Explanatory Note

We are filing this report on Form 6-K to recast our segment financial information and related disclosure for the three years ended December 31, 2018 which were included in our annual report on Form 20-F for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on March 26, 2019 (the “2018 Form 20-F”), in order to reflect our current reporting structure.

On July 4, 2019, we announced that, starting with the financial information for the first half of 2019, we will carry out a change in our reported segments to reflect our current reporting structure. This announcement has been included in our Form 6-K furnished to the SEC on July 5, 2019.

This change in our reported segments aims to align the segment information to how segments and units are managed and has no impact at the Group level. The main changes, which have been applied to segment information for all periods included in the consolidated financial statements, are the following:

Primary segments

 

 

-    The UK unit is aligned with ring-fencing structure, including products and services distributed to our retail customers and the majority of our business customers. The businesses excluded are now incorporated in the rest of Europe.

-    Spain unit now includes the Real Estate Activity Spain, previously included in the rest of Europe, and it excludes some treasury businesses now reported in the rest of Europe and the online bank OpenBank which is now incorporated in the new Digital segment (Santander Global Platform).

-    The rest of Europe comprises mainly (i) CIB businesses such as Banco Santander, S.A. branches outside of Spain (including the excluded businesses in the UK as a result of ring-fencing) as well as Spain’s treasury business and (ii) Private Banking’s Wealth Management & Insurance businesses in Switzerland, mutual funds in Luxemburg and Insurance in Zurich.

 

 

 

 

Secondary segments

 

 

 

 

 

 

The changes in the secondary segments have no impact on the primary segments.

The Group restated the corresponding information of earlier periods to reflect these changes in the structure of its internal organization.

In this report we have included only such disclosure as was impacted by the revisions described above and have only revised such disclosure to reflect such revisions. This report does not, and does not purport to, recast the information in any other part of the 2018 Form 20-F filed on March 26, 2019 or update any information in such Form 20-F to reflect any events that have occurred after its filing. The filing of this report should not be understood to mean that any statements contained in the above mentioned Form 20-F are true and complete as of any date subsequent to March 26, 2019. References in this report to our consolidated financial statements shall be deemed to refer to our recast consolidated financial statements and related notes that are also included as an exhibit to this Form 6-K. This Form 6-K should be read in conjunction with the above mentioned 2018 Form 20-F, the related recast consolidated financial statements and our other filings with the SEC.

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002, all companies governed by the law of an EU Member State (a “Member State”) and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of 22 December 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. This Circular was repealed on 1 January 2018 by Bank of Spain Circular 4/2017, of 27 November 2017 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2017”). Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended 31 December 2018 in conformity with EU-IFRS and Bank of Spain’s Circular 4/2017, while previous periods have to be prepared under EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circulars and International Financial Reporting Standards as issued by the International Accounting Standard Board (“IFRS-IASB”) are not material. Therefore, we assert that the financial information contained in this report on Form 6-K complies with IFRS-IASB.

In July 2014, the IASB published IFRS9 Financial Instruments – Classification and measurement, hedging and impairment that we adopted with the subsequent amendments on 1 January 2018. As permitted by the regulation, we have chosen not to re-classify the comparative financial statements. Therefore, previous periods are not comparable. However, note 1.b to our consolidated financial statements included in Exhibit 99.2 of this Form 6-K includes a reconciliation of balances as of 31 December 2017 under IAS 39 and the corresponding balances as of 1 January 2018 under IFRS9. The adoption of Bank of Spain’s Circular 4/2017 has modified the breakdown and presentation of certain headings in the 31 December 2018 financial statements, to adapt them to the aforementioned IFRS9. Previous periods have not been restated under this Circular.

Our auditors, PricewaterhouseCoopers Auditores, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the years ended 31 December 2018, 2017 and 2016 in accordance with IFRS-IASB. See pages 2 and 3 in Exhibit 99.2 of this Form 6-K for the audit report issued by PricewaterhouseCoopers Auditores, S.L.

We have presented our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the US Securities and Exchange Commission that contains presentation requirements for bank holding company financial statements.

General Information

Our consolidated financial statements included in Part 2 of the 2018 Form 20-F are in Euros, which are denoted “euro”, “euros”, “EUR” or “€” throughout this annual report.  Also, throughout this annual report, when we refer to:

When we refer to “net interest income” we mean “interest income/(charges)”.

When we refer to “staff costs” we mean “personnel expenses”.

When we refer to “profit before tax” we mean “operating profit/(loss) before tax”.

