinculado, S.L. Spain 0.00% 94.61% 100.00% 100.00% Insurance intermediary EUR million Capital + reserves 36 Net results 22 Carrying amount 0 33 26 (171) 35 26 0 0 0 0 0 0 0 3,313 2,429 381 712 1,168 898 506 (36) 108 6 57 287 41 (13) 23 42 18 3 (91) 65 6 0 0 0 0 404 163 36 68 3 66 40 0 15 2 13 27 7 0 0 0 0 0 0 0 0 0 0 0 0 5,070 2,188 363 486 1,170 603 492 0 190 5 37 166 60 9,995 145 10,021 2 14 0 1 2 12 364 18 518 5,455 225 6,077 7 20 1 3 74 0 8 101 0 809 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Company Santander Consumer Multirent Sp. z o.o. Location Poland % of ownership held by Banco Santander % of voting power (d) Direct 0.00% Indirect 80.44% Year 2020 Year 2019 Activity 100.00% 100.00% Leasing EUR million Capital + reserves 24 Net Carrying results amount 5 3 Santander Consumer Operations Services GmbH Germany 0.00% 100.00% 100.00% 100.00% Services Santander Consumer Receivables 10 LLC United States Santander Consumer Receivables 11 LLC United States Santander Consumer Receivables 3 LLC Santander Consumer Receivables 7 LLC Santander Consumer Receivables Funding LLC Santander Consumer Renting, S.L. Santander Consumer S.A. United States United States United States Spain Argentina 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 80.24% 0.00% 100.00% 0.00% 99.32% Santander Consumer S.A.S. Colombia 0.00% 100.00% Santander Consumer Services GmbH Austria Santander Consumer Services, S.A. Portugal 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Leasing 100.00% 100.00% Finance company 100.00% 100.00% Financial advisory 100.00% 100.00% Services 100.00% 100.00% Finance company Spain Spain - - (b) (b) - - - Securitization - Securitization Germany 0.00% 100.00% 100.00% 100.00% IT services 15 10 625 1 82 249 139 200 90 359 (81) 1 (1) (1) 0 0 1 0 0 5 18 0 0 0 0 0 39 2 1 0 6 0 0 22 3,839 742 4,281 4,766 (382) 3,517 0 38 2 1 0 9 0 0 0 871 81 52 101 475 2 5 94 0 55 28 20 16 0.00% 80.24% 80.24% 72.40% Holding company 0.00% 80.24% 100.00% 100.00% Finance company - (b) - - Securitization 0.00% 91.79% 100.00% 100.00% Cards 0.00% 67.20% 100.00% 100.00% Insurance brokerage 0.00% 83.23% 0.00% 89.99% 0.00% 89.99% 99.50% 0.50% 100.00% 100.00% Securities company 100.00% 100.00% Securities company 100.00% 100.00% Holding company 100.00% 100.00% Services 81.00% 19.00% 100.00% 100.00% Fund 100.00% 100.00% 100.00% 100.00% Finance 100.00% 0.00% 0.00% 80.24% - - - - - (b) (b) (b) (b) (b) - - - - - management company IT services company - Securitization - Securitization - Securitization - Securitization - Securitization (4) 0 193 (2) 1 14 90 0 3 (97) 0 25 23 33 31 42 0 977 53 44 103 505 2 2 0 0 0 0 0 0 0 Santander Consumer Spain Auto 2019-1, Fondo de Titulización Santander Consumer Spain Auto 2020-1, Fondo de Titulización Santander Consumer Technology Services GmbH Santander Consumer USA Holdings Inc. Santander Consumer USA Inc. Santander Consumo 3, F.T. 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 Customer Voice, S.A. Santander de Titulización, S.G.F.T., S.A. Santander Digital Assets, S.L. Santander Drive Auto Receivables LLC 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 2018-1 810 United States United States Spain Mexico Chile Chile Brazil Brazil Spain Spain Spain United States United States United States United States United States United States Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Santander Drive Auto Receivables Trust 2018-2 Location United States Direct Year 2020 Year 2019 Activity EUR million Capital + reserves (23) Net Carrying results amount 0 40 Indirect (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - - - - - - - Securitization (101) - - - - - - - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Inactive - Inactive - Inactive - Inactive (49) (38) (52) (62) (85) 0 0 0 0 0 0 0 0 14 55 51 42 48 48 64 65 (102) (121) (223) (223) 0 0 0 0 2 (15) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 28 214 14 185 8 3 0 414 40 22 0 0 0 3 1 6 8 0 0 393 41 1 49.48% 10.19% 59.66% 59.66% Venture capital United Kingdom Spain 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Finance company 100.00% 100.00% Payment services Spain 99.97% 0.03% 100.00% 100.00% Services United Kingdom Poland 0.00% 100.00% 100.00% 100.00% Real estate 0.00% 67.41% 100.00% 100.00% Finance company Spain 100.00% 0.00% 100.00% 100.00% Real estate Chile Poland 0.00% 99.84% 100.00% 100.00% Factoring 0.00% 67.41% 100.00% 100.00% Financial services 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 Santander Drive Auto Receivables Trust 2018-3 Santander Drive Auto Receivables Trust 2018-4 Santander Drive Auto Receivables Trust 2018-5 Santander Drive Auto Receivables Trust 2019-1 Santander Drive Auto Receivables Trust 2019-2 Santander Drive Auto Receivables Trust 2019-3 Santander Drive Auto Receivables Trust 2020-1 Santander Drive Auto Receivables Trust 2020-2 Santander Drive Auto Receivables Trust 2020-3 Santander Drive Auto Receivables Trust 2020-4 Santander Drive Auto Receivables Trust 2021-1 Santander Drive Auto Receivables Trust 2021-2 Santander Drive Auto Receivables Trust 2021-3 Santander Drive Auto Receivables Trust 2021-4 Santander Energías Renovables I, S.C.R., S.A. Santander Equity Investments Limited Santander España Merchant Services, Entidad de Pago, S.L. Unipersonal Santander España Servicios Legales y de Cumplimiento, S.L. Santander Estates Limited Santander F24 S.A. Santander Facility Management España, S.L. Santander Factoring S.A. Santander Factoring Sp. z o.o. Santander Factoring y Confirming, S.A., E.F.C. Santander Finance 2012-1 LLC Santander Financial Exchanges Limited Santander Financial Services plc Santander Financial Services, Inc. Spain 100.00% 0.00% 100.00% 100.00% Factoring 191 64 126 United States United Kingdom United Kingdom Puerto Rico 0.00% 100.00% 100.00% 0.00% 0.00% 100.00% 0.00% 100.00% Santander Finanse Sp. z o.o. Poland 0.00% 67.41% Santander Fintech Holdings, S.L. Spain 99.97% 0.03% 100.00% 100.00% Financial services 100.00% 100.00% Finance company 100.00% 100.00% Banking 100.00% 100.00% Finance company 100.00% 100.00% Financial services 100.00% 100.00% Holding company 2 0 0 0 2 0 355 (13) 375 255 (33) 225 55 13 6 0 19 13 811 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Santander Fintech Limited Santander Fundo de Investimento Santillana Multimercado Crédito Privado Investimento No Exterior (e) Santander Fundo de Investimento SBAC Referenciado di Crédito Privado (h) Santander Gestión de Recaudación y Cobranzas Ltda. Santander Global Consumer Finance Limited Santander Global Facilities, S.A. de C.V. Santander Global Facilities, S.L. Santander Global Operations, S.A. Santander Global Services S.A. (j) Santander Global Sport, S.A. Santander Global Technology Brasil Ltda. Santander Global Technology Chile Limitada Santander Global Technology, S.L. Santander Global Trade Platform Solutions, S.L. Santander Guarantee Company Santander Hipotecario 1 Fondo de Titulización de Activos Santander Hipotecario 2 Fondo de Titulización de Activos Santander Hipotecario 3 Fondo de Titulización de Activos Santander Holding Imobiliária S.A. Santander Holding Internacional, S.A. Santander Holdings USA, Inc. Santander Inclusión Financiera, S.A. de C.V., S.O.F.O.M., E.R., Grupo Financiero Santander México Location United Kingdom Brazil United Kingdom Mexico Spain Spain Uruguay Spain Brazil Chile Spain Spain United Kingdom Spain Spain Spain Brazil Spain United States Mexico Santander Insurance Agency, U.S., LLC United States Santander Insurance Services UK Limited Santander Intermediación Correduría de Seguros, S.A. United Kingdom Spain Direct 100.00% Indirect 0.00% Year 2019 Activity 100.00% 100.00% Finance Year 2020 company EUR million Capital + reserves 219 Net Carrying results amount 144 (15) - (b) - - Investment fund 308 100 0 Brazil 0.00% 89.10% 100.00% 100.00% Investment fund 1,121 28 993 Chile 0.00% 99.84% 0.00% 100.00% 100.00% 100.00% Financial services 100.00% 100.00% Finance company 100.00% 0.00% 100.00% 100.00% 0.00% 0.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Real estate management 100.00% 100.00% Real estate 100.00% 100.00% Services 100.00% 100.00% Services 100.00% 100.00% Sports activity 0.00% 100.00% 100.00% 100.00% IT services 0.00% 100.00% 100.00% 100.00% IT services 6 7 0 0 5 7 108 11 120 236 (163) 33 0 23 3 25 0 0 (2) 1 (1) 71 24 0 21 1 20 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% 100.00% IT services IT services 395 98 16 (22) 346 76 0.00% 100.00% 100.00% 100.00% Leasing - - - (b) (b) (b) - - - - Securitization - Securitization - Securitization 4 0 0 0 0.00% 89.99% 100.00% 100.00% Real estate 60 0 0 0 0 1 3 0 0 0 54 99.95% 0.05% 100.00% 0.00% 0.00% 91.79% 100.00% 100.00% Holding company 100.00% 100.00% Holding company 100.00% 100.00% Finance company 0.00% 100.00% 100.00% 100.00% Insurance 100.00% 0.00% 100.00% 100.00% Asset 100.00% 0.00% 100.00% 100.00% management Insurance brokerage 100.00% 100.00% Holding company 100.00% 100.00% Banking 100.00% 100.00% Finance company 100.00% 100.00% Holding company 100.00% 100.00% Securities company 100.00% 100.00% Banking 0.00% 100.00% 100.00% 0.00% 0.00% 100.00% 100.00% - Fund management 3,355 1,177 2,355 16,775 (685) 12,221 14 (9) 1 40 22 1 0 1 2 0 5 1 41 18 0 1,506 176 1,032 575 520 218 399 1,405 1 3 17 0 35 3 0 529 321 29 434 245 1 Santander International Products, Plc. (l) Santander Inversiones S.A. Ireland 99.99% 0.01% 100.00% 100.00% Finance company Chile 0.00% 100.00% Santander Investment Bank Limited Bahamas Santander Investment Chile Limitada Chile 0.00% 100.00% 0.00% 100.00% Santander Investment I, S.A. Spain 100.00% 0.00% Santander Investment Securities Inc. United States Spain Luxembourg Santander Investment, S.A. Santander Investments GP 1 S.