8		Message from Ana Botín, Group executive chairman
16		Message from José Antonio Álvarez, chief executive officer
22		Corporate governance

 

1
28		Business model and strategy
30		Purpose and business model
32		Aim and value creation
		34 Employees
		38 Customers
		44 Shareholders
		48 Communities
52		Risk management

 

 

2
56		2015 results
58		Economic, banking and regulatory environment
62		Santander Group results
65		Countries
73		Global Corporate Banking

 

 

3
74		Corporate governance report
76		Executive summary
78		Introduction
79		Ownership structure
82		Banco Santander’s board of
		directors
105		Shareholder rights and the
		general shareholders’ meeting
107		Santander Group
		management team
109		Transparency and independence
111		Challenges for 2016

 

4
112		Economic and financial review
114		Consolidated financial report
		114 2015 summary of
		Santander Group
		116 Santander Group results
		122 Santander Group
		balance sheet
129		Geographic businesses
		132 Continental Europe
		146 United Kingdom
		149 Latin America
		163 United States
		166 Corporate centre
168		Global businesses
		168 Retail and
		commercial banking
		171 Global Corporate Banking

 

5
174		Risk management report
176		Executive summary
180		A. Pillars of the risk function
182		B. Risk control and management
		model - Advanced Risk
		Management
		182		1. Map of risks
		183		2. Risk governance
		185		3. Management processes     and tools
		192		4. Risk culture - Risk Pro
194		C. Background and upcoming
		challenges
199		D. Risk profile
		199		1. Credit risk
		230		2. Trading market risk
				and structural risks
		250		3. Liquidity risk and funding
		261		4. Operational risk
		270		5. Compliance and conduct     risk
		277		6. Model risk
		279		7. Strategic risk
		281		8. Capital risk
290		Appendix: EDTF transparency
292		Historical data
294		General information

 

Dear fellow shareholders,

In 2015, we delivered on everything we promised a year ago and delivered in the right way. We increased our earnings and used them to pay a higher cash dividend, to invest in our business and to strengthen our capital base organically. This success has put us ahead of our strategic plan.

2015 At a Glance

We have increased our number of loyal customers by 1.2 million and improved customer satisfaction so that we are now in the top 3 in 5 of the countries where we operate, which is our aim in all markets. According to our internal surveys, we are all feeling more engaged in our work.

The results of more loyal customers and a more engaged team are a strong operating performance and a net statutory profit in 2015 of €6 billion:

 

•

Customer loans grew by 6.4%.

 

•

Customer revenues grew by 7.6% to €42 billion.

 

•

Underlying profit after tax (excluding PPI and other one-off effects) grew by 13%.

 

•

This growth in revenues and profitability has allowed us also to grow our capital organically by 40 basis points, to 10.05% (10.15% excluding PPI) and to grow our cash dividend per share by 79%.

 

•

Finally, our company is more valuable than 1 year ago, as measured by our tangible net asset value (TNAV) per share, which grew by €0.11.

Those of you who acquired shares at the time of our capital raise on January 8 2015 and still hold them, have received a cash dividend per share of €0.11 and a total dividend per share of €0.40, equivalent to 6% of your investment.

But since that date our market valuation has fallen by 36%. This is probably related to a different perception of the strength of our capital and the extent of our regulatory capital buffers and to the concern about our presence in certain emerging markets.

The purpose of capital buffers is to protect our customers, shareholders and employees. We take this responsibility extremely seriously.

Our prudential minimum capital requirement today is to maintain a Common Equity Tier1 (CET1) of 9.75%. Our capital adequacy currently stands at 12.55%, a buffer of 280 bps, equivalent to €16 billion.

The reason we have these excess buffers is to get ready for 2019 when we will converge to the regulatory requirements known as Basel III.

As we announced to investors last September, our goal is to have a CET1 capital ratio fully compliant with Basel III criteria of more than 11% by December 2018, when our regulatory requirement will be 10.5%. I am confident that with the uplift we achieved in 2015 and our current growth and capital generation, we will meet our target.

 

 

We have set this goal of above 11% to align with the highest prudential standards for two reasons. First, our required minimum is less because our model is considered less interconnected, and easy to resolve. Second, we need lower management buffers over this minimum because of the relatively low volatility of our earnings and our better relative performance under stress scenarios.

The key factors in favor of Santander are:

 

•

Our business is less volatile than that of our peers. We have paid a dividend every year for 50 years.

 

•

We went through the financial crisis without reporting any quarterly loss. We paid dividends every year and at the lowest point, in 2012, we delivered a net statutory profit of €2.3 billion, as our retail and commercial banking activities continued to be profitable practically in every market.

 

•

Our subsidiaries are autonomous in managing their capital and liquidity. We have more than sufficient capital to operate safely, to satisfy regulators in all of our markets and at the Group level, and to provide the returns expected by our investors.

 

•

Since 2007 we have generated profits before taxes of €93 billion. Our pre-provision profit has been on average 2.3 times the provisions we incurred. We are now transforming our bank to expand our capacity to generate capital. This will make us even more resilient throughout the business cycle.

However, what best explains our market underperformance since our historical high valuation of €100 billion in April last year are concerns about the future of Brazil.

Brazil is going through a challenging period, but our bank performed excellently there this year. Our team delivered strong recurring profits and made significant one-off positive contributions. Net statutory profit grew by 33% in local currency and by 13% in euros in 2015. Our return on tangible equity (RoTE) in Brazil was a healthy 14%. Finally, our balance sheet in Brazil –which represents 8% of total Group customer loans- shows the lowest non-performing loan ratio among the top Brazilian private banks: 3.2%.

Today in Banco Santander, as our performance in 2015 shows, we have the people, the vision and the resources to deliver for our shareholders.

We will manage the business to deliver on earnings per share (EPS), dividends per share (DPS) and TNAV per share as I laid out in my letter last year and at our Investor Day in September.

 

The Santander “Moat” is large and deep

In summary, today’s market is not considering the full value and strength of our model and our diversification.

Warren Buffett often says that he likes to invest in companies with a “moat”, a competitive advantage which protects profits and market share over time.

Our moat is our critical mass in every one of our 9+1 (Santander Consumer Finance Europe) core markets, where we serve a total of 121 million customers. This provides consistent earnings, quarter after quarter and through the cycle.

We have earned the trust of our customers over many years, through hard work and careful stewardship of their financial affairs. Our relationship managers talk to many of these customers every day. They have helped them through difficult times, supporting when others who know them less well might have walked away.

We also operate in a carefully assembled mix of developed and developing markets. When one or two markets are struggling, others are thriving.

Santander Consumer Finance is the top consumer bank in Europe. In Mexico, we are the main bank for small and medium sized enterprises. In Poland, our bank is the most profitable among its peers. We have the second largest private bank and the most profitable one in Portugal. And that doesn’t take into account the continued strength of our most important banks in Spain and the UK, which have performed well despite continued low interest rates.

The combined growth of our continental European business this year has delivered €2.2 billion attributable profit, or 35% growth; our UK and US businesses delivered €2.6 billion attributable profit, 10% more, representing 31% of total attributable profit¹.

The second half of this year’s disappointing share price does nothing to undermine my belief in our diversified structure which has been built to do exactly what it is doing: providing predictable earnings with lower volatility through the cycle.

Our critical mass, our personal relationships with customers and our geographical diversification combine to create the large, deep moat around us.

These are the sources of our unique competitive advantage and what give us confidence that we can deliver earnings at the same time as we adapt our business for the future.

They are the foundations upon which we are building Santander for the next 50 years.

We have scale and financial strength on our side and we are learning how to think and act like a challenger at the same time.

 

 

Customers

When I wrote to you last year and laid out my vision and plans to transform Santander, I said that the “measure of our success will be that wherever we operate our customers are the ones who champion our services and bring in new customers.” We have made great strides in helping people and businesses, our customers, prosper. I would like to review in detail what we have achieved in 2015.

