SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to                     

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-12518

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain

(Jurisdiction of incorporation)

Ciudad Grupo Santander

28660 Boadilla del Monte (Madrid), Spain

(address of principal executive offices)

José G. Cantera

Banco Santander, S.A.

Ciudad Grupo Santander

28660 Boadilla del Monte

Madrid, Spain

Tel: +34 91 289 32 80

Fax: +34 91 257 12 82

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered, pursuant to Section 12(b) of the Act

Title of each class	Name of each exchange on which registered
American Depositary Shares, each representing the right to receive one Share of Capital Stock of Banco Santander, S.A., par value euro 0.50 each	New York Stock Exchange
Shares of Capital Stock of Banco Santander, S.A., par value euro 0.50 each	New York Stock Exchange *
Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series 1, 4, 5 and 6	New York Stock Exchange **

* Banco Santander Shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal (100% owned subsidiary of Banco Santander, S.A.)

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None.

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

None.

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board  x Other  ¨

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. 14,434,492,579 shares

BANCO SANTANDER, S.A.

TABLE OF CONTENTS

		Page
Presentation of Financial and Other Information			5
Cautionary Statement Regarding Forward-Looking Statements			6
PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		8
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		8
ITEM 3.	KEY INFORMATION		8
	A. Selected financial data		8
	B. Capitalization and indebtedness		13
	C. Reasons for the offer and use of proceeds		13
	D. Risk factors		13
ITEM 4.	INFORMATION ON THE COMPANY		36
	A. History and development of the company		36
	B. Business overview		43
	C. Organizational structure		115
	D. Property, plant and equipment		115
ITEM 4A.	UNRESOLVED STAFF COMMENTS		115
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		115
	A. Operating results		123
	B. Liquidity and capital resources		153
	C. Research and development, patents and licenses, etc.		154
	D. Trend information		155
	E. Off-balance sheet arrangements		158
	F. Tabular disclosure of contractual obligations		158
	G. Other disclosures		158
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		160
	A. Directors and senior management		160
	B. Compensation		167
	C. Board practices		181
	D. Employees		193
	E. Share ownership		195
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		196
	A. Major shareholders		196
	B. Related party transactions		198
	C. Interests of experts and counsel		198
ITEM 8.	FINANCIAL INFORMATION		199
	A. Consolidated statements and other financial information		199
	B. Significant Changes		208

ITEM 9.	THE OFFER AND LISTING	208
	A. Offer and listing details	208
	B. Plan of distribution	210
	C. Markets	210
	D. Selling shareholders	216
	E. Dilution	216
	F. Expense of the issue	216
ITEM 10.	ADDITIONAL INFORMATION	216
	A. Share capital	216
	B. Memorandum and articles of association	216
	C. Material contracts	228
	D. Exchange controls	228
	E. Taxation	228
	F. Dividends and paying agents	234
	G. Statement by experts	234
	H. Documents on display	234
	I. Subsidiary information	234
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	235
	Introduction.	235
	Part 1. Cornerstones of the risk function	235
	Part 2. Risk management and control model - Advanced Risk Management (ARM)	235
	Part 3. Credit risk	244
	Part 4. Trading market and structural risk	265
	Part 5. Liquidity and funding risk	293
	Part 6. Operational risk	299
	Part 7. Compliance and conduct risk	304
	Part 8. Model risk	310
	Part 9. Strategic risk	312
	Part 10. Capital risk	313
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	318
	A. Debt Securities	318
	B. Warrants and Rights	318
	C. Other Securities	318
	D. American Depositary Shares	318
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	320
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	320
ITEM 15.	CONTROLS AND PROCEDURES	320
ITEM 16	[Reserved].
	A. Audit committee financial expert	323
	B. Code of Ethics	323
	C. Principal Accountant Fees and Services	324
	D. Exemptions from the Listing Standards for Audit Committees	324
	E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	325
	F. Changes in Registrant’s Certifying Accountant	325
	G. Corporate Governance	326
	H. Mine Safety Disclosure	328

PART III
ITEM 17.	FINANCIAL STATEMENTS	329
ITEM 18.	FINANCIAL STATEMENTS	329
ITEM 19.	EXHIBITS	329

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2015 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.

We have presented our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the US Securities and Exchange Commission that contains presentation requirements for bank holding company financial statements.

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2015, 2014 and 2013 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2015, 2014 and 2013 report prepared by Deloitte, S.L.

General Information

Our consolidated financial statements are in Euros, which are denoted “euro”, “euros”, “EUR” or “€” throughout this annual report. Also, throughout this annual report, when we refer to:

• “we”, “us”, “our”, the “Group”, “Grupo Santander” or “Santander”, we mean Banco Santander, S.A. and its subsidiaries, unless the context otherwise requires;

• “dollars”, “US$” or “$”, we mean United States dollars; and

• “pounds” or “£”, we mean United Kingdom pounds.

When we refer to “average balances” for a particular period, we mean the average of the month-end balances for that period, unless otherwise noted. We do not believe that monthly averages present trends that are materially different from trends that daily averages would show. In calculating our interest income, we include any interest payments we received on non-accruing loans if they were received in the period when due. We have not reflected consolidation adjustments in any financial information about our subsidiaries or other business units.

When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted. The loan to value “LTV” ratios disclosed in this report refer to LTV ratios calculated as the ratio of the outstanding amount of the loan to the most recent available appraisal value of the mortgaged asset. Additionally, if a loan is approaching a doubtful status, we update the appraisals which are then used to estimate allowances for loan losses.

When we refer to “non-performing balances”, we mean non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.

When we refer to “allowances for credit losses”, we mean the specific allowances for impaired assets, and unless otherwise noted, the allowance for inherent losses and any allowances for country-risk. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Allowances for Credit Losses and Country-Risk Requirements”.

When we refer to “perimeter effect”, we mean growth or reduction derived from changes in the companies that we consolidate resulting from acquisitions, dispositions or other reasons.

5

Where a translation of foreign exchange is given for any financial data, we use the exchange rates of the relevant period (as of the end of such period for balance sheet data and the average exchange rate of such period for income statement data) as published by the European Central Bank, unless otherwise noted.

Management makes use of certain financial measures in local currency to help in the assessment of on-going operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the eurozone, excluding the impact of foreign exchange. We analyze these banks’ performance on a local currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on the results of operations, we believe that evaluating their performance on a local currency basis provides an additional and meaningful assessment of performance to both management and the company’s investors. For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see note 2(a) to our consolidated financial statements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, information regarding:

• exposure to various types of market risks;

• management strategy;

• capital expenditures;

• earnings and other targets; and

• asset portfolios.

Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Risks” sections. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements.

6

You should understand that the following important factors, in addition to those discussed in “Key Information—Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this annual report, could affect our future results and could cause those results or other outcomes to differ materially from those anticipated in any forward-looking statement:

Economic and Industry Conditions

• general economic or industry conditions in Spain, the U.K., the U.S., other European countries, Brazil, other Latin American countries and the other areas in which we have significant business activities or investments;

• exposure to various types of market risks, principally including interest rate risk, foreign exchange rate risk and equity price risk;

• a worsening of the economic environment in Spain, the U.K., other European countries, Brazil, other Latin American countries, and the U.S., and an increase of the volatility in the capital markets;

• the effects of a continued decline in real estate prices, particularly in Spain and the U.K.;

• monetary and interest rate policies of the European Central Bank and various central banks;

• inflation or deflation;

• the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;

• changes in competition and pricing environments;

• the inability to hedge some risks economically;

• the adequacy of loss reserves;

• acquisitions or restructurings of businesses that may not perform in accordance with our expectations;

• changes in demographics, consumer spending, investment or saving habits;

• potential losses associated with prepayment of our loan and investment portfolio, declines in the value of collateral securing our loan portfolio, and counterparty risk; and

• changes in competition and pricing environments as a result of the progressive adoption of the internet for conducting financial services and/or other factors.

Political and Governmental Factors

• political stability in Spain, the U.K., other European countries, Latin America and the U.S.;

• changes in Spanish, U.K., E.U., Latin American, U.S. or other jurisdictions’ laws, regulations or taxes, including changes in regulatory capital and liquidity requirements; and

• increased regulation in light of the global financial crisis.

Transaction and Commercial Factors

• damage to our reputation;

• our ability to integrate successfully our acquisitions and the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters while we integrate these acquisitions; and

• the outcome of our negotiations with business partners and governments.

Operating Factors

• potential losses associated with an increase in the level of non-performance by counterparties to other types of financial instruments;

• technical difficulties and/or failure to improve or upgrade our information technology;

• changes in our ability to access liquidity and funding on acceptable terms, including as a result of changes in our credit spreads or a downgrade in our credit ratings or those of our more significant subsidiaries;

• our exposure to operational losses (e.g., failed internal or external processes, people and systems);

• changes in our ability to recruit, retain and develop appropriate senior management and skilled personnel;

• the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio; and

• the impact of changes in the composition of our balance sheet on future net interest income.

The forward-looking statements contained in this report speak only as of the date of this report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

7

PART I

Item 1. Identity of Directors, Senior Management and Advisers

A. Directors and Senior Management

Not applicable.

B. Advisers

Not applicable.

C. Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

A. Offer Statistics

Not applicable.

B. Method and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data

Selected Consolidated Financial Information

We have selected the following financial information from our consolidated financial statements. You should read this information in connection with, and it is qualified in its entirety by reference to, our consolidated financial statements.

In the F-pages of this annual report on Form 20-F, our audited financial statements for the years 2015, 2014 and 2013 are presented. The audited financial statements for 2012 and 2011 are not included in this document, but they can be found in our previous annual reports on Form 20-F. These previous annual reports do not include the effect of the change in our reported segments described in Item 4. Information on the Company—B. Business Overview for the year 2011. The audited financial statements for the years 2014, 2013 and 2012 were recast in our Report on Form 6-K filed with the SEC on November 5, 2015.

The income statement for the year ended December 31, 2014 reflects the impact of the reconsolidation of Santander Consumer USA Inc. (“SCUSA”) after we gained control of this company in January 2014. Prior to the aforementioned change of control, we accounted for our ownership interest in SCUSA using the equity method (see “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Santander Consumer USA”). In addition, the income statement for the year ended December 31, 2013 includes the results from Kredyt Bank S.A. after the merger in early 2013 of the subsidiaries in Poland of Banco Santander, S.A. and KBC Bank NV (Bank Zachodni WBK, S.A. and Kredyt Bank S.A.). Finally, the income statement for the year ended December, 31, 2011 reflects the impact of the consolidation of Bank Zachodni WBK, S.A.

8

	Year ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros, except percentages and per share data)
Interest and similar income		57,198			54,656			51,447			58,791			60,618
Interest expense and similar charges		(24,386	)		(25,109	)		(25,512	)		(28,868	)		(30,024	)
Interest income / (charges)		32,812			29,547			25,935			29,923			30,594
Income from equity instruments		455			435			378			423			394
Income from companies accounted for using the equity method		375			243			500			427			57
Fee and commission income		13,042			12,515			12,473			12,732			12,640
Fee and commission expense		(3,009	)		(2,819	)		(2,712	)		(2,471	)		(2,232	)
Gains/losses on financial assets and liabilities (net)		(770	)		3,974			3,234			3,329			2,838
Exchange differences (net)		3,156			(1,124	)		160			(189	)		(522	)
Other operating income		3,067			5,214			5,903			6,693			8,050
Other operating expenses		(3,233	)		(5,373	)		(6,205	)		(6,607	)		(8,180	)
Total income		45,895			42,612			39,666			44,260			43,639
Administrative expenses		(19,302	)		(17,899	)		(17,452	)		(17,801	)		(17,644	)
Personnel expenses		(11,107	)		(10,242	)		(10,069	)		(10,306	)		(10,305	)
Other general administrative expenses		(8,195	)		(7,657	)		(7,383	)		(7,495	)		(7,339	)
Depreciation and amortization		(2,418	)		(2,287	)		(2,391	)		(2,183	)		(2,098	)
Provisions (net)		(3,106	)		(3,009	)		(2,445	)		(1,472	)		(2,534	)
Impairment losses on financial assets (net)		(10,652	)		(10,710	)		(11,227	)		(18,880	)		(11,794	)
Impairment losses on other assets (net)		(1,092	)		(938	)		(503	)		(508	)		(1,517	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		112			3,136			2,152			906			1,846
Negative difference of consolidation		283			17			—			—			—
Gains/(losses) on non-current assets held for sale not classified as discontinued operations		(173	)		(243	)		(422	)		(757	)		(2,109	)
Operating profit/(loss) before tax		9,547			10,679			7,378			3,565			7,789
Income tax		(2,213	)		(3,718	)		(2,034	)		(584	)		(1,727	)
Profit from continuing operations		7,334			6,961			5,344			2,981			6,062
Profit/(loss) from discontinued operations (net)		—			(26	)		(15	)		70			15
Consolidated profit for the year		7,334			6,935			5,329			3,051			6,077
Profit attributable to the Parent		5,966			5,816			4,175			2,283			5,289
Profit attributable to non-controlling interest		1,368			1,119			1,154			768			788
Per share information:
Average number of shares (thousands) (1)		14,113,617			11,858,690			10,836,111			9,766,689			8,892,033
Basic earnings per share (euros)		0.40			0.48			0.39			0.23			0.59
Basic earnings per share continuing operation (euros)		0.40			0.48			0.39			0.22			0.59
Diluted earnings per share (euros)		0.40			0.48			0.38			0.23			0.59
Diluted earnings per share continuing operation (euros)		0.40			0.48			0.38			0.22			0.59
Remuneration paid (euros) (2)		0.20			0.60			0.60			0.60			0.60
Remuneration paid (US$) (2)		0.22			0.73			0.83			0.79			0.78

9

	Year ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros, except percentages and per share data)
Total assets		1,340,260			1,266,296			1,115,763			1,269,645			1,251,048
Loans and advances to credit institutions (net) (3)		78,952			81,713			74,964			73,900			51,726
Loans and advances to customers (net) (3)		790,848			734,711			668,856			719,112			748,541
Investment securities (net) (4)		203,834			195,164			142,234			152,066			154,015
Investments: Associates and joint venture		3,251			3,471			5,536			4,454			4,155
Contingent liabilities		40,115			44,078			41,049			45,033			48,042
Liabilities
Deposits from central banks and credit institutions (5)		175,371			155,369			109,397			152,966			143,138
Customer deposits (5)		683,122			647,627			607,837			626,639			632,533
Debt securities (5)		205,029			196,889			175,477			205,969			197,372
Capitalization
Guaranteed subordinated debt excluding preferred securities and preferred shares (6)		6,091			3,276			4,603			5,207			6,619
Other subordinated debt		7,864			6,878			7,483			8,291			10,477
Preferred securities (6)		6,749			6,239			3,652			4,319			5,447
Preferred shares (6)		449			739			401			421			449
Non-controlling interest (including net income of the period)		10,713			8,909			9,314			9,415			6,354
Stockholders’ equity (7)		88,040			80,805			70,328			71,797			74,408
Total capitalization		119,906			106,846			95,781			99,450			103,754
Stockholders’ equity per average share (7)		6.24			6.81			6.49			7.35			8.37
Stockholders’ equity per share at the year-end (7)		6.12			6.42			6.21			6.99			8.71
Other managed funds
Mutual funds		109,028			109,519			93,304			89,176			102,611
Pension funds		11,376			11,481			10,879			10,076			9,645
Managed portfolio		20,337			20,369			20,987			18,889			19,200
Total other managed funds (8)		140,741			141,369			125,170			118,141			131,456
Consolidated ratios
Profitability ratios:
Net yield (9)		2.90	%		2.89	%		2.55	%		2.81	%		2.96	%
Return on average total assets (ROA)		0.55	%		0.58	%		0.44	%		0.24	%		0.49	%
Return on average stockholders’ equity (ROE) (10)		6.61	%		7.75	%		5.84	%		3.14	%		7.33	%
Capital ratio:
Average stockholders’ equity to average total assets		6.70	%		6.24	%		5.89	%		5.65	%		5.88	%
Ratio of earnings to fixed charges (11)
Excluding interest on deposits		1.77	%		1.90	%		1.69	%		1.27	%		1.62	%
Including interest on deposits		1.39	%		1.43	%		1.29	%		1.11	%		1.26	%
Credit quality data
Loans and advances to customers
Allowances for non-performing balances including country risk and excluding contingent liabilities as a percentage of total gross loans		3.24	%		3.57	%		3.59	%		3.41	%		2.45	%
Non-performing balances as a percentage of total gross loans (12)		4.42	%		5.30	%		5.81	%		4.74	%		4.07	%
Allowances for non-performing balances as a percentage of non-performing balances (12)		73.39	%		67.42	%		61.76	%		72.01	%		60.17	%
Net loan charge-offs as a percentage of total gross loans		1.34	%		1.38	%		1.38	%		1.36	%		1.39	%
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)
Allowances for non-performing balances (**) as a percentage of total loans and contingent liabilities		3.19	%		3.49	%		3.48	%		3.29	%		2.38	%
Non-performing balances as a percentage of total loans and contingent liabilities (**) (12)		4.36	%		5.19	%		5.64	%		4.54	%		3.90	%
Allowances for non-performing balances as a percentage of non-performing balances (**)(12)		73.11	%		67.24	%		61.65	%		72.41	%		61.02	%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		1.29	%		1.30	%		1.29	%		1.28	%		1.29	%

(*) We disclose these ratios because our credit risk exposure comprises loans and advances to customers as well as contingent liabilities, all of which are subject to impairment and, therefore, allowances are taken in respect thereof.

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(**) Non-performing loans and contingent liabilities, securities and other assets to collect.

(1) Average number of shares has been calculated on the basis of the weighted average number of shares outstanding in the relevant year, net of treasury stock.

(2) The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the dividends in cash or new shares. The remuneration per share for 2011, 2012, 2013 and 2014 disclosed above, €0.60, is calculated assuming that the four dividends for these years were paid in cash.

On January 8, 2015, an extraordinary meeting of the board of directors took place to reformulate the dividend policy of the Bank to take effect with the first dividend to be paid with respect to our 2015 results, in order to distribute three cash dividends and a scrip dividend relating to such 2015 results. Each of these dividends will have an estimated amount of €0.05 per share. The Bank has paid the first 3 dividends on account of the earnings for the 2015 financial year in August 2015, November 2015 and February 2016 for a gross amount per share of €0.05 and will pay the fourth dividend in May 2016.

(3) Equals the sum of the amounts included under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss” and “Loans and receivables” as stated in our consolidated financial statements.

(4) Equals the amounts included as “Debt instruments” and “Equity instruments” under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss”, “Available-for-sale financial assets”, “Loans and receivables” and “Held-to-maturity investments” as stated in our consolidated financial statements.

(5) Equals the sum of the amounts included under the headings “Financial liabilities held for trading”, “Other financial liabilities at fair value through profit or loss” and “Financial liabilities at amortized cost” included in notes 20, 21 and 22 to our consolidated financial statements.

(6) In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”.

(7) Equals the sum of the amounts included at the end of each year as “Equity” and “Valuation adjustments” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity.

(8) At December 31, 2015 2014, and 2013 we held a 50% ownership interest in Santander Asset Management (“SAM”) and controlled this company jointly with Warburg Pincus and General Atlantic. Funds under “Other managed funds” are mostly managed by SAM.

(9) Net yield is the total of net interest income (including dividends on equity securities) divided by average earning assets. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Earning Assets—Yield Spread”.

(10) The Return on average stockholders’ equity ratio is calculated as profit attributable to the Parent divided by average stockholders’ equity.

(11) For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense.

(12) Non-performing loans reflect Bank of Spain classifications. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and potential problem loans. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain’s Classification Requirements”.

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Set forth below is a table showing our allowances for non-performing balances broken down by various categories as disclosed and discussed throughout this annual report on Form 20-F:

	IFRS-IASB
	Year Ended December 31,
	2015		2014		2013		2012		2011
	(in millions of euros)
Allowances refers to:
Allowances for non-performing balances (*) (excluding country risk)		27,121		28,046		25,681		26,112		19,531
Less: Allowances for contingent liabilities and commitments (excluding country risk)		616		652		688		614		648
Allowances for balances of loans (excluding country risk):		26,505		27,394		24,993		25,497		18,883
Allowances relating to country risk and other		322		46		154		98		210
Allowances for non-performing balances (excluding contingent liabilities)		26,827		27,440		25,147		25,595		19,093
Of which:
Allowances for loans and receivables:		26,631		27,321		24,959		25,467		18,858
Allowances for customers		26,517		27,217		24,903		25,422		18,806
Allowances for credit institutions and other financial assets		19		79		37		30		36
Allowances for debt instruments		95		25		19		15		16
Allowances for debt instruments available for sale		196		119		188		129		235

(*) Non-performing loans and contingent liabilities and other assets to collect.

Exchange Rates

The exchange rates shown below are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. CET.

	Rate During Period
Calendar Period	Period End ($)		Average Rate ($)
2011		1.29		1.39
2012		1.32		1.28
2013		1.38		1.33
2014		1.21		1.33
2015		1.09		1.11

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	Rate During Period
Last six months	High $		Low $
2015
October		1.14		1.09
November		1.10		1.06
December		1.10		1.06
2016
January		1.09		1.07
February		1.13		1.09
March		1.14		1.09
April (through April 8)		1.14		1.13

On April 8, 2016, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.14.

For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see note 2 (a) to our consolidated financial statements.

B. Capitalization and indebtedness.

Not Applicable.

C. Reasons for the offer and use of proceeds.

Not Applicable.

D. Risk factors.

1. Macro-Economic and Political Risks

1.1 Because our loan portfolio is concentrated in Continental Europe, the United Kingdom, Latin America and the United States, adverse changes affecting the economies of Continental Europe, the United Kingdom, certain Latin American countries or the United States could adversely affect our financial condition.

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom, Latin America and the United States. At December 31, 2015, Continental Europe accounted for 36% of our total loan portfolio (Spain accounted for 20% of our total loan portfolio), the United Kingdom (where the loan portfolio consists primarily of residential mortgages) accounted for 36%, Latin America accounted for 17% (of which Brazil represents 8% of our total loan portfolio) and the United States accounted for 11%. Accordingly, the recoverability of these loan portfolios in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Continental Europe (in particular, Spain), the United Kingdom, Latin America and the United States. A return to recessionary conditions in the economies of Continental Europe (in particular, Spain), the United Kingdom, some of the Latin American countries in which we operate or the United States, or continued recessionary conditions in Brazil, would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview”.

1.2 We are vulnerable to disruptions and volatility in the global financial markets.

In the past eight years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity and greater volatility (such as volatility in spreads). Global economic conditions deteriorated significantly between 2007 and 2009, and many of the countries in which we operate fell into recession. Although most countries have begun to recover, this recovery may not be sustainable. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).

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In particular, we face, among others, the following risks related to the economic downturn:

• Reduced demand for our products and services.

• Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services and limit our ability to pursue business opportunities.

• Inability of our borrowers to timely or fully comply with their existing obligations. Macroeconomic shocks may negatively impact the household income of our retail customers and may adversely affect the recoverability of our retail loans, resulting in increased loan losses.

• The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.

• The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

• Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. There can be no assurance that economic conditions in these segments will continue to improve or that the global economic condition as a whole will improve significantly. Such economic uncertainty could have a negative impact on our business and results of operations. Investors remain cautious. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

Increased disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

If all or some of the foregoing risks were to materialize, this could have a material adverse effect on us.

1.3 We may suffer adverse effects as a result of economic and sovereign debt tensions in the eurozone.

Our results of operations are materially affected by conditions in the capital markets and the economy generally in the eurozone, which, although improving recently, continue to show signs of fragility and volatility. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies.

The European Central Bank (the “ECB”) and European Council have taken actions with the aim of reducing the risk of contagion in the eurozone and beyond. These included the creation of the Open Market Transaction facility of the ECB and the decision by eurozone governments to progress towards the creation of a banking union. In January 2015, the ECB announced an extensive quantitative easing scheme. The scheme comprises a €60 billion-a-month bond-buying program across the eurozone, which was raised to €80 billion in March 2016, such program to last until at least September 2016, with a potential for extension if inflation in the eurozone does not meet the ECB target of 2%. Notwithstanding these measures, a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by eurozone nations, which are under financial stress. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized, resulting in the further spread of the recent economic crisis.

We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. While concerns relating to sovereign defaults or a partial or complete break-up of the European Monetary Union, including potential accompanying redenomination risks and uncertainties, seemed to have abated, such concerns could resurface (as it was demonstrated in the earlier part of 2015 with the doubts regarding Greece’s membership of the eurozone). A deterioration of the economic and financial environment could have a material adverse impact on the whole financial sector, creating new challenges in sovereign and corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.

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1.4 Exposure to sovereign debt could have a material adverse effect on us.

Like many other banks, we invest in debt securities of governments in the geographies in which we operate. A failure by any such government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on us.

1.5 Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

The economies of some of the countries where we operate, particularly in Latin America, have experienced significant volatility in recent decades. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. In addition, some of the countries where we operate are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate environment, impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services. For instance, Brazil’s present high rate of inflation, compounded by high and increasing interest rates, declining consumer spending and increasing unemployment, have had and may continue to have a material adverse impact on the Brazilian economy as a whole as well as on our financial condition and earnings in Brazil, which represented 20% of profit attributable to the Parent bank’s total operating areas in 2015 and 8% of our total loans as of December 31, 2015. In addition, our business in Brazil will continue to be adversely affected by recessionary conditions and political instability in that country.

There is uncertainty over the long-term effects of the monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China. China’s economy is entering a period of slower growth. Any continuing or worsening slowdown in China could further reduce domestic demand in China which in turn could have ripple effects on the global economy. Furthermore, financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets. Continued or increased perceived risks associated with investing in emerging economies in general, or the emerging market economies where the Group operates in particular, could further dampen capital flows to such economies and adversely affect such economies, and as a result, could have an adverse impact on the Group’s business and results of operations.

Negative and fluctuating economic conditions in the countries in which we operate, such as those that certain Latin American and European countries have experienced recently, could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in these regions or countries.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies. In particular, the UK government has committed to hold a referendum on the UK’s membership of the European Union in June 2016. Future UK political developments, including but not limited to any changes in government structure and policies, could affect the fiscal, monetary and regulatory landscape to which we are subject and also therefore our financing availability and terms.

Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

2. Risks Relating to Our Business

2.1 Legal, Regulatory and Compliance Risks

2.1.1 We are exposed to risk of loss from legal and regulatory proceedings.

We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment in the jurisdictions in which we operate reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

We are from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees and other

15

commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings (see note 25 to our consolidated financial statements). However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

2.1.2 We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, we are subject to extensive regulation, which materially affects our businesses. The statutes, regulations and policies to which we are subject may be changed at any time. In addition, the interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. Extensive legislation affecting the financial services industry has recently been adopted in regions that directly or indirectly affect our business, including Spain, the United States, the European Union, Latin America and other jurisdictions, and regulations are in the process of being implemented. The manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

The regulations which most significantly affect the Bank, or which could most significantly affect the Bank in the future, relate to capital requirements, liquidity and funding, development of a fiscal and banking union in the European Union and regulatory reforms in the United States, and are discussed in further detail below. Other regulatory reforms adopted or proposed in the wake of the financial crisis have increased and may continue to materially increase our operating costs and negatively impact our business model. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands and we may face supervisory measures as a result.

Capital requirements, liquidity, funding and structural reform

Increasingly onerous capital requirements constitute one of the Bank’s main regulatory challenges. Increasing capital requirements may adversely affect the Bank’s profitability and create regulatory risk associated with the possibility of failure to maintain required capital levels. As a Spanish financial institution, the Bank is subject to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (“CRD IV”), through which the European Union began implementing the Basel III capital reforms from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. While the CRD IV requires national transposition, the CRR is directly applicable in all the EU member states. This regulation is complemented by several binding technical standards and guidelines issued by the EBA , directly applicable in all EU member states, without the need for national implementation measures. The implementation of the CRD IV Directive into Spanish law has largely taken place through Royal Decree Law 14/2013 and Law 10/2014, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016. Credit institutions, such as the Bank, are required, on a standalone and consolidated basis, to hold a minimum amount of regulatory capital of 8% of risk weighted assets (of which at least 4.5% must be Common Equity Tier 1 (“CET1”) capital and at least 6% must be Tier 1 capital). In addition to the minimum regulatory capital requirements, CRD IV also introduces capital buffer requirements that must be met with CET1 capital. CRD IV introduces five new capital buffers: (1) the capital conservation buffer for unexpected losses, requiring additional CET1 of up to 2.5% of total weighted exposures; (2) the institution-specific counter-cyclical capital buffer, requiring additional CET1 of up to 2.5% of total weighted exposures; (3) the global systemically important institutions buffer of between 1% and 3.5% of CET1; (4) the other systemically important institutions buffer, which may be as much as 2% of CET1; and (5) the Common Equity Tier 1 systemic risk buffer. Beginning in 2016, and subject to the applicable phase-in period, entities will be required to comply with the “combined buffer requirement” (broadly, the combination of the capital conservation buffer, the institution-specific counter-cyclical buffer and the higher of (depending on the institution) the systemic risk buffer, the global systemically important institutions buffer and the other systemically important financial institutions buffer, in each case as applicable to the institution).The Bank will be required

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to maintain a conservation buffer of 2.5% and a systemically important institutions buffer of 1%, in each case considered on a fully loaded basis. However, as of the date of this Report, due to the application of the phase-in period, the Bank is required to maintain a conservation buffer of 2.5% and a systemically important institutions buffer of 0.25%.

Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No 1024/2013 of October 15, 2013 conferring specific tasks on the European Central Bank (the “ECB”) concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), also contemplate that in addition to the minimum “Pillar 1” capital requirements (including, if applicable, any buffer capital as discussed above), supervisory authorities may impose further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum capital requirements under CRD IV or to address macro-prudential considerations. This may result in the imposition of additional capital requirements on the Bank and/or the Group pursuant to this “Pillar 2” framework. Any failure by the Bank and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional capital requirements could result in administrative actions or sanctions, which, in turn, may have a material adverse impact on the Group’s results of operations.

The ECB is required to carry out, at least on an annual basis, assessments under CRD IV of the additional “Pillar 2” capital requirements that may be imposed for each of the European banking institutions subject to the Single Supervisory Mechanism (the “SSM”). Any additional capital requirement that may be imposed on the Bank and/or the Group by the ECB pursuant to these assessments may require the Bank and/or the Group to hold capital levels similar to, or higher than, those required under the full application of CRD IV. There can be no assurance that the Group will be able to continue to maintain such capital ratios.

In addition to the above, the EBA published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of its supervisory review and evaluation process (SREP). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional capital requirements to be implemented by January 1, 2016. Under these guidelines, national supervisors must set a composition requirement for the additional capital requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital. The guidelines also contemplate that national supervisors should not set additional capital requirements in respect of risks which are already covered by capital buffer requirements and/or additional macro-prudential requirements; and, accordingly, the above “combined buffer requirement” is in addition to the minimum capital requirement and to the additional capital requirement. In this regard, under article 141 of the CRD IV Directive, Member States of the European Union must require that institutions that fail to meet the “combined buffer requirement” or the “Pillar 2” capital requirements described above, will be prohibited from paying any “discretionary payments” (which are defined broadly by the CRD IV Directive as payments relating to Common Equity Tier 1, variable remuneration and payments on Additional Tier 1 capital instruments), until it calculates its applicable restrictions and communicates them to the Regulator and, once completed, such institution will be subject to restricted “discretionary payments”. The restrictions will be scaled according to the extent of the breach of the “combined buffer requirement” and calculated as a percentage of the profits of the institution since the last distribution of profits or “discretionary payment”. Such calculation will result in a “Maximum Distributable Amount” in each relevant period. As an example, the scaling is such that in the bottom quartile of the “combined buffer requirement”, no “discretionary distributions” will be permitted to be paid. Articles 43 to 49 of Law 10/2014 and Chapter II of Title II of Royal Decree 84/2015 implement the above provisions in Spain. In particular article 48 of Law 10/2014 and articles 73 and 74 of Royal Decree 84/2014 deal with restrictions on distributions. In connection with this, Banco Santander announced on December 23, 2015 that it had received from the ECB its decision regarding prudential minimum capital phase-in requirements for 2016, following the results of SREP. The ECB decision requires that the Group maintains a Common Equity Tier 1 capital ratio of 9.75% on a consolidated basis. This 9.75% capital requirement includes: the minimum Pillar 1 requirement (4.5%); the Pillar 2 requirement including the capital conservation buffer (5.0%); and the requirement from its consideration as a global systemic financial institution (0.25%). The ECB decision also requires that Banco Santander, S.A. maintains a Common Equity Tier 1 capital ratio of 9.50% on an individual basis. This 9.50% capital requirement includes: the minimum Pillar 1 requirement (4.5%), and the Pillar 2 requirement including the capital conservation buffer (5.0%). These capital requirements do not imply any limitations referred to in CRR to distributions in the form of dividends, variable remuneration and coupon payments to holders of AT1 instruments.

In addition to the above, the CRR also includes a requirement for institutions to calculate a leverage ratio, report it to their supervisors and to disclose it publicly from January 1, 2015 onwards. More precisely, Article 429 of the CRR requires institutions to calculate their leverage ratio (LR) in accordance with the methodology laid down in that article. In January 2014, the Basel Committee finalized a definition of how the LR should be prepared and set an indicative benchmark (namely 3% of Tier 1 capital). Such 3% Tier 1 LR will be tested during the monitoring period until 2017 when the Basel Committee will decide on the final calibration. Thus, the CRR does not contain a requirement for institutions to have a capital requirement

17

based on the LR and the decision on whether such a requirement will be introduced has been left for a later date. In accordance with Article 511 of the CRR, the European Commission is required to submit, by the end of 2016, a report on the LR to the Council and the Parliament. The report will be based on an EBA report and will be accompanied, where appropriate, by a legislative proposal to introduce a binding LR or different LRs for different business models, applicable from January 1, 2018 onwards. At December 31, 2015 the Group’s fully loaded LR was 4.73% and the phase-in LR was 5.38%.

On November 9, 2015, the Financial Stability Board (the “FSB”) published its final principles and term sheet containing an international standard to enhance the loss absorbing capacity of global systemically important banks (“G-SIBs”), such as the Bank. The final standard consists of an elaboration of the principles on loss absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet setting out a proposal for the implementation of these proposals in the form of an internationally agreed standard on total loss absorbing capacity (“TLAC”) for G-SIBs. Once implemented in the relevant jurisdictions, these principles and terms will form a new minimum TLAC standard for G-SIBs, and in the case of G-SIBs with more than one resolution group, each resolution group within the G-SIB. If implemented as contemplated, the TLAC requirement is expected to create material additional quantitative requirements for the Bank and each of its resolution sub-groups, including new minimum risk-based and leverage TLAC ratios of (i) the Bank’s and each of its resolution sub-groups’ regulatory capital plus certain types of long-term unsecured debt instruments and other eligible liabilities that can be written down or converted into equity during resolution to (ii) the Bank’s or the resolution sub-group’s risk-weighted assets and the Basel III leverage ratio denominator.

The FSB term sheet reflects a minimum Pillar 1 risk-based TLAC requirement of 16% of the Bank’s and each of its resolution sub-groups’ risk weighted assets as from January 1, 2019 and 18% as from January 1, 2022. Minimum TLAC under the term sheet must be also at least 6% of the Basel III leverage ratio denominator as from January 1, 2019, and at least 6.75% as from January 1, 2022.

While definitive TLAC requirements remain subject to significant uncertainty, based on our interpretation of the FSB’s final principles and term sheet from November 2015 and assuming TLAC requirements at 18% (the fully phased-in requirement at 2022), a Basel III capital conservation buffer of 2.5% and a G-SIB surcharge of 1.0%, the estimated shortfall between our current capital levels and the requirements expected to be in force by 2019 would be such that, given historical annual debt issuance volumes by the Group, we believe the Group has flexibility to comply with expected TLAC requirements through recurring issuances of qualifying debt.

Furthermore, the European Bank Recovery and Resolution Directive (“BRRD”) requires all European banks to maintain a minimum requirement for own funds and eligible liabilities (“MREL”). The purpose of MREL, which is calculated as a percentage of the total liabilities and own funds of an institution, is to ensure that institutions maintain enough capital capable of being written down and/or bailed-in, so as to facilitate resolution. Therefore, the objective of the MREL is broadly the same as TLAC.

The obligation to set an MREL for the Group and individual Group entities applied under the BRRD from January 1, 2016. The European Union Single Resolution Board (SRB) intends to determine MREL for all major banking groups established in the Banking Union over the course of 2016 although during this year the SRB will focus on determining MREL at the consolidated level of each group only. The MREL determinations allow for a case-by-case analysis. In the case of G-SIBs and the other major banking groups for which it is the resolution authority, the SRB will make its decisions taking into account the main features of TLAC so that these entities would be subject to a single requirement for loss absorbing capacity.

TLAC requirements contain a common minimum requirement but allow resolution authorities to specify additional TLAC requirements on an individual institution basis. TLAC requirements may further be imposed in addition to the minimum “own funds” requirements under CRD IV. Any failure by an institution to meet the applicable minimum TLAC requirements are supposed to be treated in the same manner as a failure to meet minimum regulatory capital requirements, where resolution authorities must ensure that they intervene and place an institution into resolution sufficiently early if it is deemed to be failing or likely to fail and there is no reasonable prospect of recovery.

The conditions required of TLAC eligible instruments (other than own funds) and those required of eligible liabilities for MREL purposes under the BRRD are different. Furthermore, the implementation of TLAC at the European level is currently being discussed. Only some jurisdictions have designed a framework for such eligible instruments (other than own funds instruments) but there is not yet a European solution that gives certainty in relation to the eligibility of instruments and enforcement action for breach of the requirement to hold MREL. There can be no assurance that the Bank and each of its European resolution sub-groups, will be able to issue sufficient TLAC and MREL eligible liabilities to meet their requirements. That may limit the quantity of the Bank’s CET1 capital which is available to meet its “combined buffer requirement”, and may, therefore, limit the Bank’s ability to make “discretionary payments” in the form of dividends, variable remuneration and coupon payments to holders of AT1 instruments.

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EU fiscal and banking union

The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards the European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the eurozone.

The Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the Single Supervisory Mechanism (“SSM”) and the Single Resolution Mechanism (“SRM”).

The SSM (comprised by both the ECB and the national competent authorities) is designed to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular direct supervision of the 123 largest European banks (including the Bank), on November 4, 2014. In preparation for this step, between November 2013 and October 2014, the ECB conducted, together with national supervisors, a comprehensive assessment of 130 banks, which together hold more than 80% of eurozone banking assets. The exercise consisted of three elements: (i) a supervisory risk assessment, which assessed the main balance sheet risks including liquidity, funding and leverage; (ii) an asset quality review, which focused on credit and market risks; and (iii) a stress test to examine the need to strengthen capital or take other corrective measures.

The SSM represents a significant change in the approach to bank supervision at a European and global level. The SSM results in the direct supervision of 123 financial institutions (as of September 30, 2015), including the Bank, and indirect supervision of around 3,500 financial institutions and is now one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 national competent authorities that are part of the SSM. Several steps have already been taken in this regard such as the recent publication of the Supervisory Guidelines and the approval of the Regulation (EU) No 468/2014 of the European Central Bank of April 16, 2014, establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation). In addition, this new body represents an extra cost for the financial institutions that funds it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost for the taxpayers and the real economy. Regulation (EU) No. 806/2014 of the European Parliament and the Council of the European Union (the “SRM Regulation”), which was passed on July 15, 2014, and became effective from January 1, 2015, establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund (“SRF”). Under the intergovernmental agreement (“IGA”) signed by 26 EU member states on May 21, 2014, contributions by banks raised at national level were transferred to the SRF. The new Single Resolution Board (“SRB”), which is the central decision-making body of the SRM, started operating on January 1, 2015 and has fully assumed its resolution powers on January 1, 2016. The SRB is responsible for managing the SRF and its mission is to ensure that credit institutions and other entities under its remit, which face serious difficulties, are resolved effectively with minimal costs to taxpayers and the real economy. From that date onwards the Single Resolution Fund is also in place, funded by contributions from European banks in accordance with the methodology approved by the Council of the European Union. The Single Resolution Fund is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s liabilities has been applied to cover capital shortfalls (in line with the BRRD).

By allowing for the consistent application of EU banking rules through the SSM and the SRM, the banking union is expected to help resume momentum towards economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as the Bank’s main supervisory authority may have a material impact on the Bank’s business, financial condition and results of operations. In particular, the BRRD and Directive 2014/49/EU on deposit guarantee schemes were published in the Official Journal of the EU on June 12, 2014. The BRRD was required to be implemented on or before January 1, 2015, although the bail-in tool only applies since January 1, 2016. The BRRD was partially implemented in Spain in June 2015 through Law 11/2015 and Royal Decree 1012/2015.

In addition, on January 29, 2014, the European Commission released its proposal on the structural reforms of the European banking sector that will impose new constraints on the structure of European banks. The proposal aims at ensuring the harmonization between the divergent national initiatives in Europe. It includes a prohibition on proprietary trading similar to that contained in Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) and a mechanism to potentially require the separation of trading activities (including market making), such as in the Financial Services (Banking Reform) Act 2013, complex securitizations and risky derivatives.

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Moreover, regulations adopted on structural measures to improve the resilience of EU credit institutions may have a material impact on the Bank’s business, financial condition and results of operations. These regulations, if adopted, may also cause the Group to invest significant management attention and resources to make any necessary changes.

Other regulatory reforms adopted or proposed in the wake of the financial crisis

On August 16, 2012, the EU Regulation on over-the-counter (“OTC”) derivatives, central counterparties and trade repositories, referred to as EMIR, entered into force. While a number of the compliance requirements introduced by EMIR already apply, the European Securities and Markets Authority is still in the process of finalizing some of the implementing rules mandated by EMIR. EMIR introduced a number of requirements, including clearing obligations for certain classes of OTC derivatives, exchange of initial and variation margin and various reporting and disclosure obligations. Although some of the particular effects brought about by EMIR are not yet fully foreseeable, many of its elements have led and may lead to changes which may negatively impact our profit margins, require us to adjust our business practices or increase our costs (including compliance costs). The Markets in Financial Instruments legislation (which comprises a regulation (“MiFIR”) and a directive (“MiFID”)), introduces a trading obligation for those OTC derivatives which are subject to mandatory clearing and which are sufficiently standardized. Additionally, it includes other requirements such as enhancing the investor protection’s regime and governance and reporting obligations. It also extends transparency requirements to OTC operations in non-equity instruments. MiFID was initially intended to enter into effect on January 3, 2017. Notwithstanding this, in order to ensure legal certainty and avoid potential market disruption, the European Commission has proposed delaying the effective date of MiFID 12 months, until January 3, 2018.

Separately, on September 28, 2011, the European Commission tabled a proposal for an European Council Directive on a common system of financial transaction tax (FTT) and amending Directive 2008/7/EC. The objective of the proposal was to ensure a fair contribution of the financial sector to the costs of the financial crisis, avoid fragmentation of the single market and create appropriate disincentives for transactions that do not enhance the efficiency of financial markets. At the European Council meetings of June 22 and July 10, 2012 and at the European Council meeting on June 28/29, 2012, it was ascertained that essential differences in opinion remained as regards the need to establish a common system of FTT at EU level and that the proposal would have not received unanimous support within the Council in the foreseeable future. On the basis of the request of eleven Member States (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain (the “Participating Member States”)), and in accordance with the authorization of the European Council of January 22, 2013, which was adopted following the European Parliament’s consent given on December 12, 2012, the European Commission on March 14, 2013 submitted a proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax (the “Commission Proposal”). The Commission Proposal, essentially, mirrored the scope and objectives of the original FTT proposal put forward by the European Commission in 2011. Though further progress during 2015 was expected, work will have to continue in 2016 on a number of other open questions that constitute the “building blocks” of the design of the future FTT. This work will have to cover all remaining aspects of the Commission Proposal on FTT, and in particular whether the final compromise should include specific provisions or exemptions to address concerns relating to the potential impact of the future FTT on the real economy and retirement schemes (pension plans, funds, and other products serving similar objective). The ECOFIN meeting held on December 8, 2015 was intended to be a make or break meeting for the prospects of an enhanced co-operation FTT. A statement following the meeting released by the 10 remaining Participating Member states (Estonia has now dropped out) represents progress of sorts but significant differences still remain. A further deadline of June 2016 has been set to reach consensus, though there is still real uncertainty over the prospects of the EU FTT. Depending on the final details, the proposed financial transaction tax could have a materially negative effect on the Bank’s profits and business. Different forms of national financial transaction taxes have already been implemented in a number of European jurisdictions, including France and Italy, and these taxes may result in compliance costs as well as market consequences which may affect the Bank’s revenues.

United States significant regulation

In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was adopted in 2010, will continue to result in significant structural reforms affecting the financial services industry. This legislation provided for, among other things, the establishment of a Consumer Financial Protection Bureau with broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter derivatives market, prohibitions on engagement in certain proprietary trading activities and restrictions on ownership or sponsorship of, or entering into certain credit-related transactions with related, covered funds, restrictions on the interchange fees earned through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.

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With respect to OTC derivatives, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, trading through electronic platforms and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. Banco Santander, S.A. and Abbey National Treasury Services plc became provisionally registered as a swap dealer with the CFTC on July 8, 2013 and November 4, 2013, respectively. In addition, we may register one more subsidiary as swap dealer with the CFTC. Although many significant regulations applicable to swap dealers are already in effect, some of the most important rules, such as margin requirements for uncleared swaps and capital rules for swap dealers, are not yet effective and we continue to assess how compliance with these new rules will affect our business.

In July 2013, the U.S. bank regulators issued the U.S. Basel III final rules implementing the Basel III capital framework for U.S. banks and bank holding companies. Certain aspects of the U.S. Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, became effective for part of the Bank’s U.S. operations on January 1, 2015. Other aspects of the U.S. Basel III final rules, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, in September 2014 the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and other U.S. regulators issued a final rule introducing a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The liquidity coverage ratio is part of the Basel Committee’s international standards on quantitative liquidity metrics, which are in turn part of the international Basel III framework. The U.S. implementation of the liquidity coverage ratio is broadly consistent with the Basel Committee’s liquidity standards, but is more stringent in several important respects. Although this final rule does not apply to foreign banking organizations (“FBOs”), the Federal Reserve Board has stated that it intends, through future rulemakings, to apply the liquidity coverage ratio and another Basel III liquidity metric to the U.S. operations of some or all large FBOs.

On February 18, 2014, the Federal Reserve Board issued a final rule to enhance its supervision and regulation of certain FBOs. Among other things, this rule requires FBOs with over $50 billion of U.S. non-branch assets to establish or designate a U.S. intermediate holding company (an “IHC”) and to transfer its entire ownership interest in substantially all of its U.S. subsidiaries to such IHC by July 1, 2016. U.S. branches and agencies are not required to be transferred to the IHC. The IHC will be subject to an enhanced supervision framework, including enhanced risk-based and leverage capital requirements, liquidity requirements, risk management and governance requirements, and stress-testing requirements. A phased-in approach is being used for the standards and requirements. Certain enhanced standards are effective in 2015, with other standards and requirements becoming effective between July 1, 2016 and January 1, 2018. Pursuant to the final rule, as an FBO with over $50 billion of U.S. non-branch assets as of June 30, 2014, we submitted an IHC implementation plan to the Federal Reserve Board by January 1, 2015. As of the date of this annual report, we are continuing to refine this plan. Implementation and compliance with this plan have caused and will continue to cause the Group to invest significant management attention and resources.

The Volcker Rule, a statutory provision of the Dodd-Frank Act, prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring, investing in, or entering into certain credit-related transactions with related, covered funds, in each case subject to certain exceptions. The term “covered fund” is defined very broadly to include traditional hedge funds, private equity funds, certain securitization vehicles and other entities that rely on Sections 3(c)(1) or 3(c)(7) of the U.S. Investment Company Act of 1940 for an exemption under that Act, as well as certain similar foreign funds. The Volcker Rule became effective in July 2012 and in December 2013 U.S. regulators issued final rules implementing the Volcker Rule. The statute and final rules also contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. Banking entities such as the Bank must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. In general, all banking entities were required to conform to the requirements of the Volcker Rule, except for provisions related to certain funds, and to implement a compliance program by July 21, 2015. In December 2014, the Federal Reserve Board issued an order extending the Volcker Rule’s general conformance period until July 21, 2016 for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 (“legacy covered funds”), and stated its intention to grant a final one-year extension of the general conformance period, to July 21, 2017, for banking entities to conform ownership interests in and relationships with legacy covered funds. This extension of the conformance period does not apply to the Volcker Rule’s prohibitions on proprietary trading and does not appear to apply to any investments in and relationships with covered funds put in place after December 31, 2013. We have assessed how the final rules implementing the Volcker Rule affect our businesses and have adopted the necessary measures to bring our activities into compliance with the rules.

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Furthermore, Title I of the Dodd-Frank Act and the implementing regulations issued by the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) require each bank holding company with assets of $50 billion or more, including us, to prepare and submit annually to the Federal Reserve Board and the FDIC a plan for the orderly resolution of our subsidiaries and operations that are domiciled in the United States in the event of future material financial distress or failure. In addition, each insured depository institution (“IDI”) with assets of $50 billion or more, such as Santander Bank, N.A., our U.S. national bank subsidiary, must submit a separate IDI resolution plan annually to the FDIC. The Title I and IDI plans each must include information on resolution strategy, major counterparties and interdependencies, among other things, and require substantial effort, time and cost to prepare. We submitted our most recent annual U.S. resolution plans in December 2015. The Title I plan resolution plan is subject to review by the Federal Reserve Board and the FDIC. The IDI plan is subject to review solely by the FDIC.

On October 30, 2015, the Federal Reserve Board proposed a rule that would establish certain TLAC and long-term debt requirements in the United States generally consistent with the FSB’s international TLAC standard. The proposed U.S. TLAC rule would require, among other things, the U.S. IHCs of non-U.S. G-SIBs, including the Group’s future U.S. IHC, to maintain a minimum amount of internal TLAC and would separately require them to maintain a minimum amount of internal long-term debt. The terms “internal TLAC” and “internal long-term debt” refer to instruments that would be required to be issued internally within the banking group, from the IHC to a foreign parent entity. The proposed minimum amounts of internal TLAC and internal long-term debt vary depending on the home country resolution authority’s preferred resolution strategy. Under the proposed rule, the Group’s U.S. IHC, if it is treated as a resolution entity IHC under the proposed rule, would be required to maintain, on a fully phased-in basis by 2022, internal TLAC of at least 18% of risk-weighted assets (plus an internal TLAC buffer of an additional 2.5%), at least 6.75% of the Basel III leverage ratio denominator and at least 9% of average total consolidated assets, as well as internal long-term debt of at least 7% of risk-weighted assets, at least 3% of the Basel III leverage ratio denominator and at least 4% of average total consolidated assets. Internal long-term debt instruments would be subject to certain eligibility criteria, including issuance to a foreign parent entity (a non-U.S. entity that controls the IHC) and the inclusion of a contractual trigger allowing for, in limited circumstances, the cancellation of, or immediate conversion or exchange of the instrument into, common equity tier 1 capital upon an order by the Federal Reserve Board. As proposed, the internal TLAC requirements may be satisfied with a combination of eligible long-term debt instruments and tier 1 capital, whereas the internal long-term debt requirements would be required to be satisfied only with eligible long-term debt instruments. The proposed rule would also require internal TLAC to be contractually subordinated to ineligible debt instruments and prohibit the U.S. IHC from issuing any external short-term debt, issuing parent guarantees with certain impermissible cross defaults, entering into any qualified financial contract with a third party, benefitting from upstream guarantees or issuing any instruments with certain setoff rights.

Each of these aspects of the Dodd-Frank Act, as well as other changes in U.S. banking regulations, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act poses to us is not yet known; however, such risks could be material and we could be materially and adversely affected by them.

United States stress testing, capital planning, and related supervisory actions

Certain of our U.S. subsidiaries, including Santander Holdings USA, our U.S. bank holding company subsidiary, are subject to stress testing and capital planning requirements under regulations implementing the Dodd-Frank Act or other banking laws or policies. In March 2014 and March 2015, the Federal Reserve Board, as part of its Comprehensive Capital Analysis and Review (“CCAR”) process, objected on qualitative grounds to the capital plans submitted by Santander Holdings USA. In its 2015 public report on CCAR, the Federal Reserve Board cited widespread and critical deficiencies in Santander Holdings USA’s capital planning processes, including specific deficiencies in governance, internal controls, risk identification and risk management, management information systems, and supporting assumptions and analysis. As a result of the 2014 and 2015 CCAR objections, Santander Holdings USA is not permitted to make any capital distributions without the Federal Reserve Board’s approval, other than the continued payment of dividends on Santander Holdings USA’s outstanding class of preferred stock, until a new capital plan is approved by the Federal Reserve Board. The deadline for Santander Holdings USA’s next capital plan submission is in April 2016, and there is the risk that the Federal Reserve Board will object to Santander Holdings USA’s next capital plan.

In addition, Santander Holdings USA is subject to supervisory actions in the United States related to the CCAR stress testing and capital planning processes. Specifically, on September 15, 2014, Santander Holdings USA and the Federal Reserve Bank of Boston (“FRB Boston”) executed a written agreement relating to a subsidiary’s declaration and payment of dividends in the second quarter of 2014 without the Federal Reserve Board’s approval. Under the written agreement, Santander Holdings USA agreed to submit to the FRB Boston written procedures to strengthen board oversight of management regarding planned capital distributions by Santander Holdings USA and its subsidiaries. In addition, Santander Holdings USA agreed to subject future distributions to the prior written approval of Federal Reserve System and to take necessary actions to ensure that no such distributions are made.

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Other supervisory actions and restrictions on U.S. activities

In addition to the foregoing, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In some instances, we are subject to significant legal restrictions on our ability to publicly disclose these actions or the full details of these actions. Furthermore, as part of the regular examination process, our U.S. banking subsidiaries’ regulators may advise our U.S. banking subsidiaries to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Under the U.S. Bank Holding Company Act, the Federal Reserve Board has the authority to disallow us and our U.S. banking subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or our U.S. banking subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations; and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions. In addition to such confidential actions and restrictions, in July 2015, Santander Holdings USA became subject to a public enforcement action with the FRB Boston under which Santander Holdings USA entered into a written agreement to make enhancements with respect to, among other matters, board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.

2.1.3 We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints.

As noted above, our business and operations are subject to increasingly significant rules and regulations that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and prudential and conduct of business regulations. These requirements are set by the relevant central banks and regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate.

In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines. Some of the regulators are focusing intently on consumer protection and on conduct risk and will continue to do so. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Some of the laws in the relevant jurisdictions on which we operate, give the regulators the power to make temporary product intervention rules either to improve a firm’s systems and controls in relation to product design, product management and implementation, or to address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features or governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some of the regulatory regimes on the relevant jurisdictions on which we operate, require us to be in compliance across all aspects of our business, including the training, authorization and supervision of personnel, systems, processes and documentation. If we fail to comply with the relevant regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by the regulatory authorities. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the mis-selling of a particular product, or through incorrect application of the terms and conditions of a particular product. Given the inherent unpredictability of litigation and the evolution of judgments by the relevant authorities, it is possible that an adverse outcome in some matters could harm our reputation or have a material adverse effect on our operating results, financial condition and prospects arising from any penalties imposed or compensation awarded, together with the costs of defending such an action, thereby reducing our profitability.

2.1.4 We are subject to review by taxing authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Spain and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on our results of operations.

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2.1.5 Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.

2.1.6 We may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with applicable anti-money laundering (“AML”), anti-terrorism, sanctions and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to conduct full customer due diligence regarding sanctions and politically-exposed person screening, keep our customer, account and transaction information up to date and have implemented effective financial crime policies and procedures detailing what is required from those responsible. Our requirements also include AML training for our employees, reporting suspicious transactions and activity to appropriate law enforcement following full investigation by our local AML team.

Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML sanctions, laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel.

We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. These require implementation and embedding within our business effective controls and monitoring, which in turn requires on-going changes to systems and operational activities. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight, there remains a risk of regulatory breach.

If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our banking license.

The reputational damage to our business and global brand would be severe if we were found to have breached AML or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers or our business from being used by criminals for illegal or improper purposes.

In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

Any such risks could have a material adverse effect on our operating results, financial condition and prospects.

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2.2 Liquidity and Financing Risks

2.2.1 Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.

Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.

Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and the financial services industry in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits or competition with other products, such as mutual funds. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue, in the near future, to make deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

Central banks have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis. If current facilities were rapidly removed or significantly reduced, this could have an adverse effect on our ability to access liquidity and on our funding costs.

We cannot assure that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

2.2.2 Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Spanish sovereign debt. If Spain’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.

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Any downgrade in our debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies—A3 stable outlook by Moody’s Investors Service España, S.A., A- stable outlook by Standard & Poor’s Ratings Services and A- stable outlook by Fitch Ratings Ltd. In June 2015, Moody’s upgraded Banco Santander, S.A.’s rating from Baa1 to A3 in light of their new banking methodology and in October 2015 Standard & Poor’s upgraded Banco Santander, S.A.’s rating from BBB+ to A- following the upgrade of the sovereign credit rating of Spain.

Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: A1 with stable outlook by Moody’s Investors Service, A with stable outlook by Standard & Poor’s Ratings Services and A with positive outlook by Fitch Ratings.

Banco Santander (Brasil)’s long-term debt in foreign currency is currently rated BB with a negative outlook by Standard & Poor’s Ratings Services, BBB- with negative outlook by Fitch Ratings Ltd. and Ba3 with a negative outlook by Moody’s Investors Service. During the course of 2015 and the first quarter of 2016 the three major agencies lowered the rating as a result of the lowering of Brazil’s sovereign credit rating.

We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. We estimate that as of December 31, 2015, if all the rating agencies were to downgrade Banco Santander, S.A.’s long-term senior debt ratings by one notch we would be required to post up to €200 million in additional collateral pursuant to derivative and other financial contracts. A hypothetical two notch downgrade would result in a requirement to post up to €6 million in additional collateral. We estimate that as of December 31, 2015, if all the rating agencies were to downgrade Santander UK’s long-term credit ratings by one notch, and thereby trigger a short-term credit rating downgrade, this could result in contractual outflows from Santander UK’s total liquid assets of £4.6 billion of cash and additional collateral that Santander UK would be required to post under the terms of secured funding and derivatives contracts. A hypothetical two notch downgrade would result in an additional contractual outflow of £0.3 billion of cash and collateral under secured funding and derivatives contracts.

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on Banco Santander, S.A., and/or its subsidiaries.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain the current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

2.3 Credit Risks

2.3.1 If the level of non-performing loans increases or the credit quality deteriorates in the future, or if our loan loss reserves are insufficient to cover loan losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our business. Non-performing or low credit quality loans have in the past and can continue to negatively impact our results of operations. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future,

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or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Continental Europe, the United Kingdom, Latin America, particularly Brazil, the United States or global economic conditions, impact of political events, events affecting certain industries or events affecting financial markets and global economies. We cannot assure that we will be able to effectively control the level of the non-performing loans in our total loan portfolio.

Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot assure that our current or future loan loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the credit card portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our loan loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

Mortgage loans are one of our principal assets, comprising 49% of our loan portfolio as of December 31, 2015. We are exposed to developments in housing markets, especially in Spain and the United Kingdom, and to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the eurozone. The United Kingdom also experienced an increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage finance and the continued effect of global market volatility have caused home prices to decline, while mortgage delinquencies and forbearances have increased.

As a result of these and other factors, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008, to 3.24% at December 31, 2009, to 3.54% at December 31, 2010, to 3.90% at December 31, 2011, to 4.54% at December 31, 2012 and to 5.64% at December 31, 2013. Although the trend changed during the last two years as our NPL ratio decreased to 5.19% at December 31, 2014 and to 4.36% at December 31, 2015, we can provide no assurance that our NPL ratio will not increase again as a result of the aforementioned and other factors. High unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

2.3.2 The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Europe, the United States and Latin American countries. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

2.3.3 We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

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We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

2.4 Market Risks

2.4.1 Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, inflation, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

• net interest income;

• the volume of loans originated;

• volatility of credit spreads;

• the market value of our securities holdings;

• gains from sales of loans and securities; and

• gains and losses from derivatives.

Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This results from the varying effect that a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. The continued depreciation of the Latin American currencies against the U.S. dollar could make our Latin American subsidiaries’ foreign currency-linked obligations and funding more expensive and have similar consequences for our borrowers in Latin America.

We are also exposed to equity price risk in our investments in equity securities in the banking book and in the trading portfolio. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be materially adversely affected.

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2.4.2 Market conditions have resulted and could result in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In the past eight years, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

2.4.3 We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

Market practices and documentation for derivative transactions in the countries where we operate differ from each other. In addition, the execution and performance of these transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.

2.5 Risk Management

2.5.1 Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or the use of such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition and prospects.

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As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

In addition, we have refined our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

2.6 General Business and Industry Risks

2.6.1 The financial problems faced by our customers could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. We may also be adversely affected by the negative effects of the heightened regulatory environment on our customers due to the high costs associated with regulatory compliance and proceedings. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

2.6.2 Changes in our pension liabilities and obligations could have a material adverse effect on us.

We provide retirement benefits for many of our former and current employees through a number of defined benefit pension plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, or others. The accounting and disclosures are based on IFRS and on those other requirements defined by the local supervisors. Given the nature of these obligations, changes in the assumptions that support valuations, including market conditions, can result in actuarial losses which would in turn impact the financial condition of our pension funds. Because pension obligations are generally long term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of pension expense that we accrue.

Any increase in the current size of the deficit in our defined benefit pension plans, due to reduction in the value of the pension fund assets (depending on the performance of financial markets) or an increase in the pension fund liabilities due to changes in mortality assumptions, the rate of increase of salaries, discount rate assumptions, inflation, the expected rate of return on plan assets, or other factors, could result in our having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.

2.6.3 We depend in part upon dividends and other funds from subsidiaries.

Some of our operations are conducted through our financial services subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and to pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent upon our subsidiaries’ earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

2.6.4 Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business, including in originating loans and in attracting deposits. The competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

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In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Non-traditional providers of banking services, such as Internet based e-commerce providers, mobile telephone companies and internet search engines may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets which would in turn have an adverse effect on our competitive position and business.

Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

If our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

2.6.5 Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If our products and services employ technology that is not as attractive to our clients as that employed by our competitors, if we fail to employ technologies desired by our clients before our competitors do so, or if we fail to execute effectively on targeted strategic technology initiatives, our business and results could be adversely affected. In addition, we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks and development expenses. Our employees and risk management systems, as well as our experience and that of our partners may not be sufficient or adequate to enable us to properly handle or manage such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

Further, our customers may issue complaints and seek redress if they consider that they have suffered loss from our products and services, for example, as a result of any alleged mis-selling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers and intervention by our regulators. We have in the past experienced losses due to claims of mis-selling in the U.K., Spain and other jurisdictions and may do so again in the future. For further detail on our legal and regulatory risk exposures, please see the risk factor entitled “We are exposed to risk of loss from legal and regulatory proceedings.”

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2.6.6 If we are unable to manage the growth of our operations this could have an adverse impact on our profitability.

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

• manage efficiently the operations and employees of expanding businesses;

• maintain or grow our existing customer base;

• assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;

• finance strategic investments or acquisitions;

• fully integrate strategic investments, or newly-established entities or acquisitions in line with its strategy;

• align our current information technology systems adequately with those of an enlarged group;

• apply our risk management policy effectively to an enlarged group; and

• manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively, including any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.

Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.

2.6.7 Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions in recent years and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written-down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. While no material impairment of goodwill was recognized at Group level in 2013, 2014 or 2015, there can be no assurances that we will not have to write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.

2.6.8 We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

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In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.

2.6.9 We rely on third parties for important products and services.

Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with our third party vendors. As our interconnectivity with these third parties increases, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third party vendors could also entail significant delays and expense.

2.6.10 Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to its business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us, whether or not true, may result in harm to our prospects.

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

2.6.11 We engage in transactions with our subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

Spanish law provides for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

2.7 Technology Risks

2.7.1 Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

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2.7.2 Risks relating to data collection, processing and storage systems and security are inherent in our business.

Like other financial institutions with a large customer base, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Accordingly, our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. There can be no assurance that we will not suffer material losses from operational risk in the future, including those relating to any security breaches.

We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in our attempt to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber security risk, e.g. by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be subject to cyber-attacks against critical infrastructures of the countries where we operate. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. For further information see Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 6. Operational risk—3 Mitigation measures—Cybersecurity and data security plans.

We manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, we may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.

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2.8 Financial Reporting and Control Risks

2.8.1 Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

2.8.2 Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets provision and pension obligation for liabilities.

If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

2.8.3 Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

These disclosure controls and procedures have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

2.9 Foreign Private Issuer and Other Risks

2.9.1 Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.

Issuers of securities in Spain are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS, which differs from U.S. GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

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2.9.2 Investors may find it difficult to enforce civil liabilities against us or our directors and officers.

The majority of our directors and officers reside outside of the United States. In addition, all or a substantial portion of our assets and their assets are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors or officers has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

Additionally, investors may experience difficulty in Spain enforcing foreign judgments obtained against us and our executive officers and directors, including in any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of Spanish counsel, there is doubt as to the enforceability against such persons in Spain, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

2.9.3 As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our Bylaws and Spanish corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Spain. Under Spanish corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Spain.

Although Spanish corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Spain, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.

2.9.4 ADS holders may be subject to additional risks related to holding ADSs rather than shares.

Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:

• as an ADS holder, you may not be able to exercise the same shareholder rights as a direct holder of ordinary shares;

• we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and

• the depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.

Item 4. Information on the Company

A. History and development of the company

Introduction

Banco Santander, S.A. (“Santander”, the “Bank”, the “Parent” or the “Parent bank”) is the Parent bank of Grupo Santander. It was established on March 21, 1857 and incorporated in its present form by a public deed executed in Santander, Spain, on January 14, 1875.

On January 15, 1999, the boards of directors of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. agreed to merge Banco Central Hispanoamericano, S.A. into Banco Santander, S.A., and to change Banco Santander’s name to Banco Santander Central Hispano, S.A. The shareholders of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. approved the merger on March 6, 1999, at their respective general meetings. The merger and the name change were registered with the Mercantile Registry of Santander, Spain, by the filing of a merger deed. Effective April 17, 1999, Banco Central Hispanoamericano, S.A. shares were extinguished by operation of law and Banco Central Hispanoamericano, S.A. shareholders received new Banco Santander shares at a ratio of three shares of Banco Santander, S.A. for every five shares of Banco Central Hispanoamericano, S.A. formerly held. On the same day, Banco Santander, S.A. changed its legal name to Banco Santander Central Hispano, S.A.

The general shareholders’ meeting held on June 23, 2007 approved the proposal to change the name of the Bank to Banco Santander, S.A.

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The general shareholders’ meeting held on March 22, 2013 approved the merger by absorption of Banco Español de Crédito, S.A. (Banesto) and Banco Banif, S.A.

We are incorporated under, and governed by the laws of the Kingdom of Spain. We conduct business under the commercial name “Santander”. Our headquarters are located in Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid), Spain. Telephone: (011) 34-91-259-6520 and the corporate offices are located at Paseo de Pereda, numbers 9 to 12, Santander, Spain.

Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2015, 2014 and 2013 were as follows:

Merger of Bank Zachodni WBK S.A. and Kredyt Bank S.A.

On February 28, 2012, the Group announced that Banco Santander, S.A. and KBC Bank NV (KBC) had entered into an investment agreement to merge their two subsidiaries in Poland, Bank Zachodni WBK S.A. and Kredyt Bank S.A., respectively, following which the Group would control approximately 76.5% of the entity resulting from the merger and KBC 16.4%, with the remaining 7.1% being owned by non-controlling interests. Also, the Group undertook to place a portion of its ownership interest among investors and to acquire up to 5% of the entity resulting from the merger in order to help KBC to reduce its holding in the merged entity to below 10%. KBC’s objective is to dispose of its entire investment in order to maximize its value.

The transaction was carried out through a capital increase at Bank Zachodni WBK S.A., whose new shares would be offered to KBC and the other shareholders of Kredyt Bank S.A. in exchange for their shares in Kredyt Bank S.A. The related exchange ratio was established at 6.96 shares of Bank Zachodni S.A. for every 100 shares of Kredyt Bank S.A.

In early 2013, following the approval from the Polish financial regulator (KNF), the aforementioned transaction was consummated. As a result, the Group controlled approximately 75.2% of the post-merger entity and KBC controlled approximately 16.2%, with the remaining 8.6% being owned by non-controlling holders. This transaction gave rise to an increase of €1,037 million in non-controlling interests – €169 million as a result of the acquisition of control of Kredyt Bank S.A. and €868 million as a result of the reduction in the percentage of ownership of Bank Zachodni WBK S.A.

On March 22, 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for €285 million, which gave rise to an increase of €292 million in non-controlling interests.

Following these transactions, the Group held 70% of the share capital of Bank Zachodni WBK S.A. and the remaining 30% was held by non-controlling holders.

Mergers by absorption of Banesto and Banco Banif

On December 17, 2012, we announced that we had resolved to approve the plan for the merger by absorption of Banesto and Banco Banif, S.A. as part of the restructuring of the Spanish financial sector. These transactions are part of a commercial integration which brought Banesto and Banif under the Santander brand.

At their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banesto approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which were acquired, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than the Bank, received in exchange shares of the Bank.

January 1, 2013 was established as the date from which the transactions of Banesto shall be considered to have been performed for accounting purposes for the account of the Bank.

On March 22, 2013 and March 21, 2013, the general shareholders meetings of the Bank and Banesto, respectively, approved the terms of the merger.

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On April 29, 2013, pursuant to the provisions of the terms of the merger and to the resolutions of the general shareholders’ meetings of both companies, the regime and procedure for the exchange of Banesto shares for shares of Banco Santander was made public. Banco Santander covered the exchange of Banesto shares with shares held as treasury stock based on the exchange ratio of 0.633 shares of Banco Santander, each with a nominal value of €0.50, for each share of Banesto, each with a nominal value of €0.79, without provision for any supplemental cash remuneration.

On May 3, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banesto was completed.

The directors of Banco Banif, S.A., at its board of directors meeting held on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to Banco Santander, S.A., which acquired, by universal succession, the rights and obligations of the absorbed entity.

January 1, 2013 was established as the date from which the transactions of Banif were considered to have been performed for accounting purposes for the account of the Bank.

On May 7, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banco Banif, S.A. was completed.

Insurance business in Spain

On December 20, 2012, we announced that we had reached an agreement with Aegon. In this regard, we created two insurance companies, one for life insurance and the other for general insurance, in which Aegon would acquire ownership interests of 51%, and management responsibility would be shared by Aegon and the Group. We would hold 49% of the share capital of the companies and we would enter into a distribution agreement for the sale of insurance products in Spain through the commercial networks for a period of 25 years. The agreement would not affect savings, health and vehicle insurance, which would continue to be owned and managed by Santander.

In June 2013, after obtaining the relevant authorizations from the Directorate-General of Insurance and Pension Funds and from the European competition authorities, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes, one for life insurance and the other for general insurance (currently Aegon Santander Vida Seguros y Reaseguros, S.A. and Aegon Santander Generales Seguros y Reaseguros, S.A.), for which it paid €220 million, thereby gaining joint control together with the Group over the aforementioned companies. The agreement also includes payments to Aegon that are deferred over two years and amounts receivable for the Group that are deferred over five years, depending on the business plan.

The aforementioned agreement includes the execution of a distribution agreement for the sale of insurance products in Spain for 25 years through commercial networks, for which the Group will receive commissions at market rates.

This transaction gave rise to a gain of €385 million recognized under Gains (losses) on disposal of assets not classified as non-current assets held for sale (€270 million net of tax), of which €186 million related to the fair value recognition of the 49% ownership interest retained by the Group.

Agreement with Elavon Financial Services Limited

On October 19, 2012, we announced that we had entered into an agreement with Elavon Financial Services Limited to jointly develop the payment services business in Spain through point-of-sale credit and debit card terminals at merchants.

This transaction involved the creation of a joint venture, 51% owned by Elavon and 49% owned by us, to which we transferred our aforementioned payment services business in Spain (excluding the former Banesto).

The transaction was completed in the first half of 2013 and generated a gain of €122 million (€85 million net of tax).

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Agreement with Warburg Pincus and General Atlantic

On May 30, 2013, we announced that we had entered into an agreement with subsidiaries of Warburg Pincus and General Atlantic to foster the global development of our asset management unit, Santander Asset Management (SAM). Pursuant to the terms and conditions of the agreement, Warburg Pincus and General Atlantic together own 50% of the holding company which comprises the eleven management companies we have, mainly in Europe and Latin America, while the other 50% are held by us.

The purpose of the alliance is to enable SAM to improve its ability to compete with the large independent international asset management companies, since the businesses to be strengthened include asset management in the global institutional market, with the additional advantage of having knowledge and experience in the markets in which we are present. The agreement also contemplates the distribution of products managed by SAM in the countries in which we have a commercial network for a period of ten years, renewable for five additional two-year periods, for which we will receive commissions at market rates, thus benefiting from broadening the range of products and services we offer our customers. SAM also distributes its products and services internationally, outside our commercial network.

Since the aforementioned asset management companies belonged to different Group companies, a corporate restructuring took place prior to the completion of the transaction whereby each of the asset management companies was sold by its shareholders for its fair value to SAM Investment Holdings Limited (SAM), a holding company created by us. The aggregate value of the asset management companies was approximately €1.7 billion.

Subsequently, in December 2013, once the required authorizations were obtained from various regulators, the agreement was executed through the acquisition of a 50% ownership interest in SAM’s share capital by Sherbrooke Acquisition Corp SPC (an investee of Warburg Pincus and General Atlantic) for €449 million. At that date, SAM had financing from third parties for €845 million. The agreement includes deferred contingent amounts payable and receivable for the Group based on the achievement of the business plan targets over the coming five years.

Also, we entered into a shareholders’ agreement with Sherbrooke Acquisition Corp SPC shareholders regulating, inter alia, the taking of strategic, financial, operational and other significant decisions regarding the ordinary management of SAM on a joint basis. Certain restrictions on the transferability of the shares were also agreed, and a commitment was made by the two parties to retain the restrictions for at least 18 months. Lastly, Sherbrooke Acquisition Corp SPC will be entitled to sell to the Group its ownership interest in the share capital of SAM at market value on the fifth and seventh anniversaries of the transaction, unless a public offering of SAM shares has taken place prior to those dates.

Following these transactions, at year-end we held a 50% ownership interest in SAM and controlled this company jointly with the aforementioned shareholders.

As a result of the aforementioned transaction, we recognized a gain of €1,372 million in the consolidated income statement for 2013, of which €671 million related to the fair value of the 50% ownership interest retained by us.

Sale of Altamira Asset Management

On November 21, 2013, we announced that we had reached a preliminary agreement with Apollo European Principal Finance Fund II, a fund managed by subsidiaries of Apollo Global Management, LLC, for the sale of the platform for managing the recovery of Banco Santander, S.A.’s loans in Spain and for managing and marketing the properties obtained through this activity (“Altamira Asset Management, S.L.”).

On January 3, 2014, we announced that we had sold 85% of the share capital of Altamira Asset Management, S.L. to Altamira Asset Management Holdings, S.L., an investee of Apollo European Principal Finance Fund II, for €664 million, giving rise to a net gain of €385 million, which was recognized in our consolidated income statement for 2014.

Following this transaction, we retained the aforementioned property assets and loan portfolio on our balance sheet, while management of these assets is carried out from the platform owned by Apollo.

Santander Consumer USA

In January 2014, the public offering of shares of Santander Consumer USA Inc. (“SCUSA”) was completed and the company was admitted to trading on the New York Stock Exchange. The offering represented 21.6% of SCUSA’s share capital, of which 4.23% related to the ownership interest sold by the Group. Following this sale, we held 60.74% of the share capital

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of SCUSA (December 31, 2014: 60.46%). Both Sponsor Auto Finance Holdings Series LP (“Sponsor Holdings”) – an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P. – and DDFS LLC (“DDFS”) – a company controlled by Thomas G. Dundon, who holds the position of Chief Executive Officer of SCUSA – also reduced their ownership interest in SCUSA.

Since the ownership interests of the aforementioned shareholders were reduced below specified percentages following the offering, the shareholders’ agreement previously entered into by the shareholders was terminated in accordance with its terms; this entailed the termination of the agreement which, inter alia, had granted Sponsor Holdings and DDFS representation on the board of directors of SCUSA and had established a voting system under which the strategic, financial and operating decisions, and other significant decisions associated with the ordinary management of SCUSA, were subject to joint approval by the Group and the aforementioned shareholders. Therefore, SCUSA ceased to be controlled jointly by all the above and is now controlled by the Group on the basis of the percentage held in its share capital (“change of control”).

Prior to this change of control the Group accounted for its ownership interest in SCUSA using the equity method. Following the change of control, the Group fully consolidated its ownership interest in SCUSA and, on the date it obtained control, included all of SCUSA’s assets and liabilities in its consolidated balance sheet at their fair value.

As a result of the aforementioned transaction, we recognized a net gain of €730 million in the consolidated income statement for 2014.

On July 3, 2015, we announced that we had reached an agreement to acquire the stake held by DDFS LLC in SCUSA, representing 9.68% of the company, for U.S. $928 million. The transaction is subject to regulatory approval. If the transaction closes, our stake in SCUSA will be approximately 68.62%.

Agreement with El Corte Inglés

On October 7, 2013, we announced that we had entered into a strategic agreement through our subsidiary Santander Consumer Finance, S.A. with El Corte Inglés, S.A. in the area of consumer finance, which included the acquisition of 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A., with El Corte Inglés, S.A. retaining the remaining 49%. On February 27, 2014, following the receipt of the relevant regulatory and competition authorizations, the acquisition was completed. Santander Consumer Finance, S.A. paid €140 million for 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A.

GetNet Tecnologia Em Captura e Processamento de Transações H.U.A.H. S.A.

On April 7, 2014, Banco Santander (Brasil) S.A. announced that it had reached an agreement to purchase through an investee all the shares of GetNet Tecnologia Em Captura e Processamento de Transações H.U.A.H. S.A. (“GetNet”). The transaction was completed on July 31, 2014 for a purchase price of BRL1,156 million (approximately €383 million), giving rise to goodwill of €229 million.

Acquisition of non-controlling interests in Banco Santander (Brasil) S.A.

On April 28, 2014, the Bank’s board of directors approved a bid for the acquisition of all the shares of Banco Santander (Brasil) S.A. not then owned by the Group, which represented approximately 25% of the share capital of Banco Santander (Brasil) S.A., offering in consideration Bank shares in the form of Brazilian Depositary Receipts (BDRs) or American Depositary Receipts (ADRs). As part of the bid, the Bank requested that its shares be listed on the São Paulo Stock Exchange in the form of BDRs.

The offer was voluntary, in that the non-controlling shareholders of Banco Santander (Brasil) S.A. were not obliged to participate, and it was not conditional upon a minimum acceptance level. The consideration offered, following the adjustment made as a result of the application of the Santander Dividendo Elección scrip dividend scheme in October 2014, consisted of 0.7152 new Banco Santander shares for each unit or ADR of Banco Santander (Brasil) S.A. and 0.3576 new Banco Santander shares for each ordinary or preference share of Banco Santander (Brasil) S.A.

The bid was accepted by holders of 13.65% of the share capital of Banco Santander (Brasil) S.A. Accordingly, the Group’s ownership interest in Banco Santander (Brasil) S.A. rose to 88.30% of its share capital. To cater for the exchange, the Bank, executing the agreement adopted by the extraordinary general shareholders’ meeting held on September 15, 2014, issued 370,937,066 shares, representing approximately 3.09% of the Bank’s share capital at the issue date. The aforementioned transaction gave rise to an increase of €185 million in Share capital, €2,372 million in Share premium and €15 million in Reserves, and a reduction of €2,572 million in Non-controlling interests.

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The shares of Banco Santander (Brasil) S.A. continue to be listed on the São Paulo and New York stock exchanges.

Agreement with CNP

On July 10, 2014, we announced that we had reached an agreement with the French insurance company CNP to acquire a 51% stake in three insurance companies based in Ireland (Santander Insurance Life Limited, Santander Insurance Europe Limited and Santander Insurance Services Ireland Limited) that distribute life and non-life products through the Santander Consumer Finance network.

In December 2014, after the regulatory authorizations were obtained, CNP paid €297 million to acquire 51% , or a controlling interest in, the three aforementioned insurance companies. The agreement includes deferred payments to CNP in 2017 and 2020 and deferred amounts receivable by the Group in 2017, 2020 and 2023, based on the business plan.

The agreement included the execution of a 20-year retail agreement, renewable for five-year periods, for the sale of life and non-life insurance products through the Santander Consumer Finance network, for which we will receive commissions at market rates.

This transaction gave rise to the recognition of a gain of €413 million under Gains/(losses) on disposal of assets not classified as non-current assets held for sale, of which €207 million related to the fair value recognition of the 49% ownership interest retained by us.

Agreement with GE Capital

On June 23, 2014, we announced that Santander Consumer Finance, S.A., Banco Santander’s consumer finance unit had reached an agreement with GE Money Nordic Holding AB to acquire GE Capital’s business in Sweden, Denmark and Norway for approximately €693 million at the date of the announcement. The acquisition was completed on November 6, 2014, following the receipt of the relevant authorizations.

Agreement with Banque PSA Finance

We, through our subsidiary Santander Consumer Finance, S.A., and Banque PSA Finance, the vehicle financing unit of the PSA Peugeot Citroën Group, entered into an agreement in July 2014 for the joint operation of a vehicle financing business in twelve European countries. Pursuant to the terms of the agreement, we will finance this business under certain circumstances and conditions from the date on which the transaction is completed. In addition, in certain countries, we will purchase the current lending portfolio of Banque PSA Finance. We also entered into a cooperation agreement relating to the insurance business in all these countries.

In January 2015, the relevant regulatory authorizations were obtained for the commencement of activities in France and the United Kingdom. As a result, we acquired in February 2015 50% of Société Financière de Banque - SOFIB and PSA Finance UK Limited for €462 million and €148 million, respectively.

In addition, under the framework agreement, PSA Insurance Europe Limited and PSA Life Insurance Europe Limited (both insurance companies with registered office in Malta) were incorporated on May 1, 2015 in which we contributed 50% of the share capital, amounting to €23 million. On August 3, 2015 we acquired a full ownership interest in PSA Gestão - Comércio E Aluguer de Veiculos, S.A. (a company with registered office in Portugal) and the loan portfolio of the Portuguese branch of Banque PSA Finance for €10 million and €25 million, respectively. On October 1, 2015 PSA Financial Services Spain, E.F.C., S.A. (a company with registered office in Spain) was incorporated, in which we contributed €181 million (50% of the share capital).

Agreement to acquire Carfinco

On September 16, 2014, we announced that we had reached an agreement to acquire the listed Canadian company Carfinco Financial Group Inc. (“Carfinco”). The board of directors of Carfinco approved the transaction and recommended to its shareholders that they vote in favor of it at the general meeting called for such purpose, and the transaction was completed on March 6, 2015 for an amount of €209 million generating goodwill of €162 million.

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Metrovacesa, S.A.

On December 19, 2012, the creditor entities that participated in a debt restructuring agreement for the Sanahuja Group under which they received shares of Metrovacesa, S.A. as payment for that group’s debt, announced that they reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and they voted in favor of this at the general meeting held for this purpose on January 29, 2013. Following the approval of the delisting and the public takeover offer at the Metrovacesa, S.A. general meeting, the entities made a delisting public takeover offer of €2.28 per share to the Metrovacesa, S.A. shareholders that had not entered into the agreement. We participated in the delisting public takeover offer by acquiring an additional 1.953% of Metrovacesa, S.A. for €44 million.

Following this transaction, at December 31, 2013, we held an ownership interest of 36.82% in the share capital of Metrovacesa, S.A.

On December 23, 2014, we acquired 19.07% of Metrovacesa, S.A. from Bankia, S.A. for €98.9 million, as a result of which our stake increased to 55.89%, thus obtaining control over this company. After this transaction, Metrovacesa, S.A. is fully consolidated with the Group (until then it was accounted for by the equity method).

Lastly, on September 15, 2015, we acquired 13.8% of Metrovacesa, S.A. from Banco Sabadell, S.A. for €253 million, raising our ownership interest to 72.51%.

For further information see note 3.b. xv. Metrovacesa to our consolidated financial statements.

Acquisition of Banco Internacional do Funchal (Banif)

On December 21, 2015, we announced that, with the aim of providing continuity to Banco Internacional do Funchal (Banif) and safeguarding the interest of its customers, the Bank of Portugal, the resolution authority, had decided to award Banco Banif’s business to Banco Santander Totta, a subsidiary of Banco Santander.

The transaction was carried out via the transfer of a large part (the commercial banking business) of Banif’s assets and liabilities to Santander Totta. Banco Santander Totta paid €150 million for Banco Banif’s assets and liabilities. Meanwhile, other assets and liabilities remained in Banco Banif, which is responsible for any possible litigation resulting from its past activity, for their orderly liquidation or sale.

The acquisition of Banco Banif’s businesses positioned Banco Santander Totta as Portugal’s second privately-held bank, after BCP-Milenium, with a 14.5% market share in loans and deposits. Banco Banif contributes 2.5 points in market share and has a network of 150 branches and 400,000 customers.

This transaction has no material impact on our capital.

Custody business

On June 19, 2014, we announced that we had reached a definitive agreement with FINESP Holdings II B.V., a subsidiary of Warburg Pincus, to sell a 50% stake in Santander’s current custody business in Spain, Mexico and Brazil, retaining the remaining 50%. The transaction values the business at €975 million at the date of the announcement. At December 31, 2015, the sale remained subject to the obtainment of the relevant regulatory authorizations.

On March 16, 2016, the parties agreed to leave aside the original investment structure and continue to work in good faith until June 30, 2016 on an alternative investment structure that would allow the sale by Santander of the 50% stake referred to above.

Merger of Santander Asset Management and Pioneer Investments

On April 23, 2015, we announced that we had reached a preliminary and exclusive agreement with our partners Warburg Pincus and General Atlantic, subject to the signing of final terms, to merge Santander Asset Management and Pioneer Investments to create a leading global asset manager in Europe and Latin America. The combined company, with approximately €353 billion in assets under management at the close of 2014, will be called Pioneer Investments.

The agreement contemplates the creation of a new company into which the local asset managers of Santander Asset Management and Pioneer Investments will be incorporated. Santander will have a direct 33.3% stake in the new company, UniCredit will have a 33.3% stake, and private equity fund managers Warburg Pincus and General Atlantic will share a 33.3% stake. Pioneer Investments’ operations in the United States will not be included in the new company but will be owned by UniCredit (50%) and Warburg Pincus and General Atlantic (50%).

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The transaction values Santander Asset Management at €2.6 billion and Pioneer Investments at €2.75 billion. Warburg Pincus and General Atlantic will make an additional equity investment into the company as part of the transaction. This transaction will not have any material impact on our capital.

On November 11, 2015, the final framework agreement was signed by UniCredit, Santander, Warburg Pincus and General Atlantic for the integration of these businesses in accordance with the aforementioned structure. The transaction is scheduled to be completed in 2016 once the preconditions established in the framework agreement have been met and the relevant regulatory authorizations have been obtained.

Capital Increases

As of December 31, 2013, our capital had increased by 1,012,240,738 shares, or 9.81% of our total capital as of December 31, 2012, to 11,333,420,488 shares as a result of the following transactions:

• Scrip Dividend: On January 30, 2013, April 30, 2013, July 31, 2013 and October 31, 2013, we issued 217,503,395 shares, 270,917,436 shares, 282,509,392 shares and 241,310,515 shares, giving rise to capital increases of €108,751,697.50, €135,458,718, €141,254,696 and €120,655,257.50, respectively.

As of December 31, 2014, our capital had increased by 1,250,994,171 shares, or 11.04% of our total capital as of December 31, 2013, to 12,584,414,659 shares as a result of the following transactions:

• Scrip Dividend: On January 30, 2014, April 29, 2014, July 30, 2014 and November 5, 2014, we issued 227,646,659 shares, 217,013,477 shares, 210,010,506 shares and 225,386,463 shares (2.01%, 1.88%, 1.78%, and 1.82% of the share capital, respectively), giving rise to capital increases of €113,823,329.50, €108,506,738.50, €105,005,253 and €112,693,231.50, respectively.

• Acquisition of non-controlling interests in Banco Santander (Brasil) S.A.: On November 4, 2014 we issued 370,937,066 shares (3.27% of the share capital) giving rise to a capital increase of €185,468,533.

As of December 31, 2015, our capital had increased by 1,850,077,920 shares, or 14.70% of our total capital as of December 31, 2014, to 14,434,492,579 shares as a result of the following transactions:

• Capital increase: On January 8, 2015 an extraordinary meeting of the board of directors took place to approve a capital increase with the exclusion of pre-emption rights for an amount of up to €7,500 million. The transaction was implemented through an accelerated book-building. The objective of this transaction was to accelerate our plans to grow organically allowing us to increase both customer credit and market share in our core geographies, and to take advantage of our business model. Our capital was increased for a nominal amount of €606,796,117 through the issuance of 1,213,592,234 ordinary shares of Banco Santander (9.64% of the share capital before the capital increase) with a nominal value of 0.50 each. The price for the new shares was fixed at €6.18 per share. Consequently, the total amount of the capital increase was of €7,500,000,006.12 (€606,796,117 nominal amount and €6,893,203,889.12 share premium). The new shares were admitted to trade in the Spanish markets on January 12, 2015.

• Scrip Dividend: On January 29, 2015, April 29, 2015 and November 4, 2015, we issued 262,578,993 shares, 256,046,919 shares and 117,859,774 shares (1.90%, 1.82% and 0.82% of the share capital, respectively), giving rise to capital increases of €131,289,496.50, €128,023,459.50 and €58,929,887, respectively.

B. Business overview

At December 31, 2015, we had a market capitalization of €65.8 billion, stockholders’ equity of €88.0 billion and total assets of €1,340.3 billion. We had €1,050.0 billion in customer funds under management³ at that date. As of December 31, 2015, we had 58,049 employees and 5,548 branch offices in Continental Europe, 25,866 employees and 858 branches in the United Kingdom, 89,819 employees and 5,841 branches in Latin America, 18,123 employees and 783 branches in the United States and 2,006 employees in Corporate Activities (for a full breakdown of employees by country, see “Item 6. Directors, Senior Management and Employees—D. Employees” herein).

We are a financial group operating principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products.

³  Including customer deposits, marketable debt securities, subordinated liabilities and other customer funds under management.

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In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay.

Grupo Santander maintains the general criteria used in our 2014 Form 20-F, with the exceptions explained below, all of which are reflected in the recast financial information included in our Report on Form 6-K filed with the SEC on November 5, 2015.

In the third quarter 2015, we carried out a change in our reported segments resulting from the application of new financial criteria to reflect our current reporting structure.

This change in our reported segments aimed to (i) increase transparency in the Corporate Center segment; (ii) facilitate the analysis of all business units; and (iii) highlight the activity carried out by the Corporate Center segment. The consolidated figures for the Group are unaffected.

The main changes were the following:

1. Change of criteria: the change in segments mainly affected the income statement line items of net interest income, gains on financial transactions and operating expenses, due to decrease in the Corporate Center segment and its allocation to the business units. The main changes were as follows:

Previous criteria	New criteria
The Spain business unit was treated as a retail network, thus individualized internal transfer rates (ITR)* by operation were applied to calculate the financial margin, and the balance sheet was matched in terms of interest rate risk. The counterparty of these results was the Corporate Center segment.	The Spain business unit is treated like the other units of the Group. All results from financial management of the balance sheet are recorded in Spain, including the results from interest rate risk management.
The cost of issuances eligible as additional Tier 1 capital (AT1) made by Brazil and Mexico to replace common equity tier 1 (CET1) was recorded in the Corporate Center segment, as the issuances were made for capital optimization in these units.	Each country recognizes the cost related to its AT1 issuances.
The Corporate Center segment costs were charged to the countries/units; this criterion has not changed in recent years.	The scope of costs allocated to the units from the Corporate Center segment is expanded.

* ITR is a mechanism designed to help manage interest rate and liquidity risks, by isolating them from the business areas and centralizing them into the Financial Management Area in the Corporate Center. The main function of a transfer rate system is to set the price of the fund exchanges between business areas and the Corporate Center. This price represents the true opportunity cost of the funds (raised or invested) and has to take into account the costs of all associated interest rate and liquidity risks. Whether it is a fund investment or a fund raising transaction, the different business areas obtain a spread over or under the current transfer rate, and that spread is used to analyze the results of these business areas.

2. Creation of a new business segment Real Estate Operations in Spain, which combines the former “Spain’s Run-Off Real Estate” business segment and other real estate assets, such as our subsidiary Metrovacesa, the assets from our old real estate fund (Santander Banif Inmobiliario) and others, previously included in the Corporate Center segment.

3. The United States geographic segment is modified such that it continues to include the businesses of Santander Holdings USA (“SHUSA”), Santander Bank and Santander Consumer USA Holding Inc. (“SCUSA”), and the commercial banking activity of Banco Santander Puerto Rico and in addition includes Banco Santander International, Santander Investment Securities Inc. and the Bank’s New York branch, units that were previously included in Latin America.

4. The business of Private Banking, Asset Management and Insurance, which previously appeared as an independent global business, is now integrated into Retail Banking.

Other changes: Annual change in the scope of the customer global relationship model between commercial banking and global banking and markets. This change does not have any effect on the geographical segments.

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The financial statements of each business area have been drawn up by aggregating the Group’s basic operating units. The information relates to both the accounting data of the companies in each area as well as that provided by the management information systems. In all cases, the same general principles as those used in the Group are applied.

In accordance with the criteria established by IFRS-IASB, the structure of our operating business areas has been segmented into two levels:

First (or geographic) level. The activity of our operating units is segmented by geographical areas. This coincides with our first level of management and reflects our positioning in the world’s main currency areas.

The reported segments are:

• Continental Europe. This covers all retail banking business and corporate banking in this region. This segment includes the following units: Spain, Portugal, Poland, Santander Consumer Finance (which includes the consumer business in Europe, including that of Spain, Portugal and Poland) and Real Estate Operations in Spain.

• United Kingdom. This includes retail and corporate banking conducted by the various units and branches of the Group in the country.

• Latin America. This embraces all the Group’s financial activities conducted via its subsidiary banks and subsidiaries. It also includes the specialized units of Santander Private Banking, as an independent and globally managed unit.

• United States. This includes the holding entity (SHUSA), Santander Bank, National Association, Banco Santander Puerto Rico, Santander Consumer USA Inc., Banco Santander International (BSI), Santander Investment Securities Inc. and the Santander branch in New York.

Second (or business) level. This segments the activity of our operating units by type of business. The reported segments are:

• Retail Banking. This area covers all customer banking businesses (except those of Corporate Banking, managed through the Global Customer Relationship Model). Also included in this business area are the results of the hedging positions taken in each country within the scope of the relevant ALCO portfolio.

• Santander Global Corporate Banking. This business reflects the revenues from global corporate banking, investment banking and markets worldwide including all treasuries managed globally, both trading and distribution to customers (after the appropriate distribution with Retail Banking customers), as well as equities business.

• Real Estate Operations in Spain. This business includes loans to customers in Spain whose activity is mainly real estate development, equity stakes in real estate companies and foreclosed assets.

In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Center area. This area incorporates the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position, as well as management of liquidity and of stockholders’ equity through issuances. As the Group’s holding entity, the Corporate Center area manages all capital and reserves and allocations of capital and liquidity. It also incorporates the goodwill’s impairment but not the costs related to the Group’s central services except for corporate and institutional expenses related to the Group’s functioning. Finally, we also include in this area significant Group one-offs.

For purposes of our financial statements and this report on Form 20-F, we have calculated the results of operations of the various units of the Group listed below using these criteria. As a result, the data set forth herein may not coincide with the data published independently by each unit individually.

First level (or geographic):

Continental Europe

Continental Europe includes all activities carried out in this region: Retail Banking and Santander Global Corporate Banking. During 2015, there were four main units within this area: Spain, Portugal, Poland and Santander Consumer Finance. Additionally, this area includes the Real Estate Operations in Spain unit.

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Continental Europe is the largest business area of Grupo Santander by assets. At the end of 2015, it accounted for 38% of total managed customer funds, 36% of total loans to customers and 28% of profit attributed to the Parent bank’s total operating areas.

The area had 5,548 branches and 58,049 employees (direct and assigned) of which 3,196 were temporary employees, at the end of 2015.

The eurozone growth as a whole accelerated, but varied from country to country. Spain was one of the countries that expanded the most. Inflation was around 0% in the zone, resulting in the European Central Bank continuing its expansive monetary policy: interest rates at historic lows and quantitative easing.

In 2015, this segment obtained profit attributable to the Parent of €2,218 million, an increase of €571 million or 35% as compared to 2014, mainly due to improved interest income/(charges) (which increased by €489 million) and to the decrease of €892 million in impairment losses on financial assets. Return on equity (“ROE”) stood at 7.1%.

Spain

We have a solid retail presence in Spain (3,467 branches) which is reinforced with global businesses in key products and segments (corporate banking, private banking, asset management, insurance and cards). We had a total of 24,216 employees (direct and assigned), all of which were hired on a full time basis.

In order to consolidate the Group’s leadership in Spain and increase profitability and efficiency, Santander merged its two large retail networks (Santander and Banesto) and its private bank (Banif) in 2013. See “—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

The integration was completed in July 2014, ahead of schedule. All private banking clients were incorporated to Banif’s specialized customer attention model. We took advantage of the integration to optimize segmentation and specialization of branches, with a particular emphasis on private banking, Select and company banking, and increasing coverage in specialized portfolios to almost 100%.

In 2015 Spain grew by around 3.2% with a well-diversified base that made it possible to bring the unemployment rate down to around 21% by the end of the year. In addition, progress was made in correcting the imbalance in the public accounts while at the same time maintaining the foreign trade surplus. Energy prices kept inflation rates negative for a large part of the year, although the underlying rate remained positive.

Against this background, activity in Spain is well placed to accelerate its growth and build long-term relationships with its customers, in addition to boosting its business with SMEs and businesses, and maintaining its lead in big companies.

In 2015, profit attributable to the Parent bank in Spain was €977 million, a €150 million or 18% increase as compared to 2014, while the ROE was 8.1%.

Total income decreased by €556 million or 8% in 2015 in an environment of interest rates at historic lows and strong competition in loans (interest income/(charges) fell 5% compared to 2014) and a regulatory environment that hits net fees and commissions income (-6% compared to 2014). Gains/losses on financial assets and liabilities decreased by €250 million or 24% due to lower results in financial activity. While Other operating income/(expenses) decreased by €53 million mainly due to the charges to the Deposit Guarantee Fund and Resolution fund.

There was a €63 million or 2% reduction in operating expenses as a result of the synergies achieved through the optimization plans introduced. Loan losses provisions were €754 million or 43% lower than 2014 with the continuing process of normalization in a more favorable economic cycle.

In 2015, Spain’s loans and advances to costumers decreased by 1%, customer deposits decreased by 2% and other customer funds under management increased by 4%.

The non-performing loans (“NPL”) ratio was 6.53%, an 86 basis point decrease as compared to 2014. The coverage ratio increased from 45% in 2104 to 48% in 2015.

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Portugal

Our main Portuguese retail and investment banking operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”).

On December, 21, 2015, the Bank of Portugal selected Santander Totta to acquire most of the assets and liabilities of Banco Internacional do Funchal (Banif) for €150 million. With this transaction, which evidences the commitment to the economic development of Portugal, Santander became the second private bank in the country with a market share in loans and deposits of over 14%.

At the end of 2015, Portugal had 752 branches and 6,568 employees (direct and assigned), of which 62 employees were temporary.

The Portuguese economy continued to recover in 2015. The growth of GDP accelerated to a rate of 1.5% compared with 0.9% in 2014. The recovery benefited from the ECB’s expansive monetary policy and the positive effect it had on spreads and the euro exchange rate. The country’s economic fundamentals continued to improve, the rate of unemployment fell for the last three years and the current account balance remained positive.

In 2015, the strategy was very focused on managing interest rates for loans and deposits, gaining market share particularly in companies, controlling non-performing loans and improvement the efficiency

In 2015, profit attributable to the Parent bank was €300 million, a €116 million or 63% increase from 2014. There was a growth of €60 million or 6% in total income, with increase of €9 million in interest income/(charges) due to the improvement in the cost of funding, and in Gains/losses on financial assets and liabilities with an increase of €77 million mainly due to sales of government debt securities.

Operating expenses fell €3 million or 1% due to the optimization of the commercial network in line with the business environment.

Loan losses provisions were down by €52 million or 42% due to the decrease in net additions to delinquent balances.

In 2015, loans and advances to customers and customer deposits increased by 22% and 21% respectively, due to the acquisition of Banif. Excluding Banif, lending’s declining trend slowed in 2015 (-1% compared to -5% in 2014) and growth in loans to companies rose (+5%) compared to a fall in the market. Funds increased 5%, under the strategy of boosting demand deposits (+37%) and mutual funds (+18%), while time deposits fell 7%. The result was a further improvement in the cost of deposits.

2015 ended with an NPL ratio of 7.46%, as compared to 8.89% at the end of 2014. The coverage ratio stood at 99% compared to 52% in December 2014. The ROE stood at 12.4%.

Poland

At the end of 2015, Poland had 723 branches and 11,474 employees (direct and assigned), of which 1,269 employees were temporary.

The Polish economy grew strongly in 2015 (3.6%) with inflation at -1% well below the target of 2.5% set by the National Bank of Poland, which lowered the reference rates to 1.5% in March 2015. Noteworthy as the most positive factor was the significant improvement in the labor market, with steady creation of jobs and a substantial fall in unemployment to the lowest rate since 2008.

In 2015, profit attributable to the Parent bank was €300 million, €55 million or 15% lower than in 2014. Total income decreased by €99 million or 7% for the following reasons: (i) Interest income/ (charges) decreased by €52 million impacted by the fall in interest rates which particularly affected the consumer finance rates due to the ceiling set by the Lombard rate, (ii) Fees and commissions decreased by €13 million due to increased regulation mainly affecting the card business and (iii) Other operating income/(expenses) decreased by €80 million due to the one-time charge to the Deposit Guarantee Fund as a result of the failure of SK Wołomin Bank.

Furthermore, operating expenses increased by €9 million or 2% as compared to 2014 while Loan losses provisions were down by €18 million or 10% despite the increase in lending.

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Loans and advances to customers and customer deposits increased by 12% and 7% respectively as compared to 2014, however the other customer funds under management decrease 9% compared with 2014. The NPL ratio decreased 112 basis points to 6.30% and the coverage ratio increased 4 percentage points to 64%. The ROE stood at 12.5%.

Santander Consumer Finance

Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance (SCF) and its group of companies. Most of the activity of SCF relates to auto financing, personal loans, credit cards, insurance and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway, Poland, Finland and Sweden. SCF also conducts business in the UK, France, Portugal, Austria and the Netherlands, among others.

The main European markets where business is conducted grew at between 1.7% and 3.5% in 2015.

In 2015 the management focuses were: (i) the integration of the GE Nordics businesses, (ii) the implementation of the agreements with PSA, and (iii) promoting new lending and cross-selling tailored to the situation in each market, supported by brand agreements.

The following agreements were entered into in 2014 and strengthen SCF’s position in its markets: (i) the agreement with Banque PSA Finance (PSA Peugeot Citroën Group), (ii) the acquisition in Spain of 51% of Financiera El Corte Inglés, and (iii) the acquisition of GE Nordics (GE Money’s business in Norway, Sweden and Denmark). See “—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

At the end of 2015, this unit had 588 branches and 14,533 employees (direct and assigned), of which 1,189 employees were temporary.

The Santander Consumer Finance units in Continental Europe operated in an environment of incipient recovery of both consumer spending and vehicle registrations (+9% year on year in the countries in which they operate). In 2015, SCF continued to gain market share, supported by a business model that has been strengthened during the crisis thanks to a high level of geographical diversification with critical mass in key projects, high levels of efficiency, and a shared risk control and recovery system that makes it possible to maintain a high level of credit quality.

In 2015, this unit generated €938 million in Profit attributable to the Parent bank, a €143 million or 18% increase compared with 2014. This growth benefited from the impact of the previously mentioned agreements, with Total income growing faster than operating expenses and Impairment losses on financial assets. Total income rose €742 million or 23% (interest income/charges increased €728 million or 31%), while operating expenses grew €306 million or 21%. Loan losses provisions declined €7 million or 1%, due to improved credit quality. Minority interests increased by €99 million resulting from the PSA agreements.

Loans and advances to customers increased by 22% and customer deposits increased by 6%. The NPL ratio decreased 140 basis points to 3.42%, while the coverage increased to 109% from 100% in 2014. The ROE stood at 12.0%.

Real Estate Operations in Spain

The segment, which has a specialized management model, combines (i) the run-off real estate activity in Spain, which includes loans to customers mainly for real estate promotion, where our strategy focuses on a significant reduction of our exposure; (ii) quality real estate operating assets (mainly from our old real estate fund, Santander Banif Inmobiliario); (iii) our subsidiary Metrovacesa; and (iv) certain other assets such as our stake in Spanish Bank Restructuring Asset Management Company, or Sareb (see note 8.b.ii to our consolidated financial statements). As of the end of 2014, the stake in Metrovacesa was consolidated by global integration. See “—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Metrovacesa, S.A.”

The Group’s strategy in recent years has been directed at reducing these assets, mainly loans and foreclosed assets. Net loans totaled €2,794 million, which was 33% less than in 2014 and accounted for 0.4% of the Group’s loans and less than 2% of those of Santander Spain.

In 2015, this segment had €420 million of losses attributable to the Parent bank, a €232 million decrease in losses as compared to 2014, mainly due to the lower need for write-downs.

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United Kingdom

As of December 31, 2015, the United Kingdom accounted for 31% of the total managed customer funds of the Group’s operating areas. Furthermore, it accounted for 36% of total loans to customers and 24% of profit attributed to the Parent bank’s total operating areas.

At the end of 2015, we had 858 branches and a total of 25,866 employees (direct and assigned), of which 661 employees were temporary, in the United Kingdom.

The UK economy continued to grow at 2.2%, registering another year of steady growth. The main driver was domestic demand (particularly private consumption, robust labor market, improved consumer confidence and favorable financial conditions) and a recovery in investment. The unemployment rate fell in the year to 5.2%, in part due to a large increase in self-employment. This pushed the number of people in employment to a record high. Inflation was around 0%, mainly due to lower oil and commodity prices and the consolidation of sterling’s appreciation registered since mid-2013. Based on this, the Bank of England kept interest rates unchanged in 2015.

There have been significant changes recently, in terms of regulation, tax and public policy as well as a significant advance in the use of technology in banking, especially mobile. Additionally the impact of the new entrants and existing competitors who have renewed focus on the UK market opportunities. The strategic direction has been fine-tuned, to align with the economic, regulatory and market environment changes. Based on the new scenario we have focused on the customer loyalty, on increasing the flows in retail and corporate segments and ongoing investment in business growth and in digital channels.

In 2015, Santander UK contributed €1,971 million of profit attributable to the Parent bank, a €415 million or 27% (14% in local currency) increase from 2014. The main developments were: (i) a €708 million or 17% (5% in local currency) increase in interest income/(charges) mainly due to higher volumes, (ii) a €302 million or 10% (-1% in local currency) increase in operating expenses due to investment in business growth, higher regulatory costs and the continued enhancements to our digital channels and (iii) a €225 million or 68% (71% local currency) decrease in impairment losses on financial assets with improved credit quality across the loan portfolios, conservative loan-to-value criteria, and supported by a favorable economic environment.

As of December 31, 2015, loans and advances to customers increased by 13% (6% excluding the exchange rate impact), and customer deposits increased 15% (8% excluding the exchange rate impact). Other customer funds under management were flat as compared to 2014. The NPL ratio decreased 27 basis points to 1.52% and the coverage ratio decreased to 38% from 42% in 2014. The ROE was 11.5%

Latin America

At December 31, 2015, we had 5,841 branches and 89,819 employees (direct and assigned) in Latin America, of which 1,794 were temporary employees. At that date, Latin America accounted for 22% of the total managed customer funds, 17% of total loans to customers and 40% of profit attributed to the Parent bank’s total operating areas.

In a complex international environment, the Latin American economy was affected in 2015 by various external factors such as the outlook for US interest rate rises, the price of commodities and the slowing of the Chinese economy.

Our Latin American banking business is principally conducted by the following banking subsidiaries:

	Percentage held at December 31, 2015			Percentage held at December 31, 2015
Banco Santander (Brasil), S.A.		89.25	Banco Santander, S.A. (Uruguay)		100.00
Banco Santander Chile		67.12	Banco Santander Perú, S.A.		100.00
Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		75.07	Banco Santander Río, S.A. (Argentina)		99.30
Banco Santander de Negocios Colombia S.A.		99.99

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We engage in a full range of retail banking activities in Latin America, although the range of our activities varies from country to country. We seek to take advantage of whatever particular business opportunities local conditions present.

Our significant position in Latin America is attributable to our financial strength, high degree of diversification (by countries, businesses, products, etc.), and the breadth and depth of our franchise. Grupo Santander has the region’s largest international franchise.

In Latin America the regional GDP shrank 0.4% in 2015 after the growth of 1.2% in 2014, in a complex international environment faced with the prospect of a rise in interest rates in the United States, the downturn of international trade and the lower growth in China. There was very different performance country by country, with some in recession and others showing a gradual recovery. There was a slight upturn in inflation, mainly as a result of the effects of the depreciation of the Latin American currencies.

The Group continued to focus as a priority on strengthening customer relations by improving their experience and increasing their satisfaction. For this purpose, 2015 saw the launch in the principal geographical areas of the “1|2|3 World” range of products that are designed to attract and engage private individual customers, and the Advance program, the aim of which is to strengthen the Bank’s positioning in business customers.

Profit attributable to the Parent bank from Latin America in 2015 was €3,193 million, a €291 million or 10% increased as compared to 2014 (excluding the exchange rate impact 17%). Total income increased €198 million or 1% (excluding the exchange rate impact 10%) driven by the growth of volumes and transactionality, which impacted both the interest income and the fees and commissions. Operating expenses increased €56 million or 1%, however excluding the exchange rate impact they grew 10% as a result of salary increase agreements in an environment of high inflation in countries such as Brazil, Argentina and Uruguay, dollar-indexed costs, and investments to develop the commercial and digital networks. The growth was moderate as compared to inflation rates. The change in lending mix towards products with a lower risk premium continued in 2015 and Impairment losses decreased 1% as compared to 2014.

As of December 31, 2015, loans and advances to customers decreased by 5%, however excluding the exchange rate impact increased 14%. Customer deposits decreased 7% as compared to 2014, nevertheless excluding the exchange rate impact increased 12%. The NPL ratio stood at 4.96% and the coverage ratio at 79% at December 31, 2015.

Detailed below are the performance highlights of the main Latin American countries in which we operate:

Brazil. Santander Brazil is the country’s third largest private sector bank by assets and the largest foreign bank in the country. The institution operates in the main regions, with 3,443 branches and points of banking attention, 49,520 employees (direct and assigned), all of which were hired on a full time basis.

During the first quarter of 2015 Santander Brazil entered into an agreement to acquire Banco Bonsucesso to leverage activities in the payroll business, as well as increase the number of products offered and improve the distribution and marketing capacity.

Brazil went into recession in 2015, with contraction of consumer spending and private investment and rising unemployment. There was an upturn in inflation to over 10%. The central bank reinforced its commitment to control inflation by raising the Selic rate 250 basis points in the year, taking it to 14.25%.

In 2015, the Bank made progress in its process of transformation to simplify, modernize and improve the experience of customers, while agreements were also reached in order to increase the more transactional portion of the Bank’s income.

Profit attributable to the Parent bank from Brazil in 2015 was €1,631 million, a €194 million or 13% (33% excluding the exchange rate impact) increase as compared to 2014. Total income fell €739 million or 6% compared with 2014 (excluding the exchange rate impact increased 10%), mainly due to interest income/(charge).

Operating expenses decreased €491 million or 10% (excluding the exchange rate impact increased 5%). Excluding the inflation and exchange rate impact and on a like-for-like basis, they fell 6%, reflecting the efforts made in previous years to improve efficiency and productivity.

Loan losses provisions declined by €385 million or 10%, however excluding the exchange rate impact they raised by 5%.

During 2015, total loans and advances to customers decreased by 19%, in local currency increased 8%, mainly due to the forex impact on dollar portfolios and the entry of Bonsucesso. Customer deposits decrease 17% as compared to 2014, excluding the exchange rate impact increased 11%. The NPL ratio was 5.98% at December 31, 2015 compared with 5.05% at December 31, 2014. The coverage ratio stood at 84% at December 31, 2015. The ROE stood at 13.6%.

50

Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. Santander is the third largest banking group in Mexico by business volume. As of December 31, 2015, it had 1,377 branches throughout the country, 17,847 employees (direct and assigned), of which 1,634 were temporary.

Mexico gave clear signs of improvement in the second half of the year driven by the recovery of both domestic demand and exports. Although the inflation rate remained low, the central bank decided to raise the official interest rate in response to the increase by the Federal Reserve, in order to prevent possible outbreaks of volatility given the country’s strong commercial and financial connection with the United States.

2015 saw the completion of the branch expansion plan, following the opening of 200 branch offices in the last three years. The increase in installed capacity was accompanied by improvements in customer segmentation and sales platforms.

Profit attributable to the Parent bank from Mexico in 2015 was €629 million, a €22 million or 4% (3% excluding the exchange rate impact) increase as compared to 2014. The growth of €298 million or 10% in total income, was mainly driven by an increase of €313 million in interest income/(charge) due to the higher loans volume.

Operating expenses increased €87 million or 7%, due to the greater installed capacity and new commercial projects to increase attraction and penetration in the customer base.

Loan losses provisions increased by €120 million or 16% due to greater lending volume.

As of December 31, 2015, loans and advances to customers increased by 17% (23% excluding the exchange rate impact), and customer deposits decreased 1% (5% increase excluding the exchange rate impact). Other customer funds under management were flat as compared to 2014.

At December 31, 2015, the NPL ratio decreased 46 basis points to 3.38% while the coverage ratio was 91%. The ROE was 12.9%.

Chile. Banco Santander Chile is the leading bank in Chile in terms of assets and customers, with a particular focus on retail activity (individuals and SMEs). As of December 31, 2015, Banco Santander Chile had 472 branches and 12,454 employees (direct and assigned), all of which were hired on a full time basis.

The Chilean economy recovered in 2015 as a result of the expansion of investment and private consumer spending, which led the central bank to begin to normalize its monetary policy by raising the official interest rate 50 basis points to 3.50%.

In 2015 more branches and exclusive Select spaces for high-income customers were opened, as well as the new model of branch offices in the traditional network. The Group continued to pursue its strategy of increasing long-term profitability in a climate of smaller margins and greater regulation.

Profit attributable to the Parent bank from Chile in 2015 was €455 million, a €43 million or 9% (13% excluding the exchange rate impact) decrease as compared to 2014, mainly due to lower inflation-indexed UF, some regulatory impact, higher technology costs and higher tax pressure.

In 2015, customer loans increased 6% (11% in local currency) and customer deposits increase 4% (9% in local currency) as compared to 2014. Other customer funds under management increased 2% as compared to 2014.

At December 31, 2015, the NPL ratio decreased 35 basis points to 5.62% while the coverage ratio was 54% and the ROE 15.32%.

Argentina. Santander Río is the country’s leading private sector bank in terms of assets, loans and customer funds. At December 31, 2015 we had 436 branches and 7,952 employees in Argentina.

Argentina ended the year with an economy that was still weak and inflation that was among the highest in the region. In mid-December the new government announced the liberalization of capital movements and the exchange rate of the Argentine peso began to float freely.

51

The Group’s strategy in 2015 focused on increasing its penetration through its branch office expansion plan, the transformation towards a digital bank with the focus on efficiency and customer experience, and the engagement of the customer segments of high-income private individuals and SMEs.

Profit attributable to the Parent bank was €378 million, a 29% (22% in local currency) increase compared with 2014. The commercial strategy helped to push up total income by 34%, mainly due to the increase of interest income/ (charge) by 35% and fees and commissions by 46%. Operating expenses rose 51% (43% in local currency) because of the opening of new branches, the transformation and technology projects and the review of the salary increase agreement. Loan loss provisions increased 22% (16% in local currency), below the growth in lending.

During the year, lending and customer deposits increased 10% and 15%, respectively. Nevertheless, in local currency lending rose 52%, focused on lending to SMEs and companies and deposits increased 58%. Mutual funds grew 26% during 2015 (73% in local currency).

At the end of 2015, the ROE was 30.6%, while the NPL ratio decreased 46 basis points to 1.15% and the coverage ratio was 194%.

Uruguay. The Group maintained its leadership in Uruguay. We are the largest private sector bank in the country. Overall, the Group had 111 branches and 1,808 employees.

Inflation was 9.4%, well above the central bank’s target of (+3% to 7%). The key rate remained high in order to converge toward this goal. The Uruguayan peso depreciated 20% against the dollar and 10% against the euro.

The Group continued to be the country’s leading private sector bank, focusing on growing in retail banking and improving efficiency and the quality of service.

Profit attributable to the Parent bank from Uruguay in 2015 was €70 million, a €20 million or 41% (38% in local currency) increase as compared to 2014. Lending increased by 8%, with particular growth in individual customers and SMEs, and deposits rose by 19%, in each case compared with 2014.

Peru. As of December 31, 2015, Banco Santander Perú, S.A. had 1 branch and 156 employees. The unit’s activity is focused on companies and on the Group’s global customers. An auto finance company began to operate in 2013, together with a well-known international partner with considerable experience in Latin America. The company has a specialized business model, focused on service and with products that enable customers to acquire any brand of new car from any dealer in Peru.

Profit attributable to the Parent bank from Peru reached €32 million, a €10 million or 46% increase compared with 2014.

Colombia. Banco Santander de Negocios Colombia S.A. began operating in January 2014. The bank targets the corporate and business markets, with a special focus on global customers and local customers aiming to expand to gain international presence.

Colombia had a €1 million loss attributable to the Parent bank.

United States

At the end of 2015, we had 783 branches and a total of 18,123 employees (direct and assigned), none of them temporary.

The US economy grew a modest but solid pace (2.5%). Thanks to the improving economy, the unemployment rate fell on a sustained basis to 5% at the end of the year, a level regarded as full employment. Inflation, however, remained low (1.3%) and at some distance from the Federal Reserve’s target (set in terms of the underlying deflator of private consumption), which is 2%. In this context, the Fed raised its interest rates at the end of the year, accompanied by a message indicating the interest rate profile outlook would be moderate.

The U.S. segment includes the holding entity (SHUSA), Santander Bank, National Association, Banco Santander Puerto Rico, Santander Consumer USA Inc., Banco Santander International (BSI), Santander Investment Securities Inc. and the Santander branch in New York.

Santander US continues to focus on several strategic priorities directed at enhancing its position and diversification, including: the implementation of a multi-year project to comply with regulatory requirements globally, the improvement of the governance structure, the setting up of local managerial team with wide experience in the management of large financial companies, the improvement of profitability at Santander Bank, National Association, and the optimization of the vehicle finance business at SCUSA.

52

The U.S. segment accounted for 9% of the total managed customer funds, 11% of total loans to customers and 8% of profit attributed to the Parent bank’s total operating areas.

Profit attributable to the Parent decreased €184 million or €352 without exchange rates. Despite the increase in total income of €1,821 million or 30% (9% in local currency), Profit attributable to the Parent was lower due to higher operating expenses by €786 million or 35% (13% excluding the exchange rate impact) and higher impairment losses of €858 million or 38% (16% in local currency) relating to greater lending in SCUSA, and income taxes.

For 2015, ROE was 6.0% and the NPL ratio was 2.13%. The coverage ratio stood at 225% at year end.

Second or business level:

Retail Banking

Retail Banking’s profit attributable to the Parent bank in 2015 increased 14% (10% excluding the exchange rate impact), to €6,854 million. This evolution was spurred by the good performance of total income which grew 7% (+6% excluding the exchange rate impact). Operating expenses were 7% higher (+1% excluding perimeter and in real terms) and loan loss provisions were 5% lower.

In 2015, Retail Banking generated 88% of the operating areas’ total income and 85% of profit attributable to the Parent bank. This segment had 183,182 employees as of December 31, 2015.

In 2015 Santander continued to make progress with its program for transforming commercial banking focusing on the following:

• In order to gain greater knowledge of customers, progress is being made in improving the analytical capabilities. A new commercial front has been developed for the branch offices in order to improve commercial productivity and customer satisfaction.

• In order to increase customer engagement and long-term relations, progress was made in 2015 in the launching and consolidation of differential value offerings. These included most notably (i) the “1|2|3 World” strategy (with the launch of proposals in other geographical regions such as Portugal, Spain and certain Latin America countries, after the success in the United Kingdom), (ii) integral offers launched in Chile with proposals which reward transactionality and increase customer benefits, (iii) the expansion of the Select value offering for high-income customers which is now available throughout the geographical regions, and (iv) the roll-out of the program for SMEs that combines a very attractive financial offering with non-financial solutions and that is now available in eight countries.

• The Bank made further progress with the development of its distribution models focused on digital channels, resulting in substantial improvements to the different channels, most notably with new apps, developments and functionalities for mobile phones in the various geographical areas and the new model of branch office in Spain and Brazil, which offers simpler procedures, more intuitive technology and differentiated areas within the branch.

• The Bank supports the internationalization of its business customers by harnessing the synergies and international capabilities of the Group, thereby ensuring consistent and uniform customer relations throughout all the local units and enabling our customers to connect with each other and capture international trade flows with the Santander Trade Portal and the Santander Trade Club.

Santander Global Corporate Banking

This area covers our corporate banking, treasury and investment banking activities throughout the world.

Global Corporate Banking generated 12% of total income and 20% of the profit attributable to the Parent bank in 2015. This segment had 8,037 employees at December 31, 2015.

Profit attributable to the Parent bank in 2015 was €1,626 million, an increase of €1 million as compared to 2014. This performance was impacted by an increase in interest income/(charges) (€349 million or 14%) offset by an increase in operating expenses (€218 million or 12%) and in impairment losses (€130 million or 22%).

Global Corporate Banking has 3 major areas: (i) Global Transaction Banking (which includes cash management, trade finance and basic financing and custody), (ii) Financing Solutions and Advisory (which includes the units that originate and

53

distribute corporate loans or structured financing, the teams that originate bonds and securitization, the corporate finance units (mergers and acquisitions, primary equity markets, investment solutions for corporate clients via derivatives), as well as asset and capital structuring), and (iii) Global Markets (which include the sale and distribution of fixed income and equity derivatives, interest rates and inflation, the trading and hedging of exchange rates, short-term money markets for the Group’s corporate and retail clients, management of books associated with distribution, brokerage of equities, and derivatives for investment and hedging solutions).

Real Estate Operations in Spain

See above under “First level (or geographic)—Continental Europe—Real Estate Operations in Spain.”

Corporate Center

Loss attributable to the Parent increased by €943 million as the increase in Interest income / (charges) and the decrease in Provisions (net) was compensated by the decrease in gains from centralized management of risks and to a greater extent the drop in Gains/(losses) on other assets (net), as compared to 2014. At the end of 2015 this area had 2,006 employees.

The Corporate Center is responsible for, on the one hand, a series of centralized activities to manage the structural risks of the Group and of the Parent bank. It executes the necessary activities for managing interest rates, exposure to exchange-rate movements and the required levels of liquidity in the Group. On the other hand, it acts as the Group’s holding entity, managing the Group’s global capital as well as that of each of the business units.

Within corporate activities, the financial management area conducts the global functions of balance sheet management, both structural interest rate and liquidity risk management (the latter via issuances and securitizations), as well as the structural position of exchange rates:

• Interest rate risk is actively managed by taking market positions to soften the impact of interest rate changes on net interest income, and is done via bonds and derivatives of high credit quality and liquidity and low consumption of capital.

• The objective of structural liquidity management is to finance the Group’s recurring activity in optimum conditions of maturity and cost, maintaining an appropriate profile (in volumes and maturities) by diversifying the funding sources.

• Management of the exposure to exchange rate movements is also carried out on a centralized basis. This management (which is dynamic) is conducted through exchange-rate derivatives, seeking to optimize at all times the financial cost of hedging.

Hedging of net investments in the capital of businesses abroad aims to neutralize the impact on capital of converting into euros the balances of our material subsidiaries that are consolidated and whose currency is not the euro.

The Group’s policy seeks to mitigate the impact, which, in situations of high volatility in the markets, sudden changes in interest rates would have on these exposures of a permanent nature. At the end 2015, we had €20,349 million hedged relating to our investments in Brazil, the U.K., Mexico, Chile, the U.S., Poland and Norway and the instruments used were spot and foreign exchange forwards.

Exposures of a temporary nature—those regarding results that the Group’s units will contribute in the next 12 months in non-euro currencies—are also managed on a centralized basis in order to limit their volatility in euros.

Meanwhile, and separately from the financial management described here, the Corporate Center manages all capital and reserves and allocations of capital to each of the units, as well as providing the liquidity that some of the business units might need. The price at which these transactions are carried out is the market rate (Euribor or swap) plus a risk premium associated with the hold of the funds during the life of the transaction, which in terms of liquidity, the Group supports.

Lastly, and marginally, the equity stakes of a financial nature that the Group takes within its policy of optimizing investments are reflected in the Corporate Center.

Total Revenues by Activity and Geographic Location

For a breakdown of our total revenues by category of activity and geographic market, see note 52 to our consolidated financial statements.

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Selected Statistical Information

The following tables show our selected statistical information.

Average Balance Sheets and Interest Rates

The following tables show, by domicile of customer, our average balances and interest rates for each of the past three years.

You should read the following tables and the tables included under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread” in conjunction with the following:

• We have included interest received on non-accruing assets in interest income only if we received such interest during the period in which it was due;

• We have included loan arrangement fees in interest income;

• We have not recalculated tax-exempt income on a tax-equivalent basis because the effect of doing so would not be significant;

• We have included income and expenses from interest-rate hedging transactions as a separate line item under interest income and expenses if these transactions qualify for hedge accounting under IFRS-IASB. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;

• We have stated average balances on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which includes such netting; and

• All average data have been calculated using month-end balances, which is not significantly different from having used daily averages.

As stated above under “Presentation of Financial and Other Information”, we have prepared our financial statements for 2015, 2014, 2013, 2012 and 2011 under IFRS-IASB.

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Average Balance Sheet - Assets and Interest Income

	Year Ended December 31,
ASSETS	2015								2014							2013
	Average Balance		Interest			Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(in millions of euros, except percentages)
Cash and due from central banks
Domestic		2,511		7			0.28	%		1,737		13		0.75	%		6,590		54		0.83	%
International		72,101		1,385			1.92	%		75,567		2,025		2.68	%		77,467		2,647		3.42	%
		74,612		1,392			1.87	%		77,304		2,038		2.64	%		84,057		2,701		3.21	%
Due from credit entities
Domestic		28,449		126			0.44	%		22,614		98		0.43	%		28,206		152		0.54	%
International		60,238		1,719			2.85	%		59,090		1,684		2.85	%		56,983		614		1.08	%
		88,687		1,845			2.08	%		81,704		1,782		2.18	%		85,189		766		0.90	%
Loans and credits
Domestic		159,897		4,134			2.59	%		164,517		5,125		3.12	%		178,227		5,755		3.23	%
International		625,763		41,311			6.60	%		541,635		37,050		6.84	%		519,037		34,450		6.64	%
		785,660		45,445			5.78	%		706,152		42,175		5.97	%		697,264		40,205		5.77	%
Debt securities
Domestic		51,467		859			1.67	%		44,797		1,582		3.53	%		55,497		2,113		3.81	%
International		130,918		6,502			4.97	%		110,741		5,665		5.12	%		94,144		4,322		4.59	%
		182,385		7,361			4.04	%		155,538		7,247		4.66	%		149,641		6,435		4.30	%
Income from hedging operations
Domestic				83								95							85
International				(350	)							198							125
				(267	)							293							210
Other interest
Domestic				658								689							677
International				764								432							453
				1,422								1,121							1,130
Total interest-earning assets
Domestic		242,324		5,867			2.42	%		233,665		7,602		3.25	%		268,520		8,836		3.29	%
International		889,020		51,331			5.77	%		787,033		47,054		5.98	%		747,631		42,611		5.70	%
		1,131,344		57,198			5.06	%		1,020,698		54,656		5.35	%		1,016,151		51,447		5.06	%
Other non-interest earning assets		214,313								181,149							198,097
Assets from discontinued operations		—								—							—
Total average assets		1,345,657		57,198						1,201,847		54,656					1,214,248		51,447

Notes: 1) Amounts previously reported in Other interest-earning assets have been reclassified to Other non interest-earning assets, consistent with their non interest-earning nature.

2) As of December 31, 2015, 2014 and 2013, Total average assets attributed to international activities accounted for 76%, 75% and 70%, respectively, of the Group’s Total average assets.

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Average Balance Sheet - Liabilities and Interest Expense

	Year Ended December 31,
LIABILITIES AND STOCKHOLDERS EQUITY	2015								2014								2013
	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
Due to credit entities
Domestic		31,931		180			0.56	%		16,006		225			1.41	%		21,654		335			1.55	%
International		134,781		2,176			1.61	%		116,499		1,980			1.70	%		107,956		1,635			1.51	%
		166,712		2,356			1.41	%		132,505		2,205			1.66	%		129,610		1,970			1.52	%
Customers deposits
Domestic		173,793		1,102			0.63	%		170,327		1,629			0.96	%		173,833		3,053			1.76	%
International		511,282		12,347			2.41	%		459,133		11,787			2.57	%		458,506		11,752			2.56	%
		685,075		13,449			1.96	%		629,460		13,416			2.13	%		632,339		14,805			2.34	%
Marketable debt securities
Domestic		62,510		1,628			2.60	%		68,571		2,242			3.27	%		83,445		2,993			3.59	%
International		140,147		5,337			3.81	%		121,194		4,602			3.80	%		105,509		3,886			3.68	%
		202,657		6,965			3.44	%		189,765		6,844			3.61	%		188,954		6,879			3.64	%
Subordinated debt
Domestic		6,840		250			3.65	%		7,114		407			5.72	%		8,547		496			5.80	%
International		8,296		684			8.24	%		7,762		677			8.72	%		8,098		764			9.43	%
		15,136		934			6.17	%		14,876		1,084			7.29	%		16,645		1,260			7.57	%
Other interest-bearing liabilities
Domestic		6,896		137			1.99	%		6,988		192			2.75	%		7,062		200			2.83	%
International		2,160		133			6.16	%		2,158		152			7.04	%		2,654		164			6.18	%
		9,056		270			2.98	%		9,146		344			3.76	%		9,716		364			3.75	%
Expenses from hedging operations
Domestic				(307	)							(388	)							(1,138	)
International				(103	)							(158	)							(290	)
				(410	)							(546	)							(1,428	)
Other interest
Domestic				761								725								762
International				61								1,037								900
				822								1,762								1,662
Total interest-bearing liabilities
Domestic		281,970		3,751			1.33	%		269,006		5,032			1.87	%		294,541		6,701			2.28	%
International		796,666		20,635			2.59	%		706,746		20,077			2.84	%		682,723		18,811			2.76	%
		1,078,636		24,386			2.26	%		975,752		25,109			2.57	%		977,264		25,512			2.61	%
Other non-interest bearing liabilities		166,518								141,291								155,410
Non-controlling interest		10,283								9,757								10,066
Stockholders’ Equity		90,220								75,047								71,508
Liabilities from discontinued operations		—								—								—
Total average Liabilities and Stockholders’ Equity		1,345,657		24,386						1,201,847		25,109						1,214,248		25,512

Notes: 1) Certain balances previously reported in Other interest-bearing liabilities and Subordinated debt have been reclassified to Other non interest-bearing liabilities, consistent with their non interest-bearing nature.

2) As of December 31, 2015, 2014 and 2013, Total average liabilities attributed to international activities accounted for 71%, 70% and 67%, respectively, of the Group’s Total average liabilities.

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Changes in Interest Income / (charges)—Volume and Rate Analysis

The following tables allocate, by domicile of customer, changes in our interest income / (charges) between changes in average volume and changes in average rate for 2015 compared to 2014 and 2014 compared to 2013. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Volume and rate analysis	IFRS-IASB 2015/2014
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest and similar income
Cash and due from central banks
Domestic		4			(10	)		(6	)
International		(89	)		(551	)		(640	)
		(85	)		(561	)		(646	)
Due from credit entities
Domestic		26			2			28
International		33			2			35
		59			4			63
Loans and credits
Domestic		(140	)		(851	)		(991	)
International		5,591			(1,330	)		4,261
		5,451			(2,181	)		3,270
Debt securities
Domestic		209			(932	)		(723	)
International		1,005			(168	)		837
		1,214			(1,100	)		114
Total interest-earning assets without hedging operations
Domestic		99			(1,791	)		(1,692	)
International		6,540			(2,047	)		4,493
		6,639			(3,838	)		2,801
Income from hedging operations
Domestic		(12	)		—			(12	)
International		(548	)		—			(548	)
		(560	)		—			(560	)
Other interests
Domestic		(31	)		—			(31	)
International		332			—			332
		301			—			301
Total interest-earning assets
Domestic		56			(1,791	)		(1,735	)
International		6,324			(2,047	)		4,277
		6,380			(3,838	)		2,542

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Volume and rate analysis	IFRS-IASB 2014/2013
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest and similar income
Cash and due from central banks
Domestic		(36	)		(5	)		(41	)
International		(63	)		(559	)		(622	)
		(99	)		(564	)		(663	)
Due from credit entities
Domestic		(27	)		(27	)		(54	)
International		24			1,046			1,070
		(3	)		1,019			1,016
Loans and credits
Domestic		(432	)		(198	)		(630	)
International		1,527			1,073			2,600
		1,095			875			1,970
Debt securities
Domestic		(386	)		(145	)		(531	)
International		814			529			1,343
		428			384			812
Total interest-earning assets without hedging operations
Domestic		(881	)		(375	)		(1,256	)
International		2,302			2,089			4,391
		1,421			1,714			3,135
Income from hedging operations
Domestic		10			—			10
International		73			—			73
		83			—			83
Other interests
Domestic		12			—			12
International		(21	)		—			(21	)
		(9	)		—			(9	)
Total interest-earning assets
Domestic		(859	)		(375	)		(1,234	)
International		2,354			2,089			4,443
		1,495			1,714			3,209

59

Volume and rate analysis	IFRS-IASB Year Ended December 31, 2015/2014
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest charges
Due to credit entities
Domestic		140			(185	)		(45	)
International		299			(103	)		196
		439			(288	)		151
Customers’ deposits
Domestic		33			(560	)		(527	)
International		1,287			(727	)		560
		1,320			(1,287	)		33
Marketable debt securities
Domestic		(186	)		(428	)		(614	)
International		722			13			735
		536			(415	)		121
Subordinated debt
Domestic		(15	)		(142	)		(157	)
International		45			(38	)		7
		30			(180	)		(150	)
Other interest-bearing liabilities
Domestic		(2	)		(53	)		(55	)
International		—			(19	)		(19	)
		(2	)		(72	)		(74	)
Total interest-bearing liabilities without hedging operations
Domestic		(30	)		(1,368	)		(1,398	)
International		2,353			(874	)		1,479
		2,323			(2,242	)		81
Expenses from hedging operations
Domestic		81			—			81
International		55			—			55
		136			—			136
Other interests
Domestic		36			—			36
International		(976	)		—			(976	)
		(940	)		—			(940	)
Total interest-bearing liabilities
Domestic		87			(1,368	)		(1,281	)
International		1,432			(874	)		558
		1,519			(2,242	)		(723	)

60

Volume and rate analysis	IFRS-IASB 2014/2013
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest expense and similar charges
Due to credit entities
Domestic		(81	)		(29	)		(110	)
International		136			209			345
		55			180			235
Customers’ deposits
Domestic		(60	)		(1,364	)		(1,424	)
International		16			19			35
		(44	)		(1,345	)		(1,389	)
Marketable debt securities
Domestic		(502	)		(249	)		(751	)
International		593			123			716
		91			(126	)		(35	)
Subordinated debt
Domestic		(82	)		(7	)		(89	)
International		(31	)		(56	)		(87	)
		(113	)		(63	)		(176	)
Other interest-bearing liabilities
Domestic		(2	)		(6	)		(8	)
International		(33	)		21			(12	)
		(35	)		15			(20	)
Total interest-bearing liabilities without hedging operations
Domestic		(727	)		(1,655	)		(2,382	)
International		681			316			997
		(46	)		(1,339	)		(1,385	)
Expenses from hedging operations
Domestic		750			—			750
International		132			—			132
		882			—			882
Other interests
Domestic		(37	)		—			(37	)
International		137			—			137
		100			—			100
Total interest-bearing liabilities
Domestic		(14	)		(1,655	)		(1,669	)
International		950			316			1,266
		936			(1,339	)		(403	)

61

Assets

Earning Assets—Yield Spread

The following table analyzes, by domicile of customer, our average earning assets, interest income and dividends on equity securities and interest income / (charges) and shows gross yields, net yields and yield spread for each of the years indicated. You should read this table and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Earning Assets—Yield Spread	IFRS-IASB
	Year Ended December 31,
	2015			2014			2013
	(in millions of euros, except percentages)
Average earning assets
Domestic		242,324			233,665			268,520
International		889,020			787,033			747,631
		1,131,344			1,020,698			1,016,151
Interest and similar income
Domestic		5,867			7,602			8,836
International		51,331			47,054			42,611
		57,198			54,656			51,447
Interest income / (charges) (1)
Domestic		2,116			2,570			2,135
International		30,696			26,977			23,800
		32,812			29,547			25,935
Gross yield (2)
Domestic		2.42	%		3.25	%		3.29	%
International		5.77	%		5.98	%		5.70	%
		5.06	%		5.35	%		5.06	%
Net yield (3)
Domestic		0.87	%		1.10	%		0.80	%
International		3.45	%		3.43	%		3.18	%
		2.90	%		2.89	%		2.55	%
Yield spread (4)
Domestic		1.09	%		1.38	%		1.02	%
International		3.18	%		3.14	%		2.94	%
		2.79	%		2.78	%		2.45	%

(1) Interest income / (charges) is the net amount of interest and similar income and interest expense and similar charges. See “Income Statement” on page 9 of this annual report.

(2) Gross yield is the quotient of interest income divided by average earning assets.

(3) Net yield is the quotient of net interest income divided by average earning assets.

(4) Yield spread is the difference between gross yield on earning assets and the average cost of interest-bearing liabilities. For a discussion of the changes in yield spread over the periods presented, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Interest Income / (Charges)” herein.

62

Return on Equity and Assets

The following table presents our selected financial ratios for the years indicated.

	Year Ended December 31,
	2015			2014			2013
ROA: Return on average total assets		0.55	%		0.58	%		0.44	%
ROE: Return on average stockholders’ equity		6.61	%		7.75	%		5.84	%
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*)		38.02	%		19.65	%		20.22	%
Average stockholders’ equity as a percentage of average total assets		6.70	%		6.24	%		5.89	%

(*) The pay-out ratio does not include in the numerator the amounts paid under the Santander Dividendo Elección program (scrip dividends) which are not dividends paid on account of the net attributable income of the period. Such amounts equivalent to dividends are €607 million, €6,595 million, and €5,920 million, for 2015, 2014 and 2013, respectively. The pay-out ratio for 2015 is an estimate that includes the part of the final dividend expected to be paid in cash in May 2016.

Interest-Earning Assets

The following table shows, by domicile of customer, the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Interest-earning assets

	IFRS-IASB
	Year Ended December 31,
	2015			2014			2013
Cash and due from Central Banks
Domestic		0.24	%		0.16	%		0.65	%
International		6.37	%		7.40	%		7.62	%
		6.61	%		7.56	%		8.27	%
Due from credit entities
Domestic		2.51	%		2.22	%		2.78	%
International		5.32	%		5.79	%		5.61	%
		7.83	%		8.01	%		8.39	%
Loans and credits
Domestic		14.13	%		16.12	%		17.54	%
International		55.31	%		53.07	%		51.08	%
		69.44	%		69.19	%		68.62	%
Debt securities
Domestic		4.55	%		4.39	%		5.46	%
International		11.57	%		10.85	%		9.26	%
		16.12	%		15.24	%		14.72	%
Total interest-earning assets
Domestic		21.43	%		22.89	%		26.43	%
International		78.57	%		77.11	%		73.57	%
		100.00	%		100.00	%		100.00	%

63

The following tables show our short-term funds deposited with other banks at each of the dates indicated.

	IFRS-IASB Year Ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros)
Reciprocal accounts		2,947			1,571			1,858			1,863			2,658
Time deposits		7,142			8,177			16,284			15,669			11,419
Reverse repurchase agreements		37,744			39,807			29,702			25,486			10,647
Other accounts		31,119			32,158			27,120			30,882			27,002
		78,952			81,713			74,964			73,900			51,726
Of which impairment allowances		(19	)		(79	)		(37	)		(30	)		(36	)

Investment Securities

At December 31, 2015, the book value of our investment securities was €203.8 billion (representing 15% of our total assets). These investment securities had a yield of 3.81% in 2015 compared with a yield of 4.51% in 2014 and a yield of 4.23% in 2013. Approximately €45.8 billion, or 22.5%, of our investment securities at December 31, 2015 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see note 2 to our consolidated financial statements.

The following tables show the book values of our investment securities by type and domicile of counterparty at each of the dates indicated.

	IFRS-IASB Year Ended December 31,
	2015			2014			2013
	(in millions of euros)
Debt securities
Domestic-
Spanish Government		44,583			37,324			31,160
Other domestic issuer:
Public authorities		1,204			1,858			1,720
Other domestic issuer		7,387			8,542			11,752
Total domestic		53,174			47,724			44,632
International-
United States:
U.S. Treasury and other U.S. Government agencies		9,040			4,289			2,620
States and political subdivisions		713			1,558			1,653
Other securities		11,919			8,793			5,945
Total United States		21,672			14,640			10,218
Other:
Governments		78,593			87,190			55,387
Other securities		26,982			26,954			22,416
Total Other		105,575			114,144			77,803
Total International		127,247			128,784			88,021
Less- Allowance for credit losses		(291	)		(144	)		(207	)
Total Debt Securities		180,130			176,364			132,446
Equity securities
Domestic		3,470			4,197			3,449
International-
United States		1,340			1,106			951
Other		18,894			13,497			5,388
Total international		20,234			14,603			6,339
Total Equity Securities		23,704			18,800			9,788
Total Investment Securities		203,834			195,164			142,234

64

The following table sets out the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2015 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).

	Aggregate as of December 31, 2015
	Book value		Market value
Debt securities:	(in millions of euros)
Exceed 10% of stockholder’s equity:
Spanish Government		45,787		45,755
Brazilian Government		25,588		25,549
Mexican Government		15,296		15,296
Portuguese Government		9,975		9,975
US Government		9,753		9,753
Near 10% of stockholder’s equity:
UK Government		6,456		6,456
Polish Government		5,470		5,470

65

The following table shows the maturities of our debt securities (before impairment allowances) as of December 31, 2015.

							Year Ended December 31, 2015
					Maturing				Maturing
	Maturing Within 1 Year		Yield Within 1 Year		Between 1 and 5 Years		Yield 1 and 5 Years		Between 5 and 10 Years		Yield 5 and 10 Years		Maturing After 10 Years		Yield After 10 Years		Total
DEBT SECURITIES							(in millions of euros)
Domestic:
Spanish Government		10,989		0.43		8,142		1.61		17,947		2.26		7,505		4.61		44,583
Other domestic issuer:
Public authorities		106		3.32		233		2.95		739		2.39		126		3.21		1,204
Other domestic issuer		2,764		1.72		3,109		3.43		640		3.73		874		2.31		7,387
Total domestic		13,859				11,484				19,326				8,505				53,174
International:
United States:
U.S. Treasury and other U.S. Government agencies		1,321		0.45		2,507		0.85		383		1.93		4,829		2.78		9,040
States and political subdivisions		—		—		—		4.00		178		4.68		535		4.27		713
Other securities		472		1.56		2,857		1.39		886		2.81		7,704		2.97		11,919
Total United States		1,793				5,364				1,447				13,068				21,672
Other:
Governments		22,210		3.20		32,598		5.88		20,185		5.89		3,600		7.27		78,593
Other securities		8,634		4.29		9,922		4.37		5,815		4.05		2,611		2.82		26,982
Total Other		30,844				42,520				26,000				6,211				105,575
Total International		32,637				47,884				27,447				19,279				127,247
Total debt investment securities		46,496				59,368				46,773				27,784				180,421

66

Loan Portfolio

At December 31, 2015, our total loans and advances to customers equaled €817.4 billion (61.0% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €790.8 billion at December 31, 2015 (59.0% of our total assets). In addition to loans, we had outstanding as of December 31, 2015, 2014, 2013, 2012 and 2011 €195.6 billion, €183.0 billion, €154.3 billion, €187.7 billion and €181.6 billion, respectively, of undrawn balances available to third parties.

Loans by Geographic Area and Type of Customer

The following tables illustrate our loans and advances to customers (including securities purchased under agreement to resell), by domicile and type of customer at each of the dates indicated.

	IFRS-IASB
	Year Ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros)
Loans to borrowers in Spain: (**):
Spanish Government		13,993			17,465			13,374			16,884			12,147
Commercial, financial, agricultural and industrial		32,426			46,355			47,583			61,527			65,935
Real estate and construction (*)		20,438			24,673			27,158			29,008			36,260
Other mortgages		69,234			60,583			62,180			63,886			69,297
Installment loans to individuals		14,654			11,644			8,668			12,775			12,964
Lease financing		3,472			3,267			3,372			3,857			5,043
Other		13,639			8,384			11,517			12,077			12,912
Total		167,856			172,371			173,852			200,014			214,558
Loans to borrowers outside Spain: (**):
Non-Spanish Governments		7,772			7,053			4,402			4,983			4,394
Mortgage loans		322,816			296,236			275,739			290,825			296,330
Commercial, industrial and installment loans to individuals		276,895			253,843			209,820			217,358			225,961
Other		42,026			32,425			29,946			31,354			26,104
Total		649,509			589,557			519,907			544,520			552,789
Total loans and advances to customers, gross		817,365			761,928			693,759			744,534			767,347
Allowance for loan losses (***)		(26,517	)		(27,217	)		(24,903	)		(25,422	)		(18,806	)
Total loans and advances to customers, net of allowances		790,848			734,711			668,856			719,112			748,541

(*) As of December 31, 2015, the portfolio of loans to real estate and construction companies included €7,388 million of loans, the proceeds of which were to be used for real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, compared to €9,349 million, €12,105 million, €15,867 million and €23,442 million of such loans in 2014, 2013, 2012 and 2011, respectively.

(**) Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

(***) Refers to loan losses of “Loans and Advances to customers”. See “Item 3. Key information - A. Selected financial data”.

67

At December 31, 2015, our loans and advances to associated companies and jointly controlled entities amounted to €5,997 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 2015 was €2.2 billion (0.3% of total loans and advances, including government-related loans), and the five next largest exposures totaled €8.7 billion (1.1% of total loans, including government-related loans).

Maturity

The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer as of December 31, 2015.

	Maturity
	Less than					One to five					Over five
	one year					years					years					Total
	Balance		% of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
	(in millions of euros, except percentages)
Loans to borrowers in Spain: (*)
Spanish Government		1,859		0.93	%		3,593		1.76	%		8,541		2.06	%		13,993		1.71	%
Commercial, financial, agriculture and industrial		10,429		5.24	%		12,864		6.29	%		9,133		2.21	%		32,426		3.97	%
Real estate and construction		10,669		5.36	%		4,410		2.16	%		5,359		1.29	%		20,438		2.50	%
Other mortgages		7,390		3.72	%		2,687		1.31	%		59,157		14.29	%		69,234		8.47	%
Installment loans to individuals		6,146		3.09	%		5,276		2.58	%		3,232		0.78	%		14,654		1.79	%
Lease financing		329		0.17	%		1,940		0.95	%		1,203		0.29	%		3,472		0.42	%
Other		7,415		3.73	%		5,239		2.56	%		985		0.24	%		13,639		1.67	%
Total borrowers in Spain		44,237		22.24	%		36,009		17.61	%		87,610		21.16	%		167,856		20.54	%
Loans to borrowers outside Spain: (*)
Non-Spanish Governments		3,128		1.57	%		1,946		0.95	%		2,698		0.65	%		7,772		0.95	%
Mortgage loans		17,007		8.55	%		33,854		16.56	%		271,955		65.69	%		322,816		39.49	%
Commercial, industrial and installment loans to individuals		103,689		52.12	%		126,606		61.92	%		46,600		11.26	%		276,895		33.88	%
Other		30,887		15.53	%		6,036		2.95	%		5,103		1.23	%		42,026		5.14	%
Total loans to borrowers outside Spain		154,711		77.76	%		168,442		82.39	%		326,356		78.84	%		649,509		79.46	%
Total loans and leases, gross		198,948		100.00	%		204,451		100.00	%		413,966		100.00	%		817,365		100.00	%

(*) Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

For roll-over not due to clients’ financial difficulties, the analysis is performed under standard acceptance terms and a comprehensive review of the client.

68

Fixed and Variable Rate Loans

The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2015.

	Fixed and variable rate loans
	having a maturity of more than one year
	Domestic		International		Total
	(in millions of euros)
Fixed rate		30,159		244,073		274,232
Variable rate		93,460		250,725		344,185
Total		123,619		494,798		618,417

Cross-Border Outstandings

The following table sets forth, as of the end of the years indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans by Santander UK or our Latin American subsidiaries.

	IFRS-IASB
	2015					2014					2013
			% of					% of					% of
			total					total					total
			assets					assets					assets
	(in millions of euros, except percentages)
OECD (1) (2) Countries:
Total OECD Countries		11,067		0.83	%		11,909		0.94	%		12,518		1.12	%
Non-OECD Countries:
Total Latin American Countries (2) (3)		13,786		1.03	%		13,751		1.09	%		10,962		0.98	%
Other Non-OECD		7,969		0.59	%		10,142		0.80	%		10,698		0.96	%
Total Non-OECD		21,755		1.62	%		23,893		1.89	%		21,660		1.94	%
Total		32,822		2.45	%		35,802		2.83	%		34,178		3.06	%

(1) The Organization for Economic Cooperation and Development.

(2) Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets.

(3) With regards to these cross-border outstandings, at December 31, 2015, 2014 and 2013, we had allowances for country-risk equal to €13,0 million, €12.4 million, and €14.7 respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.

As of December 31, 2015, 2014 and 2013, we did not have any cross-border outstanding to any single borrower that exceeded 0.75% of total assets.

Exposure to sovereign counterparties by credit rating

Our exposure to sovereign counterparties (the exposure is included in the financial statement line items “Financial assets held for trading—Debt instruments”, “Other financial assets at fair value through profit or loss—Debt instruments”, “Available for sale financial assets—Debt instruments”, “Loans and receivables—Debt instruments” and “Held-to-maturity investments”) organized by credit rating and our exposure to private and sovereign debt organized by origin of the issuer is included in note 7 to the Financial Statements.

Additionally, in note 10 to our consolidated financial statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.

69

The detail at December 31, 2015, 2014 and 2013, by type of financial instrument, of the Group’s sovereign risk exposure to Europe’s peripheral countries and of the short positions held with them, taking into consideration the criteria established by the European Banking Authority (EBA) is explained in note 51.d to our consolidated financial statements.

Classified Assets

In the following pages, we describe the Bank of Spain’s requirements for classification of non-performing assets. The Group has established a credit loss recognition process that is independent of the process for balance sheet classification and derecognition of non-performing loans from the balance sheet.

The description below sets forth the minimum requirements that are followed and applied by all of our subsidiaries. Nevertheless, if the regulatory authority of the country where a particular subsidiary is located imposes stricter or more conservative requirements for classification of the non-performing balances, the more strict or conservative requirements are followed for classification purposes.

The classification described below applies to all debt instruments not measured at fair value through profit or loss, and to contingent liabilities.

Bank of Spain’s Classification Requirements

a) Standard Assets

Standard assets include loans, fixed-income securities, guarantees and certain other extensions of credit that are not classified in any other category. Under this category, assets that require special attention must be identified, including restructured loans and standard assets with clients that have other outstanding risks classified as Non-Performing Past Due.

b) Sub-standard Assets

This category includes all types of credits and off-balance sheet risks that cannot be classified as non-performing or charged-off assets but that have certain weaknesses that may result in losses for the bank higher than those described in the previous category. Credits and off-balance sheet risks with insufficient documentation must also be classified under this category.

c) Assets classified as non-performing due to counterparty arrears

The Bank of Spain requires Spanish banks to classify as non-performing the entire outstanding principal amount and accrued interest on any loan, fixed-income security, guarantee and certain other extensions of credit on which any payment of principal or interest or agreed cost is 90 days or more past due (“non-performing past-due assets”).

In relation to the aggregate risk exposure (including off-balance sheet risks) to a single obligor, if the amount of non-performing balances exceeds 20% of the total outstanding risks (excluding non-accrued interest on loans to such borrower), then banks must classify all outstanding risks to such borrower as non-performing.

Once any portion of a loan is classified as non-performing, the entire loan is placed on a non-accrual status. Accordingly, even the portion of any such a loan which may still be identified as performing will be recorded on non-accrual status.

d) Assets classified as non-performing for reasons other than counterparty arrears

The Bank of Spain requires Spanish banks to classify any loan, fixed-income security, guarantee and certain other extensions of credit as non-performing if they have a reasonable doubt that these extensions of credit will be collected (“other non-performing assets”), even if any past due payments have been outstanding for less than 90 days or the asset is otherwise performing. When a bank classifies an asset as non-performing on this basis, it must classify the entire principal amount of the asset as non-performing.

Once any such asset is classified as non-performing, it is placed on a non-accrual status.

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e) Charged-off Assets

Credit losses are generally recognized through provisions for allowances for credit losses, well before they are removed from the balance sheet. Under certain unusual circumstances (such as bankruptcy, insolvency, etc.), the loss is directly recognized through write-offs.

The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset, Spanish banks may maintain that non-performing asset, fully provisioned, on their balance sheet for the full four-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

Because the Bank of Spain does not permit partial write-offs of non-performing loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the derecognition of non-performing loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years. Loans can be charged-off earlier depending on our management’s view as to the recoverability of the loan. After that period, the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.

f) Country-Risk Outstandings

The Bank of Spain requires Spanish banks to classify as country-risk outstandings all loans, fixed-income securities and other outstandings to any countries, or residents of countries, that the Bank of Spain has identified as being subject to transfer risk or sovereign risk and the remaining risks derived from the international financial activity.

All outstandings must be assigned to the country of residence of the client except in the following cases:

• Outstandings guaranteed by residents in other countries in a better category or by the Spanish Government Export Credit Insurer (CESCE) or by residents in Spain, should be classified in the category of the guarantor.

• Fully secured loans, when the security covers sufficiently the outstanding risk and can be enforced in Spain or in any other “category 1” country, should be classified as category 1.

• Outstanding risks with foreign branches of a bank should be classified according to the residence of the headquarters of those branches.

The Bank of Spain has established six categories to classify such countries, as shown in the following table:

Country-Risk Categories	Description
1	European Union, Norway, Switzerland, Iceland, USA, Canada, Japan, Australia and New Zealand
2	Low risk countries not included in 1
3	Countries with transitory difficulties
4	Countries with serious difficulties
5	Doubtful countries
6	Bankrupt countries

The Bank of Spain allows each bank to decide how to classify the listed countries within this classification scheme, subject to the Bank of Spain’s oversight. The classification is made based on criteria such as the payment record (in particular, compliance with renegotiation agreements), the level of the outstanding debt and of the charges for debt services, the debt quotations in the international secondary markets and other indicators and factors of each country as well as all the criteria indicated by the Bank of Spain. All credit extensions and off-balance sheet risks included in country-risk categories 3 to 6, except the excluded cases described below, will be classified as follows:

• Sub-standard assets: All outstandings in categories 3 and 4 except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.

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• Non-performing assets: All outstandings in category 5 and off-balance sheet risks classified in category 6, except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.

• Charged-off assets: All other outstandings in category 6 except when they should be classified as charged-off assets due to credit risk attributable to the client.

Among others, the Bank of Spain excludes from country-risk outstandings:

• Regardless of the currency of denomination of the asset, risks with residents in a country registered in subsidiary companies in the country of residence of the holder.

• Any trade credits established by letter of credit or documentary credit with a due date of one year or less after the drawdown date.

• Any trade credits granted under specific export contracts with a due date of six months or less if the credits mature on the date of the export.

• Any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks.

• Private sector risks in countries included in the monetary zone of a currency issued by a country classified in category 1; and

• Any negotiable financial assets purchased at market prices for placement with third parties within the framework of a portfolio separately managed for that purpose, held for less than six months by the company.

Non-Accrual of Interest Requirements

We stop accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an non-performing asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. Thereafter, we recognize the passage of time (financial effect) releasing provisions for loan losses by calculating the present value of the estimated future cash flows using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. On the other hand, any collected interest for any assets classified as non-performing are accounted for on a cash basis.

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The following table shows the amount of non-accrued interest owed on non-performing assets and the amount of such interest that was received:

	IFRS-IASB
	At December 31,
	2015		2014		2013
	(in millions of euros)
Non accrued interest on the basis of contractual terms owed on non-performing assets
Domestic		472		658		606
International		1,351		1,342		1,294
Total		1,823		2,000		1,900
Non accrued interest on the basis of contractual terms received on non-performing assets
Domestic		188		202		190
International		255		256		265
Total		443		458		455

The balances of non-performing loans and contingent liabilities as of December 31, 2015, 2014 and 2013 are as follows:

	Millions of Euros
	2015		2014		2013
Non-performing loans more than ninety days past due		24,226		29,810		30,832
Other non-performing loans and contingent liabilities (*)		12,868		11,899		10,820
Total non-performing loans and contingent liabilities		37,094		41,709		41,652

(*) See above “—Bank of Spain’s Classification Requirements—d) Assets classified as non-performing for reasons other than counterparty arrears” for a detailed explanation of assets included under this category.

The roll-forward of allowances (under IFRS-IASB) is shown in note 10 to our consolidated financial statements.

Guarantees

The Bank of Spain requires certain guarantees to be classified as non-performing in the following situations:

• in cases involving past-due guaranteed loans and advances: (i) for non-financial guarantees, the amount demanded by the beneficiary and outstanding under the guarantee; and (ii) for financial guarantees, at least the amount classified as non-performing of the guaranteed risk; and

• in all other cases, the entire amount of the guaranteed debt when the debtor has declared bankruptcy or has demonstrated serious solvency problems, even if the guaranteed beneficiary has not reclaimed payment.

Allowances for Credit Losses and Country-Risk Requirements

The Bank of Spain requires that we develop internal models to manage credit risk and to calculate the allowances for both credit risk and country-risk based on historical experience. We detail below the main characteristics of our internal models.

Since 1993 we have used our internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. We have different internal rating models for risk admission and monitoring (differentiating between segments; models for corporate, sovereign, financial institutions; medium and small companies, retail, etc.).

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The ratings accorded to customers are regularly reviewed, incorporating new financial information and the experience in the development of the banking relationship with the customer. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as special watch. The rating tools are also reviewed so that Group’s accuracy can be fine-tuned.

In order to make the internal ratings of the various models comparable and to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale. The comparisons are established via the probability of default associated with each rating.

The process of credit rating and parameter estimation

Credit risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.

We cover our losses inherent in loans and advances not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses are losses incurred at the reporting date, calculated using statistical methods.

The parameters necessary for its calculation, with the corresponding adjustment are also used to calculate economic capital and to calculate BIS III regulatory capital under internal models.

Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date due to an event that had already occurred at the assessment date and considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

The incurred loss is calculated using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”.

• Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.

• Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non-performing loans:

• In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies of outside agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.

• For the rest of portfolios, estimates are based on our own internal experience.

PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The calculation of PD considers both to loans that are past-due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective non-performing assets).

• Loss given default (“LGD”) is the expected loss arising in the event of default. It depends mainly on the present value of credit enhancements, such as collateral and guarantees associated with the transaction and other future flow that are expected to be recovered. The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and loans associated with the collection process, but also the moment when these revenues and costs take place and all direct costs linked to the collecting activity.

Once estimated, the credit risk parameters are assigned to assets that are not past due and play an essential role in the risk management and decision taking processes. These parameters, with the corresponding adjustments, are used by several management tools such as (1) pre-classifications, (2) economic capital, (3) return on risk adjusted capital (“RORAC”), or (4) stress scenarios.

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Control of the process

Internal validation is a prerequisite for supervisory validation and consists of a specialized and sufficiently independent unit forming a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and drawing conclusions on its usefulness and effectiveness. Moreover, it must evaluate whether the risk management and control procedures are appropriate for the entity’s strategy and risk profile.

Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between Internal Validation and Internal Audit which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by Internal Validation and to give its opinion on its degree of effective independence.

The calculation obtained based on the output from the internal models described above reflects the best estimate of the Group as to probable credit losses and constitute an appropriate basis for determining loan loss allowances.

As of July 2008, the Bank of Spain approved the Group’s internal models for regulatory capital calculation purposes with respect to the vast majority of the Group’s credit risk net exposure. The Bank of Spain continues to review the models for the purpose of calculating allowances for loan losses.

While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below:

a. Specific allowance for impaired assets:

The allowance for debt instruments not measured at fair value through profit or loss that are classified as non-performing is generally recognized in accordance with the criteria set forth below:

i. Assets classified as non-performing due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually. The allowances percentages are determined taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. Loans are identified as non-performing and income no longer accrued when it is determined that collection of interest or principal is non-performing or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection. According to Bank of Spain’s requirements, all non-performing loans not guaranteed by effective collateral must be fully provisioned (hence all the credit loss recognized) when they are more than 12 months overdue.

ii. Assets classified as non-performing for reasons other than counterparty arrears:

Debt instruments which are not classifiable as non-performing due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

b. Allowance for inherent losses:

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

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c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in respect of country risk are not material with respect to the credit loss allowances recognized.

The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ended December 31, 2015, 2014 and 2013.

Guarantees

Provisions for non-performing guarantees will be equal to the amount that, using prudent criteria, is considered irrecoverable.

Bank of Spain’s Foreclosed Assets Requirements

If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the value of the foreclosed assets should be the lesser of the amount of the debt net of allowances (which shall be at least 10% of the value) and the fair value of the foreclosed assets less the estimated selling costs (which shall be at least 10% of such value).

After the initial recognition of foreclosed assets, the Bank of Spain establishes that if the fair value of the foreclosed asset less the estimated selling cost is lower than the carrying amount, the entity should recognize the corresponding impairment.

The Bank of Spain considers the amount of time acquired assets have been held is a clear indication of impairment. Accordingly, it determines that Spanish entities will recognize impairment (unless the bids received indicate a higher amount) at least as large as the amount resulting from applying the following discounts to the initial valuation:

Terms from acquisition	% Coverage
Over 12 months		20
Over 24 month		30
Over 36 month		40

For the purpose of ensuring that the provisions determined in accordance with the above-mentioned policy are reasonable under IFRS-IASB we develop an estimation of the fair value of our foreclosed assets using external valuations. The difference between both estimations was not material for any of the three years ended December 31, 2015, 2014 and 2013.

Bank of Spain’s Charge-off Requirements

The Bank of Spain does not permit non-performing assets to be partially charged-off.

The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid or that were made to category 6 (“bankrupt”) countries or residents of such category 6 countries. See the above sub-section entitled “—Bank of Spain’s Classification Requirements—Country-Risk Outstandings”. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after

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they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset (in accordance with the Bank of Spain criteria discussed above), the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

Movements in Allowances for Credit Losses

The following table analyzes movements in our allowances for credit losses and movements, by domicile of customer, for the years indicated. See “Presentation of Financial and Other Information”. For further discussion of movements in the allowances for credit losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Impairment Losses (net)”.

	IFRS-IASB Year Ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain		11,264			12,279			11,711			6,907			6,810
Borrowers outside Spain		16,057			12,680			13,756			11,951			12,734
Total		27,321			24,959			25,467			18,858			19,544
Consolidation/deconsolidation of companies’ credit loss allowances (1)
Borrowers in Spain		—			—			—			—			—
Borrowers outside Spain		—			—			—			(266	)		(1,267	)
Total		—			—			—			(266	)		(1,267	)
Net provisions for credit losses charged to income statement (2)
Borrowers in Spain		1,572			2,531			3,447			8,847			3,169
Borrowers outside Spain		9,997			9,326			8,607			10,992			9,581
Total		11,569			11,857			12,054			19,839			12,750
Charge-offs against credit loss allowance
Borrowers in Spain		(2,877	)		(3,009	)		(2,580	)		(2,747	)		(2,798	)
Borrowers outside Spain		(9,484	)		(8,818	)		(8,046	)		(8,599	)		(9,495	)
Total		(12,361	)		(11,827	)		(10,626	)		(11,346	)		(12,293	)
Other movements		102			2,332			(1,936	)		(1,618	)		124
Allowance for credit losses at end of year (3) (4)
Borrowers in Spain		9,554			11,264			12,279			11,711			6,907
Borrowers outside Spain		17,077			16,057			12,680			13,756			11,951
Total		26,631			27,321			24,959			25,467			18,858
Recoveries of loans previously charged off against income statement
Borrowers in Spain		202			296			395			272			297
Borrowers outside Spain		1,173			1,040			673			1,044			1,487
Total		1,375			1,336			1,068			1,316			1,784
Average loans outstanding
Borrowers in Spain		159,897			164,517			178,227			198,643			217,235
Borrowers outside Spain		625,763			541,635			519,037			550,730			511,964
Total		785,660			706,152			697,264			749,373			729,199
Net charge-offs against loan loss allowance to average loans ratio (5)
Borrowers in Spain		1.67	%		1.65	%		1.23	%		1.25	%		1.15	%
Borrowers outside Spain		1.33	%		1.44	%		1.42	%		1.37	%		1.56	%
Total		1.40	%		1.49	%		1.37	%		1.34	%		1.44	%

(1) The negative net balance in 2011 is related to the deconsolidation of Santander Consumer USA Inc. (SCUSA) which was accounted for by the equity method in December 2011. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions and Reorganizations—Santander Consumer USA”.

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(2) We have not included a separate line item for charge-offs of loans not previously provided for (loans charged-off against income) as these are not permitted.

(3) Allowances for the impairment losses on the assets making up the balances of “Loans and receivables—Loans and advances to customers”, “Loans and receivables—Loans and advances to credit institutions” and “Loans and receivables—Debt securities”. See “Item 3. Key information—A. Selected financial data”.

(4) The segregation of the allowance for credit losses between Spain and outside Spain was made by geographical location of the Group’s company that accounts for the risk.

(5) For the purpose of calculating the ratio, net charge-offs consist of charge-offs against credit loss allowance less Recoveries of loans previously charged-off.

The net charge-offs against loan loss allowance to average loans ratio was lower in Spain than in foreign jurisdictions as of December 31, 2013, 2012 and 2011 primarily due to the different mix of products of our credit portfolio in the various countries in which we operate (our mortgage portfolio is focused in Spain and United Kingdom while in Latin America (including Brazil) the main products are non-collateral loans (credit cards or consumer loans)). This means that the amount of loan write-offs contributed each year by these countries is far higher than in Spain, since these entities of the Group have fewer possibilities of recovering the loans once they have fallen into arrears.

However, in 2014 the trend changed due both to an increase in charge-offs in Spain together with a reduction in the average loan volumes in Spain. The balance of loans to businesses and households in Spain declined, due to the deleveraging in some sectors and the increased number of debt issuances by large companies.

In 2015 the net charge-offs against loan loss allowance to average loans ratio remained stable in Spain (+2 basis points) with a reduction both in charge-offs and in average loans outstanding. On the other hand, in foreign jurisdictions the ratio decreased 11 basis points as the growth in average loans offset the increase in net charge-offs

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The table below shows a breakdown of recoveries, net provisions and charge-offs against credit loss allowance by type and domicile of borrower for the years indicated.

	Year Ended December 31,
	2015			2014			2013			2012			2011
	(in millions of euros)
Recoveries of loans previously charged off against income statement
Domestic:
Commercial, financial, agricultural, industrial		85			104			236			85			135
Real estate and construction		66			77			80			38			31
Other mortgages		7			5			7			10			37
Installment loans to individuals		44			91			48			137			92
Lease finance		—			18			19			—			1
Other		—			1			5			2			1
Total Borrowers in Spain		202			296			395			272			297
Borrowers outside Spain
Government and official institutions		—			—			—			—			—
Commercial, industrial and installment loans to individuals		1,066			932			575			877			1,208
Mortgage loans		82			79			78			79			197
Other		25			29			20			88			82
Borrowers outside Spain		1,173			1,040			673			1,044			1,487
Total		1,375			1,336			1,068			1,316			1,784
Net provisions for credit losses charged to income statement
Domestic:
Commercial, financial, agricultural, industrial		681			989			1,842			1,290			1,070
Real estate and construction		174			282			176			5,378			672
Other mortgages		233			818			587			1,291			818
Installment loans to individuals		494			352			745			709			489
Lease finance		1			52			52			57			122
Other		(11	)		38			45			122			(2	)
Total Borrowers in Spain		1,572			2,531			3,447			8,847			3,169
Borrowers outside Spain
Government and official institutions		8			9			1			—			(4	)
Commercial, industrial and installment loans to individuals		9,068			8,824			7,772			9,673			7,962
Mortgage loans		269			28			553			624			1,163
Other		652			465			281			695			460
Borrowers outside Spain		9,997			9,326			8,607			10,992			9,581
Total		11,569			11,857			12,054			19,839			12,750
Charge-offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial		(1,037	)		(1,439	)		(893	)		(755	)		(980	)
Real estate and construction		(877	)		(787	)		(717	)		(676	)		(133	)
Other mortgages		(291	)		(198	)		(278	)		(400	)		(592	)
Installment loans to individuals		(639	)		(506	)		(593	)		(839	)		(870	)
Lease finance		(24	)		(22	)		(60	)		(27	)		(220	)
Other		(9	)		(57	)		(39	)		(50	)		(3	)
Total Borrowers in Spain		(2,877	)		(3,009	)		(2,580	)		(2,747	)		(2,798	)
Borrowers outside Spain
Government and official institutions		—			—			—			—			—
Commercial, industrial and installment loans to individuals		(8,629	)		(8,162	)		(7,130	)		(7,402	)		(8,445	)
Mortgage loans		(325	)		(277	)		(459	)		(477	)		(791	)
Other		(530	)		(379	)		(457	)		(720	)		(259	)
Borrowers outside Spain		(9,484	)		(8,818	)		(8,046	)		(8,599	)		(9,495	)
Total		(12,361	)		(11,827	)		(10,626	)		(11,346	)		(12,293	)

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The table below shows a breakdown of allowances for credit losses by type and domicile of borrower for the years indicated.

Allowances for Credit Losses

	IFRS-IASB Year Ended December 31,
	2015		%		2014		%		2013		%		2012		%		2011		%
	(in millions of euros, except percentages)
Borrowers in Spain:
Commercial, financial, agricultural, industrial		2,373		8.91		2,354		8.62		2,681		10.74		1,775		6.97		1,579		8.37
Real estate and construction (*)		3,539		13.29		4,749		17.38		6,678		26.76		7,511		29.49		3,210		17.02
Other mortgages		2,854		10.72		3,254		11.91		1,810		7.25		1,420		5.58		1,325		7.03
Installment loans to individuals		566		2.12		703		2.57		967		3.87		823		3.23		690		3.66
Lease finance		159		0.60		121		0.44		113		0.46		103		0.40		101		0.54
Other		63		0.24		83		0.31		30		0.12		79		0.31		2		0.01
Total Borrowers in Spain		9,554		35.88		11,264		41.23		12,279		49.20		11,711		45.98		6,907		36.62
Borrowers outside Spain:
Government and official institutions		43		0.16		36		0.13		21		0.08		30		0.12		31		0.17
Commercial, industrial and installment loans to individuals		14,083		52.88		13,218		48.38		9,765		39.12		10,628		41.74		9,334		49.50
Mortgage loans		1,828		6.86		2,043		7.48		2,223		8.91		2,054		8.06		1,791		9.50
Other		1,123		4.22		760		2.78		671		2.69		1,043		4.10		795		4.21
Total Borrowers outside Spain		17,077		64.12		16,057		58.77		12,680		50.80		13,756		54.02		11,951		63.38
Total		26,631		100.00		27,321		100.00		24,959		100.00		25,467		100.00		18,858		100.00

(*) As of December 31, 2015, the allowances of the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to €3,041 million. In this table and in the previous one, loans to construction and property development companies are defined as loans granted to companies that belong to that sector, irrespective of the purpose of the loan.

Non-performing Balances

The following tables show our non-performing assets (loans and other assets to collect) and contingent liabilities, excluding country-risk.