à.r.l. 812 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Direct 0.00% Indirect 67.41% Year 2020 Year 2019 Activity 100.00% 100.00% Securities company EUR million Capital + reserves 11 Net Carrying results amount 7 0 0.00% 100.00% 100.00% 100.00% Management of 28 7 6 Location Poland United Kingdom Spain Ireland Poland Brazil United States United Kingdom Spain Mexico Mexico Brazil Mexico Company Santander Inwestycje Sp. z o.o. Santander ISA Managers Limited Santander Lease, S.A., E.F.C. 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. Santander Merchant Platform Operations, S.A. de C.V. Santander Merchant Platform Services, S.A. de C.V. Santander Merchant Platform SoluçõesTecnológicas Brasil Ltda. Santander Merchant Platform Solutions México, S.A. de C.V. Santander Merchant Platform Solutions S.A. Santander Merchant Platform Solutions Uruguay S.A. Santander Merchant S.A. Santander Prime Auto Issuance Notes 2018-A Designated Activity Company Santander Prime Auto Issuance Notes 2018-B Designated Activity Company Santander Prime Auto Issuance Notes 2018-C Designated Activity Company Santander Prime Auto Issuance Notes 2018-D Designated Activity Company Santander Prime Auto Issuance Notes 2018-E Designated Activity Company Ireland Ireland Ireland Ireland Ireland Santander Private Banking Gestión, S.A., S.G.I.I.C. Spain 100.00% 0.00% 100.00% 100.00% Leasing - (b) - - Securitization funds and portfolios 0.00% 67.41% 0.00% 89.99% 100.00% 100.00% Leasing 99.99% Leasing 100.00% 0.00% 100.00% 100.00% 100.00% Leasing 0.00% 100.00% 100.00% 100.00% Mortgage credit 100.00% 0.00% 100.00% 100.00% 0.00% 95.98% 100.00% 0.00% 95.98% 100.00% 0.00% 100.00% 100.00% 100.00% 0.00% 95.98% 100.00% company Insurance intermediary - Financial services - Financial services IT services - Holding company - Payment methods 66 0 131 907 0 (5) 0 3 12 0 51 0 28 827 0 229 (3) 231 5 0 0 29 13 7 0 0 0 44 0 0 (6) 15 (2) 0 0 (1) 3 1 1 23 73 6 0 2 0 491 (248) 219 91 18 184 - - - - - (b) (b) (b) (b) (b) - - - - - - Securitization (20) 3 0 6 - Securitization (11) (5) - Securitization (2) (3) - Securitization (16) (6) - Securitization (1) (8) 3 0 0 0 0 0 Argentina 0.00% 99.66% 100.00% Uruguay 0.00% 100.00% Argentina 0.00% 100.00% 100.00% - Payment methods 100.00% 100.00% Finance company Santander Mortgage Holdings Limited Santander Paraty Qif PLC United Kingdom Ireland 0.00% 100.00% 100.00% 100.00% Financial services 0.00% 89.99% 100.00% 100.00% Investment company Santander Pensiones, S.A., E.G.F.P. Spain 0.00% 100.00% Santander Pensões - Sociedade Gestora de Fundos de Pensões, S.A. Portugal 100.00% 0.00% 100.00% 100.00% Pension fund management company 100.00% 100.00% Pension fund management company 100.00% 0.00% 100.00% 100.00% Fund 42 10 35 management company Santander Private Banking s.p.a. in Liquidazione (j) Italy 100.00% 0.00% 100.00% 100.00% Finance company Santander Private Banking UK Limited United Kingdom 0.00% 100.00% 100.00% 100.00% Real estate 13 284 0 0 7 388 813 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) EUR million Location Spain Direct 99.99% Indirect 0.01% Year 2020 Year 2019 Activity 100.00% 100.00% Real estate Capital + reserves 4 Net Carrying results amount 4 0 Spain Spain 100.00% 0.00% 100.00% 100.00% Real estate 100.00% 0.00% 0.00% 80.24% 100.00% 100.00% 100.00% 100.00% Securitization Inactive Company Santander Private Real Estate Advisory & Management, S.A. Santander Private Real Estate Advisory, S.A. Santander Real Estate, S.A. Santander Retail Auto Lease Funding LLC United States Santander Retail Auto Lease Trust 2018-A Santander Retail Auto Lease Trust 2019-A Santander Retail Auto Lease Trust 2019-B Santander Retail Auto Lease Trust 2019-C Santander Retail Auto Lease Trust 2020-A Santander Retail Auto Lease Trust 2020-B Santander Retail Auto Lease Trust 2021-A Santander Retail Auto Lease Trust 2021-B United States United States United States United States United States United States United States United States Santander Revolving Auto Loan Trust 2019-A United States - - - - - - - - - - (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Inactive - Inactive - Inactive - Securitization (126) 23 Santander Revolving Auto Loan Trust 2021-A Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A. Santander Río Trust S.A. Santander Río Valores S.A. Santander RMBS 6, Fondo de Titulización Santander S.A. Sociedad Securitizadora Santander Secretariat Services Limited Santander Securities LLC 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 Technology USA, LLC United States Argentina Argentina Argentina 0.00% 99.97% 0.00% 99.35% 0.00% 100.00% 100.00% 100.00% Fund management company 100.00% 100.00% Services 100.00% 100.00% Securities company Spain Chile United Kingdom United States Spain - (b) - - Securitization 0.00% 67.24% 100.00% 100.00% Fund management company 0.00% 100.00% 0.00% 100.00% 100.00% 0.00% 100.00% 100.00% Holding company 100.00% 100.00% Securities company Insurance 100.00% 100.00% Mexico 0.00% 91.79% 100.00% 100.00% Services Mexico United States 0.00% 91.79% 0.00% 100.00% 100.00% 100.00% Financial services IT services 100.00% 100.00% Santander Tecnología Argentina S.A. Argentina 0.00% 99.35% 100.00% 100.00% Santander Tecnologia e Inovação Ltda. Santander Tecnología España, S.L.U. Spain Brazil 0.00% 89.99% 100.00% 100.00% 100.00% 0.00% 100.00% 100.00% Mexico 0.00% 91.79% 100.00% 100.00% IT services IT services IT services IT services 2 1 45 38 1 1 4 4 Portugal 0.00% 99.91% 100.00% 100.00% Insurance 144 27 Portugal 99.85% 0.06% 99.91% 99.91% Holding company 3,805 7 5,551 Santander Tecnología México, S.A. de C.V. Santander Totta Seguros, Companhia de Seguros de Vida, S.A. Santander Totta, SGPS, S.A. 814 13 1 0 82 38 26 28 0 0 0 0 0 0 0 43 24 13 13 44 24 0 0 0 4 0 2 0 1 0 0 4 0 1 0 0 0 44 (8) 36 1,301 151 1,188 6 2 4 1 9 2 85 (11) 74 14 1 0 0 0 0 0 0 0 0 0 0 0 3 0 2 0 0 0 1 1 45 36 47 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Santander Towarzystwo Funduszy Inwestycyjnych S.A. Location Poland Direct 50.00% Indirect 33.70% Year 2020 Year 2019 Activity 100.00% 100.00% Fund management company Inactive 100.00% 100.00% 100.00% 100.00% Finance company 100.00% 100.00% Finance company 100.00% 100.00% Services EUR million Capital + reserves 4 Net Carrying results amount 15 25 16 1 16 14,823 269 15,056 49 23 0 3 45 17 Hong-Kong 0.00% 100.00% 77.67% 22.33% 100.00% 0.00% 0.00% 100.00% United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Mexico 0.00% 100.00% 100.00% 100.00% Banking 15,732 289 14,725 0.00% 100.00% 100.00% 100.00% IT services - (b) - - Securitization 27 7 9 0 1 (1) 6 0 2 5,905 2,440 6,477 Switzerland 0.00% 100.00% Spain 69.76% 30.24% 100.00% 100.00% Asset management 100.00% 100.00% Holding company Santander Trade Services 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 como Fiduciaria del Fideicomiso Bursa Santander Wealth Management International SA Santusa Holding, S.L. SC Austria Finance 2013-1 S.A. SC Austria Finance 2020-1 Designated Activity Company SC Germany Auto 2014-2 UG (haftungsbeschränkt) SC Germany Auto 2016-2 UG (haftungsbeschränkt) SC Germany Auto 2017-1 UG (haftungsbeschränkt) SC Germany Auto 2018-1 UG (haftungsbeschränkt) SC Germany Auto 2019-1 UG (haftungsbeschränkt) SC Germany Consumer 2014-1 UG (haftungsbeschränkt) SC Germany Consumer 2016-1 UG (haftungsbeschränkt) SC Germany Consumer 2018-1 UG (haftungsbeschränkt) SC Germany Mobility 2019-1 UG (haftungsbeschränkt) SC Germany S.A. SC Germany S.A., Compartment Consumer 2020-1 SC Germany S.A., Compartment Mobility 2020-1 SC Germany Vehicles 2013-1 UG (haftungsbeschränkt) Luxembourg Ireland Germany Germany Germany Germany Germany Germany Germany Germany Germany Luxembourg Luxembourg Luxembourg Germany Germany SC Germany Vehicles 2015-1 UG (haftungsbeschränkt) SC Poland Consumer 15-1 Sp. z.o.o. Poland Poland SC Poland Consumer 16-1 Sp. z o.o. Ireland SCF Ajoneuvohallinto I Limited (j) Ireland SCF Ajoneuvohallinto II Limited Ireland SCF Ajoneuvohallinto IX Limited Ireland SCF Ajoneuvohallinto KIMI VI Limited Ireland SCF Ajoneuvohallinto VII Limited Ireland SCF Ajoneuvohallinto VIII Limited - - - - - - - - - - - - - - - - - - - - - - - - (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) - - - - - - - - - - - - - - - - - - - - - - - - - Securitization - Securitization - Securitization - Securitization - Securitization 0 0 0 0 0 - Securitization (1) - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization 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 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 0 0 0 0 0 0 0 0 0 0 815 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 Company SCF Eastside Locks GP Limited SCF Rahoituspalvelut I Designated Activity Company (j) SCF Rahoituspalvelut II Designated Activity Company SCF Rahoituspalvelut IX DAC SCF Rahoituspalvelut KIMI VI Designated Activity Company SCF Rahoituspalvelut VII Designated Activity Company SCF Rahoituspalvelut VIII Designated Activity Company SCM Poland Auto 2019-1 DAC SDMX Superdigital, S.A. de C.V. Location United Kingdom Ireland Ireland Ireland Ireland Ireland Ireland Ireland Mexico Ireland Secucor Finance 2013-I Designated Activity Company (q) Services and Promotions Delaware United Corp. States Services and Promotions Miami LLC United States Spain Servicio de Alarmas Controladas por Ordenador, S.A. Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. Sheppards Moneybrokers Limited Shiloh III Wind Project, LLC Silk Finance No. 5 Sixt Leasing (Schweiz) AG Sixt Leasing GmbH Sixt Leasing SE Sixt Location Longue Durée S.à.R.L. Sixt Mobility Consulting AG United Kingdom United States Portugal Switzerland Austria Germany France Switzerland % of ownership held by Banco Santander % of voting power (d) Year 2020 Year 2019 Activity 100.00% 100.00% Real estate Indirect Direct 0.00% 100.00% - - - - - - - (b) (b) (b) (b) (b) (b) (b) - - - - - - - management - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Securitization - Payment platform Mexico 0.00% 85.00% 85.00% 85.00% Finance company 0.00% 100.00% 100.00% - (b) - - Securitization 0.00% 100.00% 100.00% 100.00% Holding company 0.00% 100.00% 100.00% 100.00% Real estate 99.99% 0.01% 100.00% 100.00% Security 0.00% 100.00% 100.00% 100.00% Advisory services 0.00% 100.00% - (b) 0.00% 46.95% 0.00% 46.95% 0.00% 46.95% 0.00% 46.95% - 100.00% 100.00% 100.00% Electricity production - Securitization - Renting - Renting - Leasing - Renting 100.00% 100.00% 92.07% 0.00% 46.95% 100.00% EUR million Capital + reserves 0 Net Carrying results amount 0 0 0 0 1 0 0 0 0 0 0 60 53 2 32 0 0 0 0 0 0 0 0 0 0 2 2 0 1 0 0 0 0 0 0 0 0 0 0 62 55 1 28 0 279 20 299 0 12 (2) 191 9 1 (2) 1 0 0 1 0 0 1 1 0 0 3 0 0 0 0 0 175 0 0 0 0 0 0 - Consulting services - Consulting services - Consulting services - Consulting services - Consulting services Sixt Mobility Consulting B.V. Netherlands 0.00% 46.95% 100.00% Sixt Mobility Consulting GmbH Germany 0.00% 46.95% 100.00% 0.00% 46.95% 100.00% 0.00% 46.95% 100.00% Sixt Mobility Consulting Österreich GmbH Sixt Mobility Consulting S.à.R.L. SMPS Merchant Platform Solutions México, S.A de C.V Sociedad Integral de Valoraciones Automatizadas, S.A. Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile S.A. Austria France Mexico Spain Chile 0.00% 95.98% 100.00% - Collection and 12 14 25 payment services 100.00% 0.00% 100.00% 100.00% Appraisals 0.00% 67.12% 100.00% - Collection and payment services 1 19 0 (1) 1 12 Socur S.A. (f) Uruguay 100.00% 0.00% 100.00% 100.00% Finance company 29 23 59 816 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Subsidiaries of Banco Santander, S.A. 1 Company Sol Orchard Imperial 1 LLC (c) Solarlaser Limited Sovereign Community Development Company Sovereign Delaware Investment Corporation Sovereign Lease Holdings, LLC Sovereign REIT Holdings, Inc. Sovereign Spirit Limited (n) Location United States United Kingdom United States United States United States United States Bermudas % of ownership held by Banco Santander % of voting power (d) Direct 0.00% Indirect 58.40% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% Activity Year 2020 Year 2019 100.00% 100.00% Electricity production 100.00% 100.00% Real estate 100.00% 100.00% Holding company 100.00% 100.00% Holding company 100.00% 100.00% Financial services 100.00% 100.00% Holding company EUR million Capital + reserves 27 Net results (1) Carrying amount 26 0 35 122 0 0 1 0 35 124 184 20 204 6,833 90 6,923 0.00% 100.00% 100.00% 100.00% Leasing 0 0 0 Sterrebeeck B.V. Netherlands 100.00% 0.00% 100.00% 100.00% Holding company 3,954 211 10,521 Suleyado 2003, S.L. Unipersonal Spain 0.00% 100.00% 100.00% 100.00% Securities investment - Real estate management Summer Empreendimentos Ltda. Brazil 0.00% 89.99% 100.00% Super Pagamentos e Administração de Meios Eletrônicos S.A. Superdigital Argentina S.A.U. Superdigital Colombia S.A.S. Argentina Colombia 0.00% 100.00% 100.00% 100.00% Payment services - IT services 100.00% 0.00% 99.97% 99.97% - IT services Brazil 0.00% 100.00% Superdigital Holding Company, S.L. Spain 0.00% 100.00% 100.00% 100.00% Holding company Superdigital Perú S.A.C. Suzuki Servicios Financieros, S.L. Svensk Autofinans WH 1 Designated Activity Company Swesant SA Peru Spain Ireland 0.00% 100.00% 100.00% 0.00% 51.00% 51.00% - Financial services Intermediation 51.00% - (b) - - Securitization Switzerland 0.00% 100.00% 100.00% 100.00% Holding SXT Dienstleistungen GmbH & Co. KG Germany 0.00% 46.95% 100.00% company - Services SXT Leasing Verwaltungs GmbH Germany 0.00% 46.95% 100.00% - Portfolio management Taxagest Sociedade Gestora de Participações Sociais, S.A. Teatinos Siglo XXI Inversiones S.A. Portugal 0.00% 99.86% Chile 50.00% 50.00% 100.00% 100.00% Holding company 100.00% 100.00% Holding company The Alliance & Leicester Corporation Limited The Best Specialty Coffee, S.L. Unipersonal Tikgi Aviation One Designated Activity Company Time Retail Finance Limited (j) TIMFin S.p.A. Tonopah Solar I, LLC TOPSAM, S.A de C.V. United Kingdom Spain Ireland United Kingdom Italy United States Mexico 0.00% 100.00% 100.00% 100.00% Real estate 100.00% 0.00% 100.00% 100.00% Restaurant - (b) - services - Renting 0.00% 100.00% 100.00% 100.00% Services 0.00% 51.00% 51.00% - Finance company 0.00% 100.00% 100.00% 100.00% Holding company 0.00% 100.00% 100.00% 100.00% Fund management company Toque Fale Serviços de Telemarketing Ltda. Tornquist Asesores de Seguros S.A. (j) Totta (Ireland), PLC (h) Brazil 0.00% 89.99% 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 23 3 9 0 0 84 0 7 0 10 1 0 56 (1) 0 (2) 0 0 (2) 0 2 0 8 0 0 0 23 8 57 0 0 82 0 0 0 0 0 0 0 1,434 236 2,145 14 1 (2) 0 6 5 2 11 0 451 0 0 0 0 (2) 0 0 (1) 0 9 14 1 0 0 3 5 1 9 0 450 817 Annual report 2020 Contents Subsidiaries of Banco Santander, S.A. 1 % of ownership held by Banco Santander % of voting power (d) Company Totta Urbe - Empresa de Administração e Construções, S.A. Trabajando.com Mexico, S.A. de C.V. en liquidación (j) Trabajando.com Perú S.A.C. Location Portugal Direct 0.00% Indirect 99.86% Year 2020 Year 2019 100.00% 100.00% Real estate Activity Mexico 0.00% 100.00% 100.00% 99.87% Services Peru 0.00% 100.00% 100.00% 100.00% Services Trade Maps 3 Hong Kong Limited Hong Kong Trade Maps 3 Ireland Limited (j) Ireland - - (b) (b) - - - Securitization - Securitization Trans Rotor Limited (j) Transolver Finance EFC, S.A. United Kingdom Spain Tresmares Growth Fund Santander, SCR, S.A. Tresmares Santander Direct Lending, Spain SICC, S.A. Tuttle and Son Limited Spain United Kingdom 100.00% 0.00% 100.00% 100.00% Renting 0.00% 51.00% 51.00% 51.00% Leasing 100.00% 0.00% 100.00% 99.60% 0.00% 99.60% - Holding company - Fund management 0.00% 100.00% 100.00% 100.00% Payments and collections services Universia Brasil S.A. Universia Chile S.A. Brazil Chile 0.00% 100.00% 100.00% 100.00% Internet 0.00% 86.84% 86.84% 86.84% Internet Universia Colombia S.A.S. Colombia 0.00% 100.00% 100.00% 100.00% Internet Universia España Red de Universidades, S.A. Universia Holding, S.L. Universia México, S.A. de C.V. Universia Perú, S.A. Universia Uruguay, S.A. Spain Spain Mexico Peru Uruguay 0.00% 89.45% 89.45% 89.45% Internet 100.00% 0.00% 100.00% 100.00% Holding 0.00% 100.00% 100.00% 100.00% 0.00% 100.00% 100.00% 99.73% Internet 0.00% 100.00% 100.00% 100.00% Internet company Internet Uro Property Holdings, SOCIMI, S.A. Spain 99.99% 0.00% 99.99% 22.77% Real estate Wallcesa, S.A. Wave Holdco, S.L. Spain Spain Waypoint Insurance Group, Inc. United States WIM Servicios Corporativos, S.A. de Mexico C.V. 100.00% 0.00% 0.00% 100.00% 0.00% 100.00% 0.00% 100.00% 100.00% 100.00% Financial services 100.00% 100.00% Holding company 100.00% 100.00% Holding company 100.00% 100.00% Advisory WTW Shipping Designated Activity Company Ireland 100.00% 0.00% 100.00% 100.00% Leasing EUR million Capital + reserves 127 Net Carrying results amount 100 1 0 0 0 0 7 62 1 149 0 0 0 0 2 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 5 17 1 148 0 0 0 0 2 18 (9) 15 0 0 0 163 (937) 0 0 0 9 0 0 0 0 179 0 54 (16) 38 8 0 13 0 0 1 8 0 9 a. Amount according to the provisional books of each company at the date of publication of these annexes generally referring to 31 December 2020 without taking into account, where applicable, interim dividends paid during the year. In the carrying amount (cost net of provision), the Group's percentage ownership has been applied to the figure for each holding company, disregarding goodwill impairments made in the consolidation process. The figures for foreign companies are converted into euro at the year-end exchange rate. b. Companies over which effective control is exercised. c. Data as at 31 December 2019, latest available accounts. d. Data as at 31 March 2020, latest available accounts. e. Data as at 30 June 2020, latest available accounts. f. Data as at 30 September 2020, latest available accounts. g. Data as at 31 July 2020, latest available accounts. h. Data as at 30 November 2020, latest available accounts. i. Date as at 31 October 2020, latest available accounts. j. Company in liquidation as at 31 December 2020. k. Pursuant to Article 3 of Royal Decree 1159/ 2010, of 17 September, approving the rules for the preparation of consolidated annual accounts, in order to determine the voting rights, voting rights held directly by the parent company have been added to those held by subsidiaries or other persons acting in their own name but on behalf of a Group company. For these purposes, the number of votes corresponding to the parent company, in relation to its indirect subsidiaries, is that corresponding to the subsidiary which has a direct holding in the share capital of the latter. Company with Tax Residence in Spain. l. m. See note 2.b.i. n. Company with Tax Residence in the United Kingdom. o. Company recently incorporated to the Group, with no available accounts. p. Data as at 31 May 2020, latest available accounts. q. Data as at 31 January 2020, latest available accounts. r. Data as at 31 December 2004, latest available accounts. 