Banking is an industry which will look very different very soon because of technology. But it remains at its heart a personal business. It is about satisfying the needs and aspirations of our customers, of families wanting to buy homes and businesses wanting to expand. Our daily work is about serving our 121 million customers today and to anticipate what they will need tomorrow: a loan as well as the latest mobile app to fit seamlessly into their digital lives.

Our focus this year and going forward, will be to earn the loyalty of our customers and encouraging greater use of our digital banking services. In simple terms: we want more of our customers to do more of their banking with us. And we are ready for them to do more of their banking digitally.

Progress in 2015

 

•

In the UK, one out of every three new accounts is now opened via our digital channels.

 

•

In Poland, our customers can now apply for a cash loan using their phones and receive a response within 60 seconds.

 

•

In Spain, a new 1|2|3 account is opened every minute through our digital channels.

As a result of these efforts, we have reached our targets and grown our number of loyal customers by 1.2 million and our digital customers by 2.5 million.

In the markets where our number of loyal customers has increased the most, so has our revenue. And this progress is reflected in rising customer satisfaction. In five of the markets we serve, we are ranked among the top three banks for customer satisfaction. We care a lot about these customer satisfaction rankings and loyalty numbers because they set the pulse of our business. If they are strong and healthy, our company is too.

People

Santander built a strong, successful culture over many years. This culture was at the root of our expansion and growth. Now we need to change. This is going to take hard work and time, but we are well on our way.

Internally, we have been undergoing a process of profound cultural change. We are reevaluating every one of our processes to ensure that we can be true to our values, purpose and aim, and be ready to embrace new technology sweeping through financial services.

I want every member of our global team to feel motivated and inspired by these changes, to know that we will do everything we can to support them in their work. I am asking for the same commitment to change from myself, my board and my most senior executives, as I am from those who work in our branches and help our customers every day.

Our latest survey of our global team showed that many more of us believe in this process today than when we started a year ago. We are rethinking how we measure performance and create incentives. Our program of flexiworking has been especially popular. We want our teams to guide us, to let us know how they can contribute most to our organization.

 

During 2015 we have worked to agree on the behaviours that will help us build a bank that is more Simple, Personal and Fair.

There are eight of them: show respect; truly listen; talk straight; keep promises; actively collaborate; bring passion; support people; and embrace change. It is a short list on purpose. It is meant to be achievable.

We value honesty, energy and directness in our families and friends, and we should expect no less from our colleagues at work.

Across the organization, we are focused on becoming more efficient and more transparent. At the corporate centre, we have reduced the number of divisions from 15 to 10 as well as the number of top executives and executive board directors at the Group level.

This has allowed us to reduce the total cost of compensation for those at this level by 23%.

Good governance has taken on fresh importance since the financial crisis, and we are working harder than ever to appoint the best people and create the clearest lines of accountability between all of our operations. Our industry is complex by nature, but our business should never be more complex than necessary.

We are constantly seeking the ideal balance between our corporate centre and our countries. We trust our local teams because they are closest to our customers. But we also want them to take advantage of being part of a global Group.

From our centre in Spain, we offer products and best practices, ranging from technology systems to control, which enable our subsidiaries to capture significant economies of scale. The synergies created by this system are worth 3 points of our cost-to-income ratio. Our in-country teams can stay close to their markets while operating more efficiently than their competitors. There are no intermediate levels between our country heads and the Group CEO, because we believe that a lean corporate structure, with the fewest possible layers of management, is the best guarantee of simplicity and transparency, and will deliver for both our customers and our shareholders.

This relationship between the centre and our subsidiaries is essential to continue to improve our cost-to-income ratio, a key measure of efficiency that remains one of the best in the industry at 47.6%. And our simple, geographically ring-fenced subsidiary model results in the lowest Financial Stability Board additional capital recommendation among our peers.

Shareholders

Until the situation in Brazil began to deteriorate in mid year, the relative performance of our share price was comparable to that of our peers and the major indexes.

The long-term story of Brazil is the growth and development of one of the largest emerging economies in the world. We are going to endure the current situation, be patient and be strongly positioned when Brazil resumes its upward journey.

It is important that our shareholders recognize this, and consider the growth in our TNAV per share in 2015. There is always a lot of noise in finance, but the strong, underlying signal coming from Santander is of steady growth and value-building. I am convinced that our share price will eventually come to reflect this and our shareholders patience will be rewarded.

 

 

We derive enormous benefits from the way our diverse geographies and retail and commercial banks with critical mass minimize our risks and even out our revenues.

During 2015, we grew our net profits (in euros) in Spain and SCF by 18%, in the UK by 27%, in Portugal by 63%, in Brazil by 13% and in Mexico by 4%. These businesses represent 81% of our customer loans and 76% of our Group profits. Chile reduced its profit by 9%, US by 21% and Poland by 15%. These three businesses represent 16% of our customer loans and 17% of our profits.

We see great potential for us to grow in Poland where we are leaders in digital channels and where loans are growing by 11%. We are working to improve our operations in the USA: we have put in place a new team in recent months, composed of top talent at both the executive and board levels. We know what we have to do in the USA to succeed on all fronts.

Our model proved its worth during the financial crisis, throughout which we never posted a single quarter of losses. We never required a bail-out in any of the countries where we operate. Though designated a global SIFI (Systemically Important Financial Institution) we have the lowest capital charge among global SIFIs. And for these reasons, we need lower capital buffers, as noted previously, than other international banks with different models.

It was not an easy decision to change our dividend policy, as we did last year. But we have to pay a dividend that reflects the reality of the macro-regulatory situation and our earnings, and is consistent with our strategy. What is important, is that our model delivers enough profits to reinvest further in: profitable growth; a strengthened capital base; and an increased dividend per share.

Communities

We continued our support for higher education through our Santander Universities programme which now reaches more than 1,200 universities around the world. Last year, we awarded around 35,000 scholarships to students attending these universities, as well as investing in programmes to improve financial inclusion and education.

We have launched the UK Discovery Project, helping people prosper through enhanced education, skills and innovation, which will support a million people by 2020.

We also supported around 7,000 entrepreneurs and 500 start-ups through our community programs to promote job creation.

Our target is to support 4.5 million people between now and 2018.

Looking ahead

It is said that strategy rarely survives first contact with adversity. But after eighteen months in charge of Santander, I am confident that the plan we have in place is the right one.

We are building from a strong and diverse base. Santander built a reputation over the past three decades as an expansive, acquisitive bank, venturing from Spain to markets across Europe and the Americas. I cannot rule out future bolt-on acquisitions in our 9+1 core markets, provided they make both strategic and financial sense, but for the immediate future we are focused on growing loyal customers and organic growth.

We are overhauling our operations and our management to make them more Simple, Personal and Fair. We want our employees to feel happier and prouder than ever to work for Santander. We are building and learning new technologies so that we can revamp our internal processes and develop better products and services for our customers, whilst remaining best-in-class in efficiency.

 

And we are lowering our cost of risk with an average target for 2015-2018 of 1.2%.

Our goal is to grow earnings and dividends per share annually, reaching double digit EPS growth by 2018, from a stronger, more resilient capital base with a CET1 above 11%.

Over the coming year, we anticipate different contexts for the developed and developing economies where we operate. In the developed economies, we envisage steady low GDP growth and falling unemployment. Low oil prices and low interest rates will be good for both individual and corporate customers.

Interest rates in the United States seem to be moving upwards, but the return to normality in the credit markets after years of quantitative easing is going to take time. Political uncertainty persists in parts of Europe, and a new president will be elected in the United States in November. Our base case scenario is low and flat yield curves in the developed markets for quite some time.

In the developing economies, we are always braced for greater volatility. But the underlying trends remain hugely promising. We are well placed in markets with young and growing populations, low banking penetration and low borrowing levels, where we can earn returns on equity far higher than those we earn in the developed markets. As I mentioned above, diversification is our strength.

Listening to our customers and anticipating what they want from us; fixing things fast when we make mistakes; making their interactions with us Simple, Personal and Fair, each and every time - these are our main goals, today, tomorrow and as far into the future as we can see.

