Annual Report Committed to transparency

Transcription

1 Annual Report 2002 Committed to transparency

2 Contents Key Facts 3 Letter from the Chairman 4 Letter from the Chief Executive Officer 8 The Santander Central Hispano Group Our Group 28 Our Customers 31 Our Employees Report on Corporate Governance Report on the Board of Directors and its Committees 50 General Shareholders Meetings 62 The Share 67 Senior Management 67 Group Website Corporate Social Responsibility Universities 73 Other Social Programmes 74 The Environment and Sustainable Development 75 Foundations 76 Social Responsibility Indicators Financial Report Group Consolidated Financial Report 98 Report by Business Areas Financial and Risk Management Financial Management 130 Risk Management Legal Information Auditor s Report 152 Annual Consolidated Accounts 211 Management Report 216 Balance Sheet and Income Statement of Banco Santander Central Hispano, S.A. Appendices Compliance 224 Prevention of Money-Laundering 226 Chronology 228 Historical Data 230 Financial Statements of the Group s Main Entities 235 General Information Santander Central Hispano Annual Report 2002

3 Reflecting our confidence in the Santander Group s capacity to generate earnings, we are proposing to the General Meeting to repeat the 2001 dividend of EUR per share, bringing the total dividend yield to 4.4% at the end-year price. We define ourselves as a «multi-local» group, meaning that we specialize in domestically focused commercial banking and at the same time are well diversified geographically. We combine a common business model with local management. 2 The Santander Group has no need for new acquisitions or investments to secure its future. We have many options for value creation through efficient management of organic growth, far in excess of our main international competitors

4 Key Group Figures Net attributable income 2, , ,247.2 Euro million Dividend per share Euros Equity 21,621 24,597* 23,417 Euro million Variation Net operating income (Euro million) 5, , % Net attributable income (Euro million) 2, , % Efficiency ratio (%) p. Net attributable per share (euros) % Dividend per share (euros) Average yield (%) p. BIS ratio (%) * 0.60 p. (*) Discounting the amortization of preferred stock effective in Note: More key data for 2002 available on page 79 of this Report. Santander Central Hispano Annual Report 2002

5 Letter from the Chairman 4 Dear Shareholder, The Santander Central Hispano Group achieved a net attributable income of EUR 2,247.2 million in 2002, a decline of 9.6% from the previous year, but our dividend was nonetheless maintained at EUR per share, equivalent to a yield of 4.4% based on the year-end price. It is important to remember that these results were obtained in a difficult year for the sector, with international banks in general having seen both profits and share prices fall considerably. We continue to set long-term creation of value for shareholders, who exceeded one million last year, as the Santander Group s main priority. Accumulated total return for the Bank s share has been 360% in the past 10 years, while dividend per share has risen at an average annual rate of 10.3%. We closed the year with a market capitalization of EUR 31,185.4 million, ranking second in the Euro zone and 16th worldwide. Business model and management strategy We define ourselves as a «multi-local» group, meaning that we specialize in domestically-focused commercial banking and at the same time are well diversified geographically. Santander is a group that combines a common business model with locally focused management, giving us a deep understanding of the markets where we operate. Despite the considerable size of the Group, our risk is local rather than global in nature. For this reason, and because of our experience in these markets, the risk is more diversified and easier to manage.

6 This «multi-local» approach is reinforced by a management style with two key characteristics: efficiency, based on revenue generation and cost control, and balance sheet strength, founded on strict risk management and our solid capital base. The fruits of this policy are strong performance in recurring business, which is our platform for future development. This is underlined by the fact that 86% of our net operating income comes from commerciall banking. This is complemented by Treasury, International Private Banking, Wholesale Banking and Asset Management, all of which feature integrated and global management, enabling us to cover a full range of customer requirements across the countries where we operate. Based on these principles, the Group has developed a strategy focused on the Iberian Peninsula and Latin America, complemented by its alliance with The Royal Bank of Scotland and our Consumer Banking activities in Europe. Also of major strategic importance was the recent agreement with Bank of America to develop the Mexican American business. Among other developments during the year were the business integration of Banco Santander Mexicano and Banca Serfin, the merger of Banco Santander Chile and Banco Santiago, the integration of AKB in CC-Bank and the public share offer of 11.64% of Banesto. Looking at the Group s capital base, the impact of Latin American currency depreciation was neutralized by strong generation of recurring income and the sale of industrial stakes (Dragados and Vallehermoso), as well as that of 3% of Royal Bank of Scotland. In all, we have made provisions and writedowns totalling EUR 4.3 billion, repeated the previous year s dividend and maintained our improved our capital ratios, all without seeking new funds from our shareholders. As a result, the Group started 2003 with a solid capital base, placing it among the best capitalized banks in the Euro zone. Commercial Banking During the year we focused activity on countries with the highest profit and growth potential: Spain, Portugal, Brazil, Mexico and Chile. These countries comprise a sizeable market, with a population of 330 million, 30 million of whom are Santander customers. In these countries Santander has a clear competitive advantage thanks to market shares in excess of 10%, to its broad experience in commercial banking and credit risk management, and to the wide range of additional services available in Investment and Global Corporate Banking. 5 During the year, we have strengthened our capability in these countries, improving cost-income and bad loan ratios, with a highly favourable impact on all other ratios. We are thus exceptionally well placed in a substantial target market, offering us an excellent platform for future profit growth. The Santander Group has no need for new acquisitions or investments to secure its future. We have many options for value creation through efficient management of organic growth, far in excess of those of our main international competitors. In other countries where the Group operates, where the conditions necessary to develop a universal commercial banking model are lacking, we have adjusted our presence on a more selective basis. Santander Central Hispano Annual Report 2002

