Speech by Mr. Emilio Botín – Annual General Meeting 2013

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Speech by Mr. Emilio Botín – Annual General Meeting
March 22, 2013

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Speech by Mr. Emilio Botín – Annual General Meeting 2013

  1. 1. Speech by Mr. Emilio Botín – Annual General Meeting March 22, 2013INTRODUCTIONPresident of the Autonomous Region of CantabriaMayor of SantanderShareholdersGood morningThank you for attending Banco Santander’s 2013 Annual General Meeting.In my speech:  I will explain the 2012 results and decisions Banco Santander’s management took in a difficult macro-economic and financial environment.  I will discuss our corporate governance and our corporate social responsibility policy.  And I will discuss our vision for 2013.Against a particularly difficult economic and regulatory backdrop, BancoSantander registered attributable net profit of EUR 2.205 billion, a decline of59% from the previous year.These profits were significantly affected by the extraordinarily high level ofspecial provisions and write-downs carried out in Spain. These amounted toEUR 6.140 billion and were only partially offset by EUR 1.241 billion inextraordinary gains.I would like to highlight that, with the provisions made in 2012, the coverage ofreal estate exposure in Spain has been completed.The decisions we took over the course of 2012 and Banco Santander’s resultsallow us to be optimistic about the immediate future. There are four reasons forthis:First, pre-provision profit was EUR 23.559 billion in 2012.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  2. 2. Regulatory authorities study this figure carefully because it shows the solidityand stability of the Banks revenues and confirms our Groups ability to generateprofits once the level of provisions and write-downs returns to normal. BancoSantander is the third largest bank in the world in terms of pre-provision profit.Second, we strengthened the balance sheet in three key areas:  Provisions  Capital  Liquidity.Specifically:  In 2012, we allocated EUR 18.800 billion to provisions and write-downs - - 54% more than in 2011 -- due to the exceptional circumstances we faced.  At the close of 2012, our core capital was 10.33%, comfortably above the regulatory requirement.  And we have significantly strengthened our liquidity. The Group’s ratio of loans to deposits improved from 117% to 113%. In Spain, it was 96%.Third, we set in motion three major transactions that strengthen our position inthree main markets:  The integration of Banesto and Banif into Banco Santander  The IPO of Banco Santander Mexico  And the merger between our bank in Poland and Kredyt Bank.Fourth, as I announced at last years Annual General Meeting, BancoSantander is going to continue to pay its 3.3 million shareholders EUR 0.60 pershare against the 2012 results. Performance of recurring profit, a reflection ofthe ability to generate sustained profits, and the soundness of our balancesheet, have enabled us to maintain the same remuneration for four consecutiveyears.For the 2012 financial year, we have already paid our shareholders EUR 0.45per share through the Santander Dividendo Elección, or scrip dividend,programme.At its meeting on January 28, Banco Santanders board of directors approvedthis programme once again, for EUR 0.15 euros per share on the dates onSpeech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  3. 3. which the complementary dividend is usually paid (from May 1), subject to theratification of this AGM.As you know, the Santander Scrip Dividend programme gives our shareholdersthe option to receive payment in cash or in shares. Since its launch, four yearsago, holders of more than 80% of the share capital have opted to receiveshares.Accordingly, the amount allocated by the Bank to pay its shareholders for the2012 financial year amounts to EUR 6.086 billion, in cash and shares, 15.7%more than in 2011.Over the last five years, we have paid our shareholders a total of EUR 26billion.In view of the success of the Santander Scrip Dividend programme, the Bankintends to apply it once again to pay its shareholders in 2013. This is also in linewith the European Union recommendation to use scrip issues to pay dividends.Specifically, at this meeting, the board proposes the application of theSantander Scrip Dividend programme on the dates on which the first, secondand third interim dividends are usually paid for the 2013 financial year. Theboard intends to include the complementary dividend, payable from May 12014, in the scrip programme, subject to the approval of next year’s annualgeneral meeting.Santander’s share price rose 3.9% in 2012, compared with a fall in the IBEXindex. The total return for Banco Santander shareholders was 17.3%. Weremain the top bank in the eurozone by market value and Santanders share isthe most liquid in the Eurostoxx index.The markets and Santander shares got off to a strong start in 2013. However,uncertainty generated by the Italian elections and the situation in Cyprus haveled to a certain amount of instability in the markets. In any case, I am convincedthat as the situation returns to normal, the market will reward the bank for itssound management.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  4. 