Economic and financial review78
80   Consolidated financial report 99   Information by segments100      1. Principal segments or geographic areas136      ...
Economic and financialreviewGeneral background                                                       Mexico showed conside...
In this context of sharp slowdown and uncertainty, the ECB            Summary of 2011 for Grupo Santanderundid in the four...
– Total operating costs increased 9.3%, reflecting a                 management model, together with the capacity to assig...
the end of 2010 materialised and other operations were           Rating agencies  carried out to increase and restructure ...
Grupo Santander generated an attributable profit of EUR 5,351Grupo Santander. Results                                     ...
• The impact of the exchange rates of various currencies against         • Net interest income rose 5.5% to EUR 30,821 mil...
Net interest income                                                    As regards the rest of revenues, dividends collecte...
This performance showed the Group’s capacity to continue to          Gross income and expensesgenerate revenues in a diffi...
Net loan-loss provisionsMillion euros                                                                                     ...
Balance sheetMillion euros                                                                                         Variati...
Total managed funds at the end of 2011 amounted to EURGrupo Santander. Balance sheet                                    1,...
In Continental Europe, Spain and Portugal’s lending fell by           Gross customer loans4.6% and 5.6%, respectively, due...
Credit risk management* Million euros                                                                                     ...
Around 90% of the portfolio (including mortgages and                                                                     N...
• Brazil’s NPL ratio was 5.38% (+47 b.p.). This increase was due         Customer funds under management  to the small ris...
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
Santander Bank Annual Report 2011 Economic and financial review 2011
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Santander Bank Annual Report 2011 Economic and financial review 2011

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Transcript of "Santander Bank Annual Report 2011 Economic and financial review 2011"

  1. 1. Economic and financial review78
  2. 2. 80 Consolidated financial report 99 Information by segments100 1. Principal segments or geographic areas136 2. Secondary segments or by business 79
  3. 3. Economic and financialreviewGeneral background Mexico showed considerable resistance to the internationalThe global economy continued to slowdown, due to worsening financial turbulence and weakening of the global economy.of European sovereign debt crisis and a fall in confidence, with Based on figures for the first nine months (+4.5% year-on-yearnew episodes of uncertainty as of the summer which, sparked growth in the third quarter), GDP growth for the whole yeartougher funding conditions. This scenario was partly offset by a was around the potential rate of 4%. This was due to industrialgeneral softening of monetary policy: injections of liquidity in the output, investment and the recovery in lending to the privatecase of the European Central Bank, a prolongation of low interest sector, particularly consumer credit, which is expected torates in the US and cuts in official interest rates in Latin America. remain solid in coming quarters despite the external uncertainties.The US economy grew 1.7%, after growth of 2.8% annualisedin the fourth quarter, which helped to offset part of the drop in The good activity growth, moderate inflation (3.4% average ingrowth in the first half of 2011. This growth, basically due to 2011), which remained within the Bank of Mexico’s targetinvestment in equipment and the external sector, gradually gave range (2%-4%), and an external position favoured by higher oilway to greater participation of consumption and investment in prices enabled the central bank to hold its key interest rate atnon-residential construction, which will remain in coming 4.5%, keeping its leeway. The peso depreciated during the year,quarters and put the growth rate at around its potential. after ending the year at MXN 13.95/$1, the result of international financial tensions in the second half of the year.The impact of oil prices and greater use of installed capacityraised inflation to more than 3% in the middle of the year. The Chilean economy grew 6.3%, partly due to the weakness inHowever, the underlying rate remained under control at around the beginning of 2010 following the earthquake. Growth was1.5%, enabling the Federal Reserve to maintain a very on a downward trend, more so in the second half of the yearaccommodating monetary policy in favour of growth and re- because of international tensions, which is expected to continueestablish the interbank market. because of a weaker external environment and flagging private consumption.Latin America kept up good growth rates for the year as awhole, although lower than in 2010. In the second half the Inflation remained under control (3.3% average), enabling theimpact of the downturn in the global economy and the drop in central bank to stop raising interest rates in the second half ofraw material prices began to be felt. In order to counter the the year (+200 b.p. between January and June to 5.25%). Theimpact on growth, some central banks began to soften their spurt in inflation in the last part of the year (4.4% in December)monetary policies, which is still going on. This strategy is likely to is considered temporary, which would allow the central bank tobe replicated by other central banks during 2012. maintain leeway for softening monetary policy and fostering growth, as reflected in January when it cut the rate by 25 b.p.Brazil’s growth eased to 3.0% from 4.2% year-on-year in the to 5%. The peso, like other main currencies in the region,first quarter and subsequent deceleration, which reached a low depreciated, ending the year at CLP 519/$1.in the third quarter. The downturn led the central bank to beginto gradually cut the Selic rate from 12.50% in September to The euro zone grew 1.6% in 2011. After a robust start, activity10.50% in January 2012, a trend that will continue in the slowed due to risks appearing that threatened the recoverycoming months. (greater than envisaged impact of the rise in raw material prices and Japan’s earthquake), coupled with, in the second half of theA softer monetary policy and buoyant domestic demand, backed year, management of the sovereign debt crisis that did notby a solid labour market (jobless rate at its lowest, less than 5%), convince the markets. Fourth quarter GDP shrank 0.3%, a fallwill continue to fuel growth. Inflation remained high (6.5% in expected to carry on into early 2012.December) and in some months above the central banks target(4.5+2%). As regards the currency, the evolution of interest rates in Inflation remained above the ECB’s target throughout the yearthe second half of the year and the measures to control an (2.7% vs. 2%) and in December began a downward path (fromexcessive appreciation of the real produced a depreciation for the 3.0% to 2.8%) that could see inflation moving towards theyear as a whole. The real ended 2011 at BRL 1.87/$1 (BRL 1.66/$1 target.in 2010).80 ANNUAL REPORT 2011