	IFRS-IASB At December 31,
Non-performing balances	2015		2014		2013		2012		2011
	(in millions of euros)
Past-due and other non-performing balances (1) (2) (3):
Domestic		17,722		20,891		22,658		16,623		15,340
International		19,372		20,818		18,994		19,438		16,666
Total		37,094		41,709		41,652		36,061		32,006

(1) The total amount of our non-performing balances fully provisioned under IFRS was €4,306 million, €5,255 million, €5,312 million, €5,176 million and €5,106 million, at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.

(2) Non-performing balances due to country risk were €8 million, €7 million, €3 million, €6 million and €7 million at December 31, 2015, 2014, 2013, 2012, and 2011, respectively.

(3) At December 31, 2015, 2014, 2013, 2012, and 2011 (i) the total amount of our non-performing past-due balances was €24,226 million, €29,810 million, €30,832 million, €31,326 million, and €27,415 million, respectively, and (ii) the total amount of our other non-performing was €12,868 million, €11,899 million, €10,820 million, €4,735 million, and €4,591 million respectively.

We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2015 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.

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The following table shows our financial assets classified as loans and receivables which are considered to be non-performing due to credit risk at December 31, 2015, classified by geographical location of risk and by age of the oldest past-due amount (see note 10.d, to our consolidated financial statements):

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		6,623		894		622		551		8,329		17,019
European Union (excluding Spain)		1,854		1,720		916		791		4,394		9,675
United States and Puerto Rico		1,305		135		58		29		257		1,784
Other OECD countries		721		894		232		194		1,237		3,278
Latin America (no OECD)		1,418		995		666		477		766		4,322
Rest of the world		8		2		—		—		45		55
		11,929		4,640		2,494		2,042		15,028		36,133

Evolution of Non-performing Balances

The following tables show the movement in our non-performing assets and contingent liabilities (excluding country risk, see “—Country-Risk Outstandings” herein).

	IFRS-IASB
(in millions of euros)	Quarter ended												Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,
	Mar. 31, 2015			Jun. 30, 2015			Sep. 30, 2015			Dec. 31, 2015			2015			2014			2013			2012			2011
Opening balance		41,709			41,919			40,273			37,856			41,709			41,652			36,061			32,006			28,478
Increases		6,283			4,688			4,618			5,704			21,293			28,805			37,316			34,983			34,379
Cash recoveries		(4,039	)		(2,985	)		(2,211	)		(3,250	)		(12,485	)		(17,783	)		(17,863	)		(16,298	)		(15,466	)
Foreclosed assets		(226	)		(389	)		(276	)		(212	)		(1,103	)		(1,370	)		(1,857	)		(2,146	)		(2,791	)
Changes in scope of consolidation		54			1			—			50			105			497			743			(628	)		69
Exchange differences and others		853			(36	)		(1,849	)		968			(64	)		1,735			(2,122	)		(509	)		(370	)
Write-offs		(2,715	)		(2,925	)		(2,699	)		(4,022	)		(12,361	)		(11,827	)		(10,626	)		(11,347	)		(12,293	)
Closing balance		41,919			40,273			37,856			37,094			37,094			41,709			41,652			36,061			32,006

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Non-performing Balances Ratios

The following table shows the total amount of our computable credit risk, our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our non-performing balances to total computable credit risk and our coverage ratio at the dates indicated.

	IFRS-IASB At December 31,
	2015			2014			2013			2012			2011
	(in millions of euros, except percentages)
Computable credit risk (1)		850,909			804,084			738,558			793,449			820,968
Non-performing balances by category:
Individuals		15,588			17,251			17,607			16,828			15,951
Mortgages		8,772			9,022			9,609			7,281			6,872
Consumer loans		4,673			5,874			5,129			5,961			6,254
Credit cards and others		2,143			2,355			2,869			3,586			2,825
Enterprises		17,888			21,648			21,538			18,155			14,995
Corporate Banking		3,479			2,643			2,408			991			954
Public sector		139			167			99			87			106
Total non-performing balances		37,094			41,709			41,652			36,061			32,006
Allowances for non-performing balances		27,121			28,046			25,681			26,112			19,531
Ratios
Non-performing balances (2) to computable credit risk		4.36	%		5.19	%		5.64	%		4.54	%		3.90	%
Coverage ratio (3)		73.11	%		67.24	%		61.65	%		72.41	%		61.02	%
Balances charged-off to total loans and contingent liabilities		1.29	%		1.30	%		1.29	%		1.27	%		1.29	%

(1) Computable credit risk is the sum of the face amounts of loans and advances (including non-performing assets but excluding country risk loans), guarantees and documentary credits.

(2) Non-performing loans and contingent liabilities, securities and other assets to collect.

(3) Allowances for non-performing balances as a percentage of non-performing balances.

Non-performing loan (NPL) balances decreased by €4,615 million or 11% to €37,094 million in 2015 as compared to 2014. Net NPL entries in 2015 amounted to €7,705 million, which is a €1,947 million decrease as compared to 2014. NPLs decreased in all countries, particularly in Spain (-€2,219 million), except for the U.S. as SCUSA registered a €131 million increase, in line with its lending growth and business nature.

At the end of 2015, loans and advances to customers was 7.6% higher. Growth in local currency is across the board except for Spain. These levels of lending, together with lower non-performing loans, reduced the Group’s NPL ratio by 83 basis points to 4.36%.

The coverage ratio improved 6 percentage points to 73% at December 31, 2015 as the reduction in Allowances for credit losses was lower than the decrease in NPL. This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.

The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 20% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans.

The NPL ratios by units as of December 31, 2015 are set out below².

• Continental Europe:

• In Spain (excluding the Real Estate Operations Spain unit), the NPL ratio amounted to 6.53% a 85 basis points decrease as compared to 2014, despite the reduction in total loans and contingent liabilities and due to the favorable evolution of NPLs, mainly at companies. The coverage ratio rose to 48% a 3 percentage points increase as compared to 2014.

²  For further details on credit risk refer to “Item 11. Quantitative and qualitative disclosures about market risk—Part 3. Credit risk”.

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• Portugal closed the year with a 143 basis points fall in the NPL ratio to 7.46%, and a 47 percentage points increase in the coverage ratio to 99%. This performance is due to a fall in NPL in most segments and the addition of Banif.

• In Poland the downturn in the NPL ratio continued with a 112 basis points decrease to 6.3%. The coverage ratio rose to 64%.

• Santander Consumer’s NPL ratio, after the increase in the perimeter (see “Item 4. Information on the Company—B. Business Overview—Santander Consumer Finance”), was 3.42% a 140 basis points decrease as compared to 2014, with a good general performance of portfolios in all countries. The coverage ratio increased to 109%.

• The United Kingdom reduced its NPL ratio 27 basis points to 1.52%, due to the good performance in all segments, particularly retail and especially the mortgage portfolio. The coverage ratio was 38%.

• Brazil, against an adverse macroeconomic background, the NPL ratio was contained to 5.98% (+93 basis points in the year) using proactive risk management. The coverage ratio was 84%.

• Chile has reduced its NPL ratio to 5.62 % (-35 basis points in the year), thanks to the good performance in non-performance loans across most segments. The coverage ratio was 54%.

• In Mexico the NPL ratio was down to 3.38% (-46 basis points in the year), with increase in credit risk much higher than growth in the NPL portfolio. The coverage ratio was 91%.

• The United States’ NPL ratio declined to 2.13% (-29 basis points) and the coverage ratio rose to 225% (+31 percentage points since 2014).

• The NPL ratio at Santander Bank was 1.16% (-25 basis points), as a result of the good performance of the portfolios, while the coverage ratio was higher at 115%.

• In SCUSA, the high rotation of the portfolio and the unit’s active credit management brought the NPL ratio to 3.66% (-31 basis points) and the coverage ratio increased to 337%.

• Puerto Rico’s NPL ratio fell to 6.96% (-49 basis points) and the coverage ratio dropped to 49%.

Other non-accruing balances

As described previously herein under “—Bank of Spain’s Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interest. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.

Summary of non-accrual balances	IFRS-IASB Year Ended December 31,
	2015		2014		2013		2012		2011
	(in millions of euros)
Balances classified as non-performing balances		37,094		41,709		41,652		36,061		32,006
Non-performing balances due to country risk		8		7		3		6		7
Total non-accruing balances		37,102		41,716		41,655		36,067		32,013

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Foreclosed Assets

The tables below set forth the movements in our foreclosed assets for the periods shown.

	IFRS-IASB
	Quarterly movements												Year Ended December 31,
	Mar. 31, 2015			Jun. 30, 2015			Sep. 30, 2015			Dec. 31, 2015			2015			2014			2013
	(in millions of euros, except percentages)
Opening balance		10,543			10,832			11,167			11,205			10,543			9,698			8,611
Foreclosures		443			592			472			540			2,047			2,144			2,308
Sales		(247	)		(268	)		(410	)		(483	)		(1,408	)		(1,307	)		(1,315	)
Other movements		93			11			(24	)		121			201			8			94
Gross foreclosed assets		10,832			11,167			11,205			11,383			11,383			10,543			9,698
Of which: in Spain		10,033			10,381			10,472			10,609			10,609			9,760			8,831
Valuation adjustment		5,543			5,706			5,756			5,850			5,850			5,404			4,956
Of which: in Spain		5,304			5,477			5,536			5,626			5,626			5,163			4,685
Closing balance (net)		5,289			5,461			5,449			5,533			5,533			5,139			4,742
Of which: in Spain		4,729			4,904			4,936			4,983			4,983			4,597			4,146
Valuation adjustment as a percentage of foreclosed assets		51.2	%		51.1	%		51.3	%		51.4	%		51.4	%		51.3	%		51.1	%
Of which: in Spain		52.9	%		52.8	%		52.9	%		53.0	%		53.0	%		52.9	%		53.1	%

Liabilities

Deposits

The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2015, 2014 and 2013 see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.

We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros) was 17.8% at November 30, 2015 (most recent available data), according to figures published by the Spanish Banking Association (“AEB”) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition” herein.

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The following tables analyze our year-end deposits.

Deposits (from central banks and credit institutions and customers) by type of deposit.

	IFRS-IASB At December 31,
	2015		2014		2013
	(in millions of euros)
Deposits from central banks and credit institutions-
Reciprocal accounts		1,332		704		755
Time deposits		113,117		85,178		55,839
Other demand accounts		3,199		4,893		3,425
Repurchase agreements		57,723		64,594		49,378
Total		175,371		155,369		109,397
Customer deposits-
Demand deposits-
Current accounts		257,192		200,752		167,787
Savings accounts		180,415		173,105		164,214
Other demand deposits		5,489		5,046		3,512
Time deposits-
Fixed-term deposits and other time deposits		196,965		223,262		225,955
Home-purchase savings accounts		59		71		102
Discount deposits		448		448		1,156
Hybrid financial liabilities		5,174		3,525		3,324
Repurchase agreements		37,380		41,418		41,787
Total		683,122		647,627		607,837
Total deposits		858,493		802,996		717,234

Deposits (from central banks and credit institutions and customers) by geographic location of the Group entity that accounts for the deposits.

	IFRS-IASB At December 31,
	2015		2014		2013
	(in millions of euros)
Deposits from central banks and credit institutions-
Due to credit institutions
Offices in Spain		93,635		80,805		49,770
Offices outside Spain:
Other EU countries		32,849		34,164		35,472
United States		19,576		13,514		7,215
Other OECD countries (1)		12,315		6,656		15
Latin America (no OECD) (1)		16,993		20,229		16,924
Other		3		1		1
Total offices outside Spain		81,736		74,564		59,627
Total		175,371		155,369		109,397
Customer deposits
Offices in Spain		183,778		186,051		185,460
Offices outside Spain:
Other EU countries		311,314		275,291		259,903
United States and Puerto Rico		59,814		51,291		43,773
Other OECD countries (1)		57,817		55,003		1,879
Latin America (no OECD) (1)		69,792		79,848		116,666
Other		607		143		156
Total offices outside Spain		499,344		461,576		422,377
Total		683,122		647,627		607,837
Total deposits		858,493		802,996		717,234

(1) In this schedule Mexico and Chile are classified under “Other OECD countries” since 2014.

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The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2015. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.

	Year Ended December 31, 2015
	Domestic		International		Total
	(in millions of euros)
Under 3 months		5,792		31,911		37,703
3 to 6 months		3,272		15,863		19,135
6 to 12 months		4,552		16,867		21,419
Over 12 months		6,695		23,107		29,802
Total		20,311		87,748		108,059

The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €58 billion, €64 billion and €49 billion, at December 31, 2015, 2014 and 2013, respectively.

Short-Term Borrowings	IFRS-IASB At December 31,
	2015					2014					2013
	Amount		Average Rate			Amount		Average Rate			Amount		Average Rate
	(in millions of euros, except percentages)
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills):
At December 31		95,103		4.55	%		106,012		3.85	%		91,166		3.69	%
Average during year		103,089		4.20	%		100,771		4.05	%		109,191		3.08	%
Maximum month-end balance		125,545					110,877					122,226
Other short-term borrowings:
At December 31		22,943		0.36	%		18,126		1.02	%		13,945		3.48	%
Average during year		21,876		0.37	%		18,787		2.58	%		19,329		2.51	%
Maximum month-end balance		24,029					22,686					23,049
Total short-term borrowings at year-end		118,046		3.74	%		124,138		3.43	%		105,111		3.66	%

Competition in Spain

We face strong competition in all of our principal areas of operation from other banks, savings banks, credit co-operatives, brokerage services, on-line banks, insurance companies and other financial services firms.

Banks

At the end of November 2015 (most recent available information), Banco Bilbao Vizcaya Argentaria, S.A. and Banco Santander, S.A. accounted for approximately 56.5% of loans and 66.0% of deposits in all Spanish banks, which in turn represented 33.2% of loans and 35.6% of deposits in the Spanish financial system, according to figures published by the AEB and the CECA.

Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2015, there were 85 foreign banks (of which 79 were from European Union countries) with branches in Spain. In addition, there were 22 Spanish subsidiary banks of foreign banks (of which 16 were from European Union countries).

The ECB is responsible for authorizing and revoking the authorization of credit institutions, and authorizing the purchase of qualifying holdings, under the terms of the European regulations which establish the competences conferred on the European Central Bank (ECB) and the Single Supervisory Mechanism. In these cases, the Bank of Spain, as the national competent authority (NCA), will submit to the ECB plans for the granting of an authorization or the acquisition of a qualifying holding, and where applicable, proposals for the revocation of authorization.

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Any financial institution organized and licensed in another Member State of the European Union may conduct business in Spain from an office outside Spain, without having obtained first prior authorization from the Spanish authorities to do so. The opening of a branch of any financial institution authorized in another Member State of the European Union does not need prior authorization or specific allocation of resources either.

Financial institutions which are not authorized in another Member State of the European Union do not benefit from the ‘Community Passport’, and are therefore required to obtain prior authorization from the Bank of Spain to operate in Spain with branches. The procedure to obtain such authorization from the Bank of Spain is similar to the one set up for the establishment of new Spanish banks in the Law 10/2014 of June 26, 2014 on Organization, Supervision and Solvency of Credit Entities and the Royal Decree 84/2015, of February 13, 2015, which develops Law 10/2014. These branches of third country institutions must necessarily be ascribed to the Spanish Deposit Guarantee Fund, in case there is no system of coverage in their home country, or if the system guarantees less than €100,000 per depositor (in this case, for the difference up to such €100,000). These institutions may also be authorized to operate in Spain and to provide services (no branches), although, in this case, the institutions cannot raise funds from the public.

Spanish law requires prior approval by the Bank of Spain for a Spanish bank to acquire a significant interest in a bank organized outside the European Union, create a new bank outside the European Union or open a branch outside the European Union. Spanish banks must provide prior notice to the Bank of Spain to conduct any other business outside of Spain.

The opening of branches outside Spain requires prior application to the Bank of Spain, including information about the country where the branch will be located, the address, program of activities and names and resumes of the branch’s managers. The opening of representative offices requires prior notice to the Bank of Spain detailing the activities to be performed.

Savings Banks

Spanish savings banks (“Cajas de Ahorros”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provided strong competition for the demand and savings deposits through a vast network of offices in Spain. Royal Decree-Law 2/2011, which came into force on February 18, 2011 was designed to reinforce the Spanish financial system and opened up a new stage in the process of restructuring and strengthening the Spanish savings banks. The focus was set on recapitalizing institutions that needed more capital and encouraging the savings banks to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. As of December 31, 2012, the downsizing of the savings sector within this framework was finalized and the savings banks completed their conversion into commercial banks. Notwithstanding this, to address concerns in connection with the persistence of savings banks as controllers or significant shareholders of commercial banks the Spanish parliament adopted in December 2013 a comprehensive reform of the savings bank system as part of the ESM-supported program. The reform entailed a two-fold approach: a) strengthening the regulatory regime for the two small savings banks that still carry out banking activities directly; and b) providing that former savings banks that indirectly exercise banking activity (through ownership of a commercial bank) be transformed into “foundations”.

Credit Co-operatives

Credit co-operatives are active principally in rural areas. They provide savings and loan services including financing of agricultural machinery and supplies. They are also a source of competition.

Brokerage Services

We face competition in our brokerage activities in Spain from brokerage houses of other financial institutions.

Any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the Spanish Securities Markets Commission (“CNMV”) receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.

Credit entities have access, as members, to the Spanish stock exchanges, in accordance with the provisions established by the European Union Investment Services Directive.

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We also face strong competition in our mutual funds, pension funds and insurance activities from other banks, savings banks, insurance companies and other financial services firms.

On-line Banks and Insurance Companies

The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial service firms also compete for customer funds.

Competition outside Spain

In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany, Poland, and the United States. In these corporate and institutional banking markets, we compete with the large domestic banks active in these markets and with the major international banks.

The global banking crisis resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the U.S. and U.K. Competition for retail deposits has intensified significantly reflecting the difficulties in the wholesale money markets.

In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks. Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.

Competition for corporate and institutional customers in the U.K. is from U.K. banks and from large foreign financial institutions that are also active and offer combined investment and commercial banking capabilities. Santander UK’s main competitors are established U.K. banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).

In the U.K. credit card market, large retailers and specialist card issuers, including major U.S. operators, are active in addition to the U.K. banks. In addition to physical distribution channels, providers compete through direct marketing activity and the Internet.

In the United States, Santander Bank competes in the Northeastern, New England and New York retail and mid-corporate banking markets with local and regional banks and other financial institutions. Santander Bank also competes in the U.S. in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large U.S. commercial and investment banks and international banks active in the U.S.

SUPERVISION AND REGULATION

Single Supervisory Mechanism, Bank of Spain and the European Central Bank

The Single Supervisory Mechanism (SSM) establishes a new financial supervision system consisting of the European Central Bank (ECB) and the national competent authorities (NCAs) of the participating European Union (EU) countries and combines the strengths, experience and expertise of these bodies. Its main objectives are to guarantee the safety and soundness of the European banking system and to increase financial integration and stability in Europe. It also aims at ensuring a consistent supervision. The SSM is one of the two pillars of the EU banking union, along with the Single Resolution Mechanism (SRM) and is to be completed with a harmonized deposit guarantee system.

The ECB is responsible for the effective and consistent functioning of the SSM and exercises oversight over the functioning of the system. To ensure efficient supervision, credit institutions were categorized as “significant” and “less significant.” In accordance with the Single Supervisory Mechanism (SSM) Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM on November 4, 2014.

The ECB supervises directly the significant banks (including us) through the Joint Supervisory Teams (JSTs), which are responsible for the day-to-day supervision of these institutions. These teams comprise staff from the ECB and the NCAs, whose work is coordinated by an ECB staff member, assisted by one or more NCA sub-coordinators. Among other duties, these teams are responsible for the ongoing assessment of institutions’ risk profiles, solvency and liquidity, and prepare the draft decisions to be presented to the Supervisory Board. All other less-significant institutions (as of the date of this report, approximately 3,500 in the euro area) are directly supervised by national competent authorities (NCAs), and indirectly supervised by the ECB.

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In relation to significant institutions, the NCAs, including the Bank of Spain, must assist the ECB, contributing their experience and most of the supervisors making up the JSTs. Also, among other tasks, they provide support for on-site inspections (to be carried out by non-JST teams), gather and transmit any information required, participate in the preparation of supervisory decisions, and collaborate on sanction procedures.

In the case of less-significant institutions, the NCAs supervise them directly, while the ECB supervises them indirectly. In these cases, the ECB, which has ultimate responsibility for the functioning of the SSM, may issue guidelines to ensure consistent supervision in participating countries, request additional information, or even take over the direct supervision of an institution if it considers it necessary.

The participants in the Single Supervisory Mechanism (SSM) are all the countries that form part of the Eurosystem and all European Union countries which are not in the eurozone, but which want to establish a close cooperation with the European Central Bank (ECB) and therefore accept this new supervision system.

Article 6.4 of the Council Regulation (EU) 1024/2013 of 15 October 2013, conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), establishes the criteria under which an institution shall not be considered “less significant”:

• Its consolidated total assets are worth over 30 billion euros.

• Its assets are worth more than 20% of the GDP of the country in which it is established, unless the consolidated total assets are less than 5 billion euros.

• It is one of the three largest credit institutions in a member state.

• It has subsidiaries in more than one participant country, with cross-border assets or liabilities representing more than 20% of its total assets and liabilities.

• It has requested or received public financial assistance from the European Stability Mechanism or the European Financial Stability Facility.

Based on these criteria, and as of the date of this report, the ECB is directly supervising 129 “significant banks”, representing almost 82% of total banking assets in the euro area. In the case of Spain, the significant institutions which are directly supervised by the ECB (as of the date of this report, 14 Spanish banks) represent more than 90% of deposit institution assets. We have been categorized as a significant institution.

To directly supervise the significant banks, the ECB has created two directorate generals, which perform the continuous monitoring of the 129 groups. DG I (“Microprudential Supervision I”) supervises the 30 largest significant banks in terms of balance sheet and activities, while DG II (“Microprudential Supervision II”) covers the other significant banks. However, the supervision of specific aspects or matters, what is known as on-site inspection, is carried out by different teams. The ECB has thus adopted a different model to that place at the Bank of Spain to date: functionally separating the continuous monitoring of banks and inspection visits.

Prior to the European Central Bank (ECB) assuming its supervisory competencies, it carried out a comprehensive assessment of significant institutions in order to foster transparency regarding the situation of the main European banks, and identify and apply any corrective measures needed to strengthen their solvency.

This assessment, in which the Bank of Spain worked intensively with the ECB, consisted of two main phases:

• Asset quality review: a detailed review of the balance sheets of the banks analyzed. This process was decentralized with the support of leading auditing firms under the central control of the ECB. After a stringent quality control process in which the national competent authorities (NCAs) played a vital role, the process resulted in a series of adjustments to the CET1 capital ratio (the highest quality one), which were taken into account to set the baseline levels for the stress tests.

• Stress tests: this is a simulation exercise to assess the resilience of the institutions in severe but plausible hypothetical stress scenarios. The exercise can indicate the capital which might be needed if certain risks were to materialize, and identify areas where other supervision could be required.

The stress test is basically designed by the institutions themselves (bottom-up approach), applying the methods of the European Banking Authority (EBA) with strict quality controls by the ECB and the NCAs. It assessed the predicted situation of the institutions in two scenarios: a baseline one and an adverse one. The time frame for the exercise is three years (2014-2016) and it was designed based on the consolidated year-end 2013 figures.

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To determine which institutions pass the comprehensive assessment, minimum thresholds were defined for the different parts of the exercise. Banks must achieve a CET1 ratio of at least 8% to satisfy the asset quality review and the baseline scenario of the stress tests. The minimum threshold for adverse scenario stress tests is 5.5%.

If an institution falls below one of these thresholds, it has two weeks to present a capital plan to make up the shortfall. It will then have a period of 6 to 9 months to implement it.

On October 26, 2014, the results of the comprehensive assessment of the banking sector were published and summarized by the Bank of Spain as follows:

• The comprehensive assessment of the European banking sector satisfactorily fulfilled its main objectives: to improve transparency, to identify potential weaknesses on bank balance sheets and to contribute to strengthening banks’ solvency.

• No Spanish bank had a capital shortfall and, generally, the margin by which they have exceeded the thresholds set in the exercise is a comfortable one.

• The exercise conducted (asset quality review and stress tests) showed that Spanish banks’ balance sheets offered a rigorous view of their assets and that the impact of an adverse scenario on their solvency would be relatively limited.

• This outcome confirmed that the clean-up, reform and restructuring of the Spanish banking system undertaken in recent years has borne fruit and that Spanish banks face the future with healthy balance sheets and a sound solvency position.

With regard to the asset quality review exercise in Grupo Santander, an analysis was conducted of 16 major credit portfolios from seven countries and various segments (residential, SMEs and corporates) representing more than 50% of the credit risk exposure at December 31, 2013. In addition, a review was made of procedures and policies, taking samples of files and reviewing them, of appraisals of properties and collateral and of the valuation models for the trading book. The impact of the analysis on CET1 was not material (-4 basis points). With respect to the stress test, the Group met the capital requirements comfortably in the proposed scenarios, particularly in the adverse scenario which is very unlikely to occur.

With regard to significant Spanish banks, the Bank of Spain, in addition to providing its experience and most of the staff of the joint supervisory teams, will shoulder the weight of on-site inspections, it will participate in the preparation of all the decisions to be adopted by the ECB Supervisory Board and it will be active in the exercise of its sanctioning powers. As regards the sanctioning regime, the European Central Bank is responsible for imposing sanctions, provided that three requirements are met: that the sanction is imposed on the credit institution, i.e. on the legal person; that it stems from non-compliance with directly applicable European Union legal rules; and that the sanctions are of a pecuniary nature. In the remaining cases, power will continue to be exercised by the national supervisory authorities, without prejudice to the ECB being able to demand that the appropriate proceedings be initiated.

There are certain areas of banking activity whose supervision is not assumed by the SSM, but continue to be within the purview of the national authorities. The Bank of Spain thus continues to exercise supervisory powers in the areas of money laundering prevention, consumer protection and, partly, in the oversight of financial markets. It also retains the supervision of banking foundations associated with regional governments. In addition to this, the Bank of Spain, like the other national supervisory authorities participating in the SSM, fully retains its supervisory powers over non-bank financial institutions, other financial institutions and entities related to the financial sector such as payment institutions, electronic money institutions, credit financial intermediaries, mutual guarantee companies, currency-exchange bureau and appraisal companies.

Until January 1, 1999, the Bank of Spain was the entity responsible for implementing Spanish monetary policy. As of that date, the start of Stage III of the European Monetary Union, the European System of Central Banks and the European Central Bank became jointly responsible for Spain’s monetary policy. The European System of Central Banks consists of the national central banks of the twenty eight Member States belonging to the European Union, whether they have adopted the euro or not, and the European Central Bank. The “Eurosystem” is the term used to refer to the European Central Bank and the national central banks of the Member States which have adopted the euro. The European Central Bank is responsible for the monetary policy of the European Union. The Bank of Spain, as a member of the European System of Central Banks, takes part in the development of the European System of Central Banks’ powers including the design of the European Union’s monetary policy.

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The European System of Central Banks is made up of three decision-making bodies:

• the Governing Council, comprised of the 6 members of the Executive Board of the European Central Bank and the governors of the national central banks of the 19 Member States which have adopted the euro;

• the Executive Board, comprised of the president, vice-president and four other members; and

• the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 28 European Union Member States.

The Governing Council is the body in charge of formulating monetary policy for the eurozone and adopting the guidelines and decisions necessary to ensure the performance of the tasks entrusted to the ECB and the Eurosystem. The Executive Board is the body in charge of implementing the monetary policy for the eurozone laid out by the Governing Council, providing the instructions necessary to carry out monetary policy to the eurozone’s national central banks and of exercising certain powers delegated to it by the Governing Council, including some of a regulatory nature. The General Council is the transitional body which carries out the tasks taken over from the European Monetary Institute which the ECB is required to perform in Stage III of the European Monetary Union on account of the fact that not all EU Member States have adopted the euro yet.

The European Central Bank has delegated the authority to issue the euro to the central banks of each country participating in Stage III. These central banks are also in charge of executing the European Union’s monetary policy in their respective countries. The countries that have not adopted the euro will have a seat in the European System of Central Banks, but will not have a say in the monetary policy or instructions laid out by the governing council to the national central banks.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks:

• defining and executing the European Union monetary policy;

• conducting currency exchange operations consistent with the provisions of Article 109 of the Treaty on European Union, and holding and managing the States’ official currency reserves;

• promoting the sound working of payment systems in the eurozone; and

• issuing legal tender bank notes.

Notwithstanding the European Monetary Union, the Bank of Spain, as the Spanish national central bank, continues to be responsible for:

• maintaining, administering and managing the foreign exchange and precious metal reserves;

• promoting the sound working and stability of the financial system and, without prejudice to the functions of the European System of Central Banks, of national payment systems;

• supervising and compliance with the specific rules of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility;

• placing currency in circulation and the performance, on behalf of the State, of all such other related functions;

• preparing and publishing statistics relating to its functions, and assisting the European Central Bank in the compilation of the necessary statistical information;

• rendering treasury services to the Spanish Treasury and to the regional governments, although the granting of loans or overdrafts in favor of the State, the regional governments or other bodies referred to in Article 104 of the European Union Treaty, is generally prohibited;

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• rendering services related to public debt to the State and regional governments; and

• advising the Spanish Government and preparing the appropriate reports and studies.

Reserve Ratio

European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Reserve Base” liabilities with their respective National Central Banks (“NCBs”) in the form of interest bearing deposits as specified below (the “Reserve Ratio”).

The European Central Bank requires the maintenance of a minimum reserve ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the eurozone of institutions not registered in this area are also subject to this ratio, while the branches of institutions registered in the eurozone which have neither their registered nor their head office in a participating Member State are not subject to this ratio.

“Reserve Base” liabilities are broadly defined as deposits and debt securities issued. Liabilities which are owed to any other institution not listed as being exempt from the ECB’s minimum reserve system and liabilities which are owed to the ECB or to a participating NCB are excluded from the Reserve Base. Reserve Ratio is 1% over the liabilities included in the Reserve Base. A Reserve ratio of 0% shall apply to (i) deposits with agreed maturity over two years; (ii) deposits redeemable at notice over two years; (iii) repos and (iv) debt securities issued with an original maturity over two years. Investment Ratio

The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “Investment Ratio”), and has exercised this power in the past. Although the Investment Ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could re-impose the Ratio, subject to EU requirements.

Capital Adequacy Requirements

The regulations known as Basel III, which established new global capital and liquidity standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

The Group shares the ultimate objective pursued by the regulator with this new framework, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has collaborated on the impact studies for calibrating the new rules conducted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

In Europe, the new standards have been implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related CRR, which is directly applicable in all EU member states (as part of the Single Rulebook). In addition, the standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA), some of which will be issued in the coming months/years.

The Capital Requirements Regulation came into force on January 1, 2014, with many of its rules subject to various implementation timetables. This transitional implementation phase, which affects mainly the definition of eligible capital, concludes at the end of 2019, except with regard to the deduction for deferred tax assets, the transition period for which lasts until 2023.

Subsequent to the transposition of Basel III into European legislation, the Basel Committee has continued to issue additional standards, some in the form of public consultation processes, which will entail a future amendment of CRD IV and the CRR. The Group will continue to support the regulators by offering its opinions and participating in impact studies.

The Group currently has robust capital ratios, in keeping with its business model and risk profile, which, coupled with its substantial capacity to generate capital organically and the gradual implementation timetable envisaged for the new requirements in the legislation, place it in a position to comply with Basel III.

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With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, in 2015 the Group continued the project of progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. To date the Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent, the main subsidiaries in Spain, the United Kingdom and Portugal, certain portfolios in Mexico, Brazil and Chile, as well as for United States and Santander Consumer Finance in Spain, Germany, Nordic countries and France. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe.

With regard to operational risk, the Group currently uses the standardized approach for regulatory capital calculation and the Group stepped up the process of moving towards an advanced measurement (AORM) approach for operational risks. The AORM program will provide the Group with internal capital estimation models in the main geographical areas. The Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature.

Grupo Santander Brazil meets the requirements to apply the Alternative Standardized Approach. On February 3, 2016, the European Central Bank approved the use of the alternative standardized approach for the calculation of the capital requirements at the consolidated level for operational risk to Grupo Santander Brazil.

As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Grupo Santander has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

With respect to Pillar II, the Group uses an economic capital approach to quantify its global risk profile and its capital adequacy position as part of the internal capital adequacy assessment process (ICAAP) at consolidated level. This process includes regulatory and economic capital planning under several alternative economic scenarios, in order to ensure that the internal capital adequacy targets are met even in plausible but highly unlikely adverse scenarios. The ICAAP exercise is supplemented with a qualitative description of the risk management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Parent bank’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis.

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, the Group publishes its Pillar III disclosures report on an annual basis. This report comfortably meets the market transparency requirements in relation to Pillar III. The Group considers the market reporting requirements to be fundamental in order to complement the minimum capital requirements of Pillar I and the supervisory review process performed through Pillar II. In this respect, its Pillar III disclosures report incorporates the recommendations made by the European Banking Authority (EBA), thus making Grupo Santander an international benchmark in terms of market transparency, as is already the case with its annual report.

Parallel to the roll-out of advanced approaches at the various Group units, Grupo Santander is carrying out an ongoing training process on Basel at all levels of the organization, covering a significant number of professionals from all areas and divisions, with a particular focus on those most affected by the changes arising from the adoption of the new international capital standards.

At December 31, 2015, our eligible capital exceeded the minimum required by over €37.5 billion. Our Spanish subsidiary banks were, at December 31, 2015, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.

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Concentration of Risk

An institution’s exposure to a client or group of connected clients is considered a large exposure where its value is equal to or exceeds 10% of its eligible capital.

An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation, to a client or group of connected clients the value of which exceeds 25% of its eligible capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall not exceed the greater of 25% of the institution’s eligible capital and €150 million, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403 of the Capital Requirements Regulation 575/2013 (CRR), to all connected clients that are not institutions does not exceed 25% of the institution’s eligible capital. Where the amount of €150 million is higher than 25 % of the institution’s eligible capital, the value of the exposure, after taking into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of CRR shall not exceed a reasonable limit in terms of the institution’s eligible capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in Article 81 of Directive 2013/36 (CRD), to address and control concentration risk. This limit shall not exceed 100% of the institution’s eligible capital.

Legal Reserve and Other Reserves

Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in note 33 to our consolidated financial statements.

Allowances for Credit Losses and Country-Risk

For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain’s Classification Requirements” herein.

Employee Pension Plans

At December 31, 2015, our pension plans were all funded according to the criteria disclosed in note 25 to our consolidated financial statements.

Restrictions on Dividends

We may only pay dividends (including interim dividends) if such payment is in compliance with the applicable capital requirement regulations (described under “—Capital Adequacy Requirements” herein) and other requirements. Credit institutions must comply at all times with the “combined capital buffers” requirement established in articles 43 of Law 10/2014 of June 26, 2014, on the organization, supervision and solvency of credit institutions, article 58 of the Royal Decree 84/2015, of February 13, 2015, which develops the Law 10/2014, and in article 6 of the Circular 2/2016, of February 2, 2016, on supervision and solvency. The “combined capital buffers” requirement is defined as the total common equity tier 1 capital necessary to comply with the obligation to have a capital conservation buffer, and, where appropriate: a) institution-specific countercyclical capital buffer; b) a global systemically important institution (G-SII) buffer; c) a buffer for other systemically important institutions; and d) a systemic risk buffer.

Pursuant to article 48.2 of the Law 10/2014, credit institutions which do not fulfill the requirement of combined capital buffers, or those institutions for which a common equity tier 1 capital distribution results in their decline to a level where the combined buffer requirement is not fulfilled, shall calculate the maximum distributable amount (MDA), in accordance with article 73 of the Royal Decree 84/2015, of February 13, 2015, which develops the Law 10/2014. Until the MDA has been calculated and such MDA has been immediately reported to the Bank of Spain none of the following actions can be performed by the credit institutions: a) make a distribution in connection with common equity tier 1 capital; b) create an obligation to pay variable remuneration or discretionary pension benefits or pay variable remuneration if the obligation to pay was created at a time when the institution failed to meet the combined buffer requirements; and c) make payments on additional tier 1 instruments. The restrictions shall only apply to payments that result in a reduction of common equity tier 1 or in a reduction of the profits reduced, provided that the suspension or cancellation of the payment does not constitute an event of default of the payment obligations or other circumstances that lead to the opening of an insolvency proceeding.

In addition to the above, Recommendation of the European Central Bank of December 17, 2015 on dividend distribution policies (ECB/2015/49) provides that credit institutions need to establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements and, in relation to the payment of dividends in 2016 for the financial year 2015,

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recommended that: a) Category 1: Credit institutions which satisfy the applicable capital requirements and which have already reached their fully loaded ratios as at December 31, 2015, should distribute their net profits in dividends in a conservative manner to enable them to continue to fulfil all requirements even in the case of deteriorated economic and financial conditions; b) Category 2: Credit institutions which satisfy the applicable capital requirements as at December 31, 2015 but which have not reached their fully loaded ratios as at December 31, 2015 should distribute their net profits in dividends in a conservative manner to enable them to continue to fulfil all requirements, even in the case of deteriorated economic and financial conditions. In addition, they should in principle only pay out dividends to the extent that, at a minimum, a linear path towards the required fully loaded ratios is secured; and c) Category 3: Credit institutions in breach of the applicable capital requirements, should in principle not distribute any dividend.

As of December 31, 2015, our total capital ratio is 14.4% and our minimum capital requirement under Pillar I is 8%. As of that date, our eligible capital exceeded the minimum required under Pillar I by over €37.5 billion.

Limitations On Types Of Business

Spanish banks generally are not subject to any prohibitions on the types of business they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.

The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 12 and in the annex of Law 10/2014 of June 26, on Organization, Supervision and Solvency of Credit Entities.

Deposit Guarantee Fund and Resolution Fund

The Deposit Guarantee Fund on Credit Institutions (Fondo de Garantía de Depósitos, or the “FGD”), which operates under the rules of the European Union and the guidance of Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to €100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to €100,000 per investor. Taking into account the principle of minimal capital impact, the FGD may participate in resolution proceedings by granting financial support in exceptional cases.

The FGD is funded by annual contributions from member banks. The objective of Member States FGD contributions is to collect 0.8 per thousand of deposits to which the guarantee extends in 2024. Nevertheless, further contributions will be suspended when the FGD’s are totally unified, which is projected to take place by 2024, with the entry into force of the European Deposit Guarantee Scheme (EDIS).

As of December 31, 2015, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it. The contributions made by the Bank to the FGD amounted to €130 million in 2015 (€261 million at the end of 2014).

On April 16, 2014, the recast Deposit Guarantee Schemes Directive was published (Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014 on deposit guarantee schemes (recast)), which is aimed at eliminating certain differences between the laws of the European Union Member States as regards the rules on deposit guarantee schemes to which those credit institutions are subject. Law 11/2015, of June 18, for the recovery and resolution of credit institutions and investment firms, transposed the Deposit Guarantee Schemes Directive to the Spanish legislation.

One of the main pillars of the Single Resolution Mechanism (“SRM”), established by the Regulation (EU) No. 806/2014 of the European Parliament and the Council of the European Union, is the creation of the Single Resolution Fund (the “SRF”). The SRF became effective on January 1, 2015 and will be financed by bank contributions raised at national level which will be pooled at Union level in accordance with an intergovernmental agreement on the transfer and progressive mutualization of those contributions, thus increasing financial stability and limiting the link between the perceived fiscal position of individual Member States and the funding costs of banks and undertakings operating in those Member States. At a national level, the referred Law 11/2015 regulates the FGD harmonization at an European level, as well as the creation of a National Resolution Fund, to be financed by credit institutions and investment services companies, and whose financial resources must reach before December 31 2024, at least 1% of covered deposits authorized of all credit institutions in all the Member States of the banking union. The approximate amount will be around €55 billion. Contributions made by the Bank to the National Resolution Fund in 2015 amounted to €144 million.

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Data Protection

Organic Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Spanish Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Spanish Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.

Recent Spanish Legislation

Spain and the United States of America signed an Intergovernmental Agreement (“Spain-U.S. IGA”) to improve international tax compliance and implement the legislation commonly referred to as the Foreign Account Tax Compliance Act (FATCA) on May 14, 2013 which entered into force on December 9, 2013. FATCA provisions were included in the HIRE Act, which was signed into U.S. Law on March 18, 2010, aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by U.S. citizens and residents through the use of offshore accounts. The Spain-US IGA provides a system for the automatic exchange of information with respect to financial accounts for tax purposes within the scope of mutual assistance between the two countries, and requires financial institutions in each country to (i) identify the accounts held or controlled by tax residents of the other country and (ii) provide annual information on such financial accounts to their Tax Authorities, who will exchange them with the Tax Authorities of the other country.

Royal Decree-Law 4/2014 of March 7, 2014 (BOE of March 8, 2014), adopting urgent measures relating to the refinancing and rescheduling of corporate debt in order to speed up these processes and make them more flexible, was published. It entered into force on March 9, 2014 and was validated by the Spanish Congress on March 20, 2014. The main purpose of the Royal Decree-Law is to increase the effectiveness of pre-insolvency refinancing so that firms can reschedule their debt more flexibly without having to apply for insolvency proceedings. For this purpose various aspects of Spanish Insolvency Law 22/2003 of July 9, 2003 are amended. For instance, as a result of the amendment of Article 5 bis of Law 22/2003, notification to the court by the debtor that it has commenced negotiations to reach a refinancing agreement is sufficient to stay, for the foreseeable duration of the negotiations, the execution of judgments in relation to assets required for the continuation of the debtor’s professional or business activity, including execution actions before the courts (previously, refinancing agreements only halted executions if such agreements had been judicially approved). The proceedings arising from public-law claims are excluded, in any event, from this stay. In addition to this, article 56 of Law 22/2003 is amended to limit the cases where the execution of judgments in relation to secured assets is stayed to those in which the assets are required for the continuation of a professional or business activity; and those assets not considered necessary for the continuation of such activity are specified, such as shares or investments of companies engaging exclusively in holding an asset and the liability required to finance it.

Law 3/2014 of March 27, 2014 which amends the consolidated text of the General Consumer and User Protection Law and other supplementary laws, enacted by Legislative Royal Decree 1/2007 of November 16, 2007, was published with the aim of transposing into Spanish law Directive 2011/83/EU of the European Parliament and of the Council, of October 25, 2011 on consumer rights. This law increases the information which must be provided to consumers and users by enlarging pre-contractual information requirements. For instance, the new obligations include informing consumers and users, where applicable, of the existence and the conditions of deposits or other financial guarantees to be paid or provided by them at the request of the trader, including an arrangement whereby an amount is blocked on the consumer’s credit or debit card. The law came into force on March 29, 2014.

Law 10/2014 of June 26, 2014, on the regulation, supervision and solvency of credit institutions was published and came into force on June 28, 2014, except for certain specific provisions referring to Securities Market Law 24/1988 of July 29, 1988 which are enforceable from October 31, 2014. Its main purpose is to complete the transposition (commenced by Royal Decree-Law 14/2013 of November 29, 2013 on urgent measures for the adaptation of Spanish law to EU supervisory and solvency regulations for financial institutions) of Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013. Inter alia, the Law 10/2014 regulates general aspects of the legal framework governing access to the status of credit

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institution; the functioning of its governing bodies, and the supervisory and disciplinary instruments that the authorities are to use. The Law 10/2014 is subdivided into the following main sections:

a) Legal framework for Credit Institutions, including a set of general provisions concerning the legal framework applicable to credit institutions. It therefore defines what constitutes a credit institution, establishes the nature of the business reserved exclusively to them, and the sources of the legal rules governing them. It also regulates other points, which are inherently associated with the characteristics of credit institutions, such as the system for granting and revoking authorization; the rules on significant shareholdings; the suitability of members of the board of directors or equivalent body and incompatibilities to which they are subject, the rules of corporate governance and remuneration policy;

b) Solvency of Credit institutions: Although the regulations on solvency are determined by Regulation (EU) No 575/2013 of June 26, 2013, which has already been in force since January 1, 2014, the Law 10/2014 includes the provisions on the matters which are to be included in Spanish legislation. These include credit institutions’ self-assessment of their capital relative to the risks they assume, to ensure that they have in place sound, effective and comprehensive strategies and processes to continuously assess and maintain the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or might be exposed. Additionally, it sets out a series of requirements additional to those for Common Equity Tier 1 – the so-called capital buffers –which allow supervisors to demand higher levels of capital than those established in Regulation (EU) No 575/2013 of June 26, 2013. Specifically, five types of buffers are defined:

1) Capital conservation buffer for unexpected losses, comprising Common Equity Tier 1 equivalent to 2.5% of the total amount of the risk exposure. Transitional arrangements are established according to the following timetable: 0.625% in 2016; 1.25% in 2017; 1.875% in 2018; and 2.5% as of 2019;

2) Specific counter-cyclical capital buffer, in terms of Common Equity Tier 1, calculated specifically for each institution or group, equivalent to the total amount of the risk exposure multiplied by a specific percentage. This percentage will be the weighted average of the percentages for counter-cyclical buffers applicable in the territories in which the institution’s relevant credit exposures are located such that up to 2.5% of the total weighted exposures may be required. The same transitional arrangements are established as for the capital conservation buffer;

3) Capital conservation buffer for global systemically important financial institutions (G-SIFIs) of between 1% and 3.5% of the total risk exposure, depending on the systemic importance of the institution concerned. As in previous cases, transitional arrangements are applicable to these percentages according to the following timetable: 25% in 2016; 50% in 2017; 75% in 2018; and 100% as of 2019;

4) Buffer for other systemically important financial institutions (SIFIs), giving the Bank of Spain a degree of discretion as to whether to require certain institutions to set aside this buffer, which may be as much as 2% of the total risk exposure, bearing in mind the criteria used to identify SIFIs; and

5) Common Equity Tier 1 systemic risk buffer in order to prevent or avoid non-cyclical long-term specific or macroprudential risks that could prompt a shock in the financial system with serious negative consequences for the system and the real economy;

c) Prudential Supervision: Under the legislation currently in force the Bank of Spain has been designated as the supervisory authority for credit institutions. It has therefore been granted the powers and authority necessary to perform this role, the scope and aims of its supervisory activities have been defined, and it has been granted authority to take the necessary measures to ensure compliance with solvency regulations. Moreover, given that credit institutions conduct their business in an increasingly integrated environment, particularly within Europe, the regulations also cover the Bank of Spain’s dealings with other supervisory authorities, and in particular the European Banking Authority (EBA). In this context, once the Single Supervisory Mechanism (SSM) has come fully into effect in the European Union, the Bank of Spain will have to perform its credit institution supervisory duties in cooperation with, and without prejudice to the competences directly assigned to, the ECB, by virtue of Regulation (EU) No 1024/2013 of the Council of October 15, 2013, which entrusts the ECB with specific tasks concerning policies relating to the prudential supervision of credit institutions;

d) Institutions’ Reporting and Disclosure obligations;

e) New System of Penalties, since the penalty system applicable to credit institutions follows the model defined by Law 26/1988 of July 29, 1988 which is repealed;

f) Changes to the legal rules of preference shares, since the classification in Regulation (EU) No 575/2013, June 26, 2013, of preference shares as additional Tier 1 capital for the credit institutions issuing them needed to be introduced into Spanish legislation, subject to the conditions established in the Regulation;

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g) Integration of the Bank of Spain in the Single Supervisory Mechanism, pursuant to Regulation (EU) No 1024/2013 of the Council of October 15, 2013;

h) Amendments to Law 26/2013, December 27, 2013 in relation to saving banks and banking foundations;

i) As envisaged in Regulation (EU) No 575/2013, June 26, 2013, the Bank of Spain may exempt credit institutions forming part of an institutional protection system from compliance with individual solvency requirements under the Regulation 575/2013;

j) The composition of the management board of the Deposit Guarantee Fund, regulated under Royal Decree Law 16/2011 of October 14, 2011, is amended to include representatives of the Ministries of Economic Affairs and Competitiveness, and of Finance and Public Administration, as the institution is included within the scope of fiscal consolidation;

k) Supervision on individuals or legal entities which, not being registered in any of the legally required administrative registers of financial institutions, offer loans, deposits or financial services of any kind; and

l) Wide-ranging amendments to Law 24/1988 of July 28, 1988 on the securities market in order to bring investment firms within the scope of the prudential supervision system envisaged for credit institutions under Directive 2013/36/EU of June 26, 2013. Royal Decree 84/2015 of February 13, on banking solvency gave the details of Law 10/2014 on credit institutions’ organization, supervision and solvency, completing transposition of EU solvency law into the Spanish legal framework. The Royal Decree came into force on February 15, 2015.

Royal Decree 84/2015, of February 13, 2015, implementing Law 10/2014, of June 26, 2014, on the regulation, supervision and solvency of credit institutions, was published on February 14, 2015. The Royal Decree has two basic aims: firstly, to complete the transposition into Spanish legislation of European Directive 2013/36 of the European Parliament and of the Council of June 26, 2013, which forms part of the CRR/CRD IV package of legislation on credit institutions’ solvency and which adapts and implements the Basel III accords in EU legislation; and its second goal is to consolidate and systematize previously dispersed Spanish banking legislation in a single text, adapting it to the requirements deriving from the implementation of the Single Supervisory Mechanism (SSM) in November 2014. In addition to this, Circular 2/2016, of February 2, 2016, on supervision and solvency, completing the adaptation of the Spanish law to the Directive 2013/36/EU and to the Regulation EU 575/2013.

Royal-Decree-Law 8/2014, of July 4, 2014 of urgent measures for growth, competitiveness and efficiency, among other tax measures, introduces, with effect from January 1, 2014, a tax rate of 0.03% (instead of 0% previously established) in the Tax on deposits in credit institutions created by Law 16/2012, of December 27, 2014, also introducing technical improvements in the determination of taxable income.

Royal Decree 636/2014 of July 25, 2014 sets up the General Government Economic and Financial Information Office (Central de Información Económico-Financiera de las Administraciones Públicas, CIEF) and regulates the sending of information by the Bank of Spain and financial institutions to the Ministry of Finance and Public Administration.

Royal Decree 11/2014 of September 5, 2014 on urgent insolvency measures was published, with the aim, inter alia, of extending the reforms brought in by Royal Decree-Law 4/2014 for the pre-insolvency stage (refinancing agreements) to the insolvency agreement itself, with the main objective being to promote agreements that will enable economically viable companies to survive insolvency proceedings. The key changes ushered in by the Royal Decree-Law 11/2014, which came into force on September 7, 2014, are as follows: a) General changes to insolvency agreements: aiming at helping companies to survive the Royal Decree 11/2014 provides that assets and rights can only be transferred to creditors in payment if they are not essential for the continuation of the professional or business activity and if their fair value is equal to or less than that of the claim being discharged. If their fair value is higher, the difference should be included in the assets available to creditors. In no event will there be an obligation to transfer assets or rights in payment to public sector creditors; b) Changes relating to preferred creditors: provisions are introduced in respect of the valuation of preferred collateral. Accordingly, the special preference will only affect the portion of the claim that does not exceed the value of the collateral included in the list of creditors. Any portion of the claim exceeding that value will not receive special treatment and will be classified according to the nature of the claim; c) Changes relating to winding-up proceedings. In respect of winding-up, the aim is to ensure, insofar as possible, the continuation of the business activity, basically facilitating the sale of the establishments and operations, and of any other production units, of the debtor.

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Law 17/2014 of September 30, 2014 adopts urgent measures on the refinancing and restructuring of corporate debt. The Law 17/2014 writes into Insolvency Law 22/2003 of July 9, 2003 the text of Royal Decree-Law 4/2014 of March 7, 2014, which substantially amended Law 22/2003, particularly regarding the regulation of refinancing agreements able to be entered into by companies and the extension of their terms to dissenting creditors. The submission of notification of commencement of negotiations may be accepted as cause for staying judicial enforcement proceedings against assets required for the continuation of the debtor’s professional or business activity. Also permitted is the stay of any other individual enforcement proceedings at the initiative of financial creditors, provided that not less than 51% of the creditors holding financial claims have expressly supported the initiation of negotiations aimed at entering into the related refinancing agreement. Any proceedings arising from public law claims are excluded, in any event, from this stay.

Law 22/2014 of November 12, 2014, regulates venture capital entities and other closed-end collective investment institutions (CECIIs) and their management companies (CECIIMCs) and amends Law 35/2003 of November 4, 2003 on CIIs. The main new features include a speedier and less onerous administrative process for the creation of venture capital entities, as the administrative authorization by the CNMV is virtually eliminated, being replaced by registration with the CNMV once it has been confirmed that all the documentation required by law is complete.

Laws 26/2014 and 27/2014, of November 27, 2014 modify important Spanish tax laws. This new legislation will generally come into force on January 1, 2015, though it includes some transitory regimes. Some of the main tax amendments are summarized below:

(a) Corporate income tax:

• The general corporate income tax rate is reduced from 30% to 28% in 2015 and to 25% in 2016 and onwards. The tax rate applicable to credit institutions will remain at 30%.

• Tax Losses can be carried forward indefinitely (previously only 18 years) but with an annual quantitative limit of 70% of the positive taxable base (prior to the application of the capitalization reserve taxable reduction), for tax years starting in 2017 (60% limit applies to tax years starting in 2016), with a minimum threshold of €1 million. For 2015 the limitation stood at 50% or 25% of the company’s taxable base if its turnover in the previous tax year exceeded €20 million or €60 million respectively. The right of the tax authorities to audit tax losses carry-forwards is established for 10 years (the ordinary statute of limitations period remains 4 years).

• The participation exemption regime is introduced for dividends and capital gains derived from both Spanish resident and non-Spanish resident subsidiaries, with the following requirements: (i) a minimum ownership percentage of 5% or a cost acquisition of €20 million and one-year minimum holding period in the subsidiary; (ii) for foreign subsidiaries only, if they are not resident in a tax treaty country, a minimum level of nominal taxation of 10% under a foreign corporate tax system similar to the Spanish corporate income tax. This regime will not apply where the distributed dividends generated a tax deductible expense in the entity paying the dividend, or if the participation is held in a company resident in a tax haven.

• Withholding taxes are generally reduced from 21% to 19% as from 2016 (20% for tax year 2015).

• The Tax credit for reinvestment of extraordinary profits is abolished. Instead, companies subject to the general tax rate may annually reduce their taxable base to an amount equal to 10% of the increase of their net equity during a given year, provided a special reserve is booked for the same amount, non-disposable for at least 5 years.

• The Group taxation regime scope of application is extended to Spanish subsidiaries held indirectly through a foreign intermediary company and Spanish subsidiaries of a common foreign parent company. In addition to the requirement of a 75% participation in the subsidiary (70% for listed subsidiaries), the new Law also requires a minimum of 50% of the voting rights.

• The impairment of tangible fixed assets, real estate investments, intangible fixed assets (including goodwill), securities representing a capital or equity shareholding in an entity and debt securities will be nondeductible for tax purposes. Losses derived from these items will be deductible only where transferred to unrelated third parties or when actually charged-off from the balance sheet.

• Transfer pricing rules are amended, including changes in the definition of a related party (new 25% participation threshold). The Law also introduces certain amendments in anti-abuse rules in line with

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OECD Base Erosion and Profit Shifting (BEPS) project, as amendments in relation to the tax treatment of hybrid instruments, and additional substance requirements in the Control Foreign Companies (CFC) rules in order to avoid imputation of foreign low-taxed income.

(b) Non-resident income tax:

• The withholding tax applicable to dividends, interest and capital gains is reduced to 19% as from January 1, 2016 (20% for tax year 2015). The general withholding tax rate is also reduced to 19% as from January 1, 2016 (20% for tax year 2015) for income obtained by residents in EU or European Economic Area (EEA) countries with which an effective exchange of information exists.

• The annual exemption of €1,500 on dividends obtained by certain non-resident individuals is abolished.

(c) Personal income tax:

• Tax rates have being decreased from January 1, 2015, with further reductions from 2016, but several exemptions, deductions and rebates have been reduced. Tax rates band for savings income (dividends, interest and capital gains –including short term capital gains previously included as part of the general income-) is 20 to 24% for 2015 and 19 to 23% from 2016 onwards, and for general income 20 to 47% for 2015 and 19 to 45% from 2016 onwards, though the final tax rate will depend on the tax scale approved by the region (“Comunidad Autónoma”) where the taxpayer is resident.

Law 36/2014, of December 26, 2014, relating to the 2014 National General Budget, among other tax measures, includes the extension for the year 2015 of the wealth tax enforcement.

Law 31/2014 of December 3, 2014, amending the Spanish Limited Companies Law in order to improve corporate governance, entered into force, with certain exceptions, on December 24, 2014. The changes can be divided into two categories: those referring to the annual general meeting and those concerning the board of directors.

a) Annual General Meeting: The Annual General Meeting’s powers to deliberate and resolve on matters are broadened, among others, in respect of the director remuneration policy and transactions having an effect equivalent to that of winding up the company, such as acquisition, sale or transfer to another company of essential assets. So-called “minority rights” in listed companies are strengthened by lowering from 5% to 3% the minimum share capital needed for shareholders to be able to exercise their rights. Also, the Bylaws cannot require ownership of more than 1,000 shares to be eligible to attend the Annual General Meeting. The legal treatment of shareholders’ conflicts of interest is reformed and its application extended to public limited companies (by broadening the applicability of the existing regime for private limited companies). Shareholders’ right to information is enhanced, particularly for listed companies, where the period during which shareholders can exercise their right to information prior to the Annual General Meeting is extended to five days before it is held (compared with seven previously). As a new development, valid written requests for information, clarifications and written questions, as well as written replies from directors, must be placed on the company’s website. All cases of the challenging of corporate resolutions (void and voidable resolutions) are unified under a general regime of voidance, for which an expiration period of one year is set, the only exception being challenges to resolutions contrary to public order for which there is no expiration period. For listed companies, the expiration period is reduced from one year to three months, so as to safeguard the efficacy and flexibility particularly required in the management of these companies. As regards the capacity to challenge corporate resolutions, to avoid situations of abuse of rights, a lower limit is set such that the only shareholders eligible to challenge corporate resolutions will be those representing, individually or jointly, at least 1% of capital for unlisted companies and 0.1% for listed companies, although the Law permits these thresholds to be lowered in the articles of association. Finally, for these purposes the concept of corporate interest is broadened, such that it is now deemed to be prejudiced if a resolution is imposed unfairly by the majority.

b) Board of Directors: The Law 31/2014 assigns to the board of directors, as a non-delegable duty, the taking of decisions relating to core management and supervision activities. It is thus stipulated that the board has to meet at least once a quarter so as to maintain a constant presence in the dealings of the company. Law 31/2014 introduces a number of significant changes intended to contribute to the proper functioning of the board, particularly in listed companies. Thus directors are required to attend board meetings in person, the non-delegable powers of the board are listed exhaustively and director categories are stipulated, defining those who are executive, non-executive, nominee and independent directors (definitions formerly included in Order ECC/461/2013). The appointment and re-election of directors is regulated, and the maximum period of office is

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set at four years, compared with the former maximum of six years generally in force. New obligations regarding remuneration policy are also established for all limited companies. Thus, the maximum amount of total annual remuneration of all directors taken together must be approved by the Annual General Meeting and will remain in force so long as it is not changed. Also, remuneration must be reasonably consistent with the importance of the company, its economic situation at each point in time and the market standards of comparable companies. Additionally, in listed companies, the director remuneration policy must conform, wherever applicable, to the remuneration system set out in the articles of association and must be approved by the Annual General Meeting at least every three years as a separate item on the agenda. Any change to or replacement of the director remuneration policy during that three-year period must have prior approval from the Annual General Meeting.

In addition to this, the Law 31/2014, places the control of tax risks within the responsibilities of the boards of directors of listed companies. The board of directors of a listed company may not delegate the determination of the company’s policy on tax risk control and management and the supervision of internal information and control systems. The law also tasks the audit committee with supervising the effectiveness of internal control of the company, its internal audit and its risk (including tax) management systems. The audit committee must also give prior notice to the board of the creation or acquisition of investments in special purpose vehicles or entities domiciled in countries or territories classified as tax havens, as well as of transactions with related parties. Lastly, information must be included in the annual corporate governance report on the company’s risk (including tax) control systems.

Law 36/2014 of December 26, 2014 on the State Budget for 2015 was published on December 30, 2014. The Spanish Minister for Economic Affairs and Competitiveness was authorized to increase the outstanding balance of State debt in 2015 by up to €49,503 million with respect to its level at the start of the year (the limit set in the last budget was €72,958 million). This limit may be exceeded during the course of the year upon the authorization of the Minister for Economic Affairs and Competitiveness. A number of circumstances were established in which it will be automatically reviewed. In accordance with Law 9/2012 of November 14, 2012 on restructuring and resolution of credit institutions, during the 2015 budget year the FROB’s borrowed funds must not exceed €22 billion (€63.5 billion was the limit set in the last budget). With regard to government guarantees, the limit on the total guarantees granted by the State and other government agencies is €3.5 billion (the limit set in the last budget was €3.725 billion). Of this amount, €3 billion (the same amount as envisaged in previous budgets) will be earmarked to guarantee fixed-income securities issued by securitization SPVs, designed to improve the financing of businesses’ productive activity. To set up these securitization SPVs, the credit institutions concerned must transfer loans and credits granted to all types of non-financial firms located in Spain, of which at least 50% must have been granted to SMEs and 25% must be short-term (for less than one year). The liquidity obtained through the securitization must be reinvested by the credit institutions concerned in loans or credits granted to the types of firms indicated above, of which at least 80% must be SMEs. At least half of the reinvestment must take place within one year from when this liquidity is obtained. Under personal income tax, compensation is maintained for the loss of tax benefits affecting the recipients of certain income from capital produced over a period of more than two years in 2014, as was the case under the Personal Income Tax Law approved by Royal Legislative Decree 3/2004 of March 5, 2004, that remained in force until December 31, 2006. In the case of venture capital funds, an exemption is established for all transactions subject to tax under the corporate transactions heading, in order to align their treatment with that of mortgage securitization SPVs and financial instrument securitization SPVs. In accordance with ECB regulations, the budget law authorized the Bank of Spain to entrust the production of its share of euro banknotes to a public corporation in which it has a controlling interest, and whose sole corporate purpose is the production of such State budget for 2015.

Royal Decree-Law 17/2014, of December 26, 2014, on financial sustainability measures of regional and local governments, and other economic measures, was published and, barring certain exceptions, came into force on December 31, 2014. On the one hand, it aims to set up new mechanisms which will enable all tiers of government to share financial savings, give priority attention to social spending, continue to assist regional and local governments with greater funding difficulties and give a boost to those which have managed to overcome them. On the other, it is intended to reduce the number of funds set up to finance liquidity support mechanisms and improve the efficiency of their management. Thus, two funds are set up, the Fund for Financing Regional Governments (FFCA) and the Fund for Financing Local Governments (FFEL). These funds are compartmentalized to adapt them to the financial needs of the aforementioned regional and local governments, and are treated as additional funding mechanisms.

Law 36/2014 of December 26, 2014 on the State Budget for 2015 authorized the Minister for Economic Affairs and Competitiveness to increase State debt for 2015, with the limitation that the outstanding balance at the end of the year may not exceed that on January 1, 2015 by more than €49.5 million (the previous year’s limit was €73 billion).

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Royal Decree 83/2015, of February 13, 2015, amending Royal Decree 1082/2012 of July 13, 2012, approved the implementing Regulations of Law 35/2003 of 4 November 2012, on Collective Investment Institutions (CIIs). The royal decree’s objectives include: 1) completing the transposition of Directive 2011/61/ EU of the European Parliament and of the Council of June 8, 2011 on Alternative Investment Fund Managers (AIFMs); 2) integrating the regulations on depositaries, to improve their consistency, make them more systematic and compliant with the applicable delegated regulation; and 3) incorporate into Spanish legislation the various aspects that reflect the permanent evolution and development of the collective investment market in Spain.

Royal Decree-Law 1/2015, February 27, 2015, which came into force on March 1, 2015, on the second-opportunity mechanism, reduction of financial burden, and other social measures, establishes a debt-relief system for natural persons in the framework of bankruptcy proceedings which rests on two fundamental pillars: that the debtor is in good faith and that his or her assets have been liquidated or the bankruptcy proceedings deemed concluded due to insufficient assets. The royal decree also introduced certain amendments to Royal Decree-Law 6/2012, March 9, 2012, on urgent measures to protect mortgage debtors without resources. Thus, in relation to the code of good practice for mortgage debtors, the subjective scope was expanded, raising the annual ceiling for beneficiary families, which is calculated based on the annual multipurpose income indicator (IPREM) in fourteen monthly payments, including as a new situation of special vulnerability that the debtor be aged over 60 –although not meeting the requirements to be considered a household– and a new form of calculating the price limit of the immovable property acquired. Additionally, floor clauses in the contracts of debtors on the new exclusion threshold were rendered definitively inapplicable. Law 1/2013 of May 14, 2013 on measures to strengthen the protection of mortgagors, debt restructuring, and rented social housing was also amended by the Royal Decree-Law 1/2015, to extend from two to four years the suspension of evictions when judicial or out-of-court foreclosure awards the creditor, or person acting in the creditor’s name, the principal residence of persons in situations of particular vulnerability and in the economic situations envisaged in the aforementioned law. This extension began with the entry into force of the law, such that it will end on May 15, 2017. Changes introduced by the Royal Decree-Law 1/2015 in Law 35/2006 of November 28, 2006 on personal income tax and partially amending the corporate income tax, non-resident income tax and wealth tax laws included the inclusion of an additional provision establishing the tax exemption of income received by debtors as a consequence of settlements and lieu in payment of debts established in: 1) a court-approved agreement; 2) a court-endorsed refinancing agreement; 3) an out-of-court payment agreement; or 4) as a result of cancellation of outstanding liabilities, provided that the debts do not arise out of business activities.

Law 25/2015 of July 28, on the second chance mechanism, reduction of financial burden, and other social measures, and which came into force on July 30, 2015, has been used to introduce certain amendments to Royal-Decree Law 1/2015 of February 27, 2015. These include improvements to the code of good practice introduced by Royal Decree-Law 6/2012 of March 9, 201224 on urgent measures to protect mortgage debtors without resources. The code’s scope of application has been broadened by increasing the annual income limit for beneficiary families, calculated based on the annual 14-monthly payment Multi-Purpose Public Income Index (IPREM), including as a new case of special vulnerability the fact that the mortgagor is aged over 60, and introducing a new calculation of the limit on the price of properties acquired. Additionally, floor clauses in the contracts of debtors on the new exclusion threshold have been rendered definitively inapplicable.

Law 2/2015, of March 30, 2015 on the desindexation of the Spanish economy was published on 1 April 2015 aiming at establishing a regime based on the principle that monetary values are not revised in line with price indices or formulas containing them, except in those cases where such a revision is indispensable. The Law applies to: 1) revisions of any monetary value which the public sector has a role in determining, including all items subject to revision in the existing legislation, including, inter alia, prices of public contracts, levies, regulated prices and charges, subsidies, benefits, assistance, fines and penalties, or reference values; and 2) periodic or non-periodic reviews of income from rural and urban leases, consideration for service leasing agreements, supplies, and annuities or monetary values in any other contract between private individuals. The Law’s scope does not include: 1) collective wage bargaining; 2) pension revisions, revaluations or updates; and 3) financial instruments envisaged in Law 24/1988, July 28, 1988, such as negotiable securities and derivatives.

Law 11/2015 of June 18, 2015 on the recovery and resolution of credit institutions and of investment firms, which entered into force on June 20, 2015, transposes a very important part of European Union law into Spanish law in respect of the recovery and resolution mechanisms for credit institutions and investment firms. It further assumes many of the provisions of Law 9/2012 of November 14, 2012 on the restructuring and resolution of credit institutions, which it partially repeals. The regime set in place by the Law 11/2015 constitutes a special and full administrative procedure that seeks to ensure maximum speed in the intervention of the institution so as to provide for the continuity of its core functions, while minimizing the impact of its non-viability on the economic system and on public resources. The supervisory and resolution-related functions are separated, such that supervision and resolution functions in the pre-emptive phase are entrusted to the Bank of Spain for credit institutions and to the Spanish National Securities Market Commission (CNMV) for

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Investment Firms. Functions shall be exercised by each of these authorities through internal operationally independent bodies. Resolution functions in the enforcement phase are assigned to the Fund for the Orderly Restructuring of the Banking Sector (FROB). The early intervention phase is reinforced and the pre-emptive resolution phase is developed, given that all institutions, and not only non-viable ones, must have recovery and resolution plans. One new aspect involves the regulation of internal recapitalization as a resolution instrument conceived as a “bail-in” arrangement (the absorption of losses by the shareholders and by the creditors of the institution under resolution). The bail-in is effective since January 1, 2016. A National Resolution Fund (NRF) financed by the institutions themselves is also created with the end-purpose to finance the resolution measures executed by the FROB, which will oversee its management and administration.

Royal Decree 1012/2015, of November 6, 2015 was published, implementing Law 11/2015 on recovering and resolution of credit institutions and investment firms, amending Royal Decree 2606/1996 of December 20, 1996 on deposit guarantee funds. The royal decree came into force on November 8, 2015, and will be applied in a way that is compatible with European legislation on resolution, in particular the SRM Regulation. The circumstances determining when an entity may require the establishment and application of the obligations, requirements and resolution instruments envisaged in Law 11/2015 are defined, together with the general criteria for the establishment of simplified obligations and exemptions for particular entities when preparing their recovery plans, and when the resolution authority designs resolution plans. Detailed regulations are also set out for the manner in which entities are to be valued by an independent expert appointed by the Fund for Orderly Restructuring of the Banking Sector (FROB) prior to the adoption of any resolution measures. The quantitative and qualitative indicators these plans are to include, in accordance with the provisions of Law 11/2015 are also specified, and must include, at least, capital, liquidity, asset quality and profitability indicators, and macroeconomic, market, and other indicators that are relevant to evaluating the entity’s financial situation. The regulations are defined for certain aspects of the redemption and conversion of capital instruments and internal recapitalization, in particular: 1) the determination of the minimum requirement for capital and eligible liabilities; 2) the valuation of liabilities arising from financial derivatives; and 3) the conditions for the conversion and redemption of capital instruments. Other changes introduced by the Royal Decree 1012/2005 include: 1) its scope is extended, in certain cases, to other types of legal persons forming part of an entity’s group, such as financial holding companies, mixed-activity financial holding companies, and mixed-activity holding companies, and 2) the regulations on the rules for the management, settlement and collection of the levy to which entities are subject in order to meet the administrative costs of the FROB, as the resolution authority, are defined.

Royal Decree 1012/2015 amends Royal Decree 2606/1996 of December 20, on the Credit Institution Deposit Guarantee Fund (“DGF”) in order to implement the changes introduced by Law 11/2015 in Royal Decree Law 16/2011 of October 14, which created the DGF. This completes the transposition of Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014 on deposit-guarantee schemes. The modifications introduced require the updating of the information that entities and branches belonging to the DGF are to provide to the Bank of Spain for the purposes of calculating contributions. The Royal Decree introduces a change in the calculation basis for contributions to the DGF new deposit guarantee compartment. Thus, the basis for the calculation of contributions, following the provisions of Directive 2014/49/EU, will not be determined by the total volume of deposits eligible for coverage by the DGF, but only by their effectively guaranteed amount. Institutions and branches that belong to the DGF are to submit quarterly (previously this was annually) to the Bank of Spain a statement of «Information for the determination of the basis of calculation of contributions to the Deposit Guarantee Fund» with data referring to the end of the relevant quarter. The Bank of Spain will then forward to the DGF the information from the statements received from each of the entities that is necessary to comply with its obligations, and the aggregated data. The Royal Decree also introduces obligations upon credit institutions to inform their depositors and actual and potential investors so they are able to identify the DGF to which the entity belongs. The Royal Decree defines the rules for the DGF’s cooperation with deposit guarantee schemes in other European Union Member States, in particular, as regards the reimbursement of deposits at branches operating outside their home country. Thus, forexample, the DGF will make payments to depositors at branches of credit institutions of other European Union Member States established in Spain on behalf of the deposit guarantee scheme of the European Union Member State of origin, and vice versa.

Royal Decree 358/2015, of May 8, amending Royal Decree 217/2008 of February 15, 2008 on the legal framework governing investment firms and other institutions providing investment services, and partially amending the implementing regulations of Collective Investment Institutions Law 35/2003 of November 4, 2003, approved by Royal Decree 1309/2005 of November 4, 2005, was published and came into force on 10 May 2015. The Royal Decree has two essential aims: to complete the transposition into Spanish law of European Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013; and to transform Royal Decree 217/2008 into the main set of implementing regulations governing the regulation, supervision and solvency of investment firms. Besides establishing a significant reduction in the minimum share capital required of investment firms, the Royal Decree places more emphasis on the suitability

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requirements for board members, managers and similar officers and for persons holding internal control functions or key posts for the day-to-day running of the business of investment firms, in similar terms to those required of credit institutions. In the case of remuneration policy, it implements the legislation introduced by Law 10/2014 that also applies to credit institutions. The Royal Decree also implements the internal capital adequacy assessment process envisaged in the referred Law 10/2014. The ICAAP strategies and procedures needs to be summarized in an annual internal capital adequacy assessment report, to be submitted to the Spanish CNMV by April 30 of each year, or earlier if so established by the latter. The Royal Decree also describes the objective and subjective scope of the supervisory function of the CNMV, the cooperation arrangements among the supervisory authorities and the reporting and disclosure requirements on similar terms to those established in Royal Decree 84/2015 for credit institutions.

Law 5/2015 of April 27, 2015, on the promotion of business financing, establishes a new legal regime for credit financial intermediaries. In addition, the Law regulates two types of hybrid institutions: 1) firms that intend to become CFIs and, in turn, to provide payment services, which will be considered hybrid payment institutions; and 2) firms that intend to become CFIs and, in turn, to issue electronic money, which will be considered hybrid electronic money institutions. Both will have to be specifically authorized to pursue their respective activities by the Minister for Economic Affairs and Competitiveness, following a report from the Bank of Spain and from the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC) on matters within their respective remit. The Law groups asset securitization vehicles and mortgage securitization vehicles in a single legal category and also amends the Spanish Securities Market Law 24/1988, of July 28, to encourage companies to move from multilateral trading facilities (MTFs) to official secondary markets, easing some of the requirements for a transitional period of two years. Specifically, companies will not be required to release and disseminate the second half-yearly financial report and the interim management statement. It also regulates, for the first time, the legal regime for crowdfunding platforms. To that end, these platforms must be authorized by and registered with the Spanish CNMV, restricting the activity to authorized institutions so as to safeguard financial stability, combining, therefore, the principles of necessity and proportionality envisaged in Law 20/2013 of December 9 on market unity.

Royal Decree-Law 6/2015 of May 14, amending Film Industry Law 55/2007 of December 28, 2007, granting several extraordinary loans and supplementary funding in the State budget and adopting other tax measures, was published on May 15, 2015. Law 35/2006 of November 28, 2006 on personal income tax and partially amending the corporate income tax, non-resident income tax and wealth tax laws, is amended, establishing, in certain cases, improvements in the tax treatment of taxpayers affected by mis-selling of subordinated debt and preference shares. The new rules apply to taxpayers that receive compensation, on or after January 1, 2013, as a consequence of agreements reached with institutions that issued subordinated debt securities or preference shares and will affect: 1) that compensation; 2) any positive or negative income that may have been generated previously as a result of buy-back and subscription or exchange for other securities; and 3) income obtained on the sale of those securities. Lastly, holders of subordinated debt or preference shares whose contracts have been declared null and void by the courts may request that their personal income tax self-assessments be corrected and, where appropriate, may obtain a refund of any tax paid incorrectly on the returns obtained, even if the right to apply for that refund is statute-barred. Rectification of self-assessments will only affect returns obtained on subordinated debt and preference shares, and any tax withholdings made against those returns.

Royal Decree 633/2015 of July 10, 2015, amending the Personal Income Tax Regulations, was approved by Royal Decree 439/2007 of March 30, 2007, and the Nonresident Income Tax Regulations, was approved by Royal Decree 1776/2004 of July 30, 2004. Both Regulations develop the legislative changes of the Personal Income Tax Law and the Nonresident Income Tax Law introduced by Law 26/2014 of November 27, 2014.

Royal Decree 634/2015, of July 10, 2015, approving the new Corporate Income Tax Regulations adapts and updates the former regulations to the new Corporate Income Tax Law 2014, of November 7, 2014. Among other changes, the new Regulations introduce important developments in transfer pricing obligations, especially with the introduction of reporting obligations in the form of a country-by-country reporting (in line with the recommendations of the BEPS Plan of the OECD), and substantially change and extend general transfer pricing documentation requirements with related parties.

Royal Decree-Act 9/2015, of July 10, 2015, introduced measures to reduce the tax burden on personal income taxpayers and other urgent economic measures. Among other changes, this Royal Decree approves a new tax scale and tax rates for 2015, bringing forward to 2015 the second phase of the reduction in the tax rates initially scheduled for 2016, and is accompanied by a reduction in the relevant withholding rates starting on July 12, 2015.

Law 20/2015 of July 14, on the organization, supervision and solvency of insurance and reinsurance undertakings, came into force on January 1, 2016. The Law introduces some of the provisions of Directive

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2009/138/EC of the European Parliament and of the Council of November 25, 2009, on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), which require incorporation through a rule with the status of law. The remainder of the provisions of this Directive will be transposed into Spanish legislation by means of a regulation, which will also implement some of the provisions of this Law, without prejudice to the implementing measures that may be stipulated by the European Commission. The purpose is the regulation and supervision of the insurance and reinsurance business, including the conditions for taking up and pursuing this business, and the rules on solvency, reorganization and winding up of entities, in order to protect the rights of policy holders, insured parties and beneficiaries, and to promote the appropriate degree of transparency and proper development of the insurance business. The main changes the Law introduces are: a) In relation to the conditions for the pursuit of the business, persons exercising effective control over insurance undertakings and controlling entities of groups of insurance undertakings shall be required, inter alia, to meet the conditions of good repute, and necessary professional qualifications and experience; b) the requirement for entities to have an effective system of governance (one of the new features introduced by the Solvency II Directive), which recognizes that some risks can only be duly taken into consideration through requirements for entities’ governance and rather than by means of quantitative requirements; c) two levels of solvency capital requirements are established: one, obligatory solvency capital, varying as a function of the risk assumed by the entity and based on a prospective calculation, and the other, the minimum obligatory capital, configured as a minimum level of security below which the entity’s financial resources must never drop; d) As regards supervision, insurance and reinsurance undertakings considered individually constitute an essential element of supervision; e) The law specifies the concept of a specially privileged creditor under an insurance contract in the event of an entity’s being wound up, and confers upon members of mutual and cooperative insurance societies the same rights as partners in capital companies, in particular the right to information and a share of the assets resulting from the liquidation; and f) The types of infringers under the infringements and penalties regime are adjusted to the new requirements for the taking-up and pursuit of the business. The limits to the financial penalties are defined more precisely and more details of disciplinary proceedings are set out.

Law 22/2015 of July 20, 2015 on Statutory Audits was published, and is due to come into force on June 17, 2016. The main purpose of the Law is to adapt Spanish legislation to the changes introduced by Directive 2014/56/EU of the European Parliament and of the Council of April 16, 2014, amending Directive 2006/43/EC of the European Parliament and of the Council of May 17, 2006 on statutory audits of annual accounts and consolidated accounts, on those points where there were divergences. Also, as regards the auditors of public-interest entities, supplementary provisions to Regulation 537/2014 of April 16, 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC have been included.

Law 34/2015, of September 21, 2015, partially amends General Taxation Law 58/2003, of December 17, 2003, with the intention to bolster the legal certainty of taxpayers and tax authorities, reduce the potential for litigation, prevent tax fraud and increase the efficiency of tax management, inspection and collection by the tax authorities. Among other changes this reform introduces the penalties and infringements regime regarding the implementation of the regulations approved for the automatic exchange of tax information between states (FATCA, Common Reporting Standard), which includes the obligation to block any improperly identified financial account within 90 days of the date on which the application to open the account was submitted.

Royal Decree-Law 11/2015 of October 2 was published, regulating the withdrawal of cash from ATMs, coming into force on the day of its publication. Its main objective is to avoid those cases in which, as well as being obliged to pay a fee to the card issuing entity for withdrawing cash from a cash dispenser (ATM), the customer is also obliged to pay another fee to the owner of the ATM as a consequence of this withdrawal. The Royal Decree-Law establishes that, in the case of a cash withdrawal using a card, the ATM owner may not charge any amount whatsoever to customers of other entities, but may demand a fee from the card issuer. For its part, the card issuer may not charge its customers a fee higher than that the ATM owner charges the card issuer, nor may it charge any additional sums for any other items. Within the foregoing limit, the amount to be charged will be that freely determined in the contract between the card issuer and its customers. Issuers may charge an additional amount for cash withdrawals, but under no circumstances may this be more than customers are charged for withdrawing cash on credit from the issuer’s own ATMs.

Royal Decree 877/2015 of October 2 implementing Law 26/2013 of December 27, 2013 on savings banks and banking foundations, regulating the reserve fund to be constituted by certain banking foundations, came into force on October 4, 2015. In addition to this, the Ministerial Order ECC/2575/2015 of November 30, determining the content, structure and publication requirements of the annual corporate governance report, and establishing the accounting requirements for banking foundations, and Circular of Bank of Spain 6/2015 of November 17 on certain aspects of the corporate governance and remunerations reports of savings banks that do not issue securities admitted to trading on official securities markets, and on obligations of banking foundations deriving from their holdings in credit institutions, were published. The referred Ministerial Order and Circular came into force on December 5, 2015 and November 21, 2015 respectively.

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Royal Decree 878/2015 of October 2, on clearing, settlement and registration of traded securities represented as book entries, on the legal framework for central securities depositaries and central counterparties, and the transparency requirements for issuers of securities admitted to trading on an official secondary market, came into force on February 3, 2016. The Royal Decree continues the transposition of European legislation, inter alia, on the system for the clearing, settlement and registration of securities begun by Law 32/2011 of October 4, amending Law 24/1988 of July 28, 1988 on the Securities Market, and certain minor changes introduced by Law 11/2015 of June 18, on the recovery and resolution of credit institutions and of Investment Firms. Furthermore, it also completes the transposition into Spanish legislation of Directive 2013/50/EU of the European Parliament and of the Council of October 22 on transparency and information requirements in relation to issuers, begun by Law 11/2015. The main regulatory changes are as follows: a) the same system of book entries established in Royal Decree 116/1992 of February 14 on representation of securities by means of book entries and clearing and settlement of stock market transactions has essentially been left unchanged; the amendments refer to adjustments made by the first final provision of Law 11/2015 in relation to the reversibility of the representation of securities by means of book entries, which must be authorized by the Spanish CNMV; b) one of the main pillars on which the reform of the securities clearing, settlement and registration system is based is the substitution of the current equity registration system, based on registry references, by a system based only on securities balances, and the establishing of alternative control procedures. The legal and economic framework for central counterparties and other central securities depositaries has also been implemented. The members of the boards of directors of central counterparties and central securities depositaries, and their managing directors and other similar officers, must obtain prior authorization from the Spanish CNMV, for the purposes of verification of compliance with the applicable legal rules, and in particular, that the persons concerned comply with the reputation and experience requirements laid down in Regulation (EU) No 648/2012 of July 4, 2012 and Regulation (EU) No 909/2014 of July 23, 2014; c) the Royal Decree also introduces a series of amendments to Royal Decree 1362/2007 of October 19, implementing the Securities Market Law in relation to the transparency requirements concerning information on issuers whose securities are admitted to trading on an official secondary market or any other regulated market in the European Union.

Law 48/2015 of October 29, on the State Budget for 2016 was published, and the key points from the fiscal and financial regulatory viewpoint are a) that the Minister of Economic Affairs and Competitiveness has been authorized to increase the outstanding balance of state debt in 2016 by up to €52.9bn from its level at the start of the year (the limit set in the previous budget was €49.5bn); b) in the case of personal income tax, that as of January 1, 2016 the maximum deduction applicable for health insurance premiums when the insured person is disabled has been raised from €500 to €1500; and c) that two main changes have been made affecting corporation tax: Firstly, as of July 1, 2016 the way in which the tax incentive allowing the income from certain intangible assets to be reduced is calculated has been changed in order to align it with European and OECD standards; and secondly, in relation to the conversion of certain deferred tax assets into a credit vis-à-vis the tax authorities, as of January 1, 2016 new conditions have been established for deferred tax assets arising to acquire the right of conversion. In addition to the above, other financial measures reduced the legal interest rate and the late-payment interest rate from 3.5% to 3% and from 4.375% to 3.75%, respectively.

Royal Decree 1021/2015, of November 13, 2015 establishes from January 1, 2016, the obligation for financial institutions to identify the tax residence of persons who hold or control certain financial accounts and to provide certain information concerning them to the Tax Authorities which could share it with Tax Authorities of other countries in the area of Mutual Assistance agreements. This Royal Decree incorporates into Spanish legislation the rules on reporting and due diligence procedures established in Directive 2011/16/EU (amended by Directive 2014/107/EU as regards mandatory automatic exchange of information in the field of taxation) and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the “Agreement” published in Spain in August 13, 2015), within the scope of what is commonly known as the OECD Common Reporting Standard (CRS). As a result of this legislation, Spanish financial institutions will be obliged to supply to the Spanish Tax Authorities certain information regarding their customers resident in the European Union or in any other country with which Spain has an Agreement in effect, for the first time in 2017, regarding the information of year 2016.

Royal Decree 1060/2015 of November 20, on the organization, supervision and solvency of insurance and reinsurance undertakings was published. The Royal Decree implements Law 20/2015 of July 14, 2015 on the organization, supervision and solvency of insurance and reinsurance undertakings, and completes the transposition of the Solvency II Directive, also known as the Omnibus II Directive, begun by the referred Law 20/2015. Aspects such as the procedure for application and approval, documentation to provide, or the effects of authorization are regulated in detail. These points include in particular the fact that authorization granted to a Spanish insurance and reinsurance undertaking to operate in Spain means that it can also do so throughout the

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European Union (known as the single license or community passport). The general requirements that the system of governance must meet in order to ensure a sound and prudent management of the activity were established, as have the requirements that partners holding significant shareholdings in the undertaking and those exercising effective management or key roles within the system of governance be fit and proper. A new solvency regime has also been put in place, establishing the rules for the correct calculation of technical provisions, the determination, classification and eligibility of capital, and the calculation of obligatory solvency capital, using both the standard formula and by means of internal models.

On November 5, 2015, Spain’s Official State Gazette published Order ECC/2316/2015 of November 4 on information obligations and the classification of financial products, which entered into force on February 5, 2016. The order introduces information and classification obligations that must be fulfilled by entities that market certain financial products or render investment services. The aim of the order is to ensure that retail clients are provided with pre-contractual documentation that follows a standardized format and includes an indicator of the product’s level of risk. This documentation must be provided for products to which the Order applies and is additional to that which must be provided pursuant to the legislation currently in force. The order applies to the following financial products: a) Financial instruments included in article 2.1 of the Securities Market Law; b) bank deposits, including, among others, sight, savings and term deposits; c) life insurance products with a savings element, including assured savings plans; d) individual and group pension plans.

On December 17, 2015, Spain and Mexico signed a new tax protocol amending the current Tax Treaty, which must be ratified by both countries and will enter into force three months following the later of the dates on which any of the countries give notice that their internal procedures for entry into force have been fulfilled. Among the most significant changes included by the protocol in the Tax Treaty, the Tax Treaty provides for a general 10% dividend withholding tax reduced to 0% for dividends derived from “qualifying participations” (i.e., more than 10% direct participation in the share capital of the paying entity) and pension funds, a reduction of the withholding tax on interest from 15% to 10% (4.9% for financial institutions), and a reduction of the tax rate applicable to capital gains derived from the transfer of shares from 25% to 10% (0% if derived for financial or insurance institutions or pension funds, or for listed shares).

United States Supervision and Regulation

Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Santander UK’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico, Santander Bank, a national bank that has branches throughout the Northeast U.S., and Santander Consumer USA, an auto financing company. We also engage in securities activities in the United States directly through our broker-dealer subsidiaries, Santander Securities Corporation and Santander Investment Securities Inc.

Disclosure pursuant to Section 219 of the Iran threat reduction and Syria human rights act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Group. During the period covered by this annual report:

(a) Santander UK holds frozen savings accounts and one current account for two customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer’s designation and have remained blocked and dormant throughout 2015. Revenue generated by Santander UK on these accounts is negligible.

(b) An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation of Weapons of Mass Destruction (“NPWMD”) designation, holds a mortgage with Santander UK that was issued prior to any such designation. No further drawdown has been made (or would be allowed) under this mortgage although we continue to receive repayment instalments. In 2015, total revenue in connection with the mortgage was approximately £3,876 while net profits were negligible relative to the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance

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with applicable sanctions. The same Iranian national also holds two investment accounts with Santander ISA Managers Limited. The funds within both accounts are invested in the same portfolio fund. The accounts have remained frozen during 2015. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Group in connection with the investment accounts was approximately £188 while net profits in 2015 were negligible relative to the overall profits of Banco Santander, S.A.

(c) During the third quarter of 2015 two additional Santander UK customers were designated. A UK national is designated by the U.S. under the Specially Designated Global Terrorist (“SDGT”) sanctions program and is on the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons (“SDN”) List. This customer holds a bank account which generated revenue of approximately £180 during the third and fourth quarter of 2015. The account is blocked. Net profits in the third and fourth quarter of 2015 in connection with this account were negligible relative to the overall profits of Banco Santander, S.A. A second UK national is designated by the U.S. under the SDGT sanctions program and is on the U.S. SDN List. No transactions were made in the third and fourth quarter of 2015 and his account is blocked and in arrears.

(d) In addition, during the fourth quarter of 2015, Santander UK has identified one additional customer. A UK national is designated by the U.S. under the SDGT sanctions program and is on the U.S. SDN List. The customer holds a bank account which generated negligible revenue during the fourth quarter of 2015. The account was closed during the fourth quarter of 2015. Net profits in the fourth quarter of 2015 were negligible relative to the overall profits of Banco Santander, S.A.

In addition, the Group has an outstanding legacy export credit facility with Bank Mellat, which was in the U.S. SDN List at December 31, 2015. In 2005 Banco Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matured on July 6, 2015. As of December 31, 2015, the Group was owed €0.3 million not paid at maturity under this credit facility and 95% covered by official export credit agencies.

Banco Santander has not been receiving payments from Bank Mellat under this or other credit facilities in recent years. Banco Santander has been and expects to continue to be repaid any amounts due by official export credit agencies. No funds have been extended by Santander under this facility since it was granted.

The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Group would need prior approval from the Spanish Government to pay any amounts due to Bank Sepah or Bank Mellat pursuant to Council Regulation (EU) No. 2015/1861.

In the aggregate, all of the transactions described above resulted in approximately €15,000 gross revenues and approximately €77,000 net loss to the Group in 2015, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount – which payment would be subject to prior approval (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

Dodd-Frank Act

On July 21, 2010, the United States enacted the Dodd-Frank Act, which provides a broad framework for significant regulatory changes that has already extended, and will continue to extend, to almost every area of U.S. financial regulation. Implementation of the Dodd-Frank Act requires further detailed rulemaking over several years by different U.S. regulators, including the Office of the Comptroller of the Currency (the “OCC”), the Federal Reserve Board, the Securities and Exchange Commission (the “SEC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission (the “CFTC”) and the newly created Financial Stability Oversight Council (the “Council”) and Consumer Financial Protection Bureau (the “CFPB”), although uncertainty remains to some degree about the final details, timing and impact of the rules.

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Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring, investing in, or entering into certain credit-related transactions with related, covered funds, in each case subject to certain exceptions. The Volcker Rule became effective in July 2012 and in December 2013 U.S. regulators issued final rules implementing the Volcker Rule. The statute and final rules also contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. Banking entities such as the Bank must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. In general, all banking entities were required to conform to the requirements of the Volcker Rule, except for provisions related to certain funds, and to implement a compliance program by July 21, 2015. In December 2014, the Federal Reserve Board issued an order extending the Volcker Rule’s general conformance period until July 21, 2016 for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 (“legacy covered funds”), and stated its intention to grant a final one-year extension of the general conformance period, to July 21, 2017, for banking entities to conform ownership interests in and relationships with legacy covered funds. This extension of the conformance period does not apply to the Volcker Rule’s prohibitions on proprietary trading and does not appear to apply to any investments in and relationships with covered funds put in place after December 31, 2013. We have assessed how the final rules implementing the Volcker Rule affect our businesses and have adopted the necessary measures to bring our activities into compliance with the rules. It is expected that our non-U.S. banking organizations, such as the Bank, will largely be able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions under the Volcker Rule and its implementing regulations.

The Dodd-Frank Act also provides regulators with authority to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk. However, in imposing heightened capital, leverage, liquidity and other prudential standards on non-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank is subject to comparable home country standards (although certain of our activities are or will be subject to the U.S. standards).

Pursuant to this authority, in February 2014, the Federal Reserve Board issued a final rule to enhance its supervision and regulation of the U.S. operations of foreign banking organizations (“FBOs”) such as us. Under this rule, FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies (“Large FBOs”), are required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that will hold substantially all of the FBO’s U.S. bank and nonbank subsidiaries. These IHCs will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. The final rule also permits the Federal Reserve Board to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of a Large FBO will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, if stress-test requirements are not met, certain asset maintenance requirements. Large FBOs generally will be required to establish IHCs and comply with the enhanced prudential standards beginning July 1, 2016. An IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018. FBOs that had $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014, such as us, were required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the IHC and other requirements. Enhanced prudential standards will apply to our top-tier U.S.-based bank holding companies beginning on January 1, 2015 until we form or designate an IHC and the IHC becomes subject to corresponding enhanced prudential standards. The Federal Reserve Board has stated that it will issue, at a later date, final rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and large FBOs, including an early remediation framework.

As part of the implementation of enhanced prudential standards under the Dodd-Frank Act, the Federal Reserve proposed on March 4, 2016 a rule implementing single-counterparty credit limits for large bank holding companies and Large FBOs with respect to their combined U.S. operations. The proposed rule would apply both to Santander Holdings USA and to the combined U.S. operations of Banco Santander with different levels of stringency. Santander Holdings USA’s credit exposure to any single counterparty would be limited to 25 percent of its eligible capital base, while Banco Santander’s credit exposures with respect to its combined U.S. operations would be limited to 25 percent of its Tier 1 capital for most counterparties or 15 percent of Tier 1 capital for counterparties that are G-SIBs and certain other large financial institutions. The proposed rule would also require Santander Holdings USA and Banco Santander to aggregate exposure between counterparties that are economically interdependent or in the presence of certain control relationships.

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U.S. regulators will also be able to restrict the size and growth of systemically significant non-bank financial companies and large interconnected bank holding companies. In addition, a bank holding company will become subject to a bright-line debt-to-equity ratio limit if the Council determines the company poses a grave threat to U.S. financial stability.

Furthermore, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, trading through electronic platforms and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. Banco Santander, S.A. and Abbey National Treasury Services plc became provisionally registered as swap dealers with the CFTC on July 8, 2013 and November 4, 2013, respectively. In addition, we may register one more subsidiary as a swap dealer with the CFTC. Although many significant regulations applicable to swap dealers are already in effect, some of the most important rules, such as margin requirements for uncleared swaps and capital rules for swap dealers, are not yet effective and we continue to assess how compliance with these new rules will affect our business.

The Dodd-Frank Act removed, effective in July 2011, a longstanding prohibition on the payment of interest on demand deposits by our FDIC-insured bank subsidiaries and our New York branch. The Dodd-Frank Act also requires that the lending limits applicable to Santander Bank, Santander Puerto Rico, and our New York branch take into account credit exposure arising from derivative transactions, and that those applicable to Santander Bank and our New York branch also take into account securities borrowing and lending transactions and repurchase and reverse repurchase agreements with counterparties. The OCC has issued a final rule implementing the Dodd-Frank Act’s provisions relating to lending limits. Also, under the so-called swap “push-out” provisions of the Dodd-Frank Act, certain derivatives activities of FDIC-insured banks and U.S. branch offices of foreign banks (including our New York branch) were restricted or prohibited effective July 2015. In December 2014, the United States enacted an amendment to the swap “push-out” provision of the Dodd-Frank Act that significantly narrows the scope of derivatives subject to the restrictions or prohibitions, effectively limiting the provision to certain derivatives based on asset-backed securities.

In addition, Title I of the Dodd-Frank Act and the implementing regulations issued by the Federal Reserve Board and the FDIC require each bank holding company with assets of $50 billion or more, including us, to prepare and submit annually to the Federal Reserve Board and the FDIC a plan for the orderly resolution of our subsidiaries and operations that are domiciled in the United States in the event of future material financial distress or failure. In addition, each insured depository institution (“IDI”) with assets of $50 billion or more, such as Santander Bank, must submit a separate IDI resolution plan annually to the FDIC. The Title I and IDI plans each must include information on resolution strategy, major counterparties and interdependencies, among other things, and require substantial effort, time and cost to prepare. We submitted our most recent annual U.S. resolution plans in December 2015. The Title I plan resolution plan is subject to review by the Federal Reserve Board and the FDIC and the IDI plan is subject to review by the FDIC only. If the Federal Reserve Board and the FDIC jointly find a bank holding company’s Title I plan to be not credible, and the company fails to correct any deficiencies in a timely manner, the Federal Reserve Board and the FDIC may impose increased capital or liquidity requirements, restrictions on growth, activities or operations, or requirements to divest certain assets or operations.

Regulations that the FDIC or CFPB may adopt could affect the nature of the activities that a bank, such as Santander Bank and Santander Puerto Rico, may conduct, and may impose restrictions and limitations on the conduct of such activities.

The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

Regulatory Authorities

We are a financial holding company and a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Bank, Santander Holdings USA and Santander BanCorp. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Federal Reserve System, including both the Federal Reserve Board and Federal Reserve Banks, such as the Federal Reserve Bank of New York and the Federal Reserve Bank of Boston.

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Certain of our subsidiaries, branches and branches of our subsidiaries are subject to regulation and supervision in the United States. Santander Puerto Rico is a Puerto Rico-chartered bank and its deposits are insured by the FDIC. Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Office of Financial Institutions and the FDIC. Santander Bank is a federally-chartered national bank, the deposits of which are also insured by the FDIC. Santander Bank is subject to regulation, supervision and examination by the OCC and the FDIC. Our New York branch is supervised by the Federal Reserve Bank of New York and the New York State Department of Financial Services, but its deposits are not insured (or eligible to be insured) by the FDIC. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Bank of New York and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Bank of Atlanta. Santander Consumer USA is regulated and supervised by the Federal Reserve Bank of Boston and various state regulators.

Restrictions on Activities

As described below, federal and state banking laws and regulations impose certain requirements and restrict our ability to engage, directly or indirectly through subsidiaries, in activities or make investments, directly or indirectly, in companies in the United States.

As a financial holding company and a bank holding company under the Bank Holding Company Act, we are subject to regulation and supervision by the Federal Reserve Board. As a financial holding company, the scope of our permitted activities and investments in the United States is broader than that permitted for bank holding companies that are not also financial holding companies, although it is nevertheless subject to certain limitations and restrictions. Our U.S. activities and investments are limited to those that are financial in nature or incidental or complementary to a financial activity, as determined by the Federal Reserve Board. To maintain our financial holding company status, we and all of our subsidiaries must be “well capitalized” and “well managed” as determined by the Federal Reserve Board. If at any time we fail to meet these capital and management requirements, the Federal Reserve Board may impose limitations or conditions on the conduct of our activities and we may not commence in the United States any new activities otherwise permissible for financial holding companies or acquire any shares in any U.S. company under Section 4(k) of the Bank Holding Company Act, subject to certain narrow exceptions, without prior Federal Reserve Board approval.

In addition, we are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of a U.S. bank or other depository institution, or a depository institution holding company. Under the Bank Holding Company Act and Federal Reserve Board regulations, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services. We are also required to act as a source of financial strength for our U.S. bank subsidiaries.

Santander Puerto Rico and Santander Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.

Under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the single-borrower lending limits, which are substantially similar to the lending limits applicable to national banks. For our U.S. branches, these single-borrower lending limits are based on the worldwide capital of the entire foreign bank (e.g., Banco Santander, S.A. in the case of our New York branch).

Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines (i) that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), (ii) that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would

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be inconsistent with the public interest or with the purposes of federal banking laws or, (iii) for a foreign bank that presents a risk to the stability of the U.S. financial system, the home country of the foreign bank has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk.

There are various qualitative and quantitative restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities must be secured by designated amounts of specified collateral and are subject to volume limitations. These restrictions also apply to certain transactions of our New York branch with certain of our U.S. affiliates. Effective in July 2012, the Dodd-Frank Act subjects credit exposures arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements to these collateral and volume limitations. The Federal Reserve Board has not yet issued regulations to implement these changes made by the Dodd-Frank Act.

A major focus of U.S. governmental policy relating to financial institutions is aimed at preventing money laundering and terrorist financing and compliance with economic sanctions in respect of designated countries or activities. Failure of an institution to have policies and procedures and controls in place to prevent, detect and report money laundering and terrorist financing could in some cases have serious legal, financial and reputational consequences for the institution.

Our U.S. Bank Holding Company Subsidiary

Certain of our U.S. banking and bank holding company subsidiaries, including Santander Holdings USA, our largest U.S. bank holding company subsidiary and future U.S. intermediate holding company (“IHC”), are subject to stress testing and capital planning requirements under regulations implementing the Dodd-Frank Act. In March 2014 and 2015, the Federal Reserve Board, as part of its Comprehensive Capital Analysis and Review (“CCAR”) process, objected on qualitative grounds to the capital plans submitted by Santander Holdings USA. In its 2015 public report on CCAR, the Federal Reserve Board cited widespread and critical deficiencies in Santander Holdings USA’s capital planning processes, including specific deficiencies in governance, internal controls, risk identification and risk management, management information systems, and supporting assumptions and analysis. As a result of the 2014 and 2015 CCAR objections, Santander Holdings USA is not permitted to make any capital distributions without the Federal Reserve Board’s approval, other than the continued payment of dividends on Santander Holdings USA’s outstanding class of preferred stock, until a new capital plan is approved by the Federal Reserve Board or the Federal Reserve Board approves the capital distribution. The deadline for Santander Holdings USA’s next capital plan submission was April 5, 2016. There is a risk that the Federal Reserve Board will object to Santander Holdings USA’s next capital plan.

The Group is in the process of enhancing management structures, including by making Santander Holdings USA a corporate center which oversees and supports all the Group’s activities in the United States. Recent actions taken to implement these enhancements include (i) reorganizing Santander Holdings USA’s board of directors, (ii) appointing a new country head, (iii) launching a Capital and Risk Transformation project, which aims to meet regulatory expectations by reinforcing risk management, finance and technology to better manage our businesses, and (iv) investing in technology to improve our internal controls, risk management and capital planning systems, which we believe will also produce better customer service quality.

On October 30, 2015, the Federal Reserve Board proposed a rule that would establish certain TLAC and long-term debt requirements in the U.S. generally consistent with the FSB’s international TLAC standard. The proposed U.S. TLAC rule would require, among other things, the U.S. IHCs of non-U.S. G-SIBs, including the Group’s future U.S. IHC, to maintain a minimum amount of internal TLAC and would separately require them to maintain a minimum amount of internal long-term debt. The terms “internal TLAC” and “internal long-term debt” refer to instruments that would be required to be issued internally within the banking group, from the IHC to a foreign parent entity. The proposed minimum amounts of internal TLAC and internal long-term debt vary depending on the home country resolution authority’s preferred resolution strategy. Under the proposed rule, the Group’s U.S. IHC, if it is treated as a resolution entity IHC under the proposed rule, would be required to maintain, on a fully phased-in basis by 2022, internal TLAC of at least 18% of risk-weighted assets (plus an internal TLAC buffer of an additional 2.5%), at least 6.75% of the Basel III leverage ratio denominator and at least 9% of average total consolidated assets, as well as internal long-term debt of at least 7% of risk-weighted assets, at least 3% of the Basel III leverage ratio denominator and at least 4% of average total consolidated assets. Internal long-term debt instruments would be subject to certain eligibility criteria, including issuance to a foreign parent entity (a non-U.S. entity that controls the IHC) and the inclusion of a contractual trigger allowing for, in limited circumstances, the cancellation of, or immediate conversion or exchange of the instrument into, common equity tier 1 capital upon an order by the Federal Reserve Board. As proposed, the internal TLAC requirements may be satisfied with a combination of eligible long-term debt instruments and

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tier 1 capital, whereas the internal long-term debt requirements would be required to be satisfied only with eligible long-term debt instruments. The proposed rule would also require internal TLAC to be contractually subordinated to ineligible debt instruments and prohibit the U.S. IHC from issuing any external short-term debt, issuing parent guarantees with certain impermissible cross-defaults, entering into any qualified financial contract with a third party, benefitting from upstream guarantees or issuing any instruments with certain setoff rights.

We are also subject to supervisory actions in the United States. Specifically, on September 15, 2014, Santander Holdings USA and the Federal Reserve Bank of Boston (“FRB Boston”) executed a written agreement relating to a subsidiary’s declaration and payment of dividends in the second quarter of 2014 without the Federal Reserve Board’s approval. Under this written agreement, Santander Holdings USA agreed to submit to the FRB Boston written procedures to strengthen board oversight of management regarding planned capital distributions by Santander Holdings USA and its subsidiaries. In addition, Santander Holdings USA agreed to subject future distributions to the prior written approval of Federal Reserve System and to take necessary actions to ensure that no such distributions are made without the Federal Reserve Board’s approval.

In addition, on July 2, 2015, Santander Holdings USA and the FRB Boston executed a second written agreement. Under the terms of this written agreement, Santander Holdings USA is required to make enhancements with respect to, among other matters, (1) board oversight, (2) risk management, (3) capital planning, and (4) liquidity risk management with respect to Santander Holdings USA as a consolidated organization. The Capital and Risk Transformation project described above is intended to address the provisions of this written agreement.

As a separate supervisory matter, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In some instances, we are subject to significant legal restrictions on our ability to publicly disclose these actions or the full details of these actions. In addition, as part of the regular examination process, our U.S. banking and bank holding company subsidiaries’ regulators may advise our U.S. banking subsidiaries to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Currently, under the U.S. Bank Holding Company Act, we and our U.S. banking and bank holding company subsidiaries may not be able to engage in certain categories of new activities in the U.S. or acquire shares or control of other companies in the U.S. Any such actions or restrictions, if and in whatever manner imposed, could adversely affect our costs and revenues. Moreover, efforts to comply with any nonpublic supervisory actions or restrictions may require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions, if and in whatever manner imposed, could have a material adverse effect on our business and results of operations; and, in certain instances, we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions.

Our New York branch

Our New York branch is licensed by the New York Superintendent of Financial Services to conduct a commercial banking business. Its activity is mainly focused on wholesale banking, providing lending, markets activity on rates and currencies derivatives and transactional services to corporate and institutional investors. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.

The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis.

The New York State Banking Law authorizes the Superintendent of Financial Services to take possession of the business and property of a New York branch of a foreign bank under certain circumstances, generally involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of depositors and other creditors that arose out of transactions with a branch are to be accepted by the Superintendent of Financial Services for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Financial Services will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

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Our U.S. Depository Institution Subsidiaries

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Bank and Santander Puerto Rico), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five capitalization categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.

In July 2013, the U.S. bank regulators issued the U.S. Basel III final rules implementing the Basel III capital framework for U.S. banks and bank holding companies and other U.S. capital reform. Certain aspects of the U.S. Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, became effective on January 1, 2015 for our U.S. depository institution subsidiaries. These minimum capital ratios include a total capital to risk-weighted assets of 8%, Tier 1 capital to risk-weighted assets of 6% and CET1 capital to risk-weighted assets of 4.5%. Other aspects of the U.S. Basel III final rules, such as the 2.5% capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, the Federal Reserve Board and other U.S. regulators issued in September 2014 a final rule implementing a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The final liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The final rule became effective on January 1, 2015. The Federal Reserve Board has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all large FBOs.

Monetary Policy and Exchange Controls

The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.

The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Single Supervisory Mechanism, Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the then fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.

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C. Organizational structure.

Banco Santander, S.A. is the parent company of the Group which was comprised at December 31, 2015 of 782 companies that consolidate by the global integration method. In addition, there were 216 companies that were accounted for by the equity method.

See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.

D. Property, plant and equipment.

During 2015, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2015 included 3,530 branches offices in Spain and 9,500 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See note 16 to our consolidated financial statements.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

Critical Accounting Policies

The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see note 1.c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.

We believe that of our significant accounting policies, the following may involve a high degree of judgment:

Fair value of financial instruments

Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument on a given date is taken to be the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price).

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.

The following subsections set forth the most important products and families of derivatives, and the related valuation techniques and inputs, by asset class.

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• Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using the net present value of the estimated future cash flows discounted taking into account basis swap and cross currency spreads determined on the basis of the payment frequency and currency of each leg of the derivative. Vanilla options, including caps, floors and swaptions, are priced using the Black-Scholes model, which is one of the benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable market data such as deposit interest rates, futures rates, cross currency swap and constant maturity swap rates, and basis spreads, on the basis of which different yield curves, depending on the payment frequency, and discounting curves are calculated for each currency. In the case of options, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions, and interpolation and extrapolation of volatilities from the quoted ranges are carried out using generally accepted industry models. The pricing of more exotic derivatives may require the use of non-observable data or parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates, which are usually defined from historical data or through calibration.

Inflation-related assets include zero-coupon or year-on-year inflation-linked bonds and swaps, valued with the present value method using forward estimation and discounting. Derivatives on inflation indices are priced using standard or more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality, on the basis of which a forward inflation curve is calculated. Also, implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

• Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts; they also include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using generally accepted industry models or bespoke models, as appropriate. For derivatives on illiquid stocks, hedging takes into account the liquidity constraints in models.

The inputs of equity models consider yield curves, spot prices, dividends, asset funding costs (repo margin spreads), implied volatilities, correlation among equity stocks and indices, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American-style vanilla call and put options. Various interpolation and extrapolation techniques are used to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are implied, when possible, from market quotes of correlation-dependent products. In all other cases, proxies are used for correlations between benchmark underlyings or correlations are obtained from historical data.

The inputs of foreign exchange models include the yield curve for each currency, the spot foreign exchange rate, the implied volatilities and the correlation among assets of this class. Volatilities are obtained from European call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

• Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate the probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs, NTDs and CDOs.

Valuation inputs are the yield curve, the CDS spread curve and the recovery rate. For indices and important individual issuers, the CDS spread curve is obtained in the market. For less liquid issuers, this spread curve is estimated using proxies or other credit-dependent instruments. Recovery rates are usually

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set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

Valuation adjustment for counterparty risk or default risk

The credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed to each counterparty.

The CVA is calculated taking into account potential exposure to each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA:

• Expected exposure: including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for derivatives with interim payments.

• LGD: percentage of final loss assumed in a counterparty credit event/default.

• Probability of default: for cases where there is no market information (the CDS quoted spread curve, etc.), proxies based on companies holding exchange-listed CDSs, in the same industry and with the same external rating as the counterparty, are used.

• Discount factor curve.

The debit valuation adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises as a result of the Group’s own risk assumed by its counterparties in OTC derivatives.

The CVA and DVA recognized by the Group at December 31, 2015 amounted to €851 million and €531 million, respectively.

Valuation adjustments due to model risk

The valuation models described above do not involve a significant level of subjectivity, since they can be adjusted and recalibrated, where appropriate, through internal calculation of the fair value and subsequent comparison with the related actively traded price. However, valuation adjustments may be necessary when market quoted prices are not available for comparison purposes.

The sources of risk are associated with uncertain model parameters, illiquid underlying issuers, poor quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, the Group calculates and applies valuation adjustments in accordance with common industry practice.

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities.

In note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the effect on the fair value of a reasonable change in the assumptions used in the valuation.

Allowance for credit losses for financial instruments accounted for at amortized cost

Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.

When a loan is deemed partially uncollectible, a provision is recorded (charged against earnings) as opposed to a partial write-off (derecognition from the balance sheet), since a partial write-off of the loan is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, the provision is increased to 100% of the loan balance. Accordingly, we recognize a credit loss on any loan at the time it is deemed to be impaired.

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The credit loss recognition process is independent of the process for the derecognition of non-performing loans from the balance sheet. The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until we consider that the recovery of those amounts is remote.

We consider recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as non-performing due to arrears (the maximum period established by the Bank of Spain).

When the recovery of a financial asset is considered remote, it is charged-off, together with the related allowance, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute of limitations period, forgiveness or any other cause.

For the purpose of determining impairment losses, we monitor our debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics, which are classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases, which are classified by the Group as “standardized” by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.

As regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

• When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

• When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

We have certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the coverage of loss arising from credit risk, we must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as set forth below:

a. Specific allowance for impaired assets:

The allowance for debt instruments not measured at fair value through profit or loss that are classified as non-performing is generally recognized in accordance with the criteria set forth below:

i. Assets classified as non-performing due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than 90 days past due are provisioned individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

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ii. Assets classified as non-performing for reasons other than counterparty arrears:

Debt instruments which are not classifiable as non-performing due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are provisioned individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

b. Allowance for inherent losses:

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classify all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of our country risk exposure, the allowances recognized relating to this matter are not material with respect to the credit loss allowances recognized.

The allowance for credit losses for financial instruments accounted for at amortized cost and contingent liabilities recorded by Grupo Santander as at December 31, 2015, using the methodology outlined above, was €27,249 million.

However, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRS-IASB and, therefore, we check the allowances calculated as described above with those obtained from our own internal models for the calculation of the coverage of losses arising from credit risk in order to confirm that there are no material differences.

Our internal models (a full description of our credit risk management system is included in Item 4. Information on the Company—B. Business Overview—Allowance for Credit Losses and Country Risk Requirements and in Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 3. Credit Risk) determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows. In estimating the future cash flows of debt instruments the following factors are taken into account:

• All the amounts that are expected to be obtained over the remaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;

• The various types of risk to which each instrument is subject; and

• The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

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The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default. These parameters are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.

• Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.

• Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.

• For the purposes of calculating the incurred losses PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective non-performing assets).

• Loss given default (LGD) is the expected loss arising in the event of default. It depends mainly on the present value of the guarantees associated with the transaction and other the future flows that are expected to be recovered.

In addition to all of the above, the calculation of the incurred loss takes into account the adjustment to the current situation of the aforementioned factors (PD and LGD) considering our historical experience and other specific information to reflect the current conditions.

At December 31, 2015 there is no material difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 (as explained above) and IFRS-IASB.

Impairment

Certain assets, including goodwill, other intangible assets, non-current assets held for sale, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.

Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An asset is impaired when its carrying amount exceeds its recoverable amount.

In relation to goodwill, the first step of the impairment review process requires the identification of the cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following business reorganization.

The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.

The recoverable amount is defined as the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount

An impairment loss recognized for goodwill may not be reversed in a subsequent period.

The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment. The Group assesses the existence of any indication that might be considered to be evidence of impairment of the cash-generating unit by reviewing information including the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarization-, among others) and (ii) various microeconomic variables comparing our investments with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital adequacy ratio, return on equity, among others).

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Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, to this end, it uses price quotations, if available, market references (multiples), internal estimates and based in part on third-party appraisals.

We determine the recoverable amount by: (i) calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings ratios of comparable local entities; or (ii) performing estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections.

The main assumptions used in the value in use calculation are: (i) earnings projections based on the financial budgets approved by the directors which normally cover a five-year period (unless a longer time horizon can be justified), (ii) discount rates determined as the cost of capital taking into account the risk-free rate of return plus a risk premium in line with the market and the business in which the units operate and (iii) constant growth rates used in order to extrapolate earnings to perpetuity which do not exceed the long-term average growth rate for the market in which the cash-generating unit in question operates.

The cash flow projections used to obtain the values in use are based on the financial budgets approved by both local management of the related local units and the Group’s directors. Our budgetary estimation process is common for all the cash-generating units. The local management teams prepare their budgets using the following key assumptions:

a) Microeconomic variables of the cash-generating unit: management takes into consideration the current balance sheet structure, the product mix on offer and the business decisions taken by local management in this regard.

b) Macroeconomic variables: growth is estimated on the basis of the changing environment; taking into consideration expected GDP growth in the unit’s geographical location and forecast trends in interest and exchange rates. These data, which are based on external information sources, are provided by the Group’s economic research service.

c) Past performance variables: in addition, management takes into consideration in the projection the difference (both positive and negative) between the cash-generating unit’s past performance and that of the market.

Given the degree of uncertainty of these assumptions, we perform a sensitivity analysis thereof using reasonable changes in the key assumptions on which the recoverable amount of the cash-generating units is based in order to confirm whether their recoverable amount still exceeds their carrying amount. Following the sensitivity analysis performed, the value in use of all the cash-generating units still exceeds their recoverable amount.

Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in 2015 we recognized impairment losses on goodwill totaling €115 million (2014: €2 million; 2013: €40 million) under Impairment losses on other assets (net)—Goodwill and other intangible assets. The 2015 impairment losses recognized were related mainly to the Group’s businesses in Puerto Rico and was due to the deterioration of the projected business expectations.

At December 31, 2015, none of the cash-generating units with significant goodwill had a recoverable amount approximating their carrying amount. The recoverable amount is considered to be close to the carrying amount when reasonable changes in the main assumptions used in the valuation cause the recoverable amount to be below the carrying amount.

Non-current assets held for sale are measured at the lower of fair value less costs to sell and the carrying amount. The Group measures foreclosed property assets located in Spain by taking into consideration the appraisal value on the date of foreclosure and the length of time each asset has been recognized in the balance sheet. Property assets under construction are measured taking into account the current situation of the property, not the final value. In addition, in order to check at the end of each reporting period that the measurement made using the aforementioned criteria does not differ from fair value, the Group requests an independent expert to perform an appraisal. Further information on non-current assets held for sale is set out in note 12 to our consolidated financial statements.

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Equity method investments are evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. In 2015, 2014 and 2013 there was no evidence of material impairment on the Group’s equity method investments.

In relation to the available for sale securities (debt and equity instruments) at the end of each year, we make an assessment of whether there is any objective evidence that any our available for sale securities of is impaired. This assessment includes but is not limited to an analysis of the following information: (i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; (ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; (iii) changes in the fair value of the security analyzed, analysis of the origins of such changes—whether they are intrinsic or the result of the general uncertainty concerning the economy or the country; and (iv) independent analysts’ reports and forecasts and other independent market information.

In the case of quoted equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for us is taken into account. As a general rule, for these purposes we consider a significant fall to be a 40% drop in the value of the asset or a continued fall over a period of 18 months. Nevertheless, it should be noted that we assess, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, we consider that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under valuation adjustments. Also, where we do not intend and/or are not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.

Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.

At the end of 2015 we performed the assessment described above and recognized in the consolidated income statement impairment losses of €127 million in respect of debt instruments (€42 million in 2014 and €89 million in 2013). At 2015, 2014 and 2013 year-end, we analyzed the additional unrealized revaluation losses related to debt instruments and we concluded that they were temporary and, therefore, there was no evidence of impairment since the interest payment schedules for all the securities had been complied with and there was no evidence that the issuers would not continue to meet their payment obligations or that the future payments (both principal and interest) would not be sufficient to recover the cost.

At the end of 2015, 54.66% of the losses recognized under valuation adjustments—available-for-sale financial assets arising from debt securities had been incurred in more than twelve months.

During 2015, 2014 and 2013 we completed the analysis described above for equity securities valued at fair value and we recognized in 2015 impairments amounting to €112 million (€147 million in 2014 and €169 million in 2013).

Retirement Benefit Obligations

We provide pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.

The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:

• annual discount rate-determined, when available, by reference to high-quality corporate bonds;

• mortality tables;

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• annual social security pension revision rate;

• price inflation;

• annual salary growth rate; and

• the method used to calculate vested commitments to current employees.

The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date is recognized as a liability in the balance sheet.

Further information on retirement benefit obligations is set out in notes 2 and 25 to our consolidated financial statements.

Business combinations and goodwill

Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.

To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid.

We test goodwill for impairment at the cash-generating unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those cash-generating units unchanged unless business segment reorganization occurs. We disclose our goodwill impairment assessment methodology in “Critical Accounting Policies—Impairment”.

The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.

For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.

As a result of the first consolidation of the acquired subsidiaries, Carfinco Financial Group (2015), Santander Consumer USA and GE Capital (2014) and merger of Bank Zachodni WBK S.A. and Kredyt Bank S.A. (2013), a significant amount of goodwill was recorded (see note 3 and note 17 to our consolidated financial statements). Management made this determination, based in part upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB.

Recent Accounting Pronouncements

See note 1.b to our consolidated financial statements for the detail of standards and interpretations that came into force in 2015 and those with effective dates subsequent to December 31, 2015.

A. Operating results

We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.

In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation/appreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.

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General

We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.

Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.

Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.

In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.

2015 Overview

The global economy slowed in 2015 (GDP growth of 3.1% as compared to 3.4% in 2014). The upswing in developed economies could not offset the downturn in emerging economies. The fall in commodity prices and the slowdown of the Chinese economy had a bigger relative impact on emerging economies, although the degree of slowdown varied according to each market’s domestic situation.

As for the financial markets, their performance in 2015 can be divided into two parts. In the first half of the year there were rises across the board in stock market indices, and risk premiums on both government and private debt securities fell significantly, especially in the developed economies. Access to capital markets was more fluid and in the advanced economies the conditions on the supply of bank credit eased.

This performance was supported by the monetary policies of the central banks, which supplied abundant liquidity, and this facilitated investors’ pursuit of returns. The quantitative easing of the European Central Bank (ECB) contained any contagion effect during the worst moments of the Greek bail-out negotiations.

During the summer there was an increase in volatility in the markets linked to the concerns about the slowdown of growth in China and the emerging economies. Although the start of monetary normalization in the United States was delayed until December, equities underwent a major adjustment that significantly eroded the gains accumulated in the year.

The banking sector environment of the countries in which Banco Santander operates continued to be marked by the regulatory changes and the challenging economic environment, which presented a significant challenge for management to raise profitability.

Interest rates remained extraordinarily low; although business volumes gradually recovered they were still low; and there was a big increase in competitive pressure in most markets.

In the supervisory and regulatory context, there was once again an intensive regulatory agenda in 2015. While progress continued with the revision of the prudential framework and the development of crisis management frameworks, issues concerning consumer and investor protection were the focus of increased attention. The aim is to make all these matters compatible with driving economic growth.

Lastly, as regards banking supervision, the Single Supervisory Mechanism (SSM) launched in November 2014 enabled the ECB to assume the comprehensive supervision of banks in the euro area. In 2015 the SSM became fully operational and the 123 most important banking groups came under the direct supervision of the ECB. Each bank has a joint supervisory team made up of personnel from the ECB and the national authorities of the member states where the bank has a significant presence.

Following is a summary of the macroeconomic performance of the main countries in which the Group operates:

• The US is in a phase of moderate but solid growth. GDP grew 2.5% in 2015 and the unemployment rate continued to fall to levels regarded as full employment (5%). Inflation came down as a result of the fall in oil prices, although the underlying rate (1.3%) remained below the target (2%). The Federal Reserve raised its interest rates in December 2015 to 0.25-0.5%.

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• The United Kingdom maintained the robust pace of GDP growth (2.2%) of the last few years, accompanied by a decline in the jobless rate close to pre-crisis levels. Inflation was around 0% without signs of salary tensions. The Bank of England held its rate at 0.5%.

• The eurozone economy accelerated. Inflation continued to be close to 0%, which led the European Central Bank to further cut its rates and launch new quantitative easing measures, with an increased program of purchasing public sector securities.

• Spain’s GDP grew by around 3.2% with a well-diversified base that lowered the unemployment rate to 21% at the end of 2015. The budget deficit continued to decline and the current account remained in surplus. Inflation was negative for most of the year due to the impact of lower oil prices, although the underlying rate remained positive.

• Germany expanded at a faster pace as the year progressed. Domestic demand remained strong and unemployment low.

• Poland’s GDP grew briskly at 3.6% and inflation (-0.9%) was well below the target (2.5%) of the National Bank of Poland, which cut interest rates to 1.5% in March.

• Latin America’s GDP shrank 0.4% after growing 1.2% in 2014, in a complex international environment with the prospect of a rise in US interest rates, the slowdown in international trade and lower growth in China. The evolution of countries varied between recession in some countries and a gradual recovery in others. Inflation increased slightly, mainly due to the impact of the depreciation of Latin American currencies.

• Brazil entered recession, with consumption and private investment falling and the unemployment rate higher. The cut in subsidies and the increase in prices for public services pushed up inflation to 10.7%. The central bank reinforced its commitment to control inflation and raised the Selic rate by 250 basis points to 14.25%.

• The Chilean economy recovered in 2015, spurred by increased investment and private consumption, which led the central bank to begin to normalize its monetary policy and raise its benchmark rate by 50 basis points to 3.5%.

• Mexico improved in the second half of the year, fueled by stronger domestic demand and exports. Although inflation remained low, the central bank decided to raise its key rate in response to the US Federal Reserve’s move, in order to anticipate possible bouts of volatility given the strong trade and financial links with the US.

Exchange rates fluctuated considerably during 2015. The dollar appreciated significantly against the euro and the main Latin American currencies, reaching a 12-year high in effective terms. Emerging market currencies were affected by the ongoing slide in commodity prices, as well as the outflows of capital into developed economies.

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Results of Operations for Santander

Summary

Profit attributable to the Parent in 2015 was €5,966 million, a 2.6% or €150 million increase from €5,816 million in 2014, which represented a 39.3% or €1,641 million increase from €4,175 million in 2013, based on (i) consistent and recurring growth of net interest income quarter by quarter (disregarding the impact of exchange rates), (ii) cost control and operating excellence that resulted in moderate growth of administrative expenses, and (iii) a decrease in impairment in loan losses and a fall in the cost of lending, reflecting the strategy for growth and the appropriate risk management policy.

There are a number of factors that have an impact on the year-on-year comparison:

• Macroeconomic environment with slower global growth.

• Interest rates that remained at historic lows in most countries.

• Tough competition in some of the markets where the Group operates.

• A more demanding regulatory environment, with impacts that limited revenues and increased costs.

• A positive perimeter effect from consumer business (mainly the agreements with PSA) and Brazil (agreement with Bonsucesso, GetNet and the acquisition of minority interests in the fourth quarter of 2014).

• The impact of exchange rates of the different currencies in which the Group operates as regards the euro was less than one percentage point positive for the whole Group in revenues and costs. The impacts were as follows: US (+21 percentage points), UK (+12 percentage points), Argentina (+7 percentage points), Chile (+5 percentage points), Brazil (-16 percentage points), while in Mexico and Poland it was less than one point.

Interest Income / (Charges)

Net interest income was €32,812 million, an 11.1% or €3,265 million increase from €29,547 million, which represented a 13.9% or €3,612 million increase from €25,935 million in 2013.

2015 compared to 2014

The €3,265 million increase in net interest income was mainly due to the increase in lending and the decrease in the cost of liabilities.

The performance of net interest income by geographic areas was the following:

Excluding the impact of exchange rates, all countries increased except for Poland (down by 6%), due to the fall in interest rates, Spain (down by 5%), in an environment of low interest rates and strong competition in lending, and Chile (down by 1%), due to the impact of the lower rate of variation in the UF unit of account and the regulation of the policy on maximum rates. There was noteworthy growth in Santander Consumer Finance (up by 31%), partly due to the change in the scope of consolidation, Mexico (up by 14%), due to the increase in lending, Brazil (up by 10%), after quarter-by-quarter improvements throughout the year, and the United States (up by 7%) due to the higher portfolio volume at Santander Consumer USA and Santander Bank.

The average balance of interest earning assets in 2015 was €1,131,344 million, which was 11% or €110,645 million more than in 2014. In Spain, balances increased by €8,659 million mainly due to increases in Due from credit entities (€5,835 million) and Debt securities (€6,670 million) partially offset by a decrease in Loans and advances to customers (-€4,620 million) resulting from a further reduction of the exposure to property activity in Spain. Average balances outside of Spain increased €101,986 million mainly due to the increase in Loans and advances to customers (€84,128 million) and Debt securities (€20,177 million) partially offset by a decrease in Cash and due from central banks (-€3,466 million). The average return on total interest-earning assets decreased by 29 basis points to 5.06%.

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The change in the scope of consolidation had a slight positive effect on the year-on-year variation in lending, in the area of Consumer Finance (mainly due to the implementation of the agreement with PSA), and the addition at the end of December 2015 of the assets and liabilities acquired from Banco Internacional do Funchal (Banif) in Portugal. The breakdown by geographical region of the variations in gross lending to customers, excluding reverse repos, in 2015 was as follows (disregarding the exchange rate effect):

• The biggest increases were at Santander Consumer Finance (up by 21%, assisted by the change in the scope of consolidation referred to above), the Latin American countries (Brazil: +9%; Mexico: +19%; Chile: +11%) and Poland (+11%). They were joined by Portugal, with an increase of 26% (-1%, disregarding the change in the scope of consolidation).

• There was also growth in the United States (+7%) with positive performance from Santander Bank and Santander Consumer USA, and in the United Kingdom (+5%). Noteworthy in the UK was the good performance of the businesses segment, where Santander achieved much higher growth than the market, and the progress in mortgages.

• Spain was down 3% in an environment of strong competition in prices, in which the growth of new lending, at double-digit rates, was still below that of loans repaid.

• Generally speaking, there was growth in the businesses segment, which was assisted by the launch or development, in those countries where it already existed, of the Advance strategy, as well as the 1|2|3 strategy. The Advance strategy is a key tool, to attract new corporate customers while the 1|2|3 strategy proposes a new concept of relationship that rewards loyalty for transactions and enhances customers’ relationship with the Bank.

• At the Real Estate Operations in Spain unit, net lending was down by 33% year on year in response to the ongoing policy of divestment adopted in recent years.

At the end of 2015, Continental Europe accounted for 36% of the Group’s total net lending (20% Spain), the U.K. 36%, Latin America 17% (8% Brazil) and the U.S. 11%.

The average balance of interest-bearing liabilities in 2015 was €1,078,636 million, which was 11% or €102,884 million more than in 2014, with a 31 basis points decrease in their average cost of funds to 2.26%. In Spain, balances increased by €12,964 million as a result of increases in Due to credit entities (€15,925 million) and Customer deposits (€3,466 million) partially offset by decreases in Marketable debt securities (-€6,061 million). Balances outside of Spain increased by €89,920 million, mainly due to Due to credit entities (€18,282 million), Customer deposits (€52,149 million) and Marketable debt securities (€18,953 million) as debt issuances increased and amortizations decreased (see note 23 to our consolidated financial statements).

The development by geographic distribution (principal segments) of customer deposits as of December 31, 2015 as compared to December 31, 2014 was the following:

• Deposits in Continental Europe increased 3% with increases in Santander Consumer (6%), Poland (7%) and Portugal (21% mainly due to the addition at the end of December 2015 of the deposits acquired from Banco Internacional do Funchal) partially offset by decreases in Spain (-2%).

• In the U.K., customer deposits increased by 15% (8% in sterling) driven by increased Retail Banking current account balances which have grown 29% over December 2014. Corporate customer deposits also rose by 18%.

• In Latin America, customer deposits decreased by 7% (an increase of 12% in local currencies) with Brazil, Mexico and Chile growing in local currencies by 11%, 5% and 9%, respectively.

• Lastly, in the U.S. deposits rose 17% mainly due to exchange rates. In dollars, deposits increased 5% and continued to improve in their composition and cost.

Continental Europe accounted for 39% of customer deposits (26% Spain), the U.K. 34%, Latin America 18% (Brazil 8%) and the U.S. 9%.

2014 compared to 2013

The €3,612 million increase in net interest income was mainly due to the full consolidation of Santander Consumer USA. Excluding this effect and the exchange rate impact, net interest income increased by €2,384 million. The main developments were:

• The general macroeconomic improvement in all countries except for Brazil, with very positive growth in Spain, the U.K., the U.S. and Chile.

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• The positive evolution of lending, with growth in all units except Portugal, which is still deleveraging.

• The growth in deposits, together with decreases in the average cost of funds mainly in developed countries.

The performance of net interest income by geographic areas was the following:

• Favorable evolution in the U.K. (23%) and the U.S. (177%), due to the decrease in the cost of retail deposits in the U.K. and the impact of the reconsolidation of SCUSA in the U.S. (eliminating the effect of the reconsolidation of Santander Consumer USA, growth would have been of 11% due to increased consumer activity).

• Continental Europe’s net interest income increased 5%, with growth in all units. Spain’s rose 9%, due to the decreased cost of funds which offset the decline in interest earned.

• Latin America as a whole grew because of increased loan volumes. Brazil is the only unit that declined (-11%) due to lower spreads from the change of business mix toward lower risk segments.

The average balance of interest earning assets in 2014 was €1,020,699 million, which was 0.4% or €4,548 million more than in 2013. In Spain balances dropped by €34,855 million as a result of decreases in (i) Cash and due from central banks (-€4,853 million), (ii) Due from credit entities (-€5,592 million), (iii) Loans and advances to customers (-€13,710 million), as a result of the reduction in loan volume that occurred in the end of 2013 which lowered the starting point for 2014, and the balances of the real estate operations that were discontinued in Spain, which continued to impact the 2014 fiscal year, and (iv) Debt securities (-€10,700 million). Average balances outside of Spain increased €39,403 million mainly due to the increase in Loans and advances to customers (€22,598 million) and Debt securities (€16,597 million). The average return on total interest-earning assets rose by 29 basis points to 5.35%.

The development by geographic distribution (principal segments) of customer loans as of December 31, 2014 as compared to December 31, 2013 was the following:

• In Continental Europe, the evolution varied among its units. Lending fell in Portugal, still affected by low demand, and in the Real estate operations in Spain unit, as the strategy of reducing this type of risk continued. Loans grew at Santander Consumer Finance, with a good evolution by products and segments, and in Spain, where the deleveraging trend of the last few years was reversed as a result of growth in lending to companies and public administrations.

• In the United Kingdom, the balance of customer loans was 2% higher in sterling with the balance of mortgages and lending to companies increasing by 1% and 8%, respectively.

• Lending in Latin America in local currencies terms increased 12%, with significant growth in all countries: Brazil (11%), Mexico (15%), Chile (8%), Argentina (23%), Uruguay (17%) and Peru (28%).

• Lending in the U.S. rose 3% in dollars in constant perimeter (eliminating the effect of the reconsolidation of SCUSA), impacted by to the sale and securitizations of assets in the second half of 2014 (7% without this impact). Santander Bank’s lending increased 1% (6% excluding the sale of assets) and SCUSA’s increased 13%, benefiting from the strategic alliance with Chrysler, while lending in Puerto Rico dropped 16% against a backdrop of deleveraging.

At the end of 2014, Continental Europe accounted for 37% of the Group’s total net lending (22% Spain), the U.K. 34%, Latin America 19% (10% Brazil) and the U.S. 10%.

The average balance of interest-bearing liabilities in 2014 was €975,752 million, which was 0.2% or €1,512 million less than in 2013, with a 4 basis points decrease in their average cost to 2.57%.

The reason for the drop in average liabilities, as in the case of assets, was Spain (-€25,535 million), as a result of: (i) the decreases in Customer deposits (-€3,506 million), Marketable debt securities (-€14,874 million) due to the fall in the outstanding average balances of wholesale funds, after the parent company raised an amount that was lower than the maturities and amortizations booked in the year, and (ii) transactions with Credit institutions (-€5,648 million). Balances outside of Spain increased (€24,023 million), mainly due to Marketable debt securities (€15,685 million) as debt issuances increased and amortizations decreased (see note 23 to our consolidated financial statements) and transactions with Credit institutions (€8,543 million).

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The development by geographic distribution (principal segments) of customer deposits as of December 31, 2014 as compared to December 31, 2013 was the following:

• Deposits in Continental Europe remained flat with decreases in Spain, Portugal and Santander Consumer offset by growth in Poland.

• In the U.K., customer deposits increased by 8% (1% in sterling) due to the strategy of replacing expensive and less stable deposits with those that offer a better opportunity of customer linkage. Demand deposits grew because of the rise in current accounts as a result of the success of marketing the 1|2|3 range of products (designed to build closer customer relationships, greater transactionality and increased loyalty), which offset the reduction in time deposits.

• In Latin America, customer deposits grew by 13% (12% in local currencies) with Brazil, Mexico and Chile growing by 12%, 16% and 11%, respectively.

• Lastly, in the U.S. deposits rose 19% mainly due to exchange rates. In dollars, deposits increased 5% and continued to improve in their composition and cost.

Continental Europe accounted for 40% of customer deposits (28% Spain), the U.K. 31%, Latin America 21% (Brazil 11%) and the U.S. 8%.

Income from Equity Instruments

Income from equity instruments was €455 million in 2015, a 5% or €20 million increase from €435 million in 2014, which was a 15% or €57 million increase from €378 million in 2013.

These increases are mainly explained by the variation in dividends from our equity portfolio (mainly Spanish blue chips).

Income from Companies Accounted for by the Equity Method

Income from companies accounted for by the equity method was €375 million in 2015, a €132 million increase from €243 million in 2014, which was a €257 million decrease from €500 million in 2013. In this line item we recorded in 2013 the contribution to the Group of Santander Consumer USA and the corporate insurance transactions in Europe and Latin America. Starting in 2014, we are fully consolidating Santander Consumer USA financial statements, hence the reduction in 2014. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions and Reorganizations”. (For further information see note 13 to our consolidated financial statements).

Fee and Commission Income (net)

Fee and commission income was €10,033 million in 2015, a 3% or €337 million increase from €9,696 million in 2014. During 2014, fee and commission income decreased by 1% as compared to €9,761 million obtained in 2013.

2015 compared to 2014

Fee and commission income for 2015 and 2014 was as follows:

	2015		2014		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		863		913		(50	)		(5.5	%)
Insurance		2,225		2,193		32			1.5	%
Securities services		905		763		142			18.6	%
Commissions for services		6,040		5,827		213			3.7	%
Total fee and commission income (net)		10,033		9,696		337			3.5	%

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Increases in income from services and securities were partially offset by decreases in mutual and pension funds. By unit, performance was very uneven due to the different economic and business cycles in each of the countries. In some cases regulatory changes that limited revenues, mainly in insurance and cards, also had an impact.

The average balances of mutual funds managed and marketed increased 12% from €117.5 billion in 2014 to €131.6 billion in 2015, with growth in most countries, particularly in Spain.

The average balances of pension funds increased 4% from €11.2 billion in 2014 to €11.6 billion in 2015. Spain accounted for most of this growth. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal increased 9% to €926 million in 2015 from €852 million in 2014.

2014 compared to 2013

Fee and commission income for 2014 and 2013 was as follows:

	2014		2013		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		913		1,121		(208	)		(18.6	%)
Insurance		2,193		2,284		(91	)		(4.0	%)
Securities services		763		678		85			12.5	%
Commissions for services		5,827		5,678		149			2.6	%
Total fee and commission income (net)		9,696		9,761		(65	)		(0.7	%)

Fee and commission income was virtually flat affected by reduced activity in some markets because of the economic environment. Increases in income from services and securities were offset by decreases in mutual and pension funds and insurance.

The average balances of mutual funds managed and marketed increased 14% from €101.2 billion in 2013 to €117.5 billion in 2014, with significant growth in Spain and Brazil partially offset by a 18% decrease in the United Kingdom.

The average balances of pension funds increased 7% from €10.4 billion in 2013 to €11.2 billion in 2014. Spain accounted for most of this growth. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal also increased 8% to €852 million in 2014 from €788 million in 2013.

Gains/(Losses) on Financial Assets and Liabilities (net)

Net gains/(losses) on financial assets and liabilities in 2015 were losses of €770 million, a €4,744 million decrease as compared to gains of €3,974 million in 2014, which represented a 23% or €740 million increase from gains of €3,234 million in 2013. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see note 44 to our consolidated financial statements.

2015 compared to 2014

This comparison is conditioned by the high gains obtained in 2014 from the management of portfolios of interest rate hedging.

The €4,744 million decrease was mainly due to the net effect of: (i) a €4,689 million decrease in financial assets and liabilities held for trading, that had losses of €2,312 million in 2015 and includes the net gain or loss arising from transactions involving debt securities, equity instruments, derivatives and short positions included in the trading portfolio (ii) a €86 million increase in other financial instruments at fair value through profit or loss relating to valuation fluctuations, and (iii) a €162 million decrease in financial instruments not measured at fair value through profit or loss.

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2014 compared to 2013

The €740 million increase was mainly due to the net effect of: (i) a €644 million increase in trading gains, (ii) a €245 million increase in other financial instruments at fair value through profit or loss relating to valuation fluctuations, and (iii) a €195 million decrease in financial instruments not measured at fair value through profit or loss.

Exchange differences (net)

Exchange differences (net) in 2015 were a €3,156 million gain, a €4,280 million increase as compared to €1,124 million loss in 2014, which represented a €1,284 million decrease from €160 million gains in 2013.

We manage the currencies to which we are exposed together with the arrangement of derivative instruments and, accordingly, the changes in this line item should be analyzed together with those recognized under Gains/losses on financial assets and liabilities above.

In 2015, the positive impact of exchange rates of the dollar, the sterling and the Mexican and Chilean currencies against the euro was partially offset by a negative impact of the Brazilian currency against the euro.

In 2014, the negative impact of exchange rates of Brazilian, Mexican and Chilean currencies against the euro was partially offset by a positive impact of the sterling against the euro. There was no significant impact due to the dollar.

Other operating income / expenses (net)

Net other operating income in 2015 was a €166 million loss, a €7 million decrease from losses of €159 million in 2014, which was a €143 million increase from losses of €302 million in 2013. Under this line item we include income and expenses from insurance activity, non-financial services, other commissions and charges to the Deposit Guarantee Fund.

The main developments in insurance activity were:

• In July 2014, we announced that we had reached an agreement for the French insurance company CNP to acquire a 51% stake in our three insurance companies based in Ireland (Santander Insurance Life Limited, Santander Insurance Europe Limited and Santander Insurance Services Ireland Limited) that distribute life and non-life products through the Santander Consumer Finance network. This transaction was closed in December 2014 and therefore impacted our 2015 results of operations as our stake these businesses are now accounted for by the equity method.

• In December 2012, we entered into a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through our commercial networks. In June 2013, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes.

131

	2015			2014			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity		98			137			(39	)		(28.5	%)
Income from insurance and reinsurance contracts issued		1,096			3,532			(2,436	)		(69.0	%)
Of which:
Insurance and reinsurance premium income		961			3,284			(2,323	)		(70.7	%)
Reinsurance income		135			248			(113	)		(45.6	%)
Expenses of insurance and reinsurance contracts		(998	)		(3,395	)		2,397			(70.6	%)
Of which:
Claims paid and other insurance-related expenses		(3,101	)		(3,800	)		699			(18.4	%)
Net provisions for insurance contract liabilities		2,361			910			1,451			159.5	%
Reinsurance premiums paid		(258	)		(505	)		247			(48.9	%)
Non-financial services		121			88			33			37.5	%
Sales and income from the provision of non-financial services		711			343			368			107.3	%
Cost of sales		(590	)		(255	)		(335	)		131.4	%
Other operating income and expenses		(385	)		(384	)		(1	)		(0.3	%)
Other operating income		1,260			1,339			(79	)		(5.9	%)
Of which, fees and commissions offsetting direct costs		115			106			9			8.5	%
Other operating expenses		(1,645	)		(1,723	)		78			(4.5	%)
Of which, Deposit Guarantee Fund		(769	)		(577	)		(192	)		33.3	%
Other operating income / expenses, net		(166	)		(159	)		(7	)		4.4	%

In 2015 income and expenses from insurance and reinsurance contracts decreased further as a result of the agreement with CNP as previously mentioned.

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	2014			2013			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity		137			117			20			17.1	%
Income from insurance and reinsurance contracts issued		3,532			4,724			(1,192	)		(25.2	%)
Of which:
Insurance and reinsurance premium income		3,284			4,513			(1,229	)		(27.2	%)
Reinsurance income		248			211			37			17.5	%
Expenses of insurance and reinsurance contracts		(3,395	)		(4,607	)		1,212			(26.3	%)
Of which:
Claims paid and other insurance-related expenses		(3,800	)		(4,497	)		697			(15.5	%)
Net provisions for insurance contract liabilities		910			382			528			138.2	%
Reinsurance premiums paid		(505	)		(492	)		(13	)		2.6	%
Non-financial services		88			93			(5	)		(5.4	%)
Sales and income from the provision of non-financial services		343			322			21			6.5	%
Cost of sales		(255	)		(229	)		(26	)		11.4	%
Other operating income and expenses		(384	)		(512	)		128			(25.0	%)
Other operating income		1,339			857			482			56.2	%
Of which, fees and commissions offsetting direct costs		106			115			(9	)		(7.8	%)
Other operating expenses		(1,723	)		(1,369	)		(354	)		25.9	%
Of which, Deposit Guarantee Fund		(577	)		(570	)		(7	)		1.2	%
Other operating income / expenses, net		(159	)		(302	)		143			(47.4	%)

The €143 million increase in net other operating income in 2014 was mainly due to an increase of €128 million in other operating income and expenses. The 2014 reduction in income and expenses from insurance and reinsurance contracts results from the previously mentioned agreement with Aegon, as a result of these joint ventures being accounted for by the equity method.

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Administrative Expenses

Administrative expenses increased 8% or €1,403 million to €19,302 million in 2015 from €17,899 million in 2014, which increased from €17,452 million in 2013.

2015 compared to 2014

Administrative expenses for 2015 and 2014 were as follows:

	2015		2014		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		11,107		10,242		865			8.4	%
Other general administrative expenses		8,195		7,657		538			7.0	%
Building and premises and supplies		1,943		1,930		13			0.7	%
Information technology		1,188		979		209			21.3	%
Technical reports		810		606		204			33.7	%
Advertising		705		655		50			7.6	%
Communications		587		489		98			20.0	%
Taxes (other than income tax)		529		462		67			14.5	%
Guard and cash courier services		413		397		16			4.0	%
Per diems and travel expenses		278		287		(9	)		(2.8	%)
Insurance premiums		74		64		10			15.6	%
Other expenses		1,668		1,788		(120	)		(6.8	%)
Total administrative expenses		19,302		17,899		1,403			7.8	%

In 2015, administrative expenses increased due to several factors: the evolution of inflation in Latin America, investments in programs for innovation and improvements in future efficiency, the impact of the measures adopted by the Bank as a result of new regulatory requirements (particularly in the US) and the change of perimeter. Eliminating the perimeter impact and adjusting for the year’s average inflation, administrative expenses were flat, reflecting the positive effect of the three-year efficiency and productivity plan launched at the end of 2013, which is enabling us to make the investments previously commented, and maintain real growth in administrative expenses close to zero.

2014 compared to 2013

Administrative expenses for 2014 and 2013 were as follows:

	2014		2013		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		10,242		10,069		173			1.7	%
Other general administrative expenses		7,657		7,383		274			3.7	%
Building and premises and supplies		1,930		1,980		(50	)		(2.5	%)
Information technology		979		992		(13	)		(1.3	%)
Advertising		655		630		25			4.0	%
Technical reports		606		493		113			22.9	%
Communications		489		519		(30	)		(5.8	%)
Taxes (other than income tax)		462		445		17			3.8	%
Guard and cash courier services		397		425		(28	)		(6.6	%)
Per diems and travel expenses		287		284		3			1.1	%
Insurance premiums		64		59		5			8.5	%
Other expenses		1,788		1,556		232			14.9	%
Total administrative expenses		17,899		17,452		447			2.6	%

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In 2014, administrative expenses were negatively affected by exchange rates.

The performance by units varied:

• certain units in processes of integration (Spain and Poland) or structural adjustment (Portugal) saw their operating costs decline in nominal terms. Brazil also did well, reflecting the effort in efficiency improvement plans and a nominal rise of 1% in local currency (an 8% decline in euros), compared to inflation of more than 6%.

• the U.K. is combining investments in its digital transformation plan, commercial plan and in branches with efficiency improvements, same as in Chile.

• higher expenses in Mexico and Argentina because of their expansion plans or programs to improve commercial capacity, and in the U.S., which is enhancing the franchise of Santander Bank and adapting to regulatory requirements (8%).

Depreciation and Amortization

Depreciation and amortization was €2,418 million in 2015, a 6% or €131 million increase from €2,287 million in 2014, which was a 4% or €104 million decrease from €2,391 million in 2013. The increase in 2015 was mainly due to an increase in the depreciation of tangible assets for own use.

Provisions (net)

Net provisions were €3,106 million in 2015, a 3% or €97 million increase from €3,009 million in 2014, which was a 23% or €564 million increase from €2,445 million in 2013. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation).

The variation in 2015 is mainly due to a €364 million increase in provisions for taxes and other legal contingencies partially offset by a €212 million decrease in provisions for pensions and similar obligations. Of note were provisions of €689 million recognized in connection with customer remediation in the UK as compared to €455 million in 2014 for customer remediation in Germany.

The variation in 2014 is mainly due to a €672 million increase in provisions for taxes and other legal contingencies and other provisions of which €455 million recognized for customer remediation in Germany.

For further details, see note 25 to our consolidated financial statements.

Impairment Losses (net)

Impairment losses (net) were €11,744 million in 2015, a 1% or €96 million increase from €11,648 million in 2014, which was a 1% or €82 million decrease from €11,730 million in 2013.

Impairment losses are divided in the income statement as follows:

	2015		2014		2013
Impairment losses on financial assets (net):		10,652		10,710		11,227
Loans and receivables		10,194		10,521		10,986
Other financial assets not measured at fair value through profit and loss		458		189		241
Impairment losses on other assets (net):		1,092		938		503
Goodwill and other intangible assets		701		701		41
Other assets		391		237		462
Total impairment losses (net)		11,744		11,648		11,730

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2015 compared to 2014

The €327 million or 3.1% decrease in net impairment losses for loans and receivables in 2015 as compared to 2014 reflected a €288 million decrease in provisions and a €39 million increase in recoveries of loans previously charged-off. For a further discussion on credit risk see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 3. Credit Risk”.

The most significant decreases were in the U.K., Spain, Portugal and Real Estate Operations in Spain. They were also lower in Poland and Santander Consumer Finance but higher in Chile, Brazil, Mexico and the US, in all of which volumes increased significantly. The lower provisions, coupled with higher lending, continued to improve the Group’s cost of credit, which improved in all the Group’s units, except for the US. Of note were Spain, Portugal, UK and Brazil. This evolution was due to the improvement in the quality of their portfolios, thanks to active risk management combined with the better macroeconomic environment in some countries.

Our total allowances for credit losses (excluding country-risk) decreased by €925 million to €27,121 million at December 31, 2015, from €28,046 million at December 31, 2014 mainly driven by the improvement in the quality of the portfolios.

Non-performing balances (excluding country-risk) were €37,094 million at December 31, 2015, a €4,615 million decrease as compared to €41,709 million at December 31, 2014. Our Non-performing balance ratio was 4.36% at December 31, 2015 as compared to 5.19% at December 31, 2014. Credit quality ratios performed well in almost all countries and reflected the appropriate risk management policy, which we are strengthening with the launch of the Advanced Risk Management (ARM) program and boosting the risk culture throughout the Group under a common identity, risk-pro. Our coverage ratio was 73% at December 31, 2015 and 67% at December 31, 2014. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Non-performing Balances Ratios” and “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Evolution of Non-performing Balances”.

The impairment losses of other financial assets not measured at fair value through profit and loss in 2015 of €458 million relate to impaired available for sale financial instruments (mainly equity instruments that had suffered a significant and prolonged fall in price and debt instruments).

Net impairment losses on other assets in 2015 increased to €1,092 million compared to €938 million in 2014. In 2015 we recognized €586 million in other intangible assets. These impairment losses relate mainly to the decline in or loss of the recoverable value of certain computer systems and applications as a result of the processes initiated by the Group to adapt to the various regulatory changes and to transform or integrate businesses.

2014 compared to 2013

The €465 million or 4.2% decrease in net impairment losses for loans and receivables in 2014 compared to 2013 reflected a €204 million decrease in provisions, a €268 million increase in recoveries of loans previously charged-off and a €7 million increase in impairment losses of other assets. For a further discussion on credit risk see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 3. Credit Risk”.

The most significant decreases were in the U.K., Spain, Brazil and Portugal, due to the improved macroeconomic environment and balance sheet management. Among the rest of the large units, the only significant rise was in the U.S. because of the reconsolidation of SCUSA, which, in addition, made larger provisions partly due to the larger volume of business following the agreement with Chrysler.

Our total allowances for credit losses (excluding country-risk) increased by €2,365 million to €28,046 million at December 31, 2014, from €25,681 million at December 31, 2013 mainly driven by the reconsolidation of SCUSA.

Non-performing balances (excluding country-risk) were essentially flat at €41,709 million at December 31, 2014, a €57 million increase compared to €41,652 million at December 31, 2013. Our Non-performing balance ratio was 5.19% at December 31, 2014 as compared to 5.64% at December 31, 2013. The ratio decreased or remained stable in all the main units except for Santander Consumer Finance where the ratio increased adversely impacted by the consolidation of GE’s business in the Nordic countries and Portugal partially impacted by the decrease in loans. Our coverage ratio was 67% at December 31, 2014 and 62% at December 31, 2013. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Non-performing Balances Ratios” and “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Evolution of Non-performing Balances”.

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The impairment losses of other financial assets not measured at fair value through profit and loss in 2014 of €189 million were mainly due to equity instruments that had suffered a significant and prolonged fall in price.

Net impairment losses on other assets in 2014 increased to €938 million compared to €503 million in 2013. In 2014 we recognized €699 million in other intangible assets. These impairment losses relate mainly to the decline in or loss of the recoverable value of certain computer systems and applications as a result of the processes initiated by the Group to adapt to the various regulatory changes and to transform or integrate businesses.

Net gains / (losses) on other assets

Net gains on other assets were €222 million in 2015, a €2,688 million decrease from gains of €2,910 million in 2014, which was a €1,180 million increase from gains of €1,730 million in 2013.

2015 compared to 2014

	2015			2014			Amount Change			% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		112			3,136			(3,024	)		(96.4	%)
Of which:
Disposal of investments		104			3,026			(2,935	)		(97.0	%)
Gains from bargain purchases arising in business combinations		283			17			266			n/a
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(173	)		(243	)		70			(28.8	%)
Of which:
Impairment of non-current assets held for sale		(222	)		(339	)		117			(34.5	%)
Gains/Losses on sale of non-current assets held for sale		51			48			3			6.3	%
Net gains / (losses) on other assets		222			2,910			(2,688	)		(92.4	%)

The €283 million gains from bargain purchases arising in business combinations in 2015 reflects the gain on acquisition of Banco Internacional do Funchal (Banif) resulting from the difference between the consideration paid and the provisional fair value of the identifiable assets acquired and liabilities assumed at the business combination date.

Losses on non-current assets held for sale not classified as discontinued operations in 2015 totaled €173 million as compared to €243 million in 2014. This line item includes mainly impairment of foreclosed assets recorded during the year and the sale of properties which have continued to reduce in 2015.

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2014 compared to 2013

	2014			2013			Amount Change			% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		3,136			2,152			984			45.7	%
Of which:
Disposal of investments		3,026			2,167			859			39.6	%
Gains from bargain purchases arising in business combinations		17			—			17			n/a
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(243	)		(422	)		179			(42.4	%)
Of which:
Impairment of non-current assets held for sale		(339	)		(335	)		(4	)		1.2	%
Gains/Losses on sale of non-current assets held for sale		48			(87	)		135			n/a
Net gains / (losses) on other assets		2,910			1,730			1,180			68.2	%

The €3,136 million gains on disposal of assets not classified as non-current assets held for sale accounted in 2014 were mainly due to disposal of investments (Altamira Asset Management and insurance companies in Ireland) and to the recognition at fair value of the ownership interest held by the Group in Santander Consumer USA after its IPO and the public placement of 4% of our stake in Santander Consumer USA. There was no significant disposal of investments in 2015. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions and Reorganizations” and note 49 to our consolidated financial statements.

Income Tax

The provision for corporate income tax was €2,213 million in 2015, a 40% or €1,505 million decrease from €3,718 million in 2014, which represented an 83% or €1,684 million increase from €2,034 million in 2013. The effective tax rate was 23.2% in 2015, 34.9% in 2014 and 27.6% in 2013.

The decrease in the effective tax rate in 2015 compared to 2014 is primarily due to the reversal in the second quarter of 2015 of tax liabilities in Brazil. See more information in note 27.c to our consolidated financial statements.

The increase in the effective tax rate in 2014 compared to the prior year is mainly due to the €3,301 million increase in consolidated operating profit before tax together with the movement in the net adjustments to profit before tax that applied in 2014 as compared to 2013 (see the reconciliation in note 27.c to our consolidated financial statements).

For more information about factors affecting effective tax rates, see note 27 to our consolidated financial statements.

Profit / (losses) from discontinued operations

Profit from discontinued operations was €0 million in 2015, compared to €26 million loss in 2014, and a €15 million loss in 2013. During 2015, 2014 and 2013 we did not discontinue any significant operations.

Profit attributable to non-controlling interest

Profit attributable to non-controlling interest was €1,368 million in 2015, a 22% or €249 million increase from €1,119 million in 2014, which represented a 3% or €35 million decrease from €1,154 million in 2013. For further details, see note 28 to our consolidated financial statements.

138

2015 compared to 2014

In 2015 the Group acquired 50% of Société Financière de Banque - SOFIB, PSA Finance UK Limited and PSA Financial Services Spain, E.F.C., S.A., thereby generating an increase in the balance of non-controlling interests of €462 million, €148 million and €181 million. In addition, we increased our non-controlling interests by €493 million resulting from the decrease in our stake in SCUSA. All these effects were partially offset by our increase of ownership interest in Banco Santander (Brasil) S.A., that generated a decrease in the balance of non-controlling interests of €472 million. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions and Reorganizations” and note 28 to our consolidated financial statements.

2014 compared to 2013

In 2014, we increased our ownership interest in Banco Santander (Brasil) S.A., thereby generating a decrease in the balance of non-controlling interests of €2,630 million which was partially offset by the €1,013 million increase resulting from the reconsolidation of SCUSA and €598 million from the consolidation of Metrovacesa.

Results of Operations by Business Areas

For a description of our segments see “Item 4. “Information on the Company—B. Business Overview”.

Our results of operations by business areas can be summarized as follows.

First level (geographic):

Continental Europe

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		8,006			7,517			7,189			7	%		5	%
Income from equity instruments		277			286			265			(3	%)		8	%
Income from companies accounted for by the equity method		120			(25	)		14			n.a.			n.a.
Net fees and commissions		3,417			3,500			3,467			(2	%)		1	%
Gains/losses on financial assets and liabilities (net) *		1,186			1,221			1,905			(3	%)		(36	%)
Other operating income/(expenses) (net)		(178	)		5			(48	)		n.a.			n.a.
TOTAL INCOME		12,828			12,504			12,792			3	%		(2	%)
Administrative expenses		(6,274	)		(5,972	)		(5,991	)		5	%		(0	%)
Depreciation and amortization		(461	)		(472	)		(522	)		(2	%)		(10	%)
Provisions (net)		(352	)		(205	)		(163	)		72	%		26	%
Impairment losses on financial assets (net)		(2,083	)		(2,975	)		(3,833	)		(30	%)		(22	%)
Impairment losses on other assets (net)		(172	)		(156	)		(149	)		10	%		5	%
Gains/(losses) on other assets (net)		(120	)		(238	)		(372	)		(50	%)		(36	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		3,366			2,486			1,762			35	%		41	%
Income tax		(887	)		(639	)		(385	)		39	%		66	%
PROFIT FROM CONTINUING OPERATIONS		2,479			1,847			1,377			34	%		34	%
Profit/(loss) from discontinued operations (net)		—			(26	)		(6	)		(100	%)		n.a.
CONSOLIDATED PROFIT FOR THE YEAR		2,479			1,821			1,371			36	%		33	%
Profit attributable to non-controlling interest		261			174			135			50	%		29	%
Profit attributable to the Parent		2,218			1,647			1,236			35	%		33	%

* Includes exchange differences (net)

2015 compared to 2014³

In 2015, Continental Europe accounted for 28% of profit attributed to the Parent bank’s total operating areas.

³  For a summary by countries see “Item 4. Information on the Company—B. Business Overview—Continental Europe”.

139

Highlights of the year were (i) the start of the implementation of the agreement between Santander Consumer Finance and Banque PSA Finance in a number of countries. The agreement with Banque PSA Finance will consolidate our auto finance leadership. At the end of the year, transactions had been carried out in Spain, Portugal, UK, France and Switzerland. The latter two are new markets where Santander Consumer Finance had no presence. These incorporations contributed around €11,500 million of loans, plus €3,700 million in the UK. The rest of countries (Germany, Italy, Holland, Belgium, Poland and Austria) will be integrated in 2016. (ii) The acquisition of assets and liabilities of Banco Internacional do Funchal (Banif) in Portugal, which positioned the Group as the second private bank in the Portuguese market. (iii) The integration of GE Nordics and Carfinco in Canada. (iv) The transaction with Banco Internacional do Funchal (Banif). See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

The business dynamics in Continental Europe were still moderate, with some countries still engaged in deleveraging. However, there were signs during the year of acceleration in business activity, particularly in the arrangement of new loans. Loans and advances to customers increased by 7% year on year and total customer funds under management by 2%, with growth rates of around 10% in demand accounts and investment funds.

Total income increased by €324 million mainly due to the €489 million increase in Interest/income (charges) partially offset by the €183 million decrease in Other operating income/(expenses) (net). The rise in Interest/income (charges) was concentrated in Santander Consumer due to the previously mentioned agreements. The decrease in Other operating income/(expenses) (net) reflects the one-off charge in Poland to the Deposit Guarantee Fund, due to the collapse of SK Wolomin Bank as well as Spain’s higher charges to the Deposit Guarantee Fund and Resolution Fund.

Operating expenses, which include administrative expenses and depreciation and amortization, increased by €291 million or 5%, primarily due to businesses incorporated in 2015 in Santander Consumer, as previously mentioned.

Impairment losses, which include impairment losses on financial assets (net) and impairment losses on other assets (net) (loan-loss provisions), decreased by €876 million or 28% with loan-loss provisions decreasing in all commercial units, especially in Spain as the economic cycle continues to improve.

The NPL ratio in Continental Europe decreased 161 basis points to 7.27%, while the coverage ratio improved 7 percentage points to 64%.

Profit attributable to the Parent increased by €571 million or 35% mainly due to: (i) the decrease in Impairment losses on financial assets (net) through all units, which resulted in improvements in non-performing loans ratios and the cost of lending, and (ii) the integration of the previously mentioned units in Santander Consumer, whose contribution to total income was higher than expenses and impairment losses.

2014 compared to 2013

In 2014, Continental Europe accounted for 24% of profit attributed to the Parent bank’s total operating areas.

The different units from the Continental Europe segment developed their business in 2014 in an environment of moderate growth, with significant variances among countries and low interest rates. The system’s high liquidity facilitated corporate debt issuances and better access to credit by both companies and households. Nevertheless, lending in the eurozone declined further (-0.4%), reflecting continued deleveraging in some economies and disintermediation. The deposits of companies and households continued to grow at rates of around 3%.

In this context, the integration of the retail networks in Spain and the banks in Poland was completed.

Total income decreased by €288 million mainly due to the €684 million decrease in gains on financial assets and liabilities partially offset by the €328 million increase in net interest income. The fall in gains/(losses) on financial assets and liabilities was due to reduced gains from the management of risks (mainly interest rate risk). The growth in net interest income reflects the greater reduction in the cost of deposits, in all units, which offset the decline in interest earned.

Operating expenses, which include administrative expenses and depreciation and amortization, decreased by €69 million or 1%, primarily due to synergies from the merger and optimization plans in Spain.

140

Impairment losses, which include impairment losses on financial assets (net), and impairment losses on other assets (net) (loan-loss provisions), decreased by €851 million or 21% reflecting decreases in all commercial units, except Poland, in loan-loss provisions.

The NPL ratio in Continental Europe decreased 22 basis points to 8.88%, while the coverage ratio was flat at 57%.

Profit attributable to the Parent increased by €411 million or 33% mainly due to improved net interest income, the decrease in operating expenses relating to synergies from the merger and optimization plans in Spain and the decrease in impairment losses on financial assets.

United Kingdom

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		4,942			4,234			3,451			17	%		23	%
Income from equity instruments		1			1			1			0	%		0	%
Income from companies accounted for by the equity method		10			9			4			11	%		125	%
Net fees and commissions		1,091			1,028			992			6	%		4	%
Gains/losses on financial assets and liabilities (net) *		302			241			402			25	%		(40	%)
Other operating income/(expenses) (net)		37			28			31			32	%		(10	%)
TOTAL INCOME		6,383			5,541			4,881			15	%		14	%
Administrative expenses		(3,009	)		(2,702	)		(2,318	)		11	%		17	%
Depreciation and amortization		(348	)		(353	)		(316	)		(1	%)		12	%
Provisions (net)		(351	)		(184	)		(231	)		91	%		(20	%)
Impairment losses on financial assets (net)		(107	)		(332	)		(580	)		(68	%)		(43	%)
Impairment losses on other assets (net)		(9	)		—			(4	)		n.a.			(100	%)
Gains/(losses) on other assets (net)		5			3			—			67	%		n.a.
OPERATING PROFIT/(LOSS) BEFORE TAX		2,564			1,973			1,432			30	%		38	%
Income tax		(556	)		(416	)		(293	)		34	%		42	%
PROFIT FROM CONTINUING OPERATIONS		2,008			1,557			1,139			29	%		37	%
Profit/(loss) from discontinued operations (net)		—			—			(9	)		n.a.			(100	%)
CONSOLIDATED PROFIT FOR THE YEAR		2,008			1,557			1,130			29	%		38	%
Profit attributable to non-controlling interest		37			1			1			n.a.			0	%
Profit attributable to the Parent		1,971			1,556			1,129			27	%		38	%

* Includes exchange differences (net)

2015 compared to 2014

In 2015, the United Kingdom accounted for 24% of profit attributed to the Parent bank’s total operating areas.

The Bank’s focus was on boosting the loyalty and engagement of its private individual and business customers.

In 2015, as a new strategic priority, the Bank focused on operational and digital excellence. A number of different digital solutions were launched in the year that were very well received by the market, and attracting new digital customers was set as a priority. By year end there were 3.7 million digital customers, an increase of 22% year on year.

The Bank also kept the focus on the profitability and strength of the balance sheet, while at the same time establishing a target ring-fencing structure to enable it to meet the distinct needs of its retail, business and institutional customers.

Total income increased by €842 million in 2015 mainly due to the €708 million increase in Interest/income (charges) driven by higher volumes. In local currency, customer loans increased 5% compared to December 2014, largely due to corporate lending (+10%), mortgages (+2%) and unsecured consumer and vehicle finance lending (+42%), which was impacted by the PSA Finance UK limited commencement in February 2015. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Agreement with Banque PSA Finance”.

141

Operating expenses increased €302 million or 10% in 2015 reflecting the higher regulatory costs and the continued enhancements of our digital channels. These strategic investment programs underpin future efficiency improvements.

Impairment losses decreased €216 million or 65% of which €225 million were due to lower impairment losses on financial assets with improved credit quality across the loan portfolios, conservative loan-to-value criteria, and supported by a favorable economic environment. The NPL ratio improved 27 basis points to 1.52% at the end of 2015, while the coverage ratio decreased 4 percentage points to 38%.

The €167 million increase in Provisions (net) relates to the €286 million reduction in pension obligations registered in 2014 and not repeated in 2015.

Profit attributable to the Parent increased by €415 million supported by greater business flows which resulted in enhanced Interest/income (charges) and by improving credit quality which resulted in lower impairment losses on financial assets. These improvements were partially offset by (i) increased operating expenses relating to our strategic investments and (ii) a rise in Provisions (net).

2014 compared to 2013

In 2014, the United Kingdom accounted for 22% of profit attributed to the Parent bank’s total operating areas.

Santander UK’s strategy is built around three priorities: loyal and satisfied retail customers; Bank of Choice for U.K. companies, and consistent profitability and a strong balance sheet.

Total income increased by €660 million in 2014 mainly due to greater net interest income, partially offset by lesser gains / (losses) on financial assets and liabilities. Net interest income increased by €783 million due to the reduced cost of retail deposits. Santander UK’s Retail Banking reduced its more rate sensitive and short term deposits (mainly through maturities of higher rate eSaver savings products), and replaced them with deposits that offer better relationship opportunities and lower cost term products. Gains / (losses) on financial assets and liabilities decreased €161 million mainly due unrepeated results obtained in 2013 from the ALCO portfolio and debt repurchases.

Operating expenses increased €421 million or 16% in 2014 due to continued investments in the retail banking and business segments, which were partially offset by the efficiency plans being implemented. These investment programs continued to support improvements in the business and to provide the underpinning for future efficiency improvements.

We continued to invest in branch renovations and digital technology. This year we have delivered a number of improvements in all of our digital platforms including our online and mobile banking services as well as introducing more digital technology into our branches.

Impairment losses decreased €252 million or 43% of which €248 million were due to lower impairment losses on financial assets relating to improved credit quality across our product range and supported by an improving economic environment.

Provisions (net) decreased by €47 million as a result of a €286 million reduction in pension obligations due to the agreement reached to limit pensionable salary (see note 25.C.ii to our consolidated financial statements), partly offset by restructuring costs. The NPL ratio of 1.79% at the end of 2014 was lower than at the end of 2013 when it was 1.98%. We maintained our conservative lending criteria, with an average LTV of 65% for new loans, including Help to Buy, and 47% on the stock of mortgages.

Profit attributable to the Parent increased €427 million mainly due to improved net interest income and lower provisions and impairment losses which were partially offset by increased operating expenses. The results demonstrate a further improvement in performance and continued progress evident during the year, particularly in net interest income.

142

Latin America

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		13,752			13,620			14,808			1	%		(8	%)
Income from equity instruments		57			88			54			(35	%)		63	%
Income from companies accounted for by the equity method		285			283			264			1	%		7	%
Net fees and commissions		4,452			4,372			4,477			2	%		(2	%)
Gains/losses on financial assets and liabilities (net) *		517			484			982			7	%		(51	%)
Other operating income/(expenses) (net)		(308	)		(290	)		(267	)		6	%		9	%
TOTAL INCOME		18,755			18,557			20,318			1	%		(9	%)
Administrative expenses		(7,230	)		(7,130	)		(7,497	)		1	%		(5	%)
Depreciation and amortization		(676	)		(720	)		(827	)		(6	%)		(13	%)
Provisions (net)		(831	)		(946	)		(770	)		(12	%)		23	%
Impairment losses on financial assets (net)		(5,108	)		(5,145	)		(6,487	)		(1	%)		(21	%)
Impairment losses on other assets (net)		20			16			(24	)		25	%		n.a.
Gains/(losses) on other assets (net)		78			113			312			(31	%)		(64	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		5,008			4,745			5,025			6	%		(6	%)
Income tax		(1,219	)		(1,053	)		(1,113	)		16	%		(5	%)
PROFIT FROM CONTINUING OPERATIONS		3,789			3,692			3,912			3	%		(6	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n.a.			n.a.
CONSOLIDATED PROFIT FOR THE YEAR		3,789			3,692			3,912			3	%		(6	%)
Profit attributable to non-controlling interest		596			790			861			(25	%)		(8	%)
Profit attributable to the Parent		3,193			2,902			3,051			10	%		(5	%)

* Includes exchange differences (net)

2015 compared to 2014⁴

As of December 31, 2015, Latin America accounted for 40% of profit attributable to the Parent’s total operating areas.

In general, the environment in Latin America was not favorable for business, mainly due to the widespread depreciation of currencies and Brazil’s recession.

The Group continued to focus, as a priority, on strengthening customer relations by improving their experience and increasing their satisfaction. For this purpose, 2015 saw the launch in the principal geographical areas of the “1|2|3 World” range of products that is designed to attract and engage private individual customers, and the Advance program, the aim of which is to strengthen the Bank’s positioning in business customers.

As a result, the number of loyal and digital customers rose in all countries. In 2015, in the region’s main countries the average growth was 11% in loyal customers and 17% in digital customers.

Total income increased by €198 million heavily affected by exchange rates, especially in Brazil, as excluding the exchange rate impact they improved by €1,735 million. The main drivers of growth were Interest/income (charges) (+ €132 million or + €1,282 without exchange rates) and Net fees and commissions (+ €80 million or + €450 million eliminating the exchange rate impact). These growths were spurred by the strength of business which fed through to net interest income and fee income. The Group kept significant business growth rates with a 14% and 12% growth (excluding the effect of exchange rates) in customer loans and deposits, respectively, with the focus on strategic segments for the Group.

Operating expenses increased by €56 million or 1%. Nevertheless, excluding the exchange rate impact expenses grew by €691 million or 10%. This increase was due to salary agreements, in an environment of high inflation in countries such as Brazil, Argentina and Uruguay, dollar-indexed expenses and investments in the development of the retail network and digital channels. However, growth was moderate as compared to inflation rates.