7 Letter from the Chairman Brazil The uncertainty linked to the country s elections required sharp reflexes on the part of the Group. We have always been clear, nonetheless, that Brazil is and will continue to be a strategic priority for our Group. The strength and vitality of the Brazilian banking system is a guarantee of future stability for the country as a whole. It is a modern banking system with strong and well capitalized institutions. I am happy to say that the Santander Group is meeting on schedule all the objectives set at the time of the Banespa acquisition, as borne out by the excellent results achieved last year. Royal Bank of Scotland and Bank of America Our strategic alliance with Royal Bank of Scotland has an important impact on all our activities. Over the years, the reciprocal financial support and exchange of ideas and experiences have comprised an invaluable joint contribution, and we expect a lot more from this in the future. 6 Shortly before the end of the year, we signed an important cooperation agreement with Bank of America, aimed at the Mexican American market. Under this agreement, Bank of America will acquire 24.9% of Santander Serfin, thereby giving a springboard for joint activities and services offered to the Mexican and North American markets. It is a great opportunity, both for Bank of America and also for Santander Group, renewing a relationship that began 37 years ago with the creation of Bankinter. This agreement clearly demonstrates the value of our investment in Latin America, providing significant added value through new business opportunities. Our long-standing alliance with Royal Bank of Scotland, the world s 5th largest bank by market capitalization, and the new opportunities made possible through the agreement with Bank of America, the world number 3, are complementary relationships giving us a privileged position in Europe and in the international financial system in general. Corporate values All strategic initiatives must be founded on solid corporate values. At Santander, over its 145 years, these values have been professional ethics, business drive and customer service, prudent risk management, adaptability to changing market circumstances and a notable ability to anticipate new developments. These values have gone side by side with driving ambition in profit generation. These same values are those that explain the pride of belonging to Santander, a hallmark of all our professionals. The Board is determined to preserve and strengthen these values, ones that have enabled the Group to occupy its position of leadership today. Corporate Governance We have also made significant progress during 2002 in two aspects that I believe to be fundamental: good corporate governance and corporate social responsibility. The new By-Laws of the Board of Directors were presented to the General Shareholders Meeting on June 24, They incorporate the most advanced practices in corporate governance with the aim of widening shareholder rights, avoiding conflicts of interest and improving transparency. In line with these actions, the Board will propose to the next General Shareholders Meeting the elimination of the anti-takeover clauses currently contained in the corporate by-laws.

8 Meanwhile, the Board of Directors, the Executive Committee, the Board Committees and the International Advisory Board are carrying out their duties with increasingly effective participation of their members. These steps form part of a permanent process of improving our Corporate Governance. Joining the Board in 2002 were Mr Juan Abelló, Mr. Guillermo de la Dehesa and Mr. Abel Matutes. It is very important that a Board reflects an appropriate balance between external directors, of recognized prestige and professional achievement, and executive directors involved in the day-to-day business. Our Board reflects this balance, with committed directors who have a clear vision of what this Group is and what it aspires to be. Corporate Social Responsibility In line with our objective of creating consistent and lasting value for all stakeholders (shareholders, employees, customers and society in general), Santander Central Hispano has defined and announced its Corporate Social Responsibility Model, which I believe to be an international standard-bearer. The Universities Programme and the Universia portal are the tangible fruits of this commitment to cultural and educational priorities, and make Santander the financial institution that has the largest and most active presence in the Latin American academic world. We already have 249 specific agreements with the same number of universities within the Universities Programme. The Universia portal brings together 635 Spanish, Portuguese and Latin American universities with 7 million students. Over the past four years, we have spent EUR 151 million on social and cultural activities in Spain, Portugal and Latin America. Investment in 2002 made up 2.7% of net attributable income, a sizeable sum that is creating social recognition and prestige for our Group and which is subject to the same requirements of transparency as with the rest of our activity. Summing up, 2002 has put our management to the test. And the results prove that we are up to the task of managing in a difficult environment. Our organization is more efficient today than a year ago and can count on a strong balance sheet structure. We are therefore in a better position to take advantage of future opportunities, based on a highly skilled workforce, understanding of the business and its risks, and the competitive advantages we enjoy in our markets. I would like to personally thank the 104,000 employees of Santander. Their professionalism continues to provide the best possible guarantee for continuing growth. Ensuring their motivation and commitment is a challenge and a permanent requirement for me and for the Board of Directors. 7 This year we must also make further progress towards improving customer service, quickly and efficiently correcting deficiencies when detected. Management will continue to make maximum use of the impressive assets that make Santander unique, one with an enormous potential for growth. In this regard, I am convinced that the current price of our share in no way reflects the true value of our Group, and that recovery in the markets will bring a significant improvement in this regard. With this in mind, I thank you again for placing your trust in us. Emilio Botín Chairman Santander Central Hispano Annual Report 2002