  4. 4. In this context of sharp slowdown and uncertainty, the ECB Summary of 2011 for Grupo Santanderundid in the fourth quarter the two rises in its rates carried out Grupo Santander registered attributable profit of EUR 5,351in the first half of the year (from 1.0% to 1.5%) and ended million in 2011, a decline of 34.6% from 2010. Profit would2011 with a repo rate of 1%. Furthermore, it re-established have been EUR 7,021 million, a decline of 14.2%, if the bankunconventional liquidity facilities and in December made a new had not made pre-tax provisions in the fourth quarter againstauction (3 years without a volume limit) which will be repeated property exposure in Spain of EUR 1,812 million and a pre-taxin February 2012. The intensified tensions in the euro zone and amortisation of EUR 601 million from goodwill related tothe slower growth caused the euro to gradually weaken against Santander Totta. The bank also applied net capital gains of EURthe dollar and end the year at EUR 1/$1.29 (EUR 1/$1.34 in 1,513 million realised in 2011 to other provisions.2010). In an environment that was once again complex in manyThere are significant divergences and prospects in the euro markets where it operates, Santander continued to prove thezone. The worst countries are the so called peripheral ones, robustness of its business model, which is adapted to thewhich face a greater loss of confidence and high funding costs various markets and environments. Differentiated managementcombined with the shrinkage effect of fiscal adjustment policies. enables Santander to generate high recurring profits, whileGermany, on the other hand, is in a better situation, with GDP improving, at the same time, the Group’s positioning for thegrowth of 3.0% in 2011 and an unemployment rate of 6.8%, coming years.the lowest rate since 1991. However, like the euro zone, fourthquarter growth shrunk 0.2% which could be corrected in the The pillars of Santander’s model are the focus on the customershort term. and on commercial business, geographic diversification, the continuous striving to improve efficiency, prudence in risk andThe Spanish economy expanded 0.7% in 2011, fuelled by discipline in capital and liquidity. All of this enhanced by theexports, which offset the weak domestic demand. Growth Santander brand, which is recognised as one of the world’sslowed and GDP contracted 0.3% in the fourth quarter, due to leading financial brands.anaemic consumption. The continuation of these trends,combined with the impact of the large deficit reduction process, The key points in 2011 were:point to a return to recession, according to all forecasts. In thiscontext, inflation, which remained high (3.2% average), largely 1) Solid generation of recurring profits. In the last fewdue to higher energy prices, fell significantly in the last part of years Grupo Santander has been able to keep on increasingthe year (2.4% in December). its revenues which, as well as setting us apart from the sector, enabled net operating income (pre-provision profit) toThe UK showed similar growth levels and profiles: +0.9% for the continue to grow and reach EUR 24,373 million in 2011.whole of 2011 and shrinkage in the fourth quarter (0.8%annualised). This reflected the worsening international financial This figure makes Santander one of the best banks in theand trade situation, and weak domestic demand, which is world in these terms. It also shows an excellent evolutionexpected to continue in coming quarters, although partly offset during the four years of the crisis, as profits before provisionsby a more stable labour market. amounted to EUR 90,000 million.Inflation was high throughout the year (4.5% average) but on a This capacity to generate such results makes the incomedownward path (4.2% in December as against 5.2% in statement very solid and gives it a substantial cushion forSeptember) which will continue in 2012. The Bank of England, absorbing provisions in the most demanding environments.which held its base rate at 0.5%, increased its programme to The 2011 income statement continues to reflect thebuy bonds by £75,000 million in October, which was added to diversification and management focuses adapted to eachthe £200,000 million already acquired. Sterling appreciated market:against a euro weakened by the sovereign debt crisis to £1/EUR1.20 (£1/EUR 1.16 in 2010). – By areas, growth in net operating income in emerging markets (Latin America and, in local criteria, Poland). There was also an increase in the units of developed countries where the macroeconomic environment is still weak but the units are benefiting from the business moment (US and consumer business, ahead in the cycle). All of this is in stark contrast to the sharp fall in profits in markets such as Spain and Portugal, hard hit by intense deleveraging, as well as the lower level in the UK which was very affected by the cost of regulatory impacts. – By lines, of note was the growth in revenues (+5.3%). Net interest income and net fees increased at a good pace in a scenario of lower activity in developed markets, very low interest rates and upward pressure of funding costs. On the other hand, the negative impact of gains on financial transactions of the operating areas, especially in Global Banking and Markets. ANNUAL REPORT 2011 81
  5. 5. – Total operating costs increased 9.3%, reflecting a management model, together with the capacity to assign differentiated management on the basis of markets and profits to provisions, make the evolution of the credit quality businesses. Most of the rise was due to capture growth in ratios compare very well with those of other banks in the emerging markets. The efficiency ratio was 44.9%, the main countries where we operate. best among comparable banks. This led to the Group’s NPL ratio stabilising in the last two2) Effort in provisions to strengthen the balance sheet. quarters. It ended 2011 at 3.89% and coverage was 61%. As well as the recurring profits, Grupo Santander decided to realise provisions net of taxes of EUR 3,183 million, of which 4) Strengthening the capital position. Grupo Santander EUR 1,513 million were drawn from capital gains and EUR once again displayed its financial strength and flexibility by 1,670 million from the fourth quarter profits. anticipating compliance with the European Banking Authority’s capital requirement, which has to be reached by The bank charged EUR 1,812 million pre-tax provisions against June 2012. The Group was able to carry out various the fourth quarter earnings to cover real estate exposure in measures to raise its core capital ratio from 7.53% to 9.01%, Spain and EUR 601 million in pre-tax provisions to amortise in accordance with the EBA’s criteria. goodwill related to the businesses in Santander Totta. At the same time, the increase in the last quarter meant that Moreover, net capital gains of EUR 1,513 million generated in the core capital ratio, in accordance with the BIS II 2011 were also assigned to provisions, including charges international standard, rose by 122 b.p. to 10.02% from against investment portfolios of EUR 620 million, and 8.80% in December 2010. For the fifth year running, the amortisation of intangibles and contributions to pensions and Group improved its solvency. other contingencies of EUR 893 million. 