⁴  For a summary by countries see “Item 4. Information on the Company—B. Business Overview—Latin America”.

143

Impairment losses decreased by €41 million mainly due to exchange rates. Even though provisions for loan-losses increased by 7% (eliminating the foreign exchange impact) the pace was slower than the 14% growth in customer loans. Aiming to this is our continued change in lending mix toward low risk premium products.

The NPL ratio increased 17 basis points to 4.96% and the coverage ratio stood at 79% at the end of 2015.

Profit attributable to the Parent increased by €291 million heavily impacted by the widespread depreciation of currencies, especially in Brazil. Deducting the exchange rate impact the increase was €455 million spurred by the growth in business which offset the rise in expenses and impairment losses.

2014 compared to 2013

As of December 31, 2014, Latin America accounted for 42% of profit attributable to the Parent’s total operating areas.

The strategy in 2014 focused on expansion, consolidation and improvement in the business of the commercial franchise in the region.

Total income decreased by €1,761 million or 9%, however in local currencies and eliminating the perimeter effect (the units of Santander Asset Management that were sold and that we now consolidate by the equity method in the various countries), they increased slightly. Net interest income fell by €1,188 million or 8%, mainly affected by the change in business mix to lower cost of credit products and also reduced spreads, particularly in Brazil and Mexico. Higher volumes and a lower cost of funds partially offset these effects. Gains / (losses) on financial assets and liabilities decreased €498 million mainly due to lower trading gains as the income obtained in 2013 from the sale of portfolios, mainly in Brazil, was not repeated.

Operating expenses decreased by €474 million or 6%. Nevertheless, excluding the exchange rate impact and the perimeter effect, expenses grew slightly mainly due to investment in networks and commercial projects (some traditional and others focused on priority customer segments) and inflationary pressures on employee compensation and contracted services, and to a lesser extent, the consolidation of GetNet in Brazil.

Impairment losses decreased by €1,382 million as impairment losses on financial assets declined €1,342 million, mainly due to the improvement in Brazil (-€1,212 million) accentuating the change in trend started at the beginning of 2013. The NPL ratio decreased 31 basis points to 4.79%, positively impacted by Brazil, and the coverage ratio stood at 84% at the end of 2014.

Profit attributable to the Parent decreased by €149 million or 5%, mainly due to decreased net interest income and gains / (losses) on financial assets and liabilities, offset by lower loan-loss provisions.

144

United States

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		6,116			4,789			1,807			28	%		165	%
Income from equity instruments		48			29			24			66	%		21	%
Income from companies accounted for by the equity method		3			4			331			(25	%)		(99	%)
Net fees and commissions		1,086			830			578			31	%		44	%
Gains/losses on financial assets and liabilities (net) *		231			205			106			13	%		93	%
Other operating income/(expenses) (net)		316			122			(63	)		159	%		n.a.
TOTAL INCOME		7,800			5,979			2,783			30	%		115	%
Administrative expenses		(2,761	)		(2,039	)		(1,481	)		35	%		38	%
Depreciation and amortization		(264	)		(200	)		(149	)		32	%		34	%
Provisions (net)		(164	)		(21	)		(59	)		n.a.			(64	%)
Impairment losses on financial assets (net)		(3,103	)		(2,233	)		(43	)		39	%		n.a.
Impairment losses on other assets (net)		—			(12	)		(17	)		(100	%)		(29	%)
Gains/(losses) on other assets (net)		16			46			(2	)		(65	%)		n.a.
OPERATING PROFIT/(LOSS) BEFORE TAX		1,524			1,520			1,032			0	%		47	%
Income tax		(517	)		(439	)		(164	)		18	%		168	%
PROFIT FROM CONTINUING OPERATIONS		1,007			1,081			868			(7	%)		25	%
Profit/(loss) from discontinued operations (net)		—			—			—			n.a.			n.a.
CONSOLIDATED PROFIT FOR THE YEAR		1,007			1,081			868			(7	%)		25	%
Profit attributable to non-controlling interest		329			219			(1	)		50	%		n.a.
Profit attributable to the Parent		678			862			869			(21	%)		(1	%)

* Includes exchange differences (net).

2015 compared to 2014⁵

In 2015, United States contributed 8% of the profit attributable to the Parent bank’s total operating areas.

Santander US continues to focus on several strategic priorities directed at enhancing its position and diversification, including: the implementation of a multi-year project to comply with regulatory requirements globally, the improvement of the governance structure (including the creation of an Intermediate Holding Company), the setting up of a local managerial team with wide experience in the management of large financial companies, the improvement of profitability at Santander Bank, National Association, and the optimization of the vehicle finance business at Santander Consumer USA.

Total income increased by €1,821 million heavily affected by exchange rates as deducting this impact total income improved by €647 million. This growth was due to Santander Consumer USA, driven by the greater volume of portfolios, which boosted Interest/income (charges), and Net fees and commissions from servicing. Further contributing to the increase in total income was the growth in Other operating income/(expenses) (net) due to the development of the leasing business.

Interest/income (charges) at Santander Bank were under pressure from lower than expected interest rates, which were offset by the Gains/losses on financial assets and liabilities (net).

Operating expenses rose €786 million or 35% (€346 million or 13% deducting exchange rates), derived from the growth of the servicing platform, the setting up of the holding company and regulatory requirements.

Provisions and Impairment losses increased by €1,001 million resulting mainly from Impairment losses on financial assets (net) that rose €870 million (€433 million excluding the exchange rate impact) due to continued lending growth. At December 31, 2015, the NPL ratio was 2.13%, which represents a 29 basis points reduction from 2014. The coverage ratio improved 31 percentage points to 225% at December 31, 2015.

Profit attributable to the Parent decreased by €184 million or €352 million without exchange rates. Despite the increase in Total income, Profit attributable to the Parent was lower due to higher Operating expenses, Impairment losses relating to greater lending in Santander Consumer USA, and Income taxes.

⁵  For further information on the segment, see “Item 4. Information on the Company—B. Business Overview—United States”.

145

2014 compared to 2013

In 2014, United States contributed 12% of the profit attributable to the Parent bank’s total operating areas. In 2014, business was conducted in an environment of faster growth. With interest rates at historic lows, this enabled quantitative stimulus measures to be reduced and the dollar to strengthen against the euro.

Santander Bank strategy in 2014 centered on growth in loans to companies and consolidating the business derived from auto finance, and on increasing and improving the quality of deposits. In addition, measures to optimize the balance sheet were implemented which will have a positive impact on results in the future.

In Santander Puerto Rico the strategy of deleveraging led to a 16% fall in lending.

SCUSA completed in the first quarter of 2014 its public offering of shares and listing on the New York Stock Exchange. SCUSA continued in 2014 its auto finance plan stemming from the agreement with Chrysler, whereby we originate private-label loans and leases under the Chrysler Capital brand (“Chrysler Capital”) to facilitate Chrysler vehicle retail sales. Furthermore, SCUSA took actions and entered into agreements that enabled it to continue to grow in unsecured consumer loans. The strategy of the last few quarters was centered on increasing originations, but maintaining more stable on-balance sheet balances, as a result of securitizations and sales of portfolios.

Total income increased €3,196 million or 115%, mainly due to SCUSA’s change in consolidation method (see “Item 4. Information on the Company—B. Business Overview—United States”). Excluding the change in consolidation method and exchange rate impacts, growth was mostly due to the increase in lending in SCUSA, offset by the reduction in the investments portfolio that impacted net interest income, as well as the decline in fee income largely due to new regulations on fees we can charge on overdrafts.

Operating expenses rose €609 million or 37%, largely due to SCUSA’s change in consolidation method and the need to adapt to regulatory requirements, as well as investment in technology (ATMs, mobile banking and cards).

Impairment losses increased by €2,185 million as Impairment losses on financial assets (net), increased by €2,190 million, significantly affected by SCUSA’s change in consolidation method. The increase in the amount of allowances was mainly related to loans originated after the change in control date and was driven by strong new originations and an increase in the net charge-off rate, events that occurred subsequent to that date. At December 31, 2014, the NPL ratio was 2.42%, which represents a 60 basis points reduction from 2013. The coverage ratio improved 46 percentage points to 194% at December 31, 2014.

Profit attributable to the Parent was €862 million in line with the €869 million obtained in 2013. The increase in total income due to SCUSA’s growth in lending did not feed through fully to profits because of the higher provisions required for the faster pace of lending and to a lesser extent, the increase in operating expenses.

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Corporate Center

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		(4	)		(613	)		(1,320	)		(99	%)		(54	%)
Income from equity instruments		72			31			34			132	%		(9	%)
Income from companies accounted for by the equity method		(43	)		(28	)		(113	)		54	%		(75	%)
Net fees and commissions		(13	)		(34	)		247			(62	%)		n.a.
Gains/losses on financial assets and liabilities (net) *		150			699			(1	)		(79	%)		n.a.
Other operating income/(expenses) (net)		(33	)		(24	)		45			38	%		n.a.
TOTAL INCOME		129			31			(1,108	)		n.a.			n.a.
Administrative expenses		(28	)		(56	)		(165	)		(50	%)		(66	%)
Depreciation and amortization		(669	)		(542	)		(577	)		23	%		(6	%)
Provisions (net)		(1,408	)		(1,653	)		(1,222	)		(15	%)		35	%
Impairment losses on financial assets (net)		(251	)		(25	)		(284	)		n.a.			(91	%)
Impairment losses on other assets (net)		(931	)		(786	)		(309	)		18	%		154	%
Gains/(losses) on other assets (net)		243			2,986			1,792			(92	%)		67	%
OPERATING PROFIT/(LOSS) BEFORE TAX		(2,915	)		(45	)		(1,873	)		n.a.			(98	%)
Income tax		966			(1,171	)		(79	)		n.a.			n.a.
PROFIT FROM CONTINUING OPERATIONS		(1,949	)		(1,216	)		(1,952	)		60	%		(38	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n.a.			n.a.
CONSOLIDATED PROFIT FOR THE YEAR		(1,949	)		(1,216	)		(1,952	)		60	%		(38	%)
Profit attributable to non-controlling interest		145			(65	)		158			n.a.			n.a.
Profit attributable to the Parent		(2,094	)		(1,151	)		(2,110	)		82	%		(45	%)

* Includes exchange differences (net).

2015 compared to 2014⁶

Our subsidiaries’ model is complemented by a corporate center that has support and control units which carry out functions for the Group in risk, auditing, technology, human resources, legal affairs, communication and marketing, among other matters.

Total income improved by €98 million resulting from the centralized management of risks (mainly interest rate risk and exchange rate risk) and the financial cost of issuances. The improved performance of Interest income/(charges) was partially offset by the decrease in Gains/losses on financial assets and liabilities.

Operating expenses increased €99 million or 17% mainly due to regulatory projects.

Provisions (net) decreased by €245 million. Of note were decreases in pre-retirements in Spain and a £450 million allowance to cover possible claims relating to payment protection insurance (PPI) products in the United Kingdom (see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal Proceedings—ii. Non-tax-related proceedings”).

Impairment losses increased by €371 million. The main developments were impairment of minor goodwills and other intangible assets as well as other write-downs. Goodwill impairment mainly relates to the Group’s businesses in Puerto Rico and was due to the deterioration of the projected business expectations. Furthermore, other impairment losses mainly relate to the decline in or loss of the recoverable value of certain computer systems and applications as a result of the processes initiated by the Group to adapt to various regulatory changes and to transform or integrate businesses.

Gains/(losses) on other assets (net) were €243 million which mainly include the generation of badwill amounting to €283 million as a result of the acquisition of the assets and liabilities of Banco Internacional do Funchal (Banif) in Portugal. See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Acquisition of Banco Internacional do Funchal (Banif)”.

⁶  For further information on the segment, see “Item 4. Information on the Company—B. Business Overview—Corporate Center”.

147

Income taxes decreased by €2,137 million mainly due to the SCUSA transaction registered in 2014 which was not repeated in 2015 together with the reversal of tax liabilities in Brazil that took place in the second quarter of 2015.

Loss attributable to the Parent increased by €943 million as the increase in Interest income / (charges) and the decrease in Provisions (net) were offset by the decrease in Gains/losses on financial assets and liabilities (net) and to a greater extent the drop in Gains/(losses) on other assets (net).

2014 compared to 2013

Total income improved by €1,139 million. Net interest income / (charges) improved by €707 million largely due to the lower cost of issuances, and gains/losses on financial assets and liabilities (net) increased by €700 million due to gains from centralized management of risks (mainly interest rate risk and exchange rate risk).

Operating expenses decreased €144 million or 19% mainly due to the impact of the efficiency plans, which are producing their results.

Provisions increased €431 million mainly due to provision for pre-retirements in Spain, restructuring costs and provisions of €455 million for customer remediation in Germany.

Impairment losses increased €218 million mainly due to impairment losses on intangible assets partly offset by the decrease in loan-loss provisions. These impairment losses on intangible assets mainly relate to the decline in, or loss, of the recoverable value of certain computer systems and applications as a result of the processes initiated by the Group to adapt to the various regulatory changes and to transform or integrate businesses.

Gains/(losses) on other assets (net) were €2,986 million which mainly include: (i) the public offering of shares by SCUSA €1.7 billion, (ii) the sale of Altamira for €550 million, and (iii) €413 million due to the sale of insurance companies in Ireland of which €207 million related to the fair value recognition of the 49% ownership interest retained by the Group. See notes 3 and 49 to our consolidated financial statements.

Income taxes increased by €1,092 million mainly due to the previously mentioned transactions.

Loss attributable to the Parent decreased by €959 million due to increases in total income and gains on other assets, partially offset by higher provisions and impairment losses on other assets.

148

Second level (business):

Retail Banking

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		30,027			27,699			24,856			8	%		11	%
Income from equity instruments		124			132			79			(6	%)		67	%
Income from companies accounted for by the equity method		434			341			656			27	%		(48	%)
Net fees and commissions		8,621			8,338			8,206			3	%		2	%
Gains/losses on financial assets and liabilities (net) *		1,346			1,394			2,239			(3	%)		(38	%)
Other operating income/(expenses) (net)		(194	)		(215	)		(378	)		(10	%)		(43	%)
TOTAL INCOME		40,358			37,689			35,658			7	%		6	%
Administrative expenses		(17,153	)		(15,946	)		(15,478	)		8	%		3	%
Depreciation and amortization		(1,577	)		(1,573	)		(1,652	)		0	%		(5	%)
Provisions (net)		(1,656	)		(1,309	)		(1,179	)		27	%		11	%
Impairment losses on financial assets (net)		(9,462	)		(9,812	)		(9,578	)		(4	%)		2	%
Impairment losses on other assets (net)		2			(26	)		(74	)		n.a.			(65	%)
Gains/(losses) on other assets (net)		117			158			255			(26	%)		(38	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		10,629			9,181			7,952			16	%		15	%
Income tax		(2,663	)		(2,128	)		(1,617	)		25	%		32	%
PROFIT FROM CONTINUING OPERATIONS		7,966			7,053			6,335			13	%		11	%
Profit/(loss) from discontinued operations (net)		—			(26	)		(15	)		(100	%)		73	%
CONSOLIDATED PROFIT FOR THE YEAR		7,966			7,027			6,320			13	%		11	%
Profit attributable to non-controlling interest		1,112			1,033			799			8	%		29	%
Profit attributable to the Parent		6,854			5,994			5,521			14	%		9	%

* Includes exchange differences (net).

2015 compared to 2014

Retail Banking generated 85% of the operating areas’ profit attributable to the Parent bank in 2015. The evolution of results in euros is affected by average exchange rates.

The €2,669 million increase in Total income was mainly due to a €2,328 million growth in interest income / (charges) spurred by the rise in volumes. By geographic regions the increase in interest income / (charges) was as follows: +€1,303 million in the U.S., +€688 million in the U.K., +€543 million in Continental Europe and -€206 million in Latin America heavily impacted by exchange rates. Further contributing to the rise in total income was the €283 million increase in Net fees and commissions driven by the performance in the U.S. from servicing.

Operating expenses increased by €1,211 million or 7% mainly relating to the U.S. due to the growth of the servicing platform, the setting up of the holding company and regulatory requirements.

Provisions (net) increased by €347 million. This increase was mainly concentrated in the U.S. and Continental Europe, as releases performed in 2014 were not repeated in 2015.

Impairment losses decreased by €378 million or 4% spurred by Spain’s performance, as the process of normalization in a more favorable economic cycle continued, and the U.K. with improved credit quality across the loan portfolios. Partially offsetting these decreases were Mexico and U.S.A. due to lending increases.

Profit attributable to the Parent increased by €860 million mainly due to the rise in interest income / (charges) partly offset by operating expenses.

2014 compared to 2013

Retail Banking generated 86% of the operating areas’ profit attributable to the Parent bank in 2014. The evolution of results in euros is affected by average exchange rates. In addition, SCUSA, which was previously accounted for by the equity method, is fully consolidated in our results as of the date we took control after its public offering and listing in January 2014.

The €2,031 million increase in total income was mainly due to a €2,843 million or 11% growth in net interest income. The increase in net interest income was primarily focused in: (i) Continental Europe and the

149

U.K. as the reduction in cost of funds offset the decrease in interest income and (ii) in U.S. due to SCUSA’s change in consolidation method. Each of our four business areas (Continental Europe, the U.K., Latin America and the U.S.) improved their total income. Partly offsetting the increase in net interest income was a €845 million decrease in gains/losses on financial assets and liabilities (net) mainly due to a decrease in gains from the management of risks.

Operating expenses increased by €389 million or 2% mainly due to the perimeter effect and the investments made to develop the network and businesses.

Impairment losses increased by €186 million or 2%. The main developments were SCUSA’s change in consolidation method, as well as the decrease in impairments in Latin America mainly concentrated in Brazil.

Profit attributable to the Parent increased by €473 million or 9%, mainly due to the increase in net interest income.

Santander Global Corporate Banking

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		2,830			2,481			2,361			14	%		5	%
Income from equity instruments		259			272			265			(5	%)		3	%
Income from companies accounted for by the equity method		(6	)		(2	)		(1	)		200	%		100	%
Net fees and commissions		1,425			1,392			1,293			2	%		8	%
Gains/losses on financial assets and liabilities (net) *		739			749			1,155			(1	%)		(35	%)
Other operating income/(expenses) (net)		24			31			15			(23	%)		107	%
TOTAL INCOME		5,271			4,923			5,088			7	%		(3	%)
Administrative expenses		(1,897	)		(1,682	)		(1,634	)		13	%		3	%
Depreciation and amortization		(161	)		(158	)		(148	)		2	%		7	%
Provisions (net)		(51	)		(38	)		(44	)		34	%		(14	%)
Impairment losses on financial assets (net)		(688	)		(552	)		(953	)		25	%		(42	%)
Impairment losses on other assets (net)		(37	)		(43	)		(37	)		(14	%)		16	%
Gains/(losses) on other assets (net)		4			(13	)		11			(131	%)		n.a.
OPERATING PROFIT/(LOSS) BEFORE TAX		2,441			2,437			2,283			0	%		7	%
Income tax		(695	)		(667	)		(633	)		4	%		5	%
PROFIT FROM CONTINUING OPERATIONS		1,746			1,770			1,650			(1	%)		7	%
Profit/(loss) from discontinued operations (net)		—			—			—			n.a.			n.a.
CONSOLIDATED PROFIT FOR THE YEAR		1,746			1,770			1,650			(1	%)		7	%
Profit attributable to non-controlling interest		120			145			197			(17	%)		(26	%)
Profit attributable to the Parent		1,626			1,625			1,453			0	%		12	%

* Includes exchange differences (net).

2015 compared to 2014

Santander Global Corporate Banking maintained in 2015 the key pillars of its business model, focused on the customer, the division’s global capacities and its interconnection with local units, while actively managing risk, capital and liquidity.

This segment contributed 20% of the operating areas’ profit attributable to the Parent bank in 2015.

Total income increased by €348 million or 7% (+€385 million or 8% deducting exchange rates) with growth in all products. Eliminating the exchange rate impact the increases by business areas were as follows: (i) Global Transaction Banking +5% against a backdrop of containment of spreads and low interest rates, (ii) Financing Solutions and Advisory 9%, reflecting the soundness of the various businesses, and (iii) Global Markets 1% (good performance in the Americas, Spain and Portugal).

Operating expenses rose €218 million or 12% due to the investments in high potential markets, particularly the UK and Poland.

Impairment losses increased by €130 million or 22% due to higher loan-loss provisions, mainly in Brazil.

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Profit attributable to the Parent increased by €1 million impacted by exchange rates as deducting this effect the increase was €27 million. This performance was due to the increase in total income which was partly offset by the costs incurred from the investment in high potential markets and the rise in impairment losses.

2014 compared to 2013

This segment contributed 23% of the operating areas’ profit attributable to the Parent bank in 2014.

Total income decreased €165 million mainly due to lower gains on financial assets and liabilities (€406 million) partially offset by the €99 million increase in net fees and commissions and the €120 million increase in net interest income. The sharp fall in gains on financial assets and liabilities was due to lower trading gains relating to the impact of markets on transactions with customers and valuation adjustments.

Operating expenses increased 3% reflecting investments in high potential markets, particularly in the U.K. and the U.S.

Impairment losses decreased by €395 million or 40% compared with 2013 due to lower loan-loss provisions, after the increase experienced in 2013 in Spain and Mexico.

Profit attributable to the Parent increased by €172 million. This performance was due to the increase in income from fees and commissions, the growth in net interest income and lower provisions, which were offset by the decrease in gains on financial assets and liabilities and higher costs incurred from the investment in franchises under development.

Real Estate Operations in Spain

										Variations
	2015			2014			2013			2015/14			2014/13
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		(41	)		(20	)		38			105	%		(153	%)
Income from equity instruments		—			—			—			n.a.			n.a.
Income from companies accounted for by the equity method		(10	)		(68	)		(42	)		(85	%)		62	%
Net fees and commissions		—			—			15			n.a.			(100	%)
Gains/losses on financial assets and liabilities (net) *		151			8			1			n.a.			n.a.
Other operating income/(expenses) (net)		37			49			16			(24	%)		n.a.
TOTAL INCOME		137			(31	)		28			n.a.			n.a.
Administrative expenses		(224	)		(215	)		(175	)		4	%		23	%
Depreciation and amortization		(11	)		(14	)		(14	)		(21	%)		0	%
Provisions (net)		9			(9	)		—			(200	%)		n.a.
Impairment losses on financial assets (net)		(251	)		(321	)		(412	)		(22	%)		(22	%)
Impairment losses on other assets (net)		(126	)		(83	)		(83	)		52	%		0	%
Gains/(losses) on other assets (net)		(142	)		(221	)		(328	)		(36	%)		(33	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		(608	)		(894	)		(984	)		(32	%)		(9	%)
Income tax		179			248			295			(28	%)		(16	%)
PROFIT FROM CONTINUING OPERATIONS		(429	)		(646	)		(689	)		(34	%)		(6	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n.a.			n.a.
CONSOLIDATED PROFIT FOR THE YEAR		(429	)		(646	)		(689	)		(34	%)		(6	%)
Profit attributable to non-controlling interest		(9	)		6			—			n.a.			n.a.
Profit attributable to the Parent		(420	)		(652	)		(689	)		(36	%)		(5	%)

* Includes exchange differences (net).

2015 compared to 2014

The segment, which has a specialized management model, combines (i) the run-off real estate activity in Spain, which includes loans to clients mainly for real estate promotion, where our strategy focuses on a significant reduction of our exposure; (ii) quality real estate operating assets (mainly from our old real estate fund, Santander Banif Inmobiliario); (iii) our subsidiary Metrovacesa; and (iv) certain other assets such as our stake in Sareb.

The Group’s strategy in recent years has been directed at reducing these assets, mainly loans and foreclosed assets. Net loans totaled €2,794 million, which was 33% less than in 2014. They accounted for 0.4% of the Group’s loans and less than 2% of those of Santander Spain.

151

Gains/losses on financial assets and liabilities (net) increased by €143 million reflecting gains from favorable renegotiation of debt.

Impairment losses on financial assets and Impairment losses on other assets (net) continued a downward trend and experienced a reduction of €27 million directly related to the decrease in net customer lending.

Losses on other assets (net) decreased by €79 million mainly due to a drop in impairments and losses from the sale of foreclosed assets.

Losses attributable to the Parent decreased by €232 million, benefiting for the improvement in Gains/losses on financial assets and liabilities (net) and the fall in impairment losses and losses on other assets.

2014 compared to 2013

Impairment losses on financial assets continued its downward trend and experienced a reduction of €91 million directly related to the decrease in net customer lending.

Losses on other assets (net) decreased by €107 million mainly due to a drop in impairments and losses from sale of foreclosed assets.

Losses attributable to the Parent decreased €37 million, mainly due to a fall in impairment losses and decreased losses on other assets.

Financial Condition

Assets and Liabilities

Our consolidated total assets were €1,340,260 million at December 31, 2015, a €73,964 million increase from total assets of €1,266,296 million at December 31, 2014. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, increased by 7.3% to €817,365 million at December 31, 2015, from €761,928 million at December 31, 2014.

In the Group overall, the impact of exchange rates on the variation in lending to customers was zero, and just one negative percentage point on the variation in customer funds. However, by unit, the impact was significant in the United States (+13 percentage points), the United Kingdom (+6 percentage points), Chile (-5 percentage points), Mexico (-6 percentage points), Brazil (-28 percentage points) and Argentina (-42 percentage points).

The change in the scope of consolidation had a slight positive effect on the year-on-year variation in lending, in the area of consumer finance (mainly due to the implementation of the agreement with PSA), and the addition at the end of December 2015 of the assets and liabilities acquired from Banco Internacional do Funchal (Banif) in Portugal.

Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, increased by 5.5% from €647,627 million at December 31, 2014, to €683,122 million at December 31, 2015, affected by exchange rates. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, decreased by 0.4% from €141,369 million at December 31, 2014 to €140,741 million at December 31, 2015. The general strategy of reducing time deposits and growing demand accounts and investment funds continued, with practically all of the regions achieving growth in both.

During 2015, the Group issued senior debt amounting to €66,223 million (including Santander UK’s medium term program and covered bonds) and subordinated debt amounting to €4,787 million. As regards securitization activities, in 2015 the Group’s subsidiaries placed several securitizations for a total amount of €14,379 million, mainly through the Santander Consumer Finance units. In turn, there were senior debt (including Santander UK’s medium term program and covered bonds) maturities totaling €69,295 million.

Regarding other balance sheet items, goodwill totaled €26,960 million, which was €588 million less than in 2014, mainly explained by the variation in the exchange rate of the Brazilian real against the euro.

152

The financial assets available for sale totaled €122,036 million in December 2015, which was €6,786 million (5.9%) more than at the end of 2014. This increase was located mainly in Spain, the United States and Mexico.

Capital

Stockholders’ equity, net of treasury stock, at December 31, 2015, was €88,040 million, an increase of €7,235 million or 9.0% from €80,805 million at December 31, 2014, mainly due to the €7,500 million capital and additional paid-in capital increase after the January 8, 2015, transaction (see “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Capital Increases”) and an increase in reserves partially offset by an increase of negative valuation adjustments, principally exchange differences.

In regulatory terms, phase-in eligible equity was €84,346 million, which gave a total capital ratio of 14.40% and a common equity Tier 1 (CET1) ratio of 12.55%. This ratio was 280 basis points above the 9.75% minimum that the European Central Bank (under its Supervisory Review and Evaluation Process) established for Grupo Santander in 2016 on a consolidated basis (including the 0.25% derived from being a global systemically important bank).

In fully-loaded terms, the CET1 at the end of 2015 was 10.05%, the goal set at the start of the year and an increase of 40 basis points in the year (excluding the capital increase). The rise was 50 basis points before nonrecurring net capital gains and provisions.

The fully-loaded total capital ratio was 13.05% (+130 basis points in the year), as to the rise in the CET1 was added the favorable impact from the eligibility of the hybrid issues made.

On February 3, 2016, the European Central Bank approved the use of the Alternative Standardized Approach for the calculation of capital requirements at the consolidated level for operational risk to Banco Santander Brazil. As this approval was dated subsequently to the presentation of financial results, the impact on the Group’s risk weighted assets (-€7,836 million), and consequently on its capital ratios, were not taken into account in the figures published on January 27, 2016, which are presented herein.

Qualitatively speaking, the Group has solid and appropriate ratios for its business model, balance sheet structure and risk profile. The fully-loaded leverage ratio (as established by regulation 2015/621) was 4.7%.

See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.

B. Liquidity and capital resources

Management of liquidity

For information about our liquidity risk management process, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 2. Risk management and control model – Advanced Risk Management (ARM)” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Part 5. Liquidity and funding risk”.

Sources of funding

As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.

At December 31, 2015, we had outstanding €205.0 billion of senior debt, of which €62.4 billion were mortgage bonds and €23.0 billion were promissory notes. Additionally, we had €21.2 billion in outstanding subordinated debt (which includes €6.7 billion preferred securities and €0.4 billion in preferred shares).

153

The following table shows the average balances during the years 2015, 2014 and 2013 of our principal sources of funds:

	2015		2014		2013
	(in millions of euros)
Due to credit entities		166,712		132,505		129,610
Customer deposits		685,075		629,460		632,339
Marketable debt securities		202,657		189,765		188,954
Subordinated debt		19,472		17,302		16,645
Total		1,073,916		969,032		967,548

The average maturity of our outstanding debt as of December 31, 2015 is as follows:

(1) Senior debt	6.6 years
(2) Mortgage debt	14.4 years
(3) Dated subordinated debt	7.2 years

For more information see notes 22.b, 23.a and 51.a to our consolidated financial statements.

The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of and reduce our market access to debt financing. Our credit ratings are as follows:

	Long-Term	Short-Term	Outlook
Moody’s	A3	P-2	Positive
Standard & Poor’s	A-	A-2	Stable
Fitch	A-	F2	Stable
DBRS	A	R-1 (low)	Stable

Our total customer deposits, excluding assets sold under repurchase agreements, totaled €645.7 billion at December 31, 2015. Loans and advances to customers (gross) totaled €817.4 billion at the same date.

We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.

We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.

We, Grupo Santander, are a European, Latin American and North American financial group. Although in some jurisdictions limitations have been imposed on dividend payments under the new, much stricter capital adequacy regulations, we are not aware of any current material legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, other than the limitations related to the objections to our U.S. subsidiary’s capital plan issued by the Federal Reserve Board in connection with its annual Comprehensive Capital Analysis Review (CCAR⁷) process. Nevertheless, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Anyway, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

As of December 31, 2015, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.

C. Research and development, patents and licenses, etc.

During 2015, 2014 and 2013, we spent €1,481 million, €1,345 million and €1,229 million, respectively, in research and development activities in connection with information technology projects.

⁷  CCAR is a framework used by the Federal Reserve Board to review the capital planning processes of large U.S. bank holding companies.

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D. Trend information

Overview

We believe we have a unique model and franchise to compete in the global retail banking landscape. Our purpose is to help people and businesses prosper. At our core lies:

• A diversified presence. Our well-balanced emerging-mature markets mix is delivering growth above our peers.

• Strong retail and commercial operations. We are or aim to be one of the top 3 banks in our core 10 markets, which give us access to one billion customers.

• Autonomous subsidiaries in liquidity and capital. The Group is composed of subsidiaries that are autonomous in capital and liquidity. This autonomy creates incentives for good local management and enhances our stability and flexibility.

• International talent management, a common culture and a top global brand. We are able to attract and retain world class talent. We have a shared approach as to how we want to operate and we have created a powerful, global brand.

• Prudent risk management and balance sheet strength, underpinned by our Group’s solid control framework. We have delivered a dividend every year for more than 50 years, including during the financial crisis.

• Investment in innovation, driving digital transformation, and sharing best practice. Our global scale enables us to add value to our subsidiaries around the world.

Our aim is to be the best retail and commercial bank earning the lasting loyalty of our employees, customers, shareholders and communities. The Group’s commercial transformation will continue with the objective of improving the return on capital employed. In order to achieve this, the focus was placed on the following strategic priorities:

1. In relation to the businesses, the Group seeks to improve the commercial franchises and customer service. In particular, it is already undertaking the transformation of commercial banking, growing in SMEs and companies and in consumer finance. In general, there is an opportunity to gain business share in many of the markets in which the Group operates.

2. Continuing to have one of the best efficiency ratios in the industry. With lower interest rates and moderate growth in certain countries, it is essential to do more at a lower cost in order to improve returns. To this end, on Investor Day it was announced that the cumulative savings under the efficiency plan, which was expected to end in 2016 and will now end in 2018, would be increased from €2 billion to €3 billion.

3. Best in class efficiency must go hand in hand with operational excellence which implies the digital transformation of the Bank: a simplification of internal processes that help the Group to be more efficient and to provide better customer service.

4. The more efficient use of capital has been a growing priority in recent years. In view of the higher capital requirements for banking, it is essential to optimize the use of risk-weighted assets.

5. The reinforcement of risk management, a traditional priority in well-managed entities, has also become more important in the current environment. Significant measures have been launched in the last two years on which work will continue. The most notable of these measures is the fostering of local implementation of the risk appetite at the Group units and the launch of the Advanced Risk Management Program (ARM), with which Santander’s aims to construct its future through the timely management of all risks.

6. In order to implement all these strategies it is necessary to have employees who are qualified, motivated and aligned with the Bank’s policies. The improvement of human resources management is fundamental, and the Group is carrying this out through a new talent management model to enable it to identify and harness employees’ potential, thus pursuing Santander’s objective of being a better place to work.

7. And finally, as a result of all these strategic actions, Santander expects to achieve higher returns for shareholders. As has already been announced to the market, the Group aims to position the return on tangible equity at 13% by 2018, improve the efficiency ratio, increase dividends in line with the Group’s profits and pay them largely in cash. All of which is compatible with an increase in capital ratios. Specifically, at the latest Investor Day, Santander announced its objective of achieving a fully-loaded CET1 capital ratio of 11% in 2018.

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Our corporate culture is based on everything we do should be Simple, Personal and Fair.

• A simple bank offers its customers a service that is convenient and products that are easy to understand, however and whenever they choose to bank. It makes its processes better every day, so they are easy and clear for customers and its team.

• A personal bank treats its customers as valued individuals, providing a professional, personal service they can trust. It supports colleagues to develop their skills and achieve their ambitions.

• A fair bank treats people as they like to be treated – and it earns investors an adequate and sustainable return, while contributing its share to help communities.

Outlook

The forward-looking statements included above and in the following section are based on the current beliefs and expectations of our management, including the macroeconomic expectations described below, and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Group’s actual results to differ materially from those set forth in such forward-looking statements. See the sections entitled “Forward-Looking Statements” and “Risk Factors” of this annual report.

According to the International Monetary Fund, the outlook for the world economy in 2016 is for growth of somewhat in excess of 3%, underpinned by a slight improvement in the advanced economies and stability in the emerging economies.

The advanced economies have recorded a clear, albeit gradual improvement in recent years, which will continue in 2016. Easier financial conditions, fiscal policy that is no longer contracting, balance-sheet adjustments and the price of commodities are the reasons for this improvement. However, not all these economies are in the same position. The United States and the United Kingdom are in a relatively advanced phase of the cycle, with projected growth rates of around 2%, which is similar to or somewhat above their potential, and their unemployment rates are practically at levels of full employment. Despite this, so far there is no apparent pressure on prices. The euro area is at a more incipient stage of recovery with a trend of accelerating growth (expected growth of 1.7% in 2016) although the unemployment rate is still high, and both current inflation and the medium-term forecasts are still off target. In addition, various different situations coexist within the euro area. For example, Germany is working at full capacity (its cyclical position is closer to those of the US or the UK) and will grow at a rate of at least 1.5%, somewhat above potential. Spain will continue to show notable dynamism, with projected growth rates of close to 3%.

The emerging economies as a whole will maintain growth of around 4%, according to the IMF’s latest projections. Various factors explain these developments: the gradual slowdown in China, where the sustainable growth rate has fallen, low commodity prices and a certain tightening of financial conditions tied to the beginning of the Fed’s rate rise process. This situation varies considerably depending on each country’s sensitivity to the factors outlined above, the accumulated imbalances of recent years and the ability to apply the appropriate policies. Latin America could again post zero or slightly negative growth in 2016, though this conceals different situations. Brazil will continue to be in recession, Argentina will undertake profound reforms and Chile and Mexico expect to see growth of around 2-3%, relatively modest rates due to the adverse international environment -especially for Mexico-. Growth in Poland is expected to once again exceed 3%, with a new executive considering more expansive policies. The expansionary impact of the fall in commodity prices in advanced countries and the monetary and fiscal policy stimulus -or weaker adjustment- measures in China, the US, Japan and the euro area enable the risk to growth and the risk of deflation to be mitigated. However, as in recent years, the risk balance continues to be downward, albeit less steep, and economic policies allow limited room for maneuver.

The risks are fundamentally related to how events unfold in (i) China, with its ability to sustain growth rates above 6% at the same time as it adjusts its imbalances, (ii) the Fed’s success in gradually progressing in the normalization of its monetary policy, (iii) the stabilization of commodities prices, (iv) the provision of liquidity to avoid sharp adjustments in the markets, (v) the ECB’s determination to handle potential shocks and other more local events that might have international repercussions.

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Following is a brief description of the management priorities and macroeconomic expectations of the main units in 2016:

Europe

United Kingdom. The economy will continue to grow at a good clip although this growth will be supported to a lesser extent by consumption. There will be a moderate recovery in credit, but loan balances to companies will continue to be weak. Against this backdrop, the Bank will continue to seek excellence by prioritizing customers’ needs.

Spain. GDP growth will continue to be among the highest in Europe. A gradual recovery in credit should begin to be discernible, especially in lending to consumers and companies, although overall growth will be slight, still held back by mortgages. In this connection, Santander seeks to have a larger presence (gaining market share in SMEs and progressing in the Bank’s digital transformation) and to offer better service quality. The real estate operations segment in Spain will maintain its strategy of reducing assets, mainly reducing exposure to credits.

Santander Consumer Finance. Taking advantage of its positioning in the European consumer finance market, this area aims to complete the scheduled joint venture processes and take advantage of their growth potential. Its priorities will be centered on (i) increasing and improving the vehicle financing business through agreements with brands and customer loyalty, (ii) completing the integration agreement with Banque PSA Finance, and (iii) strengthening the consumer business through pan-European agreements and increasing its presence through digital channels.

Portugal. With the economy returning to a higher rate of growth, underpinned by domestic demand and a banking sector still undergoing deleveraging, in 2016 Santander will focus on managing the integration of the customers and volumes acquired from Banco Internacional do Funchal (Banif).

Poland. From a leadership position in profitability and digital services, Poland has as main targets for the year to make progress in the digital transformation of the distribution network and improving efficiency and profitability.

Americas

Brazil. Although we are not immune to the country’s current recession, the improvement in the franchise over the last few years enables us to better face the current environment. We have management tools to take advantage of high interest rates and inflation, and in 2016 we will focus on selective business growth, operational efficiency and risk control.

Mexico. In a market of moderate growth and good commercial dynamic, Santander should harness its market-share gains in key segments (SMEs, companies and mortgages) to consolidate its position.

Chile. In a recovering economy in a less favorable external environment, the bank’s strategy will focus on improving the quality of customer service, which will lead to an improvement in loyalty.

United States. In 2016 Santander will continue to strengthen governance structures with a view to improving the management of the business and making progress vis-à-vis compliance with the regulator’s requirements. The commercial management priorities by unit will be as follows:

• To improve the loyalty of Santander Bank customers and the experience provided to them by increasing multichannel banking capacity and offering more, simpler products.

• At Santander Consumer USA, to harness the potential of the agreement with Chrysler, to increase the penetration rate and to continue to optimize the mix of the assets retained and those sold.

• In Puerto Rico, the priority will be the integration of the Puerto Rican entities in SHUSA. The Group will look to generate business by giving priority to target markets and always maintaining loan quality. In deposits, the strategy of retaining cheap deposits and holding appropriate levels of liquidity will be maintained.

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E. Off-balance sheet arrangements

As of December 31, 2015, 2014 and 2013, we had outstanding the following contingent liabilities (for more information see note 35 to our consolidated financial statements):

	2015		2014		2013
	(in millions of euros)
Contingent liabilities:
Financial guarantees and other sureties		14,648		13,383		13,479
Irrevocable documentary credits		2,139		2,381		2,430
Other guarantees		23,047		28,006		24,690
Other contingent liabilities		281		308		450
		40,115		44,078		41,049

F. Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations by remaining maturity at December 31, 2015:

Contractual obligations

(in millions of euros)	Less than 1 year		More than 1 year but less than 3 years		More than 3 years but less than 5 years		More than 5 years		Total
Deposits from central banks and from credit institutions		88,676		46,996		6,294		6,113		148,079
Customer deposits		572,675		41,810		8,163		24,930		647,578
Marketable debt securities		60,377		55,689		30,877		54,713		201,656
Subordinated debt		2,103		2,193		4,126		12,731		21,153
Liabilities under insurance contracts (1)		566		13		14		34		627
Operating lease obligations		496		488		340		1,608		2,932
Capital lease obligations		58		46		39		94		237
Purchase obligations		2		2		2		—		6
Other long-term liabilities (2)		1,858		3,507		3,321		8,352		17,038
Contractual interest payments (3)		9,101		6,513		6,034		31,166		52,814
Total		735,912		157,257		59,210		139,741		1,092,120

(1) Includes life insurance contracts in which the investment risk is borne by the policy holder and insurance savings contracts.

(2) Other long-term liabilities relate to pensions and similar obligations and include the estimated benefit payable for the next ten years.

(3) Calculated for all Deposits from credit institutions, Customer deposits, Marketable debt securities and Subordinated debt assuming a constant interest rate based on data as of December 31, 2015 over time for all maturities, and those obligations with maturities of more than five years have an average life of ten years.

The table above excludes the “fixed payments” of our derivatives since derivative contracts executed by the Group apply close-out netting across all outstanding transactions, that is, these agreements provide for settlements to be made on a maturity or settlement date for the differences that arise, and as such, the obligation to be settled in the future is not fixed at the present date and is not determined by the fixed payments.

For a description of our trading and hedging derivatives, which are not reflected in the above table, see note 36 to our consolidated financial statements.

For more information on our marketable debt securities and subordinated debt, see notes 22 and 23 to our consolidated financial statements.

G. Other disclosures

Higher-Risk Loans

Grupo Santander does not have any significant exposure to higher-risk loans. Our credit profile is focused on retail banking with a medium-low risk profile⁸ and with broad diversification both by geography and segment, and 61% of the Group’s total loan portfolio is secured (in most cases, by real estate).

⁸  See further information regarding medium-low risk profile in Item 11. Quantitative and Qualitative Disclosures About Market Risk. Part 2. Risk management and control model - Advanced Risk Management (ARM) - 3. Management processes and tools – 3.1.Risk appetite and limits structure - Banking business model and fundamentals of the risk appetite.

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Mortgages to individuals represent approximately 36% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the U.K., and are mainly residential mortgages with a low risk profile, low non-performing ratios and an appropriate coverage ratio. This low risk profile produces low related losses.

In Spain, at December 31, 2015, the loan portfolio and thus its risk profile mainly comprises primary residence loans with an affordability rate close to 28%. Residential mortgages represent around 29% of the total loans and advances to customers (excluding the public sector) within the business in Spain, a 69% of which has a LTV at inception lower than 80%.

All customers applying for a prime residential mortgage are subject to a rigorous assessment of credit risk and affordability. In evaluating the payment capacity (affordability) of a potential customer, the credit analyst must determine if the income of the customer is sufficient to meet the payment of the loan installments taking into consideration other income that the customer may receive. In addition, the analyst must decide if the customer’s income will be stable over the term of the loan.

The U.K.’s mortgage portfolio is focused on primary residence mortgages with high risk quality in terms of LTV (45.3% as of December 31, 2015). Certain portfolios that may present higher risks than others (interest only, flexible loans, loans with LTV greater than 100%, buy to let), are subject to strict lending policies to mitigate risks. Furthermore, their performance is continuously monitored to ensure an adequate control.

The Group manages, in a separate unit, run-off real estate activity in Spain, which includes loans to clients mainly for real estate promotion, and has a specialized management model, stakes in real estate companies and foreclosed assets.

The Group’s strategy in the last few years has been to reduce the volume of these loans which at the end of 2015 stood at €6,991 million in net terms (around 2% of loans in Spain and less than 1% of the Group’s loans).

Changes in Practices

There have not been any significant changes in policies and practices in response to the effects of the current economic environment that might affect the quality of the credit information presented. This is due to the fact that the following policies and practices already formed part of our normal course of business:

a) Medium-low risk profile of the portfolio

Our risk profile is characterized by the prevalence of primary residence loans and a low affordability rate, which leads to a medium-low risk profile for the mortgage portfolio. This is due to the establishment of risk management frameworks and policies that reflect our risk management principles.

In addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function for adequate credit quality control with local and global teams.

b) Suspended accrual interest of non-performing past-due assets

Balances are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received to secure (fully or partially) collection of the related balances. For all non-performing past due assets, any collections relating to non-performing loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding.

When the recovery of any recognized amount is considered unlikely, the amount is charged-off, without prejudice to any actions that we may initiate to seek collection.

c) Allowances for credit losses and internal model

As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described in “Item 4. Information on the Company – B. Business overview – Classified Assets”, and are subject to continuing review by Bank of Spain, and subsequent continuous

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improvement of the processes within our internal model. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain guidance, was not material for each one of the three years ended December 31, 2015, 2014 and 2013.

Other

We use credit derivatives to cover loans and trading transactions. The volume of this activity is subject to strict internal controls that minimize operational risk. Risk in these activities is controlled via a series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, and sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.

Exposures related to complex structured assets

We have a very limited exposure to complex structured assets. See “Item 11. Quantitative and Qualitative Analysis About Market Risk—Part 4. Trading market and structural risk”.

Item 6. Directors, senior management and employees

A. Directors and senior management

We are managed by our board of directors, which currently consists of 15 members. In accordance with our Bylaws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a three-year term by our shareholders at a general meeting. One-third of the members are re-elected each year.

Our board of directors holds its meetings in accordance with an annual calendar. The Rules and Regulations of the Board⁹ provide that the board shall hold not less than nine annual ordinary meetings; in 2015, it met 21 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the executive risk committee (comisión delegada de riesgos) of our board of directors.

The chairman of the board is the executive chairman and the highest-ranking officer of the Bank (article 48.1 of the Bylaws and article 8.5 of the Rules and Regulations of the Board) and accordingly, all the powers that may be delegated under the Law, our Bylaws and the Rules and Regulations of the Board have been delegated to him.

However, it is the chief executive officer, in accordance with article 10.1 of the Rules and Regulations of the Board, in his capacity as such, who is entrusted with the day-to-day management of the different business areas and the highest executive functions.

There is a clear separation of duties between the executive chairman, the chief executive officer, the board and the committees thereof, as well as various checks and balances that assure proper equilibrium in the corporate governance structure of the Bank.

Members of our senior management are appointed and removed by the board.

⁹  The Rules and Regulations of the Board of Directors are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Rules and Regulations of the Board of Directors”.

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The current members of our board of directors are:

Name	Position with Banco Santander	Director since
Ana Botín (1)	Chairman	1989
José Antonio Álvarez	Chief executive officer	2015
Bruce Carnegie-Brown	Vice chairman	2015
Rodrigo Echenique	Vice chairman	1988
Matías R. Inciarte	Vice chairman	1988
Guillermo de la Dehesa	Vice chairman	2002
Ignacio Benjumea	Director	2015
Javier Botín (1)	Director	2004
Sol Daurella	Director	2015
Carlos Fernández	Director	2015
Esther Giménez-Salinas	Director	2012
Ángel Jado	Director	2010
Belén Romana	Director	2015
Isabel Tocino	Director	2007
Juan Miguel Villar-Mir	Director	2013

(1) Ana Botín and Javier Botín are siblings.

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Our current executive officers are:

Name	Position with Banco Santander
Ana Botín	Group executive chairman and chairman of the executive committee
José Antonio Álvarez	Chief executive officer
Rodrigo Echenique	Executive vice chairman
Matías R. Inciarte	Executive vice chairman
Rami Aboukhair	Executive vice president, Spain
Juan Manuel Cendoya	Executive vice president, communication, corporate marketing and research
José Francisco Doncel	Executive vice president, Group chief accounting officer
José G. Cantera	Executive vice president, Group chief financial officer
Juan Guitard	Executive vice president, Group chief audit executive
J. Peter Jackson*	Executive vice president, innovation
Mónica López-Monís	Executive vice president, Group chief compliance officer
Javier Maldonado	Executive vice president, costs
Víctor Matarranz	Executive vice president, chairman’s office and strategy
José Luis de Mora	Executive vice president, corporate development
José María Nus	Executive vice president, Group chief risk officer
Jaime P. Renovales	Executive vice president, General secretary’s office and human resources
Andreu Plaza	Executive vice president, Technology and operations
Jacques Ripoll	Executive vice president, global banking and markets
Ángel Rivera	Executive vice president, retail and commercial banking
Magda Salarich	Executive vice president, consumer finance
Francisco Javier San Félix	Executive vice president, retail and commercial banking
Juan Manuel San Roman	Executive vice president, strategic alliances in asset management and insurance
José Antonio Villasante	Executive vice president, universities

* This appointment is subject to regulatory authorization.

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The following is a summary of the relevant business experience and principal business activities of our current directors and executive officers:

Ana Botín (chairman of the board of directors and of the executive committee, the innovation and technology committee and the international committee)

Born in 1960. Joined the board of directors in 1989. Graduate in Economics. Joined the bank after a period at JP Morgan (1980-1988). Ms. Botín was appointed executive vice president of Banco Santander, S.A. in 1992, after having served as executive chairman of Banesto from 2002 to 2010 and chief executive officer of Santander UK from 2010 to 2014. Other significant positions: She is a non-management director of The Coca-Cola Company. She is also a member of the board of Deusto Business School and of the Financial Services Trade and Investment Board (FSTIB), created by the British Ministry of Economy to promote the financial services industry of the United Kingdom. She is also Dame Commander of the British Empire, Business Ambassador of the government of the United Kingdom and member of the Trilateral Commission and of the advisory board of Saïd Business School (University of Oxford).

José Antonio Álvarez (chief executive officer)

Born in 1960. Joined the board of directors in 2015. Graduate in Economics and Business Administration. Earned an MBA from the University of Chicago. Joined the bank in 2002 and was appointed Group chief financial officer in 2004. Other significant positions: Mr. Álvarez serves on the boards of Banco Santander (Brasil), S.A. and SAM Investment Holdings Limited. He was also a board member at Santander Consumer Finance, S.A. and Santander Holdings USA, Inc. and a member of the supervisory boards of Santander Consumer AG, Santander Consumer Holding GMBH, and Bank Zachodni WBK, S.A. Furthermore, he served as a board member of Bolsas y Mercados Españoles (BME).

Bruce Carnegie-Brown (vice chairman of the board of directors, lead director, chairman of the appointments committee, the remuneration committee and the risk supervision, regulation and compliance committee)

Born in 1959. Joined the board of directors in 2015. Mr. Carnegie-Brown holds an M.A. degree in English Language and Literature from Oxford University. Other significant positions: Previously, he was non-management chairman at Aon UK Ltd, founder and managing partner of the listed private equity division of 3i Group plc, and president and CEO of Marsh Europe. He also held several positions at JP Morgan Chase and Bank of America. Furthermore, he was a lead independent director at Close Brothers Group plc (2008-2014) and Catlin Group Ltd (2010-2014). He is currently non-management chairman at Moneysupermarket.com Group plc and non-management director at Santander UK plc.

Rodrigo Echenique (vice chairman of the board of directors)

Born in 1946. Joined the board of directors in 1988. Graduate in Law and State Attorney. Other significant positions: Mr.Echenique served as chief executive officer of Banco Santander, S.A. from 1988 to 1994. He has served on the boards of several industrial and financial companies such as Ebro Azúcares y Alcoholes, S.A. and Industrias Agrícolas, S.A. and chaired the advisory board of Accenture, S.A. Mr.Echenique was also a non-management chairman of NH Hotels Group, S.A., Vocento, S.A. and Vallehermoso, S.A. He currently is a non-management director at Inditex, S.A. and chairs the board of directors of Metrovacesa, S.A.

Matías R. Inciarte (vice chairman of the board of directors and chairman of the executive risk committee)

Born in 1948. Joined the board of directors in 1988. Graduate in Economics and a Government Economist. Mr.Inciarte studied Business Administration at the Massachusetts Institute of Technology (MIT). Other significant positions: He was Minister of the Presidency from 1981 to 1982 and technical general secretary of the Ministry of Economy, general secretary of the Ministry of European Community Relations and deputy Secretary of State to the President. He currently chairs the boards of Unión de Crédito Inmobiliario, S.A.; the Fundación Princesa de Asturias and the board of trustees of Universidad Carlos III de Madrid. He is also non-management director of Sanitas, S.A. de Seguros, Financiera Ponferrada, S.A., SICAV, and Financiera El Corte Inglés E.F.C.

Guillermo de la Dehesa (vice chairman of the board of directors)

Born in 1941. Joined the board of directors in 2002. Government Economist and office head at the Bank of Spain (on leave of absence). Mr.de la Dehesa is an international advisor at Goldman Sachs International. Other significant positions: He served as state secretary of Economy, secretary-general of Commerce and chief executive officer of Banco Pastor, S.A. He currently acts as non-management vice-chairman of Amadeus IT Holding, S.A., honorary chairman of the Centre for Economic Policy Research (CEPR) in London, and

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member of the Group of Thirty in Washington, DC. He also chairs the board of trustees of the IE Business School and is non-management chairman of Aviva Grupo Corporativo, S.L. and Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.

Ignacio Benjumea

Born in 1952. Joined the board of directors in 2015. Holds a degree in law from Universidad de Deusto and a joint degree in Business Administration and Law from the E-3 program at ICADE. He is a State Attorney. He currently is vice-chairman of the Fundación de Estudios Financieros and serves on the board of trustees and the executive committee of Fundación Banco Santander. Other significant positions: He was senior executive vice president, general secretary and secretary of the board of Banco Santander, S.A., Banco Santander de Negocios and Santander Investment, and director of the two latter companies. He was also technical general secretary of the Ministry of Employment and Social Security, general secretary of Banco de Crédito Industrial and director of Dragados, S.A., Bolsas y Mercados Españoles (BME) and of the Governing Body of the Madrid Stock Exchange.

Javier Botín

Born in 1973. Joined the board of directors in 2004. Graduate in Law. Mr.Botín serves as executive chairman and chief executive officer of JB Capital Markets, Sociedad de Valores, S.A.U. Other significant positions: Mr.Botín also collaborates with numerous not-for-profit institutions in addition to his work in the financial sector. Since 2014, Mr.Botín has been the executive chairman of the Fundación Botín and trustee of the Fundación Princesa de Gerona and the Instituto de Investigaciones Prehistóricas de Cantabria.

Sol Daurella

Born in 1966. Joined the board of directors in 2015. Graduate in Business Studies with an MBA in Business Administration. Ms. Daurella is the executive chairwoman at Olive Partners, S.A. and holds other positions at Cobega Group companies. Other significant positions: Ms. Daurella has served on the board of the Círculo de Economía and was an external independent director at Banco Sabadell, S.A., Ebro Foods, S.A. and Acciona, S.A. She is also Honorary Consul-General for Iceland in Catalonia.

Carlos Fernández

Born in 1966. Joined the board of directors in 2015. An Industrial Engineer, Mr.Fernández earned a graduate degree in Business Administration at the Instituto Panamericano de Alta Dirección de Empresa. He currently chairs the board of directors of Finaccess, S.A.P.I. Other significant positions: Mr.Fernández also serves on the board of the Modelo Group.

Esther Giménez-Salinas

Born in 1949. Joined the board of directors in 2012. PhD in Law. Ms. Giménez-Salinas is emeritus Professor at the Universidad Ramon Llull. She also serves on the boards of Unibasq and Aqu (quality agencies of the basque and catalan university system) and Gawa Capital Partners, S.L. and she is a member of the advisory committee of Endesa-Catalunya. Other significant positions: Previously, she had been the vice-chancellor of the Universidad Ramon Llull, member of the Spanish General Council of the Judiciary, member of the Standing Committee of the Conference of Spanish University Vice-Chancellors (CRUE) and executive vice president of the Centre for Legal Studies of the Department of Justice of the government of Catalonia.

Ángel Jado

Born in 1945. Joined the board of directors in 2010. Graduate in Law and Business Administration. Other significant positions: Mr.Jado served on the boards of Banco Santander from 1972 to 1999, and Banco Banif, S.A. from 2001 to 2003. Currently holds several positions in investment trusts.

Belén Romana

Born in 1965. Joined the board of directors in 2015. Graduate in Business and Economics from Universidad Autónoma de Madrid, and Government Economist. Ms. Romana serves as a non-management director at Aviva plc in London. Other significant positions: Ms. Romana was the director-general for Economic Policy and head of the Spanish Treasury of the Ministry of Economy of the Spanish government. She also served on the boards of the Bank of Spain and the Spanish National Securities Market Commission. A former board member at the Instituto de Crédito Oficial and other entities on behalf of the Spanish Ministry of Economy. She served as President (Executive and Chair of the Board) of the asset management company, Sareb.

164

Isabel Tocino

Born in 1949. Joined the board of directors in 2007. PhD in Law. Ms. Tocino has completed senior management programs at IESE and the Harvard Business School. Tenured lecturer at the Universidad Complutense de Madrid. Other significant positions: She served as Minister of the Environment, president of the Committee for European Affairs and the Foreign Affairs Committee of the Spanish Congress of Deputies, as well as executive chairman for Spain and Portugal and vice-chairman for Europe of Siebel Systems. She currently is an elected member of the Spanish State Council, a member of the Spanish Royal Academy of Doctors and a non-management director of ENCE Energía and Celulosa, S.A., Naturhouse Health, S.A. and Enagás, S.A.

Juan Miguel Villar-Mir (chairman of the audit committee)

Born in 1931. Joined the board of directors in 2013. Doctorate in Civil Engineering, graduate in Law with a certificate in Industrial Organization. Mr.Villar serves as chairman of Grupo OHL and Grupo Villar Mir and represents these entities as vice chairman and director at Abertis Infraestructuras S.A. and Inmobiliaria Colonial, S.A. Other significant positions: Mr.Villar was Minister of Finance and vice president for Economic Affairs from 1975 to 1976. He also acted as chairman at Electra de Viesgo, Altos Hornos de Vizcaya, Hidro Nitro Española, Empresa Nacional de Celulosa, Empresa Nacional Carbonífera del Sur, Cementos del Cinca, Cementos Portland Aragón, Puerto Sotogrande, Fundación COTEC and the National College of Civil Engineering. He is also currently Professor of Business Organization at the Technical University of Madrid, a full member of the Spanish Royal Academy of Engineering and the Spanish Royal Academy of Moral and Political Sciences, an honorary member of the Spanish Royal Academy of Doctors and a supernumerary member of the Spanish Royal Academy of Economic and Financial Sciences.

Rami Aboukhair

Born in 1967. He joined the Group in 2008 as director of Santander Insurance and head of products and marketing. He also served as managing director of products, marketing and customers in Banesto and as managing director and head of retail banking in Santander UK. In 2015, he was appointed country head for Santander Spain.

Juan Manuel Cendoya

Born in 1967. He joined the Bank in July 2001 as executive vice president and head of the communication, corporate marketing and research division. Formerly, he was head of legal and tax department of Bankinter, S.A. He is member of the Spanish Central Administration Attorneys Group.

José Doncel

Born in 1961. He joined the Group in 1989 as responsible for accounting. He also served as head of accounting and financial management in Banesto (1994-2013). In 2013, he was appointed executive vice president and head of the internal audit division. In 2014, he was appointed head of the financial accounting and control division. Currently, he serves as Group Chief Accounting Officer.

José G. Cantera

Born in 1966. He joined the Group in 2003 as vice president of global wholesale banking of Banesto. In 2006, he was appointed Banesto’s chief executive officer. Formerly, he was member of the executive committee of Citigroup EMEA and member of the board of directors of Citigroup Capital Markets Int. Ltd. and Citigroup Capital Markets UK. In 2012, he was appointed executive vice president of global wholesale banking. Currently, he serves as Group Chief Financial Officer.

Juan Guitard

Born in 1960. He joined the Group in 1997 as head of Human Resources of Santander Investment, S.A. He was also General Counsel and Secretary of the Board of Santander Investment, S.A. and Banco Santander Negocios. In 2013, he was responsible for the Bank’s risk division. In November 2014, he was appointed head of the internal audit division. Currently, he serves as Chief Audit Executive. He is member of the Spanish Central Administration Attorneys Group.

165

J. Peter Jackson

Born in 1975. He joined the Group in 2016 as senior executive vice president and head of the corporate Innovation area. Previously, he was chief executive officer of Travelex and he also served as managing director in Lloyds Banking Group.

Mónica López-Monís

Born in 1969. She joined the Group in 2009 as General Secretary and Board Secretary of Banesto. Formerly, she was general secretary of Aldeasa, S.A. She also served as General Secretary of Bankinter, S.A. In 2015 she was appointed executive vice-president of Banco Santander, S.A. and Group chief compliance officer. She is member of the Spanish Central Administration Attorneys Group.

Javier Maldonado

Born in 1962. He joined the Group in 1995 as head of the international legal division of Banco Santander de Negocios. He was in charge of several positions in Santander UK. He was appointed senior executive vice president of Banco Santander S.A. and head of coordination and control of regulatory projects in 2014. He currently serves as senior executive vicepresident and head of costs.

Víctor Matarranz

Born in 1976. He joined the Group in 2012 as head of strategy and innovation in Santander UK. In 2014, he was appointed senior executive vice president and head of Group strategy and of the executive chairman’s office. Previously, he held several positions in McKinsey&Company, where he became partner.

José Luis de Mora

Born in 1966. He joined the Group in 2003. Since 2003, he has been in charge of developing the strategic plan and the group acquisitions. In 2015, he was appointed executive vice president and head of corporate development.

José María Nus

Born in 1950. He joined the Group in 1996 as executive director and chief risk officer of Banesto. In 2010, he was appointed executive director of Santander UK and chief risk officer. Formerly, he served as executive vice president in Argentaria and Bankinter. Currently, he serves as Group Chief Risk Officer.

Jaime Pérez Renovales

Born in 1968. Joined the Group in 2003 as General Secretary and Board Secretary of Banesto. In 2009 he was appointed deputy general secretary, deputy board secretary and head of legal affairs of the Bank. In 2015, he was appointed Board Secretary and head of General secretary’s office and human resources. Formerly, he was under-secretary for the Presidency of the Spanish Government and chairman of the Committee for Public Administration Reform (CORA). He is member of the Spanish Central Administration Attorneys Group.

Andreu Plaza

Born in 1960. He joined the Group in 2012 as head of technology and operations (IT&OP) in Santander UK. In 2015, he was appointed executive vice president of Banco Santander S.A. and head of technology and operations. Formerly, he was head of Organization and IT & Operations in Catalunya Banc and Caixa Catalunya.

Jacques Ripoll

Born in 1966. He joined the Group in 2013 as head of global banking and markets business in the United Kingdom. In 2015, he was appointed senior executive vice president and head of Santander global banking and markets in 2015. Previously, he held a number of management positions at Societé Générale.

Ángel Rivera

Born in 1966. He joined the Bank in 2013 as executive vice president responsible for companies and institutions within the commercial banking division. In 2015, he was appointed head of retail and commercial banking. Previously, he developed his professional career over 23 years with the Banco Popular Group. Currently, he serves as senior executive vicepresident head of retail and commercial banking.

166

Magda Salarich

Born in 1956. She joined the Bank in 2008 as executive vice president responsible for the consumer finance division. Previously, she held several positions in the automobile industry, including the position of director and executive vice president of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.

Javier San Félix

Born in 1967. He joined the Group in 2004 as head of strategic planning in the consumer finance division. In 2005 he was appointed director and executive vice president of Santander Consumer Finance in Spain and in 2006 he was appointed chief operating officer of the consumer finance division. In 2013 he was appointed executive vice president of Banco Santander, S.A. and head of the commercial banking division. Formerly, he was the chief executive officer of Banesto. Currently, he serves as senior executive vicepresident and head of retail and commercial banking in the UK.

Juan Manuel San Román

Born in 1964. He joined the Group in 1995. He was appointed executive vice president and head of strategic alliances of Banco Santander S.A. in 2015. Previously, he held several positions within the Group as responsible for the financial area of Santander Consumer, M&A and Asia-Pacific region. Currently, he serves as senior executive vicepresident and head of strategic alliances in asset management and insurance.

José Antonio Villasante

Born in 1946. He joined the Bank in 1964. Mr. Villasante’s entire professional career has been with Banco Santander, S.A. He was appointed senior vice president in 1994. Currently, he serves as executive vicepresident and head of Santander Universities.

* * * * * *

For a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ agreements” herein.

B. Compensation

The following sections contain qualitative and quantitative disclosures on the remuneration paid to the members of the board of directors -both executive and non-executive directors- and senior managers for 2015 and 2014. These disclosures include the information relating to all the members of the board of directors or senior managers who formed part of these governing bodies in 2015 even if retired at some time during the year.

Following is a summary of the remuneration paid to the Bank’s executive directors and senior managers who formed part of these governing bodies at the end of 2015 and 2014:

	Thousands of euros
	2015		2014
Current executive directors		24,692		22,364
Current senior managers		56,076		81,785
		80,768		104,419	-22.7	%

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Directors’ compensation

i. Fees Stipulated in the Bylaws

The annual general meeting held on March 22, 2013 approved an amendment to the Bylaws, whereby the remuneration of directors in their capacity as board members became an annual fixed amount determined by the shareholders at the annual general meeting. This amount shall remain in effect unless the shareholders resolve to change it at a general meeting. However, the board of directors may elect to reduce the amount in any years in which it deems such action justified. The remuneration established for 2015 by the annual general meeting was €6 million, with two components: (a) an annual retainer and (b) attendance fees. The annual general meeting has set again the remuneration for 2016 in €6 million.

The specific amount payable for the above-mentioned items to each of the directors is determined by the board of directors. For such purpose, it takes into consideration the positions held by each director on the board, their attendance of board meetings, their membership of the various committees, their attendance of committee meetings and any other objective circumstances considered by the board.

The total Bylaw-stipulated fees earned by the directors in 2015 amounted to €5.2 million compared to €4.4 million in 2014.

Annual retainer

The amounts received individually by the directors in 2015 and 2014 based on the positions held by them on the board and their membership of the board committees were as follows:

	Euros
	2015		2014
Members of the board of directors		84,954		84,954
Members of the executive committee		170,383		170,383
Members of the audit committee		39,551		39,551
Members of the appointments committee (1)		23,730		23,730
Members of the remuneration committee (1)		23,730		23,730
Members of the risk supervision, regulation and compliance committee (2)		39,551		20,697
Chairman of the appointments committee		50,000		—
Chairman of the remuneration committee		50,000		—
Chairman of the risk supervision, regulation and compliance committee		50,000		26,164
Lead director		111,017		—
Non-management deputy chairmen		28,477		28,477

(1) In 2014, the former appointments and remuneration committee was divided into two, namely the appointments committee and the remuneration committee. The amount indicated relates to the entire year, the corresponding proportional part for each case having been paid.

(2) Held its first meeting on July 23, 2014.

168

Attendance fees

The directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for attending this committee.

By resolution of the board of directors, at the proposal of the remuneration committee, the fees for attending board and committee meetings (excluding executive committee meetings) have remained unchanged since 2008.

Board meeting attendance fees	Euros
	2008-2015
Board of directors
Resident directors		2,540
Non-resident directors		2,057
Executive risk committee (1), audit committee and risk supervision, regulation and compliance committee
Resident directors		1,650
Non-resident directors		1,335
Other committees (except the executive committee)
Resident directors		1,270
Non-resident directors		1,028

(1) Disbanded by the resolution of the board of December 1, 2015; the committee held its last meeting on October 29.

ii. Salaries

The executive directors receive salaries. In accordance with the policy approved by the general meeting, salaries are composed of fixed annual remuneration and variable remuneration comprising, in turn, the so-called deferred conditional variable remuneration plan (bonus) and a Long-term incentive (Performance Share Plan or “ILP”) (see note 47 to our consolidated financial statements).

The deferred conditional variable remuneration plan (bonus), the fifth cycle of which was approved in 2015, has a payment schedule similar to that of previous cycles (see note 47 to our consolidated financial statements). Accordingly, the bonus is determined at year-end on the basis of the achievement of the targets set, and 40% is paid immediately, while the remaining 60% is deferred over five years (2014: three years), for it to be paid, as the case may be, in five portions (2014: three portions) on the achievement of the conditions stipulated for the payment of each portion. Both the immediate (short-term) and deferred (long-term, conditional) payments are settled 50% in cash and 50% in Santander shares.

The ILP for the executive directors was set in 2015 by the board, at the proposal of the remuneration committee, at a maximum benchmark value of 20% of the bonus (2014: 15%). Based on the maximum benchmark value, at the proposal of the remuneration committee and in view of the Group’s earnings per share and return on tangible equity (ROTE) for 2015 with respect to the budgets, the board of directors determined for each executive director the “Agreed ILP Amount” in euros, which in turn determines, for each executive director, the maximum number of shares that the executive director may, as the case may be, receive; this number was calculated taking into account the market price of the Santander share in the 15 trading sessions prior to January 26, 2016, which was €3.971 per share. The accrual and the amount of this variable remuneration are linked to the achievement of the multiannual targets described in note 47 to our consolidated financial statements, and it will be deferred over three years and paid, as the case may be, in early 2019.

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iii. Detail by director

The detail, by Bank director, of the short-term (immediate payment) remuneration for 2015 and 2014 is provided below:

Directors	Thousands of euros
	2015																												2014
	Bylaw-stipulated emoluments																Short-term salaries of executive directors								Other remuneration (a)
	Annual emolument												Attendance fees
	Board				Audit committee		Appointments committee		Remuneration committee		Risk, regulation and compliance oversight committee		Board		Other fees		Fixed		Variable- immediate payment				Total				Total		Total
			Executive committee																In cash		In shares
Ana Botín
Chief executive officer of Santander UK		—		—		—		—		—		—		—		—		—		—		—		—		—		—		3,010
Chair		85		170		—		—		—		—		53		—		2,500		840		840		4,180		396		4,884		1,453
José Antonio Álvarez (1)		85		170		—		—		—		—		48		38		2,000		558		558		3,116		1,468		4,925		—
Rodrigo Echenique (2)		85		170		—		—		—		—		51		88		1,500		414		414		2,328		26		2,748		526
Matías R. Inciarte		85		170		—		—		—		—		53		132		1,710		573		573		2,856		169		3,465		3,484
Guillermo de la Dehesa		113		170		—		24		24		40		53		49		—		—		—		—		—		473		436
Bruce Carnegie-Brown (3)		374		170		—		24		24		40		35		33		—		—		—		—		—		700		—
Ignacio Benjumea (4)		24		47		—		7		7		10		10		32		—		—		—		—		242		379		—
Javier Botín (5)		85		—		—		—		—		—		35		—		—		—		—		—		—		120		110
Sol Daurella (6)		85		—		—		24		24		—		38		11		—		—		—		—		—		183		—
Carlos Fernández (7)		85		—		40		24		—		40		31		34		—		—		—		—		—		254		—
Esther Giménez-Salinas		85		—		—		—		—		—		48		—		—		—		—		—		—		133		121
Ángel Jado Becerro		85		—		40		24		24		40		53		161		—		—		—		—		—		427		152
Belén Romana (8)		2		—		1		—		—		—		2				—		—		—		—		—		5		—
Isabel Tocino		85		170		40		—		24		40		53		178		—		—		—		—		—		590		485
Juan Miguel Villar Mir		85		—		40		—		—		40		48		33		—		—		—		—		—		246		105
Emilio Botín (9)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		1,129
Fernando de Asúa (10)		43		20		5		3		3		5		10		27		—		—		—		—		—		116		645
Sheila Bair (11)		64		—		—		—		—		30		31		12		—		—		—		—		—		137		129
Vittorio Corbo (12)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		56
Javier Marín (13)		3		6		—		—		—		—		—		—		165		—		—		165		47		221		3,934
Abel Matutes (14)		11		—		5		3		—		—		8		5		—		—		—		—		—		32		183
Juan R. Inciarte (15)		42		—		—		—		—		—		38		61		600		220		220		1,040		153		1,334		2,484
Total 2015		1,612		1,266		169		131		128		282		701		894		8,475		2,605		2,605		13,685		2,501		21,372		—
Of which: Current directors		1,448		1,240		159		125		125		247		614		789		7,710		2,385		2,385		12,480		2,301		19,532		—
Total 2014		1,347		1,310		131		57		57		18		484		873		8,065		2,564		2,564		13,193		884		—		18,354

(1) Appointed chief executive officer effective from January 13, 2015. Remuneration as executive vice president in 2014 is included in note 5.g to our consolidated financial statements.

(2) Executive director since January 16, 2015.

(3) Appointed director effective from February 12, 2015.

(4) Appointed director effective from September 21, 2015. Remuneration as executive vice president received prior to this date is included in note 5.g to our consolidated financial statements.

(5) All the amounts received were repaid to the Fundación Marcelino Botín.

(6) Appointed director effective from February 18, 2015.

(7) Appointed director effective from February 12, 2015.

(8) Appointed director effective from December 22, 2015.

(9) Ceased to be a member of the board due to his death on September 9, 2014.

(10) Ceased to be a director on February 12, 2015.

(11) Ceased to be a member of the board on October 1, 2015.

(12) Ceased to be a member of the board on July 24, 2014.

(13) Ceased to be a member of the board and chief executive officer on January 12, 2015.

(14) Ceased to be a member of the board on February 18, 2015.

(15) Ceased to be a member of the board on June 30, 2015. Salary remuneration between this date and removal from office as executive vice president (January 1, 2016) is included in note 5.g to our consolidated financial statements.

(a) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

170

Following is the detail, by executive director, of the deferred (i.e. long-term) salaries, which will only be received if the conditions of continued service, non-applicability of “malus” clauses and, in the case of the ILP, full achievement of the objectives established (or, as the case may be, of the minimum thresholds thereof, with the consequent reduction of the agreed-upon amount of the ILP) in the terms described in note 47 to our consolidated financial statements.

	Thousands of euros
	2015								2014
	Long-term salaries						Total		Total
	Variable - Deferred payment (1)				ILP (2)
	In cash		In shares
Ana Botín
Chief executive officer of Santander UK		—		—		—		—		1,468
Chair		1,260		1,260		512		3,032		930
José Antonio Álvarez		838		838		346		2,022		—
Rodrigo Echenique		620		620		256		1,496		—
Matías R. Inciarte		860		860		400		2,120		1,890
Emilio Botín		—		—		—		—		—
Javier Marín		—		—		—		—		2,527
Juan R. Inciarte (3)		330		330		141		801		1,454
Total 2015		3,908		3,908		1,655		9,471		—
Total 2014		3,846		3,846		577		—		8,269

(1) The maximum amount receivable in a total of five years: 2017, 2018, 2019, 2020 and 2021 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) The estimated fair value at the plan grant date, taking into account various possible scenarios regarding the performance of the various plan variables in the measurement periods (see note 47 to our consolidated financial statements).

(3) Ceased to be a member of the board on June 30, 2015 and executive vice president on January 1, 2016. Long-term salary remuneration between this date and removal from office as executive vice president (January 1, 2016) is included in note 5.g. to our consolidated financial statements.

Note 5.e) to our consolidated financial statements includes disclosures on the shares delivered by virtue of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the corresponding years, and on the maximum number of shares receivable in future years in connection with the aforementioned 2015 and 2014 variable remuneration plans.

171

Compensation of the board members as representatives of the Bank on other boards

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake, paid by those companies and relating to appointments made after March 18, 2002, accrues to the Group. In 2015 and 2014, the Bank’s directors did not receive any remuneration in respect of these representative duties.

Matías R. Inciarte received €42 thousand as non-management director of U.C.I., S.A. in 2015 and 2014.

Pension commitments and other items for directors

In 2012, within the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans, the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. This system grants the executive directors the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ at the time, based on the contributions made to the aforementioned system, and replaced the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made as described below¹. In the event of pre-retirement, the executive directors who have not exercised the option to receive their pensions in the form of a lump sum are entitled to receive an annual emolument until the date of retirement.

The initial balance for each executive director in the new defined-contribution welfare system was that corresponding to the market value of the assets in which the provisions for the respective accrued obligations had been invested, at the date on which the former pension obligations were converted into the new welfare system².

Since 2013 the Bank has made annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their respective pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions are made for the executive directors and senior executives who, prior to the conversion of the defined-benefit pension obligations into the current defined-contribution employee welfare system, had exercised the option to receive their pension rights in a lump sum³.

The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the withholding tax on shares arising from such remuneration.

In 2015, as a result of his appointment as chief executive officer, changes were introduced to the contract of José Antonio Álvarez with respect to the pension obligations stipulated in his senior management contract. The annual contribution to the employee welfare system was thereafter calculated as 55% of the sum of: (i) the fixed annual remuneration; and (ii) 30% of the arithmetic mean of the last three gross amounts of variable remuneration. The pensionable base in the event of death or disability is 100% of his fixed remuneration. Under his senior management contract the annual contribution was 55.93% of his fixed remuneration, and the pensionable base in the event of death or disability was 100% of his fixed remuneration.

¹  As provided for in the contracts of the executive directors and members of senior management prior to their modification, Emilio Botín and Matías R. Inciarte had exercised the option to receive the accrued pensions -or amounts similar thereto- in the form of a lump sum -i.e. in a single payment-, which meant that no further pension benefit would accrue to them from that time, and the lump sum to be received, which would be updated at the agreed-upon interest rate, was fixed.

²  In the case of Emilio Botín and Matías R. Inciarte, the initial balance corresponded to the amounts that were set when, as described above, they exercised the option to receive a lump sum, and includes the interest accrued on these amounts from that date.

³  Rodrigo Echenique, appointed executive director on 16 January 2015, does not participate in the welfare system and is not entitled to have any contributions made in his favor by the Bank in this connection, notwithstanding the pension rights to which he was entitled prior to his appointment as executive director.

172

Following is a detail of the balances relating to each of the executive directors under the welfare system at December 31, 2015 and 2014:

	Thousands of euros
	2015			2014
Ana Botín (1)		41,291			40,134
José Antonio Álvarez (2)		14,167			—
Rodrigo Echenique		14,623			14,946	(3)
Matías R. Inciarte		47,745			47,255
Emilio Botín		—			—	(4)
Javier Marín (5)		—			4,523
Juan R. Inciarte		—	(6)		13,730
		117,826			120,588

(1) Includes the amounts relating to the period of provision of services at Banesto, externalized with another insurance company.

(2) Member of the board and chief executive officer of the Bank effective from January 13, 2015.

(3) Executive director since January 16, 2015. The amount at December 31, 2014, which reflects the amount to which he was entitled as a director of the Bank, is included for comparison purposes.

(4) Following his death on September 9, 2014, a death benefit of the amount of the accumulated rights (€26,498 thousand) was payable to the beneficiaries designated in the policy arranged under the welfare system.

(5) Ceased to be a director on January 12, 2015 and took voluntary pre-retirement, as provided for in his contract; he opted to receive the annual pre-retirement emoluments to which he was entitled (€800 thousand gross) in a single payment (€10,861 thousand gross). As stipulated in his contract, the Bank will make annual contributions to the welfare system, amounting to 55% of this director’s annual emolument during the pre-retirement period, and Mr. Marín will be entitled to receive, at the time of his retirement, the retirement benefit recognized in the welfare system, equal to the amount of the balance accumulated in the system corresponding to him at that time. The balance accrued at December 31, 2015 amounted to €4,869 thousand and the Bank had recognized a provision of €6,336 thousand in relation to future contributions. As regards the deferred variable remuneration corresponding to Mr. Marín in relation to years prior to his pre-retirement, the scheme described in the relevant sections of this report shall apply, and Mr. Marín will receive this remuneration, if appropriate, on the dates envisaged in the corresponding plans, subject to the stipulated conditions for its accrual being met.

(6) Ceased to be a director on June 30, 2015 and executive vice president on January 1, 2016, and retained his pension rights, amounting to €14,188 thousand at December 31, 2015.

The Group also has pension obligations to other directors amounting to €2.4 million (December 31, 2014: €3 million). The payments made in 2015 to the members of the board entitled to post-employment benefits amounted to €1.2 million (2014: €1.2 million).

Lastly, the contracts of the executive directors who had not exercised the option referred to above prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingency of death (surviving spouse and child benefits) and permanent disability of serving directors.

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The provisions recognized in 2015 and 2014 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability) were as follows:

	Thousands of euros
	2015		2014
Ana Botín		2,302		2,140
José Antonio Álvarez		2,677		—
Rodrigo Echenique		—		—
Matías R. Inciarte		—		—
Emilio Botín		—		—
Javier Marín		484		2,126
Juan R. Inciarte		849		718
		6,312		4,984

Insurance

For more information see Item 6. Directors, senior management and employees—C. Board practices—e) Insurance.

Deferred variable remuneration systems

Following is information on the maximum number of shares to which the executive directors are entitled at the beginning and end of 2014 and 2015 due to their participation in the deferred variable remuneration systems, which instrumented a portion of their variable remuneration relating to 2015 and prior years, as well as on the deliveries, whether shares or cash, made to them in 2014 and 2015 where the conditions for the receipt thereof had been met (see note 47 to our consolidated financial statements):

i) Deferred conditional delivery share plan

The 2010 variable remuneration of the executive directors and certain Group executives or employees was approved at the time by the board of directors through the instrumentation of the first cycle of the deferred conditional delivery share plan, whereby a portion of the aforementioned variable remuneration or bonus was deferred over a period of three years for it to be paid, where appropriate, in Santander shares.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

The share-based bonus was deferred over three years and would be paid, where appropriate, in three instalments starting in the first year. The shares relating to the third were delivered in February 2014, once the conditions for the receipt thereof were met, and the plan was therefore settled:

	Number of shares delivered in 2014 (3rd third)
Ana Botín (1)		19,240
Matías R. Inciarte		45,063
Emilio Botín		31,448
Javier Marín		12,583
Juan R. Inciarte		20,462

(1) Shares of Banesto, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011. Following the merger of Banesto with the Bank, 19,240 shares of the Bank were delivered in 2014, equal to the 30,395 shares of Banesto authorized by the annual general meeting.

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ii) Deferred conditional variable remuneration plan

Since 2011, the bonuses of executive directors and certain executives (including senior management) and employees who assume risk, who perform control functions or receive an overall remuneration that puts them on the same remuneration level as senior executives and employees who assume risk (all of whom are referred to as identified staff) have been approved by the board of directors and instrumented, respectively, through various cycles of the deferred conditional variable remuneration plan. Application of these cycles, insofar as they entail the delivery of shares to the plan beneficiaries, was authorized by the related annual general meetings.

The purpose of these plans is to defer a portion of the bonus of the plan beneficiaries (60% in the case of executive directors) over a period of five years (three years for the plans approved up to 2014) for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the bonus is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

In addition to the requirement that the beneficiary remains in Santander Group’s employ, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee- in relation to the corresponding year in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or its risk profile. All the foregoing shall in each case be governed by the rules of the relevant plan cycle.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares and the interest on the amount deferred in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights corresponding to those shares.

The maximum number of shares to be delivered is calculated taking into account the daily volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for each year.

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The table below shows the number of Santander shares assigned to each executive director and not yet delivered at January 1, 2014; December 31, 2014; and December 1, 2015; and the gross shares delivered to them in 2014 and 2015, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the remuneration committee, that the third relating to each plan had accrued. The shares resulted from each of the plans which instrumented the variable remuneration of 2011, 2012, 2013, 2014 and 2015, as shown in the following table:

Share-based variable remuneration	Maximum number of shares to be delivered at 1 January 2014		Shares delivered in 2014 (immediate payment 2013 variable remuneration)			Shares delivered in 2014 (deferred payment 2012 variable remuneration)			Shares delivered in 2014 (deferred payment 2011 variable remuneration)			Variable remuneration 2014 (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2014			Shares delivered in 2015 (immediate payment 2014 variable remuneration)			Shares delivered in 2015 (deferred payment 2013 variable remuneration)			Shares delivered in 2015 (deferred payment 2012 variable remuneration)			Shares delivered in 2015 (deferred payment 2011 variable remuneration)			Variable remuneration 2015 (maximum number of shares to  be delivered) (1)		Maximum number of shares to be delivered at December 31, 2015(4)
2011 variable remuneration
Ana Botín		94,001		—			—			(47,001	)		—		47,000			—			—			—			(47,000	)		—		—
José Antonio Álvarez		—		—			—			—			—		32,038	(3)		—			—			—			(32,038	)		—		—
Matías R. Inciarte		125,756		—			—			(62,878	)		—		62,878			—			—			—			(62,878	)		—		—
Emilio Botín		99,551		—			—			(49,776	)		—		49,775	(2)		—			—			—			(49,775	)		—		—
Javier Marín		51,921		—			—			(25,961	)		—		25,960			—			—			—			(25,960	)		—		—
Juan R. Inciarte		73,380		—			—			(36,690	)		—		36,690			—			—			—			(36,690	)		—		—
		444,609		—			—			(222,306	)		—		254,341			—			—			—			(254,341	)		—		—
2012 variable remuneration
Ana Botín		104,874		—			(34,958	)		—			—		69,916			—			—			(34,958	)		—			—		34,958
José Antonio Álvarez		—		—			—			—			—		48,093	(3)		—			—			(24,047	)		—			—		24,046
Matías R. Inciarte		124,589		—			(41,530	)		—			—		83,059			—			—			(41,530	)		—			—		41,529
Emilio Botín		65,927		—			(21,976	)		—			—		43,951	(2)		—			—			(21,976	)		—			—		21,975	(2)
Javier Marín		58,454		—			(19,485	)		—			—		38,969			—			—			(19,485	)		—			—		19,484
Juan R. Inciarte		72,699		—			(24,233	)		—			—		48,466			—			—			(24,233	)		—			—		24,233
		426,543		—			(142,182	)		—			—		332,454			—			—			(166,229	)		—			—		166,225
2013 variable remuneration
Ana Botín		165,603		(66,241	)		—			—			—		99,362			—			(33,121	)		—			—			—		66,241
José Antonio Álvarez		—		—			—			—			—		58,681	(3)		—			(19,560	)		—			—			—		39,121
Matías R. Inciarte		172,731		(69,092	)		—			—			—		103,639			—			(34,546	)		—			—			—		69,093
Emilio Botín		105,718		(42,287	)		—			—			—		63,431	(2)		—			(21,144	)		—			—			—		42,287	(2)
Javier Marín Romano		187,125		(74,850	)		—			—			—		112,275			—			(37,425	)		—			—			—		74,850
Juan R. Inciarte		110,747		(44,299	)		—			—			—		66,448			—			(22,149	)		—			—			—		44,299
		741,924		(296,769	)		—			—			—		503,836			—			(167,945	)		—			—			—		335,891
2014 variable remuneration
Ana Botín		—		—			—			—			304,073		304,073			(121,629	)		—			—			—			—		182,444
José Antonio Álvarez		—		—			—			—			—		157,452	(3)		(78,726	)		—			—			—			—		78,726
Matías R. Inciarte		—		—			—			—			231,814		231,814			(92,726	)		—			—			—			—		139,088
Emilio Botín		—		—			—			—			—		—			—			—			—			—			—		—
Javier Marín Romano		—		—			—			—			320,563		320,563			(128,225	)		—			—			—			—		192,338
Juan R. Inciarte		—		—			—			—			179,680		179,680			(71,872	)		—			—			—			—		107,808
		—		—			—			—			1,036,130		1,193,582			(493,178	)		—			—			—			—		700,404
2015 variable remuneration
Ana Botín		—		—			—			—			—		—			—			—			—			—			528,834		528,834
José Antonio Álvarez		—		—			—			—			—		—			—			—			—			—			351,523		351,523
Rodrigo Echenique		—		—			—			—			—		—			—			—			—			—			260,388		260,388
Matías R. Inciarte		—		—			—			—			—		—			—			—			—			—			361,118		361,118
Juan R. Inciarte		—		—			—			—			—		—			—			—			—			—			138,505		138.505	(5)
																														1,640,368		1,640,368

(1) 40% of the shares indicated, for each director, relates to short-term (immediate payment) variable remuneration. The remaining 60% is deferred and will be delivered, where appropriate, in fifths over the following five years.

(2) The amounts corresponding to his participation in these plans accrue to his heirs in accordance with the plan regulations.

(3) Maximum number of shares corresponding to his participation in the related plans when he was an executive vice president.

(4) Also, Ignacio Benjumea is entitled to a maximum of 582,237 shares corresponding to his participation in the related plans when he was an executive vice president.

(5) Ceased to be a member of the board on June 30, 2015. The shares relating to his variable remuneration between this date and removal from office as executive vice president (January 1, 2016) are included in note 5.g to our consolidated financial statements.

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Also, the table below shows the cash delivered in 2015 and 2014, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the remuneration committee that the third relating to each plan had accrued:

	Thousands of euros
	2015					2014
	Cash paid (immediate payment 2014 variable remuneration)		Cash paid (third of deferred payment 2013, 2012 and 2011 variable remuneration)			Cash paid (immediate payment 2013 variable remuneration)		Cash paid (third of deferred payment 2012 and 2011 variable remuneration)
Ana Botín		801		829			466		513
José Antonio Álvarez (1)		487		468			—		—
Rodrigo Echenique		—		—			—		—
Matías R. Inciarte		574		855			462		624
Emilio Botín		—		—	(2)		282		423
Javier Marín		793		522			500		272
Juan R. Inciarte		445		512			296		364
		3,100		3,186			2,005		2,197

(1) Appointed chief executive officer effective from January 13, 2015.

(2) The amounts corresponding to his participation in these plans were paid to his heirs in accordance with the plan regulations.

iii) Performance share plan (ILP)

The table below shows the maximum number of shares to which the executive directors are entitled, as part of their variable remuneration for 2015 and 2014, as a result of their participation in the ILP (see note 47 to our consolidated financial statements).

	Maximum number of shares
	2015			2014
Ana Botín		184,337			62,395
José Antonio Álvarez		124,427			48,982	(1)
Rodrigo Echenique		92,168			—
Matías R. Inciarte		143,782			75,655
Emilio Botín		—			—
Javier Marín Romano		—			65,470
Juan R. Inciarte		50,693	(2)		53,346
Total		595,407			305,848

(1) Relates to the maximum number of shares assigned to him as executive vice president.

(2) Ceased to be a member of the board on June 30, 2015. The shares relating to his variable remuneration between this date and removal from office as executive vice president (January 1, 2016) are included in note 5.g to our consolidated financial statements.

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The accrual of the ILP and its amount are conditional on the performance of certain metrics of Banco Santander over a multiannual period (2015 to 2017 for the 2015 ILP, and 2014 to 2017 for the 2014 ILP). Accordingly, the amount to be received, as the case may be, by each executive director in relation to the 2015 ILP (the Accrued ILP Amount) will be determinable after the end of 2017. In the case of the 2014 ILP, the annual amount which, as the case may be, accrues to each executive director will be determined after the end of 2015, 2016 and 2017 by applying to one third of the Agreed ILP Amount the percentage resulting from the corresponding metrics (see note 47 to our consolidated financial statements). If the metrics are not achieved, the amount to be received could be zero.

The shares to be delivered in 2019 (in respect of the 2015 ILP) or on each ILP payment date (for the 2014 ILP) based on compliance with the related multiannual target are conditional, in addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee-, during the period prior to the delivery, as a result of actions performed in the year to which the plan relates: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

iv) Information on former members of the board of directors

Following is information on the maximum number of shares to which former members of the board of directors who ceased in office prior to January 1, 2014 are entitled for their participation in the various deferred variable remuneration systems, which instrumented a portion of their variable remuneration relating to the years in which they were executive directors. Also set forth below is information on the deliveries, whether shares or cash, made in 2015 and 2014 to former board members, upon achievement of the conditions for the receipt thereof (see note 47 to our consolidated financial statements):

Maximum number of shares to be delivered	31/12/15		31/12/14
Deferred conditional variable remuneration plan (2011)		—		189,181
Deferred conditional variable remuneration plan (2012)		54,607		109,212
Number of shares delivered	2015		2014
Deferred conditional delivery plan (2010)		—		155,810
Deferred conditional variable remuneration plan (2011)		189,181		189,181
Deferred conditional variable remuneration plan (2012)		54,605		54,605

In addition, €1,424 thousand relating to the deferred portion payable in cash on the aforementioned plans were paid each in 2015 and 2014.

Senior managers

In 2015 the Bank’s board of directors approved a series of appointments and organizational changes aimed at simplifying the Group’s organization and rendering it more competitive.

The table below includes the amounts relating to the short-term remuneration of the members of senior management at December 31, 2015 and 2014, excluding the remuneration of the executive directors, which is detailed above:

			Thousands of euros
	Number of persons		Short-term salaries						Other remuneration (1)			Total
			Fixed		Variable remuneration (bonus) - Immediate payment
					In cash		In shares (2)
2015		21		17,838		6,865		6,865		5,016			36,584
2014		25		24,772		9,259		9,259		12,729	(3)		56,019

(1) Includes other remuneration items such as life insurance premiums totaling €1,309 thousand (2014: €1,290 thousand).

178

(2) The amount of the immediate payment in shares for 2015 relates to 1,726,893 Santander shares (2014: 1,514,738 Santander shares and 148,631 Banco Santander (Brasil) S.A. shares).

(3) Includes US$6.9 million were paid in relation to the extraordinary taxation in the United States due to the transformation of the pension plans of Banco Santander, S.A.

Also, the detail of the deferred (i.e. long-term) salaries of the members of senior management at December 31, 2015 and 2014 is provided below. These remuneration payments shall be received, as the case may be, in the corresponding deferral periods upon achievement of the conditions stipulated for each payment (see note 47 to our consolidated financial statements).

			Thousands of euros
	Number of persons		Long-term salaries						Total
			Variable remuneration - Deferred payment (1)				ILP (2)
			In cash		In shares
2015		21		7,880		7,880		3,732		19,492
2014		25		11,751		11,751		2,264		25,766

(1) Relates to the fifth and fourth cycles of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2015 and 2014 will be deferred over five or three years and three years, respectively, for it to be paid, where appropriate, in five or three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met.

(2) Relates to the estimated fair value of the ILP. The accrual and amount of the ILP are subject, inter alia, to achievement of the multiannual targets envisaged in the plan. Any ILP payments will be received in full in shares and deferred in 2019 -in the case of the second cycle approved in 2015, or in thirds in the case of the first cycle approved in 2014-.

Also, executive vice presidents who retired in 2015 and, therefore, were not members of senior management at year-end, received in 2015 salaries and other remuneration relating to their retirement amounting to €17,803 thousand (€3,349 thousand for those who retired in 2014), and remained entitled to long-term salary remuneration of €7,123 thousand (€1,342 thousand for those who retired in 2014).

Following is a detail of the maximum number of Santander shares that the members of senior management at each plan grant date (excluding executive directors) were entitled to receive at December 31, 2015 and 2014 relating to the deferred portion under the various plans then in force (see note 47 to our consolidated financial statements):

Maximum number of shares to be delivered	31/12/15		31/12/14
Deferred conditional variable remuneration plan (2011)		—		637,995
Deferred conditional variable remuneration plan (2012)		447,214		1,014,196
Deferred conditional variable remuneration plan (2013) (1)		852,898		1,412,164
Deferred conditional variable remuneration plan (2014) (2)		1,802,779		1,857,841
Deferred conditional variable remuneration plan (2015) (3)		2,480,849		—
ILP (2014)		1,025,853		1,008,398
ILP (2015)		1,798,395		—

(1) Also, they were entitled to a maximum of 111,962 Banco Santander (Brasil) S.A. shares at December 31, 2015.

(2) In addition, at December 31, 2015 and 2014 they were entitled to a maximum of 222,946 Banco Santander (Brasil) S.A. shares (the maximum number of shares corresponding to the deferred portion of the 2014 bonus).

(3) Also, they were entitled to a maximum of 252,503 Banco Santander (Brasil) S.A. shares at December 31, 2015.

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In 2015 and 2014, since the conditions established in the corresponding deferred share-based remuneration schemes for prior years had been met, in addition to the payment of the related cash amounts, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2015		2014
Deferred conditional delivery plan (2010)		—		365,487
Deferred conditional variable remuneration plan (2011)		550,064		637,996
Deferred conditional variable remuneration plan (2012)		447,212		507,098
Deferred conditional variable remuneration plan (2013)		426,449		—

As indicated in note 5.c to our consolidated financial statements, in 2012 the contracts of the members of the Bank’s senior management which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. The new system grants the senior executives the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaces the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in note 5.c to our consolidated financial statements are entitled to an annual emolument until the date of retirement.

The senior executives’ beginning balance under the new employee welfare system amounted to €287 million. This balance reflects the market value, at the date of conversion of the former pension obligations into the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested. The balance at December 31, 2015 amounted to €250 million (December 31, 2014: €296 million).

The contracts of the senior executives who had not exercised the option referred to in note 5.c) to our consolidated financial statements prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingencies of death (surviving spouse and child benefits) and permanent disability of serving executives.

In 2015 the number of executive vice presidents was reduced: two of them requested payment of the pensions to which they were entitled in a lump sum amounting to €53.2 million, and an additional three took voluntary pre-retirement and opted to receive the annual pre-retirement emoluments to which they were entitled in a single payment amounting to €21.5 million.

Additionally, the total sum insured under life and accident insurance policies relating to this group of employees amounted to €76.8 million at December 31, 2015 (December 31, 2014: €154 million).

Lastly, the net charge to profit or loss amounted to €21 million in 2015 (2014: €20 million).

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C. Board practices

Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:

The period during which the directors have served in their office is shown in the table under Section A of this Item 6.

The date of expiration of the current term of office is shown in the table below:

Name	Date of expiration (1)
Ana Botín		1st half 2017
José Antonio Álvarez		1st half 2018
Bruce Carnegie-Brown		1st half 2019
Rodrigo Echenique		1st half 2017
Matías R. Inciarte		1st half 2018
Guillermo de la Dehesa		1st half 2018
Ignacio Benjumea		1st half 2019
Javier Botín		1st half 2019
Sol Daurella		1st half 2019
Carlos Fernández		1st half 2018
Esther Giménez-Salinas		1st half 2017
Ángel Jado		1st half 2019
Belén Romana		1st half 2019
Isabel Tocino		1st half 2019
Juan Miguel Villar-Mir		1st half 2018

(1) Pursuant to the provisions of our Bylaws, one-third of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

At the annual general meeting held on March 18, 2016, our shareholders passed the following resolutions:

• To ratify the appointment of Ignacio Benjumea, which appointment was approved by the board of directors at its meeting of September 21, 2015, and to re-elect him for a term of three years.

• To ratify the appointment of Belén Romana, which appointment was approved by the board of directors at its meeting of December 22, 2015.

• To re-elect for a term of three years the following directors: Bruce Carnegie-Brown, Javier Botín, Sol Daurella, Ángel Jado and Isabel Tocino.

The basic terms and conditions of the contracts of the executive directors, besides those relating to the remuneration thereof, are the following:

a) Exclusivity and non-competition

Executive directors may not enter into contracts to provide services to other companies or entities except where expressly authorized by the board of directors. In all cases, a duty of non-competition is established with respect to companies and activities similar in nature to those of the Bank and its consolidated Group.

Likewise, the contracts of the executive directors provide for certain prohibitions against competition and the taking of clients, employees and suppliers that may be enforced for two years after the termination thereof for reasons other than retirement, pre-retirement or a breach by the Bank. The compensation to be paid by the Bank for this prohibition against competition is 80% of the fixed remuneration of the corresponding director, payable 40% on termination of the contract and 60% at the end of the two-year period.

b) Code of conduct

There is an obligation to strictly observe the provisions of the Group’s General Code and of the Code of Conduct in the Securities Markets, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.

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c) Pre-retirement and retirement

The following executive directors will be entitled to take pre-retirement in the event of termination, if they have not yet reached the age of retirement, on the terms indicated below:

Ana Botín will be entitled to take pre-retirement in the event of termination for reasons other than breach. In such case, she will be entitled to an annual emolument equivalent to her fixed remuneration plus 30% of the average of her latest amounts of variable remuneration, up to a maximum of three. This emolument would be reduced by up to 20% in the event of voluntary retirement before the age of 60.

If Ana Botín takes pre-retirement, she has the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

José Antonio Álvarez will be entitled to take pre-retirement in the event of termination for reasons other than his own free will or breach. In such case, he will be entitled to an annual emolument equivalent to the fixed remuneration corresponding to him as executive vice president.

If José Antonio Álvarez takes pre-retirement, he has the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

For his part, Matías R. Inciarte may take retirement at any time and, therefore, claim from the insurer the benefits corresponding to him under the externalized employee welfare system described in note 5.c to our consolidated financial statements, with no obligation whatsoever being incumbent upon the Bank in such circumstance.

d) Termination

The executive directors and senior executives have indefinite-term employment contracts. Executive directors or senior executives whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the Bank terminates the contract for any other reason, they will be entitled to the corresponding legally-stipulated termination benefit.

However, should Rodrigo Echenique’s contract be terminated prior to January 1, 2018, unless it is terminated voluntarily or due to his death, permanent disability, or serious breach of his duties, he shall be entitled to receive compensation of twice his fixed salary.

If the Bank were to terminate her contract, Ana Botín would have to remain at the Bank’s disposal for a period of four months in order to ensure an adequate transition, and would receive her fixed salary during that period.

Other non-director members of the Group’s senior management, other than those whose contracts were amended in 2012 as indicated above, have contracts which entitle them, in certain circumstances, to an extraordinary contribution to their welfare system in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a staff cost only when the employment relationship between the Bank and its executives is terminated before the normal retirement date.

e) Insurance

The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in note 5.a.iii to our consolidated financial statements. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Insured sum (Thousands of euros)
	2015		2014
Ana Botín		7,500		7,500
José Antonio Álvarez		6,000		—
Rodrigo Echenique		1,385		—
Matías R. Inciarte		5,131		5,131
Emilio Botín		—		—
Javier Marín Romano		2,400		2,400
Juan R. Inciarte		3,600		2,961
		26,016		17,992

Additionally, at December 31, 2014, other directors had life insurance policies the cost of which was borne by the Group, the related insured sum being €1.4 million; at December 31, 2015, there were no obligations in this connection.

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f) Confidentiality and return of documents

A strict duty of confidentiality is established during the relationship and following termination thereof, pursuant to which executive directors must return to the Bank the documents and items related to their activities that are in their possession.

g) Other terms and conditions

The advance notice periods contained in the contracts with the executive directors are as follows:

Advance notice period	Date of current contract (month/day/year)	By decision of the Bank (months)		By decision of the director (months)
Ana Botín	01/26/2015		(*)		4
José Antonio Alvarez	02/23/2015		(*)		(*)
Rodrigo Echenique	01/26/2015		(*)		(*)
Matías R. Inciarte	12/26/2012		4		4

(*) There is no contractual provision in this regard.

In the other cases, payment clauses in place of pre-notice periods are not contemplated.

Audit Committee, Risk Supervision, Regulation and Compliance Committee, Appointments Committee and Remuneration Committee

An audit committee, a risk supervision, regulation and compliance committee, an appointments committee as well as a remuneration committee operate as part of the board of directors.

Audit Committee

The Bank’s audit committee was created in 1986, with significant progress since that time with respect to both its duties and its operation.

The committee is regulated by articles 53 of the Bylaws and 16 of the Rules and Regulations of the Board. In addition, articles 27 and 35 of its Rules and Regulations contain specific provision regarding certain aspects of its activities. The risk supervision, regulation and compliance committee, created in June 2014, has assumed a portion of the duties until then attributed to the audit committee.

The Rules and Regulations of the Board provide that only non-management directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Nevertheless, we have determined that all of the members of our audit committee meet the independence criteria for foreign private issuers set forth in Rule 10A-3 under the Exchange Act. The committee’s chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit committee is Juan Miguel Villar-Mir, who our board of directors has determined is an “Audit Committee Financial Expert”, as such term is defined in the SEC’s Form 20-F.

The members of the audit committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting and auditing.

Functions of the audit committee:

(a) Have its chairman and/or secretary report to the shareholders at the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers and, specifically, regarding the results of the audit, explaining how such audit has contributed to the integrity of the financial information and the role that the committee has played in such process.

(b) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles and report on the proposals for alterations to the accounting principles and standards suggested by management.

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(c) In connection with the Company’s external auditor:

(i) With respect to the appointment thereof, the audit committee shall have the following powers:

(1) Submit to the board of directors the proposals for selection, appointment, reelection and replacement of the external auditor, assuming responsibility for the selection procedure established by applicable law, as well as the terms of the contract therewith, and periodically obtain from the external auditor information regarding the audit plan and the implementation thereof. The committee shall favor the Group’s external auditor also assuming responsibility for auditing the companies making up the Group.

(2) Ensure that the Company gives public notice of the change of external auditor in the form of a material fact, attaching to such notice a statement regarding the possible existence of disagreements with the outgoing external auditor and, if any have existed, regarding the content thereof, and in the event of resignation of the external auditor, examine the circumstances giving rise thereto.

(ii) With respect to the conduct of the audit, the audit committee shall:

(1) Establish appropriate relationships with the external auditor in order to receive information regarding matters that might risk the independence thereof, for examination by the committee, as well as any other information related to the development of the auditing procedure and such other communications as are provided for in the laws on auditing of accounts and in audit regulations; serve as a channel of communication between the board and the external auditor, assessing the results of each audit and the response of the management team to its recommendations, and acting as a mediator in the event of disagreement between the board and the external auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the shareholders at the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.

(2) Supervise the fulfilment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.

(3) Ensure that the external auditor annually attends the meeting of the board of directors provided for in article 35.1 in fine of these rules and regulations.

(iii) And with respect to the independence of the auditor and the provision of services other than audit work, the audit committee shall ensure that the Company and the external auditor comply with applicable regulations regarding the provision of such services, the limits on concentration of the external auditor’s business and, in general, all other regulations governing independence of the external auditor. For purposes of ensuring the independence of the external auditor, the audit committee shall take note of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure. And, specifically, it shall ensure that the remuneration of the external auditor for its work does not compromise the quality and independence thereof, and shall verify the percentage that the fees paid for any and all reasons represent out of the total income of the audit firm, as well as the length of service of the partner who leads the audit team in the provision of such services to the Company.

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In addition, a favorable report from the audit committee shall be needed prior to any decision to contract services other than audit work that are not forbidden by applicable regulations, following an appropriate evaluation of any threats to the independence of the external auditor and of the safeguards applied as provided by such regulations.

The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work.

In any event, the audit committee should annually receive from the external auditor written confirmation of the latter’s independence versus the Company or institutions directly or indirectly related to the Company, as well as detailed and itemized information on additional services of any kind provided by the aforementioned auditor or by persons or institutions related thereto and the fees received from such entities, pursuant to the regulations governing the auditing of accounts.

Likewise, prior to the issuance of the external auditor’s report, the committee shall annually issue a report expressing an opinion on whether the independence of the external auditor is compromised. Such report shall in any event contain a reasoned evaluation of each and every one of the additional services mentioned in the preceding paragraph, taken both individually and as a whole, other than legal audit services, and in connection with the rules on independence or with the regulations governing the auditing of accounts.

(d) Supervise the internal audit function and, specifically:

(i) Propose the selection, appointment and withdrawal of the officer responsible for internal audit;

(ii) Approve the proposed guidance and the annual working plan of internal audit submitted to the board, ensuring that internal audit activities are primarily focused on the Company’s significant risks, and review the annual activities report;

(iii) Ensure the independence and effectiveness of the internal audit function;

(iv) Propose the budget for this service, including the physical and human resources needed for the performance of its duties;

(v) Receive periodic information regarding the activities thereof; and

(vi) Verify that senior management and the board take into account the conclusions and recommendations set forth in its reports.

(e) Supervise the financial reporting system and the internal control systems. In particular, the audit committee shall:

(i) Supervise the process of preparing and presenting the required financial information relating to the Company and the Group, as well as its integrity, reviewing compliance with regulatory requirements, the proper demarcation of the Group’s scope of consolidation and the correct application of accounting standards;

(ii) Supervise the effectiveness of the internal control systems, reviewing them periodically, so that the principal risks are identified, managed and properly disclosed; and

(iii) Discuss with the external auditor any significant weaknesses detected in the internal control system during the course of the audit.

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As a consequence of its activities, the audit committee may submit recommendations or proposals to the board of directors.

In any event, the performance of the duties established herein shall not affect the independence of the internal audit function.

(f) Report to the board, in advance of its adoption of the corresponding decisions, regarding:

(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual accounts.

(ii) The creation or acquisition of interests in special purpose entities or entities registered in countries or territories that are considered to be tax havens.

(iii) The approval of related-party transactions provided for in article 33.

(g) Become apprised of and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted thereto by the office of the general secretary of the Company. The committee shall also:

(i) Receive, deal with and keep a record of the claims received by the Bank on matters related to the process for generating financial information, auditing and internal controls.

(ii) Establish and supervise a mechanism whereby Group employees may communicate, confidentially and anonymously, potentially significant irregularities as to matters within its area of authority, especially of a financial and accounting nature.

(h) Receive information regarding structural and corporate changes planned by the Company, for analysis thereof and for submission of a prior report to the board of directors regarding the financial terms and the accounting impact of any such transactions and, in particular and if applicable, regarding the proposed exchange rate. The foregoing shall not apply to transactions of little complexity and significance to the Group’s activities, including, if applicable, intragroup reorganization transactions.

(i) Receive information from the person responsible for the Company’s taxation matters on the tax policies applied, at least prior to the drawing-up of the annual accounts and the filing of the Corporate Tax return, and where relevant, on the tax consequences of transactions or matters submitted to the board of directors or the executive committee for approval, unless such bodies have been informed directly, in which case this shall be reported to the committee at the first meeting thereafter held by it. The audit committee shall transmit the information received to the board of directors.

(j) Evaluate its operation and the quality of its work at least once per year.

(k) And the other duties specifically provided for in these rules and regulations.

The 2016 annual general meeting (held on March 18, 2016) passed a resolution amending, among others, article 53 (sub section 1, 2, 4 y 5) of the Bylaws in order to increase the maximum number of members of the audit committee (from seven to nine), to conform its text to the amendments introduced to section 529 quaterdecies of the Spanish Capital Corporations Law by the fourth final provision of the Audit Law, which means include the requirement that the members of the audit committee have the appropriate technical knowledge in the Company’s sector of activity and conform the text outlining the duties of the audit committee according to the amendments introduced by the prior mentioned Law (thought they do not imply a substantial amendment of the current functions). Besides this resolution amends article 50 (sub section 2) of the Bylaws to clarify that, pursuant to the provisions of the Spanish Capital Corporations Law, the audit committee does have decision-making powers for the purposes of authorizing the provision by the external auditor of non-audit services.

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The Group’s 2015 audit committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—committees’ report”.

The following are the current members of the audit committee:

Name	Position
Juan Miguel Villar-Mir	Chairman
Carlos Fernández	Member
Angel Jado	Member
Belén Romana	Member
Isabel Tocino	Member

Jaime P. Renovales acts as secretary to the audit committee, but is classified as a non-member.

Risk Supervision, Regulation and Compliance Committee

The risk supervision, regulation and compliance committee of the Bank was created in June 2014, with general powers to support and advise the board of directors on risk supervision and control, on the definition of the Group’s risk policies, on relations with supervisory authorities and on regulation and compliance.

The committee is regulated by articles 54 ter of the Bylaws and 17 ter of the Rules and Regulations of the Board. The committee has assumed a portion of the duties previously attributed to the audit committee.

The Rules and Regulations of the Board state that the members of this committee must all be non-management directors with independent directors having a majority representation including an independent director as chairman.

The members of the risk supervision, regulation and compliance committee are appointed by the board of directors taking into account the directors knowledge, aptitude and experience and the duties of the committee.

Functions of the risk supervision, regulation and compliance committee:

(a) Support and advice to the board in defining and assessing risk policies affecting the Group, and in determining the current and future risk appetite and the strategy in this area.

The Group’s risk policies shall include:

(i) The identification of the various types of financial and non-financial risk (operational, technological, tax, legal, social, environmental, political, reputational, and compliance and behavioral, among others) that the Company faces, including, among financial or economic risks, contingent liabilities and others which are off-balance sheet;

(ii) The setting of the risk appetite that the Company deems acceptable;

(iii) The measures planned to mitigate the impact of identified risks in the event that they materialize; and

(iv) The information and internal control systems that will be used to control and manage such risks, including tax risks.

(b) Assistance to the board in monitoring the implementation of the risk strategy and the alignment thereof with the strategic commercial plans.

(c) Assistance to the board in approving the capital and liquidity strategy and supervision of the application thereof.

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(d) Ensuring that the pricing policy for the assets and liabilities offered to customers is fully aligned with the Company’s business model, risk appetite and risk strategy. If such is not the case, the committee shall submit to the board of directors a plan for the correction of such policy.

(e) Knowing and assessing the risks arising from the macroeconomic context and from the economic cycles within which the Company and its Group carry out their activities.

(f) Systematic review of exposure to principal customers, economic sectors of activity, geographic areas and risk types.

(g) Supervising the risk function, without prejudice to the direct access of the latter to the board of directors.

(h) Support and assistance to the board in the performance of stress tests by the Company, in particular by assessing the scenarios and assumptions to be used in such tests, evaluating the results thereof and analyzing the measures proposed by the risk function as a consequence of such results.

(i) Knowing and assessing management tools, improvement initiatives, advancement of projects and any other relevant activity relating to the control of risks, including the policy on internal risk models and the internal validation thereof.

(j) Determination, together with the board of directors, of the nature, amount, format and frequency of the risk-related information that is to be received by the committee itself and by the board of directors. In particular, the risk supervision, regulation and compliance committee shall receive periodic information from the chief risk officer (CRO).

(k) Cooperation in establishing rational remuneration policies and practices. For such purpose, the risk supervision, regulation and compliance committee shall examine, without prejudice to the duties of the remuneration committee, whether the incentive policy contemplated in the remuneration system takes risk, capital, liquidity and the likelihood and opportunity of earnings into consideration.

(l) Supervision and regular evaluation of the operation of the Company’s compliance program, of the governance rules and the compliance function, and making such proposals as may be required for the improvement thereof. For such purpose, the risk supervision, regulation and compliance committee:

(i) Shall supervise the observance of the general code of conduct, the manuals and procedures for the prevention of money laundering and financing of terrorism and the other codes and industry regulations.

(ii) Shall receive information and, if applicable, shall issue reports on disciplinary measures for members of senior management.

(iii) Shall supervise the adoption of actions and measures that result from the reports issued or the inspection proceedings carried out by the administrative authorities in charge of supervision and control.

(iv) Shall supervise the operation of and compliance with the criminal risk prevention model approved by the board of directors pursuant to article 3.2 of these rules and regulations.

For the performance of this task, the committee shall have its own powers of initiative and control. This includes, without limitation, the power to obtain any information it deems appropriate and to call any officer or employee of the Group, including, in particular, the heads of the compliance function and of the various committees related to this area that may exist in order to assess their performance, as well as the power to commence and direct such internal inquiries as it deems necessary into events related to any possible noncompliance with the criminal risk prevention model.

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Furthermore, the committee shall periodically evaluate the operation of the prevention model and the effectiveness thereof in preventing or mitigating the commission of crimes, for which purpose it may rely on external advice when it deems it appropriate, and shall propose to the board of directors any changes to the criminal risk prevention model and, in general, to the compliance program that it deems fit in view of such evaluation.

(m) Review of the Company’s corporate social responsibility policy, ensuring that it is aimed at the creation of value for the Company, and monitoring of the strategy and practices in this field, evaluating the level of adherence thereto.

(n) Supervision of the strategy for communication and relations with shareholders and investors, including small and mid-sized shareholders, as well as supervision and evaluation of the procedures for relations with stakeholders.

(o) Coordination of the process of communication of non-financial and diversity information, in accordance with applicable regulations and leading international standards.

(p) Periodic evaluation of the appropriateness of the Company’s corporate governance system, in order to ensure that it fulfils its mission of promoting the corporate interest and that it takes into account, where applicable, the legitimate interests of the other stakeholders.

(q) Support and advice to the board regarding relations with supervisors and regulators in the various countries where the Group operates.

(r) Tracking and evaluation of rule-making proposals and regulatory changes that may be applicable and of any possible consequences for the Group.

(s) Reporting on any proposed amendments to these rules and regulations prior to the approval thereof by the board of directors.

The 2016 annual general meeting (held on March 18, 2016) passed a resolution amending, among others, article 54 ter of the Bylaws in order to increase the maximum number of members of the risk supervision, regulation and compliance committee (from seven to nine) for the purpose of granting the Company’s board of directors greater flexibility to establish the composition that is appropriate for these committees at any time.

The Group’s 2015 risk supervision, regulation and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—committees’ report”.

The following are the current members of the risk supervision, regulation and compliance committee:

Name	Position
Bruce Carnegie-Brown	Chairman
Guillermo de la Dehesa	Member
Ignacio Benjumea	Member
Carlos Fernández	Member
Ángel Jado	Member
Isabel Tocino	Member
Juan Miguel Villar-Mir	Member

Jaime P. Renovales acts as secretary to the risk supervision, regulation and compliance committee, but is classified as a non-member.

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Appointments Committee

Since October 2014, the appointments committee assumed the duties contained in article 17.4 of the Rules and Regulations of the Board, as well as, any other duties corresponding thereto under applicable law.

The committee is regulated by articles 54 of the Bylaws and 17 of the Rules and Regulations of the Board.

The Rules and Regulations of the Board state that the members of this committee must all be non-management directors with independent directors having a majority representation including an independent director as chairman.

The members of the appointments committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.

Functions of the appointments committee:

The appointments committee shall have the following duties, and any other provided for in applicable law:

(a) Propose and review the director selection policy and the succession plan approved by the board and the internal criteria and procedures to be followed in order to select those persons who will be proposed to serve as directors, as well as for the continuous evaluation of directors, reporting on such continuous evaluation. In particular, the appointments committee shall:

(i) Evaluate the balance among the components of knowledge, capabilities, qualifications, diversity and experience that are required and existing on the board of directors and prepare the respective matrix of capabilities and the description of duties and qualifications required for each specific appointment, assessing the time and dedication needed for appropriate performance of the duties of director.

(ii) Receive, for subsequent consideration, any proposals of potential candidates to cover vacancies that the directors may submit.

(iii) Conduct a periodic review, at least once per year, of the structure, size, composition and activities of the board of directors, the operation of and compliance with the director selection policy and the succession plan, making recommendations to the board regarding possible changes.

(iv) Conduct a periodic review, at least once per year, of the fitness and properness of the different members of the board of directors and of the board as a whole and report to the board of directors accordingly.

(v) Establish, in line with the provisions of article 6.1 of these rules and regulations, a goal for representation of the less-represented gender on the board of directors and prepare guidelines as to how to increase the number of persons of that less represented gender in order to reach such target. The target, the guidelines and the application thereof shall be published as provided by applicable law.

(b) Apply and supervise the succession plan for the directors approved by the board of directors, working in coordination with the chairman of the board or, for purposes of the succession of the chairman, with the lead director. In particular, examine or organize the succession of the chairman and of the chief executive officer pursuant to article 24 of these rules and regulations.

(c) Prepare, by following standards of objectiveness and conformance to the corporate interest, taking into account the succession plan and assessing the fitness and properness of the potential candidates and, in particular, the existence of possible conflicts of interest, the reasoned proposals for appointment, re-election and ratification of directors provided for in section 2 of article 21 of these rules and regulations, any proposals for removal of directors, as well as proposals for appointment of the members of each of the committees of the board of directors. It shall also prepare the proposals for the appointment of positions on the board of directors and its committees, following the same aforementioned standards.

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(d) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of the confirmation or review thereof at the ordinary general shareholders’ meeting and in the annual corporate governance report.

(e) Report on proposals for appointment or withdrawal of the secretary of the board and, if applicable, the vice secretary, prior to submission thereof to the board.

(f) Propose and review the policies and internal procedures for the selection and continuous evaluation of senior executive vice presidents or similar officers and other employees responsible for internal control functions or who hold key positions for the day-to-day conduct of banking activities, as well as the succession plan for such executive officers, report on their appointment and withdrawal from office and their continuous evaluation in implementation of such procedures, and make any recommendations it deems appropriate.

(g) Ensure compliance by the directors with the duties prescribed in article 30 of these rules and regulations, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of noncompliance with the abovementioned duties or with the code of conduct of the Group in the securities markets.

(h) Examine the information provided by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.

(i) Evaluate its operation and the quality of its work at least once per year.

(j) Report on the process of self-evaluation of the board and of the members thereof and assess the independence of the external consultant hired pursuant to article 19.7 of these rules and regulations.

(k) Report on and supervise the application of the policy for planning the succession of the Group and any amendments thereto.

The other duties specifically provided for in these rules and regulations and any others assigned to the committee by applicable law.

The 2016 annual general meeting (held on March 18, 2016) passed a resolution amending, among others, article 54 of the Bylaws in order to increase the maximum number of members of the risk supervision, regulation and compliance committee (from seven to nine) for the purpose of granting the Company’s board of directors greater flexibility to establish the composition that is appropriate for these committees at any time.

The Group’s 2014 appointments committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

The following are the members of the appointments committee:

Name	Position
Bruce Carnegie-Brown	Chairman
Guillermo de la Dehesa	Member
Ignacio Benjumea	Member
Sol Daurella	Member
Carlos Fernández	Member
Ángel Jado	Member

Jaime P. Renovales acts as secretary to the appointments and remuneration committee but is classified as a non-member.

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Remuneration Committee

Since October 2014, the remuneration committee assumed the duties contained in article 17 bis.4 of the Rules and Regulations of the Board, as well as, any other duties corresponding thereto under applicable law.

The committee is regulated by articles 54 bis of the Bylaws and 17 bis of the Rules and Regulations of the Board.

The Rules and Regulations of the Board state that the members of this committee must all be non-management directors with independent directors having a majority representation including an independent director as chairman.

The members of the remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience and the goals of the committee.

Functions of the remuneration committee:

The remuneration committee shall have the following functions and any other provided for in applicable law:

(a) Prepare and propose the decisions relating to remuneration that the board of directors must adopt, including those that have an impact on the Company’s risk and risk management. In particular, the remuneration committee shall propose:

(i) The director remuneration policy, preparing the required reasoned report on such remuneration policy as provided by article 28 bis of these rules and regulations as well as the annual remuneration report provided for in article 29.

(ii) The individual remuneration of the directors in their capacity as such.

(iii) The individual remuneration of the directors for the performance of duties other than those in their capacity as such, and other terms of their contracts.

(iv) The remuneration policy applicable to the senior executive vice presidents and other members of senior management in compliance with the provisions of law.

(v) The basic terms of the contracts and the remuneration of the members of senior management.

(vi) The remuneration of those other officers who, while not members of senior management, are assigned to the Company’s internal control functions (internal audit, risk management or compliance) or receive significant remuneration, particularly variable remuneration, and whose activities may have a significant impact on the assumption of risks by the Group.

(b) Ensure compliance with the remuneration policy for the directors and other members of senior management established by the Company.

(c) Periodically review the remuneration programs in order to update them, assessing the appropriateness and performance thereof and endeavoring to ensure that director remuneration conforms to standards of moderation and correspondence to the earnings, risk culture and risk appetite of the Company and that it does not offer incentives to assume risks in excess of the level tolerated by the Company, such that it promotes and is consistent with appropriate and effective risk management, for which purposes the remuneration committee shall see that the mechanisms and systems adopted ensure that the remuneration programs take into account all types of risks and capital and liquidity levels and allow for remuneration to be aligned with the business objectives and strategies, corporate culture and long-term interest of the Company.

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(d) Ensure the transparency of remuneration and the inclusion in the annual report, the annual corporate governance report, the annual remuneration report or other reports required by applicable law of information regarding the remuneration of directors and, for such purposes, submit to the board any and all information that may be appropriate.

(e) And such other duties as are specifically provided for in these rules and regulations or assigned thereto by applicable law.

In the performance of its duties, the remuneration committee shall take into account the long-term interest of shareholders, investors and other Company stakeholders, as well as the public interest.

The 2016 annual general meeting (held on March 18, 2016) passed a resolution amending, among others, article 54 bis of the Bylaws in order to increase the maximum number of members of the risk supervision, regulation and compliance committee (from seven to nine) for the purpose of granting the Company’s board of directors greater flexibility to establish the composition that is appropriate for these committees at any time.

The Group’s 2015 remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report.

The following are the members of the remuneration committee:

Name	Position
Bruce Carnegie-Brown	Chairman
Guillermo de la Dehesa	Member
Ignacio Benjumea	Member
Sol Daurella	Member
Angel Jado	Member
Isabel Tocino	Member

Jaime P. Renovales acts as secretary to the remuneration committee but is classified as a non-member.

D. Employees

As of December 31, 2015, we had 193,863 employees (as compared to 185,405 in 2014 and 182,958 in 2013) of which 30,106 were employed in Spain (as compared to 30,153 in 2014 and 32,208 in 2013) and 163,757 were employed outside Spain (as compared to 155,252 in 2014 and 150,750 in 2013). The terms and conditions of employment in the non-government-owned banks in Spain are negotiated on an industry-wide basis with the trade unions. This process has historically produced collective agreements binding on all the non-government-owned banks and their employees. The 2015-2018 agreement was signed on April 19, 2016. The terms and conditions of employment in many of our subsidiaries outside Spain (including in Argentina, Portugal, Italy, Uruguay, Puerto Rico, Chile, Mexico, Germany, the U.K., Brazil and Poland) are negotiated either directly or indirectly (on an industry-wide basis) with the trade unions.

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The table below shows our employees by geographic area:

	Number of employees
	2015		2014		2013
SPAIN		30,106		30,153		32,208
LATIN AMERICA		89,352		84,086		84,555
Argentina		7,966		7,319		6,945
Brazil		49,199		46,281		49,187
Chile		12,360		12,087		12,217
Colombia		60		55		40
Mexico		17,831		16,991		14,819
Peru		149		128		127
Uruguay		1,787		1,220		1,220
Venezuela		—		—		—
EUROPE		56,111		54,515		54,456
Austria		395		389		423
Germany		5,421		5,339		5,491
Belgium		16		16		22
Finland		155		148		140
France		910		48		52
Hungary		39		44		48
Ireland		9		36		34
Italy		757		747		737
Norway		1,257		593		557
Poland		14,724		15,363		15,689
Portugal		6,972		5,829		6,029
Switzerland		203		148		148
The Netherlands		333		339		363
Sweden		0		767		—
United Kingdom		24,920		24,709		24,723
USA		17,799		16,398		11,542
ASIA		247		189		154
Hong Kong		145		110		93
China		75		71		45
Japan		9		5		5
Others		18		3		11
OTHERS		66		64		43
Bahamas		42		43		24
Others		24		21		19
Total		193,863		185,405		182,958

In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.

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The table below shows our employees by type of business:

	Number of employees
	2015		2014		2013
Retail Banking		183,182		175,213		173,141
Global Corporate Banking		8,037		7,601		7,285
Corporate Center		2,006		2,059		1,852
Spain’s Real Estate Activity		638		532		680
Total		193,863		185,405		182,958

As of December 31, 2015, we had 5,651 temporary employees (as compared to 7,160 as of December 31, 2014 and 6,274 as of December 31, 2013). In 2015, the average number of temporary employees working for the Group was 6,406 employees.

E. Share ownership

As of April 8, 2016, the direct, indirect and represented holdings of our current directors were as follows:

Directors	Direct Stake		Indirect stake		Represented stake		Total shares			% of Capital stock
Ana Botín		605,727		17,602,582		—		18,208,309	(1)		0.126	%
José Antonio Álvarez		689,969		1,302		—		691,271			0.005	%
Bruce Carnegie-Brown		10,099		—		—		10,099			0.000	%
Rodrigo Echenique		822,927		14,023		—		836,950			0.006	%
Matías R. Inciarte		1,475,161		306,729		205,751		1,987,641			0.014	%
Guillermo de la Dehesa		143		—		—		143			0.000	%
Ignacio Benjumea		3,067,201		—		—		3,067,201			0.021	%
Javier Botín		4,793,481		11,496,979		116,250,650		132,541,110			0.918	%
Sol Daurella		949		412,521		—		413,470			0.003	%
Carlos Fernández		16,839,714		—		—		16,839,714			0.117	%
Esther Giménez-Salinas		5,344		—		—		5,344			0.000	%
Ángel Jado		2,200,000		5,100,000		—		7,300,000			0.051	%
Belén Romana García		149		—		—		149			0.000	%
Isabel Tocino		267,511		—		—		267,511			0.002	%
Juan Miguel Villar-Mir		1,186		—		—		1,186			0.000	%
Total share		30,779,561		34,934,136		116,456,401		182,170,098			1.262	%

(1) Syndicated shares. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Shares covered by the shareholders’ agreement” herein.

Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.

As of April 8, 2016, our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 4,031,997 ordinary shares, or 0.028% of our issued and outstanding share capital as of that date. No individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.

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Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

As of December 31, 2015, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.

As of December 31, 2015 a total of 2,411,986,555 shares, or 16.71% of our share capital, were held by 1,276 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program. These ADSs were held by 17,512 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2015.

To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control. The Bylaws of Banco Santander provide for only one class of shares (ordinary shares), granting all holders thereof the same rights.

Shareholders’ agreements

In February 2006, a shareholders’ agreement was entered into that was notified to the Bank and to the CNMV. The document witnessing the aforementioned agreement was filed at both the CNMV Registry and the Cantabria Mercantile Registry.

The agreement, which was signed by Emilio Botín, Ana Botín, Emilio Botín O’Shea, Javier Botín, Simancas, S.A., Puente San Miguel, S.A. Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal, provides for the syndication of the Bank shares held by the signatories to the agreement or whose voting rights have been granted to them.

The aim of the syndication agreement through the restrictions established on the free transferability of the shares and the regulated exercise of the voting rights inherent thereto is to ensure, at all times, the concerted representation and actions of the syndicate members as shareholders of the Bank, for the purpose of developing a lasting, stable common policy and an effective, unitary presence and representation in the Bank’s corporate bodies.

At any given time, the chair of the syndicate is the person then presiding over the Fundación Botín, currently Javier Botín.

The members of the syndicate undertake to syndicate and pool the voting and other political rights attaching to the syndicated shares, so that these rights may be exercised, and, in general, the syndicate members may act towards the Bank, in a concerted manner, in accordance with the instructions and indications and with the voting criteria and orientation, necessarily unitary, issued by the syndicate.

Except for transactions carried out in favor of other members of the syndicate or in favor of the Fundación Botín, prior authorization must be granted from the syndicate meeting, which may freely approve or refuse permission for the planned transfer.

Banco Santander informed the CNMV on August 3 and November 19, 2012, by means of material fact filings, that it had been officially notified of amendments to this shareholder agreement in respect of the persons subscribing to it.

On October 17, 2013, the Bank filed a significant event with the CNMV updating the holders and distribution of the shares in the syndication to reflect the business reorganization of one of the pact members.

Banco Santander filed a significant event with the CNMV on October 3, 2014 updating the holders and the distribution of the shares in the syndication, and changing the chair of the syndicate to Javier Botín, present chair of the Fundación Botín, completing this information through a significant event filed on February 6, 2015.

The Bank filed respective a material facts with the CNMV on 6 February and 29 May 2015 updating the holders and the distribution of the shares included in the syndication, all within the framework of the inheritance process as a result of the death of Mr. Emilio Botín.

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Lastly, Banco Santander filed a material fact with the CNMV on 29 July 2015 updating the holders and the distribution of shares included in the syndication as a result of extinguishing the usufruct over the shares held by one of the parties to the agreement along with the voting rights arising therefrom, thereby consolidating the full price of the aforementioned shares in the Botín Foundation.

At the date of execution of the agreement, the syndicate comprised a total of 44,396,513 shares of the Bank (0.3075% of its share capital at year-end 2015). In addition, as established in clause one of the shareholders’ agreement, the syndication extends, solely with respect to the exercise of the voting rights, to other Bank shares held either directly or indirectly by the signatories, or whose voting rights are assigned to them through contractual arrangements (usufruct, pledge and alike) in the future. Accordingly, at December 31, 2015, a further 28,536,680 shares (0.1977% of share capital) were also included in the syndicate.

Details of the shares currently covered by the syndication are as follows:

Shares covered by the shareholders’ agreement

As of April 8, 2016, the agreement encompassed a total of 73,419,499 Bank shares (0.509% of its share capital), broken down as follows:

Parties to the shareholder agreement	No. of shares syndicated		% of total share capital
Ana Botín 1		8,679,990		0.060	%
Emilio Botín O. 2		16,873,709		0.117	%
Javier Botín 3		16,290,460		0.113	%
Paloma Botín 4		7,835,293		0.054	%
Carmen Botín		8,636,449		0.060	%
PUENTEPUMAR, S.L.		—		—
LATIMER INVERSIONES, S.L.		—		—
CRONJE, S.L., Unipersonal 5		9,528,319		0.066	%
NUEVA AZIL, S.L. 6		5,575,279		0.039	%
Total		73,419,499		0.509	%

(1) 8,074,263 shares held indirectly through Bafimar, S.L.

(2) 7,800,332 shares held indirectly through Puente San Miguel, S.L.U.

(3) 4,652,747 shares held indirectly through Inversiones Zulú, S.L. and 6,794,391 shares indirectly through Agropecuaria El Castaño, S.L.U.

(4) 6,628,291 shares held indirectly through Bright Sky 2012, S.L.

(5) Controlled by Ana Botín.

(6) Controlled by Carolina Botín.

In all other respects, the agreement remains unchanged.

The aforementioned significant filings can be found on the Group’s website (www.santander.com).

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B. Related party transactions

Loans made to members of our board of directors and to our executive officers

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below.

	Thousands of euros
	2015						2014
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Ana Botín		46		—		46		—		—		—
José Antonio Álvarez		11		—		11		—		—		—
Matías R. Inciarte		13		—		13		8		—		8
Rodrigo Echenique		24		—		24		317		—		317
Javier Botín		6		—		6		18		—		18
Ángel Jado		2		—		2		1		—		1
Isabel Tocino		—		—		—		7		—		7
Javier Marín1		—		—		—		723		—		723
Juan R. Inciarte2		—		—		—		4,182		—		4,182
		102		—		102		5,255		—		5,255

(1) Ceased to be a member of the board and executive vice president on January 12, 2015.

(2) Ceased to be a member of the board on June 30, 2015 and executive vice president on January 1, 2016. Positions held at the Group are included in note 53 to our consolidated financial statements.

Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2015 amounted to € 28 million (see note 53 to our consolidated financial statements).

Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectability or present other unfavorable features.

Loans made to other Related Parties

The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:

• overnight call deposits;

• foreign exchange purchases and sales;

• derivative transactions, such as forward purchases and sales;

• money market fund transfers; and

• letters of credit for imports and exports

and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:

• in the ordinary course of business;

• on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and

• did not involve more than the normal risk of collectability or other unfavorable features.

As of December 31, 2015 our loans and credits to associated and jointly controlled entities, amounted to €5,997 million. Those loans and credits represented 0.76% of our total net loans and credits and 6.81% of our total stockholders’ equity as of December 31, 2015.

For more information, see notes 5 and 53 to our consolidated financial statements.

C. Interests of experts and counsel

Not Applicable.

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Item 8. Financial Information

A. Consolidated statements and other financial information

Financial Statements

See Item 18 for our consolidated financial statements.

(a) Index to consolidated financial statements of Santander Group

	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets as of December 31, 2015, 2014 and 2013		F-2
Consolidated Income Statements for the Years Ended December 31, 2015, 2014 and 2013		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2015, 2014 and 2013		F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2015, 2014 and 2013		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013		F-8
Notes to the Consolidated Financial Statements		F-9

Legal Proceedings

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine amounts to be provided as our best estimate of the expenditure required to settle the corresponding claim based, among others, on a case-by-case basis based on the analysis and legal opinion of internal and external counsel or by considering the historical average amount of loss of such category of lawsuits.

i. Tax-related litigation

As of the date of this report, the main tax-related proceedings concerning the Group were as follows:

• Legal actions filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008, a provision having been recognized for the amount of the estimated loss.

• Legal actions filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. No provision was recognized in connection with the amount considered to be a contingent liability.

• Legal actions filed by Banco Santander, S.A. (currently Banco Santander (Brasil) S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the legal action was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. On 23 April 2015, the Federal Supreme Court issued a decision granting leave for the extraordinary appeal filed by the Brazilian authorities with regard to the PIS contribution to proceed, and dismissing the extraordinary appeal lodged by the Brazilian Public Prosecutor’s Office in relation to the COFINS contribution. The Federal Supreme Court has not yet handed down its decision on the PIS contribution and, with regard to the COFINS contribution, on 28 May 2015, the Federal Supreme Court in plenary session unanimously rejected the extraordinary appeal filed by the Brazilian Public Prosecutor’s Office, and the petition for clarification (“embargos de declaraçao”) subsequently filed by the Brazilian Public Prosecutor’s Office, which on 3 September admitted that no further appeals may be filed. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil) S.A.), in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court. Law 12,865/2013 established a program of payments or deferrals of certain tax and social security debts, under which any entities that availed themselves of the program and withdrew the legal actions brought by them were exempted from paying late-payment interest. In November 2013 Banco Santander (Brasil) S.A. partially availed itself

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of this program but only with respect to the legal actions brought by the former Banco ABN AMRO Real, S.A. in relation to the period from September 2006 to April 2009, and with respect to other minor actions brought by other entities in its Group. However, the legal actions brought by Banco Santander, S.A. and those of Banco ABN AMRO Real, S.A. relating to the periods prior to September 2006, for which a provision for the estimated loss was recognized, still persist.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. No provision was recognized in connection with the amount considered to be a contingent liability.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against several municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. No provision was recognized in connection with the amount considered to be a contingent liability.

• In addition, Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. No provision was recognized in connection with the amount considered to be a contingent liability.

• In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSLL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil) S.A. did not meet the necessary legal requirements to be able to deduct the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (the Brazilian Tax Appeal Administrative Council, CARF), which on 21 October 2011 unanimously decided to render the infringement notice null and void. The tax authorities appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil) S.A. filed an appeal against these procedures at CARF, which was partially upheld on 8 October 2013. This decision has been appealed at the higher instance of CARF (Tax Appeal High Chamber). In December 2013 the Brazilian tax authorities issued the infringement notice relating to 2008, the last year for amortization of the goodwill. Banco Santander (Brasil) S.A. appealed against this infringement notice and the court found in its favor. The Brazilian tax authorities appealed against this decision at CARF. Based on the advice of its external legal counsel and in view of the first decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notices. Accordingly, the risk of incurring a loss is remote. Consequently, no provisions were recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

• In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) (currently Produban Serviços de Informática S.A.) and Banco Santander (Brasil), S.A. (currently Banco Santander (Brasil) S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander (Brasil) S.A. to DTVM in 2000, 2001 and the first two months of 2002. The two entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander (Brasil) S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the High Chamber of CARF, and unfavorable decisions were obtained by Banco Santander (Brasil) S.A. and DTVM on 12 and 19 June 2015, respectively. Both cases were appealed at court in a single proceeding and a provision was recognized for the estimated loss.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A. (Brasil), as the successor by merger to ABN AMRO Brasil Dois Participações S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The aforementioned entity filed an appeal for reconsideration against this infringement notice. As the former parent of Santander Seguros S.A. (Brasil), Banco Santander (Brasil) S.A. is liable in the event of any adverse outcome of this proceeding. No provision was recognized in connection with this proceeding as it was considered to be a contingent liability.

• In June 2013, the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. as the party liable for tax on the capital gain allegedly obtained in Brazil by the entity

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not resident in Brazil, Sterrebeeck B.V., as a result of the “incorporação de ações” (merger of shares) transaction carried out in August 2008. As a result of the aforementioned transaction, Banco Santander (Brasil) S.A. acquired all of the shares of Banco ABN AMRO Real, S.A. and ABN AMRO Brasil Dois Participações, S.A. through the delivery to these entities’ shareholders of newly issued shares of Banco Santander (Brasil) S.A., issued in a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. obtained income subject to tax in Brazil consisting of the difference between the issue value of the shares of Banco Santander (Brasil) S.A. that were received and the acquisition cost of the shares delivered in the exchange. In December 2014 the Group appealed against the infringement notice at CARF after the appeal for reconsideration lodged at the Federal Tax Office was dismissed. Based on the advice of its external legal counsel, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notice. Accordingly, the risk of incurring a loss is remote. Consequently, the Group has not recognized any provisions in connection with these proceedings because this matter should not affect the consolidated financial statements.

• In November 2014 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSLL) for 2009 questioning the tax-deductibility of the amortization of the goodwill of Banco ABN AMRO Real S.A. performed prior to the absorption of this bank by Banco Santander (Brasil) S.A., but accepting the amortization performed after the merger. On the advice of its external legal counsel, Banco Santander (Brasil), S.A. lodged an appeal against this decision at the Federal Tax Office and obtained a favorable decision in July 2015, which we expect will be appealed at CARF by the Brazilian tax authorities. No provision was recognized in connection with this proceeding as it was considered to be a contingent liability. Banco Santander (Brasil) S.A. has also appealed against infringement notices issued by the tax authorities questioning the tax deductibility of the amortization of the goodwill arising on the acquisition of Banco Comercial e de Investimento Sudameris S.A. No provision was recognized in connection with this matter as it was considered to be a contingent liability.

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA, Inc. considers that, in accordance with applicable tax legislation, it is entitled to recognize the aforementioned tax credits as well as the related issuance and financing costs. In addition, if the final outcome of this legal action is favorable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. In 2013 and in 2015 the US courts found against two taxpayers in cases with a similar structure. In the case of Santander Holdings USA, Inc., on November 13, 2015, the district judge found for Santander Holdings USA, Inc. in the final decision. On January 13, 2016, the judge ordered the amounts paid over with respect to 2003 to 2005 to be refunded to Santander Holdings USA, Inc. On March 11, 2016, the US government filed its appeal to the decision at the Court of Appeals. The estimated loss relating to this proceeding was provided for.

• Santander UK has proactively engaged with HM Revenue & Customs to resolve a number of outstanding legacy tax matters, all of which relate to periods prior to Santander UK plc’s adoption of the Code of Practice on Taxation for Banks. However, litigation proceedings were commenced in relation to a small number of these issues, with respect to which the court of first instance found in favor of HM Revenue & Customs. Santander UK has decided not to appeal these rulings. The provision recognized for the amounts relating to these matters has been used in full.

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Non-tax-related proceedings

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a U.K. insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all U.K. banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008.

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On July 1, 2008, the U.K. Financial Ombudsman Service (“FOS”) referred concerns regarding the handling of PPI complaints to the U.K. Financial Services Authority (“FSA”). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

On October 8, 2010, the British Bankers’ Association (“BBA”), the principal trade association for the U.K. banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the proceeding brought by the BBA.

Santander UK did not participate in the legal action undertaken by other U.K. banks and had been consistently making provisions and settling claims with regards to PPI complaints liabilities.

There was a fall in compensation payments in the first half of 2015 and an increase from the third quarter, in line with industry trends, with compensation remaining stable in the last quarter.

The FSA consultation papers of November 2015 were taken into account in order to calculate the provision in 2015. As a result of considering the contents of the consultation papers, an additional provision of GBP 450 million was recognized. This amount is based on a probable scenario of two years in which customers could make their claims and on the anticipated increase in the volume of claims due to the established two-year period.

At December 31, 2015, the provision recognized in this connection totaled GBP 465 million.

The following table shows information on the total claims received up to December 31, 2015 and the resolution thereof:

(number of claims, in thousands)
	2015			2014			2013
Claims outstanding at the beginning of the period		20			14			31
Claims received (1)		251			246			363
Claims rejected as being invalid(2)		(195	)		(194	)		(298	)
Resolved claims		(57	)		(46	)		(82	)
Claims outstanding at the end of the period		19			20			14

⁽¹⁾  Includes rejected claims relating to customers that had never purchased payment protection insurance from Santander UK.

⁽²⁾  Customers are entitled to appeal to the Financial Ombudsman Service (FOS) if their claims are rejected. The FOS may uphold or reject an appeal and if an appeal is upheld, Santander UK is required to compensate the customer. The table shows the result of appeals relating to paid or rejected claims.

The provision recognized at the end of 2015 represents the best estimate by Group management, taking into account the opinion of its advisers and of the costs to be incurred in relation to any compensation that may result from the redress measures associated with the sales of payment protection insurance (PPI) in the UK. The provision was calculated on the basis of the following key assumptions resulting from judgments made by management:

• Volume of claims- estimated number of claims;

• Percentage of claims lost- estimated percentage of claims that are or will be in the customers’ favor; and

• Average cost - estimated payment to be made to customers, including compensation for direct loss plus interest.

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These assumptions were based on the following information:

• A complete analysis of the causes of the claim, the probability of success, as well as the possibility that this probability could change in the future;

• Activity recorded with respect to the number of claims received;

• Level of compensation paid to customers, together with a projection of the probability that this level could change in the future;

• Impact on the level of claims in the event of proactive initiatives carried out by the Group through direct contact with customers; and

• Impact of the media coverage.

These assumptions are reviewed, updated and validated on a regular basis using the latest available information, such as, the number of claims received, the percentage of claims lost, the potential impact of any change in that percentage, etc. and any new evaluation of the estimated population.

The most relevant factor for calculating the balance of the provision is the number of claims received as well as the expected level of future claims. The percentage of claims lost is calculated on the basis of the analysis of the sale process. The average cost of compensation is calculated in a reasonable manner as the Group manages a high volume of claims and the related population is homogenous. Group management reviews the provision required at each relevant date, taking into account the latest available information on the aforementioned assumptions as well as past experience.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011, Banco Santander, S.A. filed a new request for arbitration with the Spanish Arbitration Court against Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores, S.A.), claiming €66 million that the latter owes it as a result of the declaration on January 4, 2008 of the early termination by the Bank of all the financial transactions agreed upon between the parties.

On August 3, 2012, Delforca 2008, S.A. was declared to be in a position of voluntary insolvency by Barcelona Commercial Court no. 10, which had agreed as part of the insolvency proceeding to stay the arbitration proceeding and the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A. The Arbitration Court, in compliance with the decision of the Commercial Court, agreed on January 20, 2013 to stay the arbitration proceedings at the stage reached at that date until a decision could be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party with a view to having the claim recognized as a contingent ordinary claim without specified amount. However, the insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, Banco Santander, S.A. filed an ancillary claim, which was dismissed by a Court decision on February 17, 2015. This decision also declared that Banco Santander, S.A. had breached its contractual obligations under the framework financial transaction agreement it had entered into with Delforca 2008, S.A.

As part of the same insolvency proceeding, Delforca 2008, S.A. has filed another ancillary claim requesting the termination of the arbitration agreement included in the framework financial transactions agreement entered into by that party and Banco Santander, S.A. in 1998, as well as the termination of the obligation that allegedly binds the insolvent party to the High Council of Chambers of Commerce (Spanish Arbitration Court). This claim was upheld in full by the Court.

On December 30, 2013, Banco Santander filed a complaint requesting the termination of the insolvency proceeding of Delforca 2008, S.A. due to supervening disappearance of the alleged insolvency of the company. The complaint was dismissed by a decision handed down on June 30, 2014. A court order dated 25 May 2015 declared the end of the common phase of the insolvency proceeding and the opening of the arrangement phase. Banco Santander, S.A. lodged an appeal against the court’s decisions 1) to stay the arbitration proceeding and the effects of the arbitral award, 2) to terminate the arbitration agreement 3) not to recognize the contingent claim, and to declare a breach by Banco Santander, S.A. and 4) not to conclude the proceeding due to the non-existence of insolvency.

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On 23 June 2015, Delforca 2008, S.A. submitted an arrangement proposal entailing the payment in full of the ordinary and subordinate claims.

On February, 2016, notice was served on the Bank of another ancillary claim filed by Delforca 2008, S.A. and Mobiliaria Monesa, S.A. (parent of Delforca 2008, S.A.) requesting the voidness of the enforcement of securities made by the Bank for a total sum of €57 million. This claim has been stayed on preliminary civil ruling grounds, until the abovementioned appeals are handed down.

In addition, in April 2009 Mobiliaria Monesa, S.A. (parent of Delforca 2008, S.A.) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, claiming damages which it says it incurred as a result of the (in its opinion) unwarranted claim filed by the Bank against its subsidiary, reproducing the same objections as Delforca 2008, S.A. This proceeding has currently been stayed on preliminary civil ruling grounds, against which Mobiliaria Monesa, S.A. filed an appeal which was dismissed by the Cantabria Provincial Appellate Court in a judgment dated January 16, 2014.

Lastly, on April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it sought indemnification for the damage and losses it alleges it incurred due to the (in its opinion) unwarranted claim by the Bank. Delforca 2008, S.A. made the request in a counterclaim filed in the arbitration proceeding that concluded with the annulled award, putting the figure at up to €218 million. The aforementioned Court has dismissed the motion for declinatory exception proposed by Banco Santander, S.A. as the matter has been referred for arbitration. This decision was upheld in an appeal at the Madrid Provincial Appellate Court in a judgment dated May 27, 2014. The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

• Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000, as agreed by the board of directors, and the relevant clause was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision at the High Employment Court (“TST”) and, subsequently, at the Federal Supreme Court (“STF”). The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and the association. Only the appeal lodged by the bank has been given leave to proceed and will be decided upon by the STF in plenary session.

• “Planos economicos”: Like the rest of the banking system, Santander Brazil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation (“planos economicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (“STJ”) set the limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will probably significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the STJ and the Supreme Federal Court (“STF”) with which the matter is expected to be definitively settled. In August 2010, STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute of limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress were stayed until this court issues a final decision on the matter.

• Proceeding under Criminal Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150 million in principal plus USD 4.7 million in interests, upon alleged termination of an escrow contract.

The court upheld the claim but did not make a specific pronouncement on costs. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A.,

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dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. An appeal was filed at the Supreme Court by Banco Occidental de Descuento against the Madrid Provincial Appellate Court decision. The appeal was dismissed in a Supreme Court judgment dated October 24, 2014. Banco Occidental de Descuento filed a motion for annulment against the aforementioned judgment which was dismissed in an order dated 2 December 2015. The complainant has stated that it will appeal. The Bank has not recognized any provisions in this connection.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group, S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving €32 million in principal and €2.7 million in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding. The Court dismissed the claim in full in a judgment dated November 13, 2013. The judgment was confirmed at appeal by the Murcia Provincial Appellate Court in a judgment dated July 10, 2014. The insolvency managers have filed a cassation and extraordinary appeal against procedural infringements against the aforementioned judgment.

• The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying.

At the date of this annual report, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, as a result, no provisions needed to be recognized in this connection.

• The intervention, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) by the U.S. Securities and Exchange Commission (“SEC”) took place in December 2008. The exposure of customers of the Group through the Optimal Strategic US Equity (“Optimal Strategic”) subfund was €2,330 million, of which €2,010 million related to institutional investors and international private banking customers, and the remaining €320 million made up the investment portfolios of the Group’s private banking customers in Spain, who were qualifying investors.

At the date of this annual report, certain claims had been filed in relation to this matter. The Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, the risk of loss is considered to be remote or non-material.

• At the end of the first quarter of 2013, news stories were published stating that the public sector was debating the validity of the interest rate swaps arranged between various financial institutions and public sector companies in Portugal, particularly in the public transport industry.

The swaps under debate included swaps arranged by Banco Santander Totta, S.A. with the public companies Metropolitano de Lisboa, E.P.E. (MdL), Metro de Porto, S.A. (MdP), Sociedade de Transportes Colectivos do Porto, S.A. (STCP) and Companhia Carris de Ferro de Lisboa, S.A. (Carris). These swaps were arranged prior to 2008, i.e. before the start of the financial crisis, and had been executed without incident.

In view of this situation Banco Santander Totta, S.A. took the initiative to request a court judgment on the validity of the swaps in the jurisdiction of the United Kingdom to which the swaps are subject. The corresponding claims were filed in May 2013.

After the Bank had filed the claims, the four companies (MdL, MdP, STCP and Carris) notified Banco Santander Totta, S.A. that they were suspending payment of the amounts owed under the swaps until a final decision had been handed down in the U.K. jurisdiction in the proceedings. MdL, MdP and Carris suspended payment in September 2013 and STCP did the same in December 2013.

Consequently, Banco Santander Totta, S.A. extended each of the claims to include the unpaid amounts.

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On November 29, 2013, the companies presented their defense in which they claimed that the swaps were null and void under Portuguese law and, accordingly, that they should be refunded the amounts paid. On February 14, 2014, Banco Santander Totta, S.A. answered the counterclaim, maintaining its arguments and rejecting the opposing arguments in its documents dated November 29, 2013.

On April 4, 2014, the companies issued their replies to the Bank’s documents. The preliminary hearing took place on May 16, 2014.

The case was heard from October 12 to December 10, 2015.

The judgment was handed down on March 4, 2016. The Court decided in favor of Banco Santander Totta, S.A. on all requests submitted by it and against the transport companies on all requests made by them. It considered all nine swap contracts to be valid and binding.

Banco Santander Totta, S.A. and its legal advisers consider that this judgment confirmed that the bank acted at all times in accordance with applicable legislation and under the terms of the swaps. As a result, the Group has not recognized any provisions in this connection.

• Most of the German banking industry has been affected by two German Supreme Court decisions in 2014 in relation to handling fees in consumer loan agreements.

In May 2014 the German Supreme Court held handling fees in loan agreements to be null and void. The Court subsequently handed down a ruling at the end of October 2014 extending from three to ten years the statute of limitation period on claims relating to old transactions. Therefore, any claims relating to handling fees paid between 2004 and 2011 became statute-barred in 2014. This situation gave rise to numerous claims at the end of 2014 which affected the income statements of banks in Germany.

Santander Consumer Bank AG stopped including these handling fees in agreements from January 1, 2013 and ceased charging these fees definitively at that date, i.e. before the Supreme Court handed down its judgment on the issue.

Provisions of approximately €455 million were recognized in 2014 to cover the estimated cost of the claims. In order to calculate the provision, the claims already received, as well as an estimate of those that could be received in 2015 (the year in which the period for making claims ends as they become statute-barred) were taken into account. The provisions recognized to cover the claims received were used progressively throughout 2014 and 2015.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2015, 2014 and 2013, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the Group cannot state with confidence what the eventual outcome of any of these pending matters will be, what the timing of the ultimate resolution of such matters will be or what the eventual loss, fines or penalties related to each such pending matter may be. Consequently, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Group; and the outcome of a particular matter may be material to the Group’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of the Group’s income for that period.

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Shareholders remuneration

The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total remuneration in respect of each fiscal year indicated, distributed quarterly.

	Euro per Share										Dollars per ADS
	First		Second		Third		Fourth		Total		First		Second		Third		Fourth		Total
2009		0.14		0.12		0.12		0.22		0.60		0.16		0.14		0.14		0.24		0.67
2010		0.14		0.12		0.12		0.23		0.60		0.14		0.13		0.13		0.25		0.65
2011		0.14		0.13		0.12		0.22		0.60		0.15		0.14		0.12		0.23		0.64
2012		0.15		0.15		0.15		0.15		0.60		0.14		0.19		0.21		0.21		0.75
2013		0.15		0.15		0.15		0.15		0.60		0.15		0.15		0.16		0.21		0.67
2014		0.15		0.15		0.15		0.15		0.60		0.16		0.16		0.15		0.13		0.60
2015(*)		0.05		0.05		0.05		0.05		0.20		0.04		0.04		0.04		0.04		0.16

(*) As of the date of this annual report on Form 20-F, the fourth dividend has not yet been paid.

The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the dividends in cash or new shares. The remuneration per share approved in subsequent annual shareholders’ meetings for 2009, 2010, 2011, 2012, 2013 and 2014 disclosed above, €0.60, is calculated assuming that the four payments for these years (either cash dividends or scrip dividends) were made in cash.

On January 8, 2015, an extraordinary meeting of the board of directors took place to reformulate the dividend policy of Banco Santander to take effect with the first dividend to be paid with respect to our 2015 results, in order to distribute 3 cash dividends and a scrip dividend relating to such 2015 results.

Banco Santander paid on account of 2015:

• A dividend of €0.05 per share equivalent to the first interim dividend (August 2015);

• A scrip dividend of €0.05 per share equivalent to the second interim dividend (November 2015);

• A dividend of €0.05 per share equivalent to the third interim dividend (February 2016); and

• A dividend of €0.05 per share equivalent to the fourth dividend is expected to be paid in May 2016.

Following the increase of capital of the second interim dividend, the Bank’s share capital at the date of this annual report on Form 20-F was €7,217 million represented by 14,434,492,579 shares, par value €0.50 each.

Banco Santander assigned €2.9 billion to dividends in 2015 as compared to €7.7 billion in 2014.

The Bank intends the remuneration on account of the earnings for the 2016 financial year to be 0.21 euros per share, which would be paid, as always, in four payments, of which three would be received in cash and the other in shares or cash at the shareholder’s discretion, under the Santander Dividendo Elección scrip dividend scheme. As such, the resolution passed by our annual general shareholders’ meeting held on March 18, 2016, under item 8, was to offer all shareholders of the Bank the option to receive their remuneration corresponding to one of the interim dividends for 2016 through the application of the Santander Dividendo Elección scrip dividend scheme.

For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends” herein.

For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends” herein.

The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the

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Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends” herein. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:

Year Ended December 31,
IFRS-IASB
2011		2012		2013		2014		2015
(in millions of euros)
	2,151		1,355		1,030		1,435		2,277

The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.

B. Significant Changes

No material changes.

Item 9. The Offer and Listing

A. Offer and listing details

Market Price and Volume Information

Santander’s Shares

In 2015, Santander was the most actively traded stock on the Spanish stock exchange. As at December 31, 2015, the stock had a 12.65% weighting in the IBEX 35 Index and was ranked first among all Spanish issuers represented in this index. Santander’s stock weighting in the Euro Stoxx 50 was, at year end, 3.35%, placing it in ninth position. Our market capitalization of €65,792 million at 2015 year-end made us the largest bank in the eurozone by market capitalization and the 19^th in the world in 2015.

At December 31, 2015 a total of 2,411,986,555 shares, or 16.71% of our share capital, were held by 1,276 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program.

Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao). Our shares are also listed on the New York (in the form of American Depositary Shares), London (in the form of CREST Depository Interests), São Paulo (in the form of Brazil Depositary Shares), Milan, Lisbon, Buenos Aires, Warsaw and Mexico stock exchanges. At December 31, 2015, 58.21% of our shares were held of record by non-residents of Spain.

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The table below sets forth the high and low of the daily closing prices and last daily sales prices in euros for our shares on the Spanish continuous market for the periods indicated.

	Euros per Share
	High		Low		Last
2011 Annual		9.32		5.13		5.87
2012 Annual		6.68		4.04		6.10
2013 Annual		6.77		4.84		6.51
2014 Annual		7.90		6.22		7.00
First Quarter		6.92		6.22		6.92
Second Quarter		7.89		6.93		7.63
Third Quarter		7.90		7.14		7.61
Fourth Quarter		7.56		6.63		7.00
2015 Annual		7.15		4.45		4.56
First Quarter		7.03		5.89		7.02
Second Quarter		7.15		6.26		6.26
Third Quarter		6.76		4.61		4.74
Fourth Quarter		5.37		4.45		4.56
2016 First Quarter		4.51		3.31		3.87
Last six months
2015
October		5.37		4.73		5.10
November		5.31		4.95		5.17
December		5.17		4.45		4.56
2016
January		4.42		3.73		3.94
February		3.81		3.31		3.75
March		4.51		3.83		3.87
April (through April 8, 2016)		3.80		3.58		3.66

On April 8, 2016, the reported last sale price of our shares on the continuous Spanish market was €3.66.

American Depositary Shares

Our ADSs have been listed and traded on the New York Stock Exchange since July 30, 1987. Each ADS represents one of our shares and is evidenced by an American Depositary Receipt or “ADR.” The deposit agreement, pursuant to which ADRs have been issued, is among us, JP Morgan Chase, as depositary, and the holders from time to time of ADRs. At December 31, 2015, a total of 470,220,926 of our ADSs were held by 17,512 registered holders. Since certain of such of our shares and our ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.

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The table below sets forth the reported high and low of the daily closing prices and last daily sales prices for our ADSs on the New York Stock Exchange for the periods indicated.

	Dollars Per ADS
	High		Low		Last
2011 Annual		12.69		6.80		7.52
2012 Annual		8.76		4.89		8.17
2013 Annual		9.29		6.43		9.07
2014
Annual		10.75		8.21		8.33
First Quarter		9.58		8.36		9.58
Second Quarter		10.75		9.58		10.42
Third Quarter		10.64		9.46		9.50
Fourth Quarter		9.43		8.21		8.33
2015
Annual		8.42		4.85		4.87
First Quarter		8.42		6.62		7.45
Second Quarter		7.72		7.00		7.01
Third Quarter		7.31		5.13		5.28
Fourth Quarter		6.04		4.85		4.87
2016 First Quarter		4.96		3.74		4.36
Last six months
2015
October		6.04		5.28		5.54
November		5.69		5.29		5.40
December		5.46		4.85		4.87
2016
January		4.79		4.06		4.19
February		4.17		3.74		3.99
March		4.96		4.16		4.36
April (through April 8, 2016)		4.33		4.00		4.13

On April 8, 2016, the reported last sale price of our ADSs on the New York Stock Exchange was $4.13.

B. Plan of distribution

Not Applicable

C. Markets

General

Spanish Securities Market

The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System. During the year ended December 31, 2015, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

Automated Quotation System

The Automated Quotation System was founded in November 2, 1995, substituting the computer assisted trading system known as Sistema de Interconexión Bursátil, which had been in place since 1989. It links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the company that manages the Spanish Stock Exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, a dealer firm or a credit entity that are a member of a Spanish stock exchange directly.

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There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. (Madrid time) each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. (Madrid time). Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.

From May 14, 2001, rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.

Moreover, there is a block trades market (el mercado de bloques) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.

Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:

• the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;

• relates to a merger or spin-off of a listed company;

• relates to the reorganization of a business group;

• the transaction is executed for the purposes of settling litigation;

• involves certain types of contracts or complex transactions; or

• the Sociedad de Bolsas finds other justifiable cause.

Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in the Boletín de Cotización and in the computer system by the next trading day.

Sociedad de Bolsas is also the manager of the IBEX 35^® Index. This index is made up by the 35 most liquid securities traded on the Spanish Market and, technically, it is a price index that is weighted by capitalization and adjusted according to the free float of each company comprised in the index. Apart from its quotation on the four Spanish Exchanges, the Bank is also currently included in the IBEX 35^® Index.

Clearance and Settlement System. Book-Entry System

On April 1, 2003, by virtue of Law 44/2002 and of Order ECO 689/2003 of March 27, 2003 approved by the Spanish Ministry of Economy, the integration of the two main existing book-entry settlement systems existing in Spain at the time–the equity settlement system Servicio de Compensación y Liquidación de Valores (“SCLV”) and the Public Debt settlement system Central de Anotaciones de Deuda del Estado (“CADE”)– took place. As a result of this integration, a single entity, known as Sociedad de Gestión de los Sistemas de Registro Compensación y Liquidación de Valores (“Iberclear”) assumed the functions formerly performed by SCLV and CADE according to the legal regime stated in article 44 bis of the Spanish Securities Market Act.

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Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, which is the Spanish Central Securities Depositary, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name.

A reform of the existing clearing, settlement and registry system is currently being implemented in Spain. The reform introduces three fundamental changes that, in turn, will involve a number of operating modifications. These changes are as follows: a) Transition to a registry system based on balances; b) the introduction of a new Central Counterparty (“BME Clearing”); and c) the integration of the Central de Anotaciones del Mercado de Deuda Pública (CADE), or the registry, and SCL into a single platform. With the introduction of the Central Counterparty, Spain’s stock exchange markets will be organized around three infrastructures: a trading platform (SIBE), the Central Counterparty (a new segment of BME) and the central securities depository (IBERCLEAR). This new system will be implemented in two consecutive phases: a) first phase: the implementation of the Central Counterparty and the transition to a registry system based on balances to be scheduled to be completed in the fourth quarter of 2015; and b) second phase: the transfer of CADE into the new system and the connection to Target 2 Securities system scheduled to be completed during the first quarter of 2017. On February 3, 2016 came into force Royal Decree 878/2015 on clearing, settlement and registration of traded securities represented as book entries, on the legal framework for central securities depositaries and central counterparties, and the transparency requirements for issuers of securities admitted to trading on an official secondary market. One of its main pillars on which the reform of the securities clearing, settlement and registration system is based is the substitution of the current equity registration system, based on registry references, by a system based only on securities balances, and the establishing of alternative control procedures. The royal decree also implements the legal and economic framework for central counterparties and other central securities depositaries.

Securities Market Legislation

The Spanish Securities Markets Act, enacted in 1988, among other things:

• established an independent regulatory authority, the CNMV, to supervise the securities markets;

• established a framework for the regulation of trading practices, tender offers and insider trading;

• required stock exchange members to be corporate entities;

• required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;

• established a framework for integrating quotations on the four Spanish stock exchanges by computer;

• exempted the sale of securities from transfer and value added taxes;

• deregulated brokerage commissions as of 1992; and

• provided for transfer of shares by book-entry or by delivery of evidence of title.

The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems.

Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included.

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The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:

• provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for material facts, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;

• the establishment of Iberclear; and

• the authorization of the Minister of Economy and Competitiveness to regulate financial services electronic contracts.

On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:

• information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and

• the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meetings.

On March 11, 2005, Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle.

On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectorial rules applicable to investment firms more consistent with other sectorial rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings.

On November 14, 2005, the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities.

Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects.

Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse.

Law 12/2006 of May 16, 2006 amended the Securities Market Law by: (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets.

Law 36/2006 of November 30, 2006, relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law.

Law 6/2007 of April 12, 2007 amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and articles of association—Tender Offers”.

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Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:

• Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owning, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;

• Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation; and

• Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations.

Law 47/2007 of December 19, 2007 amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively.

Law 32/2011 of October 4, 2011, amending Law 24/1988 of July 28, 1988, on the securities market, introduced a central counterparty for equity transactions imposing the obligation to carry out all equity transactions traded through a central counterparty. Other relevant amendments of Law 32/2011 of October 4, 2011, include the introduction of a right of withdrawal in the event of insolvency of the entities in charge of keeping the registry and of participating entities and the pro rata rule. Modifications were also made to the regulatory regime of Iberclear, which is in charge of both the register of securities held in book-entry form and their clearing and settlement. Specifically, the new rules facilitate the relationship between Iberclear and the other agents of the trading and post-trading system and regulate the agreements that Iberclear may carry out to provide a better integration with to the TARGET2-Securities project, which aims to establish a eurozone-wide settlement system.

Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (cédulas de internacionalización). These bonds are similar to “territorial covered bonds” (cédulas territoriales), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.

The Law 11/2012 of December 19, 2012 on urgent measures relating to the environment, which included transposition into Spanish legislation of the provisions of the Commission Regulation 1031/2010 of November 12, 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances, amended by the Commission Regulation 1210/2011 of November 23, 2011, also amended Law 24/1988 of July 28, 1988 on the Securities Market to define the financial institutions that can participate in these auctions and grant the CNMV supervisory, inspection and sanctioning powers in relation to the aforementioned misconduct. It established that investment firms and credit institutions authorized to provide investment services may submit bids to greenhouse gas emission allowance auctions on their customers’ behalf, as well as conduct the activities envisaged in Law 24/1988.

Law 10/2014 of June 26, 2014, on the regulation, supervision and solvency of credit institutions makes wide-ranging amendments to Law 24/1988 of July 28, 1988 on the securities market in order to bring investment firms within the scope of the supervision system envisaged for credit institutions under Directive 2013/36/EU of June 26, 2013.

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Law 31/2014 of December 3, 2014, amending the Spanish Limited Companies Law in order to improve corporate governance, also amends Law 24/1988 of July 28, 1988 to confer on the CNMV the necessary powers to enable it to supervise some of the aspects introduced or modified in this Law, which are applicable to listed companies.

The first final provision of Law 11/2015 of June 18, 2015 on the recovery and resolution of credit institutions and of Investment Firms introduces certain amendments to Law 24/1988 of July 28, 1988 on the Securities Market, in respect of book-entry securities is included, providing for both the reversibility of this book-entry status and for the requirements that must be met by the issuance document. Further amendments clarify the structure and functioning of the Spanish securities registration system, which has two levels making up the so-called two-step system.

Legislative Royal Decree 4/2015 of October 23, 2015 integrates the amendments made to Law 24/1988 of July 28, 1988, on the Securities Market, since it was passed. In particular, this includes the changes introduced by: 1) Law 37/1998 of November 16, 1998, reforming Law 24/1988 of July 28, 1988, on the Securities Market; 2) the third additional provision of Law 41/1999 of November 12, 1999, on payment and securities settlement systems; 3) certain provisions of Law 44/2002 of November 22, 2002 on financial system reform measures; of Law 9/2012 of November 14, 2012 on restructuring and resolution of credit institutions, and of Law 11/2015 of June 18, 2015 on the recovery and resolution of credit institutions and of Investment Firms; and 4) Law 47/2007 of December 19, 2007, incorporating various European Directives into Spanish legislation, particularly Directive 2004/39/EU of the European Parliament and of the Council of April 21, 2004 on markets in financial instruments, also known as MIFID. In order to facilitate application of the Legislative Royal Decree a table of correspondences with the precepts of Law 24/1988 has been published on the Spanish Treasury’s website.

Trading by Santander’s Subsidiaries in the Shares

Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and in transactions that are undertaken to supply liquidity to the market, and occasionally for other purposes. Among such other purposes are those transactions that have provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time.

Our trading activities in our shares are limited to those set forth above. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander’s broker subsidiary, Santander Investment Bolsa, S.V., S.A., and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal.

Under the Capital Companies Law, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate nominal value of such purchases (referred to as “treasury stock” or “autocartera”) and of the shares previously held by the company and its subsidiaries does not exceed 10% of the total outstanding capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) such purchases, together with the shares previously held by the company and its subsidiaries, do not result in a net equity less than the company’s stock and the minimum reserves stipulated by law and our Bylaws.

The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Spanish Limited Companies Law establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares.

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The portion of overall trading volume in Santander ordinary shares transacted by Group subsidiaries continues to vary from day to day and from month to month, and is expected to continue to do so in the future. In 2015, 8.99% of the total volume traded in Santander ordinary shares executed on the Primary Spanish The portion of trading volume in shares allocable to purchases and sales as principal by our companies (treasury shares) was approximately 1.9% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.132% to 0.336% in 2015. At December 31, 2015, the Parent bank and our subsidiaries held 38,161,833 of our shares (0.264% of our total capital stock as of that date).

D. Selling shareholders

Not Applicable.

E. Dilution

Not Applicable.

F. Expense of the issue

Not Applicable.

Item 10. Additional Information

A. Share capital

Not Applicable.

B. Memorandum and articles of association

The following summary of the material terms of our Bylaws is not meant to be complete and is qualified in its entirety by reference to our Bylaws. Because this is a summary, it does not contain all the information that may be important to you. You should read our Bylaws carefully before you decide to invest. Copies of our Bylaws are incorporated by reference.

The current Bylaws of Banco Santander, S.A. were approved by our shareholders acting at the annual general shareholders’ meeting held on June 21, 2008 and incorporated with the office of the Mercantile Registry on August 11, 2008.

Subsequently, several articles have been amended and sub-subsections 1 and 2 of Article 5 of the Bank’s Bylaws have been updated several times to show the current share capital and the number of shares outstanding. The most recent of such amendments corresponds to the one required by the share capital increase carried out on November 4, 2015 and filed with the office of the Mercantile Registry on the following day.

At the 2014 annual general meeting, held on March 28, 2014, our shareholders resolved to amend our Bylaws to achieve two separate goals:

i) to adjust the Bylaws to statutory amendments regarding corporate governance introduced by: (a) Order EEC/461/2013 of March 20, which determines the content and structure of the annual corporate governance report, of the annual remuneration report and of other reporting instruments of listed corporations (sociedades anónimas), of savings associations and of other entities that issue securities admitted to trading on official securities markets, and (b) Royal Decree-law 14/2013 of November 29, on urgent measures to adjust Spanish Law to European Union regulations governing supervision and solvency of financial institutions; and

ii) to make certain changes in the Bylaws regarding the organization of the Bank, relating primarily to the provisions of Directive 2013/36/UE of the European Parliament and of the Council, of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (“Directive CRD IV”). Such Directive, together with (UE) Regulation No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms, constitute the new supervision and solvency regulations for credit institutions applicable in the European Union since January 1, 2014.