9 Letter from the CEO 8 Dear Shareholders: Our net attributable profit for the year 2002 was EUR 2,247 million, a fall of 9.6% from the year before. We are not at all happy with this result, but at the same time it still compares favourably with our domestic and international competitors. And more importantly, we have increased our principal recurring businesses, European Commercial Banking and Latin America, and have also strengthened our financial base. In Spain, Portugal, Mexico, Brazil and Chile we have leadership positions in commercial banking, a business we manage in a decentralised way which allows us to adapt to the needs and characteristics of each market. This «multi-local» business model, together with our experience and proven ability to manage in volatile environments, and our continued success in cutting costs, enabled us to achieve net operating income of EUR 5,566 million, an increase (excluding Argentina) of 1.5%.

10 Financially Solid These results were obtained after substantial efforts to consolidate and strengthen our balance sheet. Some EUR 4.3 billion have been provisioned for ordinary and extraordinary write-downs, for covering non-performing loans, and for scheduled and accelerated amortisation of goodwill including amounts relating to Brazil and Colombia as well as AOL and BtoB Factory. Thus, goodwill carried on the Group s books excluding Argentina was EUR 9,309 million, of which EUR 5.37 billion are related to Latin America; goodwill related to Banespa stood at EUR 1.77 billion, less than half its initial amount. Today, some 75% of our goodwill is linked to businesses or countries where our return on the initial investment (ROI) is higher than the cost of capital. We also considerably improved our capital ratios in Tier I stands at 8% and the BIS ratio at 12.6%, levels we always said we aimed to attain. Transactions carried out the sales of industrials holdings, of 3% of the Royal Bank of Scotland and the public offering of Banesto shares more than offset the impact of depreciation of Latin American currencies on our reserves (some EUR 2.7 billion). Operations already announced for 2003, the quality of our credit risk and the recurring generation of capital from our business activities will allow us to continue to improve these ratios. The strength of the Group s balance sheet is also underpinned by the excellent quality of our credit risk, another basic principal of our management. The local, predictable nature of this risk, which we manage with the utmost prudence, is reflected in our rate of non-performing loans (1.89%, 1,68% excluding Argentina) and loan-loss coverage (140%, 152% excluding Argentina), highly positive levels in view of the uncertain economic environment. Lastly, unrealised capital gains in the Group s portfolio came to some EUR 2.6 billion at the end of The figure reinforces an already solid balance sheet, creating a strong platform for growth and creation of shareholder value. Productivity and Technology To assure our medium-term growth in a competitive environment, we must be leaders in productivity, generating more profit for each unit of cost. To achieve this, we maintain strict cost controls, which have enabled us to improve our efficiency ratio by 2.5 points to 51.8%, excluding Argentina. Of particular note in this area is Chile, where the efficiency ratio was 41.6% at the end of 2002 and Santander Central Hispano Commercial Banking in Spain, where it was 50%. 9 We will maintain these improvements in efficiency and productivity with the help of the best technology available. The Partenón Project, which will permit us to adopt the Banesto model in all our Spanish business, is critical to this effort, as is the installation of the Altair platform in Latin America, which will be completed with its implementation in Brazil in 2003 Our Business In 2002, all our business areas considerably improved their profitability and efficiency, while keeping risk under control, thanks to our substantial capacity for generating recurring revenues, our high degree of financial solidity and our leadership in technology. Our core business, commercial banking in Europe and Latin America, has performed particularly well. Santander Central Hispano Annual Report 2002