1. The companies issuing preference shares and participating interests are listed in Annex III, together with other relevant information. 818 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Appendix II Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) Location Caymand Island Netherlands Direct Indirect (h) - Year 2020 Year 2019 - 8.89% 0.00% 8.89% Activity - Leasing - Holding company EUR million Type of Capital + company reserves - Net Carrying results amount - - 356 356 20 Chile 0.00% 13.42% 20.00% 20.00% Payment and collection services Associated 57 20 Portugal 0.00% 48.95% 49.00% 49.00% Insurance Portugal 0.00% 48.95% 49.00% 49.00% Insurance Portugal 0.00% 19.97% 20.00% 20.00% Inactive Joint venture — Joint venture Joint venture — — — — 53 17 133 22 15 0 0 0 - - - - - - 403 104 (42) 565 519 46 Aguas de Fuensanta, S.A. (k) Spain Spain Alcuter 2, S.L. (k) 36.78% 0.00% 36.78% 36.78% Food 37.23% 0.00% 37.23% 37.23% Technical services 0.00% 15.00% 15.00% 15.00% Real estate Spain Brazil 0.00% 30.00% 33.33% 33.33% Investment fund Joint venture Banco RCI Brasil S.A. Brazil 0.00% 35.90% 39.89% 39.89% Banking 1,898 192 28 Spain 20.00% 0.00% 20.00% 20.00% Advertising Associated 328 101 1 Morocco 0.00% 5.11% 5.11% 5.11% Banking — 48,831 4,307 637 Argentina 0.00% 14.17% 14.17% Poland 0.00% 6.74% 10.00% 14.17% Motorway concession 10.00% Pension fund — — management 154 104 (33) 107 99 24 Poland 0.00% 6.74% 10.00% 10.00% Insurance — 3,271 264 129 Mexico 0.00% 50.00% 50.00% 50.00% Banking China China France Brazil 0.00% 20.00% 20.00% 6.54% 0.00% 6.54% 0.00% 30.50% 30.50% 0.00% 15.88% 17.65% 20.00% Finance company 6.54% Banking 30.50% Custody services 17.61% Payment and collection services Joint venture Joint venture 158 59 Associated 1,052 102 — 278,755 19,490 2,529 Associated 120,704 4,020 189 — 253 171 28 Spain 50.00% 0.00% 50.00% 50.00% Venture capital Associated Portugal 0.00% 49.98% 49.98% Chile 0.00% 22.37% 33.33% 49.98% Real estate services 33.33% Payment and collection services Joint venture Associated 0 0 13 0 0 8 0 0 2 819 Company Abra 1 Limited (k) Achmea Tussenholding, B.V. (b) 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. Aeroplan - Sociedade Construtora de Aeroportos, Lda. (e) Altamira Asset Management, S.A. (b) Apolo Fundo de Investimento em Direitos Creditórios Arena Communications Network, S.L. (consolidado) (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 S3 Caceis México, S.A., Institución de Banca Múltiple Bank of Beijing Consumer Finance Company Bank of Shanghai Co., Ltd. (consolidado) (b) CACEIS (consolidado) Câmara Interbancária de Pagamentos - CIP Cantabria Capital, SGEIC, S.A. CCPT - ComprarCasa, Rede Serviços Imobiliários, S.A. Centro de Compensación Automatizado S.A. 2 4 4 6 Annual report 2020 Contents Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) EUR million Location Spain Direct 0.00% Indirect 49.00% Year 2020 49.00% Year 2019 49.00% Technology Activity Type of company Associated Capital + reserves 3 Net results 2 Carrying amount 0 Ireland 49.00% 0.00% 49.00% Ireland 49.00% 0.00% 49.00% 49.00% Insurance brokerage 49.00% Insurance brokerage Associated 960 164 31 Associated 1,378 229 48 Ireland 49.00% 0.00% 49.00% 49.00% Services Associated Chile Brazil Spain 0.00% 8.37% 12.47% 0.00% 25.00% 25.00% 20.18% 0.00% 20.18% 12.45% Financial services 25.00% Financial services 20.18% Finance company Associated Joint venture — 29 29 1 3 12 (1) 1 1 0 145 131 10 Spain 23.33% 0.55% 23.88% 23.88% Credit insurance — 927 351 24 7 0 (1) 0 0 (5) Spain Spain Spain Spain Portugal United States United Kingdom Poland 24.07% 0.00% 24.07% 24.07% Real estate Associated 507 328 21.98% 0.00% 21.98% 21.98% Real estate development — 38 (324) 32.21% 0.00% 36.21% 36.21% Services 19.90% 0.00% 19.90% 0.00% 27.54% 27.58% 0.00% 36.30% 36.30% 0.00% 45.45% 45.45% 0.00% 13.13% 22.00% - Consulting services 27.58% Cork industry — — 33.60% Holding company 6.39% Payment services — Joint venture Spain 50.00% 0.00% 50.00% Portugal 0.00% 36.57% 36.62% 36.62% Real estate — Associated 445 28 (34) 21.99% Electricity production 50.00% Payment services — Associated 0 83 0 (1) 1 58 1 (12) 0 87 2 3 185 25 0 20 170 United States Spain Spain Spain Spain Spain Spain Spain Spain 0.00% 25.73% 25.73% 23.56% Banking — 89,406 1,440 51 - - - - - - - - (h) (h) (h) (h) (h) (h) (h) (h) - - - - - - - - - Securitizations - Securitizations - Securitizations - Securitizations - Securitizations - Securitizations - Securitizations - Securitizations Joint venture Joint venture Joint venture Joint venture Joint venture Joint venture Joint venture Joint venture 150 406 487 678 570 85 217 387 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Company 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 Comder Contraparte Central S.A Companhia Promotora UCI Compañía Española de Financiación de Desarrollo, Cofides, 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) Condesa Tubos, S.L. (b) Connecting Visions Ecosystems, S.L. Corkfoc Cortiças, S.A. (b) Corridor Texas Holdings LLC (consolidado) (b) Ebury Partners Limited (consolidado) (d) (m) Eko Energy Sp. z o.o (b) (e) Euro Automatic Cash Entidad de Pago, S.L. FAFER- Empreendimentos Urbanísticos e de Construção, S.A. (c) (e) Federal Reserve Bank of Boston (b) Fondo de Titulización de Activos UCI 11 Fondo de Titulización de Activos UCI 14 Fondo de Titulización de Activos UCI 15 Fondo de Titulización de Activos UCI 16 Fondo de Titulización de Activos UCI 17 Fondo de Titulización Hipotecaria UCI 10 Fondo de Titulización Hipotecaria UCI 12 Fondo de Titulización, RMBS Prado II 820 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities Company Fondo de Titulización, RMBS Prado III Fondo de Titulización, RMBS Prado IV Fondo de Titulización, RMBS Prado V Fondo de Titulización, RMBS Prado VI Fondo de Titulización, RMBS Prado VII Fortune Auto Finance Co., Ltd Fremman limited Gestora de Inteligência de Crédito S.A. Gire S.A. Spain Spain Spain Spain China HCUK Auto Funding 2017-2 United Ltd Kingdom Healthy Neighborhoods United States Equity Fund I LP (b) Hyundai Capital UK Limited United Location Spain Direct % of ownership held by Banco Santander Indirect (h) (h) (h) (h) (h) - - - - - % of voting power (b) Year 2020 Year 2019 Activity - - - - - - Securitizations - Securitizations - Securitizations - Securitizations - Securitizations 0.00% 50.00% 50.00% 50.00% Finance company United Kingdom Brazil 33.00% 0.00% 4.99% 0.00% 18.00% 20.00% Argentina 0.00% 57.93% 58.33% - Finance company 20.00% Collection services 58.33% Payment and collection services - (h) - - Securitizations 0.00% 22.37% 22.37% 22.37% Real estate Kingdom Brazil 0.00% 50.01% 50.01% 0.00% 44.99% 50.00% Luxemborg 0.00% 36.36% 36.36% 50.01% Finance company 50.00% Insurance brokerage 36.36% Securities investment Luxemborg 0.00% 40.20% 40.20% 40.20% Holding company Hyundai Corretora de Seguros Ltda. Imperial Holding S.C.A. (e) (i) Imperial Management S.à r.l. (b) (e) Índice Iberoamericano de Investigación y Conocimiento, A.I.E. Inmoalemania Gestión de Activos Inmobiliarios, S.A. Innohub S.A.P.I. de C.V. Inverlur Aguilas I, S.L. Spain 0.00% 51.00% 51.00% 51.00% Information system Joint venture Spain Mexico Spain 0.00% 20.00% 20.00% 0.00% 20.00% 20.00% 0.00% 50.00% 50.00% 20.00% Holding company 20.00% IT services 50.00% Real estate EUR million Type of Capital + company reserves 321 Net Carrying results amount 0 0 Joint venture Joint venture Joint venture Joint venture Joint venture Joint venture Associated Joint venture Associated Joint venture — Joint venture Joint venture — — — Associated Joint venture Joint venture Associated 318 341 372 0 0 0 0 0 0 0 0 0 2,205 303 42 1 198 123 779 14 3 37 22 0 14 (3) (15) 12 0 (1) 3,787 256 45 0 0 0 1 0 2 0 1 0 0 (112) 0 (5) 0 4 0 1 (3) 0 0 0 (1) 0 (2) 0 0 1 Inverlur Aguilas II, S.L. Spain 0.00% 50.00% 50.00% 50.00% Real estate Inversiones en Resorts Mediterraneos, S.L., en liquidación (e) Spain 0.00% 43.28% 43.28% 43.28% Real estate Inversiones Ibersuizas, S.A. (b) Inversiones ZS América Dos Chile Ltda Spain 25.42% 0.00% 25.42% 25.42% Venture capital — 20 21 (1) 0.00% 49.00% 49.00% 49.00% Real estate and Associated 297 297 37 securities investment Inversiones ZS América SpA Chile 0.00% 49.00% 49.00% 49.00% Real estate and Associated 365 325 35 J.C. Flowers I L.P. (b) JCF AIV P L.P. (b) LB Oprent, S.A. United States Canada Spain 0.00% 10.60% 0.00% 0.00% 7.67% 4.99% 38.33% 0.00% 38.33% securities investment 0.00% Holding company 4.99% Holding company - Industrial machinery rent Loop Gestão de Pátios S.A. Brazil 0.00% 32.12% 35.70% Lusimovest Fundo de Investimento Imobiliário Portugal 0.00% 25.73% 25.77% 35.70% Business services 25.77% Investment fund — — Associated Joint venture Associated 2 4 3 6 3 4 1 3 107 101 (1) 0 0 (1) 1 821 Annual report 2020 Contents Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) EUR million Location Portugal Direct 0.00% Indirect 49.94% Year Year 2020 2019 49.99% 100.00% Insurance Activity Type of company Associated Capital + reserves 14 Net results 9 Carrying amount (1) Company Mapfre Santander Portugal - Companhia de Seguros, S.A. Massachusetts Business Development Corp. (consolidado) (b) United States 0.00% 21.61% 21.61% 21.60% Finance company MB Capital Fund IV, LLC (b) United States Spain Merlin Properties, SOCIMI, S.A. (consolidado) (b) Metrovacesa, S.A. (consolidado) (b) New PEL S.