5) Solid funding structure and liquidity ratios. After a year The aforementioned provisions made for real estate risk of tensions in the markets, particularly in the second half, pushed up coverage of foreclosed properties in Spain to Santander managed to maintain a solid liquidity position, 50%, while coverage of doubtful and substandard loans with thanks to its considerable capacity in the retail market via its a real estate purpose was also improved (33% and 16% branches, and its broad and diversified access to wholesale respectively). markets via its model of subsidiaries. Another factor at play in the current context is deleveraging in some markets. These increases in coverage anticipated part of the new requirements outlined in the Royal Decree 2/2012 which The loan-to-deposit ratio ended 2011 at 117% compared to came into force on February 3, to increase provisions for real 150% at the beginning of the crisis in 2008. estate assets in the Spanish financial system. Moreover, the Group maintained in 2011 a very conservative In the case of Grupo Santander, such requirements amount policy in medium- and long-term wholesale issues. The to EUR 6,100 million, and will be entirely met in 2012, as volume issued was higher than the maturities during the follows: year. • EUR 1,800 million already charged against 2011 results. 6) High shareholder return. The total shareholder remuneration was EUR 0.60 per share, including the scrip • EUR 2,000 million are a capital buffer required by the rules dividend, thereby maintaining the remuneration for the last and already covered by the capital surplus held by the two years. Group. 7) Better positioning of the Group. In the last few years, • The remaining EUR 2,300 million will be covered through Santander has continued to combine organic growth capital gains which may be obtained during the year initiatives in key countries with active management of the (including EUR 900 million from the capital gain obtained business portfolio, enabling it to end the year in a more from the sale of Banco Santander Colombia) and through diversified position and with greater future growth potential. ordinary contributions to provisions during 2012. During 2011, some of the pending agreements announced at3) High level of credit quality. Grupo Santander’s riskExchange rates: 1 euro / currency parity 2011 2010 Year-end Average Year-end Average$ 1.2939 1.3903 1.3362 1.3228Pound sterling 0.8353 0.8675 0.8608 0.8570Brazilian real 2.4159 2.3244 2.2177 2.3262New Mexican peso 18.0512 17.2523 16.5475 16.6997Chilean peso 671.3400 672.0923 625.2748 673.9214Argentine peso 5.5686 5.7445 5.3074 5.1737Colombian peso 2,509.5191 2,568.6527 2,565.5040 2,507.2221Uruguayan peso 25.8133 26.7630 26.5904 26.4588Polish zloty 4.4580 4.1105 3.9750 3.993182 ANNUAL REPORT 2011
  6. 6. the end of 2010 materialised and other operations were Rating agencies carried out to increase and restructure the Group’s presence The Group’s access to wholesale finance markets, as well as the in emerging countries and developed with great potential for cost of issues, depend, to some extent, on the ratings given by Santander. rating agencies. As regards the Group’s incorporations, the acquisition of the These agencies regularly review the Group’s ratings. The long- Polish bank BZ WBK was completed (it began to consolidate term debt rating depends on a series of endogenous factors in the Group in the second quarter), as well as of the retail (solvency, business model, capacity to generate profits, ...) and business of Skandinaviska Enskilda Banken (SEB Group) in other exogenous ones related to the general economic Germany, which entered the Group in the first quarter. environment, the sector’s situation and the sovereign risk of the countries in which it does business. The transaction with the insurer Zurich was also completed in order to reorganise bancassurance business in Latin America Since autumn the difficulties in resolving the problems of and new partners entered the capital of Santander Consumer European countries, which have required financial assistance, USA, where the Group holds a 65% stake. together with worsening of the euro zone’s growth expectations, have produced a fall in confidence and a rise in These operations together with the economic cycle in the tensions on European sovereign debt. This situation led to a various geographic areas, increased the contribution of widespread and significant downgrading of the sovereign emerging countries up to 54% of the operating areas ratings of many European countries, which, in turn, resulted in attributable profit. actions on the rating of their banks. Lastly, agreement was reached to sell the subsidiary in Between October 2011 and February 2012, the Kingdom of Colombia, which will probably be completed during the first Spain’s credit rating was cut one notch by DBRS from AA to AA half of 2012. This sale will generate capital gains of around (low), three by Standard & Poor’s (from AA to A) and four in the EUR 615 million, which will also be assigned to strengthening case of Moody’s (from Aa2 to A3) and Fitch (from AA+ to A), the balance sheet. maintaining the negative outlook in all of them.As regards the main segments (geographic), the main These movements led to a review of Banco Santander’s ratings,developments were: which in February 2012 were as follows:• Continental Europe: attributable profit was 15.1% lower at EUR 2,849 million, hard hit by the low growth environment and deleveraging and low interest rates, as well as the Rating Agencies negative impact of gains on financial transactions and fee income. Profits fell at the three commercial networks and at Long Short Stand- wholesale businesses, while Santander Consumer Finance term term alone Outlook performed well (+51.5% in attributable profit) and Poland’s Standard & Poor’s A+ A-1 a Negative BZ WBK was incorporated to the Group in April. Fitch Ratings A F1 a Negative• United Kingdom: attributable profit of EUR 1,145 million Moody’s Aa3 P1 B- Negative (£993 million), 41.0% less than in 2010 in local currency. The DBRS AA (low) R1(medium) Negative income statement was very affected by the environment of low activity, low interest rates, regulatory changes, higher funding costs and the PPI charge. On the other hand, costs were almost flat and fewer provisions were made, reflecting Lastly, after its latest review, Standard & Poor’s put Banco the good evolution of non-performing loans. Santander’s long-term rating one notch above the Spanish sovereign credit rating. Fitch and DBRS give the Bank the same• Latin America: attributable profit of EUR 4,664 million, rating as the Kingdom of Spain, and following the recent similar to 2010 without the impact of exchange rates, thanks downgrading by Moodys of Spanish sovereign debt the Bank’s to the dynamism of net interest income and fee income, rating is three notches above that of the Kingdom of Spain. At which lifted gross income by 9.5%. This offset the higher the date of publication of this report, Moody’s was reviewing costs from investments, the pressure of inflation on salaries Banco Santander’s rating. and higher provisions.• Sovereign: attributable profits of EUR 526 million ($732 million), 30.3% higher in local currency than in 2010. Revenues and provisions performed well and costs rose because of investments in technology and commercial structures. ANNUAL REPORT 2011 83