11 Letter from the CEO European Commercial Banking, which contributed 49% to Group results and constitutes a stable and reliable income stream, posted attributable net profit of EUR 1,566 million, a rise of 12.5% from Of note in these results were the Santander Central Hispano network in Spain, with net attributable income of EUR 786 million, and increase of 6.3% reflecting strong activity in the launch of new initiatives, products and marketing campaigns. Banesto, with its advanced, client-oriented business model, supported by its cutting edge technology, and our banks in Portugal, with their multi-brand strategy and focus on efficiency, have expanded their market shares and efficiency ratios. Lastly, our Consumer Finance unit consolidated its position en Germany with the integration of AKB and CC-Bank. Results from Commercial Banking Latin America also increased considerably, despite the volatility in some important markets. Our net attributable income in the region grew by 14.3%, at constant exchange rates, to EUR 1,383 million, thanks to the strong performance of our units in our key markets: Brazil, Mexico and Chile. In Brazil, we surpassed targets set at the time we acquired Banespa, achieving net attributable income of EUR 802 million, up 20.5% from We also improved our risk profile and the efficiency of the bank. We expanded the already broad customer base, reinforcing Banespa s position as the dominant private sector bank in the most dynamic region of the country. 10 The Group s result in Mexico grew by 16.4% to EUR 681 million, driven by an aggressive commercial drive and continued expansion of market share, which grew by 1% during the year and could reach 20% within three years. The merger of our two Mexican banks into Santander Serfin, completed in September, makes us the third largest bank in the country and sets the stage for improved efficiency. Our recent agreement with Bank of America will undoubtedly boost our business in Mexico even further. In Chile, Banco Santander Chile is the largest in the country since the merger with Banco Santiago last August. Net attributable income at the bank, at EUR 229 million, was affected by extraordinary costs related to the merger, nearly all of which were absorbed in 2002 earnings. Nonetheless, the maturity and stability of the Chilean economy, the privileged position of our bank and the quality of management are guarantees for the growth of our business there. In Venezuela, we obtained a net attributable income of EUR 166 million, underlining the Group s well-tried ability to manage through periods of high volatility. Before moving on from Latin America, I would like to briefly mention Argentina, where the macroeconomic outlook has improved and some steps toward normality in the financial sector have been taken, though there is still much ground to cover. Banco Río is carrying out a restructuring programme that will allow it to re-establish its economic and financial stability. Argentina s contribution to the 2002 results has been nil, as the entire capital investment there has been provisioned. Global Businesses The solid base created by our retail banking operations in Europe and Latin America offer many opportunities for developing our global businesses: Corporate Banking, Asset Management and Private Banking. Earnings in these areas were affected by the high volatility in financial markets in In Asset Management, a strategic area for our Group, we manage EUR 85,653 million in mutual and pension funds, of which 75% is in Europe. Our market shares are improving in every market in which we are active, especially in Spain, where in mutual funds we have a 28% market share after growing by 2 points in In Private Banking, we maintain our leadership in Spain through our specialised bank, Banif. Our share in this market exceeds 30%. International Private Banking primarily serves Latin American clients and continued to advance toward its medium-term goal of becoming the most important player in this market.

12 Wholesale Banking has focused its efforts on putting at our customers disposal the enormous range of products and services that our multi-local banking model provides, with our leading presence in five key markets. Our Clients Our goal in all our businesses is to give the best service to our customers, as we know that is the key to competitive advantage. We have 35 million customers and operate in markets that have 500 million inhabitants, offering a great opportunity to increase our customer base. Nonetheless, we strive to serve each as a unique individual. This is why we work to give value to their relationship with us. We are moving forward in our goal of being the best and biggest provider of financial services to our clients. To do this, we have accelerated in all our business areas initiatives aimed at improving the quality of service. Our Staff These goals and results have only been possible through the work of the 104,000 professionals who make up the Group, and the skills of their managers. Our human capital is a guarantee of future growth. This is why we have implemented career development programmes to foster creativity and ambition among our professionals. The contribution of each person and each team will determine his remuneration and career development. In this year, a difficult one for the Group as well as for the management team, our earnings have obliged us to reduce by 20% the pool earmarked for variable pay for our executives. This was a difficult decision but one made necessary by the decline of our attributable net profit. Our Goal In the last 15 years we have successfully combined organic growth with growth through acquisitions, which has made us the multi-local Group we are today. The success of this strategy has translated into annual accumulated growth of 19% in attributable net profit and of 13% in per share dividend. 11 We are proud to have achieved this, but also deeply dissatisfied. We are convinced that these results place us in a strong position to move decisively toward our goal. It is an ambitious goal: To be the best and most profitable financial Group, to be the benchmark for our sector, in our natural markets. We are well aware of the opportunity before us. We know where we want to go, and we know how to get there. We embark on 2003 with this ambition and clarity of vision. Alfredo Sáenz Second Vice-Chairman and Chief Executive Officer Santander Central Hispano Annual Report 2002

13 Transparency starts

14 Our Business The Group 14 Santander Central Hispano Commercial Banking 17 Banesto 19 Portugal 20 Consumer Finance in Europe 21 Latin America 22 Asset Management and Insurance 25 Private Banking 26 Global Wholesale Banking 27 Our Customers 28 Our Employees 31 with clarity and quality. Santander Central Hispano Annual Report 2002

