1.Banco Santander, S.A.and Companiescomposing SantanderGroupConsolidated Financial Statements andDirectors Report for the year ended 31December 2011, together with AuditorsReportTranslation of a report originally issued in Spanishbased on our work performed in accordance with theaudit regulations in force in Spain and ofconsolidated financial statements originally issued inSpanish and prepared in accordance with theregulatory financial reporting framework applicable tothe Group (see Notes 1 and 55). In the event of adiscrepancy, the Spanish-language version prevails.

2. Banco Santander, S.A.and Companiescomposing SantanderGroupConsolidated Financial Statements andDirectors Report for the year ended 31December 2011 3. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails.SANTANDER GROUP CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2011, 2010 AND 2009 (Millions of Euros) ASSETS Note2011 2010 (*)2009 (*) LIABILITIES AND EQUITYNote 2011 2010 (*)2009 (*)CASH AND BALANCES WITH CENTRAL BANKS 96,52477,78634,889 FINANCIAL LIABILITIES HELD FOR TRADING:146,948 136,772 115,516 Deposits from central banks 20 7,74012,605 2,985 Deposits from credit institutions 20 9,28728,371 43,131FINANCIAL ASSETS HELD FOR TRADING:172,638 156,762 135,054 Customer deposits2116,574 7,849 4,658 Loans and advances to credit institutions6 4,63616,2165,953 Marketable debt securities22 77 366 586 Loans and advances to customers 10 8,056755 10,076 Trading derivatives 9103,083 75,279 58,713 Debt instruments 752,70457,87249,921 Short positions 910,18712,302 5,140 Equity instruments 8 4,744 8,8509,248 Other financial liabilities 24- - 303 Trading derivatives9 102,49873,06959,856OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:44,909 51,02042,371OTHER FINANCIAL ASSETS AT FAIR VALUE Deposits from central banks 201,510 337 10,103 THROUGH PROFIT OR LOSS:19,56339,480 37,814 Deposits from credit institutions208,232 19,26312,745 Loans and advances to credit institutions64,70118,831 16,243 Customer deposits21 26,982 27,14214,636 Loans and advances to customers 10 11,748 7,777 8,329 Marketable debt securities228,1854,278 4,887 Debt instruments 72,649 4,605 7,365 Subordinated liabilities -- - Equity instruments 8 4658,267 5,877 Other financial liabilities-- - FINANCIAL LIABILITIES AT AMORTISED COST: 935,669898,969 823,403Deposits from central banks2034,9968,64422,345AVAILABLE-FOR-SALE FINANCIAL ASSETS:86,61386,23586,620 Deposits from credit institutions 2081,373 70,89250,782 Debt instruments 7 81,58979,68979,289 Customer deposits 21 588,977581,385 487,681 Equity instruments 85,024 6,546 7,331 Marketable debt securities22 189,110188,229 206,490Subordinated liabilities 2322,992 30,47536,805Other financial liabilities2418,221 19,34419,300LOANS AND RECEIVABLES:779,525 768,858736,746 Loans and advances to credit institutions642,38944,808 57,641 CHANGES IN THE FAIR VALUE OF HEDGED ITEMS Loans and advances to customers 10 730,296 715,621664,146 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 36876810 806 Debt instruments 7 6,840 8,429 14,959 HEDGING DERIVATIVES 116,4446,634 5,191HELD-TO-MATURITY INVESTMENTS- --LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE 42 54 293CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF LIABILITIES UNDER INSURANCE CONTRACTS15517 10,44916,916 INTEREST RATE RISK362,024 1,4641,420PROVISIONS: 15,572 15,66017,533HEDGING DERIVATIVES119,898 8,227 7,834 Provision for pensions and similar obligations259,0459,51910,629 Provisions for taxes and other legal contingencies253,6633,670 3,283NON-CURRENT ASSETS HELD FOR SALE 125,338 6,285 5,789 Provisions for contingent liabilities and commitments 25 659 1,030642 Other provisions252,2051,441 2,979INVESTMENTS: 134,155 273164 Associates2,082 273164 TAX LIABILITIES: 8,1748,618 7,005 Jointly controlled entities 2,073-- Current 5,1014,306 3,338 Deferred273,0734,312 3,667INSURANCE CONTRACTS LINKED TO OTHER LIABILITIES26 9,5167,600 7,625 PENSIONS142,146 2,2202,356 TOTAL LIABILITIES 1,168,6671,136,586 1,036,659REINSURANCE ASSETS 15254 546 417 EQUITYSHAREHOLDERS EQUITY:30 80,896 77,33371,832TANGIBLE ASSETS:13,84611,1428,996 Share capital314,4554,164 4,114Property, plant and equipment- 9,995 9,8327,905 Registered 4,4554,164 4,114 For own use 167,797 7,5086,202 Less: Uncalled capital-- - Leased out under an operating lease 162,198 2,3241,703 Share premium32 31,223 29,45729,305Investment property163,851 1,3101,091 Reserves 33 32,980 28,30724,608Accumulated reserves (losses)33 32,921 28,25524,540Reserves (losses) of entities accounted for using theINTANGIBLE ASSETS:28,08328,064 25,643equity method 3359 5268 Goodwill17 25,08924,622 22,865 Other equity instruments 348,7088,686 7,189 Other intangible assets 182,994 3,4422,778 Equity component of compound financial instruments 341,6681,668-Other347,0407,018 7,189 Less: Treasury shares 34 (251)(192) (30)TAX ASSETS: 22,90122,572 20,655 Profit for the year attributable to the Parent 5,3518,181 8,942 Current 5,140 5,4834,828 Less: Dividends and remuneration4(1,570)(1,270) (2,296) Deferred27 17,76117,089 15,827VALUATION ADJUSTMENTS(4,482)(2,315) (3,165)OTHER ASSETS 198,018 7,5876,132 Available-for-sale financial assets29 (977) (1,249)645 Inventories319 455519 Cash flow hedges11 (202)(172) (255) Other 7,699 7,1325,613 Hedges of net investments in foreign operations29(1,850)(1,955)297 Exchange differences29(1,358)1,061 (3,852) Non-current assets held for sale -- - Entities accounted for using the equity method29 (95) - - Other valuation adjustments-- - NON-CONTROLLING INTERESTS 28 6,4455,897 5,203Valuation adjustments43583845Other 6,0105,059 5,158 TOTAL EQUITY82,859 80,91573,870TOTAL ASSETS1,251,526 1,217,5011,110,529 TOTAL LIABILITIES AND EQUITY 1,251,5261,217,501 1,110,529 MEMORANDUM ITEMS: CONTINGENT LIABILITIES3548,042 59,79559,256 CONTINGENT COMMITMENTS35 195,382203,709 163,531 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at 31 December 2011. 4. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group(see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails.SANTANDER GROUPCONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009(Millions of Euros)(Debit) Credit Notes20112010 (*) 2009 (*)Interest and similar income38 60,85652,90753,173Interest expense and similar charges 39(30,035)(23,683) (26,874)NET INTEREST INCOME30,821 29,22426,299Income from equity instruments 40 394 362436Share of results of entities accounted for using the equity method 415717(1)Fee and commission income42 12,74911,68110,726Fee and commission expense 43(2,277) (1,946)(1,646)Gains/losses on financial assets and liabilities (net) 442,838 2,1643,802 Held for trading2,113 1,3122,098 Other financial instruments at fair value through profit or loss2170198 Financial instruments not measured at fair value through profit or loss803 791 1,631 Other(99)(9) (125)Exchange differences (net) 45(522)441444Other operating income 8,050 8,1957,929 Income from insurance and reinsurance contracts issued466,748 7,1627,113 Sales and income from the provision of non-financial services 46 400 340378 Other operating income46 902 693438Other operating expenses (8,032) (8,089)(7,785) Expenses of insurance and reinsurance contracts 46(6,356) (6,784)(6,774) Changes in inventories46(249) (205)(238) Other operating expenses46(1,427) (1,100)(773)GROSS INCOME 44,078 42,04940,204Administrative expenses(17,781)(16,255) (14,825) Staff costs 47(10,326)(9,329)(8,451) Other general administrative expenses 48(7,455) (6,926)(6,374)Depreciation and amortisation charge 16 & 18 (2,109) (1,940)(1,596)Provisions (net) 25(2,601) (1,133)(1,792)Impairment losses on financial assets (net)(11,868)(10,443) (11,578) Loans and receivables10 (11,040)(10,267) (11,088) Other financial instruments not measured at fair value through profit or loss7 & 29 (828) (176)(490)PROFIT FROM OPERATIONS 9,71912,27810,413Impairment losses on other assets (net)(1,517) (286)(165) Goodwill and other intangible assets17 & 18 (1,161)(69) (31) Other assets(356) (217)(134)Gains/(losses) on disposal of assets not classified as non-current assets held for sale491,846350 1,565Gains on bargain purchases arising on business combinations- --Gains/(losses) on non-current assets held for sale not classified as discontinued operations 50(2,109) (290)(1,225)PROFIT BEFORE TAX7,93912,05210,588Income tax 27(1,776) (2,923)(1,207)PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 6,163 9,1299,381PROFIT (LOSS) FROM DISCONTINUED OPERATIONS (Net) 37 (24)(27)31CONSOLIDATED PROFIT FOR THE YEAR 6,139 9,1029,412Profit attributable to the Parent5,351 8,1818,942Profit attributable to non-controlling interests 28 788 921470EARNINGS PER SHAREFrom continuing and discontinued operationsBasic earnings per share (euros) 4 0.60 0.941.04Diluted earnings per share (euros) 4 0.60 0.941.04From continuing operationsBasic earnings per share (euros) 4 0.60 0.941.04Diluted earnings per share (euros) 4 0.60 0.941.04 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated income statement for the year ended 31 December 2011. 5. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSEFOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009 (Millions of Euros)20112010 (*) 2009 (*)CONSOLIDATED PROFIT FOR THE YEAR6,1399,102 9,412OTHER RECOGNISED INCOME AND EXPENSE(2,570)1,6435,551Available-for-sale financial assets: 344(2,719)1,254 Revaluation gains/(losses)231(1,863)2,133 Amounts transferred to income statement 156 (856) (777) Other reclassifications (43) -(102)Cash flow hedges:(17)117 73 Revaluation gains/(losses) (109)(89) 160 Amounts transferred to income statement92 206(41) Amounts transferred to initial carrying amount of hedged items-- - Other reclassifications --(46)Hedges of net investments in foreign operations: 106(2,253) (1,171) Revaluation gains/(losses) 13(2,444) (1,222) Amounts transferred to income statement9 191 51 Other reclassifications84- -Exchange differences:(2,824) 5,704 5,915 Revaluation gains/(losses)(2,906) 5,986 5,944 Amounts transferred to income statement85(282) (29) Other reclassifications (3)- -Non-current assets held for sale:-- (37) Revaluation gains/(losses)-- (37) Amounts transferred to income statement -- - Other reclassifications -- -Actuarial gains/(losses) on pension plans-- -Entities accounted for using the equity method:(95) - 148 Revaluation gains/(losses)(37) - - Amounts transferred to income statement -- - Other reclassifications (58) - 148Other recognised income and expense-- -Income tax (84)794 (631)TOTAL RECOGNISED INCOME AND EXPENSE 3,569 10,74514,963Attributable to the Parent3,1849,03114,077Attributable to non-controlling interests 3851,714886 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of recognised income and expensefor the year ended 31 December 2011. 6. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009(Millions of Euros)Equity Attributable to the Parent Shareholders EquityReserves Reserves(losses) of entities Profit for AccumulatedaccountedOther Less:the yearLess: Total Non-Share Sharereservesfor using the equityTreasury attributableDividends andshareholdersValuationcontrolling Totalcapitalpremium(losses)equity method instruments shares to the Parentremunerationequity adjustmentsTotal interestsequityEnding balance at 31/12/10 (*) 4,164 29,45728,255528,686 (192) 8,181 (1,270)77,333(2,315)75,0185,897 80,915Adjustments due to changes inaccounting policies--- - - - - --- - - -Adjustments due to errors--- - - - - --- - - -Adjusted beginning balance 4,164 29,45728,255528,686 (192) 8,181 (1,270)77,333(2,315)75,0185,897 80,915Total recognised income andexpense--- - - -5,351- 5,351 (2,167)3,1843853,569Other changes in equity2911,766 4,6667 22 (59)(8,181)(300) (1,789) -(1,789)164(1,625)Capital increases12017(123)-(17) - - - (3) -(3)- (3)Capital reductions --- - - - - --- -(51) (51)Conversion of financial liabilitiesinto equity1711,773- - - - - - 1,944 -1,944-1,944Increases in other equityinstruments--- - 185 - - - 185 - 185 -185Reclassification of financialliabilities to other equityinstruments--- - - - - --- - - -Reclassification of other equityinstruments to financial liabilities --- - - - - --- - - -Distribution of dividends--(2,060) - - - - (1,570) (3,630) -(3,630)(431)(4,061)Transactions involving own equityinstruments (net)--(31)- -(59) - - (90)- (90)-(90)Transfers between equity items - (24) 6,9707(41) -(8,181) 1,270 -- - - -Increases (decreases) due tobusiness combinations--- - - - - --- -162162Equity-instrument-based payments --- - (105) - - -(105)-(105)-(105)Other increases/(decreases) inequity --(90)--- - - (90)- (90) 484 394Ending balance at 31/12/11 4,455 31,22332,921598,708 (251) 5,351 (1,570)80,896(4,482)76,4146,445 82,859 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2011. 7. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009(Millions of Euros) Equity Attributable to the Parent (*)Shareholders EquityReserves Reserves(losses) of entitiesProfitNon- Accumulatedaccounted OtherLess: for the yearLess:TotalcontrollingTotal ShareSharereservesfor using theequity TreasuryattributableDividends andshareholdersValuationinterests equity capital premium(losses)equity methodinstrumentssharesto the Parentremunerationequity adjustments Total(*)(*)Ending balance at 31/12/094,11429,30524,54068 7,189(30) 8,942 (2,296)71,832 (3,165) 68,6675,203 73,870Adjustments due to changes inaccounting policies - --- - - - -- -- - -Adjustments due to errors - --- - - - -- -- - -Adjusted beginning balance4,11429,30524,54068 7,189(30) 8,942 (2,296)71,832 (3,165) 68,6675,203 73,870Total recognised income andexpense - --- - -8,181- 8,181 8509,031 1,71410,745Other changes in equity50 152 3,715 (16)1,497 (162)(8,942) 1,026(2,680)- (2,680) (1,020) (3,700)Capital increases50 162(44) - (168) - - -- -- - -Capital reductions- --- - - - -- -- - -Conversion of financialliabilities into equity - --- - - - -- -- - -Increases in other equityinstruments - --- 1,821 - - - 1,821- 1,821-1,821Reclassification of financialliabilities to other equityinstruments - --- - - - -- -- - -Reclassification of otherequity instruments tofinancial liabilities - --- - - - -- -- - -Distribution of dividends - -(1,825)- - - - (1,270) (3,095)- (3,095)(400)(3,495)Transactions involving ownequity instruments (net)- -(18) - - (162) - -(180) - (180)-(180)Transfers between equityitems - (10)6,712 (16) (40) -(8,942) 2,296 - -- - -Increases (decreases) due tobusiness combinations - --- - - - -- --101 101Equity-instrument-basedpayments- --- (116) - - -(116) - (116)-(116)Other increases/(decreases) inequity- -(1,110)- - - - - (1,110)-(1,110) (721) (1,831)Ending balance at 31/12/104,16429,45728,25552 8,686 (192) 8,181 (1,270)77,333 (2,315) 75,0185,897 80,915 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2011.2 8. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009(Millions of Euros) Equity Attributable to the Parent (*) Shareholders EquityReservesReserves (losses)of entities Profit Non-Accumulatedaccounted OtherLess:for the yearLess: TotalcontrollingTotal Share Sharereservesfor using theequity treasury attributableDividends and shareholdersValuationinterests equity capitalpremium(losses)equity methodinstrumentsshares to the Parentremuneration equity adjustmentsTotal (*)(*)Ending balance at 31/12/083,997 28,10421,158 (290) 7,155 (421)8,876(2,693) 65,886 (8,300)57,5862,415 60,001Adjustments due to changes inaccounting policies ---- - --- - - - - -Adjustments due to errors ---- - --- - - - - -Adjusted beginning balance3,997 28,10421,158 (290) 7,155 (421)8,876(2,693) 65,886 (8,300)57,5862,415 60,001Total recognised income andexpense ---- - - 8,942 - 8,942 5,135 14,077886 14,963Other changes in equity117 1,201 3,382 35834391(8,876)397(2,996) - (2,996) 1,902(1,094)Capital increases117 1,224(88) -(2)--- 1,251 - 1,251 2,1873,438Capital reductions---- - --- - --- -Conversion of financialliabilities into equity ---- - --- - --- -Increases in other equityinstruments ----148--- 148 - 148 -148Reclassification of financialliabilities to other equityinstruments ---- - --- - --- -Reclassification of otherequity instruments tofinancial liabilities ---- - --- - --- -Distribution of dividends --(2,119)- - --(2,296) (4,415) - (4,415) (233)(4,648)Transactions involving ownequity instruments (net)--321- -391 -- 712 - 712 -712Transfers between equityitems - (23) 5,891 358 (43)- (8,876)2,693- --- -Increases (decreases) due tobusiness combinations ---- - --- - -- (10)(10)Equity-instrument-basedpayments---- (76)--- (76)- (76)-(76)Other increases/(decreases) inequity-- (623) - 7 ---(616)-(616) (42)(658)Ending balance at 31/12/094,114 29,30524,54068 7,189(30)8,942(2,296) 71,832 (3,165)68,6675,203 73,870 (*) Presented for comparison purposes only.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended 31 December 2011. 3 9. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish-language version prevails. SANTANDER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009 (Millions of Euros)20112010 (*) 2009 (*)A. CASH FLOWS FROM OPERATING ACTIVITIES:35,995 51,874 (18,036)Consolidated profit for the year 6,1399,1029,412Adjustments made to obtain the cash flows from operating activities-21,877 17,849 15,558 Depreciation and amortisation charge2,1091,9401,596 Other adjustments19,768 15,909 13,962Net increase/decrease in operating assets- (337) 28,487 23,749 Financial assets held for trading (7,561)6,310 (10,146) Other financial assets at fair value through profit or loss (12,221) 413 11,553 Available-for-sale financial assets 383(3,145) 30,417 Loans and receivables20,569 18,481 (11,196) Other operating assets(1,507)6,4283,121Net increase/decrease in operating liabilities-9,566 55,488 (17,730) Financial liabilities held for trading(15,348) 7,583 (14,437) Other financial liabilities at fair value through profit or loss(6,351)2856,730 Financial liabilities at amortised cost32,901 47,274 (10,206) Other operating liabilities (1,636)346183Income tax recovered/paid(1,924)(2,078)(1,527)B. CASH FLOWS FROM INVESTING ACTIVITIES: (7,099)(2,635)2,884Payments- 10,5755,3105,341 Tangible assets 1,8583,6351,880 Intangible assets 1,5401,5053,223 Investments 1 10 13 Subsidiaries and other business units 7,176160225 Non-current assets held for sale and associated liabilities --- Held-to-maturity investments--- Other payments related to investing activities---Proceeds-3,4762,6758,225 Tangible assets 5206961,176 Intangible assets -91,321 Investments10104 14 Subsidiaries and other business units 1,044 33756 Non-current assets held for sale and associated liabilities 1,9021,8334,958 Held-to-maturity investments--- Other proceeds related to investing activities---C. CASH FLOWS FROM FINANCING ACTIVITIES: (8,111) (11,301)433Payments- 16,259 21,470 18,281 Dividends 3,4894,1074,387 Subordinated liabilities5,3297,7274,245 Redemption of own equity instruments--- Acquisition of own equity instruments 6,9377,3729,263 Other payments related to financing activities5042,264386Proceeds-8,148 10,169 18,714 Subordinated liabilities1712873,654 Issuance of own equity instruments--- Disposal of own equity instruments6,8487,1919,975 Other proceeds related to financing activities1,1292,6915,085D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES (2,046)4,9573,826E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 18,738 42,897 (10,892)F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 77,786 34,889 45,781G. CASH AND CASH EQUIVALENTS AT END OF YEAR 96,524 77,786 34,889COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR: Cash5,4835,515 5,172 Cash equivalents at central banks91,041 72,27129,717 Other financial assets-- - Less: Bank overdrafts refundable on demand-- -TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR 96,52477,786 34,889 (*) Presented for comparison purposes only. See Note 37.The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of cash flowsfor the year ended 31 December 2011. 10. Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 55). In the event of a discrepancy, the Spanish- language version prevails. Banco Santander, S.A. and Companies composing the Santander Group Notes to the consolidated financial statements for the year ended 31 December 20111. Introduction, basis of presentation of the consolidated financial statements and other information a) IntroductionBanco Santander, S.A. (the Bank or Banco Santander) is a private-law entity subject to the rules andregulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank canbe consulted on the website of the Bank (www.santander.com) and at its registered office at Paseo dePereda 9-12, Santander.In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries thatengage in various business activities and which compose, together with it, Santander Group (the Group orSantander Group). Therefore, the Bank is obliged to prepare, in addition to its own separate financialstatements, the Groups consolidated financial statements, which also include the interests in joint venturesand investments in associates.The Groups consolidated financial statements for 2009 were approved by the shareholders at the Banksannual general meeting on 11 June 2010. The Groups consolidated financial statements for 2010 wereapproved by the shareholders at the Banks annual general meeting on 17 June 2011. The 2011 consolidatedfinancial statements of the Group and the 2011 financial statements of the Bank and of substantially all theGroup companies have not yet been approved by their shareholders at the respective annual generalmeetings. However, the Banks board of directors considers that the aforementioned financial statements willbe approved without any changes. b) Basis of presentation of the consolidated financial statementsUnder Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002, allcompanies governed by the Law of an EU Member State and whose securities are admitted to trading on aregulated market of any Member State must prepare their consolidated financial statements for the yearsbeginning on or after 1 January 2005 in conformity with the International Financial Reporting Standards(IFRSs) previously adopted by the European Union (EU-IFRSs).In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spainissued Circular 4/2004, of 22 December, on Public and Confidential Financial Reporting Rules and Formats.The Groups consolidated financial statements for 2011 were formally prepared by the Banks directors (at theboard meeting on 23 January 2012) in accordance with International Financial Reporting Standards asadopted by the European Union and with Bank of Spain Circular 4/2004 and Spanish corporate andcommercial law applicable to the Group, using the basis of consolidation, accounting policies andmeasurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they 11. present fairly the Groups equity and financial position at 31 December 2011 and the consolidated results ofits operations, the changes in the consolidated equity and the consolidated cash flows in 2011. Theseconsolidated financial statements were prepared from the separate accounting records of the Bank and ofeach of the companies composing the Group, and include the adjustments and reclassifications required tounify the accounting policies and measurement bases applied by the Group.The notes to the consolidated financial statements contain supplementary information to that presented in theconsolidated balance sheet, consolidated income statement, consolidated statement of recognised incomeand expense, consolidated statement of changes in total equity and consolidated statement of cash flows.The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions andbreakdowns of these financial statements.Adoption of new standards and interpretations issuedThe following standards and interpretations came into force and were adopted by the European Union in2011: - Amendment to IAS 32, Classification of Rights Issues - this amendment relates to the classification of foreign currency denominated rights issues (rights, options or warrants). Pursuant to this amendment, when these rights are to acquire a fixed number of shares in exchange for a fixed amount, they are classified as equity instruments, irrespective of the currency in which that fixed amount is denominated and provided that the other requirements of the standard are fulfilled. - Revision of IAS 24, Related Party Disclosures - the revised IAS 24 addresses related party disclosures in financial statements. There are two new basic features. Firstly, it provides a partial exemption from certain disclosure requirements when the transactions are between state-controlled entities or government-related entities (or equivalent government institution) and, secondly, it simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. - Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement - these amendments remedy the fact that in some circumstances entities could not recognise certain voluntary prepayments as assets. - IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments - this interpretation addresses the accounting by a debtor when all or part of a financial liability is extinguished through the issue of equity instruments. The interpretation does not apply to transactions in situations where the counterparties in question are shareholders or related parties, acting in their capacity as such, or where extinguishing the financial liability by issuing equity instruments is in accordance with the original terms of the financial liability. In this case, the equity instruments issued are measured at fair value at the date the liability is extinguished and any difference between this value and the carrying amount of the liability is recognised in profit or loss.The application of the aforementioned accounting standards and interpretations did not have any materialeffects on the Groups consolidated financial statements. 