Annual Report 2011 Santander Bank Letter from the Chairman, Emilio Botín

1. Letter from the Chairman
Emilio Botín
In a very difficult economic, financial and regulatory
environment, Banco Santander maintained its policy of giving
priority to strengthening its balance sheet as regards capital,
liquidity and provisions and generated an attributable profit of
EUR 5,351 million, 34.6% less than in 2010.
This profit was generated after setting aside EUR 1,812 million
of gross provisions, which were not required, to clean up our
real estate assets. This increased coverage for repossessed
property to 50% and got ahead of the extra provisioning
requirements for the financial system approved by the
government on February 3, 2012.
This provisions, together with writing down part of the goodwill
of Banco Santander Portugal, reduced net profits for the year by
EUR 1,670 million.
Net capital gains in 2011 from the strategic alliance with the
insurer Zurich in Latin America and the entry of new partners
into the capital of Santander Consumer Finance in the United
States amounted to EUR 1,513 million and were used to bolster
the balance sheet via other provisions.
Net operating income (gross income less operating expenses)
was EUR 24,373 million, underscoring the Group’s strength and
capacity to generate results.
We improved the capital base and liquidity and notably
reinforced our balance sheet. With a core capital of 9.01%,
according to the more demanding criteria of the European
Banking Authority, Banco Santander complied with the EBA’s
Emilio Botín new capital requirements six months ahead of the deadline.
The requirements recently approved by the government and the
Bank of Spain to raise coverage of bad property loans in Spain
“In the last five years, the total will require EUR 2,300 million of provisions, over and above
those made ahead of time against 2011’s earnings. These
shareholder remuneration paid provisions will be fully charged in 2012.
by Banco Santander was
EUR 24,000 million”
4 ANNUAL REPORT 2011

2. Shareholder remuneration 1. Geographic diversification and recurring nature
The Group’s sound results will enable, as I said at the last of revenues
shareholders’ meeting, the total remuneration per share to be Banco Santander has achieved a geographic positioning in the
maintained at EUR 0.60 for the third year running. I would like last few years centred on its 10 core markets, with an
to point out that in the last five years, thanks to recurring profits appropriate balance between developed countries (which
and international diversification, Banco Santander’s shareholder contribute 46% of the Group’s profits) and emerging markets
remuneration amounted to EUR 24,000 million. (54%).
The Santander Dividendo Elección (scrip dividend) offers our The retail banking model, developed via our 15,000 branches,
shareholders the option to receive part of the dividend in cash which provide services to 102 million customers, give us
or new shares. Since its launch three years ago, more than 80% recurring growth in commercial revenues in most of the
of capital has chosen shares. The board agreed to propose to countries where we operate.
the next shareholders’ meeting applying this programme for the
fourth dividend payment (May 2012). In 2011, we sold Banco Santander Colombia for $ 1,225 million.
Our market share in Colombia is far from the 10% we aspire to
In short, Banco Santander demonstrated its capacity to generate have in the markets in which we are present in order to create
results to meet simultaneously the EBA’s capital requirements, value for our shareholders. This operation generated EUR 615
substantially increase provisions for bad property loans and million of net capital gains, which will be recorded in 2012 and
maintain the remuneration at EUR 0.60 per share. assigned to further clean up bad property loans, in accordance
with the new rules.
Banco Santander’s response to
the challenges of the environment 2. Capital and liquidity management and model
for subsidiaries
In my view, the Bank faced three big challenges in 2011 and
Our overriding priority objective in 2011 was to strengthen the
they will continue to determine the international economic and
balance sheet.
financial situation in the coming quarters:
In October 2011, the European Banking Authority announced
• Weak economic activity, particularly in developed countries.
the core capital requirements for the main European banks and
• Very unstable financial markets, especially European sovereign set June 30 2012 as the deadline for meeting them. In
debt markets. December, the EBA said Santander needed a further EUR 15,302
million of capital to comply with these requirements.
• And very significant regulatory measures and changes,
particularly higher liquidity and capital requirements for banks. Banco Santander has yet again demonstrated its flexibility and
capacity of execution and, in just two months, we reached the
Banco Santander has four management drivers, enabling it, core capital of 9% required by the EBA.
from a position of strength, to comply with this new scenario
and continue to gain ground over its competitors: Our goal is to have a core capital of 10%, one percentage point
above the EBA’s requirement and well above the demands of
the new Basel III regulation and those applicable to systemically
important financial institutions.
We maintained a comfortable liquidity position by increasing our
deposits base without having to remunerate above market rates.
Meanwhile, the maturity profile of our debt, concentrated in the
medium and long term, enables us not to have to go to the
debt markets in Spain and Portugal. All of this, coupled with
weak demand for loans in developed countries, produced an
improvement in our liquidity situation. The loan-to-deposit ratio
reached 117% at the end of 2011 (135% in 2009).
ANNUAL REPORT 2011 5

