1.1 Introduction

Grupo Santander is one of the world’s largest financial groups. It occupies a unique position in international banking, with a strong commercial franchise and a high degree of geographical diversification.

In terms of market capitalisation, at year-end Banco Santander was the eurozone’s largest bank in stock market terms and the world’s nineteenth largest, valued at EUR 65,792 million

Its corporate purpose is to perform all manner of activities, transactions and services proper to the banking business. Its business model is centred on commercial banking products and services designed to meet the needs of personal, business and corporate customers. It has a global network of 13,030 branches, the largest of any international bank, through which it serves more than 117 million customers. Its assets amount to EUR 1,340 billion and it manages funds totalling EUR 1,507 billion for all customer segments. The Group has 3.6 million shareholders and more than 190,000 employees.

The purpose of Grupo Santander is to help people and business prosper becoming the best retail and commercial bank in a Simple, Personal and Fair way

Commercial banking generates 88% of its revenue.

The Group is highly diversified, with a presence in ten main markets, in which it has a significant share of business. The business is well balanced between developed and emerging markets.

 

		A detailed analysis of Grupo Santander’s results for 2015 is given in the economic and financial statements included in the Annual Report.

 

*	In the Group’s activity report it can be found all the strategic goals and their progress in 2015.

 

 

Commercial activity and revenue

Total revenue was EUR 45,272 million, up by 6.2% compared to 2014.

This represents higher quality growth, based on increases in the most commercial levers of the revenue line (net interest income and fee and commission income), together with a fall in the gains on financial assets and liabilities, which accounts for only 5% of Group revenue (7% in 2014).

Operating costs rose 8% compared to 2014 (adjusted for the exchange rate effect and the scope of consolidation effect this is only 1%).

This is due to a number of reasons: inflation in Latin American, investment in innovation and programmes to improve future efficiency, the impact of the measures adopted by the Bank due to new regulatory requirements (particularly in the US) and changes to the scope of consolidation. The Group’s cost to income ratio is 47.6%, increasing 0.6 points in the year as a result of the evolution of income from financial transactions. Nevertheless, a leading position is mantained among competitors.

Pre-provision profit was EUR 23,702 millions.

Credit quality

The Group’s non-performing loans (NPL) ratio fell to 4.36%, a major annual decrease (-83 basis points). The NPL coverage ratio was 73% (67% in December 2014).

Loan loss provisions fell to EUR 10,108 million (-4.3%), caused by significant decreases in United Kingdom (-71%), Spain (-43%), Portugal (-42%) and Real Estate Business Spain (-26%). As a result, the cost of lending (measured as loan loss provisions for the last twelve months as a percentage of average loans and receivables for the same period) stood at 1.25% (1.43% in December 2014).

Attributable profit

The Grupo Santander continued to increase its profit and revert to normal levels of returns, posting attributable profit of EUR 5,966 million in 2015, up by 2.6% on 2014. Excluding the net effect in capital gains and write-downs, the ordinary attributed profit is EUR 6,566 million, up by 13% on 2014.

This growth is due to the good performance of the main P&L lines and the improvement in results in practically all the business units.

Noteworthy is the net interest income figure which rose 11% mainly due to higher lending and a lower cost of funds and the reduction in loan-loss provisions.

In 2015, approximately 40% of group profit came from developing markets and 60% from mature markets.

 

Balance sheet strength

Improving the liquidity position has been a major objective of the Group’s strategy in recent years and has been achieved thanks to the Group’s ability to capture deposits in the retail market through its extensive branch network and the broad, diversified access to wholesale markets provided by its subsidiaries model.

In 2015, the loan-to-deposit ratio and the ratio of deposits and mid-to long-term funding to loans remained at comfortable levels, both in the Group (116%) and in the main units.

We took advantage of the more favourable interest rate environment to support the liquidity reserve growth in terms of quantity (EUR 257,740 million) and quality (high-quality liquid assets accounted for 52% of the total).

 

The Group ended the year with high capital levels, which has been reinforced with the EUR 7.5 billion capital increase carried out in January 2015.

The Group has a phase-in CET1 capital ratio of 12.55% and a fully-loaded capital ratio of 10.05%. These capital levels make Santander one of the world’s strongest capitalised banking groups, considering our business model, geographical diversification and resistance to adverse stress scenarios. These levels are adequate taking into account business model, geographical diversification and resistance to adverse stress scenarios and provide a comfortable capital position that will allow to take organic growth opportunities in the key markets in which the Group’s operates.

On 3 February, the European Central Bank approved the use of Alternative Standardised 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 Euros), and consequently on its capital ratios, were not taken into account in the figures published on 27 January 2015, which are presented herein.

 

		For more information on the capital requirements for each risk, see Chapter 4.6.3.

 

*	Breakdown of other assets: goodwill €27bn, tangible and intangible assets €28bn, held to maturity investment portfolio 4 bn; other capital instruments at fair value through profit or loss €1bn and accruals and other accounts €60bn.

 

n Executive summary

n Flow statement. Capital requirement for credit risk*

    Millions of Euros

 

		Capital*				RWAs*
Starting figure (31/12/2014)			37,429				467,859
Changes in exposure			2,473				30,913
Perimeter of portfolios under internal models			-542				-6,781
Perimeter changes			1,358				16,973
Business risk changes			1,679				20,993
Changes in parameters that affect exposure			-22				-272
Methodological changes			-392				-4,896
Exchange rate			-835				-10,440
Securitisations**			-198				-2,476
Changes in credit portfolio quality			-46				-570
End figure (31/12/2015)			38,431				480,390

 

*	Does not include capital requirements for equity investments or securitisations under the IRB approach.