At the 2015 annual general meeting, held on March 27, 2015, our shareholders resolved to amend our Bylaws to conform the Bylaws to the amendments of the Capital Companies Law introduced by Law 31/2014, of December 3, 2014, amending the Capital Companies Law to improve corporate governance (“Law 31/2014”). That reform has been supplemented with the inclusion of certain technical improvements to the Bylaws, whether to improve their drafting, facilitate understanding, provide the text of the Bylaws with greater flexibility or, simply, adjust them to the Group’s practices.

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In particular, the following articles of the Bylaws have been amended: articles 20 (distribution of powers), 23 (power and duty to call a meeting), 24 (call of a general shareholders’ meeting), 25 (establishment of the general shareholders’ meeting), 31 (right to receive information), 35 (approval of resolutions), 42 (qualitative composition of the board), 43 (chairman of the board), 44 (vice chairman of the board), 45 (secretary of the board), 46 (meetings of the board of directors), 47 (conduct of the meetings), 50 (committees of the board of directors), 52 (executive risk committee), 53 (audit committee), 54 (appointments and remuneration committee), 54 bis (risk supervision, regulation and compliance committee, whose only amendment has been its renumbering as 54 ter), 55 (term of office), 56 (withdrawal of directors), 57 (liability of directors), 58 (compensation of directors), 59 (transparency of the director compensation system, which has also been renumbered as 59 bis), 60 (annual corporate governance report), 61 (corporate website), 62 (submission of the annual accounts), 64 (dividends in kind) and 65 (deposit of the annual accounts). Likewise, the following new articles have been included in the Bylaws: articles 54 bis (the remuneration committee) and 59 (approval of director remuneration policy).

At the 2016 annual general meeting, held on March 18, 2016, our shareholders resolved to amend our Bylaws to conform the Bylaws to: (i) certain amendments of the Spanish Capital Corporations Law, introduced by Law 15/2015 of July 2 on Voluntary Jurisdiction Law and Law 22/2015 of July 20 on the Audit of Financial Statements; and (ii) the recommendations of the new good governance code of listed companies, approved by resolution of the Board of the Spanish CNMV on February 18, 2015 which replaces the unified good governance code of listed companies of 2006. Additionally certain amendments seek to introduce greater flexibility in the Bylaws regarding the composition of the committees of the board.

In particular, the following articles of the Bylaws have been amended: Article 23 (power and duty to call a meeting), related to the general shareholders’ meeting; and, in relation to the board of directors, articles 40 (creation of shareholder value) and 45 (secretary of the board); and in relation to the committees of the board, articles 50 (committees of the board of directors), 53 (audit committee), 54 (appointments committee), 54 bis (remuneration committee) and 54 ter (risk supervision, regulation and compliance committee).

Our current Bylaws are included as Exhibit 1.1 to this annual report. The Bylaws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com, under the heading “Information for shareholders and investors—General information—Bylaws”.

In 2014, several amendments to the Rules and Regulations of the Board of Directors were recorded with the Companies Register of Cantabria. The purpose of such modifications was to adapt the Rules and Regulations to new legislative developments on corporate governance. Such amendments consist of adapting to Order ECC/461/2013, Royal Decree-Law 14/2013 and the CRD IV Directive (Directive 2013/36/ EU) for the following purposes, among others: (i) to adjust director typology definitions; (ii) to regulate the sphere of competence of a new committee in charge of assisting the board with regards risk, regulation and compliance, adjusting where applicable the other responsibilities of the board committees; and (iii) to specify the requirement that the chairman may not simultaneously serve as chief executive officer.

The following is a summary of the main changes approved in 2014:

• Adaptation of the definitions of executive director, proprietary director and independent director to those set forth in Order ECC/461/2013 (which, following the coming into force of Act 31/2014, are contained in section 529 duodecies of the Capital Companies Law).

• Reform of the regulations governing the positions of chair and vice-chair of the board and chief executive officer, and insertion of a new article that further regulates the position of lead director.

• Amendment of the provisions that regulate board committees with the creation of a new risk supervision, regulation and compliance committee.

• Modification of the provisions for board meetings, which may now be called by the lead director.

• Inclusion, pursuant to the Bylaws, of a limit on variable remuneration of executive directors in proportion to fixed remuneration.

• Replacement of the existing provisions for transition of power with new provisions under which independent directors that have held their position for more than 12 years may be considered independent directors until the end of their term.

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• Adaptation of the regime of limitations and incompatibilities applicable to directors of the Bank to conform to current legislation, currently codified in article 26 of Act 10/2014, of June 26, 2014, on the ordering, supervision and solvency of credit institutions.

In March 2015, an amendment to the Rules and Regulations of the Board of Directors was recorded with the Companies Register of Cantabria. The purpose of such modification was to change the name of the technology, productivity and quality committee, which would henceforth be known as the innovation and technology committee.

In July 2015, the Board of Directors modified and introduced various articles of the Rules and Regulations. The purpose of this reform was:

• To complete the changes to the Bylaws approved at the ordinary general meeting on March 27, 2015, adapting the Rules and Regulations of the Board to the new aspects of the Spanish Corporate Enterprises Act pursuant to Law 31/2014.

• To review and adapt the Bank’s corporate governance rules to the recommendations applicable to it in its dual position as a listed company and credit institution, considering: i) the new code of good governance for listed companies issued by the Securities Market Commission (CNMV) in February 2015; ii) the guide to internal governance issued by the European Banking Authority; and iii) the new Basel corporate governance principles for banks, published on July 8, 2015.

• To review the functions of the board’s committees in view of recent regulatory changes.

• To bring the operating rules for the board and its committees into line with the Bank’s current practices.

• To separately regulate the appointments and remuneration committees and to reform the regulation of the international and innovation and technology committees.

• To include certain internal rules regarding the Bank’s criminal risk prevention model, considering the modification of article 31-2 of Spain’s Penal Code.

• To introduce technical improvements or enhancements to the wording or explain certain rules of the Bank’s internal governance.

At its meeting of September 29, the Board of Directors modified section 1 of article 17 of the Rules and Regulations of the Board, in order to increase the maximum number of members of the innovation and technology committee from seven to eight.

Finally, in January 2016, the Board approved the amendment of section 3 of article 17 quinquies of the Rules and Regulations of the Board, in order to extend the functions of the innovation and technology committee.

All the above mentioned modifications to the Rules and Regulations of the Board were registered with the Companies Register of Cantabria.

With regard to the Rules and Regulations of the General Shareholders’ Meeting, at the 2016 annual general meeting, held on March 18, 2016, our shareholders resolved to amend article 6 (information available as of the date of the call to meeting), relating to the publication of information regarding the general shareholders’ meeting, and article 21 (voting on proposed resolutions), relating to the procedure at the general shareholders’ meeting. The reason for the aforementioned proposed amendments is the appropriateness of conforming the organizational rules of the Company to the recommendations of the good governance code of listed companies, approved by resolution of the Board of the Spanish CNMV on February 18, 2015, a purpose which is also shared by part of the amendments of the Bylaws approved by the shareholders at the referred annual general shareholders’ meeting held on March 18, 2016.

All references to the Rules and Regulations of the Board and to the Rules and Regulations for the general shareholders’ meeting in this annual report on Form 20-F are references to the current text.

The Rules and Regulations of the Board and the Rules and Regulations of the General Shareholders’ Meeting are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com, under the heading “Information for shareholders and investors—Corporate governance—Rules and Regulations of the Board of Directors” and “Information for shareholders and investors—Corporate governance—Rules and Regulations for the general shareholders´ meeting”, respectively.

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General

As of December 31, 2015, the Bank’s share capital was €7,217,246,289.50, represented by a single class of 14,434,492,579 book-entry Santander shares with a nominal value of €0.50 each.

All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only.

Register

Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is A-39000013.

Corporate Object and Purpose

Article 2 of our Bylaws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities.

Certain Provisions Regarding Shareholder Rights

As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital.

Our Bylaws do not contain any provisions relating to sinking funds.

Our Bylaws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the Bylaws of the company that complies with the requirements explained below under “—Meetings and Voting Rights”.

Meetings and Voting Rights

We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 3% of the outstanding share capital of Santander. At our annual general shareholders’ meeting held on March 30, 2012, our shareholders approved an amendment to our Bylaws to require that notices of all meetings be published at least one month prior to the date set for the meeting, except in those instances in which a different period is established by law, in the Official Gazette of the Mercantile Register or in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located, on the website of the CNMV and on the Bank’s website (www.santander.com). In addition, under Spanish law, the agenda of the meeting must be sent to the CNMV and the Spanish Stock Exchanges and published on the company’s website. Our last ordinary general meeting of shareholders was held on March 18, 2016 and our last extraordinary general meeting of shareholders was held on September, 15, 2014.

Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our Bylaws do not contain provisions regarding cumulative voting.

Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares (unless specific instructions were given by the shareholder) in connection with decisions relating to:

• his appointment or ratification, removal, dismissal or withdrawal as director;

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• the institution of a derivative action against him; or

• the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account.

In accordance with the Rules and Regulations for the General Shareholders’ Meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.

At both general shareholders’ meetings held in 2004 (the annual shareholders’ meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the annual general shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008, June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012, March 22, 2013, March 28, 2014, March 27, 2015 and March 18, 2016 and in the extraordinary general shareholders’ meeting of October 23, 2006, July 27, 2007, September 22, 2008, January 26, 2009 and September 15, 2014 our shareholders, besides exercising their voting and representation rights prior to the meeting by mail or via the Internet, were able to attend (besides attending and voting in person) via the Internet and were also able to vote in real time on the Internet on the resolutions considered at the meeting.

Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law.

In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formula or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates.

Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against. Except for the foregoing cases in which the law or the Bylaws require a greater majority.

In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing at least 25% of the subscribed voting capital. On the second call there is no quorum requirement.

Notwithstanding the above, a quorum of at least 50% of the subscribed voting capital is required on the first call of ordinary or extraordinary general meeting of shareholders to validly approve any of the following actions:

• the issuance of debentures;

• the increase or reduction of share capital, the exclusion or limitation of pre-emptive rights, or the relocation of the registered office abroad;

• the transformation, merger, split-off, or assignment of assets and liabilities; and

• any other amendment of our Bylaws.

A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call.

For the valid approval of all the above listed actions the favorable vote of more than half of the votes corresponding to the shares represented in person or by proxy at the general shareholders’ meeting shall be

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required, except when on second call shareholders representing less than fifty percent of the subscribed share capital with the right to vote are in attendance, in which case the favorable vote of two-thirds of the share capital represented in person or by proxy at the general shareholders’ meeting shall be required.

For purposes of determining the quorum, those shareholders who vote by mail or via the Internet are counted as present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings. The quorum at the 2016 annual general meeting was 57.63% of the Bank’s share capital.

Changes in Capital

Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.

The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange.

Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase.

At the Bank’s annual general shareholders’ meeting held on March 27, 2015, our shareholders passed a resolution which, among other things, gave the board the authority to increase, within a period of three years from the date of the meeting, the Bank’s capital by up to €3,515,146,471.50. Under this resolution, the board is authorized to totally or partially exclude pre-emptive rights, upon the terms of the Spanish law, provided, however, that this power is limited to capital increases carried out under this resolution up to the amount of €1,406,058,588.50.

At the Bank’s annual general shareholders’ meeting held on March 18, 2016, our shareholders passed a resolution which, among other things, withdrew, to the extent of the unused amount, the authorization granted by our shareholders at the annual meeting held on March 27, 2015, and gave the board the authority to execute the increase, within a period of 1 year from the date of the meeting, the Bank’s capital by up to € 500 million, pursuant to the provisions of section 297.1.a) of the Spanish Companies Act.

Likewise, at the Bank’s annual general shareholders’ meeting held on March 18, 2016, our shareholders passed a resolution to increase the share capital by such amount as may be determined pursuant to the terms of the resolution, by means of the issuance of new ordinary shares having a par value of one-half (0.5) euro each, with no share premium, of the same class and series as those that are currently outstanding, with a charge to reserves.

Finally, at the Bank’s annual general shareholders’ meeting held on March 18, 2016, our shareholders passed a resolution which, among other things, withdrew, to the extent of the unused part, the authorization granted by our shareholders at the annual general shareholders meeting held on March 27, 2015, on March 28, 2014, on March 22, 2013, on March 30, 2012 and on June 17, 2011, and permitted the Bank to issue, within five years from the date of the meeting, on one or more occasions, debentures, bonds, participating preference shares and other fixed-income securities or debt instruments of a similar nature (including warrants) that are non-convertible in an amount up to € 50 billion aggregate principal amount or the equivalent thereof in another currency. This power may be exercised by the board of directors within a maximum period of five years from the date of adoption of the resolution by our shareholders, at the end of which period it shall be cancelled to the extent of the unused amount.

Dividends

On January 8, 2015, we announced that the Bank has reformulated its shareholder remuneration policy with the objective of once again paying the majority of shareholders’ quarterly remuneration in cash. In particular, the Bank announced its intention to offer remuneration of 0.20 euros per share with a charge to the 2015 results, which would be paid in four installments, of which three will be received in cash and the other in shares or cash at the shareholder’s discretion, under the Santander Dividendo Elección scrip dividend program. In subsequent financial years, the Bank aims for its cash pay-out to represent between 30% and 40% of its recurring profit, instead of the current 20%, and for shareholder remuneration to match the growth of its results.

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Notwithstanding this change in remuneration policy, Banco Santander maintained its stated intention to apply the Santander Dividendo Elección scrip dividend scheme to the remuneration corresponding to the final dividend for 2014 and offered all shareholders of the Bank the option to receive their remuneration corresponding to the final dividend for 2014 and to one of the interim dividends for 2015 (on November 2015) through the application of the Santander Dividendo Elección scrip dividend program.

The Bank intends the remuneration on account of the earnings for the 2016 financial year to be 0.21 euros per share, which would be paid, as always, in four payments, of which three would be received in cash and the other in shares or cash at the shareholder’s discretion, under the Santander Dividendo Elección scrip dividend scheme. As such, the resolution passed by our annual general shareholders’ meeting held on March 18, 2016, under item 8, was to offer all shareholders of the Bank the option to receive their remuneration corresponding to one of the interim dividends for 2016 through the application of the Santander Dividendo Elección scrip dividend scheme.

Once the annual accounts are approved, our shareholders at the general shareholders’ meeting resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the Bylaws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses.

The amount, time and form of payment of the dividends, to be distributed among our shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. Our shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law.

A shareholder’s dividend entitlement lapses five years after the dividend payment date.

Dividends may be paid in kind in whole or in part, provided that:

• the property or securities to be distributed are of the same nature;

• they have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is duly guaranteed by the Bank within a maximum period of one year; and

• they are not distributed for a value that is lower than the value at which they are recorded on the Bank’s balance sheet.

Preemptive Rights

In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt. However, preemptive rights of shareholders may be excluded under certain circumstances by specific approval at the shareholders’ meeting (or upon its delegation by the board of directors) and preemptive rights are deemed excluded by operation of law in the relevant capital increase when our shareholders approve:

• capital increases following conversion of convertible bonds into Santander shares;

• capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or

• capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration.

If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders.

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Redemption

Our Bylaws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.

Registration and Transfers

The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.

Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a Sociedad o Agencia de Valores, credit entities and investment services companies, that are members of the Spanish stock exchange.

Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book-entry transfer, including registration by Iberclear.

New shares may not be transferred until the capital increase is registered with the Commercial Registry.

Liquidation Rights

Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.

Change of Control

Our Bylaws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring.

Legal Restrictions on Acquisitions of Shares in Spanish Banks

Certain provisions of Spanish law require notice to the Bank of Spain and non-objection by the European Central Bank prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish financial institution.

Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding (participación significativa) in a Spanish financial institution must give advance notice to the Bank of Spain describing the size of such participation, its terms and conditions, and the anticipated closing date of the acquisition. “Significant holding” is defined as 10% of the outstanding share capital or voting rights of the bank or any lesser participation that gives the acquirer effective influence or control over the target bank.

In addition, prior notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant holding resulting in percentage equity interest or voting rights reaching or surpassing one of the following percentages: 20%, 30% or 50%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity.

Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have voting rights suspended and any votes casted will be void, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer.

The European Central Bank has sixty business days after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, among others, of its

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commercial or professional reputation, its solvency or ability of the credit institution to comply with the applicable prudential regulation on a permanent basis. If sixty business days elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the European Central Bank, it may set forth a different maximum period for closing the proposed transaction.

Any individual or institution that plans to sell its significant holding, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties.

Any acquisition or sale, directly or indirectly, of a participation in a Spanish financial institution which results in the percentage of its share capital or voting rights reaching or exceeding 5%, must be notified to the Bank of Spain by the relevant financial institution, indicating the amount of the participation reached.

In addition to this, the credit institutions must notify the Bank of Spain, during the following month to each natural quarter (i.e. April, July, October and January), of a list of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity.

If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may: (1) suspend the voting rights of such person’s shares up to 3 years; (2) seize control of the bank or replace its board of directors; or (3) exceptionally revoke the bank’s license. Where appropriate, a fine may also be levied on the relevant person.

Tender Offers

Law 6/2007, of April 12, which amends the Securities Market Law, modified the rules for takeover bids. This Law, came into effect on August 13, 2007, and partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.

These rules replaced the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities.

The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company.

Law 6/2007 also regulates, among other things: (i) obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securities representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid.

Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids.

Reporting Requirements

Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or falls below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which

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Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 trading days from the date on which the person becomes aware or should have become aware of the circumstance obliging him or her to notify, notify and report it to such company, and to the Spanish CNMV. From November 27, 2015, notification must be given of financial instruments with a financial effect similar to that of holding shares, regardless of whether settlement is made through shares or in cash. For these purposes it should be considered as financial instruments negotiable securities, options, futures, swaps, forward rate agreements, contracts for difference and any other contract or agreement with similar financial effects that can be settled by delivering the underlying securities or in cash, and any others established by the Ministry of Economics and Competitiveness and, with its express authorization, the Spanish Securities and Exchange Market Commission. To calculate whether the thresholds for notification of major holdings have been met, the voting rights corresponding to holding shares (physical position) and financial instruments (derivative position) will be added together. The number of voting rights attributable to a financial instrument will be calculated by referring to the theoretical total amount of shares underlying the financial instrument. When the financial instrument is only settled in cash, the number of voting rights will be calculated by multiplying the number of underlying shares by the delta of the instrument (sensitivity of the price of the instrument to the price of the underlying value). To calculate the voting rights, only long positions, which cannot be netted with short positions relating to the same underlying issuer, will be considered. All these calculations will be made under the provisions of Commission Delegated Regulation (EU) 2015/761.

This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or falls below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (ii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law).

In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares” herein.

Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation.

In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.

Board of Directors

Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed by our shareholders acting at the general meeting of shareholders.

Members of the board of directors are elected for an initial term of three years but can be re-elected. One third of the members of the board are re-elected each year.

A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

The Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies (co-option), the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors.

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Article 42.1 of our Bylaws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.

The Rules and Regulations of the Board (Article 6.2.c.) include the definition of independent directors, which coincides with the one currently established in section 529 duodecies of the Capital Companies Law.

Eight out of our 15 board members are external independent directors.

The independence standards set forth in the Rules and Regulations of the Board may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See “Item 16G. Corporate Governance—Independence of the directors on the board of directors” herein.

Certain Powers of the Board of Directors

The actions of the members of the board are limited by Spanish law and certain general provisions contained in our Bylaws. For instance, Article 57 of our Bylaws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the Bylaws or by acts or omissions contrary to the duties inherent in the exercise of their office, provided that there has been willful misconduct or negligence.

A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our Bylaws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction with the Bank, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the audit committee; and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates.

According to our Bylaws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases.

Our Bylaws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their appointment. The compensation has two components: an annual retainer and attendance fees. Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our Bylaws and applicable Spanish legislation).

At the Bank’s annual general shareholders’ meeting held on March 27, 2015, our shareholders passed a resolution to amend articles 58 and 59 (renumbered as 59 bis) of our Bylaws, and to introduce a new article 59 setting out the rules for the remuneration of directors. Such amendments aimed at conforming the terminology of the Bylaws to the text that Law 31/2014 introduced to the sections of the Spanish Capital Companies Law regarding the remuneration of directors. The main amendments to those rules are summarized below.

Amendments to the second paragraph of sub-section 2 of Article 58 purported to incorporate into the Bylaws the standard, established in the Spanish Capital Companies Law, that the board must distribute among its members the total remuneration corresponding to them as board members.

Additionally, amendments to sub-section 4 of article 58 of the Bylaws set forth the precautionary procedures to which board approval of agreements with executive directors must be subject in accordance with Spanish law: the requirement of a two-thirds majority, the abstention of any affected director and the inclusion of the agreement in the minutes of the meeting as an exhibit. They also reproduce the legal provisions regarding the contents of such agreements and the principle that a director may not receive any remuneration for the performance of executive duties which amounts or items are not recorded therein.

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The article 59 was introduced in order for the Bylaws to reflect the new provision of the Spanish Capital Companies Law, which establishes the requirement that any document entitled “Director remuneration policy” with the following content has to be approved by the shareholders at the general shareholders’ meeting as a separate item on the agenda at least each three years: (i) the remuneration of directors in their capacity as such (in Bylaws mandate) including the total amount accrued by the board in its capacity as such and (ii) the basis for the remuneration of directors for the performance of executive duties that, at least, shall include the amount of the fixed remuneration and the variation during the period at which the policy is referred, the principles in order to fix the variable components and the terms and conditions of the remuneration, its duration and, if applicable, indemnity for early termination or end of the contractual relationship, or exclusivity and non-competition.

The amendment of the content of the renumbered article 59 bis) was intended to conform the regulation of the annual director remuneration report in the Bylaws to the amendments introduced by Law 31/2014 to the legal rules for this report subject to the consultative voting of the shareholders meeting. The most noteworthy legal change is that the report no longer has to include information on the planned policy for future years (given that this will be the object of a new remuneration policy), and is only required to offer complete, clear and understandable information regarding the policy for the current year and an overall summary of the policy applied in the previous financial year.

The new sub-section 4 of article 59 bis regulates the special circumstance in which the vote at the general shareholders’ meeting rejects the annual director remuneration report during the effective term of a specific remuneration policy. In this case, the remuneration policy applicable to the following financial year would have to be submitted to the shareholders at the general shareholders’ meeting prior to its application, though the maximum term for the policy may not have expired (except for those situations in which the policy has already been approved at the same general shareholders’ meeting that rejected the annual remuneration report).

Amendments to the second paragraph of sub-section 2 of Article 58 purported to incorporate into the Bylaws the standard, established in the Spanish Capital Companies Law, that the board must distribute among its members the total remuneration corresponding to them as board members.

At the Bank’s annual general shareholders’ meeting held on March 18, 2016, our shareholders passed a resolution to amend, among others, article 40 of our Bylaws. Such amendment aimed to conform the text thereof to recommendation 12 of the New Code, which replaces recommendation 7 of the Unified Code, stating that the board of directors will be guided by the corporate interest, understood as the achievement of a business that is profitable and sustainable over the long term and that promotes the continuity thereof and the maximization of the value of the company, in line with the provisions of article 5 of the Rules and Regulations of the Board.

The amendments of Bylaws approved at the Bank’s annual general shareholders’ meeting held on March 18, 2016 have not yet been filed with the Mercantile Register (since they are subject to the prior authorization of the Bank of Spain), which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2016.

Board of Directors Qualification

There are no mandatory retirement provisions due to age for board members in our Bylaws or in the Regulations of our Board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.

In addition, there are no share ownership requirements in our Bylaws or in the Rules and Regulations of the Board of Directors.

Pursuant to Spanish law, directors appointed by the board but whose appointment remains subject to ratification by the shareholders may not necessarily be a shareholder of the Bank and, pursuant to the Rules and Regulations of the Board, proprietary directors must submit their resignation proportionately when the shareholder that they represent parts with its shareholdings or reduces them in a significant manner. Our Bylaws and Rules and Regulations of the Board do not otherwise require ownership of Santander shares for a director’s qualification.

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C. Material contracts

During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole.

D. Exchange controls

Restrictions on Foreign Investments

Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and money laundering prevention provisions, by recognizing the principle of freedom of the movement of capital between Spanish residents and non-residents. The law establishes procedures for the declaration of capital movements for purposes of administrative or statistical information and authorizes the Spanish Government to take measures which are justified on grounds of public policy or public security. It also provides the mechanism to take exceptional measures with regard to third countries if such measures have been approved by the European Union or by an international organization to which Spain is a party. The Spanish stock exchanges and securities markets are open to foreign investors. Royal Decree 664/1999, on Foreign Investments (April 23, 1999), established a new framework for the regulation of foreign investments in Spain which, on a general basis, will no longer require any prior consents or authorizations from authorities in Spain (without prejudice to specific regulations for several specific sectors, such as television, radio, mining, telecommunications, etc.). Royal Decree 664/1999 requires notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Finance, strictly for administrative statistical and economical purposes. Only investments from “tax haven” countries (as they are defined in Royal Decree 1080/1991), shall require notice before and after performance of the investment, except that no prior notice shall be required for: (1) investments in securities or participations in collective investment schemes that are registered with the CNMV, and (2) investments that do not increase the foreign ownership of the capital stock of a Spanish company to over 50%. In specific instances, the Council of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Competitiveness, or, in some cases, a proposal by the head of the government department with authority for such matters and a report of the Foreign Investment Body. These specific instances include a determination that the investments, due to their nature, form or condition, affect activities, or may potentially affect activities relating to the exercise of public powers, national security or public health. Royal Decree 664/1999 is currently suspended for investments relating to national defense. Whenever Royal Decree 664/1999 is suspended, the affected investor must obtain prior administrative authorization in order to carry out the investment.

E. Taxation

The following is a discussion of the material Spanish and U.S. federal income tax consequences to you of the ownership and disposition of ADSs or shares.

The description of Spanish tax consequences below is intended as a general guide and applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and you are a U.S. resident entitled to the benefits of the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”).

On January 14, 2013, the United States of America and the Kingdom of Spain signed a protocol amending the Treaty, which needs to be ratified by both countries, and will become effective three months following the date on which both countries have provided notice that its internal procedures for effectiveness have been fulfilled. When this protocol becomes effective, taxation described under the Treaty in this section may be altered.

This summary is for general information only and does not constitute tax advice. You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of the Treaty, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.

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Spanish tax considerations

The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect..

Taxation of dividends

Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at a 19% rate from January 1, 2016 (this rate was 20% from January 1, 2015 to July 11, 2015, and 19.5% from July 12, 2015 to December 31, 2015).

We will withhold tax on the gross amount of dividends at the tax rates referred to above, following the procedures set forth by the Order of April 13, 2000. However, under the Treaty and subject to the fulfillment of certain requirements, you may be entitled to a reduced rate of 15%.

To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase Bank, N.A., with a certificate from the U.S. Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year.

According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail timely to provide our depositary with the required documentation, you may obtain a refund of the amount withheld exceeding 15% that would result from the Spanish tax authorities in accordance with the procedures below.

A scrip dividend will be treated as follows:

• If the holder of ordinary shares or ADSs elects to receive newly issued ordinary shares or ADSs it will be considered a delivery of fully paid-up shares free of charge and, hence, will not be considered income for purposes of the Spanish Non-Resident Income Tax. The acquisition value, both of the new ordinary shares or ADSs received in the scrip dividend and of the ordinary shares or ADSs from which they arise, will be the result of dividing the total original cost of the shareholder’s portfolio by the number of shares, both old and new. The acquisition date of the new shares will be that of the shares from which they arise.

• If the holder of ordinary shares or ADSs elects to sell the rights on the market, the amount obtained from the sale of rights will be deducted from the acquisition value of the shares from which the rights arose. If the amount obtained from such sale is higher than the acquisition value of the shares from which the rights arose, the excess amount will be treated as a capital gain for the holder in the fiscal year in which the transfer takes place (please refer to “—Taxation of capital gains” below). Note that, pursuant to Law 26/2014, the tax treatment of this option will be modified from January 1, 2017 onwards. According to this amendment, the full amount obtained from the sale of rights will be treated as a taxable capital gain for the holder at the time the transfer takes place, provided the transfer occurs on or after January 1, 2017 (please refer to “—Taxation of capital gains” below).

• If the holder of ordinary shares or ADSs elects to receive the proceeds from the sale of rights back to us at a fixed price, the tax regime applicable to the amounts received will be that applicable to cash dividends described above.

Spanish refund procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, and the Order EHA/3316 dated December 17, 2010, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. resident entitled to the benefits of the Treaty, you are required to file all of the following:

• the applicable Spanish Tax Form (currently, Form 210),

• the certificate of tax residence referred to in the preceding section, and

• evidence that Spanish Non-Resident Income Tax was withheld with respect to you.

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For the purposes of the Spanish refund procedure, the holder must file Form 210 (together with the corresponding documentation) within the period from February 1 of the year following the year in which the Non-Resident Income Tax was withheld and ending four years after the end of the filing period in which we reported and paid such withholding taxes. The Spanish Revenue Office must make the refund within six months after the refund claim is filed. If such period lapses without receipt of the refund, the holder is entitled to receive interest for late payment on the amount of the refund claimed. For further details, prospective holders should consult their tax advisors.

You are urged to consult your own tax adviser regarding refund procedures and any U.S. tax implications of receipt of a refund.

Taxation of capital gains

Under Spanish law, any capital gains derived from the transfer of securities issued by Spanish tax residents are deemed to be Spanish-source income and, therefore, are taxable in Spain. If you are a U.S. resident, income from the sale of ADSs or shares will be treated as capital gains for Spanish tax purposes. Since January 1, 2015, Spanish Non-Resident Income Tax is levied at a 19% rate from January 1, 2016 (this rate was 20% from January 1, 2015 to July 11, 2015, and 19,5% from July 12, 2015 to December 31, 2015) on capital gains realized by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation. Capital gains and losses will be calculated separately for each transaction and losses may not be offset against capital gains.

Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, if you are a U.S. resident, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish 210 Form, between January 1 and January 20 of the calendar year following the year in which the transfer of ADSs or shares took place.

Spanish wealth tax

Individuals not resident in Spain for tax purposes who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property and rights located in Spain or that can be exercised within the Spanish territory on the last day of any year. The Spanish tax authorities might take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view were to prevail, non-residents of Spain who held shares or ADSs on the last day of any year would be subject to the Spanish wealth tax for such year on the average market value of such shares or ADSs during the last quarter of such year (this average price of listed shares is published in the Official State Gazette every year). Law 4/2008 amended the Spanish wealth tax law, introducing a 100% tax rebate and eliminating the obligation to file any form for tax periods starting as of January 1, 2008. However, this 100% tax rebate was temporarily abolished by different legislation with effect as of the 2011 fiscal year, and was expected to be restored from January 1, 2016, but Law 48/2015 of October 29 has delayed it again until January 1, 2017. Notwithstanding the above, the first €700,000 of net wealth owned by an individual will be exempt from taxation.

As a result of the above legislation, non-residents of Spain who hold or held shares, ADSs, or other assets or rights located in Spain according to Spanish wealth tax law, on the last day of 2015 or 2016, the combined value of which exceeds €700,000 might be subject to the Spanish wealth tax on that excess amount at marginal rates varying between 0.2% and 2.5%, and would be obliged to file the corresponding wealth tax return.

Spanish inheritance and gift taxes

Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities might determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 0% and 81.6% for individuals.

Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a 19% tax rate from January 1, 2016 (this rate was 20% from January 1, 2015 to July 11, 2015, and 19,5% from

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July 12, 2015 to December 31, 2015) on the fair market value of the shares as a capital gain. If the donee is a United States corporation, the exclusions available under the Treaty described in the section “—Taxation of capital gains” above will be applicable.

Transfer tax and VAT

The subscription, acquisition and transfer of ADSs or shares will be exempt from Spanish transfer tax and value-added tax. Additionally, no Spanish Stamp Duty or registration tax will be levied as a result of such subscription, acquisition and transfer.

Compliance

In certain circumstances, the Spanish tax authorities can impose penalties for any failure to comply with any of the Spanish tax requirements referred to above. Such penalties may in certain cases be based on the amount of tax payable.

U.S. Federal Income Tax Considerations

The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of ADSs or shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to U.S. Holders (as defined below) that hold ADSs or shares as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of the U.S. Holder’s particular circumstances, including the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax, state, local or non-United States tax laws, and tax consequences applicable to U.S. Holders subject to special rules, such as:

• financial institutions;

• insurance companies;

• dealers and traders in securities that use a mark-to-market method of tax accounting;

• persons holding ADSs or shares as part of a “straddle”, conversion transaction or integrated transaction;

• persons whose “functional currency” is not the U.S. dollar;

• persons liable for the alternative minimum tax;

• tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

• partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

• persons that own or are deemed to own 10% or more of our voting shares;

• persons that acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

• persons holding ADSs or shares in connection with a trade or business outside the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the shares or ADSs.

This summary is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury Regulations, and the Treaty, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. In addition, this summary assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. U.S. Holders are urged to consult their own tax advisers as to the U.S., Spanish and other tax consequences of the ownership and disposition of ADSs or shares in their particular circumstances.

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As used herein, a “U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of ADSs or shares who is eligible for the benefits of the Treaty and is:

• a citizen or individual resident of the United States;

• a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

• an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

In general, for U.S. federal income tax purposes, U.S. Holders of ADSs will be treated as the owners of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary, or intermediaries in the chain of ownership between U.S. Holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by these parties or intermediaries.

Taxation of Distributions

To the extent paid out of our current or accumulated earnings and profits (as determined in accordance with U.S. federal income tax principles), distributions, including the amount of any Spanish withholding tax, made with respect to ADSs or shares (other than certain pro rata distributions of our capital stock or rights to subscribe for shares of our capital stock) will be includible in the income of a U.S. Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. These dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividends, and will not be eligible for the “dividends-received deduction” generally allowed to corporations receiving dividends from U.S. corporations under the Code. The amount of the distribution will equal the U.S. dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for U.S. Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euros received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect thereof. A U.S. Holder may have foreign currency gain or loss if the euros are converted into U.S. dollars after the date of receipt. Any gain or loss resulting from the conversion of euros into U.S. dollars will be treated as ordinary income or loss, as the case may be, and will be U.S.-source.

A scrip dividend will be treated as a distribution of cash, even if a U.S. Holder elects to receive the equivalent amount in shares. In that event, the U.S. Holder will be treated as having received the U.S. dollar fair market value of the shares on the date of receipt, and that amount will be the U.S. Holder’s tax basis in those shares. The holding period for the shares will begin on the following day.

Subject to generally applicable limitations that may vary depending upon a U.S. Holder’s individual circumstances, the discussion above regarding concerns expressed by the U.S. Treasury, and the discussion of the passive foreign investment company rules below, under current law, dividends paid to certain non-corporate U.S. Holders may be taxable at rates applicable to long-term capital gains. A U.S. Holder must satisfy minimum holding period requirements in order to be eligible to be taxed at these favorable rates. Non-corporate U.S. Holders are urged to consult their own tax advisers regarding the availability of the reduced rate on dividends in their particular circumstances.

Subject to certain generally applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for Spanish income taxes withheld at a rate not exceeding the rate provided by the Treaty. Spanish income taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “—Spanish tax considerations—Spanish refund procedure” for a discussion of how to obtain amounts withheld in excess of the applicable Treaty rate. The limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Instead of claiming a credit, a U.S. Holder may, at its

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election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.

A U.S. Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.

Sale or Exchange of ADSs or Shares

A U.S. Holder will realize gain or loss on the sale or exchange of ADSs or shares in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or shares and the amount realized on the sale or exchange, in each case as determined in U.S. dollars. Subject to the discussion of the passive foreign investment company rules below, the gain or loss will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the ADSs or shares for more than one year. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for the 2015 taxable year. However, because our PFIC status depends upon the composition of our income and assets and the fair market value of our assets (including, among others, less than 25% owned equity investments) from time to time, and upon certain proposed Treasury Regulations that are not yet in effect but are proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we were not or will not be a PFIC for any taxable year.

If we were a PFIC for any taxable year during which a U.S. Holder owns ADSs or shares, any gain recognized by a U.S. Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the U.S. Holder’s holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amounts allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to each of those taxable years. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares.

In addition, if we were a PFIC in a taxable year in which we paid a dividend or the prior taxable year, the reduced rate on dividends discussed above with respect to non-corporate U.S. Holders would not apply.

If we were a PFIC for any taxable year during which a U.S. Holder owned the ADSs or shares, the U.S. Holder would generally be required to file IRS Form 8621 with its annual U.S. federal income tax return, subject to certain exceptions.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals (and under recently finalized Treasury regulations, specified entities that are formed or availed of for purposes of holding certain foreign financial assets) may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. entity, subject to certain exceptions (including an exception for publicly traded stock and interests held in custodial accounts maintained by a U.S. financial institution). U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this requirement on the ownership and disposition of ADSs or shares.

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F. Dividends and paying agents

Not Applicable.

G. Statement by experts

Not Applicable.

H. Documents on display

We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1580, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC’s regional offices at 200 Vesey Street, Suite 400, New York, New York 10281-1022 and 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed on the internet at http://www.sec.gov. The information contained on this website does not form part of this annual report on Form 20-F.

I. Subsidiary information

Not Applicable.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

Introduction

We have divided this section into the following ten parts:

• Cornerstones of the risk function

• Risk management and control model - Advanced Risk Management (ARM)

• Credit risk;

• Trading market and structural risk

• Liquidity and funding risk

• Operational risk

• Compliance and conduct risk

• Model risk

• Strategic risk

• Capital risk

Part 1. Cornerstones of the risk function

The Group has calculated that the risk function should be based on the following cornerstones, which are in line with the Group’s strategy and business model and take into account the recommendations of the supervisory and regulatory bodies and the best market practices:

• The business strategy is defined by the risk appetite. The Group’s board calculates the amount and type of risk that it considers reasonable to assume in implementing its business strategy and its deployment in objective verifiable limits that are consistent with the risk appetite for each significant activity.

• All risks must be managed by the units that generate them using advanced models and tools and integrated in the various businesses. The Group is fostering advanced risk management, using innovative models and metrics together with a control, reporting and escalation framework to ensure that risks are identified and managed from different perspectives.

• A forward-looking vision of all types of risks should be included in the risk identification, assessment and management processes.

• The independence of the risk function encompasses all risks and appropriately separates the risk generating units from those responsible for risk control.

• The best processes and infrastructure must be used for risk management.

• A risk culture integrated throughout the organization, consisting of a series of attitudes, values, skills and guidelines for action vis-à-vis all risks.

Part 2. Risk management and control model - Advanced Risk Management (ARM)

The risk management and control model ensures that the risk profile remains within the levels set for the risk appetite and other limits. Similarly, it includes the adoption of the corrective and mitigating measures required to keep risk levels in line with the defined objectives.

In 2014, the Group launched the ARM program, the main aim of which is to contribute to progress towards advanced risk management by laying the foundations to make available the best integrated risk management model in the industry.

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The roll-out of the ARM in 2015 at the various Group units enabled progress to be made in strategic projects that were already under way, such as the Risk Data Aggregation/Risk Reporting Framework (RDA/RRF), the risk appetite to be developed, the control environment through the governance of the risk function to be strengthened and new initiatives such as the risk management model or the Advanced Operational Risk Management (AORM) model, inter alia, to be developed.

The instruments that help ensure that all the risks arising from the Group’s business activity are properly managed and controlled are described below.

1. Risk map

The risk map covers the main risk categories in which the Group has its most significant current and/or potential exposures, thus facilitating the identification thereof.

The risk map includes the following:

• Financial risks

• Credit risk: risk that might arise from the failure to meet agreed-upon contractual obligations in financial transactions.

• Market risk: that which is incurred as a result of the possibility of changes in market factors affecting the value of positions in the trading portfolios.

• Liquidity risk: risk of non-compliance with payment obligations on time or of complying with them at an excessive cost.

• Structural and capital risks: risk caused by the management of the various balance sheet items, including those relating to the adequacy of capital and those arising from the insurance and pensions businesses.

• Non-financial risks

• Operational risk: the risk of incurring losses due to the inadequacy or failure of processes, staff and internal systems or due to external events.

• Conduct risk: the risk caused by inappropriate practices in the Group’s dealings with its customers, and the treatment and products offered to each particular customer and the adequacy thereof.

• Compliance and legal risk: risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

• Transversal risks

• Model risk: includes losses arising from decisions based mainly on the results of models, due to errors in the design, application or use of the aforementioned models.

• Reputational risk: risk of damage in the perception of the Group by public opinion, its customers, investors or any other interested party.

• Strategic risk: the risk that results diverge significantly from the Group’s strategy or business plan due to changes in general business conditions and risks associated with strategic decisions. This includes the risk of poor implementation of decisions or lack of capacity to respond to changes in the business environment.

2. Risk governance

In line with the objective of strengthening the Group’s corporate governance, the governance of the risk function was updated and reinforced in 2015. In this connection, the responsibilities of the various committees were defined more clearly, and the decision-making and risk management units, with the participation of the business functions, were separated from those engaged in risk control.

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Governance of the risk function should seek to ensure that risk decisions are taken appropriately and efficiently and that risks are effectively controlled, and also guarantee that risks are managed in accordance with the risk appetite level defined by senior management of the Group and the units.

For this purpose, the following principles were established:

• Separation of decision-making from risk control.

• Strengthening of the responsibility of the risk generating functions in decision-making.

• Ensuring that all risk decisions have a formal approval process.

• Ensuring an aggregate view of all risks.

• Strengthening of the risk control committees.

• Maintenance of a simple committee structure.

2.1. Lines of defense

The Group follows a risk management and control model based on three lines of defense.

The business functions or activities that take or generate risk exposure comprise the first line of defense against it. The assumption or generation of risks in the first line of defense must comply with the defined risk appetite and limits. In order to perform its function, the first line of defense must have available the means to identify, measure, handle and report the risks assumed.

The second line of defense comprises the risk control and oversight function and the compliance function. This second line seeks to ensure effective control of risks and guarantees that risks are managed in accordance with the defined risk appetite level.

Internal audit, as the third line of defense and in its role as the last control layer, performs regular assessments to ensure that the policies, methods and procedures are appropriate and checks their effective implementation.

The risk control function, the compliance function and the internal audit function are sufficiently separate and independent of each other and of the other functions that they control or supervise for the performance of their duties, and they have access to the board of directors and/or its committees, through their presiding officers.

2.2. Risk committee structure

Responsibility for the control and management of risk and, in particular, for the setting of the Group’s risk appetite, rests ultimately with the board of directors, which has the powers delegated to the various committees. The board is supported by the risk, regulation and compliance oversight committee and the independent risk control and supervision committee. In addition, the Group’s executive committee pays particular attention to the management of the Group’s risks.

The following bodies constitute the top level risk governance bodies.

Independent control bodies

Risk, regulation and compliance oversight committee:

This committee’s mission is to assist the board in the oversight and control of risk, the definition of the Group’s risk policies, relationships with supervisory bodies and matters of regulation and compliance, sustainability and corporate governance.

It is composed of external or non-executive directors, with a majority of independent directors, and is chaired by an independent director.

Risk control committee (CCR):

This collective body is responsible for the effective control of risks, ensuring that risks are managed in accordance with the risk appetite level approved by the board, while taking into account at all times an overall view of all the risks included in the general risk framework. This means the identification and monitoring of current and emerging risks and their impact on the Group’s risk profile.

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This committee is chaired by the Group Chief Risk Officer (GCRO) and is composed of executives of the entity. At least, the risk function, which holds the chairmanship, and the compliance, financial, controller’s unit and risk control functions, inter alia, are represented The CROs of local entities participate periodically in order to report, inter alia, on the various entities’ risk profiles.

The risk control committee reports to the risk, regulation and compliance oversight committee and assists it in its function of supporting the board.

Decision-making bodies

Executive risk committee (CER):

This collective body is responsible for risk management pursuant to the powers delegated by the board of directors and, in its sphere of action and decision-making, oversees all risks.

It participates in decision-making on the assumption of risks at the highest level, guarantees that these are within the limits set in the Group’s risk appetite and reports on its activities to the board or its committees when so required.

This committee is chaired by an executive deputy chairman of the board, comprises the CEO, executive directors and other executives of the entity, and the risk, financial, and compliance functions, inter alia, are represented. The Group CRO has the right of veto over this committee’s decisions.

2.3. Organizational risk function structure

The GCRO is the head of the Group’s risk function and reports to an executive deputy chairman of the Bank who is a member of the board of directors and chairman of the executive risk committee.

The GCRO, whose duties include advising and challenging the executive line, also reports separately to the risk, regulation and compliance oversight committee and to the board.

Advanced risk management has a holistic forward-looking vision of risks, based on the intensive use of models, aimed at constructing a sound control environment while complying with the requirements of the regulator and supervisor.

In this connection, the risk management and control model has the following key features:

• Coordination of the relationship between the countries and the corporate headquarters, assessing the effective implementation of the risk management and control framework at each unit and ensuring the alignment with the achievement of strategic risk objectives.

• Enterprise Wide Risk Management (EWRM) involves providing a consolidated view of all risks to senior management and the Group’s governing bodies together with the development of the risk appetite and identifying and assessing all risks (Risk identification & assessment). It also handles the relationship with supervisors and regulators in relation to risks.

• Control of financial, non-financial and transversal risks, checking, for each type of risk, that management and exposure are in keeping with the guidelines established by senior management.

• Development, in the sphere of risk, of reporting regulations, methodologies, scenario analysis, stress tests and infrastructure, together with robust risk governance.

2.4. The Group’s relationship with subsidiaries regarding risk management

Alignment of units with the corporate center

The risk management and control model, at all Group units, has a common set of basic principles, achieved by means of corporate frameworks. These emanate from the Group itself and the subsidiaries adhere to them through their respective governing bodies, thus configuring the relationships between the subsidiaries and the Group, including its participation in the making of important decisions by validating them.

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Beyond these principles and fundamentals, each unit adapts its risk management to its local reality, pursuant to the corporate frameworks and reference documents furnished by corporate headquarters, which makes it possible to identify a risk management model at the Group.

Committee structure

The subsidiaries’ governing bodies are structured taking into account local regulatory and legal requirements and each subsidiary’s size and complexity and are consistent with those of the Parent, as established in the internal governance framework, thus facilitating communication, reporting and effective control.

The subsidiaries’ managing bodies, in accordance with the internal governance framework in place at the Group, have their own model of (quantitative and qualitative) risk management powers and must adhere to the principles of conduct contained in the benchmark models and frameworks developed at corporate level. Given its ability to take an aggregate, comprehensive view of all risks, corporate headquarters reserves for itself the powers to validate and question the operations and management policies at the various units, to the extent that they affect the Group’s risk profile.

3. Management processes and tools

3.1. Risk appetite and limits structure

Risk appetite is defined at the Group as the amount and type of risk that it considers reasonable to assume in implementing its business strategy, in order to ensure that it can continue to operate normally if unexpected events occur. To this end, severe scenarios are taken into account, which might have an adverse impact on its levels of capital or liquidity, its profits and/or its share price.

The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring its actual risk profile and for ensuring consistency between the two. The risk appetite is determined both for the Group as a whole and for each of the main business units using a corporate methodology adapted to the circumstances of each unit/market. At local level, the boards of directors of the related subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group.

Banking business model and fundamentals of the risk appetite

The definition and establishment of the Group’s risk appetite is consistent with its risk culture and its banking business model from the risk perspective. The main features defining the business model, which form the basis of the risk appetite at the Group, are as follows:

• A predictable general medium-low risk profile based on a diversified business model focusing on retail banking with a diversified international presence and significant market shares, and a wholesale banking model which prioritizes the relationship with the customer base in the Group’s principal markets.

• A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify sources and maturities.

• A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms, minimizing the use of non-operating or purely instrumental companies, and ensuring that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

• An independent risk function with highly active involvement of senior management to guarantee a strong risk culture focused on protecting and ensuring an adequate return on capital.

• To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.

• A business model that focuses on the products with respect to which the Group considers that it has sufficient knowledge and management capacity (systems, processes and resources).

• The conduct of the Group’s business activity on the basis of a behavior model that safeguards the interests of its customers and shareholders.

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• The availability of sufficient and adequate human resources, systems and tools to enable the Group to maintain a risk profile compatible with the established risk appetite, at both global and local level.

• The application of a remuneration policy containing the incentives required to ensure that the individual interests of employees and executives are in line with the corporate risk appetite framework and that the incentives are consistent with the Group’s long-term earnings performance.

Corporate risk appetite principles

The Group’s risk appetite is governed by the following principles at all the entities:

• Responsibility of the board and of senior executives. The board of directors is the body ultimately responsible for establishing the risk appetite and its supporting regulations, as well as for overseeing compliance therewith.

• Integral view of risk, involving the checking and questioning of the risk profile. The risk appetite should take into consideration all the significant risks to which the Group may be exposed, providing an aggregate view of the Group’s risk profile through the use of quantitative metrics and qualitative indicators.

• Future risk estimate. The risk appetite should take into consideration the desirable risk profile at the present time and in the medium term considering both the most likely circumstances and stress scenarios.

• Links with strategic and business plans and integration in management. The risk appetite is a benchmark in strategic and business planning.

• Risk appetites that are consistent across the various units and risk language that is common to the entire organization.

• Periodic review, ongoing checking and adaptation to best practices and regulatory requirements.

Limits, monitoring and control structure

The risk appetite exercise is performed annually and includes a series of metrics and limits on the aforementioned metrics that express in quantitative and qualitative terms the maximum risk exposure that each Group entity and the Group as a whole are willing to assume.

Compliance with risk appetite limits is subject to ongoing monitoring. The specialized control functions report at least quarterly to the board and its specialized risk committee on the compliance of the risk profile with the authorized risk appetite.

The linking of the risk appetite limits with the limits used in the management of the business units and of the portfolios is a key element for ensuring that the use of the risk appetite as a risk management tool is effective.

Pillars of the risk appetite

The risk appetite is expressed through limits on quantitative metrics and qualitative indicators that measure the Group’s exposure or risk profile by type of risk, portfolio, segment and business line, in both current and stressed conditions. The aforementioned risk appetite metrics and limits are structured around five main pillars that define the position that the Group’s senior management wishes to adopt or maintain in developing its business model.

• The volatility in the income statement that the Group is willing to assume.

• The solvency position the Group wishes to maintain.

• The minimum liquidity position the Group wishes to have.

• The maximum concentration levels that the Group considers it reasonable to assume.

• Qualitative aspects and complementary metrics.

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3.2. Risk identification and assessment (RIA)

As part of its routine management, the Group identifies and assesses the risks inherent to its business activity to which it is exposed in the various geographical areas in which it operates.

In order to make the measurement of the Group’s risk profile more robust and systematic, at the end of 2014 a corporate Risk identification and assessment exercise was started that continued throughout 2015.

Risk identification and assessment is one of the initiatives that form part of the ARM (Advanced Risk Management) program the purpose of which is the advanced management of risks to enable Santander to continue to be a sound sustainable bank over the long term.

Also, it complies with regulatory expectations on the need to deepen the understanding of the Group’s risk profile and the importance of identifying, measuring and assessing the entity’s main risks, the associated control environment and the possible factors that might pose a threat to the achievement of the Group’s strategic plan.

Per the methodology used in the RIA exercise, the Group’s risk profile is determined by a combination of three aspects:

• Risk performance which enables the profile by type of risk and business activity to be ascertained.

• Control environment to objectively establish a self-assessment of the effectiveness of the management and control of the risk in accordance with pre-established targets and a defined control model.

• Top Risks identify the material risks threatening the strategic and business objectives and establish action plans and monitor them.

One of the most important aspects of the RIA exercise is the development of a methodology to identify the current material risks on which senior management will focus its attention. These risks are considered to be those which, either on their own or collectively, could have a significant impact on the Group’s results, financial position or ability to maintain appropriate capital levels.

It also enables the identification of so-called emerging risks, i.e. those risks that could potentially have an adverse impact on the Group’s future performance, even though their outcome and time horizon are uncertain and difficult to predict.

3.3. Scenario analysis

The Group conducts advanced risk management through the analysis of the impact that various scenarios in the environment in which the Group operates might cause. These scenarios are expressed in terms of both macroeconomic variables and other variables that affect management.

Scenario analysis is a very useful tool for senior management since it allows them to test the Bank’s resistance to stressed environments or scenarios and to implement packages of measures to reduce the Bank’s risk profile vis-à-vis such scenarios.

The robustness and consistency of the scenario analysis exercises are based on the following three pillars:

• The development of mathematical models that estimate the future performance of metrics (e.g. loan losses) based on historical information (internal Group information or external market information) and simulation models.

• The inclusion of expert judgement and the knowledge of the portfolios, and questioning and checking the results of the models.

• Backtesting or periodic checking of the results of the models against the data observed, which ensures that the aforementioned results are appropriate.

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The main uses of scenario analysis are as follows:

• Regulatory uses: in which stress tests of scenarios are performed under guidelines set by the European regulator or by each of the various national regulators that supervise the Group.

• Internal capital (ICAAP) or liquidity adequacy assessment processes (ILAAP) in which, although the regulator can impose certain requirements, the Group develops its own methodology to assess its capital and liquidity levels vis-à-vis various stress scenarios. These tools enable capital and liquidity management to be planned.

• Risk appetite: this contains stressed metrics on which maximum loss levels (or minimum liquidity levels) are established that the Bank does not wish to exceed.

• Daily risk management: scenario analysis is used in budgetary and strategic planning processes, in the generation of commercial risk approval policies, in senior management’s overall analysis of risk or in specific analyses of the profiles of activities or portfolios.

3.4. Living wills (recovery and resolution plans)

The sixth version of the living will (the most important portion of which envisages the measures that the entity would have available to exit a highly severe crisis situation by itself) was prepared in 2015. The living will was prepared, for the first time, at the request of the European Central Bank, which has become the Group’s main supervisor (pursuant to the mandate assigned under the Single Supervisory Mechanism, which came into force on 4 November 2014). The will also follows the non-binding recommendations made in this regard by international bodies such as the Financial Stability Board.

As with the other versions prepared between 2010 and 2014, the will was submitted to the competent authorities for assessment in the first half of 2016.

The living will comprises the corporate living will (corresponding to Banco Santander, S.A.) and the individual living wills for the most important local units (the UK, Brazil, Mexico, the US, Germany, Argentina, Chile, Poland and Portugal).

The Group’s senior management keeps itself fully involved in the preparation and periodic monitoring of the content of the living wills by holding specific committee meetings of a technical nature, as well as for monitoring at institutional level, and this ensures that the content and structure of the documents are adapted to local and international crisis management legislation, which has been in continuous development in recent years.

The board of directors is responsible for approving the corporate living will, without prejudice to the content and important data therein being previously presented and discussed by the Bank’s main management and control committees. In turn, the individual living wills are approved by local bodies, always in coordination with the Group since they must form part of the corporate living will.

As regards resolution plans, the competent authorities forming part of the Crisis Management Group (CMG) have decided on a common approach to the Group’s resolution strategy which, given Santander’s legal and business structure, is the multiple point of entry (MPE) strategy; also, they have signed the corresponding cooperation agreement (COAG) and developed the initial resolution plans.

3.5. Risk Data Aggregation & Risk Reporting Framework (RDA/RRF)

In recent years the Group has developed and implemented structural and operational improvements in order to reinforce and consolidate its integral view of risk based on complete, accurate and recurring information, thus enabling senior management of the Group to assess risk and take decisions accordingly.

2015 saw the completion of the project launched at the beginning of 2014 whose main objective was to ensure that risk reporting to senior management incorporates the basic principles of Risk Data Aggregation (RDA).

Risk reports maintain a balance between data, analysis and qualitative commentaries, and include forward-looking measures and information on risk appetite, risk limits and emerging risks.

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With regard to governance, the data quality and risk reporting committee was created, which is responsible for executing the measures decided upon by the board in this area; in addition, a common data management methodology was implemented though the relevant models, procedures and guidelines.

The Group has a common risk reporting taxonomy covering the significant areas of risk within the organization, in keeping with the Group’s size, risk profile and activity.

3.6. Control environment

The risk management model has a control environment that ensures appropriate control of all risks and provides an integrated view thereof. This control is performed at all the Group’s units and for each type of risk in order to ensure that the Group’s exposures and overall risk profile are within the framework of the mandates established by both the board of directors and the regulators.

The main elements ensuring effective control are:

• The allocation of responsibilities in risk-generating functions through decision-making and the due control of their activity.

• Specialized control of each risk factor.

• The supervision and aggregate consolidation of all risks.

• The assessment of control mechanisms.

• Independent assessment by internal audit.

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Part 3. Credit risk

1. Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

In credit risk management terms, segmentation is based on the distinction between three types of customers:

• The individuals segment includes all individuals, except for those engaging in a business activity. This segment is in turn divided into various sub-segments based on income levels, which makes it possible to tailor risk management to each type of customer.

• The SMEs, companies and institutions segment includes legal entities and individuals engaging in a business activity. It also includes public-sector entities in general and not-for-profit private-sector entities.

• The Santander Global Corporate Banking - SGCB - segment comprises corporate customers, financial institutions and sovereigns, which make up a closed list of entities that is reviewed on an annual basis. Inclusion of an entity on this list is determined on the basis of a comprehensive analysis of the enterprise (business, countries in which it operates, types of products used, level of income it represents for the Bank, length of relationship with the customer, etc.).

The Group has a mainly retail profile, with 84% of its total risk exposure being generated by its commercial banking business.

2. Main aggregates and variations

Following are the main aggregates relating to credit risk arising on customer business:

Main credit risk aggregates arising on customer business

Data at December 31, 2015

	Credit risk exposure to customers (1) (Millions of euros)				Non-performing loans ratio (%)				Coverage ratio (%)
	2015		2014		2015		2014		2015		2014
Continental Europe		321,395		308,205		7.27		8.88		64.2		57.2
Spain		173,032		182,974		6.53		7.38		48.1		45.5
Santander Consumer Finance (1)		76,688		63,654		3.42		4.82		109.1		100.1
Portugal		31,922		25,588		7.46		8.89		99.0		51.8
Poland		20,951		18,920		6.30		7.42		64.0		60.3
United Kingdom		282,182		256,337		1.52		1.79		38.2		41.9
Latin America		151,302		167,065		4.96		4.79		79.0		84.5
Brazil		72,173		90,572		5.98		5.05		83.7		95.4
Mexico		32,463		27,893		3.38		3.84		90.6		86.1
Chile		35,213		33,514		5.62		5.97		53.9		52.4
Argentina		6,328		5,703		1.15		1.61		194.2		143.3
United States		90,727		72,477		2.13		2.42		225.0		196.3
Puerto Rico		3,924		3,871		6.96		7.45		48.5		55.6
Santander Bank		54,089		45,825		1.16		1.41		114.5		109.4
SC USA		28,280		22,782		3.66		3.97		337.1		296.2
Total Group		850,909		804,084		4.36		5.19		73.1		67.2

(1) Including gross loans and advances to customers, guarantees and documentary credits

In 2015 credit risk exposure to customers increased by 6%. The growth was across the board in local currency terms, except in Spain. The fall in lending in Brazil in euros was due the devaluation of the Brazilian real in the year.

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These lending levels, together with the fall in non-performing loans, resulted in a reduction in the Group’s non-performing loans ratio to 4.36%.

The Group’s coverage ratio stood at 73%. It is important to take into account that this ratio is reduced by the relatively high proportion of mortgage portfolios (especially in the UK and Spain), which require lower on-balance-sheet provisions since they are secured by collateral.

3. Detail of the main geographical areas

3.1. United Kingdom

Credit risk exposure to UK customers amounted to €282,182 million at the end of December 2015, and represented 33% of the Group total.

Due to its importance, not only to Santander UK, but also to the Group’s lending activity as a whole, the mortgage loan portfolio (which totaled €207,319 million at the end of December 2015) must be highlighted.

This portfolio is composed entirely of first-mortgage home purchase or home improvement loans to new and existing customers, since second or successive liens on mortgaged properties are no longer originated.

The property on which the mortgage guarantee is constituted must always be located in the UK, irrespective of where the funding is to be employed, except for certain one-off transactions performed in the Isle of Man. Loans may be granted for the purchase of homes abroad, but the mortgage guarantee must in all cases be constituted on a property located in the UK.

Geographically speaking, the credit risk exposure is concentrated mainly in the South East of the country, particularly in the metropolitan area of London, where home prices rose last year. Properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles.

For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation.

The non-performing loans ratio fell from 1.64% in 2014 to 1.44% at 2015 year-end. This decrease in the non-performing loans ratio was based on the behavior of non-performing loans, which improved significantly as a result of the more favorable macroeconomic environment and the increase in re-performing loans due to the improved efficiency of the recovery teams. Thus, the amount of non-performing loans fell by 10.2%, continuing the trend observed in 2014.

The credit policies limit the maximum loan-to-value ratio to 90% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity.

Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, the granting of mortgage loans with LTVs exceeding 100% has been forbidden since 2009.

Another indicator of the performance of the portfolio is the small volume of foreclosed properties, which amounted to €62 million at December 31, 2015. The management of foreclosures, coupled with the existence of a dynamic market for foreclosed homes, makes it possible to sell these properties in a short space of time (on average approximately 18 weeks), thus contributing to the good results obtained.

3.2. Spain

Portfolio overview

Total credit risk exposure in Spain (including guarantees and documentary credits but excluding the real estate operations unit - discussed below) amounted to €173,032 million (20% of the Group total), with an adequate degree of diversification in terms of both products and customer segments.

In 2015 the growth was consolidated in new production in the main portfolios in the individuals and companies segments, underpinned by the improvement in the economic situation and in the various strategies implemented at the Group. In year-on-year terms, total credit risk exposure fell by 5% mainly as a result of the lower level of funding to public authorities and a rate of repayments even higher than the rate of growth of new production in the other segments.

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The non-performing loans ratio for the total portfolio stood at 6.53%. The reduction in lending was offset by the improvement in non-performing loans. This improvement is due mainly to the fall in gross new NPLs and, to a lesser extent, to the return to performing status of various restructured positions and portfolio sales. The coverage ratio stood at around 48%, continuing the increase recognized in 2014.

Portfolio of home purchase loans to families

Home purchase loans granted to families in Spain stood at €50,786 million at 2015 year-end. Of this amount, 99% was secured by mortgages.

In millions of euros	31/12/15
	Gross amount		Of which: Non- performing
Home purchase loans to families		50,786		2,567
Without mortgage guarantee		480		40
With mortgage guarantee		50,306		2,527

The risk profile of the home purchase mortgage loan portfolio in Spain remained at a medium-low level, with limited prospects of additional impairment:

• All mortgage transactions include principal repayments from the very first day.

• Early repayment is common practice and, accordingly, the average life of the transactions is far shorter than their contractual term.

• Debtors provide all their assets as security, not just the home.

• High quality of collateral, since the portfolio consists almost exclusively of principal-residence loans.

• Stable average debt-to-income ratio at around 28%.

• 69% of the portfolio has an LTV of less than 80% (calculated as the ratio of total exposure to the amount of the latest available appraisal).

	31/12/15
	Loan to value ratio
In millions of euros	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and less than or equal to 100%		More than 100%		Total
Initial gross amount		10,300		11,079		13,178		9,249		6,500		50,306
Of which: Non-performing		134		201		359		484		1,349		2,527

Companies portfolio

The €92,889 million of direct credit risk exposure to SMEs and companies constitute the most important lending segment in Spain, representing 54% of the total.

94% of the portfolio relates to customers to which an analyst has been assigned who monitors the customer on an ongoing basis in all the phases of the risk cycle.

The non-performing loans ratio of this portfolio stood at 7.64% in 2015.

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Real estate business

The Group manages, as a separate unit, its real estate business in Spain, which includes loans to customers engaging mainly in property development, for which a specialized management model is in place, investments in real-estate industry companies and foreclosed assets.

In recent years the Group’s strategy has been geared towards reducing these assets. The changes in gross property development loans to customers were as follows:

	Millions of euros
	31/12/15			31/12/14			31/12/13
Balance at beginning of year (net)		9,349			12,105			15,867
Foreclosed assets		(62	)		(357	)		(848	)
Reductions (1)		(1,481	)		(2,015	)		(2,114	)
Written-off assets		(418	)		(384	)		(800	)
Balance at end of year (net)		7,388			9,349			12,105

(1) Includes portfolio sales, cash recoveries and third-party subrogations.

The NPL ratio of this portfolio ended the year at 67.6% (compared with 67.3% at December 2014) due to the increase in the proportion of non-performing assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The table below shows the distribution of the portfolio. The coverage ratio of the real estate exposure in Spain stands at 41.16%.

Millions of euros	31/12/15
	Gross amount		Excess over collateral value		Specific allowance
Financing for construction and property development recognized by the Group’s credit institutions (business in Spain)		7,388		3,618		3,041
Of which: Non-performing		4,995		2,701		2,861
Of which: Substandard		582		231		180
Memorandum items: Written-off assets		1,352

At year-end, the concentration of this portfolio was as follows:

	Loans: Gross amount
Millions of euros	31/12/15
1. Without mortgage guarantee		875
2. With mortgage guarantee		6,513
2.1 Completed buildings		3,862
2.1.1 Residential		1,740
2.1.2 Other		2,122
2.2 Buildings under construction		236
2.2.1 Residential		226
2.2.2 Other		10
2.3 Land		2,415
2.3.1 Developed land		1,991
2.3.2 Other land		424
Total		7,388

Policies and strategies in place for the management of these risks

The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified.

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In order to manage this credit exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal procedures and potential recovery management.

As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total.

Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or approved for development.

The significant reduction of exposure in the case of residential financing projects in which the construction work has already been completed was based on various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio.

The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria:

• Property developers with a robust solvency profile and a proven track record in the market.

• Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc.

• Support of financing of government-subsidized housing, with accredited sales percentages.

• Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral.

In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis.

In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.).

The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property, which is supplemented by the commercial network structure. The sale prices are reduced in line with market conditions.

Foreclosed properties

At December 31, 2015, the net balance of these assets amounted to €4,983 million (gross amount: €10,609 million; recognized allowance: €5,626 million, of which €3,310 million related to impairment after the foreclosure date).

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The following table shows the detail of the assets foreclosed by the businesses in Spain at the end of 2015:

Millions of euros	31/12/15
	Gross carrying amount		Valuation adjustments		Of which: Impairment losses on assets since time of foreclosure		Carrying amount
Property assets arising from financing provided to construction and property development companies		8,638		4,726		2,771		3,912
Of which:
Completed buildings		2,535		1,150		504		1,385
Residential		1,019		474		180		545
Other		1,516		676		324		840
Buildings under construction		831		408		244		423
Residential		831		408		244		423
Other		—		—		—		—
Land		5,272		3,168		2,023		2,104
Developed land		2,167		1,268		705		899
Other land		3,105		1,900		1,318		1,205
Property assets from home purchase mortgage loans to households		1,971		900		359		1,071
Other foreclosed property assets		—		—		—		—
Total property assets		10,609		5,626		3,130		4,983
Equity instruments, ownership interests and financing provided to non-consolidated companies holding these assets		—		—		—		—
Total		10,609		5,626		3,130		4,983

In recent years, the Group has considered foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the loans (net of provisions) and the fair value of the foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year. Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions.

The changes in foreclosed properties were as follows:

	Thousands of millions of euros
	2015			2014			2013
Gross additions		1.7			1.8			1.9
Disposals		(1.1	)		(0.9	)		(0.9	)
Difference		0.6			0.9			1.0

3.3. Brazil

Credit risk exposure in Brazil amounted to €72,173 million, and fell by 20.3% compared to 2014, due mainly to the depreciation of the Brazilian real. Thus, Santander Brazil accounts for 8.5% of the Group’s total credit risk exposure. The exposure is adequately diversified and has a predominantly retail profile, with approximately 46.4% of lending granted to individual, consumer finance and SME customers.

At 2015 year-end, growth of 5.70% was recognized, at constant exchange rates, which is in line with the average of private banks in Brazil.

In 2015 the change of mix strategy initiated in recent years was continued, and more intense growth was registered in segments with a more conservative risk profile and, accordingly, higher loan quality products increased their relative importance. Noteworthy in the individuals segment was the growth in the mortgage portfolio and the portfolio of loans that might be deducted from salaries (“crédito consignado”).

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At 2015 year-end, the non-performing loans ratio was 5.98%. The factors explaining the increase on 2014 are: the economic recession the country is suffering and the added difficulties in the sectors of activity most sensitive to changes in the prices of commodities, especially the energy and oil industries.

In view of this situation, Santander Brazil has implemented a series of measures to strengthen risk management. These measures focus both on improving the quality of new production and on mitigating the effects of the aforementioned adverse environment on the portfolio. This package of measures is based mainly on preventive management of arrears, thus anticipating possible further deterioration of customer balances. The highlights of the defensive measures included in the plan are as follows:

• Reduction of limits vis-à-vis medium-high risk products/customers.

• Implementation of maximum debt limits.

• Migration of revolving products to instalment payment products.

• Higher collateralization of the portfolio.

• Improvements to acceptance models, to make them more precise and predictive, and in collection channels.

• More individualized treatment of SMEs of a certain size (individualized model).

• Management of risk appetite by sector, and restriction of powers in the most critical sectors.

The coverage ratio stood at 83.7% at 2015 year-end.

4. Credit risk from other standpoints

4.1. Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and products with counterparty risk intended to provide service to the Group’s customers.

As defined in Chapter 6 of the CRR (Regulation (EU) No 575/2013), counterparty credit risk is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. It includes the following types of transaction: derivative instruments, repurchase agreements, securities or commodities lending transactions, deferred settlement transactions and guarantee financing transactions.

The Group uses two methods to measure its exposure to this risk: a mark-to-market method (replacement cost for derivatives or amount drawn down for committed facilities) including an add-on for potential future exposure; and another method, introduced in mid-2014 for certain regions and products, which calculates exposure using Monte Carlo simulations. Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries).

When the markets close, the exposures are recalculated by adjusting all the transactions to their new time horizon, the potential future exposure is adjusted and mitigation measures are applied (netting arrangements, collateral arrangements, etc.) so that the exposures can be controlled daily against the limits approved by senior management.

Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, for any product and maturity and at any Group unit.

4.2. Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by country, sector and customer group.

The board of directors, by reference to the risk appetite, determines the maximum levels of concentration. In keeping with the risk appetite, the executive risk committee establishes the risk policies and reviews the appropriate exposure limits to ensure the adequate management of credit risk concentration.

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In geographical terms, credit risk exposure to customers is diversified in the main markets where the Group has a presence.

The Group is subject to the regulation of “Large Exposures” contained in Part Four of CRR (Regulation (EU) No 575/2013), according to which an institution’s exposure to a customer or group of connected customers is considered a “large exposure” where its value is equal to or exceeds 10% of its eligible capital. Additionally, in order to limit large exposures, an institution may not incur an exposure to a customer or group of connected customers the value of which exceeds 25% of its eligible capital, after taking into account the effect of the credit risk mitigation contained in the Regulation.

At December 31, 2015, after applying risk mitigation techniques and the regulations applicable to large exposures, the exposure to each of the reported groups was below 4.9% of eligible capital, with the exception of two entities, one central counterparty in the EU, the exposure to which stood at 7.3% and an EU-based corporate group, the exposure to which stood at 6.8%.

The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2015 is as follows:

	31/12/15
Millions of euros	Total		Spain		Other EU countries		Americas		Rest of the world
Credit institutions		162,410		26,037		86,726		41,269		8,378
Public sector		158,215		60,482		33,306		59,528		4,899
Of which:
Central government		137,873		46,353		33,020		53,677		4,823
Other		20,342		14,129		286		5,851		76
Other financial institutions		74,246		16,206		24,194		31,586		2,260
Non-financial companies and individual traders		338,140		87,781		113,873		124,082		12,404
Of which:
Construction and property development		30,087		4,638		5,387		20,009		53
Civil engineering construction		4,671		2,837		1,307		525		2
Large companies		200,380		52,141		60,194		77,534		10,511
SMEs and individual traders		103,002		28,165		46,985		26,014		1,838
Other households and non-profit institutions serving households		477,693		67,319		298,851		106,405		5,118
Of which:
Residential		325,169		49,948		238,836		36,119		266
Consumer loans		133,841		11,990		57,270		60,490		4,091
Other purposes		18,683		5,381		2,745		9,796		761
Subtotal		1,210,704		257,825		556,950		362,870		33,059
Less: valuation adjustments for unimpaired assets		9,253
Total (*)		1,201,451

(*) For the purposes of this table, the definition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions, Loans and advances to customers, Debt instruments, Equity instruments, Trading derivatives, Hedging derivatives, Investments and Contingent liabilities.

4.3. Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.).

At December 31, 2015, the provisionable country risk exposure amounted to €193 million (2014: €176 million). The allowance recognized in this connection at 2015 year-end amounted to €25 million, as compared with €22 million at 2014 year-end.

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The Group’s country risk management policies continued to adhere to a principle of maximum prudence, and country risk is assumed, applying highly selective criteria, in transactions that are clearly profitable for the Group and bolster its global relationship with its customers.

4.4. Sovereign risk and exposure to other public sector entities

As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or similar body (government debt securities) and the risk arising from transactions with public entities that have the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the central government public sector; and their activities are of a non-commercial nature.

This criterion, which has been employed historically by the Group, differs in certain respects from that requested by the European Banking Authority (EBA) for its periodic stress tests. The most significant differences are that the EBA’s criteria do not include risk exposure to central banks, exposure to insurance companies or indirect exposure by means of guarantees or other instruments. However, they do include exposure to public sector entities (including regional and local entities) in general, not only the central government public sector.

Sovereign risk exposure (per the criteria applied at the Group) arises mainly from the subsidiary banks’ obligations to make certain deposits at the corresponding central banks, from the arrangement of deposits using liquidity surpluses, and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy and in the trading books of the treasury departments. The vast majority of these exposures is taken in local currency and is financed out of local customer deposits, also denominated in local currency.

The detail at December 31, 2015, 2014 and 2013, based on the Group’s management of each portfolio, of the Group’s sovereign risk exposure, net of the short positions held with the respective countries, taking into consideration the aforementioned criterion established by the European Banking Authority (EBA), is as follows:

Country	31/12/15
	Millions of euros
	Portfolio									Total net direct exposure
	Financial assets held for trading and Other financial assets at fair value through profit or  loss (*)			Available-for-sale financial assets		Loans and receivables		Held-to maturity investments
Spain		8,954			26,443		11,272		2,025		48,694
Portugal		104			7,916		1,987		—		10,007
Italy		2,717			—		—		—		2,717
Greece		—			—		—		—		—
Ireland		—			—		—		—		—
Rest of eurozone		(211	)		143		69		—		1
United Kingdom		(786	)		5,808		141		—		5,163
Poland		13			5,346		42		—		5,401
Rest of Europe		120			312		238		—		670
United States		280			4,338		475		—		5,093
Brazil		7,274			13,522		947		2,186		23,929
Mexico		6,617			3,630		272		—		10,519
Chile		193			1,601		3,568		—		5,362
Other American countries		155			1,204		443		—		1,802
Rest of the world		3,657			1,687		546		—		5,890
Total		29,087			71,950		20,000		4,211		125,248

(*) Includes short positions.

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In addition, at December 31, 2015, the Group had net direct derivative exposures the fair value of which amounted to €2,070 million and net indirect derivative exposures the fair value of which amounted to €25 million.

Country	31/12/14
	Millions of euros
	Portfolio
	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Total net direct exposure
Spain		5,778			23,893		15,098		44,769
Portugal		104			7,811		589		8,504
Italy		1,725			—		—		1,725
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,070	)		3		1		(1,066	)
United Kingdom		(613	)		6,669		144		6,200
Poland		5			5,831		30		5,866
Rest of Europe		1,165			444		46		1,655
United States		88			2,897		664		3,649
Brazil		11,144			17,685		783		29,612
Mexico		2,344			2,467		3,464		8,275
Chile		593			1,340		248		2,181
Other American countries		181			1,248		520		1,949
Rest of the world		4,840			906		618		6,364
Total		26,284			71,194		22,205		119,683

(*) Includes short positions.

In addition, at December 31, 2014, the Group had net direct derivative exposures the fair value of which amounted to €1,028 million and net indirect derivative exposures the fair value of which amounted to €5 million. Also, the Group did not have any exposure to held-to-maturity investments.

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Country	31/12/13
	Millions of euros
	Portfolio							Total net direct exposure
	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables
Spain		4,359			21,144		12,864		38,367
Portugal		148			2,076		583		2,807
Italy		1,309			77		—		1,386
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,229	)		67		—		(1,161	)
United Kingdom		(1,375	)		3,777		—		2,402
Poland		216			4,770		43		5,030
Rest of Europe		5			117		—		122
United States		519			2,089		63		2,671
Brazil		8,618			8,901		223		17,743
Mexico		3,188			2,362		2,145		7,695
Chile		(485	)		1,037		534		1,086
Other American countries		268			619		663		1,550
Rest of the world		5,219			596		146		5,964
Total		20,762			47,632		17,268		85,661

(*) Includes short positions.

In addition, at December 31, 2013, the Group had net direct derivative exposures the fair value of which amounted to €(206) million and net indirect derivative exposures the fair value of which amounted to €6 million. Also, the Group did not have any exposure to held-to-maturity investments.

4.5. Social and environmental risk

The Group considers social and environmental issues relating to its customers’ activities to be key to the risk analysis and decision-making processes in its financing transactions. Accordingly, it has implemented processes to identify, analyze and assess risk in the credit transactions that are aligned with international best practices, particularly the Equator Principles to which the Bank adhered in 2009. Furthermore, the Group has set out specific sector policies that define social and environmental criteria to assess when engaging with customers that develop activities in sensitive sectors, such as defense, energy and soft commodities.

In 2015 the Group undertook a review of these social and environmental sector policies that included a comparative study of other similar banks as well as an analysis of expectations, trends and interests of the most active NGOs both within countries where the Group operates and internationally. This process culminated in the adoption of such policies by the board of directors of Banco Santander in its meeting held on December 22, 2015. During 2016, the Bank’s internal process will be adapted at both corporate and local level to ensure the proper application of the new requirements.

5. Credit risk cycle

The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units.

The process involves the board of directors and the executive risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

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5.1. Risk analysis and credit rating process

In general, the risk analysis consists of examining the customer’s ability to meet its contractual obligations to the Group and to other creditors. This involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

Since 1993 the Group has used internal rating models for this purpose. These mechanisms are used in both the wholesale segment (sovereigns, financial institutions and corporate banking) and the other companies and institutions segment.

The rating is obtained from a quantitative module based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgement.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship.

The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

In contrast to the use of ratings in the wholesale and other companies and institutions segments, in the individuals and SMEs segment scoring techniques predominate; in general, these tools automatically assign a customer a score for decision-making purposes.

5.2. Planning (Commercial Strategic Plan)

The purpose of this phase is to efficiently and comprehensively limit the risk levels the Group assumes.

The credit risk planning process is used to establish the budgets and limits at portfolio level.

Risk limit planning is instrumented through the Commercial Strategic Plan (PEC), thus ensuring the coordination of the business plan, the risk-appetite-based lending policy and the resources required to implement it. Thus, it was created as a joint initiative between the commercial and risk units and is not only a management tool but also a form of teamwork.

Approval and monitoring is the responsibility of each entity’s top executive risk committee. Validation and monitoring is performed at corporate level.

The PECs enable the map of all the Group’s loan portfolios to be defined.

Scenario analysis

Credit risk scenario analysis enables senior management to gain a clearer understanding of the performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the adequacy of the provisions recognized and the capital held to cater for stress scenarios.

These analyses, which are performed for all the Group’s significant portfolios, comprise the following milestones:

• Definition of benchmark scenarios (at global level and for each of the Group units).

• Determination of the value of the risk parameters (probability of default, loss given default) in various scenarios.

• Estimation of the expected loss associated with each of the scenarios considered and of the other salient credit risk metrics derived from the parameters obtained (non-performing loans, provisions, ratios, etc.).

• Analysis of the changes in the credit risk profile at portfolio, segment, unit and Group level in various scenarios and in comparison with previous years.

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The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables. These models undergo regular backtesting and recalibration processes in order to ensure that they provide a correct reflection of the relationship between the macroeconomic variables and the risk parameters.

The process is completed with a package of controls and checks that ensure that the metrics and calculations are appropriate.

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (GDP, unemployment rate, housing prices, inflation, etc.).

The economic scenarios defined are based on different stress levels, ranging from the base or most probable scenario to more stressed economic scenarios which, although less probable, could possibly arise.

These scenarios are generally defined by the Group’s economic research service, in coordination with each unit, using as a reference the data published by the main international organizations.

A global stress scenario is defined that describes a situation of worldwide crisis and the manner in which it affects each of the main geographical regions in which the Group is present. In addition, a local stress scenario is defined which, affecting certain of the Group’s main units in an isolated fashion, includes a higher level of stress than the global stress scenario.

5.3. Limit setting/pre-classifications

The risk limits are planned and set using documents agreed upon by the business areas and risk units and approved by the executive risk committee or its delegated committees, which contain the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the management of the related risk by group/customer.

Also, an analysis is conducted at customer level in the wholesale and other companies and institutions segments. When certain features concur, an individual limit is established for the customer (pre-classification).

Thus, for large corporate groups a pre-classification model based on an economic capital measurement and monitoring system is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the companies segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

5.4. Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyze and resolve upon transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. This process must consider the transaction approval policies defined and take into account both the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

In the sphere of lower-revenue individuals, businesses and SMEs, the management of large volumes of loan transactions is facilitated by the use of automatic decision-making models that rate the customer/loan relationship. Thus, loans are classified in homogeneous risk groups using the rating assigned to the transaction by the model on the basis of information on the features of the transaction and the borrower.

The preliminary limit-setting stage can follow two different paths, giving rise to different types of decisions in the companies’ sphere:

• Automatic decisions, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications.

• Decisions requiring the analyst’s authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process applies to pre-classifications of retail banking companies.

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Credit risk mitigation techniques

The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements).

The various mitigation techniques can be grouped into the following categories:

Netting by counterparty

Netting refers to the possibility of determining a net balance of transactions of the same type, under the umbrella of a master agreement such as an ISDA or similar agreement.

It consists of aggregating the positive and negative market values of the derivatives transactions entered into by the Group with a particular counterparty, so that, in the event of default, the counterparty owes the Group (or the Group owes the counterparty, if the net figure is negative) a single net figure and not a series of positive or negative amounts relating to each of the transactions entered into with the counterparty.

An important aspect of master agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to offset the risks of all the transactions covered by the contract with the same counterparty (see note 2.f to our consolidated financial statements).

Collateral

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

• Financial: cash, security deposits, gold, etc.

• Non-financial: property (both residential and commercial), other movable property, etc.

From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords can be taken into consideration.

One very important example of financial collateral is the collateral agreement. Collateral agreements comprise a set of highly liquid instruments with a certain economic value that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce any counterparty credit risk that might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as with the netting technique, is to reduce counterparty risk.

Transactions subject to a collateral agreement are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, for example, security deposits, suretyships and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets.

Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.

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5.5. Monitoring/anticipation

The monitoring function is founded on a process of ongoing observation, which makes it possible to detect early any changes that might arise in customers’ credit quality, so that action can be taken to correct any deviations with an adverse impact.

Monitoring is based on the segmentation of customers, is performed by dedicated local and global risk teams and is complemented by the work performed by internal audit. In the individuals model this function is performed using customer behavior valuation models.

The function involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and the ongoing monitoring of indicators.

The system called “companies under special surveillance” (FEVE) distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a position in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for the position in question, to place a person in charge and to set the policy implementation period.

Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to lower-revenue individuals, businesses and SMEs, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

5.6. Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product, etc., thus facilitating the early detection of specific areas requiring attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both those of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures aimed at placing the profile and amount of the risk portfolio within the parameters set by the Group.

In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase: Change in non-performing loans (VMG), EL (expected loss) and capital

Assessment of the control processes

This includes a systematic periodic review of the procedures and methodology, and is performed over the entire credit risk cycle to ensure that they are in force and effective.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. In this connection, the risk division assesses the efficiency of the internal control of its activities on an annual basis.

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5.7. Recovery management

Recovery is a significant function within the sphere of the Group’s risk management. This function is performed by the recovery and collection unit, which defines a global strategy and an integrated approach to recovery management.

The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. The Recovery Units are business areas involving direct customer management and, accordingly, this corporate model has a business approach that creates value sustainably over time on the basis of effective and efficient collection management, achieved through either the return of unpaid balances to performing status or the full recovery thereof.

The recovery management model requires the proper coordination of all management areas (recovery business, commercial, technology and operations, human resources and risk) and the management processes and methodology supporting it are reviewed and enhanced on an ongoing basis, through the application of the best practices developed in the various countries.

In order to manage recovery properly, action is taken in four main phases: early arrears management, recovery of non-performing loans, recovery of written-off loans and management of foreclosed assets.

In fact, the actions taken by the recovery function commence even before the first missed payment, i.e. when there are signs of a deterioration of the customer’s ability to pay, and they end when the customer’s debt has been paid or has returned to performing status. The recovery function aims to anticipate default events and focuses on preventive management.

The macroeconomic environment has a direct effect on the customer default rate. Therefore, the quality of the portfolios is fundamental to the development and growth of our businesses in the various countries, and particular attention is paid, on a permanent basis, to the debt collection and recovery functions in order to guarantee that this quality remains at the expected levels at all times.

The differing characteristics of customers make segmentation necessary in order to ensure proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality of the different countries, and various management mechanisms have been used, all involving appropriate prudential criteria, based on the age, collateral and conditions of the transaction, while always ensuring that, at least, the required ratings and provisions are maintained.

Within the recovery function particular emphasis has been placed on using the mechanisms referred to above for early arrears management, in accordance with corporate policies, considering the various local realities and closely monitoring the production, inventory and performance of those local areas. The aforementioned policies are reviewed and adapted periodically in order to reflect both best management practices and any applicable regulatory amendments.

In addition to the measures aimed at adapting transactions to the customer’s ability to pay, special mention should be made of recovery management, in which alternative solutions to legal action are sought to ensure the early collection of debts.

One of the channels for the recovery of debts of customers whose ability to pay has deteriorated severely is foreclosure (either court-ordered or through dation in payment) of the property assets securing the transactions. In geographical regions that are highly exposed to real estate risk, such as Spain, the Group has very efficient instruments in place to manage the sale of such assets, making it possible to maximize recovery and reduce the on-balance-sheet stock of property assets at a much faster pace than at other financial institutions.

Forborne loan portfolio

The term forborne loan portfolio refers, for the purposes of the Group’s risk management, to those transactions in which the customer has, or might foreseeably have, financial difficulty that might materially affect its payment obligations under the terms and conditions of the current agreement and, accordingly, the agreement has been modified or cancelled or even a new transaction has been entered into.

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The Group has a detailed customer debt forbearance policy that serves as a reference for the various local adaptations made for all the financial institutions forming part of the Group. This policy shares the principles laid down in both Bank of Spain Circular 6/2012 and the technical standards published by the European Banking Authority in 2014, which it develops in greater detail based on the level of customer impairment.

This policy establishes strict prudential criteria for the assessment of these loans:

• The use of this practice is restricted, and any actions that might defer the recognition of impairment must be avoided.

• The main aim must be to recover the amounts owed, and any amounts deemed unrecoverable must be recognized as soon as possible.

• Forbearance must always envisage maintaining the existing guarantees and, if possible, enhance them. Not only can effective guarantees serve to mitigate losses given default, but they might also reduce the probability of default.

• This practice must not give rise to the granting of additional funding, or be used to refinance debt of other entities or as a cross-selling instrument.

• All the alternatives to forbearance and their impacts must be assessed, making sure that the results of this practice will exceed those which would foreseeably be obtained if it were not performed.

• Forborne transactions are classified using criteria which ensure that the customer’s ability to pay is restored from the date of forbearance and for an adequate period of time thereafter.

• In addition, in the case of customers that have been assigned a risk analyst, it is particularly important to conduct an individual analysis of each specific case, for both the proper identification of the transaction and its subsequent classification, monitoring and adequate provisioning.

The forbearance policy also sets out various criteria for determining the scope of transactions qualifying as forborne exposures by defining a detailed series of objective indicators to facilitate the identification of situations of financial difficulty that might materially affect whether payment obligations are met.

Accordingly, transactions not classified as non-performing at the date of forbearance are generally considered to be experiencing financial difficulty if at that date they were more than one month past due. Where no payments have been missed or there are no payments more than one month past due, other indicators assessing financial difficulty are taken into account, including most notably the following:

• Transactions with customers who are already experiencing difficulties in other transactions.

• Situations where a transaction has to be modified prematurely, and the Group has not yet had a previous satisfactory experience with the customer.

• Cases in which the necessary modifications entail the grant of special conditions, such as the establishment of a grace period, or where these new conditions are deemed to be more favorable for the customer than those which would have been granted for an ordinary loan approval.

• Where a customer submits successive loan modification requests at unreasonable time intervals.

• In any case, if once the modification has been made any payment irregularity arises during a given probation period (as evidenced by backtesting), even in the absence of any other symptoms, the transaction will be deemed to be within the scope of forborne exposures.

Once it has been determined that the reasons for the modification relate to financial difficulties, for management purposes a distinction is made between two types of forbearance based on the original management status of the transactions: ex-ante forbearance, when the original transaction was classified as other than non-performing; and ex-post forbearance, when it had previously been classified as non-performing.

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In addition, within the category of ex-post forbearance, distinct treatments are established for cases of advanced impairment, the classification requirements and criteria for which are even more stringent than those for other forborne transactions.

As regards the strategies to be applied, corporate policy requires the customer’s ability and willingness to pay to be analyzed and a distinction to be drawn between the severity and the estimated duration of the impairment. The results of this analysis will be used as a basis for deciding whether the debt should be forborne and the most appropriate way of doing so for each case:

• When borrowers display a severe but temporary deterioration in their ability to pay (which is expected to recover in a short space of time), short-term adjustment strategies are applied, such as a payment moratorium on the principal or the reduction of instalments for a short, limited period until the ability to pay is recovered.

• When borrowers display a slight deterioration in their ability to pay (an early recovery of which is not expected), more long-term strategies are applied, such as reducing instalments by deferring either the maturity date or a portion of the principal, which would be paid at the same time as the last instalment, at all times securing its payment through the provision of effective guarantees.

In any case, through a case-by-case analysis, priority is given to modifications for customers displaying a slight but prolonged deterioration, since those experiencing severe but transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery. Cases of severe deterioration deemed to be prolonged over time are not considered for forbearance.

Corporate policy also establishes mechanisms for the management and control of forborne transactions, allowing them to be treated in a different way from other transactions, with particular attention being paid to the processes of:

• Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant aggregates.

• Monitoring the performance of the portfolio and assessing the degree of achievement of the projections prepared in the planning phase.

Once forbearance measures have been adopted, transactions that have to remain classified as non-performing because at the date of forbearance they do not meet the regulatory requirements to be classified in a different category must comply with a continuous prudential payment schedule in order to assure reasonable certainty as to the recovery of the ability to pay.

If there is any (non-technical) default in payments during that period, the aforementioned payment schedule starts again.

On successful completion of the period, the duration of which depends on the customer’s situation and the transaction features (term and guarantees provided), the transaction is no longer considered to be non-performing, although it continues to be subject to a probation period during which it undergoes special monitoring.

This monitoring continues until a series of requirements have been met, including most notably: a minimum observation period; repayment of a substantial percentage of the outstanding amounts; and settlement of the amounts that were past due at the time of forbearance.

When forbearance is applied to a transaction classified as non-performing, the original default dates continue to be considered for all purposes, including the calculation of provisions, irrespective of whether as a result of forbearance the transaction becomes current in its payments.

By contrast, if following arrangement of forbearance there is no improvement in the customer’s payment performance, the possibility of extending new forbearance measures will be considered, with the application of more stringent classification/return-to-performing criteria, including the establishment of a longer period of uninterrupted payments before the transaction can return to performing status, which could last up to 36 months in certain circumstances. The duration of this period is determined by any collateral provided and the residual maturity of the loan. The Group’s policy permits a maximum of one modification per year and three modifications every five years.

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The internal models used by the Group for provisioning purposes include forborne transactions as follows:

• Customers not subject to individual monitoring: the internal models consider forborne transactions as a distinct segment with its own probability of default calculated on the basis of past experience, considering, among other factors, the performance of the successive forbearance measures.

• Customers subject to individual monitoring: the internal rating is an essential input in determining the probability of default and it takes into consideration the existence of successive forbearance measures. This rating must be updated at least once every six months for customers with forborne transactions.

At December 31, 2015, 34% of the forborne loan portfolio had undergone several modifications.

Quantitative information required by Bank of Spain Circular 6/2012

Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on the restructured/refinanced transactions in force at December 31, 2015. The following terms are used in Bank of Spain Circular 6/2012 with the meanings specified:

• Refinancing transaction: transaction that is granted or used, for reasons relating to current or foreseeable financial difficulties of the borrower, to repay one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the borrowers of the cancelled or refinanced transactions to repay their debt (principal and interest) because they are unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.

• Restructured transaction: transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the borrower, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.

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CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)

	Millions of euros
	Standard (b)												Substandard														Non-performing
	Full property mortgage guarantee				Other collateral (c)				Without collateral				Full property mortgage guarantee				Other collateral (c)				Without collateral						Full property mortgage guarantee				Other collateral (c)				Without collateral						Total
	Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Allowance		Number of transactions		Gross amount		Number of transactions		Gross amount		Number of transactions		Gross amount		Allowance		Number of transactions		Gross amount		Allowance
Public sector		10		21		12		257		78		513		1		8		—		—		2		3		2		5		4		—		—		30		32		8		138		838		10
Other legal entities and individual traders		7,791		2,883		3,567		3,046		84,017		2,495		3,942		1,171		1,254		791		31,047		903		427		10,239		4,808		6,414		5,456		71,890		4,252		7,637		220,161		25,805		8,064
Of which: Financing for construction and property development		560		563		118		168		195		4		455		302		39		92		169		15		118		2,236		2,123		1,269		2,519		364		509		2,869		5,405		6,295		2,987
Other individuals		91,501		7,252		510,288		8,609		1,227,992		1,865		28,057		2,612		7,617		1,039		266,780		722		359		34,184		2,329		64,794		2,562		909,193		1,729		2,477		3,140,406		28,719		2,836
Total		99,302		10,156		513,867		11,912		1,312,087		4,873		32,000		3,791		8,871		1,830		297,829		1,628		788		44,428		7,141		71,208		8,018		981,113		6,013		10,122		3,360,705		55,362		10,910

(a) Including all refinanced or restructured transactions as defined in section 1.g) of Annex IX of Bank of Spain Circular 4/2004.

(b) Standard risks classified as under special monitoring pursuant to section 7.a) of Annex IX of Bank of Spain Circular 4/2004.

(c) Including transactions without a full property mortgage guarantee, i.e. with a loan-to-value ratio of more than 1, and transactions with collateral other than a real estate mortgage, irrespective of their loan-to-value ratio.

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The transactions presented in the foregoing tables were classified at December 31, 2015, by nature, as follows:

• Non-performing: transactions that are in the process of being returned to performing status, those for which advantageous conditions had to be granted that would not have been granted for an ordinary loan approval or those which, having been classified as standard or substandard, have again encountered payment difficulties during the term of the transaction.

• Substandard: transactions previously classified as non-performing with respect to which, following forbearance, sustained payments have been made for a certain period, depending on the transaction features and the type of guarantee, and transactions previously classified as standard: i) which have been granted an initial grace period and will remain in this category until three monthly instalments (or the equivalent) have been paid after the grace period, or ii) that following forbearance have become irregular (missed payment).

• Standard: transactions previously classified as non-performing or substandard which have successfully completed the precautionary observation periods established in the corporate policy evidencing that payment capacity pursuant to the terms established has been restored, and transactions classified as standard at the date of forbearance, until they meet the requirements to cease to be subject to the special monitoring described above.

The table below shows the changes in 2015 in the forborne loan portfolio:

Millions of euros	2015
Beginning balance		56,703
Of which: Unimpaired		33,135
Impaired		23,568
Additions		18,178
Reductions (*)		(19,519	)
Balance at end of year		55,362
Of which: Unimpaired		34,190
Impaired		21,172

(*) Including, mainly, debt repayments, foreclosures and write-offs and transactions that have ceased to be subject to special monitoring because the probation periods and aforementioned requirements have been met.

62% of the forborne loan transactions are classified as other than non-performing. Particularly noteworthy are the level of existing guarantees (77% of transactions are secured by collateral) and the coverage provided by specific allowances (representing 20% of the total forborne loan portfolio and 52% of the non-performing portfolio).

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Part 4. Trading market and structural risk

A. Activities subject to market risk and types of market risk

The scope of activities subject to market risk includes transactions in which net worth risk is borne due to changes in market factors. Thus they include trading risks and also structural risks which are also affected by market shifts.

This risk comes from the change in risk factors -interest rates, inflation rates, exchange rates, share prices, the spread on loans, commodity prices and the volatility of each of these elements– as well as from the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that changes in interest rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects loans, deposits, debt securities, most assets and liabilities of trading portfolios as well as derivatives, among others.

• Inflation rate risk is the possibility that changes in inflation rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects instruments such as loans, debt securities and derivatives, whose return is linked to inflation or to an actual change in the rate.

• Exchange rate risk is the sensitivity of the value of a position in a currency different to the base currency to a potential movement in exchange rates. Hence, a long position in a foreign currency will produce a loss if that currency depreciates against the base currency. Among the positions affected by this risk are the Group’s investments in subsidiaries in non-euro currencies, as well as any foreign currency transactions.

• Equity risk is the sensitivity of the value of positions opened in equities to adverse movements in the market prices or in expectations of future dividends. Among other instruments, this affects positions in shares, stock market indices, convertible bonds and derivatives using shares as the underlying asset (put, call, and equity swaps).

• Credit spread risk is the risk or sensitivity of the value of positions opened in fixed income securities or in credit derivatives to movements in credit spread curves or in recovery rates associated with issuers and specific types of debt. The spread is the difference between financial instruments that quote with a margin over other benchmark instruments, mainly the yield of government bonds and interbank interest rates.

• Commodities price risk is the risk derived from the effect of potential changes in prices. The Group’s exposure to this risk is not significant and is concentrated in derivative transactions on commodities with clients.

• Volatility risk is the risk or sensitivity of the value of a portfolio to changes in the volatility of risk factors: interest rates, exchange rates, shares, credit spreads and commodities. Financial instruments which have volatility as a variable in their valuation model incur in this risk. The most significant case is financial options portfolios.

All these market risks can be partly or fully mitigated by using options, futures, forwards and swaps.

There are other types of market risk, whose coverage is more complex. They are the following:

• Correlation risk is the sensitivity of the value of a portfolio to changes in the relationship between risk factors, either of the same type (for example, between two exchange rates) or of a different nature (for example, between an interest rate and the price of a commodity).

• Market liquidity risk is that of a Group entity or the Group as a whole finding itself unable to get out of or close a position in time without having an impact on the market price or the cost of the transaction. This risk can be caused by a reduction in the number of market makers or institutional investors, the execution of large volumes of transactions, or the instability of the markets. It increases as a result of the concentration of certain products and currencies.

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• Prepayment or cancellation risk. When the contractual relationship in certain transactions explicitly or implicitly permits the possibility of early cancellation without negotiation before maturity, there is a risk that the cash flows may have to be reinvested at a potentially lower interest rate. It affects mainly mortgage loans or mortgage securities.

• Underwriting risk. This occurs as a result of an entity’s participation in underwriting a placement of securities or another type of debt, assuming the risk of partially owning the issue or the loan due to non-placement of all of it among potential buyers.

Pension and actuarial risks, which are described later on, also depend on shifts in market factors.

On the basis of the finality of the risk, activities are segmented in the following way:

a) Trading: financial services to customers and purchase-sale and positioning mainly in fixed-income, equity and currency products. The SGCB (Santander Global Corporate Banking) division is mainly responsible for managing it.

b) Structural risks: we distinguish between balance sheet risks and pension and actuarial risks:

b.1) Structural balance sheet risks: market risks inherent in the balance sheet excluding the trading portfolio. Management decisions on these risks are taken by the ALCO committees of each country in coordination with the Group’s ALCO committee and are executed by the financial management division. This management seeks to inject stability and recurrence into the financial margin of commercial activity and to the Group’s economic value, maintaining adequate levels of liquidity and solvency. The risks are:

• Structural interest rate risk. This arises from mismatches in the maturities and repricing of all assets and liabilities.

• Structural exchange rate risk/hedging of results. Exchange rate risk occurs when the currency in which the investment is made is different from the euro in companies that consolidate and those that do not (structural exchange rate). In addition, this item also includes positions of exchange rate hedging of future results generated in currencies other than the euro (hedging of results).

• Structural equity risk. This involves investments via stakes in financial or non-financial companies that are not consolidated, as well as portfolios available for sale formed by equity positions.

b.2) Pension and actuarial risk

• Pension risk: the risk assumed by the Bank in relation to the pension commitments with its employees. The risk lies in the possibility that the fund does not cover these commitments in the period of accrual of the provision and the profitability obtained by the portfolio is not sufficient and obliges the Group to increase the level of contributions.

• Actuarial risk: unexpected losses produced as a result of an increase in the commitments with the insurance takers, as well as losses from an unforeseen rise in costs.

B. Trading market risks

1. Quantitative analysis

Grupo Santander’s trading risk profile remained relatively low in 2015, in line with previous years, due to the fact that traditionally the Group’s activity has been focused on providing services to its customers, with limited exposure to complex structured products and diversification by geographic area and risk factor.

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1.1. Value at Risk (VaR) analysis

During the 2015 year, Grupo Santander maintained its strategy of concentrating its trading activity on customer business, minimizing where possible exposures of directional risk opened in net terms. This was seen in the VaR evolution of the SGCB trading portfolio, which was around the average of the last three years and ended 2015 at €13.6 million¹².

EVOLUTION OF VaR 2013-2015

Million euros. VaR at 99%, with a time frame of one day

VaR during 2015 fluctuated between €10.3 million and €31 million. The most significant changes were related to changes in exchange rate and interest rate exposure and also market volatility.

The average VaR in 2015 was €15.6 million, very similar to the two previous years (€16.9 million in 2014 and €17.4 million in 2013).

The following chart shows a frequency histogram of risk measured in terms of VaR between 2013 and 2015. The accumulation of days with levels of between €9.5 and 23 million (96%) is shown. Values of higher than €23 million (3.2%) largely occur in periods mainly affected by temporary spikes in volatility mainly in the Brazilian real against the dollar and also interest rates during the Greek bail-out period.

VaR 15d Moving Average 3 year average VaR 35 30 25 20 15 10 5 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 MIN(8.2) MAX (31)

¹²  Regarding trading activity in financial markets of SGCB (Santander Global Corporate Banking). As well as the trading activity of SGCB, there are other positions catalogued for accounting purposes. The total VaR of trading of this accounting perimeter was €14.5 million.

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VaR RISK HISTOGRAM

VaR at 99%, with a time frame of one day

Risk by factor

The following table displays the average and latest VaR values at 99% by risk factor over the last three years, and the lowest and highest values in 2015 and the Expected Shortfall (ES) at 97.5% at the close of 2015:

VaR AND EXPECTED SHORTFALL STATISTICS BY RISK FACTOR ¹³,¹⁴

Million euros. VaR at 99% and ES at 97.5%, with a time frame of one day

¹³  The VaR of global activities includes operations that are not assigned to any particular country.

¹⁴  In Latin America, United States and Asia, the VaR levels of the credit spread and commodity factors are not shown separately because of their scant or zero materiality.

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		2015										2014				2013
		VaR (99%)								ES (97.5%)		VaR				VaR
		Minimum		Average		Maximum		Latest		Latest		Average		Latest		Average		Latest
	Total		10.3		15.6		31.0		13.6		14.0		16.9		10.5		17.4		13.1
	Diversification Effect		(5.0)		(11.1)		(21.3)		(5.8)		(5.7)		(13.0)		(9.3)		(16.2)		(12.3)
	Interest Rate		9.7		14.9		28.3		12.7		12.7		14.2		10.5		12.7		8.5
	Equities		1.0		1.9		3.8		1.1		1.1		2.7		1.8		5.6		4.7
	Exchange rates		1.6		4.5		15.2		2.6		2.4		3.5		2.9		5.4		4.7
	Credit Spread		1.9		5.2		13.7		2.9		3.4		9.3		4.6		9.6		7.2
	Commodities		0.0		0.2		0.6		0.1		0.1		0.3		0.1		0.3		0.3
	Total		7.4		11.6		24.8		11.1		11.2		12.2		7.3		13.9		9.9
	Diversification Effect		(1.1)		(8.3)		(17.2)		(5.6)		(5.8)		(9.2)		(5.5)		(14.1)		(9.0)
	Interest Rate		6.1		10.6		25.1		10.9		10.7		8.9		6.2		9.3		6.6
	Equities		0.8		1.4		2.9		1.0		1.0		1.7		1.0		4.3		2.6
	Exchange rates		0.7		3.3		10.7		1.9		1.8		2.9		1.5		5.2		3.7
	Credit Spread		1.6		4.4		11.5		2.8		3.4		7.6		3.9		9.0		5.8
	Commodities		0.0		0.2		0.6		0.1		0.1		0.3		0.1		0.3		0.3
	Total		5.4		10.6		27.4		9.7		6.7		12.3		9.8		11.1		6.9
	Diversification Effect		(0.5)		(4.8)		(10.6)		(4.4)		(1.5)		(3.5)		(12.2)		(5.3)		(6.7)
	Interest Rate		5.7		10.7		27.2		9.3		6.4		11.8		9.8		9.6		5.9
	Equities		0.5		1.5		3.2		0.5		0.6		2.1		3.0		3.2		2.9
	Exchange rates		0.7		3.2		8.2		4.3		1.3		2.0		9.2		3.5		4.7
	Total		0.3		0.9		2.0		0.9		0.8		0.7		0.7		0.8		0.5
	Diversification Effect		(0.1)		(0.5)		(1.4)		(0.4)		(0.3)		(0.3)		(0.2)		(0.4)		(0.2)
	Interest Rate		0.2		0.8		1.6		0.8		0.8		0.7		0.7		0.7		0.5
	Equities		0.0		0.1		1.8		0.0		0.0		0.1		0.0		0.1		0.0
	Exchange rates		0.2		0.4		1.1		0.4		0.3		0.3		0.2		0.4		0.2
	Total		0.3		1.6		3.0		0.4		0.3		2.3		1.9		1.5		2.0
	Diversification Effect		0.1		(0.6)		(2.7)		(0.2)		(0.1)		(0.6)		(0.6)		(0.3)		(0.5)
	Interest Rate		0.0		0.5		3.0		0.1		0.0		0.6		0.4		0.3		0.4
	Credit Spread		0.3		1.6		2.8		0.4		0.0		2.2		1.9		1.5		2.1
	Exchange rates		0.0		0.0		0.2		0.0		0.3		0.0		0.2		0.1		0.0

EUR million

At the end of 2015, VaR had increased by €3 million against 2014, although average VaR was down by €1.4 million. By risk factor, the average VaR increased in interest rates and in exchange rates, while it fell in equities and credit spread. By geographies, it slightly increased in the United States/Asia, while it was down in the other geographies.

The VaR evolution by risk factor in general was stable in the last few years. The transitory rises in VaR of various factors are explained more by transitory increases in the volatility of market prices than by significant changes in positions.

TOTAL Trading Europe LatinAmerica US and Asia Global Activities

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VaR BY RISK FACTOR EVOLUTION

Million euros, VaR at 99% with a time frame of one day (15 day moving average)

Lastly, the table below compares the VaR figures with stressed VaR figures for trading activity of the two portfolios with highest average VaR in 2015.

STRESSED VaR STATISTICS VERSUS VaR IN 2015: MAIN PORTFOLIOS

Million euros. Stressed VaR and VaR at 99% with a time frame of one day

		Min		Aveage		Max		Latest
Spain-G10	VaR (99%)		4.0		8.9		15.9		11.2
	Stressed VaR (99%)		11.4		19.4		26.8		13.5
Brasil	VaR (99%)		4.5		9.5		25.6		9.4
	Stressed VaR (99%)		8.1		16.6		39.9		14.2

1.2. Gauging and backtesting measures

The real losses can differ from the forecasts by the VaR for various reasons related to the limitations of this metric, which are set out in detail later in the section on the methodologies. The Group regularly analyses and contrasts the accuracy of the VaR calculation model in order to confirm its reliability.

The most important test consists of backtesting exercises, analyzed at the local and global levels and in all cases with the same methodology. Backtesting consists of comparing the forecast VaR measurements, with a certain level of confidence and time frame, with the real results of losses obtained in a same time frame. This can detect anomalies in the VaR model of the portfolio in question to be detected (for example, shortcomings in the parameterization of the valuation models of certain instruments, not very adequate proxies, etc.).

Santander calculates and evaluates three types of backtesting:

• “Clean” backtesting: the daily VaR is compared with the results obtained without taking into account the intraday results or the changes in the portfolio’s positions. This method contrasts the effectiveness of the individual models used to assess and measure the risks of the different positions.

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• Backtesting on complete results: the daily VaR is compared with the day’s net results, including the results of the intraday operations and those generated by commissions.

• Backtesting on complete results without mark-ups or fees: the daily VaR is compared with the day’s net results from intraday operations but excluding those generated by mark-ups and commissions. This method aims to give an idea of the intraday risk assumed by the Group’s treasuries.

For the first case and for the total portfolio, there were four exceptions of Value at Earnings (VaE) at 99% in 2015 (days on which daily profit was higher than VaE) on January 15, January 23, May 19 and December 3. These were primarily caused by strong shifts in the euro’s exchange rates against the Swiss franc and the pound, and of the euro and dollar against the Brazilian real. The high VaE levels at the end of the year were due to the depreciation of the Argentinian peso after exchange restrictions in the country were lifted.

There was also an exception of VaR at 99% (days on which the daily loss was higher than the VaR) on September 24, caused mainly, as in the above cases, by high volatility in exchange rates, in this case of the euro and dollar against the Brazilian real.

The number of exceptions responded to the expected performance of the VaR calculation model, which works with a confidence level of 99% and an analysis period of one year (over a longer period of time, an average of two or three exceptions a year is expected).

BACKTESTING OF TRADING PORTFOLIOS: DAILY RESULTS VERSUS PREVIOUS DAY’S VALUE AT RISK (Million euros)

Clean P&L VaE 99% VaE 95% VaR 99% VaR 95% 60 45 30 15 0 -15 -30 -45 2-Jan-13 19-Feb-13 8-Apr-13 26-May-13 13-Jul-13 30-Aug-13 17-Oct-13 4-Dec-13 21-Jan-14 10-Mar-14 27-Apr-14 14-Jun-14 1-Aug-14 18-Sep-14 5-Nov-14 23-Dec-14 9-Feb-15 29-Mar-15 16-May-15 3-Jul-15 20-Aug-15 7-Oct-15 24-Nov-15

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1.3. Distribution of risks and management results¹⁵

Geographic distribution

In trading activity, the average contribution of Latin America to the Group’s total VaR in 2015 was 45.1% compared with a contribution of 39.7% in economic results. Europe, with 53.6% of global risk, contributed 54% of results. In relation to prior years, there was a gradual homogenization in the profile of activity in the Group’s different units, focused generally on providing service to professional and institutional clients.

Below is the geographic contribution (by percentage) to the Group total, both in risks, measured in VaR terms, as well as in results, measured in economic terms.

BINOMIAL VaR-MANAGEMENT RESULTS: GEOGRAPHIC DISTRIBUTION

Average VaR (at 99%, with a time frame of one day) and annual cumulative management result (million euros); percentage of annual totals.

Monthly distribution of risks and results

The following chart shows the risk assumption profile, in terms of VaR, compared to results in 2015. The average VaR remained relatively stable, albeit with higher values in the second quarter, while results evolved in a more regular way during the first half of the year, and were lower in the second half.

¹⁵  Results in terms similar to Gross Margin (excluding operating costs, the financial would be the only cost).

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TEMPORARY DISTRIBUTION OF RISK AND RESULTS IN 2015: PERCENTAGES OF ANNUAL TOTALS

Average VaR (at 99%, with a time frame of one day) and annual cumulative management result (million euros); percentage of annual totals.

The following frequency histogram shows the distribution of daily economic results on the basis of their size between 2013 and 2015. It shows that on over 97.4% of days on which the markets were open daily returns¹⁶ were in a range of between €-15 and +15 million.

DAILY RESULTS (MTM) FREQUENCY HISTOGRAM

Daily management result “clean” of fees and intraday operations (million euros). Number of days (%) in each range.

¹⁶  Yields “clean” of fees and results of intraday derivative operations.

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1.4. Risk management of derivatives

Derivatives activity is mainly focused on marketing investment products and hedging risks for clients. Management is focused on ensuring that the net risk opened is the lowest possible.

These transactions include options on equities, fixed-income and exchange rates. The units where this activity mainly takes place are: Spain, Santander UK, and, to a lesser extent, Brazil and Mexico.

The chart below shows the VaR Vega¹⁷ performance of structured derivatives business over the last three years. It fluctuated at around an average of €6 million. In general, the periods with higher VaR levels related to episodes of significant rises in volatility in the markets. The evolution of VaR Vega in the second quarter of 2013 was the result of the increased volatility of euro and US dollar interest rate curves, coinciding with a strategy of hedging client operations of significant amounts. Although in 2015, VaR Vega was similar to the previous year in the first quarter of the year, in the two next quarters it was affected by high market volatility due to events such as Greece’s bail-out, high stock market volatility in China or Brazil’s currency depreciation and rating downgrade, as well as the BRL’s strong depreciation against the euro and the dollar.

EVOLUTION OF RISK (VaR) OF THE DERIVATIVES BUSINESS

Million euros. VaR Vega at 99%, with a time frame of one day

¹⁷  Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.

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As regards the VaR by risk factor, on average, the exposure was concentrated, in this order, in interest rates, equities, exchange rates and commodities. This is shown in the table below:

FINANCIAL DERIVATIVES. RISK (VaR) BY RISK FACTOR

Million euros. VaR at 99%, with a time frame of one day

Exposure by business unit was concentrated in Spain, Santander UK, Mexico and Brazil (in that order).

FINANCIAL DERIVATIVES. RISK (VaR) BY UNIT

Million euros. VaR at 99%, with a time frame of one day

The average risk in 2015 (€6.8 million) is slightly lower compared to 2013 and higher than in 2014, for the reasons explained above.

Grupo Santander continues to have a very limited exposure to instruments or complex structured vehicles, reflecting a management culture one of whose hallmarks is prudence in risk management. At the end of 2015, the Group had:

• Hedge funds: the total exposure is not significant (€219.8 million at close of December 2015) and most of it is indirect, largely acting as counterparty in derivatives transactions, and also in financing transactions for those funds. This exposure has low loan-to-value levels of around 16.7% (collateral of €1,225.1 million at the close of December). The risk with this type of counterparty is analyzed case by case, establishing percentages of collateralization on the basis of the features and assets of each fund.

• Monolines: Santander’s exposure to bond insurance companies (monolines) was €137.9 million¹⁸ as of December 2015, mainly indirect exposure, €136.1 million, by virtue of the guarantee provided by this type of entity to various financing or traditional securitization operations. The exposure in this case is to double default, with primary underlying assets of high credit quality. The small remaining amount is direct exposure (for example, via purchase of protection from the risk of nonpayment by any of these insurance companies through a credit default swap). Exposure was virtually unchanged vs. 2014.

¹⁸  Collateral provided by monoline in bonds issued by US states (Municipal Bonds), which amounted to €19.1 million at December 2015, are not considered to be exposure.

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In short, the exposure to this type of instrument, as the result of the Group’s usual operations, continued to decline in 2015. This was mainly due to the integration of positions of institutions acquired by the Group, as Sovereign in 2009. All these positions were known at the time of purchase, having been duly provisioned. These positions, since their integration in the Group, have been notably reduced, with the ultimate goal of eliminating them from the balance sheet.

Santander’s policy for approving new transactions related to these products remains very prudent and conservative. It is subject to strict supervision by the Group’s senior management. Before approving a new transaction, product or underlying asset, the risks division verifies:

• The existence of an appropriate valuation model to monitor the value of each exposure: Mark-to-Market, Mark-to-Model or Mark-to-Liquidity.

• The availability in the market of observable data (inputs) needed to be able to apply this valuation model.

And provided these two points are always met:

• The availability of appropriate systems, duly adapted to calculate and monitor every day the results, positions and risks of new operations.

• The degree of liquidity of the product or underlying asset, in order to make possible their coverage when deemed appropriate.

1.5. Issuer risk in trading portfolios

Trading activity in credit risk is mainly conducted in the Treasury Units in Spain. It is done by taking positions in bonds and credit default swaps (CDS) at different maturities on corporate and financial references, as well as indexes (Itraxx, CDX).

The accompanying table shows the major positions at year-end in Spain, distinguishing between long (purchases of bonds and sales of CDS protection) and short (sales of bonds and purchases of CDS protection) positions:

  Million euros. Data at December 31, 2015.

	Largest ‘long’ positions (sale of protection)		Largest ‘short’ positions (purchase of protection)
	Exposure at   default (EAD)	% total EAD	Exposure at   default (EAD)	% total EAD
1st reference	131	5.09%	(32)	4.30%
2nd reference	124	4.82%	(25)	3.36%
3rd reference	59	2.29%	(23)	3.09%
4th reference	54	2.10%	(23)	3.09%
5th reference	51	1.98%	(20)	2.68%
Sub-total top 5	419	16.28%	(123)	16.52%
Total	2,572	100.00%	(745)	100.00%

Note: zero recoveries are supposed (LCR=0) in the EaD calculation.

1.6. Analysis of scenarios

Various stress scenarios were calculated and analyzed regularly in 2015 (at least monthly) at the local and global levels for all the trading portfolios and using the same risk factor assumptions.

Maximum volatility scenario (Worst Case)

This scenario is given particular attention as it combines historic movements of risk factors with an ad-hoc analysis in order to reject very unlikely combinations of variations (for example, sharp falls in stock markets together with a decline in volatility).

A historic volatility equivalent to six standard deviations is applied. The scenario is defined by taking for each risk factor the movement which represents the greatest potential loss in the portfolio, rejecting the most unlikely combinations in economic-financial terms. At year-end, that scenario implied, for the global portfolio, rising interest rates in Latin American markets and low interest rates in core markets, falls in stock markets, depreciation of all currencies against the euro, and widening credit spreads and volatility. The results for this scenario at December 31, 2015 are shown in the following table.

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MAXIMUM VOLATILITY STRESS SCENARIO (WORST CASE)

Million euros. Data at December 31, 2015

The stress test shows that the economic loss suffered by the Group in its trading portfolios, in terms of the mark to market (MtM) result, would be, if the stress movements defined in the scenario materialized in the market, €164.2 million. This loss would be concentrated in Europe (in the following order: interest rates, credit spread and equities) and Latin America (in the following order: interest rates, exchange rates and equities).

Other global stress scenarios

• Abrupt crisis: an ad hoc scenario with sharp market movements. Rise in interest rate curves, sharp falls in stock markets, large appreciation of the dollar against other currencies, rise in volatility and in credit spreads.

• September 11 crisis: historic scenario of the September 11, 2001 attacks with a significant impact on the US and global markets. This is sub-divided into two scenarios: I) maximum accumulated loss until the worst moment of the crisis; and II) the maximum loss in a day. In both cases, there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against other currencies.

• Subprime crisis: historic scenario of the US mortgage crisis. The objective of the analysis is to capture the impact on results of the reduction in liquidity in the markets. Two time horizons were used (one day and 10 days), in both cases there are falls in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against other currencies.

• EBA adverse scenario: the scenario proposed by the European Banking Authority (EBA) in April 2014 as part of the EBA 2014 EU-Wide Stress Test. This involves an adverse scenario for European banks over a time horizon from 2014 to 2016. The scenario reflects the systemic risks considered the most serious threats to the stability of the European Union’s banking sector. These include: an increase in bond yields worldwide; incremental deterioration of credit quality in countries with weak demand; political reforms grinding to a halt, endangering the sustainability of public finances; and insufficient adjustments to balance sheets to maintain reasonable market finance .

This latter scenario replaced the sovereign debt crisis scenario in November 2014. This historic scenario identified four geographic zones (the US, Europe, Latin America and Asia) and included interest rate rises, falls in stock markets and volatilities, widening credit spreads, and depreciation of the euro and Latin American currencies, and appreciation of Asian currencies, against the dollar.

Every month a consolidated stress test report is drawn up with explanations of the main changes in results for the various scenarios and units. An early warning mechanism has also been established so that when the loss for a scenario is high in historic terms and/or in terms of the capital consumed by the portfolio in question, the relevant business executive is informed.

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The results of these global scenarios for the last three years are shown in the following table:

STRESS TEST RESULTS: COMPARISON OF THE 2013 TO 2015 SCENARIOS (ANNUAL AVERAGES)

(Million euros)

2. Methodologies

2.1 Value at Risk (VaR)

The standard methodology that Grupo Santander applies to trading activities is Value at Risk (VaR), which measures the maximum expected loss with a certain confidence level and time frame. The standard for historic simulation is a confidence level of 99% and a time frame of one day. Statistical adjustments are applied enabling the most recent developments affecting the levels of risk assumed to be incorporated efficiently and quickly. A time frame of two years or at least 520 days from the reference date of the VaR calculation is used. Two figures are calculated every day: one applying an exponential decay factor that accords less weight to the observations furthest away in time and another with the same weight for all observations. The higher of the two is reported as the VaR.

Value at Earnings (VaE) is also calculated. This measures the maximum potential gain with a certain level of confidence and time frame, applying the same methodology as for VaR.

VaR by historic simulation has many advantages as a risk metric (it sums up in a single number the market risk of a portfolio; it is based on market movements that really occurred without the need to make assumptions of functions forms or correlations between market factors, etc.), but also has limitations.

Some limitations are intrinsic to the VaR metrics, regardless of the methodology used for its calculation, including:

• The VaR calculation is calibrated at a certain level of confidence, which does not indicate the levels of possible losses beyond it.

• There are some products in the portfolio with a liquidity horizon greater than that specified in the VaR model.

• VaR is a static analysis of the risk of the portfolio, and the situation could change significantly during the following day, although the likelihood of this occurring is very low.

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Using the historic simulation methodology also has its limitations:

• High sensitivity to the historic window used.

• Inability to capture plausible events that would have significant impact, if these do not occur in the historic window used.

• The existence of valuation parameters with no market input (such as correlations, dividend and recovery rate).

• Slow adjustment to new volatilities and correlations, if the most recent data receives the same weight as the oldest data.

Some of these limitations are overcome by using Stressed VaR and Expected Shortfall, calculating VaR with exponential decay and applying conservative valuation adjustments. Furthermore, as previously stated, the Group regularly conducts analysis and backtesting of the accuracy of the VaR calculation model.

2.2 Stressed VaR (sVaR) and Expected Shortfall (ES)

In addition to standard VaR, Stressed VaR is calculated daily for the main portfolios. The calculation methodology is the same as for VaR, with the two following exceptions:

• The historical observation period for the factors: when calculating Stressed VaR a window of 260 observations is used, rather than 520 for VaR. However, this is not the most recent data: rather, the data used is from a continuous period of stress for the portfolio in question. This is determined for each major portfolio by analyzing the history of a subset of market risk factors selected based on expert judgement and the most significant positions in the books.

• In order to obtain the stressed VaR, unlike when calculating the VaR, the maximum between the percentile uniformly weighted and the one exponentially weighted is not applied. Instead, the percentile uniformly weighted is used directly.

Moreover, the expected shortfall (ES) is also calculated in order to estimate the expected value of the potential loss when this is higher than the level set by the VaR. Unlike VaR, ES has the advantage of better capturing the tail risk and of being a sub-additive metric¹⁹.

Going forward, in the near term the Basel Committee has recommended replacing VaR with Expected Shortfall as the baseline metric for calculating regulatory capital for trading portfolios. The Committee considers that ES with a 97.5% confidence interval delivers a similar level of risk to VaR at a 99% confidence interval. Equal weights are applied to all observations when calculating ES.

2.3 Analysis of scenarios

The Group uses other metrics in addition to VaR, giving it greater control over the risks it faces in the markets where it is active. These measures include scenario analysis. This consists of defining alternative behaviors for various financial variables and obtaining the impact on results of applying these to activities. These scenarios may replicate events that occurred in the past (such as a crisis) or determine plausible alternatives that are unrelated to past events.

The potential impact on earnings of applying different stress scenarios is regularly calculated and analyzed, particularly for trading portfolios, considering the same risk factor assumptions. Three scenarios are defined, as a minimum: plausible, severe and extreme. Taken together with VaR, these reveal a much more complete spectrum of the risk profile.

A number of trigger thresholds have also been established for global scenarios, based on their historical results and the capital associated with the portfolio in question. When these triggers are activated, the portfolio managers are notified so they can take appropriate action. The results of the global stress exercises, and any breaches of the trigger thresholds, are reviewed regularly, and reported to senior management, when this is considered appropriate.

¹⁹  According to the financial literature, subaddivity is a desirable property for a coherent risk metric. This property establishes that f(a+b) is less than or equal to f(a)+f(b). Intuitively, it assumes that the more instruments and risk factors there are in a portfolio, the lower the risks, because of the benefits of diversification. Whilst VaR only offers this property for some distributions, ES always does so. Fundamental review of the trading book: a revised market risk framework (Basel Committee consultation document on banking supervision, October 2013).

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2.4 Analysis of positions, sensitivities and results

Positions are used to quantify the net volume of the market securities for the transactions in the portfolio, grouped by main risk factor, considering the delta value of any futures or options. All risk positions can be expressed in the base currency of the unit and the currency used for standardizing information. Changes in positions are monitored on a daily basis to detect any incidents, so they can be corrected immediately.

Measurements of market risk sensitivity estimate the variation (sensitivity) of the market value of an instrument or portfolio to any change in a risk factor. The sensitivity of the value of an instrument to changes in market factors can be obtained using analytical approximations by partial derivatives or by complete revaluation of the portfolio.

In addition, the statement of income is also drawn up every day, providing an excellent indicator of risk, enabling us to identify the impact of changes in financial variables on the portfolios.

2.5 Derivative activities and credit management

Also noteworthy is the control of derivative activities and credit management which, because of its atypical nature, is conducted daily with specific measures. First, the sensitivities to price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) are controlled. Second, measures such as the sensitivity to the spread, jump-to-default, concentrations of positions by level of rating, etc., are reviewed systematically.

With regard to the credit risk inherent to trading portfolios, and in line with the recommendations of the Basel Committee on Banking Supervision and prevailing regulations, a further metric is also calculated: the Incremental Risk Charge (IRC). This seeks to cover the risks of non-compliance and ratings migration that are not adequately captured in VaR, through changes in the corresponding credit spreads. This metric is basically applied to fixed-income bonds, both public and private, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset backed securities, etc.). IRC is calculated using direct measurements of loss distribution tails at an appropriate percentile (99.9%), over a one year horizon. The Monte Carlo methodology is used, applying one million simulations.

2.6 Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)

Grupo Santander incorporates credit valuation adjustment (CVA) and debt valuation adjustment (DVA) when calculating the results of trading portfolios. The CVA is a valuation adjustment of over-the-counter (OTC) derivatives, as a result of the risk associated with the credit exposure assumed by each counterparty.

The CVA is calculated by taking into account the potential exposure with each counterparty in each future maturity. The CVA for a certain counterparty is therefore the sum of the CVA over all such future terms. The following inputs are used:

• Expected exposure: including, for each operation the current market value (MtM) as well as the potential future risk (add-on) to each maturity. CVA also considers mitigating factors such as collateral and netting agreements, together with a decay factor for derivatives with interim payments.

• Severity: the percentage of final loss assumed in case of credit/ non-payment of the counterparty.

• Probability of default: for cases where there is no market information (spread curve traded through CDS, etc.) general proxies generated on the basis of companies with listed CDS of the same sector and external rating as the counterparty are used.

• Discount factor curve.

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The DVA is a valuation adjustment similar to the CVA, but in this case as a result of Grupo Santander’s risk that counterparties assume in OTC derivatives.

3. System for controlling limits

Setting market risk and liquidity limits is designed as a dynamic process which responds to the Group’s risk appetite level. This process is part of an annual limits plan drawn up by the Group’s senior management, involving every Group entity.

The market risk limits used in Grupo Santander are established based on different metrics and try to cover all activity subject to market risk from many perspectives, applying a conservative approach. The main ones are:

• VaR limits.

• Limits of equivalent positions and/or nominal.

• Interest rate sensitivity limits.

• Vega limits.

• Delivery risk limits for short positions in securities (fixed income and securities).

• Limits to constrain the volume of effective losses, and protect results generated during the period:

• Loss trigger.

• Stop loss.

• Credit limits:

• Total exposure limit.

• Jump to default by issuer limit.

• Others.

• Limits for origination operations.

These general limits are complemented by other sub-limits to establish a sufficiently granular limits framework for effective control of the market risk factors to which the Group is exposed in its trading activities. Positions are monitored on a daily basis, at both the unit and global levels, with exhaustive control of changes to portfolios, so as to identify any incidents that might need immediate correction. Meanwhile, the daily drawing up of the income statement by the risks area is an excellent indicator of risks, as it allows the impact that changes in financial variables have had on portfolios to be identified.

Implementation of the Volcker Rule throughout the Group in July 2015 required activities to be reorganized to ensure compliance with this new regulation, the preparation of new metrics and the definition of limits at the desk level.

Three categories of limits were established based on the scope of approval and control: global approval and control limits, global approval limits with local control, and local approval and control limits. The limits are requested by the business executive of each country/entity, considering the particular nature of the business and so as to achieve the budget established, seeking consistency between the limits and the risk/return ratio. The limits are approved by the corresponding risk bodies.

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Business units must comply with the approved limits at all times. In the event of a limit being exceeded, the local business executives have to explain, in writing and on the day, the reasons for the excess and the action plan to correct the situation, which in general might consist of reducing the position until it reaches the prevailing limits or setting out the strategy that justifies an increase in the limits.

If the business unit fails to respond to the excess within three days, the global business executives will be asked to set out the measures to be taken in order to make the adjustment to the existing limits. If this situation lasts for 10 days as of the first excess, senior risk management will be informed so that a decision can be taken: the risk takers could be made to reduce the levels of risk assumed.

C. Structural balance sheet risks

1. Quantitative analysis²⁰

The market risk profile inherent in Grupo Santander’s balance sheet, in relation to its asset volumes and shareholders’ funds, as well as the budgeted financial margin, remained moderate in 2015, in line with previous years.

1.1. Structural interest rate risk

Europe and the United States

Against a backdrop of low interest rates, the main balance sheets in mature markets - the parent bank, the UK and the US – show positive economic value and net interest income sensitivities to interest rate rises.

Exposure levels in all countries are moderate in relation to the annual budget and equity levels.

At December 2015, net interest income risk at one year, measured as sensitivity to parallel changes of ±100 basis points, was concentrated in the yield curve for the euro, at €257 million, the Polish zloty, at €83 million, and the US dollar, at €78 million, all relating to risks of rate cuts.

²⁰  Includes the whole balance sheet except for the trading portfolios.

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NET INTEREST INCOME (NII) SENSITIVITY²¹

% of the total

Rest: Portugal and SCF.

At the same date, the most relevant risk to the economic value of equity, measured as its sensitivity to parallel changes in the yield curve of ±100 basis points, was in the euro interest rate curve, at €3,897 million, for the risk of rate cuts. The amounts at risk for the dollar and sterling curves were €691 million and €488 million, respectively, also for rate cuts. These scenarios are extremely unlikely in practice at present.

ECONOMIC VALUE OF EQUITY (EVE) SENSITIVITY²²

% of the total

Rest: Poland, Portugal and SCF.

²¹  Sensitivity for the worst scenario between +100 and -100 basis points.

²²  Sensitivity for the worst scenario between +100 and -100 basis points.

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The following tables set out the interest-rate risk of the balance sheets of the parent bank and Santander UK by maturity, at the end of 2015.

PARENT BANK: INTEREST RATE REPRICING GAP²³

Million euros. December 31, 2015

SANTANDER UK: INTEREST RATE REPRICING GAP²⁴

Million euros. December 31, 2015

In general, the gaps by maturities are kept at reasonable levels in relation to the size of the balance sheet.

Latin America

Latin American balance sheets are positioned for interest rate cuts for both economic value and net interest income, except for net interest income in Mexico, where excess liquidity is invested in the short term in the local currency.

In 2015, exposure levels in all countries were moderate in relation to the annual budget and capital levels.

At the end of the year, net interest income risk over one year, measured as sensitivity to parallel ± 100 basis point movements, was concentrated in three countries, Brazil (€124 million), Mexico (€37 million) and Chile (€23 million), as shown in the chart below.

²³  Aggregate gap of all currencies on the balance sheet of the Parent bank, in euros.

²⁴  Aggregate gap of all currencies on the balance sheet of the Santander UK unit, in euros.

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NET INTEREST INCOME (NII) SENSITIVITY²⁵

% of the total

Rest: Argentina, Uruguay and Peru.

Risk to the value of equity over one year, measured as sensitivity to parallel ± 100 basis point movements, was also concentrated in Brazil (€425 million), Mexico (€180 million) and Chile (€132 million).

ECONOMIC VALUE OF EQUITY (EVE) SENSITIVITY²⁶

% of the total

Rest: Argentina, Uruguay and Peru.

²⁵  Sensitivity for the worst scenario between +100 and -100 basis points.

²⁶  Sensitivity for the worst scenario between +100 and -100 basis points.

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The table below shows the interest-rate risk maturity structure of the Brazil balance sheet in December 2015.

BRAZIL: INTEREST RATE REPRICING GAP²⁷

Million euros. December 31, 2015

1.2. Structural exchange-rate risk/hedging of results

Structural exchange rate risk arises from Group operations in currencies, mainly related to permanent financial investments, and the results and hedging of these investments.

This management is dynamic and seeks to limit the impact on the core capital ratio of movements in exchange rates²⁸. In 2015, hedging levels of the core capital ratio for exchange rate risk were maintained at around 100%.

At the end of 2015, the largest exposures of permanent investments (with their potential impact on equity) were, in order, in pounds sterling, US dollars, Brazilian reais, Chilean pesos, Mexican pesos and Polish zlotys. The Group hedges some of these positions of a permanent nature with exchange-rate derivatives.

In addition, the Financial Management area is responsible for managing exchange-rate risk for the Group’s expected results and dividends in units where the base currency is not the euro.

1.3. Structural equity risk

Santander maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as available for sale portfolios (capital instruments) or as equity stakes, depending on their envisaged time in the portfolio.

The equity portfolio of the banking book at the end of 2015 was diversified in securities in various countries, mainly Spain, the U.S., China, Brazil and the Netherlands. Most of the portfolio is invested in the financial and insurance sectors; other sectors, to a lesser extent, are professional, scientific and technical activities, public administrations (stake in Sareb), manufacturing industry, the transport sector and warehousing.

Structural equity positions are exposed to market risk. VaR is calculated for these positions using market price data series or proxies. At the end of December 2015, the VaR at 99% with a one day time frame was €208.1 million (€208.5 and €235.3 million at the end of December 2014 and 2013, respectively).

1.4. Structural VaR

A standardized metric such as VaR can be used for monitoring total market risk for the banking book, excluding the trading activity of Santander Global Corporate Banking, distinguishing between fixed income (considering both interest rates and credit spreads on ALCO portfolios), exchange rates and equities.

²⁷  Aggregate gap of all currencies on the balance sheet of the Brazil unit.

²⁸  In early 2015, the criteria for coverage of the core capital ratio was changed from phase-in to fully loaded.

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In general, structural VaR is not high in terms of the Group’s volume of assets or equity.

Structural VaR

Million euros

			December 31, 2015
	December 31, 2014		Low		Average		High		Period End
TOTAL		806.5		568.6		703.9		900.0		707.1
Trading		10.5		10.3		15.6		31.0		13.6
Non-Trading		809.8		561.6		698.5		883.5		710.2
Diversification Effect		-13.9		-3.3		-10.2		-14.5		-16.6

The diversification effect is calculated as the sum of the individual or “stand alone” VaR of each portfolio minus the total VaR of the consolidated portfolio.

Santander calculates the VaR for full revaluation (individual pricers for each position) or second-order Taylor approximation for the most complex portfolios. Several individual factors are included, such as each interest rate curve involved, individual share prices, currencies and volatility matrices. For reporting purposes, they are grouped based on the primary factor (interest rate, equity, foreign exchange, credit spread and commodities).

Daily VaR (considering each factor of interest rate risk, foreign exchange rate risk and equity price risk individually) were as set forth below.

Interest Rate Risk, Foreign Exchange Rate Risk and Equity Price Risk

Million euros

			December 31, 2015
	December 31, 2014		Low		Average		High		Period End
Interest Rate Risk
Trading		10.5		9.7		14.9		28.3		12.7
Non-Trading		493.6		250.5		350.0		775.7		264.2
Diversification Effect		-10.4		-9.6		-14.6		-27.8		-12.4
TOTAL		493.7		250.7		350.4		776.2		264.5
Exchange Rate Risk
Trading		2.9		1.6		4.5		15.2		2.6
Non-Trading		533.8		428.7		634.7		908.6		657.1
Diversification Effect		-2.9		-1.6		-4.5		-15.0		-2.6
TOTAL		533.8		428.8		634.7		908.7		657.1
Equity Price Risk
Trading		1.8		1.0		1.9		3.8		1.1
Non-Trading		208.5		208.1		223.2		241.8		208.1
Diversification Effect		-1.7		-1.0		-1.9		-3.8		-1.1
TOTAL		208.5		208.1		223.2		241.9		208.1

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The Group’s daily VaR estimates by activity were as set forth below.

VaR by Activity

Million euros

			December 31, 2015
	December 31, 2014		Low		Average		High		Period End
Trading
Interest Rate		10.5		9.7		14.9		28.3		12.7
Exchange Rate		2.9		1.6		4.5		15.2		2.6
Equity		1.8		1.0		1.9		3.8		1.1
Credit Spread		4.6		1.9		5.2		13.7		2.9
Commodities		0.1		0.0		0.2		0.6		0.1
TOTAL		10.5		10.3		15.6		31.0		13.6
Non-Trading Interest Rate
Interest Rate		493.6		250.5		350.0		775.7		264.2
Non-Trading Foreign Exchange
Exchange Rate		533.8		428.7		634.7		908.6		657.1
Non-Trading Equity
Equity		208.5		208.1		223.2		241.8		208.1
TOTAL		806.5		568.6		703.9		900.0		707.1
Interest Rate		493.7		250.7		350.4		776.2		264.5
Exchange Rate		533.8		428.8		634.7		908.7		657.1
Equity		208.5		208.1		223.2		241.9		208.1

2. Methodologies

2.1 Structural interest rate risk

The Group analyses the sensitivity of its net interest income and equity value to changes in interest rates. This sensitivity arises from gaps in maturity dates and the review of interest rates in the different asset and liability items.

The financial measures to adjust the positioning to that desired by the Group are agreed on the basis of the positioning of balance sheet interest rates, as well as the situation and outlook for the market. These measures range from taking positions in markets to defining the interest rate features of commercial products.

The metrics used by the Group to control interest rate risk in these activities are the repricing gap, the sensitivity of net interest income and of equity value to changes in interest rate levels, the duration of equity and Value at Risk (VaR), for the purposes of calculating economic capital.

With regard to the regulatory approach, in June 2015 the Basel Committee issued a consultative document on structural interest rate risk²⁹ proposing changes to the regulatory capital treatment and supervision of this risk in order to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates and to limit incentives for capital arbitrage between the trading book and the banking book.

²⁹  “Interest rate risk in the banking book” (consultative document of the Basel Committee on Banking Supervision, June 2015).

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Interest rate gap of assets and liabilities

This is the basic concept for identifying the entity’s interest rate risk profile and measuring the difference between the volume of sensitive assets and liabilities on and off the balance sheet that reprice (i.e. that mature or are subject to rate revisions) at certain times (buckets). This provides an immediate approximation of the sensitivity of the entity’s balance sheet and its net interest income and equity value to changes in interest rates.

Net interest income (NII) sensitivity

This is a key measure of the profitability of balance sheet management. It is calculated as the difference in the net interest income resulting from a parallel movement in interest rates over a particular period. The standard period for measuring net interest income sensitivity is one year.

Economic value of equity (EVE) sensitivity

This measures the interest rate risk implicit in equity value - which for the purposes of interest rate risk is defined as the difference between the net current value of assets and the net current value of liabilities outstanding - based on the impact that a change in interest rates would have on these values.

Treatment of liabilities without defined maturity

In the corporate model, the total volume of the balances of accounts without maturity is divided between stable and unstable balances. This separation between stable and unstable balances is obtained from a model that is based on the relation between balances and their own moving averages.

From this simplified model, the monthly cash flows are obtained and used to calculate NII and EVE sensitivities.

The model requires a variety of inputs:

• Parameters inherent in the product.

• Performance parameters of the client (in this case analysis of historic data is combined with the expert business view).

• Market data.

• Historic data of the portfolio.

Pre-payment treatment for certain assets

The pre-payment issue mainly affects fixed-rate mortgages in units where the relevant interest rate curves for the balance sheet are at low levels. This risk is modelled in these units, and this can also be applied, with some modifications, to assets without defined maturity (credit card businesses and similar).

The usual techniques used to value options cannot be applied directly because of the complexity of the factors that determine borrower pre-payments. As a result, the models for assessing options must be combined with empirical statistical models that seek to capture pre-payment performance. Some of the factors conditioning this performance are:

• Interest rate: the differential between the fixed rate on the mortgage and the market rate at which it could be refinanced, net of cancellation and opening costs;

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• Seasoning: pre-payment tends to be low at the start of the instruments life cycle (signing of the contract) and grow and stabilize as time passes;

• Seasonality: redemptions or early cancellations tend to take place at specific dates;

• Burnout: decreasing trend in the speed of pre-payment as the instrument’s maturity approaches, which includes:

a) Age: defines low rates of pre-payment.

b) Cash pooling: defines as more stable those loans that have already overcome various waves of interest rate falls. In other words, when a portfolio of loans has passed one or more cycles of downward rates and thus high levels of pre-payment, the “surviving” loans have a significantly lower pre-payment probability.

c) Others: geographic mobility, demographic, social and available income factors, etc.

The series of econometric relations that seek to capture the impact of all these factors is the probability of pre-payment of a loan or pool of loans and is denominated the pre-payment model.

Value at Risk (VaR)

For balance sheet activity and investment portfolios, this is defined as the 99% percentile of the distribution function of losses in equity value, calculated based on the current market value of positions and returns over the last two years, at a particular level of statistical confidence over a certain time horizon. As with trading portfolios, a time frame of two years or at least 520 days from the reference date of the VaR calculation is used.

2.2 Structural exchange rate risk/hedging of results

These activities are monitored via position measurements, VaR and results, on a daily basis.

2.3 Structural equity risk

These activities are monitored via position measurements, VaR and results, on a monthly basis.

3. System for controlling limits

As already stated for the market risk of trading, under the framework of the annual limits plan, limits are set for balance sheet structural risks, responding to Grupo Santander’s risk appetite level.

The main ones are:

Balance sheet structural interest rate risk:

• Limit on the sensitivity of net interest income to one year.

• Limit on the sensitivity of economic value of equity.

Structural exchange rate risk:

• Net position in each currency (for hedging positions of results).

In the event of exceeding one of these limits or their sub limits, the relevant risk management executives must explain the reasons and facilitate the measures to correct it.

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D. Pension and actuarial risks

1. Pension risk

When managing the pension fund risks of employees (defined benefit), the Group assumes the financial, market, credit and liquidity risks it incurs for the assets and investment of the fund, as well as the actuarial risks derived from the liabilities, and the responsibilities for pensions to its employees.

The Group’s objective in the sphere of controlling and managing pension risk focuses on identifying, measuring, monitoring, mitigating and communicating this risk. The Group’s priority is thus to identify and mitigate all the focuses of risk.

This is why the methodology used by Grupo Santander estimates every year the combined losses in assets and liabilities in a defined stress scenario from changes in interest rates, inflation, stocks markets and properties, as well as credit and operational risk.

Main figures

The main figures for the pension funds of employees with defined benefit plans are set out in note 25 of our consolidated financial statements, including the details and movements of provisions for pensions, as well as the main hypotheses used to calculate the actuarial risk and the risk of the fund, changes in the value of assets and liabilities and details of the investment portfolios assigned to them.

The investor profile of the aggregated portfolio of employees’ pension funds is medium-low risk, as around 65% of the total portfolio is invested in fixed-income assets, as set out in the following chart.

* Includes positions in hedge funds, private equity and derivatives Figures as of 31 December 2015

2. Actuarial risk

Actuarial risk is produced by biometric changes in the life expectancy of those with life insurance, from the unexpected increase in the indemnity envisaged in non-life insurance and, in any case, from unexpected changes in the performance of insurance takers in the exercise of the options envisaged in the contracts.

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The following are actuarial risks:

Risk of life liability: risk of loss in the value of life insurance liabilities caused by fluctuations in risk factors that affect these liabilities:

i. Mortality/longevity risk: risk of loss from movements in the value of the liabilities deriving from changes in the estimation of the probability of death/survival of those insured.

ii. Morbidity risk: risk of the loss from movements in the value of the liabilities deriving from changes in estimating the probability of disability/incapacity of those insured.

iii. Redemption/fall risk: risk of loss from movements in the value of the liabilities as a result of the early cancellation of the contract, of changes in the exercise of the right of redemption by the insurance holders, as well as options of extraordinary contribution and/or suspending contributions.

iv. Risk of costs: risk of loss from changes in the value of the liabilities derived from negative variances in envisaged costs.

v. Catastrophe risk: losses caused by catastrophic events that increase the entity’s life liability.

Risk of non-life liability: risk of loss from the change in the value of the non-life insurance liability caused by fluctuations in risk factors that affect these liabilities:

i. Premium risk: loss derived from the insufficiency of premiums to cover the disasters that might occur.

ii. Reserve risk: loss derived from the insufficiency of reserves for disasters, already incurred but not settled, including costs from management of these disasters.

iii. Catastrophe risk: losses caused by catastrophic events that increase the entity’s non-life liability.

Main figures

In the case of Grupo Santander, actuarial risk embraces the activity of the Group’s fully-owned subsidiaries, which are subject not only to risk of an actuarial nature, but whose activity is also impacted by the other financial, non-financial and transversal risks defined by the Group.

As of December 31, 2015, the volume of assets managed by the companies in Spain and Portugal that belong 100% to Grupo Santander amounted to €25,956 million, of which €21,444 million relates directly to commitments with insurance holders, as follows:

• €14,663 million are commitments guaranteed (wholly or partly) by the companies themselves.

• €6,781 million are commitments where the risks are assumed by the insurance holders.

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Part 5. Liquidity and funding risk

1. Introduction to the treatment of liquidity and funding risk

Liquidity and funding management has always been a basic element of the Group’s business strategy and a fundamental cornerstone, together with capital, on which the strength of its balance sheet rests.

The Group relies on a decentralized funding model composed of subsidiaries that are autonomous and self-sufficient in terms of liquidity. Each subsidiary is responsible for covering the liquidity needs arising from its current and future activity, either by taking deposits from its customers in its area of influence, or by resorting to the wholesale markets where it operates, subject to management and supervision procedures coordinated at Group level.

This funding structure has proven to be most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other areas and, therefore, the Group as a whole, which could occur if a centralized funding model were used.

In addition, at the Group this funding structure benefits from the advantages of having a commercial banking model with a significant presence in ten markets with great potential, with the focus on retail customers and a high level of efficiency. As a result, the subsidiaries have a considerable capacity to attract stable deposits, as well as a significant issue capacity in the wholesale markets of their respective countries, generally in local currency.

2. Liquidity management

Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

Liquidity management at the Group is based on the following principles:

• Decentralized liquidity model.

• Medium- and long-term liquidity needs arising from the business must be funded using medium- and long-term instruments.

• High proportion of customer deposits, as a result of a commercial balance sheet.

• Diversification of wholesale funding sources by: instrument/investor; market/currency; and maturity.

• Restrictions on recourse to short-term wholesale financing.

• Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in adverse situations.

• Compliance with the regulatory liquidity requirements at Group and subsidiary level, as a new conditioning factor in management.

In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones:

• A sound organizational and governance model to ensure that senior management of the subsidiaries is involved in the decision-making process and is included in the Group’s global strategy.

• An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

• A management approach adapted in practice to the liquidity needs of each business.

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2.1. Organizational and governance model

Decisions relating to all structural risks, including liquidity and funding risk, are made though local asset-liability committees (ALCOs) in coordination with the Global ALCO.

The Global ALCO is the body empowered by the board of directors of Banco Santander to coordinate the asset and liability management (ALM) function throughout the Group, including the management of liquidity and funding, which is carried out by the local ALCOs in accordance with the corporate ALM framework.

It is presided over by the Bank’s chair and its members are an executive deputy chairman (who, in turn, is the chairman of the executive risk committee), the CEO, the finance and risk executive vice presidents, and other executive vice presidents and heads of certain business and analysis units who perform advisory functions.

The liquidity risk profile and appetite aim to reflect the Group’s strategy in conducting its business, which consists of structuring the balance sheet to render it as resilient as possible to potential liquidity stress scenarios. To this end, appetite metrics have been structured to reflect the application, on an individual basis, of the principles of the Group’s management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios.

Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain very severe but highly unlikely events occur.

2.2. Balance sheet analysis and liquidity risk measurement

Liquidity and funding decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the various units and businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains adequate liquidity levels to cover its short- and long-term requirements with stable funding sources, optimizing the impact of funding costs on the income statement.

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic metrics.

The results of these balance-sheet, projection and scenario analyses provide the inputs required to prepare the Group’s various contingency plans, which, if necessary, would enable it to anticipate a broad spectrum of potential adverse situations.

All these measures are in line with the practices being promoted to strengthen the liquidity of financial institutions by the Basel Committee and the various regulators (in the European Union, the European Banking Authority). The objective is to define a framework of principles and metrics which, in certain cases, are nearing implementation and, in others, are at the early stages of development.

In 2015 the Internal Liquidity Adequacy Assessment Process (ILAAP) was conducted for the first time. The ILAAP, which focuses on both quantitative and qualitative aspects, must be integrated with the Group’s other strategic and risk management processes. The Group maintained a robust liquidity position across all its units, in both the base scenario and potential stress scenarios.

Methodology for liquidity risk monitoring and control

The aims of the liquidity risk metrics adopted by the Group are:

• To attain the highest degree of effectiveness in liquidity risk measurement and control.

• To provide support for financial management, to which end the metrics are adapted to the manner in which the Group’s liquidity is managed.

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• To be aligned with the regulatory requirements arising from the transposition of Basel III in the European Union, in order to avoid any conflicts between limits and to facilitate management.

• To act as an early warning system that anticipates potential risk situations by monitoring certain indicators.

• To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, these have to be analyzed and adapted by each unit.

Two kinds of basic metrics are used to control liquidity risk: short term and structural.

Short-term metrics include basically the liquidity gap, while structural metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:

Liquidity gap

The liquidity gap provides information on potential cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main entities and for each of the currencies in which the Group operates. At the end of 2015, all units complied comfortably with the horizons set at corporate level for the liquidity scenario.

Net structural position

The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base, as well as capital and other non-current liabilities. Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. At the end of 2015, the Group had a structural liquidity surplus of more than €149,000 million.

Scenario analysis

The Group supplements the aforementioned metrics by developing various stress scenarios. Its main objective is to identify the critical factors of potential crises and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analyses the units generally consider three different scenarios: idiosyncratic, local systemic and global systemic. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

The definition of scenarios and the calculation of metrics under each of them are directly related to the definition and execution of the liquidity contingency plan, which is the responsibility of financial management.

2.3. Management tailored to business needs

The Group performs its liquidity management at subsidiary and/or business unit level in order to finance its recurring activities with the appropriate terms and prices.

In practice, in keeping with the funding principles mentioned above, the liquidity management at these units consists of the following:

• Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business. Based on these liquidity requirements and taking into account certain prudential limits on the raising of funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level.

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• Year-round monitoring of the actual changes in the balance sheets and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan.

• Monitoring and management of the units’ compliance with the regulatory ratios, and oversight of the level of encumbered assets in each unit’s funding, from a structural standpoint and with regard to its shortest-term component.

• Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity.

The effectiveness of this management effort at Group level is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to raise funds in the wholesale markets so that, in ongoing coordination with the Group, it can establish an issue and securitization plan.

Traditionally, the Group’s main subsidiaries have been self-sufficient in terms of their structural funding. The exception is Santander Consumer Finance (SCF), which, because it specializes in consumer financing mainly through dealer/retailer recommendations, has required the financial support of other Group units, especially the Parent.

This support, at all times provided at market prices based on the term of the funding and the internal rating of the borrower unit, has decreased over time and currently relates substantially in full to needs with regard to the new portfolios and business units included in SCF within the framework of the agreement with Banque PSA Finance. This requirement for increased financial support from the Group will remain in 2016, since further units have yet to be included. In the medium term, as the new units develop their own wholesale funding capacities, as required by the Group’s model, this financial support will be reduced.

3. Funding strategy and evolution of liquidity in 2015

3.1. Funding strategy

In the last few years the Group’s funding activity has been underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of the subsidiaries’ strategies to the growing demands of both markets and regulators. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe.

In any case, it is possible to identify a series of general trends in the policies implemented by the Group’s subsidiaries in their funding and liquidity management strategies since the beginning of the crisis, namely:

• Maintenance of adequate, stable medium- and long-term wholesale funding levels at Group level. At 2015 year-end, this funding represented 21% of the liquidity balance sheet, a level similar to that of recent years but well below that at 2008 year-end (28%) when wholesale liquidity, which was more abundant and less expensive, had not yet suffered the pressures of the crisis.

• Holding a sufficient volume of assets eligible for discount at central banks as part of the liquidity reserve to cater for episodes of stress on wholesale markets. In particular, in recent years the Group has raised its total discount capacity significantly, from close to €85,000 million at 2008 year-end to the current level of more than €195,000 million.

• Strong generation of liquidity from the commercial business due to the lower growth of credit and greater emphasis on attracting customer funds.

Thanks to all these market and business developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure, the main features of which are as follows:

• High proportion of customer deposits in a predominantly commercial balance sheet. Customer deposits are the Group’s major source of funding. These deposits represent around two thirds of the Group’s net liabilities (i.e. of the liquidity balance sheet) and at the end of 2015 they accounted for 86% of net loans.

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• Diversified wholesale funding, primarily at medium and long term, with a very small proportion maturing in the short term. Medium- and long-term wholesale funding represents 21% of the Group’s net liabilities and enables it to cater for the net loans not funded with customer deposits (the commercial gap).

This funding is well-balanced by type of instrument (approximately 40% senior debt, 30% securitizations and structured instruments with collateral, 20% cédula-type covered bonds, with the remainder consisting of preference shares and subordinated debt) and by market: the markets with a greater proportion of issues are the ones where investment activity is higher.

3.2. Evolution of liquidity in 2015

At the end of 2015, in comparison with 2014, the Group reported:

• A stable ratio of loans to net assets (total assets less trading derivatives and interbank balances) at 75% due to the improvement in lending following the end of deleveraging in mature markets.

• A loan-to-deposit (LTD) ratio of 116%. This trend reflects the recovery of credit in mature markets, both organic and inorganic (acquisition of consumer finance businesses in Europe), and the increased focus on optimizing the cost of retail deposits in countries with low interest rates.

• A decline in the ratio of customer deposits plus medium- and long-term funding to loans, for reasons similar to those for the trend in the LTD ratio, since the increase in the wholesale funds raised at the Group is also lower than that in loans.

• A continuing limited recourse to short-term wholesale funding at the Group. The ratio of this funding stood at around 2%.

• Lastly, an increase in the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium- and long-term funding, and capital- over structural liquidity requirements -non-current assets and loans-), which had an average balance of €159,000 million in 2015.

Early compliance with regulatory ratios

As part of its liquidity management model, in recent years the Group has been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.

LCR (Liquidity Coverage Ratio)

In 2014, following the approval by the Basel Committee of the final definition of the short-term liquidity coverage ratio (LCR), the delegated act of the European Commission was adopted which, within the scope of the CRD IV, defines the criteria for calculating and implementing this metric in the European Union. The implementation has been delayed until October 2015, although the level of initial compliance remains at 60%, which should gradually increase to 100% by 2018.

The starting position in short-term liquidity, coupled with the autonomous management of the ratio in all major units, has enabled compliance levels exceeding 100% to be maintained throughout 2015, thereby surpassing regulatory requirements.

NSFR (Net Stable Funding Ratio)

The final definition of the net stable funding ratio was approved by the Basel Committee in October 2014, and it has still to be transposed into local legislation.

In relation to this ratio, the Group benefits from a high weighting of customer deposits, which are more stable, from long-term liquidity needs arising from the commercial activity funded by medium- and long-term instruments, and from limited recourse to short term. All of this enables the Group to maintain a balanced liquidity structure, which is reflected in NSFR levels exceeding 100% at 2015 year-end, although compliance will not be required until 2018.

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Asset encumbrance

It is important to note the Group’s moderate use of assets as collateral for structural balance-sheet funding sources. Following the guidelines laid down by the European Banking Authority (EBA) in 2014, the concept of asset encumbrance includes both on-balance-sheet assets provided as collateral in transactions to obtain liquidity and off-balance-sheet assets that have been received and re-used for the same purpose, as well as other assets associated with liabilities for reasons other than funding.

The reported Group information as required by the EBA at 2015 year-end is as follows:

On-balance-sheet encumbered assets

Billions of euros	Carrying amount of encumbered assets		Carrying amount of non- encumbered assets
Assets		323.3		1,017.0
Loans and advances		217.8		725.9
Equity instruments		13.2		10.5
Debt securities		74.6		105.5
Other assets		17.7		175.1

Encumbrance of collateral received

Billions of euros	Fair value of encumbered collateral received or own debt securities issued		Fair value of collateral received or own debt securities issued available for encumbrance
Collateral received		44.9		52.0
Credits and loans		1.2		—
Equity instruments		0.9		1.7
Debt securities		42.8		45.1
Other collateral received		—		5.2
Own debt securities issued other than own covered bonds or ABSs		—		5.6

Encumbered assets and collateral received and matching liabilities

Billions of euros	Matching liabilities, contingent liabilities or securities lent		Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
Total sources of encumbrance (carrying amount)		302.6		368.3

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On-balance-sheet encumbered assets amounted to €323.3 billion, more than two-thirds of which are loans (mortgage loans, corporate loans, etc.). Off-balance-sheet encumbered assets amounted to €44.9 billion, relating mostly to debt securities received as collateral in asset purchase transactions and re-used as reverse repo. Taken together, these two categories represent a total of €368.3 billion of encumbered assets, which give rise to €302.6 billion of matching liabilities.

At December 31, 2015, total assets encumbered in funding transactions represented 26% of the Group’s expanded balance sheet under EBA standards (total assets plus collateral received: €1,437 billion at December 2015).

Therefore, the ratio of encumbered assets in funding transactions remained at the same level as in 2014: the Group’s recourse to TLTROs in 2015 was offset by the maturity of secured debt (mainly mortgage-backed securities) that has been replaced by unsecured debt.

Lastly, regard should be had to the different sources of encumbrance and the role they play in the Group’s funding:

• 44% of total encumbered assets relate to collateral provided in medium- and long-term financing transactions (with residual maturity of more than one year) to fund the commercial balance-sheet activity. This places the level of asset encumbrance in “structural” funding transactions at 11% of the expanded balance sheet under EBA standards.

• The other 56% relate to transactions in the short-term market (with residual maturity of less than one year) or to collateral provided in derivative transactions whose purpose is not to fund the ordinary business activity but rather to ensure efficient short-term liquidity management.

Part 6. Operational risk

1. Definition and objectives

Following the Basel guidelines, the Group defines operational risk (OR) as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Operational risk is inherent in all products, activities, processes and systems, and is generated in all business and support areas; accordingly, all employees are responsible for managing and controlling the risks arising in their area of activity.

The aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, monitor, control, mitigate and report this risk.

The Group’s priority, therefore, is to identify and mitigate any clusters of operational risk, irrespective of whether or not they have given rise to any losses. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, the Group has been applying the standardized approach provided for under the European Capital Requirements Directive.

2. Operational risk management and control model

2.1. Operational risk management cycle

The operational risk management and control model includes the following phases:

• Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

• Definition of the target operational risk profile, specifying the strategies by unit and time horizon, through the establishment of the operational risk appetite and tolerance, the annual loss budget and the monitoring thereof.

• Encouragement of the involvement of all employees in the operational risk culture, through appropriate training for all areas and levels of the organization.

• Objective and ongoing measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.).

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• Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of the internal control environment and mitigation of losses.

• Establishment of mitigation measures to eliminate or minimize operational risk.

• Preparation of periodic reports on the exposure to operational risk and its level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.

• Definition and implementation of the methodology required for the internal calculation of capital in terms of expected and unexpected loss.

The following is required for each of the key processes indicated above:

• Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.

• Definition and documentation of operational risk management and control policies and implementation of the related methodologies and tools consistent with current regulations and best practices.

2.2. Risk identification, measurement and assessment model

In order to identify, measure and assess operational risk, the Group defined a set of quantitative and qualitative corporate techniques/tools that are combined to perform a diagnosis based on the identified risks and obtain a valuation through the measurement/assessment of the area/unit.

The quantitative analysis of this risk is carried out mainly using tools that record and quantify the potential level of losses associated with operational risk events.

The tools defined for the qualitative analysis aim to assess aspects (coverage/exposure) linked to the risk profile, thereby making it possible to capture the control environment in place.

2.3. Operational risk information system

The Group has a corporate information system that supports the operational risk management tools and facilitates the information and reporting functions and requirements at local and corporate level.

This system features event recording, risk mapping, assessment, indicator, mitigation and reporting modules, and is applicable to all the Group entities.

3. Mitigation measures

The model requires the Group to monitor the mitigation measures established in response to the main sources of risk, which were identified through an analysis of the tools used in managing operational risk, and as a result of the organizational and development model and the preventive implementation of operational risk management and control policies and procedures.

The Group’s model integrates the measures in a shared database, which makes it possible to assign each mitigating measure to the various tools used (events, indicators, self-assessment, scenarios, recommendations and preventive policies).

The most significant mitigation measures have focused on the improvement of security for customers in their day-to-day transactions, the management of external fraud, the ongoing improvement of processes and technology, and on taking steps to ensure that products are sold and services are provided in an appropriate manner.

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Cybersecurity and data security plans

In 2015 the Group continued to devote its full attention to cybersecurity-related risks, which affect all types of companies and institutions, including those in the financial sector.

This situation, which is generating concern among entities and regulators, is prompting the adoption of preventive measures in order to be prepared for cyberattacks.

In order to step up and supplement the actions already in progress, the Group has prepared the Santander cyber-security program, which stipulates: i) a governance integrating the three lines of defense; ii) a cyber resilience-oriented line of action envisaging measures in the areas of identification, prevention, protection, detection and reaction; iii) aspects of cybersecurity with an impact on training, access control and segregation of functions, as well as secure software development; and iv) initiatives for organizational reinforcement.

Inspired by international standards, the Group has developed its internal cybersecurity reference model, endowing it with certain maturity concepts. At the same time, it has continued to implement the cybersecurity master plans at the various Group entities, achieving the following noteworthy milestones:

• Specific budgetary allocations for the improvement of mechanisms to protect against cybersecurity problems at the Group’s various entities and geographical locations.

• Arrangement of a corporate-wide cyber insurance policy.

• Improvement of the security monitoring services and extension of their scope.

• Participation in the numerous cyber exercises conducted at various Group locations, aimed at evaluating the response of companies to cyber incidents.

• Cooperation with international forums with the objective of identifying best practices and sharing information about threats.

4. Business continuity plan

The Group has a business continuity management system to ensure the continuity of the business processes of its entities in the event of a disaster or serious incident.

This basic objective consists of the following:

• Minimizing possible injury to persons, as well as adverse financial and business impacts for the Group, resulting from an interruption of normal business operations.

• Reducing the operational effects of a disaster by supplying a series of pre-defined, flexible guidelines and procedures to be employed in order to resume and recover processes.

• Resuming time-sensitive business operations and associated support functions, in order to achieve business continuity, stable earnings and planned growth.

• Protecting the public image of, and confidence in, the Group.

• Meeting the Group’s obligations to its employees, customers, shareholders and other third-party stakeholders.

In 2015 the Group continued to make progress in the implementation and ongoing improvement of its business continuity management system. Implementation of the three lines of defense with regard to business continuity was reinforced and the newly-created businesses and divisions were included in the scope of management.

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5. Other matters relating to operational risk control and monitoring

Analysis and monitoring of controls in market operations

In view of the specific features and complexity of financial markets, the Group continually improves its operational control procedures in order to remain in line with new regulations and best market practices. Thus, in 2015, further improvements were made to the control model for this business, placing particular emphasis on the following points:

• Analysis of the individual transactions of each treasury operator to detect any possible anomalous conduct. In the course of the year, the thresholds applied for each of the controls were reviewed, together with the other control areas, and, as a new feature, specific limits were introduced for each desk.

• Implementation of a new tool enabling compliance with new record-keeping requirements in monitoring communication channels adapted to the new regulations.

• Tightening of controls on transaction cancellations and modifications, and calculation of the actual cost of such events if they are due to operational errors.

• Reinforcement of controls on contributions of prices to market indices.

• Development of additional controls to detect and prevent irregular transactions (such as, for example, the establishment of controls on triangular transactions).

• Development of additional controls on access to front-office transaction record-keeping systems (for example, for the purpose of detecting shared users).

• Adaptation of existing controls and development of new controls to comply with Volcker Rule requirements.

• Formalization of IT procedures, tools and systems for cybersecurity risk protection, prevention and training.

The financial market business is also undergoing a global transformation and evolution of the operational risk management model, combined with a modernization of the technology platforms and operating processes which, incorporating a robust control model, will reduce the operational risk associated with this activity.

Corporate information

The operational risk function has an operational risk management information system that provides data on the Group’s main risk elements. The information available from each country/unit in the operational risk sphere is consolidated to obtain a global view with the following features:

• Two levels of information: one corporate, with consolidated information, and the other individualized for each country/unit.

• Dissemination of best practices among the Group’s countries/units, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

This information acts as the basis for meeting reporting requirements vis-à-vis the risk control committee, the risk, regulation and compliance oversight committee, the operational risk committee, senior management, regulators, rating agencies, etc.

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The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. 2015 saw the reinforcement of the common guidelines for coordinating the various functions involved in the management cycle for operational risk-mitigating insurance, mainly the areas of proprietary insurance and operational risk control, but also the various front-line risk management areas, based on the procedure designed in 2014.

These guidelines included most notably the following activities:

• Identification of all risks at the Group which could be covered by insurance, as well as new insurance cover for risks already identified in the market.

• Establishment and implementation of methods for quantifying insurable risk, based on loss analysis and loss scenarios that make it possible to determine the Group’s level of exposure to each risk.

• Analysis of the cover available in the insurance market, as well as preliminary design of the terms and conditions that best suit the requirements previously identified and evaluated.

• Technical assessment of the level of protection provided by a policy, and of the cost and retention levels that the Group will assume (excesses and other items to be borne by the insured), for the purpose of deciding whether to arrange it.

• Negotiation with insurance providers and award of policies in accordance with the relevant procedures established by the Group.

• Monitoring of claims reported under the policies, as well as those not reported or not recovered due to incorrect reporting, establishing action protocols and specific monitoring forums.

• Analysis of the appropriateness of the Group’s policies for the risks covered, taking the necessary measures to correct any deficiencies detected.

• Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.

• Active involvement of the two areas in the global insurance sourcing desk (the Group’s highest technical body for the definition of insurance cover and arrangement strategies), in the insured risk monitoring forum and in the corporate operational risk committee.

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Part 7. Compliance and conduct risk

1. Scope, mission, definitions and objective

The compliance function encompasses all matters relating to regulatory compliance, the prevention of money laundering and terrorist financing, product governance and consumer protection, and reputational risk.

To this end, the compliance function promotes adherence by the Group to the rules, oversight requirements, principles and values of good conduct by establishing standards, holding debates and providing advice and information in the interest of employees, customers, shareholders and society in general.

Based on the current corporate arrangement of the Group’s three lines of defense, the compliance function is a second-line independent control function with direct access to the board of directors and its committees through the Group Chief Compliance Officer (GCCO), who has access to these bodies on a regular and independent basis. This structure is in line with banking regulatory requirements and supervisory expectations.

Compliance risks are defined as including the following:

• Compliance risk: the risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

• Conduct risk: the risk caused by inappropriate practices vis-à-vis the Bank’s relationship with its customers, the treatment and products offered to customers, and their suitability for each particular customer.

• Reputational risk: the risk arising from negative perception of the Bank on the part of public opinion, its customers, investors or any other stakeholder.

The Group’s objective regarding compliance and conduct risk is to minimize the likelihood of non-compliance and irregularities occurring and to ensure that, should they ultimately occur, they are promptly identified, assessed, reported and resolved.

Other control functions (risk) and support functions (legal, T&O, etc.) are also involved in the control of the aforementioned risks.

2. Control and supervision of compliance risks

Based on the arrangement of the Group’s lines of defense, in particular within the compliance function, primary responsibility for managing compliance risks is shared, in the first line of defense, by the business units directly originating those risks and the compliance function, acting either directly or by assigning compliance activities or tasks to that first line.

Furthermore, as the second line of defense, in its control and oversight capacity, the compliance function is charged with establishing, encouraging and achieving adherence by the units to the uniform frameworks, policies and standards in place across the Group. To this end, a set of controls is established, the application of which is monitored and verified.

In the sphere of compliance, the GCCO is responsible for reporting to the governing and managing bodies, and also for advising and informing senior management about compliance matters and for fostering a compliance culture, within the framework of an annual program, the effectiveness of which is assessed on a regular basis. In addition to the foregoing, the deputy chairman in charge of risk and the CRO also report to the governing and managing bodies on all the Group’s risks, including compliance risks.

The compliance function provides the basic components for the management of these risks (frameworks and policies for anti-money laundering measures, codes of conduct, product marketing, reputational risk, etc.) and ensures that the other components are duly addressed by the corresponding Group units (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and supervision systems, within the second line of defense against compliance risk.

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Also, internal audit - as part of its functions in the third line of defense - conducts the tests and reviews required to check that the appropriate supervision controls and components are applied, and that the standards and procedures established at the Group are being complied with.

The essential components of compliance risk management are based on resolutions adopted by the board of directors, as the highest authority for such matters, through the approval of corporate frameworks - which regulate the relevant matters - and the Group’s general code of conduct. These frameworks are approved at corporate level by Banco Santander, S.A. as the Parent of the Group, and are subsequently approved by the units, by way of their adherence thereto, for the purpose of transposing them, taking into account any applicable local requirements.

The corporate frameworks for the compliance function are as follows:

• General compliance framework.

• Product and service marketing framework.

• Claims management framework.

• Framework for the prevention of money laundering and of terrorist financing.

These corporate frameworks are developed within the sphere of the Group’s internal governance and are in keeping with the parent-subsidiaries relationship model.

For its part, the general code of conduct contains the rules of behavior and ethical principles that must govern the actions of all Group employees and is supplemented in certain matters by the rules contained in other codes and the related internal implementing regulations.

Also, the code establishes:

• The functions and responsibilities relating to the compliance matters addressed by it.

• The rules regulating the consequences of failure to observe the code.

• The channel for submitting and processing notifications of allegedly irregular actions.

The regulatory compliance function, under the supervision of the risk, regulation and compliance oversight committee (CSRRC) and the regulatory compliance committee, is responsible for ensuring the effective implementation and monitoring of the general code of conduct.

3. Governance and organizational model

It is the responsibility of the board of directors of the Bank, as part of its general supervisory function, to approve the appointment of the person ultimately responsible for the compliance function (the GCCO), as well as for its framework and its development policies. In addition, the board is in charge of the Group’s general code of conduct and the corporate frameworks developed by the compliance function.

In order to reinforce the independence of compliance, the executive committee of the board of directors resolved to appoint an executive vice president to the position of GCCO. In this connection, pursuant to the GCCO’s mandate, in 2015 a program was developed for the transformation of the compliance function at global level, namely the target operating model for compliance (TOM), which will be implemented over a three-year time horizon, with the aim of elevating this function to place it on a par with the best standards in the financial services industry.

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The compliance function reports to the board of directors and its committees on a monthly basis.

Also worthy of mention is the appropriate coordination in place with the operational risk function, which compiles the various loss events arising from compliance and conduct risks and which, using a risk governance featuring a combined view of all the Group’s risks, also reports to the board and its committees.

3.1. Governance

The corporate committees listed below are collective bodies with responsibilities in the sphere of compliance and are replicated at local level:

• The regulatory compliance committee: this is the collective governance body for regulatory compliance, without prejudice to the responsibilities assigned to the specialist bodies currently existing in the function (namely the corporate product and service marketing committee, the monitoring committee and the committee for the prevention of money laundering and terrorist financing).

• The product and service marketing committee: this is the collective governance body for the validation of products and services. The units are empowered to make the initial proposals and give authorization for new products and services, although such proposals and their compliance with corporate policies must be validated at corporate level. The committee’s objectives and functions are based on minimizing the improper marketing of products and services for customers, taking into account consumer protection principles. Its functions are performed at both corporate and local level.

