Annual Report 2007 - Santander

Carta del Presidente“We focus on retail banking and are prudent in risks. This produceshigh-quality, recurrent earnings”MAXIMUM TRANSPARENCY IN A DIFFICULTFINANCIAL ENVIRONMENTThese results and the Group’s performance were generated ata particularly difficult time for the international financial sector.Turmoil in the market, sparked in July by the meltdown in the USsubprime mortgage market, intensified during the rest of the yearand produced liquidity tensions, a widening of risk differentialsand a significant need for asset writedowns by some banks.These circumstances underlined the need to pay particularattention to liquidity and capital management in financialinstitutions and re-establish a reasonable balance betweenprofitability and risk in loan operations.It is at times like this when transparency is the key to restoringinvestors’ confidence. For this reason, Banco Santander givesmaximum priority to transparency when presenting its results,objectives, strategy and risks’ policy.SANTANDER’S STRATEGY IN THIS CONTEXTIn my letter in the 2006 Annual Report, I stated that “ourcompetitive advantage, even in the face of an eventual economicslowdown, is based on the greater recurring nature of ourbusiness compared with that of many of our competitors, who aremore dependent on markets whose performance is, by definition,more volatile.” The year 2007 showed, with crystal clarity, theadvantages of Banco Santander’s strategy, based on six solidpillars:1) The diversification of our businesses, which combine astrong presence in emerging and mature markets.Our exposure to emerging markets has always been taken ongradually and with thorough knowledge of the markets in which weinvest, such as Latin America. We combine an appropriatediversification and a leadership position in the markets where we arepresent. This enables us to attain the right balance between highgrowth in revenues, efficient management and moderate risk.2) We focus on retail banking and are prudent whenassuming risks. This translates into high-quality, recurrentearnings.We are a retail bank which concentrates on individualcustomers and SMEs, focusing on closeness to customers and thehighest quality of service. We have 11,178 branches (13,000including Banco Real), which makes us the international bank withthe most branches in the world. Retail banking generates 84% ofSantander’s earnings compared to 16% from corporate banking.Growth in our earnings is based on recurrent businesses. Thequality of our results was clear in 2007 as we were not affected bythe crisis in the financial markets.This model, combined with Santander’s traditional prudence inrisk management, enabled us to avoid liquidity problems seen atother institutions linked to extensive use of conduits and specialvehicles; and we did not become involved in investments insecurities and financial structures affected by the crisis which,because of their complex nature and difficult valuation, wereparticularly vulnerable.As a result, we did not have to make any allowances otherthan provisions related to our lending and ordinary investments.Furthermore, our Group ended the year with EUR 6,027 million ofgeneric provisions.3) We strive to have the best technology as the base forour commercial success, innovation and recurrent gains incost efficiency.Thanks to technology, we continue to improve our efficiencyratio – from 52.9% in 2005 to 44.2% in 2007 and we expect toreach around 40% in 2009. Moreover, our cutting-edgetechnology has played a key role in quickly improving the costbases of new acquisitions, as shown in the case of Abbey.4) We create value through acquisitions and by sellingnon-strategic assets.To maintain recurrent growth in earnings per share higherthan that of our competitors it is vital to actively manage ourportfolio of businesses, investing with price discipline in banksand markets where our management can create value. We alsodispose of non-essential assets where we have little capacity tocreate value.The acquisitions policy will be selective and based on strictstrategic and financial criteria. The return on these investmentsmust always exceed the cost of capital within a maximum of threeyears.Banco Real’s acquisition in 2007 and the sale of pensionbusinesses in Latin America, property in Spain, and Antonveneta inItaly reflect the discipline in capital that we are imposing on all ourdecisions so as to maximise shareholder value.8