Nota de Resultados

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Nota de Resultados
Mexico Earnings Report
GRUPO FINANCIERO SANTANDER RECORDS NET INCOME OF
Ps 4,392 MILLION DURING THE FIRST HALF OF 2006
•
Grupo Financiero Santander (the “Group”) recorded net income of Ps 4,392 million during the first
half of 2006, coming in 22% above net income registered during the first half of 2005.
•
During the second quarter of 2006, Group earnings totaled Ps 2,247 million, up 15% and 5% vs.
2Q05 and 1Q06 levels, respectively.
•
Net interest income grew 33% during the first six months of 2006 as compared to the same yearearlier period, as growth in loans (mainly consumer loans) and demand deposits more than offset
declining interest rates.
•
Commissions and fees were up 5% as a result of stronger commercial activity and increased
transactions over the past twelve months.
•
Non-interest expense rose 8% to support increased commercial activity.
•
Based on the above, cumulative operating income as of the first half of 2006 rose 32% as compared
to the same year-earlier period.
•
Business volumes (total loans + deposits) grew 18% thanks to stronger customer activity and the
added boost in commercial activity.
•
Total loans ex-IPAB note rose 16% from 1H05 to 1H06, rising 8% on a quarterly basis.
•
Funding (deposits + mutual funds) grew 19%, with a 14% increase in demand deposits.
•
Past-due loans accounted for 0.8% of total loans, while reserve coverage ended at 214% of past-due
loans.
•
Banco Santander's capitalization ratio stood at 14.3% as of June 2006.
Figures in millions of Mexican pesos, expressed in constant prices as of June 2006, with growth figures stated in real
terms unless otherwise explicitly stated.
Investor Relations
Juan Carlos Antonovich
(5255) 52578204
[email protected]
www.santander.com.mx
Juan Salles
(5255) 5269 2719
[email protected]
1
Mexico City, July 28, 2006. Today, Grupo Financiero Santander, an affiliate of Grupo Santander,
announced its results for the first half of 2006.
The Group recorded cumulative net income of Ps 4,392 million as of the first half of 2006, up 22% vs. net
income registered as of the first half of 2005.
During the second quarter of 2006, Group net income totaled Ps 2,247 million, representing 15% and 5%
increases as compared to earnings recorded during the second quarter of 2005 and the first quarter of
2006, respectively.
Commercial Activity and Market Share
2005
June
March
June
Deposits + Funds
262,469
292,213
312,396
Total Loans (w/o IPAB)
139,440
149,528
162,247
18,519
24,896
29,611
Credit Card Portfolio
2006
Market
Share
16.7
YoY Change
Annual Market Share
Growth
bp.
19.0%
60
15.6
16.4%
(70)
17.3
59.9%
20
Mutual Funds
75,176
100,427
101,796
16.7
35.4%
(60)
Total Business
401,909
441,741
474,642
16.3
18.1%
10
Pension Funds
42,877
43,338
42,738
7.0
-0.1%
(100)
Commercial Activity:
Business volumes, including total loans plus deposits, were up by almost Ps 73,000 million over the past
twelve months, growing 18%.
The number of clients rose 12% to 7 million as of the first half of 2006, with over 10 million debit and credit
cards and more than 175 thousand mutual fund agreements. The number of transactions per month grew
25% on a yearly basis, most notably at alternate channels, which rose 35% and accounted for 78% of total
transactions.
The Credit Card business outperformed the market during the second quarter of the year. Total credit card
loans grew by more than Ps 4,700 million during the quarter, ending at Ps 29,611 million as of June 2006,
for a YoY 60% increase, allowing market quota to end the period at 17.3%.
Regarding new accounts opened, Santander broke the record again with 651,000 new cards placed during
the second quarter of 2006, for a total of almost 3.9 million cards as of the first half of the year. During the
first six months of the year, Santander placed over 1 million new cards in the market.
During 2Q06, total billing rose to Ps 17,548 million, representing over 57% growth as compared to the same
year-earlier period. On a cumulative basis, billing exceeded the Ps 31,000 million mark during the first half
of the year, coming in even higher than full-year 2005 figures.
2
The Consumer Loans business also hit a record high in terms of loan extensions, with over 110,000 loans
extended during the second quarter of the year, for a total worth of over Ps 4,300 million. On a cumulative
basis, loans worth a total of Ps 6,900 million were extended, again coming in above full-year 2005 levels.
As of June 30, 2006, total consumer loans (excluding credit cards) grew 79% vs. June 2005, to end at a
total of Ps 9,791 million.
Activities connected with Small- and Medium-Sized Companies (Pymes) recorded positive commercial
results during the second quarter, with 5% and 3% increases in demand deposits and deposits plus mutual
funds, respectively. Commercial loan growth came in at a 24-month record high of 17%. As regards
commercial processing and delivery, two new initiatives were implemented this quarter, aimed at positioning
our brand as the market leader in terms of competitiveness and response time in Pymes loan extensions.
Such initiatives consisted of optimizing and reducing by 60% the documentation required for loan approval,
and the coming on line of the Pymes Factory to lower the network's administrative burden and provide funds
to customers in only two-days time.
Mortgage loans recorded their best quarter yet in terms of new mortgage loan volumes (up by 2,300) since
new mortgages started being extended again in 2001. Modifying agreements were also placed in the
market, allowing customers who acquired their mortgage loans at higher rates in pesos during previous
years to sign an agreement whereby they will benefit from the same rates, terms, and conditions currently
offered in the open market. This same fixed-rate product with rewards for timely payment is also being
offered to our UDI clients, allowing for a fixed outstanding balance in pesos, the early encashment of the
Punto Final Debtor Support Program discount benefits, and greater certainty in terms of fixed monthly
payments.
In Mutual Funds, monthly funding remained at Ps 2,800 million on average, despite strong market volatility.
As of the second quarter of the year, assets totaled Ps 101,796 million, representing 35% growth in funding
on an inter-annual basis.
Santander remains as the second largest mutual fund manager in the Funds for Individuals segment. As
mutual fund performance and product innovation drove positive results for Santander Asset Management
during 1H06, customers earned competitive yields as compared to other funds in the market during the
period.
During the first half of 2006, two new Private Banking-oriented mutual funds were launched to complement
the “ST&ER Family of Funds”: The STERIN1, an international long-term debt fund, and the STERASI equity
fund, which allows for diversification via investments in Asian companies.
On the other hand, the PREMIER Fund, which Santander began marketing in early 2006, is a Fund of
Funds aimed at the Premier and Banking Plus segments that serves to fulfill an asset diversification and
allocation strategy by investing its assets in a series of Funds belonging to the "ST&ER Family of Funds”.
With respect to Global Wholesale Banking, Santander has been recognized by the Ministry of Finance and
Public Credit (in Spanish, Secretaría de Hacienda and Crédito Público or SHCP) as the leader of the FixedIncome Market Makers Program, with an index market quota of 21%. This program was created to increase
the liquidity and depth of the secondary Federal Government debt market. Market makers are evaluated on
an ongoing basis by the SHCP according to their trading activity with government securities.
Other segments led by Santander included:
3
1. The Organized Derivatives Market—MEXDER—with Santander boasting the strongest trading levels
in Interbank Equilibrium Interest Rate (TIIE) futures, Treasury Certificates (Cetes), Price and
Quotations Index (IPC), and M10 Notes during the first half of 2006.
2. FX trading volumes, with an 18.4% quota as of May 2006, according to the last report issued by the
Central Bank.
3. Infrastructure Project Financing and Advisory, a segment with strong growth prospects in Mexico. As
an example, negotiations were closed on two different projects worth US$ 150 million:
• First "Service Provision Project" (in Spanish, Proyectos para Prestación de Servicios or PPS)
for the Irapuato-La Piedad Highway, belonging to a program implemented by the Mexican
Government to build and execute several different projects in the highway, education and
health sectors
• PEMEX Nitrogen Plant Project
4. Santander served as "Lead Underwriter" for the Stock Market Certificates issued by "Telefónica
Móvil" worth a total of Ps 6,500 million.
During the second quarter of the year, Middle Market Banking showed strong dynamics across all
business lines. Funding rose 17.6% on an inter-annual basis, with strong increases in demand deposits,
directly attributable to higher transactionality levels from current and new clients, as well as 37.9% YoY
growth in mutual funds. Total loans were up 37.5% YoY, due to loan management efforts resulting from
business orientation meetings.
Universia – Universidades Program: Continuing with Grupo Santander México's commitment, a Universia
Classroom was donated to the Banking and Commercial School (in Spanish, Escuela Bancaria y Comercial
or EBC) for the development of high-technology multimedia classrooms, allowing both students and
teachers to further their education and professional development. Universia Directors and Deans who are
also members of the Board attended the Eighth Meeting of Universia's Board of Directors. During this
meeting, attendants confirmed the program's outstanding results and also outlined significant commitments
regarding their joint participation with member Universities.
Grupo Financiero Santander - Main Figures
Net Income
2Q05
1Q06
2Q06
1S05
1S06
YoY Change
1,960
2,145
2,247
3,594
4,392
22.2%
ROE
22.0%
19.9%
19.7%
20.4%
19.8%
(60bp)
Efficiency Ratio
45.7%
39.0%
42.8%
45.8%
40.9%
(490pb)
Commissions / Expenses
67.9%
68.8%
65.7%
69.9%
67.2%
(270pb)
0.8%
0.7%
0.8%
0.8%
0.8%
0pb
272.8%
274.1%
214.2%
272.8%
214.2%
(5,860pb)
11.9%
21.5%
14.3%
11.9%
14.3%
240pb
Past due Loans Ratio
Coverage Ratio
Capitalization Ratio
4
Financial Results:
This was a good quarter for Santander, as commercial dynamics translated into increased funding and loan
volumes, as well as strong results across all of Santander's businesses, offsetting the downward trend in
interest rates observed over the past twelve months.
On a cumulative basis, net interest income w/o repos or monetary gains/losses (repomo) rose 28% during
the first half of 2006 as compared to the same year-earlier period, and 31% in 2Q06.
Higher business volumes and number of transactions led to 12% YoY growth in cumulative banking service
commissions (excluding Afore results).
On a cumulative basis, 1H06 trading results came in at a positive Ps 225 million. In 2Q06, however, the
negative impact on financial instrument valuations caused by volatility in long-term interest rates led to Ps
285 million in trading losses during this period.
Cumulative 1H06 non-interest expenses were up 8% as compared to 1H05, associated with Santander's
commercial business expansion and increases in transactionality levels, sales force and infrastructure. On a
quarterly basis, non-interest expenses rose 3%.
As of June 2006, cumulative and quarterly operating income grew 31% and 25% vs. 1H05 and 2Q05,
respectively.
Past-due loans represented 0.8% of total loans as of June 2006, while reserve coverage ended the period
at 214%, confirming the quality of Group assets.
Banco Santander's capitalization ratio stood at 14.3% as of June 30, 2006.
Results from Subsidiaries
Grupo Financiero Santander
Net Income by Type of Business
Pesos in millions
YoY
Banks and Afore
2Q05
1Q06
2Q06
1S05
1S06
Change
1,887
2,032
2,089
3,648
4,121
13.0%
Brokerage House
14
42
70
(100)
112
212.2%
Holding and other Subsidiaries 1/
59
71
88
46
159
245.6%
1,960
2,145
2,247
3,594
4,392
22.2%
Grupo Financiero Santander
1/ Mutual Fund Management, Insurance and Holding Companies.
Banco Santander reported cumulative net earnings of Ps 4,121 million as of the first half of 2006. This figure
represents a 13% increase as compared to the same year-earlier period.
Afore Santander, a subsidiary of Banco Santander, recorded net earnings of Ps 190 million as of the first six
months of the year. Afore Santander manages resources for a total worth of Ps 42,829 million and has 3.0
million affiliates.