• The corporate monitoring committee is the Group’s collective governance body for the monitoring of products and services and the evaluation of customer claims across all the Group’s units. Approved products and services are monitored locally by the local monitoring committees or equivalent bodies, which report their conclusions directly to the corporate monitoring committee.

• The committee for the prevention of money laundering and terrorist financing (formerly the analysis and resolution committee - CAR) is the collective body in this sphere that defines the related action frameworks, policies and general objectives. It also validates the prevention and coordination regulations of other collective bodies and units of the Group. In order to reinforce the governance of the function and safeguard its independence, the objectives and duties of the aforementioned committees have been revised, in the adaptation of TOM, to bring them into line with the Group’s governance model.

3.2. Organizational model

As a result of the aforementioned transformation program (TOM) and in order to ensure a vision and integrated management of the various compliance risks, the organizational structure of the function was modified, using a hybrid approach, so as to make the specialist compliance risks (vertical functions) converge with the standardized aggregate vision of those risks (transversal functions).

4. Regulatory compliance

The following functions are in place to ensure the proper control and supervision of regulatory compliance risks:

• Application of the Group’s general code of conduct and the other codes and rules implementing it. Provision of advice on the resolution of any doubts arising from their application.

• Cooperation with Internal Audit in the periodic reviews conducted by it on compliance with the general code of conduct and with the other codes and rules implementing it, without prejudice to any periodic reviews of compliance matters that have to be conducted directly.

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• Preparation (or amendment) of compliance programs on specific regulations, for submission to the regulatory compliance committee and, where appropriate, subsequent approval by the board of directors or its committees.

• Presentation of periodic reports to the risk, regulation and compliance oversight committee (CSRRC) and to the board of directors on the development of the framework and the application of the compliance program.

• Assessment of any changes that may need to be made to the compliance program, in particular where unregulated risk situations and improvable procedures are detected, and proposal of such changes to the regulatory compliance committee or to the CSRRC.

• Receipt and handling of the complaints made by employees through the whistleblowing facility.

• Direction and coordination of any investigations into breaches, with possible support from internal audit, and proposal of the appropriate penalties to the related committee.

• Supervision of the compulsory training activity for the compliance program.

The target operating model (TOM) for compliance places the spotlight of the regulatory compliance function on the following areas:

• Compliance in employee-related matters.

• Compliance in organizational matters.

• Compliance with market regulations.

• Conduct in securities markets.

5. Product governance and consumer protection

As a result of the transformation of the compliance function into its new TOM, the former reputational risk management office was renamed as the product governance and consumer protection office. Its responsibilities were extended to bolster the adequate control and oversight of product and service marketing risks, to foster transparency and a simple, personal and fair approach to customers in order to protect their rights, and to ensure that policies and procedures take the consumers’ perspective into account. For this purpose, the functions listed below were established, based on two corporate frameworks and a set of policies that define the basic principles and rules of action in this area:

• Frameworks:

• Corporate marketing framework: a uniform system for the marketing of products and services, aimed at minimizing exposure to the risks and possible claims arising in all phases of the marketing process (validation, pre-sale, sale, monitoring).

• Claims management framework: a uniform system for the systematized management of the recording, control, management and analysis of the causes of claims, based on their various types; this makes it possible to identify the reasons for customer dissatisfaction, to provide suitable solutions for each case and to improve, where appropriate, the processes that gave rise to the claims.

• Functions:

• To promote the adherence of the units to the above-mentioned corporate frameworks.

• To facilitate the functions of the corporate marketing committee by guaranteeing the proper validation, prior to its launch, of any new product or service proposed by any Group subsidiary or by the Parent.

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• To safeguard the internal protection of consumers, with the aim of improving their relationships with the Group, by effectively promoting their rights and providing solutions to possible disputes, in accordance with best practices through any channel, as well as by fostering consumers’ financial knowledge. All these efforts are geared towards building lasting relationships with customers.

• To identify, analyze and control the fiduciary risk generated by the private banking, asset management and insurance businesses and the outsourced custody services for customers’ financial instruments. Fiduciary risk is considered to be that arising from the management of financial instruments on behalf of customers.

• To compile, analyze, and report to the Group’s governance bodies, the information required to conduct a proper analysis of product and service marketing risk and of claims risk, from a two-fold perspective: the possible impact on customers and on the Group, as well as on the monitoring of products and services throughout their life-cycle.

• To supervise the marketing and claims management processes in place at the subsidiaries, making proposals for improvements and monitoring the mitigating actions taken for the risks detected.

6. Prevention of money laundering and of terrorist financing

The following functions are in place to ensure the proper control and supervision of risks relating to the prevention of money laundering and of terrorist financing:

• One of the Group’s strategic objectives is to have an effective advanced system for the prevention of money laundering and terrorist financing that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations.

• This system is based on a corporate framework that defines the principles and basic action guidelines required to set minimum standards that the Group’s units must observe and which in addition are formulated on the basis of the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and of the obligations and stipulations of EU directives on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.

• The local units, in their role as the first line of defense, are responsible for directing and coordinating the systems and procedures for the prevention of money laundering and terrorist financing in the countries where the Group has a presence, as well as for investigating and reporting suspect transactions and meeting the related supervisory reporting requirements. In addition, all local units have officers in charge of this function.

• Corporate systems and processes have been set up at all Group units, based on decentralized technology systems, which make it possible to obtain locally managed information and data, as well as corporate function reporting, monitoring and control information. These systems enable the Group to take an active and preventive approach in analyzing, identifying and monitoring any transactions that could be linked to money laundering or terrorist financing activities.

• The Group is a founder member, along with other large international banks, of the Wolfsberg Group, the objective of which is to establish international standards to increase the effectiveness of programs to combat money laundering and terrorist financing in the financial community. In this connection, various initiatives have been conducted which have addressed a number of different issues. The supervisory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money laundering, corruption, terrorism and other serious crimes.

7. Reputational risk

As a result of the transformation of the compliance function in the development of the TOM, major progress has been made in the definition of the reputational risk model.

The specific nature of reputational risk, which arises from a wide variety of sources, combined with the highly variable perception of this risk, as it is understood by the various stakeholders, requires an approach and a management and control model that are unique, different from those used for other risks.

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The reputational risk model is based on an eminently preventive approach, but also on effective crisis management processes.

Therefore, the Group’s intention is for reputational risk management to be integrated both in business and support activities and in internal processes, thus allowing the risk control and supervision functions to integrate it in their activities.

Also, the reputational risk model requires a comprehensive understanding, not only of the Group’s business activities and processes, but also of how it is perceived by its stakeholders (employees, customers, shareholders, investors and society in general) in its different environments. This approach requires close coordination between the management, support and control functions and the various stakeholders.

As mentioned above, reputational risk governance is one of the components of compliance governance. The compliance function reports on reputational risk to senior management, once the information on sources of reputational risk has been consolidated.

8. Compliance risk assessment model and risk appetite

The Group’s risk appetite, in relation to compliance, is set by its statement that it is not willing to accept any risks of this nature, the clear objective being to minimize any economic, regulatory or reputational impact on the Group. To this end, a uniform system is implemented across the units through the establishment of a common methodology consisting of the setting of a series of compliance risk indicators and assessment matrices prepared by each local unit.

In 2015 the corporate compliance function carried out a regulatory risk assessment exercise focusing on the main countries in which the Group operates. Each quarter the Group monitors -on a country-by-country basis- the action plans designed to mitigate any high risks arising from this risk assessment exercise.

Based on the new compliance TOM, in 2015 an exercise was also launched to establish new indicators and an initial risk assessment in the following functions: product governance and consumer protection, regulatory compliance, prevention of money laundering and terrorist financing, and reputational risk.

In order to obtain a global integrated view of all compliance risks and to ensure that these can be included, together with all the Group’s risks, in a single view, so that the board of directors may in turn have a holistic perspective of those risks, from 2015 onwards the risk assessment will be conducted on a consolidated basis.

Thus, the setting of the Group’s compliance risk appetite, the monitoring of compliance risks and the adoption of corrective measures, if necessary, will be included in a single view. All this will be achieved using methods and indicators that are shared with the risk function and, therefore, form part of the Group’s risk appetite framework. The incurred losses resulting from compliance risks are entered into the shared event database managed by the risk function, in order to facilitate a comprehensive view, as well as an integrated control and management, of non-financial risks.

The Group also intends, as part of the development of the TOM, to revise the taxonomy of the various types of compliance risk, as first-level risks, in order to clearly identify them and thus be able to respond to possible stress test exercises in the future.

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Part 8. Model risk

The Group understands a model as being any metric based on a quantitative method, system or approach that provides a simplified representation of reality by applying statistical, economic, financial or mathematical techniques to process data and obtain a result based on a series of assumptions and subject to a certain degree of uncertainty. Using models makes it possible to take swifter, more objective decisions, generally supported by the analysis of large quantities of information.

The use of models invariably presents model risk, which is defined as the potential for adverse consequences, including losses, from decisions based on incorrect or misused models.

According to this definition, the sources of model risk are as follows:

• The model itself, due to the use of incorrect or incomplete data in its construction, and due to the modelling method used and its implementation in the systems.

• The misuse of the model.

In recent years the Group has been working on the definition, management and control of model risk. A particularly noteworthy development was the creation in 2015 of a dedicated area within its risk division. This area comprises both the former model validation team and a specific control team.

The model risk function is performed both at corporate level and at each of the main entities in which the Group is present. A control framework has been defined for this function detailing, inter alia, matters relating to organization, governance and model management and validation.

Model risk management and control are structured around the life cycle of a model, as defined by the Group:

1.- Definition of standards

The Group has defined a series of standards for the development, monitoring and validation of its models. All models used within the Group -both those developed in-house and those acquired from third parties- must meet these standards. Thus, the quality of the models used at the Group for decision-making purposes is assured.

2.- Inventory

A key component of good model risk management is a complete, exhaustive inventory of the models in use.

The Group has a centralized inventory that has been constructed using a uniform taxonomy for all the models used in the various business units. This inventory contains all the relevant information on each of the models, which permits an appropriate monitoring of the models based on their importance.

The inventory also makes it possible to perform cross data analyses (by geographical area, type of model, materiality, etc.), thus facilitating the taking of strategic decisions in relation to the models.

3.- Planning

This phase features the participation of all those involved in the life-cycle of the model (users, developers, validators, data providers, technology personnel, etc.), who agree upon and set the relevant priorities.

Model planning is performed annually at each of the Group’s main units and is approved by the local governance bodies and endorsed at corporate level.

4.- Compilation of information

As indicated above, the data used in the construction of a model constitute one of the potential sources of model risk. These data must be reliable, complete and have sufficient historical depth to guarantee the suitability of the model developed.

The Group has teams that specialize in providing model construction data that have previously been certified by the data owners.

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5.- Development

This is the phase in which the model is constructed, based on the needs established in the model plan and using the information provided by specialists for this purpose.

Most of the models used by the Group are developed by in-house methodology teams, although certain models are also acquired from external providers. In both cases, the models must be developed in accordance with the established standards.

6.- Pre-implementation testing

Once a model has been constructed, the developers, together with the model owners, subject it to various tests in order to ensure that the model functions as expected and, where appropriate, they make the necessary adjustments.

7.- Materiality

Each of the Group’s models must have an associated level of materiality that is set by consensus of the parties involved.

The criteria for establishing materiality are documented in a corporate policy, which is transposed and approved by each of the Group’s main units.

Materiality determines the thoroughness, frequency and scope of the validations and follow-ups performed on the model, as well as the governance bodies in which decisions on the model have to be taken.

Materiality is one of the basic data for the proper management of model risk and one of the attributes contained in the corporate inventory.

8.- Independent validation

In addition to being a regulatory requirement in certain cases, the independent validation of models is a fundamental cornerstone for the proper management and control of model risk at the Group.

Therefore, as mentioned earlier, the Group has a specialist unit, fully independent of the developers and users, which issues a technical opinion on the suitability of the internal models for the intended purposes and concludes on their robustness, usefulness and effectiveness.

Internal validation currently covers all models used in the risk function, i.e. credit, market, structural and operational risk models, as well as economic and regulatory capital models, allowance models and stress test models (including, for the latter, the models used to estimate the Group’s balance sheet and income statement aggregates).

The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that underpin the effective operation of the models. In general, it includes all the relevant aspects of model management: controls, reporting, uses, involvement of senior management, etc.

After each model has been reviewed, the opinion issued is translated into a rating which, on a scale of one to five, summarizes the model risk perceived by the internal validation team.

It should be noted that the Group’s corporate internal validation environment is fully consistent with the criteria for internal validation of advanced approaches issued by the various supervisory authorities to whom the Group is subject. Accordingly, the Group maintains a segregation of functions between the units that develop and use models (first line of defense), the internal validation units (second line of defense) and internal audit (third line), which, in its role as the last layer of control, is responsible for reviewing the efficiency of the function, compliance with internal and external policies and procedures and for giving its opinion on the degree of effective independence.

9.- Approval

Before it is implemented -and, therefore, used- each model must be submitted for approval by the body corresponding to it on the basis of its materiality.

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10.- Implementation

This is the phase in which the developed model is implemented in the system through which it is intended to be used. As mentioned above, the implementation phase is another possible source of model risk and, therefore, it is absolutely essential that the technical teams and model owners conduct tests to certify that the model has been implemented as defined in the relevant methodology.

11.- Monitoring

A model is designed and constructed using certain information and in specific circumstances which may change in the course of time. Consequently, models must be reviewed periodically in order to ensure that they continue to function correctly and, if this is not the case, they are adapted or redesigned.

The frequency and thoroughness with which a model is monitored is established on the basis of that model’s materiality.

12.- Management reporting

Senior Group management, both at the different units and at corporate level, monitors model risk on a regular basis through various reports that enable it to obtain a consolidated view and take the appropriate decisions.

13.- Governance

According to the model risk control framework, the models committee is the body responsible for authorizing the use of models in management. Each business unit has a models committee that is responsible for deciding on the approval of the local use of models once the consent of the corporate models committee has been obtained. Pursuant to current Group policy, all models submitted to a models committee must be accompanied by an internal validation report.

Part 9. Strategic risk

Strategic risk is one of the risks considered by the Group to be transversal. In 2015 a management and control model was designed for this risk that serves as a benchmark for the Group subsidiaries. This model includes the definition of strategic risk, the functional and governance-related matters and a description of the main processes associated with the management and control of this risk.

Strategic risk is the risk associated with strategic decisions and with changes in an entity’s general conditions that have a significant impact on its business model and its medium- and long-term strategy.

An entity’s business model is a key element around which strategic risk revolves. It must be viable and sustainable, i.e. capable of generating acceptable results each year and for at least three years into the future.

Three categories or subtypes of strategic risk can be distinguished:

• Business model risk: the risk associated with an entity’s business model. This includes, inter alia, the risk that the business model may become outdated or irrelevant and/or may no longer have the value to generate the desired results. This risk is caused both by external factors (macroeconomic, regulatory, social and political matters, changes in the banking industry, etc.) and by internal factors (strength and stability of the income statement, distribution model/channels, income and cost structure, operational efficiency, suitability of human resources and systems, etc.).

• Strategy design risk: the risk associated with the strategy reflected in the entity’s five-year strategic plan. More specifically, it includes the risk that this plan may prove to be inadequate in terms of its nature or due to the assumptions considered, leading to unexpected results. Another factor that should be borne in mind is the opportunity cost of designing another more effective strategy or even that arising from a lack of action if no such strategy is designed.

• Strategy execution risk: the risk associated with the implementation processes of three- and five-year strategic plans. Due to the medium- and long-term nature of such plans, their execution often entails risk, as a result of its complexity and the numerous variables involved. Other sources of risk to be considered are inadequate resources, change management and, lastly, the inability to respond to changes in the business environment.

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In addition, for the purpose of managing and controlling strategic risk, the transversal risks associated with corporate development transactions must be taken into consideration, since they can represent a significant source of risk for the business model. These transactions are understood to be: those resulting in a change in an entity’s scope and activity, acquisitions or transfers of significant ownership interests or assets, joint ventures, strategic alliances, shareholders agreements and capital transactions.

Lastly, other types of risk must be taken into account the origin of which may be other than strategic in nature (credit, market, operational and compliance risks, etc.). These risks may have a significant impact on an entity’s financial health and also affect its strategy and business model; therefore, they must be identified, assessed, managed and controlled.

Thus, top risks are those risks with a material impact on an entity’s earnings, liquidity or capital or risks that may have undesired concentrations. These risks can reduce the entity’s distance to default.

In addition, emerging and evolving risks are those risks that had not appeared before or which have taken on a different form. Although these risks often involve a high level of uncertainty and are very difficult to quantify, their impact could be significant over a medium-long term time horizon.

Part 10. Capital risk

The Group defines capital risk as the risk that the Group or any of its companies may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

The objectives in this connection include most notably:

• To meet the internal capital and capital adequacy targets

• To meet the regulatory requirements

• To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.)

• To support the growth of the businesses and any strategic opportunities that may arise

The Group has a capital adequacy position that surpasses the levels required by regulations and the European Central Bank. In 2015 the Group continued to bolster its main capital ratios in response to the difficult economic and financial environment and the new regulatory demands. It began the year with a €7,500 million capital increase and established a dividend policy that guarantees the organic generation of capital.

At the end of 2015 the ECB notified each bank of its minimum prudential capital requirements for the following year. In 2016, at consolidated level, Santander Group must have a minimum phase-in CET1 capital ratio of 9.75% (9.5% is the requirement for Pillar 1, Pillar 2 and the capital conservation buffer, and 0.25% is the requirement for being a global systemically important bank). At December 31, 2015, the Group’s capital exceeded the ECB’s minimum requirement.

The Group is working towards achieving a fully-loaded CET1 capital ratio in excess of 11% in 2018.

1. Regulatory framework

The regulations known as Basel III, which establish new global capital, liquidity and leverage standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

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In Europe, the new standards were implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related Capital Requirements Regulation 575/2013 (“CRR”), which is directly applicable in all EU Member States (as part of the Single Rulebook). In addition, these standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA).

CRD IV was transposed into Spanish legislation through Law 10/2014 on the regulation, supervision and capital adequacy of credit institutions, and its subsequent implementing regulations contained in Royal Decree 84/2015. The CRR is directly applicable in EU Member States as from 1 January 2014 and repeals all lower-ranking rules providing for additional capital requirements.

The CRR establishes a phase-in that will permit a progressive adaptation to the new requirements in the European Union. The phase-in arrangements were incorporated into Spanish regulations through Bank of Spain Circular 2/2014. They affect both the new deductions and the issues and items of capital which cease to be eligible as such under this new regulation. The capital buffers provided for in CRD IV are also subject to phase-in; they are applicable for the first time in 2016 and must be fully implemented by 2019.

The Group shares the ultimate objective pursued by the regulator, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has provided assistance by supporting the regulators and participating in the impact studies to calibrate standards promoted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

Lastly, the latest G-20 summit (Antalya, November 2015) approved the total loss-absorbing capacity (TLAC) requirement for global systemically important banks (G-SIBs), an event which constitutes a major regulatory milestone. Banks are required to have a sufficient buffer of liabilities (capital and contingently convertible debt) that are capable of absorbing losses, either because they convert into capital or because a debt reduction is applied to them. The aim is to enable banks, when faced with the risk of bankruptcy, to regain solvency without requiring the intervention of any government. The TLAC standard has not yet been included in the current legal framework. However, the Financial Stability Board (FSB) has set its entry into force for 2019, with a three-year phase-in arrangement. For January 2019 the FSB proposes a minimum TLAC requirement equal to the higher of 16% of risk-weighted assets and 6% of leverage exposure, and, for January 2022, the higher of 18% of risk-weighted assets and 6.75% of leverage exposure.

The standard stipulates that the liabilities eligible to meet the TLAC requirement must be subordinated to other non-eligible liabilities and may include common equity, preference shares qualifying as Tier 1 capital and subordinated debt qualifying as Tier 2 capital; also, at least 33% of the TLAC-eligible liabilities must be in the form of senior and junior debt.

The FSB standard provides that the TLAC requirement must be met at consolidated level and at the level of each resolution group, as defined in the living wills. It also establishes certain restrictions on the financial support that a parent may provide to a subsidiary in complying with the standard.

In Europe, Directive 2014/59/EU -known as the Bank Recovery and Resolution Directive (BRRD)- was implemented, which pursues objectives similar to those of the TLAC standard.

This directive also includes the concept of loss absorption and a minimum requirement for capital and eligible liabilities (MREL), which is similar to the TLAC requirement. However, there are differences in terms of the ratios established, the scope of application and other definitions. The MREL is applicable to all entities operating in Europe and is not limited to global systemically important banks. It shall begin to apply on January 1, 2016, based on an “entity-by-entity” calibration, with a phase-in period of 48 months, and it is only applicable within the EU.

The MREL regulations will be reviewed at the end of 2016, following a report to be submitted to the European Commission by the EBA.

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2. Regulatory capital

At December 31, 2015, the Group met the minimum capital requirements established by current legislation.

Model roll-out

With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches.

The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, the Group continued in 2015 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units.

To date the Group has obtained authorization from the supervisory authorities to use AIRB approaches for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the United Kingdom and Portugal, as well as for certain portfolios in Germany, Mexico, Brazil, Chile, the Nordic countries (Sweden, Finland and Norway), France and the United States. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe. In 2015 authorization was obtained for the Santander Consumer Nordics auto loan portfolios to switch from the standardized approach to the AIRB approach, while the IRB approach was maintained for the corporate and retail portfolios of PSA France, following the acquisition of this investee.

With regard to operational risk, Santander Group currently uses the standardized approach for regulatory capital calculation provided for in the European Capital Directive. In 2015 the Group stepped up the pace of its transition towards an advanced operational risk management (AORM) approach. The AORM program will enable the Group to have internal capital estimation models in place in the main geographical areas, both for economic capital and stress testing purposes and with a view to their potential application for regulatory capital purposes.

As regards the other risks explicitly addressed in Pillar 1 of the Basel Capital Accord, Santander Group has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

Leverage ratio

The leverage ratio was established within the Basel III regulatory framework as a non-risk-sensitive measure of the capital that financial institutions are required to hold. CRD IV was amended on January 17, 2015 through the modification of Regulation (EU) No 575/2013 to harmonize the calculation criteria with those specified in the Basel Committee’s document entitled “Basel III leverage ratio framework and disclosure requirements”.

This ratio is calculated as Tier 1 capital divided by leverage exposure. Exposure is calculated as the sum of the following items:

• Accounting assets, excluding derivatives and items treated as deductions from Tier 1 capital (for example, the balance of loans is included, but not that of goodwill).

• Off-balance-sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors.

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• The net value of derivatives (gains and losses vis-à-vis the same counterparty are netted, less the collateral if certain conditions are met) plus an add-on for potential future exposure.

• An add-on for the potential exposure of securities financing transactions.

• Lastly, an add-on for the exposure of credit derivatives (CDSs).

The leverage ratio is still in the calibration phase and there is no obligation to comply with it until 2018. It is currently set at 3%, a ratio which the Bank surpasses.

Global systemically important banks

The Group is one of 30 banks designated as global systemically important banks (G-SIBs).

Designation as a global systemically important bank is the result of an assessment by the regulators (FSB and BCBS) on the basis of five criteria (size, cross-jurisdictional activity, interconnectedness, substitutability and complexity).

Its designation as a G-SIB obliges the Group to comply with additional requirements. These consist mainly of a capital buffer (the Group belongs to the group of banks with the lowest capital buffer, i.e. 1%), total loss-absorbing capital (TLAC) requirements, the requirement to publicly disclose relevant information more frequently than other banks, greater regulatory requirements for its internal control bodies, special supervision and the requirement to submit special reports to its supervisors.

Compliance with these requirements renders the Group more robust than its domestic rivals.

3. Economic capital

Economic capital is the capital required, based on an internally-developed model, to support all the risks of the Group’s business activity with a given solvency level. In the Group’s case, the solvency level is determined by the A long-term target rating (two notches above the rating for Spain), which results in the application of a 99.95% confidence level (higher than the regulatory 99.90%) for the purpose of calculating the required capital.

The Group’s economic capital model includes in its measurement all the significant risks incurred by it in its operations. Accordingly, it considers risks such as concentration risk, structural interest rate risk, business risk, pension risk and other risks outside the scope of regulatory Pillar 1 capital requirements. Economic capital also includes the diversification effect, which in the Group’s case, owing to the multinational, multibusiness nature of its operations, is of key importance in determining its overall risk and solvency profile.

Economic capital is a fundamental tool for the internal management and implementation of the Group’s strategy, from the viewpoint of both the assessment of capital adequacy and the management of portfolio and business risk.

With regard to capital adequacy, in the context of Pillar 2 of the Basel Capital Accord, the Group conducts the internal capital adequacy assessment process (ICAAP) using its economic capital model. To this end, it plans the evolution of the business and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it will continue to meet its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital-based metrics make it possible to assess risk-return targets, price transactions on a risk basis and gauge the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

Since it is a uniform risk measure, economic capital makes it possible to explain the distribution of risk across the Group, placing different activities and types of risk in a comparable metric.

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RORAC and value creation

The Group has used RORAC methodology in its risk management since 1993, with the following objectives:

• Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and customers, in order to facilitate an optimal allocation of capital.

• Measurement of management of the Group’s units, through the budgetary monitoring of capital requirements and RORAC.

• Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

The RORAC methodology facilitates the comparison, on a like-for-like basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.

The Group periodically assesses the level of and the changes in the value creation (VC) and return on risk-adjusted capital (RORAC) of the Group and of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula: value creation = recurring profit – (average economic capital x cost of capital).

The profit used is obtained by making the required adjustments to accounting profit in order to reflect only the recurring profit obtained by each unit from its business activity.

4. Capital planning and stress tests

Capital stress tests have gained particular significance as a tool for the dynamic evaluation of banks’ risk exposure and capital adequacy. A new forward-looking assessment model has become a key component of capital adequacy analysis.

This forward-looking assessment is based on both macroeconomic and idiosyncratic scenarios that are highly improbable but nevertheless plausible. To conduct the assessment, it is necessary to have robust planning models capable of transferring the effects defined in the projected scenarios to the various elements that have a bearing on the adequacy of a bank’s capital.

The ultimate goal of capital stress tests is to perform a complete evaluation of banks’ risk exposure and capital adequacy in order to determine any possible capital requirements that would arise if banks failed to meet the regulatory or internal capital targets set.

Internally, the Group has defined a capital planning and stress process, to serve not only as a response to the various regulatory exercises, but also as a key tool integrated in the Bank’s management and strategy.

The aim of the internal capital planning and stress process is to guarantee current and future capital adequacy, even in adverse yet plausible economic scenarios. To this end, taking as a basis the Group’s initial position (as defined by its financial statements, its capital base, its risk parameters and its regulatory ratios), estimates are made of the expected outcomes for the Group in various business environments (including severe recessions as well as “normal” macroeconomic scenarios), and the Group’s capital adequacy ratios, projected generally over a three-year period, are obtained.

The process implemented provides a comprehensive view of the Group’s capital for the time horizon analyzed and in each of the scenarios defined. The analysis incorporates regulatory capital, economic capital and available capital metrics.

The entire process is carried out with the maximum involvement and under the close supervision of senior management, and within a framework that guarantees suitable governance and the application of adequate levels of challenge, review and analysis to all components of the process.

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It should be noted that this internal capital planning and stress process is conducted transversally across the entire Group, not only at consolidated level, but also locally at the various units composing the Group. These units use the capital planning and stress process as an internal management tool and to respond to their local regulatory requirements.

During the recent economic crisis, the Group has undergone five stress tests in which it has demonstrated its strength and capital adequacy in the most extreme and severe macroeconomic scenarios. All the tests showed that, due mainly to its business model and current geographical diversification, the Group would continue to generate profits for its shareholders and comply with the most demanding regulatory requirements.

Item 12. Description of Securities Other than Equity Securities.

A. Debt Securities

Not Applicable

B. Warrants and Rights

Not Applicable

C. Other Securities

Not Applicable

D. American Depositary Shares

Our Depositary is J.P. Morgan Chase & Co., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070.

Each ADS represents the right to receive one share of Capital Stock of Santander, par value €0.50 each.

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• Fees charged to investors as outlined in the deposit agreement are the following:

Category of Service	Depositary Actions	Associated Fee
(a) Deposit or substituting the underlying shares	Each person to whom ADSs are issued against deposits of shares, including deposits in respect of share distributions, rights and other distributions.30 Each person surrendering ADRs for the withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.
(b) Receiving or distributing dividends	Distribution of dividends.	$0.01 per ADS.
(c) Selling or Exercising Rights	Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.	$5.00 for each 100 ADSs (or portion thereof).
(d) Withdrawing an underlying security	Acceptance of ADRs surrendered for withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.
(e) Expenses of the Depositary	Expenses incurred on behalf of and charged to Holders in connection with: i) Stock transfer or other taxes and other governmental charges. ii) Cable, telex and facsimile transmission and delivery. iii) Transfer or registration fees for the registration of transfers of deposited shares and other deposited securities on any applicable register in the name of the Custodian or its nominee in connection with the deposit of shares or in the name of such person as a Holder may direct in connection with any withdrawal of deposited securities. iv) Expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency).	Expenses payable at the sole discretion of the depositary.

• Fees received from our depositary in connection with the ADR program are the following:

Contract amount:

Fixed: $4,524,058.22

Variable: $691,837.71

Total: $5,215,895.93

Waived fees:

Ongoing program maintenance per contract year: $150,000

Annual meeting services: $15,000

Investor Relations advisory services: $185,000

Total: $350,000

There were no fees received from our depositary bank during 2015 in connection with the ADR program.

³⁰  The Depositary may sell (by public or private sale) sufficient securities and property received in respect of such share distributions, rights and other distributions prior to such deposit to cover such charge.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

A. Not Applicable

B. Not Applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

A. Not Applicable

B. Not Applicable

C. Not Applicable

D. Not Applicable

E. Not Applicable

Item 15. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2015, Banco Santander, S.A., under the supervision and with the participation of its management, including its disclosure committee, its chief executive officer, chief financial officer, and chief accounting officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based on such evaluation, Banco Santander, S.A.’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Report on Internal Control over Financial Reporting

The management of Banco Santander, S.A. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act.

Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

Our internal control over financial reporting includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

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• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework.

The documentation, update and maintenance processes in the Group’s companies have been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.

The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.

Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on this assessment, management believes that, as of December 31, 2015, its internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2015. This report follows below.

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(c) Attestation report of the registered public accounting firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Santander, S.A.:

We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2015 of the Group and our report dated April 20, 2016 expressed an unqualified opinion on those financial statements.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

April 20, 2016

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(d) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit committee financial expert

The audit committee has five members, all of whom are non-executive independent directors (as defined by Article 6.2c) of the Rules and Regulations of the Board). All members of the audit committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that the Board shall appoint the members of the audit committee, taking into account their knowledge, aptitude and experience in the areas of accounting, auditing or risk management, such that, as a whole, the audit committee has the appropriate technical knowledge regarding the company’s sector of activity. Currently, the chairman of the audit committee is Juan Miguel Villar-Mir. The standards for director independence by Spanish law may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE for U.S. issuers. Our board of directors has determined that Juan Miguel Villar-Mir is an “Audit Committee Financial Expert”, as such term is defined in the SEC’s Form 20-F.

Item 16B. Code of Ethics

We have adopted a code of ethics (the “General Code of Conduct”) that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors.

In 2012, a new General Code of Conduct was published. The current Code primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

This Code is available on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.

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Item 16C. Principal Accountant Fees and Services

Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows

	2015		2014		2013
	(in millions of euros)
Audit Fees		49.6		44.2		35.9
Audit Related Fees		46.9		31.1		20.8
Tax Fees		9.1		6.6		4.6
All Other Fees		12.6		8.0		6.5
		118.2		89.9		67.8

The services commissioned from the Group’s auditors meet the independence requirements stipulated by the Audit Law, the US Securities and Exchange Commission (SEC) rules and the Public Accounting Oversight Board (PCAOB), and they did not involve the performance of any work that is incompatible with the audit function.

The audit committee is required to pre-approve the audit and non-audit services performed by the Group’s auditors in order to assure that the provision of such services do not impair the audit firm’s independence.

In the first months of each year the audit committee proposes to the board the appointment of the independent auditor. At that time, the audit committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the corresponding audit contracts of the Bank and of any other company of the Group with its principal auditing firm.

In addition, non-recurring audit or audit-related services and all non-audit services provided by the Group’s principal auditing firm or other auditing firms are subject to case-by-case pre-approval by the audit committee.

During 2013 the audit committee reviewed the policies and procedures to manage the approval of services to be rendered by the auditor. A list of pre-approved services, including the most common non-prohibited services that may be required from the auditor, was adopted. Specific approval is required for other services not included in the list. The Chief Accounting Officer is in charge of managing the process and must report monthly to the audit committee detailing all services to be provided by auditors, including those pre-approved and others requiring individual approval.

All services provided by the Group’s principal auditing firm in 2015 detailed in the table above were approved by the audit committee.

Item 16D. Exemption from the Listing Standards for Audit Committees

Not applicable.

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during 2015:

2015	(a) Total number of shares (or units) purchased*		(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs		(d) Maximum number (or approximate dollar value) of shares (or units) that may yet  be purchased under the plans or programs
January		115,177,818		5.88		—		—
February		16,120,721		6.12		—		—
March		59,135,483		6.54		—		—
April		95,563,728		6.79		—		—
May		29,971,780		6.65		—		—
June		22,349,810		6.43		—		—
July		18,206,937		6.34		—		—
August		33,091,433		5.82		—		—
September		43,652,345		4.95		—		—
October		10,226,304		5.09		—		—
November		39,029,989		5.08		—		—
December		60,692,002		4.88		—		—
Total		537,314,450

* The number of shares purchased included securities lending and short positions.

During 2015, all purchases and sales of equity securities were made in open-market transactions.

Item 16F. Changes in Registrant’s Certifying Accountant

On July 6, 2015, we announced that the board of directors selected PricewaterhouseCoopers Auditores, S.L. to be the independent registered public accounting firm of Banco Santander and of its consolidated Group for the 2016, 2017 and 2018 fiscal years. Such selection was adopted at the proposal of the audit committee in accordance with the corporate governance guidelines recommending periodic rotation of the independent registered public accounting firm, following a transparent selection process. This selection was approved by the shareholders at the annual shareholders’ meeting held on March 18, 2016. The appointment was registered in the Commercial Registry of Cantabria on April 15, 2016, on page S-1960, volume 1089, book 9, folio 214, record 2999. Accordingly, on March 18, 2016, Deloitte, S.L. was dismissed and was not re-elected for another term as our independent registered public accounting firm.

The report of Deloitte, S.L. on our financial statements for financial years ended December 31, 2015, 2014 and 2013 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There was no disagreement whatsoever relating to the years ended December 31, 2015, 2014, and 2013 and the period from January 1, 2016 through March 18, 2016 with Deloitte, S.L. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of the former auditor, would have caused them to make reference to the subject matter of the disagreement in connection with their report, or any “reportable event” as described in Item 16F(a)(1)(v) of Form 20-F.

We have provided a copy of the above statements to Deloitte, S.L. and requested that Deloitte, S.L. furnish us with a letter addressed to the SEC stating whether or not they agree with the above disclosure. A copy of that letter, dated April 21, 2016, is filed as an exhibit to this Annual Report.

325

Item 16G. Corporate Governance

The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards.

Independence of the directors on the board of directors

Under the NYSE corporate governance rules, a majority of the board of directors of any U.S. company listed on the NYSE must be composed of independent directors, whose independence is determined in accordance with highly detailed rules promulgated by the NYSE.

Under Spanish law, section 529.duodecies of the Capital Companies Law, passed by RDL 1/2010 (July 2, 2010) sets out the requirements to be considered as independent director in a listed company but does not set the number of independent directors. There is a non-binding recommendation that the number of independent directors represent at least half of the total size of the Board. Article 42.1 of our Bylaws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has eight independent directors (out of fifteen directors total), as defined in Article 6.2.c) of the Rules and Regulations of the Board, in accordance with section 529 duodecies of the Capital Companies Law. We have not determined whether the directors on the Santander board would be considered independent under the NYSE rules except in the case of the members of our audit committee where we have determined that all of them meet the independence criteria for foreign private issuers set forth in Rule 10A-3 under the Exchange Act. In accordance with section 529.duodecies of the Capital Companies Law, Article 6.2.c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:

“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.

In no event may there be a classification as independent directors of those who:

a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship.

b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial.

For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations.

c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period.

d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director.

e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship.

Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services.

326

f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group.

Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter.

g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company.

h) Have not been proposed, whether for appointment or for renewal, by the appointments committee or remuneration committee.

i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c). In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.

The independence standards set forth in the Rules and Regulations of the Board may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.

Independence of the directors on the appointments committee and remuneration committee

In accordance with the NYSE corporate governance rules, all U.S. companies listed on the NYSE must have a compensation committee and a nominating and corporate governance committee and all members of such committees must be independent in accordance with highly detailed rules promulgated by the NYSE. The appointments committee and the remuneration committee of the Bank’s board of directors are composed of five external directors (four are independent and one in the opinion of the board is neither proprietary nor independent), and the risk supervision, regulation and compliance committee is composed of seven external directors (six are independent and one in the opinion of the board is neither proprietary nor independent) and the chairman of those three committees is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. The composition of the appointments committee and the remuneration committee is described under the caption “Audit Committee, Risk Supervision, Regulation and Compliance Committee, Appointments Committee and Remuneration Committee” below.

327

During the fiscal year 2015, none of the members of the appointments committee, the remuneration committee and the risk supervision, regulation and compliance committee was an executive director, member of senior management or a Bank employee, and no executive director or member of senior management has held a position on the board (or its remuneration committee) of companies that employ members of the appointments committee, the remuneration committee and the risk supervision, regulation and compliance committee.

Separate meetings for non-management directors

In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Although this practice is not required under Spanish law, the board adopted the practice as a result of changes made following the board’s self-assessment exercise. The audit committee, the appointments committee, the remuneration committee and the risk supervision, regulation and compliance committee of the Bank’s board of directors consist entirely of non-management directors.

The audit committee met 13 times during 2015. The appointments committee met 12 times during 2015. The remuneration committee met 10 times during 2015. The risk supervision, regulation and compliance committee met 13 times during 2015.

Code of ethics

Under the NYSE corporate governance rules, all U.S. companies listed on the NYSE must adopt a Code of Business Conduct and Ethics which contains certain required topics. In March 2000, Santander adopted a General Code of Conduct that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. On July 28, 2003, the board approved amendments to the General Code of Conduct to conform it to the requirements of Law 44/2002 (November 2, 2002) on reform measures of the financial system. The code came into force on August 1, 2003 and replaced the previous one. The General Code of Conduct establishes the principles that guide the actions of officers and directors including ethical conduct, professional standards and confidentiality.

In 2012, a new General Code of Conduct was published. The current Code primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

As of December 31, 2015, no waivers with respect to the General Code of Conduct had been applied for or granted.

In addition, we abide by a Code of Conduct in the Securities Markets, which was adopted on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information. Recently, the Code was updated in order to include the new requirements under the Market Abuse Directive (MAD), which will enter into force on July 3, 2016. Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.

Item 16H. Mine Safety Disclosure

Not applicable.

328

PART III

Item 17. Financial Statements

We have responded to Item 18 in lieu of this item.

Item 18. Financial Statements

Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F.

Item 19. Exhibits

(a) Index to Financial Statements	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets at December 31, 2015, 2014 and 2013		F-2
Consolidated Income Statements for the Years Ended December  31, 2015, 2014 and 2013		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December 31, 2015, 2014 and 2013		F-4
Consolidated Statements of Changes In Total Equity for the Years Ended December 31, 2015, 2014 and 2013		F-5
Consolidated Cash Flow Statement for the Years Ended December  31, 2015, 2014 and 2013		F-8
Notes to the Consolidated Financial Statements		F-9

(b) List of Exhibits.

Exhibit Number	Description
1.1	Bylaws (Estatutos) of Banco Santander, S.A.
1.2	Bylaws (Estatutos) of Banco Santander, S.A., (English translation of Bylaws set forth in Exhibit 1.1 hereto).
8.1	List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).
12.1	Section 302 Certification by the chief executive officer.
12.2	Section 302 Certification by the chief financial officer.
12.3	Section 302 Certification by the chief accounting officer.
13.1	Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer.
15.1	Consent of Deloitte, S.L.
15.2	Letter of Deloitte, S.L., dated April 21, 2016, regarding change in the Group’s independent registered public accounting firm.

We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Santander.

329

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

BANCO SANTANDER, S.A.
By:	/s/ José G. Cantera
	Name:	José G. Cantera
	Title:	Chief financial officer

Date: April 20, 2016

330

INDEX TO FINANCIAL STATEMENTS

Index to Financial Statements

	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets at December 31, 2015, 2014 and 2013		F-2
Consolidated Income Statements for the Years Ended December 31, 2015, 2014 and 2013		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2015, 2014 and 2013		F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2015, 2014 and 2013		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013		F-8
Notes to the Consolidated Financial Statements		F-9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Santander, S.A.:

We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2015, 2014 and 2013, and the related consolidated income statements, statements of recognized income and expense, changes in total equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2015, 2014, and 2013, and the results of its operations, its changes in equity, and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 20, 2016 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

April 20, 2016

F-1

SANTANDER GROUP

CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

ASSETS	Note		2015		2014		2013
CASH AND BALANCES WITH CENTRAL BANKS				81,329		69,428		77,103
FINANCIAL ASSETS HELD FOR TRADING:				147,287		148,888		115,289
Loans and advances to credit institutions		6		2,293		1,815		5,503
Loans and advances to customers		10		6,081		2,921		5,079
Debt instruments		7		43,964		54,374		40,841
Equity instruments		8		18,225		12,920		4,967
Trading derivatives		9		76,724		76,858		58,899
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:				45,043		42,673		31,381
Loans and advances to credit institutions		6		26,403		28,592		13,444
Loans and advances to customers		10		14,293		8,971		13,196
Debt instruments		7		3,717		4,231		3,875
Equity instruments		8		630		879		866
AVAILABLE-FOR-SALE FINANCIAL ASSETS:				122,036		115,250		83,799
Debt instruments		7		117,187		110,249		79,844
Equity instruments		8		4,849		5,001		3,955
LOANS AND RECEIVABLES:				831,637		781,635		714,484
Loans and advances to credit institutions		6		50,256		51,306		56,017
Loans and advances to customers		10		770,474		722,819		650,581
Debt instruments		7		10,907		7,510		7,886
HELD-TO-MATURITY INVESTMENTS		7		4,355		—		—
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		36		1,379		1,782		1,627
HEDGING DERIVATIVES		11		7,727		7,346		8,301
NON-CURRENT ASSETS HELD FOR SALE		12		5,646		5,376		4,892
INVESTMENTS:		13		3,251		3,471		5,536
Associates		13		1,659		1,775		1,829
Jointly controlled entities		13		1,592		1,696		3,707
INSURANCE CONTRACTS LINKED TO PENSIONS		14		299		345		342
REINSURANCE ASSETS		15		331		340		356
TANGIBLE ASSETS:				25,320		23,256		13,654
Property, plant and equipment-				19,335		16,889		9,974
For own use		16		7,949		8,324		7,787
Leased out under an operating lease		16		11,386		8,565		2,187
Investment property		16		5,985		6,367		3,680
INTANGIBLE ASSETS:				29,430		30,401		26,241
Goodwill		17		26,960		27,548		23,281
Other intangible assets		18		2,470		2,853		2,960
TAX ASSETS:				27,814		27,956		26,944
Current				5,769		5,792		5,751
Deferred		27		22,045		22,164		21,193
OTHER ASSETS		19		7,376		8,149		5,814
Inventories				1,013		1,099		80
Other				6,363		7,050		5,734
TOTAL ASSETS				1,340,260		1,266,296		1,115,763

LIABILITIES AND EQUITY	Note		2015			2014			2013
FINANCIAL LIABILITIES HELD FOR TRADING:				105,218			109,792			94,673
Deposits from central banks		20		2,178			2,041			3,866
Deposits from credit institutions		20		77			5,531			7,468
Customer deposits		21		9,187			5,544			8,500
Marketable debt securities		22		—			—			1
Trading derivatives		9		76,414			79,048			58,887
Short positions		9		17,362			17,628			15,951
Other financial liabilities				—			—			—
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:				54,768			62,317			42,311
Deposits from central banks		20		16,486			6,321			2,097
Deposits from credit institutions		20		8,551			19,039			9,644
Customer deposits		21		26,357			33,127			26,484
Marketable debt securities		22		3,373			3,830			4,086
Subordinated liabilities				—			—			—
Other financial liabilities		24		1			—			—
FINANCIAL LIABILITIES AT AMORTISED COST:				1,039,343			961,052			863,114
Deposits from central banks		20		38,872			17,290			9,788
Deposits from credit institutions		20		109,207			105,147			76,534
Customer deposits		21		647,578			608,956			572,853
Marketable debt securities		22		201,656			193,059			171,390
Subordinated liabilities		23		21,153			17,132			16,139
Other financial liabilities		24		20,877			19,468			16,410
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		36		174			31			87
HEDGING DERIVATIVES		11		8,937			7,255			5,283
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE				—			21			1
LIABILITIES UNDER INSURANCE CONTRACTS		15		627			713			1,430
PROVISIONS:				14,494			15,376			14,589
Provision for pensions and similar obligations		25		8,272			9,412			9,126
Provisions for taxes and other legal contingencies		25		2,577			2,916			2,727
Provisions for contingent liabilities and commitments		25		618			654			693
Other provisions		25		3,027			2,394			2,043
TAX LIABILITIES:				7,725			9,379			6,079
Current				2,160			4,852			4,254
Deferred		27		5,565			4,527			1,825
OTHER LIABILITIES		26		10,221			10,646			8,554
TOTAL LIABILITIES				1,241,507			1,176,582			1,036,121
EQUITY
SHAREHOLDERS’ EQUITY:		30		102,402			91,663			84,480
Share capital		31		7,217			6,292			5,667
Registered				7,217			6,292			5,667
Less: Uncalled capital				—			—			—
Share premium		32		45,001			38,611			36,804
Reserves		33		45,760			41,160			38,056
Accumulated reserves (losses)		33		45,469			40,973			37,793
Reserves (losses) of entities accounted for using the equity method		33		291			187			263
Other equity instruments		34		214			265			193
Equity component of compound financial instruments		34		—			—			—
Other		34		214			265			193
Less: Treasury shares		34		(210	)		(10	)		(9	)
Profit for the year attributable to the Parent				5,966			5,816			4,175
Less: Dividends and remuneration		4		(1,546	)		(471	)		(406	)
VALUATION ADJUSTMENTS				(14,362	)		(10,858	)		(14,152	)
Available-for-sale financial assets		29		844			1,560			35
Cash flow hedges		36		171			204			(233	)
Hedges of net investments in foreign operations		29		(3,597	)		(3,570	)		(1,874	)
Exchange differences		29		(8,383	)		(5,385	)		(8,768	)
Non-current assets held for sale				—			—			—
Entities accounted for using the equity method		29		(232	)		(85	)		(446	)
Other valuation adjustments		29		(3,165	)		(3,582	)		(2,866	)
NON-CONTROLLING INTERESTS		28		10,713			8,909			9,314
Valuation adjustments				(1,227	)		(655	)		(1,541	)
Other				11,940			9,564			10,855
TOTAL EQUITY				98,753			89,714			79,642
TOTAL LIABILITIES AND EQUITY				1,340,260			1,266,296			1,115,763
MEMORANDUM ITEMS:
CONTINGENT LIABILITIES		35		40,115			44,078			41,049
CONTINGENT COMMITMENTS		35		221,457			208,040			172,797

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet as at December 31, 2015.

F-2

SANTANDER GROUP

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

			(Debit) Credit
	Notes		2015			2014			2013
Interest and similar income		38		57,198			54,656			51,447
Interest expense and similar charges		39		(24,386	)		(25,109	)		(25,512	)
INTEREST INCOME/(CHARGES)				32,812			29,547			25,935
Income from equity instruments		40		455			435			378
Income from companies accounted for using the equity method		13 & 41		375			243			500
Fee and commission income		42		13,042			12,515			12,473
Fee and commission expense		43		(3,009	)		(2,819	)		(2,712	)
Gains/losses on financial assets and liabilities (net)		44		(770	)		3,974			3,234
Held for trading				(2,312	)		2,377			1,733
Other financial instruments at fair value through profit or loss				325			239			(6	)
Financial instruments not measured at fair value through profit or loss				1,265			1,427			1,622
Other				(48	)		(69	)		(115	)
Exchange differences (net)		45		3,156			(1,124	)		160
Other operating income				3,067			5,214			5,903
Income from insurance and reinsurance contracts issued		46		1,096			3,532			4,724
Sales and income from the provision of non-financial services		46		711			343			322
Other		46		1,260			1,339			857
Other operating expenses				(3,233	)		(5,373	)		(6,205	)
Expenses of insurance and reinsurance contracts		46		(998	)		(3,395	)		(4,607	)
Changes in inventories		46		(590	)		(255	)		(229	)
Other		46		(1,645	)		(1,723	)		(1,369	)
TOTAL INCOME				45,895			42,612			39,666
Administrative expenses				(19,302	)		(17,899	)		(17,452	)
Personnel expenses		47		(11,107	)		(10,242	)		(10,069	)
Other general administrative expenses		48		(8,195	)		(7,657	)		(7,383	)
Depreciation and amortization		16 & 18		(2,418	)		(2,287	)		(2,391	)
Provisions (net)		25		(3,106	)		(3,009	)		(2,445	)
Impairment losses on financial assets (net)				(10,652	)		(10,710	)		(11,227	)
Loans and receivables		10		(10,194	)		(10,521	)		(10,986	)
Other financial instruments not measured at fair value through profit or loss		7 & 29		(458	)		(189	)		(241	)
Impairment losses on other assets (net)				(1,092	)		(938	)		(503	)
Goodwill and other intangible assets		17 & 18		(701	)		(701	)		(41	)
Other assets				(391	)		(237	)		(462	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		49		112			3,136			2,152
Gains from bargain purchases arising in business combinations		3		283			17			—
Gains/(losses) on non-current assets held for sale not classified as discontinued operations		50		(173	)		(243	)		(422	)
OPERATING PROFIT /(LOSS) BEFORE TAX				9,547			10,679			7,378
Income tax		27		(2,213	)		(3,718	)		(2,034	)
PROFIT FROM CONTINUING OPERATIONS				7,334			6,961			5,344
LOSS FROM DISCONTINUED OPERATIONS (net)		37		—			(26	)		(15	)
CONSOLIDATED PROFIT FOR THE YEAR				7,334			6,935			5,329
Profit attributable to the Parent				5,966			5,816			4,175
Profit attributable to non-controlling interests		28		1,368			1,119			1,154
EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)		4		0.40			0.48			0.39
Diluted earnings per share (euros)		4		0.40			0.48			0.38
From continuing operations
Basic earnings per share (euros)		4		0.40			0.48			0.39
Diluted earnings per share (euros)		4		0.40			0.48			0.38

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated income statement for the year ended December 31, 2015.

F-3

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

	2015			2014			2013
CONSOLIDATED PROFIT FOR THE YEAR		7,334			6,935			5,329
OTHER RECOGNISED INCOME AND EXPENSE		(4,076	)		4,180			(5,913	)
Items that will not be reclassified to profit or loss		445			(703	)		188
Actuarial gains/(losses) on defined benefit pension plans		695			(1,009	)		502
Non-current assets held for sale		—			—			—
Income tax relating to items that will not be reclassified to profit or loss		(250	)		306			(314	)
Items that may be reclassified to profit or loss		(4,521	)		4,883			(6,101	)
Available-for-sale financial assets:		(1,216	)		2,324			(99	)
Revaluation gains/(losses)		(555	)		3,604			1,150
Amounts transferred to income statement		(661	)		(1,280	)		(1,250	)
Other reclassifications		—			—			1
Cash flow hedges:		(91	)		589			47
Revaluation gains/(losses)		(105	)		934			463
Amounts transferred to income statement		14			(345	)		(416	)
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			—			—
Hedges of net investments in foreign operations:		(27	)		(1,730	)		1,117
Revaluation gains/(losses)		(27	)		(1,730	)		1,074
Amounts transferred to income statement		—			—			38
Other reclassifications		—			—			5
Exchange differences:		(3,518	)		4,189			(7,028	)
Revaluation gains/(losses)		(3,518	)		4,184			(7,020	)
Amounts transferred to income statement		—			5			(37	)
Other reclassifications		—			—			29
Non-current assets held for sale:		—			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Entities accounted for using the equity method:		(147	)		361			(294	)
Revaluation gains/(losses)		(156	)		266			(283	)
Amounts transferred to income statement		9			95			23
Other reclassifications		—			—			(34	)
Other recognized income and expense		—			—			—
Income tax relating to items that may be reclassified to profit or loss		478			(850	)		156
TOTAL RECOGNISED INCOME AND EXPENSE		3,258			11,115			(584	)
Attributable to the Parent		2,462			9,110			(504	)
Attributable to non-controlling interests		796			2,005			(80	)

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of recognized income and expense for the year ended December 31, 2015.

F-4

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED

DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves					Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																	Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/14		6,292		38,611			40,973			187		265			(10	)		5,816			(471	)		91,663			(10,858	)		80,805			8,909			89,714
Adjustments due to changes in accounting policies		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		6,292		38,611			40,973			187		265			(10	)		5,816			(471	)		91,663			(10,858	)		80,805			8,909			89,714
Total recognized income and expense		—		—			—			—		—			—			5,966			—			5,966			(3,504	)		2,462			796			3,258
Other changes in equity		925		6,390			4,496			104		(51	)		(200	)		(5,816	)		(1,075	)		4,773			—			4,773			1,008			5,781
Capital increases		925		6,575			(65	)		—		—			—			—			—			7,435			—			7,435			320			7,755
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			(20	)		(20	)
Conversion of financial liabilities into equity		—		—			—			—		—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—		101			—			—			—			101			—			101			890			991
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(673	)		—		—			—			—			(1,546	)		(2,219	)		—			(2,219	)		(461	)		(2,680	)
Transactions involving own equity instruments (net)		—		—			16			—		—			(200	)		—			—			(184	)		—			(184	)		—			(184	)
Transfers between equity items		—		(185	)		5,426			104		—			—			(5,816	)		471			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			761			761
Equity-instrument-based payments		—		—			—			—		(188	)		—			—			—			(188	)		—			(188	)		107			(81	)
Other increases/(decreases) in equity		—		—			(208	)		—		36			—			—			—			(172	)		—			(172	)		(589	)		(761	)
Ending balance at 12/31/15		7,217		45,001			45,469			291		214			(210	)		5,966			(1,546	)		102,402			(14,362	)		88,040			10,713			98,753

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2015.

F-5

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED

DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves						Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																		Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/13		5,667		36,804			37,858			263			193			(9	)		4,370			(406	)		84,740			(14,152	)		70,588			9,314			79,902
Adjustments due to changes in accounting policies		—		—			(65	)		—			—			—			(195	)		—			(260	)		—			(260	)		—			(260	)
Adjustments due to errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		5,667		36,804			37,793			263			193			(9	)		4,175			(406	)		84,480			(14,152	)		70,328			9,314			79,642
Total recognized income and expense		—		—			—			—			—			—			5,816			—			5,816			3,294			9,110			2,005			11,115
Other changes in equity		625		1,807			3,180			(76	)		72			(1	)		(4,175	)		(65	)		1,367			—			1,367			(2,410	)		(1,043	)
Capital increases		625		1,932			(30	)		—			—			—			—			—			2,527			—			2,527			(524	)		2,003
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			78			—			—			—			78			—			78			—			78
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(438	)		—			—			—			—			(471	)		(909	)		—			(909	)		(380	)		(1,289	)
Transactions involving own equity instruments (net)		—		—			40			—			—			(1	)		—			—			39			—			39			—			39
Transfers between equity items		—		(125	)		4,033			(76	)		(63	)		—			(4,175	)		406			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			1,465			1,465
Equity-instrument-based payments		—		—			—			—			(51	)		—			—			—			(51	)		—			(51	)		—			(51	)
Other increases/(decreases) in equity		—		—			(425	)		—			108			—			—			—			(317	)		—			(317	)		(2,971	)		(3,288	)
Ending balance at 12/31/14		6,292		38,611			40,973			187			265			(10	)		5,816			(471	)		91,663			(10,858	)		80,805			8,909			89,714

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2015.

F-6

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED

DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves					Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																	Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/12		5,161		37,412			36,898			255		250			(287	)		2,205			(650	)		81,244			(6,590	)		74,654			9,672			84,326
Adjustments due to changes in accounting policies		—		—			(53	)		—		—			—			78			—			25			(2,882	)		(2,857	)		(257	)		(3,114	)
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		5,161		37,412			36,845			255		250			(287	)		2,283			(650	)		81,269			(9,472	)		71,797			9,415			81,212
Total recognized income and expense		—		—			—			—		—			—			4,175			—			4,175			(4,680	)		(504	)		(80	)		(584	)
Other changes in equity		506		(608	)		948			8		(57	)		278			(2,283	)		244			(964	)		—			(964	)		(21	)		(985	)
Capital increases		506		(506	)		(7	)		—		—			—			—			—			(7	)		—			(7	)		(2	)		(9	)
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—		—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—		103			—			—			—			103			—			103			—			103
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(412	)		—		—			—			—			(406	)		(818	)		—			(818	)		(747	)		(1,565	)
Transactions involving own equity instruments (net)		—		—			(28	)		—		—			278			—			—			250			—			250			—			250
Transfers between equity items		—		(102	)		1,836			8		(109	)		—			(2,283	)		650			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			169			169
Equity-instrument-based payments		—		—			—			—		(41	)		—			—			—			(41	)		—			(41	)		—			(41	)
Other increases/(decreases) in equity		—		—			(441	)		—		(10	)		—			—			—			(451	)		—			(451	)		559			108
Ending balance at 12/31/13		5,667		36,804			37,793			263		193			(9	)		4,175			(406	)		84,480			(14,152	)		70,328			9,314			79,642

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2015.

F-7

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Millions of Euros)

	2015			2014			2013
A. CASH FLOWS FROM OPERATING ACTIVITIES:		12,857			(3,939	)		(34,852	)
Consolidated profit for the year		7,334			6,935			5,329
Adjustments made to obtain the cash flows from operating activities-		20,614			18,772			17,894
Depreciation and amortization		2,418			2,287			2,391
Other adjustments		18,196			16,485			15,503
Net increase/decrease in operating assets-		62,408			88,438			(13,533	)
Financial assets held for trading		1,013			12,931			(8,440	)
Other financial assets at fair value through profit or loss		2,376			11,012			3,426
Available-for-sale financial assets		15,688			27,968			(4,149	)
Loans and receivables		46,554			35,644			(2,767	)
Other operating assets		(3,223	)		883			(1,603	)
Net increase/decrease in operating liabilities-		49,522			60,144			(68,031	)
Financial liabilities held for trading		(2,655	)		(4,667	)		4,320
Other financial liabilities at fair value through profit or loss		(8,011	)		19,786			(2,781	)
Financial liabilities at amortized cost		58,568			46,747			(63,939	)
Other operating liabilities		1,620			(1,722	)		(5,631	)
Income tax recovered/paid		(2,205	)		(1,352	)		(3,577	)
B. CASH FLOWS FROM INVESTING ACTIVITIES:		(6,218	)		(6,005	)		677
Payments-		10,671			9,246			3,322
Tangible assets		7,664			6,695			1,877
Intangible assets		1,572			1,218			1,264
Investments		82			18			181
Subsidiaries and other business units		1,353			1,315			—
Non-current assets held for sale and associated liabilities		—			—			—
Held-to-maturity investments		—			—			—
Other payments related to investing activities		—			—			—
Proceeds-		4,453			3,241			3,999
Tangible assets		2,386			986			500
Intangible assets		2			—			39
Investments		422			324			295
Subsidiaries and other business units		565			1,004			1,578
Non-current assets held for sale and associated liabilities		940			927			1,587
Held-to-maturity investments		138			—			—
Other proceeds related to investing activities		—			—			—
C. CASH FLOWS FROM FINANCING ACTIVITIES:		8,960			(62	)		(1,676	)
Payments-		7,248			8,094			8,528
Dividends		1,498			909			818
Subordinated liabilities		2,239			3,743			1,915
Redemption of own equity instruments		—			—			—
Acquisition of own equity instruments		3,225			3,442			5,592
Other payments related to financing activities		286			—			203
Proceeds-		16,208			8,032			6,852
Subordinated liabilities		4,787			4,351			1,027
Issuance of own equity instruments		7,500			—			—
Disposal of own equity instruments		3,048			3,498			5,560
Other proceeds related to financing activities		873			183			265
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES		(3,698	)		2,331			(5,534	)
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		11,901			(7,675	)		(41,385	)
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		69,428			77,103			118,488
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		81,329			69,428			77,103
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR:
Cash		7,436			7,491			6,697
Cash equivalents at central banks		73,893			61,937			70,406
Other financial assets		—			—			—
Less: Bank overdrafts refundable on demand		—			—			—
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR		81,329			69,428			77,103

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of cash flows for the year ended December 31, 2015.

F-8

Banco Santander, S.A. and Companies composing Santander Group

Notes to the consolidated financial statements for the year ended December 31, 2015

1. Introduction, basis of presentation of the consolidated financial statements and other information

a) Introduction

Banco Santander, S.A. (“the Bank” or “Banco Santander”) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be found on the website of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, Santander Group (“the Group” or “Santander Group”). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.

b) Basis of presentation of the consolidated financial statements

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (“IFRSs”) previously adopted by the European Union (“EU-IFRSs”).

In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats.

The Group’s consolidated financial statements for 2015 were authorized by the Bank’s directors (at the board meeting on February 12, 2016) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004 and Spanish corporate and commercial law applicable to the Group and in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS – IASB” and together with IFRS adopted by the European Union, “IFRS”), using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they present fairly the Group’s equity and financial position at December 31, 2015, 2014 and 2013 and the consolidated results of its operations, the consolidated recognized income and expense, the changes in its consolidated equity and the consolidated cash flows in 2015, 2014 and 2013. These consolidated financial statements were prepared from the accounting records kept by the Bank and by the other Group entities, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.

The notes to the consolidated financial statements contain additional information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in total equity and consolidated statement of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these financial statements.

F-9

Adoption of new standards and interpretations issued

The following standards came into force and were adopted by the European Union in 2015:

• Improvements to IFRSs, 2011-2013 cycle (mandatory for reporting periods beginning on or after July 1, 2014)—these improvements introduce minor amendments to IFRS 3, IFRS 13 and IAS 40.

The application of the aforementioned accounting standards did not have any material effects on the Group’s consolidated financial statements.

Also, at the date of preparation of these consolidated financial statements, the following amendments with an effective date subsequent to December 31, 2015 were in force:

• Disclosure Initiative (Amendments to IAS 1) (mandatory for annual reporting periods beginning on or after January 1, 2016, early application permitted)—the main objective of these amendments is to improve financial statement presentation and disclosures. To this end, the amendments introduce certain qualifications relating to materiality, aggregation and disaggregation of items and the structure of the notes.

• Amendments to IAS 16 and IAS 38—Clarification of Acceptable Methods of Depreciation and Amortization (mandatory for annual reporting periods beginning on or after January 1, 2016, early application permitted)—these amendments clarify that when an item of property, plant and equipment or an intangible asset is accounted for using the revaluation model, the total gross carrying amount of the asset is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset, so that the accumulated depreciation or amortization is equal to the difference between the gross carrying amount and the carrying amount of the asset after revaluation (after taking into account any impairment losses).

• Amendments to IASs 16 and 41—Bearer Plants (mandatory for annual reporting periods beginning on or after January 1, 2016, early application permitted)—under these amendments, plants of this nature are now within the scope of IAS 16 and must be accounted for in the same way as property, plant and equipment rather than at their fair value.

• Amendments to IAS 27—Equity Method in Separate Financial Statements (mandatory for annual reporting periods beginning on or after January 1, 2016, early application permitted)—these amendments permit the use of the equity method as an option in the separate financial statements of an entity for accounting for investments in subsidiaries, joint ventures and associates.

• Amendments to IFRS 11—Accounting for Acquisitions of Interests in Joint Operations (mandatory for annual reporting periods beginning on or after January 1, 2016, early application permitted)—these amendments specify how to account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business.

• Improvements to IFRSs, 2012-2014 cycle (mandatory for reporting periods beginning on or after January 1, 2016, early application permitted)—these improvements introduce minor amendments to IFRS 5, IFRS 7, IAS 19 and IAS 34.

In addition, the Group decided to apply early the following standards (the application of which is mandatory under IASB-IFRSs for annual reporting periods beginning on or after July 1, 2014) under IFRSs adopted by the European Union, as permitted by the corresponding standard:

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• Amendments to IAS 19, Employee Benefits—Defined Benefit Plans: Employee Contributions—these amendments allow employee contributions to be deducted from the service cost in the same period in which they are paid, provided certain requirements are met, without having to perform calculations to attribute the reduction to each year of service.

• Improvements to IFRSs, 2010-2012 cycle—these improvements introduce minor amendments to IFRS 2, IFRS 3, IFRS 8, IAS 16, IAS 24 and IAS 38.

The application of the aforementioned accounting standards did not have any material effects on the Group’s consolidated financial statements.

Lastly, at the date of preparation of these consolidated financial statements, the following standards which effectively come into force after December 31, 2015 had not yet been adopted by the European Union:

• IFRS 9, Financial Instruments: Classification and Measurement, Hedge Accounting and Impairment (mandatory for reporting periods beginning on or after January 1, 2018). The conceptual change is important in all sections. The financial asset classification and measurement model changes, with the business model being the focal point. The approach of the hedge accounting model attempts to rely more on economic risk management and require fewer rules. Lastly, the impairment model evolves from an incurred loss approach to an expected loss approach.

• IFRS 15, Revenue from Contracts with Customers (mandatory for annual reporting periods beginning on or after January 1, 2018)—the new standard on the recognition of revenue from contracts with customers. It supersedes the following standards and interpretations currently in force: IAS 18, Revenue; IAS 11, Construction Contracts; IFRIC 13, Customer Loyalty Programs; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfers of Assets from Customers; and SIC-31, Revenue-Barter Transactions Involving Advertising Services. Under IFRS 15, an entity recognizes revenue in accordance with the core principle of the standard by applying the following five steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations identified in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation.

• IFRS 16 Leases (mandatory for annual reporting periods beginning on or after January 1, 2019)—this new standard on leases supersedes IAS 17. IFRS 16 introduces a single lessee accounting model; a lessee is required to recognize, with limited exceptions, a right-of-use asset and a lease liability. By contrast, in the case of lessor accounting, a dual model will continue to be used, similar to that currently established in IAS 17.

• Amendments to IFRS 10 and IAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (without a defined mandatory effective date)—these amendments establish that a gain or loss must be recognized for the full amount when the transaction involves assets that constitute a business (whether the business is housed in a subsidiary or not). When the transaction involves assets that do not constitute a business, a partial gain or loss is recognized, even if these assets are housed in a subsidiary.

The Group is currently analyzing the possible effects of these new standards and interpretations.

All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2015 were applied in their preparation.

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c) Use of estimates

The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.

In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:

• The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);

• The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);

• The useful life of the tangible and intangible assets (see Notes 16 and 18);

• The measurement of goodwill arising on consolidation (see Note 17);

• The calculation of provisions and the consideration of contingent liabilities (see Note 25);

• The fair value of certain unquoted assets and liabilities (see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22); and

• The recoverability of deferred tax assets (see Note 27).

Although these estimates were made on the basis of the best information available at 2015 year-end, future events might make it necessary to change these estimates (upwards or downwards) in coming years. Changes in accounting estimates would be applied prospectively, recognizing the effects of the change in estimates in the related consolidated income statement.

d) Information relating to 2014 and 2013

As required by the applicable accounting standards, the balances relating to the segment reporting disclosed in Note 52 for the years ended December 31, 2014 and 2013 were adjusted with respect to those shown in the consolidated financial statements for 2014, as a result of the amendments to the management and presentation criteria mentioned in that note.

In 2014 the Group recognized the effects of the accounting changes introduced by the application of IFRIC 21, Levies, which amended the accounting for the contributions made by Santander UK to the Financial Services Compensation Scheme, as well as for those made by the Spanish financial institutions in the Group to the Deposit Guarantee Fund. The consolidated statements of changes in total equity for 2014 and 2013 include the impact on equity at the beginning of each of those years arising from the retrospective application of the aforementioned interpretation, which gave rise to a reduction in equity of EUR 260 million at January 1, 2014 (January 1, 2013: EUR 63 million).

Also, in 2013 the Group applied the accounting changes introduced by the amendment to IAS 19, Employee Benefits, which, inter alia, eliminated the possibility of deferring recognition of a portion of actuarial gains and losses. The consolidated statement of changes in total equity for 2013 includes the impact on equity at the beginning of that year arising from the retrospective application of the aforementioned amendment, which gave rise to a reduction in equity of EUR 3,051 million at January 1, 2013.

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e) Capital management

i. Regulatory and economic capital

The Group’s capital management is performed at regulatory and economic levels.

The aim is to secure the Group’s solvency and guarantee its economic capital adequacy and its compliance with regulatory requirements, as well as an efficient use of capital.

To this end, the regulatory and economic capital figures and their associated metrics -return on risk-weighted assets (RORWA), return on risk-adjusted capital (RORAC) and value creation of each business unit- are generated, analyzed and reported to the relevant governing bodies on a regular basis.

Within the framework of the internal capital adequacy assessment process (Pillar II of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in various economic scenarios, with the solvency levels agreed upon by the Group; at the same time the Group assesses, also in the various scenarios, whether it meets the regulatory capital ratio requirements.

In order to adequately manage the Group’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on the budgetary information (balance sheet, income statement, etc.) and the macroeconomic scenarios defined by the Group’s economic research service. These estimates are used by the Group as a reference when planning the management actions (issues, securitizations, etc.) required to achieve its capital targets.

In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables (GDP, interest rates, housing prices, etc.) that mirror historical crises that could happen again or plausible but unlikely stress situations.

Following is a brief description of the regulatory capital framework to which Santander Group is subject.

In December 2010 the Basel Committee on Banking Supervision published a new global regulatory framework for international capital standards (Basel III) which strengthened the requirements of the previous frameworks, known as Basel I and Basel II, and other requirements additional to Basel II (Basel 2.5), by enhancing the quality, consistency and transparency of the capital base and improving risk coverage. On June 26, 2013, the Basel III legal framework was included in European law through Directive 2013/36 (CRD IV), repealing Directives 2006/48 and 2006/49, and through Regulation 575/2013 on prudential requirements for credit institutions and investment firms (CRR).

Directive 2013/36 (CRD IV) was transposed into Spanish legislation through Law 10/2014 on the regulation, supervision and capital adequacy of credit institutions, and its subsequent implementing regulations contained in Royal Decree-Law 84/2015. Regulation 575/2013 is directly applicable in EU Member States as from January 1, 2014 and repeals all lower-ranking rules providing for additional capital requirements.

Regulation 575/2013 (CRR) establishes a phase-in that will permit a progressive adaptation to the new requirements in the European Union. These phase-in arrangements were incorporated into Spanish regulations through the approval of Royal Decree-Law 14/2013 and Bank of Spain Circular 2/2014. They affect both the new deductions and the issues and items of own funds which cease to be eligible as such under this new regulation. The capital buffers provided for in CRD IV are also subject to phase-in; they are applicable for the first time in 2016 and must be fully implemented by 2019.

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The Basel regulatory framework is based on three pillars. Pillar I sets out the minimum capital requirements to be met, and provides for the possibility of using internal ratings and models (the Advanced Internal Ratings-Based (AIRB) approach) in the calculation of risk-weighted exposures. The aim is to render regulatory requirements more sensitive to the risks actually borne by entities in carrying on their business activities. Pillar II establishes a supervisory review system to improve internal risk management and internal capital adequacy assessment based on the risk profile. Lastly, Pillar III defines the elements relating to disclosures and market discipline.

At December 31, 2015, the Group met the minimum capital requirements established by current legislation.

ii. Plan for the roll-out of advanced approaches and authorization from the supervisory authorities

The Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of exposure of the loan portfolio covered by this approach exceeds 90%.

Accordingly, the Group continued in 2015 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approach for regulatory capital calculation purposes at the various Group units.

To date the Group has obtained authorization from the supervisory authorities to use the AIRB approach for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the United Kingdom and Portugal, as well as for certain portfolios in Germany, Mexico, Brazil, Chile, the Nordic countries (Norway, Sweden and Finland), France and the United States. In 2015 approval was obtained for the auto loan portfolios of the consumer finance unit in the Nordic countries, and the foundation IRB approach was maintained for the corporate and retail portfolios in France which joined the Group following the agreement reached with Banque PSA Finance (see Note 3.b xiii).

As regards the other risks explicitly addressed under Basel Pillar I, the Group is authorized to use its internal model for market risk for its treasury trading activities in Madrid, Chile, Portugal and Mexico.

Also, the Group has regulatory approval for its corporate methodology, enabling it to calculate, for the market risk of the trading book, the incremental default and migration risk charge (IRC – Incremental Risk Charge) and stressed value at risk (VaR).

In 2015 the Group stepped up the pace of its transition towards an advanced operational risk management (AORM) approach. The objective of the AORM program is, on the one hand, to bolster the current operational risk management framework and, on the other, to achieve best market practices and to leverage the monitoring of an integrated consolidated operational risk profile in order to proactively direct the business strategy and tactical decision-making. The AORM program will enable the Group to have capital estimation models in place in the main geographical areas, both for economic capital and stress testing purposes and with a view to their potential application for regulatory capital purposes. For the purpose of calculating regulatory capital for operational risk, Santander Group has been applying the standardized approach provided for under the European Capital Requirements Directive. On February 3, 2016, the European Central Bank authorized the use of the Alternative Standardized Approach to calculate the capital requirements at consolidated level for operational risk at Banco Santander (Brasil) S.A.

f) Environmental impact

In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these consolidated financial statements.

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g) Events after the reporting period

No significant events occurred from January 1, 2016 to April 20, 2016 on which these consolidated financial statements were authorized for issue.

2. Accounting policies

The accounting policies applied in preparing the consolidated financial statements were as follows:

a) Foreign currency transactions

i. Functional currency

The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.

ii. Translation of foreign currency balances

Foreign currency balances are translated to euros in two consecutive stages:

• Translation of foreign currency to the functional currency (currency of the main economic environment in which the entity operates), and

• Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.

Translation of foreign currency to the functional currency

Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate.

Furthermore:

• Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.

• Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined.

• Income and expenses are translated at the average exchange rates for the year for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.

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• The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity.

Translation of functional currencies to euros

The balances in the financial statements of consolidated entities (or entities accounted for using the equity method) whose functional currency is not the euro are translated to euros as follows:

• Assets and liabilities, at the closing rates.

• Income and expenses, at the average exchange rates for the year.

• Equity items, at the historical exchange rates.

iii. Recognition of exchange differences

The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under Exchange differences in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under Valuation adjustments—Exchange differences.

The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized in equity under Valuation adjustments—Exchange differences in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognized in equity under Valuation adjustments—Entities accounted for using the equity method, until the related item is derecognized, at which time they are recognized in profit or loss.

iv. Entities located in hyperinflationary economies

In 2009 the Group sold substantially all its businesses in Venezuela and at December 31, 2013 its net assets in that country amounted to only EUR 1 million. At December 31, 2015 and 2014, the Group did not have any net assets in Venezuela.

In view of the foregoing, at December 31, 2015, 2014 and 2013 none of the functional currencies of the consolidated entities and associates located abroad related to hyperinflationary economies as defined by International Financial Reporting Standards as adopted by the European Union. Accordingly, at the end of the last three reporting periods it was not necessary to adjust the financial statements of any of the consolidated entities or associates to correct for the effect of inflation.

v. Exposure to foreign currency risk

The Group hedges a portion of its long-term foreign currency positions using foreign exchange derivative financial instruments (see Note 36). Also, the Group manages foreign currency risk dynamically by hedging its short-term position (with a potential impact on profit or loss) in order to limit the impact of currency depreciations while optimizing the finance cost of the hedges.

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The following tables show the sensitivity of consolidated profit and total equity to the changes in the foreign currency positions resulting from all the Group’s foreign currency items caused by 1% variations in the various foreign currencies in which the Group has material balances.

The estimated effect on the total equity attributable to the Group and on consolidated profit of a 1% appreciation of the euro against the corresponding currency is as follows:

	Millions of euros
	Effect on total equity									Effect on consolidated profit
Currency	2015			2014			2013			2015			2014			2013
US dollar		(167.2	)		(114.6	)		(74.2	)		(8.7	)		(14.9	)		(9.0	)
Chilean peso		(23.7	)		(23.3	)		(16.2	)		(5.0	)		(6.2	)		(6.7	)
Pound sterling		(194.2	)		(195.0	)		(173.1	)		(13.0	)		(12.6	)		(7.9	)
Mexican peso		(19.7	)		(18.1	)		(9.7	)		(5.9	)		(6.7	)		(7.8	)
Brazilian real		(93.1	)		(138.9	)		(73.8	)		(13.6	)		(3.5	)		(3.9	)
Polish zloty		(32.8	)		(34.1	)		(32.5	)		(3.9	)		(3.8	)		(3.8	)

Similarly, the estimated effect on the Group’s total equity and on consolidated profit of a 1% depreciation of the euro against the corresponding currency is as follows:

	Millions of euros
	Effect on total equity						Effect on consolidated profit
Currency	2015		2014		2013		2015		2014		2013
US dollar		170.5		117.0		75.7		8.8		15.2		9.2
Chilean peso		24.1		23.8		16.5		5.1		6.4		6.9
Pound sterling		198.2		198.9		176.6		13.2		12.8		8.0
Mexican peso		20.1		18.5		9.9		6.0		6.8		8.0
Brazilian real		94.9		141.8		75.4		13.8		3.6		4.0
Polish zloty		33.4		34.8		33.1		4.0		3.9		3.8

The foregoing data were obtained as follows:

a. Effect on total equity: in accordance with the accounting policy detailed in Note 2.a.iii, the exchange differences arising on the translation to euros of the financial statements in the functional currencies of the Group entities whose functional currency is not the euro are recognized in total equity. The possible effect that a change in the exchange rates of the related currency would have on the Group’s total equity was therefore determined by applying the aforementioned change to the net value of each unit’s assets and liabilities -including, where appropriate, the related goodwill- and by taking into consideration the offsetting effect of the hedges of net investments in foreign operations.

b. Effect on consolidated profit: the effect was determined by applying the fluctuations in the average exchange rates used for the year, as indicated in Note 2.a.ii, to translate to euros the income and expenses of the consolidated entities whose functional currency is not the euro, taking into consideration, where appropriate, the offsetting effect of the various hedging transactions in place.

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The estimates used to obtain the foregoing data were performed considering the effects of the exchange rate fluctuations in isolation from the effect of the performance of other variables whose changes would affect equity and profit or loss, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations were kept constant with respect to their positions at December 31, 2015, 2014 and 2013.

b) Basis of consolidation

i. Subsidiaries

Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; the Bank controls an entity when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions between consolidated companies are eliminated on consolidation.

On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognized at their acquisition-date fair values. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 17). Negative differences are recognized in profit or loss on the date of acquisition.

Additionally, the share of third parties of the Group’s equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.

At December 31, 2015, the Group controlled the following companies in which it held an ownership interest of less than 50% of the share capital: (i) Luri 1, S.A., (ii) Luri 2, S.A., (iii) Luri Land, S.A. and (iv) Super Pagamentos e Administração de Meios Eletrônicos, S.A. The percentage ownership interests in the aforementioned companies were 26%, 30%, 28.20% and 44.62%, respectively (see Exhibit I). Although the Group holds less than half the voting power, it manages and exercises control over these entities. The company object of the first three entities is the acquisition of real estate and other general operations relating thereto, including rental, and the purchase and sale of properties; the company object of the latter entity is the provision of payment services.

The impact of the consolidation of these companies on the Group’s consolidated financial statements is immaterial.

The Appendices contain significant information on the subsidiaries.

ii. Interests in joint ventures (jointly controlled entities)

Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more parties have interests in entities so that decisions about the relevant activities require the unanimous consent of all the parties sharing control.

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In the consolidated financial statements, investments in jointly controlled entities are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with a jointly controlled entity are eliminated to the extent of the Group’s interest therein.

At December 31, 2015, the Group exercised joint control of Luri 3, S.A., despite holding 10% of its share capital. This decision is based on the Group’s presence on the company’s board of directors, in which the agreement of all members is required for decision-making.

The Appendices contain significant information on the jointly controlled entities.

iii. Associates

Associates are entities over which the Bank is in a position to exercise significant influence, but not control or joint control. It is presumed that the Bank exercises significant influence if it holds 20% or more of the voting power of the investee.

In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate.

There are certain investments in entities which, although the Group owns 20% or more of their voting power, are not considered to be associates because the Group is not in a position to exercise significant influence over them. These investments are not significant for the Group and are recognized under Available-for-sale financial assets.

The Appendices contain significant information on the associates.

iv. Structured entities

When the Group incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes (also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity), the Group determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. Specifically, for those entities to which this policy applies (mainly investment funds and pension funds), the Group analyses the following factors:

• Percentage of ownership held by the Group; 20% is established as the threshold above which a more in-depth analysis is performed.

• Identification of the fund manager, and verification as to whether it is a company controlled by the Group since this could affect the Group’s ability to direct the relevant activities.

• Existence of agreements between investors that might require decisions to be taken jointly by the investors, rather than by the fund manager.

• Existence of currently exercisable removal rights (possibility of removing the manager from his position) since the existence of such rights might limit the manager’s power over the fund, and it may be concluded that the manager is acting as an agent of the investors.

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• Analysis of the fund manager’s remuneration regime, taking into consideration that a remuneration regime that is proportionate to the service rendered does not, generally, create exposure of such importance as to indicate that the manager is acting as the principal Conversely, if the remuneration regime is not proportionate to the service rendered, this might give rise to an exposure that would lead the Group to a different conclusion.

These structured entities also include the securitization special purpose vehicles, which are consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.

The balances associated with unconsolidated structured entities are not material with respect to the Group’s consolidated financial statements.

v. Business combinations

A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities.

Business combinations whereby the Group obtains control over an entity are recognized for accounting purposes as follows:

• The Group measures the cost of the business combination, which is normally the consideration transferred, defined as the acquisition-date fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity instruments issued, if any, by the acquirer. In cases where the amount of the consideration to be transferred has not been definitively established at the acquisition date, but rather depends on future events, any contingent consideration is recognized as part of the consideration transferred and measured at its acquisition-date fair value; also, acquisition-related costs do not for these purposes form part of the cost of the business combination.

• The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated and recognized in the consolidated balance sheet; the Group also estimates the amount of any non-controlling interests and the fair value of the previously held equity interest in the acquiree.

• Any positive difference between the aforementioned items is recognized as discussed in Note 2.m. Any negative difference is recognized under Gains from bargain purchases arising in business combinations in the consolidated income statement.

Goodwill is only measured and recognized once, when control of a business is obtained.

vi. Changes in the levels of ownership interests in subsidiaries

Acquisitions and disposals not giving rise to a change in control are recognized as equity transactions, and no gain or loss is recognized in the income statement and the initially recognized goodwill is not remeasured. The difference between the consideration transferred or received and the decrease or increase in non-controlling interests, respectively, is recognized in reserves.

Similarly, when control over a subsidiary is lost, the assets, liabilities and non-controlling interests and any other items recognized in valuation adjustments of that company are derecognized from the consolidated balance sheet, and the fair value of the consideration received and of any remaining equity interest is recognized. The difference between these amounts is recognized in profit or loss.

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vii. Acquisitions and disposals

Note 3 provides information on the most significant acquisitions and disposals in 2015, 2014 and 2013.

c) Definitions and classification of financial instruments

i. Definitions

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

An equity instrument is a contract that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.

Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer).

The preference shares contingently convertible into ordinary shares eligible as Additional Tier 1 capital (“CCPSs”) -perpetual preference shares, which may be repurchased by the issuer in certain circumstances, the interest on which is discretionary, and would convert into a variable number of newly issued ordinary shares if the capital ratio of the Bank or its consolidable group falls below a given percentage (trigger event), as those two terms are defined in the related issue prospectuses- are recognized for accounting purposes by the Group as compound instruments. The liability component reflects the issuer’s obligation to deliver a variable number of shares and the equity component reflects the issuer’s discretion in relation to the payment of the related coupons. In order to effect the initial allocation, the Group estimates the fair value of the liability as the amount that would have to be delivered if the trigger event were to occur immediately and, accordingly, the equity component, calculated as the residual amount, is zero. In view of the aforementioned discretionary nature of the payment of the coupons, they are deducted directly from equity.

The following transactions are not treated for accounting purposes as financial instruments:

• Investments in associates and jointly controlled entities (see Note 13).

• Rights and obligations under employee benefit plans (see Note 25).

• Rights and obligations under insurance contracts (see Note 15).

• Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).

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ii. Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

• Financial assets held for trading (at fair value through profit or loss): this category includes financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

• Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Financial assets may only be included in this category on the date they are acquired or originated.

• Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss.

• Loans and receivables: this category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and receivables from the purchasers of goods, or the users of services, constituting part of the Group’s business.

The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (which includes any reductions required to reflect the estimated losses on their recovery).

• Held-to-maturity investments: this category includes debt instruments with fixed maturity and with fixed or determinable payments, for which the Group has both the intention and proven ability to hold to maturity.

iii. Classification of financial assets for presentation purposes

Financial assets are classified by nature into the following items in the consolidated balance sheet:

• Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.

• Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Group, such as cheques drawn on credit institutions, balances receivable

F-22

from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items. They are classified, on the basis of the institutional sector to which the debtor belongs, into:

• Loans and advances to credit institutions: credit of any nature, including deposits and money market operations, in the name of credit institutions.

• Loans and advances to customers: includes the remaining credit, including money market operations through central counterparties.

• Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.

• Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, other than investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.

• Trading derivatives: includes the fair value in favor of the Group of derivatives which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments.

• Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

• Hedging derivatives: includes the fair value in favor of the Group of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

iv. Classification of financial liabilities for measurement purposes

Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Liabilities associated with non-current assets held for sale or they relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interest rate risk (liability side), which are reported separately.

Financial liabilities are included for measurement purposes in one of the following categories:

• Financial liabilities held for trading (at fair value through profit or loss): this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements (“reverse repos”) or borrowed (short positions).

• Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Liabilities may only be included in this category on the date when they are incurred or originated.

F-23

• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities carried on by financial institutions.

v. Classification of financial liabilities for presentation purposes

Financial liabilities are classified by nature into the following items in the consolidated balance sheet:

• Deposits: includes all repayable balances received in cash by the Group, other than those instrumented as marketable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received the amount of which may be invested without restriction. Deposits are classified on the basis of the creditor’s institutional sector into:

• Deposits from central banks: deposits of any nature, including credit received and money market operations received from the Bank of Spain or other central banks.

• Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

• Customer deposits: includes the remaining deposits, including money market operations through central counterparties.

• Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.

• Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, including embedded derivatives separated from the host contract, which do not form part of hedge accounting.

• Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed.

• Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although capital for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.

• Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as non-performing.

• Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

F-24

• Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

d) Measurement of financial assets and liabilities and recognition of fair value changes

In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each year-end as follows:

i. Measurement of financial assets

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.

The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price). At December 31, 2015, there were no significant investments in quoted financial instruments that had ceased to be recognized at their quoted price because their market could not be deemed to be active.

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in Gains/losses on financial assets and liabilities (net) in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organized markets included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.

Loans and receivables and Held-to-maturity investments are measured at amortized cost using the effective interest method. Amortized cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the consolidated income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortized cost also includes any reduction for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

F-25

The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under finance lease and full-service lease agreements, assets acquired under repurchase agreements, securities loans and credit derivatives.

ii. Measurement of financial liabilities

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under Financial liabilities held for trading and Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.

iii. Valuation techniques

The following table shows a summary of the fair values, at the end of 2015, 2014 and 2013, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:

F-26

	Millions of euros
	2015						2014						2013
	Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total
Financial assets held for trading		65,849		81,438		147,287		67,319		81,569		148,888		46,472		68,817		115,289
Other financial assets at fair value through profit or loss		3,244		41,799		45,043		3,670		39,003		42,673		3,687		27,694		31,381
Available-for-sale financial assets (1)		92,284		27,962		120,246		90,149		23,455		113,604		62,343		20,415		82,758
Hedging derivatives (assets)		271		7,456		7,727		26		7,320		7,346		221		8,080		8,301
Financial liabilities held for trading		17,058		88,160		105,218		17,409		92,383		109,792		14,643		80,030		94,673
Other financial liabilities at fair value through profit or loss		—		54,768		54,768		—		62,317		62,317		—		42,311		42,311
Hedging derivatives (liabilities)		400		8,537		8,937		226		7,029		7,255		187		5,096		5,283
Liabilities under insurance contracts		—		627		627		—		713		713		—		1,430		1,430

(1) In addition to the financial instruments measured at fair value shown in the foregoing table, at December 31, 2015, 2014 and 2013, the Group held equity instruments classified as available-for-sale financial assets and carried at cost amounting to EUR 1,790 million, EUR 1,646 million and EUR 1,041 million, respectively (see Note 51.c).

The financial instruments at fair value determined on the basis of published price quotations in active markets (Level 1) include government debt securities, private-sector debt securities, derivatives traded in organized markets, securitized assets, shares, short positions and fixed-income securities issued.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set, using its own internal models. In most cases, these internal models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

General measurement bases

The Group has developed a formal process for the systematic valuation and management of financial instruments, which has been implemented worldwide across all the Group’s units. The governance scheme for this process distributes responsibilities between two independent divisions: Treasury (development, marketing and daily management of financial products and market data) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transaction approval policies, management of market risk and implementation of fair value adjustment policies).

The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used.

F-27

The following subsections set forth the most important products and families of derivatives, and the related valuation techniques and inputs, by asset class:

Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using the net present value of the estimated future cash flows discounted taking into account basis swap and cross currency spreads determined on the basis of the payment frequency and currency of each leg of the derivative. Vanilla options, including caps, floors and swaptions, are priced using the Black-Scholes model, which is one of the benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable market data such as deposit interest rates, futures rates, cross currency swap and constant maturity swap rates, and basis spreads, on the basis of which different yield curves, depending on the payment frequency, and discounting curves are calculated for each currency. In the case of options, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions, and interpolation and extrapolation of volatilities from the quoted ranges are carried out using generally accepted industry models. The pricing of more exotic derivatives may require the use of non-observable data or parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates, which are usually defined from historical data or through calibration.

Inflation-related assets include zero-coupon or year-on-year inflation-linked bonds and swaps, valued with the present value method using forward estimation and discounting. Derivatives on inflation indices are priced using standard or more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality, on the basis of which a forward inflation curve is calculated. Also, implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts; they also include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using generally accepted industry models or bespoke models, as appropriate. For derivatives on illiquid stocks, hedging takes into account the liquidity constraints in models.

The inputs of equity models consider yield curves, spot prices, dividends, asset funding costs (repo margin spreads), implied volatilities, correlation among equity stocks and indices, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American-style vanilla call and put options. Various interpolation and extrapolation techniques are used to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are implied, when possible, from market quotes of correlation-dependent products. In all other cases, proxies are used for correlations between benchmark underlyings or correlations are obtained from historical data.

The inputs of foreign exchange models include the yield curve for each currency, the spot foreign exchange rate, the implied volatilities and the correlation among assets of this class. Volatilities are obtained from European call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

F-28

Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate the probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs, NTDs and CDOs.

Valuation inputs are the yield curve, the CDS spread curve and the recovery rate. For indices and important individual issuers, the CDS spread curve is obtained in the market. For less liquid issuers, this spread curve is estimated using proxies or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

Valuation adjustment for counterparty risk or default risk

The credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed to each counterparty.

The CVA is calculated taking into account potential exposure to each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA:

• Expected exposure: including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for derivatives with interim payments.

• LGD: percentage of final loss assumed in a counterparty credit event/default.

• Probability of default: for cases where there is no market information (the CDS quoted spread curve, etc.), proxies based on companies holding exchange-listed CDSs, in the same industry and with the same external rating as the counterparty, are used.

• Discount factor curve.

The debit valuation adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises as a result of the Group’s own risk assumed by its counterparties in OTC derivatives.

The CVA and DVA recognized at December 31, 2015 amounted to EUR 851 million and EUR 531 million, respectively.

F-29

Valuation adjustments due to model risk

The valuation models described above do not involve a significant level of subjectivity, since they can be adjusted and recalibrated, where appropriate, through internal calculation of the fair value and subsequent comparison with the related actively traded price. However, valuation adjustments may be necessary when market quoted prices are not available for comparison purposes.

The sources of risk are associated with uncertain model parameters, illiquid underlying issuers, poor quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, the Group calculates and applies valuation adjustments in accordance with common industry practice. The main sources of model risk are described below:

In the fixed income markets, the sources of model risk include bond index correlations, basis spread modelling, the risk of calibrating model parameters and the treatment of near-zero or negative interest rates. Other sources of risk arise from the estimation of market data, such as volatilities or yield curves, whether used for estimation or cash flow discounting purposes.

In the equity markets, the sources of model risk include forward skew modelling, the impact of stochastic interest rates, correlation and multi-curve modelling. Other sources of risk arise from managing hedges of digital callable and barrier option payments. Also worthy of consideration as sources of risk are the estimation of market data such as dividends and correlation for quanto and composite basket options.

For specific financial instruments relating to home mortgage loans secured by financial institutions in the UK (which are regulated and partially financed by the Government) and property asset derivatives, the main input is the Halifax House Price Index (HPI). In these cases, risk assumptions include estimations of the future growth and the volatility of the HPI, the mortality rate and the implied credit spreads.

Inflation markets are exposed to model risk resulting from uncertainty around modelling the correlation structure among various CPI rates. Another source of risk may arise from the bid-offer spread of inflation-linked swaps.

The currency markets are exposed to model risk resulting from forward skew modelling and the impact of stochastic interest rate and correlation modelling for multi-asset instruments. Risk may also arise from market data, due to the existence of specific illiquid foreign exchange pairs.

The most important source of model risk for credit derivatives relates to the estimation of the correlation between the probabilities of default of different underlying issuers. For illiquid underlying issuers, the CDS spread may not be well defined.

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2015, 2014 and 2013:

F-30

	Millions of euros
	Fair values calculated using internal models at 12/31/15
	Level 2		Level 3		Valuation techniques	Main assumptions
ASSETS:		156,174		2,481
Financial assets held for trading		80,488		950
Loans and advances to credit institutions		2,293		—	Present Value Method	Yield curves, FX market prices
Loans and advances to customers (a)		6,081		—	Present Value Method	Yield curves, FX market prices
Debt and equity instruments		650		43	Present Value Method	Yield curves, HPI, FX market prices
Trading derivatives		71,464		907
Swaps		52,904		54	Present Value Method, Gaussian Copula (b)	Yield curves, FX market prices, Basis, Liquidity
Exchange rate options		1,005		—	Black-Scholes Model	Yield curves, Volatility surfaces, FX market prices, Liquidity
Interest rate options		8,276		619	Black’s Model, Heath-Jarrow-Morton Model	Yield curves, Volatility surfaces, FX market prices, Liquidity, Correlation
Interest rate futures		84		—	Present Value Method	Yield curves, FX market prices
Index and securities options		1,585		120	Black-Scholes Model	Yield curves, Volatility surfaces, FX & EQ market prices, Dividends, Correlation, Liquidity, HPI
Other		7,610		114	Present Value Method, Monte Carlo simulation and other	Yield curves, Volatility surfaces, FX market prices, Other
Hedging derivatives		7,438		18
Swaps		6,437		18	Present Value Method	FX market prices, Yield curves, Basis
Exchange rate options		—		—	Black-Scholes Model	FX market prices, Yield curves, Volatility surfaces
Interest rate options		19		—	Black’s Model	FX market prices, Yield curves, Volatility surfaces
Other		982		—	N/A	N/A
Other financial assets at fair value through profit or loss		41,285		514
Loans and advances to credit institutions		26,403		—	Present Value Method	FX market prices, Yield curves
Loans and advances to customers (c)		14,213		81	Present Value Method	FX market prices, Yield curves, HPI
Debt and equity instruments		669		433	Present Value Method	FX market prices, Yield curves
Available-for-sale financial assets		26,963		999
Debt and equity instruments		26,963		999	Present Value Method	FX market prices, Yield curves
LIABILITIES:		151,768		324
Financial liabilities held for trading		87,858		302
Deposits from central banks		2,178		—	Present Value Method	FX market prices, Yield curves
Deposits from credit institutions		76		—	Present Value Method	FX market prices, Yield curves
Customer deposits		9,187		—	Present Value Method	FX market prices, Yield curves
Debt and equity instruments		—		—	Present Value Method	Yield curves, HPI, FX market prices
Trading derivatives		74,893		302
Swaps		55,055		1	Present Value Method, Gaussian Copula (b)	FX market prices, Yield curves, Basis, Liquidity, HPI
Exchange rate options		901		—	Black-Scholes Model	FX market prices, Yield curves, Volatility surfaces, Liquidity
Interest rate options		9,240		194	Black’s Model, Heath-Jarrow-Morton Model	FX market prices, Yield curves, Volatility surfaces, Liquidity, Correlation
Index and securities options		2,000		107	Black-Scholes Model	FX & EQ market prices, Yield curves, Volatility surfaces, Dividends, Correlation, Liquidity, HPI
Interest rate and equity futures		101		—	Present Value Method	FX & EQ market prices, Yield curves
Other		7,596		—	Present Value Method, Monte Carlo simulation and other	FX market prices, Yield curves, Volatility surfaces, Other
Short positions		1,524		—	Present Value Method	FX & EQ market prices, Yield curves
Hedging derivatives		8,526		11
Swaps		7,971		11	Present Value Method	FX market prices, Yield curves, Basis
Exchange rate options		—		—	Black-Scholes Model	FX market prices, Yield curves
Interest rate options		12		—	Black’s Model	FX market prices, Yield curves
Other		543		—	N/A	N/A
Other financial liabilities at fair value through profit or loss		54,757		11	Present Value Method	FX market prices, Yield curves
Liabilities under insurance contracts		627		—	See Note 15

F-31

	Millions of euros
	Fair values calculated using internal models
	12/31/14				12/31/13
	Level 2		Level 3		Level 2		Level 3		Valuation techniques
ASSETS:		148,760		2,587		123,499		1,507
Financial assets held for trading		80,378		1,191		68,535		282
Loans and advances to credit institutions		1,815		—		5,502		—	Present Value Method
Loans and advances to customers (a)		2,921		—		5,079		—	Present Value Method
Debt and equity instruments		1,768		85		1,585		50	Present Value Method
Trading derivatives		73,874		1,106		56,369		232
Swaps		55,794		116		40,380		56	Present Value Method, Gaussian Copula (b)
Exchange rate options		1,000		—		849		16	Black-Scholes Model
Interest rate options		8,385		768		7,375		—	Black’s Model, Heath-Jarrow-Morton Model
Interest rate futures		132		—		16		—	Present Value Method
Index and securities options		2,420		111		2,953		56	Black-Scholes Model
Other		6,143		111		4,796		104	Present Value Method, Monte Carlo simulation and other
Hedging derivatives		7,320		—		8,080		—
Swaps		7,058		—		6,920		—	Present Value Method
Exchange rate options		40		—		400		—	Black-Scholes Model
Interest rate options		28		—		24		—	Black’s Model
Other		194		—		736		—	N/A
Other financial assets at fair value through profit or loss		38,323		680		27,184		510
Loans and advances to credit institutions		28,592		—		13,444		—	Present Value Method
Loans and advances to customers (c)		8,892		78		13,135		61	Present Value Method
Debt and equity instruments		839		602		605		449	Present Value Method
Available-for-sale financial assets		22,739		716		19,700		715
Debt and equity instruments		22,739		716		19,700		715	Present Value Method
LIABILITIES:		161,890		552		128,762		105
Financial liabilities held for trading		91,847		536		79,970		60
Deposits from central banks		2,041		—		3,866		—	Present Value Method
Deposits from credit institutions		5,531		—		7,468		—	Present Value Method
Customer deposits		5,544		—		8,500		—	Present Value Method
Debt and equity instruments		—		—		1		—	Present Value Method
Trading derivatives		76,644		536		57,260		60
Swaps		56,586		49		41,156		2	Present Value Method, Gaussian Copula (b)
Exchange rate options		1,033		—		660		—	Black-Scholes Model
Interest rate options		9,816		294		8,457		—	Black’s Model, Heath-Jarrow-Morton Model
Index and securities options		3,499		193		4,252		—	Black-Scholes Model
Interest rate and equity futures		165		—		88		—	Present Value Method
Other		5,545		—		2,647		58	Present Value Method, Monte Carlo simulation and other
Short positions		2,087		—		2,875		—
Hedging derivatives		7,029		—		5,096		—	Present Value Method
Swaps		6,901		—		4,961		—	Present Value Method
Exchange rate options		2		—		1		—	Black-Scholes Model
Interest rate options		14		—		13		—	Black’s Model
Other		112		—		121		—	N/A
Other financial liabilities at fair value through profit or loss		62,301		16		42,266		45	Present Value Method
Liabilities under insurance contracts		713		—		1,430		—	See Note 15

(a) Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).

(b) Includes credit risk derivatives with a net fair value of EUR 46 million at December 31, 2015 (December 31, 2014 and 2013: positive net fair value of EUR 83 million and EUR 56 million, respectively). These assets and liabilities are measured using the Standard Gaussian Copula Model.

(c) Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogeneous in this sector. The results arising from the valuation model are checked against current market transactions.

F-32

Level 3 financial instruments

Set forth below are the Group’s main financial instruments measured using unobservable market data as significant inputs of the internal models (Level 3):

• Instruments in Santander UK’s portfolio (loans, debt instruments and derivatives) linked to the House Price Index (HPI). Even if the valuation techniques used for these instruments may be the same as those used to value similar products (present value in the case of loans and debt instruments, and the Black-Scholes model for derivatives), the main factors used in the valuation of these instruments are the HPI spot rate, the growth and volatility thereof, and the mortality rates, which are not always observable in the market and, accordingly, these instruments are considered illiquid.

• HPI spot rate: for some instruments the NSA HPI spot rate, which is directly observable and published on a monthly basis, is used. For other instruments where regional HPI rates must be used (published quarterly), adjustments are made to reflect the different composition of the rates and adapt them to the regional composition of Santander UK’s portfolio.

• HPI growth rate: this is not always directly observable in the market, especially for long maturities, and is estimated in accordance with existing quoted prices. To reflect the uncertainty implicit in these estimates, adjustments are made based on an analysis of the historical volatility of the HPI, incorporating reversion to the mean.

• HPI volatility: the long-term volatility is not directly observable in the market but is estimated on the basis of shorter-term quoted prices and by making an adjustment to reflect the existing uncertainty, based on the standard deviation of historical volatility over various time periods.

• Mortality rates: these are based on published official tables and adjusted to reflect the composition of the customer portfolio for this type of product at Santander UK.

• Illiquid CDOs and CLOs in the portfolio of the treasury unit in Madrid. These are measured by grouping together the securities by type of underlying (sector/country), payment hierarchy (prime, mezzanine, junior, etc.), and assuming forecast conditional prepayment rates (CPR) and default rates, adopting conservative criteria.

• Trading derivatives on baskets of shares. These are measured using advanced local and stochastic volatility models, through Monte Carlo simulations; the main unobservable input is the correlation between the prices of the shares in each basket in question.

• Callable interest rate trading derivatives (Bermudan-style options) where the main unobservable input is mean reversion of interest rates.

In 2014 the Group reclassified to Level 3 the interest-rate derivatives with periodic call options and the options on baskets of listed shares. The reason for the reclassification was the greater significance in the fair value of the aforementioned financial instruments of the illiquidity in the inputs used (the mean reversion of interest rates and the correlations between the underlyings, respectively). These products relate almost exclusively to derivatives transactions performed as a service for the Group’s customers.

In 2015 the Group did not make any significant reclassifications of financial instruments to Level 3.

F-33

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, the Bank’s directors consider that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.

The net loss recognized in profit or loss in 2015 arising from models whose significant inputs are unobservable market data amounted EUR 28 million (2014 and 2013: gains of EUR 302 million and EUR 46 million, respectively).

The table below shows the effect, at December 31, 2015, on the fair value of the main financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation. This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table:

F-34

Portfolio / Instrument (Level 3)	Valuation technique	Main unobservable inputs	Range	Weighted average	Impacts (in millions of euros)
					Unfavorable scenario			Favorable scenario
Financial assets held for trading
Debt instruments	Partial differential equations	Long-term volatility	27% - 41%	35.25%		(0.1	)		0.1
Trading derivatives	Present Value Method	Curves on TAB indices (*)	(a)	(a)		(2.1	)		2.1
	Present Value Method	Prepayment curves	(a)	(a)		(0.7	)		0.7
	Present Value Method, Modified Black-Scholes Model	HPI forward growth rate	0%-5%	2.65%		(39.4	)		34.9
	Present Value Method, Modified Black-Scholes Model	HPI spot rate	N/A	688.3(**)		(11.4	)		11.4
	Standard Gaussian Copula Model	Probability of default	0%-5%	2.09%		(3.2	)		2.3
	Advanced local and stochastic volatility models	Correlation between share prices	59%-79%	69%		(5.7	)		5.7
	Advanced multi-factor interest rate models	Mean reversion of interest rates	0.0001-0.03	0.01(***)		—			37.3
Hedging derivatives (assets)	Advanced multi-factor interest rate models	Mean reversion of interest rates	0.0001-0.03	3.0%		(0.03	)		—
Other financial assets at fair value through profit or loss
Loans and advances to customers	Probability-weighted set (per forecast mortality rates) of European HPI options, using the Black-Scholes model	HPI forward growth rate	0%-5%	2.8%		(8.0	)		6.3
Debt and equity instruments	Probability-weighted set (per forecast mortality rates) of HPI forwards, using the present value model	HPI forward growth rate	0%-5%	2.7%		(51.6	)		45.8
	Probability-weighted set (per forecast mortality rates) of HPI forwards, using the present value model	HPI spot rate	N/A	688.3(**)		(26.0	)		26.0
Available-for-sale financial assets
Debt and equity instruments	Present Value Method and other	Default and prepayment rates, cost of capital, long-term earnings growth rate	(a)	(a)		(0.8	)		0.8
Financial liabilities held for trading
Trading derivatives	Present Value Method, Modified Black-Scholes Model	HPI forward growth rate	0%-5%	2.1%		(19.8	)		14.2
	Present Value Method, Modified Black-Scholes Model	HPI spot rate	N/A	659.2(**)		(19.2	)		21.0
	Present Value Method, Modified Black-Scholes Model	Curves on TAB indices (*)	(a)	(a)		—			—
	Advanced local and stochastic volatility models	Correlation between share prices	59%-79%	69%		(b	)		(b	)
	Advanced multi-factor interest rate models	Mean reversion of interest rates	0.0001-0.03	0.01(***)		(b	)		(b	)
Hedging derivatives (liabilities)	Advanced multi-factor interest rate models	Mean reversion of interest rates	0.0001-0.03	3.0%		(0.03	)		—
Other financial liabilities at fair value through profit or loss	—	—				(b	)		(b	)

(*) TAB: “Tasa Activa Bancaria” (Active Bank Rate). Average interest rates on 30-, 90-, 180- and 360-day deposits published by the Chilean Association of Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for inflation (in Chilean unit of account (Unidad de Fomento—UF)).

(**) There are national and regional HPIs. The HPI spot value is the weighted average of the indices that correspond to the positions of each portfolio. The impact reported is in response to a 10% shift.

(***) Theoretical average value of the parameter. The change made for the favorable scenario is from 0.0001 to 0.03. An unfavorable scenario was not considered as there was no margin for downward movement from the parameter’s current level. The Group is also exposed, to a lesser extent, to this type of derivative in currencies other than the euro and, therefore, both the average and the range of the unobservable inputs are different. The impact in an unfavorable scenario would be losses of EUR 6.5 million.

(a) The exercise was conducted for the unobservable inputs described in the Main unobservable inputs column under probable scenarios. The range and weighted average value used are not shown because the aforementioned exercise was conducted jointly for various inputs or variants thereof (e.g. the TAB input comprises vector-time curves, for which there are also nominal yield curves and inflation-indexed yield curves), and it was not possible to break down the results separately by type of input. In the case of the TAB curve the gain or loss is reported for changes of +/-100 b.p. for the total sensitivity to this index in Chilean pesos and UFs.

(b) The Group calculates the potential effect on the valuation of each of these instruments on a joint basis, irrespective of whether their individual value is positive (asset) or negative (liability), and discloses the joint effect associated with the corresponding instruments classified on the asset side of the consolidated balance sheet.

F-35

Lastly, the changes in the financial instruments classified as Level 3 in 2015, 2014 and 2013 were as follows:

	2014		Changes																								2015
Millions of euros	Fair value calculated using internal models (Level 3)		Purchases		Sales			Issues		Settlements			Changes in fair value recognized in profit or loss (unrealized)			Changes in fair value recognized in profit or loss (realized)			Changes in fair value recognized in equity		Level reclassifications			Other			Fair value calculated using internal models (Level 3)
Financial assets held for trading		1,191		—		(272	)		—		—			31			(7	)		—		(2	)		9			950
Debt and equity instruments		85		—		(38	)		—		—			(11	)		8			—		(2	)		1			43
Trading derivatives		1,106		—		(234	)		—		—			42			(15	)		—		—			8			907
Swaps		116		—		(63	)		—		—			17			(15	)		—		—			(1	)		54
Interest rate options		768		—		(119	)		—		—			(28	)		—			—		—			(2	)		619
Index and securities options		111		—		(45	)		—		—			51			—			—		—			3			120
Other		111		—		(7	)		—		—			2			—			—		—			8			114
Hedging derivatives		—		—		—			—		—			1			—			—		17			—			18
Swaps		—		—		—			—		—			1			—			—		17			—			18
Other financial assets at fair value through profit or loss		680		7		(47	)		—		—			(64	)		—			—		—			(62	)		514
Loans and advances to customers		78		—		(5	)		—		—			2			—			—		—			6			81
Debt and equity instruments		602		7		(42	)		—		—			(66	)		—			—		—			(68	)		433
Available-for-sale financial assets		716		18		(75	)		—		(72	)		—			—			271		139			2			999
TOTAL ASSETS		2,587		25		(394	)		—		(72	)		(32	)		(7	)		271		154			(51	)		2.481
Financial liabilities held for trading		536		4		(230	)		—		—			(15	)		—			—		—			7			302
Trading derivatives		536		4		(230	)		—		—			(15	)		—			—		—			7			302
Swaps		49		—		(47	)		—		—			(1	)		—			—		—			—			1
Interest rate options		294		—		(71	)		—		—			(30	)		—			—		—			1			194
Index and securities options		193		4		(112	)		—		—			16			—			—		—			6			107
Hedging derivatives		—		—		(16	)		—		—			8			—			—		5			14			11
Swaps		—		—		(16	)		—		—			8			—			—		5			14			11
Other financial liabilities at fair value through profit or loss		16		—		(9	)		—		—			(4	)		—			—		—			8			11
TOTAL LIABILITIES		552		4		(255	)		—		—			(11	)		—			—		5			29			324

F-36

	2013		Changes																								2014
Millions of euros	Fair value calculated using internal models (Level 3)		Purchases		Sales			Issues		Settlements			Changes in fair value recognized in profit or loss (unrealized)			Changes in fair value recognized in profit or loss (realized)			Changes in fair value recognized in equity			Level reclassifications		Other			Fair value calculated using internal models (Level 3)
Financial assets held for trading		282		182		(14	)		—		—			174			(7	)		—			575		(1	)		1,191
Debt and equity instruments		50		4		(1	)		—		—			—			—			—			32		—			85
Trading derivatives		232		178		(13	)		—		—			174			(7	)		—			543		(1	)		1,106
Swaps		56		—		(2	)		—		—			(7	)		(7	)		—			52		24			116
Exchange rate options		16		—		—			—		—			—			—			—			—		(16	)		—
Interest rate options		—		162		(5	)		—		—			257			—			—			359		(5	)		768
Index and securities options		56		16		—			—		—			(100	)		—			—			132		7			111
Other		104		—		(6	)		—		—			24			—			—			—		(11	)		111
Other financial assets at fair value through profit or loss		510		37		(5	)		—		—			61			—			—			90		(13	)		680
Loans and advances to customers		61		—		(5	)		—		—			18			—			—			—		4			78
Debt and equity instruments		449		37		—			—		—			43			—			—			90		(17	)		602
Available-for-sale financial assets		715		35		(55	)		—		(36	)		—			—			(35	)		78		14			716
TOTAL ASSETS		1,507		254		(74	)		—		(36	)		235			(7	)		(35	)		743		—			2,587
Financial liabilities held for trading		60		48		(6	)		—		—			(71	)		(2	)		—			503		4			536
Trading derivatives		60		48		(6	)		—		—			(71	)		(2	)		—			503		4			536
Swaps		2		—		—			—		—			2			(2	)		—			47		—			49
Interest rate options		—		41		—			—		—			56			—			—			197		—			294
Index and securities options		—		7		(6	)		—		—			(128	)		—			—			259		61			193
Other		58		—		—			—		—			(1	)		—			—			—		(57	)		—
Other financial liabilities at fair value through profit or loss		45		—		(26	)		—		—			(1	)		—			—			—		(2	)		16
TOTAL LIABILITIES		105		48		(32	)		—		—			(72	)		(2	)		—			503		2			552

F-37

	2012		Changes																					2013
Millions of euros	Fair value calculated using internal models (Level 3)		Purchases		Sales			Issues		Settlements			Changes in fair value recognized in profit or loss (unrealized)			Changes in fair value recognized in profit or loss (realized)			Changes in fair value recognized in equity		Other			Fair value calculated using internal models (Level 3)
Financial assets held for trading		395		131		(164	)		—		(44	)		(4	)		2			—		(34	)		282
Debt and equity instruments		—		46		—			—		—			8			—			—		(4	)		50
Trading derivatives		395		85		(164	)		—		(44	)		(12	)		2			—		(30	)		232
Swaps		109		—		(62	)		—		—			19			—			—		(10	)		56
Exchange rate options		46		—		(1	)		—		—			(8	)		(3	)		—		(18	)		16
Index and securities options		—		85		—			—		(39	)		—			—			—		10			56
Other		240		—		(101	)		—		(5	)		(23	)		5			—		(12	)		104
Other financial assets at fair value through profit or loss		469		111		(32	)		—		(17	)		18			9			—		(48	)		510
Loans and advances to customers		74		—		—			—		(11	)		(8	)		6			—		—			61
Debt and equity instruments		395		111		(32	)		—		(6	)		26			3			—		(48	)		449
Available-for-sale financial assets		424		277		(48	)		—		—			(1	)		(2	)		73		(8	)		715
TOTAL ASSETS		1,288		519		(244	)		—		(61	)		13			9			73		(89	)		1,507
Financial liabilities held for trading		99		—		(18	)		—		(14	)		(11	)		13			—		(9	)		60
Customer deposits		7		—		—			—		—			—			—			—		(7	)		—
Trading derivatives		92		—		(18	)		—		(14	)		(11	)		13			—		(2	)		60
Swaps		8		—		(6	)		—		—			(1	)		—			—		1			2
Exchange rate options		6		—		(6	)		—		—			—			—			—		—			—
Other		78		—		(6	)		—		(14	)		(10	)		13			—		(3	)		58
Other financial liabilities at fair value through profit or loss		106		—		(42	)		—		—			(14	)		(12	)		—		7			45
TOTAL LIABILITIES		205		—		(60	)		—		(14	)		(25	)		1			—		(2	)		105

F-38

iv. Recognition of fair value changes

As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognized under Interest and similar income or Interest expense and similar charges, as appropriate, and those arising for other reasons, which are recognized at their net amount under Gains/losses on financial assets and liabilities (net).

Adjustments due to changes in fair value arising from:

• Available-for-sale financial assets are recognized temporarily under Valuation adjustments - Available-for-sale financial assets, unless they relate to exchange differences, in which case they are recognized in equity under Valuation adjustments - Exchange differences (net), or to exchange differences arising on monetary financial assets, in which case they are recognized in Exchange differences (net) in the consolidated income statement.

• Items charged or credited to Valuation adjustments - Available-for-sale financial assets and Valuation adjustments - Exchange differences (net) in equity remain in the Group’s total equity until the asset giving rise to them is impaired or derecognized, at which time they are recognized in the consolidated income statement.

• Unrealized gains on available-for-sale financial assets classified as Non-current assets held for sale because they form part of a disposal group or a discontinued operation are recognized in equity under Valuation adjustments - Non-current assets held for sale.

v. Hedging transactions

The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (hedging derivatives); and iii) to obtain gains from changes in the prices of these derivatives (trading derivatives).

Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.

A derivative qualifies for hedge accounting if all the following conditions are met:

1. The derivative hedges one of the following three types of exposure:

a. Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge);

b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge);

c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).

2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). To this end, the Group checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item.

F-39

3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, provided that this is consistent with the Group’s management of own risks.

The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:

a. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement.

In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under Changes in the fair value of hedged items in portfolio hedges of interest rate risk on the asset or liability side of the balance sheet, as appropriate.

b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under Valuation adjustments - Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability.

c. In hedges of a net investment in a foreign operation, the gains or losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under Valuation adjustments - Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in profit or loss.

d. The ineffective portion of the gains or losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation is recognized directly under Gains/losses on financial assets and liabilities (net) in the consolidated income statement.

If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified for accounting purposes as a trading derivative.

When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are amortized to profit or loss at the effective interest rate recalculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.

When cash flow hedge accounting is discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under Valuation adjustments (from the period when the hedge was effective) remains in this equity item until the forecast transaction occurs, at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in profit or loss.

vi. Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Other financial assets/liabilities at fair value through profit or loss or as Financial assets/liabilities held for trading.

F-40

e) Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:

1. If the Group transfers substantially all the risks and rewards to third parties -unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases-, the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously.

2. If the Group retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases-, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized:

a. An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss.

b. The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting.

3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:

a. If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.

b. If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

Accordingly, financial assets are only derecognized when the rights to the cash flows they generate have expired or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired with the intention either to cancel them or to resell them.

f) Offsetting of financial instruments

Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the Group entities currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

F-41

Following is the detail of financial assets and liabilities that were offset in the consolidated balance sheets as at December 31, 2015, 2014 and 2013:

	December 31, 2015
	Millions of euros
Assets	Gross amount of financial assets		Gross amount of financial liabilities offset in the balance sheet			Net amount of financial assets presented in the balance sheet
Derivatives		127,017		(42,566	)		84,451
Reverse repurchase agreements		59,158		(2,066	)		57,092
Total		186,175		(44,632	)		141,543
	December 31, 2014
	Millions of euros
Assets	Gross amount of financial assets		Gross amount of financial liabilities offset in the balance sheet			Net amount of financial assets presented in the balance sheet
Derivatives		128,076		(43,872	)		84,204
Reverse repurchase agreements		57,882		(7,064	)		50,818
Total		185,958		(50,936	)		135,022
	December 31, 2013
	Millions of euros
Assets	Gross amount of financial assets		Gross amount of financial liabilities offset in the balance sheet			Net amount of financial assets presented in the balance sheet
Derivatives		86,813		(19,613	)		67,200
Reverse repurchase agreements		59,990		(12,463	)		47,527
Total		146,803		(32,076	)		114,727

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	December 31, 2015
	Millions of euros
Liabilities	Gross amount of financial liabilities		Gross amount of financial assets offset in the balance sheet			Net amount of financial liabilities presented in the balance sheet
Derivatives		127,917		(42,566	)		85,351
Repurchase agreements		97,169		(2,066	)		95,103
Total		225,086		(44,632	)		180,454
	December 31, 2014
	Millions of euros
Liabilities	Gross amount of financial liabilities		Gross amount of financial assets offset in the balance sheet			Net amount of financial liabilities presented in the balance sheet
Derivatives		130,175		(43,872	)		86,303
Repurchase agreements		113,075		(7,064	)		106,011
Total		243,250		(50,936	)		192,314
	December 31, 2013
	Millions of euros
Liabilities	Gross amount of financial liabilities		Gross amount of financial assets offset in the balance sheet			Net amount of financial liabilities presented in the balance sheet
Derivatives		83,783		(19,613	)		64,170
Repurchase agreements		103,621		(12,463	)		91,158
Total		187,404		(32,076	)		155,328

Also, the Group has offset other items amounting to EUR 2,036 million (December 31, 2014 and 2013: EUR 2,084 million and EUR 2,267 million, respectively).

Most of the derivatives and repos not offset in the balance sheet are subject to netting and collateral arrangements.

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g) Impairment of financial assets

i. Definition

A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:

• In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

• In the case of equity instruments, mean that their carrying amount may not be fully recovered.

As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

When an asset is considered to be impaired, the interest accrual is suspended and any amounts received are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding.

Transactions classified as non-performing due to arrears are reclassified as standard if, as a result of the collection of a portion or the sum of the unpaid instalments, the reasons for classifying such transactions as non-performing cease to exist, i.e. they no longer have any amount more than 90 days past due, unless other subjective reasons remain for classifying them as non-performing. The refinancing of non-performing loans does not result in their reclassification to standard unless: there is certainty that the customer can make payment in accordance with the new schedule; the customer provides effective guarantees or collateral; the customer pays the current interest receivable; and the customer complies with the established cure period (see Note 54).

The following constitute effective guarantees or collateral: collateral in the form of cash deposits; quoted equity instruments and debt securities issued by creditworthy issuers; mortgages on completed housing, offices and multi-purpose premises and on rural property, net of any prior charges; and personal guarantees (bank guarantees, inclusion of new obligors, etc.) which entail the direct and joint liability of the new guarantors to the customer, these being persons or entities whose solvency is sufficiently demonstrated so as to ensure the full repayment of the transaction on the agreed terms.

The balances relating to impaired assets continue to be recognized on the balance sheet, for their full amounts, until the Group considers that the recovery of those amounts is remote.

The Group considers recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as non-performing due to arrears (the maximum period established by the Bank of Spain).

When the recovery of a financial asset is considered remote, it is written off, together with the related allowance, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.

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ii. Debt instruments carried at amortized cost

For the purpose of determining impairment losses, the Group monitors its debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics -customers classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases -customers classified by the Group as “standardized”-, by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual traders and retail banking enterprises not classified as individualized customers.

As regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

• When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

• When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the coverage of loss arising from credit risk, the Group must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as follows:

a. Specific allowance for impaired assets:

The allowance for debt instruments not measured at fair value through profit or loss that are classified as non-performing is generally recognized in accordance with the criteria set forth below:

i. Assets classified as non-performing due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than 90 days past due are provisioned individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets classified as non-performing for reasons other than counterparty arrears:

Debt instruments which are not classifiable as non-performing due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are provisioned individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

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b. Allowance for inherent losses:

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Economic Area countries, Switzerland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the loan loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized for country risk are not material with respect to the allowances recognized for loan losses.

However, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRSs and, therefore, the Group checks the allowances calculated as described above against those obtained from internal models for the calculation of the coverage of losses arising from credit risk, in order to confirm that there are no material differences.

The Group’s internal models determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

The amount of an impairment loss incurred on these debt instruments is equal to the difference between their carrying amount and the present value of their estimated future cash flows. In estimating the future cash flows of debt instruments the following factors are taken into account:

• All the amounts that are expected to be obtained over the remaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;

• The various types of risk to which each instrument is subject; and

• The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default. These parameters are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 1.e).

• Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

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• Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.

For the purpose of calculating the incurred loss, PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective non-performing assets).

• Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the discounting of the guarantees associated with the transaction and the future flows that are expected to be recovered.

In addition to all of the above, the calculation of the incurred loss takes into account the adjustment to the cycle of the aforementioned factors (PD and LGD) and historical experience and other specific information that reflects current conditions.

At December 31, 2015, the estimated incurred losses due to credit risk calculated by the Group’s internal models did not differ materially from the allowances calculated on the basis of the Bank of Spain’s requirements.

iii. Debt or equity instruments classified as available for sale

The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.

When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under Valuation adjustments - Available-for-sale financial assets and are reclassified, for the cumulative amount at that date, to the consolidated income statement.

If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurs (or in equity under Valuation adjustments - Available-for-sale financial assets in the case of equity instruments).

iv. Equity instruments carried at cost

The amount of the impairment losses on equity instruments carried at cost is the difference between the carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.

Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.

h) Repurchase agreements and reverse repurchase agreements

Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under Balances with central banks, Loans and advances to credit institutions or Loans and advances to customers (Deposits from central banks, Deposits from credit institutions or Customer deposits).

Differences between the purchase and sale prices are recognized as interest over the contract term.

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i) Non-current assets held for sale and Liabilities associated with non-current assets held for sale

Non-current assets held for sale includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale in their present condition is highly likely to be completed within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal.

Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets. In this connection, for the purpose of its consideration in the initial recognition of these assets, the Group obtains, at the foreclosure date, the fair value of the related asset through a request for appraisal by external appraisal agencies.

The Group has in place a corporate policy that ensures the professional competence and the independence and objectivity of the external appraisal agencies, in accordance with the regulations, which require appraisal agencies to meet independence, neutrality and credibility requirements, so that the use of their estimates does not reduce the reliability of its valuations. This policy establishes that all the appraisal companies and agencies with which the Group works in Spain should be registered in the Official Register of the Bank of Spain and that the appraisals performed by them should follow the methodology established in Ministry of Economy Order ECO/805/2003, of March 27. The main appraisal companies and agencies with which the Group worked in Spain in 2015 are as follows: Eurovaloraciones, S.A., Ibertasa, S.A., Tinsa Tasaciones Inmobiliarias, S.A.U., Tasaciones Hipotecarias Renta, S.A., Krata, S.A. and Compañía Hispania de Tasaciones y Valoraciones, S.A. Also, this policy establishes that the various subsidiaries abroad work with appraisal companies that have recent experience in the area and the type of asset under appraisal and meet the independence requirements established in the corporate policy. They should verify, inter alia, that the appraisal company is not a party related to the Group and that its billings to the Group in the last twelve months do not exceed 15% of the appraisal company’s total billings.

Liabilities associated with non-current assets held for sale includes the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.

Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.

Subsequent to initial recognition, the Group measures its non-current assets at the lower of their fair value less costs to sell and their carrying amount. The Group measures foreclosed property assets located in Spain by taking into consideration the appraisal value on the date of foreclosure and the length of time each asset has been recognized in the balance sheet. Property assets under construction are measured taking into account the stage of completion of the property, not the final value. In addition, in order to check at the end of each reporting period that the measurement made using the aforementioned criteria does not differ from fair value, the Group requests an independent expert to perform an appraisal.

At December 31, 2015, the fair value less costs to sell of non-current assets held for sale exceeded their carrying amount by EUR 990 million; however, in accordance with the applicable accounting standards, this unrealized gain could not be recognized.

The valuation of the non-current assets held for sale portfolio performed by the independent expert conforms to the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors (RICS) and the International Valuation Standards published by the International Valuation Standards Council (IVSC), in relation to the estimation of the fair value of tangible assets and the value in use of financial assets.

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The internationally recognized RICS methodology is considered to be appropriate for valuations of this kind, since it reflects the current market situation and, implicitly, a potential investor’s internal rate of return (IRR) requirements.

The value of the portfolio is calculated as the sum of the values of the individual items composing it, irrespective of any total or batch grouping performed for the purpose of correcting the individual values.

The non-current assets held for sale portfolio is valued by applying mainly the models indicated below using the latest available appraisals, corrected on the basis of a series of macroeconomic and property market variables, as follows:

• Market Value Model based on Average Market Value Evolution Series (M-Ser) - This methodology is used in the revaluation of housing units, parking lots, offices, commercial premises and multi-purpose industrial buildings. The current market value of the properties is estimated based on a projection of the latest available appraisal, using a revaluation rate calculated on the basis of the historical series of average market values (sales prices only), and drawing a distinction by asset location and type. The valuations performed using this approach are considered as Level 2 valuations.

• Market Value Model based on Average Market Value Evolution Series for Rural Properties (M-INE) - This methodology is used in the revaluation of rural properties. A method is used which, by applying statistical procedures to the agricultural land price database published by the Spanish National Statistics Institute (INE), estimates the possible current market value of rural properties. The agricultural land price database published by the INE is prepared from data furnished by the Spanish Ministry for Agriculture, Food and Environmental Affairs. The valuations performed using this approach are considered as Level 2 valuations.

• Market Value Model based on Statistical Evolution of Land Values (M-Ter) - This methodology is used in the revaluation of non-rural land. The current market value is estimated based on a projection of the latest available appraisal, using a revaluation rate calculated by means of statistical series of the evolution of the average value of land per built square meter at various stages of urban development, and drawing a distinction by asset location and type. The valuations performed using this approach are considered as Level 3 valuations, since they use unobservable inputs, such as the statistical series of the evolution of the average value of land per built square meter at various stages of urban development.

At December 31, 2015, 36.7% of the non-current assets held for sale related to urban land.

Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on non-current assets held for sale not classified as discontinued operations in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.

j) Reinsurance assets and Liabilities under insurance contracts

Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flows will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.

The Group controls its insurance risk as follows:

• By applying a strict methodology in the launch of products and in the assignment of value thereto.

• By using deterministic and stochastic actuarial models for measuring commitments.

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• By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.

• By establishing an operating framework for credit risks.

• By actively managing asset and liability matching.

• By applying security measures in processes.

Reinsurance assets includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities.

At least once a year these assets are reviewed to ascertain whether they are impaired (i.e. there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are written down.

Liabilities under insurance contracts includes the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end.

Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items.

In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are therefore required to accrue at period-end the unearned revenues credited to their income statements and the accrued costs not charged to income.

At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequate. For this purpose, it calculates the difference between the following amounts:

• Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and

• The carrying amount recognized in the consolidated balance sheet of its insurance contract liabilities (see Note 15), less any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio.

If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When unrealized gains or losses on assets of the Group’s insurance companies affect the measurement of liabilities under insurance contracts and/or the related deferred acquisition costs and/or the related intangible assets, these gains or losses are recognized directly in equity. The corresponding adjustment in the liabilities under insurance contracts (or in the deferred acquisition costs or in intangible assets) is also recognized in equity.

The most significant items forming part of the technical provisions (see Note 15) are detailed below:

• Non-life insurance provisions:

i) Provision for unearned premiums: relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

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ii) Provisions for unexpired risks: this supplements the provision for unearned premiums to the extent that the amount of the latter is not sufficient to reflect all the assessed risks and expenses to be covered by the insurance companies in the policy period not elapsed at the reporting date.

• Life insurance provisions: represent the value of the net obligations acquired vis-à-vis life insurance policyholders. These provisions include:

i) Provision for unearned premiums and unexpired risks: this relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

ii) Mathematical provisions: these relate to the value of the insurance companies’ obligations, net of the policyholders’ obligations. These provisions are calculated on a policy-by-policy basis using an individual capitalization system, taking as a basis for the calculation the premium accrued in the year, and in accordance with the technical bases of each type of insurance updated, where appropriate, by the local mortality tables.

• Provision for claims outstanding: this reflects the total obligations outstanding arising from claims incurred prior to the reporting date. This provision is calculated as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid and all the amounts already paid in relation to such claims.

• Provision for bonuses and rebates: this provision includes the amount of the bonuses accruing to policyholders, insureds or beneficiaries and that of any premiums to be returned to policyholders or insureds, to the extent that such amounts have not been assigned at the reporting date. These amounts are calculated on the basis of the conditions of the related individual policies.

• Technical provisions for life insurance policies where the investment risk is borne by the policyholders: these provisions are calculated on the basis of the indices established as a reference to determine the economic value of the policyholders’ rights.

k) Tangible assets

Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:

i. Property, plant and equipment for own use

Property, plant and equipment for own use –including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases– are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (carrying amount higher than recoverable amount).

Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.

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The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):

	Average annual rate
Buildings for own use		2.0	%
Furniture		7.7	%
Fixtures		7.0	%
Office and IT equipment		25.0	%
Leasehold improvements		7.0	%

The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities recognize the reversal of the impairment loss recognized in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives.

Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.

ii. Investment property

Investment property reflects the carrying amount of the land, buildings and other structures held either to earn rentals or for capital appreciation.

The criteria used to recognize the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognize any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

The Group determines periodically the fair value of its investment property so that, at the end of the reporting period, the fair value reflects the market conditions of the investment property at that date. This fair value is determined annually, taking as benchmarks the valuations performed by independent experts.

The methodology used to determine the fair value of investment property is selected based on the status of the asset in question; thus, for properties earmarked for lease, the valuations are performed using the sales comparison approach, whereas for leased properties the valuations are made primarily using the income capitalization approach and, alternatively, the sales comparison approach.

• In the sales comparison approach, the property market segment for comparable properties is analyzed, inter alia, and, based on specific information on actual transactions and firm offers, current prices are obtained for cash sales of those properties. The valuations performed using this approach are considered as Level 2 valuations.

• In the income capitalization approach, the cash flows estimated to be obtained over the useful life of the property are discounted taking into account factors that may influence the amount and actual receipt thereof, such as: (i) the payments that are normally received on comparable properties; (ii) current and

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probable future occupancy; (iii) the current or foreseeable default rate on payments. The valuations performed using this approach are considered as Level 3 valuations, since unobservable inputs are used, such as current and probable future occupancy and/or the current or foreseeable default rate on payments.

At December 31, 2015, 73.21% of the Group’s investment properties were leased out.

iii. Assets leased out under an operating lease

Property, plant and equipment - Leased out under an operating lease reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

l) Accounting for leases

i. Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term when such exercise price is sufficiently below fair value at the option date such that it is reasonably certain that the option will be exercised, is recognized as lending to third parties and is therefore included under Loans and receivables in the consolidated balance sheet.

When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognize a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

In both cases, the finance income and finance charges arising under finance lease agreements are credited and debited, respectively, to Interest and similar income and Interest expense and similar charges in the consolidated income statement so as to produce a constant rate of return over the lease term.

ii. Operating leases

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under Tangible assets (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use, and income from operating leases is recognized on a straight-line basis under Other operating income in the consolidated income statement.

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to Other general administrative expenses in their consolidated income statements.

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iii. Sale and leaseback transactions

In sale and leaseback transactions where the sale is at fair value and the leaseback is an operating lease, any profit or loss is recognized at the time of sale. In the case of finance leasebacks, any profit or loss is amortized over the lease term.

In accordance with IAS 17, in determining whether a sale and leaseback transaction results in an operating lease, the Group should analyze, inter alia, whether at the inception of the lease there are purchase options whose terms and conditions make it reasonably certain that they will be exercised, and to whom the gains or losses from the fluctuations in the fair value of the residual value of the related asset will accrue.

m) Intangible assets

Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

i. Goodwill

Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:

• If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.

• If it is attributable to specific intangible assets, by recognizing it explicitly in the consolidated balance sheet provided that the fair value of these assets within twelve months following the date of acquisition can be measured reliably.

• The remaining amount is recognized as goodwill, which is allocated to one or more cash-generating units (a cash-generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). The cash-generating units represent the Group’s geographical and/or business segments.

Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.

At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) - Goodwill and other intangible assets in the consolidated income statement.

An impairment loss recognized for goodwill is not reversed in a subsequent period.

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ii. Other intangible assets

Other intangible assets includes the amount of identifiable intangible assets (such as purchased customer lists and computer software).

Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

The intangible asset amortization charge is recognized under Depreciation and amortization charge in the consolidated income statement.

In both cases the consolidated entities recognize any impairment loss on the carrying amount of these assets with a charge to Impairment losses on other assets (net) in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years are similar to those used for tangible assets (see Note 2.k).

Internally developed computer software

Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.

Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.

n) Other assets

Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:

• Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories includes land and other property held for sale in the property development business.

Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.

Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.

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The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.

• Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest, fees and commissions), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s favor, when this net amount is to be reported in the consolidated balance sheet, and the amount of any other assets not included in other items.

ñ) Other liabilities

Other liabilities includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.

o) Provisions and contingent assets and liabilities

When preparing the financial statements of the consolidated entities, the Bank’s directors made a distinction between:

• Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the consolidated entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing.

• Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

• Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes.

Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows (see Note 25):

• Provision for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.

• Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.

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• Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. Other provisions includes, inter alia, any provisions for restructuring costs and environmental measures.

p) Court proceedings and/or claims in process

At the end of 2015 certain court proceedings and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).

q) Own equity instruments

Own equity instruments are those meeting both of the following conditions:

• The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.

• The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity.

Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments, including the coupons on preference shares contingently convertible into ordinary shares, is directly added to or deducted from equity.

r) Equity-instrument-based employee remuneration

Own equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted are vested immediately, the Group recognizes in full, at the grant date, the expense for the services received.

When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.

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s) Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

i. Interest income, interest expenses and similar items

Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.

However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than 90 days past due. Any interest that may have been recognized in the consolidated income statement before the corresponding debt instruments were classified as impaired, and that had not been collected at the date of that classification, is considered when determining the allowance for loan losses; accordingly, if subsequently collected, this interest is recognized as a reversal of the related impairment losses. Interest whose recognition in the consolidated income statement has been suspended is accounted for as interest income, when collected, on a cash basis.

ii. Commissions, fees and similar items

Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:

• Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.

• Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

• Those relating to services provided in a single act are recognized when the single act is carried out.

iii. Non-finance income and expenses

These are recognized for accounting purposes on an accrual basis.

iv. Deferred collections and payments

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

v. Loan arrangement fees

Loan arrangement fees, mainly loan origination, application and information fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.

t) Financial guarantees

Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.

The Group initially recognizes the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and simultaneously the Group recognizes the amount of the fees, commissions and similar interest received at the inception of the transactions and a credit on the asset side of the consolidated balance sheet for the present value of the fees, commissions and interest outstanding.

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Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments carried at amortized cost (described in Note 2.g above).

The provisions made for these transactions are recognized under Provisions - Provisions for contingent liabilities and commitments in the consolidated balance sheet (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.

If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost - Other financial liabilities in the consolidated balance sheet are reclassified to the appropriate provision.

u) Assets under management and investment and pension funds managed by the Group

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement.

The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under Fee and commission income in the consolidated income statement.

Note 2.b.iv describes the internal criteria and procedures used to determine whether control exists over the structured entities, which include, inter alia, investment funds and pension funds.

v) Post-employment benefits

Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, and the post-employment welfare benefits.

The Group’s post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognized under Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 25).

Defined contribution plans

The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet.

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Defined benefit plans

The Group recognizes under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets.

Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:

• They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.

• They are only available to pay or fund post-employment benefits and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the entity to current and former employees, or they are returned to reimburse employee benefits already paid by the Group.

If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognizes its right to reimbursement -which, in all other respects, is treated as a plan asset- under Insurance contracts linked to pensions on the asset side of the consolidated balance sheet.

Post-employment benefits are recognized as follows:

• Service cost is recognized in the consolidated income statement and includes the following items:

• Current service cost, i.e. the increase in the present value of the obligations resulting from employee service in the current period, is recognized under Personnel expenses.

• The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognized under Provisions (net).

• Any gain or loss arising from plan settlements is recognized under Provisions (net).

• Net interest on the net defined benefit liability (asset), i.e. the change during the period in the net defined benefit liability (asset) that arises from the passage of time, is recognized under Interest expense and similar charges (Interest and similar income if it constitutes income) in the consolidated income statement.

• The remeasurement of the net defined benefit liability (asset) is recognized in equity under Valuation adjustments and includes:

• Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions.

• The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset).

• Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

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w) Other long-term employee benefits

Other long-term employee benefits, defined as obligations to pre-retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that actuarial gains and losses are recognized under Provisions (net) in the consolidated income statement (see Note 25).

x) Termination benefits

Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.

y) Income tax

The expense for Spanish income tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.

The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards.

Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.

Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.

Income and expenses recognized directly in equity are accounted for as temporary differences.

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The deferred tax assets and liabilities are reassessed at the reporting date in order to ascertain whether any adjustments need to be made on the basis of the findings of the analyses performed.

z) Residual maturity periods and average interest rates

The analysis of the maturities of the balances of certain items in the consolidated balance sheet and the average interest rates at the end of the reporting periods is provided in Note 51.

aa) Consolidated statements of cash flows

The following terms are used in the consolidated statements of cash flows with the meanings specified:

• Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified.

The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.

• Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.

• Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

• Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

It should be noted that there are no material differences between the cash flows relating to interest received and interest paid and the interest received and interest paid recognized in the consolidated income statement. Accordingly, these items are not disclosed separately in the consolidated statements of cash flows.

ab) Consolidated statements of recognized income and expense

This statement presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in total equity.

Accordingly, this statement presents:

a. Consolidated profit for the year.

b. The net amount of the income and expenses recognized in equity under Valuation adjustments that will not be reclassified to profit or loss.

c. The net amount of the income and expenses recognized in equity that may be reclassified subsequently to profit or loss.

d. The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net.

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e. Total consolidated recognized income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests.

The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities accounted for using the equity method.

The statement presents the items separately by nature, grouping together items that, in accordance with the applicable accounting standards, will not be reclassified subsequently to profit and loss since the requirements established by the corresponding accounting standards are met.

ac) Statements of changes in total equity

This statement presents all the changes in equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the total equity items, and the changes are grouped together on the basis of their nature into the following items:

a. Adjustments due to changes in accounting policies and to errors: include the changes in total equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors.

b. Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated statement of recognized income and expense.

c. Other changes in equity: includes the remaining items recognized in equity, including, inter alia, increases and decreases in capital, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in total equity.

3. Santander Group

a) Banco Santander, S.A. and international Group structure

The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).

At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.

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The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.

The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.

b) Acquisitions and disposals

Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years:

i. Merger of Bank Zachodni WBK S.A. and Kredyt Bank S.A.

On February 28, 2012, the Group announced that Banco Santander, S.A. and KBC Bank NV (KBC) had entered into an investment agreement to merge their two subsidiaries in Poland, Bank Zachodni WBK S.A. and Kredyt Bank S.A., respectively, following which the Group would control approximately 76.5% of the entity resulting from the merger and KBC 16.4%, with the remaining 7.1% being owned by non-controlling interests. Also, the Group undertook to place a portion of its ownership interest among investors and to acquire up to 5% of the entity resulting from the merger in order to help KBC to reduce its holding in the merged entity to below 10%. KBC’s objective is to dispose of its entire investment in order to maximize its value.

It was agreed to carry out the transaction through a capital increase at Bank Zachodni WBK S.A., whose new shares would be offered to KBC and the other shareholders of Kredyt Bank S.A. in exchange for their shares in Kredyt Bank S.A. The related exchange ratio was established at 6.96 shares of Bank Zachodni WBK S.A. for every 100 shares of Kredyt Bank S.A.

In the first few days of 2013, following receipt of the related authorization from the Polish financial regulator (KNF), the aforementioned transaction was carried out. As a result, the Group controlled approximately 75.2% of the post-merger entity and KBC controlled approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests. This transaction gave rise to an increase of EUR 1,037 million in Non-controlling interests – EUR 169 million as a result of the acquisition of control of Kredyt Bank S.A. and EUR 868 million as a result of the reduction in the percentage of ownership of Bank Zachodni WBK S.A.

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The detail of the fair values of the identifiable assets acquired and liabilities assumed at the business combination date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks		351
Loans and receivables - Loans and advances to customers (*)		6,767
Available-for-sale assets		2,547
Other assets (**)		692
Total assets		10,357
Deposits from credit institutions		1,414
Customer deposits		7,620
Other liabilities		642
Total liabilities		9,676
Net asset value		681
Non-controlling interests		(169	)
Cost of investment		838
Goodwill at January 2013 (***)		326

(*) EUR 122 million of additional impairment losses were considered in estimating the fair value of the loans and receivables.

(**) The estimate identified intangible assets amounting to EUR 51 million.

(***) Belongs to the Bank Zachodni WBK S.A. cash-generating unit (see Note 17).

On March 22, 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for EUR 285 million, which gave rise to an increase of EUR 292 million in Non-controlling interests.

Following these transactions, the Group held 70% of the share capital of Bank Zachodni WBK S.A. and the remaining 30% was held by non-controlling interests.

ii. Merger by absorption of Banesto and Banco Banif

On December 17, 2012, Banco Santander, S.A. announced that it had resolved to approve the plan for the merger by absorption of Banco Español de Crédito, S.A. (Banesto) and Banco Banif, S.A. (Sole-Shareholder Company) as part of the restructuring of the Spanish financial sector.

On January 9, 2013, the boards of directors of Banco Santander, S.A. and Banesto approved the common draft terms of merger. Also, on January 28, 2013, the boards of directors of Banco Santander, S.A. and Banco Banif, S.A. (Sole-Shareholder Company) approved the related common draft terms of merger. The draft terms of merger were approved by the shareholders of Banco Santander, S.A. and Banesto at the annual general meetings held on March 22 and 21, respectively.

On April 29, 2013, pursuant to the common draft terms of merger and the resolutions of the annual general meetings of the two companies, Banco Santander, S.A. announced the regime and procedure for the exchange of shares of Banesto for shares of Banco Santander, S.A.

Banco Santander, S.A. exchanged the Banesto shares for treasury shares at a ratio of 0.633 shares of Banco Santander, S.A., of EUR 0.5 par value each, for each share of Banesto, of EUR 0.79 par value each, without any additional cash payment. As a result of this exchange, Non-controlling interests fell by EUR 455 million.

On May 3, 2013, the public deed of the merger by absorption of Banesto, which was extinguished, was registered at the Cantabria Mercantile Registry. Also, on April 30, the public deed of the merger by absorption of Banco Banif S.A. (Sole-Shareholder Company) was executed, and this entity was extinguished. The public deed was registered at the Cantabria Mercantile Registry on May 7, 2013.

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iii. Insurance business in Spain

On December 20, 2012, the Group announced that it had reached an agreement with Aegon to strengthen the bancassurance business in Spain. The agreement does not affect savings, health and vehicle insurance, which continue to be managed by Santander.

In June 2013, having obtained the relevant authorizations from the Directorate-General of Insurance and Pension Funds and from the European competition authorities, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes, one for life insurance and the other for general insurance (currently Aegon Santander Vida Seguros y Reaseguros, S.A. and Aegon Santander Generales Seguros y Reaseguros, S.A.), for which it paid EUR 220 million, thereby gaining joint control together with the Group over the aforementioned companies. The agreement also includes payments to Aegon that are deferred over two years and amounts receivable by the Group that are deferred over five years, based on the business plan.

The aforementioned agreement included the execution of a 25-year distribution agreement for the sale of insurance products through the commercial networks in Spain, for which the Group will receive commissions at market rates.

This transaction gave rise to the recognition of a gain of EUR 385 million under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2013 (EUR 270 million net of tax), of which EUR 186 million related to the fair value recognition of the 49% ownership interest retained by the Group.

iv. Agreement with Elavon Financial Services Limited

On October 19, 2012, Banco Santander, S.A. announced that it had entered into an agreement with Elavon Financial Services Limited to jointly develop the payment services business in Spain through point-of-sale credit and debit card terminals at merchants.

This transaction involved the creation of a joint venture, 51% owned by Elavon and 49% owned by Santander, to which Santander Group transferred its aforementioned payment services business in Spain (excluding the former Banesto).

The transaction was completed in the first half of 2013 and generated a gain of EUR 122 million (EUR 85 million net of tax).

v. Agreement with Warburg Pincus and General Atlantic

On May 30, 2013, the Group announced that it had entered into an agreement with subsidiaries of Warburg Pincus and General Atlantic to foster the global development of its asset management unit, Santander Asset Management (SAM). According to the terms and conditions of the agreement, Warburg Pincus and General Atlantic would together own 50% of the holding company which would comprise the Group’s eleven management companies, mainly in Europe and Latin America, while the other 50% would be held by the Group.

The purpose of the alliance was to enable SAM to improve its ability to compete with the large independent international management companies, and the businesses to be strengthened included asset management in the global institutional market, with the additional advantage of having knowledge and experience in the markets in which the Group is present. The agreement also envisaged the distribution of products managed by SAM in the countries in which the Group has a commercial network for a period of ten years, renewable for five additional two-year periods, for which the Group would receive commissions at market rates, thus benefiting from broadening the range of products and services to offer its customers. SAM would also distribute its products and services internationally, outside the Group’s commercial network.

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Since the aforementioned management companies belonged to different Group companies, prior to the completion of the transaction a corporate restructuring took place whereby each of the management companies was sold by its shareholders, for its fair value, to SAM Investment Holdings Limited (SAM), a holding company created by the Group. The aggregate value of the management companies was approximately EUR 1,700 million.

Subsequently, in December 2013, once the required authorizations had been obtained from the various regulators, the agreement was executed through the acquisition of a 50% ownership interest in SAM’s share capital by Sherbrooke Acquisition Corp SPC (an investee of Warburg Pincus and General Atlantic) for EUR 449 million. At that date, SAM had financing from third parties amounting to EUR 845 million. The agreement included deferred contingent amounts payable and receivable for the Group based on the achievement of the business plan targets over the coming five years.

Also, the Group entered into a shareholders agreement with the aforementioned shareholders regulating, inter alia, the taking of strategic, financial, operational and other significant decisions regarding the ordinary management of SAM on a joint basis. Certain restrictions on the transferability of the shares were also agreed, and a commitment was made by the two parties to retain the shares for at least 18 months. Lastly, Sherbrooke Acquisition Corp SPC will be entitled to sell to the Group its ownership interest in the share capital of SAM at market value on the fifth and seventh anniversaries of the transaction, unless a public offering of SAM shares has taken place prior to those dates.

Following these transactions, at the end of 2013, 2014 and 2015 the Group held a 50% ownership interest in SAM and controlled this company jointly with the aforementioned shareholders (see Note 13).

As a result of the above-mentioned transaction, the Group recognized a gain of EUR 1,372 million under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2013 (see Note 49), of which EUR 671 million related to the fair value of the 50% ownership interest retained by the Group.

vi. Sale of Altamira Asset Management

On November 21, 2013, the Group announced that it had reached a preliminary agreement with Apollo European Principal Finance Fund II, a fund managed by subsidiaries of Apollo Global Management, LLC, for the sale of the platform for managing the loan recovery activities of Banco Santander, S.A. in Spain and for managing and marketing the properties relating to this activity (Altamira Asset Management, S.L.).

On January 3, 2014, the Group announced that it had sold 85% of the share capital of Altamira Asset Management, S.L. to Altamira Asset Management Holdings, S.L., an investee of Apollo European Principal Finance Fund II, for EUR 664 million, giving rise to a net gain of EUR 385 million, which was recognized at its gross amount under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2014.

Following this transaction, the Group retained the aforementioned property assets and loan portfolio on its balance sheet, while management of these assets is carried out from the platform owned by Apollo.

vii. Santander Consumer USA

In January 2014 the public offering of shares of Santander Consumer USA Inc. (SCUSA) was completed and the company was admitted to trading on the New York Stock Exchange. The placement represented 21.6% of SCUSA’s share capital, of which 4.23% related to the holding sold by the Group. Following this sale, the Group held 60.74% of the share capital of SCUSA. Both Sponsor Auto Finance Holdings Series LP (Sponsor Holdings) -an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P.- and DDFS LLC (DDFS) - a company controlled by Thomas G. Dundon, the Chief Executive Officer of SCUSA- also reduced their holdings.

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Following the placement, since the ownership interests of the aforementioned shareholders were reduced to below certain percentages established in the shareholders agreement previously entered into with the Group by the shareholders, the agreement was terminated, pursuant to the terms and conditions established therein. This entailed the termination of the agreements which, inter alia, had granted Sponsor Holdings and DDFS representation on the board of directors of SCUSA and had established a voting system under which the strategic, financial and operating decisions, and other significant decisions associated with the ordinary management of SCUSA, were subject to joint approval by the Group and the aforementioned shareholders. Therefore, SCUSA ceased to be controlled jointly by all the above and is now controlled by the Group on the basis of the percentage held in its share capital (“change of control”).

Prior to this change of control the Group accounted for its ownership interest in SCUSA using the equity method. Following the obtainment of control, the Group now recognizes its investment in SCUSA using the full consolidation method and, at the date of obtainment of control, it included each of SCUSA’s assets and liabilities in its consolidated balance sheet at their fair value.

The Group did not make any disbursement in relation to this change of control and, therefore, goodwill was determined by reference to the fair value of SCUSA implicit in the public offering. The detail of the fair values of the identifiable assets acquired and liabilities assumed at the business combination date is as follows:

	Millions of euros
Cash and balances with central banks		1,185
Financial assets held for trading		22
Loans and receivables - Loans and advances to customers (*)		16,113
Tangible assets		1,636
Intangible assets (**)		503
Other assets		1,172
Total assets		20,631
Deposits from credit institutions		6,191
Marketable debt securities and other financial liabilities (***)		11,256
Provisions		11
Other liabilities		935
Total liabilities		18,393
Net asset value		2,238
Non-controlling interests		(879	)
Fair value of employee share option plans		(94	)
Fair value of previously held investment		3,747
Goodwill		2,482

(*) The estimate of fair value included gains of EUR 18 million.

(**) The valuation work identified the following intangible assets additional to those already existing:

• Relationships with dealer networks amounting to EUR 429 million with an average amortization period of approximately 17 years.

• Trademarks amounting to EUR 37 million.

(***) In the estimate of fair value, the value of marketable debt securities increased by EUR 117 million.

In order to determine the fair value of loans and receivables, the loans and receivables were segregated into portfolios of loans with similar features and for each portfolio the present value of the cash flows expected to be received was calculated on the basis of the estimated future losses and prepayment rates.

The goodwill is attributable to the capability and experience of SCUSA’s employees and management team.

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As a result of the aforementioned transaction, the Group recognized a gain net of tax of EUR 730 million at its gross amount under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2014 (see Notes 27 and 49), of which EUR 688 million related to the recognition at fair value of the ownership interest held by the Group.

Had the business combination taken place on January 1, 2014, the results contributed to the Group by SCUSA would not have varied significantly from those recognized in the consolidated income statement for 2014.

Also, on July 3, 2015, the Group announced that it had reached an agreement to purchase the 9.68% ownership interest held by DDFS LLC in SCUSA for USD 928 million. Following this transaction, which is subject to the receipt of the relevant regulatory authorizations, the Group will have an ownership interest of approximately 68.62% in SCUSA.

viii. Agreement with El Corte Inglés

On October 7, 2013, the Group announced that it had entered into a strategic agreement through its subsidiary Santander Consumer Finance, S.A. with El Corte Inglés, S.A. in the area of consumer finance, which included the acquisition of 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A., with El Corte Inglés, S.A. retaining the remaining 49%. On February 27, 2014, following the receipt of the relevant regulatory and competition authorizations, the acquisition was completed. Santander Consumer Finance, S.A. paid EUR 140 million for 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the business combination date is as follows:

	Millions of euros
Loans and advances to credit institutions		29
Loans and receivables - Loans and advances to customers		1,291
Intangible assets		2
Other assets		22
Total assets		1,344
Deposits from credit institutions		173
Customer deposits		81
Marketable debt securities		585
Provisions		3
Other liabilities		290
Total liabilities		1,132
Net asset value		212
Non-controlling interests		(104	)
Consideration paid		140
Goodwill		32

In 2014 Financiera El Corte Inglés E.F.C., S.A. contributed EUR 26 million to the Group’s profit. Had the business combination taken place on January 1, 2014, the profit contributed would not have varied significantly.

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ix. Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H., S.A.

On April 7, 2014, Banco Santander (Brasil), S.A. announced that it had reached an agreement to purchase through an investee all the shares of Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H., S.A. (“Getnet”). The transaction was completed on July 31, 2014 and the price was set at BRL 1,156 million (approximately EUR 383 million), giving rise to goodwill of EUR 229 million, which was included in the Banco Santander (Brasil) cash-generating unit (see Note 17).

Among the agreements reached, the Group granted a put option to the non-controlling shareholders of Getnet Adquirência e Serviços para Meios de Pagamento, S.A. on all the shares held by them (11.5% of the share capital of this company). The Group recognized the corresponding liability amounting to EUR 308 million with a charge to equity.

In 2014 Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H., S.A. contributed EUR 11 million to the Group’s profit. Had the business combination taken place on January 1, 2014, the profit contributed to the Group in 2014 would have been approximately EUR 21 million.

x. Banco Santander (Brasil), S.A.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil), S.A. to two leading international financial institutions that undertook to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil), S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds. This transaction did not give rise to any change in the Group’s equity.

The delivery of the aforementioned shares took place on November 7, 2013.

Acquisition of non-controlling interests in Banco Santander (Brasil), S.A.

On April 28, 2014, the Bank’s board of directors approved a bid for the acquisition of all the shares of Banco Santander (Brasil), S.A. not then owned by the Group, which represented approximately 25% of the share capital of Banco Santander (Brasil), S.A., offering in consideration Bank shares in the form of Brazilian Depositary Receipts (BDRs) or American Depositary Receipts (ADRs). As part of the bid, the Bank requested that its shares be listed on the São Paulo Stock Exchange in the form of BDRs.

The offer was voluntary, in that the non-controlling shareholders of Banco Santander (Brasil), S.A. were not obliged to participate, and it was not conditional upon a minimum acceptance level. The consideration offered, following the adjustment made as a result of the application of the Santander Dividendo Elección scrip dividend scheme in October 2014, consisted of 0.7152 new Banco Santander shares for each unit or ADR of Banco Santander (Brasil), S.A. and 0.3576 new Banco Santander shares for each ordinary or preference share of Banco Santander (Brasil), S.A.

The bid was accepted by holders of 13.65% of the share capital of Banco Santander (Brasil), S.A. Accordingly, the Group’s ownership interest in Banco Santander (Brasil), S.A. rose to 88.30% of its share capital. To cater for the exchange, the Bank, executing the agreement adopted by the extraordinary general meeting held on September 15, 2014, issued 370,937,066 shares, representing approximately 3.09% of the Bank’s share capital at the issue date. The aforementioned transaction gave rise to an increase of EUR 185 million in Share capital, EUR 2,372 million in Share premium and EUR 15 million in Reserves, and a reduction of EUR 2,572 million in Non-controlling interests.

The shares of Banco Santander (Brasil), S.A. continue to be listed on the São Paulo and New York stock exchanges.

xi. Agreement with CNP

On July 10, 2014, the Bank announced that it had reached an agreement for the French insurance company CNP to acquire a 51% stake in the three insurance companies based in Ireland (Santander Insurance Life Limited, Santander Insurance Europe Limited and Santander Insurance Services Ireland Limited) that distribute life and non-life products through the Santander Consumer Finance network.

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In December 2014, after the regulatory authorizations had been obtained, CNP paid EUR 297 million to acquire 51% of the share capital of the three aforementioned insurance companies and, therefore, control thereof. The agreement also included deferred payments to CNP in 2017 and 2020, and deferred amounts receivable by the Group in 2017, 2020 and 2023, based on the business plan.

The aforementioned agreement included the execution of a 20-year retail agreement, renewable for five-year periods, for the sale of life and non-life insurance products through the Santander Consumer Finance network, for which the Group will receive commissions at market rates.

This transaction gave rise to the recognition of a gain of EUR 413 million under Gains/(losses) on disposal of assets not classified as non-current assets held for sale (see Note 49), of which EUR 207 million related to the fair value recognition of the 49% ownership interest retained by the Group.

xii. Agreement with GE Capital

On June 23, 2014, the Group announced that Santander Consumer Finance, S.A., the Group’s consumer finance unit, had reached an agreement with GE Money Nordic Holding AB to acquire GE Capital’s business in Sweden, Denmark and Norway for approximately EUR 693 million (SEK 6,408 million). On November 6, 2014, following the receipt of the relevant authorizations, the acquisition was completed.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the business combination date is as follows:

	Millions of euros
Cash and balances with central banks		28
Loans and advances to credit institutions		179
Loans and receivables - Loans and advances to customers (*)		2,099
Intangible assets		22
Other assets		62
Total assets		2,390
Deposits from credit institutions		1,159
Customer deposits		769
Subordinated liabilities		81
Other liabilities		79
Total liabilities		2,088
Net asset value		302
Consideration paid		693
Goodwill		391

(*) In estimating their fair value, the value of the loans was reduced by EUR 75 million.

In 2014 this business contributed EUR 8 million to the Group’s profit. Had the business combination taken place on January 1, 2014, the profit contributed to the Group in 2014 would have been approximately EUR 94 million.

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xiii. Agreement with Banque PSA Finance

The Group, through its subsidiary Santander Consumer Finance, S.A., and Banque PSA Finance, the vehicle financing unit of the PSA Peugeot Citroën Group, entered into an agreement in 2014 for the operation of the vehicle financing business in twelve European countries. Pursuant to the terms of the agreement, the Group will finance this business, under certain circumstances and conditions, from the date on which the transaction is completed. In addition, in certain countries, the Group will purchase a portion of the current lending portfolio of Banque PSA Finance. A cooperation agreement for the insurance business in all these countries is also included.

In January 2015 the related regulatory authorizations to commence activities in France and the United Kingdom were obtained and, accordingly, on February 2, 2015 the Group acquired 50% of Société Financière de Banque - SOFIB and PSA Finance UK Limited for EUR 462 million and EUR 148 million, respectively.

In addition, under the framework agreement, PSA Insurance Europe Limited and PSA Life Insurance Europe Limited (both insurance companies with registered office in Malta) were incorporated on May 1, in which the Group contributed 50% of the share capital, amounting to EUR 23 million. On August 3, the Group acquired a full ownership interest in PSA Gestão - Comércio E Aluguer de Veiculos, S.A. (a company with registered office in Portugal) and the loan portfolio of the Portuguese branch of Banque PSA Finance for EUR 10 million and EUR 25 million, respectively. On October 1, PSA Financial Services Spain, E.F.C., S.A. (a company with registered office in Spain) was incorporated, in which the Group contributed EUR 181 million (50% of the share capital).

In 2015 these businesses contributed EUR 121 million to the Group’s profit. Had the business combination taken place on January 1, 2015, the profit contributed to the Group in 2015 would have been approximately EUR 159 million.

xiv. Carfinco Financial Group

On September 16, 2014, the Bank announced that it had reached an agreement to purchase the listed Canadian company Carfinco Financial Group Inc. (“Carfinco”), a company specializing in vehicle financing.

In order to acquire Carfinco, Santander Holding Canada Inc. was incorporated, a company 96.4% owned by Banco Santander, S.A. and 3.6% owned by certain members of the former management group. On March 6, 2015, all of Carfinco was acquired through the aforementioned holding company for EUR 209 million, giving rise to goodwill of EUR 162 million.

In 2015 this business contributed EUR 6 million to the Group’s profit. Had the business combination taken place on January 1, 2015, the profit contributed to the Group in 2015 would have been approximately EUR 7 million.

xv. Metrovacesa

On December 19, 2012, the creditor entities that had participated in a debt restructuring agreement for the Sanahuja Group, under which they received shares of Metrovacesa, S.A. as dation in payment for that group’s debt, announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and they voted in favor of this at the general meeting held for this purpose on January 29, 2013. Following the approval of the delisting and the public takeover offer at the Metrovacesa, S.A. general meeting, the entities made a delisting public takeover offer of EUR 2.28 per share to the Metrovacesa, S.A. shareholders that had not entered into the agreement. The Group participated in the delisting public takeover offer by acquiring an additional 1.953% of Metrovacesa, S.A. for EUR 44 million.

Following this transaction, at December 31, 2013, the Group held an ownership interest of 36.82% in the share capital of Metrovacesa, S.A.

On December 23, 2014, the Group acquired 19.07% of Metrovacesa, S.A. from Bankia, S.A. for EUR 98.9 million, as a result of which its stake increased to 55.89%, thus obtaining control over this company.

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The detail of the fair values of the identifiable assets acquired and liabilities assumed at the business combination date is as follows:

	Millions of euros
Loans and receivables		256
Tangible assets (*)		3,522
Deferred tax assets		364
Other assets (**)		1,181
Total assets		5,323
Deposits from credit institutions		3,359
Deferred tax liabilities		382
Other liabilities		226
Total liabilities		3,967
Net asset value		1,356
Non-controlling interests		(598	)
Consideration paid plus fair value of the previously held investment		598
Gain on the acquisition		160
Effect of the fair value recognition of the previously held investment on profit or loss		(143	)
Net effect recognized in profit or loss		17

(*) Relating mainly to leased assets recognized at fair value by the acquiree and recognized under Tangible assets - Investment property.

(**) Including mainly Inventories. The estimate of fair value includes gains of EUR 268 million.

The fair value of the investment held was calculated using the fair value of the net assets and liabilities at the acquisition-date.

The measurement at fair value of the investment held prior to the acquisition of control had an adverse effect of EUR 143 million on profit or loss in 2014. Consequently, the aforementioned transaction gave rise to the recognition of a gain of EUR 17 million in the consolidated income statement for 2014.

The results contributed by Metrovacesa, S.A. until December 23, 2014, the date of the business combination, are broken down in Note 41.

Lastly, on September 15, 2015, the Group acquired 13.8% of Metrovacesa, S.A. from Banco Sabadell, S.A. for EUR 253 million, raising its ownership interest to 72.51%, this transaction gave rise to an increase of EUR 18 million in reserves.

xvi. Banco Internacional do Funchal (Banif)

On December 21, 2015, the Group announced that the Bank of Portugal, as the ruling authority, decided to award Banco Santander Totta, S.A., the Portuguese subsidiary of Banco Santander, S.A., the commercial business of BANIF- Banco Internacional do Funchal, S.A. and, accordingly, the businesses and branches of this entity became part of the Group.

The transaction was performed through the transfer of a substantial portion (commercial banking business) of the assets and liabilities of BANIF- Banco Internacional do Funchal, S.A. for which the Group paid EUR 150 million.

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The detail of the provisional fair values of the identifiable assets acquired and liabilities assumed at the business combination date is as follows:

	Millions of euros
Cash and balances with central banks		2,510
Loans and advances to credit institutions		424
Debt instruments		1,824
Loans and advances to customers		5,320
Other assets		218
Total assets		10,296
Deposits from central banks		2,110
Deposits from credit institutions		1,052
Customer deposits		4,430
Marketable debt securities		1,697
Other liabilities		574
Total liabilities		9,863
Net asset value		433
Consideration paid		150
Gain on the acquisition		283

Since the acquisition took place by the end of December 2015, these businesses did not contribute materially to the Group’s profit.

xvii. Custody business

On June 19, 2014, the Group announced that it had reached an agreement with FINESP Holdings II B.V., a subsidiary of Warburg Pincus, to sell a 50% stake in Santander’s custody business in Spain, Mexico and Brazil. The remaining 50% will be retained by the Group. At December 31, 2015, the sale remained subject to the receipt of the relevant regulatory authorizations.

On March 16, 2016, the parties agreed to leave aside the original investment structure and continue to work in good faith until June 30, 2016 on an alternative investment structure that would allow the sale by Santander of the 50% stake referred to above.

xviii. Agreement with UniCredit, Warburg Pincus and General Atlantic

On April 23, 2015, the Group announced that, together with its partners Warburg Pincus and General Atlantic, it had entered into a preliminary and exclusive agreement with UniCredit, subject to the signing of the final agreement, to merge Santander Asset Management and Pioneer Investments.

The agreement provides for the creation of a new company comprising the local asset managers of Santander Asset Management and Pioneer Investments. The Group will have a 33.3% direct stake in the new company, UniCredit another 33.3%, and Warburg Pincus and General Atlantic will share a 33.3% stake. Pioneer Investments’ operations in the United States will not be included in the new company but rather will be owned by UniCredit (50%) and Warburg Pincus and General Atlantic (50%).

On November 11, 2015, the final framework agreement was signed by UniCredit, Santander, Warburg Pincus and General Atlantic for the integration of these businesses in accordance with the aforementioned structure. At present the transactions is scheduled to be completed in 2016 once the preconditions established in the framework agreement have been met and the relevant regulatory authorizations have been obtained.

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c) Off-shore entities

At the reporting date, under current Spanish legislation, the Group had ten subsidiaries resident in off-shore territories, although these territories are not considered to be tax havens as defined by the OECD and the European Commission. Three of these subsidiaries are currently in liquidation and, over the next few years, four more subsidiaries are expected to be liquidated (one issuer and three companies which have reduced activity or are inactive).

Following these planned disposals, the Group would have three substantially inactive off-shore subsidiaries in Jersey and the Isle of Man:

• Abbey National International Limited (Jersey), which is substantially inactive following the transfer in 2015 of most of its business to the Jersey branch of Santander UK plc.

• Whitewick Limited (Jersey), an inactive company.

• ALIL Services Limited (Isle of Man), currently providing substantially reduced services.

The individual results of the three subsidiaries listed above, calculated in accordance with local accounting principles, are shown in the Appendices to these notes to the consolidated financial statements together with other data thereon.

These three subsidiaries contributed a profit of approximately EUR 11 million to the Group’s consolidated profit in 2015.

Also, the Group has five branches: three in the Cayman Islands, one in the Isle of Man and one in Jersey. These branches report to, and consolidate their balance sheets and income statements with, their respective foreign parents.

The aforementioned jurisdictions had 118 employees in total at December 2015.

In 2015 Spain signed information exchange agreements with Jersey, Guernsey and the Isle of Man, which are expected to enter into force in 2016. An agreement is also expected to be signed in the future with the Cayman Islands. All these territories will cease to be tax havens under Spanish law when the aforementioned agreements come into force and, consequently, the Group would no longer have any entities in off-shore territories. In addition, these jurisdictions have successfully passed the evaluations conducted by the Global Forum on Transparency and Exchange of Information for Tax Purposes, and are not considered to be tax havens by the OECD. Furthermore, they are not considered to be off-shore centers by the European Commission.

Also, the Group manages from Brazil a segregated portfolio company called Santander Brazil Global Investment Fund SPC in the Cayman Islands, and manages from the United Kingdom a protected cell company in Guernsey called Guaranteed Investment Products 1 PCC Limited. The Group also has, directly or indirectly, certain financial investments located in tax havens including Olivant Limited in Guernsey.

The Group also has five subsidiaries domiciled in off-shore territories that are not considered to be off-shore entities since they are resident for tax purposes in, and operate exclusively from, the UK (two of these subsidiaries are expected to be liquidated in 2016).

The Group has established appropriate procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputational and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units. The financial statements of the Group’s off-shore units are audited by member firms of Deloitte.

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4. Distribution of the Bank’s profit, shareholder remuneration scheme and earnings per share

a) Distribution of the Bank’s profit and shareholder remuneration scheme

The distribution of the Bank’s net profit for 2015 that the board of directors will propose for approval by the shareholders at the annual general meeting is as follows:

	Millions of euros
First and third interim dividends and final dividend		2,159
Acquisition, with a waiver of exercise, of bonus share rights from the shareholders which, under the Santander Dividendo Elección scrip dividend scheme, opted to receive in cash remuneration equivalent to the second interim dividend		109
		2,268
Of which:
Approved at December 31, 2015 (*)		1,546
Final dividend		722
To voluntary reserves		9
Net profit for the year		2,277

(*) Recognized under Shareholders’ equity - Dividends and remuneration.

In addition to the EUR 2,268 million indicated above, EUR 607 million in shares were allocated to the remuneration of shareholders under the shareholder remuneration scheme (Santander Dividendo Elección) approved by the shareholders at the annual general meeting held on March 27, 2015, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the second interim dividend out of 2015 profit in cash or new shares.

The board of directors will propose to the shareholders at the annual general meeting that remuneration of EUR 0.20 per share be paid for 2015.

b) Earnings per share from continuing and discontinued operations

i. Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Group (adjusted by the after-tax amount of the remuneration of contingently convertible preference shares recognized in equity - see Note 23) by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.

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Accordingly:

	12/31/15			12/31/14			12/31/13
Profit attributable to the Group (millions of euros)		5,966			5,816			4,175
Remuneration of contingently convertible preference shares (millions of euros)		(276	)		(131	)		—
		5,690			5,685			4,175
Of which:
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		—			(26	)		(15	)
Profit from continuing operations (net of non-controlling interests) (millions of euros)		5,690			5,711			4,190
Weighted average number of shares outstanding		14,113,617,450			11,858,689,721			10,836,110,583
Adjusted number of shares		14,113,617,450			11,858,689,721			10,836,110,583
Basic earnings per share (euros)		0.40			0.48			0.39
Basic earnings per share from discontinued operations (euros)		0.00			(0.00	)		(0.00	)
Basic earnings per share from continuing operations (euros)		0.40			0.48			0.39

ii. Diluted earnings per share

Diluted earnings per share are calculated by dividing the net profit attributable to the Group (adjusted by the after-tax amount of the remuneration of contingently convertible preference shares recognized in equity - see Note 23) by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares and adjusted for all the dilutive effects inherent to potential ordinary shares (share options, and convertible debt instruments).

