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Annual Report
2008

Highlights
EARNINGS PER SHARE +3%
ROE 16.6%
EFFICIENCY 39%
NON-PERFORMING
LOANS RATIO 1.62%
Earnings per share*
euros
1.10
0.67
0.82
0.97
1.13
ROE
2004 2005 2006 2007 2008
2004 2005 2006 2007 2008
*Recurrent *Before discontinued operations
Gross operating income
million euros
2,462
2,271
1,696 1,789
1,983
+3 %
2004 2005 2006 2007 2008
Attributable profit
million euros
458
570
2004 2005 2006 2007 2008
(%)
18.3
19.0
Efficiency
(%)
606*
*Before discontinued operations
48.1 45.0
765
15.6*
42.5
+2 %
17.1
780
16.6
40.5 39.0
2004 2005 2006 2007 2008
Operation costs/Gross operating income

Index
Chairman’s Letter 2
Governing bodies 6
Banesto in 2008
Business model 9
The customer and quality 12
Managing talent 14
Risk control 18
Technology 20
Business units
Retail banking 22
Company banking 26
Wholesale banking 28
The Banesto share 30
Corporate social responsibility 32
Corporate governance 36
Financial information 38
Risk management 62
Audit and compliance committee 74
Internal control model 81
Audit0r’s report and
annual financial statements 82
Auditor’s report 83
Consolidated financial statements 85
Management report 178
Corporate governance report according
to the CNMV model 185
Noteworthy figures 186
General information and
regional offices 187
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Chairman’s Letter
Banesto is ready to
Successfully weather An
environment like The
current one.
We know our market,
Understand our customers
And have a business Model
that works.
Ana P. Botín
Executive Chairman

Dear Shareholder,
In an exceptional year like 2008, which will be
remembered as one of the most complicated in
the history of the international financial sector,
Banesto’s results underscored its solid position
and capacity to generate recurrent and quality
revenues, with sustainable spreads, even during
times of crisis.
Performance and results
Attributable profit was 2% higher than in 2007
at €779 million. With the prudence demanded
by the current economic situation, we decided to
make a one-time €60 million loan loss provision
charged against results. It has not been assigned
for anything in particular. But for this provision,
profit would have risen 7.5%.
The financial crisis, which began in August 2007,
deepened during 2008 and fed through to the
real economy. Economic and banking activity fell
sharply. Despite this, gross operating income
increased 8.4% to €2,461 million.
A key element in the current environment is our
traditional discipline in costs. This enabled the
efficiency ratio to improve yet again to 39%,
making Banesto one of the most efficient
Spanish and European banks.
It is essential in this environment to maintain an
appropriate balance between growth in lending
and risk assumption. Our policy enabled many of
our customers, both companies and individuals, to
receive the necessary financing for their projects.
Banesto distributed:
- 46,500 loans to SMEs amounting to €3,540
million,
- 20,400 mortgages totalling €2,860 million
and
- 87,900 personal loans amounting to €1,800
million.
The credit quality deterioration is a natural
consequence of the economic downturn.
Nevertheless, rigorous control of risks,
improvements in the way they are managed and a
clear strategy of anticipating them led Banesto to
outperform the Spanish banking sector. Our nonperforming
loans ratio was 1.62% at the end of
2008 and coverage stood at 105.4%.
Given the current liquidity crunch, particular
attention was paid to attracting deposits. And we
were successful, as they grew 8.4%, a faster pace
than the banking sector, and produced a gain in
market share of 0.36 p.p.
In short, the results were good in a complicated
year, and very good when compared to other
Spanish and European banks. This was ratified by
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all financial analysts and the market in general.
Although the Banesto share could not escape the
plunge in all equity markets, its performance was
relatively better than European markets in general
and the banking sector in particular.
The 3% rise in earnings per share was very
notable compared to the rest of European
banks. This increase, based on comparative
figures for the first nine months of 2008 (the
latest available), was higher than all its European
competitors.
The dividend per share in 2008 was €0.56, the
same as in 2007, and maintained a policy of
distributing around 50% of profits. Based on the
share price, it represents a return of 8%.
As a result of all these achievements, the
magazine Euromoney recognised Banesto as
the best bank in Spain, due to its high quality
growth, the rise in net operating income and our
leadership in attributable profit and customer
funds.
Strategy and strengths
In 2006 we laid the foundations of a strategy to
make Banesto the best commercial bank in Europe.
We aim to be the leaders in consumer credit and
cards, value-added businesses in wholesale
banking and become the bank in Spain for
companies, especially SMEs.
In order to achieve this, we must continuously
improve the quality of service and increase our
business strength. We have successfully
surmounted these challenges, and done so despite
an economic environment that has radically
changed and become more complex. Becoming
the best bank in Spain is the first step towards
becoming the best commercial bank in Europe.
The road will not be easy; 2009 will be no less
complicated than 2008. Developed countries are
now in recession and the pace of growth in
emerging economies is declining, all of which is
affecting banking activity.
Banesto is in a position to weather this
environment successfully. We know our market,
understand our customers and have a business
model which:
- seeks an ongoing improvement in customer
and employee satisfaction;
- is based on innovation and customer service;
- and strives to have an impact on society
beyond that of banking.
It is a model which
- focuses on rigorously managing risks and
capital and
- generates recurrent, quality revenues and with
sustainable spreads.
And its operational efficiency enables us to adapt
to a changing environment.
Our starting point is very solid: in the talent and
commitment of our employees, in risk
management, in efficiency and in the speed of
response to customers’ new needs. The current
crisis is a great opportunity for Banesto to keep
on growing and move further ahead of its
competitors.

Corporate Social Responsibility
We continue to back the professional development
of our employees as one of the fundamental
elements of our management style. We launched
the Human Resources Master Plan which makes
involvement, identity and impetus the strategic
lines. This strategy was put into effect during
2008, and we advanced in the idea of mutual
commitment with more training, tailored career
development plans and creating a more flexible
working environment that facilitates the
appropriate balance between professional and
family life.
In today’s environment, our management must go
hand in hand with a greater commitment to
society. Banesto’s Corporate Social
Responsibility focuses on fostering
entrepreneurship and supporting small firms,
thereby fomenting a new concept of socially
responsible companies.
More than 4,000 SMEs took part in courses run
by the Banespyme school and the Solidarity and
Sustainable Tourism project already operates in 20
African countries.
Future priorities
We have very clear ideas. The management
priorities for 2009 are:
- Risks: we have always been noted for a rigorous
risks policy, which, in periods of growth, has
distinguished us from our competitors. During
a crisis, it is of vital importance.
- Productivity: we have the means, the
technology, the management model and the
talent to be an even more productive and
efficient bank. There is always room for
improvement and we will continue to be
particularly watchful in costs.
- Customers: the focus on them will be
maintained. Our model is based on forging
stable, lasting and increasingly close relations
with customers, on being on their side, as has
always been the case: both in good times and
the not so good like now. We will continue this
strategy of capturing customers in all
segments.
If we have learned anything from previous crises it
is that they offer opportunities.
An opportunity we are in a position to seize,
because we have a business model that
generates value for our customers and because
the market always offers opportunities.
It is easy to grow when the going is good. In
difficult periods, however, only those who
combine the best staff with the best position in
the market prosper. And Banesto offers this
combination.
We also have the backing of its shareholders,
whom I would like to thank once again for placing
their trust in us.
Ana P. Botín
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Governing bodies
Board of Directors
Executive Chairman
Ana P. Botín-Sanz de Sautuola y O´Shea
Executive Director
Vice-Chairman
Víctor Manuel Menéndez Millán
Non-executive Director (independent)
Chief Executive Officer
José García Cantera
Executive Director
Secretary
Jaime Pérez Renovales
BOARD OF DIRECTORS
Directors
Juan Delibes Liniers / Executive
José María Nus Badía / Executive
José María Fuster Van Bendegem / Non-executive, proprietary
Matías Rodríguez Inciarte / Non-executive, proprietary
David Arce Torres / Non-executive, proprietary
Carlos Pérez de Bricio / Non-executive, independent
Belén Romana García / Non-executive, independent
Rafael del Pino y Calvo-Sotelo / Non-executive, independent
Francisco Daurella Franco / Non-executive, independent
José Luis López Combarros / Non-executive, independent
Carlos Sabanza Teruel / Non-executive, independent
From left to right and starting at the front: Francisco Daurella Franco, Belén Romana García, José García Cantera,
José Luis López Combarros, David Arce Torres, Carlos Sabanza Teruel, Matías Rodríguez Inciarte,

Committees of the Board of Directors
Executive Committee
Chairman
Ana P. Botín-Sanz de Sautuola
y O´Shea
Members
Víctor Manuel Menéndez Millán
José García Cantera
Juan Delibes Liniers
José María Nus Badía
José María Fuster Van Bendegem
Carlos Sabanza Teruel
Secretary (not a Board member)
Jaime Pérez Renovales
Audit and Compliance Committee
Chairman
Belén Romana García
Members
Víctor Manuel Menéndez Millán
Matías Rodríguez Inciarte
José Luis López Combarros
Secretary (not a Board member)
Jaime Pérez Renovales
Appointments and Remuneration Committee
Chairman
José Luis López Combarros
Members
Víctor Manuel Menéndez Millán
Belén Romana García
Secretary (not a Board member)
Jaime Pérez Renovales
Ana Patricia Botín-Sanz de Sautuola y O'Shea, Víctor Manuel Menéndez Millán and Carlos Pérez de Bricio.
Rafael del Pino y Calvo-Sotelo, José María Fuster Van Bendegem, José María Nus Badia, Juan Delibes Liniers and Jaime Pérez Renovales.
Standing Committee on Risks
Chairman
José María Nus Badía
Members
Juan Delibes Liniers
Carlos Sabanza Teruel
Secretary (not a Board member)
Jaime Pérez Renovales
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Banesto in 2008
Business Model 9
The customer and quality 12
Managing talent 14
Risk control 18
Technology 20
Business units
Retail banking 22
Company banking 26
Wholesale banking 28
The Banesto share 30
Corporate social responsibility 32
Corporate governance 36

Business Model
Banesto has a proven
business model which
generates value in all
phases of the economic
cycle. The winning banks
in the current
environment will be
those that are
customer-focused
Banesto’s business model focuses on supplying the
products and services that customers want at each
phase of the cycle, continuous improvement in the
quality of service, capturing, developing and retaining
talent, prudent management of risks and constantly
striving for the highest efficiency through operational
excellence that contributes cutting-edge technology.
The customer is the
focal point of our
business model.
José García Cantera
CEO
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Banesto’s business model is based on the
following pillars:
1. Customer satisfaction via the quality of service
Banesto is convinced that continuous improvement in its standards of quality enhances customer satisfaction and strengthens their
loyalty and linkage. In 2004 we established our Q10 management of quality model which today uses more than 2,200 indicators to
gauge the quality of service throughout the bank and the level of customer satisfaction.
We continued to develop this model during 2008 with new projects such as the Banesto Responde Centre, which manages, on a multi
channel basis, incidents and complaints, the Q10 Branch Model and the creation of Quality Committee in each of the zones into which
the retail banking network is divided.
All of this enables us to increase the degree of customer satisfaction. The number of complaints received in 2008 by the Customer
Attention Service was 5% lower.
A further step in our commitment to continuously improving the quality of service and striving for excellence was taken in December
2008 when Banesto obtained the stamp of approval from the European Foundation for Quality Management (EFQM) for excellence with
500+ points, the highest level certified by the Excellence Club in Management. This recognition is based on the impact of the bank’s
achievements on customers, employees and society.
2. Management of talent
Talent is a scant asset and a critical factor for success. One of Banesto’s basic lines of management is to find, develop and retain the best
talent.
In 2007 we launched our Human Resources Master Plan which defines involvement, identity and drive as the strategic lines of
management. This strategy was implemented during 2008 through different projects including those for Quality Management, Knowledge
of People, Career Plan, Talent Map, Improving Productivity, Value Proposal and Diversity.
A basic objective of our policy is to have the most skilled employees in banking. In order to achieve this, Banesto continues to be fully
committed to training. Employees in 2008 spent 65 hours on average in training courses, much higher than the average for banks in
Spain.
As a result of this long-term policy, Banesto was again selected in 2008, for the fifth straight year, as one of the five best companies to
work for in Spain (Actualidad Económica ranking). And for the first time Banesto was chosen by Euromoney as the best bank in Spain.
3. Prudent management of risks
One of Banesto’s hallmarks is its culture of prudence in risk management, particularly credit and liquidity risks. This principle in the
current environment has acquired an importance not known since 1993 when the Spanish economy was last in recession.
The strategic objective is to maintain a quality of risk higher than the average of the banking sector. In a year when there have been major
differences because of the complicated environment, we again achieved this goal: at the end of 2008 Banesto’s ratio of non-performing
loans was 1.62%, which is almost half the ratio of the whole financial system. Coverage of non-performing loans by provisions stood at
105%, well above the sector’s average.
Such a performance is only possible with the best admission, monitoring and recovery systems, whose structure were strengthened in
2008 with 389 people. Management anticipates the risks.
Banesto significantly improved its liquidity position during 2008, aided by a change of business mix to one more focused on capturing
deposits, and on the bank’s capacity to make new wholesale issues (€6,981 million in 2008), even in the most adverse market
conditions.

4. Efficiency and operational excellence
Operational excellence based on continuously optimising processes with a notable impact on costs, but without quality suffering, coupled
with improvements in commercial efficiency enabled Banesto to increase its productivity more than that of its competitors.
In 2008, operational efficiency (gross operating income as a percentage of total operating costs, including depreciation, improved by
1.5 p.p. to 39%, meeting the target for the year. This was achieved with growth of 8.4% in gross operating income and only 3.4% in costs.
Efficiency improvements are producing an increasingly less bureaucratic structure and one focused more on the customer. The measures
to improve efficiency are in the Menara Plan and its various projects. Thanks to them, 100 employees were released in 2008 from
back-office tasks to concentrate on customer management. Back-office teams were reduced in 2008 from 3.5% to 2.8% and intermediate
structures from 6.3% to 5% of the branch network’s total employees.
5. Cutting edge tecnology
One of Banesto’s competitive advantages is cutting edge technology that is customer-focused as well as economies of scale that provide
the use of a common platform in Grupo Santander, making Banesto a unique model.
Technology has also enabled us to continue to develop a multi channel offer of products and services. During 2008 a new online broker
was launched and iBanesto.com and the Banesto Responde Centre were developed.
As a result of all these factors, the proportion of operations through channels other than branches was 33%, and the business volume
24%. Furthermore, the migration of transactions to more economic channels reduced unit costs per transaction to €0.03, 3.7% less than
in the year 2000.
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The customer and quality
The q10 model covers everyone
and has more than 2,200
indicators of quality
for all the bank.
In an environment of maximum competitiveness, quality of service and
customer attention are key aspects in each business with customers.
Established in 2004, the main objective of the Q10 Model is to
improve customer satisfaction. The Q10 indicators have made Banesto
a reference in the sector and consolidate the most important aspects
regarding customers, incorporating their view via a model of multi
channel quality.
Banesto obtains the stamp of
gold for european excellence
Banesto obtained the European Excellence stamp of gold +
500 points from the Excellence Club in Management which
evaluates and fosters European business management quality.
This recognition, the highest granted by the European
Foundation for Quality Management (EFQM), rewards the
level of excellence achieved in corporate strategy, leadership,
policies developed, management of employees, funds,
processes and relations with the bank’s various stakeholders.
EFQM assessment team, Excellence Club in Management and S.G.S.

THE Q10 MODEL CONTRIBUTES THE FOLLOWING
ADVANTAGES:
• A global model: the quality of the whole organisation is
managed strategically, influencing, in turn, those key aspects
related to customers through the use of more than 2,200
indicators.
• Multichannel: it measures the quality of customer service in all
channels (branches, telephone and Internet) and enables us to
integrate the internal and external views of quality.
• Provides efficient management: the system identifies the
indicators where improvements and/or measures have to be
made.
• Systematic and reliable: it monitors every month the results
at all levels and conducts audits in order to ensure the model is
reliable.
New projects were launched in 2008 to improve customer quality
and service:
Banesto Responde Centre
In order to keep on improving one of the most important
customer-related aspects, this centre was launched so as to
guarantee a quick and efficient solution to any problem arising in
any channel.
This new centre manages problems and complaints in all the
channels and speeds up the response to them. Complaints were
down 5% in 2008.
Q10 Branch Model
In order to ensure the same excellent level of service in all our
branches, a customer management and attention model was
established which standardises a high level of service.
In order to assess the model, as well as the level of service
provided, “mysterious customer” visits are made every month to
branches. More than 1,100 such visits were made in 2008,
enabling the pulse of customer service to be taken continuously.
The index of the quality of service improved by more than 0.56
points.
Q10 Challenge
A programme was developed for all customer attention managers in
order to improve service from behind the counter, one of the
functions with a significant impact on the perception of customers.
Self-evaluation of the quality of service
Every month the teams in all branches meet to assess the service
provided to customers and suggest ways to improve it.
Quality committees
Those responsible for quality in branches meet every month with
the manager of their zone to work on improving the indicators of
quality and transmit good practices.
Domina programme
This programme improves the information provided to customers
by obtaining better knowledge of products.
THE PATH TO EXCELLENCE: BANESTO MAKES
THE FIRST EFQM SELF-ASSESSMENT
Thanks to the improvement achieved in the last few years in quality
for customers, in processes and in results we began to work with
the EFQM Excellence Model in 2008. The first self-assessment was
carried out on the basis of nine criteria so that an improvement
plan could be drawn up.
BANESTO AWARDED THE CUSTOMER
CONFIDENCE PRIZE
In April 2008 the Fundación Madrid para la Excelencia awarded
Banesto its customer confidence prize for the Madrid region. The
following aspects were taken into account:
• Leadership and coherence with quality.
• Focusing on the customer.
• Customers’ confidence.
• Results with customers.
The prize recognises
the efforts made by
Banesto in
survey
developing,
Scale 0-10
implementing and
continuously
improving its Q10 7.84
Management of
Quality Model, which
is applied to
everyone and
enabled the whole
bank to be customer-
2007
focused and
continuously
improve the quality
of service.
Growth in linked
customers
(with more than 4 products)
2%
1T
Recommendation of customers
76.3%
2005
9%
2T
76.5%
2006
Service quality
12%
3T
77.0%
2007
7.97
2008
15%
4T
78.2%
2008
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Management of talent
Women/total
employees
26%
Female executives/
total executives
15%
36%
2002 2008
28%
2002 2008
Our main competitive advantage
lies in our employees
Commitment is at the heart of our management of human resources. It
is a key factor for attaining our strategic business objectives.
9,718 employees
41.2 Average age
91% dedicated to commercial activity
65 hours of training / 2008
11.8 adherence to the measures of the “banesto x ti” programme

MANAGEMENT OF TALENT AT BANESTO
Banesto’s commitment to its staff is based on two premises: on the
one hand, knowledge of employees in order to identify their needs
and provide tailored management and, on the other, the value
proposal comprising those products and services that strengthen
the commitment: training, career path, competitive remuneration
and programmes to reconcile family and working life, equality of
opportunity and diversity.
The Human Resources Master Plan has three strategic lines:
involvement (commitment to employees), identity (commitment
with the sense of belonging) and drive (commitment to business
results).
Seven projects were launched in 2007 and 2008:
• iCRM Banesto: managing employees as if they were customers.
• Quality Management: manage the commitment of employees.
• GPS Professional Banesto: guide of sustainable professional
progression for professional orientation.
• Banesto Value Proposal: communicate everything that Banesto
makes available to its employees.
• Improving Productivity: commitment to results.
• Talent Map: develop the pool of possible people to fill key
posts.
• “Banesto x ti”: diversity and reconciling work and family life
programme.
THE TEAM
Banesto’s 9,718 employees combine youth and experience (more
than 43% are under the age of 40 and 59% have worked for the
bank for 10 years or more), diversity (26 different nationalities), a
desire to be up-to-date in everything (more than 65 hours of
training per employee/year), expectations of professional
development (9.67% of staff were promoted to positions of
greater responsibility) and determination (74.27% of new
appointments achieve their results). The working environment is
flexible and allows for the reconciliation of professional and family
life (11.8% of employees adhere to elements of the “Banesto x ti”
programme), all of which made Banesto one of the five best
companies to work for in Spain for the fifth year running according
to the ranking of Actualidad Económica.
REMUNERATION
Banesto launched a Flexible Remuneration System for executives
which enables part of the salary to be exchanged for various
products with competitive prices and significant tax advantages.
Every year we increase by 10% the executives included in this
system as a way to ensure commitment and motivation.
The Top 10 Executives Programme was consolidated in 2008. It
covers those executives whose performance, results, capacity and
potential require special treatment. There are currently 500
executives in it. Forming part of it depends on meeting the criteria
established.
ASSESSMENT PROCESS
A new assessment process was put into effect in 2008 for all staff,
706 of them in the 360 o method and the rest in the System of
Skills. This process is a new version of the former systems and puts
the emphasis on interviews with line managers.
Banesto’s employees combine
Youth, experience and
Diversity
A total of 9,189 interviews were held and the corresponding
improvement plans defined. As a result, 14,041 steps to improve
results were identified, 11,518 for improving knowledge and 11,941
for skills.
TRAINING AND DEVELOPMENT
The main focus in 2008 was on improving management quality,
seeking a management style more in tune with the times so as to
make executives feel responsible for the commitment of their staff.
All the bank’s executives participated in the programmes.
As regards branches, the training for new managers and deputy
managers was strengthened in the areas of credit quality and
monitoring and negotiating and management skills.
In line with the bank’s strategy for risks (culture and practice;
selective growth in lending; proactive management of loans and
optimising recovery management), an ambitious project of
mentoring was incorporated to the training programme in order to
improve knowledge of risks. Experts in this field also participate in
the programme and give practical advice.
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SME account managers were trained in 2008 in risk quality and
optimising the spread on loans, as well as in the quality of service
and closing sales.
Banesto has quickly adapted to the new digital area, incorporating
just-in-time learning and offering employees the maximum flexibility
via high impact e-learning (more than 56,000 on-line courses and
over 200,000 on-line training hours).
The key elements of our
management style are knowledge
of people, permanent
improvement through training
and constant evaluation of
quality
In personal and private banking, we continued to provide the most
qualified advice to clients on their portfolios and wealth. Training
programmes increased executives’ knowledge of markets and
helped them in the search for new business opportunities.
We continued to work with the best Spanish and international
business schools to develop the potential of our executives.
RECONCILING WORK AND FAMILY LIFE, EQUALITY
OF OPPORTUNUTY AND DIVERSITY
Banesto’s commitment to equality of opportunity and reconciling
work and family life was given shape in a plan signed in December
2007. It sets out the main lines for guaranteeing and fomenting
equality of opportunity (training, remuneration and development)
right from the moment when someone joins the bank. The existing
measures for facilitating the reconciliation of work and family life
and the range of solutions for all types of situation and profiles
were strengthened.
The main steps taken in 2008 were aimed at communicating the
programme (22% rise in the degree of knowledge of the “Banesto
x ti” programme), as well as fomenting the measures that benefit
male employees (98% of fathers made use of the five days off and
81% requested paternity leave).
The second Open Day was held in July in Banesto’s main offices
for all employees and their families. More than 2,500 people took
part.
Open Day
BANESTO OLYMPICS
Banesto held its first Olympics in 2008. More than 1,700
employees participated in seven activities: seven-a-side football,
3x3 basketball, paddle tennis, golf, ping pong and athletics. There
were regional finals and then a national final in Barcelona. The
winners received their trophies at the executives’ convention in
Barcelona.
Banesto Olympics
Olympic winners at the Banesto Convention with the Chairman, Ana P. Botín, and Rafa Nadal

Management data
dec-08 dec-07 dec-06 dec-05
PROFESSIONAL CAPITAL (CURRENT PROFILE)
Total number of employees 9,718 9,923 9,708 9,468
Average age 41.12 40.41 41.08 41.25
Number of years at Banesto 17 16.34 17.42 18.49
Diversity (women as % of total employees) 36.41% 35.77% 33.35% 33%
Diversity (number of different nationalities) 28 25 23 25
% of staff with a university degree 54% 53% 60% 58.8%
Number of different degrees 93 87 82 104
% of staff with the three most frequent degrees 38% 35.00% 35.14% 31.61%
(% of employees with degrees) 76% 71%
Internal promotion: promotions/total employees 13.59% 13.57% 14.58% 8.77%
Average number of years in current post 3.79 3.53 3.2 3.56
Average number of years in current centre 4.46 4.18 4.04 3.92
% of employees with variable remuneration 100% 100% 100% 71.32%
% of employees in commercial tasks in branches 84% 83% 79.37% 77%
Internal functional rotation 15% 15.57% 12.57% 20.18%
HUMAN POTENTIAL (CAPACITY TO IMPROVE)
New employees/total employees 5.27% 15.38% 9.46% 5.03%
Training hours per employee 65 71 63 55
Training costs/personnel costs 1.82% 1.73% 1.54%
% of employees with evaluation of skills 100% 100% 100% 100%
Number of online training hours 226,735 205,912 177,488 135,000
Number of e-learning courses completed 56,898 79,884 111,775 63,000
Employees/total employees users of online training 80% 86% 87% 90%
Employees in training/total employees 88% 88% 86% 85%
Evaluation of the satisfaction of participants in training courses 8.7 8.6 8.6 8.5
Index of application of training in the post occupied 8.49 8.42 8.34 8.00
SOCIAL QUALITY (SOCIAL POLICIES)
% of employees on a permanent contract 99.59% 98.45% 96.54% 96.50%
SOCIAL RETURN (RETURN ON THE HUMAN FACTOR)
Human factor cost: personnel costs/total operating costs 75.58% 77.16% 74.43% 77.20%
ROI of human capital: gross operating income less operating costs per
employee/personnel costs per employee 2.4 2.21 1.91 1.94
Value added of human capital: gross operating income less operating
costs/average number of employees 161.8 142.28 121.20 119.56
Efficiency of wage bill: personnel costs/total revenues 26.62% 27.96% 30.63% 30.89%
TRAINING
By posts
Commercial 63% 83.00% 68.86% 82.08%
Technicians and other executives 36% 12.00% 27.88% 10.66%
Support 1% 1.38% 3.26% 7.26%
By age
Under 30 43% 48.76% 41.45% 33.00%
30-39 33% 28.77% 29.31% 26.00%
40-49 18% 17.88% 22.98% 36.00%
Over 50 6% 4.59% 6.26% 5.00%
Resources for reconciling professional and family life
Mobile phones 2,148 1,675 1,285 1,151
PCs 3,939 2,411 2,575 2,296
Selection process
CVs managed 130,330 119,431 109,524 103,588
Indices of quality
Internal customer June 6.57 6.59 6.68 6.64
Internal customer December n.d. n.d 6.58 6.86
Employees in 360 o assessment 860 707 n.d 290
Average number of evaluators per person evaluated 10 10 n.d 10
17

18
Risk Control
Banesto has a solid culture of
risks firmly rooted in all
employees
The basic principles of risk management coupled with advanced tools
and techniques for analysis and assessment enable us to face
unfavourable changes in the environment with excellent credit quality.
Our risk monitoring system predicts, anticipates and minimises on a
sustained basis the impact of any deterioration in the portfolio of
customers.
Risk Control
Non-performing loans ratio 1,62%
NPL coverage 105,4%

anesto attaches great importance to quality in risk management,
something that is consistent with a strategy of growth and
financial soundness
Our prudent management of risk and predictable levels over the last few years give us a competitive advantage in the current economic
environment. Our mortgage risk admission policies of not participating in loans with high levels of leverage and focused on first home
buyers – both real estate developers and individuals -, as well as a management style that anticipates risks, has made the quality of our
portfolio excellent.
Risk management is a competitive advantage for being close to customers, measuirng the risk that has to be assumed and setting an
appropriate price. Thanks to the quality of our admission, monitoring and recovery systems, together with active and anticipative
management of risks, Banesto's risk quality continued to be excellent in 2008.
BASIC PRINCIPLES OF BANESTO’S RISK
MANAGEMENT:
1. The risks function is INDEPENDENT of business when
decisions are taken. The Risks Committee, which reports to the
Board of Directors, defines the risk policies and validates the
management tools which are adapted to the new Basel II
capital accord.
2. SENIOR MANAGEMENT IS INVOLVED in risk
management and plays an active role in admitting and
monitoring risk, as well as supervising the exposure of the main
customers, economic sectors and types of risk in a systematic
way in order to avoid the risk of concentration.
3. ANTICIPATION through monitoring risks, assessing
customers constantly and updating information on them. This
enables us to minimise the impact in the event of high risk
situations.
4. PRUDENCE IN ADMISSION, setting new policies
adapted to the market. Portfolios are actively managed and
focused on improving Banesto’s risk profile in terms of quality.
5. QUALITY SERVICE externally and internally, through
the Q10 quality model which speeds up responses and
coordination between the business area and the customer.
6. ADVANCED MANAGEMENT TECHNIQUES
based on a methodology of analysis, evaluation and specific
measurement of each customer segment.
7. DEFINITIVE ADJUSTMENT to the New Basel Capital
Accord (Basel II) through validation of our capital requirement
model and development of methodologies and models which
give us parameters for measuring and quantifying that facilitate
global and efficient management of risk.
8. The Risks Area COMPLEMENTS the different business
areas. Risk management is fundamental for designing pricing
policies.
The Bank of Spain approved our internal risk control and capital
consumption models.
19

20
Technology
Our technolgy’s agility and
flexibility to adapt, which enables
processes to be continuously
redesigned, is a key competitive
advantage
In an era where telematics and critical business processes are
increasingly part of day-to-day activity, efficient and customer-focused
information is a vital element for being able to attain a leadership
position.
The objective set by the Resources Area in its strategic Menara Plan is
to ensure the business areas have powerful and cutting-edge systems
(applications, operational models and processes) that give Banesto, in
a scenario of flat costs, competitive advantages.

The Menara Plan maximises productivity and makes the
distribution of resources efficient, thanks to its structure of
automation, centralisation and optimisation of key processes, and
the use of common “factories” with service contracts that ensure
excellent levels of quality with low costs, in line with the best
market prices. This model has become a best practice reference
among banks.
The Menara Plan, in its second year, is based on commercial
efficiency (giving the bank a sales force and eliminating
administrative tasks from the branches), efficiency in production
(producing at low cost thanks to operational synergies and
strategic IT platforms) and quality of service.
COMMERCIAL AND PRODUCTIVE EFFICIENCY
A new structure was approved in 2008 for the Retail Banking Area
in order to anticipate the market’s requirements in the next cycle.
The main objective of this reorganisation is to achieve a better
alignment of business, segments and products at a time when the
method and commercial systematics are crucial for achieving
targets.
The processes and structures of the network (regional and zones)
have moved toward a more business focused model with lighter
structures and a greater focus on customer management.
Intermediate structures employed 5% of staff in branches in 2008,
down from 13% in 2001. As regards the commercial force, more
than 60% of posts in branches are sales jobs, with the consequent
increase in customer attention.
8%
13%
7.2%
9%
7.4%
7%
6.3%
4.7%
2002 2003 2004 2005 2006 2007 2008
Back office staff as a proportion of total employees
Intermediate structures as a proportion of branch staff
6.3%
5% 5%
4.3% 3.5%
2.8%
Progress continued to be made on reducing the proportion of
employees in back office tasks (from 8% in 2001 to 2.8% in
2008). These advances enabled Banesto to produce with better
quality and controls at a lower cost, using simple and streamlined
processes.
QUALITY
Banesto strives to have the best technology as the basis for
commercial success, innovation and achieving recurrent cost
savings. Significant investments were made in 2008 in technology
in order to foster high added value and strategic projects aligned
with the bank’s objectives, including among them:
Ibanesto.com
The new portal of the online bank (ibanesto.com) strengthens the
multi channel relation and the service and contracting channels. Its
more modern design follows the latest standards of usability which
enable the user to carry out a dynamic and efficient management
of contents and have their own specialised telephone center.
Banesto Broker
The new Banesto Broker portal was installed in 2008 which has
real time information on market prices, latest generation graphs
and a wide range of tools: technical analysis of value and
fundamentals, analysis of portfolios, virtual portfolio, watch list,
prices, ranking and searcher of warrants, simulators of volatility,
hedging and speculation, etc.
Security
The establishment of a new IT security via OTP authentication for
online banking transfers provided customers with tranquillity,
security, comfort and reliability.
CRM
Improvements were made to the customer relationship
management (CRM) system by giving it commercial intelligence on
the basis of the type of customer and a range of tailored products
and services.
Management of risks and recoveries
Substantial improvements were made to risk and recovery systems,
adapting them to the new business trends, strengthening the
systems for analysing customers’ risks and controlling admission,
and developing the factoring of processes and analysis systems.
As regards the call centre for recoveries, where Banesto has
benchmark methodology, a system known as Cobra was launched
to control the process.
Document Quality
Measurement of document quality was incorporated to processes,
backed by digitisation projects in order to improve the efficiency of
the critical commercial processes and maintain the highest
standards.
Telephone service
Banesto has a telephone platform with very advanced CRM
technology, CTI (integration of telephony and computers),
recording of calls, OCM, etc. This platform has a dual multi
discipline culture in calls with customers and non-customers and
manages calls, e-mails, faxes, mail, SMS. Call blending was
incorporated so that outbound calls can be handled while
receiving inbound calls.
The results of the quality plan were excellent: Banesto was ranked
second in customer attention (telephone and mail) by AQMetrix
and first in e-mails. In short, Banesto today is a reference bank in
efficiency and quality of service.
21

22
Retail Banking
Our customer relationship model
is ahead of developments and the
market
Banesto’s striving to become the best bank in customer relations was
recognised by Euromoney which named it the best bank in Spain in
2008.
The launch of nine plans and 38 projects related to customers
produced a significant increase in the number of customers and the
launch of innovative products to meet their needs.

INDIVIDUAL CUSTOMERS
A broad range of products and services was created, which are
noteworthy for their simplicity and clarity and stand out from
those of our competitors.
Mortgages are the main source of our new customers. The payroll
account and the domiciling of receipts increased the volume of
transactions. A relationship model was created around these
products that goes beyond that of a one-off campaign:
• Connecting households to communication networks via the gift
of an HP Compaq PC.
• Gift of a 32 inch Toshiba TV.
This way of working for and with customers has produced
significant results and helped to manage household economies.
Particularly noteworthy is that the number of customers in the
“Tarifa Plana” account surpassed 900,000 and almost 400,000
new payrolls were domiciled in accounts, bringing the total to
900,000. We continued to increase the number of linked
customers (those with four or more products); the average number
rose from 4.4 to 4.6 and the number of receipts domiciled grew by
more than 900,000.
COLLECTIVES
The Banesto Justice Club has 30,000 customers between judges,
magistrates, lawyers and secretaries of courts. The Colegio
Nacional de Secretarios Judiciales awarded Banesto a prize for the
technological excellence of its management of the courts’
accounts.
Our offer of products and
services stands out from those
of our competitors for their
simplicity and clarity
PERSONAL BANKING
Personal banking continued to advance and secure a model that
puts the emphasis on personalised advice through total coverage
of needs by all our branches. Their management capacity was
strengthened by the incorporation of 100 specialised
managers who, together with the branch managers, guarantee
permanent contact with the segment’s more than 70,000
customers.
The Personal Banking Services Centre was consolidated.
This has 45 specialised managers and ensures that all
customers have a financial advisor and the best tools for achieving
the maximum return on investments. Our ability to anticipate the
market and take advantage of opportunities enables us to provide
a very attractive range of products and services for our customers.
Of note among them are new structured deposits with the capital
fully or partially guaranteed, depending on the demands and
investor profile, and the “Gama Selecta”: the most competitive
mortgage, the “Selecta” card for the most demanding customers,
personal loans and exclusive insurance.
PRIVATE BANKING
Our objective in private banking is to achieve greater proximity
through a customer relationship model that is largely based on our
extensive network of branches and managers. In addition, we
increased the number of account managers and created a new
team of investment specialists. We also established a larger and
better level of information by setting up new channels such as
“reports of market expectations” or “management of portfolios”,
depending on customers’ preferences.
SMES
Our model in this area focuses on the branches with a greater
potential, where our specialised sales force is concentrated. We
manage portfolios using the Banespyme concept: SMEs are seen in
the full context of relations with suppliers, customers, employees
and partners. This strategy enabled the number of new customers
to surpass 28,000.
This model, which incorporates innovative proposals and
cooperates with various public and private sector institutions,
enables SME clients to develop their businesses.
Of note are:
• Learning to Export Programme, organised by ICEX, which helps
first-time exporters.
• “ICO Pymes” Line and ICO “Avanza”, which finance improvements
made by SMEs in technology and communications.
• Banesto Enisa Sepi Desarrollo
venture capital fund, focused on
investing in high growth
potential SMEs. In three
years it has taken stakes in
16 companies.
• Development of a
project within the
framework of the
Excellence in
Management Club in
cooperation
with the EOI,
which aims to
transfer to the
world of SMEs
the management
models of Spain’s
leading
companies.
23

24
SHOPS
Integral products and services to foster the growth of shops and
help their day-to-day management through the branch network.
More than 32 agreements were signed with the main franchises in
Spain and 63 cooperation agreements with associations of local
shops.
These actions enabled Banesto to increase its presence in sectors
such as pharmaceuticals, good, health, cosmetics, cars and beauty.
Our support for technological development and modernisation
made Banesto the leader in GPRS point-of-sale terminals in the 4B
system (market share of 26.9%).
We captured 21,000 new customers in 2008.
THE SELF-EMPLOYED
This segment also enjoys products and services tailored to their
needs. Actions in 2008 included:
The gift of a 32 inch LCD TV to all those who domicile regular
income of more than €800 a month and three main receipts.
Those who domicile payment of their taxes or the receipts of the
special regime of self-employed workers (RETA) and contribute
€3,000 to their pension plan or a mutual fund can select a gift.
Agreements were made with various business groups that
contribute added value by offering other non-financial services
that cover needs. Of note among them are communication with
Orange and labour risk prevention with the MGOP Group.
Agreements were also made with professional groupings and
associations, such as OPA Extremadura, the Association of Madrid
Taxi drivers and the Association of Andalusian Taxi Drivers, that
provide financial services to all their members.
Thanks to these agreements, Banesto incorporated more than
23,000 new customers (market share of 4.6%, one point more
than in 2007).
Sube
a la red
BANESTO NATURA
Banesto Natura, which specialises in the rural world, continued to
offer products and services to the whole sector. Of particular note
were the agreements with leading public and private sector
institutions to install new information and communication
technologies and improve farming through latest technology
machinery.
The steps taken in 2008 included:
• CAP development throughout Spain. More than 45,000
operations consolidated Banesto as the leader.
• Development of new information and communication
technologies through agreements with the Industry and Energy
Ministry and eight events attended by more than 10,000 people.
• Joint lines of action with various official institutions (Agriculture
Ministry and ministries in regions) to finance the cattle sector in
exceptional conditions (2,400 loans for a total of more than
€51 million).
• Cooperation agreements with suppliers of machinery to facilitate
financing in special conditions.
INSTITUTIONS
More than 2,300 public institutions (town councils, town halls, etc)
and 4,350 private institutions (foundations, professional colleges,
religious congregations) are provided with products and services.
MARKETING AND PRODUCTS
This area developed measures and plans which made 2008 the
year of the “Winning Spirit.”
Innovative products associated with the tennis champion Rafa
Nadal were created, such as “Ofertas Nómina” (payroll cheques
deposited in accounts), consumer loans and the Match Point card.
The payroll campaigns established a new type of relation with
customers with the launch of two very attractive products: “Sube a
la Red” campaign (customers who domicile their salary and bills
receive a HP Compaq personal computer) and the TV 32”
campaign (gift of a Toshiba 32” TV with TDT).
Both campaigns were driving forces behind the capturing of new
customers and positioned Banesto as the bank with the best
payroll offer. More than 400,000 people signed up.

FUNDS
Of note was the gain in market share of 30 b.p., with a
contribution from sight deposits of 40 b.p., mainly backed by the
payroll campaigns and a considerable rise in transactional business.
The “Sobre Ruedas” deposit was launched. This is a unique time
deposit with a remuneration in kind – a car or a motorbike
depending on the amount and the maturity period.
Other innovative and tailored products launched in 2008 were the
“Titanio” and “Titanio Plus” deposits and mutual funds such as
“Fondepósito” and “Liquidez deuda Pública”, leaders in capturing
funds.
CONSUMER LOANS
Banesto was one of the first banks to launch a revolving credit, the
“Préstamo 15-30-40”, which using the points of a tennis match
and the image of Rafa Nadal offers customers the possibility of
being able to avail themselves of their money at the maturity of 15,
30 and 40 months.
The Match Point card was also created. This provides significant
benefits for cardholders through one of the best points
programmes in the market; the Banesto Premium Class points
programme offers flights and access to VIP lounges in airports
around the world via Priority Pass. More than 150,000 cards were
issued during 2008.
Banesto continued its revolving credit strategy through the “Tarjeta
Diez en Una”. More than 200,000 of these cards were issued.
The total stock of our cards is more than 2.3 million (1.23 million
credit cards and more than 1.1 million debit).
CUSTOMER RELATIONS
Banesto’s strategy is a multi channel one in order to increase the
capacity of contact with our customers and be able to make major
improvements to the products and services offered via
www.banesto.es, our telephone banking service, ATMs and banking
through a mobile phone. Of note was the launch of a new platform
for securities, futures and options.
Banesnet, our online bank, increased the number of its active
customers by 40%. Transfers through this channel represented
45% of Banesto’s total and securities operations 20%.
The telephone platform received 1.5 million calls, 93% of which
were tended to in less than 20 seconds. More than 200,000 emails
were answered, 74% more than in 2007.
IBANESTO.COM
The online bank ibanesto.com changed both its aspect and its
strategy of direct banking in order to become a reference in this
market. Its whole structure was revised:
• The portfolio of products so as to offer the most competitive
ones.
• The corporate image, the blue products and low cost banking,
transmitting to customers the message that ibanesto “spends less
in order to give more.”
• The website, making it simpler in contents and how to surf it.
• The processes of contracting products, introducing contracting
by telephone and strengthening all the internal processes.
The impact was quickly seen: more than 50,000 new customers in
2008 and leading the capturing of funds in the direct banking
market (more than €700 million).
25

26
Banking for companies
Anticipation is a key factor in
management
2008 was the second year of the 2007-09 Strategic Plan for this
segment. Our strategy of anticipating developments enabled Banesto
to successfully face a year of uncertainty in the markets. The progress
made in previous years to improve the quality of products and services
as well as ensure the selection and training of the best teams
enhanced customer satisfaction and linkage and set Banesto apart
from its main competitors.
Growth in gross operating income maintained
This strategy was endorsed by the significant rise in business volumes:
both lending and funds grew by 16% and gross operating income was
20% higher.

Banesto’s strategy for companies is based on differentiation,
speed, agility, flexibility, effectiveness and innovation. Market
conditions also underscored our capacity to adapt and anticipate.
The following areas were worked on during 2008:
• Risks. While the focus in previous years was to speed up circuits
and processes in order to respond more quickly and with higher
quality to customers, in 2008 it was on managing a fast-changing
environment.
• The joint work of commercial teams and risk management
specialists helped customers to anticipate many situations arising
from market tensions. The success of this policy is well reflected
in the quality of our lending portfolio.
• Management of spreads. The excessive liquidity generated in
previous years triggered distortions in price-setting which were
often not reflected correctly in risk premiums. This phenomenon
put well managed companies at a disadvantage as they saw how
their less qualified competitors were able to obtain similar
conditions. In 2008, greater emphasis was placed on the policy
of prices in order to adjust them to activity and each company’s
business volume.
• Products. Banesto maintained its commitment to provide the
best products, updating and improving them.
Continuous improvement in
products and management
processes to achieve greater
customer linkage and
satisfaction
We continued to grow at a faster pace than our peers in syndicated
loans, project finance, electronic banking, foreign trade, confirming,
leasing, renting and factoring.
In capital markets, Banesto remained the leader in structured loans
for companies and led most of the operations, contributing a
differential value to customers in sectors such as renewable energy,
health, shipping and industry.
In mergers and acquisitions, the bank consolidated itself in 2008
as one of the leaders in Spain of buying/selling medium-sized
companies. We advised more than 40 clients.
The excellent acceptance of confirming, coupled with the
magnificent work by teams of specialists, produced growth of 36%
in this product.
Factoring continued to grow at a much faster pace than that of our
main competitors (30% vs. 18%), enabling the bank to consolidate
its third position in the ranking. Our online bank BanesNet
continued to capture new customers. At the end of 2008, 90% of
our customers used BanesNet for their normal transactions.
New foreign trade functions were incorporated in 2008, enabling
online customers to easily conduct sophisticated operations such
as opening import documentary credits or financing payments
abroad, as well as obtain information on all their transactions.
We will continue to grow and
strive to become the reference
bank for spanish companies
A public foreign trade portal was launched in order to help
strengthen the international development of our customers,
facilitating commercial contacts as well as other personalised
services, such as: the regulations for labelling products in all
countries, standardisation rules and customs duties.
More than 12,000 companies already use the foreign trade
products and services; the rates of growth in 2008 were double
the market’s which meant we continued to gain market share
(+0.40 p.p.).
The range of treasury products continued to provide customers
with solutions for risks arising from interest rates, currency and raw
materials and to increase the generation of revenues.
• Customers. We continued the steps taken in 2007 to focus
activity on the largest customers and with a turnover of more
than €10 million.
The cooperation of all levels of the commercial network with
regional managers, centre managers and branch managers was very
important.
More than 900 companies with high growth potential were
captured as clients.
A considerable effort is made to
ensure the best people are
selected to work for Banesto
and trained
• Employees. One of the main factors of success in 2008 was
active management of employees and development of training
and motivation programmes.
The main challenge in 2009 is to continue growing at a faster pace
than the rest of the market, both in business volumes and results.
27

28
Wholesale Banking
Banesto is a global supplier of
products and services and helps
to implement and develop new
financial solutions in order to be
in the vanguard of banking
In a complex market environment, the Wholesale Banking Area’s
activity and earnings continued to grow, as well as creating value for
the bank and customers. All the area’s units contributed to this
improvement, met their goals and continued to strictly control risk.

MARKETS
This unit is responsible for resolving clients’ needs in all matters
related to the capital and stock markets and treasury products.
More than 20,000 operations
were conducted with clients
in 2008
More than 20,000 operations were carried out during 2008,
underscoring the success of the usefulness of our products. The
Markets’ Unit generated €223 million of revenue for the bank,
22% more than in 2007.
The Capital Markets Unit led xx lending operations for Spanish
companies. Of note was the xx% increase in loans to finance the
international expansion of clients.
The capital markets unit took
part in the main operations to
finance spanish companies
abroad
Also noteworthy was Banesto’s increasing participation in the
structuring and financing of renewable energy projects (wind
power, photovoltaic and solar). A total of 37 operations were
conducted amounting to €400 million.
Sept. 2008
CAD 1,094,000,000
Availability / Toll Road
Mandated Lead Arranger
Jun. 2008
$ 246,000,000
Syndicated Loan
Mandated Lead Arranger
Jun. 2008
$ 150,000,000
Syndicated Loan
Mandated Lead
Arranger
The Corporate Finance Unit was particularly active during 2008,
responding to the needs of clients whose operations affected the
capital of their companies (search for partners, sale, acquisitions,
etc).
Banesto Bolsa, Banesto Factoring and our New York office worked
with the Wholesale Banking Area, thereby ensuring the widest
range of products.
CORPORATE BANKING
Another wholesale banking activity is corporate banking. This unit
meets the needs of those companies which because of their size,
singularity and complexity require tailored solutions.
The range of products complement those of other wholesale
banking units such as treasury, capital markets and corporate
finance.
Its earnings were 7.7% higher in 2008 at €170 million. These
results were achieved with a more efficient management of the
balance sheet and of the unit’s funds.
Corporate banking continued
to grow and with a lower risk
exposure
The wholesale banking model delivers products quickly, enabling
clients to adapt rapidly to the changing needs and opportunities
of markets.
International Operations of Capital Markets with Corporate Banking Clients
Feb. 2008
$ 399,000,000
Toll Road
Arranger
Jun. 2008
$ 400,000,000
Syndicated Loan
Mandated Lead Arranger
Jun. 2008
$ 1,110,000
LNG Regasification Plant
Mandated Lead Arranger/
Syndicated Agent
29

30
The Banesto Share
January 08
The return on the Banesto share
was 60% in the last six years
(From january 1, 2003 to december 31, 2008
including dividends)
The downturn in the international macroeconomic environment and
particularly the global financial crisis caused all stock markets to fall in
2008. Despite its good results and solid fundamentals, the Banesto
share ended the year at €8.08, down 39.29% over 2007. The Dow
Jones Stoxx 600 Banks Index plummeted 64%.
THE BANESTO SHARE PRICE PERFORMANCE COMPARED TO THAT OF THE DOW
JONES STOXX 600 BANKS INDEX IN 2008
June 08
December 08

CAPITAL STOCK
Banesto reduced its capital stock in 2008 by €5,485,207 by
redeeming 6,943,300 shares owned by the bank, previously
acquired after obtaining approval from the Shareholders’ Meeting
at the beginning of the year.
The capital stock stood at €543,035,570,42 (five hundred and
forty three million thirty five thousand five hundred and seventy
euros and forty two cents), represented by 687,386,798 shares of
79 cents nominal value each, numbered from one to 687,386,798
inclusive and which are fully subscribed and disbursed and
constitute a single series.
The shares are traded on the continuous market of the four
Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao).
SHAREHOLDER REMUNERATION
Banesto’s Board of Directors approved the dividend policy to be
implemented provided there are no extraordinary circumstances.
The policy is as follows:
1. Pay-out of around 50% of the bank’s recurrent profit.
2. Payment of quarterly dividends charged to the year’s earnings
in August, November and February, and a final one agreed at
the AGM.
Each dividend will be distributed under a specific agreement of the
Board, which will be taken once it is known there are sufficient
profits and liquidity for payments, in accordance with the prevailing
regulations.
The dividend per share in 2008 was €0.56.
DISTRIBUTION OF THE CAPITAL STOCK
MARKET CAPITALISATION
Banesto’s market capitalisation at the end of 2008 was €5,554
million, making it the xx largest Spanish company in the benchmark
Ibex 35 index and the fourth biggest bank.
COVERAGE OF THE SHARE
We continued to foster the growth and trading of the share by
maintaining active communication with analysts and investors, etc.
There are currently 23 analysts covering the Banesto stock on an
ongoing basis.
Banesto was one of the most recommended shares to buy among
Spanish and European banks. The average daily volume of shares
traded was €8.6 million.
RATINGS FROM AGENCIES
S&P
Moody’s
Fitchratings
Long term Short term
AA A-1+
Aa2 P-1
AA F1+
Shareholders Shares % of Capital Stock
Board of Directors 14 704,908 0.10
Institutional* 122 649,627,069 94.51
Individuals 85,496 37,054,821 5.39
85,632 687,386,798 100.00
* Including Banco Santander, the majority shareholder, which holds directly and indirectly 89.28% of capital stock.
DISTRIBUTION OF CAPITAL STOCK BY NUMBER OF SHARES
Number of shares Shareholders Shares % of Capital Stock
1 to 250 59,253 5,509,062 0.80
251 to 500 11,955 4,283,616 0.62
500 to 1.000 7,767 5,591,433 0.81
1,001 to 5,000 5,596 11,360,688 1.65
more than 5,000* 1,061 660,641,999 96.11
85,632 687,386,798 100.00
31

32
Corporate social
responsibility
Banesto’s csr is based on a well
defined strategy and policy that
guarantees responsible
management, a beneficial impact on
society and contributes to a more
sustainable environment
Banesto’s CSR provides an integral focus based on its vision and values
and a strategy and policy approved by the Board. These aspects are the
starting point for harmonising the business objectives and needs and
expectations of stakeholders, creating constant and balanced value in
conditions of social and environmental sustainability.

Responsible management entails complying with legislation and
commitments acquired and focuses on quality in managing
customers, transparency with shareholders, the importance of
employees, control of risks and responsible behaviour throughout
the supply chain. This framework lays the foundations for
increasing the impact of CSR on society and contributing to a
more sustainable environment.
COMMITMENT TO OUR STAKEHOLDERS
Banesto’s corporate social responsibility (CSR) represents a
commitment to all our stakeholders to create constant and
balanced value and in conditions of social and environmental
sustainability.
It is based on two main principles:
1.- aligning the bank’s vision and values and generating internal
synergies between foundations and business areas in order to
make social and economic objectives complementary and
2.- cooperating with other companies and institutions in order to
increase the impact of the measures taken via networks with
public and private agents.
Banesto’s CSR framework
Dialogue with
stakeholders
Fostering the
entrepreneurial
spirit
HALLMARKS OF OUR CSR STRATEGY
The hallmark of our CSR strategy is the fostering of an
entrepreneurial spirit together with innovation, dissemination of
new technologies and protecting the environment.
Banesto believes that a country’s prosperity is linked to the
entrepreneurial capacity of its citizens. This philosophy is behind
our support for SMEs and is coherent with the bank’s strategy of
becoming the bank for companies.
Access to new technologies is a key element for society’s
modernisation and competitiveness. For this reason, their
dissemination among collectives who have difficulties doing this is
a priority area of our CSR.
Respect for environmental sustainability in all our actions is
another important part of our CSR. The Ecobanesto plan to
protect the environment and the fight against climate change limits
defines our scope.
Dialogue with
stakeholders
Vision and Values
Strategy and Policy
Strategy Policy Organisation
Responsible Management
Compliance Risks Quality Value for
Shareholders
People Suppliers
Impact on Society Sustainable Environment
Innovation
and new
technologies
Rural
Development
Humanitarian
Actions
Strategy,
Policy and
Management
Ecobanesto
Plan
Environmental
Financing
33
Dialogue with
stakeholders

34
Main advances in CSR
in 2008
Measures were taken in 2008 to consolidate the
path of CSR
STRATEGY AND POLICY
• The Board approves the CSR policy at the proposal of the
Sustainability Committee.
• Consolidation of the Sustainability Committee, coordinated by
the Chairman’s Office and comprising all areas with an impact on
sustainability.
• Adherence to the ethical principles of the United Nations Global
Compact.
• Entry into the selective FTSE4Good Ibex, which only covers
those companies that meet the most exacting standards in CSR.
• Publication of the CSR
Report drawn up on the
basis of the Global
Reporting Initiative
(GRI) at it’s A+ level.
optional obligatory
RESPONSIBLE MANAGEMENT
• Development of the Regulatory Compliance Model. MiFID
regulations applied.
• Launch of the Banesto Responde Centre, Q10 Model Branch,
Q10 Challenge, self-assessment of the quality of service, Quality
Committee and Domina Programme.
• Improvement of 0.56 in the Q10 indicator of quality.
• Launch of the “Depósito Sostenible”, a socially responsible
investment project.
• Greater communication with shareholders and investors. 658
consultations resolved, 10 road shows, attendance at the main
international banking conferences and more than 200 meetings.
• Consolidation of the environmental rating and launch of new
tools.
• Human Resources Master Plan put into effect.
Rating level A+
Self-declaration
• New process for evaluating the performance of employees.
IMPACT ON SOCIETY
• 4,000 SMEs trained via the Banespyme School.
�
Gri verification �
• More than 370 entrepreneurial experiences and 2 million videos
seen on the Internet TV channel emprendedorestv.com. The
channel emprenedorstv.com was launched in October in
cooperation with the Industry Ministry and the government of
Catalonia and the support of Microsoft. It received more than
160,000 visits in the first two months.
Presentation of emprenedorstv.com
• Investment in two new companies by the Enisa Sepi Desarrollo
venture capital firm, bringing the total number to 16 and
providing direct employment to 312 people.
• Solidaridad x 2. Plumpy Nuts Christmas campaign with Unicef,
which enabled employees to buy a food product that helped to
feed more than 17,000 children in Africa.
- Employees’ contributions: €57,400
- Solidaridad x 2 contribution: €57,400
- TOTAL: €114,828
• Solidarity and Sustainability Tourism project: 250 establishments
certified and more than 20 alternative routes drawn up in 11
African countries. Thirty seven Banesto employees worked in the
project.
First programme of Volunteers in Solidarity and Sustainable tourism in Africa
• 6,551 participants in six Ciberplaza meetings to foster the use of
ITCs in rural development.
• Sixth edition of the Solidaridad x 2 programme.
SUSTAINABLE ENVIRONMENT
• Ecobanesto Plan for the Protection of the Environment put into
effect.
• Reduction of 9% (consumption of materials, emissions, waste).
• Banesto consolidates its leadership in the Spanish market in
financing environmental projects and renewable energy.