5
Highlights
• Ratings
On May 25, 2006, the rating agency Moody’s Investor Service upgraded its rating on Banco Santander's
foreign currency, unsecured senior debt from “A1” to “A2”, with a stable outlook, following the publication of
Moody's revised country ceiling policy.
On May 30, 2006, Standard & Poor’s confirmed Banco Santander S.A.'s foreign currency, long- and shortterm counterparty credit and CD ratings of ‘BBB’ and ‘A-3’, respectively. Standard & Poor’s also confirmed
local currency, long- and short-term counterparty ratings of ‘BBB+’ and ‘A-2’, respectively, as well as
national scale -CaVal- long- and short-term ratings of ‘mxAAA’ and ‘mxA-1+’, respectively. The outlook is
stable.
Grupo Financiero Santander - Main
Business Figures
YoY
2005
2006
Change
June
March
June
Total Assets
337,076
381,133
432,966
28.4%
Total Loan Portfolio without IPAB
139,440
149,528
162,247
16.4%
Retail Deposits
187,293
191,786
210,600
12.4%
81,387
84,177
95,657
17.5%
105,906
107,609
114,943
8.5%
Mutual Funds
75,176
100,427
101,796
35.4%
Pension Funds
42,877
43,338
42,738
-0.1%
-Demand deposits*
-Time deposits**
Branches
914
913
917
0.3%
2,739
3,132
3,227
17.8%
12,197
12,405
12,862
5.5%
Clients
6,215,399
6,499,495
* Excluding Fobaproa checking accounts and tax collections. ** Treasury terms are not included
6,991,059
12.5%
ATM's
Employees
6
Santander (SAN.MC, STD.N) Is the largest bank in the Euro Zone by market capitalization and one of the
largest worldwide. Founded in 1857, Santander has €818,100 million in assets and €976,500 million in
managed funds, 67 million customers, 10,300 offices and a presence in 40 countries. It is the largest
financial group in Spain and Latin America, and is a major player elsewhere in Europe, including the United
Kingdom through its Abbey subsidiary and Portugal, where it is the third largest banking group. Through
Santander Consumer Finance, it also operates a leading consumer finance franchise in Germany, Italy,
Spain and nine other European countries. As of the first half of 2006, Santander recorded €3,216 million in
net attributable profits, 26% more than in the same period of the previous year.
In Latin America, Santander manages over US$200 billion in business volumes (loans, deposits, mutual
funds, pension funds and managed funds) through 4,200 offices. As of the first half of 2006, Santander
recorded in Latin America US$1,409 million in net attributable income, 21% higher than in the prior year.
We, the undersigned, hereby state under oath that, within the scope of our respective duties, we have prepared the
information associated with Grupo Financiero Santander presented herein, and that, to the best of our knowledge,
such information reasonably reflects the Group's situation.
MARCOS A. MARTINEZ GAVICA
CARLOS A. LOPEZ GALAN
CEO
CFO
JESUS GONZALEZ DEL REAL
JOSE ALBERTO ZAMORANO HERNANDEZ
Executive Comptroller
Executive Auditing Director
The financial information presented in this report is derived from unaudited financial statements prepared according to Mexican regulatory principles
and regulations set forth by he National Banking and Securities Commission (in Spanish, Comisión Nacional Bancaria y de Valores or CNBV) and
does not represent financial positions, operating results or other information relating to the generally accepted accounting principles of the United
States of America (U.S. GAAP). This financial information has been prepared pursuant to the General Provisions Applicable to Financial Information
of Financial Group Holding Corporations, subject to the oversight of the National Banking and Securities Commission and published in the Official
Gazette on April 27, 2005. All figures included herein are expressed in constant pesos as of June 30, 2006. Variations are also stated in real terms,
discounting the effect of inflation. The exchange rate used for translating pesos into US dollars is P$11.2723/US$1.
7
Income Statement
Comments on Santander's financial statements are based on the Financial Group's consolidated figures.
Grupo Financiero Santander recorded net earnings of Ps 4,392 million during the first half of 2006, representing 22%
growth as compared to the first half of 2005.
For the second quarter of 2006, the Group reported earnings of Ps 2,247 million, coming in 15% and 5% above 2Q05
and 1Q06 levels, respectively.
Grupo Santander's positive results are a consequence of stronger commercial activity from clients, increased
transactions, higher funding and loan volumes, and efficient resource management.
Santander's operating income for the first six months of the year rose 32%, and also grew 25% in 2Q06 vs. 2Q05.
Grupo Financiero Santander
Net Income
Constant pesos in millions of June 30, 2006
Quarter
Net Interest Income
Provisions for Loan Losses
January- June
2Q05
1Q06
2Q06
2005
2006
4,323
3,985
4,858
6,637
8,843
(48)
(351)
(378)
(90)
(729)
Adjusted Net Interest Income
4,275
3,634
4,480
6,547
8,114
Commissions and Fees
1,653
1,789
1,775
3,392
3,564
Trading Income
(794)
512
(287)
143
225
Operating Income
5,134
5,935
5,968
10,082
11,903
(2,918)
(3,091)
(3,198)
(5,814)
(6,289)
2,216
2,844
2,770
4,268
5,614
106
(290)
13
30
(277)
(385)
(455)
(596)
(759)
(1,051)
Non Interest Expense
Net Operating Income
Other Income (Expense)
Income Tax
Subsidiaries Results
Net Income
23
46
60
55
106
1,960
2,145
2,247
3,594
4,392
8
Net Interest Income
During the first half of 2006, Grupo Santander's net interest income w/o repos or monetary gains/losses totaled Ps
8,410 million, up 28% as compared to the same year-earlier period. This was largely attributable to stronger total loan
volumes, improvements in loan portfolio composition with an increased contribution of consumer loans to total loans
and higher demand deposits, the combination of which helped offset the decline in interest rates observed over the
past twelve months.
During the second quarter of 2006, net interest income grew 31% as compared to the second quarter of 2005.
Grupo Financiero Santander
Net Interest Income
Constant pesos in millions of June 30, 2006
Quarter
January- June
2Q05
1Q06
2Q06
2005
2006
Interest and Yield on Loans
4,918
4,827
5,214
9,432
10,041
Interest and Yield on Securities
1,777
1,540
986
3,300
2,526
889
1,010
1,341
1,730
2,351
Interest on Funds Available
Other
42
47
44
77
91
Interest Income
7,626
7,424
7,585
14,539
15,009
Demand Deposits
(365)
(465)
(480)
(669)
(945)
Term Deposits
(2,762)
(2,472)
(2,267)
(5,157)
(4,739)
Loans to Banks and Other Organizations
(1,186)
(326)
(487)
(2,108)
(813)
(36)
(45)
(54)
(49)
(99)
Interest Expense of Subordinate Debentures
Other
Interest Expense
Net Interest Income w/o Repos
Repo Income
0
(3)
0
0
(3)
(4,349)
(3,311)
(3,288)
(7,983)
(6,599)
3,277
4,113
4,297
6,556
8,410
5,491
4,581
3,962
8,359
8,543
(4,302)
(4,336)
(3,432)
(7,868)
(7,768)
Repo Margin
1,189
245
530
491
775
Net Interest Income before Repomo
4,466
4,358
4,827
7,047
9,185
Monetary resorts (Repomo)
(143)
(373)
31
(410)
(342)
Net Interest Income
4,323
3,985
4,858
6,637
8,843
Repo Expense
9
Non-Interest Income
Net Fees and Commissions
Net commissions for the first half of the year rose 5% as compared to the first half of last year. Banking commissions
grew 12%, while Afore commissions declined 26% during the period in reference.
The inter-annual increase in banking commissions was largely due to increases in credit card, collection and payment,
and mutual fund commissions. Another contributing factor was the 35% YoY increase in transaction volumes through
alternate channels.
In 2Q06, Afore commissions declined due to a one-time contribution made during the quarter and lower rates charged
to affiliates.
Grupo Financiero Santander
Commissions and Fees
Constant pesos in millions of June 30, 2006
Quarter
January- June
2Q05
1Q06
2Q06
2005
2006
Credit Card
415
483
501
858
984
Handling Fees
262
254
264
502
518
Collections and payments
139
176
165
291
341
Mutual Funds
245
290
285
474
575
Credit Fees
105
87
114
198
201
72
84
92
135
176
160
129
169
296
298
Insurance
Other Commissions
1,398
1,503
1,590
2,754
3,093
Afore
Banking Commissions and Fees
255
286
185
638
471
Total
1,653
1,789
1,775
3,392
3,564
10
Trading Income
As of the first half of 2006, trading income came in at a positive Ps 225 million, as security trading gains were partially
affected by losses in valuation results.
Market volatility and higher long-term interest rates had a negative impact on repo transaction and debt instrument
valuation results in 2Q06 and 1Q06, respectively.
Grupo Financiero Santander
Trading income
Constant pesos in millions of June 30, 2006
Quarterly
2Q05
1Q06
January- June
2Q06
2005
2006
Valuation
Derivatives
111
791
394
1,176
1,185
(247)
1,139
(2,108)
(453)
(969)
76
374
(322)
40
52
Debt Instruments
(253)
(1,003)
16
(264)
(987)
Security Lending
182
(35)
22
185
(13)
(131)
1,266
(1,998)
684
(732)
87
165
4
(514)
169
Repos
Stock
Subtotal
Securities Trading
Foreign Currencies
Derivatives
(792)
(847)
(675)
(132)
(1,522)
Repo
0
(1,053)
1,786
0
733
Stock
33
(207)
376
81
169
9
1,186
222
24
1,408
Subtotal
(663)
(756)
1,713
(541)
957
Total
(794)
510
(285)
143
225
Debt Instruments
The financial instrument portfolio grew 78% from March 2006 to June 2006, on the back of increases in tradeable
government and bank securities as well as government securities available for sale over the past three months. As of
June 2006, the financial instrument portfolio was broken down as follows: 82% in government securities, 11% in bank
securities, 2% in stocks, and 4% in other instruments.
11
Non-Interest Expense
During the first six months of 2006, non-interest expense rose 8% vs. the first six months of 2005. This increase in the
expense base is explained by the Group's commercial activity expansion, which has called for stronger commercial
and sales forces, increased infrastructure, and increases in the number of transactions.
During 2Q06, non-interest expense grew 4%, with a 7.4% quarterly increase in credit card-related operating expenses
due to both the success of this product and increases in billing and number of cards, and 4.7% growth in administrative
and operating expenses.
The increase in yearly contributions to the IPAB was attributable to the Group's higher deposit base.
Efficiency (operating expenses / total income) improved by 490 bp over the past twelve months, to end at 40.9% as of
1H06.
Grupo Financiero Santander
Non Interest Expense
Constant pesos in millions of June 30, 2006
Quarterly
January- June
2Q05
1Q06
2Q06
2005
2006
Compensation & Benefits
1,152
1,234
1,274
2,316
2,508
Administrative & Operation Expenses
1,180
1,255
1,314
2,358
2,569
Credit Card Operation
101
108
116
176
224
Operating Expenses
2,433
2,597
2,704
4,850
5,301
Contributions to IPAB
267
271
264
526
535
Depreciation & Amortization
218
223
230
438
453
2,918
3,091
3,198
5,814
6,289
Non Interest Expense
Other Income / Expense
In 1H06, Santander recorded a negative Ps 277 million under other net income/expense, due to the combined result of
Ps 1,651 million in income and Ps 1,928 million in expenses. During 2Q06 alone, the result recorded under this line
item was net income of Ps 13 million.
12
Balance Sheet
Loans
As of June 30, 2006, Santander's total loans ex-IPAB note amounted to Ps 162,247 million, rising 16% and 8% vs.