15 Our Group We are the largest Spanish bank and second in the Euro zone, with a marked focus on commercial banking The Santander Central Hispano Group is Spain s largest financial group and second in the Euro zone, with a market capitalization at the end of 2002 of EUR 31,185 million. We have 104,000 employees, 65% of whom work outside Spain. We have a very clear strategy: to be an international pacesetter, specialized in commercial banking and with a strong presence in Europe and Latin America. We combine geographic diversity with a profound knowledge of the markets where we operate and which we manage locally. Our large market shares enable us to reap the maximum potential from our business model. This involvement in the markets where we are present makes us a multiple local presence/operations group. Commercial banking activity generates 86% of the Group s net operating income and is our main competitive advantage. This activity is complemented by global businesses: asset management, private banking, corporate banking, investment banking and treasury. We focus on those countries with high business potential: Spain, Portugal, Brazil, Mexico and Chile. 14 In Europe, we are leaders in consumer banking in Spain, Portugal, Germany and Italy and we have a solid strategic alliance with Royal Bank of Scotland. All of this gives us a privileged position in the European financial system. In other Latin American countries we have a more selective presence, both geographically with fewer branches as well as by businesses corporate and institutional, private banking and asset management. Also in Latin America, we reached a strategic alliance in 2002 with Bank of America, which will enable us to take advantage of all the business potential of the Mexican population in the US and of the more than 5,000 US companies in Mexico. We are a Group with clear mission to grow, although we do not believe acquisitions or mergers are necessary to achieve this. We trust fully in our ability to exploit the competitive advantages of our business model and create value by maximizing the return on our current business structure. We define ourselves as a multi-local group, a model based on the integration of locally-run banks focused on local customers

16 For this strategy to be successful we need clearly defined management principles based on two requirements: efficiency and strength. Improved efficiency supports the generation of revenues and control of costs. In order to achieve the first, we have redefined the strategy of the business areas in order to boost activity and gain market share by launching new products and through customer fidelity programs. We not only want to be the bank with the best products but also the one that provides the best service. In this way we can ensure that we can keep our customers loyal at a time of increasing competition in all markets where we operate. To achieve this, we have the best technology among Spanish banks. This strategy has enabled us to gain market share in deposits and investment funds in Spain and 70 basis points in the Latin American countries where we focus our strategy. We made a special effort in 2002 to generate revenues, and in cost control we continued the policy of austerity which we have been implementing for several years. The main elements supporting the cost control policy are reducing the head count and the number of branches, exploiting the possibilities offered by technology and streamlining procedures. As a result, we reduced costs by 12.8%. 15 Thanks to these measures we continue to be one of the most cost efficient financial groups. We are the third most efficient entity among the largest European financial groups, with a ratio of 51.8%, 2.5 points better than in 2001, excluding Argentina. The strength of our balance sheet comes from prudent risk management and the quality of our capital base. The Group s position in risk matters is a privileged one, especially among entities that are international players. Our risk is more predictable and of a higher quality than that of our international competitors for two reasons. This is because our risk management policy has traditionally been very prudent. We are very clear about not allowing growth to produce a deterioration of credit quality. Because of this, we have been able over the last three years to combine business activity with a stable non-performing loans (NPL) ratio of around 2%, and despite the slowdown in the international economy results underline strong performance in recurring businesses Santander Central Hispano Annual Report 2002

17 Our Group Also, our structure is very different from that of other multinational groups, enabling us to benefit from its advantages, but to avoid the disadvantages. We are the product of the integration of local banks, with local customer bases. We are a multi-local group, which makes our exposure to global risks minimal. The result is that although 2002 saw some of the largest corporate collapses, our NPL ratio remained at 1.89% and our NPL coverage stood at 140%. Our excellent results in risk control is in large part due to diversification based on two complementary strategies: expansion into new markets and new businesses. The effect of this strategy has been to increase the degree of stability and recurrence of our earnings. As regards our capital base, we ended 2002 with ratios that were above our targets after a series of operations that countered the effect of the depreciation of Latin American currencies. These measures lifted the BIS ratio at the end of 2002 to 12.64% which, together with our capacity to generate capital via earnings and the prudent policy for provisions, create a solid balance sheet structure. 16 Lastly, our business model incorporates transparency with all its consequences. We owe this to our shareholders, customers, employees and society as a whole. It is something which, in the long term, creates value on the basis of confidence and the strengthening of the links of companies with the groups with whom they do business. Implementation of these policies during 2002 led to a strong performance of the most recurring business activities and a worse performance of those most directly related to the currency and securities markets. The joint impact was a drop in net operating income of 6.4% (+1.5% excluding Argentina). However, on the basis of the most recurring element in our activities (i.e. excluding dividends and trading gains), net operating income ex-argentina grew 14.3%. The level of provisions and writedowns led to the decline in net attributable income (9.6%) being somewhat deeper than that in net operating income. In any event the amount recorded EUR 2,247 million was the highest of the sector in Spain. Summing up, the earnings underscored the Group s capacity to manage difficult situations. Our net attributable income was EUR 2,247 million in 2002

