Table of Contents

 

 

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of May, 2016

Commission File Number: 001-12518

Banco Santander, S.A.

(Exact name of registrant as specified in its charter)

Ciudad Grupo Santander

28660 Boadilla del Monte (Madrid) Spain

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

  Form 20-F      X        Form 40-F               

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

  Yes                  No      X     

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

  Yes                  No      X     

 

 

 


Table of Contents

Banco Santander, S.A.

TABLE OF CONTENTS

 

      Item          

1

  Banco Santander, S.A. and Companies composing Santander Group – Interim Condensed Consolidated Financial Statements for the three-month period ended 31  March 2016, together with the Report on Limited Review


Table of Contents

Item 1

 

 

 

 

 

 

  Banco Santander, S.A. and Companies composing Santander Group  
  Interim Condensed Consolidated Financial Statements for the three-month period ended 31 March 2016, together with the Report on Limited Review  
 

Translation of a report originally issued in Spanish and of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 


Table of Contents

 

 

 

  Banco Santander, S.A. and Companies composing Santander Group  
  Interim Condensed Consolidated Financial Statements for the three-month period ended 31 March 2016  


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

SANTANDER GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS AS AT 31 MARCH 2016 AND 31 DECEMBER 2015

(Millions of euros)

 

               
ASSETS   Note      31/03/16      31/12/15(*)       LIABILITIES AND EQUITY   Note      31/03/16      31/12/15(*)    
         

CASH AND BALANCES WITH CENTRAL BANKS

         73,239         81,329       

FINANCIAL LIABILITIES HELD FOR TRADING

  9        108,567          105,218   
         

FINANCIAL ASSETS HELD FOR TRADING

  5        152,621         147,287       

OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

  9        63,404          54,768   
         

OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

 

 

5  

 

     48,771         45,043       

FINANCIAL LIABILITIES AT AMORTISED COST

  9  

 

     1,012,407          1,039,343   
         

AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

5  

 

     118,298         122,036       

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

         453          174   
         

LOANS AND RECEIVABLES

  5        817,409         831,637       

HEDGING DERIVATIVES

         8,067          8,937   
         

HELD-TO-MATURITY INVESTMENTS

  5        4,566         4,355       

LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE

                 -   
         

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

         1,815         1,379       

LIABILITIES UNDER INSURANCE CONTRACTS

         656          627   
         
               

PROVISIONS

  10        14,292          14,494   

HEDGING DERIVATIVES

         8,581         7,727                   
         
               

TAX LIABILITIES:

         7,952          7,725   

NON-CURRENT ASSETS HELD FOR SALE

  6        5,727         5,646       

Current

         2,609          2,160   
               

Deferred

         5,343          5,565   
         

INVESTMENTS:

         3,350         3,251                   

Associates

         1,725         1,659     

OTHER LIABILITIES

         9,621          10,221   

Joint ventures

         1,625         1,592                 
               

TOTAL LIABILITIES

         1,225,419          1,241,507   
         

INSURANCE CONTRACTS LINKED TO PENSIONS

         286         299       

SHAREHOLDERS’ EQUITY:

  11        103,264          102,402   
               

Share capital

         7,217          7,217   

REINSURANCE ASSETS

         340         331       

Share premium

         45,001          45,001   
               

Reserves

         49,328          45,760   

TANGIBLE ASSETS:

  7        25,465         25,320       

Other equity instruments

         216          214   

Property, plant and equipment

         19,155         19,335       

Less: Treasury shares

         (131)          (210)   

Investment property

         6,310         5,985       

Profit for the period attributable to the Parent

         1,633          5,966   
               

Less: Dividends and remuneration

                 (1,546)   

INTANGIBLE ASSETS:

  8        28,693         29,430                   

Goodwill

         26,209         26,960       

VALUATION ADJUSTMENTS:

  11        (15,949)         (14,362)   

Other intangible assets

         2,484         2,470       

Available-for-sale financial assets

         1,129          844   
               

Cash flow hedges

         575          171   

TAX ASSETS:

         26,347         27,814       

Hedges of net investments in foreign operations

         (3,356)         (3,597)   

Current

         4,998         5,769       

Exchange differences

         (10,820)         (8,383)   

Deferred

         21,349         22,045       

Non-current assets held for sale

         -         -   
               

Entities accounted for using the equity method

         (229)         (232)   

OTHER ASSETS

         8,692         7,376       

Other valuation adjustments

         (3,248)          (3,165)   
         
               

NON-CONTROLLING INTERESTS

         11,466           10,713   
               

Valuation adjustments

         (1,249)          (1,227)   
               

Other

         12,715          11,940   
               

EQUITY

         98,781          98,753   

TOTAL ASSETS

         1,324,200         1,340,260       

TOTAL LIABILITIES AND EQUITY

         1,324,200          1,340,260   
         
               

MEMORANDUM ITEMS:

           
               

CONTINGENT LIABILITIES

         40,176          40,115   
               

CONTINGENT COMMITMENTS

         221,260          221,457   
                           
               
                                                 

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated balance sheet as at 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS AT 31 MARCH 2016 AND 31 DECEMBER 2015

(Millions of reais)

 

               
ASSETS    Note      31/03/16      31/12/15(*)     LIABILITIES AND EQUITY    Note      31/03/16      31/12/15(*)  
         

CASH AND BALANCES WITH CENTRAL BANKS

          301,554         350,666     

FINANCIAL LIABILITIES HELD FOR TRADING

   9        447,015         453,669   
         

FINANCIAL ASSETS HELD FOR TRADING:

   5        628,402         635,058     

OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

   9        261,059         236,142   
         

OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

 

   5  

 

     200,809         194,212     

FINANCIAL LIABILITIES AT AMORTISED COST

 

   9  

 

     4,168,484         4,481,334   
         

AVAILABLE-FOR-SALE FINANCIAL ASSETS

   5  

 

     487,080         526,182     

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

          1,865         750   
         

LOANS AND RECEIVABLES

   5        3,365,600         3,585,770     

HEDGING DERIVATIVES

          33,215         38,534   
         

HELD-TO-MATURITY INVESTMENTS

   5  

 

     18,800         18,777     

LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE

          -         -   
         

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK

          7,473         5,946     

LIABILITIES UNDER INSURANCE CONTRACTS

          2,701         2,703   
         
                

PROVISIONS

   10        58,847         62,494   

HEDGING DERIVATIVES

          35,331         33,317                  
         
                

TAX LIABILITIES:

          32,741         33,308   

NON-CURRENT ASSETS HELD FOR SALE

   6        23,580         24,344     

Current

          10,742         9,313   
                

Deferred

          21,999         23,995   
         

INVESTMENTS:

          13,794         14,017                  

Associates

          7,103         7,154     

OTHER LIABILITIES

          39,610         44,061   

Joint ventures

          6,691         6,864                  
                

TOTAL LIABILITIES

          5,045,537         5,352,995   
         

INSURANCE CONTRACTS LINKED TO PENSIONS

          1,178         1,289     

SHAREHOLDERS’ EQUITY:

   11        262,807         258,463   
                

Share capital

          18,016         18,016   

REINSURANCE ASSETS

          1,400         1,427     

Share premium

          107,097         107,097   
                

Reserves

          130,676         117,613   

TANGIBLE ASSETS:

   7        104,850         109,173     

Other equity instruments

          541         531   

Property, plant and equipment

          78,869         83,367     

Less: Treasury shares

          (540)         (904)   

Investment property

          25,981         25,806     

Profit for the period attributable to the Parent

          7,017         21,746   
                

Less: Dividends and remuneration

          -         (5,636)   

INTANGIBLE ASSETS:

   8        118,141         126,893                  

Goodwill

          107,913         116,243                  

Other intangible assets

          10,228         10,650     

VALUATION ADJUSTMENTS:

   11        96,706         121,150   
                

Available-for-sale financial assets

          4,648         3,638   

TAX ASSETS:

          108,481         119,925     

Cash flow hedges

          2,367         738   

Current

          20,579         24,874     

Hedges of net investments in foreign operations

          (13,816)         (15,507)   

Deferred

          87,902         95,051     

Exchange differences

          117,824         146,926   
                

Non-current assets held for sale

          -         -   

OTHER ASSETS

          35,788         31,803     

Entities accounted for using the equity method

          (943)         (1,001)   
                

Other valuation adjustments

          (13,374)         (13,644)   
         
                

NON-CONTROLLING INTERESTS

          47,211         46,191   
                

Valuation adjustments

          13,598         15,968   
                

Other

          33,613         30,223   
                

EQUITY

          406,724         425,804   

TOTAL ASSETS

          5,452,261         5,778,799     

TOTAL LIABILITIES AND EQUITY

          5,452,261         5,778,799   
         
                

MEMORANDUM ITEMS:

            
                

CONTINGENT LIABILITIES

          165,421         172,964   
                

CONTINGENT COMMITMENTS

          911,016         954,856   
                                                   

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated balance sheet as at 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of euros)

 

          (Debit) Credit
       Note         31/03/16       31/03/15 (*)
       

INTEREST AND SIMILAR INCOME

  12      13,560      14,307

INTEREST EXPENSE AND SIMILAR CHARGES

        (5,936   (6,269)

NET INTEREST INCOME

        7,624      8,038

INCOME FROM EQUITY INSTRUMENTS

  12      44      33

SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD

        83      99

FEE AND COMMISSION INCOME

  12      3,112      3,261

FEE AND COMMISSION EXPENSE

        (715   (737)

GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net)

  12      476      (203)

EXCHANGE DIFFERENCES (net)

        28      898

OTHER OPERATING INCOME

  12      1,109      969

OTHER OPERATING EXPENSES

        (1,031   (914)

GROSS INCOME

        10,730      11,444

ADMINISTRATIVE EXPENSES

        (4,572   (4,785)

Staff costs

        (2,683   (2,755)

Other general administrative expenses

        (1,889   (2,030)

DEPRECIATION AND AMORTISATION CHARGE

        (586   (592)

PROVISIONS (net)

        (381   (603)

IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net)

      (2,416   (2,563)

IMPAIRMENT LOSSES ON OTHER ASSETS (net)

  7 & 8      (35   (60)

GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE

        8      172

GAINS FROM BARGAIN PURCHASES ARISING IN BUSINESS COMBINATIONS

        -      -

GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS

      (17   (24)

PROFIT BEFORE TAX

        2,731      2,989

INCOME TAX

        (810   (922)

PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS

        1,921      2,067

PROFIT/LOSS FROM DISCONTINUED OPERATIONS (net)

        -      -

CONSOLIDATED PROFIT FOR THE PERIOD

        1,921      2,067

Profit attributable to the Parent

        1,633      1,717

Profit attributable to non-controlling interests

        288      350

EARNINGS PER SHARE:

           

From continuing and discontinued operations:

           

Basic earnings per share (euros)

      0.11      0.12

Diluted earnings per share (euros)

      0.11      0.12
       

From continuing operations:

           

Basic earnings per share (euros)

      0.11      0.12

Diluted earnings per share (euros)

      0.11      0.12

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated income statement

for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of reais)

 

          (Debit) Credit
       Note         31/03/16       31/03/15 (*)
       

INTEREST AND SIMILAR INCOME

  12      58,255      45,997

INTEREST EXPENSE AND SIMILAR CHARGES

        (25,502)      (20,155)

NET INTEREST INCOME

        32,753      25,842

INCOME FROM EQUITY INSTRUMENTS

  12      189      106

SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD

        357      318

FEE AND COMMISSION INCOME

  12      13,369      10,484

FEE AND COMMISSION EXPENSE

        (3,072)      (2,369)

GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net)

  12      2,045      (653)

EXCHANGE DIFFERENCES (net)

        120      2,887

OTHER OPERATING INCOME

  12      4,765      3,115

OTHER OPERATING EXPENSES

        (4,430)      (2,939)

GROSS INCOME

        46,096      36,791

ADMINISTRATIVE EXPENSES

        (19,641)      (15,383)

Staff costs

        (11,526)      (8,857)

Other general administrative expenses

        (8,115)      (6,526)

DEPRECIATION AND AMORTISATION CHARGE

        (2,517)      (1,904)

PROVISIONS (net)

        (1,637)      (1,939)

IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net)

      (10,379)      (8,240)

IMPAIRMENT LOSSES ON OTHER ASSETS (net)

  7 & 8      (150)      (192)

GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE

        35      553

GAINS FROM BARGAIN PURCHASES ARISING IN BUSINESS COMBINATIONS

        -      -

GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS

      (73)      (77)

PROFIT BEFORE TAX

        11,734      9,609

INCOME TAX

        (3,480)      (2,964)

PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS

        8,254      6,645

PROFIT/LOSS FROM DISCONTINUED OPERATIONS (net)

        -      -

CONSOLIDATED PROFIT FOR THE PERIOD

        8,254      6,645

Profit attributable to the Parent

        7,017      5,520

Profit attributable to non-controlling interests

        1,237      1,125

EARNINGS PER SHARE:

           

From continuing and discontinued operations:

           

Basic earnings per share (reais)

      0.47      0.39

Diluted earnings per share (reais)

      0.47      0.39
       

From continuing operations:

           

Basic earnings per share (reais)

      0.47      0.39

Diluted earnings per share (reais)

      0.47      0.39

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated income statement

for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of euros)

 

                      
     Note           31/03/16          31/03/15 (*)  
       

CONSOLIDATED PROFIT FOR THE PERIOD

           1,921      2,067
       

OTHER RECOGNISED INCOME AND EXPENSE:

           (1,609   3,067

Items that will not be reclassified to profit or loss

           (85   (171)

Actuarial gains and losses on defined benefit pension plans

  11          (124   (226)

Non-current assets held for sale

           -      -

Income tax relating to items that will not be reclassified to profit or loss

           39      55

Items that may be reclassified subsequently to profit or loss for the period

           (1,524   3,238

Available-for-sale financial assets:

           686      618

Revaluation gains/(losses)

           946      828

Amounts transferred to income statement

           (260   (210)

Other reclassifications

           -      -

Cash flow hedges:

           563      77

Revaluation gains/(losses)

           824      261

Amounts transferred to income statement

           (261   (184)

Other reclassifications

           -      -

Hedges of net investments in foreign operations:

  11          241      (1,260)

Revaluation gains/(losses)

           241      (1,260)

Amounts transferred to income statement

           -      -

Other reclassifications

           -      -

Exchange differences:

  11          (2,498   3,982

Revaluation gains/(losses)

           (2,498   3,982

Amounts transferred to income statement

           -      -

Other reclassifications

           -      -

Non-current assets held for sale:

           -      -

Revaluation gains/(losses)

           -      -

Amounts transferred to income statement

           -      -

Other reclassifications

           -      -

Entities accounted for using the equity method:

           3      -

Revaluation gains/(losses)

           3      -

Amounts transferred to income statement

           -      -

Other reclassifications

           -      -

Income tax

           (519   (179)

TOTAL RECOGNISED INCOME AND EXPENSE

           312      5,134

Attributable to the Parent

           46      4,503

Attributable to non-controlling interests

           266      631

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of recognised income and expense for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of reais)

 

                   
       Note         31/03/16          31/03/15 (*)
       

CONSOLIDATED PROFIT FOR THE PERIOD

        8,254      6,645   
       

OTHER RECOGNISED INCOME AND EXPENSE:

        (26,814   38,475   

Items that will not be reclassified to profit or loss

        (365   (550)

Actuarial gains and losses on defined benefit pension plans

  11      (533   (727)

Non-current assets held for sale

        -      -   

Income tax relating to items that will not be reclassified to profit or loss

        168      177

Items that may be reclassified subsequently to profit or loss for the period

        (26,449   39,025  

Available-for-sale financial assets:

        2,947      1,987  

Revaluation gains/(losses)

        4,064      2,662  

Amounts transferred to income statement

        (1,117   (675)

Other reclassifications

        -      -   

Cash flow hedges:

        2,419      248

Revaluation gains/(losses)

        3,540      840

Amounts transferred to income statement

        (1,121   (592)

Other reclassifications

        -      -

Hedges of net investments in foreign operations:

  11      1,035      (4,051)  

Revaluation gains/(losses)

        1,035      (4,051)  

Amounts transferred to income statement

        -      -   

Other reclassifications

        -      -   

Exchange differences:

  11      (30,633   41,416   

Revaluation gains/(losses)

        (30,633   41,416   

Amounts transferred to income statement

        -      -   

Other reclassifications

        -      -   

Non-current assets held for sale:

        -      -   

Revaluation gains/(losses)

        -      -   

Amounts transferred to income statement

        -      -   

Other reclassifications

        -      -   

Entities accounted for using the equity method:

        13      -   

Revaluation gains/(losses)

        13      -   

Amounts transferred to income statement

        -      -   

Other reclassifications

        -      -   

Income tax

        (2,230   (575)

TOTAL RECOGNISED INCOME AND EXPENSE

        (18,560   45,120   

Attributable to the Parent

        (17,427   40,168   

Attributable to non-controlling interests

        (1,133   4,952   

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of recognised income and expense for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of euros)

 

      Equity attributable to the Parent     

Non-controlling
interests

    

  Total

  equity

      Shareholders’ equity     

Valuation
adjustments

       
        Share   
  capital   
     Share premium 
and reserves 
less dividends 
and 
remuneration 
    

Other

equity
  instruments  

     Less: Treasury
shares
     Profit for the
period
attributable to
the Parent
          

Balance as at 31/12/15(*)

     7,217          89,215          214          (210)         5,966          (14,362)         10,713        98,753 

Adjustments due to changes in accounting policies

     -         -         -         -         -         -         -       -

Adjustments due to errors

     -         -         -         -         -         -         -       -

Adjusted beginning balance (*)

     7,217          89,215          214          (210)         5,966         (14,362)         10,713        98,753 

Total recognised income and expense

     -         -         -         -         1,633         (1,587)         266       312

Other changes in equity

             5,114                 79          (5,966)         -         487        (284)

Capital increases/(reductions)

             -         -         -         -         -         607        607 

Conversion of financial liabilities into equity

     -         -         -         -         -         -         -       -

Increases in other equity instruments

     -         -         39          -         -         -         1       40 

Reclassification from/to financial liabilities

     -         -         -         -         -         -         -       -

Distribution of dividends

     -         (722)         -         -         -         -         (101)       (823)

Transactions involving own equity instruments (net)

     -         (13)         -         79         -         -         -       66 

Transfers between equity items

     -         5,966         -         -         (5,966)         -         -       -

Increases/(decreases) due to business combinations

     -         -         -         -         -         -         40        40 

Equity-instrument-based payments

     -         -         (43)         -         -         -         -       (43)

Other increases/(decreases) in equity

     -         (117)         6         -         -         -         (60)       (171)

Balance at 31/03/16

               7,217            94,329          216                  (131)         1,633              (15,949)         11,466                  98,781 

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of changes in total equity for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE THREE-MONTH PERIODS ENDED 31 March 2016 AND 2015

(Millions of reais)

 

      Equity attributable to the Parent     

Non-controlling
interests

    

  Total

  equity

      Shareholders’ equity     

Valuation
adjustments

       
        Share  
  capital  
     Share premium 
and reserves 
less dividends 
and 
remuneration 
    

Other

equity
  instruments  

     Less: Treasury
shares
     Profit for the
period
attributable to
the Parent
          

Balance as at 31/12/15(*)

     18,016         219,074         531         (904)         21,746         121,150         46,191       425,804

Adjustments due to changes in accounting policies

     -         -         -         -         -         -         -       -

Adjustments due to errors

     -         -         -         -         -         -         -       -

Adjusted beginning balance (*)

     18,016         219,074         531         (904)         21,746         121,150         46,191       425,804

Total recognised income and expense

     -         -         -         -         7,017         (24,444)         (1,133)       (18,560)

Other changes in equity

     -         18,699         10         364         (21,746)         -         2,153       (520)

Capital increases/(reductions)

     -         -         -         -         -         -         2,666       2,666

Conversion of financial liabilities into equity

     -         -         -         -         -         -         -       -

Increases in other equity instruments

     -         -         167         -         -         -         3       170

Reclassification from/to financial liabilities

     -         -         -         -         -         -         -       -

Distribution of dividends

     -         (2,632)         -         -         -         -         (433)       (3,065)

Transactions involving own equity instruments (net)

     -         (56)         -         364         -         -         -       308

Transfers between equity items

     -         21,746         -         -         (21,746)         -         -       -

Increases/(decreases) due to business combinations

     -         -         -         -         -         -         172       172

Equity-instrument-based payments

     -         -         (183)         -         -         -         -       (183)

Other increases/(decreases) in equity

     -         (359)         26         -         -         -         (255)       (588)

Balance at 31/03/16

             18,016             237,773         541                 (540)         7,017             96,706         47,211               406,724

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of changes in total equity for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial

reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of euros)