  7. 7. Grupo Santander generated an attributable profit of EUR 5,351Grupo Santander. Results million, 34.6% less than the EUR 8,181 million posted in 2010. Earnings per share (EPS) were EUR 0.6018 (-36.1%). Solid profit generation: the Group generated over EUR 24,000 million in net operating income for the The following factors need to be taken into account in order to first time ever (pre-provision profit), improving for the interpret the results appropriately. ninth year running. • In the second half of the year, the economic environment Big effort to strengthen the balance sheet: deteriorated considerably, which is leading to lower global extraordinary provisions of EUR 3,183 million net of growth. tax, of which EUR 1,513 were capital gains and EUR 1,670 million fourth quarter profits. • In the fourth quarter the bank made provisions for EUR 3,183 million net of tax, of which EUR 1,513 million came from Recurring profit amounted to EUR 7,021 million, capital gains and EUR 1,670 million from fourth quarter 14.2% less than in 2010: profits (EUR 1,812 million gross) to be assigned to real estate • Gross income rose 5.3% reaching historic highs, provisions in Spain, and EUR 601 million for the amortisation withstanding the cycle in mature markets and of Santander Tottas goodwill. recovering in emerging ones. • In addition, the profit reflects a one-off charge in the second • Differentiated management of costs by unit. quarter of EUR 620 million (£538 million) net of tax from a • Loan-loss provisions increased 3.0% due to the provision made in the second quarter related to Payment lower release of generic ones, as specific provisions Protection Insurance (PPI) remediation in the UK. were 9.8% lower. Income statement Million euros Variation 2011 2010 amount % 2009Net interest income 30,821 29,224 1,597 5.5 26,299Dividends 394 362 32 8.9 436Income from equity-accounted method 57 17 40 235.1 (1)Net fees 10,471 9,734 737 7.6 9,080Gains (losses) on financial transactions 2,500 2,606 (106) (4.1) 3,423Other operating income/expenses 18 106 (88) (82.8) 144Gross income 44,262 42,049 2,213 5.3 39,381Operating expenses (19,889) (18,196) (1,694) 9.3 (16,421) General administrative expenses (17,781) (16,256) (1,525) 9.4 (14,825) Personnel (10,326) (9,330) (996) 10.7 (8,450) Other general administrative expenses (7,455) (6,926) (528) 7.6 (6,374) Depreciation and amortisation (2,109) (1,940) (169) 8.7 (1,596)Net operating income 24,373 23,853 519 2.2 22,960Net loan-loss provisions (10,562) (10,258) (304) 3.0 (9,484)Impairment losses on other assets (173) (471) 298 (63.4) (402)Other income (2,822) (1,072) (1,749) 163.1 (1,311)Profit before taxes (w/o capital gains) 10,817 12,052 (1,235) (10.2) 11,764Tax on profit (2,936) (2,923) (12) 0.4 (2,336)Profit from continuing operations (w/o capital gains) 7,881 9,129 (1,248) (13.7) 9,427Net profit from discontinued operations (24) (27) 3 (9.3) 31Consolidated profit (w/o capital gains) 7,857 9,102 (1,245) (13.7) 9,458Minority interests 836 921 (85) (9.2) 516Attributable profit to the Group (w/o capital gains) 7,021 8,181 (1,160) (14.2) 8,943Net extraordinary capital gains and provisions (1) (1,670) — (1,670) — —Attributable profit to the Group 5,351 8,181 (2,830) (34.6) 8,943EPS (euros) 0.6018 0.9418 (0.3400) (36.1) 1.0454Diluted EPS (euros) 0.5974 0.9356 (0.3382) (36.1) 1.0382Pro memoria: Average total assets 1,228,382 1,190,361 38,021 3.2 1,099,018 Average shareholders equity 74,901 69,334 5,567 8.0 64,335(1) In 2009 extraordinary capital gains and extraordinary provisions for the same amount are included, and thus the net amount is zero.84 ANNUAL REPORT 2011
  8. 8. • The impact of the exchange rates of various currencies against • Net interest income rose 5.5% to EUR 30,821 million. This the euro was not very significant at around one percentage was due to the net impact of several factors. point negative in comparing revenues and costs with 2011. In the UK and Latin America, the impact was one percentage – There was a positive effect from the moderate increase in point negative and in Sovereign five percentage points volumes and the improvement in the spreads on loans for negative. the whole Group (from 3.64% to 3.89%).• Lastly, there is a positive impact of around three or four points – Spreads on deposits which compared negatively in the first in revenues and costs from the change in perimeter. This half of the year, are already at the same levels (0.28% in impact is the net effect of the entry into consolidation of Bank 2010 and 0.29% in 2011). Zachodni WBK, AIG in Poland and SEB in Germany (Santander – Negative impact from the higher cost of wholesale funding Retail) and lower revenues from insurance business, as the and the greater regulatory requirements for liquidity in operation with Zurich Financial Services was closed in the some countries, mainly the UK. fourth quarter. • Net fee income increased 7.6%, with a favourableThe performance of the income statement and comparisons performance of those from insurance and services. The latterwith 2010 was as follows: showed rises in almost all lines: cards, demand deposits, etc.Basic revenues (net interest income, fee income and insurance On the other hand, income from securities and custody wasresults) amounted to EUR 41,685 million, 6.0% more than in lower and virtually unchanged from mutual and pension2010 (+4.8% excluding the perimeter and exchange rate funds.effects).QuarterlyMillion euros 2010 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Net interest income 7,122 7,378 7,396 7,329 7,514 7,638 7,700 7,969Dividends 47 144 60 111 40 193 60 101Income from equity-accounted method 3 5 5 4 5 5 6 40Net fees 2,326 2,483 2,481 2,445 2,595 2,729 2,694 2,454Gains (losses) on financial transactions 724 567 599 715 657 722 639 482Other operating income/expenses 38 38 22 9 41 (2) 18 (38)Gross income 10,260 10,614 10,563 10,613 10,852 11,285 11,117 11,008Operating expenses (4,263) (4,548) (4,687) (4,698) (4,824) (4,908) (4,994) (5,164) General administrative expenses (3,812) (4,070) (4,206) (4,168) (4,314) (4,380) (4,456) (4,631) Personnel (2,182) (2,317) (2,408) (2,421) (2,521) (2,550) (2,611) (2,644) Other general administrative expenses (1,629) (1,753) (1,798) (1,746) (1,792) (1,830) (1,845) (1,987) Depreciation and amortisation (451) (478) (481) (531) (510) (528) (538) (534)Net operating income 5,997 6,066 5,876 5,915 6,029 6,377 6,123 5,843Net loan-loss provisions (2,436) (2,483) (2,935) (2,404) (2,188) (2,684) (2,906) (2,785)Impairment losses on other assets (57) (63) (41) (310) (48) (52) (84) 11Other income (331) (362) (364) (16) (550) (1,379) (361) (531)Profit before taxes (w/o capital gains) 3,173 3,158 2,535 3,186 3,243 2,262 2,773 2,538Tax on profit (734) (680) (634) (874) (888) (636) (778) (634)Profit from continuing operations (w/o capital gains) 2,439 2,477 1,901 2,311 2,355 1,627 1,995 1,904Net profit from discontinued operations (12) (1) (4) (10) (6) (0) (15) (3)Consolidated profit (w/o capital gains) 2,427 2,476 1,897 2,301 2,349 1,626 1,980 1,901Minority interests 212 246 262 201 241 234 177 184Attributable profit to the Group (w/o capital gains) 2,215 2,230 1,635 2,101 2,108 1,393 1,803 1,717Net extraordinary capital gains and provisions — — — — — — — (1,670)Attributable profit to the Group 2,215 2,230 1,635 2,101 2,108 1,393 1,803 47EPS (euros) 0.2553 0.2574 0.1884 0.2408 0.2382 0.1569 0.2030 0.0037Diluted EPS (euros) 0.2537 0.2558 0.1854 0.2406 0.2364 0.1558 0.2007 0.0045 ANNUAL REPORT 2011 85