18 Santander Central Hispano Commercial Banking Santander Central Hispano Commercial Banking serves 8.5 million customers in Spain via a network of 2,506 branches. It manages EUR 80,513 million in customer funds. In 2002 we focused on boosting the generation of revenues and gaining market share. The Santander Central Hispano network uses a unique business model with two strategies that complement one another: focus on the customer and development of innovative products. The customer is at the center of our strategy with these objectives: attracting new funds, while securing customer loyalty and affinity. The best way to capture new customers us to treat existing ones well. All the business areas of Santander Central Hispano Commercial Banking share a common idea: service quality focused on the customer. In order to optimize the service we give to our customers, we have developed the Da Vinci model using the most up-to-date systems for segmentation and customer profiling to significantly enhance our commercial drive and quality of service. These systems are helping us to develop a revenue growth plan based on efficient business management across the Bank s three segments: individuals, high net worth clients and companies and institutions. Individual Customer Banking aims at a wide social spectrum, based on a powerful branch network and salesforce and on the best products and services available in the market, making full use of cross-selling, quality service and top-flight management systems. 17 The goal of the Private Banking area is to be a benchmark for high income clients, relying on personalised financial advice and the ability to produce specific value proposals with constant improvements. The area serving Companies and Institutions bonds the client through a highly qualified professional service, available through a broad network of specialized offices. Along with customer service, innovation is the second key element of our business management, through the design and launch of products that combine customers needs with the Bank s profitability requirements. Specifically, several innovative products were launched in 2002, and were well received by our customers with more than EUR 6 billion attracted during the year. They included: «Depósito Supersatisfacción», «Fondo Supersatisfacción» and «Depósito Super Rendimiento». All business areas of Santander Central Hispano Commercial Banking share a common idea: quality service aimed at the customer Santander Central Hispano Annual Report 2002

19 Santander Central Hispano Commercial Banking As a result we increased our market share in key products such as time deposits and mutual funds. In lending, we achieved strong growth in mortgages to individual customers (14.2%) and in credit lines to finance companies working capital. Net attributable income increased 6% in The strong commercial impetus developed by Santander Central Hispano Commercial Banking, coupled with maintenance of customer spreads, income from commissions and cost savings, contributed to a rise of 7.8% in net operating income and 6.3% in net attributable income. We have four objectives in 2003: maintain net interest margin, increase commissions, expand market share and improve service. To achieve these, we can count on the Da Vinci model, our professional skills and the muscle of our branch network. 18

20 Banesto Banesto, which celebrated its 100th anniversary in 2002, is Spain s third largest bank in terms of managed customer funds and lending. It is one of the Group s main companies because of the growth in its business and the continuous improvement in its earnings. Banesto remains at the forefront of the sector, with a business model focused on commercial banking activity in the domestic market. The Bank focuses on retail banking in the domestic market. It has a network of 1,679 branches and more than 10,000 employees serving 3.5 million customers. In 2002 a new customer-focused business model was drawn up on the basis of business segmentation by companies and individuals. This moves decision-taking closer to the customer and accelerates the pace at which decisions are taken with a common objective: to provide the best service. Banesto has three strengths with which to achieve this: technology, risk management and its professionals. Banesto s technology is a comparative advantage that is being exploited to move ahead of the competition. Its prudent risk management is reflected in one of the lowest non-performing loan (NPL) ratios in the Spanish banking system (0.78%) and NPL coverage of 275%. Our staff is increasingly young, better trained and more focused on selling products and services (90% of employees). One hundred years after it was founded, Banesto today is again one of the leading Spanish banks. It has a clear mission to be the benchmark entity for important entities such as SMEs, professionals and family-run firms. 19 There were clear examples during 2002 of its ambition to lead Spanish commercial banking and its capacity to do so. The awarding of the contract for Spanish courts EUR 2 billion average managed balance was one of them. The keys to this success were the competitiveness of the offer and its leadership in banking technology, specifically the capacity of its applications to manage customers and the security of our processes. Banesto has its own distinctive model, and autonomy of management, features that were reinforced by the public offering that increased the free float to around 12%, making the Banesto share more liquid. The strong business drive is reflected in gains of market share against all banks of 0.27 percentage points. The goal is to keep gaining market share in Net operating income was EUR million, 7.7% more than in Income before taxes was EUR 562 million, up 9.4%. Note: The data correspond to the contribution of Banesto to Group results, after applying the criteria stated on page 98. This explains the discrepancy with figures published by Banesto. Net operating income rose 7.7% and income before taxes increased 9.4%. Santander Central Hispano Annual Report 2002