Main prizes and
Recognitions
• Euromoney awards for excellence to the
Best Bank in Spain in 2008.
• Entry into the FTSE4Good IBEX.
• EFQM Excellence stamp
+500 points
• Cinco días prize for the most
innovative initiative in corporate
social responsibility.
• Certification of quality and excellence and
customer confidence prize from
Madrid Excelente.
• Banca 15 prize for the best bank in
product innovation in 2008.
• Excellence award for introduction of
new technologies and
modernisation of the justice
administration of the Colegio Nacional
de Secretarios Judiciales.
• For the fifth year running one of the
five best companies to work for in
spain, according to the ranking of
actualidad económica.
35

36
Corporate Governance
Full equality of shareholders’ rights
and maximum transparency
Banesto put into effect in 2008 the recommendations it assumed in the Code of Good Governance
and, specifically, the measures taken to guarantee that all shareholders are treated equally.
2008 saw the full implementation by Banesto of the
recommendations assumed in the Unified Code of Good
Governance published in May 2006, although most of them
already formed part of the bank’s good governance procedures
and practices. In other cases, changes were made in some precepts
in order to improve the regulation of certain matters. In the few
cases where it was decided not to fully assume the
recommendations, the Board duly explained its decision.
Over the last few years the Board has strengthened ways to
dialogue with shareholders and has fostered and facilitated their
informed participation in Shareholders’ Meetings.
FULL EQUALITY OF SHAREHOLDERS’ RIGHTS
The AGM held in February put into practice the measures adopted
to guarantee the same treatment for all shareholders. In order to
qualify to attend Shareholders’ Meetings, a shareholder only needs
to hold any number of shares five days before the date of the
meeting, and splitting the vote of financial intermediaries acting on
behalf of various clients is allowed.
As in other years, the option of attending remotely and the
telematic vote is facilitated, and the various points on the agenda
are voted on separately. The chairman of the Audit and
Compliance Committee is also called on to speak at these
meetings.
TRANSPARENCY
One of the guiding principles of Banesto’s corporate governance
model is transparent information; it is a key element for generating
confidence and security in the markets.
The detailed information provided by the various communication
channels underscores our commitment to transparency.
Since 2006 we have set out the remuneration of all directors.
The AGM in 2008 presented for the first time, in accordance with
the Board’s Regulations, the Annual report on the Remuneration
Policy for 2007 drawn up by the Board at the proposal of the
Appointments and Remuneration Committee.
BALANCED BOARD OF DIRETCORS
Most of the members of Banesto’s Board are non-executive
directors (10 out of a total of 14), seven of whom are independent.
In accordance with the Unified Code, the chairmen of the
Appointments and Remuneration Committee and of the Audit and
Compliance Committee are independent directors.

38
Financial Information
ROE 16.6%
Efficiency ratio 39%
Non-performing loans ratio 1.62%

2008 Income Statement
Net interest income
40
42
Net fees and insurance activity 43
Gains (losses) on financial transactions 44
Gross operating income 44
Gross operating income by business areas 45
Retail Banking 45
Domestic Corporate Banking 45
Markets 46
Non-financial affiliates net results 46
Operating Costs 46
Net operating income 48
Asset deterioration losses 48
Other net income 49
Profits 49
2008 Balance Sheet 50
Customer loans 52
Doubtful loans 53
Country risk xx
Foreclosed assets 54
Customer funds 54
Shareholders’ equity
Financial information of the main
56
entities of the Banesto group 57
2004-2008 Performance 59
Highlights 59
Results 59
Lending 59
Customer funds 61
Shareholders’ equity 61
39

40
2008 Income Statement
Banking in 2008 was conducted against a more difficult economic
background than envisaged, with sharp falls in economic activity and
tensions in markets, which triggered a significant slowdown in the pace
of business growth and a sharp rise in the financial system’s nonperforming
loans.
In this complicated environment, thanks to an appropriate choice of
management priorities, Banesto generated quality results. It
outperformed the sector in growth in revenues, results and earnings
per share, enabling it to face the next few years from a position of
solid financial strength.
Moreover, in order to anticipate possible effects arising from the
economic downturn, €60 million was allocated to special reserves.
Including this strengthening of provisions, Banesto’s consolidated
profit before taxes was €1,085.7 million, 1.3% less than in 2007.
Attributable profit was 2% higher at €779.8 million.
ROE was 16.6% and earnings per share grew 3%.

Consolidated income statement
Million euros
2008 2007 % Change
Interest and similar revenues 5,443.28 4,611.47 18.0%
Interest and similar expenses 3,805.64 3,150.38 20.8%
Net interest income 1,637.64 1,461.09 12.1%
Income from companies accounted by equity method 1.87 1.71 9.8%
Net fees and commissions 562.37 574.44 -2.1%
From mutual and pension funds 139.13 191.91 -27.5%
From services 423.24 382.53 10.6%
Insurance activity 108.25 95.91 12.9%
Gains (losses) on financial transactions 151.41 137.97 9.7%
Gross operating income 2,461.54 2,271.11 8.4%
Non-financial affiliates net results 8.32 9.21 -9.7%
Net operating costs 867.04 826.24 4.9%
a/personnel 655.29 637.52 2.8%
b/general 233.87 221.81 5.4%
c/Recoveries -22.11 -33.09 -33.2%
Depreciation and amortization of fixed and intangible assets 100.19 97.62 2.6%
Other operating income and expenses -39.73 -36.35 9.3%
Net operating income 1,462.89 1,320.12 10.8%
Asset deterioration losses 337.01 230.23 46.4%
- Loan loss provisions (net) 299.76 229.10 30.8%
- Other write-offs 37.25 1.13 n,s,
Other net income -40.23 10.21 n,s,
Profit before taxes 1,085.66 1,100.10 -1.3%
Corporate tax 306.21 335.53 -8.7%
Net consolidated profit 779.44 764.57 1.9%
Minority interests -0.40 0.01 n,s,
Attributable profit 779.84 764.57 2.0%
41

42
Net interest income
million euros
1,461.09
+12.1%
1,637.64
2007 2008
Net interest income
Net interest income was 12.1% higher than in 2007 at €1,637.6
million. This increase of €176.5 million, in a very competitive
environment, was due to selective growth in lending, focusing on
the capturing of deposits and good management of the balance
sheet and of spreads.
The table sets out the structure of net interest income, with the
average balances, the revenues and costs associated with them and
the interest rates received and paid for the respective items.
Average total assets amounted to €103,406 million, 5.2% more
than in 2007. This growth, the fruit of business plans developed
during the year, was focused on the most profitable assets.
Customer loans accounted for 85% of the increase. They
represented 68% of the total (67% in 2007) and generated 79%
Average return on assets
in thousands of euros
Net consolidated profit
million euros
764.57
+1.9%
779.44
2007 2008
of total revenues (76% in 2007), while the rest of assets, less
profitable, only increased by €732 million, underscoring the
quality of net interest income. The growth in business was largely
financed by customer deposits; they rose by €6,044 million, faster
than lending, which strengthened the Group’s liquidity position.
The average yield on total assets in 2008 was 5.26% compared to
4.69% in 2006, reflecting the positive impact of higher interest
rates during the third quarter. The average cost of funds increased
from 3.20% to 3.68% and was in line with the market’s evolution.
Consequently, the greater activity produced an increase from a
volume effect of €118.6 million, while good management of prices
and spreads produced an increase from the interest rate impact of
€57.9 million.
2008 2007
average % av. average % av.
balance int. rate revenue balance int. rate revenue
Assets
Cash and credit entities 17,771.95 4.32 768.29 16,841.03 4.00 674.03
Customer lending 68,978.93 6.09 4,203.63 64,446.46 5.27 3,396.66
Public sector 793.52 4.12 32.68 672.23 3.75 25.20
Residents 66,554.93 6.16 4,097.00 62,372.66 5.31 3,310.96
Non-residents 1,630.48 4.54 73.94 1,401.57 4.32 60.50
Lending in foreign currency 1,717.84 5.10 87.66 1,922.95 6.00 115.42
Securities portfolio and financial assets 9,666.59 3.34 323.17 11,271.55 3.16 356.59
Average income-yielding assets 98,135.31 5.49 5,382.75 94,482.00 4.81 4,542.70
Equity stakes 288.09 0.00 0.00 241.95 0.00 0.00
Tangible assets 1,148.23 0.00 0.00 1,032.90 0.00 0.00
Other assets 3,834.48 1.58 60.53 2,580.06 2.67 68.77
Total average assets 103,406.11 5.26 5,443.28 98,336.91 4.69 4,611.47

Average cost of funds
In thousands of euros
2008 2007
average % av. interest average % av. interest
balance int. rate and charges balance int. rate and charges
Liabilities
Due to credit entities and other financial liabilities 4,798.51 4.27 204.85 7,739.01 3.63 281.18
Customer funds (euros) 55,328.21 3.43 1,895.73 49,756.68 2.86 1,422.95
Public sector 5,558.41 3.40 188.76 6,531.99 3.02 197.09
Private sector 31,793.19 2.96 939.98 25,494.07 2.10 535.60
Non-residents 8,183.27 4.60 376.77 6,568.13 3.95 259.31
REPOs 9,793.33 3.98 390.23 11,162.49 3.86 430.96
Customer funds in foreign currency 2,604.05 3.93 102.29 2,131.45 4.73 100.85
Debt securities 30,332.42 4.75 1,440.94 27,966.17 4.28 1,197.50
Subordinated debt and capital like financial liabilities 2,110.09 5.61 118.47 2,067.01 4.71 97.30
Total funds with costs 95,173.28 3.95 3,762.29 89,660.33 3.46 3,099.77
Other funds 3,537.59 1.23 43.36 4,138.06 1.22 50.61
Shareholders’ equity 4,695.24 0.00 0.00 4,538.52 0.00 0.00
Total average funds 103,406.11 3.68 3,805.64 98,336.91 3.20 3,150.38
Net fees and insurance activity
Net fees and insurance activity amounted to €670.6 million,
slightly more than in 2007. Excluding revenue from management of
mutual and pension funds, growth was 11.1%..
Fee income
Million euros
2008 2007 % Var.
Fees for services 549.58 512.90 7.2%
Services charged and paid for 315.93 290.13 8.9%
Credit risk 93.58 87.82 6.6%
Securities services 34.32 48.22 -28.8%
Other 105.74 86.73 21.9%
Insurance activity
Management of mutual
108.25 95.91 12.9%
and pension funds 139.13 191.91 -27.5%
Commissions paid -126.34 -130.37 -3.1%
TOTAL 670.62 670.35 0.0%
Fees for services rose 7.2% to €549.6 million and growth of all the
lines was balanced.
Fees for services
million euros
Insurance activity
million euros
382.53
+10.6%
423.24
2007 2008
95.91
+12.9%
108.25
2007 2008
43

44
Of note were commissions from collection and payment services
which at €315.9 million were 8.9% higher than in 2007,
particularly those from cards, as well as those from the different
types of “Tarifa Plana” accounts. Those from risks, in a period of
much lower demand, rose 6.6%, while those from securities, hard
hit by lower activity, was lower than in 2007.
Fees from mutual and pension funds amounted to €139.1 million,
lower than in 2007 because of a policy focused more on capturing
Gains on financial transaction and
exchange-rate difference
Gains on financial transactions increased 9.7% to €151.4 million.
million euros
2008 2007 % Change
Trading operations and hedging 7.74 8.22 -5.8%
Distribution to customers 138.66 124.57 11.3%
Securitization of assets 5.01 5.21 -3.8%
TOTAL 151.41 138.00 9.7%
Gross operating income
Gross operating income was 8.4% higher than in 2007 at
€2,461.5 million. Its high degree of recurrence is underscored by
net interest income, net fees and earnings from the distribution of
Gross operating revenue
million euros
2,271.11
+8.4%
2,461.54
2007 2008
deposits. The average fee, however, remained higher than at the
end of 2007 at 1.27%. Insurance business was again a significant
source of revenues (+12.9% to €108.2 million).
Fees paid dropped 3.1% to €126.3 million. This was directly linked
to activity as most of the payments were to intermediaries and
agents.
The main component was once again revenue from the distribution
of treasury products to customers. It rose 11.3% to €138.7 million
and represented 92% of the total, (denoting a high level of
recurrence). Gains on financial transactions also includes fees from
securitization funds which at €5 million were practically the same
as in 2007.
Lastly, the gains from management of positions amounted to €7.7
million (€8.2 million in 2007). They accounted for 5% of the
total, in line with the Group’s policy of controlling the share of this
activity, but optimising opportunities that arise in the markets.
treasury products to customers accounting for more than 99% of
total gross operating income.
Gross operating revenue
by business areas
(%)
Corporate
activities
Retail
1.5
Corporate
9.1
6.9
Markets
82.5

Gross Operating Income by Business
Areas
The following table sets out the distribution and growth of gross
operating income by business areas:
million euros
Retail Banking
2008 2007 % Change
Retail 2,031.12 1,881.29 8.0%
Corporate 170.17 158.01 7.7%
Markets and international 223.03 183.02 21.9%
Corporate activities 37.22 48.79 -23.7%
million euros
2,461.54 2,271.11 8.4%
2008 2007 % Change
Net interest income 1,403.59 1,251.14 12.2%
Net fees 556.55 564.21 -1.4%
Gains on financial transactions 70.98 65.94 7.6%
Gross operating income 2,031.12 1,881.29 80.0%
The retail banking area enjoyed a year of profitable growth. The
lower demand resulting from the downturn in the mortgage market
was offset by selective growth in lending to companies and SMEs.
Particular importance was attached to capturing deposits, which
together with efficient management of prices led to net interest
income of €1,403.6 million, 12.2% more than in 2007.
Management of customers, backed by campaigns to capture
payroll cheques, among them “Sube a la red”, produced greater
linkage and rises of €556.6 million in fee income and €71.0
million in trading gains.
Corporate Banking
This business segment focused on optimising the return. Balance
sheet management concentrated on operations with an adequate
return. As a result, net interest income was 7.3% higher than in
2007.
Domestic Banking (Retail, Companies and Corporate) generated
€2,201.3 million, 89.4% of gross operating income, and Markets
9.1%.
Gross operating income from Corporate Activities, which includes
asset management, dividends received, earnings from securitization
and other revenues and costs not assigned to business areas, was
slightly lower than in 2007, largely due to lower gains from hedging
in the interest rate environment.
As a result, gross operating income increased 8.0% to €2,031.1
million.
Gross Operating Income Retail Banking
million euros
million euros
1,881.29
+8.0%
2,031.12
2007 2008
2008 2007 % Change
Net interest income 106.00 98.80 7.3%
Net fees 51.95 47.03 10.5%
Gains on financial transactions 12.22 12.18 0.3%
Gross operating income 170.17 158.01 7.7%
45

46
The special needs of these clients led to demand for solutions
tailored to suit them, which at times were very complex. This was
successfully done, thanks to Banesto’s technological capacity and
the profound knowledge of its managers. Revenue from services
grew 10.5% and gains on financial transactions 0.3%.
Gross operating income was €170.2 million, 7.7% more than in
2007.
Markets
million euros
2008 2007 % Change
Net interest income 129.08 89.43 44.3%
Net fees 22.91 38.27 -40.1%
Gains on financial transactions 71.04 55.32 28.4%
In accordance with the Group’s strategy, the distribution of
treasury products to customers and our leadership in capital
markets operations were the drivers of revenue generation. The
creation of products that solved customers’ needs in the capital
and stock markets and treasury products also helped to generate
results.
Gross operating income rose 21.9% to €223 million. Net interest
income increased 44.3% to €129.1 million, net fees and
commissions amounted to €22.9 million and gains on financial
transactions rose 28.4% to €71.0 million.
Non-financial affiliates net results
These are the net results from non-financial subsidiaries, basically
property and technology companies and those providing nonfinancial
services.
In 2008 they amounted to €8.3 million, 9.7% less than in 2007
and basically due to the decline in the property market.
Gross operating income corporate
banking
million euros
158.01
+7.7%
170.17
2007 2008
These results were also achieved with a noteworthy degree of
customer diversification; operations were conducted in 2008 with
more than 20,000 customers.
Gross operating income 223.03 183.02 21.9% Gross operating income markets
million euros
183.02
+21.9%
223.03
2007 2008
Operating Costs
Banesto’s discipline in costs, in the current environment, is a
strength and a key element of management. Operating expenses
increased by only 3.4% in 2008, largely thanks to the Menara Plan
launched in early 2007 to continuously improve operational and
commercial efficiency.
As a result of operating costs rising at a much lower pace than
gross operating income, the efficiency ratio made a further gain in
2008 to 39.0% (40.5% in 2007) and met the target.

Operating Costs
million euros
Personnel costs rose 2.8% to €655.3 million, the result of a drop
in the average number of employees and an increase in the average
cost of 5.1%. In 2008, 110 employees retired early, charged to the
special fund established for this purpose in 2006.
2008 2007 % Change
Net general administrative expenses 867.04 826.24 4.9%
Personnel 655.29 637.52 2.8%
Wages and salaries 479.81 467.88 2.5%
Social security 122.26 118.90 2.8%
Other 53.22 50.74 4.9%
General expenses 233.87 221.81 5.4%
Premises, installations and material 66.18 63.79 3.8%
IT and communications 57.34 57.15 0.3%
Advertising 16.78 17.69 -5.1%
Other concepts 79.58 70.55 12.8%
Taxes (excluding income tax) 13.99 12.64 10.7%
Recovery of expenses -22.11 -33.09 -33.2%
Depreciation 100.19 97.62 2.6%
Total 967.23 923.86 4.7%
Efficiency ratio (%) 39.04% 40.51%
Efficiency ratio
(%)
40.51
39.04
2007 2008
Operating Costs
million euros
826.24
637.52
221.81
+4.9%
personnel
general
recovered
867.04
655.29
233.87
General costs were 5.4% higher at €233.9 million, the net effect
of rises in rents, taxes – in both cases mainly because of the new
branches opened during 2008 – and IT (basically due to the sale
in the middle of 2007 of the stake in Isban), which lowered
-33.09
-22.11
personnel costs, and less advertising.
Depreciation amounted to €100.2 million, slightly more than in
2007, due to new investments in IT and fixed assets in order to
2007 2008
maintain the cutting edge of the Group’s operational capacity. Other revenue and costs, which cover those outside ordinary
activity, amounted to €39.7 million net, 9.3% more than in 2007.
The largest item and the main reason for the increase is the
contribution to the Deposit Guarantee Fund (DGF), in line with the
growth in customer funds.
47

48
Net Operating Income
Higher recurrent revenue and containment of operating expenses
produced a rise of 10.8% in net operating income to €1,462.9
million.
Losses from deterioration of assets
The net impairment loss on lending amounted to €299.8 million,
30.8% more than in 2007. Of this amount, €481.9 million were
specific provisions made because of the increase in non-performing
loans (lower than the average rise among banks) and €124.2
million provisions to cover risks. Even though there was a normal
evolution, Banesto believed its move was prudent because of the
economic difficulties.
Generic provisions, in addition to the €124.2 million, amounted to
€25.2 million and corresponded solely to the evolution of lending
during 2008, as recourse to it was not necessary in 2008 for the
constitution of specific provisions.
Loan-loss provisions
million euros and %
1.026,0
67,5%
0,9
Country risk Specific Generic
0,1%
492,8
32,4%
Net Operating Income
million euros
million euros
1,320.12
+10.8%
1,462.89
2007 2008
2008 2007 % Change
Net loan-loss provisions 332.16 272.04 22.1%
Generic -149.44 157.56 n.s.
Specific 481.90 115.14 318.5%
Country risk -0.30 -0.66 -54.5%
Loan-loss recoveries -32.40 -42.94 -24.5%
Total lending 299.76 229.10 30.8%
Other net write-offs 37.25 1.13 n.s.
Total 337.01 230.23 46.4%
Recovery of country-risk provisions made in prior years amounted
to €0.3 million, and €32.2 million of risks previously classified as
bad debts were recovered.
Allocation adjustments resulting from the deterioration of other
assets amounted to €37.3 million, basically for foreclosed property
in the event of possible price falls derived from the downturn in
the real estate market.

Other net income
This line embraces a series of different items. The main
components are:
The sale of fixed assets produced a loss of €0.9 million compared
to a profit of €7.4 million in 2007.
Allocation to the pension fund of €4.9 million (€0.2 million in
2007).
Other non-recurrent income and net recoveries of special funds
from the disappearance or materialisation of contingencies
mentioned in previous paragraphs amounted to €25.6 million
(€3.0 million in 2007).
There was an extraordinary allocation of €60 million, in
anticipation of the possible effects from the economic downturn.
million euros
2008 2007
Sale of fixed and financial assets
Other extraordinary income
-0.87 7.43
and from prior years -9.22 -19.60
Allocation to pension fund -4.95 -0.23
Net allocation (recovery) to provisions -25.19 22.61
Total -40.23 10.21
Profits
Profit before taxes was €1,085.7 million, 1.3% lower than in 2007. After the corporate tax charge of €306.2 million, attributable
profit was 2.0% higher at €779.8 million.
49

50
Balance Sheet 2008
One of the management priorities in 2008 was to optimise the
return on the balance sheet. At the end of 2008 total assets
amounted to €117,186 million. In addition, the Group managed
Consolidated balance sheet
million euros
off-balance sheet pension and mutual funds and insurance
products of €9,745 million. Total assets were 2.8% higher at
€126,931 million.
2008 2007 % Change
Assets
Cash on hand and at central banks 1,688.15 1,412.87 19.5%
Trading portfolio, derivatives and other financial assets 12,115.18 10,229.83 18.4%
Customer lending 76,903.82 74,200.89 3.6%
Other loans 20,127.48 19,965.72 0.8%
Equity stakes 307.58 269.45 14.1%
Tangible assets 1,159.55 1,128.91 2.7%
Intangible assets 56.88 50.22 13.2%
Other assets 4,676.51 2,709.05 72.6%
Accrual accounts 151.28 100.82 50.1%
Total assets 117,186.42 110,067.76 6.5%
Liabilities
Trading portfolio and other financial liabilities 4,870.51 3,631.00 34.1%
Customer deposits 57,779.45 53,340.18 8.3%
Marketable debt securities 28,315.10 28,248.97 0.2%
Subordinated debt 2,185.15 2,043.91 6.9%
Other financial liabilities at amortised cost 15,458.91 14,761.04 4.7%
Other liabilities 384.19 336.77 14.1%
Provisions 2,534.64 2,604.79 -2.7%
Accrual accounts 493.74 414.03 19.3%
Capital like financial liabilities 51.69 52.45 -1.5%
Minority interests 1.72 1.14 51.0%
Valuation adjustments 41.55 -114.42 n,s,
Share capital and reserves 4,289.92 3,983.33 7.7%
Profit for the year 779.84 764.57 2.0%
Total liabilities 117,186.42 110,067.76 6.5%
Total Assets
million euros
110,068
+6.5%
117,186
2007 2008

The changes in the balance sheet reflect the management priority
of strengthening liquidity and enhancing the relative share of the
most profitable assets and liabilities:
• Customer lending rose 3.6% to €76,904 million.
• The portfolio of equity stakes amounted to €308 million, up
from €269 million at the end of 2007. This increase was due
to the valuation of companies accounted for by the equity
method, their results, net of dividends distributed, and
changes in their net worth.
• The trading portfolio, derivatives and other financial assets
amounted to €12,115 million in assets and €4,871 million in
liabilities. Most of these amounts correspond to treasury
operations with customers.
• Tangible assets increased 2.7% to €31 million, largely because
of IT investments and improvements to the branch network.
• Customer deposits rose 8.3% to €57,779 million. Given the
very strong competition to capture funds, this growth was
particularly significant and resulted in a gain in market share of
36 b.p.
Customer Loans
The Group’s volume of lending stood at €77,224 million at the end
of 2008, 4.1% more than in 2007.
Customer Loans
million euros
• Marketable debt securities amounted to €28,315 million,
0.2% more than in 2007.
• Subordinated debt increased by €141 million, €100 million of
which corresponds to the net rise in issues made in 2008 and
the rest to valuation adjustments.
• Valuation adjustments at the end of 2008 amounted to €42
million (€114.4 million negative in 2007). Most of the change
was due to the impact on the valuation of ordinary fixedincome
portfolios of the interest rate evolution.
• Share capital amounted to €543.0 million, 1.0% less than at
the end of 2007, after the amortisation of the treasury stock
approved at the AGM on February 25, 2008 and materialised
in June. Total shareholders’ funds amounted to €5,070 million,
6.8% higher. This was due to the allocation of the prior year’s
income, net of the dividends paid to shareholders.
2008 2007 % Change
Public sector 1,447.77 958.77 51.0%
Private sector 71,581.39 70,267.41 1.9%
Commercial bills 5,352.15 6,583.06 -18.7%
Secured loans 37,291.92 37,109.74 0.5%
Other credits and loans 28,937.32 26,574.61 8.9%
Non-resident sector 4,063.58 3,608.87 12.6%
Total 77,092.74 74,835.04 3.0%
Activos dudosos 1,396.09 398.45 250.4%
Less: provisions for non-performing loans -1,417.62 -1,238.77 14.4%
Valuation adjustment 152.64 206.68 -26.1%
Total 77,223.84 74,201.40 4.1%
This growth in lending growth took place against a backdrop of a
sharp fall in demand and rigorous selection of operations focused
on the private sector (+€1,314 million to €71,581 million), and
with a greater share to SMEs and companies which offset the
decline in lending to the property sector.
The portfolio of commercial bills declined 18.7% to €5,352
million, due to less use by customers of this type of financing.
The pace of growth in secured loans continued to decelerate and
at the end of 2008 these amounted to €37,292 million, 0.5%
more than in 2007. Most of the increase was in first home loans.
Other credits and loans, mainly to companies, SMEs, shops and
the self-employed, rose 8.9% to €28,937 million.
Lending to the public sector increased by €489 million to €1,448
million and that to the non-resident sector 12.6% to €4,064
million.
51

52
The structure of lending by amounts, type of customer and
economic sector remained highly suitable, as shown below.
Customer Loans
million euros
74.835
Customer loans:
customers
(%)
Institutions
and others
+3.0%
77.093
2007 2008
46.6
Individuals
SMEs
Large
companies
As well as loans, the Group has other non-lending risks
(guarantees, documentary credits and other sureties) which at the
end of 2008 amounted to €10,906 million, 8.9% less than in
2007.
Customer loans:
amounts
Up to
€50,000
Guarantee on the basis of the operation guaranteed
million euros
2.4
34.3
16.8
(%)
€50,000
to
€150,000
Customer loans:
sectors
(%)
Agriculture,
cattle and
fisheries
Industry
and Energy
€150,000
to
€500,000
Services
€500,000
to €5
million
More
than €5
million
2008 2007 % Change
Guarantees and other sureties 10,631.29 11,543.61 -7.9%
Guarantees for commercial paper and bills of exchange 205.96 402.34 -48.8%
Other obligations 10,425.33 11,141.27 -6.4%
Documentary credits 274.25 420.85 -34.8%
Total 10,905.54 11,964.45 -8.9%
18.6
62,20
16.9
20.4
3,50
32.4
9.9
34,30

Doubtful Loans
Non-performing loans (NPLs) grew significantly in 2008 because
of the economic downturn. Banesto’s doubtful loans at the end of
the year amounted to €1,441 million and although the NPL ratio
Doubtful Loans
million euros
rose from 0.47% in 2007 to 1.62% in 2008 it was still well below
the average of our rivals.
2008 2007
Non-performing loans:
Balance at January 1 410.80 306.40
Entries 1,577.17 419.82
Recoveries -420.98 -235.82
Write-offs -125.54 -79.60
Balance at December 31 1,441.45 410.80
Provisions:
Balance at January 1 1,353.52 1,203.08
Net provisions 368.15 290.75
Available funds -35.69 -18.05
Provisions released -167.15 -122.27
Balance at December 31 1,518.82 1,353.52
Detail of provisions
Specific 492.82 161.11
Generic 1,026.01 1,192.41
TOTAL 1,518.82 1,353.52
NPL Ratio (%) 1.62% 0.47%
NPL coverage (%) 105.37% 329.48%
New entries of NPLs amounted to €1,577 million, but thanks to
firm management in tracking risks and recoveries of NPLs,
anticipating operations that could cause problems, recoveries
amounted to €421 million and so net entries were €1,156 million
and only represented 1.3% of total risks.
Doubtful loans that became write-offs totalled €126 million as
against €80 million in 2007.
Loan-loss provisions amounted to €1,519 million at the end of
2008, 12.2% more than a year earlier and providing coverage of
105%. They include both generic and specific provisions, with
€124.2 million to cover risks which the bank prudently
constituted, due to the economic downturn, even though the
evolution was normal
. Ratio of Non-performing Loans
(%)
0.47 +115 p.b.
1.62
2007 2008
Coverage of Non-performing Loans
(%)
329.48
-224 p.b.
105.37
2007 2008
53

54
Foreclosed assets
An important part of tracking and recovering risks is anticipating
problems. In the current context of a sharp rise in non-performing
loans, the allotment of the assets of borrowers defaulting on their
loans is an effective instrument for strengthening the bank’s
balance sheet and improving the possibilities of total recovery.
The bank was awarded assets in 2008 which served to cancel out
loans, whose recovery by other means was difficult.
Customer Funds
million euros
The policy of capturing funds, focused on optimising the mix of
products and management of spreads, and in 2008 more oriented
towards capturing deposits, resulted in an 8.3% rise in on-balance
sheet funds to €57,779 million. Particularly noteworthy was the
performance in all types of resident private sector funds.
Private sector funds increased 16.3% to €44,473 million. Against
a background of very strong competition, all types of deposits did
well, particularly time deposits (+37.1%).
Public sector and non-resident sector funds were lower than in
2007, due to the policy of optimising spreads and only accepting
deposits that offer an adequate return. Those of the public sector
dropped 7.9% to €10,091 million and those of the non-resident
sector 22.3% to €3,215 million.
The net amount of these assets at the end of 2008 was €363 million.
Given that the value in the books is always the lower figure between
the market value and the net value of provisions of the assets applied
at the time of acquisition, this should not mean any loss.
Customer Funds
Customer funds, including mutual and pension funds and
insurance-based savings plans, amounted to €67,525 million, 1.1%
more than in 2007.
2008 2007 % Change
Public sector 10,091.46 10,958.99 -7.9%
Private sector 44,472.90 38,244.36 16.3%
Current and savings accounts 15,005.60 14,896.91 0.7%
Time deposits 19,244.03 14,032.83 37.1%
Repos and other accounts 10,223.27 9,314.62 9.8%
Non-resident sector 3,215.10 4,136.84 -22.3%
On-balance sheet funds 57,779.45 53,340.18 8.3%
Managed funds 9,745.41 13,422.69 -27.4%
Mutual funds 6,814.59 10,605.18 -35.7%
Pension funds 1,409.66 1,626.13 -13.3%
Insurance-savings policies 1,521.16 1,191.38 27.7%
Total managed funds 67,524.86 66,762.87 1.1%
Customer funds
million euros
66,763
+1.1%
67,525
2007 2008
Off-balance sheet funds, very affected by the markets’
performance, and in accordance with Banesto’s policy, dropped
27.4% to €9,745 million. Mutual funds managed by Grupo
Banesto amounted to €6,815 million. The table below itemises the
type of funds.

Mutual funds
million euros
10,605
Customer funds
million euros
-35.7%
6,815
2007 2008
2008 2007 % Change
Money market 1,356.92 2,070.38 -34.5%
Fixed income 2,548.49 2,183.22 16.7%
Mixed 783.46 2,036.50 -61.5%
Equity 107.31 367.99 -70.8%
International 62.44 232.09 -73.1%
Guaranteed 960.12 1,432.05 -33.0%
Simcavs 253.22 428.02 -40.8%
Unit linked 72.25 144.44 -50.0%
Real estate 371.22 457.30 -18.8%
External management 299.17 1,253.20 -76.1%
Total 6,814.59 10,605.18 -35.7%
The suitable structure of customer funds is shown below. The
funds of individuals accounted for 63.9% of the total and balances
under €250,000 for 61.3%
Pension funds
million euros
Managed pension funds amounted to €1.410 million at the end of
2008, 13.3% lower than in 2007. Individual funds have the largest
share of total funds.
Pension funds
million euros
1,626
-13.3%
1,410
2007 2008
2008 2007 % Change
Individuals 1,326.25 1,616.46 -18.0%
Associated 10.27 0.38 n.s.
Employment 73.15 9.30 n.s.
TOTAL 1,409.66 1,626.13 -13.3%
Customer funds:
by customer
(%)
Large
companies
SMEs
9,5
3,7
Individuals
23,0
63,9
Institutions
55

56
Customer funds:
by amount
(%)
Up to
€5,000
€5,000
to
€25,000
€25,000
to
€50,000
€50,000
to
€150,000
€150,000
to
€250,000
More
than
€250,000
Shareholders’ equity
The new regulations on equity, known as BIS II, came into force in
2008 and allowed banks to use internal models to calculate the
minimum capital needed, following Bank of Spain approval (which
Banesto achieved). BIS II represented for Banesto a saving in
capital needs of around 10% with regard to the previous
regulations. At the end of 2008, the new BIS ratio was 10.66%,
with Tier 1 of 7.70% and core capital of 7.18%. Grupo Banesto
thus has a level of capitalisation and financial strength enabling it
to conduct its business in coming years from a solid position.
million euros
38,7
6,6
4,9
18,5
2008 2007 % Change
Core Capital 4,889.07 4,554.12 7.35%
Tier I 5,246.01 5,056.03 3.76%
Tier 2 2,009.25 2,506.09 -19.83%
Total 7,255.26 7,562.12 -4.06%
Our dividend policy enabled Tier 1 capital to continue to grow and
reach €4,889 million at the end of 2008, up 7.4%.
The capital stock was 1% lower at €543 million, as result of the
amortisation of treasury stock approved at the AGM in February
2008.
19
12,4
Shareholders’ equity - Tier I
5,056
+3.8%
5,246
2007 2008
Reserves were strengthened by the increase arising from the
inclusion of income generated in the prior year, net of the
dividends paid to shareholders.
Once the Shareholders’ Meeting has approved the 2008 financial
statements, the net dividend is envisaged at €0.56 per share and
the rest of earnings will go to reserves.
Tier 1 equity stood at €5,246 million at the end of 2008 and Tier
II at €2,015 million. New net issues of subordinated debt were
made in 2008 amounting to €100 million. The rest of the change
in Tier II was basically due to the lower amount of generic
provisions for non-performing loans, in accordance with the new
method of calculation.
Banco Santander Central Hispano remained the majority
shareholder at the end of 2008, with a direct and indirect stake of
89.28%. The section on “The Banesto share” gives detailed
information on shareholders.
Moody’s, Standard & Poor’s and Fitch Ibca continued to issue
short-and long-term debt ratings for Banesto, as shown below:
RATING AGENCIES
Moody’s
Standard & Poors
Fitch Ibca
Long term Short term
Aa2 P1
AA A1+
AA F1+

Financial information
of the main entities of
the Banesto Group
Banco Español de Crédito is the parent company of the
consolidated Banesto Group. The group’s main activity is
commercial banking in Spain, particularly retail banking for
individuals, SMEs, businesses and professionals. It also carries out
wholesale banking and capital markets activities.
Banesto has direct and indirect stakes in financial, insurance,
industrial, commercial and real estate companies.
For its purely banking and financial activities the group used
Banesto Banco de Emisiones, Banesto Factoring and Banesto
Renting in 2008.
Banesto Banco de Emisiones is the Group’s financial vehicle,
capturing funds through issues of commercial paper, long-term
debt and subordinated financing. These funds are loaned to
Banesto which uses them to finance the group’s ordinary activity.
Banesto Factoring and Banesto Renting are two wholly owned
subsidiaries of Banesto, which design and conduct factoring and
renting operations, either directly or through the group’s
distribution channels. Backed by the group’s technological
strength and innovative capacity, they offer a wide range of
products. Business growth rates have been significant year after
year; in 2008 they were 9.9% and 6.7%, respectively, making
them among the leaders in their fields.
Banesto Bolsa is the Group’s broker-dealer and is part of the
Wholesale Banking Area. Its main activity is brokerage in domestic
and international markets. It provides services to the bank’s
customers and to domestic and international clients. The indices of
international markets plummeted in 2008 and also trading
volumes. Despite this, Banesto Bolsa continued to gain more
customers and develop new tools which enhanced operations and
information.
Mutual and pension fund management are handled by Santander
Gestión de Activos, SA and Santander Pensiones, SA part of
Grupo Santander, in each of which Banesto has 20% stakes.
Insurance products distributed by our network are covered by
Santander Seguros, 39% owned by Banesto.
The main figures of these companies are set out below.
57

58
Financial group information
BANKS
million euros
Banesto Banesto B. Emisiones Banesto Bolsa
2008 2007 2008 2007 2008 2007
Income statement
Net interest income 1,626.0 1,449.1 1.5 1.8 4.4 4.1
Net fees and insurance activity 567.2 569.2 - - 12.9 18.6
Gains (losses) on financial transactions 97.8 98.8 - - -0.5 -0.6
Gross operating income 2,291.0 2,117.1 1.5 1.8 16.7 22.1
Net operating expenses 946.7 899.5 0.2 0.4 8.1 8.3
Other net income -41.1 -33.7 - - - -
Net operating income 1,303.2 1,183.9 1.3 1.4 8.7 13.8
Net provisions 337.4 228.1 - - 0.0 0.1
Other income -18.6 0.4 - - - -
Profit before taxes 947.2 956.2 1.3 1.4 8.7 13.7
Balance Sheet
Customer loans 76,662.3 74,351.4 - - - -
Lending portfolio to maturity - - - - 0.0 0.1
Other financial assets 21,114.4 19,714.7 - - 124.1 117.7
Due from credit entities 21,364.3 18,479.5 9,750.9 7,733.4 11.8 71.6
Other assets 4,033.2 3,773.8 114.9 464.4 0.4 0.7
Total assets/liabilities 123,174.2 116,319.4 9,865.8 8,197.8 136.3 190.1
Customer funds 67,542.3 63,126.4 - - - -
Marketable debt securities 16,503.2 19,889.0 9,135.1 6,620.4 - -
Subordinated financing 2,186.9 2,075.0 514.7 1,012.9 - -
Due to credit entities 19,466.5 15,551.2 - - 21.6 80.6
Other liabilities 12,704.0 11,272.0 114.9 464.4 5.2 2.0
Capital. reserves and earnings 4,771.4 4,405.8 101.1 100.1 109.6 107.5
Other companies
Million euros Banesto Factoring Banesto Renting
2008 2007 2008 2007
Income statement
Net interest income 19.1 13.0 4.4 5.5
Net fees and insurance activity 5.4 5.7 -0.1 -0.1
Gains (losses) on financial transactions - - 1.8 1.0
Gross operating income 24.5 18.7 6.2 6.4
Net operating expenses 2.4 2.6 3.5 3.2
Net operating income 22.1 16.1 2.6 3.2
Deterioration of assets 6.8 6.5 0.8 0.2
Other income - - -0.5 -1.6
Profit before taxes 15.3 9.6 1.4 1.4
Balance Sheet
Customer loans 2,261.0 2,056.6 347.7 325.9
Other financial assets - - 1.9 1.6
Due from credit entities 5.2 4.6 - -
Other assets 60.4 48.5 29.5 34.8
Total assets/liabilities 2,326.6 2,109.7 379.1 362.2
Subordinated financing 8.0 8.0 - -
Due to credit entities 2,112.6 1,912.2 361.9 334.8
Other liabilities 80.7 73.6 4.8 17.0
Capital. reserves and earnings 125.2 115.9 12.4 10.4

2004-2008
performance
This section sets out the Group’s performance over the last five
years. The tables and graphs give one a better perspective to
gauge the business performance and the progress in the income
statement.
The International Accounting Standards (IAS) produced changes in
accounting criteria and presentation. The figures for 2004 have
been redrawn in accordance with the criteria set in the new
regulations.
All the items of the income statement performed well. Gross
operating income rose 51% between 2004 and 2008 to
€2,461.5 million, with significant growth in net interest income,
net fees and gains on financial transactions.
Personnel and general expenses and depreciation remained stable
over the five year period. In current euros cumulative annual
growth was only 3.9%, the result of successful efficiency plans to
reduce the head count, mainly through early retirements,
streamlining structures and costs and optimising branch networks
and distribution channels.
Net Operating Income
million euros
796
925
1,071
1,320
2004 2005 2006 2007 2008
Business performance
1,463
The business progress is shown in the following charts. Sustained
growth in lending and in funds, with cumulative growth rates of
98% and 58%, respectively, produced a further gain in market
share of 0.6 p.p. over the period to 9.4% in 2008.
The combined effect of higher revenues and contained operating
costs (personnel and general) produced a constant and significant
improvement in the efficiency ratio (operating costs as a
percentage of gross operating income) from 48.1% in 2004 to
39% in 2008. This figure is better than the banking sector’s
average.
Net operating income grew 86% to €1,462.9 million (cumulative
annual growth of 16.8%).
Over this period the Group implemented a conservative policy for
loan-loss provisions as well as for special reserves. As a result,
coverage of non-performing loans was 105% at the end of 2008,
higher than the average for the banking sector.
Lastly, net profit rose 70% to €779.8 million and more than
double this pace in terms adjusted to the new regulations.
Net Consolidated Profit
million euros
459
570
606
765
779
2004 2005 2006 2007 2008
Lending
Ordinary lending rose 98% to €77,093 million. The main driver, in
line with our policies, was lending to the private sector whose
balance at the end of 2008 was €71,581 million, more than
double that in 2004. The change by components enhanced the
structure of lending which was highly diversified by customer
segments and types of loan.
59

60
Customer Loans
million euros 77,093
38,906
48,746
61,826
74,835
2004 2005 2006 2007 2008
The growth in lending went hand in hand with efficient control of
credit risk, which gave the bank a solid financial position in the face
of the change in the economic cycle that took place in 2008. The
rise in Banesto’s non-performing loans was much lower than the
average of other Spanish banks.
• Despite the economic downturn, the non-performing loans
ratio only rose from 0.63% in 2004 to 1.62% in 2008, below
the banking sector’s average
• NPL coverage at the end of 2008 was 105%, also higher than
the average.
Customer Funds
Total managed funds (deposits, mutual and pension funds and
insurance-based savings) rose 58% between 2004 and 2008 to
€67,525 million.
Deposits increased by €29,032 million and at the end of 2008
were double the amount in 2004, while off-balance sheet funds
dropped by €4,257 million to €9,745 million.
Ratio of Non-performing
loans
(%)
0.63 0.49
2004
305.9
2004
2005
2005
0.42
2006
2006
0.47
2007
371.7 392.7
329.5
2007
1.62
2008
Coverage of Non-performing
loans
(%)
105.4
2008
Managed Customer Funds
million euros
Managed funds
42,750
14,002
28,747
50,853
15,053
35,800
Mutual and pension
funds and insurance
60,549
15,387
45,162
On-balance sheet funds
66,763
13,423
53,340
67,525
9,745
57,779
2004 2005 2006 2007 2008

Shareholders’ equity
Shareholders’ equity – core capital – gradually strengthened, rising
from €3,086 million in 2004 to €4,889 million in 2008. This was
the result of retained earnings, net of dividends paid, and
reductions of capital with the return of contributions to
shareholders.
The BIS ratio remained at an appropriate level. At the end of 2008,
in accordance with the new BIS II regulations, it was 10.66%, with
Tier 1 of 7.7% and core capital of 7.18%.
Over the last five years rating agencies have recognised Banesto’s
progress in business growth, profitability and solvency and this has
been reflected in continuous improvements in ratings.
LONG-TERM RATINGS
Moody’s
Standard & Poor’s
Fitch Ibca
2004 2008
Aa3 Aa2
A+ AA
AA AA
BIS Ratio
12.34
5.05
7.29
11.35
4.29
7.06
11.18
3.75
7.43
Tier II
Tier I
10.44
3.46
6.98
10.66
2.96
2004 2005 2006 2007 2008
7.7
61

62
Risk Management
Quality is the priority in
Banesto’s risk management
Thanks to our selective process of admitting risks and close
monitoring of existing risk we are able to face today’s complicated
environment with excellent credit quality. Our structure and
monitoring tools enable us to anticipate and manage difficult
situations and respond quickly to each scenario.

Banesto’s prudent and predictable risk management is a
competitive advantage in any economic environment, as it assesses
all implicit risks assumed with a customer – credit, market, liquidity,
sovereign risk and operational, environmental and reputational
risks.
Performance in 2008:
Credit Risk
Credit risk is the possibility of default by a counterparty on
contractual obligations which produce losses for a bank.
1. Banesto’s risk admission is structured on the basis of customer
segmentation (retail, companies, real estate and wholesale).
Reatil Risk
Risk admission processes in 2008 were characterised by prudent
and responsible management and adjusting policies and systems to
the prevailing economic context.
There are different strategies for each business segment and the
key element of all of them is ensuring the quality of risks.
The steps taken in 2008 enabled Banesto to reach a high degree
of credit quality and meet our basic objectives:
• High levels of specialisation by segments and channels of
provenance, with homogeneous management criteria for each
one of them.
• Improve productivity and the capacity to respond to
customers.
• Adjust the admission processes to the customer’s risk profile
(rating).
• Maintain high standards of quality in risk operations.
Banesto’s efficient systems combining advanced models of automatic
decision-making and solid teams of experienced and specialised risk
analysts enable the bank to meet its risk quality goals.
The Risk Analysis Centre consists of highly specialised analysts.
They ensure that operations meet the required risk quality
standards and provide advice to the branch network on customers’
operations.
The Expected Loss model for operations with SMEs has improved
the risk management of our analysts and helped to adjust
guarantees to the profile of the customer.
As regards individual customers, we have advanced analysis tools
(scores) which are part of the admission process and are an
efficient instrument for evaluation and monitoring.
There is a risk-value model for consumer loans that maximises the
risk-return for high profile customers.
Companies’ Risk
Under a strict framework of prudence, in line with the economic
situation, which is maintaining the credit quality of our portfolio at
high levels, the risk admission process for companies begins in
Company Centres and Regional Headquarters. They have certain
levels of risk laid down and delegated by the bank’s Executive
Committee.
In Central Services, also under criteria of maximum quality, risk
admission is carried out by the Company Risks Unit which channels
the proposals that exceed the delegated attributions, and the
Large Clients and Capital Markets Unit , which manages a portfolio
comprising the main companies. This gives greater proximity to the
client and speeds up the decision-making process, as well as
integral management (analysis, admission and monitoring) of loans.
The specialisation of the teams and the use of admission circuits
and tools for analysis and assigning specific ratings for each
segment ensures homogeneous treatment of risk classification
proposals and customers’ operations.
Real Estate Risk
2008 saw a change of cycle in the real estate sector and a bursting
of its bubble.
The sector is facing a much more demanding scenario and the best
managed companies will have considerable competitive advantages.
With the creation eight years ago of a specific segment for real
estate risks, Banesto has been preparing for this change of cycle. It
assumes controlled risks based on mortgages and adequate
guarantees (85% of the bank’s risks are backed by real
guarantees).
Nevertheless, in order to manage real estate risks better and more
efficiently, we reinforced the Risks Area with more specialists and
new tools to manage and analyse risks.
Wholesale Risk
The process of admitting wholesale risks is based on the
classification or global limit of each economic group, financial or
sovereign institution, as well as strict monitoring and control of the
classification permitting internal management of risk limits and
positions at all times. The Wholesale Risk Unit also specialises in
analysing the risk of our clients’ investment projects.
The expert teams of analysts specialised by sectors draw up
reports and assess the risks with a rating based on credit quality.
Our strict policy of risk admission has given us a portfolio of
diversified and high credit quality clients.
A key element for risk and business decisions in corporate banking
are price simulators and measurements of historic Risk Adjusted
Return on Capital (RAROC).
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Environmental Risk
For many years now Banesto has been applying a methodology
that assesses the environmental risk of corporate banking clients.
Assessing this risk is one more variable in credit risk analysis.
Environmental risk arises from the category of sector of activity
and a series of variables ranging from the level of emissions and
waste generated to fulfilling the specific regulations of each sector,
the existence or not of lawsuits or complaints and the corrective
measures taken and homologated certifications obtained.
In short, by evaluating the environmental risk of a client we can
select business opportunities in “clean” investment projects and
forego those with a high environmental content.
2. We closely supervise the loans granted and the existing risk.
This tracking process enables us to anticipate difficult situations
and respond quickly to them.
The monitoring system is based on the following pillars:
• Risk Anticipation System which reads every month 120
variables representing credit risk, including internal and
external information. Its use identifies counterparties requiring
a special watch (FEVE).
• Regular review of internal ratings of clients.
• Tracking of irregular contracts.
• Specialised staff in branches in Spain’s regions.
• Tracking Committees covering branches, company centres,
retail banking units, regional headquarters and central services.
• Use of tools to obtain precise information on the state of our
portfolio.
• Monitoring covers all business channels in order to maintain
quality.
3. Loan recovery activity has known how to adapt to the more
complex economic environment, creating instruments that respond
rapidly to new needs, producing recovery policies, implementing
specialised management by customer segment and all of this
supported by cutting-edge technology and strengthening
resources.
The traditional policy of segmentation of loans above a certain
amount was strengthened by increasing the number of managers
involved in recoveries, in accordance with the current economic
situation. This focuses the recovery strategy depending on the
type of debt and immediate attention when called for. There are
managers specialised in companies whose objective is to manage
technically and efficiently creditors’ meetings which are
increasingly happening in this segment; specific recovery
strategies for SMEs have been established and through individual
business plans segmented individual customers are managed. Of
note is the high recovery capacity in mortgages.
Contracts below a certain amount and consumer loans are handled
by an extensive range of companies and external recovery
managers, with efficiency ratios measured every six months. These
structures also handle bad debts to which Banesto has always
provided attention different from that of the rest of the banking
sector, highlighting its recovery capacity and contribution to the
income statement.
The introduction in 2005 of the new model, now consolidated, for
managing judicial proceedings, articulated in the Astrea tool and
monitored by a specialised centre, put Banesto in a clear
advantage over its competitors in these issues and enables the
bank to face future challenges from a position of strength.
A new version of the Recovery Management System was put into
effect in 2008 which will make recoveries more efficient and quick.
Lastly, another factor that distinguishes Banesto from other banks
is the integration of recovery activity with the management and
selling of assets assigned for non-payment of loans, which
optimises the disinvestment process and focuses recovery activity
on obtaining liquidity. The new and ambitious model for managing
assigned real estate will help as of 2009 to boost these sales and
significantly increase efficiency.
The non-performing loans figures in 2008 were:
NPL ratio % % EAD
Corporate and Companies: 1.37 52
Mortgages: 1.39 25
SMEs: 2.35 15
Consumer: 3.78 8
TOTAL: 1.62 100

Market Risk
This stems from the uncertainty over the future performance of
markets, inherent in financial activity. In order to measure and
control this risk, Banesto makes a distinction between risk
management inherent in the bank’s structural position and
management of treasury risks.
1.- Structural Risks of the Balance Sheet
1.1 Interest rate Risk
In banks that simultaneously conduct trading and commercial
activities, balance sheet management tends to be divided between
the trading book – managed by the Markets Area – and the
banking book managed by the Assets and Liabilities Committee
(ALCO).
Structural interest rate risk consists of any exposure to risk
inherent in commercial banking activity (banking book). This risk
can be defined as the mismatch in the calendar of repricing created
between assets and liabilities by a bank’s activity, mainly deposits
and loans, which make the balance sheet sensitive to movements in
the curve of market interest rates.
The main objective of Banesto’s ALCO is to manage the impact of
the swings in interest rates and other variables included in the net
interest margin and in the economic value of capital. This requires
active management of interest rate risk based on monitoring the
bank’s exposure and taking positions to ease that exposure.
This requires detailed knowledge of the balance sheet positions
and involves the development and maintenance of technologies to
know the performance of each one of the balance sheet contracts.
Banesto has experts and IT systems solely dedicated to providing
all the information needed for structural risk management.
Measures to improve the management processes were put into
effect which reduced the time needed to know all the information
of the systems and conduct simulations useful for structural risk
management.
A dynamic focus is used to measure the sensitivity of the net
interest margin and of the economic value of capital. With
previously established limits, significant variables are incorporated
(reinvestment periods, early cancellations, new business, customer
spreads, etc) to deterministic and stochastic models to verify the
possible effects on the balance sheet of interest rate variations.
These simulations also enable Banesto to analyse possible risk
hedging strategies and aggregate to its balance sheet the most
efficient operations, regardless of their nature (fixed income or
derivatives) and always in strict compliance with prevailing rules
and regulations (IAS-39 and Bank of Spain circular 4/2004).
The ALCO uses different interest rate scenarios to predict the net
interest margin and the economic value of capital, based on the
forward curve of the market. In deterministic models, for example,
the sensitivity of results arising from parallel shifts in all tranches of
the market curve or movements in the slope is verified.
At the end of 2008, the sensitivity of the net interest margin for
the first year was -3.35% in the face of interest rate cuts, with a
coverage ratio of more than 61%, while the sensitivity of the
economic value of capital was at only -1.18%.
In stochastic models, the bank conducts studies on the basis of
neutral risk methodologies such as those specified in Hull & White.
Tests were carried out in 2008 with multifactor models which
reflect in the most reliable way the behaviour of interest rates in
long-term scenarios, such as the Rebonato semiparametric
methodology.
1.2 -Liquidity Risk
Banesto’s basic strategy in liquidity risk management is to ensure
there are no imbalances in complying with the bank’s
commitments. Particularly attention is paid to the cost and to
maintaining a conservative policy in keeping positions in liquid
assets.
Banesto improved its net monetary position during 2008, thanks
to optimum management of funding and of liquidity. Wholesale
financing generated ¤6,500 million.
Of note in short-term wholesale financing was the opening of the
Euro Commercial Paper programme, keeping the programme of
institutional domestic paper and increasing assets that can be
discounted in the European Central Bank via securitisation of
loans.
Noteworthy in the medium and long term were private placements
of senior debt and mortgage bonds, and the programmes of
structured issues. This improvement in liquidity together with a
positive commercial gap reduced Banesto’s dependency on
wholesale financing.
2. Treasury Risk
Measuring the risks of treasury activity are mainly concentrated in
loans (or counterparty) and the market. Banesto has a Market Risk
Activities Unit which monitors and measures these risks. This unit
has an area for risk analysis and one for quantitative and valuation
aspects. Under this structure it is possible to group the
measurement of all treasury risks with an integrated focus and
systems. In 2008 a very detailed monitoring of risks in treasury
activities was required as a result of the financial crisis, intensified
in the second half of the year.
2.1. Credit Risk
Credit risk in treasury activities is measured as the positive value
that any financial instrument could potentially acquire in the event
that the counterparty fails to meet their contractual obligations.
This would produce a drop in value for Banesto as the replacement
cost of an instrument with a positive value would represent a loss.
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Exposure of treasury
activities by segments
wholesale
banking
company
banking
0.27
5.52
0.45
retail
banking
93.76
Credit Risk management of Treasury
As a result of the surge in wholesale banking activity in the last few
years, the number of operations with clients related to treasury
products has increased notably. The Market Risk Activities Unit
Profile of exposure and limits
billions
Today
real estate
(MRAU) manages and controls the credit risk of treasury products.
The potential values of each financial instrument during their life
are estimated with a confidence level of 97.725%. In the event of a
non-payment, Banesto’s loss would be less than the estimated loss
in 97.725% of cases
The MRAU introduced new credit risk measurement systems in
2008, which calculate the exposure to each client on the basis of
various time frames. This analysis facilitates greater control and a
more dynamic and efficient management of the limits set by the
admission units. Every day these units and wholesale banking are
informed of the credit risk positions with each client and given a
detailed breakdown. Every week the Risks Committee is given
detailed information of Banesto’s exposures by segment, product,
rating, maturities and risk factors.
The average exposure in 2008 was €7,450 million. Wholesale
banking accounted for 93.7%, company banking 5.5%, real estate
0.45% and retail banking 0.3%.
The consumer profile during 2008 was concentrated on short-term
maturities of up to a month and low levels of use of the assigned
limits (see the graph).
Market conditions made close monitoring of the limits necessary.
The limits were reviewed for those counterparties in which the
perceived credit quality could have suffered significant
deterioration. Banesto was thus constantly alert to changing
situations in the market and closely tracked the limits approved for
the various counterparties for operations with financial
instruments, particularly derivatives
Exposure
Limits
1 1 1M 3M 6M 9M 1Y 18M 2Y 30M 3Y 42M 4Y 54M 5Y 6Y 7Y 8Y 9Y 10Y 12Y 15Y 20Y 25Y 30Y Inf
Day Week

2.2. Market Risk
The market risks that affect treasury activity (interest rates,
exchange rates, equities, spreads on loans, Implicit volatilities,
correlations, etc) are managed and controlled with the standard
methodology of Value at Risk (VaR) through historic simulation.
The VaR provides a homogeneous risk figure that represents the
maximum expected loss in the face of adverse market movements,
with a level of confidence of 99%. The VaR is calculated and
reported to senior management every day, and is controlled
through a system of limits that affect the total positions as well as
each of the portfolios. Senior management is continuously
informed and involved in market risk management through weekly
meetings of committees under the Board’s Risks Committee, as well
as via the Assets and Liabilities Committee.
The average daily VaR in 2008 remained at around €4.9 million, of
which €2.2 million reflected the level of market risk really assumed
and €2.7 million other technical market risks which are
systematically covered by provisions, in accordance with Banesto’s
policy.
As well as market risk measurement via VaR tension scenarios are
VaR distribution in 2008
Number of days (%)
11.6
4
10.9 11.6
4.25
4.50
12.4 12.8
4.75
5
5.25
VaR in millions of euros
Operational Risk
5.50
5.75
6
6.25
6.5
and
more
Banesto’s operational risk management model was created in line
with the requirements of the BIS II agreement, the EU directive on
the capital of banks and Bank of Spain circular 3/2008 on
solvency.
The main objectives in this sphere are:
• Identify and eliminate points of operational risk before they lead
to problems.
• Reduce operational risk losses and establish plans to ease them
6.2
3.1
5.0
7.4
5.4
1.2
analysed in which the impact on the value of portfolios of certain
extreme events is simulated. Historic and hypothetical scenarios
are evaluated with various degrees of severity and probability, and
the conclusions drawn are regularly discussed by senior
management through the mentioned reporting cycles. Banesto
also regularly estimates the average extreme losses that could
occur in the event of exceeding the VaR level, through the
statistical conditional VaR, which is reported to senior management
on a daily basis and analysed by the committees. The conditional
VaR in 2008 was maintained at around €7 million.
Banesto’s market risk measurement model is being assessed by the
Bank of Spain for its use as the internal model for determining the
minimum equity for this concept. The relevant audits of the model
were satisfactorily conducted in 2008 before being presented to
the Bank of Spain, whose inspection is underway. Internally,
Banesto traces and continuously fine tunes the quality of the
model through a backtesting programme, which systematically
compares the model’s predictions with the actual results of
treasury activities. The results of the retrospective tests have been
verified by the Group’s auditing departments, and by rating
agencies, meeting the requirements recommended by international
regulators.
VaR evolution during 2008
8.000.000
6.000.000
4.000.000
2.000.000
0
-2.000.000
-4.000.000
-6.000.000
-8.000.000
-10.000.000
-12.000.000
VaR / EaR 2008
Total VaR Total EaR Result
Jan-08 Feb-08 Mar-08 Apr-08 May-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
on the basis of the type of risk and the business affected.
In order to cover these objectives in 2008, we finished putting into
effect a wide series of qualitative and quantitative operational risk
management tools, taking full advantage of the bank’s advanced
technology and information system.
We launched the NORMA project. It is based on five elements
(cash management, operational and documentary normalisation,
security, order and image, and other operational risks), and other
measures which aim to:
• Improve the practices and performance of the project.
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68
• Reduce to an efficient threshold the events and losses of each
type of risk.
• Incorporate the business direction vision to operational risk
management of the network.
• Consolidate the results in a series of indicators valid for all levels.
We have increased the coverage of operational risk indicators,
doubling their number in our data base. Measurements of these
indicators are regularly and automatically obtained, facilitating a
warning system through the corresponding analysis of the
appropriate intervals for each indicator. A study will be made at
some point on the relation between these indicators and the losses
from operational risk.
The creation in 2008 of Regional Committees of Operational Risk
helped to deepen knowledge and management of operational risk.
The Central Committee of Operational Risk, established in 2004 to
reduce this risk and support the implementation of measures to
ease it, has been successful in its tasks, particularly in risks related
to execution, practices with customers and incidents in systems.
Our data base of losses has already been operating for five years.
Its level of automation and detail enables all the bank’s centres and
Distribution of losses
by type of risk (%)
accumulated data 2008
Retail
Banking
10.3
3.7
6.0
0.7
3.6
Central
Services
Company
Banking
Wholesale
Banking
Treasury
75.8
Channels and
dedicated office
branches to immediately know operational risk incidents. This data
base has also enabled us to draw up reports comparing Banesto to
other Spanish banks in the Operational Riskdata Exchange
Association (ORX). The main objective of ORX is to exchange
anonymously operational risk losses, which are used to make a
model of this risk and validate internal capturing. ORX, which
Banesto joined in 2005, currently has 49 members, and is a
leading forum for research and development of standards within
operational risk management.
The information obtained through self-assessment questionnaires
during 2008 is enabling us to draw up in greater detail Banesto’s
risks map, and define the priorities for each of the areas evaluated.
The bank’s operational risk department is also responsible for the
project to draw up a Business Continuity Plan based on the critical
processes detected for the various areas and their requirements to
keep on operating in the event of serious problems. This plan is
being developed in accordance with the banking sector’s
regulations and best practices. Banesto is a member of the Spanish
Consortium of Business Continuity and actively participates in the
Working Groups of Definitions and Coordination with Critical
Sectors and Institutions..
Distribution of losses
by business line (%)
accumulated data 2008
Execution, delivery
and management of
processes
Practices with
customers,
products and
businesses
36.0
9.3
External fraud
2.9 2.0
0.4
Damage to
material assets
Internal fraud
Incidents and
failures on systems
18.3
31.0
Labour relations

Global risk management
1. Risk Cuantification.
One of the basic elements of risk management is correct
measurement and quantification.
Global and efficient risk management requires the development of
methodologies and models that the enable basic parameters of
measurement to be quantified, such as expected and unexpected
loss. Moreover, it is vital to have tools that allow adequate
protection measures to be established in order to identify business
growth areas. The bank’s appetite for risk, however, is always taken
into account.
For several years Banesto has been using quantitative models that
estimate these parameters, on the basis of four basic elements: the
probability of default (PD), the exposure at default (EaD), the loss
given default (LGD) and asset correlation (AC).
A significant step was taken in 2008 when a model was made of
these parameters which reflected the current situation of the
macroeconomic cycle from a point of time perspective (PiT). Each
parameter is estimated on the basis of macroeconomic variables
such as GDP, interest rates, unemployment, housing prices, growth
in lending, etc and incorporated to risk and return management
according to the bank’s prospects for the coming months.
In addition, the behaviour of portfolios/customers in the face of
the change in the environment makes it necessary for these models
to be increasingly more granular, in order to support management
tailored to each customer’s requirements and not implement the
same policies for different risk profiles.
Rating through the cycle
Corporate Banking
Probability of default (PD)
All our rating/scoring models (corporate, banks, companies, real
estate promoters, SMEs, consumer credit, mortgages, cards and
individuals) are calibrated for default probabilities.
This measurement is based on a statistical process which, drawing
on the bank’s history of defaults with customers/operations,
assigns to each risk category (rating/score) a probability of
suffering a default of more than 90 days over the course of a year.
These default probabilities are the homogeneous term that enable
comparisons to be made between customers from different
segments, and which also serve as an objective measurement for
comparing banks’ risk profiles.
In line with making models subject to the impact of
macroeconomic effects, our probabilities of default are adjusted by
corrective coefficients according to the objective of their use
(pricing, internal provisions, regulatory and economic capital, etc)
and the scenarios set by senior management.
Final models of PD adjustment were developed, which are based on
structural credit risk models and are a very important qualitative
addition as they enable the deficiencies that sometimes come from
adjustment models (from regression in macroeconomic trends) to
be improved.
All these models connect to our stress test models, enabling the
default rates to be assessed in the event of adverse
macroeconomic variables, and analyse the sensitivity of our
portfolio to each of the effects separately and together.
Promoters
Medium Companies SMEs
Self-employed Mortgages Personal
Rest Retail
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Rating point in time
Corporate Banking
Promoters
Medium Companies SMEs
Self-employed Mortgages Personal
Rest Retail
Exposure at default (EaD)
This measures the potential risk by estimating the use a contract
will have at the point of going into default. It is calculated on the
basis of committed lines of credit, such as credit accounts or
commercial discount.
In a world that is increasingly using financial instruments, the
challenge has been to precisely model the exposure of our
customers in these products (hedging of interest rates, currency,
structured products, etc).
Loss Given Default (LGD)
After knowing the probability of occurrence of default and the
amount exposed, LGD enables the definitive loss to be measured
after recovery of interest and capital, including the direct and
indirect recovery costs. This process is conducted on the basis of
the historic experience of customers in recovery management. As in
the case of PD, the LGD is determined by the moment of the
economic cycle, as bad debts, asset prices and other factors
significantly affect non-payment recoveries and hence the loss.
In order to incorporate this cyclical effect the models take into
account those variables that most affect the final loss such as the
recovery time, the probability of legal proceedings, the recovery
distribution in the event of proceedings, etc.
Using the same factors as for PD enables us to assess the
correlation between PD and LGD and the joint impact on expected
loss of specific stress scenarios of both parameters.

