18

Commercial focus

Efficiency

Prudencein risk

Disciplineduse ofcapital andfinancialstrength

Geographic diversificationand model of subsidiaries

Santanderbrand

Santander complied with the European BankingAuthority’s core capital requirement of 9% sixmonths ahead of schedule.

Santander did not need public funds at any timeduring the crisis and is one of the world’s mostsolid and solvent banks.

In an environment of tensions in financial markets,Santander’s liquidity position has remainedcomfortable.

Grupo Santander’s non-performing loans ratio isbelow the sector’s average in the main countrieswhere it operates.

Santander was recognized by Brand Finance as thefourth most valuable brand in the world.

Banco Santander’s business model providessubstantial recurrence in results.

Retail banking generates 87% of revenues.Santander has 102 million customers who aretended to via 14,756 branches, the largest networkof any international bank.

Geographic diversification in 10 core countriesprovides Santander with an appropriate balancebetween mature and emerging markets.

The Bank’s international expansion was achievedwith subsidiaries autonomous in capital andliquidity, giving us advantages when financing andlimiting the risk of contagion.

The Group’s technology and its control of costsmake Santander one of the world’s most efficientbanks.

The Santander business model

ANNUAL REPORT 2011

Commercial focusThe customer is the focal point of Banco Santander’s activity.

Grupo Santander’s customer base has grown notably in the lastfew years and more than doubled between 2003 and 2011(from 41 million to 102 million). The geographic distribution ofcustomers was as follows: 40.8% in Latin America, 31.3% incontinental Europe, 26.2% in the UK and 1.7% in the US.

The Bank’s retail business focus sets it apart from other globalcompetitors, underlined by the fact that 99.8% of the Group’scustomers are in the segments of commercial banking andconsumer finance.

Branches help generate and maintain more lasting, greatervalue-added relationships with customers. Santander has 14,756branches, the largest network of any international bank. In2011, Grupo Santander increased its distribution capacity withthe addition of 674 branches, mainly as a result of theincorporation of new businesses in Poland and Germany andprogrammes to open new branches in high growth countriessuch as Brazil, Mexico and Argentina.

In addition to this network, the Bank also has other channels,available around-the-clock, such as online banking, mobiletelephone banking and telephone banking. In 2011, Santanderstepped up its investment in its call centres in the UK in order toimprove its customer service. It also launched applications thatenable it to operate via iPhone and other mobile telephonemeans in some of the Group’s banks.

19

92.0

97.2

102.1

201120102009 201120102009

13,660

14,082 14,756

CustomersMillion

BranchesNumber

Santander branch in Madrid, Spain

ANNUAL REPORT 2011

Santander Branch Network

Banesto

Portugal

Bank Zachodni WBK

Santander Consumer Finance

Rest

Total continental Europe

United Kingdom

Brazil

Mexico

Chile

Argentina

Uruguay

Colombia

Puerto Rico

Peru

Rest

Total Latin America

United States-Sovereign

Total customers

9.6

2.4

2.0

2.4

15.5

0.1

32.0

26.7

25.3

9.3

3.5

2.5

0.2

0.3

0.5

0.1

0.1

41.7

1.7

102.1

Group customers (Million)

20 ANNUAL REPORT 2011

Quality of service and customer satisfaction Quality of service is a fundamental part of Banco Santander’sstrategy.

In 2011, customer satisfaction with the services provided by BancoSantander through various channels (branches, telephone andInternet) improved. Some 88.2% of customers said they weresatisfied, generating greater linkage, proximity and loyalty, as wellas higher customer revenues.

In order to improve the quality of service, the Group has acorporate model called META 100, which has been extended tomore countries year after year. The main objectives of META 100are to reflect the voice of customers and integrate it into theBank’s businesses; establish a culture of quality (i.e. an organisationthat is closer to and focused on customers) and generate dynamicsof continuous improvement, centred on customer satisfaction.

