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Annual Report 2011 Santander Bank Letter from the Chairman, Emilio Botín
Letter from the Chairman Emilio Botín In a very difficult economic, financial and regulatory environment, Banco Santander maintained its policy of giving priority to strengthening its balance sheet as regards capital, liquidity and provisions and generated an attributable profit of EUR 5,351 million, 34.6% less than in 2010. This profit was generated after setting aside EUR 1,812 million of gross provisions, which were not required, to clean up our real estate assets. This increased coverage for repossessed property to 50% and got ahead of the extra provisioning requirements for the financial system approved by the government on February 3, 2012. This provisions, together with writing down part of the goodwill of Banco Santander Portugal, reduced net profits for the year by EUR 1,670 million. Net capital gains in 2011 from the strategic alliance with the insurer Zurich in Latin America and the entry of new partners into the capital of Santander Consumer Finance in the United States amounted to EUR 1,513 million and were used to bolster the balance sheet via other provisions. Net operating income (gross income less operating expenses) was EUR 24,373 million, underscoring the Group’s strength and capacity to generate results. We improved the capital base and liquidity and notably reinforced our balance sheet. With a core capital of 9.01%, according to the more demanding criteria of the European Banking Authority, Banco Santander complied with the EBA’s Emilio Botín new capital requirements six months ahead of the deadline. The requirements recently approved by the government and the Bank of Spain to raise coverage of bad property loans in Spain“In the last five years, the total will require EUR 2,300 million of provisions, over and above those made ahead of time against 2011’s earnings. These shareholder remuneration paid provisions will be fully charged in 2012. by Banco Santander was EUR 24,000 million” 4 ANNUAL REPORT 2011
Shareholder remuneration 1. Geographic diversification and recurring natureThe Group’s sound results will enable, as I said at the last of revenuesshareholders’ meeting, the total remuneration per share to be Banco Santander has achieved a geographic positioning in themaintained at EUR 0.60 for the third year running. I would like last few years centred on its 10 core markets, with anto point out that in the last five years, thanks to recurring profits appropriate balance between developed countries (whichand international diversification, Banco Santander’s shareholder contribute 46% of the Group’s profits) and emerging marketsremuneration amounted to EUR 24,000 million. (54%).The Santander Dividendo Elección (scrip dividend) offers our The retail banking model, developed via our 15,000 branches,shareholders the option to receive part of the dividend in cash which provide services to 102 million customers, give usor new shares. Since its launch three years ago, more than 80% recurring growth in commercial revenues in most of theof capital has chosen shares. The board agreed to propose to countries where we operate.the next shareholders’ meeting applying this programme for thefourth dividend payment (May 2012). In 2011, we sold Banco Santander Colombia for $ 1,225 million. Our market share in Colombia is far from the 10% we aspire toIn short, Banco Santander demonstrated its capacity to generate have in the markets in which we are present in order to createresults to meet simultaneously the EBA’s capital requirements, value for our shareholders. This operation generated EUR 615substantially increase provisions for bad property loans and million of net capital gains, which will be recorded in 2012 andmaintain the remuneration at EUR 0.60 per share. assigned to further clean up bad property loans, in accordance with the new rules.Banco Santander’s response tothe challenges of the environment 2. Capital and liquidity management and model for subsidiariesIn my view, the Bank faced three big challenges in 2011 and Our overriding priority objective in 2011 was to strengthen thethey will continue to determine the international economic and balance sheet.financial situation in the coming quarters: In October 2011, the European Banking Authority announced• Weak economic activity, particularly in developed countries. the core capital requirements for the main European banks and• Very unstable financial markets, especially European sovereign set June 30 2012 as the deadline for meeting them. In debt markets. December, the EBA said Santander needed a further EUR 15,302 million of capital to comply with these requirements.• And very significant regulatory measures and changes, particularly higher liquidity and capital requirements for banks. Banco Santander has yet again demonstrated its flexibility and capacity of execution and, in just two months, we reached theBanco Santander has four management drivers, enabling it, core capital of 9% required by the EBA.from a position of strength, to comply with this new scenarioand continue to gain ground over its competitors: Our goal is to have a core capital of 10%, one percentage point above the EBA’s requirement and well above the demands of the new Basel III regulation and those applicable to systemically important financial institutions. We maintained a comfortable liquidity position by increasing our deposits base without having to remunerate above market rates. Meanwhile, the maturity profile of our debt, concentrated in the medium and long term, enables us not to have to go to the debt markets in Spain and Portugal. All of this, coupled with weak demand for loans in developed countries, produced an improvement in our liquidity situation. The loan-to-deposit ratio reached 117% at the end of 2011 (135% in 2009). ANNUAL REPORT 2011 5