  9. 9. Net interest income As regards the rest of revenues, dividends collected amountedMillion euros to EUR 394 million (EUR 362 million in 2010), while income accounted for by the equity method was EUR 57 million, up+ 5.5% 2011-2010 from EUR 17 million in 2010. This increase benefited from the recording in the fourth quarter of insurance business in Latin America. 30,821 29,224 Total gross income was EUR 44,262 million (EUR 42,049 26,299 million in 2010), 5.3% more than in 2010 (+4.0% excluding the perimeter and exchange rate effects). Operating expenses rose 9.3% and 6.8% excluding the perimeter and exchange rate effects. The year-on-year performance varied throughout the Group, depending on the environment and strategy followed in each unit. 2009 2010 2011 In Europe, both the large retail units (Santander Branch Network, Banesto and Portugal) as well as the UK recorded falls in expenses in real terms. Of note were the reductions of 2.5% at Banesto,Net fees 2.1% in Portugal and 1.2% in the Santander Branch Network.Million euros The global units (GBM and Asset Management and Insurance)+ 7.6% 2011-2010 registered higher growth in expenses (+4.1%) because of investments in equipment and technology with the double purpose of strengthening the positions attained in key markets 10,471 and businesses in previous years, and developing new initiatives. 9,734 Moreover, there is also an increase in expenses resulting from 9,080 the incorporation of new entities, mainly Bank Zachodni WBK in Poland and SEB in Germany. In Latin America, costs also rose due to the drive in new commercial projects, the increase in installed capacity, the restructuring of points of attention, particularly in Brazil, and the 2009 2010 2011 revision of collective bargaining agreements in an environment of higher inflation. Sovereign also registered single digit growth in costs. Net operating income (pre-provision profit) was EUR 24,373• Results from insurance activity were 3.9% higher at EUR million, 2.2% more than the EUR 23,853 million registered in 393 million (EUR 378 million in 2010) and were affected by 2010. the completion of the operation with Zurich Financial Services, which meant reduced revenues in the fourth quarter. Net operating income was particularly noteworthy as it set a new record. It rose for the ninth year running and exceeded EURGains on financial transactions dropped 4.1%, due to the 24,000 million for the first time, placing Santander among thenet impact of two factors. On the one hand, the reduced best banks in the world for its profit generation capacity.revenues from the operating areas, mostly GBM (Global Bankingand Markets), which were weak in the last three quarters of The efficiency ratio was 44.9% with amortisations and 40.2%2011, very affected by the environment, compared to strong without amortisations (43.3% and 38.7%, respectively, in 2010).results in 2010, mainly in the first half of the year. On the otherhand, Corporate Activities registered profits in hedging ofexchange rates in 2011 as against losses in 2010.Gains on financial transactions as a proportion of total revenuesdropped from 6.2% in 2010 to 5.6% in 2011.Net feesMillion euros Variation 2011 2010 amount % 2009Fees from services 6,171 5,632 538 9.6 5,267Mutual & pension funds 1,236 1,267 (31) (2.4) 1,178Securities and custody 668 784 (117) (14.9) 774Insurance 2,397 2,051 346 16.9 1,861Net fee income 10,471 9,734 737 7.6 9,08086 ANNUAL REPORT 2011
  10. 10. This performance showed the Group’s capacity to continue to Gross income and expensesgenerate revenues in a difficult context and comfortably absorb Billion eurosthe provisions made for loan losses, which at EUR 10,562million were 3.0% more than in 2010. This increase was due to Gross incomethe reduced release of generic provisions, as based on just Expensesspecific ones there was a decline of 9.8%. 44.3Similar comments can be made for Spain, where total provisions 42.1rose 13.6% and specific ones dropped 32.0%. There were 39.4significant reductions in provisions in the UK, Sovereign andSantander Consumer Finance (even with the incorporation of 19.9new units). Provisions in Latin America excluding Brazil also 18.2dropped. However, they rose strongly in Portugal, reflecting the 16.4economic difficulties, and in Brazil because of the greatergrowth in lending of around 20% and an increase in thesector’s NPLs in previous quarters. 2009 2010 2011Net operating income after provisions was EUR 13,811million, 1.6% more than in 2010 (+1.1% excluding theperimeter and exchange-rate impacts). Net operating income Billion eurosThere were notable rises in these results in SantanderConsumer Finance (+46.8%), Sovereign (+33.6%) and almost + 2.2% 2011-2010all Latin American units such as Brazil (+2.9%), Mexico(+12.4%), Argentina (+8.2%), Puerto Rico (+42.4%) andColombia (+43.1%). On the other hand there were declines in 24.4 23.9the UK (-8.4%), after absorbing the significant effects of the 23.0regulatory changes, as commented on in greater detail in therelevant section. There were larger falls in Spain (-30.4%) andPortugal (-56.2%).Asset impairment losses and other results were EUR 2,995million negative compared to EUR 1,543 million, also negative,in 2010, largely due to the charge made in the second quarterfor EUR 842 million gross for payment protection insurance (PPI) 2009 2010 2011remediation in the UK.Profit before tax was 10.2% lower at EUR 10,817 million After deducting the tax charge profit from continued(excluding the perimeter and exchange rate effects: -10.6% ). operations was EUR 7,881 million (-13.7%). RecurringThe tax charge of EUR 2,936 million was almost the same as in attributable profit, after incorporating discontinued operations2010, mainly due to a higher rate in Brazil, Sovereign and and minority interests, was EUR 7,021 million (-14.2%).Corporate Activities.Operating expensesMillion euros Variation 2011 2010 amount % 2009Personnel expenses 10,326 9,330 996 10.7 8,450General expenses 7,455 6,926 528 7.6 6,374 Information technology 875 798 77 9.7 786 Communications 659 670 (12) (1.7) 632 Advertising 695 634 62 9.7 594 Buildings and premises 1,667 1,553 114 7.4 1,405 Printed and office material 178 178 (0) (0.2) 209 Taxes (other than profit tax) 401 376 25 6.5 313 Other expenses 2,980 2,718 263 9.7 2,436Personnel and general expenses 17,781 16,256 1,525 9.4 14,825Depreciation and amortisation 2,109 1,940 169 8.7 1,596Total operating expenses 19,889 18,196 1,694 9.3 16,421 ANNUAL REPORT 2011 87