2 12. At the date of preparation of these consolidated financial statements, the European Union had approved andadopted the amendments to IFRS 7, Financial Instruments, which are mandatorily applicable for reportingperiods beginning on or after 1 July 2011. These amendments reinforce the disclosure requirementsapplicable to transfers of financial assets, including both those in which the assets are not derecognised and,principally, those in which the assets qualify for derecognition but the entity has a continuing involvement inthem.Lastly, at the date of preparation of these consolidated financial statements, the following Standards andInterpretations which effectively come into force after 31 December 2011 had not yet been adopted by theEuropean Union:- IFRS 9, Financial Instruments: Classification and Measurement (obligatory as from 1 January 2015),which will in the future replace the part of the current IAS 39 relating to the classification andmeasurement of financial assets. IFRS 9 presents significant differences regarding financial assets withrespect to the current standard, including the approval of a new classification model based on only twocategories, namely instruments measured at amortised cost and those measured at fair value, thedisappearance of the current Held-to-maturity investments and Available-for-sale financial assetscategories, impairment analyses only for assets measured at amortised cost and the non-separation ofembedded derivatives in financial contracts. The main change introduced with regard to financial liabilitiesapplies only to liabilities that an entity elects to measure at fair value. The portion of the change in the fairvalue of these liabilities attributable to changes in the entitys own credit risk must be presented inValuation adjustments instead of in profit or loss.- Amendments to IAS 12, Income Taxes (obligatory for annual reporting periods beginning on or after 1January 2012) - these amendments incorporate the requirement to measure deferred tax assets andliabilities relating to investment property depending on whether the entity expects to recover the carryingamount of the asset through use or sale.- IFRS 10, Consolidated Financial Statements (obligatory for reporting periods beginning on or after 1January 2013) - this standard will replace the current IAS 27 and SIC 12, introducing a single basis forconsolidation (control), irrespective of the nature of the investee. IFRS 10 modifies the current definition ofcontrol. The new definition of control sets out the following three elements of control: power over theinvestee; exposure, or rights, to variable returns from involvement with the investee; and the ability to usepower over the investee to affect the amount of the investors returns.- IFRS 11, Joint Arrangements (obligatory for reporting periods beginning on or after 1 January 2013) - thisstandard will replace the IAS 31 currently in force. The fundamental change introduced by IFRS 11 withrespect to the current standard is the elimination of the option of proportionate consolidation for jointlycontrolled entities, which will begin to be accounted for using the equity method.- IFRS 12, Disclosure of Interests in Other Entities (obligatory for reporting periods beginning on or after 1January 2013) - this standard represents a single standard presenting the disclosure requirements forinterests in other entities (whether these be subsidiaries, associates, joint arrangements or other interests)and includes new disclosure requirements. The objective of this standard is to require an entity to discloseinformation that enables users of its financial statements to evaluate the nature of its interests in otherentities (control), the possible restrictions on its ability to access or use assets and settle liabilities, therisks associated with its interests in unconsolidated structured entities, etc. 3 13. - IFRS 13, Fair Value Measurement (obligatory for reporting periods beginning on or after 1 January 2013) - this standard replaces the current rules concerning fair value contained in various standards and sets out in a single IFRS a framework for measuring fair value. It does not modify the criteria set out in other standards for measuring assets and liabilities at fair value. IFRS 13 is applicable to the measurement of both financial and non-financial items and it introduces new disclosure requirements. - Amendments to IAS 27 and IAS 28 (revised) (obligatory for reporting periods beginning on or after 1 January 2013) - these amendments reflect the changes arising from the new IFRS 10 and IFRS 11 described above. - Amendments to IAS 1, Presentation of Items of Other Comprehensive Income (obligatory for reporting periods beginning on or after 1 July 2012) - these amendments consist basically of the requirement to present items that will be reclassified (recycled) to profit or loss in subsequent periods separately from those that will not be reclassified. - Amendments to IAS 19, Employee Benefits (obligatory for reporting periods beginning on or after 1 January 2013) - these amendments eliminate the "corridor" under which entities are currently able to opt for deferred recognition of a given portion of actuarial gains and losses, establishing that when the amendments come into effect, all actuarial gains and losses must be recognised immediately (see Note 25). The amendments include significant changes in the presentation of cost components, as a result of which service cost (past service cost and plan curtailments and settlements) and net interest will be recognised in profit or loss and the remeasurement component (comprising basically gains and losses) will be recognised in Equity - Valuation adjustments and may not be reclassified to profit or loss. - Amendments to IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after 1 January 2014) - these amendments introduce a series of additional clarifications on the requirements established by the standard for an entity to be able to offset a financial asset and a financial liability, indicating that they can only be offset when an entity currently has a legally enforceable right to set off the recognised amounts and this does not depend on the occurrence of future events. - Amendments to IFRS 7, Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after 1 January 2013) - these amendments introduce new disclosures for financial assets and financial liabilities that are presented net in the balance sheet and for other instruments subject to an enforceable netting arrangement. - IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine - in view of its nature, this interpretation does not affect the Groups operations. The Group is currently analysing the possible effects of these new standards and interpretations. All accounting policies and measurement bases with a material effect on the 2011 consolidated financial statements were applied in their preparation.c) Use of estimates The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.4 14. In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following: - The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18); - The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25); - The useful life of the tangible and intangible assets (see Notes 16 and 18); - The measurement of goodwill arising on consolidation (see Note 17); and - The fair value of certain unquoted assets and liabilities (see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22).d) Other matters i. Disputed corporate resolutions The directors of the Bank and its legal advisers consider that the objection to certain resolutions adopted by the Banks shareholders at the general meetings on 18 January 2000, 4 March 2000, 10 March 2001, 9 February 2002, 24 June 2002, 21 June 2003, 19 June 2004, 18 June 2005 and 11 June 2010 will have no effect on the financial statements of the Bank and the Group. The status of these matters at the date of preparation of the consolidated financial statements is detailed below: On 25 April 2002, the Santander Court of First Instance number 1 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on 18 January 2000. The plaintiff filed an appeal against the judgment. On 2 December 2002, the Cantabria Provincial Appellate Court dismissed the appeal. The Bank appeared as a party to the cassation appeal and filed pleadings with respect to the inadmissibility of the appeal. In the Order dated 4 November 2008 the Supreme Court considered the appeal to have been withdrawn in view of the decease of the appellant and the failure to appear of his heirs. On 29 November 2002, the Santander Court of First Instance number 2 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on 4 March 2000. The plaintiffs filed an appeal against the judgment. On 5 July 2004, the Cantabria Provincial Appellate Court dismissed the appeal. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of 31 July 2007. On 12 March 2002, the Santander Court of First Instance number 4 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on 10 March 2001. The plaintiffs filed an appeal against the judgment. On 13 April 2004, the Cantabria Provincial Appellate Court dismissed the appeals. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of 6 November 2007.5 15. On 9 September 2002, the Santander Court of First Instance number 5 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on 9 February 2002. The plaintiff filed an appeal against the judgment. On 14 January 2004, the Cantabria Provincial Appellate Court dismissed the appeal. The appellant prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of 8 May 2007. On 29 May 2003, the Santander Court of First Instance number 6 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on 24 June 2002. The plaintiffs filed an appeal against the judgment. On 15 November 2005, the Cantabria Provincial Appellate Court dismissed the appeal in full. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment. The Bank appeared as a party to the two appeals and filed pleadings with respect to the inadmissibility thereof. In the order dated 23 September 2008 the Supreme Court refused leave to proceed with the aforementioned appeals. On 23 November 2007, the Santander Court of First Instance number 7 dismissed in full the claims contesting the resolutions adopted by the shareholders at the annual general meeting on 21 June 2003. The plaintiffs filed an appeal against the judgment. The court was notified of the decease of one of the appellants and the court considered his appeal to have been withdrawn on the grounds of his decease and the failure to appear of his heirs. The other three appeals filed were dismissed in full by the Cantabria Provincial Appellate Court on 30 June 2009. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against this judgment, and the appeal filed by one of the three appellants was refused leave to proceed by the Provincial Appellate Court. The cassation appeals filed against the judgments that dismissed the claims contesting the resolutions adopted at the annual general meeting on 21 June 2003 were not given leave to proceed by order of the Supreme Court of 25 January 2011. On 28 October 2005, the Santander Court of First Instance number 8 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on 19 June 2004. The plaintiffs filed an appeal against the judgment. In a Judgment dated 28 June 2007 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed cassation appeals and extraordinary appeals on the grounds of procedural infringements. The cassation appeal and extraordinary appeal for procedural infringement filed by one of the appellants were refused leave to proceed due to the decease of the appellant and the failure to appear of his heirs. The other two appeals were refused leave to proceed by order of the Supreme Court of 27 October 2009. On 13 July 2007, the Santander Court of First Instance number 10 dismissed in full the claims contesting the resolutions adopted by the shareholders at the general meeting on 18 June 2005. The plaintiffs filed an appeal against the judgment. In a judgment dated 14 May 2009 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements, and these appeals are still being processed at the Supreme Court. A claim contesting certain of the resolutions adopted by the shareholders at the general meeting held on 11 June 2010 is currently in process at the Santander Commercial Court number 1.ii. Credit assignment transactionsFollowing the prolonged investigations carried out since 1992 by the Madrid Central Examining Court number3, and the repeated applications by the Public Prosecutors Office and the Government Lawyer, as therepresentative of the Public Treasury, to have the case against the Bank and its executives dismissed andstruck off, the trial commenced at Panel One of the Criminal Chamber of the National Appellate Court and6 16. after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutors Office reiterated its appeal to set aside the trial and interrupt the proceedings, on 20 December 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutors Office and the private prosecution. A cassation appeal was filed against the aforementioned order by the Association for the Defence of Investors and Customers and Iniciativa per Catalunya Verds and, following the opposition by the Public Prosecutors Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court decision handed down on 17 December 2007. In an interlocutory order of 15 April 2008, the Supreme Court dismissed the request filed by the Association for the Defence of Investors and Customers for the decision handed down in the judgment of 17 December 2007 to be set aside. The appeal filed by the Association for the Defence of Investors and Customers against the aforementioned Supreme Court decision was given leave to proceed by the Spanish Constitutional Court, and the appearing parties have submitted their pleadings.e) Information relating to 2010 and 2009 The information relating to 2010 and 2009 contained in these notes to the consolidated financial statements is presented with the information relating to 2011 for comparison purposes only and, accordingly, it does not constitute the Groups statutory consolidated financial statements for 2010 and 2009.f) Capital management The Groups capital management is performed at regulatory and economic levels. Regulatory capital management is based on the analysis of the capital base and the capital ratios using the criteria of the related Bank of Spain Circular. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitisations, sales of assets, issues of equity instruments (preference shares and subordinated debt) and hybrid instruments. From an economic standpoint, capital management seeks to optimise value creation at the Group and at its constituent business units. To this end, the economic capital, RORAC and value creation data for each business unit are generated, analysed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar II of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in various economic scenarios, with the solvency levels agreed upon by the Group. In order to adequately manage the Groups capital, it is essential to estimate and analyse future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on the budgetary information (balance sheet, income statement, etc.) and on macroeconomic scenarios defined by the Groups economic research service. These estimates are used by the Group as a reference to plan the management actions (issues, securitisations, etc.) required to achieve its capital targets.7 17. In addition, certain stress scenarios are simulated in order to assess the availability of capital in adversesituations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates,values of equity instruments, etc. that mirror historical crises that could happen again.Bank of Spain Circular 3/2008 on the calculation and control of minimum capital requirements, which hasbeen in force since June 2008, was partially amended in certain aspects by Circular 9/2010 and Circular4/2011. Pending implementation of the new capital regulations known as Basel III, which will be carried outprogressively from 2013 to 2019 through the corresponding European Capital Requirements Directive (CRDIV), the current Bank of Spain Circular addresses new developments relating to capital requirements (Pillar I)and to the possibility of using internal ratings-based (IRB) classifications and methods for calculating risk-weighted exposures, and the inclusion therein of operational risk. The aim is to render regulatoryrequirements more sensitive to the risks actually borne by entities in carrying on their business activities. Italso establishes a supervisory review system to improve internal risk management and internal capitaladequacy assessment based on the risk profile (Pillar II), and incorporates elements relating to disclosuresand market discipline (Pillar III).The Group intends to adopt, over the next few years, the Basel II advanced internal ratings-based (AIRB)approach for substantially all its banks, until the percentage of net exposure of the loan portfolio covered bythis approach exceeds 90%.Accordingly, the Group continued in 2011 with the progressive implementation of the technology platformsand methodological improvements required for the roll-out of the AIRB approaches. In this connection, in thecourse of the year the Group obtained regulatory authorisation for various units, including most notablySantander Consumer Espaa, Banco Santander (Mxico), S.A., Institucin de Banca Mltiple, GrupoFinanciero Santander and the global corporate customer portfolios in Brazil and Chile. In addition, in 2008 theGroup obtained authorisation from the supervisory authorities to use advanced approaches for the calculationof regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the UnitedKingdom and Portugal. The Groups Basel implementation strategy is focused on obtaining authorisation forthe use of AIRB approaches at the main entities in the Americas and at consumer banking entities in Europe.As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group wasauthorised to use its internal model for market risk with respect to the treasury areas trading activities inMadrid and the Chile and Portugal units, thus continuing implementation of the roll-out plan it submitted to theBank of Spain for the other units.With regard to operational risk, the Group considers that the internal model should be developed primarily onthe basis of the experience accumulated in managing the entity through the corporate guidelines and criteriaestablished after assuming control, which are a distinctive feature of Santander Group. The Group hasperformed numerous acquisitions in recent years and, as a result, a longer maturity period will be required inorder to develop the internal model based on its own management experience of the various acquiredentities. However, although the Group has decided to use the standardised approach for regulatory capitalcalculation purposes, it is considering the possibility of adopting AMA approaches once it has collatedsufficient data using its own management model in order to make full use of the positive qualities that arecharacteristic of the Group.Also, Royal Decree-Law 2/2011, approved on 18 February 2011, established the implementing regulations ofthe Plan for Strengthening the Financial Sector published in January 2011 by the Spanish Ministry ofEconomy and Finance, which aimed, inter alia, to establish certain minimum requirements for core capital, inadvance of those established by Basel III, to be met before autumn 2011. At the reporting date, the Grouphad complied with these minimum core capital requirements.8 18. Furthermore, in December 2011 the European Banking Authority (EBA) published the new capitalrequirements for the main European credit institutions. These requirements are part of a package ofmeasures adopted by the European Council in the second half of 2011 with the aim of restoring stability andconfidence in the European markets.At 30 June 2012, the institutions selected for the EBA sample must have a Tier 1 core capital ratio,determined on the basis of EBA rules of at least 9%. These capital requirements are expected to be of anexceptional and temporary nature.The EBA published the capital requirements of each credit institution and required them to submit, on 20January 2012, their capital plans to reach the required ratio by 30 June 2012.The EBA estimated a EUR 15,302 million capital shortfall for Santander Group. In January 2012 the Groupreported the measures it had taken -detailed in its capital plan submitted to the Bank of Spain- and which hadenabled it to attain the required 9% ratio. These measures are summarised as follows: i) EUR 6,829 millionrelating to "Valores Santander" -securities that are mandatorily convertible before the end of October 2012; ii)the exchange of EUR 1,943 million of preference shares for new shares in December 2011; iii) EUR 1,660million resulting from application of the "Santander Dividendo Eleccin" programme at the date of the finaldividend for 2011; and iv) EUR 4,890 million obtained through the organic generation of capital, write-downsand the transfer of various ownership interests, most notably those held in Chile and Brazil (see Note 1.h). g) Environmental impactIn view of the business activities carried on by the Group entities, the Group does not have any environmentalliability, expenses, assets, provisions or contingencies that might be material with respect to its consolidatedequity, financial position or results. Therefore, no specific disclosures relating to environmental issues areincluded in these notes to the consolidated financial statements. h) Events after the reporting periodIt should be noted that from 1 January 2012 to the date on which these financial statements were authorisedfor issue, the following significant events occurred:In the first week of January 2012, the Group transferred shares representing a 4.41% ownership interest inBanco Santander (Brasil), S.A. to a leading international financial institution. This institution has undertaken todeliver these shares to the holders of the bonds which, issued by Banco Santander in October 2010, areexchangeable for Banco Santander (Brasil), S.A. shares upon maturity, in accordance with the termsgoverning them.2. Accounting policies and measurement bases The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows: a) Foreign currency transactionsi. Functional currencyThe Groups functional currency is the euro. Therefore, all balances and transactions denominated incurrencies other than the euro are deemed to be denominated in foreign currency. 9 19. ii. Translation of foreign currency balancesForeign currency balances are translated to euros in two consecutive stages:- Translation of foreign currency to the functional currency (currency of the main economic environment inwhich the entity operates), and- Translation to euros of the balances held in the functional currencies of entities whose functional currencyis not the euro.Translation of foreign currency to the functional currencyForeign currency transactions performed by consolidated entities (or entities accounted for using the equitymethod) not located in EMU countries are initially recognised in their respective currencies. Monetary items inforeign currency are subsequently translated to their functional currencies using the closing rate.Furthermore:- Non-monetary items measured at historical cost are translated to the functional currency at the exchangerate at the date of acquisition.- Non-monetary items measured at fair value are translated at the exchange rate at the date when the fairvalue was determined.- Income and expenses are translated at the average exchange rates for the year for all the transactionsperformed during the year. When applying this criterion, the Group considers whether there have beensignificant changes in the exchange rates in the year which, in view of their materiality with respect to theconsolidated financial statements taken as a whole, would make it necessary to use the exchange rates atthe transaction date rather than the aforementioned average exchange rates.- The balances arising from non-hedging forward foreign currency/foreign currency and foreigncurrency/euro purchase and sale transactions are translated at the closing rates prevailing in the forwardforeign currency market for the related maturity.Translation of functional currencies to eurosIf the functional currency is not the euro, the balances in the financial statements of the consolidated entities(or entities accounted for using the equity method) are translated to euros as follows:- Assets and liabilities, at the closing rates.- Income and expenses, at the average exchange rates for the year.- Equity items, at the historical exchange rates.iii. Recognition of exchange differencesThe exchange differences arising on the translation of foreign currency balances to the functional currencyare generally recognised at their net amount under Exchange differences in the consolidated incomestatement, except for exchange differences arising on financial instruments at fair value through profit or loss,which are recognised in the consolidated income statement without distinguishing them from other changes in10 20. fair value, and for exchange differences arising on non-monetary items measured at fair value through equity,which are recognised under Valuation adjustments - Exchange differences.The exchange differences arising on the translation to euros of the financial statements denominated infunctional currencies other than the euro are recognised under Valuation adjustments - Exchange differencesin the consolidated balance sheet, whereas those arising on the translation to euros of the financialstatements of entities accounted for using the equity method are recognised under Valuation adjustments -Entities accounted for using the equity method, until the related item is derecognised, at which time they arerecognised in the consolidated income statement.iv. Entities located in hyperinflationary economiesAs indicated in Note 3, in 2009 the Group sold substantially all its businesses in Venezuela and at 31December 2011 its net assets in that country amounted to only EUR 10 million (31 December 2010: EUR 18million).In view of the foregoing, at 31 December 2011, 2010 and 2009 none of the functional currencies of theconsolidated entities and associates located abroad related to hyperinflationary economies as defined byInternational Financial Reporting Standards as adopted by the European Union. Accordingly, at 2011, 2010and 2009 year-end it was not necessary to adjust the financial statements of any of the consolidated entitiesor associates to correct for the effect of inflation.v. Exposure to foreign currency riskAt 31 December 2011, the Groups largest exposures on temporary positions (with a potential impact on theincome statement) were concentrated, in descending order, on the pound sterling, the Mexican peso, theChilean peso, the Polish zloty and the US dollar. At that date, its largest exposure on permanent positions(with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the poundsterling, the US dollar, the Mexican peso and the Polish zloty.At 31 December 2010, the Groups largest exposures on temporary positions (with a potential impact on theincome statement) were concentrated, in descending order, on the pound sterling, the Mexican peso and theChilean peso. At that date, its largest exposures on permanent positions (with a potential impact on equity)were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso, the USdollar and the Chilean peso.At 31 December 2009, the Groups largest exposures on temporary positions (with a potential impact on theincome statement) were concentrated, in descending order, on the pound sterling and the Chilean peso. Atthat date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated,in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso.The Group hedges a portion of these permanent positions using foreign exchange derivative financialinstruments (see Note 36).The following tables show the sensitivity of consolidated profit and consolidated equity to changes in theGroups foreign currency positions due to 1% variations in the various foreign currencies in which the Grouphas material balances.The estimated effect on the Groups consolidated equity and consolidated profit of a 1% appreciation of theeuro against the related currency is as follows: 11 21. Millions of eurosEffect on consolidated equityEffect on consolidated profitCurrency20112010 2009 2011 20102009US dollar (41.7) (39.1) - 2.8 - 2.8Chilean peso (7.3) (11.7) (12.7)6.17.67.0Pound sterling(72.8) (62.0) (21.5) 10.5 20.3 16.2Mexican peso(22.2) (42.9) (20.5)9.59.14.7Brazilian real (151.7) (89.2)(111.4) ---Polish zloty(19.4)(2.6) (2.3) 3.7 --Similarly, the estimated effect on the Groups consolidated equity and consolidated profit of a 1% depreciationof the euro against the related currency is as follows: Millions of eurosEffect on consolidated equityEffect on consolidated profitCurrency20112010 2009 2011 20102009US dollar 42.5 39.9 -(2.9) - (2.8)Chilean peso 7.5 11.9 12.9 (6.2)(7.8)(7.2)Pound sterling74.2 63.2 21.9 (10.7) (20.7) (16.5)Mexican peso22.6 42.0 16.5 (9.7)(9.3)(4.8)Brazilian real60.1 81.0 81.9 ---Polish zloty19.82.72.4 (3.8)--The foregoing data were obtained by calculating the possible effect of a variation in exchange rates on thevarious asset and liability items, excluding the foreign exchange positions arising from goodwill, and on otherforeign currency-denominated items, such as the Groups derivative instruments, considering the offsettingeffect of the various hedging transactions on these items. This effect was estimated using the exchangedifference recognition methods set forth in Note 2.a) iii above.Also, the estimated effect on the Groups consolidated equity of a 1% appreciation or depreciation of the euroagainst the foreign currencies in which goodwill is denominated at 31 December 2011 would be a decrease orincrease, respectively, in equity due to valuation adjustments of EUR 88.1 million and EUR 89.9 million in thecase of the pound sterling (2010: EUR 85.5 million and EUR 87.2 million; 2009: EUR 82.8 million and EUR84.5 million), EUR 80.5 million and EUR 82.1 million in the case of the Brazilian real (2010: EUR 86.7 millionand EUR 88.4 million; 2009: EUR 76.3 million and EUR 77.8 million), EUR 22.5 million and EUR 23 million inthe case of the US dollar (2010: EUR 21.8 million and EUR 22.3 million; 2009: EUR 20.3 million and EUR20.7 million), and EUR 39.2 million and EUR 40 million for the other currencies (2010: EUR 15.1 million andEUR 15.4 million; 2009: EUR 11.0 million and EUR 11.3 million). These changes are offset by a decrease orincrease, respectively, in the balance of goodwill at that date and, therefore, they have no impact on thecalculation of the Groups equity.The estimates used to obtain the foregoing data were performed considering the effects of the exchange ratefluctuations in isolation from the effect of the performance of other variables, the changes in which wouldaffect equity and profit, such as variations in the interest rates of the reference currencies or other market12 22. factors. Accordingly, all variables other than the exchange rate fluctuations were kept constant with respect to their positions at 31 December 2011, 2010 and 2009.b) Basis of consolidation i. Subsidiaries Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; control is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, as in the case of agreements with shareholders of the investee, the Bank is granted control. Control is the power to govern the financial and operating policies of an entity, as stipulated by the law, the Bylaws or agreement, so as to obtain benefits from its activities. The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions between consolidated entities are eliminated on consolidation. On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognised at fair value at the date of acquisition. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognised as goodwill (see Note 17). Negative differences are recognised in profit or loss on the date of acquisition. Additionally, the share of third parties of the Groups equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement. The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal. The Appendices contain significant information on these entities. ii. Interests in joint ventures (jointly controlled entities) Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (venturers) acquire interests in entities (jointly controlled entities) or undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the venturers. In the consolidated financial statements, investments in jointly controlled entities are accounted for using the equity method, i.e. at the Groups share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with a jointly controlled entity are eliminated to the extent of the Groups ownership interest in the entity. The Appendices contain significant information on these entities.13 23. iii. AssociatesAssociates are entities over which the Bank is in a position to exercise significant influence, but not controlor joint control. Significant influence generally exists when the Bank holds 20% or more of the voting power ofthe investee.In the consolidated financial statements, investments in associates are accounted for using the equitymethod, i.e. at the Groups share of net assets of the investee, after taking into account the dividendsreceived therefrom and other equity eliminations. The profits and losses resulting from transactions with anassociate are eliminated