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Accordingly, diluted earnings per share were determined as follows:

	12/31/15			12/31/14			12/31/13
Profit attributable to the Group (millions of euros)		5,966			5,816			4,175
Remuneration of contingently convertible preference shares (millions of euros)		(276	)		(131	)		—
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares		—			—			—
		5,690			5,685			4,175
Of which:
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		—			(26	)		(15	)
Profit from continuing operations (net of non-controlling interests) (millions of euros)		5,690			5,711			4,190
Weighted average number of shares outstanding		14,113,617,450			11,858,689,721			10,836,110,583
Dilutive effect of options/rights on shares		26,779,882			29,829,103			51,722,251
Adjusted number of shares		14,140,397,332			11,888,518,824			10,887,832,834
Diluted earnings per share (euros)		0.40			0.48			0.38
Diluted earnings per share from discontinued operations (euros)		0.00			(0.00	)		(0.00	)
Diluted earnings per share from continuing operations (euros)		0.40			0.48			0.38

5. Remuneration and other benefits paid to the Bank’s directors and senior managers

The following sections of this Note contain qualitative and quantitative disclosures on the remuneration paid to the members of the board of directors -both executive and non-executive directors- and senior managers for 2015 and 2014. These disclosures include the information relating to all the members of the board of directors or senior managers who formed part of these governing bodies in 2015 even if retired at some time during the year.

Following is a summary of the remuneration paid to the Bank’s executive directors and senior managers who formed part of these governing bodies at the end of 2015 and 2014:

	Thousands of euros
	2015		2014
Current executive directors		24,692		22,364
Current senior managers		56,076		81,785
		80,768		104,419	-22.7	%

a) Remuneration of directors

i. Bylaw-stipulated emoluments

The annual general meeting held on March 22, 2013 approved an amendment to the Bylaws, whereby the remuneration of directors in their capacity as board members became an annual fixed amount determined by the annual general meeting. This amount shall remain in effect unless the shareholders resolve to change it at a general meeting. However, the board of directors may elect to reduce the amount in any years in which it deems such action justified. The remuneration established for 2015 by the annual general meeting, as for 2014, was EUR 6 million, with two components: (a) an annual emolument and (b) attendance fees.

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The specific amount payable for the above-mentioned items to each of the directors is determined by the board of directors. For such purpose, it takes into consideration the positions held by each director on the board, their membership of the board and the board committees and their attendance of the meetings thereof, and any other objective circumstances considered by the board.

The total bylaw-stipulated emoluments earned by the directors in 2015 amounted to EUR 5.2 million.

Annual emolument

The amounts received individually by the directors in 2015 and 2014 based on the positions held by them on the board and their membership of the board committees were as follows:

	Euros
	2015		2014
Members of the board of directors		84,954		84,954
Members of the executive committee		170,383		170,383
Members of the audit committee		39,551		39,551
Members of the appointments committee		23,730		23,730
Members of the remuneration committee		23,730		23,730
Members of the risk, regulation and compliance oversight committee		39,551		20,697
Chairman of the appointments committee		50,000		—
Chairman of the remuneration committee		50,000		—
Chairman of the risk, regulation and compliance oversight committee		50,000		26,164
Coordinating director		111,017		—
Non-executive deputy chairmen		28,477		28,477

Attendance fees

The directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.

By resolution of the board of directors, at the proposal of the remuneration committee, the fees for attending board and committee meetings -excluding executive committee meetings, for which no attendance fees have been established- have remained unchanged since 2008.

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Meeting attendance fees	Euros
	2008-2015
Board of directors
Resident directors		2,540
Non-resident directors		2,057
Executive risk committee, audit committee and risk, regulation and compliance oversight committee
Resident directors		1,650
Non-resident directors		1,335
Other committees (except the executive committee)
Resident directors		1,270
Non-resident directors		1,028

ii. Salaries

The executive directors receive salaries. In accordance with the policy approved by the general meeting, salaries are composed of fixed annual remuneration and variable remuneration comprising, in turn, the so-called deferred conditional variable remuneration plan (bonus) and a Long-term incentive (Performance Share Plan or “ILP”) (see Note 47).

The deferred conditional variable remuneration plan (bonus), the fifth cycle of which was approved in 2015, has a payment schedule similar to that of previous cycles (see Note 47). Accordingly, 40% of the bonus is determined at year-end on the basis of the achievement of the targets set, and is paid immediately, while the remaining 60% is deferred over five years (2014: three years), for it to be paid, as the case may be, in five portions (2014: three portions) on the achievement of the conditions stipulated for the payment of each portion. Both the immediate (short-term) and deferred (long-term, conditional) payments are settled 50% in cash and 50% in Santander shares.

The ILP for the executive directors was set in 2015 by the board, at the proposal of the remuneration committee, at a maximum benchmark value of 20% of the bonus (2014: 15%). Based on the maximum benchmark value, at the proposal of the remuneration committee and in view of the Group’s earnings per share and return on tangible equity (ROTE) for 2015 with respect to the budgets, the board of directors determined for each executive director the “Agreed ILP Amount” in euros, which in turn determines, for each executive director, the maximum number of shares that the executive director may, as the case may be, receive; this number was calculated taking into account the market price of the Santander share in the 15 trading sessions prior to January 26, 2016, which was EUR 3.971 per share. The accrual and the amount of this variable remuneration are linked to the achievement of the multiannual targets described in Note 47, and it will be deferred over three years and paid, as the case may be, in early 2019.

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iii. Detail by director

The detail, by Bank director, of the short-term (immediate payment) remuneration for 2015 and 2014 is provided below:

Directors	Thousands of euros
	2015																												2014
	Bylaw-stipulated emoluments																Short-term salaries of executive directors								Other remuneration (a)		Total		Total
	Annual emolument												Attendance fees
	Board		Executive committee		Audit committee		Appointments committee		Remuneration committee		Risk, regulation and compliance oversight committee		Board		Other fees
																	Fixed		Variable - immediate payment				Total
																			In cash		In shares
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Chief executive officer of Santander UK		—		—		—		—		—		—		—		—		—		—		—		—		—		—		3,010
Chair		85		170		—		—		—		—		53		—		2,500		840		840		4,180		396		4,884		1,453
Mr. José Antonio Álvarez Álvarez (1)		85		170		—		—		—		—		48		38		2,000		558		558		3,116		1,468		4,925		—
Mr. Rodrigo Echenique Gordillo (2)		85		170		—		—		—		—		51		88		1,500		414		414		2,328		26		2,748		526
Mr. Matías Rodríguez Inciarte		85		170		—		—		—		—		53		132		1,710		573		573		2,856		169		3,465		3,484
Mr. Guillermo de la Dehesa Romero		113		170		—		24		24		40		53		49		—		—		—		—		—		473		436
Mr. Bruce Carnegie-Brown (3)		374		170		—		24		24		40		35		33		—		—		—		—		—		700		—
Mr. Ignacio Benjumea Cabeza de Vaca (4)		24		47		—		7		7		10		10		32		—		—		—		—		242		379		—
Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea (5)		85		—		—		—		—		—		35		—		—		—		—		—		—		120		110
Ms. Sol Daurella Comadrán (6)		85		—		—		24		24		—		38		11		—		—		—		—		—		183		—
Mr. Carlos Fernández González (7)		85		—		40		24		—		40		31		34		—		—		—		—		—		254		—
Ms. Esther Giménez-Salinas i Colomer		85		—		—		—		—		—		48		—		—		—		—		—		—		133		121
Mr. Ángel Jado Becerro de Bengoa		85		—		40		24		24		40		53		161		—		—		—		—		—		427		152
Ms. Belén Romana García (8)		2		—		1		—		—		—		2				—		—		—		—		—		5		—
Ms. Isabel Tocino Biscarolasaga		85		170		40		—		24		40		53		178		—		—		—		—		—		590		485
Mr. Juan Miguel Villar Mir		85		—		40		—		—		40		48		33		—		—		—		—		—		246		105
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos (9)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		1,129
Mr. Fernando de Asúa Álvarez (10)		43		20		5		3		3		5		10		27		—		—		—		—		—		116		645
Ms. Sheila Bair (11)		64		—		—		—		—		30		31		12		—		—		—		—		—		137		129
Mr. Vittorio Corbo Lioi (12)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		56
Mr. Javier Marín Romano (13)		3		6		—		—		—		—		—		—		165		—		—		165		47		221		3,934
Mr. Abel Matutes Juan (14)		11		—		5		3		—		—		8		5		—		—		—		—		—		32		183
Mr. Juan Rodríguez Inciarte (15)		42		—		—		—		—		—		38		61		600		220		220		1,040		153		1,334		2,484
Total 2015		1,612		1,266		169		131		128		282		701		894		8,475		2,605		2,605		13,685		2,501		21,372		—
Of which: Current directors		1,448		1,240		159		125		125		247		614		789		7,710		2,385		2,385		12,480		2,301		19,532		—
Total 2014		1,347		1,310		131		57		57		18		484		873		8,065		2,564		2,564		13,193		884		—		18,354

(1) Appointed chief executive officer effective from January 13, 2015. Remuneration as executive vice president in 2014 is included in Note 5.g.

(2) Executive director since January 16, 2015.

(3) Appointed director effective from February 12, 2015.

(4) Appointed director effective from September 21, 2015. Remuneration as executive vice president received prior to this date is included in Note 5.g.

(5) All the amounts received were repaid to the Fundación Marcelino Botín.

(6) Appointed director effective from February 18, 2015.

(7) Appointed director effective from February 12, 2015.

(8) Appointed director effective from December 22, 2015.

(9) Ceased to be a member of the board due to his death on September 9, 2014.

(10) Ceased to be a director on February 12, 2015.

(11) Ceased to be a member of the board on October 1, 2015.

(12) Ceased to be a member of the board on July 24, 2014.

(13) Ceased to be a member of the board and chief executive officer on January 12, 2015.

(14) Ceased to be a member of the board on February 18, 2015.

(15) Ceased to be a member of the board on June 30, 2015. Salary remuneration between this date and removal from office as executive vice president (January 1, 2016) is included in Note 5.g.

(a) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

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Following is the detail, by executive director, of the deferred (i.e. long-term) salaries, which will only be received if the conditions of continued service, non-applicability of “malus” clauses and, in the case of the ILP, full achievement of the objectives established (or, as the case may be, of the minimum thresholds thereof, with the consequent reduction of the agreed-upon amount of the ILP) in the terms described in Note 47.

	Thousands of euros
	2015								2014
	Long-term salaries						Total		Total
	Variable - Deferred payment (1)				ILP (2)
	In cash		In shares
Ms. Ana Botín-Sanz de Sautuola y O’Shea
Chief executive officer of Santander UK		—		—		—		—		1,468
Chair		1,260		1,260		512		3,032		930
Mr. José Antonio Álvarez Álvarez		838		838		346		2,022		—
Mr. Rodrigo Echenique Gordillo		620		620		256		1,496		—
Mr. Matías Rodríguez Inciarte		860		860		400		2,120		1,890
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—		—		—		—
Mr. Javier Marín Romano		—		—		—		—		2,527
Mr. Juan Rodríguez Inciarte (3)		330		330		141		801		1,454
Total 2015		3,908		3,908		1,655		9,471		—
Total 2014		3,846		3,846		577		—		8,269

(1) The maximum amount receivable in a total of five years: 2017, 2018, 2019, 2020 and 2021 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) The estimated fair value at the plan grant date, taking into account various possible scenarios regarding the performance of the various plan variables in the measurement periods (see Note 47).

(3) Ceased to be a member of the board on June 30, 2015 and executive vice president on January 1, 2016. Long-term salary remuneration between this date and removal from office as executive vice president (January 1, 2016) is included in Note 5.g.

Note 5.e) below includes disclosures on the shares delivered by virtue of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the corresponding years, and on the maximum number of shares receivable in future years in connection with the aforementioned 2015 and 2014 variable remuneration plans.

b) Remuneration of the board members as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake, paid by those companies and relating to appointments made on or after March 18, 2002, accrues to the Group. In 2015 and 2014 the Bank’s directors did not receive any remuneration in respect of these representative duties.

Mr. Matías Rodríguez Inciarte received EUR 42 thousand as non-executive director of U.C.I., S.A. in 2015 and 2014.

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c) Post-employment and other long-term benefits

In 2012, within the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans, the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. This system grants the executive directors the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ at the time, based on the contributions made to the aforementioned system, and replaced the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made as described below¹. In the event of pre-retirement, the executive directors who have not exercised the option to receive their pensions in the form of a lump sum are entitled to receive an annual emolument until the date of retirement.

The initial balance for each executive director in the new defined-contribution welfare system was that corresponding to the market value of the assets in which the provisions for the respective accrued obligations had been invested, at the date on which the former pension obligations were converted into the new welfare system².

Since 2013 the Bank has made annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their respective pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions are made for the executive directors and senior executives who, prior to the conversion of the defined-benefit pension obligations into the current defined-contribution employee welfare system, had exercised the option to receive their pension rights in a lump sum³.

The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the withholding tax on shares arising from such remuneration.

In 2015, as a result of his appointment as chief executive officer, changes were introduced to the contract of Mr. José Antonio Álvarez Álvarez with respect to the pension obligations stipulated in his senior management contract. The annual contribution to the employee welfare system was thereafter calculated as 55% of the sum of: (i) the fixed annual remuneration; and (ii) 30% of the arithmetic mean of the last three gross amounts of variable remuneration. The pensionable base in the event of death or disability is 100% of his fixed remuneration. Under his senior management contract the annual contribution was 55.93% of his fixed remuneration, and the pensionable base in the event of death or disability was 100% of his fixed remuneration.

¹  As provided for in the contracts of the executive directors and members of senior management prior to their modification, Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr. Matías Rodríguez Inciarte had exercised the option to receive the accrued pensions -or amounts similar thereto- in the form of a lump sum -i.e. in a single payment-, which meant that no further pension benefit would accrue to them from that time, and the lump sum to be received, which would be updated at the agreed-upon interest rate, was fixed.

²  In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr. Matías Rodríguez Inciarte, the initial balance corresponded to the amounts that were set when, as described above, they exercised the option to receive a lump sum, and includes the interest accrued on these amounts from that date.

³  Mr. Rodrigo Echenique Gordillo, appointed executive director on 16 January 2015, does not participate in the welfare system and is not entitled to have any contributions made in his favour by the Bank in this connection, notwithstanding the pension rights to which he was entitled prior to his appointment as executive director.

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Following is a detail of the balances relating to each of the executive directors under the welfare system at December 31, 2015 and 2014:

	Thousands of euros
	2015			2014
Ms. Ana Botín-Sanz de Sautuola y O’Shea (1)		41,291			40,134
Mr. José Antonio Álvarez Álvarez (2)		14,167			—
Mr. Rodrigo Echenique Gordillo		14,623			14,946	(3)
Mr. Matías Rodríguez Inciarte		47,745			47,255
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—			—	(4)
Mr. Javier Marín Romano (5)		—			4,523
Mr. Juan Rodríguez Inciarte		—	(6)		13,730
		117,826			120,588

(1) Includes the amounts relating to the period of provision of services at Banesto, externalized with another insurance company.

(2) Member of the board and chief executive officer of the Bank effective from January 13, 2015.

(3) Executive director since January 16, 2015. The amount at December 31, 2014, which reflects the amount to which he was entitled as a director of the Bank, is included for comparison purposes.

(4) Following his death on September 9, 2014, a death benefit of the amount of the accumulated rights (EUR 26,498 thousand) was payable to the beneficiaries designated in the policy arranged under the welfare system.

(5) Ceased to be a director on January 12, 2015 and took voluntary pre-retirement, as provided for in his contract; he opted to receive the annual pre-retirement emoluments to which he was entitled (EUR 800 thousand gross) in a single payment (EUR 10,861 thousand gross). As stipulated in his contract, the Bank will make annual contributions to the welfare system, amounting to 55% of this director’s annual emolument during the pre-retirement period, and Mr. Marín will be entitled to receive, at the time of his retirement, the retirement benefit recognized in the welfare system, equal to the amount of the balance accumulated in the system corresponding to him at that time. The balance accrued at December 31, 2015 amounted to EUR 4,869 thousand and the Bank had recognized a provision of EUR 6,336 thousand in relation to future contributions. As regards the deferred variable remuneration corresponding to Mr. Marín in relation to years prior to his pre-retirement, the scheme described in the relevant sections of this report shall apply, and Mr. Marín will receive this remuneration, if appropriate, on the dates envisaged in the corresponding plans, subject to the stipulated conditions for its accrual being met.

(6) Ceased to be a director on June 30, 2015 and executive vice president on January 1, 2016, and retained his pension rights, amounting to EUR 14,188 thousand at December 31, 2015.

The Group also has pension obligations to other directors amounting to EUR 2.4 million (December 31, 2014: EUR 3 million). The payments made in 2015 to the members of the board entitled to post-employment benefits amounted to EUR 1.2 million (2014: EUR 1.2 million).

Lastly, the contracts of the executive directors who had not exercised the option referred to above prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingency of death (surviving spouse and child benefits) and permanent disability of serving directors.

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The provisions recognized in 2015 and 2014 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability) were as follows:

	Thousands of euros
	2015		2014
Ms. Ana Botín-Sanz de Sautuola y O’Shea		2,302		2,140
Mr. José Antonio Álvarez Álvarez		2,677		—
Mr. Rodrigo Echenique Gordillo		—		—
Mr. Matías Rodríguez Inciarte		—		—
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—
Mr. Javier Marín Romano		484		2,126
Mr. Juan Rodríguez Inciarte		849		718
		6,312		4,984

d) Insurance

The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii above. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Insured sum (Thousands of euros)
	2015		2014
Ms. Ana Botín-Sanz de Sautuola y O’Shea		7,500		7,500
Mr. José Antonio Álvarez Álvarez		6,000		—
Mr. Rodrigo Echenique Gordillo		1,385		—
Mr. Matías Rodríguez Inciarte		5,131		5,131
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—
Mr. Javier Marín Romano		2,400		2,400
Mr. Juan Rodríguez Inciarte		3,600		2,961
		26,016		17,992

Additionally, at December 31, 2014, other directors had life insurance policies the cost of which was borne by the Group, the related insured sum being EUR 1.4 million; at December 31, 2015, there were no obligations in this connection.

e) Deferred variable remuneration systems

Following is information on the maximum number of shares to which the executive directors are entitled at the beginning and end of 2014 and 2015 due to their participation in the deferred variable remuneration systems, which instrumented a portion of their variable remuneration relating to 2015 and prior years, as well as on the deliveries, whether shares or cash, made to them in 2014 and 2015 where the conditions for the receipt thereof had been met (see Note 47):

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i) Deferred conditional delivery share plan

The 2010 variable remuneration of the executive directors and certain Group executives or employees was approved at the time by the board of directors through the instrumentation of the first cycle of the deferred conditional delivery share plan, whereby a portion of the aforementioned variable remuneration or bonus was deferred over a period of three years for it to be paid, where appropriate, in Santander shares.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

The share-based bonus was deferred over three years and would be paid, where appropriate, in three instalments starting in the first year. The shares relating to the third were delivered in February 2014, once the conditions for the receipt thereof were met, and the plan was therefore settled:

	Number of shares delivered in 2014 (3rd third)
Ms. Ana Botín-Sanz de Sautuola y O’Shea (1)		19,240
Mr. Matías Rodríguez Inciarte		45,063
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		31,448
Mr. Javier Marín Romano		12,583
Mr. Juan Rodríguez Inciarte		20,462

(1) Shares of Banesto, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011. Following the merger of Banesto with the Bank, 19,240 shares of the Bank were delivered in 2014, equal to the 30,395 shares of Banesto authorized by the annual general meeting.

ii) Deferred conditional variable remuneration plan

Since 2011, the bonuses of executive directors and certain executives (including senior management) and employees who assume risk, who perform control functions or receive an overall remuneration that puts them on the same remuneration level as senior executives and employees who assume risk (all of whom are referred to as identified staff) have been approved by the board of directors and instrumented, respectively, through various cycles of the deferred conditional variable remuneration plan. Application of these cycles, insofar as they entail the delivery of shares to the plan beneficiaries, was authorized by the related annual general meetings.

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The purpose of these plans is to defer a portion of the bonus of the plan beneficiaries (60% in the case of executive directors) over a period of five years (three years for the plans approved up to 2014) for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the bonus is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

In addition to the requirement that the beneficiary remains in Santander Group’s employ, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee- in relation to the corresponding year in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or its risk profile. All the foregoing shall in each case be governed by the rules of the relevant plan cycle.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid for the amount deferred in shares and the interest on the amount deferred in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights corresponding to those shares.

The maximum number of shares to be delivered is calculated taking into account the daily volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for each year.

The table below shows the number of Santander shares assigned to each executive director and not yet delivered at January 1, 2014, December 31, 2014 and December 31, 2015, and the gross shares delivered to them in 2014 and 2015, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the remuneration committee, that the third relating to each plan had accrued. The shares resulted from each of the plans which instrumented the variable remuneration of 2011, 2012, 2013, 2014 and 2015, as shown in the following table:

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Share-based variable remuneration	Maximum number of shares to be delivered at January 1, 2014		Shares delivered in 2014 (immediate payment 2013 variable remuneration)			Shares delivered in 2014 (deferred payment 2012 variable remuneration)			Shares delivered in 2014 (deferred payment 2011 variable remuneration)			Variable remuneration 2014 (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2014			Shares delivered in 2015 (immediate payment 2014 variable remuneration)			Shares delivered in 2015 (deferred payment 2013 variable remuneration)			Shares delivered in 2015 (deferred payment 2012 variable remuneration)			Shares delivered in 2015 (deferred payment 2011 variable remuneration)			Variable remuneration 2015 (maximum number of shares to be delivered) (1)		Maximum number of shares to be delivered at December 31, 2015 (4)
2011 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea		94,001		—			—			(47,001	)		—		47,000			—			—			—			(47,000	)		—		—
Mr. José Antonio Álvarez Álvarez		—		—			—			—			—		32,038	(3)		—			—			—			(32,038	)		—		—
Mr. Matías Rodríguez Inciarte		125,756		—			—			(62,878	)		—		62,878			—			—			—			(62,878	)		—		—
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		99,551		—			—			(49,776	)		—		49,775	(2)		—			—			—			(49,775	)		—		—
Mr. Javier Marín Romano		51,921		—			—			(25,961	)		—		25,960			—			—			—			(25,960	)		—		—
Mr. Juan Rodríguez Inciarte		73,380		—			—			(36,690	)		—		36,690			—			—			—			(36,690	)		—		—
		444,609		—			—			(222,306	)		—		254,341			—			—			—			(254,341	)		—		—
2012 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea		104,874		—			(34,958	)		—			—		69,916			—			—			(34,958	)		—			—		34,958
Mr. José Antonio Álvarez Álvarez		—		—			—			—			—		48,093	(3)		—			—			(24,047	)		—			—		24,046
Mr. Matías Rodríguez Inciarte		124,589		—			(41,530	)		—			—		83,059			—			—			(41,530	)		—			—		41,529
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		65,927		—			(21,976	)		—			—		43,951	(2)		—			—			(21,976	)		—			—		21,975	(2)
Mr. Javier Marín Romano		58,454		—			(19,485	)		—			—		38,969			—			—			(19,485	)		—			—		19,484
Mr. Juan Rodríguez Inciarte		72,699		—			(24,233	)		—			—		48,466			—			—			(24,233	)		—			—		24,233
		426,543		—			(142,182	)		—			—		332,454			—			—			(166,229	)		—			—		166,225
2013 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea		165,603		(66,241	)		—			—			—		99,362			—			(33,121	)		—			—			—		66,241
Mr. José Antonio Álvarez Álvarez		—		—			—			—			—		58,681	(3)		—			(19,560	)		—			—			—		39,121
Mr. Matías Rodríguez Inciarte		172,731		(69,092	)		—			—			—		103,639			—			(34,546	)		—			—			—		69,093
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		105,718		(42,287	)		—			—			—		63,431	(2)		—			(21,144	)		—			—			—		42,287	(2)
Mr. Javier Marín Romano		187,125		(74,850	)		—			—			—		112,275			—			(37,425	)		—			—			—		74,850
Mr. Juan Rodríguez Inciarte		110,747		(44,299	)		—			—			—		66,448			—			(22,149	)		—			—			—		44,299
		741,924		(296,769	)		—			—			—		503,836			—			(167,945	)		—			—			—		335,891
2014 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea		—		—			—			—			304,073		304,073			(121,629	)		—			—			—			—		182,444
Mr. José Antonio Álvarez Álvarez		—		—			—			—			—		157,452	(3)		(78,726	)		—			—			—			—		78,726
Mr. Matías Rodríguez Inciarte		—		—			—			—			231,814		231,814			(92,726	)		—			—			—			—		139,088
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—			—			—			—		—			—			—			—			—			—		—
Mr. Javier Marín Romano		—		—			—			—			320,563		320,563			(128,225	)		—			—			—			—		192,338
Mr. Juan Rodríguez Inciarte		—		—			—			—			179,680		179,680			(71,872	)		—			—			—			—		107,808
		—		—			—			—			1,036,130		1,193,582			(493,178	)		—			—			—			—		700,404
2015 variable remuneration
Ms. Ana Botín-Sanz Sautuola y O’Shea		—		—			—			—			—		—			—			—			—			—			528,834		528,834
Mr. José Antonio Álvarez Álvarez		—		—			—			—			—		—			—			—			—			—			351,523		351,523
Mr. Rodrigo Echenique Gordillo		—		—			—			—			—		—			—			—			—			—			260,388		260,388
Mr. Matías Rodríguez Inciarte		—		—			—			—			—		—			—			—			—			—			361,118		361,118
Mr. Juan Rodríguez Inciarte		—		—			—			—			—		—			—			—			—			—			138,505		138.505	(5)
																														1,640,368		1,640,368

(1) 40% of the shares indicated, for each director, relates to short-term (immediate payment) variable remuneration. The remaining 60% is deferred and will be delivered, where appropriate, in fifths over the following five years.

(2) The amounts corresponding to his participation in these plans accrue to his heirs in accordance with the plan regulations.

(3) Maximum number of shares corresponding to his participation in the related plans when he was an executive vice president.

(4) Also, Mr. Ignacio Benjumea Cabeza de Vaca is entitled to a maximum of 582,237 shares corresponding to his participation in the related plans when he was an executive vice president.

(5) Ceased to be a member of the board on June 30, 2015. The shares relating to his variable remuneration between this date and removal from office as executive vice president (January 1, 2016) are included in Note 5.g.

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Also, the table below shows the cash paid in 2015 and 2014, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the recommendation of the remuneration committee that the third relating to each plan had accrued:

	Thousands of euros
	2015					2014
	Cash paid (immediate payment 2014 variable remuneration)		Cash paid (third of deferred payment 2013, 2012 and 2011 variable remuneration)			Cash paid (immediate payment 2013 variable remuneration)		Cash paid (third of deferred payment 2012 and 2011 variable remuneration)
Ms. Ana Botín-Sanz de Sautuola y O’Shea		801		829			466		513
Mr. José Antonio Álvarez Álvarez (1)		487		468			—		—
Mr. Rodrigo Echenique Gordillo		—		—			—		—
Mr. Matías Rodríguez Inciarte		574		855			462		624
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—	(2)		282		423
Mr. Javier Marín Romano		793		522			500		272
Mr. Juan Rodríguez Inciarte		445		512			296		364
		3,100		3,186			2,005		2,197

(1) Appointed chief executive officer effective from January 13, 2015.

(2) The amounts corresponding to his participation in these plans were paid to his heirs in accordance with the plan regulations.

iii) Performance share plan (ILP)

The table below shows the maximum number of shares to which the executive directors are entitled, as part of their variable remuneration for 2015 and 2014, as a result of their participation in the ILP (see Note 47).

	Maximum number of shares
	2015			2014
Ms. Ana Botín-Sanz de Sautuola y O’Shea		184,337			62,395
Mr. José Antonio Álvarez Álvarez		124,427			48,982	(1)
Mr. Rodrigo Echenique Gordillo		92,168			—
Mr. Matías Rodríguez Inciarte		143,782			75,655
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—			—
Mr. Javier Marín Romano		—			65,470
Mr. Juan Rodríguez Inciarte		50,693	(2)		53,346
Total		595,407			305,848

(1) Relates to the maximum number of shares assigned to him as executive vice president.

(2) Ceased to be a member of the board on June 30, 2015. The shares relating to his variable remuneration between this date and removal from office as executive vice president (January 1, 2016) are included in Note 5.g.

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The accrual of the ILP and its amount are conditional on the performance of certain metrics of Banco Santander over a multiannual period (2015 to 2017 for the 2015 ILP, and 2014 to 2017 for the 2014 ILP). Accordingly, the amount to be received, as the case may be, by each executive director in relation to the 2015 ILP (the Accrued ILP Amount) will be determinable after the end of 2017. In the case of the 2014 ILP, the annual amount which, as the case may be, accrues to each executive director will be determined after the end of 2015, 2016 and 2017 by applying to one third of the Agreed ILP Amount the percentage resulting from the corresponding metrics (see Note 47). If the metrics are not achieved, the amount to be received could be zero.

The shares to be delivered in 2019 (in respect of the 2015 ILP) or on each ILP payment date (for the 2014 ILP) based on compliance with the related multiannual target are conditional, in addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee-, during the period prior to the delivery, as a result of actions performed in the year to which the plan relates: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

iv) Information on former members of the board of directors

Following is information on the maximum number of shares to which former members of the board of directors who ceased in office prior to January 1, 2014 are entitled for their participation in the various deferred variable remuneration systems, which instrumented a portion of their variable remuneration relating to the years in which they were executive directors. Also set forth below is information on the deliveries, whether shares or cash, made in 2015 and 2014 to former board members, upon achievement of the conditions for the receipt thereof (see Note 47):

Maximum number of shares to be delivered	12/31/15		12/31/14
Deferred conditional variable remuneration plan (2011)		—		189,181
Deferred conditional variable remuneration plan (2012)		54,607		109,212

Number of shares delivered	2015		2014
Deferred conditional delivery plan (2010)		—		155,810
Deferred conditional variable remuneration plan (2011)		189,181		189,181
Deferred conditional variable remuneration plan (2012)		54,605		54,605

In addition, EUR 1,424 thousand relating to the deferred portion payable in cash on the aforementioned plans were paid each in 2015 and 2014.

f) Loans

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on terms equivalent to those that prevail in arm’s-length transactions or the related compensation in kind was recognized:

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	Thousands of euros
	2015						2014
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Ms. Ana Botín-Sanz de Sautuola y O’Shea		46		—		46		—		—		—
Mr. José Antonio Álvarez		11		—		11		—		—		—
Mr. Matías Rodríguez Inciarte		13		—		13		8		—		8
Mr. Rodrigo Echenique Gordillo		24		—		24		317		—		317
Mr. Javier Botín-Sanz de Sautuola y O’Shea		6		—		6		18		—		18
Mr. Ángel Jado Becerro de Bengoa		2		—		2		1		—		1
Ms. Isabel Tocino Biscarolasaga		—		—		—		7		—		7
Mr. Javier Marín Romano		—		—		—		723		—		723
Mr. Juan Rodríguez Inciarte		—		—		—		4,182		—		4,182
		102		—		102		5,255		—		5,255

(1) Ceased to be a member of the board and executive vice president on January 12, 2015.

(2) Ceased to be a member of the board on June 30, 2015 and executive vice president on January 1, 2016. Positions held at the Group are included in Note 53.

g) Senior managers

In 2015 the Bank’s board of directors approved a series of appointments and organizational changes aimed at simplifying the Group’s organization and rendering it more competitive.

The table below includes the amounts relating to the short-term remuneration of the members of senior management at December 31, 2015 and 2014, excluding the remuneration of the executive directors, which is detailed above:

			Thousands of euros
	Number of persons		Short-term salaries						Other remuneration (1)			Total
			Fixed		Variable remuneration (bonus) - Immediate payment
					In cash		In shares (2)
2015		21		17,838		6,865		6,865		5,016			36,584
2014		25		24,772		9,259		9,259		12,729	(3)		56,019

(1) Includes other remuneration items such as life insurance premiums totaling EUR 1,309 thousand (2014: EUR 1,290 thousand).

(2) The amount of the immediate payment in shares for 2015 relates to 1,726,893 Santander shares (2014: 1,514,738 Santander shares and 148,631 Banco Santander (Brasil) S.A. shares).

(3) Includes USD 6.9 million were paid in relation to the extraordinary taxation in the United States due to the transformation of the pension plans of Banco Santander, S.A.

Also, the detail of the deferred (i.e. long-term) salaries of the members of senior management at December 31, 2015 and 2014 is provided below. These remuneration payments shall be received, as the case may be, in the corresponding deferral periods upon achievement of the conditions stipulated for each payment (see Note 47).

			Thousands of euros
	Number of persons		Long-term salaries						Total
			Variable remuneration - Deferred payment (1)				ILP (2)
			In cash		In shares
2015		21		7,880		7,880		3,732		19,492
2014		25		11,751		11,751		2,264		25,766

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(1) Relates to the fifth and fourth cycles of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2015 and 2014 will be deferred over five or three years and three years, respectively, for it to be paid, where appropriate, in five or three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met.

(2) Relates to the estimated fair value of the ILP. The accrual and amount of the ILP are subject, inter alia, to achievement of the multiannual targets envisaged in the plan. Any ILP payments will be received in full in shares and deferred in 2019 -in the case of the second cycle approved in 2015, or in thirds in the case of the first cycle approved in 2014-.

Also, executive vice presidents who retired in 2015 and, therefore, were not members of senior management at year-end, received in 2015 salaries and other remuneration relating to their retirement amounting to EUR 17,803 thousand (EUR 3,349 thousand for those who retired in 2014), and remained entitled to long-term salary remuneration of EUR 7,123 thousand (EUR 1,342 thousand for those who retired in 2014).

Following is a detail of the maximum number of Santander shares that the members of senior management at each plan grant date (excluding executive directors) were entitled to receive at December 31, 2015 and 2014 relating to the deferred portion under the various plans then in force (see Note 47):

Maximum number of shares to be delivered	12/31/15		12/31/14
Deferred conditional variable remuneration plan (2011)		—		637,995
Deferred conditional variable remuneration plan (2012)		447,214		1,014,196
Deferred conditional variable remuneration plan (2013) (1)		852,898		1,412,164
Deferred conditional variable remuneration plan (2014) (2)		1,802,779		1,857,841
Deferred conditional variable remuneration plan (2015) (3)		2,480,849		—
ILP (2014)		1,025,853		1,008,398
ILP (2015)		1,798,395		—
(1)    Also, they were entitled to a maximum of 111,962 Banco Santander (Brasil) S.A. shares at December 31, 2015. (2)    In addition, at December 31, 2015 and 2014 they were entitled to a maximum of 222,946 Banco Santander (Brasil) S.A. shares (the maximum number of shares corresponding to the deferred portion of the 2014 bonus). (3)    Also, they were entitled to a maximum of 252,503 Banco Santander (Brasil) S.A. shares at December 31, 2015.

In 2015 and 2014, since the conditions established in the corresponding deferred share-based remuneration schemes for prior years had been met, in addition to the payment of the related cash amounts, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2015		2014
Deferred conditional delivery plan (2010)		—		365,487
Deferred conditional variable remuneration plan (2011)		550,064		637,996
Deferred conditional variable remuneration plan (2012)		447,212		507,098
Deferred conditional variable remuneration plan (2013)		426,449		—

As indicated in Note 5.c above, in 2012 the contracts of the members of the Bank’s senior management which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. The new system grants the senior executives the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaces the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the previous system into the new

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employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c are entitled to an annual emolument until the date of retirement.

The senior executives’ beginning balance under the new employee welfare system amounted to EUR 287 million. This balance reflects the market value, at the date of conversion of the former pension obligations into the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested. The balance at December 31, 2015 amounted to EUR 250 million (December 31, 2014: EUR 296 million).

The contracts of the senior executives who had not exercised the option referred to in Note 5.c) prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingencies of death (surviving spouse and child benefits) and permanent disability of serving executives.

In 2015 the number of executive vice presidents was reduced: two of them requested payment of the pensions to which they were entitled in a lump sum amounting to EUR 53.2 million, and an additional three took voluntary pre-retirement and opted to receive the annual pre-retirement emoluments to which they were entitled in a single payment amounting to EUR 21.5 million.

Additionally, the total sum insured under life and accident insurance policies relating to this group of employees amounted to EUR 76.8 million at December 31, 2015 (December 31, 2014: EUR 154 million).

Lastly, the net charge to profit or loss amounted to EUR 21 million in 2015 (2014: EUR 20 million).

h) Post-employment benefits to former directors and former executive vice presidents

The post-employment benefits and settlements paid in 2015 to former directors of the Bank, other than those detailed in Note 5.c and below⁴, amounted to EUR 8.5 million (2014: EUR 8.9 million). Also, the post-employment benefits and settlements paid in 2015 to former executive vice presidents amounted to EUR 10.2 million (2014: EUR 37.2 million).

In 2015 a period provision of EUR 250 thousand was recognized in the consolidated income statement in connection with the Group’s pension and similar obligations to former directors of the Bank (including insurance premiums for supplementary surviving spouse/child and permanent disability benefits), and a period provision of EUR 424 thousand was also recognized in relation to former executive vice presidents (2014: a period provision of EUR 250 thousand was recognized and EUR 3,272 thousand were released, respectively).

In addition, Provisions - Provision for pensions and similar obligations in the consolidated balance sheet as at December 31, 2015 included EUR 89 million in respect of the post-employment benefit obligations to former directors of the Bank (December 31, 2014: EUR 91 million) and EUR 121 million corresponding to former executive vice presidents (2014: EUR 114 million).

⁴  In January 2013, upon his retirement, Mr. Francisco Luzón López requested payment of the pensions to which he was entitled in a lump sum (EUR 65.4 million gross). For such purpose, his pension rights were settled, in accordance with the applicable contractual and legal terms, through: i) the payment in cash of EUR 21.1 million relating to the net amount of the pension calculated taking into account the fixed remuneration and the bylaw-stipulated emoluments, and EUR 7.1 million relating to the net amount of the pension calculated taking into account the accrued variable remuneration at the retirement date, ii) the investment by Mr. Luzón of those EUR 7.1 million in Santander shares (1,144,110 shares), which shall be deposited on a restricted basis until 23 January 2017, and iii) the investment by the Bank of the gross remaining amount of the pension (EUR 6.6 million), calculated taking into account the unaccrued variable remuneration, in Santander shares (1,061,602 shares), which remained pending delivery to Mr. Luzón (subject to the same restriction period mentioned above and net of tax) depending on whether or not the variable remuneration giving rise to them finally accrued to him. Of these 1,061,602 shares, on the accrual of the variable remuneration giving rise to them, 800,296 shares were delivered to Mr. Luzón in January 2014 (January 2015: 261,306 shares), and they have been deposited on a restricted basis until 23 January 2017.

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i) Pre-retirement and retirement

The following executive directors will be entitled to take pre-retirement in the event of termination, if they have not yet reached the age of retirement, on the terms indicated below:

Ms. Ana Botín-Sanz de Sautuola y O’Shea will be entitled to take pre-retirement in the event of termination for reasons other than breach or resignation. In such case, she will be entitled to an annual emolument equivalent to her fixed remuneration plus 30% of the average of her latest amounts of variable remuneration, up to a maximum of three. This emolument would be reduced by up to 20% in the event of voluntary retirement before the age of 60.

If Ms. Ana Botín-Sanz de Sautuola y O’Shea takes pre-retirement, she has the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

Mr. José Antonio Álvarez Álvarez will be entitled to take pre-retirement in the event of termination for reasons other than his own free will or breach. In such case, he will be entitled to an annual emolument equivalent to the fixed remuneration corresponding to him as executive vice president.

If Mr. José Antonio Álvarez Álvarez takes pre-retirement, he has the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

For his part, Mr. Matías Rodríguez Inciarte may take retirement at any time and, therefore, claim from the insurer the benefits corresponding to him under the externalized employee welfare system described in Note 5.c above, with no obligation whatsoever being incumbent upon the Bank in such circumstance.

j) Contract termination

The executive directors and senior executives have indefinite-term employment contracts. Executive directors or senior executives whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the Bank terminates the contract for any other reason, they will be entitled to the corresponding legally-stipulated termination benefit.

However, should Mr. Rodrigo Echenique Gordillo’s contract be terminated prior to January 1, 2018, unless it is terminated voluntarily or due to his death, permanent disability, or serious breach of his duties, he shall be entitled to receive compensation of twice his fixed salary.

If the Bank were to terminate her contract, Ms. Ana Botín-Sanz de Sautuola y O’Shea would have to remain at the Bank’s disposal for a period of four months in order to ensure an adequate transition, and would receive her fixed salary during that period.

Other non-director members of the Group’s senior management, other than those whose contracts were amended in 2012 as indicated above, have contracts which entitle them, in certain circumstances, to an extraordinary contribution to their welfare system in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a staff cost only when the employment relationship between the Bank and its executives is terminated before the normal retirement date.

k) Information on investments held by the directors in other companies and conflicts of interest

None of the members of the board of directors or persons related to them perform, as independent professionals or as employees, activities that involve effective competition, be it present or potential, with the activities of Banco Santander, S.A., or that, in any other way, place the directors in an ongoing conflict with the interests of Banco Santander, S.A.

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Without prejudice to the foregoing, following is a detail of the declarations by the directors with respect to their equity interests in companies whose object is banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat.

Director	Corporate name	Number of shares		Functions
Ms. Ana Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		6,050,000	—
	SAM Investment Holdings Limited		—	Director (1)
	Santander UK Group Holdings Limited		—	Director (1)
	Santander UK plc		—	Director (1)
Mr. José Antonio Álvarez Álvarez	Banco Santander (Brasil) S.A.		—	Director (1)
	SAM Investment Holdings Limited		—	Director (1)
Mr. Rodrigo Echenique Gordillo	Wells Fargo & Co.		2,250	—
	Bank of America Corporation		6,000	—
	Grupo Financiero Santander México, S.A.B. de C.V.		—	Director (1)
	Santander Vivienda, S.A. de C.V. SOFOM, E.R. Grupo Financiero Santander México		—	Director (1)
	Santander Hipotecario, S.A. de C.V., SOFOM, E.R., Grupo Financiero Santander México		—	Director (1)
	Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		—	Director (1)
	Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México		—	Director (1)
	Santander Consumo, S.A. de C.V., SOFOM, E.R., Grupo Financiero Santander México		—	Director (1)
Mr. Matías Rodríguez Inciarte	Financiera de Ponferrada, S.A., SICAV		—	Director (1)
	Unión de Crédito Inmobiliario, S.A., EFC		—	Chairman (1)
	Financiera El Corte Inglés, E.F.C., S.A.		—	Director (1)
Mr. Guillermo de la Dehesa Romero	Goldman, Sachs & Co. (The Goldman Sachs Group, Inc.) Banco Popular Español, S.A.		19,546 2,789	—   —
Mr. Bruce Carnegie-Brown	Santander UK Group Holdings Limited		—	Director (1)
	Santander UK plc		—	Director (1)
	Moneysupermarket.com Group plc		—	Director (1)
Mr. Javier Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		7,929,853	—
Ms. Esther Giménez-Salinas i Colomer	Gawa Capital Partners, S.L.		—	Director (1)
Mr. Ángel Jado Becerro de Bengoa	Bankinter, S.A. (2)		1,774,000	—
Ms. Isabel Tocino Biscarolasaga	Banco Bilbao Vizcaya Argentaria, S.A.		9,585	—
Mr. Abel Matutes Juan (4)	Banco Bilbao Vizcaya Argentaria, S.A. (*)		716,136	—
	Citibank		109,062	—
Mr. Juan Rodríguez Inciarte (5)	Banco Bilbao Vizcaya Argentaria, S.A. (3)		1,184	—
	Wells Fargo & Co.		107	—
	Santander UK plc		—	Director (1)
	Santander Consumer Finance, S.A.		—	Director (1)

(*) Ownership interests held by related persons.

(1) Non-executive.

(2) Of the shares indicated, 274,000 are held by related persons.

(3) Held jointly with a related person.

(4) Ceased to be a director on February18, 2015.

(5) Ceased to be a member of the board on June 30, 2015.

With regard to situations of conflict of interest, as stipulated in Article 30 of the Rules and Regulations of the Board, the directors must notify the board of any direct or indirect conflict with the interests of the Bank in which they or persons related thereto may be involved. The director involved shall refrain from taking part in discussions or voting on any resolutions or decisions in which the director or any persons related thereto may have a conflict of interest.

F-95

Also, under Article 33 of the Rules and Regulations of the Board, following a favorable report by the audit committee, the board must authorize the transactions which the Bank performs with directors (unless the power to approve them is vested by law in the general meeting), excluding the transactions indicated in Article 33.2.

Accordingly, the related party transactions performed in 2015 met the conditions established in the Rules and Regulations of the Board not to require authorization of the governing bodies, or obtained such authorization, following a favorable report by the audit committee, after confirming that the consideration and the other conditions agreed upon were within market parameters.

In addition, other directors abstained from participating in and voting on the deliberations of the meetings of the board of directors or the board committees on 175 occasions in 2015. The breakdown of these 175 cases is as follows: 56 related to proposals for the appointment, re-election or removal of directors, or the appointment of members of the board committees or committees in Group companies; 92 related to matters connected with remuneration or the extension of loans or credits; 20 related to the debate of proposed financing or other lending transactions involving companies related to directors; and on 7 occasions the abstention occurred in connection with the annual verification of the directors’ status which, pursuant to Article 6.3 of the Rules and Regulations of the Board, was performed by the appointments committee.

6. Loans and advances to credit institutions

The detail, by classification, type and currency, of Loans and advances to credit institutions in the consolidated balance sheets is as follows:

	Millions of euros
	2015			2014			2013
Classification:
Financial assets held for trading		2,293			1,815			5,503
Other financial assets at fair value through profit or loss		26,403			28,592			13,444
Loans and receivables		50,256			51,306			56,017
		78,952			81,713			74,964
Type:
Reciprocal accounts		2,947			1,571			1,858
Time deposits		7,142			8,177			16,284
Reverse repurchase agreements		37,744			39,807			29,702
Other accounts		31,119			32,158			27,120
		78,952			81,713			74,964
Currency:
Euro		46,397			49,099			33,699
Pound sterling		5,192			4,348			4,964
US dollar		18,413			15,964			14,915
Other currencies		8,969			12,381			21,423
Impairment losses (Note 10)		(19	)		(79	)		(37	)
Of which: due to country risk		(12	)		(13	)		(11	)
		78,952			81,713			74,964

The loans and advances to credit institutions classified under Financial assets held for trading consist mainly of securities of foreign institutions acquired under reverse repurchase agreements, whereas those classified under Other financial assets at fair value through profit or loss consist of securities of Spanish and foreign institutions acquired under reverse repurchase agreements.

The loans and advances to credit institutions classified under Loans and receivables are mainly time deposits and guarantees given in cash to credit institutions.

F-96

The impairment losses on financial assets recognized in Loans and receivables are disclosed in Note 10.

Note 51 contains a detail of the residual maturity periods of Loans and receivables and of the related average interest rates.

7. Debt instruments

a) Detail

The detail, by classification, type and currency, of Debt instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2015			2014			2013
Classification:
Financial assets held for trading		43,964			54,374			40,841
Other financial assets at fair value through profit or loss		3,717			4,231			3,875
Available-for-sale financial assets		117,187			110,249			79,844
Loans and receivables		10,907			7,510			7,886
Held-to-maturity investments		4,355			—			—
		180,130			176,364			132,446
Type:
Spanish government debt securities		45,787			39,182			32,880
Foreign government debt securities		88,346			93,037			59,660
Issued by financial institutions		18,843			18,041			17,206
Other fixed-income securities		27,445			26,248			22,907
Impairment losses		(291	)		(144	)		(207	)
		180,130			176,364			132,446
Currency:
Euro		81,196			74,833			63,263
Pound sterling		10,551			9,983			7,709
US dollar		27,011			20,452			14,195
Other currencies		61,663			71,240			47,486
Impairment losses		(291	)		(144	)		(207	)
		180,130			176,364			132,446

In 2015 the Group reclassified certain financial instruments from the available-for-sale portfolio into the held-to-maturity investment portfolio. Pursuant to the applicable legislation, the fair value of these instruments at the date of reclassification was considered their initial cost and the valuation adjustments in the Group’s total equity remained in the consolidated balance sheet, together with the adjustments relating to the other available-for-sale financial assets. The reclassified instruments were subsequently measured at their amortized cost, and both the difference between their amortized cost and their maturity amount and the valuation adjustments previously recognized in equity will be recognized in the consolidated income statement over the remaining life of the financial assets using the effective interest method.

F-97

b) Breakdown

The breakdown, by origin of the issuer, of Debt instruments at December 31, 2015, 2014 and 2013, net of impairment losses, is as follows:

	Millions of euros
	2015									2014									2013
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
Spain		7,387		45,787		53,174		29.52	%		8,542		39,182		47,724		27.06	%		11,752		32,880		44,632		33.70	%
Portugal		3,889		9,975		13,864		7.70	%		3,543		8,698		12,241		6.94	%		2,634		3,465		6,099		4.60	%
United Kingdom		3,746		6,456		10,202		5.66	%		3,502		7,577		11,079		6.28	%		3,268		5,112		8,380		6.33	%
Poland		802		5,470		6,272		3.48	%		745		6,373		7,118		4.04	%		723		5,184		5,907		4.46	%
Italy		1,312		4,423		5,735		3.18	%		1,670		4,170		5,840		3.31	%		733		2,857		3,590		2.71	%
Ireland		342		—		342		0.19	%		405		—		405		0.23	%		848		—		848		0.64	%
Greece		—		—		—		—			—		—		—		—			—		—		—		—
Other European countries		7,912		3,133		11,045		6.13	%		7,327		4,267		11,594		6.57	%		5,357		3,607		8,964		6.77	%
United States		11,919		9,753		21,672		12.03	%		8,793		5,847		14,640		8.30	%		5,945		3,997		9,942		7.51	%
Brazil		5,405		25,588		30,993		17.21	%		5,673		37,792		43,465		24.65	%		4,954		19,852		24,806		18.73	%
Mexico		723		15,296		16,019		8.89	%		847		9,071		9,918		5.62	%		566		8,156		8,722		6.59	%
Chile		1,027		2,032		3,059		1.70	%		909		2,389		3,298		1.87	%		1,467		1,272		2,739		2.07	%
Other American countries		762		1,611		2,373		1.32	%		1,558		1,514		3,072		1.74	%		1,384		995		2,379		1.80	%
Rest of the world		771		4,609		5,380		2.99	%		631		5,339		5,970		3.38	%		275		5,163		5,438		4.11	%
		45,997		134,133		180,130		100	%		44,145		132,219		176,364		100	%		39,906		92,540		132,446		100	%

The detail, by issuer rating, of Debt instruments at December 31, 2015, 2014 and 2013 is as follows:

	Millions of euros
	2015									2014									2013
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
AAA		16,975		9,164		26,139		14.51	%		17,737		10,647		28,384		16.09	%		10,357		7,847		18,204		13.74	%
AA		3,452		13,168		16,620		9.23	%		2,763		14,770		17,533		9.94	%		2,884		11,304		14,188		10.71	%
A		7,379		9,120		16,499		9.16	%		5,711		6,373		12,084		6.85	%		5,036		5,184		10,220		7.72	%
BBB		8,011		65,707		73,718		40,92	%		5,215		90,505		95,720		54.27	%		7,158		64,341		71,499		53.98	%
Below BBB		2,575		35,573		38,148		21.18	%		3,092		8,698		11,790		6.69	%		6,386		3,864		10,250		7.74	%
Unrated		7,605		1,401		9,006		5.00	%		9,627		1,226		10,853		6.15	%		8,085		—		8,085		6.10	%
		45,997		134,133		180,130		100	%		44,145		132,219		176,364		100	%		39,906		92,540		132,446		100	%

F-98

The distribution of exposure by rating shown in the foregoing table has been affected by the various reviews of sovereign issuer ratings conducted in recent years. The main review in 2015 was that of Brazil (from BBB to Below BBB), whereas the main review in 2014 was that of Argentina (from Below BBB in 2013 to Unrated in 2014). Also, at December 31, 2015 the exposures with BBB ratings included mainly the sovereign exposures in Spain and Mexico, while those with ratings Below BBB included the sovereign exposures in Portugal and Brazil.

The detail, by type of financial instrument, of Private fixed-income securities at December 31, 2015, 2014 and 2013, net of impairment losses, is as follows:

	Millions of euros
	2015		2014		2013
Securitized mortgage bonds		2,110		3,388		2,936
Other asset-backed bonds		3,073		2,315		2,781
Floating rate debt		16,633		13,172		10,857
Fixed rate debt		24,181		25,270		23,332
Total		45,997		44,145		39,906

c) Impairment losses

The changes in the impairment losses on Available-for-sale financial assets - Debt instruments are summarized below:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		119			188			129
Net impairment losses for the year		119			42			72
Of which:
Impairment losses charged to income (Note 29)		127			42			89
Impairment losses reversed with a credit to income		(8	)		—			(18	)
Assets written off		—			(110	)		—
Exchange differences and other items		(42	)		(1	)		(13	)
Balance at end of year		196			119			188
Of which:
By geographical location of risk:
European Union		9			9			105
Latin America		187			110			83

Also, the impairment losses on Loans and receivables (EUR 95 million, EUR 25 million and EUR 19 million at December 31, 2015, 2014 and 2013, respectively) are disclosed in Note 10.

F-99

d) Other information

At December 31, 2015, the nominal amount of debt instruments assigned to certain own or third-party commitments, mainly to secure financing facilities received by the Group, amounted to EUR 80,746 million. Of these debt instruments, EUR 30,913 million related to Spanish government debt.

The detail, by term to maturity, of the debt instruments pledged as security for certain commitments, is as follows:

	Millions of euros
	1 day		1 week		1 month		3 months		6 months		1 year		More than 12 months		Total
Government debt securities		4,994		35,611		5,349		5,906		6,875		528		3,559		62,822
Other debt instruments		2,380		2,968		2,494		1,642		811		512		1,492		11,749
Total		7,374		38,579		7,843		7,548		7,686		1,040		4,501		74,571

There are no particular conditions relating to the pledge of these assets that need to be disclosed.

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets.

Note 51 contains a detail of the residual maturity periods of Available-for-sale financial assets and of Loans and receivables and of the related average interest rates.

8. Equity instruments

a) Breakdown

The detail, by classification and type, of Equity instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Classification:
Financial assets held for trading		18,225		12,920		4,967
Other financial assets at fair value through profit or loss		630		879		866
Available-for-sale financial assets		4,849		5,001		3,955
		23,704		18,800		9,788
Type:
Shares of Spanish companies		2,479		3,102		2,629
Shares of foreign companies		19,077		12,773		4,711
Investment fund units and shares		2,148		2,925		2,448
		23,704		18,800		9,788

F-100

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets, and also the related impairment losses.

b) Changes

The changes in Available-for-sale financial assets-Equity instruments were as follows:

	Millions of euros
	2015			2014		2013
Balance at beginning of year		5,001			3,955		4,542
Changes in the scope of consolidation		—			—		—
Net additions (disposals)		(392	)		743		(722	)
Of which:
Bank of Shanghai Co., Ltd.		109			396		—
SAREB		—			—		44
Valuation adjustments and other items		240			303		135
Balance at end of year		4,849			5,001		3,955

The main acquisitions and disposals made in 2015, 2014 and 2013 were as follows:

i. Bank of Shanghai Co., Ltd.

In May 2014 the Group acquired 8% of Bank of Shanghai Co., Ltd. for EUR 396 million.

In June 2015 the Group subscribed to a capital increase at this company for EUR 109 million, thereby retaining its ownership interest percentage.

ii. Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A. (SAREB)

In December 2012 the Group, together with other Spanish financial institutions, entered into an agreement to invest in the Spanish Bank Restructuring Asset Management Company (SAREB). The Group undertook to make an investment of up to EUR 840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, it had paid EUR 164 million of capital and EUR 490 million of subordinated debt.

In February 2013, following the review of the own funds that SAREB required, the aforementioned undertaking was reduced to EUR 806 million, and the Group disbursed the remaining EUR 44 million of capital and EUR 108 million of subordinated debt.

c) Notifications of acquisitions of investments

The notifications made by the Bank in 2015, in compliance with Article 155 of the Spanish Limited Liability Companies Law and Article 125 of Spanish Securities Market Law 24/1998, of the acquisitions and disposals of holdings in investees are listed in Exhibit IV.

F-101

9. Trading derivatives (assets and liabilities) and Short positions

a) Trading derivatives

The detail, by type of inherent risk, of the fair value of the trading derivatives entered into by the Group is as follows (see Note 36):

	Millions of euros
	2015				2014				2013
	Debit balance		Credit balance		Debit balance		Credit balance		Debit balance		Credit balance
Interest rate risk		51,576		49,095		56,878		56,710		43,185		43,154
Currency risk		21,924		23,444		16,201		17,418		11,315		10,181
Price risk		2,598		3,343		2,800		4,118		3,247		4,609
Other risks		626		532		979		802		1,152		943
		76,724		76,414		76,858		79,048		58,899		58,887

b) Short positions

Following is a breakdown of the short positions:

	Millions of euros
	2015		2014		2013
Borrowed securities:
Debt instruments		3,098		3,303		3,921
Of which: Santander UK plc		1,857		2,537		3,260
Equity instruments		990		1,557		189
Of which: Santander UK plc		905		1,435		7
Short sales:
Debt instruments		13,274		12,768		11,840
Of which:
Banco Santander, S.A.		6,953		7,093		6,509
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		1,290		1,561		2,882
Banco Santander (Brasil) S.A.		4,619		3,476		2,388
Equity instruments		—		—		1
		17,362		17,628		15,951

F-102

10. Loans and advances to customers

a) Detail

The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:

	Millions of euros
	2015			2014			2013
Financial assets held for trading		6,081			2,921			5,079
Other financial assets at fair value through profit or loss		14,293			8,971			13,196
Loans and receivables		770,474			722,819			650,581
Of which:
Before impairment losses		796,991			750,036			675,484
Impairment losses		(26,517	)		(27,217	)		(24,903	)
Of which, due to country risk		(12	)		(7	)		(31	)
		790,848			734,711			668,856
Loans and advances to customers before impairment losses (*)		817,365			761,928			693,759

(*) Includes Valuation adjustments for accrued interest receivable and other items amounting to EUR 3,628 million at December 31, 2015 (2014: EUR 3,402 million; 2013: EUR 2,593 million).

Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

Note 54 shows the Group’s total exposure, by origin of the issuer.

There are no loans and advances to customers for material amounts without fixed maturity dates.

b) Breakdown

Following is a breakdown, by loan type and status, geographical area of residence and interest rate formula, of the loans and advances to customers of the Group, which reflect the Group’s exposure to credit risk in its core business, before impairment losses:

F-103

	Millions of euros
	2015		2014		2013
Loan type and status:
Commercial credit		18,404		18,900		11,898
Secured loans		478,925		440,827		396,432
Reverse repurchase agreements		11,969		3,993		13,223
Other term loans		216,862		206,261		185,951
Finance leases		22,798		15,353		15,871
Receivable on demand		8,466		10,329		10,155
Credit cards receivables		20,180		22,491		17,316
Impaired assets		36,133		40,372		40,320
Valuation adjustments for Accrued interest receivable and other items		3,628		3,402		2,593
		817,365		761,928		693,759
Geographical area:
Spain		167,856		172,371		173,852
European Union (excluding Spain)		401,315		353,674		328,118
United States and Puerto Rico		88,737		71,764		43,566
Other OECD countries		69,519		60,450		54,713
Latin America (non-OECD)		77,519		93,145		84,000
Rest of the world		12,419		10,524		9,510
		817,365		761,928		693,759
Interest rate formula:
Fixed rate		407,026		363,679		280,188
Floating rate		410,339		398,249		413,571
		817,365		761,928		693,759

At December 31, 2015, the Group had granted loans amounting to EUR 13,993 million (December 31, 2014: EUR 17,465 million; December 31, 2013: EUR 13,374 million) to Spanish public sector agencies (which had ratings of BBB at December 31, 2015, 2014 and 2013), and EUR 7,722 million to the public sector in other countries (December 31, 2014: EUR 7,053 million; December 31, 2013: EUR 4,402 million). At December 31, 2015, the breakdown of this amount by issuer rating was as follows: 21.2% AAA, 9.4% AA, 0.5% A, 46% BBB and 22.9% below BBB.

At December 31, 2015, the Group had EUR 759,627 million of loans and advances to customers classified as other than non-performing (excluding loans granted to the public sector). The percentage breakdown of these loans and advances by counterparty credit rating is as follows: 11.6% AAA, 14.85% AA, 18.9% A, 24.8% BBB and 29.9% below BBB.

The above-mentioned ratings were obtained by converting the internal ratings awarded to customers by the Group (see Note 54) into the external ratings classification established by Standard & Poor’s, in order to make them more readily comparable.

Following is a detail, by activity, of the loans and advances to customers at December 31, 2015, net of impairment losses:

F-104

	Millions of euros
					Secured loans
					Net exposure				Loan-to-value ratio (a)
	Total		Without collateral		Of which: Property collateral		Of which: Other collateral		Less than or equal to 40%		More than 40% and less than or equal to 60%		More than 60% and less than or equal to 80%		More than 80% and less than or equal to 100%		More than 100%
Public sector		21,732		19,859		297		1,576		458		509		86		622		198
Other financial institutions		41,681		23,738		505		17,438		394		388		199		16,767		195
Non-financial companies and individuals		265,645		135,992		62,122		67,531		20,808		17,532		18,589		47,505		25,219
Of which:
Construction and property development		28,508		3,841		21,321		3,346		7,551		5,315		5,354		4,129		2,318
Civil engineering construction		2,701		1,618		181		902		51		190		163		280		399
Large companies		139,075		90,805		10,682		37,588		4,498		4,307		3,736		21,327		14,402
SMEs and individual traders		95,361		39,728		29,938		25,695		8,708		7,720		9,336		21,769		8,100
Other households and non-profit institutions serving households		470,886		102,902		328,301		39,683		68,910		105,397		103,201		49,508		40,968
Of which:
Residential		325,167		1,827		322,472		868		63,600		101,107		99,512		44,883		14,238
Consumer loans		133,633		97,688		1,973		33,972		3,647		3,011		2,045		1,897		25,345
Other purposes		12,086		3,387		3,856		4,843		1,663		1,279		1,644		2,728		1,385
Subtotal		799,944		282,491		391,225		126,228		90,570		123,826		122,075		114,402		66,580
Less: valuation adjustments on unimpaired assets		9,096
Total		790,848
Memorandum item Refinanced and restructured transactions (*)		45,240		9,673		17,398		18,169		4,116		4,312		5,386		5,228		16,525

(*) Includes the net balance of the valuation adjustments associated with impaired assets. Also, this portfolio has an allowance of EUR 788 million in relation to valuation adjustments associated with unimpaired assets.

(a) The ratio of the carrying amount of the Loans and advances to customers transactions at December 31, 2015 to the latest available appraisal value of the collateral.

F-105

Note 54 contains information relating to the restructured/refinanced loan book.

c) Impairment losses

The changes in the impairment losses on the assets making up the balances of Loans and receivables - Loans and advances to customers, Loans and receivables - Loans and advances to credit institutions (see Note 6) and Loans and receivables—Debt instruments (see Note 7) were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		27,321			24,959			25,467
Net impairment losses charged to income for the year		11,569			11,857			12,054
Of which:
Impairment losses charged to income		16,557			16,518			17,551
Impairment losses reversed with a credit to income		(4,988	)		(4,661	)		(5,497	)
Write-off of impaired balances against recorded impairment losses		(12,361	)		(11,827	)		(10,626	)
Exchange differences and other changes		102			2,332			(1,936	)
Balance at end of year		26,631			27,321			24,959
Of which:
By status of the asset:
Impaired assets		17,531			19,451			18,788
Of which: due to country risk (Note 2.g)		24			20			42
Other assets		9,100			7,870			6,171
By classification of assets:
Loans and advances to credit institutions (Note 6)		19			79			37
Debt instruments (Note 7)		95			25			19
Loans and advances to customers		26,517			27,217			24,903

Previously written-off assets recovered in 2015, 2014 and 2013 amounted to EUR 1,375 million, EUR 1,336 million and EUR 1,068 million, respectively. Taking into account these amounts and those recognized in Impairment losses charged to income for the year in the foregoing table, impairment losses on Loans and receivables amounted to EUR 10,194 million in 2015, EUR 10,521 million in 2014 and EUR 10,986 million in 2013.

F-106

d) Impaired assets and assets with past-due amounts

The detail of the changes in the balance of the financial assets classified as Loans and receivables—Loans and advances to customers and considered to be impaired due to credit risk is as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		40,372			40,320			35,301
Net additions		7,862			9,841			16,438
Written-off assets		(12,361	)		(11,827	)		(10,626	)
Changes in the scope of consolidation		106			497			699
Exchange differences and other		154			1,541			(1,492	)
Balance at end of year		36,133			40,372			40,320

This amount, after deducting the related impairment losses, represents the Group’s best estimate of the discounted value of the flows that are expected to be recovered from the impaired assets.

At December 31, 2015, the Group’s written-off assets totaled EUR 36,848 million (December 31, 2014: EUR 35,654 million; December 31, 2013: EUR 30,006 million).

Following is a detail of the financial assets classified as Loans and receivables and considered to be impaired due to credit risk at December 31, 2015, classified by geographical location of risk and by age of the oldest past-due amount:

	Millions of euros
			With balances past due by
	With no past-due balances or less than 90 days past due		90 to 180 days		180 to 270 days		270 days to 1 year		More than 1 year		Total
Spain		6,623		894		622		551		8,329		17,019
European Union (excluding Spain)		1,854		1,720		916		791		4,394		9,675
United States and Puerto Rico		1,305		135		58		29		257		1,784
Other OECD countries		721		894		232		194		1,237		3,278
Latin America (non-OECD)		1,418		995		666		477		766		4,322
Rest of the world		8		2		—		—		45		55
		11,929		4,640		2,494		2,042		15,028		36,133

F-107

The detail at December 31, 2014 is as follows:

	Millions of euros
			With balances past due by
	With no past-due balances or less than 90 days past due		90 to 180 days		180 to 270 days		270 days to 1 year		More than 1 year		Total
Spain		6,664		2,764		909		866		9,404		20,607
European Union (excluding Spain)		2,027		2,520		908		767		3,532		9,754
United States and Puerto Rico		661		626		58		29		329		1,703
Other OECD countries		272		1,364		259		239		1,726		3,860
Latin America (non-OECD)		1,324		338		933		841		1,012		4,448
Rest of the world		—		—		—		—		—		—
		10,948		7,612		3,067		2,742		16,003		40,372

The detail at December 31, 2013 is as follows:

	Millions of euros
			With balances past due by
	With no past-due balances or less than 90 days past due		90 to 180 days		180 to 270 days		270 days to 1 year		More than 1 year		Total
Spain		6,876		3,327		1,707		1,700		8,255		21,865
European Union (excluding Spain)		1,791		3,141		994		763		3,461		10,150
United States and Puerto Rico		322		178		78		43		417		1,038
Other OECD countries		231		1,377		346		273		626		2,853
Latin America (non-OECD)		600		1,332		877		787		816		4,412
Rest of the world		—		—		—		—		2		2
		9,820		9,355		4,002		3,566		13,577		40,320

F-108

Set forth below for each class of impaired asset are the gross amount, associated impairment losses and information relating to the collateral and/or other credit enhancements obtained at December 31, 2015:

	Millions of euros
	Gross amount		Impairment losses recognized		Estimated collateral value(*)
Without associated collateral		13,423		9,566		—
With property collateral		20,236		7,229		11,577
With other collateral		2,474		1,252		628
Balance at end of year		36,133		17,421		12,205

(*) Including the estimated value of the collateral associated with each loan. Accordingly, any other cash flows that may be obtained, such as those arising from borrowers’ personal guarantees, are not included.

When classifying assets in the foregoing table, the main factors considered by the Group to determine whether an asset has become impaired are the existence of amounts past due -assets impaired due to arrears- or other circumstances that lead it to believe that not all the contractual cash flows will be recovered -assets impaired for reasons other than arrears-, such as a deterioration of the borrower’s financial situation, the worsening of its capacity to generate funds or difficulties experienced by it in accessing credit.

Loans classified as standard: past-due amounts receivable

In addition, at December 31, 2015, there were assets with amounts receivable that were past due by 90 days or less, the detail of which, by age of the oldest past-due amount, is as follows:

	Millions of euros
	Less than 1 month		1 to 2 months		2 to 3 months
Loans and advances to customers		1,654		553		407
Public sector		4		—		—
Private sector		1,650		553		407
Total		1,654		553		407

e) Securitization

Loans and advances to customers includes, inter alia, the securitized loans transferred to third parties on which the Group has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of original financial instrument, and of the securitized loans derecognized because the stipulated requirements were met (see Note 2.e) is shown below. Note 22 details the liabilities associated with these securitization transactions.

F-109

	Millions of euros
	2015		2014		2013
Derecognized		685		2,391		3,618
Of which
Securitized mortgage assets		685		2,391		3,618
Retained on the balance sheet		107,643		100,503		78,229
Of which
Securitized mortgage assets		54,003		57,808		56,277
Of which: UK assets		30,833		36,475		45,296
Other securitized assets(*)		53,640		42,695		21,952
Total		108,328		102,894		81,847

(*) The increase in Other securitized assets in 2014 with respect to December 31, 2013 relates mainly to the acquisition of control of SCUSA by the Group in January 2014 (see Note 3).

Securitization is used as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2015, 2014 and 2013 the Group did not derecognize any of the securitizations performed, and the balance shown as derecognized for those years relates to securitizations performed in prior years.

The loans derecognized include assets of Santander Holdings USA, Inc. amounting to approximately EUR 506 million at December 31, 2015 (December 31, 2014: EUR 1,942 million; December 31, 2013: EUR 3,082 million) that were sold, prior to this company’s inclusion in the Group, on the secondary market for multifamily loans, and over which control was transferred and substantially all the associated risks and rewards were not retained. At December 31, 2015, the Group recognized under Other liabilities an obligation amounting to EUR 6 million (December 31, 2014: EUR 34 million; December 31, 2013: EUR 49 million), which represents the fair value of the retained credit risk.

The loans retained on the face of the balance sheet include the loans associated with securitizations in which the Group retains a subordinated debt and/or grants any manner of credit enhancements to the new holders.

The loans transferred through securitization are mainly mortgage loans, loans to companies and consumer loans.

F-110

11. Hedging derivatives

The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):

	Millions of euros
	2015				2014				2013
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Fair value hedges		4,620		5,786		5,072		5,321		5,403		4,146
Of which: Portfolio hedges		426		2,168		413		2,319		610		1,703
Cash flow hedges		2,449		3,021		2,094		1,650		1,766		1,023
Hedges of net investments in foreign operations		658		130		180		284		1,132		114
		7,727		8,937		7,346		7,255		8,301		5,283

Note 36 contains a description of the Group’s main hedges.

12. Non-current assets held for sale

The detail of Non-current assets held for sale in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Tangible assets		5,623		5,256		4,845
Of which:
Foreclosed assets		5,533		5,139		4,742
Of which: Property assets in Spain (Note 54)		4,983		4,597		4,146
Other tangible assets held for sale		90		117		103
Other assets		23		120		47
		5,646		5,376		4,892

At December 31, 2015, the allowances recognized represented 51.4% (2014: 51.3%; 2013: 51.1%). The net charges recorded in those years amounted to EUR 222 million, EUR 339 million and EUR 335 million, respectively (see Note 50).

In 2015 the Group sold, for EUR 898 million, foreclosed properties with a gross carrying amount of EUR 1,375 million, for which provisions totaling EUR 517 million had been recognized. These sales gave rise to gains of EUR 40 million; in addition, other tangible assets were sold for EUR 42 million, giving rise to a gain of EUR 11 million (see Note 50).

F-111

13. Investments

a) Breakdown

The detail, by company, of Investments (see Note 2.b) is as follows:

	Millions of euros
	2015		2014		2013
Associates
Zurich Santander Insurance América, S.L.		873		997		826
Santander Insurance (Ireland)		301		288		—
Metrovacesa, S.A.		—		—		647
Other companies		485		490		356
		1,659		1,775		1,829
Jointly controlled entities
SAM Investment Holdings Limited		514		456		449
Aegon Santander Seguros		240		227		213
Unión de Créditos Inmobiliarios, S.A., EFC		184		178		189
Santander Consumer USA Inc.		—		—		2,159
Other companies		654		835		697
		1,592		1,696		3,707

b) Changes

The changes in Investments were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		3.471			5,536			4,454
Acquisitions (disposals) and capital increases (reductions)		(72	)		80			422
Changes in the scope of consolidation (Note 3)		21			(2,383	)		769
Of which:
Santander Consumer USA Inc.		—			(2,159	)		—
Metrovacesa Group		—			(642	)		—
Santander Insurance (Ireland)		—			285			—
SAM Investment Holdings Limited		—			—			449
Aegon Santander Seguros		—			—			211
Effect of equity accounting (Note 41)		375			243			500
Dividends paid and reimbursements of share premium		(227	)		(178	)		(303	)
Exchange differences and other changes		(317	)		173			(306	)
Balance at end of year		3,251			3,471			5,536

c) Impairment losses

In 2015, 2014 and 2013 there was no evidence of material impairment on the Group’s investments.

F-112

d) Other information

Following is a summary of the financial information on the companies accounted for using the equity method (obtained from the information available at the date of preparation of the financial statements):

	Millions of euros
	2015			2014			2013
Total assets		42,510			40,749			63,443
Total liabilities		(38,118	)		(36,120	)		(55,483	)
Net assets		4,392			4,629			7,960
Group’s share of net assets		1,904			2,272			3,755
Goodwill		1,347			1,199			1,781
Of which:
Zurich Santander Insurance América, S.L.		526			526			526
Santander Insurance (Ireland)		205			205			—
Santander Consumer USA Inc.		—			—			937
Total Group share		3,251			3,471			5,536
Total income		11,430			9,780			11,756
Total profit		935			750			1,029
Group’s share of profit		375			243			500

Following is a summary of the financial information for 2015 on the main associates and jointly controlled entities (obtained from the information available at the date of preparation of the financial statements):

	Millions of euros
	Total assets		Total liabilities			Total income		Total profit
Associates		17,921		(15,826	)		6,594		616
Of which:
Zurich Santander Insurance América, S.L.		9,724		(9,014	)		4,048		407
Santander Insurance (Ireland)		1,606		(1,413	)		826		23
Jointly controlled entities		24,589		(22,292	)		4,836		319
Of which:
SAM Investment Holdings Limited		3,157		(2,482	)		2,232		129
Unión de Créditos Inmobiliarios, S.A., EFC		12,236		(11,868	)		422		3
Aegon Santander Seguros		610		(270	)		293		27
Total		42,510		(38,118	)		11,430		935

At December 31, 2015, 2014 and 2013, the Group did not hold any ownership interests in jointly controlled entities or associates whose shares are listed.

F-113

14. Insurance contracts linked to pensions

The detail of Insurance contracts linked to pensions in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Assets relating to insurance contracts covering post-employment benefit plan obligations:
Banco Santander, S.A.		299		345		342
		299		345		342

15. Liabilities under insurance contracts and Reinsurance assets

The detail of Liabilities under insurance contracts and Reinsurance assets in the consolidated balance sheets (see Note 2.j) is as follows:

	Millions of euros
	2015							2014							2013
Technical provisions for:	Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)
Unearned premiums and unexpired risks		62		(39	)		23		107		(34	)		73		245		(36	)		209
Life insurance		149		(136	)		13		157		(146	)		11		546		(183	)		363
Claims outstanding		335		(112	)		223		378		(107	)		271		315		(55	)		261
Bonuses and rebates		18		(9	)		9		15		(8	)		7		25		(6	)		19
Other technical provisions		63		(35	)		28		56		(45	)		11		299		(76	)		222
		627		(331	)		296		713		(340	)		373		1,430		(356	)		1,074

The reduction in the amount of Direct insurance and reinsurance assumed at December 31, 2014 is due to the sale of the insurance companies in Ireland-Santander Insurance Life Limited, Santander Insurance Europe Limited and Santander Insurance Services Ireland Limited- (see Note 3).

F-114

16. Tangible assets

a) Changes

The changes in Tangible assets in the consolidated balance sheets were as follows:

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Cost:
Balances at January 1, 2013		15,780			3,117			4,265			23,162
Additions / disposals (net) due to change in the scope of consolidation		(17	)		—			541			524
Additions / disposals (net)		1,021			(124	)		(23	)		874
Transfers, exchange differences and other items		(989	)		212			(139	)		(916	)
Balances at December 31, 2013		15,795			3,205			4,644			23,644
Additions / disposals (net) due to change in the scope of consolidation		229			2,472			3,296			5,997
Additions / disposals (net)		952			4,868			(774	)		5,046
Transfers, exchange differences and other items		375			(79	)		258			554
Balances at December 31, 2014		17,351			10,466			7,424			35,241
Additions / disposals (net) due to change in the scope of consolidation		(22	)		1			(27	)		(48	)
Additions / disposals (net)		878			3,857			(88	)		4,647
Transfers, exchange differences and other items		(765	)		597			36			(132	)
Balances at December 31, 2015		17,442			14,921			7,345			39,708
Accumulated depreciation:
Balances at January 1, 2013		(7,626	)		(869	)		(164	)		(8,659	)
Disposals due to change in the scope of consolidation		16			—			—			16
Disposals		280			179			14			473
Charge for the year		(1,020	)		(1	)		(17	)		(1,038	)
Transfers, exchange differences and other items		416			(235	)		(36	)		145
Balances at December 31, 2013		(7,934	)		(926	)		(203	)		(9,063	)
Disposals due to change in the scope of consolidation		4			—			—			4
Disposals		403			157			43			603
Charge for the year		(1,048	)		—			(12	)		(1,060	)
Transfers, exchange differences and other items		(404	)		(1,009	)		(22	)		(1,435	)
Balances at December 31, 2014		(8,979	)		(1,778	)		(194	)		(10,951	)
Disposals due to change in the scope of consolidation		(27	)		—			5			(22	)
Disposals		423			196			11			630
Charge for the year		(1,161	)		—			(11	)		(1,172	)
Transfers, exchange differences and other items		296			(1,794	)		(95	)		(1,593	)
Balances at December 31, 2015		(9,448	)		(3,376	)		(284	)		(13,108	)

F-115

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Impairment losses:
Balances at January 1, 2013		(18	)		(68	)		(556	)		(642	)
Impairment charge for the year		(53	)		(24	)		(260	)		(337	)
Disposals due to change in the scope of consolidation		—			—			39			39
Exchange differences and other		(3	)		—			16			13
Balances at December 31, 2013		(74	)		(92	)		(761	)		(927	)
Impairment charge for the year		(5	)		(31	)		(112	)		(148	)
Disposals due to change in the scope of consolidation		—			—			28			28
Exchange differences and other		31			—			(18	)		13
Balances at December 31, 2014		(48	)		(123	)		(863	)		(1,034	)
Impairment charge for the year		(2	)		(37	)		(89	)		(128	)
Disposals due to change in the scope of consolidation		5			—			(4	)		1
Exchange differences and other		—			1			(120	)		(119	)
Balances at December 31, 2015		(45	)		(159	)		(1,076	)		(1,280	)
Tangible assets, net:
Balances at December 31, 2013		7,787			2,187			3,680			13,654
Balances at December 31, 2014		8,324			8,565	(*)		6,367	(*)		23,256
Balances at December 31, 2015		7,949			11,386			5,985			25,320

(*) The increases in 2014 in Tangible assets - Leased out under an operating lease and Tangible assets - Investment property were due to the business combinations of SCUSA and Metrovacesa, S.A, respectively (see Note 3.b.vii and 3.b.xv).

F-116

b) Property, plant and equipment for own use

The detail, by class of asset, of Property, plant and equipment - For own use in the consolidated balance sheets is as follows:

	Millions of euros
	Cost		Accumulated depreciation			Impairment losses			Carrying amount
Land and buildings		5,781		(1,624	)		(74	)		4,083
IT equipment and fixtures		4,168		(3,271	)		—			897
Furniture and vehicles		5,616		(2,983	)		—			2,633
Construction in progress and other items		230		(56	)		—			174
Balances at December 31, 2013		15,795		(7,934	)		(74	)		7,787
Land and buildings		5,829		(1,790	)		(48	)		3,991
IT equipment and fixtures		4,716		(3,722	)		—			994
Furniture and vehicles		6,494		(3,409	)		—			3,085
Construction in progress and other items		312		(58	)		—			254
Balances at December 31, 2014		17,351		(8,979	)		(48	)		8,324
Land and buildings		5,754		(1,892	)		(45	)		3,817
IT equipment and fixtures		4,984		(3,927	)		—			1,057
Furniture and vehicles		6,374		(3,561	)		—			2,813
Construction in progress and other items		330		(68	)		—			262
Balances at December 31, 2015		17,442		(9,448	)		(45	)		7,949

The carrying amount at December 31, 2015 in the foregoing table includes the following approximate amounts:

• EUR 5,870 million (December 31, 2014: EUR 6,161 million; December 31, 2013: EUR 5,615 million) relating to property, plant and equipment owned by Group entities and branches located abroad.

• EUR 195 million (December 31, 2014: EUR 187 million; December 31, 2013: EUR 138 million) relating to property, plant and equipment being acquired under finance leases by the consolidated entities.

c) Investment property

The fair value of investment property at December 31, 2015 amounted to EUR 6,012 million (2014: EUR 6,366 million; 2013: EUR 3,689 million). A comparison of the fair value of investment property at December 31, 2015 with the carrying amount gives rise to unrealized gross gains of EUR 27 million (gross losses of EUR 1 million and gross gains of EUR 9 million at December 31, 2014 and 2013, respectively).

The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2015, 2014 and 2013 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.

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d) Sale of properties

In 2007 and 2008 the Group sold ten hallmark properties, 1,152 Bank branch offices in Spain and its head office complex (Ciudad Financiera or Santander Business Campus) to various buyers. Also, the Group entered into operating leases (with maintenance, insurance and taxes payable by the Group) on those properties with the buyers for various compulsory terms (12 to 15 years for the hallmark properties, 24 to 26 years for the branch offices and 40 years for the Santander Business Campus), with various rent review agreements applicable during those periods and the possible extensions thereof. The agreements between the parties also provided for purchase options that in general are exercisable by the Group on final expiry of the leases at the market value of the properties on the expiry dates; the market value will be determined, where appropriate, by independent experts.

The rental expense recognized by the Group in 2015 in connection with these operating lease agreements amounted to EUR 297 million (2014: EUR 292 million; 2013: EUR 286 million). At December 31, 2015, the present value of the minimum future payments that the Group will incur in the compulsory term amounted to EUR 243 million payable within one year, EUR 774 million payable at between one and five years and EUR 1,544 million payable at more than five years.

17. Intangible assets – Goodwill

The detail of Goodwill, based on the cash-generating units giving rise thereto, is as follows:

	Millions of euros
	2015		2014		2013
Santander UK		10,125		9,540		8,913
Banco Santander (Brazil)		4,590		6,129		5,840
Santander Consumer USA		3,081		2,762		—
Bank Zachodni WBK		2,423		2,418		2,487
Santander Bank, National Association		1,886		1,691		1,489
Santander Consumer Germany		1,217		1,315		1,315
Banco Santander Totta		1,040		1,040		1,040
Banco Santander - Chile		644		675		687
Santander Consumer Bank (Nordics)		546		564		171
Grupo Financiero Santander (Mexico)		517		561		541
Other companies		891		853		798
Total goodwill		26,960		27,548		23,281

F-118

The changes in Goodwill were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		27,548			23,281			24,626
Additions (Note 3)		235			3,176			398
Of which:
Carfinco Financial Group Inc.		162			—			—
Santander Consumer USA Holdings, Inc.		—			2,482			—
Santander Consumer Bank (Nordics) (*)		—			408			—
Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H. S.A., - Banco Santander (Brasil), S.A.		—			229			—
Financiera El Corte Inglés, E.F.C., S.A.		—			32			—
Bank Zachodni WBK, S.A.		—			—			326
Impairment losses		(115	)		(2	)		(40	)
Disposals or changes in scope of consolidation		(172	)		—			(39	)
Exchange differences and other items		(536	)		1,093			(1,664	)
Balance at end of year		26,960			27,548			23,281

(*) In 2015 the Group completed the purchase price allocation, the goodwill on which finally amounted to EUR 391 million (see Note 3.b.xii).

The Group has goodwill allocated to cash-generating units located in non-euro currency countries (mainly the UK, Brazil, the United States, Poland, Chile, Norway, Sweden and Mexico) and, therefore, this gives rise to exchange differences on the translation to euros, at closing rates, of the amounts of goodwill denominated in foreign currencies. Accordingly, in 2015 goodwill decreased by EUR 514 million due to exchange differences (see Note 29.c) which, pursuant to current accounting guidance, were recognized with a credit to Valuation adjustments—Exchange differences in equity in the consolidated statement of recognized income and expense.

At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). The first step that must be taken in order to perform this analysis is the identification of the cash-generating units, i.e. the Group’s smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustment arising on the business combination) of all the assets and liabilities of all the independent legal entities composing the cash-generating unit, together with the related goodwill.

The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.

The Group’s directors assess the existence of any indication that might be considered to be evidence of impairment of the cash-generating unit by reviewing information including the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarisation-, among others) and (ii) various microeconomic variables comparing the investments of the Group with the financial services industry of the country in which the cash-generating unit carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital adequacy ratio, return on equity, among others).

F-119

Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, to this end, it uses price quotations, if available, market references (multiples), internal estimates and appraisals performed by independent experts.

Firstly, the Group determines the recoverable amount by calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings ratios of comparable local entities.

In addition, the Group performs estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections. The main assumptions used in this calculation are: (i) earnings projections based on the financial budgets approved by the Group’s directors which normally cover a five-year period (unless a longer time horizon can be justified), (ii) discount rates determined as the cost of capital taking into account the risk-free rate of return plus a risk premium in line with the market and the business in which the units operate and (iii) constant growth rates used in order to extrapolate earnings in perpetuity which do not exceed the long-term average growth rate for the market in which the cash-generating unit in question operates.

The cash flow projections used by Group management to obtain the values in use are based on the financial budgets approved by both local management of the related local units and the Group’s directors. The Group’s budgetary estimation process is common for all the cash-generating units. The local management teams prepare their budgets using the following key assumptions:

a) Microeconomic variables of the cash-generating unit: management takes into consideration the current balance sheet structure, the product mix on offer and the business decisions taken by local management in this regard.

b) Macroeconomic variables: growth is estimated on the basis of the changing environment, taking into consideration expected GDP growth in the unit’s geographical location and forecast trends in interest and exchange rates. These data, which are based on external information sources, are provided by the Group’s economic research service.

c) Past performance variables: in addition, management takes into consideration in the projection the difference (both positive and negative) between the cash-generating unit’s past performance and that of the market.

F-120

Following is a detail of the main assumptions used in determining the recoverable amount, at 2015 year-end, of the most significant cash-generating units which were valued using the discounted cash flow method:

	Projected period		Discount rate (*)			Nominal perpetual growth rate
Santander UK		5 years		9.3	%		2.5	%
Banco Santander (Brazil)		5 years		15.2	%		6.9	%
Santander Bank, National Association(**)		7 years		9.0	%		2.5	%
Santander Consumer Germany		5 years		8.7	%		2.5	%
Santander Consumer USA		3 years		9.9	%		3.0	%
Banco Santander Totta		5 years		10.2	%		2.5	%
Santander Consumer Bank (Nordics)		5 years		9.0	%		2.5	%

(*) Post-tax discount rate for the purpose of consistency with the earnings projections used.

(**) A seven-year period was used for Santander Bank, National Association in order to provide normalized earnings projections which reflect the strategic plan of the cash-generating unit’s new management team.

Given the degree of uncertainty of these assumptions, the Group performs a sensitivity analysis thereof using reasonable changes in the key assumptions on which the recoverable amount of the cash-generating units is based in order to confirm whether their recoverable amount still exceeds their carrying amount. The sensitivity analysis involved adjusting the discount rate by +/- 50 basis points and the perpetuity growth rate by +/-50 basis points. Following the sensitivity analysis performed, the value in use of all the cash-generating units still exceeds their recoverable amount.

The recoverable amount of Bank Zachodni WBK, Banco Santander - Chile and Grupo Financiero Santander (México) was calculated as the fair values of the aforementioned cash-generating units obtained from the market prices of their shares at year-end. This value exceeded the recoverable amount.

Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in 2015 the Group recognized impairment losses on goodwill totaling EUR 115 million (2014: EUR 2 million; 2013: EUR 40 million), under Impairment losses on other assets (net) - Goodwill and other intangible assets. This related mainly to the Group’s businesses in Puerto Rico and was due to the deterioration of the projected business expectations.

At December 31, 2015, none of the cash-generating units with significant goodwill had a recoverable amount approximating their carrying amount. The recoverable amount is considered to be close to the carrying amount when reasonable changes in the main assumptions used in the valuation cause the recoverable amount to be below the carrying amount.

F-121

18. Intangible assets - Other intangible assets

The detail of Intangible assets - Other intangible assets in the consolidated balance sheets and of the changes therein in 2015, 2014 and 2013 is as follows:

		Millions of euros
	Estimated useful life	31 December 2014			Net additions and disposals		Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			31 December 2015
With indefinite useful life:
Brand names			61			—		(2	)		—			(17	)		7			49
With finite useful life:
IT developments	3 to 7 years		5,350			1,481		(25	)		—			(951	)		(444	)		5,411
Other			1,294			87		—			—			(81	)		6			1,306
Accumulated amortization			(3,623	)		—		20			(1,246	)		663			313			(3,873	)
Impairment losses			(229	)		—		—			(586	)		386			6			(423	)
			2,853			1,568		(7	)		(1,832	)		—			(112	)		2,470

In 2015, impairment losses of EUR 586 million were recognized under Impairment losses on other assets (net) in the consolidated income statement. These impairment losses related mainly to the decline in or loss of the recoverable value of certain computer systems and applications as a result of the processes initiated by the Group to adapt to the various regulatory changes and to transform or integrate businesses.

		Millions of euros
	Estimated useful life	31 December 2013			Net additions and disposals			Change in scope of consolidation		Amortization and impairment			Application of amortization and impairment			Exchange differences and other			31 December 2014
With indefinite useful life:
Brand names			15			—			43		—			—			3			61
With finite useful life:
IT developments	3 to 7 years		5,546			1,345			63		—			(1,731	)		127			5,350
Other			1,132			(127	)		525		—			(250	)		14			1,294
Accumulated amortization			(3,603	)		—			—		(1,227	)		1,269			(62	)		(3,623	)
Impairment losses			(130	)		—			—		(699	)		712			(112	)		(229	)
			2,960			1,218			631		(1,926	)		—			(30	)		2,853

F-122

		Millions of euros
	Estimated useful life	31 December 2012			Net additions and disposals			Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			31 December 2013
With indefinite useful life:
Brand names			14			2			—			—			—			(1	)		15
With finite useful life:
IT developments	3 to 7 years		5,285			1,229			4			—			(679	)		(293	)		5,546
Other			1,373			(46	)		37			—			(37	)		(195	)		1,132
Accumulated amortization			(3,106	)		—			(3	)		(1,353	)		715			144			(3,603	)
Impairment losses			(130	)		—			—			(1	)		1			—			(130	)
			3,436			1,185			38			(1,354	)		—			(345	)		2,960

19. Other assets

The detail of Other assets is as follows:

	Millions of euros
	2015		2014		2013
Inventories		1,013		1,099		80
Transactions in transit		323		727		127
Net pension plan assets (Note 25)		787		413		149
Prepayments and accrued income		1,976		2,001		2,114
Other		3,277		3,909		3,344
		7,376		8,149		5,814

The increase in Inventories in 2014 related mainly to the consolidation of the assets of Metrovacesa, S.A. (see Note 3).

F-123

20. Deposits from central banks and Deposits from credit institutions

The detail, by classification, counterparty, type and currency, of Deposits from central banks and Deposits from credit institutions in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Classification:
Financial liabilities held for trading		2,255		7,572		11,334
Of which:
Deposits from central banks		2,178		2,041		3,866
Deposits from credit institutions		77		5,531		7,468
Other financial liabilities at fair value through profit or loss		25,037		25,360		11,741
Of which:
Deposits from central banks		16,486		6,321		2,097
Deposits from credit institutions		8,551		19,039		9,644
Financial liabilities at amortized cost		148,079		122,437		86,322
Of which:
Deposits from central banks		38,872		17,290		9,788
Deposits from credit institutions		109,207		105,147		76,534
		175,371		155,369		109,397
Type:
Reciprocal accounts		1,332		704		755
Time deposits		113,117		85,178		55,839
Other demand accounts		3,199		4,893		3,425
Repurchase agreements		57,723		64,594		49,378
		175,371		155,369		109,397
Currency:
Euro		92,060		86,539		63,947
Pound sterling		5,961		8,107		6,993
US dollar		48,586		34,646		27,509
Other currencies		28,764		26,077		10,948
		175,371		155,369		109,397

The increase in Deposits from central banks measured at amortized cost in the last two years relates mainly to the Group’s participation in the European Central Bank’s targeted longer-term refinancing operations (TLTROs) for approximately EUR 21.8 thousand million and EUR 8.2 thousand million in 2015 and 2014, respectively.

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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21. Customer deposits

The detail, by classification, geographical area and type, of Customer deposits is as follows:

	Millions of euros
	2015		2014		2013
Classification:
Financial liabilities held for trading		9,187		5,544		8,500
Other financial liabilities at fair value through profit or loss		26,357		33,127		26,484
Financial liabilities at amortized cost		647,578		608,956		572,853
		683,122		647,627		607,837
Geographical area:
Spain		183,778		186,051		185,460
European Union (excluding Spain)		311,314		275,291		259,903
United States and Puerto Rico		59,814		51,291		43,773
Other OECD countries		57,817		55,003		47,541
Latin America (non-OECD)		69,792		79,848		71,004
Rest of the world		607		143		156
		683,122		647,627		607,837
Type:
Demand deposits-
Current accounts		257,192		200,752		167,787
Savings accounts		180,415		173,105		164,214
Other demand deposits		5,489		5,046		3,512
Time deposits-
Fixed-term deposits and other term deposits		196,965		223,262		225,955
Home-purchase savings accounts		59		71		102
Discount deposits		448		448		1,156
Hybrid financial liabilities		5,174		3,525		3,324
Repurchase agreements		37,380		41,418		41,787
		683,122		647,627		607,837

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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22. Marketable debt securities

a) Breakdown

The detail, by classification and type, of Marketable debt securities is as follows:

	Millions of euros
	2015		2014		2013
Classification:
Financial liabilities held for trading		—		—		1
Other financial liabilities at fair value through profit or loss		3,373		3,830		4,086
Financial liabilities at amortized cost		201,656		193,059		171,390
		205,029		196,889		175,477
Type:
Bonds and debentures outstanding		182,073		178,710		161,274
Notes and other securities		22,956		18,179		14,203
		205,029		196,889		175,477

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates in those years.

b) Bonds and debentures outstanding

The detail, by currency of issue, of Bonds and debentures outstanding is as follows:

							December 31, 2015
							Outstanding issue amount  in foreign currency (millions)		Annual interest  rate (%)
	Millions of euros
Currency of issue	2015		2014		2013
Euro		88,922		89,803		85,120		88,922		2.25	%
US dollar		46,463		39,992		25,641		50,585		2.46	%
Pound sterling		16,757		19,613		20,237		12,299		2.58	%
Brazilian real		19,125		18,707		15,017		82,459		13.57	%
Hong Kong dollar		74		41		5,026		626		3.20	%
Chilean peso		3,634		3,596		3,360		2,811,775		3.79	%
Other currencies		7,098		6,958		6,873
Balance at end of year		182,073		178,710		161,274

F-126

The changes in Bonds and debentures outstanding were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		178,710			161,274			183,686
Net inclusion of entities in the Group		5,229			7,024			—
Of which:
Banco Santander Totta, S.A. (Note 3)		1,729			—			—
Auto ABS UK Loans PLC		1,358			—			—
Auto ABS DFP Master Compartment France 2013		550			—			—
Auto ABS2 FCT Compartiment 2013-A		514			—			—
PSA Financial Services, Spain, E.F.C., S.A.		401			—			—
Auto ABS FCT Compartiment 2012-1		274			—			—
Auto ABS FCT Compartiment 2013-2		205			—			—
PSA Finance Suisse, S.A.		200			—			—
Santander Consumer USA Holdings Inc.(Note 3)		—			7,024			—
Issues		66,223			66,360			61,754
Of which:
Santander UK Group
Bonds in other currencies		11,727			18,608			23,491
Bond in pounds sterling		4,552			2,769			5,877
Banco Santander (Brasil) S.A.
Real estate letters of credit		6,966			9,551			4,989
Bonds		8,870			4,511			5,777
Agricultural letters of credit		1,074			1,756			478
Santander Consumer USA Holdings Inc. - Asset-backed securities		11,330			7,600			—
Santander Consumer Finance, S.A. - Bonds		5,070			3,602			2,325
Santander International Debt, S.A. Sole-Shareholder Company - Bonds - floating/fixed rate		4,270			4,853			4,654
Santander Holdings USA, Inc. - Bonds		1,921			—			362
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander – México Bonds		1,874			1,099			392
Santander Consumer Bank AS - Bonds		1,328			470			443
Banco Santander - Chile - Bonds		1,198			1,979			1,469
Banco Santander, S.A.
Mortgage-backed bonds - fixed rate		995			2,944			1,990
Territorial bonds - fixed rate		—			218			4,000
Bonds		—			—			323
Santander Bank, National Association - Bonds		910			—			—
Banco Santander Totta S.A.- Mortgage debentures		749			1,746			—
Emisora Santander España - Bonds		745			—			—
Fondo de Titulización RMBS Santander 4 - Asset-backed securities		613			—			—
Bilkreditt 7 Designated Activity Company - Bonds		500			—			—
Santander International Products, Plc. - Bonds		402			341			65
SCF Rahoituspalvelut I DAC - Bonds		316			—			—
Santander Consumer Bank S.p.A. - Bonds - floating rate		300			35			100
SC Poland Consumer 15-1 Sp. z.o.o. - Bonds		247			—			—
Bank Zachodni WBK S.A. - Bonds		114			—			—
Santander Consumer Bank SA - Bonds		61			188			256
Motor 2014-1 plc - Asset-backed securities		—			736			—
Bilkreditt 6 Limited - Asset-backed securities		—			638			—
Fondo de Titulización de Activos Pymes Santander 10 - Asset-backed securities		—			590			—
Svensk Autofinans WH 1 Ltd - Asset-backed securities		—			474			—
SC Germany Auto 2014-1 UG (haftungsbeschränkt) - Asset-backed securities		—			389			—
Motor 2013-1 plc - Asset-backed securities		—			—			598
Bilkreditt 5 Limited - Asset-backed securities		—			—			494
Bilkreditt 3 Limited - Asset-backed securities		—			—			468
SC Germany Auto 2013-2 UG - Asset-backed securities		—			—			466
Dansk Auto Finansiering 1 Ltd - Asset-backed securities		—			—			416
SC Germany Auto 2013-2 UG (Haftungsbeschränkt) - Asset-backed securities		—			—			407
SCF Rahoituspalvelut 2013 Limited - Asset-backed securities		—			—			384
Bilkreditt 4 Limited - Asset-backed securities		—			—			357
Trade Maps 3 Ireland Limited - Debentures - floating rate		—			—			313
Fondo de Titulización de Activos PYMES Santander 6 - Asset-backed securities		—			—			235
Redemptions		(69,295	)		(60,883	)		(73,619	)
Of which:
Santander UK Group		(18,702	)		(19,213	)		(37,388	)
Banco Santander (Brasil) S.A.		(14,718	)		(14,359	)		(8,246	)
Banco Santander, S.A.		(12.058	)		(12,391	)		(11,434	)
Santander Consumer USA Holdings Inc.		(7,556	)		—			—
Santander International Debt, S.A. Sole-Shareholder Company		(5,938	)		(6,967	)		(10,437	)
Santander Consumer Finance, S.A.		(2,838	)		(1,422	)		(1,012	)
Banco Santander - Chile		(2,136	)		(2,186	)		(1,263	)
Santander US Debt, S.A. Sole-Shareholder Company		(1,064	)		—			(947	)
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		(789	)		(726	)		(62	)
Santander Holdings USA, Inc.		(494	)		—			—
SCFI Ajoneuvohallinto Limited		(452	)		—			—
Fondo de Titulización de Activos PYMES Santander 10		(404	)		—			—
Bilkreditt 6 Limited		(268	)		—			—
SC Germany Auto 2014-1 UG (haftungsbeschränkt)		(178	)		—			—
Dansk Auto Finansiering 1 Ltd		(169	)		—			—
Bilkreditt 3 Limited		(169	)		—			—
Santander Consumer Bank A.S.		(163	)		—			—
SC Germany Auto 2013-2 UG (haftungsbeschränkt)		(147	)		—			—
Bilkreditt 5 Limited		(143	)		—			—
SC Austria Finance 2013-1 S.A.		(143	)		—			—
Santander Consumer Bank S.A.		(141	)		(200	)		(48	)
Santander Consumer Bank S.p.A.		(135	)		—			—
Banco Santander Totta, S.A.		(130	)		(1,095	)		(962	)
Santander International Products plc.		(64	)		(610	)		(1,605	)
Brazil Foreign Diversified Payment Rights Finance Company		—			(655	)		—
Santander Consumer Bank AG		—			—			(6	)
Exchange differences		3,850			6,706			(5,590	)
Other changes		(2,644	)		(1,771	)		(4,957	)
Balance at end of year		182,073			178,710			161,274

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c) Notes and other securities

These notes were issued basically by Abbey National Treasury Services plc, Santander Consumer Finance, S.A., Santander Commercial Paper, S.A. (Sole-Shareholder Company), Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, Abbey National North America LLC, Bank Zachodni WBK S.A., Banco Santander Totta, S.A. and Banco Santander, S.A.

d) Guarantees

Set forth below is information on the liabilities secured by financial assets:

	Millions of euros
	2015		2014		2013
Asset-backed securities		42,201		39,594		30,020
Of which, mortgage-backed securities		14,152		18,059		22,843
Other mortgage securities		48,227		60,569		59,984
Of which: mortgage-backed bonds		19,747		29,227		32,717
		90,428		100,163		90,004

The main characteristics of the assets securing the aforementioned financial liabilities are as follows:

1. Asset-backed securities:

a. Mortgage-backed securities- these securities are secured by securitized mortgage assets (see Note 10.e) with average maturities of more than ten years that must: be a first mortgage for acquisition of principal or second residence, be current in payments, have a loan-to-value ratio below 80% and have a liability insurance policy in force covering at least the appraisal value. The value of the financial liabilities broken down in the foregoing table is lower than the balance of the assets securing them - securitized assets retained on the balance sheet - mainly because the Group repurchases a portion of the bonds issued, and in such cases they are not recognized on the liability side of the consolidated balance sheet.

b. Other asset-backed securities- including asset-backed securities and notes issued by special-purpose vehicles secured mainly by mortgage loans that do not meet the foregoing requirements and other loans (mainly personal loans with average maturities of five years and loans to SMEs with average maturities of seven years).

2. Other mortgage securities include mainly: (i) mortgage-backed bonds with average maturities of more than ten years that are secured by a portfolio of mortgage loans and credits (included in secured loans - see Note 10.b) which must: not be classified as at procedural stage; have available appraisals performed by specialized entities; have a loan-to-value ratio below 80% in the case of home loans and below 60% for loans for other assets and have sufficient liability insurance, (ii) other debt securities issued as part of the Group’s liquidity strategy in the UK, mainly covered bonds in the UK secured by mortgage loans and other assets.

The fair value of the collateral received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the owner of the collateral has not defaulted is not material taking into account the Group’s financial statements as a whole.

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e) Spanish mortgage-market issues

The members of the board of directors hereby state that the Group entities operating in the Spanish mortgage-market issues area have established and implemented specific policies and procedures to cover all activities carried on and guarantee strict compliance with mortgage-market regulations applicable to these activities as provided for in Royal Decree 716/2009, of April 24, implementing certain provisions of Mortgage Market Law 2/1981, of March 25, and, by application thereof, in Bank of Spain Circulars 7/2010 and 5/2011, and other financial and mortgage system regulations. Also, financial management defines the Group entities’ funding strategy.

The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, and specific policies are also in place adapted to each mortgage product, which occasionally require the application of stricter limits.

The Bank’s general policies in this respect require the repayment capacity of each potential customer (the effort ratio in loan approval) to be analyzed using specific indicators that must be met. This analysis must determine whether each customer’s income is sufficient to meet the repayments of the loan requested. In addition, the analysis of each customer must include a conclusion on the stability over time of the customer’s income considered with respect to the life of the loan. The aforementioned indicator used to measure the repayment capacity (effort ratio) of each potential customer takes into account mainly the relationship between the potential debt and the income generated, considering on the one hand the monthly repayments of the loan requested and other transactions and, on the other, the monthly salary income and duly supported income.

The Group entities have specialized document comparison procedures and tools for verifying customer information and solvency (see Note 54).

The Group entities’ procedures envisage that each mortgage originated in the mortgage market must be individually valued by an appraisal company not related to the Group.

In accordance with Article 5 of Mortgage Market Law 41/2007, any appraisal company approved by the Bank of Spain may issue valid appraisal reports. However, as permitted by this same article, the Group entities perform several checks and select, from among these companies, a small group with which they enter into cooperation agreements with special conditions and automated control mechanisms. The Group’s internal regulations specify, in detail, each of the internally approved companies, as well as the approval requirements and procedures and the controls established to uphold them. In this connection, the regulations establish the functions of an appraisal company committee on which the various areas of the Group related to these companies are represented. The aim of the committee is to regulate and adapt the internal regulations and the activities of the appraisal companies to the current market and business situation.

Basically, the companies wishing to cooperate with the Group must have a significant level of activity in the mortgage market in the area in which they operate, they must pass a preliminary screening process based on criteria of independence, technical capacity and solvency -in order to ascertain the continuity of their business- and, lastly, they must pass a series of tests prior to obtaining definitive approval.

In order to comply in full with the legislation, any appraisal provided by the customer is reviewed, irrespective of which appraisal company issues it, to check that the requirements, procedures and methods used to prepare it are formally adapted to the valued asset pursuant to current legislation and that the values reported are customary in the market.

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The information required by Bank of Spain Circulars 7/2010 and 5/2011, by application of Royal Decree 716/2009, of April 24, is as follows:

	Millions of euros
Face value of the outstanding mortgage loans and credits that support the issuance of mortgage-backed and mortgage bonds pursuant to Royal Decree 716/2009 (excluding securitized bonds)		60,043
Of which:
Loans eligible to cover issues of mortgage-backed securities		39,414
Transfers of assets retained on balance sheet: mortgage-backed certificates and other securitized mortgage assets		21,417

Mortgage-backed bonds

The mortgage-backed bonds (“cédulas hipotecarias”) issued by the Group entities are securities the principal and interest of which are specifically secured by mortgages, there being no need for registration in the Property Register and without prejudice to the issuer’s unlimited liability.

The mortgage-backed bonds include the holder’s financial claim on the issuer, secured as indicated in the preceding paragraph, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (established in Article 1923.3 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer’s favor and, where appropriate, in relation to the cash flows generated by the derivative financial instruments associated with the issues.

In the event of insolvency, the holders of mortgage-backed bonds will enjoy the special privilege established in Article 90.1.1 of Insolvency Law 22/2003, of July 9. Without prejudice to the foregoing, in accordance with Article 84.2.7 of the Insolvency Law, during the insolvency proceedings, the payments relating to the repayment of the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be settled up to the amount of the income received by the insolvent party from the mortgage loans and credits and, where appropriate, from the replacement assets backing the bonds and from the cash flows generated by the financial instruments associated with the issues (Final Provision 19 of the Insolvency Law).

If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the insolvency managers must settle them by realizing the replacement assets set aside to cover the issue and, if this is not sufficient, they must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders.

In the event that the measure indicated in Article 155.3 of the Insolvency Law were to be adopted, the payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, irrespective of the issue dates of the bonds.

The outstanding mortgage-backed bonds issued by the Group totaled EUR 19,747 million at December 31, 2015 (all of which were denominated in euros), of which EUR 18,603 million were issued by Banco Santander, S.A. and EUR 1,144 million were issued by Santander Consumer Finance, S.A. The issues outstanding at December 31, 2015 and 2014 are detailed in the separate financial statements of each of these companies.

Mortgage-backed bond issuers have an early redemption option solely for the purpose of complying with the limits on the volume of outstanding mortgage-backed bonds stipulated by mortgage market regulations.

None of the mortgage-backed bonds issued by the Group entities had replacement assets assigned to them.

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23. Subordinated liabilities

a) Breakdown

The detail, by currency of issue, of Subordinated liabilities in the consolidated balance sheets is as follows:

	Millions of euros						December 31, 2015
							Outstanding issue amount in foreign currency (millions)		Annual interest rate (%)
Currency of issue	2015		2014		2013
Euro		8,001		5,901		4,600		8,001		3.59	%
US dollar		9,174		5,525		4,413		9,987		4.02	%
Pound sterling		851		1,776		2,750		625		8.36	%
Brazilian real		1,878		2,267		2,734		8,097		14.64	%
Other currencies		1,249		1,663		1,642
Balance at end of year		21,153		17,132		16,139
Of which, preference shares (acciones preferentes)		449		739		401
Of which, preference shares (participaciones preferentes)		6,749		6,239		3,652

Note 51 contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.

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b) Changes

The changes in Subordinated liabilities in the last three years were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		17,132			16,139			18,238
Net inclusion of entities in the Group (Note 3)		—			—			237
Placements		4,787			4,351			1,027
Of which:
Santander Issuances, S.A., Sole-Shareholder Company		2,878			—			—
Santander UK Group Holdings plc		1,377			—			—
Santander UK plc		521			—			599
Banco Santander, S.A.		—			4,235			—
Banco Santander (Brasil) S.A.		—			115			—
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		—			—			235
Banco Santander - Chile		—			—			191
Redemptions and repurchases		(1,029	)		(3,743	)		(1,915	)
Of which:
Santander UK plc		(466	)		—			—
Bank Zachodni WBK S.A.		(237	)		—			—
Banco Santander, S.A.		(114	)		(61	)		(28	)
Santander Central Hispano Issuances Limited		(79	)		—			—
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		(64	)		—			—
Banco Santander (Brasil) S.A.		(60	)		(379	)		(663	)
Banco Santander - Chile		(4	)		(174	)		(7	)
Santander Issuances, S.A., Sole-Shareholder Company		—			(1,425	)		(608	)
Santander Finance Capital, S.A., Sole-Shareholder		—			(21	)		(4	)
Santander Finance Preferred, S.A., Sole-Shareholder		—			(1,678	)		(7	)
Santander Securities Services, S.A.		—			(3	)		(6	)
Abbey National Capital Trust I		—			—			(278	)
Santander Holdings USA, Inc.		—			—			(193	)
Santander PR Capital Trust I		—			—			(91	)
Santander Perpetual, S.A., Sole-Shareholder Company		—			—			(28	)
Exchange differences		389			737			(923	)
Other changes		(126	)		(352	)		(525	)
Balance at end of year		21,153			17,132			16,139

c) Other disclosures

This item includes the preference shares (participaciones preferentes) and other financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity (preference shares).

The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Santander UK plc referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.

At December 31, 2015, Santander UK plc had a GBP 200 million subordinated issue which is convertible, at Santander UK plc’s option, into preference shares of Santander UK plc, at a price of GBP 1 per share.

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For the purposes of payment priority, preference shares (participaciones preferentes) are junior to all general creditors and to subordinated deposits. The remuneration of these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

The other issues are subordinated and, therefore, for the purposes of payment priority, they are junior to all general creditors of the issuers. The issues launched by Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company), Santander International Preferred, S.A. (Sole-Shareholder Company) and Santander Finance Preferred, S.A. (Sole-Shareholder Company) are guaranteed by the Bank or by restricted deposits arranged at the Bank for this purpose and totaled EUR 8,118 million at December 31, 2015.

At December 31, 2015, the following issues were convertible into Bank shares:

On March 5, May 8 and September 2, 2014, Banco Santander, S.A. announced that its executive committee had resolved to launch issues of preference shares contingently convertible into newly issued ordinary shares of the Bank (“CCPSs”) for a nominal amount of EUR 1,500 million, USD 1,500 million and EUR 1,500 million, respectively. The interest on the CCPSs, payment of which is subject to certain conditions and is discretionary, was set at 6.25% per annum for the first five years (to be repriced thereafter by applying a 541 basis-point spread to the 5-year Mid-Swap Rate) for the March issue, at 6.375% per annum for the first five years (to be repriced thereafter by applying a 478.8 basis-point spread to the 5-year Mid-Swap Rate) for the May issue and at 6.25% per annum for the first seven years (to be repriced every five years thereafter by applying a 564 basis-point spread to the 5-year Mid-Swap Rate) for the September issue.

On March 25, May 28 and September 30, 2014, the Bank of Spain confirmed that the CCPSs were eligible as Additional Tier 1 capital under the new European capital requirements of Regulation (EU) No 575/2013. The CCPSs are perpetual, although they may be redeemed early in certain circumstances and would convert into newly issued ordinary shares of Banco Santander if the Common Equity Tier 1 ratio of the Bank or its consolidated group fell below 5.125%, calculated in accordance with Regulation (EU) No 575/2013. The CCPSs are traded on the Global Exchange Market of the Irish Stock Exchange.

Furthermore, on January 29, 2014, Banco Santander (Brasil), S.A. launched an issue of Tier 1 perpetual subordinated notes for a nominal amount of USD 1,248 million, of which the Group has acquired 89.6%. The notes are perpetual and would convert into ordinary shares of Banco Santander (Brasil), S.A. if the common equity Tier 1 ratio, calculated as established by the Central Bank of Brazil, were to fall below 5.125%.

The interest accrued on subordinated liabilities amounted to EUR 934 million in 2015 (2014: EUR 1,084 million; 2013: EUR 1,260 million) (see Note 39).

The interest accrued on the CCPSs in 2015 amounted to EUR 276 million (2014: EUR 131 million).

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24. Other financial liabilities

The detail of Other financial liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Trade payables		1,264		1,276		1,031
Clearing houses		708		562		841
Tax collection accounts:
Tax payables		2,489		2,304		2,197
Factoring accounts payable		194		193		194
Unsettled financial transactions		5,584		4,445		3,063
Other financial liabilities		10,639		10,688		9,084
		20,878		19,468		16,410

Note 51 contains a detail of the residual maturity periods of other financial liabilities at each year-end.

25. Provisions

a) Breakdown

The detail of Provisions in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Provision for pensions and similar obligations		8,272		9,412		9,126
Provisions for taxes and other legal contingencies		2,577		2,916		2,727
Provisions for contingent liabilities and commitments (Note 2):		618		654		693
Of which: due to country risk		2		2		4
Other provisions		3,027		2,394		2,043
Provisions		14,494		15,376		14,589

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b) Changes

The changes in Provisions in the last three years were as follows:

	Millions of euros
	2015												2014												2013
	Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments			Other provisions			Total
Balances at beginning of year		9,412			654			5,310			15,376			9,126			693			4,770			14,589			10,353			617			5,032			16,002
Net inclusion of entities in the Group		17			8			162			187			11			3			74			88			(1	)		15			—			14
Additions charged to income:
Interest expense and similar charges (Note 39)		270			—			—			270			344			—			—			344			363			—			—			363
Personnel expenses (Note 47)		96			—			—			96			75			—			—			75			88			—			—			88
Period provisions (net)		149			(1	)		2,958			3,106			361			54			2,594			3,009			397			126			1,922			2,445
Other additions arising from insurance contracts linked to pensions		(18	)		—			—			(18	)		31			—			—			31			(27	)		—			—			(27	)
Changes in value recognized in equity		(575	)		—			—			(575	)		770			—			—			770			(90	)		—			—			(90	)
Payments to pensioners and pre-retirees with a charge to internal provisions		(1,014	)		—			—			(1,014	)		(1,038	)		—			—			(1,038	)		(1,086	)		—			—			(1,086	)
Benefits paid due to settlements		—			—			—			—			—			—			—			—			(2	)		—			—			(2	)
Insurance premiums paid		(1	)		—			—			(1	)		(11	)		—			—			(11	)		(6	)		—			—			(6	)
Payments to external funds		(146	)		—			—			(146	)		(607	)		—			—			(607	)		(217	)		—			—			(217	)
Amounts used		—			—			(1,684	)		(1,684	)		—			—			(2,293	)		(2,293	)		—			—			(1,661	)		(1,661	)
Transfers, exchange differences and other changes		82			(43	)		(1,142	)		(1,103	)		350			(96	)		165			419			(646	)		(65	)		(523	)		(1,234	)
Balances at end of year		8,272			618			5,604			14,494			9,412			654			5,310			15,376			9,126			693			4,770			14,589

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c) Provision for pensions and similar obligations

The detail of Provisions for pensions and similar obligations is as follows:

	Millions of euros
	2015		2014		2013
Provisions for post-employment plans - Spanish entities		4,826		4,915		4,643
Of which: defined benefit		4,822		4,910		4,633
Provisions for other similar obligations - Spanish entities		1,813		2,237		2,161
Of which: Pre-retirements		1,801		2,220		2,149
Provisions for post-employment plans - Santander UK plc		150		256		806
Provisions for post-employment plans and other similar obligations - Other foreign subsidiaries		1,483		2,004		1,516
Of which: defined benefit		1,478		1,999		1,512
Provisions for pensions and similar obligations		8,272		9,412		9,126

i. Spanish entities - Post-employment plans and other similar obligations

At December 31, 2015, 2014 and 2013, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans In addition, in various years some of the consolidated entities offered certain of their employees the possibility of taking pre-retirement and, therefore, provisions are recognized each year for the obligations to employees taking pre-retirement -in terms of salaries and other employee benefit costs- from the date of their pre-retirement to the date of effective retirement. In 2015, 589 employees accepted the pre-retirement and voluntary redundancy offers, and the provision recognized to cover these obligations totaled EUR 217 million (2014: EUR 642 million; 2013: EUR 334 million).

The expenses incurred by the Group in respect of contributions to defined contribution plans amounted to EUR 99 million in 2015 (2014: EUR 105 million; 2013: EUR 108 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	Post-employment plans			Other similar obligations
	2015	2014	2013	2015	2014	2013
Annual discount rate	1.75%	2.00%	3.00%	1.75%	2.00%	3.00%
Mortality tables	PERM/F-2000	PERM/F-2000	PERM/F-2000	PERM/F-2000	PERM/F-2000	PERM/F-2000
Cumulative annual CPI growth	1.0%	1.5%	1.5%	1.0%	1.5%	1.5%
Annual salary increase rate	2.0% (*)	2.50% (*)	2.50% (*)	N/A	N/A	N/A
Annual social security pension increase rate	1.0%	1.5%	1.5%	N/A	N/A	N/A
Annual benefit increase rate	N/A	N/A	N/A	0% to 1.5%	0% to 1.5%	0% to 1.5%

(*) Corresponds to the Group’s defined-benefit obligations.

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The discount rate used for the flows was determined by reference to high-quality corporate bonds (at least AA in euros) with terms consistent with those of the obligations. The portfolio of bonds taken into consideration excludes callable, puttable and sinkable bonds which could distort the indices.

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2015, if the discount rate used had been decreased or increased by 50 basis points, there would have been an increase or decrease in the present value of the post-employment obligations of +5.70% and -5.10%, respectively, and an increase or decrease in the present value of the long-term obligations of +1.10% and -1.08%. These changes would be offset in part by increases or decreases in the fair value of the assets and insurance contracts linked to pensions.

3. The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.

The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:

	Post-employment plans									Other similar obligations
	2015			2014			2013			2015	2014	2013
Expected rate of return on plan assets		1.75	%		2.0	%		3.0	%	N/A	N/A	N/A
Expected rate of return on reimbursement rights		1.75	%		2.0	%		3.0	%	N/A	N/A	N/A

The funding status of the defined benefit obligations in 2015 and the four preceding years is as follows:

	Millions of euros
	Post-employment plans												Other similar obligations
	2015			2014		2013			2012		2011		2015		2014		2013		2012		2011
Present value of the obligations:
To current employees		48			62		50			58		1,533		—		—		—		—		—
Vested obligations to retired employees		4,551			4,708		4,483			4,765		4,367		—		—		—		—		—
To pre-retirees		—			—		—			—		—		1,801		2,220		2,149		2,389		2,769
Long-service bonuses and other benefits		—			—		—			—		—		12		13		11		7		7
Other		380			307		257			221		185		—		4		1		8		5
		4,979			5,077		4,790			5,044		6,085		1,813		2,237		2,161		2,404		2,781
Less - Fair value of plan assets		157			167		157			144		177		—		—		—		—		—
Provisions - Provisions for pensions		4,822			4,910		4,633			4,900		5,908		1,813		2,237		2,161		2,404		2,781
Of which:
Internal provisions for pensions		4,524			4,565		4,293			4,495		3,762		1,813		2,237		2,161		2,404		2,781
Insurance contracts linked to pensions (Note 14)		299			345		342			405		2,146		—		—		—		—		—
Unrecognized net assets for pensions		(1	)		—		(2	)		—		—		—		—		—		—		—

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The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2015			2014			2013			2015			2014		2013
Current service cost		12			10			10			2			1		—
Interest cost (net)		100			139			139			37			59		61
Expected return on insurance contracts linked to pensions		(6	)		(9	)		(11	)		—			—		—
Extraordinary charges:
Actuarial (gains)/losses recognized in the year		—			—			—			(8	)		48		3
Past service cost		4			—			30			—			—		34
Pre-retirement cost		4			12			8			213			630		326
Effect of curtailment/settlement		(28	)		(14	)		(6	)		(33	)		—		—
		86			138			170			211			738		424

In addition, in 2015 Valuation adjustments – Other valuation adjustments increased by EUR 145 million with respect to defined benefit obligations (2014: an increase of EUR 427 million; 2013: an increase of EUR 52 million).

The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2015			2014			2013			2015			2014			2013
Present value of the obligations at beginning of year		5,077			4,790			5,044			2,237			2,161			2,404
Net inclusion of entities in the Group		—			—			(5	)		—			—			—
Current service cost		12			10			10			2			1			—
Interest cost		105			144			145			37			59			61
Pre-retirement cost		4			12			8			213			630			326
Effect of curtailment/settlement		(28	)		(14	)		(6	)		(33	)		—			—
Benefits paid due to settlements		—			—			—			(1	)		—			—
Other benefits paid		(327	)		(355	)		(394	)		(657	)		(665	)		(661	)
Past service cost		4			—			30			—			—			34
Actuarial (gains)/losses (*)		124			485			(79	)		(8	)		48			3
Exchange differences and other items		8			5			37			23			3			(6	)
Present value of the obligations at end of year		4,979			5,077			4,790			1,813			2,237			2,161

(*) Including in 2015 demographic actuarial losses of EUR 24 million and financial actuarial losses of EUR 100 million in the post-employment plans, as well as demographic actuarial gains of EUR 12 million and financial actuarial losses of EUR 4 million in other similar obligations.

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The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows:

Plan assets

	Millions of euros
	Post-employment plans
	2015			2014			2013
Fair value of plan assets at beginning of year		167			157			144
Expected return on plan assets		5			5			6
Actuarial gains/(losses)		(3	)		27			—
Contributions/(surrenders)		1			11			5
Benefits paid		(17	)		(38	)		(12	)
Exchange differences and other items		4			5			14
Fair value of plan assets at end of year		157			167			157

Insurance contracts linked to pensions

	Millions of euros
	Post-employment plans
	2015			2014			2013
Fair value of insurance contracts linked to pensions at beginning of year		345			342			405
Expected return on insurance contracts (Note 38)		6			9			11
Benefits paid		(34	)		(37	)		(47	)
Actuarial gains/(losses)		(18	)		31			(27	)
Fair value of insurance contracts linked to pensions at end of year		299			345			342

In view of the conversion of the defined-benefit obligations to defined-contribution obligations, the Group will not make material current contributions in Spain in 2015 to fund its defined-benefit pension obligations.

The plan assets and the insurance contracts linked to pensions are instrumented mainly through insurance policies.

The following table shows the estimated benefits payable at December 31, 2015 for the next ten years:

	Millions of euros
2016		873
2017		754
2018		647
2019		545
2020		459
2021 to 2025		1,510

F-139

ii. United Kingdom

At the end of each of the last three years, the businesses in the United Kingdom had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 90 million in 2015 (2014: EUR 84 million; 2013: EUR 62 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	2015	2014	2013
Annual discount rate	3.74%	3.65%	4.45%
Mortality tables	116/98 S1 Light TMC	116/98 S1 Light TMC	103 S1 Light TMC
Cumulative annual CPI growth	2.98%	3.05%	3.40%
Annual salary increase rate	1.00%	1.00%	3.40%
Annual pension increase rate	2.83%	2.85%	3.15%

The discount rate used for the flows was determined by reference to high-quality corporate bonds (at least AA in pounds sterling) that coincide with the terms of the obligations. The portfolio of bonds taken into consideration excludes callable, puttable and sinkable bonds which could distort the indices.

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2015, if the discount rate used had been decreased or increased by 50 basis points, there would have been an increase or decrease in the present value of the obligations of +/- 10.1%. If the inflation assumption had been increased or decreased by 50 basis points, there would have been an increase or decrease in the present value of the obligations of +/- 6.6%. These changes would be offset in part by increases or decreases in the fair value of the assets.

The funding status of the defined benefit obligations in 2015 and the four preceding years is as follows:

	Millions of euros
	2015			2014			2013			2012			2011
Present value of the obligations		12,271			11,959			10,120			9,260			8,467
Less-
Fair value of plan assets		12,880			12,108			9,455			9,194			8,496
Provisions - Provisions for pensions		(609	)		(149	)		665			66			(29	)
Of which:
Internal provisions for pensions		150			256			806			409			255
Net assets for pensions		(759	)		(405	)		(141	)		(343	)		(284	)

F-140

The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	2015			2014			2013
Current service cost		39			29			32
Interest cost (net)		(5	)		16			1
Past service cost		—			(286	)		—
		34			(241	)		33

In addition, in 2015 Valuation adjustments – Other valuation adjustments decreased by EUR 435 million with respect to defined benefit obligations (2014: a decrease of EUR 173 million; 2013: a decrease of EUR 697 million).

The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	2015			2014			2013
Present value of the obligations at beginning of year		11,959			10,120			9,260
Current service cost		39			29			32
Interest cost		466			455			396
Benefits paid		(342	)		(263	)		(239	)
Past service cost		—			(286	)		—
Actuarial (gains)/losses (*)		(656	)		1,174			852
Exchange differences and other items		805			730			(181	)
Present value of the obligations at end of year		12,271			11,959			10,120

(*) Including in 2015 demographic actuarial gains of EUR 364 million and financial actuarial gains of EUR 292 million.

In 2014 Santander UK reached an agreement with the workers’ representatives to convert a portion of the defined-benefit obligations into defined-contribution plans. The effect of the reduction of the aforementioned obligations is shown in the preceding table under Past service cost.

The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2015			2014			2013
Fair value of plan assets at beginning of year		12,108			9,455			9,194
Expected return on plan assets		471			439			395
Actuarial gains/(losses)		(222	)		1,346			155
Contributions		59			450			133
Benefits paid		(342	)		(263	)		(239	)
Exchange differences and other changes		806			681			(183	)
Fair value of plan assets at end of year		12,880			12,108			9,455

F-141

In 2016 the Group expects to make current contributions to fund these obligations for amounts similar to those made in 2015.

The main categories of plan assets as a percentage of total plan assets are as follows:

	2015			2014			2013
Equity instruments		23	%		22	%		24	%
Debt instruments		53	%		56	%		59	%
Properties		15	%		12	%		11	%
Other		9	%		10	%		6	%

The following table shows the estimated benefits payable at December 31, 2015 for the next ten years:

	Millions of euros
2016		359
2017		383
2018		409
2019		436
2020		466
2021 to 2025		2,860

iii. Other foreign subsidiaries

Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits.

At December 31, 2015, 2014 and 2013, these entities had defined-contribution and defined-benefit post-employment benefit obligations. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 90 million in 2015 (2014: EUR 58 million; 2013: EUR 53 million).

The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located.

Specifically, the discount rate used for the flows was determined by reference to high-quality corporate bonds, except in the case of Brazil where there is no extensive corporate bond market and, accordingly the discount rate was determined by reference to the series B bonds issued by the Brazilian National Treasury Secretariat for a term coinciding with that of the obligations.

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2015, if the discount rate used had been decreased or increased by 50 basis points, there would have been an increase or decrease in the present value of the obligations of +/- 5%. These changes would be offset in part by increases or decreases in the fair value of the assets.

F-142

The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2015 and the four preceding years is as follows:

	Millions of euros
	2015			2014			2013			2012			2011
Present value of the obligations		8,337			10,324			9,289			12,814			11,245
Less-
Of which: with a charge to the participants		133			151			133			125			—
Fair value of plan assets		7,008			8,458			7,938			10,410			9,745
Provisions - Provisions for pensions		1,196			1,715			1,218			2,279			1,500
Of which:
Internal provisions for pensions		1,478			1,999			1,512			2,626			1,827
Net assets for pensions		(28	)		(8	)		(8	)		(5	)		(15	)
Unrecognized net assets for pensions		(254	)		(276	)		(286	)		(342	)		(312	)

In December 2011 the Portuguese financial institutions, including Banco Santander Totta, S.A., transferred in part their pension obligations to the social security authorities. As a result, Banco Santander Totta, S.A. transferred the related assets and liabilities and Provisions - Provision for pensions and similar obligations at December 31, 2011 included the present value of the obligations, net of the fair value of the related plan assets.

The amounts recognized in the consolidated income statements in relation to these obligations are as follows:

	Millions of euros
	2015			2014			2013
Current service cost		43			35			46
Interest cost (net)		138			131			162
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		(1	)		4			(1	)
Past service cost		1			1			7
Pre-retirement cost		—			—			—
Other		(1	)		(34	)		(2	)
		180			137			212

In addition, in 2015 Valuation adjustments – Other valuation adjustments decreased by EUR 285 million with respect to defined benefit obligations (2014: an increase of EUR 515 million; 2013: an increase of EUR 735 million).

F-143

The changes in the present value of the accrued obligations were as follows:

	Millions of euros
	2015			2014			2013
Present value of the obligations at beginning of year		10,324			9,289			12,814
Net inclusion of entities in the Group		26			25			4
Current service cost		43			35			46
Interest cost		778			865			951
Pre-retirement cost		—			20			—
Effect of curtailment/settlement		(1	)		(6	)		(1	)
Benefits paid		(639	)		(669	)		(686	)
Benefits paid due to settlements		—			(6	)		(2	)
Contributions made by employees		8			7			21
Past service cost		1			1			7
Actuarial (gains)/losses (*)		(271	)		646			(2,039	)
Exchange differences and other items		(1,932	)		117			(1,826	)
Present value of the obligations at end of year		8,337			10,324			9,289

(*) Including in 2015 demographic actuarial gains of EUR 393 million and financial actuarial gains of EUR 664 million.

The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2015			2014			2013
Fair value of plan assets at beginning of year		8,458			7,938			10,410
Net inclusion of entities in the Group		9			13			—
Expected return on plan assets		667			759			789
Actuarial gains/(losses)		43			124			(1,314	)
Gains/(losses) due to settlements		1			(24	)		—
Contributions		109			205			239
Benefits paid		(594	)		(643	)		(641	)
Exchange differences and other items		(1,685	)		86			(1,545	)
Fair value of plan assets at end of year		7,008			8,458			7,938

In 2016 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2015.

F-144

The main categories of plan assets as a percentage of total plan assets are as follows:

	2015			2014			2013
Equity instruments		12	%		8	%		10	%
Debt instruments		84	%		83	%		85	%
Properties		1	%		5	%		2	%
Other		3	%		4	%		3	%

The following table shows the estimated benefits payable at December 31, 2015 for the next ten years:

	Millions of euros
2016		626
2017		644
2018		670
2019		695
2020		720
2021 to 2025		3,982

d) Provisions for taxes and other legal contingencies and Other provisions

Provisions - Provisions for taxes and other legal contingencies and Provisions - Other provisions, which include, inter alia, provisions for restructuring costs and tax-related and non-tax-related proceedings, were estimated using prudent calculation procedures in keeping with the uncertainty inherent to the obligations covered. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, these obligations have no fixed settlement period and, in other cases, depend on the legal proceedings in progress.

The detail, by geographical area, of Provisions for taxes and other legal contingencies and Other provisions is as follows:

	Millions of euros
	2015		2014		2013
Recognized by Spanish companies		1,332		1,217		1,228
Recognized by other EU companies		1,766		1,206		1,027
Recognized by other companies		2,506		2,887		2,515
Of which:
Brazil		2,016		2,453		2,263
		5,604		5,310		4,770

F-145

Set forth below is the detail, by type of provision, of the balance at December 31, 2015, 2014 and 2013 of Provisions for taxes and other legal contingencies and Other provisions. The types of provision were determined by grouping together items of a similar nature:

	Millions of euros
	2015		2014		2013
Provisions for taxes		997		1,289		1,177
Provisions for employment-related proceedings (Brazil)		581		616		638
Provisions for other legal proceedings		999		1,011		912
Provision for customer remediation		916		632		465
Regulatory framework-related provisions		308		298		315
Provision for restructuring		404		273		378
Other		1,399		1,191		885
		5,604		5,310		4,770

Relevant information is set forth below in relation to each type of provision shown in the preceding table:

The provisions for taxes include provisions for tax-related proceedings.

The provisions for employment-related proceedings (Brazil) relate to claims filed by trade unions, associations, the prosecutor’s office and ex-employees claiming employment rights to which, in their view, they are entitled, particularly the payment of overtime and other employment rights, including litigation concerning retirement benefits. The number and nature of these proceedings, which are common for banks in Brazil, justify the classification of these provisions in a separate category or as a separate type from the rest. The Group calculates the provisions associated with these claims in accordance with past experience of payments made in relation to claims for similar items. When claims do not fall within these categories, a case-by-case assessment is performed and the amount of the provision is calculated in accordance with the status of each proceeding and the risk assessment carried out by the legal advisers. The average duration of the employment-related proceedings is approximately eight years.

The provisions for other legal proceedings include provisions for court, arbitration or administrative proceedings (other than those included in other categories or types of provisions disclosed separately) brought against Santander Group companies.

The provisions for customer remediation include mainly the estimated cost of payments to remedy errors relating to the sale of certain products in the UK and Germany. To calculate the provision for customer remediation, the best estimate of the provision made by management is used, which is based on the estimated number of claims to be received and, of these, the number that will be accepted, as well as the estimated average payment per case.

The regulatory framework-related provisions include mainly the provisions for the extraordinary contribution to the Deposit Guarantee Fund in Spain and those relating to the FSCS and the Bank Levy in the UK.

The provisions for restructuring include only the costs arising from restructuring processes carried out by the various Group companies.

Qualitative information on the main litigation is provided in Note 25.e to the consolidated financial statements.

F-146

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in claims of the same nature. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, the obligations do not have a fixed settlement term and, in others, they depend on legal proceedings in progress.

The changes in Provisions for taxes and other legal contingencies and Other provisions are set forth in Note 25.b. With respect to Brazil, the main charges to the income statement in 2015 were EUR 289 million for civil contingencies (2014: EUR 316 million; 2013: EUR 247 million) and EUR 370 million for employment-related claims (2014: EUR 358 million; 2013: EUR 336 million). In addition, a charge of EUR 346 million was recognized in relation to restructuring provisions in 2013. This charge was offset in part by the use of the available provisions, of which EUR 241 million corresponded to employment-related payments (2014: EUR 343 million; 2013: EUR 500 million), EUR 273 million to civil payments (2014: EUR 278 million; 2013: EUR 215 million) and EUR 234 million to the use of restructuring provisions in 2014. In the UK, period provisions of EUR 689 million were recognized in connection with customer remediation (2014: EUR 174 million), of EUR 243 million in connection with the regulatory framework (the bank levy and the Financial Services Compensation Scheme (FSCS)) (2014: EUR 205 million; 2013: EUR 347 million), and of EUR 56 million for restructuring in 2014. These increases were offset by the use of EUR 227 million of provisions for customer remediation (2014: EUR 321 million; 2013: EUR 319 million), EUR 233 million in payments relating to the bank levy and the FSCS (2014: EUR 197 million; 2013: EUR 317 million) and EUR 41 million for restructuring in 2015 (2014: EUR 54 million). In Spain, EUR 95 million were paid in 2015 (2014: EUR 32 million) in relation to the extraordinary contribution to the Deposit Guarantee Fund, recognized in 2013, amounting to EUR 228 million. With regard to Germany, in 2014 period provisions of EUR 455 million were recognized for customer remediation payments and payments of EUR 184 million were made in 2015 (2014: EUR 197 million). In addition, period provisions of EUR 125 million were recognized at the companies acquired in the consumer lending business.

e) Litigation and other matters

i. Tax-related litigation

As of the date of this report, the main tax-related proceedings concerning the Group were as follows:

• Legal actions filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008, a provision having been recognized for the amount of the estimated loss.

• Legal actions filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. No provision was recognized in connection with the amount considered to be a contingent liability.

• Legal actions filed by Banco Santander, S.A. (currently Banco Santander (Brasil) S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the legal action was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. On April 23, 2015, the Federal Supreme Court issued a decision granting leave for the extraordinary appeal filed by the Brazilian authorities with regard to the PIS contribution to proceed, and dismissing the extraordinary appeal lodged by the Brazilian Public Prosecutor’s Office in relation to the COFINS contribution. The Federal Supreme Court has not yet

F-147

handed down its decision on the PIS contribution and, with regard to the COFINS contribution, on May 28, 2015, the Federal Supreme Court in plenary session unanimously rejected the extraordinary appeal filed by the Brazilian Public Prosecutor’s Office, and the petition for clarification (“embargos de declaraçao”) subsequently filed by the Brazilian Public Prosecutor’s Office, which on September 3, admitted that no further appeals may be filed. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil) S.A.), in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court. Law 12,865/2013 established a program of payments or deferrals of certain tax and social security debts, under which any entities that availed themselves of the program and withdrew the legal actions brought by them were exempted from paying late-payment interest. In November 2013 Banco Santander (Brasil) S.A. partially availed itself of this program but only with respect to the legal actions brought by the former Banco ABN AMRO Real, S.A. in relation to the period from September 2006 to April 2009, and with respect to other minor actions brought by other entities in its Group. However, the legal actions brought by Banco Santander, S.A. and those of Banco ABN AMRO Real, S.A. relating to the periods prior to September 2006, for which a provision for the estimated loss was recognized, still subsist.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. No provision was recognized in connection with the amount considered to be a contingent liability.

• Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against several municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. No provision was recognized in connection with the amount considered to be a contingent liability.

• In addition, Banco Santander (Brasil) S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. No provision was recognized in connection with the amount considered to be a contingent liability.

• In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSLL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil) S.A. did not meet the necessary legal requirements to be able to deduct the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil) S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (the Brazilian Tax Appeal Administrative Council, CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil) S.A. filed an appeal against these procedures at CARF, which was partially upheld on October 8, 2013. This decision has been appealed at the higher instance of CARF (Tax Appeal High Chamber). In December 2013 the Brazilian tax authorities issued the infringement notice relating to 2008, the last year for amortization of the goodwill. Banco Santander (Brasil) S.A. appealed against this infringement notice and the court found in its favor. The Brazilian tax authorities appealed against this decision at CARF. Based on the advice of its external legal counsel and in view of the first decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notices. Accordingly, the risk of incurring a loss is remote. Consequently, no provisions were recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

F-148

• In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM), (currently Produban Serviços de Informática S.A.) and Banco Santander (Brasil), S.A. (currently Banco Santander (Brasil) S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander (Brasil) S.A. to DTVM in 2000, 2001 and the first two months of 2002. The two entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander (Brasil) S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the High Chamber of CARF, and unfavorable decisions were obtained by Banco Santander (Brasil) S.A. and DTVM on June 12 and 19, 2015, respectively. Both cases were appealed at court in a single proceeding and a provision was recognized for the estimated loss.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A. (Brasil), as the successor by merger to ABN AMRO Brasil dois Participações S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The aforementioned entity filed an appeal for reconsideration against this infringement notice. As the former parent of Santander Seguros S.A. (Brasil), Banco Santander (Brasil) S.A. is liable in the event of any adverse outcome of this proceeding. No provision was recognized in connection with this proceeding as it was considered to be a contingent liability.

• In June 2013, the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. as the party liable for tax on the capital gain allegedly obtained in Brazil by the entity not resident in Brazil, Sterrebeeck B.V., as a result of the “incorporação de ações” (merger of shares) transaction carried out in August 2008. As a result of the aforementioned transaction, Banco Santander (Brasil) S.A. acquired all of the shares of Banco ABN AMRO Real, S.A. and ABN AMRO Brasil Dois Participações, S.A. through the delivery to these entities’ shareholders of newly issued shares of Banco Santander (Brasil) S.A., issued in a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. obtained income subject to tax in Brazil consisting of the difference between the issue value of the shares of Banco Santander (Brasil) S.A. that were received and the acquisition cost of the shares delivered in the exchange. In December 2014 the Group appealed against the infringement notice at CARF after the appeal for reconsideration lodged at the Federal Tax Office was dismissed. Based on the advice of its external legal counsel, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notice. Accordingly, the risk of incurring a loss is remote. Consequently, the Group has not recognized any provisions in connection with these proceedings because this matter should not affect the consolidated financial statements.

• In November 2014 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSLL) for 2009 questioning the tax-deductibility of the amortization of the goodwill of Banco ABN AMRO Real S.A. performed prior to the absorption of this bank by Banco Santander (Brasil) S.A., but accepting the amortization performed after the merger. On the advice of its external legal counsel, Banco Santander (Brasil), S.A. lodged an appeal against this decision at the Federal Tax Office and obtained a favorable decision in July 2015, which will foreseeably be appealed at CARF by the Brazilian tax authorities. No provision was recognized in connection with this proceeding as it was considered to be a contingent liability. Banco Santander (Brasil) S.A. has also appealed against infringement notices issued by the tax authorities questioning the tax deductibility of the amortization of the goodwill arising on the acquisition of Banco Comercial e de Investimento Sudameris S.A. No provision was recognized in connection with this matter as it was considered to be a contingent liability.

F-149

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA, Inc. considers that, in accordance with applicable tax legislation, it is entitled to recognize the aforementioned tax credits as well as the related issuance and financing costs. In addition, if the final outcome of this legal action is favorable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. In 2013 and in 2015 at second instance the US courts found against two taxpayers in cases with a similar facts. In the case of Santander Holdings USA, Inc., on November 13, 2015, the district judge found for Santander Holdings USA, Inc. in the final decision. On January 13, 2016, the judge ordered the amounts paid over with respect to 2003 to 2005 to be refunded to Santander Holdings USA, Inc. On March 11, 2016, the US government filed its appeal to the decision at the Court of Appeals. The estimated loss relating to this proceeding was provided for.

• Santander UK has proactively engaged with HM Revenue & Customs to resolve a number of outstanding legacy tax matters, all of which relate to periods prior to Santander UK plc’s adoption of the Code of Practice on Taxation for Banks. However, litigation proceedings were commenced in relation to a small number of these issues, with respect to which the court of first instance found in favor of HM Revenue & Customs. Santander UK has decided not to appeal these rulings. The provision recognized for the amounts relating to these matters has been used in full.

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Other litigation

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008.

On July 1, 2008, the UK Financial Ombudsman Service (FOS) referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority (FSA). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

On October 8, 2010, the British Bankers’ Association (BBA), the principal trade association for the UK banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the proceeding brought by the BBA.

Santander UK did not participate in the legal action undertaken by other UK banks and had been consistently making provisions and settling claims with regards to PPI complaints liabilities.

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There was a fall in compensation payments in the first half of 2015 and an increase from the third quarter, in line with industry trends, with compensation remaining stable in the last quarter.

The FSA consultation papers of November 2015 were taken into account in order to calculate the provision in 2015. As a result of considering the contents of the consultation papers, an additional provision of GBP 450 million was recognized. This amount is based on a probable scenario of two years in which customers could make their claims and on the anticipated increase in the volume of claims due to the established two-year period.

At December 31, 2015, the provision recognized in this connection totaled GBP 465 million.

The following table shows information on the total claims received up to December 31, 2015 and the resolution thereof:

(Number of claims, in thousands)

	2015			2014			2013
Claims outstanding at the beginning of the period		20			14			31
Claims received(1)		251			246			363
Claims rejected as being invalid(2)		(195	)		(194	)		(298	)
Resolved claims		(57	)		(46	)		(82	)
Claims outstanding at the end of the period		19			20			14

(1) Includes rejected claims relating to customers that had never purchased payment protection insurance from Santander UK.

(2) Customers are entitled to appeal to the Financial Ombudsman Service (FOS) if their claims are rejected. The FOS may uphold or reject an appeal and if an appeal is upheld, Santander UK is required to compensate the customer. The table shows the result of appeals relating to paid or rejected claims.

The provision recognized at the end of 2015 represents the best estimate by Group management, taking into account the opinion of its advisers and of the costs to be incurred in relation to any compensation that may result from the redress measures associated with the sales of payment protection insurance (PPI) in the UK. The provision was calculated on the basis of the following key assumptions resulting from judgments made by management:

• Volume of claims- estimated number of claims;

• Percentage of claims lost- estimated percentage of claims that are or will be in the customers’ favor; and

• Average cost- estimated payment to be made to customers, including compensation for direct loss plus interest.

These assumptions were based on the following information:

• A complete analysis of the causes of the claim, the probability of success, as well as the possibility that this probability could change in the future;

• Activity recorded with respect to the number of claims received;

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• Level of compensation paid to customers, together with a projection of the probability that this level could change in the future;

• Impact on the level of claims in the event of proactive initiatives carried out by the Group through direct contact with customers; and

• Impact of the media coverage.

These assumptions are reviewed, updated and validated on a regular basis using the latest available information, such as, the number of claims received, the percentage of claims lost, the potential impact of any change in that percentage, etc. and any new evaluation of the estimated population.

The most relevant factor for calculating the balance of the provision is the number of claims received as well as the expected level of future claims. The percentage of claims lost is calculated on the basis of the analysis of the sale process. The average cost of compensation is calculated in a reasonable manner as the Group manages a high volume of claims and the related population is homogenous. Group management reviews the provision required at each relevant date, taking into account the latest available information on the aforementioned assumptions as well as past experience.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011, Banco Santander, S.A. filed a new request for arbitration with the Spanish Arbitration Court against Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores, S.A.), claiming EUR 66 million that the latter owes it as a result of the declaration on January 4, 2008 of the early termination by the Bank of all the financial transactions agreed upon between the parties.

On August 3, 2012, Delforca 2008, S.A. was declared to be in a position of voluntary insolvency by Barcelona Commercial Court no. 10, which had agreed as part of the insolvency proceeding to stay the arbitration proceeding and the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A. The Arbitration Court, in compliance with the decision of the Commercial Court, agreed on January 20, 2013 to stay the arbitration proceedings at the stage reached at that date until a decision could be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party with a view to having the claim recognized as a contingent ordinary claim without specified amount. However, the insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, Banco Santander, S.A. filed an ancillary claim which was dismissed by a court decision on February 17, 2015. This decision also declared that Banco Santander, S.A. had breached its contractual obligations under the framework financial transaction agreement it had entered into with Delforca 2008, S.A.

As part of the same insolvency proceeding, Delforca 2008, S.A. has filed another ancillary claim requesting the termination of the arbitration agreement included in the framework financial transactions agreement entered into by that party and Banco Santander, S.A. in 1998, as well as the termination of the obligation that allegedly binds the insolvent party to the High Council of Chambers of Commerce (Spanish Arbitration Court). This claim was upheld in full by the Court.

On December 30, 2013, Banco Santander filed a complaint requesting the termination of the insolvency proceeding of Delforca 2008, S.A. due to supervening disappearance of the alleged insolvency of the company. The complaint was dismissed by a decision handed down on June 30, 2014.

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A court order dated May 25, 2015 declared the end of the common phase of the insolvency proceeding and the opening of the arrangement phase. Banco Santander, S.A. lodged an appeal against the court’s decisions 1) to stay the arbitration proceeding and the effects of the arbitral award, 2) to terminate the arbitration agreement 3) not to recognize the contingent claim, and to declare a breach by Banco Santander, S.A. and 4) not to conclude the proceeding due to the non-existence of insolvency.

On June 23, 2015, Delforca 2008, S.A. submitted an arrangement proposal entailing the payment in full of the ordinary and subordinate claims.

On February, 2016, notice was served on the Bank of another ancillary claim filed by Delforca 2008, S.A. and Mobiliaria Monesa, S.A. (parent of Delforca 2008, S.A.) requesting the voidness of the enforcement of securities made by the Bank for a total sum of EUR 57 million. This claim has been stayed on preliminary civil ruling grounds, until the abovementioned appeals are handed down.

In addition, in April 2009 Mobilaria Monesa, S.A. (parent of Delforca 2008, S.A.) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, claiming damages which it says it incurred as a result of the (in its opinion) unwarranted claim filed by the Bank against its subsidiary, reproducing the same objections as Delforca 2008, S.A. This proceeding has currently been stayed on preliminary civil ruling grounds, against which Mobilaria Monesa, S.A. filed an appeal which was dismissed by the Cantabria Provincial Appellate Court in a judgment dated January 16, 2014.

Lastly, on April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it sought indemnification for the damage and losses it alleges it incurred due to the (in its opinion) unwarranted claim by the Bank. Delforca 2008, S.A. made the request in a counterclaim filed in the arbitration proceeding that concluded with the annulled award, putting the figure at up to EUR 218 million. The aforementioned Court has dismissed the motion for declinatory exception proposed by Banco Santander, S.A. as the matter has been referred for arbitration. This decision was upheld in an appeal at the Madrid Provincial Appellate Court in a judgment dated May 27, 2014. The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

• Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000, as agreed by the board of directors, and the relevant clause was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision at the High Employment Court (TST) and, subsequently, at the Federal Supreme Court (STF). The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and the association. Only the appeal lodged by the bank has been given leave to proceed and will be decided upon by the STF in plenary session.

• “Planos economicos”: Like the rest of the banking system, Santander Brazil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation (“planos economicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (STJ) set the limitation period for these class actions at five years, as claimed by the banks, rather than 20 years, as sought by the claimants, which will probably significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the STJ and the Federal Supreme Court (STF) with which the matter is expected to be definitively settled.

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In August 2010, the STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute-of-limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress were stayed until this court issues a final decision on the matter.

• Proceeding under Criminal Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150 million in principal plus USD 4.7 million in interests, upon alleged termination of an escrow contract.

The court upheld the claim but did not make a specific pronouncement on costs. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. An appeal was filed at the Supreme Court by Banco Occidental de Descuento against the Madrid Provincial Appellate Court decision. The appeal was dismissed in a Supreme Court judgment dated October 24, 2014. Banco Occidental de Descuento filed a motion for annulment against the aforementioned judgment which was dismissed in an order dated December 2, 2015. The complainant has stated that it will appeal. The Bank has not recognized any provisions in this connection.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group, S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving EUR 32 million in principal and EUR 2.7 million in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding. The Court dismissed the claim in full in a judgment dated November 13, 2013. The judgment was confirmed at appeal by the Murcia Provincial Appellate Court in a judgment dated July 10, 2014. The insolvency managers have filed a cassation and extraordinary appeal against procedural infringements against the aforementioned judgment.

• The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying.

At the date of this annual report on Form 20-F, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, as a result, no provisions needed to be recognized in this connection.

• The intervention, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (Madoff Securities) by the US Securities and Exchange Commission (SEC) took place in December 2008. The exposure of customers of the Group through the Optimal Strategic US Equity (Optimal Strategic) subfund was EUR 2,330 million, of which EUR 2,010 million related to institutional investors and international private banking customers, and the remaining EUR 320 million made up the investment portfolios of the Group’s private banking customers in Spain, who were qualifying investors.

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At the date of this annual report on Form 20-F, certain claims had been filed against Group companies in relation to this matter. The Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, the risk of loss is considered to be remote or non-material.

• At the end of the first quarter of 2013, news stories were published stating that the public sector was debating the validity of the interest rate swaps arranged between various financial institutions and public sector companies in Portugal, particularly in the public transport industry.

The swaps under debate included swaps arranged by Banco Santander Totta, S.A. with the public companies Metropolitano de Lisboa, E.P.E. (MdL), Metro de Porto, S.A. (MdP), Sociedade de Transportes Colectivos do Porto, S.A. (STCP) and Companhia Carris de Ferro de Lisboa, S.A. (Carris). These swaps were arranged prior to 2008, i.e. before the start of the financial crisis, and had been executed without incident.

In view of this situation Banco Santander Totta, S.A. took the initiative to request a court judgment on the validity of the swaps in the jurisdiction of the United Kingdom to which the swaps are subject. The corresponding claims were filed in May 2013.

After the Bank had filed the claims, the four companies (MdL, MdP, STCP and Carris) notified Banco Santander Totta, S.A. that they were suspending payment of the amounts owed under the swaps until a final decision had been handed down in the UK jurisdiction in the proceedings. MdL, MdP and Carris suspended payment in September 2013 and STCP did the same in December 2013.

Consequently, Banco Santander Totta, S.A. extended each of the claims to include the unpaid amounts.

On November 29, 2013, the companies presented their defense in which they claimed that the swaps were null and void under Portuguese law and, accordingly, that they should be refunded the amounts paid.

On February 14, 2014, Banco Santander Totta, S.A. answered the counterclaim, maintaining its arguments and rejecting the opposing arguments in its documents dated November 29, 2013.

On April 4, 2014, the companies issued their replies to the Bank’s documents. The preliminary hearing took place on May 16, 2014.

The case was heard from October 12 to December 10, 2015.

The judgment was handed down on March 4, 2016. The Court decided in favor of Banco Santander Totta, S.A. on all requests submitted by it and against the transport companies on all requests made by them. It considered all nine swap contracts to be valid and binding.

Banco Santander Totta, S.A. and its legal advisers consider that this judgment confirmed that the bank acted at all times in accordance with applicable legislation and under the terms of the swaps. As a result, the Group has not recognized any provisions in this connection.

• Most of the German banking industry was affected by two German Supreme Court decisions in 2014 in relation to handling fees in consumer loan agreements.

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In May 2014 the German Supreme Court held handling fees in loan agreements to be null and void. The Court subsequently handed down a ruling at the end of October 2014 extending from three to ten years the statute of limitation period on claims relating to old transactions. Therefore, any claims relating to handling fees paid between 2004 and 2011 became statute-barred in 2014. This situation gave rise to numerous claims at the end of 2014 which affected the income statements of banks in Germany.

Santander Consumer Bank AG stopped including these handling fees in agreements from January 1, 2013 and ceased charging these fees definitively at that date, i.e. before the Supreme Court handed down its judgment on the issue.

Provisions of approximately EUR 455 million were recognized in 2014 to cover the estimated cost of the claims. In order to calculate the provision, the claims already received, as well as an estimate of those that could be received in 2015 (the year in which the period for making claims ends as they become statute-barred) were taken into account. The provisions recognized to cover the claims received were used progressively throughout 2014 and 2015.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2015, 2014 and 2013, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

26. Other liabilities

The detail of Other liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2015		2014		2013
Transactions in transit		744		621		505
Accrued expenses and deferred income		6,562		6,415		5,275
Other		2,915		3,610		2,774
		10,221		10,646		8,554

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27. Tax matters

a) Consolidated Tax Group

Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).

The other Group companies file income tax returns in accordance with the tax regulations applicable to them.

b) Years open for review by the tax authorities

In 2015 notification was received of the final agreed payments relating to the assessments arising from the outcome of the tax audit of the Consolidated Tax Group of the years 2005 to 2007, which were signed partly on an uncontested basis and partly on a contested basis. As the Parent of the Consolidated Tax Group, in accordance with the advice of its external lawyers, Banco Santander, S.A. considers that the aforementioned final agreed payments should not have a material impact on the consolidated financial statements as there are sound defense arguments in relation to the appeals filed against them. As a result, no provision has been recognized in this connection. As regards the tax inspections relating to prior years, in 2015 notification was received of the Supreme Court judgment on the years 2001 and 2002, and it is considered that the effect thereof on the consolidated financial statements is not material.

Also, in 2014 an audit by the tax authorities was initiated at the Consolidated Tax Group in relation to the years up to 2011, and the Consolidated Tax Group has the years subject to that audit and the subsequent years up to and including 2015 open for review in relation to the main taxes applicable to it.

The other entities have the corresponding years open for review, pursuant to their respective tax regulations.

Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such tax liabilities will arise, and that in any event the tax charge arising therefrom would not materially affect the Group’s consolidated financial statements.

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c) Reconciliation

The reconciliation of the income tax expense calculated at the tax rate applicable in Spain (30%) to the income tax expense recognized and the detail of the effective tax rate are as follows:

	Millions of euros
	2015			2014			2013
Consolidated profit (loss) before tax:
From continuing operations		9,547			10,679			7,378
From discontinued operations		—			(26	)		(18	)
		9,547			10,653			7,360
Income tax at tax rate applicable in Spain (30%)		2,864			3,196			2,208
Effect of application of the various tax rates applicable in each country (*)		158			187			100
Of which:
Brazil		300			185			304
United Kingdom		(146	)		(138	)		(87	)
United States		156			302			37
Chile		(60	)		(79	)		(105	)
Effect of profit or loss of associates and jointly controlled entities		(111	)		(73	)		(153	)
Effect of deduction of goodwill in Brazil		(133	)		(304	)		(274	)
Effect of reassessment of deferred taxes		30			279			(21	)
Permanent differences		476			433			171
Reversal of tax liabilities (**)		(1,071	)		—			—
Current income tax		2,213			3,718			2,031
Effective tax rate		23.18	%		34.90	%		27.60	%
Of which:
Continuing operations		2,213			3,718			2,034
Discontinued operations (Note 37)		—			—			(3	)
Of which:
Current taxes		4,070			2,464			3,511
Deferred taxes		(1,857	)		1,254			(1,480	)
Taxes paid in the year		2,205			1,352			3,577

^(*)  Calculated by applying the difference between the tax rate applicable in Spain and the tax rate applicable in each jurisdiction to the profit or loss contributed to the Group by the entities which operate in each jurisdiction.

^(**)  Effect of the reversal of the tax liabilities of Banco Santander (Brasil) S.A. associated with the tax-related proceedings concerning Brazilian PIS and COFINS social contributions (see Note 25.e).

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d) Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in total equity in 2015, 2014 and 2013:

	Millions of euros
	2015			2014			2013
Net tax credited (charged) to equity:
Measurement of available-for-sale fixed-income securities		418			(633	)		162
Measurement of available-for-sale equity securities		(34	)		(50	)		(51	)
Measurement of cash flow hedges		51			(150	)		(38	)
Actuarial (gains) losses		(231	)		319			(331	)
Measurement of entities accounted for using the equity method		13			(33	)		39
		217			(547	)		(219	)

e) Deferred taxes

Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities.

On June 26, 2013, the Basel III legal framework was included in European law through Directive 2013/36 (CRD IV) and Regulation 575/2013 on prudential requirements for credit institutions and investment firms (CRR), directly applicable in every Member State as from January 1, 2014, albeit with a gradual timetable with respect to the application of, and compliance with, various requirements.

This legislation establishes that deferred tax assets, the use of which relies on future profits being obtained, must be deducted from regulatory capital.

In this regard, pursuant to Basel III, in recent years several countries have amended their tax regimes with respect to certain deferred tax assets so that they may continue to be considered regulatory capital since their use does not rely on the future profits of the entities that generate them (referred to hereinafter as “monetisable tax assets”).

Italy had a very similar regime to that described above, which was introduced by Decree-Law no. 225, of 29 December 2010, and amended by Law no. 10, of February 26, 2011.

In addition, in 2013 in Brazil, by means of Provisional Measure no. 608, of February 28,2013 and, in Spain, through Royal Decree-Law 14/2013, of November 29, confirmed by Law 27/2014, of November 27, tax regimes were established whereby certain deferred tax assets (arising from provisions to allowances for loan losses in Brazil and provisions to allowances for loan losses, provisions to allowances for foreclosed assets and provisions for pension and pre-retirement obligations in Spain) may be converted into tax receivables in specific circumstances. As a result, their use does not rely on the entities obtaining future profits and, accordingly, they are exempt from deduction from regulatory capital.

In 2015 Spain completed its regulations on monetisable tax assets with the introduction of a financial contribution which will involve the payment of 1.5% for maintaining the right to monetize which will be applied to the portion of the deferred tax assets that qualify under the legal requirements as monetisable assets generated prior to 2016.

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The detail of deferred tax assets, by classification as monetisable or non-monetisable assets, and of deferred tax liabilities at December 31, 2015, 2014 and 2013 is as follows:

	Millions of euros
	2015				2014				2013
	Monetisable (*)		Other		Monetisable (*)		Other		Monetisable (*)		Other
Tax assets:		8,887		13,158		8,444		13,720		7,902		13,291
Tax losses and tax credits		—		4,808		—		5,650		—		5,671
Temporary differences		8,887		8,350		8,444		8,070		7,902		7,620
Of which:
Non-deductible provisions		—		1,631		—		2,709		—		2,365
Valuation of financial instruments		—		2,231		—		775		—		1,213
Loan losses		4,667		827		4,429		1,013		3,989		920
Pensions		3,557		475		3,408		759		3,286		553
Valuation of tangible and intangible assets		663		686		607		474		627		522
Tax liabilities:		—		5,565		—		4,527		—		1,825
Temporary differences		—		5,565		—		4,527		—		1,825
Of which:
Valuation of financial instruments		—		896		—		1,093		—		729
Valuation of tangible and intangible assets		—		1,727		—		1,323		—		461
Investments in Group companies (Note 3)		—		1,249		—		1,096		—		—

(*) Not deducted from regulatory capital.

The Group only recognizes deferred tax assets for temporary differences or tax loss and tax credit carryforwards where it is considered probable that the consolidated entities that generated them will have sufficient future taxable profits against which they can be utilized.

The deferred tax assets and liabilities are reassessed at the reporting date in order to ascertain whether any adjustments need to be made on the basis of the findings of the analyses performed.

These analyses take into account, inter alia: (i) the results generated by the various entities in prior years, (ii) each entity or tax group’s projected earnings, (iii) the estimated reversal of the various temporary differences, based on their nature, and (iv) the period and limits established by the legislation of each country for the recovery of the various deferred tax assets, thereby concluding on each entity or tax group’s ability to recover its recognized deferred tax assets.

The projected earnings used in these analyses are based on the financial budgets approved by the Group’s directors for the various entities, which generally cover a period of three years (see further details in Note 17), applying constant growth rates not exceeding the average long-term growth rate for the market in which the consolidated entities operate, in order to estimate the earnings for subsequent years considered in the analyses.

Relevant information is set forth below for the main countries which have recognized deferred tax assets:

Spain

The deferred tax assets recognized at the Consolidated Tax Group total EUR 11,031 million, of which EUR 5,928 million were for monetisable temporary differences, EUR 1,876 million for other temporary differences and EUR 3,227 million for tax losses and credits.

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The Group estimates that the recognized deferred tax assets for temporary differences will be recovered in 15 years. This period would also apply to the recovery of the recognized tax loss and tax credit carryforwards.

Brazil

The deferred tax assets recognized in Brazil total EUR 6,350 million, of which EUR 2,747 million were for monetisable temporary differences, EUR 3,371 million for other temporary differences and EUR 232 million for tax losses and credits.

The Group estimates that the recognized deferred tax assets for temporary differences, tax losses and credits will be recovered in approximately eight years.

United States

The deferred tax assets recognized in the United States total EUR 1,596 million, of which EUR 518 million were for temporary differences and EUR 1,078 million for tax losses and credits.

The Group estimates that the recognized deferred tax assets for temporary differences will be recovered before 2024. The recognized tax loss and tax credit carryforwards will be recovered before 2029.

Mexico

The deferred tax assets recognized in Mexico total EUR 760 million, substantially all of which were for temporary differences.

The Group estimates that substantially all the recognized deferred tax assets for temporary differences will be recovered in three years.

The changes in Tax assets - Deferred and Tax liabilities - Deferred in the last three years were as follows:

	Millions of euros
	Balances at December 31, 2014			(Charge)/Credit to income			Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability valuation adjustments			Acquisitions for the year (net)			Balances at December 31, 2015
Deferred tax assets		22,164			2,330			(2,831	)		356			26			22,045
Tax losses and tax credits		5,650			(449	)		(399	)		—			6			4,808
Temporary differences		16,514			2,779			(2,432	)		356			20			17,237
Of which: monetisable		8,444			1,199			(794	)		38			—			8,887
Deferred tax liabilities		(4,527	)		(473	)		(200	)		(73	)		(292	)		(5,565	)
Temporary differences		(4,527	)		(473	)		(200	)		(73	)		(292	)		(5,565	)
		17,637			1,857			(3,031	)		283			(266	)		16,480

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	Millions of euros
	Balances at December 31, 2013			(Charge)/Credit to income			Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability valuation adjustments			Acquisitions for the year (net)			Balances at December 31, 2014
Deferred tax assets		21,193			36			194			21			720			22,164
Tax losses and tax credits		5,671			(392	)		115			—			256			5,650
Temporary differences		15,522			428			79			21			464			16,514
Of which: monetisable		7,902			406			14			122			—			8,444
Deferred tax liabilities		(1,825	)		(1,290	)		(328	)		(527	)		(557	)		(4,527	)
Temporary differences		(1,825	)		(1,290	)		(328	)		(527	)		(557	)		(4,527	)
		19,368			(1,254	)		(134	)		(506	)		163			17,637

	Millions of euros
	Balances at December 31, 2012			(Charge)/Credit to income			Foreign currency balance translation differences and other items			(Charge)/Credit to asset and liability valuation adjustments			Acquisitions for the year (net)			Balances at December 31, 2013
Deferred tax assets		20,987			1,315			(493	)		(616	)		—			21,193
Tax losses and tax credits		7,719			(488	)		(1,560	)(*)		—			—			5,671
Temporary differences		13,268			1,803			1,067	(*)		(616	)		—			15,522
Deferred tax liabilities		(2,603	)		165			259			361			(7	)		(1,825	)
Temporary differences		(2,603	)		165			259			361			(7	)		(1,825	)
		18,384			1,480			(234	)		(255	)		(7	)		19,368

(*) Includes reclassification of tax loss carryforwards to monetisable temporary differences by application of Royal Decree-Law 14/2013, of November 27, and Income Tax Law 27/14.

Also, the Group did not recognize deferred tax assets relating to tax losses, tax credits for investments and other incentives amounting to approximately EUR 2,300 million, the use of which is subject, among other requirements, to time limits. It also did not recognize certain deductible temporary differences, tax losses and tax credits for which there is currently no time limit for offset, amounting to approximately EUR 5,800 million.

f) Tax reforms

The following significant tax reforms were approved in 2015:

In the UK a surcharge of 8% on the standard income tax rate for bank profits was approved. This surcharge will be applied from January 1, 2016. In addition, from 2015 customer remediation payments are no longer considered to be tax-deductible.

In Brazil there was also an increase in the rate of the Brazilian social contribution tax on net income (CSL) from 15% to 20% (applicable from September 1, 2015), as a result of which the income tax rate (25%) plus the CSL rate total 45%.

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In Poland, the introduction of a tax on certain bank assets at a monthly rate of 0.0366%, which comes into force in 2016, was approved.

g) Other information

In compliance with the disclosure requirement established in the Listing Rules Instrument 2005 published by the UK Financial Conduct Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Santander Nominee Service will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.

28. Non-controlling interests

Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.

a) Breakdown

The detail, by Group company, of Equity - Non-controlling interests is as follows:

	Millions of euros
	2015		2014		2013
Bank Zachodni WBK S.A.		1,685		1,545		1,372
Santander Consumer USA Holdings Inc.		1,506		1,013		—
Grupo Financiero Santander México, S.A.B. de C.V.		1,201		1,192		978
Banco Santander (Brasil) S.A.		1,190		1,662		4,292
Banco Santander - Chile		1,037		1,049		950
Metrovacesa, S.A.		560		598		—
Société Financière de Banque - SOFIB		462		—		—
PSA Financial Services Spain, E.F.C., S.A.		181		—		—
PSA Finance UK Limited		148		—		—
Other companies (*)		1,375		731		568
		9,345		7,790		8,160
Profit/(Loss) for the year attributable to non-controlling interests		1,368		1,119		1,154
Of which:
Santander Consumer USA Holdings Inc.		329		219		—
Banco Santander (Brasil) S.A.		296		315		494
Grupo Financiero Santander México, S.A.B. de C.V.		201		193		251
Banco Santander - Chile		191		210		221
Bank Zachodni WBK S.A.		154		121		123
Société Financière de Banque - SOFIB		78		—		—
PSA Finance UK Limited		37		—		—
Other companies		82		61		65
		10,713		8,909		9,314

(*) Includes an issue of perpetual equity instruments by Santander UK acquired by non-Group third parties.

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b) Changes

The changes in Non-controlling interests are summarized as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		8,909			9,314			9,415
Banesto Group merger (Note 3)		—			—			(455	)
Changes in the scope of consolidation (Note 3)		761			1,465			199
Change in proportion of ownership interest		(168	)		(2,971	)		925
Dividends paid to non-controlling interests		(461	)		(380	)		(747	)
Changes in capital and other items		876			(524	)		57
Profit for the year attributable to non-controlling interests		1,368			1,119			1,154
Valuation adjustments (including exchange differences)		(572	)		886			(1,234	)
Balance at end of year		10,713			8,909			9,314

In 2013 the Group reduced its ownership interest in Bank Zachodni WBK S.A. to 70%, thereby generating an increase in the balance of Non-controlling interests of EUR 1,329 million (see Note 3).

Also, in 2014 the Group increased its ownership interest in Banco Santander (Brasil), S.A., thereby generating a decrease in the balance of Non-controlling interests of EUR 2,572 million (see Note 3).

Lastly, in 2015 the Group acquired 50% of Société Financière de Banque—SOFIB, PSA Finance UK Limited and PSA Financial Services Spain, E.F.C., S.A. (see Note 3), thereby generating an increase in the balance of Non-controlling interests of EUR 462 million, EUR 148 million and EUR 181 million. Also, the acquisition of a 13.8% interest in Metrovacesa, S.A. from Banco Sabadell, S.A. (see Note 3) generated a decrease in the balance of Non-controlling interests of EUR 271 million.

The foregoing changes are shown in the consolidated statement of changes in total equity.

c) Other information

The financial information on the subsidiaries with significant non-controlling interests at December 31, 2015 is summarized below:

	Millions of euros (*)
	Banco Santander (Brazil)		Banco Santander - Chile		Grupo Financiero Santander (Mexico)		Bank Zachodni WBK		Santander Consumer USA Holdings.
Total assets		138,534		45,960		64,728		29,112		34,229
Total liabilities		126,988		41,723		58,251		24,751		29,667
Net assets		11,546		4,237		6,477		4,361		4,562
Total gross income		11,140		2,336		3,317		1,276		4,935
Total profit		1,824		655		831		410		812

(*) Information prepared in accordance with the segment reporting criteria described in Note 52 and, therefore, it may not coincide with the information published separately by each entity.

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29. Valuation adjustments

The balances of Valuation adjustments include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the consolidated statement of recognized income and expense. The amounts arising from subsidiaries are presented, on a line by line basis, in the appropriate items according to their nature.

It should be noted that the consolidated statement of recognized income and expense presents items separately according to their nature, grouping together those which, pursuant to the applicable accounting standards, will not be subsequently reclassified to profit or loss when the requirements established by the related accounting standards are met. Also, with respect to items that may be reclassified to profit or loss, the consolidated statement of recognized income and expense includes changes in Valuation adjustments as follows:

• Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.

• Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.

• Amounts transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.

• Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items.

The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to non-controlling interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.

a) Available-for-sale financial assets

Valuation adjustments - Available-for-sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 7 and 8).

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The breakdown, by type of instrument and geographical origin of the issuer, of Valuation adjustments—Available-for-sale financial assets at December 31, 2015, 2014 and 2013 is as follows:

	Millions of euros
	December 31, 2015										December 31, 2014										December 31, 2013
	Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value
Debt instruments
Government debt securities and debt instruments issued by central banks
Spain		641		(62	)		579			35,283		835		(176	)		659			31,190		356		(496	)		(140	)		25,664
Rest of Europe		283		(47	)		236			20,310		325		(56	)		269			20,597		28		(143	)		(115	)		12,080
Latin America and rest of the world		42		(671	)		(629	)		32,185		89		(97	)		(8	)		30,230		38		(217	)		(179	)		17,134
Private-sector debt securities		165		(253	)		(88	)		29,409		243		(193	)		50			28,232		258		(280	)		(22	)		24,966
		1,131		(1,033	)		98			117,187		1,492		(522	)		970			110,249		680		(1,136	)		(456	)		79,844
Equity instruments
Domestic
Spain		66		(5	)		61			1,140		35		(8	)		27			1,447		132		(10	)		122			1,432
International
Rest of Europe		438		(14	)		424			1,338		282		(23	)		259			1,245		158		(25	)		133			974
United States		14		(2	)		12			980		25		—			25			762		20		(1	)		19			661
Latin America and rest of the world		251		(2	)		249			1,391		298		(19	)		279			1,547		235		(18	)		217			888
		769		(23	)		746			4,849		640		(50	)		590			5,001		545		(54	)		491			3,955
Of which:
Listed		436		(15	)		421			1,986		311		(26	)		285			1,787		313		(26	)		287			1,330
Unlisted		333		(8	)		325			2,863		329		(24	)		305			3,214		232		(28	)		204			2,625
		1,900		(1,056	)		844			122,036		2,132		(572	)		1,560			115,250		1,225		(1,190	)		35			83,799

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At each reporting date the Group assesses whether there is any objective evidence that the instruments classified as available-for-sale (debt securities and equity instruments) are impaired.