à r.l. (b) (e) NIB Special Investors IV-A LP (b) NIB Special Investors IV-B LP (b) Niuco 15, S.L. (k) Nowotna Farma Wiatrowa Sp. z o.o (b) Odc Ambievo Tecnologia e Inovacao Ambiental, Industria e Comercio de Insumos Naturais S.A. Canada Canada Spain Poland Brazil 0.00% 21.51% 21.51% 19.00% 5.81% 24.81% Spain 31.94% 17.52% 49.45% Luxemborg 0.00% 7.67% 0.00% 0.00% 99.49% 4.99% 0.00% 91.89% 4.99% 37.23% 0.00% 37.23% 21.51% Finance company 22.78% Real estate investment 49.46% Real estate development 0.00% Holding company 4.99% Holding company 4.99% Holding company 37.23% Technical services 0.00% 12.97% 21.73% 0.00% 18.17% 20.19% 21.73% Electricity production 20.19% Technology Operadora de Activos Beta, S.A. de C.V. Parque Solar Páramo, S.L. Mexico Spain 0.00% 49.99% 49.99% 92.00% 0.00% 25.00% 49.99% Finance company 25.00% Electricity production Germany Poland 0.00% 10.00% 10.00% 0.00% 33.70% 50.00% 10.00% Software 50.00% Management Payever GmbH POLFUND - Fundusz Poręczeń Kredytowych S.A. Popular Vida 2020, Compañía de Seguros y Reaseguros, S.A.U. Procapital - Investimentos Imobiliários, S.A. (b) (e) Project Quasar Investments 2017, S.L. (consolidado) (b) Promontoria Manzana, S.A. (consolidado) (b) PSA Corretora de Seguros e Serviços Ltda. PSA Insurance Europe Limited PSA Life Insurance Europe Limited PSA UK Number 1 plc (e) Redbanc S.A. Redsys Servicios de Procesamiento, S.L. (consolidado) Spain 0.00% 49.00% 49.00% - Insurance Joint venture 2,889 Portugal 0.00% 39.96% 40.00% 40.00% Real estate Spain Spain Brazil Malta Malta United Kingdom Chile Spain 49.00% 0.00% 49.00% 20.00% 0.00% 20.00% 0.00% 44.99% 50.00% 49.00% Holding company 20.00% Holding company 50.00% Insurance 0.00% 50.00% 50.00% 50.00% Insurance 0.00% 50.00% 50.00% 50.00% Insurance 0.00% 50.00% 50.00% 50.00% Leasing 0.00% 22.44% 33.43% 20.00% 0.06% 20.06% 33.43% Services 20.08% Cards Retama Real Estate, S.A. Spain 0.00% 50.00% 50.00% 50.00% Services Rías Redbanc S.A. RMBS Green Belem I Uruguay Portugal 0.00% 25.00% 25.00% 25.00% Services - (h) - - Securitizations Santander Assurance Solutions, S.A. Spain 0.00% 73.99% 73.99% - Insurance intermediary 822 — — 66 8 23 18 1 2 Associated 13,306 6,145 564 Associated 2,679 2,345 (4) — — — — — — Associated Joint venture Associated Associated 0 16 4 - 92 1 0 24 2 26 0 15 4 - 12 1 0 1 2 20 73 0 1 0 - 8 (1) 0 0 0 0 21 — — 2 13 0 9,435 3,870 (1,229) Associated 1,126 353 (32) Joint venture Joint venture Joint venture Associated Associated Associated Joint venture — Joint venture Joint venture 0 249 104 5 29 105 0 66 10 5 10 69 0 25 15 0 0 2 34 (43) (1) 3 362 8 1 0 4 0 0 0 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) EUR million Company Santander Auto S.A. Location Brazil Direct 0.00% Indirect 44.99% Year 2020 50.00% Year 2019 50.00% Insurance Activity Type of company Associated Capital + reserves 16 Net results 6 Carrying amount (1) Poland 0.00% 33.03% 49.00% 49.00% Insurance Associated 305 32 25 Poland 0.00% 33.03% 49.00% 49.00% Insurance Associated 115 50 14 Brazil 0.00% 50.00% 50.00% 50.00% Securities investment Joint venture 183 138 13 Servicios de Infraestructura Chile de Mercado OTC S.A SIBS-SGPS, S.A. (b) Portugal Santander Aviva Towarzystwo Ubezpieczeń na Życie S.A. Santander Aviva Towarzystwo Ubezpieczeń S.A. Santander Caceis Brasil Distribuidora de Títulos e Valores Mobiliários S.A. Santander Caceis Brasil Participações S.A. Santander Caceis Colombia S.A. Sociedad Fiduciaria Santander Caceis Latam Holding 1, S.L. Santander Caceis Latam Holding 2, S.L. Santander Generales Seguros y Reaseguros, S.A. Santander Mapfre Seguros y Reaseguros, S.A. Santander Vida Seguros y Reaseguros, S.A. Sepacon 31, S.L. (k) Siguler Guff SBIC Fund LP (b) Sistema de Tarjetas y Medios de Pago, S.A. 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. (c) Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A. (b) Sociedad Española de Sistemas de Pago, S.A. (b) Sociedad Interbancaria de Depósitos de Valores S.A. Solar Maritime Designated Activity Company (b) Stephens Ranch Wind Energy Holdco LLC (consolidado) (b) Syntheo Limited (e) Spain Spain Spain Spain Spain Spain United States Spain Spain Spain Chile Ireland United States United Kingdom Brazil 0.00% 50.00% 50.00% Colombia 0.00% 50.00% 50.00% 0.00% 50.00% 50.00% 0.00% 50.00% 50.00% 0.00% 49.00% 49.00% 50.00% Holding company 50.00% Finance company 50.00% Holding company 50.00% Holding company 49.00% Insurance 0.00% 49.99% 49.99% 49.99% Insurance 0.00% 49.00% 49.00% 49.00% Insurance 37.23% 0.00% 37.23% 0.00% 8.37% 12.48% 0.00% 16.52% 16.55% 0.00% 20.00% 20.00% 37.23% Technical services 12.48% Services 16.56% Portfolio management 20.00% Investment fund — — Joint venture Joint venture Joint venture Joint venture Joint venture Associated Joint venture — Associated 154 140 14 8 9 (1) 714 714 2 2 0 0 657 207 22 45 35 (9) 816 371 38 - 17 148 2 - 14 67 2 4 7 - 0 10 (1) 0 7 1 0 18.11% 0.00% 18.11% 27.15% 0.00% 27.15% 18.11% Payment methods 27.15% Building materials Associated 464 — 97 Spain 45.70% 0.00% 45.70% 42.50% Payment services Joint venture 101 34 Spain 25.50% 0.23% 25.73% Spain 22.21% 0.00% 22.21% 25.73% Financial services 22.21% Financial services 21.32% 0.00% 21.32% 0.00% 19.66% 29.29% - (h) - 21.32% Payment services 29.29% Securities deposit - Leasing 0.00% 19.20% 19.20% 21.30% Electricity production — — — Associated Joint venture — 17 11 31,470 1,177 (947) 11 7 25 9 6 0 1 1 0 210 209 (6) 0.00% 50.00% 50.00% 50.00% Payment services — 1 0 0 823 Annual report 2020 Contents Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) EUR million Location Brazil Direct 0.00% Indirect 17.83% Year 2020 19.81% Year 2019 Activity 19.81% Security Type of company Associated Capital + reserves 86 Net results 54 Carrying amount 2 Company Tbforte Segurança e Transporte de Valores Ltda. Tbnet Comércio, Locação e Administração Ltda. Tecnologia Bancária S.A. Teka Industrial, S.A. (consolidado) (b) Tonopah Solar Energy Holdings I, LLC (consolidado) (b) Trabajando.com Chile S.A. Transbank S.A. Tresmares Growth Fund II, SCR, S.A. Tresmares Growth Fund III, SCR, S.A. U.C.I., S.A. UCI Hellas Credit and Loan Receivables Servicing Company S.A. UCI Mediação de Seguros Unipessoal, Lda. UCI Servicios para Profesionales Inmobiliarios, S.A. Unicre-Instituição Financeira de Crédito, S.A. Unión de Créditos Inmobiliarios, S.A., EFC VCFS Germany GmbH Venda de Veículos Fundo de Investimento em Direitos Creditórios Brazil Brazil Spain United States Chile Chile Spain Spain Spain 0.00% 17.83% 19.81% 19.81% Telecommunic ations 0.00% 17.83% 19.81% 19.81% ATM 0.00% 9.42% 9.42% 0.00% 26.80% 26.80% 9.42% Household appliances 26.80% Holding company 0.00% 33.33% 33.33% 0.00% 16.78% 25.00% 33.33% Services 25.00% Cards 40.00% 0.00% 40.00% 40.00% 0.00% 40.00% 50.00% 0.00% 50.00% Greece 0.00% 50.00% 50.00% Portugal 0.00% 50.00% 50.00% Spain 0.00% 50.00% 50.00% Portugal 0.00% 21.83% 21.86% Spain 0.00% 50.00% 50.00% - Holding company - Holding company 50.00% Holding company 50.00% Financial services 50.00% Holding company 50.00% Insurance brokerage 50.00% Real estate services 21.86% Finance company 50.00% Mortgage credit company Germany 0.00% 50.00% 50.00% 50.00% Marketing Brazil - (h) - - Securitizations UCI Holding Brasil Ltda Brazil 0.00% 50.00% 50.00% Volvo Car Financial Services UK Limited Webmotors S.A. United Kingdom Brazil 0.00% 50.00% 50.00% - Leasing 0.00% 62.99% 70.00% 70.00% Services 0.00% 48.79% 48.79% 48.79% Insurance Associated 60 57 2 Associated — 369 938 86 167 20 (10) Joint venture Associated Associated — — Joint venture Joint venture Joint venture Joint venture Joint venture 461 140 (65) 1 (2) 1,154 29 22 424 1 1 0 2 81 16 13 62 0 (1) 0 0 0 0 (2) (1) 10 0 0 0 0 Associated 371 87 23 Joint venture Joint venture Joint venture Joint venture Joint venture Associated 12,218 363 (25) 0 102 76 43 0 98 76 24 0 3 0 9 11,557 535 119 0.00% 48.79% 48.79% 48.79% Insurance Associated 151 1 31 0.00% 49.00% 49.00% 0.00% 49.00% 49.00% 49.00% 0.00% 49.00% 49.00% Holding company 49.00% Holding company 49.00% Holding