AR11 - Banesto

11 

ARANNUAL REPORT

Contents 

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Contents 

Letter from the Chairman 

Letter from the Chief Executive Officer 

Governing bodies 

Banesto in 2011 

Business model 

Quality and innovation 

People, the key element for business 

Risk control 

Resources and technology 

Business units 

Retail Banking 

Company Banking 

Wholesale Banking 

The Banesto share 

Corporate social responsibility 

Corporate governance 

Key figures 

Financial information 

Risk management 

Report of the Audit and Compliance Committee 

Compliance and Internal Control 

Auditor’s Report and Annual Financial Statements 

Auditor’s Report 

Annual Consolidated Financial Statements 

Management Report 

Corporate Governance Report in accordance with the model 

of the National Securities Market Commission 

General information and addresses

AR 11 

Letter from 

the Chairman 

Antonio Basagoiti García-Tuñón 

Dear Shareholder, 

When I addressed you in 2011 through this publication 

we were moderately optimistic but also prudent about the 

prospects for 2011 for the global economic recovery and, 

specifically, the Spanish economy. 

As you know, these forecasts were truncated as the year 

progressed because of the worsening of Greece’s financial 

situation, the spreading of the sovereign debt crisis to a 

country as large as Italy, the contagion to financial sector 

(which also spread to France) and, above all, the lack of 

political agreements in the euro zone. All of this left us facing 

a very complicated year. 

The year’s main indicators showed this. 

The Spanish economy grew by only 0.7% in 2011 and with a 

downward quarterly growth profile, which was negative in the 

fourth quarter. A massive 600,000 jobs were lost during the 

year and the unemployment rate rose to 22.9%, Obviously, 

these are not soothing figures. 

However, within this complex panorama, there were some 

promising factors. Exports performed very well and grew at 

a faster pace than the euro zone average. Tourism also had 

a bumper year. 

There is no doubt that our economy is being transformed. 

The economic crisis in 2009 underscored the need to move 

toward a more balanced growth model and we are in the 

º Letter from the Chairman 

2 

process of doing this. Against this backdrop. The challenges 

facing us in 2012 are particularly important. 

The growth forecasts are negative; it is very striking that the 

Bank of Spain is estimating GDP shrinkage of 1.5%. 

During these years of internal adjustment, it is logical 

that economic growth will depend notably on exports. 

Unfortunately, the external environment is worse than in 

2011 and the euro zone could contract (by 0.5% according 

to the IMF). 

That said, the United States seems to be moving away from 

recession and is forecast to grow by around 2%. 

We are aware that not all the reforms undertaken in the 

last few years have achieved the necessary scope but, and 

this is positive, there is a firm political will to correct these 

shortcomings. 

There are three areas of action: first, complete the process of 

cleaning up and consolidating the financial sector; second, 

a profound reform of the labour market and third, review the 

measures needed to advance in fiscal consolidation. 

These changes will very probably mean sacrifices in the 

short term but it is also certain that our capacity to return to 

sustained growth will depend on the transformation we are 

capable of achieving today in order to make the economy 

more flexible and competitive. 

What has Banesto done in this scenario? I can tell you that, 

despite the persistent economic weakness, strong tensions 

and very volatile markets, Banesto knew how to face a very 

difficult year successfully, through prudent management, in 

other words, strengthening its liquidity and capital position 

and preserving the bank’s credit quality and profitability. 

Another of the strengths shown during the year was our 

capacity to generate revenues, with a growing proportion 

coming from those segments that today have the greatest 

potential such as companies, SMEs and businesses. 

Although this report gives you the figures for the bank’s 

evolution, I would like to highlight some of them. 

Net profits amounted to EUR 125 million, after the special and 

voluntary bad loan provision of EUR 400 milion for property 

and in line with our criteria of prudence and anticipation. This 

extraordinary effort lifted coverage of property to 36%. 

The banking system’s non-performing loans continued to 

rise, and in Banesto’s case its NPL ratio at 4.94% was below 

the sector’s average. 

A key objective in 2011 was the control the efficiency ratio. 

It improved to 43.1% and throughout the year was the best 

ratio among Spanish banks. I would like to highlight the strict 

control of spending which produced a 2.5% fall in operating 

expenses. 

Ordinary profit before tax was EUR 530.4 million, 13.2% less 

than in 2010.

At the end of 2011, customer funds amounted to EUR 

53,360 million and lending to EUR 69,225 million. Lending 

continued to decline (-8.6%), due, on the one hand, to weak 

demand and, on the other, to greater credit and liquidity 

risks, in line with the rest of the sector. 

During 2011, liquidity management, critical at a time of 

instability in the wholesale finance markets, focused on 

improving the commercial gap, which generated EUR 6,000 

million. 

The level of the bank’s capitalisation improved organically, 

and is above the minimum requirements (surplus of EUR 

1,600 million). The BIS ratio at the end of 2011 was 10.65% 

and the core capital ratio 9.02% (+0.71 p.p.). 

In the light of these results, the board agreed to propose 

to the shareholders’ meeting a total remuneration for 2011 

of EUR 0.18 per share, which equals the three interim 

dividends already paid. 

Turning to other matters, in 2011 we continued to maintain, 

particularly via our foundations, an active culture in 

corporate social responsibility. 

The Yuzz programme became a real engine of social 

change among the young, placing the entrepreneurial spirit 

and innovation on their agenda via social networks and 

transforming the life of hundreds of young people who every 

year ensure the future success of their ideas and initiatives. 

The Global Business Trip Programme aims to internationalise 

Spanish technology SMEs. In 2011, the companies in this 

programme held meetings with potential partners, investors 

and other key players in the main companies in Silicon 

Valley. 

In 2011, we launched the Spain Tech Centre (STC) in San 

Francisco to house and support Spanish firms that want to 

set up in this market, offering them a nine-month programme 

of accompanying them between Spain and the US. 

Within the “Emprendedores en red” (Entrepreneurs in 

internet) initiative, we held several workshops of social 

networks in which more than 800 companies participated 

and which, in this case, aimed to disseminate the possibilities 

of 2.0 tools and social networks within SMEs. 

We expanded the “Turismo Solidario Sostenible” (Solidarity 

and Sustainable Tourism) project which already has 400 

lodges and 40 routes that meet the requirements associated 

with fostering female employment. 

After nine years, the “Solidaridad x 2” (Solidarity x 

2) programme continued to cooperate with various 

humanitarian organisations and match the donations made 

by employees. In 2011, 42 organisations took part in this 

programme and we participated in extraordinary campaigns 

such as those to support the victims of the Lorca earthquake 

or UNICEF in the Horn of Africa. 

3 

These efforts and other initiatives in 2011, which are 

reported on in the CSR report, were recognised with 

Banesto’s continued presence, for the fourth year running, 

in the FTSE4Good Ibex sustainability index. Only those 

companies that meet the highest CSR standards are in this 

select index. 

Lastly, I would like to comment on how Banesto views 2012. 

We are facing this year, in which we are sure we will emerge 

strengthened, with confidence in our strategy, backed 

by the strengths emanating from solvency and prudent 

management. 

We are going to strengthen in 2011 the customer-focus 

concept, as we want to be the reference back for making 

and receiving payments for many more customers, both by 

capturing more clients as well as developing the ones we 

have. 

We have set ambitious goals which will continue to 

strengthen our capital, in order to maintain a core capital 

ratio of more than 9%, preserve risk quality with a NPL ratio 

below that of the sector’s average and continue to be the 

leaders in efficiency in retail banking. 

These goals are clearly demanding, but I am sure we have 

the resources and equipment needed to achieve them. 

I do not want to end without congratulating the more than 

8,600 employees who made these results possible. Without 

their commitment and efforts, the results would not have 

been achieved. 

As for you, the shareholders, I ask for your renewed support 

and confidence.

Letter from 

the Chief 

Executive 

Officer 

José García Cantera 

Dear Shareholder, 

Despite the expectations at the beginning of the year that 

2011 would a be better year, it was another complicated one 

for banking business. As the year progressed, the hope for a 

quick recovery petered out while, at the same time, the existing 

problems in the financial markets worsened. In the second 

half of the year, Europe’s sovereign debt crisis shut down the 

wholesale funding market and the Spanish economy was on 

the verge of recession again. 

In this context, with the economy slowing down and with 

substantial financial difficulties and very volatile markets, 

financial activity was conducted. 

The bank had four strategic focal points in this period: 

manage risks prudently, maintain comfortable levels of 

liquidity, strengthen capital and preserve profitability, while 

guaranteeing optimum customer service quality. In all of these 

areas, we achieved significant results: 

AR 11 

• Thanks to our capacity to generate recurring revenues, 

we were able to make significant provisions. We made an 

extraordinary provision of EUR 400 million in order to get 

ahead of the likely evolution of the property market and 

increase coverage of properties on the balance sheet. 

Coverage is now 36%, well above the 24% we had at the 

end of 2010. At the same time, we continued to actively 

manage our real estate risk with promoters, which was 

reduced during the year by EUR 1,087 million. As detailed 

later on, non real estate credit risk management resulted in 

º Letter from the Chief Executive Officer 

4 

a NPL ratio lower than the sector’s average and much higher 

coverage. 

• We increased our internal liquidity positions, thanks to the 

flexibility of our balance sheet management. The best display 

of this was the EUR 5,600 million reduction in our reliance 

on wholesale funding markets during 2011. 

• We continued to strengthen our capital base by purely 

organic ways. Despite the extraordinary provision, we ended 

the year with a core capital ratio of 9.02%, above the target 

we had set ourselves. 

• And all of this was achieved while preserving the bank’s 

medium-term profitability, by managing the variables we 

control, mainly spreads on lending and deposits and costs. 

As a result, we have the best efficiency ratio (43.1%) among 

all Spanish banks throughout 2011. 

The income statement reflected the economic situation in 

which banking business was conducted during 2011. 

Net interest income was EUR 1,455 million, 12.4% less 

than in 2010. Our good management of spreads offset the 

shrinkage in business volumes. The customer spread and the 

total financial margin performed favourably. 

Fee income was very positive: gross income rose 1.6% and 

net (after discounting the commissions paid by the bank) was 

2.6% higher. One factor at play here was the increase in the 

number of customers and greater linkage and the consequent 

growth in transactions. 

Gains on financial transactions amounted to EUR 119 million, 

underscoring the recurrence of our business as most of it 

comes from customer activity. 

Gross income was 10.2% lower at EUR 2,235 million. 

Strict control of costs was another pillar of our strategy. 

Operating costs were EUR 963.8 million, 2.5% less than in 

2010. As the year advanced, the fall in costs accelerated. 

Net operating income of EUR 1,271 million was 15.4% less 

than in 2010. 

Ordinary profit before tax was EUR 530 million, 13% below 

2010. 

Attributable profit, after the provision of EUR 400 million, was 

EUR 125 million. 

As regards the main items of the balance sheet, I would like 

to comment that in a context of substantial deleveraging by 

households and companies and of considerable uncertainty 

about the future, demand for loans in Spain continued to 

be very moderate. Banesto’s lending dropped 8.6% to EUR 

69,225 million, in line with the tone of the whole banking 

sector.

The non-performing loans ratio was 4.94% at the end of 

2011, more than 250 b.p. below the sector’s average, while 

coverage was above 53%. 

Customer funds from the resident private sector amounted to 

EUR 53,360 million, 9.8% less than in 2010. This reduction 

was due to the bank’s policy of only renewing part of the 

deposits captured in the special campaign launched in the 

second quarter of 2010 for reasons of profitability, as there 

are less costly funding alternatives. 

These results were made possible because the customer 

is the focal point of our business model and our strategy 

is centred on maximising the value of the service offered. 

Continuous improvement in quality is the only way to generate 

lasting and mutually satisfactory relations with our customers 

and with society in general. 

Renewal of the AENOR certificate of quality of service and 

management of customer satisfaction, the awarding of the 

EFQM +500 points stamp of European excellence and the 

“Madrid Excelente” certificate of quality, among others, are 

recognitions that underpin the quality of the bank’s processes. 

Surveys of our customers and rankings of various external 

studies, such as Aqmetrix, Equos or FRS Inmark, underline 

the sustained improvements. In several of these indices, 

Banesto is already among the three best Spanish banks in 

quality and quality perceived by the customer. 

Capturing and linking customers remained one of our priorities. 

The increase in the degree of linkage is an aspect on which our 

business revolves. Half of our individual customers domicile 

their payroll cheque in their account in Banesto. This relation 

has also improved with corporate clients, Thanks to this, 

we managed to capture a higher proportion of transactional 

business (transfers, domiciling payments, cheques, etc). We 

attained a market share of 5.60% in the National Electronic 

Compensation System, higher than our natural share, which 

underscored the importance given by Banesto to financial 

relations with households and companies. 

The year 2012 will be another very complicated one. Global 

growth will slow down and in Spain the necessary adjustments 

are generating very negative prospects, particularly in the 

first half of the year. The scenario for the financial sector 

is thus very difficult, as to this must be added the sector’s 

restructuring which will deepen in the coming months. 

Our goals for 2012 are framed within the strategic points set 

out at the beginning of this letter. We are striving to strengthen 

the capital and liquidity positions in order to continue to boost 

capital of maximum quality and reduce our dependence on 

the markets by narrowing the commercial gap, in a scenario 

of enormous economic difficulties and strong regulatory 

pressure. 

5 

In terms of risk quality, we will continue to maintain our NPL 

ratio advantage with the rest of the banking sector. 

We want to achieve all this while preserving our profitability, 

which should enable us to maintain net operating income 

levels better than those of our competitors and leadership in 

efficiency. 

I would like to thank you for the confidence placed in 

Banesto. As you well know, our management of key variables 

and clearly better evolution than our competitors were not 

reflected in the performance of our share price in 2011. I am 

convinced, however, that the good prospects for our bank will 

eventually be reflected in the share price. 

Banesto is in a solid position that will enable us to take 

advantage of big opportunities. We have one of the best teams 

of Spanish banks, and I thank all our employees for their 

efforts and dedication. We are all working to make Banesto 

better for shareholders, customers and employees.

AR 11 

Organs of 

Government 

Board of Directors 

º Governing bodies 


Chairman 

Juan Delibes Liniers 

Executive director 

Juan Guitard Marín 

Non-executive director (proprietary) 

Belén Romana García 

Non-executive director (independent) 

Rosa María García García 


6 

José Luis López Combarros 

Vice Chairman 

José María Fuster Van Bendegem 


José Corral Lope 

Non-executive director 

Rafael del Pino y Calvo-Sotelo 


Alfonso Líbano Daurella 



Chief Executive Officer 

Matías Rodríguez Inciarte 


Carlos Pérez de Bricio 


Carlos Sabanza Teruel 


Mónica López-Monís Gallego 

Secretary of the Board (not a director)

Executive Committee 

Chairman 


Audit and 

Compliance Committee 

Chairman 


Appointment and 

Remuneration Committee 

Chairman 


Risk Committee 

Chairman 


Members 






Members 



Juan Guitard Marín 

Members 


Rosa María García García 

Members 




7 

Secretary (not a director) 

Mónica López - Monís Gallego 






Mónica López - Monís Gallego

AR 11 

Banesto 

in 2011 

Business model 

FINANCIAL STRENGTH, A KEY FACTOR IN OUR POSITIONING 

The magazine Global Finance chose Banesto as one of the world’s 50 safest banks. This distinction is a result of our business 

model and guarantees the bank’s financial strength in all phases of the cycle. 

During the difficult year, Banesto’s business model enabled it to continue to meet its strategic objectives of generating recurring 

revenues and beating the sector in risk quality, efficiency and the evolution of its net interest income, gross income and net 

operating income. The bank posted a net profit of EUR 405 million. 

In addition, the bank’s policy of prudence and anticipation led to a special provision to raise coverage of properties well above 

that of the sector’s average. 

Managing the balance sheet appropriately enabled us to reduce significantly our dependence on the markets. Furthermore, the 

bank has a solid liquidity position that improved over the year. 

Internal generation of capital and optimization of the mix of risks enabled the bank to achieve ahead of time a core capital ratio 

of 9.0%, 0.7 points higher than in 2010. The internal exercises of simulation of stress scenarios, as well as the figures published 

by both the Bank of Spain and the European authorities, show that Banesto is solidly capitalized. 

The magazine Euromoney chose Banesto as Spain’s best managed bank for the fourth year running. Rating agencies also 

recognised Banesto’s solvency and accorded it one of the highest ratings of the Spanish financial system (AA- from Standard & 

Poor’s and Fitch and A2 from Moody’s). 

QUALITY OF SERVICE, THE FOUNDATION OF OUR CULTURE 

Quality for Banesto is an inherent part of its strategy and enables us to offer customers value proposals. The Q10 model, 

which integrates internal and external quality management, enables us to progress every day in offering the best experience to 

customers. The model includes tracking more than 1,900 indicators and conducting more than 100,000 surveys a year, allowing 

us to detect areas for improvement and attain significant advances in our own indicators of quality and in the rankings of quality. 

Thanks to this work, the bank has obtained significant recognitions from the market. Of note among them is that Banesto 

was the first bank in Spain to obtain the AENOR Certificate of Quality of Service and Management of Customer Satisfaction, 

something which was renewed in 2011. Also noteworthy is renewal of the “EFQM+500 points European Stamp of Excellence” 

by the European Foundation for Quality Management and “recognised for excellence 5 stars.” Other achievements, such as the 

“Madrid Excelente” certificate of quality, heading the Equos ranking in contact centres and for telephone attention (AQmetrix), 

for individual customers and companies, underline the quality of the bank’s processes. 

With regard to the annual customer satisfaction survey conducted by FRS Inmark, Banesto was again well above the average for 

the sector in the index of perceived satisfaction and ranked second. Moreover, the bank has significantly improved in terms of 

the number of complaints made to the Bank of Spain, which were down 28% over 2010. 

º Banesto in 2011 º Business model 

8 

Our business model 

gives us a competitive 

advantage in this phase 

of the cycle and puts 

us in a solid position to 

take advantage of the 

opportunities arising 

in the markets.

Management Committee. From left to right: Matías Sánchez, Jaime Ybarra, Ignacio Ezquerra, Ernesto Martínez (head of auditing, who is invited to 

attend the management committee), José Doncel, Jesús Fuentes, Miguel Sanz, José García Cantera, Mónica López-Monís, José Miguel Alonso de 

Ozalla, Gonzalo Alonso, José Antonio Lombardía, Juan Delibes and Adolfo Ramírez. 

9 

PRUDENT RISK MANAGEMENT 

Risk management, based on criteria of prudence and responsibility, is combined with advanced risk management and measurement 

methodologies, as well as an efficient operating structure to control and anticipate risk, in order to maintain a high standard of credit quality 

and optimise the creation of shareholder value. The quality of the risk is a priority objective, and is present in all our activities, and in all of 

our employees. The risk culture, deeply rooted throughout the bank, is one of our hallmarks, and makes every executive a risk manager. 

Banesto’s NPL ratio of 4.94% has been notably below that of the financial system throughout the cycle model. 

OPERATING EFFICIENCY AND TECHNOLOGICAL LEADERSHIP 

Operating and commercial efficiency is another of the pillars of our business model. In the current environment, Banesto is managing 

costs optimally, which by virtue of being one of the variables totally in the hands of the bank strengthens the suitability and soundness 

of the business model in all phases of the cycle. The bank has systematically achieved a better cost-to-income (efficiency) ratio than 

the financial system as whole, and this difference has been widening to the extent that Banesto is now the sector’s most efficient bank 

(4,94% at the end of 2011). 

Given that operating and commercial efficiency are one of our strategic objectives, we realise that we have to incorporate technological 

solutions that help us to achieve excellence in executing and optimising processes. In 2011, we attained the best ever results in the 

bank’s history, as we were placed first in customer quality via “Contact Centre” (source Stiga, AQmetrix). 

We are installing a new contracting platform which significantly enhances efficiency and reduces the operational tasks. Meanwhile, 

thanks to technological developments and the adjustments made we have become full members of the London and Paris Clearing 

Houses. Among the actions taken during 2011 was the “Domótica Plan”, which cuts consumption of electricity and optimises 

maintenance of installations. We also installed in various areas of the bank the “NORMA indicator”, which measures the technological 

and operational risk. These and other measures reaffirmed our leadership in technology. 

In order to adjust to the new relations with customers, we launched the Banesto 2.0 programme where the customer defines their 

relation with the bank and not the other way round. A mobile telephone banking service was also launched. 

COMMITMENT TO EMPLOYEES, A KEY ELEMENT IN OUR BUSINESS 

People are the main asset for realising our strategy. The bank has a front rank team that reflects its corporate values. In 2011, 

Banesto received the “Human Capital Prize” and “Top Employer 2011” for the fourth consecutive year, among other awards. 

The “Human Resources Master Plan” makes employees the focal point and impregnates the whole organisation. It has three 

strategic lines of action: involvement, identity and pride in belonging to Banesto and driving Business results. Top quality 

management is given the highest importance, underscored by a process for assessing all employees. At the same time, equality 

of opportunity, integration, diversity and a work-life balance are part of Banesto’s culture. For example, every year the proportion 

of women throughout the bank and in management positions increases (38.5% and 32%, respectively). Tools such as the “talent 

map” and the “professional GPS Banesto” enable us to identify key posts to be covered by employees and develop career plans.

AR 11 

Banesto’s constant 

striving for quality 

was rewarded with 

an improvement in 

customer satisfaction. 

Prizes, rewards and certifications in quality 

received by Banesto 

10 

8 

6 

4 

2 

0 

º Banesto in 2011 º Quality and innovation 

First bank in Spain to obtain the AENOR 

Certificate of Quality of Service and 

Management of Customer Satisfaction 

(renewed in 2011). 

+500 points European Stamp of 

Excellence from the European 

Foundation for Quality Management 

(EFQM) and “Recognised for Excellence 

5 stars” (renewed in 2010). 

Certification of Quality Madrid 

Excelente from the Madrid regional 

government (renewed in 2011). 

Prize for one of the 100 best ideas in 

innovation (2011) from the magazine 

Actualidad Económica. 

Customer survey on quality (out of 10) 

2008 2009 2010 2011 

7.97 8.22 8.34 8.35 

10 

Quality and innovation 

For Banesto, quality is culture and method. It is part of 

our strategy, and through the Q10 model, which integrates 

internal and external quality management, we strive every day 

to provide customers with the best experience. The model 

includes tracking more than 1,900 indicators, enabling us 

to detect proactively areas for improvement and achieve 

significant progress in our own indicators of quality and in the 

rankings. Constant work in this area has been rewarded with 

an improvement in customer satisfaction. We conduct more 

than 100,000 customer surveys a year in the 24 hours after 

a product has been contracted or an operation carried out. 

Banesto scored 8.35, which compares well with other years. 

As regards the customer satisfaction study conducted every 

year by FRS Inmark, in 2011 Banesto was well above the 

average score for banks in the index of perceived satisfaction 

and second in the sector. 

Banesto was the bank that improved the most in 2011, 

according to the Equos quality study in networks. 

Furthermore, Banesto improved significantly in terms of the 

number of complaints made to the Bank of Spain, which 

were 28% lower than in 2010. 

Q10 continuous improvement systematics 

Banesto’s quality model, implemented under a system 

of continuous improvement, provides regular detailed 

information that allows us to identify areas where we can 

act, either in processes of sales, such as products or in 

the branch network and other channels, and establish 

corporate actions and projects to advance in areas detected 

as susceptible to improvement. The system for managing 

quality includes distributing the monthly results throughout 

the bank, which analyse, establish, develop and implement 

all those improvements aimed at the quality of processes, 

products and services and, therefore, increase customer 

satisfaction and reduce the number of complaints. 

The model also includes quarterly quality controls on the sale 

of complex products, as well as in all phases of the process: 

pre-sale, sale and post-sale. 

As well as our internal model, we also work on assessments 

and external certifications.

Q10 continuous improvement systematics 

Q10 map of 

indicators 

Q10 quality 

committees 

Customer 

satisfaction 

survey 

OK 

IMPROVEMENT 

FIs: Financial Institutions 

TDs: Territorial areas 

CNMV: National Securities Market Commission 

CSA: Customer service attention 

Comparative 

study FEs 

Banesto renewed in 2010, and for two years, the 

European Stamp of Excellence +500 points, the highest 

level of recognition of excellence in management granted by 

the European Foundation for Quality Management with +600 

points. 

Banesto renewed in 2011 the AENOR quality of service 

and customer satisfaction certificate 

Banesto is also the first and only bank in Spain to obtain 

the AENOR quality of service and customer satisfaction 

certificate for financial institutions. We have renewed this 

certificate every year since 2005. 

Madrid Excelente Certification of Quality 

Banesto successfully renewed this certification in 2011. 

CSA, CNMV 

B. of Spain 

In 2011, Banesto consolidated its innovation model 

known as InnoBanesto 

Innovation has always been something very important for 

Banesto, as we view it as a basic element for continuous 

improvement and for fostering growth and productivity. As a 

result of our progress in innovation, in 2011 we consolidated 

InnoBanesto, the model for managing innovation launched 

in 2010. 

11 

Complaints 

Portal 

solutions 

Inventory improvements 

Pre-CSA Quality tables 

in TDs 

Impact Q10 

Analysis 

Implementation of improvements 

Improvement projects 

Communication of standards/information 

Q10 quality committees 

RADAR 

offices 

Q10 internal 

customer 

survey 

The model, articulated under the concept of communicating 

innovation, was developed around an internal social network, 

Innovationbook, as a platform for managing, channelling, 

selecting and implementing ideas arising from creativity and 

the collective intelligence of everyone working for Banesto. 

Banesto rewards good ideas; the innovation model includes 

quarterly recognition of those ideas rewarded by the 

Innovation Committee. 

The market also recognises our work and dedication to 

innovation. In 2011, the magazine Actualidad Económica 

awarded us a prize for one of the 100 most innovative 

ideas for our social networks model to foster innovation and 

generate ideas among employees. 


in 2011

AR 11 

People, the key element for business 

Recognitions 

Banesto was chosen, for the fourth year running, as Top 

Employer 2011. This certification recognises Banesto as 

an excellent place to work, because of its organisation, 

diversity of opportunities for career development, the various 

remuneration models on the basis of the performance, 

management of commitment and flexibility in working 

conditions, development of talent with an ambitious training 

plan and solid corporate values. 

Banesto also received the Human Capital Prize, in its XV 

edition, in the category of strategic training and development 

policy, for the second time since 2008. 

The bank also has other recognitions, including the Citation 

in Excellence in Practice 2010 in the ASTD awards for its 

training and development model linked to the development 

of performance and the V Gaudí-Gresol Prize in the social 

action category. 

These awards support Banesto’s model for managing people, 

which strengthens ambition, responsibility, effort, leadership 

and commitment. 

The team 

For Banesto people are the main asset for realising its 

business strategy. Ambition, effort and commitment are the 

determining factors among our 8,613 employees. 

Banesto’s staff reflects the bank’s main corporate values. It 

is a motivated team, identified with the brand, determined to 

succeed, effectively led and committed to providing an agile 

and responsible service to customers. 

The average age of employees is 43.8 and the average 

number of years with the bank 18.85. We have a diverse and 

multi disciplinary team, 56.76% of whom have degrees in 97 

different subjects, and a mixture of professionals with long 

experience and talented young people. 

Banesto continues to strive for a work-life balance and 

equality of opportunities in career development. Close to onethird 

(32%) of executives are female. 

º Banesto in 2011 º People, the key element for business 

12 

Accompanying the business strategy via the Human 

Resources Master Plan 

This plan makes commitment the central plank, because 

we believe that committed employees produces a better 

performance, greater retention of talent, more satisfied 

customers and better business results. 

The plan’s strategic lines revolve around three large areas: 

involvement, identity and pride in belonging and driving 

business results. 

iCRM: consolidating the knowledge of people 

iCRM Banesto is part of our identity and way of doing 

things. Managing commitment requires knowledge of our 

professionals and for this we have a model of individualised 

management, backed by specific systematics and tools, 

which give us a better person/post fit and more effective 

management. 

The rigourous execution of the iCRM enabled human 

resources managers to conduct 8,847 interviews during 

2011, either directly or via new virtual channels. All people 

working in key collectives were interviewed and different 

levels of service applied on the basis of the life cycle of 

employees, potential, performance, commitment, etc. 

The quality and usefulness of interviews was also strengthened 

(satisfaction score of 7.86 compared to 7.72 in 2010).

Executive quality: a management culture that mobilises 

sales 

The quality of executives is a priority for Banesto, as it is vital 

for managing commitment and developing a culture than 

mobilises sales. Banesto’s executives are responsible for the 

bonding, development and commitment of their teams. 

The challenge for each team leader is to attain the best 

from their members in their daily work, through constant 

motivation, continuous training and the most demanding 

ambition to reach a shared goal. 

Executive quality is fostered through an annual assessment 

process with regular monitoring, where individual interviews 

with each employee with their line manager becomes the 

main nucleus and where knowledge of expectations, analysis 

of the business areas and individual career development are 

articulated as pillars of the process. 

A 360º assessment process is established for certain key 

collectives which combine self-assessment with evaluations 

by team leaders and members of these executives, in order to 

provide a more global view of their executive profile. 

All employees were assessed during 2011, 691 of them via 

360º feedback and 8,076 via 180º feedback. 

The information obtained, as well as the iCRM systematics, 

are a priority for management decisions in human resources: 

career development, participation in coaching programmes, 

mentoring, training, etc. 

13 

Banesto’s employees 

form a motivated team, 

identified with the 

brand and determined to 

succeed, with effective 

leadership and committed 

to providing an agile and 

responsible service. 

Training and development 

In 2011, continuing the model for performance development, 

sales solutions were put into effect, focused on innovation, as 

the engine of continuous improvement and in cooperative 

learning, through communities and networks of experts. 

This enhanced productivity, strengthened self-learning and 

facilitated the resources for constant training. Individual 

learning routes were developed, aligned with strategic 

business objectives and centred on the impact on the 

performance in the post, maximising internal knowledge via 

our new environments of cooperation. 

As in every year, the specific training and development plans 

were drawn up on the basis of the strategy, objectives and 

lines of action of each business pillar: risks, resources, prices 

and productivity, with the focus on executive quality and 

quality of service. 

The risk culture was strengthened and management of 

spreads, promoting the sale of products and seeking 

continuous improvement in commercial systematics, the 

performance and productivity, using various channels 

and methodologies: direct training, permanent class 

rooms, mentoring, coaching, personal learning routes and 

communities of practices. 

Improvement in productivity 

Banesto deepened and systematised individualised support 

protocols in 2011 for business tasks, through commercial 

tools, tutoring, training in skills, capacities and knowledge, 

as well as through a system of incentives linked to achieving 

goals. 

Thanks to the optimisation of efficiency via the productivity 

improvement project, the participating collective increased 

by 10 percentage points and attained the desired commercial 

standards. 


in 2011

AR 11 

In 2011, more than 6,900 

employees used the GPS 

Professional Banesto, 

simulating different career 

paths in order to analyse 

their professional 

development options. 

GPS Professional Banesto: career plan 

The professional career is a differentiating element in our 

value proposal. We have a career management model, GPS 

Professional Banesto, which, via an interactive web available 

to all employees, enables them to visualise their development, 

the main functions, the different professional phases and the 

knowledge and skills requirements in each function. Support 

is also provided by professionals recounting their experiences 

and career paths. 

In 2011, more than 6,900 employees used the GPS 

Professional Banesto, simulating different career paths in 

order to analyse their professional development options. 


14 

A team with identity 

Banesto offers a series of value proposals for all employees, 

and other particular ones for certain collectives, such as 

those in the Top 10 programme or people benefiting from the 

flexible remuneration programme. 

Top 10 Programme: in 2011 we renewed the collective 

included in this programme on the basis of criteria of talent, 

productivity, quality of service, leadership, management of 

teams, etc. More than 490 executives are in this programme 

and have specific training, development, leadership and 

coaching plans, etc, as well as special ones for remuneration 

and benefits. 

The flexible remuneration programme was increased in 2011 

to cover more than 1,400 employees, mainly incorporating 

commercial network executives. Employees can compose 

their remuneration package according to their preferences 

and priorities. 

Another important aspect are the various programmes that 

strengthen the sense of belonging and a shared identity: 

the “Banesto Pinta” Christmas painting competition for 

children, the Open Day, kindergartens and camps, help to 

find family support personnel and volunteering proposals via 

the Banesto Solidarity Network, among others.

Remuneration 

In general, Banesto’s remuneration package is global and 

is based on factors such as salary, social benefits, exclusive 

offers for employees and preferential conditions in many of 

the bank’s finance products, as well as qualitative elements. 

The remuneration policy seeks a competitive and fair 

package on the basis of performance and productivity in the 

variable element in order to provide incentives for ambition 

and results. 

During 2011, Banesto adapted its remuneration policy to 

the regulations set by the Bank of Spain and the National 

Securities Market Commission, adopting as regards the 

variable element for executive directors, senior management 

and the leading people in wholesale banking measures of 

deferment in time and part payment in the form of shares in 

Banesto. 

Diversity and reconciling the work-life balance 

Banesto respects the principle of non-discrimination for 

reasons of race, gender, ideology, nationality, religion, sexual 

orientation and any other personal, physical, mental of social 

condition of its employees, thereby ensuring equality of 

opportunity in hiring, training, developing and supporting the 

work-life balance. 

The policy for having and developing a diverse and balanced 

staff is reflected in the proportion of male and female 

employees: 

• 38.24% are women, 0.4% more than in 2011. 

• 32% of executives are women, maintaining the segmentation 

and monitoring of women with potential. 

Thanks to the initiatives taken and consolidated to support 

the family, flexibility, equality of opportunity and the wellbeing 

of employees, Banesto continued to be certificated as a 

responsible family company. 

Of the wider range of work-life balance measures made 

available to employees, 40% were enjoyed by men compared 

to 25% in 2007, and the Banesto x Ti programme was 

generally well received. The global assessment score of the 

programme was 6.94, up from 6.23 in 2008. 

Banesto also dedicated special efforts to the programmes 

and initiatives centred on strengthening the identity and pride 

in belonging to the Banesto Group, mainly by integrating the 

15 

family into the bank’s activities and reconciling the work-life 

balance. 

Health and prevention 

Banesto has a system for managing the prevention of risks 

at work and assistance, which is certificated every year by 

internal and external auditing and accredited by the OHSAS 

18001:2007 and the ISO 9001:2008 rules. 

This system enables the bank to guarantee homogeneously 

the quality of the services provided, as well as the individual 

and collective wellbeing of employees and the working 

conditions, together with sustainability and interaction with 

the environment. 

All employees are guaranteed access to health vigilance, 

assigning specific protocols on the basis of the activity and 

risk recognised in posts. Medical examinations are conducted 

to promote the collective health of employees. 


in 2011

AR 11 

We promote preventative medicine, identifying the classic risk 

factors, as well as the emerging one, while the cardiovascular 

area identifies and corrects early on heart diseases. 

We maintain continuously practical theoretical training and 

specific information on health and safety. Training in the 

prevention of risks at work is updated for all employees in 

order to act effectively in the event of accidents. 

We facilitate training and medical-health coverage for those 

employees who take part in the Solidarity and Sustainable 

Tourism projects and in all projects of the Banesto Solidarity 

Network. 

We promote collective health and are committed to 

increasing the health culture through orientation and general 

information for all employees and on a personalised basis 

for those who request it. We are particularly sensitive toward 

those employees with social or family problems. 


16 

We maintain permanent communication channels for 

employees via the corporate Intranet and a specific health 

mail box. The same system is also used to publish articles 

that foster the acquisition and improvement of healthy life 

habits and the monthly bulletin of the Spanish Association 

against Cancer. 

We cooperate with the national health system through various 

preventative campaigns; first aid courses, seminars for 

people to give up smoking and blood donation campaigns. 

We participate in inter company forums in order to generate 

the best updated practices in continuous improvement in the 

health and safety conditions of employees and the optimum 

working conditions. 

We participate in permanent control of accidents at work, 

which improved 28%.

Management data. Professional capital (current human profile) 

2011 2010 2009 2008 

Total number of employees 8,613 8,855 8,905 9,718 

Average age (years) 43.8 42.54 41.7 41.12 

Number of years at Banesto 18.85 18.28 17.43 17 

Diversity (women as % of total employees) 38.24 37.88 37.45 36.41 

Diversity (number of different nationalities) 26 23 23 28 

% of staff with a university degree 56.76 55.99 55.65 54 

Number of different degrees 97 104 90 93 

% of staff with the three most frequent degrees 32.5 37.73 36.78 38.00 

Internal promotion: promotions/total employees (%) 8.09 7.24 7.07 13.80 

Average number of years in current post 4.38 4.36 3.99 3.79 

Average number of years in current centre 4.97 4.71 4.59 4.46 

% of employees with variable remuneration 100 100 100 100 

% of employees in commercial tasks in branches 95.52 96.82 95.36 84 

Internal functional rotation 

Human potential (capacity to improve) 

17.21 9.38 11.56 15 

New employees/total employees (%) 1.38 2.11 1.57 5.27 

Training hours per employee 38 43 49 65 

Training costs/personnel costs (%) 1.24 1.42 1.65 1.68 

% of employees with evaluation of skills 100 100 100 100 

Total number of online training hours 109,491 227,040 264,622 226,735 

Number of e-learning courses completed 39,243 42,762 66,460 56,898 

Employees/total employees users of online training (%) 98 91 90 80 

Employees in training/total employees (%) 98 91 90 88 

Evaluation of the satisfaction of participants in training courses 9.1 9.0 8.6 8.7 

Index of application of training in the post occupied 

Social quality (social policies) 

8.9 8.80 8.4 8.49 

% of employees on permanent contracts 

Social return (return on the human factor) 

99.85 99.85 99.91 99.59 

Human factor cost: personnel costs/total operating costs (%) 69.99 70.81 72.21 75.58 

ROI of human capital: profit before amortisation/personnel costs per 

employee 

2.3 2.55 2.62 2.4 

Value added of human capital: profit before amortisation/average number 

of employees 

159.76 187.96 180.7 161.8 

Efficiency of wage bill: personnel costs/total revenues (%) 

Resources for the work-life balance 

26.85 25.23 24.95 26.62 

Mobile phones 3,400 3,395 3,774 3,939 

PCs 

Selection process 

4,000 2,220 2,625 2,148 

CVs handled 

Indices of quality 

79,712 104,325 129,523 130,330 

Internal customer June 7.12 7.13 6.81 6.57 

Internal customer December NA 7.18 6.96 6.65 

Employees in 360º assessment 691 707 863 860 

Average number of evaluators per person evaluated 10 10 10 10 

17 


in 2011

AR 11 

Banesto’s risk 

management during 

2011 stood out for 

implementation of policies 

and procedures based 

on criteria of prudence 

and responsibility. 

Risk control 

The year 2011 was again characterised by very unstable 

markets and a delicate economic environment, making a 

prudent risk policy even more important. 

The main goal of our risk management policy is to maintain 

a quality credit portfolio and to do this we have advanced 

methodologies to assess and identify risks. 

Our risk policies are designed to meet the following objectives: 

• Maintain a low risk profile, which can be predicted and 

managed at any time. 

• Attain minimum levels of losses and NPL ratios. 

• Seek equilibrium in the composition of the balance sheet, 

liquidity, profitability and capital. 

• Develop risk management as a task for all employees. 

• Make Banesto a customer-focused bank, based on 

knowledge, ethics and professionalism. 

• Have competitive advantages that support the business 

generation goals. 

• Proactive management with aggregate and individual 

focuses, based on specific models integrated by customer 

types. 

• Develop the best risk team. 

• Establish remuneration frameworks centred on appropriate 

management of risk and risk/return over the medium-and 

long-term. 

º Banesto in 2011 º Risk control 

18 

The risk measurement model, implemented in Banesto many 

years ago, enables us to quantify risk on the basis of four basic 

indicators: expected loss (EL), exposure at risk (EaD), loss 

given default (LGD) and asset correlation (AC). 

The bank also has a structure that combines various centralised 

units, specialised in integral management of the risk cycle 

(admission, management, monitoring, anticipation and 

recovery), as well as a decentralised network of management 

in territories, company centres, zones and branches to carry 

out this process. The impact of changes in the market and the 

solvency of counterparties is continuously assessed. 

One of Banesto’s hallmarks is the principle of being a customerfocused 

bank , in order to maintain long and lasting relations 

and for this it has developed and adapted its policies in order 

to try to achieve continuous improvement in the quality of 

customer service. 

The bank’s risk management is present in all its activities, and 

covers all the phases of relations with customers, as managing 

risks helps to be close to them, advise them on the risk to 

be assumed and anticipate any event that could affect the 

customer and the bank. 

Banesto’s risk culture, present throughout the bank, aims to 

make each manager a personalised risk manager in order to 

provide customers with the best service and the bank with the 

highest security. 

The fundamental principles of risk management are conceived 

as a common task, which begins in senior management and 

involves all employees. These principles are:

1 2 

4 5 

Integral management, 

whose key elements, as 

well as customer service 

and risk quality, are the 

composition of the balance 

sheet, management of 

capital and liquidity and 

profitability 

7 8 

10 

Comply with prevailing 

regulations and the best 

risk management practices 

Provide a quality 

internal and 

external service 

Involve 

senior management 

Flexible management 

model, which can be 

adapted to the market in 

policies and structures 

Focus the bank on 

customers, based on stable 

relations 

Anticipation 

by monitoring 

19 

3 

6 

Use of advanced techniques 

of analysis, assessment and 

quantification of risks 

9 

Independence 

of the risk area 

Prudence 

in admitting loans 


in 2011

AR 11 

Resources and technology 

The current climate of a more competitive market and more 

demanding customers means that all the bank’s actions have, as 

their main strategic lines, efficiency, in its various perspectives, 

and striving for excellence. 

Meanwhile, this competitiveness encourages us to seek other 

activities in order to obtain additional advantages. 

Efficiency, more necessary than ever 

In the resources area, our contribution to efficiency is based 

on management of decision-making and execution structures, 

aspects of support and operational execution, technological 

infrastructure, streamlined and robust processes and efficient 

consumption of energy. All of this is aimed at being more 

efficient in carrying out our business and in managing customer 

relations. 

For example, a project was launched on the evolution our work 

phases, with a large investment in technology. This is boosting 

productivity, due to a greater capacity from the tools acquired 

as well as more flexibility in terms of communication and 

management. 

A new contracting platform is being installed which integrates 

in a single process commercial, documentary and operational 

aspects. This platform improves the experience of our customers 

and facilitates the creation of a link with the bank in an agile and 

simple way. 

The new process significantly improves efficiency, reducing the 

operational burden, while cutting the time needed for a new 

contracting and so enhancing the business attention for our 

customers. 

As regards the branch network, we are undertaking various 

initiatives to boost business and operational efficiency. Various 

branches with little activity were closed in August, in order to 

strengthen this capacity in July and September. The results 

were very satisfactory. The role of branch deputy managers 

was changed, reducing their operational tasks and increasing 

commercial ones. A specialised commercial attention branch 

model was created, which involved moving the cash desk to 

other centres and focusing on selling and commercial relations. 

In order to be coherent with this strategy, the corresponding 

management and support procedures have to be developed 

and new forms of working implemented through the use of new 

technologies. 

º Banesto in 2011 º Resources and technology 

20 

The project to re-engineer management processes, launched in 

the middle of 2011, seeks to transform key processes in order 

to generate value for the bank and our customers, on the basis 

of efficiency and excellency. 

In addition, at the beginning of 2011 the technological 

developments and the necessary adjustments to the operational 

procedures were completed, enabling Banesto to become a full 

member of LCH (London) and LCH (Paris). 

Membership of these clearing houses gives us a clear position 

of strength in our liquidity, as they are the main sources in the 

wholesale markets given the drying up of the interbank market. 

They also offer very favourable prices to the participating banks, 

given the guarantees and solvency required in order to be able 

to participate in them. 

Banesto is also sensitive to the need to be efficient in consuming 

energy. The resources area launched a large number of 

initiatives focused on attaining the degree of efficiency we want, 

fostering a culture that makes us closer to society and which 

enhances our credibility. 

The Domótica plan is centred on cost savings, reducing 

consumption of electricity and optimising maintenance of 

installations. 

This plan revolves around a remote control system for lighting, 

air conditioning, merchandising and electrical system which, 

through centralisation, enables us to manage, analyse and 

make savings. 

Excellence, a differentiating factor 

Banesto regards excellence in the execution of operations as a 

basic pillar for establishing lasting relations between customers 

and the bank. This excellence is materialised in both the 

framework of relations with customers as well in the contents 

offered them. 

In 2011, the quality offered to our customers via the contact 

centre reached the best levels in the bank’s history and put 

us in first position among all the banks operating in Spain.* 

A mobile telephone banking service was launched, which 

allows the most demanded consultations and operations to 

be made for accounts, cards and securities. It facilitates the 

customer’s global position.

In the management of excellence, the control processes 

are very important for ensuring quality and generating 

confidence. Banesto continues to develop its model with 

various initiatives. Among the most noteworthy ones is the 

work in the sphere of technological and operational risk 

relating to management of documents and the business 

continuity plan. 

During 2011, technological and operational risk made further 

progress in continuous identification of new focuses of risk 

and the launch of mitigation plans, strongly supported by 

the new operational risk management indicator (NORMA) 

installed in the bank’s various business areas, and always 

being flexible and adapting to the management priorities 

identified. 

A business continuity plan was also developed and 

implemented, which covers the various strategies for different 

contingency scenarios and contrasts their functioning with 

tests on the different continuity teams defined and two 

practices in the main installations involving all employees. 

The new documentary control centre was consolidated, which 

centralises and optimises the execution of key processes 

and regulations regarding the management of documents in 

branches. 

The structural system of guarantees strengthens the integrity 

of the system of provisions and incorporates new functions 

for identifying and managing the guarantees associated with 

loans. 

The authorising centre was also renewed and two main 

objectives set: enhance the quality of customer service and 

minimise the operational and technological risk associated 

with the processes of authorising means of payment 

operations. 

This change enables a larger number of transactions to 

be processed in less time, and new tools for security and 

detection of fraud were added that better protect payment 

operations. 

Banesto has always been committed to technology and 

innovation and once again we are the leaders in meeting the 

banking industry’s security standards in means of payment. 

All of this is a guarantee of confidence for our customers. 

*Source: Stiga, AQmetrix at the end of the third quarter of 2011. (Latest published figures). 

21 

Customer relationship model. Banesto 2.0 

The technological advances and the ease they give to 

customers to manage their relations with the financial sector, 

both in their influence over contents as well as in their 

behaviour, have stimulated us to decidedly go for developing 

our customer relationship model, which gives us an edge 

over our competitors. 

The objective is to adapt to the conditions of a new scenario 

where the customer defines the type of relation with the bank, 

under a model characterised by agility, simplicity, flexibility 

and technological innovation, and focused on the customer’s 

experience. 

The Banesto 2.0 programme was launched, centred on 

building this customer relationship model, backed by an 

integrated structure of our distribution channels, upon 

which our commercial, operational and relation skills will be 

developed. 

Cooperation with the Justice Ministry 

In the second year of the contract, Banesto maintained its 

commitment to support the ministry’s modernisation strategy 

with a new contribution of 100,000 hours spent on more than 

40 projects. 

Development of the deposit accounts and judicial 

consignations service enabled the support for judicial 

embargoes to be automatically incorporated and deal with 

more than 6 million operations in 3.3 million accounts. A 

virtual training system in situ for secretaries was also added. 

The excellent level of service provided by Banesto in 2011 

resulted in the bank being awarded the justice quality prize 

by the Consejo General del Poder Judicial, the body that 

oversees the judicial system, and the Equitas del Colegio de 

Graduados Sociales de Valencia prize for its performance 

and quality in the judicial world. 


in 2011

AR 11 

Retail banking activity 

focuses on the customer 

with a single purpose: 

accompany them during their 

financial life and tend to 

their aspiration to work with 

one bank, where they feel 

comfortable and confident 

and receive a professional 

and quality service. 

Retail banking 

The customer: the reason for our activity 

Retail banking activity focuses on the customer with a 

single purpose: accompany them during their financial 

life and tend to their aspiration to work with one bank, 

where they feel comfortable and confident and receive a 

professional and quality service. 

With this objective in mind, employees are set an 

ambitious degree of quality in their daily activity and 

recurrent actions established for their relations with 

customers which lead them to attain their full confidence. 

To be your bank. 

These objectives are reviewed every six months and 

established as a goal that can only be achieved with effort 

and dedication: reaching the top of the highest mountain 

was our challenge in the last part of 2011. 

º Banesto in 2011 º Business units º Retail Banking 

22 

The customer chooses how and when 

he wants involvement with the bank 

Customer relations are conducted through a full range of 

channels that cover all needs: the branch network with more 

than 6,500 managers; the 118 financial agents that carry 

out their work with a single model in the financial market 

and throughout Spain; more than 700 agents that cooperate 

and a broad base of alternatives supported by cutting 

edge technology, such as Internet, with various specialised 

websites, telephone banking and Ibanesto, the online 

banking leader. 

Furthermore, with a clear motivation of service and to 

strengthen activity, structural changes were made in the unit, 

developing the concept of “customer experience”, bolstering 

a model that sets us apart, is close to the customer and is 

backed by pioneering communication systems that enable 

real time interaction between all employees, who strive for 

one objective: the customer comes first. 

Excellence in attention 

is our hallmark 

Each customer is different for Banesto and requires tailored 

treatment, on the basis of their features and needs. By 

establishing their profile, personalised solutions can be 

offered. 

Actions were developed in all segments in order to enhance 

Banesto as the reference bank.

Progress continued to be made in the segment for SMEs. A 

manager is assigned to each company who, backed by the 

branch network, administers portfolios and offers specific 

products that are usually only within the reach of large 

companies. 

This management model was consolidated during 2011, 

and revenues from the segment grew thanks to greater 

rotation of the portfolio of loans and the increase in customer 

transactions. Some 15,000 new customers were captured, 

enhancing Banesto’s position as a reference in the market. 

The year 2011 was a complicated one for lending. A total of 

37,800 new loans were made, 30% more than in 2010, which 

ratified Banesto’s commitment to this important segment for 

the Spanish economy. 

Of note in this segment was the activity developed in products 

such as confirming and factoring, where increases in the 

number of active lines of 75% were achieved. 

23 

Against the backdrop of companies going abroad to find 

new markets and customers, business tools were installed, 

based on proximity, advice and product innovation, in order 

to support greater internationalisation of corporate Spain. 

A group of foreign trade specialists were trained to support 

management of this business and very significant results 

were produced in 2011. Business grew 40%, gross income 

36% and more than 1,000 new customers were incorporated. 

In 2012, Banesto aspires to secure its position as the 

reference bank in international business. 

In businesses, commerce and the self-employed, proximity, 

a very important aspect for these customers, was the key 

to consolidating the new management model, in which the 

branch deputy manager is the person around whom business 

revolves and is responsible for the segment in each branch. 

Banesto continues to consolidate itself as the reference bank 

in this segment, with a specialised and very competitive offer, 

both for their personal as well as professional life, which 

has been broadened with the development of new products 

such as the “Cuenta Profesional” and the range of “Activo 

Profesional”. 

Proof of this is the 4% rise over 2010 in loans signed 

during 2011.The number of point-of-sale terminals was 

also increased to a record high and the e-commerce offer 

strengthened. 


in 2011

AR 11 

Also noteworthy were the good results obtained in chemists, 

where Banesto has a leadership position with a one-third 

market share. The bank has signed exclusive agreements 

with the colleges of pharmacists, distributors of medicine 

and other companies. The number of customers increased 

by more than 15% to 8,100. 

In Premium Banking, 2011 saw the implementation of a 

model that is making us the main bank for medium/high 

income families. The strategy is based on: 

An exclusive and differentiating treatment 

This is achieved through the creation of portfolios whose 

management is the responsibility of the branch manager, 

strengthening the team of specialists with European Financial 

Advisor certification and bolstering the Banesto Premium 

Service Centre, which has a team of professionals with wide 

economic and fiscal training that supports the management 

and customer attention and the Premium managers. 


24 

Integral offer of products and services 

This is aimed at Premium customers and their families, and 

tailored to their needs. The offer ranges from the simplest 

and most traditional products to the most complex ones, 

such as managed portfolios of investment funds and SICAVs. 

Preferential and specialised attention 

For Premium customers and their families in any of our 

branches. Commitment in writing with the new Banesto 

Premium card and guaranteed by Banesto’s chairman. 

A world of advantages and exclusive privileges with 

Premium Life 

Premium Life makes available to our Premium customers a 

world of privileges and benefits, a hallmark of the offer.

The segment for individual customers continued to be a key 

and priority area in planning and in actions carried out in 

2011. 

Either alone or collectively (associated with many public 

and private institutions), the capturing of customers was 

strengthened via campaigns to domicile salaries in accounts 

and the rest of transactions. 

As well as the campaigns involving a gift of a laptop, or 

promoting “Vamos 500€ o 1.000”, which continued to 

be successful, new formulas were incorporated such as 

“Nómina Sony 3D Internet TV 32” and “Gol TV.” 

This strategy enabled us to improve our market share in 

households and attain a high percentage of customers whose 

salaries are paid into their accounts (more than 50%), as well 

as linked customers (consumption of 4 or more families of 

products), which accounted for 46% of the total. The offer 

was also complemented by the results of the UNICEF Account 

aimed at the young (71,500 accounts). 

25 

All activity and achievements with customers were supported 

by an offer of products and services of permanent value, 

which our customers knew how to appreciate. 

In funds, where the market has been particularly dynamic, we 

worked very hard on determining the profile of each customer 

in order to place their savings via investment vehicles tailored 

to their features and which are safe and profitable, such as 

paper of varying maturities, guaranteed pension plans and 

funds, with fully covered issues. 

Particularly noteworthy was the marketing of structured 

deposits (more than 22,400 contracts) and financial 

insurance (more than 12,700 contracts). 

In loans, we have a privileged position due to the exceptional 

competitive advantage provided by our analysis systems 

(customer relationship management), following development 

of a prudent policy where activity is significantly centred on 

pre-approved loans. 

At the same time, we worked to boost customer linkage, with 

excellent results (rise in insurance and cards). 

In insurance, we made considerable progress in becoming 

the only providers for our customers. The range of products 

was increased during the year and adjusted to profiles and 

needs in order to set protection in all spheres, both life-risk as 

well as patrimony (mainly household multi risk policies), and 

for vehicles, where our insurance buyer AutoDrive achieved 

much success. 

The results speak for themselves: more than 180,000 new 

policies (+15%). 

In cards, with a well structured portfolio in debit, credit and 

pre-payment, we continued to grow, both in terms of the 

proportion of customers with cards, as well as in the use of 

them. In this way, the percentage of customers with a card 

reached 48%, which at the level of billings, despite the 

recession, had a positive trend. Of note were debit cards, 

which increased by more 5%. 


in 2011

AR 11 

Other activities in the retail banking market area included: 

The Banesto Justice Club was five years old and has more 

than 65,000 customers (justice professionals, companies 

and institutions), 9% more than in 2010. 

A recognised and valued brand has been created for the 

whole judicial sector, underscored by the institutional 

cooperation increasingly sought by all colleges and 

associations of solicitors, lawyers, legal advisors in sociolabour 

relations, judges and magistrates, judicial secretaries 

and civil servants, who want to improve the profession and 

modernise the justice system. 

As a result of its striving for better quality service and 

technological and training improvements, the Banesto Justice 

Club was recognised in 2011 by the most prestigious public 

institutions for its institutional cooperation and contribution 

to the modernisation of the justice system, with three prizes: 

• The Justice Ministry’s prize for good practices. 

• The AEquitas prize from the Colegio de Graduados de 

Valencia. 

• The prize for quality in justice awarded by the Consejo 

General del Poder Judicial. 

The segment of institutions boosted its revenues, thanks to 

rotation of the portfolio and improvements in transactions. 

More private institutions were captured as clients, with 

solutions tailored to their needs. Banesto’s position in 

public entities was also strengthened by winning the payroll 

contracts for the Ministry of the Environment, the Science 

and Innovation Ministry and management of the Tesorería de 

Patrimonio Nacional. 

AgroBanesto is the bank that has secured us as the 

undisputed leader in agricultural business. The experience, 

knowledge and a team of specialists enable it to provide a 

response adjusted to the needs of each local environment. 


26 

We have a wide network of branches in towns of less than 

10,000 inhabitants, enhanced by more than 310 agents who 

provide services to Banesto’s customers in rural areas. 

Particularly noteworthy is the campaign to help farmers 

manage and handle funds related to the Common Agricultural 

Policy (CAP) which offers a free specialised service. With 

more than 46,500 managed operations, our market share in 

CAP funds paid into Banesto accounts rose again in 2011 

(by 0.6 points). 

In online banking, iBanesto.com again secured its leadership 

position and maintained a healthy balance sheet, with growth 

in deposits and in other business lines, while improving its 

efficiency and enjoying excellent risk quality. 

The significant growth in new customers in 2011, together 

with the improvement in the number of products consumed, 

enabled iBanesto.com to progress in its goal of becoming the 

first choice bank for customers. 

Various media and specialised blogs recognise the superiority 

of Banesto’s online bank, making it the first option in Spain 

for such institutions.

All these services in the retail banking area are impregnated 

with the “Winning Spirit” of Rafa Nadal and the Spanish 

national football team, which Banesto sponsors. This has 

enabled our customers, through our campaigns, to get close 

to these sporting stars. 

Banesto’s innovative spirit is also to be seen in social networks, 

where we are very active. The “Winning Spirit” Facebook 

page has more than 80,000 fans, which provides an open 

line of connection with our customers. The Banesto channel 

was launched in the second half of 2011, from where the 

bank’s main developments can be followed in real time. 

27 

We have a very 

active presence in 

social networks, via 

facebook and twitter. 


in 2011

AR 11 

Value-added 

transactional products 

were converted in 2011 

into the base of our 

customer relations. 

Company Banking 

The tensions generated by the markets, coupled with 

the process of consolidation in the banking sector, are 

determining the relationship with clients. 

Despite this difficult environment, Banesto knows how to 

take advantage of its position and continue consolidating 

our company banking segment as one of the market’s main 

references. 

A key factor here are clients’ needs to restructure their banking 

relations. With some banks undergoing an irreversible 

process of consolidation and others in the process of drawing 

up new strategies, focused on activities that consume less 

capital, the result could only be one of reordering the banking 

pool of many companies. 

The company banking segment manages companies/groups 

with billings of more than EUR 6 million. 

The main lines of our business developed very well. While 

the downturn in economic growth has moderated the high 

growth rates in banks’ balance sheets seen in prior years, this 

has been offset by more efficient management of our capital. 

The final result was growth in the segment’s gross income. 

This success was achieved with positive contributions from 

all territorial areas. 

º Banesto in 2011 º Business units º Company Banking 

28 

In 2011, we took another step in our ambition of becoming 

the best bank in Spain for companies. In line with the strategic 

plan, we continued to convert Banesto into the best bank for 

companies’ transactions, with a special emphasis on: 

• Customers (linkage and capturing of new clients) 

• Risk management 

• Profitability 

• Products 

• Structure and processes 

and all combined with continuous improvement in the 

management model. 

One of the main achievements in 2011, aside from achieving 

the gross income goal we set at the beginning of the year, 

something very difficult in the current market circumstances, 

was consolidation of the customer management model in 

company banking. The combination of client proximity with 

specialisation, as opposed to the product model, was one 

of the key tools for continuing to be the reference for the 

majority of our customers. 

We also dedicated many resources from our teams to getting 

close to those companies that do not bank with us. This effort 

was rewarded with an 8% rise in the number of our clients. 

Another success was anticipative risk management. The 

involvement of all members of our teams contributed 

decisively to maintaining a portfolio with a low risk profile, 

an essential condition for ensuring good management of the 

ratio of non-performing loans.

Another notable aspect was channelling customers’ 

transactions. Banesnet, our online bank, has been in 

existence for some time. Although all customers have this 

service, increasing use is being made of it for transactions. 

Banesnet gives customers greater control over the flow 

of payments made and received, reducing management 

costs. Once again, the specialised consultancy AQmetrix 

highlighted Banesto’s offer of products and services as the 

best in the market. 

One product that concentrated our attention in particular 

in 2011 was foreign trade. The international market 

became the alternative for partly offsetting the weakness of 

domestic demand. The teams of foreign trade specialists 

were strengthened throughout the branch network in order 

to support clients in seeking out new markets. From the 

drive in export finance to making available to clients a portal 

specialised in finding business opportunities abroad, we 

did not cease in our efforts to seek initiatives to support this 

activity. 

Discounting commercial paper and factoring continued 

to gain ground as essential tools for enabling our clients to 

manage their payment collection risk, freeing up management 

capacity in order to be able to concentrate their efforts on the 

productive and commercial processes. 

The confirmed payment, in its many versions, is another 

transactional product that gained importance in 2011. What 

until fairly recently was seen as a sophisticated product, 

has become something fundamental within the reach of all 

clients seeking to optimise management of their suppliers. 

29 

With the focus on clients, we are taking advantage of the 

specialisation of several of our product departments. A 

good example are the treasury and capital market areas. 

Offers such as hedging the inflation risk or the price of raw 

materials, as well as the most traditional ones like exchange 

rates or interest rates, or even novel products such as those 

on “prestamos profit”, have enabled us to make available to 

clients a service that has become a reference in the market. 

Company banking managers continue to be the key element 

of our strategy of being the reference bank for our clients, the 

one in whom they can entrust their transactions and contact 

in the first place when they have a need. 


in 2011

AR 11 

Wholesale Banking 

The wholesale banking area comprises two large units, 

markets and corporate banking. 

Markets is made up of the units of distribution, institutions 

and credit, books, Banesto Bolsa, capital markets, corporate 

finance, international business and factoring, as well as our 

New York branch. 

These units are responsible for finding the best solutions for 

clients’ needs in everything related to the markets (capital, 

stock and treasury products). 

The corporate banking unit provides service to large clients 

who, because of their size, nature and complexity of their 

operations, require tailored solutions. The offer of transactional 

and traditional financing products is complemented by other 

value-added products such as treasury, capital markets and 

corporate finance. 

In 2011, we adapted our offer of products in order to cover 

the new needs of our clients in a complex and changing 

environment in the financial markets. 

The markets determined the activity developed during 2011. 

This introduced new variables within the management 

that had to be conducted, but at the same time meant 

the appearance of new opportunities in the market due to 

Banesto’s solid financial position. 

º Banesto in 2011 º Business units º Wholesale Banking 

30 

Noteworthy in 2011 was the work conducted by both the 

institutions and credit units as well as the capital markets 

team, giving our clients access to financial markets to obtain 

financing through bonds, ECPs or structured funding. 

Wholesale banking also cooperated very actively in 

management of liquidity and in the bank’s access to financing 

in the markets. 

The objective of 

wholesale banking is 

to contribute to the 

bank’s results, as well 

as optimise liquidity and 

capital management.

The corporate finance and stock market units were active in 

operations and in executing them in the securities markets. 

Banesto factoring and the New York office complete the 

area’s global offer, enabling Banesto to have an increasingly 

specialised range of products at the service of its clients. 

Corporate banking results were noteworthy as they were 

obtained despite a reduction in lending and in exposure to 

risk of 4.5%. Also significant was management of funds, 

which reduced the unit’s liquidity gap by EUR 485 million 

and contributed to management of the bank’s liquidity. 

In short, during 2011, as in 2010, wholesale banking 

manifested its capacity to adapt to different market situations, 

enabling it to continue to provide a quality service and 

generate value for the bank. 

Wholesale banking focuses on maintaining and improving 

the service provided to all the bank’s clients and tailored to 

the business environment’s particular situations, offering new 

products that satisfy our clients’ needs in different economic 

scenarios. 

The area also helps to improve the bank’s results, as well as 

optimise liquidity and capital management. 

31 

Wholesale banking 

focuses on maintaining 

and improving the service 

provided to all the bank’s 

clients and tailored to the 

business environment’s 

particular situations. 


in 2011

AR 11 

The share 

Despite the expectations generated at the start of the year, 

2011 did not bring the expected recovery in financial 

markets. On the one hand, the growth profile was downward, 

with a sharp worsening of economic prospects as the year 

progressed; on the other, the euro zone’s sovereign debt crisis, 

initially confined to several countries, and then spreading and 

pushing up risk premiums and closing off financial markets. 

The evolution of stock markets reflected the uncertainty 

and volatility continued to be the dominant note during the 

year. In particular, bank shares remained the main focus of 

investors’ concern. 

Investors’ scant appetite for Spanish banks and the lack 

of discrimination among the various shares meant that 

Banesto’s favourable performance compared to that of its 

peers was not reflected in its share price. The market’s low 

liquidity intensified this impact. The Banesto share ended the 

year at EUR 3.725, 39.9% lower than in 2010. 

Rating agencies, meanwhile, put Banesto in a noteworthy 

position in the Spanish financial panorama. At the end of 

2011, Banesto was one of two banks with the best rating 

according to S&P and Fitch and among the five best 

according to Moody’s. 

Ratings 

Long-term 

S&P AA- 

Moody’s A2 

Fitch AA- 

º The Banesto share 

32 

Share capital 

At the end of 2011, 

Banesto had 79,440 

shareholders. 

The share capital amounted to EUR 543,035,570.42 (FIVE 

HUNDRED AND FORTY THREE MILLION THIRTY FIVE 

THOUSAND FIVE HUNDRED AND SEVENTY AND FORTY 

TWO CENTS), represented by 687,386,798 shares of EUR 

0.79 nominal value each, numbered from 1 to 687,386,798, 

inclusive, which are fully subscribed and disbursed and 

constitute a single series. 

These shares are listed on the four Spanish stock exchanges 

(Madrid, Barcelona, Valencia and Bilbao) via the continuous 

market. 

Shareholder remuneration 

Banesto’s board approved the payment of three ordinary 

quarterly dividends charged to 2011’s earnings, in August 

and November 2011 and February 2012, for a total of EUR 

0.18. 

The total remuneration per share paid in 2011 was EUR 

0.288, consisting of the first two dividends in February and 

May, charged to 2010’s profits, and the last two in August 

and November, charged to 2011’s earnings.

Distribution of the share capital by shareholder type 

Type of 

shareholder 

Shareholders Shares % of share 

capital 

Board of Directors 14 166,496 0.02 

Institutional* 186 650,451,419 94.63 

Individual 79,240 36,768,883 5.35 

Total 79,440 687,386,798 100 

* Includes the majority shareholder Banco Santander, which holds directly and 

indirectly 89.034% of the share capital. 

Datos a Diciembre 2011 

* Dentro de estos datos se encuentra incluido el accionista mayoritario Banco 

Santander, S.A. 

33 

Distribution of the share capital by number of shares 

Number of 

shares held 

Shareholders Shares % of share 

capital 

1-250 53,110 4,837,771 0.70 

251-500 11,006 3,964,730 0.58 

501-1,000 7,754 5,709,269 0.83 

1,001-5,000 6,425 13,406,986 1.95 

More than 5,000* 1,145 659,468,042 95.94 

Total 79,440 687,386,798 100

CSR 

AR 11 

Banesto’s CSR has an integral focus that emanates from its 

vision and values and rests on a strategy and policy approved 

by the board. These aspects constitute the starting point for 

combining the business objectives, needs and expectations 

of stakeholders creating constant value, balanced and in 

conditions of local and environmental sustainability. 

Responsible management comes from complying with 

legislation and the commitments acquired and centres 

on considering the customer as the focal point of activity, 

quality in management, transparency with shareholders, 

the importance of people, control of risks and extending 

responsible performance throughout the supply chain. This 

framework lays the foundation for increasing its impact on 

society and contributing to a more sustainable environment. 

Commitment to stakeholders 

For Banesto, corporate social responsibility represents 

commitment to each stakeholder in the creation of constant 

and balanced value in conditions of social and environmental 

sustainability. 

It is based on two fundamental principles: 

— Alignment with the Bank’s vision and values, generating 

internal synergies among the foundations and business 

areas in order to make social and economic objectives 

complement one another. 

— Cooperation between other companies and institutions to 

multiply the impact of the initiatives through networks with 

public and private agents. 

The hallmarks of our CSR 

The hallmark of our CSR strategy is to foster the 

entrepreneurial spirit together with innovation, dissemination 

of new technologies and protection of the environment. 

º Corporate social responsibility 

34 

Banesto’s CSR stems from 

its view and values and 

rests on a formally defined 

strategy and policy that 

guarantees responsible 

management, the impact 

on society and the 

contribution to a more 

sustainable environment. 

Banesto believes that a country’s prosperity is related to 

the entrepreneurial capacity of its inhabitants. This ideas is 

behind our firm support of SMEs and is aligned with Banesto’s 

strategy of becoming a bank for companies. 

Access to new technologies is a key aspect for the 

modernisation and competitiveness of society. This is why 

disseminating them among the collectives with the most 

problems in accessing them is a priority area of our CSR. 

Respect toward environmental sustainability in all the bank’s 

actions is another hallmark. Protecting the environment and 

fighting climate change materialise in the actions taken by 

.

Framework of CSR actions at Banesto 

Financing the environment 

IMPACT ON SOCIETY 

Strategy, policy and management Social actions Fostering the entrepreneurial spirit Innovat 

ion and new technologies Rural development 

Quality Value for shareholders 

Employees Suppliers 

VISION AND VALUES 

STRATEGY AND POLICY 

Compliance Risk 

RESPONSIBLE MANAGEMENT 

SUSTAINABLE ENVIRONMENT 

35

AR 11 

Main CSR advances in 2011 

Strategy and policy 

The strategy and policy approved by the board in 2008 was 

consolidated in 2011. 

Regarding the main CSR standards, Banesto renewed its 

commitment to adhere to the ethical principles of the UN’s 

Global Compact. 

Banesto also remained in the FTSE4Good Ibex index which 

only comprises those companies that meet the highest CSR 

standards. In this same line of commitment to the main 

international standards, the CSR report was again drawn up 

in accordance with the Global Reporting Initiative (GRI) at its 

maximum level (A+). 

Responsible management 

Banesto continued in 2011 its improvement processes in 

order to guarantee the soundness of its compliance model, 

internal control and risks, and reviewed its general policy of 

conflict of interests, execution of orders policy and incentives 

policy. 

Processes to identify customers and assign risks were 

adapted, in all business lines, as a result of publication of the 

new law on prevention of money laundering. 

In accordance with our commitment to transparency, 461 

consultations from shareholders, analysts and investors were 

tended to, 10 road shows were made, the main international 

banking and financial sectors conferences were attended 

and more than 200 meetings held with institutional investors. 

The InnoBanesto initiative was consolidated as Banesto’s 

new innovation model. This was developed around an 

internal social network, Innovationbook, as the platform for 

managing, channeling, selecting and implementing ideas 

arising from Banesto’s creativity and collective intelligence. 

Banesto also has the +500 points European stamp of 

excellence from the European Foundation for Quality 

Management (EFQM), making it one of the most advanced 

Spanish companies in this sphere. 

º Corporate social responsibility 

36 

Some 98% of employees participated in the satisfaction 

surveys. 

The year 2011 was the one of greatest push in the corporate 

volunteering programme through which employees can 

participate in various initiatives. 

Impact on society 

— The Yuzz programme was consolidated to support young 

entrepreneurs. 

— Emprendedorestv.com continued, with more than 3 

million videos already seen. 

— 52 chapters of lideratv.com, a business training TV web, 

were broadcast. 

— The Global Business Trip programme for the 

internationalization of Spanish technology SMEs was 

consolidated. 

— AgroBanesto has more than 400 branches and more than 

500 cooperation agents in towns of fewer than 10,000 

inhabitants to promote rural development.

— Promote the pro-UNICEF Banesto solidarity account, with 

more than 71,000 accounts opened and a balance at the 

end of the year of almost EUR 70 million. 

— Expansion of the Solidarity and Sustainable Tourism 

project in Africa and Latin America. 

— Donation of EUR 36,930 to Cáritas Murcia in support of the 

victims of the Lorca earthquake through the Solidarity x 2 

initiative (the bank matches the donations of employees). 

— More than EUR 152,000 was donated to support UNICEF’s 

campaign to combat the emergency famine in the Horn 

of Africa through Solidarity x 2 (the bank matches the 

donations of employees). 

Sustainable environment 

In 2011, Banesto continued to protect the environment 

and fight climate change by launching , 

which includes specific objectives and measures to reduce 

consumption and increase awareness. 

Internal consumption is the key element for attaining our 

sustainability objectives. The bank developed three lines of 

action to make energy efficiency a sustainable value: 

— Instill an environmental awareness among employees for 

lower and responsible consumption. 

— Put into effect projects that promote energy efficiency and 

sustainability from the start, by re-engineering the process 

37 

for incorporating the digital image and use of cutting-edge 

technology tools. 

— Large investments in teams and installations that enable 

an intelligent and efficient use of consumption. 

Main prizes and recognitions in 2011 

— First financial institution in Spain to obtain the AENOR 

Certificate of Quality of Service and Management of 

Customer Satisfaction (renewed in 2011). 

— EFQM Stamp of European Excellence+500 points from 

the European Foundation for Quality Management and 

“Recognised for Excellence 5 stars” (renewed in 2011). 

— Certification of Madrid Excelente Quality from the Madrid 

regional government (renewed in 2011). 

— Quality of justice prize from the CGPJ (the governing body 

of the judiciary). 

— Muycomputer prize for commitment to entrepreneurs for 

Emprendedorestv.com. 

— Prize for 100 Best Ideas in innovation from the magazine 

Actualidad Económica. 

— Yuzz.MC prize for the best CSR practice. 

— Gaudí-Gresol prize in the social action category.

AR 11 

Corporate 

governance 

Banesto’s corporate governance is based on the equality of 

rights of shareholders and on maximum transparency. 

Banesto has its own corporate governance model driven by 

the board and adapted to the main national and international 

standards, which guarantee long-term sustainable 

management. 

The main elements behind this model are full equality of 

shareholders’ right and fostering the maximum transparency, 

especially in remuneration matters. 

Following the changes in the legal information of corporate 

governance, risk control has been included among its 

principles, establishing measures to assess risk for the 

purpose of remuneration as well as for controlling risk in the 

process of issuing financial information. 

The Board of Directors 

Banesto’s board is made up of people of high professional 

capacity, integrity and independence. A large majority of its 

members are non-executive directors (12 out of a total of 14), 

seven of whom are independent. 

In January 2011, after the resignation of Mr. José María Nus 

Badía, Mr. Francisco Daurella and Mr. David Arce Torres, Mr. 

José Corral Lope, Mr. Juan Guitard Marín and Mr. Alfonso 

Líbano Daurella were appointed directors by co-option and 

ratified at the shareholders’ meeting on February 23, 2011. At 

the following board meeting, Mr. José Corral Lope was appointed 

chairman of the risk committee and a member of the executive 

committee and Mr. Juan Guitard Marín a member of the audit 

and compliance committee. 

The board met 10 times in 2011, the executive committee 49 

and the risk committee 51. 

The chairman of the appointment and remuneration committee 

and of the audit and compliance committee, in accordance with 

the recommendations in the Unified Code of Good Governance, 

are independent directors. The appointments and remuneration 

º Corporate governance / Key figures 

38 

committee held five meetings and the audit and compliance 

committee 15. 

Shareholders’ rights 

Banesto’s commitment to full equality of shareholders’ rights 

revolves around two focal points: 

— “one share, one dividend, one vote”: only one share 

has to be registered in the name of the shareholder in 

order to attend Shareholder Meetings and exercise the 

corresponding rights. 

— Informed participation of shareholders at meetings: the 

Board ensures that before the meeting shareholders 

receive all information that is legally required, as well 

as compliance with the right of information before the 

meeting as set out in articles 6 and 7 of the Board’s 

regulations. The option of remote attendance and voting 

by electronic means is facilitated, incorporating separate 

voting on the points in the agenda. A new development 

in 2011 was that the necessary changes were made 

to enable shareholders to delegate in anyone their 

right of representation which until then was limited to 

representation among shareholders. 

Transparency 

Transparent information is a key element for generating 

confidence and security in the markets. The extensive 

information via the various communication channels is 

clear evidence of our commitment to transparency. In order 

to strengthen this transparency and our best practices 

in corporate governance, and continue with the practice 

developed in 2010, the annual report on the remuneration 

policy for 2011 drawn up by the board will be submitted to a 

consultative vote at the 2012 meeting, following the proposal 

of the appointments and remuneration Committee. This 

report sets out the criteria upon which the board determines 

the remuneration of its members. 

Our corporate governance model has been recognised by 

external institutions, enabling us to renew our presence in the 

FTSE4Good Ibex index after the review carried out in March 

and September 2011.

Main 

figures 

Balance sheet 

Million euros 31/12/11 31/12/10 Change Absolute Change (%) 

Total assets 106,157.5 117,368.5 -11,211.0 -9.6 

Shareholders’ equity 5,424.2 5,466.6 -42.5 -0.8 

Total managed funds 60,180.4 69,948.7 -9,768.3 -14.0 

On-balance sheet customer funds 51,954.4 60,449.4 -8,495.1 -14.1 

Managed funds 8,226.0 9,499.3 -1,273.2 -13.4 

Lending 69,225.3 75,744.5 -6,519.2 -8.6 

Bad and doubtful loans 3,943.6 3,541.3 402.3 11.4 

Non-performing loan (NPL) ratio (%) 4.94 4.08 --- --- 

NPL coverage (%) 52.72 53.98 --- --- 

BIS ratio 10.65 11.18 --- --- 

Tier 1 (%) 10.28 9.31 --- --- 

Core capital ratio (%) 9.02 8.31 --- --- 

Income statement 

Million euros 31/12/11 31/12/10 Change Absolute Change (%) 

Net interest income 1,454.9 1,660.5 -205.6 -12.4 

Net fee income 616.0 617.5 -1.5 -0.2 

Gross income 2,234.9 2,490.0 -255.1 -10.2 

Operating costs 963.8 988.3 -24.4 -2.5 

Net operating income 1,271.1 1,501.7 -230.7 -15.4 

Cost-to-income (efficiency) ratio (%) 43.13 39.69 --- --- 

Ordinary profit before taxes 530.4 611.2 -80.8 -13.2 

Ordinary attributable profit 405.1 460.1 -54.9 -11.9 

Net attributable profit 125.1 460.1 (*) -334.9 -72.8 

ROA (%) 0.14 0.42 --- --- 

ROE (%) 2.29 8.40 --- --- 

Data per share 

31/12/11 31/12/10 Change Absolute Change (%) 

Earnings per share in the year 0.18 0.67 -0.5 -72.8 

Theoretical book value per share 7.89 7.95 -0.1 -0.7 

PER 20.46 9.26 --- --- 

Price/theoretical book value 0.47 0.78 --- --- 

Other information 

31/12/11 31/12/10 Change Absolute Change (%) 

Employees 8,613 8,855 -242 -2.7 

Branches 1,714 1,762 -48 -2,7 

(*) Including an extraordinary provision of EUR 400 million for real estate assets. 

39


1. SUMMARY OF 2011 

2. 2011 INCOME STATEMENT 

Net interest income 

Net fee income 

Gains on financial transactions and exchange rate differences 

Other operating results and net results of non-financial affiliates 

Gross income 

Gross income by business areas 


Domestic Corporate Banking 

Markets 

Operating Costs 

Net operating income 

Losses from deterioration of assets 

Impairment of other assets and other net results 

Net extraordinary capital gains, provisions and writedowns 

Profits 

3. 2011 BALANCE SHEET 

Customer loans 

Doubtful loans 

Risks with the real estate sector 

Foreclosed and acquired assets 

Customer funds 

Shareholders’ equity 

4. FINANCIAL INFORMATION OF THE MAIN ENTITIES OF THE BANESTO GROUP 

40

Net profit EUR 

125 

million 

Efficiency ratio 

43.1% 

41 

NPL ratio 

4.9% 

Core capital 

9.0%

AR 11 

SUMMARY OF 2011 

The year 2011 was a complicated one for banking business. 

The economy was weak throughout the year, and in the 

second half new uncertainties gave rise to sharp tensions and 

high volatility in the markets. Non-performing loans continued 

to rise and liquidity tensions pushed up the cost of wholesale 

funding, with a direct impact on the bank’s accounts. 

In this environment, Banesto prioritised its objectives and 

focused on improving the quality of its assets, strengthening 

equity and optimising liquidity, while still paying attention to 

profitability and enhancing its competitive position. 

In this context and in a one-off and prudent move, given the 

foreseeable evolution of the real estate market, a special bad 

loan provision of EUR 400 million was made to strengthen 

the bank’s financial position. 

Liquidity management played a major role in improving the 

commercial gap, enabling the bank to reduce wholesale 

funding by almost EUR 5,600 million. This situation enabled 

cost optimisation as against volume to be the priority in the 

debt issues made during the year (EUR 2,200 million). 

Banesto continued to improve its competitive advantage 

thanks to its cutting-edge technology and innovation capacity, 

which produced further advances in efficiency, enhancing 

the already existing procedures and products or launching 

new initiatives, such as expanding the range of foreign trade 

services. 

These achievements were attained while overseeing the 

quality of service as a driver to improve and consolidate 

the value offer for customers. Banesto continued to obtain 

certifications of quality from well known institutions, while the 

main indicators in this field put Banesto among the reference 

banks in Spain. For the fourth year running, Banesto was 

recognised by Euromoney as the best bank in Spain, and it 

was recently included by Global Finance among the world’s 

50 most solvent banks. 

º Financial information 

42 

In 2011, the bank generated extraordinary capital gains of 

EUR 194 million from the sale of branches, restructuring 

equity stakes and the sale or amortisation of financial assets, 

and EUR 237 million of extraordinary provisions were made. 

Including loan-loss provisions (EUR 661 million), total 

provisions made in 2011 amounted to EUR 1,298 million. 

Net ordinary profit before the special provision was EUR 405 

million, 11.9% less than in 2010. Attributable profit was EUR 

125 million. 

At the end of 2011, Banesto had the following noteworthy 

indicators: 

— The core capital ratio remained above the minimum 

requirement at 9.02%, 71 b.p. higher than in 2010. 

— The efficiency ratio was 43.1%, the best among Spain’s 

banks. 

— The first line net liquidity position is sufficient to meet 

maturities of medium-and long-term debt until the first half 

of 2013, after generating more than EUR 6,000 million. 

— The NPL ratio is 4.94% and coverage 52.7%, better than 

those in the sector. 

This situation is reflected by rating agencies, with AA2 from 

Standard & Poor’s and Fitch Ibca and A2 from Moody’s, 

which are among the best ratings for Spanish banks.

Banesto Group - consolidated income statement. Figures at December 2011 and compared with 2010 

Million euros Difference 

31/12/11 31/12/10 Absolute % change 

Interest and similar revenues 3,056.43 3,025.44 30.99 1.0 

Interest and similar expenses 1,601.50 1,364.94 236.55 17.3 

NET INTEREST INCOME 1,454.93 1,660.50 -205.56 -12.4 

Income from capital instruments 32.57 42.89 -10.32 -24.1 

Income from companies accounted by equity method -1.52 0.24 -1.76 -732.5 

Net fees and commissions 615.97 617.47 -1.50 -0.2 

From mutual and pension funds 77.35 92.51 -15.16 -16.4 

From services 538.61 524.95 13.66 2.6 

Gains on financial transactions 119.20 150.87 -31.67 -21.0 

Other operating results -35.20 -35.18 -0.02 0.0 

Net income from non-financial affiliates 48.94 53.22 -4.27 -8.0 

GROSS INCOME 2,234.90 2,490.01 -255.11 -10.2 

Administration costs 857.26 884.95 -27.69 -3.1 

a) personnel 600.01 633.04 -33.03 -5.2 

b) general 257.25 251.91 5.35 2.1 

Depreciation and amortization 106.56 103.32 3.24 3.1 

NET OPERATING INCOME 1,271.08 1,501.74 -230.66 -15.4 

Loan losses 660.66 399.89 260.77 65.2 

Impairment of other assets 32.43 44.20 -11.77 -26.6 

Other results and provisions -4.45 40.97 -45.42 n,s, 

Net extraordinary capital gains, provisions and writedowns -43.16 -487.45 444.29 -91.1 

ORDINARY PROFIT BEFORE TAxES 530.37 611.17 -80.79 -13.2 

Corporate tax 125.25 151.48 -26.23 -17.3 

ORDINARY CONSOLIDATED PROFIT 405.13 459.69 -54.57 -11.9 

Minority interests -0.02 -0.38 0.37 -95.8 

ORDINARY ATTRIBUTABLE PROFIT 405.14 460.07 -54.93 -11.9 

Special provision for real estate (net of taxes) -280.00 0.00 -280.00 - 

ATTRIBUTABLE PROFIT 125.14 460.07 -334.93 -72.8 

43

AR 11 

Net interest income (million euros) Ordinary attributable profit (million euros) 

2,000 

0 

Net interest income 

1,660.5 500 460.1 

1,454.9 

0 

2010 2011 2010 2011 

Net interest income was 12.4% lower than in 2010 at EUR 

1,459.4 million. This reflected the impact of lower activity and 

the increase in funding costs which, however, were largely 

offset by management of prices and of the balance sheet. 

The table sets out the structure of net interest income and of 

income from capital instruments, with the average balances, 

the revenues and costs associated with them and the interest 

rates received and paid for the respective items. 

AVERAGE RETURN ON ASSETS 

44 

400 

300 

200 

100 

405.1 

Average total assets amounted to EUR 98,271 million, 9.2% 

less than in 2010. This decline was due to the transformation 

of the balance sheet during the year, which thanks to the 

development of the bank’s business model focused on the 

most profitable assets. Customer loans accounted for 66.1% 

of loans and generated 79.2% of total revenues. On the 

liabilities side, optimisation of the liquidity sources was the 

main priority. 