Losses in corporate
portfolio (at dec. 08)
% LGD
80
70
60
50
40
30
20
10
0
Guarantees Loans Commercial Leasing
discount
Loan with Personal
real loan
guarantee
Expected Loss: this comes from the combination of the three
previous concepts and is the annual risk cost associated with our
credit exposure, which shows up in the income statement.
As in previous cases, this expected loss depends on the
management objective and the scenario foreseen for it.
On the basis of our internal estimates, Banesto's average expected
loss (point in time) is 0.67% and the through cycle 0.41% (0.30%
in 2007).
Risk adjusted exposure
Losses in retail
portfolio (at dec. 08)
% LGD
80
70
60
50
40
30
20
10
0
(%) (%)
4
5
17
23
Corp. Banking
Med size
companies
3
Promoters
9
Small Comps
and shops
10
Self-employed
Mortgages
Personal
29
Rest
Loans
Mortgage
Personal
loan
Cards
Asset correlation and diversification: this is the fourth factor. It
measures the contribution that the joint movement of financial
assets makes to the distribution of credit risk losses.
The key element in capital models and thus of their appropriate
measurement depends on ensuring the bank’s solvency during
extreme moments of an adverse cycle.
In an environment like the current one it is a very important
competitive advantage to have a diversified portfolio. Banesto pays
particular attention to measuring and managing this parameter and
for this reason created a post for constant analysis of the portfolio
and controlling concentrations by individuals and sectors and
setting limits for them.
Every year Banesto reviews the correlation models, checking the
prior estimates and the methodologies used.
Expected loss
Corp. Banking
Med size
companies
11
4
Promoters
15
17
Small Comps
and shops
6 6
Self-employed
Mortgages
Personal
21
20
Rest
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Economic Capital (EC): although the expected loss is one of the
key elements of credit risk management, it is not sufficient because
these losses are not stable. A tool is therefore needed which
provides information on the variability of these losses. This
information is provided by the economic capital, which seeks to
measure the impact on the bank of these losses in exceptional
situations. Banesto has two objectives: on the one hand, to
minimise this volatility and ensure the best return for shareholders
and, on the other, maintain a maximum level of solvency during
stress situations.
Economic Capital/risk adjusted capital Expected Loss/risk adjusted exposure
8%
7%
6%
5%
4%
3%
2%
1%
0%
3.31
Corp. Banking
7.57
3.57
Med size
companies
Promoters
Small Comps
and shops
5.22
Self-employed
2.67
Mortgages
1.71
5.34
Personal
3.23
Rest
Economic Capital
4%
3.5%
3%
2.5%
2%
1.5%
1%
0.5%
0%
(%)
Corp. Banking
0.24
0.12
Corp. Banking
Med size
companies
0.47
Med size
companies
2
13
Promoters
11
% PE/EAD TTC
% PE/EAD PIT
1.34
20
0.74
0.24
Promoters
Small Comps
and shops
5
1.15
0.75
Small Comps
and shops
4
Self-employed
Self-employed
0.90
0.63
Mortgages
0.32
Mortgages
16
Personal
0.22
29
2.76
1.95
Personal
Rest
0.82
0.60
Rest

2. Integration in risk management
Risk quantification is not an end in itself, but provides tools which,
incorporated to daily activity, are vital for modern risk management
at both the individual and portfolio levels.
Incorporating expected loss and capital estimates as basic
management elements has been one of the challenges in recent
years and more so now in a market environment that requires a
much more advanced management and one able to anticipate.
In corporate banking and companies the price simulators and
measurements, both for historic and projected RAROC, are the key
elements for taking decisions on risks and businesses.
In the case of retail portfolios the risk premium is incorporated to
the income statement at all levels. This step has made all
employees aware of anticipative risk management and the need for
correct measurement. This means quality management in elements
such as customer rating and taking additional guarantees.
One of the spheres at the strategic level that is very important for
us is defining and monitoring the risk profile based on our risk
appetite. This profile is the projection/estimation that the bank
makes every year for each portfolio on the basis of business issues
and forecasts for the main risk parameters. These projections made
for various time scales enable us to anticipate and manage changes
(in the cycle, migration from portfolios, structural change in the
population, etc) and so detect shifts in the risks profile well before
they produce a deterioration in the quality of our lending portfolio.
Stress Test: Various analyses with an impact on the income
statement were conducted in 2008, using “once every three years”
or “once every five years” interest rate scenarios, as well as general
stress models for the banking sector as a whole using unlikely
events (once in every 10,000 years).
The big challenge in 2008 was to define a stress model that as well
as incorporating all types of possible or extreme scenarios and
assessing their global impact, gives us information by product,
customer, sector, geographic area, credit quality and the sub
portfolios most exposed to a specific scenario and the impact.
This again became a tool for anticipating risk which identifies
customers susceptible to problems as well as those with a good
risk profile and draw up management strategies based on this
information.
Strategic management of risk: One of the important tasks of the
Global Risk Unit is risk intelligence, probably the factor that
contributes most value added.
Banesto’s risk intelligence architecture, based on developing
advanced decision-making models, has three specific lines of
analysis:
• Support for decision-making, detecting performance changes.
• Backing the bank in strategic business areas, bearing in mind
the advances in financial markets: transfer and movement of
risk among others.
• Co-operation with universities and other agents, keeping us in
touch with the financial world and fostering new developments
in methodologies.
These three lines were strengthened in 2008 through:
• The management structure for the Risks Area.
• Strengthening the Management Analysis Area whose task is to
ensure strategic management by globally tracking the portfolio
of loans and analysing the main risk/return magnitudes.
Internal validation: A critical element of global risk management is
the role played by internal validation as an independent control
team. Its main mission is to issue opinions on whether the models
work as has been envisaged and whether the results obtained
(methodology, data bases, qualitative and quantitative aspects, use
test) are appropriate for the different uses to which they are
applied, both internal and regulatory, and question in an effective
way the work of all the areas.
Internal validation reviewed in 2008 all the advanced models and
detected areas for improvement, contributing greater value and
benefiting management of the various risks.
3. New Capital Accord – Basel ii
Banesto won approval in 2008 for its internal model for estimating
capital and informed the Bank of Spain, according to this model, of
its requirements in June and September.
We thus completed the Basel II project and it became an integral
part of our daily management of risks and capital.
It is increasingly important to continue to make progress in those
aspects that sustain the spirit of the accord and which entail
considerable efforts in methodology, processes, control and
internal validation, technology and incorporation of all these
elements into management.
Banesto developed a plan during 2008 to enable us to adapt to
future requirements in all spheres of our business and anticipate
possible future needs from increasingly demanding regulations.
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2008 report of the Audit and
Compliance Committee
Banesto created its Audit and Compliance Committee on December 18, 2002. It is regulated by the
18th additional disposition of the Securities Market Act (introduced by article 47 of Law
44/2002), in article 18 of the corporate by-laws and article 14 of the Board’s Regulations.
The functions of the Audit and Compliance Committee are set out
in Appendix 1, and are summarised as follows:
Shareholders
- Inform Shareholders’ Meetings
- Reply to questions regarding matters within its sphere.
Internal auditing
Supervise the Internal Auditing services by
- Annual planning of work.
- Reports on activities.
- Monitoring the conclusions and recommendations of its
reports.
External auditing
- Propose the appointment of the auditing firm and the
conditions of the contract.
- Supervise compliance with the contract and assess the results.
- Act as a channel of communication between the Board and the
auditing firm.
- Seek to obtain clear and precise reports.
- Vouch for the auditing firm’s independence.
Compliance
Supervise compliance with:
- The Group’s Code of Conduct in the Securities Markets.
- The manuals and procedures for the prevention of money
laundering.
- The actions and measures that are the result of the steps taken
by the supervision authorities.
- The rules and procedures of corporate governance.
Financial information
- Review the annual financial statements.
- Vouch for compliance with the legal requirements.
- Vouch for the correct application of accounting principles.
- Be familiar with and supervise the drawing up of financial
information.
- Review, before dissemination, the regular financial information
supplied to the National Securities Market Commission.
- Receive, treat and keep the complaints (internal and external)
received by the Bank on issues related to the process of
generating financial information, auditing and internal controls.
Internal control systems
- Be familiar with and supervise the internal control systems.
- Be familiar with and supervise the risk management control
systems.
- Report on, before approval by the Board or the Executive
Committee, the creation or acquisition of participations in
special purpose entities or those domiciled in tax havens.
- Report on linked operations submitted for the Board’s
approval.

Composition of the committee
The Audit and Compliance Committee consisted of three directors
and a Secretary (not a director) at the end of 2008. Of the four
members, three are independent directors and the other is a
proprietary director:
Chairman: Belén Romana García
Members: José Luis López Combarros
Víctor Manuel Menéndez Millán
Matías Rodríguez Inciarte
Secretary: Jaime Pérez Renovales
The changes during 2008 in the Audit and Compliance Committee
were as follows
1.) The Board at its meeting on March 25, 2008 approved, at the
request of the Appointments and Remuneration Committee,
the incorporation to the Board of Belén Romana García as an
independent director. Her inclusion in the Audit and
Compliance Committee was also approved.
2) On July 22, 2008, the Board agreed, at the request of the
Appointments and Remuneration Committee, to appoint Belén
Romana García as chairman of the Audit and Compliance
Committee, to replace José Luis López Combarros who had
been in the post for the maximum period of four years set in
the law regulating the Securities Market, article 18 of the Bylaws
and article 14 of the Regulations of the Board of Directors.
Activties during 2008 of the Audit and
Compliance Committee
The Audit and Compliance Committee met 14 times during 2007
in order to carry out the tasks entrusted it by the Board of
Directors. There were also frequent contacts with the external
auditors, the internal auditors, the Directorate of Corporate
Development and Finances, the Group’s financial controller, the
Directorate of Internal Control and Compliance, as well as with
most of the Bank’s executives in order to obtain information and
explanations about the Group.
A brief summary is given below of the aforementioned functions.
Shareholders
At the Shareholders’ Meeting in February, 2008 the work of the
Audit and Compliance Committee was explained and replies were
given to the questions raised regarding matters that are its
responsibility. The Meeting in February 2009 will report on the
activities in 2008.
Internal Auditing
The maximum executive of Internal Auditing met three times with
the Committee during 2008 to inform it of the work plan for the
year, the recommendations and conclusions reached and the
monitoring and implementation of these recommendations
In addition, Internal Auditing also informed the Bank’s Board of the
work done and their conclusions.
The Committee expressed its satisfaction with the work carried out
by the services of Internal Auditing as regards supervising
compliance, the effectiveness and efficiency of the Group’s internal
control systems, as well as the reliability and quality of the
accounting information.
External Auditing
The Audit and Compliance Committee proposed at its meeting on
January 21, 2008 the re-election of Deloitte S.L. as the auditing
firm of the Bank’s and the Group’s financial statements during
2008, and the scope of its mandate.
The Committee held six meetings with its external auditors during
2008 at which it was informed of the process of auditing the
2008 financial statements, and the inherent aspects, problems and
considerations.
The auditors attended the presentation to the Committee of the
public information on the quarterly and annual results given by the
Financial Controller and the Directorate of Corporate Development
and Finances.
The audits on the 2007 individual statements of the Bank and the
consolidated ones were clean (without qualifications) and the
auditors stated that
a) the annual financial statements faithfully reflect, in all
significant aspects, the Bank’s and the Group’s shareholders’
equity and financial situation at December 31, 2008, the
results of the Bank’s and the Group’s operations, the changes
in net worth and their cash flows and
b) the Bank’s and the consolidated Group’s annual financial
statements contain the necessary and sufficient information
to be interpreted and adequately understood, in accordance
with the International Financial Reporting Standards adopted
by the European Union (for the consolidated Group), and in
accordance with the principles and accounting rules in Bank
of Spain Circular 4/2004 (for the Bank), and are in
conformance with the rules used to draw up the previous
year’s statements.
In accordance with Royal Decree 1362 of October 19, 2007, which
regulates the financial information that the bank, as a listed
company, has to approve and send to the National Securities
Market Commissions, consolidated and summarised half yearly
financial statements were drawn up and sent to the supervisor,
corresponding to the first half of the year, whose submission to the
auditing firm is voluntarily decided by each company.
The Bank’s Board decided that this half yearly information should
be subject to auditing, and the firm issued the corresponding audit
(without qualifications).
The Committee was told by the partner responsible for auditing
that during the work the team had access to the necessary
information and received full cooperation from the Group’s
employees. The external auditor also reported on compliance with
the rules of independence established in the Auditing of Accounts
Act.
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Article 39 of the Board’s Regulations does not allow an auditing
firm to be hired when the fees it charges to the Group represent
more than 2% of its total fees. This article also establishes that the
partner responsible for the auditing team allocated to the Group
must be replaced every seven years and services other than those
of auditing which could put at risk the firm’s independence will not
be contracted.
Regarding these stipulations in the regulations, we would like to
point out that
1. The bill for auditing the Group in 2008 and other nonauditing
services provided by the auditor is duly set out in
note 42 in the section on the annual financial statements.
2. The auditing fees of Deloitte, S.L for services other than
auditing amounted to €1,221,000 (€254,000 for work
required by supervisory bodies and which can be done by the
same auditor).
3. The partner responsible for responsible for the team auditing
the Group began in 2007, making it the second year auditing
the accounts of the Banesto Group.
The Audit and Compliance Committee also verified that the work
contracted with the auditor and requested by supervisory bodies
complied with the requirements of independence established in
Law 19 of July 12, 1988 on Auditing of Accounts.
The fees charged to the Banesto Group by Deloitte worldwide
represented 0.015% of their global total and those charged by
Deloitte (Spain) 0.69% of its turnover.
As a result, the Audit and Compliance Committee concludes there
are no objective reasons for questioning the auditing firm’s
independence.
The Committee agreed at its meeting on January 19, 2009 to
propose to the Board the re-election of Deloitte, S.L. as the firm to
audit the Bank’s and the Group’s financial statements for 2009.
Compliance
In order to verify the existence of procedures for complying with
regulations, the Audit and Compliance Committee held meetings
with those in charge of:
- Implementing the EU’s Markets in Financial Instruments
Directive (MiFID)
- Prevention of money laundering
- Compliance with the Code of Conduct in the Securities
Market.
- Areas subject to the control and inspection of the
administrative authorities.
- Compliance with the rules and procedures of corporate
governance.
The MFID directive, incorporated to Spanish law by Law 47 of
December 19, 2007, established the requirements which certain
companies and financial institutions have to adapt in order to
develop their activity of providing investment services.
During 2008, the Bank implemented all the regulations, via various
policies and internal procedures. A new map of regulations in risks,
integrated into the internal control model, was installed in order to
be able to monitor the correct implementation of the new
procedures.
In order to adapt the commercial processes with customers, the
internal regulation on the marketing and distribution of products
and services, marketing and publicity actions with customers and
the circuit for creating and launching new products were updated.
The Audit and Compliance Committee was informed of the
adaptation tasks in order to verify compliance with the
requirements set in the new regulations and with the date of
implementation. This supervision will continue during 2009.
In money laundering, information was received on the new
developments in the regulatory framework which came into effect
during 2008, the training courses developed, the compliance of
manuals and internal procedures, as well as the contents of the
external expert’s report on the Group’s procedures to prevent
money laundering, required by article 11, item 7, of Royal Decree
325/1995.
The Committee also supervised compliance with the Code of
Conduct in the Securities Market , which affects 654 people in
Grupo Banesto. Compliance executives reported on the control
activities, the results, the training courses given, as well as the
improvements being made.
The Committee was also informed of the communications received
from the supervision and control authorities, as well as the
measures taken to comply with the requirements and
recommendations of these bodies.
The Corporate Governance report, which is included in the annual
public information, was also reviewed. We acknowledged there are
reasonable rules and procedures to meet the requirements, and the
contents of this report, which will be submitted for the Board’s
approval, were favourably reported on.
The Committee received information on linked operations and the
measures underway regarding appropriate documentation and
information.
Financial information
The Audit and Compliance Committee held several meetings with
the Group’s financial controller in order to know in detail the
process for drawing up the Bank’s and the Group’s annual and
quarterly financial statements.
The Group’s controller and the auditing firm reported on the
regular public information sent to the supervisory authority during
2008 and on the individual and consolidated financial statements
for 2008, which were drawn up in accordance with the Bank of
Spain Circular 4 of December 22, 2004 and with the International
Financial Reporting Standards adopted by the European Union,
which follow criteria consistent with 2007.

Information was also requested to verify the adjustment of the
criteria used to the applicable accounting regulations and
principles and so ensure that the financial statements reflect the
Group’s financial and net worth situation as well as the results of
its operations. The Committee reported favourably on the
definitive texts of the annual statements for 2008, as well as the
regular information published as a listed company during 2008.
The Group’s lawyers were also asked to provide information on the
legal and fiscal eventualities and confirm they were appropriately
treated in the financial information.
As reported at the Shareholders’ Meeting in 2008, the Regulations
of the Board, were modified and included among the functions of
the Audit and Compliance Committee the following:
“Adopt the necessary measure to: (i) receive, treat and keep the
complaints received by the Bank on matters related to the
process of generating financial information, auditing and internal
controls; and (ii) enable employees, confidentially, and, if
considered appropriate, anonymously, to communicate
irregularities of potential importance, especially financial and
accounting ones, they see in the sphere of the company.”
In order to fulfil this mandate, the Committee called for a Circular
to be drawn up which regulates the procedure for receiving these
communications, which was disseminated throughout the group.
Internal control systems
The Audit and Compliance Committee dedicated several meetings
to knowing and evaluating the internal control systems of the
Group’s operating areas, especially the credit, market and financial
areas as well as the systems, computer processes and the policies
and procedures for risk control, mainly credit, market, liquidity and
operational.
Given their importance, we would like to mention the following two
projects which are having a significant impact on improving internal
control of the Bank, as well as summarising the actions taken by
the Bank during 2008 in the sphere of credit risks.
Requirements of the Sarbanes Oxley Act
The Bank, by belonging to the Group of Banco Santander S.A.
which is listed on the US market, has to meet the requirements of
the Sarbanes-Oxley Act of July 2002. Among its objectives are to
foster and favour the transparency and reliability of financial
statements by promoting the review and systemisation of the
internal controls established for mitigating the risks associated
with financial information.
The internal control model is a dynamic one which reviews and
updates the risks and, consequently, the controls constantly
associated. During 2008, 75 new controls for new documented
activities were incorporated, regarding the MiFID regulations,
control of the activities of financial agents, the activity of Banesto
Bolsa and the outsourcing of processes.
Critical and non-critical controls were identified during 2008
(classified on the basis of four parameters: economic, financial,
legal and reputational impact), with no significant incidents
observed.
The model covers almost 99% of the Bank’s financial statements,
so the documented controls guarantee their correct drawing up.
As in 2007, the model was certified without qualifications. Some
250 people took part in this process, among them the Bank’s
senior financial and management executives, as well as all the
General Directorates. This assessment was ratified by Internal
Auditing in various reports as well as the external auditing firm in
its report on May 22, 2008.
Basel II
2008 saw the entry into force of Basel II, with implementation for
regulatory purposes of a model which until then had been solely
used for internal management purposes. The Bank of Spain
authorised Banesto in July to use its advanced Internal Rating
Based (IRB) model to estimate the requirements of equity capital
corresponding to credit risk.
The main tasks undertaken related to the following aspects:
• Improving all the methodologies and systems: on the basis of
continuous work by the internal validation teams and the
reports of auditors and the Bank of Spain, all relevant aspects
of the existing model were improved. The model is a dynamic
one which needs to be continuously fine tuned.
• Estimating the capital: since June estimates have been made in
parallel of the capital requirements applying Basel II under its
IRB focus with the results of using Basel I.
• Improved processes to increase the test of use: management
processes were reviewed incorporating more intensely all the
estimates of risk supporting the capital model. A decisive step
was the incorporation of the risk premium to all levels in the
income statement.
• Self-evaluation of capital: lastly, and in line with the
requirements of regulations, we assessed the capital in order to
ensure sufficient coverage levels for the next few years, both in
foreseeable situations as well as in others under severe crisis
scenarios.
The measures to be taken during the first half of 2009 include
publishing, for the first time, information with prudential relevance
which will represent a significant advance in transparent
information about the management model and the risk profile of
our business.
As anticipated in our 2007 report, Basel II is no longer a project
and has been implemented, both for estimating equity as well as
integrating it into all the risk management processes.
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Credit risk
Given the economic and financial situation in 2008, the
Committee dedicated several of its meetings to credit risk
management, evaluating non-performing loans, tracking risks and
recoveries.
This is an activity of maximum priority to which the Bank’s
Executive Committee and the Risks Committee are dedicating a lot
of time. The Audit and Compliance Committee will continue to
supervise the credit risk control systems during 2009.
Conclusion
The Audit and Compliance Committee informed the Board in detail
of its work during 2008 on two occasions and held 14 meetings. It
was in close contact with those running the various areas
mentioned in this report, enabling the committee to fulfil the
functions assigned to it by the Board of Banco Español de Crédito,
S.A.
APPENDIX 1
REGULATIONS OF THE AUDIT AND COMPLIANCE COMMITTEE
The Audit and Compliance Committee is regulated by the 18th
additional regulation of the Securities Market Act (introduced by
article 47 of Law 44/2002) and articles 18 of the corporate bylaws
and 14 of the Board’s Regulations, which are as follows
Article 18 of the by-laws
The Board will appoint from among its members its Chairman and
one or more Vice-Chairmen, determining, if appropriate, the order
of preference. If the Chairman is not available, the Board will be
chaired by one of the Vice-Chairmen, on the basis of the order of
preference determined, and, if none of them are available, by the
oldest director.
It can also appoint one or more Chief Executive Officers, and an
Executive Committee and as many Committees or Commissions as
are deemed necessary or convenient for the Company’s smooth
running.
If the Board makes use of the power conferred in the previous
paragraph, it will specify the responsibilities of the Chief Executive
Officers and the Committees and Commissions designated.
The Board will appoint a Secretary and a deputy Secretary who
does not have to be a director but can be. If the Secretary or the
deputy Secretary meets the legally required conditions they can
also be the Board’s Legal Advisor. If the Secretary is not available
the deputy Secretary will exercise the functions and if he is not
available then the Board will appoint a director to do this from
among those attending the meeting. Unless there is a Board
decision, the Secretary will also be the Secretary of the
Committees set up in the Board’s sphere.
The Chairman, Vice-chairmen and, if appropriate, the Secretary
and/or deputy Secretary of the Board who are re-elected members
of the Board by agreement of the Shareholders’ Meeting will
continue to hold the posts they previously had in the sphere of the
Board without the need for new election and without detriment to
the power of revoking those posts which corresponds to the
Board. This rule will not apply to the Chief Executive Officers or to
members of the Executive Committees.
The Board will always appoint an Audit and Compliance
Committee.
This Committee will consist of a minimum of three and a maximum
of five members, all of them non-executive directors. The minimum
powers of the committee are as follows:
a) To report, through its Chairman or Secretary, to the
Shareholders’ Meeting on any matters raised thereat by the
shareholders on which the committee has authority.
b) To Propose to the Board for submission to the Shareholders’
Meeting the appointment of an external auditor.
c) To supervise the internal auditing services.

d) To be familiar with the financial reporting process and the
Bank’s internal control systems.
e) To take charge of the relations with the external auditors in
order to receive information on any issues which might
jeopardise the independence of the auditors and any other
matters related to the process of auditing, as well as other
communications envisaged in the legislation on auditing and
in the technical rules of auditing.
f) To examine compliance with the Group’s Code of Conduct
relating to the securities markets, with the anti-money
laundering manuals and procedures and, in general, the Bank’s
rules of governance, and to make the required proposals for
their improvement. In particular, the committee must receive
information and, if appropriate, issue reports on disciplinary
measures for members of senior management.
The Board will appoint the Chairman of the Audit and Compliance
Committee and he or she will be replaced every four years. The
outgoing Chairman can be re-elected a year after departing the
post.
The Audit and Compliance Committee will meet, at least, four
times a year and as many times as deemed necessary by its
Chairman or as required by agreement of the committee or at the
request of at least two of its members. All members of the
management team or employees are obliged to attend its meetings,
if so required, and collaborate with it and provide access to the
information they have. The auditing firm can also be required to
attend. One of its meetings will be used to evaluate the efficiency
and compliance with the rules and procedures of governance and
prepare the information that the Board has to approve and include
within its annual public documentation.
The Audit and Compliance committee, via its Chairman, will inform
the Board at least twice a year.
The Board’s Regulations will develop and complement the previous
rules. As regards everything not envisaged in laws, the corporate
by-laws and the Board’s regulations, the Board’s functioning will be
governed by the Board’s rules to the extent they are compatible
with the nature of the committee and with the independence of its
activities.
Article 14.- The Board’s Regulations on the Audit and
Compliance Committee
Article 14. The Audit and Compliance Committee
1. The Audit and Compliance Committee consists of a minimum of
three and a maximum of five members, all of them non-executive
directors. They are appointed by the Board, bearing in mind,
particularly for the Chairman, their knowledge and experience in
accounting, auditing or risk management
The Committee’s Chairman must be independent, and will be
replaced every four years. The outgoing Chairman can be reelected
one year after departing the post.
2. The Committee’s functions are as follows
a) To report, through its Chairman or Secretary, at the Annual
General Meeting, to whom approval of the annual financial
statements is submitted, on any matters raised thereat by
the shareholders on whom the committee has authority. The
Committee is responsible for knowing and, where
appropriate, responding to initiatives, suggestions or
complaints raised by shareholders on its sphere of functions,
and those submitted by the Bank’s Secretary General.
b) To propose to the Board for submission to the
Shareholders’ Meeting the appointment of the auditors, the
terms of their engagement, the scope of their services and,
if appropriate, their revocation or non-renewal.
c) To review the Bank’s financial statements and the Group’s
consolidated financial statements, vouch for compliance with
legal requirements and correct application of generally
accepted accounting principles, as well as report on
proposed changes to these principles and criteria suggested
by management.
d) To supervise the internal auditing services. They must
present every year to the Committee their work plan and
inform it directly of events during its development,
submitting a report at the end of the year. In order to make
this supervision possible, the Bank’s Internal Auditing
services will tend to the Committee’s information
requirements.
e) To be familiar with and supervise the drawing up and the
integrity of the Bank’s financial information and, where
appropriate, the Group’s, reviewing compliance with the
regulatory requirements, the appropriate delimiting of the
perimeter of consolidation and correct application of the
accounting criteria.
f) To serve as communication channel between the Board of
Directors and the auditing firm, and assess the findings of
each audit and the replies of the management team to the
firm’s recommendations and mediate in cases of
discrepancies between it and the Board concerning the
applicable principles and criteria when drawing up financial
statements.
g) To monitor fulfilment of the auditing contract, ensuring that
the opinion on the annual financial statements and the main
contents of the auditing report are clearly and precisely
written.
h) Keep watch over the auditing firm’s independence, paying
attention to those circumstances or issues that could put it
at risk and to anything else related to the auditing process,
as well as receive information and maintain with the auditor
the communications envisaged in the legislation on auditing
and on the technical rules of auditing. And, specifically:
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i. require information on the percentage that the fees
charged for all concepts represent against the total
worldwide fees of the auditing firm and on the number of
years that the partner responsible for the auditing team
providing service to the Bank has spent with it, as well as
warn the firm of the limit referred to in article 39 of these
regulations.
ii If the auditing firm quits, examine the reasons for this.
iii. Ensure that the change in the auditing firm is
communicated as a relevant fact and, where appropriate,
disseminate a communiqué on the existence of
disagreements with the outgoing firm in the event that
this is the case.
i) To review, before dissemination, the regular financial
information which, as a listed company, the Bank must make
public and ensure it is prepared in accordance with the same
principles and practices as those used for the annual
financial statements, for which purpose the auditing firm can
revise the information to a limited extent.
j) To supervise compliance with the Group’s Code of Conduct
in the securities markets, with the anti-money laundering
manuals and procedures and, in general, the Bank’s rules of
governance, and make the required proposals for their
improvement. In particular, the Committee must receive
information and, if appropriate, issue reports on disciplinary
measures for members of senior management. All of this
without detriment to the rules approved for prevention of
money laundering.
k) To be familiar with the reports and inspection activities of
the supervision and control authorities and review
compliance with the actions and measures that emanate
from them.
l) To adopt the necessary measures to: (1) receive, treat and
keep the complaints received by the Bank on issues related
to the process of generating financial information, audits and
internal controls; and (ii) make it possible for employees,
confidentially and, if considered appropriate, anonymously
to report irregularities of potential significance, especially
financial and accounting ones, detected within the sphere of
the Bank.
m) To inform on the proposed changes to these regulations
before their approval by the Board.
n) To supervise the internal control and management risk
systems so that the main risks are identified, managed and
known in sufficient time.
ñ) To report on, before approval by the Board or the Executive
Committee, the creation or acquisition of participations in
special purpose entities or domiciled in tax havens.
o) To report on linked operations submitted for the Board’s
approval.
p) To report on the process of assessing its functioning.
3. The internal auditing services are within the Board’s sphere and
report to it. Without detriment to this, the Committee will vouch
for the independence and effectiveness of internal auditing,
reporting on the proposals regarding the election, appointment,
re-election and dismissal of the person in charge of the Bank’s
internal auditing service. The Committee will receive regular
information on the activities of internal auditing and will verify
that senior management takes into account the conclusions and
recommendations of its reports.
4. The Committee will meet, at least, four times a year and as many
times as called by its Chairman or as required by agreement of
the committee or at the request of at least two of its members.
All members of the management team or employees are obliged
to attend its meetings, if so required, and collaborate with it and
provide access to the information they have. The auditing firm
can also be required to attend. One of its meetings will be used
to evaluate the efficiency and compliance with the rules and
procedures of governance and prepare the information that the
Board has to approve and include within its annual public
documentation.
5. The Committee can obtain external advice under the terms of
article 23 of the Regulations.
6. The Committee, via its Chairman, will inform the Board of its
activity at the meetings called for this purpose, or in the first
one afterwards when the Committee’s Chairman considers it
necessary. The minutes of the meetings are available to all
members of the Board who request them.

Internal Control Model
Banesto’s Internal Control Model is
continuously evolving and adapting to the most
demanding international regulatory
requirements, and it provides customers and
shareholders with maximum security.
It meets international guidelines
This demanding framework guarantees compliance with the guidelines of the Committee Of
Sponsoring Organizations (COSO) of the Treadway Commission within the Enterprise Risk
Management Integrated Framework (1)
Structure of the model
The main processes and sub processes related to the generation of financial information in each of our activities are identified and
documented. Other relevant procedures developed by the support areas have also been documented.
The risks inherent in these processes and sub processes that could generate material errors are identified, in accordance with the Basel
classification.
Lastly, the necessary controls to ease risks are defined in the most effective way.
All this information is available on line via an IT tool that provides management and treatment (maintenance, supervision, updating,
consulting, etc.) in real time.
Internal processes of supervision and contrasting
In order to ensure the quality, consistency and updating of the model, the bank has a specialised unit to care for and supervise it. Senior
management and the Board of Directors are informed of the results.
There are also certifications and twice yearly assessments of the staff, as well as validations by Internal Auditing of the model’s
functioning.
Certification of the auditing firm
The model was examined by the auditing firm in 2008, in compliance with the Sarbanes-Oxley Law whose purpose is to reduce the risk
that published information is insecure, incomplete or mistaken. It imposes obligations on all those involved in the process of producing,
certifying and analysing financial information.
In the opinion of the auditing firm, “Banesto maintains effective internal controls on the generation of financial information contained in
the consolidated annual financial statements drawn up in accordance with the international regulations of financial information adopted
by the European Union”
(1) International committee created in 1985 to establish a methodology for identifying risk factors that could give rise to the presentation of false or fraudulent financial
information, as well as issue recommendations that guarantee the maximum transparency.
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Auditor’s Report and
Consolidated financial
statement
Auditor’s Report and Consolidated
financial statement 83
Consolidated financial statement 85
Management report
Corporate Governance report
178
according to the CNMV model 185

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Responsibility for the information
The Board of Directors of Banco Español de Crédito, S.A. expressly
undertakes the general function of supervision of the Group's
operations and discharges its duties in this respect directly and on
a non-delegation basis.
Its Audit and Compliance Committee is entrusted, inter alia, with
the following duties in the areas of information, accounting control
and assessment of the compliance system:
1. To report, through its Chairman or Secretary, to the Annual
General Meeting on any matters raised thereat by the
shareholders on which the Committee has authority.
2. To propose the appointment of the auditors, the terms of
their engagement, the scope of their services and, if
appropriate, their revocation or non-renewal.
3. To review the Bank's financial statements and the Group's
consolidated financial statements, monitoring compliance with
legal requirements and the proper application of generally
accepted accounting principles.
4. To serve as a communication channel between the Board of
Directors and the auditors, and assess the findings of each
audit and the replies of the management team to the auditors'
recommendations.
5. To be familiar with the financial reporting process and the
internal control systems.
6. To monitor any situations which might jeopardise the
independence of the auditors and, specifically, to check the
percentage that the fees paid to them in all connections
represents with respect to the auditors' total revenues. The
fees paid must be disclosed publicly
7. To review, before public disclosure, the periodic financial
information furnished by the Bank and Group to the markets
and to their supervisory bodies, making sure that this
information is prepared in accordance with the same principles
and practices as those used for the financial statements.
8. To examine compliance with the Group's Code of Conduct
relating to the securities markets, with the anti-money
laundering manuals and procedures and, in general, with the
Bank's rules of governance, and to make the required
proposals for improvement.
For these purposes, the Audit and Compliance Committee meets
whenever it deems it appropriate with the persons in charge of the
Group's business areas and with those in charge of the support
and risk management areas, in particular with the Controller and
with the Group's Internal Audit Division, and with the external
auditors to analyse their reports and recommendations.
Our external auditors, Deloitte, examine each year the financial
statements of substantially all the companies composing the
Group to issue their professional opinion thereon. The external
auditors are regularly informed of our controls and procedures;
they define and perform their audit tests with full freedom and
have free access to the Bank's Chairwoman, Deputy Chairman and
CEO, to set forth their conclusions and discuss their
recommendations for improving the efficiency of the internal
control systems.
The Audit and Compliance Committee meets periodically with the
external auditors to ensure the effectiveness of their audit and to
analyse any situations which might jeopardise their independence.
In this connection, following the most advanced practices in
shareholder information transparency (as described in Note 42 to
the consolidated financial statements), it is hereby reported that in
2008 the fees paid for the financial audits performed by the
Deloitte worldwide organisation amounted to EUR 1,524
thousand, those paid for other reports required by the supervisory
bodies amounted to EUR 254 thousand and those paid for other
work amounted to EUR 967 thousand.
To facilitate analysis of the situations which might jeopardise the
independence of our auditors from a quantitative and qualitative
standpoint, we set forth below significant information relating to
the criteria established by the O'Malley Panel and in other relevant
international documents for the purpose of evaluating the
effectiveness of the external audit function:
1. In 2008 the ratio of the amount billed by our main auditor
for non-attest work to the fees for financial audits and for
other reports required by the supervisory bodies was
54.41%.
The services commissioned from our auditors meet the
independence requirements stipulated by Law 44/2002, of
22 November, on Financial System Reform Measures and by
the Regulations governing the Bank's Board of Directors.
2. The relative importance of the fees generated by a given
customer with respect to the total fees of the audit firm:
The Group has adopted the policy of not engaging audit
firms if the estimated fees for all services exceed 2.0% of their
total revenues.
In the case of Deloitte and the Deloitte worldwide
organisation, this ratio was 0.69% and 0.015% of their total
revenues.
Based on the foregoing, the Audit and Compliance Committee
considers that there are no objective reasons to question the
independence of our auditors.

Consolidated Financial
Statement
Banco Español de Crédito, S.A.
and Companies composing the
Banco Español de Crédito Group
(Banesto Group)
Consolidated Financial Statements and Directors' Report for the year
ended 31 December 2008, together with Auditors' Report
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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated balance sheets At 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
Assets
Note 2008 2007(*)
CASH AND BALANCES WITH CENTRAL BANKS 1,688,153 1,412,871
FINANCIAL ASSETS HELD FOR TRADING: 5,083,815 4,605,807
Debt instruments 7 402,154 781,542
Equity instruments 8 472,996 1,636,069
Trading derivatives
OTHER FINANCIAL ASSETS AT FAIR VALUE
9 4,208,665 2,188,196
THROUGH PROFIT OR LOSS 2,191,162 1,492,762
Loans and advances to credit institutions 6 1,793,839 905,291
Loans and advances to customers - 504
Debt instruments 7 253,887 285,474
Equity instruments 8 143,436 301,493
AVAILABLE-FOR-SALE FINANCIAL ASSETS: 6,742,582 5,969,913
Debt instruments 7 6,620,409 5,605,166
Equity instruments 8 122,173 364,747
LOANS AND RECEIVABLES: 98,209,587 94,711,217
Loans and advances to credit institutions 6 19,700,685 19,118,526
Loans and advances to customers 10 77,772,663 75,066,531
Debt instruments 7 736,239 526,160
HELD-TO-MATURITY INVESTMENTS - -
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK - -
HEDGING DERIVATIVES 11 1,194,849 537,352
NON-CURRENT ASSETS HELD FOR SALE 14 1,556,174 102,730
INVESTMENTS 12 16,722 16,258
INSURANCE CONTRACTS LINKED TO PENSIONS 22 248,025 257,633
REINSURANCE ASSETS 13 199,411 121,162
TANGIBLE ASSETS: 14 1,225,546 1,193,896
Property, plant and equipment
Property, plant and equipment for own use 1,154,954 1,128,088
Investment property 70,592 65,808
INTANGIBLE ASSETS: 15 58,524 51,828
Goodwill - 3,924
Other intangible assets 58,524 47,904
TAX ASSETS: 23 1,099,929 1,102,996
Current 205,235 62,861
Deferred 894,694 1,040,135
OTHER ASSETS: 16 964,494 369,566
Inventories 566,876 206,755
Other 397,618 162,811
TOTAL ASSETS 120,478,973 111,945,991
Memorandum items:
Contingent liabilities 30 10,896,866 11,994,698
Contingent commitments 30 16,218,347 16,300,288
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated balance sheet at 31 December 2008.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated balance sheets At 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
Liabilities and equity
LIABILITIES
Note 2008 2007(*)
FINANCIAL LIABILITIES HELD FOR TRADING: 3,950,718 2,628,898
Trading derivatives 9 3,913,573 2,532,019
Short positions
OTHER FINANCIAL LIABILITIES AT FAIR VALUE
37,145 96,879
THROUGH PROFIT OR LOSS - -
FINANCIAL LIABILITIES AT AMORTISED COST: 103,445,656 98,432,494
Deposits from central banks 17 1,952,343 1,955,660
Deposits from credit institutions 17 10,454,275 10,341,441
Customer deposits 18 57,589,628 52,747,448
Marketable debt securities 19 28,315,103 28,737,082
Subordinated liabilities 20 2,236,835 2,124,980
Other financial liabilities 21 2,897,472 2,525,883
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK 31 440,135 (516,725)
HEDGING DERIVATIVES 11 577,091 1,090,616
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE - -
LIABILITIES UNDER INSURANCE CONTRACTS 13 3,435,629 2,226,588
PROVISIONS: 22 2,532,290 2,614,307
Provisions for pensions and similar obligations 2,215,208 2,301,205
Provisions for contingent liabilities and commitments 102,092 115,923
Other provisions 214,990 197,179
TAX LIABILITIES: 23 394,822 76,305
Current 326,095 37,856
Deferred 68,727 38,449
OTHER LIABILITIES 16 548,442 713,312
TOTAL LIABILITIES 115,324,783 107,265,795
SHAREHOLDERS' EQUITY: 26 5,069,766 4,747,892
Capital
Registered 27 543,036 548,521
Reserves 28 4,055,165 3,769,902
Accumulated reserves 4,052,869 3,768,093
Reserves of entities accounted for using the equity method 2,296 1,809
Other equity instruments 29 - 1,778
Other - 1,778
Treasury shares 29 (36,074) (86,917)
Profit for the year attributable to the Parent 779,844 764,567
Dividends and remuneration (272,205) (249,959)
VALUATION ADJUSTMENTS: 25 41,541 (114,424)
Available-for-sale financial assets (48,614) (13,505)
Cash flow hedges 90,115 (100,868)
Exchange differences 40 (51)
MINORITY INTERESTS:: 24 42,883 46,728
Other 42,883 46,728
TOTAL EQUITY 5,154,190 4,680,196
TOTAL LIABILITIES AND EQUITY 120,478,973 111,945,991
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated balance sheet at 31 December 2008
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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated income statements For the years ended
31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
Income/(Expenses)
Note 2008 2007(*)
INTEREST AND SIMILAR INCOME 33 5,471,597 4,638,611
INTEREST EXPENSE AND SIMILAR CHARGES 34 (3,756,531) (3,156,765)
RETURN ON EQUITY REFUNDABLE ON DEMAND - -
NET INTEREST INCOME 1,715,066 1,481,846
INCOME FROM EQUITY INSTRUMENTS 35 59,237 55,814
SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD 36 1,874 1,707
FEE AND COMMISSION INCOME 37 705,699 741,965
FEE AND COMMISSION EXPENSE 38 (144,025) (161,314)
GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 39 109,400 84,924
Held for trading 80,848 89,036
Financial instruments not measured at fair value
through profit or loss 29,260 (6,051)
Other (708) 1,939
EXCHANGE DIFFERENCES (net) 41,867 34,866
OTHER OPERATING INCOME 40 2,189,420 1,497,959
Income from insurance and reinsurance contracts issued 2,000,274 1,284,950
Sales and income from the provision of non-financial services 75,401 162,758
Other 113,745 50,251
OTHER OPERATING EXPENSES 40 (2,199,840) (1,420,563)
Expenses of insurance and reinsurance contracts (2,027,516) (1,259,195)
Changes in inventories (18,107) (86,686)
Other (154,217) (74,682)
GROSS INCOME 2,478,698 2,317,204
ADMINISTRATIVE EXPENSES (921,049) (930,693)
Personnel expenses 41 (673,383) (664,598)
Other general administrative expenses 42 (247,666) (266,095)
DEPRECIATION AND AMORTISATION 14, 15 (102,317) (99,542)
PROVISIONS (net) 2-v, 22 (16,271) 16,671
IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (321,922) (233,699)
Loans and receivables
Other financial instruments not measured at fair value
10 (299,799) (228,974)
through profit or loss 8 (22,123) (4,725)
PROFIT FROM OPERATIONS 1,117,139 1,069,941
IMPAIRMENT LOSSES ON OTHER ASSETS (net) (6,882) 1,951
Goodwill and other intangible assets 15 4 53
Other assets
GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED
14 (6,886) 1,898
AS NON-CURRENT ASSETS HELD FOR SALE 43 (455) 13,027
NEGATIVE GOODWILL IN BUSINESS COMBINATIONS
GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE
- -
NOT CLASSIFIED AS DISCONTINUED OPERATIONS 14 (28,515) 14,191
PROFIT BEFORE TAX 1,081,287 1,099,110
IMPUESTO SOBRE BENEFICIOS 23 (306,278) (335,654)
PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 775,009 763,456
PROFIT FROM DISCONTINUED OPERATIONS (net) - -
CONSOLIDATED PROFIT FOR THE YEAR 775,009 763,456
PROFIT ATTRIBUTABLE TO THE PARENT 779,844 764,567
PROFIT ATTRIBUTABLE TO MINORITY INTERESTS (4,835) (1,111)
EARNINGS PER SHARE:
Basic earnings per share (euros 4 1,14 1,10
Diluted earnings per share (euros) 4 1,14 1,10
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated income statement for 2008.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Banesto group Consolidated statements of recognised income and expense for the
years ended 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
2008 2007(*)
A) CONSOLIDATED PROFIT FOR THE YEAR 775,009 763,456
B) OTHER RECOGNISED INCOME AND EXPENSE 155,965 (118,101)
Available-for-sale financial assets (28,659) (84,101)
Revaluation gains/(losses) 11,016 (64,604)
Amounts transferred to income statement (39,675) (19,497)
Cash flow hedges 264,609 (79,118)
Revaluation gains/(losses) 245,420 (71,351)
Amounts transferred to income statement 19,189 (7,767)
Hedges of net investments in foreign operations - -
Exchange differences 91 (43)
Revaluation gains/(losses) 91 (43)
Non-current assets held for sale - -
Actuarial gains/(losses) on pension plans - -
Entities accounted for using the equity method (4,553) (3,207)
Revaluation gains/(losses) (4,694) (3,207)
Amounts transferred to income statement 141 -
Other recognised income and expense - -
Income tax (75,523) 48,368
TOTAL RECOGNISED INCOME AND EXPENSE (A + B) 930,974 645,355
C 1) Attributable to the Parent 935,809 646,466
C 2) Attributable to minority interests (4,835) (1,111)
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated statement of recognised income and expense for 2008.
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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated statements of changes in equity
Consolidated statements of total changes in equity for the years ended 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
EQUITY ATTRIBUTABLE TO THE PARENT
SHAREHOLDERS’ EQUITY
Reserves of
Entities
Accounted Profit
for Using Other Less: Attributable Less: Total
Share Accumulated the Equity Equity Treasury to the Dividends and Shareholders’ Valuation Minority
Capital Premium Reserves Method Instruments Shares Parent Remuneration Equity Adjustments Total Interests Equity
Balance at 01/01/08 548,521 - 3,768,093 1,809 1,778 (86,917) 764,567 (249,959) 4,747,892 (114,424) 4,633,468 46,728 4,680,196
Adjustments due to changes in accounting policy - - - - - - - - - - - -
Adjustments made to correct errors - - - - - - - - - - - -
Adjusted beginning balance 548,521 - 3,768,093 1,809 1,778 (86,917) 764,567 (249,959) 4,747,892 (114,424) 4,633,468 46,728 4,680,196
Total recognised income/(expense) - - - - - - 779,844 - 779,844 155,965 935,809 (4,835) 930,974
Other changes in equity
Capital reductions (5,485) - (78,321) - - - - - (83,806) - (83,806) - (83,806)
Distribution of dividends - - - - - - - (411,071) (411,071) - (411,071) - (411,071)
Transactions involving own
equity instruments (net) (Note 29) - - (12,088) - - 50,843 - - 38,900 - 38,900 - 38,900
Transfers between equity items - - 375,255 487 - - (764,567) 388,825 - - - - -
Equity-instrument-based payments (Note 29) - - - - (1,778) - - - (1,778) - (1,778) - (1,778)
Other increases/(decreases) in equity - - (215) - - - - - (215) - (215) 990 775
Balance at 31/12/08 543,036 - 4,052,869 2,296 - (36,074) 779,844 (272,205) 5,069,766 41,541 5,111,307 42,883 5,154,190

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto Group
Consolidated statements of changes in equity (cont)
Consolidated statements of total changes in equity for the years ended 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
EQUITY ATTRIBUTABLE TO THE PARENT (*)
SHAREHOLDERS’ EQUITY
Reserves/
(Losses)
of Entities
Accounted for
Using the Other Less: Profit Less: Total
Share Accumulated Equity Equity Treasury Attributable Dividends and Shareholders’ Valuation Minority Total
Capital Premium Reserves Method Instruments Shares to the Parent Remuneration Equity Adjustments Total Interests Equity
Balance at 01/01/07 548,521 - 2,633,138 (1,055) - (4,554) 1,451,264 (312,449) 4,314,865 3,677 4,318,542 53,700 4,372,242
Adjustments due to changes in accounting policy - - - - - - - - - - - - -
Adjustments made to correct errors - - - - - - - - - - - - -
Adjusted beginning balance 548,521 - 2,633,138 (1,055) - (4,554) 1,451,264 (312,449) 4,314,865 3,677 4,318,542 53,700 4,372,242
Total recognised income/(expense) - - - - - - 764,567 - 764,567 (118,101) 646,466 (1,111) 645,355
Other changes in equity
Distribution of dividends - - - - - - - (249,959) (249,959) - (249,959) (5,156) (255,115)
Transactions involving own equity instruments (net) - - (996) - - (82,363) - - - - (83,359) - (83,359)
Transfers between equity items - - 1,135,951 2,864 - - (1,451,264) 312,449 - - - - -
Increases/(Decreases) due to business combinations - - - - - - - - - - - (644) (644)
Equity-instrument-based payments - - - - 1,778 - - - - - 1,778 - 1,778
Other increases/(decreases) in equity - - - - - - - - - - - (61) (61)
Balance at 31/12/07 548,521 - 3,768,093 1,809 1,778 (86,917) 764,567 (249,959) 4,747,892 (114,424) 4,633,468 46,728 4,680,196
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated statement of total changes in equity for 2008.
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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated cash flow statements
For the years ended 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
2008 2007(*)
1. CASH FLOWS FROM OPERATING ACTIVITIES 982,724 (2,197,170)
Profit for the year attributable to the Parent 775,009 763,456
Adjustments made to obtain the cash flows from operating activities:
Depreciation and amortisation 102,317 99,542
Other adjustments 2,027,167 1,240,540
Net increase/decrease in operating assets:
Financial assets held for trading- 478,008 (635,874)
Debt instruments (379,388) (553,235)
Other equity instrumentsl (1,163,073) 60,376
Trading derivatives 2,020,469 (143,015)
Other financial assets at fair value through profit or loss- 698,400 556,984
Loans and advances to credit institutions 888,548 703,480
Loans and advances to customers (504) 504
Debt instruments (31,587) 18,384
Other equity instruments (158,057) (165,384)
Available-for-sale financial assets- 828,806 (275,234)
Debt instruments 1,071,380 (259,691)
Other equity instruments (242,574) (15,543)
Loans and receivables- 3,096,279 9,244,260
Loans and advances to credit institutions (119,731) (4,604,331)
Loans and advances to customers 3,005,931 13,322,431
Debt instruments 210,079 526,160
Other operating assets 2,148,724 258,318
Net increase/decrease in operating liabilities:
Financial liabilities held for trading- 1,321,820 (59,579)
Trading derivatives 1,381,554 (59,398)
Short positions (59,734) (181)
Financial liabilities at amortised cost- 4,706,884 4,805,089
Deposits from credit institutions 112,834 (7,750,674)
Deposits from central banks (3,317) 805,312
Customer deposits 4,842,180 8,312,644
Marketable debt securities (421,979) 4,360,167
Other financial liabilities 177,166 (922,360)
Other operating liabilities (564,422) 977,960
Collections/Payments of income tax (135,834) (875,724)
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated cash flow statement for 2008.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto group
Consolidated cash flow statements
For the years ended 31 december 2008 and 2007 (notes 1 to 4)
Thousands of Euros
2008 2007(*)
2. CASH FLOWS FROM INVESTING ACTIVITIES (154,753) 3,514,682
Payments
Tangible assets (276,709) (487,689)
Intangible assets (48,708) -
Investments - (18)
Collections
Tangible assets 168,562 188,382
Intangible assets 2,102 -
Investments - 1,705
Held-to-maturity investments - 3,812,302
3. CASH FLOWS FROM FINANCING ACTIVITIES (371,944) (200,955)
Payments
Dividends (403,656) (249,959)
Subordinated liabilities (500,000) (105,817)
Redemption of own equity instruments (5,485) -
Acquisition of own equity instruments - (82,363)
Other payments related to financing activities (75,648) (13,421)
Collections
Subordinated liabilities 611,855 -
Other collections related to financing activities 990 250,605
4. EFFECTS OF CHANGES IN EXCHANGE RATES 10,276 (26,117)
5. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (1+2+3+4) 466,303 1,090,440
6. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,923,740 833,300
7. CASH AND CASH EQUIVALENTS AT END OF YEAR 2,390,043 1,923,740
MEMORANDUM ITEMS
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR
Cash 263,073 258,489
Cash equivalents at central banks 1,425,080 1,154,382
Other financial assets 701,890 510,869
Less: Bank overdrafts refundable on demand - -
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 2,390,043 1,923,740
(*) Presented for comparison purposes only.
The accompanying Notes 1 to 49 and Appendixes I to V are an integral part of the consolidated cash flow statement for 2008.
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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 49).
In the event of a discrepancy, the Spanish-language version prevails.
Banesto Group
Notes to the Consolidated Financial Statements for the year ended 31
December 2008