4. THE BASIS OF BANCO SANTANDERS STRATEGYOur results and our ability to pay dividends is the result of the consistentstrategy we have followed over the years, made up of five fundamentalprinciples:  Strength in the balance sheet and liquidity,  Diversification and the structure of our subsidiaries,  The commercial banking model,  Prudent risk management,  And cost efficiency.1. Strength in the balance sheet and liquidity,Provisions, along with capital and liquidity management, were BancoSantander’s priorities in 2012.The groups strength was confirmed in the stress tests supervised by theEuropean Central Bank, the European Commission, the International MonetaryFund and other international agencies. These tests were exceptionally rigorousand transparent and were not performed elsewhere in Europe.The stress test carried out in the third quarter of 2012 ranked Banco Santanderas the most solid institution in Spain, with a capital surplus of EUR 25.297billion even in the most adverse economic scenario – well above the otherSpanish banks.Our goal is to always maintain a considerable excess of core capital overand above regulatory requirements.I would now like to mention the new Basel III capital requirements:As you know, they are due to come into effect in January 2014, at the earliest.What’s more, they are scheduled to be applied gradually up to, in principle,2019, which is when full compliance is expected.However, markets are pressuring banks to provide advance notice of theirexpected capital ratios under Basel III.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  5. 5. Therefore, ladies and gentlemen, I would like to inform you of our estimates,subject to clarification of the regulations governing minimum capitalrequirements in the next few weeks.According to these estimates, at the end of 2013, Grupo Santander’s corecapital ratio under Basel III would be:  11% in accordance with the approved implementation schedule; and  8% in terms of what the market calls "fully loaded", that is to say, if the deadline for the new requirements were brought forward to December 31, 2013, instead of in 2019 as planned.It is important to highlight that:  These estimates assume that, as I mentioned previously, in 2013 we will apply the Santander Scrip Dividend programme to pay our shareholders each of the four dividends due, maintaining the sum of EUR 0.60 per share;  Furthermore, these estimates are based on the organic growth in profits, without a capital increase; and  We have the advantage that the Bank for International Settlements requires Santander to hold only one percentage point extra core capital for being a systemic institution. This is thanks to our geographic diversification and risk profile. By contrast, the bank requires our international competitors to have an average of 2.3 percentage points extra.All of this demonstrates the Groups ability to generate profits and the strengthof the Group’s capital, based on our diversified business model and recurringprofits.Ladies and gentlemen,I would like to make special mention of the steps taken in 2012 to strengthenthe balance sheet and liquidity in Spain:Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  6. 6.  In 2012, Banco Santander set aside provisions and reserves of EUR 18.800 billion and improved coverage of non-performing loans by eleven points to 73%.o We allocated EUR 6.140 billion in provisions to cover exposure to problem real estate assets. This amount exceeded the requirements of the two Spanish government royal decrees.o We have reduced real estate exposure in Spain, net of provisions, by EUR 12.400 billion, from EUR 24.900 billion to EUR 12.500 billion. This adjustment substantially strengthened the balance sheet. We achieved it with the sale of 33,500 properties, belonging to the bank and to property developers it has financed, and with the sale of loan portfolios. For the first time since the crisis began, the volume of foreclosed properties decreased, falling by 8% during the year. In other words, in 2012, more properties came off the balance sheet than were added to it. By 2014, I expect that we will have sold a significantly more of the property portfolio. Exposure to the property sector in Spain, net of provisions, represented 1.7% of the group’s loan portfolio at the end of the year. As I mentioned at the beginning of my speech, as a result of the provisions set aside in 2012, the coverage of real estate exposure in Spain has been completed.o The improvement in liquidity during the year has also been very important. In Spain, we have a loan-to-deposit ratio of 96% following the success in securing customer deposits, which increased by EUR 22.000 billion in the year, meaning that our market share increased by 2.2 percentage points. These data reflect the confidence that Banco Santander generates in the Spanish market and we hope that this trend will continue in 2013.Additionally, we issued EUR 31 billion in debt in major international markets.We have also taken advantage of windows of opportunity in the Spanish marketto issue a further EUR 9 billion.Taken as a whole, we have a comfortable maturity structure. All of this hasallowed us to return EUR 24 billion of the European Central Bank medium-termSpeech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  7. 7. liquidity made available to European banks. These funds were deposited withthe European Central Bank as liquidity insurance.2.- Diversification and subsidiary modelThe second fundamental principle of Banco Santanders strategy is thegeographic distribution of its businesses. We achieved this while maintaining acommercial banking model with critical mass in its ten core markets and abalanced distribution of profits: 45% in mature markets and 55% in emergingmarkets.Banco Santanders international structure is based on a model of subsidiariesthat are autonomous in capital and liquidity, some of them publicly listed. Ourgoal is for all our major subsidiaries to be listed on their respective markets.In 2012, we progressed with this model, which allows us a great deal offlexibility in terms of management. I would like to highlight three transactionscarried out during the year:  The highly successful placement of 24.9% of Santander Mexico. The volume was of EUR 3.178 billion euros and demand outstripped supply fivefold. This group subsidiary ranks as the world’s 70thlargest bank by market value.  