The average yield on total assets in 2011 was 3.14% 

compared to 2.84% in 2010, while the average cost of funds 

rose from 1.26% to 1.63%. This left the average spread at 

1.51% (1.58% in 2010). 

Million euros 2011 2010 

ASSETS 

Average 

balance 

% av. int. 

rate 

Revenue 

Average 

balance 

% av. int. 

rate 

Revenue 

Cash and credit entities 13,824.06 2.27 313.91 21,855.10 1.90 416.32 

Customer lending 63,409.58 3.81 2,417.38 65,009.13 3.57 2,321.43 

Public sector 2,758.21 2.90 80.01 2,415.16 2.01 48.64 

Residents 59,108.69 3.89 2,298.43 60,997.63 3.68 2,246.28 

Non-residents 1,542.68 2.52 38.94 1,596.34 1.66 26.51 

Lending in foreign currency 1,595.35 2.16 34.45 1,858.82 2.08 38.69 

Securities portfolio and financial assets 12,526.20 2.36 296.03 12,612.92 2.17 273.50 

Average income-yielding assets 91,355.20 3.35 3,061.77 101,335.98 3.01 3,049.93 

Equity stakes 373.68 0.00 0.00 348.87 0.00 0.00 

Tangible assets 1,131.57 0.00 0.00 1,151.30 0.00 0.00 

Other assets 5,410.63 0.50 27.23 5,341.76 0.34 18.41 

Total average assets 98,271.08 3.14 3,089.00 108,177.90 2.84 3,068.33 

º Financial information

Average cost of funds 


LIABILITIES 


Average 

balance 

Net fee income, whose structure is shown in the table, 

amounted to EUR 616 million, almost the same as in 2010. 

Excluding revenue from management of mutual and pension 

funds, growth in net revenue from services was 2.6%. 



% 

Change. 

Fees for services 650.99 641.06 1.5% 

Services charged and paid for 284.52 285.38 -0.3% 

Risks 105.47 99.60 5.9% 

Securities services 24.24 22.58 7.4% 

Insurance 74.22 72.76 2.0% 

Other 162.54 160.74 1.1% 

Management of mutual 

and pension funds 

77.35 92.51 -16.4% 

Commissions paid -112.38 -116.10 -3.2% 

TOTAL 615.97 617.47 -0.2% 

% av. int. 

rate 

45 

Costs 

Average 

balance 

% av. int. 

rate 

Due to credit entities and other financial 

liabilities 

2,753.83 1.43 39.28 3,669.85 1.12 40.94 

Customer funds (euros) 55,155.01 1.62 892.05 61,642.81 1.43 881.48 

Public sector 4,199.88 2.05 86.09 5,274.79 1.76 92.59 

Private sector 35,760.00 1.66 592.94 37,263.05 1.58 590.42 

Non-residents 8,557.94 1.47 125.41 9,520.00 1.49 141.52 

REPOs 6,637.18 1.32 87.61 9,584.96 0.59 56.96 

Customer funds in foreign currency 2,441.38 1.46 35.72 2,545.87 1.11 28.18 

Debt securities 27,436.73 1.98 542.52 28,851.64 1.11 319.96 

Subordinated debt 2,024.71 2.30 46.66 2,568.56 1.73 44.52 

Total funds with costs 89,811.65 1.73 1,556.23 99,278.72 1.32 1,315.07 

Other funds 2,930.37 1.54 45.27 3,431.71 1.45 49.87 

Shareholders’ equity 5,529.06 0.00 0.00 5,467.47 0.00 0.00 

Total average funds 98,271.08 1.63 1,601.50 108,177.90 1.26 1,364.94 

Net fee income from services (million euros) 

600 

500 

400 

300 

200 

100 

0 

525.0 

538.6 

2010 2011 

Costs

AR 11 

Banesto’s business model focuses on growth in the 

customer base and in linkage, and this is producing a rise 

in transactions, improving our share in the Bank of Spain’s 

payments system (SNCE) by 3.7% and achieving growth in 

the use of value-added services. Fees from services grew 

1.6% to EUR 651 million. Of note were those from insurance, 

which amounted to EUR 74.2 million (+2.0%), and from 

securities and loans (+7.4% and +5.9%, respectively). 

Fees from services charged and paid for amounted to EUR 

284.5 million, almost the same as in 2010, and still the main 

component of this revenue line (43.7% of the total). 

Fees from mutual and pension funds were 16.4% lower than 

in 2010 at EUR 77.4 million, due to the fall in the average 

commission and customers’ preference for other savings 

products. 

Fees paid amounted to EUR 112.4 million, 3.2% less than 

in 2010. 

Gains on financial transaction and exchange-rate 

differences 

Gains on financial transactions dropped 21% to EUR 119.2 

million. 

Gains on financial transactions 


% 

Change. 

Trading operations and 

hedging 

-9.50 8.43 n.s. 

Distribution to customers 128.70 139.04 -7.4% 

Securitization of assets - 3.40 n.s. 

TOTAL 119.20 150.87 -21.0% 

Market tensions in the last part of the year affected trading 

gains because of reduced activity by customers and negative 

results from asset valuation. 


46 

The main component of results, however, was once again 

the distribution of treasury products to customers, which 

declined 7.4% to EUR 128.7 million. 

The gains from management of positions amounted to EUR 

9.5 million, up from EUR 8.4 million in 2010. This figure 

includes the impact of the losses in asset valuation. 

Other operating income and net income from nonfinancial 

affiliates 

Other operating income and costs covers items not related to 

ordinary activity. In 2011, the net cost was EUR 35.2 million, 

the same as in 2010. The main component, on the cost side, 

is the contribution to the Deposit Guarantee Fund and, on 

the revenue side, commissions and revenues from real estate 

investment. 

Net income from non-financial affiliates largely comes from 

property companies and those offering non-financial services, 

as well as the insurance subsidiary. 

The net figure was EUR 48.9 million, 8.0% less than in 

2010 and mainly due to the lower contribution of property 

companies. 

Gross income 

Gross income was 10.2% lower at EUR 2,234.9 million. 

Its high degree of recurrence is underscored by net interest 

income, net fees and revenue from the distribution of treasury 

products to customers accounting for more than 98% of total 

gross income. Also indicative is that 90.2% of gross income 

was generated by domestic banking (retail and corporate).

Gross income (million euros) 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

0 

2,490.0 

2010 2011 

Gross Income by Business Areas 

The following table sets out the distribution and evolution of 

gross income by business areas: 

Million euros 2011 2010 % change 

Retail 1,822.83 2,039.45 -10.6% 

Corporate 193.34 193.96 -0.3% 

Markets and international 191.00 226.09 -15.5% 

Corporate activities 27.73 30.50 -9.1% 

TOTAL 2,234.90 2,490.01 -10.2% 

Gross Income by Business Areas 

2,234.9 

Retail , 81,6% 

Corporate, 8,7% 

Markets, 8,5% 

Corporate activities, 1,2% 

Domestic Banking (retail, companies and corporate) generated 

EUR 2,016.1 million and markets 8.6% of the total. 

Gross operating income from corporate activities, which 

includes asset management, dividends received, results from 

the equity accounted method and other revenues and costs 

not assigned to business areas, was 9.1% lower at EUR 27.7 

million, largely due to the impact of interest rates and the 

lower contribution from property subsidiaries. 

47 



Net interest income 1,241.66 1,420.46 -12.6% 

Net fees 548.63 565.43 -3.0% 

Gains on financial 

transactions 

50.28 70.31 -28.5% 

Other operating income -17.74 -16.75 5.9% 

GROSS INCOME 1,822.83 2,039.45 -10.6% 

The retail banking area’s business was determined in 2011 

by reduced demand and lack of liquidity in the market. In 

this context, activity focused on customer linkage and on 

increasing transactions – in the case of individual customers 

backed by campaigns to domicile payroll cheques in accounts 

and sell products such as insurance and cards. In the case 

of companies and SMEs, by offering a wide range of services 

from traditional financing products or management of their 

payment and collection flows to more sophisticated ones 

such as foreign trade products where Banesto is a reference 

in the Spanish market. 

Net interest income declined 12.6% to EUR 1,241.7 million. 

The increase in linkage together with growth in transactions 

produced revenues from services that largely offset the lower 

contribution of commissions from funds. Net commissions 

were EUR 548.6 million and gains on financial transactions 

EUR 50.3 million, respectively 3.0% and 28.5% lower than 

in 2010. 

Gross income was 10.6% lower at EUR 1,822.8 million. 

Gross income from retail banking (Million euros) 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

0 

2,039.5 

1,822.8 

2010 2011

AR 11 

Corporate Banking 


Net interest income 117.61 126.58 -7.1% 

Net fee income 57.04 54.86 4.0% 


transactions 

20.13 13.47 49.4% 

Other operating income -1.44 -0.95 51.6% 

GROSS INCOME 193.34 193.96 -0.3% 

This area, which provides services to large corporate clients, 

adapted its range of products to cover clients’ new needs in a 

complex and changing environment in the financial markets. 

Individualised management of the return and selective growth 

in lending focused on risk operations that can be assumed 

and provide an adequate return resulted in net interest 

income of EUR 117.6 million, limiting the fall to 7.1%. 

The provision of value-added services and the response 

to complex solutions required by clients complemented 

the range of traditional transactional products. Fee income 

increased 4.0% to EUR 57.0 million and gains on financial 

transactions were EUR 20.1 million (+49.4%). 

Gross income was EUR 193.3 million, almost the same as 

in 2010. 

Gross Income of Corporate Banking (Million euros) 

300 

200 

100 

0 


194.0 193.3 

2010 2011 

48 

Markets 


Net interest income 113.53 124.81 -9.0% 

Net fees 23.05 23.62 -2.4% 


transactions 

54.07 77.01 -29.8% 

Other operating income 0.35 0.65 n.s 

GROSS OPERATING INCOME 191.00 226.09 -15.5% 

This areas focuses on meeting clients’ needs in everything to 

do with the markets. 

Banesto’s good positioning in this activity, where it is a pioneer 

and enjoys an undeniable capacity, coupled with the bank’s 

situation in capital market operations enabled us to manage 

favourably the impact of the economic environment which 

reduced demand for these products, and offset the negative 

results from the valuation of some assets. 

Gross income declined 9.1% to EUR 191.0 million. Net 

interest income was 9.0% less at EUR 113.5 million, net 

fees amounted to EUR 23.1 million and gains on financial 

transactions were EUR 54.1 million (-2.4% and -29.8%, 

respectively). 

These results were generated by more than 28,600 

operations, underscoring consolidation of these types of 

operations, while the high granularity facilitated revenue 

recurrence. 

Gross Income Markets (Million euros) 

300 

200 

100 

0 

226.1 

191.0 

2010 2011

Operating expenses 

In the current context, it is even more important to improve 

efficiency. Disciplined control of costs is a basic pillar of the 

bank’s business model. Thanks to management of costs, 

general expenses and amortizations were 2.5% lower. Strict 

selection of projects and continuous development of certain 

actions enabled us to both cut costs and maintain our 

capacity to generate profits. 

The evolution of costs, together with that of gross income, 

produced an efficiency ratio of 43.1%, the best level among 

Spanish banks. 

million euros 2011 2010 % change 

PERSONNEL 600.01 633.04 -5.2% 

Wages and salaries 441.95 471.77 -6.3% 

Social security 116.63 118.20 -1.3% 

Other 41.43 43.08 -3.8% 

GENERAL ExPENSES 257.25 251.91 2.1% 

Premises, installations and 

material 

77.09 72.87 5.8% 

IT and communications 62.52 61.57 1.5% 

Advertising 11.76 12.08 -2.6% 

Other concepts 87.34 88.65 -1.5% 

Taxes (excluding income tax) 18.54 16.74 10.8% 

Depreciation and 

amortisation 

106.56 103.32 3.1% 

Total 963.82 988.27 -2.5% 

Efficiency ratio (%) 43.13% 39.69% 

Operating costs (million euros) 

1,000 

750 

500 

250 

0 

988.3 963.8 

633.04 

251.91 

103.32 

Personal 

General 

Depreciation and amortisation 

600.01 

257.25 

106.56 

2010 2011 

49 

Personnel costs amounted to EUR 600 million, 5.2% less 

than in 2010. The average headcount dropped 2.7%, as a 

result of the early retirement of 120 employees for whom the 

corresponding provision was established for their payments 

until their date of retirement. 

General costs increased 2.1% to EUR 257.3 million. This 

small rise included the impact of the rise in VAT in the 

middle of 2010, as well as the new rentals assumed after 

the sale of branches by the bank in a lease back operation. 

Other items that increased were taxes, while the cost of 

advertising and marketing, and items that were outsourced 

was lower as they were adjusted to the business volume. 

We took advantage of the flexibility of the structure of costs. 

Depreciation and amortisation amounted to €106.6 million, 

3.1% more than in 2010. 

Net Operating Income 

Net operating income declined 15.4% to EUR 1,271.1 

million. 

Net Operating Income (million euros) 

2,000 

1,500 

1,000 

500 

0 

1,501.7 

1,271.1 

2010 2011

AR 11 

Losses from deterioration of assets 

The net impairment loss on lending amounted to EUR 

660.6 million, up from EUR 399.9 million in 2010. The 

weak economy is generating problems for companies and 

individuals in meeting their commitments, which is pushing 

up the volume of non-performing loans for all banks including 

Banesto, although our performance is better than that of our 

competitors. 

This figure is the result of lower needs for specific provisions 

(EUR 818 million in 2011 as against EUR 1,300,2 million in 

2010) and reduced use of generic provisions (EUR 118.1 

million vs. EUR 864 million), as they are now at the permitted 

minimum of 10%. The specific provisions include EUR 72.4 

million to cover risks, which although evolving normally the 

bank has classified as sub standard, due to the economic 

difficulties. 


Net loan-loss provisions 700.67 436.27 60.6% 

Generic -118.09 -864.01 n.s. 

Specific 817.95 1,300.20 -37.1% 

Country risk 0.81 0.08 n.s. 

Loan-loss recoveries -40.01 -36.38 10.0% 

Total 660.66 399.89 65.2% 

Lastly, recovery of risks previously classified as bad debts 

amounted to EUR 40 million, and EUR 0.8 million of 

provisions were made for country risk. 

Deterioration of other assets and other net results 

This line embraces a series of very different items that 

amount in net terms to EUR 36.9 million compared to EUR 

3.2 million in 2010. The main components of the net figure 

of were writedowns of own use fixed assets, provisions for real 

estate investments and other non-recurring results. 


50 

Net extraordinary capital gains, provisions and 

writedowns 

The bank generated extraordinary capital gains of EUR 194 

million, which together with another EUR 43 million were 

assigned to strengthen the financial position. Extra provisions 

of EUR 237 million were also made. 

The capital gains came from: 

EUR 116 million from the sale of equity stakes of 20% in 

mutual fund and pension management institutions and 13% 

of Santander Seguros. 

EUR 45 million from the sale of branches that were then 

leased back. 

EUR 33 million from the sale or amortisation of financial 

assets. 

Provisions of EUR 237 million, distributed as follows: 

Writedown of properties acquired and foreclosed (EUR 206 

million). 

Allocation for early retirements and other provisions (EUR 31 

million) 

Profits 

Ordinary profit before taxes was EUR 530.4 million, 13.2% 

lower than in 2010. 

After the corporate tax charge of EUR 125.2 million and 

minority interests, net ordinary profit was EUR 405.1 million, 

11.9% less than in 2010. 

Attributable profit, after discounting the special provision for 

properties of EUR 400 million, was EUR 125.1 million.

BALANCE SHEET 2011 

The evolution of the balance sheet in 2011 reflected our 

focus on strengthening the liquidity and capital positions, 

controlling risks and conserving and optimising profitability. 

The economy remained weak and activity was lower. At 

the end of 2011 total assets stood at EUR 106,157 million, 

9.6% less than in 2010. In addition, the Group managed 

off-balance sheet pension and mutual funds and insurance 

products of EUR 8,226 million. The total figure was 9.8% 

lower at €114,383 million. 

CONSOLIDATED BALANCE SHEET 

(Million euros) 

ASSETS 2011 2010 % Change 

Cash on hand and at central banks 4,633.80 1,578.85 193.5% 

Trading portfolio. derivatives and other financial assets 18,374.68 17,651.23 4.1% 

Customer lending 69,225.28 75,744.47 -8.6% 

Other loans 7,381.34 15,588.66 -52.6% 

Equity stakes 253.70 373.02 -32.0% 

Tangible assets 1,103.32 1,145.42 -3.7% 

Intangible assets 72.24 74.38 -2.9% 

Other assets 5,113.13 5,212.43 -1.9% 

Total assets 106,157.48 117,368.46 -9.6% 

(Million euros) 

LIABILITIES 2011 2010 % Change 

Trading portfolio and other financial liabilities 7,085.14 5,865.17 20.8% 

Customer deposits 51,489.56 60,449.45 -14.8% 

Marketable debt securities 24,410.77 29,725.08 -17.9% 

Subordinated debt 1,365.82 2,504.43 -45.5% 

Other financial liabilities at amortised cost 13,819.52 10,429.21 32.5% 

Other liabilities 544.50 716.42 -24.0% 

Provisions 2,034.85 2,238.83 -9.1% 

Minority interests 1.04 1.06 -1.5% 

Valuation adjustments -17.89 -27.83 n.s. 

Share capital and reserves 5,299.04 5,006.57 5.8% 

Profit for the year 125.14 460.07 -72.8% 

Total liabilities 106,157.48 117,368.46 -9.6% 

51 

Total Assets (Million euros) 

200,000 

150,000 

100,000 

50,000 

0 

117,368.5 

106,157.5 

2010 2011

AR 11 

The aforementioned principles gave rise to the following 

changes: 

• Customer lending was EUR 69,225 million, 8.6% less than 

in 2010, due to the weaker demand and the environment 

of greater credit and liquidity risks. Despite the reduction, 

the bank maintained its market share. 

• The portfolio of equity stakes amounted to EUR 253 million, 

EUR 120 million less than at the end of 2010. This fall was 

due to the valuation of companies accounted for by the 

equity method, their results, net of dividends distributed, 

and the sale at the end of the year of 13% of Santander 

Seguros. 

• The trading portfolio, derivatives and other financial assets 

amounted to EUR 18,375 million in assets and EUR 7,085 

million in liabilities. Most of these amounts correspond 

to treasury operations with customers, as well as EUR 

8,458 million of investments in very liquid and high quality 

financial assets. 

• Tangible assets dropped 3.7%, largely due to the sale of 

branches that were then leased back. 

• Customer deposits declined 14.8% to EUR 51,490 million. 

This was due to the bank’s policy of renovating only part of 

the deposits captured in the special campaign launched 

in the second quarter of 2010. Marketable debt securities 

amounted to EUR 24,411 million, 17.9% less than in 2010. 

• Liquidity management reduced wholesale funding by 

almost EUR 5,600 million. 

• Subordinated debt amounted to EUR 1,366 million, down 

from EUR 2,504 million in 2010.The Group’s comfortable 

financial position meant new issues were not needed and 

made it possible to cancel more than EUR 1,100 million. 


52 

• Valuation adjustments, which at the end of 2010 amounted 

to EUR 28 million negative, reflected in 2011 the impact of 

fixed-income markets and registered a negative adjustment 

of EUR 18 million. 

• Share capital remained unchanged at EUR 543.0 million. 

Total shareholders’ funds stood at EUR 5,424 million, 

almost the same as in 2010. 

• The level of capitalisation improved organically and was 

almost EUR 1,600 million above the minimum requirement. 

The core capital ratio was 9.0% (+0.7 p.p.). 

Customer Loans 

At the end of 2011, Grupo Banesto’s lending amounted to 

EUR 69,225 million, 8.6% less than in 2010. 


Public sector 2,603.42 2,797.50 -6.9% 

Private sector 62,095.24 68,373.76 -9.2% 

Commercial bills 3,741.55 3,925.36 -4.7% 

Secured loans 34,155.12 37,492.14 -8.9% 

Other credits and loans 24,198.57 26,956.26 -10.2% 

Non-resident sector 2,741.33 2,973.36 -7.8% 

Total 67,439.98 74,144.62 -9.0% 

Doubtful loans 3,819.13 3,463.51 10.3% 

Less: provisions for nonperforming 

loans 

-2,059.45 -1,843.18 11.7% 

Valuation adjustment 25.61 -20.48 -225.1% 

Total 69,225.28 75,744.47 -8.6% 

Lending continued to decline because of weaker demand 

and the environment of greater credit and liquidity risks. 

Demand was particularly low in the segment of individual 

customers (62% below that of 2010) and 18% less among 

companies. The percentages of loan approvals was similar 

to those in 2010: 78% in individuals (76% in 2010), 65% 

in SMEs (68%) and 96% among SMEs. Operations were 

rigorously analysed, enabling the bank to end the year with 

almost the same market share while widening the positive 

differential in risk quality.

The portfolio of commercial bills was one of the products that 

best performed. It amounted to EUR 3,742 million at the end 

of 2011, only 4.7% below 2010. 

Secured loans amounted to EUR 34,155 million, 8.9% less 

than in 2010. This was due to the recovery of real estate 

promoter loans and the collection of quotas for amortisation 

of mortgages which were not fully offset by new loans in the 

year. 

Other credits and loans, mainly to companies, SMEs, shops 

and the self-employed, as well as consumer credit, one of 

the items hardest hit by the scant demand, declined 10.2% 

to EUR 24,199 million. 

Lending to the public sector, after selecting high quality 

operations, dropped 6.9% to EUR 2,603 million, while that 

to the non-resident sector was 7.8% lower at EUR 2,741 

million. 

The structure and diversification of lending by amounts, type 

of customer and economic sector remained highly suitable, 

as shown below. 

Customer lending (million euros) 

100,000 

50,000 

0 

75,744.5 

69,225.3 

2010 2011 

53 

Customer loans: type of customer (%) 

Customer loans: amounts (%) 

Customer loans: sectors (%) 

Institutions and others, 3.9% 

Individuals, 38.5% 

Large companies, 17.3% 

Medium-sized companies, 40.3% 

Up to EUR 50,000, 9.3% 

EUR 50,000 to 150,000, 22.7% 

EUR 150.000 to 500.000, 21.1% 

EUR 500.000 to 5.000.000, 19.5% 

More than EUR 5 million, 27.4% 

Primary, 3.3% 

Secondary , 26.7% 

Tertiary, 70.0% 

As well as loans, the Group has other non-lending risks 

(guarantees, documentary credits and other sureties) which 

at the end of 2011 amounted to EUR 8,497 million, 7.0% 

less than in 2010. 

Guarantees 


Guarantees and other 

sureties 

Guarantees for 

8,040.13 8,678.40 -7.4% 

commercial paper 

and bills of exchange 

823.30 48.63 n.s. 

Other obligations 7,216.83 8,629.77 -16.4% 

Documentary credits 456.86 459.59 -0.6% 

Total 8,496.99 9,137.99 -7.0%

AR 11 

Doubtful loans 

The NPL ratio continued to rise in 2011, due to the worsening 

economic situation and the fall in lending. Banesto was also 

affected by this environment, but its performance was notably 

better than the rest of the system as growth in its NPLs was 

less than that of its competitors. Doubtful loans at the end of 

2011 were EUR 3,944 million (+EUR 402 million) and the 

NPL ratio was 4.94%. 

Million euros 

Non-performing loans: 

2011 2010 

Balance at January 1 3,541.28 2,565.96 

Entries 1,699.95 2,116.88 

Recoveries -981.52 -884.81 

Write-offs -316.13 -256.75 

Balance at December 31 3,943.58 3,541.28 

Provisions: 

Balance at January 1 1,911.70 1,626.16 

Net provisions 917.25 980.57 

Provisions released -217.39 -133.18 

Other movements -532.67 -561.86 

Balance at December 31 2,078.89 1,911.70 

Detail of provisions 

Specific 2,007.35 1,721.69 

Generic 71.54 190.01 

TOTAL 2,078.89 1,911.70 

NPL ratio (%) 4.94% 4.08% 

NPL coverage (%) 52.72% 53.98% 

Banesto’s firmly anticipative and proactive credit risk 

management during 2011 produced excellent results. New 

entries of NPLs amounted to EUR 1,700 million, 19.7% less 

than in 2010. Loan-loss recoveries were EUR 982 million, 

10.9% more than in 2010. The total amount of net NPL 

entries was EUR 718 million, down from EUR 1,232 million 

in 2010 (0.90% and 1.42%, respectively, of total risks). 

Doubtful loans that became write-offs totalled EUR 316 

million compared with EUR 252 million in 2010. 


54 

Loan-loss provisions amounted to EUR 2,079 million at the 

end of 2011, 8.8% more than in 2010 and provided coverage 

of NPLs of 52.7%. They include both generic and specific 

provisions, with EUR 358 million to cover risks, which 

although evolving completely normally the bank believed 

prudent to constitute as substandard, due to the difficult 

economic environment. Generic provisions amounted to 

EUR 72 million, above the minimum required by regulations 

(10%). 

Ratio of Non-performing Loans (%) 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0 

Coverage of Non-performing Loans (%) 

100 

50 

0 

4.1% 

2010 2011 

54.0% 

4.9% 

52.7% 

2010 2011 

Credit risk with the real estate sector 

Reducing credit risk with the real estate sector was a 

key part of the bank’s lending policy and balance sheet 

strengthening. 

This risk is mainly guaranteed, not only by the personal 

responsibility of the borrowers, but also by real estate assets 

in various phases of development. The risk declined during 

2011 to EUR 7,950 million. This figure includes both the

loans for real estate construction and promotion (EUR 6,588 

million vs. EUR 7,959 million in 2010) as well as other loans 

for the normal activity of companies. 

The following table sets out the loans for real estate 

construction and promotion on the basis of the guarantees. 

Real estate construction and promotion risk 


Without specific 

guarantee 

1,151 1,594 -27.8% 

With specific guarantee 5,437 6,365 -14.6% 

Completed buildings 3,623 3,780 -4.2% 

Buildings under 

construction 

278 480 -42.1% 

Land 1,536 2,105 -27.0% 

Total 6,588 7,959 -17.2% 

Of the total amount, EUR 1,680 million of risks are classified 

as doubtful and EUR 1,399 million as substandard, and 26% 

of them are covered by specific provisions. In accordance 

with the value of the mortgage guarantees, corrected in 

percentages set by Bank of Spain rules, the percentage 

coverage is 67% (68% for doubtful loans and 64% for 

substandard). 

Foreclosed and acquired assets 

Banesto uses all the mechanisms to achieve its objectives 

when tracking and recovering risks. In the current context of 

a continued rise in non-performing loans, anticipation plays 

a key role in recoveries, and foreclosures are an effective 

instrument that strengthens the bank’s financial position and 

improves the possibilities of total repayment. 

The Bank was awarded assets in 2011, which served to 

cancel loans whose recovery by other means was difficult. 

Also, although to a lesser extent than in previous years, and 

particularly in the case of loans to clients involved in real 

estate activities, the bank acquired assets whose prices 

enabled borrowers to cancel their loans, while also allowing 

them to reduce their future financial burden and carry on 

their businesses and future commitments with guarantees of 

success. 

As it is not the bank’s mission to hold these assets on its 

books for an indeterminate time, Banesto is developing an 

active policy to sell them. There was a notable volume of 

sales in 2011. 

55 

The amount of foreclosed properties at the end of 2011 was 

EUR 3,607 million, EUR 657 million more than in 2010 (gross 

foreclosures of EUR 1,040 million, slightly less than in 2010, 

and sales of EUR 383 million). Of the total amount of property 

assets, EUR 1,612 million were for completed buildings, EUR 

190 million for buildings under construction and EUR 1,805 

million for land in various phases of urbanisation. 

The initial accounting figure for all these assets is always 

the lower between the market value and the net value of 

provisions of the assets applied in their acquisition. Moreover, 

the bank has an active policy for provisions and makes 

additional allocations on the basis of the age of the assets and 

updating their valuations. In 2011, furthermore, due to the 

likely evolution of the real estate market, a special provision 

of EUR 400 million was made, bringing the total provisions 

for these assets to EUR 1,291 million (coverage of 35.6%, 

+11.6. p.p.). The level of coverage is above the minimum 

required and higher than the gross losses produced in the 

disposal of the properties. 

Million euros Assets Coverage 

Completed buildings 1.612 369 

Buildings under construction 125 38 

Land 1.870 484 

Special provision - 400 

Total 3.607 1.291 

Customer Funds 

Customer funds, including mutual and pension funds and 

insurance-based savings plans, amounted to EUR 60,180 

million. 

Resident private sector funds were 9.8% lower at EUR 

53,360 million. This reduction was due to the bank’s policy 

of renewing only part of the deposits captured in the special 

campaign launched in the second quarter of 2010. Excluding 

this, the fall was 2.3%. Current accounts, thanks to the 

capturing and customer linkage campaigns, declined by 

hardly 1.5% to EUR 17,280 million. Time deposits, after the 

partial renovation, were EUR 16,938 million.

AR 11 


Public sector 3,611.87 6,162.14 -41.4% 

Private sector 45,133.78 49,625.72 -9.1% 

Current and savings 

accounts 

17,280.20 17,537.35 -1.5% 

Time deposits 16,938.24 22,070.39 -23.3% 

Repos and other 

accounts 

10,915.34 10,017.97 9.0% 

Non-resident sector 3,208.74 4,661.58 -31.2% 

On-balance sheet funds 51,954.39 60,449.45 -14.1% 

Managed funds 8,226.03 9,499.25 -13.4% 

Mutual funds 4,400.43 5,711.70 -23.0% 

Insurance-savings 

policies 

2,588.20 2,450.13 5.6% 

Pension funds 1,237.41 1,337.42 -7.5% 

Total managed funds 60,180.43 69,948.70 -14.0% 

Resident private sector 

funds 

53,359.82 59,124.97 -9.8% 

The evolution of public sector funds was the result of a policy 

of optimising the spread and only accepting those deposits, 

which offered an adequate return and with the lowest volume 

of this sector’s savings in the system. At the end of 2011 

these funds amounted to EUR 3,612 million, 41.49% less 

than in 2010. Non-resident sector funds were 31.2% lower 

at EUR 3,209 million. 

80,000 

40,000 

0 


Customer funds (Million euros) 

69,949 

60,180 

2010 2011 

56 

Off-balance-sheet funds were affected by lower demand 

for these products. At the end of 2011, they amounted to 

EUR 8,226 million, 13.4% less than in 2010. Mutual funds 

managed by the Banesto Group amounted to EUR 4,400 

million. The table below itemises the type of funds. 

Mutual Funds 


Money market 80.13 524.86 -84.7% 

Fixed income 1,321.39 1,245.89 6.1% 

Mixed 897.76 1,561.98 -42.5% 

Equity 91.70 119.35 -23.2% 

International 54.78 75.83 -27.8% 

Guaranteed 1,203.69 978.75 23.0% 

Simcavs 195.31 252.15 -22.5% 

Unit linked 31.37 40.42 -22.4% 

Real estate 257.33 268.77 -4.3% 

External management 266.96 643.71 -58.5% 

Total 4,400.43 5,711.70 -23.0% 

Mutual Funds (million euros) 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

2010 2011 

Managed pension funds amounted to EUR 1,237 million, 

7.5% lower. Individual funds have the largest share, as the 

table below shows. 

Pension funds 

5,711.7 

4,400.4 


Individuals 1,154.81 1,252.48 -7.8% 

Associated 10.52 10.46 0.6% 

Employment 72.08 74.48 -3.2% 

Total 1,237.41 1,337.42 -7.5%

Pension funds (million euros) Core capital (%) 

2,000 

1,000 

0 

1,337.4 

0 

2010 2011 2010 2011 

Lastly, insurance-savings policies grew 5.6% to EUR 2,588 

million. 

The structure of customer funds is shown below. Individuals 

accounted for a notable 68.6% of the total number and 

balances under EUR 250,000 for 67.3% of total balances, 

underscoring the degree of diversification. 

Customer funds: type of customer (%) 

Customer funds: amounts (%) 

Shareholders’ Equity 

1,237.4 

Institutions and others, 8.9% 

Individuals, 63.6% 

Large companies, 7.4% 

SMEs, 20.1% 

Up to EUR 5,000 

EUR 5,000 to 25,000, 19.3% 

EUR 25,000 to 50,000, 13.8% 

EUR 50,000 to 150,000, 20.9% 

EUR 150,000 to 250,000, 6.0% 

More than EUR 250,000, 35.7% 

One of Grupo Banesto’s priorities in 2011 was to keep on 

strengthening its financial position, achieved, furthermore, 

organically. At the end of 2011, after notable progress, the core 

capital ratio was 9.02%, well above the minimum requirements 

and 71 b.p. higher than in 2010. This improvement was the 

57 

10 

5 

8.3 

+71 pb 

result of generation of profits, as well as active management 

of the balance sheet which reduced risk weighted assets by 

7.6%. The BIS ratio at the end of 2011 was 10.65% and Tier 1 

10.28%. Grupo Banesto thus has a level of capitalisation and 

financial strength enabling it to conduct its business in coming 

years from a solid financial position. 

Capital base 


Core capital 5,429.16 5,397.79 0.6% 

Tier 1 6,187.48 6,041.21 2.4% 

Tier 2 226.52 1,218.41 -81.4% 

Total 6,414.00 7,259.62 -11.6% 

Core capital, thanks to the dividend policy, continued to 

improve in 2011 and reached EUR 5,429 million, 0.6% more 

than in 2010. 

Reserves were also strengthened by the increase from 

including income generated in the prior year, net of the 

dividends paid to shareholders. 

Tier 1 equity stood at EUR 6,188 million at the end of 2011 

(+2.4%) and Tier II at EUR 227 million. No new issues of 

subordinated debt were needed in 2011, thanks to the 

comfortable capital situation. Indeed, this debt declined by 

EUR 1,138 million because of amortisations. 

Banco Santander is Banesto’s majority shareholder with a 

direct and indirect stake of 89.034%. The section on “The 

Banesto share” gives detailed information on shareholders. 

9.0

AR 11 

Moody’s, Standard & Poor’s and Fitch Ibca continued to 

issue short-and long-term debt ratings for Banesto, as shown 

below. These ratings are among the highest received by 

Spanish banks. In the case of Standard & Poor’s and Fitch 

Ibca, it is the highest received, and in the case of Moody’s 

only two other Spanish banks are one notch higher. 

Ratings by agencies Long term Short term 

Standard & Poors AA- A-1+ 

Fitch Ibca AA- F1+ 

Moody’s A2 P-1 


58 

Liquidity 

Another priority in 2011 was to strengthen liquidity. This gave 

rise to strong internal generation of liquidity and less reliance 

on the markets. 

The improvement in the commercial gap reduced wholesale 

funding by almost EUR 5,600 million (from EUR 30,054 

million in 2010 to EUR 24,499 million in 2011). Of this 

amount, EUR 2,840 million was short term, mainly euro 

commercial paper. 

In addition, net recourse to the European Central Bank 

declined by EUR 800 million to EUR 700 million at the end of 

the year, and there is still available collateral of around EUR 

5,900 million.

Despite the very complicated environment in the debt 

issuance markets, the bank issued EUR 2,200 million 

through a jumbo issue of mortgage bonds (EUR 600 million) 

in March and private placements, where the financial cost 

was optimised over the volume. 

Liquid assets at the end of 2011 amounted to EUR 12,200 

million and enable the EUR 4,700 million of maturities 

of wholesale funding to be comfortably met in 2012, even 

without new debt issues. Also noteworthy is that 75% of the 

maturities in 2010 are mortgage bonds with AAA rating which 

can be automatically discounted by the ECB. 

Improving the commercial gap will continue to be a strategic 

management line, enabling dependence on markets to be 

cut. 

59 

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 and Banesto Renting in 2011.

AR 11 

Banesto Banco de Emisiones is the Group’s financial vehicle, 

capturing funds through issues of commercial paper, longterm 

debt and subordinated financing. These funds are 

loaned to Banesto which uses them to finance the group’s 

ordinary activity. 

Banesto Renting is a wholly owned subsidiary of Banesto, 

which designs, produces and conducts renting operations, 

either directly or through the group’s distribution channels. 

Thanks to the group’s technological strength and permanent 

innovation, this company offers a wide range of products. 

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 


60 

clients. Although activity in the equity markets in 2011 

was affected by the economic environment, Banesto Bolsa 

continued to be successful, channelling customer activity via 

the branch network and actively participating in corporate 

operations. 

Mutual and pension funds are handled by Santander 

Gestión de Activos and Santander Pensiones, part of Grupo 

Santander, in each of which Banesto has 20% stakes and 

which were sold to Banco Santander in December in order to 

optimise the structure of Banesto’s equity stakes. 

Insurance products distributed by our network are covered 

by Santander Seguros, 26% owned by Banesto. 

The main figures of the group’s companies are set out below.

FINANCIAL GROUP INFORMATION 

Million euros Banesto Banesto B. Emisiones 

2011 2010 2011 2010 


Net interest income and dividends 1,545.2 1,688.0 1.1 1.1 

Net fees and insurance activity 591.7 589.0 - - 

Gains on financial transactions 133.6 137.7 - - 

Other operating results -49.9 -43.7 - - 

Gross income 2,220.5 2,371.0 1.1 1.1 

Operating expenses 937.4 969.0 0.1 

Net operating income 1,283.1 1,402.0 1.1 1.0 

Loan losses 680.0 404.6 - - 

Other results -471.0 -456.8 - - 

Profit before taxes 132.1 540.6 1.1 1.0 

Balance Sheet 

Customer loans 72,439.4 78,388.8 - - 

Lending portfolio to maturity 3,402.8 3,431.2 - - 

Other financial assets 25,879.4 23,683.5 - - 

Due from credit entities 6,792.4 15,076.4 4,026.1 5,364.4 

Other assets 2,232.6 2,271.3 87.6 35.9 

Total assets/liabilities 110,746.6 122,851.2 4,113.7 5,400.3 

Customer funds 62,143.8 72,385.9 - - 

Marketable debt securities 17,073.4 18,886.8 3,911.4 4,744.7 

Subordinated financing 1,434.9 2,541.3 11.3 517.1 

Due to credit entities 12,749.7 12,328.2 - - 

Other liabilities 12,335.4 11,681.6 87.6 35.9 

Capital, reserves and earnings 5,009.5 5,027.4 103.4 102.7 

Million euros Banesto Bolsa Banesto Renting 

2011 2011 2011 2010 


Net interest income and dividends 1.1 0.5 7.3 9.5 

Net fees and insurance activity 8.1 7.3 -0.1 0.4 

Gains on financial transactions -1.7 -1.0 1.0 0.0 

Other operating results - - - - 

Gross income 7.5 6.8 8.2 9.9 

Operating expenses 6.7 6.2 2.3 2.9 

Net operating income 0.8 0.7 5.8 7.0 

Loan losses -1.0 8.3 

Other results - - -3.1 0.6 

Profit before taxes 0.8 0.7 3.7 -0.6 

Balance Sheet 

Customer loans - - 209.3 266.6 

Lending portfolio to maturity - - - - 

Other financial assets - - 1.9 0.3 

Due from credit entities 126.7 126.2 - - 

Other assets 0.3 0.1 34.0 17.5 

Total assets/liabilities 127.0 126.3 245.3 284.4 

Customer funds - - - - 

Marketable debt securities - - - - 

Subordinated financing - - - - 

Due to credit entities 12.8 12.9 226.5 269.7 

Other liabilities 2.2 1.5 5.9 6.9 

Capital, reserves and earnings 112.0 112.0 12.9 7.8 

61

AR 11 

Risk 

management 

Risk management in 2011 involved implementing policies and 

procedures, based on criteria of prudence and responsibility. 

Advanced methodologies to manage and measure risk were 

combined with an efficient operational structure to control 

and anticipate risk, in order to maintain a high standard of 

credit quality and optimise the creation of shareholder value. 

The quality of the risk is a priority objective, and is present in 

all our activities, and in all of our employees. The risk culture, 

deeply rooted throughout the bank, is one of our hallmarks, 

and makes every executive a risk manager. 

The lending and risk area has the necessary people, 

technologies and control systems to guarantee risk quality, 

with clearly defined roles and methodologies integrated into 

efficient decision-making structures. 

Our solid admission, tracking and recovery processes make 

Banesto one of the banks with the lowest ratio of nonperforming 

loans. 

º Risk management 

62 

Risk management at Banesto is conceived as an integral task 

which begins with senior management and covers all the 

bank’s structures. It is governed by the following principles: 

Main risk management principles 

1) Fulfilling the prevailing regulations and best risk 

management practices 

2) Involvement of senior management 

3) Independence of the risk area 

4) Integral management, with, as well as customer service 

and risk quality, the following key elements: balance sheet 

composition, management of capital and liquidity and 

profitability 

5) Flexible management model adapted to the market, both 

in policies and structures 

6) Use of advanced techniques of analysis, assessment and 

quantification of risk 

7) Quality internal and external service 

8) Customer banking focused on stable relations 

9) Prudence in allowing operations 

10) Anticipation through tracking 

Corporate Governance of the Risks Function 

The Risk Committee, regulated by article 15 of the Board’s 

Regulations, proposes to the Board the risk policies. The 

Executive Committee decides on the operations of the

largest amount and complexity and delegates the rest of its 

powers lower down the hierarchy according to the General 

Map of Risk Attributions. 

As well as proposing to the Board the risk strategy and 

policies, the Risk Committee is responsible for monitoring 

all risks that Banesto occurs, verifying and authorising the 

systems, processes and criteria for efficiently developing the 

risk function. 

The senior management of Lending and Risk is responsible 

for proposing, managing, transmitting and implementing the 

risk policies and ensuring they are fulfilled, and for all the 

bank’s credit and market tasks. 

Risk is organised as follows: the senior management of 

Lending and Risks manages and directly controls credit and 

market risks, the Financial Area manages the structural risk 

of the balance sheet and the Resources Area operational risk. 

The Compliance Area regulates and supervises Banesto’s 

reputational risk. 

The Global Risk Unit centralises, analyses and gathers 

information on all risks and draws up the command panels 

for the bank’s senior management. 

Credit risk 

Credit risk is the possibility of default by a counterparty which 

produce losses for the bank. 

The risk cycle has three phases: admission, monitoring and 

management of recoveries. 

In admission, risk management is organised on the basis 

of monitoring the client. This enables specific policies and 

criteria to be applied to each type of customer, homogenise 

analysis and have admission structures with a high degree of 

specialisation. 

Risk admission 

Retail risk 

The economic situation in 2011 underscored the particular 

importance of applying prudent policies and criteria adapted 

to the current cycle. Rigorous selection of customers and 

differentiated policies for each business segment was the 

reference for managing retail risk. 

63 

The unit of retail risks, responsible for admitting and managing 

these risks, has an admission model that combines automatic 

decision-making systems, which incorporate efficient models 

of behaviour and automatic calculation of the expected 

loss by the customer, with specialised risk analysis teams 

by collectives for standardising decisions. Both systems 

complement one another and guarantee a continued high 

standard of credit quality. 

The analysis systems, integrated in our IT platform, are 

adapted to each type of retail customer (individuals, SMEs, 

businesses, commerce, the self-employed, agricultural and 

fisheries sector) and constitute the method for taking risk 

decisions, either automatically or manually. 

The Risk Analysis Centre is responsible for admitting 

operations, which have not been decided on automatically. 

The experience and specialisation of its analysts ensure the 

operations comply with the quality standards required by the 

bank and provide our branches with the necessary advice for 

correctly analysing customers’ risk operations. 

Company risk 

Risk quality is a 

priority objective 

for Banesto, and is 

inherent in all the 

bank’s activities and 

in all employees. 

This area admits risk under the bank’s policy of strict criteria 

of prudence and in line with the requirements of the difficult 

economic environment. This is enabling us to meet our 

main objective which is to maintain the highest standards of 

credit quality and always better than the average ones of our 

competitors.

AR 11 

Specialisation is the main element of the risk admission 

organisation and function, in accordance with the following 

framework: 

• All customers have a manager who administers everything 

including their credit needs. Each manager is assisted by 

sectoral and general analysts. 

• Sectoral risks: specialised teams who analyse a specific 

portfolio of clients belonging to certain sectors, which 

enhances the perspective and facilitates and enriches 

analysis. The composition of each portfolio reflects the 

customer’s sector of activity and its size, regardless of the 

management segment in which it is located. 

• Traditional circuit: the rest of customers are segmented on 

the basis of geographic criteria by analysts of the territorial 

areas in which the network of companies is divided. 

Operations can be resolved by the areas on the basis of 

delegating risk attributions. Above these attributions, 

operations are sent to the central services and channelled 

via the company risk unit, which manages their resolution 

in the various risk committees on the basis of the size of 

each operation. 

• Capital markets: team specialised in certain types of 

operations, which have greater value-added because 

of their purpose, structure, complexity, etc, as they seek 

to satisfy the increasingly sophisticated needs of our 

customers. Specialisation is by product, regardless of the 

management segment in which the customer is located. 


64 

• Restructurings: this team tends to the very specific needs 

of customers, such as those that are in a delicate situation 

and require a complete finance restructuring. 

• International risk: the bank has a team specialised in 

analysis of international risks and profound knowledge 

of the various products we offer customers to resolve 

their foreign trade needs. Each type of risk is analysed 

by a specific methodology: country risk, risk of financial 

institutions and risk of companies. 

The methodologies and tools used are also adjusted to the 

type of customer, both regarding analysis and assessment 

as well as management and monitoring. This provides 

homogeneous treatment for all customers. 

Wholesale risks 

The corporate banking area conducts an integral 

management of customers on the basis of each one’s 

features. Sectoral risk customers are managed by a team 

of specialised managers and analysts who know, compare 

and assess a sector’s customers. Multisectoral customers are 

dealt with by teams from the Madrid and Barcelona offices. 

There is also a specialised team in project finance with 

specific methodologies which, given the economic situation 

of the past few years, has been strengthened with a risk 

restructuring team to tend more closely to customers in a 

very delicate situation. 

Monitoring risks 

The monitoring unit strives to know at all times the degree 

of certainty that our loans will be repaid on time, thereby 

anticipating any event that harms the customer and affects our 

credit risks. 

Monitoring includes all customers with credit risks. All risks are 

tracked.

In 2011, we increased 

the number of managers 

working in loan recovery 

activity in order to 

enhance and optimise 

portfolio management. 

The branches and managers of customers are the primary 

figures responsible for all risks and for monitoring them. They 

are backed up by zone risk managers and they, in turn, are 

supported by monitoring coordinators, both of which conduct 

a secondary management and ensure that monitoring is 

carried out in the branches under their responsibility. 

In order to ensure the monitoring tasks are carried out, 

committees have been set up in branches, zones and 

territories. Customers to be reviewed in these committees 

are automatically assigned by the anticipation systems and 

applications and manually when the reviews are of a specific 

nature. 

The monitoring unit has a special watch unit whose specific 

objective is to avoid loans in an irregular situation being 

classified as doubtful. It identifies, analyses and manages 

the risk, contributing solutions to achieve cancellation of 

regularisation. 

The unit is supported by a network of managers of special 

operations, specialised on the basis of the segment they 

manage. 

Recovery and management of foreclosures 

Recovery activity is aimed at payment and regularisation 

of doubtful loans and bad debts as well as marketing and 

the sale of assets foreclosed in lieu of payment of debts. All 

the bank’s units work to improve recovery activity in their 

particular spheres, as well as market and sell foreclosed 

assets. 

In 2011, the number of managers assigned to recovery 

activity was increased in order to enhance and optimise 

portfolios under management, supported by leading-edge IT 

tools, both for judicial and extra judicial management. 

65 

The specialisation of managers covering customer 

segments and sectors was increased. There are managers 

specialised in companies whose management requires a 

high technical content, and differentiated recovery strategies 

were implemented in the sphere of SMEs. Meanwhile, a 

management model continued to be developed for mortgages 

via Sociedad Aktua Soluciones Financieras, S.A., set up in 

2009, which manages the mortgages of individual customers, 

as well as the marketing and sale of foreclosed assets. 

In consumer loans, the contracts below a certain amount 

are handled with the support of a large network of recovery 

companies and managers (outside Banesto), which are 

measured every month by efficiency ratios and encouraged to 

achieve success. Contracts of a larger amount are managed 

internally via a model characterised by specialisation and 

direct management. These structures support the relevant 

recovery levels of non-performing loans to which Banesto 

has always given attention different to that of the rest of the 

sector, underscoring their recovery capacity and contribution 

to the income statement. 

Judicial management is monitored via a centre, where all the 

cases related to recovery are prepared via a fully consolidated 

management model, articulated by the Astrea IT tool, which 

is in the vanguard of the sector. The new version of the 

recovery management system also continued to be improved 

and produced greater efficiency. 

Market Risk 

Structural Risk of the Balance Sheet 

The structural risk of the balance sheet is inherent in banking 

activity and consists of interest rate and liquidity risks. 

Interest rate risk emanates from the existence in the bank’s 

balance sheet of assets and liabilities sensitive to interest 

rate movements which have different maturity and repricing 

structures. Interest rate movements can have a negative 

impact on the financial margin and on the economic value of 

the bank’s capital. As a result, active management is required 

to offset this impact.

AR 11 

Policy and Management Strategy 

The bank’s main objective is to provide stability and recurrence 

to net interest income in the face of interest rate changes, 

while preserving at the same time the bank’s economic value 

and maintaining adequate liquidity and solvency levels. In 

order to control the exposure to interest rates, the Assets and 

Liabilities Committee approves the lending strategies and the 

policies of management, hedging, measurement and control 

of risks coherent with the scenario of interest rates at each 

moment and tending to protect the financial margin and 

economic value. This committee manages on a global basis 

the interest rate risk of the bank’s balance sheet, excluding 

the positions of the Markets area. 

The aim of interest rate risk management is to neutralise 

the negative impact of the evolution of interest rates and 

of the balance sheet structure on the financial margin and 

the economic value. Banesto does this through hedging 

operations, which can be either fixed-income instruments 

as well as interest rate derivatives (swaps, collars and 

swaptions). Which instrument is chosen depends on factors 

such as cost, the efficiency of the instrument and the impact 

on the bank’s liquidity and capital. 

Management Methodology 

In order to measure the structural risk of the balance sheet, 

Banesto uses the information provided by its accounting 

systems. This information groups all the necessary relevant 

features for risk analysis (dates, coupons, etc), and is squared 

with the bank’s accounting. In addition, we continued to invest 

in applications and systems which enable us to develop models 

that provide a considerable capacity for risk analysis and for 

anticipating future additional information requirements. 

The main measures for managing and controlling interest rate 

risk are: 

a) Interest rate gap 

The structure of maturities and repricing of on-and off-balance 

sheet items shows the bank’s exposure to interest rate risk. 

After separating the items sensitive to interest rates from 

those that are not, the on- and off-balance sheet balances 

and positions are distributed by time frames on the basis 

of their nature. These items (sensitive or not) that have no 

contractual maturity date are distributed in accordance with 

certain hypotheses derived from their historic performance. 


66 

b) Sensitivity of the net interest margin and of economic value 

The bank analyses and manages interest rate risk on the 

basis of a variety of representative scenarios and time frames 

in accordance with its risk profile, simulating shifts in the 

yield curve and changes in the slope of the curve. Along with 

changes in interest rates, other relevant factors such as the 

risk of reinvestment or new contractings are modelised. 

The sensitivity of the net interest margin is measured through 

simulation dynamics. This is the difference between the 

projected net interest margin with market rate curves at each 

date of analysis and that forecast according to the various 

scenarios previously described. The sensitivity of the bank’s 

economic value is calculated as the difference between the 

net value of the items sensitive to interest rates calculated by 

the curve of market rates at the date and the curve modified 

by various hypotheses. In the sensitivity analysis, Banesto 

mainly centres on the first year. As one would expect, 

Banesto’s exposure to interest rate risk is moderate in terms 

of negative sensitivity at one year of the financial margin with 

-6.30% (EUR 78 million) and particularly flat in the case of 

the economic value of capital with -5.10% with parallel shifts 

of the curve of 100 b.p. 

Sensitivity of the Net Interest Margin at one year (%) 

8.10 

6.10 

4.10 

2.10 

0.10 

-1.90 

-3.90 

-5.90 

-7.90 

-9.90 

8.10 

6.10 

4.10 

2.10 

0.10 

-1.90 

-3.90 

-5.90 

5.53% 

Sensitivity of Economic Value (%) 

-5.10% 

-6.30% 

4.60% 

+100 b.p. 

-100 b.p. 

Down 100 

Up 100

Liquidity Risk 

The Financial Management unit is responsible for liquidity 

risk management. Senior management is very involved in this 

via the Assets and Liabilities Committee, the Risk Committee, 

the Executive Committee and the Board. 

The aims of liquidity risk management are: 

• To comply with the applicable regulations and adopt the 

necessary measures to guarantee compliance with the new 

regulatory framework, currently being prepared, when it 

comes into force, without producing points of discontinuity 

in the management of business. 

• Maintain surplus liquid funds that enable the bank to have 

high levels of flexibility in order to be able to adapt to the 

changing conditions of the environment. 

• Reduce the liquidity risk in the short term, through active 

management of the structure of the maturity of assets and 

liabilities. 

• Diversification and promotion of sources of liquidity in the 

medium- and long-term. 

Maturity profile of medium- and long-term wholesale financing (Million euros) 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

0 

5,169 5,035 

4,703 

67 

In 2011, the bank generated more than EUR 6,000 million of 

liquidity, as a result of the varying evolution of the balances of 

the lending portfolio and of customer deposits. This secured 

even more the solid structure of the balance sheet, reducing 

dependence on wholesale funding markets. Of note was that 

all lending was financed by customer deposits and long-term 

financing. 

As regards financing from the wholesale markets, the bank’s 

structure is based on medium- and long-term uses, which 

together account for 85% of total financing. 

This medium- and long-term financing is well diversified by 

instruments, markets, investors and maturities. 

In 2011, the bank captured EUR 2,190 million in medium- 

and long-term issues in the wholesale markets of senior debt 

and mortgage bonds compared with EUR 3,050 million of 

maturities of the same type. The reduction of the commercial 

gap enabled the bank’s issuance activity to be done more 

selectively, giving priority to the distribution of maturities and 

the cost over the amount issued. This issuance capacity is 

supported by the bank’s credit quality and its flexibility in 

adapting to the needs of different types of investors. 

4,126 

3,460 

1,204 

1,198 

2012 2013 2014 2015 2016 2017 ≥2018

AR 11 

As a result, short-term wholesale funding accounts for a very 

small part of the bank’s financing structure (less than 1% of 

total liabilities) and is fully covered by liquid assets. 

Lastly, Banesto still has a significant capacity of recourse to 

the European Central Bank. At the end of 2011, total assets 

eligible to be discounted at the ECB amounted to around 

EUR 6,600 million. At this date, net funds from the ECB’s 

financing facility amounted to EUR 700 million. 

Risks of Treasury activities 

The measurement of Treasury activities is mainly concentrated 

in credit and market. Banesto has a Unit of Risks of Market 

Activities (URMA) to monitor and measure these risks. This unit 

has three areas for analysing these risks: market, credit and one 

for market valuation and prices which assesses positions. This 

structure draws together measurement of all Treasury risks with 

an integrated focus and systems. A very detailed monitoring of 

the risks in Treasury activities was required in 2011, because of 

the very volatile financial markets. 

1. Credit risk in Treasury activity 

Credit risk in Treasury activities is measured as the positive 

value that any financial instrument could potentially acquire 

in the future if the counterparty failed to meet its contractual 

obligations. This failure would generate capital losses for 

Banesto as the cost of replacement of an instrument with a 

positive value would represent a loss. 

2. Evolution of the credit risk of Treasury 

The sale of Treasury products to customers was less than 

in previous years, although the number of operations 

outstanding related to derivatives was very high. The credit 

risk of Treasury products is managed and controlled by the 

URMA. Estimates are made of the potential values of each 

financial instrument during its life with a confidence level of 

97.725%. This means that in the event of a customer’s bad 

debt, Banesto’s loss would be less than the estimated loss in 

97.725% of cases. 


68 

The URMA calculates and controls the exposure to risk to 

each client with different time frames. This analysis facilitates 

greater control and more dynamic and efficient management 

of the limits established by the admission units. Every day, 

the admission units and wholesale banking are informed of 

each client’s credit risk positions, with a full breakdown of 

the structure. Every week detailed information of Banesto’s 

exposure is presented to senior management via the Risk 

Committee and the Executive Committee, aggregating the 

information by segment, product, rating, maturities and risk 

factors. During 2011, the URMA continued to enhance the 

methodology used to calculate the exposure to risk. 

At the end of 2011, the risk exposure was EUR 10,437 

million, with wholesale banking (Banking, Corporations 

and Institutions) accounting for the largest share (94.76%) 

compared to 4,81% for company banking, 0.02% for real 

estate and 0.41% for retail banking. 

Exposure of Treasury activities by segment (%) 

Wholesale Banking 94.76% 

Company banking 4.81% 

Retail Banking 0.41% 

Real estate 0.02% 

Consumption was concentrated in 2011 in short maturities 

(up to nine months). The levels of use of the limits assigned 

remained low as can be seen in the graph below.

Map of credit exposure (total in billion euros and euros for the rest) 

Billion euros 

14 

12 

10 

8 

6 

4 

2 

0 

VaR distribution in 2011 

Number of days (%) 

Today 1 week 3 M 9 M 6 Y 8 Y 

6.61% 

25.68% 

The conditions in the markets made it necessary to closely 

track limits; they were revised very dynamically for those 

counterparties where the perceived credit quality could 

have suffered significant deterioration. As a result, Banesto 

remained alert to changing market situations and monitored 

in a very detailed way the lines approved to counterparties 

for operations of market financial instruments, with particular 

emphasis on derivative products. 

3. Market Risk of Treasury Activity 

28.79% 

10.51% 

The market risks that affect treasury activity (interest rates, 

exchange rates, equities, spreads on loans, implicit volatilities, 

correlations, etc) are managed and controlled by using the 

standard methodology of Value at Risk (VaR) through historic 

6.61% 5.84% 

69 

Exposure 

Limit 

2.21 3.30 4.38 5.46 6.55 7.63 8.71 9.80 10.88 11.97 13.05 

VaR (million euros) 

9.73% 

3.11% 

1.17% 1.17% 0.78% 

and more 

simulation. The VaR provides a homogeneous risk figure 

which represents the maximum expected loss in the face of 

adverse movements in the market, with a confidence level of 

99% assumed. The VaR at Banesto is calculated and reported 

to senior management every day, and is controlled through a 

system of limits that affect the total position as well as each 

one of the portfolios. Senior management is continuously 

informed and involved in market risk management via 

committee meetings every two weeks under the framework of 

the Risks Committee, as well as via the Assets and Liabilities 

Committee. 

The average daily VaR was around EUR 6 million. The main 

risk is in the volatile equities portfolio.

AR 11 

Measurement of market risk via VaR is complemented by 

analysis of tension scenarios in which the impact on the value 

of portfolios in certain extreme circumstances is simulated, 

replicating historic crisis and generating scenarios of extreme 

movements not experienced by the market in the past. 

Historic and hypothetical scenarios are assessed with various 

degrees of severity and probability, and the conclusions 

reached are discussed regularly with senior management via 

the aforementioned reporting cycles. Banesto also regularly 

estimates the average of extreme losses which could occur 

in the event of exceeding the VaR level, through “conditional 

VaR”, which is also reported every day to senior management 

and analysed in depth by the committees. The conditional 

VaR in 2011 was around EUR 8 million. 

The Bank of Spain authorised Banesto’s model for market 

risk measurement in February 2011 so that it can be used 

internally for determining the minimum capital for this 

concept. Banesto monitors and fine-tunes the quality of the 

model with a backtesting programme which systematically 

compares the model’s predictions with the actual results 

of treasury activities. The results of the tests have been 

verified by the Group’s auditing departments and meet the 

requirements recommended by international regulators. The 

result of these tests shows that on only two days in 2011 was 

the value foreseen for the VaR exceeded and it did not affect 

the consumption of equity. 


VaR evolution in 2011 

15,000,000 

10,000,000 

5,000,000 

0 

-5,000,000 

-10,000,000 

-15,000,000 

-20,000,000 

70 

Operational Risk 

Banesto’s operational risk management model was defined 

in accordance with the requirements of the Basel II accord, 

the EU directive on capital requirements for credit institutions 

and Bank of Spain Circular 3/2008 on solvency. 

The main objectives are: 

• Identify and eliminate the focuses of operational risk, before 

they cause losses. 

• Reduce operational risk losses, establishing mitigation plans 

on the basis of the type of risk and the business affected. 

Banesto is solidly positioned in applying the standard 

method within the regulatory framework, with wide coverage 

of requirements, both qualitative and quantitative, which, 

in turn, constitute a large part of the requirements set for 

applying advanced models to calculate capital by operational 

risk. 

In 2011, we focused on activities to mitigate operational risk, 

defining a methodology for monitoring and disseminating its 

importance. Mitigation marks the difference in operational 

risk management as it enables losses to be reduced and 

facilitates the creation of a culture for managing this risk, 

involving all areas of the bank. 

Total EaR 

Result 

Total VaR 

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Operational risk management in retail, company and 

corporate banking achieved notable results thanks to the 

NORMA project, which revolves around various items of the 

operational risk of the commercial network: cash management, 

documentary quality, security, operational control and 

prevention of money laundering, and other operational risks. 

In order to strengthen the model, specific campaigns were 

introduced that put the focus on shortcomings or specific 

risks to be resolved in the short term. 

NORMA has incorporated operational risk into Banesto’s 

management framework, from the branch and zone level to 

territorial and central committees of operational risk. They 

receive information every two weeks on their management 

focuses. The incorporation of the NORMA indicator to 

the branch network’s model of incentives is an important 

milestone in consolidating global management of operational 

risk. 

In 2011, we increased the coverage of self-assessment risk 

questionnaires, enabling us to deepen knowledge of the map 

of operational risks. Other risk identification mechanisms 

that continue to be used are tracking of operational and 

technological event, contrasting documentary quality, 

participating in the committees of other areas, analysing 

customer complaints and other issues that might cause risks 

and/or losses. 

The operational risk management model includes 

management of technology risk, through questionnaires 

and specific indicators, as well as controlling the IT security 

and participation of the operational risk unit in regular 

contingency tests. 

Our database of losses already covers eight years, and its 

level of automation and detail in capturing information 

enables all Banesto’s centres, and in particular all branches, 

to know immediately the operational risk events that have 

occurred. This data base also allows us to draw up reports 

that compare Banesto with other banks and, specifically, with 

Spanish institutions in the Operational Riskdata Exchange 

Association (ORX). The main objective of this association 

is to exchange operational risk losses data anonymously, 

which is used in each bank to modelise this risk and validate 

internal capturing of events. ORX has more than 50 members 

internationally (Banesto since 2005), and it is a leading forum 

in research and development of standards within operational 

risk management. 

71 

During 2011, active management of events and the 

implementation of corrective measures enabled us to reduce 

losses in types of risk such as internal fraud, errors in the 

execution of processes and events and failures in the system. 

Distribution of losses by business lines 

Cumulative 2011 figures 

Retail Banking 66.1% 

Central services 29.4% 

Company Banking 2.4% 

Execution, delivery and 

management of processes 

25.4% 

Practices with customers, 

products and businesses 

28.8% 

External fraud 28.2% 

Wholesale Banking 0.7% 

Channels and 

back office 1.4% 

Distribution of losses by types of risk 

Cumulative 2011 figures 

Damages in material 

assets 11.8% 

Internal fraud 2.7% 

Events and failures in 

systems 1.1% 

Labour relations 1.9% 

Banesto’s Operational and Technological Risk unit is also 

responsible for the function of Business Continuity, whose 

purpose is to ensure the bank’s critical processes continue 

in the event of something serious happening. We have a 

Continuity Management Committee, which meets regularly 

and defines the general strategies and the response 

mechanisms on the basis of the risks detected. In 2011, the 

emphasis was on disseminating the knowledge plan through 

wide training sessions and conducting various tests and 

simulations on elements of the continuity plan.

AR 11 

Banesto is an active member of the Spanish Consortium 

of Operational Risk (CERO Group) and of the Spanish 

Consortium of Business Continuity (CECON). 

Global Risk Management 

Risk quantification 

Measuring and quantifying risk as the basic element for risk 

management 

In order to efficiently manage global risk, it is necessary to 

develop methodologies and models that enable concepts 

such as expected and unexpected loss to be quantified and, 

as a result, capital to be calculated (regulatory as well as 

economic). 

It is also necessary to have tools which enable adequate 

protection measures against risks to be established, as well 

as systems to identify business growth areas which always 

take into account the bank’s risk appetite. 

For many years Banesto has used quantitative models that 

estimate the necessary components for calculating expected 

loss and capital. 

For more than a decade, the bank has internal models to 

assess each customer and operation, both in admission and 

monitoring. 

These ratings or scorings enable us to measure the credit 

quality of each customer or operation, which is quantified via 

the probability of default (PD), one of the three parameters 

of basic risks: the probability of default associated with each 

customer/contract, exposure at default (EaD) and the loss 

given default (LGD). 

The combination of these three parameters gives the probable 

or expected loss. This loss is considered an additional cost, 

the risk premium, and the bank has tended to incorporate 

it into decision-taking when admitting operations, as well as 

incorporating it to pricing. 


72 

There is also a fourth factor: asset correlation (AC). 

These risk parameters also calculate the regulatory capital, 

according to the BIS II rules, which is the difference between 

the expected and the unexpected loss (very high level of loss 

but unlikely which must be covered by equity). 

Whenever possible, the modelisation of these risk parameters 

is done on the basis of past experience of default and 

Banesto’s recovery processes, except for those portfolios 

whose small number of defaults makes this internal estimate 

unfeasible (low default). 

The PD is calculated, except for low default portfolios, by 

observing the internal historic defaults and contrasting them 

with the rating/scoring. 

The LGD estimate is based on observing the bank’s recovery 

processes, bearing in mind all the flows occurred in it (both 

the revenues and costs derived from the process). 

The EAD calculation focuses on comparing the use made of 

the lines committed at the time of default and in a normal 

situation. 

These modelisations are done on the basis of the average 

performance of an economic cycle (through the cycle, TtC) 

in a cyclical way so that the situation of the macroeconomic 

cycle is well reflected from a point in time (PiT) or a downturn 

period. 

The instability in recent years, however, made it vital to 

analyse and quantify the sensitivity of the components of 

risk, both to certain macroeconomic scenarios as well as to 

changes in certain features of the bank’s portfolios. 

The different performance of portfolios/customers in the 

changed environment makes it necessary to have increasingly 

granular modelisation in order to support management 

tailored to the needs of each customer, so as not to apply the 

same policies for profiles of different risks.

• Probability of Default (PD) 

All our rating/scoring models (corporate, banks, companies, 

real estate promoters, SMEs, consumer lending, mortgages, 

credit cards and performance of individuals) measure the 

credit quality of the client or the operation which is quantified 

by probabilities of default. 

This quantification (calibration of PD score) is backed by a 

statistical process which, on the basis of the internal record 

of non-payment by various customers/operations, assigns to 

each risk category (rating/score) a probability of suffering a 

non-payment of more than 90 days over the course of a year. 

These probabilities of default are the homogeneous term that 

enable comparisons to be made between different segments, 

and also serves as the objective measure for comparing the 

risk profile of banks. 

EAD 

Company Ratings (%) 

EAD 

50 

40 

30 

20 

10 

0 

Retail Ratings (%) 

40 

30 

20 

10 

0 

73 

There are also external tools and data bases to support 

estimation of the PD in portfolios that do not have a sufficient 

number of internal defaults to make estimates (low default). 

In order to capture performance patterns in the face of 

default differentials, the PD estimate is increasingly granular 

and incorporates each year new elements for estimating (for 

example, sectors of activity and size in the case of companies 

or minimum existence of the company, relation with liabilities, 

circuit of concession, in the case of individuals). 

Also, in line with a modelisation subject to the impact of 

macroeconomic effects, our probabilities of default are 

adjusted by corrective coefficients on the basis of their use 

(pricing, internal provisions, regulatory capital, economic 

capital, etc) and scenarios defined by senior management. 

1 2 3 4 5 6 7 8 9 10 

Tranches of TTC ratings 

1 2 3 4 5 6 7 8 9 10 

Tranches of TTC ratings 

Corporate 

Companies 

SMEs 

Promoters 

Mortgage 

Personal 

Rest

AR 11 

• Exposure at Default (EaD) 

This concept measures the potential risk of an operation when 

it enters into default. It is calculated on the basis of committed 

lines of credit, such as credit accounts, while observing the 

variation in their use before customer/operation default. In 

the case of technical guarantees, the EaD is calculated on 

the basis of the probability of executing the line of guarantees 

of a customer who fails to meet his credit obligations with the 

bank in other products. 

• Loss Given Default (LGD) 

After knowing the probability of a default occurring and 

the amount exposed at that moment, the LGD enables the 

definitive loss incurred by the bank after the recovery process 

to be measured. This process is conducted on the basis of 

the past experience of customers in recovery management. 

LGD 

LGD 

Companies (%) 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Retail (%) 

80 

70 

60 

50 

40 

30 

20 

10 

0 


Guarantees Credits Commercial 

discount 

74 

As with the PD, the LGD is determined by the moment of the 

economic cycle, as non-performing loans, asset prices and 

other factors significantly affect recoveries and so the loss. 

In order to incorporate this cyclical effect, the LGD is modelised 

on the basis of different macroeconomic scenarios. Examples 

of variables that affect the loss are the customer’s credit 

profile, the time of recovery, the probability of foreclose or the 

prices of the assets. The greater granularity obtained in the 

estimates produces an improvement in the management of 

the guarantees in risk admission. 

Moreover, these modelisations enable the bank to assess the 

correlation between PD and LGD and the joint impact on the 

expected loss of specific stress scenarios of both parameters. 

Leasing Secured loans Personal loans 

Credits Mortgages Personal loans Cards

• Expected Loss 

The aforementioned factors are the main parameters of 

credit risk. Their combination gives us the expected loss, 

which is the annual cost of risk associated with our credit 

exposure (risk premium), which, since 2008, is transferred 

to the income statement of the whole bank. 

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 0.68% and in the through 

cycle 0.44%. 

Expected loss (%) 

Corporate 5% 

Medium-sized 

companies 25% 

Promoters 31% 

SMEs 9% 

Self-employed 4% 

Mortgages 17% 

Personal loans 6% 

Other retail 3% 

• Asset correlation (AC) and Diversification 

The fourth factor to be taken into account is the correlation 

of assets, which measures the contribution that the joint 

movement of financial assets makes to the distribution of 

credit risk losses. 

It is a key element in capital models and thus ensuring the 

bank’s solvency during extreme moments of an adverse cycle 

depends on measuring it adequately. 

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. We have a post for constant analysis of the 

portfolio’s composition and controlling concentrations by 

individuals and sectors, setting maximum limits for them on 

75 

the basis of the most used standard indicators (Herfindahl- 

Hirschman, ICS BdE, Gini). 

Every year Banesto reviews the correlation models, checking 

the prior estimates and the methodologies used. 

Risk-adjusted exposure 

Corporate 5% 

Medium-sized 

companies 25% 

Promoters 31% 

SMEs 9% 

Self-employed 4% 

Mortgages 17% 

Personal loans 6% 

Other retail 3% 

• Economic Capital (EC) 

Although the expected loss is a key element of credit risk 

management and price-setting, it is not sufficient as we have 

to also take into account less probable events of losses but 

which, however, are of higher magnitudes. 

It is thus important to have a tool that 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. 

• Incremental Risk Charge (IRC)/Incremental Default Risk (IDR) 

Given the increasing exposure to credit defaults suffered 

by the trading portfolios of all banks, the Basel Committee 

introduced the need for an extra increase in capital to meet 

these situations not captured in Value at Risk.

AR 11 

Capital 

80 

70 

60 

50 

40 

30 

20 

10 

0 

In order to conduct this measurement, we developed an 

internal model which was approved by the Bank of Spain at 

the end of 2010. 

Since then we have been calculating every day the capital 

figure corresponding to the incremental default risk (IDR), 

which can absorb the losses associated with specific default 

events of the entities that comprise the trading portfolio and 

meet the regulation requirements. 

This internal model incorporates a simulation of scenarios via 

the Montecarlo method to obtain a distribution of losses from 

which is extracted the 99.9% percentile as established by 

Basel II, and which gives the daily IDR figure. 

A new incremental risk charge (IRC) model was developed 

in 2011 in the bank which consists of an extension of the 

current IDR model which not only gives the possible losses 

from defaults but also those from credit migrations. 

This new model was established, at the request of the 

regulator, on December 31, 2011. 

The additional capital from the IRC is determined by the 

same formula as for the IDR. 


Evolution of IDR capital vs. capital risk of the market (%) 

Capital by incremental default risk 

Mar. Apr. May. Jul. Aug. Sep. Oct. Nov. Dec. 

76 

The extra capital emanating from the IDR is determined as 

follows: 

IDR = max (IRC t-1 , IRC average ) 

IDR average = arithmetic average of the daily IDR figures 

calculated in the last three months 

IDR t-1 = daily IDR calculated in t-1 

Stressed VaR 

The stressed VaR has been calculated since the fourth 

quarter of 2011, for capital calculation purposes. 

This figure aims to be able to manage the risks emanating 

from possible future scenarios subject to stressed market 

movements experienced in the past in addition to the VaR 

figure. 

INTEGRATION IN CREDIT RISK MANAGEMENT 

In the Basel framework, after the supervisor approved the 

internal models, we continued to focus on strengthening risk 

management, enhancing parameters, and integrate them 

fully into the sphere of the bank’s strategy. 

a. Cycle of management 

As 2011 was another year characterised by instability and 

uncertainty due to the crisis, this strengthening assumed 

greater importance and the need to analyse and quantify the 

sensitivity of risk components was even more important, both

for certain macroeconomic scenarios as well as for changes 

in the features of the bank’s portfolios. Equally important was 

constant revision of the metrics, not only from the regulatory 

standpoint but also from the management perspective. 

Cycle of integration in management 

Focus 

Bottom-Up 

Sensitivity/macroeconomic 

environment 

Metrics 

Management 

Policies 

This cycle of management also means greater integration of 

risk metrics in the management of the bank in two aspects – 

from the standpoint of daily management as well as strategic 

definition and planning. 

In daily management, this means: 

• Changing the admission policies. By analysing the 

evolution of the parameters of the portfolios under different 

perspectives, not just traditional ones, changes are detected 

which can lead to modifications to the admission policies. 

• Development of new business strategies by identifying new 

niches for growth in lending. 

• More detailed monitoring of customers/operations, 

guaranteeing regular review and analysis of the assessments 

and establishing anticipative measures. 

All of this ensures fulfilment of the bank’s risk profile. 

As regards the more global or strategic perspective: 

• Knowledge of the likely evolution of the risk profile of different 

portfolios focused on a more proactive management, 

coupled with a framework of business forecasts, enables 

all aspects related to the risk profile and capital to be 

determined, thereby realigning the strategies and day-today 

operational aspects. 

Regulatory/management vision 

77 

b. Risk metrics 

The metrics used in management aim to be forward looking 

and so are in general more cyclical measures, characterised 

by a great dynamism, as they have to be adapted to the 

bank’s business plans and to changes in the environment. 

The regulatory ones, however, are mainly acyclical, static and 

more anchored in observation of the past. 

Despite the differences, the two metrics are interrelated. 

Integration in management means continuous adapting 

of the regulatory metrics so that each time measures more 

adjusted to the various needs of business/risks, admission/ 

monitoring, pricing/remuneration are obtained. 

Meanwhile, given that the current environment has produced 

changes that affect these metrics, analysis of the impact of 

these changes has become crucial, in order to not transfer to 

business the very aspects of the modelisations. 

In this respect, movements in the rating scores triggered by 

the economic cycle (analysis of the cyclicity of models) are 

constantly analysed, as well as studies of the performance to 

the default of different portfolios. 

These exercises resulted in the creation of new methodologies 

that incorporate both the impact of the changes in the rating 

of customers, and thus, not related to a change in their credit 

quality, as well as including new differentiating features in 

the risk metrics, such as the sector of activity or the size of 

companies. 

The cyclicity of metrics, combined with the economic crisis, 

has made even clearer the need to quantify the sensitivity 

of risk to changes in macroeconomic scenarios. In 2011, 

efforts were intensified to obtain in an agile way the relation 

of the metrics observed and estimated, through continuous 

backtesting and analysis and by observing the trends, 

possible critical points in the performance of all the bank’s 

portfolios.

AR 11 

This continuous revision of the forecasts made is vital, given 

the high penetration of risk metrics in the management 

model: in the income statement of branches, via expected 

loss; in the use of risk-adjusted profitability (Raroc), for risk 

management; and in planning the provisions and capital 

needed for the following years. In 2011, we worked to 

incorporate into management metrics liquidity on the basis 

of maturity. 

Stress testing tools continue to be used in order to quantify 

agilely the impact on portfolios of different macroeconomic 

scenarios, enabling: 

• Specific threats to be anticipated. 

• The most sensitive loans in terms of an increase in bad 

debts to be identified. 

• New business opportunities to be detected, identifying the 

profile which, in a specific macro scenario, are the least 

sensitive to risk. 

The greater granularity provided by the tool is vital for 

management, as well as ensuring convergence of the top 

down and bottom up focuses. 


Analysis of the differences 

Analysis of the differences (envisaged vs. assigned and observed) 

a) Impact of rating migrations 

b) Impact of policies 

c) Others 

l Default rate observed 

l PD point-in-time envisaged 

l PD point-in-time assigned to business 

78 

STRATEGIC MANAGEMENT OF RISK 

In 2011, Banesto completed the installation of the 

programme of strategic management and global optimisation 

of risks and capital. This produced a global understanding 

of the different types of risk, as well as providing greater 

depth in analysing the performance of portfolios under the 

bank’s main decision-making criteria, not only from the risk 

standpoint, but also putting them in relation to other criteria 

such as those of profitability. This improved the reporting 

systems, where information on credit, market, operational, 

interest and liquidity risks, consumption of regulatory capital 

and concentration was improved. 

Volumes and 

portfolios vision 

Manage 

pool of operations 

Mitigation 

plans 

Positioning and corporate governance. General framework 

Top Down 

Risk vision 

Impact on the 

balance sheet 

and the income 

statement 

Actions 

Growth 

plans 

Business 

strategy 

Global risk 

management 

Risk integration 

Reports, limits, 

models 

Management of portfolios, products, 

segments, sectors 

Tactical and operational decisions 

Identify risk 

External factors 

vision 

Understand the 

transversal impact 

Management of 

improvements 

Within the sphere of risk concentration and due to its 

importance, work was carried out in 2011 on defining the 

governance and management framework for this risk, improving 

the already existing procedures for identification, measurement, 

management, overseeing and information and putting the 

emphasis on interactions between the various risk categories 

(credit, market, operational, interest, liquidity). 

Bottom Up

MANAGEMENT OF CAPITAL 

Given the current environment of rising risk costs, capital 

requirements and stricter regulations, Banesto created an 

office in 2010 for capital management in order, on the one 

hand, to improve the granularity of understanding the bank’s 

risks and, on the other, launch initiatives for the consumption 

of capital of businesses. 

This office seeks to anticipate both the regulatory changes of 

Basel III as well as the evolution of the country’s economic 

situation and its impact on the cost of capital. 

The office’s main activity in 2011 was to make all businesses 

aware of the importance of actively managing the capital 

assigned to them and identify new opportunities for their 

correct estimation and maximisation (precision in calculating 

risk-weighted assets, reduction in and/or appropriate 

compensation). 

New improvement measures were also put into effect during 

2011 that enhance the quality of the figures, automation 

of processes and the regulatory models. Other initiatives to 

support commercial management are also underway, with 

the creation of new products, active management of credit 

limits, monitoring of maturities, severity and other parameters 

of regulatory relevance. 

Understanding the impact of 

anticipation initiatives 

New 

regulations 

Capital 

requirements 

Commercial 

management 

Admission and 

tracking of risks 

Support for commercial management 

and risk admission policies 

Commercial model of efficiency of 

capital 

79 

REGULATIONS 

In 2011, the Spanish and European regulations were 

published on implementing the Basel III recommendations 

in a shorter period of time and more restrictively. They are 

aimed at improving the quality and quantity of capital and 

also increasing the capital requirements. 

Stress tests were conducted to validate the solvency of banks 

in a series of scenarios set by the supervisor. 

Conscious of the challenges raised by these new requirements, 

Banesto continued to work to achieve them successfully. Our 

goal is to have a core capital ratio of close to 10% in 2012, 

higher than the requirement.

AR 11 

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 (modified by Law 12 

of June 30, 2010), in article 36 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 supervisory authorities. 

The rules and procedures of corporate governance. 

º Report of the Audit and Compliance Committee 

80 


Review the annual financial statements. Ensure compliance 

with the legal requirements. Ensure the correct application of 

accounting principles. 

Be familiar with and supervise the drawing up of financial 

information. 

Regulated financial information 

— Review, before dissemination, the regular financial 

information supplied to the National Securities Market 

Commission (CNMV). 

— 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 four 

directors and a Secretary (not a director) at the end of 2011. 

Of the four directors, two are independent (the chairman and 

a member) and two non-executive proprietary. 

Chairman: Belén Romana García 

Members: Juan Guitard Marín, José Luis López Combarros, 


Secretary: Mónica López-Monís Gallego 

There was one change in 2011. The board, at its meeting 

on January 19, 2011, approved the resignation of Mr. David 

Arce Torres as a director and thus also as a member of the 

Audit and Compliance Committee. The board also approved 

at that meeting, at the proposal of the Appointments and 

Remuneration Committee, the incorporation of Mr. Juan 

Guitard Marín to Audit and Compliance Committee in his 

condition as a proprietary director.

Activities of the Audit and Compliance Committee 

The Audit and Compliance Committee met 15 times during 

2011 when it was regularly informed by the external and 

internal auditors, the Directorate of Corporate Development 

and Finances, the Group’s financial controller, the Directorate 

of Internal Control and Compliance, as well by most of the 

bank’s executives in order to obtain information needed to 

carry out the functions entrusted to it by the board and its 

regulations. 

A brief summary is given below of these functions. 

Shareholders 

At the Shareholders’ Meeting in February, 2011 the work 

of the Audit and Compliance Committee during 2010 was 

explained. The Meeting in February 2012 reported on the 

activities in 2011. 

Internal Auditing 

The maximum executive of Internal Auditing met eight times 

with the committee to inform it of the work plan for the year, 

its development, the recommendations and conclusions 

reached and the monitoring and implementation of these 

recommendations. 

Internal Auditing also informed the bank’s board of the work 

done and the conclusions. 

During 2011, 93 auditing jobs, reviews of processes and 

visits to branches were conducted. As a result, 88 reports 

and notes were issued. 

The auditors focused on: 

— Reviewing the Group’s financial information and the 

criteria and procedures for drawing it up, in accordance 

with the regulations of the Bank of Spain and the Sarbanes 

Oxley (SOX) model. Banesto’s internal control system was 

assessed, including the financial information. The system 

was shown to be effective for mitigating correctly the risks 

incurred in material errors in financial information. 

In this context, the quarterly analysis of the Group’s 

statements was conducted, all of it in order to support the 

Audit and Compliance Committee’s supervision of this model, 

in accordance with the applicable regulations. 

81 

— The bank’s control and risk management systems, 

including: 

— Credit risks, reviewing all segments, criteria and 

admission, monitoring and recovery procedures, as 

well as the correct classification of the portfolio and 

its level of provisions. 

— Other financial risks; market, structural of the balance 

sheet and liquidity, verifying compliance with the 

established policies and procedures. 

— Operational risk, with emphasis on the risk control 

model, correct documentation of operations, main 

operational processes, security policies, contingency 

plans and continuity of business. 

— For the risks where it is applicable, they were also 

audited in accordance with the Bank of Spain’s 

requirements and the Basel models both for 

solvency purposes as well as their integration into the 

management of Banesto. 

— Correct compliance with rules and regulations, particularly 

regarding prevention of money laundering and all internal 

and external regulations concerning the marketing of 

products and the information sent to the regulators. 

The concluding opinion of Internal Auditing on Banesto’s 

internal risk control systems and its internal control model is 

good. The financial statements are formulated in accordance 

with prevailing regulations. 

As part of this favourable opinion, and as a result of the 

principles of Internal Auditing regarding the contribution of 

value to the audited units, 375 recommendations, aspects 

for improvement and suggestions on best practices were 

issued in order to guarantee, enhance and perfect the control 

models. The implementation of these recommendations is 

monitored every month and the progress reported to senior 

management and the Audit and Compliance Committee.

AR 11 

All the work carried out complied with the international 

rules for the professional exercise of internal auditing, as 

certificated by the Institute of Internal Auditors (IIA). 

The committee expressed its satisfaction with the work 

carried out by the Internal Auditing Department in supervising 

the compliance, 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 agreed at its meeting 

on January 17, 2011 to propose the reappointment of 

Deloitte S.L. as the auditing firm of the bank’s and the Group’s 

financial statements for 2011, as well as the professional 

scope of its mandate. 

The committee held four meetings with the external auditors 

during 2011 at which it was informed of the process of 

auditing the 2011 financial statements, and the inherent 

aspects, problems and considerations. 

The auditors also attended the presentation to the committee 

by the Financial Controller and the Directorate of Corporate 

Development and Finances of the quarterly and annual 

results. 

The auditing reports on the 2011 individual statements of 

the bank and the consolidated ones of the Group were clean 

(without qualifications) and the auditors stated that in their 

opinion: 

“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, 2011, the 

results of the bank’s and the Group’s operations, and their 

cash flows, in accordance with the regulatory framework of 

financial information and, in particular, the principles and 

accounting criteria contained in the same (in the case of the 

bank) and in accordance with the International Financial 

Reporting Standards (IFRS), adopted by the European 

Union, and other regulations that are applicable (in the case 

of the Group)”. 