  11. 11. Net loan-loss provisionsMillion euros Variation 2011 2010 amount % 2009Non performing loans 12,368 11,457 911 7.9 10,516Country-risk (7) 2 (9) — (117)Recovery of written-off assets (1,800) (1,201) (598) 49.8 (915)Total 10,562 10,258 304 3.0 9,484 Moreover, and as it was already commented on, the bank madeProfit before taxMillion euros provisions for EUR 3,183 million net of tax, of which EUR 1,513 million came from capital gains and EUR 1,670 million from-10.2% 2011-2010 fourth quarter profits. After these impacts, attributable profit was EUR 5,351 million. Earnings per share were EUR 0.6018, 36.1% less than in 2010 and slightly affected by the capital increases in 2011 to 12,052 11,764 convert Valores Santander (convertible bonds) and tend to the 10,817 remuneration in shares for those shareholders that chose this option, as no adjustment was made retroactively to the number of shares of previous periods. The Groups ROE was 7.14% and ROTE (measured as attributable profit / shareholders equity less goodwill) was 2009 2010 2011 10.81% (9.37% and 14.18%, respectively, on the basis of recurring attributable profit).Attributable profit to the GroupMillion euros-34.6% 2011-2010 8,943 8,181 5,351 2009 2010 2011Extraordinary capital gains and provisions(net of tax) Million euros -3,183 Impact on Funds established attributable profit: before tax -1,670 million -1,670 Not required Spain real estate 1,812 1,513 Portugal goodwill 601 Sale of Insurance Holding Latam 641 Amortisation of intangibles, -893 pensions and other SCF USA 872 -620 Portfolio writedowns transaction capital gains* provisions (*) Not including capital gains from agreement to sell the bank in Colombia, which are to be registered in 201288 ANNUAL REPORT 2011
  12. 12. Balance sheetMillion euros Variation 2011 2010 amount % 2009AssetsCash on hand and deposits at central banks 96,524 77,785 18,739 24.1 34,889Trading portfolio 172,637 156,762 15,875 10.1 135,054 Debt securities 52,704 57,871 (5,168) (8.9) 49,921 Customer loans 8,056 755 7,301 966.7 10,076 Equities 4,744 8,850 (4,107) (46.4) 9,248 Trading derivatives 102,498 73,069 29,429 40.3 59,856 Deposits from credit institutions 4,636 16,216 (11,581) (71.4) 5,953Other financial assets at fair value 19,563 39,480 (19,917) (50.4) 37,814 Customer loans 11,748 7,777 3,971 51.1 8,329 Other (deposits at credit institutions, debt securities and equities) 7,815 31,703 (23,888) (75.4) 29,485Available-for-sale financial assets 86,612 86,235 378 0.4 86,621 Debt securities 81,589 79,689 1,900 2.4 79,289 Equities 5,024 6,546 (1,522) (23.3) 7,331Loans 779,525 768,858 10,667 1.4 736,746 Deposits at credit institutions 42,389 44,808 (2,419) (5.4) 57,641 Customer loans 730,296 715,621 14,675 2.1 664,146 Debt securities 6,840 8,429 (1,589) (18.9) 14,959Investments 4,154 273 3,881 — 164Intangible assets and property and equipment 16,840 14,584 2,257 15.5 11,774Goodwill 25,089 24,622 466 1.9 22,865Other 50,580 48,901 1,679 3.4 44,602Total assets 1,251,525 1,217,501 34,024 2.8 1,110,529Liabilities and shareholders equityTrading portfolio 146,949 136,772 10,177 7.4 115,516 Customer deposits 16,574 7,849 8,725 111.2 4,658 Marketable debt securities 77 365 (288) (78.8) 586 Trading derivatives 103,083 75,279 27,804 36.9 58,713 Other 27,214 53,279 (26,064) (48.9) 51,559Other financial liabilities at fair value 44,908 51,020 (6,111) (12.0) 42,371 Customer deposits 26,982 27,142 (160) (0.6) 14,636 Marketable debt securities 8,185 4,278 3,907 91.3 4,887 Due to central banks and credit institutions 9,741 19,600 (9,859) (50.3) 22,848Financial liabilities at amortized cost 935,669 898,969 36,700 4.1 823,403 Due to central banks and credit institutions 116,368 79,537 36,832 46.3 73,126 Customer deposits 588,977 581,385 7,593 1.3 487,681 Marketable debt securities 189,110 188,229 880 0.5 206,490 Subordinated debt 22,992 30,475 (7,482) (24.6) 36,805 Other financial liabilities 18,221 19,343 (1,122) (5.8) 19,300Insurance liabilities 517 10,449 (9,932) (95.1) 16,916Provisions 15,571 15,660 (89) (0.6) 17,533Other liability accounts 25,052 23,717 1,335 5.6 20,919Total liabilities 1,168,666 1,136,586 32,080 2.8 1,036,659Shareholders equity 80,895 77,334 3,562 4.6 71,832 Capital stock 4,455 4,165 290 7.0 4,114 Reserves 72,660 66,258 6,402 9.7 61,071 Attributable profit to the Group 5,351 8,181 (2,830) (34.6) 8,943 Less: dividends (1,570) (1,270) (300) 23.6 (2,297)Equity adjustments by valuation (4,482) (2,315) (2,166) 93.6 (3,165)Minority interests 6,445 5,896 549 9.3 5,204Total equity 82,859 80,914 1,944 2.4 73,871Total liabilities and equity 1,251,525 1,217,501 34,024 2.8 1,110,529 ANNUAL REPORT 2011 89
  13. 13. Total managed funds at the end of 2011 amounted to EURGrupo Santander. Balance sheet 1,382,980 million, of which 90%, EUR 1,251,525 million, were on-balance sheet and the rest off-balance sheet mutual and Activity continued to reflect the market context: pension funds and managed portfolios. • Lower demand for loans in Europe, especially in Two factors need to be taken into account in the year-on-year Spain and Portugal, and double-digit growth in comparisons: Latin America. • A slightly positive perimeter impact from the net effect of the • In funds, preference for deposits and conservative following changes in the Group’s composition: policy in issues. – Positive impact from the consolidation of Banco Zachodni • Loan-to-deposit ratio of 117% (150% at the start WBK in Poland, the incorporation to the Group in 2011 of of the crisis). SEB’s retail banking business in Germany (Santander Retail) Core capital ratio (BIS II) of 10.02%, after rising for into Santander Consumer Finance and the acquisition of GE the fifth year running. Capital Corporations mortgage portfolio in Mexico and of Creditel in Uruguay. The European Banking Authority’s target has – Negative impact from Santander Consumer USA, which in already been reached: core capital ratio of 9.01%. December stopped consolidating by global integration and moved to consolidation by the equity accounted method, Shareholders’ equity per share increased again to and Latinoamerica’s bancassurance business. EUR 8.62. • The second effect came from the appreciation/depreciation of various currencies against the euro (end of period rates). Both the dollar and sterling appreciated by 3%, while the mainDistribution of total assets by geographic segment Latin American currencies depreciated: Brazilian real andDecember 2011 Mexican peso (8%); Chilean peso (7%) and the Argentine peso (5%). The net impact of both is virtually zero. Sovereign 5% Other 5% The joint impact of the two effects on changes in customerOther Latin America 3% balances was minimal (less than one percentage point positive), Chile 3% Spain 27% both on lending as well as managed customer funds. Mexico 3% Lending The Group’s customer loans amounted to EUR 769,036 million, Brazil 13% 3.4% higher than in 2010. Eliminating the exchange rate and perimeter effects it was 3.0% higher. Portugal 4% Germany 3% The geographic distribution (principal segments) was also very Retail Poland 1% different by markets. Other Europe 5% United Kingdom 28%Customer loansMillion euros Variation 2011 2010 amount % 2009Public sector 12,147 12,137 10 0.1 9,803Other residents 202,411 217,497 (15,086) (6.9) 222,355 Commercial bills 9,679 11,146 (1,466) (13.2) 11,134 Secured loans 117,946 127,472 (9,526) (7.5) 125,397 Other loans 74,785 78,879 (4,094) (5.2) 85,824Non-resident sector 554,478 514,217 40,262 7.8 468,267 Secured loans 342,676 311,048 31,627 10.2 286,381 Other loans 211,802 203,168 8,634 4.2 181,886Gross customer loans 769,036 743,851 25,185 3.4 700,424Loan-loss allowances 18,936 19,697 (761) (3.9) 17,873Net customer loans 750,100 724,154 25,946 3.6 682,551Pro memoria: Doubtful loans 31,287 27,908 3,379 12.1 24,027 Public sector 102 42 60 142.0 18 Other residents 14,745 12,106 2,639 21.8 9,898 Non-resident sector 16,439 15,759 680 4.3 14,11190 ANNUAL REPORT 2011