 

      Equity attributable to the Parent    

Non-controlling
interests

    

  Total

  equity

      Shareholders’ equity     

Valuation
adjustments

      
        Share  
  capital  
     Share premium 
and reserves 
less dividends 
and 
remuneration 
    

Other

equity
  instruments  

     Less: Treasury
shares
     Profit for the
period
attributable to
the Parent
         

Balance as at 31/12/14 (*)

     6,292         79,300         265         (10)         5,816         (10,858)        8,909       89,714

Adjustments due to changes in accounting policies

     -         -         -         -         -         -        -       -

Adjustments due to errors

     -         -         -         -         -         -        -       -

Adjusted beginning balance (*)

     6,292         79,300         265         (10)         5,816         (10,858)        8,909       89,714

Total recognised income and expense

     -         -         -         -         1,717         2,786        631       5,134

Other changes in equity

     738         11,881         33         (228)         (5,816)         -        649       7,257

Capital increases/(reductions)

     738         6,705         -         -         -         -        9       7,452

Conversion of financial liabilities into equity

     -         -         -         -         -         -        -       -

Increases in other equity instruments

     -         -         12         -         -         -        -       12

Reclassification from/to financial liabilities

     -         -         -         -         -         -        -       -

Distribution of dividends

     -         (665)         -         -         -         -        (26)       (691)

Transactions involving own equity instruments (net)

     -         17         -         (228)         -         -        -       (211)

Transfers between equity items

     -         5,816         -         -         (5,816)         -        -       -

Increases/(decreases) due to business combinations

     -         -         -         -         -         -        612       612

Equity-instrument-based payments

     -         -         (46)         -         -         -        -       (46)

Other increases/(decreases) in equity

     -         8         67         -         -         -        54       129

Balance at 31/03/15

               7,030           91,181         298                 (238)         1,717             (8,072     10,189                 102,105

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of changes in total equity for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE THREE-MONTH PERIODS ENDED 31 March 2016 AND 2015

(Millions of reais)

 

      Equity attributable to the Parent     

Non-controlling
interests

    

Total

equity

      Shareholders’ equity     

Valuation
adjustments

       
        Share    
  capital    
     Share premium
and reserves
less dividends
and
remuneration
    

Other

equity
  instruments  

     Less: Treasury
shares
     Profit for the
period
attributable to
the Parent
          

Balance as at 31/12/14 (*)

     15,027         188,920         613         (31)         18,135         37,584         28,692       288,940

Adjustments due to changes in accounting policies

     -         -         -         -         -         -         -       -

Adjustments due to errors

     -         -         -         -         -         -         -       -

Adjusted beginning balance (*)

     15,027         188,920         613         (31)         18,135         37,584         28,692       288,940

Total recognised income and expense

     -         -         -         -         5,520         34,648         4,952       45,120

Other changes in equity

     2,323         37,401         116         (802)         (18,135)         -         1,977       22,880

Capital increases/(reductions)

     2,323         21,308         -         -         -         -         27       23,658

Conversion of financial liabilities into equity

     -         -         -         -         -         -         -       -

Increases in other equity instruments

     -         -         38         -         -         -         -       38

Reclassification from/to financial liabilities

     -         -         -         -         -         -         -       -

Distribution of dividends

     -         (2,074)         -         -         -         -         (84)       (2,158)

Transactions involving own equity instruments (net)

     -         55         -         (802)         -         -         -       (747)

Transfers between equity items

     -         18,135         -         -         (18,135)         -         -       -

Increases/(decreases) due to business combinations

     -         -         -         -         -         -         1,843       1,843

Equity-instrument-based payments

     -         -         (149)         -         -         -         -       (149)

Other increases/(decreases) in equity

     -         (23)         227         -         -         -         191       395

Balance at 31/03/15

               17,350           226,321         729                 (833)         5,520                     72,232         35,621                 356,940

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the

condensed consolidated statement of changes in total equity for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED 31 March 2016 AND 2015

(Millions of euros)

 

    

 

 Note  

   31/03/16      31/03/15
       

A. CASH FLOWS FROM OPERATING ACTIVITIES

         (4,008)       (11,604)

Consolidated profit for the period

         1,921       2,067

Adjustments made to obtain the cash flows from operating activities:

         4,760       4,926

Depreciation and amortisation charge

         586       592

Other adjustments

         4,174       4,334

Net increase/(decrease) in operating assets and liabilities:

         (10,633)       (18,718)

Operating assets

         (23,088)       (40,387)

Operating liabilities

         12,455       21,669

Income tax recovered/(paid)

         (56)       121

B. CASH FLOWS FROM INVESTING ACTIVITIES

         (1,440)       (1,347)

Payments:

         2,199       2,562

Tangible assets

  7      1,720       1,409

Intangible assets

         440       165

Investments

         3       29

Subsidiaries and other business units

         36       959

Non-current assets held for sale and associated liabilities

         -       -

Held-to-maturity investments

         -       -

Other payments related to investing activities

         -       -

Proceeds:

         759       1,215

Tangible assets

  7      545       751

Intangible assets

         -       210

Investments

         7       10

Subsidiaries and other business units

         -       59

Non-current assets held for sale and associated liabilities

  6      207       185

Held-to-maturity investments

         -       -

Other proceeds related to investing activities

         -       -

C. CASH FLOWS FROM FINANCING ACTIVITIES

         (1,067)       9,001

Payments:

         1,534       669

Dividends

  3      722       328

Subordinated liabilities

         361       68

Redemption of own equity instruments

         -       -

Acquisition of own equity instruments

         411       273

Other payments related to financing activities

         40       -

Proceeds:

         467       9,670

Subordinated liabilities

         -       2,101

Issuance of own equity instruments

  11      -       7,500

Disposal of own equity instruments

         467       69

Other proceeds related to financing activities

         -       -

D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES

         (1,575)       2,263

E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

         (8,090)       (1,687)

F. CASH AND CASH EQUIVALENTS AS AT BEGINNING OF PERIOD

         81,329       69,428

G. CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

         73,239       67,741
       

COMPONENTS OF CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

             

Cash

         6,826       6,736

Cash equivalents at central banks

         66,413       61,005

Other financial assets

         -       -

Less - Bank overdrafts refundable on demand

         -       -

TOTAL CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

                     73,239                    67,741

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated statement of cash flows

for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed 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 16). In the event of a discrepancy, the Spanish-language version prevails.

 

SANTANDER GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED 31 MARCH 2016 AND 2015

(Millions of reais)

 

    

 

 Note  

   31/03/16      31/03/15
       

A. CASH FLOWS FROM OPERATING ACTIVITIES

         (17,217)       (37,307)

Consolidated profit for the period

         8,254       6,645

Adjustments made to obtain the cash flows from operating activities:

         20,449       15,837

Depreciation and amortisation charge

         2,517       1,904

Other adjustments

         17,932       13,933

Net increase/(decrease) in operating assets and liabilities:

         (45,679)       (60,178)

Operating assets

         (99,187)       (129,844)

Operating liabilities

         53,508       69,666

Income tax recovered/(paid)

         (241)       389

B. CASH FLOWS FROM INVESTING ACTIVITIES

         (6,185)       (4,330)

Payments:

         9,447       8,236

Tangible assets

  7      7,389       4,530

Intangible assets

         1,890       530

Investments

         13       93

Subsidiaries and other business units

         155       3,083

Non-current assets held for sale and associated liabilities

         -       -

Held-to-maturity investments

         -       -

Other payments related to investing activities

         -       -

Proceeds:

         3,262       3,906

Tangible assets

  7      2,342       2,414

Intangible assets

         -       675

Investments

         30       32

Subsidiaries and other business units

         -       190

Non-current assets held for sale and associated liabilities

  6      890       595

Held-to-maturity investments

         -       -

Other proceeds related to investing activities

         -       -

C. CASH FLOWS FROM FINANCING ACTIVITIES

         (4,094)       28,687

Payments:

         6,100       2,120

Dividends

  3      3,198       1,023

Subordinated liabilities

         971       219

Redemption of own equity instruments

         -       -

Acquisition of own equity instruments

         1,766       878

Other payments related to financing activities

         165       -

Proceeds:

         2,006       30,807

Subordinated liabilities

         -       6,755

Issuance of own equity instruments

  11      -       23,830

Disposal of own equity instruments

         2,006       222

Other proceeds related to financing activities

         -       -

D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES

         (21,616)       26,152

E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

         (49,112)       13,202

F. CASH AND CASH EQUIVALENTS AS AT BEGINNING OF PERIOD

         350,666       223,607

G. CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

         301,554       236,809
       

COMPONENTS OF CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

             

Cash

         28,105       23,548

Cash equivalents at central banks

         273,449       213,261

Other financial assets

         -       -

Less - Bank overdrafts refundable on demand

         -       -

TOTAL CASH AND CASH EQUIVALENTS AS AT END OF PERIOD

                     301,554                    236,809

(*) Presented for comparison purposes only (see Note 1.e).

The accompanying explanatory Notes 1 to 16 are an integral part of the condensed consolidated statement of cash flows

for the three-month period ended 31 March 2016.


Table of Contents

Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 1 and 16). In the event of a discrepancy, the Spanish-language version prevails.

Banco Santander, S.A. and Companies composing Santander Group

Explanatory notes to the interim condensed consolidated financial statements for the three-month period ended 31 March 2016

1.    Introduction, basis of presentation of the interim condensed consolidated financial statements and other information

 

  a) Introduction

Banco Santander, S.A. (“the Bank” or “Banco Santander”) 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 Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

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, Santander Group (“the Group” or “Santander Group”).

The Group’s interim condensed consolidated financial statements for the three-month period ended 31 March 2016 (“interim financial statements”) were prepared and signed by the Group’s directors at the board meeting held on 26 April 2016.

 

  b) Basis of presentation of the interim financial statements

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after 1 January 2005 in accordance with the International Financial Reporting Standards (“IFRSs”) previously adopted by the European Union (“EU-IFRSs”). In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of 22 December, on Public and Confidential Financial Reporting Rules and Formats.

Banco Santander, S.A.’s policy is to present its interim financial statements using the euro as its presentation currency, for their use in the various markets. These interim financial statements were prepared to comply with the requirements and specific provisions established in CVM Instruction no. 480/2009 of the Securities and Exchange Commission of Brazil (CVM), as a result of the trading of the Bank’s marketable securities in Brazilian regulated markets, which requires the presentation of interim consolidated financial statements prepared in accordance with financial reporting standard IAS 34 issued by the IASB, in Brazilian reais and in Brazilian Portuguese. Accordingly, these interim consolidated financial statements may not be suitable for other purposes.

 

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The Group’s consolidated financial statements for 2015 prepared in accordance with the requirements and specific provisions of CVM Instruction no. 480/2009 of the Securities and Exchange Commission of Brazil were prepared by the Bank (and approved at the board of directors meeting on 12 February 2016) in compliance with International Financial Reporting Standards as adopted by the European Union, taking into account Bank of Spain Circular 4/2004, and with the International Financial Reporting Standards adopted by the International Accounting Standards Board (IASB-IFRSs), using the basis of consolidation, accounting policies and measurement bases described in Note 2 to the aforementioned consolidated financial statements and, accordingly, they presented fairly the Group’s consolidated equity and consolidated financial position at 31 December 2015 and the consolidated results of its operations, the consolidated recognised income and expense, the changes in consolidated equity and the consolidated cash flows in 2015.

These interim financial statements were prepared and are presented in accordance with IAS 34, Interim Financial Reporting, for the preparation of interim condensed financial statements and contain disclosures relating to the three-month period ended 31 March 2016.

In accordance with IAS 34, the interim financial report is intended only to provide an update on the content of the latest annual consolidated financial statements authorised for issue, focusing on new activities, events and circumstances occurring during the first quarter, and does not duplicate information previously reported in the latest approved annual consolidated financial statements. Consequently, these interim financial statements do not include all the information that would be required for a complete set of consolidated financial statements prepared in accordance with IFRSs and, accordingly, for a proper comprehension of the information included in these interim financial statements, they should be read together with the Group’s consolidated financial statements for the year ended 31 December 2015.

These interim financial statements are presented in euros (the Bank’s functional currency and the Group’s presentation currency) and in Brazilian reais. The amounts presented in reais are included solely to comply with the requirements of CVM Instruction no. 480/2009 of the Securities and Exchange Commission of Brazil and subsequent amendments thereto. The balances were translated to reais in accordance with the policies set forth in Note 2.a to the Group’s consolidated financial statements for 2015, which were prepared to comply with the requirements and specific provisions of CVM Instruction no. 480/2009 of the Securities and Exchange Commission of Brazil. As indicated in the aforementioned Note 2.a, for practical reasons, balance sheet was translated at closing period exchange rate, the shareholders equity at historical exchange rate and income and expenses were translated at the average exchange rate for the period; the application of this exchange rate or that corresponding to the date of each transaction does not give rise to significant differences in the Group’s interim financial statements.

The accounting policies and methods used in preparing these interim financial statements are the same as those applied in the consolidated financial statements for 2015, taking into account the standards and interpretations that came into force in the first quarter of 2016. In this connection it should be noted that the following standards came into force in the first quarter of 2016:

-     Disclosure Initiative (Amendments to IAS 1) (obligatory for annual reporting periods beginning on or after 1 January 2016, early application permitted) - the main objective of these amendments is to improve financial statement presentation and disclosures. To this end, the amendments introduce certain qualifications relating to materiality, aggregation and disaggregation of items and the structure of the notes.

-     Amendments to IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation (obligatory for annual reporting periods beginning on or after 1 January 2016, early application permitted) - these amendments clarify that when an item of property, plant and equipment or an intangible asset is accounted for using the revaluation model, the total gross carrying amount of the asset is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset, so that the accumulated depreciation or amortisation is equal to the difference between the gross carrying amount and the carrying amount of the asset after revaluation (after taking into account any impairment losses).

 

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  -  

Amendments to IASs 16 and 41 - Bearer Plants (obligatory for annual reporting periods beginning on or after 1 January 2016, early application permitted) - under these amendments, plants of this nature are now within the scope of IAS 16 and must be accounted for in the same way as property, plant and equipment rather than at their fair value.

 

  -  

Amendments to IAS 27 - Equity Method in Separate Financial Statements (obligatory for annual reporting periods beginning on or after 1 January 2016, early application permitted) - these amendments permit the use of the equity method as an option in the separate financial statements of an entity for accounting for investments in subsidiaries, joint ventures and associates.

 

  -  

Amendments to IFRS 11 - Accounting for Acquisitions of Interests in Joint Operations (obligatory for annual reporting periods beginning on or after 1 January 2016, early application permitted) – these amendments specify how to account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business.

 

  -  

Improvements to IFRSs, 2012-2014 cycle (obligatory for reporting periods beginning on or after 1 January 2016, early application permitted) - these improvements introduce minor amendments to IFRS 5, IFRS 7, IAS 19 and IAS 34.

The application of the aforementioned accounting standards did not have any material effects on the Group’s interim financial statements.

 

  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 interim financial statements. The main accounting policies and measurement bases are set forth in Note 2 to the consolidated financial statements for 2015.

In the interim financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:

 

  1.

The income tax expense, which, in accordance with IAS 34, is recognised in interim periods based on the best estimate of the weighted average tax rate expected by the Group for the full financial year;

 

  2.

The impairment losses on certain assets - available-for-sale financial assets, loans and receivables, non-current assets held for sale, investments, tangible assets and intangible assets–;

 

  3.

The assumptions used in the calculation of the post-employment benefit liabilities and commitments and other obligations;

 

  4.

The useful life of the tangible and intangible assets;

 

  5.

The measurement of goodwill arising on consolidation;

 

  6.

The calculation of provisions and the consideration of contingent liabilities;

 

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  7.

The fair value of certain unquoted assets and liabilities; and

 

  8.

The recoverability of deferred tax assets.

In the three-month period ended 31 March 2016 there were no significant changes in the estimates made at 2015 year-end other than those indicated in these interim financial statements.

 

  d) Contingent assets and liabilities

Note 2.o to the Group’s consolidated financial statements for the year ended 31 December 2015 includes information on the contingent assets and liabilities at that date. There were no significant changes in the Group’s contingent assets and liabilities from 31 December 2015 to the date of formal preparation of these interim financial statements.

 

  e) Comparative information

The information for 2015 contained in these interim financial statements is presented for comparison purposes only with the information relating to three-month period ended 31 March 2016.

In order to interpret the changes in the balances with respect to December 2015, it is necessary to take into consideration the exchange rate effect arising from the volume of foreign currency balances held by the Group in view of its geographic diversity (see Note 51.b to the consolidated financial statements for the year ended 31 December 2015) and the impact of the appreciation/depreciation of the various currencies against the euro in the first three months of 2016, considering the exchange rates at the end of the three-month period, was as follows: Mexican peso (-3.45,%), US dollar (-4.37%), Brazilian real (+4.72%), pound sterling (-7.28%), Chilean peso (+1.42%) and Polish zloty (+0.15%).

 

  f) Seasonality of the Group’s transactions

In view of the business activities carried on by the Group entities, their transactions are not cyclical or seasonal in nature. Therefore, no specific disclosures are included in these explanatory notes to the condensed consolidated financial statements for the three-month period ended 31 March 2016.

 

  g) Materiality

In determining the note disclosures to be made on the various items in the financial statements or other matters, the Group, in accordance with IAS 34, took into account their materiality in relation to the financial statements for the first quarter of 2016.

 

  h) Events after the reporting period

It should be noted that from 1 April 2016 to the date on which the interim financial statements for the first quarter of 2016 were authorised for issue, the following significant event occurred at Santander Group:

 

  -  

Commercial transformation plan: During April the Group has started negotiations with the trade unions in order to drive a commercial transformation plan for Santander Spain and move ahead with the construction of a more simple Corporative Center that creates more value to the subsidiaries. On the signing date of these interim consolidated financial statements, Group’s directors consider that it isn’t possible to estimate financial impact figures of these measures because of it is in a preliminary realization phase and the characteristics that a process like this leads to.

 

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  i) Condensed consolidated statements of cash flows

The following terms are used in the condensed 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, irrespective of the portfolio in which they are classified.

The Group classifies as cash and cash equivalents the balances recognised under Cash and balances with central banks in the condensed consolidated balance sheet.

 

  -  

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.

2.   Santander Group

Appendices I, II and III to the consolidated financial statements for the year ended 31 December 2015 provide relevant information on the Group companies at that date and on the equity-accounted companies.

Also, Note 3 to the aforementioned consolidated financial statements includes a description of the most significant acquisitions and disposals of companies performed by the Group in 2015, 2014 and 2013.

There were no significant adquisitions/ disposals of ownership interests, as well as on other significant corporate transactions, in the first quarter of 2016.

The most significant transactions in process in the first quarter of 2016 were as follows:

Other transactions

Custody business

On 19 June 2014, the Group announced that it had reached an agreement with FINESP Holdings II B.V., a subsidiary of Warburg Pincus, to sell a 50% stake in Santander’s custody business in Spain, Mexico and Brazil. The remaining 50% will be retained by the Group.

On March 16, 2016, the parties agreed disregard the original investment structure and continue to work in good faith until June 30, 2016, on an alternative investment structure that would allow the sale by Santander of the 50% stake referred to above.

 

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Agreement with UniCredit, Warburg Pincus and General Atlantic

On 23 April 2015, the Group announced that, together with its partners Warburg Pincus and General Atlantic, it had entered into a heads of terms and exclusivity agreement with UniCredit, subject to the signing of the final agreement, to merge Santander Asset Management and Pioneer Investments.

The agreement provides for the creation of a new company comprising the local asset managers of Santander Asset Management and Pioneer Investments. The Group will have a 33.3% direct stake in the new company, UniCredit another 33.3%, and Warburg Pincus and General Atlantic will share a 33.3% stake. Pioneer Investments’ operations in the United States will not be included in the new company but rather will be owned by UniCredit (50%) and Warburg Pincus and General Atlantic (50%).

On 11 November 2015, the final framework agreement was signed by UniCredit, Santander, Warburg Pincus and General Atlantic for the integration of these businesses in accordance with the aforementioned structure.

At present the transactions is scheduled to be completed in 2016 once the preconditions established in the framework agreement have been met and the relevant regulatory authorisations have been obtained

Purchase of shares to DDFS LLC in Santander Consumer USA (SCUSA)

Also, on 3 July 2015, the Group announced that it had reached an agreement to purchase the 9.68% ownership interest held by DDFS LLC in SCUSA. Following this transaction, which is subject to the obtainment of the relevant regulatory authorisations, the Group will have an ownership interest of approximately 68.62% in SCUSA.