82 

In accordance with Royal Decree 1362 of October 19, 2007, 

Banesto, as a listed company, has to approve and send 

to the National Securities Market Commissions (CNMV), 

consolidated and summarised half yearly financial statements 

whose submission to the auditing firm may be voluntarily 

decided by each company. 

The Bank’s Board decided that the half yearly consolidated 

and summarised information at June 30, 2011 to be sent to 

the CNMV should be subject to auditing, and the auditor’s 

report issued on July 28 was without qualifications. 

The Committee was told by the partner responsible for 

auditing that during the work the team had access to all 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 Law. As a result, the Audit and 

Compliance Committee, in accordance with Article 14.1.i.v. 

of the Board’s Regulations, reflects in this report that it 

reviewed the works contracted with the auditor and those 

requested by the supervisory bodies and they comply with the 

requirements of independence established in the Auditing of 

Accounts Law, modified by Law 12 of June 30, 2010. 

In addition, 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 auditor’s independence will not be contracted. 

Regarding these stipulations in the regulations, we would like 

to point out that: 

— The bill for auditing the Group in 2011 and other services 

provided by the auditor is duly set out in note 43 in the 

section on the annual financial statements.

— The auditing fees of Deloitte, S.L for services other than 

auditing, excluding the work required by the supervisory 

bodies, which is included as auditing costs in the last four 

years, was as follows: 

Year Thousand euros 

2008 967 

2009 649 

2010 476 

2011 203 

— The current partner responsible for responsible for the 

team auditing the Group began in 2009, making 2011 the 

third year auditing the accounts of the Banesto Group. 

The fees charged to the Banesto Group by Deloitte in 2011 

worldwide represented 0.007% of its global to tal and 

those charged by Deloitte (Spain) 0.4% of its turnover. The 

respective percentages in 2009 were 0.009% and 0.5% and 

in 2010 0.008% and 0.5%. 

The new Law 12 of June 30, 2010 requires the Auditing 

Committee, prior to the auditing report, to issue every 

year a report, which expresses an opinion affirming the 

independence of the auditors. 

Based on this requirement and the information set out 

before, 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, 2012 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 2012. 

Compliance 

In order to check the existence of the procedures for complying 

with regulations, the Audit and Compliance Committee 

continued to hold meetings with those in charge of: 

— Monitoring implementation of the EU’s Markets in Financial 

Instruments Directive (MiFID) and of the control frameworks 

for product marketing. 

— Control and monitoring of compliance with the requirements 

of Basel and the Bank of Spain. 

83 

— 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. 

— Compliance and Internal Control. 

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. 

Since the law came into force, the bank has implemented 

all the regulations, developing various policies and internal 

procedures and validating and reviewing their implementation. 

The map of regulations in risks, integrated into the Internal 

Control Model, continued to be developed in order to be able 

to appropriately monitor the correct implementation of the 

various requirements. 

In money laundering, information was received on the new 

developments in Law 10/2015 on Prevention of Money 

Laundering and Financing of Terrorism, in order to adapt 

the models of admission, identification and knowledge of 

customers. 

The external expert’s report as required by article 11, item 7, of 

Royal Decree 325/1995, for 2010 and 2011, makes this clear 

and includes a series of recommendations for improvement 

that the bank is taking into consideration. 

The Committee also supervised compliance with the Code of 

Conduct in the Securities Market, which affects 848 people 

in Grupo Banesto. Compliance executives reported on the 

control activities, the results, the training courses given, as 

well as the improvements being made to strengthen control of 

compliance with the code. 

The committee was also informed of the communications 

received from the supervisory 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

AR 11 

acknowledged there are reasonable rules and procedures to 

meet the regulatory 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 assessment criteria used, and the measures underway 

regarding their documentation and information in the annual 

statements. 


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 2011 and on the individual and consolidated financial 

statements for 2011, which were drawn up in accordance 

with the regulatory framework of the applicable financial 

information. 

The information at June 30, 2011 was also revised by the 

external auditors. 

Law 12 of June 30, 2010 requires the Auditing Committee to: 

1) Supervise the effectiveness of internal control of the 

company, internal auditing and the risk management 

systems, as well as discuss with the auditors the significant 

weaknesses in the internal control system detected by the 

auditing process. 

2) Supervise the preparation process and presentation of 

regulated financial information. 

In order to comply with the legal requirements, the Auditing 

Committee carried out the following work: 

— Review, analyse and comment on the financial statements 

and other relevant information with senior management 

and the internal and external auditors in order to confirm 

that, on the basis of the work conducted by everyone, the 

information is reliable, understandable, relevant and has 

followed accounting criteria consistent with that used in 

the previous year. 


84 

— Approve the internal auditing plan for assessing the 

internal control systems for preparing the regulated 

financial information, receive regular information on the 

results of work, as well as the action plan to correct any 

shortcomings observed. 

— Supervise the process developed by senior management 

for making significant judgements, valuations and 

estimates and their impact on financial statements. 

— Supervise senior management’s decisions on the 

adjustments proposed by the external auditor, as well as 

know and where necessary mediate in disagreements 

between them. 

Information was also requested from the Group’s financial 

controller and the external auditors to verify whether the criteria 

used were in line with the applicable accounting regulations 

and principles and so ensure that the financial statements 

truly 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 

2011, as well as the regular information published as a listed 

company during 2011. . 

The Group’s lawyers were also asked to provide information 

on the legal and fiscal contingencies and confirm they were 

appropriately treated in the financial information. 

Regarding the measure implemented in 2007 that anyone 

involved in the bank can communicate any event or 

irregularity of potential importance, particularly financial or of 

an accounting nature, that occurs in the sphere of the bank 

to the Audit and Compliance Committee, we point out that 

during 2011 we received one such notification which was 

examined and had no impact on the financial information. 

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 the control 

and management of risks, mainly credit, market (interest, 

liquidity and treasury activities), operational and reputational. 

Internal Control Model 

For the past five years the Banesto Group has an internal 

control system for financial information which meets the

guidelines set out in section 404 of the Sarbanes-Oxley Act, 

to which Grupo Santander is subject and hence Banesto. 

The main purpose of this law is to ensure the transparency 

and reliability of financial reports. It directly makes responsible 

all those involved in the process of production, certification 

and analysis of financial information. 

This model provides a framework of control that identifies and 

documents the critical processes linked to the generation of 

financial information, the risks inherent in these activities 

and guarantees the sufficiency and efficiency of the controls 

associated. 

Furthermore, and in order to develop the control model even 

more, in Banesto’s case this identification and documentation 

has been extended to the processes developed by the support 

areas, as well as those related to financial statements, 

Risk identification is based on detecting potential events 

that could affect the bank and, in consequence, its financial 

statements in order to provide reasonable security by 

executing appropriate controls. 

The control model is dynamic and is applied to the whole 

bank, in each level and unit, and is done by employees 

directly, adapting and updating it constantly on the basis 

of the changes in the environment. At the end of 2011, 

the model had 508 sub processes, 1,538 identified risks 

and 2,058 associated controls. In 2011, 76 new risks were 

incorporated and 107 controls to mitigate them, mainly 

related to real estate companies the outsourcing of processes 

and business continuity plans. 

The model’s accounting coverage at the end of 2011 remained 

at optimum levels (more than 99%). It is a very complex and 

fully automated process which creates specific financial 

information on the basis of daily accounting movements 

associated with the model’s controls and compares it with 

the published information. 

Furthermore, this model is perfectly integrated into all the 

bank’s areas and units, and is coordinated and supervised in 

an independent way by the Internal Control Unit. 

As in other years, the result of the certification process to 

which the model is submitted, together with validation of 

internal auditing, was good certificated without qualifications. 

This process involved around 250 people, including executive 

vice-presidents of all the areas, as well as the Group’s CEO 

and chief financial officer. 

85 

As in other years, the auditing firm (Deloitte) issued a positive 

opinion on the internal control model in its report dated 

May 23, 2011 on the closing of the 2010 accounts, and is 

currently reviewing those of 2011. 

As a supplement to the internal control model, a command 

panel of control indicators was installed in 2010, based on 

the international COSO II standard and broken down by types 

of risk according to the BIS II European guidelines. One of the 

objectives is to have an integral vision of the internal control 

environment, which also provides information from various 

standpoints. 

Its regular monitoring enables us to know the current state 

of the control environment, facilitating decision-taking for 

constant improvement. This command panel is integrated as 

a management tool into the areas and units so that it is a 

regular source of information, measurement and decisions. 

The perimeter of activity includes all the bank’s areas, as 

well as the spheres of control established (operational, 

documentary, technological, risks, accounting, compliance, 

etc). 

Lastly, as part of the process of continuous development to 

complete and improve the command panel, 98 new indicators 

mainly related to financial management, accounting, costs 

and suppliers were incorporated. 

Basilea 

The year 2011 was another very important year for Banesto 

as regards capital models and adapting to Basel’s rules. The 

importance of capital in the current environment is strategic, 

as demonstrated by the European Banking Authority’s stress 

tests, while the new requirements associated with the new 

Basel II anticipate that in the neat future this issue will 

assume even more importance for regulators and for markets 

and customers.

AR 11 

Banesto worked to improve its risk management and capital 

model in all of the spheres and risks, as set out below: 

Credit risk 

The model was improved during 2011, particularly increasing 

its granularity in order to better discriminate risk and so 

make it more useful for management, In addition, the capital 

management culture by business areas was deepened, which 

internalised the importance of management and maximised 

a key element for the bank. 

Market risk 

At the beginning of the year, the Bank of Spain authorised 

the internal market risk model for the purposes of calculating 

the capital, including the consumption by Value at Risk (VaR) 

and by Incremental Default Risk (IDR). 

In response to the regulatory requirements, the model 

was reviewed, incorporating the stress VaR model and the 

impact of migration of ratings to the IDR, turning it into the 

Incremental Risk Charge (IRC). These models are closed and 

pending formal authorisation by the Bank of Spain, expected 

in the short term. 

Operational risk 

In operational risk, Banesto continued to be solidly positioned 

in the standard method, with wide coverage of its qualitative 

and quantitative requirements. 

The sphere of self-assessment was improved during 2011 

and the business continuity plans. 

In the stress test within the work conducted by Grupo 

Santander for the EBA, Banesto developed in 2011 stress 

tests for capital under very severe macroeconomic scenarios 

which produced very positive results in coverage levels and 

quality of capital. 


86 

These tests were aligned with the self-assessment of capital 

plan, which currently has data bases and methodologies that 

simplify these estimates significantly and become powerful 

portfolio management models. 

Considerable progress is also expected in 2012 which will 

respond to the issues raised by the committee related to the 

quality and consistency of the capital bases, revision of the 

counterparty risk framework, reduction in the pro-cyclicity of 

capital models and advances in establishing a new regulatory 

framework to manage liquidity risk. 

The bank’s goal continues to be to anticipate wherever 

possible compliance with the new requirements, ensuring 

levels of capital higher than those set by regulations and with 

more demanding schedules. 

Credit risk 

Given the economic situation in 2011, the committee 

continued to give preferential attention in various meetings 

to monitoring the various portfolios, in order to know the 

steps the bank’s management is taking to achieve the best 

management of them, reducing as much as possible the 

impact of bad loans and write offs on the bank’s income 

statement, and ensure appropriate classification and 

provisions in these situations. 

We believe that the measures taken, as well as greater 

prudence in granting loans, the existence of a risks 

functions independent of the business areas, the monitoring 

procedures, the definition and application of explicit policies, 

etc, have had a positive impact on reducing the percentage 

of non-performing loans and write-offs, as well as in the 

adequate accounting reflection of both items. 

Conclusion 

The Audit and Compliance Committee informed the board 

in detail of its work during 2011 on two occasions and held 

15 meetings. It continued to be 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 by-laws and 14 of the Board’s Regulations, 

which are as follows: 

Article 36 of the By-laws 

ARTICLE 36. The audit and compliance committee. 

1 st . The audit and compliance committee shall be comprised 

of a minimum of three and a maximum of five members, all 

non-executive directors appointed by the Board of Directors, 

taking into account, especially regarding the chairman, their 

knowledge and experience in accounting, auditing or risk 

management. 

2 nd . The chairman of the audit and compliance committee, 

should be an independent director, and shall be substituted 

every four years, and may be re-elected one year after he has 

stepped down. 

3 rd . The number of members, the powers and the rules 

on the functioning of the audit and compliance committee 

shall be those established in the By-laws and in the Board 

of Directors’ regulations, and should be interpreted in the 

way that most favours the independence of the functioning 

thereof. Its powers shall at least include the following: 

1 st . Inform the General Meeting of the matters raised before it 

and which fall under its jurisdiction. 

2 nd . Supervise the effective internal control of the company, 

the internal audit and the risk management systems, and 

discuss with the auditors the significant weaknesses in 

the internal control system detected when conducting 

the audit. 

3 rd . Supervise the process for drawing up and submitting 

regulated financial information. 

4 th . Propose to the administrative authority to be submitted to 

the General Meeting of Shareholders, the appointment of 

auditors, in accordance with the regulations applying to 

the company. 

87 

5 th . Establish the relevant relations with the auditors to 

receive information on those matters that might endanger 

their independence, so that it can be examined by 

the committee, and any other information related to 

the process to conduct the audit, as well as any other 

communications provided for in the legislation on audits 

and in auditing rules. In any case, every year they should 

receive from the auditors written confirmation of their 

independence vis-à-vis the company or companies 

directly or indirectly associated with it, as well as 

information on any type of additional services rendered 

for these companies by the said auditors, or by persons 

or companies associated with them, pursuant to the 

provisions of the Law on Auditing. 

6 th . Every year, prior to issuing the audit report, issue a 

report expressing an opinion on the independence of the 

auditors. This report should in any case pronounce on 

the rendering of the additional services referred to in the 

previous section. 

4 th . The audit and compliance committee shall meet, at 

least, four times per annum, and as often as convened by its 

chairman, when he deems it appropriate or as requested as 

a result of a resolution adopted by the committee itself or at 

the request of any two of its members. Any member of the 

company’s management team or personnel required to do so 

is under the obligation to attend its meetings and collaborate 

and provide access to the information in its possession, 

and the auditor may also be requested to attend. One of its 

meetings shall necessarily be to assess the effectiveness and 

the compliance with the rules and procedures governing the 

company and to prepare the information that the Board must 

approve and include in the annual public documentation. 

5 th . Through its chairman, the audit and compliance 

committee shall report to the Board of Directors, at least, 

twice a year. 

6 th . The Board of Directors’ regulations shall develop and 

complete the above rules. Any subject not provided for in the 

law, these By-laws and the Board regulations, with regard to 

the functioning of the committee shall be governed by the 

rules regarding the Board of Directors, insofar as they are 

compatible with the nature of the committee and with the 

independence that should preside over its activities.

AR 11 

Article 14. Audit and Compliance Committee 

1. The Audit and Compliance Committee shall consist of 

a minimum of three and a maximum of five members, all 

non-executive Directors, designated by the Board, taking 

into account, particularly with regard to its Chairman, their 

accounting, auditing and risk management knowledge and 

experience. 

The Chairman of the Audit and Compliance Committee must 

be an independent Director, and shall be replaced every four 

years. He may be re-elected one year after the end of his 

preceding term. 

2. The Audit and Compliance Committee shall perform the 

following duties: 

a) to report, through its Chairman or Secretary, at the General 

Shareholders Meeting respect to matters raised therein 

on issues of its competence. In like manner the Audit and 

Compliance Committee shall also be responsible for knowing 

of and, where appropriate, dealing with initiatives, suggestions 

or complaints raised by shareholders regarding its duties, 

and those raised by the Company’s General Secretary. 

b) to propose to the Board of Directors, to be submitted to 

the General Meeting of Shareholders, the designation of the 

Auditors, endeavouring that they should be the same for 

all of the companies in the Group, together with the terms 

and conditions under which such auditors will be hired, the 

scope of their professional services and, if appropriate, the 

revocation or non-renewal of their appointment. 

c) to review the Company’s and the Group’s accounts, monitor 

compliance with the legal requirements and the correct 

application of generally accepted accounting principles, 

and report on the proposals for alterations to the accounting 

principles and standards suggested by Management. 

d) to supervise the internal auditing services. To that end, the 

person responsible should submit annually to the Committee 

their work plan and inform directly of any incidents arising 

during the development thereof, and submit to the Committee 

a year-end activities report. In order to make this supervision 

possible, the Bank’s internal Auditors shall deal with the 

Audit and Compliance Committee’s requests for information 

in the performance of their duties; 

e) to supervise the effective internal control of the Company 

and the riskmanagement systems, and discuss with the 


88 

auditors the significant weaknesses of the internal control 

system, detected in the audit; 

f) to be fully familiar with and supervise the process of 

preparing and presenting the financial information relating to 

the Company and where appropriate to the Group, reviewing 

compliance with the regulatory requirements, the adequate 

delimiting of the perimeter of consolidation and the correct 

application of the accounting standards. 

g) to serve as a communication channel between the Board 

and the Auditors, assess the results of each audit and the 

response of the management team to its recommendations, 

and act as a mediator in the event of disagreement between 

the Board and the Auditor regarding the principles and 

standards to be applied in the preparation of the financial 

statements. 

h) to supervise the fulfilment of the auditing contract, 

endeavouring to ensure that the opinion on the annual 

financial statements and the main contents of the Auditor’s 

report are set forth in a clear and accurate fashion. 

i) to ensure the Auditor’s independence, establishing 

the relevant relations with the Auditor so as to receive 

information on those circumstances or issues that may put 

its independence at risk, to be examined by the Committee, 

and any other issue related to the auditing process, as well 

as receive information and maintain such communication 

with the Auditor as is provided for in legislation regarding 

the auditing of financial statements and in technical auditing 

regulations. 

And, specifically to: 

i. on an annual basis, receive from the Auditor written 

confirmation of its independence with respect to the 

Company or institutions directly or indirectly connected to 

the Company, as well as information on any type of additional 

services provided to these institutions by the said Auditor, or 

by persons or institutions related to the latter pursuant to the 

provisions of the Law on Auditing; 

ii. request information on the percentage represented by 

the fees paid for any and all reasons of the total income of 

the audit firm, and the length of service of the partner who 

leads the audit team in the provision of such services to the 

Company as well as to warn the firm of the limit referred to in 

article 39 of these Regulations; 

iii. examine, in the event of resignation of the auditing firm, 

the circumstances leading to this;

iv. ensure that the change in the auditing firm is publicly 

communicated as relevant fact and, where appropriate, 

accompany such communication with a declaration 

regarding the possible existence of disagreements with the 

outgoing auditor. 

v. issue annually, prior to the issuing of the external auditor’s 

report, a report expressing an opinion on the independence 

of the external auditor. In any event, such report should make 

a statement as to the providing of the additional services 

referred to in the preceding paragraph. 

j) To review, before its issue, the regular financial information, 

which, as a listed company, the Company periodically must 

make public ensuring that such information, is prepared 

in accordance with the same principles and practices 

applicable to the annual financial statements. To that effect, 

the Committee might consider the need to proceed to a 

limited revision of the Auditor. 

k) Supervise the observance of the Code of Conduct of the 

Group in the Securities Markets, the manuals and procedures 

for the prevention of money laundering and, in general, the 

rules of governance and compliance in effect in the Company, 

and make such proposals as are deemed necessary for the 

improvement thereof. In particular, the Committee shall have 

the duty to receive information and, if applicable, issue a 

report on disciplinary penalties to be imposed upon members 

of the top management. All of this without detriment to the 

Company rules approved for prevention of money laundering. 

l) be familiar with the reports and inspection activities of the 

supervision and control authorities and review compliance 

with the actions and measures resulting from the said reports 

and inspection proceedings. 

m) To adopt the necessary measures to: (i) receive, deal 

with and keep a record of the claims received by the Bank 

on matters related to the process for gathering financial 

information, auditing and internal control; and (ii) make it 

possible for employees, on a confidential and, if considered 

appropriate, anonymous basis to report irregularities of 

potential significance, specially financial and accounting 

ones, detected within the sphere of the Company. 

n) To inform on any proposed amendments to these Regulations 

prior to the approval thereof by the Board of Directors. 

ñ) To supervise the internal control and management risk 

systems so that the main risks are identified, managed and 

reported adequately. 

89 

o) To report, before approval by the Board or the Executive 

Committee, on the creation or acquisition of participations in 

special purpose entities or domiciled in countries or territories 

considered tax havens. 

p) To report on operations between related parties submitted 

for the Board of Directors’ approval. 

q) To report on the process of assessment of its functioning. 

3. The internal auditing services are within the Board of 

Directors sphere and report to it. Without detriment to this, 

the Audit and Compliance Committee shall vouch at all 

time 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 Audit 

and Compliance Committee shall receive regular information 

on the activities of internal auditing and shall verify that the 

top management takes into account the conclusions and 

recommendations of its reports. 

4. The Audit and Compliance Committee shall meet as many 

times as it is called to meeting upon resolution made by the 

Committee itself or by the Chairman thereof, or at request 

of any two of its members and at least four times per year. 

Any member of the management team or of the Company’s 

personnel shall, when so required, attend the meetings of 

the Audit and Compliance Committee, provide it with his 

cooperation and make available to it such information as he 

may have in his possession. The Auditing firm might also be 

required to attend to any such meeting. One of its meetings 

shall be necessarily devoted to evaluating the efficiency of and 

compliance with the rules and procedures for governance of 

the Company and to prepare the information that the Board 

is to approve and include in the annual public documents. 

5. The Audit and Compliance Committee, through its 

Chairman, shall report on its activities to the Board of 

Directors at least twice a year. 

6. The Audit and Compliance Committee might obtain external 

advice under the terms of article 23 of these Regulations. 

7. The Audit and Compliance Committee, through its 

Chairman, shall report on its activities to the Board of 

Directors at the meetings called for this purpose, or in the 

first following one, when the Committee’s chairman should 

consider it necessary. The minutes of the meetings will be 

available to all members of the Board that should request 

them.

AR 11 

Compliance 

and internal 

control 

Compliance with regulations 

1. Conduct 

The Compliance function controls and regularly assesses the 

adequacy and effectiveness of internal and external regulations, 

as well as the procedures established to detect risks of 

non-compliance and the measures adopted to meet possible 

shortcomings. 

Those responsible for providing the various investment services 

are assisted and advised. These functions are conducted 

via a unit that guarantees compliance with the bank’s regulations 

and which operates independently. 

º Compliance and Internal Control º Compliance with regulations 

90 

The Banesto Group has various types of policies, procedures 

and regulations, adjusted to the Compliance function, which 

set out the steps to follow, the organisation, the mechanisms 

and the existing procedures, which enable it: 

i) To minimise the probability of irregularities, 

ii) Identify, report and quickly resolve those irregularities that 

could occur and 

iii) Justify, if necessary, that the bank has the appropriate organisation, 

procedures and measures to meet these purposes. 

Of note among the functions and activities is integral management 

of codes and monitoring implementation of the various 

policies, particularly: 

• The Banesto Group’s Code of Conduct. 

• The Group’s Code of Conduct in the Securities Market, 

• Code of Conduct of Analysis Activity. 

• General conflict of interests policy. 

• Policy for executing orders. 

• Incentives policy. 

The formal channel of internal communication is the Compliance 

Intranet Portal, whose structure is focused on facilitating 

navigation by all those users who want to access the 

different materials regarding compliance with regulations. 

The Compliance Unit maintains a very direct level of communication 

with all of the Bank’s areas, via Intranet, of the 

publication of news in “Esto es Banesto”, internal forums, 

etc. In addition, it promotes and carries out a large number 

of training actions and dissemination of the codes and other 

materials, such as conflicts of interest, prevention of money 

maundering, etc. 

2. Prevention of Money Laundering 

Banesto has regulations for the prevention of money 

laundering (PML), in accordance with the Group’s rules 

and prevailing regulations, in order to cooperate in the fight 

against drug trafficking, terrorism and organised crime. 

All the Bank’s units and all employees have to apply and 

comply with the regulations and are subject to the training 

processes. 

All PML activity, procedures and training, as well as its 

indicators, are coordinated by the Group via the Central 

Department of PML.

Of note in 2011 was adapting customer identification and risk 

assignment processes to the opening of new accounts, as a 

result of publication of the new Law 10 of 2010 on prevention 

of money laundering and financing of terrorism. 

3. Marketing of products 

Products and services 

The various phases for marketing products and services have 

procedures that cover everything, from the design of them 

to making them available to the distribution channels, the 

processes for making them available to customers, contracting 

and monitoring their performance. These procedures are 

supplemented by specific studies on the behaviour of 

customers and trends (focus, group, etc), knowledge of 

products by commercial agents, monitoring campaigns, etc. 

All areas and units (both commercial and support) involved 

in launching a new product have to give their opinion on and 

agreement of the launch, guaranteeing that the necessary 

actions and tasks have been developed, and the internal 

procedures for correct marketing and good selling to customers 

have been fulfilled 

All products and services to be launched require the approval 

of the Products Committee. It meets every month and is 

chaired by a director- executive vice president. This committee 

is responsible for complying with the following rules needed to 

launch any product or service: 

• The products and services to be launched must comply with 

the requirements that integrally affect their commercial and 

technical development. 

• There is a commercial actions guide, which regulates the 

marketing and publicity procedures related to the launch of 

products and services. 

• There is an internal manual of product marketing, designed 

to establish the steps to be taken for correct selling to 

customers. 

91 

Of note in 2011 was 

that adapting all the 

customer identification 

and risk assignment 

processes in all the 

bank’s business lines 

was completed. 

All products and services launched therefore involve: 

• Training the people who are going to sell them. 

• Documenting and preparing the support materials. 

• Commercial steps to be taken. 

Customers are provided with information of maximum 

transparency and are treated equally, while the confidentiality 

of their operations is guaranteed. 

Derived from transposing the Markets in Financial 

Instruments Directive (MiFID) to Spanish law, by partly 

modifying the Securities Market Act, Banesto implemented, 

as of November 1, 2007, all the legal requirements and since 

then has been securing it in all the process for marketing 

products and services. This regulation seeks to provide 

maximum protection for retail customers and guarantee 

transparency in financial markets. 

As regards the confidentiality and security measures applied 

to the personal data of customers, the bank meets all the 

requirements of Organic Law 15/1999 on data protection and 

of its development regulations.

Under the most 

demanding international 

guidelines, Banesto has 

maintained an internal 

control model for the 

past five years, which 

continues to evolve 

in order to ensure its 

efficiency and constant 

updating. 

Internal control model 

Evolution of the Internal Control Model 

The critical tasks related to the generation of financial 

information are identified and documented in each of our 

activities. Other relevant procedures developed by all the 

support areas are also documented. 

The risks inherent in these tasks that could cause material 

errors are then identified. 

Lastly, for each risk the necessary controls to mitigate them 

most effectively are defined. 

All this information is available on line through a technology 

tool that manages and treats the risk in real time. 

In order to comply with the guidelines established by the 

Committee of Sponsoring Organisations for the Commission 

on Fraudulent Financial Reporting (Treadway Commission) 

under the framework of the Enterprise Risk Management 

Integrated Framework, we continued to adapt the model to 

changes in the environment 1 . 

Contrasting and supervision of the model 

Internal certification process 

In order to ensure the model’s quality, consistency and 

updating, the bank has a dedicated internal control unit that 

oversees and constantly supervises it, reporting the results to 

the board and senior management. 

AR 11 

(1)This international committee was 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 for guaranteeing maximum transparency in information. 

º Compliance and Internal Control º Internal control model 

92 

There are also certifications and evaluations twice a year of 

all those involved in the model, as well as validations on its 

functioning by Internal Auditing in each of its tasks. 

Certification by the auditing firm 

Every year the control model is examined by the auditing firm 

in compliance with the Sarbanes-Oxley Law. 

The objective of this law is to reduce the risk that the 

published information is uncertain, incomplete or wrong. 

It imposes obligations on all those involved in producing, 

certificating and analysing financial information. 

the opinion of the auditing firm certifies that Banesto 

maintains effective internal controls on the generation of the 

financial information contained in the annual consolidated 

statements, in accordance with the international rules on 

financial information adopted by the European Union. 

Control Panel: CONTROL + 

The Internal Control Model is aided by a command panel 

of control indicators based on the international COSO II 

standard, broken down by types of risk that follow the BIS II 

European guidelines. 

One of the objectives of the command panel is to have 

an integral view of the control environment, enabling us 

to access detailed information from various standpoints 

and facilitate and orientate decision-taking for achieving 

permanent improvements. 

It is integrated, for this reason, as a management tool in the 

bank’s areas so that it can be regularly used as a source of 

information, measurement and decision-taking. 

On the basis of the evaluations obtained and their evolution, 

regular improvement plans were established, and the general 

trend has been a positive change in results. 

In 2011, it continued to evolve with the aggregation of 

new indicators and the establishment of metrics more in 

accordance with the current situation.

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 2011, together with Auditors' 

Report 

Translation of a report originally issued in Spanish 

based on our work performed in accordance with the 

audit regulations in force in Spain and of 

consolidated financial statements originally issued in 

Spanish and prepared in accordance with the 

regulatory financial reporting framework applicable to 

the Group (see Notes 1 and 51). In the event of a 

discrepancy, the Spanish-language version prevails. 

93

AR 11 

º Annual Consolidated Financial Statements, Management Report and Annual Corporate Governance Report 

94

Translation of a report originally issued in Spanish based on our work performed in accordance with the audit 

regulations in force in Spain and of consolidated financial statements originally issued in Spanish and prepared in 

accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 51). In the 

event of a discrepancy, the Spanish-language version prevails. 

AUDITORS’ REPORT ON CONSOLIDATED FINANCIAL STATEMENTS 

To the Shareholders of 

Banco Español de Crédito, S.A.: 

We have audited the consolidated financial statements of Banco Español de Crédito, S.A. (“the Bank”) and 

Subsidiaries composing, together with the Bank, the Banco Español de Crédito Group (“the Group” - see 

Notes 1 and 3), which comprise the consolidated balance sheet at 31 December 2011 and the related 

consolidated income statement, consolidated statement of recognised income and expense, consolidated 

statement of changes in total equity, consolidated statement of cash flows and notes to the consolidated 

financial statements for the year then ended. As indicated in Note 1-b to the accompanying consolidated 

financial statements, the Bank’s directors are responsible for the preparation of the Group’s consolidated 

financial statements in accordance with International Financial Reporting Standards as adopted by the 

European Union and the other provisions of the regulatory financial reporting framework applicable to the 

Group. Our responsibility is to express an opinion on the consolidated financial statements taken as a whole 

based on our audit work performed in accordance with the audit regulations in force in Spain, which require 

examination, by means of selective tests, of the evidence supporting the consolidated financial statements 

and evaluation of whether their presentation, the accounting principles and policies applied and the 

estimates made comply with the applicable regulatory financial reporting framework. 

In our opinion, the accompanying consolidated financial statements for 2011 present fairly, in all material 

respects, the consolidated equity and consolidated financial position of the Banco Español de Crédito Group 

at 31 December 2011, and the consolidated results of its operations and its consolidated cash flows for the 

year then ended, in conformity with International Financial Reporting Standards as adopted by the 

European Union and the other provisions of the regulatory financial reporting framework applicable to the 

Group. 

The accompanying consolidated directors’ report for 2011 contains the explanations which the Bank’s 

directors consider appropriate about the Group’s situation, the evolution of its business and other matters, 

but is not an integral part of the consolidated financial statements. We have checked that the accounting 

information in the directors’ report is consistent with that contained in the consolidated financial statements 

for 2011. Our work as auditors was confined to checking the consolidated directors’ report with the 

aforementioned scope, and did not include a review of any information other than that drawn from the 

accounting records of Banco Español de Crédito, S.A. and Subsidiaries. 

DELOITTE, S.L. 

Registered in ROAC under no. S0692 

Juan José Pérez Sáez 

26 January 2012 

95

AR 11 

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 nondelegation 

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 revise 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 and monitor 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 the 

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 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 Chairman, 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 


96

Note 43 to the consolidated financial statements), it is hereby reported that in 2011 the fees paid for the 

financial audits performed by the Deloitte worldwide organisation amounted to EUR 1,438 thousand, those 

paid for other reports required by the supervisory bodies amounted to EUR 169 thousand and those paid for 

other work amounted to EUR 203 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 2011 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 12.63%. 

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% of their total revenues. 

In the case of Deloitte and the Deloitte worldwide organisation, this ratio was 0.4% and 0.007% 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. 

97

AR 11 

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 51). 

In the event of a discrepancy, the Spanish-language version prevails. 

BANCO ESPAÑOL DE CRÉDITO GROUP 

CONSOLIDATED BALANCE SHEETS 

AT 31 DECEMBER 2011 AND 2010 (NOTES 1 TO 4) 

(Thousands of Euros) 

ASSETS Note 2011 2010 (*) LIABILITIES AND EQUITY Note 2011 2010 (*) 

CASH AND BALANCES WITH CENTRAL BANKS 6 4,633,798 1,578,855 LIABILITIES 

FINANCIAL LIABILITIES HELD FOR TRADING: 5,631,779 4,556,294 

FINANCIAL ASSETS HELD FOR TRADING: 7,611,103 6,588,982 Trading derivatives 10 5,609,165 4,554,149 

Debt instruments 8 304,157 334,808 Short positions 22,614 2,145 

Equity instruments 9 1,290,142 1,818,344 OTHER FINANCIAL LIABILITIES AT 

Trading derivatives 10 6,016,804 4,435,830 FAIR VALUE THROUGH PROFIT OR LOSS - 

OTHER FINANCIAL ASSETS 

AT FAIR VALUE THROUGH FINANCIAL LIABILITIES AT AMORTISED COST: 91,213,397 102,367,945 

PROFIT OR LOSS: 937,351 1,491,687 Deposits from central banks 19 5,005,842 1,537,587 

Loans and advances to credit institutions 7 836,380 1,144,540 Deposits from credit institutions 19 7,130,530 6,013,047 

Debt instruments 8 31,147 210,927 Customer deposits 20 51,246,144 60,076,180 

Equity instruments 9 69,824 136,220 Marketable debt securities 21 24,022,730 29,214,182 

Subordinated liabilities 22 1,365,819 2,504,426 

Other financial liabilities 23 2,442,332 3,022,523 

AVAILABLE-FOR-SALE FINANCIAL ASSETS: 7,326,363 8,041,491 CHANGES IN THE FAIR VALUE OF HEDGED ITEMS 

Debt instruments 8 6,648,310 7,754,470 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 32 875,993 810,376 

Equity instruments 9 678,053 287,021 

HEDGING DERIVATIVES 12 575,190 492,540 

LOANS AND RECEIVABLES: 77,862,364 92,239,225 

Loans and advances to credit institutions 7 8,591,987 16,110,980 LIABILITIES ASSOCIATED WITH NON-CURRENT 

Loans and advances to customers 11 69,198,400 75,749,057 ASSETS HELD FOR SALE - 

Debt instruments 8 71,977 379,188 

LIABILITIES UNDER INSURANCE CONTRACTS 14 2,507,061 3,919,029 

HELD-TO-MATURITY INVESTMENTS 8 3,402,807 3,431,173 

PROVISIONS: 24 2,035,324 2,238,989 

CHANGES IN THE FAIR VALUE OF HEDGED 32 185,341 91,213 Provisions for pensions and similar obligations 1,947,103 2,024,299 

ITEMS IN PORTFOLIO HEDGES OF INTEREST Provisions for contingent liabilities and commitments 30,846 82,609 

RATE RISK Other provisions 57,375 132,081 

HEDGING DERIVATIVES 12 1,493,038 1,534,464 

TAX LIABILITIES: 25 138,975 282,403 

NON-CURRENT ASSETS HELD FOR SALE 16 2,349,130 2,328,170 Current 73,998 221,668 

Deferred 64,977 60,735 

INVESTMENTS 13 29,943 30,048 

OTHER LIABILITIES 18 428,051 475,345 

INSURANCE CONTRACTS LINKED TOTAL LIABILITIES 103,405,770 115,142,921 

TO PENSIONS 24 190,613 202,458 SHAREHOLDERS' EQUITY: 

Share capital 

5,424,176 5,466,646 

REINSURANCE ASSETS 14 44,165 71,974 Registered 28 543,036 543,036 

Reserves 29 4,903,607 4,689,328 

TANGIBLE ASSETS: 15 1,175,010 1,215,079 Accumulated reserves 4,899,600 4,682,760 

Property, plant and equipment Reserves of entities accounted for using the equity method 4,007 6,568 

For own use 1,010,694 1,064,579 Other equity instruments 4,075 2,343 

Investment property 164,316 150,500 Less: Treasury shares 30 (27,954) (41,164) 

Profit for the year attributable to the Parent 125,141 460,072 

INTANGIBLE ASSETS: 17 73,663 75,896 Dividends and remuneration (123,729) (186,969) 

Other intangible assets 73,663 75,896 

VALUATION ADJUSTMENTS: 27 (17,890) (27,830) 

TAX ASSETS: 25 1,072,216 1,158,509 Available-for-sale financial assets (43,446) (112,409) 

Current 52,296 107,751 Cash flow hedges 25,482 83,599 

Deferred 1,019,920 1,050,758 Other valuation adjustments 74 980 

OTHER ASSETS: 18 461,167 541,028 NON-CONTROLLING INTERESTS: 26 36,016 38,515 

Inventories 294,066 344,548 Other 36,016 38,515 

Other 167,101 196,480 TOTAL EQUITY 5,442,302 5,477,331 

TOTAL ASSETS 108,848,072 120,620,252 TOTAL LIABILITIES AND EQUITY 108,848,072 120,620,252 

Memorandum items: 

Contingent liabilities 31 8,491,769 9,131,524 

Contingent commitments 31 11,026,669 19,408,590 

(*) Presented for comparison purposes only. 

The accompanying Notes 1 to 51 and Appendices I to V are an integral part of the consolidated balance sheet at 31 December 2011. 


98

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework 

applicable to the Group (see Notes 1 and 51). In the event of a discrepancy, the Spanish-language version prevails. 


CONSOLIDATED INCOME STATEMENTS FOR 

THE YEARS ENDED 31 DECEMBER 2011 AND 2010 (NOTES 1 TO 4) 


Income /(Expenses) 

Note 2011 2010 (*) 

INTEREST AND SIMILAR INCOME 34 3,071,009 3,041,218 

INTEREST EXPENSE AND SIMILAR CHARGES 35 (1,554,697) (1,317,817) 

NET INTEREST INCOME 1,516,312 1,723,401 

INCOME FROM EQUITY INSTRUMENTS 36 32,570 42,894 

SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD 37 (1,518) 240 

FEE AND COMMISSION INCOME 38 665,932 667,037 

FEE AND COMMISSION EXPENSE 39 (124,449) (122,780) 

GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 40 99,535 153,628 

Held for trading 40,683 58,470 

Financial instruments not measured at fair value through profit or loss 57,084 95,501 

Hedge accounting transactions not included in interest 32 1,768 (343) 

Other - - 

EXCHANGE DIFFERENCES (net) 52,664 42,242 

OTHER OPERATING INCOME 41 1,343,493 1,045,137 

Income from insurance and reinsurance contracts issued 1,285,892 986,788 

Sales and income from the provision of non-financial services 26,691 29,362 

Other 30,910 28,987 

OTHER OPERATING EXPENSES 41 (1,290,269) (991,898) 

Expenses of insurance and reinsurance contracts (1,211,756) (912,705) 

Changes in inventories (659) (4,921) 

Other (77,854) (74,272) 

GROSS INCOME 2,294,270 2,559,901 

ADMINISTRATIVE EXPENSES (882,368) (912,056) 

Staff costs 42 (611,030) (645,861) 

Other general administrative expenses 43 (271,338) (266,195) 

DEPRECIATION AND AMORTISATION CHARGE 15, 17 (108,911) (105,532) 

PROVISIONS (net) 24 (15,114) 52,967 

IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (661,017) (845,053) 

Loans and receivables 11 (660,651) (811,093) 

Other financial instruments not measured at fair value through profit or loss 9 (366) (33,960) 

PROFIT FROM OPERATIONS 626,860 750,227 

IMPAIRMENT LOSSES ON OTHER ASSETS (net): (33,474) (53,182) 

Goodwill and other intangible assets 17 664 (634) 

Other assets 

GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD 

15.18 (34,118) (52,548) 

FOR SALE 44 167,750 108,224 

GAINS ON BARGAIN PURCHASES ARISING ON BUSINESS COMBINATIONS 

GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED 

- - 

OPERATIONS 16 (633,260) (196,971) 

PROFIT BEFORE TAX 127,876 608,298 

INCOME TAX 25 (5,249) (150,876) 

PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 122,627 457,422 

PROFIT FROM DISCONTINUED OPERATIONS (net) - - 

CONSOLIDATED PROFIT FOR THE YEAR 122,627 457,422 

PROFIT ATTRIBUTABLE TO THE PARENT 125,141 460,072 

LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS 

EARNINGS PER SHARE: 

(2,514) (2,650) 

Basic earnings per share (euros) 4 0.18 0.67 

Diluted earnings per share (euros) 4 0.18 0.67 


The accompanying Notes 1 to 51 and Appendices I to V are an integral part of the consolidated income statement for 2011. 

99

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CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR 




100 

2011 2010 (*) 

A) CONSOLIDATED PROFIT FOR THE YEAR 122,627 457,422 

B) OTHER RECOGNISED INCOME AND EXPENSE 9,940 (159,839) 

Available-for-sale financial assets 98,518 (190,360) 

Revaluation gains (losses) 83,199 (116,987) 

Amounts transferred to income statement 15,319 (73,373) 

Cash flow hedges (83,024) (39,401) 

Revaluation gains (losses) (39,392) (22,122) 

Amounts transferred to income statement (43,632) (17,279) 

Hedges of net investments in foreign operations - - 

Exchange differences 111 6 

Revaluation gains (losses) 111 6 

Non-current assets held for sale - 

Actuarial gains (losses) on pension plans - 

Entities accounted for using the equity method (984) 990 

Revaluation gains (losses) 3 990 

Amounts transferred to income statement 

(987) 

- - 

Other recognised income and expense - - 

Income tax (4,681) 68,926 

TOTAL RECOGNISED INCOME AND EXPENSE (A + B) 132,567 297,583 

C 1) Attributable to the Parent 135,081 300,233 

C 2) Attributable to non-controlling interests (2,514) (2,650) 


The accompanying Notes 1 to 51 and Appendices I to V are an integral part of the consolidated statement of recognised income and expense for 2011.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 51). In the event of a discrepancy, the Spanish-language version prevails. 


CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY FOR 

THE YEAR ENDED 31 DECEMBER 2011 (NOTES 1 TO 4) 


EQUITY ATTRIBUTABLE TO THE PARENT 

SHAREHOLDERS' EQUITY 

Reserves of 

Entities 

Accounted 

Profit 

for Using the Other Less: Attributable Less: Total 

Non- 

Share Share Accumulated Equity Equity Treasury to the Dividends and Shareholders' Valuation 

Controlling 

Capital Premium Reserves Method Instruments Shares Parent Remuneration Equity Adjustments Total Interests Equity 

Balance at 01/01/11 543,036 - 4,682,760 6,568 2,343 (41,164) 460,072 (186,969) 5,466,646 (27,830) 5,438,816 38,515 5,477,331 

Adjustments due to changes 

in accounting policies - - - - - - - - - - - - - 

Adjustments due to errors - - - - - - - - - - - - - 

Adjusted beginning balance 543,036 - 4,682,760 6,568 2,343 (41,164) 460,072 (186,969) 5,466,646 (27,830) 5,438,816 38,515 5,477,331 

Total recognised 

income/(expense) - - - - - - 125,141 - 125,141 9,940 135,081 (2,514) 132,567 

Other changes in equity - - 216,840 (2,561) 1,732 13,210 (460,072) 63,240 (167,611) - (167,611) - (167,596) 

Distribution of 

dividends - - - - - - - (177,345) (177,345) - (177,345) - (177,345) 

Transactions involving own 

equity instruments (net) 

(Note 30) - - (5,208) - - 13,210 - - 8,002 - 8,002 - 8,002 

Transfers between equity 

items - - 222,048 (2,561) - - (460,072) 240,585 - - - - - 

Equity-instrument-based 

- 

1,732 

payments 

- - 

- 

- 

1,732 - - - 

1,732 - 

1,732 

Other increases/(decreases) 

in equity 

- - 

- 

- 

- 

- 

- 

- 

- 

- 

- 

15 

15 

Balance at 31/12/11 543,036 - 4,899,600 4,007 4,075 (27,954) 125,141 (123,729) 5,424,176 (17,890) 5,406,286 36,016 5,442,302 

101

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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 51). In the event of a discrepancy, the Spanish-language version prevails. 


CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY FOR 

THE YEAR ENDED 31 DECEMBER 2010 (NOTES 1 TO 4) 



EQUITY ATTRIBUTABLE TO THE PARENT 


Reserves of 

Entities 

Accounted 

Profit 

for Using the Other Less: Attributable Less: Total 

Non- 

Share Share Accumulated Equity Equity Treasury to the Dividends and Shareholders' Valuation 

Controlling 

Capital Premium Reserves Method Instruments Shares Parent Remuneration Equity Adjustments Total Interests Equity 

Balance at 01/01/10 543,036 - 4,444,247 5,204 - (29,527) 559,803 (223,401) 5,299,362 132,009 5,431,371 41,165 5,472,536 

Adjustments due to changes 

in accounting policies - - - - - - - - - - - - - 

Adjustments due to errors - - - - - - - - - - - - - 

Adjusted beginning balance 543,036 - 4,444,247 5,204 - (29,527) 559,803 (223,401) 5,299,362 132,009 5,431,371 41,165 5,472,536 


income/(expense) - - - - - - 460,072 - 460,072 (159,839) 300,233 (2,650) 297,583 

Other changes in equity - - 238,513 1,364 2,343 (11,637) (559,803) 36,432 (292,788) - - - (292,788) 

Distribution of dividends - - - - - - - (279,766) (279,766) - (279,766) - (279,766) 

Transactions involving own - - (3,728) - - (11,637) - - (15,365) - (15,365) - (15,365) 

equity instruments (net) 

(Note 30) 

Transfers between equity 

- - 242,241 1,364 - - (559,803) 316,198 - - - - - 

items 

Equity-instrument-based 

- - - - 2,343 - - - 2,343 - 2,343 

- 2,343 

payments 

Balance at 31/12/10 543,036 4,682,760 6,568 2,343 (41,164) 460,072 (186,969) 5,466,646 (27,830) 5,438,816 38,515 5,477,331 

102 


The accompanying Notes 1 to 51 and Appendices I to V are an integral part of the consolidated statement of changes in total equity for 2011.




CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 



103 

2011 2010 (*) 

1. CASH FLOWS FROM OPERATING ACTIVITIES 3,524,752 2,011,734 

Consolidated profit for the year 122,627 457,422 

Adjustments made to obtain the cash flows from operating activities: 

Depreciation and amortisation charge 108,911 105,532 

Other adjustments 1,119,555 740,289 

Net increase/decrease in operating assets: 

Financial assets held for trading 1,022,121 (248,016) 

Other financial assets at fair value through profit or loss (554,336) (780,626) 

Available-for-sale financial assets (813,281) 648,288 

Loans and receivables (13,393,793) (6,285,339) 

Other operating assets 493,840 219,766 

Net increase/decrease in operating liabilities: 

Financial liabilities held for trading 1,075,485 (22,510) 

Financial liabilities at amortised cost (10,445,630) (4,874,299) 

Other operating liabilities (1,714,903) (830,893) 

Income tax recovered/paid 13,258 (9,734) 

2. CASH FLOWS FROM INVESTING ACTIVITIES (1,137) (1,326,586) 

Payments 

Tangible assets (106,356) (158,001) 

Intangible assets (42,743) (29,672) 

Investments (11,200) (10,884) 

Held-to- maturity investments - (1,354,846) 

Proceeds 

Tangible assets 110,888 226,817 

Intangible assets - - 

Held-to-maturity investments 28,367 

Investments 19,907 - 

3. CASH FLOWS FROM FINANCING ACTIVITIES (784,033) (326,359) 

Payments 

Dividends (144,351) (293,514) 

Subordinated liabilities (551,450) - 

Acquisition of own equity instruments - (11,637) 

Other payments related to financing activities (101,442) (21,208) 

Proceeds 

Subordinated liabilities - - 

Disposal of equity instruments 13,210 

Other proceeds related to financing activities - -

AR 11 

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting 

framework applicable to the Group (see Notes 1 and 51). In the event of a discrepancy, the Spanish-language version prevails. 


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 




104 

2011 2010 (*) 

4. EFFECT OF FOREIGN EXCHANGE RATE CHANGES (7,056) (6,883) 

5. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (1+2+3+4) 2,732,526 351,906 

6. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,914,639 2,562,733 

7. CASH AND CASH EQUIVALENTS AT END OF YEAR 5,647,165 2,914,639 

MEMORANDUM ITEMS 

COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR 

Cash 253,822 235,540 

Cash equivalents at central banks 4,379,976 1,343,315 

Other financial assets 1,013,367 1,335,784 

TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 5,647,165 2,914,639 


The accompanying Notes 1 to 51 and Appendices I to V are an integral part of the consolidated statement of cash flows for 2011.

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory 

financial reporting framework applicable to the Company (see Notes 1 and 51). In the event of a discrepancy, the Spanishlanguage 

version prevails. 

Banco Español de Crédito Group 

Notes to the consolidated financial statements 

for the year ended 31 December 2011 

1. Introduction, basis of presentation of the consolidated financial statements, 

use of estimates, 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 

separate financial statements, the Group's consolidated financial statements. 

b) Basis of presentation of the consolidated financial statements 

The Group’s consolidated financial statements for 2011 were prepared by the Bank’s directors, at the Board 

meeting on 25 January 2012, in accordance with the regulatory framework applicable to the Group, which is 

that established in the Spanish Commercial Code and other Spanish corporate and commercial law and in 

the International Financial Reporting Standards adopted by the European Union, taking into account Bank of 

Spain Circular 4/2004, of 22 December. Accordingly, they present fairly the Group's equity and financial 

position at 31 December 2011, and the consolidated results of its operations and its consolidated cash flows 

in the year then ended. These consolidated financial statements for 2011 have not yet been approved by the 

shareholders at the Annual General Meeting. However, the Bank's Board of Directors considers that the 

aforementioned consolidated financial statements will be approved without any changes. 

In accordance with the options established in IAS 1.81, the Group opted to present separately a statement 

displaying components of consolidated profit or loss ("consolidated income statement") and a second 

statement beginning with consolidated profit or loss and displaying components of other comprehensive 

income for the year (called “consolidated statement of recognised income and expense” in these consolidated 

financial statements, using the nomenclature in Bank of Spain Circular 4/2004). 

All the figures relating to 2010 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 2011, without having a material effect on the consolidated financial statements: 

105

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- Amendment to IAS 32, Financial Instruments: Presentation - Classification of Rights Issues: This 

amendment relates to the classification of foreign currency denominated rights issues (rights, options or 

warrants). Pursuant to this amendment, when these rights are offered to all owners and are to acquire a 

fixed number of shares in exchange for a fixed amount, they are equity instruments, irrespective of the 

currency in which that fixed amount is denominated and provided that other specific requirements of the 

standard are fulfilled. 

- Revised IAS 24, Related Party Disclosures: The revised IAS 24 provides a partial exemption from 

certain disclosure requirements when the transactions are between government-related entities (or 

entities related to an equivalent government institution) and revises the scope applicable to the 

disclosure requirements through the inclusion in the definition of “related party” of certain relationships 

between joint ventures and associates of the same entity which were not explicit in the previous version 

of the standard. 

- Improvements to IFRSs (issued in May 2010): Amendments to various standards. 

- Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement: This amendment 

introduces the possibility that prepayments for minimum funding contributions may give rise to an asset. 

- IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments: This interpretation addresses the 

accounting by a debtor when all or part of a financial liability is extinguished through the issue of equity 

instruments to the creditor. The interpretation does not apply to transactions in situations where the 

counterparties in question are shareholders or related parties, acting in their capacity as such, or where 

extinguishing the financial liability by issuing equity shares is in accordance with the original terms of the 

financial liability. In all cases, the equity instruments issued are measured at fair value at the date the 

liability is extinguished and any difference between this value and the carrying amount of the liability is 

recognised in profit or loss. 

Following is a detail of the new standards, amendments and interpretations mandatorily applicable in years 

subsequent to the calendar year that began on 1 January 2011 (applicable from 2012 onwards): 

- Amendment to IFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets: This 

amendment extends and enhances the disclosure requirements applicable to transfers of financial 

assets, including both those in which the assets are not derecognised and, principally, those in which 

the assets qualify for derecognition. 

At the date of preparation of these consolidated financial statements, the most significant standards and 

interpretations that had been published by the IASB but which had not yet come into force, either because 

their effective date is subsequent to the date of the consolidated financial statements or because they had not 

yet been adopted by the European Union, were as follows: 

- IFRS 9, Financial Instruments: Classification and Measurement: IFRS 9 will in the future replace the 

current part of IAS 39 relating to classification and measurement. There are very significant differences 

with respect to the current standard, in relation to financial assets, including the approval of a new 

classification model based on only two categories, namely instruments measured at amortised cost and 

those measured at fair value, the disappearance of the current “held-to-maturity investments” and 

“available-for-sale financial assets” categories, impairment analyses only for assets measured at 

amortised cost and the non-separation of embedded derivatives in financial asset contracts. 

In relation to financial liabilities, the classification categories proposed by IFRS 9 are similar to those 

currently contained in IAS 39. 


106

- Amendments to IAS 12, Income Taxes- Deferred Taxes Arising from Investment Property: Amends the 

treatment of the measurement of deferred taxes arising from investment property using the fair value 

model of IAS 40. 

- IFRS 10, Consolidated Financial Statements: Will modify the current definition of control. The new 

definition of control sets out the following three elements of control: power over the investee; exposure, 

or rights, to variable returns from involvement with the investee; and the ability to use power over the 

investee to affect the amount of the investor’s returns. 

- IFSR 11, Joint Arrangements: supersedes IAS 31. The fundamental change with respect to the current 

standard is the elimination of the option of proportionate consolidation for jointly controlled entities, 

which will begin to be accounted for using the equity method. 

- IFRS 12, Disclosures of Interests in Other Entities: Is a single standard presenting the disclosure 

requirements for interests in other entities (whether they be subsidiaries, associates, joint arrangements 

or other interests) and includes new disclosure requirements. 

- IFRS 13, Fair Value Measurement: The purpose of this IFRS is to set out in a single standard a 

framework for measuring the fair value of assets or liabilities when other standards require that the fair 

value measurement model be used. It changes the current definition of fair value, introduces new 

matters for consideration and extends the requirements regarding disclosures: 

- IAS 27 (Revised) Separate Financial Statements and IAS 28 (Revised), Investments in Associates and 

Joint Ventures: These IAS are revised in conjunction with the issue of the aforementioned new IFRSs 

(IFRS 10, 11 and 12). 

- Amendments to IAS 1, Presentation of Items of Other Comprehensive Income: minor amendments 

relating to the presentation of items of other comprehensive income. 

- Amendments to IAS 19, Employee Benefits: The main changes introduced by these amendments will 

affect the accounting treatment of defined benefit plans since the “corridor” is eliminated under which 

companies are currently permitted to opt for deferred recognition of a given portion of actuarial gains 

and losses. When the amendments come into effect, all actuarial gains and losses must be recognised 

immediately. The amendments also include significant changes in the presentation of cost components 

in the statement of comprehensive income, which will be aggregated and presented in a different way. 

- Amendments to IFRS 9 and IFRS 7, Mandatory Effective Date of IFRS 9 and Transition Disclosures: 

deferral of the mandatory effective date of IFRS 9 and amends transition requirements and disclosures. 

- Amendments to IAS 32 and IFRS 7, Offsetting Financial Assets and Liabilities: Additional clarifications 

to the rules for offsetting financial assets and liabilities included in IAS 32 and introduction of the related 

new disclosures in IFRS 7. 

The impact of the application of these standards has not yet been assessed. 

c) Use of estimates 

The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, 

measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial 

statements. The main accounting policies and measurement bases are set forth in Note 2. 

107

AR 11 

In the Group's consolidated financial statements for 2011 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 obligations reported herein. These estimates relate 

basically to the following: 

- The impairment losses on certain assets (see Notes 7, 8, 9, 11, 13, 15, 16 and 18); 

- The assumptions used in the actuarial calculation of the post-employment benefit liabilities and obligations 

(see Notes 2-u and 2-v); and 

- The useful life of the tangible and intangible assets (see Notes 15 and 17). 

Although these estimates were made on the basis of the best information available at 2011 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 of the affected years. 

d) Basis of consolidation 

i. Subsidiaries 

“Subsidiaries” are defined as entities over which the Bank has the capacity to exercise management control; 

control 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 

acquisition date. Any positive differences between the acquisition cost and the fair values of the identifiable 

net assets acquired are recognised as goodwill. Negative differences are recognised in profit or loss on the 

acquisition date. 

Additionally, the share of third parties of the Group’s equity is presented under “Non-Controlling Interests” in 

the consolidated balance sheet (see Note 26). Their share of the consolidated profit for the year is presented 

under “Loss Attributable to Non-Controlling Interests” in the consolidated income statement. 

The results of subsidiaries acquired during the year are included in the consolidated income statement from 

the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are 

included in the consolidated income statement from the beginning of the year to the date of disposal. 


108

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. Significant influence generally exists when the Bank holds 20% or more of the voting power of 

the investee. 

In the consolidated financial statements, investments in associates are accounted for using the equity 

method, i.e. at the Group's share of net assets of the investee, after taking into account the dividends 

received therefrom and other equity eliminations. The profits and losses resulting from transactions with an 

associate are eliminated to the extent of the Group's interest in the associate. 

iv. Acquisitions and disposals 

Appendices 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 

2011 and 2010. 

e) Challenges of corporate resolutions 

In 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 Meeting held on 15 January 1995, which approved, inter alia, the 1994 

financial statements of the Bank and the Group. The claim filed against the approval of the 1994 financial 

statements was 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 this claim will not have any effect. 

f) Equity 

Bank of Spain Circular 3/2008, of 22 May, amended by Bank of Spain Circular 9/2010, of 22 December, on 

the calculation and control of minimum capital requirements, regulates the minimum capital requirements for 

Spanish credit institutions -both as stand-alone 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. 

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In addition, on 18 February 2011, the Spanish Cabinet approved Royal Decree-Law 2/2011 on Strengthening 

the Financial System, which establishes that credit institutions and their groups that can take refundable 

funds from the public must have principal capital of 8% or more of their total risk-weighted exposure 

calculated in accordance with Law 13/1985, of 25 May. 

Pursuant to Transitional Provision One of this Royal Decree-Law, the date of entry into force of the 

aforementioned minimum core capital requirements was 10 March 2011, using as the basis for the calculation 

the risk-weighted assets at 31 December 2010. 

At 31 December 2011 and 2010, the eligible capital of the Group and of the Group entities subject to this 

requirement, taken individually, exceeded the minimum principal capital required under the regulations then in 

force. 

Lastly, the Group is subject to compliance with the risk concentration limits established in Bank of Spain 

Circular 3/2008 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 49). 

g) Deposit Guarantee Fund 

The Deposit Guarantee Fund for Credit Institutions was created pursuant to Royal Decree-Law 16/2011, of 14 

October, following the unification of the three previously existing deposit guarantee funds in a single deposit 

guarantee fund for Credit Institutions, and maintains the functions and characteristics of the three funds which 

it replaces. This Royal Decree-Law revises the legally stipulated maximum annual contribution that entities 

must make to this fund from 2 to 3 per mil to guarantee the maximum operating capability of the fund. It also 

repeals the Ministerial Orders which, pursuant to legislation then in force, granted powers to reduce 

contributions by 0.6, 0.8 and 1 per mil, respectively, depending on the type of entity. The result of these 

changes is the establishment of a ceiling on the contributions of 3 per mil of guaranteed deposits and the 

establishment of a real contribution of 2 per mil instead of the aforementioned figures. 

In addition Bank of Spain Circular 3/2011, of 30 June 2011, stipulated the rules permitting the application of 

the amendments introduced by Royal Decree 771/2011, of 3 June, amending Royal Decree-Law 216/2008, of 

15 February, for guaranteed deposits the remuneration on which exceeds any of the following limits: 

a. Time deposits and similar instruments or instruments which perform the same economic function: that 

the agreed annual interest exceeds average 3-month Euribor by more than 150 basis points on deposits 

made for three months or more, exceeds average 6-month Euribor by more than 150 basis points on 

deposits made for between three months and one year or exceeds average one-year Euribor by more 

than 100 basis points on deposits made for more than one year. 

b. Demand deposits: that the annual interest payments on the account exceed average one-month Euribor 

by more than 100 basis points. 

The treatment of contributions to the Fund is amended so that, for the purposes of calculating the 

contributions to be made by member entities, a weighting of 500% is applied to the amounts of deposits the 

agreed remuneration on which exceeds the limits stipulated in points a) and b) above. Any amount of this 

contribution in excess of the amount that would be applicable if none of the above circumstances are present 

will be taken to the Fund's account on a quarterly basis. 


110

The Bank participates in the Deposit Guarantee Fund. The contributions made to this Fund amounted to EUR 

22,464 thousand in 2011 (2010: EUR 18,606 thousand) and the related expense is recognised under “Other 

Operating Expenses” in the consolidated income statement for 2011 (see Note 41). 

The estimated contribution for 2012 arising from the increase in the percentage contribution is approximately 

EUR 42 million. 

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 25 January 2012 is summarised in the 

Directors' Report. 

j) Events after the reporting period 

From 1 January 2012 to the date on which these consolidated financial statements were authorised for issue 

no events took place having a material effect on the consolidated financial statements that have not been 

described in the other notes to the financial statements. 

2. Accounting policies and measurement bases 

The accounting policies and measurement bases applied in preparing these 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 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. 

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 the related index), whose initial investment is much smaller than 

would be required for other financial instruments with a similar response to changes in market factors, and 

which is generally settled at a future date. 

111

AR 11 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract 

together with a derivative, known as an embedded derivative, that is not separately transferable and has the 

effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative. 

“Compound financial instruments” are contracts that simultaneously create for their issuer a financial liability 

and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into 

equity instruments of the issuer). 

The following transactions are not treated for accounting purposes as financial instruments: 

- Investments in associates (see Note 13). 

- Rights and obligations under employee benefit plans (see Notes 2-u and 2-v). 

- Rights and obligations under insurance contracts (see Note 14). 

- Contracts and obligations relating to transactions involving payments based on own equity instruments 

(see Note 5 and 42). 

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 not permitted. 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-tomaturity 

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”. 


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- 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. 

iii. 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”). 

An embedded derivative included in a hybrid financial instrument is separated from the host contract and 

accounted for separately if, and only if: 

a) the economic characteristics and risks of the embedded derivative are not closely related to the 

economic characteristics and risks of the non-derivative host contract and, therefore, the changes in value 

of the host contract are not linked to the changes in value attributable to the embedded derivative. 

b) a separate instrument with the same terms as the embedded derivative would meet the definition of a 

derivative under current accounting regulations. 

c) the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in 

profit or loss. 

The amount relating to the separated embedded derivative is recognised as a derivative on the asset or 

liability side of the balance sheet, as appropriate, and the amount of the host contract is recognised under 

the appropriate line item based on its category and type of instrument. 

In circumstances other than those described above, certain hybrid financial instruments are designated on 

initial recognition as financial assets at fair value through profit or loss and, therefore, the derivatives are 

not separated from the host contract. 

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. 

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. Financial assets and liabilities are subsequently measured at 

each year-end as follows: 

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i. Measurement of financial assets 

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on 

their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair 

value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity 

instruments as their underlying and are settled by delivery of those instruments. 

The “fair value” of a financial instrument on a given date is taken to be the 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 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 (Net)” 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 these 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"). They are 

measured using methods recognised by the financial markets: "net present value" and option pricing models 

among others. 

“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 

consolidated 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. 


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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 Group 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 2011 and 2010: 

Percentage 

2011 2010 

Market Value Based on Assets Liabilities Assets Liabilities 

Public price quotations in active markets 61% 6% 68% 9% 

Internal valuation models with observable 

market data 39% 93% 32% 91% 

Internal valuation models with non-market data - 1% - - 

100% 100% 100% 100% 

The main techniques employed in the “internal valuation models” are as follows: 

- In the valuation of financial instruments permitting static hedging (basically, forwards and swaps) the 

“present value” method is used. 

- In the valuation of financial instruments requiring dynamic hedging, the Black-Scholes model is mainly 

used. 

- In the valuation of financial instruments exposed to interest rate risk, the Heath-Jarrow-Morton model is 

used to analyse the correlation by currency. 

- Credit risk is measured with dynamic models similar to those used in the measurement of interest rate 

risk. 

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The fair value of the financial instruments arising from the aforementioned internal models takes into account, 

inter alia, the contract terms and observable market data, which include interest rates, credit risk, exchange 

rates, the quoted market price of raw materials and shares, volatility and prepayments. The valuation models 

are not significantly subjective, since these methodologies can be adjusted and gauged, as appropriate, 

through the internal calculation of fair value and the subsequent comparison with the related traded price. 

The use of observable data assumes that the markets in which the Group operates are functioning efficiently 

and, therefore, that these data are representative. The main assumptions used in the measurement of the 

financial instruments that were valued by means of internal models employing unobservable market data are 

as follows: 

- Correlation: the assumptions relating to the correlation between the value of quoted and unquoted assets 

are based on historical correlations between the impact of adverse changes in market variables and the 

corresponding valuation of the associated unquoted assets. 

- Dividends: the estimates of dividends used as inputs in the internal models are based on the expected 

dividend payments of the issuers. Since the dividend expectations can change or vary depending on the 

source of the price and the companies' dividend policies can vary, the valuation is adjusted to the best 

estimate of the fair value of the dividends expected in more or less conservative scenarios. 

- Liquidity: the assumptions include estimates in response to market liquidity. For example, they take 

market liquidity into consideration when very long-term estimates of exchange rates or interest rates are 

used, or when the instrument is part of a new or developing market where, due to the absence of market 

prices that reflect a reasonable price for these products, the standard valuation methods and the 

estimates available might give rise to less precise results in the measurement of these instruments at that 

time. 

The measurements obtained using the internal models might have been different had other methods or 

assumptions been used with respect to interest rate risk, credit risk spreads, market risk, or to their related 

correlations and volatilities. However, 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 ownership interest in Metrovacesa was measured at the net asset value of the company rather than 

using internal valuation methods. Metrovacesa notified the Spanish National Securities Market Commission 

(CNMV) of this net asset value since it is observable public information which, therefore, is available to the 

whole market. 

The detail of the financial instruments, by valuation method, at 31 December 2011 is as follows: 


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Thousands of Euros 

2011 

Public Price Internal 

Quotations Models 

in Active Market Non-Market 

Markets Inputs Inputs Total 

Financial assets held for trading 1,637,373 5,890,275 83,455 7,611,103 

Available-for-sale financial assets 6,942,970 383,393 - 7,326,363 

Hedging derivatives (assets) - 1,493,038 - 1,493,038 

Held-to- maturity investments 3,402,807 - - 3,402,807 

Financial liabilities held for trading 354,977 5,213,071 63,731 5,631,779 

Hedging derivatives (liabilities) - 575,190 - 575,190 

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, among others, in the interest rate 

and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”); 

b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and 

highly probable forecast transactions (“cash flow hedge”); 

c. The net investment in a foreign operation (“hedge of a net investment in a foreign operation”). 

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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 yield 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. 

− 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 yield 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 how this effective hedge was expected to be achieved and 

measured, provided that this is consistent with the Group's management of own risks. 

The changes in value of financial instruments qualifying for hedge accounting are 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. 


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. 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 recognised 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 under “Gains/Losses on Financial Assets and Liabilities (Net)” in the 

consolidated income statement. 

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 

in consolidated equity under “Valuation Adjustments” (while the hedge was effective) remains in this equity 

item until the forecast transaction occurs, at which time it is recognised in profit or loss, unless the transaction 

is no longer expected to occur, in which case the gain or loss is recognised immediately in profit or loss. 

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. 

As established in the relevant regulatory framework, 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 to third parties. 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 2011 financial instruments totalling approximately EUR 2,731 million were transferred in relation to 

securitisations but not derecognised (2010: approximately EUR 1,600 million –see Note 11). 

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 Group entities 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. 

For these purposes, the presentation in accordance with current regulations in these consolidated financial 

statements of the financial assets subject to impairment losses or valuation adjustments, net of these 

concepts, is not considered offsetting. 

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e) Impairment of financial assets 

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 on these assets are assessed as follows: 

- Individually, for all significant debt instruments. 

- Collectively: the Group classifies transactions on the basis of the nature of the obligors, the conditions 

of the countries in which they reside, transaction status, type of collateral or guarantee, age of pastdue 

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. 

ii. Debt or equity instruments classified as available for sale 

The amount of the impairment losses on these instruments is 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 removed from the equity item “Valuation Adjustments - Available-for-Sale Financial 

Assets” and are recognised in the consolidated income statement. If all or part of the impairment losses on 

debt instruments 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). If all or part of the impairment losses 

on equity instruments are subsequently reversed, the reversed amount is recognised directly in consolidated 

equity under the related “Valuation Adjustments” item. 

iii. Equity instruments carried at cost 

The amount of the impairment losses on equity instruments carried at cost is the difference between the 

carrying amount and the present value of the expected future cash flows discounted at the market rate of 

return for similar securities. 


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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 likely to be completed within one 

year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial 

nature or otherwise- will foreseeably be recovered through the proceeds from their disposal. Specifically, 

property or other non-current assets received by the consolidated entities as total or partial settlement of their 

debtors' payment obligations to them are deemed to be non-current assets held for sale, unless the 

consolidated entities have decided to make continuing use of these assets. 

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. 

The assets acquired from certain borrowers to settle their debts are initially recognised at fair value (equal to 

the appraised value at the acquisition date) less the required costs to sell. Foreclosed assets, except those 

intended for continuing use, are initially recognised at the carrying amount of the financial assets given up. 

Under no circumstances are impairment losses on loans thus settled reversed with a credit to profit or loss. 

Non-current assets held for sale are generally measured at the lower of fair value less costs to sell, adjusted 

on the basis of the time they have remained in assets, 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 scantly material and were recognised in the corresponding income statement 

items based on their nature. The fair value of these assets and liabilities does not differ significantly from its 

carrying amount. 

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. 

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“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 therefore required to accrue at period-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 14), 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 

(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 period tangible asset depreciation charge is recognised in the consolidated income statement and is 

calculated using the following depreciation rates (based on the average years of estimated useful life of the 

various assets): 


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123 

Annual 

Rate 

Buildings for own use 2.0% 

Furniture 7.7% 

Fixtures 6.0% 

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 the items of property, plant and equipment for own use are reviewed at least at 

the end of the reporting period with a view to detecting significant changes therein. If changes are detected, 

the useful lives of the assets are adjusted by correcting the depreciation charge to be 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. 

In most cases the fair value of these assets was calculated using appraisals conducted by an independent 

expert. 

j) Accounting for leases 

i. Finance leases 

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the 

leased asset to the lessee.

AR 11 

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease 

payments receivable from the lessee 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 the lessees, they present the cost of the leased assets in the 

consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, 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 payable to the lessor plus, if appropriate, the exercise price of the 

purchase option). The depreciation policy for these assets is consistent with that for property, plant and 

equipment for own use. 

In both cases, the finance income and finance charge arising under finance lease agreements are credited 

and 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 items of 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 the lessees, lease expenses, including any incentives granted by the 

lessor, are charged to the consolidated income statement on a straight-line basis. 

Where transactions involve the sale to a third party of a Group asset that is simultaneously leased back, the 

terms and conditions of the lease agreement are analysed to determine whether it should be considered a 

finance or an operating lease. If it is determined to be a finance lease, the gain arising on the sale is not 

recognised immediately, but deferred and recognised in the consolidated income statement over the lease 

term. However, if the leaseback is an operating lease and the sale price is the fair value of the property, any 

profit or loss on the sale is recognised in the consolidated income statement. 

k) Intangible assets 

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. 

l) Tax assets 

“Tax Assets” in the consolidated balance sheet includes the amount of all tax assets, 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). 


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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. 

The estimated net realisable value of these assets is calculated using appraisals by independent experts, 

most of which were performed within the last 12 months and none of which are more than 24 months old, 

taking into account losses from sales recognised in 2011 and the outlook for the real estate industry. 

- 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. 

n) Provisions and contingent liabilities 

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. 

o) Litigation and/or claims in process 

In addition to the disclosures made in Note 1, at the end of 2011 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 ultimate economic loss, if any, that may derive from litigation and 

claims will not have a material effect on the consolidated financial statements (see Note 23). 

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AR 11 

p) 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 foreign currency assets and liabilities held by the Group at 31 

December 2011 amounted to EUR 3,351,922 thousand and EUR 3,968,323 thousand, respectively (31 

December 2010: EUR 3,236,487 thousand and EUR 3,827,953 thousand, respectively). Approximately 89.3% 

of these amounts relate to US dollars and the remainder mostly to currencies quoted in the Spanish market. 

ii. Translation of foreign currency balances 

- Monetary items in foreign currency are translated to the functional currency using the closing rate. 

- Non-monetary items measured at historical cost are translated to the functional currency at the 

exchange rate at the date of acquisition. 

- Non-monetary items measured at fair value are translated at the exchange rate at the date when the 

fair value was determined. 

- Income and expenses are translated at the 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. 

iii Recognition of exchange differences 

The exchange differences arising on the translation of foreign currency balances to the functional currency 

are generally recognised at their net amount under “Exchange Differences (Net)” 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, at which time they are recognised in profit 

or loss. 

q) Own equity instruments 

Own equity instruments are those meeting both of the following conditions: 

- The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another 

financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party 

under conditions that are potentially unfavourable to the issuer. 


126

- 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. 

r) Recognition of income and expenses 

The most significant criteria used by the Group to recognise its income and expenses are summarised as 

follows: 

i. Interest income, interest expenses and similar items 

Interest income, interest expenses and similar items are generally recognised on an accrual basis using the 

effective interest method. Dividends received from other companies are recognised as income when the 

consolidated entities' right to receive them arises. 

ii. Commissions, fees and similar items 

Fee and commission income and expenses are recognised in the consolidated income statement using 

criteria that vary according to their nature. The main criteria are as follows: 

- Fee and commission income and expenses relating to financial assets and liabilities measured at fair 

value through profit or loss are recognised when collected. 

- Those arising from transactions or services that are performed over a period of time are recognised over 

the life of these transactions or services. 

- Those relating to services provided in a single act are recognised when the single act is carried out. 

iii. Non-finance income and expenses 

These are recognised for accounting purposes on an accrual basis. 

iv. Deferred collections and payments 

These are recognised for accounting purposes at the amount resulting from discounting the expected cash 

flows at market rates. 

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AR 11 

s) Financial guarantees 

A financial guarantee contract is a contract that requires the issuer to make payments to reimburse the 

creditor for the loss incurred when a specific debtor fails to meet its payment obligations in accordance with 

the original or modified terms and conditions of a debt instrument, irrespective of the legal form it may have 

(guarantee, insurance contract or credit derivative). 

The Group recognises these financial guarantees -other than contracts issued by insurance entities- when 

they are issued on the liability side of the balance sheet at their fair value, which on initial recognition is the 

premium received, plus, where appropriate, the present value of the cash flows to be received (fees and 

commissions), using an interest rate similar to that of the financial assets granted by the Group with a similar 

term and risk. Simultaneously, the Group recognises as a balance receivable on the asset side of the 

consolidated balance sheet the present value of the future cash flows receivable using the aforementioned 

interest rate. 

Financial guarantees, irrespective of the guarantor, instrumentation or other circumstances, are reviewed 

periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider 

whether a provision is required. The credit risk is determined by application of criteria similar to those 

established for quantifying impairment losses on debt instruments carried at amortised cost. 

If a provision is required for these financial guarantees, the unearned commissions recognised under “Other 

Liabilities” in the consolidated balance sheet are reclassified to “Provisions for Contingent Liabilities and 

Commitments”. 

t) Assets under management 

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the 

consolidated balance sheet. Management fees are included in “Fee and Commission Income” in the 

consolidated income statement. Information on third-party assets managed by the Group at 31 December 

2011 is disclosed in Note 33. 

u) Post-employment benefits 

Under the collective agreement currently in force, the Bank has undertaken to supplement the public social 

security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, 

permanent disability, death of spouse or death of parent, and other benefits. 

i. Defined benefit plans 

The Group recognises under “Provisions - Provisions for Pensions and Similar Obligations” on the liability 

side of the consolidated balance sheet the present value of its defined benefit pension obligations, net of the 

fair value of the plan assets and of the unrecognised cumulative actuarial gains or losses, using a corridor 

approach. 

If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit 

obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required 

to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognises its 

right to reimbursement which, in all other respects, is treated as a plan asset, under “Insurance Contracts 

Linked to Pensions” on the asset side of the consolidated balance sheet. 


128

“Actuarial Gains and Losses” are defined as those arising from differences between the previous actuarial 

assumptions and what has actually occurred and from the effect of changes in the actuarial assumptions. The 

Group uses, on a plan-by-plan basis, the corridor approach and recognises, either directly in reserves through 

the consolidated statement of recognised income and expense or in the consolidated income statement, the 

amount resulting from deferring over five years the net amount of the cumulative unrecognised actuarial gains 

and/or losses at the beginning of the year which exceeded the greater of 10% of the present value of the 

obligations or 10% of the fair value of the plan assets at the beginning of the year. 

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 – Staff Costs”. 

- 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 recognised in the period, in accordance with the corridor approach, 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 “Staff 

Costs” and “Provisions (Net)”, respectively, in the consolidated income statement. The amounts not yet 

contributed at each year-end are recognised, at their present value, under “Provisions - Provisions for 

Pensions and Similar Obligations” on the liability side of the consolidated balance sheet. 

In 2011 the Group contributed EUR 6,773 thousand to defined contribution plans (see Note 42). In 2010 the 

Group contributed EUR 6,645 thousand to defined contribution plans, which were recognised under “Staff 

Costs” in the consolidated income statement. 

v) Other long-term employee benefits 

Obligations to pre-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, obligations for death of spouse or disability before retirement that 

depend on the employee's length of service at the entity and other similar items are treated for accounting 

purposes, where applicable, as established above for defined benefit post-employment plans, except that all 

past service costs and actuarial gains and losses are recognised immediately in the consolidated income 

statement. 

w) Transactions involving equity-instrument-based payments 

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. 

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AR 11 

When the requirements stipulated in the remuneration agreement include external market conditions (such as 

equity instruments reaching a certain quoted price), the amount ultimately to be 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. 

x) 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. 

y) 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, 

after considering 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 offset in the current year. 

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 paid or larger amounts of tax to be refunded in 

future tax years. 

Deferred tax assets (deductible temporary differences, tax loss carryforwards, unused tax credits and other 

unused tax benefits) are only recognised to the extent that it is probable that the Group will have future 

taxable profits available against which these assets can be utilised. 

Deferred tax liabilities are always recognised except when accounting for goodwill. However, deferred tax 

assets and liabilities are not recognised if they arise from the initial recognition of an asset or liability (other 

than in a business combination) that at the time of recognition affects neither accounting profit nor taxable 

profit. 

Recognised and previously unrecognised deferred tax assets and liabilities are reassessed at each reporting 

date, either in order to ascertain whether they still exist, in which case the appropriate adjustments are made 

on the basis of the findings of the analyses performed (see Note 24), 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. 


130

z) Consolidated statements of cash flows 

The following terms are used in the consolidated statements of cash flows with the meanings specified: 

- Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid 

investments that are subject to an insignificant risk of changes in value. 

- 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 statement of cash flows, short-term highly liquid investments that are subject to 

an insignificant risk of changes in value were treated 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 demand deposits recognised under “Loans and Advances 

to Credit Institutions”. 

3. Banesto Group 

a) Banco Español de Crédito, S.A. 

Banesto is the parent of the Banesto Group. At 31 December 2011, the Bank’s assets represented 

substantially all the Group’s consolidated assets; the Bank’s equity represented 92.65% of the Group’s equity, 

and the Bank’s net profit for 2011 represented 114.6% of the consolidated net profit for the year attributable to 

the Group (31 December 2010: 92.5% and 95.25%, respectively). 

At 31 December 2011 and 2010, the Bank conducted its business in Spain through 1,713 and 1,761 branch 

offices, respectively, located throughout the country and had 122 agents to which Bank 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 balance sheets, income statements, statements of recognised income and expense, 

statements of changes in total equity and statements of cash flows for 2011 and 2010 are as follows: 

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AR 11 

BANCO ESPAÑOL DE CREDITO, S.A. 

CONDENSED BALANCE SHEETS AT 31 DECEMBER 2011 AND 2010 


ASSETS 2011 2010 LIABILITIES AND EQUITY 2011 2010 

CASH AND BALANCES WITH CENTRAL BANKS 4,633,792 1,578,846 LIABILITIES 

FINANCIAL ASSETS HELD FOR TRADING 8,016,714 7,069,988 FINANCIAL LIABILITIES HELD FOR TRADING 6,054,621 5,045,805 

OTHER FINANCIAL ASSETS AT FAIR VALUE 

THROUGH PROFIT OR LOSS - - FINANCIAL LIABILITIES AT AMORTISED COST 95,324,073 108,391,457 

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS 

AVAILABLE-FOR-SALE FINANCIAL ASSETS 8,417,414 9,920,646 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 875,993 810,376 

LOANS AND RECEIVABLES 79,303,756 93,844,417 HEDGING DERIVATIVES 575,190 492,540 

HELD-TO-MATURITY INVESTMENTS 3,402,807 3,431,173 PROVISIONS 2,386,870 2,438,706 

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS TAX LIABILITIES 112,253 203,944 

IN PORTFOLIO HEDGES OF INTEREST RATE RISK 185,341 91,213 OTHER LIABILITIES 408,067 440,912 

HEDGING DERIVATIVES 1,493,038 1,534,464 TOTAL LIABILITIES 105,737,066 117,823,740 

NON-CURRENT ASSETS HELD FOR SALE 1,240,295 986,869 

INVESTMENTS 425,482 698,304 

INSURANCE CONTRACTS LINKED TO PENSIONS 1,395,328 1,423,964 

TANGIBLE ASSETS 976,650 1,016,710 EQUITY 

INTANGIBLE ASSETS 62,632 65,223 SHAREHOLDERS' EQUITY 5,025,646 5,058,277 

TAX ASSETS 1,009,509 1,032,198 VALUATION ADJUSTMENTS (16,101) (30,866) 

OTHER ASSETS 183,853 157,136 TOTAL EQUITY 5,009,545 5,027,411 

TOTAL ASSETS 110,746,611 122,851,151 TOTAL LIABILITIES AND EQUITY 110,746,611 122,851,151 


Contingent liabilities 8,532,745 9,165,419 

Contingent commitments 11,435,199 19,866,238 


132


CONDENSED INCOME STATEMENTS 

FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 


133 

Income/(Expenses) 

2011 2010 

INTEREST AND SIMILAR INCOME 3,210,413 3,146,671 

INTEREST EXPENSE AND SIMILAR CHARGES (1,736,948) (1,502,686) 

NET INTEREST INCOME 1,473,465 1,643,985 

INCOME FROM EQUITY INSTRUMENTS 71,701 43,965 

FEE AND COMMISSION INCOME 700,665 701,004 

FEE AND COMMISSION EXPENSE (108,962) (112,006) 

GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) 81,094 141,356 

EXCHANGE DIFFERENCES (net) 52,484 41,312 

OTHER OPERATING INCOME 17,775 22,449 

OTHER OPERATING EXPENSES (67,722) (66,122) 

GROSS INCOME 2,220,500 2,415,943 

ADMINISTRATIVE EXPENSES (833,417) (867,268) 

DEPRECIATION AND AMORTISATION CHARGE (103,955) (101,753) 

PROVISIONS (net) (111,183) 76,544 

IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (680,297) (841,492) 

PROFIT FROM OPERATIONS 491,648 681,974 

IMPAIRMENT LOSSES ON OTHER ASSETS (net) (243,007) (157,379) 

GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT 

ASSETS HELD FOR SALE 273,948 108,388 

GAINS/(LOSSES) ON DISPOSAL OF NON-CURRENT ASSETS HELD-FOR SALE NOT CLASSIFIED 

AS DISCONTINUED OPERATIONS (390,473) (92,420) 

PROFIT BEFORE TAX 132,116 540,563 

INCOME TAX 11,248 (104,833) 

PROFIT FROM ORDINARY ACTIVITIES 143,364 435,730 

PROFIT FOR THE YEAR 143,364 435,730

AR 11 


CONDENSED STATEMENTS OF RECOGNISED INCOME AND EXPENSE 




134 

2011 2010 

PROFIT FOR THE YEAR 143,364 435,730 

OTHER RECOGNISED INCOME AND EXPENSE 14,765 (159,192) 

Available-for-sale financial assets 104,117 (188,015) 

Cash flow hedges (83,024) (39,401) 

Income tax (6,328) 68,224 

TOTAL INCOME AND EXPENSE FOR THE YEAR 158,129 276,538 


CONDENSED STATEMENTS OF CHANGES IN TOTAL EQUITY 




Other Less: Profit 

Less: 

Dividends 

Share Share 

Equity Treasury for the and Total Shareholders' Valuation Total 

Capital Premium Reserves Instruments Shares Year Remuneration Equity 

Adjustments Equity 

Balance at 01/01/10 543,036 - 4,075,970 - - 504,382 (223,401) 4,899,987 128,326 5,028,313 


income/(expense) 

- - - - - 

435,730 

- 

435,730 (159,192) 276,538 

Other changes in 

equity 

- 

- 

188,167 

2,343 

- 

(504,382) 36,432 (277,440) - (277,440) 

Balance at 31/12/10 543,036 - 4,264,137 2,343 - 435,730 (186,969) 5,058,277 (30,866) 5,027,411 


income/(expense) 

Other changes in 

- - - - - 

143,364 

- 

143,364 14,765 158,129 

equity - - 194,764 1,732 - (435,730) 63,239 (175,995) - (175,995) 

Balance at 31/12/11 543,036 - 4,458,901 4,075 - 143,364 (123,730) 5,025,646 (16,101) 5,009,545


CONDENSED STATEMENTS OF CASH FLOWS 



2011 2010 

A. CASH FLOWS FROM OPERATING ACTIVITIES 3,103,985 2,026,349 

Profit for the year 143,364 435,730 

Adjustments made to obtain the cash flows from operating activities: 

Depreciation and amortisation charge 103,955 101,753 

Other adjustments 1,141,550 1,013,535 

Net increase/decrease in operating assets: 

Financial assets held for trading 946,726 (310,930) 

Other financial assets at fair value through profit or loss - - 

Available-for-sale financial assets- (1,501,813) 368,941 

Loans and receivables- (13,805,273) (6,073,235) 

Other operating assets 361,172 533,647 

Net increase/decrease in operating liabilities: 

Financial liabilities held for trading 1,008,816 (79,659) 

Financial liabilities at amortised cost- (12,990,519) (4,436,158) 

Other operating liabilities- (315,271) (480,701) 

Income tax recovered/paid 12,.902 (9,728) 

B. CASH FLOWS FROM INVESTING ACTIVITIES 141,113 (1,419,934) 

Payments 

Tangible assets (82,688) (81,009) 

Intangible assets (42,714) (20,656) 

Held-to- maturity investments - (1,354,846) 

Investments (9,823) (164,366) 

Proceeds 

Tangible assets 188,631 199,591 

Intangible assets 40,402 1,155 

Held-to-maturity investments 28.367 - 

Investments 18,938 197 

Other proceeds related to investing activities - - 

C. CASH FLOWS FROM FINANCING ACTIVITIES (240,966) (316,215) 

Payments 

Dividends (197,967) (293,514) 


Redemption of own equity instruments - - 

Other payments related to financing activities (42,999) (22,701) 

Proceeds 


D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES (4,264) (1,003) 

E. NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS (A+B+C+D) 2,999,508 289,197 

F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,795,621 2,506,424 

G. CASH AND CASH EQUIVALENTS AT END OF YEAR 5,795,129 2,795,621 

MEMORANDUM ITEMS 

COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR 

Cash 253,816 235,531 

Cash equivalents at central banks 4,379,976 1,343,315 

Other financial assets 1,161,337 1,216,775 

TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 5,795,129 2,795,621 

135

AR 11 

b) Changes in Group structure 

The salient changes and events at the Group in relation to its scope of consolidation in 2011 were as follows: 

1. On 13 December 2011, the Bank's Executive Committee approved the sale of 20% of the Bank's 

shareholding in Santander Asset Management, S.A., S.G.I.I.C. to Santander AM Holding, S.L. (member 

of the Santander Group) for EUR 57,000 thousand, giving rise to a gain of EUR 30,889 thousand, which 

was recognised under "Gains/(Losses) on Disposal of Assets Not Classified as Non-Current Assets 

Held For Sale" in the consolidated income statement for the year ended 31 December 2011 (see Note 

44). 