**	Capital saving due to securitisations with risk transfer.

n Flow statement. Capital requirement

    for market risk, internal models

    Millions of Euros

 

		Capital				RWAs
Starting figure (31/12/2014)			816				10,200
Changes in VaR/SVaR			-32				-400
IRC			-50				-631
End figure (31/12/2015)			734				9,169

n Flow statement. Capital requirement for

    market risk, standardised approach

    Millions of Euros

 

		Capital				RWAs
Starting figure (31/12/2014)			1,914				23,925
Changes in business and inclusion of new entities			-519				-6.487
New regulations			66				825
End figure (31/12/2015)			1,461				18,263

 

n Rorac and value creation at

    Group’s main business areas

    Millions of Euros

 

		Dec-15								Dec-14
						Value								Value
Main segments		Rorac				creation				Rorac				creation
Continental Europe			13.9	%			883				13.6	%			358
UK			22.5	%			1,065				20.4	%			634
Latin America			33.8	%			2,746				29.7	%			2,401
US			13.4	%			308				19.5	%			412
Total business units			20.2	%			5,001				20.4	%			3,805

 

2.1. Macroeconomic environment

The pace of world economic recovery slowed down in 2015 (3.1% vs. 3.4% in 2014). An improvement in the developed economies proved unable to offset the decelerating emerging markets. Falling commodity prices and a cooling Chinese economy had a greater relative impact on the emerging economies, although slowdowns varied depending on internal contexts.

 

•

The US has reached a phase of moderate but steady economic growth. GDP rose by 2.5% in 2015, and unemployment continued to fall to levels considered to represent full employment (5%). Inflation fell in the wake of lower oil prices, although underlying inflation remained in place (1.3%) below the target (2%). The Federal Reserve raised interest rates in December 2015 from 0.25% to 0.5%.

 

•

The UK held on to the steady growth (2.2%) observed in recent years, which has gone hand in hand with better jobless figures to pre-crisis levels. Inflation was around 0%, with no indications of wage pressure, and the Bank of England kept the discount rate unchanged at 0.5% accordingly.

 

•

The pace of GDP growth in the Eurozone increased. Inflation continued to stand at around 0%, prompting the ECB to cut key rates and embark upon a new round of quantitative easing with an extended programme of government bond purchases.

 

•

Spain registered a growth of approximately 3.2% in 2015, with a well-diversified base that helped reduce unemployment to around 21% by year-end. Progress was also made in terms of correcting the imbalance of public finances, and the trade balance surplus was maintained. Inflation was in negative territory for much of the year on the strength of energy prices, although the underlying portion remained positive.

 

•

Germany stepped up the pace of growth as the year went on, maintaining its solid domestic demand and healthy job market.

 

•

Poland continued its trend of solid growth in 2015 (3.6%), with inflation (-0.9%) well below the target set by the country’s central bank (2.5%), which brought down key rates to 1.5% in March.

 

•

In Latin America, regional GDP fell by 0.4% in 2015, following 1.2% growth in 2014, against a complicated international backdrop with the prospect of higher interest rates in the US, a slowdown in worldwide trade and lower growth in China. Trends varied considerably from country to country, with some going into recession and others showing a gradual recovery. A slight increase in Inflation was observed, chiefly due to the effects of depreciation of Latin American currencies.

 

•

Brazil fell into recession amid falling consumption and private investment, along with higher unemployment. Cuts in subsidies and higher prices for public services pushed up inflation to 10,7%. The country’s central bank bolstered its commitment to control inflation, raising the SELIC rate by 250 basis points to 14.25%.

 

•

The Chilean economy regained ground in 2015, driven by increases in investment and private consumption, and this encouraged the central bank to normalise monetary policy by raising the key rate by 50 basis points to 3.5%.

 

•

Mexico notched up a clear improvement in the latter half of the year, driven by the recovery of domestic demand and exports. Although inflation remained low, Mexico’s central bank decided to raise the key rate in response to the FED’s increase, in a bid to prevent any outbreaks of volatility brought on by its strong commercial and financial links with the US.

 

Banking sector

The banking environment in countries in which Banco Santander operates continues to be marked by regulatory changes and a defiant economic panorama, and this represented a genuine challenge in terms of management to push up returns.

In the developed economies, financial institutions continued to bolster their balance sheets, and general levels of capital adequacy rose. Returns on capital nevertheless showed some improvement. The profitability of banks supervised by the EBA increased from an average of 0% at year-end 2014 to 7.3% by mid-2015, thanks to higher net interest margin and lower provisions.

Banks, however, still face some major challenges to push up profits. Interest rates remained extraordinarily low; volumes of business remained low, despite a gradual recovery; and competitor pressure heightened on most markets.

Competition became more acute among the entities, and with new market players. Shadow banking has continued to gain ground, with an increased presence of non-bank financial intermediaries focusing on niche markets such as methods of payment, financial advisory services or credit services.

In this situation, the sector’s restructuring process cannot be brought to conclusion. A number of entities are currently carrying out processes to redefine their business model. Most are implementing cultural changes in a bid to regain the confidence of society, and in general, all of them must adapt to the digital revolution that will be shaping the way in which banks relate to their customers, the service quality provided and the efficiency of their processes.

In addition, international entities face divergent socio-demographic trends, with a prominent ageing process in the developed economies and a considerably increased presence of the middle class in emerging markets, which will require different strategies according to the markets concerned.

 

2.2. Regulatory framework

In December 2010, with the aim of enhancing the quality, consistency and transparency of the capital base and improving risk coverage, the Basel Committee on Banking Supervision (BCBS) published a new global regulatory framework for the international capital standards (Basel III), reinforcing the requirements established in the previous frameworks (known as Basel I, Basel II and Basel 2.5). On 26 June 2013 the Basel III legal framework was implemented in European law via Directive 2013/36 (hereinafter CRD IV) and Regulation 575/2013 (hereinafter CRR).

CRD IV was transposed into Spanish law through Law 10/2014 of 26 June on the organisation, supervision and solvency of credit institutions and its subsequent regulatory development through Royal Decree 84/2015 and Circular 2/2016 of the Bank of Spain, which completes its adaptation to the Spanish legal system. This Circular abolishes largely Circular 3/2008, on the calculation and monitoring of minimum capital (though, in the aspects covered by Circular 5/2008, on minimum capital and other mandatory reporting of information for mutual guarantee societies, the latter will remain in effect); and a section of Circular 2/2014, on the exercise of various regulatory options contained in the Capital Requirements Regulation. The CRR is directly applicable in Member States from 1 January 2014, and repeals all subordinate acts that entail additional capital requirements.