1. Introduction, basis of presentation of
the consolidated financial statements,
estimates made, basis of consolidation
and other information
a) Introduction
Banco Español de Crédito, S.A. (“the Bank” or “Banesto”) is a
private-law entity subject to the rules and regulations applicable to
banks operating in Spain. The bylaws and other public information
on the Bank can be consulted on the website of the Group
(www.banesto.es) and at its registered office at Gran Vía de
Hortaleza, 3, Madrid.
In addition to the operations carried on directly by it, the Bank is
the head of a group of subsidiaries that engage in various business
activities and which compose, together with it, the Banco Español
de Crédito Group (“the Group” or “the Banesto Group”).
Therefore, the Bank is obliged to prepare, in addition to its own
individual financial statements, the Group's consolidated financial
statements.
b) Basis of presentation of the consolidated financial
statements
The consolidated financial statements for 2007 were prepared by
the Bank's directors at the Board meeting on 22 January 2008 in
accordance with International Financial Reporting Standards as
adopted by the European Union and with Bank of Spain Circular
4/2004, of 22 December, using the basis of consolidation,
accounting policies and measurement bases set forth in Note 2 to
the 2007 consolidated financial statements, which were approved
by the shareholders at the Annual General Meeting held on 26
February 2008.
The Group’s consolidated financial statements for 2008 were
prepared by the Bank's directors at the Board meeting on 20
January 2009 in accordance with International Financial Reporting
Standards as adopted by the European Union and with Bank of
Spain Circular 4/2004, of 22 December, as amended by Bank of
Spain Circular 6/2008, of 26 November, and, accordingly, they
present fairly the Group's equity and financial position at 31
December 2008, and the consolidated results of its operations,
the changes in consolidated equity and the consolidated cash
flows in the year then ended. These consolidated financial
statements for 2008 have not yet been approved by the
shareholders at the Annual General Meeting. However, the Bank's
Board of Directors considers that the aforementioned financial
statements will be approved without any changes.
The consolidated balance sheet, consolidated income statement,
consolidated statement of recognised income and expense,
consolidated cash flow statement and consolidated statement of
total changes in equity for 2008 and 2007 presented in these
consolidated financial statements were prepared using the formats
contained in the aforementioned Bank of Spain Circular 6/2008,
of 26 November. These formats differ, only as regards the basis of
presentation of certain items and margins, from those presented in
the statutory consolidated financial statements for the year ended
31 December 2007, and, accordingly, the comparative figures were
reclassified for presentation purposes
The main presentation differences between the two financial
statement formats are as follows:
1. Consolidated balance sheet: : the consolidated balance sheet
format presented in these consolidated financial statements
differs from the consolidated balance sheet format presented in
the statutory consolidated financial statements for the year
ended 31 December 2007, in the following respects
a) “Other Assets”, on the asset side, groups together the line
items “Prepayments and Accrued Income” and “Other
Assets” which were included on the asset side of the
consolidated balance sheet in the Group’s statutory
consolidated financial statements for 2007, except for
inventories, which are presented under “Other Assets –
Inventories”.
b) “Loans and Receivables” on the asset side no longer includes
“Other Financial Assets”. The items which composed this
heading are now included in “Loans and Advances to Credit
Institutions” and “Loans and Advances to Customers” under
“Loans and Receivables”, on the basis of the institutional
sector to which they relate.
c) The breakdown by nature of the assets included under “Non-
Current Assets Held for Sale” is eliminated.
d) “Other Liabilities” on the liability side groups together the
line items “Accrued Expenses and Deferred Income” and
“Other Liabilities” which were included on the liability side of
the consolidated balance sheet in the statutory consolidated
financial statements for 2007..
e) Finally, it should be noted that the name of certain equity
items has been changed, with no substantial changes in the
content (e.g. “Profit Attributed to the Group” has changed to
“Profit for the Year Attributable to the Parent”).
2. Consolidated income statement: the consolidated income
statement format presented in these consolidated financial
statements differs from the consolidated income statement
format presented in the statutory consolidated financial
statements for the year ended 31 December 2007, in the
following respects::
a) A new margin is introduced, the so-called margen de interés
(“Net Interest Income”), which is calculated as the difference
between “Interest and Similar Income” and “Interest Expense
and Similar Charges”. The former margen de intermediación
(which was also translated as “Net Interest Income” and
included “Income from Equity Instruments”) is eliminated.
b) Income and expenses from the Group’s insurance activity are
not longer grouped together as a separate item and are
recognised, according to their nature, under the various
consolidated income statement items, with the consequent
effect on each margin and item in this statement.
Specifically, insurance and reinsurance premium income and
reinsurance income are included in “Income from Insurance
and Reinsurance Contracts Issued” under “Other Operating
Income” in the consolidated income statement; and the
amount of claims paid and other insurance-related expenses,
the reinsurance premiums paid to third parties and the net
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provisions for insurance contract liabilities are included in
“Expenses of Insurance and Reinsurance Contracts” under
“Other Operating Expenses” in the consolidated income
statement presented in these consolidated financial
statements.
c) The gains or losses on financial assets and liabilities
measured at cost, at amortised cost or available for sale,
other than changes in fair value hedges on these items, are
now recognised in “Financial Instruments Not Measured at
Fair Value through Profit or Loss” under “Gains/Losses on
Financial Assets and Liabilities (Net)” in the consolidated
income statement.
d) A new margin entitled margen bruto (“Gross Income”) is
presented, which is similar to the former margen ordinario
(which was also translated as Gross Income), except,
basically, for the fact that the new margin includes other
operating income and other operating expenses, which were
not previously included in gross income, and for the effect of
including interest and financial charges from non-financial
activities according to their nature. The former margen
ordinario ("Gross Income”) is eliminated.
e) “Sales and Income from the Provision of Non-Financial
Services” and “Cost of Sales” are eliminated from the
consolidated income statements and are recognised,
basically, under “Other Operating Income – Sales and
Income from the Provision of Non-Financial Services” and
“Other Operating Expenses – Changes in Inventories”,
respectively, in the consolidated income statement.
f) “Personnel Expenses” and “Other General Administrative
Expenses” are grouped together under ”Administrative
Expenses”.
g) The balance of “Impairment Losses (Net)” is split into two
line items: “Impairment Losses on Financial Assets (Net)”,
which includes net impairment losses on financial assets
other than equity instruments classified as “Investments”;
and “Impairment Losses on Other Assets (Net)”, which
includes the net impairment losses on equity instruments
classified as “Investments” and on other non-financial assets.
h) “Finance Income from Non-Financial Activities” and “Finance
Expenses of Non-Financial Activities” are eliminated and
included basically in “Interest and Similar Income” and
“Interest Expense and Similar Charges”, respectively, in the
consolidated income statement.
i) “Net Operating Income“ is eliminated and “Profit from
Operations” is created. The difference between the two
margins is basically that the latter includes the finance income
and costs from the Group’s non-financial activities, the net
charge to impairment losses on financial instruments and the
net charge to provisions.
j) The line items “Other Gains" and "Other Losses” are
eliminated.
Instead, three new line items are created: “Gains/Losses on
Disposal of Assets not Classified as Non-Current Assets Held
for Sale”, “Negative Goodwill in Business Combinations” and
“Gains/Losses on Non-Current Assets Held for Sale not
Classified as Discontinued Operations”, which include mainly
the balances of the two eliminated line items mentioned
above.
“Gains/Losses on Non-Current Assets Held for Sale not
Classified as Discontinued Operations” includes, inter alia,
the net impairment losses on these assets, when current
regulations do not stipulate that they must be recognised in
a different line item, and the gains or losses on the sale of
equity instruments classified as available for sale which are
strategic investments, even if they were not classified as noncurrent
assets held for sale in a former balance sheet.
The remaining gains or losses which were recognised in the
two eliminated line items and are not now included in the
aforementioned three new line items have been classified
according to their nature in the consolidated income
statement.
3. Consolidated statement of recognised income and expense
and consolidated statement of total changes in equity: the
consolidated statement of changes in equity and the detail of
the changes in consolidated equity disclosed in the notes to the
Group’s consolidated financial statements for the year ended 31
December 2007 are replaced by the consolidated statement of
recognised income and expense and the consolidated statement
of total changes in equity, respectively, which are included in the
consolidated financial statements for 2008 and present,
basically, the following significant differences:
a) The consolidated statement of total changes in equity and
the consolidated statement of recognised income and
expense presented in these consolidated financial statements
for 2008 should be understood as the two parts of the
former consolidated statement of changes in equity and
replace the aforementioned statements presented in the
statutory financial statements for 2007. The statement of
recognised income and expense does not include “Other
Financial Liabilities at Fair Value” and the related balance is
recognised under “Other Recognised Income and Expense”.
b) The statement of recognised income and expense includes
“Actuarial Gains/(losses) on Pension Plans”, for the
recognition of changes in equity resulting from the recording
of such actuarial gains and losses, if appropriate, against
reserves; “Entities Accounted for Using the Equity Method”,
which includes the changes in consolidated equity valuation
adjustments arising from the application of the equity
method to associates and jointly controlled entities; and
“Other Recognised Income and Expense”, for the recognition
of the items recorded as consolidated equity valuation
adjustments and not included in any other specific line item
in this statement.
c) The statement of recognised income and expense includes the
line item "Income Tax" for the recognition of the tax effect of
the items recognised directly in equity, except for "Entities
Accounted for Using the Equity Method", which is presented
net of the related tax effect. Accordingly, each item recognised
in equity valuation adjustments is recognised gross.
All the items recognised as valuation adjustments in the
format of the consolidated statement of changes in equity
included in the consolidated financial statements for 2007
were presented net of the related tax effect.

d) The consolidated statement of recognised income and
expense no longer includes the effect on equity of
changes in accounting policies or of errors allocable to
prior years.
4. Consolidated cash flow statement: the format of consolidated
cash flow statement included in these consolidated financial
statements contains, at the end of the statement, a detail of the
items composing cash and cash equivalents, which was not
included in the consolidated cash flow statement presented in
the Group’s statutory consolidated financial statements for the
year ended 31 December 2007. Also, certain disclosures
relating to certain operating assets and liabilities, adjustments
to profit or loss and cash flows from financing activities are
eliminated; the wording and disclosures relating to certain items
which compose the cash flows from investing activities are
changed.
All the figures relating to 2007 included in these notes to the
consolidated financial statements are presented for comparison
purposes only.
The following standards and interpretations adopted by the
European Union and by the Group came into force in 2008,
without having a material effect on the consolidated financial
statements
- Amendments to IAS 39: the amendments permit
reclassifications from financial assets held for trading to
available-for-sale financial assets, under certain conditions.
This amendment in turn affects IFRS 7, which requires
additional disclosures on these reclassifications.
- Interpretation IFRIC 11 of IFRS 2 “Group and Treasury Share
Transactions”: this intepretation clarifies whether certain
transactions must be accounted for as equity-settled or as
cash-settled, as set forth in IFRS 2. It also stipulates how to
recognise share-based payment arrangements involving two or
more entities in the same group.
At the date on which these consolidated financial statements
were authorised for issue certain new standards had been
adopted by the Europan Union that will come into force for the
Group in 2009. The directors consider that the entry into force
of these standards will not have a significant impact on the
Group’s consolidated financial position:
- IFRS 8 Operating Segments (January 2009):): this standard
replaces IAS 14. The main new development introduced by
this new standard is that it requires an entity to adopt a
management approach when reporting on the financial
performance of its business segments. The information to be
reported will generally be that used internally by management
to assess the profit or loss of the segments and to allocate
resources among them.
- Amendment to IAS 23 Borrowing Costs (January 2009): the main
change in the new revised version of IAS 23 is the elimination
of the option of the immediate recognition as an expense of
borrowing costs relating to assets that take a substantial
period of time to get ready for use or sale. This new standard
may be applied prospectively.
- Amendment to IFRS 2 Share-based Payment (January 2009): the
objective of the amendment to IFRS 2 is basically to clarify
the concepts of vesting conditions and cancellations in sharebased
payments.
- Interpretation IFRIC 13 Customer Loyalty Programmes (January
2009): this interpretation indicates how to recognise certain
loyalty awards granted to customers in the form of points that
provide discounts on future purchases of other goods or
services.
- Interpretation IFRIC 14 on the scope of application of IAS 19
(January 2009): provides general guidance on how to assess
the limit in IAS 19 Employee Benefits on the amount of the
surplus that can be recognised as an asset. It also explains
how pension assets or liabilities can be affected when there is
a statutory or contractual minimum funding requirement and
establishes the need to recognise an additional liability if the
entity has a contractual obligation to make additional
contributions to the plan and its capacity to recover them is
restricted. The interpretation will standardise the practice and
ensure that the entities recognise an asset in relation to a
surplus on a consistent basis.
- Amendments to IAS 1 Presentation of Financial Statements
(January 2009): the purpose of the new version of this
standard is to improve users' ability to analyse and compare
the information provided in financial statements. These
improvements will enable users of consolidated financial
statements to analyse changes in equity arising from
transactions with owners acting in their capacity as owners
(e.g. dividends and share buy-backs) separately from “nonowner”
changes (e.g. transactions with third parties or income
and expenses recognised directly in equity). The revised
standard provides the option of presenting income and
expense items and components of other comprehensive
income either in a single statement of comprehensive income
with subtotals or in two separate statements (a separate
income statement followed by a statement of recognised
income and expense).
IAS 1 also introduces new reporting requirements when the
entity applies an accounting change retrospectively, makes a
restatement or reclassifies items in previously issued financial
statements, as well as changes in the names of certain financial
statements with a view to reflecting their function more clearly
(e.g. the balance sheet will be called the statement of financial
position). The impacts of this standard will basically be at
presentation and disclosure level.
Set forth below are the Standards and Interpretations not yet
adopted by the European Union, together with the expected date
of adoption for the Group based on the application date required
by the Standard. The impact of the application of these Standards
has not yet been assessed:
- Interpretation IFRIC 12 Service Concession Arrangements (January
2009): indicates how to recognise the obligations and rights
of a private-sector entity that obtains a contract as a public
services provider.
- Amendment to IAS 27 Consolidated and Separate Financial
Statements and to IFRS 3 Business Combinations (July 2009):
these standards were issued as a result of the project for the
convergence of international standards relating to business
combinations with US accounting standards. The revised IFRS
3 and the amendments to IAS 27 give rise to significant
changes in several matters relating to accounting for business
combinations which, in general, place greater emphasis on the
use of fair value. Since the changes are significant, set forth
below are certain of these changes, merely for illustration
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98
purposes: acquisition costs must be expensed, as opposed to
the current accounting treatment of recognising them as an
increase in the cost of the business combination; in step
acquisitions the acquirer must remeasure its investment at fair
value on the date that control is obtained; or there is an option
to measure at fair value the minority interests of the acquiree,
as opposed to the single current treatment of measuring them
as the proportionate share of the fair value of the net assets
acquired.
- Amendments to IAS 32 and IAS 1 (January 2009): the changes
approved relate to the classification of certain financial
instruments issued which, although because of their
characteristics it might be concluded that they evidence a
residual interest in the entity, in accordance with current IAS 32
they should be classified as financial liabilities since their
features include that of being redeemable. The amendments will
permit the classification of certain of these financial instruments
as equity, provided they meet certain criteria, including that of
being the most subordinated class, and provided they evidence
a residual interest in the net assets of the entity.
- Amendments to IFRS 1 and IAS 27 (January 2009): these
amendments propose that, when adopting IFRS for the first
time in the separate financial statements of an entity, the
entity may opt to use a deemed cost to account for its
investments in subsidiaries, joint ventures and associates,
which can be determined as either the previous GAAP carrying
amount of the investment at the date of transition or the fair
value of the investment in the subsidiary, determined in
accordance with IFRS, at the date of transition.
- Amendment to IAS 39 (June 2009): the aim of this amendment
to IAS 39 is to clarify two specific hedge accounting issues:
(a) when inflation can be designated as a hedged item and (b)
in which cases purchased options can be designated as a
hedging instrument. Under the amendment, inflation can only
be designated as a hedged item if the inflation portion is a
contractually specified portion of the cash flows to be hedged.
With respect to options, only the part related to the intrinsic
value, and not that related to the time value, can be
designated as a hedging instrument.
- IFRIC 15 Agreements for the Construction of Real Estate (January
2009): this interpretation indicates when revenue from the
construction of real estate should be recognised, on the basis
of whether the agreement involves a construction contract, a
sale of goods or the rendering of services.
- IFRIC 16 Hedges of a Net Investment in a Foreign Operation
(March 2009): this interpretation clarifies three main issues.
Firstly, the risk between the functional currency of the foreign
operation and the presentation currency of the parent does
not qualify for hedge accounting and only the risk arising from
the functional currencies of the two entities may be
designated as a hedged risk. It also clarifies that the hedging
instrument in a hedge of a net investment in a foreign
operation may be held by any entity within the group, not
necessarily by the parent holding the net investment. And
lastly, the interpretation addresses how an entity should
determine the amounts to be reclassified from equity to profit
or loss on disposal of the foreign operation.
- IFRIC 17 Distributions of Non-Cash Assets to Owners (June
2009): this interpretation addresses the accounting
treatment of the distribution of non-cash assets to owners
(“dividends”), although its scope does not include
distributions of assets within a group or between jointly
controlled entities. The interpretation requires an entity to
measure the dividend payable at the fair value of the assets to
be distributed and to recognise any difference with respect to
the carrying amount of the asset in profit or loss.
The principal accounting policies and measurement bases applied
in preparing the Group's consolidated financial statements for
2008 are described in Note 2. All mandatory accounting policies
and measurement bases with a material effect on the consolidated
financial statements for 2008 were applied in their preparation.
c) Estimates made
The consolidated results and the determination of consolidated
equity are sensitive to the accounting policies, measurement bases
and estimates used by the directors of the Bank in preparing the
consolidated financial statements. The main accounting policies
and measurement bases are set forth in Note 2.
In the Group's consolidated financial statements for 2008
estimates were occasionally made by the senior executives of the
Group and of the consolidated entities, later ratified by the
directors, in order to quantify certain of the assets, liabilities,
income, expenses and commitments reported herein. These
estimates relate basically to the following:
- The impairment losses on certain assets (see Notes 6, 7, 8, 9,
10 and 12);
- The assumptions used in the actuarial calculation of the postemployment
benefit liabilities and commitments (see Notes
2-v and 2-w);
- The useful life of the tangible and intangible assets (see Notes
14 and 15); and
Although these estimates were made on the basis of the best
information available at 2008 year-end, future events might make
it necessary to change these estimates in coming years. Changes in
accounting estimates would be applied prospectively in accordance
with the requirements of IAS 8, recognising the effects of any
change in estimates in the related consolidated income statement.
d) Basis of consolidation
i. Subsidiaries
“Subsidiaries” are defined as entities over which the Bank has the
capacity to exercise management control; this capacity is, in
general but not exclusively, presumed to exist when the Parent
owns directly or indirectly half or more of the voting power of the
investee or, even if this percentage is lower or zero, when, for
example, there are agreements with other shareholders of the
investee that give the Bank control. Control is the power to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities.

The financial statements of the subsidiaries are fully consolidated
with those of the Bank. Accordingly, all material balances and
transactions between consolidated entities and between
consolidated entities and the Bank are eliminated on consolidation.
On acquisition of a subsidiary, its assets, liabilities and contingent
liabilities are recognised at fair value at the date of acquisition. Any
positive differences between the acquisition cost and the fair
values of the identifiable net assets acquired are recognised as
goodwill (see Note 15). Negative differences are charged to
income on the date of acquisition.
Additionally, the share of third parties of the Group's equity is
presented under “Minority Interests” in the consolidated balance
sheet (see Note 24) and their share of the profit for the year is
presented under “Profit Attributable to Minority Interests” in the
consolidated income statement.
The results of subsidiaries acquired during the year are included in
the consolidated income statement from the date of acquisition to
year-end. Similarly, the results of subsidiaries disposed of during
the year are included in the consolidated income statement from
the beginning of the year to the date of disposal.
ii. Interests in joint ventures (jointly controlled entities)
“Joint ventures” are deemed to be ventures that are not
subsidiaries but which are jointly controlled by two or more
unrelated entities. This is evidenced by contractual arrangements
whereby two or more entities (“venturers”) undertake a business
activity which is subject to joint control so as to share the power
to govern the financial and operating policies of an entity, or
another business activity, in order to benefit from its operations.
Therefore, any strategic financial or operating decision affecting
the joint venture requires the unanimous consent of the venturers.
The financial statements of investees classified as joint ventures are
proportionately consolidated with those of the Bank and,
therefore, the aggregation of balances and subsequent
eliminations are made only in proportion to the Group's ownership
interest in the capital of these entities.
iii. Associates
“Associates” are entities over which the Bank is in a position to
exercise significant influence, but not control or joint control,
usually because it holds 20% or more of the voting power of the
investee.
In the consolidated financial statements, investments in ssociates
are accounted for using the equity method, i.e. at the Group's
share of net assets of the investee, after taking into account the
dividends received therefrom and other equity eliminations. In the
case of transactions with an associate, the related profits or losses
are eliminated to the extent of the Group's investment in the
associate.
iv. Acquisitions and disposals
Appendixes I, II and III contain salient information on the
subsidiaries, jointly controlled entities and associates, respectively.
Note 3-b provides information on the most significant acquisitions
and disposals in 2008 and 2007.
e) Challenges of corporate resolutions
In 1995 and 1996, the former directors of the Bank who had been
replaced by decision of the Bank of Spain's Executive Council on
28 December 1993 filed claims challenging certain corporate
resolutions adopted by the shareholders at the Annual General
Meetings in 1994 and 1995, which approved, inter alia, the Bank's
financial restructuring plan and the 1994 financial statements of
the Bank and the Group. In 2000 Madrid Provincial Appellate
Court decisions dismissed all the appeals filed by the plaintiffs in
connection with the claim filed challenging the legality of the
resolutions adopted by the Annual General Meeting approving the
financial restructuring plan; the plaintiffs subsequently filed
cassation appeals against these decisions. The claim filed against
the approval of the 1994 financial statements was also dismissed in
2000 by the Court of First Instance and this decision was
subsequently appealed against by the plaintiffs. In 2003 the
Provincial Appellate Court dismissed in full the appeal and the
notice given by the appellants of their intention to file a cassation
appeal. The appellants subsequently filed an appeal for
reconsideration, which was again rejected by the Provincial
Appellate Court, and, consequently, they filed an appeal against
the denial of leave to appeal before the Supreme Court. The
Bank's directors and its legal advisers consider that these claims
will not have any effect.
f) Capital requirements
Bank of Spain Circular 3/2008, of 22 May, on the calculation and
control of minimum capital requirements, regulates the minimum
capital requirements for Spanish credit institutions –both as
individual entities and as consolidated groups– and how to
calculate them, as well as the various internal capital adequacy
assessment processes they should have in place and the
information they should disclose to the market.
This Circular is the final implementation, for credit institutions, of
the legislation on capital and consolidated supervision of financial
institutions, which was contained in Law 36/2007, of 16 November,
amending Law 13/1985, of 25 May, on the investment ratios,
capital and reporting requirements of financial intermediaries, and
other financial regulations, which also includes Royal Decree
216/2008, of 15 February, on the capital of financial institutions.
Bank of Spain Circular 3/2008 also culminates the process of
adaptation of Spanish legislation to Directive 2006/48/EC of the
European Parliament and of the Council, of 14 June 2006, and
Directive 2006/49/EC of the European Parliament and of the
Council, of 14 June 2006. The minimum capital requirements for
credit institutions and their consolidable groups were thoroughly
revised in both Directives, based on the new Capital Accord
adopted by the Basel Committee on Banking Supervision (“Basel
II”).
Bank of Spain Circular 3/2008, of 22 May, establishes the
elements that should be classified as capital for the purpose of
compliance with the minimum capital requirements set forth
therein. Under this Circular, capital is classified into core capital
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and Tier 2 capital and differs from the capital calculated in
accordance with EU-IFRSs, since the Circular considers certain
items as capital and establishes certain mandatory deductions from
capital which are not provided for in the aforementioned EU-IFRSs.
Additionally, the consolidation and measurement bases to be
applied to investees for the purpose of calculating the Group’s
minimum capital requirements pursuant to current standards differ
from those applied in the preparation of these consolidated
financial statements, which also gives rise to differences in the
calculation of capital under Bank of Spain standards and EU-IFRSs.
The minimum capital requirements established by Bank of Spain
Circular 3/2008 are calculated on the basis of the Group’s
exposure to credit risk and dilution risk (on the basis of the assets,
obligations and other memorandum items that present these risks,
depending on their amounts, characteristics, counterparties,
guarantees, etc.), to counterparty risk and position and settlement
risk in the trading book, to foreign exchange risk (on the basis of
the overall net foreign currency position) and to operational risk.
Additionally, the Group is subject to compliance with the risk
concentration limits established in the aforementioned Circular
and with the requirements concerning internal corporate
governance, internal capital adequacy assessment, measurement of
interest rate risk and information to be disclosed to the market
also set forth therein. With a view to guaranteeing compliance with
the aforementioned objectives, the Group performs integrated
management of these risks, in accordance with its internal policies
(see Note 48).
At 31 December 2008 and 2007, and throughout these years, the
eligible capital of the Group and of the Group entities subject to
this requirement at individual level exceeded the minimum required
under the regulations then in force.
The calculation of the minimum regulatory capital requirements
under the new standards, the so-called Pillar 1, is supplemented
with an internal capital adequacy assessment and supervisory
review process, also called Pillar 2. The Group’s internal capital
adequacy assessment process is based on the internal model for
the quantification of the economic capital required on the basis of
the Group’s overall risk profile to maintain a target rating of AA.
Finally, Basel II standards establish, through Pillar 3, strict
transparency requirements regarding the information on risks to be
disclosed to the market.
g) Deposit Guarantee Fund
The Bank participates in the Deposit Guarantee Fund. The
contributions made to this Fund amounted to EUR 17,296
thousand in 2008 and this expense is recorded under “Other
Operating Expenses” in the consolidated income statement for
2008 (see Note 40).
h) Environmental impact
In view of the business activities carried on by the Group entities,
the Group does not have any environmental liability, expenses,
assets, provisions or contingencies that might be material with
respect to its consolidated equity, financial position or results.
Therefore, no specific disclosures relating to environmental issues
are included in these notes to the consolidated financial
statements.
i) Customer Care Service Annual Report
As required by Article 17 of Ministry of Economy Order
ECO/734/2004, of 11 March, on Customer Care Departments
and Services and the Customer Ombudsmen of Financial
Institutions, the Annual Report presented by the Head of the
Service to the Board meeting held on 20 January 2009 is
summarised in the Directors' Report.
j) Events after the balance sheet date
The following significant events took place from 1 January 2009 to
the date on which these consolidated financial statements were
authorised for issue.
Acquisition of Metrovacesa, S.A. shares
As a result of the partial debt restructuring at certain Cresa-
Sacresa Group companies, on 3 December 2008, the Sanahuja
Group reached an agreement with the creditors, including the
Bank, whereby it will deliver the shares owned by it securing the
aforemented debt to these creditors. Under this agreement, the
Bank will receive 6,356,191 Metrovacesa, S.A. shares, representing
9.56% of its share capital, together with the cash amount which,
added to the debt repayment amounts, determines the per
exchange value of the dation in payment at EUR 57.
Additionally, the Bank will acquire 1,250,000 Matrovacesa, S.A.
shares, representing 1.78% of its share capital, at EUR 57 per
share, and will grant to the shareholders of the Cresa-Sacresa
Group an option to purchase these shares over four years. The
option is exercisable at any time within that period at an exercise
price of EUR 57 per share.
This agreement is subject to certain conditions precedent. The
Sahanuja Group and the creditors have agreed to extend the
period for the performance of these transactions as soon as these
conditions precendent are met, which will foreseeably be the case
in January 2009.
Plan for the merger of Banesto Factoring, E.F.C., S.A.U., Banesto,
S.A.U. and Gedinver e Inmuebles, S.A.U. into the Bank
In accordance with Articles 234 and 250 of the Consolidated
Spanish Companies Law, the Boards of Directors of Banco Español
de Crédito, S.A., Banesto Factoring, E.F.C., S.A.U., Gedinver e
Inmuebles, S.A.U. and Banesto, S.A.U., at their meetings on 20
January 2009, prepared a merger plan for the merger by
absorption of the last three entities (the absorbed companies) by
the Bank (the absorbing company), with the dissolution without
liquidation of the absorbed companies and the resulting transfer
en bloc, by universal succession, of their assets and liabilities to
Banco Español de Crédito, S.A., which would acquire, by universal
succession, the rights and obligations of the absorbed companies.
The merger plan will be submitted for approval by the shareholders
of the Bank at the Annual General Meeting and by the respective
sole shareholders of the absorbed companies. Since the Bank is
the sole owner of all the share capital of the absorbed companies,
no capital increase or exchange process is required.
The main features of the merger plan are as follows:
1. The justification for the merger is that the Bank, as the sole
shareholder, understands that the reasons for which Gedinver
e Inmuebles, S.A.U. and Banesto, S.A.U. were created no

longer exist and that it is more sensible to carry out the Group’s
factoring business at the Bank itself, as a way of joining together
the operations of the two groups of professionals with expertise
in this industry. Additionally, the merger is also intended to give
continuity to the Group’s corporate structure rationalisation
policy, simplify its management and reduce administration and
management costs
2. The transactions of the extinct companies will be deemed, for
accounting purposes, to have been performed for the account
of Banco Español de Crédito, S.A. from 1 January 2009.
3. The required authorisation will be requested from the
Thousandss
Banesto Factoring, E.F.C., S.A.U. of Euros
ASSETS-
Cash and balances with central banks 2
Loans and receivables 2,281,458
Hedging derivatives 170
Tangible assets 27
Tax assets 1,315
Other assets 974
Total assets 2,283,946
LIABILITIES AND EQUITY-
Financial liabilities at amortised cost 2,124,162
Hedging derivatives 1,163
Tax liabilities 2,972
Other liabilities 30,415
Share capital 19,500
Share premium 97,086
Reserves (947)
Profit for the year 9,595
Total liabilities and equity 2,283,946
2. Accounting policies and measurement
bases applied
The accounting policies and rules and measurement bases applied
in preparing the Group's consolidated financial statements were as
follows::
a) Definitions and classification of financial instruments
i. Definitions
A “financial instrument” is any contract that gives rise to a
financial asset of one entity and to a financial liability or equity
instrument of another entity.
An “equity instrument” is any agreement that evidences a
residual interest in the assets of the issuing entity after
deducting all of its liabilities.
Ministry of Economy and, therefore, the merger plans relating
to the aforementioned entities will be adopted subject to the
sole condition precedent, applicable to the merger with
Banesto Fáctoring, E.F.C., S.A.U., that the required
authorisation be granted. Also, the intended merger
transaction must be notified to the Ministry of Finance to
qualify for the special regime provided for mergers under Law
43/1995, of 27 December.
The detail, by main items, of the condensed balance sheets at 31
December 2008 of the absorbed companies is as follows:
Thousands of Euros
Gedinver e
Banesto Inmuebles,
S.A.U. S.A.U.
ASSETS-
Property, plant and equipment - 43
Trade and other receivables - 433
Current financial assets 1 2
Current prepayments and accrued income - 3
Cash and cash equivalents 48 6,152
Total assets 49 6,633
EQUITY AND LIABILITIES-
Capital 60 3,348
Reserves (10) 2,805
Profit (loss) for the year (2) 135
Long-term provisions - 161
Non-current payables to Group companies and
associates - 86
Trade and other payables 1 27
Current accruals and deferred income - 71
Total equity and liabilities 49 6,633
A “financial derivative” is a financial instrument whose value
changes in response to the change in a specified variable,
sometimes called the underlying (such as an interest rate,
financial instrument price, commodity price, foreign exchange
rate, credit rating or index thereof), whose initial investment is
very small compared with other financial instruments with a
similar response to changes in market factors, and which is
generally settled at a future date.
“Hybrid financial instruments” are contracts that simultaneously
include a non-derivative host contract together with a derivative,
known as an embedded derivative, that is not separately
transferable and has the effect that some of the cash flows of the
hybrid contract vary in a way similar to a stand-alone derivative..
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“Compound financial instruments” are contracts that
simultaneously create for their issuer a financial liability and an
own equity instrument (such as convertible bonds, which entitle
their holders to convert them into equity instruments of the
issuer).
The following transactions are not treated for accounting
purposes as financial instruments:
- Investments in associates (see Note 12).
- Rights and obligations under employee benefit plans (see
Notes 2-v and 2-w).
- Rights and obligations under insurance contracts (see Note
13).
- Contracts and obligations relating to transactions involving
payments based on own equity instruments (see Note 41).
ii. Classification of financial assets for measurement purposes
Financial assets are generally included for measurement
purposes in one of the following categories:
- Financial assets held for trading (at fair value through profit
or loss): this category includes the financial assets acquired
for the purpose of generating a profit in the near term from
fluctuations in their prices and financial derivatives that do
not meet the definition of a financial guarantee contract and
have not been designated as hedging instruments.
- Other financial assets at fair value through profit or loss: this
category includes hybrid financial instruments containing
one or more embedded derivatives that do not significantly
modify the cash flows that otherwise would be generated by
the instrument and whose separation is prohibited. These
instruments must be assigned to this category from their
initial recognition, and can only be assigned thereto if this
reduces accounting mismatches or if they are part of a group
of financial instruments whose performance is evaluated in
accordance with a documented risk management or
investment strategy.
- Financial instruments classified in this category are
permanently subject to an integrated and consistent system
of measuring, managing and controlling risks and profit or
loss that enables all the financial instruments involved to be
monitored and identified and allows the effective reduction
of risk to be checked. Financial assets may only be included
in this category on the date they are acquired or originated.
- Held-to-maturity investments: this category includes debt
instruments traded in an active market, with fixed maturity
and fixed or determinable cash flows, for which the Group
has, from inception and at any subsequent date, both the
intention and proven financial ability to hold to maturity.
- Available-for-sale financial assets: this category includes debt
instruments not classified as “held-to-maturity investments”
or as “at fair value through profit or loss”, and equity
instruments issued by entities other than subsidiaries,
associates and jointly controlled entities, provided that such
instruments have not been classified as “financial assets at
fair value through profit or loss”.
- Loans and receivables: this category includes financing
granted to third parties, based on the nature thereof,
irrespective of the type of borrower and the form of
financing, including finance lease transactions in which the
consolidated entities act as the lessors.
The Group may not classify or continue to classify any financial
asset as “held-to-maturity” if during the current year or the two
preceding years it has sold or reclassified assets included in this
portfolio for a significant amount.
iii. Classification of financial assets for presentation purposes
Financial assets are presented in the consolidated balance sheet
classified into the various categories used for management and
measurement purposes (section ii. above), unless they have to
be presented as “non-current assets held for sale” or they relate
to “cash and balances with central banks”, “hedging derivatives”
or “investments”, which are reported separately.
Financial assets are classified by type of instrument into the
following items in the consolidated balance sheet:
- Cash and balances with central banks: cash balances and
deposits with the Bank of Spain and other central banks.
- Loans and advances to credit institutions: credit of any
nature in the name of credit institutions.
- Loans and advances to customers: all credit granted by the
Group, other than that represented by marketable securities,
money market operations through central counterparties,
finance lease receivables and loans and advances to credit
institutions.
- Debt instruments: bonds and other securities that create a
debt for their issuer, that generate an implicit or explicit
interest return at a contractually agreed rate, and that are in
the form of certificates or book entries, irrespective of the
issuer.
- Other equity instruments: financial instruments issued by
other entities, such as shares and non-voting equity units,
which have the nature of equity instruments for the issuer,
unless they are investments in subsidiaries, jointly controlled
entities or associates. Investment fund units are included in
this item.
- Trading derivatives: includes the fair value in favour of the
Group of derivatives which do not form part of hedge
accounting.
- Changes in the fair value of hedged items in portfolio hedges
of interest rate risk: includes the net balance of the positive
or negative changes in the fair value of the hedged amount
of financial assets included in portfolio hedges of interest
rate risk, attributable exclusively to such risk.
- Other financial assets: other debit balances in favour of the
Group in respect of transactions which do not have the
nature of credit (such as cheques drawn on credit
institutions, the amounts receivable from clearing houses
and settlement agencies for transactions on the stock
exchange and organised markets, bonds given in cash, capital
calls, and fees and commissions receivable for financial
guarantees).

- Hedging derivatives: includes the fair value in favour of the
Group of derivatives designated as hedging instruments in
hedge accounting.
iv. Classification of financial liabilities for measurement purposes
Financial liabilities are classified for measurement purposes into
one of the following categories::
- Financial liabilities held for trading (at fair value through
profit or loss): includes financial liabilities issued with the
intention to repurchase them in the near future, assumed for
the purpose of generating a profit in the near term from
fluctuations in their prices, financial derivatives that do not
meet the definition of a financial guarantee contract and
have not been designated as hedging instruments, and
financial liabilities arising from the outright sale of financial
assets purchased under resale agreements (reverse repos) or
borrowed (“short positions”).
- Other financial liabilities at fair value through profit or loss:
this category includes all hybrid financial instruments
containing one or more embedded derivatives that do not
significantly modify the cash flows that otherwise would be
generated by the instrument and whose separation
therefrom is prohibited. These financial instruments must be
assigned to this category from their initial recognition, and
can only be assigned thereto if this significantly reduces
accounting mismatches or if they are part of a group of
financial instruments whose performance is evaluated in
accordance with a documented risk management or
investment strategy.
- Financial liabilities at fair value through equity: financial
liabilities associated with available-for-sale financial assets
arising as a result of transfers of assets in which the
consolidated entities, acting as transferors, neither transfer
nor retain substantially all the risks and rewards of ownership
of the assets.
- Financial liabilities at amortised cost: financial liabilities not
included in any of the above categories which arise from the
ordinary borrowing activities carried on by financial
institutions, irrespective of their instrumentation and
maturity.
v. Classification of financial liabilities for presentation purposes
Financial liabilities are presented in the consolidated balance sheet
classified into the various categories used for management and
measurement purposes (see section iv. above), unless they have to
be presented as “liabilities associated with non-current assets held
for sale” or they relate to “hedging derivatives” and “equity having
the substance of a financial liability”, which are reported
separately.
Financial liabilities are classified by type of instrument into the
following items:
- Deposits from central banks and from credit institutions:
deposits of any nature, including credit and money market
operations received from the Bank of Spain or other central
banks, and credit received and money market operations in
the name of credit institutions.
- Customer deposits: includes all repayable balances received
in cash by the Group, other than those represented by
marketable securities, money market operations through
central counterparties and subordinated liabilities.
- Marketable debt securities: includes the amount of bonds
and other debt represented by marketable securities, other
than those that have the substance of subordinated
liabilities. This item includes the component considered to
be a financial liability of issued securities that are compound
financial instruments.
- Trading derivatives: includes the fair value of the Group's
liability in respect of derivatives which do not form part of
hedge accounting.
- Short positions: includes the amount of financial liabilities
arising from the outright sale of financial assets purchased
under reverse repurchase agreements or borrowed.
- Subordinated liabilities: amount of financing received which,
for the purposes of payment priority, ranks behind ordinary
debt.
- Other financial liabilities: includes the amount of payment
obligations having the substance of financial liabilities not
included under any other item.
- Changes in the fair value of hedged items in portfolio hedges
of interest rate risk: includes the net balance of the positive
or negative changes in the fair value of the hedged amount
of financial liabilities included in portfolio hedges of interest
rate risk, attributable exclusively to such risk.
- Hedging derivatives: includes the fair value of the Group's
liability in respect of derivatives designated as hedging
instruments in hedge accounting.
- Capital refundable on demand: amount of the financial
instruments issued by the consolidated entities which,
although capital for legal purposes, do not meet the
requirements for classification as equity.
b) Measurement of financial assets and liabilities and
recognition of fair value changes
In general, financial instruments are initially recognised at fair value
which, in the absence of evidence to the contrary, is deemed to be
their acquisition cost, and are subsequently measured at each
period-end as follows:
i. Measurement of financial assets
Financial assets are measured at fair value, without deducting
any transaction costs that may be incurred on their sale or other
form of disposal, except for loans and receivables, held-tomaturity
investments, equity instruments whose fair value cannot
be determined in a sufficiently objective manner and financial
derivatives that have those equity instruments as their
underlying and are settled by delivery of those instruments.
The “fair value” of a financial instrument on a given date is taken
to be the amount for which it could be bought or sold on that
date by two knowledgeable, willing parties in an arm's length
transaction acting prudently. The most objective and common
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reference for the fair value of a financial instrument is the price
that would be paid for it on an organised, transparent and deep
market (“quoted price” or “market price”).
If there is no market price for a given financial instrument, its fair
value is estimated on the basis of the price established in recent
transactions involving similar instruments and, in the absence
thereof, of valuation techniques commonly used by the
international financial community, taking into account the
specific features of the instrument to be measured and,
particularly, the various types of risk associated with it. However,
the inherent limitations of the valuation techniques used and the
possible inaccuracies of the assumptions made under these
techniques may result in a fair value of a financial instrument
which does not exactly coincide with the price at which the
instrument could be bought or sold at the date of measurement.
All derivatives are recognised in the balance sheet at fair value
from the trade date. If the fair value is positive, they are
recognised as an asset and if the fair value is negative, they are
recognised as a liability. The fair value on the trade date is
deemed, in the absence of evidence to the contrary, to be the
transaction price. The changes in the fair value of derivatives
from the trade date are recognised in “Gains/Losses on Financial
Assets and Liabilities” in the consolidated income statement.
Specifically, the fair value of standard financial derivatives
included in the portfolios of financial assets or liabilities held for
trading is deemed to be their daily quoted price and if, for
exceptional reasons, the quoted price cannot be determined on
a given date, these financial derivatives are measured using
methods similar to those used to measure OTC derivatives.
The fair value of OTC derivatives is taken to be the sum of the
future cash flows arising from the instrument, discounted to
present value at the date of measurement (“present value” or
“theoretical close”) using valuation techniques accepted in the
financial markets: “net present value” (NPV), option pricing
models and other methods.
“Loans and Receivables” and “Held-to-Maturity Investments” are
measured at amortised cost using the effective interest method.
“Amortised cost” is understood to be the acquisition cost of a
financial asset or liability plus or minus, as appropriate, the
principal repayments and the cumulative amortisation (taken to
the income statement) of the difference between the initial cost
and the maturity amount. In the case of financial assets,
amortised cost furthermore includes any reductions for
impairment or uncollectibility. In the case of loans and
receivables hedged in fair value hedges, the changes in the fair
value of these assets related to the risk or risks being hedged are
recognised in the consolidated income statement.
The “effective interest rate” is the discount rate that exactly
matches the initial amount of a financial instrument to its
estimated cash flows during its estimated life, based on the
contractual terms, but disregarding future credit losses. For fixed
rate financial instruments, the effective interest rate coincides
with the contractual interest rate established on the acquisition
date plus, where applicable, the fees that, because of their
nature, can be equated with a rate of interest. In the case of
floating rate financial instruments, the effective interest rate
coincides with the rate of return prevailing in all connections
until the next benchmark interest reset date.
Equity instruments of other entities whose fair value cannot be
determined in a sufficiently objective manner and financial
derivatives that have those instruments as their underlying and
are settled by delivery of those instruments are measured at
acquisition cost adjusted, where appropriate, by any related
impairment loss.
The amounts at which the financial assets are recognised
represent, in all material respects, the Group’s maximum
exposure to credit risk at each reporting date. Also, the Bank has
received collateral and other credit enhancements to mitigate its
exposure to credit risk, which consist mainly of mortgage
guarantees, cash collateral and insurance.
ii. Measurement of financial liabilities
In general, financial liabilities are measured at amortised cost, as
defined above, except for those included under “Financial
Liabilities Held for Trading” and financial liabilities designated as
hedged items (or hedging instruments) in fair value hedges,
which are measured at fair value.
iii. Valuation techniques
Following is a summary of the various valuation techniques used
by the Group to measure the financial instruments recognised at
fair value at 31 December 2008:
The main techniques employed in the “internal valuation models”
are as follows:
Percentage
Market Value Based on Assets Liabilities
Public price quotations in active markets
Internal valuation models with observable
64% 19%
market data 36% 80%
Internal valuation models with non-market data - 1%
100% 100%
- In the valuation of financial instruments permitting static
hedging (basically, forwards and swaps) the “present value”
method is employed.
- In the valuation of financial instruments requiring dynamic
hedging, the Black-Scholes model is mainly employed.
- In the valuation of financial instruments exposed to interest
rate risk, the Heath-Jarrow-Morton model is employed to
analyse the correlation by currency.
- Credit risk is measured with dynamic models similar to those
used in the measurement of interest rate risk.

The Bank's directors consider that the financial assets and
liabilities recognised in the consolidated balance sheet and
the gains and losses arising from these financial instruments
are reasonable and reflect their market value.
The breakdown of the financial instruments, by valuation
method, is as follows
Thousands of Euros
Public Price
Quotations
in Active Internal
Markets Models Total
Financial assets held for trading 860,411 4,223,404 5,083,815
Other financial assets
at fair value through
profit or loss 2,189,943 1,219 2,191,162
Available-for-sale
financial assets 6,709,546 33,036 6,742,582
Hedging derivatives (assets) - 1,194,849 1,194,849
Financial liabilities held for trading 609,214 3,341,504 3,950,718
Hedging derivatives (liabilities) - 577,091 577,091
Liabilities under insurance contracts 930,694 2,504,935 3,435,629
iv. Recognition of fair value changes
As a general rule, changes in the fair value of financial
instruments are recognised in the consolidated income
statement. A distinction is made between the changes resulting
from the accrual of interest or dividends, which are recognised
under “Interest and Similar Income”, “Interest Expense and
Similar Charges” and “Income from Equity Instruments”, as
appropriate; those arising from the impairment of asset quality;
and those arising for other reasons, which are recognised at
their net amount under “Gains/Losses on Financial Assets and
Liabilities (net)” in the consolidated income statement.
Exceptionally, adjustments due to changes in fair value arising
from “Available-for-Sale Financial Assets” are recognised
temporarily in consolidated equity under “Valuation
Adjustments”, unless they relate to exchange differences on
monetary financial assets, in which case they are recognised in
the consolidated income statement. Items charged or credited to
“Valuation Adjustments” remain in the Group's consolidated
equity until the asset giving rise to them is derecognised, at
which time they are recognised in the consolidated income
statement.
v. Hedging transactions
The consolidated entities use financial derivatives for the
purpose of trading with customers who request these
instruments in order to manage their own market and credit risks
and for their structured financial transactions; for the purpose of
managing the risks of the Group entities' own positions and
assets and liabilities (“hedging derivatives”); or for the purpose
of obtaining gains from changes in the prices of these
derivatives.
A derivative qualifies for hedge accounting if all the following
conditions are met:
1. The derivative hedges one of the following three types of
exposure:
a. Changes in the fair value of assets and liabilities due to
fluctuations in, inter alia, the interest rate and/or exchange
rate to which the position or balance to be hedged is
subject (“fair value hedge”);
b. Changes in the estimated cash flows arising from financial
assets and liabilities, commitments and highly probable
forecast transactions (“cash flow hedge”);
c. The net investment in a foreign operation (“hedge of a net
investment in a foreign operation”).
2. It is effective in offsetting exposure inherent in the hedged
item or position throughout the expected term of the hedge,
which means that:
a. At the date of arrangement the hedge is expected, under
normal conditions, to be highly effective (“prospective
effectiveness”).
b. There is sufficient evidence that the hedge was actually
effective during the whole life of the hedged item or
position (“retrospective effectiveness”).
The consolidated entities ascertain the prospective and
retrospective effectiveness of their hedges as follows:
In fair value hedges, the ratio of the change in the fair value of
the hedged item during the measurement period to the
change in the fair value of the hedging instrument during the
same period is calculated retrospectively. The hedge is
deemed to be effective if this ratio is within a range of 80% to
125%. Prospective effectiveness is calculated by comparing
the sensitivity of the hedged item (to changes in the interest
rate curve) with the sensitivity of the hedging instrument. The
hedge is deemed to be effective if this comparison shows that
the two sensitivities offset each other.
In order to measure the effectiveness of fair value hedges of
the interest rate exposure of a portfolio of financial
instruments, the Group compares the amount of the net asset
and/or liability position with the hedged amount designated
for each one. The hedge is deemed to be ineffective when the
amount of this net position is less than the hedged amount, in
which case the ineffective portion is recognised immediately in
the consolidated income statement.
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In cash flow hedges, retrospective effectiveness is assessed by
calculating the ratio of the interest cash flows generated by
the hedged item during the measurement period to the
interest cash flows generated by the hedging instrument
during the same period. The hedge is deemed to be effective
if this ratio is within a range of 80% to 125%. Prospective
effectiveness is calculated by comparing the future interest
cash flows (obtained from the related market interest rate
curve) of the hedged item and the hedging instrument. The
hedge is deemed to be effective if the related cash flows offset
each other.
3. There must be adequate documentation evidencing the
specific designation of the financial derivative to hedge
certain balances or transactions and the manner in which this
effective hedge was intended to be achieved and measured,
provided that this is consistent with the Group's management
of own risks.
The changes in value of financial instruments qualifying for
hedge accounting are recognised as follows:
a. In fair value hedges, the gains or losses arising on both the
hedging instruments and the hedged items (attributable to
the type of risk being hedged) are recognised directly in the
consolidated income statement.
In the case of fair value hedges of the interest rate exposure
of a portfolio of financial instruments, the gains or losses
due to changes in the fair value of the hedged amount
(attributable to the hedged risk) are recognised in the
consolidated income statement with a balancing entry under
“Changes in the Fair Value of Hedged Items in Portfolio
Hedges of Interest Rate Risk” on the asset or liability side of
the balance sheet, as appropriate..
b. In cash flow hedges, the effective portion of the change in
value of the hedging instrument is recognised temporarily in
equity under “Valuation Adjustments - Cash Flow Hedges”
until the forecast transactions occur, when it is recorded in
the consolidated income statement, unless, if the forecast
transactions result in the recognition of non-financial assets
or liabilities, it is included in the cost of the non-financial
asset or liability. The ineffective portion of the change in
value of the hedging derivatives is recognised directly in the
consolidated income statement under “Gains/Losses on
Financial Assets and Liabilities (net)”.
When fair value hedges are discontinued, the adjustments
relating to the hedged item previously recognised under
“Valuation Adjustments” are transferred to profit or loss at the
effective interest rate re-calculated at the date of hedge
discontinuation. The adjustments must be fully amortised at
maturity.
When cash flow hedges are discontinued, any cumulative gain or
loss on the hedging instrument recognised under “Valuation
Adjustments” in consolidated equity (while the hedge was
effective) continues to be recognised in equity until the hedged
transaction occurs, at which time it is recognised in income,
unless the transaction is no longer expected to occur, in which
case the gain or loss is recognised immediately in income.
Derivatives embedded in other financial instruments or in other
host contracts are accounted for separately as derivatives if their
risks and characteristics are not closely related to those of the
host contracts, provided that the host contracts are not
classified as “Other Financial Assets/Liabilities at Fair Value
through Profit or Loss” or as “Financial Assets/Liabilities Held for
Trading”.
Financial derivatives that do not qualify for hedge accounting
are treated for accounting purposes as trading derivatives.
c) Derecognition of financial assets and liabilities
The accounting treatment of transfers of financial assets depends
on the extent to which the risks and rewards associated with the
transferred assets are transferred to third parties:
1. If the Group transfers substantially all the risks and rewards to
third parties -unconditional sale of financial assets, sale of
financial assets under an agreement to repurchase them at their
fair value at the repurchase date, sale of financial assets with a
purchased call option or written put option that is deeply out of
the money, securitisation of assets in which the transferor does
not retain a subordinated debt or grant any credit enhancement
to new holders, and other similar cases-, the transferred financial
asset is derecognised and any right or obligation retained or
created in the transfer is recognised separately.
2. If the Group retains substantially all the risks and rewards
associated with the transferred financial asset -sale of financial
assets under an agreement to repurchase them at a fixed price
or at the sale price plus interest, a securities lending agreement
in which the borrower undertakes to return the same or similar
assets, and other similar cases-, the transferred financial asset is
not derecognised and continues to be measured by the same
criteria as those used before the transfer. However, the following
items are recognised:
a. An associated financial liability, which is recognised for an
amount equal to the consideration received and is
subsequently measured at amortised cost, unless it meets the
requirements to be classified as a financial liability at fair value
through profit or loss.
b. The income from the transferred financial asset not
derecognised and any expense incurred on the new financial
liability.
3. If the Group neither transfers nor retains substantially all the
risks and rewards associated with the transferred financial asset
-sale of financial assets with a purchased call option or written
put option that is not deeply in or out of the money,
securitisation of assets in which the transferor retains a
subordinated debt or other type of credit enhancement for a
portion of the transferred asset, and other similar cases-, the
following distinction is made:
a. If the transferor does not retain control of the transferred
financial asset, the asset is derecognised and any rights or
obligations retained or created in the transfer are recognised
separately.