To guide us, we will focus on our purpose: to help people and businesses prosper. This is the Santander Way. It is the foundation for our success. And we have a clear aim: to be the best retail and commercial bank, earning the lasting loyalty of our people, customers, shareholders and communities.

Strong corporate governance is vital to all of our work. Banco Santander’s board is fully involved in the Group’s oversight. I would like to thank Juan Rodríguez Inciarte and Sheila Bair for their invaluable contribution to the bank.

We have strengthened our boards both centrally and in our regional subsidiaries, drawing on strong independent directors to provide fresh perspectives and advice.

2015 has been a year of tremendous learning and progress for me personally and for Santander. We can see a clear path to the objectives we have set ourselves for 2018. But we still have to walk that path and turn the unforeseen bumps ahead into opportunities if we want to deliver on our purpose of helping people and businesses prosper.

We still have to act each day in a way that is more Simple, Personal and Fair. The digital revolution in finance won’t happen by itself. We aspire to lead in ensuring that it delivers on its promise for our customers above all.

With the support of our nearly 4 million shareholders, a Board committed to our objectives and an excellent team, I am confident we will succeed.

 

2018 TARGETS:

 

•

Increase EPS reaching double digit growth in 2018

 

•

CET1 >11%

 

•

Average cost of credit 2015-2018: 1.2%

 

•

Increase DPS and TNAV per share

 

 

 

We are living in a time of significant change. Technology is generating a new way of relating to one another and is increasing the information and decision-making capacity of all economic agents. In the financial sector, other challenges add to these changes, such as new regulations, the entry of new competitors, an environment of low interest rates and uneven growth between mature and emerging economies.

Developed economies continued in 2015 to show signs of recovery but emerging countries, as a whole, grew at a slower pace, because of their internal dynamics as well as the fall in commodity prices and China’s slowdown.

The markets were volatile. Emerging currencies depreciated against the dollar and interest rates remained low in mature markets. The Federal Reserve waited until December to announce the first increase in interest rates of only 25 b.p.

This environment continued to put pressure on banks’ profitability, added to which were regulatory requirements in two directions. Firstly, greater capital requirements, which have doubled in the last few years. Secondly, regulatory requirements hit income statements as they limited the capacity to generate revenues, required higher costs and investments in technology and personnel, while producing a higher tax charge.

Competition from banks and non-banks was also stronger in various countries and business areas.

Santander is facing these challenges with a business model that has proved its strength in recent years and which we are adapting to the new environment, in order to maximise our profitability goals.

2015 Group results

2015 was a year of transition in which we posted good results and the Bank advanced in its commercial transformation.

We want to have more loyal customers and make transaction banking the key element. We are analysing which products have opportunities for improvement in each market and we are working on them. We are launching the 1|2|3 strategy, as well as other global Group proposals such as Santander Advance, International Desk, Santander Passport and Santander Trade for the corporate world.

The number of digital customers reflect the boost provided by the multichannel strategy. Of note were Mexico, Spain, UK and Portugal, which grew at rates of around 20% or more.

Digitalisation is key for adapting to the new form of customer relationships. Handling big data will provide us with better knowledge on our customers and enable us to respond to their needs. Moreover, it is an effective way to cut costs, enhance efficiency of processes and simplify our structure. We are making significant progress in this direction and have been recognised in the sector as pioneers in the launch of various apps and services.

 

 

 

 

 

This strategy is reflected in increased customer satisfaction and in balanced growth in business volumes.

Lending increased 6%, with gains in market share, mainly in SMEs and companies. Customer funds rose 7%.

These dynamics spurred revenues and enhanced their quality, as the most commercial and recurring income (+8%) increased its percentage of the total:

 

•

In an environment of very low interest rates in some countries where we operate, net interest income increased 9% thanks to commercial and spread management.

 

•

Fee and commission income rose 4%, absorbing the negative impact of regulatory requirements. We have improvement plans for the coming years.

In contrast, trading gains fell 16% as they were hit by market volatility. Other income was affected by higher allocations to deposit guarantee and resolution funds, to which the Group assigned close to €800 million in 2015.

The efficiency plans and discipline in costs enabled growth in costs to be almost flat in real terms and on a like-for-like basis. We met the efficiency plan goals (€2,000 million) one year ahead of schedule, thereby making austerity in operating costs compatible with investment in regulatory requirements and in digitalisation and the multichannel strategy.

We are one of the international financial system’s most efficient banks, and in order to continue being so, we announced at the Investor Day that we had increased the efficiency plan by €1,000 million to €3,000 million of cost savings for 2018. These will enable us to make investments and improvements while continuing to achieve excellent cost-to-income ratios.

Revenue growth and cost control were accompanied by a 4% decline in loan-loss provisions. This was made possible by the improvement in credit quality in almost all countries, thanks to an adequate risk management policy. With the launch of the advanced risk management programme (ARM) and strengthening of the risk culture throughout the Group under a common identity (risk pro), we are continuing to advance toward prudent and sustainable risk management.

These measures also pushed down the NPL ratio to 4.36% at the end of 2015, 83 basis points lower than in 2014, while coverage was six percentage points higher at 73%.

Underlying attributable profit increased 13% to €6,566 million.

In addition, in 2015 we recorded the impact of the net of non-recurring positive and negative results of €600 million. Even after absorbing this impact, profit was 3% higher.

The year’s results contributed significantly to the generation of capital, where we have a comfortable position consistent with the stability and recurrence of our business model. In fully loaded terms, the ratio was above the 10% target we set at the start of the year, as optimisation of capital is one of our strategic objectives.

And we combined an increase of 3% in the tangible book value per share with a cash dividend distribution of more than €2,200 million compared to €1,143 million in 2014.

 

In underlying terms, the RoTE remained at 11% and the RoRWA rose to 1.30%.

In short, we progressed in 2015 toward our main goals, demonstrating our strength and the efforts to earn the lasting loyalty of our employees, customers, shareholders and communities.

I will now devote the rest of my message to the performance by the main units in 2015 and the management priorities for 2016.

Performance by business areas in 2015¹

In Spain, we focused on forging long-term relations with our customers. For example, launching the 1|2|3 strategy with which we attained 860,000 accounts. We want to be the bank of choice for companies and so we launched the 1|2|3 account for SMEs, and other programmes with differentiated offers. This increased our market share in the segment, and we are leaders in wholesale banking. We also achieved a significant improvement in customer satisfaction surveys. Lastly, we strengthened the corporate governance model, aligning it with the rest of the Group’s subsidiaries.

In an environment of tough competition, attributable profit was 18% higher than in 2014 at €977 million, thanks to lower provisions and control of costs.

In the United Kingdom, the positive trend continued in individual customers with the 1|2|3 strategy, as well as in companies where we continued to gain market share. We focused on mobile and online channels, launching a range of solutions that was well received by the market. The number of digital customers rose 22%. We also continued to increase the number of loyal customers. In companies, we gained more market share with sustained growth in a market that as a whole is not growing.

Underlying attributable profit was 14% higher at £1,430 million thanks to good commercial dynamics, reflected in revenues and in an improvement in credit quality that led to lower provisions.

In Brazil, we continued to improve the bank and carry on the commercial transformation, based on a multichannel approach and growth in digital customers, improving and simplifying processes and in operations such as Getnet and Bonsucesso, with which we increased our fee and commission income. All of this is reflected in a more sustainable business model.

Attributable profit was €1,631 million, up 33%, and driven by commercial revenues, enhanced efficiency and provisions growing at a slower pace than lending.

Although it is not possible to isolate oneself completely from the country’s current recession, the improvement in the franchise over the last few years, the better quality of the balance sheet and gains in productivity and efficiency enable us to face the current environment with guarantees.

In the United States, we continued to strengthen the governance structure. We bolstered the risk management and control models in order to meet the regulator’s expectations. We are creating the holding company that will integrate businesses in the country, which impacted costs. We are investing in improving the banking franchise, in order to enhance the customer relationship and increase profitability.