June 30, 2005 and March 31, 2006, respectively, on the back of QoQ and YoY growth across the most profitable
segments:
•
Consumer loans were up by 64% on an inter-annual basis, with 60% and 79% increases in credit cards and
other consumer loans (such as personal and payroll loans), respectively.
•
New mortgage loans doubled, hitting an all-time record high in 2Q06 in terms of new mortgage loan
extensions.
•
Commercial loans grew 55%, with 50% and 33% increases in Pymes and company loans, respectively.
Loan portfolio composition and yield have steadily improved quarter after quarter, with consumer loans accounting for
24% of total loans ex-IPAB Note as of June 2006.
Grupo Financiero Santander
Loan Portfolio by Type of Loan
Constant pesos in millions of June 30, 2006
2005
2006
June
%
March
%
June
%
Commercial Loans
42,098
25.8
56,130
32.7
65,359
35.4
Consumer Loans
23,993
14.7
32,136
18.7
39,402
21.4
Credit Cards
18,519
11.4
24,896
14.5
29,611
16.1
5,474
3.4
7,240
4.2
9,791
5.3
4,364
2.7
7,622
4.4
8,936
4.8
Other
Mortgage Loans
New Mortgage
IPAB Loans
Government Loans
4,364
2.7
7,622
4.4
8,936
4.8
19,527
12.0
18,910
11.0
18,936
10.3
34,899
21.4
27,019
15.7
22,421
12.2
124,882
76.6
141,816
82.5
155,053
84.1
46
0.0
2
0.0
1
0.0
States and Municipal Government
2,003
1.2
1,679
1.0
1,648
0.9
Mortgage Loans
4,137
2.5
3,774
2.2
3,648
2.0
6,186
4.0
5,455
3.2
5,297
2.9
Total
UDI-restructured loans:
National Industry
Total
Low-income Housing
2,268
1.4
1,857
1.1
1,735
0.9
Other Restructured Loans
6,103
3.8
401
0.2
161
0.1
139,440
85.5
149,528
87.0
162,247
88.0
23,628
14.5
22,371
13.0
22,187
12.0
163,068
100.0
171,899
100.0
184,434
100.0
Total Loan Portfolio w/o IPAB
Loans to Fobaproa / IPAB
Total Loan Portfolio
13
Past-Due Loans and Reserve Coverage
Santander's past-due loans totaled Ps 1,549 million as of June 30, 2006, up by Ps 183 million as compared to the
same year-earlier period and by Ps 348 million as compared to March 31, 2006. Considering total loan growth
observed over the past twelve months, these figures evidence the Group's superb credit risk management.
As of June 30, 2006, reserve coverage (reserves / past-due loans) ended at 214%, while the past-due loan ratio (past
due loans / total loans) improved to 0.8%.
Grupo Financiero Santander
Asset Quality
Constant pesos in millions of June 30, 2006
2005
June
2006
% Change
March
June
Jun. 05
Mar. 06
Total Loan Portfolio (without IPAB)
139,440
149,528
162,247
16.4%
8.5%
Performing Loans
138,074
148,327
160,698
16.4%
8.3%
1,366
1,201
1,549
13.4%
29.0%
0.8
0.7
0.8
0.0
0.1
Past Due Loans
Past Due Loans Ratio (with IPAB)
Past Due Loans Ratio (without IPAB)
Allowances to Past Due Loans
1.0
0.8
1.0
(0.0)
0.2
272.8
274.1
214.2
(58.6)
(59.8)
Allowances for Loan Losses
During the first six months of 2006, Santander created allowances for loan losses in the amount of Ps 1,071 million. Of
this total, Ps 729 million were due to the creation of reserves, Ps 319 million to recoveries, and Ps 23 million to forex
and other effects. Charge-offs, debt relieves, and acquittals were applied in the amount of Ps 1,020 million, broken
down as follows: 19.8% in commercial loans, 6.7% in mortgage loans, 56.4% in credit cards, and the remaining 17.1%
in consumer loans.
Grupo Financiero Santander
Allowances for Loan Losses
Nominal pesos in millions
Allowances for Loan Losses as of December 31, 2005
3,377
Plus:
Allowances created through income statement
729
Recoveries
319
Exchange Rate Effect
22
Other
1
Minus:
Charge-offs, debt relieves and acquittals
(1,020)
Goodwill release
(73)
Support Programs Cost
(37)
Allowances for Loan Losses as of June 30, 2006
3,318
14
Capitalization Ratio
As of June 30, 2006, Banco Santander's capitalization ratio ended at 14.3%, dropping 720 bp as compared to March
2006, while capitalization ratio for Tier I capital stood at 14.1%. Both ratios take account of both credit and market
risk-weighted assets.
The quarterly reduction in Santander's capitalization ratio was due mainly to an increase in risk-weighted assets, which
in turn called for an increase in capital requirements. Credit risk-weighted assets grew as a result of increases in total
loans, while market risk-weighted assets rose mainly as a result of transactions performed at nominal interest rates in
pesos with positions in debt instruments and futures.
Beginning on January 2, 2006, capitalization ratio is computed pursuant to the amended capitalization rules applicable
to multiple banking institutions. As such, figures for prior periods are not comparable.
As of May 2006, Banco Santander is classified as Category I, pursuant to the general rules set forth in Article 134bis of
the Credit Institutions Law (in Spanish, Ley de Instituciones de Crédito).
Banco Santander
Risk Weighted Capital Ratios
Pesos in Millions
2005
2006
June
March
June
Tier 1 Capital
36,448
42,748
45,023
Tier 2 Capital
538
643
720
36,985
43,391
45,743
- Credit Risks
111,355
132,456
147,734
- Credit + Market Risks
311,794
202,058
319,190
Tier 1 / Risk Adjusted Assets (%)
32.7
32.3
30.5
Tier 2 / Risk Adjusted Assets (%)
0.5
0.5
0.5
33.2
32.8
31.0
Tier 1 / Risk Adjusted Assets (%)
11.7
21.2
14.1
Tier 2 / Risk Adjusted Assets (%)
0.2
0.3
0.2
11.9
21.5
14.3
Risk Based Capital
Risk Adjusted Assets
Credit Risks:
Risk Based Capital / Risk Adjusted Assets (%)
Credit and Market Risks:
Risk Based Capital / Risk Adjusted Assets (%)
15
Consolidated Financial Statements with its Subsidiaries and Udi Trust
Grupo Financiero Santander
•
•
•
•
•
•
•
•
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Stockholders Equity
Consolidated Statement of Changes in Financial Position
Earnings per Share
Statement of Income by Business Segment
Appendix 1. Loan Portfolio Grading
Appendix 2. Financial Ratios
Notes to Consolidated Financial Statements of Grupo Financiero Santander
The information included in this report can be obtained at: www.santander.com.mx or in the
following direct link:
http://www.santander.com/publishapp/servlet/GestionFront?comando=2&idsite=10159322174320&idcategoria=10185266015770&id
cnt=&n=4
There exists also information of Santander in the website of CNBV: www.cnbv.gob.mx
Changes in accounting practices entering into effect as of 2004
The National Banking and Securities Commission (in Spanish, Comisión Nacional Bancaria y de Valores or CNBV) issued the “General Provisions Applicable to Loan
Portfolio Grading Methods Used by Credit Institutions", which entered into effect as of December 1, 2004. These provisions establish, among other things, the changes in
the method used to valuate allowances for loan losses and reserves for awarded assets.
16
Grupo Financiero Santander
Consolidated Balance Sheet
Constant pesos in millions of June 30, 2006
2005
2006
Mar.
Jun.
Sep.
Dec.
Mar.
Jun.
Funds available
70,341
58,345
65,230
72,632
72,549
75,309
Financial instruments
81,907
80,866
99,442
91,669
58,872
104,866
Securities, for trade
23,082
22,312
31,265
32,723
13,885
27,463
Securities, available for sale
Securities, held until maturity
38,042
20,783
38,727
19,827
48,464
19,713
52,921
6,025
39,893
5,094
72,280
5,123
9,127
11,687
17,290
26,084
27,241
27,132
33
20
66
0
144
0
1,018
99
851
56
554
102
9,074
11,621
17,146
24,967
26,334
26,476
Commercial loans
47,836
49,216
51,960
53,880
56,680
65,623
Loans to financial intermediaries
Consumer loans
165
20,654
485
23,512
1,417
26,155
1,351
28,482
1,229
31,472
1,234
38,432
Housing loans
Government loans
Loans without IPAB
9,977
56,431
135,063
10,435
54,426
138,074
10,967
53,560
144,059
12,371
47,096
143,180
13,017
45,929
148,327
14,053
41,356
160,698
IPAB
Total current loan portfolio
23,766
158,829
23,628
161,702
23,348
167,407
22,848
166,028
22,371
170,698
22,187
182,885
Assets
Securities and derivative operations
Forward contracts receivable
Securities receivable on loan transactions
Derivative instruments
Current loan portfolio
Past due loan portfolio
Commercial loans
515
547
545
533
299
310
327
401
2
1,245
482
335
2
1,366
606
321
2
1,474
739
271
2
1,545
663
237
2
1,201
970
267
2
1,549
Total loan portfolio
160,074
163,068
168,881
167,573
171,899
184,434
Allowance for loan losses (-)
Loan portfolio, net
(3,919)
156,155
(3,724)
159,344
(3,506)
165,375
(3,412)
164,161
(3,293)
168,606
(3,318)
181,116
14,986
4,790
139
1,518
1,993
16,674
4,689
138
1,541
1,990
25,448
4,593
150
1,527
2,042
14,128
4,646
109
1,608
905
44,449
4,594
105
1,682
549
35,619
4,516
128
1,573
210
1,148
827
990
812
1,100
795
1,406
779
1,469
1,015
1,501
996
342,931
337,076
382,992
378,127
381,131
432,966
Consumer loans
Housing loans
Other past due loans
Total past due loan portfolio
Other receivables, net
Property, furniture and fixtures, net
Foreclosed assets
Long-term investment in equity securities
Deferred taxes
Other assets, deferred charges and intangibles
Goodwill
Total Assets
17
Grupo Financiero Santander
Consolidated Balance Sheet
Constant pesos in millions of June 30, 2006
2005
2006
Mar.
Jun.
Sep.
Dec.
Mar.
Jun.
257,770
Liabilities & stockholders' equity
222,279
210,702
216,996
240,744
235,887
Demand deposits
Funding
78,969
83,841
77,165
88,024
89,563
103,700
Retail time deposits
Money market time deposits
99,685
43,625
103,363
23,498
103,385
36,446
112,942
39,778
105,876
40,448
113,926
40,144
Bank and other loans
41,585
40,392
57,557
26,886
16,836
28,428
Call loans
Short-term loans
Long-term loans
11,797
26,246
3,542
6,263
30,797
3,332
21,421
32,948
3,188
4,518
19,338
3,030
3,673
10,344
2,819
10,703
14,992
2,733
Securities and derivative operations
Repurchase agreements
16,931
274
17,409
558
24,606
139
39,937
1,492
35,942
181
37,508
1,975
8,438
8,219
6,590
10,261
7,932
16,535
11,149
27,296
9,888
25,873
9,663
25,870
Other payables
24,736
27,588
39,655
24,840
44,843
59,052
Income taxes and employee profit sharing
Sundry creditors and other payables
213
24,523
111
27,477
209
39,446
221
24,619
173
44,670
259
58,793
3,488
3,360
3,344
3,255
3,295
3,419
309,019
299,451
342,158
335,662
336,803
386,177
Securities deliverable under loan transactions
Derivative instruments
Subordinated debentures outstanding
Total Liabilities
Paid-in capital
29,806
29,806
29,806
29,806
29,806
29,806
Capital stock
Additional paid-in capital
28,252
1,554
28,252
1,554
28,252
1,554
28,252
1,554
28,252
1,554
28,252
1,554
Capital gains
4,106
7,819
11,028
12,659
14,522
16,983
Capital reserves
Prior year results
98
9,312
98
9,595
98
9,974
98
9,698
98
16,697
98
16,862
(1,998)
(4,704)
(76)
(76)
(524)
(4,704)
(80)
(80)
647
(4,704)
(107)
(107)
1,021
(4,704)
(109)
(109)
559
(4,704)
(106)
(106)
556
(4,704)
(106)
(106)
(167)
1,634
(168)
3,594
(168)
5,280
(176)
6,823
(176)
2,145
(125)
4,392
7
33,912
8
37,625
8
40,834
8
42,465
9
44,328
10
46,789
342,931
337,076
382,992
378,127
381,131
432,966
Surplus (deficit) from valuation of securities available for sale
Cumulative effect of restatement
Results from the holding of non monetary assets
Mark - to- market of long term investments in equity securities
Adjustments due to retirement benefits obligations
Net income
Minority interest
Total stockholders' equity
Liabilities & stockholders' equity
18
Grupo Financiero Santander
Consolidated Balance Sheet
Constant pesos in millions of June 30, 2006
2005
Mar.