  14. 14. In Continental Europe, Spain and Portugal’s lending fell by Gross customer loans4.6% and 5.6%, respectively, due to deleveraging. Santander Billion eurosConsumer Finance’s lending dropped 4.8%, due to the impactof the consolidation by the equity accounted method of + 3.4%* 2011-2010Santander Consumer USA in December 2011 (+16.1% before * Excluding exchange rate impact: +3.8%this impact). The incorporation of Bank Zachodni WBK increased 769the Group’s net lending by EUR 8,479 million. 744Gross customer loans in Spain amounted to EUR 225,288 700million, with the following structure:• Loans to the public sector amounted to EUR 12,147 million, (+0.1%).• Lending to individuals amounted to EUR 84,816 million, of which EUR 58,535 million were mortgages for homes. These 2009 2010 2011 are the healthiest part and with the least risk of further deterioration of the portfolio in Spain because of the different features of this product compared to similar ones in other countries. For example, the principle is amortised as of the Gross customer loans first day, the borrowers responsibility extends to all their % o/ operating areas. December 2011 assets and almost all loans are for residences in ownership, with a very low expected loss. Sovereign 5% Other Latin America 2% In the specific case of Grupo Santander, the portfolio is mostly Chile 3% Mexico 3% composed of mortgages that are for the first residence, with large concentration of loans in the lowest tranches of loan-to- Spain 29% Brazil 11% value (88% with an LTV lower than 80%) and the NPL ratio is very low (2.7%).• Loans to SMEs and companies without real estate purpose, the most relevant part of the lending portfolio, amounted to Portugal 4% EUR 104,883 million and accounted for 47% of the total. Of Germany 4% note was the stability shown during the year (-0.4%) within Retail Poland 1% an environment of widespread reduction of lending in the United Kingdom 34% Other whole system. Europe 4%• Loans for real estate purposes (with the greatest risk) stood at EUR 23,442 million, after falling in every quarter of 2011. The total reduction for the year was EUR 3,892 million (-14.2%). Loan portfolio in Spain Billion euros The Group maintained in the year the strategy of previous years to reduce exposure to this segment of greater risk. The 245 total reduction in the last three years amounts to EUR 14,246 Total 236 225 million (-37.8%). Public Sector 10 12In Portugal, the fall in lending (5.6%) came from all segments: Household mortgages 64 12-11.8% to SMEs, -13.9% to companies and -3.1% to 61 59individuals. In addition, balances in construction and real Other loans to individuals 31 30estate, which represent only 3.6% of lending in the country, 26declined 12.1% in 2011. Companies without realSantander Consumer Finance’s lending, after the operation at estate purpose 108 105 105Santander Consumer USA, dropped 4.8%. Excluding thisimpact, growth was 16.1% due to organic growth plus SEB’sintegration in Germany. New lending rose 11.1%. Real estate purpose 31 27 23 2009 2010 2011 ANNUAL REPORT 2011 91
  15. 15. Credit risk management* Million euros Variation 2011 2010 amount % 2009Non-performing loans 32,036 28,522 3,514 12.3 24,554NPL ratio (%) 3.89 3.55 0.34 p. 3.24Loan-loss allowances 19,661 20,748 (1,087) (5.2) 18,497 Specific 15,474 14,901 572 3.8 11,770 Generic 4,187 5,846 (1,659) (28.4) 6,727NPL coverage (%) 61 73 (11 p.) 75Credit cost (%) ** 1.41 1.56 (0.15 p.) 1.57Ordinary non-performing and doubtful loans *** 18,318 18,061 257 1.4 17,641NPL ratio (%) *** 2.26 2.28 (0.02 p.) 2.35NPL coverage (%) *** 107 115 (8 p.) 105* Excluding country-risk** Net specific allowance / computable assets*** Excluding mortgage guaranteesNote: NPL ratio: Non-performing loans / computable assetsIn the United Kingdom, the balance of customer loans was Bad and doubtful loans amounted to EUR 32,036 million,4.6% higher. In local criteria, the stock of residential mortgages, 12.3% more than in 2010.in a still depressed market, were very stable, while loans to SMEsincreased 25.4%, gaining further market share. Personal loans, The Group’s NPL ratio was 3.89% at the end of 2011 (+34 b.p.),reflecting the policy in the last few years of reducing them, but it only rose by 11 b.p. in the second half of the year (+3 b.p.declined 12.7%. in the fourth quarter).Lending in Latin America increased 17.9% excluding the In order to cover these loans, total loan-loss provisionsexchange rate impact, due to organic growth and the amounted to EUR 19,661 million, of which 21% (EUR 4,187incorporation of GE Capital Corporations mortgage portfolio in million) were generic provisions.Mexico and of Creditel in Uruguay. Loans in local currency rose Since the end of 2008, total loan-loss provisions have increased20.3% in Brazil, 7.3% in Chile and 30.9% in Mexico (+22.4% by EUR 6,800 million (+53%), reflecting the efforts made in theexcluding the perimeter impact). last three years. The Group’s NPL coverage is 61%, negativelySovereign’s loans rose 6.0% in dollars, due to the 4.5% affected by some 3 percentage points because of the operationincrease in the most attractive mortgage segments (residential at Santander Consumer USA.and multifamily), and the acquisition of a consumer credit The NPL ratios by units and countries are set out below:portfolio from GE. Both effects comfortably offset the exit fromhigher risk segments and from those not considered strategic • The NPL ratio in Spain is 5.49%, well below the sector’sfor the Group. average, and coverage 45% (4.24% and 58%, respectively, in 2010).Continental Europe accounted for 42% of the Group’s totallending (29% Spain), the UK 34%, Latin America 19% (11%Brazil) and Sovereign 5%. These percentages in 2010 were 45%for Continental Europe (32% Spain), 32% the UK, 18% Latin Loan-loss allowancesAmerica (10% Brazil) and 5% (Sovereign). Million eurosRisks -5.2% 2011-2010 20,748The still weak scenario in some markets continued to push up 19,661 18,497non-performing loans, linked both to the rise in bad anddoubtful loans (the numerator) as well as the slower growth inlending (denominator), which in some cases were declines. 5,846 4,187 Generic 6,727Despite this, the active management of risk is reflected in aslower pace of growth in the Group’s NPLs in the last few 15,474 14,901quarters. Specific 11,770The Groups annual risk premium was 1.67% at December2011, well below the maximum of 2.47% reached in the third 2009 2010 2011quarter of 2009.92 ANNUAL REPORT 2011