The priority at Santander Consumer USA is auto finance, as we are discontinuing the business of personal loans.

All these measures are temporarily impacting results and largely explain the drop in profit to $752 million.

 

 

 

 

Santander Consumer Finance is Europe’s consumer credit leader, with a unique business model and excellent credit quality. Geographic and product diversification was strengthened by the latest operations, such as the integration of GE Nordics and development of the agreement with Banque PSA Finance, which is meeting the timetable set. Attributable profit rose 18% to €938 million.

In Mexico, we completed the expansion plan begun in 2012, which was reflected in a faster pace of business growth and gains in market share. Pre-tax profit grew 8% thanks to the positive trend in revenues, mainly net interest income.

In Chile, the focus was on business growth in companies and in target segments of individual customers, as well as in improving the quality of customer attention. The result was better than expected despite the 13% fall in profit, which was due to lower UF inflation than in 2014 and a higher tax charge.

In Argentina, profit grew by more than 20%, thanks to progress in the new commercial strategy and the expansion plan, which produced higher net interest income, and fee and commission income.

In Poland, we are the best bank in terms of profitability and continued to be the leader in cards, and mobile and online banking. Profit fell 15% because of the drop in interest rates and the introduction of maximum rates for consumer credit and cards.

In Portugal, we gained market share, mainly in companies. We are in a process of normalising profits, which rose 63%. In December, Santander Totta was awarded most of assets and liabilities of Banco Internacional do Funchal (Banif), making us the country’s second largest private sector bank.

Business areas priorities for 2016

Looking to 2016, the outlook for the global economy points to a slight and uneven recovery. This improvement will come from advanced economies, which will consolidate their moderate recovery, while emerging economies will struggle to stabilise their growth.

Beyond the current point in the cycle, emerging economies are a fundamental asset in Banco Santander’s strategy. Firstly, because of their higher growth potential, in view of their demographic dynamics, and their more vigorous productive capacity; secondly, the considerable gap they still have to fill in terms of banking penetration, based on the improvement of their levels of development, and the substantial growth in their middle classes; and thirdly, the diversification and stability that these countries provide to our balance sheet and income statement from businesses in economies with different cycles, as shown once again in the extreme conditions of the last few years.

In this context, we will continue to focus on improving customer satisfaction in all the Group’s units, on advancing in the digital transformation process and on increasing the number of loyal customers. We will also continue to centre selectively on key businesses in order to gain market share in them. At the same time, setting priorities on the basis of the features and the circumstances of each market:

 

•

In Spain, we want to have 2 million 1|2|3 accounts, continue to improve customer satisfaction, reduce the cost of credit and gain market share in SMEs.

 

•

The UK will continue to focus on customer satisfaction, the digitization process, increase the range of services and grow again at a faster pace than the market in SMEs.

 

•

In Brazil, the improvement in our franchise in the last few years, the enhanced quality of the balance sheet and further gains in productivity and efficiency should enable us to face the year with guarantees. We have management tools to take advantage of the high interest rate environment and we will concentrate on selective business growth, operational efficiency and control of risk.

 

•

Santander Consumer Finance will complete the agreement with Banque PSA Finance, strengthen consumer business through Pan-European agreements and step up its presence in digital channels.

 

•

In the United States, we will continue to bolster the franchise with differentiated strategies for each entity, while integrating the main units in the country into Santander Holding USA.

 

•

In the rest of units, the priorities are the following. In Mexico, we will strengthen our position by consolidating key segments. In Chile, we will focus on improving customer attention and on transforming our commercial and retail banking, while renewing our branches. We have a very similar strategy in Argentina, where we are also expanding the network and advancing in digitization. Lastly, in Portugal we will manage Banif’s integration and in Poland we will continue to be the reference point bank in innovation and leaders in digital channels, with a clear objective of gaining more market share in companies.

Conclusions

We made progress in 2015 in the main strategic objectives and our financial variables performed well.

We will continue in 2016 to advance in the Group’s commercial transformation. We have clear goals for the year, as announced at the Investor Day, both for the whole Group and for countries:

 

•

Raise the number of loyal customers, both individuals and companies, and digital customers.

 

•

Increase market share in SMEs and companies.

 

•

Reduce the cost of credit.

 

•

Grow fee and commission income at a faster pace.

 

•

Maintain the year-end cost-to-income ratio stable.

 

•

Boost dividend and earnings per share.

These objectives are part of our medium-term priorities: grow in business volumes, increase revenues and improve profitability, with capital levels in line with business needs and regulatory requirements.

None of this would be possible without the help, work and motivation of Santander Group’s highly professional and experienced team. We want to continue to strengthen it through our talent management model that enables us to identify employees’ potential and develop a career plan that is individually tailored. In addition, we are implementing new ways of working, with more flexible models that are adapted to current life, in order to consolidate our bank as one of the best companies to work for.

I firmly believe that, with the commitment of our employees and the trust of our customers and shareholders, we can attain our goals and continue to help people and businesses prosper in a Simple, Personal and Fair way.

 

 

 

 

 

 

 

Board of directors

The board of directors is the Group’s highest decision-making body, except for matters reserved for the general shareholders’ meeting. Santander has a first-class, highly qualified board; experience, knowledge, dedication and diversity are its main assets.

In line with the Bank’s aim and purpose and as part of its general oversight function, the board leads the decisions regarding the Group’s main policies, strategy and corporate culture. It defines the Group’s structures and promotes the appropriate policies in relation to corporate social responsibility. In particular, in the exercise of its responsibility and involvement in managing all risks, it must approve and monitor the risk appetite and framework and ensure that the “three lines of defence” model (business and risk origination; risk control and compliance and internal audit) are respected.

Its functioning and activities are regulated by the Bank’s internal rules, which are governed by the principles of transparency, responsibility, justice, effectiveness and defence of shareholders’ interests. The board also ensures compliance with the best international practices and continues to advance in attaining the highest corporate governance standards, for which several changes were made to the board’s rules and regulations during 2015.

The composition of Banco Santander’s board is balanced between executive and non-executive directors. The board was strengthened in 2015 with more non-executive directors (most of them independent) who ensure appropriate control of the business and decision-taking, fostering, furthermore, debate that is more challenging and of higher quality on these issues.

 

 

For more information on corporate governance see pages 74 to 111 of Banco Santander’s Annual Report

 

Subsidiary model

Santander Group is structured using a subsidiary model of which the parent is Banco Santander, S.A. Its registered office is in the city of Santander (Cantabria, Spain) and its corporate centre is in Boadilla del Monte (Madrid, Spain).

The Group’s subsidiary model is characterised by the following:

 

•

The governing bodies of each subsidiary are responsible for rigorous and prudent management, ensuring economic soundness and overseeing the interests of shareholders and other stakeholders.

 

•

The subsidiaries are managed on the basis of local criteria and by local teams that contribute considerable knowledge and experience of customer relationships in their markets, while benefiting from the synergies and advantages of belonging to Santander Group.

 

•

They are subject to the regulation and supervision of their local authorities, in addition to the supervision performed globally by the European Central Bank on the Group.

 

•

Their deposits are guaranteed by the respective deposit guarantee schemes of the countries where they are located.

The subsidiaries are funded autonomously in terms of capital and liquidity. The Group’s capital and liquidity positions are coordinated in the corporate committees. The intragroup exposures are limited, transparent and at market prices. The Group, moreover, has listed subsidiaries in some countries in which it retains a controlling stake.

The subsidiaries’ autonomy limits the contagion risk between the Group’s different units, which reduces systemic risk. Each subsidiary has its own resolution plan.

Corporate centre

Banco Santander’s subsidiary model is complemented by a corporate centre that has support and control units which carry out functions for the Group in matters of risk, auditing, technology, human resources, legal affairs, communication and marketing, among others. The corporate centre adds value to the Group by:

 

•

Making the Group’s governance more solid, through global control frameworks and supervision, and taking strategic decisions.