. If the transferor retains control, it continues to recognise the
transferred financial asset for an amount equal to its exposure
to changes in value and recognises a financial liability
associated with the transferred financial asset. The net
carrying amount of the transferred asset and the associated
liability is the amortised cost of the rights and obligations
retained, if the transferred asset is measured at amortised
cost, or the fair value of the rights and obligations retained, if
the transferred asset is measured at fair value.
Accordingly, financial assets are only derecognised when the cash
flows they generate have been extinguished or when substantially
all the inherent risks and rewards have been transferred. Similarly,
financial liabilities are only derecognised when the obligations they
generate have been extinguished or when they are acquired (with
the intention either to cancel them or to resell them)..
In 2008 financial instruments totalling approximately EUR 4,300
million were transferred but not derecognised (see Note 10).
d) Offsetting of financial instruments
Financial asset and liability balances are offset, i.e. reported in the
consolidated balance sheet at their net amount, only if the
subsidiaries currently have a legally enforceable right to set off the
recognised amounts and intend either to settle on a net basis, or
to realise the asset and settle the liability simultaneously.
e) Impairment of financial assets
i. Definition
A financial asset is considered to be impaired –and, therefore, its
carrying amount is adjusted to reflect the effect of impairmentwhen
there is objective evidence that events have occurred which:
- In the case of debt instruments (loans and debt securities),
give rise to an adverse impact on the future cash flows that
were estimated at the transaction date.
- In the case of equity instruments, mean that their carrying
amount cannot be fully recovered.
As a general rule, the carrying amount of impaired financial
instruments is adjusted with a charge to the consolidated income
statement for the year in which the impairment becomes evident.
The reversal, if any, of previously recognised impairment losses is
recognised in the consolidated income statement for the year in
which the impairment ceases to exist or is reduced.
Balances are deemed to be impaired when there are reasonable
doubts as to their full recovery and/or the collection of the related
interest for the amounts and on the dates initially agreed upon,
after taking into account the guarantees received by the
consolidated entities to secure (fully or partially) collection of the
related balances. Collections relating to impaired loans and
advances are used to recognise the accrued interest and the
remainder, if any, to reduce the principal amount outstanding. The
amount of the financial assets that would be deemed to be
impaired had the conditions thereof not been renegotiated is not
material with respect to the Group’s financial statements taken as a
whole.
When the recovery of any recognised amount is considered
unlikely, the amount is written off, without prejudice to any actions
that the consolidated entities may initiate to seek collection until
their contractual rights are extinguished due to expiry of the
statute-of-limitations period, forgiveness or any other cause
ii. I Debt instruments carried at amortised cost
The amount of an impairment loss incurred on a debt instrument
carried at amortised cost is equal to the difference between its
carrying amount and the present value of its estimated future cash
flows, and is presented as a reduction of the balance of the asset
adjusted.
Impairment losses are assessed as follows:
- Individually, for all significant debt instruments.
- Collectively: the Bank classifies transactions on the basis of the
nature of the obligors, the conditions of the countries in which
they reside, transaction status and type of collateral or
guarantee, age of past-due amounts, etc. For each risk group, it
establishes the impairment losses that are to be allocated to
specific transactions. In addition, the Group identifies any
homogenous groups of debt instruments and contingent
liabilities which, although not classifiable as impaired, evidence
weaknesses that may give rise to losses higher than those for
the categories described above, since they belong to a group
that is experiencing difficulties. In this case, the impairment
losses are determined as the difference between the amount
recognised in assets for these instruments and the present
value of the cash flows expected to be received, discounted at
the average contractual interest rate.
The total allowances recognised at any given time are the sum of
the allowances for losses on specific transactions, for losses on
transactions of homogenous groups of debt instruments
evidencing weaknesses, and for inherent impairment losses (losses
incurred at the date of the financial statements, calculated using
statistical methods), and the allowance for the risk exposure of
groups experiencing difficulties.
Interest accrual is suspended for all debt instruments individually
classified as impaired and for the instruments for which impairment
losses have been assessed collectively because they have payments
more than three months past due.
iii. Debt or equity instruments classified as available for sale
Impairment losses on these instruments are the difference between
the acquisition cost of the instruments (net of any principal
repayment or amortisation, in the case of debt instruments) and
their fair value less any impairment loss previously recognised in
the consolidated income statement.
When there is objective evidence that the losses arising on
measurement of these assets are due to impairment, they are no
longer recognised in equity under “Valuation Adjustments -
Available-for-Sale Financial Assets” and are recorded in the
consolidated income statement. If all or part of the impairment
losses are subsequently reversed, the reversed amount is
recognised in the consolidated income statement for the year in
which the reversal occurs (with a balancing entry under “Valuation
Adjustments - Available-for-Sale Financial Assets” in the
consolidated balance sheet).
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iv. Equity instruments carried at cost
The impairment loss on equity instruments carried at cost is the
difference between the carrying amount and the present value of
the expected future cash flows discounted at the market rate of
return for similar securities.
Impairment losses are recognised in the consolidated income
statement for the period in which they arise as a direct reduction
of the cost of the instrument. These losses can only be reversed
subsequently if the related assets are sold..
f) Repurchase agreements and reverse repurchase agreements
Purchases (sales) of financial assets under a non-optional resale
(repurchase) agreement at a fixed price (“repos”) are recognised in
the consolidated balance sheet as financing granted (received)
based on the nature of the debtor (creditor) under “Loans and
Advances to Credit Institutions” or “Loans and Advances to
Customers” (“Deposits from Credit Institutions” or “Customer
Deposits”).
Differences between the purchase and sale prices are recognised as
interest over the contract term.
g) Non-current assets held for sale and Liabilities associated
with non-current assets held for sale
“Non-Current Assets Held for Sale” in the consolidated balance
sheet includes the carrying amount of individual items, disposal
groups or items forming part of a business unit earmarked for
disposal (“discontinued operations”), whose sale in their present
condition is highly probable and is expected to occur within one
year from the date of the accompanying consolidated financial
statements. Therefore, the carrying amount of these items (which
can be of a financial nature or otherwise) will foreseeably be
recovered through the proceeds from their disposal. Specifically,
property or other non-current assets received by the consolidated
entities as total or partial settlement of their debtors' payment
obligations to them are deemed to be non-current assets held for
sale, unless the consolidated entities have decided to make
continuing use of these assets.
Similarly, “Liabilities Associated with Non-Current Assets Held for
Sale” includes the balances payable arising from the assets held for
sale or disposal groups and from discontinued operations.
Non-current assets held for sale are generally measured at the
lower of fair value less costs to sell and their carrying amount at
the date of classification in this category. Non-current assets held
for sale are not depreciated as long as they remain in this category.
The gains and losses arising on the disposal of assets and liabilities
classified as held for sale, as well any related impairment losses
recognised or reversed, are recorded under “Gains (Losses) on
Non-Current Assets Held for Sale not Classified as Discontinued
Operations”. All other income and expenses relating to these assets
and liabilities are classified in the corresponding income statement
items based on their nature.
h) Reinsurance assets and Liabilities under insurance contracts
“Reinsurance Assets” in the consolidated balance sheet includes
the amounts that the consolidated entities are entitled to receive
for reinsurance contracts with third parties and, specifically, the
reinsurer's share of the technical provisions recorded by the
consolidated insurance entities. In the event of impairment of
these assets, the related loss is recognised directly in the
consolidated income statement against these assets.
“Liabilities under Insurance Contracts” in the consolidated balance
sheet includes the technical provisions recorded by the
consolidated insurance entities to cover obligations arising from
insurance contracts in force at year-end.
In accordance with standard accounting practice in the insurance
industry, the consolidated insurance entities credit to the income
statement the amounts of the premiums written and charge to
income the cost of the claims incurred on final settlement thereof.
Insurance entities are required to accrue at year-end the unearned
revenues credited to their income statements and the accrued
costs not charged to income.
At each reporting date the Group assesses whether the insurance
contract liabilities recognised in the consolidated balance sheet are
adequately measured. For this purpose, it calculates the difference
between the following amounts:
- Current estimates of future cash flows under the insurance
contracts of the consolidated entities. These estimates include
all contractual cash flows and any related cash flows, such as
claims handling costs; and
- The value recognised in the consolidated balance sheet for
insurance liabilities (see Note 13), net of any related deferred
acquisition costs or intangible assets, such as the amount paid
to acquire, in the event of purchase by the entity, the economic
rights held by a broker deriving from policies in the entity's
portfolio.
If the calculation results in a positive amount, this amount is
charged to the consolidated income statement.
i) Tangible assets
“Tangible Assets” includes the amount of buildings, land, furniture,
vehicles, computer hardware and other fixtures owned by the
consolidated entities or acquired under finance leases. Tangible
assets are classified by use as follows:
i. Property, plant and equipment for own use
Property, plant and equipment for own use are presented at
acquisition cost revalued, where appropriate, pursuant to the
applicable legislation, less the related accumulated depreciation
and any impairment losses (net carrying amount higher than
recoverable amount).

Depreciation is calculated, using the straight-line method, on the
basis of the acquisition cost of the assets less their residual value.
The land on which the buildings and other structures stand has an
indefinite life and, therefore, is not depreciated.
The tangible asset depreciation charge is recognised in the
consolidated income statement and is calculated basically using
the following depreciation rates (based on the average years of
estimated useful life of the various assets):
Anual Rate
Buildings for own use 2.0%
Furniture 7.7%
Fixtures 7.0%
Office and IT equipment 25.0%
Leasehold improvements 7.0%
The consolidated entities assess at the reporting date whether
there is any indication that an asset may be impaired (i.e. its
carrying amount exceeds its recoverable amount). If this is the
case, the carrying amount of the asset is reduced to its recoverable
amount and future depreciation charges are adjusted in proportion
to the revised carrying amount and to the new remaining useful life
(if the useful life has to be re-estimated).
Similarly, if there is an indication of a recovery in the value of a
tangible asset, the consolidated entities recognise the reversal of
the impairment loss recognised in prior periods and adjust the
future depreciation charges accordingly. In no circumstances may
the reversal of an impairment loss on an asset raise its carrying
amount above that which it would have if no impairment losses had
been recognised in prior years.
The estimated useful lives of property, plant and equipment for
own use are reviewed at least at the end of the reporting period
with a view to detecting significant changes therein. If changes are
detected, the useful lives of the assets are adjusted by correcting
the depreciation charge to be recognised in the consolidated
income statement in future years on the basis of the new useful
lives.
Upkeep and maintenance expenses relating to property, plant and
equipment for own use are recognised as an expense in the period
in which they are incurred.
ii. Investment property
“Investment Property” in the consolidated balance sheet reflects,
at acquisition cost, the net values of the land, buildings and other
structures held either to earn rentals or for capital appreciation.
The fair value of the investment property does not differ
significantly from its carrying amount.
The criteria used to recognise the acquisition cost of investment
property, to calculate its depreciation and its estimated useful life
and to recognise the impairment losses thereon are consistent with
those described in relation to property, plant and equipment for
own use.
j) Accounting for leases
i. Finance leases
Finance leases are leases that transfer to the lessee substantially all
the risks and rewards incidental to ownership of the leased asset.
When the consolidated entities act as lessors of an asset, the sum
of the present value of the lease payments receivable from the
lessee plus the guaranteed residual value (which is generally the
exercise price of the purchase option of the lessee at the end of
the lease term) is recognised as lending to third parties and is
therefore included under “Loans and Receivables” in the
consolidated balance sheet.
When the consolidated entities act as lessees, they present the
cost of the leased assets in the consolidated balance sheet
according to the nature of the asset forming the subject-matter of
the contract and, simultaneously, recognise a liability for the same
amount (which is the lower of the fair value of the leased asset and
the sum of the present value of the lease payments to be made to
the lessor plus, if appropriate, the exercise price of the purchase
option). The depreciation policy for these assets is consistent with
that for property, plant and equipment for own use.
In both cases, the finance income and finance expense arising from
these contracts is credited or debited, respectively, to the
consolidated income statement so as to achieve a constant rate of
return over the life of the lease contracts.
ii. Operating leases
In operating leases, ownership of the leased asset and substantially
all the risks and rewards incidental thereto remain with the lessor.
When the consolidated entities act as the lessors, they present the
acquisition cost of the leased assets under “Tangible Assets” in the
consolidated balance sheet. The depreciation policy for these
assets is consistent with that for similar property, plant and
equipment for own use, and income from operating leases is
recognised in the consolidated income statement on a straight-line
basis.
When the consolidated entities act as lessees, lease expenses,
including any incentives granted by the lessor, are charged to the
consolidated income statement on a straight-line basis.
k) Intangible assets
Intangible assets are identifiable non-monetary assets (separable
from other assets) without physical substance (including customer
lists, patents, leasehold assignment rights, computer software, etc.)
which arise as a result of a legal transaction or which are developed
internally by the consolidated entities. Only intangible assets
whose cost can be estimated reliably and from which the
consolidated entities consider it probable that future economic
benefits will be generated are recognised.
Intangible assets are recognised initially at acquisition or
production cost and are subsequently measured at cost less any
accumulated amortisation and any accumulated impairment losses.
Intangible assets can have an indefinite useful life -when, based on
an analysis of all the relevant factors, it is concluded that there is
no foreseeable limit to the period over which the asset is expected
to generate net cash inflows for the consolidated entities- or a
finite useful life, in all other cases.
Intangible assets with indefinite useful lives are not amortised, but
rather at the end of each reporting period the consolidated
entities review the remaining useful lives of the assets in order to
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determine whether they continue to be indefinite and, if this is not
the case, to take the appropriate steps. Intangible assets with finite
useful lives are amortised over those useful lives using methods
similar to those used to depreciate tangible assets.
The intangible asset amortisation charge is recognised under
“Depreciation and Amortisation - Intangible Assets” in the
consolidated income statement.
In both cases the consolidated entities recognise any impairment
loss on the carrying amount of these assets with a charge to
“Impairment Losses on Other Assets - Goodwill and Other
Intangible Assets” in the consolidated income statement. The
criteria used to recognise the impairment losses on these assets
and, where applicable, the reversal of impairment losses recognised
in prior years are similar to those used for tangible assets
Internally developed computer software
The costs of internally developed computer software are
recognised as an intangible asset if, among other requisites
(basically the capacity to be used or sold), the software can be
identified and its ability to generate future economic benefits can
be demonstrated. These assets are amortised over three years.
Expenditure on research activities is recognised as an expense in
the year in which it is incurred and cannot be subsequently
capitalised..
l) Tax assets
“Tax Assets” in the consolidated balance sheet includes the
amount of all the assets of a tax nature, distinguishing between:
“Current” (amounts of tax to be recovered within the next twelve
months) and “Deferred” (amounts of tax to be recovered in future
years, including those arising from tax loss and tax credit
carryforwards).
m) Other assets and Other liabilities
“Other Assets” in the consolidated balance sheet includes the
amount of assets not recorded in other items, which relate
basically to the following:
- Inventories: this item includes the amount of assets, other than
financial instruments, that are held for sale in the ordinary
course of business, that are in the process of production,
construction or development for such purpose, or that are to
be consumed in the production process or in the provision of
services. Inventories are measured at the lower of cost and net
realisable value at year-end, which is the estimated selling price
of the inventories in the ordinary course of business, less the
estimated costs of completion and the estimated costs
required to make the sale. Any impairment losses are
recognised as adjustments for the year in which the impairment
or loss occurs. Subsequent reversals are recognised in the
consolidated income statement for the year in which they
occur.
- Prepayments and accrued income, excluding accrued interest,
which is recognised in the same item as the financial
instruments giving rise to it.
- Other: the amount of guarantees provided mainly as a result of
operations in organised markets and the amount of other
assets not included in other items.
“Other Liabilities” includes the payment obligations having the
substance of financial liabilities not included in any other category
and accrued expenses and deferred income.
o) Provisions and contingent liabilities
Provisions are present obligations arising from past events which
are clearly specified as to their nature at the reporting date but are
uncertain as to their amount or settlement date. The settlement of
these obligations on maturity will foreseeably give rise to an
outflow of cash embodying economic benefits for the Group.
Contingent liabilities are possible obligations that arise from past
events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more future events not
wholly within the control of the Group. They include present
obligations of the Group when it is not probable that an outflow of
cash resources embodying economic benefits will be required to
settle them or when their amount cannot be quantified in a
sufficiently reliable manner.
The consolidated financial statements include all the material
provisions with respect to which it is considered that it is more
likely than not that the obligation will have to be settled.
Contingent liabilities are not recognised in the consolidated
financial statements, but rather are disclosed in the notes to the
financial statements.
Provisions, which are quantified on the basis of the best
information available on the consequences of the event giving rise
to them and are reviewed and adjusted at the end of each year, are
used to cater for the specific obligations for which they were
originally recognised. Provisions are fully or partially reversed when
such obligations cease to exist or are reduced.
Provisions are classified according to the obligations covered as
follows
- Provisions for contingent liabilities and commitments and other
provisions: includes the amount of the provisions made to
cover contingent liabilities, which are defined as transactions in
which the Group guarantees the obligations of a third party,
arising as a result of financial guarantees granted or contracts
of another kind, and contingent commitments, which are
defined as irrevocable commitments that may give rise to the
recognition of financial assets; and the amount of other
provisions made by the consolidated entities.
- Provisions for pensions and similar obligations: includes the
amount of all the provisions made to cover post-employment
benefits, including commitments to early retirees and similar
obligations.

p) Litigation and/or claims in process
In addition to the disclosures made in Note 1, at the end of 2008
certain litigation and claims were in process against the
consolidated entities arising from the ordinary course of their
operations. The Group's legal advisers and directors consider that
the economic loss, if any, that may derive from litigation and claims
will not have a material effect on the consolidated financial
statements (see Note 22).
q) Foreign currency transactions
i. Functional currency
The Group's functional currency is the euro. Therefore, all balances
and transactions denominated in currencies other than the euro
are deemed to be denominated in “foreign currency”.
The equivalent euro value of the total assets and liabilities
denominated in foreign currency held by the Group at 31
December 2008 amounted to EUR 4,326,264 thousand and EUR
5,947,715 thousand, respectively (EUR 2,511,004 thousand and
EUR 5,153,034 thousand, respectively, at 31 December 2007).
Approximately 79% of these amounts relate to US dollars and the
remainder mostly to currencies quoted in the Spanish market.
ii Translation of foreign currency balances
Foreign currency balances are translated to euros in two
consecutive stages:
- Translation of foreign currency to the functional currency
(currency of the main economic environment in which the
Group operates), and
- Translation to euros of the balances held in the functional
currencies of entities whose functional currency is not the
euro.
Translation of foreign currency to the functional currency
Foreign currency transactions performed by consolidated
entities not located in EMU countries are initially recognised in
their respective currencies. Monetary assets and liabilities in
foreign currency are subsequently translated to their functional
currencies using the closing rate, which is defined as the
average spot exchange rate prevailing at the date of the
consolidated financial statements.
Furthermore:
- Non-monetary items measured at historical cost are
translated to the functional currency at the exchange rate
at the date of acquisition.
- Non-monetary items measured at fair value are translated
at the exchange rate on the date when the fair value was
determined.
- Income and expenses are translated at the exchange rate
on the transaction date or using the average exchange rate
for the period for all the transactions performed during the
year.
- The balances arising from non-hedging forward foreign
currency/foreign currency and foreign currency/euro
purchase and sale transactions are translated at the closing
rates prevailing in the forward foreign currency market for
the related maturity
Translation of functional currencies to euros
If the functional currency is not the same as the reporting
currency, the debit and credit balances denominated in the
functional currency are translated to the reporting currency as
follows:
- Assets and liabilities, at the average exchange rate
prevailing on the Spanish spot foreign exchange market at
year-end.
- Income and expenses, at the exchange rate on the
transaction date or using an average exchange rate for the
period for all the transactions performed during the year.
- Equity items, at the historical exchange rates.
iii Recognition of exchange differences
The exchange differences arising on the translation of foreign
currency balances to the functional currency are generally
recognised in the consolidated income statement.
The exchange differences arising on the translation to euros of the
financial statements in functional currencies other than the euro
are recognised under “Valuation Adjustments - Exchange
Differences” in the consolidated balance sheet until the related
item is derecognised, when they are recognised in profit or loss.
r) Own equity instruments
Own equity instruments are those meeting both of the following
conditions:
- The instruments do not include any contractual obligation for
the issuer: (i) to deliver cash or another financial asset to a
third party; or (ii) to exchange financial assets or financial
liabilities with a third party under conditions that are
potentially unfavourable to the issuer.
- The instruments will or may be settled in the issuer's own
equity instruments and are: (i) a non-derivative that includes
no contractual obligation for the issuer to deliver a variable
number of its own equity instruments; or (ii) a derivative that
will be settled by the issuer through the exchange of a fixed
amount of cash or another financial asset for a fixed number of
its own equity instruments.
Transactions involving own equity instruments, including their
issuance and cancellation, are deducted directly from equity.
Changes in the value of instruments classified as own equity
instruments are not recognised in the consolidated financial
statements. Consideration received or paid in exchange for such
instruments is directly added to or deducted from equity
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s) Recognition of inc

the consolidated income statement the amount resulting from
deferring over five years the net amount of the cumulative actuarial
gains and/or losses not recognised at the beginning of the year
which exceeds 10% of the present value of the obligations or 10%
of the fair value of the plan assets at the beginning of the year,
whichever amount is higher.
Post-employment benefits are recognised in the consolidated
income statement as follows:
- Current service cost, i.e. the increase in the present value of
the obligations resulting from employee service in the current
period, under “Administrative Expenses - Personnel Expenses”.
- Interest cost, i.e. the increase during the year in the present
value of the obligations as a result of the passage of time,
under “Interest Expense and Similar Charges”.
- The expected return on plan assets and the gains or losses on
the value of the plan assets, less any plan administration costs
and less any applicable taxes, under “Interest and Similar
Income”.
- The actuarial gains and losses calculated in accordance with
the corridor approach are recognised under “Provisions (Net)”,
unless the Entity opts to recognise them directly in equity.
ii. Defined contribution plans
The ordinary and extraordinary contributions made in this
connection in each year are recognised under “Personnel
Expenses” and “Provisions (Net)”, respectively, in the consolidated
income statement. The amounts not yet contributed at each yearend
are recognised, at their present value, under “Provisions -
Provisions for Pensions and Similar Obligations” on the liability
side of the consolidated balance sheet.
In 2008 the Group contributed EUR 8,521 thousand to defined
contribution plans (EUR 1,026 thousand in 2007; see Note 41).
At 31 December 2008 and 2007, there were no accrued
contributions to be made in this connection.
w) Other long-term employee benefits
Commitments to early retirees -defined as those who have ceased
to render services at the entity but who, without being legally
retired, continue to have economic rights vis-à-vis the entity until
they acquire the legal status of retiree-, long-service bonuses,
commitments for death of spouse or disability before retirement
that depend on the employee's length of service at the entity and
other similar items are treated for accounting purposes, where
applicable, as established above for defined benefit postemployment
plans, except that all past service costs and actuarial
gains and losses are recognised immediately in the consolidated
income statement.
x) Transactions involving payments based on equity
instrumentsl
Equity instruments delivered to employees in consideration for
their services, if the instruments are delivered once the specific
period of service has ended, are recognised as an expense for
services (with the corresponding increase in equity) in the period
the services are rendered by employees. At the grant date the
services received (and the related increase in equity) are measured
at the fair value of the equity instruments granted.
When the requirements stipulated in the remuneration agreement
include external market conditions (such as equity instruments
reaching a certain price), the amount ultimately to be recognised
in equity will depend on the other conditions being satisfied by the
employees, irrespective of whether the market conditions are
satisfied. If the conditions of the agreement are met but the
external market conditions are not satisfied, the amounts
previously recognised in equity are not reversed, even if the
employees do not exercise their right to receive the equity
instruments.
y) Termination benefits
Under current legislation, the Spanish entities are required to pay
termination benefits to employees terminated without just cause.
There are no redundancy plans making it necessary to record a
provision in this connection.
z) Income tax
The current income tax expense is recognised in the consolidated
income statement, except when it results from a transaction
recognised directly in equity, in which case the related tax effect is
also recognised in equity, or from a business combination in which
the related deferred tax is recognised as one of its assets or
liabilities.
The current income tax expense is calculated as the tax payable
with respect to the taxable profit for the year, adjusted for the
amount of the changes in the year arising from temporary
differences, tax credits and other tax benefits and prior years’ tax
loss carryforwards effectively used in 2008.
Deferred tax assets and liabilities include the temporary differences
arising from the different bases used for accounting and tax
purposes to measure the assets, liabilities and certain of the
entity’s own equity instruments, insofar as they have an impact on
the future tax charge.
Temporary differences are classified as: taxable temporary
differences, which will give rise to larger amounts of tax to be paid
or smaller amounts of tax to be refunded in future years; and
deductible temporary differences, which will give rise to smaller
amounts of tax to be refunded in future years.
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Deferred tax assets (deductible temporary differences, the right to
offset tax losses in future years, unused tax credits and other
unused tax benefits) are only recognised to the extent that it is
probable that the Group will have sufficient future taxable profits
against which these assets can be utilised.
Deferred tax liabilities are always recognised except when goodwill
is recognised or they arise in accounting for investments in
subsidiaries or associates or interests in joint ventures where the
investor is able to control the timing of the reversal of the
temporary difference and, in addition, it is probable that the
temporary difference will not reverse in the future. Notwithstanding
the foregoing, deferred tax assets and liabilities are not recognised
if they arise from the initial recognition of an asset or liability other
than a business combination that at the time of recognition affects
neither accounting profit nor taxable profit.
The deferred tax assets and liabilities recognised and unrecognised
are reassessed at year-end either in order to ascertain whether
they still exist, and the appropriate adjustments are made on the
basis of the findings of the analyses performed (see Note 23), or
in order to recognise any deferred tax asset not previously
recognised, provided that it is probable that the Group will have
sufficient future taxable profit against which the deferred tax asset
can be utilised.
Income and expenses recognised directly in equity are accounted
for as temporary differences.
aa) Consolidated cash flow statements
The following terms are used in the consolidated cash flow
statements with the meanings specified:
- Cash flows: inflows and outflows of cash and cash equivalents,
which are short-term, highly liquid investments that are subject
to an insignificant risk of changes in value
- Operating activities: the principal revenue-producing activities
of credit institutions and other activities that are not investing
or financing activities.
- Investing activities: the acquisition and disposal of long-term
assets and other investments not included in cash and cash
equivalents.
- Financing activities: activities that result in changes in the size
and composition of the equity and liabilities that are not
operating activities.
In preparing the consolidated cash flow statement, short-term
highly liquid investments that are subject to an insignificant risk of
changes in value were classified as “cash and cash equivalents”.
Accordingly, the Group classifies as cash and cash equivalents the
balances recognised under “Cash and Balances with Central Banks”
in the consolidated balance sheet and the cash balances
recognised under “Loans and Advances to Credit Institutions”.
ab) Consolidated statement of changes in equity
The consolidated statement of changes in equity presented in
these consolidated financial statements shows the total changes in
consolidated equity in the year. This information is in turn
presented in two statements: the consolidated statement of
recognised income and expense and the consolidated statement of
total changes in equity. The main characteristics of the information
contained in the two parts of the statement are explained below::
Consolidated statement of recognised income and expense
This part of the consolidated statement of changes in equity
presents the income and expenses generated by the Group as a
result of its business activity in the year, and a distinction is made
between the income and expenses recognised in the consolidated
income statement for the year and the other income and expenses
recognised, in accordance with current regulations, directly in
consolidated equity.
Accordingly, this statement presents:
a) Consolidated profit for the year.
b) The net amount of the income and expenses recognised
temporarily in consolidated equity under “Valuation
Adjustments”.
c) The net amount of the income and expenses recognised
definitively in consolidated equity.
d) The income tax incurred by the items indicated in b) and c)
above, except for the valuation adjustments arising from
investments in associates or jointly controlled entities
accounted for using the equity method, which are presented
net.
e) Total consolidated recognised income and expense, calculated
as the sum of the items in a) to d) above, presenting
separately the amount attributable to the Parent and the
amount relating to minority interests.
The amount of the income and expenses relating to entities
accounted for using the equity method recognised directly in
equity is presented in this statement, irrespective of its nature,
under “Entities Accounted for Using the Equity Method”.
The detail of the changes in income and expenses recognised in
equity under “Valuation Adjustments” is as follows:
a) Revaluation gains/(losses): includes the amount of the
income, net of the expenses incurred in the year, recognised
directly in consolidated equity. The amounts recognised
under this line item in the year remain there, even if in the
same year they are transferred to the consolidated income
statement, to the initial carrying amount of other assets or
liabilities or are reclassified to another line item.

) Amounts transferred to income statement: includes the
amount of the revaluation gains and losses previously
recognised in consolidated equity, albeit in the same year,
which are recognised in the consolidated income statement.
c) Amount transferred to the initial carrying amount of
hedged items: : includes the amount of the revaluation gains
and losses previously recognised in consolidated equity, albeit
in the same year, which are recognised at the initial carrying
amount of the assets or liabilities as a result of cash flow
hedges
d) Other reclassifications: includes the amount of the transfers
made in the year between valuation adjustment items in
accordance with current regulations.
The amounts of these items are presented gross and, except as
indicated above for the items relating to valuation adjustments of
entities accounted for using the equity method, the related tax
effect is recognised in this statement under “Income Tax”.
Consolidated statement of total changes in equity
This part of the consolidated statement of changes in equity
includes all the changes in equity, including those due to changes
in accounting policy and those made to correct errors.
Accordingly, this statement presents a reconciliation of the
carrying amount at the beginning and end of the year of all the
consolidated equity items, and the changes made are grouped
together on the basis of their nature into the following items:
a) Adjustments due to changes in accounting policy and
adjustments made to correct errors: include the changes in
consolidated equity arising as a result of the retrospective
restatement of the balances in the consolidated financial
statements due to changes in accounting policy or to the
correction of errors.
b) Income and expense recognised in the year: includes, in
aggregate form, the total of the aforementioned items
recognised in the consolidated statement of recognised
income and expense.
c) Other changes in equity: includes the remaining items
recognised in equity, including, inter alia, increases and
decreases in the endowment fund, distribution of profit,
transactions involving own equity instruments, equityinstrument-based
payments, transfers between equity items
and any other increases or decreases in consolidated equity.
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3. Banesto Group
a) Banco Español de Crédito, S.A.
Banesto is the parent of the Banesto Group. At 31 December
2008, the Bank's assets represented substantially all the Group's
consolidated assets; the Bank's equity represented 93.33% of the
Group's equity, and the Bank's net profit for 2008 represented
86.09% of the consolidated net profit for the year attributed to
the Group.
At 31 December 2008 and 2007, the Bank conducted its business
in Spain through 1,914 and 1,946 branch offices, respectively,
located throughout the country and had 128 agents to which Bank
Banco Español de Crédito, S. A.
Condensed balance sheets at 31 december 2008 and 2007
Thousands of Euros
of Spain Circular 5/1995 was applicable (the detail is shown in
Appendix V). As additional support for its international activities,
the Bank also has one branch abroad and controls certain financial
institutions which operate exclusively outside Spain.
The Bank's condensed 2008 and 2007 balance sheets, income
statements, statements of recognised income and expense,
statements of total changes in equity and cash flow statements are
as follows:
ASSETS 2008 2007
CASH AND BALANCES WITH CENTRAL BANKS 1,688,142 1,412,860
FINANCIAL ASSETS HELD FOR TRADING 5,677,350 5,517,853
OTHER FINANCIAL ASSETS AT FAIR VALUE
THROUGH PROFIT OR LOSS - 504
AVAILABLE-FOR-SALE FINANCIAL ASSETS 10,992,558 9,858,716
LOANS AND RECEIVABLES 98,762,850 94,379,377
HEDGING DERIVATIVES 1,196,011 537,621
NON-CURRENT ASSETS HELD FOR SALE 355,821 92,902
INVESTMENTS 659,720 766,071
INSURANCE CONTRACTS LINKED TO PENSIONS 1,496,732 1,500,282
TANGIBLE ASSETS 1,111,582 1,081,599
INTANGIBLE ASSETS 55,981 44,231
TAX ASSETS 879,866 1,048,619
OTHER ASSETS 297,601 83,362
TOTAL ASSETS 123,174,214 116,323,997
Memorandum items:
Contingent liabilities 11,026,642 11,993,742
Contingent commitments 16,904,405 16,961,201

Banco Español de Crédito, S. A.
Condensed balance sheets at 31 december 2008 and 2007
Thousands of Euros
LIABILITIES AND EQUITY 2008 2007
LIABILITIES
FINANCIAL LIABILITIES HELD FOR TRADING 4,447,440 3,499,984
FINANCIAL LIABILITIES AT AMORTISED COST 109,658,146 104,675,980
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS
IN PORTFOLIO HEDGES OF INTEREST RATE RISK 440,136 (516,725)
HEDGING DERIVATIVES 577,261 1,090,740
PROVISIONS 2,477,127 2,563,792
TAX LIABILITIES 347,751 17,382
OTHER LIABILITIES 454,979 587,033
TOTAL LIABILITIES 118,402,840 111,918,186
EQUITY
VALUATION ADJUSTMENTS 39,625 (151,275)
SHAREHOLDERS' EQUITY 4,731,749 4,557,086
TOTAL EQUITY 4,771,374 4,405,811
TOTAL LIABILITIES AND EQUITY 123,174,214 116,323,997
117

118
Banco Español de Crédito, S. A.
Condensed income statements For the years ended 31 december 2008 and 2007
Thousands of Euros
Income/(Expenses)
2008 2007
INTEREST AND SIMILAR INCOME 5,638,283 4,715,105
INTEREST EXPENSE AND SIMILAR CHARGES (4,091,918) (3,351,986)
NET INTEREST INCOME 1,546,365 1,363,119
INCOME FROM EQUITY INSTRUMENTS 79,676 85,976
FEE AND COMMISSION INCOME 681,680 686,075
FEE AND COMMISSION EXPENSE (114,498) (116,866)
GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 57,405 45,595
EXCHANGE DIFFERENCES (net) 40,329 35,005
OTHER OPERATING INCOME 27,041 41,140
OTHER OPERATING EXPENSES (55,974) (61,589)
GROSS INCOME 2,262,024 2,078,455
ADMINISTRATIVE EXPENSES (866,348) (837,483)
DEPRECIATION AND AMORTISATION (101,879) (94,268)
PROVISIONS (net) 3,527 (438)
IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (349,957) (224,924)
PROFIT FROM OPERATIONS 947,369 921,341
IMPAIRMENT LOSSES ON OTHER ASSETS (net) (5,438) (3,908)
GAINS/LOSSES ON DISPOSAL OF ASSETS NOT CLASSIFIED
AS NON-CURRENT ASSETS HELD-FOR SALE 7,481 37,970
GAINS/LOSSES ON DISPOSAL OF NON-CURRENT ASSETS HELD-FOR SALE
NOT CLASSIFIED AS DISCONTINUED OPERATIONS (2,233) 762
PROFIT BEFORE TAX 947,179 956,165
INCOME TAX (275,791) (295,879)
PROFIT FROM ORDINARY ACTIVITIES 671,388 660,286
PROFIT FOR THE YEAR 671,388 660,286

Banco Español de Crédito, S. A.
Condensed statement of changes in equity
Condensed statements of recognised income and expense For the years ended 31
december 2008 and 2007
Thousands of Euros
2008 2007
RPROFIT FOR THE YEAR 671,388 660,286
OTROS INGRESOS Y GASTOS RECONOCIDOS 190,900 (102,927)
Available-for-sale financial assets 1,721 (75,053)
Cash flow hedges 264,657 (79,193)
Income tax (75,478) 51,319
TOTAL INCOME AND EXPENSES FOR THE YEAR 862,288 557,359
119

120
Banco Español de Crédito, S. A.
Condensed statement of changes in equity
Condensed statements of total changes in equity
For the years ended 31 december 2008 and 2007
Thousands of Euros
SHAREHOLDERS' EQUITY
Other Less: Profit Less: Total
Share Equity Treasur for the Dividends and Shareholders Valuation Total
Capital Premium Reserves Instruments Shares Year Remuneration Equity Adjustments Equity
Balance at 01/01/07 548,521 - 2,421,468 - - 1,487,484 (312,449) 4,145,024 (48,348) 4,096,676
Total recognised income/(expenses) - - - - - 660,286 - 660,286 (102,927) 557,359
Other changes in equity - - 1,174,992 1,778 - (1,487,484) 62,490 (248,224) (102,927) (248,224)
Balance at 31/12/07 548,521 - 3,596,460 1,778 - 660,286 (249,959) 4,557,086 (151,275) 4,405,811
Total recognised income/(expenses) - - - - - 671,388 - 671,388 190,900 862,288
Other changes in equity (5,485) - 193,070 (1,778) - (660,286) (22,246) (496,725) - (496,725)
Balance at 31/12/08 543,036 - 3,789,530 - - 671,388 (272,205) 4,731,749 39,625 4,771,374

Banco Español de Crédito, S. A.
Condensed cash flow statements For the years ended 31 december 2008 and 2007
Thousands of Euros
2008 2007
A. CASH FLOWS FROM OPERATING ACTIVITIES 1,221,867 (2,187,674)
Profit for the year 671,388 660,286
Adjustments made to obtain the cash flows from operating activities:
Depreciation and amortisation 101,879 94,268
Other adjustments 620,914 500,946
Net increase/decrease in operating assets:
Financial assets held for trading- 159,497 (103,544)
Other financial assets at fair value through profit or loss (504) 504
Available-for-sale financial assets- 1,134,795 (245,215)
Loans and receivables- 4,466,549 9,424,235
Other operating assets 156,095 429,367
Net increase/decrease in operating liabilities:
Cartera de negociación- 1,011,221 371,587
Financial liabilities at amortised cost- 5,531,382 5,416,357
Other operating liabilities- (997,940) 1,105,446
Collections/Payments income tax (132,823) (831,217)
B. CASH FLOWS FROM INVESTING ACTIVITIES (335,943) 3,609,020
Payments
Tangible assets (275,341) (482,578)
Intangible assets (45,710) (34,516)
Investments (86,094) (74,036)
Other payments related to operating activities (214,239) -
Collections
Tangible assets 167,948 185,404
Investments 117,494 57,225
Held-to-maturity investments - 3,812,302
Other collections relating to investing activities - 145,219
C. NET CASH FLOWS FROM FINANCING ACTIVITIES (360,935) (355,167)
Payments
Dividends (403,656) (249,959)
Subordinated liabilities (500,000) (106,850)
Redemption of own equity instruments (5,485) -
Other payments related to financing activities (63,560) -
Collections
Subordinated liabilities 611,766 -
Other collections related to financing activities - 1,642
D. EFFECT OF CHANGES IN EXCHANGE RATES (3,779) 3,033
E. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (A+B+C+D) 521,210 1,069,212
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,795,498 726,286
G. CASH AND CASH EQUIVALENTS AT END OF YEAR
MEMORANDUM ITEMS
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR
2,316,708 1,795,498
Cash 263,062 258,478
Cash equivalents at central banks 1,425,080 1,154,382
Other financial assets 628,566 382,638
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 2,316,708 1,795,498
121

122
b) Group structure
The salient changes and events in the Group in relation to its
scope of consolidation in 2008 and 2007 were as follows:
2008
1. Promodomus Desarrollo de Activos, S.L.
On 6 June 2008, Intursa, S.A. and Dudebasa, S.A. acquired
3,599 shares and 1 share, respectively, of Global Marhabat,
S.L. for EUR 3,600. At the Annual General Meeting of Global
Marhabat, S.L. on 6 June 2008, the shareholders resolved to
change its name to Promodomus Desarrollo de Activos, S.L.
On 11 July 2008, Intursa, S.A. acquired the shareholding of
Dudebasa, S.A. and approved a capital increase of EUR 1,996
thousand at Global Marhabat, S.L. through the issue of
1,996,400 shares of EUR 1 par value each, 980,000 of
which were subscribed and paid by Reyal Urbis, S.A. after
Intursa, S.A., which subscribed and paid for the remaining
1,016,400 shares, waived its pre-emptive subscription rights.
2. Cambios Sol, S.A.
On 31 July 2008, Hualle, S.A. and Dudebasa, S.A. sold their
shareholding (50,093 and 1 shares, respectively) in Cambio
Sol, S.A., which constituted all of the company’s share capital,
to Moneygram Payment Systems Inc. for EUR 2,905
thousand.
3. Liquidation of Proyecto Europa, S.A.
On 3 June 2008, Banco Español de Crédito, S.A., as the sole
shareholder of the Company, approved the dissolution and
simultaneous liquidation thereof since there were no
creditors. This dissolution was registered in the Mercantile
Register on 29 July 2008
4. Distribution of the Bank's profit and
Earnings per share
a) Distribution of the Bank's profit
The distribution of the Bank's net profit for 2008 that the Board
of Directors will propose for approval by the shareholders at the
Annual General Meeting is as follows:
Thousands of Euros
Dividends 384,936
Voluntary reserves 286,452
Net profit for the year 671,388
4. Sale of Desarrollo Informático, S.A
On 14 October 2008, the Bank sold 2,768,838 shares of
Desarrollo Informático, S.A. which constituted all of its share
capital to Suministros, Importaciones y Mantenimientos
Electrónicos, S.A. and Imesapi, S.A., who acquired 2,768,831
and 7 shares, respectively, for EUR 1,800 thousand.
5. Liquidation of Banesto Delaware Inc. in October 2008.
6. Liquidation of Banesto Isuances Ltd in November 2008.
7. Change in the name of Larix Ltd to Larix Spain S.L. and
relocation of its registered office from the Isle of Man to
Spain..
2007
1. Absorption of Corporación Industrial y Financiera de Banesto,
S.A. by Banco Español de de Crédito, S.A.
2. Absorption of Grupo Golf del Sur, S.A.U., Aparcamientos y
Construcciones, S.A.U. and Inmobiliaria Laukariz, S.A.U. by
Elerco, S.A.
3 .Absorption of Crinaria, S.A.U., Deposoltenegolf, S.A.U. and
B2C Escaparate, S.L. by Banco Español de Crédito, S.A.
4. Disposal of Ingeniería de Software Bancario, S.L.
5. Liquidation of Banesto e-Business, S.A.U.
6. Liquidation of Banesto Finance, Ltd.
At its meetings on 22 July, 6 October and 17 December 2008, the
Board of Directors of the Bank resolved to distribute three interim
dividends out of 2008 profit, of EUR 0.132 per share each, for a
total of EUR 272,205 thousand. The dividend declared at the
Board of Directors Meeting on 17 December 2008 will be paid on
2 February 2009 and, accordingly, it is recognised under “Other
Financial Liabilities” on the liability side of the accompanying
consolidated balance sheet (see Note 21).
The provisional accounting statements prepared on each of the
dates indicated below by the Board of Directors of Banco Español
de Crédito, S.A., pursuant to Article 216 of the Consolidated
Companies Law, to evidence the existence of sufficient liquidity for
the distribution of the interim dividends are as follows:

At their meeting on 20 January 2009, the Bank’s Board of
Directors agreed to submit for approval by the shareholders’ at the
Annual General Meeting a final dividend of EUR 0.164 per share,
for a total of EUR 112,731 thousand, which will be paid out on 4
May 2009.
b) Earnings per share
Thousands of Euross
22-07-2008 6-10-2008 17-12-2008
Profit before tax at 30 November, 30
September and 30 June 2008 (*) 557,638 838,764 1,001,099
Less:
Estimated income tax (149,928) (219,447) (277,039)
Dividends paid - (90,735) (181,470)
Liquidity 407,710 528,582 542,590
Interim dividend to be distributed (90,735) (90,735) (90,735)
Gross dividend per share (euros) 0,132 0,132 0,132
Date of payment 1-8-08 3-11-08 2-2-09
(*) The latest balance sheet at the date of each Board of Directors meeting.,
i. Basic earnings per share
Basic earnings per share are calculated by dividing the net profit or
loss attributable to the Group by the weighted average number of
ordinary shares outstanding during the year, excluding the average
number of treasury shares held in the year.
Accordingly:
2008 2007
Net profit for the year attributed to the Parent (thousands of euros) 779,844 764,567
Net profit for the year from ordinary activity attributed to the
Parent (thousands of euros) 779,844 764,567
Weighted average number of shares outstanding 685,211,431 692,523,374
Basic earnings per share (euros)
Of net profit for the year 1.14 1.10
Of net profit from ordinary activities 1.14 1.10
ii. Diluted earnings per share
In calculating diluted earnings per share, the amount of profit
attributable to ordinary shareholders and the weighted average
number of shares outstanding, net of treasury shares, are adjusted
to take into account all the dilutive effects inherent to potential
ordinary shares (share options, warrants and convertible debt
instruments).
At 31 December 2008 and 2007, the Group had no issues
outstanding of debt instruments convertible into Bank shares or
conferring privileges or rights which might, due to any contingency,
make them convertible into shares. The Bank's share-based
incentive plans outstanding at 31 December 2008 and 2007 (see
Note 41) have a dilutive effect on the earnings per share equal to
an increase of 245,907 and 531,206 shares, respectively.
Accordingly, 2008 and 2007 diluted earnings per share were
calculated as follows:
2008 2007
Net profit for the year attributed to the Parent
(in thousands of euros) 779.844 764.567
Dilutive effect of changes in profit for the year arising from
potential conversion of ordinary shares 779.844 764.567
Weighted average number of shares outstanding 685.211.431 692.523.374
Dilutive effect of:
Share options 245,907 531,206
Adjusted average number of shares for the calculation 685,457,338 693,054,580
Diluted earnings per share (euros) 1.14 1.10
123

124
5. Remuneration and other benefits paid
to the Bank's directors and senior
executives
a) Remuneration of directors
Following is an individualised detail of the remuneration earned in
2008 and 2007 by the Bank's directors, in their capacity as such,
in respect of the by-law-stipulated share of profits and attendance
The foregoing table shows the amounts earned in 2008 by
Federico Outón del Moral and Isabel Polanco Moreno, who at 31
December 2008 were not members of the Board, and who have
earned attendance fees for the meetings that they attended and all
other remuneration to which they are entitled in proportion to the
amount of time served by them as members the Board.
The other members of the Bank's Board of Directors did not
receive any remuneration.
At the Bank's Annual General Meeting on 28 February 2006 the
shareholders approved a medium- to long-term Incentive Plan to
grant options on shares of Banco Santander, S. A. to the
beneficiaries and, if the terms of the plan are met, shares of Banco
Español de Crédito, S.A. will be delivered to the senior executives
and an amount in cash will be paid to the other beneficiaries.
fees corresponding to them for the supervisory and decisionmaking
functions discharged as members of the Board of Directors,
in accordance with Article 27 of the bylaws:
2008 2007
Bylaw-Stipulated Directors’ Emoluments Attendance Fees
Audit and Other
Executive Compliance Risk Attendance
Directors Board Committee Committee Committee Board Fees Total Total
José Antonio García Cantera 59,400 26,100 - - 13,500 ,- 99,000 102,500
Víctor Manuel
Menéndez Millán 59,400 26,100 26,100 - 12,000 13,500 137,100 149,500
José María Nus Badia 59,400 26,100 - 26,100 13,500 - 125,100 131,500
Juan Delibes Liniers 59,400 26,100 - 26,100 13,500 - 125,100 131,500
Federico Outón del Moral 34,650 - - - 6,000 - 40,650 79,500
Isabel Polanco Moreno 14,850 - - - 1,500 - 16,350 76,500
Rafael del Pino y
Calvo-Sotelo 59,400 - - - 10,500 - 69,900 78,000
Francisco Daurella Franco 59,400 - - - 9,000 - 68,400 76,500
José Luis López Combarros 59,400 - 37,650 - 13,500 13,500 124,050 142,500
Carlos Sabanza Teruel 59,400 26,100 - 26,100 13,500 - 125,100 137,500
Carlos Pérez de Bricio
Olariaga 24,750 - - - 3,000 - 27,750 -
Belén Romana García 44,550 - 27,825 - 10,500 9,000 91,875 -
Total 2008 594,000 130,500 91,575 78,300 120,000 36,000 1,050,375
Total 2007 660,000 145,000 80,000 87,000 109,500 24,000 1,105,500
EUROS
As the terms of the Plan were met, the detail of the shares of
Banco Español de Crédito, S.A. delivered to the members of the
Board of Directors of the Bank is as follows:
Medium-/long-term Incentive Plan:
Number of Shares
Ana Patricia Botín-Sanz de Sautuola y O'Shea 54,166
José Antonio García Cantera 16,920
Federico Outón del Moral 43,834
Juan Delibes Liniers 26,015
José María Fuster Van Bendegem 18,570
José María Nus Badía
(*) See Note 41.
15,566
175,071 (*)

The detail of the options on shares of Banco Santander, S.A.
granted to members of the Board of Directors of the Bank, and the
number of options exercised, is as follows:.
On 27 June 2007, the Bank’s Extraordinary General Meeting
approved an Incentive Plan which entails the delivery, if the terms
of the plan are met, of shares of Banco Español de Crédito, S. A. to
certain executives, including executive directors and senior
executives (see Note 41).
The maximum number of shares of Banco Español de Crédito, S.A.
to be delivered, no later than 31 June 2010, to each of the
executive directors who are beneficiaries of the Plan is as follows:
Number Date of Date of Number
of Exercise Commencemen Expiry of of
Share Price of Exercise Exercise Options
Options (Euros) Period Period Exercised
Medium-/long-term Incentive Plan:
Ana Patricia Botín-Sanz de Sautuola y O'Shea 293,692 9,09 2-3-2008 15-1-2009 -
José Antonio García Cantera 91,743 9,09 2-3-2008 15-1-2009 91,743
Federico Outón del Moral 237,672 9,09 2-3-2008 15-1-2009 237,672
Juan Delibes Liniers 141,055 9,09 2-3-2008 15-1-2009 141,055
osé María Fuster Van Bendegem 100,688 9,09 2-3-2008 15-1-2009 100,688
José María Nus Badía 84,403
949,253
9,09 2-3-2008 15-1-2009 -
Medium-/long-term Incentive Plan:
Additionally, the aforementioned Extraordinary General Meeting
approved the first cycle (2007-2008) and the second cycle
(2007-2009) of the Target-Based Share Plan and the first cycle
(2008-2010) of the Obligatory Investment Share Plan of Banco
Santander, S.A., which entails the delivery, if the terms of the plans
are met, of the following number of shares of Banco Santander, S.A.
to Ana Patricia Botín-Sanz de Sautuola y O'Shea:
Price Number
(Euros per of Delivery
Share) Shares Deadline
First cycle of Target-Based Share Plan 13.46 (*) 27,929 31 de julio 2009
Second cycle of Target-Based Share Plan 13.46 (*) 41,835 31 de julio 2010
First cycle of Obligatory Investment Share Plan (**) 13,610 1 de abril 2011
(*) Average market price of the shares of Banco Santander, S.A. weighted by daily volume in the 15 trading days prior to 7 May 2007.
(**) The obligatory investment had an average price of EUR 11.80 per share.
Maximum Number of Shares
Ana Patricia Botín-Sanz de Sautuola y O'Shea 22,798
José Antonio García Cantera 39,729
Juan Delibes Liniers 37,457
José María Nus Badía 20,148
120,132
125

126
b) Remuneration of executive directors and senior executives
The detail of the remuneration of the Bank's executive directors
and senior executives in 2008 and 2007, including the fixed
remuneration in 2008 and 2007 and the variable remuneration
recognised in income for those years is as follows::
Thousands of Euros
Salary
Number of Other
Year Persons Fixed Variable Total Remuneration Total
2007 15 6,356 7,072 13,428 56 13,484
2008 16 6,300 6,909 13,209 5,621 18,830
The figures in the foregoing table include the amounts, by item,
corresponding to Ana P. Botín-Sanz de Sautuola y O'Shea, José
Antonio García Cantera, Juan Delibes Liniers, José María Fuster Van
Bendegem and José María Nus Badía for the provision of services
other than those of directors, pursuant to the last paragraph of
Article 27 of the bylaws. Bank of Spain Circular 4/2004 only
requires that the remuneration received by the executive directors
be indicated in aggregate form, together with the remuneration of
the other senior executives, as shown in the foregoing table.
However, set forth below are the individualised amounts
corresponding to the executive directors at 31 December 2008 for
the provision of services other than the supervisory and decisionmaking
functions discharged by them in their capacity as directors:
2008
Thousands of Euros
2007
Salary
Fixed Variable Total
Other
Remuneration Total Total
Ana Patricia Botín-Sanz de Sautuola y O'Shea 1,269 1,786 3,055 613 3,668 3,123
José Antonio García Cantera 704 756 1,460 762 2,222 1,447
Juan Delibes Liniers 573 769 1,342 910 2,252 1,333
José María Nus Badía 484 414 898 176 1,074 885
Total 2008 3,030 3,725 6,755 2,461 9,216
Total 2007 2,764 4,008 6,772 16 6,788
The foregoing tables include, under other remuneration, the
income arising from the delivery of shares of Español de Crédito,
S.A. the exercise of options on shares of Banco Santander, S.A. and
the amounts received in cash under the Plan approved by the
shareholders at the Annual General Meeting of 28 February 2006.
As beneficiaries of the Plan, non-director executives exercised a
total of 348,668 options on Banco Santander, S.A. shares and in
2008 they received a total of 70,836 Banco Español de Crédito,
S.A. (see Note 41) shares and EUR 514 thousand in cash.
The maximum number of shares of Banco Español de Crédito, S.A.
to be delivered to the non-director executives who are beneficiaries
of the Incentive Plan approved by the Extraordinary General
Meeting of the Bank on 27 June 2007 is 150,113 shares (see Note
41).
Following is a detail explaining the changes in the remuneration of
executive directors, by item, in relation to the Bank’s profit and
share price (Article 25.2 of the Regulations governing the Bank’s
Board of Directors):

c) Pension, insurance and other obligations
The actuarial liability recognised in connection with postemployment
benefits earned by current and former senior
executives and directors of the Bank amounted to approximately
EUR 43,005 thousand at 2008 year-end (EUR 42,824 thousand
at 31 December 2007). Approximately EUR 3,018 thousand were
The capital guaranteed by life insurance policies for executive
directors amounted to EUR 4,174 thousand and EUR 3,854
thousand at 31 December 2008 and 2007, respectively..
d) Loans
At 31 December 2008 and 2007, the direct risk exposure to
directors of the Bank amounted to EUR 206 thousand and EUR
256 thousand, respectively.
e) Termination benefits
The executive directors have indefinite-term employment contracts.
However, executive directors whose contracts are terminated
voluntarily or due to breach of duties are not entitled to receive
any economic compensation. If the contracts are terminated for
reasons attributable to the Bank or due to objective circumstances
(such as those affecting the executive directors' functional and
organic statute), the directors will be entitled, at the date of
termination of their employment relationships with the Bank, to
the following:
1) In the case of Ana Patricia Botín-Sanz de Sautuola y O'Shea,
to receive a termination benefit of up to five years' annual
fixed salary payments, as established in the related contract,
based on the date on which the contract is terminated.
2) In the case of José Antonio García Cantera, to receive a
termination benefit of two years’ annual fixed salary
payments, as established in the related contract.
3) In the case of Juan Delibes Liniers, to receive a termination
benefit equal to half of 80% of the annual fixed salary
Thousands of Euros
2008 2007
Overall remuneration of executive directors for the
supervisory and decision-making functions discharged by them
Overall remuneration of executive directors for functions discharged by them other than
349 366
those discharged in their capacity as directors 9,217 7,457
Total remuneration of executive directors 9,566 7,823
Profit attributed to the Group 779,844 764,567
Change in share price (39,3%) (20,6%)
charged to the income statement in this connection in 2008 (EUR
3,083 thousand in 2007).
The following table details the defined benefit pension obligations
to executive directors at 31 December 2008 and 2007:
Euros
Vested Obligations
2008 2007
Ana Patricia Botín-Sanz de Sautuola y O’Shea 21,736,799 17,975,347
José Antonio García Cantera 2,396,917 1,612,304
Juan Delibes Liniers 8,598,210 8,031,893
José María Nus Badía 5,193,608 1,701,960
multiplied by the number of years of recognised service in the
banking industry, as established in the related contract.
4) In the case of José María Nus Badía, to receive a termination
benefit of EUR 811,366.
In all cases these amounts are incompatible with the receipt of any
other pension supplement.
Additionally, other members of the Bank's senior management have
contracts which entitle them to receive benefits in the event of
termination for reasons other than voluntary redundancy,
retirement, disability or serious breach of duties. These benefits
are only recognised as personnel expenses when the employment
relationship between the Bank and its directors is terminated
before the normal retirement date.
f) Detail of the directors' investments in companies with similar
business activities and performance by directors, as
independent professionals or as employees, of similar
activities
Pursuant to Article 127 ter.4 of the Spanish Companies Law, in
order to reinforce the transparency of listed companies, set forth
below are the ownership interests held by the members of the
Board of the Directors in entities whose company object is to
engage in: (i) banking, financing or lending; (ii) insurance; (iii)
management of collective investment undertakings; or (iv)
securities brokerage; and the management or executive functions, if
any, that the directors discharge thereat:
127

128
Director Corporate Name Line of Business % of Ownership Functions
Ana P. Botín-Sanz de Sautuola y O’Shea Banco Santander, S.A. Banking 0.113 Director
Assicurazioni Generali, S.P.A. Insurance - Director
Santander Investment Services, S.A. Banking - Director
Banco Santander de Negocios Portugal Banking - Director
Matías Rodríguez Inciarte Banco Santander, S.A. Banking 0.011 Third Deputy Chairman
and Executive Director
Rafael del Pino Calvo-Sotelo Pactio Gestión, SGIIC, S.A. CIU management company 22.30 -
Banco Pastor, S.A. Banking 1.12 -
The Blackstone Group Internacional Ltd. Investments Member of the European
Advisory Board
David Arce Torres Banco Santander, S.A. Banking 0.022 General Managerl
Juan Delibes Liniers Santander Seguros
y Reaseguros, Cía. Aseguradora, S.A. Insurance - Director
Víctor Manuel Menéndez Millán Banco Santander, S.A. Banking 0.019 -
BBVA Banking 0.012 -
José Luis Lopez Combarros Bankinter, S.A. Banking 0.006 -
Corporación Mapfre, S.A. Insurance 0.002 -
Francisco Daurella Franco Banco Vitalicio de España, S.A. Insurance - Director
Carlos Sabanza Teruel Banco Santander, S.A. Banking 0.006 -
José María Fuster Van Bendegem Banco Santander, S.A. Banking - General Managerl
Abbey National Bank Banking - Directoro
Sistemas 4B, S.A. Means of payment - Director
Certain members of the Board of Directors hold ownership
interests of less than 0.001% in the following listed companies:
BBVA, Allianz, Banco Popular and Banco Santander.
None of the members of the Board of Directors perform,
as independent professionals or as employees, activities similar to
those detailed above. Additionally, as required by Article 114.2 of
the Securities Market Law, it is hereby stated that in 2008 and
2007 the Bank's directors did not perform, either on their own
behalf or through an intermediary, any transaction with the Bank or
with other Group companies other than those conducted in the
ordinary course of operations or on an arm's length basis

6. Loans and advances to credit
institutions
The breakdown, by classification, type and currency of the
transaction, of the balances of “Loans and Advances to Credit
Institutions” on the asset side of the consolidated balance sheets
is as follows:
Thousands of Euros
2008 2007
Classification:
Other financial assets at fair value through profit or loss 1,793,839 905,291
Loans and receivables 19,700,685 19,118,526
21,494,524 20,023,817
Type:
Reciprocal accounts 165 2,118
Time deposits 9,951,882 4,776,284
Reverse repurchase agreements 8,737,545 13,600,703
Other 2,468,039 1,518,918
21,157,631 19,898,023
Add- Valuation adjustments 336,893 125,794
Of which:
Accrued interest 335,943 125,811
Impairment losses (1) (99)
Other 951 82
21,494,524 20,023,817
Currency:
Euro 19,468,799 19,386,801
Foreign currencies 2,025,725 637,016
21,494,524 20,023,817
The impairment losses on financial assets classified as loans and
receivables are disclosed in Note 10.
Note 44 contains a detail of the terms to maturity of these assets
at 2008 year-end and of the average interest rates in 2008.
129

130
7. Debt instruments
The breakdown, by classification, type and currency, of the
balances of “Debt Instruments” on the asset side of the
consolidated balance sheets is as follows:
Thousands of Euros
2008 2007
Classification:
Financial assets held for trading 402,154 781,542
Other assets at fair value through profit or loss 253,887 285,474
Available-for-sale financial assets 6,620,409 5,605,166
Loans and receivables 736,239 526,160
8,012,689 7,198,342
Type:
Spanish government debt securities-
Treasury bills 163,291 444,509
Government bonds 4,363,750 2,997,930
Accrued interest 24,368 20,725
Foreign government debt securities 137,632 311,769
Issued by financial institutions 1,353,576 1,556,464
Other fixed-income securities 1,986,373 1,881,207
8,028,990 7,212,594
Valuation adjustments (16,301) (14,252)
Of which:
Impairment losses (16,301) (14,252)
8,012,689 7,198,342
Currency:
Euro 7,958,682 7,141,617
Foreign currencies 54,007 56,725
8,012,689 7,198,342
At 31 December 2008, the nominal amount of debt instruments
assigned to certain Group or third-party commitments amounted
to approximately EUR 10,660 thousand (EUR 10,660 thousand at
31 December 2007).
The impairment losses on available-for-sale financial assets are
disclosed in Note 8-d.
Note 44 contains a detail of the terms to maturity of these assets
at 2008 year-end and of the average interest rates in 2008.