3.   Shareholder remuneration system and earnings per share

 

  a) Shareholder remuneration system

The cash remuneration paid by the Bank to its shareholders in the first three months of 2016 and 2015 was as follows:

 

    

 

31/03/16

 

   

 

31/03/15

 

 
       % of par
  value
     Euros per  
 share  
     Amount  
 (millions  
 of euros)  
      % of par
  value
      Euros per  
  share  
       Amount
   (millions
   of euros)
 
             

Ordinary shares

    10.00     0.05000        722        4.75     0.02375        328   

 

Other shares (non-voting, redeemable, etc.)

                            -        -           -     

Total remuneration paid

    10.00     0.05000        722        4.75     0.02375        328   

Remuneration paid out of profit

    10.00     0.05000        722        4.75     0.02375        328   

 

Remuneration paid with a charge to reserves or share premium

    -               -                -                -        -           -     

 

Remuneration paid in kind

    -               -                -                -        -           -     

 

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31/03/16

 

   

31/03/15

 

 
       % of par
  value
     Reais per  
 share  
     Amount  
 (millions  
 of reais)  
      % of par
  value
     Reais per  
 share  
       Amount
   (millions
   of reais)
 
             

Ordinary shares

    10.00     0.22147        3.198        4.75     0.07406        1.023   

 

Other shares (non-voting, redeemable, etc.)

                            -        -           -     

Total remuneration paid

    10.00     0.22147        3.198        4.75     0.07406        1.023   

Remuneration paid out of profit

    10.00     0.22147        3.198        4.75     0.07406        1.023   

 

Remuneration paid with a charge to reserves or share premium

    -               -                -                -        -           -     

 

Remuneration paid in kind

    -               -                -                -        -           -     

 

  b) Earnings per share from continuing and discontinued operations

i. Basic earnings per share

Basic earnings per share for the period are calculated by dividing the net profit attributable to the Group for the period (adjusted by the after-tax amount relating to the remuneration of contingently convertible preference shares recognised in equity) by the weighted average number of ordinary shares outstanding during the period, excluding the average number of treasury shares held in the period.

Accordingly:

 

      31/03/16      31/03/15  

Net profit attributable to the Parent (millions of euros)

     1,633         1,717   

 

Remuneration of contingently convertible preference shares (millions of euros)

     (84)         (68)   
       1,549         1,649   

Of which:

         

 

Profit/Loss from discontinued operations (millions of euros)

     -         -   

 

Profit from continuing operations (millions of euros)

     1,549         1,649   

 

Weighted average number of shares outstanding

     14,391,044,388         13,664,257,942   

Basic earnings per share (euros)

     0.11         0.12   

Of which: from discontinued operations (euros)

     -         -   

  from continuing operations (euros)

     0.11         0.12   
     
      31/03/16      31/03/15  

Net profit attributable to the Parent (millions of reais)

     7,017         5,520   

 

Remuneration of contingently convertible preference shares (millions of reais)

     (260)         (219)   
       6,757         5,301   

Of which:

         

 

Profit/Loss from discontinued operations (millions of reais)

     -         -   

 

Profit from continuing operations (millions of reais)

     6,757         5,301   

 

Weighted average number of shares outstanding

     14,391,044,388         13,664,257,942   

Basic earnings per share (reais)

     0.47         0.39   

Of which: from discontinued operations (reais)

     -         -   

 from continuing operations (reais)

     0.47         0.39   

 

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ii. Diluted earnings per share

Diluted earnings per share for the period are calculated by dividing the net profit attributable to the Group for the period (adjusted by the after-tax amount relating to the remuneration of contingently convertible preference shares recognised in equity) by the weighted average number of ordinary shares outstanding during the period, excluding the average number of treasury shares and adjusted for all the dilutive effects inherent to potential ordinary shares (share options, warrants and convertible debt instruments).

Accordingly, diluted earnings per share were determined as follows:

 

      31/03/16      31/03/15  
     

Net profit attributable to the Parent (millions of euros)

     1,633         1,717   

Remuneration of contingently convertible preference shares
(millions of euros)

     (84)         (68)   

Dilutive effect of changes in profit for the period arising from potential conversion of ordinary shares

     -         -   

Net profit attributable to the Parent (millions of euros)

     1,549         1,649   

Of which:

                 

Profit/Loss from discontinued operations (millions of euros)

     -         -   

Profit from continuing operations (millions of euros)

     1,549         1,649   
     

Weighted average number of shares outstanding

     14,391,044,388         13,664,257,942   

Dilutive effect of:

         

Options/ receipt of shares

     53,907,515         21,188,883   

Adjusted number of shares

     14,444,951,903         13,685,446,825   

Diluted earnings per share (euros)

     0.11         0.12   

Of which: from discontinued operations (euros)

     -         -   

from continuing operations (euros)

     0.11         0.12   

 

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      31/03/16      31/03/15  
     

Net profit attributable to the Parent (millions of reais)

     7,017         5,520   

Remuneration of contingently convertible preference shares
(millions of reais)

     (286      (219

Dilutive effect of changes in profit for the period arising from potential conversion of ordinary shares

     -         -   

Profit attributable to the Parent (millions of reais)

     6,731         5,301   

Of which:

                 

Profit/Loss from discontinued operations (millions of reais)

     -         -   

Profit from continuing operations (millions of reais)

     6,731         5,301   
     

Weighted average number of shares outstanding

     14,391,044,388         13,664,257,942   

Dilutive effect of:

         

Options/ receipt of shares

     53,907,515         21,188,883   

Adjusted number of shares

     14,444,951,903         13,685,446,825   

Diluted earnings per share (reais)

     0.47         0.39   

Of which: from discontinued operations (reais)

     -         -   

from continuing operations (reais)

     0.47         0.39   

4.   Remuneration and other benefits paid to the Bank’s directors and senior

       managers

Note 5 to the Group’s consolidated financial statements for the year ended 31 December 2015 includes the detail of the remuneration and other benefits paid to the Bank’s directors and senior managers in 2015 and 2014.

The most salient data relating to the aforementioned remuneration and benefits for the three-month periods ended 31 March 2016 and 2015 are summarised as follows:

Remuneration of directors (1)

 

      Thousands of euros  
        31/03/16         31/03/15  
     

Members of the board of directors:

         

Type of remuneration-

         

Fixed salary remuneration of executive directors

     1,741               2,165   

Variable remuneration in cash of executive directors

     -         -      

Attendance fees of directors

     262         508   

Bylaw-stipulated annual directors’ emoluments (2)

     946           

Other (except insurance premiums)

     589         347   

Sub-total

     3,538         3,020   
     

Transactions with shares and/or other financial instruments

     -         -      
       3,538         3,020   

 

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        Thousands of reais  
        31/03/16           31/03/15  
     

Members of the board of directors:

         

Type of remuneration-

         

Fixed salary remuneration of executive directors

     7,479         6,960   

Variable remuneration in cash of executive directors

     -            -      

Attendance fees of directors

     4,064         -      

Bylaw-stipulated annual directors’ emoluments (2)

     1,126         1,633   

Other (except insurance premiums)

     2,530         1,116   

Sub-total

     15,199         9,709   
     

Transactions with shares and/or other financial instruments

     -           -     
       15,199         9,709   

 

(1)   The notes to the annual consolidated financial statements for 2016 will contain detailed and complete information on the remuneration paid to all the directors, including executive directors.

 

(2)   During 2015 the stipulated annual director’s emoluments has been modified. The accrual during the first three f months of 2015 amounted to 862 thousand Euro (BRL: 2.771 thousand).

Other benefits of the directors

 

        Thousands of euros  
        31/03/16           31/03/15  
     

Members of the board of directors:

         

Other benefits-

         

Advances

     -               -      

Loans granted

     101         4,262   

Pension funds and plans: Provisions and/or contributions (1)

     1,124            1,330   

Pension funds and plans: Accumulated rights (2)

     117,675            136,968   

Life insurance premiums

     475         377   

Guarantees provided for directors

 

    

 

-     

 

  

 

    

 

-    

 

  

 

 

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        Thousands of reais  
        31/03/16          31/03/15    
     

Members of the board of directors:

         

Other benefits-

         

Advances

     -         -       

Loans granted

     415         14,898     

Pension funds and plans: Provisions and/or contributions (1)

     4,629         4,649     

Pension funds and plans: Accumulated rights (2)

     484,515         478,813     

Life insurance premiums

     1,956         1,318     

Guarantees provided for directors

 

    

 

-

 

  

 

    

 

-    

 

  

 

 

(1)   Corresponds to the provisions and/or contributions made in the first quarter of 2016 and 2015 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability).

 

(2)   Corresponds to the pension rights accumulated by the directors. In addition, at 31 March 2016 and 2015, former Board members held accumulated pension rights amounting to EUR 114,943 thousand (BRL 460,914 thousand) and EUR 89,471 thousand (BRL 312,773 thousand), respectively.

Also, in their capacity as members of the boards of directors of other Group companies, Mr Matías Rodríguez Inciarte received EUR 10.5 thousand (BRL 45 thousand) in the first quarter of 2015 as non-executive director of U.C.I., S.A. (first quarter of 2015:– EUR 10.5 thousand (BRL 37 thousand).

Remuneration of senior managers (1) (2) (3)

 

      Thousands of euros  
        31/03/16          31/03/15    
     

Senior management:

         

Total remuneration of senior management

 

    

 

5,651   

 

  

 

    

 

8,878  

 

  

 

     
      Thousands of reais  
        31/03/16          31/03/15    
     

Senior management:

         

Total remuneration of senior management

 

    

 

24,277

 

  

 

    

 

28,543

 

  

 

 

(1)   The above amounts reflect the quarterly remuneration irrespective of the months in which the senior managers have held positions as members of the Bank’s general management, and they exclude the remuneration of executive directors.

 

(2)   The number of senior managers of the Bank, excluding executive directors, changed from 28 in the first quarter of 2015 to 20 in the first quarter of 2016.

 

(3)   In addition, members of Senior Management who, at March 31, 2016, had ceased their duties, received remunerations or payments related to their resignations in the amount of 784 thousand euros (BRL: 3.368 thousand) during the three month period ended March 31, 2016.

 

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The annual variable remuneration (or bonus) for 2015 paid to the directors and the other members of senior management was disclosed in the information on remuneration set forth in the notes to the financial statements for that year. Similarly, the variable remuneration allocable to 2016 profit or loss, which will be submitted for approval by the board of directors, will be disclosed in the notes to the financial statements for 2016.

5.    Financial assets

 

  a) Breakdown

The detail, by nature and category for measurement purposes, of the Group’s financial assets, other than the balances relating to Cash and balances with central banks and Hedging derivatives, at 31 March 2016 and 31 December 2015 is as follows:

 

      Millions of euros
   31/03/16
   Financial
  assets held  
for trading
       Other financial  
assets at fair
value through
profit or loss
    

  Available-  

for-sale
financial
assets

     Loans and
  receivables  
     Held-to-
maturity
  investments  
           

Loans and advances to credit institutions

     4,468           30,714              -         52,220         -

Loans and advances to customers

     6,866           13,884              -         752,702         -

Debt instruments

     50,060           3,564              113,656           12,487         4,566

Equity instruments

     14,584           609         4,642           -       -

Trading derivatives

     76,643           -         -         -       -
       152,621           48,771              118,298           817,409         4,566
              
              
      Millions of reais
   31/03/16
  

Financial

  assets held  
for trading

       Other financial  
assets at fair
value through
profit or loss
    

  Available-  

for-sale
financial
assets

     Loans and
  receivables  
     Held-to-
maturity
  investments  
           

Loans and advances to credit institutions

     18,397           126,462               -         215,011         -

Loans and advances to customers

     28,270           57,166               -         3,099,175         -

Debt instruments

     206,117           14,674               467,967         51,414         18,800

Equity instruments

     60,048           2,507               19,113         -       -

Trading derivatives

     315,570           -         -         -       -
       628,402           200,809               487,080         3,365,600         18,800

 

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      Millions of euros
   31/12/15
   Financial
  assets held  
for trading
       Other financial  
assets at fair
value through
profit or loss
    

  Available-  

for-sale
financial
assets

     Loans and
  receivables  
     Held-to-
maturity
  investments  
           

Loans and advances to credit institutions

     2,293           26,403               -         50,256         -

Loans and advances to customers

     6,081           14,293               -         770,474         -

Debt instruments

     43,964           3,717               117,187           10,907         4,355

Equity instruments

     18,225           630         4,849           -       -

Trading derivatives

     76,724           -         -         -       -
       147,287           45,043               122,036           831,637         4,355
              
              
      Millions of reais
   31/12/15
   Financial
assets held
for trading
     Other financial
assets at fair
value through
profit or loss
     Available-
for-sale
financial
assets
     Loans and
receivables
     Held-to-
maturity
investments
           

Loans and advances to credit institutions

     9,887           113,842               -         216,689         -

Loans and advances to customers

     26,219           61,627               -         3,322,053         -

Debt instruments

     189,560           16,027               505,275           47,028         18,777

Equity instruments

     78,581           2,716               20,907           -       -

Trading derivatives

     330,811           -         -         -       -
       635,058           194,212               526,182           3,585,770         18,777

 

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Table of Contents
  b) Sovereign risk with peripheral European countries

The detail at 31 March 2016 and 31 December 2015, by type of financial instrument, of the Group credit institutions’ sovereign risk exposure to Europe’s peripheral countries and of the short positions held with them, taking into consideration the scope established by the European Banking Authority (EBA) in the analyses performed on the capital needs of European credit institutions (see Note 54 to the consolidated financial statements for 2015), is as follows:

 

Sovereign risk by country of issuer/borrower at 31 March 2016 (*)  
                 Millions of euros                
   Debt instruments                       Derivatives (***)    
  

Financial
assets held

for trading

and Other
financial
  assets at fair  
value

through
profit or loss

     Short
  positions  
   

  Available-  

for-sale
financial
assets

    

Held-to
maturity

  investments  

     Loans and
  receivables  
   

Loans

and

advances

to

  customers  

(**)

         Total net    
direct
exposure
       Other than  
CDSs
       CDSs    

 

Spain

     8,191           (3,040 )        24,544         1,210         2,015        14,624         47,544         41         -   

Portugal

     179           (400 )        5,235         932         6        900         6,852         -         (1

Italy

     3,773           (1,761 )        -         -         -        -         2,012         (2)         2   

Greece

     -         -        -         -         -        -         -         -         -   

Ireland

     -         -        -         -         -        -         -         44         -   
                        
      Sovereign risk by country of issuer/borrower at 31 March 2016 (*)  
                 Millions of reais                
   Debt instruments                     Derivatives (***)  
  

Financial
assets held

for trading

and Other
financial
  assets at fair  
value

through
profit or loss

     Short
  positions  
   

  Available-  

for-sale
financial
assets

    

Held-to
maturity

  investments  

     Loans and
  receivables  
   

Loans

and

advances

to

  customers  

(**)

       Total net  
direct
exposure
       Other than  
CDSs
       CDSs    

 

Spain

     33,726         (12,517     101,057         4,982         8,297        60,213         195,758         169         -   

Portugal

     737         (1,647     21,555         3,837         25        3,706         28,213         -         (4

Italy

     15,535         (7,251     -         -         -        -         8,284         (8)         8   

Greece

     -         -        -         -         -        -         -         -         -   

Ireland

     -         -        -         -         -        -         -         181         -   

 

  (*)

Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 11,835 million (BRL 48,730 million) (of which EUR 10,389 million, EUR 606 million and EUR 840 million (BRL 42,776 million, BRL 2,495 million and BRL 3,459 million) relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 1,989 million (BRL 8,190 million) (of which EUR 1,850 million, EUR 75 million,EUR 62 million and EUR 2 million. (BRL 7,618million, BRL 309 million, BRL 255 million and BRL 8 million) relate to Spain, Portugal, Italy and Ireland , respectively).

 

  (**)

Presented without taking into account the valuation adjustments recognised (EUR 24 million (BRL 99 million)).

 

  (***)

“Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

 

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Table of Contents
Sovereign risk by country of issuer/borrower at 31 December 2015 (*)  
                    Millions of euros                  
   Debt instruments      Loans and
advances to
  customers (**)  
       Total net direct  
exposure
     Derivatives (***)  
  

 

Financial
assets held

for trading

and Other
financial
assets at fair
value

through
  profit or loss  

     Short
  positions  
   

  Available-  

for-sale
financial
assets

    

Held-to
maturity

  investments  

     Loans and
  receivables  
             Other than  
CDSs
       CDSs    

 

Spain

     7,647           (2,446     26,443         1,032           2,025         13,993           48,694         (217)         -   

Portugal

     278           (174     7,916         916           -         1,071           10,007         -         1   

Italy

     3,980           (1,263     -         -         -         -         2,717         (4)         4   

Greece

     -         -        -         -         -         -         -         -         -   

Ireland

     -         -        -         -         -         -         -         6         -   
                      
      Sovereign risk by country of issuer/borrower at 31 December 2015 (*)  
                    Millions of reais                
   Debt instruments      Loans and
advances to
  customers (**)  
       Total net direct  
exposure
     Derivatives (***)  
  

 

Financial
assets held

for trading

and Other
financial

assets at fair
value

through

  profit or loss  

     Short
  positions  
   

  Available-  

for-sale
financial
assets

    

Held-to
maturity

  investments  

     Loans and
  receivables  
             Other than  
CDSs
       CDSs    

 

Spain

     32,972           (10,598     114,014         4,450           8,731         60,334           209,903         (936)         -   

Portugal

     1,199           (750     34,131         3,950           -         4,618           43,148         -         4   

Italy

     17,161           (5,446     -         -         -         -         11,715         (17)         17   

Greece

     -         -        -         -         -         -         -         -         -   

Ireland

     -         -        -         -         -         -         -         26         -   

 

  (*)

Information prepared under EBA standards. Also, there are government debt securities on insurance companies’ balance sheets amounting to EUR 11,273 million (BRL 48,606 million) (of which EUR 9,892 million, EUR 605 million and EUR 776 million (BRL 42,651 million, BRL 2,609 million and BRL 3,346 million) relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 3,134 million (BRL 13,513 million) (of which EUR 3,045 million and EUR 89 million (BRL 13,129 million and BRL 384 million) relate to Spain and Portugal, respectively).

 

  (**)

Presented without taking into account the valuation adjustments recognised (EUR 31 million (BRL 134 million)).

 

  (***)

“Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

 

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Table of Contents

The detail of the Group’s other exposure to other counterparties (private sector, central banks and other public entities that are not considered to be sovereign risks) in the aforementioned countries at 31 March 2016 and 31 December 2015 is as follows:

 

Exposure to other counterparties by country of issuer/borrower at 31 March 2016 (*)  
      Millions of euros  
                    Debt instruments                           Derivatives (***)  
                    Financial assets                          Loans and                 
     

Balances
  with central  
banks

 

    

Reverse
repurchase
  agreements  

 

    

held for trading
and Other
financial assets

at FVTPL

    

    Available-    

for-sale
financial

assets

 

  

 

Loans and
  receivables  

    

Held-to
maturity
investments

      advances to 
customers
(**)
       Total net  
direct
  exposure  
       Other  
  than  
  CDSs  
    

 

    CDSs    

 

Spain

     1,843         18,266         1,386             5,082       1,023         -             151,697         179,297         3,759         (37)     

Portugal

     1,087         -         124       497      3,093         245         29,540         34,586         1,831         -   

Italy

     6         -         467       848       -         -             6,986         8,307         161         5   

Greece

     -         -         -       -      -         -             45         45         38         -   

Ireland

     -         -         47       218       90         -             727         1,082         272         -   

 

Exposure to other counterparties by country of issuer/borrower at 31 March 2016 (*)  
      Millions of reais  
                    Debt instruments                           Derivatives (***)  
                    Financial assets                          Loans and                 
     

Balances
  with central  
banks

 

    

Reverse
repurchase
  agreements  

 

    

held for trading
and Other
financial assets

at FVTPL

    

    Available-    

for-sale
financial

assets

 

  

 

Loans and
  receivables  

    

Held-to
maturity
investments

      advances to 
customers
(**)
       Total net  
direct
  exposure  
       Other  
  than  
  CDSs  
    

 

    CDSs    

 

Spain

     7,588         75,208         5,707       20,925      4,212         -         624,597         738,237         15,477         (152)       

Portugal

     4,476         -         511       2,046      12,735         1,009         121,628         142,405         7,539         -   

Italy

     25         -         1,923       3,492      -         -         28,764         34,204         663         21   

Greece

     -         -         -       -      -         -         185         185         156         -   

Ireland

     -         -         194       898      371         -         2,993         4,456         1,120         -   

 

(*)

Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 63,454 million, EUR 7,272 million, EUR 3,648 million, EUR 13 million and EUR 399 million (BRL 261,265 million, BRL 29,942 million, BRL 15,020 million, BRL 54 million and BRL 1,643 million) to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

 

(**)

Presented excluding valuation adjustments and impairment losses recognised (EUR 11,500 million (BRL 47,350 million)).