 

•

Making the Group’s units more efficient, fostering the exchange of best practices in cost management, economies of scale and a common brand.

 

•

Sharing the best commercial practices, focusing on global connectivity, launching global commercial initiatives and fostering digitalisation, the corporate centre contributes to the Group’s revenue growth.

Changes in the boards

of the subsidiaries in 2015

 

•

Since the end of 2014 there have been changes in the boards of the Group’s subsidiaries with the appointment of new non-executive chairmen and new country heads in the US, UK, Brazil, Spain and Mexico. Of note was the creation of the Santander Spain board, which did not involve any corporate change, thereby making its governance structure similar to the subsidiary model used in the Group’s other markets. Banco Santander also strengthened its presence and oversight of local units with the appointment of new Group directors to the boards of its main subsidiaries.

 

The board agreed a series of changes during 2015 to simplify the structure of the corporate centre in order to enhance responsiveness to internal customers and reinforce risk control. As a result, the number of divisions at the corporate centre was reduced from 15 to 10.

Santander Group’s internal governance

Santander has an internal governance framework that includes a governance model that establishes the principles defining relations between the Group and its subsidiaries, and the interaction that must exist between them, at three levels:

 

•

the subsidiaries’ governing bodies, in accordance with the Group’s composition, creation and functioning guidelines of the subsidiaries’ boards;

 

•

between the chief executive officers and country heads and the Group, as well as;

 

•

between the teams deemed significant with regard to control functions, as well as certain support and business functions, both at the corporate centre and the subsidiaries.

Santander also has an internal governance framework with thematic frameworks, developed as common operating frameworks for those matters considered important, due to their influence on the Group’s risk profile-notable

among which are risks, capital, liquidity, corporate governance, audit, accounting and information, financial management, technology, marketing of products and services, anti-money laundering, brand and communication - and which specify:

 

•

the way of exercising oversight and control by the Group over the subsidiaries and;

 

•

the Group’s participation in certain of the subsidiaries’ important decisions.

Both documents, which comprise the governance framework, have been approved by the board of directors of Banco Santander, S.A. for subsequent adoption by the subsidiaries’ governing bodies, bearing in mind the local requirements applicable to them.

Governance of the risk function

During 2015, Banco Santander’s board agreed significant changes to the way in which governance of the risk function is structured, clearly defining the responsibilities of the various committees and separating the units that take decisions and manage risks from those responsible for control. In this way, governance of the risk function at its highest level in the Group is structured via a board risk committee (the risk supervision, regulation and compliance committee) and two committees, one executive and the other of control.

 

 

 

For more information on corporate governance of the risk function, see pages 182 to 193 of Banco Santander’s Annual Report

 

Santander aspires to be one of the top 3 banks to work for in most of the countries where it operates and continue strengthening its corporate culture.

Working differently

New ways of working at Santander were developed during 2015, based on the new corporate culture. We established more flexible corporate behaviour and work systems that allow for a better work-life balance.

•

Corporate behaviours. Employees in all countries participated in a process to define eight corporate behaviours that will shape the way we work and make Santander an increasingly Simple, Personal and Fair bank. These behaviours have been adapted to the local reality of each country.

 

•

Flexiworking. This is a new way of working in the Bank which aims to:

 

•

Improve the organisation and planning of work, making it more efficient and collaborative, getting more out of technology, eliminating bureaucracy and making better use of meetings and e-mails.

 

•

Give executives the autonomy to facilitate to their teams flexibility measures that help them to attain a better work-life balance.

 

•

Acknowledge employees’ engagement and dedication.

The first initiative was the flexibility policy. A total of 939 flexibility plans were formalised in 2015 in the corporate centre, which led to 34,446 measures enjoyed by 93% of employees.

One of the keys of the success of Flexiworking is the ambassadors, professionals chosen in various divisions and countries to help to drive and implement the new culture.

 

•

New relationship model between countries and the corporation, to identify and share the best practices for managing people and take advantage of the Group’s diversity. There are three areas of activity: regulation and governance, to ensure compliance with the regulatory requirements in matters of compensation, succession planning, training, etc; policies, to design the basic lines of managing the Group’s employees, but with the autonomy to adapt and execute depending on

each particular situation; and additional support of the corporation, contributing value-added, for example, ensuring that best practices are shared and promoting global projects.

 

•

Digital transformation. Digital Days were launched in 2015, held in the corporate centre as well as in almost all countries, with the aim of turning employees into opinion leaders of digital banking.

Mobile phone apps were also launched, such as the app for expenses and problem-solving in the corporate centre, which, respectively, facilitate settlement of expenses and reporting of various types of incidents; and the É Conmigo Santander in Brazil, which also reports incidents.

 

•

Corporate volunteer policy. Approved by the board in December in order to organise and highlight the current volunteer initiatives. Education will be the focal point of this policy and there will be two key events: the We are Santander Week in June and the International Volunteer Day in December. Each country also has its own initiatives. Santander had 55,254 volunteers worldwide in 2015.

 

•

We are Santander Week. Under the slogan of “A Simple, Personal and Fair Week”, the new corporate culture was the central element of the We are Santander Week in 2015. Corporate and local activities were developed to foster commitment among employees, education, listening and pride in belonging to the Group.

 

Annual engagement survey

 

•

The 2015 results were better compared to 2014, particularly in two aspects: work-life balance, which rose from 50% to 72%, thanks to the launch of Flexiworking, and the role of executives as people managers, especially in terms of respect and recognition, which improved from 61% to 72%.

 

•

Moreover, there were still areas of improvement regarding organisational support, such as the speed with which decisions are taken, the simplification of processes and the improvement in the organisation of positions, although in general it increased from 63% to 66%.

 

 

Of note among the ideas implemented in 2015, in addition to Flexiworking, was Best4us, which puts Group employees in touch with one another so that they can share common interests (language learning, cultural exchanges); Santander Benefits, an online space that promotes offers and services for the Group’s professionals in Spain; and ideas related to the Branch of the Future, a new branch model that allows simpler processes, a more intuitive technology and differentiated spaces according to the customers’ needs.

 

•

Various town hall meetings were held, both in the corporate centre and in countries, led by our Group executive chairman, the Group CEO and country and division heads, in order to enhance the information on of the progress made in executing the strategy and fostering the corporate culture.

Recognitions

Among the recognitions obtained by Banco Santander during 2015 were the following:

 

•

The annual Most Attractive Employers study carried out by the Swedish consultancy Universum, which gathers the opinions of more than 16,000 Spanish students, places Banco Santander among the four best companies to work for by business students and business schools that also consider it their preferred bank.

 

•

The 2015 Latam ranking of Universum puts Banco Santander as the most preferred bank to work for and the eighth company among business students in Latin America.

 

•

The study by the consultancy Randstad among more than 8,000 potential candidates aged between 18 and 65 recognises Santander as one of the preferred banks to work for in Spain.

 

Santander continued to make progress in 2015 in transforming its commercial model with three clear priorities:

 

•

Customer loyalty, with specific programmes in all countries that enable us to reach our target of 18.6 million loyal customers by 2018.

 

•

Digital transformation, with an end-to-end strategy to reach 30 million digital customers by 2018.

 

•

Operational excellence, with initiatives that improve customer experience so that Santander is among the top 3 banks in 2018 in customer satisfaction in its core markets.

Customer loyalty

Developing value propositions by customer type and having a long-term strategy is the way to increase customer loyalty in the Group’s core markets. Among the main initiatives in 2015 were:

 

•

1|2|3 World. In Spain, the 1|2|3 Account for individual customers was launched in May and rewards balances with interest rates of 1%, 2% and 3% up to €15,000 and cashback on household bills. This product has also been adapted and extended to the SME segment, reimburses in cash part of payroll and social security payments, taxes and supplies related to business activity and provides loans on preferential terms.

In Portugal, 1|2|3 World was launched in March and offers discounts on purchases made with the 1|2|3 card, cashback on household bills and discounts on petrol, among other benefits.