In late 2012, our Polish subsidiary Bank Zachodni WBK and Kredyt Bank merged. Today, we are the third-largest bank in Poland by deposits, loans and number of branches and we have more than 4 million customers. This transaction, completed on January 4, was clearly made possible by our subsidiary structure. The absorption of Kredyt Bank by our subsidiary in Poland was paid for with Zachodni shares and the merger will create value for shareholders from the very first year.Yesterday, Thursday, the successful placement of 21% of our bank in Polandwas completed. Of that, 16% was held by KBC, in line with the mergeragreement.Finally, in December, we announced the integration of Banesto and Banif intoBanco Santander in Spain. This was a strategic decision taken as part of therestructuring of the Spanish financial system.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  8. 8. This transaction, which was approved yesterday by Banestos Annual GeneralMeeting, , is being submitted to Banco Santanders shareholders for approvaltoday in points six and seven on the agenda.The strategy of having two separate branch networks in Spain and a privatebanking network for high-net-worth customers made sense in the past, in adifferent economic setting.Now, with the sectors profound restructuring resulting in fewer, larger banks, itmakes much more sense to operate under a single brand. We are going tobe able to compete better with:  A network of 4,000 branchesA better regional balance  The strongest brand in Spain and the top retail banking brand worldwide.By the end of 2013, the groups sales networks in Spain will be completelyunified under the Santander brand,This is a very positive transaction:  For shareholders in Banco Santander, because we foresee cost and revenue synergies of EUR 520 million and an increase in profit per share of 3% starting in the third year. I am confident that the merger of our commercial networks in Spain will strengthen our retail, corporate and private banking business and will consolidate our position as a leading bank in Spain. Our goal is to gain market share in loans and deposits. Banesto shareholders, on the other hand, will receive a 25% premium when their Banesto shares are exchanged for Santander shares and will become shareholders in an international bank with one of the highest dividend yields.  It is also positive for employees, as the businesss new structure in Spain and our international diversification will offer new career opportunities. Furthermore, an agreement has already been signed with the unions.  And Grupo Santanders customers in Spain will benefit from the merger because they will have access to more branches and a broader range of products.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  9. 9. The merger is practically free of execution risk because Banesto has been partof the group for almost twenty years. It will be carried out rapidly and efficiently,with focus particularly on the quality of service provided to our customers.I can tell you that we are ahead of schedule and as of today:  All Santander and Banesto customers can withdraw cash using their debit cards, with no commission, from the cash machines of both networks in Spain.  And those who are customers of both banks will be able to make transfers between their accounts as if they were transferring within the same institution; in other words, with no costs and with immediate effect.3. The Retail Banking ModelThe third element that defines Banco Santanders business strategy is our retailbanking model, our main activity.Eighty-eight per cent of revenues come from retail and commercial banking,which makes our revenues highly recurrent . To this end, we have 14,400branches - the largest international banking branch network - in which we servemore than one hundred million individual, SME and corporate customers.In line with our goal to maximise the quality of our service and the satisfaction ofour customers, the bank launched a new corporate slogan: "Santander, a bank for your ideas".With this slogan the bank intends to convey to our customers that we make ourexperience, capabilities and knowledge available to them so that they can maketheir projects a reality.The new slogan will be included in all our activities and initiatives withcustomers and in all communications in the countries in which we are present.4. Prudent risk managementPrudent and comprehensive risk management is the fourth fundamentalelement of our business model and a hallmark of Banco Santander during itsmore than 150-year history.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  10. 10. The bank has very well defined principles of risk management:  The management and control of risk in the group are independent of the business areas.  Decisions are made by a majority and there is a clear definition of powers.  The final responsibility for risk management rests with the board of directors, which sets a medium-to-low risk appetite.  The board is closely involved in risk management, both directly and through its executive and risk committees. The risk committee met 98 times in 2012.  