Jun.
Sep.
Dec.
2006
Mar.
Jun.
Memorandum accounts
Customer current accounts
74
157
(287)
(92)
186
(144)
Customer cash balances
Customer transaction settlements
20
54
90
67
38
(325)
34
(126)
327
(141)
37
(181)
Customer securities
152,976
153,726
166,497
155,632
161,684
174,932
Customer securities held in custody
151,313
152,252
164,813
154,278
160,108
173,274
1,663
1,474
1,684
1,354
1,576
1,658
Transactions on behalf of customers
Transactions on clients' securities loans
38,400
328
34,067
411
36,691
571
26,907
240
34,713
142
35,560
220
Customer repurchase and resale agreements
Purchase transactions (option prices)
37,777
295
33,542
114
35,881
239
26,416
251
34,318
253
34,863
477
191,450
187,950
202,901
182,447
196,583
210,348
Securities and documents held in guaranty
Operation on behalf third parties
Own operations
1,078,657 1,235,060 1,343,009 1,651,929
Guarantees granted
Irrevocable lines of credit granted
Goods in trust or mandate
Goods in custody or administration
2
8,368
0
8,098
0
8,107
0
8,281
124,378
120,160
116,165
100,508
895,360 1,056,638 1,168,661 1,495,486
1,827,563 1,898,970
0
8,646
0
11,389
101,876
104,747
1,669,440 1,745,817
FOBAPROA operations - committed amounts
Not collected interest accrued of past due loan
20,932
16
21,348
20
21,455
0
19,505
0
19,750
0
9,739
0
Certificates of deposits in circulation
Securities delivered in custody
21
27,944
21
27,895
20
27,882
20
27,517
20
26,985
20
27,127
Securities delivered in guaranty
Own government sec. deposited in custody
44
713
93
300
2
200
4
98
5
333
8
(393)
Debt with contingency fund
Other contingent obligations
24
871
25
482
26
491
26
484
27
481
27
489
Repurchase agreements
Reselling party
Securities receivable under resale agreements
153,040
186,616
206,226
210,260
194,163
196,397
(Less) Resale agreements
Net
153,284
(244)
187,101
(485)
206,223
3
210,773
(513)
193,537
626
198,272
(1,875)
524
521
3
23,624
23,630
(6)
17,251
17,250
1
7,908
7,867
41
11,022
10,979
43
9,392
8,938
454
Repurchasing party
Repurchase agreements
(Less) Securities deliverable under repurchase agreements
Net
Total own operations
1,078,416 1,234,569 1,343,013 1,651,457
19
1,828,232 1,897,549
This Consolidated Accounting Statement, jointly with those of the financial entities and other corporations of the Financial Group that are subject to
consolidation, was prepared pursuant to the Accounting Criteria for Financial Group Controlling Corporations issued by the National Banking and
Securities Commission pursuant to the general and mandatory provisions set forth in article 30 of the Law to Regulate Financial Groups, which
provisions were consistently applied, reflecting the transactions effected by the controlling corporation and the financial entities and other
corporations of the financial group that are subject to consolidation up to the aforementioned date, which transactions were performed and valuated
in accordance with sound practices and applicable legal and administrative provisions.
Historical capital stock to date amount to P$ 19,657 million.
Under the permanent investments line item, the Insurance Company is valuated using the equity method.
The explanatory notes attached are part of this financial statement.
This Consolidated Accounting Statement was approved by the Board of Directors, at the responsibility of the undersigned thereof.
MARCOS A. MARTINEZ GAVICA
CARLOS A. LOPEZ GALAN
CEO
CFO
JESUS GONZALEZ DEL REAL
JOSE ALBERTO ZAMORANO HERNANDEZ
Chief Accounting Officer
Executive Vicepresident of Auditing
www.santander.com.mx
20
Grupo Financiero Santander
Consolidated Statement of Income
Constant pesos in millions of June 30, 2006
1Q
Interest income
2Q
9,781 13,117
Interest expense
Gains from monetary position, net (net financial
margin)
Net interest income before provisions
Provisions for loan losses, net
4Q
2005
YTD
Dec
22,898 12,899 13,500
49,297
6M05
3Q
(7,200) (8,651) (15,851) (9,342) (9,769) (34,962)
2006
2Q
6M06
12,005 11,547
1Q
23,552
(7,647) (6,720) (14,367)
(267)
(143)
(410)
(162)
(395)
(967)
(373)
31
(342)
2,314
4,323
6,637
3,395
3,336
13,368
3,985
4,858
8,843
(42)
(48)
(90)
(97)
(200)
(387)
(351)
(378)
(729)
Net interest income after provisions
2,272
4,275
6,547
3,298
3,136
12,981
3,634
4,480
8,114
Commissions (income)
2,298
2,278
4,576
2,407
2,395
9,378
2,533
2,598
5,131
Commissions (expenses)
(559)
(625)
(1,184)
(690)
(724)
(2,598)
(744)
(823)
(1,567)
937
(794)
143
388
581
1,112
512
(287)
225
4,948
5,134
10,082
5,403
5,388
20,873
5,935
5,968
11,903
(3,091) (3,198)
(6,289)
Trading income
Total operating income (net)
Administrative and promotion expenses
Operating income (loss)
(2,896) (2,918)
2,052
Other income
2,216
(5,814) (3,079) (3,281) (12,174)
4,268
2,324
2,107
8,699
2,844
2,770
5,614
817
371
1,188
412
197
1,797
1,143
508
1,651
Other expenses
(893)
(265)
(1,158)
(621)
(279)
(2,058)
(1,433)
(495)
(1,928)
Pre-tax Income
1,976
2,322
4,298
2,115
2,025
8,438
2,554
2,783
5,337
Income tax and employee profit sharing
(128)
(141)
(269)
(187)
(135)
(591)
(122)
(142)
(264)
Deferred income taxes
(246)
(244)
(490)
(283)
(369)
(1,142)
(333)
(454)
(787)
Income (loss) before subsidiaries results
1,602
1,937
3,539
1,645
1,521
6,705
2,099
2,187
4,286
32
23
55
41
22
118
46
60
106
1,634
1,960
3,594
1,686
1,543
6,823
2,145
2,247
4,392
Subsidiaries Results and minority interest
Net Income
“This Consolidated Income Statement, jointly with those of the financial entities and other corporations of the Financial Group that are subject to
consolidation, was prepared pursuant to the Accounting Criteria for Financial Group Controlling Corporations issued by the National Banking and
Securities Commission pursuant to the general and mandatory provisions set forth in article 30 of the Law to Regulate Financial Groups, which
provisions were consistently applied, reflecting all inflows and outflows derived from transactions effected by the controlling corporation and the
financial entities and other corporations of the Financial Group that are subject to consolidation up to the aforementioned date, which transactions
were performed and valuated in accordance with sound practices and applicable legal and administrative provisions.
The explanatory notes that are attached are part of this financial statement.
This Consolidated Income Statement was approved by the Board of Directors, at the responsibility of the undersigned thereof”.
MARCOS A. MARTINEZ GAVICA
CARLOS A. LOPEZ GALAN
CEO
CFO
JESUS GONZALEZ DEL REAL
JOSE ALBERTO ZAMORANO HERNANDEZ
Chief Accounting Officer
Executive Vicepresident of Auditing
www.santander.com.mx
21
Grupo Financiero Santander
Consolidated Statement of Changes in Stockholders' Equity
From January 1st. to June 30, 2006
Constant pesos in millions of June 30, 2006
Paid-in capital
CONCEPT
Capital
stock
BALANCES AS
OF DECEMBER
31, 2005
RESTATED IN
TERMS OF THE
PURCHASING
POWER OF THE
PESO AS OF
JUNE 30, 2006
28,252
Capital Gains
Additional
paid-in
capital
1,554
Capital
reserves
Retained
earnings
Surplus
(deficit)
from
valuation
of
securities
available
for sale
98
9,698
1,021
Cumulative
effect of
restatement
(4,704)
Results
from holding
non
monetary
assets
(109)
Adjustments
due to
retirement
benefits
obligations
(176)
Net
income
(loss)
6,823
Minority
Interest
Total
stockholders'
equity
8
42,465
0
0
MOVEMENTS INHERENT TO THE SHAREHOLDERS DECISION
Transfer of result
2005 to result of
prior years
TOTAL
6,823
0
0
0
6,823
(6,823)
0
0
0
0
(6,823)
0
MOVEMENTS FOR THE RECOGNITION OF THE INTEGRAL INCOME
Surplus (deficit)
from valuation of
securities
available for sale
Deferred taxes
applied to prior
year results
Recoveries on
loan reserves
previously applied
to prior year
results
Results from the
holding of non
monetary assets
Adjustments due
to retirement
benefits
obligations
Net income on
the current
period
Minority interest
on the current
period
TOTAL
BALANCES AS
OF JUNE 30,
2006
(465)
(465)
267
267
74
74
3
3
51
51
4,392
4,392
2
1
0
0
0
341
(465)
0
3
51
4,392
2
4,323
28,252
1,554
98
16,862
556
(4,704)
(106)
(125)
4,392
10
46,789
22
"This Statement of Changes in Consolidated Stockholders' Equity, jointly with those of the financial entities and other corporations of the financial
group that are subject to consolidation, was prepared pursuant to the Accounting Criteria for Financial Group Controlling Corporations issued by the
National Banking and Securities Commission pursuant to the general and mandatory provisions set forth in article 30 of the Law to Regulate
Financial Groups, which provisions were consistently applied, reflecting all movements in stockholders' equity accounts derived from transactions
effected by the controlling corporation and the financial entities and other corporations of the financial group that are subject to consolidation up to
the aforementioned date, which transactions were performed and valuated in accordance with sound practices and applicable legal and
administrative provisions.
The explanatory notes attached are part of this financial statement.
This statement of changes in stockholders' equity was approved by the Board of Directors at the responsibility of the undersigned thereof.”