In the United Kingdom, the 1I2I3 value proposition consolidated as the first choice of customers who decide to switch their bank.

 

•

Santander Select. The Group’s differentiated value proposal for high income customers is already installed in all countries and has more than 2 million customers. It is a specialised attention model, with a global and exclusive offer tailored to the needs of these customers, which during 2015 was improved and extended. Of note among these practices is Select Expat in Mexico, which exploits the Group’s global scale to accompany customers in their internationalisation process; the launch of a range of profiled funds in several countries; and the consolidation of the Débito Global card.

 

•

Santander Private Banking. A comprehensive and specialised service model for higher income customers, which during 2015 received important awards, such as those given by Euromoney magazine in Argentina, Chile and Portugal; and Global Finance in Spain, Mexico and Portugal. The volume of funds managed by the private banking business increased 5% during 2015.

 

•

Santander has specific programmes for SMEs which combine a strong financial offer with non-financial solutions that help spur internationalisation, connectivity, training, talent attraction, etc. This programme was extended to Uruguay, Argentina, Brazil and Chile in 2015 and is now in place in eight of the Group’s markets. Santander Advance and Breakthrough are the main hallmarks of this programme.

 

n Group customers
Million
Spain			12.7
Portugal			3.8
UK			26.0
Poland			4.3
Germany			6.1
Rest of Europe			10.8
Total Europe			63.7
Brazil			32.4
Mexico			12.4
Chile			3.6
Argentina			2.8
Rest of Latin America			0.8
Total Latin America			52.0
United States			5.1
Total customers			120.8

1. Excluding consumer finance customers.

 

 

 

Moreover, by harnessing its synergies and international presence, Santander has specific solutions to support the internationalisation of its customers. Among the main initiatives are:

 

•

Santander Passport. A customer service model with a consistent offer for global companies in all the countries where the Group operates. It has more than 6,000 registered customers and is installed in eight countries. The rest of countries where the Bank has a commercial presence are due to join the model during 2016.

 

•

Santander Trade. A portal dedicated to foreign trade that provides information, tools and resources to help companies grow their business abroad. It is already available in 14 countries and has received more than two million visits since its creation and more than 35,000 registered exporters and importers.

As part of this portal, the Santander Trade Club is an innovative social platform that enables the Bank’s customers from various countries to contact one another and expand their international activity. There are currently more than 11,000 members.

 

•

International Desk. A service established in 14 countries with over 8,000 registered customers and offering support to companies that want to enter markets where the Bank is operating, thereby facilitating their entry into a new country.

Progress was made in defining trade corridors within the Group (for example, UK-Spain, Mexico-Spain). Its international trade tools, products and services are also being improved in order to offer our customers the best solutions.

 

•

In order to deepen knowledge of customers and have a 360º view of their behaviour and preferences with regard to the Bank, the NEO CRM was developed further during 2015. This tool uses business intelligence methodology to compile more than 500 relationship instances with the Bank and learn how customers behaved. On the basis of

this knowledge, commercial actions can be launched and customers’ opinions collected, thereby improving commercial effectiveness and customer satisfaction.

 

•

NEO CRM was launched in Chile in 2012 and then extended to Spain, Brazil, United States and Uruguay. In 2016, it will be installed in Mexico, Argentina and Poland.

 

Digital transformation

The multichannel transformation of the commercial model is one of Santander’s strategic priorities. Digital channels offer new opportunities to personalise customer relationships, facilitate greater availability and proximity and contribute to improving satisfaction and loyalty with the Bank.

Santander has four basic drivers for this transformation:

1. Incorporate digital channels in the day-to-day commercial activity, without forgetting personal attention.

2. Offer a first-class customer experience, with new and different multichannel relationship models for each segment.

3. Develop new functionalities, in order to have best-in-class digital channels, particularly in the area of mobile banking.

4. Foster a multichannel culture that involves and engages all teams in our transformation plans.

Our local units have developed specific projects for each of these drivers and all have their own Multichannel Transformation Plans.

The M programme was launched during 2015 in order to drive change. This programme has a global-local collaborative approach and is based on the best practices implemented in our local markets to incorporate multichannel services in day-to-day retail and commercial banking.

Among the major developments achieved by our local units during 2015 in our digital transformation agenda were:

 

•

Santander UK is participating in the first group of Apple Pay issuers in the UK and has developed new apps such as Cash Kitti, a group money management app, and Spendlytics, a card expenses tracking app.

 

•

In Spain, Santander renewed its commercial website and launched a new mobile app for SMEs and companies, and Santander Watch, which allows customers to check their accounts and card transactions from smart watches.

 

•

Brazil launched a strong plan for digital customers (“Vale a pena ser digital”) in order to inform customers of the Bank’s digital offer. A new version of the Bank’s mobile app was also launched.

 

•

In Argentina, Global Finance magazine chose Santander Río as the country’s best digital bank for the 16th consecutive year.

 

•

Bank Zachodni WBK’s mobile banking app is considered to be the best in Poland and the second in Europe, according to a study by the consulting firm Forrester. The Bank was also awarded the prize by Global Finance magazine as the best mobile bank and the best app in Central and Eastern Europe.

•

In the United States, Santander launched its online bank for SMEs and companies, as well as Mobile Deposit Capture, which enables cheques to be easily and safely processed via a mobile phone.

 

•

Santander Mexico carried out a project to simplify credentials, which allows access to various digital channels from a single password.

As a result of these initiatives, the number of digital customers is growing at a brisk pace: 17% since December 2014 to 16.6 million.

The Bank has an innovation area whose purpose is to research and anticipate market trends, and design businesses and solutions for customers from a global, disruptive and long-term standpoint. The Group also fosters innovation via Santander Innoventures, a corporate $100 million venture capital fund that holds minority stakes in financial sector start-ups, helping

 

them to grow and, in turn, learning about the new technologies they develop in order to use them for the Group and its customers. The Retail and Commercial Banking, and Technology and Operations divisions carry out the day-to-day digital transformation, improving the Bank’s offer and responding to business needs.

In order to drive the process of change and ensure coordination between all the involved areas of the Bank, a committee to coordinate digital transformation was created in 2015. It involves the areas of Strategy and Innovation and the divisions of Retail and Commercial Banking, Technology and Operations and the Group’s main local units. This committee reports to the Bank’s management and strategy committees.

In addition, while making progress in the digital world, we continued to work to improve customer experience in traditional channels. Branches are the key channel for maintaining and strengthening long-term relations with our customers. Our Spanish and Brazilian units launched their new Santander branch model in 2015, which responds to the current form of customer relations with technological developments to simplify processes and make them easier and intuitive, and differentiated spaces that allow the advantages of technology to be combined with the proximity of personal treatment by the Bank’s professionals. Argentina inaugurated its first

digital branch. Other countries such as Mexico and the UK will soon open their new spaces.

Operational excellence

Santander made progress in the following three key areas:

 

•

Transform the customer experience for the main customer journeys, such as, customer onboarding (opening and activating accounts, applying for loans, etc).

 

•

Improve customer experience and customer satisfaction.

 

•

Create value for customers by reducing costs. The Group aims to generate €3,000 million of cost savings by 2018 through greater efficiency in technology and operations and at its corporate centre, and through the digitalisation of the commercial distribution model.

Transform customer journeys

A best-in-class customer experience is essential to achieve more satisfied and loyal customers. In order to incorporate customers’ suggestions and improve their experience in their main processes and interactions with the Bank,

 

n Customer satisfaction    % of active satisfied customers
Bank		2015				2014
Argentina			87.6	%			86.8	%
Brazil			71.6	%			70.6	%
Chile			92.6	%			88.4	%
Spain			87.6	%			85.0	%
Mexico			94.0	%			95.0	%
Poland			96.4	%			93.5	%
Portugal			93.1	%			94.1	%
UK			95.7	%			94.5	%
US			81.8	%			80.8	%
Uruguay			94.3	%			90.0	%
TOTAL			86.6	%			85.3	%

Source: Corporate Benchmark of Customer Experience and Satisfaction of active individual customers. (Figures at the end of 2015, corresponding to the results of surveys in the second half of the year).