21 Portugal We are the third largest financial group in Portugal, with a market share of 10%. The Totta Group, with 659 branches around the country and 2 million customers, is Portugal s third largest private sector financial group. It has a market share above 10%. Totta conducts its business through three brands in commercial banking Totta, Crédito Predial Português and Santander Portugal and, in Investment Banking, through Banco Santander de Negocios Portugal. We have the optimal segmentation of customers in this market, as a result of the complementary nature of its three Commercial Banking brands. While Totta is a leader in Universal Banking, Crédito Predial specializes in capturing customers through mortgages and Santander Portugal focuses on urban and high income customers. The business strategy pursued in Portugal has increased the public s awareness and attractiveness of the brands, thanks to the improved segmentation of customers, a clearer focus on strategic products and the launch of the best products in strategic segments of the market, such as mortgages and mutual funds. 20 Of note in the product innovation policy is the «Crédito Vivienda Súper Oferta Hogar», which produced a sharp rise in the volume of mortgages contracted and the boost given to products that generate commissions, such as mutual funds and credit and debit cards. The success of this strategy is reflected in a significant gain in market share in mortgages, which reached 11.7%, and in mutual funds, which reached 17.4%. In insurance, the Totta Group is the fourth largest in life assurance business, with a market share in 2002 in new business of 14.7%, double that of The Group s presence in Portugal is completed with Investment Banking, where its broker-dealer is second in the Euronext/Lisbon ranking (market share of 15.9%). Despite a difficult year for the Portuguese economy, the Group s net attributable income rose 16.8%. The quality of the Group s activity in Portugal and its prestige were recognized on many occasions. The Totta Group received in 2002 the «best bank in Portugal» prize from The Banker, Euromoney and the Portuguese Exame and obtained the ISO 9001:2000 global certification, the first Portuguese financial group to do so under the new regulations. The Group s net attributable income in Portugal rose 16.8%.

22 Consumer Finance in Europe The Santander Central Hispano Group provides consumer finance services to more than 7 million customers in eight European countries, and has a leadership position in Spain, Germany, Italy and Portugal. This activity is a strategic opportunity for the Group because of its high spreads and growth potential. It is basically concentrated in two segments: auto financing and personal loans and cards, which accounted for more than 80% of new business in Consumer Finance in Europe is a strategic option because of its high customer spreads and growth potential. Activity is focused on four countries: Spain, Germany, Italy and Portugal, which account for 41% of the European consumer financing market and where we have a combined market share of 15% in auto financing. We are also present in the main markets of Central Europe (Austria, Hungary, the Czech Republic and Poland), where our goal is to become a leading player. In Spain, Hispamer is the leader in vehicle financing with a market share of 25% and a leader in issuance of bank cards (6.8 million issued) and in mortgages. Net attributable income was 22.2% higher in 2002 at EUR 90 million. In Germany, we operate as CC-Bank, the country s second largest auto financing group with a market share of 15.4% and more than two million customers, following the acquisition of AKB. In Italy, we have close to 500,000 customers and a market share of 4.4%, thanks to our stake in Finconsumo since The Group owns 50% of Finconsumo and the rest is owrred by Sanpaolo IMI. 21 Hispamer, CC-Bank and Finconsumo have full management autonomy, although they take advantage of belonging to the same Group to draw up common lines of action and optimization of resources. This combination of local character and exploiting the benefits of belonging to a large Group comprise a comparative advantage that makes us a leader in consumer banking throughout Europe. Net attributable income from consumer finance was EUR 209 million, 89.4% more than in Net attributable income in 2002 was 89.4% higher at EUR 209 million. Santander Central Hispano Annual Report 2002

23 Latin America We are the leading financial group in Latin America by net attributable income (EUR 1,383 million). The Group has 4,183 branches, 57,358 employees and 13.6 million customers, and manages EUR 108,537 million of funds in Latin America. Santander Central Hispano is the largest banking Group in Latin America in terms of deposits plus mutual funds and on the basis of lending. We also generate the largest net attributable income of any financial group in the region. In 2002 we proved our ability to manage flexibly in a rapidly changing environment. Net attributable income was EUR 1,383 million, underscoring the Group s capacity and experience to generate income and to manage itself well in a very volatile context. We understand the markets where we operate and we do what we know best, commercial banking. This enables us to achieve a solid return on our investments, which in the case of Chile, Mexico and Venezuela was an ROI in dollar terms of 13%, 24% and 21%, respectively. We are extremely satisfied with our strong presence in Brazil, which will be a key market in Latin America, a region with high growth potential. 22 We have differentiated our strategy by countries, focusing on the largest and fastest-growing economies, Brazil, Mexico and Chile. In all three countries we have a very broad customer base and the human and technical resources needed to offer the same wide range of banking services as in Spain. Brazil Santander Banespa is Brazil s fourth largest private-sector financial group, with a significant presence in the south/southeast of the country where almost 60% of the population live and which generates 76% of GDP and 4.6 million customers. Its market shares are around 4-5% for the whole of the country and 8-10% in the south/southeast. The Group s net attributable income grew 20.5% to EUR 802 million, meeting the goals that we set when we bought Banespa. Moreover, the bank is becoming more efficient with the development of activities that generate commissions and with cost control. Mexico In September 2002, the Group created a new commercial brand, Santander Serfin, following the integration of Banco Santander Mexicano and Banca Serfin. The integration gives us cost savings and synergies, as well as greater business strength and effectiveness. We have differentiated our strategy by countries, focusing on the largest and fastest-growing economies, Brazil, Mexico and Chile The single network of 1,000 branches and 1,800 ATMs will serve 4 million customers. Santander Serfin is Mexico s third largest bank by business volume and the first in terms of profitability and balance sheet strength. In 2002 we notably increased our market shares in Mexico to around 13-14%. Net attributable income was EUR 681 million and the ROI in dollar terms reached 24%. Of