When we refer to “average balances” for a particular period, we mean the average of the month-end balances for that period, unless otherwise noted.  We do not believe that monthly averages present trends that are materially different from trends that daily

averages would show.  In calculating our interest income, we include any interest payments we received on non-accruing loans if they were received in the period when due.

When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted. The loan to value “LTV” ratios disclosed in this report refer to LTV ratios calculated as the ratio of the outstanding amount of the loan to the most recent available appraisal value of the mortgaged asset. Additionally, if a loan is approaching a doubtful status, we update the appraisals which are then used to estimate allowances for loan losses.

When we refer to “non-performing balances”, we mean non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.

When we refer to “allowances for credit losses” or “allowances for non-performing balances”, we mean the allowances for impaired assets, and unless otherwise noted, the allowance for inherent losses and any allowances for country-risk.  See “Item 5. Other Industry Guide 3 disclosures—Bank of Spain’s Classification Requirements— Allowances for Credit Losses and Country-Risk Requirements”. From 1 January 2018, after the adoption of IFRS9, the allowances reflect expected credit losses whereas the previous model (IAS 39) was based on incurred losses.

When we refer to “perimeter effect”, we mean growth or reduction derived from changes in the companies that we consolidate resulting from acquisitions, dispositions or other reasons.

Where a translation of foreign exchange is given for any financial data, we use the exchange rates of the relevant period (as of the end of such period for balance sheet data and the average exchange rate of such period for income statement data) as published by the European Central Bank, unless otherwise noted.

Management makes use of certain financial measures in local currency to help in the assessment of ongoing operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the eurozone, excluding the impact of foreign exchange. We analyze these banks’ performance on a local currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on the results of operations, we believe that evaluating their performance on a local currency basis provides an additional and meaningful assessment of performance to both management and the company’s investors. Variances in financial metrics, excluding the exchange rate impact, are calculated by translating the components of the financial metrics to our Euro presentation currency using the same foreign currency exchange rate for both periods presented. For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see note 2(a) to our consolidated financial statements included in Exhibit 99.2 of this Form 6-K.

 

This annual report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements include, but are not limited to, information regarding:

Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions.  We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Risks” sections. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements.

You should understand that the following important factors, in addition to those discussed in “Item 4. Risk Factors”, “Item 5.  Information on the Company”, “Consolidated Directors’ Report —Economic and Financial Review” in Part 1 of the 2018 Form 20-F, and elsewhere in the 2018 Form 20-F and in this Form 6-K, could affect our future results and could cause those results or other outcomes to differ materially from those anticipated in any forward-looking statement:

 

 

 

 

Economic and Industry Conditions       general economic or industry conditions in Spain, the U.K., the U.S., other European countries, Brazil, other Latin American countries and the other areas in which we have significant business activities or investments;     exposure to various types of market risks, principally including interest rate risk, foreign exchange rate risk and equity price risk;     a worsening of the economic environment in Spain, the U.K., the U.S., other European countries, Brazil, other Latin American countries, and increase of the volatility in the capital markets;     the effects of a decline in real estate prices, particularly in Spain and the U.K.;     the effects of results of U.K political developments, including the U.K’s potential exit from the European Union;     monetary and interest rate policies of the European Central Bank and various central banks;     inflation or deflation;     the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;     changes in competition and pricing environments;     the inability to hedge some risks economically;     the adequacy of loss reserves;     acquisitions or restructurings of businesses that may not perform in accordance with our expectations;     changes in demographics, consumer spending, investment or saving habits;     potential losses associated with prepayment of our loan and investment portfolio, declines in the value of collateral securing our loan portfolio, and counterparty risk; and     changes in competition and pricing environments as a result of the progressive adoption of the internet for conducting financial services and/or other factors.		Political and Governmental Factors       political stability in Spain, the U.K., other European countries, Latin America and the U.S.;     changes in Spanish, U.K., E.U., U.S., Latin American, or other jurisdictions’ laws, regulations or taxes, including changes in regulatory capital and liquidity requirements, including as a result of the U.K exiting the European Union; and     increased regulation in light of the global financial crisis. Transaction and Commercial Factors     damage to our reputation;     our ability to integrate successfully our acquisitions and the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters while we integrate these acquisitions; and     the outcome of our negotiations with business partners and governments. Operating Factors       potential losses associated with an increase in the level of non‑performance by counterparties to other types of financial instruments;     technical difficulties and/or failure to improve or upgrade our information technology;     changes in our ability to access liquidity and funding on acceptable terms, including as a result of changes in our credit spreads or a downgrade in our credit ratings or those of our more significant subsidiaries;     our exposure to operational losses (e.g., failed internal or external processes, people and systems);     changes in our ability to recruit, retain and develop appropriate senior management and skilled personnel;     the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio; and     the impact of changes in the composition of our balance sheet on future interest income / (charges).     potential losses associated with cyber-attacks.