8. Other equity instruments
a) Breakdown
The breakdown, by currency, classification and type, of the balance
of “Other Equity Instruments” in the consolidated balance sheets
is as follows:
b) Acquisitions and disposals
The main acquisitions and disposals effected in 2008 and 2007
relate to changes in financial assets held for trading and to
purchases and sales of investment fund units and shares.
Thousands of Euros
2008 2007
Currency:
Euro 726,667 2,282,157
Foreign currencies 11,938 20,152
738,605 2,302,309
Classification:
Financial assets held for trading 472,996 1,636,069
Other financial assets at fair value through profit or loss 143,436 301,493
Available-for-sale financial assets 122,173 364,747
738,605 2,302,309
Type:
Shares of Spanish companies 466,937 1,634,591
Shares of foreign companies 61,432 261,020
Investment fund units and shares 72,413 109,624
Other securities 143,436 301,493
744,218 2,306,728
Less- Impairment losses (5,613) (4,419)
738,605 2,302,309
c) Notifications of acquisitions of holdings
The notifications made by the Bank, in compliance with Article 86
of the Spanish Companies Law and Article 53 of Securities Market
Law 24/1988, of the acquisition and sale of holdings in investees
are listed in Appendix IV.
d) Impairment losses
Following is a summary of the changes in the impairment losses in
the foregoing table and those on debt instruments classified as
available-for-sale (see Note 7) in 2008 and 2007::
Thousands of Euros
2008 2007
Balance at beginning of year 18,671 15,439
Impairment losses charged to income for the year 2,123 4,725
Other changes 1,120 (1,493)
Balance at end of year 21,914 18,671
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132
9. Trading derivatives
(assets and liabilities)
The detail, by type of inherent risk, of the fair value of the trading
derivatives arranged by the Group at 31 December 2008 and
2007 is as follows:
Thousands of Euros
2088 2007
Balance Balance Balance Balance
Receivable Payable Receivable Payable
Interest rate risk 2,325,533 2,289,170 940,529 1,049,146
Currency risk 370,139 322,882 167,815 289,545
Price risk 1,460,110 1,249,750 812,742 1,190,061
Credit risk 51,575 50,463 (2,483) 3,266
Other 1,308 1,308 269,593 1
4,208,665 3,913,573 2,188,196 2,532,019

10. Loans and advances to customers
The detail, by loan type and status, borrower sector, geographical
area of residence and interest rate formula, of the balance of
“Loans and Advances to Customers” on the asset side of the
consolidated balance sheets is as follows::
Note 44 contains a detail of the terms to maturity of these assets
at 2008 year-end and of the average interest rates in 2008.
At 31 December 2008 and 2007, there were no loans and
advances to customers for material amounts without fixed maturity
dates.
In 2008 and 2007 the Bank securitised loans in its portfolio
amounting to approximately EUR 4,300 million and EUR 2,750
million. All the securities issued were subscribed by securitisation
Thousands of Euros
2008 2007
By loan type and status:
Commercial credit 5,905,809 6,939,383
Secured loans 37,614,501 37,788,047
Reverse repurchase agreements 4,873,678 2,953,070
Personal loans 14,842,798 12,512,504
Credit accounts 7,489,257 9,735,996
Other term loans 2,258,037 1,589,018
Finance leases 2,271,165 2,162,650
Receivable on demand and other 1,398,485 1,037,536
Impaired assets 1,396,085 398,460
Other 988,800 983,020
79,038,615 76,099,684
Less: Valuation adjustments (1,265,952) (1,032,649)
Of which:
Prepayments and accrued income and other adjustment 151,668 206,118
Impairment losses (1,417,620) (1,238,767)
77,772,663 75,067,035
By borrower sector:
Public sector - Spain 1,466,929 975,419
Other resident sectors 72,233,071 70,478,261
Non-residents 4,072,663 3,613,355
77,772,663 75,067,035
By geographical area:
Spain 75,730,528 72,882,332
European Union (excluding Spain) 1,934,819 2,115,630
United States and Puerto Rico 258,507 102,053
Other OECD countries 481,402 347,169
Latin America 425,328 511,516
Rest of the world 208,031 140,984
79,038,615 76,099,684
By interest rate formula
Fixed interest rate 21,129,858 19,961,030
Floating interest rate 57,908,757 56,138,654
79,038,615 76,099,684
vehicles set up by Santander de Titulización, Sociedad Gestora de
Fondos de Titulización, S.A. This securitisation did not give rise to
the derecognition of the loans from the balance sheet (see Note
2-c).
At 31 December 2008 and 2007, outstanding securitisation bonds
issued by these SPVs (the total face value of which amounted to
EUR 523,887 thousand and EUR 714,745 thousand, respectively)
were owned by the Group.
133

134
At 31 December 2008 and 2007, the Group had recognised loans
amounting to EUR 24,149 thousand and EUR 29,338 thousand,
respectively, relating to the financing granted to its employees for
the acquisition of shares of the Bank and of Banco Santander, S.A.
In addition, the Bank has in certain cases financed acquisitions of
its own shares by third parties, and has granted loans to third
parties secured by shares of the Bank or of Banco Santander, S.A.
At 31 December 2008 and 2007, these financing and guarantee
arrangements, net of the related impairment losses, amounted to
EUR 1,732 thousand and EUR 1,844 thousand, respectively, and a
restricted reserve was recorded for the carrying amount thereof,
net of the related impairment losses, where appropriate, as
required by Articles 75, 79, 80 and 81 of the Consolidated
Companies Law (see Note 28).
Impairment losses
The changes in 2008 and 2007 in the balance of the impairment
losses in the foregoing table and of those on “Loans and
Receivables - Loans and Advances to Credit Institutions” (see Note
6) were as follows:
Thousands of Euros
2008 2007
Balances at beginning of year 1,238,866 1,092,713
Impairment losses charged to income for the year
Individually assessed 393,998 133,630
Collectively assessed 10,693 156,801
Impairment losses reversed with a credit to income (72,491) (18,516)
Net impairment losses for the year 332,200 271,915
Net write-off of impaired balances and other changes (153,445) (125,762)
Balances at end of year 1,417,621 1,238,866
By method of assessment:
Individually 486,883 156,846
Collectively 930,738 1,082,020
Written-off loans recovered in 2008 amounted to EUR 32,401
thousand (EUR 42,941 thousand in 2007), and this amount is
presented as a reduction of the balance of “Impairment Losses on
Financial Assets - Loans and Receivables” in the consolidated
income statements.
Impaired assets
Following is a detail of the financial assets classified as loans and
receivables and considered to be impaired due to credit risk at 31
December 2008, and of the assets which, although not considered
to be impaired, include any past-due amount at that date, classified
by age of the oldest past-due amount:
Thousands of Euros
With Balances Past Due by
Up to 6 Months 6 to 12 12 to 18 18 to 24 More than 24
Months Months Months Months Total
699,455 340,548 115,074 20,982 220,026 1,396,085
Of this amount, 99.1% related to residents in Spain..

11. Hedging derivatives
The detail, by type of risk hedged, of the fair value of the
derivatives qualifying for hedge accounting is as follows:
Cash flow hedges are used to reduce the cash flow fluctuations
(attributable to the interest rate) generated by the hedged items
(loans and receivables tied to a floating interest rate). These
hedges use interest rate derivatives to convert the floating interest
rate on the loans and receivables to a fixed interest rate.
In 2007 the Bank arranged a fair value hedge of the interest rate
risk of a portfolio of financial instruments. The purpose of the
hedge is to maintain the economic value of the hedged assets,
which are fixed-interest marketable debt securities with original
maturities at long term, hedged mainly by IRSs
12. Investments
This heading includes equity instruments issued by associates
owned by the Bank.
Associates are entities over which the Caja is in a position to
exercise significant influence, but not control or joint control,
usually because it holds 20% or more of the voting power of the
investee.
Appendix III contains a detail of the investments in associates,
indicating the percentage of direct and indirect ownership and
other relevant information.
Thousands of Euros
2008 2007
Assets Liabilities Assets Liabilities
Fair value hedges
Micro-hedges 58,450 177,036 67,662 79,781
Portfolio hedges 866,721 337,296 398,143 826,178
Cash flow hedges 269,678 62,759 71,547 184,657
Of which:
Recognised in equity (Note 25 - 90,115 - (100,868)
1,194,849 577,091 537,352 1,090,616
The changes in 2008 and 2007 in the balance of “Investments” in
the consolidated balance sheets were as follows:
Thousands of Euros
2008 2007
Balance at beginning of year 16,258 29,142
Purchases and capital increases - 18
Ventas y reducciones de capital - (166)
Exchange differences and other 464 (12,736)
Balance at end of year 16,722 16,258
Following is a summary of the financial information on the
associates (obtained from the information available at the
reporting date):
Thousands of Euros
2008 2007
Total assets 371.238 295.772
Total liabilities (268.662) (235.543)
Net assets 102.576 60.229
Group's share of the net assets
of associates 23.027 16.685
Total income 210.103 139.822
Total profit 52.909 6.649
Group's share of the profit
Group's share of the profit of associates 1.874 1.707
135

136
13. Liabilities under insurance contracts
and Reinsurance assets
The breakdown of the balances of “Liabilities under Insurance
Contracts” in the consolidated balance sheets at 31 December
2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Direct Inward Direct Inward
Technical provisions for: Insurance Reinsurance Total Insurance Reinsurance Total
Unearned premiums and unexpired risks 110,920 65,910 176,830 82,121 43,380 125,501
Life insurance:
Unearned premiums and risks 85,112 9,316 94,428 32,390 8,603 40,993
Mathematical provisions 797,630 - 797,630 478,290 - 478,290
Claims 112,723 15,644 128,367 93,831 9,429 103,260
Bonuses and rebates 4,881 2,315 7,196 4,674 4,538 9,212
Life insurance policies where the investment
risk is borne by the policyholders 2,181,312 - 2,181,312 1,424,557 - 1,424,557
Other technical provisions - 49,866 49,866 12,912 31,863 44,775
3,292,578 143,051 3,435,629 2,128,775 97,813 2,226,588
At 31 December 2008 and 2007, the consolidated insurance
entities had balances receivable from reinsurance companies
amounting to EUR 199,411 thousand and EUR 121,162 thousand,
respectively, which are recognised under “Reinsurance Assets” in
the consolidated balance sheets..

14. Tangible assets and Non-current
assets held for sale
Tangible assets
a) Changes
The changes in 2008 and 2007 in the balance of “Tangible
Assets” in the consolidated balance sheets were as follows
Cost:
Direct write-downs due to the impairment of tangible assets
amounted to EUR 7,199 thousand in 2008 (EUR 1,732 thousand
in 2007). .
Thousands of Euros
Property,
Plant and
Equipment Investment
for Own Use Property Total
Balances at 1 January 2007 1,451,734 71,911 1,523,645
Additions 503,648 3,661 507,309
Disposals (267,104) (165) (267,269)
Exchange differences (net) 4 (135) (131)
Transfers and other 7,661 (35) 7,626
Balances at 31 December 2007 1,695,943 75,237 1,771,180
Additions 273,828 5,076 278,904
Disposals (300,070) (81) (300,151)
Exchange differences (net) 41 (4) 37
Transfers and other (138) - (138)
Balances at 31 December 2008 1,669,604 80,228 1,749,832
Accumulated depreciation:
Balances at 1 January 2007 573,665 3,713 577,378
Disposals (83,138) (13) (83,151)
Charge for the year 74,427 353 74,780
Exchange differences, transfers and other 2,901 - 2,901
Balances at 31 December 2007 567,855 4,053 571,908
Disposals (130,557) (47) (130,604)
Charge for the year 77,872 413 78,285
Exchange differences (520) - (520)
Balances at 31 December 2008 514,650 4,419 519,069
Impairment losses:
At 31 December 2007 - (5,376) (5,376)
Amounts used and other net changes - 159 159
Balance at 31 December 2008 - (5,217) (5,217)
Tangible assets, net:
Balances at 31 December 2007 1,128,088 65,808 1,193,896
Balances at 31 December 2008 1,154,954 70,592 1,225,546
b) Property, plant and equipment for own use
The breakdown, by type of asset, of the balances of “Property,
Plant and Equipment for Own Use” in the consolidated balance
sheets at 31 December 2008 and 2007 is as follows:
137

138
Al 31 de diciembre de 2008 y 2007 el Grupo tenía contraídos At
31 December 2008 and 2007, the Group had rights on assets
used under finance leases amounting to EUR 20,821 thousand and
EUR 19,166 thousand, respectively.
c) Investment property
In 2008 and 2007 the rental income earned from investment
property owned by the consolidated entities amounted to
approximately EUR 2,005 thousand and EUR 2,006 thousand,
respectively, (see Note 40) while the operating expenses of all
kinds related to such investment property amounted to
approximately EUR 254 thousand (approximately EUR 256
thousand in 2007).
Non-current assets held for sale
The breakdown of the balance of “Non-Current Assets Held for
Sale” is as follows
Accumulated
Thousands of Euros
Carrying
Cost Depreciation Amount
Buildings 791,840 132,893 658,947
Furniture 103,616 76,426 27,190
Fixtures 428,869 157,659 271,210
Office and IT equipment 264,344 180,666 83,678
Other 107,274 20,211 87,063
Balances at 31 December 2007 1,695,943 567,855 1,128,088
Land and buildings 820,776 147,474 673,302
Furniture 103,540 73,390 30,150
Fixtures 469,369 185,834 283,535
Office and IT equipment 148,299 75,084 73,215
Other 127,620 32,868 94,752
Balances at 31 December 2008 1,669,604 514,650 1,154,954
Thousands of Euros
2008 2007
Investment property 1,192,331 -
Foreclosed assets 363,728 102,615
Assets recovered from finance leases 115 115
1,556,174 102,730
n 2008, the Bank and other Group companies acquired assets
amounting to EUR 1,192 million with the aim of settling certain
loan transactions.
Impairment losses of EUR 110,548 thousand and EUR 42,738
thousand were deducted from the balance of “Non-Current Assets
Held for Sale” at 31 December 2008 and 2007, respectively. The
net charges for 2008 amounted to EUR 28,258 thousand (net
reversals amounted to EUR 1,629 thousand in 2007) and were
recognised under “Gains/(Losses) on Non-Current Assets Held for
Sale not classified as Discontinued Operations”. Also, the balance
of this item in the income statement includes the net gain arising
from the sale of these assets, which amounted to EUR 257
thousand (EUR 12,562 thousand in 2007).
The fair value of the non-current assets held for sale was estimated
as follows:
- The fair value of assets appraised by a valuer authorised by the
Bank of Spain was deemed to be the value obtained from this
appraisal pursuant to Ministerial Order 805/2003.
- The fair value of the assets included in the foregoing table
which were not appraised by a valuer authorised by the Bank of
Spain was calculated based on estimates made by the Group,
taking into account data from the mortgage market in relation
to the changes in the price of tangible assets of similar
characterstics to those of the Group.

15. Intangible assets
a) Goodwill
The balance of “Goodwill” at 31 December 2007 relates in full to
Cambios Sol, S.A. The change in the balance thereof in 2008
relates to the sale of the aforementioned company (see Note 3).
b) Other intangible assets
The breakdown of the balance of “Other Intangible Assets” in the
consolidated balance sheets is as follows
Thousands of Euros
Estimated
Useful Life 2008 2007
With finite useful life:
IT developments 3 years
3 to
111,936 166,212
Concessions and other 50 years 4,405 6,963
Less-
116,341 173,175
Accumulated amortisation (57,659)(125,109)
Impairment losses (158) (162)
Total, net 58,524 47,904
16. Other assets and Other liabilities
The breakdown of the balances of “Other Assets” and “Other
Liabilities” in the consolidated balance sheets is as follows:
Changes
The changes (gross amounts) in “Other Intangible Assets” in the
consolidated balance sheets in 2008 and 2007 were as follows:
Cost:
Thousands of Euross
2008 2007
Balance at beginning of year 173,175 150,104
Net additions (disposals) (56,834) 23,071
Balance at end of year 116,341 173,175
Accumulated amortisation:
Balances at beginning of year (125,109) (99,988)
Net charges (24,032) (24,762)
Disposals and other changes 91,482 (359)
Balance at end of year (57,659) (125,109)
Impairment losses
Balances at beginning of year (162) (228)
Net reversals 4 53
Amounts used and other changes - 13
Balance at end of year (158) (162)
Net balance at end of year 58,524 47,904
Thousands of Euros
Assets Liabilities
2008 2007 2008 2007
Inventories 566,876 206,755 - -
Guarantees on futures transactions and other 130,271 1 245 -
Unmatured accrued income/expenses 128,553 70,991 263,740 124,425
Prepayments 19,608 10,319 78,121 -
Financial guarantees - - - 30,924
Accrued expenses - - 196,901 205,849
Other 119,186 81,500 9,435 352,114
964,494 369,566 548,442 713,312
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140
17. Deposits from central banks and
Deposits from credit institutions
The breakdown, by classification, counterparty, type and currency,
of the balances of “Deposits from Central Banks” and “Deposits
from Credit Institutions” on the liability side of the consolidated At
31 December 2008 and 2007, the limit established by the Bank of
Spain for the Group for the system of loans guaranteed by public
debt securities and other assets amounted to EUR 3,468,931
thousand and EUR 3,221,040 thousand, respectively. The amount
drawn down at those dates corresponds to that recognised under
“Central Banks” in the foregoing table.
Thousands of Euros
2008 2007
Classification:
Financial liabilities at amortised
cost 12,406,618 12,297,101
Counterparty:
Central banks 1,952,343 1,955,660
Credit institutions 10,454,275 10,341,441
12,406,618 12,297,101
Type:
Reciprocal accounts 825 1,332
Time deposits 6,369,261 6,410,419
Hybrid financial liabilities 2,150 2,150
Repurchase agreements 5,272,125 5,455,534
Other 609,668 365,711
12,254,029 12,235,146
Add- Valuation adjustments 152,589 61,955
Of which::
Accrued interest 152,426 62,090
Other 163 (135)
12,406,618 12,297,101
Currency:
Euro 9,705,371 11,867,818
Foreign currencies 2,701,247 429,283
12,406,618 12,297,101
Note 44 contains a detail of the terms to maturity of these
liabilities at 2008 year-end and of the average interest rates in
2008.
18. Customer deposits
The breakdown, by currency, classification and type, of the balance
of “Customer Deposits” in the consolidated balance sheets is as
follows:
Thousands of Euros
2008 2007
Classification:
Financial liabilities at amortised
cost 57.589.628 52.747.448
Type:
On demand-
Current accounts 13.543.773 13.775.479
Savings accounts 6.204.063 5.709.310
Other demand deposits 320.284 335.714
Time deposits-
Fixed-term deposits 17.718.068 11.970.654
Home-purchase savings accounts 58.161 58.581
Discount deposits 246 246
Hybrid financial liabilities 3.853.773 4.047.098
Other time deposits 12.824 460
Repurchase agreements 15.671.107 16.642.048
57.382.299 52.539.590
Add- Valuation adjustments 207.329 207.858
Of which:
Accrued interest 208.747 144.080
Other (1.418) 63.778
Currency:
57.589.628 52.747.448
Euros 54.970.183 50.590.093
Foreign currencies 2.619.445 2.157.355
57.589.628 52.747.448
Note 44 contains a detail of the terms to maturity of these
liabilities at 2008 year-end and of the average interest rates in
2008.

19. Marketable debt securities
a) Breakdow
The breakdown, by classification and type, of the balance of
“Marketable Debt Securities” in the consolidated balance sheets is
as follows:
Classification:
Note 44 contains a detail of the terms to maturity of these
liabilities at 2008 year-end and of the average interest rates in
2008.
b) Bonds and debentures outstanding
Thousands of Euros
2008 2007
Financial liabilities at amortised cost 28,315,103 28,737,082
Type:
Bonds and debentures outstanding 5,894,424 8,434,905
Hybrid securities 3,339,757 2,790,601
Mortgage-backed bonds
(“cédulas hipotecarias”) 14,917,885 14,958,239
Promissory notes 2,602,478 498,034
Other securities associated with
transferred financial assets (Note 10) 716,457 1,298,597
Mortgage bonds (Note 10) 435,450 367,057
27,906,451 28,347,433
Add- Valuation adjustments 408,652 389,649
Of which:
Accrued interest 437,002 406,306
Adjustments due to hedges (28,350) (16,657)
28,315,103 28,737,082
The breakdown, by issue currency and interest rate, of the balance
of “Bonds and Debentures Outstanding” in the foregoing table is
as follows:
Annual
Thousands of Euros Interest Maturity
Currency of Issue 2008 2007 Rate Date
Euro:
Non-convertible bonds issued by the Bank 1,000,000 2,500,000 3-month Euribor +0.12% Until June 2009
Non-convertible bonds issued by Banesto Issuances, Ltd. - 1,000 6-month Euribor Until June 2008
Non-convertible bonds issued by Banesto Banco de Emisiones, S.A. 1,000,000 1,000,000 3-month Euribor +0.05%
3-month Euribor +
February 2010
Non-convertible bonds issued by Banesto Financial Products
US dollar:
Floating rate-
3,660,897 2,896,000 floating spread February 2038
Non-convertible bonds issued by the Bank 233,527 2,037,905 3-month Libor -0.01% Until April 2012
Balance at end of year 5,894,424 8,434,905
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142
c) Mortgage-backed bonds (cédulas hipotecarias)
The breakdown, by currency of issue and interest rate, of the
balance of “Mortgage-Backed Bonds” is as follows:
Annual
Thousands of Euros Interest Maturity
Currency of Issue 2008 2007 Rate Date
Euro:
March 2002 issue 1,000,000 1,000,000 5.75% March 2017
May 2003 issue 1,500,000 1,500,000 4% May 2010
February 2004 issue 2,000,000 2,000,000 3.75% February 2011
September 2004 issue 1,695,000 1,750,000 4.25% September 2014
January 2005 issue 2,000,000 2,000,000 3.50% January 2015
September 2005 issue 2,000,000 2,000,000 2.75% September 2012
January 2006 issue 2,000,000 2,000,000 3.50% January 2016
July 2006 issue 935,000 1,000,000 4.25% July 2013
February 2007 issue 1,687,885 1,708,239 4.25% February 2014
February 2008 issue 50,000 - 6-month Euribor +0.12% February 2010
February 2008 issue 50,000 - 6-month Euribor +0.25% February 2013
Balance at end of year 14,917,885 14,958,239
Mortgage-backed bond issuers have an early redemption option
solely for the purpose of complying with the limits on the volume
of outstanding mortgage bonds stipulated by mortgage market
regulations.

20. Subordinated liabilities
a) Breakdown
The detail, by currency of issue and interest rate, of the balance of
“Subordinated Liabilities” in the consolidated balance sheets is as
follows:
b) Other disclosures
For debt seniority purposes preference shares are junior to all
general creditors and to subordinated deposits. The payment of
dividends on these shares, which have no voting rights, depends on
the obtainment of sufficient distributable profit and on the limits
imposed by Spanish banking regulations on equity. If for these
reasons remuneration is not paid on the preference shares, the
Bank will not pay dividends on its ordinary shares. Subject to
authorisation by the Bank of Spain, the issue launched by Banesto
Preferentes, S.A. can be redeemed as from December 2008 and
the issues launched by the Bank can be redeemed as from
November 2009 and April 2011.
The other issues are subordinated and, therefore, for debt
seniority purposes they are junior to all general creditors. The
issues launched by subsidiaries are guaranteed by Banesto or by
restricted deposits arranged at Banesto for this purpose.
At 31 December 2008, no issues were convertible into shares of
Banesto or granted privileges or rights which, in certain
circumstances, make them convertible them into shares.
Thousands of Euros
2008 2007 Currency Interest Rate/ Dividends Maturity
Banco Español de Crédito, S.A.:
Subordinated deposit 600,000 600,000 Euros 3-month Euribor + 0.32%,
+0.5% from the fifth year
June 2014
Subordinated deposit 600,000 - Euros 3-month Euribor + 2.50% June 2018
Preference shares Floating CMS + 0.125%
(fixed coupon of 6% in the
125,000 125,000 Euros first year) Perpetual
Preference shares
Banesto Banco Emisiones, S.A.:
200,000 200,000 Euros Fixed coupon of 5.5% Perpetual
September
Subordinated debentures - 500,000 Euros 3-month Euribor + 0.4% 2013
Subordinated debentures
Banesto Preferentes, S.A.:
500,000 500,000 Euros Mid IRS at one year + 0.6% March 2016
Subordinated deposit
Banesto Holding, Ltd.:
131,145 131,145 Euros 3-month Euribor + 0,2% Perpetual
Preference shares 51,684 52,452 Dólares 10.5% (a)
2,207,829 2,108,597
Add- Valuation adjustments
Of which:
29,006 16,383
Accrued interest 32,120 21,357
Hedge accounting (3,114) (4,974)
Balance at end of year 2,236,835 2,124,980
(a)Redeemable at the discretion of the issuer, with the prior consent of the Bank of Spain.
The preference shares issued by Banesto Holding Ltd. relate to the
issue launched in 1992 for USD 100 million and guaranteed by
Banesto. The preference shares do not carry voting rights, pay a
fixed dividend of 10.5% per annum and are fully or partially
redeemable at the discretion of the issuer, with the prior consent
of the Bank of Spain. The outstanding balance at 31 December
2008 amounted to EUR 51,684 thousand, equivalent to USD
77,285,400 (31 December 2007: EUR 52,452 thousand
equivalent to USD 77,285,400).
The interest accrued on subordinated liabilities amounted to
approximately EUR 121,350 thousand in 2008 (EUR 110,508
thousand in 2007).
Note 44 contains a detail of the terms to maturity of these
liabilities at 2008 year-end and of the average interest rates in
2008.
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21. Other financial liabilities
The breakdown of the balances of “Other Financial Liabilities” in
the consolidated balance sheets is as follows:
Note 44 contains a detail of the terms to maturity of these
financial liabilities at 2008 year-end.
22. Provisions
a) Breakdown
Thousands of Euros
2008 2007
Trade payables (*) 1,470,806 891,170
Public sector 432,892 603,397
Other 993,774 1,031,316
2,897,472 2,525,883
(*) Including EUR 90,735 thousand and EUR 83,320 thousand relating to the unpaid
interim dividends declared by the Bank’s Board of Directors at 31 December 2008
and 2007, respectively (see Note 4).
The breakdown of the balance of “Provisions” in the consolidated
balance sheets is as follows:
Thousands of Euros
2008 2007
Provisions for pensions and similar
obligations (Notes 2-v and 2-w) 2,215,208 2,301,205
Provisions for contingent liabilities
and commitments 102,092 115,923
Other provisions 214,990 197,179
Provisions 2,532,290 2,614,307
b) Changes
The changes in “Provisions” in 2008 and 2007 were as follows:
c) Provisions for pensions and similar obligations
Thousands of Euros
2008 2007
Balance at beginning of year 2,614,307 2,779,391
Period provision charged to income 121,656 94,814
Of which:
Finance expense (Note 34) 95,050 96,229
Personnel expenses (Note 41) 12,658 15,256
Additions to provisions 13,948 (16,671)
Provisions for pensions and
similar obligations 4,946 228
Other provisions 9,002 (16,899)
Payments to retired employees (84,214) (70,137)
Payments to early retirees (122,807) (146,270)
Insurance premiums paid (7,748) (6,199)
Provisions used, exchange differences
and other changes 11,096 (37,292)
Balance at end of year 2,532,290 2,614,307
The detail of the present value of the Group's post-employment
benefit obligations at 31 December 2008 and 2007, showing the
funding status of these obligations, the fair value of the plan assets
funding them and the present value of the unrecognised
obligations at those dates, is as follows:
Thousands of Euros
2008 2007
Present value of the obligations:
To current employees 361,885 343,421
To retired employees (vested) 1,470,807 1,480,049
1,832,692 1,823,470
Fair value of plan assets 193,106 191,823
Unrecognised actuarial losses 108,476 97,280
Unrecognised past service cost 6,951 4,246
Provisions - Provisions for pensions 1,276,134 1,272,488
Insurance contracts linked to pensions 248,025 257,633
1,832,692 1,823,470

Al 31 December 2006, 2005 y 2004, the present value of the
obligations amounted to EUR 1,821,116 thousand, EUR
1,829,954 thousand and EUR 1,824,719 thousand, respectively;
the fair value of the plan assets amounted to EUR 203,244
thousand, EUR 211,289 thousand and EUR 212,421 thousand,
respectively; and the unrecognised actuarial losses amounted to
EUR 73,245 thousand, EUR 80,387 thousand and EUR 77,338
thousand, respectively.
The amount of these obligations was determined by independent
insurance actuaries using, under their own responsibility, the
following valuation criteria, inter alia:
1. Valuation method: projected unit credit method, which sees
each period of service as giving rise to an additional unit of
benefit entitlement and measures each unit separately
2. Actuarial assumptions used: unbiased and mutually compatible.
Specifically, the most significant actuarial assumptions used in
the calculations were as follows:
3. The estimated retirement age of each employee is the first at
which the employee is entitled to retire or the agreed-upon age,
as appropriate.
The fair value of insurance contracts was determined as the
amount of the mathematical provisions made by the related
insurer, taking into account the following assumptions:
The changes in 2008 and 2007 in the cumulative net
unrecognised actuarial losses were as follows:
2008 2007
Discount rate 4% 4%
Mortality tables PERM/F 2000 PERM/F 2000
Cumulative annual CPI growth 1.5% 1.5%
Annual salary increase rate 2.9% 2.9%
Annual social security pension increase rate 1.5% 1.5%
2008 2007
Expected rate of return on plan assets 4.0% 4.0%
Expected rate of return on reimbursement
rights 4.0% 4.0%
Thousands of Euros
2008 2007
Balance at beginning of year 97,280 73,245
Increases due to:
Net actuarial losses arising in the year 11,196 24,035
Balance at end of year 108,476 97,280
d) Other long-term employee benefits
In 2008 and 2007, Banesto offered certain employees the
possibility of taking early retirement. Accordingly, provisions were
made in both years to cover the obligations (in terms of both
salaries and other employee welfare costs) to early retirees from
the date of early retirement to the date of effective retirement,
amounting to EUR 48,270 thousand and EUR 49,773 thousand,
respectively.
Additionally, at its meeting on 20 December 2006 the Board of
Directors of the Bank approved an Extraordinary Early Retirements
Plan that started in 2007 and ended in 2008. At 31 December
2007, the provision recognised in this connection amounted to
EUR 57,070 thousand and was assigned in full to the early
retirement obligations in 2008.
The present value of the obligations and the fair value of the plan
assets and the reimbursement rights at 31 December 2008 and
2007, were as follows:
The amount of these obligations was determined by independent
actuaries using, under their own responsibility, the same
techniques as those applied to quantify defined benefit obligations
(see Note 22-c).
e) Other provisions
The balance of “Provisions - Other Provisions”, which includes, inter
alia, provisions for restructuring costs and tax and other litigation,
was estimated using prudent calculation procedures in keeping
with the uncertainty inherent in the obligations covered. The
definitive date of the outflow of resources embodying economic
benefits for the Group depends on each obligation; in certain
cases, these obligations have no fixed settlement period and, in
other cases, are based on litigation in progress.
f) Litigation
Thousands of Euros
2008 2007
Present value of the obligations:
To early retirees 687,853 710,703
Long-service bonuses and other benefits 3,196 3,311
Extraordinary Early Retirements Plan - 57,070
691,049 771,084
Provisions - Provisions for pensions 691,049 771,084
691,049 771,084
i. Tax litigation
The main tax litigation affecting Banesto at 31 December 2008
can be divided into two groups according to its origin: firstly, that
arising from a difference in the criteria used by the State Tax
Agency and that used by the Entity for the regularisation of the
relevant taxes; and secondly, that arising from the introduction by
the Extremadura Autonomous Community Government of the tax
on deposits at credit institutions, against which an appeal has
been filed at the Spanish Constitutional Court.
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A) Difference in the criteria used by the State Tax Agency and the
Bank.
a) Litigation arising from the calculation of the VAT pro rata: the
difference in the criteria used relates to the type of services
which it is considered must be included in the VAT calculation.
The amount relating to this litigation, for all the years, is
approximately EUR 3,779 thousand.
b) Withholdings from income from movable capital: the litigation
arose from a difference in the criteria used for the inclusion of
income from movable capital and the withholdings applicable
to certain amounts paid by the Bank. The potential liability of
Banesto in this connection is approximately EUR 6,505
thousand.
B) Tax on deposits at credit institutions introduced by the
Extremadura Autonomous Community Government.
The Extremadura Autonomous Community Government approved a
tax on the deposits held by credit institutions in its territory, which
was applied for the first time in 2002.
An appeal against the tax has been filed at the Spanish
Constitutional Court. Consequently, the Bank files its returns in
due time, challenges the self-assessment, posts a bond for the
related amount and then files an appeal. The Extremadura High
Court decided not to consider the merits of the case until the
Constitutional Court hands down a decision on the
unconstitutional nature or otherwise of the tax.
The amount relating to this litigation totals EUR 20,004 thousand.
The above amount includes the enforced collection surcharges
that the Bank was unable to avoid, except the enforced collection
surcharge for 2007, which had not yet been issued by the tax
authorities.
If the Spanish Constitutional Court were to declare that the
legislation establishing this tax is constitutional, since the debt is
suspended the late-payment interest would fall due. This interest
amounted to EUR 2,769 thousand at 31 December 2008.
ii. Other litigationl
In addition to the challenges of corporate resolutions (see Note 1e),
the main non-tax litigation affecting the Bank at 31 December
2008, on the basis of the amount thereof, was as follows:
− Trustees in the bankruptcy of Ágora, Corporación de
Inversiones Inmobiliarias, S.A. The insolvency of this entity and
the related bankruptcy order has given rise to several lawsuits
and ancillary proceedings related mainly to the backdating of
the bankruptcy order and, as a result thereof, the intention to
terminate certain financing agreements and debt repayments.
The most noteworthy in this respect is the claim to annul the
collection of a debt of EUR 5,409 thousand received by the
Bank in 1994.
− Claims filed against the Bank by companies which received
supplementary income tax returns from the tax authorities of
the Navarra Autonomous Community Government with respect
to transactions performed with the Bank. One of the two
ongoing proceedings concluded with a firm court decision
which dismissed in full the claim of the plaintiff company. In
the other proceeding, in which a favourable decision for the
Bank has been handed down, a claim was made totalling EUR
1,812 thousand.
− Claim filed by American Express Bank Limited (“Amex”) against
Banco Español de Crédito, S.A. at the United States District
Court in New York in respect of certain counterguarantees
given by a company financed by the Bank in 1995. The Bank is
being petitioned to pay USD 3,557,143 and PKR 10,873,000
plus costs and damage or loss incurred by American Express in
this connection. The disputed guarantees were issued by
Amex’s branch in Pakistan to the Pakistani company WAPDA,
with the related counterguarantees of Banco Español de
Crédito, S.A. (all by order and for the account of the
company) to Amex (the “counterguarantees”). The guarantees
and counterguarantees were executed in 2004 but Banco
Español de Crédito, S.A. was unable to pay due to an
injunction issued by a court of first instance of Madrid initially
served on the Bank and subsequently extended in June 2006
to Amex, which prohibited the payment of any amount to
WAPDA or to any third party in connection with the
guarantees until an award had been rendered by the
International Chamber of Commerce (ICC) in the arbitration
taking place in Paris between the parties concerning the
commercial agreement for which the guarantees were given. In
February 2007, the Court of Arbitration of the ICC rendered
an award ordering WAPDA not to execute the guarantees given
to it. Banesto notified the New York court of the content of
the aforementioned award and a decision has yet to be
handed down.
− Claim for the execution of a decision filed by Malce, S.L. and
others against Corporación Industrial y Financiera de Banesto,
S.A., currently Banco Español de Crédito, S.A. In the claim filed
on 25 April 2007 at the Court of First Instance no. 2 of El
Ejido, Malce S.L. and others requested the execution of the
decision handed down by the Supreme Court on 14 December
2006 which, by overturning the decision of the Almería
Provincial Appellate Court, upheld the cassation appeal filed
by the plaintiffs and ordered Quash S.A. and Área de Servicios
Agrícolas S.A. (currently Banco Español de Crédito S.A. due to
the absorption of Corporación Industrial y Financiera de
Banesto S.A. which, in turn, had taken over the
aforementioned companies) to execute the sale transaction in
a public deed and to transfer the water wells, auxiliary facilities
and the property on which the wells and facilities are located
to the plaintiffs, to whom they had been sold by the
aforementioned companies in the agreement dated 27
November 1995 and the supplementary agreement of 8
January 1994. The Supreme Court clarified that its decision of
14 December 2006 did not include and were accordingly not
deliverable, the water wells and auxiliary facilities required to
establish the Comunidad de Regantes (association of irrigation
water users) in accordance with the agreement of 8 January
1994. By interlocutory order of 2 April 2008, the Supreme
Court clarified that its decision of 14 December 2006 did not
include and were accordingly not deliverable, the water wells
and auxiliary facilities required to establish the Comunidad de
Regantes de Almeria (association of irrigation water users of
Almeria) to which they were sold by Quash S.A. and Área de
Servicios Agrícolas S.A. in a deed dated 2 November 1995 (in
which reference was made to the lawsuit described), being the
only water wells and auxiliary facilities referred to in the
contingency.

− Complaint in an ordinary proceeding filed by a former Bank
employee claiming EUR 5,003 thousand in consideration for
the professional services which the plaintiff declared to have
provided to the Bank. Currently, the hearing to be held prior
to the court proceeding has not been set. The plaintiff’s
relationship with the Bank was terminated through a justified
dismissal resulting from a firm court decision.
− Claim filed by an association called “Grouping of the
Shareholders of Banesto” against Mario Conde, Enrique
Lasarte Pérez Arregui and the Bank. With respect to the Bank,
certain third-party liability claims were filed relating to the
actions of the other two defendants which gave rise to the
intervention of the Bank of Spain on 28 December 1993 in
what is known as the “Banesto case”. The claim did not specify
the amount in question. The proceeding was initially allocated
to the Court of First Instance no. 2 of Alicante. However, the
defendants filed a declinatory exception with the Court
arguing that it did not have regional jurisdiction. The
declinatory exception was upheld as the jurisdiction was
deemed to correspond to the Courts of First Instance of
Madrid which motivated the referral of the court orders to the
Senior Court of Madrid. The claim was allocated to the Court
of First Instance no. 41 of Madrid. By court order of 10
October 2008, the Court refused leave to proceed with the
claim and dismissed the proceedings due to the lack of
standing of the plaintiff association. The plaintiff has filed an
appeal against this court order which is currently being
processed.
At 31 December 2008, there were other less material lawsuits of a
tax and legal nature. At 31 December 2008 and 2007, the Bank
had recognised reasonable provisions to cover any payments it
may be required to make as a result of all of the aforementioned
litigation.
23. Tax matters
a) Consolidated Tax Group, reconciliation and other
information
Since 1999 the Bank has filed consolidated tax returns as part of
the corporate Group of which Banco Santander, S.A. is the parent
(see Note 27).
The balance of “Financial Liabilities at Amortised Cost - Other
Financial Liabilities” in the accompanying consolidated balance
sheets includes the liability for the various applicable taxes.
At 31 December 2008 deferred tax assets amounted to EUR
894,694 thousand (EUR 1,040,135 thousand at 31 December
2007). In 2008, EUR 33,268 thousand, EUR 105,091 thousand
and EUR 21,961 thousand relating to payments to pensioners and
early retirees were credited to deferred tax assets, unused tax
credits and other items, respectively. These items relate basically to
income directly recognised in equity due to valuation adjustments.
EUR 9,292 thousand and EUR 5,587 thousand of provisions for
pensions and provisions for inherent losses in the outstanding loan
portfolio, respectively, were charged to deferred tax assets.
The deferred tax liabilities recognised at 31 December 2008
amounted to EUR 68,727 thousand (EUR 38,449 thousand at 31
December 2007). They relate basically to income directly
recognised in equity due to valuation adjustments.
Law 35/2006, of 28 November, on personal income tax and
partially amending the Spanish Corporation Tax, Non-Resident
Income Tax and Wealth Tax Laws, establishes, inter alia, a reduction
over two years of the general income tax rate, which until 31
December 2006 was 35%, so that the tax rate for 2007 was
32.5% and 30% for 2008 and subsequent years.
Since 1999 the companies which until 1998 were part of the
consolidated tax group headed by Banco Español de Crédito, S.A.
have filed consolidated tax returns together with the consolidated
tax group headed by Banco Santander, S.A. Following is the
estimated reconciliation of the accounting profit to the income tax
for the year prepared on the assumption that the consolidated tax
group headed by Banco Español de Crédito, S.A. still existed at 31
December 2008 and 2007:
Thousands of Euros
2008 2007
Consolidated profit before tax::
From ordinary activities 1,081,287 1,099,110
1,081,287 1,099,110
Income tax at 30% (32.5% in 2007)
Decreases due to permanent
324,386 357,211
differences
Increases due to permanent differences
(5,376) (11,981)
Due to other permanent differences 13,772 23,950
Elimination of the tax effect of dividends
paid between Group companies
Elimination of the tax effect of the results
(7,832) (10,761)
of intra-group transactions 3,623 (4,290)
Other, net (22,295) (18,475)
Current income tax 306,278 335,654
Ordinary activities 306,278 335,654
Discontinued operations - -
This calculation includes the dividends of approximately EUR
26,107 thousand at 31 December 2008 received from companies
belonging to the consolidated tax group and other positive and
negative adjustments to be made amounting to approximately EUR
26,409 thousand and EUR 14,333 thousand, respectively, since
they will be eliminated from the consolidated tax group's return.
For the purpose of determining the income tax expense recognised
by the Group, regard should be had to the fact that the tax losses
incurred at the Group companies before the extinction of the
consolidated tax Group headed by Banco Español de Crédito, S.A.
can only be carried forward for offset by the entities at which they
arose. After filing the 2008 and 2007 tax returns, the tax loss
carryforwards at the Banco Español de Crédito Group companies
amounted to approximately EUR 61,950 thousand and EUR
67,103 thousand at 31 December 2008 and 2007, respectively.
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148
In 2008 and 2007, the Group obtained gains of EUR 33,182
thousand and EUR 54,925 thousand on the transfer of assets for
consideration, to which the tax credit for reinvestment of
extraordinary income stipulated in Article 42 of Legislative Royal
Decree 4/2004, of 5 March, approving the Consolidated Income
Tax Law as drafted by law 16/2007, of 4 July is applicable.
The Bank has the years from 2003 to date open for review by the
tax authorities in relation to income tax and the other main taxes.
The varying interpretations which can be made of certain tax
regulations applicable to the Bank's operations might give rise to
contingent tax liabilities which cannot be objectively quantified.
However, the Bank's directors and its tax advisers consider that the
tax charge, if any, which might arise from future inspections by the
tax authorities or from inspections already performed pending final
resolutions, would not have a material effect on the Group's
consolidated financial statements for the year ended 31 December
2008.
The Banco Español de Crédito Group companies included in the
consolidated tax group, the parent of which is Banco Santander,
S.A., are Banco Español de Crédito, S.A., Banesto Bolsa, S.A., S.V.B.,
and 26 and 29 other companies, respectively, at 31 December
2008 and 2007.
The other Group companies will file individual tax returns in
accordance with the tax regulations applicable in their countries of
residence.
24. Minority interests
The balance of “Minority Interests” in the consolidated balance
sheets shows the net amount of the equity of subsidiaries
attributable to equity instruments that do not belong, directly or
indirectly, to the Bank, including the portion attributed to them of
profit for the year.
a) Breakdown
The detail, by Group company, of the balance of “Equity - Minority
Interests” in the consolidated balance sheets is as follows:
Thousands of Euros
2008 2007
Alcaidesa Holding, S.A. 33,875 38,519
Costa Canaria de Veneguera, S.A. 3,816 3,870
Clínica Sear, S.A. 2,339 2,561
Aljarafe Golf, S.A. 1,136 1,135
Other 1,717 643
42,833 46,728
b) Changes
EThe changes in 2008 and 2007 in “Minority Interests” in the
consolidated balance sheets are summarised as follows:
25. Valuation adjustments
The balances of “Valuation Adjustments” in the consolidated
balance sheets include the amounts, net of the related tax effect,
of adjustments to the assets and liabilities recognised temporarily
in equity through the statement of changes in equity until they are
extinguished or realised, at which point they are recognised
definitively as shareholders’ equity through the consolidated
income statement. The amounts arising from subsidiaries, jointly
controlled entities and associates are presented, on a line by line
basis, in the appropriate items according to their nature.
Valuation Adjustments” includes the following items:
a) Available-for-sale financial assets
“Valuation Adjustments - Available-for-Sale Financial Assets”
includes the net amount of unrealised changes in the fair value of
assets classified for measurement purposes as available-for-sale
financial assets.
b) Cash flow hedges
“Valuation Adjustments - Cash Flow Hedges” includes the net
amount of changes in the value of derivatives designated as
hedging instruments in cash flow hedges, for the portion of these
changes considered as “effective hedges” (see Note 11).
The consolidated statement of recognised income and expense for
2008 and 2007, which is an integral part of the consolidated
statement of changes in equity, shows the changes in this item in
the consolidated balance sheets in 2008 and 2007.
26. Shareholders’ equity
Thousands of Euros
2008 2007
Beginning balance
Change in proportion of ownership
46,728 53,700
interest 980 (644)
Dividends paid to minority interests - (5,156)
Attributed profit for the year
Of which:
(4,835) (1,111)
Alcaidesa Holding, S,A, (4,647) (501)
Other (188) (610)
Other changes 10 (61)
Ending balance 42,883 46,728
“Shareholders’ Equity” in the consolidated balance sheets includes
the amounts of equity contributions from shareholders,
accumulated profit or loss recognised through the income
statement, and components of compound financial instruments
having the substance of permanent equity. Amounts arising from
subsidiaries and jointly controlled entities are presented in the
appropriate items based on their nature.

27. Issued capital
At 31 December 2007, the share capital of Banco Español de
Crédito, S.A., the only share capital included in the consolidated
balance sheet as a result of the consolidation process, consisted of
694,330,098 fully subscribed and paid book-entry shares of EUR
0.79 par value each, all with identical voting and dividend rights
and listed on the Spanish stock exchanges.
At the Annual General Meeting held on 26 February 2008, the
shareholders resolved to reduce capital by EUR 5,485,207,
through the redemption of 6,943,300 treasury shares with a
charge to voluntary reserves. This capital reduction was registered
in the Madrid Mercantile Register on 20 June 2008 and a reserve
for retired capital was recognised for an amount equal to the par
value of the redeemed shares. Therefore, at 31 December 2008,
the Bank’s share capital consisted of 687,386,798 shares of EUR
0.79 par value each.
At 31 December 2008 the Bank's majority shareholder was the
Santander Group, which held 89.28% of the Bank's share capital
(88.39% at 31 December 2007).
At the Annual General Meeting on 26 February 2008, the
shareholders authorised the Board of Directors to implement the
derivative acquisition of shares of the Bank and its parent by the
Bank and its subsidiaries within the legally stipulated limits.
Accumulated reserves:
At 31 December 2008 and 2007, the Group held 3,863,230 and
6,272,646 treasury shares with an acquisition cost of EUR 36,074
thousand and EUR 86,917 thousand, respectively (see Notes 28
and 29).
28. Reserves
a) Definitions
The balance of “Shareholders’ Equity - Reserves - Accumulated
Reserves” in the consolidated balance sheets includes the net
amount of the accumulated profit or loss recognised in previous
years through the income statement that, in the distribution of the
profit, was assigned to equity. The balance of “Shareholders' Equity
- Reserves of Entities Accounted for Using the Equity Method” in
the consolidated balance sheets includes the net amount of the
accumulated profit or loss generated in previous years by entities
accounted for using the equity method, recognised through the
consolidated income statement.
b) Breakdown
The breakdown of the balances of “Shareholders’ Equity - Reserves
- Accumulated Reserves” and “Shareholders’ Equity - Reserves of
Entities Accounted for Using the Equity Method” at 31 December
2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Restricted reserves-
Legal reserve 216,460 216,460
Reserve for treasury shares (Notes 29 and 31) and for loans for the purchase
of shares of the Bank and of Banco Santander, S.A. (Note 10) 43,770 96,652
Revaluation reserve Royal Decree-Law 7/1996 2,480 2,480
For retired capital 5,485 -
Unrestricted reserves-
Voluntary reserves 3,521,335 3,280,868
Consolidation reserves attributed to the Bank (109,229) (72,364)
Reserves at subsidiaries 372,568 243,997
4,052,869 3,768,093
Reserves of entities accounted for using the equity method:
Associates-
Of which
Sistemas 4B 886 886
Other 1,410 923
2,296 1,809
4,055,165 3,769,902
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150
Legal reserve
Under the Consolidated Companies Law, Spanish entities must
transfer 10% of net profit for each year to the legal reserve. These
transfers must be made until the balance of this reserve reaches
20% of the share capital. The legal reserve can be used to increase
capital provided that the remaining reserve balance does not fall
below 10% of the increased share capital amount.
Reserve for treasury shares
Pursuant to the Consolidated Companies Law, a restricted reserve
has been recorded for an amount equal to the carrying amount of
the Bank shares owned by subsidiaries. The balance of this reserve
will become unrestricted when the circumstances that made it
necessary to record it cease to exist. Additionally, this reserve
covers the outstanding balance of loans granted by the Group
secured by Bank shares.
Revaluation reserve Royal Decree-Law 7/1996, of 7 June
The balance of “Revaluation Reserve Royal Decree-Law 7/1996”
can be used, free of tax, to increase share capital. From 1 January
2007, the balance of this account can be taken to unrestricted
reserves, provided that the monetary surplus has been realised.
The surplus will be deemed to have been realised in respect of the
portion on which depreciation has been taken for accounting
purposes or when the revalued assets have been transferred or
derecognised.
If the balance of this reserve were used in a manner other than that
provided for in Royal Decree-Law 7/1996, of 7 June, it would be
subject to taxation.
Reserves for retired capital
Pursuant to the Consolidated Companies Law, a restricted reserve
has been recorded for an amount equal to the par value of the
redeemed Bank shares (see Note 26).
Reserves at subsidiaries
The detail, by company, of the balance of these reserves, based on
the subsidiaries' contribution to the Group (considering the effect
of consolidation adjustments) is as follows:
Thousands of Euros
2008 2007
Elerco, S.A. 152,181 132,241
Banesto Bolsa, S.A., S.V.B. 67,511 58,250
Dudebasa, S.A. 9,021 20,256
Oil-Dor, S.A.
Santander Seguros y Reaseguros
27,125 24,096
Compañía Aseguradora, S.A. 97,673 66,933
Santander Pensiones, E.G.F.P., S.A. 5,060 11,227
Banesto Holding, Ltd.
Grupo Inmobiliario La Corporación
(5,719) (6,623)
Banesto, S.A. (8,397) (10,873)
Inversiones Turísticas, S.A. (487) (13,217)
Desarrollo Informático, S.A. - (36,924)
Other companies 28,600 (1,369)
Total 372,568 243,997
29. Treasury shares and other equity
instruments
Treasury shares
The balance of “Shareholders’ Equity – Treasury Shares” in the
consolidated balance sheets includes the amount of equity
instruments held by the Group entities.
Transactions involving own equity instruments, including their
issuance and cancellation, are deducted directly from equity, and
no profit or loss may be recognised as a result of them. The costs
of any transaction involving own equity instruments are deducted
directly from equity, net of any related tax effect.
The Bank shares owned by the Banesto Group entities accounted
for 0.56% of issued capital at 31 December 2008 (0.90% at 31
December 2007).
The average purchase price of the Bank shares was EUR 10.9 per
share in 2008 and the average selling price was EUR 11.08 in that
year (EUR 16.20 and EUR 16.67, respectively, in 2007).
The net gains or losses on transactions involving Bank shares
(losses of EUR 11,943 thousand in 2008 and EUR 996 thousand
in 2007) were recognised as a reduction of/addition to reserves.
Other equity instruments
At 31 December 2007 “Other Equity Instruments” includes the
increase in equity due to personnel remuneration (see Note 41).
30. Off-balance-sheet items
“Off-Balance-Sheet Items” includes balances representing rights,
obligations and other legal situations that in the future may have
an impact on net assets, as well as any other balances needed to
reflect all transactions entered into by the consolidated entities
although they may not compromise their net assets.
a) Contingent liabilities
“Contingent Liabilities” includes all transactions under which the
consolidated entities guarantee the obligations of a third party and
which result from financial guarantees granted by the entities or
from other types of contract. The breakdown of this item is as
follows:
Guarantees
Guarantees are the amounts that would be payable by the
consolidated entities on behalf of third parties as a result of the
commitments assumed by those entities in the course of their
ordinary business, if the parties who are originally liable to pay
failed to do so.
The breakdown of “Guarantees” at 31 December 2008 and 2007
is as follows:

Thousands of Euros
2008 2007
Bank guarantees and other indemnities
provided 9,798,966 10,719,593
Credit derivatives sold 780,000 804,250
Irrevocable documentary credits 317,898 420,846
10,896,864 11,944,689
A significant portion of these guarantees will expire without any
payment obligation materialising for the consolidated entities and,
therefore, the aggregate balance of these commitments cannot be
considered as an actual future need for financing or liquidity to be
provided by the Group to third parties.
Income from guarantee instruments is recognised under “Fee and
Commission Income” in the consolidated income statements and is
calculated by applying the rate established in the related contract
to the nominal amount of the guarantee.
Other contingent liabilities
This includes the amount of any contingent liability not included in
other items (EUR 2 thousand in 2008 and EUR 9 thousand in
2007).
b) Contingent commitments
“Contingent Commitments” includes those irrevocable
commitments that could give rise to the recognition of financial
assets.
The breakdown of “Contingent Commitments” at 31 December
2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Drawable by third parties
(undrawn credit facilities)
Regular way financial asset
12,897,760 11,237,115
purchase contracts 1,410,793 2,807,648
Other contingent commitments 1,909,794 2,255,525
16,218,347 16,300,288
:31. Notional amounts of trading and
hedging derivatives
The breakdown of the notional and/or contractual amounts of the
trading and hedging derivatives held by the Group at 31 December
2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Notional Market Notional Market
Amount Value (*) Amount Value (*)
Trading derivatives:
Interest rate risk-
Forward rate agreements 650,000 (2,218) 4,117,000 (11)
Interest rate swaps 132,121,853 27,368 150,262,729 (10,574)
Options and futures
Currency risk-
102,992,447 108,024 100,123,193 34,244
Foreign currency purchases and sales 4,930,523 48,311 5,086,030 (42,488)
Foreign currency options 1,409,096 (4,859) 1,548,551 (389)
Currency swaps 3,687,841 3,806 2,410,902 167
Securities and commodities derivatives 18,734,249 114,660 16,899,830 (324,772)
Hedging derivatives:
Interest rate risk-
264,526,009 295,092 280,448,235 (343,823)
Interest rate swaps 23,206,508 551,746 23,369,725 (454,057)
Options and futures 7,191,839 66,012 4,397,061 (99,207)
Securities and commodities derivatives 20,838 - - -
30,419,185 617,758 27,766,786 (553,264)
Total
(*) See Notes 2-a and 2-b.
294,945,194 912,850 308,215,021 (897,087)
151

152
The Group manages the credit risk exposure of these contracts
through netting agreements with its main counterparties and by
taking assets as collateral of its risk function.
The fair value of hedging derivatives, by type of hedge, is as
follows:
Millions of Euros
2008 2007
Fair value hedge 410,389 (440,154)
Cash flow hedge 206,919 (113,110)
617,758 (553,264)
As stated in Note 2-b, the fair value of hedging derivatives is taken
to be the sum of the future cash flows arising from the instrument,
discounted to present value at the date of measurement.
Following is a description of the main hedges (including the results
of the hedging instrument and the hedged item attributable to the
hedged risk):
i. Fair value hedges
The Bank basically hedges the interest rate risk of the issues
secured by it. At 2008 year-end, the Bank held IRS contracts with
a nominal value of EUR 17,572 million. The accumulated gains on
these transactions amounted to EUR 440 million, which was offset
by the losses of the same amount on the hedged items, and this
amount is recognised under “Changes in the Fair Value of Hedged
Items in Portfolio Hedges of Interest Rate Risk” in the consolidated
balance sheet.
iI. Cash flow hedges
The Bank hedges the interest rate risk arising from the fluctuations
in the cash flows from mortgage loans tied to floating interest
rates.
Following is a detail of the years in which the flows hedged by the
cash flow hedges will foreseeably take place:
Thousands of Euros
2009 2010 2011 2012 2013 >2013
1,840 61,247 24,544 5,948 5,271 4,645
The notional and/or contractual amounts of the aforementioned
contracts do not reflect the actual risk assumed by the Bank, since
the net position in these financial instruments is the result of
offsetting and/or combining them. This net position is used by the
Bank basically to hedge the interest rate, underlying asset price or
currency risk.
32. Off-balance-sheet funds under
management
The detail of off-balance-sheet funds managed by the Group at 31
December 2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Investment funds 6,838,078 11,228,947
Pension funds 1,409,663 1,626,128
Assets under management 1,521,157 1,191,376
9,768,898 14,046,451
33. Interest and similar income
“Interest and Similar Income” in the consolidated income
statement comprises the interest accruing in the year on all
financial assets with an implicit or explicit return, calculated by
applying the effective interest method, irrespective of
measurement at fair value; and the rectifications of revenue as a
consequence of hedge accounting. Interest is recognised gross,
without deducting any tax withheld at source.
The breakdown of the main items of interest and similar income
earned by the Group in 2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Balances with central banks 37,873 30,593
Financial assets held for trading 53,861 46,334
Available-for-sale financial assets 234,027 189,215
Loans and receivables 4,988,016 4,166,506
Held-to-maturity investments
Adjustments to financial assets as
- 50,043
a result of hedging transactions 5,482 9,565
Insurance contracts linked to pensions 58,837 58,893
Insurance activity income 93,501 87,429
Other assets - 33
5,471,597 4,638,611