The CRR provides for a phase-in period that will allow institutions to adapt gradually to the new requirements of the European Union. The phase-in arrangements have been incorporated into Spanish law by Bank of Spain Circular 2/2014 affecting both the new capital deductions from capital and the instruments and elements of capital that cease to be eligible under the new regulation. In addition, the capital conservation buffers provided for in CRD IV will be phased in gradually, starting in 2016 and reaching full implementation in 2019.

The Basel regulatory framework is based on three pillars. Pillar I determines the minimum capital requirement and allows for the use of internal ratings and models (IRB Approach) to calculate risk-weighted exposures. The aim is to make the regulatory requirements more sensitive to the risks actually incurred by financial institutions when carrying on their business activities. Pillar II establishes a system of supervisory review, aimed at improving banks’ internal risk management and capital adequacy assessment in line with their risk profile. Lastly, Pillar III deals with disclosure and market discipline.

 

 

2.2.1. Regulatory changes in 2015

The pace of regulatory change continued to intensify during 2015. Progress was made in terms of the review of the prudential framework and development of crisis management frameworks, with uncertainty concerning the global prudential framework.

International Regulation

The Basel Committee is reviewing its initial proposals for the standardised approach to credit, market and operational risk, in terms of capital consumption, in a bid to improve its simplicity, comparability and sensitivity to risk and reduce the variability of risk-weighted assets not justified by the different risk profiles.

The Committee is also reconsidering the role of internal models for the calculation of regulatory capital. The aim is that such reviews should not entail a widespread capital increase within the entire system:

 

•

Credit risk: A revised proposal concerning the standardised approach was tabled in December 2015. This proposal simplifies the previous version, and reintroduces the use of external ratings, in a non-mechanistic manner, for exposures to banks and corporates. The revised proposal also includes alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.

The Basel Committee has also embarked upon a review of internal models in order to incorporate limits on the estimation of parameters, and even remove them for some portfolios; to review the treatment of risk mitigation techniques; and to align the definitions of exposures in internal models and standardised models. Consultation concerning this review is expected during the first quarter of 2016.

 

•

Market risk: The Basel Committee in January 2016 published the final calibration and fundamental review for the trading book, which includes the standardised model, the advanced model and the separation between the banking book and the trading book.

 

•

Operational risk: Consultation concerning the review of the standardised approach was published in 2014, which entailed replacing the business lines in the current standardised calculation methodology with a size basis as the main driver. The Basel Committee is now reviewing this proposal, and a new one is expected in early 2016 wich not only intends to replace the current standardised approaches, but also AMA internal models.

The review of the capital framework is expected to be completed in 2016. The outcome is expected to be a hybrid approach, in which the utilisation of internal models will be permitted, albeit with limitations. Concerning the capital floors, the BCBS has indicated the intention of replacing the actual minumum of 80% RWA under Basel I, to minimum requirements defined under the standardised method of Basel III.

In 2015 the Basel Committee also published a proposal for a review of the risk framework for credit valuation adjustment (CVA). The latter aims at ensuring that all drivers of CVA and coverages are included in the Basel capital framework, aligning the capital standard with measurement of the fair value of the CVA employed for accounting purposes, and guaranteeing consistency with the basic review of the trading book.

In November 2015 the Basel Committee also published a proposal to add the STC criteria (simple, transparent and comparable securitisations) published in July by the BSBS and the IOSCO as part of the revised framework of securitisation capital of December 2014. This acknowledges a different capital treatment for STC securitisations entailing reductions in capital loads. The scope of the proposal, however, excludes synthetic securitisations and asset-backed commercial programmes (ABCPs), because the Committee is considering whether or not to treat these types of securitisations as STCs.

Another aspect on which the Basel Committee is engaged is a review of the treatment of sovereign debt within the prudential framework, which could lead to withdrawal of the application of zero risk for certain sovereign debt exposure or even the imposition of concentration limits on such exposures. A consultation concerning this debate is expected during the second quarter of 2016.

In 2016 the Basel Committee is also expected to submit a final proposal on the review of the regulatory treatment of the interest rate in the banking book. In June 2015 a proposal was published outlining the possibility of this risk becoming a Pillar I risk, or remaining within Pillar II with certain additional requirements such as, for example, a quantitative disclosure for market information based on the Pillar I approach proposed for this risk.

With respect to the leverage ratio, final calibration has been scheduled for 2017 and will depend on the final calibration of capital measures for credit, operational and market risk.

The Basel Committee also intends to carry out a holistic comprehensive assessment of the prudential framework in order to appraise the impact of the package of regulatory reforms, the interaction, coherence and calibration of these measures and ensure they are consistent with the desired objectives.

Additionally, with respect to the crisis management framework, in 2015 the FSB concluded a framework agreement to put an end to the notion of “Too Big To Fail” in the banking sector. Its last component, a standard to demand the minimum loss absorbing-capacity in order to recapitalise a bank (Total Loss Absorbing Capacity or TLAC), which will be required of G-SIBs (global systemically important banks), including Santander, was completed in November.

 

In this respect, in November 2015 the FSB published the final list of G-SIBs for 2017. Santander remains in the group of the least systemic banks, with the minimum additional capital load requirements (1%) and a confirmed phase-in load of 0.5% for 2017.

In June 2015, the net stable funding ratio requirements (NSFR) were published to improve transparency, bolster the principles of liquidity risk management, strengthen market discipline and reduce uncertainty in the markets as to its implementation. As a result, from January 2018, banks must publish details of this ratio’s numerator and denominator along with their quarterly statements.

Finally, with respect to market information disclosure requirements, the Committee published the revised Pillar III framework that will come into force in 2016 to address the shortcomings identified in the original Basel framework and enhance the comparability of banks’ risk-weighted assets.

European Regulation

The European Banking Authority (EBA) continued to issue standards and guidelines implementing aspects of European capital requirements (CRR/CRD IV) and helping to guarantee harmonious implementation of minimum capital requirements within the European Union. All these tasks are decisive factors to reduce the variability of capital consumptions not justified by the various risk profiles, thereby enhancing the level playing field and comparability among banks.

The EBA’s major regulatory initiatives in 2015 were as follows:

 

•

The final proposal for Prudent Valuation with requirements to make prudent valuation adjustments to fair-value positions. This is scheduled to be implemented in March 2016.