2. On 13 December 2011, the Bank's Executive Committee approved the sale of 20% of Santander 

Pensiones E.G.F.P., S.A. to Santander AM Holding, S.L. (a member of the Santander Group) by way of 

an agreement signed on 29 December 2011, for EUR 27,414 thousand, giving rise to a gain for the 

Bank of EUR 11,559 thousand, which was recognised under "Gains/(Losses) on Disposal of Assets Not 

Classified as Non-Current Assets Held For Sale" in the consolidated income statement for the year 

ended 31 December 2011 (see Note 44). 

3. On 13 December 2011, the Bank's Executive Committee approved the sale of 13% of the Bank's 

shareholding in Santander Seguros y Reaseguros, Cía. Aseguradora for EUR 173,849 thousand, giving 

rise to a gain of EUR 73,979 thousand, which was recognised under "Gains/(Losses) on Disposal of 

Assets Not Classified as Non-Current Assets Held For Sale" in the consolidated income statement for 

the year ended 31 December 2011 (see Note 44). 

The prices of the aforementioned transactions were validated by the report of an independent appraiser. 

Pursuant to the terms and conditions of the three aforementioned purchase and sale agreements, a price 

adjustment clause has been established in the event that, within a period of 36 months from the transaction 

dates, the buyer transfers the shares to a third party for an amount which is a maximum of 15% higher or 

lower than the transaction price. 

These ownership interests were proportionately consolidated and the sale reduced assets and liabilities by 

EUR 2,410 million and EUR 2,290 million, respectively. 

4. Sale to non-Group third parties of 100% of the shareholding in Banco Alicantino de Comercio, S.A. in 

March 2011 with a gross gain of EUR 6 million. 

5. Sale to non-Group third parties of the 32.7% shareholding in Compañía Concesionaria del Túnel del 

Soller, S.A. in September 2011. This sale did not have a material impact on profit or loss. 

6. Dissolution and liquidation of Espais Promocat, S.L. in October 2011. This sale did not have a material 

impact on profit or loss. 

The most significant changes at the Group in relation to its scope of consolidation in 2010 are detailed in the 

consolidated financial statements for the year ended 31 December 2010. These changes were as follows: 


136

1. Merger of Intursa, S.A.U., Efearvi, S.A.U. and Programa Hogar Montigalá, S.A.U. into Mesena Servicios de 

Gestión Inmobiliaria, S.A. 

2. Capital increase at Mesena Servicios de Gestión Inmobiliaria, S.A. 

3. Liquidation of Inmobiliaria Sitio de Baldeazores, S.A. 

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 2011 that the Board of Directors will propose for approval by the 

shareholders at the Annual General Meeting is as follows: 

137 

Thousands 

of Euros 

Dividends 123,730 

To voluntary reserves 19,634 

Net profit for the year 143,364 

At its meetings on 14 June, 24 October and 21 December 2011, the Board of Directors of the Bank resolved to 

distribute three interim dividends out of 2011 profit for a total of EUR 123,730 thousand. The dividend declared at 

the Board of Directors Meeting on 21 December 2011 will be paid on 2 February 2012 and, accordingly, it is 

recognised under "Financial Liabilities at Amortised Cost – Other Financial Liabilities" on the liability side of the 

accompanying consolidated balance sheet (see Note 22). 

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 277 of the Consolidated Spanish Limited Liability 

Companies Law, evidencing the existence of sufficient liquidity for the payment of the interim dividends are as 

follows: 

Profit before tax at 30 June, 30 

September and 30 November 

2011 (*) 


30/06/11 30/09/11 30/11/11 

335,412 445,531 470,926 

Less: 

Estimated income tax (68,282) (81,471) (77,711) 

Dividends paid - (54,991) (89,630) 

Liquidity 267,130 309,069 303,585 

Interim dividend to be distributed 54,991 34,369 34,369 

Gross dividend per share (euros) 0.08 0.05 0.05 

Date of payment 01/08/11 01/11/11 02/02/12 

(*) The latest balance sheet at the date of each Board of Directors Meeting.

AR 11 

The Bank's Board of Directors, at its meeting on 25 January 2012, resolved to submit for approval by the 

shareholders at the Annual General Meeting a proposal not to distribute a final dividend additional to those 

already paid. 

b) Earnings per share 

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: 


138 

2011 2010 

Net profit for the year attributable to the Parent (in thousands 

of euros) 125,141 460,072 

Net profit from ordinary activities (thousands of euros) 125,141 460,072 

Weighted average number of shares outstanding 682,804,693 683,089,166 

Basic earnings per share (euros) 

Of net profit for the year 0.18 0.67 

Of net profit from ordinary activities 0.18 0.67 

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 2011 and 2010, the Group did not have any 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 and, accordingly, there was no dilutive effect. At 31 December 2011, the Bank's 

share-based incentive plans outstanding (see Note 42) had a dilutive effect on earnings per share equal to an 

increase of 2,403,378 shares (31 December 2010: an increase of 2,114,263 shares). 

Accordingly, 2011 and 2010 diluted earnings per share were calculated as follows:

139 

2011 2010 

Net profit for the year attributable to the Parent 

(in thousands of euros) 125,141 460,072 

Dilutive effect of changes in profit for the year arising 

from potential conversion of ordinary shares - - 

125,141 460,072 

Weighted average number of shares outstanding 682,804,693 683,089,166 

Dilutive effect of: 

Share options 2,408,378 2,114,263 

Adjusted average number of shares for the calculation 685,208,071 685,203,429 

Diluted earnings per share (euros) 0.18 0.67 

5. Remuneration and other benefits paid to the Bank's directors and senior 

executives 

a) Remuneration and other benefits of directors 

Following is an individualised detail of the remuneration earned in 2011 by the Bank's directors, in their 

capacity as such, in respect of the by-law-stipulated share of profits and attendance fees corresponding to 

them for the collective supervisory and decision-making functions discharged as members of the Board of 

Directors, in accordance with Article 39.1 of the bylaws:

AR 11 

Directors Board 

Euros 

2011 2010 

Bylaw-Stipulated Directors' Emoluments Attendance Fees 

Reduction 

Executive 

Committee 

Audit and 

Compliance 

Committee 

Risk 

Committee Board 


140 

Other 

Attendance 

Fees 

Total 

Approved 

by the 

AGM 

Due to 

Bylaw 

Stipulated 

Limits 

(1) Total Total 

Antonio Basagoiti García-Tuñón 266,650 233,350 - - - - 500,000 (125,000) 375,000 83,333 

José Antonio García Cantera 59,400 26,100 - - 13,500 - 99,000 (24,375) 74,625 100,500 

José María Nus Badia 2,970 1,305 - - 1,500 1,500 7,275 - 7,275 126,600 

Juan Delibes Liniers 59,400 26,100 - 26,100 15,000 36,750 163,350 (42,150) 121,200 126,600 

Rafael del Pino y Calvo-Sotelo 59,400 - - - 9,000 - 68,400 (17,850) 50,550 69,900 

Francisco Daurella Franco 2,970 - - - 1,500 - 4,470 - 4,470 71,400 

José Luis López Combarros 59,400 26,100 26,100 - 15,000 15,000 141,600 (36,150) 105,450 142,350 


Carlos Pérez de Bricio 

59,400 26,100 - 26,100 15,000 31,500 158,100 (39,900) 118,200 126,600 

Olariaga 59,400 - - - 12,000 - 71,400 (17,850) 53,550 72,900 

Belén Romana García 59,400 - 52,200 26,100 13,500 51,000 202,200 (50,925) 151,275 153,375 

David Arce Torres 2,970 - 1,305 - 1,500 - 5,775 - 5,775 109,500 

Rosa María García García 59,400 - - - 13,500 3,750 76,650 (18,600) 58,050 74,400 

José Corral Lope 56,430 24,795 - 206,248 13,500 35,250 336,223 (87,188) 249,035 - 

Alfonso Libano Daurella 56,430 - - - 10,500 - 66,930 (17,850) 49,080 - 

Total 2011 863,620 363,850 79,605 284,548 135,000 174,750 1,901,373 (477,838) 1,423,535 

Total 2010 697,842 169,391 98,100 97,875 150,000 44,250 1,257,458 

(1) Reduction to limit the directors' remuneration to 1% of the Bank's profit pursuant to Article 39 of the bylaws. 

The foregoing table shows the amounts received in 2011 by Francisco Daurella Franco, David Arce Torres 

and Jose María Nus Badía, who at 31 December 2011 were not members of the Board, but who earned 

attendance fees for the meetings that they attended as well as the other remuneration to which they are 

entitled in proportion to the amount of time they served as members of the Board. 

The foregoing table also shows the amounts received in 2011 by José Corral Lope and Alfonso Líbano 

Daurella, who were appointed members of the Board by cooptation and, in the case of the former, member of 

the Executive Committee and chairman of the Risk Committee by resolution of the Board of 19 January 2011. 

It also shows the amounts received by Antonio Basagoiti García-Tuñon since his appointment as Chairman of 

the Board and of the Executive Committee by resolution of the Board meeting held on 3 November 2010. 

The other members of the Bank's Board of Directors, who are proprietary directors and are not included in the 

foregoing table, did not receive any remuneration in their capacity as directors of the Bank. 

At the Extraordinary General Meeting on 27 June 2007, the shareholders 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 entail 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, who ceased to discharge her duties as director prior to 31 December 2010: 

141 

Price Number 

(Euros per of Delivery 

Share) Shares Deadline 

First cycle of Target-Based Share Plan 13.46 (*) 27,929 31 July 2009 

Second cycle of Target-Based Share Plan 13.46 (*) 41,835 31 July 2010 

First cycle of Obligatory Investment Share Plan (**) 13,610 1 April 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 was made at an average price of EUR 11.80 per share. 

As the terms of the second cycle (2007-2009) of the Target-Based Share Plan were met, 37,982 shares of 

Banco Santander, S.A. were delivered to Ana Patricia Botín-Sanz de Sautuola y O’Shea in 2010. 

On 24 February 2010, the Bank’s Annual General Meeting approved an Incentive Plan which entails the 

delivery, if the terms of the related schemes are met, of shares of Banco Español de Crédito, S.A. to certain 

executives, including the executive directors and senior executives (see Note 39). 

The maximum number of shares of Banco Español de Crédito, S.A. to be delivered to each of the executive 

directors who are beneficiaries of the Plan, for each of the first three schemes composing it, is as follows: 

Maximum Number of Shares 

First Second Third 

Scheme Scheme Scheme Total 

Medium-/long-term Incentive Plan: 

Ana Patricia Botín-Sanz de Sautuola y O'Shea (*) 10,786 21,572 32,358 64,716 

José Antonio García Cantera 23,078 46,156 69,234 138,468 

Juan Delibes Liniers 17,680 35,360 53,040 106,080 

José María Nus Badía (*) 14,975 29,951 44,926 89,852 

66,519 133,039 199,558 399,116 

(*) Ana Patricia Botín-Sanz de Sautuola y O'Shea and José Maria Nus Badía ceased to discharge their duties 

as directors in 2010 and 2011, respectively. However, as they continue to provide services at an entity 

belonging to the Santander Group, they are still beneficiaries of the long-term incentive plan approved by the 

shareholders at the Annual General Meeting on 24 February 2010. 

At 31 December 2010, the TSR targets established in the Plan regulations had been met, since Banesto 

ranked third when compared to the benchmark banks. The shares corresponding to each of the beneficiaries 

were delivered on 6 July 2011.The shares of the second scheme corresponding to each of the beneficiaries 

will be delivered in July 2012. 

Additionally, at the aforementioned Annual General Meeting on 24 February 2010, the shareholders approved 

the third cycle (2009-2011) and the fourth cycle (2010-2012) of the Target-Based Share Plan and the second 

cycle (2009-2011) and third cycle (2010-2012) of the Obligatory Investment Share Plan of Banco Santander,

AR 11 

S.A., which entail 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: 


142 

Price Number 

(Euros per of Delivery 

Share) Shares Deadline 

Third cycle of Target-Based Share Plan 13.46 (*) 46,855 31 July 2011 

Fourth cycle of Target-Based Share Plan 56,447 31 July 2012 

Second cycle of Obligatory Investment Share Plan 16,956 1 April 2012 

Third cycle of Obligatory Investment Share Plan 39,885 1 April 2013 

(*) 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. 

Ana Patricia Botín-Sanz de Sautuola y O’Shea ceased to discharge her duties as director prior to 31 

December 2010. 

b) Remuneration of executive directors and senior executives 

The detail of the remuneration of the Bank's executive directors and senior executives in 2011 and 2010, 

including the fixed remuneration in 2011 and 2010 and the variable remuneration allocable to profit or loss for 

those years, is as follows: 

Number of Thousands of Euros 

Executive 

Directors 

and Senior Salary 

Executives 

in Year 

Fixed Variable Total Other 

Remuneration 

Total 

2010 17 6,236 7,437 13,673 433 14,106 

2011 15 4,785 8,377(*) 13,162 938 14,100 

(*) Variable remuneration available: EUR 4,883 thousand, variable remuneration deferred for 3 

years: EUR 3,494 thousand. 

"Other Remuneration" includes the delivery of shares of Banesto relating to the first long-term incentive plan, 

to both Ana Patricia Botín-Sanz de Sautuola y O´Shea, who ceased to discharge her duties as director on 3 

November 2010, and José María Nus Badía who ceased to discharge his duties as director in the first half of 

2011. It also includes the remuneration received by Rami Aboukhair Hurtado, a senior executive who ceased 

to be employed by the Bank on 23 February 2011. 

The figures in the foregoing table include the amounts, for each item described above, corresponding to José 

Antonio García Cantera, Juan Delibes Liniers and José María Nus Badía for the provision of services other 

than those of directors, pursuant to the last paragraph of Article 39 of the bylaws. Bank of Spain Circular 

4/2004 requires that the remuneration received by the executive directors in their capacity as such be 

indicated only 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

Ana Patricia Botín- 

Sanz de Sautuola y 

O'Shea 

José Antonio García 

Cantera 

directors at 31 December 2011 and 2010 for the provision of services other than the collective supervisory 

and decision-making functions discharged by them in their capacity as directors: 

Fixed 

Salary 

Available 

Variable 


2011 2010 

Salary 

Variable, 

Deferred 

for 3 Other Total 

Years Remuneration 2011 Available Deferred Total 

143 

Economic 

Value of 3- 

Year Long- 

Term 

Incentives 

Total 

2010 

- - - 62 62 2,957 560 3,517 - 3,517 

1,200 906 905 204 3,215 1,786 240 2,026 611 2,637 


José María Nus 

596 788 526 154 2,064 1,314 133 1,447 468 1,915 

Badía - - - 86 86 919 31 950 - 950 

Total 2011 1,796 1,694 1,431 506 5,427 

Total 2010 6,976 944 7,940 - 9,019 

The foregoing table includes the main changes affecting the remuneration policy in 2011. Specifically, for 

executive directors has the economic value of the long-term incentive plan approved by the shareholders at 

the Annual General Meeting held on 24 February 2010 been included in annual variable remuneration. This 

economic value compensates the future long-term incentive plans eliminated, and the aforementioned current 

plan will remain in force. Accordingly, the column that contains the economic value of three – year long – term 

incentive has been incorporated only for comparison purposes between 2010 and 2011 salary. 

The other remuneration in the preceding tables includes, inter alia, the delivery of Banesto shares under the 

first long-term incentive plan approved by the shareholders at the Annual General Meeting held on 24 

February 2010, and the amounts of remuneration in kind. 

At the Annual General Meeting held on 23 February 2011, the shareholders approved a resolution to defer by 

three years a percentage of Annual variable remuneration earned by the executive directors in 2010 that 

exceeds EUR 300 thousand, which will be settled by the delivery of shares of Banesto. In addition, the 

accrual of the deferred remuneration in shares is conditional not only upon the beneficiary remaining in the 

employ of the Banesto Group or other Santander Group companies, but also that in the opinion of the Board 

of Directors based on a report from the Nomination and Remuneration Committee, none of the circumstances 

included in this agreement arise. The Board of Directors' estimates of the maximum amount of the overall 

2010 variable remuneration of executive directors to be deferred as shares is as follows:

AR 11 


2011 2012 2013 Total 

Ana Patricia Botín-Sanz 

de Sautuola y O'Shea 

30,395 30,396 30,396 91,187 

José Antonio García Cantera 13,023 13,023 13,023 39,069 

Juan Delibes Liniers 7,260 7,260 7,261 21,781 

José María Nus Badía 1,682 1,682 1,682 5,046 

Total 52,360 52,361 52,362 157,083 

(*) Amount estimated at EUR 6,143, the average market price of Banesto shares weighted by 

daily volume in the 15 trading days prior to 19 January 2011, the date on which the Board of 

Directors approved the executive directors' variable remuneration for 2010. 

The shares will be delivered in the first four months of each year. In this case it should be noted that the 

deferral years for Ana Patricia Botín are 2012, 2013 and 2014. 

Following is an explanatory detail of the changes in the overall remuneration of executive directors in relation 

to the Bank’s profit and share price (Article 25.2 of the Regulations governing the Bank’s Board of Directors): 

144 


2011 2010 

Overall remuneration of executive directors for the collective supervisory 

and decision-making functions discharged by them 203 354 

Overall remuneration of executive directors for functions discharged by 

them other than those discharged in their capacity as directors 5,427 7,940 

Total remuneration of executive directors 5,630 8,294 

Profit attributable to the Group 125,141 460,072 

Change in share price (39.9%) (27.6%) 

c) Pension, insurance and other obligations 

The actuarial liability recognised in respect of post-employment benefits earned by the Bank's current and 

retired senior executives and directors totalled approximately EUR 23,250 thousand at 2011 year-end (31 

December 2010: EUR 49,483 thousand). Approximately EUR 1,697 thousand were charged to profit or loss in 

this connection in 2011 (2010: EUR 2,913 thousand), EUR 946 thousand of which related to executive 

directors. 

The following table details the defined benefit pension obligations to executive directors in 2011: 

Euros 

Vested 

Obligations 

José Antonio García Cantera 6,090,398 

Juan Delibes Liniers 9,843,345 

The capital guaranteed by life insurance policies for executive directors amounted to EUR 3,592 thousand at 

31 December 2011 (31 December 2010: EUR 4,301 thousand).

d) Loans 

At 31 December 2011, the direct risk exposure to directors of the Bank amounted to EUR 549 thousand (31 

December 2010: EUR 167 thousand). 

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 José Antonio García Cantera, to receive a termination benefit of three years’ annual fixed 

salary payments, as established in the related contract. 

2) In the case of Juan Delibes Liniers, to receive a termination benefit equal to half of 80% of the annual 

fixed salary multiplied by the number of years of recognised service in the banking industry, as 

established in the related contract. 

In all cases these amounts are incompatible with the receipt of any other pension supplement. 

In 2011 no circumstances arose which required the entity to pay termination benefits to members of the 

Board. 

Additionally, other senior executives of the Bank 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 recognised as staff costs only when the employment relationship between the Bank 

and its executives 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 Articles 229 and 230 of the Spanish Limited Liability 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: 

145

AR 11 

Director Corporate Name Line of Business 


146 

% of 

Ownership Functions 

Antonio Basagoiti García-Tuñón Banco Santander, S.A. Banking 0.009% Director 

José Luis López Combarros Bankinter, S.A. 

Mapfre, S.A. 

Banking 

Insurance 

0.005% 

0.002% 

Belen Romana García Ageas SA NV Insurance - Director 

Juan Delibes Liniers Santander Seguros Insurance - Director 

José Corral Lope Banco Santander, S.A. Banking 0.002% - 

Matías Rodríguez Inciarte Banco Santander, S.A. Banking 0.014% Deputy chairman 

Rafael del Pino Calvo-Sotelo The Blackstone Group Internacional LTD Investments - Member of the external 

advisory board 

Carlos Sabanza Teruel Banco Santander, S.A. Banking 0.006% - 

José María Fuster Van Bendegem Banco Santander, S.A. 

Santander UK, PLC 

Alliance & Leicester 

Sistemas 4B, S.A. 

Open Bank Santander Consumer, S.A. 

Santander Consumer Bank Germany 

Banking 

Banking 

Banking 

Means of 

payment 

Banking 

Banking 

0.001% 

- 

- 

- 

- 

- 

- 

General manager 

- 

Director 

Director 

Director 

Director 

Director 

Rosa María García García Bolsas y Mercados Españoles Sociedad 

Holding de Mercados y Sistemas Financieros, 

S.A. Stock market - Director 

José Antonio García Cantera Banco Santander, S.A. Banking - Member of the 

Management Committee 

Juan Guitard Marín Banco Santander, S.A. Banking 0.001% General Manager 

Certain members of the Board of Directors hold ownership interests of less than 0.001% in the following listed 

companies: BBVA, Banco Santander, Caixabank, S.A. and Banco Popular. 

As required by Article 114.2 of the Securities Market Law, it is hereby stated that in 2011 and 2010 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. Additionally, in accordance with Article 229 of the Spanish Limited Liability Companies 

Law, the conflicts of interest involving members of the Board of Directors in 2011 are disclosed below:

(i) Alfonso Líbano Daurella Description of the conflict of interest: 

He abstained from participating in the discussion and vote on the proposals made by the Board of Directors at 

its meeting on 19 January 2011 to the shareholders at the Annual General Meeting on 23 February 2011 

regarding his appointment as a director. 

(ii) Antonio Basagoiti García - Tuñon. Description of the conflict of interest: 

1. He abstained from participating in the discussion and vote on the resolution of the Board meeting on 19 

January 2011 proposing his appointment as director of the Bank to the shareholders at the Annual General 

Meeting on 23 February 2011. 

2. He abstained from participating in the discussion and vote on the resolutions adopted by the Board of 

Directors at its meeting on 23 February 2011 regarding his appointment as a member and chairman of the 

Bank’s Executive Committee. 

(iii) José Antonio García Cantera. Description of the conflict of interest: 

1. He abstained from participating in the discussion and vote on the resolution of the Board meeting on 19 

January 2011 proposing his reappointment as director of the Bank to the shareholders at the Annual General 

Meeting on 23 February 2011. 


Directors at its meeting on 19 January 2011 relating to the approval of the remuneration policy and the basic 

terms and conditions of the contracts of senior executives, including executive directors, and to the proposal 

for variable remuneration charged to profit for 2010 and a review of fixed remuneration for 2011. 

3. He abstained from participating in the discussion and vote on the proposals put forth by the Board of 

Directors at its meeting on 23 February 2011 regarding his reappointment as member of the Executive 

Committee and CEO of the Bank. 

(iv) José Corral Lope. Description of the conflict of interest: 

1. He abstained from participating in the discussion and vote on the proposals made by the Board of Directors 

at its meeting on 19 January 2011 to the shareholders at the Annual General Meeting on 23 February 2011 



Directors at its meeting on 23 February 2011 regarding his appointment as a member of the Bank’s Executive 

Committee and as member and chairman of the Risk Committee. 

(v) Juan Delibes Liniers. Description of the conflict of interest: 



regarding his reappointment as a director. 


Directors at its meeting on 19 January 2011 relating to the approval of the remuneration policy and the basic 

terms and conditions of the contracts of senior executives, including executive directors, and to the proposal 

for variable remuneration charged to profit for 2010 and a review of fixed remuneration for 2011. 

147

AR 11 


Directors at its meeting on 23 February 2011 regarding his reappointment as member of the Executive 

Committee and the Risk Committee. 

(vi) Juan Guitard Marín. Description of the conflict of interest: 




6. Cash and balances with central banks 

The detail of “Cash and Balances with Central Banks” in the consolidated balance sheets at 31 December 2011 

and 2010 is as follows: 


148 


2011 2010 

Cash 253,822 235,540 

Balances with central banks 4,373,687 1,323,758 

Balances with other central banks 5,884 18,684 

Add - Valuation adjustments 

Accrued interest 405 873 

4,633,798 1,578,855 

7. Loans and advances to credit institutions 

The detail, by classification, type and currency of the transaction, of "Loans and Advances to Credit Institutions" 

on the asset side of the consolidated balance sheets is as follows:

149 


2011 2010 

Classification: 

Other financial assets at fair value through 

profit or loss 836,380 1,144,540 

Loans and receivables 8,591,987 16,110,980 

9,428,367 17,255,520 

Type: 

Reciprocal accounts 136 213 

Time deposits 7,044,929 13,528,852 

Reverse repurchase agreements 979,842 1,123,494 

Other accounts 1,185,964 2,113,596 

9,210,871 16,766,155 

Add- Valuation adjustments 217,496 489,365 

Of which: 

Accrued interest 224,105 495,777 

Impairment losses (6,415) (6,401) 

Other adjustments (194) (11) 

9,428,367 17,255,520 

Currency: 

Euro 8,287,407 16,238,599 

Foreign currencies 1,140,960 1,016,921 

9,428,367 17,255,520 

The impairment losses on financial assets classified as loans and receivables are disclosed in Note 11. 

Note 45 contains a detail of the terms to maturity of these assets at 2011 and 2010 year-end and of the related 

average interest rates in 2011 and 2010. 

8. Debt instruments 

The detail, by classification, type and currency, of “Debt Instruments” on the asset side of the accompanying 

consolidated balance sheets is as follows:

AR 11 


150 


2011 2010 


Financial assets held for trading 304,157 334,808 

Other financial assets at fair value through profit or loss 31,147 210,927 

Available-for-sale financial assets 6,648,310 7,754,470 

Loans and receivables 71,977 379,188 

Held-to- maturity investments 3,402,807 3,431,173 

10,458,398 12,110,566 

Type: 

Spanish government debt securities- 

Treasury bills 2,927,522 2,747,260 

Government bonds 1,557,263 2,743,424 

Other book-entry debt securities 3,402,807 3,431,173 


Foreign government debt securities 103,430 208,476 

Issued by financial institutions 1,140,860 1,466,778 

Other fixed-income securities 1,197,033 1,382,345 

10,459,767 12,111,567 

Valuation adjustments (1,369) (1,001) 

Of which: 


10,458,398 12,110,566 

Currency: 

Euro 10,443,636 12,100,073 

Foreign currencies 14,762 10,493 

10,458,398 12,110,566 

The breakdown by country of foreign government debt securities at 31 December 2011 is as follows: 

Miles de Euros 

2011 2010 

Country: 

France 40,255 63,357 

Germany 

26,555 51,218 

Italy 

35,779 90,676 

Other 

841 3,225 

103,430 208,476 

At 31 December 2011, the nominal amount of debt instruments assigned to certain Group or third-party 

commitments amounted to approximately EUR 685 thousand (31 December 2010: EUR 27,080 thousand). 

The impairment losses on available-for-sale financial assets are disclosed in Note 9-d.

Note 45 contains a detail of the terms to maturity of these assets at 2011 and 2010 year-end and of the average 

interest rates in 2011 and 2010. 

9. Other equity instruments 

a) Breakdown 

The detail, by currency, classification and type, of “Other Equity Instruments” in the accompanying 

consolidated balance sheets is as follows: 

151 


2011 2010 

Currency: 

Euro 1,942,930 2,157,213 

Foreign currencies 95,089 84,372 

2,038,019 2,241,585 


Financial assets held for trading 1,290,142 1,818,344 

Other financial assets at fair value through 

profit or loss 69,824 136,220 

Available-for-sale financial assets 678,053 287,021 

2,038,019 2,241,585 

Type: 

Shares of Spanish companies 1,582,066 1,863,941 

Shares of foreign companies 285,894 365,252 

Investment fund units and shares 284,807 62,617 

Other securities 69,824 136,220 

2,222,591 2,428,030 

Less- Impairment losses (184,572) (186,445) 

2,038,019 2,241,585 

b) Acquisitions and disposals 

As a result of the partial debt restructuring, on 20 February 2009 certain Cresa-Sacresa Group companies 

executed in a public deed a private dation in payment agreement with certain creditors whereby the Bank 

received 6,356,191 shares of Metrovacesa, S.A. representing 9.56% of its share capital. The exchange value 

for the repayment of the debt was set at EUR 57 per share. The debt repaid amounted to EUR 326 million of 

principal plus accrued interest. 

On 28 June 2011, the shareholders of Metrovacesa, S.A. at their Annual General Meeting approved, among 

other resolutions, a capital increase with a nominal value of EUR 1,949,903,763 through the issuance of 

1,299,935,842 new ordinary shares of the Company with a par value of EUR 1.5 each, comprising:

AR 11 

1. An initial 15 day pre-emptive subscription period in which the shareholders of Metrovacesa (not those of 

Banco Español de Crédito S.A. or other financial institutions which partook only in the second phase of 

the capital increase described in the following paragraph) and acquirers of pre-emption rights may 

execute them and subscribe new shares of Metrovacesa. 

2. The creditor entities, including the Bank, subscribed shares of Metrovacesa which had not been 

subscribed and paid for in the pre-emptive subscription period, through the conversion of certain loans 

to Metrovacesa, S.A. into equity. 

As the end of the pre-emptive subscription period, the number of new shares subscribed amounted to 

12,853,846 and, therefore, the Board of Directors of Metrovacesa assigned 905,653,361 shares to convert 

into equity the loans from various creditor entities including the Bank, which was assigned 114,857,040 

shares of EUR 1.5 par value each. 

Taking into account the initial shareholding acquired on 20 February 2009 as result of the partial restructuring 

of the debt through which the Bank received 6,356,191 shares of Metrovacesa, S.A., representing 9.56% of 

the company's share capital, at 31 December 2011, the Bank had a shareholding of 12.27% of Metrovacesa, 

S.A. 

At 31 December 2011, these shares were valued at EUR 2.9 per share using the net asset value (NAV) as a 

reference since the quoted price on the stock market was not deemed representative due to the scant trading 

volume. 

In the first half of 2011, the Bank acquired 215,096 units of the Santander Banif Inmobiliario, FII investment 

fund for EUR 260,491 thousand. Following these acquisitions the Bank's share in this fund rose to 10.54%. 

The other acquisitions and disposals effected in 2011 and 2010 related to changes in financial assets held for 

trading and purchases and sales of investment fund units and shares. 

c) Notifications of acquisitions of investments 

The notifications made by the Bank, in compliance with Article 148 of the Spanish Limited Liability 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 2011 and 2010: 


152

153 


2011 2010 

Balance at beginning of year 187,446 160,112 

Net impairment losses charged to income 366 33,960 

Other changes (1,871) (6,626) 

Balance at end of year 185,941 187,446 

10. 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 2011 and 2010 is as follows: 


2011 2010 

Balance Balance Balance Balance 

Receivable Payable Receivable Payable 

Interest rate risk 4,948,211 4,639,981 3,604,649 3,392,839 

Currency risk 313,448 502,700 213,225 509,328 

Price risk 747,613 456,950 574,435 644,477 

Credit risk 7,499 9,501 865 7,504 

Other risks 33 33 42,656 1 

6,016,804 5,609,165 4,435,830 4,554,149 

11. Loans and advances to customers 

The detail, by loan type and status, borrower sector, geographical area of residence and interest rate formula, of 

“Loans and Advances to Customers” on the asset side of the accompanying consolidated balance sheets is as 

follows:

AR 11 


154 


2011 2010 

By loan type and status: 

Commercial credit 4,396,445 4,750,872 

Secured loans 34,893,267 38,162,725 

Reverse repurchase agreements 4,552,309 4,960,453 

Personal loans 7,138,488 7,503,044 

Credit accounts 11,721,054 13,438,413 

Other term loans 1,577,994 1,771,160 

Finance leases 883,118 1,190,764 

Receivable on demand and other 805,608 841,846 

Impaired assets 3,819,129 3,463,505 

Other 1,436,467 1,517,566 

71,223,879 77,600,348 

Less: Valuation adjustments (2,025,479) (1,851,291) 

Of which: 

Prepayments and accrued income and other adjustments 24,363 (21,230) 

Impairment losses (2,049,842) (1,830,061) 

69,198,400 75,749,057 

By borrower sector: 

Public sector - Spain 2,624,640 2,816,949 

Other resident sectors 63,843,335 69,968,497 

Non-residents 2,730,425 2,963,611 

69,198,400 75,749,057 

By geographical area: 

Spain 68,475,724 74,617,380 

European Union (excluding Spain) 1,207,257 1,528,601 

United States and Puerto Rico 328,180 384,937 

Other OECD countries 393,038 454,002 

Latin America 710,955 356,663 

Rest of the world 108,725 258,765 

71,223,879 77,600,348 

By interest rate formula: 

Fixed interest rate 20,349,549 22,655,382 

Floating interest rate 50,874,330 54,944,966 

71,223,879 77,600,348 

Note 45 contains a detail of the terms to maturity of these assets at 2011 and 2010 year-end and of the average 

interest rates in 2011 and 2010. 

At 31 December 2011 and 2010, there were no loans and advances to customers for material amounts without 

fixed maturity dates.

Finance leases 

The reconciliation of the total gross investment in finance leases to the present value of the minimum finance 

lease payments receivable at 31 December 2011 and 2010 is as follows: 


2011 2010 

Minimum finance lease payments receivable 825,945 1,131,066 

Unguaranteed residual values 97,534 98,590 

Gross investment in finance leases(*) 

(*) Includes impaired assets 

923,479 1,229,656 

At 31 December 2011, the impairment losses covering bad debts relating to the minimum finance lease 

payments receivable amounted to EUR 28,933 thousand (31 December 2010: EUR 27,172 thousand). 

At 31 December 2011, unearned finance income amounted to EUR 10,466 thousand (31 December 2010: EUR 

7,122 thousand). 

Securitisation 

In 2011 and 2010 the Group securitised loans, the type and amount of which are as follows: 

Millions of Euros 

Origin of collection rights 2011 2010 

Commercial loans 2,731 1,600 

Of which: 

Loans with mortgage guarantee 227 467 

Loans with other collateral 2,504 1,133 

All the securities issued were subscribed by securitisation 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 since, as a result of the terms and conditions agreed upon for the transfer of the assets, the 

Group retained the substantial risks and rewards inherent thereto (mainly the credit risk of the transferred 

transactions) and, accordingly, the Group's exposure to changes in the present value of the future net cash flows 

of these financial assets did not change substantially (see Note 2-c). 

At 31 December 2011, the total carrying amount of the transferred assets amounted to EUR 5,313 million (31 

December 2010: EUR 6,459 million), none of which had been derecognised in 2011 (2010: EUR 3 million was 

derecognised). 

At 31 December 2011, the carrying amount of the liabilities associated with financial assets that were not 

derecognised was EUR 348 million (31 December 2010: EUR 587 million) and this amount is recognised under 

“Marketable Debt Securities” in the consolidated balance sheets at those dates. The remaining bonds issued in 

securitisation transactions were subscribed in full by the Group. 

155

AR 11 

Other information 

At 31 December 2011, the Group had recognised loans amounting to EUR 25,040 thousand (31 December 2010: 

EUR 26,218 thousand) relating to financing granted to its employees to acquire shares of the Bank and of Banco 

Santander, S.A. 

In addition, the Group 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 2011, 

these financing and guarantee arrangements amounted to EUR 1,478 thousand (31 December 2010: EUR 1,480 

thousand) net of the related impairment losses, and as required by Articles 146, 148, 149 and 150 of the 

Consolidated Spanish Limited Liability Companies Law, a restricted reserve was recorded for the carrying 

amount of these arrangements net, where appropriate, of the related impairment losses (see Note 27). 

Impairment losses 

The changes in 2011 and 2010 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: 


156 


2011 2010 

Balances at beginning of year 1,836,462 1,515,859 

Impairment losses charged to income for the year: 

Individually assessed 918,061 1,413,929 

Collectively assessed - 

Impairment losses reversed with a credit to income (217,400) (566,455) 

Net impairment losses for the year 700,661 847,474 

Net write-off of impaired balances and other changes (*) (480,867) (526,871) 

Balances at end of year 2,056,256 1,836,462 

By method of assessment: 

Individually 1,991,388 1,702,848 

Collectively 64,868 133,614 

(*) Of these amounts, EUR 71,227 thousand and EUR 162,088 thousand relate to transfers to impairment 

losses on non-current assets held for sale in 2011 and 2010, respectively (see Note 16).

The following table details impairment losses on the basis of the factors employed in calculating them: 

Due to Arrears For Reasons Other 

than Arrears 


157 

Collectively 

Assessed 

2011 2010 2011 2010 2011 2010 2011 2010 

Less than 3 36,343 37,596 467,618 672,540 - - 503,961 710,136 

months 

3 to 6 months 47,266 10,611 115,671 26,513 - - 162,937 37,124 

6 to 9 months 63,024 68,698 8,125 31,596 - - 71,149 100,294 

9 to 12 months 73,194 30,460 161,612 79,110 - - 234,806 109,570 

More than 12 

months 

1,016,136 158,841 2,399 586,843 - - 1,018,535 745,684 

Without arrears - - - - 64,868 133,614 64,868 133,614 

Total 

1,235,963 306,206 755,425 1,396,642 64,868 133,614 2,056,256 1,836,462 

Written-off loans recovered in 2011 amounted to EUR 40,010 thousand (2010: EUR 36,381 thousand), and this 

amount is presented as a reduction of "Impairment Losses on Financial Assets (Net) - Loans and Receivables" in 

the consolidated income statement. 

Past-due assets 

Financial assets classified as “Loans and Receivables - Loans and Advances to Customers” that were past due 

but not impaired at 31 December 2011 amounted to EUR 304,379 thousand (31 December 2010: EUR 275,684 

thousand). 

Impaired assets 

Following is a detail of the financial assets classified as “Loans and Receivables – Loans and Advances to 

Customers” and considered to be impaired due to credit risk at 31 December 2011 and 2010, classified by age of 

the oldest past-due amount at those dates, and of those assets which, although not past due, are considered to 

be impaired due to other factors: 

Less than 6 

Months 

Thousands of Euros Total 

6 to 9 

Months 

9 to 12 

Months 

More than 12 

Months 

2010 1,877,269 259,397 205,343 1,121,496 3,463,505 

2011 1,216,028 254,894 887,615 1,460,592 3,819,129

AR 11 

Of this amount, at 31 December 2011 approximately 99.8% related to Spanish residents (31 December 2010: 

approximately 99.9%). 

12. Hedging derivatives 

The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows: 


158 


2011 2010 

Assets Liabilities Assets Liabilities 

Fair value hedges 

Micro-hedges 7 2,343 7 31,044 

Macro-hedges 1,492,114 555,884 1,503,281 460,953 

Cash flow hedges 917 16,963 31,176 543 

Of which: 

Recognised in equity (Note 26) - 25,482 - 83,599 

1,493,038 575,190 1,534,464 492,540 

Cash flow hedges are used to reduce the variability of the cash flows (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. 

The Group has two fair value hedges of the interest rate risk of a portfolio of financial instruments and of the 

issues that it guarantees. The purpose of these hedges is to maintain the economic value of the hedged assets, 

which are fixed-interest loans and marketable debt securities, hedged mainly by IRSs (see Note 32). 

As a result of the discontinuation of certain cash flow hedges, the balance of "Valuation Adjustments – Cash Flow 

Hedges” at 31 December 2011 included EUR 36,543 million (31 December 2010: EUR 62,638 million) relating to 

the value of the hedging derivatives at the date they were discontinued. Pursuant to current legislation, this 

amount will be recognised in the consolidated income statement symmetrically to the recognition of the cash 

flows generated by the hedged items. 

13. Investments 

"Investments" includes the equity instruments issued by associates owned by the Bank. 

“Associates” are defined as entities over which the Bank is in a position to exercise significant influence, but not 

control or joint control. Significant influence generally exists when the Bank 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. 

The changes in 2011 and 2010 in “Investments" in the consolidated balance sheets were as follows:

159 


2011 2010 


Purchases and capital increases 12,565 10,884 

Disposals and capital reductions (4,733) - 

Exchange differences and other (7,937) 5411 


14. Liabilities under insurance contracts and Reinsurance assets 

The detail of “Liabilities under Insurance Contracts” in the consolidated balance sheets at 31 December 2011 and 

2010 is as follows: 


2011 2010 

Direct Inward Direct Inward 

Technical Provisions for: Insurance Reinsurance Total Insurance Reinsurance Total 

Unearned premiums and unexpired risks 40,444 19,827 60,271 59,501 41,174 100,675 

Life insurance: 

Unearned premiums and risks 21,832 3,236 25,068 36,908 5,382 42,290 

Mathematical provisions 1,085,743 - 1,085,743 1,742,477 - 1,742,477 

Claims outstanding 78,929 13,464 92,393 121,641 18,374 140,015 

Bonuses and rebates 4,195 - 4,195 7,064 - 7,064 

Life insurance policies where the 

investment risk is borne by the 

policyholders 1,213,039 - 1,213,039 1,853,908 - 1,853,908 

Other technical provisions 18,714 7,638 26,352 25,556 7,044 32,600 

2,462,896 44,165 2,507,061 3,847,055 71,974 3,919,029 

At 31 December 2011, the consolidated insurance entity had balances receivable from reinsurance companies 

amounting to EUR 44,165 thousand (31 December 2010: EUR 71,974 thousand), which are recognised under 

“Reinsurance Assets” in the consolidated balance sheets. 

The consolidated insurance entity does not operate in lines of insurance giving rise to significant concentrations 

of insurance risk and it applies controls and procedures which enable it to limit and control any such 

concentration which, in addition, is mitigated by reinsurance contracts. 

Risk management 

The consolidated insurance entity analyses the various risk categories related to its activities. In order to obtain 

an accurate diagnosis of the efficiency of the internal control environment, it has a system of pre-controls 

(through the definition of exposure limits), ongoing controls (to ensure the proper monitoring of the efficiency of 

the control map) and post-controls (to validate the efficiency of the control environment through a subsequent 

analysis of the Company’s activities).

AR 11 

15. Tangible assets 

a) Changes 

The changes in 2011 and 2010 in "Tangible Assets" in the accompanying consolidated balance sheets were 

as follows: 


160 


Property, 

Plant and 

Equipment 

for Own Use 

Investment 

Property Total 

Cost: 

Balances at 1 January 2010 1,704,293 139,708 1,844,001 

Additions 95,970 62,031 158,001 

Disposals (166,690) (13,016) (179,706) 

Exchange differences (net) 75 - 75 

Transfers and other 1 - 1 

Balances at 31 December 2010 1,633,649 188,723 1,822,372 

Additions 69,784 36,572 106,356 

Disposals (104,912) (2,483) (107,395) 

Exchange differences (net) 23 - 23 

Transfers and other 210 - 210 


Accumulated depreciation: 

Balances at 1 January 2010 (570,905) (5,568) (576,473) 

Disposals 60,886 227 61,113 

Charge for the year (60,004) (713) (60,717) 

Exchange differences, transfers and other 953 (956) (3) 

Balances at 31 December 2010 (569,070) (7,010) (576,080) 

Disposals 42,084 - 42,084 

Charge for the year (61,549) (1,679) (63,228) 

Exchange differences 475 (357) 118 

Balances at 31 December 2011 (588,060) (9,046) (597,106) 

Impairment losses: 

Balances at 1 January 2010 - (8,805) (8,805) 

Charge for the year (15,757) (22,362) (38,119) 

Amounts used and other net changes 15,757 (46) 15,711 

Balances at 31 December 2010 - (31,213) (31,213) 

Charge for the year - (18,238) (18,238) 

Amounts used and other net changes - 1 1 

Balances at 31 December 2011 - (49,450) (49,450) 

Tangible assets, net: 


Balances at 31 December 2011 1,010,694 164,316 1,175,010

) Property, plant and equipment for own use 

The detail, by type of asset, of the items composing "Property, Plant and Equipment for Own Use" in the 

consolidated balance sheets at 31 December 2011 and 2010 is as follows: 


Accumulated Carrying 

Cost Depreciation Amount 

Buildings 791,778 (156,859) 634,919 

Furniture 99,195 (71,617) 27,578 

Fixtures 486,259 (222,121) 264,138 

Office and IT 

equipment 

145,497 (87,393) 58,104 

Other 110,920 (31,080) 79,840 

Balances at 31 

December 2010 

1,633,649 (569,070) 1,064,579 

Land and buildings 769,713 (156,087) 613,626 

Furniture 82,934 (57,920) 25,014 

Fixtures 521,828 (248,709) 273,119 

Office and IT 

equipment 

154,252 (98,572) 55,680 

Other 70,027 (26,772) 43,255 

Balances at 31 

December 2011 

1,598,754 (588,060) 1,010,694 

At 31 December 2011, the Group had rights on assets used under finance leases amounting to EUR 23,810 

thousand (31 December 2010: EUR 21,174 thousand). 

In 2011 the Group completed the sale of 35 offices (2010: 24) to non-Group third parties for EUR 90,551 

thousand (2010: EUR 124,885 thousand). These transactions gave rise to a gain of EUR 44,955 thousand 

(2010: EUR 83,862 thousand) which is recognised under “Gains/(Losses) on Disposal of Assets Not 

Classified as Non-Current Assets Held for Sale” in the accompanying consolidated income statement for 

2011. At the same time, the Group entered into operating lease agreements for these offices with the buyers 

(with maintenance, insurance and taxes payable by the Group). The agreements have an initial compulsory 

term for both parties of fifteen years, during which the rent will be reviewed annually on the date of completion 

of each year of the lease term, based on the percentage variation in the Spanish CPI. 

The agreements are renewable for a maximum of four additional five-year periods each, up to a maximum 

limit of 35 years. Renewal is obligatory on the part of the lessor, whereas the Group is not obliged in this 

respect, nor does it have any commitment to ensure that the renewals come into force. If the Group were to 

exercise its right to renew the contract, upon commencement of the first and third renewal periods, the rent 

would be adjusted to market value on the basis of a report by independent property experts. 

161

AR 11 

Certain contracts include a free purchase option, exercisable by the Group at any time after the fifteenth year 

from execution of the agreement, for the market value of the properties at that date, which will be determined, 

where appropriate, by independent experts. 

The most noteworthy feature of the other agreed terms and conditions, all of which are customary market 

conditions for operating lease agreements, is that none of the aforementioned lease agreements provides for 

the transfer of ownership of the properties to the Group on expiry thereof. Furthermore, the Group has not 

granted any guarantee to the buyers for any losses that might arise from the early termination of the 

agreements or for possible fluctuations in the residual value of the aforementioned properties. 

The Group was advised in the above-mentioned transactions by independent experts, who estimated the 

remaining useful lives of the transferred properties at the transaction date, which were between 42 and 75 

years (2010: between 26 and 74 years). These experts also analysed both the selling prices of the properties 

and the agreed subsequent rental payments and, on the basis of this analysis, the Group concluded that they 

had been set at fair market values at that date. 

The rental expense recognised by the Group in 2011 in connection with these agreements amounted to EUR 

7,794 thousand (2010: 5,945 thousand). At 31 December 2011, the present value of the minimum future 

payments that the Group will incur during the compulsory term (since it is considered that the agreements will 

not be renewed and the existing purchase options will not be exercised) amounted to EUR 12,506 thousand 

(31 December 2010: EUR 6,100 thousand) payable within one year, EUR 48,129 thousand (31 December 

2010: EUR 26,900 thousand) payable at between one and five years and EUR 95,243 thousand (31 

December 2010: EUR 59,400 thousand) payable at more than five years. 

Also, the Group sold other properties, giving rise to a gain of 433 thousand (2010: EUR 24,362 thousand) 

which is recognised under “Gains/(Losses) on Disposal of Assets Not Classified as Non-Current Assets Held 

for Sale” in the accompanying consolidated income statement for 2011. 

c) Investment property 

In 2011 the rental income earned from investment property owned by the consolidated entities amounted to 

approximately EUR 5,236 thousand (31 December 2010: approximately EUR 3,240 thousand) (see Note 41) 

and the operating expenses of all kinds related to such investment property amounted to approximately EUR 

1,985 thousand (2010: approximately EUR 2,332 thousand). 

16. Non-current assets held for sale 

The detail of “Non-Current Assets Held for Sale” at 31 December 2011 and 2010 is as follows: 


162 


2011 2010 

Investment property 1,019,696 1,218,117 

Foreclosed assets 1,309,311 1,086,808 

Assets recovered from finance leases 

2,387 5,509 

Other 

17,736 17,736 

2,349,130 2,328,170

At 31 December 2011 and 2010, substantially all the assets classified as non-current assets held for sale related 

to residential property assets at various stages of development: from plots earmarked for construction to 

completed housing units. 

In 2011 the Bank and other Group companies acquired assets amounting to EUR 153 million (2010: EUR 485 

million) in settlement of certain loan transactions. 

Impairment losses of EUR 1,293,177 thousand had been deducted from the balance of “Non-Current Assets Held 

for Sale” at 31 December 2011 (31 December 2010: EUR 678,228 thousand). The changes in these impairment 

losses in 2011 and 2010 were as follows: 

163 


2011 2010 


Impairment losses charged to income for the year 527,072 128,517 

Transfer of impairment losses from “Loans and Advances 

to Customers” (Note 11) 71,227 162,088 

Transfer from “Provisions – Other Provisions” 30,715 189,805 

Other net changes (14,065) (83,881) 

Balance at end of year 1,293,177 678,228 

The net impairment losses for 2011 are recognised under “Gains/(Losses) on Non-Current Assets Held for Sale 

Not Classified as Discontinued Operations”. 

In 2011 assets with a carrying amount of EUR 381,940 thousand were sold (2010: EUR 375,654 thousand). The 

net loss arising from the sale of these assets (EUR 106,188 thousand and EUR 68,454 thousand in 2011 and 

2010, respectively) is recognised under “Gains/(Losses) on Non-Current Assets Held for Sale not Classified as 

Discontinued Operations" in the consolidated income statements. 

The fair value of substantially all the non-current assets held for sale was estimated by means of an appraisal by 

a valuer authorised by the Bank of Spain and this, together with the Bank's experience in asset sales and the 

current situation in the property market, was deemed to be the value obtained from this appraisal conducted 

pursuant to Ministerial Order 805/2003. 

The detail of the carrying amount and fair value of non-current assets held for sale at 31 December 2011 and 

2010 is as follows:

AR 11 

Investment 

property 

Foreclosed 

assets 

Thousands of Euros Age of Appraisal (%) 

Carrying Amount Appraisal Value Less than 12 12 to 24 More than 24 

Months Months Months 

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 

1,608,879 1,574,931 1,394,361 1,364,164 88.6% 93.0% 10.9% 7.0% 0.6% - 

2,013,305 1,408,222 2,263,759 1,559,483 39.3% 43.7% 27.6% 31.0% 33.1% 25.8% 

TOTAL 3,622,184 2,983,153 3,658,120 2,923,647 58.1% 69.6% 21.2% 18.4% 20.7% 12.0% 

The policy for selling assets of this type or disposing of them by other means consists of defining a complete sale 

plan that aims to optimise both the deadlines and the values of the sales and which considers: 

- the preparation of assets for their sale, including the maturation process or supplementary investments 

which, within reasonable limits of amount and duration, favour the sale, 

- a comprehensive commercial plan, 

The expected timeframe for selling or otherwise disposing of non-current assets held-for sale is the shortest 

possible one, but it will depend on the performance of the Spanish real estate market, 

In 2011 and 2010 the Group sold various non-current assets held for sale and disposal groups in relation to 

which it provided financing to the buyer for the agreed selling price, This financing was granted independently of 

the sales transaction and at all times with the Group's general lending policy and the creditworthiness 

requirements for any borrower, As a result, there are no unrecognised gains in this connection, 

17, Intangible assets- Other intangible assets 

The detail of "Intangible Assets – Other Intangible Assets" in the consolidated balance sheets is as follows: 


164

Changes 

165 

Estimated Thousands of Euros 

Useful Life 2011 2010 

With finite useful life: 

IT developments 3 years 178,327 178,768 

Concessions and other 3 to 50 

years 

12,313 12,288 

Less- 

190,640 191,056 

Accumulated amortisation (116,835) (114,374) 

Impairment losses (142) (786) 

Total, net 73,663 75,896 

The changes in “Intangible Assets – Other Intangible Assets” in the consolidated balance sheets in 2011 and 

2010 were as follows: 


2011 2010 

Cost: 


Net additions/(disposals) (416) 29,672 


Accumulated amortisation: 

Balances at beginning of year (114,374) (92,032) 

Net charges (45,683) (44,815) 

Disposals and other changes 43,222 22,473 

Balance at end of year (116,835) (114,374) 

Impairment losses 

Balances at beginning of year (786) (152) 

Net impairment losses (recognised) /reversed 644 (634) 

Balance at end of year (142) (786) 

Net balance at end of year 73,663 75,896 

18, Other assets and Other liabilities 

The detail of “Other Assets” and “Other Liabilities” in the consolidated balance sheets is as follows:

AR 11 


166 


Assets Liabilities 

2011 2010 2011 2010 

Inventories 294,066 344,548 - - 

Guarantees on futures transactions and other 4 - 773 150 

Unmatured accrued income/expenses 133,236 150,502 196,672 205,069 

Prepayments 6,222 6,783 - - 

Accrued expenses - - 216,271 241,153 

Other 27,639 39,195 14,335 55,524 

461,167 541,028 428,051 475,345 

Inventories 

The detail of “Inventories” at 31 December 2011 and 2010 is as follows: 


2011 2010 

Developments in progress 36,011 38,557 

Raw materials 63,088 61,502 

Finished goods 230,600 278,574 

Less- 


294,066 344,548 

In 2011 impairment losses amounting to EUR 7,252 thousand (2010: EUR 14,429 thousand) were recognised 

under “Impairment Losses on Other Assets (Net) – Other Assets”, 

The impairment losses on the developments in progress were determined based on valuations performed by 

independent experts, 

19, Deposits from central banks and Deposits from credit institutions 

The detail, by classification, counterparty, type and currency, of “Deposits from Central Banks" and “Deposits 

from Credit Institutions" on the liability side of the consolidated balance sheets is as follows:

167 


2011 2010 


Financial liabilities at amortised cost 12,136,372 7,550,634 

Counterparty: 

Central banks 5,005,842 1,537,587 

Credit institutions 7,130,530 6,013,047 

12,136,372 7,550,634 

Type: 

Reciprocal accounts 784 2,061 

Term deposits 7,153,593 4,581,786 

Hybrid financial liabilities 350 1,400 

Repurchase agreements 4,006,175 2,043,977 

Other accounts 965,437 912,725 

12,126,339 7,541,949 


Of which: 


Other adjustments - - 

12,136,372 7,550,634 

Currency: 

Euro 10,813,147 6,388,760 


12,136,372 7,550,634 

At 31 December 2011, the limit established by the Bank of Spain for the Group for the system of loans 

guaranteed by public-sector debt securities and other assets amounted to EUR 6,032,982 thousand (31 

December 2010: EUR 6,017,512 thousand), The amount drawn down at those dates corresponds to that 

recognised under “Central Banks” in the foregoing table, 

Note 45 contains a detail of the terms to maturity of these liabilities at 2011 and 2010 year-end and of the 

average interest rates in 2011 and 2010,

AR 11 

20, Customer deposits 

The detail, by classification, type and currency, of “Customer Deposits” in the consolidated balance sheets is as 

follows: 


168 


2011 2010 



Type: 

On demand- 

Current accounts 14,454,646 15,016,568 

Savings accounts 6,985,503 7,049,874 

Other demand deposits 190,718 175,230 

Term deposits- 

Fixed-term deposits 16,275,795 22,003,243 

Home-purchase savings accounts 34,144 46,069 

Discount deposits 240 240 

Hybrid financial liabilities 2,290,583 2,485,664 

Other term deposits 26,066 7,200 

Repurchase agreements 10,766,068 13,004,965 

51,023,763 59,789,053 


Of which: 


Other adjustments (6,681) (9,595) 

51,246,144 60,076,180 

Currency: 

Euros 48,890,285 57,693,163 


51,246,144 60,076,180 

Note 45 contains a detail of the terms to maturity of these liabilities at 2011 and 2010 year-end and the average 

interest rates in 2011 and 2010,

21, Marketable debt securities 

a) Breakdown 

The detail, by classification and type, of “Marketable Debt Securities” in the consolidated balance sheets is as 

follows: 

169 


2011 2010 



Type: 

Bonds and debentures outstanding 3,715,729 7,116,913 

Hybrid securities 2,434,086 2,571,818 

Mortgage-backed bonds 16,014,836 17,733,282 

Promissory notes 1,222,719 780,487 

Other securities associated with transferred financial assets 

(Note 11) - 389,922 

Mortgage bonds (Note 11) 239,576 172,816 

23,626,946 28,765,238 


Of which: 

Accrued interest and other 474,937 496,140 

Adjustments due to hedges (79,153) (47,196) 

24,022,730 29,214,182 


average interest rates in 2011 and 2010, 

b) Bonds and debentures outstanding 

The detail, by issue currency and interest rate, of “Bonds and Debentures Outstanding” in the foregoing table 

is as follows:

AR 11 


Currency of Issue 2011 2010 


170 

Annual 

Interest 

Rate 

Maturity 

Date 

Euro: 

Fixed rate 

Territorial bonds - 250,000 2,307% October 2011 

Territorial bonds - 250,000 2,304% October 2011 

Territorial bonds 500,000 - 4,250% October 2016 

Non-convertible debentures 488,500 - 4,080% March 2016 

Territorial bonds 100,000 - 3,350% July 2020 

Floating rate 

Non-convertible bonds issued by Banesto Financial Products 

3,021,683 6,616,913 

3-month 

Euribor+0,05% 

Until April 2037 

Banesto non-mortgage securitisation bonds 105,546 - - - 

Balance at end of year 4,215,729 7,116,913 

The foregoing detail includes bonds repurchased for EUR 500,000 thousand which offset the above balances, 

and were recognised under "Financial Liabilities at Amortised Cost - Marketable Debt Securities" in the 

consolidated balance sheet at 31 December 2011, 

c) Disclosures required pursuant to Mortgage Market Law 2/1981, of 25 March, and to Royal Decree 

716/2009, of 24 April, implementing certain provisions of the aforementioned Law, 

Mortgage-backed bonds (cédulas hipotecarias) are securities, the principal and interest of which are secured 

by mortgage without prejudice to the Bank's unlimited liability and, where appropriate, by the replacement 

assets and by the cash flows generated by the derivative financial instruments associated with each issue, 

The mortgage-backed bonds include the holder’s financial claim on the Bank, secured as indicated in the 

preceding paragraph, and may be enforced to claim payment from the issuer after maturity, The holders of 

these securities have the status of special preferential creditors vis-à-vis all other creditors (established in 

Article 1923,3 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the 

issuer's favour and, where appropriate, in relation to the replacement assets and the cash flows generated by 

the derivative financial instruments associated with the issues, 

In the event of insolvency, the holders of these bonds will enjoy the special privilege established in Article 

90,1,1 of Insolvency Law 22/2003, of 9 July, Without prejudice to the foregoing, in accordance with Article 

84,2,7 of the Insolvency Law, during the insolvency proceedings, the payments relating to the repayment of 

the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be 

settled up to the amount of the income received by the insolvent party from the mortgage loans and credits 

and, where appropriate, from the replacement assets backing the bonds and from the cash flows generated 

by the financial instruments associated with the issues, 

If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments 

described in the preceding paragraph, the insolvency managers must settle them by realising the 

replacement assets set aside to cover the issue and, if this is not sufficient, they must obtain financing to 

meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be 

subrogated to the position of the bond-holders,

In the event that the measure indicated in Article 155,3 of the Insolvency Law were to be adopted, the 

payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, 

irrespective of the issue dates of the bonds, 

The members of the Board of Directors state that the Bank has specific policies and procedures in place to 

cover all activities relating to the mortgage-market issues launched by it, which guarantee strict compliance 

with the mortgage market regulations applicable to these activities as provided for in Royal Decree 716/2009, 

of 24 April, implementing certain provisions of Mortgage Market Law 2/1981, of 25 March, and, by application 

thereof, in Bank of Spain Circular 7/2010, of 30 November, and other financial and mortgage system 

regulations, Also, financial management defines the Bank's funding strategy, 

The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, 

and specific policies are also in place adapted to each mortgage product, which occasionally require the 

application of stricter limits, 

The Bank’s general policies establish a maximum debt-to-income (DTI) ratio and repayment capacity 

indicators for each potential customer, This analysis must determine whether each customer's income is 

sufficient to meet the repayments of the loan requested, In addition, the analysis of each customer must 

include a conclusion on the stability over time of the customer's income considered with respect to the life of 

the loan, The indicator used to measure the repayment capacity (effort ratio) of each potential customer takes 

into account mainly the relationship between the potential debt and the income generated, considering on the 

one hand the monthly repayments of the loan requested and other transactions and, on the other, the monthly 

salary income and other duly supported income, 

With regard to the verification of customer information and solvency, the Bank has specialised document 

comparison procedures and tools that are subject to strict quality controls and internal and external audits 

which ensure the reliability of the checks, 

The Bank’s procedures stipulate that each mortgage originated in the mortgage market must be individually 

valued by an appraisal company not related to Banesto, 

Mortgage Market Law 41/2007, Article 5, establishes that any appraisal company approved by the Bank of 

Spain may issue valid appraisal reports, However, as permitted by this same article, Banesto performs a 

series of checks and selects, from among these companies, a small Group with which it enters into 

cooperation agreements with special conditions and automated control mechanisms, The Bank's internal 

regulations specify, in detail, each of the internally approved companies, as well as the approval requirements 

and procedures and the controls established to uphold them, 

In this connection, the regulations establish the functions of an appraisal company committee on which the 

various areas of the Bank related to these companies are represented, The aim of the committee is to 

regulate and adapt the internal regulations and the activities of the appraisal companies to the current market 

and business situation, 

Basically, the companies wishing to cooperate with Banesto must have a significant level of activity in the 

mortgage market in the area in which they operate- they must pass a preliminary screening process based on 

criteria of independence, technical capacity and solvency -in order to ascertain the continuity of their business 

and, lastly, they must pass a series of tests prior to obtaining definitive approval, 

171

AR 11 

Nominal value and other disclosures relating to the issues of mortgage-backed bonds 

The nominal value of the mortgage-backed bonds issued by the Bank, by date of issue, is as follows: 


Issue Date 2011 2010 


172 

Annual 

Interest Rate 

(%) 

Maturity 

Date 

Public mortgage-backed bonds 17,817,236 17,733,282 

March 2002 issue 1,057,752 969,528 5,75 March 2017 

February 2004 issue - 1,943,391 3,75 February 2011 

September 2004 issue 1,789,400 1,781,600 4,25 September 2014 

January 2005 issue 2,190,120 2,165,180 3,50 January 2015 

September 2005 issue 1,993,916 1,990,874 2,75 September 2012 

January 2006 issue 1,196,490 2,043,735 3,50 January 2016 

July 2006 issue 992,928 975,192 4,25 July 2013 

February 2007 issue 1,880,908 1,690,738 4,25 February 2014 

February 2008 issue 50,000 49,844 6-month Euribor 

+ 0,25% 

February 2013 

December 2008 issue - 739,200 4,00 December 2011 

February 2009 issue 557,400 557,400 3,50 February 2012 

June 2009 issue 1,102,400 996,100 3,63 June 2013 

September 2009 issue 1,302,200 1,238,300 2,63 February 2013 

September 2010 issue 999,722 592,200 3,63 September 2015 

March 2011 issue 600,000 - 4,625 March 2015 

December 2011 issue 1,100,000 - 4,75 December 2017 

Singular bonds 181,764 181,764 

June 2002 issue 81,764 81,764 3-month Euribor 

+ 0,12% 

June 2014 

December 2005 issue 100,000 100,000 3-month Euribor 

+ 0,13% 

December 2012 

Registered mortgage-backed bonds 226,000 227,000 



April 2008 issue 70,000 70,000 4,585 April 2013 


The foregoing detail includes repurchased bonds amounting to EUR 1,798 thousand which offset the above 

balance at 31 December 2011 (31 December 2010: EUR 109,800 thousand), The bonds repurchased in 2011 

gave rise to a gain of EUR 7 million which is recognised under Gains/Losses on Financial Assets and 

Liabilities (Net)" in the consolidated income statement, 

On 30 March 2011, the Group launched a public issue of mortgage-backed bonds for a nominal amount of 

EUR 600 million which matures on 30 March 2015, This issue consists of mortgage-backed bonds of EUR 

100,000 nominal value each, 

On 14 December 2011, the Group launched a public issue of mortgage-backed bonds for a nominal amount 

of EUR 1,100 million which matures on 14 December 2017, This issue consists of mortgage-backed bonds of 

EUR 100,000 nominal value each,

In the course of 2011, the Bank issued eleven mortgage-backed bonds fungible with existing bonds totalling 

EUR 1,495 million, 

In 2011 the aggregate nominal value of mortgage-backed bond issues totalled EUR 2,595 million, maturing 

between February 2013 and December 2017, 

Mortgage-backed bond issues may be redeemed early by the issuer solely for the purpose of complying, 

where necessary, with the limits on the balance of outstanding mortgage-backed bonds stipulated by 

mortgage market regulations, 

None of the mortgage-backed bonds issued by the Bank had replacement assets assigned to them, 

At 31 December 2011 and 2010, the breakdown of the mortgage loans, indicating their eligibility and 

computability for mortgage market regulatory purposes, was as follows: 

173

AR 11 


174 


Nominal Value 

31/12/11 31/12/10 

Total mortgage loans and credits (*) 34,253,325 36,740,286 

Mortgage participation certificates issued 405,563 646,609 

Of which: On-balance-sheet loans 405,563 646,609 

Mortgage transfer certificates issued 1,922,656 3,573,371 

Of which: On-balance-sheet loans 1,922,656 3,573,371 

Mortgage loans and credits securing 

- - 

borrowings 

Mortgage loans and credits backing 

mortgage 

and mortgage-backed bond issues (**) 

31,925,106 

32,520,306 

i) Non-eligible mortgage loans and 

credits 

(***) 

- Which comply with the 

requirements to become eligible, 

except for the limit established 

in Art, 5,1 of Royal Decree 

716/2009 6,189,819 7,217,068 

- Other - - 

ii) Eligible mortgage loans and 

credits 

(****) 

25,735,287 25,303,238 

- Non-computable amounts 

(*****) 

5,147,057 5,060,648 

- Computable amounts 

a) Mortgage loans and credits 

covering mortgage bond 

20,588,230 20,242,590 

issues 

b) Mortgage loans and credits 

eligible to cover mortgage- 

- - 

backed bond issues 20,588,230 20,242,590 

(*) Including mortgage loans and credits acquired through mortgage participation certificates and mortgage transfer 

certificates, irrespective of whether they have been derecognised, 

(**) Total loans less mortgage participation certificates issued, mortgage transfer certificates issued and mortgage loans 

securing borrowings, 

(***) Due to non-compliance with the requirements of Art, 3 of Royal Decree 716/2009, 

(****) Pursuant to Art, 3 of Royal Decree 716/2009, without taking into account the calculation limits established in Art, 12 of 

Royal Decree 716/2009, 

(*****) Pursuant to Art, 12 of Royal Decree 716/2009,

Following is a detail of the nominal value of the outstanding mortgage loans and credits and of the nominal 

value of the loans and credits that are eligible pursuant to Royal Decree 716/2009, without considering the 

computation limits established under Article 12 of Royal Decree 716/2009, by origin, currency, payment 

status, average term to maturity, interest rate, type of collateral and loan-to-value ratio: 


31/12/11 31/12/10 

Mortgage 

Mortgage 

Loans and Credits 

Loans and 

Backing 

Credits Backing 

Mortgage and 

Mortgage and 

Mortgage- Of which: Mortgage- Of which: 

Backed Bond Eligible Backed Bond Eligible 

Issues Loans (*) Issues Loans (*) 

By origin of transactions 

Originated by the Bank 26,452 20,456 27,115 20,116 

From subrogations 5,473 5,280 5,405 5,187 

Other - - - - 

31,925 25,736 32,520 25,303 

By currency 

Euros 31,921 25,732 32,273 25,298 

Other currencies 4 4 247 5 

31,925 25,736 32,520 25,303 

By payment status 

Current 29,625 24,313 29,475 24,054 

Past due 2,300 1,423 3,045 1,249 

31,925 25,736 32,520 25,303 

By term to maturity 

Less than 10 years 7,526 4,562 8,599 5,293 

10 to 20 years 7,987 6,815 7,742 6,479 

20 to 30 years 13,005 11,895 13,029 11,538 

More than 30 years 3,407 2,464 3,150 1,993 

31,925 25,736 32,520 25,303 

175

AR 11 



31/12/11 31/12/10 

Mortgage Of which: Mortgage Of which: 

Loans and Credits Eligible Loans and Eligible 

Backing Loans (*) Credits Backing Loans (*) 

Mortgage and 

Mortgage and 

Mortgage- 

Mortgage- 

Backed Bond 

Backed Bond 

Issues 

Issues 

By interest rate formula 

Fixed-rate loans 1,404 766 1,153 501 

Floating-rate loans 25,949 22,039 26,088 21,847 

Fixed-floating rate loans 4,572 2,931 5,279 2,955 

By borrower 

Legal entities and individual 

31,925 25,736 32,520 25,303 

businessmen 10,773 6,674 12,151 8,126 

Of which: Property developments 

Other individuals and non-profit 

5,584 2,917 6,613 1,813 

institutions serving households NPISHs) 21,152 19,062 20,369 17,079 

By type of collateral 

31,925 25,736 32,520 25,303 

Completed buildings - residential 23,468 21,362 23,309 20,366 

Of which: Officially sponsored housing 454 367 425 358 

Completed buildings - commercial 4,305 2,879 3,464 2,145 

Completed buildings - other 

Buildings under construction - 

586 - 900 214 

residential 

Of which: Officially sponsored 

1,097 763 2,155 1,797 

housing 9 4 - - 

Buildings under construction - 

978 372 

commercial 

176 

674 311 

Buildings under construction - other 4 - 13 7 

Land - developed land 134 34 138 49 

Land - other 1,353 326 1,867 414 

31,925 25,736 32,520 25,303 

(*) Pursuant to Art, 3 of Royal Decree 716/2009, without taking into account the calculation limits established in Art, 12 of 

Royal Decree 716/2009, 

Following is a detail, by loan-to-value ratio, of the nominal value of the eligible mortgage loans and credits 

pursuant to Royal Decree 716/2009, without considering the computation limits established in Article 12 of 

Royal Decree 716/2009:

177 

31 December 2011 

LTV Ranges (Millions of Euros) 

40%, 60%, 80% TOTAL 

Mortgage loans and credits eligible 6,809 8,340 9,234 1,353 25,736 

for mortgage and mortgage-backed bond 

issues (*) 

Home mortgages 4,867 6,703 9,234 1,353 22,157 

Other mortgages 1,941 1,637 - - 3,578 

(*) Pursuant to Art, 3 of Royal Decree 716/2009, without taking into account the calculation limits established in Art, 12 of Royal 

Decree 716/2009, 


LTV Ranges (Millions of Euros) 

40%, 60%, 80% TOTAL 

Mortgage loans and credits eligible 6,353 8,062 9,758 1,130 25,303 

for mortgage and mortgage-backed bond 

issues (*) 

Home mortgages 4,904 6,640 9,758 1,130 22,432 

Other mortgages 1,449 1,422 - - 2,871 

(*) Pursuant to Art, 3 of Royal Decree 716/2009, without taking into account the calculation limits established in Art, 12 of Royal 

Decree 716/2009,

AR 11 

Following is a detail of the changes in the nominal value of eligible and non-eligible mortgage loans and 

credits pursuant to Royal Decree 716/2009: 


178 

Eligible 

Mortgage 

Loans and 

Credits (*) 


Non-Eligible 

Mortgage 

Loans and 

Credits (**) 

Balance at 1 January 2010 24,904 6,279 

Period reductions (1,029) (868) 

Redemption on maturity (270) (45) 

Early redemptions (759) (823) 

Subrogations by other entities - - 

Other - - 

Period additions 1,428 1,806 

Originated by the Bank 1,092 1,042 

Subrogations from other entities 61 744 

Other 275 20 

Balance at 31 December 2010 25,303 7,217 

Period disposals (2,976) (2,882) 

Redemption on maturity (212) (441) 

Early redemptions (1,049) (807) 

Subrogations by other entities (141) (24) 

Other (1,574) (1,610) 

Period additions 3,409 1,855 

Originated by the Bank 2,175 1,476 

Subrogations from other entities 387 34 

Other 847 345 

Balance at 31 December 2011 25,736 6,190 

(*) Pursuant to Art, 3 of Royal Decree 716/2009, without deduction of the limits on their 

calculation established in Art, 12 of Royal Decree 716/2009, 

(**) That do not comply with the requirements of Art, 3 of Royal Decree 716/2009, 

Following is a detail of the undrawn balances of the mortgage loans and credits backing mortgage and 

mortgage-backed bond issues: 


Undrawn Balances, Nominal Value (*) 

31/12/11 31/12/10 

Potentially eligible (**) 177,674 501,425 

Non-eligible 144,773 85,497 

(*) Amounts committed less amounts drawn down, including amounts delivered to 

property developers only when the housing units are sold, 

(**) Pursuant to Art, 3 of Royal Decree 716/2009,

At 31 December 2011 and 2010 and during these years, the Bank had no replacement assets assigned to 

mortgage and mortgage-backed bond issues, 

d) Mortgage-backed securities 

The detail of the Bank's mortgage securities outstanding at 31 December 2011 and 2010 is as follows: 

Mortgage bonds outstanding 

179 

Nominal 

Value 

(Thousands of euros) 

Average Term to 

Maturity 

2011 2010 2011-2010 (***) 

- - 

Mortgage-backed bonds issued (*) 18,350,164 18,495,364 

Of which: Not recognised in liabilities 

i) Debt instruments, Issued in a public offering 

a) Term to maturity of up to one year, 2,557,400 2,739,200 

b) Term to maturity of one to two years 3,300,000 2,257,400 

c) Term to maturity of two to three years 3,500,000 3,500,000 

d) Term to maturity of three to five years 5,200,000 6,355,000 

e) Term to maturity of five to ten years 1,500,000 3,135,000 

f) Term to maturity of more than ten years - - 

ii) Debt instruments, Other issues 

a) Term to maturity of up to one year, - - 

b) Term to maturity of one to two years 165,000 - 

c) Term to maturity of two to three years 230,000 - 

d) Term to maturity of three to five years 805,000 - 

e) Term to maturity of five to ten years 685,000 - 

f) Term to maturity of more than ten years - 

-

AR 11 

(*) Whether or not recognised in liabilities, 

(**) Relating solely to mortgage loans and credits not derecognised, 

(***) Average term to maturity weighted by amount, expressed in months, rounded up when equidistant, 

22, Subordinated liabilities 

a) Breakdown 

The detail, by currency of issue and interest rate, of “Subordinated Liabilities” in the consolidated balance 

sheets is as follows: 


180 

Nominal 

Value 

(Thousands of euros) 

Average Term to 

Maturity 

2011 2010 2011-2010(***) 

(Continued) 

iii) Deposits 

a) Term to maturity of up to one year, 100,000 100,000 

b) Term to maturity of one to two years 226,000 226,000 

c) Term to maturity of two to three years 81,764 81,764 

d) Term to maturity of three to five years - - 

e) Term to maturity of five to ten years - - 

f) Term to maturity of more than ten years 

- - 

Mortgage participation certificates issued (**) 

405,563 646,609 36-28 

i) Issued in a public offering 

ii) Other issues 

405,563 646,609 36-28 

Mortgage transfer certificates issued (**) 

1,922,656 3,573,371 43-51 

i) Issued in a public offering 

ii) Other issues 

1,922,656 3,573,371 43-51


Issuer 2011 2010 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% 

Floating CMS + 0,125% 

September 

2018 

Preferred participating securities 87,120 96,934 Euros (fixed coupon of 6% in the 

first year) 

Perpetual 

Preferred participating securities 152,959 158,004 Euros Fixed coupon of 5,5% Perpetual 

Preferred participating securities 

Banesto Banco Emisiones, 

S,A,: 

497,466 497,466 Euros Fixed coupon of 6% (a) 

Subordinated debentures 9,300 500,000 Euros 1-year Mid IRS + 0,6% March 2016 

Banesto Holding, Ltd,: 

Preference shares 16,526 33,787 US dollar 10,5% (a) 

1,363,371 2,486,191 


Of which: 


Hedge accounting (156) (464) 


(a) Redeemable at the discretion of the issuer with the prior consent of the Bank of Spain, 

The EUR 87 million, EUR 153 million and EUR 497 million preferred participating security issues are 

redeemable, subject to authorisation from the Bank of Spain, as from April 2011, May 2010 and June 2014, 

respectively, 

On 23 March 2011, the Group issued 4,885 non-convertible debentures of EUR 100,000 unit value aimed at 

holders of subordinated debentures included in the “Subordinated Debentures March 2004” issue launched 

by Banesto Banco de Emisiones, S,A,, which was jointly and severally guaranteed by Banco Español de 

Crédito, S,A, The non-convertible debentures were exchangeable for the subordinated debentures at full par 

value, This exchange was authorised by the Bank of Spain on 2 March 2011, with an exchange ratio of one 

subordinated debenture for one non-convertible debenture, The final acceptance rate was 97,7%, 

On 19 December 2011, the Bank and Banco Santander, S,A,, following notice to the Bank of Spain, 

redeemed early in full the subordinated deposit (nominal amount: EUR 600,000 thousand) for an ex-coupon 

amount of EUR 546,000 thousand, returning a gain of EUR 54,000 thousand recognised under “Gains/Losses 

on Financial Assets and Liabilities (Net) - Financial Instruments not Measured at Fair Value through Profit or 

Loss" in the 2011 consolidated income statement, 

181

AR 11 

b) Other disclosures 

For the purposes of payment priority, preferred participating securities rank 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 capital, If for these reasons the dividends payable on the preferred participating securities are not paid, the 

Bank will not pay dividends on its ordinary shares, 

The other issues are subordinated and, therefore, for the purposes of payment priority, they are junior to all 

general creditors of the issuers, The issues launched by subsidiaries are guaranteed by Banesto or by 

restricted deposits arranged at Banesto for this purpose, 

At 31 December 2011 and 2010, no issues were convertible into shares of Banesto or granted privileges or 

rights which, in certain circumstances, make them convertible into shares, 

The preference shares issued by Banesto Holding Ltd, relate to the issue launched in 1992 for USD 100 

million and guaranteed by Banesto, These 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 2011 amounted to EUR 16,526 thousand, 

equivalent to USD 21,383,500 (31 December 2010: EUR 33,787 thousand, equivalent to USD 45,145,700), 

The interest accrued on subordinated liabilities amounted to approximately EUR 74,728 thousand in 2011 

(2010: EUR 56,349 thousand), 


average interest rates in 2011 and 2010, 

23, Other financial liabilities 

The detail of “Other Financial Liabilities” in the consolidated balance sheet is as follows: 


182 


2011 2010 

Trade payables (*) 766,504 868,003 

Public sector 210,123 273,207 

Other 1,465,705 1,881,313 

2,442,332 3,022,523 

(*) Including EUR 34,369 thousand and EUR 54,991 thousand relating to the unpaid 

interim dividends declared by the Bank’s Board of Directors at 31 December 2011 

and 2010, respectively (see Note 4), 

The disclosures required by Additional Provision Three of Law 15/2010, of 5 July, pursuant to Law 3/2004, of 29 

December, on combating late payment in commercial transactions, are as follows at 31 December 2011: 

payments made to suppliers in 2011 amounted to EUR 366,3 million and all of them were made within the 

statutory period, 

At 31 December 2011, there were no unpaid trade payables past due by more than the maximum payment 

period,

Note 45 contains a detail of the terms to maturity of these liabilities at 2011 and 2010 year-end, 

24, Provisions 

a) Breakdown 

The detail of "Provisions" in the consolidated balance sheets is as follows: 

b) Changes 

183 


2011 2010 

Provisions for pensions and similar obligations 

(Notes 2-u and 2-v) 

1,947,103 2,024,299 

Provisions for contingent liabilities and commitments 30,846 82,609 

Other provisions 57,375 132,081 

Provisions 2,035,324 2,238,989 

The changes in “Provisions” in 2011 and 2010 were as follows: 


2011 2010 

Balance at beginning of year 2,238,989 2,599,571 

Additions charged to income 107,424 45,663 

Of which: 

Interest cost (Note 35) 81,697 86,898 

Staff costs (Note 42) 10,613 11,732 

(Reversals) / Period provisions 15,114 (52,967) 

Provisions for pensions and similar obligations 31,142 (22,213) 

Other provisions (16,028) (30,754) 

Payments to retired employees (78,250) (74,647) 

Payments to pre-retirees (122,171) (129,546) 

Insurance premiums paid/return premiums received 1,625 (2,487) 

Transfers to impairment of non-current assets held for sale (Note 16) (30,715) (189,805) 

Provisions used, exchange differences and other changes (81,578) (9,760) 


c) Provisions for pensions and similar obligations 

The detail of the present value of the Group's post-employment benefit obligations at 31 December 2010 and 

2010, 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:

AR 11 


184 


2011 2010 

Present value of the obligations: 

To current employees 452,796 361,821 

To retired employees (vested) 1,341,810 1,364,684 

1,794,606 1,726,505 

Fair value of plan assets 177,064 182,547 

Unrecognised actuarial losses 196,878 110,972 

Unrecognised past service cost 7,348 8,007 

Provisions - Provisions for pensions 1,413,316 1,424,979 

Of which- 

Insurance contracts linked to pensions: 

Other insurers 190,613 202,458 

1,794,606 1,726,505 

At 31 December 2009, 2008 and 2007, the present value of the obligations amounted to EUR 1,756,202 

thousand, EUR 1,832,692 thousand and EUR 1,823,470 thousand, respectively; the fair value of the plan 

assets amounted to EUR 184,279 thousand, EUR 193,106 thousand and EUR 191,823 thousand, 

respectively; and the unrecognised actuarial losses amounted to EUR 101,969 thousand, EUR 108,476 

thousand and EUR 97,280 thousand, respectively, 

The changes between the beginning and ending balances of the defined benefit obligations relating to postemployment 

benefits for current and former employees of the Group are summarised as follows: 


2011 2010 

Present value of obligations at 1 January 1,726,505 1,756,202 

Current service cost 12,995 13,637 

Interest cost 67,302 68,545 

Benefits paid (87,887) (85,124) 

Amortisation and new benefits assumed (net) (13,151) (12,338) 

Actuarial gains/(losses) 88,842 (14,417) 

Value of obligations at 31 December 1,794,606 1,726,505 

The amount of these obligations was determined by independent 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:

185 

2011 2010 

Annual 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% 

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: 