This assessment includes but is not limited to an analysis of the following information: i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such changes—whether they are intrinsic or the result of the general uncertainty concerning the economy or the country—and iv) independent analysts’ reports and forecasts and other independent market information.

In the case of quoted equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the decline in its market price below cost for the Group is taken into account. As a general rule, for these purposes the Group considers a significant fall to be a 40% drop in the value of the asset or a continued fall over a period of 18 months. Nevertheless, it should be noted that the Group assesses, on a case-by-case basis, each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, the Group considers that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under Valuation adjustments. Also, where the Group does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.

At the end of 2015 the Group performed the assessment described above and recognized in the consolidated income statement impairment losses of EUR 127 million in respect of debt instruments (2014: EUR 42 million; 2013: EUR 89 million) and of EUR 112 million in respect of equity instruments which had suffered a significant and prolonged fall in price at December 31, 2015 (2014: EUR 147 million; 2013: EUR 169 million).

At the end of 2015, 54.66% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from debt securities had been incurred in more than twelve months.

Also, at the end of 2015, 12.64% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from equity instruments had been incurred in more than twelve months. After carrying out the aforementioned assessment, the Group concluded that, given its ability and intention to hold the securities in the long term, it did not expect the factors giving rise to the decline in value described above to have an impact on future cash flows and, therefore, no impairment loss was required to be recognized at year-end.

b) Cash flow hedges

Valuation adjustments - Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.

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c) Hedges of net investments in foreign operations and Exchange differences

Valuation adjustments - Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).

Valuation adjustments - Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2.a).

The changes in 2015 reflect the negative effect of the sharp depreciation of the Brazilian real and the positive effect of the appreciation of the US dollar and the pound sterling, whereas the changes in 2014 reflected the appreciation of the US dollar and the pound sterling.

Of the change in the balance in these years, a loss of EUR 514 million in 2015, a gain of EUR 1,093 million in 2014 and a loss of EUR 1,665 million in 2013 related to the measurement of goodwill.

The detail, by country, of Valuation adjustments - Hedges of net investments in foreign operations and Valuation adjustments - Exchange differences is as follows:

	Millions of euros
	2015			2014			2013
Net balance at end of year		(11,980	)		(8,955	)		(10,642	)
Of which:
Brazilian real		(10,679	)		(5,936	)		(5,480	)
Mexican peso		(1,497	)		(1,243	)		(1,171	)
Pound sterling		232			(1,042	)		(2,364	)
Argentine peso		(1,135	)		(729	)		(618	)
Chilean peso		(711	)		(528	)		(453	)
US dollar		2,342			535			(352	)
Other		(532	)		(12	)		(204	)

d) Entities accounted for using the equity method

Valuation adjustments - Entities accounted for using the equity method includes the amounts of valuation adjustments recognized in equity arising from associates and jointly controlled entities.

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The changes in Valuation adjustments - Entities accounted for using the equity method were as follows:

	Millions of euros
	2015			2014			2013
Balance at beginning of year		(85	)		(446	)		(152	)
Revaluation gains/(losses)		(156	)		266			(283	)
Net amounts transferred to profit or loss		9			95			23
Transfers		—			—			(34	)
Balance at end of year		(232	)		(85	)		(446	)
Of which:
Metrovacesa, S.A.		—			—			(63	)
Zurich Santander Insurance América, S.L.		(136	)		(37	)		(135	)
Santander Consumer USA Inc.		—			—			(145	)

e) Other valuation adjustments

Valuation adjustments - Other valuation adjustments include the actuarial gains and losses and the return on plan assets, less the administrative expenses and taxes inherent to the plan, and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

The changes in this balance are shown in the consolidated statement of recognized income and expense, and the most significant changes in 2015 related to:

• Increase of EUR 145 million in the cumulative actuarial losses relating to the Group’s entities in Spain, due basically to the change in the main actuarial assumptions—a decrease in the discount rate from 2% to 1.75%-.

• Decrease of EUR 282 million in the cumulative actuarial losses relating to the Group’s businesses in Brazil, due basically to an increase in the discount rate from 10.94% to 12.25% on pension benefits and from 11.04% to 12.03% on medical benefits and to changes in other assumptions.

• Decrease of EUR 435 million in the cumulative actuarial losses relating to the Group’s businesses in the UK, due basically to the change in the main actuarial assumptions – a decrease in the long-term inflation rate from 3.05% to 2.98% and an increase in the discount rate from 3.65% to 3.74%-.

• Also, changes arose as a result of fluctuations in exchange rates, mainly in Brazil (depreciation of the Brazilian real) and the UK (appreciation of the pound sterling).

30. Shareholders’ equity

Shareholders’ equity includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries are presented in the appropriate items based on their nature.

The changes in Shareholders’ equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders’ equity and the changes therein in 2015 is set forth below.

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31. Issued capital

a) Changes

At December 31, 2012, the Bank’s share capital consisted of 10,321,179,750 shares with a total par value of EUR 5,161 million.

On January 30, 2013, April 30, 2013, July 31, 2013 and October 31, 2013, the bonus issues through which the Santander Dividendo Elección scrip dividend scheme is instrumented took place, whereby 217,503,395, 270,917,436, 282,509,392 and 241,310,515 shares (2.06%, 2.51%, 2.55% and 2.13% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 108.8 million, EUR 135.5 million, EUR 141.3 million and EUR 120.7 million, respectively.

At December 31, 2013, the Bank’s share capital consisted of 11,333,420,488 shares with a total par value of EUR 5,667 million.

On January 30, 2014, April 29, 2014, July 30, 2014 and November 5, 2014, the bonus issues through which the Santander Dividendo Elección scrip dividend scheme is instrumented took place, whereby 227,646,659, 217,013,477, 210,010,506 and 225,386,463 shares (2.01%, 1.88%, 1.78% and 1.82% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 113.8 million, EUR 108.5 million, EUR 105 million and EUR 112.7 million, respectively.

Also, on November 4, 2014, a capital increase was carried out to cater for the exchange of Banco Santander (Brasil) S.A. shares (see Note 3), whereby 370,937,066 shares (3.09% of the share capital) were issued, corresponding to a capital increase of EUR 185.5 million (see Note 3).

At December 31, 2014, the Bank’s share capital consisted of 12,584,414,659 shares with a total par value of EUR 6,292 million.

On January 8, 2015, the Group announced that its board of directors had resolved to increase capital through an accelerated bookbuilt offering with disapplication of pre-emption rights. The capital increase amounted to EUR 7,500 million, of which EUR 607 million related to the par value of the 1,213,592,234 new shares issued and EUR 6,893 million to the share premium.

On January 29 and November 4, 2015, the bonus issues through which the Santander Dividendo Elección scrip dividend scheme is instrumented took place, whereby 262,578,993, 256,046,919 and 117,859,774 shares (1.90%, 1.82% and 0.82% of the share capital) were issued for an amount of EUR 131 million, EUR 128 million and EUR 59 million, respectively.

At December 31, 2015, the Bank’s share capital consisted of 14,434,492,579 shares with a total par value of EUR 7,217 million.

The Bank’s shares are listed on the Spanish Stock Market Interconnection System and on the New York, London, Milan, Lisbon, Buenos Aires, Mexico, São Paulo and Warsaw Stock Exchanges, and all of them have the same features and rights. At December 31, 2015, the only shareholders listed in the Bank’s shareholders register with ownership interests of more than 3% were State Street Bank & Trust Company (12.62%), The Bank of New York Mellon (6.05%), Chase Nominees Ltd. (4.84%), EC Nominees Limited (3.99%), Société Générale (3.81%), Clearstream Banking S.A. (3.50%) and Guaranty Nominees Limited (3.23%).

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However, the Bank considers that these ownership interests are held in custody on behalf of third parties and that none of them, as far as the Bank is aware, has an ownership interest of more than 3% of the Bank’s share capital or voting power.

b) Other considerations

The shareholders at the annual general meeting held on March 27, 2015 authorized additional share capital of EUR 3,515 million. The Bank’s directors have until March 27, 2018 to carry out capital increases up to this limit. The resolution empowers the board to fully or partially disapply the pre-emption right in accordance with the terms of Article 506 of the Spanish Limited Liability Companies Law, although this power is limited to EUR 1,406 million.

The shareholders at the annual general meeting of March 27, 2015 also resolved to increase the Bank’s capital by a par value of EUR 500 million and granted the board the broadest powers to set the date and establish the terms and conditions of this capital increase within one year from the date of the aforementioned annual general meeting. If the board does not exercise the powers delegated to it within the period established by the annual general meeting, these powers will be rendered null and void.

In addition, the aforementioned annual general meeting authorized the board to issue fixed-income securities, convertible into or exchangeable for shares of the Bank, for up to a total amount of the issue or issues of EUR 10,000 million or the equivalent amount in another currency. The Bank’s directors are authorized to execute this resolution until March 27, 2020.

At December 31, 2015, the shares of the following companies were listed on official stock markets: Banco Santander Río, S.A.; Grupo Financiero Santander México, S.A.B. de C.V.; Banco Santander - Chile; Cartera Mobiliaria, S.A., SICAV; Santander Chile Holding S.A.; Banco Santander (Brasil) S.A., Bank Zachodni WBK S.A. and Santander Consumer USA Holdings Inc.

At December 31, 2015, the number of Bank shares owned by third parties and managed by Group management companies (mainly portfolio, collective investment undertaking and pension fund managers) or jointly managed was 53 million, which represented 0.37% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 220 million (equal to 1.52% of the Bank’s share capital).

At December 31, 2015, the capital increases in progress at Group companies and the additional capital authorized by their shareholders at the respective general meetings were not material at Group level (see Exhibit V).

32. Share premium

Share premium includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value.

The Spanish Limited Liability Companies Law expressly permits the use of the share premium account balance to increase capital at the entities at which it is recognized and does not establish any specific restrictions as to its use.

The increase in the balance of Share premium in 2013 relates to the capital increases detailed in Note 31.a. The increase in 2014 is the result of the capital increase of EUR 2,372 million carried out to cater for the exchange of Banco Santander (Brasil) S.A. shares (see Note 3) and the reduction of EUR 440 million to cater for the capital increases arising from the Santander Dividendo Elección scrip dividend scheme. The increase in 2015 is the result of the capital increase of EUR 6,893 million carried out on January 8, 2015 (see Note 31.a) and the reduction of EUR 318 million to cater for the capital increases arising from the Santander Dividendo Elección scrip dividend scheme.

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Also, in 2015 an amount of EUR 185 million was transferred from the Share premium account to the Legal reserve (2014: EUR 125 million; 2013: EUR 102 million) (see Note 33.b.i).

33. Reserves

a) Definitions

Shareholders’ equity - Reserves - Accumulated reserves (losses) includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that, in the distribution of profit, was appropriated to equity, and the own equity instrument issuance expenses and the differences between the selling price of treasury shares and the cost of acquisition thereof.

Shareholders’ equity - Reserves - Reserves (losses) of entities accounted for using the equity method includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.

b) Breakdown

The detail of Accumulated reserves and Reserves of entities accounted for using the equity method is as follows:

	Millions of euros
	2015		2014		2013
Accumulated reserves:
Restricted reserves-
Legal reserve		1,444		1,259		1,134
Reserve for treasury shares		1,210		1,487		1,509
Revaluation reserve Royal Decree-Law 7/1996		43		43		43
Reserve for retired capital		11		11		11
Voluntary reserves		3,230		2,997		3,048
Consolidation reserves attributable to the Bank		8,256		7,908		7,968
Reserves of subsidiaries		31,275		27,268		24,080
		45,469		40,973		37,793
Reserves of entities accounted for using the equity method:
Associates		291		187		263
		45,760		41,160		38,056

i. Legal reserve

Under the Consolidated Spanish Limited Liability Companies Law, 10% of net profit for each year must be transferred to the legal reserve. These transfers must be made until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.

In 2015 the Bank transferred EUR 185 million from the Share premium account to the Legal reserve (2014: EUR 125 million; 2013: EUR 102 million).

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Consequently, once again, after the capital increases described in Note 31 had been carried out, the balance of the Legal reserve reached 20% of the share capital, and at December 31, 2015 the Legal reserve was at the stipulated level.

ii. Reserve for treasury shares

Pursuant to the Consolidated Spanish Limited Liability Companies Law, a restricted reserve has been recognized for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances that made it necessary to record it cease to exist. Additionally, this reserve covers the outstanding balance of loans granted by the Group secured by Bank shares and the amount equivalent to loans granted by Group companies to third parties for the acquisition of treasury shares.

iii. Revaluation reserve Royal Decree Law 7/1996, of June 7.

The balance of Revaluation reserve Royal Decree-Law 7/1996 can be used, free of tax, to increase share capital. From January 1, 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized. The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognized.

If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of June 7, it would be subject to taxation.

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iv. Reserves of subsidiaries

The detail, by company, of Reserves of subsidiaries, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:

	Millions of euros
	2015		2014		2013
Banco Santander (Brasil) S.A. (Consolidated Group)		8,408		7,361		6,478
Santander UK Group		6,457		5,842		5,540
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México		2,977		2,566		2,573
Santander Holdings USA Group		2,968		1,712		1,084
Banco Santander - Chile		2,534		2,446		2,736
Banco Santander Totta, S.A. (Consolidated Group)		2,165		2,021		1,890
Santander Consumer Finance Group		1,549		1,815		1,189
Banco Santander Río, S.A.		965		703		395
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.		754		725		515
Bank Zachodni WBK S.A.		578		315		175
Banco Santander International		472		408		348
Santander Investment, S.A.		367		282		222
Cartera Mobiliaria, S.A., SICAV		363		370		339
Banco Santander (Suisse) SA		346		282		242
Exchange differences, consolidation adjustments and other companies (*)		372		420		354
		31,275		27,268		24,080
Of which, restricted		2,445		2,233		2,062

^(*)  Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.

34. Other equity instruments and Treasury shares

a) Other equity instruments

“Other equity instruments” includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other “Shareholders’ equity” items.

b) Treasury shares

Shareholders’ equity - Treasury shares includes the amount of own equity instruments held by all the Group entities.

Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.

On October 21, 2013 and October 23, 2014, the Bank’s board of directors amended the regulation of its treasury share policy in order to take into account the criteria recommended by the CNMV, establishing limits on average daily purchase trading and time limits. Also, a maximum price per share was set for purchase orders and a minimum price per share for sale orders.

The Bank’s shares owned by the consolidated companies accounted for 0.279% of issued share capital at December 31, 2015 (December 31, 2014: 0.012%; December 31, 2013: 0.013%).

The average purchase price of the Bank’s shares in 2015 was EUR 6.00 per share and the average selling price was EUR 6.12 per share.

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The effect on equity, net of tax, arising from the purchase and sale of Bank shares was a EUR 16 million increase in 2015 (2014: EUR 40 million increase; 2013: EUR 28 million reduction).

35. Memorandum items

Memorandum items relates to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.

a) Contingent liabilities

Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:

	Millions of euros
	2015		2014		2013
Financial guarantees		14,648		13,383		13,479
Financial bank guarantees		13,704		12,121		12,186
Non-performing guarantees		944		1,262		1,293
Irrevocable documentary credits		2,139		2,381		2,430
Other bank guarantees and indemnities provided		23,047		28,006		24,690
Other guarantees		22,526		27,630		24,496
Undertakings to provide bank guarantees		521		376		194
Other contingent liabilities		281		308		450
Assets earmarked for third-party obligations		17		25		128
Other contingent liabilities		264		283		322
		40,115		44,078		41,049

A significant portion of these guarantees will expire without any payment obligation materializing for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered as an actual future need for financing or liquidity to be provided by the Group to third parties.

Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee.

At December 31, 2015, the Group had recognized provisions of EUR 618 million to cover contingent liabilities (December 31, 2014: EUR 654 million; December 31, 2013: EUR 693 million) (see Note 25).

i. Financial guarantees

Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.

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ii. Other bank guarantees and indemnities provided

This item includes guarantees other than those classified as financial, such as technical guarantees, guarantees covering the import and export of goods and services, irrevocable formal undertakings to provide bank guarantees, legally enforceable letters of guarantee and other guarantees of any kind.

iii. Other contingent liabilities

Other contingent liabilities includes the amount of any contingent liability not included in other items.

b) Contingent commitments

Contingent commitments includes those irrevocable commitments that could give rise to the recognition of financial assets.

The detail is as follows:

	Millions of euros
	2015		2014		2013
Drawable by third parties		195,628		182,955		154,314
Financial asset forward purchase commitments		485		530		82
Regular way financial asset purchase contracts		12,755		11,725		8,222
Documents delivered to clearing houses		12,251		12,444		9,901
Other contingent commitments		338		386		278
		221,457		208,040		172,797

c) Off-balance-sheet funds under management

The detail of off-balance-sheet funds managed by the Group and by jointly controlled companies is as follows:

	Millions of euros
	2015		2014		2013
Investment funds		109,028		109,519		93,304
Pension funds		11,376		11,481		10,879
Assets under management		20,337		20,369		20,987
		140,741		141,369		125,170

d) Third-party securities held in custody

At December 31, 2015, the Group held in custody debt securities and equity instruments totaling EUR 877,682 million (December 31, 2014: EUR 1,023,819 million; December 31, 2013: EUR 853,509 million) entrusted to it by third parties.

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36. Derivatives - Notional amounts and fair values of trading and hedging derivatives

The detail of the notional and/or contractual amounts and the fair values of the trading and hedging derivatives held by the Group is as follows:

	Millions of euros
	2015					2014					2013
	Notional amount		Market value			Notional amount		Market value			Notional amount		Market value
Trading derivatives:
Interest rate risk-
Forward rate agreements		175,661		(59	)		192,659		(50	)		120,773		(2	)
Interest rate swaps		2,839,940		3,095			2,738,960		1,253			2,454,752		1,190
Options, futures and other derivatives		505,655		(555	)		665,658		(1,035	)		605,532		(1,157	)
Credit risk-
Credit default swaps		54,056		46			66,596		81			79,822		49
Foreign currency risk-
Foreign currency purchases and sales		250,596		80			230,961		515			186,207		1,935
Foreign currency options		35,772		104			46,311		(38	)		45,196		200
Currency swaps		342,401		(1,704	)		278,380		(1,694	)		255,731		(1,001	)
Securities and commodities derivatives and other		90,662		(697	)		105,901		(1,222	)		95,634		(1,202	)
		4,294,743		310			4,325,426		(2,190	)		3,843,647		12
Hedging derivatives:
Interest rate risk-
Interest rate swaps		175,199		(1,153	)		190,872		(185	)		219,103		1,456
Options, futures and other derivatives		22,169		(54	)		9,569		13			2,144		12
Credit risk-
Credit default swaps		469		(5	)		607		(9	)		760		(14	)
Foreign currency risk-
Foreign currency purchases and sales		38,685		500			25,530		86			24,161		630
Foreign currency options		—		—			621		39			3,883		409
Currency swaps		59,472		(496	)		46,727		147			38,760		525
Securities and commodities derivatives and other		299		(2	)		168		—			258		—
		296,293		(1,210	)		274,094		91			289,069		3,018

The notional and/or contractual amounts of the contracts entered into (shown above) do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11).

Additionally, in order to interpret correctly the results on the Securities and commodities derivatives shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive fair values generated by symmetrical positions in the Group’s held-for-trading portfolio.

The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions (see Note 2.f).

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The notional amounts and fair values of the hedging derivatives, by type of hedge, are as follows:

	Millions of euros
	2015					2014					2013
	Notional amount		Fair value			Notional amount		Fair value			Notional amount		Fair value
Fair value hedges		214,591		(1,166	)		234,939		(249	)		229,439		1,257
Cash flow hedges		63,912		(572	)		22,388		444			55,417		743
Hedges of net investments in foreign operations		17,790		528			16,767		(104	)		4,213		1,018
		296,293		(1,210	)		274,094		91			289,069		3,018

Following is a description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):

Hedge accounting

The Group, as part of its financial risk management strategy and for the purpose of reducing mismatches in the accounting treatment of its transactions, enters into interest rate, foreign currency or equity hedging derivatives, depending on the nature of the hedged risk.

In line with its objective, the Group classifies its hedges into the following categories:

• Cash flow hedges: hedge the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction. Thus, floating rate issues in foreign currencies, fixed rate issues in non-local currency, floating rate interbank financing and floating rate assets (bonds, commercial credit, mortgages, etc.) are hedged.

• Fair value hedges: hedge the exposure to changes in the fair value of assets or liabilities attributable to an identified, hedged risk. Thus, the interest rate risk of assets and liabilities (bonds, loans, bills, issues, deposits, etc.) with coupons or fixed interest rates, investments in entities, issues in foreign currencies and deposits and other fixed rate liabilities are hedged.

• Hedges of net investments in foreign operations: hedge the foreign currency risk of investments in subsidiaries domiciled in countries outside the euro zone.

i. Cash flow hedges

The fair value of the cash flow hedges, net of the related tax effect, is recognized under Valuation adjustments - Cash flow hedges in the Group’s equity. The detail of the terms, from December 31, 2015, within which the amounts recognized under Valuation adjustments - Cash flow hedges in equity will be recognized in the consolidated income statements in the coming years is as follows:

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	Millions of euros
2015	Within 1 year		1 to 5 years		More than 5 years		Total
Debit balances (losses)		1		145		25		171

The net amount recognized as an equity valuation adjustment in 2015, as a result of the cash flow hedges, was a reduction of EUR 33 million.

The market value of the derivatives in portfolio cash flow hedges gave rise to a loss of EUR 393 million at December 31, 2015.

The net amount transferred from equity to 2015 profit was EUR -14 million, relating to the accrual to the net interest margin of the cash flow hedges.

The impact on 2015 profit and loss of the ineffectiveness of the Group’s cash flow hedges was a net loss of EUR 10 million (see Note 44).

ii. Fair value hedges

In 2015 a net loss of EUR 38 million was recognized (gains of EUR 258 million on hedged items and losses of EUR 296 million on hedging derivatives) on fair value hedging transactions (see Note 44). In this connection, at December 31, the Bank accounted for most of the Group’s fair value hedges.

Hence, the financial management area of the Bank, as Parent of the Group, uses derivatives to hedge the interest rate risk and foreign currency risk of the issues of instrumental companies of the Group guaranteed by the Bank. Following are details of the main hedges taken out by the Bank which remained outstanding at the Group at December 31, 2015.

At December 31, 2015, the Group held hedging derivatives for a notional amount equivalent to EUR 22,769 million, the market value of which represented a gain of EUR 1,021 million which is offset in profit and loss on measurement of the hedged issues. The net result of these hedges is a net loss of EUR 23 million.

The main currencies of these fair value hedges are: the euro, with a notional amount of EUR 21,369 million and gains on derivatives of EUR 1,020 million, and the US dollar, with a notional amount of EUR 623 million and gains on derivatives of EUR 10 million.

The Bank also uses derivatives to hedge the interest rate risk of government and corporate bonds recognized as available-for-sale assets for accounting purposes. At December 31, 2015, the notional amount of these derivatives was EUR 10,213 million and their market value gave rise to a loss of EUR 583 million, which was offset by the result of measuring the gain on the bonds attributable to their hedged risk, giving rise to a net overall gain on these hedges of EUR 1.7 million. Fair value hedges (hedging both interest rate and credit risk) have also been arranged on government bonds not hedged against interest rate risk, using forward bonds with a notional amount at December 31, 2015 of EUR 6,365 million and a market value representing a loss of EUR 43 million which was offset by the gain on the value of the bonds attributable to the hedged risk.

Lastly, the Bank has two fair value macro-hedges from its merger with Banesto. At year-end, the notional amount of the related derivatives was EUR 2,860 million and their market value gave rise to a loss of EUR 73 million. Including the measurement of the hedged items, the net result of the macro-hedges was a gain of EUR 7.7 million. At December 31, 2015, the market value of the fair value derivative macro-hedges at the Group was a loss of EUR 1,742 million. Including the measurement of the hedged items, the net result of the macro-hedges was a loss of EUR 537 million.

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iii. Foreign currency hedges (net investments in foreign operations)

As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment.

At December 31, 2015, the total notional amount of the instruments hedging these investments was the equivalent of EUR 20,349 million, of which EUR 16,504 million related to foreign currency swaps and forwards and EUR 3,845 million to spot foreign currency purchases/sales.

By currency,

• Hedges of the Brazilian real included hedging foreign currency non-deliverable forwards amounting to EUR 3,289 million (BRL 14,182 million), with a gain of EUR 733 million, of which EUR 27 million related to the gain on the settlement of options used as hedges which expired in January 2015 and were not renewed.

• The position in Mexican pesos is hedged through foreign currency forwards and swaps with a notional amount of EUR 2,582 million (MXN 48,836 million) and a gain of EUR 25 million.

• The Polish zloty is hedged through foreign currency forwards and swaps with a notional amount of EUR 1,981 million (PLN 8,445 million) and a loss of EUR 25 million.

• The hedging of the Chilean peso is instrumented through non-deliverable foreign currency forwards amounting to EUR 2,975 million (CLP 2,302,000 million), with a gain of EUR 146 million.

• The investment in Norwegian kroner is hedged through foreign currency forwards and swaps amounting to EUR 630 million (NOK 6,048 million), with a gain of EUR 34 million.

• The hedging of the Colombian peso is instrumented through non-deliverable foreign currency forwards with a notional amount of EUR 21 million (COP 73,400 million), with a gain of EUR 4 million.

• The position in Chinese yuan is hedged through non-deliverable foreign currency forwards of EUR 95 million (CNY 674 million). These instruments generated a gain of EUR 5 million in the year.

The positions in US dollars and pounds sterling are hedged through foreign currency forwards and swaps and, in addition, spot purchases and sales are made to offset the structural foreign currency risk. In the case of the US dollar, an amount of EUR 1,653 million (USD 1,800 million) was hedged with foreign currency forwards and EUR 954 million (USD 1,039 million) with spot foreign currency purchases and sales against euros, which gave rise to a loss of EUR 242 million in the year. In the case of pounds sterling, an amount of EUR 3,278 million (GBP 2,406 million) was hedged with foreign currency swaps and EUR 2,858 million (GBP 2,098 million) with spot foreign currency purchases and sales against euros, which gave rise to a loss of EUR 270 million in the year.

Lastly, positions in Canadian dollars and Swiss francs are hedged solely with spot foreign currency purchases and sales against euros. The hedged position in Canadian dollars amounted to EUR 25 million (CAD 38 million), with a gain of EUR 2 million in the year. The hedged position in Swiss francs amounted to EUR 8 million (CHF 9 million), giving rise to a loss of EUR 11 million in the year.

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At 2014 year-end, the Group held foreign currency options in this connection with an equivalent euro notional amount of EUR 310 million, which were denominated in Brazilian reais. In 2014 gains amounting to EUR 124 million, which arose from the settlement of options that were exercised, were taken to equity. At 2014 year-end, the market value of the options not yet exercised represented a net gain of EUR 40 million. In addition to foreign currency options, the Group had also arranged other hedging derivatives to round off its hedging of the structural foreign currency risk of its foreign currency investments: derivatives in Chilean pesos for a notional amount of EUR 1,194 million, which gave rise to a loss of EUR 44 million; in Brazilian reais for a notional amount of EUR 4,549 million, with a loss of EUR 417 million; in Mexican pesos for a total notional amount of EUR 2,728 million, with a loss of EUR 123 million; in Polish zloty for a notional amount of EUR 1,376 million, with a gain of EUR 5 million; and in Norwegian kroner for a notional amount of EUR 326 million, with a gain of EUR 36 million.

In addition to these hedges with derivatives, spot foreign currency sales were made to offset the structural foreign currency risk: spot sales were made of US dollars against euros, which amounted to EUR 1,593 million and gave rise to a loss of EUR 233 million, of pounds sterling against euros, which totaled EUR 3,523 million and gave rise to a loss of EUR 264 million and, lastly, of Swiss francs against euros, with a notional amount of EUR 115 million, which gave rise to a loss of EUR 2 million.

At 2013 year-end, the Group held foreign currency options in this connection with an equivalent euro notional amount of EUR 8,846 million, which were denominated in Brazilian reais. In 2013 losses amounting to EUR 214 million, which arose from the settlement of options that were exercised, were taken to equity. At 2013 year-end, the market value of the options not yet exercised represented a net gain of EUR 399 million. In addition to foreign currency options, the Group had also arranged other hedging derivatives to round off its hedging of the structural foreign currency risk of its foreign currency investments: derivatives in Chilean pesos for a notional amount of EUR 1,187 million, which gave rise to a gain of EUR 139 million; in Brazilian reais for a notional amount of EUR 6,905 million, with a gain of EUR 720 million; in Mexican pesos for a total notional amount of EUR 3,185 million, with a loss of EUR 2 million; and in Polish zlotys for a notional amount of EUR 1,651 million, with a loss of EUR 40 million; as well as a gain of EUR 6 million on options that had already expired.

Lastly, in addition to these hedges involving derivatives, spot foreign currency sales were made to offset structural foreign currency risk. By currency, spot sales were made of US dollars against euros, which amounted to EUR 1,293 million and gave rise to a gain of EUR 68 million, and of pounds sterling against euros, which totaled EUR 3,345 million and gave rise to a gain of EUR 214 million.

In line with the purpose of hedging the underlying carrying amount of net assets in foreign currencies, the overall valuation adjustments (gains/losses) obtained from the aforementioned hedges offset from an equity position the exchange differences arising from the conversion to euros of the Group’s investments in its investees’ net assets.

The hedges of net investments in foreign operations did not generate gains or losses due to ineffectiveness in 2015.

37. Discontinued operations

No significant operations were discontinued in 2015, 2014 or 2013.

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a) Profit or loss and net cash flows from discontinued operations

The detail of the profit or loss from discontinued operations is set forth below.

The comparative figures were restated in order to include the operations classified as discontinued:

	Millions of euros
	2015		2014			2013
Interest income/(charges)		—		4			84
Net fee and commission income		—		—			22
Gains/losses on financial assets and liabilities		—		—			—
Other operating income (expenses)		—		—			—
Total income		—		4			106
Personnel expenses		—		(1	)		(7	)
Other general administrative expenses		—		(3	)		(23	)
Depreciation and amortization		—		—			(2	)
Provisions (net)		—		(22	)		(6	)
Impairment losses on financial assets		—		(4	)		(6	)
Gains (losses) on disposal of assets not classified as non-current assets held for sale		—		—			(80	)
Profit (loss) before tax		—		(26	)		(18	)
Income tax (Note 27)		—		—			3
Profit (loss) from discontinued operations		—		(26	)		(15	)

Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

	Millions of euros
	2015		2014			2013
Cash and cash equivalents as at beginning of year		—		—			—
Cash flows from operating activities		—		(10	)		2
Cash flows from investing activities		—		10			(2	)
Cash flows from financing activities		—		—			—
Cash and cash equivalents as at end of year		—		—			—

b) Earnings per share relating to discontinued operations

The earnings per share relating to discontinued operations were as follows:

	2015		2014			2013
Basic earnings per share (euros)		0.00		(0.00	)		(0.00	)
Diluted earnings per share (euros)		0.00		(0.00	)		(0.00	)

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38. Interest and similar income

Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.

The detail of the main interest and similar income items earned in 2015, 2014 and 2013 is as follows:

	Millions of euros
	2015		2014		2013
Balances with the Bank of Spain and other central banks		1,392		2,038		2,701
Loans and advances to credit institutions		1,845		1,782		766
Debt instruments		7,361		7,247		6,435
Loans and advances to customers		45,445		42,175		40,206
Insurance contracts linked to pensions (Note 25)		6		9		11
Other interest		1,149		1,405		1,328
		57,198		54,656		51,447

Most of the interest and similar income was generated by the Group’s financial assets that are measured either at amortized cost or at fair value through equity.

39. Interest expense and similar charges

Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to provisions recorded for pensions.

The detail of the main items of interest expense and similar charges accrued in 2015, 2014 and 2013 is as follows:

	Millions of euros
	2015		2014		2013
Balances with the Bank of Spain and other central banks		79		55		118
Deposits from credit institutions		2,277		2,144		1,852
Customer deposits		12,826		13,415		14,805
Marketable debt securities		6,965		6,844		6,880
Subordinated liabilities (Note 23)		934		1,084		1,260
Provisions for pensions (Note 25)		270		344		363
Other interest		1,035		1,223		234
		24,386		25,109		25,512

Most of the interest expense and similar charges was generated by the Group’s financial liabilities that are measured at amortized cost.

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40. Income from equity instruments

Income from equity instruments includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.

The detail of Income from equity instruments is as follows:

	Millions of euros
	2015		2014		2013
Equity instruments classified as:
Financial assets held for trading		266		287		264
Available-for-sale financial assets		189		148		114
		455		435		378

41. Income from companies accounted for using the equity method

Income for companies accounted for using the equity method comprises the amount of profit or loss attributable to the Group generated during the year by associates and jointly controlled entities.

The detail of Income from companies accounted for using the equity method is as follows:

	Millions of euros
	2015		2014			2013
Santander Consumer USA Inc.		—		—			322
Zurich Santander Insurance América, S.L.		183		167			138
Metrovacesa, S.A.		—		(68	)		(40	)
SAM Investment Holdings Limited		64		51			—
Allfunds Bank, S.A.		—		23			17
Companhia de Crédito, Financiamento e Investimento RCI Brasil		28		20			21
Other companies		100		50			42
		375		243			500

42. Fee and commission income

Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

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The detail of Fee and commission income is as follows:

	Millions of euros
	2015		2014		2013
Collection and payment services:
Bills		271		284		333
Demand accounts		1,074		1,006		1,163
Cards		2,768		2,769		2,890
Orders		412		422		347
Cheques and other		134		144		165
		4,659		4,625		4,898
Marketing of non-banking financial products:
Investment funds		805		831		1,040
Pension funds		92		111		163
Insurance		2,350		2,304		2,399
		3,247		3,246		3,602
Securities services:
Securities underwriting and placement		252		306		208
Securities trading		303		303		316
Administration and custody		265		248		212
Asset management		222		78		107
		1,042		935		843
Other:
Foreign exchange		303		264		243
Financial guarantees		494		498		476
Commitment fees		314		343		329
Other fees and commissions		2,983		2,604		2,082
		4,094		3,709		3,130
		13,042		12,515		12,473

43. Fee and commission expense

Fee and commission expense shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The detail of Fee and commission expense is as follows:

	Millions of euros
	2015		2014		2013
Fees and commissions assigned to third parties		1,593		1,618		1,718
Of which: Cards		1,201		1,149		1,279
Brokerage fees on lending and deposit transactions		43		42		37
Other fees and commissions		1,373		1,159		957
		3,009		2,819		2,712

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44. Gains/losses on financial assets and liabilities

Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.

a) Breakdown

The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:

	Millions of euros
	2015			2014			2013
Financial assets and liabilities held for trading (*)		(2,312	)		2,377			1,733
Other financial instruments at fair value through profit or loss (*)		325			239			(6	)
Financial instruments not measured at fair value through profit or loss		1,265			1,427			1,622
Of which: Available-for-sale financial assets		891			1,416			1,490
Of which:
Debt instruments		760			1,173			1,345
Equity instruments		131			243			145
Other (Note 36)		(48	)		(69	)		(115	)
		(770	)		3,974			3,234

^(*)  Includes the net gain or loss arising from transactions involving debt securities, equity instruments, derivatives and short positions included in this portfolio, since the Group manages its risk in these instruments on a global basis.

b) Financial assets and liabilities at fair value through profit or loss

The detail of the amount of the asset balances is as follows:

	Millions of euros
	2015		2014		2013
Loans and advances to credit institutions		28,696		30,407		18,947
Loans and advances to customers		20,374		11,892		18,275
Debt instruments		47,681		58,605		44,716
Equity instruments		18,855		13,799		5,833
Derivatives		76,724		76,858		58,899
		192,330		191,561		146,670

The Group mitigates and reduces this exposure as follows:

• With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment.

At December 31, 2015, the actual credit risk exposure of the derivatives was EUR 43,468 million.

• Loans and advances to credit institutions and Loans and advances to customers included reverse repos amounting to EUR 37,563 million at December 31, 2015.

Also, mortgage-backed assets totaled EUR 2,855 million.

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• Debt instruments include EUR 40,148 million of Spanish and foreign government securities.

At December 31, 2015, the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material.

The detail of the amount of the liability balances is as follows:

	Millions of euros
	2015			2014			2013
Deposits from central banks		(18,664	)		(8,362	)		(5,963	)
Deposits from credit institutions		(8,628	)		(24,570	)		(17,112	)
Customer deposits		(35,544	)		(38,671	)		(34,984	)
Marketable debt securities		(3,373	)		(3,830	)		(4,087	)
Short positions		(17,362	)		(17,628	)		(15,951	)
Derivatives		(76,414	)		(79,048	)		(58,887	)
Other financial liabilities		(1	)		—			—
		(159,986	)		(172,109	)		(136,984	)

45. Exchange differences

Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.

The Group manages the currencies to which it is exposed together with the arrangement of derivative instruments and, accordingly, the changes in this line item should be analyzed together with those recognized under Gains/losses on financial assets and liabilities (see Note 44).

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46. Other operating income and Other operating expenses

Other operating income and Other operating expenses in the consolidated income statements include:

	Millions of euros
	2015			2014			2013
Insurance activity		98			137			117
Income from insurance and reinsurance contracts issued		1,096			3,532			4,724
Of which:
Insurance and reinsurance premium income		961			3,284			4,513
Reinsurance income (Note 15)		135			248			211
Expenses of insurance and reinsurance contracts		(998	)		(3,395	)		(4,607	)
Of which:
Claims paid and other insurance-related expenses		(3,101	)		(3,800	)		(4,497	)
Net provisions for insurance contract liabilities		2,361			910			382
Reinsurance premiums paid		(258	)		(505	)		(492	)
Non-financial services		121			88			93
Sales and income from the provision of non-financial services		711			343			322
Cost of sales		(590	)		(255	)		(229	)
Other operating income and expenses		(385	)		(384	)		(512	)
Other operating income		1,260			1,339			857
Of which, fees and commissions offsetting direct costs		115			106			115
Other operating expenses		(1,645	)		(1,723	)		(1,369	)
Of which, Deposit Guarantee Fund		(769	)		(577	)		(570	)
		(166	)		(159	)		(302	)

Most of the Bank’s insurance activity is carried on in life insurance.

47. Personnel expenses

a) Breakdown

The detail of Personnel expenses is as follows:

	Millions of euros
	2015		2014		2013
Wages and salaries		8,034		7,412		7,215
Social security costs		1,330		1,293		1,296
Additions to provisions for defined benefit pension plans (Note 25)		96		75		88
Contributions to defined contribution pension funds (Note 25)		279		247		223
Share-based remuneration costs		47		66		103
Other personnel expenses		1,321		1,149		1,144
		11,107		10,242		10,069

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b) Headcount

The average number of employees in the Group, by professional category, was as follows:

	Average number of employees (**)
	2015		2014		2013
The Bank:
Senior management (*)		93		101		133
Other line personnel		20,909		21,376		23,403
Clerical staff		2,138		2,563		3,421
General services personnel		22		25		28
		23,162		24,065		26,985
Rest of Spain		6,922		6,781		6,931
Santander UK plc		20,069		19,866		19,773
Banco Santander (Brasil) S.A.		47,720		47,296		51,462
Other companies (**)		91,591		85,930		81,222
		189,464		183,938		186,373

^(*) Categories of deputy assistant executive vice president and above, including senior management.

^(**)  Excluding personnel assigned to discontinued operations.

The functional breakdown, by gender, at December 31, 2015 is as follows:

	Functional breakdown by gender
	Senior executives				Other executives				Other personnel
	Men		Women		Men		Women		Men		Women
Continental Europe		995		237		6,162		3,135		21,711		29,068
United Kingdom		132		35		1,219		565		9,539		13,430
Latin America		671		106		6,167		3,674		40,653		56,364
		1,798		378		13,548		7,374		71,903		98,862

The same information, expressed in percentage terms at December 31, 2015, is as follows:

	Functional breakdown by gender
	Senior executives						Other executives						Other personnel
	Men			Women			Men			Women			Men			Women
Continental Europe		81	%		19	%		66	%		34	%		43	%		57	%
United Kingdom		79	%		21	%		68	%		32	%		42	%		58	%
Latin America		86	%		14	%		63	%		37	%		42	%		58	%
		83	%		17	%		65	%		35	%		42	%		58	%

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The labor relations between employees and the various Group companies are governed by the related collective agreements or similar regulations.

c) Share-based payments

The main share-based payments granted by the Group in force at December 31, 2015, 2014 and 2013 are described below.

i. Bank

The variable remuneration policy for the Bank’s executive directors and certain executive personnel of the Bank and of other Group companies includes Bank share-based payments, the implementation of which requires, in conformity with the law and the Bank’s Bylaws, specific resolutions to be adopted by the general meeting.

Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.

The plans that include share-based payments are as follows: (i) performance share plan; (ii) mandatory investment share plan; (iii) deferred conditional delivery share plan; (iv) deferred conditional variable remuneration plan and (v) performance share plan. The characteristics of the plans are set forth below:

(i) Performance share plan

This deferred share-based variable remuneration was instrumented through a multiannual incentive plan payable in shares of the Bank. The beneficiaries of the plan were the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive committee, except for Plan PI14 (approved in 2011), of which the executive directors and senior executives who participated in the deferred conditional variable remuneration plan were not beneficiaries.

This plan involved successive three-year cycles of share deliveries to the beneficiaries. In June 2010 and 2011 the fifth and sixth and final cycles (PI13 and Pl14, respectively) were approved. On July 31, 2013 and 2014 the fifth and sixth cycles (PI13 and PI14, respectively) were cancelled.

For each cycle a maximum number of shares was established for each beneficiary who remained in the Group’s employ for the duration of the plan. The target, which, if met, would determine the number of shares to be delivered, was defined by comparing the Total Shareholder Return (TSR) performance of the shares of Banco Santander, S.A. with the TSR of a benchmark group of financial institutions.

The ultimate number of shares to be delivered in the aforementioned cycles was determined by the degree of achievement of the targets on the third anniversary of commencement of each cycle, and the shares would be delivered within a maximum period of seven months from the beginning of the year in which the corresponding cycle ended.

Plans I14 and I13 expired in 2014 and 2013, without any shares having been delivered to the plan beneficiaries, since the minimum target for shares to be delivered had not been achieved.

Following is a summary of the changes in the cycles of this plan in the period from 2013 to 2014:

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	Number of shares (in thousands)			Year granted		Employee group		Number of persons			Date of commencement of exercise period		Date of expiry of exercise period
Plans outstanding at 01/01/13		34,089
Options cancelled, net (Plan I13)		(19,613	)		2010		Executives		(6,782	)		11/06/10		31/07/13
Plans outstanding at 12/31/13		14,476
Options cancelled, net (Plan I14)		(14,476	)		2011		Executives		(6,699	)		17/06/11		31/07/14
Plans outstanding at 12/31/14		—

(ii) Mandatory investment share plan

This deferred share-based variable remuneration was instrumented through a multiannual incentive plan payable in shares of the Bank and conditional upon compliance with certain investment and continued Group service requirements. The beneficiaries of this plan were the executive directors, members of the Bank’s senior management and other Group executives determined by the board of directors.

This plan, which was discontinued in 2010, was structured in three-year cycles. The beneficiaries of the plan had to use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the “Mandatory Investment”). In accordance with the terms and conditions of the corresponding cycles, the Mandatory Investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.

Participants who held the shares acquired through the Mandatory Investment and remained in the Group’s employ for three years from the date on which the Mandatory Investment was made (until 2011, 2102 and 2013, respectively) were entitled to receive the same number of Bank shares as that composing their initial mandatory investment.

The shares would be delivered within a maximum period of one month from the third anniversary of the date on which the mandatory investment was made.

In 2009 a requirement was introduced for the third cycle additional to that of remaining in the Group’s employ, which was that in the three-year period from the investment in the shares, none of the following circumstances should occur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it was required pursuant to a change in accounting standards.

This plan was cancelled with the delivery of the shares of the third cycle in March 2013.

(iii) Deferred conditional delivery share plan

In 2013 the Bank’s board of directors, at the proposal of the appointments and remuneration committee, approved the fourth cycle of the deferred conditional delivery share plan to instrument payment of the share-based bonus of the Group executives or employees whose variable remuneration or annual bonus for 2013 exceeded, in general, EUR 0.3 million (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares. Since this cycle entailed the delivery of Bank shares, the shareholders at the annual general meetings of March 22,

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2013 approved the application of the fourth cycle of the deferred conditional delivery share plan. This cycle is not applicable to the executive directors or other members of senior management or other executives who are beneficiaries of the deferred conditional variable remuneration plan described below.

The share-based bonus is being deferred over three years and will be paid, where appropriate, in three instalments starting after the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for the year:

Benchmark bonus (thousands of euros)	Percentage (deferred)
300 or less		0	%
300 to 600 (inclusive)		20	%
More than 600		30	%

The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

(iv) Deferred conditional variable remuneration plan

In 2013, 2014 and 2015 the Bank’s board of directors, at the proposal of the appointments and remuneration committee in 2013 and 2014 and of the remuneration committee in 2015, approved the third, fourth and fifth cycles of the deferred conditional variable remuneration plan to instrument payment of the bonus for 2013, 2014 and 2015, respectively, of the executive directors and certain executives (including senior management) and employees who assume risk, who perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees who assume risks (all of whom are referred to as the “Identified Staff”, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010 for 2013; in 2014, pursuant to Article 92(2) of Directive 2013/36/EU of the European Parliament and of the Council, of June 26, 2013, and the related implementing legislation; and in 2015, pursuant to Article 32.1 of Law 10/2014, of June 26, on the regulation, supervision and capital adequacy of credit institutions, and the related implementing legislation).

Since the aforementioned cycles entail the delivery of Bank shares, the shareholders at the annual general meetings of March 22, 2013, March 28, 2014 and March 27,2015 approved, respectively, the application of the third, fourth and fifth cycles of the deferred conditional variable remuneration plan.

The purpose of these cycles is to defer a portion of the bonus of the beneficiaries thereof over a period of three years for the third and fourth cycles, and over three or five years for the fifth cycle, for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

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The bonus will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):

	2015
	Immediate payment percentage (*)			Deferred percentage (*)			Deferral period
Executive directors and members of the Identified Staff with total variable remuneration ³ EUR 2.6 million		40	%		60	%		5 years
Division managers, country heads of countries that represent at least 1% of the Group’s economic capital, other executives of the Group with a similar profile and members of the Identified Staff with total variable remuneration ³ EUR 1.7 million (< EUR 2.6 million)		50	%		50	%		5 years
Other beneficiaries		60	%		40	%		3 years

	2014
	Immediate payment percentage (*)			Deferred percentage (*)
Executive directors and members of the Identified Staff with total variable remuneration ³ EUR 2.6 million		40	%		60	%
Division managers, country heads, other executives of the Group with a similar profile and members of the Identified Staff with total variable remuneration ³ EUR 1.8 million (< EUR 2.6 million)		50	%		50	%
Other beneficiaries		60	%		40	%

	2013
	Immediate payment percentage (*)			Deferred percentage (*)
Executive directors		40	%		60	%
Division managers and other executives of the Group with a similar profile		50	%		50	%
Other executives subject to supervision		60	%		40	%

(*) Generally applicable percentages. In some countries deferred percentages may be higher for certain categories of executives, thereby giving rise to lower immediate payment percentages.

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For the third and fourth cycle, the payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in three instalments, within 30 days following the anniversaries of the initial date (the date on which the immediate payment percentage is paid) in 2015, 2016 and 2017 for the third cycle, and in 2016, 2017 and 2018 for the fourth cycle, 50% being paid in cash and 50% in shares, provided that the conditions described below are met.

For the fifth cycle, the payment of the deferred percentage of the bonus applicable in each case based on the group to which the beneficiary belongs will be deferred over a period of three or five years and will be paid in three or five instalments, as appropriate, within 30 days following the anniversaries of the initial date in 2017, 2018 and 2019 and, where appropriate, in 2020 and 2021, provided that the conditions described below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee-, during the period prior to each of the deliveries, pursuant to the provisions set forth in each case in the plan regulations: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid on the deferred amount in shares and the interest on the amount accrued in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights corresponding to those shares.

The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average share prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2013, 2014 and 2015 for the third, fourth and fifth cycle, respectively.

(v) Performance share plan

In 2014 and 2015 the Bank’s board of directors approved the first and second cycles, respectively, of the performance share plan by which to instrument a portion of the variable remuneration of the executive directors and other members of the Identified Staff, consisting of a long-term incentive (ILP) in shares based on the Bank’s performance over a multiannual period. In addition, the second cycle also applies to other Bank employees not included in the Identified Staff, in respect of whom it is deemed appropriate that the potential delivery of Bank shares be included in their remuneration package in order to better align the employee’s interests with those of the Bank.

Since the aforementioned plans entail the delivery of Bank shares, the annual general meetings of March 28, 2014 and March 27, 2015 approved the application of the first and second cycles of the plan, respectively.

The maximum amounts of the plan and, consequently, the maximum number of shares to which a beneficiary may be entitled under this plan was set at 15% and 20% of the beneficiaries’ benchmark bonus for 2014 and 2015, respectively.

The board of directors, following a proposal of the remuneration committee, set the amount of the ILP for each beneficiary for 2014 and 2015.

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For the second cycle, based on the maximum benchmark value (20%), at the proposal of the remuneration committee, the board of directors will set the maximum number of shares, the value in euros of which is called the “Agreed-upon Amount of the ILP”, taking into account (i) the Group’s earnings per share (EPS) and (ii) the Group’s return on tangible equity (ROTE) for 2015 with respect to those budgeted for the year.

Both items had the same weighting when setting the ILP and each of them were measured based on the following scales of target compliance:

• Scale applicable to EPS of Santander Group in 2015 with respect to the budgeted EPS for the year:

EPS in 2015 (% of budgeted 2015 EPS)	2015 EPS coefficient
³ 90%	1
> 75% but < 90%	0.75 - 1 (*)
£ 75%	0

(*) Straight-line increase of the 2015 EPS coefficient based on the specific percentage that the 2015 EPS represents of the budgeted EPS within this line of the scale.

• Scale applicable to Santander Group’s 2015 ROTE with respect to the ROTE budgeted for the year:

ROTE in 2015 (% of budgeted 2015 ROTE)	2015 ROTE coefficient
³ 90%	1
> 75% but < 90%	0.75 - 1 (*)
£ 75%	0

(*) Straight-line increase of the 2015 ROTE coefficient based on the specific percentage that the 2015 ROTE represents of the budgeted ROTE within this line of the scale.

Based on the Group’s performance, the coefficient to be applied was 91.50%.

For the first cycle, the following percentages were applied to 15% of the benchmark bonus in accordance with the relative performance of the Bank’s Total Shareholder Return (TSR) in 2014 compared to a benchmark group:

Santander’s place in the TSR ranking	Percentage of maximum shares to be delivered
1st to 8th	100%
9th to 12th	50%
13th and below	0%

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Since the Bank’s TSR was in fourth place, the applicable percentage was 100%.

Also, for the second cycle, the agreed-upon amount of the ILP for each beneficiary will be deferred over a period of three years and will be paid, where appropriate, at the beginning of 2019 (foreseeably, in the first quarter) based on compliance with the multiannual targets and other plan terms and conditions. Thus, prior to the payment date, the board of directors, following a proposal of the remuneration committee, will calculate the amount, where appropriate, to be received by each beneficiary based on the agreed-upon amount of the ILP. The multiannual targets, the related metrics and scales of compliance are as follows:

• Relative performance of the Group’s EPS growth for 2015-2017 with respect to a benchmark group of 17 credit institutions

Position of Santander’s EPS growth 2015-2017	EPS coefficient
1st to 5th	1
6th	0.875
7th	0.75
8th	0.625
9th	0.50
10th and below	0

• Santander Group’s 2017 ROTE:

ROTE in 2017 (%)	ROTE coefficient
³ 12%	1
> 11% but < 12%	0.75 - 1 (*)
£ 11%	0

(*) Straight-line increase of the ROTE coefficient based on the specific percentage, within this line of the scale, of Santander Group’s ROTE in 2017.

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• Employee satisfaction, measured by the inclusion or exclusion of the related Group company in 2017 among the “Top 3” best banks to work for.

• Scale of compliance at country level:

Position among the best banks to work for in 2017	Employee coefficient
1st to 3rd		1
4th or below		0

• Scale of compliance at Santander Group level:

No. of main markets in which Santander is ranked in the top three of the best banks to work for in 2017	Employee coefficient
6 or more		1
5 or less		0

• Customer satisfaction, measured by the inclusion or exclusion of the related Group company in 2017 among the top three best banks in the customer satisfaction index.

• Scale of compliance at country level:

Position among the best banks as per the customer satisfaction index in 2017	Customer coefficient
1st to 3rd		1
4th or below		0

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• Scale of compliance at Santander Group level:

No. of main markets in which Santander is ranked in the top three of the best banks in the customer satisfaction index in 2017	Customer coefficient
10	1
Between 6 and 9	0.2 - 0.8 (*)
5 or less	0

(*) Straight-line increase of customer coefficient, whereby, within this line of the scale, the coefficient is increased by 0.2 for each additional main market in which the customer satisfaction index ranks it in the top three.

• Customer loyalty, taking into account that the targets at Santander Group level are 17 million individual customers and 1.1 million SME and business customers at December 31, 2017.

• Scales of compliance at country level:

Individual customers (% of the budget for the related market)	Individual coefficient	SME and business customers (% of the budget for the related market)	Business coefficient
³ 100%	1	³ 100%	1
> 90% but < 100%	0.5 - 1 (*)	> 90% but < 100%	0.5 - 1 (*)
£ 90%	0	£ 90%	0

(*) Straight-line increase of the individual coefficient and business coefficient based on the specific percentage, within these lines of each scale, that the number of customers of each type represents of the budgeted number at December 31, 2017.

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• Scales of compliance at Santander Group level:

Individual customers (millions)	Individual coefficient	SME and business customers (millions)	Business coefficient
³ 17	1	³ 1.1	1
> 15 but < 17	0.5 - 1 (*)	> 1 but < 1.1	0.5 - 1 (*)
£ 15	0	£ 1	0

(*) Straight-line increase of the individual coefficient and business coefficient based on the number of customers of each type at December 31, 2017.

Based on the foregoing metrics and compliance scales and the data relating to the end of 2017, the amount accrued of the ILP for each beneficiary (the “Accrued Amount of the ILP”) will be calculated by weighting the above coefficients by 0.25, 0.25, 0.2, 0.15, 0.075 and 0.075, respectively.

For the first cycle, the agreed-upon amount of the ILP for each beneficiary will be deferred over a period of three years and will be paid, where appropriate, in thirds in June 2016, 2017 and 2018 based on compliance with the multiannual TSR targets. Thus, for each payment date, the board of directors, following a proposal of the remuneration committee, will calculate the amount, where appropriate, to be received by each beneficiary applying to the third of the agreed-upon amount of the ILP for that year the percentage resulting from the following table:

Santander’s place in the TSR ranking	Percentage of maximum shares to be delivered
1st to 4th		100.0	%
5th		87.5	%
6th		75.0	%
7th		62.5	%
8th		50.0	%
9th and below		0	%

For the accrual for 2016, the benchmark TSR will be that accumulated between January 1, 2014 and December 31, 2015, for the accrual for 2017, the benchmark TSR will be that accumulated between January 1, 2014 and December 31, 2016 and for the accrual for 2018, the benchmark TSR will be that accumulated between January 1, 2014 and December 31, 2017.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the delivery of shares to be paid on the ILP payment date based on compliance with the related multiannual target is conditional upon none of the following circumstances existing -in the opinion of the board of directors following a proposal of the remuneration committee-, during the period prior to each of the deliveries as a result of the actions taken in 2014 and 2015, respectively: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

F-199

ii. Santander UK plc

The long-term incentive plans on shares of the Bank granted by management of Santander UK plc to its employees are as follows:

	Number of shares (in thousands)			Exercise price in pounds sterling (*)		Year granted		Employee group		Number of persons			Date of commencement of exercise period		Date of expiry of exercise period
Plans outstanding at 01/01/13		14,814
Options granted (Sharesave)		4,340			3.69		2013		Employees		13,110	(**)		01/11/13		01/11/16
														01/11/13		01/11/18
Options exercised		(78	)		4.02
Options cancelled (net) or not exercised		(3,169	)		4.72
Plans outstanding at 12/31/13		15,907
Options granted (Sharesave)		6,745			4.91		2014		Employees		6,639	(**)		01/11/14		01/11/17
														01/11/14		01/11/19
Options exercised		(1,375	)		4.36
Options cancelled (net) or not exercised		(2,155	)		4.85
Plans outstanding at 12/31/14		19,122
Options granted (Sharesave)		14,074			3.13		2015		Employees		7,759	(**)		01/11/15		01/11/18
														01/11/15		01/11/20
Options exercised		(1,839	)		3.75
Options cancelled (net) or not exercised		(6,595	)		4.50
Plans outstanding at 12/31/15		24,762

(*) At December 31, 2015, 2014 and 2013, the euro/pound sterling exchange rate was EUR 1.36249/GBP 1; EUR 1.28386/GBP 1 and EUR 1.19947/GBP 1, respectively.

(**) Number of accounts/contracts. A single employee may have more than one account/contract.

In 2008 the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 (between GBP 5 and GBP 500 in 2014 and 2015) deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the three trading sessions prior to the approval of the scheme by the UK tax authorities (HMRC). This approval must be received within 21 to 41 days following the publication of the Group’s results for the first half of the year. This scheme was approved by the board of directors, at the proposal of the appointments and remuneration committee, and, since it involved the delivery of Bank shares, its application was authorized by the annual general meeting held on June 21, 2008. Also, the scheme was authorized by the UK tax authorities (HMRC) and commenced in September 2008. In subsequent years, at the annual general meetings held on June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012, March 22, 2013, March 28, 2014 and March 27, 2015, respectively, the shareholders approved the application of schemes previously approved by the board and with similar features to the scheme approved in 2008.

F-200

iii. Fair value

The fair value of the performance share plans was calculated as follows:

a) 2015 Performance share plan:

The Group calculates at the grant date the fair value of this plan relying in part upon the report of an independent expert. On the basis of the design of the plan for 2015 and the levels of achievement of similar plans at comparable entities, the expert concluded that the reasonable range for estimating the initial achievement coefficient was approximately 60% to 80% and, accordingly, the fair value was considered to be 70% of the maximum. Therefore, as the maximum level was determined as being 91.50%, the fair value is 64.05% of the maximum amount.

b) 2014 Performance share plan:

The Group calculates at the grant date the fair value of the Banks’s relative TSR position relying in part upon the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model to perform thousands of simulations to determine the TSR of the Bank and of each of the companies in the benchmark group. Taking into account the foregoing, the fair value of the plan at the grant date was 36.3% of the maximum amount.

c) Performance share plans:

• It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.

• The Group calculates at the grant date the fair value of the Banks’s relative TSR position relying in part upon the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model to perform 10,000 simulations to determine the TSR of each of the companies in the benchmark group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.

	PI13			PI14
Expected volatility (*)		49.65	%		51.35	%
Annual dividend yield based on last few years		6.34	%		6.06	%
Risk-free interest rate (Treasury Bond yield (zero coupon) over the period of the plan)		3.33	%		4.073	%

(*) Calculated on the basis of historical volatility over the corresponding period (three years).

The application of the simulation model resulted in a percentage value of 62.62% for Plan I-13 and 55.39% for Plan l-14. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.

F-201

d) Santander UK Sharesave plans:

The fair value of each option granted by Santander UK was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:

	2015	2014	2013
Risk-free interest rate	1.06%-1.37%	1.56%-1.97%	1.2%-1.7%
Dividend increase	6.91%-7.36%	10.16%-10.82%	16%-19%
Volatility of underlying shares based on historical volatility over five years	28.54%-29.11%	24.16%-24.51%	32.15%-32.32%
Expected life of options granted	3 and 5 years	3 and 5 years	3 and 5 years

48. Other general administrative expenses

a) Breakdown

The detail of Other general administrative expenses is as follows:

	Millions of euros
	2015		2014		2013
Property, fixtures and supplies		1,943		1,930		1,980
Technology and systems		1,188		979		992
Technical reports		810		606		493
Advertising		705		655		630
Communications		587		489		519
Taxes other than income tax		529		462		445
Surveillance and cash courier services		413		397		425
Per diems and travel expenses		278		287		284
Insurance premiums		74		64		59
Other administrative expenses		1,668		1,788		1,556
		8,195		7,657		7,383

b) Technical reports and other

Technical reports includes the fees paid by the various Group companies (detailed in the accompanying Appendices) for the services provided by their respective auditors, the detail being as follows:

	Millions of euros
	2015		2014		2013
Audit fees		49.6		44.2		35.9
Audit-related fees		46.9		31.1		20.8
Tax fees		9.1		6.6		4.6
All other fees		12.6		8.0		6.5
Total		118.2		89.9		67.8

F-202

The detail of the main items included in Audit fees is as follows:

	Millions of euros
	2015		2014		2013
Audit of the financial statements of the companies audited by Deloitte		32.1		28.3		21.7
Of which:
Santander UK plc		6.6		5.8		5.0
Santander Holdings USA, Inc./Santander Consumer USA Holdings Inc.		6.7		5.7		2.4
Banco Santander (Brasil) S.A.		1.4		1.8		1.7
Audit of the Bank’s separate and consolidated financial statements		2.4		2.1		2.1
Other audit engagements		17.5		15.9		14.2
Of which:
Internal control audit (SOX) and capital audit (Basel)		7.9		6.9		5.9
Audit of the Group’s half-yearly financial statements		6.5		6.0		6.0
Issue of comfort letters		3.1		3.0		2.3
Audit fees		49.6		44.2		35.9

The detail of the main items included in Audit-related fees is as follows:

	Millions of euros
	2015		2014		2013
Other recurring engagements and reports required by the various national supervisory bodies of the countries in which the Group operates		10.9		8.8		7.6
Limited reviews and other reports required by the Group due to its listing in Brazil		3.8		5.3		—
Non-recurring reviews required by regulators		0.4		0.6		1.1
Due diligence audits and other reviews		2.2		1.7		3.1
Issuance of other attest reports		5.2		4.0		3.7
Reviews of procedures, data and controls and other checks		24.4		10.7		5.3
Total audit-related fees		46.9		31.1		20.8

Other information

The services commissioned from the Group’s auditors meet the independence requirements stipulated by the Audit Law, the US Securities and Exchange Commission (SEC) rules and the Public Accounting Oversight Board (PCAOB), and they did not involve the performance of any work that is incompatible with the audit function.

Lastly, the Group commissioned services from audit firms other than Deloitte amounting to EUR 117.4 million in 2015 (2014: EUR 97.3 million; 2013: EUR 48.6 million).

F-203

49. Gains/(losses) on disposal of assets not classified as non-current assets held for sale

The detail of Gains/(losses) on disposal of assets not classified as non-current assets held for sale is as follows:

	Millions of euros
	2015			2014			2013
Gains:
On disposal of tangible and intangible assets (*)		104			216			74
On disposal of investments		104			3,026			2,167
Of which:
Santander Consumer USA (Note 3)		—			1,739			—
Altamira Asset Management (Note 3)		—			550			—
Insurance companies in Ireland (Note 3)		—			413			—
Management companies (Note 3)		—			—			1,372
Insurance companies in Spain (Note 3)		—			—			385
Payment services company (Note 3)		—			—			122
		208			3,242			2,241
Losses:
On disposal of tangible and intangible assets		(83	)		(103	)		(78	)
On disposal of investments		(13	)		(3	)		(11	)
		(96	)		(106	)		(89	)
		112			3,136			2,152

(*) Includes in 2014 mainly the gains recognized on the sale of corporate buildings in Mexico and Argentina (EUR 85 million) and the gains arising from the sales of branches (EUR 76 million) in various countries in which the Group operates.

50. Gains/(losses) on non-current assets held for sale not classified as discontinued operations

The detail of Gains/(losses) on non-current assets held for sale not classified as discontinued operations is as follows:

	Millions of euros
Net balance	2015			2014			2013
Tangible assets		(171	)		(291	)		(422	)
Impairment (Note 12)		(222	)		(339	)		(335	)
Gain (loss) on sale (Note 12)		51			48			(87	)
Other gains and other losses		(2	)		48			—
		(173	)		(243	)		(422	)

F-204

51. Other disclosures

a) Residual maturity periods and average interest rates

The detail, by maturity, of the balances of certain items in the consolidated balance sheet is as follows:

	December 31, 2015
	Millions of euros																						Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years		More than 5 years		Total
Assets:
Cash and balances with central banks		68,469			4,677			3,714			1,573			35			2,845		16		81,329			2.26	%
Available-for-sale financial assets-
Debt instruments		172			4,268			2,389			11,899			18,718			18,537		61,204		117,187			3.87	%
Loans and receivables-
Loans and advances to credit institutions		19,697			11,974			4,115			5,294			3,897			1,240		4,039		50,256			1.58	%
Loans and advances to customers		20,976			38,004			39,647			73,928			105,614			96,146		396,159		770,474			5.99	%
Debt instruments		15			1,383			1,083			1,143			1,764			1,241		4,278		10,907			5.40	%
Held-to-maturity investments		—			—			—			—			2,013			140		2,202		4,355			2.39	%
		109,329			60,306			50,948			93,837			132,041			120,149		467,898		1,034,508			5.22	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		1,580			3,874			2,348			—			31,070			—		—		38,872			0.17	%
Deposits from credit institutions		7,043			30,187			11,801			31,843			15,926			6,294		6,113		109,207			2.64	%
Customer deposits		394,956			88,173			33,128			56,418			41,810			8,163		24,930		647,578			2.48	%
Marketable debt securities (*)		133			13,134			14,547			32,563			55,689			30,877		54,713		201,656			2.91	%
Subordinated liabilities		—			7			354			1,742			2,193			4,126		12,731		21,153			5.85	%
Other financial liabilities		4,212			4,955			6,814			648			661			515		3,072		20,877			N/A
		407,924			140,330			68,992			123,214			147,349			49,975		101,559		1,039,343			2.56	%
Difference (assets less liabilities)		(298,595	)		(80,024	)		(18,044	)		(29,377	)		(15,308	)		70,174		366,339		(4,835	)

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

F-205

The Group’s net borrowing position with the ECB was EUR 33.6 thousand million at December 31, 2015, mainly because in 2015 and 2014 the Group borrowed funds under the ECB’s targeted longer-term refinancing operations (TLTRO) program.

	December 31, 2014
	Millions of euros																					Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years		More than 5 years		Total
Assets:
Cash and balances with central banks		46,521			17,667			4,060			518			—			645		17		69,428		3.21	%
Available-for-sale financial assets-
Debt instruments		154			3,878			1,098			4,528			19,811			24,363		56,417		110,249		4.62	%
Loans and receivables-
Loans and advances to credit institutions		18,270			16,481			3,285			4,951			3,738			317		4,264		51,306		2.11	%
Loans and advances to customers		17,095			41,520			31,093			67,627			97,744			80,123		387,617		722,819		6,37	%
Debt instruments		14			1,422			1,180			947			858			554		2,535		7,510		3.66	%
		82,054			80,968			40,716			78,571			122,151			106,002		450,850		961,312		5.69	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		4,614			2,703			1,179			500			—			8,294		—		17,290		0.24	%
Deposits from credit institutions		7,390			24,596			23,238			19,154			18,546			5,995		6,228		105,147		3.16	%
Customer deposits		347,108			79,128			28,570			66,632			56,359			8,629		22,530		608,956		2.50	%
Marketable debt securities (*)		54			10,802			22,847			35,913			49,978			22,457		51,008		193,059		3.50	%
Subordinated liabilities		114			24			15			109			3,699			5,458		7,713		17,132		6.46	%
Other financial liabilities		4,131			4,145			8,265			942			465			447		1,073		19,468		N/A
		363,411			121,398			84,114			123,250			129,047			51,280		88,552		961,052		2.81	%
Difference (assets less liabilities)		(281,357	)		(40,430	)		(43,398	)		(44,679	)		(6,896	)		54,722		362,298		260

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

F-206

	December 31, 2013
	Millions of euros																					Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years		More than 5 years		Total
Assets:
Cash and balances with central banks		70,303			4,565			1,410			706			—			—		119		77,103		2.53	%
Available-for-sale financial assets-
Debt instruments		200			3,034			2,194			5,100			13,243			16,965		39,108		79,844		4.60	%
Loans and receivables-
Loans and advances to credit institutions		13,794			25,619			3,710			2,120			3,360			2,415		4,999		56,017		2.36	%
Loans and advances to customers		13,475			45,117			28,939			70,130			88,822			67,727		336,371		650,581		5.69	%
Debt instruments		3			1,024			646			1,470			1,042			283		3,418		7,886		3.01	%
		97,775			79,359			36,899			79,526			106,467			87,390		384,015		871,431		5.07	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		485			3,207			156			312			5,628			—		—		9,788		0.27	%
Deposits from credit institutions		2,756			27,665			5,578			14,436			13,106			7,837		5,156		76,534		2.18	%
Customer deposits		328,508			53,108			26,039			80,639			63,278			9,576		11,705		572,853		2.55	%
Marketable debt securities (*)		146			8,551			17,198			27,092			53,966			20,667		43,770		171,390		3.72	%
Subordinated liabilities		24			159			2			821			2,468			2,723		9,942		16,139		6.02	%
Other financial liabilities		5,524			7,476			1,613			312			486			115		884		16,410		N/A
		337,443			100,166			50,586			123,612			138,932			40,918		71,457		863,114		2.80	%
Difference (assets less liabilities)		(239,668	)		(20,807	)		(13,687	)		(44,086	)		(32,465	)		46,472		312,558		8,317

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost at December 31, 2015 is as follows:

	December 31, 2015
	Millions of euros
	On demand		Within 1 month		1 to 3 months		3 to 12 months		1 to 3 years		3 to 5 years		More than 5 years		Total
Financial liabilities at amortized cost (*):
Deposits from central banks		1,579		3,872		2,347		—		31,053		—		—		38,851
Deposits from credit institutions		7,021		30,094		11,765		31,745		15,877		6,275		6,094		108,871
Customer deposits		393,213		87,784		32,982		56,169		41,626		8,127		24,820		644,721
Marketable debt securities		130		12,801		14,178		31,737		54,277		30,094		53,325		196,542
Subordinated liabilities		—		5		333		1,640		2,065		3,885		11,987		19,915
Other financial liabilities		4,212		4,955		6,814		648		661		515		3,072		20,877
		406,155		139,511		68,419		121,939		145,559		48,896		99,298		1,029,777

(*) The analysis of the expiry dates of the derivatives is not broken down because this is not essential to the comprehension of the cash flow schedule, since substantially all of them are subject to netting arrangements with other derivatives held with the same counterparty.

In the Group’s experience, no outflows of cash or other financial assets take place prior to the contractual maturity date that might affect the information broken down above.

F-207

b) Equivalent euro value of assets and liabilities

The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:

	Equivalent value in millions of euros
	2015				2014				2013
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Cash and balances with central banks		72,153		—		64,839		—		71,328		—
Financial assets/liabilities held for trading		94,640		66,576		94,375		66,011		72,888		61,473
Other financial assets at fair value through profit or loss		7,367		21,546		7,107		15,494		9,177		9,953
Available-for-sale financial assets		68,012		—		65,031		—		43,558		—
Loans and receivables		561,805		—		521,497		—		454,791		—
Held-to-maturity investments		2,342		—		—		—		—		—
Investments		1,191		—		1,231		—		3,941		—
Tangible assets		15,005		—		12,479		—		5,611		—
Intangible assets		26,377		—		26,710		—		22,422		—
Financial liabilities at amortized cost		—		668,014		—		618,936		—		526,588
Liabilities under insurance contracts		—		1		—		—		—		—
Other		23,622		22,626		23,915		23,997		20,700		23,817
		872,514		778,763		817,184		724,438		704,416		621,831

c) Fair value of financial assets and liabilities not measured at fair value

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for cash and balances with central banks, loans and receivables, held-to-maturity investments, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.

Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlying equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the accompanying consolidated balance sheet.

Following is a comparison of the carrying amounts of the Group’s financial instruments measured at other than fair value and their respective fair values at year-end:

F-208

i) Financial assets measured at other than fair value

	Millions of euros
	2015										2014										2013
Assets	Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Level 1		Level 2		Level 3
Loans and advances to credit institutions		50,256		50,440		—		22,663		27,777		51,306		51,202		—		25,660		25,542		56,017		56,213		—		—		56,213
Loans and advances to customers		770,474		775,713		—		114,463		661,250		722,819		727,383		—		197,187		530,196		650,581		651,338		—		—		651,338
Debt instruments		15,262		15,071		4,310		9,333		1,428		7,510		7,441		—		6,065		1,376		7,886		7,858		—		3,017		4,841
		835,992		841,224		4,310		146,459		690,455		781,635		786,026		—		228,912		557,114		714,484		715,409		—		3,017		712,392

ii) Financial liabilities measured at other than fair value

	Millions of euros
	2015										2014										2013
Liabilities	Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Level 1		Level 2		Level 3
Deposits from central banks		38,872		38,894		—		—		38,894		17,290		17,290		—		—		17,290		9,788		9,788		—		—		9,788
Deposits from credit institutions		109,207		109,478		—		109,478		—		105,557		105,557		—		105,557		—		76,534		76,636		—		76,636		—
Customer deposits		647,578		646,916		—		—		646,916		608,956		608,339		—		—		608,339		572,853		570,312		—		—		570,312
Marketable debt securities		201,656		204,290		52,148		152,142		—		193,059		197,093		53,925		143,168		—		171,390		170,787		41,355		129,432		—
Subordinated liabilities		21,153		21,085		10,391		10,694		—		17,132		17,428		7,971		9,457		—		16,139		16,342		—		16,342		—
Other financial liabilities		20,877		21,178		—		—		21.178		19,468		19,428		—		—		19,428		16,410		16,407		—		—		16,407
		1,041,841		1,042,898		62,539		272,314		706,998		961,052		965,135		61,896		258,182		645,057		863,114		860,272		41,355		222,410		596,507

F-209

The main valuation methods and inputs used in the estimates at December 31, 2015 of the fair values of the financial assets and liabilities in the foregoing table were as follows:

• Loans and receivables: the fair value was estimated using the present value method. The estimates were made considering factors such as the expected maturity of the portfolio, market interest rates, spreads on newly approved transactions or market spreads -when available-.

• Held-to-maturity investments: the fair value was calculated based on market prices for these instruments.

• Financial liabilities at amortized cost:

i) The fair value of Deposits from central banks was taken to be their carrying amount since they are mainly short-term balances.

ii) Deposits from credit institutions: the fair value was obtained by the present value method using market interest rates and spreads.

iii) Customer deposits: the fair value was estimated using the present value method. The estimates were made considering factors such as the expected maturity of the transactions and the Group’s current cost of funding in similar transactions.

iv) Marketable debt securities and Subordinated liabilities: the fair value was calculated based on market prices for these instruments -when available- or by the present value method using market interest rates and spreads.

In addition, the fair value of Cash and balances with central banks was taken to be their carrying amount since they are mainly short-term balances.

Lastly, at December 31, 2015, 2014 and 2013, equity instruments amounting to EUR 1,790 million, EUR 1,646 million and EUR 1,041 million, respectively, and recognized as available-for-sale financial assets were measured at cost in the consolidated balance sheet because it was not possible to estimate their fair value reliably, since they related to investments in entities not listed on organized markets and, consequently, the non-observable inputs were significant.

d) Exposure of the Group to Europe’s peripheral countries

The detail at December 31, 2015, 2014 and 2013, by type of financial instrument, of the Group’s sovereign risk exposure to Europe’s peripheral countries and of the short positions held with them, taking into consideration the criteria established by the European Banking Authority (EBA) –explained in Note 54– is as follows:

F-210

Sovereign risk by country of issuer/borrower at December 31, 2015 (*)
	Millions of euros
	Debt instruments											Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Financial assets held for trading and Other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables		Held-to- maturity investments						Other than CDSs			CDSs
Spain		7,647		(2,446	)		26,443		1,032		2,025		13,993		48,694		(217	)		—
Portugal		278		(174	)		7,916		916		—		1,071		10,007		—			1
Italy		3,980		(1,263	)		—		—		—		—		2,717		(4	)		4
Greece		—		—			—		—		—		—		—		—			—
Ireland		—		—			—		—		—		—		—		6			—

(*) Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 11,273 million (of which EUR 9,892 million, EUR 605 million and EUR 776 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 3,134 million (EUR 3,045 million and EUR 89 million to Spain and Portugal, respectively).

(**) Presented without taking into account the valuation adjustments recognized (EUR 31 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Sovereign risk by country of issuer/borrower at December 31, 2014 (*)
	Millions of euros
	Debt instruments							Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Financial assets held for trading and Other financial assets at fair value through profit or loss		Short positions	Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		4,374	(2,558)		23,893		1,595		17,465		44,769		(60	)		—
Portugal		163	(60)		7,811		—		590		8,504		—			—
Italy		3,448	(1,723)		—		—		—		1,725		—			—
Greece		—	—		—		—		—		—		—			—
Ireland		—	—		—		—		—		—		61			—

(*) Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 8,420 million (of which EUR 7,414 million, EUR 691 million and EUR 315 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 3,081 million (EUR 2,929 million, EUR 97 million and EUR 55 million to Spain, Portugal and Italy, respectively).

(**) Presented without taking into account the valuation adjustments recognized (EUR 45 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

F-211

Sovereign risk by country of issuer/borrower at December 31, 2013 (*)
	Millions of euros
	Debt instruments									Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Financial assets held for trading and Other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		4,783		(2,079	)		21,144		1,145		13,374		38,367		(153	)		—
Portugal		148		—			2,076		—		583		2,807		—			—
Italy		2,571		(1,262	)		77		—		—		1,386		—			2
Greece		—		—			—		—		—		—		—			—
Ireland		—		—			—		—		—		—		199			—

(*) Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 5,645 million (of which EUR 4,783 million, EUR 654 million and EUR 208 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 1,884 million (EUR 1,627 million, EUR 118 million, EUR 137 million and EUR 2 million to Spain, Portugal, Italy and Ireland, respectively).

(**) Presented without taking into account the valuation adjustments recognized (EUR 20 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

The detail of the Group’s other exposure to other counterparties (private sector, central banks and other public entities that are not considered to be sovereign risks) in the aforementioned countries at December 31, 2015, 2014 and 2013 is as follows:

Exposure to other counterparties by country of issuer/borrower at December 31, 2015 (*)
	Millions of euros
	Debt instruments										Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and Other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables						Other than CDSs		CDSs
Spain		2,349		15,739		1,545		4,166		1,143		153,863		178,805		3,367		(42	)
Portugal		2,938		—		159		992		2,999		29,928		37,016		1,729		—
Italy		5		—		167		813		—		6,713		7,698		35		5
Greece		—		—		—		—		—		44		44		32		—
Ireland		—		—		63		239		40		734		1,076		300		—

(*) Also, the Group has off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 64,159 million, EUR 6,374 million, EUR 3,746 million, EUR 17 million and EUR 387 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (EUR 11,641 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

F-212

Exposure to other counterparties by country of issuer/borrower at December 31, 2014 (*)
	Millions of euros
	Debt instruments										Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and Other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables						Other than CDSs		CDSs
Spain		1,513		17,701		3,467		5,803		1,176		154,906		184,567		3,521		(15	)
Portugal		675		—		229		1,126		2,221		24,258		28,509		1,889		—
Italy		5		—		1,037		1,040		—		6,342		8,424		20		6
Greece		—		—		—		—		—		50		50		37		—
Ireland		—		—		161		133		111		538		943		299		—

(*) Also, the Group has off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 60,318 million, EUR 6,051 million, EUR 3,049 million, EUR 17 million and EUR 237 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (EUR 12,238 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Exposure to other counterparties by country of issuer/borrower at December 31, 2013 (*)
	Millions of euros
	Debt instruments										Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and Other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		816		7,451		3,148		7,826		1,804		160,478		181,523		1,981			(44	)
Portugal		1,716		—		209		1,168		1,845		25,578		30,516		1,454			(1	)
Italy		11		—		368		273		93		6,490		7,235		(115	)		(2	)
Greece		—		—		—		—		—		80		80		—			—
Ireland		—		—		229		360		259		507		1,355		1,031			—

(*) Also, the Group has off-balance-sheet exposure other than derivatives -contingent liabilities and commitments- amounting to EUR 48,659 million, EUR 5,982 million, EUR 2,717 million, EUR 4 million and EUR 93 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (EUR 13,209 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

F-213

Following is certain information on the notional amount of the CDSs at December 31, 2015, 2014 and 2013 detailed in the foregoing tables:

12/31/15
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought			Sold			Net
Spain	Sovereign Other		—		—		—			—			—			—
			724		991		(267	)		(3	)		(39	)		(42	)
Portugal	Sovereign Other		28		187		(159	)		—			1			1
			71		77		(6	)		—			—			—
Italy	Sovereign Other		183		448		(265	)		(1	)		5			4
			553		618		(65	)		4			2			6
Greece	Sovereign Other		—		—		—			—			—			—
			—		—		—			—			—			—
Ireland	Sovereign Other		—		—		—			—			—			—
			—		—		—			—			—			—

12/31/14
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought			Sold			Net
Spain	Sovereign Other		—		—		—			—			—			—
			1,260		1,576		(316	)		(11	)		(4	)		(15	)
Portugal	Sovereign Other		210		239		(29	)		1			(1	)		—
			149		162		(13	)		—			—			—
Italy	Sovereign Other		401		318		83			(1	)		1			—
			668		735		(67	)		2			4			6
Greece	Sovereign Other		—		—		—			—			—			—
			—		—		—			—			—			—
Ireland	Sovereign Other		4		4		—			—			—			—
			—		—		—			—			—			—

F-214

12/31/13
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought			Sold			Net
Spain	Sovereign		—		—		—			—			—			—
	Other		1,735		2,277		(542	)		(18	)		(26	)		(44	)
Portugal	Sovereign		192		174		18			5			(5	)		—
	Other		223		278		(55	)		1			(2	)		(1	)
Italy	Sovereign		603		570		33			(1	)		3			2
	Other		834		913		(79	)		(2	)		—			(2	)
Greece	Sovereign		—		—		—			—			—			—
	Other		5		5		—			—			—			—
Ireland	Sovereign		4		4		—			—			—			—
	Other		6		6		—			—			—			—

52. Geographical and business segment reporting

Business segment reporting is a basic tool used for monitoring and managing the Group’s various activities.

In 2015 the Group made the following changes to its criteria for the management and presentation of its financial information by segment:

• Changes in the measurement of segment profit or loss: they affect mainly the interest income/(charges), net gains/losses on financial assets and liabilities and operating expenses items, through a decrease in the corporate center and the allocation thereof to the business units.

Previous criteria	New criteria
The Spain business unit was treated as a retail network. Therefore, individualized internal transfer rates (ITR)* by operation were applied to calculate the financial margin and, accordingly, the balance sheet was matched in terms of interest rate risk. The counterparty of these results was the corporate center.	The Spain business unit is treated like the other countries and units of the Group. All results from financial management of the balance sheet are therefore recorded in Spain, including the aforementioned results from interest rate risk management.
The cost of issuances eligible as Additional Tier 1 (AT1) capital made by Brazil and Mexico to replace Core Equity Tier 1 (CET1) capital was recorded in the corporate center, as the issuances were made for capital optimization in these units.	Each country recognizes the cost related to its AT1 issuances.
The corporate center costs were charged to the countries/units based on the previous structure, which had not changed in recent years.	The scope of costs allocated to the units from the corporate center is expanded in accordance with the new structure.

* ITR is a mechanism designed to help manage interest rate and liquidity risks, by isolating them from the business areas and centralizing them into the Financial Management Area in the Corporate Center. The main function of a transfer rate system is to set the price of the fund exchanges between business areas and the Corporate Center. This price represents the true opportunity cost of the funds (raised or invested) and has to take into account the costs of all associated interest rate and liquidity risks. Whether it is a fund investment or a fund raising transaction, the different business areas obtain a spread over or under the current transfer rate, and that spread is used to analyze the results of these business areas.

• The “Real estate operations in Spain” unit was created, which includes the former “Real estate operations discontinued in Spain” unit, together with other real estate assets, such as assets pertaining to the investment in Metrovacesa and to the former real estate fund (Santander Banif Inmobiliario), which were previously included in the corporate center.

• The United States geographical segment was changed to include Santander Bank, Santander Holdings USA, SCUSA and Puerto Rico (already included in previous scope) plus Banco Santander International Miami and the New York branch.

F-215

• The private banking, asset management and insurance business, which was previously classified as an independent global business, became part of the commercial banking business.

Other changes: Annual change in the scope of the customer global relationship model between commercial banking and global banking and markets. This change does not have any effect on the geographical segments.

Consequently, the segment information for 2014 and 2013 shown below has been recalculated using these criteria in order to make it comparable.

a) Geographical segments

This primary level of segmentation, which is based on the Group’s management structure, comprises five segments: four operating areas plus the corporate center. The operating areas, which include all the business activities carried on therein by the Group, are: Continental Europe, the United Kingdom, Latin America and the United States, based on the location of the Group’s assets.

The Continental Europe area encompasses all the business activities carried on in the region. The United Kingdom area includes the business activities carried on by the various Group units and branches with a presence in the UK. The Latin America area includes all the financial activities carried on by the Group through its banks and subsidiaries in the region. The United States area includes the holding company (SHUSA) and the businesses of Santander Bank, Santander Consumer USA, Banco Santander Puerto Rico, Banco Santander International’s specialized unit and the New York branch.

The corporate center segment includes the centralized management business relating to financial investments, financial management of the structural currency position, within the remit of the Group’s corporate asset and liability management committee, and management of liquidity and equity through issues.

The financial information of each operating segment is prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available in the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group.

Consequently, the sum of the various segment income statements is equal to the consolidated income statement. With regard to the balance sheet, due to the required segregation of the various business units (included in a single consolidated balance sheet), the amounts lent and borrowed between the units are shown as increases in the assets and liabilities of each business. These amounts relating to intra-Group liquidity are eliminated and are shown in the Intra-Group eliminations column in the table below in order to reconcile the amounts contributed by each business unit to the consolidated Group’s balance sheet.

There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of total income.

F-216

The condensed balance sheets and income statements of the various geographical segments are as follows:

	Millions of euros
	2015
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate center		Intra-Group eliminations			Total
Total Assets		538,645		383,155		267,885		130,584		148,134		(128,143	)		1,340,260
Loans and advances to customers		287,252		282,673		133,139		84,190		3,594		—			790,848
Financial assets held for trading (excluding loans and advances)		60,151		40,138		33,669		2,299		2,656		—			138,913
Available-for-sale financial assets		60,913		12,279		25,926		19,145		3,773					122,036
Credit institutions		81,867		15,459		21,923		3,902		6,781		(50,980	)		78,952
Non-current assets (*)		11,798		3,025		3,522		9,156		289					27,790
Other asset accounts		36,664		29,581		49,706		11,892		131,041		(77,163	)		181,721
Total Liabilities and Equity		538,645		383,155		267,885		130,584		148,134		(128,143	)		1,340,260
Customer deposits		263,462		231,947		122,413		60,115		5,185		—			683,122
Marketable debt securities		50,934		70,133		33,172		23,000		27,790		—			205,029
Subordinated liabilities		169		4,127		6,356		905		9,596		—			21,153
Liabilities under insurance contracts		626		—		1		—		—		—			627
Deposits from central banks and credit institutions		132,688		23,610		42,393		26,170		1,490		(50,980	)		175,371
Other accounts (**)		58,253		36,162		43,872		9,073		18,012					165,372
Share capital, reserves, profit for the year and valuation adjustments		32,513		17,176		19,678		11,321		86,061		(77,163	)		89,586
Other Customer funds under management		64,433		9,703		59,065		7,540		—		—			140,741
Investment funds		44,393		9,564		54,426		645		—		—			109,028
Pension funds		11,376		—		—		—		—		—			11,376
Assets under management		8,664		139		4,639		6,895		—		—			20,337
Customer funds under management (***)		378,998		315,910		221,006		91,560		42,571		—			1,050,045

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Non-controlling interests.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

The corporate center segment acts as the Group’s holding company. Therefore, it manages all equity (share capital and reserves of all the units) and determines the allocation thereof to each unit. The Group’s share capital and reserves are initially assigned to this segment, and is then allocated in accordance with corporate policies to the business units. This allocation is shown as an asset of the corporate center segment (included in Other asset accounts) and as a liability of each business unit (included in Share capital, reserves, profit for the year and valuation adjustments). Therefore, the allocation is reflected in the balance sheet net of adjustments for intra-Group eliminations in order not to duplicate the balances and obtain the total consolidated balance sheet for the Group.

F-217

	Millions of euros
	2014
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate center		Intra-Group eliminations			Total
Total assets		496,598		354,235		268,488		108,034		141,375		(102,434	)		1,266,296
Loans and advances to customers		268,735		251,191		139,955		70,420		4,410		—			734,711
Financial assets held for trading (excluding loans and advances)		65,863		39,360		31,766		5,043		2,120		—			144,152
Available-for-sale financial assets		56,845		11,196		31,174		12,737		3,298		—			115,250
Loans and advances to credit institutions		66,602		14,093		22,104		3,460		2,858		(27,404	)		81,713
Non-current assets (*)		11,796		2,700		3,912		6,905		796		—			26,109
Other asset accounts		26,757		35,695		39,577		9,469		127,893		(75,030	)		164,361
Total liabilities and equity		496,598		354,235		268,488		108,034		141,375		(102,434	)		1,266,296
Customer deposits		256,909		202,328		131,826		51,304		5,260		—			647,627
Marketable debt securities		54,431		69,581		31,920		16,000		24,957		—			196,889
Subordinated liabilities		409		5,376		6,443		796		4,108		—			17,132
Liabilities under insurance contracts		713		—		—		—		—		—			713
Deposits from central banks and credit institutions		90,305		26,720		35,978		17,760		12,010		(27,404	)		155,369
Other accounts (**)		64,305		34,888		39,945		10,542		17,610		—			167,290
Share capital, reserves, profit for the year and valuation adjustments		29,526		15,342		22,376		11,632		77,430		(75,030	)		81,276
Other customer funds under management		60,679		9,667		62,488		8,535		—		—			141,369
Investment funds		40,829		9,524		57,548		1,618		—		—			109,519
Pension funds		11,481		—		—		—		—		—			11,481
Assets under management		8,369		143		4,940		6,917		—		—			20,369
Customer funds under management (***)		372,428		286,952		232,677		76,635		34,325		—			1,003,017

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Non-controlling interests.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

F-218

	Millions of euros
	2013
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate center		Intra-Group eliminations			Total
Total assets		430,021		323,743		233,918		68,933		158,230		(99,082	)		1,115,763
Loans and advances to customers		267,532		231,046		125,349		43,698		1,231		—			668,856
Financial assets held for trading (excluding loans and advances)		50,320		28,831		20,584		2,638		2,334		—			104,707
Available-for-sale financial assets		37,319		6,003		20,792		9,008		10,677		—			83,799
Loans and advances to credit institutions		37,660		17,136		26,157		2,362		24,564		(32,915	)		74,964
Non-current assets (*)		8,635		2,498		3,858		650		973		—			16,614
Other asset accounts		28,555		38,229		37,178		10,577		118,451		(66,167	)		166,823
Total liabilities and equity		430,021		323,743		233,918		68,933		158,230		(99,082	)		1,115,763
Customer deposits		257,050		187,467		116,652		43,817		2,851		—			607,837
Marketable debt securities		53,409		64,092		28,987		1,146		27,843		—			175,477
Subordinated liabilities		406		5,805		4,812		1,245		3,871		—			16,139
Liabilities under insurance contracts		1,430		—		—		—		—		—			1,430
Deposits from central banks and credit institutions		41,636		26,902		25,039		9,051		39,684		(32,915	)		109,397
Other accounts (**)		47,737		27,774		37,995		4,404		16,839		—			134,749
Share capital, reserves, profit for the year and valuation adjustments		28,353		11,703		20,433		9,270		67,142		(66,167	)		70,734
Other customer funds under management		51,768		9,645		52,610		11,147		—		—			125,170
Investment funds		33,485		9,645		48,243		1,931		—		—			93,304
Pension funds		10,879		—		—		—		—		—			10,879
Assets under management		7,404		—		4,367		9,216		—		—			20,987
Customer funds under management (***)		362,633		267,009		203,061		57,355		34,565		—			924,623

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Non-controlling interests.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

F-219

	Millions of euros
	2015
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate center			Total
INTEREST INCOME/(CHARGES)		8,006			4,942			13,752			6,116			(4	)		32,812
Income from equity instruments		277			1			57			48			72			455
Income from companies accounted for using the equity method		120			10			285			3			(43	)		375
Net fee and commission income (expense)		3,417			1,091			4,452			1,086			(13	)		10,033
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		1,186			302			517			231			150			2,386
Other operating income (expenses)		(178	)		37			(308	)		316			(33	)		(166	)
TOTAL INCOME		12,828			6,383			18,755			7,800			129			45,895
Administrative expenses		(6,274	)		(3,009	)		(7,230	)		(2,761	)		(28	)		(19,302	)
Depreciation and amortization		(461	)		(348	)		(676	)		(264	)		(669	)		(2,418	)
Provisions (net)		(352	)		(351	)		(831	)		(164	)		(1,408	)		(3,106	)
Impairment losses on financial assets		(2,083	)		(107	)		(5,108	)		(3,103	)		(251	)		(10,652	)
Impairment losses on other assets		(172	)		(9	)		20			—			(931	)		(1,092	)
Other income and charges		(120	)		5			78			16			243			222
OPERATING PROFIT /(LOSS) BEFORE TAX		3,366			2,564			5,008			1,524			(2,915	)		9,547
Income tax		(887	)		(556	)		(1,219	)		(517	)		966			(2,213	)
PROFIT FROM CONTINUING OPERATIONS		2,479			2,008			3,789			1,007			(1,949	)		7,334
Profit (Loss) from discontinued operations		—			—			—			—			—			—
CONSOLIDATED PROFIT FOR THE YEAR		2,479			2,008			3,789			1,007			(1,949	)		7,334
Attributable to non-controlling interests		261			37			596			329			145			1,368
PROFIT ATTRIBUTABLE TO THE PARENT		2,218			1,971			3,193			678			(2,094	)		5,966

F-220

	Millions of euros
	2014																		2013
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate center			Total			Continental Europe			United Kingdom			Latin America			United States			Corporate center			Total
INTEREST INCOME/(CHARGES)		7,517			4,234			13,620			4,789			(613	)		29,547			7,189			3,451			14,808			1,807			(1,320	)		25,935
Income from equity instruments		286			1			88			29			31			435			265			1			54			24			34			378
Income from companies accounted for using the equity method		(25	)		9			283			4			(28	)		243			14			4			264			331			(113	)		500
Net fee and commission income (expense)		3,500			1,028			4,372			830			(34	)		9,696			3,467			992			4,477			578			247			9,761
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		1,221			241			484			205			699			2,850			1,905			402			982			106			(1	)		3,394
Other operating income (expenses)		5			28			(290	)		122			(24	)		(159	)		(48	)		31			(267	)		(63	)		45			(302	)
TOTAL INCOME		12,504			5,541			18,557			5,979			31			42,612			12,792			4,881			20,318			2,783			(1,108	)		39,666
Administrative expenses		(5,972	)		(2,702	)		(7,130	)		(2,039	)		(56	)		(17,899	)		(5,991	)		(2,318	)		(7,497	)		(1,481	)		(165	)		(17,452	)
Depreciation and amortization		(472	)		(353	)		(720	)		(200	)		(542	)		(2,287	)		(522	)		(316	)		(827	)		(149	)		(577	)		(2,391	)
Provisions (net)		(205	)		(184	)		(946	)		(21	)		(1,653	)		(3,009	)		(163	)		(231	)		(770	)		(59	)		(1,222	)		(2,445	)
Impairment losses on financial assets		(2,975	)		(332	)		(5,145	)		(2,233	)		(25	)		(10,710	)		(3,833	)		(580	)		(6,487	)		(43	)		(284	)		(11,227	)
Impairment losses on other assets		(156	)		—			16			(12	)		(786	)		(938	)		(149	)		(4	)		(24	)		(17	)		(309	)		(503	)
Other income and charges		(238	)		3			113			46			2,986			2,910			(372	)		—			312			(2	)		1,792			1,730
OPERATING PROFIT /(LOSS) BEFORE TAX		2,486			1,973			4,745			1,520			(45	)		10,679			1,762			1,432			5,025			1,032			(1,873	)		7,378
Income tax		(639	)		(416	)		(1,053	)		(439	)		(1,171	)		(3,718	)		(385	)		(293	)		(1,113	)		(164	)		(79	)		(2,034	)
PROFIT FROM CONTINUING OPERATIONS		1,847			1,557			3,692			1,081			(1,216	)		6,961			1,377			1,139			3,912			868			(1,952	)		5,344
Profit (Loss) from discontinued operations		(26	)		—			—			—			—			(26	)		(6	)		(9	)		—			—			—			(15	)
CONSOLIDATED PROFIT FOR THE YEAR		1,821			1,557			3,692			1,081			(1,216	)		6,935			1,371			1,130			3,912			868			(1,952	)		5,329
Attributable to non-controlling interests		174			1			790			219			(65	)		1,119			135			1			861			(1	)		158			1,154
PROFIT ATTRIBUTABLE TO THE PARENT		1,647			1,556			2,902			862			(1,151	)		5,816			1,236			1,129			3,051			869			(2,110	)		4,175

F-221

Following is the detail of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognized under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/Losses on financial assets and liabilities (net) and Other operating income in the consolidated income statements for 2015, 2014 and 2013.

	Revenue (Millions of euros)
	Revenue from external customers							Inter-segment revenue									Total revenue
	2015			2014		2013		2015			2014			2013			2015			2014			2013
Continental Europe		22,877			21,218		23,106		422			56			1,141			23,299			21,274			24,247
United Kingdom		11,150			9,091		9,612		416			1,204			1,180			11,566			10,295			10,792
Latin America		32,936			35,038		31,930		(776	)		(441	)		341			32,160			34,597			32,271
United States		9,364			7,791		6,147		157			30			126			9,521			7,821			6,273
Corporate center		(3,335	)		3,656		2,641		6,643			7,323			9,416			3,308			10,979			12,057
Inter-segment revenue adjustments and eliminations		—			—		—		(6,862	)		(8,172	)		(12,204	)		(6,862	)		(8,172	)		(12,204	)
		72,992			76,794		73,436		—			—			—			72,992			76,794			73,436

b) Business segments

At this secondary level of segment reporting, the Group is structured into commercial banking, Santander Global Corporate Banking and the segment relating to real estate operations in Spain; the sum of these segments is equal to that of the primary geographical operating segments. Total figures for the Group are obtained by adding to the business segments the data for the corporate center.

The commercial banking segment encompasses the entire customer banking business (including the consumer finance business), except for the corporate banking business, which is managed through Santander Global Corporate Banking. Also, this segment includes the gains or losses on the hedging positions taken in each country, within the remit of each of their asset-liability management committees. The Santander Global Corporate Banking segment reflects the returns on the global corporate banking business and the markets and investment banking business worldwide, including all the globally managed treasury departments (excluding the portion allocated to commercial banking customers) and the equities business. The real estate operations in Spain include loans to customers engaging mainly in property development, for which a specialized management model is in place, Metrovacesa’s real estate assets and the assets of the former real estate fund (Santander Banif Inmobiliario), together with the Group’s ownership interest in SAREB and foreclosed assets.

F-222

The condensed income statements are as follows:

(Condensed) income statement	Millions of euros
	2015
	Commercial banking			Santander Global Corporate Banking			Real estate operations in Spain			Corporate center			Total
INTEREST INCOME/(CHARGES)		30,027			2,830			(41	)		(4	)		32,812
Income from equity instruments		124			259			—			72			455
Income from companies accounted for using the equity method		434			(6	)		(10	)		(43	)		375
Net fee and commission income (expense)		8,621			1,425			—			(13	)		10,033
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		1,346			739			151			150			2,386
Other operating income (expenses)		(194	)		24			37			(33	)		(166	)
TOTAL INCOME		40,358			5,271			137			129			45,895
Administrative expenses		(17,153	)		(1,897	)		(224	)		(28	)		(19,302	)
Depreciation and amortization		(1,577	)		(161	)		(11	)		(669	)		(2,418	)
Provisions (net)		(1,656	)		(51	)		9			(1,408	)		(3,106	)
Impairment losses on financial assets		(9,462	)		(688	)		(251	)		(251	)		(10,652	)
Net impairment losses on other assets		2			(37	)		(126	)		(931	)		(1,092	)
Other non-financial gains/(losses)		117			4			(142	)		243			222
OPERATING PROFIT /(LOSS) BEFORE TAX		10,629			2,441			(608	)		(2,915	)		9,547
Income tax		(2,663	)		(695	)		179			966			(2,213	)
PROFIT FROM CONTINUING OPERATIONS		7,966			1,746			(429	)		(1,949	)		7,334
Profit (Loss) from discontinued operations		—			—			—			—			—
CONSOLIDATED PROFIT FOR THE YEAR		7,966			1,746			(429	)		(1,949	)		7,334
Attributable to non-controlling interests		1,112			121			(9	)		145			1,368
PROFIT ATTRIBUTABLE TO THE PARENT		6,854			1,626			(420	)		(2,094	)		5,966

F-223

(Condensed) income statement	Millions of euros
	2014															2013
	Commercial banking			Santander Global Corporate Banking			Real estate operations in Spain			Corporate center			Total			Commercial banking			Santander Global Corporate Banking			Real estate operations in Spain			Corporate center			Total
INTEREST INCOME/(CHARGES)		27,699			2,481			(20	)		(613	)		29,547			24,856			2,361			38			(1,320	)		25,935
Income from equity instruments		132			272			—			31			435			79			265			—			34			378
Income from companies accounted for using the equity method		341			(2	)		(68	)		(28	)		243			656			(1	)		(42	)		(113	)		500
Net fee and commission income (expense)		8,338			1,392			—			(34	)		9,696			8,206			1,293			15			247			9,761
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		1,394			749			8			699			2,850			2,239			1,155			1			(1	)		3,394
Other operating income (expenses)		(215	)		31			49			(24	)		(159	)		(378	)		15			16			45			(302	)
TOTAL INCOME		37,689			4,923			(31	)		31			42,612			35,658			5,088			28			(1,108	)		39,666
Administrative expenses		(15,946	)		(1,682	)		(215	)		(56	)		(17,899	)		(15,478	)		(1,634	)		(175	)		(165	)		(17,452	)
Depreciation and amortization		(1,573	)		(158	)		(14	)		(542	)		(2,287	)		(1,652	)		(148	)		(14	)		(577	)		(2,391	)
Provisions (net)		(1,309	)		(38	)		(9	)		(1,653	)		(3,009	)		(1,179	)		(44	)		—			(1,222	)		(2,445	)
Impairment losses on financial assets		(9,812	)		(552	)		(321	)		(25	)		(10,710	)		(9,578	)		(953	)		(412	)		(284	)		(11,227	)
Net impairment losses on other assets		(26	)		(43	)		(83	)		(786	)		(938	)		(74	)		(37	)		(83	)		(309	)		(503	)
Other non-financial gains/(losses)		158			(13	)		(221	)		2,986			2,910			255			11			(328	)		1,792			1,730
OPERATING PROFIT /(LOSS) BEFORE TAX		9,181			2,437			(894	)		(45	)		10,679			7,952			2,283			(984	)		(1,873	)		7,378
Income tax		(2,128	)		(667	)		248			(1,171	)		(3,718	)		(1,617	)		(633	)		295			(79	)		(2,034	)
PROFIT FROM CONTINUING OPERATIONS		7,053			1,770			(646	)		(1,216	)		6,961			6,335			1,650			(689	)		(1,952	)		5,344
Profit (Loss) from discontinued operations		(26	)		—			—			—			(26	)		(15	)		—			—			—			(15	)
CONSOLIDATED PROFIT FOR THE YEAR		7,027			1,770			(646	)		(1,216	)		6,935			6,320			1,650			(689	)		(1,952	)		5,329
Attributable to non-controlling interests		1,033			145			6			(65	)		1,119			799			197			—			158			1,154
PROFIT ATTRIBUTABLE TO THE PARENT		5,994			1,625			(652	)		(1,151	)		5,816			5,521			1,453			(689	)		(2,110	)		4,175

F-224

53. Related parties

The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those that prevail in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognize.

F-225

	Millions of euros
	2015												2014												2013
	Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties
Assets:		6,542			—			28			573			6,885			5			25			1,276			9,425			6			36			1,599
Loans and advances to credit institutions		8			—			—			—			5			—			—			—			7,392			—			—			—
Loans and advances to customers		5,997			—			28			293			6,202			5			25			284			1,331			6			36			424
Debt instruments		537			—			—			280			678			—			—			992			702			—			—			1,175
Liabilities:		(1,122	)		(25	)		(16	)		(103	)		(1,034	)		(9	)		(20	)		(315	)		(946	)		(9	)		(10	)		(197	)
Deposits from credit Institutions		(501	)		—			—			—			(337	)		—			—			—			(440	)		—			—			—
Customer deposits		(620	)		(25	)		(16	)		(103	)		(696	)		(9	)		(20	)		(315	)		(498	)		(9	)		(10	)		(197	)
Marketable debt securities		(1	)		—			—			—			(1	)		—			—			—			(8	)		—			—			—
Income statement:		802			—			—			24			656			—			—			11			143			—			—			29
Interest and similar income		98			—			—			17			89			—			—			6			109			—			—			6
Interest expense and similar charges		(15	)		—			—			—			(18	)		—			—			(2	)		(12	)		—			—			(7	)
Gains/losses on financial assets and liabilities		73			—			—			—			35			—			—			2			12			—			—			25
Fee and commission income		664			—			—			8			572			—			—			5			56			—			—			5
Fee and commission expense		(18	)		—			—			(1	)		(22	)		—			—			—			(22	)		—			—			—
Other:		4,123			2			4			2,682			4,270			2			3			3,720			14,029			—			4			4,137
Contingent liabilities		46			—			—			191			43			—			—			265			74			—			—			145
Contingent commitments		95			2			4			132			59			2			3			77			1,063			—			4			95
Derivative financial instruments		3,982			—			—			2,359			4,168			—			—			3,378			12,892			—			—			3,897

In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR 299 million at December 31, 2015 (December 31, 2014: EUR 345 million; December 31, 2013: EUR 342 million).

F-226

54. Risk management

a) Cornerstones of the risk function

The Group has calculated that the risk function should be based on the following cornerstones, which are in line with the Group’s strategy and business model and take into account the recommendations of the supervisory and regulatory bodies and the best market practices:

• The business strategy is defined by the risk appetite. The Group’s board calculates the amount and type of risk that it considers reasonable to assume in implementing its business strategy and its deployment in objective verifiable limits that are consistent with the risk appetite for each significant activity.

• All risks must be managed by the units that generate them using advanced models and tools and integrated in the various businesses. The Group is fostering advanced risk management, using innovative models and metrics together with a control, reporting and escalation framework to ensure that risks are identified and managed from different perspectives.

• A forward-looking vision of all types of risks should be included in the risk identification, assessment and management processes.

• The independence of the risk function encompasses all risks and appropriately separates the risk generating units from those responsible for risk control.

• The best processes and infrastructure must be used for risk management.

• A risk culture integrated throughout the organization, consisting of a series of attitudes, values, skills and guidelines for action vis-à-vis all risks.

b) Risk management and control model - Advanced Risk Management (ARM)

The risk management and control model ensures that the risk profile remains within the levels set for the risk appetite and other limits. Similarly, it includes the adoption of the corrective and mitigating measures required to keep risk levels in line with the defined objectives.

In 2014, the Group launched the ARM program, the main aim of which is to contribute to progress towards advanced risk management by laying the foundations to make available the best integrated risk management model in the industry.

The roll-out of the ARM in 2015 at the various Group units enabled progress to be made in strategic projects that were already under way, such as the Risk Data Aggregation/Risk Reporting Framework (RDA/RRF), the risk appetite to be developed, the control environment through the governance of the risk function to be strengthened and new initiatives such as the risk management model or the Advanced Operational Risk Management (AORM) model, inter alia, to be developed.

The instruments that help ensure that all the risks arising from the Group’s business activity are properly managed and controlled are described below.

1. Risk map

The risk map covers the main risk categories in which the Group has its most significant current and/or potential exposures, thus facilitating the identification thereof.

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The risk map includes the following:

• Financial risks

• Credit risk: risk that might arise from the failure to meet agreed-upon contractual obligations in financial transactions.

• Market risk: that which is incurred as a result of the possibility of changes in market factors affecting the value of positions in the trading portfolios.

• Liquidity risk: risk of non-compliance with payment obligations on time or of complying with them at an excessive cost.

• Structural and capital risks: risk caused by the management of the various balance sheet items, including those relating to the adequacy of capital and those arising from the insurance and pensions businesses.

• Non-financial risks

• Operational risk: the risk of incurring losses due to the inadequacy or failure of processes, staff and internal systems or due to external events.

• Conduct risk: the risk caused by inappropriate practices in the Group’s dealings with its customers, and the treatment and products offered to each particular customer and the adequacy thereof.

• Compliance and legal risk: risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

• Transversal risks

• Model risk: includes losses arising from decisions based mainly on the results of models, due to errors in the design, application or use of the aforementioned models.

• Reputational risk: risk of damage in the perception of the Group by public opinion, its customers, investors or any other interested party.

• Strategic risk: the risk that results diverge significantly from the Group’s strategy or business plan due to changes in general business conditions and risks associated with strategic decisions. This includes the risk of poor implementation of decisions or lack of capacity to respond to changes in the business environment.

2. Risk governance

In line with the objective of strengthening the Group’s corporate governance, the governance of the risk function was updated and reinforced in 2015. In this connection, the responsibilities of the various committees were defined more clearly, and the decision-making and risk management units, with the participation of the business functions, were separated from those engaged in risk control.

Governance of the risk function should seek to ensure that risk decisions are taken appropriately and efficiently and that risks are effectively controlled, and also guarantee that risks are managed in accordance with the risk appetite level defined by senior management of the Group and the units.

For this purpose, the following principles were established:

• Separation of decision-making from risk control.

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• Strengthening of the responsibility of the risk generating functions in decision-making.

• Ensuring that all risk decisions have a formal approval process.

• Ensuring an aggregate view of all risks.

• Strengthening of the risk control committees.

• Maintenance of a simple committee structure.

2.1. Lines of defense

The Group follows a risk management and control model based on three lines of defense.

The business functions or activities that take or generate risk exposure comprise the first line of defense against it. The assumption or generation of risks in the first line of defense must comply with the defined risk appetite and limits. In order to perform its function, the first line of defense must have available the means to identify, measure, handle and report the risks assumed.

The second line of defense comprises the risk control and oversight function and the compliance function. This second line seeks to ensure effective control of risks and guarantees that risks are managed in accordance with the defined risk appetite level.

Internal audit, as the third line of defense and in its role as the last control layer, performs regular assessments to ensure that the policies, methods and procedures are appropriate and checks their effective implementation.

The risk control function, the compliance function and the internal audit function are sufficiently separate and independent of each other and of the other functions that they control or supervise for the performance of their duties, and they have access to the board of directors and/or its committees, through their presiding officers.

2.2. Risk committee structure

Responsibility for the control and management of risk and, in particular, for the setting of the Group’s risk appetite, rests ultimately with the board of directors, which has the powers delegated to the various committees. The board is supported by the risk, regulation and compliance oversight committee and the independent risk control and supervision committee. In addition, the Group’s executive committee pays particular attention to the management of the Group’s risks.

The following bodies constitute the top level risk governance bodies.

Independent control bodies

Risk, regulation and compliance oversight committee:

This committee’s mission is to assist the board in the oversight and control of risk, the definition of the Group’s risk policies, relationships with supervisory bodies and matters of regulation and compliance, sustainability and corporate governance.

It is composed of external or non-executive directors, with a majority of independent directors, and is chaired by an independent director.

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Risk control committee (CCR):

This collective body is responsible for the effective control of risks, ensuring that risks are managed in accordance with the risk appetite level approved by the board, while taking into account at all times an overall view of all the risks included in the general risk framework. This means the identification and monitoring of current and emerging risks and their impact on the Group’s risk profile.

This committee is chaired by the Group Chief Risk Officer (GCRO) and is composed of executives of the entity. At least, the risk function, which holds the chairmanship, and the compliance, financial, controller’s unit and risk control functions, inter alia, are represented The CROs of local entities participate periodically in order to report, inter alia, on the various entities’ risk profiles.

The risk control committee reports to the risk, regulation and compliance oversight committee and assists it in its function of supporting the board.

Decision-making bodies

Executive risk committee (CER):

This collective body is responsible for risk management pursuant to the powers delegated by the board of directors and, in its sphere of action and decision-making, oversees all risks.

It participates in decision-making on the assumption of risks at the highest level, guarantees that these are within the limits set in the Group’s risk appetite and reports on its activities to the board or its committees when so required.

This committee is chaired by an executive deputy chairman of the board, comprises the CEO, executive directors and other executives of the entity, and the risk, financial, and compliance functions, inter alia, are represented. The Group CRO has the right of veto over this committee’s decisions.

2.3. Organizational risk function structure

The GCRO is the head of the Group’s risk function and reports to an executive deputy chairman of the Bank who is a member of the board of directors and chairman of the executive risk committee.

The GCRO, whose duties include advising and challenging the executive line, also reports separately to the risk, regulation and compliance oversight committee and to the board.

Advanced risk management has a holistic forward-looking vision of risks, based on the intensive use of models, aimed at constructing a sound control environment while complying with the requirements of the regulator and supervisor.

In this connection, the risk management and control model has the following key features:

• Coordination of the relationship between the countries and the corporate headquarters, assessing the effective implementation of the risk management and control framework at each unit and ensuring the alignment with the achievement of strategic risk objectives.

• Enterprise Wide Risk Management (EWRM) involves providing a consolidated view of all risks to senior management and the Group’s governing bodies together with the development of the risk appetite and identifying and assessing all risks (Risk identification & assessment). It also handles the relationship with supervisors and regulators in relation to risks.

• Control of financial, non-financial and transversal risks, checking, for each type of risk, that management and exposure are in keeping with the guidelines established by senior management.

• Development, in the sphere of risk, of reporting regulations, methodologies, scenario analysis, stress tests and infrastructure, together with robust risk governance.

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2.4. The Group’s relationship with subsidiaries regarding risk management

Alignment of units with the corporate center

The risk management and control model, at all Group units, has a common set of basic principles, achieved by means of corporate frameworks. These emanate from the Group itself and the subsidiaries adhere to them through their respective governing bodies, thus configuring the relationships between the subsidiaries and the Group, including its participation in the making of important decisions by validating them.

Beyond these principles and fundamentals, each unit adapts its risk management to its local reality, pursuant to the corporate frameworks and reference documents furnished by corporate headquarters, which makes it possible to identify a risk management model at the Group.

Committee structure

The subsidiaries’ governing bodies are structured taking into account local regulatory and legal requirements and each subsidiary’s size and complexity and are consistent with those of the Parent, as established in the internal governance framework, thus facilitating communication, reporting and effective control.

The subsidiaries’ managing bodies, in accordance with the internal governance framework in place at the Group, have their own model of (quantitative and qualitative) risk management powers and must adhere to the principles of conduct contained in the benchmark models and frameworks developed at corporate level. Given its ability to take an aggregate, comprehensive view of all risks, corporate headquarters reserves for itself the powers to validate and question the operations and management policies at the various units, to the extent that they affect the Group’s risk profile.

3. Management processes and tools

3.1. Risk appetite and limits structure

Risk appetite is defined at the Group as the amount and type of risk that it considers reasonable to assume in implementing its business strategy, in order to ensure that it can continue to operate normally if unexpected events occur. To this end, severe scenarios are taken into account, which might have an adverse impact on its levels of capital or liquidity, its profits and/or its share price.

The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring its actual risk profile and for ensuring consistency between the two. The risk appetite is determined both for the Group as a whole and for each of the main business units using a corporate methodology adapted to the circumstances of each unit/market. At local level, the boards of directors of the related subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group.

Banking business model and fundamentals of the risk appetite

The definition and establishment of the Group’s risk appetite is consistent with its risk culture and its banking business model from the risk perspective. The main features defining the business model, which form the basis of the risk appetite at the Group, are as follows:

• A predictable general medium-low risk profile based on a diversified business model focusing on retail banking with a diversified international presence and significant market shares, and a wholesale banking model which prioritizes the relationship with the customer base in the Group’s principal markets.

• A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify sources and maturities.

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• A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms, minimizing the use of non-operating or purely instrumental companies, and ensuring that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

• An independent risk function with highly active involvement of senior management to guarantee a strong risk culture focused on protecting and ensuring an adequate return on capital.

• To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.

• A business model that focuses on the products with respect to which the Group considers that it has sufficient knowledge and management capacity (systems, processes and resources).

• The conduct of the Group’s business activity on the basis of a behavior model that safeguards the interests of its customers and shareholders.

• The availability of sufficient and adequate human resources, systems and tools to enable the Group to maintain a risk profile compatible with the established risk appetite, at both global and local level.

• The application of a remuneration policy containing the incentives required to ensure that the individual interests of employees and executives are in line with the corporate risk appetite framework and that the incentives are consistent with the Group’s long-term earnings performance.

Corporate risk appetite principles

The Group’s risk appetite is governed by the following principles at all the entities:

• Responsibility of the board and of senior executives. The board of directors is the body ultimately responsible for establishing the risk appetite and its supporting regulations, as well as for overseeing compliance therewith.

• Integral view of risk, involving the checking and questioning of the risk profile. The risk appetite should take into consideration all the significant risks to which the Group may be exposed, providing an aggregate view of the Group’s risk profile through the use of quantitative metrics and qualitative indicators.

• Future risk estimate. The risk appetite should take into consideration the desirable risk profile at the present time and in the medium term considering both the most likely circumstances and stress scenarios.

• Links with strategic and business plans and integration in management. The risk appetite is a benchmark in strategic and business planning.

• Risk appetites that are consistent across the various units and risk language that is common to the entire organization.

• Periodic review, ongoing checking and adaptation to best practices and regulatory requirements.

Limits, monitoring and control structure

The risk appetite exercise is performed annually and includes a series of metrics and limits on the aforementioned metrics that express in quantitative and qualitative terms the maximum risk exposure that each Group entity and the Group as a whole are willing to assume.

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Compliance with risk appetite limits is subject to ongoing monitoring. The specialized control functions report at least quarterly to the board and its specialized risk committee on the compliance of the risk profile with the authorized risk appetite.

The linking of the risk appetite limits with the limits used in the management of the business units and of the portfolios is a key element for ensuring that the use of the risk appetite as a risk management tool is effective.

Pillars of the risk appetite

The risk appetite is expressed through limits on quantitative metrics and qualitative indicators that measure the Group’s exposure or risk profile by type of risk, portfolio, segment and business line, in both current and stressed conditions. The aforementioned risk appetite metrics and limits are structured around five main pillars that define the position that the Group’s senior management wishes to adopt or maintain in developing its business model.

• The volatility in the income statement that the Group is willing to assume.

• The solvency position the Group wishes to maintain.

• The minimum liquidity position the Group wishes to have.

• The maximum concentration levels that the Group considers it reasonable to assume.

• Qualitative aspects and complementary metrics.

3.2. Risk identification and assessment (RIA)

As part of its routine management, the Group identifies and assesses the risks inherent to its business activity to which it is exposed in the various geographical areas in which it operates.

In order to make the measurement of the Group’s risk profile more robust and systematic, at the end of 2014 a corporate Risk identification and assessment exercise was started that continued throughout 2015.

Risk identification and assessment is one of the initiatives that form part of the ARM (Advanced Risk Management) program the purpose of which is the advanced management of risks to enable Santander to continue to be a sound sustainable bank over the long term.

Also, it complies with regulatory expectations on the need to deepen the understanding of the Group’s risk profile and the importance of identifying, measuring and assessing the entity’s main risks, the associated control environment and the possible factors that might pose a threat to the achievement of the Group’s strategic plan.

Per the methodology used in the RIA exercise, the Group’s risk profile is determined by a combination of three aspects:

• Risk performance which enables the profile by type of risk and business activity to be ascertained.

• Control environment to objectively establish a self-assessment of the effectiveness of the management and control of the risk in accordance with pre-established targets and a defined control model.

• Top Risks identify the material risks threatening the strategic and business objectives and establish action plans and monitor them.

One of the most important aspects of the RIA exercise is the development of a methodology to identify the current material risks on which senior management will focus its attention. These risks are considered to be those which, either on their own or collectively, could have a significant impact on the Group’s results, financial position or ability to maintain appropriate capital levels.

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It also enables the identification of so-called emerging risks, i.e. those risks that could potentially have an adverse impact on the Group’s future performance, even though their outcome and time horizon are uncertain and difficult to predict.

3.3. Scenario analysis

The Group conducts advanced risk management through the analysis of the impact that various scenarios in the environment in which the Group operates might cause. These scenarios are expressed in terms of both macroeconomic variables and other variables that affect management.

Scenario analysis is a very useful tool for senior management since it allows them to test the Bank’s resistance to stressed environments or scenarios and to implement packages of measures to reduce the Bank’s risk profile vis-à-vis such scenarios.

The robustness and consistency of the scenario analysis exercises are based on the following three pillars:

• The development of mathematical models that estimate the future performance of metrics (e.g. loan losses) based on historical information (internal Group information or external market information) and simulation models.

• The inclusion of expert judgement and the knowledge of the portfolios, and questioning and checking the results of the models.

• Backtesting or periodic checking of the results of the models against the data observed, which ensures that the aforementioned results are appropriate.

The main uses of scenario analysis are as follows:

• Regulatory uses: in which stress tests of scenarios are performed under guidelines set by the European regulator or by each of the various national regulators that supervise the Group.

• Internal capital (ICAAP) or liquidity adequacy assessment processes (ILAAP) in which, although the regulator can impose certain requirements, the Group develops its own methodology to assess its capital and liquidity levels vis-à-vis various stress scenarios. These tools enable capital and liquidity management to be planned.

• Risk appetite: this contains stressed metrics on which maximum loss levels (or minimum liquidity levels) are established that the Bank does not wish to exceed.

• Daily risk management: scenario analysis is used in budgetary and strategic planning processes, in the generation of commercial risk approval policies, in senior management’s overall analysis of risk or in specific analyses of the profiles of activities or portfolios.

3.4. Living wills (recovery and resolution plans)

The sixth version of the living will (the most important portion of which envisages the measures that the entity would have available to exit a highly severe crisis situation by itself) was prepared in 2015. The living will was prepared, for the first time, at the request of the European Central Bank, which has become the Group’s main supervisor (pursuant to the mandate assigned under the Single Supervisory Mechanism, which came into force on November 4, 2014). The will also follows the non-binding recommendations made in this regard by international bodies such as the Financial Stability Board.

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As with the other versions prepared between 2010 and 2014, the will was submitted to the competent authorities for assessment in the first half of 2016.

The living will comprises the corporate living will (corresponding to Banco Santander, S.A.) and the individual living wills for the most important local units (the UK, Brazil, Mexico, the US, Germany, Argentina, Chile, Poland and Portugal).

The Group’s senior management keeps itself fully involved in the preparation and periodic monitoring of the content of the living wills by holding specific committee meetings of a technical nature, as well as for monitoring at institutional level, and this ensures that the content and structure of the documents are adapted to local and international crisis management legislation, which has been in continuous development in recent years.

The board of directors is responsible for approving the corporate living will, without prejudice to the content and important data therein being previously presented and discussed by the Bank’s main management and control committees. In turn, the individual living wills are approved by local bodies, always in coordination with the Group since they must form part of the corporate living will.

As regards resolution plans, the competent authorities forming part of the Crisis Management Group (CMG) have decided on a common approach to the Group’s resolution strategy which, given Santander’s legal and business structure, is the multiple point of entry (MPE) strategy; also, they have signed the corresponding cooperation agreement (COAG) and developed the initial resolution plans.

3.5. Risk Data Aggregation & Risk Reporting Framework (RDA/RRF)

In recent years the Group has developed and implemented structural and operational improvements in order to reinforce and consolidate its integral view of risk based on complete, accurate and recurring information, thus enabling senior management of the Group to assess risk and take decisions accordingly.

2015 saw the completion of the project launched at the beginning of 2014 whose main objective was to ensure that risk reporting to senior management incorporates the basic principles of Risk Data Aggregation (RDA).

Risk reports maintain a balance between data, analysis and qualitative commentaries, and include forward-looking measures and information on risk appetite, risk limits and emerging risks.

With regard to governance, the data quality and risk reporting committee was created, which is responsible for executing the measures decided upon by the board in this area; in addition, a common data management methodology was implemented though the relevant models, procedures and guidelines.

The Group has a common risk reporting taxonomy covering the significant areas of risk within the organization, in keeping with the Group’s size, risk profile and activity.

3.6. Control environment

The risk management model has a control environment that ensures appropriate control of all risks and provides an integrated view thereof. This control is performed at all the Group’s units and for each type of risk in order to ensure that the Group’s exposures and overall risk profile are within the framework of the mandates established by both the board of directors and the regulators.

The main elements ensuring effective control are:

• The allocation of responsibilities in risk-generating functions through decision-making and the due control of their activity.

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• Specialized control of each risk factor.

• The supervision and aggregate consolidation of all risks.

• The assessment of control mechanisms.

• Independent assessment by internal audit.

c) Credit risk

1. Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

In credit risk management terms, segmentation is based on the distinction between three types of customers:

• The individuals segment includes all individuals, except for those engaging in a business activity. This segment is in turn divided into various sub-segments based on income levels, which makes it possible to tailor risk management to each type of customer.

• The SMEs, companies and institutions segment includes legal entities and individuals engaging in a business activity. It also includes public-sector entities in general and not-for-profit private-sector entities.

• The Santander Global Corporate Banking - SGCB - segment comprises corporate customers, financial institutions and sovereigns, which make up a closed list of entities that is reviewed on an annual basis. Inclusion of an entity on this list is determined on the basis of a comprehensive analysis of the enterprise (business, countries in which it operates, types of products used, level of income it represents for the Bank, length of relationship with the customer, etc.).

The Group has a mainly retail profile, with 84% of its total risk exposure being generated by its commercial banking business.

2. Main aggregates and variations

Following are the main aggregates relating to credit risk arising on customer business:

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Main credit risk aggregates arising on customer business

Data at December 31, 2015

	Credit risk exposure to customers (1) (Millions of euros)				Non-performing loans ratio (%)				Coverage ratio (%)
	2015		2014		2015		2014		2015		2014
Continental Europe		321,395		308,205		7.27		8.88		64.2		57.2
Spain		173,032		182,974		6.53		7.38		48.1		45.5
Santander Consumer Finance (1)		76,688		63,654		3.42		4.82		109.1		100.1
Portugal		31,922		25,588		7.46		8.89		99.0		51.8
Poland		20,951		18,920		6.30		7.42		64.0		60.3
United Kingdom		282,182		256,337		1.52		1.79		38.2		41.9
Latin America		151,302		167,065		4.96		4.79		79.0		84.5
Brazil		72,173		90,572		5.98		5.05		83.7		95.4
Mexico		32,463		27,893		3.38		3.84		90.6		86.1
Chile		35,213		33,514		5.62		5.97		53.9		52.4
Argentina		6,328		5,703		1.15		1.61		194.2		143.3
United States		90,727		72,477		2.13		2.42		225.0		196.3
Puerto Rico		3,924		3,871		6.96		7.45		48.5		55.6
Santander Bank		54,089		45,825		1.16		1.41		114.5		109.4
SC USA		28,280		22,782		3.66		3.97		337.1		296.2
Total Group		850,909		804,084		4.36		5.19		73.1		67.2

(1) Including gross loans and advances to customers, guarantees and documentary credits

In 2015 credit risk exposure to customers increased by 6%. The growth was across the board in local currency terms, except in Spain. The fall in lending in Brazil in euros was due the devaluation of the Brazilian real in the year.

These lending levels, together with the fall in non-performing loans, resulted in a reduction in the Group’s non-performing loans ratio to 4.36%.

The Group’s coverage ratio stood at 73%. It is important to take into account that this ratio is reduced by the relatively high proportion of mortgage portfolios (especially in the UK and Spain), which require lower on-balance-sheet provisions since they are secured by collateral.

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3. Detail of the main geographical areas

3.1. United Kingdom

Credit risk exposure to UK customers amounted to EUR 282,182 million at the end of December 2015, and represented 33% of the Group total.

Due to its importance, not only to Santander UK, but also to the Group’s lending activity as a whole, the mortgage loan portfolio (which totaled EUR 207,319 million at the end of December 2015) must be highlighted.

This portfolio is composed entirely of first-mortgage home purchase or home improvement loans to new and existing customers, since second or successive liens on mortgaged properties are no longer originated.

The property on which the mortgage guarantee is constituted must always be located in the UK, irrespective of where the funding is to be employed, except for certain one-off transactions performed in the Isle of Man. Loans may be granted for the purchase of homes abroad, but the mortgage guarantee must in all cases be constituted on a property located in the UK.

Geographically speaking, the credit risk exposure is concentrated mainly in the South East of the country, particularly in the metropolitan area of London, where home prices rose last year. Properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles.

For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation.

The non-performing loans ratio fell from 1.64% in 2014 to 1.44% at 2015 year-end. This decrease in the non-performing loans ratio was based on the behavior of non-performing loans, which improved significantly as a result of the more favorable macroeconomic environment and the increase in re-performing loans due to the improved efficiency of the recovery teams. Thus, the amount of non-performing loans fell by 10.2%, continuing the trend observed in 2014.

The credit policies limit the maximum loan-to-value ratio to 90% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity.

Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, the granting of mortgage loans with LTVs exceeding 100% has been forbidden since 2009.

Another indicator of the performance of the portfolio is the small volume of foreclosed properties, which amounted to EUR 62 million at December 31, 2015. The management of foreclosures, coupled with the existence of a dynamic market for foreclosed homes, makes it possible to sell these properties in a short space of time (on average approximately 18 weeks), thus contributing to the good results obtained.

3.2. Spain

Portfolio overview

Total credit risk exposure in Spain (including guarantees and documentary credits but excluding the real estate operations unit - discussed below) amounted to EUR 173,032 million (20% of the Group total), with an adequate degree of diversification in terms of both products and customer segments.

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In 2015 the growth was consolidated in new production in the main portfolios in the individuals and companies segments, underpinned by the improvement in the economic situation and in the various strategies implemented at the Group. In year-on-year terms, total credit risk exposure fell by 5% mainly as a result of the lower level of funding to public authorities and a rate of repayments even higher than the rate of growth of new production in the other segments.

The non-performing loans ratio for the total portfolio stood at 6.53%. The reduction in lending was offset by the improvement in non-performing loans. This improvement is due mainly to the fall in gross new NPLs and, to a lesser extent, to the return to performing status of various restructured positions and portfolio sales. The coverage ratio stood at around 48%, continuing the increase recognized in 2014.

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Portfolio of home purchase loans to families

Home purchase loans granted to families in Spain stood at EUR 50,786 million at 2015 year-end. Of this amount, 99% was secured by mortgages.

In millions of euros	12/31/15
	Gross amount		Of which: Non-performing
Home purchase loans to families		50,786		2,567
Without mortgage guarantee		480		40
With mortgage guarantee		50,306		2,527

The risk profile of the home purchase mortgage loan portfolio in Spain remained at a medium-low level, with limited prospects of additional impairment:

• All mortgage transactions include principal repayments from the very first day.

• Early repayment is common practice and, accordingly, the average life of the transactions is far shorter than their contractual term.

• Debtors provide all their assets as security, not just the home.

• High quality of collateral, since the portfolio consists almost exclusively of principal-residence loans.

• Stable average debt-to-income ratio at around 28%.

• 69% of the portfolio has an LTV of less than 80% (calculated as the ratio of total exposure to the amount of the latest available appraisal).

In millions of euros	12/31/15
	Loan to value ratio
	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and less than or equal to 100%		More than 100%		Total
Initial gross amount		10,300		11,079		13,178		9,249		6,500		50,306
Of which: Non-performing		134		201		359		484		1,349		2,527

Companies portfolio

The EUR 92,889 million of direct credit risk exposure to SMEs and companies constitute the most important lending segment in Spain, representing 54% of the total.

94% of the portfolio relates to customers to which an analyst has been assigned who monitors the customer on an ongoing basis in all the phases of the risk cycle.

The non-performing loans ratio of this portfolio stood at 7.64% in 2015.

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Real estate business

The Group manages, as a separate unit, its real estate business in Spain, which includes loans to customers engaging mainly in property development, for which a specialized management model is in place, investments in real-estate industry companies and foreclosed assets.

In recent years the Group’s strategy has been geared towards reducing these assets. The changes in gross property development loans to customers were as follows:

	Millions of euros
	12/31/15			12/31/14			12/31/13
Balance at beginning of year (net)		9,349			12,105			15,867
Foreclosed assets		(62	)		(357	)		(848	)
Reductions (1)		(1,481	)		(2,015	)		(2,114	)
Written-off assets		(418	)		(384	)		(800	)
Balance at end of year (net)		7,388			9,349			12,105

(1) Includes portfolio sales, cash recoveries and third-party subrogations.

The NPL ratio of this portfolio ended the year at 67.6% (compared with 67.3% at December 2014) due to the increase in the proportion of non-performing assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The table below shows the distribution of the portfolio. The coverage ratio of the real estate exposure in Spain stands at 41.16%.

Millions of euros	12/31/15
	Gross amount		Excess over collateral value		Specific allowance
Financing for construction and property development recognized by the Group’s credit institutions (business in Spain)		7,388		3,618		3,041
Of which: Non-performing		4,995		2,701		2,861
Of which: Substandard		582		231		180
Memorandum items: Written-off assets		1,352

Memorandum items: Data from the public consolidated balance sheet	12/31/15
Millions of euros	Carrying amount
Total loans and advances to customers excluding the public sector (business in Spain)		153,863
Total consolidated assets		1,340,260
Impairment losses and credit risk allowances. Coverage for unimpaired assets (business in Spain)		919

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At year-end, the concentration of this portfolio was as follows:

	Loans: Gross amount
Millions of euros	12/31/15
1. Without mortgage guarantee		875
2. With mortgage guarantee		6,513
2.1 Completed buildings		3,862
2.1.1 Residential		1,740
2.1.2 Other		2,122
2.2 Buildings under construction		236
2.2.1 Residential		226
2.2.2 Other		10
2.3 Land		2,415
2.3.1 Developed land		1,991
2.3.2 Other land		424
Total		7,388

Policies and strategies in place for the management of these risks

The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified.

In order to manage this credit exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal procedures and potential recovery management.

As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total.

Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or approved for development.

The significant reduction of exposure in the case of residential financing projects in which the construction work has already been completed was based on various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio.

The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria:

• Property developers with a robust solvency profile and a proven track record in the market.

• Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc.

• Support of financing of government-subsidised housing, with accredited sales percentages.

• Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral.

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In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis.

In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.).

The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property, which is supplemented by the commercial network structure. The sale prices are reduced in line with market conditions.

Foreclosed properties

At December 31, 2015, the net balance of these assets amounted to EUR 4,983 million (gross amount: EUR 10,609 million; recognized allowance: EUR 5,626 million, of which EUR 3,310 million related to impairment after the foreclosure date).

The following table shows the detail of the assets foreclosed by the businesses in Spain at the end of 2015:

Millions of euros					12/31/15
	Gross carrying amount		Valuation adjustments		Of which: Impairment losses on assets since time of foreclosure		Carrying amount
Property assets arising from financing provided to construction and property development companies		8,638		4,726		2,771		3,912
Of which:
Completed buildings		2,535		1,150		504		1,385
Residential		1,019		474		180		545
Other		1,516		676		324		840
Buildings under construction		831		408		244		423
Residential		831		408		244		423
Other		—		—		—		—
Land		5,272		3,168		2,023		2,104
Developed land		2,167		1,268		705		899
Other land		3,105		1,900		1,318		1,205
Property assets from home purchase mortgage loans to households		1,971		900		359		1,071
Other foreclosed property assets		—		—		—		—
Total property assets		10,609		5,626		3,130		4,983
Equity instruments, ownership interests and financing provided to non-consolidated companies holding these assets		—		—		—		—
Total		10,609		5,626		3,130		4,983

In recent years, the Group has considered foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the loans (net of provisions) and the fair value of the foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year.

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Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions.

The changes in foreclosed properties were as follows:

	Thousands of millions of euros
	2015			2014			2013
Gross additions		1.7			1.8			1.9
Disposals		(1.1	)		(0.9	)		(0.9	)
Difference		0.6			0.9			1.0

3.3. Brazil

Credit risk exposure in Brazil amounted to EUR 72,173 million, and fell by 20.3% compared to 2014, due mainly to the depreciation of the Brazilian real. Thus, Santander Brazil accounts for 8.5% of the Group’s total credit risk exposure. The exposure is adequately diversified and has a predominantly retail profile, with approximately 46.4% of lending granted to individual, consumer finance and SME customers.

At 2015 year-end, growth of 5.70% was recognized, at constant exchange rates, which is in line with the average of private banks in Brazil.

In 2015 the change of mix strategy initiated in recent years was continued, and more intense growth was registered in segments with a more conservative risk profile and, accordingly, higher loan quality products increased their relative importance. Noteworthy in the individuals segment was the growth in the mortgage portfolio and the portfolio of loans that might be deducted from salaries (“crédito consignado”).

At 2015 year-end, the non-performing loans ratio was 5.98%. The factors explaining the increase on 2014 are: the economic recession the country is suffering and the added difficulties in the sectors of activity most sensitive to changes in the prices of commodities, especially the energy and oil industries.

In view of this situation, Santander Brazil has implemented a series of measures to strengthen risk management. These measures focus both on improving the quality of new production and on mitigating the effects of the aforementioned adverse environment on the portfolio. This package of measures is based mainly on preventive management of arrears, thus anticipating possible further deterioration of customer balances. The highlights of the defensive measures included in the plan are as follows:

• Reduction of limits vis-à-vis medium-high risk products/customers.

• Implementation of maximum debt limits.

• Migration of revolving products to instalment payment products.

• Higher collateralisation of the portfolio.

• Improvements to acceptance models, to make them more precise and predictive, and in collection channels.

• More individualized treatment of SMEs of a certain size (individualized model).

• Management of risk appetite by sector, and restriction of powers in the most critical sectors.

The coverage ratio stood at 83.7% at 2015 year-end.

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4. Credit risk from other standpoints

4.1. Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and products with counterparty risk intended to provide service to the Group’s customers.

As defined in Chapter 6 of the CRR (Regulation (EU) No 575/2013), counterparty credit risk is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. It includes the following types of transaction: derivative instruments, repurchase agreements, securities or commodities lending transactions, deferred settlement transactions and guarantee financing transactions.

The Group uses two methods to measure its exposure to this risk: a mark-to-market method (replacement cost for derivatives or amount drawn down for committed facilities) including an add-on for potential future exposure; and another method, introduced in mid-2014 for certain regions and products, which calculates exposure using Monte Carlo simulations. Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries).

When the markets close, the exposures are recalculated by adjusting all the transactions to their new time horizon, the potential future exposure is adjusted and mitigation measures are applied (netting arrangements, collateral arrangements, etc.) so that the exposures can be controlled daily against the limits approved by senior management.

Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, for any product and maturity and at any Group unit.

4.2. Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by country, sector and customer group.

The board of directors, by reference to the risk appetite, determines the maximum levels of concentration. In keeping with the risk appetite, the executive risk committee establishes the risk policies and reviews the appropriate exposure limits to ensure the adequate management of credit risk concentration.

In geographical terms, credit risk exposure to customers is diversified in the main markets where the Group has a presence.

The Group is subject to the regulation of “Large Exposures” contained in Part Four of CRR (Regulation (EU) No 575/2013), according to which an institution’s exposure to a customer or group of connected customers is considered a “large exposure” where its value is equal to or exceeds 10% of its eligible capital. Additionally, in order to limit large exposures, an institution may not incur an exposure to a customer or group of connected customers the value of which exceeds 25% of its eligible capital, after taking into account the effect of the credit risk mitigation contained in the Regulation.

At December 31, 2015, after applying risk mitigation techniques and the regulations applicable to large exposures, the exposure to each of the reported groups was below 4.9% of eligible capital, with the exception of two entities, one central counterparty in the EU, the exposure to which stood at 7.3% and an EU-based corporate group, the exposure to which stood at 6.8%.

The Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

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The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2015 is as follows:

	12/31/15
Millions of euros	Total		Spain		Other EU countries		Americas		Rest of the world
Credit institutions		162,410		26,037		86,726		41,269		8,378
Public sector		158,215		60,482		33,306		59,528		4,899
Of which:
Central government		137,873		46,353		33,020		53,677		4,823
Other		20,342		14,129		286		5,851		76
Other financial institutions		74,246		16,206		24,194		31,586		2,260
Non-financial companies and individual traders		338,140		87,781		113,873		124,082		12,404
Of which:
Construction and property development		30,087		4,638		5,387		20,009		53
Civil engineering construction		4,671		2,837		1,307		525		2
Large companies		200,380		52,141		60,194		77,534		10,511
SMEs and individual traders		103,002		28,165		46,985		26,014		1,838
Other households and non-profit institutions serving households		477,693		67,319		298,851		106,405		5,118
Of which:
Residential		325,169		49,948		238,836		36,119		266
Consumer loans		133,841		11,990		57,270		60,490		4,091
Other purposes		18,683		5,381		2,745		9,796		761
Subtotal		1,210,704		257,825		556,950		362,870		33,059
Less: valuation adjustments for unimpaired assets		9,253
Total (*)		1,201,451

(*) For the purposes of this table, the definition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions, Loans and advances to customers, Debt instruments, Equity instruments, Trading derivatives, Hedging derivatives, Investments and Contingent liabilities.

4.3. Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.).

At December 31, 2015, the provisionable country risk exposure amounted to EUR 193 million (2014: EUR 176 million). The allowance recognized in this connection at 2015 year-end amounted to EUR 25 million, as compared with EUR 22 million at 2014 year-end.

The Group’s country risk management policies continued to adhere to a principle of maximum prudence, and country risk is assumed, applying highly selective criteria, in transactions that are clearly profitable for the Group and bolster its global relationship with its customers.

4.4. Sovereign risk and exposure to other public sector entities

As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or similar body (government debt securities) and the risk arising from transactions with public entities that have the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the central government public sector; and their activities are of a non-commercial nature.

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This criterion, which has been employed historically by the Group, differs in certain respects from that requested by the European Banking Authority (EBA) for its periodic stress tests. The most significant differences are that the EBA’s criteria do not include risk exposure to central banks, exposure to insurance companies or indirect exposure by means of guarantees or other instruments. However, they do include exposure to public sector entities (including regional and local entities) in general, not only the central government public sector.

Sovereign risk exposure (per the criteria applied at the Group) arises mainly from the subsidiary banks’ obligations to make certain deposits at the corresponding central banks, from the arrangement of deposits using liquidity surpluses, and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy and in the trading books of the treasury departments. The vast majority of these exposures is taken in local currency and is financed out of local customer deposits, also denominated in local currency.

The detail at December 31, 2015, 2014 and 2013, based on the Group’s management of each portfolio, of the Group’s sovereign risk exposure, net of the short positions held with the respective countries, taking into consideration the aforementioned criterion established by the European Banking Authority (EBA), is as follows:

Country	12/31/15
	Millions of euros
	Portfolio									Total net direct exposure
	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Held-to maturity investments
Spain		8,954			26,443		11,272		2,025		48,694
Portugal		104			7,916		1,987		—		10.007
Italy		2,717			—		—		—		2,717
Greece		—			—		—		—		—
Ireland		—			—		—		—		—
Rest of eurozone		(211	)		143		69		—		1
United Kingdom		(786	)		5,808		141		—		5,163
Poland		13			5,346		42		—		5,401
Rest of Europe		120			312		238		—		670
United States		280			4,338		475		—		5,093
Brazil		7,274			13,522		947		2,186		23,929
Mexico		6,617			3,630		272		—		10,519
Chile		193			1,601		3,568		—		5,362
Other American countries		155			1,204		443		—		1,802
Rest of the world		3,657			1,687		546		—		5,890
Total		29,087			71,950		20,000		4,211		125,248

(*) Includes short positions.

In addition, at December 31, 2015, the Group had net direct derivative exposures the fair value of which amounted to EUR 2,070 million and net indirect derivative exposures the fair value of which amounted to EUR 25 million.

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Country	12/31/14
	Millions of euros
	Portfolio							Total net direct exposure
	Financial assets held for trading and Other financial assets at fair value through profit or  loss (*)			Available-for-sale financial assets		Loans and receivables
Spain		5,778			23,893		15,098		44,769
Portugal		104			7,811		589		8,504
Italy		1,725			—		—		1,725
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,070	)		3		1		(1,066	)
United Kingdom		(613	)		6,669		144		6,200
Poland		5			5,831		30		5,866
Rest of Europe		1,165			444		46		1,655
United States		88			2,897		664		3,649
Brazil		11,144			17,685		783		29,612
Mexico		2,344			2,467		3,464		8,275
Chile		593			1,340		248		2,181
Other American countries		181			1,248		520		1,949
Rest of the world		4,840			906		618		6,364
Total		26,284			71,194		22,205		119,683

(*) Includes short positions.

In addition, at December 31, 2014, the Group had net direct derivative exposures the fair value of which amounted to EUR 1,028 million and net indirect derivative exposures the fair value of which amounted to EUR 5 million. Also, the Group did not have any exposure to held-to-maturity investments.

Country	12/31/13
	Millions of euros
	Portfolio							Total net direct exposure
	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables
Spain		4,359			21,144		12,864		38,367
Portugal		148			2,076		583		2,807
Italy		1,309			77		—		1,386
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,229	)		67		—		(1,161	)
United Kingdom		(1,375	)		3,777		—		2,402
Poland		216			4,770		43		5,030
Rest of Europe		5			117		—		122
United States		519			2,089		63		2,671
Brazil		8,618			8,901		223		17,743
Mexico		3,188			2,362		2,145		7,695
Chile		(485	)		1,037		534		1,086
Other American countries		268			619		663		1,550
Rest of the world		5,219			596		146		5,964
Total		20,762			47,632		17,268		85,661

(*) Includes short positions.

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In addition, at December 31, 2013, the Group had net direct derivative exposures the fair value of which amounted to EUR (206) million and net indirect derivative exposures the fair value of which amounted to EUR 6 million. Also, the Group did not have any exposure to held-to-maturity investments.

4.5. Social and environmental risk

The Group considers social and environmental issues to be key to the risk analysis and decision-making processes in its financing transactions. It has implemented processes to identify, analyze and assess risk in the credit transactions that are subject to the Group’s policies, which are based on the Equator Principles, an initiative in which the Group has participated since 2009. In accordance with these principles, an analysis is performed of the social and environmental risk of Project Finance transactions and corporate loans granted for known purposes (bridge loans that are intended to be refinanced through Project Finance, and corporate loans for the construction or extension of a particular project).

5. Credit risk cycle

The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units.

The process involves the board of directors and the executive risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

5.1. Risk analysis and credit rating process

In general, the risk analysis consists of examining the customer’s ability to meet its contractual obligations to the Group and to other creditors. This involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

Since 1993 the Group has used internal rating models for this purpose. These mechanisms are used in both the wholesale segment (sovereigns, financial institutions and corporate banking) and the other companies and institutions segment.

The rating is obtained from a quantitative module based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgement.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship.

The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

In contrast to the use of ratings in the wholesale and other companies and institutions segments, in the individuals and SMEs segment scoring techniques predominate; in general, these tools automatically assign a customer a score for decision-making purposes.

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5.2. Planning (Commercial Strategic Plan)

The purpose of this phase is to efficiently and comprehensively limit the risk levels the Group assumes.

The credit risk planning process is used to establish the budgets and limits at portfolio level.

Risk limit planning is instrumented through the Commercial Strategic Plan (PEC), thus ensuring the coordination of the business plan, the risk-appetite-based lending policy and the resources required to implement it. Thus, it was created as a joint initiative between the commercial and risk units and is not only a management tool but also a form of teamwork.

Approval and monitoring is the responsibility of each entity’s top executive risk committee. Validation and monitoring is performed at corporate level.

The PECs enable the map of all the Group’s loan portfolios to be defined.

Scenario analysis

Credit risk scenario analysis enables senior management to gain a clearer understanding of the performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the adequacy of the provisions recognized and the capital held to cater for stress scenarios.

These analyses, which are performed for all the Group’s significant portfolios, comprise the following milestones:

• Definition of benchmark scenarios (at global level and for each of the Group units).

• Determination of the value of the risk parameters (probability of default, loss given default) in various scenarios.

• Estimation of the expected loss associated with each of the scenarios considered and of the other salient credit risk metrics derived from the parameters obtained (non-performing loans, provisions, ratios, etc.).

• Analysis of the changes in the credit risk profile at portfolio, segment, unit and Group level in various scenarios and in comparison with previous years.

The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables. These models undergo regular backtesting and recalibration processes in order to ensure that they provide a correct reflection of the relationship between the macroeconomic variables and the risk parameters.

The process is completed with a package of controls and checks that ensure that the metrics and calculations are appropriate.

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (GDP, unemployment rate, housing prices, inflation, etc.).

The economic scenarios defined are based on different stress levels, ranging from the base or most probable scenario to more stressed economic scenarios which, although less probable, could possibly arise.

These scenarios are generally defined by the Group’s economic research service, in coordination with each unit, using as a reference the data published by the main international organizations.

A global stress scenario is defined that describes a situation of worldwide crisis and the manner in which it affects each of the main geographical regions in which the Group is present. In addition, a local stress scenario is defined which, affecting certain of the Group’s main units in an isolated fashion, includes a higher level of stress than the global stress scenario.

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5.3. Limit setting/pre-classifications

The risk limits are planned and set using documents agreed upon by the business areas and risk units and approved by the executive risk committee or its delegated committees, which contain the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the management of the related risk by group/customer.

Also, an analysis is conducted at customer level in the wholesale and other companies and institutions segments. When certain features concur, an individual limit is established for the customer (pre-classification).

Thus, for large corporate groups a pre-classification model based on an economic capital measurement and monitoring system is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the companies segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

5.4. Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyze and resolve upon transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. This process must consider the transaction approval policies defined and take into account both the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

In the sphere of lower-revenue individuals, businesses and SMEs, the management of large volumes of loan transactions is facilitated by the use of automatic decision-making models that rate the customer/loan relationship. Thus, loans are classified in homogeneous risk groups using the rating assigned to the transaction by the model on the basis of information on the features of the transaction and the borrower.

The preliminary limit-setting stage can follow two different paths, giving rise to different types of decisions in the companies’ sphere:

• Automatic decisions, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications.

• Decisions requiring the analyst’s authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process applies to pre-classifications of retail banking companies.

Credit risk mitigation techniques

The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements).

The various mitigation techniques can be grouped into the following categories:

Netting by counterparty

Netting refers to the possibility of determining a net balance of transactions of the same type, under the umbrella of a master agreement such as an ISDA or similar agreement.

It consists of aggregating the positive and negative market values of the derivatives transactions entered into by the Group with a particular counterparty, so that, in the event of default, the counterparty owes the Group (or the Group owes the counterparty, if the net figure is negative) a single net figure and not a series of positive or negative amounts relating to each of the transactions entered into with the counterparty.

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An important aspect of master agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to offset the risks of all the transactions covered by the contract with the same counterparty (see Note 2.f).

Collateral

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

• Financial: cash, security deposits, gold, etc.

• Non-financial: property (both residential and commercial), other movable property, etc.

From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords can be taken into consideration.

One very important example of financial collateral is the collateral agreement. Collateral agreements comprise a set of highly liquid instruments with a certain economic value that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce any counterparty credit risk that might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralisation may be, the ultimate aim, as with the netting technique, is to reduce counterparty risk.

Transactions subject to a collateral agreement are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, for example, security deposits, suretyships and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets.

Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.

5.5. Monitoring/anticipation

The monitoring function is founded on a process of ongoing observation, which makes it possible to detect early any changes that might arise in customers’ credit quality, so that action can be taken to correct any deviations with an adverse impact.

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Monitoring is based on the segmentation of customers, is performed by dedicated local and global risk teams and is complemented by the work performed by internal audit. In the individuals model this function is performed using customer behavior valuation models.

The function involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and the ongoing monitoring of indicators.

The system called “companies under special surveillance” (FEVE) distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a position in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for the position in question, to place a person in charge and to set the policy implementation period.

Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to lower-revenue individuals, businesses and SMEs, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

5.6. Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product, etc., thus facilitating the early detection of specific areas requiring attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

• Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both those of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures aimed at placing the profile and amount of the risk portfolio within the parameters set by the Group.

In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase: Change in non-performing loans (VMG), EL (expected loss) and capital

• Assessment of the control processes

This includes a systematic periodic review of the procedures and methodology, and is performed over the entire credit risk cycle to ensure that they are in force and effective.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. In this connection, the risk division assesses the efficiency of the internal control of its activities on an annual basis.

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5.7. Recovery management

Recovery is a significant function within the sphere of the Group’s risk management. This function is performed by the recovery and collection unit, which defines a global strategy and an integrated approach to recovery management.

The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. The Recovery Units are business areas involving direct customer management and, accordingly, this corporate model has a business approach that creates value sustainably over time on the basis of effective and efficient collection management, achieved through either the return of unpaid balances to performing status or the full recovery thereof.

The recovery management model requires the proper coordination of all management areas (recovery business, commercial, technology and operations, human resources and risk) and the management processes and methodology supporting it are reviewed and enhanced on an ongoing basis, through the application of the best practices developed in the various countries.

In order to manage recovery properly, action is taken in four main phases: early arrears management, recovery of non-performing loans, recovery of written-off loans and management of foreclosed assets.

In fact, the actions taken by the recovery function commence even before the first missed payment, i.e. when there are signs of a deterioration of the customer’s ability to pay, and they end when the customer’s debt has been paid or has returned to performing status. The recovery function aims to anticipate default events and focuses on preventive management.

The macroeconomic environment has a direct effect on the customer default rate. Therefore, the quality of the portfolios is fundamental to the development and growth of our businesses in the various countries, and particular attention is paid, on a permanent basis, to the debt collection and recovery functions in order to guarantee that this quality remains at the expected levels at all times.

The differing characteristics of customers make segmentation necessary in order to ensure proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality of the different countries, and various management mechanisms have been used, all involving appropriate prudential criteria, based on the age, collateral and conditions of the transaction, while always ensuring that, at least, the required ratings and provisions are maintained.

Within the recovery function particular emphasis has been placed on using the mechanisms referred to above for early arrears management, in accordance with corporate policies, considering the various local realities and closely monitoring the production, inventory and performance of those local areas. The aforementioned policies are reviewed and adapted periodically in order to reflect both best management practices and any applicable regulatory amendments.

In addition to the measures aimed at adapting transactions to the customer’s ability to pay, special mention should be made of recovery management, in which alternative solutions to legal action are sought to ensure the early collection of debts.

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One of the channels for the recovery of debts of customers whose ability to pay has deteriorated severely is foreclosure (either court-ordered or through dation in payment) of the property assets securing the transactions. In geographical regions that are highly exposed to real estate risk, such as Spain, the Group has very efficient instruments in place to manage the sale of such assets, making it possible to maximize recovery and reduce the on-balance-sheet stock of property assets at a much faster pace than at other financial institutions.

Forborne loan portfolio

The term forborne loan portfolio refers, for the purposes of the Group’s risk management, to those transactions in which the customer has, or might foreseeably have, financial difficulty that might materially affect its payment obligations under the terms and conditions of the current agreement and, accordingly, the agreement has been modified or cancelled or even a new transaction has been entered into.

The Group has a detailed customer debt forbearance policy that serves as a reference for the various local adaptations made for all the financial institutions forming part of the Group. This policy shares the principles laid down in both Bank of Spain Circular 6/2012 and the technical standards published by the European Banking Authority in 2014, which it develops in greater detail based on the level of customer impairment.

This policy establishes strict prudential criteria for the assessment of these loans:

• The use of this practice is restricted, and any actions that might defer the recognition of impairment must be avoided.

• The main aim must be to recover the amounts owed, and any amounts deemed unrecoverable must be recognized as soon as possible.

• Forbearance must always envisage maintaining the existing guarantees and, if possible, enhance them. Not only can effective guarantees serve to mitigate losses given default, but they might also reduce the probability of default.

• This practice must not give rise to the granting of additional funding, or be used to refinance debt of other entities or as a cross-selling instrument.

• All the alternatives to forbearance and their impacts must be assessed, making sure that the results of this practice will exceed those which would foreseeably be obtained if it were not performed.

• Forborne transactions are classified using criteria which ensure that the customer’s ability to pay is restored from the date of forbearance and for an adequate period of time thereafter.

• In addition, in the case of customers that have been assigned a risk analyst, it is particularly important to conduct an individual analysis of each specific case, for both the proper identification of the transaction and its subsequent classification, monitoring and adequate provisioning.

The forbearance policy also sets out various criteria for determining the scope of transactions qualifying as forborne exposures by defining a detailed series of objective indicators to facilitate the identification of situations of financial difficulty that might materially affect whether payment obligations are met.

Accordingly, transactions not classified as non-performing at the date of forbearance are generally considered to be experiencing financial difficulty if at that date they were more than one month past due. Where no payments have been missed or there are no payments more than one month past due, other indicators assessing financial difficulty are taken into account, including most notably the following:

• Transactions with customers who are already experiencing difficulties in other transactions.

• Situations where a transaction has to be modified prematurely, and the Group has not yet had a previous satisfactory experience with the customer.

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• Cases in which the necessary modifications entail the grant of special conditions, such as the establishment of a grace period, or where these new conditions are deemed to be more favorable for the customer than those which would have been granted for an ordinary loan approval.

• Where a customer submits successive loan modification requests at unreasonable time intervals.

• In any case, if once the modification has been made any payment irregularity arises during a given probation period (as evidenced by backtesting), even in the absence of any other symptoms, the transaction will be deemed to be within the scope of forborne exposures.

Once it has been determined that the reasons for the modification relate to financial difficulties, for management purposes a distinction is made between two types of forbearance based on the original management status of the transactions: ex-ante forbearance, when the original transaction was classified as other than non-performing; and ex-post forbearance, when it had previously been classified as non-performing.

In addition, within the category of ex-post forbearance, distinct treatments are established for cases of advanced impairment, the classification requirements and criteria for which are even more stringent than those for other forborne transactions.

As regards the strategies to be applied, corporate policy requires the customer’s ability and willingness to pay to be analyzed and a distinction to be drawn between the severity and the estimated duration of the impairment. The results of this analysis will be used as a basis for deciding whether the debt should be forborne and the most appropriate way of doing so for each case:

• When borrowers display a severe but temporary deterioration in their ability to pay (which is expected to recover in a short space of time), short-term adjustment strategies are applied, such as a payment moratorium on the principal or the reduction of instalments for a short, limited period until the ability to pay is recovered.

• When borrowers display a slight deterioration in their ability to pay (an early recovery of which is not expected), more long-term strategies are applied, such as reducing instalments by deferring either the maturity date or a portion of the principal, which would be paid at the same time as the last instalment, at all times securing its payment through the provision of effective guarantees.

In any case, through a case-by-case analysis, priority is given to modifications for customers displaying a slight but prolonged deterioration, since those experiencing severe but transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery. Cases of severe deterioration deemed to be prolonged over time are not considered for forbearance.

Corporate policy also establishes mechanisms for the management and control of forborne transactions, allowing them to be treated in a different way from other transactions, with particular attention being paid to the processes of:

• Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant aggregates.

• Monitoring the performance of the portfolio and assessing the degree of achievement of the projections prepared in the planning phase.

Once forbearance measures have been adopted, transactions that have to remain classified as non-performing because at the date of forbearance they do not meet the regulatory requirements to be classified in a different category must comply with a continuous prudential payment schedule in order to assure reasonable certainty as to the recovery of the ability to pay.

If there is any (non-technical) default in payments during that period, the aforementioned payment schedule starts again.

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On successful completion of the period, the duration of which depends on the customer’s situation and the transaction features (term and guarantees provided), the transaction is no longer considered to be non-performing, although it continues to be subject to a probation period during which it undergoes special monitoring.

This monitoring continues until a series of requirements have been met, including most notably: a minimum observation period; repayment of a substantial percentage of the outstanding amounts; and settlement of the amounts that were past due at the time of forbearance.

When forbearance is applied to a transaction classified as non-performing, the original default dates continue to be considered for all purposes, including the calculation of provisions, irrespective of whether as a result of forbearance the transaction becomes current in its payments.

By contrast, if following arrangement of forbearance there is no improvement in the customer’s payment performance, the possibility of extending new forbearance measures will be considered, with the application of more stringent classification/return-to-performing criteria, including the establishment of a longer period of uninterrupted payments before the transaction can return to performing status, which could last up to 36 months in certain circumstances. The duration of this period is determined by any collateral provided and the residual maturity of the loan. The Group’s policy permits a maximum of one modification per year and three modifications every five years.

The internal models used by the Group for provisioning purposes include forborne transactions as follows:

• Customers not subject to individual monitoring: the internal models consider forborne transactions as a distinct segment with its own probability of default calculated on the basis of past experience, considering, among other factors, the performance of the successive forbearance measures.

• Customers subject to individual monitoring: the internal rating is an essential input in determining the probability of default and it takes into consideration the existence of successive forbearance measures. This rating must be updated at least once every six months for customers with forborne transactions.

At December 31, 2015, 34% of the forborne loan portfolio had undergone several modifications.

Quantitative information required by Bank of Spain Circular 6/2012

Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on the restructured/refinanced transactions in force at December 31, 2015. The following terms are used in Bank of Spain Circular 6/2012 with the meanings specified:

• Refinancing transaction: transaction that is granted or used, for reasons relating to current or foreseeable financial difficulties of the borrower, to repay one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the borrowers of the cancelled or refinanced transactions to repay their debt (principal and interest) because they are unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.

• Restructured transaction: transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the borrower, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.

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CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)

	Millions of euros
	Standard (b)												Substandard														Non-performing														Total
	Full property mortgage guarantee				Other collateral (c)				Without collateral				Full property mortgage guarantee				Other collateral (c)				Without collateral				Allowance		Full property mortgage guarantee				Other collateral (c)				Without collateral				Allowance
	Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount				Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount				Number of trans- actions		Gross amount		Allowance
Public sector		10		21		12		257		78		513		1		8		—		—		2		3		2		5		4		—		—		30		32		8		138		838		10
Other legal entities and individual traders		7,791		2,883		3,567		3,046		84,017		2,495		3,942		1,171		1,254		791		31,047		903		427		10,239		4,808		6,414		5,456		71,890		4,252		7,637		220,161		25,805		8,064
Of which: Financing for construction and property development		560		563		118		168		195		4		455		302		39		92		169		15		118		2,236		2,123		1,269		2,519		364		509		2,869		5,405		6,295		2,987
Other individuals		91,501		7,252		510,288		8,609		1,227,992		1,865		28,057		2,612		7,617		1,039		266,780		722		359		34,184		2,329		64,794		2,562		909,193		1,729		2,477		3,140,406		28,719		2,836
Total		99,302		10,156		513,867		11,912		1,312,087		4,873		32,000		3,791		8,871		1,830		297,829		1,628		788		44,428		7,141		71,208		8,018		981,113		6,013		10,122		3,360,705		55,362		10,910

(a) Including all refinanced or restructured transactions as defined in section 1.g) of Annex IX of Bank of Spain Circular 4/2004.

(b) Standard risks classified as under special monitoring pursuant to section 7.a) of Annex IX of Bank of Spain Circular 4/2004.

(c) Including transactions without a full property mortgage guarantee, i.e. with a loan-to-value ratio of more than 1, and transactions with collateral other than a real estate mortgage, irrespective of their loan-to-value ratio.

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The transactions presented in the foregoing tables were classified at December 31, 2015, by nature, as follows:

• Non-performing: transactions that are in the process of being returned to performing status, those for which advantageous conditions had to be granted that would not have been granted for an ordinary loan approval or those which, having been classified as standard or substandard, have again encountered payment difficulties during the term of the transaction.

• Substandard: transactions previously classified as non-performing with respect to which, following forbearance, sustained payments have been made for a certain period, depending on the transaction features and the type of guarantee, and transactions previously classified as standard: i) which have been granted an initial grace period and will remain in this category until three monthly instalments (or the equivalent) have been paid after the grace period, or ii) that following forbearance have become irregular (missed payment).

• Standard: transactions previously classified as non-performing or substandard which have successfully completed the precautionary observation periods established in the corporate policy evidencing that payment capacity pursuant to the terms established has been restored, and transactions classified as standard at the date of forbearance, until they meet the requirements to cease to be subject to the special monitoring described above.

The table below shows the changes in 2015 in the forborne loan portfolio:

Millions of euros	2015
Beginning balance		56,703
Of which: Unimpaired		33,135
Impaired		23,568
Additions		18,178
Reductions (*)		(19,519	)
Balance at end of year		55,362
Of which: Unimpaired		34,190
Impaired		21,172

(*) Including, mainly, debt repayments, foreclosures and write-offs and transactions that have ceased to be subject to special monitoring because the probation periods and aforementioned requirements have been met.

62% of the forborne loan transactions are classified as other than non-performing. Particularly noteworthy are the level of existing guarantees (77% of transactions are secured by collateral) and the coverage provided by specific allowances (representing 20% of the total forborne loan portfolio and 52% of the non-performing portfolio).

d) Trading market and structural risk

1. Activities subject to market risk and types of market risk

The scope of activities subject to market risk encompasses all operations exposed to net worth risk as a result of changes in market factors. It includes both risks arising from trading activities and the structural risks that are also affected by market fluctuations:

This risk arises from changes in the risk factors -interest rates, inflation rates, exchange rates, equity prices, credit spreads, commodity prices and the volatility thereof- and from the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that fluctuations in interest rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Interest rate risk affects, inter alia, loans, deposits, debt securities, most financial assets and liabilities held for trading and derivatives.

• Inflation rate risk is the possibility that fluctuations in inflation rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Inflation rate risk affects, inter alia, loans, debt securities and derivatives, the returns on which are linked to inflation or to an actual variation rate.

• Foreign currency risk is defined as the sensitivity of the value of a position in a currency other than the base currency to a potential change in exchange rates. Accordingly, a long position in a foreign currency will generate a loss if this currency depreciates against the base currency. The positions affected by this risk include investments in subsidiaries in currencies other than the euro, and loans, securities and derivatives denominated in foreign currencies.

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• Equity risk is the sensitivity of the value of the open positions in equity securities to adverse changes in the market prices of those equity securities or in future dividend expectations. Equity risk affects, among other instruments, positions in shares, equity indices, convertible bonds and equity derivatives (puts, calls, equity swaps, etc.).

• Credit spread risk is the sensitivity of the value of open positions in fixed-income securities or in credit derivatives to fluctuations in the credit spread curves or in the recovery rates (RR) of specific issuers and types of debt. The spread is the differential between the quoted price of certain financial instruments over other benchmark instruments, mainly the IRR of government bonds and interbank interest rates.

• Commodity price risk is the risk arising from the effect of potential changes in commodity prices. The Group’s exposure to commodity price risk is not material and it is concentrated in commodity derivatives with customers.

• Volatility risk is the sensitivity of the value of the portfolio to changes in the volatility of risk factors: interest rates, exchange rates, share prices, credit spreads and commodities. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios.

All these market risks can be mitigated in part or in full through the use of derivatives such as options, futures, forwards and swaps.

In addition, there are other market risks, which are more difficult to hedge and are as follows:

• Correlation risk. Correlation risk is defined as the sensitivity of the value of the portfolio to changes in the relationship between risk factors (correlation), whether they are the same type (e.g. between two exchange rates) or different (e.g. between an interest rate and a commodity price).

• Market liquidity risk. The risk that a Group entity or the Group as a whole may not able to unwind or close a position on time without affecting the market price or the cost of the transaction. Market liquidity risk may be caused by the reduction in the number of market makers or institutional investors, the execution of large volumes of transactions and market instability, and it increases as a result of the current concentration in certain products and currencies.

• Prepayment or termination risk. When the contractual relationship in certain transactions explicitly or implicitly permits early repayment before maturity without negotiation, there is a risk that the cash flows might have to be reinvested at a potentially lower interest rate. It mainly affects mortgage loans or securities.

• Underwriting risk. Underwriting risk arises as a result of an entity’s involvement in the underwriting of a placement of securities or other type of debt, thus assuming the risk of owning part of the issue or the loan if the entire issue is not placed among the potential buyers.

Pensions risk and actuarial risk are also affected by changes in market factors.

The activities are segmented by risk type as follows:

a) Trading: financial services for customers, trading operations and positions taken mainly in fixed-income, equity and foreign currency products. This activity is managed mainly by the Santander Global Corporate Banking (SGCB) division.

b) Structural risks: a distinction is made between on-balance-sheet risks and pensions and actuarial risks:

b.1) Structural balance sheet risks: market risks inherent to the balance sheet, excluding financial assets and liabilities held for trading. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries in coordination with the Group’s ALCO committee and are implemented by the financial management division. The aim pursued is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Group’s economic value, whilst maintaining adequate liquidity and solvency levels. The structural balance sheet risks are as follows:

• Structural interest rate risk: arises as a result of the maturity and repricing gaps of all the assets and liabilities on the balance sheet.

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• Structural foreign currency risk/hedges of results: foreign currency risk resulting from the fact that investments in consolidable and non-consolidable companies are made in currencies other than the euro (structural exchange rate). In addition, this item includes the positions to hedge the foreign currency risk on future results generated in currencies other than the euro (hedges of results).

• Structural equity risk: this item includes equity investments in non-consolidated financial and non-financial companies and available-for-sale portfolios comprising equity positions.

b.2) Pensions and actuarial risks

• Pensions risk: the risk assumed by the entity in relation to pension obligations to its employees. This relates to the possibility that the fund may not cover these obligations in the accrual period of the benefits and the return obtained by the portfolio may not be sufficient and might oblige the Group to increase the level of contributions.

• Actuarial risk: unexpected losses arising as a result of an increase in the obligations to policyholders, and losses arising from an unexpected increase in expenses.

2. Trading market risk

The Group’s trading risk profile remained moderately low in 2015, in line with previous years, due to the historical focus of the Group’s activity on providing a service to its customers, the limited exposure to complex structured products and the diversification by geographical area and risk factor.

The Group continued to have very limited exposure to complex structured instruments or vehicles, as a reflection of its culture of management in which prudence in risk management constitutes one of its principal symbols of identity. Specifically, at 2015 year-end, the Group had:

• Hedge funds: the total exposure was not material (EUR 220 million at December 31, 2015) and was entirely indirect: the Group acted mainly as a counterparty in derivatives transactions and in hedge fund funding transactions. This exposure featured low loan-to-value ratios, at around 17% (collateral of EUR 1,225 million at the end of December). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund.

• Monolines: the Group’s exposure to monoline insurers amounted to EUR 138 million⁵ in December 2015, and was concentrated mainly on an indirect exposure of EUR 136 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlyings had high credit ratings. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies). Exposure remained substantially the same as in 2014.

In short, it can be affirmed that, in general, the exposure to instruments of this kind in the ordinary course of the Group’s business continued to decrease in 2015. It is due mainly to the integration of exposures at entities acquired by the Group, such as Sovereign in 2009. All these exposures were known at the time of the purchase and adequate provisions were recognized. Since their integration in the Group these exposures have been reduced notably, the final objective being their derecognition.

The Group’s policy with respect to the approval of new transactions involving these products continues to be very prudent and conservative and is subject to strict supervision by the Group’s senior management. Before authorizing a new transaction, product or underlying, the risk division checks:

• Whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

• Whether the inputs enabling application of this valuation model are observable in the market.

Provided the two aforementioned conditions are met, the risk division ascertains:

• The availability of adequate systems duly adapted for the daily calculation and monitoring of the results, positions and risks of the new transactions envisaged.

• The degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.

⁵  The guarantees provided by monoline insurers for US municipal bonds are not treated as exposure. These guarantees amounted to EUR 19 million at December 2015.

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Calibration and test measures

Actual losses may differ from those projected by the value-at-risk (VaR) model for different reasons relating to the limitations of this metric. Therefore, the Group performs regular analyses and tests to check the accuracy of the VaR calculation model in order to verify its reliability.