Santander strives to continuously improve customer journeys.

In 2015, all countries made progress in the customer journey transformation programme, a project that involves all the Bank’s areas and entails redesigning and streamlining all its processes.

Improve customer experience and customer satisfaction

Santander has several initiatives to measure and monitor customer satisfaction. Every year more than one million surveys are conducted and work continues to incorporate the voice of more customers and at more moments in their relationship with the Bank.

As a result of these initiatives, customer satisfaction improved at Group level in 2015.

 

Banco Santander has set the following strategic priorities for its shareholders:

 

•

Obtain an attractive and sustainable return.

 

•

Attain high recurring income.

 

•

Maintain prudent risk management.

 

•

Manage capital in a disciplined way.

The Bank made significant progress during 2015 in all of these aspects:

A good return was maintained:

 

•

13% increase in underlying attributable profit.

 

•

11.0% ordinary RoTE and 3% improvement in the net tangible book value per share on a like-for-like basis.

Increased remuneration in cash and payment of the four usual dividends maintained:

 

•

The remuneration in cash rose from 20% to 38% of profit, in line with the aim of maintaining a cash pay-out of between 30% and 40% of the recurring profit.

 

•

The total shareholder remuneration out of 2015 profit was €0.20 per share. Three of these dividends have already been paid (€0.05 per share each). The fourth and final dividend is scheduled to be paid in May 2016.

Strengthened its capital position:

 

•

As a result of the organic capital generation and the accelerated book-building process carried out in January. Three scrip dividends were also paid, two of which were charged to 2014’s earnings and one to 2015’s.

•

Santander has a comfortable capital position, with a Basel III capital ratio (fully loaded CET1 ratio) of 10.05% at the end of 2015, which will enable it to take advantage of the organic growth opportunities in its core markets. The Santander regulatory capital ratio (12.55%) is 280 basis points above that required by the ECB for 2016 (9.75%).

Improved risk management:

 

•

The NPL ratio dropped by 83 b.p. to 4.36% and the cost of credit stood at 1.25%.

 

•

By implementing Santander Advanced Risk Management, the Bank wants to lay the foundations for having the industry’s best comprehensive risk management model.

Established the groundwork for a new commercial model which will enable organic capital growth:

 

•

This model is based on four main drivers: an increase in loyal customers; more digital customers; enhanced customer satisfaction; and a focus on higher growth businesses such as SMEs, consumer finance and private banking.

Increased the number of shareholders:

 

•

The total number of Banco Santander shareholders was 3.6 million from more than 100 countries at the end of 2015.

 

 

The Santander share in 2015

Share performance

In an environment of volatility marked by the Greek crisis, the slowdown of the Chinese economy, lower expectations in emerging markets (particularly Brazil) and falling oil prices, total shareholder return in 2015, taking into account the change in the share price and the remuneration received (with reinvestment of the dividend) was 31% negative. In the same period, the MSCI World Banks, the main global index for banks, registered a total return that was also negative (9%).

Banco Santander was the largest bank in the euro zone by market capitalisation at the end of 2015 and the 19th in the world, with a value of €65,792 million.

Shareholder base and capital

At the end of 2015, Banco Santander had 3.6 million shareholders in more than 100 countries.

n Shareholder base and capital

   31 December 2015

		Dec 2015				Dec 2014
Shareholders (number)			3,573,277				3,240,395
Outstanding shares (number)			14,434,492,579				12,584,414,659
Average daily trading (number of shares)			103,736,264				77,340,428

 

 

 

1 Communications

 

•

Communications via channels selected by the shareholders to inform them of material facts, shareholders’ meetings, dividends, performance of the share price and the Group, marketing campaigns, promotions and events.

 

•

Quarterly shareholders’ report: print and online versions in seven countries.

 

•

Sending of daily and weekly financial newsletters.

 

•

Launch of communication channels with shareholders based on new technologies: a new corporate website, a new commercial website and an app for Santander shareholders and investors.

2 Attention

 

•

42,805 e-mails handled.

 

•

241,553 telephone enquiries received.

 

•

22,336 personal formalities.

3 Exclusive benefits

 

•

Financial products for shareholders.

 

•

Waiver of fees.

 

•

Promotions in products and services via the “Yo Soy Accionista” website.

 

•

Delivery of study scholarships to disabled university students.

 

•

Participation in charity projects worldwide.

4 Shareholders’ meeting

 

•

Record participation in the meeting held in March 2015, in terms of both share capital and number of shareholders.

5 Quality studies

 

•

Ongoing assessment of the various services provided. Nine out of ten shareholders would recommend the telephone and Internet helpline services.

 

		Communities

Santander carries out its business in a responsible and sustainable way while contributing to the economic and social progress of the communities in which it operates, and is particularly committed to fostering higher education.

 

 

International initiatives in sustainability to which Banco Santander adheres

 

 

 

code of conduct, and among its suppliers, who are requested to comply with the ten principles of the Global Compact.

Santander, a bank committed to society and its environment

Banco Santander also contributes to the economic and social progress of communities through many social investment programmes in areas such as education, entrepreneurship, social well-being and culture, in a large number of which the participation of the Group’s professionals is fostered as a way to promote solidarity and pride in working for Santander.

Education

Banco Santander supports education as a catalyst for developing and growing the communities and countries in which it operates, with a specific focus on higher education via Santander Universities, the Group’s hallmark of social investment.

The Bank is also firmly committed to financial literacy and children’s education, as it is conscious of the need to promote better knowledge of the basic aspects of finance for the different stages of life.

Entrepreneurship

The creation of social companies, social inclusion and fostering entrepreneurial capacity are some of the Bank’s lines of action in this area.

Banco Santander has significant microcredit programmes in Brazil, Chile and El Salvador that enable the most disadvantaged groups to access loans and improve their social inclusion, standard of living and environment.

Social well-being

The Bank has a wide array of programmes that aim to eradicate the social exclusion of the most vulnerable groups, foster research to improve people’s health and make life easier for the disabled.

Environment

The Group conducts its activity while preserving the environment, and promoting initiatives and projects that require protection and mitigate the environmental impact. The Bank’s environmental initiatives focus on reducing consumption and emissions derived from its activity, developing financial solutions to combat climate change (leadership position in financing renewable energy projects), and integrating social and environmental risks into the process of granting loans.

Art and culture

Santander is very active in protecting, preserving and disseminating art and culture, mainly via the Banco Santander Foundation in Spain and Santander Cultural in Brazil.

 

Santander Universities

Investing in higher education is the hallmark of the Bank’s social commitment, which is organised and managed through Santander Universities.

 

 

 

 

 

•

Innovation and entrepreneurship: fostering the entrepreneurial culture and university innovation will be key in cooperation with universities.

 

•

University digitalisation: encouraging the digitalisation and modernisation of universities will be another priority in Santander’s commitment to education, with projects to incorporate new technologies to the teaching process, virtual campuses, and the creation of digital academic university services.

•

Internationalisation: international mobility scholarships, exchange programmes and driving transversal cooperation projects between the universities of various countries.

 

•

Employability: initiatives to help university students access the labour market, with scholarship programmes for internships in cooperation with universities.

 

•

Objective: 130,000 scholarships in 2016-2018.

 

During its more than 150 years of activity, Santander has combined prudence in risk management with the use of advanced techniques that have proven to be decisive in generating recurring economic results.

Santander Group’s risk policy is focused on maintaining a medium-low and predictable risk profile. Its risk management model is a key factor for achieving the Group’s strategic objectives.

Risk governance

Responsibility for risk management and control, particularly in setting the Group’s risk apetite, lies ultimately with the board of directors, which delegates powers to the committees. The board is supported by the board risk committee, an independent risk control and supervision committee. The Group’s executive committee also devotes particular attention to managing the Group’s risks.

The following committees form the top level of risk governance.