2011 2010 

Expected rate of return on plan assets 4,0% 4,0% 

Expected rate of return on reimbursement rights 4,0% 4,0% 

The changes in 2011 and 2010 in the fair value of the plan assets were as follows: 


2011 2010 

Fair value of plan assets at beginning of year 182,547 184,279 

Expected return on plan assets 7,146 7,189 

Actuarial gains / (losses) (4,834) (1,051) 

Contributions 1,842 2,607 

Benefits paid (9,637) (10,477) 

Fair value of plan assets at end of year 177,064 182,547 

The expected return on the plan assets was determined on the basis of the interest rates guaranteed by the 

insurance companies that underwrite the related policies, 

In 2011 the actual return on the plan assets was EUR 2,312 thousand (2010: EUR 6,138 thousand), 

At 31 December 2011 and 2010, each major category of plan assets accounted for the following percentages 

of the fair value of the plan assets:

AR 11 


2011 2010 

Insurance policies taken out with non-Banesto 

Group insurance companies 95,3% 95,7% 

Voluntary community pension entity (EPSV) 4,7% 4,3% 

Total 100% 100% 

The net amount of the experience adjustments arising on the plan assets and liabilities, expressed as an 

amount or percentage of these assets and liabilities in 2011 and in the four preceding years, is as follows: 

2011 2010 2009 2008 2007 

(2,65)% (0,58)% 0,37% (0,61)% (1,32)% 

The changes in 2011 and 2010 in the cumulative net unrecognised actuarial losses were as follows: 


186 


2011 2010 


Increases / (decreases) due to: 

Net actuarial losses / (gains) arising in the year 85,906 9,003 


The Group expects that the provisions for pensions to be recognised in 2012 in respect of post-employment 

benefit obligations will amount to EUR 30,397 thousand, 

d) Other long-term employee benefits 

In 2011 the Group offered certain of its employees the possibility of leaving its employ prior to their retirement, 

Accordingly, provisions were recognised to cover the obligations to the pre-retirees (in terms of both salaries 

and other employee benefit costs) from the date of their pre-retirement to the date of their effective retirement, 

amounting to EUR 30,164 thousand, 

At 31 December 2011 and 2010, the present value of the obligations was as follows:

187 


2011 2010 

Present value of the obligations: 

To pre-retirees 530,806 594,297 

Long-service bonuses and other benefits 2,981 5,023 

533,787 599,320 

Provisions- Provisions for pensions 533,787 599,320 

533,787 599,320 

At 31 December 2009, 2008 and 2007, the present value of the obligations amounted to EUR 711,803 

thousand, EUR 691,049 thousand and EUR 771,084 thousand, respectively, 

The changes between the beginning and ending balances of the other long-term benefit obligations are 

summarised as follows: 


2011 2010 

Present value of obligations at 1 January 599,320 711,803 

Current service cost 35,203 (8,639) 

Interest cost 21,435 25,702 

Benefits paid (122,171) (129,546) 

Value of obligations at 31 December 533,787 599,320 

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 plan obligations (see Note 

24-c), 

e) Other provisions 

The balance of “Provisions - Other Provisions” includes, inter alia, the provisions for tax and other litigation, 

which were 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 

i, Tax litigation 

The main tax litigation affecting the Banesto Group at 31 December 2011 can be divided into two groups 

according to its origin: firstly, that arising from the different criteria used by the State Tax Agency and by the 

Group companies for the regularisation of state taxes; and secondly, that affecting Banco Español de Crédito 

S,A,, 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, The

AR 11 

Andalusia Autonomous Community Government approved a similar tax to that established by the 

Extremadura Autonomous Government for 2011 and subsequent years, against which an appeal has not 

been filed at the Constitutional Court, 

A) Difference in the criteria used by the State Tax Agency and the Group, 

a) Litigation currently in progress 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 of net VAT payable relating to this litigation was EUR 3,567 thousand, This 

amount, together with the interest accrued until 5 August 2010, was paid to the tax agency on 12 May 

2010, However, Banco Español de Crédito, S,A, continues the litigation in the defence of its interests, 

Banco Español de Crédito, S,A, has filed a new lawsuit for the same facts, amounting to EUR 930 

thousand (including late-payment interest), in relation to 2006-2007, This amount was paid on 20 

January 2012, without prejudice to the continuation of the litigation in the defence of its interests, 

b) Several litigations affecting the Banesto Group entities for differences in terms of interpretation between 

the tax agency and the entities amounting to EUR 2,929 thousand, Of this amount, EUR 2,640 thousand 

relate to AG Activos y Participaciones, S,A, for personal income tax withholdings, A judgment is yet to 

be handed down by the Supreme Court, 

Should the resolution of these lawsuits be totally detrimental to the interests of the entities, they would 

be required to pay EUR 1,365 thousand in interest, (Amount calculated at 31/12/11), 

B) Tax on deposits at credit institutions introduced in Extremadura, 

a) The Extremadura Autonomous Community Government approved a tax on deposits held by credit 

institutions in their territory, The tax was charged 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 38,296 thousand, 

The above amount includes the enforced collection surcharges that the Bank was unable to avoid, 

except the enforced collection surcharge for 2010, 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 6,426 thousand at 31 December 2011, 

b) The Andalusia Autonomous Community Government approved a tax on deposits held by credit 

institutions in its territory that is similar to the Extremadura Autonomous Community Government's tax, 

This tax will be levied for the first time in 2011, and tax returns will be filed in July 2012, However, a 

prepayment has been established to be made within the year preceding the year in which the tax 

accrues, Consequently, in July 2011 the Bank filed a self-assessment for this prepayment amounting to 

EUR 5,720 thousand, 

This tax has not been appealed against at the Spanish Constitutional Court, Hence, when the Bank files 

the self-assessment in 2011, it will lodge an appeal against the tax, together with a request for it to be 

declared unconstitutional, 


188

ii, Other litigation 

In addition to the challenges of corporate resolutions (see Note 1-d), the main non-tax litigation affecting the 

Bank at 31 December 2011, 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 gave 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 and debt repayment agreements, 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 Navarre 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 claim was 

made totalling EUR 1,812 thousand, the plaintiff’s petition was dismissed at first instance and on 

appeal, The plaintiff filed an appeal on a point of law against the dismissal of the appeal, The plaintiff’s 

appeal was challenged by Banesto but a decision has not yet been handed down on it, 

Claim by the bankruptcy liquidator of the French company Frahuil S,A, In 1999 Banesto filed a claim at 

the Marseille (France) courts against Frahuil (parent of Spanish company Frint España S,A,, both of 

which were engaged in the marketing of oil) for the amount not repaid of two loans granted by Banesto 

to the parent company, Frahuil S,A,, supposedly secured by pledges on oil, and of a third loan granted 

to the Spanish subsidiary Frint España S,A,, guaranteed by the parent Frahuil S,A, After filing the claim, 

Frahuil S,A, opened insolvency proceedings, which resulted in bankruptcy, Banesto also filed a claim 

against the Azria brothers, the main shareholders of the group, for misrepresentation in documents, 

fraudulent accounting practices and fraud, On 2 June 2008, the Tribunal de Grande Instance of 

Marseille handed down judgment in the criminal proceedings, finding the Azria brothers guilty of three 

criminal offences and ordering them to pay Banesto EUR 18,063,681, plus two other amounts of EUR 

6,983,425 and EUR 5,000, An appeal was filed against part of this sentence, In 2006 the bankruptcy 

liquidator of Frahuil filed a claim against Banesto for “misuse of credit”, which is specified as an offence 

under French law, alleging that Banesto had granted credits to the Frahuil Group amounting to more 

than EUR 20 million in an extortionate manner from 1996 to 1998, thereby contributing to create an 

artificial appearance of solvency subject to liability, which it provisionally calculated to be equal to the 

amount of the equity deficit of Frahuil S,A, at the time it was declared to be insolvent, On 12 May 2010, 

the Commercial Court of Marseille handed down a decision dismissing the claim brought by the 

bankruptcy liquidator of Frahuil against Banesto, relieving the Bank of the obligation to pay any amount 

to the plaintiff and ordering the latter to pay Banesto damages totalling EUR 30,000, The plaintiff 

appealed against the decision at the Aix-en-Provence Appellate Court, which has yet to issue a decision 

on the appeal, 

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, By interlocutory order of 2 April 

2008, the Supreme Court clarified that its decision of 14 December 2006 did not include and, therefore, 

189

AR 11 

did not require delivery of, the water wells and auxiliary facilities required to establish the Comunidad de 

Regantes Tierras de Almería (association of irrigation water users of Almería) 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), these being the only water wells and auxiliary facilities 

referred to in the contingency, An enforcement proceeding was brought at the Court of First Instance 

no, 2 of El Ejido to identify and demarcate the wells that must be delivered to the plaintiff, which is 

currently being processed, Furthermore, on 19 January 2010 the Court of First Instance and Examining 

Court no, 2 of El Ejido issued an order giving permission for a claim filed by Malce, S,L, against Banco 

Español de Crédito, S,A, and Quash, S,A, to proceed, and setting the amount of the claim at EUR 3,647 

thousand, The claim requested that Banco Español de Crédito, S,A, be ordered to honour certain 

contractual obligations assumed by the former Quash, S,A, vis-à-vis Malce, S,L, In its judgment the 

Court of First Instance and Examining Court no, 2 of El Ejido dismissed in full the claim brought by 

Malce, S,L, and ordered the plaintiff to pay the costs, Malce, S,L, filed an appeal against this judgment 

on which a decision has not yet been handed down, 

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, The 

plaintiff’s relationship with the Bank was terminated through a dismissal adjudged to be justified in a firm 

court decision, The hearing was held on 16 December 2009, New evidence on several points, which 

could not be taken previously, is currently being taken, 

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 became known as the “Banesto case”, The quantum of the 

claim was not specified, The proceeding was initially to be heard at the Court of First Instance no, 2 of 

Alicante, However, the defendants filed an objection to the regional jurisdiction of the court, The 

objection was upheld as the jurisdiction was deemed to correspond to the Courts of First Instance of 

Madrid, which prompted the referral of the case 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 filed an appeal against this court order, which was allowed by the Provincial 

Appellate Court in its order of 15 June 2009, Leave was granted for the claim to proceed and the 

proceedings were referred back to the Court of Instance, In an order dated 28 September 2009, the 

Court authorised the publication of the leave to proceed of the claim in the manner set forth in Article 

15,1 of the Civil Procedure Law, Against this order and certain subsequent actions, the plaintiff has filed 

several ancillary proceedings and motions that are currently awaiting permission to proceed, On 13 July 

2010, the Bank filed its defence to the claim, On 15 July 2010, the court issued an interlocutory order in 

which it adjudged the defence to have been filed and set the date for the preliminary hearing, which will 

take place on 10 May 2011, 

Complaint in an ordinary proceeding filed against Banesto at Pamplona Court of First Instance no, 5 by 

Analistas Financieros de Navarra 2006, S,L, and others, The amount claimed by the plaintiff was EUR 

6,866,93, relating to commissions supposedly earned for the activity performed by it as a financial agent 

of Banesto under the financial agency agreement entered into by Analistas Financieros de Navarra 

2006, S,L, with Banesto on 23 April 2007, which was terminated on the grounds of breach of contract by 

the financial agent, plus damages of EUR 49,116,11, At the preliminary hearing, the quantum of the 

claim was raised to EUR 5,590,796,18, Banesto contested the claim, arguing that the aforementioned 

financial agency agreement had been terminated due to breach of the agent’s contractual obligations, 

since the agent had improperly received commissions from customers of the financial agency and had 

provided consultancy services for other financial institutions through a company related to the financial 

agent, The termination of the agreement did not give rise to the payment of any amount to the plaintiff, 


190

On 14 December 2009, a decision was handed down dismissing the claim in full and the plaintiff was 

ordered to pay costs, The plaintiff filed an appeal against the decision, contested by Banesto, 

challenging the decision and the quantum of the proceeding, The appellant requested that evidence be 

taken at second instance; however, the Provincial Appellate Court has not yet issued its decision on this 

request, 

At 31 December 2011, there were other less material lawsuits of a tax and legal nature, At 31 December 

2011 and 2010, the Bank had recognised reasonable provisions to cover any payments it may be required to 

make as a result of all the aforementioned tax and other litigation, 

25, 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 headed by Banco 

Santander, S,A, (see Note 28), 

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, 

The detail of the deferred taxes at 31 December 2011 and 2010 is as follows: 


2011 2010 

Deferred tax assets 

Provisions for pensions and similar obligations 311,463 334,268 

Other provisions 154,906 173,652 

Provisions for inherent losses in outstanding loan portfolio 131,080 154,147 

Unused tax credits 297,155 270,418 

Income and expenses recognised directly in equity 34,705 61,154 

Other deferred tax assets 90,611 57,119 

Deferred tax liabilities 

1,019,920 1,050,758 

Income and expenses recognised directly in equity 6,841 10,101 

Other deferred tax liabilitites 58,136 50,634 

64,977 60,735 

In 2011 deferred tax assets were credited for the portion relating to payments made to retired employees and 

pre-retirees in the year (EUR 31,612 thousand), to the release of other provisions (EUR 18,746 thousand) and to 

provisions for inherent losses in the outstanding loan portfolio (EUR 23,067 thousand), and were charged for 

provisions for pensions (EUR 8,807 thousand), tax credits earned in prior years (EUR 26,737 thousand) and 

other items (EUR 7,043 thousand), 

191

AR 11 

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 2011 and 2010: 


2011 2010 

Consolidated profit before tax: 

From ordinary activities 127,876 608,298 

127,876 608,298 

Income tax at 30% 38,363 182,489 

Decreases due to permanent differences (29,472) (73,323) 

Increases due to permanent differences 

Elimination of the tax effect of dividends paid between Group 

106 4,622 

companies (14,987) (1,538) 

Elimination of the tax effect of the results of intra-group transactions (22,418) 55,239 

Other, net 33,657 (16,613) 

Current income tax 5,249 150,876 

Ordinary activities 5,249 150,876 

Discontinued operations - 

This calculation took into account the dividends of EUR 49,958 thousand at 31 December 2011 received from 

companies belonging to the consolidated tax group (31 December 2010: EUR 5,125 thousand), as well as other 

positive and negative adjustments to be made amounting to approximately EUR 202,215 thousand and EUR 

276,941 thousand, respectively (31 December 2010: EUR 184,385 thousand and EUR 255 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, Once the corresponding tax returns had been filed, the tax loss carryforwards at the Banco Español de 

Crédito Group companies amounted to approximately EUR 27,364 thousand at 31 December 2011 (31 

December 2010: approximately EUR 41,634 thousand), the detail being as follows: 


192

Tax loss for the year: 

Thousands of Euros Last Year 

for 

2010 2009 Offset 

1995 - 11,576 2010 

1996 3,525 6,128 2011 

1997 1,167 1,167 2012 

1998 4,510 4,510 2013 

1999 4,097 4,097 2014 

2000 1,866 1,866 2015 

2001 1,385 1,385 2016 

2002 1,399 1,510 2017 

2003 7,149 7,149 2018 

2004 1,967 1,967 2019 

2005 141 156 2020 

2006 48 46 2021 

2007 57 53 2022 

2008 40 12 2023 

2009 13 12 2024 

27,364 41,634 

In 2011 Banesto obtained gains of EUR 54,015 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 Corporation Tax Law as drafted by Law 16/2007, of 4 July, is applicable, 

The Bank has the years from 2008 to date open for review by the tax authorities in relation to income tax and the 

other main taxes, The tax authorities are currently conducting a tax audit of the years from 2005 to 2007, 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 but pending a final decision, would not have a material effect on the 

financial statements for the year ended 31 December 2011, 

The deed of capital increase with monetary and non-monetary contribution executed by Mesena Servicios de 

Gestión Inmobiliaria S,A, on 23 December 2010 was registered at the Mercantile Registry on 10 January 2011, 

The entities which took part in this transaction decided to avail themselves of the provisions of Chapter VIII, Title 

VII of Legislative Royal Decree 4/2004, of 5 March, approving the Consolidated Spanish Corporation Tax Law, 

On 23 December 2010, the shareholders at the Universal Extraordinary General Meeting of Mesena SGI 

resolved to increase capital, of SIX HUNDRED AND ONE THOUSAND EUROS (EUR 601,000), by THREE 

HUNDRED AND FIFTY-NINE MILLION, NINE HUNDRED AND NINETY-NINE THOUSAND, NINE HUNDRED 

AND NINETY-SEVEN EUROS AND SIXTY-SIX CENTS (EUR 359,999,997,66), therefore giving a total of 

THREE HUNDRED AND SIXTY MILLION, SIX HUNDRED THOUSAND, NINE HUNDRED AND NINETY- 

SEVEN EUROS AND SIXTY-SIX CENTS (EUR 360,600,997,66), through the issue of 59,900,166 new shares of 

SIX EUROS AND ONE CENT (EUR 6,01) par value each, numbered in sequence from 100,001 to 60,000,166, 

inclusive, 

193

AR 11 

Following Dudebasa, S,A,'s waiver of any pre-emption right it might have had, the new shares, once issued and 

outstanding, were subscribed and paid in this act in the following manner and proportion: 

I,- BANCO ESPAÑOL DE CREDITO, S,A, 

CONTRIBUTED AND SUBSCRIBED 

- TWENTY-FOUR MILLION, NINE HUNDRED AND SIXTY THOUSAND, FOUR HUNDRED AND FORTY- 

SEVEN (24,960,447) new shares, numbered 100,001 to 25,060,447, inclusive, amounting to one hundred and 

fifty million, twelve thousand, two hundred and eighty-six euros and forty-seven cents (EUR 150,012,286,47) 

through payment of this amount in the Company's bank account at Banco Español de Crédito, S,A,, this payment 

being evidenced by a certificate issued by the bank, 

- NINETEEN MILLION, ONE HUNDRED AND FORTY-ONE THOUSAND, ONE HUNDRED AND TWENTY-FIVE 

(19,141,125) new shares, numbered 25,060,448 to 44,201,572, inclusive, amounting to one hundred and fifteen 

million, thirty-eight thousand, one hundred and sixty-one euros and twenty-five cents (EUR 115,038,161,25) 

which were fully paid through a non-monetary contribution of properties owned by it, 

II,- ELERCO, S,A, 

CONTRIBUTED AND SUBSCRIBED 

FIFTEEN MILLION, SEVEN HUNDRED AND NINETY-EIGHT THOUSAND, FIVE HUNDRED AND NINETY- 

FOUR (15,798,594) new shares, numbered 44,201,573 to 60,000,166, inclusive, amounting to ninety-four million, 

nine hundred and forty-nine thousand, five hundred and forty-nine euros and ninety-four cents (EUR 

94,949,549,94) which were fully paid through a non-monetary contribution of properties owned by it, 

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 22 and 22 other 

companies, respectively, at 31 December 2011 and 2010, 

The other Group companies will file individual tax returns in accordance with the tax regulations applicable in 

their countries of residence, 

26, Non-controlling interests 

The balance of “Non-Controlling 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 - Non-Controlling Interests” in the consolidated 

balance sheets is as follows: 


194

) Changes 

195 


2011 2010 

Alcaidesa Holding, S,A, 29,056 31,291 

Costa Canaria de Veneguera, S,A, 3,656 3,718 

Clínica Sear, S,A, 2,038 2,159 

Aljarafe Golf, S,A, 1,086 1,094 

Other 180 253 

36,016 38,515 

The changes in 2011 and 2010 in “Non-Controlling Interests” in the consolidated balance sheets are 

summarised as follows: 

27, Valuation adjustments 


2011 2010 

Beginning balance 38,515 41,165 

Change in proportion of ownership interest - 

Attributable loss for the year (2,514) (2,650) 

Of which: 

Alcaidesa Holding, S,A, (2,235) (2,127) 

Other (279) (523) 

Other changes 15 - 

Ending balance 36,016 38,515 

The balances of “Valuation Adjustments” in the consolidated balance sheets include the amounts, net of the 

related tax effect, of the adjustments to assets and liabilities recognised temporarily in equity through the 

statement of changes in equity until they are extinguished or realised, when they are recognised definitively in 

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,

AR 11 

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 to be 

“effective hedges” (see Note 12), This amount will be reclassified to profit or loss from 2010 to 2022, 

The consolidated statements of recognised income and expense for 2011 and 2010 include the changes in 

“Valuation Adjustments – Cash Flow Hedges” in the consolidated balance sheets in those years, 

28, Issued capital 

At 31 December 2011 and 2010, the Bank’s share capital consisted of 687,386,798 fully subscribed and paid 

shares of EUR 0,79 par value each, all with identical voting and dividend rights and listed on the Spanish stock 

exchanges, 

At 31 December 2011, the Bank's majority shareholder was the Santander Group, which held 89,03% of the 

Bank's share capital (31 December 2010: 89,28%), 

At the Annual General Meeting on 23 February 2011, the Bank’s 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, 

At 31 December 2011, the Group held 5,160,868 treasury shares with an acquisition cost of EUR 27,954 

thousand (31 December 2010: 5,819,840 treasury shares; acquisition cost of EUR 41,164 thousand) (see Notes 

29 and 30), 

29, 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 

consolidated income statement that, in the distribution of profit, was appropriated 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 detail of “Accumulated Reserves” and “Reserves of Entities Accounted for Using the Equity Method” at 

31 December 2011 and 2010 is as follows: 


196

197 


2011 2010 

Accumulated reserves: 

Restricted reserves- 

Legal reserve 216,460 216,460 

Reserve for treasury shares (Notes 28 and 30) and for loans for the purchase 

of shares of the Bank and of Banco Santander, S,A, 34,991 48,584 

Reserve for redenomination of the share capital in euros 2,480 2,480 

Reserve for retired capital 5,485 5,485 

Unrestricted reserves- 

Voluntary reserves 4,199,485 3,991,128 

Consolidation reserves attributable to the Bank 431,056 226,388 

Reserves of subsidiaries 9,643 192,235 

4,899,600 4,682,760 

Reserves of entities accounted for using the equity method: 

Associates- 

Of which: 

Sistemas 4B 4,718 4,720 

Other (711) 1,848 

4,007 6,568 

4,903,607 4,689,328 

Legal reserve 

Under the Consolidated Spanish Limited Liability Companies Law, 10% of net profit for each year must be 

transferred to the legal reserve until the balance of this reserve reaches 20% of the sahre 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, 

Reserves for treasury shares 

Pursuant to the Consolidated Spanish Limited Liability Companies Law, a restricted reserve has been 

recognised 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 the loans granted by the Group for 

the acquisition of shares of Banco Santander, S,A, and of the Bank, which are pledged as collateral, 

Reserves for retired capital 

Pursuant to the Consolidated Spanish Limited Liability Companies Law, a restricted reserve was recognised 

for an amount equal to the par value of the Bank shares retired in 2008 (see Note 28), 

Reserves of subsidiaries 

The detail, by company, of the balance of “Reserves at Subsidiaries”, based on the subsidiaries' contribution 

to the Group (considering the effect of consolidation adjustments) is as follows:

AR 11 

30, Treasury shares 


2011 2010 

Costa Canaria Veneguera, S,A, (6,879) (6,683) 

Elerco, S,A, (7,447) 6,632 

Banesto Bolsa, S,A,, S,V,B, 77,053 76,618 

Dudebasa, S,A, (631) 4,326 

Oil-Dor, S,A, 37,732 35,214 

Santander Seguros y Reaseguros, Compañía Aseguradora, S,A, 175,741 174,144 

Santander Pensiones, E,G,F,P,, S,A, (*) - 7,827 

Banesto Holding, Ltd, (6,483) (5,736) 

Mesena Servicios de Gestión Inmobiliaria, S,A, (359,392) (197,875) 

Hualle, S,A, 87,112 69,254 

Promodomus, S,L, (6,631) (510) 

Aljarafe Golf, S,A, 11,821 11,800 

Aktua Soluciones 8,876 5,072 

Other companies (1,229) (2,234) 

Total 9,643 192,235 

(*) Company sold in 2011 (see Note 3) 

The balance of “Shareholders' Equity – Treasury Shares” in the consolidated balance sheets includes the amount 

of own equity instruments held by all the Group entities, 

Transactions involving own equity instruments, including their issuance and redemption, are recognised directly 

in 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 companies accounted for 0,75% of the issued share capital at 31 

December 2011 (31 December 2010: 0,85%), 

The average purchase price of the Bank shares was EUR 5,57 per share in 2011 and the average selling price 

was EUR 4,77 per share in that year (2010: EUR 7,27 and EUR 7,34 per share, respectively), 

The net losses on transactions involving shares issued by the Bank (EUR 5,208 thousand in 2011 and EUR 

3,728 thousand in 2010) were recognised as a reduction of reserves, 

31, Memorandum items 

“Memorandum 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 impinge on 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 or from other types of contract, 

This category comprises the following items: 


198

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 detail of “Guarantees” at 31 December 2011 and 2010 is as follows: 

199 


2011 2010 

Bank guarantees and other indemnities provided 8,034,955 8,621,937 

Credit derivatives sold - 50,000 

Irrevocable documentary credits 456,814 459,587 

8,491,769 9,131,524 

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 to be 

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, 

b) Contingent commitments 

“Contingent Commitments” includes those irrevocable commitments that could give rise to the recognition of 

financial assets, 

The detail of “Contingent Commitments” at 31 December 2011 and 2010 is as follows: 


2011 2010 

Drawable by third parties (undrawn credit facilities) 7,889,498 10,426,675 

Regular way financial asset purchase contracts 191,823 192,475 

Other contingent commitments 2,945,348 8,789,440 

11,026,669 19,408,590

AR 11 

32, Notional amounts of trading and hedging derivatives 

The detail of the notional and/or contractual amounts of the trading and hedging derivatives held by the Group at 

31 December 2011 and 2010 is as follows: 



2011 2010 

Notional Market Notional Market 

Amount Value (*) Amount Value (*) 

Trading derivatives: 

Interest rate risk- 

Forward rate agreements 16,705,000 (6,272) 2,975,000 430 

Interest rate swaps 206,000,904 269,109 176,690,365 148,271 

Options and futures 54,794,015 45,393 66,251,629 97,432 

Currency risk- 

Foreign currency purchases and sales 4,435,339 84,587 5,951,087 462 

Foreign currency options 1,608,268 74 898,991 (1,327) 

Currency swaps 4,285,482 (273,913) 4,659,900 (293,673) 

Securities and commodities derivatives 18,931,482 288,661 27,169,357 (69,914) 

306,760,490 407,639 284,596,329 (118,319) 

Hedging derivatives: 

Interest rate risk- 

Interest rate swaps 38,228,777 913,704 42,304,170 1,041,506 

Options and futures 598,705 4,144 608,706 418 

38,827,482 917,848 42,912,876 1,041,924 

Total 345,587,972 1,325,487 327,509,205 923,605 

(*) See Notes 2-a and 2-b, 

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 the hedging derivatives, by type of hedge, is as follows: 

200 


2011 2010 

Fair value hedges 933,894 1,011,291 

Cash flow hedges (16,046) 30,633 

917,848 1,041,924 

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 Group basically hedges the interest rate risk of the issues guaranteed by it, At 2011 year-end the Group 

held IRS contracts and interest rate options for a nominal amount of EUR 23,123 million (2010 year-end: EUR 

23,122 million), The accumulated gains on these transactions totalled EUR 876 million (2010: EUR 810 

million), which were offset by the losses of the same amount resulting from remeasuring the hedged items; 

these losses are recognised under “Changes in the Fair Value of Hedged Items in Portfolio Hedges of Interest 

Rate Risk” on the liability side of the consolidated balance sheet, 

In 2009 the Group 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 transactions, which are basically 

fixed-interest loans with original maturities at long term, hedged by IRSs, The accumulated losses on these 

transactions totalled EUR 128 million, which were offset by the gains resulting from remeasuring the hedged 

items; these gains are recognised under “Changes in the Fair Value of Hedged Items in Portfolio Hedges of 

Interest Rate Risk” on the asset side of the consolidated balance sheet, 

In 2011 a revenue of EUR 8,739 thousand and an expense of EUR 6,971 thousand, attributable to the 

hedged risk, were recognised in profit or loss on the hedging instruments and on the hedged items, 

respectively, and these amounts are recognised under “Gains/Losses on Financial Assets and Liabilities (Net) 

- Hedge Accounting Transactions not Included in Interest” in the consolidated income statement, 

ii, Cash flow hedges 

The Group hedges the interest rate risk arising from the variability of 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: 


2012 2013 2014 2015 >2015 

159,028 11,176 - - - 

The Group did not recognise any charge in profit or loss attributable to the ineffectiveness of the cash flow 

hedges in 2011 and 2010, 

The notional and/or contractual amounts of the contracts entered into (described above) do not reflect the actual 

risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or 

combining them, This net position is used by the Group basically to hedge the interest rate, underlying asset 

price or currency risk, 

201

AR 11 

33, Off-balance-sheet funds under management 

The detail of off-balance-sheet funds managed by the Group at 31 December 2011 and 2010 is as follows: 

34, Interest and similar income 


202 


2011 2010 

Investment funds 4,447,679 5,740,670 

Pension funds 1,237,406 1,337,420 

Assets under management 2,588,197 2,450,132 

8,273,282 9,528,222 

“Interest and Similar Income” in the consolidated income statement comprises the interest accruing in the year on 

all financial assets with an implicit or explicit return, calculated by applying the effective interest method, 

irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting, 

Interest is recognised gross, without deducting any tax withheld at source, 

The detail of the main items of interest and similar income earned by the Group in 2011 and 2010 is as follows: 


2011 2010 

Balances with central banks 12,548 10,111 


Available-for-sale financial assets 143,066 161,581 

Loans and receivables 2,720,526 2,727,299 

Held-to-maturity investments 119,747 72,145 

Rectifications of income as a result of hedging transactions (9,442) (18,373) 

Insurance contracts linked to pensions 55,472 56,610 

Insurance activity income 19,223 19,968 

3,071,009 3,041,218 

35, Interest expense and similar charges 

“Interest Expense and Similar Charges” in the consolidated income statement includes the interest accruing in 

the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by 

applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a 

result of hedge accounting; and the interest cost attributable to pension funds, 

The detail of the main items of interest expense and similar charges incurred by the Group in 2011 and 2010 is 

as follows:

203 


2011 2010 

Financial liabilities held for trading 957 889 


Rectifications of costs as a result of hedging transactions (533,391) (751,525) 

Provisions for pensions (Note 24) 81,697 86,898 

Other liabilities 1,732 1,327 

1,554,697 1,317,817 

36, Income from equity instruments 

“Income from Equity Instruments” includes the dividends and payments on equity instruments out of profits 

generated by investees after the acquisition of the equity interest, 

The detail of “Income from Equity Instruments” is as follows: 


2011 2010 

Equity instruments classified as: 


Available-for-sale financial assets 45 35 

32,570 42,894 

37, 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 their measurement, 

The detail of “Share of Results of Entities Accounted for Using the Equity Method” is as follows:

AR 11 

38, Fee and commission income 


204 


2011 2010 

Associates: 

Compañía Concesionaria del Túnel de 

Soller, S,A, - 268 

Grupo Agres, S,A, 53 (62) 

Carnes Estelles, S,A, (477) (1,259) 

Aguas de Fuensanta, S,A, (27) 40 

Sistemas 4B, S,A, 1,611 1,689 

Parque Solar Saelices, S,L, (1,449) 1,449 

Parque Solar la Robla, S,L, 174 (174) 

Promoreras Desarrollos de Activos, S,L, (23) (1,627) 

Queenford, S,L, (1,495) - 

Other 115 (84) 

(1,518) 240 

“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 detail of “Fee and Commission Income” is as follows:


Fee and Commission Income Arising from: 2011 2010 

Financing granted to third parties: 

Commitment fees 22,710 14,014 

Management services: 

Investment funds and other collective investment undertakings 59,503 67,224 

Pension funds and plans 29,769 31,965 

Assets owned by third parties 846 837 

90,118 100,026 

Investment services: 

Underwriting and placement of securities issued by third parties 1,794 1,775 

Securities market brokerage 13,404 11,814 

Custody services 8,198 8,001 

23,396 21,590 

Other: 

Foreign exchange 4,841 4,035 

Financial guarantees 82,692 85,320 

Collection and payment services 321,462 327,841 

Other fees and commissions 120,713 114,211 

529,708 531,407 

665,932 667,037 

39, Fee and commission expense 

“Fee and Commission Expense” shows the amount of all fees and commissions paid or payable by the Group in 

the year, except those that form an integral part of the effective interest rate on financial instruments, 

The detail of “Fee and Commission Expense” is as follows: 

205 


2011 2010 

Fees and commissions assigned to third parties 71,752 67,668 

Other fees and commissions 52,697 55,112 

124,449 122,780 

40, 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, which are recorded in the consolidated income statement, and the gains or 

losses obtained from the sale and purchase thereof,

AR 11 

The detail, by type of instrument, of “Gains/Losses on Financial Assets and Liabilities (Net)” is as follows: 


206 


2011 2010 

Fixed-income securities 13,963 70,432 

Equities (224,462) (57,837) 

Financial derivatives and other 310,034 141,033 

99,535 153,628 

41, Other operating income and Other operating expenses 

“Other Operating Income” and “Other Operating Expenses” include the income and expenses from other 

operating activities of the Group’s credit institutions not included in other items, 

The detail of “Other Operating Income” and “Other Operating Expenses” in the consolidated income statements 

is as follows: 


Income Expenses 

2011 2010 2011 2010 

Insurance and reinsurance premium income 1,126,118 832,287 - - 

Reinsurance premiums paid 33,770 34,888 

Reinsurance income 159,774 154,501 

Claims paid and other insurance-related expenses - - 805,046 1,084,292 

Net (reversals)/provisions for insurance contract liabilities - - 372,940 (206,475) 

Sales and income from the provision of non-financial services 21,455 26,122 - - 

Cost of sales - - 5,843 10,307 

Exploitation of investment property and operating leases (Note 15) 5,236 3,240 - - 

Commissions on financial instruments offsetting related direct costs 12,928 15,041 - - 

Expenses recovered through their addition to the selling cost of goods and 

services 14,473 10,618 - - 

Other 3,509 3,328 - - 

Contribution to the Deposit Guarantee Fund (Note 1-g) - - 22,464 18,606 

Investment property and other expenses - - 50,206 50,280 

1,343,493 1,045,137 1,290,269 991,898 

Insurance activity income 

The detail of the net amount of the contribution from insurance and reinsurance subsidiaries to gross income is 

as follows:


2011 2010 

Life Non-Life Total Life Non-Life Total 

Premiums collected 1,069,871 56,247 1,126,118 802,485 29,802 832,287 

Reinsurance premiums paid (32,368) (1,402) (33,770) (29,515) (5,373) (34,888) 

Net premiums 1,037,503 54,845 1,092,348 772,970 24,429 797,399 

Claims paid and other insurance-related 

expenses (771,613) (33,433) (805,046) (917,309) (166,983) (1,084,292) 

Reinsurance income 5,855 153,919 159,774 1,912 152,589 154,501 

Net reversals / (provisions) for insurance 

contract liabilities (355,560) (17,380) (372,940) 178,812 27,663 206,475 

Finance income 17,076 2,147 19,223 17,693 2,275 19,968 

Finance expense - - - - - - 

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 sales of assets and income from the provision of services that constitute the typical activity of nonfinancial 

entities and the related cost of sales, The main lines of business of these entities are as follows: 

42, Staff costs 


2011 2010 

Sales/ Cost of Sales/ Cost of 

Line of Business Income Sales Income Sales 

Real estate 6,647 2,122 10,458 7,483 

Services 3,108 425 3,543 487 

IT and other 11,700 3,296 12,121 2,337 

21,455 5,843 26,122 10,307 

“Staff Costs” comprises all the remuneration 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, 

207

AR 11 

a) Breakdown 

The detail of “Staff Costs” is as follows: 

b) Headcount 


208 


2011 2010 

Wages and salaries 450,324 481,702 

Social security costs 101,664 102,246 

Additions to internal pension provisions (Note 24) 10,613 11,732 

Contributions to external pension funds (Note 2-v) 6,773 6,645 

Other staff costs 41,656 43,536 

611,030 645,861 

The average number of employees at the Group, by professional category and gender, was as follows: 

Number of Employees 

2011 2010 

Men Women Men Women 

Senior executives 13 1 12 2 

Other line personnel 4,641 2,783 4,801 2,765 

Clerical staff 543 434 607 525 

General services personnel 6 - 4 - 

Staff at subsidiaries and branches abroad 35 15 31 21 

Other non-financial companies 343 211 315 191 

5,581 3,444 5,770 3,504 

c) Equity-instrument-based employee remuneration 

The shareholders at the Annual General Meeting held on 24 February 2010 approved a Long-Term Incentive 

Plan comprising schemes payable in shares of Banco Español de Crédito, S,A, The Plan beneficiaries are 

certain executives, including the executive directors and senior executives (see Note 5-a), These schemes 

entail, where appropriate, the delivery of shares to the beneficiaries in successive cycles, Each cycle will have 

a duration of three-and-a-half years, although the first three schemes under the Plan commenced 

simultaneously on 1 January 2010 and will expire on 30 June 2011, 2012 and 2013, respectively, The 

maximum number of shares to be delivered was 2,489,374 ordinary shares, Following delivery in July 2011 of 

the shares relating to the scheme that was completed in June 2011, the maximum number of shares to be 

delivered has been 2,327,328 ordinary shares, The targets, which, if met, will determine the number of shares 

to be delivered, are based on the performance of the Bank’s total shareholder return (TSR) as compared with 

that of a benchmark group of financial institutions, TSR is taken to be the difference between the latest value 

of an investment in ordinary shares of each of the compared institutions and the initial value of that same 

investment, considering the dividends or similar items received by the shareholder as if they had been 

reinvested in more shares of the same type on the earliest date on which the dividend were payable to the 

shareholders, The estimated accrued cost of this Plan for the Bank is recognised in equity under “Other 

Equity Instruments - Other” in the balance sheet, As stipulated in the Plan regulations, should a beneficiary

take up employment at another Santander Group company, provided there are no other modifying 

circumstances, the rights of that beneficiary shall not be affected, 

At 31 December 2010, the TSR targets established in the Plan regulations were met, since Banesto ranked 

third when compared to the benchmark banks, The shares corresponding to each of the beneficiaries, 

totalling 153,508 shares, were delivered on 6 July 2011, 

The shareholders at the Annual General Meeting held on 23 February 2011 approved the deferral of a 

percentage of the variable remuneration earned by certain executive directors in 2010 (see Note 5-b), The 

aforementioned plan envisaged the delivery of Banesto shares over three consecutive years, in the first four 

months of each year, 

43, Other general administrative expenses 

The detail of “Other General Administrative Expenses” in the consolidated income statements is as follows: 

209 


2011 2010 

Technology, systems and communications 67,065 66,644 

Advertising and technical reports 19,304 19,270 

Property and fixtures 80,189 75,529 

Taxes other than income tax 19,138 17,382 

Surveillance and cash courier services 14,422 14,148 

Insurance premiums 1,572 1,522 

Other administrative expenses 69,648 71,700 

271,338 266,195 

The detail of the fees paid to the respective auditors for the audits of the Group companies (see Appendices I, II 

and III) is as follows:

AR 11 


210 


2011 2010 

Audit of separate and consolidated financial statements (*) 1,438 1,539 

Other reports required of the auditor by the supervisor 169 228 

1,607 1,767 

Other services billed by Deloitte 203 476 

Other auditors 

Audit 25 42 

Other services 28 224 

1,863 2,509 

(*) 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 28), 

44, 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 includes the income and expenses arising from non-ordinary activities not included in other 

items, This line item basically includes net gains on sale of property, plant and equipment amounting to EUR 

45,577 thousand (see Note 15) and on sale of investees amounting to EUR 122,173 thousand (see Note 18), 

45, Residual maturity periods and average interest rates 

The detail, by maturity, of the balances of certain items in the consolidated balance sheets at 31 December 2011 

and 2010 and of the average interest rates in 2011 and 2010 is as follows:


Average 

Annual 

Less than 1 1 to 3 3 to 12 1 to 5 More than Interest 

2011 On Demand Month Months Months Years 5 Years Total Rate (%) 

Assets: 

Cash and balances with central banks 253,822 4,379,976 - - - - 4,633,798 0,95 

Loans and receivables- 

Loans and advances to credit institutions 1,013,367 1,828,614 1,642,821 2,462,147 287,514 1,357,524 8,591,987 3,38 

Loans and advances to customers 4,408,933 4,831,497 2,094,975 9,513,397 9,540,027 38,809,571 69,198,400 2,88 

Debt instruments- 

Financial assets held for trading - 86,663 7,521 29,913 150,475 29,585 304,157 2,60 

Available-for-sale financial assets - - 110,600 3,378,313 1,908,027 1,251,370 6,648,310 2,47 

Loans and receivables - - - - 50,000 21,977 71,977 1,61 

Held-to-maturity investments - - - - 2,032,636 1,370,171 3,402,807 3,50 

5,676,122 11,126,750 3,855,917 15,383,770 13,968,679 42,840,198 92,851,436 

Liabilities: 

Financial liabilities at amortised cost- 

Deposits from central banks and credit 

institutions 142,871 6,385,375 1,401,698 2,665,918 859,954 680,556 12,136,372 1,88 

Customer deposits 21,826,222 13,517,321 7,946,485 7,340,152 70,523 545,441 51,246,144 2,01 

Marketable debt securities 395,784 495,829 1,200,961 4,296,483 15,639,041 1,994,632 24,022,730 3,05 

Subordinated liabilities 2,448 - - - 609,300 754,071 1,365,819 5,00 

Other financial liabilities 1,919,120 140,963 34,528 250 314,519 32,952 2,442,332 0,01 

24,286,445 20,539,488 10,583,672 14,302,803 17,493,337 4,007,652 91,213,397 


Average 

Annual 

Less than 1 1 to 3 3 to 12 1 to 5 More than Interest 

2010 On Demand Month Months Months Years 5 Years Total Rate (%) 

Assets: 

Cash and balances with central banks 235,540 1,343,315 - - - - 1,578,855 0,83 

Loans and receivables- 

Loans and advances to credit institutions 1,335,784 3,812,002 3,945,193 5,155,682 622,287 1,240,032 16,110,980 2,77 

Loans and advances to customers 5,063,128 3,268,396 3,870,302 9,086,564 12,633,808 41,826,859 75,749,057 3,22 

Debt instruments- 

Financial assets held for trading - 80,830 53,571 34,944 136,008 29,455 334,808 1,36 

Available-for-sale financial assets - 95,808 25,517 1,713,409 4,360,368 1,559,368 7,754,470 3,26 

Loans and receivables - - - - - 379,188 379,188 1,41 

Held-to-maturity investments - - - - 2,054,744 1,376,429 3,431,173 3,02 

6,634,452 8,600,351 7,894,583 15,990,599 19,807,215 46,411,331 105,338,531 

Liabilities: 

Financial liabilities at amortised cost- 

Deposits from central banks and credit 

institutions 114,842 3,073,397 2,012,840 2,270,098 18,098 61,359 7,550,634 1,05 

Customer deposits 23,020,874 20,080,269 12,228,304 3,664,046 407,062 675,625 60,076,180 1,81 

Marketable debt securities 448,944 1,344,232 4,355,206 2,409,614 16,156,729 4,499,457 29,214,182 1,56 

Subordinated liabilities 18,235 - - - 600,000 1,886,191 2,504,426 2,42 

Other financial liabilities 2,218,905 430,179 55,256 1,653 307,749 8,781 3,022,523 0,01 

25,821,800 24,928,077 18,651,606 8,345,411 17,489,638 7,131,413 102,367,945 

211

AR 11 

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 between assets and liabilities for each of the maturity periods are within reasonable 

thresholds in view of the business volumes managed, Note 49 contains a detailed description of the Group’s 

liquidity management activities, 

46, 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 or loss is obtained in Spain, The business lines 

described below were established on the basis of the Banesto Group's organisational structure at 2010 year-end, 

taking into account, on the one hand, the nature of the goods and services offered and, on the other, the 

customer segments at which they are targeted, 

In 2011 the Banesto Group engaged mainly in the following lines of business: 

- 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 -among them, expenses incurred in projects or activities affecting several lines of 

business, income from strategic investments, impairment losses recognised for goodwill, etc,- are attributed to a 

unit called “Corporate Activities” to which the reconciling items arising from the reconciliation of the result of 

integrating the financial statements of the various lines of business (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 shown 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 line of business were an autonomous business and had its own 

separate equity that is distributed on the basis of the risk to which the assets allocated to each line are subject, 

based on an internal cost percentage allocation system, 

The business lines' net interest income and gross income are calculated by applying to their respective assets 

and liabilities transfer prices which are consistent with current market rates, Income from equity securities is 

allocated among the various lines of business on the basis of their share, 

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, 


212

Segment assets include financial assets held for trading, investment securities and loans and advances to credit 

institutions and customers, net of impairment losses, Segment liabilities and equity include deposits from credit 

institutions, customer deposits and equity, The other assets and liabilities and the reconciling items between total 

assets, liabilities and equity allocated to the various business lines and those reported in the Group's 

consolidated balance sheet are allocated to Corporate Activities, 

213 


Markets and 

Corporate 

Commercial Banking Corporate Banking International 

Activities Total Group 

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 

Interest and similar income 2,030,883 2,129,363 387,063 328,662 265,819 296,181 387,244 287,012 3,071,009 3,041,218 

Interest expense and similar charges (789,227) (708,908) (269,451) (202,083) (184,820) (214,226) (311,199) (192,600) (1,554,697) (1,317,817) 

Net interest income 1,241,656 1,420,455 117,612 126,579 80,999 81,955 76,045 94,412 1,516,312 1,723,401 

Income from equity instruments 

Share of results of entities accounted for 

- - - - 32,526 42,859 44 35 32,570 42,894 

using the equity method 

- - - - - (1,518) 240 (1,518) 240 

Net fee and commission income 

Gains/losses on financial assets and 

548,633 565,432 57,038 54,857 23,055 23,623 (87,243) (99,655) 541,483 544,257 

liabilities and exchange differences 50,280 70,309 20,134 13,472 54,068 77,011 27,717 35,078 152,199 195,870 

Other operating income/expenses (17,742) (16,747) (1,442) (946) 355 646 72,053 70,286 53,224 53,239 

Gross income 

Expenses and depreciation and 

1,822,827 2,039,449 193,342 193,962 191,003 226,094 87,098 100,396 2,294,270 2,559,901 

amortisation charge (862,677) (875,459) (24,149) (22,739) (45,448) (44,644) (59,005) (74,746) (991,279) (1,017,588) 

Provisions - - - - - - (15,114) 52,967 (15,114) 52,967 

Asset impairment (635,458) (433,147) (39,262) (24,633) (10,531) (6,499) 24,234 (380,774) (661,017) (845,053) 

Profit (loss) from operations 324,692 730,843 129,931 146,590 135,024 174,951 37,213 (302,157) 626,860 750,227 

Other net gains/losses - - - - - - (498,984) (141,929) (498,984) (141,929) 

Profit (loss) before tax 324,692 730,843 129,931 146,590 135,024 174,951 (461,771) (444,086) 127,876 608,298 

Income tax 

Profit (loss) for the year from 

(90,914) (204,636) (36,381) (41,045) (37,806) (48,987) 159,852 143,792 (5,249) (150,876) 

continuing operations 

Loss attributable to non-controlling 

233,778 526,207 93,550 105,545 97,218 125,964 (301,919) (300,294) 122,627 457,422 

interests - - - - - - (2,514) (2,650) (2,514) (2,650) 

Profit (loss) attributable to the Group 233,778 526,207 93,550 105,545 97,218 125,964 (299,405) (297,644) 125,141 460,072 

Assets by segment - millions of euros 52,027 56,326 11,207 12,292 14,532 21,095 31,083 30,907 108,848 120,620 

Liabilities by segment - millions of euros 33,006 40,830 3,550 3,457 24,093 23,425 48,200 52,908 108,848 120,620 

Substantially all the total income for 2011, which includes interest and similar income, income from investment 

securities, fee and commission income, net gains on financial assets and liabilities held for trading and other 

income from ordinary activities, was obtained in Spain, It should be noted, however, that 0,9% of total income for 

2011 was generated in the United States (2010: 0,8%), 

96,1% of loans and advances to customers relate to borrowers resident in Spain (2010: 96,3%), 1,7% to 

borrowers resident in other EU countries (2010: 1,9%) and 0,6% to residents in other OECD countries (2010: 

0,6%),

AR 11 

47, 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 2011 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 28) and of the effect on the income statements of transactions 

performed with them is as follows: 


214 


2011 2010 

Assets: 

Credit institutions 6,336,233 13,959,093 

Claims on customers 481,883 187,637 

Liabilities: 

Credit institutions 943,645 1,128,710 

Due to customers 61,923 74,169 

Income statement: 

Debit- 

Interest expense and similar charges (52,122) (50,798) 

Fee and commission expense (3,020) (2,558) 

Other general administrative expenses (72,820) (79,332) 

Credit- 

Interest and similar income 290,503 328,405 

Income from equity securities 9,761 3,551 

Fee and commission income 135,013 80,845 

Gains on derecognition or disposal of assets 

(see Note 3) 116,427 - 

Other income – Repurchase of subordinated 

debt (see Note 22) 54,000 - 


Contingent liabilities 245,912 121,519 

Commitments 3,708 7,441

) Transactions with Board members and executives (key management 

personnel of the Bank and its parent) 

The information on the remuneration earned by the Bank's key management personnel is detailed in Note 5, 

The balance of direct lending transactions to key management personnel of the Bank amounted to EUR 

2,259 thousand at 31 December 2011 (31 December 2010: EUR 3,255 thousand), 

Additionally, the transactions currently performed by the Bank's key management personnel are those 

characteristic of a normal commercial relationship with a bank, 

c) Transactions with other related parties 

At 31 December 2011 and 2010, the positions with other related parties as defined in the applicable 

regulations were as follows: 

- Financing transactions (trade discount, credit, mortgage and other loans and other lending transactions): 

EUR 287 million and EUR 333 million, respectively, 

- Off-balance sheet risks (guarantees and documentary credits): EUR 263 million and EUR 266 million, 

respectively, 

- Deposit-taking transactions (customer deposits): EUR 99 million and EUR 6 million, respectively, 

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'slength 

basis, 

However, 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, 

48, 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-tomaturity 

investments, equity instruments whose market value cannot be estimated reliably and financial 

derivatives that have these instruments as their underlying and are settled by delivery of those investments- are 

measured at fair value in the accompanying consolidated balance sheets, 

Similarly, the Bank’s financial liabilities -except for financial liabilities held for trading, those measured at fair value 

and financial derivatives having equity instruments whose market value cannot be estimated reliably as their 

underlying- are measured at amortised cost in the accompanying consolidated balance sheets, 

A portion of the assets and liabilities recognised under “Loans and Receivables” and “Financial Liabilities at 

Amortised Cost” in the consolidated balance sheets at 31 December 2011 and 2010 are included in the fair 

values hedges managed by the Group and, accordingly, are measured in the aforementioned consolidated 

balance sheets at their fair value in respect of the risk being hedged (interest rate risk - see Note 12), 

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 consolidated balance sheet, 

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AR 11 

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 consolidated balance sheet, 

Accordingly, the fair value of the fixed-rate, fixed-term assets and liabilities, 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 consolidated balance sheet, 

The market value of the balance of “Held-to-Maturity Investments” in the consolidated balance sheet at 31 

December 2011 amounted to EUR 3,313 million (see Note 8), 

The market value of derivatives for which there are no observable market data is determined basically using 

internal valuation models which include the Bank's own analyses of the variables influencing market value, in the 

form of time series and future probability analyses, such as prepayment rates, probabilities of default, expected 

losses, etc, All these internally generated data are included in the internal valuation model -previously validated 

by the Risk Department-, from which the market value of the aforementioned derivatives is obtained, 

49, Risk and capital management 

The distinguishing feature of risk management at Banesto in 2011 was the application of policies and procedures 

based on criteria of prudence and responsibility, combining advanced risk management and measurement 

methodologies with an efficient operating structure aimed at achieving risk control and anticipation, with a view to 

maintaining a high standard of credit quality and optimising the creation of value for its shareholders, 

The risk function is performed by the Lending and Risk Area, which is responsible for meeting the credit quality 

and growth targets assigned to it, both in the strategic plans and in the annual budgets, The Lending and Risk 

Area is made up of several functional units, each of which is dedicated to the integral credit risk management of 

the various segments, 

The Risk Committee, regulated by Article 15 bis of the Board Regulations, makes risk policy proposals to the 

Board of Directors, The Executive Committee decides upon the more complex transactions and those involving 

larger amounts and has delegated its other powers by operating levels based on the General Risk 

Responsibilities Map, 

Furthermore, the Risk Committee, in addition to proposing the risk strategy and policies to the Board, is 

responsible for monitoring all the risks to which the Bank is exposed and for verifying and authorising the 

systems, processes and criteria required to ensure the efficient operation of the risk function, 

The Lending and Risk Unit is responsible for proposing, managing, conveying and implementing risk policies, for 

ensuring compliance therewith and for managing, from both an operational and functional standpoint, all the 

lending and market-related tasks performed by the Bank, 

The organisation, by type of risk, is as follows: the Lending and Risk Unit directly manages and controls credit 

risk and market risk, the Financial Area manages structural balance sheet risk, and the Resources Area manages 

operational risk, The Compliance Area regulates and oversees Banesto’s reputational risk, 

The Global Risk Unit centralises, analyses and compiles information on all risks and prepares balanced 

scorecards for the Bank's senior management, 


216

I, Global risk management 

The detail, by type of risk, of the Group's risk profile in 2011 and 2010, taking into account all its activities and 

measured in economic capital consumption terms, is shown in the table below: 

II, Credit risk 

Percentage 

Dec-10 Dec-11 

Credit risk 79% 75,3% 

Market risk 2% 3,6% 

ALM 6% 8,1% 

Operational risk 5% 3,8% 

Business 3% 2,9% 

Tangible assets 5% 6,3% 

Credit risk is the possibility of a credit institution incurring a loss stemming from the failure of counterparties to 

meet their contractual financial obligations, 

The table below details the distribution, by segment, of the credit risk exposure to customers in terms of exposure 

at default (EAD) at 31 December 2011 and 2010: 

2011 2010 

Millions of Euros EAD % EAD % 

Corporate banking 13,334 16% 13,918 17% 

Business banking 32,311 40% 31,027 38% 

SMEs, retail businesses and enterprises 5,586 7% 5,783 7% 

Independent professionals 2,151 3% 2,206 3% 

Individuals 24,502 30% 27,706 32% 

Banks, sovereign debtors and other 3,247 4% 2,497 3% 

Total 81,131 100% 83,137 100% 

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, 

Refinancing 

Refinancing is one of the management tools established to adapt the maturity structure of loan principal and 

interest to the customers’ new payment capacity, 

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AR 11 

At the Bank, refinancing is confined, with stringent and selective criteria, to: 

- Viable transactions, 

- In which customers have a willingness to pay, 

- That improve the Bank's position in terms of expected loss, and 

- In which refinancing does not discourage an additional effort by customers, 

The Bank's refinancing policy ensures uniform strict application of these criteria: 

- The overall customer risk is assessed, regardless of the situation of each individual contract, 

and the highest possible level of guarantees is assigned to all customer risks, 

- As a general rule, the customer exposure is not increased, 

- All the alternatives to refinancing and their impacts are assessed, making sure that the results of 

this solution exceed those which would foreseeably be obtained if no refinancing were 

performed, 

- Special attention is paid to the guarantees and the possible future changes in their value, 

- Its use is restricted; priority is given to the refinancing of loans that requires an additional effort 

from customers, and actions that only postpone the problem are avoided, 

- Refinanced transactions are subject to special monitoring, 

Refinancing is used mainly to address situations having a low impact on customer payment capacity and which 

are expected to last for a medium/long period of time, With greater restrictions, it can also be used for more 

serious cases in which the cause of the payment difficulty is estimated to be of short duration, No refinancing is 

applied to the most severe cases, in which other solutions are sought to recover the amount owed, 

In addition to the close monitoring of these portfolios by the Bank's risk management teams, the competent 

supervisory authorities and the internal audit department of the Group to which it belongs pay special attention to 

the control and appropriate assessment of refinanced portfolios, 

Refinancing does not entail the release of provisions or the classification of the related transactions as 

performing, unless: 

- The criteria established in the regulations based on Bank of Spain circulars are met (i,e, 

collection of ordinary interest outstanding and new effective guarantees or reasonable 

assurance of payment capacity); 

- The precautionary provisions included, using the principle of prudence, in the corporate policy of 

the Group to which the Bank belongs (sustained payment for a period of between three and 

twelve months, depending on the transaction features and the type of guarantee) are met, 

At 2011 year-end, the balance of transactions refinancing exposures previously recognised as doubtful assets 

amounted to EUR 152,465 thousand, 


218

Of the total refinanced amount, EUR 86,953 thousand met the requirements defined by the Bank of Spain to be 

reclassified as performing at the date of arrangement, 

The remaining EUR 65,512 thousand related to refinancing transactions which, again in conformity with the 

conditions established by the Bank of Spain, remained classified as non-performing at the date of arrangement, It 

should be noted that a portion of the aforementioned balance remained classified as non-performing due to the 

application of criteria that were more prudent than those required by the Bank of Spain, 

III,- Market risk 

III,a Structural balance sheet risk 

Interest rate risk is inherent to the Bank’s activity and arises because the Bank’s balance sheet contains assets 

and liabilities that are sensitive to interest rates and have different maturity and repricing structures, Dynamic 

management is required in order to mitigate the negative impact on the net interest margin and on the economic 

value of the Bank’s capital resulting from fluctuations in interest rates, 

Management policy and strategy 

The Bank’s main objective is to stabilise the net interest income in the event of interest rate fluctuations, whilst 

maintaining the entity’s economic value and adequate liquidity and solvency levels, The Asset-Liability 

Committee (ALCO) is responsible for approving lending strategies and management, hedging, measurement and 

control policies designed to safeguard the net interest margin and economic value in the various interest rate 

scenarios, This management excludes the positions of the Markets department, 

For the purpose of managing interest rate risk, the Bank enters into hedging transactions using either fixedincome 

instruments or interest rate derivatives (swaps, collars and swaptions), The selection of one instrument or 

another is based on factors such as cost, the effectiveness of the instrument and the effects it might have on the 

Bank’s liquidity and capital, 

The main measures for the management and control of interest rate risk are as follows: 

a) Interest rate gap, 

One method of ascertaining a bank's interest rate risk exposure is to analyse the maturity or repricing structure of 

its on- and off-balance-sheet items, On- and off-balance-sheet items are distributed among the various time 

horizons, distinguishing the items that are interest rate-sensitive from those that are not, Items (sensitive or 

otherwise) that do not have a contractual maturity date are allocated using certain assumptions based on their 

historical behaviour, 

b) Sensitivity of net interest margin and economic value, 

The sensitivity of the net interest margin is measured, using dynamic simulation tools, as the difference between 

the margin projected with the market yield curves at each analysis date and that projected on the basis of the 

various scenarios described above, The sensitivity of the Bank's economic value is determined as the difference 

between the net value of the interest rate-sensitive items calculated using the market yield curve at the analysis 

date and that calculated using the curve modified by the various assumptions, 

219

AR 11 

Banesto focuses its sensitivity analysis mainly on its exposure in the first year, In this regard, as can be 

observed, Banesto’s interest rate risk exposure is moderate in terms of the sensitivity at one year of the net 

interest margin, at - 6,3% (EUR 78 million), and of the economic value of capital, at - 5,1%, to parallel shifts of 

100 basis points in the curve, 

The following table shows the maturity and repricing gap structure of assets, liabilities and off-balance-sheet 

transactions at 31 December 2011 and 2010: 


3 Months More 

31 December Less than to 1 to 2 2 to 5 than Not 

2011 3 Months 1 Year Years Years 5 Years Sensitive Total 

Assets 

Money market 2,826 2,829 13 1,528 5 2 7,203 

Credit system 31,017 26,396 1,955 2,359 4,865 - 66,592 

Securities portfolio 2,474 884 145 2,854 1,531 - 7,888 

Other assets - - - - - 15,542 15,542 

Total assets 36,317 30,109 2,113 6,741 6,401 15,544 97,225 

Liabilities 

Money market 7,829 839 212 6 48 - 8,934 

Deposit market 8,915 12,719 8,492 5,776 5,333 - 41,235 

Issues 9,567 4,053 3,916 9,751 1,223 - 28,510 

Other liabilities - - - - - 18,546 18,546 

Total liabilities 26,311 17,611 12,620 15,533 6,604 18,546 97,225 

Off-balance-sheet 

transactions 

-19,598 -15,252 7,725 25,388 1,737 

Simple gap -9,592 -2,754 -2,782 16,596 1,534 -3,002 

Cumulative gap -9,592 -12,346 -15,128 1,468 3,002 - 

Sensitivity ratios: 

Assets-liabilities/Total 

assets 

10,29% 12,85% -10,81% -9,04% -0,21% -3,09% 

Simple gap/Total assets -9,87% -2,83% -2,86% 17,07% 1,58% -3,09% 

Cumulative gap/Total 

assets 

-9,87% -12,70% -15,56% 1,51% 3,09% 

Coverage ratio: 138,03% 170,97% 16,74% 43,40% 96,93% 

Sensitive assets/ 

Sensitive liabilities 


220


3 Months More 



Assets 

Money market 4,228 9,965 34 1,555 46 2 15,830 

Credit system 35,945 28,524 2,291 2,686 4,651 - 74,097 

Securities portfolio 416 4,628 4,084 2,820 3,886 - 15,834 

Other assets - - - - - 14,201 14,201 

Total assets 40,589 43,117 6,409 7,061 8,583 14,203 119,962 

Liabilities 

Money market 10,585 4,043 965 2 5 35 15,635 

Deposit market 10,037 20,500 3,194 10,365 5,385 - 49,481 

Issues 14,234 1,926 4,807 9,940 3,440 - 34,347 



Off-balance-sheet 

transactions 

5,730 12,571 1,078 9,893 7,330 

Simple gap 3 4,077 (1,479) (3,353) 7,083 (6,331) 

Cumulative gap 3 4,080 2,601 (752) 6,331 - 

Sensitivity ratios: 

Assets-liabilities/Total 

assets 4,78% 13,88% (2,13)% (11,04)% (0,20)% (5,28)% 

Simple gap/Total assets - 3,40% (1,23)% (2,79)% 5,91% (5,28)% 

Cumulative gap/Total 

assets - 3,40% 2,17% (0,62)% 5,28% 

Coverage ratio: 

Sensitive assets/ 

Sensitive liabilities 116,45% 162,90% 71,49% 34,77% 97,22% 

III,b, Liquidity risk 

Liquidity risk management at Banesto is the responsibility of the Financial Management unit, The Bank’s senior 

management is also deeply involved through the Asset-Liability Committee, the Risk Committee, the Executive 

Committee and the Board of Directors, 

In 2011 the Bank generated liquidity in excess of EUR 6,000 million organically, as a result of the different trends 

in the balances of on-balance sheet loans and receivables and customer deposits, Thus, it further consolidated 

its robust balance sheet structure and reduced its dependence on wholesale financing markets, 

The Bank's wholesale funding structure is based on medium- and long-term issues, which in aggregate account 

for 97% of total wholesale market funding, This financing is well diversified in terms of instruments, markets, 

investors and maturities, 

221 

-

AR 11 

In 2011 the Bank raised EUR 2,190 million in medium- and long-term issues in the wholesale senior debt and 

mortgage-backed bond markets, vis-à-vis maturities of the same kind totalling less than EUR 3,050 million in the 

year, The narrowing of the commercial gap referred to above enabled the Bank to be more selective in the issues 

launched by it this year, giving priority to maturity distribution and cost over the amount issued, Banesto’s issue 

capacity is underpinned by its creditworthiness and its flexibility in adapting to the needs of the various types of 

investors, 

Consequently, short-term funding represents a residual portion of the Bank’s financing structure (less than 1% of 

total liabilities) and is covered in full by liquid assets, 

Lastly, it should be noted that the Bank has significant capacity to resort to central bank funding, At 2011 yearend, 

the assets eligible for discount at the central bank totalled more than EUR 6,600 million, At that date, the net 

funds obtained from the ECB financing facility amounted to EUR 700 million, 

The following table shows the maturity gaps of assets and liabilities in millions of euros at 31 December 2011 

and 2010, which can be used as a basis for the analysis of liquidity: 


3 Months More 



Assets 

Money market 1,015 3,869 13 1,528 778 - 7,203 

Credit system 7,541 12,184 7,459 13,393 26,015 - 66,592 

Securities portfolio 1,125 2,851 1,934 2,918 3,121 - 11,949 

Other assets - - - - - 14,171 14,171 

Total assets 9,681 18,904 9,406 17,839 29,914 14,171 99,915 

Liabilities 

Money market 8,413 1,279 1,883 14 63 - 11,652 

Deposit market 6,036 13,723 10,057 5,881 5,392 119 41,208 

Issues 3,851 4,309 6,152 12,111 2,087 - 28,510 



Simple gap (8,619) (407) (8,686) (167) 22,372 (4,493) 

Cumulative gap (8,619) (9,026) (17,712) (17,879) 4,493 - 


222


3 Months More 



Assets 

Money market 3,362 9,965 34 1,555 914 - 15,830 

Credit system 9,290 15,013 9,157 16,853 23,784 - 74,097 

Securities portfolio 138 4,572 4,097 2,785 4,242 - 15,834 

Other assets - - - - - 14,201 14,201 

Total assets 12,790 29,550 13,288 21,193 28,940 14,201 119,962 

Liabilities 

Money market 10,585 4,044 967 8 19 12 15,635 

Deposit market 7,749 21,175 3,879 11,109 5,416 153 49,481 

Issues 7,763 2,412 5,864 13,799 4,509 - 34,347 



Simple gap (13,307) 1,919 2,578 (3,723) 18,996 (6,463) 

Cumulative gap (13,307) (11,388) (8,810) (12,533) 6,463 - 

These gaps reflect a typical commercial banking structure with a high percentage of demand deposit financing, 

The detail of the balance sheet funding structure of the Banesto consolidated Group at 31 December 2011 is as 

follows: 

223

AR 11 

Stable funding requirements Thousands Stable funding sources Thousands 

of Euros 

of Euros 

Loans and advances to 58,851,208 Customer deposits with 15,048,088 

customers 

100% Deposit Guarantee 

Fund coverage 

Loans and advances to Group 481,883 Customer deposits without 14,769,822 

and related companies 

100% Deposit Guarantee 

Fund coverage 

Securitised loans 5,313,000 

Specific funds 2,025,479 

Foreclosed assets 3,642,307 

Total loans and advances to 

customers 

70,313,877 

Investments 29,943 Total customer retail 

deposits 

29,817,910 

Total stable funding 

requirements 70,343,820 


Mortgage bonds (“bonos 

hipotecarios”) and 

mortgage-backed bonds 

(“cédulas hipotecarias”) 

224 

18,350,160 

Territorial bonds 600,000 

Senior debt 5,837,880 

State-guaranteed issues - 

Other medium- and longterm 

financial instruments 

- 

Securitisation issues sold to 

third parties 

354,742 

Other funding with residual 

maturity of > one year 

- 

Long-term wholesale 

financing 

25,142,782 

Subordinated financing 1,365,819 

Equity 5,442,302 

Total stable funding 

sources 61,768,813

The detail, by maturity, of the wholesale debt at 31 December 2011 is as follows: 

Mortgage bonds (“bonos hipotecarios”) 

and mortgage-backed bonds (“cédulas 

hipotecarias”) 


2012 2013 2014 >2014 Total 

2,657 3,691 3,811 8,190 18,349 

Territorial bonds - - - 600 600 

Senior debt 2,075 1,497 405 1,860 5,837 

State-guaranteed issues - - - - - 

Subordinated debt, preference shares and 

convertible debt 

Other medium- and long-term financial 

instruments 

225 

- - 600 887 1,487 

- - - - - 

Securitisation issues sold to third parties - - 355 355 

Commercial paper 580 - - - 580 

Total maturity – wholesale issues 5,312 5,188 4,816 11,892 27,208 

The table below shows the liquid assets and the available issue capacity at 31 December 2011: 

Liquid assets: 

Millions of 

Euros 

ECB eligible assets: 16,216 

Pledged assets (nominal value) 8,210 

Pledged assets (market value and ECB “haircut”) 

Of which: 

5,978 

Central government debt securities 917 

Unpledged assets (nominal value) 8,006 

Total 

Issue capacity: 

16,216 

Mortgage-backed bonds 2,238 

Territorial bonds 313 

State-guaranteed issues - available capacity - 

Total 2,551 

TOTAL LIQUIDITY CAPACITY 18,767

AR 11 

III,c Treasury operations risk 

The measurement of treasury operations risk focuses mainly on credit risk and market risk, Banesto has a Market 

Operations Risk Unit dedicated to the monitoring and measurement of this type of risk, This Unit has three areas 

dedicated to the analysis of the aforementioned risks: market risk, credit risk and validation of the models and 

market price allocation system used in the valuation of positions, This structure makes it possible to group 

together the measurement of all the types of treasury risk with an integrated approach and integrated systems, 

2011 required a meticulous monitoring of treasury operations risk owing to the high volatility in the financial 

markets, 

1,- Credit risk 

In treasury operations credit risk is measured as the positive value that any financial instrument could potentially 

acquire at a future time when it is possible that the counterparty to the financial instrument might fail to comply 

with its contractual obligations, This non-compliance would give rise to losses for Banesto, since the cost of 

replacing an instrument with a positive value would represent a loss, 

At 2011 year-end, the risk exposure was EUR 10,437 million, and the Wholesale Banking segment (which groups 

together the Banks, Corporations and Institutions sector) represented the largest portion of this figure, with 

94,76%, while the Business Banking, Real Estate and Retail Banking segments represented 4,81%, 0,02% and 

0,41%, respectively, 

2,- Market risk 

The market risks affecting treasury operations (interest rates, exchange rates, equities, credit spreads, implicit 

volatilities, correlations, etc,) are managed and controlled 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 on a daily basis 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 weekly committee meetings under the auspices of the Risk 

Committee and through the ALCO, 

During 2011 the daily average VaR remained at around EUR 5,8 million (2010: EUR 6,1 million), 

The measurement of market risk using VaR is supplemented by an analysis of stress scenarios in which the 

impact on the value of the portfolios is simulated by replicating historical crises and generating scenarios of 

extreme fluctuations not previously experienced by the market, such as a change of three or six typical 

deviations, Thus, historical and hypothetical scenarios with various degrees of severity and plausibility are 

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 calculating the statistical conditional VaR, which is also reported to senior 

management on a daily basis and analysed in depth by the aforementioned committees, Throughout 2011 

conditional VaR remained at around EUR 8,0 million (2010: EUR 8,1 million), 

It should be noted that in February 2011 the Bank of Spain approved Banesto’s market risk measurement model 

for use as an internal model to calculate its minimum capital requirements for market risk, Internally, Banesto 

monitors and refines the quality of the model on an ongoing basis, using back-testing techniques to 

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 Internal Audit Department, in compliance with the requirements 

recommended by international regulators, The outcome of these tests shows that the value predicted by VaR 


226

methodology was exceeded on only two days in 2011 and, therefore, no capital surcharge was required in this 

connection, 

III,d Risks and results in 2011 

a) Trading 

The average VaR profile assumed in 2011 was EUR 5,782 thousand (2010: EUR 6,114 thousand), 

b) Balance sheet management 

At 31 December 2011, the sensitivity of the net interest margin at one year to parallel falls of 100 basis points 

was negative by EUR 78,1 million (6,3%) (31 December 2010: EUR 36,8 million; 3,29%), 

For the same timeframe the sensitivity of economic value to parallel increases of 100 basis points in the curve 

was EUR 304,9 million (5,1%) at 2011 year-end (31 December 2010: EUR 35,7 million; 3,2%), 

IV, 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 on solvency, 

50, Disclosure transparency requirements 

Credit risk exposure to construction and property development sectors 

At 31 December 2011, the financing granted for construction and property development amounted to EUR 6,588 

million (31 December 2010: EUR 7,959 million), of which EUR 1,680 million (31 December 2010: EUR 1,346 

million) were impaired assets and EUR 1,399 million (31 December 2010: EUR 1,031 million) were classified as 

substandard assets for which impairment losses had been recognised, 

The specific impairment allowances at that date totalled EUR 793 million (31 December 2010: EUR 525 million), 

The foregoing figures relate to financing granted for construction and property development, Consequently, in 

accordance with the instructions of the Bank of Spain, the National Classification of Economic Activities of the 

debtors was not taken into account, This entails that, for example, if the debtor is: (a) a real estate company but 

uses the financing granted for a purpose other than construction or property development, it is not included in 

these tables, and if it is (b) a company whose core activity is not construction or real estate but which uses the 

loan to finance buildings to be used in property development, it is included in the tables, 

The quantitative information on real estate risk at 31 December 2011 and 2010 is as follows (in millions of euros): 

227

AR 11 

Gross 

Amount 


2011 2010 

Excess 

Over 

Collateral 

Value 

Specific 

Allowances 

228 

Gross 

Amount 

Excess Over 

Collateral 

Value 

Specific 

Allowances 

Credit risk exposure 6,588 3,315 793 7,959 - 525 

Of which non-performing 701 603 388 384 210 171 

Of which doubtful 

979 521 203 962 647 162 

(subjective) Of which substandard 1,399 699 202 1,031 (*) 192 

Memorandum items 

Written-off assets 53 - - 124 - - 

(*) The classification of risks as substandard entails the implicit consideration of the value of the underlying guarantees, 

The detail of the total loans and advances to customers at 31 December 2011 and 2010, excluding positions with 

the public sector, is as follows (Memorandum item: consolidated Group data): 


2011 2010 

Total loans and advances to customers, 

excluding public sector (*) 

65,018 72,932 

Total consolidated assets (**) 108,848 120,621 

Total general allowance (**) 72 190 

(*) Business in Spain 

(**) Total businesses 

Following is a detail of real estate credit risk, by type of associated guarantee: 


2011 2010 

Without specific guarantee 1,151 1,594 

With mortgage guarantee 5,437 6,365 

Completed buildings-residential 1,854 2,196 

Completed buildings-other 1,769 1,584 

Buildings under construction-residential 225 440 

Buildings under construction-other 53 40 

Land- developed land 952 1,305 

Land- developable land (*) 538 737 

Land- other 46 63 

6,588 7,959 

(*) Land with respect to which all the urban development procedures 

required for the commencement of construction have not been 

completed,

Risk of retail mortgage portfolio 

The quantitative information relating to the risk exposure of the retail mortgage portfolio at 31 December 2011 

and 2010 is as follows: 

229 


2011 2010 

Home purchase loans: 20,376 20,403 

Without mortgage guarantee 158 33 

Of which: 

- Doubtful - 

With mortgage guarantee 20,218 20,369 

Of which: 

- Doubtful 400 202 

The loan-to-value (LTV) ranges of the retail mortgage portfolio at 31 December 2011 and 2010 were as follows: 

>0 40%, 

60%, 

80%, 

100% Total 

Average 

LTV Ratio 

Home purchase loans outstanding 

With mortgage guarantee 4,725 5,850 7,483 2,013 147 20,218 57,15% 

Doubtful home purchase loans 

With mortgage guarantee 45 68 127 139 21 400 71,15% 

>0 40%, 

60%, >80%, 

>100% Total 

AR 11 

Property assets arising from financing granted 

to construction and property development 

companies: 


230 

31/12/11 


Carrying 

Amount 

Allowance 

% 

Allowance 

2,548,215 632,461 24,8% 

Completed buildings 593,433 139,558 23,5% 

Residential 506,968 121,166 23,9% 

Other 86,465 18,391 21,3% 

Buildings under construction 194,762 39,874 21,8% 

Residential 165,441 35,060 22,6% 

Other 29,321 4,814 17,5% 

Land 1,760,020 453,030 25,4% 

Developed land 1,680,861 432,684 25,4% 

Other land 79,159 20,346 25,7% 

Property assets from home purchase mortgage 997,708 249,518 25,0% 

financing granted to households 

Other foreclosed property assets 74,695 11,103 14,9% 

Special provision for property assets (*) - 400,000 N/A 

Equity instruments 534,588 183,412 34,3% 

(*) The special provision for property assets was recognised at 2011 year-end in order to reflect the estimated 

impairment at that date resulting from the situation of the property market, This provision brings the coverage of the 

property assets acquired by the Bank in payment of debts up to 35,7%,

Property assets arising from financing 

granted to construction and property 

development companies: 

231 

31/12/10 


Carrying 

Amount 

Allowance 

(*) 

% 

Allowance 

2,018,873 472,938 23,4% 

Completed buildings 374,186 94,250 25,2% 

Residential 317,771 78,693 24,8% 

Other 56,415 15,557 27,6% 

Buildings under construction 171,313 39,750 23,2% 

Residential 169,971 39,573 23,3% 

Other 1,342 177 13,2% 

Land 1,473,374 338,938 23,0% 

Developed land 1,387,342 315,428 22,7% 

Other land 86,032 23,510 27,3% 

Property assets from home purchase 756,264 182,643 24,2% 

mortgage financing granted to households 

Other foreclosed property assets 256,467 53,362 20,8% 

Equity instruments 362,303 207,211 (**) 57,0% 

(*) Including EUR 30,715 thousand at 31 December 2010 recognised under “Provisions – Other Provisions” 

in the accompanying consolidated balance sheets, 

(**) Including EUR 23,800 thousand at 31 December 2010 recognised under “Provisions – Other Provisions” 

in the accompanying consolidated balance sheets, 

Note 49 contains a detailed description of the Bank's global risk management, Following is a brief description of 

the asset management policies and strategies, 

1,- Credit risk management 

The policies governing lending to developers were conditioned by the Bank's strategy to attract mortgage 

business aimed at households, As a result, the Bank's investment in property developments focused on: 

� Houses to be used as principal residences 

� Target customers: medium-income bracket 

� Maximum leverage of 80% 

� Consolidated geographical areas in which the Bank is present, 

Each of the projects financed by the Bank is assigned a rating to measure its quality using various parameters, 

The Bank assesses the companies engaging in property development projects and also assigns them a rating, 

The basic characteristics evaluated are as follows:

AR 11 

� Real estate experience and track record 

� Professional, transparent management structure 

� Suitable economic and financial structure, 

The financing granted for the acquisition of land was in keeping with this investment policy and, therefore, longterm 

lending was avoided, Consequently, most of the building lots financed have been earmarked for the specific 

purpose of use in principal-residence housing developments, 

Since the end of 2007 Banesto has gradually consolidated its investment portfolio and today 90% of the 

developments are complete and are at the marketing stage, This strategy has led to a reduction of more than 

50% in its exposure to the property development sector, 

As a result of the above-mentioned financing policies, more than 90% of the exposure to developers is secured 

by mortgage, 

2, Property asset management 

Policies and strategies are defined on the basis of the nature of the assets, which are classified into four groups 

for management purposes: Land, Developments, Completed Houses and Other Buildings, 

Land 

All land is subject to an ongoing analysis of its zoning status and market value, This analysis is performed by the 

Real Estate Area with the assistance of independent experts, 

A specific action plan is established for each land lot, with the ultimate aim of divesting of the land by either 

selling or developing it, 

The plan envisages: 

- optimisation of the use of the land for urban development, through town planning agreements and 

management of zoning and development instruments 

- management and control of the urban development process, and 

- the divestment process (marketing) 

The land is marketed in conjunction with prestigious marketing companies, 

Completed houses 

The Bank's ultimate objective with regard to foreclosed completed houses is to sell them in the shortest possible 

time frame, To this end, the following steps are taken: 

- Immediate legal disencumbrance of the property, thereby placing it at the Bank's disposal, 

- Grant of financing, where required, in keeping with the creditworthiness of the buyer, 

- Use of specialist property sales channels, as well as the Bank's own branch network, 


232

Developments 

Where the Bank decides to develop land owned by it, since it considers this to be the best divestment option, the 

entire development process is contracted out to construction companies and independent professionals, under 

the supervision and control of the Real Estate Area, 

The development process involves: 

- an economic assessment of the project 

- the selection and management of contractors 

- the monitoring of work performed and of compliance with budgets 

- a marketing plan, launched in the construction phase 

Where the Bank acquires developments in progress, the situation of the project at the acquisition date is 

assessed in order to decide on the appropriate completion and marketing schedules, 

Completed developments are marketed in conjunction with prestigious marketing companies, under the 

supervision of the Real Estate Area, which has commercial offices throughout Spain, 

Each development has its own specific sales plan (prices, time frame, channels, campaigns, financing offers) 

supported by regular market analyses, which is included in the Annual Sales Plan, 

Other Properties 

This group includes: 

- tertiary or special buildings 

- residential buildings that are leased out, where this is the best economic alternative 

These properties are marketed (sold or leased out, as the case may be) using prestigious marketing companies, 

under the supervision of the Real Estate Area, 

Each property has its own specific action plan, which is included in the Annual Plan (Sales, Income, Expenses 

and Profit or Loss), 

51, Explanation added for translation to English 

These consolidated financial statements are presented on the basis of the regulatory financial reporting 

framework applicable to the Group (see Note 1-b), Certain accounting practices applied by the Group that 

conform with that regulatory framework may not conform with other generally accepted accounting principles and 

rules, 

233

AR 11 

Appendix I 

Subsidiaries Composing the Banesto Group 

at 31 December 2011 and 2010 



Ownership Interest Company Data 

Entity Location Line of Business Direct Indirect Total Assets Liabilities Equity Profit (Loss) (*) 


Agrícola Tabaibal. S.A. Gran Canaria Agriculture - 74.23 74.23 1,972 2,206 (90) (144) 

Aktúa Soluciones Financieras. S.A. Madrid Financial services 99.97 0.03 100.00 26,479 10,220 9,287 6,972 

Alcaidesa Holding. S.A. Cádiz Real estate - 50.00 50.00 131,041 72,933 62,835 (4,727) 

Aljarafe Golf. S.A. Seville Real estate - 89.41 89.41 13,229 566 13,115 (452) 

Bajondillo. S.A. Madrid Real estate 99.99 0.01 100.00 322 360 (20) (18) 

Banesto Banca Privada Gestión. S.A. S.G.I.I.C. Madrid Investment fund manager 99.99 0.01 100.00 4,031 956 2,877 198 

Banesto Banco de Emisiones. S.A. Madrid Banking 99.99 0.01 100.00 4,113,650 4,010,268 102,663 719 

Banesto Bolsa. S.A.. Sdad. Valores y Bolsa Madrid Stock market 99.99 0.01 100.00 648,141 535,602 111,964 575 

Banesto Financial Products. PLC. Ireland Finance 99.94 0.06 100.00 6,268,913 6,268,507 383 23 

Banesto Holdings. Ltd Guernsey Securities investment 100.00 - 100.00 10,092 246 10,179 (333) 

Banesto Renting. S.A. Madrid Finance 99.99 0.01 100.00 249,979 237,311 10,246 2,422 

Banesto Securities. Inc. New York Finance - 100.00 100.00 7,487 634 5,626 1,227 

Beta Cero. S.A. Madrid Finance 74.00 14.00 88.00 1 0 10 (9) 

Caja de Emisiones y Anualidades Debidas por el Estado Madrid Finance 62.87 - 62.87 69 17 62 (10) 

Clínica Sear. S.A. Madrid Healthcare 50.58 - 50.58 16,937 12,770 4,383 (216) 

Club Zaudin Golf. S.A. Seville Services - 85.04 85.04 19,550 5,809 14,131 (390) 

Costa Canaria de Veneguera. S.A. Gran Canaria Real estate 37.09 37.14 74.23 15,840 3,229 12,878 (267) 

234 

(*) The companies' results at 31 December 2011 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,) 







Depósitos Portuarios, S,A, Madrid Services 99.95 0.05 100.00 1,271 565 706 0 

Dudebasa, S,A, Madrid Finance 99.99 0.01 100.00 40,544 27,332 23,541 (10,329) 

Elerco, S,A, Madrid Real estate 99.99 0.01 100.00 360,486 299,038 116,324 (54,876) 

Fondo Titulización Hipotecaria Banesto 4 Madrid Securitisation - - (**) - - - - 

Fondo Titulización Banesto Pymes 2 Madrid Securitisation - - (**) - - - - 

Fondo Titulización Banesto 1 Madrid Securitisation - - (**) - - - - 




Mesena Clo 2011-1 B,V, Amsterdam Securitisation - - (**) - - - - 

Fondo Titulización Financiación Banesto 1 Madrid Securitisation - - (**) - - - - 

Formación Integral, S,A, Madrid Training 99.99 0.01 100.00 1,702 393 1,305 4 

Gescoban Soluciones, S,A, Madrid Finance 99.99 0.01 100.00 12,043 3,279 7,833 931 

Hualle, S,A, Madrid Securities investment 99.99 0.01 100.00 90,063 17,184 74,744 (1,865) 

Larix Chile Inversiones, Ltd, Chile Finance 100.00 100.00 12 0 215 (203) 

Merciver, S,L, Madrid Financial advisory 99.91 0.09 100.00 1,596,436 1,596,288 129 19 

Mesena Servicios de Gestión Inmobiliaria, S,A, Madrid Real estate 73.67 26.33 100.00 1,720,640 1,817,925 88,096 (185,381) 

Oil-Dor, S,A, Madrid Finance 99.99 - 99.99 163,196 260 161,079 1,857 

Promodomus Desarrollo de Activos, S,L, Madrid Real estate 51.00 51.00 107,748 126,270 (11,159) (7,363) 

Sodepro, S,A, Vitoria Finance 99.99 0.01 100.00 16,228 110 15,836 282 

Wex Point España, S,L, Madrid Services 100.00 - 100.00 1,943 1,041 976 (74) 