 

(***)

“Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

 

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Table of Contents
Exposure to other counterparties by country of issuer/borrower at 31 December 2015 (*)  
      Millions of euros  
                    Debt instruments                    Derivatives (***)  
                    Financial assets                                     
     

Balances
  with central  
banks

 

    

Reverse
repurchase
  agreements  

 

     held for trading
and Other
financial assets at
FVTPL
    

    Available-    

for-sale
financial

assets

   Loans and
  receivables  
    

Loans and

 advances to 
customers
(**)

       Total net  
direct
  exposure  
     Other than
CDSs
         CDSs      

Spain

     2,349           15,739          1,545        4,166        1,143             153,863           178,805           3,367           (42)   

Portugal

     2,938                   159       992        2,999             29,928           37,016           1,729           -      

Italy

     5                 167       813        -           6,713           7,698           35         5   

Greece

     -                 -       -      -           44         44         32         -      

Ireland

     -                 63       239        40         734         1,076           300         -      

 

Exposure to other counterparties by country of issuer/borrower at 31 December 2015 (*)  
      Millions of reais  
                    Debt instruments                    Derivatives (***)  
                    Financial assets                                     
     

Balances
  with central  
banks

 

    

Reverse
repurchase
  agreements  

 

     held for trading
and Other
financial assets at
FVTPL
    

    Available-    

for-sale
financial

assets

   Loans and
  receivables  
    

Loans and

 advances to 
customers
(**)

       Total net  
direct
  exposure  
     Other than
CDSs
         CDSs      

Spain

     10,128         67,862         6,662       17,963       4,928           663,411           770,954          14,517           (181)   

Portugal

     12,668         -         686       4,277       12,931           129,041           159,603          7,455             

Italy

     22         -         720       3,505       -         28,944           33,191          151         22   

Greece

     -         -         -       -      -         190         190         138           

Ireland

     -         -         272       1,030       172         3,165           4,639          1,294             

 

(*)

Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 64,159 million, EUR 6,374 million, EUR 3,746 million, EUR 17 million and EUR 387 (BRL 276,634 million, BRL 27,483 million, BRL 16,152 million, BRL 73 million and BRL 1,669 million) to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

 

(**)

Presented excluding valuation adjustments and impairment losses recognised (EUR 11,641 million (BRL 50,192 million)).

 

(***)

“Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

 

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Table of Contents

Following is certain information on the notional amounts of the CDSs detailed in the foregoing tables at 31 March 2016 and 31 December 2015:

 

31/03/16
Millions of euros
     Notional amount   Fair value
         Bought           Sold           Net           Bought           Sold           Net    

Spain

  Sovereign   -   -   -   -   -   -
  Other   724   1,007   (283)   (2)   (35)   (37)

Portugal

  Sovereign   26   288   (262)   1   (2)   (1)
  Other   35   56   (21)   -   -   -

Italy

  Sovereign   169   434   (265)   (1)   3   2
  Other   623   729   (106)   (3)   8   5

Greece

  Sovereign   -   -   -   -   -   -
  Other   -   -   -   -   -   -

Ireland

  Sovereign   -   -   -   -   -   -
  Other   -   -   -   -   -   -
                                
31/03/16
Millions of reais
     Notional amount   Fair value
         Bought           Sold           Net           Bought           Sold           Net    

Spain

  Sovereign   -   -   -   -   -   -
  Other   2,981   4,146   (1,165)   (8)   (144)   (152)

Portugal

  Sovereign   107   1,186   (1,079)   4   (8)   (4)
  Other   144   230   (86)   -   -   -

Italy

  Sovereign   696   1,787   (1,091)   (5)   13   8
  Other   2,565   3,002   (437)   (12)   33   21

Greece

  Sovereign   -   -   -   -   -   -
  Other   -   -   -   -   -   -

Ireland

  Sovereign   -   -   -   -   -   -
  Other   -   -   -   -   -   -

 

18


Table of Contents
31/12/15
Millions of euros
     Notional amount   Fair value
     Bought       Sold       Net       Bought       Sold         Net  
                 

Spain    

  Sovereign       -       -       -       -          -        -    
  Other       724       991       (267)      (3)          (39)         (42)   

Portugal    

  Sovereign       28       187       (159)      -          1        1    
  Other       71       77       (6)      -          -        -    

Italy    

  Sovereign       183       448       (265)      (1)          5        4    
  Other       553       618       (65)      4          2        6    

Greece    

  Sovereign       -       -       -       -          -        -    
  Other       -       -       -       -          -        -    

Ireland    

  Sovereign       -       -       -       -          -        -    
  Other       -       -       -       -          -        -    
             
31/12/15
Millions of reais
     Notional amount   Fair value
     Bought           Sold           Net           Bought       Sold         Net  
                   

Spain    

  Sovereign       -       -       -       -          -          -    
  Other       3,122       4,273       (1,151)      (13)          (168)         (181)   

Portugal    

  Sovereign       121       806       (685)      -          4          4    
  Other       306       332       (26)      -          -          -        

Italy    

  Sovereign       789       1,932       (1,143)      (4)          22          18    
  Other       2,384       2,665       (281)      17          9          26    

Greece    

  Sovereign       -       -       -       -          -          -    
  Other       -       -       -       -          -          -    

Ireland    

  Sovereign       -       -       -       -          -          -    
  Other       -       -       -       -          -          -    

 

  c) Valuation adjustments of financial assets

c.1) Available-for-sale financial assets

As of 31 March 2016, the net impairment losses over financial assets available for sale was EUR 44 million - BRL 189 million- (first quarter of 2015: EUR 32 million (BRL 103 million)), of which EUR 8 million (BRL 35 million) relates to assets impairment (EUR 21 million (BRL 68 million) in the first quarter of 2015).

Changes in value of these assets are presented in equity under Valuation adjustments - Available-for-sale financial assets (see Note 11). The changes in valuation adjustments in the three-month period are recognised in the condensed consolidated statement of recognised income and expense.

 

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Table of Contents

c.2) Loans and receivables

The changes in the balance of the allowances for impairment losses on the assets included under Loans and receivables in the three-month periods ended 31 March 2016 and 2015 were as follows:

 

      Millions of euros
           31/03/16                31/03/15     
     

Balance at beginning of period

     26,631       27,321
     

Impairment losses charged to income for the period

     2,732       2,874

Of which:

       

Impairment losses charged to income

     4,363       4,270

Impairment losses reversed with a credit to income

     (1,631)       (1,396)

Write-off of impaired balances against recorded impairment allowance

     (2,699)       (2,715)

Exchange differences and other changes

     (274)       674
           

Balance at end of period

     26,390       28,154
     

Of which, relating to:

         

Impaired assets

     17,784       20,135

Of which, arising from country risk

     19       23

Other assets

     8,606       8,019

 

      Millions of reais
            31/03/16            31/03/15     
     

Balance at beginning of period

     114,825       87,994
     

Impairment losses charged to income for the period

     11,737       9,240

Of which:

       

Impairment losses charged to income

     18,744       13,728

Impairment losses reversed with a credit to income

     (7,007)       (4,488)

Write-off of impaired balances against recorded impairment allowance

     (11,113)       (8,729)

Exchange differences and other changes

     (6,791)       9,916
           

Balance at end of period

     108,658       98,421
     

Of which, relating to:

         

Impaired assets

     73,224       70,388

Of which, arising from country risk

     78       80

Other assets

     35,434       28,033

 

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Previously written-off assets recovered in the first three months of 2016 and 2015 amounted to EUR 360 million and EUR 343 million (BRL1,547 million and BRL 1,103 million), respectively. Considering these amounts and those recognised under Impairment losses charged to income in the foregoing table, the impairment losses on loans and receivables amounted to EUR 2,372 million in the first quarter of 2016 (BRL 10,190 million) (first quarter of 2015: EUR 2,531 million (BRL 8,137 million)). If the impairment losses on available-for-sale financial assets (see Note 5.c.1) are added to these amounts, total impairment losses on financial assets amounted to EUR 2,416 million (BRL 10,379 million) for the three-month period ended 31 March 2016 (31 March 2015: EUR 2,563 million (BRL 8,240 million)).

 

  d) Non-performing assets

The detail of the changes in the three-month periods ended 31 March 2016 and 2015 in the balance of financial assets classified as loans and receivables and considered to be impaired due to credit risk is as follows:

 

      Millions of euros
          31/03/16              31/03/15  
     

Balance at beginning of period

     36,298       40,552

Net additions

     1,902       2,155

Written-off assets

     (2,699)       (2,715)

Changes in scope of consolidation

     -       54

Exchange differences and other

     80       860

Balance at end of period

     35,581       40,906
     
      Millions of reais
          31/03/16              31/03/15  
     

Balance at beginning of period

     156,506       130,606

Net additions

     8,170       6,928

Written-off assets

     (11,113)       (8,729)

Changes in scope of consolidation

     -       174

Exchange differences and other

     (7,062)       14,019

Balance at end of period

     146,501       142,998

This amount, after deducting the related allowances, represents the Group’s best estimate of the discounted value of the flows that are expected to be recovered from the impaired assets.

 

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Table of Contents
  e) Fair value of financial assets not measured at fair value

Following is a comparison of the carrying amounts of the Group’s financial assets measured at other than fair value and their respective fair values at 31 March 2016 and 31 December 2015:

 

      Millions of euros      Millions of euros
      31/03/16      31/12/15
     

   Carrying     

   amount     

    

   Fair     

   value     

    

  Carrying     

  amount     

    

Fair

value

Loans and receivables:

             

Loans and advances to credit institutions

     52,220         52,406         50,256      

50,440

Loans and advances to customers

     752,702         760,103         770,474      

775,713

Debt instruments

     17,053         16,970         15,262      

15,071

ASSETS

     821,975         829,479         835,992       841,224
           
      Millions of reais      Millions of reais
      31/03/16      31/12/15
     

   Carrying   

   amount   

    

   Fair   

   value   

      Carrying amount       

Fair

value

Loans and receivables:

             

Loans and advances to credit institutions

     215,011         215,776         216,689      

217,482

Loans and advances to customers

     3,099,175         3,129,648         3,322,053      

3,344,642

Debt instruments

     70,214         69,872         65,805      

64,982

ASSETS

     3,384,400         3,415,296         3,604,547       3,627,106

The main valuation methods and inputs used in the estimates of the fair values of the financial assets in the foregoing table are detailed in Note 51.c to the consolidated financial statements for 2015.

 

6.   Non-current assets held for sale

The detail, by nature, of the Group’s non-current assets held for sale at 31 March 2016 and 31 December 2015 is as follows:

 

      Millions of euros
           31/03/16               31/12/15    
   

Tangible assets

     5,702       5,623

Of which:

       

Foreclosed assets

     5,607       5,533

Of which: Property assets in Spain

     5,066       4,983

Other tangible assets held for sale

     95       90

Other assets

     25       23
       5,727       5,646

 

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Table of Contents
      Millions of reais
           31/03/16               31/12/15    
     

Tangible assets

     23,477       24,245

Of which:

       

Foreclosed assets

     23,086       23,857

Of which: Property assets in Spain

     20,859       21,485

Other tangible assets held for sale

     391       388

Other assets

     103       99
       23,580       24,344

At 31 March 2016, the allowance that covers the value of the foreclosed assets represents a coverage ratio of 51.2% of the gross value of the portfolio (31 December 2015: 51.4%). The net charges recorded in the first quarter of 2016 amounted to EUR 42 million (BRL 173 million) (first quarter of 2015: EUR 39 million (BRL 125 million)).

In the first quarter of 2016, the Group sold foreclosed properties for a net total of approximately EUR 194 million (BRL 834 million) with a gross carrying amount of EUR 276 million (BRL 1,186 million), for which provisions totalling EUR 106 million (BRL 455 million) had been recognised. In the first quarter of 2016, these sales gave rise to gains of EUR 23 million (BRL 103 million) which are recognised under Gains/(losses) foreclosed assets in the condensed consolidated income statements for the first quarter of 2016 and 2015. Also, in the first three months of 2016 other foreclosed assets were sold for EUR 13 million (BRL 56 million) with a gain of EUR 3 million (BRL 13 million).

7.   Tangible assets

 

  a) Changes in the period

In the first three months of 2016, tangible assets were acquired for EUR 1,720 million (BRL 7,389 million) (first three months of 2015: EUR 1,409 million (BRL 4,530 million)).

Also, in the first three months of 2016, tangible asset items were disposed of with a carrying amount of EUR 536 million (BRL 2,303 million) (first three months of 2015: EUR 742 million (BRL 2,385 million)), giving rise to a net gain of EUR 9 million (BRL 39 million) (first three months of 2015: EUR 9 million (BRL 29 million)).

 

  b) Impairment losses

In the first three months of 2016, there were impairment losses on tangible assets (mainly investment property) amounting to EUR 12 million (BRL 51 million) (first three months of 2015: EUR 29 million (BRL 93 million)), which were recognised under Impairment losses on other assets.

 

  c) Property, plant and equipment purchase commitments

At 31 March 2016 and 2015, the Group did not have any significant commitments to purchase property, plant and equipment items.

 

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8.   Intangible assets

 

  a) Goodwill

The detail of Goodwill at 31 March 2016 and 31 December 2015, based on the cash-generating units giving rise thereto, is as follows:

 

      Millions of euros
        31/03/16           31/12/15  
     

Santander UK

     9,388       10,125

Banco Santander (Brazil)

     4,807       4,590

Santander Consumer USA

     2,946       3,081

Bank Zachodni WBK

     2,427       2,423

Santander Bank NA

     1,804       1,886

Santander Consumer Germany

     1,217       1,217

Banco Santander Totta

     1,040       1,040

Banco Santander - Chile

     653       644

Grupo Financiero Santander (Mexico)

     499       517

Santander Consumer Bank (Nordics)

     546       546

Other companies

     882       891
       26,209       26,960
               
      Millions of reais
        31/03/16           31/12/15  
     

Santander UK

     38,654       43,656

Banco Santander (Brazil)

     19,792       19,791

Santander Consumer USA

     12,130       13,284

Bank Zachodni WBK

     9,993       10,447

Santander Bank NA

     7,428       8,132

Santander Consumer Germany

     5,011       5,247

Banco Santander Totta

     4,282       4,484

Banco Santander - Chile

     2,689       2,777

Grupo Financiero Santander (Mexico)

     2,055       2,229

Santander Consumer Bank (Nordics)

     2,248       2,354

Other companies

     3,631       3,842
       107,913           116,243

In the first quarter of 2016, goodwill decreased by EUR 750 million due to exchange differences which, pursuant to current regulations, were recognised with a credit to Valuation adjustments - Exchange differences in equity in the consolidated statement of recognised income and expense.

 

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Note 17 to the consolidated financial statements for the year ended 31 December 2015 includes detailed information on the procedures followed by the Group to analyse the potential impairment losses on the goodwill recognised with respect to its recoverable amount and to recognise the related impairment, as appropriate.

Accordingly, based on the analysis performed of the available information on the performance of the various cash-generating units which might evidence the existence of indications of impairment, the Group’s directors concluded that in the first quarter of 2016 there were no impairment losses which required recognition.

 

  b) Other intangible assets

During the first three months of 2016 and 2015, there were no significant impairment losses.

9.   Financial liabilities

 

  a) Breakdown

The detail, by nature and category for measurement purposes, of the Group’s financial liabilities, other than hedging derivatives, at 31 March 2016 and 31 December 2015 is as follows:

 

      Millions of euros
      31/03/16      31/12/15
      Financial
liabilities held
for trading
     Other financial
liabilities at fair
value through
profit or loss
     Financial
liabilities at
amortised cost
       Financial  
  liabilities  
  held for  
  trading  
     Other financial
liabilities at
fair value
through profit
or loss
      Financial
 liabilities at
 amortised cost
             

Deposits from central banks

     771         14,010         36,483           2,178         16,486       38,872    

Deposits from credit institutions

     205         17,464         101,835           77           8,551       109,207    

Customer deposits

         9,570         28,484         632,554           9,187         26,357       647,578    

Marketable debt securities

       -           3,445         197,383           -           3,373       201,656    

Trading derivatives

       78,608         -                   76,414         -            -

Subordinated liabilities

       -         -           20,784           -         -           21,153    

Short positions

       19,413         -                   17,362         -            -

Other financial liabilities

       -         1         23,368           -         1       20,877    
       108,567         63,404         1,012,407           105,218         54,768       1,039,343    

 

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Table of Contents
      Millions of reais
      31/03/16    31/12/15
      Financial  
liabilities held  
for trading  
   Other financial  
liabilities at  
fair value  
through profit  
or loss  
   Financial  
liabilities at  
amortised cost  
   Financial  
liabilities held  
for trading  
   Other financial  
liabilities at fair  
value through  
profit or loss  
   Financial
liabilities at
amortised cost
             

Deposits from central banks

   3,175     57,685     150,215     9,391     71,083     167,604 

Deposits from credit institutions

   844     71,906     419,295     332     36,869     470,868 

Customer deposits

   39,404     117,280     2,604,478     39,612     113,643     2,792,162 

Marketable debt securities

      14,184     812,705        14,543     869,480 

Trading derivatives

   323,661           329,474       

Subordinated liabilities

         85,576           91,205 

Short positions

   79,931           74,860       

Other financial liabilities

      4        96,215        4        90,015 
     447,015     261,059     4,168,484     453,669     236,142     4,481,334 

 

  b) Information on issuances, repurchases or redemptions of debt instruments

Following is a detail, at 31 March 2016 and 2015, of the outstanding balance of the debt instruments which at these dates had been issued by the Bank or any other Group entity. Also included is the detail of the changes in this balance in the first three months of 2016 and 2015:

 

      Millions of euros
      31/03/16
      Outstanding  
beginning  
balance at  
01/01/16  
         Issues            Repurchases or  
redemptions  
   Exchange rate  
and other  
adjustments  
   Outstanding
ending balance
at 31/03/16
           

Debt instruments issued in an EU member state for which it was necessary to file a prospectus

   147,103      11,236     (16,631)     (3,972)     137,736  

Debt instruments issued in an EU member state for which it was not necessary to file a prospectus

   4,531      526     (418)     411     5,050  

Other debt instruments issued outside EU member states

   74,548      15,092     (12,217)     1,404     78,827  
     226,182      26,854       (29,266)       (2,157)       221,612  
              
      Millions of reais
      31/03/16
      Outstanding  
beginning  
balance at  
01/01/16  
         Issues            Repurchases or  
redemptions  
   Exchange rate  
and other  
adjustments  
   Outstanding
ending balance
at 31/03/16
           

Debt instruments issued in an EU member state for which it was necessary to file a prospectus

   634.264      48.270     (71.448)     (43.972)     567.114  

Debt instruments issued in an EU member state for which it was not necessary to file a prospectus

   19.535      2.260     (1.796)     793     20.792  

Other debt instruments issued outside EU member states

   321.429      64.835     (52.485)     (9.220)     324.559  
     975.228      115.365     (125.729)     (52.399)     912.465  

 

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Table of Contents
      Millions of euros
      31/03/15
      Outstanding  
beginning  
balance at  
01/01/15  
         Issues            Repurchases or  
redemptions  
   Exchange rate  
and other  
adjustments  
   Outstanding
ending balance
at 31/03/15
         

Debt instruments issued in an EU member state for which it was necessary to file a prospectus

   148,105      17,481      (18,189)      1,094      148,491  

Debt instruments issued in an EU member state for which it was not necessary to file a prospectus

   2,084      24      (214)      55      1,949  

Other debt instruments issued outside EU member states

   63,832      24,713      (21,239)      10,311      77,617  
     214,021      42,218      (39,642)      11,460      228,057  
                             
      Millions of reais
      31/03/15
      Outstanding  
beginning  
balance at  
01/01/15  
         Issues            Repurchases or  
redemptions  
   Exchange rate  
and other  
adjustments  
   Outstanding
ending balance
at 31/03/15
         

Debt instruments issued in an EU member state for which it was necessary to file a prospectus

   477,002      56,201      (58,478)      44,370      519,095  

Debt instruments issued in an EU member state for which it was not necessary to file a prospectus

   6,712      77      (688)      712      6,813  

Other debt instruments issued outside EU member states

   205,583      79,452      (68,283)      54,581      271,333  
     689,297      135,730      (127,449)      99,663      797,241  

 

  c) Other issues guaranteed by the Group

At 31 March 2015 and 2016, there were no debt instruments issued by associates or non-Group third parties that had been guaranteed by the Bank or any other Group entity.