 

The forward-looking statements contained in this report speak only as of the date of this report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

 

 

 

 

 

3.1 BUSINESS AREAS PERFORMANCE

 

DESCRIPTION OF BUSINESSES

 

The segment reporting is based on financial information presented to the chief operating decision maker, which excludes certain items included in the statutory results that distort year-on-year comparisons and are not considered for management reporting purposes. This financial information (underlying basis) is computed by adjusting reported results for the effects of certain gains and losses (e.g.: capital gains, write-downs, impairment of goodwill, etc.). These gains and losses are items that management and investors ordinarily identify and consider separately to better understand the underlying trends in the business (see also Note 52.c to the Group financial statements).

 

The Group has aligned the information in this operating segment section in a manner consistent with the underlying information used internally for management reporting purposes and with that presented throughout the Group’s other public documents.

 

The Group executive committee has been determined to be the chief operating decision maker for the Group. The Group’s operating segments reflect the organisational and management structures. The Group executive committee reviews the internal reporting based on these segments in order to assess performance and allocate resources.

 

The segments are differentiated by the geographic area where profits are earned, and by type of business. The financial information of each reportable segment is prepared by aggregating the figures for the Group’s various geographic areas and business units. The information relates to both the accounting data of the units integrated in each segment and that provided by management information systems. In all cases, the same general principles as those used in the Group are applied.

 

The businesses included in each of the business areas in this report and the accounting principles under which their results are presented here may differ from the businesses included and accounting principles applied in the financial information separately prepared and disclosed by our subsidiaries (some of which are publicly listed) which in name or geographical description may seem to correspond to the business areas covered in this report. Accordingly, the results of operations and trends shown for our business areas in this document may differ materially from those of such subsidiaries.

 

During 2018, certain changes took place in the organisational structure of the Group, which led to a change in segment reporting:

 

     Banco Popular’s financial results and balance sheet have been allocated to the corresponding segments. The affected segments are Spain, Portugal and Real Estate Activity Spain.

 

     The Group acquired the stake of Santander Asset Management that was not already owned by the Group. Following this change in the consolidation perimeter, the Group decided to integrate the acquired Asset Management business, the International Private Banking business and the corporate unit of Private Banking, which were previously reported within the Retail Banking segment, into a new segment then identified as Wealth Management.

 

      Additionally, there has been an adjustment to the perimeter of the Global Customer Relationship Model, between the Retail Banking segment and the Santander Corporate & Investment Banking segment, as well as other minor changes relating to the Real Estate Activity Spain.

 

Additionally, on July 4, 2019, we announced that, starting with the financial information for the first half of 2019, we will carry out a change in our reported segments to reflect our current reporting structure.

 

This change in our reported segments aims to align the segment information to how segments and units are managed and has no impact at the Group level. The main changes, which have been applied to segment information for all periods included in the consolidated financial statements, are the following:

 

Primary segments

 

 

-     The UK unit is aligned with ring-fencing structure, including products and services distributed to our retail customers and the majority of our business customers. The businesses excluded are now incorporated in the rest of Europe.

-     Spain unit now includes the Real Estate Activity Spain, previously included in the rest of Europe, and it excludes some treasury businesses now reported in the rest of Europe and the online bank OpenBank which is now incorporated in the new Digital segment (Santander Global Platform).

-     The rest of Europe comprises mainly (i) CIB businesses such as Banco Santander, S.A. branches outside of Spain (including the excluded businesses in the UK as a result of ring-fencing) as well as Spain’s treasury business and (ii) Private Banking’s Wealth Management & Insurance businesses in Switzerland, mutual funds in Luxemburg and Insurance in Zurich.

 

 

 

 

-     Our fully digital native bank Openbank and Open Digital Services.

-     Global Payments Services: payments platform to better serve our customers with value propositions developed globally, including Superdigital, Pago FX and our recently launched global businesses (Global Merchant Services and Global Trade Services).

-     Digital Assets: common digital assets and Centres of Digital Expertise which help our banks in their digital transformation.