Independent control bodies

 

•

The purpose of the board risk committee is to assist the board in the supervision and control of risk, through defining the group’s risk policies, developing relationships with regulatory and supervisory authorities and overseeing the group’s management of regulation, compliance, sustainability and corporate governance.

 

•

The risk control committe is in charge of the effective control of risks. It ensures that risks are managed in accordance with the risk appetite approved by the board, taking a comprehensive view, at all times, of all the risks included in the general risk framework. This involves the identification and monitoring of current and emerging risks, and their impact on the Group’s risk profile.

 

Decision-making bodies

 

•

The executive risk committee is the collective body responsible for risk management, in accordance with the powers assigned to it by the board. It is involved with all risks.

It participates in making decisions on risk assumption at the highest level, ensuring that they are within the limits set in the Group’s risk appetite, and it informs the board and its committees of its activity when required.

Lines of defence

Banco Santander follows a risk management and control model based on three lines of defence.

The business or activity functions that assume or generate risk exposure constitute the first line of defence. The assumption or generation of risk in this line must be aligned with the pre-defined risk appetite and limits.

The second line consists of the risk supervision and control function and the compliance function. It ensures that risks are controlled effectively and are managed in line with the set risk appetite.

 

Internal audit, as the third line of defence and the last layer of control, regularly assesses that the policies, methods and procedures are adequate and tests their effective implementation.

Risk culture

Having a solid risk culture is one of the keys that has enabled Santander Group to respond to the changes in economic cycles, customers’ new requirements and to increased competition, and to position itself as a bank in which employees, customers, shareholders and communities can trust.

This culture, called risk pro, is aligned with the general principles of Simple, Personal and Fair, and is the series of behaviours that each employee must develop to proactively manage the risks that arise from daily activity.

 

 

International economic environment

The global economy slowed in 2015 (3.1% vs. 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.

 

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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 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%.

 

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The euro zone 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 programme of purchasing public sector securities.

 

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Spain 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.

 

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Germany expanded at a faster pace as the year progressed. Domestic demand remained strong and unemployment low.

 

 

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Poland grew briskly (3.6%) and inflation (-0.9%) was well below the the target (2.5%) of the National Bank of Poland, which cut interest rates to 1.5% in March.

 

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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.

 

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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 b.p. to 14.25%.

 

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The Chilean economy recovered in 2015, spurred by increased investment and private consumption, which led the central bank to begin to normalise its monetary policy and raise its benchmark rate by 50 b.p. to 3.5%.

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Mexico improved in the second half of the year, fuelled by stronger domestic demand and exports. Although inflation remained low, the central bank decided to raise its key rate in response to the Fed’s move, in order to anticipate possible bouts of volatility given the strong trade and financial links with the US.

Financial markets and exchange rates

The performance of the markets in 2015 can be divided into two parts. Stock market indices rose in the first half of the year and risk premiums on sovereign and private debt fell significantly, particularly in developed economies. Access to capital markets was more fluid and lending conditions in developed economies eased.

This performance was supported by central banks’ monetary policies, which injected plenty of liquidity, and thus made investors’ search for profitability easier. The European Central Bank’s quantitative easing contained any contagion effect during the worst moments of Greece’s bailout negotiations.

 

The summer saw an episode of increased volatility in the markets linked to concern over the slowdown in the Chinese economy and in emerging markets. Although the beginning of monetary policy normalisation in the US was put back to December, share prices took a tumble, which eroded a significant part of the year’s cumulative gains. The main stock markets, however, rallied slightly in the last part of the year.

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.

Banking sector environment

The banking environment of the countries where Santander operates continued to feel the impact of regulatory changes and a challenging economic situation, which posed a major management challenge for increasing profitability.

In developed countries, banks continued to bolster their balance sheets and their capital levels. The return on capital improved. According to the European Banking Authority, the profitability of european banks increased from 0% on average at the end of 2014 to 7.3% in mid-2015, thanks to the improvement in net interest income and reduced needs for provisions.

Even so, banks continued to face important challenges to spur profitability. Interest rates remained at extraordinarily low levels; business volumes, despite gradually recovering, were still low; and competition was much tougher in most markets.

Competition was high among banks as well as with new players. Shadow banking continued to gain weight and non-banking financial institutions, which are focusing on niches in sectors such as means of payment, financial advice and credit, carried on growing.

 

In this context, the restructuring process cannot be considered over. Most banks are embarking on changes to their culture, in order to regain the confidence of society and, in general, all need to adapt to the digital revolution, which is going to mark the way that banks relate to their customers, the level of services provided and the efficiency of processes.

International banks are also facing divergent socio-demographic changes, against a backdrop of ageing in developed economies and a sharp rise in middle classes in emerging economies, which will require differentiated strategies for each market.

Supervisory and regulatory context

The regulatory agenda remained intense in 2015. While progress was made in reviewing the prudential framework and developing crisis management plans, attention increased on issues related to consumer and investor protection. All of these areas will be addressed while at the same time driving economic growth.

With regard to capital, the Basel Committee is reviewing its initial proposals for the standard calculation of capital consumption derived from credit, market and operational risks, scheduled to be completed in 2016. The objective is to ensure simplicity, comparability and sensitivity to risk, while not involving an increase in capital for all players. In 2016, the Basel Committee will also present the final proposal on the regulatory treatment of interest rates in the banking book, and will review the treatment of sovereign debt in the prudential framework. The committee will also review the prudential framework in its entirety, in order to assess the impact of the package of regulatory reforms.

In 2015, the Financial Stability Board finalised the framework needed to address the “too big to fail” issue in the banking industry. The last piece —the Total Loss Absorbing Capacity (TLAC) that will be required of global systemically important banks— was finalised in November.

 

Europe continued to progress in implementing the crisis management framework. The Single Resolution Board (SRB) was scheduled to be fully operational as of 1 January 2016. The SRB will set this year the Minimum Requirement for own funds and Eligible Liabilities (MREL) for banks.

In order to finalise the establishment of a Banking Union, the European Commission published in November its proposal for the creation of a single deposit guarantee fund, with a gradual framework until 2024. The European Banking Authority (EBA) meanwhile continued to publish standards and guidelines that help to guarantee harmonised implementation in the European Union of the minimum capital requirements and improve the level playing field.

2015 marked a turning point in the European regulatory agenda. The European Commission stated that, after making progress in forging a more robust and solid financial system, its priority now was to finance growth and support the creation of a capital markets union, analyse the evidence for assessing the impact of regulations and conduct a consultation on the impact of the CRD IV capital requirements directive on financing the economy.

In relation to retail financial services, the European Commission presented a green paper for consultation with the aim of increasing transparency in pricing and eliminating trade barriers inside Europe. It backs digitalisation in particular as a means for achieving this. The Commission also unveiled its Digital Agenda initiative in order to address the launch of the single digital market. In 2016, certain complementary regulatory initiatives are planned, such as the cyber security and data protection directives.

Banking supervision via the Single Supervisory Mechanism (SSM)

Since its launch in November 2014, the SSM has enabled the European Central Bank (ECB) to assume comprehensive supervision of banks in the euro zone. In 2015, the SSM consolidated its functioning and the 129 most important banks came under the ECB’s direct supervision.

Each bank has a joint supervisory team formed by ECB staff and those who work for the national authorities of member states. The Joint Supervisory Team for Banco Santander worked intensely and held more than 100 meetings in 2015 with the Bank.

At the end of 2015, the ECB sent to each bank its decision, establishing the prudential minimum capital requirements for the following year. In 2016, at consolidated level, Santander Group must maintain a minimum CET1 phase-in capital ratio of 9.75% (9.5% is required by Pillar 1, Pillar 2 and the capital conservation buffer and 0.25% is the requirement for being a global systemically important financial institution).

The Joint

Supervisory Team

 

 

Comprising staff from the European Central Bank as well as the Bank of Spain, the Bank of Portugal, the Bank of Italy, the Bundesbank, BaFin and the French Prudential Supervisory Authority, among other national authorities.