 

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Table of Contents
  d) Case-by-case information on certain issuances, repurchases or redemptions of debt instruments

The main characteristics of the most significant issuances (excluding promissory notes, securitisations and issuances maturing within less than one year), repurchases or redemptions performed by the Group in the first three months of 2016, or guaranteed by the Bank or Group entities, are as follows:

 

Issuer data  

 

Data on the transactions performed in the first quarter of 2016

Name   Relationship with  
the Bank
  Country of  
registered  
office  
  (*) Issuer or
issue credit
rating
      Transaction       ISIN code   Type of security   Transaction   
date   
 

Amount of

the

issue,
repurchase
or redemption
(millions
of euros)
(a)

  Balance
outstanding
(millions
of euros)
(a)
 

    Interest    

rate

  Market where  
listed
  Type of  
guarantee  
provided  
    Risks additional
  to the guarantee
  that the Group
  would assume
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   XS1363002459   Senior   12/02/2016   750    750    EU3M + 0.55%   London   Santander UK     plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   Aaa/AAA/AAA   Issue   XS1360443979   Mortgage-backed bond   09/02/2016   1,000    1,000    0,25%   London   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   Aa3 /A /-   Issue   XS1377475709   Senior   23/03/2016   237    237    Cupon 0   Dublin   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   US002799AX28   Senior   14/03/2016   1,449    1,449    2,50%   TRACE   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   US002799AY01   Senior   14/03/2016   307    307    US Libor 3M + 0,14%   TRACE   Santander UK plc   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/ -   Issue   ES0413900392   Mortgage-backed bond   25/01/2016   1,000    1,000    1,50%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/ -   Issue   ES0413900400   Mortgage-backed bond   29/02/2016   393    393    2,03%   AIAF   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3 /A /A+   Issue   BSTDR10915   Senior   02/03/2016   208    208    2,50%   Chile   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3 /A /A+   Issue   BSTDR20915   Senior   16/03/2016   331    331    2,60%   Chile   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   A3e/A-/ -   Issue   XS1377492035   Senior   16/03/2016   244    244    EU3M + 0.82%   Dublin   N/A   N/A

SANTANDER CONSUMER BANK A.S.

  Subsidiary   Norway   A3 / - / BBB+   Issue   XS1369254310   Senior   25/02/2016   500    500    1,00%   Dublin   Santander Consumer Finance S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Issue   XS1373211900   Senior   08/03/2016   300    300    EU3M + 0.58%   Dublin   Banco Santander S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Issue   XS1370695477   Senior   03/03/2016   1,000    1,000    1,37%   Dublin   Banco Santander S.A.   N/A
                           

SANTANDER UK GROUP HOLDINGS PLC

  Subsidiary   Uk   Baa1/A/BBB   Issue   US80281LAD73   Senior   08/01/2016   878    878    3,12%   TRACE   N/A   N/A
                           

SANTANDER UK GROUP HOLDINGS PLC

  Subsidiary   Uk   Baa1/A/BBB   Issue   XS1345415472   Senior   14/01/2016   632    632    3,62%   London   N/A   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   Uk   Aa3/A/-   Cancellation   XS1023278887   Senior   27/01/2016   500    -   EU3M + 0.35%   London   Santander UK plc   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/-   Cancellation   ES0413440084   Mortgage-backed bond   18/01/2016   1,433    -   3,50%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/AA   Cancellation   ES0413900228   Mortgage-backed bond   20/01/2016   993    -   4,62%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/-   Cancellation   N/A   Mortgage-backed bond   15/03/2016   200    -   EUR BEI   N/A   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   A3/A-/A-   Cancellation   ES0313440143   Senior   23/03/2016   336    -   4,08%   AIAF   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3/A/A+   Cancellation   USP15069AM29   Senior   19/01/2016   430    -   3ML+1,60%   US   N/A   N/A
                           

BANCO SANTANDER BRASIL, S.A.

  Subsidiary   Brazil   Ba3/BBB-/BB   Cancellation   US05966UAH77   Senior   14/01/2016   747    -   4,25%   TRACE   N/A   N/A
                           

BANCO SANTANDER BRASIL, S.A.

  Subsidiary   Brazil   Ba3/BBB-/BB   Cancellation   US05966UAR59   Senior   18/03/2016   304    -   8,00%   Multiple   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Baa1/A-/BBB   Cancellation   XS1107321710   Senior   15/03/2016   298    -   EU3M + 0.50%   Dublin   N/A   N/A

 

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Table of Contents
Issuer data  

 

Data on the transactions performed in the first quarter of 2016

Name   Relationship with  
the Bank
  Country of  
registered  
office  
  (*) Issuer or
issue credit
rating
      Transaction       ISIN code   Type of security   Transaction   
date   
 

Amount of

the

issue,
repurchase
or redemption
(millions
of euros)
(a)

  Balance
outstanding
(millions
of euros)
(a)
 

    Interest    

rate

  Market where  
listed
  Type of  
guarantee  
provided  
    Risks additional
  to the guarantee
  that the Group
  would assume
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Aa3/AA-/A+   Cancellation   ES0413495005   

Mortgage-

backed bond

  23/03/2016   1,144    -   3,78%   Multiple   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Baa2/BBB+/BBB-   Cancellation   XS1016635580    Senior   29/01/2016   865    -   1,45%   Dublin   N/A   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS0899343387    Senior puttable   14/03/2016   339    -   2,15%   Luxemburgo   Banco Santander S.A.       N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   Baa1/A-/BBB+   Cancellation   XS1169932289    Senior   26/01/2016   250    -   EU3M + 0.27%   Dublin   Banco Santander, S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS1171573188    Senior   28/01/2016   200    -   EU3M + 0.23%   Dublin   Banco Santander, S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS0828735893    Senior   21/03/2016   2,188    -   4,62%   Multiple   Banco Santander S.A.   N/A

 

(a)

The amounts relating to securities denominated in foreign currencies were translated to euros at the exchange rate prevailing at the end of the first quarter of 2016.

(*) Belonging to: Moody’s, Fitch and Standard & Poor’s.

 

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Table of Contents
Issuer data  

 

Data on the transactions performed in the first quarter of 2016

Name   Relationship with  
the Bank
  Country of  
registered  
office  
  (*)Issuer or
issue credit
rating
      Transaction       ISIN code   Type of security   Transaction   
date   
 

Amount of
the

issue,
repurchase
or redemption

(millions

of reais)

(a)

 

Balance
outstanding
(millions

of reais)

(a)

 

    Interest    

rate

  Market where  
listed
  Type of  
guarantee  
provided  
    Risks additional
  to the guarantee
  that the Group
  would assume
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   XS1363002459   Senior   12/02/2016   3,088    3,088    EU3M + 0.55%   London   Santander UK     plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   Aaa/AAA/AAA   Issue   XS1360443979  

Mortgage-

backed bond

  09/02/2016   4,117    4,117    0,25%   London   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   Aa3 /A /-   Issue   XS1377475709   Senior   23/03/2016   976    976    Cupon 0   Dublin   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   US002799AX28   Senior   14/03/2016   5,967    5,967    2,50%   TRACE   Santander UK plc   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   UK   A1/A/A   Issue   US002799AY01   Senior   14/03/2016   1,266    1,266    US Libor 3M + 0,14%   TRACE   Santander UK plc   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/ -   Issue   ES0413900392  

Mortgage-

backed bond

  25/01/2016   4,117    4,117    1,50%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/ -   Issue   ES0413900400  

Mortgage-

backed bond

  29/02/2016   1,618    1,618    2,03%   AIAF   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3 /A /A+   Issue   BSTDR10915   Senior   02/03/2016   856    856    2,50%   Chile   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3 /A /A+   Issue   BSTDR20915   Senior   16/03/2016   1,364    1,364    2,60%   Chile   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   A3e/A-/ -   Issue   XS1377492035   Senior   16/03/2016   1,006    1,006    EU3M + 0.82%   Dublin   N/A   N/A
                           

SANTANDER CONSUMER BANK A.S.

  Subsidiary   Norway   A3 / - / BBB+   Issue   XS1369254310   Senior   25/02/2016   2,059    2,059    1,00%   Dublin   Santander Consumer Finance S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Issue   XS1373211900   Senior   08/03/2016   1,235    1,235    EU3M + 0.58%   Dublin   Banco Santander S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Issue   XS1370695477   Senior   03/03/2016   4,117    4,117    1,37%   Dublin   Banco Santander S.A.   N/A
                           

SANTANDER UK GROUP HOLDINGS PLC

  Subsidiary   Uk   Baa1/A/BBB   Issue   US80281LAD73   Senior   08/01/2016   3,617    3,617    3,12%   TRACE   N/A   N/A
                           

SANTANDER UK GROUP HOLDINGS PLC

  Subsidiary   Uk   Baa1/A/BBB   Issue   XS1345415472   Senior   14/01/2016   2,601    2,601    3,62%   London   N/A   N/A
                           

ABBEY NATIONAL TREASURY SERVICES PLC

  Subsidiary   Uk   Aa3/A/-   Cancellation   XS1023278887   Senior   27/01/2016   2,059    -   EU3M + 0.35%   London   Santander UK plc   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/-   Cancellation   ES0413440084  

Mortgage-

backed bond

  18/01/2016   5,902    -   3,50%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/AA   Cancellation   ES0413900228  

Mortgage-

backed bond

  20/01/2016   4,090    -   4,62%   AIAF   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   Aa2/AA/-   Cancellation   N/A  

Mortgage-

backed bond

  15/03/2016   823    -   EUR BEI   N/A   N/A   N/A
                           

BANCO SANTANDER, S.A.

  Parent   Spain   A3/A-/A-   Cancellation   ES0313440143   Senior   23/03/2016   1,384    -   4,08%   AIAF   N/A   N/A
                           

BANCO SANTANDER - CHILE

  Subsidiary   Chile   Aa3/A/A+   Cancellation   USP15069AM29   Senior   19/01/2016   1,770    -   3ML+1,60%   US   N/A   N/A
                           

BANCO SANTANDER BRASIL, S.A.

  Subsidiary   Brazil   Ba3/BBB-/BB   Cancellation   US05966UAH77   Senior   14/01/2016   3,074    -   4,25%   TRACE   N/A   N/A
                           

BANCO SANTANDER BRASIL, S.A.

  Subsidiary   Brazil   Ba3/BBB-/BB   Cancellation   US05966UAR59   Senior   18/03/2016   1,250    -   8,00%   Multiple   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Baa1/A-/BBB   Cancellation   XS1107321710   Senior   15/03/2016   1,227    -   EU3M + 0.50%   Dublin   N/A   N/A

 

30


Table of Contents
Issuer data  

 

Data on the transactions performed in the first quarter of 2016

Name   Relationship with  
the Bank
  Country of  
registered  
office  
 

(*)Issuer or

issue credit

rating

      Transaction       ISIN code   Type of security   Transaction   
date   
 

Amount of
the

issue,
repurchase
or redemption

(millions

of reais)

(a)

 

Balance
outstanding
(millions

of reais)

(a)

 

    Interest    

rate

  Market where  
listed
  Type of  
guarantee  
provided  
    Risks additional
  to the guarantee
  that the Group
  would assume
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Aa3/AA-/A+   Cancellation   ES0413495005    Mortgage-backed bond   23/03/2016   4,709    -   3,78%   Multiple   N/A   N/A
                           

SANTANDER CONSUMER FINANCE, S.A.

  Subsidiary   Spain   Baa2/BBB+/BBB-   Cancellation   XS1016635580    Senior   29/01/2016   3,560    -   1,45%   Dublin   N/A   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS0899343387    Senior puttable   14/03/2016   1,395    -   2,15%   Luxemburgo   Banco Santander S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   Baa1/A-/BBB+   Cancellation   XS1169932289    Senior   26/01/2016   1,029    -   EU3M + 0.27%   Dublin   Banco Santander, S.A.   N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS1171573188    Senior   28/01/2016   823    -   EU3M + 0.23%   Dublin   Banco Santander, S.A.       N/A
                           

SANTANDER INTERNATIONAL DEBT, S.A.U.

  Subsidiary   Spain   A3/A-/A-   Cancellation   XS0828735893    Senior   21/03/2016   9,010    -   4,62%   Multiple   Banco Santander S.A.   N/A

 

(a)

The amounts relating to securities denominated in foreign currencies were translated to reais at the exchange rate prevailing at the end of the first quarter of 2016.

(*) Belonging to: Moody’s, Fitch and Standard & Poor’s.

 

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Table of Contents
  e) Fair value of financial liabilities not measured at fair value

Following is a comparison of the carrying amounts of the Group’s financial liabilities measured at other than fair value and their respective fair values at 31 March 2016 and 31 December 2015:

 

     

 

Millions of euros

      31/03/16    31/12/15
      Carrying amount     

Fair  

value  

   Carrying amount     

Fair

value

Financial liabilities at amortised cost:

                   

Deposits from central banks

   36,483     36,768     38,872            38,894  

Deposits from credit institutions

   101,835     101,992     109,207            109,478  

Customer deposits

   632,554     631,947     647,578            646,916  

Marketable debt securities

   197,383     200,560     201,656            204,290  

Subordinated liabilities

   20,784     20,485     21,153            21,085  

Other financial liabilities

   23,368     23,324     20,877            21,178  

LIABILITIES

   1,012,407           1,015,076             1,039,343                1,041,841  
           
      Millions of reais
      31/03/16    31/12/15
      Carrying amount     

Fair  

value  

   Carrying amount     

Fair

value

Financial liabilities at amortised cost:

                   

Deposits from central banks

   150,215     151,389         167,604            167,699  

Deposits from credit institutions

   419,295     419,942         470,868            472,036  

Customer deposits

   2,604,478     2,601,979         2,792,162            2,789,308  

Marketable debt securities

   812,705     825,786         869,480            880,837  

Subordinated liabilities

   85,576     84,345         91,205            90,912  

Other financial liabilities

   96,215     96,034         90,015            91,313  

LIABILITIES

   4,168,484     4,179,475             4,481,334            4,492,105  

The main valuation methods and inputs used in the estimates of the fair values of the financial liabilities in the foregoing table are detailed in Note 51.c to the consolidated financial statements for 2015.

10.  Provisions

 

  a) Breakdown

The detail of Provisions at 31 March 2016 and 31 December 2015 is as follows:

 

      Millions of euros
        31/03/16           31/12/15
     

Provisions for pensions and similar obligations

   8,125     8,272   

Provisions for taxes and other legal contingencies

   2,629     2,577   

Provisions for contingent liabilities and commitments

   611     618 

Of which: due to country risk

   2    2

Other provisions

   2,927     3,027   

Provisions

   14,292        14,494   

 

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Table of Contents
     Millions of reais
         31/03/16           31/12/15
     

Provisions for pensions and similar obligations

    33,454      35,666 

Provisions for taxes and other legal contingencies

    10,825      11,111 

Provisions for contingent liabilities and commitments

    2,516      2,665 

Of which: due to country risk

    8     

Other provisions

    12,052      13,052 

Provisions

    58,847      62,494 

 

  b) Provisions for pensions and similar obligations

The change in Provisions for pensions and similar obligations in the first quarter of 2016 related to benefit payments exceeding EUR 300 million (BRL 1,289 million), as well as to the greater obligations arising from the increase in the cumulative actuarial gains and losses as a result of the change in actuarial assumptions.

 

  c) Provisions for taxes and other legal contingencies and Other provisions

Set forth below is the detail, by type of provision, of the balances at 31 March 2016 and at 31 December 2015 of Provisions for taxes and other legal contingencies and Other provisions. The types of provision were determined by grouping together items of a similar nature:

 

     Millions of euros
   31/03/16      31/12/15
     

Provisions for taxes

     1,059       997

Provisions for employment-related proceedings (Brazil)

     640       581

Provisions for other legal proceedings

     930       999

Provision for customer remediation

     807       916

Regulatory framework-related provisions

     311       308

Provision for restructuring

     403       404

Other

     1,406       1,399
       5,556       5,604
   
                
     Millions of reais
   31/03/16      31/12/15
     

Provisions for taxes

     4,360       4,299

Provisions for employment-related proceedings (Brazil)

     2,635       2,505

Provisions for other legal proceedings

     3,829       4,308

Provision for customer remediation

     3,323       3,951

Regulatory framework-related provisions

     1,281       1,329

Provision for restructuring

     1,659       1,742

Other

     5,790       6,028
       22,877       24,162

 

33


Table of Contents

Relevant information is set forth below in relation to each type of provision shown in the preceding table:

The provisions for taxes include provisions for tax-related proceedings.

The provisions for employment-related proceedings (Brazil) relate to claims filed by trade unions, associations, the prosecutor’s office and ex-employees claiming employment rights to which, in their view, they are entitled, particularly the payment of overtime and other employment rights, including litigation concerning retirement benefits. The number and nature of these proceedings, which are common for banks in Brazil, justify the classification of these provisions in a separate category or as a separate type from the rest. The Group calculates the provisions associated with these claims in accordance with past experience of payments made in relation to claims for similar items. When claims do not fall within these categories, a case-by-case assessment is performed and the amount of the provision is calculated in accordance with the status of each proceeding and the risk assessment carried out by the legal advisers. The average duration of the employment-related proceedings is approximately eight years.

The provisions for other legal proceedings include provisions for court, arbitration or administrative proceedings (other than those included in other categories or types of provisions disclosed separately) brought against Santander Group companies.

The provisions for customer remediation include the estimated cost of payments to remedy errors relating to the sale of certain products in the UK and Germany. To calculate the provision for customer remediation, the best estimate of the provision made by management is used, which is based on the estimated number of claims to be received and, of these, the number that will be accepted, as well as the estimated average payment per case.

The regulatory framework-related provisions include mainly the provisions for the extraordinary contribution to the Deposit Guarantee Fund in Spain and those relating to the FSCS and the bank levy in the UK.

The provisions for restructuring include only the direct costs arising from restructuring processes carried out by the various Group companies.

Qualitative information on the main litigation is provided in Note 10.d.

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in claims of the same nature. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, the obligations do not have a fixed settlement term and, in others, they depend on legal proceedings in progress.

 

34


Table of Contents

The main changes in Provisions for taxes and other legal contingencies and Other provisions are disclosure in the chart above. With regard to Brazil, the main charges to profit or loss in the period ended 31 March 2016 relate to EUR 48 million (BRL 208 million) due to civil contingencies and EUR 80 million (BRL 344 million) arising from employment-related claims. This increase was partially offset by the use of available provisions, of which EUR 51 million (BRL 221 million) related to labour payments and EUR 75 million (BRL 322 million) to civil payments to restructuring provisions used. With regard to the United Kingdom, were recognised, EUR 14 million (BRL 60 million) of restructuring provisions. These increases were partially offset by the use of EUR 45 million (BRL 193 million) of customer remediation provisions, EUR 29 million (BRL 125 million) regulatory framework (Bank Levy and FSCS) and EUR 30 million (BRL 128) of restructuring.

 

  d) Litigation and other matters

i. Tax-related litigation

At 31 March 2016, the main tax-related proceedings concerning the Group were as follows:

 

  -  

Legal actions filed by Banco Santander (Brasil), S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008, a provision having been recognised for the amount of the estimated loss.

 

  -  

Legal actions filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. No provision was recognised in connection with the amount considered to be a contingent liability.

 

  -  

Legal actions filed by Banco Santander, S.A. (currently Banco Santander (Brasil) S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the legal action was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favour of Banco Santander, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. On 23 April 2015, the Federal Supreme Court issued a decision granting leave for the extraordinary appeal filed by the Brazilian authorities with regard to the PIS contribution to proceed, and dismissing the extraordinary appeal lodged by the Brazilian Public Prosecutor’s Office in relation to the COFINS contribution. The Federal Supreme Court has not yet handed down its decision on the PIS contribution and, with regard to the COFINS contribution, on 28 May 2015, the Federal Supreme Court in plenary session unanimously rejected the extraordinary appeal filed by the Brazilian Public Prosecutor’s Office, and the petition for clarification (“embargos de declaraçao”) subsequently filed by the Brazilian Public Prosecutor’s Office, which on 3 September admitted that no further appeals may be filed. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil) S.A.), in March 2007 the court found in its favour, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil) S.A. filed an appeal at the Federal Supreme Court. Law 12,865/2013 established a programme of payments or deferrals of certain tax and social security debts, under which any entities that availed themselves of the programme and withdrew the legal actions brought by them were exempted from paying late-payment interest. In November 2013 Banco Santander (Brasil) S.A. partially availed itself of this programme but only with respect to the legal actions brought by the former Banco ABN AMRO Real, S.A. in relation to the period from September 2006 to April 2009, and with respect to other minor actions brought by other entities in its Group. However, the legal actions brought by Banco Santander, S.A. and those of Banco ABN AMRO Real, S.A. relating to the periods prior to September 2006, for which a provision for the estimated loss was recognised, still subsist.