 

•

The February report on the risk framework for credit valuation adjustment (CVA), reiterating that exemptions from this risk must be eliminated/reconsidered when the CVA framework has been revised as part of the fundamental review of market risk (FRTB). Meanwhile, the EBA published a proposal in November suggesting that the excessive CVA risk in exempted exposures ought to be considered in the SREP and ICCAP processes. A consultation was also published in August on procedures to exclude transactions with non-financial counterparties operating in third countries from the capital requirements in respect of CVA risk. The aim is to align the current treatment with the treatment for non-financial counterparties operating in the EU.

 

•

The final report on assessment of AT1 instruments in May and an update of the list of equity instruments that competent EU authorities classify as CET1, in October. Consequently, it is respectively confirmed that issues in third countries must have a trigger calculated in accordance with European CRR/CRD IV regulations for consolidated accounting, and that instruments with no voting rights and certificates issued by cooperative companies are acknowledged as being compliant.

 

•

The September proposal concerning guidelines for application of the definition of default in order to improve consistency and harmonise the definition of default within the EU prudential framework.

•

The 2015 transparency exercise published by the EBA in November, providing details of the balance sheets and portfolios of 105 European banks. For the first time, the exercise was mainly based around information up to December 2014 and June 2015 that was furnished to the EBA by regulators. Banco Santander’s fully-loaded CET1 ratio in June 2015 was 9.83%.

In 2016 a number of regulatory proposals concerning the internal credit risk models on the EBA’s work plan announced in the discussion paper addressing the future of IRB models will be published in a bid to improve sturdiness, comparability and transparency, restore confidence in the models, and ensure consistency by regulators. TheCRR is also scheduled to be reopened in order to eliminate any inconsistencies and add in new Basel regulatory requirements, such as the new prudential treatment of securitisations or calibration of the leverage ratio. Also, the Commission has yet to determine the equivalence and jurisdictions of third countries on the basis of the EBA questionnaires and rule on the qualification of CCPs that have submitted requests. The Commission recently extended the transitory period to June 2016. Finally, the EBA intends to publish the report on calibration of the leverage ratio in July 2016, ahead of the mandate deadline of October 2016.

Since it was set up in November 2014, the Single Supervisory Mechanism (SSM) has enabled the European Central Bank (ECB) to take over comprehensive control of the Euro area’s financial entities. In 2015, the SSM’s role was expanded and the Euro area’s top 129 banking groups are now directly supervised by the ECB. Each entity has been assigned a joint supervisory team comprising representatives from the ECB and the national authorities of those member states where the entity has a significant presence. Banco Santander’s joint supervisory team worked tirelessly in 2015, holding over 100 meetings with the Bank.

 

With regard to supervision, 2015 was the first year of the Single Supervisory Mechanism and initial exercise of the SREP process. However, in January 2016 the SSM mechanism will apply the final SREP methodology published by the EBA in December 2014, in order to ensure that banks with similar profiles are reviewed and assessed in a consistent, homogeneous fashion. As part of this process, in December 2015 the EBA also published proposals concerning guidelines for ICAAP and ILAAP and a stress-testing proposal, and plans have also been made to use the results of the European stress test to be carried out in February 2016 in the SREP process.

In November, the ECB also published a consultation to reduce 122 national discretionalities among Member States supervised by the SSM, which must be implemented after March 2016 and is decisive for homogeneous development of the “single rulebook”.

Europe also continues to make progress in terms of implementation of the crisis management framework. The SRB or Single Resolution Board, the second pillar of Banking Union after the Single Supervision Mechanism, will be fully operational after 1 January 2016. In 2016 the SRB will establish the final loss-absorption requirement stipulated by EU regulations (Minimum Requirement of Eligible Liabilities or MREL) for banks, as a result of the assessment of resolution plans. 2016 will also be the first year of the Single Resolution Fund, which will be managed by the SRB.

Finally, in keeping with the intention of the Basel Committee to implement a comprehensive assessment of the prudential framework, the European Commission intends to move forward in connection with proposals for its priority objective of financing growth and fostering solid, sustainable job creation. In 2015 it issued a consultation on the impact of CRD IV on the financing of the economy, and a call for evidence to gauge the impact of the regulation and to identify any obstacles preventing the financial system from carrying out its function.

The Group communicates and maintains corporate and local positions on any issues submitted for debate in the financial sector that could affect its business. The corporate and local public policy function, in coordination with the business units and support divisions concerned in each case, identifies the regulatory alerts and establishes the Group’s position.

The main courses of action taken as a result in 2015 were as follows:

 

•

The Group has been a keen participant in the main banking associations worldwide and in Europe, and in the main markets in which we operate. Among other assistance, it contributes to the replies drawn up in connection with ongoing regulatory consultations.

 

•

The Group has maintained proactive, constructive dialogue with policy-makers through the existing channels (hearings to send individual replies to official consultations on issues considered relevant to the Group).

 

•

In particular, the Group has worked towards acknowledgement of the sturdiness of our organisational model with independent subsidiaries in terms of capital and liquidity, the benefits of geographic diversification and recognition of the equivalence of the jurisdictions of third countries where the Bank operates.

 

		Appendix I contains a list of new regulatory processes.

 

 

3.1. Background information in Grupo Santander

Banco Santander, S.A. is a private-law company, subject to the rules and regulations applicable to banks operating in Spain. In addition to its own activities, Banco Santander is the parent of a group of subsidiaries engaged in a variety of activities, which together make up Grupo Santander. The CRR, CDR IV and its transposition of Bank of Spain 2/2016 Circular, 2 February, of Supervision and Solvency applicable at consolidated level to the whole Group.

The Grupo Santander companies included in the scope of regulatory consolidation for the purposes of calculating the capital ratio under the CRR are the same as those that are included in the scope of consolidation for accounting purposes under Bank of Spain Circular 4/2004.

In application of Part I of the General Provisions of the CRR, certain Grupo Santander companies are consolidated using a different method from that used for the accounting consolidation.

The companies for which a different consolidation method is used, based on the regulations applied, and the equity investments that are deducted from capital are listed in Appendix II, distinguishing between financial institutions and insurance companies in which the Group has a significant ownership interest. As of the reporting date, both types of investment are exempt from deduction pursuant to article 48 of the CRR.

 

		A complete list of the companies that comprise Grupo Santander is appended to the Notes to the Group’s consolidated financial statements.