The most important tests are the backtesting exercises, which are analyzed at both local and global level, following the same methodology in all cases. The backtesting exercise consists of comparing the projected VaR measurements, for a given confidence level and time horizon, with the actual losses obtained in the same time horizon. This facilitates the detection of any anomalies in the VaR model of the portfolio in question (e.g. deficiencies in the parameterization of the valuation models of certain instruments, scantly adequate proxies, etc.).

Three types of backtesting are calculated and assessed at the Group:

• Clean backtesting: the daily VaR is compared with the results obtained without taking into account the intra-day results or the changes in the portfolio’s positions. This model serves to check the accuracy of the individual models used to assess and measure the risks of the various positions.

• Backtesting on complete results: daily VaR is compared with the day’s net results, including the results of intra-day operations and those generated by fees and commissions.

• Backtesting on complete results without mark-ups or fees and commissions: daily VaR is compared with the day’s net results, including the results of intra-day operations but excluding those generated by mark-ups and fees and commissions. This method is intended to obtain an idea of the intra-day risk assumed by the Group’s treasury areas.

The number of violations in 2015 is in line with the expected performance of the VaR calculation model, given that a confidence level of 99% and a time horizon of one year are used (with a longer time horizon one could expect an average of two or three violations a year).

3. Structural balance sheet risks⁶

3.1. Main aggregates and variations

The market risk profile inherent to the Group’s balance sheet, in relation to the volume of assets and capital, and the projected net interest margin, remained at moderate levels in 2015, in line with previous years.

Structural interest rate risk

• Europe and the United States

The main balance sheets, i.e. those of Spain, the UK and the US, in mature markets and against a backdrop of low interest rates, reported positive sensitivities of the market value of equity and of the net interest margin to interest rate rises.

In any case, the level of exposure in all countries is moderate in relation to the annual budget and the amount of capital.

At the end of December 2015, the exposure relating to the net interest margin at one year, measured as the sensitivity thereof to parallel shifts of ± 100 basis points, was concentrated on the euro yield curve, with EUR 257 million of exposure, the Polish zloty yield curve, with EUR 83 million of exposure and the US dollar yield curve, with EUR 78 million of exposure, in all cases to falls in interest rates.

At the same date, the most significant exposure relating to the market value of equity, measured as the sensitivity thereof to parallel shifts of ± 100 basis points, was that of the euro yield curve, with EUR 3,897 million of exposure to falls in interest rates. The exposure to falls in interest rates of the US dollar and pound sterling yield curves was EUR 691 million and EUR 488 million, respectively. These scenarios are very unlikely at present.

• Latin America

The balance sheets are positioned, in terms of both value of equity and net interest margin, for falling interest rates, except in the case of the net interest margin in Mexico, since the country’s excess liquidity is invested in local currency in the short term.

⁶  Includes the total balance sheet, except for financial assets and liabilities held for trading.

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In 2015 the level of exposure in all countries continued to be moderate in relation to the annual budget and the amount of capital.

At year-end, the exposure relating to the net interest margin at one year, measured as the sensitivity thereof to parallel shifts of ± 100 basis points, was concentrated on three countries: Brazil (EUR 124 million), Mexico (EUR 37 million) and Chile (EUR 23 million).

• VaR of on-balance-sheet structural interest rate risk

In addition to sensitivities to interest rate fluctuations (shifts not only of ±100 basis points, but also of ±25, ±50 and ±75 basis points are assessed, in order to better characterize risk in countries with very low rate levels), the Group uses other methods to monitor on-balance-sheet structural interest rate risk including, inter alia, scenario analysis and VaR calculations, using a methodology similar to that used for the trading book.

Structural foreign currency risk/hedges of results

Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, the results thereof and the hedges for both.

Foreign currency risk is managed dynamically, in order to limit the impact on the core capital ratio of exchange rate fluctuations⁷. In 2015 the levels of the foreign currency risk core capital ratio remained at around 100%.

At 2015 year-end, the largest long-term exposures (with their potential impact on equity) corresponded, in descending order, to the pound sterling, the US dollar, the Brazilian real, the Chilean peso, the Mexican peso and the Polish zloty. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.

Additionally, the financial management division at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro.

Structural equity risk

The Group has equity positions in its balance sheet (banking book) in addition to the trading positions. These positions are classified as available-for-sale financial assets (equity instruments) or as investments, depending on the length of time they are expected to remain in the portfolio.

At the end of December 2015, the equity positions (banking book) were diversified across various geographical areas, the main ones being Spain, the US, China, Brazil and the Netherlands. As regards industries, the equity positions are mainly invested in financial services and insurance; other industries represented to a lesser extent are professional, scientific and technical activities, the public sector (the holding in SAREB), the manufacturing industry and the transport and storage industry.

The structural equity positions are exposed to market risk. VaR is calculated for these positions using series of market prices or proxies.

Structural VaR

In short, a homogeneous metric such as VaR can be used to monitor the total on-balance-sheet market risk (excluding the Santander Global Corporate Banking trading activity), distinguishing between fixed-income (considering both interest rates and credit spreads for ALCO portfolios), exchange rate and equities.

In general, it can be said that structural VaR is not high in terms of the Group’s volume of assets or capital.

3.2. Methodologies

Structural interest rate risk

The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items.

Taking into consideration the balance-sheet interest rate position and the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Group. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

⁷  At the beginning of 2015 the method of covering the core capital ratio was changed from phase-in to fully-loaded.

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The metrics used by the Group to control interest rate risk in these activities are the repricing gap, the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital and value at risk (VaR) for economic capital calculation purposes.

Structural foreign currency risk/hedges of results

These activities are monitored by measuring positions, VaR and results on a daily basis.

Structural equity risk

These activities are monitored by measuring positions, VaR and results on a monthly basis.

Limit control system

For trading market risk, structural balance sheet risk limits are established, within the framework of the annual limit plan, in response to the level of the Group’s risk appetite.

The main limits are:

• On-balance-sheet structural interest rate risk:

• Limit on net interest margin sensitivity at one year.

• Limit on the sensitivity of the market value of equity.

• Structural foreign currency risk: Net position in each currency (for positions hedging results).

If any of these limits or sublimits are breached, risk management officers must explain the reasons why and provide an action plan for remedying the situation.

4. Pensions and actuarial risks

4.1. Pensions risk

In managing the risk associated with the defined-benefit employee pension funds, the Group assumes the financial, market, credit and liquidity risks incurred in connection with the fund’s assets and investments and the actuarial risks arising from the fund’s liabilities, i.e. the pension obligations to its employees.

The aim pursued by the Group in pensions risk control and management is primarily to identify, measure, follow up, control, mitigate and report this risk. The Group’s priority, therefore, is to identify and mitigate all clusters of pensions risk.

Therefore, in the methodology used by the Group, the total losses on assets and liabilities in a stress scenario defined by changes in interest rates, inflation, stock markets and property indices, as well as credit and operational risk, are estimated every year.

4.2. Actuarial risk

Actuarial risk arises from biometric changes in the life expectancy of insureds (life insurance), unexpected increases in projected indemnity payments in non-life insurance and, in any event, unexpected changes in the behavior of insurance policyholders in exercising the options envisaged in the contracts.

A distinction is made between the following actuarial risks:

• Life liability risk: risk of loss in the value of life insurance liabilities caused by fluctuations in the risk factors affecting such liabilities:

• Mortality/longevity risk: risk of loss due to changes in the value of liabilities as a result of changes in the estimate of the probability of death/survival of insureds.

• Morbidity risk: risk of loss due to changes in the value of liabilities as a result of changes in the estimate of the probability of disability/incapacity of insureds.

• Surrender/lapse risk: risk of loss due to changes in the value of liabilities as a result of the early termination of the contract or changes in the policyholders’ exercise of rights with regard to surrender, extraordinary contributions and/or paid up options.

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• Expense risk: risk of loss due to changes in the value of liabilities arising from adverse variances in expected expenses.

• Catastrophe risk: losses caused by the occurrence of catastrophic events that increase the entity’s life liabilities.

• Non-life liability risk: risk of loss due to changes in the value of non-life insurance liabilities caused by fluctuations in the risk factors affecting such liabilities:

• Premium risk: loss arising from the lack of sufficient premiums to cater for claims that might be made in the future.

• Reserve risk: loss arising from the lack of sufficient reserves for claims incurred but not settled, including the expenses arising from the management of such claims.

• Catastrophe risk: losses caused by the occurrence of catastrophic events that increase the entity’s non-life liabilities.

e) Liquidity and funding risk

1. Introduction to the treatment of liquidity and funding risk

Liquidity and funding management has always been a basic element of the Group’s business strategy and a fundamental cornerstone, together with capital, on which the strength of its balance sheet rests.

The Group relies on a decentralized funding model composed of subsidiaries that are autonomous and self-sufficient in terms of liquidity. Each subsidiary is responsible for covering the liquidity needs arising from its current and future activity, either by taking deposits from its customers in its area of influence, or by resorting to the wholesale markets where it operates, subject to management and supervision procedures coordinated at Group level.

This funding structure has proven to be most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other areas and, therefore, the Group as a whole, which could occur if a centralized funding model were used.

In addition, at the Group this funding structure benefits from the advantages of having a commercial banking model with a significant presence in ten markets with great potential, with the focus on retail customers and a high level of efficiency. As a result, the subsidiaries have a considerable capacity to attract stable deposits, as well as a significant issue capacity in the wholesale markets of their respective countries, generally in local currency.

2. Liquidity management

Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

Liquidity management at the Group is based on the following principles:

• Decentralized liquidity model.

• Medium- and long-term liquidity needs arising from the business must be funded using medium- and long-term instruments.

• High proportion of customer deposits, as a result of a commercial balance sheet.

• Diversification of wholesale funding sources by: instrument/investor; market/currency; and maturity.

• Restrictions on recourse to short-term wholesale financing.

• Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in adverse situations.

• Compliance with the regulatory liquidity requirements at Group and subsidiary level, as a new conditioning factor in management.

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In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones:

• A sound organizational and governance model to ensure that senior management of the subsidiaries is involved in the decision-making process and is included in the Group’s global strategy.

• An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

• A management approach adapted in practice to the liquidity needs of each business.

2.1. Organizational and governance model

Decisions relating to all structural risks, including liquidity and funding risk, are made though local asset-liability committees (ALCOs) in coordination with the Global ALCO.

The Global ALCO is the body empowered by the board of directors of Banco Santander to coordinate the asset and liability management (ALM) function throughout the Group, including the management of liquidity and funding, which is carried out by the local ALCOs in accordance with the corporate ALM framework.

It is presided over by the Bank’s chair and its members are an executive deputy chairman (who, in turn, is the chairman of the executive risk committee), the CEO, the finance and risk executive vice presidents, and other executive vice presidents and heads of certain business and analysis units who perform advisory functions.

The liquidity risk profile and appetite aim to reflect the Group’s strategy in conducting its business, which consists of structuring the balance sheet to render it as resilient as possible to potential liquidity stress scenarios. To this end, appetite metrics have been structured to reflect the application, on an individual basis, of the principles of the Group’s management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios.

Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain very severe but highly unlikely events occur.

2.2. Balance sheet analysis and liquidity risk measurement

Liquidity and funding decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the various units and businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains adequate liquidity levels to cover its short- and long-term requirements with stable funding sources, optimizing the impact of funding costs on the income statement.

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic metrics.

The results of these balance-sheet, projection and scenario analyses provide the inputs required to prepare the Group’s various contingency plans, which, if necessary, would enable it to anticipate a broad spectrum of potential adverse situations.

All these measures are in line with the practices being promoted to strengthen the liquidity of financial institutions by the Basel Committee and the various regulators (in the European Union, the European Banking Authority). The objective is to define a framework of principles and metrics which, in certain cases, are nearing implementation and, in others, are at the early stages of development.

In 2015 the Internal Liquidity Adequacy Assessment Process (ILAAP) was conducted for the first time. The ILAAP, which focuses on both quantitative and qualitative aspects, must be integrated with the Group’s other strategic and risk management processes. The Group maintained a robust liquidity position across all its units, in both the base scenario and potential stress scenarios.

Methodology for liquidity risk monitoring and control

The aims of the liquidity risk metrics adopted by the Group are:

• To attain the highest degree of effectiveness in liquidity risk measurement and control.

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• To provide support for financial management, to which end the metrics are adapted to the manner in which the Group’s liquidity is managed.

• To be aligned with the regulatory requirements arising from the transposition of Basel III in the European Union, in order to avoid any conflicts between limits and to facilitate management.

• To act as an early warning system that anticipates potential risk situations by monitoring certain indicators.

• To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, these have to be analyzed and adapted by each unit.

Two kinds of basic metrics are used to control liquidity risk: short term and structural.

Short-term metrics include basically the liquidity gap, while structural metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:

• Liquidity gap

The liquidity gap provides information on potential cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main entities and for each of the currencies in which the Group operates. At the end of 2015, all units complied comfortably with the horizons set at corporate level for the liquidity scenario.

• Net structural position

The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base, as well as capital and other non-current liabilities. Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. At the end of 2015, the Group had a structural liquidity surplus of more than EUR 149,000 million.

• Scenario analysis

The Group supplements the aforementioned metrics by developing various stress scenarios. Its main objective is to identify the critical factors of potential crises and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analyses the units generally consider three different scenarios: idiosyncratic, local systemic and global systemic. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

The definition of scenarios and the calculation of metrics under each of them are directly related to the definition and execution of the liquidity contingency plan, which is the responsibility of financial management.

2.3. Management tailored to business needs

The Group performs its liquidity management at subsidiary and/or business unit level in order to finance its recurring activities with the appropriate terms and prices.

In practice, in keeping with the funding principles mentioned above, the liquidity management at these units consists of the following:

• Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business. Based on these liquidity requirements and taking into account certain prudential limits on the raising of funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level.

• Year-round monitoring of the actual changes in the balance sheets and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan.

• Monitoring and management of the units’ compliance with the regulatory ratios, and oversight of the level of encumbered assets in each unit’s funding, from a structural standpoint and with regard to its shortest-term component.

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• Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity.

The effectiveness of this management effort at Group level is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to raise funds in the wholesale markets so that, in ongoing coordination with the Group, it can establish an issue and securitization plan.

Traditionally, the Group’s main subsidiaries have been self-sufficient in terms of their structural funding. The exception is Santander Consumer Finance (SCF), which, because it specializes in consumer financing mainly through dealer/retailer recommendations, has required the financial support of other Group units, especially the Parent.

This support, at all times provided at market prices based on the term of the funding and the internal rating of the borrower unit, has decreased over time and currently relates substantially in full to needs with regard to the new portfolios and business units included in SCF within the framework of the agreement with Banque PSA Finance. This requirement for increased financial support from the Group will remain in 2016, since further units have yet to be included. In the medium term, as the new units develop their own wholesale funding capacities, as required by the Group’s model, this financial support will be reduced.

3. Funding strategy and evolution of liquidity in 2015

3.1. Funding strategy

In the last few years the Group’s funding activity has been underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of the subsidiaries’ strategies to the growing demands of both markets and regulators. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe.

In any case, it is possible to identify a series of general trends in the policies implemented by the Group’s subsidiaries in their funding and liquidity management strategies since the beginning of the crisis, namely:

• Maintenance of adequate, stable medium- and long-term wholesale funding levels at Group level. At 2015 year-end, this funding represented 21% of the liquidity balance sheet, a level similar to that of recent years but well below that at 2008 year-end (28%) when wholesale liquidity, which was more abundant and less expensive, had not yet suffered the pressures of the crisis.

• Holding a sufficient volume of assets eligible for discount at central banks as part of the liquidity reserve to cater for episodes of stress on wholesale markets. In particular, in recent years the Group has raised its total discount capacity significantly, from close to EUR 85,000 million at 2008 year-end to the current level of more than EUR 195,000 million.

• Strong generation of liquidity from the commercial business due to the lower growth of credit and greater emphasis on attracting customer funds.

Thanks to all these market and business developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure, the main features of which are as follows:

• High proportion of customer deposits in a predominantly commercial balance sheet. Customer deposits are the Group’s major source of funding. These deposits represent around two thirds of the Group’s net liabilities (i.e. of the liquidity balance sheet) and at the end of 2015 they accounted for 86% of net loans.

• Diversified wholesale funding, primarily at medium and long term, with a very small proportion maturing in the short term. Medium- and long-term wholesale funding represents 21% of the Group’s net liabilities and enables it to cater for the net loans not funded with customer deposits (the commercial gap).

This funding is well-balanced by type of instrument (approximately 40% senior debt, 30% securitizations and structured instruments with collateral, 20% cédula-type covered bonds, with the remainder consisting of preference shares and subordinated debt) and by market: the markets with a greater proportion of issues are the ones where investment activity is higher.

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3.2. Evolution of liquidity in 2015

At the end of 2015, in comparison with 2014, the Group reported:

• A stable ratio of loans to net assets (total assets less trading derivatives and interbank balances) at 75% due to the improvement in lending following the end of deleveraging in mature markets.

• A loan-to-deposit (LTD) ratio of 116%. This trend reflects the recovery of credit in mature markets, both organic and inorganic (acquisition of consumer finance businesses in Europe), and the increased focus on optimizing the cost of retail deposits in countries with low interest rates.

• A decline in the ratio of customer deposits plus medium- and long-term funding to loans, for reasons similar to those for the trend in the LTD ratio, since the increase in the wholesale funds raised at the Group is also lower than that in loans.

• A continuing limited recourse to short-term wholesale funding at the Group. The ratio of this funding stood at around 2%.

• Lastly, an increase in the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium- and long-term funding, and capital- over structural liquidity requirements -non-current assets and loans-), which had an average balance of EUR 159,000 million in 2015.

Early compliance with regulatory ratios

As part of its liquidity management model, in recent years the Group has been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.

• LCR (Liquidity Coverage Ratio)

In 2014, following the approval by the Basel Committee of the final definition of the short-term liquidity coverage ratio (LCR), the delegated act of the European Commission was adopted which, within the scope of the CRD IV, defines the criteria for calculating and implementing this metric in the European Union. The implementation has been delayed until October 2015, although the level of initial compliance remains at 60%, which should gradually increase to 100% by 2018.

The starting position in short-term liquidity, coupled with the autonomous management of the ratio in all major units, has enabled compliance levels exceeding 100% to be maintained throughout 2015, thereby surpassing regulatory requirements.

• NSFR (Net Stable Funding Ratio)

The final definition of the net stable funding ratio was approved by the Basel Committee in October 2014, and it has still to be transposed into local legislation.

In relation to this ratio, the Group benefits from a high weighting of customer deposits, which are more stable, from long-term liquidity needs arising from the commercial activity funded by medium- and long-term instruments, and from limited recourse to short term. All of this enables the Group to maintain a balanced liquidity structure, which is reflected in NSFR levels exceeding 100% at 2015 year-end, although compliance will not be required until 2018.

Asset encumbrance

It is important to note the Group’s moderate use of assets as collateral for structural balance-sheet funding sources. Following the guidelines laid down by the European Banking Authority (EBA) in 2014, the concept of asset encumbrance includes both on-balance-sheet assets provided as collateral in transactions to obtain liquidity and off-balance-sheet assets that have been received and re-used for the same purpose, as well as other assets associated with liabilities for reasons other than funding.

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The reported Group information as required by the EBA at 2015 year-end is as follows:

On-balance-sheet encumbered assets

Billions of euros	Carrying amount of encumbered assets		Carrying amount of non- encumbered assets
Assets		323.3		1,017.0
Loans and advances		217.8		725.9
Equity instruments		13.2		10.5
Debt securities		74.6		105.5
Other assets		17.7		175.1

Encumbrance of collateral received

Billions of euros	Fair value of encumbered collateral received or own debt securities issued		Fair value of collateral received or own debt securities issued available for encumbrance
Collateral received		44.9		52.0
Credits and loans		1.2		—
Equity instruments		0.9		1.7
Debt securities		42.8		45.1
Other collateral received		—		5.2
Own debt securities issued other than own covered bonds or ABSs		—		5.6

Encumbered assets and collateral received and matching liabilities

Billions of euros	Matching liabilities, contingent liabilities or securities lent		Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered
Total sources of encumbrance (carrying amount)		302.6		368.3

On-balance-sheet encumbered assets amounted to EUR 323.3 billion, more than two-thirds of which are loans (mortgage loans, corporate loans, etc.). Off-balance-sheet encumbered assets amounted to EUR 44.9 billion, relating mostly to debt securities received as collateral in asset purchase transactions and re-used as reverse repo. Taken together, these two categories represent a total of EUR 368.3 billion of encumbered assets, which give rise to EUR 302.6 billion of matching liabilities.

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At December 31, 2015, total assets encumbered in funding transactions represented 26% of the Group’s expanded balance sheet under EBA standards (total assets plus collateral received: EUR 1,437 billion at December 2015). Therefore, the ratio of encumbered assets in funding transactions remained at the same level as in 2014: the Group’s recourse to TLTROs in 2015 was offset by the maturity of secured debt (mainly mortgage-backed securities) that has been replaced by unsecured debt.

Lastly, regard should be had to the different sources of encumbrance and the role they play in the Group’s funding:

• 44% of total encumbered assets relate to collateral provided in medium- and long-term financing transactions (with residual maturity of more than one year) to fund the commercial balance-sheet activity. This places the level of asset encumbrance in “structural” funding transactions at 11% of the expanded balance sheet under EBA standards.

• The other 56% relate to transactions in the short-term market (with residual maturity of less than one year) or to collateral provided in derivative transactions whose purpose is not to fund the ordinary business activity but rather to ensure efficient short-term liquidity management.

f) Operational risk

1. Definition and objectives

Following the Basel guidelines, the Group defines operational risk (OR) as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Operational risk is inherent in all products, activities, processes and systems, and is generated in all business and support areas; accordingly, all employees are responsible for managing and controlling the risks arising in their area of activity.

The aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, monitor, control, mitigate and report this risk.

The Group’s priority, therefore, is to identify and mitigate any clusters of operational risk, irrespective of whether or not they have given rise to any losses. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, the Group has been applying the standardized approach provided for under the European Capital Requirements Directive.

2. Operational risk management and control model

2.1. Operational risk management cycle

The operational risk management and control model includes the following phases:

• Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

• Definition of the target operational risk profile, specifying the strategies by unit and time horizon, through the establishment of the operational risk appetite and tolerance, the annual loss budget and the monitoring thereof.

• Encouragement of the involvement of all employees in the operational risk culture, through appropriate training for all areas and levels of the organization.

• Objective and ongoing measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.).

• Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of the internal control environment and mitigation of losses.

• Establishment of mitigation measures to eliminate or minimize operational risk.

• Preparation of periodic reports on the exposure to operational risk and its level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.

• Definition and implementation of the methodology required for the internal calculation of capital in terms of expected and unexpected loss.

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The following is required for each of the key processes indicated above:

• Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.

• Definition and documentation of operational risk management and control policies and implementation of the related methodologies and tools consistent with current regulations and best practices.

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2.2. Risk identification, measurement and assessment model

In order to identify, measure and assess operational risk, the Group defined a set of quantitative and qualitative corporate techniques/tools that are combined to perform a diagnosis based on the identified risks and obtain a valuation through the measurement/assessment of the area/unit.

The quantitative analysis of this risk is carried out mainly using tools that record and quantify the potential level of losses associated with operational risk events.

The tools defined for the qualitative analysis aim to assess aspects (coverage/exposure) linked to the risk profile, thereby making it possible to capture the control environment in place.

2.3. Operational risk information system

The Group has a corporate information system that supports the operational risk management tools and facilitates the information and reporting functions and requirements at local and corporate level.

This system features event recording, risk mapping, assessment, indicator, mitigation and reporting modules, and is applicable to all the Group entities.

3. Mitigation measures

The model requires the Group to monitor the mitigation measures established in response to the main sources of risk, which were identified through an analysis of the tools used in managing operational risk, and as a result of the organizational and development model and the preventive implementation of operational risk management and control policies and procedures.

The Group’s model integrates the measures in a shared database, which makes it possible to assign each mitigating measure to the various tools used (events, indicators, self-assessment, scenarios, recommendations and preventive policies).

The most significant mitigation measures have focused on the improvement of security for customers in their day-to-day transactions, the management of external fraud, the ongoing improvement of processes and technology, and on taking steps to ensure that products are sold and services are provided in an appropriate manner.

Cybersecurity and data security plans

In 2015 the Group continued to devote its full attention to cybersecurity-related risks, which affect all types of companies and institutions, including those in the financial sector.

This situation, which is generating concern among entities and regulators, is prompting the adoption of preventive measures in order to be prepared for cyberattacks.

In order to step up and supplement the actions already in progress, the Group has prepared the Santander cyber-security program, which stipulates: i) a governance integrating the three lines of defense; ii) a cyber resilience-oriented line of action envisaging measures in the areas of identification, prevention, protection, detection and reaction; iii) aspects of cybersecurity with an impact on training, access control and segregation of functions, as well as secure software development; and iv) initiatives for organizational reinforcement.

Inspired by international standards, the Group has developed its internal cybersecurity reference model, endowing it with certain maturity concepts. At the same time, it has continued to implement the cybersecurity master plans at the various Group entities, achieving the following noteworthy milestones:

• Specific budgetary allocations for the improvement of mechanisms to protect against cybersecurity problems at the Group’s various entities and geographical locations.

• Arrangement of a corporate-wide cyber insurance policy.

• Improvement of the security monitoring services and extension of their scope.

• Participation in the numerous cyber exercises conducted at various Group locations, aimed at evaluating the response of companies to cyber incidents.

• Cooperation with international forums with the objective of identifying best practices and sharing information about threats.

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4. Business continuity plan

The Group has a business continuity management system to ensure the continuity of the business processes of its entities in the event of a disaster or serious incident.

This basic objective consists of the following:

• Minimizing possible injury to persons, as well as adverse financial and business impacts for the Group, resulting from an interruption of normal business operations.

• Reducing the operational effects of a disaster by supplying a series of pre-defined, flexible guidelines and procedures to be employed in order to resume and recover processes.

• Resuming time-sensitive business operations and associated support functions, in order to achieve business continuity, stable earnings and planned growth.

• Protecting the public image of, and confidence in, the Group.

• Meeting the Group’s obligations to its employees, customers, shareholders and other third-party stakeholders.

In 2015 the Group continued to make progress in the implementation and ongoing improvement of its business continuity management system. Implementation of the three lines of defense with regard to business continuity was reinforced and the newly-created businesses and divisions were included in the scope of management.

5. Other matters relating to operational risk control and monitoring

Analysis and monitoring of controls in market operations

In view of the specific features and complexity of financial markets, the Group continually improves its operational control procedures in order to remain in line with new regulations and best market practices. Thus, in 2015, further improvements were made to the control model for this business, placing particular emphasis on the following points:

• Analysis of the individual transactions of each treasury operator to detect any possible anomalous conduct. In the course of the year, the thresholds applied for each of the controls were reviewed, together with the other control areas, and, as a new feature, specific limits were introduced for each desk.

• Implementation of a new tool enabling compliance with new record-keeping requirements in monitoring communication channels adapted to the new regulations.

• Tightening of controls on transaction cancellations and modifications, and calculation of the actual cost of such events if they are due to operational errors.

• Reinforcement of controls on contributions of prices to market indices.

• Development of additional controls to detect and prevent irregular transactions (such as, for example, the establishment of controls on triangular transactions).

• Development of additional controls on access to front-office transaction record-keeping systems (for example, for the purpose of detecting shared users).

• Adaptation of existing controls and development of new controls to comply with Volcker Rule requirements.

• Formalization of IT procedures, tools and systems for cybersecurity risk protection, prevention and training.

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The financial market business is also undergoing a global transformation and evolution of the operational risk management model, combined with a modernization of the technology platforms and operating processes which, incorporating a robust control model, will reduce the operational risk associated with this activity.

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Corporate information

The operational risk function has an operational risk management information system that provides data on the Group’s main risk elements. The information available from each country/unit in the operational risk sphere is consolidated to obtain a global view with the following features:

• Two levels of information: one corporate, with consolidated information, and the other individualized for each country/unit.

• Dissemination of best practices among the Group’s countries/units, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

This information acts as the basis for meeting reporting requirements vis-à-vis the risk control committee, the risk, regulation and compliance oversight committee, the operational risk committee, senior management, regulators, rating agencies, etc.

The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. 2015 saw the reinforcement of the common guidelines for coordinating the various functions involved in the management cycle for operational risk-mitigating insurance, mainly the areas of proprietary insurance and operational risk control, but also the various front-line risk management areas, based on the procedure designed in 2014.

These guidelines included most notably the following activities:

• Identification of all risks at the Group which could be covered by insurance, as well as new insurance cover for risks already identified in the market.

• Establishment and implementation of methods for quantifying insurable risk, based on loss analysis and loss scenarios that make it possible to determine the Group’s level of exposure to each risk.

• Analysis of the cover available in the insurance market, as well as preliminary design of the terms and conditions that best suit the requirements previously identified and evaluated.

• Technical assessment of the level of protection provided by a policy, and of the cost and retention levels that the Group will assume (excesses and other items to be borne by the insured), for the purpose of deciding whether to arrange it.

• Negotiation with insurance providers and award of policies in accordance with the relevant procedures established by the Group.

• Monitoring of claims reported under the policies, as well as those not reported or not recovered due to incorrect reporting, establishing action protocols and specific monitoring forums.

• Analysis of the appropriateness of the Group’s policies for the risks covered, taking the necessary measures to correct any deficiencies detected.

• Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.

• Active involvement of the two areas in the global insurance sourcing desk (the Group’s highest technical body for the definition of insurance cover and arrangement strategies), in the insured risk monitoring forum and in the corporate operational risk committee.

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g) Compliance and conduct risk

1. Scope, mission, definitions and objective

The compliance function encompasses all matters relating to regulatory compliance, the prevention of money laundering and terrorist financing, product governance and consumer protection, and reputational risk.

To this end, the compliance function promotes adherence by the Group to the rules, oversight requirements, principles and values of good conduct by establishing standards, holding debates and providing advice and information in the interest of employees, customers, shareholders and society in general.

Based on the current corporate arrangement of the Group’s three lines of defense, the compliance function is a second-line independent control function with direct access to the board of directors and its committees through the Group Chief Compliance Officer (GCCO), who has access to these bodies on a regular and independent basis. This structure is in line with banking regulatory requirements and supervisory expectations.

Compliance risks are defined as including the following:

• Compliance risk: the risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

• Conduct risk: the risk caused by inappropriate practices vis-à-vis the Bank’s relationship with its customers, the treatment and products offered to customers, and their suitability for each particular customer.

• Reputational risk: the risk arising from negative perception of the Bank on the part of public opinion, its customers, investors or any other stakeholder.

The Group’s objective regarding compliance and conduct risk is to minimize the likelihood of non-compliance and irregularities occurring and to ensure that, should they ultimately occur, they are promptly identified, assessed, reported and resolved.

Other control functions (risk) and support functions (legal, T&O, etc.) are also involved in the control of the aforementioned risks.

2. Control and supervision of compliance risks

Based on the arrangement of the Group’s lines of defense, in particular within the compliance function, primary responsibility for managing compliance risks is shared, in the first line of defense, by the business units directly originating those risks and the compliance function, acting either directly or by assigning compliance activities or tasks to that first line.

Furthermore, as the second line of defense, in its control and oversight capacity, the compliance function is charged with establishing, encouraging and achieving adherence by the units to the uniform frameworks, policies and standards in place across the Group. To this end, a set of controls is established, the application of which is monitored and verified.

In the sphere of compliance, the GCCO is responsible for reporting to the governing and managing bodies, and also for advising and informing senior management about compliance matters and for fostering a compliance culture, within the framework of an annual program, the effectiveness of which is assessed on a regular basis. In addition to the foregoing, the deputy chairman in charge of risk and the CRO also report to the governing and managing bodies on all the Group’s risks, including compliance risks.

The compliance function provides the basic components for the management of these risks (frameworks and policies for anti-money laundering measures, codes of conduct, product marketing, reputational risk, etc.) and ensures that the other components are duly addressed by the corresponding Group units (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and supervision systems, within the second line of defense against compliance risk.

Also, internal audit - as part of its functions in the third line of defense - conducts the tests and reviews required to check that the appropriate supervision controls and components are applied, and that the standards and procedures established at the Group are being complied with.

The essential components of compliance risk management are based on resolutions adopted by the board of directors, as the highest authority for such matters, through the approval of corporate frameworks - which regulate the relevant matters - and the Group’s general code of conduct. These frameworks are approved at corporate level by Banco Santander, S.A. as the Parent of the Group, and are subsequently approved by the units, by way of their adherence thereto, for the purpose of transposing them, taking into account any applicable local requirements.

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The corporate frameworks for the compliance function are as follows:

• General compliance framework.

• Product and service marketing framework.

• Claims management framework.

• Framework for the prevention of money laundering and of terrorist financing.

These corporate frameworks are developed within the sphere of the Group’s internal governance and are in keeping with the parent-subsidiaries relationship model.

For its part, the general code of conduct contains the rules of behavior and ethical principles that must govern the actions of all Group employees and is supplemented in certain matters by the rules contained in other codes and the related internal implementing regulations.

Also, the code establishes:

• The functions and responsibilities relating to the compliance matters addressed by it.

• The rules regulating the consequences of failure to observe the code.

• The channel for submitting and processing notifications of allegedly irregular actions.

The regulatory compliance function, under the supervision of the risk, regulation and compliance oversight committee (CSRRC) and the regulatory compliance committee, is responsible for ensuring the effective implementation and monitoring of the general code of conduct.

3. Governance and organizational model

It is the responsibility of the board of directors of the Bank, as part of its general supervisory function, to approve the appointment of the person ultimately responsible for the compliance function (the GCCO), as well as for its framework and its development policies. In addition, the board is in charge of the Group’s general code of conduct and the corporate frameworks developed by the compliance function.

In order to reinforce the independence of compliance, the executive committee of the board of directors resolved to appoint an executive vice president to the position of GCCO. In this connection, pursuant to the GCCO’s mandate, in 2015 a program was developed for the transformation of the compliance function at global level, namely the target operating model for compliance (TOM), which will be implemented over a three-year time horizon, with the aim of elevating this function to place it on a par with the best standards in the financial services industry.

The compliance function reports to the board of directors and its committees on a monthly basis.

Also worthy of mention is the appropriate coordination in place with the operational risk function, which compiles the various loss events arising from compliance and conduct risks and which, using a risk governance featuring a combined view of all the Group’s risks, also reports to the board and its committees.

3.1. Governance

The corporate committees listed below are collective bodies with responsibilities in the sphere of compliance and are replicated at local level:

• The regulatory compliance committee: this is the collective governance body for regulatory compliance, without prejudice to the responsibilities assigned to the specialist bodies currently existing in the function (namely the corporate product and service marketing committee, the monitoring committee and the committee for the prevention of money laundering and terrorist financing).

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• The product and service marketing committee: this is the collective governance body for the validation of products and services. The units are empowered to make the initial proposals and give authorization for new products and services, although such proposals and their compliance with corporate policies must be validated at corporate level. The committee’s objectives and functions are based on minimizing the improper marketing of products and services for customers, taking into account consumer protection principles. Its functions are performed at both corporate and local level.

• The corporate monitoring committee is the Group’s collective governance body for the monitoring of products and services and the evaluation of customer claims across all the Group’s units. Approved products and services are monitored locally by the local monitoring committees or equivalent bodies, which report their conclusions directly to the corporate monitoring committee.

• The committee for the prevention of money laundering and terrorist financing (formerly the analysis and resolution committee - CAR) is the collective body in this sphere that defines the related action frameworks, policies and general objectives. It also validates the prevention and coordination regulations of other collective bodies and units of the Group. In order to reinforce the governance of the function and safeguard its independence, the objectives and duties of the aforementioned committees have been revised, in the adaptation of TOM, to bring them into line with the Group’s governance model.

3.2. Organizational model

As a result of the aforementioned transformation program (TOM) and in order to ensure a vision and integrated management of the various compliance risks, the organizational structure of the function was modified, using a hybrid approach, so as to make the specialist compliance risks (vertical functions) converge with the standardized aggregate vision of those risks (transversal functions).

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4. Regulatory compliance

The following functions are in place to ensure the proper control and supervision of regulatory compliance risks:

• Application of the Group’s general code of conduct and the other codes and rules implementing it. Provision of advice on the resolution of any doubts arising from their application.

• Cooperation with Internal Audit in the periodic reviews conducted by it on compliance with the general code of conduct and with the other codes and rules implementing it, without prejudice to any periodic reviews of compliance matters that have to be conducted directly.

• Preparation (or amendment) of compliance programs on specific regulations, for submission to the regulatory compliance committee and, where appropriate, subsequent approval by the board of directors or its committees.

• Presentation of periodic reports to the risk, regulation and compliance oversight committee (CSRRC) and to the board of directors on the development of the framework and the application of the compliance program.

• Assessment of any changes that may need to be made to the compliance program, in particular where unregulated risk situations and improvable procedures are detected, and proposal of such changes to the regulatory compliance committee or to the CSRRC.

• Receipt and handling of the complaints made by employees through the whistleblowing facility.

• Direction and coordination of any investigations into breaches, with possible support from internal audit, and proposal of the appropriate penalties to the related committee.

• Supervision of the compulsory training activity for the compliance program.

The target operating model (TOM) for compliance places the spotlight of the regulatory compliance function on the following areas:

• Compliance in employee-related matters.

• Compliance in organizational matters.

• Compliance with market regulations.

• Conduct in securities markets.

5. Product governance and consumer protection

As a result of the transformation of the compliance function into its new TOM, the former reputational risk management office was renamed as the product governance and consumer protection office. Its responsibilities were extended to bolster the adequate control and oversight of product and service marketing risks, to foster transparency and a simple, personal and fair approach to customers in order to protect their rights, and to ensure that policies and procedures take the consumers’ perspective into account. For this purpose, the functions listed below were established, based on two corporate frameworks and a set of policies that define the basic principles and rules of action in this area:

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• Frameworks:

• Corporate marketing framework: a uniform system for the marketing of products and services, aimed at minimizing exposure to the risks and possible claims arising in all phases of the marketing process (validation, pre-sale, sale, monitoring).

• Claims management framework: a uniform system for the systematized management of the recording, control, management and analysis of the causes of claims, based on their various types; this makes it possible to identify the reasons for customer dissatisfaction, to provide suitable solutions for each case and to improve, where appropriate, the processes that gave rise to the claims.

• Functions:

• To promote the adherence of the units to the above-mentioned corporate frameworks.

• To facilitate the functions of the corporate marketing committee by guaranteeing the proper validation, prior to its launch, of any new product or service proposed by any Group subsidiary or by the Parent.

• To safeguard the internal protection of consumers, with the aim of improving their relationships with the Group, by effectively promoting their rights and providing solutions to possible disputes, in accordance with best practices through any channel, as well as by fostering consumers’ financial knowledge. All these efforts are geared towards building lasting relationships with customers.

• To identify, analyze and control the fiduciary risk generated by the private banking, asset management and insurance businesses and the outsourced custody services for customers’ financial instruments. Fiduciary risk is considered to be that arising from the management of financial instruments on behalf of customers.

• To compile, analyze, and report to the Group’s governance bodies, the information required to conduct a proper analysis of product and service marketing risk and of claims risk, from a two-fold perspective: the possible impact on customers and on the Group, as well as on the monitoring of products and services throughout their life-cycle.

• To supervise the marketing and claims management processes in place at the subsidiaries, making proposals for improvements and monitoring the mitigating actions taken for the risks detected.

6. Prevention of money laundering and of terrorist financing

The following functions are in place to ensure the proper control and supervision of risks relating to the prevention of money laundering and of terrorist financing:

• One of the Group’s strategic objectives is to have an effective advanced system for the prevention of money laundering and terrorist financing that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations.

• This system is based on a corporate framework that defines the principles and basic action guidelines required to set minimum standards that the Group’s units must observe and which in addition are formulated on the basis of the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and of the obligations and stipulations of EU directives on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.

• The local units, in their role as the first line of defense, are responsible for directing and coordinating the systems and procedures for the prevention of money laundering and terrorist financing in the countries where the Group has a presence, as well as for investigating and reporting suspect transactions and meeting the related supervisory reporting requirements. In addition, all local units have officers in charge of this function.

• Corporate systems and processes have been set up at all Group units, based on decentralized technology systems, which make it possible to obtain locally managed information and data, as well as corporate function reporting, monitoring and control information. These systems enable the Group to take an active and preventive approach in analyzing, identifying and monitoring any transactions that could be linked to money laundering or terrorist financing activities.

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• The Group is a founder member, along with other large international banks, of the Wolfsberg Group, the objective of which is to establish international standards to increase the effectiveness of programs to combat money laundering and terrorist financing in the financial community. In this connection, various initiatives have been conducted which have addressed a number of different issues. The supervisory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money laundering, corruption, terrorism and other serious crimes.

7. Reputational risk

As a result of the transformation of the compliance function in the development of the TOM, major progress has been made in the definition of the reputational risk model.

The specific nature of reputational risk, which arises from a wide variety of sources, combined with the highly variable perception of this risk, as it is understood by the various stakeholders, requires an approach and a management and control model that are unique, different from those used for other risks.

The reputational risk model is based on an eminently preventive approach, but also on effective crisis management processes.

Therefore, the Group’s intention is for reputational risk management to be integrated both in business and support activities and in internal processes, thus allowing the risk control and supervision functions to integrate it in their activities.

Also, the reputational risk model requires a comprehensive understanding, not only of the Group’s business activities and processes, but also of how it is perceived by its stakeholders (employees, customers, shareholders, investors and society in general) in its different environments. This approach requires close coordination between the management, support and control functions and the various stakeholders.

As mentioned above, reputational risk governance is one of the components of compliance governance. The compliance function reports on reputational risk to senior management, once the information on sources of reputational risk has been consolidated.

8. Compliance risk assessment model and risk appetite

The Group’s risk appetite, in relation to compliance, is set by its statement that it is not willing to accept any risks of this nature, the clear objective being to minimize any economic, regulatory or reputational impact on the Group. To this end, a uniform system is implemented across the units through the establishment of a common methodology consisting of the setting of a series of compliance risk indicators and assessment matrices prepared by each local unit.

In 2015 the corporate compliance function carried out a regulatory risk assessment exercise focusing on the main countries in which the Group operates. Each quarter the Group monitors -on a country-by-country basis- the action plans designed to mitigate any high risks arising from this risk assessment exercise.

Based on the new compliance TOM, in 2015 an exercise was also launched to establish new indicators and an initial risk assessment in the following functions: product governance and consumer protection, regulatory compliance, prevention of money laundering and terrorist financing, and reputational risk.

In order to obtain a global integrated view of all compliance risks and to ensure that these can be included, together with all the Group’s risks, in a single view, so that the board of directors may in turn have a holistic perspective of those risks, from 2015 onwards the risk assessment will be conducted on a consolidated basis.

Thus, the setting of the Group’s compliance risk appetite, the monitoring of compliance risks and the adoption of corrective measures, if necessary, will be included in a single view. All this will be achieved using methods and indicators that are shared with the risk function and, therefore, form part of the Group’s risk appetite framework. The incurred losses resulting from compliance risks are entered into the shared event database managed by the risk function, in order to facilitate a comprehensive view, as well as an integrated control and management, of non-financial risks.

The Group also intends, as part of the development of the TOM, to revise the taxonomy of the various types of compliance risk, as first-level risks, in order to clearly identify them and thus be able to respond to possible stress test exercises in the future.

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h) Model risk

The Group understands a model as being any metric based on a quantitative method, system or approach that provides a simplified representation of reality by applying statistical, economic, financial or mathematical techniques to process data and obtain a result based on a series of assumptions and subject to a certain degree of uncertainty. Using models makes it possible to take swifter, more objective decisions, generally supported by the analysis of large quantities of information.

The use of models invariably presents model risk, which is defined as the potential for adverse consequences, including losses, from decisions based on incorrect or misused models.

According to this definition, the sources of model risk are as follows:

• The model itself, due to the use of incorrect or incomplete data in its construction, and due to the modelling method used and its implementation in the systems.

• The misuse of the model.

In recent years the Group has been working on the definition, management and control of model risk. A particularly noteworthy development was the creation in 2015 of a dedicated area within its risk division. This area comprises both the former model validation team and a specific control team.

The model risk function is performed both at corporate level and at each of the main entities in which the Group is present. A control framework has been defined for this function detailing, inter alia, matters relating to organization, governance and model management and validation.

Model risk management and control are structured around the life cycle of a model, as defined by the Group:

1.- Definition of standards

The Group has defined a series of standards for the development, monitoring and validation of its models. All models used within the Group -both those developed in-house and those acquired from third parties- must meet these standards. Thus, the quality of the models used at the Group for decision-making purposes is assured.

2.- Inventory

A key component of good model risk management is a complete, exhaustive inventory of the models in use.

The Group has a centralized inventory that has been constructed using a uniform taxonomy for all the models used in the various business units. This inventory contains all the relevant information on each of the models, which permits an appropriate monitoring of the models based on their importance.

The inventory also makes it possible to perform cross data analyses (by geographical area, type of model, materiality, etc.), thus facilitating the taking of strategic decisions in relation to the models.

3.- Planning

This phase features the participation of all those involved in the life-cycle of the model (users, developers, validators, data providers, technology personnel, etc.), who agree upon and set the relevant priorities.

Model planning is performed annually at each of the Group’s main units and is approved by the local governance bodies and endorsed at corporate level.

4.- Compilation of information

As indicated above, the data used in the construction of a model constitute one of the potential sources of model risk. These data must be reliable, complete and have sufficient historical depth to guarantee the suitability of the model developed.

The Group has teams that specialize in providing model construction data that have previously been certified by the data owners.

5.- Development

This is the phase in which the model is constructed, based on the needs established in the model plan and using the information provided by specialists for this purpose.

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Most of the models used by the Group are developed by in-house methodology teams, although certain models are also acquired from external providers. In both cases, the models must be developed in accordance with the established standards.

6.- Pre-implementation testing

Once a model has been constructed, the developers, together with the model owners, subject it to various tests in order to ensure that the model functions as expected and, where appropriate, they make the necessary adjustments.

7.- Materiality

Each of the Group’s models must have an associated level of materiality that is set by consensus of the parties involved.

The criteria for establishing materiality are documented in a corporate policy, which is transposed and approved by each of the Group’s main units.

Materiality determines the thoroughness, frequency and scope of the validations and follow-ups performed on the model, as well as the governance bodies in which decisions on the model have to be taken.

Materiality is one of the basic data for the proper management of model risk and one of the attributes contained in the corporate inventory.

8.- Independent validation

In addition to being a regulatory requirement in certain cases, the independent validation of models is a fundamental cornerstone for the proper management and control of model risk at the Group.

Therefore, as mentioned earlier, the Group has a specialist unit, fully independent of the developers and users, which issues a technical opinion on the suitability of the internal models for the intended purposes and concludes on their robustness, usefulness and effectiveness.

Internal validation currently covers all models used in the risk function, i.e. credit, market, structural and operational risk models, as well as economic and regulatory capital models, allowance models and stress test models (including, for the latter, the models used to estimate the Group’s balance sheet and income statement aggregates).

The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that underpin the effective operation of the models. In general, it includes all the relevant aspects of model management: controls, reporting, uses, involvement of senior management, etc.

After each model has been reviewed, the opinion issued is translated into a rating which, on a scale of one to five, summarizes the model risk perceived by the internal validation team.

It should be noted that the Group’s corporate internal validation environment is fully consistent with the criteria for internal validation of advanced approaches issued by the various supervisory authorities to whom the Group is subject. Accordingly, the Group maintains a segregation of functions between the units that develop and use models (first line of defense), the internal validation units (second line of defense) and internal audit (third line), which, in its role as the last layer of control, is responsible for reviewing the efficiency of the function, compliance with internal and external policies and procedures and for giving its opinion on the degree of effective independence.

9.- Approval

Before it is implemented -and, therefore, used- each model must be submitted for approval by the body corresponding to it on the basis of its materiality.

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10.- Implementation

This is the phase in which the developed model is implemented in the system through which it is intended to be used. As mentioned above, the implementation phase is another possible source of model risk and, therefore, it is absolutely essential that the technical teams and model owners conduct tests to certify that the model has been implemented as defined in the relevant methodology.

11.- Monitoring

A model is designed and constructed using certain information and in specific circumstances which may change in the course of time. Consequently, models must be reviewed periodically in order to ensure that they continue to function correctly and, if this is not the case, they are adapted or redesigned.

The frequency and thoroughness with which a model is monitored is established on the basis of that model’s materiality.

12.- Management reporting

Senior Group management, both at the different units and at corporate level, monitors model risk on a regular basis through various reports that enable it to obtain a consolidated view and take the appropriate decisions.

13.- Governance

According to the model risk control framework, the models committee is the body responsible for authorizing the use of models in management. Each business unit has a models committee that is responsible for deciding on the approval of the local use of models once the consent of the corporate models committee has been obtained. Pursuant to current Group policy, all models submitted to a models committee must be accompanied by an internal validation report.

i) Strategic risk

Strategic risk is one of the risks considered by the Group to be transversal. In 2015 a management and control model was designed for this risk that serves as a benchmark for the Group subsidiaries. This model includes the definition of strategic risk, the functional and governance-related matters and a description of the main processes associated with the management and control of this risk.

Strategic risk is the risk associated with strategic decisions and with changes in an entity’s general conditions that have a significant impact on its business model and its medium- and long-term strategy.

An entity’s business model is a key element around which strategic risk revolves. It must be viable and sustainable, i.e. capable of generating acceptable results each year and for at least three years into the future.

Three categories or subtypes of strategic risk can be distinguished:

• Business model risk: the risk associated with an entity’s business model. This includes, inter alia, the risk that the business model may become outdated or irrelevant and/or may no longer have the value to generate the desired results. This risk is caused both by external factors (macroeconomic, regulatory, social and political matters, changes in the banking industry, etc.) and by internal factors (strength and stability of the income statement, distribution model/channels, income and cost structure, operational efficiency, suitability of human resources and systems, etc.).

• Strategy design risk: the risk associated with the strategy reflected in the entity’s five-year strategic plan. More specifically, it includes the risk that this plan may prove to be inadequate in terms of its nature or due to the assumptions considered, leading to unexpected results. Another factor that should be borne in mind is the opportunity cost of designing another more effective strategy or even that arising from a lack of action if no such strategy is designed.

• Strategy execution risk: the risk associated with the implementation processes of three- and five-year strategic plans. Due to the medium- and long-term nature of such plans, their execution often entails risk, as a result of its complexity and the numerous variables involved. Other sources of risk to be considered are inadequate resources, change management and, lastly, the inability to respond to changes in the business environment.

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In addition, for the purpose of managing and controlling strategic risk, the transversal risks associated with corporate development transactions must be taken into consideration, since they can represent a significant source of risk for the business model. These transactions are understood to be: those resulting in a change in an entity’s scope and activity, acquisitions or transfers of significant ownership interests or assets, joint ventures, strategic alliances, shareholders agreements and capital transactions.

Lastly, other types of risk must be taken into account the origin of which may be other than strategic in nature (credit, market, operational and compliance risks, etc.). These risks may have a significant impact on an entity’s financial health and also affect its strategy and business model; therefore, they must be identified, assessed, managed and controlled.

Thus, top risks are those risks with a material impact on an entity’s earnings, liquidity or capital or risks that may have undesired concentrations. These risks can reduce the entity’s distance to default.

In addition, emerging and evolving risks are those risks that had not appeared before or which have taken on a different form. Although these risks often involve a high level of uncertainty and are very difficult to quantify, their impact could be significant over a medium-long term time horizon.

j) Capital risk

The Group defines capital risk as the risk that the Group or any of its companies may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

The objectives in this connection include most notably:

• To meet the internal capital and capital adequacy targets

• To meet the regulatory requirements

• To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.)

• To support the growth of the businesses and any strategic opportunities that may arise

The Group has a capital adequacy position that surpasses the levels required by regulations and the European Central Bank. In 2015 the Group continued to bolster its main capital ratios in response to the difficult economic and financial environment and the new regulatory demands. It began the year with a EUR 7,500 million capital increase and established a dividend policy that guarantees the organic generation of capital.

At the end of 2015 the ECB notified each bank of its minimum prudential capital requirements for the following year. In 2016, at consolidated level, Santander Group must have a minimum phase-in CET1 capital ratio of 9.75% (9.5% is the requirement for Pillar 1, Pillar 2 and the capital conservation buffer, and 0.25% is the requirement for being a global systemically important bank). At December 31, 2015, the Group’s capital exceeded the ECB’s minimum requirement.

The Group is working towards achieving a fully-loaded CET1 capital ratio in excess of 11% in 2018.

1. Regulatory framework

The regulations known as Basel III, which establish new global capital, liquidity and leverage standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

In Europe, the new standards were implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related Capital Requirements Regulation 575/2013 (“CRR”), which is directly applicable in all EU Member States (as part of the Single Rulebook). In addition, these standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA).

CRD IV was transposed into Spanish legislation through Law 10/2014 on the regulation, supervision and capital adequacy of credit institutions, and its subsequent implementing regulations contained in Royal Decree 84/2015. The CRR is directly applicable in EU Member States as from January 1, 2014 and repeals all lower-ranking rules providing for additional capital requirements.

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The CRR establishes a phase-in that will permit a progressive adaptation to the new requirements in the European Union. The phase-in arrangements were incorporated into Spanish regulations through Bank of Spain Circular 2/2014. They affect both the new deductions and the issues and items of capital which cease to be eligible as such under this new regulation. The capital buffers provided for in CRD IV are also subject to phase-in; they are applicable for the first time in 2016 and must be fully implemented by 2019.

The Group shares the ultimate objective pursued by the regulator, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has provided assistance by supporting the regulators and participating in the impact studies to calibrate standards promoted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

Lastly, the latest G-20 summit (Antalya, November 2015) approved the total loss-absorbing capacity (TLAC) requirement for global systemically important banks (G-SIBs), an event which constitutes a major regulatory milestone. Banks are required to have a sufficient buffer of liabilities (capital and contingently convertible debt) that are capable of absorbing losses, either because they convert into capital or because a debt reduction is applied to them. The aim is to enable banks, when faced with the risk of bankruptcy, to regain solvency without requiring the intervention of any government. The TLAC standard has not yet been included in the current legal framework. However, the Financial Stability Board (FSB) has set its entry into force for 2019, with a three-year phase-in arrangement. For January 2019 the FSB proposes a minimum TLAC requirement equal to the higher of 16% of risk-weighted assets and 6% of leverage exposure, and, for January 2022, the higher of 18% of risk-weighted assets and 6.75% of leverage exposure.

The standard stipulates that the liabilities eligible to meet the TLAC requirement must be subordinated to other non-eligible liabilities and may include common equity, preference shares qualifying as Tier 1 capital and subordinated debt qualifying as Tier 2 capital; also, at least 33% of the TLAC-eligible liabilities must be in the form of senior and junior debt.

The FSB standard provides that the TLAC requirement must be met at consolidated level and at the level of each resolution group, as defined in the living wills. It also establishes certain restrictions on the financial support that a parent may provide to a subsidiary in complying with the standard.

In Europe, Directive 2014/59/EU -known as the Bank Recovery and Resolution Directive (BRRD)- was implemented, which pursues objectives similar to those of the TLAC standard.

This directive also includes the concept of loss absorption and a minimum requirement for capital and eligible liabilities (MREL), which is similar to the TLAC requirement. However, there are differences in terms of the ratios established, the scope of application and other definitions. The MREL is applicable to all entities operating in Europe and is not limited to global systemically important banks. It shall begin to apply on January 1, 2016, based on an “entity-by-entity” calibration, with a phase-in period of 48 months, and it is only applicable within the EU.

The MREL regulations will be reviewed at the end of 2016, following a report to be submitted to the European Commission by the EBA.

2. Regulatory capital

At December 31, 2015, the Group met the minimum capital requirements established by current legislation.

Model roll-out

With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches.

The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, the Group continued in 2015 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units.

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To date the Group has obtained authorization from the supervisory authorities to use AIRB approaches for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the United Kingdom and Portugal, as well as for certain portfolios in Germany, Mexico, Brazil, Chile, the Nordic countries (Sweden, Finland and Norway), France and the United States. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe. In 2015 authorization was obtained for the Santander Consumer Nordics auto loan portfolios to switch from the standardized approach to the AIRB approach, while the IRB approach was maintained for the corporate and retail portfolios of PSA France, following the acquisition of this investee.

With regard to operational risk, Santander Group currently uses the standardized approach for regulatory capital calculation provided for in the European Capital Directive. In 2015 the Group stepped up the pace of its transition towards an advanced operational risk management (AORM) approach. The AORM program will enable the Group to have internal capital estimation models in place in the main geographical areas, both for economic capital and stress testing purposes and with a view to their potential application for regulatory capital purposes.

As regards the other risks explicitly addressed in Pillar 1 of the Basel Capital Accord, Santander Group has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

Leverage ratio

The leverage ratio was established within the Basel III regulatory framework as a non-risk-sensitive measure of the capital that financial institutions are required to hold. CRD IV was amended on January 17, 2015 through the modification of Regulation (EU) No 575/2013 to harmonize the calculation criteria with those specified in the Basel Committee’s document entitled “Basel III leverage ratio framework and disclosure requirements”.

This ratio is calculated as Tier 1 capital divided by leverage exposure. Exposure is calculated as the sum of the following items:

• Accounting assets, excluding derivatives and items treated as deductions from Tier 1 capital (for example, the balance of loans is included, but not that of goodwill).

• Off-balance-sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors.

• The net value of derivatives (gains and losses vis-à-vis the same counterparty are netted, less the collateral if certain conditions are met) plus an add-on for potential future exposure.

• An add-on for the potential exposure of securities financing transactions.

• Lastly, an add-on for the exposure of credit derivatives (CDSs).

The leverage ratio is still in the calibration phase and there is no obligation to comply with it until 2018. It is currently set at 3%, a ratio which the Bank surpasses.

Global systemically important banks

The Group is one of 30 banks designated as global systemically important banks (G-SIBs).

Designation as a global systemically important bank is the result of an assessment by the regulators (FSB and BCBS) on the basis of five criteria (size, cross-jurisdictional activity, interconnectedness, substitutability and complexity).

Its designation as a G-SIB obliges the Group to comply with additional requirements. These consist mainly of a capital buffer (the Group belongs to the group of banks with the lowest capital buffer, i.e. 1%), total loss-absorbing capital (TLAC) requirements, the requirement to publicly disclose relevant information more frequently than other banks, greater regulatory requirements for its internal control bodies, special supervision and the requirement to submit special reports to its supervisors.

Compliance with these requirements renders the Group more robust than its domestic rivals.

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3. Economic capital

Economic capital is the capital required, based on an internally-developed model, to support all the risks of the Group’s business activity with a given solvency level. In the Group’s case, the solvency level is determined by the A long-term target rating (two notches above the rating for Spain), which results in the application of a 99.95% confidence level (higher than the regulatory 99.90%) for the purpose of calculating the required capital.

The Group’s economic capital model includes in its measurement all the significant risks incurred by it in its operations. Accordingly, it considers risks such as concentration risk, structural interest rate risk, business risk, pension risk and other risks outside the scope of regulatory Pillar 1 capital requirements. Economic capital also includes the diversification effect, which in the Group’s case, owing to the multinational, multibusiness nature of its operations, is of key importance in determining its overall risk and solvency profile.

Economic capital is a fundamental tool for the internal management and implementation of the Group’s strategy, from the viewpoint of both the assessment of capital adequacy and the management of portfolio and business risk.

With regard to capital adequacy, in the context of Pillar 2 of the Basel Capital Accord, the Group conducts the internal capital adequacy assessment process (ICAAP) using its economic capital model. To this end, it plans the evolution of the business and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it will continue to meet its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital-based metrics make it possible to assess risk-return targets, price transactions on a risk basis and gauge the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

Since it is a uniform risk measure, economic capital makes it possible to explain the distribution of risk across the Group, placing different activities and types of risk in a comparable metric.

RORAC and value creation

The Group has used RORAC methodology in its risk management since 1993, with the following objectives:

• Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and customers, in order to facilitate an optimal allocation of capital.

• Measurement of management of the Group’s units, through the budgetary monitoring of capital requirements and RORAC.

• Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

The RORAC methodology facilitates the comparison, on a like-for-like basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.

The Group periodically assesses the level of and the changes in the value creation (VC) and return on risk-adjusted capital (RORAC) of the Group and of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula: value creation = recurring profit – (average economic capital x cost of capital).

The profit used is obtained by making the required adjustments to accounting profit in order to reflect only the recurring profit obtained by each unit from its business activity.

4. Capital planning and stress tests

Capital stress tests have gained particular significance as a tool for the dynamic evaluation of banks’ risk exposure and capital adequacy. A new forward-looking assessment model has become a key component of capital adequacy analysis.

This forward-looking assessment is based on both macroeconomic and idiosyncratic scenarios that are highly improbable but nevertheless plausible. To conduct the assessment, it is necessary to have robust planning models capable of transferring the effects defined in the projected scenarios to the various elements that have a bearing on the adequacy of a bank’s capital.

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The ultimate goal of capital stress tests is to perform a complete evaluation of banks’ risk exposure and capital adequacy in order to determine any possible capital requirements that would arise if banks failed to meet the regulatory or internal capital targets set.

Internally, the Group has defined a capital planning and stress process, to serve not only as a response to the various regulatory exercises, but also as a key tool integrated in the Bank’s management and strategy.

The aim of the internal capital planning and stress process is to guarantee current and future capital adequacy, even in adverse yet plausible economic scenarios. To this end, taking as a basis the Group’s initial position (as defined by its financial statements, its capital base, its risk parameters and its regulatory ratios), estimates are made of the expected outcomes for the Group in various business environments (including severe recessions as well as “normal” macroeconomic scenarios), and the Group’s capital adequacy ratios, projected generally over a three-year period, are obtained.

The process implemented provides a comprehensive view of the Group’s capital for the time horizon analyzed and in each of the scenarios defined. The analysis incorporates regulatory capital, economic capital and available capital metrics.

The entire process is carried out with the maximum involvement and under the close supervision of senior management, and within a framework that guarantees suitable governance and the application of adequate levels of challenge, review and analysis to all components of the process.

It should be noted that this internal capital planning and stress process is conducted transversally across the entire Group, not only at consolidated level, but also locally at the various units composing the Group. These units use the capital planning and stress process as an internal management tool and to respond to their local regulatory requirements.

During the recent economic crisis, the Group has undergone five stress tests in which it has demonstrated its strength and capital adequacy in the most extreme and severe macroeconomic scenarios. All the tests showed that, due mainly to its business model and current geographical diversification, the Group would continue to generate profits for its shareholders and comply with the most demanding regulatory requirements.

55. Other Disclosures

This Note includes relevant information about additional disclosure requirements.

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55.1 Parent company financial statements

Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2015, 2014 and 2013

	2015		2014		2013
CONDENSED BALANCE SHEETS (Parent company only)	(Millions of Euros)
Assets
Cash and due from banks		63,790		54,238		64,402
Of which:
To bank subsidiaries		10,471		7,911		27,244
Trading account assets		79,474		83,116		63,928
Investment securities		54,807		58,427		53,598
Of which:
To bank subsidiaries		12,191		14,164		20,656
To non-bank subsidiaries		2,978		6,469		—
Net Loans and leases		200,046		203,239		187,758
Of which:
To non-bank subsidiaries		36,204		35,139		23,549
Investment in affiliated companies		80,822		80,275		70,527
Of which:
To bank subsidiaries		68,681		68,135		62,234
To non-bank subsidiaries		12,141		12,140		8,293
Premises and equipment, net		1,781		1,770		1,851
Other assets		15,602		15,737		16,973
Total assets		496,322		496,802		459,037
Liabilities
Deposits		277,035		258,306		247,206
Of which:
To bank subsidiaries		18,365		14,770		21,610
To non-bank subsidiaries		43,954		50,662		46,347
Short-term debt		36,353		48,645		38,391
Long-term debt		41,248		48,596		54,632
Total debt		77,601		97,241		93,023
Of which:
To bank subsidiaries		770		1,397		1,883
To non-bank subsidiaries		17,310		14,160		18,680
Other liabilities		82,842		89,306		70,396
Total liabilities		437,478		444,853		410,625
Stockholders’ equity
Capital stock		7,217		6,292		5,667
Retained earnings and other reserves		51,627		45,657		42,745
Total stockholders’ equity		58,844		51,949		48,412
Total liabilities and Stockholders’ Equity		496,322		496,802		459,037

In the financial statements of the Parent Company, investments in subsidiaries, jointly controlled entities and associates are recorded at cost.

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Following are the condensed statements of income of Banco Santander, S.A. for the years ended December 31, 2015, 2014 and 2013.

CONDENSED STATEMENTS OF INCOME (Parent company only)	2015			2014			2013
	(Millions of Euros)
Interest income
Interest from earning assets		6,948			8,701			10,568
Dividends from affiliated companies		3,235			2,249			2,769
Of which:
From bank subsidiaries		2,786			1,929			1,788
From non-bank subsidiaries		449			320			981
		10,183			10,950			13,337
Interest expense		(3,582	)		(5,242	)		(7,178	)
Interest income / (Charges)		6,601			5,708			6,159
Provision for credit losses		(1,002	)		(1,892	)		(2,887	)
Interest income / (Charges) after provision for credit losses		5,599			3,816			3,272
Non interest income:		3,268			5,010			4,875
Non interest expense:		(6,836	)		(7,815	)		(7,741	)
Income before income taxes		2,031			1,011			406
Income tax expense		246			424			462
Net income		2,277			1,435			868

Following are the condensed statement of comprehensive income of Banco Santander, S.A. for the years ended December 31, 2015, 2014 and 2013:

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Millions of Euros
	2015			2014			2013
NET INCOME		2,277			1,435			868
OTHER COMPREHENSIVE INCOME		(356	)		603			1,380
Items that may be reclassified subsequently to profit or loss		(293	)		817			1,315
Available-for-sale financial assets:		(416	)		1,308			1,759
Revaluation gains/(losses)		34			2,154			2,767
Amounts transferred to income statement		(450	)		(846	)		(1,008	)
Other reclassifications		—			—			—
Cash flow hedges:		(1	)		(20	)		3
Revaluation gains/(losses)		(1	)		(20	)		10
Amounts transferred to income statement		—			—			(7	)
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			—			—
Hedges of net investments in foreign operations:		(1	)		(111	)		118
Revaluation gains/(losses)		(1	)		(111	)		118
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Exchange differences:		—			—			—
Non-current assets held for sale:		—			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Other comprehensive income		—			—			—
Income tax		125			(360	)		(565	)
Items that will not be reclassified to profit or loss:		(63	)		(214	)		65
Actuarial gains/(losses) on pension plans		(90	)		(302	)		93
Income tax		27			88			(28	)
TOTAL COMPREHENSIVE INCOME		1,921			2,038			2,248

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Following are the condensed cash flow statements of Banco Santander, S.A. for the years ended December 31, 2015, 2014 and 2013.

CONDENSED CASH FLOW STATEMENTS (Parent company only)	2015			2014			2013
	(Millions of Euros)
1. Cash flows from operating activities
Consolidated profit		2,277			1,435			868
Adjustments to profit		3,081			4,602			6,588
Net increase/decrease in operating assets		2,264			22,469			(50,394	)
Net increase/decrease in operating liabilities		(4,585	)		21,240			(93,431	)
Reimbursements/payments of income tax		(21	)		353			99
Total net cash flows from operating activities (1)		(1,512	)		5,161			(35,482	)
2. Cash flows from investing activities
Investments (-)		(2,149	)		(7,028	)		(1,398	)
Divestments (+)		1,696			1,508			698
Total net cash flows from investment activities (2)		(453	)		(5,520	)		(700	)
3. Cash flows from financing activities
Issuance of own equity instruments		7,500			—			—
Disposal of own equity instruments		2,240			2,833			2,893
Acquisition of own equity instruments		(2,224	)		(2,753	)		(2,857	)
Issuance of debt securities		2,849			4,101			—
Redemption of debt securities		(935	)		(6,074	)		(36	)
Dividends paid		(1,498	)		(909	)		(818	)
Issuance/Redemption of equity instruments		—			—			—
Other collections/payments related to financing activities		(72	)		(173	)		(286	)
Total net cash flows from financing activities (3)		7,860			(2,975	)		(1,104	)
4. Effect of exchange rate changes on cash and cash equivalents (4)		(496	)		(570	)		(148	)
5. Net increase/decrease in cash and cash equivalents (1+2+3+4)		5,399			(3,904	)		(37,434	)
Cash and cash equivalents at beginning of period		7,025			10,929			48,363
Cash and cash equivalents at end of period		12,424			7,025			10,929

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55.2 Preference Shares and Preferred Securities

The following table shows the balance of the preference shares and preferred securities as of December 31, 2015, 2014 and 2013:

	2015		2014		2013
	(Millions of Euros)
Preference shares		449		739		401
Preferred securities		6,749		6,239		3,652
Total at year-end		7,198		6,978		4,053

Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost – Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2015, 2014 and 2013.

Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Santander UK, plc amounting to GBP 200 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. At December 31, 2015, the following issues were convertible into Bank shares:

On March 5, May 8 and September 2, 2014, Banco Santander, S.A. announced that its executive committee had resolved to launch issues of preference shares contingently convertible into newly issued ordinary shares of the Bank (“CCPSs”) for a nominal amount of EUR 1,500 million, USD 1,500 million and EUR 1,500 million, respectively. The interest on the CCPSs, payment of which is subject to certain conditions and is discretionary, was set at 6.25% per annum for the first five years (to be repriced thereafter by applying a 541 basis-point spread to the 5-year Mid-Swap Rate) for the March issue, at 6.375% per annum for the first five years (to be repriced thereafter by applying a 478.8 basis-point spread to the 5-year Mid-Swap Rate) for the May issue and at 6.25% per annum for the first seven years (to be repriced every five years thereafter by applying a 564 basis-point spread to the 5-year Mid-Swap Rate) for the September issue.

On March 25, May 28 and September 30, 2014, the Bank of Spain confirmed that the CCPSs were eligible as Additional Tier 1 capital under the new European capital requirements of Regulation (EU) No 575/2013. The CCPSs are perpetual, although they may be redeemed early in certain circumstances and would convert into newly issued ordinary shares of Banco Santander if the Common Equity Tier 1 ratio of the Bank or its consolidated group fell below 5.125%, calculated in accordance with Regulation (EU) No 575/2013. The CCPSs are traded on the Global Exchange Market of the Irish Stock Exchange.

Furthermore, on January 29, 2014, Banco Santander (Brasil), S.A. launched an issue of Tier 1 perpetual subordinated notes for a nominal amount of USD 1,248 million, of which the Group has acquired 89.6%. The notes are perpetual and would convert into ordinary shares of Banco Santander (Brasil), S.A. if the common equity Tier 1 ratio, calculated as established by the Central Bank of Brazil, were to fall below 5.125%.

This category includes non-cumulative preferred non-voting shares issued by Santander UK plc, Santander UK Group Holdings Limited, BST International Bank, Inc., Santander Holdings USA, Inc., Santander Bank, National Association and Santander Holdings, Ltd.

For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal), and Santander International Preferred, S.A. (Sociedad Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banco Santander, S.A., Banco Santander, (Brasil), S.A. and Santander UK Group.

Preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:

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	Outstanding at December 31, 2015
Preference Shares		Amount in currency (million)		Interest rate	Redemption Option (1)
Issuer/Date of issue	Currency
Santander UK plc, October 1995	Pounds Sterling		80.3	10.375%	No option
Santander UK plc, February 1996	Pounds Sterling		80.3	10.375%	No option
Santander UK plc, March 2004	Pounds Sterling		6.5	5.827%	March 22, 2016
Santander UK plc, May 2006	Pounds Sterling		13.8	6.222%(2)	May 24, 2019
Santander Bank, National Association, August 2000	US Dollar		99.3	12.000%	May 16, 2020
Santander Holdings USA, Inc., May 2006 (*)	US Dollar		75.5	7.300%	May 15, 2011
	Outstanding at December 31, 2015
Preferred Securities		Amount in currency (million)		Interest rate	Maturity date
Issuer/Date of issue	Currency
Banco Santander, S.A.
Banco Español de Crédito, October 2004	Euro		36.5	€CMS 10 + 0.125%	Perpetuity
Banco Español de Crédito (1), November 2004	Euro		106.5	5.5%	Perpetuity
March 2014	Euro		1,500.0	6.25%(3)	Perpetuity
May 2014	US Dollar		1,500.0	6.375%(4)	Perpetuity
September 2014	Euro		1,500.0	6.250%(5)	Perpetuity
Santander Finance Capital, S.A. (Unipersonal)
March 2009	US Dollar		18.2	2.00%	Perpetuity
March 2009	US Dollar		25.0	2.00%	Perpetuity
March 2009	Euro		308.8	2.00%	Perpetuity
March 2009	Euro		153.3	2.00%	Perpetuity
Santander Finance Preferred, S.A. (Unipersonal)
March 2004 (*)	US Dollar		89.3	6.41%	Perpetuity
September 2004	Euro		144.0	€CMS 10 +0.05% subject to a maximum distribution of 8% per annum	Perpetuity
October 2004	Euro		155.0	5.75%	Perpetuity
November 2006 (*)	US Dollar		161.8	6.80%	Perpetuity
January 2007 (*)	US Dollar		109.5	6.50%	Perpetuity
March 2007 (*)	US Dollar		210.4	US3M + 0.52%	Perpetuity
July 2007	Pounds Sterling		4.9	7.01%	Perpetuity
Santander International Preferred S.A. (Sociedad Unipersonal)
March 2009	US Dollar		977.0	2.00%	Perpetuity
March 2009	Euro		8.6	2.00%	Perpetuity
Santander UK Group
Abbey National Plc, February 2001(6)	Pounds Sterling		42.5	7.037%	Perpetuity
Abbey National Plc, August 2002	Pounds Sterling		1.8	Fixed to 6.984% until February 9, 2018, and thereafter, at a rate reset semi-annually of 1.86% per annum + Libor GBP (6M)	Perpetuity
Banco Santander (Brasil), S.A.
January 2014	US Dollar		116.5	7.38%	October 29, 2049

(1) From these dates the issuer can redeem the shares, subject to prior authorization by the national supervisor.

(2) That issuance is a Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Dividends will accrue on a principal amount equal to £1,000 per Preference Share at a rate of 6.222 per cent. per annum in respect of the period from (and including) May 24, 2006 (the Issue Date) to (but excluding) May 24, 2019 (the First Call Date) and thereafter at a rate reset quarterly equal to 1.13 per cent. per annum above the London interbank offered rate for three-month sterling deposits. From (and including) the Issue Date to (but excluding) the First Call Date, dividends, if declared, will be paid annually in arrears on May 24, in each year. Subject as provided herein, the first such dividend payment date will be May 24, 2007 and the last such dividend payment date will be the First Call Date. From (and including) the First Call Date, dividends, if declared, will be paid quarterly in arrears on May 24, August 24, November 24 and February 24, in each year. Subject as provided herein, the first such dividend payment date will be August 24, 2019.

(3) Payment is subject to certain conditions and to the discretion of the Bank. The 6.25% interest rate is set for the first five years. After that, it will be reviewed by applying a margin of 541 basis points on the five-year Mid-Swap Rate.

(4) Payment is subject to certain conditions and to the discretion of the Bank. The 6.375% interest rate is set for the first five years. After that, it will be reviewed by applying a margin of 478.8 basis points on the five-year Mid-Swap Rate.

(5) Payment is subject to certain conditions and to the discretion of the Bank. The 6.25% interest rate is set for the first five years. After that, it will be reviewed by applying a margin of 564 basis points on the five-year Mid-Swap Rate.

(6) From February 14, 2026, this issue will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on a five-year specified United Kingdom government security.

(*) Listed in the U.S.

F-295

In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Preferred, S.A. (Unipersonal), Santander Finance Capital, S.A. (Unipersonal), Santander International Preferred, S.A. (Unipersonal), Santander Issuances, S.A., and Santander US Debt, S.A. (Sociedad Unipersonal) - issuers of registered securities guaranteed by Banco Santander, S.A. - do not file the financial statements required for a registrant by Regulation S-X as:

• Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5 and 6 are listed in the United States). No other subsidiary of the Bank guarantees such securities.

• Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

• Santander International Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

• Santander Issuances, S.A. is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the subordinated debt (with one issuance of 1,500 million USD, issued in November 2015 and listed in United States). No other subsidiary of the Bank guarantees such securities.

• Santander US Debt, S.A. (Sociedad Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the senior debt (not listed in United States). No other subsidiary of the Bank guarantees such securities.

F-296

Exhibit I

Subsidiaries of Banco Santander, S.A. (1)

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
2 & 3 Triton Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
A & L CF (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF (Jersey) Limited (e)	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (10) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (11) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (8) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF March (5) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF March (6) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF September (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF September (4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A N Loans Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
A&L Services Limited	Isle of Man		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Abbey Business Services (India) Private Limited	India		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey Covered Bonds (Holdings) Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Abbey Covered Bonds (LM) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Abbey Covered Bonds LLP	United Kingdom		—				(a)		—			—		SECURITISATION
Abbey National (America) Holdings Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Beta Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Business Office Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Abbey National International Limited	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Abbey National Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Nominees Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Abbey National North America Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National North America LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Pension (Escrow Services) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Abbey National PLP (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Property Investments	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National September Leasing (3) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Abbey National Treasury Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services Overseas Holdings	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Treasury Services plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Abbey National UK Investments	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey Stockbrokers (Nominees) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Abbey Stockbrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Ablasa Participaciones, S.L.	Spain		18.94	%		81.06	%		100.00	%		100.00	%	HOLDING COMPANY
Acoghe, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	HOTEL OPERATIONS

F-297

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Administración de Bancos Latinoamericanos Santander, S.L.	Spain		24.11	%		75.89	%		100.00	%		100.00	%	HOLDING COMPANY
Aevis Europa, S.L.	Spain		68.80	%		0.00	%		68.80	%		68.80	%	CARDS
AFB SAM Holdings, S.L.	Spain		1.00	%		49.50	%		100.00	%		100.00	%	HOLDING COMPANY
Afisa S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
AKB Marketing Services Sp. z.o.o. w likwidacji (b)	Poland		0.00	%		81.65	%		100.00	%		100.00	%	MARKETING
ALIL Services Limited	Isle of Man		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Aljarafe Golf, S.A. (b)	Spain		0.00	%		89.41	%		89.41	%		89.41	%	PROPERTY
Aljardi SGPS, Lda.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Bank plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Finance (Holdings) plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester Financing plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Derivatives No.3)     Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Derivatives) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Alliance & Leicester Personal Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance Corporate Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Altamira Santander Real Estate, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Amazonia Trade Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
AN (123) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Andaluza de Inversiones, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
ANITCO Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Aquanima Brasil Ltda.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Aquanima Chile S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Aquanima México S. de R.L. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Aquanima S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Argenline, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Atlantes Azor No. 1	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Azor No. 2	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 2	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 3	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 4	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 5	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 6	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 7	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 1 FTC	Portugal		—				(a)		—			—		SECURITISATION
Atlantes Mortgage No. 1 plc	Ireland		—				(a)		—			—		SECURITISATION
Atlantes NPL No. 1 - Banif	Portugal		—				(a)		—			—		SECURITISATION
Atlantes SME No. 4	Portugal		—				(a)		—			—		SECURITISATION
Atlantes SME No. 5	Portugal		—				(a)		—			—		SECURITISATION

F-298

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Atlantys Espacios Comerciales, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Atual Companhia Securitizadora de Créditos Financeiros	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	FINANCIAL SERVICES
Auto ABS 2012-3 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
Auto ABS DFP Master Compartment France 2013	France		—				(a)		—			—		SECURITISATION
Auto ABS FCT Compartiment 2011-1 (b)	France		—				(a)		—			—		SECURITISATION
Auto ABS FCT Compartiment 2012-1	France		—				(a)		—			—		SECURITISATION
Auto ABS FCT Compartiment 2013-2	France		—				(a)		—			—		SECURITISATION
Auto ABS French Loans Master	France		—				(a)		—			—		SECURITISATION
Auto ABS Swiss Leases 2013 GmbH	Switzerland		—				(a)		—			—		SECURITISATION
Auto ABS UK Loans PLC	United Kingdom		—				(a)		—			—		SECURITISATION
Auto ABS2 FCT Compartiment 2013-A	France		—				(a)		—			—		SECURITISATION
Auto ABS3 FCT Compartiment 2014-1	France		—				(a)		—			—		SECURITISATION
Auttar HUT Processamento de Dados Ltda.	Brazil		0.00	%		78.98	%		100.00	%		100.00	%	TECHNOLOGY SERVICES
Aviación Antares, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Británica, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Centaurus, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Intercontinental, A.I.E.	Spain		65.00	%		0.00	%		65.00	%		65.00	%	FULL-SERVICE LEASING
Aviación RC II, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Real, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Regional Cántabra, A.I.E.	Spain		73.58	%		0.00	%		73.58	%		73.58	%	FULL-SERVICE LEASING
Aviación Scorpius, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Tritón, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aymoré Crédito, Financiamento e Investimento S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	FINANCE
Banbou S.A.R.L.	France		0.00	%		90.00	%		100.00	%		100.00	%	HOLDING COMPANY
Banca PSA Italia S.p.A.	Italy		0.00	%		50.00	%		50.00	%		50.00	%	BANKING
Banco Bandepe S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	BANKING
Banco Bonsucesso Consignado S.A.	Brazil		0.00	%		53.55	%		60.00	%		—		BANKING
Banco de Albacete, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Banco de Asunción, S.A. in voluntary liquidation (b)	Paraguay		0.00	%		99.33	%		99.33	%		99.33	%	BANKING
Banco Madesant - Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander - Chile	Chile		0.00	%		67.12	%		67.18	%		67.18	%	BANKING
Banco Santander (Brasil) S.A.	Brazil		13.72	%		75.53	%		89.86	%		89.66	%	BANKING
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México	Mexico		0.00	%		75.07	%		99.99	%		99.99	%	BANKING
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México como Fiduciaria del Fideicomiso 100740	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	FINANCE
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México como Fiduciaria del Fideicomiso 2002114	Mexico		0.00	%		75.03	%		100.00	%		100.00	%	HOLDING COMPANY
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México como Fiduciaria del Fideicomiso GFSSLPT	Mexico		0.00	%		75.06	%		100.00	%		100.00	%	FINANCE
Banco Santander (Panamá), S.A.	Panama		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander (Suisse) SA	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander Bahamas International Limited	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING

F-299

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Banco Santander Consumer Portugal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander de Negocios Colombia S.A.	Colombia		0.00	%		99.99	%		99.99	%		99.99	%	FINANCE
Banco Santander International	United States		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander Perú S.A.	Peru		99.00	%		1.00	%		100.00	%		100.00	%	BANKING
Banco Santander Puerto Rico	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander Río S.A.	Argentina		0.00	%		99.30	%		98.44	%		98.44	%	BANKING
Banco Santander Totta, S.A.	Portugal		0.00	%		99.83	%		99.94	%		99.91	%	BANKING
Banco Santander, S.A.	Uruguay		97.75	%		2.25	%		100.00	%		100.00	%	BANKING
Banif International Bank, Ltd	The Bahamas		0.00	%		99.83	%		100.00	%		—		BANKING
Bank Zachodni WBK S.A.	Poland		69.41	%		0.00	%		69.41	%		69.41	%	BANKING
Bansa Santander S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Bansalud, S.L.	Spain		72.34	%		12.00	%		84.34	%		84.34	%	TECHNOLOGY SERVICES
Bansamex, S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	CARDS
Bayones ECA Limited	Ireland		—				(a)		—			—		FINANCE
BCLF 2013-1 B.V.	The Netherlands		—				(a)		—			—		SECURITISATION
Besaya ECA Limited	Ireland		—				(a)		—			—		FINANCE
Bilkreditt 1 Limited (b)	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 2 Limited	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 3 Limited	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 4 Limited	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 5 Limited	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 6 Limited	Ireland		—				(a)		—			—		SECURITISATION
Bilkreditt 7 Designated Activity Company	Ireland		—				(a)		—			—		SECURITISATION
Bonsucesso Tecnología LTDA.	Brazil		0.00	%		53.55	%		100.00	%		—		IT SERVICES
BPV Promotora de Vendas e Cobrança Ltda.	Brazil		0.00	%		53.55	%		100.00	%		—		FINANCE
BRS Investments S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
BST International Bank, Inc.	Puerto Rico		0.00	%		99.83	%		100.00	%		100.00	%	BANKING
BW Guirapá I S.A.	Brazil		0.00	%		76.49	%		85.70	%		66.19	%	HOLDING COMPANY
BZ WBK Asset Management S.A.	Poland		50.00	%		34.71	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
BZ WBK Faktor Sp. z o.o.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	FINANCIAL SERVICES
BZ WBK Finanse Sp. z o.o.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	FINANCIAL SERVICES
BZ WBK Inwestycje Sp. z o.o.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	SECURITIES COMPANY
BZ WBK Lease S.A.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	LEASING
BZ WBK Leasing S.A.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	LEASING
BZ WBK Nieruchomości S.A.	Poland		0.00	%		69.40	%		99.99	%		99.99	%	SERVICES
BZ WBK Towarzystwo Funduszy Inwestycyjnych S.A.	Poland		0.00	%		84.71	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
C&C Lucania S.r.l.	Italy		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.	Spain		62.87	%		0.00	%		62.87	%		62.87	%	FINANCE
Cántabra de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cántabro Catalana de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-300

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
CAPB Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Capital Street Delaware LP	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street REIT Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street S.A.	Luxembourg		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Carfax (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Carfinco Financial Group Inc.	Canada		96.42	%		0.00	%		96.42	%		100.00	%	HOLDING COMPANY
Carfinco Inc.	Canada		0.00	%		96.42	%		100.00	%		—		HOLDING COMPANY
Carpe Diem Salud, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Cartera Mobiliaria, S.A., SICAV	Spain		0.00	%		81.12	%		95.46	%		93.43	%	SECURITIES INVESTMENT
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México	Mexico		0.00	%		75.05	%		99.97	%		99.97	%	SECURITIES COMPANY
Cater Allen Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cater Allen International Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Cater Allen Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Cater Allen Lloyd’s Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cater Allen Syndicate Management Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Cavalsa Gestión, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
CCAP Auto Lease Ltd.	United States		0.00	%		58.94	%		100.00	%		100.00	%	LEASING
Central Eólica Angical S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Caititu S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Coqueirinho S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Corrupião S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Inhambu S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Tamanduá Mirim S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Central Eólica Teiu S.A.	Brazil		0.00	%		76.49	%		100.00	%		66.19	%	ELECTRICITY PRODUCTION
Centro de Capacitación Santander, A.C.	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	NOT-FOR-PROFIT INSTITUTE
Centros Comerciales Metropolitanos, S.A.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	SHOPPING CENTRE
Certidesa, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	LEASE OF AIRCRAFT
Chiplow Wind Farm Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Chrysler Capital Auto Receivables LLC (consolidated)	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Chrysler Capital Master Auto Receivables Funding 2 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Chrysler Capital Master Auto Receivables Funding LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Club Zaudin Golf, S.A. (b)	Spain		0.00	%		85.07	%		95.15	%		95.11	%	SERVICES
Compagnie Générale de Crédit aux Particuliers - Crédipar S.A.	France		0.00	%		50.00	%		100.00	%		—		BANKING
Compagnie pour la Location de Véhicules - CLV	France		0.00	%		50.00	%		100.00	%		—		FINANCE

F-301

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Conaraz Inversiones, SICAV, S.A. (b)	Spain		76.24	%		4.54	%		81.86	%		81.86	%	OPEN-END INVESTMENT COMPANY
Crawfall S.A.	Uruguay		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Dansk Auto Finansiering 1 Ltd	Ireland		—				(a)		—			—		SECURITISATION
Darep Limited	Ireland		100.00	%		0.00	%		100.00	%		100.00	%	REINSURANCE
Desarrollo de Infraestructuras de Castilla, S.A.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	WATER SUPPLY
Desarrollo Urbano de Patraix, S.A.	Spain		0.00	%		68.72	%		100.00	%		45.16	%	PROPERTY
Digital Procurement Holdings N.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Diners Club Spain, S.A.	Spain		75.00	%		0.00	%		75.00	%		75.00	%	CARDS
Dirección Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Dirgenfin, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	REAL ESTATE DEVELOPMENT
Drive Auto Receivables Trust 2015-A	United States		—				(a)		—			—		SECURITISATION
Drive Auto Receivables Trust 2015-B	United States		—				(a)		—			—		SECURITISATION
Drive Auto Receivables Trust 2015-C	United States		—				(a)		—			—		SECURITISATION
Drive Auto Receivables Trust 2015-D	United States		—				(a)		—			—		SECURITISATION
Drive Auto Receivables Trust 2016-A	United States		—				(a)		—			—		INACTIVE
Electrolyser, S.A. de C.V.	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	SERVICES
Empresas Banesto 5, Fondo de Titulización de Activos (b)	Spain		—				(a)		—			—		SECURITISATION
Entidad de Desarrollo a la Pequeña y Micro Empresa Santander Consumo Perú S.A.	Peru		55.00	%		0.00	%		55.00	%		55.00	%	FINANCE
Erestone S.A.S.	France		0.00	%		90.00	%		90.00	%		90.00	%	PROPERTY
Evidence Previdência S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	HOLDING COMPANY
Explotaciones Urbanas Españolas, S.L.U.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	HOTEL OPERATIONS
F. Café Prestadora de Serviços Ltda.	Brazil		0.00	%		89.25	%		100.00	%		—		SERVICES
FFB - Participações e Serviços, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Fideicomiso Financiero Super Letras Hipotecarias - clase I (b)	Argentina		0.00	%		99.30	%		100.00	%		100.00	%	TRUST SERVICES
Fideicomiso Financiero Super Letras Hipotecarias - clase II (b)	Argentina		0.00	%		99.30	%		100.00	%		100.00	%	TRUST SERVICES
Finance Professional Services, S.A.S.	France		0.00	%		100.00	%		100.00	%		—		SERVICES
Financiera El Corte Inglés, E.F.C., S.A.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	FINANCE
First National Motor Business Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Contracts Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Facilities Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
First National Motor Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Tricity Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Fomento e Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Fondo de Titulización de Activos PYMES Banesto 3 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 10	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 11	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 3 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 4 (b)	Spain		—				(a)		—			—		SECURITISATION

F-302

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Fondo de Titulización de Activos PYMES Santander 5 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 6	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 7 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 8 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos PYMES Santander 9	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos RMBS Santander 1	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos RMBS Santander 2	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos RMBS Santander 3	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander 2	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2011-1 (b)	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2012-1	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2013-1	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2014-1	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Empresas 1	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Empresas 2	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Empresas 3	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Hipotecario 7	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Hipotecario 8	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización de Activos Santander Hipotecario 9	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización PYMES Santander 12	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización RMBS Santander 4	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización RMBS Santander 5	Spain		—				(a)		—			—		SECURITISATION
Fondo de Titulización Santander Financiación 1	Spain		—				(a)		—			—		SECURITISATION
Fondos Santander, S.A. Administradora de Fondos de Inversión (in liquidation) (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Formación Integral, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	TRAINING
Fortensky Trading, Ltd.	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Fosse (Master Issuer) Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Fosse Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Fosse Master Issuer PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Fosse PECOH Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Fosse Trustee (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Fosse Trustee Limited	Jersey		—				(a)		—			—		SECURITISATION
FTPYME Banesto 2, Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
FTPYME Santander 2 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
Fuencarral Agrupanorte, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Geoban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Geoban, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Gesban México Servicios Administrativos Globales, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES

F-303

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Gesban Santander Servicios Profesionales Contables Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Gesban Servicios Administrativos Globales, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	SERVICES
Gesban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
Gestión de Instalaciones Fotovoltaicas, S.L. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Gestora de Procesos S.A. in liquidation (b)	Peru		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Gestora Patrimonial Calle Francisco Sancha 12, S.L.	Spain		68.80	%		0.00	%		68.80	%		68.80	%	SECURITIES AND PROPERTY MANAGEMENT
Getnet Adquirência e Serviços para Meios de Pagamento S.A.	Brazil		0.00	%		78.98	%		88.50	%		88.50	%	PAYMENT SERVICES
Gieldokracja Spólka z o.o.	Poland		0.00	%		69.41	%		100.00	%		100.00	%	SERVICES
Girobank Carlton Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Girobank Investments Ltd (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Global Carihuela, S.A.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Global Murex Iberia, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Golden Bar (Securitisation) S.r.l.	Italy		—				(a)		—			—		SECURITISATION
Golden Bar Stand Alone 2012-1	Italy		—				(a)		—			—		SECURITISATION
Golden Bar Stand Alone 2013-1	Italy		—				(a)		—			—		SECURITISATION
Golden Bar Stand Alone 2014-1	Italy		—				(a)		—			—		SECURITISATION
Golden Bar Stand Alone 2015-1	Italy		—				(a)		—			—		SECURITISATION
Green Energy Holding Company, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Grupo Alcanza, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Grupo Empresarial Santander, S.L.	Spain		99.11	%		0.89	%		100.00	%		100.00	%	HOLDING COMPANY
Grupo Financiero Santander México, S.A.B. de C.V.	Mexico		51.26	%		23.81	%		75.11	%		75.09	%	HOLDING COMPANY
GTS El Centro Equity Holdings, LLC	United States		0.00	%		82.04	%		82.04	%		81.94	%	HOLDING COMPANY
GTS El Centro Project Holdings, LLC (r)	United States		0.00	%		82.04	%		100.00	%		100.00	%	HOLDING COMPANY
Guaranty Car, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	AUTOMOTIVE
Habitatrix, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Hipototta No. 1 FTC	Portugal		—				(a)		—			—		SECURITISATION
Hipototta No. 1 plc	Ireland		—				(a)		—			—		SECURITISATION
Hipototta No. 4 FTC	Portugal		—				(a)		—			—		SECURITISATION
Hipototta No. 4 plc	Ireland		—				(a)		—			—		SECURITISATION
Hipototta No. 5 FTC	Portugal		—				(a)		—			—		SECURITISATION
Hipototta No. 5 plc	Ireland		—				(a)		—			—		SECURITISATION
Hipototta No. 7 Limited (b)	Ireland		—				(a)		—			—		SECURITISATION
Hispamer Renting, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Holbah II Limited	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holbah Santander Limited	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holding Jaureguizahar 2002, S.A.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Holmes Funding Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Holmes Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Holmes Master Issuer plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Holmes Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION

F-304

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Holneth B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Ibérica de Compras Corporativas, S.L.	Spain		97.17	%		2.82	%		100.00	%		100.00	%	E-COMMERCE
ICG do Brasil, S.A.	Brazil		0.00	%		100.00	%		100.00	%		—		HOLDING COMPANY
Independence Community Bank Corp.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Independence Community Commercial Reinvestment Corp.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Ingeniería de Software Bancario, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	IT SERVICES
Inmo Francia 2, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Inmobiliária Das Avenidas Novas, S.A.	Portugal		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Inmobiliaria Metrogolf, S.A.	Portugal		0.00	%		68.72	%		100.00	%		100.00	%	SHOPPING CENTRE
Insurance Funding Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Integry Tecnologia e Serviços A H U Ltda.	Brazil		0.00	%		78.98	%		100.00	%		100.00	%	TECHNOLOGY SERVICES
Interfinance Holanda B.V.	The Netherlands		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Inversiones Capital Global, S.A.	Spain		95.46	%		4.54	%		100.00	%		100.00	%	HOLDING COMPANY
Inversiones Casado del Alisal, S.A.	Spain		100.00	%		0.00	%		100.00	%		—		PROPERTY
Inversiones Marítimas del Mediterráneo, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	INACTIVE
Isban Argentina S.A.	Argentina		87.42	%		12.58	%		100.00	%		100.00	%	FINANCIAL SERVICES
Isban Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Isban Chile S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban DE GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban U.K., Ltd.	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Kelmarsh Wind Farm Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
La Unión Resinera Española, S.A. in liquidation	Spain		76.79	%		19.55	%		96.35	%		96.35	%	CHEMICALS
La Vital Centro Comercial y de Ocio, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	SHOPPING CENTRE
Langton Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Mortgages Trustee (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Mortgages Trustee Limited	Jersey		—				(a)		—			—		SECURITISATION
Langton PECOH Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Langton Securities (2008-1) plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Securities (2010-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Securities (2010-2) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Securities (2012-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Langton Securities Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Laparanza, S.A.	Spain		61.59	%		0.00	%		61.59	%		61.59	%	AGRICULTURE AND LIVESTOCK
Lease Totta No. 1 FTC (b)	Portugal		—				(a)		—			—		SECURITISATION
Leasetotta No. 1 Limited (b)	Ireland		—				(a)		—			—		SECURITISATION
Liquidity Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FACTORING
Luri 1, S.A. (d)	Spain		26.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri 2, S.A. (d)	Spain		30.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri 4, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri 6, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	REAL ESTATE INVESTMENT

F-305

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Luri Land, S.A. (d)	Belgium		0.00	%		28.20	%		100.00	%		100.00	%	PROPERTY
MAC No. 1 Limited	United Kingdom		—				(a)		—			—		MORTGAGE LOAN COMPANY
Mantiq Investimentos Ltda.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	SECURITIES COMPANY
Master Red Europa, S.L.	Spain		68.80	%		0.00	%		68.80	%		68.80	%	CARDS
Mata Alta, S.L.	Spain		0.00	%		61.59	%		100.00	%		100.00	%	PROPERTY
Merciver, S.L.	Spain		99.90	%		0.10	%		100.00	%		100.00	%	FINANCIAL ADVISORY
Merlion Aviation One Limited	Ireland		51.00	%		0.00	%		51.00	%		—		FULL-SERVICE LEASING
Metroparque, S.A.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	SHOPPING CENTRE
Metropolitana Castellana, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY MANAGEMENT
Metrovacesa Access Tower GmbH (b)	Germany		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY MANAGEMENT
Metrovacesa Alquileres Urbanos, S.L. Sole-Shareholder Company	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Metrovacesa France, S.A.S.	France		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Metrovacesa Inmuebles y Promociones, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Metrovacesa Mediterranée, S.A.S.	France		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Metrovacesa, S.A.	Spain		68.72	%		0.00	%		68.72	%		55.89	%	PROPERTY
Motor 2011 Holdings Limited (b)	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2011 PLC (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Motor 2012 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2012 PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Motor 2013-1 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2013-1 PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Motor 2014-1 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2014-1 PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Motor 2015-1 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2015-1 PLC	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2015-2 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITISATION
Motor 2015-2 PLC	United Kingdom		—				(a)		—			—		SECURITISATION
Naviera Mirambel, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Naviera Trans Gas, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Naviera Trans Iron, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	LEASING
Naviera Trans Ore, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Naviera Trans Wind, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Norbest AS	Norway		7.94	%		92.06	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Novimovest - Fundo de Investimento Imobiliário	Portugal		0.00	%		78.46	%		78.59	%		77.26	%	INVESTMENT FUND
NW Services CO.	United States		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Oildor, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Open Bank, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Optimal Alternative Investments, S.G.I.I.C., S.A. in liquidation (b)	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Investment Services SA	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland Euro Fund	Ireland		0,00	%		54,18	%		51,25	%		51,25	%	FUND MANAGEMENT COMPANY

F-306

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland US Dollar Fund	Ireland		0,00	%		44,14	%		51,62	%		51,62	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ltd / Optimal Strategic US Equity Series (consolidated)	The Bahamas		0,00	%		55,62	%		56,10	%		54,89	%	FUND MANAGEMENT COMPANY
Parasant SA	Switzerland		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Paseo Comercial Carlos III, S.A.	Spain		0.00	%		34.36	%		50.00	%		50.00	%	SHOPPING CENTRE
PBE Companies, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
PECOH Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITISATION
Penmanshiel Energy Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Pentapolitano, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Pereda Gestión, S.A.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	HOLDING COMPANY
Phoenix C1 Aviation Limited	Ireland		51.00	%		0.00	%		51.00	%		—		FULL-SERVICE LEASING
Pingham International, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Portada S.A. in liquidation (b)	Chile		0.00	%		96.17	%		96.17	%		96.17	%	FINANCE
Portal Universia Argentina S.A.	Argentina		0.00	%		75.75	%		75.75	%		75.75	%	INTERNET
Portal Universia Portugal, Prestação de Serviços de Informática, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Portal Universia, S.A.	Spain		0.00	%		94.72	%		94.72	%		88.07	%	INTERNET
Produban Servicios Informáticos Generales, S.L.	Spain		99.96	%		0.04	%		100.00	%		100.00	%	SERVICES
Produban Serviços de Informática S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Programa Multi Sponsor PMS, S.A.	Spain		50.00	%		50.00	%		100.00	%		100.00	%	ADVERTISING
Project Maple I B.V.	The Netherlands		0.00	%		68.72	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Promociones Vallebramen, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
PSA Finance Suisse, S.A.	Switzerland		0.00	%		50.00	%		100.00	%		—		LEASING
PSA Finance UK Limited	United Kingdom		0.00	%		50.00	%		50.00	%		—		FINANCE
PSA Financial Services Spain, E.F.C, S.A.	Spain		0.00	%		50.00	%		50.00	%		—		FINANCE
PSA Lion Deutschland GmbH	Germany		0.00	%		50.00	%		50.00	%		—		BANKING
Punta Lima, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Reintegra, S.A.	Spain		55.00	%		45.00	%		100.00	%		100.00	%	SERVICES
Reliz Sp. z o.o. w upadłości likwidacyjnej (b)	Poland		0.00	%		69.41	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Retail Financial Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Retop S.A.	Uruguay		100.00	%		0.00	%		100.00	%		—		FINANCE
Riobank International (Uruguay) SAIFE (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Roc Aviation One Designated Activity Company	Ireland		100.00	%		0.00	%		100.00	%		—		FULL-SERVICE LEASING
Roc Shipping One Limited	Ireland		51.00	%		0.00	%		51.00	%		—		FULL-SERVICE LEASING
Rosteral, SICAV, S.A. (b)	Spain		99.85	%		0.13	%		99.98	%		99.98	%	OPEN-END INVESTMENT COMPANY
Sadorma 2003, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	HOTEL OPERATIONS
Saja Eca Limited	Ireland		—				(a)		—			—		FINANCE
SAM UK Investment Holdings Limited	United Kingdom		77.67	%		22.33	%		100.00	%		100.00	%	HOLDING COMPANY
Sancap Investimentos e Participações S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	HOLDING COMPANY
Saninv - Gestão e Investimentos, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sansol S.r.l.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander (CF Trustee Property Nominee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES

F-307

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander (CF Trustee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander (UK) Group Pension Schemes Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Agente de Valores Limitada	Chile		0.00	%		67.43	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Ahorro Inmobiliario 2, S.I.I., S.A.	Spain		85.50	%		0.01	%		85.51	%		85.51	%	REAL ESTATE INVESTMENT
Santander AM Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Asset Finance (December) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Asset Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Asset Management - Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Asset Management Chile S.A.	Chile		0.01	%		99.93	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Back-Offices Globales Especializados, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Back-Offices Globales Mayoristas, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Santander Banca de Inversión Colombia, S.A.S.	Colombia		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander BanCorp	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Bank & Trust Ltd.	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Bank, National Association	United States		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Benelux, S.A./N.V.	Belgium		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander Brasil Administradora de Consórcio Ltda.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	SERVICES
Santander Brasil Advisory Services S.A.	Brazil		0.00	%		86.14	%		96.52	%		96.52	%	CONSULTANCY SERVICES
Santander Brasil, EFC, S.A.	Spain		0.00	%		89.25	%		100.00	%		100.00	%	FINANCE
Santander Capital Desarrollo, SGEIC, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	VENTURE CAPITAL COMPANY
Santander Capital Structuring, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	COMMERCE
Santander Capitalização S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INSURANCE
Santander Carbón Finance, S.A.	Spain		99.98	%		0.02	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Cards Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	CARDS
Santander Cards Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	CARDS
Santander Cards UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Central Hispano Issuances Limited (b)	Cayman Islands		100.00	%		0.00	%		100.00	%		100.00	%	INACTIVE
Santander Chile Holding S.A.	Chile		22.11	%		77.72	%		99.83	%		99.54	%	HOLDING COMPANY
Santander Commercial Paper, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consulting (Beijing) Co., Ltd.	China		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Consumer (UK) plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer ABS Funding 1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer ABS Funding 2 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer ABS Funding 3 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Auto Receivables Funding 2011-A LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2013-B1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2013-B2 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2013-B3 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2013-L1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2014-B1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2014-B2 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE

F-308

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander Consumer Auto Receivables Funding 2014-B3 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2014-B4 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2014-B5 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2014-B6 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	INACTIVE
Santander Consumer Auto Receivables Funding 2014-L1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Auto Receivables Funding 2015-L1 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Auto Receivables Funding 2015-L2 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Auto Receivables Funding 2015-L3 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Auto Receivables Funding 2015-L4 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Auto Receivables Funding 2015-L5 LLC	United States		0.00	%		58.94	%		100.00	%		—		INACTIVE
Santander Consumer Auto Specialty Trust 2015-A	United States		—				(a)		—			—		INACTIVE
Santander Consumer Bank AG	Germany		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Bank AS	Norway		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Bank S.A.	Poland		0.00	%		81.65	%		100.00	%		100.00	%	BANKING
Santander Consumer Bank S.p.A.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Captive Auto Funding 5 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Captive Auto Funding LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Chile S.A.	Chile		51.00	%		0.00	%		51.00	%		51.00	%	FINANCE
Santander Consumer Credit Funding 3 LLC	United States		0.00	%		58.94	%		100.00	%		—		FINANCE
Santander Consumer Credit Funding I LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Credit Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Benelux B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Media S.r.l. - in liquidazione (b)	Italy		0.00	%		65.00	%		65.00	%		65.00	%	FINANCE
Santander Consumer Finance Oy	Finland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Zrt.	Hungary		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance, S.A.	Spain		63.19	%		36.81	%		100.00	%		100.00	%	BANKING
Santander Consumer Finanse Sp. z o.o.	Poland		0.00	%		81.65	%		100.00	%		100.00	%	SERVICES
Santander Consumer France S.A.S.	France		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Funding 3 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Funding 5 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Holding Austria GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Holding GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer International Puerto Rico LLC	Puerto Rico		0.00	%		58.94	%		100.00	%		—		SERVICES
Santander Consumer Leasing GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Consumer Mediación Operador de Banca-Seguros Vinculado, S.L.	Spain		0.00	%		94.50	%		100.00	%		—		INSURANCE BROKERAGE
Santander Consumer Multirent Sp. z o.o.	Poland		0.00	%		81.65	%		100.00	%		100.00	%	LEASING
Santander Consumer Receivables 10 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Receivables 11 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Receivables 12 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	INACTIVE
Santander Consumer Receivables 3 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE

F-309

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander Consumer Receivables 7 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Receivables 9 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Receivables Funding LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer Renting, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Santander Consumer Services GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Consumer Services, S.A.	Portugal		0.00	%		100.00	%		100.00	%		—		PURCHASE AND SALE AND RENTAL OF VEHICLES
Santander Consumer USA Holdings Inc.	United States		0.00	%		58.94	%		58.94	%		60.46	%	HOLDING COMPANY
Santander Consumer USA Inc.	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Consumer, EFC, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumo, S.A. de C.V., SOFOM, E.R., Grupo Financiero Santander México	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	CARDS
Santander Corredora de Seguros Limitada	Chile		0.00	%		67.20	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Corredores de Bolsa Limitada	Chile		0.00	%		83.23	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Corretora de Câmbio e Valores Mobiliários S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander de Titulización S.G.F.T., S.A.	Spain		81.00	%		19.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Drive Auto Receivables LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Drive Auto Receivables Trust 2012-5	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2012-6	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-1	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-2	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-3	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-4	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-5	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2013-A	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2014-1	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2014-2	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2014-3	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2014-4	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2014-5	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-1	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-2	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-3	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-4	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-5	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S1	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S2	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S3	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S4	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S5	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S6	United States		—				(a)		—			—		SECURITISATION
Santander Drive Auto Receivables Trust 2015-S7	United States		—				(a)		—			—		SECURITISATION

F-310

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.	Spain		56.76	%		0.00	%		56.76	%		56.76	%	VENTURE CAPITAL COMPANY
Santander Envíos, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	TRANSFER OF FUNDS FOR IMMIGRANTS
Santander Equity Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Estates Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Factoring S.A.	Chile		0.00	%		99.83	%		100.00	%		100.00	%	FACTORING
Santander Factoring y Confirming, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FACTORING
Santander Finance 2012-1 LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Financial Exchanges Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Financial Products plc (b)	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Financial Services, Inc.	Puerto Rico		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Fintech Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	SECURITISATION
Santander Fund Administration, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Fundo de Investimento Amazonas Multimercado Crédito Privado Investimento no Exterior	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento Diamantina Multimercado Crédito Privado Investimento no Exterior	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento em Cotas de Fundos de Investimento Contract i Referenciado DI	Brazil		0.00	%		93.48	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento Financial Curto Prazo	Brazil		0.00	%		89.24	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento Guarujá Multimercado Crédito Privado Investimento no Exterior	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento Renda Fixa Capitalization	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento SBAC Referenciado di Crédito Privado	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander Fundo de Investimento Unix Multimercado Crédito Privado	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT FUND
Santander GBM Secured Financing Limited	Ireland		—				(a)		—			—		SECURITISATION
Santander Gestión de Recaudación y Cobranzas Ltda.	Chile		0.00	%		99.83	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Gestión Inmobiliaria, S.A.	Spain		0.01	%		99.99	%		100.00	%		100.00	%	PROPERTY
Santander Global Consumer Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Global Facilities, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY MANAGEMENT
Santander Global Facilities, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Global Property U.S.A., Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Global Property, S.L.	Spain		97.34	%		2.66	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Global Services, S.A. (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Global Sport, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SPORTS OPERATIONS
Santander Guarantee Company	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Hipotecario 1 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
Santander Hipotecario 2 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
Santander Hipotecario 3 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITISATION
Santander Hipotecario, S.A. de C.V., SOFOM, E.R., Grupo Financiero Santander México	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	FINANCE
Santander Holanda B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Holding Internacional, S.A.	Spain		99.95	%		0.05	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Holding Vivienda, S.A. de C.V.	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	SERVICES

F-311

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander Holdings USA, Inc.	United States		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Insurance Agency, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Agency, U.S., LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Santander Insurance Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Insurance Services UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Intermediación Correduría de Seguros, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander International Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander International Products, Plc.	Ireland		99.99	%		0.01	%		100.00	%		100.00	%	FINANCE
Santander Inversiones S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Investment Bank Limited	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Investment Bolsa, Sociedad de Valores, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Investment Chile Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Investment I, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Investment Limited	The Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
Santander Investment Securities Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Investment, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander ISA Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGER
Santander Issuances, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Lease, S.A., E.F.C.	Spain		70.00	%		30.00	%		100.00	%		100.00	%	LEASING
Santander Leasing S.A. Arrendamiento Mercantil	Brazil		0.00	%		89.24	%		99.99	%		99.99	%	LEASING
Santander Leasing, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Lending Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.	Spain		37.36	%		62.64	%		100.00	%		100.00	%	INSURANCE BROKERAGE
Santander Merchant S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Microcrédito Assessoria Financeira S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Operaciones Retail, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Overseas Bank, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Paraty Qif PLC	Ireland		0.00	%		89.25	%		100.00	%		100.00	%	INVESTMENT COMPANY
Santander Participações S.A.	Brazil		0.00	%		89.25	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Pensões - Sociedade Gestora de Fundos de Pensões, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Santander Perpetual, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Private Banking Gestión, S.A., S.G.I.I.C.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Private Banking S.p.A.	Italy		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander Private Banking UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Private Equity, S.A., S.G.E.C.R. (b)	Spain		90.00	%		9.98	%		100.00	%		100.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Santander Private Real Estate Advisory & Management, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Private Real Estate Advisory, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Public Sector SCF, S.A.	France		94.00	%		6.00	%		100.00	%		100.00	%	FINANCE
Santander Real Estate, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY

F-312

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Santander Revolving Asset Funding 1 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Santander Río Servicios S.A.	Argentina		0.00	%		99.97	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Río Trust S.A.	Argentina		0.00	%		99.97	%		100.00	%		100.00	%	SERVICES
Santander Río Valores S.A.	Argentina		0.00	%		99.34	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander RSPE 5 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	INACTIVE
Santander RSPE 6 LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	INACTIVE
Santander S.A. - Serviços Técnicos, Administrativos e de Corretagem de Seguros	Brazil		0.00	%		93.48	%		100.00	%		100.00	%	INSURANCE BROKER
Santander S.A. Sociedad Securitizadora	Chile		0.00	%		67.23	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Secretariat Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Securities LLC	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	MANAGEMENT COMPANY
Santander Securities Services Brasil Participações S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Securities Services, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Santander Service GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	SERVICES
Santander Servicios Especializados, S.A. de C.V.	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Tecnología y Operaciones A.E.I.E.	Spain		—				(a)		—			—		SERVICES
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.	Portugal		0.00	%		99.89	%		100.00	%		100.00	%	INSURANCE
Santander Totta, SGPS, S.A.	Portugal		0.00	%		99.89	%		99.89	%		99.89	%	HOLDING COMPANY
Santander Trade Services Limited	Hong Kong		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander UK Foundation Limited	United Kingdom		—				(a)		—			—		CHARITY
Santander UK Group Holdings plc	United Kingdom		77.67	%		22.33	%		100.00	%		100.00	%	FINANCE
Santander UK Investments	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander UK plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander US Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Vivienda, S.A. de C.V. SOFOM, E.R. Grupo Financiero Santander México	Mexico		0.00	%		75.07	%		100.00	%		100.00	%	FINANCE
Santander Vivienda, S.A. de C.V. SOFOM, E.R. Grupo Financiero Santander México como Fiduciaria del Fideicomiso Bursa	Mexico		—				(a)		—			—		SECURITISATION
Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda.	Portugal		0.00	%		99.83	%		100.00	%		100.00	%	HOLDING COMPANY
Santusa Holding, S.L.	Spain		69.76	%		30.24	%		100.00	%		100.00	%	HOLDING COMPANY
SC Austria Finance 2013-1 S.A.	Luxembourg		—				(a)		—			—		SECURITISATION
SC Germany Auto 2010-1 UG (haftungsbeschränkt) (b)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2011-1 UG (haftungsbeschränkt) (b)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2011-2 UG (haftungsbeschränkt) (b)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2013-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2013-2 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2014-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Auto 2014-2 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION

F-313

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
SC Germany Consumer 2013-1 UG (haftungsbeschränkt)	Germany		-				(a)		-			-		SECURITISATION
SC Germany Consumer 2014-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Consumer 15-1 (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Vehicles 2013-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Germany Vehicles 2015-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITISATION
SC Poland Auto 2014-1 Limited	Ireland		—				(a)		—			—		SECURITISATION
SC Poland Consumer 15-1 Sp. z o.o.	Poland		—				(a)		—			—		SECURITISATION
SCF Ajoneuvohallinta Limited	Ireland		—				(a)		—			—		SECURITISATION
SCF Ajoneuvohallinto I Limited	Ireland		—				(a)		—			—		SECURITISATION
SCF Ajoneuvohallinto Limited (b)	Ireland		—				(a)		—			—		SECURITISATION
SCF Rahoituspalvelut 2013 Limited	Ireland		—				(a)		—			—		SECURITISATION
SCF Rahoituspalvelut I Designated Activity Company	Ireland		—				(a)		—			—		SECURITISATION
SCF Rahoituspalvelut Limited	Ireland		—				(a)		—			—		SECURITISATION
SCFI Ajoneuvohallinto Limited	Ireland		—				(a)		—			—		SECURITISATION
SCFI Rahoituspalvelut Limited (b)	Ireland		—				(a)		—			—		SECURITISATION
SCI BANBY PRO	France		0.00	%		90.00	%		100.00	%		100.00	%	PROPERTY
Scottish Mutual Pensions Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Secucor Finance 2013-I Limited	Ireland		—				(a)		—			—		SECURITISATION
Serfin International (b)	Cayman Islands		0.00	%		99.83	%		100.00	%		100.00	%	INACTIVE
Services and Promotions Delaware Corp.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Services and Promotions Miami LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Servicio de Alarmas Controladas por Ordenador, S.A.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	SECURITY
Servicios Corporativos Seguros Serfin, S.A. de C.V. (b)	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sheppards Moneybrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Shiloh III Wind Project, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
SIAF LLC	United States		0.00	%		58.94	%		100.00	%		100.00	%	FINANCE
Silk Finance No. 3 Limited	Ireland		—				(a)		—			—		SECURITISATION
Silk Finance No. 4	Portugal		—				(a)		—			—		SECURITISATION
Sistema 4B, S.L. (consolidated)	Spain		68.80	%		0.00	%		68.80	%		68.80	%	CARDS
Sociedad Integral de Valoraciones Automatizadas, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	APPRAISALS
Società Energetica Vibonese Due S.r.l.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Société Financière de Banque SOFIB	France		0.00	%		50.00	%		50.00	%		—		BANKING
Socur, S.A.	Uruguay		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Sol Orchard Imperial 1 LLC	United States		0.00	%		82.04	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Solar Red, SGPS, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Solarlaser Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
SOV APEX LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Capital Trust IX	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE

F-314

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Sovereign Capital Trust VI	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sovereign Community Development Company	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Delaware Investment Corporation	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Lease Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Sovereign Precious Metals, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PURCHASE AND SALE OF PRECIOUS METALS
Sovereign REIT Holdings, Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Securities Corporation, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
Sovereign Spirit Limited (e)	Bermuda		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Sterrebeeck B.V.	The Netherlands		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Suleyado 2003, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Super Pagamentos e Administração de Meios Eletrônicos S.A. (d)	Brazil		0.00	%		44.62	%		50.00	%		50.00	%	PAYMENT SERVICES
Suzaku Aviation One Limited	United Kingdom		100.00	%		0.00	%		100.00	%		—		LEASING
Suzuki Servicios Financieros, S.L.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	INTERMEDIATION
Svensk Autofinans 1 Limited	Ireland		—				(a)		—			—		SECURITISATION
Svensk Autofinans WH 1 Ltd	Ireland		—				(a)		—			—		SECURITISATION
Swesant SA	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Synergy Abstract, LP (b)	United States		0.00	%		70.00	%		70.00	%		70.00	%	INACTIVE
Taralga Holding Land Trust	Australia		0.00	%		90.00	%		90.00	%		—		PROPERTY
Taralga Holding Nominees 1 PTY Limited	Australia		0.00	%		90.00	%		90.00	%		—		HOLDING COMPANY
Taralga Holding Nominees 2 PTY Limited	Australia		0.00	%		90.00	%		90.00	%		—		HOLDING COMPANY
Taralga Holding Operating Trust	Australia		0.00	%		90.00	%		90.00	%		—		ELECTRICITY PRODUCTION
Taxagest Sociedade Gestora de Participações Sociais, S.A.	Portugal		0.00	%		99.83	%		100.00	%		100.00	%	HOLDING COMPANY
Teatinos Siglo XXI Inversiones S.A.	Chile		50.00	%		50.00	%		100.00	%		100.00	%	HOLDING COMPANY
The Alliance & Leicester Corporation Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
The National & Provincial Building Society Pension Fund Trustees Limited	United Kingdom		—				(a)		—			—		ASSET MANAGEMENT COMPANY
Time Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Time Retail Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Títulos de Renta Fija, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Tonopah Solar I, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Toque Fale Serviços de Telemarketing Ltda.	Brazil		0.00	%		78.98	%		100.00	%		100.00	%	TELEMARKETING
Tornquist Asesores de Seguros S.A. (b)	Argentina		0.00	%		99.99	%		99.99	%		99.99	%	ADVISORY SERVICES
Totta & Açores Inc. Newark	United States		0.00	%		99.83	%		100.00	%		100.00	%	BANKING
Totta (Ireland), PLC	Ireland		0.00	%		99.83	%		100.00	%		100.00	%	FINANCE
Totta Urbe - Empresa de Administração e Construções, S.A.	Portugal		0.00	%		99.83	%		100.00	%		100.00	%	PROPERTY
Trade Maps 3 Hong Kong Limited	Hong Kong		—				(a)		—			—		SECURITISATION
Trade Maps 3 Ireland Limited	Ireland		—				(a)		—			—		SECURITISATION
Trans Rotor Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Tuttle & Son Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
Unicorn Shipping One Designated Activity Company	Ireland		100.00	%		0.00	%		100.00	%		—		LEASING

F-315

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2015			2014			Line of business
Universia Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Chile S.A.	Chile		0.00	%		86.34	%		86.34	%		85.85	%	INTERNET
Universia Colombia S.A.S.	Colombia		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Universia México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Perú, S.A.	Peru		0.00	%		90.77	%		90.77	%		79.93	%	INTERNET
Universia Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Uruguay, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Vailen Management, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Varitelia Distribuciones, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	PROPERTY
Vertiarama, S.L.	Spain		0.00	%		68.72	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Viking Collection Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Vista Capital de Expansión, SGEIC, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Vista Desarrollo, S.A., SCR	Spain		100.00	%		0.00	%		100.00	%		100.00	%	VENTURE CAPITAL COMPANY
W.N.P.H. Gestão e Investimentos Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	PORTFOLIO MANAGEMENT
Wallcesa, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Waypoint Capital Trust I	United States		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
Waypoint Insurance Group, Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Webcasas, S.A.	Brazil		0.00	%		93.48	%		100.00	%		100.00	%	INTERNET
Whitewick Limited	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
WIM Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Winwick Wind Farm Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
WTW Shipping Limited	Ireland		100.00	%		0.00	%		100.00	%		100.00	%	LEASING

(a) Companies over which effective control is exercised.

(b) Company in liquidation as at December 31, 2015.

(c) Pursuant to Article 3 of Royal Decree 1159/2010, of September 17, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(d) See note 2.b.

(e) Company resident in the UK for tax purposes.

(1) The preference share issuer companies are detailed in Exhibit III, together with other relevant information.

F-316

Exhibit II

Companies in which Santander Group has ownership interests of more than 5% (c), associates of Santander Group and jointly controlled entities

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
3E1 Sp. z o.o	Poland		0.00	%		12.26	%		21.60	%		21.60	%	ELECTRICITY PRODUCTION	—
Administrador Financiero de Transantiago S.A.	Chile		0.00	%		13.42	%		20.00	%		20.00	%	COLLECTION AND PAYMENT SERVICES	Associate
Aegon Santander Generales Seguros y Reaseguros, S.A.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Jointly controlled entity
Aegon Santander Portugal Não Vida - Companhia de Seguros, S.A.	Portugal		0.00	%		48.95	%		49.00	%		49.00	%	INSURANCE	Jointly controlled entity
Aegon Santander Portugal Vida - Companhia de Seguros Vida, S.A.	Portugal		0.00	%		48.95	%		49.00	%		49.00	%	INSURANCE	Jointly controlled entity
Aegon Santander Vida Seguros y Reaseguros, S.A.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Jointly controlled entity
Agres, Agrupación Restauradores, S.L.	Spain		0.00	%		43.00	%		43.00	%		43.00	%	RESTAURANTS	Associate
Aguas de Fuensanta, S.A.	Spain		36.78	%		0.00	%		36.78	%		36.78	%	FOOD	Associate
Allfunds Bank Brasil Representações Ltda.	Brazil		0.00	%		25.25	%		50.00	%		—		ADMINISTRATIVE SERVICES	Jointly controlled entity
Allfunds Bank International S.A.	Luxembourg		0.00	%		25.25	%		50.00	%		50.00	%	BANKING	Jointly controlled entity
Allfunds Bank, S.A.	Spain		0.00	%		25.25	%		50.00	%		50.00	%	BANKING	Jointly controlled entity
Allfunds International Schweiz AG	Switzerland		0.00	%		25.25	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Allfunds Nominee Limited	United Kingdom		0.00	%		25.25	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
Anekis, S.A.	Spain		24.75	%		24.75	%		49.50	%		49.50	%	ADVERTISING	Associate
Arena Communications Network, S.L.	Spain		20.00	%		0.00	%		20.00	%		20.00	%	ADVERTISING	Associate
Asturcontinental de Edificaciones, S.L. (consolidated)	Spain		0.00	%		30.93	%		45.00	%		45.00	%	PROPERTY	—
Attijari Factoring Maroc, S.A.	Morocco		0.00	%		24.21	%		24.21	%		28.95	%	FACTORING	Associate
Attijariwafa Bank Société Anonyme (consolidated)	Morocco		0.00	%		5.26	%		5.26	%		5.26	%	BANKING	—
Autopistas del Sol S.A.	Argentina		0.00	%		14.17	%		14.17	%		7.14	%	MOTORWAY CONCESSIONS	—
Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A.	Poland		0.00	%		6.94	%		10.00	%		10.00	%	PENSION FUND MANAGEMENT COMPANY	—
Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		6.94	%		10.00	%		10.00	%	INSURANCE	—
Banco Internacional da Guiné-Bissau, S.A. (a)	Guinea-Bissau		0.00	%		48.92	%		49.00	%		49.00	%	BANKING	—
Banco RCI Brasil S.A.	Brazil		0.00	%		35.60	%		39.89	%		39.89	%	LEASING	Jointly controlled entity
Bank of Beijing Consumer Finance Company	China		0.00	%		20.00	%		20.00	%		20.00	%	FINANCE	Associate
Bank of Shanghai Co., Ltd. (consolidated)	China		7.20	%		0.00	%		7.20	%		7.20	%	BANKING	—
Benim - Sociedade Imobiliária, S.A. (consolidated)	Portugal		0.00	%		25.77	%		25.81	%		25.81	%	PROPERTY	Associate
Bodegas Gran Feudo, S.L.	Spain		21.86	%		0.00	%		21.86	%		—		FOOD	—
Brendenbury, S.L.U.	Spain		0.00	%		40.00	%		40.00	%		—		HOLDING COMPANY	Jointly controlled entity
BZ WBK-Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		34.01	%		49.00	%		66.00	%	INSURANCE	Associate
BZ WBK-Aviva Towarzystwo Ubezpieczeń Ogólnych S.A.	Poland		0.00	%		34.01	%		49.00	%		66.00	%	INSURANCE	Associate
Cantabria Capital, SGEIC, S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY	Associate
Carnes Estellés, S.A. (a)	Spain		21.41	%		0.00	%		21.41	%		21.41	%	FOOD	Associate

F-317

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
Cartera del Norte, S.L. (e)	Spain		0.00	%		0.00	%		0.00	%		36.10	%	FINANCE	Associate
CCPT - ComprarCasa, Rede Serviços Imobiliários, S.A.	Portugal		0.00	%		49.98	%		49.98	%		47.56	%	PROPERTY SERVICES	Jointly controlled entity
Centro de Compensación Automatizado S.A.	Chile		0.00	%		22.37	%		33.33	%		33.33	%	COLLECTION AND PAYMENT SERVICES	Associate
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	TECHNOLOGY	Associate
CNP Santander Insurance Europe Designated Activity Company	Ireland		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE BROKER	Associate
CNP Santander Insurance Life Designated Activity Company	Ireland		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE BROKER	Associate
Cobranza Amigable, S.A.P.I. de C.V.	Mexico		0.00	%		48.56	%		48.56	%		—		COLLECTION SERVICES	Jointly controlled entity
Comder Contraparte Central S.A	Chile		0.00	%		7.44	%		11.09	%		11.09	%	FINANCIAL SERVICES	Associate
Companhia de Crédito, Financiamento e Investimento RCI Brasil	Brazil		0.00	%		35.60	%		39.89	%		39.90	%	FINANCE	Jointly controlled entity
Companhia Promotora UCI	Brazil		0.00	%		25.00	%		25.00	%		25.00	%	FINANCIAL SERVICES	Jointly controlled entity
Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros (consolidated)	Spain		20.53	%		0.55	%		21.08	%		21.08	%	CREDIT INSURANCE	—
Cubico Sustainable Investments Holdings Limited (consolidated)	United Kingdom		0.00	%		32.94	%		32.94	%		100.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Eko Energy Sp. z o.o.	Poland		0.00	%		12.49	%		22.00	%		22.00	%	ELECTRICITY PRODUCTION	—
Farma Wiatrowa Jablowo Sp. z o.o.	Poland		0.00	%		12.26	%		21.60	%		21.60	%	ELECTRICITY PRODUCTION	—
FC2Egestión, S.L.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	ENVIRONMENTAL MANAGEMENT	Jointly controlled entity
Federal Home Loan Bank of Pittsburgh	United States		0,00	%		17,60	%		17,60	%		14,00	%	BANKING	—
Federal Reserve Bank of Boston	United States		0,00	%		30,25	%		30,25	%		30,81	%	BANKING	—
FIDC RCI Brasil I - Financiamento de Veículos	Brazil		—				(d)		—			—		INVESTMENT FUND	Jointly controlled entity
First Wind Texas Holdings LLC	United States		0.00	%		33.00	%		33.00	%		—		HOLDING COMPANY	—
Fondo de Titulización de Activos RMBS Prado I	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 11	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 14	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 15	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 16	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 17	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 18	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización Hipotecaria UCI 10	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fondo de Titulización Hipotecaria UCI 12	Spain		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Fortune Auto Finance Co., Ltd	China		0.00	%		50.00	%		50.00	%		50.00	%	FINANCE	Jointly controlled entity
Friedrichstrasse, S.L.	Spain		35.00	%		0.00	%		35.00	%		35.00	%	PROPERTY	Associate
Generación Andina S.A.C.	Peru		0.00	%		49.78	%		49.78	%		49.78	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Gire S.A.	Argentina		0.00	%		57.92	%		58.33	%		58.33	%	COLLECTION AND PAYMENT SERVICES	Associate
Grupo Alimentario de Exclusivas, S.A. (a)	Spain		40.53	%		0.00	%		40.53	%		40.46	%	FOOD	Associate
Grupo Konecta Centros Especiales de Empleo, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Grupo Konecta Maroc S.A.R.L. à associé unique	Morocco		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Grupo Konecta UK Limited	United Kingdom		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Grupo Konectanet México Servicios, S.A. de C.V.	Mexico		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Grupo Konectanet, S.L.	Spain		0.00	%		40.00	%		40.00	%		51.86	%	HOLDING COMPANY	Jointly controlled entity

F-318

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
HCUK Auto Funding 2015 Ltd	United Kingdom		—				(d)		—			—		SECURITISATION	Jointly controlled entity
HCUK Auto Funding Ltd	United Kingdom		—				(d)		—			—		SECURITISATION	Jointly controlled entity
Hidroatlixco, S.A.P.I. DE C.V.	Mexico		0.00	%		50.00	%		50.00	%		50.76	%	ELECTRICITY PRODUCTION	Jointly controlled entity
HSH Delaware L.P.	United States		0.00	%		69.19	%		0.00	%		0.00	%	HOLDING COMPANY	—
Hyundai Capital Germany GmbH	Germany		0.00	%		49.99	%		49.99	%		49.99	%	SERVICES	Jointly controlled entity
Hyundai Capital UK Limited	United Kingdom		0.00	%		50.01	%		50.01	%		50.01	%	FINANCE	Jointly controlled entity
Imperial Holding S.C.A. (a)	Luxembourg		0.00	%		36.36	%		36.36	%		36.36	%	SECURITIES INVESTMENT	—
Inbond Inversiones 2014, S.L.	Spain		40.00	%		0.00	%		40.00	%		—		FINANCIAL STUDIES	Jointly controlled entity
Indice Iberoamericano de Investigación y Conocimiento, A.I.E.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	INFORMATION SYSTEM	Jointly controlled entity
Inmo Alemania Gestión de Activos Inmobiliarios, S.A.	Spain		0.00	%		20.00	%		20.00	%		20.00	%	HOLDING COMPANY	—
Inversiones ZS América Dos Ltda	Chile		0.00	%		49.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT	Associate
Inversiones ZS América SpA	Chile		0.00	%		49.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT	Associate
Invico S.A.	Poland		0.00	%		14.64	%		21.09	%		21.09	%	COMMERCE	—
Izettle do Brasil Meios de Pagamento S.A.	Brazil		0.00	%		39.49	%		50.00	%		50.00	%	CARDS	Jointly controlled entity
J.C. Flowers I L.P.	United States		0.00	%		10.60	%		4.99	%		4.99	%	HOLDING COMPANY	—
J.C. Flowers II-A L.P.	Canada		0.00	%		69.39	%		4.43	%		4.43	%	HOLDING COMPANY	—
JCF AIV P L.P.	Canada		0.00	%		7.67	%		4.99	%		4.99	%	HOLDING COMPANY	—
JCF BIN II-A	Mauritania		0.00	%		69.52	%		4.43	%		4.43	%	HOLDING COMPANY	—
JCF II-A AIV K L.P.	Canada		0.00	%		69.52	%		0.00	%		0.00	%	HOLDING COMPANY	—
JCF II-A Special AIV K L.P.	Canada		0.00	%		72.29	%		4.99	%		4.99	%	HOLDING COMPANY	—
Jupiter III C.V.	The Netherlands		0.00	%		72.75	%		4.99	%		4.99	%	HOLDING COMPANY	—
Jupiter JCF AIV II-A C.V.	The Netherlands		0.00	%		69.41	%		4.99	%		4.99	%	HOLDING COMPANY	—
Kallplat Chile Limitada	Chile		0.00	%		40.00	%		40.00	%		—		TELEMARKETING	Jointly controlled entity
Konecta Activos Inmobiliarios, S.L.	Spain		0.00	%		40.00	%		40.00	%		52.80	%	PROPERTY	Jointly controlled entity
Konecta Brazil Outsourcing Ltda.	Brazil		0.00	%		40.00	%		40.00	%		99.99	%	TELEMARKETING	Jointly controlled entity
Konecta Broker, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Bto, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Chile Limitada	Chile		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Colombia Grupo Konecta Colombia Ltda	Colombia		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Field Marketing, S.A.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	MARKETING	Jointly controlled entity
Konecta Gestión Integral de Procesos, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Servicios Administrativos y Tecnológicos, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	ADMINISTRATIVE SERVICES	Jointly controlled entity
Konecta Servicios de BPO, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konecta Soluciones Globales, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konectanet Andalucía, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konectanet Comercialización, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Konectanet Portugal Lda.	Portugal		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Kontacta Comunicaciones, S.A.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	MOBILE TELEPHONY	Jointly controlled entity
L’Esplai Valencia, S.L.	Spain		0.00	%		25.43	%		37.00	%		37.00	%	PROPERTY	—
Luri 3, S.A.	Spain		10.00	%		0.00	%		10.00	%		10.00	%	PROPERTY	Jointly controlled entity
Massachusetts Business Development Corp. (consolidated)	United States		0.00	%		21.60	%		21.60	%		21.60	%	FINANCE	—

F-319

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
Metrofinance Spólka z o.o.	Poland		0.00	%		15.08	%		21.73	%		—		FINANCIAL ADVISORY	Associate
Metrohouse Franchise S.A.	Poland		0.00	%		15.08	%		21.73	%		21.73	%	PROPERTY	Associate
MH - Uslugi Wspólne S.A.	Poland		0.00	%		15.08	%		21.73	%		21.73	%	PROPERTY	Associate
MH Kraków Spólka z o.o.	Poland		0.00	%		15.08	%		21.73	%		—		PROPERTY	Associate
MH Warszawa Spólka z o.o.	Poland		0.00	%		15.08	%		21.73	%		—		PROPERTY	Associate
Monitise PLC (consolidated)	United Kingdom		5.08	%		0.00	%		5.08	%		5.08	%	PAYMENT SERVICES	—
New PEL S.a.r.l.	Luxembourg		0.00	%		7.67	%		0.00	%		0.00	%	HOLDING COMPANY	—
NIB Special Investors IV-A LP	Canada		0.00	%		99.70	%		4.99	%		4.99	%	HOLDING COMPANY	—
NIB Special Investors IV-B LP	Canada		0.00	%		95.80	%		4.99	%		4.99	%	HOLDING COMPANY	—
Norchem Holdings e Negócios S.A.	Brazil		0.00	%		19.41	%		29.00	%		29.00	%	HOLDING COMPANY	Associate
Norchem Participações e Consultoria S.A.	Brazil		0.00	%		44.62	%		50.00	%		50.00	%	SECURITIES COMPANY	Jointly controlled entity
Nowotna Farma Wiatrowa Sp. z o.o.	Poland		0.00	%		12.26	%		21.60	%		21.60	%	ELECTRICITY PRODUCTION	—
NPG Wealth Management S.àr.l (consolidated)	Luxembourg		0.00	%		5.90	%		0.00	%		0.00	%	HOLDING COMPANY	—
Odc Ambievo Tecnologia e Inovacao Ambiental, Industria e Comercio de Insumos Naturais Ltda.	Brazil		0.00	%		20.59	%		23.07	%		23.08	%	TECHNOLOGY	—
Olivant Limited (consolidated)	Guernsey		0.00	%		10.39	%		10.39	%		10.39	%	HOLDING COMPANY	—
Omega Financial Services GmbH	Germany		0.00	%		50.00	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Operadora de Activos Alfa, S.A. de C.V.	Mexico		0.00	%		49.98	%		49.98	%		49.98	%	FINANCE	Associate
Operadora de Activos Beta, S.A. de C.V.	Mexico		0.00	%		49.99	%		49.99	%		49.99	%	FINANCE	Associate
Operadora de Tarjetas de Crédito Nexus S.A.	Chile		0.00	%		8.66	%		12.90	%		12.90	%	CARDS	Associate
Parque Eólico Reynosa I, S.A. de C.V.	Mexico		0.00	%		80.00	%		80.00	%		80.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Solar Páramo, S.L.	Spain		92.00	%		0.00	%		25.00	%		25.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parques Empresariales Gran Europa, S.A. (consolidated)	Spain		0.00	%		34.36	%		50.00	%		50.00	%	LAND MANAGEMENT	—
POLFUND - Fundusz Poręczeń Kredytowych S.A.	Poland		0.00	%		34.71	%		50.00	%		50.00	%	MANAGEMENT COMPANY	Associate
Prodesur Mediterráneo, S.L. (a)	Spain		0.00	%		50.00	%		50.00	%		50.23	%	PROPERTY	Jointly controlled entity
Proinsur Mediterráneo, S.L. (a)	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PROPERTY	Jointly controlled entity
PSA Insurance Europe Limited	Malta		0.00	%		50.00	%		50.00	%		—		INSURANCE	Jointly controlled entity
PSA Life Insurance Europe Limited	Malta		0.00	%		50.00	%		50.00	%		—		INSURANCE	Jointly controlled entity
PSA UK Number 1 plc	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	LEASING	Associate
Puntoform, S.L.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TRAINING	Jointly controlled entity
Redbanc S.A.	Chile		0.00	%		22.44	%		33.43	%		33.43	%	SERVICES	Associate
Redsys Servicios de Procesamiento, S.L.U.	Spain		17.56	%		0.00	%		17.56	%		16.97	%	CARDS	Associate
Retama Real Estate, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Rías Redbanc, S.A.	Uruguay		0.00	%		25.00	%		25.00	%		20.00	%	SERVICES	—
Rio Alto Gestão de Créditos e Participações, S.A.	Brazil		0.00	%		44.62	%		50.00	%		50.00	%	COLLECTION AND PAYMENT SERVICES	—
Route 66 Wind Power LLC	United States		0.00	%		33.00	%		33.00	%		—		ELECTRICITY PRODUCTION	—
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión	Mexico		0.00	%		50.00	%		50.00	%		50.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
SAM Brasil Participações S.A.	Brazil		1.00	%		49.50	%		50.50	%		50.50	%	HOLDING COMPANY	Jointly controlled entity
SAM Finance Lux S.à.r.l	Luxembourg		0.00	%		50.00	%		50.00	%		50.00	%	MANAGEMENT COMPANY	Jointly controlled entity
SAM Investment Holdings Limited	Jersey		0.00	%		50.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity

F-320

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
Santander Ahorro Inmobiliario 1, S.I.I., S.A.	Spain		40.00	%		0.01	%		40.02	%		30.95	%	REAL ESTATE INVESTMENT	Associate
Santander Asset Management Luxembourg, S.A.	Luxembourg		0.00	%		50.00	%		50.00	%		50.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management S.A. Administradora General de Fondos	Chile		0.00	%		49.99	%		49.99	%		49.99	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management UK Holdings Limited	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
Santander Asset Management UK Limited	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	FUND AND PORTFOLIO MANAGER	Jointly controlled entity
Santander Asset Management USA, LLC	United States		0.00	%		50.00	%		50.00	%		50.00	%	FUND AND ASSET MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management, LLC	Puerto Rico		0.00	%		50.00	%		50.00	%		50.00	%	MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management, S.A., S.G.I.I.C.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		50.50	%		50.50	%		50.50	%	MANAGEMENT COMPANY	Jointly controlled entity
Santander Brasil Gestão de Recursos Ltda.	Brazil		0.00	%		50.00	%		50.00	%		50.00	%	REAL ESTATE INVESTMENT	Jointly controlled entity
Santander Elavon Merchant Services Entidad de Pago, S.L.	Spain		49.00	%		0.00	%		49.00	%		49.00	%	PAYMENT SERVICES	Jointly controlled entity
Santander Insurance Services Ireland Limited	Ireland		0.00	%		49.00	%		49.00	%		49.00	%	SERVICES	Associate
Santander Pensiones, S.A., E.G.F.P.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PENSION FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.	Argentina		0.00	%		50.00	%		50.00	%		50.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Saturn Japan II Sub C.V.	The Netherlands		0.00	%		69.30	%		0.00	%		0.00	%	HOLDING COMPANY	—
Saturn Japan III Sub C.V.	The Netherlands		0.00	%		72.71	%		0.00	%		0.00	%	HOLDING COMPANY	—
Saudi Hollandi Bank (consolidated)	Saudi Arabia		0.00	%		11.16	%		11.16	%		11.16	%	BANKING	—
Servicios de Infraestructura de Mercado OTC S.A.	Chile		0.00	%		7.46	%		11.11	%		11.11	%	SERVICES	Associate
Sociedad de Garantía Recíproca de Santander, S.G.R.	Spain		25.59	%		0.00	%		25.59	%		—		FINANCIAL SERVICES	—
Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A.	Spain		17.28	%		0.00	%		17.28	%		17.28	%	FINANCIAL SERVICES	—
Sociedad Interbancaria de Depósitos de Valores S.A.	Chile		0.00	%		19.66	%		29.29	%		29.29	%	SECURITIES DEPOSITORY SERVICES	Associate
Sociedad Promotora Bilbao Plaza Financiera, S.A.	Spain		19.04	%		14.86	%		33.91	%		33.90	%	ADVISORY SERVICES	—
Solar Energy Capital Europe S.à.r.l. (consolidated)	Luxembourg		0.00	%		33.33	%		33.33	%		33.33	%	HOLDING COMPANY	Jointly controlled entity
Stephens Ranch Wind Energy Holdco LLC (consolidated)	United States		0.00	%		44.00	%		44.00	%		44.00	%	ELECTRICITY PRODUCTION	—
Syntheo Limited	United Kingdom		0.00	%		50.00	%		50.00	%		—		PAYMENT SERVICES	Jointly controlled entity
Tbforte Segurança e Transporte de Valores Ltda.	Brazil		0.00	%		18.52	%		19.81	%		19.81	%	SECURITY	Associate
Tbnet Comércio, Locação e Administração Ltda.	Brazil		0.00	%		18.52	%		19.81	%		19.81	%	TELECOMMUNICATIONS	Associate
Tecnologia Bancária S.A.	Brazil		0.00	%		18.52	%		19.81	%		19.81	%	ATMs	Associate
Teka Industrial, S.A. (consolidated)	Spain		0.00	%		9.42	%		9.42	%		9.42	%	DOMESTIC APPLIANCES	—
The HSH AIV 4 Trust	United States		0.00	%		69.19	%		4.99	%		4.99	%	HOLDING COMPANY	—
Tonopah Solar Energy Holdings I, LLC (consolidated)	United States		0.00	%		26.80	%		26.80	%		26.80	%	HOLDING COMPANY	Associate
TOPSAM, S.A de C.V.	Mexico		0.00	%		50.00	%		50.00	%		50.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Trabajando.com Chile S.A.	Chile		0.00	%		33.33	%		33.33	%		33.33	%	SERVICES	Associate
Transbank S.A.	Chile		0.00	%		16.78	%		25.00	%		25.00	%	CARDS	Associate
Transolver Finance EFC, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	LEASING	Jointly controlled entity
U.C.I., S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
UCI Holding Brasil Ltda	Brazil		0.00	%		50.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity

F-321

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2015			2014			Line of business	Type of company
UCI Mediação de Seguros Unipessoal, Lda.	Portugal		0.00	%		50.00	%		50.00	%		50.00	%	INSURANCE BROKER	Jointly controlled entity
UCI Servicios para Profesionales Inmobiliarios, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PROPERTY SERVICES	Jointly controlled entity
Unicre-Instituição Financeira de Crédito, S.A.	Portugal		0.00	%		21.46	%		21.50	%		21.50	%	FINANCE	Associate
Unión de Créditos Inmobiliarios, S.A., EFC	Spain		0.00	%		50.00	%		50.00	%		50.00	%	MORTGAGE LOAN COMPANY	Jointly controlled entity
Universal Support, S.A.	Spain		0.00	%		40.00	%		40.00	%		100.00	%	TELEMARKETING	Jointly controlled entity
Urbanizadora Valdepolo I, S.A.	Spain		0.00	%		34.36	%		50.00	%		50.00	%	PROPERTY	—
Urbanizadora Valdepolo II, S.A.	Spain		0.00	%		34.36	%		50.00	%		50.00	%	PROPERTY	—
Urbanizadora Valdepolo III, S.A.	Spain		0.00	%		34.36	%		50.00	%		50.00	%	PROPERTY	—
Urbanizadora Valdepolo IV, S.A.	Spain		0.00	%		34.36	%		50.00	%		50.00	%	PROPERTY	—
Uro Property Holdings SOCIMI, S.A.	Spain		14.96	%		7.82	%		22.77	%		—		PROPERTY	—
Valdicsa, S.A.	Spain		0.00	%		22.68	%		33.00	%		33.00	%	PROPERTY	—
VCFS Germany GmbH	Germany		0.00	%		50.00	%		50.00	%		—		MARKETING	Jointly controlled entity
Vector Software Factory, S.L. (consolidated)	Spain		0.00	%		45.00	%		45.00	%		45.00	%	IT	Associate
Venda de Veículos Fundo de Investimento em Direitos Creditórios	Brazil		—				(d)		—			—		INVESTMENT FUND	Jointly controlled entity
Viking Consortium Holdings Limited (consolidated)	United Kingdom		0.00	%		24.99	%		24.99	%		24.99	%	HOLDING COMPANY	—
Virtual Motors Páginas Eletrônicas Ltda	Brazil		0.00	%		65.43	%		70.00	%		70.00	%	INTERNET	Jointly controlled entity
Webmotors S.A.	Brazil		0.00	%		65.43	%		70.00	%		70.00	%	SERVICES	Jointly controlled entity
Yaap Digital Services, S.L.	Spain		33.33	%		0.00	%		33.33	%		33.33	%	SERVICES	Associate
Zakłady Przemysłu Jedwabniczego DOLWIS S.A. w upadłości likwidacyjnej (a)	Poland		0.00	%		30.54	%		44.00	%		44.00	%	TEXTILE PRODUCTION	—
Zurich Santander Brasil Seguros e Previdência S.A.	Brazil		0.00	%		48.79	%		48.79	%		48.79	%	INSURANCE	Associate
Zurich Santander Brasil Seguros S.A.	Brazil		0.00	%		48.79	%		48.79	%		48.79	%	INSURANCE	Associate
Zurich Santander Holding (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Holding Dos (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Insurance América, S.L.	Spain		49.00	%		0.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Seguros Argentina S.A.	Argentina		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros de Vida Chile S.A.	Chile		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros Generales Chile S.A.	Chile		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros México, S.A.	Mexico		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros Uruguay, S.A.	Uruguay		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate

(a) Company in liquidation as at December 31, 2015.

(b) Pursuant to Article 3 of Royal Decree 1159/2010, of September 17, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(c) Excluding the Group companies listed in Exhibit I and those of negligible interest with respect to the fair presentation that the consolidated financial statements must express (pursuant to Article 48 of the Spanish Commercial Code and Article 260 of the Spanish Limited Liability Companies Law).

(d) Companies over which the non-subsidiary investee of the Group exercises effective control.

(e) Liquidated company in the absence of registration in the register.

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Exhibit III

Preference share issuer subsidiaries

		% of ownership held by the Bank
Company	Location	Direct			Indirect			Line of business
Banesto Holdings, Ltd. (a)	Guernsey		99.99	%		0.00	%	INACTIVE
Emisora Santander España, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Emisora 150, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Capital, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Preferred, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander International Preferred, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Sovereign Real Estate Investment Trust	United States		0.00	%		100.00	%	FINANCE
Totta & Açores Financing, Limited	Cayman Islands		0.00	%		99.83	%	INACTIVE

(a) Company in liquidation as at December 31, 2015.

F-323

Exhibit IV

Notifications of acquisitions and disposals of investments in 2015

(Article 155 of the Spanish Limited Liability Companies Law and Article 125 of the Spanish Securities Market Law).

On May 22, 2015, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in NH Hoteles, S.A. had fallen below 3% on May 20, 2015.

On August 7, 2015, the CNMV registered a notification from Banco Santander (and seven other banks) which disclosed that the ownership interest of all of them in GENERAL DE ALQUILER DE MAQUINARIA, S.A. had exceeded 60% on August 5, 2015. Santander Group’s position in this company was 4.742% at that date.

F-324

Exhibit V

Other information on the Group’s banks

A) Following is certain information on the share capital of the Group’s main banks based on their total assets.

1. Santander UK plc

a) Number of financial equity instruments held by the Group

Santander UK plc has issued 31,051,768,866 ordinary shares with a par value of GBP 0.10 each, amounting to GBP 3,105,176,886.6. On January 10, 2014, Cántabro Catalana de Inversiones, S.A. transferred one ordinary share with a par value of GBP 0.10 to Banco Santander, S.A. for GBP 1. Subsequently, on April 1, 2014, Banco Santander, S.A. transferred 24,117,268,866.6 ordinary shares with a par value of GBP 0.10 each to Santander UK Group Holdings Limited for GBP 2,411,726,886.6. Also, on April 1, 2014, Santusa Holding, S.L. transferred 6,934,500,000 shares with a par value of GBP 0.10 each to Santander UK Group Holdings Limited for GBP 693,450,000. As at December 31, 2015, the Group holds all the ordinary share capital (31,051,768,866 ordinary shares with a par value of GBP 0.10 each, amounting to GBP 3,105,176,886.6) through Santander UK Group Holdings Limited.

On October 23, 1995, Santander UK plc issued 10.0625% exchangeable capital securities amounting to GBP 200,000,000, exchangeable into 200,000,000 10.375% non-cumulative sterling preference shares with a par value of GBP 1 each. At December 31, 2015, the Group held 30.10% of the 10.0625% exchangeable capital securities (amounting to GBP 66,147,000) through Banco Santander, S.A.

Also, on October 23, 1995, Santander UK plc issued 10.375% non-cumulative sterling preference shares amounting to GBP 100,000,000 with a par value of GBP 1 each, and on February 13, 1996 Santander UK plc issued additional 10.375% non-cumulative sterling preference shares amounting to GBP 100,000,000 with a par value of GBP 1 each. At December 31, 2015, the Group held 32% of the 10.375% non-cumulative sterling preference shares (amounting to GBP 63,913,355) through Banco Santander, S.A.

On June 9, 1997, Santander UK plc issued 8.625% non-cumulative sterling preference shares amounting to GBP 125,000,000 with a par value of GBP 1 each. At December 31, 2015, the Group held 80.40% of the 8.625% non-cumulative sterling preference shares (amounting to GBP 100,487,938) through Banco Santander, S.A.

On April 28, 2010, pursuant to current legislation, preference shares of Alliance & Leicester Limited (formerly Alliance & Leicester plc) were exchanged for 300,002 redeemable fixed/floating rate series A non-cumulative preference shares of Santander UK plc amounting to GBP 300,002,000, with a par value of GBP 1 each and a liquidation preference of GBP 1,000. On December 16, 2014, Santander UK plc repurchased 265,069 redeemable fixed/floating rate series A non-cumulative preference shares for GBP 265,069,000. On June 12, 2015, Santander UK plc repurchased 21,136 redeemable fixed/floating rate series A non-cumulative preference shares for GBP 22,509,840. At December 31, 2015, 13,797 redeemable fixed/floating rate series A non-cumulative preference shares, amounting to GBP 13,797,000, were still outstanding.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

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c) Share capital authorized by the shareholders at the general meeting

The shareholders at the annual general meeting held on April 21, 2015 resolved to unconditionally authorize the company to carry out the following repurchases of share capital.

1) The repurchase of its own 8.625% non-cumulative sterling preference shares subject to the following conditions:

(a) The company may repurchase up to 125,000,000 of the 8.625% non-cumulative sterling preference shares.

(b) The lowest price that the company may pay for the 8.625% non-cumulative sterling preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 8.625% non-cumulative preference sterling share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

It is hereby stated that this authorization will expire at the date of the company’s next annual general meeting unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its 8.625% preference shares even if the purchase is finalized after this authorization expires.

2) The repurchase of its own 10.375% non-cumulative sterling preference shares subject to the following conditions:

(a) The company may repurchase up to 200,000,000 of the 10.375% preference shares;

(b) The lowest price that the company may pay for the 10.375% non-cumulative sterling preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 10.375% non-cumulative preference sterling share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

It is hereby stated that this authorization will expire at the date of the company’s next annual general meeting unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its 10.375% preference shares even if the purchase is finalized after this authorization expires.

3) The repurchase of its own redeemable fixed/floating rate series A non-cumulative preference shares subject to the following conditions:

(a) The company may repurchase up to 300,002 redeemable fixed/floating rate series A non-cumulative preference shares;

(b) The lowest price that the company may pay for the redeemable fixed/floating rate series A non-cumulative preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

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(c) The highest price (excluding costs) that the company may pay for each of the redeemable fixed/floating rate series A non-cumulative preference shares will be 125% of the average market price of the preference shares for the five days prior to the purchase.

It is hereby stated that this authorization will expire at the date of the company’s next annual general meeting unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its redeemable fixed/floating rate series A non-cumulative preference shares even if the purchase is finalized after this authorization expires.

However, prior to such expiry, the company may submit bids or adopt resolutions that could require the allocation of shares and the directors may allocate shares in accordance with any bid or resolution, considering the expiry of the authorization granted in this resolution.

In accordance with this resolution, any previous authorizations granted to the directors and not exercised for the allocation of shares are hereby revoked and substituted, notwithstanding any allocation of shares or grant of rights already completed, offered or agreed.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

2. Abbey National Treasury Services plc

a) Number of financial equity instruments held by the Group

The Group holds ordinary shares amounting to GBP 2,549,000,000 through Santander UK plc (2,548,999,999 ordinary shares with a par value of GBP 1 each) and Abbey National Nominees Limited (1 ordinary share with a par value of GBP 1).

The Group also holds 1,000 tracker shares (shares without voting rights but with preferential dividend rights) amounting to GBP 1,000 and 1,000 B tracker shares amounting to GBP 1,000 through Santander UK plc, both with a par value of GBP 1 each.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

F-327

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

3. Banco Santander (Brasil) S.A.

a) Number of financial equity instruments held by the Group

The Group holds 3,440,170,512 ordinary shares and 3,273,507,089 preference shares through Banco Santander, S.A. and its subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander, S.L. and Santander Insurance Holding, S.L., and Banco Madesant - Sociedade Unipessoal, S.A.

The shares composing the share capital of Banco Santander (Brasil) S.A. have no par value and there are no capital payments payable. At 2015 year-end the bank’s treasury shares consisted of 20,217,733 ordinary shares and 20,217,733 preference shares, with a total of 40,435,466 shares.

In accordance with current Bylaws (Article 5.7) the preference shares do not confer voting rights on their holders, except under the following circumstances:

a) In the event of the transformation, merger, consolidation or spin-off of the company.

b) In the event of approval of agreements between the company and the shareholders, either directly, through third parties or other companies in which the shareholders hold a stake, provided that, due to legal or bylaw provisions, they are submitted to a general meeting.

c) In the event of an assessment of the assets used to increase the company’s share capital.

The General Assembly may, at any moment, decide to convert the preference shares into ordinary shares, establishing a reason for the conversion.

However, the preference shares do have the following advantages (Article 5.6):

a) Their dividends are 10% higher than those on ordinary shares.

b) Priority in the distribution of dividends.

F-328

c) Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.

d) Priority in the reimbursement of capital in the event of the dissolution of the company.

e) In the event of a public offering due to a change in control of the company, the holders of preference shares are guaranteed the right to sell the shares at the same price paid for the block of shares that changed hands as part of the change of control, i.e. they are treated the same as shareholders with voting rights.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

The company is authorized to increase share capital, subject to approval by the board of directors, up to a limit of 9,090,909,090 ordinary shares or preference shares, and without the need to maintain any ratio between any of the different classes of shares, provided they remain within the limits of the maximum number of preference shares established by Law.

At present the share capital consists of 7,563,082,417 shares (3,850,970,714 ordinary shares and 3,712,111,703 preference shares).

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At the general meeting held on April 30, 2015, the shareholders approved the rules relating to the 2015 deferred remuneration plans for the directors, management and other employees of the company and of companies under its control. The delivery of the shares is linked to the achievement of certain targets in 2015. The company considers that the exercise of these rights could give rise to the delivery of 8,800,000 treasury shares to these directors and employees.

At the general meeting held on December 14, 2015, the shareholders approved the rules relating to the 2016 deferred remuneration plans for the directors, management and other employees of the company and of companies under its control. The delivery of the shares is linked to the achievement of certain targets in 2016. The company considers that the exercise of these rights could give rise to the delivery of 9,000,000 treasury shares to these directors and employees.

e) Specific circumstances that restrict the availability of reserves

The only restriction on the availability of Banco Santander (Brasil) S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital.

The legal reserve is provided for in Article 196 of the Spanish Public Limited Liability Companies Law, which establishes that before being allocated to any other purpose, 5% of profits must be transferred to the legal reserve, which must not exceed 20% of share capital.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

F-329

g) Quoted equity instruments

All the shares are listed on the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the share deposit certificates (units) are listed on the New York Stock Exchange (NYSE).

4. Santander Bank, National Association

a) Number of financial equity instruments held by the Group

At December 31, 2015, the Group held 530,391,043 ordinary shares that carry the same voting and dividend acquisition rights over Santander Holdings USA, Inc. (SHUSA). This holding company and Independence Community Bank Corp. (ICBC) hold 1,237 ordinary shares with a par value of USD 1 each, which carry the same voting rights. These shares constitute all the share capital of Santander Bank, National Association (SBNA).

SHUSA holds an 80.84% ownership interest in SBNA, and the remaining 19.16% belongs to ICBC. ICBC is wholly owned by SHUSA. There is no shareholders’ meeting for the ordinary shares of SBNA.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

5. Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México

a) Number of financial equity instruments held by the Group

The Group holds a 75% ownership interest in the subsidiary in Mexico through the holding company Grupo Financiero Santander México, S.A.B. de C.V. At December 31, 2015, this holding company and Santander Global Facilities, S.A. de C.V. (Mexico) held 80,848,258,165 ordinary shares that constitute 99.99% of the share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México.

F-330

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

The shareholders at the general meeting held on February 22, 2012 resolved to increase the authorized share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México to MXN 8,085,540,380.30, represented by a total of 80,855,403,803 fully subscribed and paid shares of MXN 0.10 par value each, which remained unchanged at December 31, 2015.

d) Rights on founder’s shares, bonds or debt issues, convertible debentures and similar securities or rights

(i) At the board of directors meeting held on October 22, 2015 the directors acknowledged their awareness of the situation of the debt issue of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México that had been ratified at the board meeting held on October 17, 2013 for the issue of debt up to USD 6,500 million in local or international markets. They stipulated that the debt should be senior or subordinated for a maximum term of 15 years and that debt instruments that qualify as capital under current legislation should be included, and resolved that such issue may be instrumented individually or through various issue programs.

At present, the detail of Banco Santander’s debt issue is as follows:

Instrument	Type	Term	Amount	Undrawn balance
Issue program in connection with stock market certificates and term deposit certificates of deposit	Revolving	We are currently in the process of authorizing a new program for the same amount, as recurring issuer	Up to MXN 55,000,000,000.00	N/A
Private structured bank bond certificate	Non-revolving (*)	December 16, 2044	Up to MXN 20,000,000,000.00	Up to MXN 1,800,000,000.00
Private structured bank bond certificate	—	We are currently in the process of authorizing a new program for the same amount, as recurring issuer	Up to MXN 10,000,000,000.00	N/A
Issue of Tier II subordinated debt in international markets	Non-revolving	January 26, 2021	USD 1,300,000,000	N/A

* The issue of private structured bank bonds is non-revolving. Once the amount established in the related certificate is placed, a new certificate is issued for the authorized amount

The issue of public structured bank bonds with subsequent placements was approved for up to MXN 10 thousand million, the equivalent amount in US dollars or in any other currency, for a term of 1 day to 15 years, with the understanding that the bonds may not be redeemed after the term of the related certificate of issue. They may be issued with or without loss of capital, with a public offering and with registration in the Mexican National Securities Register. This issue had not yet been launched at the reporting date.

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(ii) On December 19, 2013, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México issued a total of USD 1,300,000,000 in subordinated notes that meet the capital requirements established by Basel III for Tier 2 capital at a rate of 6.125% and maturing in 2023. The Parent of Santander México, Banco Santander, S.A. Spain, resolved to purchase USD 975,000,000, i.e. 75% of the total amount of the notes.

These notes were offered through a private placement to qualified institutional buyers only in accordance with Rule 144A under the US Securities Act of 1933 and subsequent amendments thereto. Outside the US, they were offered in accordance with Regulation S of the Securities Act.

The issue was approved with a view to increasing the efficiency of the bank’s capital structure, adapting the bank’s profile with regard to capitalization to that of its competitors and obtaining greater returns on capital with the same strength of capital and capacity for growth of risk-weighted assets.

(iii) The shareholders at the general meeting held on May 14, 2012 ratified the resolution adopted by the shareholders at the extraordinary general meeting held on March 17, 2009, which approved the arrangement of a collective loan from the shareholders for USD 1,000,000,000 through the placement of unsecured subordinated non-preference debentures not convertible into shares. This issue had not yet been launched at the reporting date.

(iv) At the board of directors meeting held on January 27, 2011 the directors approved the general terms and conditions for the issue of senior debt in international markets. This issue of USD 500 million and USD 1,000 million at a five to ten year term was authorized on October 18, 2012. The issue was approved in order to obtain resources to finance the increase of business assets and the management of the Bank’s liquidity. As a result of these resolutions adopted by the board of directors, on November 9, 2012, debt amounting to USD 1,000 million was issued.

e) Specific circumstances that restrict the availability of reserves

Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, the Mexican Companies Law and the institutions’ own Bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers.

The bank increases its legal reserve annually directly from the profit obtained in the year.

The bank must recognize the various reserves as stipulated in the legal provisions applicable to credit institutions. Credit loss reserves are calculated on the basis of the credit rating assigned to each loan and are released when the rating of the related loan improves or when the loan is settled.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

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6. Banco Santander Totta, S.A

a) Number of equity instruments held by the Group

The Group holds 956,153,370 ordinary shares through its subsidiaries: Santander Totta, SGPS, S.A. with 941,269,620 shares, Taxagest Sociedade Gestora de Participações Sociais, S.A. with 14,593,315 shares, and Banco Santander Totta, S.A. with 290,435 treasury shares, all of which have a par value of EUR 1 each and identical voting and dividend rights and are subscribed and paid in full.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Under Article 296 of the Portuguese Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital.

Non-current asset revaluation reserves are regulated by Decree- Law 31/98, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, amortized or sold.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

7. Santander Consumer Bank AG

a) Number of financial equity instruments held by the Group

At December 31, 2015, through Santander Consumer Holding GmbH, the Group held 30,002 ordinary shares with a par value of EUR 1,000 each, all of which carry the same voting rights.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

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d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

8. Banco Santander - Chile

a) Number of financial equity instruments held by the Group

The Group holds a 67% ownership interest in its subsidiary in Chile corresponding to 126,593,017,845 ordinary shares of Banco Santander - Chile through its subsidiaries: Santander Chile Holding S.A. with 66,822,519,695 ordinary shares, Teatinos Siglo XXI Inversiones S.A., with 59,770,481,573 ordinary shares and Santander Inversiones S.A. with 16,577 fully subscribed and paid ordinary shares that carry the same voting and dividend rights.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

Share capital at December 31, 2015 amounted to CLP 891,302,881,691.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior authorization of the foreign investment committee.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

F-334

g) Quoted equity instruments

All the shares are listed on the Chilean stock exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange (NYSE).

9. Bank Zachodni WBK S. A.

a) Number of financial equity instruments held by the Group

At December 31, 2015, Banco Santander, S.A. held 68,880,774 ordinary shares with a par value of PLN 10 each, all of which carry the same voting rights.

b) Capital increases in progress

At December 31, 2015, there were no approved capital increases.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At the general meeting held on June 30, 2014, the shareholders resolved to approve the “Incentive Scheme V” as an initiative to attract, motivate and retain the bank’s employees. Delivery of the shares is tied to the achievement of certain targets in the years from 2014 to 2016. The bank considers that the exercise of these rights might give rise to the issuance of more than 250,000 shares.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares of Bank Zachodni WBK S.A. are listed on the Warsaw stock exchange.

B) The restrictions on the ability to access or use the assets and settle the liabilities of the Group, as required under paragraph 13 of IFRS 12, are described below.

In certain jurisdictions, restrictions have been established on the distribution of dividends on the basis of the new, much more stringent capital adequacy regulations. However, there is currently no evidence of any practical or legal impediment to the transfer of funds by Group subsidiaries to the Parent in the form of dividends, loans or advances, repatriation of capital or any other means.

F-335

Exhibit VI

Annual banking report

The Group’s total tax contribution in 2015 (taxes incurred directly by the Group and the collection of taxes incurred by third parties generated in the course of its economic activities) exceeded EUR 16,000 million.

This Annual Banking Report was prepared in compliance with Article 89 of Directive 2013/36/EU of the European Parliament and of the Council, of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and its transposition into Spanish law pursuant to Article 87 of Law 10/2014, of June 26, on the regulation, supervision and capital adequacy of credit institutions.

Pursuant to the aforementioned Article, from January 1, 2015, credit institutions must send the Bank of Spain and publish annually a report as an Exhibit to the financial statements audited in accordance with the legislation regulating audits of financial statements, which specifies, by country in which they are established, the following information on a consolidated basis for each year:

a) Name(s), nature of activities and geographical location.

b) Turnover.

c) Number of employees on a full time equivalent basis.

d) Gross profit or loss before tax.

e) Tax on profit or loss.

f) Public subsidies received.

Following is a detail of the criteria used to prepare the annual banking report for 2015:

a) Name(s), nature of activities and geographical location

The aforementioned information is available in Appendices I and III to the Group’s consolidated financial statements, which contain details of the companies operating in each jurisdiction, including, among other information, their name(s), geographical location and the nature of their activities.

As can be seen in the aforementioned Appendices, the main activity carried on by the Group in the various jurisdictions in which it operates is commercial banking. The Group operates mainly in ten markets through a model of subsidiaries that are autonomous in capital and liquidity terms, which has clear strategic and regulatory advantages, since it limits the risk of contagion between Group units, imposes a double layer of global and local oversight and facilitates crisis management and resolution. The number of Group offices totals 13,030 (the largest commercial network of any international bank) and these offices provide our customers with all their basic financial needs.

b) Turnover

For the purposes of this report, turnover is considered to be total income, as defined and presented in the consolidated income statement that forms part of the Group’s consolidated financial statements.

F-336

c) Number of employees on a full time equivalent basis

The data on employees on a full time equivalent basis were obtained from the average headcount of each jurisdiction.

d) Gross profit or loss before tax

For the purposes of this report, gross profit or loss before tax is considered to be profit or loss before tax, as defined and presented in the consolidated income statement that forms part of the Group’s consolidated financial statements.

e) Tax on profit or loss

In the absence of specific criteria, this is the amount of tax effectively paid in respect of the taxes the effect of which is recognized in Income tax in the consolidated income statement.

Taxes effectively paid in the year by each of the companies in each jurisdiction include:

• supplementary payments relating to income tax returns, normally for prior years.

• advances, prepayments, withholdings made or borne in respect of tax on profit or loss for the year. Given their scantly representative amount, it was decided that taxes borne abroad would be included in the jurisdiction of the company that bore them.

• refunds collected in the year with respect to returns for prior years that resulted in a refund.

• where appropriate, the tax payable arising from tax assessments and litigation relating to these taxes.

The foregoing amounts are part of the statement of cash flows and, therefore, differ from the income tax expense recognized in the consolidated income statement. Such is the case because the tax legislation of each country establishes:

• the time at which taxes must be paid and, normally, there is a timing mismatch between the dates of payment and the date of generation of the income bearing the tax.

• its own criteria for calculating the tax and establishes temporary or permanent restrictions on expense deduction, exemptions, relief or deferrals of certain income, thereby generating the related differences between the accounting profit (or loss) and taxable profit (or tax loss) which is ultimately taxed; tax loss carryforwards from prior years, tax credits and/or relief, etc. must also be added to this. Also, in certain cases special regimes are established, such as the tax consolidation of companies in the same jurisdiction, etc.

f) Public subsidies received

In the context of the disclosures required by current legislation, this term was interpreted to mean any aid or subsidy in line with the European Commission’s State Aid Guide and, in such context, the Group companies did not receive public subsidies in 2015.

F-337

The detail of the information for 2015 is as follows:

	2015
Jurisdiction	Turnover  (millions of euros)			Headcount		Gross profit or loss before tax (millions of euros)			Tax on profit  or loss (millions of euros)
Germany		1,519			4,748		463			140
Argentina		1,548			7,475		544			202
Australia		7			9		2			—
Austria		129			382		43			—
The Bahamas		19			43		15			—
Belgium		83			118		60			9
Brazil (1)		11,720			44,957		2,411			361
Canada		34			135		9			2
Chile		2,364			12,041		828			166
China		89			197		29			16
Colombia		11			57		(2	)		1
Spain (2)		5,551			29,838		(990	)		69
United States (3)		7,581			15,140		1,545			(95	)
Denmark		115			236		56			10
Finland		83			136		48			4
France		468			665		266			119
Hungary		2			31		(15	)		—
Ireland		25			10		27			3
Isle of Man		5			20		2			—
Cayman Islands		8			—		8			—
Italy		324			738		59			84
Jersey		(16	)		92		(36	)		2
Morocco		1			—		1			—
Mexico (4)		3,467			17,345		1,054			86
Norway		381			522		103			16
The Netherlands		57			192		12			33
Panama		5			5		1			—
Peru		78			141		19			8
Poland		1,653			14,874		705			251
Portugal (5)		1,108			5,904		647			72
Puerto Rico		388			1,492		(13	)		29
United Kingdom		6,561			24,716		1,514			582
Singapore		8			11		4			—
Sweden		116			338		7			5
Switzerland		83			161		27			12
Uruguay		320			1,398		94			18
Consolidated Group total		45,895			184,167		9,547			2,205

(1) Including the information relating to a branch in the Cayman Islands the profits of which are taxed in full in Brazil. The contribution of this branch to operating profit/(losses) before tax for 2015 is EUR 365 million.

(2) Includes the corporate center.

(3) Tax accrued in the year in this jurisdiction amounted to approximately EUR 500 million due mainly to the difference in deferred taxes.

(4) Including the information on a branch in the Bahamas the profits of which are taxed in full in Mexico. In 2015 the contribution of this branch to operating profit/(losses) before tax was EUR 50 million.

(5) Including the information relating to the branch in the UK, which is taxed both in the UK and in Portugal. In 2015 the contribution of this branch to operating profit/(losses) before tax was EUR 127 million.

At December 31, 2015, the Group’s return on assets (ROA) was estimated at 0.5%.

F-338

Exhibit VII

(Millions of Euros)	Year ended December 31,
	2015				2014				2013				2012				2011
IFRS:	Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits
FIXED CHARGES:
Fixed charges and preferred stock dividends		24,123		12,360		24,799		11,953		25,162		10,499		28,466		11,903		29,624		12,590
Preferred dividends		103		103		126		126		112		112		132		132		99		99
Fixed charges		24,020		12,257		24,673		11,827		25,050		10,387		28,334		11,771		29,525		12,491
EARNINGS:
Income from continuing operations before taxes and extraordinary items		9,547		9,547		10,679		10,679		7,378		7,378		3,565		3,565		7,789		7,789
Less: Earnings from associated companies		148		148		65		65		197		197		427		427		57		57
Fixed charges		24,020		12,257		24,673		11,827		25,050		10,387		28,334		11,771		29,525		12,491
Total earnings		33,419		21,656		35,287		22,441		32,231		17,568		31,472		14,909		37,257		20,223
Ratio of earnings to fixed charges		1.39		1.77		1.43		1.90		1.29		1.69		1.11		1.27		1.26		1.62
Ratio of earnings to combined fixed charges and preferred stock dividends		1.39		1.75		1.42		1.88		1.28		1.67		1.11		1.25		1.26		1.61

F-339