company 49.00% Insurance Associated 1,074 936 138 Associated 386 384 0 Associated 1,679 1,490 165 Associated 38 8 12 Argentina 0.00% 49.00% 49.00% Brazil Brazil Spain Spain Spain Zurich Santander Brasil Seguros e Previdência S.A. Zurich Santander Brasil Seguros S.A. Zurich Santander Holding (Spain), S.L. Zurich Santander Holding Dos (Spain), S.L. Zurich Santander Insurance América, S.L. Zurich Santander Seguros Argentina S.A. (j) 824 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Societies of which Grupo Santander owns more than 5% (c), entities associated with Grupo Santander and jointly controlled entities % of ownership held by Banco Santander % of voting power (b) EUR million Location Chile Direct 0.00% Indirect 49.00% Year 2020 49.00% Year 2019 49.00% Insurance Activity Type of Capital + company reserves 240 Associated Net Carrying results amount 34 36 Chile 0.00% 49.00% 49.00% 49.00% Insurance Associated 236 47 Mexico 0.00% 49.00% 49.00% 49.00% Insurance Associated 780 144 Uruguay 0.00% 49.00% 49.00% 49.00% Insurance Associated 29 13 15 97 7 Company 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. a. Amount according to the provisional books at the date of publication of these annexes of each company generally referring to 31 December 2020, unless otherwise indicated because the annual accounts have not yet been prepared. Data for foreign companies are converted into euros at the year-end exchange rate. b. Data as at 31 December 2019, latest available accounts. c. Data as at 31 December 2018, latest available accounts. d. Grupo Santander has the right to receive 50.38% of the dividends distributed by the company. e. Company in liquidation as at 31 December 2020. f. Pursuant to Article 3 of Royal Decree 1159/ 2010, of 17 September, approving the rules for the preparation of consolidated annual accounts, in order to determine the voting rights, voting rights held directly by the parent company have been added to those held by subsidiaries or other persons acting in their own name but on behalf of a group company. For these purposes, the number of votes corresponding to the parent company, in relation to its indirect subsidiaries, is that corresponding to the subsidiary which has a direct holding in the capital of the latter. g. Excluding the Group companies listed in Appendix I, as well as those which are of negligible interest with respect to the true and fair view that the consolidated accounts must express (in accordance with articles 48 of the Commercial Code and 260 of the Corporate Enterprises Act). h. Companies over which joint control is maintained. i. Data as at 31 October 2020, latest available accounts. j. Data as at 30 June 2020, latest available accounts. k. Company with no financial information available. l. Data as at 30 November 2017, latest available accounts. m. Data as at 30 April 2019, latest available accounts. 825 Annual report 2020 Contents Appendix III Issuing subsidiaries of shares and preference shares % of ownership held by Banco Santander Company Emisora Santander España, S.A. Unipersonal Santander UK (Structured Solutions) Limited Sovereign Real Estate Investment Trust Location Spain United Kingdom United States Direct 100.00% Indirect Activity 0.00% Finance company 0.00% 0.00% 100.00% Finance company 100.00% Finance company EUR million (a) Capital 2 Reserves 0 Cost of preferred 0 Net results 0 0 0 4,552 (2,971) 0 55 0 19 a. Amount according to the books of each interim company as at 31 December 2020, converted into euro (in the case of foreign companies) at the year-end exchange rate. 826 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Appendix IV Notifications of acquisitions and disposals of investments in 2020 With respect to compliance with Article 125 of the Securities Market Law, no communications required under this article were made in 2020. In relation to the information required by 155 of the Corporate Enterprises Act, on the shareholdings in which Grupo Santander owns more than 10% of the capital of another company, and the successive acquisitions of more than 5% of the share capital, see appendices I, II and III. 827 Annual report 2020 Contents Appendix V Other information on the Group’s banks 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 financial equity instruments held by the Group. At 31 December 2020, 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 effect from 10 January 2014, Santander UK Group Holdings Limited, a subsidiary of Banco Santander, S.A. and Santusa Holding, S.L., became the beneficial owner of 31,051,768,866 Ordinary shares 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. In addition to this there were 13,780 Series A Fixed (6.222%)/ Floating Rate Non-Cumulative Callable Preference Shares of GBP 1.00 each which were redeemed and cancelled in their entirety on 24 May 2019. The legal and beneficial 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 2020, 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 2 April 2020 resolved to authorise unconditionally 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 five business days before the purchase is made; and 828 (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 five business days before the purchase is made. This authority shall begin on the date of the passing of this resolution and 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% 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 five 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 five business days before the purchase is made. This authority shall begin on the date of the passing of this resolution and 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% preference shares even though the purchase may be completed after this authorisation ends. d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable. e) Specific 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 • 8.625% Sterling Preference - ISIN: GB0000044221 2. Santander Financial Services plc a) Number of financial 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 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix 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) Specific 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. 3. Banco Santander (Brasil) S.A. a) Number of financial 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.. The shares composing the share capital of Banco Santander (Brasil) S.A. have no par value and there are no pending payments. At 2020 year-end, the bank’s treasury shares consisted of 18,828,962 ordinary shares and 18,828,962 preferred shares, with a total of 37,657,924 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: a) b) In the event of transformation, merger, consolidation or spin-off of the company. 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 profits 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 offering 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. b) Capital increases in progress No approved capital increases are in progress. 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 different classes of shares, provided they remain within the limits of the maximum number of preferred shares provided in Law. As of 31 December 2020, 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) Specific 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 offset 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 profits to any other purpose, 5% of profits must be transferred to the legal reserve, which must not exceed 20% of the company’s share capital. f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity Not applicable. 829 Annual report 2020 Contents g) Listed capital instruments All the shares are listed on the São Paulo Stock Exchange ( B3 - Brasil, Bolsa, Balcão) and the shares deposit certificates (American Depositary Receipts - ADR) are listed on the New York Stock Exchange (NYSE). 