MARCOS A. MARTINEZ GAVICA
CARLOS A. LOPEZ GALAN
CEO
CFO
JESUS GONZALEZ DEL REAL
JOSE ALBERTO ZAMORANO HERNANDEZ
Chief Accounting Officer
Executive Vicepresident of Auditing
www.santander..com.mx
23
Grupo Financiero Santander
Consolidated Statement of Changes in Financial Position
From January 1st. to June 30, 2006
Constant pesos in millions of June 30, 2006
OPERATING ACTIVITIES
Result of continued operations
Add
(Deduct)-Charges (credits) to income not requiring (providing) funds:
Depreciation and amortization
Provisions for loan losses
Gain (loss) from valuation at market
Equity in income of subsidiaries
Provision for foreclosed assets
Deferred taxes
Release of Cetes Especiales reserves
Funds provided by operations
CHANGES IN OPERATING ACCOUNTS:
Increase (decrease) in:
Financial instruments
Securities and derivative operations
Loan portfolio, net
Other receivables
Deferred taxes, net
Deferred charges and intangibles
Goodwill
Total deposits
Interbank and other loans
Other payable accounts
Subordinated debentures outstanding
Total funds provided by operations
4,393
453
729
733
(107)
2
786
(21)
6,968
(14,757)
(3,275)
(17,686)
(21,489)
(304)
(319)
(253)
17,025
1,542
34,610
164
2,226
FINANCING ACTIVITIES :
Increase (decrease) in:
Recovered of reserves previusly applied of results prior year
Labor obligations charged against equity
Deferred Taxes registration against prior year results
Minority interest
Funds provided by financing activities
73
51
267
1
392
INVESTING ACTIVITIES:
Increase (decrease) in:
Property, furniture and equipment
Foreclosed assets
Long-term investments in equity securities
Funds used in investing activities
(94)
(21)
174
59
Increase (decrease) in funds available
Funds available at beginning of period
Funds available at end of period
2,677
72,632
75,309
24
"This Consolidated Statement of Changes in Financial Condition, jointly with those of the financial entities and other corporations of the financial
group that are subject to consolidation, was prepared pursuant to the Accounting Criteria for Financial Group Controlling Corporations issued by the
National Banking and Securities Commission pursuant to the general and mandatory provisions set forth in article 30 of the Law to Regulate
Financial Groups, which provisions were consistently applied, reflecting all changes in financial condition effected by the controlling corporation and
the financial entities and other corporations of the financial group that are subject to consolidation up to the aforementioned date, which transactions
were performed and valuated in accordance with sound practices and applicable legal and administrative provisions.
The explanatory notes attached are part of this financial statement.
This Consolidated Statement of Changes in Financial Condition was approved by the Board of Directors at the responsibility of the undersigned
thereof."
We, the undersigned, hereby state under oath that, within the scope of our respective duties, we have prepared the information associated with
Grupo Financiero Santander presented herein, and that, to the best of our knowledge, such information reasonably reflects the Group’s situation.
MARCOS A. MARTINEZ GAVICA
CARLOS A. LOPEZ GALAN
CEO
CFO
JESUS GONZALEZ DEL REAL
JOSE ALBERTO ZAMORANO HERNANDEZ
Chief Accounting Officer
Executive Vicepresident of Auditing
www.santander.com.mx
25
Grupo Financiero Santander
Earnings per share and fully diluted earnings per share
- WITH CONTRIBUTIONSPesos in millions
July 2005 - June 2006
Earnings
Earnings per
ordinary share
7,660
Contributions
for future
capital
increases
-
Mandatory
convertible
subordinated
debentures
-
Diluted
earnings per
share
7,660
Add (subtract)
losses
(earnings):
-
Discontinued
operations,
extraordinary
items and
changes in
accounting
policies
-
Continued
fully diluted
earnings per
share
7,660
# Shares
Earnings
-weighted-
per share
July 2004 - June 2005
Earnings
# Shares
Earnings
-weighted-
per share
July 2003 - June 2004
Earnings
# Shares
Earnings
-weighted-
per share
5,199,170,147 1.47326146
6,704
5,199,170,147
1.28941270
5,596
4,981,476,657
1.12340846
5,199,170,147 1.47326146
6,704
5,199,170,147
1.28941270
5,596
4,981,476,657
1.12340846
4,981,476,657
1.15853860
3
5,199,170,147 1.47326146
175
6,707
5,199,170,147
26
1.28997336
5,771
Grupo Financiero Santander
Statement of Income by Business Segmentation
Constant pesos in millions of June 30, 2006
Commercial
Banking 1/
Wholesale
Banking 2/
Asset
Management
3/
Corporate
Activities
Net interest income before provisions
6,068
1,575
17
1,182
8,843
Provisions for loan losses, net
(759)
3
0
27
(729)
Net interest income after provisions
5,309
1,578
17
1,210
8,114
Net Comissions
2,954
218
496
(103)
3,564
90
(29)
5
159
225
8,354
1,766
517
1,265
11,903
(4,862)
(530)
(267)
(630)
(6,289)
Operating income
3,492
1,236
250
635
5,613
Other Income (Expenses), net
(109)
0
22
(191)
(277)
Pretax income
3,383
1,236
272
445
5,337
(1,016)
(334)
(82)
382
(1,051)
2,367
902
190
827
4,286
Subsidiaries Result
0
0
16
92
107
Minority interest
0
0
0
(1)
(1)
2,367
902
206
918
4,392
92,258
180,040
44,777
30,557
111
0
47,288
7,029
184,434
217,626
Trading income
Total operating income (net)
Administrative and promotion expenses
Total Taxes
Income before Subsidiaries Results
Net Income
Total
Balance sheet information
Loan portfolio
Client Deposits
1/
Includes Individuals, Small and Medium Companies, Companies and Institutions
2/
Includes Global Corporate Banking, treasury and investment banking
3/
Includes Pension Funds, Mutual Funds Management and Insurance Companies
27
Segment information has been prepared pursuant to Grupo Santander's secondary-level classification, based on the type of business conducted:
Commercial Banking
Includes all customer banking businesses, and is divided into the following segments: Individuals, Small- and Medium-Sized Companies (Pymes),
Companies, Institutions and Local Corporate Banking.
Global Wholesale Banking
This area reflects the yields derived from the Global Corporate Banking, Investment Banking and Treasury businesses.
Asset Management and Insurance
Includes the contribution of Investment Funds (after commissions are transferred to the distributing networks), Pension Funds (Afore) and Insurance
(net of commissions paid to Commercial Banking).
Corporate Activities
Includes assets and liabilities that are not commercially manageable, results from hedging positions and others. Although by definition, corporate
activities form part of Commercial Banking, these are separated in this exercise to reflect a clearer view of customer-related Commercial Banking
results.
28
Appendix 1
Loan Portfolio Grading
Grupo Financiero Santander
as of June 30, 2006
Pesos in Millions
Allowances for Loan Losses
Risk Level
Exempt Loans
Loan Portfolio
Commercial
Loans
Consumer
Loans
Mortgage
Loans
Total
Reserves
49,055
Grading
A
A-1
139,947
133,962
460
400
A-2
B
B-1
B-2
B-3
C
5,986
8,544
5,880
785
1,878
873
59
368
86
58
223
58
C-1
C-2
D
E
833
40
1,255
73
199,748
Total
179
45
683
175
80
623
283
32
373
42
16
100
73
718
0
92
0
910
73
1,058
1,356
248
2,662
Less:
Reserves Created
3,318
Surplus
656
Notes:
•
Figures on the grading and creation of reserves correspond to the last day of the month referred to in the Balance Sheet as
of June 30, 2006.
•
The loan portfolio is graded pursuant to the loan portfolio grading rules issued by the Ministry of Finance and Public Credit
(in Spanish, SHCP) and the methodology established by the National Banking and Securities Commission (in Spanish,
CNBV), except in the case of commercial loans and housing mortgage loans, which were graded using an internal, CNBVauthorized methodology. The institution applies the CNBV's standard methodology.
•
Reserves created in excess are explained by the following: The bank maintains $600 million in additional reserves
resulting from the loan portfolio grading process, by virtue of the authorization made by the C.N.B.V. in the Official
Document No. 601DGSIF”C”-38625 . Also by recoveries made during the quarter and reserves created to cover costs
originated by government and the Bank debtor support programs.
29
Appendix 2
Financial Ratios
Grupo Financiero Santander
Percentages
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
6M05
6M06
0.8%
0.8%
0.9%
0.9%
0.7%
0.8%
0.8%
0.8%
314.9%
272.8%
238.1%
221.1%
274.1%
214.2%
272.8%
214.2%
3.5%
3.5%
3.4%
3.6%
3.3%
3.1%
3.5%
3.2%
ROE
19.2%
22.0%
17.5%
15.6%
19.9%
19.7%
20.4%
19.8%
ROA
2.0%
2.3%
1.9%
1.7%
2.3%
2.2%
2.2%
2.2%
32.2%
11.2%
33.2%
11.9%
33.3%
10.0%
33.2%
11.8%
32.8%
21.5%
31.0%
14.3%
33.2%
11.9%
31.0%
14.3%
112.4%
98.7%
110.2%
141.5%
122.0%
135.3%
98.7%
135.3%
2.9%
5.4%
4.1%
3.8%
4.3%
5.0%
4.2%
4.5%
Past Due Loans Ratio
Allowances to Past Due Loans
Operative Efficiency
Capitalization Ratio
Credit Risk
Credit and Market Risk
Liquidity Ratio
MIN (Net Interest Margin)
PAST-DUE LOAN RATIO = Balance in past-due loan portfolio as of the end of the quarter / Balance in total loan portfolio as of the end of the
quarter.
PAST-DUE LOAN COVERAGE = Balance in allowances for loan losses as of the end of the quarter / Balance in past-due loan portfolio as of the
end of the quarter.
OPERATING EFFICIENCY = Annualized quarterly administrative and promotional expenses / Total average assets.
ROE = Annualized quarterly net earnings / Average stockholders' equity.
ROA = Annualized quarterly net earnings / Total average assets.
CAPITALIZATION RATIO BREAKDOWN:
(1) = Net capital / Credit risk-weighted assets.
(2) = Net capital / Market and credit risk-weighted assets.
CURRENT RATIO = Current assets / Current liabilities.
Where:
Current assets =
Availabilities + trading securities + sellable securities.
Current liabilities = Demand deposits + Bank loans and loans from other entities repayable on demand + Short-term bank loans and short-term
loans from other entities
NIM = Annualized quarterly net interest income adjusted for credit risk / Average interest-earning assets
Where:
Average interest-earning assets = Availabilities, investments in securities, trading in securities and derivatives, and performing loan portfolio.
Notes:
Averages = ((Balance for the quarter in reference + Balance for the previous quarter) / 2).
Annualized figures = (Flow for the quarter in reference * 4).