 

At 31 December 2015, under Rule Five of Bank of Spain Circular 3/2008, the subsidiaries Santander Leasing S.A. EFC* and Santander Factoring y Confirming S.A. EFC* are exempt from the minimum capital requirements, the limit on large exposures and the internal corporate governance obligations. No use of the exemptions under the applicable regulations has been made for any other Grupo Santander subsidiaries.

Santander is one of the banks that have not required state aid in any of the countries in which it operates.

 

 

3.2. Structure and policy of the Pillar III Disclosures

The Grupo Santander’s Pillar III Disclosures are divided into 13 sections and 7 appendices. The first 3 chapters describe material events affecting the Group that occurred in 2014, the macroeconomic and regulatory environment, the scope of application and the background to Pillar III in Grupo Santander. The 4th chapter provides full information on capital, including qualitative information on the capital function in the Group and quantitative information on the Group’s capital base and capital requirements.

Chapters 5 to 11 describe the risk function in the Group and provide detailed information about credit risk, market and ALM risk, operational risk, liquidity risk and compliance and conduct risk.

Chapter 7 describes the basic concepts of securitisations and summarises management of this activity during the year.

Chapter 12 describes the Internal Control function in the Group. Chapter 13 contains information on remuneration policy.

 

The Appendices contain information required pursuant to prevailing legislation on certain aspects such as eligible capital, the issue of preference shares and subordinated debt, the various consolidation methods of the Group’s subsidiaries and regulatory changes in 2015.

Lastly, the Appendix includes a glossary of terms to facilitate understanding of the report.

 

3.3. Governance: approval and publication

Pursuant to the official disclosure policy approved by the Board and recently updated at its meeting on 12 February 2016 to incorporate the EBA’s recommendations, Grupo Santander publishes its annual Pillar III Disclosures following board approval. Prior to Board approval on 12 February 2016, the report was reviewed by the Committee of Risk Supervision, Regulations and Compliance at its meeting on 11 February and the Capital Committee at its meeting on 8 February 2016.

In addition, since March 2015, a set of quarterly information has been published, in compliance with the European Banking Authority “Guidelines on materiality, proprietary and confidentiality and on disclosure frequency” pursuant to article 432, sections 1 and 2 and article 433 of Regulation (EU) 575/2013.

The Pillar III Disclosures are available in the “Investor Relations” section of Grupo Santander website (www.santander.com), under “Financial reports”.

In addition to the information in this report, some Group subsidiaries publish information on capital and solvency on their websites pursuant to regulatory requirements.

3.4. Transparency enhancements

Santander has taken note of the recommendations issued by the EBA and other working groups such as the Enhanced Disclosure Task Force (EDTF) to improve the transparency of the information published each year in its Pillar III report.

The EBA Report On Bank’s Transparency in their 2014 Pillar 3 Reports assesses the information reported by 17 European banks on various capital and risk aspects. Banco Santander was not included in the analysis this time due to reasons outside the entity’s control. However, it does consider this comparative report to be a very useful tool to continue to improve transparency and has incorporated the key best practices.

The Group has incorporated a large number of the Basel Committee’s recommendations included in its Revised Pillar 3 Disclosure Requirements document published in January 2015.

The enhancements introduced as a result of these recommendations and comments are detailed below:

 

3.5. Differences between the consolidation method for accounting purposes and the consolidation method for regulatory capital calculation purposes

For the purposes of calculating the solvency ratio in accordance with the nature of their activities, the Group units included in the prudential scope of consolidation, are consolidated using the global consolidation method, with the exception of jointly controlled entities, which are consolidated using proportionate consolidation. All companies that cannot be consolidated in accordance with their activities are accounted for using the equity method and so are treated as equity exposures.

The basis of the information used for accounting purposes differs from that used for the calculation of regulatory capital requirements. The measures of risk exposure may differ, depending on the purpose for which they are calculated, e.g. generation of accounting information, calculation of regulatory capital or generation of management information. The exposure data included in the quantitative disclosures in this document are used for calculating regulatory capital.

3.6. Disclosure criteria used in this report

This report has been prepared in accordance with the applicable European Capital Requirements (CRR).

Below are the details of the type of information that best reflects the discrepancies between the regulatory information, shown in this report, and the information shown in the annual report, and the accounting information:

 

•

The measures of credit risk exposure used for calculating regulatory capital requirements include (i) not only current exposures, but also potential future risk exposures arising from future commitments (contingent liabilities and commitments) or changes in market risk factors (derivative instruments); and (ii) the mitigating factors of these exposures (netting arrangements and collateral agreements for derivative exposures and collateral, and personal guarantees for on-balance-sheet exposures).

 

•

The criteria used for classifying defaulted exposures in portfolios subject to advanced approaches for calculation of regulatory capital are more conservative than those used for preparing the disaggregated information provided in the Annual Report.

The reconciliation of public and confidential balance sheets is shown below.

 

3.7. Substantial modifications due to scope changes and corporate transactions

1) 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 authorisations to commence activities in France and the United Kingdom were obtained and, accordingly, on 2 February 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 1 May, in which the Group contributed 50% of the share capital, amounting to EUR 23 million. On 3 August 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 1 October 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 1 January 2015, the profit contributed to the Group in 2015 would have been approximately EUR 159 million.

2) Carfinco Financial Group

On 16 September 2014, the Bank announced that it had reached an agreement to acquire the listed Canadian company Carfinco Financial Group Inc. (“Carfinco”) which specialises in vehicle finance.

In order to purchase Carfinco, the Group incorporated Santander Holding Canada Inc., 96.4% of which was owned by Banco Santander, S.A. and the other 3.6% by certain members of the former management group. This holding company acquired 100% of Carfinco on 6 March 2015, paying 209 million Euros, with goodwill of 162 million Euros.

During 2015, this business contributed with EUR 6 million to the Group’s income. If the business had merged on 1 January 2015, the contribution made to the Group during 2015 would have reached 7 million Euros.