 

Secondary segments

 

 

 

 

 

 

The changes in the secondary segments have no impact on the primary segments.

 

The Group restated the information of earlier periods to reflect these changes in the structure of its internal organisation.

 

The operating business areas are structured in two levels:

 

Primary segments

 

This primary level of segmentation, which is based on the Group’s management structure, comprises five reportable segments: four operating areas plus the Corporate Centre. The operating areas, are:

 

    Europe : which comprises all the business activities carried out in the region. Detailed financial information is provided on Spain, Portugal, Poland, Santander Consumer Finance (which incorporates all the region’s business, including the three countries mentioned herewith) and the UK.

 

    North America : which comprises all the business activities carried out in Mexico and the US, which includes the holding company (SHUSA) and the businesses of Santander Bank, Santander Consumer USA, Banco Santander Puerto Rico, the specialised unit Banco Santander International and the New York branch.

 

    South America : includes all the financial activities carried out by the Group through its banks and subsidiary banks in the region. Detailed information is provided on Brazil, Chile, Argentina, Uruguay, Peru and Colombia.

 

    Santander Global Platform : includes our fully digital bank Openbank and Open Digital Services, Global Payments Services (Superdigital, Pago FX, Global Merchant Services, Global Trade Services) and Digital Assets (Centres of Digital Expertise, InnoVentures and Digital Assets).

 

Secondary segments

 

At this secondary level of segment reporting, the Group is structured into Retail Banking, Santander Corporate & Investment Banking, Wealth Management & Insurance and Santander Global Platform.

 

    Retail Banking : this covers all customer banking businesses, including consumer finance, except those of corporate banking, which are managed through Santander Corporate & Investment Banking, and asset management, private banking and insurance, which are managed by Wealth Management & Insurance. The results of the hedging positions in each country are also included, conducted within the sphere of each one’s assets and liabilities committee.

 

    Santander Corporate & Investment Banking (SCIB) : This business reflects revenue from global corporate banking, investment banking and markets worldwide including treasuries managed globally (always after the appropriate distribution with Retail Banking customers), as well as equities business.

 

    Wealth Management & Insurance : Includes the asset management business (Santander Asset Management), the corporate unit of Private Banking and International Private Banking in Miami and Switzerland and the insurance business (Santander Insurance).

 

    Santander Global Platform: includes our fully digital bank Openbank and Open Digital Services, Global Payments Services (Superdigital, Pago FX, Global Merchant Services, Global Trade Services) and Digital Assets (Centres of Digital Expertise, InnoVentures and Digital Assets).

 

In addition to these operating units, which report by geographic area and businesses, the Group continues to maintain the area of Corporate Centre , that includes the centralised activities relating to equity stakes in financial companies, financial management of the structural exchange rate position, assumed within the sphere of the Group’s assets and liabilities committee, as well as management of liquidity and of shareholders’ equity via issuances.

 

As the Group’s holding entity, this area manages all capital and reserves and allocations of capital and liquidity with the rest of businesses. It also incorporates amortisation of goodwill but not the costs related to the Group’s central services (charged to the areas), except for corporate and institutional expenses related to the Group’s functioning.

 

Finally, certain figures contained in this report, including financial information, have been subject to rounding to enhance their presentation. Accordingly, in certain instances, the sum of the numbers in a column or a row in tables contained in this report may not conform exactly to the total figure given for that column or row.

 

 

 

 

 

3.2  SUMMARY INCOME STATEMENT OF THE GROUP’S MAIN BUSINESS AREAS

 

2018 . Main items of the underlying income statement

EUR million

 