30
Grupo Financiero Santander
Notes to Financial Statements as of June 30, 2006
(Pesos in millions)
1. Financial Instruments:
Trading securities
Bank securities
Government securities
Private shares
Shares
Total
10,271
14,379
678
2,135
27,463
Securities available for sale
Bank securities
Government securities
Other
Total
1,581
70,502
197
72,280
Securities held until maturity
Government securities
Government securities (Cetes especiales)
Other
Total
1,305
3,639
179
5,123
Total Financial Instruments
104,866
2. Repurchase and resale agreements:
Debit balances
Bank securities
Government securities
Total
2
552
554
Credit balances
Bank securities
Government securities
Total
24
1,951
1,975
Credit Balance in Repo Agreements
(1,421)
31
3. Investment in securities different to government securities:
As of June 30, 2006 the investments by issuer which represent more than 5% of risk based capital are as follows:
Issuer
Series
Date or maturity
BAS
030706
03-Jul-06
Interest rate
Book Value
5.350%
5,073
Total
5,073
Risk Based capital as of June, 2006
45,743
5% of Risk Based Capital
2,287
4. Derivative financial instruments:
Swaps
Interest rate
2,302,931
Foreign exchange
52,885
Purchase
Sale
Futures
Interest rate
Foreign exchange
Index
822,671
2,110,529
4,977
4,691
116
680
93,963
89,773
123
123
921,850
2,205,796
Forward contracts
Foreign exchange
Index
Long
Short
Options
Interest rate
7,649
22,624
Foreign exchange
33,952
40,438
Index
71,909
71,564
762
1,133
3,391,938
2,341,556
Securities
Total Derivative Financial Instruments
32
5. Loan Portfolio:
MXP
USD
UDIS
Total
Current loan portfolio
Commercial loans
Loans to financial intermediaries
54,649
10,966
8
65,623
1,232
2
0
1,234
Consumer loans
38,214
0
218
38,432
Mortgage
10,743
0
3,310
14,053
Government loans
33,552
6,156
1,648
41,356
Fobaproa or IPAB
22,187
0
0
22,187
160,577
17,124
5,184
182,885
Total Current Loans
6. Past due loans:
MXP
USD
UDIS
Total
Past due loan portfolio
Commercial loans
257
53
0
310
Consumer loans
966
0
4
970
Mortgage
159
0
108
267
1
1
0
2
1,383
54
112
1,549
Other past due loans
Total past due loans
Balance as of December 31, 2005 (nominal pesos in millions
1,528
+
Transfer of current loans to past due loans
2,539
Collections
Cash
(574)
Normalization
(700)
Foreclosed assets
(2)
(1,276)
Restructured loans
(222)
Charges offs
(1,020)
Balance as of June 30, 2006
1,549
7. Allowances for loan losses:
33
Balance as of December 31, 2005
3,377
Allowances created through provisions for loan losses
729
Release against goodwill
(73)
Recoveries on loan charge-offs
319
Charge-offs
(1,020)
Foreclosed assets transfer
(9)
Others
10
Application of reserves on support Government programs
Finape
(1)
Mortgage
(25)
Final point
(11)
(37)
Exchange rate effect on foreign currency
22
3,318
Balance as of June 30, 2006
The next table details loans charge-offs by type of loan as of June 30, 2006:
First Quarter
Products
Charge-offs
Commercial loans
Mortgage
Credit card
Consumer loans
Total
Debt Relieves
Total
%
100
0
100
19
26
9
35
6
306
4
310
57
96
0
96
18
528
13
541
100
Second Quarter
Products
Charge-offs
Commercial loans
Mortgage
Credit card
Consumer loans
Total
Debt Relieves
Total
%
101
0
101
21
25
8
33
7
262
4
266
56
78
0
78
16
466
12
478
100
2006
Products
Commercial loans
Mortgage
Credit card
Charge-offs
Debt Relieves
Total
%
202
0
202
20
51
17
68
7
568
8
576
56
Consumer loans
174
0
174
17
Total
995
25
1,020
100
34
Allowances for Loan Losses from the Commerce Fund
Pursuant to the Commission's authorization, as set forth in the Official Bulletin No. 601-I-DGSIF "C"-38625 issued in March 2001, as
of June 30, 2006, there are P$ 802.7 million in allowances for loan losses from the commerce fund, witch resulted from the
restructuring process of Grupo Financiero Santander. Of this total, P$ 50.3 million corresponded to commercial loans, P$ 752.1
million to mortgage loans and the rest from SIBT loans. As of December 31, 2005, these allowances totaled P$ 858.9 million.
During this period of six months, the allowances for loan losses from the above mention paragraph had the following breakdown:
Mortgage loans charge-offs
(51)
Reserves freed up by recoveries
(10)
4
Udis reserves actualization and f/x effects
(56)
As part of the Commission's authorization for these reserves, in case there exit loan portfolio recoveries from previously charge off
loans, these recoveries will be recorded in the income statement. During the period, there has not been any charge due to these
recoveries of previously charge off loans in the amount of P$ 73.3 million.
35
8. Classification on loan portfolio:
Classification Basis
Loan Portfolio
Allowances
199,747
2,662
77,526
66,137
63,475
2,332
118
142
71
11,389
11,072
317
781
739
341
174
53
100
71
41
30
12
1,234
1,234
6
6
Consumer loans
A, B, C, D and Others
"A"
"B"
"C"
"D"
Credit Card
"A"
"B"
"C"
"D"
39,406
9,871
9,080
493
128
170
29,535
26,934
1,290
502
808
1,356
272
45
46
57
124
1,084
135
129
226
594
Mortgage loans
"A"
"B"
"C"
"D"
14,323
12,724
1,366
99
135
248
45
80
32
92
Government loans
Investment
"A"
"B"
"C"
18,202
18,202
15,429
2,746
27
270
270
82
182
5
Exempted loans
23,178
0
Loans to IPAB or FOBAPROA
25,876
0
Other past due debt
2
2
Not classified
0
0
Commercial loans
Investment
"A"
"B"
"C"
"D"
"E"
Contingency
"A"
"B"
Financial entities loans
"A"
Allowances for loan losses according to loan portfolio classification
Additional allowances from those derived from the portfolio classification process on loans
Allowances for loan losses balance
2,662
656
3,318
36
9. Problems Loans
Loan portfolio was classified in accordance with the National Banking and Securities Commission rulings. The Bank considers
problem loans those classified with “D” and “E” risk, due to lower probability of collecting the full amount of principal.
10. Program of benefit to debtors bank with from federal government support:
Amount
To debtors on housings loans and Final Point Program
36
To debtors on agricultural loans
1
37
Total
The following table shows the amount receivable from the Government as of June 30th, 2006:
Unconditioned
loans
To debtors on housings loans
Total
155
0
2
3
5
157
3
160
To debtors on agricultural loans
Total
Conditioned
loans
155
11. Average Interest Rates paid on Deposits
Pesos
Average balance
USD
73,227
Interest
Rate
37
20,634
209
136
1.13%
2.60%
12. Bank and other loans:
Amount
Rate
Maturity
Loans in Mexican pesos
Central Bank
Call-money
Public fiduciary funds
Development bank loans
Total
22,428
7.07%
From 3 to 55 days
600
7.00%
Until 3 days
3,327
5.43%
From 3 days to 24 years
592
8.63%
Until 5 years
1.51%
From 4 months to 17 years
26,947
Loans in foreign currency
Foreign banks loans
400
Public fiduciary funds
149
5.76%
From 25 days to 6 years
Government loans
475
5.83%
From 10 days to 6.5 years
Total
1,024
27,971
Accrued interest and overdraft banking
457
28,428
38
13. Deferred Taxes:
Accrued and Deferred Taxes
Accrued Taxes as of June 30, 2006
Taxes on Assets
93 (1)
Deferred Taxes
781 (2)
Total Bank
874 (3)
Accrued and Deferred Taxes from Other Subsidiaries
177
Total Financial Group
1,051
(1) Due to the existence of tax loss carry forwards, income taxes are not accrued but taxes on assets are accrued.
(2) Deferred taxes are broken down as follows:
Application of Tax Loss Carry forwards
1,004
Application of loans reserves
177
Surplus on financial instruments
(312)
63
Remaining Tax Loss Carry forwards Created
Recoverable taxes on assets created
(221)
Other created
71
Re-Statement
(1)
Total Bank
781
Deferred Taxes from Other Subsidiaries
6
Total Financial Group
787
(3) Includes Accrued Taxes for the Bank only.
As of June 30, 2006, 26.78% of total (net) deferred taxes have been registered. The application of tax loss carryforwards is
expected to take place in 2006 and 2007.
Global reserves
5,740
Recoverable taxes on assets
221
Other
(459)
Total Deferred Taxes (net)
5,502
Deferred taxes (net) registered in balance sheet
210
Deferred taxes (net) registered in memorandum accounts
5,292
39
14. Other Income and Expenses:
Interest on employee loans
62
Cancellation provision for contingencies
30
Release of the reserve on the balance of special long-term Cetes in UDI's
21
Cancellation of liabilities
29
15
Technical consultantship
Provision for contingencies
(146)
Write-offs on workout loans
(113)
Monetary position results (other income)
(22)
Write-offs
(72)
Severance expenses
(44)
Payments to IPAB (Indemnity)
(45)
Other income and expenses
8
(277)
15. Subsequent Events
As of these date there are not any relevant events to disclose
40
16. Capitalization Ratio
Grupo Financiero Santander
Amount of equivalent
positions
I. ASSETS RISK
MARKET RISKS
Transactions in Mexican pesos with a nominal rate
Transactions in Mexican pesos with a nominal rate (overrate)
Transactions in Mexican pesos with a real rate or UDI
Transactions in foreign currency, with nominal rate
UDI positions or referred to the NCPI
Foreign currency positions
Transactions involving and with respect to securities
Total
155,865
3,844
360
805
6
2,191
8,385
171,456
12,469
308
29
64
0
175
671
13,716
Total
226
205
20,484
846
113,292
12,679
147,734
18
16
1,639
68
9,063
1,014
11,819
Total
171,456
147,734
319,190
13,716
11,819
25,535
CREDIT RISKS
Other (weighted at 10%)
Other (weighted at 11.5%)
Group II (weighted at 20%)
Other (weighted at 50%)
Group III (weighted at 100%)
Other (weighted at 112%)
TOTAL POSITION AND REQUIREMENTS
Net requirement on market risk
Requirement on credit risk
II. CAPITAL INTEGRATION
BASIC CAPITAL
Shareholder’s equity
Subordinated debentures and capitalization instruments
Total stockholder’s equity
Less:
Investment in shares of financial entities
Investment in non financial shares
Deduction of organization expenses, other intangibles and other deductible assets
Total basic capital
SUPPLEMENTARY CAPITAL
Subordinated debentures and capitalization instruments
Allowances for general credit risks
NET CAPITAL
45,034
3,382
48,416
2,057
0
1,336
45,023
37
683
45,743
III. CAPITALIZATION RATIO
Net capital / Required capital
1.79
Basic Capital / Assets subject to credit and market risk
14.11
Net capital / Assets subject to credit risk
30.96
Net capital / Assets subject to credit and market risk
14.33
Capitalization Ratio
41
Capital
requirement
Santander Broker House
Amount of equivalent
Capital
positions
requirement
I. ASSETS RISK
MARKET RISKS
Transactions in Mexican pesos with a nominal rate
927
74
Transactions in Mexican pesos with a nominal rate (overrate)
269
22
22
2
1,218
98
132
10
533
43
665
53
Transactions involving and with respect to securities
Total
CREDIT RISKS
Group II
(weighted at 20%)
Group III
(weighted at 100%)
Total
TOTAL POSITION AND REQUIREMENTS
Net requirement on market risk
Requirement on credit risk
Total
1,218
98
665
53
1,883
151
II. CAPITAL INTEGRATION
BASIC CAPITAL
Shareholders equity
727
Subordinated debentures and capitalization instruments
0
Total stockholder’s equity
727
Less:
Investment in shares of financial entities
157
Investment in non financial shares
5
Deduction of organization expenses, other intangibles and other deductible assets
28
Total basic capital
537
SUPPLEMENTARY CAPITAL
Subordinated debentures and capitalization instruments
0
Allowances for general credit risks
0
NET CAPITAL
537
III. CAPITALIZATION RATIO
Global Capital / Required Capital
3.56
Basic Capital / Assets subject to credit and market risk
28.51
Global Capital / Assets subject to credit risk
80.72
Global Capital / Assets subject to credit and market risk
28.51
42
17. Diversification of Asset Transactions
Pursuant to the general rules for risk diversification in the performance of borrowing and lending transactions applicable to credit
institutions, as published in the “Circular Unica” regulation as of December 2th, 2005 the following information regarding credit risk
transactions maintained as of June 30, 2006 is provided:
Financing granted to debtors or groups of persons representing a common risk, for an individual amount that is greater than 10% of
the institution's Tier I capital. The institution does not make any disclosure from debtors over these limits.
Loans granted to the three major debtors or groups of persons representing a common risk, for the aggregate amount of $ 11,675
million pesos or 27.25% of the institution's Tier I capital.