 

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Table of Contents
  -  

Banco Santander (Brasil), S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. No provision was recognised in connection with the amount considered to be a contingent liability.

 

  -  

Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against several municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. No provision was recognised in connection with the amount considered to be a contingent liability.

 

  -  

In addition, Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. No provision was recognised in connection with the amount considered to be a contingent liability.

 

  -  

In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. in relation to income tax (IRPJ and CSLL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil), S.A. did not meet the necessary legal requirements to be able to deduct the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil), S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on 21 October 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil), S.A. filed an appeal against these procedures at CARF, which was partially upheld on 8 October 2013. This decision has been appealed at the higher instance of CARF (Tax Appeal High Chamber). In December 2013 the Brazilian tax authorities issued the infringement notice relating to 2008, the last year for amortisation of the goodwill. Banco Santander (Brasil), S.A. appealed against this infringement notice and the court found in its favour. The Brazilian tax authorities appealed against this decision at CARF. Based on the advice of its external legal counsel and in view of the first decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defence arguments to appeal against the infringement notices. Accordingly, the risk of incurring a loss is remote. Consequently, no provisions have been recognised in connection with these proceedings because this matter should not affect the consolidated financial statements.

 

  -  

In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM, currently Produban Serviços de Informática S.A.) and Banco Santander (Brasil), S.A. (currently Banco Santander (Brasil) S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander (Brasil) S.A. to DTVM in 2000, 2001 and the first two months of 2002. The two entities appealed against the infringement notices at CARF, with DTVM obtaining a favourable decision and Banco Santander (Brasil) S.A. an unfavourable decision. Both decisions were appealed by the losing parties at the High Chamber of CARF, and unfavourable decisions were obtained by Banco Santander (Brasil) S.A. and DTVM on 12 and 19 June 2015, respectively. Both cases were appealed at court in a single proceeding and a provision was recognised for the estimated loss.

 

  -  

In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A., as the successor by merger to ABN AMRO Brazil Dois Participações, S.A., in relation to income tax (IRPJ and CSLL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The bank filed an appeal for reconsideration against this infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil), S.A. is liable in the event of any adverse outcome of this proceeding. No provision was recognised in connection with this proceeding as it was considered to be a contingent liability.

 

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Table of Contents
  -  

In June 2013, the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. as the party liable for tax on the capital gain allegedly obtained in Brazil by the entity not resident in Brazil, Sterrebeeck B.V., as a result of the “incorporação de ações” (merger of shares) transaction carried out in August 2008. As a result of the aforementioned transaction, Banco Santander (Brasil), S.A. acquired all of the shares of Banco ABN AMRO Real, S.A. and ABN AMRO Brasil Dois Participações, S.A. through the delivery to these entities’ shareholders of newly issued shares of Banco Santander (Brasil), S.A., issued in a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. obtained income subject to tax in Brazil consisting of the difference between the issue value of the shares of Banco Santander (Brasil), S.A. that were received and the acquisition cost of the shares delivered in the exchange. In December 2014 the Group appealed against the infringement notice at CARF after the appeal for reconsideration lodged at the Federal Tax Office was dismissed. Based on the advice of its external legal counsel, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defence arguments to appeal against the infringement notice. Accordingly, the risk of incurring a loss is remote. Consequently, the Group has not recognised any provisions in connection with these proceedings because this matter should not affect the consolidated financial statements.

 

  -  

In November 2014 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil) S.A. in relation to income tax (IRPJ and CSLL) for 2009 questioning the tax-deductibility of the amortisation of the goodwill of Banco ABN AMRO Real S.A. performed prior to the absorption of this bank by Banco Santander (Brasil) S.A., but accepting the amortisation performed after the merger. On the advice of its external legal counsel, Banco Santander (Brasil), S.A. lodged an appeal against this decision at the Federal Tax Office and obtained a favourable decision in July 2015, which will foreseeably be appealed at CARF by the Brazilian tax authorities. No provision was recognised in connection with this proceeding as it was considered to be a contingent liability. Banco Santander (Brasil) S.A. has also appealed against infringement notices issued by the tax authorities questioning the tax deductibility of the amortisation of the goodwill arising on the acquisition of Banco Comercial e de Investimento Sudameris S.A. No provision was recognised in connection with this matter as it was considered to be a contingent liability.

 

  -  

Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA, Inc. considers that, in accordance with applicable tax legislation, it is entitled to recognise the aforementioned tax credits as well as the related issuance and financing costs. In addition, if the final outcome of this legal action is favourable to the interests of Santander Holdings USA, Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. In 2013 and in 2015 at second instance the US courts found against two taxpayers in cases with a similar structure. In the case of Santander Holdings USA, Inc., on 13 November 2015, the district judge found for Santander Holdings USA, Inc. in the final decision. On 13 January 2016, the judge ordered the amounts paid over with respect to 2003 to 2005 to be refunded to Santander Holdings USA, Inc. On 11 March 2016 the US government appealed the judge’s decision at the Court of Appeals. The estimated loss relating to this proceeding was provided for.

 

  -  

Santander UK has proactively engaged with HM Revenue & Customs to resolve a number of outstanding legacy tax matters, all of which relate to periods prior to Santander UK plc’s adoption of the Code of Practice on Taxation for Banks. However, litigation proceedings were commenced in relation to a small number of these issues, with respect to which the court of first instance found in favour of HM Revenue & Customs. Santander UK has decided not to appeal these rulings. The provision recognised for the amounts relating to these matters has been used in full.

At the date of approval of these interim financial statements certain other less significant tax-related proceedings were also in progress.

 

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ii. Non-tax-related proceedings

At 31 March 2016, the main non-tax-related proceedings concerning the Group were as follows:

 

  -  

Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

The remaining provision for PPI redress and related costs amounted to £436m, which included £450m of additional provisions made for Q4’15. Monthly utilisation, excluding pro-active customer contact, during the quarter was in line with the 2015 average.

Although we are comfortable with our current position, we will continue to review our provision levels in respect of recent claims experiences and the observed impact of the two-year deadline.

 

  -  

After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011, Banco Santander, S.A. filed a new request for arbitration with the Spanish Arbitration Court against Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores, S.A.), claiming 66 million that the latter owes it as a result of the declaration on January 4, 2008 of the early termination by the Bank of all the financial transactions agreed upon between the parties.

On August 3, 2012, Delforca 2008, S.A. was declared to be in a position of voluntary insolvency by Barcelona Commercial Court no. 10, which had agreed as part of the insolvency proceeding to stay the arbitration proceeding and the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A. The Arbitration Court, in compliance with the decision of the Commercial Court, agreed on January 20, 2013 to stay the arbitration proceedings at the stage reached at that date until a decision could be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party with a view to having the claim recognized as a contingent ordinary claim without specified amount. However, the insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, Banco Santander, S.A. filed an ancillary claim, which was dismissed by a Court decision on February 17, 2015. This decision also declared that Banco Santander, S.A. had breached its contractual obligations under the framework financial transaction agreement it had entered into with Delforca 2008, S.A.

As part of the same insolvency proceeding, Delforca 2008, S.A. has filed another ancillary claim requesting the termination of the arbitration agreement included in the framework financial transactions agreement entered into by that party and Banco Santander, S.A. in 1998, as well as the termination of the obligation that allegedly binds the insolvent party to the High Council of Chambers of Commerce (Spanish Arbitration Court). This claim was upheld in full by the Court.

On December 30, 2013, Banco Santander filed a complaint requesting the termination of the insolvency proceeding of Delforca 2008, S.A. due to supervening disappearance of the alleged insolvency of the company. The complaint was dismissed by a decision handed down on June 30, 2014. A court order dated 25 May 2015 declared the end of the common phase of the insolvency proceeding and the opening of the arrangement phase. Banco Santander, S.A. lodged an appeal against the court’s decisions 1) to stay the arbitration proceeding and the effects of the arbitral award, 2) to terminate the arbitration agreement 3) not to recognize the contingent claim, and to declare a breach by Banco Santander, S.A. and 4) not to conclude the proceeding due to the non-existence of insolvency.

 

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On 23 June 2015, Delforca 2008, S.A. submitted an arrangement proposal entailing the payment in full of the ordinary and subordinate claims.

In its appeal documents Banco Santander, S.A. requested the stay of any proceedings that might be affected by the decision on the appeals filed, including the stay of the insolvency proceeding and the processing of the arrangement phase until a decision has been handed down on the appeals. By means of an interlocutory order made on 16 September 2015 the Court resolved to postpone the holding of the creditors’ meeting until the Provincial Appellate Court has handed down a decision on the requested stay of the proceedings.

In addition, in April 2009 Mobilaria Monesa, S.A. (parent of Delforca 2008, S.A.) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, claiming damages which it says it incurred as a result of the (in its opinion) unwarranted claim filed by the Bank against its subsidiary, reproducing the same objections as Delforca 2008, S.A. This proceeding has currently been stayed on preliminary civil ruling grounds, against which Mobilaria Monesa, S.A. filed an appeal which was dismissed by the Cantabria Provincial Appellate Court in a judgment dated January 16, 2014.

Lastly, on April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it sought indemnification for the damage and losses it alleges it incurred due to the (in its opinion) unwarranted claim by the Bank. Delforca 2008, S.A. made the request in a counterclaim filed in the arbitration proceeding that concluded with the annulled award, putting the figure at up to EUR 218 million. The aforementioned Court has dismissed the motion for declinatory exception proposed by Banco Santander, S.A. as the matter has been referred for arbitration. This decision was upheld in an appeal at the Madrid Provincial Appellate Court in a judgment dated May 27, 2014. The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

 

  -  

Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000, as agreed by the board of directors, and the relevant clause was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision at the High Employment Court (“TST”) and, subsequently, at the Federal Supreme Court (“STF”). The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and the association. Only the appeal lodged by the bank has been given leave to proceed and will be decided upon by the STF in plenary session.

 

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  -  

“Planos economicos”: Like the rest of the banking system, Santander Brazil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation (“planos economicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (“STJ”) set the limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will probably significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the STJ and the Supreme Federal Court (“STF”) with which the matter is expected to be definitively settled. In August 2010, STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute of limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress were stayed until this court issues a final decision on the matter.

 

  -  

Proceeding under Criminal Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150 million in principal plus USD 4.7 million in interests, upon alleged termination of an escrow contract.

The court upheld the claim but did not make a specific pronouncement on costs. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. An appeal was filed at the Supreme Court by Banco Occidental de Descuento against the Madrid Provincial Appellate Court decision. The appeal was dismissed in a Supreme Court judgment dated October 24, 2014. Banco Occidental de Descuento filed a motion for annulment against the aforementioned judgment which was dismissed in an order dated 2 December 2015. The complainant has stated that it will appeal. The Bank has not recognized any provisions in this connection.

 

  -  

On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group, S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving 32 million in principal and 2.7 million in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final proceeding. The Court dismissed the claim in full in a judgment dated November 13, 2013. The judgment was confirmed at appeal by the Murcia Provincial Appellate Court in a judgment dated July 10, 2014. The insolvency managers have filed a cassation and extraordinary appeal against procedural infringements against the aforementioned judgment.

 

  -  

The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying.

At the date of this annual report, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, as a result, no provisions needed to be recognized in this connection.

 

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  -  

The intervention, on the grounds of alleged fraud, of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) by the U.S. Securities and Exchange Commission (“SEC”) took place in December 2008. The exposure of customers of the Group through the Optimal Strategic US Equity (“Optimal Strategic”) subfund was EUR 2,330 million, of which EUR 2,010 million related to institutional investors and international private banking customers, and the remaining EUR 320 million made up the investment portfolios of the Group’s private banking customers in Spain, who were qualifying investors.

At the date of this financial statements, certain claims had been filed in relation to this matter. The Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, the risk of loss is considered to be remote or non-material.

 

  -  

At the end of the first quarter of 2013, news stories were published stating that the public sector was debating the validity of the interest rate swaps arranged between various financial institutions and public sector companies in Portugal, particularly in the public transport industry.

The swaps under debate included swaps arranged by Banco Santander Totta, S.A. with the public companies Metropolitano de Lisboa, E.P.E. (MdL), Metro de Porto, S.A. (MdP), Sociedade de Transportes Colectivos do Porto, S.A. (STCP) and Companhia Carris de Ferro de Lisboa, S.A. (Carris). These swaps were arranged prior to 2008, i.e. before the start of the financial crisis, and had been executed without incident.

In view of this situation Banco Santander Totta, S.A. took the initiative to request a court judgment on the validity of the swaps in the jurisdiction of the United Kingdom to which the swaps are subject. The corresponding claims were filed in May 2013.

After the Bank had filed the claims, the four companies (MdL, MdP, STCP and Carris) notified Banco Santander Totta, S.A. that they were suspending payment of the amounts owed under the swaps until a final decision had been handed down in the UK jurisdiction in the proceedings. MdL, MdP and Carris suspended payment in September 2013 and STCP did the same in December 2013.

Consequently, Banco Santander Totta, S.A. extended each of the claims to include the unpaid amounts.

On November 29, 2013, the companies presented their defense in which they claimed that the swaps were null and void under Portuguese law and, accordingly, that they should be refunded the amounts paid. On February 14, 2014, Banco Santander Totta, S.A. answered the counterclaim, maintaining its arguments and rejecting the opposing arguments in its documents dated November 29, 2013.

On April 4, 2014, the companies issued their replies to the Bank’s documents. The preliminary hearing took place on May 16, 2014.

The case was heard from October 12 to December 10, 2015.

The judgment was handed down on March 4, 2016. The Court decided in favor of Banco Santander Totta, S.A. on all requests submitted by it and against the transport companies on all requests made by them. It considered all nine swap contracts to be valid and binding.

 

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Banco Santander Totta, S.A. and its legal advisers consider that this judgment confirmed that the bank acted at all times in accordance with applicable legislation and under the terms of the swaps. As a result, the Group has not recognized any provisions in this connection.

 

  -  

Most of the German banking industry has been affected by two German Supreme Court decisions in 2014 in relation to handling fees in consumer loan agreements.

In May 2014 the German Supreme Court held handling fees in loan agreements to be null and void. The Court subsequently handed down a ruling at the end of October 2014 extending from three to ten years the statute of limitation period on claims relating to old transactions. Therefore, any claims relating to handling fees paid between 2004 and 2011 became statute-barred in 2014. This situation gave rise to numerous claims at the end of 2014 which affected the income statements of banks in Germany.

Santander Consumer Bank AG stopped including these handling fees in agreements from January 1, 2013 and ceased charging these fees definitively at that date, i.e. before the Supreme Court handed down its judgment on the issue.

Provisions of approximately EUR 455 million were recognized in 2014 to cover the estimated cost of the claims. In order to calculate the provision, the claims already received, as well as an estimate of those that could be received in 2015 (the year in which the period for making claims ends as they become statute-barred) were taken into account. The provisions recognized to cover the claims received were used progressively throughout 2014 and 2015.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at March 31, 2016, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

 

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11.  Equity

In the three-month periods ended 31 March 2016 and 2015 there were no quantitative or qualitative changes in the Group’s equity other than those indicated in the consolidated statements of changes in total equity.

 

  a) Issued capital

On 8 January 2015, the Group announced that its board of directors had resolved to increase capital through an accelerated bookbuilt offering with disapplication of pre-emption rights. The capital increase amounted to EUR 7,500 million (BRL 23,830 million), of which EUR 607 million (BRL 1,928 million) related to the par value of the 1,213,592,234 new shares issued and EUR 6,893 million (BRL 21,902 million) to the share premium.

On 29 January, 29 April and 4 November 2015, the bonus issues through which the Santander Dividendo Elección scrip dividend scheme is instrumented took place, whereby 262,578,993, 256,046,919 and 117,859,774 shares (1.90%; 1.82% and 0.82% of the share capital) were issued for an amount of EUR 131, 128 and 59 million (BRL 395, 426 and 240 million).

At 31 March 2016, the Bank’s share capital consisted of 14,434,492,579 shares (31 December 2015:14,060,585,886), with a total par value of EUR 7,217 million (BRL 18,016 million). ( 31 December 2015: EUR 7,030 million (BRL 17,350 million)).

 

  b) Valuation adjustments - 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 as available-for-sale financial assets (see Note 5.b).

 

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The breakdown, by type of instrument and geographical origin of the issuer, of Valuation adjustments - Available-for-sale financial assets at 31 March 2016 and 31 December 2015 is as follows:

 

      Millions of euros
   31/03/16      31/12/15
   Revaluation
gains
     Revaluation
losses
   

Net
  revaluation  
gains/

(losses)

   

Fair

value

     Revaluation
gains
     Revaluation
losses
   

Net
  revaluation  
gains/

(losses)

   

Fair

value

                 

Debt instruments

                                   

Government debt securities and debt instruments issued by central banks

                                   

 Spain

     729         (41)        688        34,843         641         (62     579      35,283

 Rest of Europe

     76         (68)        8        17,025         283         (47     236      20,310

 Latin America and rest of the world

     149         (379)        (230     33,597         42         (671     (629   32,185

Private-sector debt securities

     170         (169)        1        28,191         165         (253     (88   29,409
       1,124         (657)        467        113,656         1,131         (1,033     98      117,187
                 

Equity instruments

                                   

Domestic

                                   

 Spain

                                   

 

International

    

 

55

 

  

 

    

 

(9)

 

  

 

   

 

46

 

  

 

   

 

1,140

 

  

 

    

 

66

 

  

 

    

 

 

(5

 

 

 

 

   

 

61

 

  

 

  1,140

 Rest of Europe

     374         (10)        364        1,234         438         (14     424      1,338

 United States

     16         (1     15        898         14         (2     12      980

 Latin America and rest of the world

     246         (9)        237        1,370         251         (2     249      1,391
       691         (29)        662        4,642         769         (23     746      4,849

 Of which:

                                   

 Listed

     370         (24)        346        1,834         436         (15     421      1,986

 Unlisted

     321         (5)        316        2,808         333         (8     325      2,863

    

                                                               
       1,815             (686)        1,129        118,298         1,900         (1,056     844      122,036

 

      Millions of reais
   31/03/16      31/12/15
   Revaluation
gains
     Revaluation
losses
   

Net
  revaluation  
gains/

(losses)

    

Fair

value

     Revaluation
gains
     Revaluation
losses
   

Net
  revaluation  
gains/

(losses)

    

Fair

value

                 

Debt instruments

                                     

Government debt securities and debt instruments issued by central banks

                                     

 Spain

     3,001         (169     2,832         143,462         2,764         (267     2,497       152,130

 Rest of Europe

     313         (280     33         70,099         1,220         (203     1,017       87,570

 Latin America and rest of the world

     613         (1,560     (947)         138,332         181         (2,893     (2,712)       138,772

Private-sector debt securities

     700         (696     4         116,074         711         (1,091     (380)       126,803
       4,627         (2,705     1,922         467,967         4,876         (4,454     422       505,275
                 

Equity instruments

                                     

Domestic

                                     

 Spain

                                     

 

International

    

 

226

 

  

 

    

 

(37

 

 

   

 

189

 

  

 

    

 

4,694

 

  

 

    

 

285

 

  

 

    

 

(22

 

 

   

 

263

 

  

 

  

4,915

 

 Rest of Europe

     1,540         (41     1,499         5,081         1,889         (61     1,828       5,769

 United States

     66         (4     62         3,697         60         (8     52       4,225

 Latin America and rest of the world

     1,013         (37     976         5,641         1,082         (9     1,073       5,998
       2,845         (119     2,726         19,113         3,316         (100     3,216       20,907

 Of which:

                                     

 Listed

     1,523         (98     1,425         7,551         1,880         (65     1,815       8,563

 Unlisted

     1,322         (21     1,301         11,562         1,436         (35     1,401       12,344

    

                                                                 
       7,472         (2,824     4,648         487,080         8,192         (4,554     3,638       526,182

 

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In the first quarter of 2016 the Group recognised EUR 8 million (BRL 35 million) in the income statement in relation to impairment of debt instruments.

 

  c) Valuation adjustments - Hedges of net investments in foreign operations and Exchange differences

Valuation adjustments - Hedges of net investments in foreign operations includes the net amount of the changes in value of hedging instruments in hedges of net investments in foreign operations, in respect of the portion of these changes considered to be effective hedges.

Valuation adjustments - Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro.

The net changes in both these items in the first quarter of 2016 recognised in the statement of recognised income and expense reflect the effect arising from the depreciation of foreign currencies, mainly the pound sterling and the US dollar, and the appreciation of the Brazilian real. Of the change in the balance in the first quarter, a loss of approximately EUR 750 million related to the measurement of goodwill using the period-end exchange rate .

 

  d) Valuation adjustments - Other valuation adjustments

The changes in the balance of Valuation adjustments - Other valuation adjustments are shown in the condensed consolidated statement of recognised income and expense and include the actuarial gains and losses generated in the period and the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset), less the administrative expenses and taxes inherent to the plan, and any change in the effect of the asset ceiling.