3) Metrovacesa

On 19 December 2012, the creditors who had taken part in an operation to restructure the debt of Grupo Sanahuja, for which they received shares of Metrovacesa, S.A. in lieu of payment, announced that they had reached an agreement to promote the delisting of shares of Metrovacesa, S.A.. Accordingly, they voted in favour of this course of action in the General Shareholders Meeting, which was held on 29 January 2014 for that purpose. Once the delisting and the takeover bid was approved by the General Shareholders Meeting of Metrovacesa, S.A., the entities made an exclusion takeover bid to those shareholders of Metrovacesa, S.A. who had not signed the agreement at a price of 2.28 Euros per share. The Group took part in the exclusion takeover bid, acquiring a further 1.953% of Metrovacesa, S.A. for 44 million Euros.

On 23 December 2014, the Group acquired 19.07% of Metrovacesa, S.A. from Bankia, S.A. for 98.9 million Euros. This brought its stake in the company to 55.89% and it thus became the controlling shareholder.

Lastly, on 15 September 2015, the Group acquired 13.8% of Metrovacesa, S.A. from Banco Sabadell, S.A. for 253 million Euros. This took its stake in the company to 72.51%, this transaction gave a rise to an increase of EUR 18 million in reserves.

4) Agreement with UniCredit, Warburg Pincus and General Atlantic

On 23 April 2015, the Group announced that, together with its partners Warburg Pincus and General Atlantic, it had entered into a heads of terms and exclusivity 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 11 November 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 authorisations have been obtained.

5) Santander Consumer USA

On 3 July 2015, the Group announced that it had signed an agreement to buy the 9.68% stake held by DDFS LLC in Santander Consumer USA Holdings Inc. (SCUSA) for 928 million dollars. Following this transaction, subject to the granting of certain regulatory authorisations, the Group’s will have a stake of approximately 68.7% in SCUSA.

 

6) Funchal International Bank (Banif)

On 21 December 2015, the Group announced that the Bank of Portugal, as the national resolution authority, had decided to award the commercial banking business of Funchal International Bank (Banif) to the Portuguese subsidiary of Banco Santander, S.A.. These businesses and subsidiaries will now be included within the Group.

The transaction was instrumented through the transfer of a substantial part (commercial banking) of Banif’s assets and liabilities, for which the Group paid EUR 150 million.

Since the acquisition took place by the end of December 2015, these businesses did not contribute materially to the Group’s profit.

7) Custody business

On 19 June 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 31 December 2015, the sale remained subject to the obtainment of the relevant regulatory authorisations.

 

4.1. Introduction

Capital management and control in the Group is performed in an integrated way, seeking to guarantee the Bank’s solvency, fulfilment of regulatory requirements and profit maximization. It is determined by the strategic objectives and by risk appetite set by the Board of Directors. In order to achieve this, the following policies have been established to shape the approach that the Group applies regarding to capital management:

 

•

Establish adequate capital planning that covers current needs and provides the necessary resources to meet the business plan requirements, regulatory requirements and the associated risks in the short and medium term, while maintaining the risk profile approved by the board.

 

•

Ensure that, under stress scenarios, the Group and its companies maintain enough capital to cover the needs arising from the risk increase due to deterioration of macroeconomic conditions.

n Table 3. Solvency ratios

 

		Fully Loaded								Phase-In
EUR million		Dec-15				Dec-14				Dec-15				Dec-14
Common Equity (CET1)			58,705				48,129				73,478				64,250
Tier 1			64,209				52,857				73,478				64,250
Total Capital			76,205				60,394				84,350				70,483
Risk Weighted Assets			583,893				582,207				585,633				585,621
CET1 Ratio			10.05	%			8.27	%			12.55	%			10.97	%
Tier 1 Ratio			11.00	%			9.08	%			12.55	%			10.97	%
Total Capital Ratio			13.05	%			10.37	%			14.40	%			12.03	%

 

•

Optimise capital use through appropriate allocation of capital among the businesses, based on the relative return on regulatory and economic capital, considering risk appetite, its growth and strategic objectives.

Santander defines Capital Risk as the risk by which the Group or any of its companies have insufficient quantity or quality of capital to meet the minimum regulatory requirements established to operate as a bank, to meet market expectations in terms of creditworthiness and to boost growth of its businesses and any strategic opportunities that arise, in accordance with its strategic plan. The main objectives are as follows:

 

•

Meet internal capital and solvency objectives.

 

•

Meet regulatory requirements.

 

•

Align the Bank’s strategic plan with the capital expectations of outside agents (rating agencies, shareholders and investors, customers, supervisors, etc.).

 

•

Support the growth of the businesses and take advantage of any strategic opportunities that arise.

Grupo Santander has a comfortable solvency position which exceeds the levels required by regulations and by the European Central Bank. In 2015, the Group continued reinforcing its key capital ratios in response to a difficult economic and financial environment and to new regulatory requirements, starting the year with a capital increase of 7,500 million EUR and establishing a dividend policy that guarantees organic capital generation.

 

 

*	ECB Minimum prudential requirements based on the supervisory review and evaluation process (SREP)

 

The Group’s main solvency ratios at 31st December 2015 are as shown in table 3. Phase-in ratios are calculated by applying the transitory schedules for implementation of Basel III, whereas fully-loaded ratios are calculated using the final regulations.

In fully-loaded terms CET1 in December stood at 10.05%, thereby meeting the year-end target announced at the beginning of 2015. This constitutes an increase of 40 basis points on the year (disregarding the capital increase). The increase is actually 50 basis points prior to consideration of the net charge for capital gains and non-recurring write-downs.

The fully-loaded capital ratio was 13.05%, up by 130 basis points during the year, as the CET1 increase was enhanced by the favourable impact of the eligibility of hybrid issues.

From the point of view of quality, the Group has solid ratios suited to its business model, the structure of its balance sheet and its risk profile.

Grupo Santander exceeds the minimum regulatory requirements for 2016 by 280 basis points.

 

4.2. Capital function

The core principles provide the basic guidelines for the Group entities in capital management, monitoring and control.

 

•

Capital autonomy. The Group’s corporate structure is based on a model of legally independent subsidiaries, each with responsibility for its own capital and liquidity. This gives advantage in raising funds and limits the risk of contagion, thus reducing systemic risk, and subjects subsidiaries to two tiers of supervision and internal control: local and global. The local units have the necessary capital to carry on their activity autonomously and to meet regulatory requirements.