3. The Group’s international expansion model, via subsidiaries that 4. Model of operational and commercial efficiency
are autonomous in capital and liquidity and in many cases listed, Banco Santander is the most efficient international bank among
gives us access to markets in an efficient and rapid way and it its competitors, with a cost-to-income (efficiency) ratio of 45%
facilitates the funding of aquisitions. compared to the average of 60% of our competitors.
The financial autonomy of these units is very well viewed by the The model of operational and commercial efficiency, with the
Group’s regulator and by local regulators, as it acts as a fire- same technology for the Group’s banks, generates cost
break, limiting the risk of contagion from any problem between synergies and economies of scale, allows for the exchange of
the Group’s units. best business practices between countries and enables us to
make significant investments in innovation, development and
We were the first international bank to present its living will to security for the benefit of our customers.
the regulator thanks to the transparency of our model of
autonomous subsidiaries. These four management drivers are strengthened by the strong,
solid and attractive Santander brand. Santander is today the
3. Prudent risk management world’s fourth most valuable financial brand according to Brand
Banco Santander’s traditional policy of prudence in risks has Finance.
enabled the Group to maintain a non-performing loans (NPLs)
ratio lower than the sector’s average in all countries where we ***
do business. Moreover, in the current socio-economic environment,
Santander remains firmly committed to sustainability, focusing
The evolution of NPLs in Spain was worse than expected for two
on higher education, and also attaches importance to social
reasons: on the one hand, the downturn in the economy was
actions and respect for the environment. The Santander
more severe than envisaged and, on the other, the fall in
Universities programme continues to grow and already has 990
lending meant the NPL ratio increased to a greater extent than
agreements and has awarded 16,000 travel scholarships.
the volume of non-performing loans.
Furthermore, in 2011 Banco Santander launched in Spain an
Real estate risk in Spain continued to fall and, at the end of ambitious youth employment plan, with 5,000 grants for
2011, represented 4% of the Group’s total lending, including internships in small-and medium-sized firms.
foreclosed properties.
“Banco Santander complied with the EBA’s
new capital requirements six months ahead
of the deadline”
6 ANNUAL REPORT 2011

4. “Net operating income of EUR 24,373 million
underscored the Group’s strength and capacity
to generate results”
Future prospects: Banco Santander’s The performance of the Santander share in 2011 was not in
unique positioning accordance with the Group’s level of recurring profits,
Some of the factors that have affected the financial sector in soundness and solvency or with the stability of earnings per
recent years are likely to persist in 2012. It is therefore vital that share.
the European Union approves as soon as possible the decisions Our share is the most liquid of Eurostoxx and ended 2011 with a
needed to quickly restore confidence. dividend yield of more than 10%. The share’s low price was
In the medium- and long-term, it is likely that, led by European mainly due to external factors, such as the penalisation of the
countries, economic growth rates will gradually return to whole banking sector and the pressure exerted on the sovereign
normal, which will make the financial markets more stable and debt of various euro zone countries, which have made it difficult
reduce unemployment. to estimate adequately Banco Santander’s profit expectations,
In this scenario, Banco Santander is in a unique position to I am convinced we will reach all our goals and this will push up
create value for its shareholders, continue to register strong the share price significantly. You can rest assured that everyone
growth in profits in emerging markets and profitably gain who works for the Group, from the board to the more than
market shares in the most mature markets. 190,000 people at the service of our 102 million customers, will
do all they can to make Banco Santander a safe and profitable
Banco Santander has no significant acquisition or disposal plans investment for its more than three million shareholders.
for the medium term, but it will be on the look out to take
advantage of opportunities to strengthen itself in its core There were changes in the composition of the board during
markets. In an environment of higher cost of capital, the strict 2011. In May, Mr Luis Ángel Rojo died and his place was taken
criteria the Bank has always used for its acquisitions assume by the appointment of Mr Vittorio Corbo. Later, Mr Antoine
even greater importance: attain in the third year a return on the Bernheim (representing Assicurazioni Generali) and Mr Francisco
investment greater than the cost of capital and a positive Luzón left the board. At the next shareholders' meeting, and if
contribution to earnings per share. the board's proposal is approved, Mr Antonio Basagoiti,
Mr Antonio Escámez and Mr Luis Alberto Salazar-Simpson will
All of this will enable us, as I said last September at the Bank’s leave the board and Ms Esther Giménez-Salinas will become
Investor Day in London, to boost Santander’s ROE to 12%-14% a director. On behalf of the board and on my own behalf I
in 2014 and ROTE (return on tangible equity) to 16%-18% from would like to thank the outgoing directors for their work. I am
the current 10.81%. sure the contribution to the board of the two new members will
be very positive.
Thank you for your support and confidence.
Emilio Botín
CHAIRMAN
ANNUAL REPORT 2011 7