The most significant changes in the first three months of 2016 related to:

 

  -   Increase of EUR 187 million (BRL 803 million) in the cumulative actuarial losses relating to the Group’s businesses in the UK, due to the change in the discount rate from 3.74% to 3.41% and a higher than expected return on plan assets.

 

  -   Changes as a result of changes in exchange rates, mainly in the UK (depreciation of the pound), and Brazil (appreciation of the real).

 

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12. Segment information

In 2015 the Group made changes to its criteria for the management and presentation of its financial information by segment:

Information related to the three-month period ended 31 March 2015 following has been re-elaborated under these criteria to be comparative.

For Group management purposes, the primary level of segmentation, by geographical area, comprises five segments: four operating areas plus Corporate Activities. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom, Latin America and the United States, based on the location of the Group’s assets.

Following is the breakdown of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognised under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/losses on financial assets and liabilities (net) and Other operating income in the accompanying consolidated income statements for the three-month periods ended 31 March 2016 and 2015.

 

Segment    Revenue (Millions of euros)
  

        Revenue from external         

customers

  

                Inter-segment                 

revenue

                   Total  revenue            
   31/03/16     31/03/15     31/03/16     31/03/15        31/03/16          31/03/15 
             

Continental Europe

   5,351     5,429     (90)     156       5,261       5,585 

United Kingdom

   2,458     2,957     235     (157)      2,693       2,800 

Latin America

   8,198     8,110     (332)     (213)      7,866       7,897 

United States

   2,454     2,512     16     (6)      2,470       2,506 

Corporate Activities

   (160)    (641)     1,663     4,279       1,503       3,638 

Inter-segment revenue adjustments and eliminations

         (1,492)     (4,059)      (1,492)      (4,059)

Total

   18,301     18,367        -       18,301       18,367 
                 
Segment    Revenue (Millions of reais)
  

        Revenue from external         

customers

  

                Inter-segment                  

revenue

                    Total revenue            
   31/03/16     31/03/15     31/03/16     31/03/15       31/03/16          31/03/15 
             

Continental Europe

   22,989     17,454     (386)     502     22,603     17,956

United Kingdom

   10,558     9,507     1,009     (506)     11,567     9,001

Latin America

   35,220     26,073     (1,425)     (686)     33,795     25,387

United States

   10,544     8,077     68     (21)     10,612     8,056

Corporate Activities

   (688)    (2,062)    7,145     13,761     6,457     11,699

Inter-segment revenue adjustments and eliminations

         (6,411)     (13,050)     (6,411)     (13,050)

Total

   78,623     59,049           78,623     59,049

 

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Also, following is the reconciliation of the Group’s consolidated profit after tax for the three-month periods ended 31 March 2016 and 2015, broken down by business segment, to the profit before tax per the condensed consolidated income statements for these periods:

 

    

          Consolidated profit          

(Millions of euros)

Segment   31/03/16     31/03/15
     

Continental Europe

  776         712  

United Kingdom

  462         479  

Latin America

  841         985  

United States

  160         356  

Corporate Activities

  (318)        (465) 

Total profit of the segments reported

          1,921                        2,067          

(+/-) Unallocated profit/loss

  -         -  

(+/-) Elimination of inter-segment profit/loss

  -         -  

(+/-) Other profit/loss

  -         -  

(+/-) Income tax and/or profit from discontinued

           operations

  810         922  
     

Profit before tax

 

  2,731         2,989  
     
    

Consolidated profit

(Millions of reais)

Segment   31/03/16     31/03/15
     

Continental Europe

  3,332         2,288  

United Kingdom

  1,986         1,540  

Latin America

  3,612         3,168  

United States

  689         1,146  

Corporate Activities

  (1,365)        (1,497) 

Total profit of the segments reported

  8,254         6,645  

(+/-) Unallocated profit/loss

  -         -  

(+/-) Elimination of inter-segment profit/loss

  -         -  

(+/-) Other profit/loss

  -         -  

(+/-) Income tax and/or profit from discontinued

           operations

  3,480         2,964  
     

Profit before tax

 

  11,734         9,609  

13. Related parties

The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Following is a detail of the transactions performed by the Group with its related parties in the first three months of 2016 and 2015, distinguishing between significant shareholders, members of the Bank’s board of directors, the Bank’s executive vice presidents, Group entities and other related parties. Related party transactions were made on terms equivalent to those that prevail in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognised.

 

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     Millions of euros
     31/03/16
Expenses and income   Significant
    shareholders    
      Directors and    
executives
  Group
    companies    
or entities
      Other related    
parties
            Total          
           

Expenses:

                   

Finance costs

  -     -         -     4   

Management or cooperation agreements

  -     -         -     -   

R&D transfers and licensing agreements

  -     -         -     -   

Leases

  -     -         -     -   

Services received

  -     -         -     -   

Purchases of goods (finished or in progress)

  -     -         -     -   

Valuation adjustments for uncollectible or doubtful debts

  -     -         -     -   

Losses on derecognition or disposal of assets

  -     -         -     -   

Other expenses

  -     -         -     4   
    -     -         -     8   

Income:

                   

Finance income

  -     -       29      33

Management or cooperation agreements

  -     -         -     -   

R&D transfers and licensing agreements

  -     -         -     -   

Dividends received

  -     -         -     -   

Leases

  -     -         -     -   

Services rendered

  -     -         -     -   

Sale of goods (finished or in progress)

  -     -         -     -   

Gains on derecognition or disposal of assets

  -     -         -     -   

Other income

  -     -       253    1     254   
    -     -       282    5     287   

 

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     Millions of reais
     31/03/16
Expenses and income   Significant
    shareholders    
      Directors and    
executives
  Group
    companies    
or entities
      Other related    
parties
            Total          
           

Expenses:

                   

Finance costs

  -     -       17    -     17   

Management or cooperation agreements

  -     -         -     -   

R&D transfers and licensing agreements

  -     -         -     -   

Leases

  -     -         -     -   

Services received

  -     -         -     -   

Purchases of goods (finished or in progress)

  -     -         -     -   

Valuation adjustments for uncollectible or doubtful debts

  -     -         -     -   

Losses on derecognition or disposal of assets

  -     -         -     -   

Other expenses

  -     -       17    -     17   
    -     -       34    -     34   

Income:

                   

Finance income

  -     -       125    17     142   

Management or cooperation agreements

  -     -         -     -   

R&D transfers and licensing agreements

  -     -         -     -   

Dividends received

  -     -         -     -   

Leases

  -     -         -     -   

Services rendered

  -     -         -     -   

Sale of goods (finished or in progress)

  -     -         -     -   

Gains on derecognition or disposal of assets

  -     -         -     -   

Other income

  -     -       1.087    4     1.091   
    -     -       1.212    21     1.233   

 

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     Millions of euros
     31/03/16
Other transactions   Significant 
    shareholders     
      Directors and     
executives 
  Group
    companies    
or entities
      Other related     
parties 
         Total   
           

Purchases of tangible, intangible or other assets

  -   2   -   -      2

Financing agreements: loans and capital contributions (lender)

  -   20   7,647   1,339      9,006

Finance leases (lessor)

  -   -   -   -      -

Repayment or termination of loans and leases (lessor)

  -   -   -   -      -

Sales of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (borrower)

  -   45   1,472   62      1,579

Finance leases (lessee)

  -   -   -   -      -

Repayment or termination of loans and leases (lessee)

  -   -   -   -      -

Guarantees provided

  -   -   42   187      229

Guarantees received

  -   -   -   -      -

Commitments acquired

  -   6   59   143      208

Commitments/guarantees cancelled

  -   -   -   -      -

Dividends and other distributed profit

  -   2   -   8      10

Other transactions

  -   -   3,640   2,435      6,075
 
     Millions of reais
     31/03/16
Other transactions   Significant
shareholders
  Directors and
executives
  Group
companies
or entities
  Other related
parties
         Total   
           

Purchases of tangible, intangible or other assets

  -   8   -   -      8

Financing agreements: loans and capital contributions (lender)

  -   82   31,486   5,513      37,081

Finance leases (lessor)

  -   -   -   -      -

Repayment or termination of loans and leases (lessor)

  -   -   -   -      -

Sales of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (borrower)

  -   185   6,061   255      6,501

Finance leases (lessee)

  -   -   -   -      -

Repayment or termination of loans and leases (lessee)

  -   -   -   -      -

Guarantees provided

  -   -   173   770      943

Guarantees received

  -   -   -   -      -

Commitments acquired

  -   25   243   589      857

Commitments/guarantees cancelled

  -   -   -   -      -

Dividends and other distributed profit

  -   8   -   33      41

Other transactions

  -   -   14,987   10,026      25,013

 

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     Millions of euros
     31/03/15
Expenses and income   Significant 
    shareholders     
      Directors and     
executives 
  Group
    companies    
or entities
      Other related     
parties 
         Total   
           

Expenses:

           

Finance costs

    -     -   4                   4          

Management or cooperation agreements

    -     -   -                   -          

R&D transfers and licensing agreements

    -     -   -                   -          

Leases

    -     -   -                   -          

Services received

    -     -   -                   -          

Purchases of goods (finished or in progress)

    -     -   -                   -          

Valuation adjustments for uncollectible or doubtful debts

    -     -   -                   -          

Losses on derecognition or disposal of assets

    -     -   -                   -          

Other expenses

    -     -   5                   5          
           
   

  -

 

 

  -

 

  9                   9          

Income:

           

Finance income

    -     -   25                 4                    29          

Management or cooperation agreements

    -     -   -                 -                     -          

R&D transfers and licensing agreements

    -     -   -                 -                     -          

Dividends received

    -     -   -                 -                     -          

Leases

    -     -   -                 -                     -          

Services rendered

    -     -   -                 -                     -          

Sale of goods (finished or in progress)

    -     -   -                 -                     -          

Gains on derecognition or disposal of assets

    -     -   -                 -                     -          

Other income

    -     -   236                 5                     241          
      -     -   261                 9                     270          
     
     Millions of reais
     31/03/15
Expenses and income   Significant
shareholders
  Directors and
executives
  Group
companies
or entities
  Other related
parties
         Total  
           

Expenses:

           

Finance costs

  -     -     13   -       13

Management or cooperation agreements

  -     -     -   -       -

R&D transfers and licensing agreements

  -     -     -   -       -

Leases

  -     -     -   -       -

Services received

  -     -     -   -       -

Purchases of goods (finished or in progress)

  -     -     -   -       -

Valuation adjustments for uncollectible or doubtful debts

  -     -     -   -       -

Losses on derecognition or disposal of assets

  -     -     -   -       -

Other expenses

  -     -     16   -       16
    -     -     29   -       29

Income:

           

Finance income

  -     -     80   13       93

Management or cooperation agreements

  -     -     -   -       -

R&D transfers and licensing agreements

  -     -     -   -       -

Dividends received

  -     -     -   -       -

Leases

  -     -     -   -       -

Services rendered

  -     -     -   -       -

Sale of goods (finished or in progress)

  -     -     -   -       -

Gains on derecognition or disposal of assets

  -     -     -   -       -

Other income

  -     -     759   16       775
    -     -     839   29       868

 

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     Millions of euros
     31/03/15
Other transactions   Significant 
    shareholders     
      Directors and     
executives 
  Group
    companies    
or entities
      Other related     
parties 
         Total   
           

Purchases of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (lender)

  -   28   6,954   604      7,586

Finance leases (lessor)

  -   -   -   -      -

Repayment or termination of loans and leases (lessor)

  -   -   -   -      -

Sales of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (borrower)

  -   31   1,283   74      1,388

Finance leases (lessee)

  -   -   -   -      -

Repayment or termination of loans and leases (lessee)

  -   -   -   -      -

Guarantees provided

  -   -   43   194      237

Guarantees received

  -   -   -   -      -

Commitments acquired

  -   5   55   182      242

Commitments/guarantees cancelled

  -   -   -   -      -

Dividends and other distributed profit

  -   5   -   21      26

Other transactions

  -   -   4,356   1,816      6,172
     
     Millions of reais
     31/03/15
Other transactions   Significant
shareholders
  Directors and
executives
 

Group
companies

or entities

  Other related
parties
         Total   
           

Purchases of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (lender)

  -   98   24,310   2,111      26,519

Finance leases (lessor)

  -   -   -   -      -

Repayment or termination of loans and leases (lessor)

  -   -   -   -      -

Sales of tangible, intangible or other assets

  -   -   -   -      -

Financing agreements: loans and capital contributions (borrower)

  -   108   4,485   259      4,852

Finance leases (lessee)

  -   -   -   -      -

Repayment or termination of loans and leases (lessee)

  -   -   -   -      -

Guarantees provided

  -   -   150   678      828

Guarantees received

  -   -   -   -      -

Commitments acquired

  -   17   192   636      845

Commitments/guarantees cancelled

  -   -   -   -      -

Dividends and other distributed profit

  -   17   -   73      90

Other transactions

  -   -   15,228   6,348      21,576

In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR 288 million (BRL 1,184million) at 31 March 2016 (31 March 2015: EUR 334 million (BRL 1,168 million)).

 

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14. Average headcount

The average number of employees at the Group and at the Bank, by gender, in the three-month periods ended 31 March 2016 and 2015 was as follows:

 

Average headcount   Bank     Group  
        31/03/16                 31/03/15                 31/03/16                 31/03/15        
         

Men

    12,902               13,081               87,193               83,489          

Women

    10,221               10,152               107,216               102,421          
     

 

23,123       

 

  

 

   

 

23,233       

 

  

 

   

 

194,409       

 

  

 

   

 

185,910       

 

  

 

15. Other disclosures: valuation techniques for financial assets and liabilities

The following table shows a summary of the fair values, at the end of the three-month periods ended 31 March 2016 and 31 December 2015, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:

 

     Millions of euros
     31/03/16   31/12/15
         Published     
price 
quotations 
in  active 
markets 
      Internal     
models 
         Total           Published 
price 
  quotations   
in active 
markets 
      Internal     
models 
         Total    
             

Financial assets held for trading

  64,179    88,442    152,621    65,849    81,438    147,287
             

Other financial assets at fair value through profit or loss

  3,148    45,623    48,771    3,244    41,799    45,043

Available-for-sale financial assets (1)

  86,821    29,718    116,539    92,284    27,962    120,246

Hedging derivatives (assets)

  38    8,543    8,581    271    7,456    7,727

Financial liabilities held for trading

  17,424    91,143    108,567    17,058    88,160    105,218
             

Other financial liabilities at fair value through profit or loss

  -   63,404    63,404    -       54,768    54,768

Hedging derivatives (liabilities)

  13    8,054    8,067    400    8,537    8,937

Liabilities under insurance contracts

  -   656    656    -       627    627
                         

 

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     Millions of reais
     31/03/16   31/12/15
         Published     
price 
quotations 
in  active 
markets 
      Internal     
models 
         Total           Published 
price 
  quotations   
in active 
markets 
      Internal     
models 
         Total    
             

Financial assets held for trading

  264,254          364,148       628,402         283,922        351,136        635,058
             

Other financial assets at fair value through profit or loss

  12,961          187,848       200,809         13,987        180,225        194,212

Available-for-sale financial assets (1)

  357,477          122,361       479,838         397,901        120,563        518,464

Hedging derivatives (assets)

  157    35,174       35,331         1,169        32,148        33,317

Financial liabilities held for trading

  71,742          375,273       447,015         73,550        380,119        453,669
             

Other financial liabilities at fair value through profit or loss

  -          261,059       261,059         -     236,142        236,142

Hedging derivatives (liabilities)

  51    33,164       33,215         1,726        36,808        38,534

Liabilities under insurance contracts

  -           2,701       2,701         -     2,703        2,703
                         
  (1)

In addition to the financial instruments measured at fair value shown in the foregoing table, at 31 March 2016, the Bank held equity instruments classified as available-for-sale financial assets and carried at cost amounting to EUR 1,759 million (BRL 7,242 million) (31 December 2015: EUR 1,790 million (BRL 7,718 million)).

Financial instruments at fair value, determined on the basis of published price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, derivatives traded in organised markets, securitised assets, shares, short positions and fixed-income securities issued.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set, using its own internal models. In most cases, these internal models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

The Group did not make any material transfers of level 3 financial instruments in the first three months of 2016.

The Group has developed a formal process for the systematic valuation and management of financial instruments, which has been implemented worldwide across all the Group’s units. The governance scheme for this process distributes responsibilities between two independent divisions: Treasury (development, marketing and daily management of financial products and market data) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transaction approval policies, management of market risk and implementation of fair value adjustment policies). The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used. Observable market data are including credit risk components.

The most important products and families of derivatives, and the related valuation techniques and inputs, by asset class, are detailed in the consolidated financial statements as at 31 December 2015.

The CVA and DVA recognised at 31 March 2016 amounted to EUR 868 million and EUR 518 million (BRL: 3,574 AN 2,134 million)), respectively.

 

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Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at 31 March 2016 and 31 December 2015:

 

           Millions of euros
          Fair values calculated
using internal models at
31/03/2016
     Fair values calculated
using internal models at
31/12/2015
            
               Level 2              Level 3              Level 2              Level 3         Valuation techniques    Main inputs

ASSETS:

         169,994         2,332         156,174         2,481            

Financial assets held for trading

         87,450         992         80,488         950            

Loans and advances to credit institutions

         4,468         -               -               -            

Present Value Method

  

Observable market data

Loans and advances to customers (a)

         6,866         -               2,293         -            

Present Value Method

  

Observable market data

Debt and equity instruments

         1,050         7         6,081         43     

Present Value Method

  

Observable market data, HPI

Trading derivatives

         75,066         985         650         907            

Swaps

     55,914         55         71,464         54     

Present Value Method, Gaussian Copula (b)

  

Observable market data, basis, liquidity

Exchange rate options

     1,145         -             52,904         -            

Black-Scholes Model

  

Observable market data, liquidity, credit spread

Interest rate options

     8,790         702         1,005         619     

Black’s Model, Heath-Jarrow-Morton Model

  

Observable market data, liquidity, correlation, credit spread

Interest rate futures

     348         -             8,276         -           

Present Value Method

  

Observable market data, credit spread

Index and securities options

     1,489         111         84         120     

Black-Scholes Model

  

Observable market data, dividends, correlation, liquidity, HPI, credit spread

Other

     7,380         117         1,585         114     

Present Value Method, Monte Carlo simulation and other

  

Observable market data, credit spread and other

Hedging derivatives

         8,516         27         7,438         18            

Swaps

     7,786         27         6,437         18     

Present Value Method

  

Observable market data, basis, credit spread

Exchange rate options

     -                 -               -         -           

Black-Scholes Model

  

Observable market data, credit spread

Interest rate options

     21         -               19         -           

Black’s Model

  

Observable market data, credit spread

Other

     709         -               982         -           

N/A

  

N/A

Other financial assets at fair value through profit or loss

         45,108         515         41,285         514            

Loans and advances to credit institutions

         30,714         -                  26,403         -           

Present Value Method

  

Observable market data

Loans and advances to customers (c)

         13,801         83         14,213         81     

Present Value Method

  

Observable market data, HPI

Debt and equity instruments

         593         432         669         433     

Present Value Method

  

Observable market data

Available-for-sale financial assets

         28,920         798         26,963         999            

Debt and equity instruments

         28,920         798         26,963         999     

Present Value Method

  

Observable market data

LIABILITIES:

         162,895         362         151,768         324            

Financial liabilities held for trading

         90,795         348         87,858         302            

Deposits from central banks

         771         -               2,178         -            

Present Value Method

  

Observable market data

Deposits from credit institutions

         205         -               76         -            

Present Value Method

  

Observable market data

Customer deposits

         9,570         -               9,187         -            

Present Value Method

  

Observable market data

Marketable debt securities

         -                         -               -                 -            

Present Value Method

  

Observable market data, liquidity

Trading derivatives

         77,698         348         74,893         302            

Swaps

     57,883         1         55,055         1     

Present Value Method, Gaussian Copula (b)

  

Observable market data, basis, liquidity, HPI, credit spread

Exchange rate options

     1,037         -               901         -            

Black-Scholes Model

  

Observable market data, liquidity, credit spread

Interest rate options

     10,190         247         9,240         194     

Black’s Model, Heath-Jarrow-Morton Model

  

Observable market data, liquidity, correlation, credit spread

Index and securities options

     1,765         100         2,000         107     

Black-Scholes Model

  

Observable market data, dividends, correlation, liquidity, HPI, credit spread

Interest rate and equity futures

     371         -                   101         -            

Present Value Method

  

Observable market data, credit spread

Other

     6,453         -                   7,596         -            

Present Value Method, Monte Carlo simulation and other

  