  16. 16. Around 90% of the portfolio (including mortgages and Non-performing loans companies) has an NPL ratio of 3.3%. The ratio for mortgages Million euros to buy homes is 2.7% and 3.5% for the rest of the portfolio (public sector, individual customers and companies without 2011 2010 2009 real estate purposes). In both cases, NPLs increased moderately. Balance at beginning of period 28,522 24,554 14,191 Net additions 15,381 13,478 18,234 The rise in the total ratio was thus due to loans with a real Increase in scope of consolidation 925 257 1,033 estate purpose (ratio of 28.6%). This ratio reflects, on the one Exchange differences (362) 1,147 890 hand, the greater NPLs in this segment and, on the other, the Write-offs (12,430) (10,913) (9,795) Group’s anticipative policy to sharply reduce balances in this Balance at period-end 32,036 28,522 24,554 segment. Doubtful loans with a real estate purpose amounted to EUR 6,772 million. Their coverage rose by 4.p.p. to 33%. Another EUR 3,916 million was recorded as substandard, all NPL ratio of which is up-to-date with payments. These balances are % 16% covered (+ 4 p.p.). The gross balance of foreclosed properties at the end of 2011 was EUR 8,552 million, and after the provisions made in the fourth quarter of the year coverage rose to 50% from 31% in 2010. 3.89 3.86 3.78 These coverage levels signify that Santander has already 3.55 3.61 anticipated a significant part of the new requirements outlined in the Royal Decree 2/2012, which came into force on February 3, 2012 and will be entirely met during the year, through the existing capital buffer, ordinary contributions to provisions and applying the capital gains which may be Dec’10 Mar’11 Jun’11 Sep’11 Dec’11 obtained during the year (including EUR 900 million from the capital gain obtained from the sale of Banco Santander Colombia).• Portugal’s NPL ratio rose 116 b.p. to 4.06%, using the Group’s criteria, while coverage was 55%, 5 p.p. less than in NPL ratio in Spain 2010. In local criteria, Santander Totta has a lower NPL ratio % than its competitors.• Santander Consumer Finance reduced its NPL ratio for the 28.6 Real estate purpose sixth quarter running to 3.77%, with coverage of 113%. The 17.0 evolution during the year was determined by the consolidation in December of Santander Consumer USA by 11.1 the equity accounted method as, without this effect, coverage was 9 p.p. higher.• In the UK the NPL ratio was 1.86%, slightly higher than in 4.2 5.5 Total portfolio Spain 2010 (+10 b.p.), while coverage was 38% (46% in 2010). 3.4 3.1 3.5 Other portfolio Because of its importance in the Group’s overall lending, the 2.5 2.7 Household mortgages 2.2 NPL ratio of mortgages was 1.46% (1.41% in 2010), while 2.4 the average loan-to-value was 53%. 2009 2010 2011 Another indicator of this portfolio’s good performance is the small volume of foreclosed homes (EUR 160 million, or only 0.07% of total mortgage lending portfolio). Efficient management of these cases and a dynamic market for this kind of housing enable sales to be made in a short period, contributing to the good results. ANNUAL REPORT 2011 93
  17. 17. • Brazil’s NPL ratio was 5.38% (+47 b.p.). This increase was due Customer funds under management to the small rise in the sector and to higher growth in lending Total managed funds amounted to EUR 984,353 million, to individuals, basically consumer credit and cards. Santander almost the same as in 2010 (-0.1%). After deducting the Brazil’s performance was better than that of the country’s perimeter and forex effects, which had a marginal impact, the other private sector banks, the most comparable collective. reduction was 0.8%. Coverage was 95%. Customer deposits rose 2.6% and 4.5% including retail• The NPL ratio of Latin America ex-Brazil was 2.89% and commercial paper in Spain and Brazil’s letras financeiras. coverage an excellent 102%. Its comparison is affected by the Mutual and pension funds declined 9.8%, affected by the incorporation in the second quarter of GE Capital greater focus on capturing on-balance sheet funds. Corporations mortgage portfolio in Mexico. Excluding it, the ratio improved in every quarter of 2011 (-25 b.p. for the Deposits in Continental Europe were very similar to 2010 at whole year), while coverage was 104% (-6 p.p.). EUR 49,400 million (-0.1%) and 25.0% higher than at the end of 2009. This reflected the strong campaign in 2010, a large• Sovereign’s NPL ratio, after declining in the last eight quarters, part of which was retained in 2011. To this is added the was 2.85%, much better than the 4.61% in 2010 (-176 b.p.). favourable impact of the entities incorporated to the Group. Coverage was 96% (+21 p.p.). • In Spain, the strategy followed in the renewal of fundsLastly, specific loan-loss provisions for the whole Group, after captured in the 2010 campaign was to give priority todeducting write-offs recovered, amounted to EUR 11,137 improved costs over volumes. As a result, deposits fell 7.2%.million (1.41% of average credit risk in the last 12 months), However, if one compares the balances at the start of thedown from EUR 12,342 million in 2010 (1.56%). campaign with those at the end of 2011, growth was more than EUR 18,800 million (+12.1%). To this is added, the retailNet provisions represented 1.4% of loans, well below the 3.3% commercial paper sold during the year, which made therepresented by net operating income/lending. changes -4.0% for 2011 and +16.0% for the last two years. This policy of emphasis on balance sheet funds was reflectedFurther information on the evolution of credit risk, particularly in a fall in mutual funds.real estate risk in Spain, control and monitoring systems andinternal risk models to calculate provisions is included in thesection on Risk Management in this annual report.Customer funds under managementMillion euros Variation 2011 2010 amount % 2009Public sector 6,528 9,655 (3,127) (32.4) 13,293Other residents 165,095 161,096 3,999 2.5 126,189 Demand deposits 68,389 67,077 1,312 2.0 61,000 Time deposits 61,185 81,145 (19,960) (24.6) 49,177 REPOs 35,520 12,873 22,647 175.9 16,012Non-resident sector 460,911 445,625 15,286 3.4 367,495 Demand deposits 220,299 210,490 9,808 4.7 195,823 Time deposits 197,249 197,590 (341) (0.2) 148,485 REPOs 33,275 30,623 2,652 8.7 18,403 Public Sector 10,089 6,922 3,167 45.7 4,784Customer deposits 632,533 616,376 16,158 2.6 506,976Debt securities 197,372 192,872 4,499 2.3 211,963Subordinated debt 22,992 30,475 (7,482) (24.6) 36,805On-balance-sheet customer funds 852,898 839,723 13,175 1.6 755,744Mutual funds 102,611 113,510 (10,898) (9.6) 105,216Pension funds 9,645 10,965 (1,320) (12.0) 11,310Managed portfolios 19,199 20,314 (1,115) (5.5) 18,364Savings-insurance policies — 758 (758) (100.0) 9,422Other customer funds under management 131,456 145,547 (14,091) (9.7) 144,313Customer funds under management 984,353 985,269 (916) (0.1) 900,05794 ANNUAL REPORT 2011

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