24 particular note was the success of innovative products such as the Serfin Light and Serfin Uni-k cards, which increased the Group s market share in this segment to 12.9%. Our strategic agreement with Bank of America, under which the US bank acquired 24.9% of Santander Serfin, underscores the depth of our commitment to Latin America and the value of our investment in the region. It is an excellent operation, which opens up business opportunities in corporate banking, with the subsidiaries of 5,000 US companies that operate in Mexico and around 8 million Mexicans working in the US. Chile The merger of Banco Santander Chile and Banco Santiago took effect on August 1, These banks were respectively the largest and third largest in Chile. The new Banco Santander Chile is the leader by business volume, profitability and efficiency. It has 350 branches and 2 million customers. Banco Santander Chile has a market share of 22.8% in deposits and 25.5% in loans and is also very active in pension and mutual funds (market share of 11.1% and 21.2% respectively). The Group earned net attributable income of EUR 229 million in Chile. Other countries 23 In Puerto Rico, the Group is one of the three leading financial institutions, with a network of more than 60 offices and a weighted market share in banking business of 13.8%. In a year focused on commercial restructuring, the Group has obtained a net attributable income of EUR 12 million. In Venezuela, where we have a weighted business market share of 12.2%, the Group has amended its policies on growth and risk in line with changing circumstances. In any event, a net attributable income of EUR 166 million was achieved. In Colombia, the restructuring of activities over the past few years towards more selective and specialized business was completed. In Argentina we have made large provisions to cover our entire capital investment, and all the cross-border, intragroup and the regulatory requirements of the countryrisk allocations with third parties. Management focused on credit quality and on maintaining liquidity during the year. Our strategic alliance with Bank of America puts us in an unbeatable position to take advantage of the business potential between the US and Mexico Argentina s results were neutralized in the consolidation process, and its contribution to earnings is zero. Meanwhile, the Argentine balance sheet declined by 39% in 2002, the result of the peso s devaluation and lower business volumes. Santander Central Hispano Annual Report 2002

25 Latin America We know the markets where we operate and do what we know best: commercial banking. In the remaining countries where the Group operates, (Bolivia, Paraguay, Peru and Uruguay), and where neither the size of the financial system or the Group s market shares are sufficient to develop a universal banking model, we have reduced our presence to a more selective banking model, both geographically, with a smaller number of branches, as well as by segments, focusing on corporate and institutional business and on private banking, and exiting from large scale retail banking. In recognition of the achievements of the Santander Central Hispano Group in Latin America, the magazines Euromoney and The Banker named us «Best bank in Latin America» in We also won the prize for «Best bank in Chile» and «Best bank in Venezuela» from Euromoney and «Best bank in Mexico» from The Banker. Lastly, Banefe, Santander Chile s consumer credit division, won the Latin American Quality prize for This was the second year running that Santander Central Hispano won this prize as in 2001 it went to AFP Summa Bansander, also in Chile. 24

26 Asset Management and Insurance The Asset Management and Insurance division consists of all the Group s companies whose activity is the management of mutual and pension funds (above EUR 85 billion) and bancassurance. In Asset Management, Santander Central Hispano Gestión consolidated its leadership in Spain with a market share of 28.2% in mutual funds and 19.3% in individual pension funds. This growth stemmed from investment management appropriate to market trends and the launch of innovative products, which enabled us to attain market shares in Spain of more than 60% in especially active sectors such as real estate funds and in alternative funds. We are leaders in asset management in Spain, with a market share that continues to increase, and we have grown in Latin America. In 2002, Citibank España and Santander Central Hispano reached an agreement under which our Group acquired Citigroup s mutual and pension fund management entities in Spain, with total assets of EUR 987 million. This agreement is the result of a selection by Citigroup among the best Spanish fund managers and ratifies both the quality of our investment processes as well as the strength of our operational resources and administrative systems. The pace of our growth in mutual funds in Latin America continued to be brisk, particularly in Chile and Puerto Rico where growth was more than 20% and 99% in local currency terms, respectively, and in pension funds with increases of around 20% in local currency terms in Mexico, Colombia and Peru. The insurance unit in Spain registered 90% growth in life-risk premium income and 94% in home insurance, significantly improving their contribution to Group earnings (+83.5% in net operating revenue plus commissions paid). The number of policies in force in 2002 rose by 22% (more than 1 million contracts). 25 Santander Group strategy continues to focus on networks in both Spain and Latin America. The level of penetration of insurance products among banking customers in Latin America is 22%. The global contribution of bancassurance was more than EUR 155 million. Santander Central Hispano s goal in 2003 in Spain is to respond to the advisory needs that customers will seek within the new regulatory framework, under which movement between funds and between fund managers will become easier, and to take advantage of the opportunities this new situations offers. Insurance business registered strong expansion in volume, both in Spain and Latin America Santander Central Hispano Annual Report 2002