34. Interest expense and similar charges
“Interest Expense and Similar Charges” in the consolidated income
statement includes the interest accruing in the year on all financial
liabilities with an implicit or explicit return, including remuneration
in kind, calculated by applying the effective interest method,
irrespective of measurement at fair value; the rectifications of cost
as a consequence of hedge accounting; and the interest cost
attributable to pension funds.
The breakdown of the main items of interest expense and similar
charges accrued by the Group in 2008 and 2007 is as follows:
Thousands of Euros
2008 2007
Financial liabilities held for trading 7,277 9,366
Financial liabilities at amortised cost
Adjustments to financial liabilities as
3,450,008 3,074,161
a result of hedging transactions 197,346 (34,476)
Provisions for pensions (Note 22) 95,050 96,229
Insurance activity expense (Note 40) 3 6,006
Other liabilities 6,847 5,479
3,756,531 3,156,765
35. Income from equity instruments
“Income from Equity Instruments” includes the dividends and
payments on equity instruments out of profits generated by
investees after the acquisition of the equity interest.
The breakdown of the balance of this item is as follows:
Thousands of Euros
2008 2007
Equity instruments classified as:
Financial assets held for trading 55,438 50,255
Available-for-sale financial assets 3,799 5,559
59,237 55,814
36. Share of results of entities
accounted for using the equity
method
“Share of Results of Entities Accounted for Using the Equity
Method” comprises the amount of profit or loss attributable to the
Group generated during the year by associates, as well as by jointly
controlled entities when the equity method has been chosen for
The breakdown of the balance of this item is as follows:
37. Fee and commission income
Thousands of Euros
2008 2007
Associates:
Compañía Concesionaria del Túnel
de Soller, S.A 476 491
Grupo Agres, S.A. 145 123
Carnes Estelles, S.A. 14 110
Aguas de Fuensanta, S.A. (8) 410
Sistemas 4B, S.A. 1,217 601
Other 30 (28)
1,874 1,707
“Fee and Commission Income” comprises the amount of all fees
and commissions accruing in favour of the Group in the year,
except those that form an integral part of the effective interest rate
on financial instruments.
The breakdown of the balance of this item is as follows:
Thousands of Euros
Fee and Commission Income Arising from: 2008 2007
Financing granted to third parties:
Commitment fees
Management and administration services:
20,157 19,857
Investment funds and other collective
investment undertakings 123,564 186,878
Pension funds and plans 34,093 36,009
Assets owned by third parties 2,297 7,068
Investment services:
Underwriting and placement of securities
159,954 229,955
issued by third parties 5,681 2,342
Securities market brokerage 18,142 29,516
Custody services 8,078 9,294
Other:
31,901 41,152
Foreign exchange 1,772 1,340
Financial guarantees 73,192 67,900
Collection and payment services 366,382 329,741
Other fees and commissions 52,341 52,020
493,687 451,001
705,699 741,965
153

154
38. Fee and commission expense
“Fee and Commission Expense” shows the amount of all fees and
commissions paid or payable by the Group in the year, except
those that form an integral part of the effective interest rate on
financial instruments.
The breakdown of the balance of this item is as follows:
Thousands of Euros
2008 2007
Fees and commissions assigned
to third parties 86,876 102,984
Other fees and commissions 57,149 58,330
144,025 161,314
40. Other operating income and Other
operating expenses
“Other Operating Income” includes the income and expenses from
other operating activities of the Group’s credit institutions not
included in other items..
39. Gains/losses on financial assets and
liabilities (net)
“Gains/Losses on Financial Assets and Liabilities (net)” includes
the amount of the valuation adjustments of financial instruments,
except those attributable to interest accrued as a result of
application of the effective interest method and to allowances,
recorded in the consolidated income statement, and the gains or
losses obtained from the sale and purchase thereof.
The breakdown of the balance of this item, by type of instrument,
is as follows:
Thousands of Euros
2008 2007
Fixed-income (8,103) 4,800
Equities 191,357 73,921
Financial derivatives and other (73,854) 6,203
109,400 84,924
The breakdown of the balances of “Other Operating Income” and
“Other Operating Expenses” in the consolidated income
statements is as follows:
Thousands of Euros
Income Expenses
2008 2007 2008 2007
Insurance and reinsurance premium income 1,960,455 1,262,304 - -
Reinsurance premiums paid - - 71,490 58,330
Reinsurance income 39,819 22,646 - -
Claims paid and other insurance-related expenses - - 574,614 514,759
Net provisions for insurance contract liabilities - - 1,381,412 686,106
Sales and income from the provision of non-financial services 73,396 160,752 - -
Cost of sales - - 35,375 86,686
Exploitation of investment property and operating leases (Note 13)
Commissions on financial instruments that compensate for related
2,005 2,006 - -
direct costs
Expenses recovered through their inclusion in the selling price of goods
21,513 33,088 - -
and services 78,805 6,037 - -
Other 13,427 11,126 - 29,386
Contribution to the Deposit Guarantee Fund (Note 1-g) - - 17,296 15,103
Investment property and other expenses - - 119,653 30,193
2,189,420 1,497,959 2,199,840 1,420,563

Insurance activity income
The breakdown of the net amount of the contribution to gross
income from subsidiaries that are insurance or reinsurance
companies, is as follows
Thousands of Euros
2008 2007
Life Non-Life Total Life Non-Life Total
Premiums collected 1,935,271 25,184 1,960,455 1,202,591 59,713 1,262,304
Reinsurance premiums paid (68,473) (3,017) (71,490) (51,946) (6,384) (58,330)
Net premiums 1,866,798 22,167 1,888,965 1,150,645 53,329 1,203,974
Claims paid and other insurance-related
expenses (550,365) (24,249) (574,614) (458,419) (56,340) (514,759)
Reinsurance income 4,448 35,371 39,819 5,002 17,644 22,646
Net provisions for insurance contract
liabilities (1,361,910) (19,502) (1,381,412) (683,341) (2,765) (686,106)
Finance income 87,179 6,322 93,501 84,077 3,352 87,429
Finance expense (Note 34) (3) - (3) (6,006) - (6,006)
Sales and income from the provision of non-financial services
and Cost of sales
“Sales and Income from the Provision of Non-Financial Services”
and “Cost of Sales” show, respectively, the amount of the sales of
assets and income from the provision of services that constitute
the typical activity of non-financial entities and the related costs of
sale. The main lines of business of these entities are as follows:
Thousands of Euros
2008 2007
Sales/ Cost of Sales/ Cost of
Line of Business Income Sales Income Sales
Real estate 46,068 28,713 103,542 80,143
Services 3,667 607 4,050 637
IT and other 23,661 6,055 53,160 5,906
73,396 35,375 160,752 86,686
41. Personnel expenses
“Personnel Expenses” comprises all the compensation of the
personnel on the pay-roll, whether permanent or temporary,
irrespective of their functions or activity, accruing in the year for
whatever reason, including the current service cost in respect of
pension plans, remuneration based on own equity instruments and
expenses capitalised as part of the value of assets.
a) Breakdown
The breakdown of “Personnel Expenses” is as follows:
Thousands of Euros
2008 2007
Wages and salaries 493,897 489,673
Social security costs
Charges to in-house pension
106,890 106,364
provisions (Note 22)
Contributions to external pension
12,658 15,256
funds (Note 2-v) 6,198 1,026
Other personnel expenses 53,740 52,279
673,383 664,598
155

156
b) Headcount
The average number of employees in the Group, by professional
category and gender, was as follows:
2008 2007
Headcount
Men Women Men Women
Senior executives 13 1 13 1
Other line personnel 5,252 2,723 5,342 2,561
Clerical staff 827 744 966 857
General services personnel 7 4 7 6
Staff at subsidiaries and companies abroad 37 25 42 28
Other non-financial companies 438 249 600 324
c) Equity-instrument-based employee remuneration
At the Extraordinary General Meeting on 27 June 2007, the
shareholders approved a three-year Bank share-based Incentive
Plan, which is tied to the achievement of several targets and
divided into two tranches:
f) Top A: appreciation of the Bank’s share price; appreciation of
the share price of Banco Santander S.A. and growth in
earnings per share. 55 Group executives are covered by this
tranche of the plan, including those belonging to the
Management Committee and executive directors (see Notes
5-a and 5-b).
g) Top 10: growth in gross income and the average amount of
the net charge for impaired loans and receivables assessed
individually. 170 Group executives are covered by this tranche
of the plan.
The shares must be delivered no later than 31 July 2010. The
maximum number of Banesto shares to be delivered under this plan
was 1,041,495 (0.15% of share capital).
In 2007 the amount recognised in this connection with a credit to
equity amounted to EUR 1,778 thousand (see Note 27). In 2008
since the targets were not achieved, the Bank proceeded to writeoff
this amount with a credit to income.
On 28 February 2006, the Bank's Annual General Meeting
approved a medium- to long-term Incentive Plan, which basically
entailed the grant to the beneficiaries of options on shares of
Banco Santander, S.A. and, if the terms of the plan are met, the
delivery of shares of Banco Español de Crédito, S.A. to senior
executives and the payment of an amount in cash to the other
beneficiaries. The number of beneficiaries, including directors and
senior executives was 271. The Plan led to the grant of 5,084,000
options on Banco Santander, S.A. shares and the delivery of the
245,907 Banesto shares referred to in Notes 5-a and 5-b. The
number of options exercised was 3,551,819.
6,574 3,746 6,970 3,777
42. Other general administrative expenses
The breakdown of the balance of “Other General Administrative
Expenses” in the consolidated income statements is as follows::
Thousands of Euros
2008 2007
Technology, systems and communications 60,396 85,422
Advertising and technical reports 24,295 26,919
Property and fixtures 68,159 65,936
Taxes other than income tax 15,289 15,517
Surveillance and cash courier services 11,575 11,208
Insurance premiums 1,248 1,444
Other administrative expenses 66,704 59,649
247,666 266,095
The detail of the fees paid to the respective auditors for the audits
of the Group companies (see Appendixes I, II and III) is as follows:
Thousands of Euros
2008 2007
udit of the individual and consolidated annual
financial statements of the Group (*)
audited by the Deloitte worldwide organisation 1,524 1,413
Work required of auditors by Spanish supervisors
and performed by Deloitte 254 350
Other work and reports by Deloitte 967 406
Fees for audits performed by other firms 59 47
Other services provided by other firms 32 110
2,836 2,326
(*) Including the fees paid for the internal control audit required by the US Sarbanes-Oxley Act, with which
the Santander Group is obliged to comply (see Note 27).

43. Gains/(losses) on disposal of assets
not classified as non-current assets
held-for sale
“Gains/(Losses) on Disposal of Assets Not Classified as Non-
Current Assets Held for Sale” in the consolidated income
statement include the income and expenses arising from nonordinary
activities not included in other items. This basically
includes the net gain/loss on the sale of tangible and intangible
assets and investments.
This table does not reflect the Group's liquidity position since it
considers demand deposits and other customer deposits as any
other liability, whereas their stability is a typical feature of
commercial banking. Considering this effect, the differences
44. Residual maturity periods and average
interest rates
The breakdown, by maturity, of the balances of certain items in the
consolidated balance sheet at 31 December 2008, and of the
average interest rates thereon in 2008 is as follows:
THOUSANDS OF EUROS
Average
Annual
Within 1 1 to 3 3 to 12 1 to 5 After 5 Interest
Demand Month Months Months Years Years Total Rate (%)
ASSETS:
Cash and balances with
central banks
Loans and receivables-
Loans and advances
263,073 1,425,080 - - - - 1,688,153 3,24
to credit institutions
Loans and advances
701,890 6,927,529 6,473,772 3,689,019 359,345 1,549,130 19,700,685 4,41
to customers
Debt instruments-
Financial assets held
2,512,189 3,119,406 6,160,379 10,910,999 13,576,362 41,493,328 77,772,663 5,70
for trading
Available-for-sale
- 5,578 15,832 176,325 191,642 12,777 402,154 3,43
financial assets - 60,163 10,360 106,083 3,041,520 3,402,283 6,620,409 4,36
Loans and receivables - - - - - 736,239 736,239 4,54
LIABILITIES:
Financial liabilities
at amortised cost--
Deposits from central
3,477,152 11,537,756 12,660,343 14,882,426 17,168,869 47,193,757 106,920,303
banks and credit institutions 101,447 8,438,192 2,951,605 695,554 13,432 206,388 12,406,618 4,29
Customer deposits 20,252,872 17,935,619 13,344,980 4,992,067 385,203 678,887 57,589,628 3,56
Marketable debt securities 40,065 931,645 2,217,268 4,318,652 10,037,747 10,769,726 28,315,103 4,80
Subordinated liabilities - - - - - 2,236,835 2,236,835 6,10
Other financial liabilities 1,772,688 555,574 93,032 115,868 322,342 37,988 2,897,472 -
22,167,052 27,861,030 18,606,885 10,122,141 10,758,724 13,929,824 103,445,656 -
between assets and liabilities for each of the maturity periods are
within reasonable thresholds in view of the business volume
managed. Note 48 contains a detailed description of the liquidity
management function performed by the Group.
157

158
45. Business segment reporting
Basis of segmentation
Segment reporting is structured by the Group's various business
segments. The distribution by geographical segment is not
significant, since substantially all the profit is obtained in Spain.
The business segments described below were defined on the basis
of the Banesto Group's organisational structure at 2008 year-end,
taking into account the nature of the products and services offered
and the customer segments targeted.
In 2008 the Banesto Group focused its activities on the following
business segments:
- Commercial Banking (households and SMEs)
- Corporate Banking (large companies)
- Markets and International.
Income and expenses that cannot be specifically attributed to any
operating line or that are the result of decisions affecting the
Group as a whole including, inter alia, expenses incurred in projects
or activities affecting several business segments, income from
strategic investments, impairment losses recognised for goodwill,
etc. are attributed to a “Corporate Unit” to which the reconciling
items arising from the reconciliation of the result of integrating the
financial statements of the various business segments (prepared
using a management approach) to the Group's consolidated
financial statements are also allocated.
Basis and methodology for business segment reporting
The segment information below is based on monthly reports
prepared using the data provided by a management control
computer application.
The reporting structure is designed as if each business segment
were a stand-alone business and had its own separate equity that
is distributed on the basis of the risk to which the assets allocated
to each segment are subject, based on an internal cost percentage
allocation system.
The net interest income and ordinary income of each business
segment are calculated by applying to the related assets and
liabilities transfer prices that are consistent with current market
rates. Interest from the securities portfolio is distributed among
the various business segments in proportion to their participation.
Administrative expenses include direct and indirect costs and are
allocated among the lines of business and support service units on
the basis of the internal use of these services.
Assets allocated to the various business segments include financial
assets held for trading, investment securities and loans and
advances to credit institutions and customers, net of the related
impairment allowance. The liabilities and shareholders' equity
allocated to the various business segments include deposits from
credit institutions, customer deposits and shareholders' equity.
The other asset and liability items and the items reconciling the
total assets, liabilities and shareholders' equity allocated to the
various business segments to those shown in the Group's
consolidated balance sheet are allocated to the Corporate Unit.

THOUSANDS OF EUROS
Markets and
Commercial Banking Corporate Banking International Corporate Unit Total Group
2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Interest and similar income 3,526,983 2,899,879 564,492 479,466 968,206 724,830 411,916 534,436 5,471,597 4,638,611
Interest expense and similar charges 2,123,389 1,648,740 458,491 380,666 894,717 687,971 279,934 439,388 3,756,531 3,156,765
Net interest income 1,403,594 1,251,139 106,001 98,800 73,489 36,859 131,982 95,048 1,715,066 1,481,846
Income from equity instruments - - - - 55,588 52,570 3,649 3,244 59,237 55,814
Share of results of entities accounted for using
the equity method - - - - - - 1,874 1,707 1,874 1,707
Net fee and commission income 556,549 564,213 51,946 47,030 22,910 38,266 (69,731) (68,858) 561,674 580,651
Gains/(losses) on financial assets and
liabilities and exchange differences 70,975 65,940 12,218 12,183 71,042 55,322 (2,968) (13,655) 151,267 119,790
Other operating income/(expenses) 4,287 16,882 (318) (452) (282) (184) (14,107) 61,150 (10,420) 77,396
Gross operating income 2,035,405 1,898,174 169,847 157,561 222,747 182,833 50,699 78,636 2,478,698 2,317,204
Expenses and depreciation and amortisation (843,317) (808,300) (21,874) (21,520) (42,032) (40,882) (116,143) (159,533) (1,023,366) (1,030,235)
Provisions - - - - - - - - (36,271) 16,671
Asset impairment (276,883) (211,350) (23,142) (17,369) (2,623) (1,513) 726 (3,467) (301,922) (233,699)
Profit/loss from operations 915,205 878,524 124,831 118,672 178,092 140,438 (64,718) (84,364) 1,117,139 1,069,941
Other net gains/losses - - - - - - (35,852) 29,169 (35,852) 29,169
Profit/loss before tax 915,205 878,524 124,831 118,672 178,092 140,438 (100,570) (55,195) 1,081,287 1,099,110
Income tax (256,257) (267,950) (34,953) (36,195) (49,866) (42,833) 34,798 11,324 (306,278) (335,654)
Profit for the year from continuing operations 658,948 610,574 89,878 82,477 128,226 97,605 (65,772) (43,871) 775,009 763,456
Profit/loss attributable to minority interests - - - - - - (4,835) (1,111) (4,835) (1,111)
Profit/loss attributed to the Group 658,948 610,574 89,878 82,477 128,226 97,605 (60,937) (42,760) 779,844 764,567
Assets by segment-millions of euros 58,237 58,940 11,833 9,963 32,039 26,851 18,370 16,192 120,479 111,946
Liabilities by segment-millions of euros 36,719 33,910 1,772 1,550 33,222 26,838 48,766 49,648 120,479 111,946
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Substantially all the total income for 2008, which includes interest
and similar income, income from equity instruments, fee and
commission income, net gains on financial assets and liabilities held
for trading and other ordinary income, was obtained in Spain. It
should be noted, however, that 1.6% of total income for 2008 was
generated in the USA (0.5% in 2007).
95.8% of loans and advances to customers relate to borrowers
resident in Spain (95.7% in 2007), 2.5% to borrowers resident in
other EU countries (2.8% in 2007) and 0.9% to residents in other
OECD countries (0.6% in 2007).
46. Related-party transactions
a) Transactions with companies in the Banco Español de
Crédito Group and the Santander Group (Parent,
subsidiaries and associates)
All significant inter-company balances at 2008 year-end and the
effect of inter-company transactions during the year were
eliminated on consolidation. The detail of the Group's most
significant balances with associates and Santander Group
companies (see Note 27) and of the effect on the income
statements of transactions performed with them is as follows:
Assets:
Thousands of Euros
2008 2007
Loans and advances to credit institutions 9,244,875 4,313,526
Loans and advances to customers 517,714 22,789
Impairment allowance - (10)
Liabilities:
Deposits from credit institutions 3,067,146 449,501
Customer deposits 523,254 49,498
Income statement:
Debit-
IInterest expense and similar charges (95,037) (73,820)
Fee and commission expense (329) (1,113)
General administrative expenses (72,895) (62,610)
Credit-
Interest and similar income 227,645 157,216
Income from equity instruments 560 520
Fee and commission income 70,091 24,054
Off-balance sheet items:
Contingent liabilities 245,279 346,718
Commitments 1,666,631 9,429
b) Transactions with Board members and executives (key
executives of the Bank and its parent)
The information on the remuneration payable to the Bank's key
executives is detailed in Note 5.
The balance of direct lending transactions to key executives of the
Bank and of its parent amounted to EUR 4,485 thousand at 31
December 2008 and to EUR 4,175 thousand at 31 December
2007.
Additionally, the transactions currently performed by the Bank's
key executives are those characteristic of a normal commercial
relationship with a bank.
c) Transactions with other related parties
At 31 December 2008, the positions with other related parties as
defined in the applicable regulations were as follows:
1. Financing transactions (trade discount, credit, mortgage and
other loans and other lending transactions): EUR 415 million.
2. Riesgos de firma (avales y créditos documentarios): 225
millones de euros.
3. Deposit-taking transactions (customer deposits): EUR 3.6
million.
The transactions included in the aforementioned categories were
performed in the normal course of the Bank's business with its
customers (most of the balances relate to the Ferrovial Group) and
on an arm's-length basis.
Notwithstanding the foregoing, certain individuals and legal
entities that are defined as related parties ordinarily perform with
the Banesto Group transactions which are characteristic of a
normal commercial relationship with a financial institution, for
amounts which are not material and under market or employee
conditions, as appropriate.
47. Fair value of financial assets and
financial liabilities not measured at
fair value
As discussed above, the financial assets owned by the Bank -except
for loans and receivables and held-to-maturity investments, equity
instruments whose market value cannot be estimated reliably and
derivatives that have these instruments as their underlyings and
are settled by delivery thereof- are measured at fair value in the
accompanying balance sheets.
Similarly, the Bank’s financial liabilities -except for financial
liabilities held for trading, those measured at fair value and
derivatives having as their underlyings equity instruments whose
market value cannot be estimated reliably- are measured at
amortised cost in the accompanying balance sheets.
Some of the assets and liabilities recognised under “Loans and
Receivables” and “Financial Liabilities at Amortised Cost” in the
balance sheet at 31 December 2008 are included in the fair value
and cash flow hedges managed by the Bank and, therefore, are
measured in the balance sheet at their fair value in respect of the
risk being hedged (interest rate risk - see Note 11).

Most of the other assets and certain liabilities earn or bear interest
at a floating rate which is adjusted each year; therefore, their fair
value resulting from the variations in market interest rates does not
differ significantly from the amount at which they are recognised in
the accompanying balance sheet.
The remaining assets and liabilities earn or bear interest at a fixed
rate; and, since a significant portion of them mature within one
year, their market value resulting from the variations in market
interest rates does not differ significantly from the amount at which
they are recognised in the accompanying balance sheet.
Accordingly, the fair value of the assets and liabilities at fixed rates,
with residual maturity of more than one year and not hedged
against variations in market interest rates, does not differ materially
from the amount recognised in the accompanying balance sheet.
48. Risk and capital management
Banesto sees risk and capital management as a means of obtaining
competitive advantages for the creation of shareholder value, and
considers that implementation of the related policy must be
compatible with a sustainable growth strategy. This can only be
achieved by maximising the risk-return ratio and, accordingly, a set
of modern structures, information systems, procedures, tools and
methodologies are required to facilitate advanced risk
management.
Basic principles
The basic principles underpinning the Bank's risk management are
as follows:
- Involvement of senior management personnel, who define the
risk policy, set the limits for the powers conferred on decisionmaking
bodies and take decisions on transactions. The
Chairman of the Risk Standing Committee reports directly to
the Executive Committee and to the Board of Directors.
- Independence of the risk function, without detriment to the
commitment to supporting the business, in line with the Bank’s
criteria and general objectives. Key importance of risk
management in Banesto's pricing and capital allocation
policies.
- Commitment to maintain a medium-low risk profile.
Accordingly, risks are assumed on the basis of collective
decisions focused on predictable and scantly volatile risks.
Banesto also seeks diversification in terms of customer, group,
industry and product, thus avoiding a high concentration of
risk.
- Anticipation and active monitoring through the ongoing
assessment of risk by means of monitoring systems to avoid
any unexpected deterioration in the credit quality of the
portfolio.
- The daily use of management tools, including internal rating,
scoring and risk-adjusted returns, as well as expected loss and
economic capital in risk management at both individual and
portfolio level.
- To this end, advanced risk measurement, assessment, analysis
and management methodologies are in place to enable the
automation of processes, which are complemented by our team
of highly-qualified, experienced professionals. The internal
ratings-based approach (IRB) adapted to Basel II enables
Banesto to optimise the management of risk and capital
requirements and the creation of shareholder value.
- Quality of internal and external service, which implies swiftness
of response.
Banesto assumes risks as a result of its lending business, its offbalance-sheet
transactions and the hedging and proprietary
trading activities it performs. In addition to credit, interest rate,
liquidity and foreign currency risk, Banesto is exposed to
operational, environmental and reputational risk.
a. Global risk management
1.Risk quantification
The detail, by type of risk, of the Group's risk profile in 2008,
taking into account all its activities and measured in terms of use of
economic capital, is shown in the table below:
Credit risk 93%
Market risk 2%
Operational risk 5%
In 2008 this capital model was substantially revised to enhance its
sensitivity to changes in the various elements that reflect the
global risk profile: the quality of individual exposures, volatility,
concentration/diversification, correlation, maturity, hedges, etc.
As illustrated, the greatest exposure is to credit risk and,
accordingly, credit risk has been the focus of most of Banesto’s
efforts from the standpoint of quantification as regards capital,
expected losses and stress scenarios.
Credit risk quantification
Effective global risk management requires the development of
methodologies and models that enable the quantification of the
basic measurement parameters, i.e. expected and unexpected loss.
It is also essential to have in place the tools that enable the
establishment of adequate risk protection measures and systems
that facilitate the identification of areas of business growth, always
bearing in mind the Bank’s risk appetite.
Several years ago Banesto implemented quantitative models that
estimate these parameters on the basis of four main components:
the probability of default associated with each customer/contract
(PD), the Bank’s exposure to this customer at the date of default
(EAD), loss severity or loss given default (LGD) and asset
correlation (AC).
The major development in 2008 was the modelling of these
parameters so that they reflect the current macroeconomic
situation from a point-in-time (PiT) approach. In this connection,
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each of the parameters was estimated on the basis of certain
scenarios of macroeconomic variables such as GDP, interest rates,
unemployment, housing prices, growth in lending, etc. to enable
them to be included in risk and return management based on the
Entity’s outlook for the coming months.
Probability of default (PD): all the rating/scoring models (corporate,
banks, businesses, developers, SMEs, consumer loans, mortgages,
cards and behaviour of loans to individuals) are calibrated on the
basis of the probability of default.
This calibration is supported by a statistical process which, based
on the internal default history of the various
customers/transactions, assigns each risk category (rating/score) a
probability of experiencing a 90-day or more default over a oneyear
time horizon.
As is the case with modelling subject to the impact of
macroeconomic effects, Banesto’s probabilities of default are
adjusted by correction coefficients depending on the purpose they
are used for (pricing, internal provisions, regulatory capital,
economic capital, etc.) and the scenarios defined by senior
management.
It was with this objective in mind that the final PD correction
models were developed. These models are based on structural
credit risk models and constitute a very significant qualitative
supplement, since they enable us to improve the occasional
shortcomings of models that use regression on macroeconomic
trends.
All of these models are connected to the Bank’s stress test models,
which allows us to assess the default rates of the macroeconomic
variables in adverse scenarios and to analyse the sensitivity of our
portfolio to each impact taken separately and to combinations
thereof.
Exposure at default (EAD): this concept measures the potential risk
exposure by estimating the amount that will have been drawn down
against a given contract at the date of default. EAD is calculated
on the basis of committed lines of credit, such as credit accounts
or trade discounting lines.
In a world in which financial instruments are increasingly used by all
types of customers, the major challenge has been to precisely
model the exposure of our customers' positions in these products
(interest rate and foreign currency hedges, structured products,
etc.).
Loss given default (LGD): after ascertaining the probability of
default and the amount of exposure at default, loss given default
makes it possible to measure the definitive loss incurred by the
Bank following the recovery of debt principal and interest,
including direct and indirect recovery costs. This process is
performed on the basis of Banesto's historical experience of
customer debt recovery management. As in the case of PD, LGD is
affected by the position in the economic cycle, since nonperforming
loans, asset prices and other factors have a significant
impact on recoveries of defaulted loans and, accordingly, on
severity.
With a view to incorporating this cyclical effect, Banesto used the
aforementioned factors to model the variables with the greatest
impact on final severity such as recovery time, the probability of
court proceedings, the distribution of recoveries in the event of
court proceedings, etc.
The fact that Banesto uses the same factors as in the case of PD
enables it to measure the correlation between PD and LGD and the
combined effect on expected loss of specific stress scenarios of
the two parameters.
Expected loss (EL): which is obtained by combining the three
concepts mentioned above, is the cost of the annual risk
associated with the Bank's loan exposure and is taken to the
management income statement of the entire Entity.
As in the foregoing cases, the expected loss will depend on the
management objective and on the scenario established for this
purpose.
Asset correlation (AC) and diversification: in the current climate the
Bank’s diversified portfolio represents a very significant
competitive edge and, accordingly, the Bank pays particular
attention to the measurement and management of this parameter.
To this end it has created the position of concentration manager
who regularly analyses the composition of the portfolio, and
controls individual and industry concentrations and establishes
maximum concentration limits.
Economic capital (EC): although expected loss is a key component
of credit risk management and pricing, it is not sufficient if we
consider that this loss is not constant over time. Therefore, a
measure is required that will provide information on the variability
of expected losses. This information is furnished by economic
capital, which is intended to measure the potential impact on the
Entity of the volatility of these losses in exceptional situations.
Banesto pursues a two-fold objective in this respect. Firstly, it
seeks to minimise this volatility, thus guaranteeing maximum
returns for shareholders, and, secondly, it aims to maintain
maximum solvency in such stress situations.
2. Integration in risk management
Risk quantification is not an end in itself, but rather it provides the
Bank with the tools which, when used in its day-to-day business,
play an essential role in ensuring adequate risk management at
both individual asset and portfolio level.
The inclusion of estimates of expected loss and capital as basic
management tools has been Banesto's main priority in recent
years, and this is especially the case in the current market climate
that requires much more advanced and anticipatory management.
In Corporate and Business Banking, price simulators and historical
and projected RAROC calculations are of vital importance in the
risk and business decision-making process.
In the case of retail portfolios, the approach adopted is to include
the risk premium in the management income statement at all levels.
This step has made the Organisation aware of the importance of
proactive risk management and of the need for the correct
measurement of risk, as a result of which it is essential to achieve
absolute quality in elements of risk management such as customer
ratings and the arrangement of additional collateral.
At a strategic level, one of the most important areas for the Bank is
the definition and monitoring of the risk profile based on our risk
appetite. This risk profile is the estimate/projection that the Bank
makes every year for each portfolio using business plans and the
forecasts of the main risk parameters. These projections over
various time horizons make it possible to anticipate and manage
behavioural changes (by cycle, portfolio migration or structural
change in the population) and, accordingly, to detect variances in
the risk profile long before they lead to a deterioration in the
quality of Banesto’s investment portfolio.
Stress test: in 2008 a stress model was defined which, in addition
to facilitating the inclusion of any manner of possible or extreme
scenarios and the assessment of their global impact, enables the

Bank to analyse the balance sheet in greater detail, by product,
customer, industry, geographical location, credit quality, etc., to
ascertain which sub-portfolios are most exposed to a given
scenario and its impact thereon.
Once again this serves as an anticipation tool which enables the
Bank to identify niches of customers likely to encounter problems
and customers with good risk profiles and, on the basis of this
information, to define different management strategies.
Strategic risk management: a very important part of the work
performed in the Global Risk Unit concerns “risk intelligence”. This
is probably the component that creates most value added.
The architecture of the risk intelligence used at Banesto, which is
based on the development of advanced decision-making models,
has three specific lines of analysis:
• To support decision-making by detecting behavioural changes
in the laboratory.
• To support the Bank in strategic business areas by taking into
account advances in financial markets, such as, inter alia, the
transfer and movement of risk.
• To cooperate with universities and other players, keeping the
Bank up to date and fostering new methodological
developments.
Internal Validation: a critical element of global risk management is
the role performed by Internal Validation as an independent
control team. The fundamental function of this unit is to issue a
well-founded, up-to-date opinion as to whether the models
function as predicted, whether the results obtained (methodology,
databases, qualitative and quantitative matters, usage test) are
appropriate for the different internal and regulatory purposes for
which they are applied, and whether they effectively question the
work of all the areas involved.
In 2008, Internal Validation completed a review of all the advanced
methods and detected areas for improvement which would lead to
greater value for the Entity and its management of the various
risks.
3. New Basel Capital Accord - Basel II - Economic Capital
In 2008 the Bank’s internal-ratings based capital circulation model
(IRB) was approved and it reported its capital requirements to the
Bank of Spain in accordance with this new model in June and
December.
This signifies that in this period the project phase of Basel II was
concluded at the Entity and Basel II became a real part of
Banesto’s day-to-day risk and capital management.
In this respect it is becoming increasingly important to continue to
make progress in the matters that underpin the spirit of this
regulation and that require major efforts in the following areas:
methodology, processes, internal control and validation,
technology and the inclusion of all these components in
management.
Accordingly, in 2008 Banesto implemented a plan that enabled it
to adapt to the demands that this regulation will impose on all the
areas of its business in the future and to anticipate any possible
future requirements of this dynamic and increasingly demanding
regulation.
The Group's capital management is performed at both regulatory
and economic level.
Regulatory capital management is based on the analysis of the
capital base and the capital ratios (core capital, Tier 1, etc.) using
Basel (“BIS”) and Bank of Spain criteria. The aim is to achieve a
capital structure that is as efficient as possible in terms of both
cost and compliance with the requirements of regulators, ratings
agencies and investors. Active capital management includes
securitisations, sales of assets, and preferred and subordinated
issues of equity and hybrid instruments.
From an economic standpoint, capital management seeks to
optimise value creation at the Group and at its different business
units. To this end, the economic capital, RORAC and value creation
data for each business unit are generated, analysed and reported
to the Management Committee on a quarterly basis.
In order to adequately manage the Group's capital, it is essential
to estimate and analyse future needs, in anticipation of the various
phases of the business cycle. Projections of regulatory and
economic capital are made based on reference to the budgetary
information (balance sheet, income statement, etc.) and to
macroeconomic scenarios defined by the Research Service. The
Group uses these estimates to plan the management measures
(issues, securitisations, etc.) required to achieve its capital targets.
In addition, certain stress scenarios are simulated in order to
assess the availability of capital in adverse situations. These
scenarios are based on sharp fluctuations in macroeconomic
variables such as GDP, interest rates, the stock market, etc. that
mirror historical crises that could happen again.
The Group’s capital management, as regards conceptual
definitions, is in keeping with Bank of Spain Circular 3/2008. In
this connection, the Group considers eligible capital to be that
specified in Rule Eight of Bank of Spain Circular 3/2008.
b. Credit risk
Credit risk is defined as the possibility of a credit institution
incurring a loss stemming from the failure of counterparties to
meet their contractual obligations.
The table below details the distribution, by segment, of the credit
risk exposure to customers in terms of EAD at 31 December 2008.
Millions of Euros EAD %
Corporate banking 16,786 20%
Business banking 31,073 36%
SMEs 5,470 6%
Independent professionals 2,254 3%
Individuals 25,814 30%
Sovereign 4,327 5%
Total 85,724 100%
b.1 Risk acceptance
Banesto’s risk acceptance process is structured on the basis of
customer segmentation:
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Retail risk
The risk acceptance processes have been characterised by prudent
and responsible risk management and the adaptation of policies
and systems to the current economic climate.
The strategies established are differentiated by business segment,
which enabled Banesto to achieve a high degree of credit quality
and meet its basic operating targets in 2008.
Banesto has in place efficient systems which combine advanced
automatic decision-making models with sound teams of highly
experienced and specialised risk analysts, with a view to achieving
the risk quality objectives the Bank requires.
The Risk Analysis Centre (RAC) is formed by highly specialised
analysts who ensure that the transactions meet the required risk
quality standards and who provide ongoing advisory services to
Banesto’s Branch Network regarding the approach to customer
transactions.
The expected loss model in the acceptance of SME transactions
led to an improvement of the analysts’ risk management and
enabled collateral to be adapted to the customer profile. In the
case of Individual Banking, advanced behaviour analysis tools
(scores) are incorporated in risk acceptance and represent an
effective risk assessment and monitoring instrument. In addition, a
value-at-risk model was implemented in Consumer Banking aimed
at maximising the risk-return ratio for high profile customers.
Business banking risk
In accordance with the principle of utmost prudence, which is
appropriate to the current economic situation and is enabling the
Bank to maintain the highest levels of credit quality in the
portfolio, the acceptance of Corporate Network risk commences in
the Business Banking Centres and Regional Offices, which are
delegated certain risk responsibilities by the Bank’s Executive
Committee.
In Central Services the acceptance of business banking risk is
performed, on the one hand, through the Business Banking Risk
Unit, which channels the risk proposals which exceed the scope of
the powers delegated to the Corporate Network, and, on the other
hand, through the Major Customers and Capital Market Unit,
which performs the integral management of a portfolio comprising
the main companies in the segment, thus facilitating a closer
relationship with the customer, greater flexibility in the decisionmaking
processes and the integral management (analysis,
acceptance and monitoring) of investment projects.
The degree of specialisation of the teams and the use of risk
acceptance circuits and rating analysis and assignment tools
specific to the segment ensure the uniform treatment of proposals
for classifying customers’ risks and transactions.
Wholesale risk
The wholesale risk acceptance process focuses on the classification
or assignment of a global limit for each economic group, financial
institution or sovereign debtor and the strict monitoring and
control of this classification, which enables the risk limits and
positions to be managed internally at all times. Also, the Wholesale
Risk Unit specialises in analysing the risk of the investment projects
carried out by the Bank’s customers.
To this end, the team of industry-specialist analysts prepares a risk
report and measures the customer risk by means of a rating based
on the customer’s creditworthiness.
As a result of the strict risk acceptance policy, Banesto has a
diversified customer portfolio with a high credit quality.
Accordingly, price simulators and historical and projected RAROC
calculations are of vital importance in the risk and business
decision-making process.
b.2 Risk monitoring
Banesto’s risk monitoring process is based on the close monitoring
of the loan transactions granted and of the outstanding risk
exposure. This enables problematic situations to be anticipated
using Banesto's risk monitoring systems and the provision of a
flexible response adapted to each scenario.
Banesto’s risk monitoring systems are based on the following
cornerstones:
- Risk Anticipation System (SAR), which each month reads 120
representative credit risk variables, including in-house and
external information. This system makes it possible to identify
counterparties requiring special surveillance (the so-called
“FEVE”).
- Periodic review of internal customer ratings.
- Monitoring of non-performing loan agreements.
- Staffing of Regional Offices with specialist professionals.
- Inclusion of risk monitoring tasks in our modus operandi
through various Monitoring Committee meetings held at
Branch, Business Centre, Retail Banking Unit, Regional Office
and even Central Services level.
- Use of tools that enable precise data to be obtained on the
performance of the portfolio.
The risk monitoring process is applied to all the business channels
in order to safeguard the quality of the risks accepted.
b.3 Recovery
Banesto’s loan recovery efforts have been adapted to the more
complex economic climate through the creation of instruments
that provide a swift response to new demands, the development of
recovery policies, the application of management specialised in
serving the various customer segments, all of which is underpinned
by cutting-edge technology and the boosting of the resources
allocated to this activity.
The traditional classification policy for cases exceeding a certain
amount was reinforced with an increase in the number of loan
recovery managers -in view of the current economic situation- who
are very goal-oriented, which also enables Banesto to focus its loan
recovery strategy on the basis of the type of debt and to pay
immediate attention to each occurrence of default as soon as it

arises. To this end there are managers specialised in Business
Banking whose objective is to technically and efficiently manage
cases of insolvency that are increasingly common in this segment;
specific loan recovery strategies focused on SMEs have been
established and, through individual business plans, Banesto
manages the individuals who are classified into portfolios, with a
notably high recovery capacity in the mortgage segment
supported by a differentiated management model.
Agreements below a given amount and consumer financing are
handled with the support of an extensive network of external
collection companies and managers, which are evaluated every six
months on the basis of efficiency ratios and are encouraged to
achieve success. These structures underpin the significant recovery
levels of written-off loans to which Banesto has always paid special
attention, which demonstrates their capacity to recover loans and
contribute to the income statement.
In 2005 Banesto implemented the legal proceedings management
model articulated in the Astrea tool and monitored by the
Procedural Management Centre. In 2008 a new version of the
Loan Recovery Management System was implemented, which will
enhance the efficiency and swiftness of the recovery of loans.
Lastly, the inclusion of the loan recovery activity in the
management and marketing of foreclosed assets enables the Bank
to optimise the divestment process, focussing its recovery efforts
on the obtainment of liquidity. In this connection, a new ambitious
foreclosed property management model is projected for 2009,
which will help intensify the marketing thereof and considerably
enhance efficiency.
b.4 Concentration risk
The Group constantly monitors the degree of concentration, by
geographical area, economic sector, product and customer group,
of its credit risk portfolios and establishes the risk policies and
exposure limits required to ensure adequate management of credit
risk portfolio concentration.
c. Market risk
Market risk is that arising from the uncertainty regarding the future
performance of the markets, which is inherent to the financial
business. In order to measure and control this risk, Banesto
distinguishes between the management of the risk relating to its
own structural position and the management of its trading
portfolio positions (fixed income and equity securities and
derivatives).
c.1 Interest rate risk
Structural interest rate risk is inherent to the banking business and
arises because the Bank’s balance sheet comprises assets and
liabilities with different repricing and maturity dates. This risk
means that changes in interest rates cause fluctuations in the net
interest margin and the economic value of its capital. Banesto aims
to stabilise the net interest margin and, in turn, to maintain the
economic value of its capital. This requires the active management
of interest rate risk by monitoring the Bank’s exposure and taking
positions aimed at mitigating such exposure.
The monitoring of structural risk involves detailed knowledge of the
balance sheet positions and requires the development and
maintenance of systems and models that enable the Bank to
ascertain the behaviour of the aggregates in different interest rate
scenarios. Banesto has technological systems that provide all the
salient structural risk information (dates, rates, accruals, etc.) for
each contract on the balance sheet. Also, the Bank has followed a
policy of investing in applications and systems that facilitate the
development of models that provide considerable capacity for risk
analysis. In this connection, in 2008 Banesto updated the models
it uses, making it possible to determine the risk of each of the
Bank’s contractual positions in a multidimensional way by
management line, thus providing an additional level of risk
reconciliation with other areas of the Bank.
As a result of the above, the Asset-Liability Committee (ALCO),
which is responsible for structural risk management, uses a
dynamic approach to measure the sensitivity of the net interest
margin and economic value and includes all the simulation factors
in deterministic and stochastic models (reinvestment periods, early
repayment, customer spreads, etc.), so that the simulation models
encompass all the variables with a direct impact on the
measurement of interest rate risk.
The monitoring performed by the Bank focuses on analysing the
behaviour of asset aggregates in different scenarios:
Deterministic models: calculate the sensitivity of the net interest
margin and the economic value to shifts in the interest rate curve.
The sensitivity is calculated as the difference between the net
interest margin and the economic value of capital obtained using
the market curve and other curves that have been subjected to
parallel shifts in all their sections or to changes in the slope, and
focuses mainly on the second year, since this shows the exposure
more clearly once the balance sheet as a whole has been repriced.
Stochastic models: calculate the VaR (Value at Risk) and MaR
(Margin at Risk) as the maximum expected loss with a 97%
confidence level, by randomly creating interest rate scenarios. To
date, the Bank has carried out studies on these simulations on the
basis of the risk-neutral methodologies such as those specified in
the Hull & White model. However, in 2008 the Bank performed
tests with multifactor models which represent more faithfully the
behaviour of interest rates over longer time horizons, such as
Rebonato’s semi-parametric approach.
As a result of the ALCO’s active management of structural balancesheet
risk, Banesto has a diversified portfolio of fixed income and
derivative hedging instruments.
Since Banesto's balance sheet is expressed 96.5% in euros, 2.8%
in US dollars and the remaining 0.7% in other currencies, interest
rate risk management focuses on the positions in euros.
The following table shows the maturity and repricing gaps of
assets, liabilities and off-balance-sheet transactions at 31
December 2008:
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c.2 Liquidity risk
The aim of Banesto's basic liquidity risk management strategy is to
ensure that no imbalances arise in meeting the Bank's payment
obligations.
This strategy is complemented by the access to funds at the lowest
possible cost at medium and long term through the maintenance
of an optimum level of liquid assets. Thus, the Bank applies a highly
conservative policy to its positions.
The methodology used by Banesto comprises various tools and
measurement systems. These include mainly the preparation of gap
tables, on a daily basis for the shorter terms and with larger
groupings for longer terms.
The Bank always seeks to maintain its net position in money
markets at reasonable levels through the early scheduling of the
financing required in the capital markets and the adoption of
balance-sheet management measures.
Within 3 3 Months 1 to 2 2 to 5 After 5
Millions of Euros
Not
Months to 1 Year Years Years Years Sensitive Total
ASSETS
Money market 10,977 3,340 53 126 62 - 14,558
Credit system 42,417 26,058 2,534 2,894 2,633 - 76,536
Securities portfolio 1,466 3,227 2,490 789 2,923 - 10,895
Other assets - - - - - 10,958 10,958
Total assets
LIABILITIES
54,860 32,625 5,077 3,809 5,618 10,958 112,947
Money market 10,905 6,204 2,287 318 3 - 19,717
Deposit market 18,088 15,257 2,567 5,456 5,272 - 46,640
Issues 10,842 2,263 1,682 5,873 8,775 - 29,435
Other liabilities - - - - - 17,155 17,155
Total liabilities 39,835 23,724 6,536 11,647 14,050 17,155 112,947
Off-balance-sheet transactions (12,422) (3,766) 1,001 5,073 10,114 -
Simple gap 2,603 5,135 (458) (2,765) 1,682 (6,197)
Cumulative gap 2,603 7,738 7,280 4,515 6,197 -
Sensitivity ratios:
Assets-liabilities/total assets 13,30% 7,88% (1,29%) (6,94%) (7,47%) (5,49%)
Simple gap/total assets 2,30% 4,55% (0,41%) (2,45%) 1,49% (5,49%)
Cumulative gap/total assets 2,30% 6,85% 6,45% 4,00% 5,49% -
Coverage ratio:
Sensitive assets/sensitive liabilities 137,72% 137,52% 77,68% 32,70% 39,99% 63,88%
Additionally, interest rate and liquidity risk management is
supplemented with stress-testing scenarios which offer information
on the interest rate and liquidity risks in the event of extreme
situations or market crises. In this connection, in a year in which
market liquidity was somewhat restrictive, extensive simulations
were performed on the Bank’s funding requirements on the basis of
the financing from current accounts and deposits, and the Bank
reanalysed the main concepts of the contingency plans established
to cater for possible liquidity crises in the markets.
The following table shows the maturity gaps of assets and liabilities
in millions of euros at 31 December 2008, which can be used as a
basis for the analysis of liquidity.

These gaps reflect a typical commercial banking structure with a
high percentage of demand deposit financing.
c.3 Other market risks
In addition to interest rate and liquidity risk, the Group is exposed
to the effects of future fluctuations in exchange rates. However, as
a result of its strategic approach, the Banesto Group's currency
positions are scantly material and it adopts a policy of hedging any
structural currency positions.
c.4 Capital market risk
The market risks affecting capital markets activity (interest rates,
exchange rates, equities, credit spreads, implicit volatilities,
correlations, etc.) are managed and controlled by the Market Risk
Unit using a standard historical simulation Value-at-Risk (VaR)
methodology. VaR provides a standardised risk figure which
represents the maximum expected loss as a result of adverse
fluctuations in the market with a confidence level of 99%. At
Banesto, VaR is calculated and reported to senior management
every day and is controlled by a system of limits that affect the
overall position and each of the portfolios that constitute the
operations. Senior management is permanently informed of and
involved in market risk management through fortnightly committee
meetings under the auspices of the Risk Standing Committee and
through the ALCO.
In 2008 the levels of risk remained at all times within the approved
limits, even at times of greater instability in the financial markets.
The daily average VaR during the year was around EUR 4.9 million,
of which EUR 2.2 million reflect the level of market risk actually
assumed and EUR 2.7 million relate to other technical market risks
that are systematically covered by provisions pursuant to Banesto’s
policy.
Within 3 3 Months 1 to 2 2 to 5 After 5
Millions of Euros
Not
Months to 1 Year Years Years Years Sensitive Total
ASSETS
Money market 10,368 3,340 53 126 672 - 14,559
Credit system 13,051 16,019 9,229 15,339 22,896 - 76,534
Securities portfolio 527 3,232 2,549 834 3,754 - 10,896
Other assets - - - - - 10,958 10,958
Total assets
LIABILITIES
23,946 22,591 11,831 16,299 27,322 10,958 112,947
Money market 10,905 6,204 2,287 318 3 - 19,717
Deposit market 9,468 15,993 6,529 8,614 6,022 14 46,640
Issues 2,480 5,067 3,281 8,002 10,605 - 29,435
Other liabilities - - - - - 17,155 17,155
Total liabilities 22,853 27,264 12,097 16,934 16,630 17,169 112,947
Simple gap 1,093 (4,673) (266) (635) 10,692 (6,211)
Cumulative gap 1,093 (3,580) (3,846) (4,481) 6,211
The measurement of market risk using VaR is supplemented by an
analysis of stress scenarios in which the impact of certain extreme
events on the value of the portfolios is simulated. This enables
historical and hypothetical scenarios with various degrees of
severity and plausibility to be assessed, and the conclusions drawn
are discussed with senior management on a regular basis through
the aforementioned reporting cycles. Banesto regularly estimates
the extreme losses that might occur if the VaR level were to be
exceeded by using the statistical conditional VaR, which is also
reported to senior management on a daily basis and analysed in
depth by the aforementioned committees. Throughout 2008
conditional VaR remained at around EUR 7.0 million.
Banesto’s market risk measurement model has been submitted for
approval by the Bank of Spain with a view to being used as an
internal model for calculating minimum capital in this area. The
pertinent audits of the model prior to its submission to the
supervisor were conducted successfully in 2008, and the related
inspection is in progress. Banesto internally monitors and refines
the quality of the model on an ongoing basis using back testing
techniques which systematically compare the model’s predictions
with the actual results of treasury activities. The results of the back
testing were checked by the Group’s audit departments and by
ratings agencies, and complied with the requirements
recommended by international regulators.
Risks and results in 2008
a) Trading
The average VaR profile assumed in 2008 was EUR 4,900
thousand.
167

168
b) Balance sheet management
At 31 December 2008, the sensitivity of the net interest margin at
one year to parallel falls of 100 b.p. was negative by EUR 60
million (4.0%).
For the same timeframe the sensitivity of economic value to parallel
increases of 100 b.p. in the curve amounted to EUR 106 million at
31 December 2008 (1.2%).
d. Operational risk
Banesto's operational risk management model was defined in
accordance with the Basel II Accord, the EU directive on capital
requirements for credit institutions and Bank of Spain Circular
3/2008.
Banesto’s main operational risk management objectives are:
- Identify and eliminate any clusters of operational risk before
they give rise to losses.
- Reduce operational risk losses by establishing mitigation plans
based on the type of risk and the business in question.
In order to fulfil these objectives, in 2008 the Bank concluded
the implementation of a wide range of qualitative and
quantitative operational risk management tools, taking full
advantage of the advanced technology and information
systems available to it.
In 2008 the Bank defined and implemented the NORMA
project which covers five areas of operational risk of the
commercial network (cash management, standardisation of
operations and documentation, security, order and reputation
and other operational risks) and establishes a series of
measures with the following objectives:
- Improve the practices and behaviours of the key areas of the
project.
- Reduce the events and losses of each type of risk to an
efficient threshold.
- Incorporate the business management view in the operational
risk management of the network.
- Consolidate the results in a series of indicators suitable for all
the echelons of the organisation.
As illustrated in the preceding paragraph, the scope of the
Operational Risk Indicators tool has increased and the number of
these indicators in the database has doubled. The measurements
of these indicators are automatically obtained on a regular basis,
which enables the Bank to establish a system of alerts through the
corresponding analysis of the appropriate intervals for each
indicator. In the future a study will be carried out on the
relationship between these indicators and the effective losses
arising from operational risk.
In 2008 the knowledge and active management of operational risk
in the entire organisation was enhanced through the creation of
Regional Operational Risk Committees. Additionally, the work of
the Central Operational Risk Committee, the body created in 2004
to reduce operational risk and support the implementation of
mitigation measures, was rewarded by a decrease in operational risk
losses, which was especially notable in the following types of risk:
execution, customer practices and systems incidents.
The Loss Database was implemented five years ago and, as a result
of its level of automation and detail in capturing data, all the Bank’s
centres, in particular all the branches, are immediately aware of all
operational risk events affecting them. This database has also
enabled Banesto to prepare reports on a comparative basis with
other entities and, in particular, with the Spanish entities forming
part of the international consortium known as the Operational
Riskdata eXchange Association (ORX).
The information obtained through the self-assessment
questionnaires performed in 2008 is enabling the Entity to
prepare its risk map in greater detail and to prioritise the actions
to be taken in each area assessed.
Banesto’s Operational Risk Department is also responsible for the
project to prepare a Business Continuity Plan on the basis of the
critical processes detected by the various areas and their
requirements to continue operating in the event of a serious
contingency. This Plan is being developed in accordance with
industry regulations and best practices. In this connection,
Banesto is a member of the Spanish Business Continuity
Consortium and participates actively in the Definitions and
Coordination with Critical Industries and Institutions Working
Groups.
e. Environmental risk
For several years Banesto has applied a methodology that assesses
a customer’s environmental risk in its corporate banking business.
The environmental assessment of a customer acts both as an
opportunity, enabling the Bank to finance investment projects that
aim to protect the environment, and as a threat, since it assesses
the risk of a customer that ignores the environmental implications
of its business.
Environmental assessment attaches weights to both the industry
category and a series of variables that involve a greater or lesser
degree of risk. Such variables range from compliance with the
profuse specific environmental legislation for each industry to
litigation and claims in progress, levels of waste emissions,
discharges and production, the corrective measures adopted and
the environmental quality certifications obtained.
The ultimate aim of this methodology is to identify, within the
credit risk analysis process, the environmental risk factors and the
measures adopted by our customers to mitigate and eliminate
them. Environmental risk is measured using a rating system that
analyses these factors. At present, the Bank’s main corporate
customers have an environmental rating assigned to them to be
taken into account in the analysis of the risks of each of these
customers.
f. Reputational risk
At Banesto reputational risk is considered to be a very important
factor in our decision-making processes.
Reputational risk can be defined as the possible impairment of the
image, prestige or reputation of an entity resulting from the
perception held by third parties of its actions.
This risk is independent from the credit and/or economic risks
inherent in the Bank's operations and from the legal risk that may
arise in the performance and instrumentation thereof. It is
therefore to be regarded as a risk that is additional to any other
risk borne.

g. Risk concentration
Although Banesto has positions that are deemed to be “large
exposures”, they are far below the maximum risk concentration limit
set by Bank of Spain Circular 3/2008.
The distribution of the loan portfolio by customer segment is
included in Note 48-b and the distribution by geographical area is
included in Note 10.
Other disclosures
In light of the exceptional circumstances that arose in the
international financial markets, mainly in the second half of 2008,
European governments undertook to adopt the appropriate
measures to seek to resolve the banks’ financing difficulties and
their impact on the real economy, with a view to preserving the
stability of the international financial system. The main objectives
of these measures were as follows: to ensure the appropriate
liquidity conditions for the functioning of the financial institutions;
to facilitate financial institutions’ access to financing; to establish
the mechanisms that will make it possible, where appropriate, to
provide additional capital resources to the financial institutions
that guarantee the functioning of the economy; to ensure that
accounting regulations are sufficiently flexible to take into account
the exceptional market circumstances; and to reinforce and improve
the mechanisms for coordination between European countries.
Within this general framework, in the last quarter of 2008 the
following measures were approved in Spain:
- Royal Decree-Law 6/2008, of 10 October, creating the Fund
for the acquisition of financial assets (“FAAF”), and Ministry of
Economy and Finance Order EHA/3118/2008, of 31 October,
implementing the aforementioned Royal Decree-Law. The
purpose of the FAAF, which is under the auspices of the
Ministry of Economy and Finance and was allocated an initial
contribution of EUR 30,000 million, extendable to EUR
50,000 million, is to use Public Treasury money and market
criteria to acquire, by means of the auction procedure, financial
instruments issued by Spanish credit institutions and
securitisation special-purpose vehicles, backed by loans
granted to individuals, companies and non-financial entities.
- Royal Decree-Law 7/2008, of 13 October, on Urgent
Economic Measures in relation to the Concerted European
Action Plan of the Euro Area Countries, and Ministry of
Economy and Finance Order EHA/3364/2008, of 21
November, implementing Article 1 of the aforementioned Royal
Decree-Law, which includes the following measures:
• On the one hand, the grant of State guarantees to the issues
of promissory notes, bonds and debentures launched on or
after 14 October 2008 by credit institutions resident in
Spain which meet certain requirements: they are individual
transactions or part of issue programmes; they are not
subordinated debt or debt secured by other types of
collateral; they are admitted for trading on official Spanish
secondary markets; they mature at between three months
and three years, extendable to five years on the basis of a
report from the Bank of Spain; the interest rate is fixed or
floating, although there are special requirements for issues
with a floating interest rate; they must be redeemed in one
single payment and they must not include options or other
financial instruments, and the nominal value must not be
below EUR 10 million. The period for granting guarantees will
end on 31 December 2009 and the maximum total amount
of guarantees to be granted in 2008 will be EUR 100,000
million.
• On the other hand, the exceptional authorisation, until 31
December 2009, for the Ministry of Economy and Finance to
acquire securities, including preference shares and nonvoting
equity units, issued by credit institutions resident in
Spain which need to strengthen their capital and request as
such.
The Bank’s directors, in accordance with their risk management
policies, have the possibility of adopting the aforementioned
measures.
49. Explanation added for translation to
English
These consolidated financial statements are presented on the basis
of IFRSs as adopted by the European Union. Certain accounting
practices applied by the Group that conform with IFRSs may not
conform with other generally accepted accounting principles.
169

170
Appendix I
Subsidiaries Composing the Banesto Group at 31 December 2008
Thousands of Euros
Company Data at
Percentage of Ownership 31 December 2008
Profit
Entity Location Line of Business Direct Indirect Total Assets Liabilities Equity (Loss) (*)
Agrícola Tabaibal, S.A. Gran Canaria Agriculture - 74.18 74.18 1,440 1,293 86 61
Alcaidesa Holding, S.A. Cádiz Real estate - 50.00 50.00 116,146 48,396 77,045 (9,295)
Alhambra 2000, S.L. Madrid Vehicle wash - 100.00 100.00 3,347 2 3,149 196
Aljarafe Golf, S.A. Seville Real estate - 89.41 89.41 14,264 332 14,004 (72)
Bajondillo, S.A. Madrid Real estate 74.00 26.00 100.00 384 359 26 (1)
Banco Alicantino de Comercio, S.A. Madrid Banking 99.99 0.01 100.00 9,119 24 9,088 7
Banesto Banca Privada Gestión, S.A. S.G.I.I.C. Madrid Investment fund manager 99.99 0.01 100.00 2,999 569 2,414 16
Banesto Banco de Emisiones, S.A. Madrid Banking 99.99 0.01 100.00 9,865,798 9,764,737 100,412 919
Banesto Bolsa, S.A., Sdad. Valores y Bolsa Madrid Stock market 99.99 0.01 100.00 479,111 367,092 103,453 8,566
Banesto Factoring, S.A Establecimiento Financiero de Crédito Madrid Factoring 99.97 0.03 100.00 2,283,946 2,158,712 115,639 9,595
Banesto Financial Products, PLC. Ireland Finance 99.94 0.06 100.00 7,510,201 7,509,811 314 76
Banesto Holdings, Ltd Guernsey Securities investment 100.00 - 100.00 47,733 218 47,430 85
Banesto Preferentes, S.A. Madrid Finance 99.76 0.24 100.00 131,724 131,523 159 42
Banesto Renting, S.A. Madrid Finance 99.99 0.01 100.00 379,204 366,790 10,381 2,033
Banesto Securities, Inc. New York Finance - 100.00 100.00 3,328 146 2,575 607
Banesto, S.A. Madrid Finance 74.00 26.00 100.00 49 1 50 (2)
Beta Cero, S.A. Madrid Finance 74.00 14.00 88.00 26 1 37 (12)
Caja de Emisiones y Anualidades Debidas por el Estado Madrid Finance 62.87 - 62.87 69 18 62 (11)
Clínica Sear, S.A. Madrid Healthcare 50.58 - 50.58 15,047 10,295 5,185 (433)
Club Zaudin Golf, S.A. Seville Services - 85.03 85.03 20,822 6,048 14,986 (122))
Corpoban, S.A. Madrid Securities investment - 100.00 100.00 76,471 2 73,477 2,992
Costa Canaria de Veneguera, S.A. Gran Canaria Real estate 37.08 37.10 74.18 16,127 2,705 13,468 (46)
(*) The companies' results at 31 December 2008 have not yet been approved by the respective Annual General Meetings.
Note: The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies
themselves.