 

•

Centralised monitoring. The capital management model must ensure a holistic view, through a corporate environment of global coordination and review (every business, every geographic region). The first level of monitoring, by the local units themselves, is supplemented by the monitoring activity of the corporate units.

 

•

Appropriate capital distribution. The allocation of capital resources must be consistent with the effective location of risk assumed within the Group and proportional to the risk taken, in order to strike an optimal balance between solvency and profitability. Both the subsidiaries and the parent entity must be adequately capitalised, and capital must be allocated using balanced criteria.

•

Capital strengthening. Independently of the need to operate with a level of adequate capital (available capital) to meet legal requirements, the right mix of capital must also be ensured , encouraging the choice of the eligible elements with the maximum possible quality (based on its loss-absorbing capacity, its likelihood of remaining on the entity’s balance sheet in the longer term, and its ranking in the priority of payments), so as to guarantee the capital stability over time and support the Group’s sustained growth strategy.

 

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Capital conservation. Capital is a scarce resource which must be used as efficiently as possible, given the high cost of generating capital organically or by resorting to the markets. All units must therefore have ongoing monitoring mechanisms to optimise capital usage.

 

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Prudent capital management. The fundamental aim of capital management is to preserve the entity’s solvency without losing focus on the return on invested capital. This requires setting capital targets that are consistent with the entity’s risk profile, both locally and globally, so as to limit the levels and types of risk the entity is willing to assume in the course of its business and ensure that capital levels consistent with those risks are maintained.

•

Maximisation of value creation. Investment decisions are aimed at optimising value creation from invested capital. In order to align business management with capital management, a set of metrics relating the cost of capital to the return on capital investment are monitored, allowing the profitability of transactions, customers, portfolios and businesses to be compared on a consistent basis.

 

4.2.1. Organisation

The organisational structure has been defined with to ensure compliance with the principles of capital management, and to guarantee that the existing relationship between each subsidiary and the corporation in this function is such as to facilitate the subsidiary’s financial autonomy, subject to strict monitoring, coordinated at Group level.

Santander’s risk management and control model is based on three lines of defence. The first line is composed of the business functions or activities that assume or generate exposure to risk. Risks undertaken or generated within the first line of defence must be in accordance with appetite and the limited defined. To carry out its function, the first line of defence must have the resources to identify, measure, manage and report the risks assumed. The second line of defence comprises the function of controlling and supervising risk, and the compliance function. The second line is charged with effective control of risks, and ensures that they are managed in accordance with the risk appetite defined. Internal audit is the third line of defence and the last layer of control, and regularly assesses policies, methods and procedures to ensure they are suitable and also checks they are operational. The risk control function, the compliance

function and the Internal Audit function are sufficiently separate and independent from each other and also regarding other functions that they control and supervise in order to carry out their tasks, and have access to the Board of Directors and/or to its Committees at the highest level.

4.2.2. Capital governance

To ensure the proper exercise of the capital function, both in terms of decision making and in terms of supervision and control, Grupo Santander has developed a structure of responsive and efficient governance bodies, which ensure the participation of all the areas concerned and guarantee the necessary involvement of senior management. Because of the Group’s characteristic subsidiaries structure, the governance structure of the capital function has to be adapted to preserve the subsidiaries’ capital autonomy, while allowing centralised monitoring and coordinated management at Group level. There are also committees that have responsibilities both at local level and also for coordination at Group level. The local committees must report to the corporate committees as and when required on any relevant aspects of their activity that may affect capital, so as to ensure proper coordination between the subsidiaries and the corporate level.

 

Regulatory capital

 

•

Capital requirements: The minimum amount of capital the supervisory authority requires the entity to hold to safeguard its solvency, based on the amount of risk assumed, in terms of credit, market and operational risk.

 

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Eligible capital: The capital the regulator considers eligible to meet capital requirements. The main components of eligible capital are accounting capital and reserves.

Economic capital

 

•

Internal capital requirements: The minimum amount of capital that the Group needs with a specified level of probability to absorb unexpected losses deriving from its current exposure to all risks taken on by the entity (including risks additional to those contemplated under the regulatory capital requirements).

 

•

Available capital: The amount of capital the Group itself considers eligible, on management criteria, to meet capital needs.

Cost of capital

The minimum return required by investors (shareholders) as compensation for the opportunity cost incurred and the risk assumed in investing their capital in the entity. This cost of capital represents a “cut-off rate” or “minimum return” to be achieved and allows comparisons to be made between the different business units and their efficiency to be assessed.

Leverage ratio

The minimum return required by investors (shareholders) as compensation for the opportunity cost incurred and the risk assumed in investing their capital in the entity. This cost of capital represents a “cut-off rate” or “minimum return” to be achieved and allows comparisons to be made between the different business units and their efficiency to be assessed.

 

Return on risk-adjusted capital (Rorac)

The return (understood as net profit after tax) on internally required economic capital. Therefore, the higher the economic capital, the lower the Rorac. For this reason, the Bank must demand a higher return from transactions or business units that consume more capital.

Rorac takes the investment risk into account and so provides a risk-adjusted measure of return.

The use of Rorac allows the Bank to better manage its activities, assess the real risk-adjusted return of businesses and be more efficient in decision-making relating to investments.

Return on Risk Weighted Asset (RoRWA)

Defined as the return (understood as net profit after tax) on a business’ risk-weighted assets.

The use of RoRWA allows the Bank to set up strategies to allocate regulatory capital and ensure the maximum return is obtained.

Value creation

Any profit generated above and beyond the cost of economic capital.

The Bank will create value when the risk-adjusted return, measured by Rorac, is higher than its cost of capital. Otherwise value will be destroyed. Measures the risk-adjusted return in absolute terms (monetary units), supplementing the Rorac result.

Expected loss

Average NPL losses expected by the entity over the course of an economic cycle. From the point of view of expected loss, defaults are considered a “cost” that could be eliminated or reduced through appropriate selection of borrowers.

 

The Group’s capital function is preformed at two levels:

 

•

Regulatory capital: Regulatory capital management is based on the analysis of the capital base, the solvency ratios as defined by applicable regulation and the scenarios used in capital planning. The aim of the capital structure is to be as efficient as possible, both in terms of cost and in terms of compliance with the requirements of regulators. Active capital management includes strategies for capital allocation and for efficient usage of business units, securitisations, asset sales and issues of capital instruments (preferred stock, subordinated debt) and hybrid capital instruments.