Banco Santander’s professionals receive continuous training inorder to inform and advise customers transparently and rigorouslyand provide the best service. In the last quarters of 2011,programmes to foster this culture were put into effect such asEl año del servicio in Chile, Nuestro estilo in Argentina andImpulsa tu lado Pro in Banco Santander Spain. The corporatefunction of Brand Customer Experience was also created, whichoversees the consistency and coherence between the promise ofthe brand and the customer’s experience.

Santander has an advanced model for managing incidents calledMIRÓ, which channels all the disagreements that the customertransmits to the Bank via various channels.

The objective of MIRÓ is to achieve a quick resolution ofcomplaints. It channels internally its treatment to specialised unitsand keeps the customer informed of the state of the incident.MIRÓ also identifies the main reasons why customers are notsatisfied and the causes of the incidents so that steps can be takento correct them.

There was also a significant advance in 2011 in implementing thecorporate model of complaints, which aims to unify the criteriaapplied in managing the customer attention services of theGroup’s various units.

This model revolves around three elements:

• Policies to improve customer attention, confidence andsatisfaction.

• Decision-taking structure based on agile and efficientgovernance systems, with reports made to the first executivelevel.

• Management of complaints in accordance with the prevailingregulations as well as the good banking practices thatregulators require in each country.

Santander Branch Network

Banesto

Portugal

United Kingdom

Argentina

Brazil

Chile

Uruguay

Mexico

Puerto Rico

Total

88.0

91.2

92.9

89.1

91.8

83.0

90.4

83.7

95.6

96.6

88.2

Customer satisfaction % of individual customers satisfied

Customer satisfaction by channel % of individual customers satisfied

20112010

87.5 89.1

20112010

88.9

89.7

20112010

90.2 93.7

Branches Telephone Internet

Santander branch in Germany

21ANNUAL REPORT 2011

Products and servicesBanco Santander has a wide range of financial products andservices based on the risk profile of its customers andcharacterised, in all its markets, by anticipation and dynamismwhen launching new value offers. Of note among the productsand services launched in 2011 were:

• In the UK, more than 100,000 123 Cashback credit cards,which return money to customers on the basis of the usage,were sold in the first two months after its launch.

• In Spain, Santander gave those customers with difficulties as aresult of the crisis the possibility of a three-year moratoriumon capital repayments of mortgages on their main home.Almost 6,000 customers have benefitted from the offer.

• In Brazil, agreements were signed with major companies, suchas petrol distributor Shell and telecoms company Vivo(Telefónica), to launch credit cards with added advantages forthe Bank’s customers.

• In the US, the SMEs area of Sovereign launched the BoostYour Business programme, designed to attract new customersand increase the already existing linkage. This programmeoffers SMEs very attractive interest rates, new financialproducts and advice shared by specialists.

Corporate school of commercial banking In order to improve Grupo Santander’s commercial bankingskills, the corporate school of commercial banking was createdin 2010.

This project is supported and involves Banco Santander’s seniormanagement: the governing board of the school is headed byMr. Alfredo Sáenz, the chief executive officer, and comprisessenior executives responsible for the main countries anddivisions.

The school’s mission is to gather the best commercial andbusiness practices which make up the Group’s commercialbanking and promote their transmission in order to drivebusiness development in the various units. The school alsoenables new countries that integrate into the Group to quicklyand efficiently adapt to Banco Santander’s commercial bankingmodel.

The school is structured into knowledge areas that respond tothe various fields and/or segments of commercial banking. Eacharea has someone in charge and consists of expert teams foreach of the matters arising from the countries in which theGroup operates. The school capitalises on the best commercialpractices of countries, in terms of products, services, quality,business intelligence, etc, and thereby becomes an extracompetitive tool for the Group.

The first phase of the school concentrated on individualcustomers. In 2011, it also began to work on company and SMEbanking, taking advantage of the experience acquired andincorporated the new countries to its sphere of action (the US,Poland and Germany).

Santander branch in Mexico

Advertising campaigns in Brazil, the UK and Mexico

Santander branch in Brazil

ANNUAL REPORT 201122

Disciplined use of capital and financial strengthCapitalStrengthening the balance sheet is a priority for BancoSantander, which has quickly and efficiently adapted to the newcapital requirements of international and European bankingauthorities, such as Basel III, regarding globally systemic banks,and the new requirements of the European Banking Authority(EBA).

Banco Santander carried out various measures regarding capitalin the last months of 2011, allowing it to achieve a core capitalratio of 9% six months ahead of the EBA’s deadline of June 30,2012.

According to the EBA, Banco Santander’s additional capitalneeds amounted to EUR 15,302 million. This amount has beenreached as follows:

• EUR 6,829 million of Valores Santander, which have to beconverted into shares before October 2012.

• EUR 1,943 million through the exchange of preferred sharesfor ordinary new shares.

• EUR 1,660 million through the application of the SantanderDividendo Elección (scrip dividend) programme at the time of the final dividend for fiscal year 2011.

• EUR 4,890 million through organic capital generation and the transfer of certain stakes, mainly in Chile and Brazil.

Regarding the latter, Santander reached in December 2011 an agreement (implemented during the first week of 2012) totransfer 4.41% of Santander Brazil to a major internationalfinancial institution which will deliver such shares to holders ofconvertible bonds issued in October, 2010, by Banco Santander,when these mature, pursuant to the terms of said convertiblebonds.

Santander is one of the world’s most solid and well-capitalisedbanks, and at no time has had to seek public funds. As a result,it has one of the best ratings among international banks.

LiquiditySantander finances most of its loans with customer deposits,maintains comfortable access to wholesale funding and hasmany instruments and markets in which to obtain liquidity.

In 2011, Banco Santander continued to strengthen its liquiditywith an increase of more than EUR 16,000 million in customerdeposits, and debt issues that exceeded the year’s maturities bymore than EUR 8,000 million. All these issues were carried outwithout state guarantees.

Active management of the business portfolioSantander made some selective sales in 2011 and obtained EUR 1,513 million of capital gains:

• The strategic alliance with the insurer Zurich to developbusiness in Latin America which generated EUR 641 million of capital gains.

• The entry of new partners into the capital of SantanderConsumer USA. This operation valued the unit at $4,000million and produced EUR 872 million of capital gains.

Santander also reached an agreement to sell the Group’sbusinesses in Colombia for $1,225 million (net gain of EUR 615 million to be recorded in 2012).

135

117

117

201120102009

Core capital BIS II. criteria. %

Loan-to-deposit ratio(*)

%

Grupo Santander City, Boadilla del Monte, Madrid, Spain

(*) Includes retail commercial paper in Spain.

8.61 8.80

10.02

201120102009

23ANNUAL REPORT 2011

Prudent risk managementPrudent risk management has been a hallmark of BancoSantander since it was founded more than 150 years ago.Everyone is involved in risk management, from the dailytransactions in branches, where business managers also haverisk objectives, to senior management and the board, whose riskcommittee comprises five directors and meets for some 300hours a year.

Of note among the corporate risk management principles is thatthe risk function is independent of business. The head of theGroup’s Risk Division, Matías Rodríguez Inciarte, third vice-chairman and chairman of the risk committee, reports directly tothe executive committee and to the board.

A low and predictable risk profileThe board sets the Bank’s risk appetite at a medium-low level.Some 86% of Grupo Santander’s risk comes from retail banking.Proximity to the customer enables us to act rigorously and withanticipation when granting, monitoring and recovering loans.Santander has units dedicated to recovering unpaid loans,which, under a corporate model, are integrated as a businessarea in the Group’s various countries and divisions.

Santander has a highly diversified risk profile, with concentrationof exposure to customers, business groups, sectors, productsand countries subject to limits.

The Group has the most advanced risk management models,such as use of tools for calculating ratings and internal scoring,economic capital, price-setting systems via return on risk-adjusted capital (RoRAC), use of value at risk (VaR) in marketrisk, and stress testing.

