Grupo Santander

Competition policy and financial market integration

European Parliament Financial Services ForumBrussels – 15 June 2005

2

What’s wrong with Europe?

•Why does Europe grow at +1% and the US at +3%?

Europe has lagged the US in productivity growth The US has a strong focus on productivity improvement

How can Europe generate a new wave of productivity growth?

3Integration of financial services as a powerful tool to boost productivity growth

•Banking is part of the national “value chain”- with global competition intensifying, Europe can afford no “weak links”

•Productivity growth has traditionally focused on non tradable sectors

•Significant potential to boost productivity in service sectors such as banking

We have freedom of movement for capital, for workers…

… now we need a fully integrated market for financial services

…but

4Why does an integrated financial services market create value?

Estimates of 0,5-0,9% EU GDP p.a.

1. Fosters financial development

2. Generates economies of scale

3. …and allows for efficiency

4. Increases competition / improve pricing

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“Letting best practice travel”- in terms of technology, products. Why it is important; How exporting best practice creates value

•1. Better products and better service

•2. Better efficiency = cheaper prices

Productivity improvement

Important to improve productivity- and productivity improvement means: having banks that can provide better products or services at cheaper prices.

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Mortgages Savings

10,4% 6,8%

Mortgage Bank

Market Share

Universal Bank

5,0

3,0

1,1

4,0

1 1,50

Currentaccount

UPLs Investments GeneralInsurance

SMEs Credit Cards Corporates

Low market shares in other areas

With the exception of Scottish Provident, Abbey has failed to grow its market shares in other PFS areas, despite its customer franchise and brand strength

Abbey: significant potential to improve the commercial efficiencyAbbey has a strong customer franchise and provides a platform to evolve in the long run from a mortgage bank into a universal bank…

18 million customers, 13.3 million active customers

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2003 2004 ene-mar 2005

Transfer of IT and product innovationSGC: Sale of treasury products to SMEs

SANTANDER GLOBAL CONNECTSPAIN

SANTANDER GLOBAL CONNECTPORTUGAL

2004 ene-mar 2005

Other countries

4,8x

6,5x 9x

Know-how and IT transfer

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Abbey: significant potential to improve the operational efficiency

59

50

49

47

40

33

Barclays

RBOS

A&L

Lloyds

HBOS

Nrock

Abbey

Based on most recent results and management estimates of the PFS components of the peer group

Grupo Santander’s proven track recordAbbey / UK Banks Cost / Income ratio

62

We run “Abbeys” with

lower costs and generate

20% + revenue per front

employee

12%

33%

Abbey*

6.9%% of IT expenses / Net operating revenue

6.5%Operations staff level as a proportion of total employees

SAN Group best

practice

12%

33%

Abbey*

6.9%% of IT expenses / Net operating revenue

6.5%Operations staff level as a proportion of total employees

SAN Group best

practice

6258 56 54 52 49 47

3932

9Why Santander buying Abbey is good for stake holder?We can introduce innovation, choice, and price competition into the Market

2,0%

2,5%

3,0%

3,5%

4,0%

1S02 2S02 1S03 2S03 1S04

400

600

800

1.000

1.200

1.400

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

q1 02 q2 02 q3 02 q4 02 q1 03 q2 03 q3 03 q4 03 q1 04 q2 04 q3 04

2002 2003 2004

1.300,0

1.400,0

1.500,0

1.600,0

1.700,0

1.800,0 Revenues /loans

Costs / loans

Operating profit(movingaverage)

… SAN opening jaws … Abbey closing jaws

IT is key

Free market works: Cross border consolidation not about egos- but about productivity, efficiency, consumer choice and market discipline.

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So… financial sector integration has the potential to boost productivity growth…

… Why is it not happening?

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There are barriers to integration of financial services market why does it matter?

Obstacles to cross border M&A Legal / Regulatory burden

– Legal structure– Ownership / voting limits– Different accounting / disclosure

needs– Lack of tax coordination– Restrictions on the kinds of offers

that can be executed– Differences on data protection

Un-coordinated supervision

Extra costs

Limits “strategic options” / potential developments

+

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Why less, not more regulation is important

Regulation is high cost

Compliance risk

Limits competition

Regulation has a significant impact on banks’ strategies and behaviour

It does not substitute sound management practices

De-regulation should be market driven

Need for co-ordinated supervision

13Conclusions Europe has all the ingredients (capital, skilled labor and market size) to become the most competitive area in the world…

…but we are not taking the opportunity

More not less financial integration is key for European competitiveness

Financial services integration fosters innovation, choice, and price competition t

For instance, by buying Abbey Santander brings more competition and innovation to the UK market

Regulatory barriers are keeping the European financial sector from realizing its full potential…

… the consumer gets less for his money

…Protectionism is just delaying the unavoidable

Need for more co-ordinated financial supervision

Letting market discipline reign

As long as regulation and protectionism keep “best practice” from travelling, it will be difficult for Europe to compete with the US

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