The bank also maintains a high level of diversification of risk, avoiding excessive concentrations by customer, product or country.The precision and prudence with which Santander manages its risk is reflectedin the fact that, in almost all the countries where we operate, we have a non-performing-loan ratio below the sector average.5. Cost EfficiencyFinally, a tightly-controlled cost structure is a clear competitive advantage inretail banking. The groups shared services, or ‘factories’, produce significanteconomies of scale.This combines with the advantages of global business management to allow usto have a cost-to-income ratio of 46.1%, one of the most efficient in internationalbanking.All these aspects relating to group management earned recognitionfromEuromoney, one of the most prestigious financial publications, whichnamed us Best Bank in the World in 2012 and Best Bank in the UK, Mexico,Poland, Portugal and Argentina.This acknowledges that Banco Santander is one of the international financialinstitutions that has best weathered the financial crisis.BOARD AND CORPORATE GOVERNANCEThese five pillars of Banco Santanders strategy are supported by solidcorporate governance, based on the principles of transparency, effectivenessand the protection of shareholders’ interests.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  11. 11. The composition of the board is balanced between external and executivemembers, all of whom have extensive knowledge of banking and finance andinternational experience. The board oversees compliance with international bestpractices in corporate governance.According to a study performed by the most prestigious international consultingfirms:  The annual dedication of each director to the board’s duties and its committees is 319 hours, practically triple that of comparable international banks.  And banks with smaller boards and experienced members with greater dedication, like that of Banco Santander, obtain better results than their competitors.In recent years, Banco Santander has followed a policy of total transparency inboard and senior management remuneration, ensuring that it does not fosterinappropriate risk-taking.I would like to highlight that:  In 2012, total board pay was reduced by 35% from the previous year.  At our own request, the bonuses of the CEO and Chairman were reduced by 50%.Under point fifteen on the agenda, the report on board member remunerationpolicy is submitted to shareholders for a consultative vote.CORPORATE SOCIAL RESPONSIBILITY POLICYBanco Santander has a sustainable and customer-oriented business model.Furthermore, the bank has a clear commitment to promoting the professionalgrowth of its employees, respecting the environment and contributing to thedevelopment of society through its support of higher education.Most of the banks investment in Corporate Social Responsibility is carried outthrough Santander Universities. This alliance between the bank and universitiesis unique in the world. It began 16 years ago and now consists of more than1,027 agreements with universities in 20 countries. The bank contributed EUR130 million last year and provided 28,303 study grants.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  12. 12. In particular, we are supporting Spanish university students and SMEs. In 2012,we granted 2,500 grants for internships in SMEs and in 2013, we have decidedto double that figure to 5,000.This year, evictions have been a particularly sensitive issue in Spain. At BancoSantander, we are very clear on this matter. Eviction is the last resort andthe worst option for everyone, for our customers and also for the bank.Proof of this is that we anticipated the problem when we launched a flexiblepayment programme in the summer of 2011, which, at the close of 2012, hadbenefited 21,000 customers.OUTLOOK FOR 2013I am now going to discuss our outlook for this year.Generally speaking, the trends will be similar to 2012: o Emerging economies will to continue to grow o and Europe will still be slow in showing clear signs of recovery, at least during the early part of the year.Specifically, as regards our main markets:Brazil is the largest contributor to the groups results, EUR 2.212 billion, or 26%of the total.Brazil continues to grow, with sharp increases in the middle classes and thelevel of banking penetration. We have every confidence in Brazil and itsexcellent prospects, which offer a unique opportunity for our group.Mexicos economy has performed very well in recent years, and the banksvarious businesses are capitalising on this very well. We are the third biggestfinancial group in the country and we have just concluded a magnificent year.We will continue to invest in Mexico and will open200 branches over the nexttwo years.Mexico and Brazil are two key countries for the Bank: in less than eightyears they are expected to have a greater population than the entireEurozone.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  13. 13. In the U.S., where we have completed the IT integration, our franchise is basedon Sovereign, which will become Santander as of October 2013, when it adoptsthe global brand, and on a powerful consumer unit.Activity in the United Kingdom has continued to be affected by a difficulteconomic and regulatory environment. Santander UK is the most profitableretail bank and is becoming a leader in the British market.In 2013, as the economic outlook for the United Kingdom improves, our modelscompetitive advantages will become apparent.In Germany, Santander has more than six million customers and is a leader inconsumer loans. Over the coming years, we will be concentrating on developingour commercial banking business in the country.In Spain, the environment has been very difficult owing to the recession and thesignificant tension in sovereign debt and banking debt markets.This had a direct effect on:  Margins, which have been under a great deal of pressure, and  The rate of NPLs, which increased, although less than the sector average, thus increasing the allocation of specific provisions.Regarding this, I want to tell you that throughout the year, Banco Santander hasheld major campaigns to support companies.We launched special lines of credit through the export plan and the activationcampaign with very favourable conditions. However, solvent demand is stillweak, affected by the deleveraging of households and companies andparticularly by the difficult situation still affecting the real estate sector.This year we will continue to search for solutions and launch initiatives topromote growth. Whats more, we hope to achieve leadership in ICO creditlines.The outlook for the Spanish economy is beginning to look morefavourable owing to the decisions adopted in Europe, the measuresimplemented by the Spanish government and the adjustments in the privatesector. The Spanish economy has embarked on a new phase, the fruits ofwhich will begin to be seen in the second half of the year and, more clearly, in2014.