Risk qualityThe Group’s non-performing loan ratio increased to 3.89% in2011, but remains below the average on all the countries whereit operates. In Spain, the NPL ratio was 5.49%, also well belowthe sector’s average.

After approval of Royal Decree Law 2/2012, which sets newrequirements for cleaning up bad property loans in Spain, the Bank announced that the amount of provisions GrupoSantander in Spain needs to meet these requirements is EUR 6,100 million.

These additional needs will be entirely met in 2012 as follows:

• EUR 1,800 million already charged against the Group’s fourthquarter 2011 results, which lifted coverage of repossessedproperties to 50% from 31%.

• EUR 2,000 million are a capital buffer required by the rulesand which are covered by capital already held by the Group.

• The remaining EUR 2,300 million will be covered throughcapital gains which may be obtained during the year –including EUR 900 million from the capital gain on the sale ofBanco Santander Colombia – and through ordinarycontributions to provisions during 2012.

Santander’s exposure to real estate developers represented 14%of its total lending in Spain at the end of 2011 and only 4%of the Group’s total loans, including repossessed homes.Santander’s market share of this business is estimated at 10%,well below that of the Group’s total business in Spain (14%).

Moreover, Santander assigned EUR 1,513 million of capital gainsobtained in 2011 to strengthening the balance sheet.

***Banco Santander’s risk management principles are treated in more detail on pages 148 to 151 of this annual report.

3.24

3.55

3.89

201120102009

Non-performing loan ratio %

Coverage ratio %

75 73

61

201120102009

Grupo Santander’s new data-processing centre in Cantabria, Spain

ANNUAL REPORT 201124

Chile 7%

Geographic diversification Grupo Santander has a geographic diversification balancedbetween mature and emerging markets (46% and 54% ofprofits, respectively, in 2011).

The Bank focuses on 10 core markets: Spain, Germany, Poland,Portugal, the UK, Brazil, Mexico, Chile, Argentina and the US.The global areas also develop products that are distributed inthe Group’s commercial networks and tend to global clients.

Contribution to the Group´s attributable profit %

United States 12%

Mexico 10%

Brazil 28%

Argentina 3%

Rest of Latin America 3%

25ANNUAL REPORT 2011

Other countries where Banco Santander hasretail banking businesses: Peru, Puerto Rico,Uruguay, Colombia, Norway, Sweden,Finland, Denmark, Netherlands, Belgium,Austria, Switzerland and Italy.

Main countries.

United Kingdom 12%

Spain 13%

Rest of Europe 2%

Portugal 2%

Poland3%Germany

5%

26

Subsidiaries modelGrupo Santander’s international expansion was carried out viasubsidiaries that are independent and autonomous in capitaland liquidity:

• Capital: the local units have the capital required to developtheir activity autonomously and meet regulatory requirements.

• Liquidity: each subsidiary develops their financial plans,liquidity projections and calculates their finance needs,without counting on funds or guarantees from the parentbank. The Group’s liquidity position is coordinated by theALCO committees (assets and liabilities).

The model of subsidiaries autonomous in capital and liquidity,with some of them listed, such as Santander Brazil, SantanderChile and Banesto, has strategic and regulatory advantages:

• The autonomy of the subsidiaries limits the possibilities ofcontagion between the various Group units during a crisis,thereby reducing systemic risk.

• The subsidiaries are subject to double supervision (local andglobal) and internal control.

• This model facilitates crisis management and resolution whilegenerating incentives for good local management.

• The listed subsidiaries allow access to capital efficiently andquickly, always choosing the best alternative for shareholders,and are subject to market discipline.

• The shares of the subsidiaries are an attractive currency foracquisitions in the local market and an alternative to investingthe Group’s capital.

• They give visibility to various business units in the Group’svaluation.

• They guarantee a high level of transparency and corporategovernance and reinforce the brand in various countries.