235 


(**) Companies over which effective control is exercised, 

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,

AR 11 









Agrícola Tabaibal, S,A, Gran Canaria Agriculture - 74.19 74.19 1,695 1,805 141 (251) 

Aktúa Soluciones Financieras, S,A, Madrid Finance 99.97 0.03 100.00 20,080 10,828 3,155 6,097 

Alcaidesa Holding, S,A, Cádiz Real estate - 50.00 50.00 131,226 68,645 65,387 (2,806) 

Aljarafe Golf, S,A, Seville Real estate - 89.41 89.41 13,623 62 13,661 (100) 

Bajondillo, S,A, Madrid Real estate 99.99 0.01 100.00 339 360 (6) (15) 

Banco Alicantino de Comercio, S,A, Madrid Banking 99.99 0.01 100.00 9,126 21 9,100 5 

Banesto Banca Privada Gestión, S,A, S,G,I,I,C, Madrid Investment fund manager 99.99 0.01 100.00 3,798 921 2,677 200 

Banesto Banco de Emisiones, S,A, Madrid Banking 99.99 0.01 100.00 5,400,343 5,297,680 101,982 681 

Banesto Bolsa, S,A,, Sdad, Valores y Bolsa Madrid Stock market 99.99 0.01 100.00 579,395 467,345 111,500 550 

Banesto Financial Products, PLC, Ireland Finance 99.94 0.06 100.00 10,114,254 10,113,866 366 22 

Banesto Holdings, Ltd Guernsey Securities investment 100.00 - 100.00 27,898 255 28,108 (465) 

Banesto Renting, S,A, Madrid Finance 99.99 0.01 100.00 286,325 276,080 10,453 (208) 

Banesto Securities, Inc, New York Finance - 100.00 100.00 5,808 549 3,595 1,664 

Beta Cero, S,A, Madrid Finance 74.00 14.00 88.00 2 1 13 (12) 

Caja de Emisiones y Anualidades Debidas por el Estado Madrid Financial services 62.87 - 62.87 45 24 35 (14) 

Clínica Sear, S,A, Madrid Healthcare 50.58 - 50.58 15,516 11,147 4,419 (50) 

Club Zaudin Golf, S,A, Seville Services - 85.04 85.04 20,104 5,979 14,501 (376) 

Costa Canaria de Veneguera, S,A, Gran Canaria Real estate 37.09 37.10 74.19 15,834 2,980 13,151 (297) 

236 

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,








Depósitos Portuarios, S,A, Madrid Services 99.95 0.05 100.00 1,248 598 506 144 

Dudebasa, S,A, Madrid Finance 99.99 0.01 100.00 54,957 27,082 31,744 (3,869) 

Elerco, S,A, Madrid Real estate 99.99 0.01 100.00 464,086 360,869 194,308 (91,091) 




Fondo Titulización Banesto Pymes 2 Madrid Securitisation - - (**) - - - - 






Fondo Titulización Financiación Banesto 1 Madrid Securitisation - - (**) - - - - 

Formación Integral, S,A, Madrid Training 99.99 0.01 100.00 1,628 318 1,302 8 

Gescoban Soluciones, S,A, Madrid Finance 99.99 0.01 100.00 13,655 5,821 6,444 1,390 

Hualle, S,A, Madrid Securities investment 99.99 0.01 100.00 86,107 11,322 74,139 646 

Larix Chile Inversiones, Ltd, Chile Finance 100.00 100.00 340 455 63 (178) 

Merciver, S,L, Madrid Shipping 99.91 0.09 100.00 1,488,804 1,488,675 137 (8) 

Mesena Servicios de Gestión Inmobiliaria, S,A, Madrid Securities investment 73.67 26.33 100.00 1,905,873 1,283,564 749,549 (127,240) 

Oil-Dor, S,A, Madrid Service stations 99.99 0.01 100.00 163,230 2,991 158,023 2,216 

Promodomus Desarrollo de Activos, S,L, Madrid Real estate 51.00 51.00 141,256 152,555 (5,188) (6,111) 

Sodepro, S,A, Vitoria Finance 99.99 0.01 100.00 16,095 228 15,580 287 

Wex Point España, S,L, Madrid Services 99.98 0.02 100.00 1,969 984 1,082 (97) 

237 




AR 11 

Appendix II 

The Banesto Group’s Joint Ventures 






Kassadesing 2005, S,L, Madrid Real estate - 50.00 50.00 57,524 56,244 2,686 (1,406) 

Prodesur Mediterráneo, S,L, Alicante Real estate - 50.00 50.00 44,134 35,895 12,634 (4,395) 

Proinsur Mediterráneo, S,L, Alicante Real estate - 50.00 50.00 67,448 49,991 19,739 (2,282) 

Santander Seguros y Reaseguros, Cía, Aseguradora Madrid Insurance 26.00 - 26.00 17,984,614 17,384,516 495,966 104,132 



238 





Espais Promocat, S,L, Barcelona Real estate - 50.00 50.00 24,412 27,489 (811) (2,266) 

Kassadesing 2005, S,L, Madrid Real estate - 50.00 50.00 54,519 52,235 3,748 (1,464) 

Prodesur Mediterráneo, S,L, Alicante Real estate - 50.00 50.00 51,210 36,778 16,615 (2,183) 

Proinsur Mediterráneo, S,L, Alicante Real estate - 50.00 50.00 67,474 46,805 22,233 (1,564) 

Santander Asset Management, S,A,, S,G,I,I,C, Madrid Investment fund manager 20.00 - 20.00 279,070 162,835 94,006 22,229 

Santander Pensiones, E,G,F,P,, S,A, Madrid Pension fund manager 20.00 - 20.00 108,924 41,353 57,220 10,351 

Santander Seguros y Reaseguros, Cía, Aseguradora Madrid Insurance 39.00 - 39.00 14,290,933 13,631,285 554,728 104,920 




Appendix III 

Associates of the Banesto Group 


The major companies (representing 100% of direct investments in associates and 100% at Banesto Group level) are included in this list: 





Agres, Agrupación Restauradores, S,L, Madrid Restaurants - 43.01 43.01 3,400 1,080 2,270 50 

Aguas de Fuensanta, S,A, Asturias Food 36.78 5.43 42.21 41,416 31,126 10,400 (110) 

Carnes Estellés, S,A, Valencia Food 21.41 - 21.41 22,478 22,521 (43) 0 

Cartera del Norte, S,A, Asturias Finance 36.10 - 36.10 1,064 14 1,050 0 

Centro Desarrollo Invest, Apli, Nuevas Tecnologías Madrid Technology 49.00 - 49.00 1,422 270 1,139 13 

Dirgenfin, S,L, Castellón Real estate development - 40.00 40.00 56,389 53,583 3,386 (580) 

Grupo Alimentario de Exclusivas, S,A, Asturias Food 40.53 6.7 47.23 5,963 5,623 319 21 

Parque Solar La Robla, S,L, (**) Madrid Energy production 95.00 - 95.00 84,199 81,769 4,845 (2,415) 

Parque Solar Páramo, S,L, (**) Madrid Energy production 92.00 - 92.00 29,547 27,172 4,482 (2,107) 

Parque Solar Saelices, S,L, (**) Madrid Energy production 95.00 - 95.00 81,733 70,622 11,349 (238) 

Promoreras Desarrollo de Activos, S,L, Madrid Real estate 

- 35.00 35.00 131,015 130,326 5,789 (5,100) 

239 

purchases/sales 

Queenford, S,L, Barcelona Real estate 

- 49.00 49.00 102,927 113,293 3,796 (14,162) 

purchases/sales 

Sistema 4B, S,A, Madrid Services 14.70 - 14.70 101,454 51,177 39,184 11,093 


(**) 25% of voting power

AR 11 

Appendix III 

Associates of the Banesto Group 






Agres, Agrupación Restauradores, S,L, Madrid Restaurants - 43.01 43.01 3,063 864 2,224 (25) 

Aguas de Fuensanta, S,A, Asturias Food 36.78 5.43 42.21 36,953 26,773 10,110 70 

Carnes Estellés, S,A, Valencia Food 21.41 - 21.41 26,780 24,431 5,110 (2,761) 

Cartera del Norte, S,A, Asturias Finance 36.10 - 36.10 1,063 13 1,049 1 

Centro Desarrollo Invest, Apli, Nuevas Tecnologías Madrid Technology 49.00 - 49.00 1,345 220 1,125 0 

Compañía Concesionaria del Túnel de Sóller, S,A, Palma de Mallorca Construction 32.70 - 32.70 45,219 26,075 18,253 891 

Dirgenfin, S,L, Castellón Real estate development - 40.00 40.00 55,756 50,848 4,999 (91) 

Grupo Alimentario de Exclusivas, S,A, Asturias Food 40.46 - 40.46 5,615 5,280 307 28 

Parque Solar La Robla, S,L, (**) Madrid Energy production 95.00 - 95.00 14,336 14,341 3 (8) 

Parque Solar Saelices, S,L, (**) Madrid Energy production 95.00 - 95.00 71,628 65,939 4,164 1,525 

Promoreras Desarrollo de Activos, S,L, Madrid Real estate purchases/sales - 35.00 35.00 140,318 130,966 13,895 (4,543) 

Redes y Procesos, S,A, Madrid Services 14.70 - 14.70 8,194 6,526 1,410 258 

Sistema 4B, S,A, Madrid Services 14.70 - 14.70 118,995 66,552 50,856 1,111 


240 



companies are undergoing restructuring and/or a sale process, the disclosure of such information might be prejudicial for the Bank,

Appendix IV 

Notifications of Acquisitions of Investees 


(Article 148 of the Consolidated Spanish Limited Liability Companies Law and Article 53 of Securities Market Law 24/1988): 

Percentage of Net 

Ownership Interest Date of 

Acquired Notification 

Line of in the At Year- to the 

Investee Business Year End Investee 

Acquisitions in 2011: 

Parque Solar Páramo, S,L, Energy 100.00% 92.00% 21/11/11 

Acquisitions in 2010: 

Parque Solar La Robla, S,L, Energy 100.00% 95.00% 19/05/10 

Parque Solar Saelices, S,L, Energy 100.00% 95.00% 26/02/10 

241

AR 11 

Appendix V 

List of agents to whom Bank of Spain 

Circular 5/1995 is applicable 

Name Location 

Area of 

Activity 

A,A,F,F Rute, S,L Rute Andalusia 

A,L,M, Finanzas y Créditos de La Mancha, S,L, Manzanares Castilla La Mancha 

Abu Road S,L,L, Marbella La Poveda Andalusia 

Agencia Financiera Ulloa, S,L, Culleredo Galicia 

Agesan 2009, S,L, Granada Andalusia 

AgilityFinancial, S,L, Xirivella Valencia Autonomous Community 

Alpasugui Agente Financiero, S,L, Roquetas Mar Andalusia 

Alto Quintana, S,L, El Barraco Castilla y León 

Arespa Gijón Y Asociados, S,L, Gijón Asturias 

Arion Financial Services, S,L, Madrid-Lagasca Madrid 

Asefisco Palma Palma del Río Andalusia 

Asemar Financiera, S,L, Rojales Valencia Autonomous Community 

Asesores Financieros de Almendralejo, S,L, Almendralejo Extremadura 

Bamarval 2008 Zaragoza Aragon 

Banest Blanes, S,L, Blanes Catalonia 

Banfortunia, S,L Alcalá de Henares Madrid 

Bangencia Aranjuez, S,L, Aranjuez Madrid 

Banking Solutions Madrid – Rivas Madrid 

Berzal Miguel Jesús Sacramenia Castilla y León 

Berzal Miguel José Turégano Castilla y León 

BNT 2008 Agentes Financieros, S,L, Almansa Castilla La Mancha 

Bolero Servicios Financieros, S,L,U Albacete Castilla La Mancha 

Bopecon Inversiones, S,L, Seville- Isla de la Cartuja Andalusia 

Burma Agentes Financieros, S,L, Nerva Andalusia 

Business and Personal Service, S,A, Pravia Asturias 

Business Rockers, S,L, Alhaurín de la Torre Andalusia 

Buzabrín, S,L, Madrid – Chamberí Madrid 

Bw Capnorth Servicios Financieros Y Banc Barbastro Aragon 

Carramigal, S,L, Madrid – Vallecas Madrid 

Cetinve, S,L, Dos Hermanas Andalusia 

Charuma, S,L, Seville Andalusia 

Cofaresa Servicios Financieros Complemen Madrid Cofares Madrid 


242

Appendix V (cont,) 



Name Location 

Area of 

Activity 

Consultores Financieros Leones León Comandante Zorita Castilla y León 

Credits Financial Murcia, S L Puente Tocinos Murcia 

De - Two Y Mas Investment Services, S,L, Madrid - Manuel Becerra Madrid 

Diptos, S,L, Cornella Carretera Esplugues Catalonia 

Diserivan, S,L,U, Garlitos Extremadura 

Division Servicios Financieros Cáceres Extremadura 

Drimty, S,L, Mutxamel Valencia Autonomous Community 

Ema Vilatorrada 2007, S,L, Sant Joan de Vilatorrada Catalonia 

Esteve Capital, S,L, Gelida Catalonia 

Ferre & Arbo & Reverte Gestio I Finances, S,L, Sant Carles de la Rapita Catalonia 

Financeres Aro, S,L, Alcarras Catalonia 

Financiaciones Las Cabezas, S,L, Las Cabezas de San Juan Andalusia 

Finanlaca, S,L, Santa Cruz de Tenerife Canary Islands 

Finansando, S,L, La Algaba Andalusia 

Finanzas Boadilla, S,L, Boadilla del Monte Madrid 

Finanzas San Andres, S,L, Barcelona - Plaza Mossen Clapes Catalonia 

Franquicies Bell-Lloch, S,L, Bell-Lloc D'urgell Catalonia 

Franquicies Financeres Lleida Lleida Catalonia 

G S G Grupo Corporativo De Servicios, S,L, Fernandez de la Hoz Madrid 

G, M, T, Proyectos De Calidad Medioambie Orba Valencia Autonomous Community 

Gessinelx, S,L, Elche Valencia Autonomous Community 

Gestión 5 Servicios Financieros Málaga Andalusia 

Gestión Financiera Madrid Norte, S,L, San Sebastián de los Reyes-A,F Avenida de Madrid Madrid 

Gestión Financiera Malacitana Málaga - Av, Andalusia Andalusia 

Gestión Invergara, S,L, Terrassa-Av, Josep Tarradellas Catalonia 

Gestiones E Inversiones Alper, S,L, Salceda de Caselas Galicia 

Gesvalor Financiación y Vida, S,L, Tarazona Aragon 

González y Naves, S,L, Oviedo Asturias 

Grup Arca Oliana, S,L, Oliana Catalonia 

Grup Bbr Gestio Privada, S,L, Mora D'Ebre Catalonia 

Hotrarescon, S,L, San Antonio Benageber Valencia Autonomous Community 

Improve Invest, S,L, Badalona Catalonia 

Interalde 2003, S,L, Valle de Trápaga Basque Country 

Inversiones Terra Ferma S,L, Lleida – Pardinyes Catalonia 

Inversiones Y Finanzas Tres Ca Madrid- Tres Cantos Madrid 

Isamer Financieros, S,L, San Pedro de Alcántara Andalusia 

J M Diversos, S,L, Navarcles Catalonia 

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Name Location 

Area of 

Activity 

Join Banaixo, S,L, Terrasa Catalonia 

Joluanca 2006, S,L, Bormujos Andalusia 

Jose Manuel Garcia Morante, S,L, Granada - Boreal Andalusia 

Jubenes Menorca, S,L, Ciudadela Balearic Islands 

Julia Lopez Garcia, S,L, Miguel Esteban Castilla La Mancha 

Lap Asturias, S,L, (Sole-Shareholder Company) Nava Asturias 

Lastras Audismar, S,L, Pelayos Presa Madrid 

León Ruiz Francisco Javier Córdoba El Naranjo Andalusia 

Mariano Morell, S,L, Soller Balearic Islands 

Marma Mallorca, S,L, Calvia -Palma Nova Balearic Islands 

Martinez Martínez Vicente Demetrio Valencia - Jaime Beltran Valencia Autonomous Community 

Meda Financiera, S,L, Arteixo Galicia 

Molina Cortes Nicolas Plasencia Extremadura 

Monica Carranza, S,L,U, Cumbres Mayores Andalusia 

Moraleda Zúñiga Mario Piedrabuena Castilla La Mancha 

Muñoz Puerto Francisco Montefrío Andalusia 

Nubarpol, S,L, Gelves Andalusia 

Ofisfin, S,L, Madrid - Torrejón de Ardoz Madrid 

Pineban, S,L, Pineda de Mar Catalonia 

Plaza Fernández, Rosario Casas de Benítez Castilla La Mancha 

Plaza Servicios Financieros, S,L, Los Barrios Andalusia 

Punt Financer Gestió i Assessorament Girona Catalonia 

Rc 2007 Financieros, S,L, Benahavis Andalusia 

Rodríguez Cals Financiera, S,L, Estepona Andalusia 

Rolarg Servicios Financieros, S,L, Bonares Andalusia 

Rusalea Finance, S,L, Madrid - Maria de Guzmán Madrid 

Sanchez Hernandez Alexis La Minilla Canary Islands 

Sánchez Solera, Felipe Hontanaya Castilla La Mancha 

Serarols Associats, S,L, Berga Catalonia 

Sercom Asfico Agentes Financieros, S,L A Coruña - Campo Marte Galicia 

Sersaf, S,L, Seville Andalusia 

Serveis Financers de Banyoles, S,L, Banyoles Catalonia 

Servicios Financieros Ceres, S,L, Plasencia Extremadura 

Servicios Financieros Juárez Gomez, S,L, Santomera Murcia 

Servicios Financieros Mantua, S,L, Villamanta Madrid 


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Name Location 

Area of 

Activity 

Sismoint, S,L, Esparreguera Catalonia 

Soluciones de Patrimonio e Inversión, S,L, Madrid - Colmenar Viejo Madrid 

Tevar Marcilla, S,L, Quintanar del Rey Castilla La Mancha 

Tinto & Santa Rosa, S,L, Huelva Andalusia 

Tomas Berlango Antonio Jesús Sant Boi de Llobregat Catalonia 

Torres Financiación, S,C,A, Dos Torres Andalusia 

Tramygest Financiera, S,L, Guardamar Segura Valencia Autonomous Community 

Trezavilla, S,L, Seville - San Bernardo Andalusia 

Unión Gestora Extremeña, S,L, Badajoz Extremadura 

Yvan 06 Inversiones, S,L, Alicante- Los Montesinos Valencia Autonomous Community 

Zisco Finanzas, S,L, Alcorcón Madrid 

Zona 4 Servicio Financieros, S,R,L, Majadahonda Madrid 

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Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in 

force in Spain, In the event of a discrepancy, the Spanish-language version prevails 

Banco Español de Crédito Group 

Directors' Report for 

the year ended 31 December 2011 

Business performance and situation of the Group 

2011 was a complicated year for the banking business, Economic weakness was persistent throughout the 

year, and in the second half new uncertainties gave rise to a scenario of high tensions and great volatility in the 

markets, Throughout the year, default rates in the system continued their upward trend and liquidity tensions 

triggered a general increase in wholesale financing costs, 

Against this backdrop, Banesto obtained attributable profit of EUR 125,1 million, i,e, 72,8% less than in 2010, 

but reinforced the Group’s solid equity position by strengthening its provisions significantly, 

The changes in the income statement items were as follows: 

Net interest income amounted to EUR 1,516,3 million, i,e, 12,0% less than in the previous year, thereby 

reflecting the impact of the drop in business activity and rising financing costs, which was limited however 

thanks to the pricing and balance sheet management performed, 

Customer management and loyalty gave rise to an increase in transactionality, which improved Banesto's share 

in the Spanish National Electronic Clearing System (SNCE) by 3,7%, and to higher use of value-added services, 

which led to a 2,8% increase in income from services to EUR 464,1 million, Fees and commissions from 

investment and pension funds amounted to EUR 77,4 million, down 16,4% on 2010, due to lower average fees 

and commissions and because customers chose other sources for placing their savings, As a result, net fees 

and commissions remained substantially at the same level as in 2010 and amounted to EUR 541,5 million, 

The situation of the markets in the second half of 2011 affected gains on financial assets and liabilities and 

exchange differences; this was due, on the one hand, to negative results from the measurement of assets and, 

on the other, to the decrease in customer activity, As a result, gains on financial assets and liabilities and 

exchange differences amounted to EUR 156,6 million in 2011, down 20,0% year-on-year, 

Consequently, gross income amounted to EUR 2,294,3 million in 2011, 10,4% less than in 2010, 

The objective of controlling efficiency is key in the current environment, Thanks to management efforts, 

administrative expenses and the depreciation and amortisation charge amounted to EUR 991,3 million, i,e, 

2,6% less than the amount incurred in the previous year, 

Impairment losses totalled EUR 661,0 million in 2011, compared with EUR 845,1 million in 2010, This trend is 

the consequence of lower needs for specific provisions in 2011 compared with the previous year and lesser use 

of provisions for inherent losses of outstanding loans, which currently stands at a minimum of 10%, 

As a result of all the above, profit from operations amounted to EUR 626,9 million, down 16,4% on 2010, 

Other operations generated a net loss of EUR 499 million, This figure includes a gain on the sale of property, 

plant and equipment (offices) and financial assets (investees) of EUR 168 million, and losses of EUR 633 million 

on the disposal of non-current assets held for sale and of EUR 33 million relating to impairment losses on nonfinancial 

assets, The above figures include the recognition of a special provision of EUR 400 million for property 

assets reflecting the property market situation at 2011 year-end, As a result, profit before tax was EUR 127,9 

million, After deducting income tax and non-controlling interests, profit attributable to the Group was EUR 125,1 

million in 2011, down 72,8% on 2010, 


246

The most significant changes in the consolidated balance sheet were as follows: 

1, Total assets at 31 December 2011 amounted to EUR 108,848 million, down 9,8% on the year-ago period, as 

a consequence of the balance sheet management and optimisation performed in 2011, 

2, The downward trend in loans and advances to customers continued, as a result of weak demand for credit 

and the environment of higher credit risk and liquidity risk, At 31 December 2011, loans and advances 

amounted to EUR 69,198 million, 8,6% less than in the previous year, 

3, Customer deposits totalled EUR 51,246 million, down 14,7% on 2010, This reduction is a result of the Bank's 

policy to partially renew deposits obtained in the special campaign launched in the second quarter of 2010, 

4, The Bank's level of capitalisation improved organically and exceeds the minimum requirement by almost EUR 

1,600 million, At 31 December 2011, its BIS ratio was 10,65% and its core capital ratio was 9,02%, up 0,71 

percentage points over the year, 

Research and development 

Despite the difficulties occurring in 2011, the Banesto Group did not neglect its commitment to innovation and 

development, In the field of technology, the Group's new software helped it achieve greater cost savings and 

further enhance customer service quality whilst preparing it to meet new technological and functional renewal 

needs, The results in efficiency were obtained by leveraging resources and rationalising processes, 

In order to carry out the aforementioned R&D work and the ongoing adaptation of the microcomputer platform 

used by its personnel, in 2011 the Group incurred expenses and made investments in IT systems amounting to 

approximately EUR 114 million, 

Training the workforce is key in situations such as the current one, with constant changes in the business, to 

enable it to adapt to the new needs, Consequently, the continuous development of Banesto's professionals was 

again one of the main focuses of human resources management in 2011, In 2011, the training development 

strategy focusing on continuous learning, professional development and the harnessing of the advantages of 

new technologies, maintained the considerable boost provided in prior years, 

With regard to innovation, 2011 was the year of consolidation for the project launched in 2010 under the name 

InnoBanesto, This internal Group social network is a platform for managing, channelling, selecting and 

implementing ideas arising from Banesto’s collective creativity and intelligence, More than 4,800 ideas were 

channelled in 2011, many of which have already been implemented or are in the process of implementation, 

thus providing further improvement in services, products and processes, 

Banesto, aware of its responsibility towards society, places the results of its innovation effort at its disposal, 

instead of limiting these results to the internal leveraging of resources, In this respect, in 2011 the Group 

continued to effectively develop the agreements entered into with official bodies aimed at providing citizens and 

businesses with easy access to new technologies, Furthermore, the initiatives implemented in 2011 by the 

Banesto Foundation for Society and Technology, a benchmark in Spain, helped to achieve this objective, 

Treasury shares 

In 2011, the Bank and two consolidated Group companies acquired and sold 9,093,770 and 9,752,742 Banco 

Español de Crédito, S,A, shares, respectively, The par value of the shares acquired was EUR 7,184 thousand 

and that of the shares sold was EUR 7,705 thousand, The acquisition cost was EUR 50,666 thousand and the 

selling price was EUR 46,565 thousand, 

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At 31 December 2011, the Bank did not own any treasury shares, Dudebasa, S,A,, a Group company, held 

5,160,868 shares of Banco Español de Crédito, S,A, with a par value of EUR 4,077 thousand, The carrying 

amount of these shares at 31 December 2011 was EUR 27,954 thousand, 

Outlook 

The economic environment is forecast by the various public and private bodies to continue to be uncertain and 

difficult in 2012, The effort to cut the public deficit will be key to laying the foundations for growth in coming 

years in order to stimulate an increase in lending and deposits, 

Against this backdrop, Banesto’s financial targets for 2012 are as follows: 

- To continue to strengthen the capital position, with the objective of increasing core capital despite strong 

regulatory pressure, 

- To maintain the difference between our non-performing loan ratio and the average for the industry and that of 

our major peers, 

- To continue to strengthen the liquidity position and reduce the current commercial gap, 

- To focus on efficiency with a reduction in operating costs in 2012, 

- To preserve operating profitability, measured in terms of maintaining higher operating profitability than that of 

our peers, 

Events after the reporting period 

From 1 January 2012 to the date on which this Directors’ Report was prepared, no events occurred that might 

significantly affect it, 

Risk management at the Banesto Group 

Note 46 to the consolidated financial statements contains quantitative data relating to risk management at the 

Banesto Group and a descriptive summary of how this management is performed, However, it is interesting to 

expand on certain aspects in order to gain a more precise understanding of risk management at Banesto, 

Risk management at Banesto is based on the following principles: 

1) Compliance with current regulations and best risk management practices, 

2) Involvement of senior management, 

3) Independence of the risk area, 

4) Integrated management, in which the key elements, apart from customer service and risk quality, are the 

composition of the balance sheet, capital and liquidity management and profitability, 

5) A flexible management model with policies and structures that are adaptable to the market, 

6) The use of advanced techniques for analysing, measuring and quantifying risks, 


248

7) The provision of a quality internal and external service, 

8) A focus on customer banking based on long-term relationships, 

9) Prudent loan approval, 

10) Foresight through monitoring, 

In the current delicate economic environment, integrated risk management continues to be the preeminent 

general risk control principle, the primary objective of which is to maintain the low and predictable risk profile of 

the Bank’s assets, At Banesto, risk quality is a priority objective that is taken into consideration in all the Bank's 

activities and by all its professionals, The risk culture, which is deeply rooted in the organisation, is one of our 

hallmarks and makes each manager at the Bank a risk manager, 

I, Global risk management 

I,a Risk quantification: tools and metrics 

Obtaining an overall management of risk in an efficient manner requires the development of methodologies and 

models to enable the quantification of concepts such as expected and unexpected loss, which both form the 

basis for calculating capital (regulatory and economic), 

It is also essential to have in place tools that enable the establishment of adequate risk protection measures, 

and systems to identify areas of potential business growth, always bearing in mind the Bank's risk appetite, 

In this regard, for several years Banesto has been implementing quantitative models that estimate the 

components required for calculating expected loss and capital, 

Firstly, for over a decade now, the Bank has had internal scoring models for each customer and transaction for 

the purposes of both risk acceptance and risk monitoring, 

These rating and scoring methods are used for measuring the credit quality of each customer or transaction, 

which is quantified through the probability of default, one of three basic risk parameters: the probability of default 

associated with each customer/contract (PD), the exposure relating to this customer at the date of default (EAD 

- exposure at default) and loss severity or loss given default (LGD), 

The combination of these three parameters is used to obtain the probable loss or expected loss, This loss is 

considered to be an additional cost of the activity i,e, the risk premium and, accordingly, the Entity has tended to 

include it in the decision-making for loan approval and in the price of loans, 

In addition, the fourth risk factor to be considered is asset correlation (AC), 

The risk parameters described above enable the Group to obtain the calculation of regulatory capital in 

accordance with the regulations deriving from the Basel Capital Accord (BIS II), which is determined as the 

difference between expected loss and unexpected loss (a very high but improbable level of loss which must be 

catered for using capital), 

All these risk parameters are modelled on the basis of Banesto's past experience except for low default 

portfolios, i,e, those in which the low number of defaults make this internal estimate non-viable, 

Accordingly, the PD is calculated except for cases of low default portfolios by observing past internal defaults in 

relation to the rating/scoring, 

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AR 11 

The LGD estimate is based on the observation of the Entity's recovery processes, taking into consideration all 

the flows occurring therein (both income and expenses arising from the process), 

The EAD calculation is based on the comparison of the use made of the lines committed at the date of the 

default with a normal situation, 

These parameters are modelled using both the average behaviour in an economic cycle (Through-the-Cycle; 

TTC) and in a cyclical manner so that they reflect the current position in the macroeconomic cycle from a pointin-time 

(PiT) approach, or in a particular stress period (downturn period), 

Due to the instability that has characterised recent years, it was essential to analyse and quantify the sensitivity 

of the risk components to certain macroeconomic scenarios and to changes in certain characteristics of the 

Bank’s portfolios, 

The different behaviour of the portfolios/customers in the light of the change in environment means that the 

models must have an increasingly high granularity in order to support a risk management tailored to each 

customer to avoid applying the same policies to different risk profiles, 

IDR/DRC 

Due to the increasing exposure to credit risk events suffered by the trading books of all financial institutions, the 

Basel Committee introduced the requirement to have increased additional capital in order to quantify the default 

risk of the trading books not included in VaR (Value at Risk), 

In order to perform this measurement, a model was developed internally at Banesto which was approved by the 

Bank of Spain at the end of 2010, 

Thenceforth, a daily calculation has been made at the Entity of an amount of capital relating to the incremental 

default risk (IDR) able to absorb the losses associated with the specific default events of the entities comprising 

the trading books which meet the regulatory requirements, 

This internal model simulates scenarios using the Monte Carlo method and subsequently obtains a distribution 

of losses from which the 99,9% percentile is extracted, as established under Basel II, which makes up the daily 

IDR figure, 

In 2011 a new incremental risk charge (IRC) model was developed at the Bank which is an extension of the 

current IDR model, The IRC takes into consideration not only the possible losses caused by default events but 

also those arising from credit migrations, 

The incremental risk charge (IRC) is determined by the same expression as that calculated for the incremental 

default risk (IDR), 

Stressed VaR 

Since the last quarter of 2011, the Group has been calculating a figure for stressed Value at Risk (VaR), with 

effects on the calculation of capital, 

The objective of this figure is to be able to manage the risks arising from possible future scenarios subject to 

stressed market conditions experienced in the past as a complement to the VaR figure, 


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I,b Integration in risk management 

Within the Basel framework, following the approval of the internal models by the supervisor, we continued to 

focus efforts on reinforcing risk management, through the strengthening of the related parameters, and on 

making risk management an integral part of the Entity’s strategy, 

Management cycle 

In 2011, a year marked again by the instability and uncertainty caused by the crisis, this reinforcement became 

more important and it became clearer that there is a need to analyse and quantify the sensitivity of the risk 

components to certain macroeconomic scenarios and to changes in the characteristics of the Bank’s portfolios, 

Equally, the ongoing review of the metrics from a regulatory and management standpoint continues to be 

important, 

This management cycle also leads to a greater integration of risk metrics in the management of the Bank in two 

respects: the day-to-day management of the Bank and in terms of planning and strategic definition, 

The impact of this on day-to-day management is as follows: 

· Modification of the loan acceptance policies, Analysing the performance of the parameters of portfolios from 

different perspectives, not only the traditional ones, discloses behavioural changes that might give rise to a 

reconsideration of the loan acceptance policies, 

· Development of new business strategies on the basis of the identification of new lending growth niches, 

· More exhaustive monitoring of customers/transactions, guaranteeing the periodic review and analysis of 

assessments and the establishment of anticipatory measures, 

The purpose of all of the foregoing is to ensure compliance with the risk profile established by the Entity, 

From a more global or strategic standpoint: 

· Knowledge of the likely performance of the risk profile of the various portfolios managed in a more proactive 

way which, together with a business forecast structure, makes it possible to project all matters relating to the 

risk profile and capital and to adjust strategies and day-to-day operating matters, 

Risk metrics 

The metrics used in management are intended to be prospective overviews and, therefore, they are generally 

more cyclical, highly dynamic measures, since they must be adapted to the Bank’s business plans and to 

changes in the environment, The regulatory metrics, however, are mostly non-cyclical, static measures that are 

based more on historical observation, 

Despite the differences, the two metrics are inter-related, Integration in management involves continually 

adapting the regulatory metrics so that they provide measures better adapted to the various requirements: 

business/risk, loan acceptance/monitoring, pricing/returns, etc, 

Furthermore, since the current environment has given rise to changes affecting these metrics, the impact 

analysis of these changes, which aims to prevent factors inherent to the models from being transferred to the 

business, has become crucial, 

In addition, this environment has helped enhance the estimation of risk metrics since it now includes profiles 

and behaviours in a period of recession, 

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In this regard, analyses are regularly performed of the changes in ratings caused by the economic cycle (i,e, of 

the cyclical nature of the models) together with studies of the default behaviour of the various portfolios, 

These analyses and studies entailed the construction of new methodologies that incorporate both the effect of 

changes in the customers' ratings brought about by extraneous circumstances rather than by a change in their 

credit quality, and the inclusion of new differential axes in the risk metrics, This is the case of the activity sector 

or the size of the companies, 

Accordingly, the cyclical nature of the metrics, together with the current economic crisis, have further highlighted 

the need to quantify the sensitivity of risk to changes in macroeconomic scenarios, Therefore, in 2011 maximum 

effort was made to quickly obtain the list of the observed and estimated metrics, by continually back-testing 

them and analysing, through the observation of trends, possible critical points in the behaviour of all the Entity's 

portfolios, 

This importance of the continuous review of the projections made is key, given the high penetration of the risk 

metrics in the management model: in the income statements of the branches, through Expected Loss, in the use 

of risk-adjusted return on capital (RAROC), for risk management and in the planning of the provisions and 

capital required for the coming years, In 2011 work was performed to include liquidity in the management 

metrics according to the term, 

Lastly, it is important to note that stress testing tools continue to be used in order to quantify swiftly the impact of 

different macroeconomic scenarios on the various portfolios, 

Strategic risk management 

In 2011 the Bank completed the implementation of the programme for the strategic management and global 

optimisation of risks and capital, thus enabling it to gain an overall understanding of the various types of risk and 

providing a deeper level of behavioural analysis of portfolios according to its main decision-making criteria, not 

only from the standpoint of risks but also by relating them to other criteria such as profitability, This 

implementation also entailed an improvement in the reporting systems, in which information was added 

regarding various types of risk: credit, market, operational, interest rate, liquidity, regulatory capital consumption 

and concentration, 


252

In 2011 work was performed to define a governance and management framework of concentration risk, due to 

its importance, by improving the procedures already in place for identifying, measuring, managing, monitoring 

and reporting on this type of risk, Particular attention was made to the interactions that might exist among the 

various risk categories (credit, market, operational, interest rate and liquidity), 

Capital management 

Given the current environment of rising risk costs and more stringent capital requirements and regulation, 

Banesto launched a capital management office, with the aim of improving the granularity of the understanding of 

the Bank’s risks and of launching initiatives to enhance the effectiveness of the use of capital at business level, 

The capital management office aims to anticipate regulatory changes with regard to Basel III and trends in 

Spain’s economic situation and their impact on capital costs, 

In 2011 the main activity performed by this office was raising awareness among all the businesses of the 

importance of active management of the assigned capital and the identification of new opportunities for correct 

estimations and obtaining profitability (precise calculations of risk-weighted assets and reduction and/or 

appropriate remuneration thereof), 

Also in 2011, new improvement initiatives were launched that affect the quality of data, the automatic 

processing of tasks and improvements to regulatory models, Initiatives are also under way to support 

commercial management through the creation of new products, active management of credit limits, deadline 

monitoring and other relevant parameters from a regulatory perspective, 

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II, Credit risk 

Credit risk is defined as the possible loss for the Bank stemming from the failure of counterparties to meet their 

contractual obligations, 

Credit risk is managed in three phases: acceptance, monitoring and recovery management, 

II,a Loan acceptance 

Loan acceptance is structured on the basis of customer segmentation, This structure enables the Bank to apply 

specific policies and criteria to each type of customer, standardise the analysis and have acceptance levels in 

place with a high degree of specialisation that enable it: 

-To maintain a quality loan portfolio, 

-To enhance the customer response capability and efficiency, 

-To adapt the loan acceptance process to the customer’s risk profile, 

In the Retail Banking segment, Banesto has an acceptance model that combines automatic decision-making 

systems that include effective behaviour models and models for automatically calculating expected loss by 

customer, with teams of specialised risk analysts by group to ensure uniform decision-making, The two systems 

complement each other and ensure the maintenance of a high standard of quality of the Bank's portfolio, 

The analysis systems, integrated into our computer platform, are also adapted to each retail customer segment 

(individuals, SMEs, businesses, retail businesses, independent professionals and the agriculture industry) and 

constitute the fundamental method for automatic and manual decision-making processes relating to risks, 

The Risk Analysis Centre (RAC) is the department responsible for the personalised acceptance of loans on 

which automatic decisions have not been taken, The experience and specialisation of the analysts in this 

department ensure that the transactions meet the quality standards required by the Bank and that the branches 

receive the advice they need to analyse the customers' risk transactions correctly, 

Loan acceptance in the Business Area is performed in accordance with the strict principles of prudence of the 

Bank's policy and in line with the demands of the difficult economic environment that we have been 

experiencing for several years, This is helping Banesto achieve its main objective: to maintain the quality 

standards of the portfolio at the highest levels, always above the average of its peers, 

Specialisation represents the mainstay of the organisation and functioning of loan acceptance, as described 

below: 

• Each customer has a personal account manager who performs an integrated management of all customers' 

needs, including loans, Each account manager is assisted by analysts, who are also personal, industryspecific 

or general, as indicated below: 

• Industry risks: specialised teams by activity sector that are responsible for analysing a specific portfolio of 

customers belonging to particular industries, thereby broadening the perspective, and facilitating and 

enhancing the analysis, The structure of each portfolio depends on the activity sector and size of the 

customer, regardless of the management segment to which the customer belongs, 

• Traditional circuit: the other customers, not included in the previous segments, are divided into geographical 

portfolios among the analysts of the Regional Offices making up the Business Network, Their transactions 

may be resolved by the Regional Offices based on the level of authority delegated to each, Transactions with 

amounts exceeding the authorisation levels are submitted to Central Services and channelled through the 

Business Risk Unit, which manages the resolution of these cases at the various risk committees according to 

the size of each transaction, 


254

• Capital Markets: this team is specialised in certain types of transaction that have higher added value, due to 

their purpose, structure, complexity, etc,, which aim to satisfy the increasingly sophisticated needs of our 

customers, It specialises by product, regardless of the management segment in which the customer is placed, 

• Restructuring: this team handles very specific needs of customers, such as those in a precarious situation who 

need a complete reordering of their financing structure, 

• International Risk: the Bank has a team specialised in the analysis of international risks with detailed 

knowledge of the various products it can offer customers to solve their needs with regard to international trade 

transactions, For this purpose it has a specific analysis methodology for each type of risk: country risk, 

financial institution risk and business risk, 

The methodologies and tools used are also adapted to the type of customer, with regard both to the analysis 

and assessment and to management and monitoring which, ultimately, means that all our customers can be 

treated in a uniform manner, 

In the area of Corporate Banking, integrated customer management is performed based on their particular 

characteristics, Industry risk customers are managed by a team of managers and analysts who are specialised 

by industry and know, analyse, compare and assess the customers of a particular industry, Multi-industry 

customers are handled by the analysis teams at the Madrid and Barcelona branches, There is also a team 

specialising in project finance with specific methodologies and, faced with the economic situation experienced in 

recent years, the loan acceptance process was strengthened by the addition of a risk restructuring team to 

provide closer attention to customers in a precarious situation, 

II,b Risk monitoring 

The purpose of the tasks and functions of the Monitoring Unit is to seek to know at all times the level of certainty 

we have that a particular credit transaction repayment will be made on a timely basis and it enables the Bank to 

foresee any event that might be detrimental to the customer or might affect Banesto's risks negatively, 

The monitoring function includes all the customers with credit risks and, therefore, all risks are monitored, 

The branches and the customer account managers exercise primary responsibility for all their risks and, 

therefore, the monitoring thereof, They are supported in this function by the Area Risk Managers who, in turn, 

are supported by the Regional Monitoring Coordinators, These two positions provide second-level management 

and are responsible for ensuring that the monitoring tasks are performed in the branches within their areas, 

To ensure that the monitoring tasks are being fulfilled, various committees have been set up at branch, area and 

regional level, Customers to be reviewed at these committees are assigned automatically by the foresight 

systems and applications in place, and manually in the case of specific reviews, 

Within the Monitoring Unit, there is a Special Monitoring Unit that aims specifically to prevent transactions with 

past-due amounts from becoming doubtful, To this end, it identifies, analyses and manages the risk, and offers 

solutions designed to either cancel or regularise the loans, 

The Unit is supported by a network of Special Transactions Managers (GEOs), who are differentiated and 

specialised according to the segment they manage, 

II,c Loan recovery and the management of foreclosed assets 

The purpose of the loan recovery activity is to collect and regularise doubtful and written-off contracts, and to 

write down, market and sell foreclosed assets, All the Bank’s units have been assigned the objective of 

improving the recovery activity within their scope of competence and of marketing and selling the foreclosed 

assets, 

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In 2011 the number of managers devoted to loan recovery activities with the dual objective of increasing and 

optimising the portfolios under management, using cutting-edge computer applications for managing court and 

out-of-court procedures, 

Further emphasis has also been placed on the specialisation of managers according to customer segment and 

industry, Accordingly, there are managers who specialise in Businesses whose work requires a highly technical 

content, Also, differentiated recovery strategies have been implemented for SME customers, Furthermore, work 

continued to develop a differentiated management model in the mortgage segment through Sociedad Aktua 

Soluciones Financieras, S,A, This company, which was incorporated in 2009, performs the integrated 

management of the mortgage portfolios of individuals, and the marketing and sale of foreclosed assets, 

In consumer financing, agreements below a given amount are handled with the support of an extensive network 

of external collection companies and managers, which are evaluated monthly on the basis of efficiency ratios 

and are encouraged to achieve success, Consumer financing agreements of a higher amount are managed 

internally through a model characterised by specialisation and face-to-face management, These structures 

underpin the significant recovery levels of written-off loans, which demonstrates their capacity to recover loans 

and contribute to the income statement, 

The legal proceedings management model is monitored by the Procedural Management Centre in which all the 

legal claims relating to the recovery activity are prepared, directed and overseen using a fully consolidated 

management model using the Astrea software which is at the leading edge of the industry, In 2011 further 

improvements were also made to the new version of the Loan Recovery Management System, which led to a 

more efficient recovery of loans, 

II,d Concentration risk 

Another component of credit risk is concentration risk, The Bank 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, 

III,- Market risk 

III,a Structural balance sheet risk 

Interest rate risk is inherent to the Bank’s activity and arises because the Bank’s balance sheet contains assets 

and liabilities that are sensitive to interest rates and have different maturity and repricing structures, Changes in 

interest rates could have a negative impact on the net interest margin and on the economic value of the Bank’s 

capital, and, accordingly, active management is required in order to mitigate this impact, 

Management policy and strategy 

The Bank’s main objective is to stabilise the net interest income in the event of interest rate fluctuations, whilst 

maintaining the Entity’s economic value and adequate liquidity and solvency levels, To control interest rate risk 

exposure, the Asset-Liability Committee (ALCO) approves lending strategies and the management, hedging, 

measurement and control policies consistent with the interest rate scenario at each moment, and policies 

designed to protect the net interest margin and economic value, The ALCO is responsible for the overall 

management of the Bank’s on-balance-sheet interest rate risk, except for the positions of the Markets 

department, 

Interest rate risk management aims to neutralise the negative impact of changes in interest rates of the balance 

sheet structure on the Entity’s net interest margin and economic value, For this purpose, the Bank enters into 

hedging transactions that are either fixed-income instruments or interest rate derivatives (swaps, collars and 


256

swaptions), The selection of one instrument or another is based on factors such as cost, the effectiveness of the 

instrument and the effects it might have on the Bank’s liquidity and capital, 

Management methodology 

For the purpose of measuring structural balance sheet risk, Banesto uses the contractual information provided 

by its accounting systems, This information, which contains all the relevant aspects required for risk analysis 

(dates, coupons, etc,), ties in with the Bank’s accounting records, Also, Banesto has followed a policy of 

investing in applications and systems that facilitate the development of models that provide considerable 

capacity for analysing risk and anticipate additional future information requirements, 

III,c Treasury operations risk 

The measurement of treasury operations risk focuses mainly on credit risk and market risk, Banesto has a 

Market Operations Risk Unit dedicated to the monitoring and measurement of this type of risk, This Unit has two 

areas dedicated to the analysis of market risk and credit risk and a third area dedicated to validating models and 

allocating the market prices used in the valuation of positions, This structure makes it possible to group together 

the measurement of all the types of treasury risk with an integrated approach and integrated systems, 2011 

required a close monitoring of treasury operations risk owing to the high volatility in the financial markets, 

Treasury credit risk 

In 2011, although the marketing of treasury products to customers did not grow significantly in comparison with 

prior years, the number of outstanding transactions relating to derivative products was very high, The credit risk 

of treasury products is managed and controlled at the Market Operations Risk Unit (URAM), For this purpose 

the potential values of each financial instrument are estimated over the life of the instrument with a confidence 

level of 97,725%, Accordingly, in the event of customer default, Banesto’s loss would be lower than the 

estimated loss in 97,725% of cases, 

The URAM calculates and controls the risk exposure to each customer over different time horizons, This 

analysis facilitates greater control and a more dynamic and efficient management of the limits established by the 

Loan Acceptance Units, The Loan Acceptance Units and the Wholesale Banking Area are furnished with very 

detailed information on the credit risk positions with each customer on a daily basis, Also, detailed information 

regarding Banesto’s exposure to its customers, by segment, product, rating, maturity and risk factor, is 

presented to senior management through the Risk Committee and the Executive Committee on a weekly basis, 

In 2011 the URAM made further advances in the methodology used for calculating risk exposure, 

IV, 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 on solvency, 

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, 

Banesto is well positioned in the application of the standardised approach within the regulatory framework, with 

ample coverage of its qualitative and quantitative requirements, which in turn represent a large portion of the 

requirements set for applying advanced models for calculating operational risk capital, 

257

AR 11 

In 2011 the Bank focussed on operational risk mitigation activities, and defined a monitoring methodology and 

raised awareness of its importance throughout the organisation, Mitigation makes a difference in operational risk 

management because it helps to reduce losses and to create a culture of management of this risk by involving 

all areas of the organisation, 

Operational risk management in the Retail, Businesses and Corporate areas continued to obtain noteworthy 

results through the NORMA model which covers several areas of operational risk in the commercial network: 

cash management, quality of documentation, security, operating control and anti-money laundering, and other 

operational risks, In order to enhance the model, temporary campaigns were introduced focussing on specific 

deficiencies or risks to be resolved in the short term, 

Through NORMA, operational risk is integrated in the Entity’s executive structure, from branch and area level to 

the regional and central operational risk committees, which are furnished fortnightly with information on the focal 

points for the management thereof, The incorporation of the NORMA indicator in the network incentives model 

represents a significant landmark in the consolidation of this global operational risk management tool, 

In 2011 the scope of the risk self-assessment questionnaires was widened, thus enabling the Bank to gain more 

detailed knowledge of its operational risk map, Other mechanisms for identifying risks that are still ongoing are 

the monitoring of operational and technical incidents, checks on the quality of documentation, participation in 

committees of other areas, and the analysis of customer claims and other unresolved matters that might give 

rise to risks and/or losses, 

The operational risk management model includes the management of technological risk, through specific 

questionnaires and indicators, and the monitoring of IT security and participation of the Operational Risk Unit in 

the regular contingency tests, 

Our loss database has a long track record dating back eight years 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 also facilitates the preparation of 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 main purpose of this association is the 

anonymous exchange of operational risk loss data, which are used at each entity to model this risk and to 

validate data captured internally, ORX currently has more than 50 members at international level (Banesto has 

been a member since 2005) and it is a leading forum for research and the development of standards in 

operational risk management, 

In 2011 the active management of events and the implementation of corrective measures gave rise to a 

reduction in losses in risk types such as External Fraud, Errors in the Execution of Processes and Systems 

Incidents and Failures, 

Banesto’s Technological and Operational Risk Unit is also responsible for the business continuity function, 

which aims to ensure the continuity of the Entity's critical processes in the event of a serious contingency, 

Banesto has a Continuity Management Committee which meets regularly, defines general strategies, reviews 

implementation progress and decides on the response mechanisms on the basis of the risks detected, In 2011 

the focus was on raising awareness of the plan through extensive training sessions and by performing a series 

of tests and simulations on areas of the continuity plan, 

Banesto participates actively in the Spanish Operational Risk Consortium (CERO Group) and in the Spanish 

Business Continuity Consortium (CECON), 

V, Environmental risk 

As part of its corporate responsibility commitment, Banesto has a clear concern for sustainability and thus 

includes environmental impact as one of the analysis criteria in all its financing projects, 


258

The Wholesale Banking Risks Unit analyses all its customers from a social and environmental perspective, by 

measuring the degree of compliance with the following variables: 

• Compliance with environmental legislation 

• Conservation of biodiversity and sustainable management of natural resources 

• Environmental litigation and claims in progress 

• Level of emissions, discharges or waste generation 

• Health and safety of the community 

• Accredited environmental certification 

In the analysis process, an assessment is also made of the measures implemented by the customers within 

their production processes to minimise possible environmental impact, 

The measures applied by Banesto in this connection help foster responsible behaviour in environmental matters 

in all its financing projects, 

Customer Care Service 

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, following is a summary of the 

Annual Report presented by the Head of the Service to the Board meeting held on 25 January 2012, 

The activity of the Banesto Group’s Customer Care Service was carried out within the framework of the 

aforementioned Ministry of Economy Order ECO/734/2004 and in compliance with the competencies and 

procedures established in the Customer Ombudsman Regulations of Banco Español de Crédito, S,A, and of its 

Economic Group, 

a) Statistical summary of the claims and complaints handled 

4,300 claims and complaints were filed with the Customer Care Service in 2011, an increase of 13,1% compared 

with 2010, all of which were admitted for consideration (without prejudice to the existence of grounds for not 

admitting complaints for consideration in the Service’s Regulations), 83,5% of the matters handled (3,616 

complaints) were resolved and concluded within the year, whereas a total of 714 complaints had not yet been 

analysed at 31 December 2011, 

The detail, by type, of the main complaints and claims handled is as follows: 

DEMAND ACCOUNTS 953 22% 

CARDS 627 14% 

CAMPAIGNS 442 10% 

MORTGAGE LOANS 299 7% 

BILLS 194 4% 

POOR SERVICE 167 4% 

INTEREST RATE HEDGES 147 3% 

WILLS 139 3% 

259

AR 11 

INSURANCE 127 3% 

POS TERMINALS 107 2% 

TRANSFERS 106 2% 

CREDITS AND LOANS 98 2% 

COMMERCIAL PAPER 

DISCOUNTING 82 2% 

INVESTMENT FUNDS 76 2% 

CHEQUES 71 2% 

RISKS 70 2% 

GUARANTEES 67 2% 

DEPOSITS 53 1% 

SECURITIES 50 1% 

TAXES 48 1% 

b) Summary of resolutions: 

In favour of the complainant: 2,210 (51,1%) 

In favour of the Bank: 1,406 (32,5%) 

Not yet analysed: 714 (16,4%) 

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, 393 were filed through 

the Bank of Spain and 95 through the CNMV, the detail being as follows: 


260

Bank of Spain 

CNMV 

Claims resolved 95 

No report 

Rejected 

d) General decision-making criteria 

Claims resolved 393 

No report 

Rejected 

In favour of the customer 112 (28%) 

Claim accepted 90 (23%) 

In favour of the Bank 69 (18%) 

No pronouncement made 36 (9%) 

In favour of the customer 13 (14%) 

In favour of the Bank 

Claim accepted 

No pronouncement made 

261 

79 (20%) 

7 (2%) 

16 (17%) 

5 (5%) 

1 (1%) 

53 (56%) 

7 (7%) 

The criteria used as a basis for the resolution of the complaints handled by the Customer Care Service in 

2011, as in previous years, were to ensure the correct application of current legislation, in particular with 

regard to transparency and customer protection, and of good banking practices and customs, all within the 

framework of the principle of equity and taking into consideration the criteria established in the reports issued 

by the respective claims services of the Bank of Spain, the CNMV and the Directorate-General of Insurance 

and Pension Funds, 

e) Recommendations or suggestions deriving from the Service’s experience, with a view to better 

attaining the aims of its work

AR 11 

In 2011 the Service continued to implement the proposals aimed at complying with Bank of Spain Circular 

8/1990 and ensuring that the Entity’s activities are in line with the regulators’ recommendations regarding 

good banking customs and practices, 

Also, the autonomy and independence of the Service in the analysis of the claims filed by customers, as 

established in the Regulations governing its activity, have led to a series of initiatives and proposals to 

various internal departments and business units aimed at improving both the information furnished before, 

during and after the arrangement of any transactions (the principle of transparency) and the contractual and 

commercial documentation provided to the customer, 

The recommendations and suggestions made by the Service to the Bank in 2011 related most notably to the 

following: 

- Demand accounts 

- Cards 

- Campaigns 

- Mortgage loans 


262

YEAR ENDED: 31/12/2011 

ANNUAL CORPORATE GOVERNANCE REPORT 

Employer identification number: A-28000032 

FOR LISTED COMPANIES 

ISSUER’S PARTICULARS 

Company name: BANCO ESPAÑOL DE CREDITO, S.A. 

263 

1

AR 11 

MODEL ANNUAL CORPORATE GOVERNANCE REPORT FOR LISTED 

COMPANIES 

For a better understanding of the model and subsequent preparation of the report, please read the 

instructions at the end before filling it out. 

A – OWNERSHIP STRUCTURE 

A.1 Fill out the following table on the company’s share capital: 

Date of last change Share capital (EUR) Number of shares Number of voting rights 

20/06/08 543,035,570.42 687,386,798 687,386,798 

If there are different classes of shares, indicate them below: 


NO 

A.2 List the direct and indirect holders of significant ownership interests in the company at year-end, 

excluding directors: 

Name or corporate name of shareholder 

Number of voting 

rights held 

directly 

2 

264 


rights held 

indirectly (*) 

% of total 

voting rights 

BANCO SANTANDER, S.A. 606,345,555 5,661,461 89.034 

Indicate the most significant changes in the shareholder structure during the year:

A.3 Fill out the following tables on the members of the Company’s Board of Directors who hold voting 

rights of shares of the Company: 

Name or corporate name of director Number of 

3 

265 

voting rights 

held directly 


rights held 

indirectly (*) 

% of total voting 

rights 

ANTONIO BASAGOITI GARCIA-TUNON 1,000 0 0.000 

JOSE LUIS LOPEZ COMBARROS 2,600 0 0.000 

JOSE ANTONIO GARCIA CANTERA 46,847 0 0.007 

ALFONSO LIBANO DAURELLA 50 64,000 0.009 

BELEN ROMANA GARCIA 200 0 0.000 

CARLOS PEREZ DE BRICIO Y OLARIAGA 100 0 0.000 

CARLOS SABANZA TERUEL 2,000 0 0.000 

JOSÉ CORRAL LOPE 10,000 0 0.001 

JOSE MARIA FUSTER VAN BENDEGEM 19,762 0 0.003 

JUAN DELIBES LINIERS 50,955 0 0.007 

JUAN GUITARD MARIN 100 0 0,000 

MATIAS RODRIGUEZ INCIARTE 27,575 0 0.004 

RAFAEL DEL PINO CALVO-SOTELO 5,000 0 0.001 

ROSA MARIA GARCIA GARCIA 200 0 0.000 

% of total voting rights held by the Board of Directors 0.034

AR 11 

Fill out the following tables on the members of the Company’s Board of Directors who hold rights 

over shares in the Company: 

Name or corporate name of director Number of 


4 

266 

direct 

options 

Number of 

indirect 

options 

Number of 

equivalent 

shares 

% of total 

voting 

rights 

JOSE ANTONIO GARCIA CANTERA 0 0 170,283 0.000 

JUAN DELIBES LINIERS 0 0 124,937 0.000 

A.4 Indicate, as appropriate, any relationships of a family, commercial, contractual or corporate 

nature existing between the holders of significant ownership interests, insofar as they are 

known to the Company, unless they have scant relevance or arise from the ordinary course of 

business: 

A.5 Indicate, as appropriate, any relationships of a commercial, contractual or corporate nature 

existing between the holders of significant ownership interests and the Company and/or its 

Group, unless they have scant relevance or arise from the ordinary course of business: 

Type of relationship: 

Commercial 

Brief description: 

TRANSACTIONS WHICH ARISE FROM THE ORDINARY COURSE OF BUSINESS: IN ACCORDANCE 

WITH RECOMMENDATION 2 OF THE UNIFIED CODE, THE BOARDS OF DIRECTORS OF BANCO 

SANTANDER, S.A. AND BANCO ESPAÑOL DE CREDITO, S.A. HAVE ESTABLISHED A 

RELATIONSHIP FRAMEWORK BETWEEN THE TWO ENTITIES DEFINING THEIR RESPECTIVE 

AREAS OF ACTIVITY AND POSSIBLE BUSINESS RELATIONSHIPS AS WELL AS THE PRECISE 

MECHANISMS FOR HANDLING ANY CONFLICTS OF INTEREST THAT MIGHT ARISE. THIS 

DOCUMENT CAN BE CONSULTED ON THE WEBSITES OF THE TWO COMPANIES. 

BANCO SANTANDER, S.A. 

Name or corporate name of related parties

Type of relationship: 

Corporate 

Brief description: 

PARENT OF THE GROUP OF COMPANIES INCLUDING BANCO ESPAÑOL DE CREDITO, S.A. 

Name or corporate name of related parties 


A.6 Indicate any shareholders agreements that have been reported to the Company pursuant to Article 

112 of the Securities Market Law. Briefly describe, as appropriate, these agreements and the 

shareholders involved: 

NO 

Indicate and briefly describe, as appropriate, any concerted action among the Company’s 

shareholders that is known to the Company: 

NO 

Expressly indicate any amendment to or termination of such agreements or concerted action during 

the year. 

A.7 Indicate whether there is any individual or legal entity that exercises, or can exercise, control over 

the Company, in accordance with Article 4 of the Securities Market Law: 


YES 

Name or corporate name 

Comments 

OWNER OF 89.034% OF THE SHARE CAPITAL AND PARENT OF THE GROUP TO WHICH 

BANESTO BELONGS 

5 

267

AR 11 

A.8 Fill out the following tables on the Company’s treasury shares: 

At year-end: 

Number of direct shares Number of indirect shares (*) Total % of share capital 

(*) Through: 


0 5,160,868 0.751 

Name or corporate name of direct holder of ownership interest 

6 

268 

Number of direct 

shares 

DUDEBASA, S.A. 5,160,868 

Total 5,160,868 

Give details of any significant changes during the year, in accordance with Royal Decree 

1362/2007: 

Date Total number of direct 

shares acquired 

Total number of indirect 

shares acquired 

Total % of share capital 

10/01/2011 0 5,877,736 0.855 

27/09/2011 0 4,449,607 0.647 

Gains/(losses) on the disposal of treasury shares in the period -4,101 

A.9 Give details of the conditions and time period of any authorisation(s) from the shareholders at the 

General Meeting for the Board of Directors to acquire and/or transfer treasury shares. 

AUTHORISATION FROM THE SHAREHOLDERS AT THE GENERAL MEETING FOR THE 

BOARD OF DIRECTORS 

The shareholders at the General Meeting held on 24 February 2010 resolved to authorise the 

Board of Directors to engage in the derivative acquisition of shares of Banco Español de Crédito, 

S.A. and its Parent and the derivative acquisition of such shares from the Bank’s subsidiaries 

treasury shares, directly and through Group companies, in Banco Español de Crédito, S.A. and its 

Parent.

Conditions: 

The sum of the shares to be acquired and of those already held by the acquirer and its investees 

and, as the case may be, by the parent company and its investees, may not exceed the established 

statutory ceiling, subject to the applicability of any lower ceiling determined by the Board of 

Directors within the time limit approved by this General Meeting, and provided that such acquisition 

– including any shares acquired previously and held by the purchaser or such person as may act in 

his own name but on behalf of the acquirer – does not have the effect that equity, within the 

meaning given in article 146 of the Spanish Corporation Law (Texto Refundido de la Ley de 

Sociedades de Capital), falls below the value of share capital plus reserves that are unavailable by 

law or under the Articles of Association, and provided that all other applicable statutory 

requirements can also be satisfied. The lower and upper bounds of the acquisition price of the 

shares shall be their listed value as at the date of performance of the transaction in question, 

reduced or increased, respectively, by 20%. 

The acquisition methods can include a sale, swap or any other form of transaction for valuable 

consideration as circumstances advise. 

An acquisition transacted on the basis of this authority may have as its subject matter shares that 

are to be transferred to company employees or Directors, whether directly or as a result of the 

exercise of options of which such parties are the holders, for which purpose recourse may be had 

to the company’s treasury shares or to fresh acquisitions within the scope of this authority. 

Timeframe: 

This authorisation is granted for a period of five years from the date of this Shareholders General 

Meeting. 

BOARD APPROVAL OF TREASURY SHARES POLICY 

At its meeting on 22 January 2008, the Board of Directors of Banco Español de Crédito, S.A., under 

the remit of article 3.2 letter a section viii of the Regulations of the Board of Directors, approved the 

general conditions of the company’s treasury shares policy governing the acquisition of treasury 

shares as authorised at the General Meeting. 

Below is a summary of the policy approved: 

1.- Treasury shares policy will have the following aims: 

a) to enhance the liquidity and availability of the company’s shares in the market, as required, thus 

providing the market with depth and minimising temporary imbalances between supply and 

demand. 

b) to enable all shareholders to benefit from weaknesses in the share price in relation to the 

medium-term expectations. 

Notwithstanding the above, all Bank departments and subsidiaries may engage in treasury share 

transactions in the course of market risk hedging or customer trading or hedging transactions, in 

which cases the rules stipulated in sections c), d) and e) of point 4 of this report will not apply. 

Treasury shares may be acquired to remunerate company directors and employees in the form of 

shares, share options or other share-based instruments, as well as to satisfy the exchange or 

conversion of securities conferring rights to acquire shares under the conditions stipulated by the 

relevant resolutions of the General Meeting. 

2.- Sales or purchases of treasury shares by the company or its subsidiaries will be governed firstly 

by prevailing legislation and by the relevant resolutions of the General Meeting. 

3.- The sale and purchase of treasury shares in the market shall be exercised in accordance with 

the following principles: Under no circumstances may this interfere with the normal evolution of 

market prices. 

7 

269

AR 11 

. Investment or disposal decisions taken by the relevant individuals shall be controlled by measures 

to prevent the use of privileged information. Decisions must be taken in isolation and shall be 

protected by appropriate barriers. To this end, the Business Unit responsible for the operation shall 

be identified in the applicable regulations, with no other Unit being entitled to carry out treasury 

share operations apart from those that are intended to hedge market risks or carry out customer 

trading or hedging operations under the terms described in paragraph 1 above. 

Those persons involved in the sale and purchase of treasury shares, as well as the management of 

the counterparty subsidiary company, must all be subject to the Banesto Group’s Code of Conduct 

in the Securities Market and shall be forbidden from carrying out proprietary trading with Banesto 

shares. 

Any exceptions must be authorised by the Audit and Compliance Department. 

. In order to determine the performance of the Bank’s shares in the market, investors may gather 

information from various market members. However, ordinary operations in the continuous market 

can only be made via one market member, with notification to the CNMV. 

4.- The following limits and conditions are set for the sale and purchase of treasury shares in the 

market: 

a) The counterparty in the market will be its subsidiary Dudebasa, S.A., which should register 

systematically the operations realized in order to dispose the necessary information to achieve the 

information obligations imposed by the current regulation. 

b) The management of the sale and purchase of treasury shares in the market shall be the 

responsibility of the financial intermediary appointed by the Executive Committee, who shall 

intermediate directly in operations as a member of the market or via other intermediaries. 

To this effect, a Liquidity Agreement shall be entered into with the appointed financial intermediary 

under the terms stipulated in Circular 3/2007 of 19 December of the CNMV regulating the 

acceptance of liquidity agreements as market practice or, if the operation should require different 

clauses as per the model agreement deemed necessary, pursuant to the requirements of the 

entity’s Compliance and Legal Advisory Departments. 

c) Sale and buy operations shall be carried out at market price at all times and within the limits and 

conditions established by the General Shareholder’s Meeting. They must meet the following 

requirements: 

- There shall be no simultaneous sale and purchase orders of treasury shares. 

- However, share buyback programmes and the acquisition of shares will be allowed to meet the 

Bank’s or Group’s obligations relating to share option plans, the delivery of shares or other similar 

operations, or for the issue of convertible securities. 

- Buy orders shall be carried out a price no higher than the higher of the following: 

i. The price of the most recent transaction performed in the market by independent third parties. 

ii. The highest price of a buy order in the order book. 

- Sell orders shall be carried out a price no lower than the lower of the following: 

i. The price of the most recent transaction performed in the market by independent third parties. 

ii. The lowest price of a sell order in the order book. 

d) The maximum daily volume of trading in treasury shares shall not exceed 25% of the average volume 

traded in the previous 30 sessions. As an exception, in isolated sessions in which market volatility is much 

greater than usual, or there is a lack of supply or demand, volume of treasury shares may exceed the 

established limit, in which case the Executive Committee must be informed at its next meeting. 

Transactions involving Banesto shares which are labelled as special stock market operations as stipulated 


8 

270

in Royal Decree 1416/1991, of 27 September regarding special stock market transactions and over-the 

counter transfer of listed securities and average weighted changes are exempt from this restriction. 

e) The following time limits must be applied to treasury share transactions: 

. During the adjustment period, sell and buy orders may not affect the share price. 

. All treasury share transactions shall be carried out during normal trading hours apart from one-off 

transactions which can be classed as special transactions. 

f) The rules contained in section 3 (paragraph 3), and letters b), c) and d) of section 4 are not 

applicable to transactions performed through the treasury share block trading system. 

5.- Information regarding treasury share transactions shall be submitted periodically to the 

Executive Committee. In addition, the Bank’s Chairman or CEO must be informed beforehand of 

any transactions involving a particularly high volume or those subject to special terms and 

conditions and, in all case, of those affecting over 0.5% of the share capital. 

6.-The Compliance Department shall establish the correct procedure to be followed for all treasury 

share sale and purchase transactions. 

A.10 Indicate any restrictions under law or the company’s articles of association on exercising 

voting rights and any legal restrictions on the acquisition and/or transfer in the share capital. 

Indicate any legal restrictions on voting rights: 

No 

Maximum percentage of legal restrictions on voting rights a shareholder can exercise 0 

Indicate any restrictions included in company’s articles of association on exercising voting rights: 

Maximum percentage of legal restrictions on voting rights a shareholder can exercise under 

the company’s articles of association 

Indicate if there are any legal restrictions on the acquisition or transfer of share capital: 

No 

YES 

Description of legal restrictions on the acquisition or transfer of share capital 

Articles 57 and 58 of Law 26/1988 of 29 July on the Discipline and Intervention of Lending Institutions require 

that prior notice be given to the Bank of Spain of any intention to acquire a significant stake (5% and multiples) 

in a Spanish credit institution. The Bank of Spain may oppose such an acquisition under certain legal 

circumstances. As a listed entity, the acquisition of certain significant stakes is subject to communication 

to the issuer and the Comisión Nacional del Mercado de Valores (CNMV) and, if applicable, 

presentation of an Initial Public Offering as per the terms stipulated in Law 24/1988 governing the 

Spanish Securities Market. 

A.11 Indicate if neutralisation measures in the event of a takeover bid were agreed upon at the General 

Meeting pursuant to Law 6/2007: 

9 

271 

0

AR 11 


No 

If so, explain the measures approved and the terms under which the inefficiency of restrictions 

would occur: 

10 

272

B – STRUCTURE OF THE CORPORATE ADMINISTRATION 

B.1 Board of Directors 

B.1.1 List the maximum and minimum number of directorships stipulated in the articles of association: 

Maximum number of directors 15 

Minimum number of directors 5 

B.1.2 Fill out the following table with Board members’ details: 

Name or company name 

of director 

ANTONIO BASAGOITI 

GARCIA TUNON 

JOSE LUIS LOPEZ 

COMBARROS 

JOSE ANTONIO 

GARCIA CANTERA 

ALFONSO LIBANO 

DAURELLA 

BELEN ROMANA 

GARCIA 

Representative 

Position on the 

Board 

11 

273 

Date of first 

appointment 

Date of last 

appointment 

Election 

procedure 

-- CHAIRMAN 03/11/2010 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 

-- VICE 

CHAIRMAN 

-- CHIEF 

EXECUTIVE 

OFFICER 

29/07/2004 25/02/2009 VOTE AT 

SHAREHOLDER 

S’ MEETING 

22/06/2006 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 

-- DIRECTOR 19/01/2011 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 


SHAREHOLDER 

S’ MEETING

AR 11 

CARLOS PEREZ DE 

BRICIO Y OLARIAGA 

CARLOS SABANZA 

TERUEL 



SHAREHOLDER 

S’ MEETING 


SHAREHOLDER 

S’ MEETING 

JOSÉ CORRAL LOPE -- DIRECTOR 19/01/2011 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 

JOSE MARIA FUSTER 

VAN BENDEGEM 


SHAREHOLDER 

S’ MEETING 

JUAN DELIBES LINIERS -- DIRECTOR 23/08/1994 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 

JUAN GUITARD MARIN -- DIRECTOR 19/01/2011 23/02/2011 VOTE AT 

SHAREHOLDER 

S’ MEETING 

MATIAS RODRIGUEZ 

INCIARTE 

RAFAEL DEL PINO 

CALVO-SOTELO 

ROSA MARIA GARCIA 

GARCIA 


SHAREHOLDER 

S’ MEETING 


SHAREHOLDER 

S’ MEETING 


SHAREHOLDER 

S’ MEETING 

12 

274

Total number of directors 14 

Indicate any directors leaving the Board during the period: 

Name or company name of director 

13 

275 

Class of director at the time of 

removal 

Date of 

removal 

DAVID ARCE TORRES OTHER EXTERNAL DIRECTOR 19/01/2011 

JOSÉ MARÍA NUS BADÍA EXECUTIVE 19/01/2011 

FRANCISCO DAURELLA FRANCO INDEPENDENT 19/01/2011 

B.1.3 Fill out the following tables on Board members and their directorships: 

EXECUTIVE DIRECTORS 

Name or corporate name of director Committee proposing 

the appointment 

JOSE ANTONIO GARCIA CANTERA APPOINTMENTS AND 

REMUNERATION 

COMMITTEE 

JUAN DELIBES LINIERS APPOINTMENTS AND 

REMUNERATION 

COMMITTEE 

Post held in the 

company 

CHIEF EXECUTIVE 

OFFICER 

GENERAL MANAGER 

CORPORATE 

DEVELOPMENT AND 

FINANCIAL 

Total number of Executive Directors 2 

% of the Board 14.286 

EXTERNAL PROPRIETARY DIRECTORS 

Name or corporate name of director 

Committee proposing 

the appointment 

Name of the main 

shareholder that 

represents

AR 11 

ANTONIO BASAGOITI GARCIA TUNON 

JOSE MARIA FUSTER VAN BENDEGEM 

JUAN GUITARD MARIN 

MATIAS RODRIGUEZ INCIARTE 

Total number of Executive Directors 

% of the Board 

INDEPENDENT DIRECTORS 


14 

APPOINTMENTS AND 

REMUNERATION 

COMMITTEE 


REMUNERATION 

COMMITTEE 


REMUNERATION 

COMMITTEE 


REMUNERATION 

COMMITTEE 

276 





4 

28.571 


JOSE LUIS LOPEZ COMBARROS 

Background 

ECONOMICS GRADUATE. HAS BEEN A PARTNER OF ARTHUR ANDERSEN AND CHAIRMAN OF 

THE ICAC (INSTITUTO DE CONTABILIDAD Y AUDITORÍA DE CUENTAS). 


ALFONSO LIBANO DAURELLA 

Background 

BUSINESS STUDIES GRADUATE. CHIEF EXECUTIVE OFFICER OF COBEGA, S.A., CHAIRMAN 

OF EQUATORIAL COCA-COLA BOTTLING COMPANY, S.L., VICE CHAIRMAN OF NORBEGA, S.A., 

DIRECTOR OF CASBEGA, S.A., DIRECTOR OF REFRIGE, S.A., TRUSTEE OF THE COCA-COLA 

AFRICA FOUNDATION, VICE CHAIRMAN OF EFB-GEEF (EUROPEAN FAMILY BUSINESS), 

MEMBER OF THE BOARD OF DIRECTORS OF THE FBN (FAMILY BUSINESS NETWORK), 

FUNDATION MEMBER AND MEMBER OF THE INTERNATIONAL COMMISSION OF THE IEF 

(FAMILY BUSINESS INSTITUT), VICE CHAIRMAN OF THE USA CHAMBER OF COMMERCE. IN 

SPAIN AND DIRECTOR OF THE FUNDACIÓN MUSEO DEL ARTE CONTEMPORÁNEO DE 

BARCELONA (BARCELONA CONTEMPORARY ART MUSEUM FUNDATION). 


BELEN ROMANA GARCIA 

Background 

GRADUATE IN ECONOMICS AND BUSINESS STUDIES FROM THE UNIVERSIDAD AUTÓNOMA 

DE MADRID, STATE COMMERCIAL TECHNICAL ADVISOR AND STATE ECONOMIST. 

MANAGING DIRECTOR CORPORATE STRATEGY AND DEVELOPMENT, ONO, S.A. 

HAS HELD DIRECTORSHIPS AT MERCASA, ICO, SIDENOR, CERSA AND SEIASA. 

WAS GENERAL MANAGER OF POLITICAL ECONOMY AND GENERAL MANAGER OF THE 

TREASURY (SPAIN) AND ALSO A MEMBER OF THE BANK OF SPAIN GOVERNANCE BOARD AND 

THE NATIONAL SECURITIES MARKET COMMISSION. 


CARLOS PEREZ DE BRICIO Y OLARIAGA 

Background 

MEMBER OF THE FINANCIAL INSPECTION BODY 

HAS ALSO BEEN EXECUTIVE CHAIRMAN AND CEO OF CEPSA SINCE 1996 AND MINISTER OF 

INDUSTRY, AND VICE CHAIRMAN OF CONFEMETAL AND CEOE.


CARLOS SABANZA TERUEL 

Background 

HAS BEEN VICE CHAIRMAN AND CEO OF BANCO DE VITORIA S.A. AND DIRECTOR OF THE 

GOVERNING BODY OF THE BILBAO STOCK EXCHANGE. VICE CHAIRMAN OF THE ASOCIACIÓN 

PARA EL PROGRESO DE LA DIRECCIÓN (ASSOCIATION FOR EXECUTIVE ADVANCEMENT) 


RAFAEL DEL PINO CALVO-SOTELO 

Background 

CIVIL ENGINEER. CHAIRMAN OF THE FERROVIAL GROUP SINCE 2000. PREVIOUSLY CEO OF 

THE FERROVIAL GROUP SINCE 1992. 


ROSA MARIA GARCIA GARCIA 

Background 

MATHEMATICS GRADUATE. INDEPENDENT DIRECTOR OF BOLSAS Y MERCADOS, S.A., 

DIRECTOR OF SIEMENS SPAIN, S.A., BOARD MEMBER OF LA BOARD MEMBER OF LA 

ASOCIACIÓN PARA EL PROGRESO DE LA DIRECCIÓN (ASSOCIATION FOR EXECUTIVE 

ADVANCEMENT) AND MEMBER OF THE SENIOR MANAGEMENT FORUM. 

Total number of independent directors 7 

% of the Board 

OTHER EXTERNAL DIRECTORS 


JOSÉ CORRAL LOPE 

15 

277 

50.00 

0 

Committee which proposed 

his appointment 

APPOINTMENT AND 

REMUNERATION 

COMMITTEE 

Total number of external directors 1 

% of the Board 7.143 

Indicate why these directors cannot be considered proprietary or independent and their links with 

either the company, its directors or shareholders. 



Company with which, or directors or shareholders with whom he has a link 

Reasons 


IN ACCORDANCE WITH ARTICLE 23 OF THE BY-LAWS AND ARTICLE 5 OF THE BOARD 

REGULATIONS, THE DIRECTOR MAY NOT BE CONSIDERED A PROPIETARY DIRECTOR OR 

AN INDEPENDENT DIRECTOR.

AR 11 

List any changes in the classification of each director which have occurred during the period: 

B.1.4 Explain, if appropriate, the reasons why they have been appointed proprietary directors at the 

behest of shareholders whose stakes represent less than 5% of the share capital. 

Indicate any rejection of a formal request for a board place from shareholders whose equity stake is 

equal to or greater than that of others applying successfully for a proprietary directorship. If so, 

explain why these requests have been rejected: 


NO 

B.1.5 Directors who give up their place before their tenure expires, through resignation or otherwise, 

should state their reasons in a letter to be sent to all members of the board. Indicate if any directors 

have given up their place before their tenure expires, through resignation or otherwise and state their 

reasons by what channel. If this was made in writing to the Board, explain the reasons given: 

Name of director 

DAVID ARCE TORRES 

Reason for resignation 

YES 

At the Board meeting held on 19 January 2011, the Board of Directors was informed about a 

letter from David Arce Torres in which, in accordance with article 20(4) of the Regulations of 

the Board of Directors, he declared his intention to resign from his position as a Director of 

Banco Español de Crédito, S.A., and likewise to resign from his position as member of Audit 

and Compliance Committee, by reason of personal reasons. 


FRANCISCO DAURELLA FRANCO 



letter from Francisco Daurella Franco in which, in accordance with article 20(4) of the 

Regulations of the Board of Directors, he declared his intention to resign from his position as 

a Director of Banco Español de Crédito, S.A., by reason of personal reasons. 


JOSÉ MARÍA NUS BADÍA 



letter from David Arce Torres in which, in accordance with article 20(4) of the Regulations of 

the Board of Directors, he declared her intention to resign from his position as a Director of 

Banco Español de Crédito, S.A., and likewise to resign from his position as Chairman of 

Delegated Risks Committee and member of the Executive Committee, by reason of his 

having been appointed as Director of Santander UK Plc. 

B.1.6 Indicate, where applicable, any powers delegated to managing directors: 


JOSÉ ANTONIO GARCÍA CANTERA 

16 

278

Brief description 

He has had delegated to him all powers required for the management of the business and 

the powers attaching to his office, except such powers as are non-delegable by law or under 

the Articles of Association or the Regulations of the Board of Directors, article 3. 

B.1.7 List any Board members holding senior management or directorships in other companies 

belonging to the listed company's group: 

B.1.8 List all board members who are also members of the board of directors of other companies listed 

on official securities markets in Spain, other than your own group, that have been reported to the 

company: 

Name or corporate name of director Name of listed entity Post 

ANTONIO BASAGOITI GARCIA TUNON PESCANOVA. S.A. DIRECTOR 

ANTONIO BASAGOITI GARCIA TUNON FAES FARMA. S.A. 

17 

279 

VICE- 

CHAIRMAN 

BELEN ROMANA GARCIA ACERINOX. S.A. DIRECTOR 

JUAN DELIBES LINIERS METROVACESA. S.A. DIRECTOR 

MATIAS RODRIGUEZ INCIARTE FINANCIERA PONFERRADA. S.A. SICAV DIRECTOR 

RAFAEL DEL PINO CALVO-SOTELO FERROVIAL. S.A. CHAIRMAN 

ROSA MARIA GARCIA GARCIA 

BOLSAS Y MERCADOS ESPANOLES. 

SOCIEDAD HOLDING DE MERCADOS Y 

SISTEMAS FINANCIEROS. S.A. 

DIRECTOR 

B.1.9. Indicate and explain if the company has established rules about the number of directorships their 

board members can hold: 

YES 

Explanation 

ARTICLE 28 OF THE REGULATIONS OF THE BOARD OF DIRECTORS STIPULATES THAT DIRECTORS 

SHALL LIMIT THEIR POSITIONS ON THE GOVERNING BODIES OF OTHER ENTITIES TO THE 

MAXIMUM NUMBER STIPULATED IN THE REGULATORY PROVISIONS FOR LENDING INSTITUTIONS 

AND OTHER APPLICABLE LEGISLATION. DIRECTORS MAY SIT ON A MAXIMUM OF FIVE GOVERNING 

BODIES OF COMPANIES OTHER THAN THOSE DIRECTLY OR INDIRECTLY CONTROLLED BY BANCO 

ESPAÑOL DE CRÉDITO, S. A. . 

B.1.10 Regarding Recommendation 8 of the Unified Code, indicate the company’s general policies and 

strategies which the Board in full should reserve the right to approve: 

Investment and financing policy YES 

Design of the structure of the corporate group YES 

Corporate governance policy YES

AR 11 

Corporate social responsibility policy YES 

The strategic or business plan, management targets and annual budgets YES 

Remuneration and evaluation of senior officers YES 

Risk control and management, and the periodic monitoring of internal information and control 

systems 

Dividend policy, as well as the policies and limits applying to treasury shares YES 

B.1.11 Fill out the following tables indicating the aggregate remuneration paid to directors during the 

year: 

a) For directors of the company subject to this report: 

Concept 


18 

280 

YES 

Thousands of 

euros 

Fixed remuneration 1,796 

Variable remuneration 3,125 

Per diems 229 

Statutory compensation 1,195 

Options on shares and/or other financial instruments 485 

Other 21 

Total 6,851 

Other benefits 

Thousands of 

euros 

Advances 0 

Loans 0 

Funds and pension plans: contributions 946 

Funds and pension plans: obligations 15,934 

Life insurance premiums 32 

Guarantees issued by the company in favour of directors 0 

b) For directors belonging to other boards of directors and/or holding senior management posts in 

group companies: 

Concept 

Thousands of 

euros 

Fixed remuneration 0 

Variable remuneration 0 

Per diems 0 

Statutory compensation 0 

Options on shares and/or other financial instruments 0 

Other 0 

Total 0


19 

281 

Thousands of 

euros 

Advances 0 

Loans 0 

Funds and pension plans: contributions 0 

Funds and pension plans: obligations 0 

Life insurance premiums 0

AR 11 



20 

282 

Thousands of 

euros 

Guarantees issued by the company in favour of directors 0 

c) Total remuneration by type of directorship: 

Type of directorship Company Group 

EXECUTIVE 5,630 0 

PROPRIETARY 375 0 

INDEPENDENT 840 0 

OTHER EXTERNAL 

DIRECTORS 

6 0 

Total 6,851 0 

d) Remuneration as a percentage of Parent attributable profit 

Total remuneration received by directors (in thousands of euros) 6,851 

Total remuneration received by directors/Parent attributable profit (%) 2.0 

B.1.12 List senior management members who are not executive directors and indicate the total 

remuneration accruing to them during the year: 

GONZALO ALONSO TEJUCA 

Name or corporate name Post 

JOSE FRANCISCO DONCEL RAZOLA 

JAIME YBARRA LORING 

GENERAL MANAGER RETAIL 

BANKING 


CONTROLLER GENERAL 

GENERAL MANAGER FOR 

WHOLESALE BANKING

MONICA LOPEZ-MONIS GALLEGO 

MIGUEL SANZ SAIZ 

ADOLFO RAMIREZ MORALES 

JESUS FUENTES COLELLA 

MATIAS FRANCISCO SANCHEZ GARCIA 

ERNESTO MARTINEZ GOMEZ 

IGNACIO MARIA EZQUERRA BASTIDA 

JUAN ANTONIO LOMBARDIA SAINT GERMAIN 

21 

283 

SECRETARY OF THE BOARD OF 

DIRECTORS 

GENERAL MANAGER HUMAN 

RESOURCES 


RESOURCES 


INVESTMENTS AND RISKS 

DEPUTY GENERAL MANAGER. 

CORPORATION BUSINESS 

DEPUTY GENERAL MANAGER 

INTERNAL AUDIT MANAGER 


COMPLIANCE AND INTERNAL 

CONTROL 

ASSISTANT GENERAL 

MANAGER FOR CLIENTS 

RELATIONSHIP STRATEGY, 

MARKETING AND PRODUCTS. 

Total remuneration received by senior directors (in thousands of euros) 8,673 

B.1.13 Identify in aggregate terms any guarantee or protective clauses benefiting senior management 

(including executive directors) of the company or its group. Indicate whether these clauses have to 

be reported to and/or authorised by the governing bodies of the company or its group:

AR 11 

Number of beneficiaries 5 


Board Of Directors Shareholders’ Meeting 

Body authorising clauses YES NO 

Is the General Meeting informed of these clauses? YES 

B.1.14 Indicate the procedures for establishing board members’ remuneration and any relevant clauses 

in the Articles of Association regarding this payment. 

Procedures for establishing board members’ remuneration and relevant clauses in the Articles of Association 

Procedures for establishing board members’ remuneration are stipulated in the bylaws and the Regulations of the Board of 

Directors. 

