Banco Santander, S.A. (STD)

Q4 2011 Earnings Conference Call

January 31, 2012 4:00 AM ET

Executives

Alfredo Sáenz Abad – Second Vice Chairman and CEO

José Antonio Álvarez – CFO

Presentation

Alfredo Sáenz Abad

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(Interpreted) Okay. Good morning. Let’s begin with the 2011 Results. As we always do, I’ll be reviewing the main highlights of the year and the group’s results, and then our CFO, José Antonio Álvarez, will give you a more detailed review of the different business area. And finally, I will conclude with some final remarks.

2011 was a year characterized by an unfavorable global economic context, which has worsened in the last half of the year. As a result, there has been an increasing downturn in the global economy in the fourth quarter, which, according to the latest forecasts, will have a negative impact on growth in 2012. In this environment, the Santander Group has adopted a conservative strategy. We’ve prioritized our balance sheet strength, supported by our ability to generate both ordinary and extraordinary revenues.

The main developments in 2011; first, solid generation of recurring profit. Profit before provisions was of over EUR24 billion and before extraordinary was at EUR7 billion. Second, the group has made a significant effort in extraordinary provisions, with EUR3.18 billion net of taxes, which is double the capital gains obtained in the year.

Thirdly, we have significantly bolstered our balance sheet, and we’ve done it by combining a strong improvement in the coverage of foreclosed properties in Spain, which is now up to 50%, with a significant reinforcement of our capital ratios. We have now achieved the EBA requirement in record time and improved our core capital ratio according to BIS II criteria up to 10%. Fourth, we’ve continued to offer our shareholders a return higher than the average of our European peers.

I will now review each of these points in more detail. The first aspect I mentioned about 2011 is the generation of recurring profit. For the first time, we’ve obtained over EUR24 billion in net operating income or pre-provision profit. And we’ve done this by continuously growing our income, which is, we feel, significant different with respect to the sector in the last years.

The figure is particularly relevant for three reasons; first, because it puts us amongst the best banks in the world in income generation. Very few banks have been able to post around EUR25 billion a year in profit before provisions. Second, because it enables us to maintain an excellent track record during the downturn. In the last four years, we’ve obtained profit or pre-provision profit of EUR90 billion. And thirdly, because it makes our income statement extraordinarily robust and gives us an extreme ability to absorb provisions, even in the most demanding environment.

After provisions, taxes and minority interest, recurring attributable profit in the year was EUR7.02 billion, 14% less than in 2010. And as for the trends, both year-on-year and in the quarterly comparison, we see the impact of the big fall in trading gains mostly in global banking and markets hard-hit by weak markets with very low volume. Provisions were also higher in 2011.

The group has allocated almost all the profits of the fourth quarter to voluntary provisions for an amount of EUR1.7 billion. And these provisions have had two purposes; a fund of EUR1.8 billion to increase coverage for our real estate exposure in Spain and the amortization of EUR600 million of Portugal’s goodwill.

In summary, if we look at recurring profit like capital gains, we’ve obtained a total of EUR8.5 billion, of which EUR3.18 billion have gone to provisions, leaving an attributable profit of EUR5.35 billion. These profits do not include the capital gains from the agreement to sell our bank in Colombia, as the operation had not been completed at the end of 2011, and these will recorded in 2012. As we’ve seen, the greater effort in provisions was mostly allocated to increase coverage for real estate risk in Spain, particularly for foreclosed properties. Coverage is now at 50%, anticipating possible legal requirements.

Two points to be made here. First, with this increase, we are, once again, ahead of the banking sector as we were in 2009, when we raised our coverage for foreclosed properties up to 31%, way above our peers and ahead of the requirements subsequently established by the Bank of Spain. Secondly, and in addition to real estate, in the quarter, we’ve also improved coverage for doubtful and substandard loans, as we will see later on.

Increasing coverage and provisions has been followed by an improvement in our capital ratios. I should mention the speed, because in just two months, we’ve met the 9% core capital requirement established by the EBA. This sin plus four on the one hand, through organic capital generation, and on the other, due to the group’s strengths and high financial flexibility, which have enable us to adopt different measures to raise our capital ratio from 7.53% in September 2011 to 9% today.

The effort made on our capital ratios in the last quarter have enabled us to meet EBA requirement, but also to speed up the rise in core capital ratios, according to the BIS criteria. We’ve ended the year at over 10%, versus 8.8% in 2010. As a result, the group solvency has been improving for five years running. In short, we have very solid cash-flow ratios appropriate for our business model, our balance sheet structure and our risk profile.

For our liquidity, we’ve also maintained an excellent position. Our liquidity drivers are well known: great retail capacity through our almost 15,000 branches, wide and diversified access to wholesale markets through our subsidiary model, and also, the deleveraging in some markets, which is also bringing in additional liquidity. And we see this in the numbers. We closed 2011 with a structural liquidity surplus of over EUR120 billion. The loan-to-deposit ratio is at 117%. I’ll remind you that it was 150% at the beginning of the crisis. We’ve issued EUR40 billion versus EUR32 billion in maturities and we’ve also placed securitizations for a total of EUR25 billion, mostly in the UK. Recourse through short-term wholesale funding was very small. And finally, we still have a total discounting capacity with central banks of around EUR100 billion.

Therefore, we begin 2012 with excellent position. We have no significant maturity concentrations in the coming years. Annual maturities are lower than the issues made in 2010 and 2011. We also do not need to cover all maturities, because of the different strategies planned in Spain and Portugal. We aim to narrow our commercial GAP by almost EUR15 billion. And this, together with less recourse to the parent bank by Santander’s consumer finance, means we don’t need to make any additional issues to maintain our liquidity position.

Santander Consumer UK and Sovereign enjoy better access to wholesale funding because of their market conditions. In emerging markets, where overall, we have strong liquidity positions. Even a surplus like in Poland, we will combine growth in lending and deposits. So, in summary, a solid starting position, limited maturities and favorable business dynamics will be the drivers that will enable the group and its subsidiaries to retain a comfortable liquidity position.

The group has closed the year with its NPL ratio at 3.89%. It’s only risen three basis points in the last quarter. This increase is basically due to the trends in Spain and Portugal, which have continued with the trends we had reported in earlier presentations. On the other hand, Sovereign has improved for the eighth consecutive quarter, Santander Consumer Finance for the sixth quarter running, and Latin America, except for Brazil, has also been improving in every quarter of 2011.

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