Primary segments		Net interest income		Net fee income		Total income		Net operating income		Profit before tax		Underlying attributable profit to the parent
Europe		14,204		5,435		21,257		10,091		7,491		5,048
Spain		4,093		2,624		7,615		3,277		2,063		1,554
Santander Consumer Finance		3,723		798		4,610		2,622		2,137		1,293
United Kingdom		4,078		912		5,132		2,295		1,803		1,272
Portugal		858		377		1,344		700		686		479
Poland		996		453		1,488		848		552		296
Other Europe		456		272		1,068		350		251		154
North America		8,154		1,615		10,476		5,988		2,337		1,304
US		5,391		859		6,949		3,930		1,113		549
Mexico		2,763		756		3,527		2,058		1,224		755
South America		12,891		4,497		17,674		11,117		6,717		3,451
Brazil		9,758		3,497		13,345		8,845		5,185		2,592
Chile		1,944		424		2,535		1,488		1,118		612
Argentina		768		448		1,209		458		183		82
Other South America		421		128		585		326		231		165
Santander Global Platform		79		7		74		(68)		(70)		(54)
Operating areas		35,328		11,554		49,481		27,128		16,475		9,750
Corporate Centre		(987)		(69)		(1,057)		(1,483)		(1,699)		(1,686)
Total Group		34,341		11,485		48,424		25,645		14,776		8,064
Secondary segments
Retail Banking		32,262		8,870		42,231		22,994		12,654		7,238
Santander Corporate & Investment Banking		2,461		1,534		5,077		2,975		2,680		1,691
Wealth Management & Insurance		526		1,142		2,099		1,226		1,211		875
Santander Global Platform		79		7		74		(68)		(70)		(54)
Operating areas		35,328		11,554		49,481		27,128		16,475		9,750
Corporate Centre		(987)		(69)		(1,057)		(1,483)		(1,699)		(1,686)
Total Group		34,341		11,485		48,424		25,645		14,776		8,064

 

 

 

A. Excluding Corporate Centre and Santander Global Platform.

 

Business areas performance

 

2017 . Main items of the underlying income statement

EUR million

 

Primary segments		Net interest income		Net fee income		Total income		Net operating income		Profit before tax		Underlying attributable profit to the parent
Europe		13,529		5,163		20,062		9,608		7,088		4,701
Spain		3,590		2,341		6,522		2,633		1,597		1,171
Santander Consumer Finance		3,571		878		4,484		2,506		2,083		1,254
United Kingdom		4,333		915		5,445		2,724		2,056		1,403
Portugal		788		360		1,245		630		574		435
Poland		928		443		1,419		814		581		300
Other Europe		321		226		948		300		197		137
North America		8,170		1,720		10,420		5,840		2,026		1,118
US		5,569		971		6,959		3,761		892		408
Mexico		2,601		749		3,460		2,078		1,134		710
South America		13,383		4,744		19,059		11,720		6,363		3,587
Brazil		10,078		3,640		14,273		9,193		4,612		2,544
Chile		1,907		391		2,523		1,498		1,059		586
Argentina		985		596		1,747		777		526		359
Other South America		413		117		516		252		165		97
Santander Global Platform		64		7		60		(7)		(14)		(11)
Operating areas		35,146		11,635		49,601		27,160		15,463		9,394
Corporate Centre		(851)		(38)		(1,209)		(1,687)		(1,913)		(1,878)
Total Group		34,296		11,597		48,392		25,473		13,550		7,516
Secondary segments
Retail Banking		32,169		9,295		42,404		22,652		11,743		6,837
Santander Corporate & Investment Banking		2,442		1,621		5,491		3,463		2,701		1,772
Wealth Management & Insurance		472		712		1,646		1,052		1,033		796
Santander Global Platform		64		7		60		(7)		(14)		(11)
Operating areas		35,146		11,635		49,601		27,160		15,463		9,394
Corporate Centre		(851)		(38)		(1,209)		(1,687)		(1,913)		(1,878)
Total Group		34,296		11,597		48,392		25,473		13,550		7,516

 

 

 

A. Excluding Corporate Centre and Santander Global Platform.

 

3.3  PRIMARY SEGMENTS

 

 

Europe

 

			2018 Highlights
Underlying attributable profit			    Focus on three main priorities: customer loyalty, digital transformation and operational excellence.
EUR 5,048 Mn			    Progress in the incorporation of the new strategic businesses: Banco Popular in Spain and Portugal, and the retail and SME businesses acquired from Deutsche Bank Polska (DBP) in Poland.     Underlying attributable profit amounts to EUR 5,048 million, 7% higher in euros (+8% excluding the exchange rate impact), spurred by customer revenue, partly driven by Banco Popular’s integration.

 

 

Strategy

 

In an environment of historically low interest rates, the Group carried out a strategy that enabled us to improve customer loyalty, increase activity, customer revenue growth, cost control and enhance credit quality.

 

Additionally, 2018 was a key year in Europe due to the resizing that followed the new strategic businesses integration into the Group.

 

In Portugal, the Bank completed the operational and technological integration of Banco Popular Portugal. After this acquisition, Santander Totta became the largest privately owned bank in terms of assets and loans and advances to customers in the domestic activity.