Appendix I (cont.)
Subsidiaries Composing the Banesto Group at 31 December 2008
Thousands of Euros
Company Data at
Percentage of Ownership 31 December 2008
Profit
Entity Location Line of Business Direct Indirect Total Assets Liabilities Equity (Loss) (*)
Depósitos Portuarios, S.A. Madrid Services 99.95 0.05 100.00 823 528 458 (163)
Diseño e Integración de Soluciones, S.A. Madrid IT 99.99 0.01 100.00 2,982 310 2,601 71
Dudebasa, S.A. Madrid Finance 99.99 0.01 100.00 46,456 14,199 46,088 (13,831)
Efearvi, S.A. Madrid Real estate - 100.00 100.00 2,010 2,525 (447) (68)
Elerco, S.A. Madrid Leasing 53.38 46.62 100.00 818,562 557,009 284,810 (23,257)
Formación Integral, S.A. Madrid Training 99.99 0.01 100.00 1,779 482 1,286 11
Gedinver e Inmuebles, S.A. Madrid Finance 99.99 0.01 100.00 6,633 345 6,153 135
Gescoban Soluciones, S.A. Madrid Finance 99.99 0.01 100.00 8,969 3,966 3,344 1,659
Grupo Inmobiliario La Corporación Banesto, S.A. Madrid Securities investment 99.99 0.01 100.00 50,952 43,059 11,706 (3,813)
Hualle, S.A. Madrid Securities investment 99.99 0.01 100.00 84,149 2,549 46,618 34,982
Inversiones Turísticas, S.A. Sevilla Hospitality - 100.00 100.00 945,717 925,506 4,910 15,301
Larix Chile Inversiones, Ltd. Chile Real estate - 100.00 100.00 94 189 32 (127)
Larix Spain, S.L. Isle of Man Real estate - 100.00 100.00 1,249 75 1,323 (149)
Mercado de Dinero, S.A. Madrid Securities investment 74.00 26.00 100.00 500 206 293 1
Merciver, S.L. Madrid Shipping 99.91 0.09 100.00 1,147,643 1,147,633 101 (91)
Oil-Dor, S.A. Madrid Service stations 99.99 0.01 100.00 152,833 123 148,876 3,834
Programa Hogar Montigalá, S.A. Madrid Real estate 0.05 99.95 100.00 374,194 372,633 7,674 (6,113)
Promodomus Desarrollo de Activos, S.L. Madrid Real estate - 51.01 51.01 589,189 587,977 2,000 (788)
Sodepro, S.A. Vitoria Finance 99.99 0.01 100.00 15,659 1 15,067 591
Wex Point España, S.L. Madrid Services 99.98 0.02 100.00 2,092 1,086 1,177 (171)
(*)The companies' results at 31 December 2008 have not yet been approved by the respective Annual General Meetings
Note:The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies
themselves.
171

172
Appendix II
The Banesto Group's Joint Ventures at 31 December 2008
Thousands of Euros
Company Data at
Percentage of Ownership 31 December 2008
Profit
Entity Location Line of Business Direct Indirect Total Assets Liabilities Equity (Loss) (*)
Espais Promocat, S.L. Barcelona Real estate - 50.00 50.00 27,636 26,574 1,375 (313)
Habitat Elpi, S.L. Barcelona Real estate - 50.00 50.00 7,296 6,151 5,894 (4,749)
Inmobiliaria Sitio de Baldeazores, S.A. Madrid Real estate - 50.00 50.00 4,300 8,981 2,264 (6,945)
Kassadesing 2005, S.L. Madrid Real estate - 50.00 50.00 63,502 53,271 12,771 (2,540)
Prodesur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 63,596 44,471 20,106 (981)
Proinsur Mediterráneo, S.L. Alicante Real estate - 50.00 50.00 75,712 52,887 30,244 (7,419)
Santander Asset Management, S.A., S.G.I.I.C. Madrid Investment fund manager 20.00 - 20.00 306,982 212,827 45,247 48,908
Santander Pensiones E.G.F.P., S.A. Madrid Pension fund manager 20.00 - 20.00 81,621 31,643 35,955 14,023
Santander Seguros y Reaseguros, Cía. Aseguradora Madrid Insurance 39.00 - 39.00 13,271,450 12,810,958 367,844 92,648
(*) The companies' results at 31 December 2008 have not yet been approved by the respective Annual General Meetings..
Note:The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial both for the Bank and for the companies
themselves.

Appendix III
Associates of the Banesto Group 31 December 2008
The major companies (representing 100% of direct investments in associates and 99% at Banco Español de Crédito Group level) are included in this list:
Thousands of Euros
Company Data
Percentage of Ownership at 31 December 2008
Profit
Associate Location Line of Business Direct Indirect Total Assets Liabilities Equity Loss) (*)
Agres, Agrupación Restauradores, S.L. Madrid Restaurants - 43.01 43.01 3,669 1,255 2,050 364
Aguas de Fuensanta, S.A. Asturias Food 36.78 5.43 42.21 35,080 25,931 9,460 (311)
Carnes Estellés, S.A. Valencia Food 21.41 - 21.41 35,633 26,313 9,049 271
Cartera del Norte, S.A. Asturias Finance 36.10 - 36.10 1,064 13 1,053 (2)
Centro Desarrollo Invest. Apli. Nuevas Tecnologías Madrid Technology 49.00 - 49.00 1,124 109 1,012 3
Compañía Concesionaria del Túnel de Soller, S.A. Palma de Mallorca Construction 32.70 - 32.70 47,234 27,920 18,886 428
Grupo Alimentario de Exclusivas, S.A. Asturias Food 40.46 - 40.46 6,784 6,497 277 10
Sistemas 4B, S.A. Madrid Services 14.70 - 14.70 228,673 169,927 7,053 51,693
(*)The companies' results at 31 December 2008 have not yet been approved by the respective Annual General Meetings.
Note:The directors have opted to omit the net amounts of these investments recognised in the Bank's books on the grounds that, since certain of these companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial for the Bank.
173

174
Appendix IV
Notifications of Acquisitions of Investees at 31 December 2008
(Art. 86 of the Consolidated Companies Law and Art. 53 of Securities Market Law 24/1988):
THOUSANDS OF EUROS
Percentage of Net
Ownership
Line of Acquired At Year
Date of
Notification
Investee Business in the Year End to Investee
Acquisitions in 2008:
Promodomus Desarrollo de Activos, S.L. Real estate 100.00% 51.00% 06/06/08

Appendix V
List of agents to whom Bank of Spain Circular 5/1995 is applicable
Location Area of Activity
A.L.M. Finanzas y Créditos de La Mancha, S.L. Manzanares Castilla-La Mancha
Abu Road, S.L. Marbella Andalucía
Agencia Financiera Ulloa, S.L. Culleredo Galicia
Agentes Financieros Reunidos, S.L. Motril Andalucía
Agility Financial S.L. Xirivella Valencia
Alpasugui Agente Financiero, S.L. Roquetas Mar Andalucía
Alto Quintana, S.L. El Barraco Castilla-León
Anagan Financiera, S XXI S.L. Sabiñánigo Aragón
Anagan Gestión S XXI S.L. Agreda Castilla-León
Ancuegar, S.L. Palencia Castilla-León
Arespa Gijón Asociados, S.L. Gijón P. de Asturias
Arión Financial Services, S.L. Madrid Madrid
Arjona Financiaciones, S.L. Arjona Andalucía
Asefisco Palma, S.L. Palma del Río Andalucía
Asemar Financiera, S.L. Rojales C. Valenciana
Aser Financieros, S.L. Galdácano País Vasco
Asesores Financieros de Almendralejo, S.L. Almendralejo Extremadura
Asesoría Tilco, S.L. Zamora Castilla-León
Azorva Patrimonio e Inversión, S.L. Yecla C. Valenciana
Balance Activo, S.L. Lliria C. Valenciana
Bamarval 2008 Zaragoza Aragón
Banefinsa, S.L. Santa Fé Andalucía
Banescomtf, S.L. S.C.Tenerife Canarias
Banesfinance S.L. Sabadell Cataluña
Banest Blanes, S.L. Blanes Cataluña
Banfortunia, S.L. Alcalá de Henares Madrid
Bangencia Aranjuez S.L. Aranjuez Madrid
Banking Solutions, S.L. Rivas Madrid
BNT 2008 Agentes Financieros S.L. Almansa Castilla-La Mancha
Bopecon Inversiones S.L. Sevilla Andalucía
Botello Ollero, Ricardo Majadahonda Madrid
Business Rokers, S.L. Alhaurín de la Torre Andalucía
Bustos Zamora, Miguel Angel Madrid Madrid
BW Capnorth Servicios Financieros y Banc Barbastro Aragón
Carramigal, S.L. Madrid Madrid
175

176
Appendix V (cont.)
List of agents to whom Bank of Spain Circular 5/1995 is applicable
Location Area of Activity
Cerda Gil, Miguel Angel Elche C. Valenciana
Cetinve S.L. Dos Hermanas Andalucía
Charuma, S.L. Sevilla Andalucía
Codelva Gestión S.L. Burgos Castilla-León
Conejos Sánchez, José Ramón S.Antonio Benageber C. Valenciana
Consultores Financieros Leoneses, S.L. León Castilla-León
Credelia, S.L. Murcia Murcia
División Servicios Financieros, S.L. Cáceres Extremadura
Drimty, S.L. Mutxamiel C. Valenciana
Ema Villatorrada 2007 S.L. Sant Joan de Vilatorrada Cataluña
Esteve Gilera, Albert Gelida Cataluña
Financeres Aro, S.L. Alcarras Cataluña
Financiaciones Las Cabezas S.L. Las Cabezas de San Juan Andalucía
Fínanlex, S.L. Llombai C. Valenciana
Finansando, S.L. Algaba Andalucía
Finanzas Boadilla, S.L. Boadilla del Monte Madrid
Finanzas y Servicios de Pueblo López, S.L. Fuengirola Andalucía
Franquicies Financeres Lleida, S.L. Lleida Cataluña
G.S.G. Grupo Corporativo de Servicios, S.L. Madrid Madrid
Garcia Bejar, Francisco Terrassa Cataluña
Garrido Garrido, Pedro Villarrubia Ojos Castilla-La Mancha y Extremadura
Gessinelx, S.L. Elche C. Valenciana
Gestión 5 Servicios Financieros, S.L. Málaga Andalucía
Gestión Financiera Madrid Norte S.L. Alcobendas Madrid
Gestión Financiera Malacitana 2007, S.L. Málaga Andalucía
Gestiones e Inversiones Alper, S.L. Salceda de Caselas Galicia
Gesvalor Financiación y Vida, S.L. Tarazona Aragón
Gil Senis, Francisco Javier Benisano C. Valenciana
González y Naves, S.L. Oviedo Asturias
Grup Arca Oliana, S.L. Oliana Cataluña
Grup Bbr Gestio Privada, S.L. Mora D’Ebre Cataluña
Grupo Bruvimar Asesores, S.L. Palafolls Cataluña
Inficlunan, S.L. Málaga Andalucía
Interalde 2003, S.L. Valle de Trapaga País Vasco
Inversiones Martuchi S.L. Madrid Madrid
Inversiones Utreranas, S.L. Utrera Andalucía
Inversiones y Finanzas Tres Cantos, S.L. Tres Cantos Madrid
Inveya S.L. Alicante Alicante
Isalos Agente Financiero S.L. Málaga Andalucía
Isamer Financieros, S.L. San Pedro de Alcántara Andalucía
Joluanca 2006, S.L. Bormujos Andalucía
José Manuel García Morante, S.L. Granada Andalucía
Julia López García, S.L. Miguel Esteban Castilla-La Mancha
Lagrebas S.L. Madrid Madrid
Lap Asturias, S.L. Nava Asturias
Lastras Audismar, S.L. Pelayos de la Presa Madrid
Marcos Sánchez, Antonio Palencia Castilla-León

Appendix V (cont.)
List of agents to whom Bank of Spain Circular 5/1995 is applicable
Location Area of Activity
Martínez Martínez, Vicente Demetrio Valencia C. Valenciana
Meda Financiera, S.L. Arteixo Galicia
Mejia Lancharro, Antonio Móstoles Madrid
Molina Cortés, Nicolás Plasencia Extremadura
Moraleda Zúñiga, Mario Piedrabuena Castilla–La Mancha
Muñoz Rodríguez, Segundo Mazarrón Murcia
Navarro Gopar, Juan Teodosio Las Palmas de G.C. Canarias
Nubarpol S.L. Gelves Andalucía
Ocendihe Servicios Integrales Financiero Las Palmas de G.C. Canarias
Oliver Sanso, Mateo Ciudadela Baleares
Palmero e Hijos, S.L. La Laguna Canarias
Pelaez García, José María Rute Andalucía
Perea Sierra, José Pilas Andalucía
Plaza Fernández, Rosario Casas de Benítez Castilla-La Mancha
Premiun Corredor Henares S.L. Alcalá de Henares Madrid
Pujol Carrera, Ramón Bellver de Cerdanya Cataluña
Rc 2007 Financieros, S.L. Benahavis Andalucía
Reig Mascarell, Fernando Denia C. Valenciana
Rodríguez Cals Financiera, S.L. Estepona Andalucía
Romero Carmona, Manuel Puebla del Río Andalucía
Rusalea Finance S.L. Madrid Madrid
Sánchez Cañadell, Carlos Terrassa Cataluña
Sánchez Cuñado, Mercedes Viator Andalucía
Sánchez Garzón, José Granada Andalucía
Sánchez Hernández, Alexis La Minilla Canarias
Sánchez Solera, Felipe Hontanaya Castilla-La Mancha
Serarols Associats, S.L. Berga Cataluña
Serban Marbella, S.L. Marbella Andalucía
Sercon Asfico Agentes Financieros, S.L. Oleiros Galicia
Sersaf, S.L. Sevilla Andalucía
Servicios Financieros Mantua S.L. Villamanta Madrid
Servicios Integrales Nase S.L. Naquera C. Valenciana
Seva Hernández, Francisco Antonio Alicante Alicante
Sismoint, S.L. Esparraguera Cataluña
Soluciones de Patrimonio e Inversión, S.L. Colmenar Viejo Madrid
Soluciones Finan 2 S.L. Capellades Cataluña
Suarez Saudinos, Antonio Peñacastillo Cantabria
Tevar Marcilla S.L. Quintanar Rey Castilla-La Mancha
Tinto Santarosa, S.L. Huelva Andalucía
Tomás Berlango, Antonio Jesús Sant Boi de Llobregat Cataluña
Torres Financiación S.C.A. Dos Torres Andalucía
Tramygest Financiera, S.L. Guardamar del Segura C. Valenciana
Trezavilla, S.L. Sevilla Andalucía
Tribaldos Villar del Saz, María Josefa La Alberca de Záncara Castilla–La Mancha
Unión Gestora Extremeña S.L. Badajoz Extremadura
Zisco Finanzas S.L. Alcorcón Madrid
177

178
Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails..
Banco Español
de Crédito Group
Business performance and situation of the Banesto Group
2008 proved to be a much more challenging year in economic
terms than forecast, with significant declines in economic activity
and tension in the markets that triggered a considerable drop in
the pace of business growth, together with a sharp increase in
default rates in the financial system.
Against this difficult backdrop, because it chose the right
management priorities, Banesto obtained an excellent set of
commercial and financial results, which will enable it to face the
coming years with a very strong equity position.
Banesto obtained profit before tax of EUR 1,081,287 thousand,
1.6% less than in 2007. After deducting the income tax expense,
the consolidated profit for the year was EUR 775,009 thousand,
up 1.5%. Lastly, after deducting minority interests, profit
attributable to the Group amounted to EUR 779,844 thousand,
2.0% more than in the previous year.
The changes in the income statement items were as follows:
Net interest income rose by 15.7% to EUR 233,220 thousand.
Amidst a highly competitive environment, this improvement is the
result of selective investment growth, an emphasis on attracting
deposits and sound management of margins and the balance
sheet.
Net fees and commissions were 3.3% lower as a result of a decline
in investment fund and pension fund management fees, due to the
shift in commercial policy towards attracting on-balance-sheet
deposits and a significant increase in fees and commissions for
services, which recorded year-on-year growth of 8.7%. Together
with the gains on financial assets and liabilities and exchange
differences, resulting mainly from the distribution of cash products
to customers, this led to 7.0% growth in gross income.
The trend in personnel expenses and other general administrative
expenses, which fell by 1.0%, and depreciation and amortisation,
which rose by 2.8%, resulted in an overall decline in operating
costs of 0.7%, in keeping with the Bank’s cost control policy.
Directors' Report for the year
ended 31 December 2008
Impairment losses amounted to EUR 321,922 thousand, of which
EUR 299,799 thousand related to loans and receivables, 30.9%
more than in 2007, as a consequence of the provisions made for
the industry-wide increase in non-performing loans in 2008.
Lastly, the Bank recognised net provisions of EUR 16,271
thousand, compared to a net recovery in this connection of EUR
16,671 thousand in 2007.
As a result of all the above, profit from operations rose by EUR
47,198 thousand, an increase of 4.4%, which we regard as very
satisfactory given how the economy performed in 2008.
Other operations generated net losses of EUR 35,852 thousand,
compared to a net profit of EUR 29,169 thousand in 2007. As a
result, profit before tax was EUR 1,081,287 thousand. After
deducting income tax and profit attributable to minority interests,
profit attributable to the Group in 2008 was EUR 779,844
thousand, up 2.0% on the previous year.
The most significant changes in the consolidated balance sheet
were as follows:
1. Total assets amounted to EUR 120,479 million at 31
December 2008, up 7.6% on 2007.
2. Loans and advances to customers increased by 3.6% to EUR
77,773 million. Of the total balance of this item, loans and
advances to the private sector amounted to EUR 72,233
million, up 2.5%.
3. Customer deposits totalled EUR 57,590 million, representing
a year-on-year increase of 9.2%.
Research and development
In the technology field, efforts were aimed mainly at continuing
with the resource optimisation policy, leading to improved
efficiency and enhanced process rationalisation. The Group
continued to develop software, enabling it to achieve cost savings
and enhance customer service quality whilst preparing it to meet
new technological and functional renewal needs.

2008 saw a continuation of the development of the efficiency
drive called the Menara Plan, which was launched in 2006. This
plan pursues a threefold objective, namely to attain:
- Increased operating efficiency, to enable the Bank to combine
growth with cost control.
- Heightened commercial efficiency, to improve the time devoted
by branches to their commercial business.
- Improved quality of service to customers.
In order to carry out the aforementioned R&D work and to expand
the microcomputer platform used by its personnel, in 2008 the
Group incurred expenses and made investments in IT systems
amounting to approximately EUR 108 million.
This endeavour is not only the result of an individual effort to
capitalise on in-house resources, but it also reflects our willingness
to place our potential at the disposal of society to facilitate its
response to the new challenges posed by information technologies.
In this respect, in 2008 the Bank entered into agreements with
official agencies aimed at providing citizens and businesses with
easy access to new technology.
Capacity for technological innovation and the ability to convert
progress into improvements accessible to society are part of our
corporate management model. Our commitment has led us to go a
step further in this respect, as shown by the actions undertaken in
2008 by the Banesto Foundation for Society and Technology,
which is a benchmark in Spain for organisations of its kind.
This Foundation is one of several channels through which Banesto
shares its technological expertise with society but not the only
one. In the performance of its business activities, Banesto
implemented a series of innovative commercial initiatives, such as
campaigns to attract new customers who agree to have their salary
paid directly into the bank, thanks to which over 300,000
personal computers were distributed in 2008, thus helping to
promote technological development in our society.
The Group continued to train its workforce and to adapt it to the
new business requirements and to the need for ongoing
professional development. To facilitate this process, a training
development strategy focusing on continuous learning,
professional development and the harnessing of the advantages of
new technologies was implemented.
Treasury shares
In 2008, the Bank and two consolidable Group companies
acquired and sold 33,367,629 and 35,777,045 Banco Español de
Crédito, S.A. shares, respectively. The par value of the shares
acquired was EUR 26,360,426.91 and that of the shares sold was
EUR 28,263,865.55. The acquisition cost was EUR 363,742
thousand and the selling price was EUR 396,522 thousand.
At 31 December 2008, the Bank did not own any treasury shares.
A Group company held 3,863,230 shares of Banco Español de
Crédito, S.A. with a par value of EUR 3,051,952. The carrying
amount of these shares at 31 December 2008 was EUR 36,074
thousand.
Outlook
As explained in the 2007 Directors’ Report, the targets set by the
Bank focus on medium-term achievements, namely for Banesto to
become the leading commercial bank in Europe among its peers
and the first-choice financial institution for its customers.
- The Bank's medium-term growth, efficiency, risk and
profitability targets are as follows:
- Business growth in terms of both customer deposits and
lending.
- Increases in productivity and cost control, leading to an
ongoing improvement of the efficiency ratio.
- A non-performing loans ratio below that of the industry as a
whole, coupled with a non-performing loans coverage higher
than the industry-wide figure.
- A concomitant sustained increase in profitability.
The economic environment in 2009 is forecast to be difficult.
Public and private agencies predict a decline in economic activity
with a knock-on effect on employment, rising public-sector deficit
and falling interest rates.
Against this backdrop, Banesto's financial targets for 2009 are as
follows:
- To improve on the 2008 efficiency ratio of 39%, with sufficient
flexibility so as to be able to manage costs as much as is
necessary.
- A non-performing loan ratio below the average for the industry
and that of our major peers.
- To achieve better results than the industry and our peers,
measured as the change in net recurring profit.
Events after the balance sheet date
From 1 January 2009 to the date on which this Directors' Report
was prepared, no events occurred that might significantly affect it,
other than those described in the note to the consolidated
financial statements on events after the balance sheet date.
Risk management at the Banesto Group
The notes to the consolidated financial statements include a broad
description of the Banesto Group's risk management.
Customer care service
As stipulated by Article 17 of Ministry of Economy Order
ECO/734/2004, of 11 March, on Customer Care Departments
and Services and Consumer Ombudsmen of Financial Institutions,
following is a summary of the Annual Report submitted by the head
of the Customer Care Service to the Board of Directors at its
meeting held on 20 January 2009.
a) Statistical summary of the claims and complaints handled
2,808 complaints were filed with the Customer Care Service in
2008, a decrease of 5% compared with 2007, all of which were
admitted for consideration (without prejudice to the existence of
grounds for not admitting complaints for consideration in the
Service's Rules). 89% of the matters handled (2,505 complaints)
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180
were resolved and concluded within the year, whereas a total of
303 complaints had not yet been analysed at 31 December 2008.
The detail of complaints and claims handled, by the subject of the
claim, is as follows:
• Lack of diligence....................................................................... 63%
• Means of payment................................................................... 1%
• Campaigns................................................................................. 9%
• Transactions .............................................................................. 4%
• Poor service............................................................................... 3%
• Insurance.................................................................................... 3%
• Internet banking....................................................................... 2%
• Other claims.............................................................................. 2%
• Reversals..................................................................................... 2%
•Recalculations............................................................................ 1%
b) Summary of resolutions:
• In favour of the complainant: .......................... 1,303 (52%)
• In favour of the Bank:........................................ 1,027 (41%)
• No pronouncement made:............................... 175 (7%)
c) Detail of the complaints filed through the Bank of Spain and
the Spanish National Securities Market Commission
(CNMV)
Of the total number of complaints and claims handled by the
Customer Care Service, 327 were filed through the Bank of Spain
and 59 through the CNMV, the detail being as follows:
Bank of Spain
Claims resolved ............................................................. 196
In favour of the customer......................................... 100 (51%)
Claim accepted ........................................................... 58 (30%)
In favour of the Bank ................................................. 18 (9%)
No pronouncement made ........................................ 20 (10%)
Claims unresolved......................................................... 131
CNMV
Claims resolved ............................................................. 39
In favour of the customer......................................... 19 (46%)
In favour of the Bank ................................................. 18(46%)
No pronouncement made ........................................ 2 (5%)
Claims unresolved......................................................... 20
d) General decision-making criteria
The decision-making criteria used by the Customer Care Service
are taken mainly from the resolutions issued by the Bank of Spain,
the CNMV and the Directorate-General of Insurance and Pension
Funds in similar cases (approximately 80% of cases), and in those
cases in which this type of reference does not exist, the response is
given taking into account the advice provided by the Bank's Legal
Department on the basis of the particular circumstances giving rise
to the complaint.
e) Recommendations or suggestions deriving from the
service's experience, with a view to better attaining the aims
of its work
In 2007, Banesto created a Quality Committee. This Committee,
chaired by the CEO and in which all the Areas concerned
participate, is responsible for defining Banesto's quality strategy,
monitoring the balanced scorecard for quality and improving
results (customer satisfaction surveys, objective service quality
indicators and levels of service provision attained), authorising and
prioritising improvements that require investment, and monitoring
the impact of the most significant enhancement projects. This
Committee holds monthly meetings and established the criteria to
be employed to improve the quality of customer service.
Another Committee meets every two weeks to analyse all the
complaints and claims in respect of which, based on the
aforementioned criteria, the Customer Care Service experts have
proposed a resolution against the claimant. The aim of this
Committee is to attempt to obtain a mutually satisfactory solution.
As a result of the work performed by these two Committees,
various measures were introduced to improve the quality of
customer service, which led to a reduction in the number of
complaints and claims handled by the Customer Care Service.
Information required under Article 116 bis of the Securities
Market Law
In conformity with Article 116 bis of the Securities Market Law
24/1988, of 28 July, introduced by Law 6/2007, of 12 April, the
Board of Directors of Banco Español de Crédito, S.A., at its
meeting on 20 January 2008, resolved to make available to
shareholders this Report explaining the matters that, in conformity
with this Article, were included in the 2008 Directors’ Report
supplementing the 2008 financial statements.
a) Structure of the share capital, including any securities not
traded in a regulated EU market, indicating, where
appropriate, the various classes of shares and, for each
class, the rights and obligations conferred and the
percentage of share capital represented
As stipulated in Article 5 of the bylaws, the Bank's share capital
consists of 687,386,798 fully subscribed and paid shares of EUR
0.79 par value each, of a single series, which confer the same
rights and obligations. It is not necessary to hold a minimum
number of shares in order to attend and vote at the General
Meetings. No securities have been issued that are convertible into
shares of Banco Español de Crédito, S.A.
b) Any restriction on the transferability of securities
There are no bylaw-stipulated restrictions on the transferability of
the shares representing the share capital, without prejudice to the
application of certain rules, which are set forth below.
The shares representing the share capital are freely transferable,
without any restriction, unless the volume of shares acquired
surpasses the threshold of a significant ownership interest, in which
case the provisions established in Law 26/1988, of 29 July, on
Discipline and Intervention of Credit Institutions shall apply. Under
this Law, anyone intending to acquire an equity interest or voting
power of more than 5% of the total capital or voting rights must
notify the Bank of Spain, which will have three months in which to
object to the acquisition. The only permissible ground for this
objection is the unsuitability of an acquirer that fails to meet the
suitability requirements of Article 43.5 of the aforementioned Law.
The Bank of Spain must also be notified of any intention to acquire
ownership interests equal to or in excess of the following limits:
10%, 15%, 20%, 25%, 33%, 40%, 50%, 66% or 75%.

As Banesto is a listed company, the acquisition of certain
significant ownership interests must be notified to the issuer and
to the Spanish National Securities Market Commission (CNMV),
pursuant to Article 53 of Spanish Securities Market Law 24/1988,
Royal Decree 1362/2007, of 19 October, and CNMV Circular
2/2007, of 19 December, which establish as the first notification
threshold 3% of the share capital or voting rights (or 1% if the
notifying party is resident in a tax haven or in a tax-free country or
c) Significant direct or indirect ownership interests in the share
capital
d) Any restriction on voting rights
The restrictions on the exercise of voting rights are those common
to any company, and the bylaws do not contain any specific
restrictions on these rights.
e) Side agreements
There are no side agreements at Banco Español de Crédito, S.A.
f) Rules governing the appointment and replacement of
members of the managing body and the amendment of the
Company's bylaws
1. Appointment and removal of members of the Board of Directors.
Articles 15, 16, 19 and 32 of the bylaws and Articles 15, 18, 19
and 20 of the Board of Directors Regulations govern the
procedures for the appointment, re-election, evaluation and
removal of directors, which can be summarised as follows:
a. Appointment, re-election and ratification..
- Competent body: the General Meeting, as provided for in the
Consolidated Spanish Companies Law (as enacted by
Legislative Royal Decree 1564/1989, of 22 December) and in
the bylaws. Nevertheless, in the event of a vacancy due to the
resignation or death of one or several directors, the Board may
designate, by virtue of the powers of co-optation attributed to
it by law, another or several other directors, whose
appointment must be confirmed at the earliest General
Meeting. In this case, the directors thus appointed shall
discharge their duties for a period not exceeding the time that
remained for their predecessors to complete their term of
office.
- Appointment requisites and restrictions: shareholder status is
not a requisite for appointment as a director, except in
appointments by co-optation, in which case this status is
required. Persons who are subject to any legally established
prohibition or incompatibility that would bar them from
holding office cannot be appointed as directors.
territory or with which there is no effective exchange of tax
information in accordance with current legislation).
Lastly, also as a listed entity, the acquisition of 30% or more of the
capital or voting rights of the Company entails the obligation to
present a takeover bid under the terms established in Article 60 of
Securities Market Law 24/1988.
Name or Company Name of Direct Holder of the Ownership Interest Number of % of Total Voting
Direct Voting Rights Rights
BANCO SANTANDER, S.A.
CANTABRO CATALANA DE INVERSIONES, S.A.
606,345,55 88.21%
(participación indirecta de Banco Santander, S.A.) 7.350.543 1.069%
The Appointments and Remuneration Committee, at its meeting on
17 December 2003, expounded the requisites established in the
Board Regulations for the proposal of candidates for the office of
director and, accordingly, the persons designated as directors must
be of renowned competence, experience and solvency and must
have an honourable reputation gained by virtue of a personal
history marked by observance of commercial and corporate laws
and other regulations governing economic activity and the
business world, and of good commercial, financial and banking
practices.
Another of the requisites established by the Committee is that a
majority of the Board members must have discharged, for a period
of not less than five years, senior administration, management,
control or advisory functions for financial institutions, or functions
of a similar degree of responsibility at other public or privatesector
entities of a size at least similar to that of the Bank, in
keeping with the requirements of the legislation governing credit
institutions.
Lastly, the Board Regulations set forth the circumstances under
which designation as an independent director is prohibited; these
circumstances are included in the recommendations of the Unified
Code, in which independent directors are considered to be persons
who, designated on the basis of their personal and professional
conditions, are able to discharge their functions without being
influenced by any relationships with the Bank, its main
shareholders or its executives. Independent director status cannot
be granted to directors who:
a) Have been employees or executive directors of Group entities,
unless three or five years, respectively, have elapsed since this
relationship was terminated.
b) Receive from the Bank or from its Group any amount or
benefit other than remuneration as directors, unless this
amount or benefit is not material.
c) Are, or have been in the last three years, a partner at the
external auditors or the partner in charge of the auditors'
report, either that relating to the audit for the year of the
listed entity or that of any other entity in its group.
d) Are executive directors or senior executives of another
different entity in which one of the Bank's executive directors
or senior executives is a non-executive director.
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182
e) Have, or have had during the last year, a significant business
relationship with the Bank or with any entity in its Group,
either in their own name or as a significant shareholder,
director or senior executive of an entity that has or has had
such a relationship.
“Business relationship” shall be taken to be that of a supplier
of goods or services, including financial, advisory or
consulting services.
f) Are significant shareholders, executive directors or senior
executives of an entity that receives, or has received in the last
three years, significant donations from the Bank or from its
Group. This definition shall not include those persons who are
merely trustees of a foundation that receives such donations.
g Are spouses, spousal equivalents, or relatives of up to the
second degree of kinship, of an executive director or a senior
executive of the Bank.
h) Have not been proposed, for either appointment or renewal,
by the Appointments Committee.
i) Are currently, with respect to a significant shareholder or a
shareholder represented on the Board, in one of the situations
described under letters a), e), f) or g) above. In the case of the
kinship referred to under letter g), the restriction shall apply
with respect not only to the shareholder, but also to its
nominee directors at the investee.
Any director who has a shareholding in the Bank may hold the
position of independent director, provided they meet all the
related conditions and, in addition, their ownership interest is not
material.
On taking office, the designated directors must formally agree to
fulfil all the obligations and perform all the duties established by
law, in the bylaws and in the Board Regulations.
- Term of office: six years. However, outgoing directors can be reelected
one or several times. The term of office of directors
appointed by co-optation and ratified at the earliest
subsequent General Meeting shall be the same as that of the
director whom they are replacing.
Article 17 of the bylaws provides for the annual renewal of onefifth
of the Board of Directors.
It was not considered necessary to establish an age limit for
appointment as a director or for the discharge of duties as a
director, or to limit the possibility of re-election of directors.
- Procedure: proposals for the appointment, re-election and
ratification of directors submitted by the Board of Directors to
the General Meeting and appointment decisions adopted by
the Board itself by virtue of its co-optation powers must be
preceded by the related proposal from the Appointments and
Remuneration Committee.
If the Board objects to the Committee's proposal, it must give the
reasons for its decision and place these reasons on record in the
minutes to the related meeting.
The directors whose appointment, re-election or removal has been
proposed shall refrain from attending and participating in the
related deliberations and ballots of the Board and of its
Committees.
Once an appointment has been made, it is made effective by the
acceptance of the director and registration at the Bank of Spain's
Registry of Senior Officers and at the Mercantile Registry.
b. Vacation of office or removal
Directors shall cease to hold office when the term for which they
were appointed elapses, unless they are re-elected, or when the
General Meeting so decides by virtue of the powers conferred
upon it. Furthermore, directors must place their office at the
disposal of the Board and give the related notice of resignation if
the Board, after receiving the report of the Appointments and
Remuneration Committee, should deem this appropriate, in those
cases in which the directors might have an adverse effect on the
functioning of the Board or on the Bank's credit and reputation
and, in particular, when they are subject to any incompatibility or
prohibition provided for by law that would bar them from holding
office.
Directors who stand down from the Board prior to the end of their
mandate, due to resignation or any other cause must submit a
letter to all the members of the Board explaining their reasons for
vacating their office. The Annual Corporate Governance Report will
disclose the reasons that prompted directors to leave the Board.
Nominee directors shall resign when the shareholder they
represent sells its entire ownership interest or when that
shareholder reduces its ownership interest to a level that requires a
reduction of the number of its nominee directors, without
prejudice to the possibility of their being re-elected as executive
directors, independent directors or nominee directors representing
another shareholder.
In the event of the removal, notice of resignation, disability or
death of members of the Board or of its Committees, or of the
removal or notice of resignation of the Chairman of the Board of
Directors, of the Chief Executive Officer and of the other officers
of these bodies, at the request of the Chairman of the Board or, in
his absence, the highest-ranking Deputy Chairman, a meeting of
the Appointments and Remuneration Committee shall be convened
in order to organise the succession or replacement process in an
orderly fashion and to propose a replacement to the Board of
Directors. This proposal shall be communicated to the Executive
Committee and subsequently submitted to the Board of Directors
at the next meeting planned in its annual schedule or at any
extraordinary meeting that, if deemed necessary, might be called.
2. Amendment of bylaws.
The procedure for the amendment of the bylaws is regulated in
Article 144 of the Spanish Companies Law, which, common to all
companies, requires the approval by the shareholders at the
Annual General Meeting, with the majorities stipulated in Article
103 of the aforementioned Law. As a credit institution, the
amendment of the Bank's bylaws is subject to the procedures for
authorisation by the Ministry of Economy and Finance contained in
Royal Decree 1245/1995, of 14 July, on the creation of banks,
cross-border activity and other matters relating to the legal regime
of credit institutions, which provides (Article 8) that the
amendment of the bylaws of banks is subject, with certain
exceptions relating to minor changes, to the authorisation and
registration procedure established in Article 1 of the
aforementioned Royal Decree.

The powers of the Annual General Meeting contained in Article 32
of the bylaws and Article 3 of the Regulations of the Annual
General Meeting expressly include that to amend the bylaws
without being subject to any majorities other than those provided
for by law.
a) Powers of the members of the Board of Directors and, in
particular, those relating to the possibility of issuing or
repurchasing shares.
The Chairwoman and the Chief Executive Officer of Banco Español
de Crédito, S.A. have been delegated all the powers of the Board of
Directors, except for those which cannot be delegated by law, per
the bylaws or per the Board Regulations, which establish (Article
3) the exclusive powers of the Board of Directors in a plenary
session. Furthermore, the executive directors have the powers
habitually conferred by the Bank on its senior executives.
The shareholders at the Annual General Meeting held on 26
February 2008 authorised the Board, with power of delegation, to
increase share capital as provided for in Article 153.1.b) of the
Spanish Companies Law. The Board of Directors meeting held
immediately after this Annual General Meeting, availing itself of this
power, resolved to delegate to the Executive Committee, in the
broadest terms required by law, all powers that may be legally
delegated so that, pursuant to Article 153.1.b) of the Spanish
Companies Law, it may increase share capital on one or several
occasions and at any time, within five years from the date of the
aforementioned Annual General Meeting. The amount of the
increase may be up to EUR 274,260,388.71 (par value), i.e. half
the share capital of the Bank at the date of the aforementioned
Annual General Meeting, and may be performed through the
issuance of new shares, with or without share premium and with or
without voting rights; the consideration for the new shares to be
issued will be monetary contributions. The Executive Committee
may set the terms and conditions of the capital increase and the
characteristics of the shares and may offer freely the new
unsubscribed shares within the pre-emptive rights period or
periods. The delegated powers include being able to establish that,
if the issue is undersubscribed, share capital is only increased by
the amount of the shares subscribed, and to revise the wording of
the article in the bylaws relating to share capital. The available
limit at any given time of the aforementioned maximum capital
increase amount shall be deemed to include the amount of any
capital increases that may be made to cater for the conversion of
debentures under Resolution Six of the Annual General Meeting of
26 February 2008. Also, the Executive Committee was empowered
to disapply pre-emptive subscription rights, fully or partially, in
accordance with Article 159.2 of the Spanish Companies Law.
The Board of Directors also delegated to the Executive Committee
the power to perform all the necessary tasks for the new shares
issued in the capital increase or increases to be admitted to trading
on the stock exchanges on which the Bank’s shares are listed in
Spain and other countries, in accordance with the procedures laid
down by each of these stock exchanges.
Neither the Board of Directors nor the Executive Committee has
exercised the powers delegated to them.
Similarly, the shareholders at the Annual General Meeting held on
26 February 2008 authorised the Board of Directors, with power
of delegation, to issue debentures convertible into or exchangeable
for Bank shares. As with the case of the powers delegated to the
Board to increase share capital, the Board of Directors Meeting
held immediately after the aforementioned Annual General
Meeting, availing itself of the powers delegated to it, agreed to
delegate to the Executive Committee, in the broadest terms
required by law, the power to execute and implement the
resolutions adopted by the aforementioned Annual General
Meeting.
Neither the Board of Directors nor the Executive Committee has
exercised the powers delegated to them.
As regards the power to purchase shares, the Board of Directors,
availing itself of the powers delegated to it by the Annual General
Meeting of 26 February 2008, at its meeting held immediately
after the aforementioned Annual General Meeting, resolved to
delegate powers to the Executive Committee so that, within
eighteen months following the adoption of the resolution to
reduce share capital by EUR 5,485,207, through the retirement of
6,943,300 treasury shares, it could implement this resolution. This
included determining the conditions that had not been expressly
defined in the resolutions adopted at the aforementioned Annual
General Meeting in relation to the capital reduction and the
matters that may arise as a consequence of the resolutions. The
Executive Committee was also empowered to revise the wording of
Article 5 of the bylaws to reflect the new amount of share capital.
At its meeting on 25 March 2008, the Board of Directors of the
Bank, availing itself of the aforementioned powers, pursuant to
Articles 163, 164 and 167 of the Consolidated Spanish Companies
Law and Articles 170 and 172 of the Regulations of the Mercantile
Registry, adopted the resolution to reduce the Bank’s share capital
by EUR 5,485,207, through the retirement of 6,943,300 treasury
shares previously acquired under authorisation of the Annual
General Meeting, within the limits set forth in Articles 75 et seq
and Additional Provision One.2, of the Spanish Companies Law.
Article 5 of the bylaws was amended accordingly.
The capital reduction was carried out with a charge to voluntary
reserves and the corresponding amount was deducted from the
restricted reserve to which Article 79.3 of the Spanish Companies
Law refers and a reserve for retired capital of EUR 5,485,207 (the
same amount as the par value of the retired shares) was recorded.
This reserve will be unrestricted under the same conditions as for
the share capital reduction, in accordance with Article 167.3 of the
Spanish Companies Law. Consequently, in accordance with the
provisions of the aforementioned Article, the Company’s creditors
did not have the right, referred to by Article 166 and the Spanish
Companies Law, to contest the agreed capital reduction.
Given that the Company was the holder of the retired shares, the
capital reduction did not entail the reimbursement of
contributions. The purpose of the capital reduction was therefore
to retire treasury shares in order to increase the value of the
shareholders’ interest in the Company.
The resolution to reduce share capital was subject to the condition
precedent that the legally required administrative authorisations
be obtained. Authorisation from the Directorate General of the
Treasury and Financial Policy for the capital reduction resolved by
the Annual General Meeting on 26 February 2008 was obtained
on 29 May, 2008. On 2 June, 2008, the Executive Committee
declared that the condition precedent, to which the resolution to
reduce share capital was subject, had occurred.
Also, the shareholders at the Annual General Meeting held on 26
February 2008 authorised the Board of Directors to implement, in
conformity with Article 75 and related provisions of the Spanish
Companies Law, the derivative acquisition of shares of Banco
Español de Crédito, S.A. The maximum number of shares to be
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184
acquired, when added to the number of shares already owned by
the acquiring Entity and its subsidiaries, shall not exceed the
legally stipulated limit, set at 5% of share capital in Additional
Provision One of the Spanish Companies Law, without prejudice to
the application of any lower limits which, within the legal limit
approved at the aforementioned Annual General Meeting, may be
(or may have been) approved by the Board of Directors. The
duration of this authorisation is 18 months from the date of the
Annual General Meeting. A similar resolution was proposed to the
Annual General Meeting called for 25 February, 2009.
b) Significant agreements entered into by the Company which will
come into force, be modified or terminate in the event of a
change in control of the Company resulting from a takeover bid,
and their effects, except when dissemination thereof may be
seriously detrimental to the Company. This exception shall not
apply when the Company is required by law to publish this
information.
The Company has not entered into any significant agreements that
will come into force, be modified or terminate in the event of a
change in control of the Company resulting from a takeover bid.
c) Agreements between the Company and its directors,
management personnel or employees which provide for
termination benefits when the latter resign or are dismissed
without justification or if the employment relationship ends as a
result of a takeover bid:
The legal and conventional effects that may result from the
termination of the services relationship between Banesto personnel
and the Bank are not uniform, but rather vary, logically, on the
basis of the personnel in question, the office or job position held
by the employee, the type of contract entered into with the Bank,
the regulations governing the employment relationship, and
various other factors. Nevertheless, the following cases can
generally be distinguished:
a) Employees: in the case of employees who have a common
employment relationship with Banesto, which is the case of
substantially all the personnel working for the Bank, the
employment contracts between these employees and the Bank
do not generally contain any clause providing for benefits in the
event of the termination of the employment relationship.
Therefore, employees shall be entitled to receive the benefits
applicable under labour legislation in their particular case,
depending on the cause of termination of their contract.
In certain common employment relationships with the Bank, the
employees' contracts entitle them to receive a benefit in the event
that the relationship is terminated on appraised grounds (generally
only in the event Sof unjustified dismissal). The amount of the
termination benefit is normally determined on the basis of the
gross annual fixed salary of the employee in force at the date on
which the contract is terminated.
b) Senior executives: among personnel who have special senior
executive employment relationships with Banesto (special senior
executive contracts), there are cases in which their contracts do
not provide for any benefits in the event of termination of the
employment relationship and, therefore, the executive in
question shall be entitled, where appropriate, to the benefit
provided for in the regulations governing special senior
executive employment relationships. For these purposes, it
should noted that Article 10.3 of Royal Decree 1382/1985, of
1 August, regulating the special senior executive employment
relationship, provides that the senior executive may terminate
the special employment contract with entitlement to the
agreed-upon benefits or, in the absence thereof, those
established in these regulations in the event of termination due
to withdrawal of the employer on the grounds, inter alia, of an
important change in the ownership of the company, resulting in
the renewal of its governing bodies, or in the content and
rationale of its core business activity, provided that the
termination takes place within the three months following the
occurrence of these changes.
In addition to these, there are other executives whose contracts do
entitle them to receive a benefit in the event of termination of the
employment relationship on certain grounds. This benefit is
normally determined individually for each senior executive on the
basis of their professional circumstances and the importance and
responsibility of the position they hold at the Bank.
c) Executive directors: the contracts regulating the discharge by
executive directors of executive functions other than the
supervisory and decision-making functions inherent to
membership of the Board of Directors are indefinite-term
contracts. Nevertheless, termination of the relationship due
either to the executive directors’ failure to fulfil their obligations
or to their own free will does not entitle them to any economic
compensation. If the relationship is terminated for reasons
attributable to the Bank or due to prevailing objective
circumstances, such as those which, as the case may be, affect
the executive directors' functional and organic statute, the
director in question shall be entitled to receive the benefit
envisaged in the respective contract, which will be determined
not by general criteria but rather by the personal and
professional circumstances of the director and by the date on
which the contract was signed. The detail of these circumstances
is contained in the notes to the consolidated financial
statements and in the Report on Remuneration Policy that was
made available to shareholders at the Annual General Meeting
on 25 February 2009.

Corporate Governance
Report according to the
CNMV model
The Corporate Governance Report access on the web is:
http://www.banesto.es/igc
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186
Noteworthy figures
Balance sheet
Million euros Absolute %
2008 2007 Change Change
Total assets 117,186.42 110,067.76 7,118.66 6.5%
Shareholders’ equity 5,069.77 4,747.89 321.88 6.8%
Total managed funds 67,524.86 66,762.87 762.00 1.1%
On-balance sheet customer funds 57,779.45 53,340.18 4,439.27 8.3%
Managed funds 9,745.41 13,422.69 -3,677.28 -27.4%
Lending 77,223.84 74,201.40 3,022.45 4.1%
Bad and doubtful loans 1,441.45 410.80 1,030.65 250.9%
Non-performing loans ratio (%) 1.62% 0.47% - -
% coverage of NPLs 105.37% 329.48% - -
BIS capital ratio 10.66% 10.43% - -
Tier 1 7.70% 6.98% - -
Income statement
Millon euros Change Change
2008 2007 Absolute %
Net interest income 1,637.64 1,461.09 176.55 12.1%
Gross operating income 2,461.54 2,271.11 190.42 8.4%
Net operating costs 989.35 956.95 32.40 3.4%
Net operating income 1,462.89 1,320.12 142.78 10.8%
Operating costs/Gross operating income 39.04% 40.51% - -
Profit before taxes 1,085.66 1,100.10 -14.44 -1.3%
Net attributable profit 779.84 764.57 15.27 2.0%
ROA 0.71% 0.75% - -
ROE 16.56% 17.05% - -
Data per share
Earnings per share in the year 1.13 1.10 0.03 3.0%
Theoretical book value per share 7.38 6.84 0.54 7.9%
PER 7.12 12.09 - -
Price/theoretical book value 1.10 1.95 - -
Other information
Employees 9,718 9,923 -205 -2.1%
Branches 1,915 1,946 -31 -1.6%

General information and
Regional Headquarters
General Information
GENERAL INFORMATION
Telephones: +34 91 338 31 00
+34 91 338 15 00
RELATIONS WITH SHAREHOLDERS
Avda. Gran Vía de Hortaleza, 3
28043 Madrid Spain
Telephone: 902 123 230
e-mail: accionistas@banesto.es
RELATIONS WITH INVESTORS AND ANALYSTS
Avda. Gran Vía de Hortaleza, 3
28043 Madrid Spain
Telephone: +34 91 338 22 44
Fax. +34 91 338 25 58
e-mail: relacionesconinversores@banesto.es
CUSTOMER ATTENTION
Avda. Gran Vía de Hortaleza, 3
28043 Madrid Spain
Telephone: 902 303 630
RELATIONS WITH THE MEDIA
e-mail: prensa@banesto.es
Telephone: +34 91 338 24 08
PRESS ROOM
www.banesto.es/webcorporativa
CORPORATE WEBSITE
www.banesto.es/webcorporativa
BANCO ESPAÑOL DE CREDITO, S.A.
The bank was constituted on May 1, 1902 through a notarised deed in Madrid, inscribed in the Mercantile Registry of
Madrid on May 14,1902, number 1,595, folio 177, first inscription of volume 36 of Companies. Its by-laws were
brought into line with the Limited Companies Act through a notarised document on August 16, 1991, inscribed in the
Mercantile Registry volume 1,582, folio 1, page M- 28968, inscription 4,417 on October 8, 1991. It is inscribed in the
special Registry of Banks and Bankers with the number 0032, and the bank’s tax identification number is A-28000032.
The bank is a member of the Deposit Guarantee Fund.
Registered office
The Corporate by-laws and other public information can be consulted at Avda. Gran Vía de Hortaleza 3, Madrid.
Additional information on Banesto’s Corporate Social Responsibility:
• Annual Report: www.banesto.es/informe_anual
• CSR Report: www.banesto.es/rsc
• Corporate Governance Report: www.banesto.es/igc
• ibanesto.com: www.ibanesto.com
• Banespyme School: www.banespyme.org
• Ciberplaza: www.ciberplaza.es
187

188
Regional Headquarters
1
2
3
4
5
1
2
3
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retail banking
ANDALUCÍA AND CANARY ISLANDS
Director: Alberto Delgado Romero
Avda. de la Palmera, 25 • 41013 • Sevilla
Telephone: 954.93.27.00 / Fax: 954.93.27.03
CANARY ISLANDS
Director: Virginia Martínez de Murguía
BASQUE COUNTRY, NAVARRE AND
LA RIOJA
Director: María Carmen Aracama Municha
Postas, 22 • 01001 • Vitoria
Telephone: 945.16.33.31 / Fax: 945.16.33.58
CASTILLA-LA MANCHA AND EXTREMADURA
Director: Carmen González Moya
Pza. de Zocodover, 4 • 45001 • Toledo
Telephone: 925.28.02.53 / Fax: 925.28.01.33
CASTILLA-LEÓN AND CANTABRIA
Director: Matías Francisco Sánchez García
Constitución, 10 1o • 47001 • Valladolid
Telephone: 983.21.74.09 / Fax: 983.21.74.08
CATALONIA AND BALEARICS
Director: Eduard Miró Contijoch
Gran Vía Corts Catalanes, 583 • 08011 • Barcelona
Telephone: 93.214.45.91 / Fax: 93.214.46.90
company banking
CATALONIA AND BALEARICS
Director: Pedro Alonso Juncar
Gran Vía Corts Catalanes, 583 • 08011 • Barcelona
Telephone: 93.214.45.44 / Fax: 93.214.46.96
INSTITUTIONAL RELATIONS
IN CATALONIA
Director: Pere Estruch Jane
Gran Vía Corts Catalanes, 583 • 08011 • Barcelona
Telephone: 93.214.45.41 / Fax: 93.214.46.96
LEVANTE
Director: José Miguel Lorente Ayala
Pintor Sorolla, 17 3a planta • 46002 • Valencia
Telephone: 96.399.62.11 / Fax: 96.399.61.31
MADRID
Director: Octavio Ramírez Romero
Princesa, 25 2a pta. • 28008 • Madrid
Telephone: 91.758.60.01 / Fax: 91.758.60.33
NORTH (ARAGON, ASTURIAS, CANTABRIA,
CASTILLA-LEÓN AND GALICIA)
Director: José Antonio Portugal Alonso
Princesa, 25 2a pta. • 28008 • Madrid
Telephone: 91.758.60.10 / Fax: 91.758.60.03
3
4
1
6 GALICIA AND ASTURIAS
Director: Vicente Pantoja Camacho
Plaza de Vigo, 2 • 15701 • Santiago de Compostela
Telephone: 981.55.34.66 / Fax: 981.59.27.91
7
6
LEVANTE
Director: Félix Subies Montalar
Pintor Sorolla, 17 4˚ • 46002 • Valencia
Telephone: 96.399.62.10 / Fax: 96.399.62.12
8 MADRID
Director: José Luis Fernández Fernández
Alcalá, 14 1˚ • 28014 • Madrid
Telephone: 91.338.15.55 / Fax: 91.338.13.50
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6
5
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3
SOUTH
Director: José Antonio Hernani Goldaracena
Avda. de la Palmera, 25 • 41013 • Sevilla
Telephone: 954.93.27.04 / Fax: 954.61.56.64
6
BASQUE COUNTRY, NAVARRE AND LA RIOJA
Director: José María Bilbao Urquijo
Navarra, 3 • 48001 • Bilbao
Telephone: 944.23.18.14 / Fax: 944.23.97.80
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7
5
1

The 2008 Annual Report and the Corporate Social Responsibility Report are published in digital and not paper form,
in order to respect the environment. Banesto saved more than seven tonnes of paper with this measure.
® Februray 2009 Banesto
Design, creative concept and production:
See the change / Álvaro Reyero Pita
Photos: Fernando Moreno Amador/Andrea Savini
Jorge Giacomuzzi / Toño Morales (photo. page 8)
Printing : TF Artes Gráficas
Translation: William Chislett
Legal deposit:
189

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