18. Internal and external liquidity sources
Internal liquidity sources in local and foreign currencies are the various funding products that the Institution offers to its clients. This
means that the Institution obtains funds through customer checking account and term deposit products. Other funds are obtained
through the sale of the Institution's assets.
As regards external liquidity sources, the Institution has several mechanisms to access debt and capital markets. This means that
the Bank obtains funds through the issuance of debt instruments, loans to other institutions including the Central Bank and
international organizations, as well as the issuance of subordinate debt. This line item also includes funds obtained by the Bank
through repos performed with securities held by the Institution that are eligible for this type of transaction.
It is important to note that the Institution also has the alternative to obtain funds through the issuance of shares representing the
Institution's capital stock.
19. Dividend Policy
The Corporation has not established a dividend distribution policy. According to the Corporation's results, the Board of Directors
proposes the declaration of dividends during General Ordinary Stockholder's Meetings.
20. Treasury Policy
The following provisions govern the Bank's Treasury activities:
a)
The provisions set forth in regulations for banking institutions issued by various financial system authorities. Such is the
case with guidelines referring to asset and liability transactions, accounting rules, liquidity ratios, regulatory matching,
payment system capacity, etc.
b)
Internal limits on market, liquidity and credit risks. This means that there are limits that must be observed in the bank's
asset and liability management as this relates to market and liquidity risks derived from said management, as well as limits
that refer to counterparty risk derived from the Institution's day-to-day operations.
c)
The guidelines set forth in local and international standard agreements regarding the various transactions that are
performed in the markets.
d)
Sound market practices.
e)
Strategies planned by the Bank's internal committees.
f)
The provisions set forth in the Institution's operating procedures.
43
20. Grupo Financiero Santander Subsidiaries
Subsidiary
% of ownership
Banco Santander, S.A.
99.988269%
Casa de Bolsa Santander, S.A. de C.V.
99.966807%
Seguros Santander, S.A. de C.V.
99.999280%
Almacenadora Serfin, S.A. de C.V.
98.710031%
Gestión Santander, S.A. de C.V.
99.999990%
22. Unsecured Subordinated Debentures voluntarily convertible into shares
During 2004 and 2005 Banco Santander issued unsecured subordinated debentures, voluntarily convertible into shares for 300
million dollars. This debentures are private and the buyers of the total amount were the current shareholders of the institution. In
accordance to the characteristics these debentures are classifield as liabilities.
23. Internal Control
Grupo Financiero Santander activities are regulated both by a series of guidelines established by the Madrid-based Banco
Santander Central Hispano—the Group’s holding company—and by Mexican law currently in force.
The internal control system established by the Group includes:
The definition of an organizational structure, which has allowed for the Group’s development and expansion and is currently formed
by the following departments:
General Direction, which supervises the following departments, among others:
Administration and Finance
Operations
Credit
Commercial Banking, Marketing and Products
Entrepreneurial Banking
Wholesale Banking
Assets and Private Banking
Legal Advisory
Internal Auditing
The functions and responsibilities of each department have been clearly delimited to help optimize the performance of the Group’s
activities.
The Organization Department, supervised by Administration and Finance, is in charge of issuing and updating internal rules and
regulations that must be followed in the Group’s day-to-day operations.
Through Circulars and Bulletins, the Organization Department regulates the Group’s functioning. Also, the Group’s Regulatory
Comptrollership has set forth a General Code of Conduct to which all employees must adhere.
The Group’s structure includes a Board of Directors that is in charge of defining the Institution’s objectives and general policies and
procedures; appointing officers; and, forming committees that are in charge of supervising the performance of Group activities.
In order to comply with the provisions set forth in the circulars issued by the National Banking and Securities Commission, the
Group’s regulating agency, the Board of Directors resolved to create the Financial Group’s Integral Risk Management Committee.
This Committee holds monthly sessions and makes sure that all operations conform to guidelines set forth and approved by the
Board. In turn, the Committee delegates the responsibility of implementing risk measurement, management and control procedures
44
to the Integral Risk Management Unit, and grants this Unit the power to authorize deviations from the established limits, all of which
must be notified to the Board of Directors.
The Assets and Liabilities Committee is responsible of determining net interest income risk management guidelines. Supervised by
the Administration and Finance Department, this Committee sets forth the strategies needed to monitor the balance sheet’s risk
profile.
Other committees that monitor and supervise the Group’s different entities include the following:
Audit Committee
Regulatory Compliance Committee
Credit Executive Committee
Operating Incidents and Sanctions Committee
Commercial Banking Risks Committee
Communication and Control Committee
Local New Products Committee
Registry, control and storage of the Institution’s daily activities is done using systems that have been specifically designed for
banking and stock exchange activities. These systems run on a common platform called ALTAIR, which is used on an institutionwide level by all Latin American entities that form part of Banco Santander Central Hispano.
The main activities that are controlled and recorded on the ALTAIR platform are those related to the loan portfolio, Banco Santander
commercial banking operations and treasury.
The Institution’s accounting system also runs on the same platform and complies with the parameters set forth by the National
Banking and Securities Commission in terms of reliability and accuracy.
As mentioned, Grupo Financiero Santander is regulated by the National Banking and Securities Commission, and therefore, its
financial statements are prepared pursuant to accounting practices established by the Commission through the issuance of
accounting circulars, and general and specific official documents that regulate the accounting registry of transactions. To such
effect, the Institution’s accounting system includes an accounting catalog of accounts established by the Commission and all reports
generated by the same, which comply with the established guidelines.
The Group also has an independent internal audit department in charge of:
Evaluating the operational functioning of the different units of the Group’s companies, as well as compliance with internal control
guidelines.
Verifying that information systems control mechanisms comply with and maintain information integrity and fulfill the purposes for
which they were designed.
Following up on transactions and operations performed by the Group, in order to correct potential failures in internal control systems.
Verifying that financial information complies with guidelines established by both the General Direction and regulating agencies.
Quarterly activities reports submitted to the Audit Committee include the following information:
Results of audits done on business units of the Group’s different companies.
Follow-up on recommendations made to the Group’s entities and/or areas, including current status and timeframe.
Planned audit schedules for the following quarter.
Certified and ISO 9001-compliant Internal Audit procedures used for the performance of its activities.
45
24. Accounting Differences between Circular 4/2004 of the Bank of Spain and CNBV Regulations in
Mexico
June
Earnings of Grupo Financiero Santander under CNBV Regulations in Mexico
Cancelled re-statement due to non -inflationary accounting
4,392
424 (a)
278 (b)
Deferred and other taxes
Complementary loan loss reserves
(124) (c)
Expenses allocated by the Head Office
(97) (d)
Earnings of Grupo Financiero Santander under Regulations Set Forth in Circular 4/2004 Issued by
the Bank of Spain
4,873
(a) Because the Mexican economy is not deemed as hyperinflationary, the effects of inflation recognized under these local rules are
eliminated to match the regulations issued by the Bank of Spain.
(b) The application of prior-year deferred taxes not recognized by the Head office was prudentially
eliminated.
(c) The regulations set forth in 4/2004 issued by the Bank of Spain require the creation of complementary loan loss reserves, which
differ from the rules pertaining to loan portfolio grading and creation of reserves issued by the CNBV.
(d) Allocation of corporate and management expenses made by the Head Office to its subsidiaries according to Banco Santander
Central Hispano policies and standards.
24. Transaction with Related Parties
Balance Sheet
Call Money (asset)
4,514
Transactions with financial derivatives (asset)
5,159
Charged accounts
12
Call Money (liabilities)
5
Transactions with financial derivatives (liabilities)
4,374
Subordinated Debentures
3,419
Sight Deposits
46
Term Deposits
74
Payable accounts
236
Income Statement
Interest
42
Fees charged
213
Corporate services
9
Results from operations with financial derivative instruments
1,186
Interest and commissions paid
172
Technical Consultanship
441
46
26. Interest and Yield on Loan Portfolio
As of June 30, 2006, the Income Statement includes in the interest and yield on loans line, 10,041 million pesos from interests
earned from the loan portfolio of Banco Santander.
27. Ratings
Counterparty risks / National Scale
Standard & Poor´s
Moody's
Fitch
Long Term
mxA1+
Aaa.mx
F1+.mx
Short Term
mxAAA
Mx-1
AAA.mx
28. Global Value at Risk Exposure (VaR)
Grupo Santander regards risk management as a competitive element of a strategic nature, with the ultimate purpose of maximizing
the shareholders’ value. This risk management is defined, conceptually and organizationally, as the comprehensive treatment of the
different risks assumed by the Bank in the normal course of business, such as credit, market, liquidity, operating and legal risks. The
Institution’s management of the risk inherent in its transactions is essential for understanding and determining how its financial
position will behave and in creating value in the long term.
In compliance with the prudential rules established by CNBV, regarding the comprehensive management of risks for credit
institutions the Board of Directors of the Group established the Comprehensive Risk Management Committee, which will function
according to the guidelines established in these Circulars. This Committee will hold monthly meetings and see that transactions are
inline with the objectives, policies and procedures approved by these guidelines for the comprehensive management of risks.
The Comprehensive Risk Management Committee, in turn, appoint the Comprehensive Risk Management Unit, which will be
responsible among others, for implementing the procedures aimed at measuring, managing and controlling risks, according to the
policies for comprehensive management of risks. Furthermore, this committee empowers authorization to approve deviation from
established limits, and inform the Board of Directors of such deviations.
Market risk
The Market Risk Management Department of the Comprehensive Risk Management Unit is responsible among other for
recommending the market risk management policies to be implemented by the Institution, by establishing the parameters for
measuring risks and delivering reports, analysis and evaluations to senior management, to the Comprehensive Risk Management
Committee and to the Board of Directors.
The market risk measurement quantifies the potential change in the value of the positions assumed as a result of changes in the
market risk factors.
Depending on the nature of each business unit's activities, debt instruments and stock are recorded as marketable securities,
sellable securities and/or securities held to maturity. Specifically, the main distinguishing feature of sellable securities is their
permanent nature; therefore, these securities are managed as a structural part of the balance sheet. The Institution has prepared
guidelines with which all sellable securities must comply, and has also implemented adequate controls to insure such compliance.
Once significant risks are identified, they are measured and limits are assigned in order to ensure appropriate control over them.
The global measurement of the risk is made through a combination of the methodology applied on the trading portfolios and the
management of assets and liabilities.
Trading portfolios
To measure risks using a global approach, the Value at Risk (VaR) method is followed, which is defined as the statistical estimate of
the potential loss of value of a specific position at a specific period of time and with a specific level of confidence. The VaR is a
47
universal measure of the exposure level of the various risk portfolios, it helps compare the risk level assumed among different
instruments and markets, expressed in the exposure level of each portfolio through a unique figure in economic units.
The VaR is calculated using the historical simulation method, with a 521-working day window (520 percentage changes) and a oneday horizon. The calculation is made based on the series of gains and losses simulated as 1% percentile with constant pesos and
with pesos decreasing on an exponential basis, with a decrease factor λ that is annually reviewed. The level of confidence is
variable. A 99% level of confidence is assumed.
As of June 30, 2006 the (unaudited) VaR was as follows:
Bank and
Brokerage House
Pesos in Thousands
Bank
VaR
%*
VaR
Trading Desks
Money Market and
Forwards
Risk Arbitrage and
Derivatives
Fx Spot
Treasury
Equity
Mutual Funds
282,635
0.61%
277,468
0.61%
251,603
0.54%
246,087
0.54%
21,005
2,300
21,043
135
772
0.05%
0.00%
0.05%
0.00%
0.00%
20,889
2,280
20,993
134
772
0.05%
0.00%
0.05%
0.00%
0.00%
Risk Factor
Interest Rate
Fx
Equity
282,635
247,683
62,787
15,373
0.61%
0.54%
0.14%
0.03%
277,468
242,119
62,787
15,373
0.61%
0.53%
0.14%
0.03%
%*
2006 quarterly average (unaudited) VarR was as follows:
Bank and
Brokerage House
Pesos in Thousands
Bank
VaR
%*
VaR
%*
Trading Desks
Money Market and
Forwards
Risk Arbitrage and
Derivatives
Fx Spot
Treasury
Equity
Mutual Funds
253,450
0.56%
248,250
0.56%
226,274
0.50%
222,438
0.50%
33,768
2,070
19,129
129
655
0.08%
0.00%
0.04%
0.00%
0.00%
33,709
2,060
19,104
129
655
0.08%
0.00%
0.04%
0.00%
0.00%
Risk Factor
Interest Rate
Fx
Equity
253,450
235,845
36,684
16,885
0.56%
0.52%
0.08%
0.04%
248,250
230,608
36,684
16,885
0.56%
0.52%
0.08%
0.04%
* As percentage of Tier 1 Capital
Weekly simulations are also performed to assess portfolio losses or gains by revaluating portfolios under different scenarios (stress
testing). These estimates are generated using three different methods:
48
•
By adjusting risk factors for percentage variations observed during a certain time period in history encompassing significant
market turbulence.
•
By adjusting risk factors for changes that depend on the volatility of each risk factor.
Once a month back-testing is carried out to compare the losses and the gains that would have been observed had the same
positions been maintained against the calculation of the value at risk and to be able to fine tune the models used. While these
reports are prepared once a month, they include the tests performed on a daily basis.
Management of assets and liabilities
The Institution’s commercial banking activities generate significant balance sheet amounts. The Assets and Liabilities Committee
(ALCO) is responsible for determining the strategies for managing the financial margin, net worth value and liquidity risks. These
strategies must be followed by the different commercial portfolios. Under this approach, the General Finance Director is responsible
for executing the strategies defined by ALCO, in order to modify the risk profile of the commercial portfolio balance, according to the
established policies. Hence, meeting the information requirements of the interest rate, exchange and liquidity risks is fundamental.
As part of the Institution’s financial management, the sensitivity of the financial margin (NIM) and net worth value (NWV) of the
different balance sheet line items is analyzed against the interest rate variances. This sensitivity arises because of a timing
difference between maturity dates of the assets and liabilities and the dates interest rates change. An analysis is done of each line
item sensitive to interest rates throughout time, considering its amortization or maturity date and contractual changes to the
applicable interest rates.
Bank and Brokerage House
Balance MXP GAP
Sensitivity 1% NIM
Apr-06 May-06 Jun-06
Average
109.87% 33.72%
13.61%
52.40%
Sensitivity 1% NWV
Apr-06 May-06 Jun-06 Average
29.63% 38.09% 85.00%
50.91%
Balance MXP Directional
Balance USD GAP
73.29%
11.24%
68.12%
33.63%
73.32%
59.14%
71.58%
34.67%
41.31%
67.03%
39.91%
62.89%
38.91%
59.65%
40.04%
63.19%
Balance USD Directional
0.76%
10.48%
13.82%
8.35%
5.19%
14.86%
20.93%
13.66%
Bank
Balance MXP GAP
Balance MXP Directional
Balance USD GAP
Balance USD Directional
Sensitivity 1% NIM
Apr-06 May-06 Jun-06
Average
109.87% 36.00%
16.13%
54.00%
73.29% 64.46%
69.36%
69.04%
11.24% 33.63%
59.14%
34.67%
0.76% 10.48%
13.82%
8.35%
Sensitivity 1% NWV
Apr-06 May-06 Jun-06 Average
29.63% 38.42% 85.36%
51.14%
41.31% 39.26% 38.18%
39.58%
67.03% 62.89% 59.65%
63.19%
5.19% 14.86% 20.93%
13.66%
Simulation techniques are used to measure the predictable valuation of the financial margin and the net worth value in various
interest rate scenarios, and the sensitivity of both under extreme change in such scenarios.
ALCO adopts investment and hedging strategies in order to maintain the above sensitivities within the target range.
Limits
Limits are used to control the global risk of the Group based on each portfolio and the books. The structure of limits is applied to
control the exposures and to establish the overall risk assigned to the business units. These limits are established with respect to
the VaR, warning of loss, maximum loss, interest rate equivalent volume, variable income delta equivalent, open foreign currency
positions, financial margin sensitivity, and net worth value sensitivity.
49
Liquidity risk
The liquidity risk is associated to Institution’s capacity to finance the commitments assumed at reasonable market prices, as well as
to carry out its business plans through stable financing sources. The influential factors may be external (liquidity crisis) and internal,
due to excessive concentration of maturities.
The Group coordinate maturities of assets and liabilities, monitoring the maximum timing difference profiles. This monitoring is
based on the analysis of the maturities of assets and liabilities, established by contract or derived from their management. The
liquidity risk is established in terms of aggregate non-liquidity levels during a 1 month period an in relation of a liquidity coefficient
established.
Liquidity Coefficient
Bank and Brokerage House
Cumulative non liquidity Gap
Apr-06 May-06 Jun-06 Average
30.72% 35.41% 30.78%
32.31%
17.07% 14.35% 14.41%
15.28%
Apr-06
Peso Book (MM MXP)
Liquidity Coefficient
Apr-06 May-06 Jun-06 Average
30.88% 35.73% 31.11%
32.57%
Monthly Cumulative non liquidity Gap
Apr-06
May-06
Jun-06
Average
88.87%
9.79%
68.84%
55.83%
Dollar Book (MM USD)
17.07% 14.35% 14.41%
Peso Book (MM MXP)
Dollar Book (MM USD)
Bank
15.28%
88.21%
7.45%
7.45%
May-06
9.01%
9.19%
9.19%
Jun-06
69.42%
6.28%
6.28%
Average
55.55%
7.64%
7.64%
Credit risk
Credit risk within the Group is managed differently for each of the customer segments throughout the three stages of the credit
process: acceptance, follow-up and recovery.
Under a global perspective, credit risk management within the Group is responsible for the identification, measurement, integration
and valuation of added risk, with the purpose of monitoring the risk concentration levels and adapting them to the established limits
and objectives.
The risks that are managed on an individual basis (companies and financial institutions and entities) are identified and separated
from other risks that are managed in a standard way (consumer, personal, mortgage loans and business and microcompany loans).
Risks managed on an individual basis are subject to a solvency or rating classification system that allows measuring the risk for
each client and for each transaction from the beginning. The rating of the customer after analyzing the relevant risk factors in
different areas is subsequently adjusted as a function of the specific characteristics of the transaction (collateral, term, etc.).
Risks that are managed in a standard way require, due to their special characteristics (large number of transactions of relatively
small amounts), different management that allows an efficient process and an effective use of resources, for which purpose
automatic decision tools are used (expert and credit scoring systems).
The credit process for companies is complemented, during the follow-up stage, with a special monitoring system that determines the
policy to be applied in managing risk with companies or groups classified under this category. Different situations or special
monitoring levels require different actions. A special monitoring classification is given when there are warning signals, systematic
reviews, or specific actions recommended by the Risk Division or Internal Audit.
Recovery Units represent a critical element in managing irregular risks because their purpose is to minimize the final loss for the
Group. In both Spain and Latin America, these units are in charge of specialized risk management as of the moment on which loans
are classified as irregular-risk loans (defaulting payment).
Based on prudent criteria determined by Grupo Santander, Grupo Financiero Santander has established a policy for the selective
growth of risk, strict treatment of late payments, and the creation of required allowances.
Probable noncompliance and expected losses
The prudential rules regarding the comprehensive management of risks for credit institutions require financial institutions to calculate
the noncompliance probability as part of the credit risk management function. The system allows estimating the noncompliance
probability in connection with the counterparty risk.
50
a)
The noncompliance probability is determined using transition matrices, which consider the results of prior period classifications
and the results obtained during the current period.
b)
Once the noncompliance probability is determined, the seriousness of the loss is calculated, considering the recoverability
factor, which is used as the basis to calculate the expected position of the reserves.
Transition matrixes assume one-year historical grading periods for each type of portfolio, as well as the distribution of current
positions per rating. Once projection matrixes are obtained per portfolio type, the integration of exposure per risk level and
consequently, the forecast Probability of Default, are determined.
Expected losses are calculated based on the recovery factor, which is represented by the loss balances and their exposed amounts
(based on collateral).
Back testing is performed on a monthly basis to compare the level of estimated and real provisions derived from official grading
exercises. Overall, the model's accuracy rate is above 90% (unaudited) for all portfolio types.
Counterparty risks
Credit risk includes an item—Counterparty Risk—, which requires special management due to its nature.
Counterparty Risk is the risk assumed by an Institution with governments, government agencies, financial institutions, corporations,
companies, and individuals in treasury and correspondent banking activities. Measurement and control of Financial Instrument
Credit Risk—Counterparty Risk—is performed by a specialized unit with an organizational structure that is independent from other
business areas.
Day-to-day Counterparty Risk control is performed using the Global Kreditnet (KGL) system, which provides information regarding
available lines of credit of any counterparty and for any product and term.
Counterparty line item control is performed using the Equivalent Credit Risk (ECR). ECR is an estimate of the amount that the
Institution could lose in current transactions with a specific counterparty, if the latter should fail to comply with its obligations at any
given time up to the date of maturity of such transactions. ECR considers Current Credit Exposure—defined as the cost of replacing
the transaction at market value, provided this amount is positive for the Institution—is measured as the transaction market value
(TVM). In addition, ECR incorporates Potential Credit Exposure or Additional Potential Risk (APR), which represents the possible
evolution of current credit exposure up to maturity, given the characteristics of the transaction and considering possible variations in
market factors. ECR calculations also consider the existence of counterparty credit risk mitigating factors, such as collateral
agreements and netting agreements, among others.
Delivery or settlement risk is another risk in addition to Counterparty Risk, which arises for any transaction at the time of maturity,
given the counterparty's possible failure to comply with its payment obligations to the Institution, once the Institution has satisfied its
own obligations and issued payment instructions.
Operating Risk
As regards Operating Risk, Grupo Financiero Santander has implemented policies, procedures and methodologies to identify,
measure, control, mitigate, oversee, and disclose operating risks, which are understood as potential losses due to internal control
failures or deficiencies, transaction processing and storage errors, data transmission errors, adverse administrative or judicial
resolutions, fraud or theft.
Several categories and lines of business that group operating incidents have been established to identify and measure operating
risks in accordance with the implemented methodology. This methodology is based on process identification and documentation, as
well as self-assessment tools, and considers the construction of historical databases and operating risk indicators, for purposes of
operating risk control, mitigation and disclosure.
Legal Risk
Legal risk is defined as potential loss derived from incompliance with applicable legal and administrative provisions, unfavorable
administrative and judicial resolutions, and the application of sanctions with respect to the operations carried out by the Institution.
Duties carried out to comply with Integral Risk Management guidelines include the following: a) Policies and procedures are
established to analyze the juridical validity of legal actions undertaken and to ascertain the adequate instrumentation of such legal
actions; b) Potential losses derived from unfavorable judicial or administrative resolutions and possible sanctions are estimated; c)
Legal actions governed by a juridical system other the national system are analyzed; d) Legal and administrative provisions applying
to operations are communicated to management and staff; e) Internal legal auditings are conducted at least once a year.
51
Technological Risk
Technological risk is defined as potential loss due to any damage, interruption, alteration or failure derived from the use or
dependence on hardware, software, systems, applications, networks and any other information distribution channel in rendering
banking services to the Institution's clients.
The Institution has built a Technological Risk Management model that has been incorporated into information systems service and
support processes to identify, measure, monitor, control and report on IT risks to which its operations are exposed. This model aims
to prioritize the implementation of control measures to lower the chance of risk realization.
52