The Group’s international expansion model, via subsidiaries that 4. Model of operational and commercial efficiency are autonomous in capital and liquidity and in many cases listed, Banco Santander is the most efficient international bank among gives us access to markets in an efficient and rapid way and it its competitors, with a cost-to-income (efficiency) ratio of 45% facilitates the funding of aquisitions. compared to the average of 60% of our competitors. The financial autonomy of these units is very well viewed by the The model of operational and commercial efficiency, with the Group’s regulator and by local regulators, as it acts as a fire- same technology for the Group’s banks, generates cost break, limiting the risk of contagion from any problem between synergies and economies of scale, allows for the exchange of the Group’s units. best business practices between countries and enables us to make significant investments in innovation, development and We were the first international bank to present its living will to security for the benefit of our customers. the regulator thanks to the transparency of our model of autonomous subsidiaries. These four management drivers are strengthened by the strong, solid and attractive Santander brand. Santander is today the 3. Prudent risk management world’s fourth most valuable financial brand according to Brand Banco Santander’s traditional policy of prudence in risks has Finance. enabled the Group to maintain a non-performing loans (NPLs) ratio lower than the sector’s average in all countries where we *** do business. Moreover, in the current socio-economic environment, Santander remains firmly committed to sustainability, focusing The evolution of NPLs in Spain was worse than expected for two on higher education, and also attaches importance to social reasons: on the one hand, the downturn in the economy was actions and respect for the environment. The Santander more severe than envisaged and, on the other, the fall in Universities programme continues to grow and already has 990 lending meant the NPL ratio increased to a greater extent than agreements and has awarded 16,000 travel scholarships. the volume of non-performing loans. Furthermore, in 2011 Banco Santander launched in Spain an Real estate risk in Spain continued to fall and, at the end of ambitious youth employment plan, with 5,000 grants for 2011, represented 4% of the Group’s total lending, including internships in small-and medium-sized firms. foreclosed properties.“Banco Santander complied with the EBA’s new capital requirements six months ahead of the deadline” 6 ANNUAL REPORT 2011
“Net operating income of EUR 24,373 million underscored the Group’s strength and capacity to generate results” Future prospects: Banco Santander’s The performance of the Santander share in 2011 was not in unique positioning accordance with the Group’s level of recurring profits, Some of the factors that have affected the financial sector in soundness and solvency or with the stability of earnings per recent years are likely to persist in 2012. It is therefore vital that share. the European Union approves as soon as possible the decisions Our share is the most liquid of Eurostoxx and ended 2011 with a needed to quickly restore confidence. dividend yield of more than 10%. The share’s low price was In the medium- and long-term, it is likely that, led by European mainly due to external factors, such as the penalisation of the countries, economic growth rates will gradually return to whole banking sector and the pressure exerted on the sovereign normal, which will make the financial markets more stable and debt of various euro zone countries, which have made it difficult reduce unemployment. to estimate adequately Banco Santander’s profit expectations, In this scenario, Banco Santander is in a unique position to I am convinced we will reach all our goals and this will push up create value for its shareholders, continue to register strong the share price significantly. You can rest assured that everyone growth in profits in emerging markets and profitably gain who works for the Group, from the board to the more than market shares in the most mature markets. 190,000 people at the service of our 102 million customers, will do all they can to make Banco Santander a safe and profitable Banco Santander has no significant acquisition or disposal plans investment for its more than three million shareholders. for the medium term, but it will be on the look out to take advantage of opportunities to strengthen itself in its core There were changes in the composition of the board during markets. In an environment of higher cost of capital, the strict 2011. In May, Mr Luis Ángel Rojo died and his place was taken criteria the Bank has always used for its acquisitions assume by the appointment of Mr Vittorio Corbo. Later, Mr Antoine even greater importance: attain in the third year a return on the Bernheim (representing Assicurazioni Generali) and Mr Francisco investment greater than the cost of capital and a positive Luzón left the board. At the next shareholders meeting, and if contribution to earnings per share. the boards proposal is approved, Mr Antonio Basagoiti, Mr Antonio Escámez and Mr Luis Alberto Salazar-Simpson will All of this will enable us, as I said last September at the Bank’s leave the board and Ms Esther Giménez-Salinas will become Investor Day in London, to boost Santander’s ROE to 12%-14% a director. On behalf of the board and on my own behalf I in 2014 and ROTE (return on tangible equity) to 16%-18% from would like to thank the outgoing directors for their work. I am the current 10.81%. sure the contribution to the board of the two new members will be very positive. Thank you for your support and confidence. Emilio Botín CHAIRMAN ANNUAL REPORT 2011 7