4. Santander Bank, National Association a) Number of financial equity instruments held by the Group At 31 December 2020, 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. b) Capital increases in progress At 31 December 2020 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) Specific 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 financial instruments of capital held by the group. On September 6 of 2019 was finalized the period for the exchange offers for up to 1,693,521,302 shares of Banco Santander México that were not held directly or indirectly by Banco Santander, S.A., which represented the 24.95% of the capital stock of Banco Santander México in exchange for up to 570,716,682 shares of Banco Santander, S.A. as a result of the exchange offer Banco Santander, S.A. increased its position in Banco Santander México from 74.96% to 91.64%, with the remaining 8.35% held by minority shareholders or in own shares and 0.01% to Santander Global Facilities, S.A. de C.V.. On June 15, 2020, Gesban México Servicios Administrativos Globales, S.A. de C.V., acquired the 1,340 shares of Banco Santander México owned by Santander Global Facilities, S.A. de C.V. 830 As a result Grupo Financiero Santander México, S.A. de C.V. ('Grupo Financiero') and Santander Global Facilities, S.A. de C.V. (México), hold 5.087.801.602 shares which represent the 74.97% of the capital stock of Banco Santander México and Banco Santander, S.A. holds 1,132,168,074 shares which represent the 16.68% of such capital stock. On September 30, 2020, the General Extraordinary Shareholders' Meetings of Banco Santander México and Santander Vivienda, S.A. de C.V., SOFOM E.R., GFSM, were held. In such meetings the merger by absorption of Banco Santander México with Santander Vivienda, S.A. de C.V., SOFOM E.R., GFSM, was approved. This merger did not result in a movement of the share capital of Banco Santander México, since it was a shareholder of 99.99998% of the shares representative of the share capital of Santander Vivienda , S.A. de C.V., SOFOM, E.R., GFSM, and such circumstance results in the material and legal impossibility for Banco Santander México, S.A., Institución de Banca Multiple, Grupo Financiero Santander México to perform the redemption of the shares, since these shares are already integrated into the assets of the merger. b) Ongoing capital stock increases. To this date there are not on going capital stock increases. c) Authorized Capital by the Shareholders Meeting. The capital stock of the Bank is 28,117,661,554.00 Mexican pesos (twenty eight thousand one hundred seventeen million six hundred sixty one thousand five hundred and fifty 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 and fifty seven) shares 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 “F” Series and 3,640,874,144 (three thousand six hundred and forty million eight hundred seventy four thousand one hundred and forty four) shares “B” Series. The capital stock is constituted as follows: • Paid-in and subscribed capital of the Bank is 25,660,152,629.00 Mexican pesos (twenty five thousand six hundred sixty million one hundred fifty two thousand six hundred and 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 fifty seven) shares 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 and forty five) shares “F” Series and 3,322,685,212 (three thousand three hundred twenty two million six hundred eighty five thousand two hundred and twelve) shares Series. • The authorized capital stock of the Bank is 2,457,508,925.00 Mexican pesos.(Two thousand four hundred fifty seven million five hundred and eight thousand nine hundred and twenty five Mexican pesos), represented by a total of 650,000,000 (six hundred and fifty million) shares with a nominal value of 3.780782962 Mexican pesos (three Mexican pesos 780782962/1000000000) each one; divided in Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix The approved debt issuance of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México is currently composed as follows: 331,811,068 (three hundred thirty one million eight hundred eleven thousand and sixty eight) shares “F” series and 318,188,932 (three hundred eighteen million one hundred eighty eight thousand nine hundred and thirty two) shares “B” Series which are kept in the treasury of the Bank. 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. , which had been previously ratified in the meeting 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 including debt instruments qualifying for purposes of capital in accordance with the legislation in force, which can be implemented individually or through several issuance programs. Instrument Issuance Program of unsecured bonds and unsecured certificates of deposit Type Revolving Term 19-Feb-21 55,000 million Mexican pesos, or its Amount equivalent in UDIs, dollars or any other foreign currency Available $25,621 million Mexican pesos Con t.c. fix according to Banxico 31/Dec/ 2019 Private banking structured bonds Act Not Revolving* 16-Ago-34 20,000 million Mexican pesos $4,379 million Mexican pesos Structured bonds without public offering 16-Feb-32 10,000 million Mexican pesos $10,000 million Mexican pesos Senior Bonds Capital Notes AT1 Capital Notes Notas Senior 144.ª/RegS Not Revolving Not Revolving Not Revolving Not Revolving 09-Nov-22 1,000 million American dollars N/A perpetual 500 million American dollars 1-Oct-2028 1,300 millon American dollars 17- Apr-2025 1,750 millon American dollars N/A N/A N/A * The issuance of the structured private banking bonds isn’t revolving. Once placed the amount laid down in the corresponding brochure a new certificate wll be issued on the authorized amount. (ii) The Board of Directors on its meeting held on January 27, 2011 approved the general conditions for the senior debt issue among international markets. On October 18, 2012 such issuance was approved on the amount of 500 and 1000 million American dollars, for a term of 5 to 10 years. The issuance was approved with the purpose of obtaining resources to finance 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., 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 equivalent to the 75% of the latter. Such notes were offered through a private offering only to qualified institutional buyers, in accordance with Rule 144A of the U.S. Securities Act of 1933 and it´s modifications, and outside the U.S. under the Regulation S of the Market Law. 831 Annual report 2020 Contents The issuance was approved with the purpose of increasing the efficiency of the capital of the Bank, to adequate its capital profile to its main competitors, as well as to increase the cost effectiveness of resources with the same capital strength and capacity for growth in risk-weighted assets. (iv) The Board of Director on its meeting held on October 27, 2016 approved the issuance in Mexico of debt up to 500 million American dollars or its equivalent in Mexican pesos. The Ordinary and Extraordinary Shareholder´s meeting held on December 5, 2016, approved to issuance of a financial instrument complying 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 made an overseas private offering of subordinated, non preferred, perpetual and convertible obligations (“2016 Obligations”) representing the share capital by a total amount of 500,000,000 American dollars, which had the character of a ‘mirror issuance‘( back-to-back), as a guarantee of liquidity of the subordinated non preferred perpetual and convertible obligations, issued by Grupo Financiero Santander Mexico. It is worth mentioning that in September, 2019, it was requested before the Registro Nacional de Valores of the National Banking and Securities Commission (Comision Nacional Bancaria y de Valores) (“CNBV”), the registry cancellation of the above mentioned 2016 Obligations, as well as the list cancellation of such notes in the Bolsa Mexicana de Valores, S.A.B. de C.V. (“BMV”). By means of official note No. 153/12251/2019 dated November 4, 2019, CNBV authorized such cancellation. (v) As a result of the corporate restructure which included, among others, the merger of Banco Santander México, as the merging entity with Grupo Financiero Santander Mexico as the merged entity, the subordinated obligations referred to in paragraph (iv), were acquired entirely by Banco 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 finalized. (vi) On September 20, 2018, Banco 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 Mexico (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 Subordinated Notes 2013. 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. 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 832 dollars and (b) the amount acquired by Banco Santander, S.A. (Spain), was a nominal 1,078,094,000.00 American dollars. In connection with the issuance of the Instruments, the total amount distributed with Banco Santander, S.A. (Spain), was 75% of such issuance; that is, the placed amount was 975,000,000.00. Therefore, the Bank’s General Extraordinary Shareholder´s Meeting held on September 10, 2018, among other subjects, approved to ratify the issuance limit for up to 6,500 million and a term of 15 years, senior or subordinate, in local and/or international markets, instrumented individually or through issuance programs, which was previously authorized by the Board of Directors on its meeting held on April 26, 2018. On January 30, 2019, Banco Santander México paid off the total remaining due amount of the Subordinated Notes 2013. On April 17th., 2020, Banco Santander Mexico issued an international Senior Note, due on five years in the global market, on the amount of 1,750 million dollars, with a rate of 5.375 per cent, whereas the demand exceeded three times the placed amount. The due date of such notes will be April 17th, 2025. e) Specific circumstances restricting the availability of reserves. According to the Law of Financial Institutions, general dispositions applicable to financial 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 fiscal year (benefits). The Bank must constitute the different reserves established in the legal provisions applicable to financial institutions, which are determined accordingly to the qualification 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 1,256,189,353 ordinary shares through its subsidiaries: Santander Totta, SGPS, S.A. with 1,241,179,513 shares, Taxagest Sociedade Gestora de Participações Sociais, S.A. with 14,593,315 shares, and Banco Santander Totta, S.A. with 416,525 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. Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix b) Capital increases in progress At 31 December 2020, there were no equity increases 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) Specific 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 offset losses or to increase capital. Non-current asset revaluation reserves are regulated by Decree- Law 31/98, under which losses can be offset 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) equity instruments Not applicable. 7. Santander Consumer Bank AG a) Number of financial equity instruments held by the Group At 31 December 2020, 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) Specific 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 2020, there were no approved capital increases. c) Capital authorised by the shareholders at the general meeting Share capital at 31 December 2020 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) Specific 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. a) Number of financial equity instruments held by the Group At 31 December, 2020, 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, 2020, there were no equity increases in progress. c) Capital authorised by the shareholders at the general meeting There was one share capital increase in 2020 – on 22 June 2020 Annual General Meeting decided to increase the share capital of the Bank in order to settle the Incentive Scheme VI. The Incentive Scheme VI was introduced on 17 May 2017 when the shareholders resolved to approve the it as an initiative to attract, motivate and retain the Bank’s employees. Delivery of the shares was tied to the achievement of certain targets in the years from 2017 to 2019. The share capital was increased by the amount of PLN 1,010, 090, i.e. 101,009 ordinary bearer O series shares were 833 Annual report 2020 Contents issued with the nominal value of PLN 10 each. As of 31 December 2020 the Bank’s share capital amounted to PLN 1,021,893,140 and was divided into 102,189,314 ordinary bearer shares with a nominal value of PLN 10 each. d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights Not applicable. e) Specific 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. 834 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix Appendix VI Annual banking report Grupo Santander’s total tax contribution (taxes incurred directly and by third parties, generated in the course of business) is around EUR 14,500 million, including more than EUR 6,400 million in taxes incurred directly (corporate income tax, non-recoverable VAT and other indirect taxes, employer Social Security contributions, payroll taxes and other taxes and levies). This report complies 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 firms, and its transposition into Spanish law pursuant to Article 87 of Act 10/2014 of 26 June on the regulation, supervision and capital adequacy of credit institutions. The criteria used to prepare this report were: a) Name(s), activities and location Appendices I to III to the consolidated financial statements contain details of the companies operating in each jurisdiction, including their name(s), location and activities. Santander main activity in the jurisdictions where operate is commercial banking. The group primarily operates in ten markets through subsidiaries that are autonomous in capital and liquidity. This has clear strategic and regulatory advantages, since it limits the risk of contagion between units, imposes a double layer of global and local oversight, and facilitates crisis management and resolution. b) Turnover and profit or loss before tax Turnover in this report is Total income, and profit or loss before tax, Operating profit/(loss) before tax, both as defined and presented in the consolidated income statement that forms part of the consolidated financial statements. c) Number of full time equivalent employees The data on full-time equivalent employees stem from the average headcount of each jurisdiction. d) Tax on profit or loss In the absence of specific criteria, we have included the amount effectively paid (EUR 2,946 million) in respect of taxes whose effect is recognized under Income tax in the consolidated income statement. Taxes effectively paid by the companies in each jurisdiction include: • Supplementary payments relating to income tax returns, usually for prior years. • Advances,prepayments, withholdings made or borne in respect of tax on profit or loss for the year. Given their nominal amount, we included taxes borne abroad in the jurisdiction of the company that bore them. • Refunds received with respect to prior years’ returns. • Where appropriate, the amount payable from assessments and litigation relating to these taxes. The foregoing form part of the cash flow statement and differ from the corporate income tax expense recognized in the consolidated income statement (EUR 5,632 million or, discounting extraordinary results, EUR 3,516 million, see note 27 and 52.c). This is because each country’s tax regulations establish: • when taxes must be paid. There is often a mismatch between the payment dates and the generation of the income bearing the tax. • their own calculation criteria to define temporary or permanent restrictions on expense deduction, exemptions and relief or deferrals of certain income, generating the differences between the accounting profit (or loss) and taxable profit (or tax loss) which is ultimately taxed; tax loss carry forwards from prior years, tax credits and/or relief, etc., must also be added. In certain cases, special regimes such as the tax consolidation of companies in the same jurisdiction are established. e) Public subsidies In the context of the legally-required disclosures, this was interpreted as any aid or subsidy in line with the European Commission’s Guidance on the notion of State aid. Grupo Santander did not receive public subsidies in 2020. 835 Annual report 2020 Contents The breakdown of information is as follows : Jurisdiction Germany Argentina Austria Bahamas Belgium 2 Brazil Canada Chile China Colombia 3 Spain United States Denmark Finland France Hong Kong Ireland Isle of Man Italy Jersey Luxembourg Mexico Norway Netherlands Peru Poland Portugal Puerto Rico United Kingdom Singapore Sweden Switzerland Uruguay Consolidated Group Total Turnover (million of euros) 1,522 1,095 173 7 88 10,519 53 2,226 21 41 6,675 7,321 189 114 697 70 (10) 13 459 26 188 3,700 258 86 103 1,859 1,342 8 4,750 7 165 137 377 44,279 2020 Employees 4,519 8,938 344 32 177 42,947 189 11,105 66 240 35,109 15,657 238 172 952 158 3 58 872 70 16 21,177 528 280 212 13,632 6,769 610 22,987 13 277 251 1,532 190,130 Gross profit or loss before 1 tax (EUR million) 520 176 71 — 40 3,842 12 815 3 5 (10,158) (1,068) 50 37 355 2 (25) 8 207 10 181 1,052 115 32 51 446 412 (28) 496 2 53 50 160 (2,076) Tax on profit or loss (EUR million) 161 104 16 2 6 764 1 365 — 4 342 (14) 11 6 40 3 1 1 91 1 30 189 49 53 16 267 175 — 204 — 21 7 30 2,946 1. 2. 3. It includes the goodwill impairment losses of EUR 10,100 million recognized by Grupo Santander in 2020 (EUR 7,770 million recognized in Spain and EUR 2,330 million in the United States). Including the information relating to a branch in the Cayman Islands, the profits of which are taxed in full in Brazil. The contribution of this branch profit before tax from continuing operations is EUR 612 million. Includes the Corporate Centre. At 31 December 2020, the group’s return on assets (ROA) was 0.50%. 836 Auditor's report Consolidated annual accounts Notes to the consolidated annual accounts Appendix [This page has been left blank intentionally] 837 PAGE INTENTIONALLY LEFT BLANK IN THE ENGLISH VERSION. IN THE SPANISH VERSION PAGES 868 AND 869 CONTAIN THE SIGNATURE PAGES TO THE BANCO SANTANDER, S.A. 2020 CONSOLIDATED DIRECTORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS IN THE FORM REQUIRED UNDER SPANISH LAW. 838 PAGE INTENTIONALLY LEFT BLANK IN THE ENGLISH VERSION. IN THE SPANISH VERSION PAGES 868 AND 869 CONTAIN THE SIGNATURE PAGES TO THE BANCO SANTANDER, S.A. 2020 CONSOLIDATED DIRECTORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS IN THE FORM REQUIRED UNDER SPANISH LAW. 839 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 Identifier (LEI) is 5493006QMFDDMYWIAM13 and its Spanish tax identification 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 filed 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 Official registry of entities of Bank of Spain with code number 0049. The Bank’s registered office is at: Paseo de Pereda, 9-12 39004 Santander Spain The Bank’s principal executive offices 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 ratified 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 indefinite 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 effective 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 firms. 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 effective on 28 September 2018. 840 Shareholder and investor relations Customer service department Calle Princesa, 25 Edificio 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 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 841 

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