1.- Article 39 of the By-laws stipulates: 

22 

284


1. The post of Director is remunerated. Directors shall be entitled to receive compensation for performing the duties 

entrusted to them by reason of their appointment as mere members of the Board of Directors by the shareholders at a 

General Meeting or by the Board itself exercising its power to make interim appointments (co-option). 

2. This compensation shall be paid as a share in profits and bylaw -mandated compensation, in accordance with legal 

requirements established, and shall have two components: (a) an annual amount and (b) attendance fees/allowance. 

Attendance fees shall be paid in advance on account of the profits for the fiscal year. 

The specific amount payable for the above-mentioned items to each of the Directors shall be determined by the Board of 

Directors. For such purpose, the Board might take into consideration the positions held by each Director in the decision- 

making body and their membership and attendance at the Board’s various Committees. 

The total amount of the remuneration comprised in this section shall be equivalent to one per cent of the Company’s annual 

profit, although the Board might agree to reduce this participation percentage in years when it deems it justified. 

3. In addition to the remuneration systems set forth in the preceding paragraphs, the Directors shall be entitled to receive 

remuneration by means of the delivery of shares or option rights thereon, or by any other remuneration system referenced 

to the value of shares, provided the application of such remuneration systems is previously approved by the shareholders at 

the General Meeting. Such resolution shall determine, as the case may be, the number of shares to be delivered, the 

exercise price of the options, the value of the shares used as a reference and the duration of such remuneration system. 

4. Independently of the provisions of the preceding paragraphs, the Directors shall also be entitled to receive such other 

compensation (salaries, incentives, bonuses, pensions, insurance and severance payments) as, following a proposal made 

by the Appointments and Remuneration Committee and upon resolution by the Board of Directors, may be considered 

appropriate in consideration for the performance of other duties at the Company, whether they are the duties of an 

executive Director or other, other than the duties of supervision and collective decision-making that they discharge in their 

capacity as members of the Board. 

5. The Board of Directors shall approve an annual report on the remuneration policy, where it shall set forth the standards 

and basis used to determine the remuneration of the Directors for the previous fiscal year and the current fiscal year, and 

shall make it available to the shareholders when the General Shareholders’ Meeting is called. The contents of the Report 

shall be governed by the provisions of the Regulations of the Board of Directors. 

6. The annual report has individual information on the remuneration received by each Director, specifying the amounts 

corresponding to each compensation item. It shall also set forth therein, on an individual basis and for each item of 

compensation, the compensation payable, pursuant to Article 31 of the current By-laws and paragraph 4 above, for the 

performance of executive duties entrusted to the executive Directors of the Company. 

7. The Company shall have in place civil liability insurance for its Directors on such terms as are customary and 

commensurate with the circumstances of the Company itself. 

Article 24 of the Regulations of the Board of Directors stipulates that: 

1. In accordance with Article 39 of the By-laws, the post of Director is remunerated, and Directors shall be entitled to 

receive compensation for performing the duties entrusted to them by reason of their appointment as mere members of the 

Board of Directors by the shareholders at a General Shareholders’ Meeting or by the Board itself exercising its power to 

make interim appointments (co-option). 

This compensation shall be paid as a share in profits and bylaw-mandated compensation, in accordance with legal 

requirements established, and shall have two components: (a) an annual amount and (b) attendance fees/allowance. 

Attendance fees shall be paid in advance on account of the profits for the fiscal year. 

In the assignation of the remuneration amount that for the above-mentioned concepts corresponds to each Director, the 

Board might take into consideration the positions held by each Director in the decision-making body and their membership 

23 

285

AR 11 


and attendance at the Board’s various Committees. 

The total amount of the remuneration comprised in this section shall be equivalent to one per cent of the Company’s annual 

profit, although the Board might agree to reduce this participation percentage in years when it deems it justified. 

2. In accordance to the provisions of the third section of Article 39 of the By-laws, the Board of Directors shall restrict 

remuneration proposals consisting of delivery or shares or option rights on shares or that are linked to the value of the 

shares, to Executive Directors, unless the remuneration consists of just the delivery of shares, and Directors being 

conditioned to hold them until they leave the Board. 

3. Independently of the provisions of the preceding paragraphs, and in accordance with Article 39(4) of the By-laws and 

Article 9.2) of these Regulations, the Directors shall also be entitled to receive such other compensation (salaries, 

incentives, bonuses, pensions, insurance and severance payments) as, following a proposal made by the Appointments 

and Remuneration Committee and upon a resolution by the Board of Directors, may be considered appropriate as 

consideration for the performance of other duties at the Company, whether they are the duties of an executive Director or 

other, other than the duties of supervision and collective decision-making that they discharge in their capacity as members 

of the Board. 

4. The Board will seek to ensure that directors’ remuneration is reasonable and in line with the Bank’s results, and is 

sufficient to remunerate the dedication, skills and responsibilities of all external directors. 

5. The Board of Directors shall approve the remuneration policy, following a proposal of the Appointments and 

Remuneration Committee. The policy will include the relevant criteria and grounds for determining directors’ remuneration 

for the current year and, if applicable, future years. The policy includes: 

a) Evolution of directors’ remuneration payable for their supervisory and decision-making duties. 

b) Separate details of the remuneration payable to executive directors for duties other than those listed above and which 

will be based, at least, on the following: 

- progression of fixed annual remuneration together with an estimate of the total amount. 

- benchmark parameters based on any short- or long-term variable remuneration scheme (bonds or annual/long-term 

incentives). 

- an estimate of the sum total of variable payments arising from the remuneration policy proposed. 

- the relative importance of variable vs. fixed remuneration and the deferred variable vs. total variable remuneration. 

- the reference criteria for the yield of stock, stock – options or stock price based remunerations. 

- the main characteristics of benefit systems (for example, supplementary pensions, life insurance and similar 

arrangements), with an estimate of their amount or annual equivalent cost. 

- the conditions of the contracts for executive directors (duration, prior notice, recruitment premiums, severance payment 

and any others). 

c) It shall also report on remuneration paid to external directors for carrying out functions other than those of director. 

d) significant changes to the remuneration policy for the current year compared to the previous year’s and a summary of 

how the remuneration policy was enacted in said year. 

6. The Company shall hold a civil liability insurance policy for its Directors in the usual terms and conditions and in 


24 

286


proportion to the Company’s circumstances. 

Indicate if the Board acting in full has approved the following decisions: 

On the proposal of the company's chief executive, the appointment and removal of senior 

officers, and their compensation clauses. 

25 

287 

YES

AR 11 

Directors' remuneration and, in the case of executive directors, the additional consideration 

for their management duties and other contract conditions. 

B.1.15 Indicate whether the Board of Directors approves a detailed remuneration policy and specify the 

points included: 

YES 

The amount of the fixed components, itemised where necessary, of board and board 

committee attendance fees, with an estimate of the fixed annual payment they give rise to. YES 

Variable components YES 

The main characteristics of pension systems with an estimate of their amount of annual 

equivalent cost. 

The conditions to apply to the contracts of executive directors exercising senior 

management functions 

B.1.16 Indicate whether the Board submits a report on the directors’ remuneration policy to the advisory 

vote of the General Meeting, as a separate point on the agenda. Explain the most points regarding the 

remuneration policy as approved by the Board for forthcoming years, the most significant changes in 

remuneration policy made this year and a global summary of how the policy was applied over the period in 

question. Provide details on the role of the Remuneration Committee along with the identity of any external 

advisors engaged. 

YES 

Issues covered in the remuneration policy report 

Article 25 of the Regulations of the Board of Directors stipulates that the Board will approve an annual 

report on the company’s remuneration policy, which must be submitted to the Ordinary General 

Meeting for informative purposes. This report shall describe the remuneration policy referred to in 

article 24.5 and described in B.1.14 above. 

The first report was submitted at the 2008 General Meeting. 

The 2011 report shall be submitted at the 29 February 2012 meeting. 

Role of the Remunerations Committee 

At its meeting on 25 January 2012, the Board of Directors approved a Remuneration Policy Report 

with the above-mentioned content, which can be consulted on the Bank’s website. It has also been 

made available to all shareholders prior to the General Meeting called for 29 February. The report, 

along with the remuneration policy, were approved following a proposal of the Appointments and 

Remuneration Committee. For its preparation, the committee used data contained in reports by 

companies specialising in directors’ remuneration as well as reports issued by corporate governance 

observatories. 

Has an external advisor been engaged? YES 

Identity of external advisor 

The Appointments and Remuneration Committee used, among other information, data from the 

external advisors Towers Watson. 

B.1.17 Indicate the identity of any board members who sit on board(s) of directors or hold senior 

management posts in companies having significant shareholdings in the listed company and/or its 

group companies: 


26 

288 

YES 

YES 

YES


ANTONIO BASAGOITI GARCIA 

TUNON 

JOSE MARIA FUSTER VAN 

BENDEGEM 

Corporate name of significant 

shareholder 

27 

289 

Post 

BANCO SANTANDER, S.A. DIRECTOR OF BANCO 

SANTANDER, S.A. 

MEMBER OF THE 

EXECUTIVE 

COMMITTEE, RISK 

COMMITTEE AND 

TECHNOLOGY 

COMMITTEE. 

BANCO SANTANDER, S.A. GENERAL MANAGER 

OF BANCO 

SANTANDER, S.A. IN 

CHARGE OF 

TECHNOLOGY AND 

OPERATIONS 

JUAN GUITARD MARIN BANCO SANTANDER, S.A. GENERAL MANAGER 

OF BANCO 

SANTANDER, S.A. IN 

CHARGE OF INTERNAL 

AUDIT 

MATIAS RODRIGUEZ INCIARTE BANCO SANTANDER, S.A. THIRD VICE 

CHAIRMAN OF 

SANTANDER, S.A. 

MEMBER OF THE 

EXECUTIVE 

COMMITTEE AND 

CHAIRMAN OF THE 

RISKS COMMITTEE. 

List, if appropriate, any relevant relations other than those indicated in the section above that link 

members of the board of directors with significant shareholders and/or their group companies: 

B.1.18 Indicate any changes made to board regulations during the year: 

YES 

Description of amendments

AR 11 

At its meeting of 19 January 2011, the Board of Directors decided to modify the Regulations of the 

Board of Directors. The main purpose of the changes was to incorporate to the Regulations the new 

duties and powers of the Audit and Compliance Committee prescribed by the Ley 12/2010, a statute 

that amends the Auditing Act (Ley de Auditoría de Cuentas) and the Securities Market Act (Ley del 

Mercado de Valores), and the new duties and powers of the Nomination and Remuneration 

Committee arising from the Company's having adopted Financial Stability Board (FSB) standards to 

implement FSF principles on good practices in remuneration. In addition, a number of clarifications 

were made regarding the alterations to the By-laws and the Regulations of the General Meeting 

proposed at the General Meeting of 23 February 2011. The changes involved alterations to Articles 

3, 7, 12, 14, 15, 17, 24, 25, 28 and 34, and were explained in a report issued in connection with that 

General Meeting. 

B.1.19 Indicate the procedures for the appointment, re-election, assessment and removal of directors. 

List the competent bodies, the steps to be followed and the criteria to be applied in each procedure. 

Articles 23, 24, 25, 26 and 43 of the By-laws and articles 15, 18, 19, 20 and 20 bis of the Regulations of the 

Board of Directors deal with the appointment, re-election, ratification and cessation of directors. 

APPOINTMENTS: 

Composition of the Board of Directors: 

The Appointments and Remuneration Committee meeting held on 17 December 2003 defined the 

requirements governing appointments and re-elections submitted by the Board to the General Meeting, as 

well as Board decisions regarding appointments by co-optation, all subject to the following distribution of 

offices: 

- a reduced minority of executive directors. At present two of the 14 directors are executive. 

- an ample majority of non-executive directors. 

- of the majority of non-executive directors, the proportion of proprietary and non-proprietary directors need not 

strictly reflect the structure of the share capital. Notwithstanding this, a preference must be shown for nonproprietary 

directors, of whom there are currently eight.. 

- Responsibilities: The General Meeting is responsible for establishing these as stipulated in the company’s 

By-laws and the Spanish Companies Law (LSA in Spanish). Notwithstanding the above, if vacancies occur 

upon the Board, by resignation or death of one or more directors, the Board may appoint new directors among 

shareholders by means of co-optation. It is necessary that the next ensuing General Meeting confirms every 

such appointment. The authority of any Director so appointed will not last beyond the term for which their 

predecessors were appointed. 

- Requirements and restrictions to appointment: It is not necessary to be a shareholder to be appointed a 

Director, except in cases of appointment by co-optation. Any persons who are restricted by law cannot be 

appointed directors. 

At its meeting of 17 December 2003, the Appointments and Remuneration Committee expanded on the 

requirements stipulated in the Regulations of the Board of Directors to be put forward as a director. Due 

consideration must now be given to the candidate having the necessary solvency, skill, and experience. 


28 

290

Special importance is also attached to their personal track record in strict compliance with company law or 

other laws regulating economic activity or business, as well as good commercial financial and banking 

practices. 

Included in the criteria set by the Committee is the requirement that a majority of the directors must have 

provided senior managerial, managerial, control or advisory services to financial institutions for a minimum 

term of five years, or held similar positions in other public or private entities of a similar size to the Bank, all the 

foregoing in line with the regulations governing lending institutions. 

Finally, the Regulations of the Board of Directors include the prohibitions on being appointed an independent 

director as listed in the Unified Good Governance Code. This stipulates that independent directors shall be 

appointed based on their personal and professional experience and must be able to exercise their functions 

without being influenced by relations with the Bank, its significant shareholders, senior officers or directors. 

Independent directors may not: 

a) Have been employees or executive directors in Group companies, unless three or five years, respectively, 

have passed since their departure. 

b) Receive any amount or benefit from the Bank or its Group companies for any reason other than 

remuneration of their directorship, unless it is insignificant. 

c) Be or have been a partner in the external auditor’s firm or in charge of the auditor’s report for either the Bank 

or its Group companies during the last three years. 

d) Be executive directors or senior executives in any other company in which a Bank executive or senior 

manager is an external director. 

e) Maintain or have maintained during the past year an important business relationship with the Bank or any of 

its Group companies, either on his/her own behalf or as a relevant shareholder, director or senior executive of 

a company that maintains or has maintained such relationship. 

Business relationships shall mean relationships as a provider of goods and/or services, including financial, 

advisory and/or consultancy services. 

f) Be significant shareholders, executive directors or senior executives of any organisation that receives or has 

received significant donations from the Bank or its Group companies during the last three years. Those who 

are merely trustees of a foundation receiving donations are excluded from the foregoing. 

g) Be married to or linked by equivalent emotional relationship, or related by up to second-degree family ties to 

an executive director or senior executive of the Bank. 

h) Have not been proposed by the Appointments Committee for appointment or renewal. 

i) Fall within the cases described under letters a), e), f) or g) above, with respect to any significant shareholder 

or shareholder represented on the Board. In cases of family relationships described under letter g), the 

limitation shall not only apply to the shareholder, but also to the directors it nominates to sit on the Bank’s 

Board. 

Directors who holding shares in the company may nevertheless be classed as independent directors provided 

they meet all the applicable requirements and their shareholding is not deemed significant. 

People appointed as directors undertake, from the time they take office, to meet the conditions and perform 

the duties required by law, the By-laws and the Regulations of the Board of Directors. 

RE-ELECTION 

Term of office: Directors will be appointed for a period of six years, without detriment of the possibility of being 

re-elected once or several times for periods of the same duration. Directors appointed by co-optation and 

subsequently ratified in their post at the first General Meeting held after their appointment will hold office for the 

same term as the director they are replacing, unless the General Meeting decides to appoint them for a new 

maximum term of office as set forth in the By-laws. 

Article 24 of the By-laws stipulates that the Board will renew every year one fifth of its members. 

29 

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AR 11 

There is no age limit for being appointed a director or for exercising the post, nor are there any restrictions on 

reappointments. 

- Procedure: The proposals for appointing, re-electing and ratifying directors submitted by the Board to the 

Shareholder Meeting and the decisions on appointments taken by the Board itself under the powers legally 

attributed to it must come with the corresponding proposal from the Appointments and Remuneration 

Committee. 

If the Board departs from the proposal of the Appointments and Remuneration Committee, it must explain its 

decision and leave a record of it. 

Directors affected by appointment, re-election or cessation proposals shall abstain from attending and voting 

at the corresponding Board or committee meetings. 

Once the appointment has been made, this will become effective following acceptance by the director, filing 

with the Bank of Spain’s Register of Senior Executives and likewise with the Companies House. 

EVALUATION 

As stipulated in article 3.4 of the Regulations of the Board of Directors, the Board shall assess, at least once a 

year, the quality and efficiency in its operation on the basis of the report submitted by the Appointments and 

Remuneration Committee. It shall also assess the quality and efficiency of its committees on the basis of the 

reports furnished by the latter. 

CESSATION 

Directors will cease in their posts when, with the mandate for which they were appointed expires, a General 

Meeting has been held and they were not re-elected. Directors must also put their post at the Board’s disposal 

and present their resignation when, following a proposal from the Appointments and Remuneration 

Committee, it is deemed opportune as a result of cases which could negatively affect the smooth running of 

the Board or the Bank’s credit and reputation and, in particular, for incurring in any of the supposition of 

incompatibility or legally envisaged bans. 

Directors who give up their place before their tenure expires, through resignation or otherwise, should state 

their reasons in a letter to be sent to all members of the Board. The reason shall be explained in the annual 

Corporate Governance Report. 

Proprietary directors shall tender their resignation when the shareholder they represent sells its shareholding 

or when said shareholder lowers its stake to a level that requires it to reduce the number of proprietary 

directors. Said directors may nevertheless be re-elected as executive, independent or proprietary directors 

acting on behalf of other shareholders. 

In the event of the cessation, resignation or dismissal, disability or death of a Board or committee member or 

the cessation, resignation or dismissal of the Chairman of the Board of Directors, the CEO or other senior 

executives, the Chairman of the Board, or, in his/her absence, the highest-ranking Vice Chairman, shall call a 

meeting of the Appointments and Remuneration Committee to guarantee the succession or replacement in an 

orderly fashion and propose a replacement to the Board. The Executive Committee shall be notified of this 

proposal, which will then be submitted to the vote at the next scheduled Board meeting or, if deemed 

necessary, an extraordinary meeting. 

B.1.20 Indicate the circumstances under which directors would be obliged to resign. 

Without prejudice to incompatibility or other legally prescribed prohibitions, article 20 of the 

Regulations of the Board of Directors stipulates that directors must offer to resign and present their 

resignation when their continuity: 

- could negatively affect the smooth running of the Board; 

- could affect the Bank’s credit and reputation; 


30 

292

Proprietary directors shall also tender their resignation when the shareholder they represent sells its 

shareholding or when said shareholder lowers its stake to a level that requires it to reduce the 

number of proprietary directors. 

B.1.21 Explain whether the duties of chief executive officer fall upon the Chairman of the Board. If so, 

indicate the measures taken to limit the risk of powers accumulating in a single person: 

NO 

31 

293

AR 11 

Risk-limitation measures 

The Regulations of the Board of Directors stipulates that the post of Chairman of the Bank shall be executive 

.However, as the Bank’s power is not concentrated in only one person, there is a clear separation of duties 

between the Executive Chairman, the CEO, the Board and its committees. 

Actually, the Chairman has the category of non executive chairman, having the faculties that the law attributes 

to its position, to the company bylaws or Board rules. 

The Chief Executive Officer, mandated by and reporting to the Board of Directors, will be the first executive of 

the bank, in charge of running the business , having been empowered by the Board of Directors to decide on 

his own behalf on every matter reserved to the Board of Director but on those specifically reserved to the Board 

by law, company bylaws or Board rules. 

The Chief Executive Officer, mandated by and reporting to the Board of Directors, will be the first executive of 

the bank, in charge of running the business, having been empowered by the Board of Directors to decide on his 

own behalf on every matter reserved to the Board of Director but on those specifically reserved to the Board by 

law, company bylaws or Board rules. 

The Chairman of the Board will be elected from among its members and will be the Bank’s top person in its 

hierarchy (as stipulated in articles 20 and 7.1 of the By-laws and Regulations of the Board of Directors, 

respectively). He or she will have all the powers that can be delegated in accordance with the law, the corporate 

By-laws and these regulations and will manage the team of executives, always in accordance with the decisions 

and criteria set by the Shareholders’ Meeting and by the Board in their respective spheres of responsibilities. 

The CEO, by delegation and under the auspices of the Board and the Chairman, as the top executive is 

responsible for the business conduct and exercises the executive functions that correspond to the job. 

The structure of the Board’s collegiate and individual bodies are formed in such a way as to allow balanced 

action between them all, including the Chairman. We would highlight the following: 

- The Board and its committees supervise and control the activities of both the Chairman and the CEO. 

- the Vice Chairman, who shall be an independent external director, shall coordinate all non-executive directors, 

and not just independents as had previously occurred prior to the latest amendment . 

- The powers delegated to the CEO shall be the same as for the Chairman, while in both cases those powers 

reserved exclusively for the Board are excluded. 

Therefore, the Board is of the opinion that there are sufficient checks in place to guarantee an adequate balance 

of the Bank’s corporate governance structure and has chosen the figure of the Executive Chairman as it is 

deemed that he/she is best placed to deal with the actual circumstances. 

There are two qualities which set apart the Chairman of the Board from the other members: the powers 

delegated and the ability to call Board meetings and set the agenda. The first has two control mechanisms: the 

existence of non-delegable powers of the Board and the possibility that the Board may withdraw the delegation 

at any given time. Article 16 of the Regulations of the Board of Directors stipulates that the Board will meet 

whenever the Chairman decides it should, at his or her own initiative or at the request of, at least, three 

directors. The agenda will be approved by the Board at its meeting. All directors have the right to submit to the 

Chairman proposals for matters not included in the agenda. 

Indicate and explain if an independent director is empowered to request the calling of board meetings or 

the inclusion of new business on the agenda; coordinate and give voice to the concerns of external 

directors; and lead the board’s evaluation of the Chairman. 

YES 

Explanation 

One of the amendments to the Regulations of the Board of Directors agreed upon at the Board meeting of 22 

May 2007 concerns article 8 whereby, in accordance with Recommendation 17 of the Unified Good 

Governance Code, the first, or only, Vice Chairman (who shall be an independent director) shall coordinate and 

give voice to the concerns of external directors. Likewise, and as indicated above, a Board meeting may be 

called at the behest of three directors by submitting to the Chairman any proposal for inclusion in the agenda. 

B.1.22 Are qualified majorities, other than those established by law, required for certain decisions? 


32 

294

NO 

Describe how resolutions are adopted by the Board of Directors and specify, at least, the minimum 

attendance quorum and the type of majority for adopting resolutions: 

Description of resolutions: 

Agreements will be adopted by absolute majority of directors present or represented at meetings. 

The permanent delegation of powers in the Executive Committee and the agreements to appoint 

members to it require the favourable vote of at least two thirds of the members of the Board. 

Quorum % 

The Board will be validly constituted when more than half of its members are present at 

meetings or represented. 

33 

295 

51.00 

Type of majority % 

Absolute majority. 0 

B.1.23 Explain if there are any requirements, other than those for Directors, for being appointed 

Chairman. 

NO 

B.1.24 Indicate whether the chairman has the casting vote: 

YES

AR 11 

Subjects for which a casting vote is required 

As stipulated in articles 32 and 17 of the By-laws and the Regulations of the Board of Directors, respectively, in 

the event of a stalemate, the Chairman will have the casting vote. 

B.1.25 Indicate whether the Articles of Association or the Board of Directors Regulations establish an 

age limit for Directors: 


NO 

Age limit for Chairman Age limit for CEO Age limit for directors 

0 0 0 

B.1.26 Indicate whether the Articles of Association or the Board of Directors’ Regulations establish a 

limit on the term of office held by independent Directors: 

NO 

Maximum number of years in office 0 

B.1.27 When women directors are few or non existent, state the reasons for this situation and the 

measures taken to correct it. 

In particular, indicate whether the Appointments and Remunerations Committee has established a 

procedure of filling board vacancies which has no implicit bias against women candidates: 

YES 

Indicate the main procedures 

Article 15.2 of the Regulations of the Board of Directors stipulates that one of the functions of the Appointments 

and Remuneration Committee shall be to propose to the Board the criteria to be followed for its composition and 

for choosing directors and, in particular, to evaluate the balance of skills, knowledge and experience on the 

Board; define the roles and capabilities required of the candidates to fill each vacancy, and decide the time and 

dedication necessary for them to properly perform their duties and formulate, with criteria of objectivity and 

meeting social interests, the proposals for appointing new directors and ratifying current ones. 

At its meeting of 17 December 2003, the Appointments and Remuneration Committee established the requirements to 

be stipulated in the Regulations of the Board of Directors governing nominations to the position of director. Due 

consideration must be given to that person having the necessary solvency, skill, and experience, with special 

importance attached to their personal track-record in strict accordance with company law or other laws regulating 

economic activity or business, as well as good commercial financial and banking practices. 

34 

296

B.1.28 Indicate whether there are any formal processes for proxy voting on the Board of Directors. If 

so, list briefly. 

Article 32 of the By-laws and article 17 of the Regulations of the Board of Directors stipulate that 

directors may delegate, in writing, their representation for each and every Meeting in any another 

director, for him to present them at the Meeting in question and exercise their voting rights. The 

same director can hold several delegations. Instructions about the each agenda points vote must 

be given for each representation. 

B.1.29 Indicate the number of sessions held by the Board of Directors during the year. Likewise, 

indicate the number of times, if any, the Board has met in the absence of its Chairman: 

Number of Board meetings 10 

Number of Board meetings held at which the Chairman was absent 0 

Indicate the number of Board Committee meetings held during the year: 

Number of Executive or delegate committee meetings 49 

Number of audit. committee meetings 15 

Number of Appointments and Remuneration committee meetings 5 

Number of Appointments committee meetings 0 

Number of Remuneration committee meetings 0 

B.1.30 Indicate the number of meetings held by the Board of Directors during the year without all its 

members present. Non-attendance shall also include proxies without specific instructions given: 

Number of non-attendances in the year 0 

% of non-attendances of the total votes deposited during the year 0.000 

B.1.31 Indicate whether the individual and consolidated accounts are certified prior to their presentation 

to the Board of Directors: 

NO 

Identify, if appropriate, the person(s) certifying the individual and consolidated accounts for their 

formulation by the Board: 

35 

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AR 11 

B.1.32 Explain the mechanisms, if any, established by the Board of Directors to ensure the individual 

and consolidated accounts are not presented at the General Meeting with qualifications in the auditor’s 

report. 

The mechanisms established by the Board of Directors to ensure the individual and consolidated 

accounts are not presented at the General Meeting with qualifications in the auditor’s report are 

stipulated in articles 14 (Audit and Compliance Committee) and 39 (Relations with the auditing firm) 

of the Regulations of the Board of Directors. 

Article 14 of the Regulations of the Board of Directors regarding the remit of the Audit and 

Compliance Committees, states the following: 

- review the Bank’s and the group’s accounts, ensure fulfilment of the legal requirements and the 

correct application of generally accepted accounting principles, as well as report on proposals to 

change the accounting principles and criteria suggested by management; 

- to be fully familiar with and supervise the process of preparing and presenting the financial 

information relating to the Company and where appropriate to the Group, reviewing compliance 

with the regulatory requirements, the adequate delimiting of the perimeter of consolidation and the 

correct application of the accounting standards; 

- to supervise the effective internal control of the Company and the risk management systems, and 

discuss with the auditors the significant weaknesses of the internal control system, detected in the 

audit; 

- act as the channel of communication between the Board and the auditing company, evaluate the 

results of each audit and the responses of the management team to its recommendations and 

mediate in cases of discrepancies between the firm and management over the principles and 

criteria applied in drawing up financial statements; 

- ensure the independence of the auditor; 

- review before dissemination the periodic financial information which, as well as the annual report, 

is sent to the markets and to supervisory bodies, and ensure that it is drawn up with the same 

principles and practices as the annual financial statements. 

B.1.33 Is the Secretary of the Board also a Director? 

NO 

B.1.34 Explain the procedure for appointing and removing the Secretary of the Board and indicate 

whether the Appointments and Remunerations Committee notified his appointment and removal and if 

these were approved by a board meeting in full. 

Appointment/removal procedure 

Article 10 of the Regulations of the Board of Directors stipulates that the Secretary to the Board of Directors shall be 

appointed at the proposal of the Chairman and on the basis of a report from the Appointments and Remuneration 

Committee. 

The appointment and removal procedure, including for the Secretary of the Board of Directors, is stipulated in article 

20 bis of the Regulations of the Board of Directors. Likewise, article 15.2 letter e) of the Regulations expressly states 

that the Appointments and Remuneration Committee shall report on the appointment and removal of the Secretary to 

the Board of Directors 

Is the appointment announced by the Appointments Committee? YES 

Is the removal announced by the Appointments Committee? YES 

Does the Board in full approve the appointment? YES 

Does the Board in full approve the removal? YES 


36 

298

Is the Secretary of the Board especially responsible for overseeing good governance 

recommendations? 

YES 

B.1.35 Indicate the mechanisms, if any, established by the Company to preserve the independence of 

the auditor, financial analysts, investment banks and rating agencies. 

As to assurance of auditor independence, Article 14 of the Board Regulations stipulates that one of the 

duties of the Audit and Compliance Committee is to seek to ensure the independence of the auditors, 

establishing the relevant relations with the Auditor so as to receive information on those circumstances 

or issues that may put its independence at risk, to be examined by the Committee, and on any other 

issues related to the auditing process, as well as receive information and maintain such communication 

with the Auditor as is provided for in legislation regarding the auditing of financial standards and in 

technical auditing regulations. And, specifically to: 

a) on an annual basis, receive from the Auditor written confirmation of its independence with respect to 

the Company or institutions directly or indirectly connected to the Company, as well as information on 

any type of additional services provided to these institutions by the said Auditor, or by persons or 

institutions related to the latter pursuant to the provisions of the Law on Auditing;. 

b) request information on the percentage represented by the fees paid for any and all reasons of the 

total income of the audit firm, and the length of service of the partner who leads the audit team in the 

provision of such services to the Company as well as to warn the firm of the limit referred to in article 

39 of these Regulations. 

c) examine, in the event of resignation of the auditing firm, the circumstances leading to this; 

d) ensure that the change in the auditing firm is publicly communicated as relevant fact and, where 

appropriate, accompany such communication with a declaration regarding the possible existence of 

disagreements with the outgoing auditor. 

e) issue annually, prior to the issuing of the external auditor’s report, a report expressing an opinion on 

the independence of the external auditor. In any event, such report should make a statement as to the 

providing of the additional services referred to in the preceding paragraph. 

No express provision is made on analysts and investment banks; the following items of the Board 

Regulations apply in a general sense. Article 36 of the Board Regulations provides as follows: 

Article 36. Relations with institutional investors 

1. The Board shall also establish adequate mechanisms to provide regular information to institutional 

investors who are shareholders of the Company. 

2. Under no circumstances shall relations between the Board and institutional investors give rise to 

the delivery of information to them that could give them a privileged or advantageous situation over 

other shareholders.. 

B.1.36 Indicate whether the Company changed its external auditor during the year. If so, identify the 

incoming and outgoing auditor: 

37 

299

AR 11 


NO 

Outgoing auditor Incoming auditor 

Explain any disagreements with the outgoing auditor and the reasons for the same: 

NO 

B.1.37 Indicate whether the auditing firm does non-audit work for the company and/or its group. If so, 

state the fees it receives for such work and the percentage such fees represent of the total fees 

invoiced to the company and/or its group: 

Fees for non-audit work (thousands 

of euros) 

Fees for non-audit work / total 

amount invoiced by the auditor (%) 

YES 

Company Group Total 

38 

300 

267 105 372 

20.200 21.500 20.550 

B.1.38 Indicate whether the audit report of the previous year’s annual accounts is qualified or has 

reservations. Should such reservations or qualifications exist, both the Chairman of the Audit 

Committee and the auditors should give a clear account to shareholders of their scope and content. 

NO 

B.1.39 Indicate how many consecutive years the current auditing firm has been auditing the annual 

accounts of the company and/or its group. Likewise, indicate how many years the current auditing firm 

has been auditing the accounts as a percentage of the total number of years over which the annual 

accounts have been audited: 

Company Group 

Number of consecutive years 10 10

Number of years audited by current 

audit firm /Number of years the 

company accounts have been 

audited (%) 

39 

Company Group 

301 

43.7 43.7 

B.1.40 List the stock holdings of the members of the company’s Board of Directors in other companies 

with the same, similar or complementary types of activity to that which constitutes the corporate 

purpose of the company and/or its group, and which have been reported to the company. Likewise, list 

the posts or duties they hold in such companies: 

Name or corporate name of 

director 

ANTONIO BASAGOITI GARCIA 

TUNON 


COMBARROS 


COMBARROS 

Name of the Company % stake Post or duties 

BANCO SANTANDER. S.A. 0.009 

EXTERNAL 

DIRECTOR 

(INDEPENDEN 

T) 

MAPFRE, S.A. 0.002 ------------ 

BANKINTER, S.A. 0.005 ----------- 

BELEN ROMANA GARCIA AGEAS, S.A. NV 0,000 DIRECTOR 

CARLOS SABANZA TERUEL BANCO SANTANDER, S.A. 0.006 --------------------- 

DAVID ARCE TORRES BANCO SANTANDER, S.A. 0.024 

--------------------- 

- 

BANCO VITALICIO DE 

0.000 DIRECTOR 

FRANCISCO DAURELLA ESPAÑA COMPAÑIA 

FRANCO 

ANONIMA DE SEGUROS Y 

REASEGUROS 

JOSE MARIA FUSTER VAN BANCO CONSUMER BANK 


BENDEGEM 

GERMANY. 

JOSE MARIA FUSTER VAN OPEN BANK SANTANDER 


BENDEGEM 

CONSUMER. S.A. 


BENDEGEM 

SANTANDER UK PLC 0.000 DIRECTOR 


BENDEGEM 

ALLIANCE LEICESTER 0.000 DIRECTOR 


BENDEGEM 


BENDEGEM 

BANKINTER, S.A. 0,004 ------------ 

BANCO SANTANDER, S.A. 0,014 GENERAL 

MANAGER 

RESPONSIBLE 

FOR 

TECHNOLOGY 

AND 

OPERATIONS 

JUAN DELIBES LINIERS SANTANDER SEGUROS Y 0.000 DIRECTOR

AR 11 

Name or corporate name of 

director 

MATIAS RODRIGUEZ 

INCIARTE 

RAFAEL DEL PINO CALVO- 

SOTELO 


SOTELO 


SOTELO 

ROSA MARIA GARCIA 

GARCIA 


Name of the Company % stake Post or duties 

REASEGUROS, CIA 

ASEGURADORA, S.A 

BANCO SANTANDER, S.A. 0.014 THIRD VICE 

CHAIRMAN 

AND 

EXECUTIVE 

DIRECTOR. 

RESPONSIBLE 

FOR RISK 

DEPARTMENT 

PACTIO GESTION, SGIIC, S.A. 22.300 ------------ 

THE BLACKSTONE GROUP 

INTERNATIONAL LTD 

40 

302 

0.000 MEMBER OF 

THE 

EUROPEAN 

ADVISORY 

BOARD 

BANCO PASTOR, S.A. 1.120 ---------------- 

BOLSAS Y MERCADOS 

ESPANOLES, SOCIEDAD 

HOLDING DE MERCADOS Y 

SISTEMAS FINANCIEROS, S.A. 

0,000 DIRECTOR 

B.1.41 Indicate and give details of any procedures through which Directors may receive external 

advice: 

YES 

Details of the procedure 

Article 23 of the Regulations of the Board of Directors stipulates that directors may enlist the help of experts in 

order to exercise their functions. They can ask, via the secretary of the Board, for legal, accounting and 

financial advice paid for by the bank. Such advice is only for specific problems of particular importance and 

complexity arising from the post of director. 

The decision to hire an expert lies with the Board which can deny it if: 

- it is not necessary for the tasks entrusted to a director; 

- the cost is not reasonable compared with the importance of the issue; or 

- the technical assistance sought can be adequately provided by the Bank’s own experts. 

B.1.42 Indicate whether there are procedures for Directors to receive the information they need in 

sufficient time to prepare for the meetings of the governing bodies: 

YES 

Details of the procedure 

Article 16. paragraphs 2 and 3 of the Regulations of the Board of Directors, stipulate that the meeting will be 

called by the Board’s secretary or deputy secretary, fulfilling the orders received from the Chairman. The 

meeting will be called at least seven days before by writing, fax, e-mail or other forms of communication. The 

agenda for the meeting proposed by the Chairman will be sent at least three days before the Board meets by the

same means. The agenda will be approved by the Board at its meeting. 

The information provided to the directors prior to the meetings is specifically drawn up to prepare these 

meetings and shall be used for that purpose. The Board is of the opinion that this information is complete. 

During the meeting and/or before it directors will be provided with as much information or clarifications as is 

deemed opportune regarding the matters on the agenda. 

Article 22 of the Regulations of the Board of Directors states that Directors have wide powers to obtain 

information on any aspect of the Bank, examine its books, registers, documents and anything else regarding its 

operations and to inspect all offices and installations. 

Finally, point 3 of Article 23 of the Regulations of the Board of Directors stipulates that the secretary shall 

organise induction programmes for new directors to acquaint them rapidly with the workings of the company 

and its corporate governance rules. 

B.1.43 Indicate and give details of whether the company has established rules obliging directors to 

inform the board of any circumstance that might harm the organisation's name or reputation, tendering 

their resignation as the case may be: 

YES 

Explain 

Article 20 of the Regulations of the Board of Directors stipulates that directors must also put their post at the 

Board’s disposal and present their resignation when, following a report from the Appointments and 

Remuneration Committee, it is deemed opportune as a result of cases which could negatively affect the smooth 

running of the Board or the Bank’s credit and reputation. Directors who step down before their term of office 

expires, through resignation or otherwise, should state their reasons in a letter to be sent to all members of the 

Board. The reason for the resignation shall be stated in the Annual Report on Good Governance. 

B.1.44 Indicate whether any director has notified the company that he has been indicted or tried for any 

of the crimes stated in article 124 of the Spanish Companies Law: 

NO 

Indicate whether the board has examined this matter and whether it has decided whether the 

director in question shall be called on to resign. 

NO 

Decision Explanation 

B.2 Board of Directors’ Committees 

B.2.1 List the Board committees and their members: 

APPOINTMENTS AND REMUNERATION COMMITTEE 

Name Post Type 

JOSE LUIS LOPEZ COMBARROS CHAIRMAN INDEPENDENT 

41 

303

AR 11 

BELEN ROMANA GARCIA MEMBER INDEPENDENT 

ROSA MARIA GARCIA GARCIA MEMBER INDEPENDENT 

AUDIT AND COMPLIANCE COMMITTEE 



BELEN ROMANA GARCIA CHAIRMAN INDEPENDENT 

JOSE LUIS LOPEZ COMBARROS MEMBER INDEPENDENT 

JUAN GUITAD MARIN MEMBER PROPRIETARY 

MATIAS RODRIGUEZ INCIARTE MEMBER PROPRIETARY 

RISK COMMITTEE 


JOSE CORRAL LOPE CHAIRMAN OTHER EXTERNAL 

BELEN ROMANA GARCIA MEMBER INDEPENDENT 

CARLOS SABANZA TERUEL MEMBER INDEPENDENT 

JUAN DELIBES LINIERS MEMBER EXECUTIVE 

EXECUTIVE COMMITTEE 

42 

304


ANTONIO BASAGOITI GARCIA TUNON CHAIRMAN PROPRIETARY 

CARLOS SABANZA TERUEL MEMBER INDEPENDENT 

JOSE ANTONIO GARCIA CANTERA MEMBER EXECUTIVE 

JOSE CORRAL LOPE MEMBER OTHER EXTERNAL 

JOSE LUIS LOPEZ COMBARROS MEMBER INDEPENDENT 

JUAN DELIBES LINIERS MEMBER EXECUTIVE 

B.2.2 Indicate if the Audit Committee is responsible for the following: 

Monitor the preparation and the integrity of the financial information prepared on the 

company and, where appropriate, the group, checking for compliance with legal 

provisions, the accurate demarcation of the consolidation perimeter, and the correct 

application of accounting principles. 

Review internal control and risk management systems on a regular basis, so main risks are 

properly identified, managed and disclosed. 

Monitor the independence and efficacy of the internal audit function; propose the 

selection, appointment, reappointment and removal of the head of internal audit; propose 

YES 

the department’s budget; receive regular report-backs on its activities; and verify that 

senior management are acting on the findings and recommendations of its reports. 

Establish and supervise a mechanism whereby staff can report, confidentially and, if 

necessary, anonymously, any irregularities they detect in the course of their duties, in 

YES 

particular financial or accounting irregularities, with potentially serious implications for 

the firm. 

Make recommendations to the board for the selection, appointment, reappointment and 

YES 

removal of the external auditor, and the terms and conditions of his engagement. 

Receive regular information from the external auditor on the progress and findings of the 

audit programme, and check that senior management are acting on its recommendations. YES 

Monitor the independence of the external auditor. YES 

In the case of groups, the Committee should urge the group auditor to take on the auditing 

YES 

of all component companies. 

B.2.3 Describe the organisational and operational rules and the responsibilities attributed to each of the 

Board committees. 

Name of committee 



43 

305 

YES 

YES

AR 11 

APPOINTMENTS AND REMUNERATION COMMITTEE (regulated by article 15 of the 

Regulations of the Board of Directors and by article 37 of the By-laws). 

FUNCTIONS: 

According to article 15.2 of the Regulations of the Board of Directors, the Committee’s 

functions are: 

a) To propose to the Board the criteria to be followed for its composition and for choosing 

the directors, in particular: 

(i) To evaluate the skills, knowledge and experience required of Board members; 

(ii) To define the roles and capabilities required of the candidates to fill each vacancy, and to 

decide upon the time and dedication necessary for them to perform their duties properly. 

b) To formulate, with criteria of objectivity and meeting social interests, the proposals for 

appointing new directors and ratifying current ones (section 2 of article 19 of these 

regulations), as well as appointing members of all the Board committees. It shall likewise 

formulate, with the same criteria as described above, the proposals for appointing members 

of the Board and its committees. 

Any board member may suggest directorship candidates to the Nomination Committee for 

its consideration. 

c) To propose to the Board the remuneration policy for directors and senior executives 

pursuant to article 24, as well as the basic conditions of senior management contracts. To 

propose to the Board the amount of remuneration payable to directors under all headings, 

and report on any remuneration proposals for senior executives that the Chairman may 

submit to the Board and the remuneration paid to other executives who, though not forming 

part of senior management, receive significant pay, particularly in the form of bonuses, and 

whose activities may have a material impact on the Group's risk exposure. 

d) To ensure the transparency of remuneration and its inclusion in the annual report in the 

section on the remuneration of Board members. 

e) To report on the appointment and removal of the Secretary of the Board and of senior 

executives proposed to the Board by the Chairman. 

f) To ensure that directors fulfil the obligations set out in articles 28 and 29 of the 

regulations, issue reports on this matter as well as receive information and, where 

appropriate, issue reports on the measures to be taken against directors who do not meet 

these obligations or fulfil the Group’s Code of Conduct in the Securities Markets. 

g) To review the status and category of directors as stated in the Annual Report on 

Corporate Governance. 

h) To inform on the process of assessing its functioning. 

ORGANISATION AND OPERATION: 

- The make-up and operation of the Appointments and Remuneration Committee are 

described in article 15 of the current Regulations of the Board of Directors. In addition, 

articles 3, 5, 10, 18, 20, 20 bis, 24, 25, 29 and 33 of the Regulations contain specific rules 

concerning its activity. 

- The Appointments and Remuneration Committee will have at least three directors and a 

maximum of five, all external and non-executive directors. The committee shall have a 

majority of independent directors and will appoint its Chairman from among its members. It 

is currently comprised of three independent directors, one of whom is the Chairman. 

- Members of the Appointments and Remuneration Committee are appointed by the 

Board, with regard to their knowledge, aptitudes and experience and the functions of 

the committee. 

- The Appointments and Remuneration Committee will meet as many times as it is called by 

the committee or by its Chairman and, at least, twice a year. Any employee of the Bank or 

someone not working for it can be asked to attend the committee. In 2011, the committee 

met on five occasions 

- The secretary is Monica Lopez-Monis Gallego, Secretary of the Board of Directors. 

The minutes of committee meetings should be sent to all Board members. 

Committee 


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DELEGATED RISKS COMMITTEE 


DELEGATED RISKS COMMITTEE: In furtherance of the powers recognised in 

article 31 of the By-laws and article 12 of the Regulations of the Board of the Directors, 

at its meeting on 28 February 2006, the Board agreed to set up a Delegated Risks 

Committee comprising a minimum of three members. Its membership and role are 

governed by Article 35 of the By-laws and Article 15a of the Board Regulations. 

FUNCTIONS: 

1. To propose a risk strategy and the policies, methods and procedures to be applied to 

granting, evaluating and recording all risk transactions entered into by the Bank, and to 

submit these for approval by the Board of Directors. 

2. To approve risk operations for each customer or Group, within the risk authorisation 

system established at the Bank. 

3. To carry out periodical assessments of the risks contained in portfolios, with the dual 

purpose of identifying credit quality and obtaining a correct risk-return trade-off. 

4. To carry out a periodical check and verify all systems, valuation processes and 

methodologies and criteria used by the Bank to approve transactions, and to a greater 

extent, to ensure the efficient working of the risk function. To determine the risk reporting 

processes ("scorecards), which must be submitted to the Executive Committee and the 

Board of Directors. 


- It is comprised of four directors, two of whom are executive and the other two are 

external independent. The Chairman is an executive director. 

- The Delegated Risks Committee will meet as many times as it is called by the 

committee itself or by its Chairman. The committee may request the attendance of any 

Bank employee or any other unrelated third party it deems fit. In 2010, the committee 

met on 51 occasions. 

- The committee’s functions are governed by the same regulations as those applicable to 

the Board of Directors, as set forth at law, in the Bank’s By-laws and in the Regulations of 

the Board of Directors. 


- The minutes of committee meetings should be sent to all Board members. 

The Risk Committee is governed by Article 15 bis of the Regulations of the Board Of 

Directors. 

Committee 



EXECUTIVE COMMITTEE (article 13 of the Regulations of the Board of Directors and 

article 34 of the By-laws) 

POWERS: 

All powers of the Board of Directors have been permanently delegated to the Executive 

Committee, except those reserved for the plenary session of the Board as stipulated in 

article 3 of its Regulations. These are: 

The non-delegable duties and powers set out in Article 3 are guided by the principle that it 

is the Board’s policy to delegate the Company’s ordinary management to its executive 

bodies and management team and focus its activity on the general function of determining 

the Company’s strategy and the organization required to put them into practice, as well as 

supervising and monitoring management to meet the targets fixed, honouring the 

corporate purpose of and the Company’s interests. The Board shall, without delegating, 

directly fulfil the responsibilities inherent in this duty and especially the following: 

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To approve the policies and strategies adopted by the Bank, and in particular: 

i. The strategic or business plan, management targets and annual budgets; 

ii. Corporate governance policy; 

iii. Corporate social responsibility policy; 

iv. The remuneration policy and basic conditions of the contracts of senior executives, 

following the proposal of the Appointments and Remuneration Committee; 

v. The remuneration of directors in accordance with article 24, following a proposal of the 

Appointments and Remuneration Committee; 

vi. General risk policy; 

vii. Dividend policy; 

viii. Policy regarding treasury shares and, in particular, the limits applied; 

ix. The policies on information and communicating with shareholders, the markets and 

public opinion. The Board shall approve the Annual Report on Corporate Governance, and 

shall be responsible for supplying the markets with rapid, precise and reliable information, 

especially with regard to the shareholding structure, material amendments to the rules of 

governance, related transactions of particular importance and the treasury stock. 

The following matters are also within the Board's exclusive purview: 

a) Approve the Regulations of the Board of Director’s functioning and internal regime and 

any amendments thereto, having received a report from the Audit and Compliance 

Committee. The Board of Directors shall inform the General Meeting of Shareholders of 

the approval of the Regulations and any amendments thereto, and shall notify the 

Securities and Investments Board thereof, and have them recorded at the Mercantile 

Registry. 

b) Approve the appointment and removal of Top Managers, monitor management activity, 

assess their performance and approve their remuneration. The approval of their 

appointments and remuneration and those of any other executives not comprising top 

management but earning significant remuneration, in particular, variables, whose activities 

may have a material impact on the Group’s risktaking decisions, shall be adopted at the 

proposal of the Company’s chief executive, having received a report from the 

Appointments and Remuneration Committee. 

c) Approve in the terms established in Article 39 of the Company By-laws, at the 

Appointments and Remuneration Committee’s proposal, the Directors’ remuneration, as 

well as, in the case of Executives, any additional remuneration and other terms and 

conditions that the contracts regulating the performance of delegated duties or duties 

different from those inherent in the post of Director, must honour. 

d) Determine the content of the Company's website, and establish the rules for the 

functioning of the shareholder’s electronic forum, provided for in Article 24 of the 

Regulation of the Company’s General Meeting of Shareholders. 

e) Constitute the Board of Directors’ Commissions and Committees, and designate the 

members of these bodies and the posts on the Board and on its Commissions and 

Committees. 

f) In general, make decisions on transactions involving the acquisition and disposal of the 

Company’s major assets and large corporate transactions which, due to the amount or 

special features thereof, are strategic, except when the General Meeting of Shareholders 

is responsible for the approval thereof. 

The Board of Directors is responsible for creating special-purpose institutions and 

companies domiciled in countries or territories regarded as tax havens, as well as for the 

acquisition of stakes individually or jointly attributing control thereof. The decision may be 

adopted by the Executive Committee if there are reasons of urgency that prevent deferring 

approval to the next Board meeting that should ratify the Committee’s decision. 


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The Board of Directors shall perform the other duties assigned under these Regulations 

and, in particular, approve the financial information which the Company, as a listed 

company, must make public periodically, in the terms established in Article 38, and the 

transactions with related parties referred to in Articles 30 and 37, in accordance with the 

rules established therein. 


- The Executive Committee will consist of a maximum of eight members. It is currently 

comprised of six directors (three executive, one proprietary and two independent 

directors). The Board is of the opinion that this meets the efficiency criteria. The 

Chairman of the Board is also a member and currently chairs the committee. 

- The Committee shall meet as many times as the Chairman or, in his/her absence, the 

Vice Chairman, deems appropriate. In 2011, the Executive Committee met on 49 

occasions. 

- All members of the Board who are also not members of the Executive Committee can 

attend the committee’s meetings at least twice a year, and will be called by the Chairman, 

if so requested. 

- The Executive Committee will inform the Board of the main decisions taken at its 

meetings. 



Committee 



AUDIT AND COMPLIANCE COMMITTEE (regulated by article 18 of the By-laws and 

article 14 of the Regulations of the Board of Directors) 

FUNCTIONS: 

As per article 14.2 of the Regulations of the Board of Directors the committee’s functions are as 

follows: 

a) To inform the Shareholders’ Meeting at which the annual financial statements are submitted for 

approval, via the Chairman or Secretary, about issues raised and within the committee’s scope. 

Likewise, the Audit and Compliance Committee shall respond to initiatives, suggestions and 

complaints from shareholders regarding the functions of this committee, which shall be submitted 

by the Bank’s General Secretariat. 

b) To propose to the Board for its submission to the Shareholders’ Meeting the appointment of the 

auditing company, ensuring it is the same for all Group companies, as well as the conditions of the 

contract, the scope of its professional mandate and, where appropriate, the company’s renewal or 

the appointment of another firm. 

c) To review the Bank’s and the Group’s accounts, ensure fulfilment of the legal requirements and 

the correct application of generally accepted accounting principles, as well as report on proposals 

to change the accounting principles and criteria suggested by management. 

d) To supervise internal auditing services. To this end, the head of internal audit shall present an 

annual work programme to the Committee; report to it directly on any incidents arising during its 

implementation; and submit an activities report at the end of each year. In order to execute this 

supervisory role, the Bank’s internal audit services shall meet any requests for information 

received from the Audit and Compliance Committee in furtherance of its duties. 

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e) To supervise the effective internal control of the Company and the risk management systems, 

and discuss with the auditors the significant weaknesses of the internal control system, detected 

in the audit; 

f) To be fully familiar with and supervise the process of preparing and presenting the financial 

information relating to the Company and where appropriate to the Group, reviewing compliance 

with the regulatory requirements, the accurate demarcation of the scope of consolidation, and 

correct application of accounting principles. 

g) To act as the channel of communication between the Board and the auditing company, 

evaluate the results of each audit and the responses of the management team to its 

recommendations and mediate in cases of discrepancies between the firm and management over 

the principles and criteria applied in drawing up financial statements. 

h) To supervise fulfilment of the auditing contract, ensuring that the opinion on the annual financial 

statements and the main contents of the report are drawn up clearly and precisely. 

i) To ensure the independence of the auditor, paying particular attention to those circumstances 

and issues that could put it at risk and any other matters regarding the development process of 

the audit, as well as receiving information and maintaining with the auditor the communications 

envisaged in the legislation on auditing and on the technical rules of auditing. And specifically, 

i. On an annual basis, receive from the Auditor written confirmation of its independence with 

respect to the Company or institutions directly or indirectly connected to the Company, as well as 

information on any type of additional services provided to these institutions by the said Auditor, or 

by persons or institutions related to the latter pursuant to the provisions of the Law on Auditing. 

ii. Require information on the fee for all concepts as a percentage of the auditing firm’s total and 

on the seniority of the partner in the firm responsible for auditing the Bank, as well as alerting the 

firm to the limit set in article 39 of these regulations. 

iii. The Committee should investigate the issues giving rise to the resignation of any external 

auditor. 

iv. The company should notify any change of auditor as a significant event, accompanied by a 

statement of any disagreements arising with the outgoing auditor and the reasons for the same. 

v. Issue annually, prior to the issuing of the external auditor’s report, a report expressing an 

opinion on the independence of the external auditor. In any event, such report should make a 

statement as to the providing of the additional services referred to in the preceding i section. 

j) To review, prior to its release, financial information that the Bank, as a publicly listed company, 

must disclose periodically, and ensure that these are drawn up following the same principles and 

practices used for the annual financial statements. For such purposes, it may decide whether or 

not to commission a limited audit on such information by the independent auditor. 

k) To supervise fulfilment of the Group’s Code of Conduct for the Securities Markets, the 

manuals and procedures to prevent money laundering and, in general, the Bank’s rules of 

governance, and make the necessary proposals for their improvement. The committee is 

also responsible for receiving information and, where appropriate, issuing a report on 

disciplinary measures for senior executives. All of this without detriment to applying the 

rules approved in matters of prevention of money laundering. 

l) To know the reports and inspection activities of the administrative authorities for 

supervision and control and review fulfilment of the actions taken as a result of them. 

m) To adopt the measures needed to: (i) receive, deal with and record complaints received 

by the Bank regarding the generation of financial information, the audit and internal 

controls; and (ii) establish and supervise a mechanism whereby staff can report, 

confidentially and, if necessary, anonymously, any irregularities they detect in the course 

of their duties, in particular financial or accounting irregularities, with potentially serious 

implications for the firm. 


48 

310

n) To report on the proposals to modify the present regulations prior to their approval by 

the Board. 

o) To review internal control and risk management systems on a regular basis, so main 

risks are properly identified, managed and disclosed. 

p) To report on, prior to obtaining approval from the Board or Executive Committee, the 

creation or acquisition of shares in special purpose vehicles or entities resident in 

countries or territories considered tax havens, 

q) To report on related-party transactions submitted for Board approval. 

r) To report on the process of assessing its functioning. 

The internal auditing services are within the Board of Directors sphere and report to it. 

Without detriment to this, the Audit and Compliance Committee shall vouch at all time 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 Audit and Compliance Committee shall receive 

regular information on the activities of internal auditing and shall verify that the top 

management takes into account the conclusions and recommendations of its reports. 


- The Audit and Compliance Committee has a minimum of three and a maximum of five 

members, all of them non-executive directors. It currently comprises four directors, two of 

whom are external independent directors with one being an external proprietary director 

and other external. One of the external independent directors is the Chairman, who boasts 

an impressive curriculum coupled with extensive experience in accounting techniques and 

principles. 

- The Audit and Compliance Committee will meet as many times as it is called by the 

Committee, its Chairman or two of its members, at least, four times a year. One of its 

meetings must be devoted to evaluating the efficiency and fulfilment of the rules and 

procedures of the Bank’s governance and to preparing the information that the Board has 

to approve and include as part of its annual public documents. In 2011 the Audit and 

Compliance Committee met on 15 occasions. The Committee, via its Chairman, reports to 

the Board on the work carried out at the meetings intended for this purpose, or at a 

meeting immediately afterwards when the Chairman of the committee deems it necessary. 



B.2.4 Indicate any advisory or consulting powers and, where applicable, the powers delegated to each of the 

committees: 




ALREADY DESCRIBED IN SECTION B.2.3 ABOVE 


RISK COMMITTEE 






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B.2.5 Indicate, if applicable, any regulations governing the Board committees, where they are made 

available for consultation and any amendments to the same made during the financial year. Indicate 

whether any annual report has been voluntarily drawn up on the activities of each committee. 


APPOINTMENT AND REMUNERATION COMMITTEE 


There are no specific regulations for Board committees as these are governed by the bank Bylaws 

and by the Regulations of the Board of Directors. These Regulations are available on the 

Bank’s website. The composition and structure of the Appointments and Remuneration 

Committee are also available on the website. 




Board committees do not have specific rules and regulations because their rules are 

contained within the Regulations of the Board of Directors. These Regulations are available 

on the bank’s corporate website. A description of functions, composition and procedures is 

available on the bank’s corporate website. 




There are no specific regulations for Board committees as these are governed by the 

Regulations of the Board of Directors. These Regulations are available on the Bank’s 

website. The composition and structure of the Executive Committee are also available on 

the website. 




The Audit and Compliance Committee has written and issued a report on its activities over 

the course of 2011 and a report stating its view on the independence of the auditors of 

companies subject to audit. 

There are no specific regulations for Board committees as these are governed by the 

Regulations of the Board of Directors. These regulations are available on the Bank’s website. 

The composition and structure of the Audit and Compliance Committee are also available on 

the website. 

B.2.6 Indicate whether the composition of the Executive Committee reflects the participation within the 

Board of the different types of directors: 

NO 

If the answer is no, explain the composition of the Executive Committee. 

As set out in previous sections of this report, Banesto has a majority shareholder that owns close to 90% of its 

capital. This distribution of capital, which would otherwise call for an overwhelming presence on the Board of 

proprietary and executive Directors, is not in fact reflected in the composition of that body: non-executive 


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312

Directors enjoy an ample majority, and independent Directors account for more than 50% of the Board. 

Corporate governance considerations have led to a predominance of non-executive Directors on the Board, and 

this same pattern is in evidence on the Executive Committee, which comprises two executive Directors and four 

non-executive Directors (one proprietary Director and three independents). 

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C. Related-party transactions: 

C.1. Indicate whether the Board in full has the right to approve, based on a report from the Audit 

Committee or any other committee responsible for this task, transactions which the company carries out 

with directors, significant shareholders or representatives on the Board, or related parties: 

YES 

C.2 List any relevant transactions entailing a transfer of resources or obligations between the company or 

its group companies and the significant shareholders in the company: 

Name or social 

denomination of 

the significant 

shareholder 

BANCO 

SANTANDER, 

S.A. 

Name or social 

denomination of 

the subsidiary of its 

group 

BANCO ESPAÑOL 

DE CREDITO, 

S.A. 

Nature of its 

relationship 

Corporate 


52 

314 

Nature of the operation 

Selling material, 

intangible, or other 

assets 

Amount (EUR 

thousands) 

258,263 

C.3 List any relevant transactions entailing the transfer of resources or obligations between the company 

or its group companies and the company’s managers or directors: 

C.4 List any relevant transaction undertaken by the company with other companies in its group that are not 

eliminated in the process of drawing up the consolidated financial statements and whose object and 

conditions set them apart from the company’s habitual trading activities: 

C.5 Identify, where appropriate, any conflicts of interest affecting company Directors pursuant to Article 

127 of the Companies Law. 

Name or company name of Director 

ALFONSO LIBANO DAURELLA 

Description of the conflict of interest 

YES 

He abstained from the debate and vote on the proposals submitted by the Board of Directors at its meeting 

on 19 January 2011, which were put to the vote at the Annual General Meeting of 23 February 2011, 

regarding his appointment as a Director. 


ANTONIO BASAGOITI GARCIA-TUÑÓN 

Description of conflict of interest

1. He abstained from the debate and vote on the resolution of the Board of Directors at its meeting on 19 

January 2011, which was put to the vote at the Annual General Meeting of 23 February 2011, regarding 

his appointment as a Director of the Bank. 

2. He abstained from the debate and vote on the resolutions adopted by the Board of Directors at its 

meeting on 23 February 2011, regarding his appointment as a member and as the chairman of the 

Executive Committee of the Bank. 


JOSÉ ANTONIO GARCÍA CANTERA 


1. He abstained from the debate and vote on the resolution of the Board of Directors at its meeting on 19 

January 2011, which was put to the vote at the Annual General Meeting of 23 February 2011, regarding 

his re-election as a Director of the Bank. 

2. He abstained from the debate and vote on the proposals put forward by the Board of Directors at its 

meeting on 23 February 2011, regarding his re-election as a member of the Executive Committee and as 

Chief Executive Officer of the Bank. 




1. He abstained from the debate and vote on the proposals submitted by the Board of Directors at its 

meeting on 19 January 2011, which were put to the vote at the Annual General Meeting of 23 February 

2011, regarding his appointment as a Director. 


meeting on 23 February 2011, regarding his appointment as a member of the Executive Committee and as 

a member and Chairman of the Risk Committee. 


JUAN DELIBES LINIERS 




2011, regarding his re-election as a Director. 


meeting on 23 February 2011, regarding his re-election as a member of the Executive Committee and of 

the Risk Committee. 


JUAN GUITARD MARIN 

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2011, regarding his appointment as a Director. 


meeting on 23 February 2011, regarding his appointment as a member of the Bank’s Audit and 

Compliance Committee. 


MATIAS RODRIGUEZ INCIARTE 




2011, regarding his re-election as a Director. 


meeting on 23 February 2011, regarding his re-election as a member of the Bank’s Audit and Compliance 

Committee. 

C.6 List the mechanisms established to detect, determine and resolve any possible conflicts of interest 

between the company and/or its group, and its Directors, management or significant shareholders. 

- Directors: 

Conflicts of interests involving company directors are regulated by article 29 of the Regulations of 

the Board of Directors. This article stipulates that directors must communicate to the Board any 

situation of direct or indirect conflict of interest and not attend or participate in discussions that 

affect their personal affairs, or that affect someone with whom they are linked. 

Article 28 also deals with obligations of non-competition while article 33 stipulates that directors 

cannot benefit personally, or anyone closely involved with them, from the Bank’s business 

opportunities, unless it stops the activity without the director’s influence being involved and it is 

authorised by the Board, following a report from the Appointments and Remuneration Committee. 

Transactions entered into by the Bank’s directors, with certain exceptions, will require authorisation 

or ratification of the Board of Directors or the Executive Committee, preceded by a favourable 

report from the Audit and Compliance Committee. 

The Board of Directors shall be responsible for regulating and resolving conflicts of interest 

involving directors. 

- Significant shareholders 

Article 37 of the Regulations of the Board of Directors stipulates that: 

The Board of Directors or, in urgent cases, the Executive Committee, shall approve, 

preceded by a favourable report from the Audit and Compliance Committee, company 

transactions with significant shareholders or those represented on the Board or related-parties, 

unless the circumstances described in article 30 exonerating the need to obtain said authorisation 

are deemed to exist. Approval granted by the Executive Committee must be subsequently 

ratified by the Board of Directors. 

- Executives 

The relevant mechanisms are provided in the Code of Conduct regarding Securities Markets, and 

are based on the duty of persons subject to the Code to report any conflict of interest. 


54 

316

The Code is available on the Company’s website. Title I, Chapter III, Section "Disclosure of 

Personal Situations" stipulates this duty of disclosure. Of particular relevance are paragraphs 14 

and 15, transcribed below: 

14. General statement on related parties. All persons subject to the Code shall submit to the 

Compliance Unit, and keep updated at all times, a statement on their personal situation, including 

disclosures on related parties. 

15. Situations of possible conflict. The Group has in place a conflict of interest policy (published on 

the website www.banesto.es) that specifies the processes of identification and management of 

conflicts of interest. 

In this connection, any person subject to the policy shall disclose to the Compliance Unit any state 

of affairs as to related parties or any other factor or circumstance that might, in the view of a fair 

and impartial observer and with respect to a specific action, service or transaction, give rise to an 

actual or contingent conflict of interest. 

Title I, Chapter III, Section “Conduct in the event of Conflicts of Interest” of the Code of Conduct 

regarding Securities Markets governs the actions of persons subject to the Code in situations of 

conflict of interest, based on the “Avoidance of Conflicts” principle, which is further specified in 

section 16 of the Code, pursuant to which: 

16. Avoidance of conflicts, awareness and action pursuant to the Banesto Group Conflicts of 

Interest Policy. A person subject to the policy shall avoid actual or contingent conflicts of interest of 

his/her own or of the Group and, if personally affected by any such conflict, shall abstain from 

taking any decision or, as the case may be, casting a vote in situations arising in that connection, 

and shall disclose such circumstance to any persons that are to take the relevant decisions. Any 

person subject to the policy shall be aware of and apply the Group Conflicts of Interest Policy 

prevailing at the given time and shall accord priority to clients' legitimate interests, acting fairly, 

diligently, loyally, even-handedly and in confidence, subject to proper compliance with the 

requirements of market integrity. The Banesto Group's prevailing Order Execution Policy always 

applies. 

Finally, in compliance with item 119 of Bank of Spain Circular 3/2008, lending to Directors and 

senior executives outside the scope of circumstances permitted under the Circular is subject to 

authorisation from the Board and disclosure to the Bank of Spain. 

Finally, it is highlighted that executives are also subject to the Banesto Code of Conduct, which was 

updated in 2011. The Code sets out the ethical principles and standards of conduct that are to 

guide the actions of Banesto employees. 

C.7 Is more than one Group company listed in Spain? 

NO 

Indicate the listed subsidiaries in Spain: 

55 

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AR 11 

D. - RISK CONTROL SYSTEMS 

�� 

�� 

Risk policy is specified in the Risk chapter of Note 49 to the consolidated financial statements for 

2011, and in the Directors' report for that year. In addition, however, at its meeting of 5 April 2011 

the Board further specified the policy, which hitherto as a general rule had been adopted as part of 

the financial statements and published in the Directors' report and the corporate governance report. 

This further specification was a response to changes undergone at the Bank and to market 

conditions, which warranted a higher profile for the Bank's key risk principles and the overarching 

goals of its risk policy. In line with this, the main points were emphasised of the specific policies to 

be implemented over the year at the proposal of the Business and Risk units. 

Specifically, the guiding principles of the Bank's general risk policy are based on the Bank's 

business model, the supporting vectors of which are: customers – Banesto aims to be the best 

commercial bank; financial strength – a key objective in terms of balance sheet structure, capital 

adequacy, liquidity and profitability; a stronger risk/profitability profile than that of competitors; and 

operational and business efficiency throughout the Bank's entire management model, with a focus 

on service excellence. 

To achieve these goals, the Bank must seek to attract the best people in the industry, and continue 

to implement its commitment to compliance with prevailing legislation, regulatory recommendations 

and best practices; and it must strive to improve every day, for the benefit of its shareholders, 

customers and employees, ethically and professionally, and based on a sustainable model that 

enables the Bank to fulfil its role as a corporate citizen. 

The Bank's overall risk principles are set out below: 

a) Compliance with prevailing laws and regulations and best practices in risk management 

b) Senior management involvement 

c) Independence of the risk area 

The Bank's key management principles are: 

a) Integrated risk management, with a focus on balance sheet structure, capital adequacy and 

liquidity, and profitability 

b) A flexible management model that adapts to market conditions in terms of both policy and 

structure 

c) Use of advanced risk analysis, measurement and quantification technologies 

d) Provision of both inward- and outward-facing services to a high standard of quality 

e) Customer-focused banking based on long-term relationships 

f) Principle of prudence guiding transaction approvals 

g) Early action via monitoring 


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318

h) Recovery model based on value maximization 

The aims of the Bank's risk policy are to: maintain a low, predictable and manageable risk exposure 

at all stages of the cycle; achieve minimal levels of loss and default rates; find the right equilibrium 

in balance sheet structure, liquidity, profitability and capital adequacy; undertake risk management 

as an organization-wide role; deliver customer-focused banking based on in-depth customer 

knowledge, acting ethically and professionally; create a competitive edge in risk management in 

support of business targets; implement proactive management using aggregate and individual 

approaches based on specific models driven by customer types and characteristics; develop the 

industry's best team of risk specialists and put in place pay schemes that reward good risk 

management; and implement a medium-and long-term risk/profitability paradigm. 

Policies in 2011 included: 

a) Improving portfolio quality in the short term (bad debt, non-performing loans, incoming assets, 

threats, outstanding risk in existing and newly signed assets) 

b) Paying special attention to property-related risk, particularly as regards land 

c) Supporting business development in terms of boosting net interest income 

d) Continuing to develop a client-focused banking model in all segments 

e) Improving balance sheet structure by implementing a policy to shorten repayment periods 

f) Improving capital adequacy and liquidity ratios as risk quality and hedging indicators 

g) Moving forward with integration and cooperation across the risk and business areas 

h) Increasing the branch network's involvement in integrated risk management 

i) Improving risk management systems and tools: 1) Analysis and monitoring models. 2) Effective 

management of pre-doubtful debt. 3) Maximising value in debt recovery. 

j) Prospective monitoring by industry and business area. Markets and competition 

D.2 Indicate whether the company and/or group has been exposed to different types of risk 

(operational, technological, financial, legal, reputational, fiscal…) during the year. 

If so, indicate the circumstances and whether the established control systems worked adequately. 

D.3 Indicate whether there is a committee or other governing body in charge of establishing and 

supervising these control systems. 

Explain its duties. 

Name of Committee or Body 

Duties 

OPERATIONAL RISKS COMMITTEE 

YES 

57 

NO 

319

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The Operational Risks Committee, as an institutional body, shall review the figures for the 

various Operational Risk business lines and assess the impact on improving the exposure to 

Operational Risk of the various business areas and units at Banesto. It shall also propose 

new mitigation measures. 

The Committee meets once a month and is comprised of Business Units which generate 

Operational Risk and those which are responsible for informing on or designing mitigation 

measures. 



Duties 

The Delegated Risks Committee’s functions are described in B.2.3 above. 

The Investment and Risks business area reports directly to the CEO and is headed by a 

General Manager. 

In addition, the Internal Control and Compliance Business Area of the Internal Audit Division 

verify the adequacy and correct implementation of the established policies, controls and 

procedures. 


Duties 


The Executive Committee, without prejudice to the powers of the Board of Directors to 

determine risk policy, shall conclude transactions involving amounts that exceed the powers 

delegated to other junior bodies; ensure that the levels of risks assumed, both global and 

individual, meet the objectives set; assess the exposure among major customers, economic 

sectors, types of risk, etc.; and oversee compliance of risk objectives, management tools, 

improvement initiatives and any other issue regarding this matter. 



Duties 

In addition to the functions mentioned above, the Audit and Compliance Committee must 

know the financial information process and the internal control systems (article 14 of the 

Regulations of the Board of Directors). 

�� 

�� 

The Banesto Group operates a range of policies, internal standards and proprietary 

procedures that are specially adapted and appropriate to the Bank's business and size, and 

are reviewed on an ongoing basis so that the Bank keeps in step with best practices in the 

industry. In addition, the Bank's processes are in conformity with applicable statutory 

provisions. These policies, standards and procedures, which are validated by different 

Committees at the highest levels, are audited within an ongoing process of review and 

improvement. 

The Compliance function is implemented: 

- first, by the Audit and Compliance Committee, which oversees compliance with the Bank's 

rules of governance, money-laundering prevention regulations, and Codes of Conduct; 


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– by the Compliance Committee, one of whose duties is to adopt Codes of Conduct and 

their implementing procedures; and, finally, 

– by the Compliance Unit, which operates as the executive arm of the Compliance 

Committee. 

The Compliance function is chiefly concerned with ensuring compliance with prevailing laws 

and regulations. The Compliance area sets in motion the necessary initiatives in partnership 

with other areas to ensure that the Bank has appropriate internal rules in place, and that the 

rules are suitably promulgated and implemented throughout the organisation. Another 

activity in this area is to implement proactive measures to disseminate information about and 

raise awareness of various aspects of Compliance throughout the Bank. 

The process of reviewing and adapting the bank’s activities to regulations in force include 

other initiatives, which are detailed below: 

BANESTO GROUP CODE OF CONDUCT 

The Code of Conduct, which is mandatory for all Group staff, sets out the key ethical 

principles and standards of conduct that are to guide the actions of Banesto employees. In 

2011, the Code was revised and updated in line with legislative changes and with 

developments in best practices that, in the Bank's view, ought to be included. 

Code of Conduct in securities market 

The Code makes general provision, without limitation, for a range of conduct areas. These 

guidelines are further specified by rules that are mandatory for the employees concerned 

with each particular market. The duties established by the Code relate to various issues that 

might affect the conduct of persons subject to the Code, such as their personal transactions, 

duty of confidentiality, conflicts of interest, etc. Internal procedures continued to be reviewed 

in 2011. 

Moreover, the Code makes provision for the treatment of privileged information arising from 

transactions, and for the separate areas and Chinese walls that must be in place to assure 

the proper handling of information so as to prevent practices that might constitute insider 

trading or conflicts of interest. 

In addition, a specific code of conduct is in existence for employees who prepare and 

circulate analysis aimed at the securities market. The code stipulates the conditions and 

restrictions under which such activities are to be performed and the duties binding those 

who perform them. The necessary resources have been provided for this activity to be 

suitably monitored. 

PRODUCT MARKETING 

The Products Committee approves proposals to market new products and services and 

establishes the requirements to be taken into account when selling them. 

In 2011, the Products Committee continued to review the marketing requirements of asset- 

and liability-side products to improve marketing processes as regards transparency, 

information to clients, and product manager roles. Several measures have been taken 

forward in this area. Furthermore, the Products and Services Marketing Monitoring 

Committee, a subcommittee of the Products Committee created in late 2009, has raised the 

frequency of its meetings to boost its monitoring of the Bank’s products. Its role is to review 

each item, frame specific policies, and propose product improvements as necessary. What 

is more, through these committees and the Compliance Unit, further adaptations and 

improvements have been made in response to the new requirements under the Securities 

Market Act (Ley del Mercado Valores) arising from MiFID, the European Community 

Markets in Financial Instruments Directive, with a special focus on the issues surrounding 

the contractual documentation of the Bank’s products. 

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Training continues to be a high priority. The Bank's marketing network undertakes specific 

training programmes to improve employee knowledge of each new product or service before 

it is launched. Alongside its training activities, the Bank has network-wide quality control 

systems in place to monitor product marketing processes. In 2011, a range of initiatives 

were carried out to boost product knowledge across the branch network and raise sale 

quality. 

PREVENTION OF MONEY-LAUNDERING AND FUNDING OF TERRORIST ACTIVITIES 

Prevention of money-laundering and the funding of terrorist activities remains a high priority 

of the Banesto Group. In 2011, therefore, the Bank continued to enhance training and 

systems in this area. 

In compliance with its statutory duties, the Bank has in place control systems, regulations 

and procedures which enable it to identify, assess and prevent the risk of its branch network 

being used to launder the proceeds of criminal activities or to fund terrorism. The Banesto 

Group follows best practices in this area, complies with all statutory standards, and fully 

cooperates with the competent authorities. 

The enactment in 2010 of Spain’s Prevention of Money-Laundering and Funding of Terrorist 

Activities Act (Ley 10/2010) brought about a major change in the way that client 

relationships are established. All clients without exception must be exhaustively identified; in 

the case of corporate clients, the ultimate beneficial owners must be made known. A risk 

level is assigned to each client. These requirements mean that clients are asked to provide 

further documentation and new processes have to be implemented. 

With these purposes in mind and in response to the new requirements, the Bank set afoot a 

review of its documentation and training processes to ensure that clients are properly 

identified and to verify that their purported business is genuine. As to training, in 2011 faceto-face 

and online sessions continued to be provided to all Banesto Group employees. 

REPUTATION RISK 

Reputation risk arises from adverse opinion on the Bank's services. In quantitative terms, an 

impaired reputation can hurt earnings or capital adequacy; qualitatively, business 

expectations and development may worsen. To minimise reputational risk, the Banesto 

Group takes ongoing measures to identify sensitive situations, particularly in the marketing 

of services and asset- and liability-side products. 

E – THE GENERAL MEETING 

E.1 Indicate the quorum required for constitution of the General Meeting established in the Company's 

Articles of Association. Describe any differences from the minimum regime set out in the Companies 

law (LSA) 


NO 

Difference in % of quorum as 

set out in art. 102 of the LSA 

for certain circumstances 

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Difference in % of quorum as 

set out in art. 103 of the LSA 

for certain circumstances in 

Quorum required for first call 0 0 

Quorum required for second 

call 

0 0

E.2 Indicate and describe the differences required for adopting shareholder agreements from the 

minimum regime set out in the Companies law (LSA). 

Describe any differences from the provisions established in the Companies Law. 

NO 

E.3 List all shareholders’ rights regarding the General Meetings other than those established under the 

Companies Law. 

E.4 Indicate the measures adopted to encourage the participation of shareholders in the General 

Meetings. 

Encouraging the participation of shareholders in the General Meetings is a precise objective of the 

Board of Directors. An indication of this is article 35 of the Regulations which states that: 

"The Board will seek informed participation by shareholders at Shareholder Meetings and will adopt 

whatever measures are needed to enable the Meeting to exercise its functions in accordance with 

the law and its By-laws. 

In particular, the Board will ensure that shareholders, before the Meeting, have all the information 

required by law and, through the secretary and/or deputy secretary, tend to the information 

requests regarding the agenda formulated by shareholders before the Meeting. The Chairman and 

any director or the Board’s secretary or deputy secretary will also tend to questions regarding the 

agenda made by shareholders during the Meeting. The Chairman and any director or the Board’s 

secretary or deputy secretary will also tend to questions regarding the agenda made by 

shareholders during the Meeting. 

The Bank’s By-laws were amended at the General Meeting of 27 June 2007. The requirement that 

shareholders hold a minimum number of shares to be able to attend and vote at the meetings was 

abolished. Holders of just one share are now allowed to attend and vote with shareholders being 

granted one vote per every share held. In addition, and in accordance with Recommendation 6 of 

the Unified Code of Good Governance, it was agreed that financial intermediaries may attend as 

authorised shareholders but must act on behalf of different customers providing they duly accredit 

their standing via the procedure established by the Board of Directors. They may therefore request 

attendance cards for the General Meeting on behalf of their customers when attendance is required 

to comply with the instructions of their principals. 

The right of information prior to the holding of a Shareholder Meeting is stipulated in article 7 of the 

Regulations of the General Meetings. Notwithstanding the above, and as part of the specific 

measures adopted to encourage participation, the following were also are also approved: 

- From the date on which the General Meeting is called, the following information shall be available 

on the company's corporate website as per article 6 of the Regulations of the General Meeting: 

a) The full text of the calling. 

b) The text of all the proposals formulated by the Board in relation to points on the agenda. 

c) The documents or information which, in accordance with the law, must be made available to 

shareholders on matters in the agenda as of the date of the calling. 

d) Type of card of attendance and, where appropriate, the other documents that must be used for 

the delegation of votes. 

e) The means of communication at a distance which, in accordance with the law, the By-laws and 

these regulation shareholders can use to make effective their rights of representation, grouping, 

voting and, where appropriate, attendance, as well as the requirements, periods and procedures 

established for their use. 

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f) Information, where appropriate, on systems and procedures that facilitate following the Meeting, 

such as simultaneous translation, dissemination via audiovisual means, information in other 

languages, etc. 

g) Information on the channels of communication with the Unit of Relations with Shareholders, in 

order to be able to gather information or make suggestions or proposals, in accordance with the 

applicable regulations. 

h) The requirements to be met by financial intermediaries who attend as authorised shareholders, 

but who are acting on behalf of different customers, to request as many voting cards as they have 

customers, when this is necessary to comply with the instructions received from their different 

customers. 

- Postal and proxy voting is allowed. 

- The mechanisms required for proxy and electronic voting have been included on the Bank’s 

website 

- Mechanisms have been developed to enable distance attendance at the General Meetings via the 

Bank’s website. These shareholders may exercise their information, proxy and voting rights 

electronically. 

- The Investor Relations Department offers shareholders a personalised service not just on 

occasion of the General Meeting but all year round. 

With a view to the General Meeting to be held on 29 February 2012, a motion is to be laid before 

the shareholders to alter the By-laws and the Regulations of the Shareholders’ Meetings in order 

that, inter alia, a shareholder may give a proxy to any person he/he wishes, without need of such 

person also being a shareholder. Moreover, the rules on financial intermediaries are to be modified 

in accordance with the Restated Corporate Enterprise Act (Texto Refundido de la Ley de 

Sociedades de Capital). 

E.5 Indicate whether the General Meeting is presided by the Chairman of the Board of Directors. List 

the measures, if any, adopted to guarantee the independence and correct operation of the General 

Meeting: 

YES 

Describe the measures 

The By-laws and the Regulations of Shareholders’ Meetings stipulate that the Chairman shall preside the 

meeting. Any shareholder, either in person or by electronic means, may attend and vote and request 

clarifications on items to be included on the agenda and, if they have the necessary share capital, may request 

the Bank to publish an addendum to the call notice including one or more items on the agenda. 

E.6 Indicate the amendments, if any, made to the General Meeting Regulations during the year. 

At the Annual General Meeting of 23 February 2011, shareholders were asked to consider the latest 

modification to the Regulations of Shareholders’ Meetings. The changes were intended to bring the 

rules into line with the Corporate Restructuring Act (Ley 3/2009) and the Restated Corporate Enterprise 

Act (Texto Refundido de la Ley de Sociedades de Capital), enacted by Royal Legislative Decree 

1/2010 ("the Corporate Enterprise Act"). In addition, Royal Decree Law 13/2010 changed the 

requirements for convening a General Meeting; this change necessitated an alteration of the By-laws 

dealing with this matter. The alterations adopted at the General Meeting were designed to achieve two 

main objectives: to bring the By-laws into line with the new statutory provisions referred to above, and 

to adapt the powers of the General Meeting in alignment with the proposed changes to the By-laws. 


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The Board's report on the motions to be laid before the shareholders in General Meeting is available on 

the corporate website, www.banesto.es/webcorporativa. 

E.7 Indicate the attendance figures for General Meetings held in 2009 

Date of 

General 

Meeting 

% attending in 

person 

Details of attendance 

% by proxy 

63 

325 

% remote voting 

Electronic 

means 

Other 

Total 

24/02/2010 88.322 2.373 0.000 1.106 91.801 

E.8 Briefly describe the resolutions adopted at the General Meetings held during the year and the 

percentage of votes by which each resolution was adopted. 

Annual General Meeting of 23 February 2011: 

AGENDA 

First. Examine and approve, in its case, the annual financial statements (balance sheet, profit and 

loss account) and the Management Report of Banco Español de Crédito, S.A. and its Consolidated 

Group, as well as the Social Management Report, all for 2010. The resolution was carried by 

621,911,117 votes in favour, 105,374 votes against and 23,374 abstentions. 

Second. Examine and approve the proposed distribution of earnings in 2010. 

The resolution was carried by 622,021,601 votes in favour, 2,830 votes against and 15,434 

abstentions. 

Third A. Set the number of Board members for 2011 at 14. The resolution was carried by 

622,988,724 votes in favour, 31908 votes against and 19,233 abstentions. 

Third B. Ratify the appointment of the proprietary Director, Mr. Antonio Basagoiti Garcia-Tuñón, 

carried out by co-option by the Board. 


abstentions. 

Third C. Ratify the appointment of the non-executive Director, Mr. José Corral Lope, carried out by 

co-option by the Board. 


abstentions.

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Third D. Ratify the appointment of the independent Director, Mr. Alfonso Líbano Daurella, carried 

out by co-option by the Board. 

The resolution was carried by 621,990.177 votes in favour, 26,464 votes against and 23,224 

abstentions. 

Third E. Ratify the appointment of the proprietary Director, Mr. Juan Guitard Marín, carried out by 

co-option by the Board. 


abstentions. 

Third F. Re-elect as executive Director Mr. José Antonio Garcia Cantera. 


abstentions. 

Third G. Re-elect as executive Director, Mr. Juan Delibes Liniers. 


abstentions. 

Third H. Re-elect as proprietary Director, Mr. Matías Rodríguez Inciarte. 


abstentions. 

Fourth. Re-elect the auditing firm. 


abstentions. 

Fifth. Approve, in its case, the new By-laws and revoke the prevailing ones. The resolution was 

carried by 621,981,248 votes in favour, 15,274 votes against and 43,343 abstentions. 

Sixth. Approve changes to the Regulations of Shareholders’ Meetings. 


abstentions. 

Seventh. Remuneration of Directors through the delivery of shares. 


abstentions. 

Eighth. Authorise the Board to interpret, rectify, complement, execute, substitute the powers and 

adapt the agreements adopted by the Shareholders’ Meeting. 


abstentions. 

Ninth. Report on the remuneration policy for Directors. Consultative vote 


abstentions. 

E.9 Indicate, if appropriate, the minimum number of shares required to attend the General Meeting. 