 

 

In Spain, we strengthened our position after the acquisition of Banco Popular, whose integration is progressing as scheduled. We completed the legal integration, and the central and territorial services are already unified. Of note, good performance of the first joint commercial offer ( 1|2|3 Profesionales account) which had accounted more than 160,000 customers by the end of the year, well above the initial target.

 

On the other hand, progress in the management of Banco Popular’s alliances in order to recover strategic business and ease its integration, focusing on enhancing the customer experience. Of note was the sale of 49% of WiZink stake to Värde Partners, Inc. and the recovering of Banco Popular card business. At the same time, we recovered its ATM business.

 

In Poland, Santander Bank Polska (former BZ WBK) strengthened its position in the country following the acquisition of the retail, SMEs and private banking business of DBP.

 

Lastly, Europe benefited from the creation of the Santander Wealth Management global segment at the end of 2017 (including Asset Management and Private Banking), currently Wealth Management & Insurance,  in order to offer an improved and wider range of funds. In Private Banking, we are developing a new proposition, which intends to be the leader in Europe, supported by the collaboration of the countries where the Group operates.

 

The Group continues to be immersed in its cultural transformation in the region. Santander was awarded with the Top Employers Europe 2018 certification.

 

As a result, the number of loyal customers and digital customers rose (15% and 22% respectively), increasing in all countries of this area.

Activity

 

Loans and advances to customers rose 3%. Excluding reverse repurchase agreements and the exchange rate impact, gross loans and advances to customers increased 1.5% mainly driven by Santander Consumer Finance and Poland (partially due to the integration of DBP). Spain and Portugal decreased in a deleveraging market environment, where consumer loans and SMEs recorded a better evolution than large companies and institutions, and the UK was almost flat.

 

Customer deposits were 1% lower year-on-year. Excluding repurchase agreements and the exchange rate impact were 2% higher, due to the increase in demand deposits in all units, which offset lower time deposits.

 

Of note was the performance of Spain, where demand deposits increased by EUR 13,000 million (+7%, driven by the 1|2|3 loyalty strategy), while time deposits decreased by EUR 13,000 million (-23%) due to reduction of expensive deposits (partially from Banco Popular), as part of our strategy to reduce the cost of funding.

 

Including mutual funds (-5%), customer funds grew 1.5%.

 

Results

 

Underlying attributable profit amounted to EUR 5,048 million in the year (51% of the Group’s operating areas). Underlying RoTE was 10.9%.

 

Compared to 2017, underlying attributable profit rose 7% in euros and 8% excluding the exchange rate impact. The evolution of profit and the main P&L lines were affected by the integration of Banco Popular in Spain and Portugal in June 2017.

 

By lines:

 

     Total income increased 6%, driven by all the main items. Net interest income rose 6% with a positive evolution in all units (mainly Spain and Portugal) except for the UK, because of the competitive pressure on mortgage spreads and continued SVR (Standard Variable Rate) volumes attrition . Net fee income was 5% higher, especially in Spain due to transactionality. The only decreases were recorded in Santander Consumer Finance, due to lower income from insurance, and in the UK. Gains on financial transactions rose 23% (accounting for just 5% of total income), mainly driven by Spain’s performance.

 

     Administrative expenses and amortisations increased 7%, as Spain was significantly affected by Popular’s integration.   Despite this increase, the ongoing measures to optimise costs, as part of the integration process, are starting to produce synergies.

 

     Net loan-loss provisions were 20% higher mainly due to the integration of Banco Popular in Spain and Portugal in 2017, as credit quality improved: the NPL ratio decreased 49 bps year-on-year to 3.67%, with a positive performance in all commercial units. The coverage ratio fell slightly to 50%.

 

     Other gains (losses) and provisions recorded a loss of EUR 1,028 million (EUR -1,206 million in 2017), with an uneven performance by units.

 

Europe

EUR million

 