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  14. 14. In Europe, the foundations have been laid for greater integration, which willresolve the institutional deficiencies with which the euro started out. There weretwo fundamental and significant accomplishments in 2012: Firstly, the European Council meetings held in June and December made progress on integration by deciding to study a roadmap to complete monetary union with economic, fiscal, financial and political union and to encourage a European banking union with the creation of a single supervisory mechanism.Banking union will be a decisive step forward: o For the European economy, o For its financial system, ... o For access to corporate and household financing and o For Spanish financial institutions, which will benefit from... o Competitive conditions that are homogeneous in their regulation, o Better credit ratings o And access to the capital markets. Measures taken by the European Central Bank and its governor, Mario Draghi, have also played a key and determining role in managing the crisis.In Spain, major progress has been achieved in the correction of imbalances.This is essentially because the government has adopted some very courageousand necessary measures to overcome the crisis and lay the foundations for anew period of prosperity:  A deep labour reform was implemented, which provides more flexibility for companies and the economy as a whole.  In 2012, the public deficit was reduced to 6.7% of GDP, despite the recession, which I consider a success. An adjustment like this is unprecedented in Europe and although it has been tough, it was necessary to re-establish confidence and ensure the sustainability of our welfare state.  But having said that, progress needs to be made on reforming public administration, announced by the government, which will be key to controlling the deficit.  The restructuring of the financial sector has entered its final phase. The problems have been faced decisively, specifically thoseSpeech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  15. 15. o Linked to real estate exposure, o Associated with the systems overcapacity and fragmentation, o And generated by insufficient transparency and poor corporate governance in part of the financial system.The reform schedule is clear and the plans are the right ones. I am fullyconfident that, with the measures adopted, we will have a well-balancedfinancial system that is more solvent and more efficient: the most solid inEurope.  The latest government measures, aimed at supporting small and medium-sized companies, enterprise and business initiatives and employment, announced by the Spanish Prime Minister in the State of the Nation debate, are also very appropriate and necessary.The private sector has also made an enormous effort:  On the one hand, the cost adjustments and increase in productivity of Spanish companies over the last four years is unequalled anywhere in Europe.  This, combined with the search for new markets, has resulted in a significant improvement of external accounts, which have gone from a deficit of more than 10% of GDP to a balanced situation.  There is much to do, but we are already a competitive country with the ability to grow. We have a corporate fabric and human capital capable of moving our economy into a new phase of expansion.The conviction that the euro will not fall apart, together with the evidentadvances in reforms and the private sectors effort in Spain, are resulting in aclear improvement in the perception of the country abroad.This positive development should not make us lower our guard...  in Europe  in Spain...  among authorities  or the private sector. We need to be ambitious and continue with the reforms that put Spain at an advantage to compete with the rest of the world.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders
  16. 16. CONCLUSIONLadies and gentlemen,Grupo Santanders goals for 2013 are:  First, once the coverage of real estate exposure in Spain has been completed, to return to growth in profit.  Second, to maintain strong liquidity and capital positions.  Third, to carry out the integrations underway in Spain and Poland in an exemplary manner.  And fourth, maintain remuneration for our shareholders at EUR 0.60 a share for the fifth consecutive year.Banco Santander is in a solid position to face the coming years. We areconfident that it has the best strategy and the best team in internationalbanking, made up of 186,000 professionals, to continue to create value for ourshareholders in all the countries where we are present.We look ahead with optimism because, although the coming quarters will betough in Spain, we are confident that we are approaching a change of cycle.In, 2012 our banks profits marked a turning point and in 2013, once the realestate coverage has been completed, we will see a significant increase inprofits.Thank you very much.Speech by Mr. Emilio Botin – Banco Santander Annual General Meeting of Shareholders

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