NO 


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Number of shares required to attend the General Meeting. 

E.10 Indicate and explain the policies pursued by the company with reference to proxy voting at the 

General Meeting. 

Pursuant to Article 522 of the Restated Corporate Enterprise Act, shareholders entitled to vote at a 

General Meeting may give proxies to any person they wish. At the Annual General Meeting to be 

held on 29 February 2012, shareholders will be asked to consider alterations to the By-laws and the 

Regulations of Shareholders’ Meetings to bring those sets of provisions into line with the new 

statutory requirements. However, the Board has already made provision for compliance, and at the 

upcoming General Meeting proxy rights will be exercisable in accordance with the new rules. For 

these purposes, proxies may be given as follows: 

- By postal delivery or correspondence, with dispatch to the Company of the hardcopy document 

granting the proxy, or a Meeting attendance card issued by the Bank, with the proxy-granting 

section of the printed form filled in and signed, which section includes a request for instructions for 

exercise of voting rights and the way in which the proxy-holder must vote if no precise instructions 

are given. Attendance, proxy and voting cards expressly set out all items on the Agenda. 

- Electronically 

Whatever the chosen proxy-granting procedure, the person to whom a proxy is granted must advise 

the Bank of his/her acceptance of the proxy. The person thus accepting must therefore sign in the 

appropriate space on the proxy card or other document granting the proxy. If a shareholder gives a 

proxy electronically, the appointee, if he/she is also a shareholder, must signify his/her acceptance 

using the application provided for the purpose on the Bank website, by an electronic signature 

based on an electronic certificate issued by the Company as an entity providing certification 

services. If the proxy-holder is not a shareholder, acceptance of the proxy must be notified by 

electronic mail. 

If a proxy is granted to the Chairman, a Director or the Secretary to the Board, such notice of 

acceptance is deemed to be effected on receipt of the electronic or distance proxy. 

To ensure voting rights are exercised, voting cards warn that: 

- If no proxy is named, this shall be granted to the Chairman of the Board. 

- If the proxy has been granted to the Chairman of the Board and a conflict of interests arises in the voting 

on any of the proposals submitted to the General Meeting, regardless of whether they are contained 

in the agenda, the Secretary of the Board shall be granted said proxy. 

- If no voting administration instructions are given, the proxy shall vote in favour of the Board’s 

proposals. 

- Should items not included in the agenda be submitted to vote, the shareholder granting the 

proxy may either instruct its proxy to abstain from voting or fail to issue any instructions. In the 

latter case, the proxy shall vote as he/she sees fit. 

- Only one proxy per Meeting is permitted and non-attendance, either physical or remote, of the 

shareholder holding the proxy, shall mean that his/her shares are not included in the quorum. 

- A proxy is always revocable. The physical or remote attendance of a shareholder who has granted 

a proxy, and subsequent remote voting, shall bring about the cancellation of said proxy, regardless 

of the date. 

E.11 Indicate whether the company is aware of the institutional investors’ policy on whether or not to 

participate in the company’s decision-making. 

NO 

E.12 Indicate the address and mode of access to Corporate Governance content on your website. 

Corporate governance information is available on www.banesto.es/webcorporativa. Click the 

corporate governance tab, and a range of further tabs will then become available: General Meeting, 

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Board of Directors, Corporate Governance, By-laws, Board Regulations, Regulations of 

Shareholders’ Meetings, Framework for the relationship between Santander and Banesto, and 

Compliance. 


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F. DEGREE OF COMPLIANCE WITH CORPORATE GOVERNANCE 

RECOMMENDATIONS 

Indicate the degree of the company's compliance with Corporate Governance recommendations. Should 

the company not comply with any of the afore-mentioned recommendations, explain the recommendations, 

rules, practices or criteria the company applies. 

1. The bylaws of listed companies should not place an upper limit on the votes that can be cast by a single 

shareholder, or impose other obstacles to the takeover of the company by means of share purchases on 

the market. 

See headings: A.9, B.1.22, B.1.23 and E.1, E.2 

Met 

2. When a dominant and a subsidiary company are stock market listed, the two should provide detailed 

disclosure on: 

a) The type of activity they engage in, and any business dealings between them, as well as between 

the subsidiary and other group companies; 

b) The mechanisms in place to resolve possible conflicts of interest. 

See headings: C.4 and C.7 

Not applicable 

3. Even when not expressly required under company law, any decisions involving a fundamental corporate 

change should be submitted to the General Meeting for approval or ratification. In particular: 

a) The transformation of listed companies into holding companies through the process of 

subsidiarisation, i.e. reallocating core activities to subsidiaries that were previously carried out by the 

originating firm, even though the latter retains full control of the former; 

b) Any acquisition or disposal of key operating assets that would effectively alter the company's 

corporate purpose; 

c) Operations that effectively add up to the company's liquidation. 

Met 

4. Detailed proposals of the resolutions to be adopted at the General Meeting, including the information 

stated in Recommendation 28, should be made available at the same time as the publication of the 

Meeting notice. 

Met 

5. Separate votes should be taken at the General Meeting on materially separate items, so shareholders 

can express their preferences in each case. This rule shall apply in particular to: 

a) The appointment or ratification of directors, with separate voting on each candidate; 

b) Amendments to the bylaws, with votes taken on all articles or groups of articles that are materially 

different. 

See heading: E.8 

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Met 

6. Companies should allow split votes, so financial intermediaries acting as nominees on behalf of different 

customers can issue their votes according to instructions. 

See heading: E.4 

Met 

7. The Board of Directors should perform its duties with unity of purpose and independent judgement, 

according all shareholders the same treatment. It should be guided at all times by the company's best 

interest and, as such, strive to maximise its value over time. 

It should likewise ensure that the company abides by the laws and regulations in its dealings with 

stakeholders; fulfils its obligations and contracts in good faith; respects the customs and good practices of 

the sectors and territories where it does business; and upholds any additional social responsibility 

principles it has subscribed to voluntarily. 

Met 

8. The board should see the core components of its mission as to approve the company's strategy and 

authorise the organisational resources to carry it forward, and to ensure that management meets the 

objectives set while pursuing the company's interests and corporate purpose. As such, the board in full 

should reserve the right to approve: 

a) The company's general policies and strategies, and in particular: 

i) The strategic or business plan, management targets and annual budgets; 

ii) Investment and financing policy; 

iii) Design of the structure of the corporate Group; 

iv) Corporate governance policy; 

v) Corporate social responsibility policy; 

vi) Remuneration and evaluation of senior officers; 

vii) Risk control and management, and the periodic monitoring of internal information and control 

systems; 

viii) Dividend policy, as well as the policies and limits applying to treasury shares. 

See headings: B.1.10, B.1.13, B.1.14 and D.3 

b) The following decisions: 

i) On the proposal of the company's chief executive, the appointment and removal of senior officers, 

and their compensation clauses. 

See heading: B.1.14 

ii) Directors' remuneration and, in the case of executive directors, the additional consideration for 

their management duties and other contract conditions. 


iii) The financial information that all listed companies must periodically disclose. 

iv) Investments or operations considered strategic by virtue of their amount or special 

characteristics, unless their approval corresponds to the General Meeting; 

v) The creation or acquisition of shares in special purpose vehicles or entities resident in countries 

or territories considered tax havens, and any other transactions or operations of a comparable 

nature whose complexity might impair the transparency of the Group. 

c) Transactions which the company conducts with directors, significant shareholders, shareholders with 

board representation or other persons related thereto (“related-party transactions”). 

However, board authorisation need not be required for related-party transactions that 

simultaneously meet the following three conditions: 

1. They are governed by standard form agreements applied on an across-the-board basis to a large 

number of customers; 

2. They go through at market rates, generally set by the person supplying the goods or services; 

3. Their amount is no more than 1% of the company's annual revenues. 

It is advisable that related-party transactions should only be approved on the basis of a favourable report 

from the Audit Committee or some other committee handling the same function; and that the directors 

involved should neither exercise nor delegate their votes, and should withdraw from the meeting room while 

the board deliberates and votes. 

Ideally the above powers should not be delegated with the exception of those mentioned in b) and c), 

which may be delegated to the Executive Committee in urgent cases and later ratified by the full board. 

See headings C.1 and C.6 

Met 


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9. In the interests of maximum effectiveness and participation, the Board of Directors should ideally 

comprise no fewer than five and no more than fifteen members. 


Met 

10. External directors, proprietary and independent, should occupy an ample majority of board places, 

while the number of executive directors should be the minimum practical bearing in mind the 

complexity of the corporate group and the ownership interests they control. 

See headings: A.2, A.3, B.1.3 and B.1.14 

Met 

11. In the event that some external director can be deemed neither proprietary nor independent, the 

company should disclose this circumstance and the links that person maintains with the company or its 

senior officers, or its shareholders. 


Met 

12. That among external directors, the relation between proprietary members and independents should 

match the proportion between the capital represented on the board by proprietary directors and the 

remainder of the company's capital. 

This proportional criterion can be relaxed so the weight of proprietary directors is greater than 

would strictly correspond to the total percentage of capital they represent: 

1. In large cap companies where few or no equity stakes attain the legal threshold for significant 

shareholdings, despite the considerable sums actually invested. 

2. In companies with a plurality of shareholders represented on the board but not otherwise related. 

See headings: B.1.3, A.2 and A.3 

Met 

13. The number of independent directors should represent at least one third of all board members. 


Met 

14. The nature of each director should be explained to the General Meeting of Shareholders, which will 

make or ratify his or her appointment. Such determination should subsequently be confirmed or 

reviewed in each year’s Annual Corporate Governance Report, after verification by the Nomination 

Committee. The said Report should also disclose the reasons for the appointment of proprietary 

directors at the urging of shareholders controlling less than 5% of capital; and explain any rejection of a 

formal request for a board place from shareholders whose equity stake is equal to or greater than that 

of others applying successfully for a proprietary directorship. 

See headings: B.1.3 and B.1 4 

Met 

15. When women directors are few or non existent, the board should state the reasons for this situation 

and the measures taken to correct it; in particular, the Nomination Committee should take steps to 

ensure that: 

a) The process of filling board vacancies has no implicit bias against women candidates; 

b) The company makes a conscious effort to include women with the target profile among the 

candidates for board places. 

See headings: B.1.2, B.1.27 and B.2.3 

Met 

16. The Chairman, as the person responsible for the proper operation of the Board of Directors, should 

ensure that directors are supplied with sufficient information in advance of board meetings, and work to 

procure a good level of debate and the active involvement of all members, safeguarding their rights to 

freely express and adopt positions; he or she should organise and coordinate regular evaluations of the 

board and, where appropriate, the company’s chief executive, along with the chairmen of the relevant 

board committees. 


Met 

17. When a company's Chairman is also its chief executive, an independent director should be 

empowered to request the calling of board meetings or the inclusion of new business on the agenda; to 

coordinate and give voice to the concerns of external directors; and to lead the board’s evaluation of 

the Chairman. 

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Not applicable 

18. The Secretary should take care to ensure that the board's actions: 

a) Adhere to the spirit and letter of laws and their implementing regulations, including those issued 

by regulatory agencies; 

b) Comply with the company bylaws and the regulations of the General Meeting, the Board of 

Directors and others; 

c) Are informed by those good governance recommendations of the Unified Code that the company 

has subscribed to. 

In order to safeguard the independence, impartiality and professionalism of the Secretary, his or her 

appointment and removal should be proposed by the Nomination Committee and approved by a full 

board meeting; the relevant appointment and removal procedures being spelled out in the board's 

regulations. 


Met 

19. The board should meet with the necessary frequency to properly perform its functions, in 

accordance with a calendar and agendas set at the beginning of the year, to which each director may 

propose the addition of other items. 


Met 

20. Director absences should be kept to the bare minimum and quantified in the Annual Corporate 

Governance Report. When directors have no choice but to delegate their vote, they should do so with 

instructions. 

See headings: B.1.28 and B.1.30 

Met 

21. When directors or the Secretary express concerns about some proposal or, in the case of directors, 

about the company's performance, and such concerns are not resolved at the meeting, the person 

expressing them can request that they be recorded in the minute book. 

Met 

22. The board in full should evaluate the following points on a yearly basis: 

a) The quality and efficiency of the board's operation; 

b) Starting from a report submitted by the Nomination Committee, how well the Chairman and chief 

executive have carried out their duties; 

c) The performance of its committees on the basis of the reports furnished by the same. 


Met 

23. All directors should be able to exercise their right to receive any additional information they require 

on matters within the board's competence. Unless the bylaws or board regulations indicate otherwise, 

such requests should be addressed to the Chairman or Secretary. 


Met 

24. All directors should be entitled to call on the company for the advice and guidance they need to 

carry out their duties. The company should provide suitable channels for the exercise of this right, 

extending in special circumstances to external assistance at the company's expense. 


Met 

25. Companies should organise induction programmes for new directors to acquaint them rapidly with 

the workings of the company and its corporate governance rules. Directors should also be offered 

refresher programmes when circumstances so advise 

Met 


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26. Companies should require their directors to devote sufficient time and effort to perform their duties 

effectively, and, as such: 

a) Directors should apprise the Nomination Committee of any other professional obligations, in case 

they might detract from the necessary dedication; 

b) Companies should lay down rules about the number of directorships their board members can 

hold. 

See headings: B.1.8, B.1.9 and B1.17 

Met 

27. The proposal for the appointment or renewal of directors which the board submits to the General 

Meeting, as well as provisional appointments by the method of co-option, should be approved by the 

board: 

a) On the proposal of the Nomination Committee, in the case of independent directors. 

b) Subject to a report from the Nomination Committee in all other cases. 


Met 

28. Companies should post the following director particulars on their websites, and keep them 

permanently updated: 

a) Professional experience and background; 

b) Directorships held in other companies, listed or otherwise; 

c) An indication of the director's classification as executive, proprietary or independent; in the case 

of proprietary directors, stating the shareholder they represent or have links with. 

d) The date of their first and subsequent appointments as a company director, and; 

e) Shares held in the company and any options on the same. 

Met 

29. Independent directors should not stay on as such for a continuous period of more than 12 years. 


Explain 

The Board does not consider it appropriate to adopt Recommendation 29 as this would entail 

disposing of directors whose presence on the Board is in the company’s interest due to their 

abilities, contribution and experience. This presence is not deemed to affect their independence. 

In any event, directors may not be appointed for any term of office in excess of the six years 

prescribed by applicable law or the By-laws, this notwithstanding their right to be re-elected. In 

addition, as stipulated in article 17 of the company’s By-laws, a fifth of the Board must be re-elected 

on an annual basis. 

30. Proprietary directors should resign when the shareholders they represent dispose of their 

ownership interest in its entirety. If such shareholders reduce their stakes, thereby losing some of their 

entitlement to proprietary directors, the latter’s number should be reduced accordingly. 

See headings: A.2, A.3 and B.1.2 

Met 

31. The Board of Directors should not propose the removal of independent directors before the expiry 

of their tenure as mandated by the bylaws, except where just cause is found by the board, based on a 

proposal from the Nomination Committee. In particular, just cause will be presumed when a director is 

in breach of his or her fiduciary duties or comes under one of the disqualifying grounds enumerated in 

section III.5 (Definitions) of this Code. 

The removal of independents may also be proposed when a takeover bid, merger or similar 

corporate operation produces changes in the company’s capital structure, in order to meet the 

proportionality criterion set out in Recommendation 12. 

See headings: B.1.2, B.1.5 and B.1.26 

Explain 

The Board considers that unity is essential when determining its composition. All directors must act 

in the interest of the Bank and its shareholders and share the same responsibility and liability for 

Board decisions. 

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The Board is of the opinion that all directors should perform their duties with independent 

judgement, based on the solvency, integrity, reputation and professionalism of all of them. 

The Board is of the opinion that treating independent directors in a different manner to other 

directors would run contrary to its principles. It shall therefore not accept Recommendation 31 

stating that the Board of Directors should not propose the removal of independent directors before 

the expiry of their tenure, except where just cause is found by the Board following a proposal from 

the Appointments and Remuneration Committee. Just cause will be presumed when a director is in 

breach of his or her fiduciary duties or when his or her independence is compromised. In this case, 

the Board’s decision not to accept Recommendation 31 is also based on the fact that there may be 

reasons in the Bank’s interest which, in the Board's opinion, would prompt it to propose the 

dismissal of an independent director to the General Meeting due to reasons other than those 

included in the recommendation. 

Therefore, the By-laws do not include the possibility of removing independent directors in that it is 

not deemed necessary as their condition is the same as that of other directors, i.e. in the event that 

directors (independent, executive or proprietary) fail to meet their obligations, they shall tender their 

resignation. 

The Bank considers that the ultimate decision on the dismissal, regardless of who submits the 

proposal, rests with the General Shareholders’ Meeting, which may reject the proposal if it deems it 

unjustified. Also, any shareholder may request its removal which, if agreed, does not mean duties 

have failed to be honoured. 

32. Companies should establish rules obliging directors to inform the board of any circumstance that 

might harm the organisation's name or reputation, tendering their resignation as the case may be, with 

particular mention of any criminal charges brought against them and the progress of any subsequent 

trial. 

The moment a director is indicted or tried for any of the crimes stated in article 124 of the Spanish 

Companies Law, the board should examine the matter and, in view of the particular circumstances 

and potential harm to the company's name and reputation, decide whether or not he or she should 

be called on to resign. The board should also disclose all such determinations in the Annual 



Met 

33. All directors should express clear opposition when they feel a proposal submitted for the board's 

approval might damage the corporate interest. In particular, independents and other directors 

unaffected by the conflict of interest should challenge any decision that could go against the interests 

of shareholders lacking board representation. 

When the board makes material or reiterated decisions about which a director has expressed 

serious reservations, then he or she must draw the pertinent conclusions. Directors resigning for 

such causes should set out their reasons in the letter referred to in the next Recommendation. 

The terms of this Recommendation should also apply to the Secretary of the board; director or 

otherwise. 

Met 

34. Directors who give up their place before their tenure expires, through resignation or otherwise, 

should state their reasons in a letter to be sent to all members of the board. Irrespective of whether 

such resignation is filed as a significant event, the motive for the same must be explained in the Annual 



Met 

35. The company's remuneration policy, as approved by its Board of Directors, should specify at least 

the following points: 

a) The amount of the fixed components, itemised where necessary, of board and board committee 

attendance fees, with an estimate of the fixed annual payment they give rise to; 

b) Variable components, in particular: 

i) The types of directors they apply to, with an explanation of the relative weight of variable to 

fixed remuneration items. 

ii) Performance evaluation criteria used to calculate entitlement to the award of shares or share 

options or any performance-related remuneration; 


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iii) The main parameters and grounds for any system of annual bonuses or other, non cash 

benefits; and 

iv) An estimate of the sum total of variable payments arising from the remuneration policy 

proposed, as a function of degree of compliance with pre-set targets or benchmarks. 

c) The main characteristics of pension systems (for example, supplementary pensions, life 

insurance and similar arrangements), with an estimate of their amount of annual equivalent cost. 

d) The conditions to apply to the contracts of executive directors exercising senior management 

functions. Among them: 

i) Duration; 

ii) Notice periods; and 

iii) Any other clauses covering hiring bonuses, as well as indemnities or ‘golden parachutes’ in 

the event of early termination of the contractual relation between company and executive 

director. 


Met 

36. Remuneration comprising the delivery of shares in the company or other companies in the group, 

share options or other share-based instruments, payments linked to the company’s performance or 

membership of pension schemes should be confined to executive directors. 

The delivery of shares is excluded from this limitation when directors are obliged to retain them until 

the end of their tenure. 

See headings: A.3 and B.1.3 

Met 

37. External directors' remuneration should sufficiently compensate them for the dedication, abilities 

and responsibilities that the post entails, but should not be so high as to compromise their 

independence. 

Met 

38. In the case of remuneration linked to company earnings, deductions should be computed for any 

qualifications stated in the external auditor’s report. 

Met 

39. In the case of variable awards, remuneration policies should include technical safeguards to ensure 

they reflect the professional performance of the beneficiaries and not simply the general progress of 

the markets or the company’s sector, atypical or exceptional transactions or circumstances of this kind. 

Met 

40. The board should submit a report on the directors’ remuneration policy to the advisory vote of the 

General Meeting, as a separate point on the agenda. This report can be supplied to shareholders 

separately or in the manner each company sees fit. 

The report will focus on the remuneration policy the board has approved for the current year with 

reference, as the case may be, to the policy planned for future years. It will address all the points 

referred to in Recommendation 35, except those potentially entailing the disclosure of commercially 

sensitive information. It will also identify and explain the most significant changes in remuneration 

policy with respect to the previous year, with a global summary of how the policy was applied over 

the period in question. 

The role of the Remuneration Committee in designing the policy should be reported to the Meeting, 

along with the identity of any external advisors engaged. 


Met 

41. The notes to the annual accounts should list individual directors' remuneration in the year, 

including: 

a) A breakdown of the compensation obtained by each company director, to include where 

appropriate: 

i)Participation and attendance fees and other fixed director payments; 

ii) Additional compensation for acting as chairman or member of a board committee; 

iii) Any payments made under profit-sharing or bonus schemes, and the reason for their accrual; 

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iv) Contributions on the director’s behalf to defined-contribution pension plans, or any increase 

in the director’s vested rights in the case of contributions to defined-benefit schemes; 

v) Any severance packages agreed or paid; 

vi) Any compensation they receive as directors of other companies in the group; 

vii) The remuneration executive directors receive in respect of their senior management posts; 

viii) Any kind of compensation other than those listed above, of whatever nature and 

provenance within the group, especially when it may be accounted a related-party transaction or 

when its omission would detract from a true and fair view of the total remuneration received by 

the director. 

b) An individual breakdown of deliveries to directors of shares, share options or other share-based 

instruments, itemised by: 

i) Number of shares or options awarded in the year, and the terms set for their execution; 

ii) Number of options exercised in the year, specifying the number of shares involved and the 

exercise price; 

iii) Number of options outstanding at the annual close, specifying their price, date and other 

exercise conditions; 

iv) Any change in the year in the exercise terms of previously awarded options. 

c) Information on the relation in the year between the remuneration obtained by executive directors 

and the company’s profits, or some other measure of enterprise results. 

Met 

42. When the company has an Executive Committee, the breakdown of its members by director 

category should be similar to that of the board itself. The Secretary of the board should also act as 

secretary to the Executive Committee. 

See headings B.2.1 and B.2.6 

Partially complies 

As set out in previous sections of this report, Banesto has a majority shareholder that owns close to 

90% of its capital. This distribution of capital, which would otherwise call for an overwhelming 

presence on the Board of proprietary and executive Directors, is not in fact reflected in the 

composition of that body: non-executive Directors enjoy an ample majority, and independent 

Directors account for 50% of the Board. Whereas corporate governance considerations have led to 

a predominance of non-executive Directors on the Board, it has not been thought appropriate for 

this pattern to be followed in the Executive Committee, whose functions, relating more closely to the 

ordinary running of the company, demand a balance between executive Directors (2) and nonexecutive 

Directors (1 proprietary and 3 independent). 

The Secretary of the Board is also the Secretary of the Executive Committee and of other 

committees having functions delegated to them by the Board of Directors. 

43. The board should be kept fully informed of the business transacted and decisions made by the 

Executive Committee. To this end, all board members should receive a copy of the Committee’s 

minutes. 

Met 

44. In addition to the Audit Committee mandatory under the Securities Market Law, the Board of 

Directors should form a committee, or two separate committees, of Nomination and Remuneration. 

The rules governing the make-up and operation of the Audit Committee and the committee or 

committees of Nomination and Remuneration should be set forth in the board regulations, and 

include the following: 

a) The Board of Directors should appoint the members of such committees with regard to the 

knowledge, aptitudes and experience of its directors and the terms of reference of each committee; 

discuss their proposals and reports; and be responsible for overseeing and evaluating their work, 

which should be reported to the first board plenary following each meeting; 

b) These committees should be formed exclusively of external directors and have a minimum of 

three members. Executive directors or senior officers may also attend meetings, for information 

purposes, at the Committees’ invitation. 

c) Committees should be chaired by an independent director. 


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d) They may engage external advisors, when they feel this is necessary for the discharge of their 

duties. 

e) Meeting proceedings should be minuted and a copy sent to all board members. 


Met 

45. The job of supervising compliance with internal codes of conduct and corporate governance rules 

should be entrusted to the Audit Committee, the Nomination Committee or, as the case may be, 

separate Compliance or Corporate Governance committees. 

Met 

46. All members of the Audit Committee, particularly its chairman, should be appointed with regard to 

their knowledge and background in accounting, auditing and risk management matters. 

Met 

47. Listed companies should have an internal audit function, under the supervision of the Audit 

Committee, to ensure the proper operation of internal reporting and control systems. 

Met 

48. The head of internal audit should present an annual work programme to the Audit Committee; 

report to it directly on any incidents arising during its implementation; and submit an activities report at 

the end of each year. 

Met 

49. Control and risk management policy should specify at least: 

a) The different types of risk (operational, technological, financial, legal, reputational…) the 

company is exposed to, with the inclusion under financial or economic risks of contingent liabilities 

and other off-balance-sheet risks; 

b) The determination of the risk level the company sees as acceptable; 

c) Measures in place to mitigate the impact of risk events should they occur; 

d) The internal reporting and control systems to be used to control and manage the above risks, 

including contingent liabilities and off-balance-sheet risks. 

See headings: D 

Met 

50. The Audit Committee’s role should be: 

1. With respect to internal control and reporting systems: 

a) Monitor the preparation and the integrity of the financial information prepared on the 

company and, where appropriate, the group, checking for compliance with legal provisions, the 

accurate demarcation of the consolidation perimeter, and the correct application of accounting 

principles. 

b) Review internal control and risk management systems on a regular basis, so main risks are 

properly identified, managed and disclosed. 

c) Monitor the independence and efficacy of the internal audit function; propose the selection, 

appointment, reappointment and removal of the head of internal audit; propose the 

department’s budget; receive regular report-backs on its activities; and verify that senior 

management are acting on the findings and recommendations of its reports. 

d) Establish and supervise a mechanism whereby staff can report, confidentially and, if 

necessary, anonymously, any irregularities they detect in the course of their duties, in particular 

financial or accounting irregularities, with potentially serious implications for the firm. 

2. With respect to the external auditor: 

a) Make recommendations to the board for the selection, appointment, reappointment and 

removal of the external auditor, and the terms and conditions of his engagement. 

b) Receive regular information from the external auditor on the progress and findings of the 

audit programme, and check that senior management are acting on its recommendations. 

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c) Monitor the independence of the external auditor, to which end: 

i) The company should notify any change of auditor to the CNMV as a significant event, 

accompanied by a statement of any disagreements arising with the outgoing auditor and the 

reasons for the same. 

ii) The Committee should ensure that the company and the auditor adhere to current 

regulations on the provision of non-audit services, the limits on the concentration of the 

auditor’s business and, in general, other requirements designed to safeguard auditors’ 

independence; 

iii) The Committee should investigate the issues giving rise to the resignation of any external 

auditor. 

d) In the case of groups, the Committee should urge the group auditor to take on the auditing of 

all component companies. 

See headings: B.1.35, B.2.2, B.2.3 and D.3 

Met 

51. The Audit Committee should be empowered to meet with any company employee or manager, 

even ordering their appearance without the presence of another senior officer. 

Met 

52. The Audit Committee should prepare information on the following points from Recommendation 8 

for input to board decision-making: 

a) The financial information that all listed companies must periodically disclose. 

The Committee should ensure that interim statements are drawn up under the same accounting 

principles as the annual statements and, to this end, may ask the external auditor to conduct a 

limited review. 

b) The creation or acquisition of shares in special purpose vehicles or entities resident in countries 

or territories considered tax havens, and any other transactions or operations of a comparable 

nature whose complexity might impair the transparency of the group. 

c) Related-party transactions, except where their scrutiny has been entrusted to some other 

supervision and control committee. 


Met 

53. The Board of Directors should seek to present the annual accounts to the General Meeting without 

reservations or qualifications in the audit report. Should such reservations or qualifications exist, both 

the Chairman of the Audit Committee and the auditors should give a clear account to shareholders of 

their scope and content. 


Met 

54. The majority of Nomination Committee members – or Nomination and Remuneration Committee 

members as the case may be – should be independent directors. 


Met 

55. The Nomination Committee should have the following functions in addition to those stated in earlier 

recommendations: 

a) Evaluate the balance of skills, knowledge and experience on the board, define the roles and 

capabilities required of the candidates to fill each vacancy, and decide the time and dedication 

necessary for them to properly perform their duties. 

b) Examine or organise, in appropriate form, the succession of the chairman and chief executive, 

making recommendations to the board so the handover proceeds in a planned and orderly manner. 

c) Report on the senior officer appointments and removals which the chief executive proposes to 

the board. 

d) Report to the board on the gender diversity issues discussed in Recommendation 14 of this 

Code. 


Met 

56. The Nomination Committee should consult with the company’s Chairman and chief executive, 

especially on matters relating to executive directors. 


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Any board member may suggest directorship candidates to the Nomination Committee for its 

consideration. 

Met 

57. The Remuneration Committee should have the following functions in addition to those stated in 

earlier recommendations: 

a) Make proposals to the Board of Directors regarding: 

i) The remuneration policy for directors and senior officers; 

ii) The individual remuneration and other contractual conditions of executive directors. 

iii) The standard conditions for senior officer employment contracts. 

b) Oversee compliance with the remuneration policy set by the company. 

See headings: B.1.14 and B. 2.3 

Met 

58. The Remuneration Committee should consult with the Chairman and chief executive, especially on 

matters relating to executive directors and senior officers. 

G – OTHER INFORMATION OF INTEREST 

Met 

List and explain below the contents of any relevant principles or aspects of corporate governance 

applied by the company that have not been covered by this report. 

SANTANDER-BANESTO RELATIONSHIP FRAMEWORK 

Even though Banco Español de Crédito S.A. does not have any listed entities within its Group 

which require it to comply with Recommendation 2, the Bank’s Board has decided to take on this 

recommendation in the relationship with its Parent. It has therefore established a series of rules to 

define a relationship framework between Banco Santander, as the Parent, and Banesto, in addition 

to their respective areas of business, possible business ties and mechanisms to avoid possible 

conflicts of interest. These rules are available on the Group’s website 

(www.banesto.es/webcorporativa). 

HEADING B.1.11 

- Total variable pay for 2011. Total variable pay is €1,694 thousand, while variable pay deferred on 

a three-year basis (2013-2015) is €1,431 thousand. 

- Share options and/or other financial instruments. This item includes remuneration in kind in the 

form of Banesto shares transferred in 2011 under the First Long-Term Incentive Scheme to Ana 

Patricia Botín (who held an executive directorship up until 3 November 2010) and José Maria Nus 

Badía (who held an executive directorship during the first half of 2011). 

- This total includes the amounts for per diems and profit-sharing under the By-laws due to José 

Maria Nus, Francisco Daurella Franco and David Arce Torres up until 19 January 2011, on which 

date they departed from office. 


Total remuneration paid to senior management: 

– Includes fixed and in-kind remuneration to Raml Aboukhair, who was a member of the 

Management Committee until 23 February 2011, on which date he departed from Banesto. 

- This section includes Variable Pay for 2011. Variable Pay breaks down into available pay of 

€3,189 and pay deferred over three years (2013-2015) of €2,063. 

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The Delegated Risks Committee met 51 times. 


Some directors hold stakes of less than 0.001% in the following companies: BBVA, BANCO 

SANTANDER and BANCO PAOPULAR. 

HEADING C.2 

- See note 47 of the consolidated annual financial statements for 2011. 

- Banco Español de Crédito, S.A. (BANESTO) sold to Santander AM Holding S.L. and Santander 

Insurance Holding S.L. its stakes in Santander Pensiones S.A., E.G.F.P. and Santander Asset 

Management S.A., S.G.I.I.C., and 13% of Santander Seguros y Reaseguros, Compañía 

Aseguradora S.A., respectively, for an aggregate price of €258.263 million. 

HEADING C.3 

- In 2011, a total of EUR 550 thousand in loans was extended to senior executives. These loans 

were extended applying the conditions of bank employee. 

- The balance at 31 December 2011 of lending operations which were subject to the conditions of 

bank employee (i.e. non-market conditions) totalled 2,259 EUR thousand. 

- Notwithstanding the above, there are directors, managers, and associated natural persons and 

legal bodies that have carried out standard commercial transactions with Banesto or Group 

companies under normal market conditions and as part of normal trade relationships. 

Other 

- On 22 September 2010, the Board of Directors decided to adhere to the Code of Good Tax Practice 

(Código de Buenas Prácticas Tributarias). At its meeting of 25 January 2012, the Board adopted tax 

policies that are compliant with the code; these policies will become effective in 2012. 

- Shareholders at the Annual General Meeting convened for 29 February 2012 will be asked to approve 

an amendment to the Bank’s By-laws. The change is intended to bring the Bank’s By-laws into line with 

prevailing company law. 

As a corollary of the foregoing proposal, there will also be laid before the Annual General Meeting a 

proposed resolution to alter the Regulations of Shareholders’ Meeting of Banco Español de Crédito, 

S.A.. In addition, shareholders will be briefed on the changes to be made to the Regulations of the 

Board of Directors. The purpose of these changes is to bring the Regulations of Shareholders’ 

Meetings and of the Board into line with the new wording of the By-laws, and with the changes to 

company law recently introduced by the Sustainable Economy Act (Ley 2/2011) and the Ley 25/2011, a 

statute that partially amends the Corporate Enterprise Act and implements Directive 2007/36/EC (the 

"Shareholders' Rights Directive"). 

The Board’s report explaining the proposed changes to the Bank’s By-laws, including the full text of the 

proposed alteration, and the Board’s report on the proposed changes to the Regulations of 

Shareholders’ Meetings and of the Board, including the full text of the proposed changes, will be made 

available to shareholders in the notice convening the Annual General Meeting. 

Finally, Article 61a of the Securities Market Act, inserted by virtue of the Sustainable Economy Act, 

requires that this Report include, in the form of an Appendix hereto, the disclosures prescribed by that 

statutory provision.This section may include any other relevant but not re-iterative information, 

clarification or detail related to previous sections of the report. 


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340

Specifically indicate whether the company is subject to corporate governance legislation from a 

country other than Spain and, if so, include the compulsory information to be provided when 

different from that required by this report. 

Binding definition of an independent director: 

List any independent directors who have or have had a relationship with the company, its significant 

shareholders or managers, which are of a sufficiently significant nature or important to determine that 

the directors may not be deemed independent as per the definition included in point 5 of the Unified 

Good Governance Code: 

Date and signature: 

79 

NO 

This Annual Corporate Governance Report was approved by the Bank’s Board of Directors at its 

Meeting on 

19/01/2011 

List the directors that voted against or abstained from approving this report. 

NO 

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ANNEX TO THE REPORT ON CORPORATE GOVERNANCE OF BANCO 

ESPAÑOL DE CRÉDITO S.A. FOR 2011 

Passage of Spanish Law 2/2011, the Sustainable Economy Act (Ley de Economía 

Sostenible), has modified the prevailing legal regime, introducing new disclosure 

requirements for listed companies. Specifically, the Sustainable Economy Act amended 

Law 24/1988, of 28 July, Spain’s Securities Market Act (Ley de Mercado de Valores), 

adding a new chapter VI titled "Regarding the annual corporate governance report". 

This new chapter VI contains a new article (article 61 bis) which regulates the contents 

of annual corporate governance reports. The foregoing article 61 bis repeals and 

consolidates the contents of article 116 regarding the Annual Corporate Governance 

Report and article 116 bis, which stipulated the need to include certain additional 

information in the management report. It further requires that the Annual Corporate 

Governance Report include a description of the main characteristics of the internal risk 

control and management systems in relation to the financial reporting process. 

The Annual Corporate Governance Report for the year ended 31 December 2011 has 

been prepared based on the content and structure of the standard-form model established 

by CNMV Circular 4/2007, of 27 December. However, the additional corporate 

governance disclosure requirements introduced under the Sustainable Economy Act 

which are not specifically referred to in any section of the standard forms in effect, 

warrant the drafting of the present Annex. 

The above-mentioned Spanish Securities Markets Commission (hereinafter, the 

“CNMV” for its acronym in Spanish) standard form is therefore complemented by this 

Annex which sets forth the disclosure requirements stipulated in article 61 bis of the 

Securities Market Act, specifically under the following headings: 

− Securities not admitted to trading on a regulated European Community market, 

where appropriate indicating the different classes of shares and, for each class of 

shares, the attaching rights and obligations. 

- Any restrictions on the ability to transfer securities or on the exercise of voting 

rights. 

− Rules governing By-law amendments. 

- Significant agreements entered into by the company which take effect, alter or 

terminate upon a change of control of the company following a takeover bid and the 

effects thereof. 

- Any agreements between the company and its board members, executives or 

employees providing for termination benefits in the event that they resign or are 

made redundant without due cause or if their employment ceases because of a 

takeover bid. 


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− Description of the key aspects of the internal control and risk management systems 

with respect to the financial reporting process. 

In light of the foregoing, there follow itemised responses to the above-listed headings: 

1. Securities not admitted to trading on a regulated European Community market, 

where appropriate indicating the different classes of shares and, for each class 

of shares, the attaching rights and obligations. 

None of the Bank’s securities trade on non-EC exchanges. 

2. Any restrictions on the ability to transfer securities or to exercise voting rights. 

a) Restrictions on the transfer of securities 

There are no Bylaw-stipulated restrictions on the transferability of securities 

representing share capital, the application of certain rules, listed below, notwithstanding. 

The transfer of the shares representing the Bank’s equity is not subject to any 

restrictions, unless the volume purchased surpasses the significant interest threshold, in 

which case the provisions of article 56 and the related articles of Law 26/1988, of 29 

July, regarding Discipline and Intervention at Credit Institutions, as newly worded in 

Law 5/2009, of 29 June, are triggered. In keeping with the abovementioned articles, any 

party intending to acquire an equity or voting interest of 10% or more is obliged to first 

notify the Bank of Spain, which has 60 working days to object to the proposed 

acquisition. The Bank of Spain may only object to the proposed acquisitions on 

reasonable grounds on the basis of the criteria established to this end in article 58, 

section 1 of the foregoing Law or if the information provided by the potential buyer is 

deemed incomplete. It is also mandatory to provide the Bank of Spain with prior notice 

of any plans to directly or indirectly increase an existing interest such that the resulting 

percentage of voting rights or equity equals or exceeds 20%, 30%, or 50%. In addition, 

any party acquiring an interest in a credit institution such that the resulting percentage 

interest in the voting rights or equity is equal to or greater than 5% must notify the Bank 

of Spain and the affected credit entity immediately of this fact. 

As a listed entity, the acquisition of certain significant interests requires notification of 

both the issuer and the CNMV, as provided for in article 53 of the Securities Market 

Act, Royal Decree 1362/2007, of 19 October, and CNMV Circular 2/2007, of 19 

December, which stipulate an initial notification threshold of 3% of equity or voting 

rights (or 1% if the party obliged to notify is a resident of a tax haven or a tax-exempt 

country or territory or one with which there is insufficient exchange of tax information 

as required under prevailing legislation). 

Lastly, and also due to its condition as a listed company, the acquisition of an interest of 

30% or more of the Company’s equity or voting rights triggers the obligation to launch 

a takeover bid under the terms set forth in article 60 of the Securities Market Act. 

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b) Restrictions on voting rights 

The existing restrictions on the exercise of voting rights are those common to any public 

limited company; the By-laws do not stipulate any other specific restrictions in this 

regard. 

Article 527 of the Consolidated Text of the Corporate Enterprises Act, enacted by 

means of Royal Legislative Decree 1/2010, of 2 July (Ley de Sociedades de Capital), 

deprives of legal effect any By-law stipulations at listed public limited companies which 

have the effect of directly or indirectly capping the number of votes which a given 

shareholder or companies belonging to the same group can issue. The By-laws of Banco 

Español de Crédito S.A. do not contain any clauses which limit the maximum number 

of votes which a given shareholder or companies belonging to the same group may cast. 

3. Rules governing By-law amendments. 

The rules in force essentially coincide with those established in the Consolidated Text 

of the Corporate Enterprises Act. Accordingly, in keeping with article 194 of the 

Consolidated Text of the Corporate Enterprises Act, article 49 of the Company’s Bylaws 

stipulates a general meeting quorum for valid ratification of a capital increase or 

decrease and any other amendment to the By-laws of shareholders at first call (whether 

attending in person or by valid proxy) holding at least fifty per cent of subscribed voting 

capital. At second call, shareholders representing twenty-five percent of share capital 

shall be sufficient. Similarly, article 12 of the Regulations of Shareholders’ Meetings 

rules establishes the same majorities as article 49 of the By-laws. As required in article 

286 of the Consolidated Text of the Corporate Enterprises Act, in the event that the Bylaws 

are to be amended, the Company’s directors or, where appropriate, the 

shareholders proposing the resolution, must draft the complete text of the proposed 

amendment along with a written report justifying the proposed change which must be 

provided to shareholders in conjunction with the call to the meeting at which proposed 

amendment will be voted on. 

Elsewhere, in its capacity as a credit institution, as required by article 8.1 of Royal 

Decree 1245/1995, of 14 July, the amendment of the Bank’s By-laws is subject to the 

authorisation and registration procedure established in article 1 of this same piece of 

legislation. Notwithstanding the foregoing, and in keeping with section 2 of the above 

article 8, the following amendments will be exempt from this authorisation procedure, 

although they must nevertheless be communicated to the Bank of Spain: those intended 

to reflect a change in registered business address within Spain, a capital increase, the 

addition to the wording of the By-laws of legal or regulatory requirements of an 

imperative or prohibitive nature or wording changes to comply with judicial or court 

rulings and any other amendments which the Directorate General of the Treasury and 

Financial Policy has ruled to be scantly material in response to prior consultations 

submitted to it to this end. 


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As is the case for all general meetings, the Bank’s shareholders may ask its directors to 

provide them with as much information and as many clarifications as they deem 

necessary and may submit as many questions as they deem warranted in writing up until 

the seventh day prior to the meeting’s scheduled date. The directors have a duty to 

provide such information in writing, to which end they have until the day the general 

meeting is scheduled to take place. In addition, during the course of the general meeting 

the Bank’s shareholders are entitled to ask verbally for any information or clarifications 

they deem warranted regarding the items included on the meeting agenda; should it not 

be possible to attend to the shareholders’ requests at that time, the directors have a duty 

to provide them with the information requested in writing during the seven days 

following the day on which the meeting ends. 

4. Significant agreements entered into by the company which take effect, alter or 

terminate upon a change of control of the company following a takeover bid 

and the effects thereof. 

The Bank is not party to any significant agreements that would take effect, be altered or 

terminate in the event of a change in control of the Bank as a result of a takeover bid. 

5. Any agreements between the company and its directors, officers or employees 

that provide for severance payments if they resign, are unfairly dismissed or if 

their employment contracts terminate as a result of a takeover bid. 

The legal and labour relations ramifications of the termination of the services linking 

the Bank’s personnel to the entity are not uniform, but rather vary as a function of the 

personnel category in question, the position or job discharged by the employee, the 

nature of the contract entered into with the entity, the legislation governing the 

employment relationship, as well as sundry other factors. However, the following 

generalisations can be made: 

a) Employees: In the case of employees tied to the Company by means of a standard 

employment arrangement, a formula which encompasses virtually all the staff in the 

entity’s service, the job contracts binding these employees to the entity do not 

include special indemnity clauses for termination of their employment; in these 

instances, the employee is entitled to any severance pay provided for in prevailing 

labour law as a function of the grounds for termination. 

There are some instances of standard employment arrangements whereby the job 

contracts entitle the employee to an indemnity in the event of termination on 

specific grounds, generally limited to unfair dismissal. In these cases, the severance 

pay is usually set as a function of the employee’s annual base salary at the time the 

employment relationship is terminated. 

b) Senior management: In the case of personnel bound to the entity under a special 

senior management contract, there are instances in which the contracts do not 

establish any severance payments in the event of termination, which means that 

these executives would be entitled to the severance provided for in the regulations 

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governing special senior management employment arrangements. To this end, it is 

worth noting that article 10.3 of Royal Decree 1382/1985, of 1 August, which 

regulates Special Senior Management Employment Arrangements, provides that 

senior executives may terminate their special job contracts with entitlement to the 

agreed-upon severance, or that provided for in the same piece of legislation in the 

event the termination is instigated by the business owner on the basis of, among 

other grounds, a material change in the ownership structure of the company which 

has the effect of renewing its governing bodies or changing the content or approach 

of the core business, so long as said termination is effected within three months 

from when these changes occur. 

Alongside these cases, there are executives whose contracts do entitle them to 

severance benefits in the event of termination on certain specific grounds. This 

severance is usually set individually with each senior executive depending on their 

professional qualifications and the importance and responsibility attaching to the 

position held at the Bank. 

c) Executive directors: As for executive directors, the contracts regulating the discharge 

of their executive duties, other than those related to the decision-making and 

supervision which are intrinsic to their board membership, are open-ended. 

However, termination of the arrangement for breach of duty or at these executives’ 

free will does not entitle them to any financial compensation. If an executive 

director is dismissed on grounds attributable to the Bank or due to the occurrence of 

neutral circumstances, such as any affecting the director’s job status or status within 

the organisational structure, the outgoing director shall be entitled to receive the 

severance provided for in the respective contracts, which is not dictated by general 

criteria but rather the directors’ personal and professional circumstances and going 

rates when they were signed. The breakdown of these terms is provided in the 

annual report and the report on director remuneration which will be provided to the 

Bank’s shareholders at the general meeting scheduled for 29 February 2012. 

- Exclusivity clause and non-compete agreement 

The executive directors may not enter into service provision agreements with other 

companies or entities without the express authorisation of the Board of Directors 

and in all cases subject to a non-compete clause with respect to companies and 

activities similar in nature to those of the Bank and its consolidated Group. 

- Compliance with the Code of Conduct 

Executive directors are bound by the Code of Conduct of Banco Español de Crédito 

S.A. 

- Confidentiality obligations and commitment to return confidential information 

Executive directors are strictly bound by a duty of confidentiality throughout the 

term of their employment and also after termination, at which point they are obliged 


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to return any documents and objects related to their professional activities in their 

possession to the Bank. 

- Term, notice periods and severance upon termination 

There are no standard criteria for setting severance pay upon contract termination 

for reasons attributable to the Bank or under other neutral circumstances; rather, 

severance is dictated by the clauses contained in the contracts in place with each 

executive director which are agreed as a function of prevailing personal 

circumstances and the dates they were signed. 

Nor are the clauses setting the periods for giving notice standard; although they exist 

in all the contracts in force, they range from 30 days to four months. 

As already noted, contracts with executive directors are open-ended. However, 

termination of the arrangement for breach of duty or at these executives’ free will 

does not entitle them to any financial compensation. If an executive director’s 

contract is terminated on grounds attributable to the Bank or due to the occurrence 

of neutral circumstances, such as any affecting the director’s job status or status 

within the organisational structure, the outgoing director shall be entitled to the 

following when the arrangement is terminated: 

• Mr. José Antonio García Cantera would receive a severance payment equivalent 

to three years’ annual fixed salary, as per his contract. 

• Mr. Juan Delibes Liniers would be entitled to payment of one-half of 80% of his 

fixed annual salary multiplied by the number of years’ of certified service at the 

Bank, up to a maximum of 10 annuities. 

6. Description of the key aspects of the internal control and risk management 

systems with respect to the financial reporting process 

Mechanisms comprising the risk control and management systems as they affect the 

entity’s internal control over financial reporting (ICFR) 

6.1 The entity’s control environment 

6.1.1. Bodies and/or functions responsible for: (i) the existence and regular updating of 

a suitable, effective ICFR; (ii) its implementation; and (iii) its monitoring. 

Article 14 of the Board Rules specifies, among other matters, the power delegated in the 

Audit and Compliance Committee “To supervise the effective internal control of the 

Company and the risk management systems, and discuss with the auditors any 

significant internal control system weaknesses detected in the audit. To be fully 

familiar with and supervise the process of preparing and presenting the financial 

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information relating to the Company and, where appropriate, to the Group, reviewing 

compliance with the regulatory requirements, the adequate delimiting of the perimeter 

of consolidation and the correct application of accounting standards”. 

The Bank has an Internal Control Unit, which is independent within the organisational 

structure and is charged with designing and implementing the ICFR model (also known 

internally as the Banesto Internal Control Model) and ensuring its quality, consistency 

and continual updating, which oversees and monitors the model continually, ensuring 

that it works as it should, is secure and efficient, reporting its findings back to 

management, the Audit and Compliance Committee and the Board of Directors. 

6.1.2. List of the components in place in relation to the process of preparing the 

financial information: 

� The departments and/or mechanisms in charge of: (i) the design and review of the 

organisational structure; (ii) defining clear lines of responsibility and authority, with an 

appropriate distribution of tasks and functions; and (iii) deploying procedures so this 

structure is communicated effectively throughout the company: 

The Organisation, Processes and Change Management Unit, which reports to the 

Resources Division, is responsible for the design, implementation, review and continual 

updating of Banesto’s organisational structure in general and, as a result, the structure of 

those units involved in the process of preparing the financial information. 

This unit has documented internal procedures intended to ensure the correct exercise of 

these functions and their due communication the all other engaged Divisions and/or 

Units at the Bank. 

The purpose of this schematic is to try to ensure, among other things, that the 

organisational structure provides a solid ICFR model. 

� Code of conduct, approving body, dissemination and instruction, principles and 

values covered (stating whether it makes specific reference to record keeping and 

financial reporting), body in charge of investigating breaches and proposing corrective 

or disciplinary action: 

The Code of Conduct is approved by the Bank’s Board of Directors and all the people 

working at the Banesto Group are bound by it. Its subjects are given copies of the Code 

and receive the opportune training (onsite and/or online). In addition, the Code can be 

consulted by anyone at any time as part of the body of internal rules and regulations; it 

is also available for download from the corporate website. 

The Code is updated whenever circumstances so warrant; the Board of Directors 

approved the latest changes on 21 December 2011. 

With respect to financial information and transaction record-keeping, the Code 

stipulates the following: 


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• Title II lists the ethical principles inspiring the Code, including that of transparency, 

and fleshes out those principles and their application in general. 

• Title III, regarding general behavioural guidelines, encompasses the concept of 

responsibility, indicating in section g) the obligation to oversee the reliability of the 

financial information, preparing it in accordance with prevailing regulations, 

ensuring that transactions, events and other developments affecting the entity 

effectively exist, having been fully documented and comply with prevailing rules and 

regulations with respect to presentation, disclosure and comparability as well as 

providing a true and fair image of the entity’s financial situation and its rights and 

obligations as of the corresponding date. 

• Title IV, regarding behavioural guidelines with respect to certain aspects of 

information disclosure stipulates that the persons subject to the Code refrain from 

disclosing any information or news regarding the Group and from expressly 

manifesting any opinion on the relevant information, stipulating that it is up to the 

Compliance Department to notify any such information to the CNMV before or at 

the same time as it is disclosed to the market or the media. 

• Title IV also includes a list of financial information obligations and controls: 

− Financial information related obligations 

Those persons subject to the Code involved in the preparation of the Group’s 

financial information undertake to work thoroughly to ensure that the information is 

reliable, ensuring that: 

a) The transactions, events and other developments mirrored in the financial 

information actually exist and were duly recorded. 

b) The information reflects all the transactions, events and other developments 

affecting the entity. 

c) The transactions, events and other developments are recorded and measured in 

keeping with applicable regulations. 

c) The transactions, events and other developments are classified, presented and 

disclosed in the financial information in keeping with applicable regulations. 

e) The financial information reflects, as of the corresponding date, the entity’s 

rights and obligations by means of the corresponding assets and liabilities, in 

keeping with applicable regulations. 

Internal controls 

Mandatory compliance with all the internal control procedures established by the 

Group to guarantee that its transactions are properly accounted for and accurately 

depicted in the financial information published by the Group. 

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In preparing the financial information, the areas of the Group responsible for each 

activity, process and sub-process must certify that the controls established by the 

Group have been complied with and the information furnished is accurate. 

The Audit and Compliance Committee shall supervise the financial information 

preparation process and oversee that the internal control model, internal audit and 

risk management systems are proving effective. 

The Internal Compliance and Control Division is in charge of directing and coordinating 

any investigations into alleged breaches and proposing any fines deemed appropriate. 

� ‘Whistle-blowing’ channel, for the reporting to the audit committee of any 

irregularities of a financial or accounting nature, as well as breaches of the code of 

conduct and malpractice within the organisation, stating whether reports made through 

this channel are confidential: 

Article 14 of the Board Rules specifies, among other matters, the power delegated in the 

Audit and Compliance Committee to “Adopt the necessary measures to: (i) receive, 

deal with and keep a record of the claims received by the Bank on matters related to the 

process of gathering financial information generation, auditing and internal control; 

and (ii) make it possible for employees, on a confidential and, if considered 

appropriate, anonymous basis to report irregularities of potential significance, 

specially financial and accounting ones, detected within the sphere of the Company”. 

On this subject there is a binding circular within the body of internal rules and 

regulations, which must be distributed to everyone, called “Employee or third-party 

reporting to the Audit and Compliance Committee” which details the following 

procedure to be followed in reporting to the committee: 

Group employees wishing to convey their concern regarding potentially questionable 

accounting or auditing practices to the Audit and Compliance Committee may do so 

on an anonymous and confidential basis by sending a letter to the General 

Secretariat and the Board (…). 

Any claims concerning matters related to accounting, auditing or internal controls 

received from third parties by the various divisions of the Bank must also be sent 

immediately to the General Secretariat and the Board (…). 

Upon receipt, the reporting party will receive a number and the complaint will be 

recorded in a special purpose file. The Secretary of the Board will review the content 

of the claim in order to determine whether or not it concerns accounting or auditing 

related matters. 

If the reported matter concerns accounting or auditing related issues, it will be put 

before the Audit and Compliance Committee at the next meeting taking place after its 

receipt by means of submission to the Secretary of the Committee (…). If the reported 


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matter does not refer to accounting or auditing related issues, it will be forwarded to 

the head of the implicated division, recording such development as appropriate. 

An account will be given at each meeting of the Audit and Compliance Committee of 

any claims not submitted to the Committee on account of not relating to accounting 

or auditing matters, making note of where, if anywhere, they were sent. 

The related documentation, including any follow-up measures, shall be archived for 

a period of five years. 

� Training and refresher courses for personnel involved in preparing and reviewing 

financial information or evaluating ICFR, which address, at least, accounting rules, 

auditing, internal control and risk management: 

Banesto employees involved in the various financial information processes benefit from 

training programmes and regular knowledge refresher courses which are specifically 

designed to allow them to discharge their duties properly. 

The training and refresher courses are mostly promoted by the Accounting Unit itself 

and are designed and overseen together with the Training and Development Unit, which 

is part of the Human Resources Division. 

These training initiatives take the form of a mixture of onsite and online sessions, all of 

which are monitored and overseen by the aforementioned Training and Development 

Unit in order to guarantee they are duly taken and that the concepts taught have been 

properly assimilated. 

The following courses stand out among the training sessions provided to these 

employees: “The New General Chart of Accounting”, “Bank of Spain Circulars and 

Regulation”, “International Financial Reporting Standards”; “Financial Statement 

Analysis”; “Transaction Taxation”, “Analysis, Valuation and Application of Financial 

Models”, “M&A and IPOs”; and “Legal Aspects of Companies and other Corporate 

Structures”. 

6.2 Risk assessment in financial reporting: 

6.2.1. The main characteristics of the risk identification process, including risks of error 

or fraud, stating whether: 

� The process exists and is documented: 

In compliance with the guidelines set by the COSO II (Committee of Sponsoring 

Organizations for the Commission on Fraudulent Financial Reporting, the Treadway 

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Commission) under the framework of the Enterprise Risk Management Integrated 

Framework 1 , Banesto has a specific procedure for performing the risk identification task 

which is duly implemented, documented and communicated at all levels of the 

organisation. 

This procedure establishes, among other matters, that the corporate risk management 

function is a process carried out by the Board of Directors of the entity, its management 

and other employees. It further states that the function is applicable to strategy setting 

throughout the whole company, designed to enable timely identification of events which 

could affect the organisation, management of risk within acceptable levels and the 

provision of reasonable assurance that objectives will be attained. 

� The process covers all financial reporting objectives (existence and occurrence; 

completeness; valuation; presentation, disclosure and comparability; and rights and 

obligations), is updated and with what frequency: 

In order to guarantee the reliability and accuracy of the financial information, the risk 

identification process takes the following potential accounting errors unwaveringly into 

account: 

• Integrity: Transactions/balances which should be recorded and are not. 

• Transaction cut-off: Transactions recognised in a period other than the accrual 

period. 

• Recording: Transactions input with mistakes (amounts, terms). 

• Measurement: This refers to transactions (assets, liabilities, expenses, income and 

commitments) recognised for which the amounts are not correct because the 

measurement calculations performed were not the right ones. 

• Presentation: Mistaken classification within the various financial statement 

headings. 

• Validity: Transactions recognised which are not valid because they do not 

correspond to the financial period in question or because they have not been 

authorised by the customer. 

• Asset safeguarding: This refers to assets acquired or liabilities incurred (or settled) 

without the right level of clearance. 

• Compliance risk: The failure to comply with applicable regulations and/or the 

obligations assumed with customers in the ordinary course of operations and which 

could give rise to claims and therefore potential losses for the company. 

1 �� 

�� 

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� A specific process is in place to define the scope of consolidation, with reference to 

the possible existence of complex corporate structures, special purpose vehicles, holding 

companies, etc.: 

The Accounting Division has a dedicated Consolidation Department which is tasked 

with ensuring that the Group’s scope of consolidation is properly defined at all times. 

By way of illustration, the financial statements of Banesto and its direct and indirect 

investees constitute the starting point for this process. On the basis of the effective 

percentage interest in all potential scope investees, this department then proceeds to 

analyse: 

• The significant influence which Banesto, individually or together with the rest 

of the Group entities, exercises over the investee under analysis. 

• Banesto’s effective ownership interest in the investee under analysis. 

• The investee’s business activity and corporate purpose, distinguishing between 

those considered similar to those of the other Group companies and those 

considered non-core. 

• The existence of a decision-making unit, as defined in applicable legislation, for 

the special-purpose vehicles (there is an additional specific procedure for 

identifying this class of entity). 

Ultimately, article 14 of the Board Rules establishes, among other things, the power 

delegated in its Audit and Compliance Committee, worded as follows: “To be fully 

familiar with and supervise the process of preparing and presenting the financial 

information relating to the Company and, where appropriate, to the Group, reviewing 

compliance with the regulatory requirements, the adequate delimiting of the perimeter 

of consolidation and the correct application of accounting standards”. 

The Committee’s duties, also stipulated in the aforementioned article 14, include “To 

report, before approval by the Board or the Executive Committee, on the creation or 

acquisition of participations in special purpose entities or domiciled in countries or 

territories considered tax haven”. 

� The process addresses other types of risk (operational, technological, financial, legal, 

reputational, environmental, etc.) insofar as they may affect the financial statements: 

In order to address important matters in addition to those directly related to the 

preparation of financial information, all classes of risk factors, especially those 

recommended by the Basel Risk Committee in its various reports, are factored into the 

entire risk identification process. 

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This process evaluates all the risk factors identified, regardless of whether or not they 

have a direct impact on the preparation of financial information, based on the criteria in 

place for prioritising and estimating their importance, which prioritisation process 

factors in the probability of occurrence and magnitude of the risk event. 

The risk identification process factors in the following risk factors, among others: credit 

and counterparty, market, interest rate (including structural), liquidity, operational, 

technological, legal, documentation-related, fraud, money laundering, organisational, 

product marketing, capital shortfall, reputational, environmental, exposure 

concentration, business change, subsidiary risks, etc. 

� Which of the company’s governing bodies is responsible for overseeing the process: 

Ultimately, the Board of Directors, through its Audit and Compliance Committee, as 

enshrined in its rules, which stipulate that it shall “supervise the internal control and 

management risk systems so that the main risks are identified, managed and reported 

adequately.”. 

6.3 Control activities 

6.3.1. Procedures for reviewing and authorising financial information and the 

description of the ICFR to be disclosed to the market, indicating the corresponding lines 

of responsibility, as well as documentation and flow charts of activities and controls 

(including those addressing the risk of fraud) for each type of transaction that may 

materially affect the financial statements, including procedures for the closing of 

accounts and for the separate review of critical judgements, estimates, evaluations and 

projections. 

As already noted elsewhere in this report, it is the Board of Directors which delegates in 

its Audit and Compliance Committee the function “To be fully familiar with and 

supervise the process of preparing and presenting the financial information relating to 

the Company and, where appropriate, to the Group, reviewing compliance with 

applicable regulatory requirements, the adequate definition of the scope of 

consolidation and the correct application of accounting standards”. 

Similarly, the Committee shall “Review, before its issue, the regular financial 

information, which, as a listed company, the Company periodically must make public 

ensuring that such information, is prepared in accordance with the same principles and 

practices applicable to the annual financial statements. To that effect, the Committee 

might consider the need to proceed to a limited revision of the Auditor.”. 

In this respect it is also necessary to periodically validate all the control mechanisms 

intended to mitigate the risks inherent to our business operations. 

For this reason, and to comply with section 404 of the Sarbanes-Oxley Act (SOX), 

which sets out very structured requirements regarding financial information production, 

analysis and publication processes, laying great responsibility with directors and 


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executives in order to reduce the risk that this information could be unsafe, incomplete 

or wrong, we have established the following certification procedure: 

1. Certification by the employees responsible for the controls. At present, the ICFR 

model comprises some 2,000 controls, for which around 150 people are responsible. 

This certification process takes place twice a year, firstly at the end of the first half 

and secondly at the financial year-end, the latter marking the start of the overall 

certification process, moving up the hierarchical ladder until it encompasses the 

Bank’s most senior officers. 

2. Certification of sub-processes, processes and activities. To ensure a well-organised 

and hierarchical schematic which encompasses the Bank’s full spectrum of activities, 

the ICFR model is built on the basis of a structure of sub-processes, processes and 

activities. As noted, the certification of this structure begins at year-end and involves 

all the Bank’s business units, including senior management. 

3. A certification signed jointly by the chief executive officer (CEO) and the chief 

financial officer (CFO). Once certification has been obtained at all levels, these two 

officers proceed to certify the overall ICFR model, to which end they are aided by 

the so-called Internal Evaluation Report. 

This report is prepared by the Internal Control Unit and includes the evidence on 

which these two officers base their certification, including: 

� A list of the certifications obtained at all levels. 

� Any additional certifications performed/obtained. 

� Specific certification of all significant outsourced services. 

� The ICFR model design and operation tests performed by those responsible for 

its maintenance, i.e., the internal audit and the internal control areas. 

This report additionally itemises any incidents unearthed throughout the certification 

process by any of the implicated parties, indicating whether these incidents have 

been properly resolved or, to the contrary, the status of the plans in place to bring 

them to a satisfactory conclusion. 

Another of the important checks in place for verifying that the accounting scope of 

the ICFR model is adequate is the so-called ‘accounting mapping’ drawn up each 

quarter; this is an extremely complex process which is fully automated and which 

generates consolidated financial information on the basis of the daily accounting 

entries previously associated with the ICFR controls, comparing this with the 

financial information actually published. 

This process is monitored and updated continually and the scope is around 99% in all 

instances. 

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Although the ICFR model encompasses all of the Bank’s activities, a significant part of 

the system is based on ensuring the proper recording, measurement, presentation and 

disclosure of all transactions which could have a material impact on its financial 

information. 

With respect to the accounting close process and the review of critical accounting 

judgements, estimates, measurements and projections, the related activities are 

established by the Accounting Division (Controller) and are outlined in detail in the 

annual financial statements in Note 1, “Critical accounting estimates and judgements”, 

and Note 2, “Accounting policies and measurement bases applied”. 

These same criteria are followed when preparing the monthly closes, which always 

entail a results presentation by the head of the Accounting and Control Division to the 

Executive Committee, a presentation which specifies any estimates made. 

In addition, the Banks earnings are analysed by the Audit and Compliance Committee at 

least quarterly prior to submission to the Board of Directors for certification. To 

discharge these duties, these governance bodies ask the Internal Audit Department for 

any analysis and input they deem warranted with the same frequency, also asking the 

firm hired to audit the Group’s financial statements for testimony twice yearly. 

6.3.2. Internal control policies and procedures for IT systems (including secure access, 

control of changes, system operation, continuity and segregation of duties) giving 

support to key company processes regarding the preparation and publication of financial 

information: 

Banesto’s IT systems which are directly or indirectly related to the financial statements 

are configured to ensure the correct preparation and publication of financial information 

at all times by means of a specific internal control protocol. 

To this end, the entity has internal policies and procedures, which are duly updated and 

distributed, relating to the management of access to the IT applications and systems in 

accordance with the duties and clearances assigned to each unit/post. 

Management of IT system access by the Bank’s various users is clearly defined and 

regulated. Access is managed by the Organisation Unit so as to ensure proper separation 

of powers. 

The Bank’s methodology is designed to ensure that any new software developments and 

the updating and maintenance of existing programmes go through a definitiondevelopment-testing 

cycle which guarantees that financial information is handled 

reliably. 

In this way, once software developments have been completed on the basis of the 

regulated and so-defined specifications (detailed documentation of the processes to be 

implemented), these developments are subjected to exhaustive testing by a specialist 

‘software lab’. 


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Subsequently, in a pre-production environment (an IT environment which simulates real 

events), and prior to definitive rollout, the implementation experts perform specific 

performance tests, while the change management area runs tests related to user 

functionality. 

Lastly, the users themselves test the new developments in order to verify the suitability 

of the new software based on the sensitivity of the data and results obtained for each 

application. 

Regarding the control mechanisms in place for recovering data for any reason, Banesto 

has a Business Continuity Plan for the IT system structure underpinning its business 

operations. 

This Plan catalogues the measures, which translate into specific plans, designed to 

mitigate the scale and severity of IT incidents and to ensure that operations get back up 

and running as quickly and with as little fallout as possible. 

To this end, the Bank has highly-automated back-up systems which ensure the 

continuity of the most critical systems with little or no human intervention thanks to 

parallel redundant systems, high-availability systems and redundant communication 

lines. 

In addition, there are specific force majeure risk mitigation strategies in place such as 

the so-called virtual data processing centres, back-up power suppliers and offsite storage 

facilities. 

6.3.3. Internal control policies and procedures for overseeing the management of 

outsourced activities and of the appraisal, calculation or valuation services 

commissioned from independent experts, when these may materially affect the financial 

statements: 

It is worth noting that Bank’s policy is not to outsource any activity considered 

significant 2 and which could have a material impact on the financial statements to 

companies which are not part of the Santander Group, the entity’s ultimate parent 

group. 

At any rate, any services so outsourced are governed by the services agreement for 

Santander Group companies which clearly indicates the service being provided and the 

resources to be provided by the service supplier. 

2 �� 

�� 

�� 

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Irrespective of these contracts, because the fact of outsourcing certain activities, albeit 

to another Group company, does not exonerate a company from liability, Banesto has in 

place a permanent protocol which monitors that all ICFR risks are sufficiently mitigated 

by means of effective controls and checks: 

� Each year, the inventory of service providers is reviewed and the services 

provided are classified as significant or not significant. 

� On the basis of the scope of companies providing significant services so-defined, 

all of which are part of the Santander Group, each provider is required to provide 

Banesto with CEO and CFO certification of its own ICFR model twice yearly. 

These individual ICFR models play a direct role in mitigating the Bank’s own 

risks, which is why Banesto’s ICFR model is equipped with permanent controls 

over these activities and these controls are performed by Banesto officers. 

� In order to ensure that this control regime is always up-to-date, the controls 

performed by outsourced providers and those within Banesto’s own model for 

overseeing these tasks are exhaustively cross-checked twice yearly so that all 

material risk factors are subject to effective mitigating controls. 

The entire process of overseeing outsourced tasks is performed for the ICFR model as a 

whole. Note, however, that none of the measurement, judgement or calculation 

processes relating to the preparation and publication of the financial statements is 

outsourced. 

6.4 Information and communication: 

6.4.1. A specific function in charge of defining and maintaining accounting policies 

(accounting policies area or department) and settling doubts or disputes over their 

interpretation, which is in regular communication with the team in charge of operations: 

The Accounting and Control Division is responsible for defining accounting policies 

and settling any queries relating to their interpretation, providing this service for all 

areas of the Bank. This Division is part of a corporate department which reports directly 

to the CEO. 

Application of accounting policies is determined by the accounting framework 

applicable to the Bank which is that enshrined in the Code of Commerce and the rest of 

the body of applicable corporate law, the International Financial Reporting Standards 

adopted by the European Union, and also taking into consideration Bank of Spain 

Circular 4/2004, of 22 December, such that the financial statements provide a true and 

fair value of its equity and financial situation. 

It is worth highlighting from a technical standpoint that these financial statements are 

built up on the basis of accounting templates as part of a fully automated process. These 


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templates underpin all the accounting processes associated with any transaction and are 

designed by the aforementioned Accounting Division, which is similarly in charge of 

maintaining them and updating them immediately whenever necessary. 

Following supervision and analysis of the financial statements by the Accounting 

Division, whenever necessary, this same unit, following a special protocol, makes any 

required accounting entries which are not encompassed by the aforementioned 

automated process. 

6.4.2. Mechanisms in standard format for the capture and preparation of financial 

information, which are applied and used in all units within the entity or group, and 

support its main financial statements and accompanying notes as well as disclosures 

concerning ICFR. 

Banesto’s computer applications are configured into a management model which, using 

an IT system structure appropriate for a bank, is divided into several ‘layers’, which 

supply different kinds of services, including: 

General IT systems: these provide information to division/business unit heads. 

Management systems: these produce information for business monitoring and 

control purposes. 

Business systems: software encompassing the full product-contract-customer 

life cycle. 

The so-called structural systems: these support the data shared and used by the 

rest of the applications and services. These systems include all those related 

to the accounting and financial information. 

The software architecture: this defines the design patterns and principles for all 

systems. 

System architecture: the mechanisms used in the model for design outsourcing, 

tool encapsulation and task automation. 

The overriding purpose of this schematic is to provide the Bank’s IT systems with the 

right software infrastructure to manage all the accounting entries made by the various 

applications and the subsequent entries into the corresponding accounting registers, all 

endowed with the resources needed to enable access to and consultation of the various 

levels of supporting data. 

The scope of this schematic therefore encompasses the most critical financial 

information related processes, including those of capturing and balancing the 

movements received, consolidating and reconciling with application balances, crosschecking 

the software and accounting information for accuracy, complying with the 

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accounting allocation structural model, managing and storing auxiliary accounting data 

and making accounting entries for saving in the accounting system itself. 

The various applications, based on a business-centric model, enter the transactions 

performed on a day-to-day basis via the various distribution channels (branches, 

internet, telephone banking, e-banking, etc.) into the “general transaction daily register”. 

These banking transactions may or may not have accounting implications and are input 

online or in batches. 

This accounting infrastructure and the aforementioned structural systems generate the 

processes needed to generate, disclose and store all the financial information required of 

a financial institution for regulatory and internal purposes, all of which under the 

guidance, supervision and control of the Accounting and Control Division. 

6.5 System monitoring 

6.5.1. ICFR monitoring activities performed by the Audit Committee, including an 

indication of whether the entity has an internal audit function whose competencies 

include supporting the audit committee in its role of monitoring the internal control 

system, including ICFR. 

Also describe the scope of the ICFR assessment conducted in the year and the procedure 

for the person in charge to communicate its findings. State also whether the company 

has an action plan specifying corrective measures for any flaws detected, and whether it 

has taken stock of their potential impact on its financial information: 

In addition to its other duties itemised elsewhere in this questionnaire, the Audit and 

Compliance Committee, one of the Board of Director’s steering committees, shall also 

“Supervise the internal auditing services. To that end, the person responsible should 

submit annually to the Committee their work plan and inform directly of any incidents 

arising during the development thereof, and submit to the Committee a year-end 

activities report.. In order to make this supervision possible, the Bank’s internal 

Auditors shall deal with the Audit and Compliance Committee’s requests for 

information in the performance of their duties;”. 

The Regulations of the Board of Directors additionally establish that the internal audit 

service reports directly to the Board. Without detriment to this, the Audit and 

Compliance Committee shall vouch at all time for the independence and effectiveness 

of internal auditing, reporting on the proposals regarding the election, appointment, reelection 

and dismissal of the person in charge of the Bank’s internal auditing service.. 

The Audit and Compliance Committee also receives regular information on the 

activities of internal audit function’s activities and verifies that senior management 

takes the conclusions and recommendations of its reports under advice. 

As already noted, the Bank also has an Internal Control Unit, which is independent 

within the organisational structure, which oversees and monitors the ICFR model 

continually, ensuring that it works as it should, is secure and efficient, reporting its 


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findings back to management, the Audit and Compliance Committee and the Board of 

Directors. 

Here we make note of the following aspects of the internal audit function: 

1. Internal audit function. 

The Banesto Group’s Internal Audit Department’s mission includes oversight of the 

suitability, efficiency and effectiveness of the Group’s internal control systems and 

the reliability and quality of its financial and business information. 

This Department, which performs this function for the entire Group, reports directly 

to Banesto’s Board of Directors, to which it gives an account of its annual audit work 

programme and the results of the work performed during the preceding year at least 

once a year. 

As already mentioned, the Audit and Compliance Committee is in charge of 

overseeing the internal audit service, to which end it performs the following duties, 

among others: 

• Ensuring the ongoing independence and effectiveness of the internal audit 

function. 

• Getting the Internal Audit Department to present it with its annual work 

schedule, report directly to it on any incidents arising during its execution and 

submit a report on its activities to it at the end of each year. In order to perform 

this duty, the Audit and Compliance Committee is kept regularly updated on the 

activities of the internal audit function, verifying that senior management takes 

the conclusions and recommendations of its reports under advice. 

In order to facilitate this supervisory function, the internal audit service is required to 

attend to any information requests made by the Audit and Compliance Committee in 

the course of discharging its duties, participating in Committee meetings as 

requested. 

The Executive Committee and the Risk Committee may also ask for information 

regarding the internal audit work performed in areas falling under their respective 

spheres of expertise and for feedback regarding compliance with the 

recommendations made in their reports. These committees may also suggest the 

addition of specific risk factors to the audit programme. 

All of the professionals working in the Internal Audit Department do so on a 

dedicated basis; none of them juggles internal audit functions with non-audit duties. 

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As already noted, these professionals’ basic duties include oversight of the Banesto 

Group’s internal control systems, additionally verifying that the risks intrinsic to the 

Group’s business operations are duly covered by these management and control 

systems. 

2. Scope of the ICFR assessment. 

In keeping with the foregoing, the Internal Audit Department, executing the annual 

work plan approved by the Board of Directors, reviews Banesto’s existing ICFR 

system on an ongoing basis to ensure the financial information produced is reliable 

and duly controlled. 

The Banesto Group, in its capacity as a subgroup certifying the ICFR model of the 

Santander Group (in compliance with the Sarbanes Oxley Act, or SOX), predicated 

primarily on the identification of potential risk events and the development of 

initiatives to control and mitigate the same, is tasked with the duties of documenting, 

updating, monitoring, validating and certifying the said model, tasks which include 

due identification of the critical processes and attendant risks which could have a 

material impact on the financial information. 

Execution of the annual work programme encompasses ongoing validation of the risk 

and control matrix defined by the Banesto Group under the auspices of the SOX Act 

in order to safeguard the quality of its financial information. 

This review also encompasses the issuance of an annual report addressing: (i) an 

assessment of how well these regulations were applied; (ii) the effectiveness of the 

controls in place; (iii) updated documentation; (iv) self-assessment of the controls by 

units of the Group; and (v) follow-up of any related audit recommendations made 

during the year. 

The conclusions of this review were positive in 2011, with no material incidents 

uncovered. 

The scope of the annual audit plan and the work methodology used encompass a 

review of the practices followed in the control environment and of the IT system 

controls themselves. 

On the basis that the ICFR review should ensure the quality of the Group’s financial 

information, the following accounting information checks, among others, are 

considered intrinsic to the ongoing execution of the annual audit programme: 

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a. Banesto’s individual financial statements and the related business-accounting 

controls. 

b. The consolidation process, including a specific review of the accounting 

processes of the Group companies which pose a greater risk of financial 

information errors or shortcomings. 

c. Reviews of the quarterly accounting closes, including analysis of the most 

significant accounting aspects of the consolidated financial information. 

d. Ad-hoc and regular analysis of the quality of and procedures for controlling 

the preparation of the financial information sent to the regulatory and 

supervisory authorities. 

e. Ongoing monitoring of any summons issued by the regulatory authorities in 

the form of inspection orders. 

f. Continual monitoring of the audit conclusions and recommendations of an 

accounting nature. 

The quarterly information published is reviewed by the Audit and Compliance 

Committee for the consolidated Group’s successive closes. This review focuses 

particularly on the adequacy of the provisioning effort, non-recurring gains and 

losses and other events of accounting significance or which pose a greater risk of 

deriving in material errors in the Group’s financial information and matters which 

enable it to stay abreast of and form an opinion on the most significant accounting 

issues affecting the Group. 

3. Specific financial statement processes, units and areas evaluated. 

The scope of the internal audit review encompasses the totality of material risk 

factors across the units within the Banesto Group ‘universe’, prioritising risks of a 

business-accounting nature, by ICFR accounting areas or implicit processes. 

To this end, the internal audit function has a risk map which enables it to prioritise, 

in keeping with the main risk parameters intrinsic to each process, unit or area, the 

work to be performed for the totality of units in order to facilitate subsequent 

execution of the annual schedule. 

The scope of the annual programme is fully comprehensive and includes all the 

processes, units and areas classified as ‘priority’ or ‘to be supervised’. 

4. Review of the effective design and operation of practices evaluated. 

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The analytical schematic outlined extends to the effective design and operation of the 

ICFR under the umbrella of consultancy reviews. The Audit Department issues 

recommendations and best practice guidance whenever warranted. 

The depth and scope of the audit work, including the annual evaluation of the overall 

model and the coordination structure, enables due verification of the effective 

operation of the ICFR model with respect to the quality of financial information and 

the identification of any flaws, with a particular focus on critical processes which 

pose a risk of material financial information errors. 

6.5.2. Indication of the existence of discussion procedure whereby the auditor (pursuant 

to TAS), the internal audit function and other experts can report any significant internal 

control weaknesses encountered during their review of the financial statements or other 

assignments to the company’s senior management and its audit committee or board of 

directors. State also whether the entity has an action plan to correct or mitigate the 

weaknesses found. 

Among other stipulations, article 14 of the Board Rules refers to the power delegated in 

the Audit and Compliance Committee to “Serve as a communication channel between 

the Board and the Auditors, assess the results of each audit and the response of the 

management team to its recommendations, and act as a mediator in the event of 

disagreement between the Board and the Auditor regarding the principles and 

standards to be applied in the preparation of the financial statements”. 

The Committee’s duties also include that of supervising “the fulfilment of the auditing 

contract, endeavouring to ensure that the opinion on the annual financial statements 

and the main contents of the Auditor’s report are drafted in a clear and accurate 

fashion”. 

In this sense, the Audit and Compliance Committee’s regularly scheduled meetings deal 

with any possible control deficiencies which could affect the reliability and accuracy of 

the financial statements, to which end it can call in the various implicated areas of the 

Bank to provide the necessary information and clarifications; the Committee also takes 

stock of the potential impact of any flaws detected on the financial information. 

6.6 Other disclosures. 

In compliance with section 404 of the Sarbanes-Oxley Act (SOX), Deloitte, S.L., in its 

capacity as auditor of the annual financial statements of the Bank and of the Banesto 

Group, reviews the ICFR model on an annual basis. 

6.7 External auditor report. 

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At the date of authorising this Annual Report on Corporate Governance for issue, the 

auditor had yet to complete the review of the ICFR model for the purpose of complying 

with article 404 of the Sarbanes–Oxley Act, as the Bank’s certification process is still 

ongoing. It is expected that the review will be completed before the annual financial 

statements are ratified by the Bank’s shareholders at its upcoming General 

Shareholders’ Meeting. 

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General 

information 

and Regional 

Headquarters 

General information Telephones: +34 91.338.31.00 - +34 91.338.15.00 

Relations with shareholders Avda. Gran Vía de Hortaleza, 3 - 28033 Madrid España 

Telephone: 902.123.230 - e-mail: accionistas@banesto.es 

Relations with investors and analysis Avda. Gran Vía de Hortaleza, 3 - 28033 Madrid España 

Telephone: +34 91.762.22.33 - Fax. +34 91.338.25.58 

e-mail: ir@banesto.es 

Customer attention Avda. Gran Vía de Hortaleza, 3 - 28033 Madrid España 

Telephone: 902.303.630 - e-mail: sacor@banesto.es 

Press centre and Telephone: +34 91.762.22.28 - e-mail: prensa@banesto.es 

relations with the media www.banesto.es/webcorporativa 

Corporate website www.banesto.es/webcorporativa 

CSR www.banesto.es/rsc 

BANCO ESPAÑOL DE CRÉDITO, 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 bylaws 

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. 

Headquarters 

The corporate by-laws and other public information on 

Banesto can be consulted at the bank’s headquarters 

(Avda. Gran Vía de Hortaleza 3, Madrid). 

º General information and addresses 

Additional information on Banesto: 

• Commercial information: www.banesto.es 

www.ibanesto.com 

• Annual Report: www.banesto.es/informe_anual 

• ICorporate Social 

Responsibility Report: www.banesto.es/rsc 

• Corporate Governance Report: www.banesto.es/igc 

• Property portal: www.banestovivienda.com 

• Banesto Foundation: www.fundacionbanesto.org 

www.turismo-solidario.es 

www.lideratv.com 

www.emprendedorestv.com 

www.yuzz.org 

www.globalbusinesstrip.org 

www.spaintechcenter.com 

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1 Western Andalucia (Sevilla / Cádiz / Córdoba 

/ Huelva) / Canary Islands 

Director: Alberto Delgado Romero 

Avda. de la Palmera, 25 - 41013 Sevilla 

Tel.: 95.493.27.02 9 - Fax 95.493.27.03 

2 Eastern Andalucia 

(Málaga / Almería / Granada / Jaén) 

Director: Carmen González Moya 

Alameda Principal, 8 29005 Málaga 

Tel.: 952.06.26.08 - Fax: 952.21.67.31 

3 Castilla la Mancha / Extremadura 

Director: Sonia Colomar Rocher 

Pza. de Zocodover, 4 - 45001 Toledo 

Tel.: 925.28.02.53 - Fax 925.28.01.33 

4 Levante 

Director: Félix Subies Montalar 

Pintor Sorolla, 17 - 46002 Valencia 

Tel.: 96.399.62.10 - Fax. 96.399.62.12 

5 Madrid 

Director: José Luís Fernández Fernández 

Villanueva, 2 - 28001 Madrid 

Tel.: 91.338.15.55 - Fax.91.338.13.50 

6 Catalonia/Balearic Islands 

Director: Eduard Miró Contijoch 

Gran Vía de les Corts Catalanes, 583 - 08011 Barcelona 

Tel.: 93.214.45.91 - Fax: 93.214.46.90 

Company banking 

1 Catalonia-Balearic Islands 

Director: Pedro Alonso Juncar 

Gran Vía de les Corts Catalanes, 583, 1ª planta – 08011 Barcelona 

Tel.: 93.214.45.43 - Fax: 93.214.46.95 

Institutional relations executive in Catalonia 

Director: Pere Estruch Jane 

Tel.: 93.214.45.41 - Fax: 93.214.46.96 

2 Levante 

Director: José Miguel Lorente Ayala 

Pintor Sorolla, 17 - 3ª planta - 46002 Valencia 

Tel.: 963.99.62.11 - Fax: 963.99.61.31 

3 Madrid 

Director: Octavio Ramírez Romero 

Princesa, 25 - 28008 Madrid 

Tel.: 91.758.60.01 - Fax: 91.758.60.33 

4 North (Aragón / Asturias / Cantabria / 

Castilla León / Galicia) 

Director: María Luisa Sauras Morellon 

Princesa, 25 - 28008 Madrid 

Tel.: 91.758.60.11 - Fax: 91.758.60.03 

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7 Basque Country / Aragón / Navarra / La Rioja 

Director: Mentxu Aracama Municha 

Postas, 22 - 01001 Vitoria-Gasteiz 

Tel.: 945.16.33.31 - Fax: 945.16.33.58 

8 Castilla León / Cantabria 

Director: Carlos Ranera González 

Constitución, 10 - 47001 Valladolid 

Tel.: 983.21.74.10 - Fax: 983.21.74.08 

9 Galicia / Asturias 

Directora: Rosario Mª García Alonso 

Cantón Pequeño, 15 - 15003 La Coruña 

Tel.: 981.216.790 - Fax: 981.217.962 

6 

4 

5 

3 

2 

5 

7 

3 4 

2 

6 

5 Basque Country, Navarra y Rioja 

Director: Txema Bilbao Urquijo 

Navarra, 3 - 48001 Bilbao (Bizkaia) 

Tel.: 94.423.18.14 - Fax: 94.423.97.80 

1 

6 South (Andalucía, Extremadura y Canarias) 

Director: Juan Antonio Hernani Goldaracena 

Avda. De La Palmera, 25 - 41013 Sevilla 

Tel.: 954.93.27.04 - Fax: 954.61.56.64

The Annual Report and Corporate Social Responsibility Report are not printed. 

They are available in digital form. Banesto saves more than seven tones of paper with this measure. 

® February 2012 Banesto 

Produced by the office of the Chairman 

Design: gosban consultora de comunicación 

Photos: Fernando Moreno y Andrea Savini 

Translation: William Chislett

www.banesto.es 

The Global Compact FTSE4Good EFQM

AR11 - Banesto

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