Underlying income statement		2018		2017		%		% excl. FX
Net interest income		14,204		13,529		5.0		5.5
Net fee income		5,435		5,163		5.3		5.6
Gains (losses) on financial transactions A		1,115		907		22.9		23.4
Other operating income		503		463		8.8		9.1
Total income		21,257		20,062		6.0		6.4
Administrative expenses and amortisations		(11,165)		(10,454)		6.8		7.2
Net operating income		10,091		9,608		5.0		5.5
Net loan-loss provisions		(1,572)		(1,313)		19.7		20.0
Other gains (losses) and provisions		(1,028)		(1,206)		(14.8)		(14.5)
Profit before tax		7,491		7,088		5.7		6.2
Tax on profit		(2,020)		(1,979)		2.1		2.5
Profit from continuing operations		5,472		5,108		7.1		7.6
Net profit from discontinued operations		—		—		—		—
Consolidated profit		5,472		5,108		7.1		7.6
Non-controlling interests		424		408		3.9		4.0
Underlying attributable profit to the parent		5,048		4,701		7.4		8.0
Balance sheet
Loans and advances to customers		639,966		623,604		2.6		3.1
Cash, central banks and credit institutions		172,298		155,204		11.0		11.3
Debt instruments		118,221		125,848		(6.1)		(5.8)
Other financial assets		49,263		64,608		(23.7)		(23.5)
Other asset accounts		40,989		53,790		(23.8)		(23.7)
Total assets		1,020,737		1,023,053		(0.2)		0.1
Customer deposits		571,834		576,072		(0.7)		(0.3)
Central banks and credit institutions		192,685		179,057		7.6		7.6
Marketable debt securities		129,574		122,325		5.9		6.4
Other financial liabilities		53,687		67,041		(19.9)		(19.7)
Other liabilities accounts		18,947		21,569		(12.2)		(11.9)
Total liabilities		966,727		966,064		0.1		0.4
Total equity		54,010		56,989		(5.2)		(4.8)
Memorandum items :
Gross loans and advances to customers B		626,205		619,764		1.0		1.5
Customer funds		634,893		628,016		1.1		1.5
Customer deposits C		557,122		546,064		2.0		2.5
Mutual funds		77,771		81,952		(5.1)		(4.9)
Ratios (%) and operating data
Underlying RoTE		10.86		10.07		0.79
Efficiency ratio		52.5		52.1		0.4
NPL ratio		3.67		4.16		(0.49)
NPL coverage		50.1		51.7		(1.6)
Number of employees		93,021		93,564		(0.6)
Number of branches		6,753		7,105		(5.0)

 

A. Includes exchange differences.

B. Excluding reverse repos.

C. Excluding repos.

Spain

 

			2018 Highlights
Underlying attributable profit			   Banco Popular’s integration is progressing as scheduled: the legal integration was completed, central services and regional teams unified, a single technological platform put in place and migration of customers has already started.
EUR 1,554 Mn			   Progress was made on digital transformation and the customer relationship model (4.3 million digital customers, launch of Work Café and reinforcement of Santander Personal).    Strong growth in SME and companies. New lending was 17% higher and the stock increased by EUR 1,800 million year-on-year.    Underlying attributable profit rose 33% in 2018, with better efficiency, a cost of credit of 38 bps and a positive impact from the incorporation of Banco Popular.

 

Strategy

 

In 2018, the integration of Banco Popular progressed as scheduled, the central services and regional teams unified and a single technological platform put in place where we started the migration of customers. Progress was also made in managing of Banco Popular’s alliances in order to recover strategic businesses.

 

Loyal customers rose 32%, with double-digit rises in the main transactional drivers: cards turnover rose 14% year-on-year; points of sale, +11% with a market share gain of 253 bps year-on-year; insurance, +30% in new protection insurance premiums and growth via digital means due to the improved process of online approvals.

 

The SMEs and companies segment was also very dynamic: commercial activity increased 17%, largely from international business (+10%), backed by trade corridors and more staffing.

 

In 2018, SCIB continued to be the leader in lending to large companies in Spain, according to Dealogic. Of note were the more than 80 syndicated loans. On the other hand, Santander Private Banking continued to be the market leader and it was named Best Private Bank in Spain by The Banker magazine.

 

Digital customers increased 57%, backed by the digital transformation, to 4.3 million and the weight of sales via digital channels rose to c.30% in December 2018. Regarding our digital transformation, of note were the following initiatives :

 

–    Implementation of Santander Personal, our tailored remote management. We doubled our remote managers, we commercialised all our products through this channel and incorporated distinctive customer relation items, such as video calls through the app or chat with the manager.

 

–    Launch of Smartbank , new relationship model with the more than 600,000 millennial customers, offering them tailored financial and non-financial proposals.

 

–    Launch of SO:FIA , an investment platform for the integral management of shares, mutual and pension funds.

 

–    New web for companies, fully renovated as a differential feature in the sector: online global position, one click remittances, totally integrated payment and transfer suite, international business, pre-approved loans, etc., to strengthen our competitive advantage in SMEs.

 

 

 

 

–    Boost in consumer credit thanks to increased sales in pre-approved credit via ATMs, going from a pure servicing model to a more commercial one.