Observable market data, credit spread and other

Short positions

         2,551         -                   1,524         -             

Present Value Method

  

Observable market data

Hedging derivatives

         8,045         9         8,526         11            

Swaps

     7,461         9         7,971         11     

Present Value Method

  

Observable market data, basis, credit spread

Exchange rate options

     -                         -               -                 -            

Black-Scholes Model

  

Observable market data, credit spread

Interest rate options

     16         -               12         -            

Black’s Model

  

Observable market data, credit spread

Other

     569         -               543         -            

N/A

  

N/A

Other financial liabilities at fair value through profit or loss

         63,399         5         54,757         11     

Present Value Method

  

Observable market data

Liabilities under insurance contracts

         656         -               627         -            

Present Value Method

    
                                                  

 

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           Millions of reais
         

Fair values calculated

using internal models at
31/03/2016

    

Fair values calculated

using internal models
at 31/12/2015

             
               Level 2              Level 3              Level 2              Level 3          Valuation techniques    Main inputs

ASSETS:

         699.932         9.599         673,375         10,697             

Financial assets held for trading

         360.066         4.082         347,040         4,096             

Loans and advances to credit institutions

         18.397         -             9,887         -               

Present Value Method

  

Observable market data

Loans and advances to customers (a)

         28.270         -             26,219         -               

Present Value Method

  

Observable market data

Debt and equity instruments

         4.323         28         2,803         185      

Present Value Method

  

Observable market data, HPI

Trading derivatives

         309.076         4.054         308,131         3,911             

Swaps

     230.220         226         228,106         233      

Present Value Method, Gaussian Copula (b)

  

Observable market data, basis, liquidity

Exchange rate options

     4.714         -             4,333         -               

Black-Scholes Model

  

Observable market data, liquidity, credit spread

Interest rate options

     36.192         2.890         35,684         2,669      

Black’s Model, Heath-Jarrow-Morton Model

  

Observable market data, liquidity, correlation, credit spread

Interest rate futures

     1.433         -             362         -               

Present Value Method

  

Observable market data, credit spread

Index and securities options

     6.131         457         6,834         517      

Black-Scholes Model

  

Observable market data, dividends, correlation, liquidity, HPI, credit spread

Other

     30.386         481         32,812         492      

Present Value Method, Monte Carlo simulation and other

  

Observable market data, credit spread and other

Hedging derivatives

         35.063         111         32,070         78             

Swaps

     32.058         111         27,754         78      

Present Value Method

  

Observable market data, basis, credit spread

Exchange rate options

     -               -             -         -      

Black-Scholes Model

  

Observable market data, credit spread

Interest rate options

     86         -             82         -      

Black’s Model

  

Observable market data, credit spread

Other

     2.919         -             4,234         -      

N/A

  

N/A

Other financial assets at fair value through profit or loss

         185.728         2.120         178,009         2,216             

Loans and advances to credit institutions

         126.462         -             113,842         -               

Present Value Method

  

Observable market data

Loans and advances to customers (c)

         56.824         342         61,282         349      

Present Value Method

  

Observable market data, HPI

Debt and equity instruments

         2.442         1.778         2,885         1,867      

Present Value Method

  

Observable market data

Available-for-sale financial assets

         119.075         3.286         116,256         4,307             

Debt and equity instruments

         119.075         3.286         116,256         4,307      

Present Value Method

  

Observable market data

LIABILITIES:

         670.706         1.491         654,377         1,395             

Financial liabilities held for trading

         373.840         1.433         378,818         1,301             

Deposits from central banks

         3.175         -             9,391         -               

Present Value Method

  

Observable market data

Deposits from credit institutions

         844         -             328         -               

Present Value Method

  

Observable market data

Customer deposits

         39.402         -             39,610         -               

Present Value Method

  

Observable market data

Marketable debt securities

         -               -             -                 -               

Present Value Method

  

Observable market data, liquidity

Trading derivatives

         319.915         1.433         322,915         1,301             

Swaps

     238.327         4         237,382         4      

Present Value Method, Gaussian Copula (b)

  

Observable market data, basis, liquidity, HPI, credit spread

Exchange rate options

     4.271         -             3,883         -               

Black-Scholes Model

  

Observable market data, liquidity, credit spread

Interest rate options

     41.954         1.017         39,838         836      

Black’s Model, Heath-Jarrow-Morton Model

  

Observable market data, liquidity, correlation, credit spread

Index and securities options

     7.267         412         8,626         461      

Black-Scholes Model

  

Observable market data, dividends, correlation, liquidity, HPI, credit spread

Interest rate and equity futures

     1.528         -             435         -               

Present Value Method

  

Observable market data, credit spread

Other

     26.568         -             32,751         -               

Present Value Method, Monte Carlo simulation and other

  

Observable market data, credit spread and other

Short positions

         10.504         -             6,574         -               

Present Value Method

  

Observable market data

Hedging derivatives

         33.127         37         36,761         47             

Swaps

     30.720         37         34,369         47      

Present Value Method

  

Observable market data, basis, credit spread

Exchange rate options

     -               -             -         -               

Black-Scholes Model

  

Observable market data, credit spread

Interest rate options

     65         -             53         -               

Black’s Model

  

Observable market data, credit spread

Other

     2.342         -             2,339         -               

N/A

  

N/A

Other financial liabilities at fair value through profit or loss

         261.038         21         236,095         47      

Present Value Method

  

Observable market data

Liabilities under insurance contracts

         2.701         -             2,703         -               

Present Value Method

    
                                                   

 

  (a)

Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).

 

  (b)

Includes credit risk derivatives with a positive net fair value of EUR 3 million (BRL 12 million) recognised in the consolidated balance sheet. These assets and liabilities are measured using the Standard Gaussian Copula Model.

 

 

  (c)

Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogeneous in this sector. The results arising from the valuation model are checked against current market transactions.

 

 

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The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, the Bank’s directors consider that the fair value of the financial assets and liabilities recognised in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.

Level 3 financial instruments

Set forth below are the Group’s main financial instruments measured using unobservable market data that constitute significant inputs of the internal models (Level 3):

 

  -  

Instruments in Santander UK’s portfolio (loans, debt instruments and derivatives) linked to the House Price Index (HPI). Even if the valuation techniques used for these instruments may be the same as those used to value similar products (present value in the case of loans and debt instruments, and the Black-Scholes model for derivatives), the main factors used in the valuation of these instruments are the HPI spot rate, the growth rate of that rate, its volatility and mortality rates, which are not always observable in the market and, accordingly, these instruments are considered illiquid.

 

   

The HPI spot rate: for some instruments the NSA HPI spot rate, which is directly observable and published on a monthly basis, is used. For other instruments where regional HPI rates must be used (published quarterly), adjustments are made to reflect the different composition of the rates and adapt them to the regional composition of Santander UK’s portfolio.

 

   

HPI growth rate: this is not always directly observable in the market, especially for long maturities, and is estimated in accordance with existing quoted prices. To reflect the uncertainty implicit in these estimates, adjustments are made based on an analysis of the historical volatility of the HPI, incorporating reversion to the mean.

 

   

HPI volatility: the long-term volatility is not directly observable in the market but is estimated on the basis of more short-term quoted prices and by making an adjustment to reflect the existing uncertainty, based on the standard deviation of historical volatility over various time periods.

 

   

Mortality rates: these are based on published official tables and adjusted to reflect the composition of the customer portfolio for this type of product at Santander UK.

 

  -  

Trading derivatives on baskets of shares. These are measured using advanced local and stochastic volatility models, using Monte Carlo simulations; the main unobservable input is the correlation between the prices of the shares in each basket in question.

 

  -  

Callable interest rate trading derivatives (Bermudan-style options) where the main unobservable input is mean reversion of interest rates.

The net gain recognised in the income statement for the first three months of 2016 arising from the aforementioned valuation models amounted to EUR 125 million (BRL: 536 million).

 

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The table below shows the effect, at 31 March 2016, on the fair value of the main financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation. This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table:

 

Portfolio / Instrument       Valuation technique   Main unobservable inputs   Range      Weighted   
average   
  Impacts (in millions of euros)
(Level 3)                 Unfavourable  
scenario
    Favourable  
scenario

Financial assets held for trading

                       

Debt instruments

  Partial differential equations   Long-term volatility   27% - 41%      37,03%      (0,1)   0,1

Trading derivatives

  Present Value Method   Curves on TAB indices (*)   (a)      (a)      (2,0)   2,0
    Present Value Method   Prepaid Curves   (a)      (a)      (0,4)   0,4
    Present Value Method, Modified Black-Scholes Model   HPI forward growth rate   0%-5%      2,69%      (40,5)   34,7
    Present Value Method, Modified Black-Scholes Model   HPI spot rate   n/a        695,42(**)      (11,4)   11,4
    Standard Gaussian Copula Model   Probability of default   0%-5%      2,21%      (3,9)   3,1
    Advanced local and stochastic volatility models   Correlation between share prices   57,1%-77,1%      67,10%      (8,7)   8,7
    Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      0,01 (***)      -   40,4
             

Hedging Derivatives (Assets)

                       

Hedging Derivatives

  Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      3,0%      (0,01)   -
             

Other financial assets at fair value through profit or loss

                       
             

Loans and advances to customers

 

Weighted average by probability (according to forecast mortality rates) of European HPI options, using the Black-Scholes model

 

HPI forward growth rate (Corrected by mortality rates)

  0%-5%      2,8%      (8,9)   6,9

Debt and equity instruments

  Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model  

HPI forward growth rate(Corrected by mortality rates)

  0%-5%      2,7%      (50,0)   42,9
    Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model   HPI spot rate   n/a      695,42 (**)      (24,5)   24,5
             

Available-for-sale financial assets

                       
             

Debt and equity instruments

  Present Value Method, others  

Non-performing loans and prepayment ratios, cost of capital, long-term earnings growth rate

  (a)      (a)      (0,8)   0,8
             

Financial liabilities held for trading

                       

Hedging derivatives

  Present Value Method, Modified Black-Scholes Model   HPI forward growth rate   0%-5%      2,21%      (16,2)   12,8
    Present Value Method, Modified Black-Scholes Model   HPI spot rate   n/a      667,8 (**)      (18,3)   19,5
    Present Value Method, Modified Black-Scholes Model   Curves on TAB indices (*)   (a)      (a)      -   -
             
    Advanced local and stochastic volatility models   Correlation between share prices   57,1%-77,1%      67,10%      (b)   (b)
             
    Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      0,01 (***)      (b)   (b)
             

Hedging Derivatives (Liabilities)

                       

Hedging derivatives

  Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      3,00%      (0,01)   -
Other financial liabilities at fair value through profit or loss   -   -   -      -      (b)   (b)
                         

 

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Table of Contents
Portfolio / Instrument       Valuation technique   Main unobservable inputs   Range      Weighted   
average   
  Impacts (in millions of reais)
(Level 3)                 Unfavourable  
scenario
    Favourable  
scenario

Financial assets held for trading

                       

Debt instruments

  Partial differential equations   Long-term volatility   27% - 41%      37,03%      (0,2)   0,6

Trading derivatives

  Present Value Method   Curves on TAB indices (*)   (a)      (a)      (8,5)   8,5
    Present Value Method   Prepaid Curves   (a)      (a)      (1,6)   1,6
    Present Value Method, Modified Black-Scholes Model   HPI forward growth rate   0%-5%      2,69%      (173,9)   149,0
    Present Value Method, Modified Black-Scholes Model   HPI spot rate   n/a        695,42(**)      (48,8)   48,8
    Standard Gaussian Copula Model   Probability of default   0%-5%      2,21%      (16,7)   13,2
    Advanced local and stochastic volatility models   Correlation between share prices   57,1%-77,1%      67,10%      (37,4)   37,4
    Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      0,01 (***)      -   173,6
             

Hedging Derivatives (Assets)

                       

Hedging Derivatives

  Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      3,0%      (0,04)   -
             

Other financial assets at fair value through profit or loss

                       
             

Loans and advances to customers

 

Weighted average by probability (according to forecast mortality rates) of European HPI options, using the Black-Scholes model

 

HPI forward growth rate (Corrected by mortality rates)

  0%-5%      2,8%      (38,1)   29,7

Debt and equity instruments

  Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model  

HPI forward growth rate(Corrected by mortality rates)

  0%-5%      2,7%      (214,8)   184,1
    Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model   HPI spot rate   n/a      695,42 (**)      (105,3)   105,3
             

Available-for-sale financial assets

                       
             

Debt and equity instruments

  Present Value Method, others  

Non-performing loans and prepayment ratios, cost of capital, long-term earnings growth rate

  (a)      (a)      (3,3)   3,3
             

Financial liabilities held for trading

                       

Hedging derivatives

  Present Value Method, Modified Black-Scholes Model   HPI forward growth rate   0%-5%      2,21%      (69,7)   55,2
    Present Value Method, Modified Black-Scholes Model   HPI spot rate   n/a      667,8 (**)      (78,7)   83,6
    Present Value Method, Modified Black-Scholes Model   Curves on TAB indices (*)   (a)      (a)      -   -
             
    Advanced local and stochastic volatility models   Correlation between share prices   57,1%-77,1%      67,10%      (b)   (b)
             
    Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      0,01 (***)      (b)   (b)
             

Hedging Derivatives (Liabilities)

                      -

Hedging derivatives

  Advanced multi-factor interest rate models   Mean reversion of interest rates   0,0001-0,03      3,00%      (0,04)   -
Other financial liabilities at fair value through profit or loss   -   -   -      -      (b)   (b)
                         

 

(*)

TAB: “Tasa Activa Bancaria” (Active Bank Rate). Average deposit interest rates (over 30, 90, 180 and 360 days) published by the Chilean Association of Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for inflation (Unidad de Fomento - UF).

 

 

(**)

There are national and regional HPI indices. The HPI spot value is the weighted average of the indices that correspond to the positions of each portfolio. The impact reported is a change of 10%.

 

 

(***)

Theoretical average value of the parameter. The change arising on a favourable scenario is from 00001 to 0.03. An unfavourable scenario is not considered as there is insufficient margin for an adverse change from the current parameter level. The Group is also exposed, to a lesser extent, to this type of derivative in currencies other than the euro and, therefore, both the average and the range of the unobservable inputs are different. The impact in an unfavourable scenario would be losses of EUR 2.3 million (BRL 9.8 million).

 

 

(a)

The exercise was conducted for the unobservable inputs described in the Main unobservable inputs column under probable scenarios. The range and weighted average value used are not shown because the aforementioned exercise was conducted jointly for various inputs or variants thereof (e.g. the TAB input comprises vector-time curves, for which there are also nominal yield curves and inflation-indexed yield curves), and it was not possible to break down the results separately by type of input. In the case of the TAB curve the gain or loss is reported for changes of +/-100 b.p. for the total sensitivity to this index in Chilean pesos and UFs.

 

 

(b)

The Group calculates the potential impact on the measurement of each instrument on a joint basis, regardless of whether the individual value is positive (assets) or negative (liabilities), and discloses the joint effect associated with the related instruments classified on the asset side of the consolidated balance sheet.

 

 

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Lastly, the changes in the financial instruments classified as Level 3 in the first quarter of 2016 were as follows:

 

     31/12/15      Changes       31/03/16
Millions of euros       Fair value   
calculated using   
internal models   
(Level 3)   
  Purchases      Sales       Issues       Settlements      Changes in fair   
value   
recognised in   
profit or loss   
(unrealised)   
  Changes in fair   
value recognised   
in profit or loss   
(realised)   
  Changes in   
fair value   
recognised   
in equity   
  Level   
reclassifications   
   Other      

Fair value
calculated using
internal models

(Level 3)

                       

Financial assets held for trading

  950      -      (73)      -       -      157      -      -      (32)       (10)       992

Debt and equity instruments

  43      -      (5)      -       -      1      -      -      (32)       -       7

Trading derivatives

  907      -      (68)      -       -      156      -      -      -       (10)       985

Swaps

  54      -      -      -       -      1      -      -      -       -       55

Interest rate options

  619      -      (59)      -       -      142      -      -      -       -       702

Index and securities options

  120      -      (9)       -       -      3      -      -      -       (3)       111

Other

  114      -      -      -       -      10      -      -      -       (7)       117

Hedging derivatives

  18      -      (7)      -       -      16      -      -      -       -       27

Swaps

  18      -      (7)      -       -      16      -      -      -       -       27

Other financial assets at fair value through profit or loss

  514      -      (9)      -       -      31      -      -      -       (21)       515

Loans and advances to customers

  81      -      -      -       -      9      -      -      -       (7)       83

Debt and equity instruments

  433      -      (9)      -       -      22      -      -      -       (14)       432

Available-for-sale financial assets

  999      6      (71)      -       (12)      -      -      3      -       (127)       798

TOTAL ASSETS

  2,481      6      (160)      -       (12)      204      -      3      (32)       (158)       2,332
                       

Financial assets held for trading

  302      -      (24)      -       -      76      -      -      -       (6)       348

Trading derivatives

  302      -      (24)      -       -      76      -      -      -       (6)       348

Swaps

  1      -      -      -       -      -      -      -      -       -       1

Interest rate options

  194      -      (22)      -       -      76      -      -      -       (1)       247

Index and securities options

  107      -      (2)      -       -      -      -      -      -       (5)       100

Hedging derivatives

  11      -      (3)      -       -      2      -      -      -       (1)       9

Swaps

  11      -      (3)      -       -      2      -      -      -       (1)       9

Other financial liabilities at fair value through profit or loss

  11      -      -      -       -      1      -      -      -       (7)       5

TOTAL LIABILITIES

  324      -      (27)      -      -      79      -      -      -       (14)       362
                                             

 

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     31/12/15     Changes       31/03/16
Millions of reais       Fair value  
calculated using  
internal models  
(Level 3)  
  Purchases     Sales       Issues       Settlements     

Changes in fair   
value   

recognised in   
profit or loss   
(unrealised)   

  Changes in fair   
value recognised   
in profit  or loss   
(realised)   
  Changes in   
fair value   
recognised   
in equity   
  Level   
reclassifications   
   Other       Fair value
calculated using
internal models
(Level 3)
                       

Financial assets held for trading

  4,096     -     (314)      -       -      674      -      -      (137)       (237)       4,082

Debt and equity instruments

  185     -     (21)      -       -      4      -      -      (137)       (3)       28

Trading derivatives

  3,911     -     (292)      -       -      670      -      -      -       (235)       4,054

Swaps

  233     -     -      -       -      4      -      -      -       (11)       226

Exchange rate options

  -     -     -      -       -      -      -      -      -       -       -

Interest rate options

  2,669     -     (253)      -       -      610      -      -      -       (136)       2,890

Index and securities options

  517     -     (39)      -       -      13      -      -      -       (34)       457

Other

  492     -     -      -       -      43      -      -      -       (54)       481

Hedging derivatives

  78     -     (30)      -       -      68      -      -      -       (5)       111

Swaps

  78     -     (30)      -       -      68      -      -      -       (5)       111

Other financial assets at fair value through profit or loss

  2,216     -     (39)      -       -      135      -      -      -       (192)       2,120

Loans and advances to customers

  349     -     -      -       -      39      -      -      -       (46)       342

Debt and equity instruments

  1,867     -     (39)      -       -      96      -      -      -       (146)       1,778

Available-for-sale financial assets

  4,307     26     (305)      -       (52)      -      -      13      -       (703)       3,286

TOTAL ASSETS

  10,697     26     (688)      -       (52)      877      -      13      (137)       (1,137)       9,599
                       

Financial assets held for trading

  1,301     -     (104)      -       -      327      -      -      -       (91)       1,433

Trading derivatives

  1,301     -     (104)      -       -      327      -      -      -       (91)       1,433

Swaps

  4     -     -      -       -      -      -      -      -       -       4

Interest rate options

  836     -     (95)      -       -      327      -      -      -       (51)       1,017

Index and securities options

  461     -     (9)      -       -      -      -      -      -       (40)       412

Other

  -     -     -      -       -      -      -      -      -       -       -

Hedging derivatives

  47     -     (13)      -       -      9      -      -      -       (6)       37

Swaps

  47     -     (13)      -       -      9      -      -      -       (6)       37

Other financial liabilities at fair value through profit or loss

  47     -     -      -       -      5      -      -      -       (31)       21

TOTAL LIABILITIES

  1,395     -     (117)      -       -      341      -      -      -       (128)       1,491
                                             

16.    Explanation added for translation to English

These interim condensed consolidated financial statements are presented on the basis of the financial reporting framework applicable to the Group in Spain and to comply with certain regulatory requirements and specific provisions established in CVM in Brazil (see Note 1.b).

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      Banco Santander, S.A.
Date:    May 4, 2016       By:      

  /s/ José García Cantera

        Name:      José García Cantera
        Title:   Chief Financial Officer
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