Banco Santander combines the financial flexibility of itssubsidiaries with their operations as an integrated group thatcreates high synergies. The corporate systems and policies thatBanco Santander implements in all the Group’s units enable thefollowing:

• Synergies in costs and revenues, by developing with globalstrategies the Santander retail banking model and sharing thebest practices among countries and units.

• A stronger Santander culture, with particular importanceattached to managing risks at the global level and controllingthe business units.

• Greater efficiency in investment by sharing systems globally.

All of this enables the Group to obtain better results than eachlocal bank would have achieved on its own.

Santander branch in Madrid, Spain Santander branch in London, United Kingdom

Santander branch in Sao Paulo, Brazil

27

The Santander brandThe Santander brand transmits the Bank’s corporate values to customers, shareholders, employees and society in general.These values are: dynamism, strength, innovation, leadership,commercial focus and quality service, professional ethics andsustainability.

Santander has a significant presence in the brand rankings ofthe main consultancy firms, such as Interbrand, Millward Brownand Brand Finance. In 2011, the brand continued to consolidateitself in the Group’s key markets, boosting its recognition inBrazil, the UK and Germany. In the US and Poland, the transitiontoward the Santander brand continued to make progress.Meanwhile, Santander continues to unify its identity in globalsegments, such as Select for personal banking, in order to alignthe positioning in these markets with the Group’s values.

Banco Santander has an international advertising strategy, whichhelps to strengthen and consolidate the Bank’s internationalpositioning and business. In 2011, when banking wasparticularly hard hit, the Bank’s corporate message was focusedon solvency and the geographically diversified business model,without overlooking our positioning of proximity, confidenceand commitment to the customer.

Corporate sponsorships have proved to be a key platform forincreasing Santander’s brand awareness, consolidate the Bank’sinternational positioning and support business.

• In 2011, Santander sponsored for the second year runningthe Formula 1 Ferrari team, an excellent business tool, asunderlined by more than 370,000 Santander-Ferrari creditcards sold throughout the world. Santander continues tosponsor the McLaren team, the main advertising tool in the UK.

• In Latin America, Santander continued to work to be thefootball bank, sponsoring the Santander Libertadores Cup, the2011 America’s Cup in Argentina, the South American Cupand the agreement in Brazil with the football player Neymar.

In 2012, and via the strategic committee of corporate marketingand brand, chaired by the CEO, the Bank will continue to fosterbrand unification in all countries, bolstering its globalpositioning, maximizing corporate sponsorships and working tocreate a good brand experience for all customers.

EfficiencySantander has a leading-edge IT and operations platform,enhancing its productivity and enabling to know and have a fulloverview of customers’ financial needs. The Bank is also makinga continuous effort to improve its processes, customer serviceand its business support areas in order to provide the bestservice.

Santander continues to advance in implementing its corporatetechnology platforms in all its business units, which is creatingvalue through revenue synergies and cost savings. In 2011,integration of Santander’s IT platforms and those of Real inBrazil were consolidated. The branches acquired from theSwedish group SEB in Germany, and Bank Zachodni WBKin Poland, were integrated into the Group.

A new data-processing centre began to operate in 2011 inCantabria, Spain, which joins the Group’s network of suchcentres that provide service from Madrid-Boadilla del Monte(Spain), London (UK), Querétaro (Mexico) and Sao Paulo (Brazil).The new centre boost the capacity for processing the Group’soperations, guarantees business growth in the future andreduces operational risk with customers to a minimum.

The Bank’s recurring growth in revenues, the culture ofcontrolling costs and the high degree of productivity ofbranches makes Santander one of the world’s most efficientbanks, with a cost-to-income ratio of 44.9%.

The continuous improvements in efficiency are leading togreater value-added for customers. The Bank, in some of its core markets, decided to eliminate commissions for its linkedcustomers: in Spain, with the We want to be your Bank plan inthe Santander Branch Network and in the UK wih the SantanderZero Current Account.

ANNUAL REPORT 2011