 

Regarding the improvements on customer experience and attention, we continue to update the branch distribution network with new models, such as Smart Red (556 branches), and we opened the first Work Café , which integrates co-working space, a coffee shop and bank, focusing on the customer experience and digital capabilities.

 

Lastly, in 2018 our contract centre was awarded the CRC ORO for excellent Customer Service in Spain.

 

Activity

 

Loans and advances to customers decreased 4%. In gross terms, excluding reverse repurchase agreements, they fell also 4% in euros compared to 2017 because of the fall in large companies and institutions, which offset the growth in retail banking due to the rise in private banking (EUR 400 million) and SMEs and companies loans (EUR 1,800 million).

 

Customer deposits were flat compared to 2017. Demand deposits rose 7%, driven by the 1|2|3 account (up EUR 5,300 million in the year), which offset the decrease in time deposits as a result of the funding cost reduction strategy.

 

Customer funds were down 1% including the 5% decrease in mutual funds. In addition, EUR 14,142 million are managed in pension funds, 5% lower than in 2017.

 

Results

 

Underlying attributable profit amounted to EUR 1,554 million (16% of the Group’s total operating areas) and underlying RoTE was 10.4%.

 

Compared to 2017, underlying attributable profit was 33% higher:

 

    Total income rose 17%, spurred by net interest income (+14%) reflecting a sustained improvement of customer spreads due to the lower cost of funding. Net fee income was 12% higher, thanks to increased transactions. Of note was income from servicing, mutual funds and insurance. Gains on financial transactions rose 65%, favoured by the management of ALCO portfolios.

 

    Administrative expenses and amortisations were 12% higher. However, the first synergies from the optimisation measures carried out as part of the integration process are starting to materialise.

 

    Net loan-loss provisions rose 14%. Nevertheless, the NPL ratio fell to 7.32% in December 2018 from 7.70% in December 2017 and the cost of credit was just 38 bps.

 

    Other gains (losses) and provisions increased their losses in the year, partly due to provisions related to foreclosed assets.

 

Year-on-year growth rates of profit and the main P&L lines were impacted by the incorporation of Popular.

 

Spain

EUR million

 

Underlying income statement		2018		2017		%
Net interest income		4,093		3,590		14.0
Net fee income		2,624		2,341		12.1
Gains (losses) on financial transactions A		703		427		64.7
Other operating income		195		164		18.5
Total income		7,615		6,522		16.8
Administrative expenses and amortisations		(4,338)		(3,889)		11.6
Net operating income		3,277		2,633		24.4
Net loan-loss provisions		(789)		(690)		14.3
Other gains (losses) and provisions		(425)		(346)		22.9
Profit before tax		2,063		1,597		29.1
Tax on profit		(508)		(422)		20.5
Profit from continuing operations		1,555		1,176		32.3
Net profit from discontinued operations		—		—		—
Consolidated profit		1,555		1,176		32.3
Non-controlling interests		1		4		(86.4)
Underlying attributable profit to the parent		1,554		1,171		32.7
Balance sheet
Loans and advances to customers		196,101		203,272		(3.5)
Cash, central banks and credit institutions		79,100		55,550		42.4
Debt instruments		48,849		59,298		(17.6)
Other financial assets		2,515		2,965		(15.2)
Other asset accounts		22,436		34,034		(34.1)
Total assets		349,001		355,118		(1.7)
Customer deposits		238,372		238,549		(0.1)
Central banks and credit institutions		56,062		53,626		4.5
Marketable debt securities		24,628		26,260		(6.2)
Other financial liabilities		6,216		6,726		(7.6)
Other liabilities accounts		8,916		11,337		(21.4)
Total liabilities		334,193		336,498		(0.7)
Total equity		14,807		18,620		(20.5)
Memorandum items:
Gross loans and advances to customers B		203,288		210,934		(3.6)
Customer funds		298,860		301,907		(1.0)
Customer deposits C		237,821		237,728		0.0
Mutual funds		61,039		64,179		(4.9)
Ratios (%) and operating data
Underlying RoTE		10.42		8.06		2.36
Efficiency ratio		57.0		59.6		(2.6)
NPL ratio		7.32		7.70		(0.38)
NPL coverage		43.7		46.1		(2.4)
Number of employees		31,229		32,430		(3.7)
Number of branches		4,365		4,484		(2.7)

 

A. Includes exchange differences.

B. Excluding reverse repos.

C. Excluding repos.