 

•

Economic capital: Economic capital management aims to optimise value creation in the Group and its business units. For that purpose, economic capital, RORAC and value creation per business unit are calculated, analysed and reported to the capital management committee. Within the framework of the internal capital adequacy assessment process (Basel Pillar II), Grupo Santander uses an economic capital measurement model to ensure that sufficient capital is available to support all the risks of its activity under several economic scenarios, and with the capital adequacy levels set by the Group.

 

 

4.4. Capital management priorities in 2015

Details of the most significant actions taken in 2015 are set out below:

January 2015 Capital increase

In 2015 Santander carried out a capital increase of 7,500 million EUR through the issuance of 1,213 million shares, disregarding preferential subscription rights for current shareholders. The capital increase was carried out via an accelerated book building offer aimed at institutional investors. The new shares started trading on 13th January 2015.

This capital strengthening enabled the Bank to take advantage of organic growth opportunities and increase lending and market share. It also allows early compliance with the Basel III capital requirements, assuming its full implementation since 2015, even though they are not required until January 2019.

Issuances of financial instruments with the legal status of capital

In March, Grupo Santander S.A. issued EUR 1,500 million in subordinated debt eligible as tier 2 capital, with fixed annual returns of 2.5%, boosting its overall capital ratio.

In June, Santander UK Group Holdings issued GBP 750 million in perpetual securities eligible as additional tier 1 capital, with an annual return of 7.375%, boosting its tier 1 capital ratio.

In September, Santander UK Group Holdings issued USD 500 million and USD 1,000 million in subordinated debt eligible as tier 2 capital, with fixed returns of 5.625% and 4.75%, respectively, boosting its overall capital ratio.

Finally, in November, Grupo Santander S.A. issued USD 1,500 million in subordinated debt eligible as Tier 2 capital, with fixed annual returns of 5.18%, boosting its overall capital ratio.

Takeover bid in Santander Consumer USA

In 3 July 2015 the Group announced it had reached an agreement to buy DDFS LLC’s 9.68% stake in Santander Consumer USA Holdings Inc. (SCUSA) for USD 928 million. Following this operation, subject to regulatory authorisations, the Group’s holding in SCUSA will stand at approximately 68.7%.

Dividend’s Policy

During 2015 Bank’s Dividend policy was reoriented, being applicable with the effect from the first dividend paid against 2015 profits and with a view to paying in cash the most part of the quarterly retribution; announcing that the retribution paid against 2015 profits would be 0.20 Euros – three cash dividends and a scrip dividend (Santander Dividendo Elección), for an approximated value of five cents per share and each of them. Furthermore, the intention of cash pay-out represents between 30% and 40% from the recurrent profit, instead of the 20% back then, and that the evolution from the shareholder retribution was according to the growth of the results.

It should be highlighted that the goals have been met with a cash dividend of 38% of the profit and a rise of the cash dividend per share of 79%.

In December 2015, the European Central Bank issued a recommendation about the dividend’s policy to be applied from 2016 to all credit entities in the Eurozone. In the same recommendation, the European Central Bank invites to stablish more conservative dividend policies and ensuring prudent assumptions.

Finally, in some geographies, some limitations about the distribution of dividends have been stablished, based on the new and more strict regulation about solvency, but at the moment and excluding the objections issued by the Boston Federal Reserve about the Comprehensive Capital Analysis Review (CCAR) from the Sub-Holding of our subsidiary in the United States, there is no record of any other practical or legal impediment, to the transfer of funds from the subsidiaries to the Parent through dividends, loans, advances, in the form of risk capital or other instruments, by the dependent entities of Grupo Santander.

 

4.5. Capital goals

Grupo Santander is working with the objective of achieving a fully loaded CET 1 ratio of above 11% in 2018.

 

 

The Group is committed to improve capital allocation efficiency. The levers and guidelines to achieve this objective are:

 

•

Maintain RWA growth below profit growth , ensuring coordination among all Units.

 

•

Develop and carry out capital optimisation plans at Group level, by countries and by business lines.

 

•

Anticipate and adapt to changes in law and in regulation.

 

•

Definition of the capital structure, capital plans and living wills.

 

•

Apply capital discipline to the entire Group and control M&A.

4.6. Pillar I regulatory capital

The current regulatory framework for capital calculation is based on three pillars:

 

•

Pillar I sets the minimum capital requirement for credit, market and operational risk, allowing the possibility of using internal ratings and internal models (IRB approach) for calculating credit-risk-weighted average exposures, internal models for market risk and internal models for operational risk. The aim is to make the regulatory requirements more sensitive to the risks actually incurred by financial institutions in carrying out their business activities.

 

•

Pillar II establishes a system of supervisory review, aimed at improving banks’ internal risk management and capital adequacy self-assessment in line with their risk profile.

 

•

Lastly, Pillar III defines the elements related to market discipline and disclosure.

In Spain, the regulations on the calculation and monitoring of minimum capital have been actively updated ever since Basel II came into effect. The Capital Requirements Directive and the Regulation implementing the Basel III agreement were approved on 27th July 2013 and apply from 1st January 2014.

4.6.1. Eligible capital

Total eligible capital, after retained earnings, amounts to EUR 103,125 million having increased EUR 11,461 million throughout the year (12%).

In January 2015, Grupo Santander carried out a capital increase of EUR 7,500 million, through the issue of 1,213 million new shares. In addition, throughout 2015, the bank launched several ordinary share issues to meet the demand of those shareholders that decided to receive dividends in the form of shares, under the Santander Dividendo Elección (scrip dividend) programmes. During the three scrip dividend issues performed during the year (two for the third and fourth dividends of 2014 and one for the second dividend of 2015), a total of 636,485,686 shares were issued, with a combined acceptance of 84.1%.

Valuation adjustments decreased in EUR 3,504 million, primarily reflecting the impact of exchange rates on the value of investments in foreign subsidiaries (partly hedged) and the valuation of available-for-sale portfolios.

A reconciliation of accounting capital, which is the subject of the preceding paragraphs, to regulatory capital is shown below: