Contents. Depósito Legal: M Imprime: Runiprint S.A.

Transcription

1 ANNUAL REPORT 2009

2 Contents Depósito Legal: M Imprime: Runiprint S.A.

3 GRUPO BANCO POPULAR CONTENTS General Information Banco Popular financial highlights Board and Management Editorial Management Report Banco Popular Group Economic environment Positioning of the Banco Popular Group in the banking sector Main consolidated results Net interest income. Gross operating income. Net operating profit. Consolidated profit for the year. Attributable profit. Activity by business line Solvency Risk management Credit risk. Crossborder risk. Structural balance sheet risk. Market risk. Liquidity risk. Operational risk. Reputational risk. Banco Popular ratings Shareholders Market performance of the Bank s shares Additional information for listed companies Corporate Governance Report Financial statements Report of independent auditors Financial reporting responsibility Consolidated statements Notes to the financial statements Independent review report on Annual Corporate Governance Report

4 ANNUAL REPORT 2009 / GROUP management performance GENERAL INFORMATION El Banco Popular Español S.A. ( Banco Popular, the Bank or the Group ) was founded on 14 July 1926, and is registered in the Madrid Mercantile Register in volume 174, folio 44, page 5,458, 1st entry. The Bank is a member of the Deposit Guarantee Fund for banking entities. The year 2009 was its 83rd year of existence. The head office is located at Velázquez 34, Madrid. The Ordinary Shareholders Meeting is scheduled for 19 April 2010, at the Hotel Hilton Madrid Airport. The financial accounting and statistical data provided herein were prepared with the utmost objectivity, detail, reporting clarity and consistency over time, from the Group s internal accounting data. 1 January 2005 saw the entry into force of the obligation to prepare consolidated financial statements in conformity with the International Financial Reporting Standards adopted by the European Union (IFRSEU) for entities with shares listed on a regulated market in any EU member state, pursuant to Regulation 1606/2002 of the European Parliament and Council dated 19 July The financial information was prepared in accordance with the new regulations and reflects the Group s entire economic activity, both financial and insurance and nonfinancial, and accordingly gives a true and fair view of the net worth, financial position, risks and consolidated earnings. Average balances are calculated on the basis of daily, monthly or quarterly data, depending on the information available in each case. Figures in brackets are negative amounts, differences or variation rates. In addition to the Annual Report and its accompanying documents, Banco Popular issues quarterly financial reports on its operations, including a detailed analysis of variations in assets, liabilities, earnings and profitability in each quarter. All the information is available at the Banco Popular Shareholders Office (José Ortega y Gasset 29,28006 Madrid. Telephone: , fax: ; accionista@bancopopular.es). All the information is also available at Banco Popular s web: 4

5 GRUPO BANCO POPULAR BANCO POPULAR FINANCIAL HIGHLIGHTS (consolidated figures) (, unless otherwise indicated) Business volume Total assets managed Onbalance sheet total assets Own funds Customer deposits adjusted Lending to customers (gross) % variation 142,352, ,290,148 8,415,854 59,557,592 97,362, ,806, ,376,051 6,734,394 51,665,410 93,452, Solvency Core capital (%) Tier 1(%) BIS ratio (%) Leverage Risk management Total risks Nonperforming loans Allowances for credit losses Nonperforming loans ratio (%) Nonperforming loans coverage ratio (%) ,469,528 5,511,516 2,770, ,584,628 3,042,612 2,221, Earnings Net interest income Gross operating income Preprovision earnings Earnings before taxes Consolidated profit for the year Profit attributed to the controlling entity Adjusted profit (1) ,822,553 4,054,170 2,761,628 1,072, , ,132 1,102,208 2,535,261 3,656,770 2,340,214 1,461,020 1,110,700 1,052,072 1,184, (26.6) (29.7) (27.2) (6.9) Profitability and efficiency Average total assets Average equity ROA (%) ROE (%) Operating efficiency (%) ,939,968 6,975, ,221,735 5,913, Per share data Final number of shares (thousands) Average number of shares (thousands) Share closing market price ( ) Market capitalisation Share book value ( ) Earnings per share ( ) (2) Dividend per share paid in the period ( ) (3) Price/Book value Price/Earnings (annualised) ,333,151 1,269, ,839, ,235,741 1,213, ,513, (15.6) (9.0) 15.8 (30.4) (19.8) Other data Shareholders Employees: Spain Men Women Abroad Men Women Branches: Spain Abroad Mundocredit offices ATMs ,207 14,431 12,709 8,684 4,025 1,722 1, ,370 2, , ,282 15,069 13,370 9,185 4,185 1,699 1, ,504 2, , (4.2) (4.9) (5.5) (3.8) (5.4) (6.0) 0.8 (16.9) (8.0) (1) Attributed net profit excluding precautionary provisions net of tax. (2) Considering the average number of shares outstanding, which includes those that will be issued in the future when the compulsorily convertible debentures are converted. (3) Excluding the second interim dividend out of 2009 earnings which was exceptionally paid in December for tax reasons. 5

6 ANNUAL REPORT 2009 / GROUP management performance BOARD AND MANAGEMENT Board of Directors Angel RON, Chairman (a) Luis HERRANDO, Vice Chairman (a) (b) (c) Roberto HIGUERA, Vice Chairman (a) Francisco APARICIO, Director ans Secretary (a) (b) Asociación de Directivos BPE (Represented by Roberto HIGUERA) Américo AMORÍM Eric GANCEDO (a) (b) (c) (d) Casimiro MOLINS Manuel MORILLO Miguel NIGORRA Nicolás OSUNA Directors: Helena REVOREDO José Ramón RODRÍGUEZ (a) (b) (d) Sindicatura de Accionistas de BPE (Represented by José Mª MÁS) Miguel Ángel SOLÍS (d) Allianz SE. (Represented by Herbert WALTER) Vicente TARDÍO Unión Europea de Inversiones, S.A. (Represented by Luis MONTUENGA) Member of: (a) Executive Committee (b) Risk Committee (c) Appointments Committee (d) Audit Committee Executive Management Ángel RON, Chairman (1) Jesús ARELLANO, Control & Delinquent Debts GD (1) Francisco GÓMEZ, Risks GD (1) Jacobo GONZÁLEZROBATTO, Corporate & Finance GD (1) Eutimio MORALES, Comptroller General (1) Ángel RIVERA, Business GD Spain (1) Fernando RODRÍGUEZ, Technical Resources GD (1) Member of: (1) General Management Committee Network Line Management Banco Popular Español Antonio FÉREZ, Western Andalusia José Manuel HEVIA, Northwestern Spain Miguel MOZO, Eastern Andalusia Antonio PUJOL, Central Spain Territorial Mangers Antonio RAMÍREZ, Northern Spain Juan José RUBIO, Levante Francisco SAFONT, Catalonia & Balearics Carlos VELÁZQUEZ, Castile & León Regional Managers José Luis ACEA, Madrid Capital Sur Francisco José BAONZA, Asturias Ramón BOSCH, Valencia NorteCastellón José Luis CABERO, GuipuzcoaAlava Manuel CASTILLO, SantiagoOrense Alonso CUETOS, SalamancaÁvila Antonio DEAN, Vigo Juan DOMENECH, MallorcaIbiza Ángel ESCUDERO, VizcayaCantabria José Antonio FERNÁNDEZ, Alicante Sur Manuel FERRER, Madrid Capital Norte Berenguer GALÍN, MallorcaMenorca Vicente GÁLVEZ, Navarra Antonio GONZÁLEZ, LeónZamora Antonio Carlos GONZÁLEZ, HuelvaBadajoz Jesús María GONZÁLEZ, GranadaJaén Manuel LAVÍN, CórdobaJaén Joan Vicent LLACER, Barcelona Centro Area Metropolitana Jaime LOBO, Cádiz Vicente LÓPEZ, Barcelona Norte Alberto MARCHANTE, Madrid Comunidad Sur Alfonso MARÍN, Almeria Luis MARÍN, Madrid Comunidad Este Armando MARTÍNEZ, Madrid Comunidad Noroeste Fernando MERINO, Canarias Manuel MOLINA, Sevilla Sur Juan Martín NIETO, Girona Luis ORTIZ, CoruñaLugo Ramón Ángel PARÍS, Málaga Este Antonio PÉREZ, Murcia Victoriano Aparicio PÉREZ, BurgosSegoviaSoria Manuel PONCELA, ValladolidPalencia Manuel QUERO, Castila la Mancha José Miguel REGUEIRA, Alicante Norte José Antonio REGO, Barcelona Centro Pablo ROMERO, Sevilla Norte Alfonso RUSPIRA, Madrid Capital Centro Manuel José SÁNCHEZ, AragónLa Rioja Eladio SEBASTIÁN, BarcelonaTarragona Antonio SILVA, Málaga Oeste Francisco SUBIRANA, BarcelonaLLeida Francisco VELASCO, Valencia Sur 6

7 GRUPO BANCO POPULAR Banks outside Spain Rui Manuel SEMEDO, Banco Popular Portugal Jorge ROSSELL, TotalBank Other units José Ramón ALONSO, Commercial Banking Joaquín ARIZA, bancopopulare.com Ángel BLAZQUEZ, Popular de Mediación Rosa María BUENO, Europensiones, Eurovida Pedro CARREÑO, Communication Juan Manuel COBO, Popular de Factoring Rafael DUARTE, International Financial Institutions Juan ECHANOJAUREGUI, International Banking Miguel Ángel FRANCO, Corporate Banking Rafael GALAN, General Treasury Francisco J. GARCIA, Corporate Development Javier GEFAELL, Popular Banca Privada Gonzalo GÓMEZ, Banco Popular Hipotecario José Luis MANSO, Human Resources Luis Felipe MARCOS, Regulatory Compliance José Carlos MARIÑO, Mundocredit Rafael de MENA, Financial Officer Javier MORENO, Financial Management Alberto MUÑOZ, Chaiman s Office Carmen ORTIZ, Popular Gestión Tomás PEREIRA, Legal Counsel José Manuel PIÑEIRO, Asset Management Miguel Angel PRIETO, Quality, CSR & y Banco Popular foundation Carlos RAMOS, Popular Bolsa Pedro Javier RODERA, Aliseda José María SAGARDOY, Wholesale Banking Francisco SANCHA, Investor & Shareholder Relations José María SANZ, Customer Care Francisco VALÉRIO, Eurovida Portugal Francisco Javier ZAPATA, Corporate Counsel 7

8 ANNUAL REPORT 2009 / GROUP management performance EDITORIAL "Wise men know to save something for tomorrow and not risk everything in a single day" Miguel de Cervantes Don Quixote (part 1, chapter XXIII) 2009 was an exceptional year because of the magnitude and depth of the crisis of the economies in our environment and, consequently, was also an exceptional year for Banco Popular. GDP shrank significantly, provoking the entry into recession of substantially all western countries. Spain, after a decade of sustained growth, recorded for the first time in 2009 negative rates of change in its GDP. The combined action of the monetary authorities of the major economies is permitting a certain return to normality in the money markets which had been seriously affected at the end of 2008, but there is still persistent weakness in consumption and in solvent demand for credit, both strongly influenced by the recessionary situation in our environment. The monetary and public investment measures have been able to partially mitigate the lack of domestic demand, although the most dramatic consequence of the crisis, namely unemployment, continues unabated. Despite the sharp collapse of the property sector, Spain s GDP did not fall in the same proportion as in other countries. The fiscal situation in our main market should, with appropriate economic policies, make it possible to face up to these difficult years since our starting point was the absence of a budget deficit at the beginning of the crisis and a manageable amount of public debt. Only from the fourth quarter of 2009 did modest rates of economic recovery begin to be observed in the countries of our environment, making it possible to harbour hopes that this exceptional economic situation will gradually abate. In this difficult context, Banco Popular remained faithful to its business model, which has proved to be a winner in the financial world thanks to its capability of generating record earnings before provisions in what was possibly the worst year of the economic cycle. Additionally, strategies to strengthen both capital and liquidity were implemented, despite the satisfactory levels existing at the beginning of the year, with the objective of positioning the Group in an unbeatable competitive situation so as to press forward with its strategy of organic growth and to take advantage of the opportunities which the new cycle will undoubtedly provide. 8

9 GRUPO BANCO POPULAR Banco Popular has always been outstanding for its very notable capital strength, with the highest tangible capital ratio in Europe. Nevertheless, in 2009 this position was strengthened still further with a capital increase of 500 million and completion of a 700 million convertible debenture issue. The aim was to improve capital strength in the face of a possible lengthening of the crisis, to have sufficient muscle to finance the strategy of organic growth and preparedness to meet the new regulatory requirements. Accordingly, the core capital at 31 December stood at 8.57% and the Tier 1 funds at 9.13%. These ratios are among the highest in Europe disregarding the entities that have received state aid and the strongest of any big Spanish bank. Also noteworthy is the high quality of the composition of the capital base, which will make it possible to apply the announced new solvency rules without any significant impairment of the ratios. From the liquidity standpoint, 2009 saw the achievement of two milestones that significantly enhanced the Bank s ample liquidity position. On the one hand, the commercial gap was reduced by nearly 9,000 million and, consequently, the loans/deposits ratio improved by 32 percentage points. On the other hand, the liquidity reserves increased by approximately 9,000 million and at year end stood at over 18,000 million of effective value, thus permitting ample coverage of the wholesale funding maturities for more than one year. As regards commercial activity, Banco Popular s differentiated business model based on customer service was further strengthened as evidenced by the growth of market share in both loans and deposits. Gross lending to customers grew by 4.2%, with new loans of 42,000 million extended mainly to SMEs and households, with the consequent gain in market share of 6 basis points. Also, savers confidence in the Bank led to a 15.3% rise in deposits and an advance of 10 basis points in market share. This growth was led by time deposits, which were up 23.1%, although demand deposits also recorded a notable 10.0% advance. The recurring nature and soundness of Banco Popular s business model are evidenced by its gross operating income of over 4,000 million, 10.9% up on that of Its strength lies in the exceptional net interest income, up by 11.3% to 2,822 million. In profitability terms the net interest margin was 10 basis points higher than in 2008 at 2.46% and remained clearly higher than that of the Bank s competitors around 25 basis points higher than that of the next most profitable bank. This strong performance was the outcome of the growth in quality business, proper management of commercial spreads, and an appropriate balance sheet structure to take advantage of the downward trend of interest rates. As regards nonfinancial income in the form of fees and commissions, gains on financial assets and liabilities, and insurance business, the Bank also demonstrated high management capability, with the contribution of these items to gross operating income again standing at around 30%. The strong ability to generate recurring income, plus efficiency in cost management, enabled the Bank to achieve a record net operating profit (preprovision earnings) of 2,761 million, with an increase of 18% over A factor contributing to this excellent performance was the 2.2% reduction in operating costs. The merger processes undertaken made it possible to reduce the number of branches by 144 in 2009 and to reduce the headcount by natural means 638 fewer staff than in 2008, with a cost saving without impairment of income. As a result, Banco Popular reached another record minimum efficiency rate in Spain of 29.31%, which was 3.94% lower than that in 2008, nearly 30 percentage points below the average rate for all European banks and over 10 percentage points below the average for all Spanish banks. As regards credit quality, the most notable feature was the slowdown from quarter to quarter of the net additions to delinquent balances; the 18 basis points increase in the nonperforming ratio in the fourth quarter was very much lower than the rise of 102 basis points in the first quarter. The nonperforming ratio at year end thus stood at 4.81%, which was lower than the 5.03% figure for the sector as a whole in December. This favourable result was the outcome not only of the decline in gross additions but also of the rising volume of recoveries, which in the fourth quarter of 2009 represented 65% of the gross additions. The evolution of both aggregates permits moderate optimism in the forecasts for 2010, when the maximum delinquency is expected to occur in one or other of the central quarters. 9

10 ANNUAL REPORT 2009 / GROUP management performance Despite this change of trend in additions to nonperforming balances, the stringent schedules of provisioning and a major effort to apply highly conservative criteria made it necessary to book provisions in 2009 of 1,520 million for credit risk, 232 million for financial investments and 408 million for nonfinancial assets, mainly property. The effort in booking provisions was offset partially by the Bank s ability to generate 458 million of gains on sales of assets, mainly of branch offices in sale and leaseback transactions. Particularly noteworthy in the total provisions was the booking of 335 million to the allowance for substandard credit risk and of a further 145 million to the allowance for properties because of the length of time they have been in the Bank s portfolio. The combined total of these two provisions 480 million is of a precautionary nature and is responsive to the prudence with which the Bank manages its risks in preparation, as far as possible, for future impairments. As a result of this higher provisioning, Banco Popular s coverage ratio at year end was 50.27%, which was 5.26 percentage points higher than at September end and amply covered the expected loss in the nonperforming portfolio. In spite of the sharp increase in provisions mentioned above, the attributed profit was 766 million, as compared with 1,052 million in Disregarding the precautionary provisions booked in each year, the adjusted profit would have been 1,102 million, down by 7% on In 2010 the Group expects a gradual return to normality, both in income foreseeably there will be a shrinkage of margins as a result of historically low interest rates and persistent weak demand for credit and in the lower pressure of impaired assets and the consequent reduction of exceptional writedown requirements. However, uncertainty persists about the macroeconomic situation, public sector financing, reordering of the banking sector, and withdrawal of the exceptional liquidity measures orchestrated by the central banks, which will involve changes in the environment and will have to be appropriately managed. Having regard to the commentary in the preceding paragraphs, Banco Popular is wellprepared to face the challenges of 2010, thanks to its excellent staff, to its capital strength, to its comfortable liquidity position, to the volume of ordinary and extraordinary provisions already booked, and to the success of its business model, which endow it with better margin profitability and outstanding ability to generate ordinary earnings. 10

11 Management report

12 ANNUAL REPORT 2009 / GROUP management performance 12

13 GRUPO BANCO POPULAR BANCO POPULAR GROUP Banco Popular heads a banking group with a strictly financial vocation, i.e. it has no strategic corporate investees other than specialpurpose financial companies. It focuses on commercial and retail banking, specializing in meeting all the financial needs of businesses, with a particular emphasis on SMEs, and on banking for households. Other activity lines such as investment banking or wholesale banking address the coverage of the requirements of its commercial customers. The Group s basic management criteria are: The pursuit of maximum profitability by generating income from interest, fees and commissions, which comes almost entirely from the commercial banking activity and is of a highly recurring nature. In 2009, gross operating income of 4,000 million was achieved, a record figure that was almost 11% higher than in 2008 despite the difficult economic environment. The strengthening of balance sheet soundness and of the Bank's solvency. Despite the downward revision of ratings in the first half of the year that was heavily influenced by the economic situation in Spain, the Bank's balance sheet was strengthened appreciably by means of the following actions: Banco Popular's core capital increased by 1,333 million in 2009 and stood at 8.57% at 31 December. This is among the highest in Europe disregarding the entities that have received state aid and in the Spanish banking sector. The Bank's liquidity position was strengthened as a result of reducing the commercial gap by 9,000 million and increasing the liquidity reserves to over 18,000 million at year end. Credit quality, which reflected the consequences of the economic crisis, particularly in the first quarters of However, the second half saw a reduction in net additions to delinquent balances and an increase in the volume of recoveries, resulting in a nonperforming ratio of 4.81% at year end below the average for the sector in Spain. Continued improvement of the efficiency ratio as a result of higher growth in income than in expenses. In 2009, Banco Popular reached another record minimum efficiency ratio of 29.31%, which is the best of Spanish banks and of comparable European entities. To apply these principles, management considers that it is essential to place customers at the centre of all decisions in order to be responsive to the aim of maximizing shareholder value with a medium and longterm outlook. That is why, despite the adverse macroeconomic environment, the Group's market share increased in both loans and deposits by 6bp and 10bp, respectively. At 31 December 2009 the Banco Popular was managing assets worth 142,353 million and onbalance sheet funds of 116,449 million, with a capital base of 8,416 million. To serve its customers and support the commercial network, the Group has a headcount of 14,431 persons, compared with 15,069 in ,709 of them are in Spain and 1,722 are in Portugal and the United States. The Group's vocation for creating value in the long term is also reflected in its human resources policy focused on internal promotion and worklife balance, which are both aspects that contribute to a more expert and motivated workforce. The Group has made efforts to introduce a variety of worklife balance measures which many of the Group's staff are now enjoying. The Group consists of the parent entity (Banco Popular); two foreign banks, both of them whollyowned: Banco Popular Portugal, and Totalbank, operating in the state of Florida, United States; as well as other banks and financial service companies. Banco Popular Portugal shares the parent company's technological platform and is integrated in its central services. But it maintains a structure of its own in order to comply with Portuguese regulations and to respond to the special characteristics of its customers. In addition to the banks mentioned above, the Group wholly owns Banco Popular Hipotecario, a subsidiary specialising in property financing, and bancopopulare, which is an Internet bank. It also has the Popular Banca Privada private banking unit (owned 60% by the Group and 40% by DexiaBIL). Lastly, the Group also has other affiliates specialising in factoring, mutual fund management, pension funds and plans, securities and stock markets, a share ownership company, a venture capital company, renting, insurance and a number of specialpurpose financial and assetholding companies, with which it covers substantially all the financial services demanded by its customers. 13

14 ANNUAL REPORT 2009 / GROUP management performance There were two noteworthy transactions in 2009 concerning the Group's structure: The takeover in August 2009 of the regional bank Banco de Andalucía by the parent entity, Banco Popular Español. With this transaction the Group completed the merger process of its regional banks begun the previous year with the aim of taking advantage of the synergies generated thereby: the simplification of the regulatory obligations with which listed companies must comply and the reduction of costs. In addition, these processes will make it possible to intensify and strengthen the Group's competitiveness in the Spanish financial market. Banco Popular has adopted the anticipatory strategy of adapting its installed capacity to the current economic situation. This strategy has been put into practical effect through planned mergers of branch offices whose business and customers could be attended by others nearby. This process led to the closure of 144 branch offices in 2009 and the relocation of the surplus staff following a policy of strengthening customer service. A restructuring of the territorial headquarters was also undertaken in order to reduce the number of branches attached to each of them, with the aim of boosting commercial activity and customer service. The Group is committed to financial personalisation and although it is a multichannel bank, the commercial network is its main and most direct channel of communication with customers, due to its proximity, personal attention and accessibility. To provide coverage to its customers, the Group has 2,419 branch offices (2,622 in 2008). 2,119 of these are distributed throughout Spain and 251 of them are located in Portugal and the United States. In addition to its operations in Portugal and the United States, the Group also has a substantial international presence through representative offices or operating staff seconded to local correspondent banks in other countries, to cater for the financial needs of customers without exposure to crossborder risk. In addition to the commercial banking branch network, the Bank has more specialised offices that support the network and provide direct service to private individuals, businesses and institutions: personal banking, banking for businesses and corporate banking. It also has Mundocredit, a Banco Popular and Mundo Envíos agent specialising in providing financial services international giros, miniloans, mortgage loans, insurance and cards and nonfinancial services marketing of consumer goods and services to foreign workers resident in Spain. It operates through its own network of branches located throughout Spain (49 branches at 31 December 2009). The Banco Popular Group occupies third place in the national league table of Spanish banking groups as regards volume of assets, and is in fifth place if savings banks are also included. It had a 4.77% share in the credit market at September 2009 (4.71% in 2008) and a 4.43% share in the deposit market (4.33% in 2008). In 2009, the Group obtained a net attributable profit of 766 million. At year end market capitalisation amounted to 6,839 million and there was a base of 136,207 shareholders, with a markedly institutional character. At the close of 2009, 40.62% of the Group s common stock was represented on the Board of Directors of the Banco Popular. The consolidated balance sheets as of 31 December 2009 and 2008, and the consolidated income statements for the years then ended, are presented on the following pages. 14

15 GRUPO BANCO POPULAR Table 1. Consolidated Balance Sheet ASSETS (Amounts in ) % variation Cash and balances with central banks Financial assets held for trading Other financial assets at fair value through profit or loss Availableforsale financial assets Loans and receivables Heldtomaturity investments Changes in the fair value of hedged items in portfolio hedges of interest rate risk Hedging derivatives Noncurrent assets held for sale Investments Insurance contracts linked to pensions Reinsurance assets Tangible assets Intangible assets Tax assets Other assets ,748,699 1,353, ,972 11,030, ,298,399 2,266,524 1,469,702 2,735,721 56, ,851 2,792 1,806, , , ,081 1,859,577 1,334, ,666 3,760,410 96,606,802 34, ,626 1,660,596 32, ,368 5,566 1,355, , , ,911 > > 5.9 > (4.7) (49.8) 33.3 (10.9) (14.4) (12.6) TOTAL ASSETS ,290, ,376, LIABILITIES Financial liabilities held for trading Other financial liabilities at fair value through profit or loss Financial liabilities at amortised cost Changes in the fair value of hedged items in portfolio hedges of interest rate risk Hedging derivatives Liabilities associated with noncurrent assets held for sale Insurance contract liabilities Provisions Tax liabilities Other liabilities Capital redeemable on demand ,195, , ,448, ,357 1,073, , , ,237 1,729, ,520 98,957, , , , , ,733 (30.9) (22.6) 17, > 12.7 TOTAL LIABILITIES ,842, ,318, SHAREHOLDERS EQUITY Own funds Valuation adjustments Minority interests ,415,854 (15,649) 47,779 6,734,394 30, , (83.7) TOTAL EQUITY ,447,984 7,057, TOTAL EQUITY AND LIABILITIES ,290, ,376, MEMORANDUM ITEMS Contingent exposures Contingent commitments ,089,615 17,41 4,213 15,132,009 18,755,570 (6.9) (7.2) 15

16 ANNUAL REPORT 2009 / GROUP management performance Table 2. Consolidated Statements of Income (Amounts in ) % variation Interest and similar income Interest expense and similar charges NET INTEREST INCOME Return on equity instruments Share of results of entities accounted for using the equity method..... Fee and commission income Fee and commission expense Gains or losses on financial assets and liabilities (net) Held for trading Other financial instruments at fair value through profit or loss Financial instruments not valued at fair value through profit or loss... Other Exchange differences (net) Other operating income Income from insurance and reinsurance contracts issued Sales and income from nonfinancial service provision Other operating income Other operating expenses Insurance and reinsurance contract expenses Variation in inventories Other operating expenses GROSS OPERATING INCOME Administrative expenses: Personnel expenses Other general administrative expenses Depreciation & amortisation Provisions to allowances (net) Financial asset impairment losses (net) Loans and receivables Other financial instruments not valued at fair value through profit or loss NET OPERATING PROFIT Losses for impairment of other assets (net) Goodwill and other intangible assets Other assets Gains/(Losses) on disposal of assets not class. as noncurrent assets held for sale Negative difference on business combinations Gains/(Losses) on noncurrent assets held for sale not classified as discontinued operations PROFIT BEFORE TAX Income tax PROFIT FOR THE PERIOD FROM ONGOING OPERATIONS Profit/Loss from discontinued operations (net) CONSOLIDATED NET PROFIT FOR THE YEAR Profit attributed to the controlling company Profit attributed to minority interests BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE ,059,068 2,236,515 2,822,553 7, , , ,168 67, ,153 (29,999) 48, , ,445 40,769 64, , ,824 26,157 43,981 4,054,170 1,188, , , ,086 (13,478) 1,752,394 1,520, ,357 1,022, ,600 64, , ,162 (200,368) 1,072, , , , ,132 14, ,289,255 3,753,994 2,535,261 23,839 14,356 1,015, ,099 74,484 16,488 (10,230) 49,522 18,704 54, , ,735 39,333 69, , ,477 41,850 3,656,770 1,215, , , ,786 29, , ,174 92,988 1,312,537 15,242 15, ,020 (69,295) 1,461, ,343 1,070,677 40,023 1,110,700 1,052,072 58, (19.6) (40.4) 11,3 (67.4) (94.3) (12.8) (19.3) > > > (10.9) (6.5) (2.2) (3.2) (0.3) > (22.1) > > > 96.6 > (26.6) (25.1) (27.1) > (29.7) (27.2) (75.8) (30.4) (30.4) 16

17 GRUPO BANCO POPULAR ECONOMIC ENVIRONMENT As expected, 2009 brought confirmation of the magnitude and depth of the economic crisis in the West. Activity shrank significantly, provoking the entry into recession of virtually all of the countries of our environment. Spain, after a decade of sustained growth, recorded for the first time in 2009 negative rates of change in its GDP and ended the year with a decrease of 3.1% year on year. The variation in GDP is shown in Figure 1. The special nature of our economy, with a model of production that is very dependent on the intensive use of labour and greater weight in the construction sector, which is the sector that has suffered the most, has resulted in a significant destruction of employment as reflected in the high unemployment rate of 18.83% at the end of the year. 5 % 0 % 5 % 1QT 08 Spain 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 Fig. 1 Interannual variation in GDP (%) Source: INE, Eurostat 4T 09 The rate of erosion followed a similar pattern in the OECD countries, with the highest levels of decline in the first half of the year and signs of a slowdown in the deterioration since then. Contributing to this process were the guarantee and stimulation measures put into effect by the central banks and governments of the different countries. These actions, which had already begun at the end of 2008, covered both monetary and fiscal aspects, with sharp reductions in the interest rates of the world's principal currencies, approval of major packages of aid for the sectors most affected and tax incentives, and were intended both to ensure the stability of the financial system and to reactivate economic activity by containing the slump in domestic demand. The signs currently being given by the different economies vary from those that are already showing positive rates of growth to those that will need more time to confirm their improvement. However all countries are equally cautious as regards both the extent and the timeliness of the gradual withdrawal of the extraordinary stimulation measures that could delay any recovery. Spain belongs to the group of countries in which there is some doubt about how long the phase of adjustment of its economy will last, although a moderation in the fall is being observed and should be confirmed in The structural deficiencies of the Spanish economy, with heavy leverage in the foreign sector, low productivity and high dependence on the building/property sector, combined with a rapid adjustment of consumer expectations, have been the main catalysts of the slowdown and will be the obstacles to overcome. The consensus of forecasts still points to a decline in activity of around 0.5% in 2010 and puts the start of the recovery back to However, there is much uncertainty about the duration and severity of the crisis, and this is reflected in the array of estimates from the various teams of analysts. An examination follows of the evolution of the various components of GDP in order to analyse the causes of the deterioration of the Spanish economy in From the point of view of demand, as shown in Figure 2, there were significant falls in both consumption and investment. Investment in capital goods, which was down year on year by 15.3% at the end of the fourth quarter, was the main factor responsible for the fall in gross capital formation. The marked decline in domestic demand and the still weak external demand, together with the continuing more stringent conditions on access to bank credit and the uncertainty about the start of a sustained recovery, continued to curb the launch of investment projects by nonfinancial companies and were not offset by the cut in credit interest rates. As expected, the performance of the construction sector was very unfavourable with a negative growth rate of 5.8% in December 2009, although the sector benefited from the upturn in nonresidential building, particularly the revitalisation of civil engineering works as a result of the execution of projects linked to the government's EPlan. This factor is making up for the significant decline in investment in residential building. The same reasoning explains the fall in consumption, with a significant drop year on year of 3.5% in household spending, compared with a rise of 0.8% in general government, both relating to the fourth quarter. 17

18 ANNUAL INFORME REPORT ANUAL / Resultado GROUP management de la gestión performance del GRUPO 10 Public spending 10 0 Household consumption 0 Services sector Primary sector Gross fixed capital formation Construction sector Energy sector Capital goods Industrial sector 30 1Q Q Q Q Q Q Q Q 2009 Fig. 2 Interannual variation in demand side components of GDP (%) Source: INE The contribution of the foreign sector was more positive. However, the reason lay in the drop in imports as a consequence of the decline in household consumption and business investment requirements. There were just signs of the beginning of a trend of improvement in exports due to the slow recovery of world trade. However, for this trend to take firm hold it is necessary to strengthen the export base and boost the competitiveness of Spanish businesses. As a result of the performance of the foreign sector contribution, the Spanish economy's need for financing per the latest data published for the fourth quarter of 2009 has dropped drastically to 4.0% of GDP compared with 10% the previous year. With regard to supply, the pattern is obviously similar, with the biggest annual fall in the output of the industrial sector (down by 10.9%), followed by the energy sector (down by 8.3%), and the construction sector (down by 5.8%), all relating to the fourth quarter of The explanation of the trend in the energy sector lies in the decrease in the requirements of the production sector. The service sector held up reasonably well with a fall of 1.1%. Lastly, the primary sector displayed some stamina with a fall of only 1.9%, and was the only sector to improve on its performance of the previous year (3.0%). Figure 3 shows the performance of the various sectors since the first quarter of Q Q Q Q Q Q Q Q 2009 Fig. 3 Interannual variation in supply side components of GDP (%) Source: INE In this respect, and in line with the increase in public spending referred to, the public accounts will record a negative balance at 2009 year end, with a record budget deficit of over 11% of GDP and a public debt that may exceed 65%. However, this is still lower than the EU average which stands at 84%. The Government has now begun to withdraw some of the incentives introduced and in 2010 the budget deficit is not expected to deteriorate any further. As a result of this macroeconomic picture, and in the absence of other adjustment mechanisms such as foreign exchange or monetary policy, the Spanish economy is reacting by sharply reducing its installed capacity. The main collateral effect has been the rise in unemployment (see Figure 4). This has been occurring at a significant pace, as shown by the fact that the unemployment rate had reached 18.83% at the end of the year, compared with 13.91% at the end of 2008 and 8.6% at the end of There are more than 4 million people out of work, compared with 3.1 million in 2008 and 2.1 million in December This sharp increase is not just a reflection of the destruction of jobs, since the number of new jobseekers, most of them foreign nationals, is still rising. However, this is an extremely worrying aspect of the Spanish economy, given the dependence of its model of growth on labourintensive sectors. Of the 1.4 million jobs lost in the period February 2008September 2009, 609,000 were 18

19 GRUPO BANCO POPULAR in the construction sector even though this sector does not account for more than 11% of Spanish GDP. The different estimates published to date point to an unemployment rate of 19%21% by the end of 2010 and a slow improvement from % The downward trend in inflation that began in mid 2008 continued, reaching negative yearonyear CPI variations in the middle of the year and a low of 1.4% in July. It recovered thereafter and regained positive rates in the latter part of the year, ending 2009 at 0.8%. This trend is shown in Figure 5. The prospects for the future reflect a continuation of this trend of moderate growth which may result in an average rate of 1%2% at the end of The fear of deflation that was experienced at the start of the recession has eased appreciably. Unemployment 6 Underlying inflation CPI 0% 1Q Q Q Q Q Q Q Q Fig. 4 Unemployment in Spain (%) Fuente: INE 2 1Q Q Q Q Q Q Q Q 2009 Fig.5 Inflation in Spain (%) Source: INE, Eurostat 19

20 ANNUAL REPORT 2009 / GROUP management performance POSITIONING OF THE GROUP IN THE BANKING SECTOR Despite the magnitude and depth of the international financial crisis, Banco Popular continued to show its strength and effective management. Also noteworthy is the high quality of the composition of the capital base, which means we are better prepared for the tougher capital conditions under the new Basel rules. In 2009, the Group was able to maintain its signs of identity: (i) capital strength, enhanced during 2009, (ii) high profitability, founded on recurring business and centred on customer service, (iii) extraordinary efficiency, as a result of the recurring income and the efforts to reduce operating costs, (iv) comfortable liquidity situation and (v) good credit quality resulting from a business model based on businesses and private individuals who are well known to the Bank. 8.57% 7.62% 7.20% The strategy based on strengthening these signs of identity has proven to be the most appropriate in the current economic climate, as shown by the fact that Banco Popular has improved its relative position in the different league tables of comparable European and Spanish banks. The Group's most significant ratios and its position in relation to its domestic and international competitors are analysed in the following paragraphs. Solvency Banco Popular has always stood out because of its capital strength. It already had the best ratio of tangible equity to tangible total assets of all European and American banks at December 2008 (5.8%). Nevertheless, in 2009 this position was strengthened still further with a capital increase of 500 million and completion of a 700 million compulsorily convertible debenture issue. These measures led to an increase in core capital over 2008 of 140 basis points, taking it to 8.57% at the end of This ratio is among the highest in Spain and Europe, disregarding the entities that have received state aid (95 basis points more than the average for Spanish banks and 137 basis points more than the European sector average, excluding the United Kingdom, per September 2009 data). Mention should be made too of the fact that in 2009 Banco Popular also continued to improve its tangible equitytototal assets ratio, which stood at 6.2% in December 2009, enabling the Bank to maintain its privileged position in the European and American league table for this ratio. Banco Popular Average Spain* Average Europe* exgb Fig. 6 Core Capital ratio (%) * September 2009 data Profitability and efficiency Banco Popular's net interest margin in 2009 was 2.46%, an improvement of 10 basis points on the figure for This strong performance was the outcome of the growth in quality business, good management of commercial spreads, and an appropriate balance sheet structure that has enabled Banco Popular to take advantage of the downward trend of interest rates. As a result of these measures, the Bank's net interest margin was around 25 basis points higher than that of the next most profitable Spanish bank. Nonfinancial income in the form of fees and commissions, gains on financial assets and liabilities, and insurance business, once again contributed around 30% of the gross operating income. The third element that characterises Banco Popular's income statement is its high operating efficiency operating costs as a percentage of operating income which stood at 29.31% in December 2009, the lowest in the Bank's history and a new record in the domestic financial market. Two factors contributing to this excellent performance were the 10.9% increase in income and the 2.2% reduction in operating costs in As Figure 7 shows, this efficiency ratio is 28 percentage points lower than the average for European banks and 11 percentage points lower than the average for Spanish banks. 20