to the extent of the Groups interest in the associate.The Appendices contain significant information on these entities.iv. Special purpose entitiesWhen the Group incorporates special purpose entities, or holds ownership interests therein, to enable itscustomers to access certain investments, or for the transfer of risks or other purposes, it determines, usinginternal criteria and procedures, and taking into consideration the applicable legislation, whether control (asdefined above) exists and, therefore, whether these entities should be consolidated. These criteria andprocedures take into account, inter alia, the risks and rewards retained by the Group and, accordingly, allrelevant matters are taken into consideration, including any guarantees granted or any losses associated withthe collection of the related assets retained by the Group. These entities include the securitisation specialpurpose vehicles, which are fully consolidated in the case of the SPVs over which, based on theaforementioned analysis, it is considered that the Group continues to exercise control.v. Other mattersAt 31 December 2011, the Group controlled the following companies in which it held an ownership interest ofless than 50% of the share capital: (i) Luri 1, S.A., (ii) Luri 2, S.A. and (iii) Luri Land, S.A. The percentageownership interest in the aforementioned companies was 5.59%, 4.82% and 5.16%, respectively (seeAppendix I). Although the Group holds less than half the voting power, it manages and, as a result, exercisescontrol over these entities.In addition, at 31 December 2011 the Group exercised joint control of Luri 3, S.A., despite holding 9.63% ofits share capital (see Appendix II). This decision is based on the Groups presence on the companys board ofdirectors, in which the agreement of all members is required for decision-making.The impact of the consolidation of these companies on the Groups consolidated financial statements isimmaterial.The company object of these entities is the acquisition of real estate and other general operations relatingthereto, including the rental, purchase and sale of properties (see Appendices I and II). 31% of their assetsare located in Spain.vi. Business combinationsA business combination is the bringing together of two or more separate entities or economic units into onesingle entity or group of entities.Business combinations whereby the Group obtains control over an entity are recognised for accountingpurposes as follows:14 24. - The Group measures the cost of the business combination, which is normally the considerationtransferred, defined as the acquisition-date fair values of the assets transferred, the liabilities incurred tothe former owners of the acquiree and the equity instruments issued, if any, by the acquirer. Since 1January 2010, in cases where the amount of the consideration to be transferred has not been definitivelyestablished at the acquisition date, but rather depends on future events, any contingent considerationmust be recognised as part of the consideration transferred and measured at its acquisition-date fairvalue; also since that date, acquisition-related costs, such as fees paid to auditors, legal advisers,investment banks and other consultants, may not for these purposes form part of the cost of the businesscombination.- The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business,including any intangible assets which might not have been recognised by the acquiree, are estimated andrecognised in the consolidated balance sheet; the Group also estimates the amount of any non-controllinginterests and the fair value of the previously held equity interest in the acquiree.- Any positive difference between the aforementioned items is recognised as discussed in Note 2.m. Anynegative difference is recognised under Gains on bargain purchases arising on business combinations inthe consolidated income statement.Since 1 January 2010, goodwill is only measured and recognised once, when control is obtained of abusiness.vii. Changes in the levels of ownership interests in subsidiariesAs required under IFRSs, since 1 January 2010, acquisitions and disposals not giving rise to a change incontrol are recognised as equity transactions, and no gain or loss is recognised in the income statement andthe initially recognised goodwill is not remeasured. The difference between the consideration transferred orreceived and the decrease or increase in non-controlling interests, respectively, is recognised in reserves.Similarly, since that date, IAS 27 has established that when control over a subsidiary is lost, the assets,liabilities and non-controlling interests and any other items recognised in valuation adjustments of thatcompany are derecognised from the consolidated balance sheet, and the fair value of the considerationreceived and of any remaining equity interest is recognised. The difference between these amounts isrecognised in profit or loss.With respect to non-monetary contributions to jointly controlled entities, the IASB has acknowledged theexistence of a conflict between IAS 27, which establishes that if control is lost the remaining equity interest ismeasured at fair value, recognising the full amount of the gain or loss in profit or loss, and IAS 31.48, togetherwith SIC 13, which for transactions under its scope- would only permit recognition of the portion of the gainor loss attributable to the capital owned by the other venturers in the jointly controlled entity. The Group hasopted to apply the provisions of IAS 27 consistently to all transactions falling under the scope of theaforementioned standards.viii. Acquisitions and disposalsNote 3 provides information on the most significant acquisitions and disposals in 2011, 2010 and 2009.15 25. c) Definitions and classification of financial instruments i. Definitions A financial instrument is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or equity instrument of another entity. An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities. A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date. Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative. Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer). The following transactions are not treated for accounting purposes as financial instruments: -Investments in associates and jointly controlled entities (see Note 13). -Rights and obligations under employee benefit plans (see Note 25). -Rights and obligations under insurance contracts (see Note 15). -Contracts and obligations relating to employee remuneration based on own equity instruments (see Note34). ii. Classification of financial assets for measurement purposes Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately. Financial assets are included for measurement purposes in one of the following categories: -Financial assets held for trading (at fair value through profit or loss): this category includes the financialassets acquired for the purpose of generating a profit in the near term from fluctuations in their prices andfinancial derivatives that are not designated as hedging instruments. -Other financial assets at fair value through profit or loss: this category includes hybrid financial assets notheld for trading that are measured entirely at fair value and financial assets not held for trading that areincluded in this category in order to obtain more relevant information, either because this eliminates orsignificantly reduces recognition or measurement inconsistencies (accounting mismatches) that would16 26. otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on differentbases, or because a group of financial assets or financial assets and liabilities is managed and itsperformance is evaluated on a fair value basis, in accordance with a documented risk management orinvestment strategy, and information about the group is provided on that basis to the Groups keymanagement personnel. Financial assets may only be included in this category on the date they areacquired or originated.- Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, andequity instruments issued by entities other than subsidiaries, associates and jointly controlled entities,provided that such instruments have not been classified as Financial assets held for trading or as Otherfinancial assets at fair value through profit or loss.- Loans and receivables: this category includes the investment arising from ordinary lending activities, suchas the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed withother institutions, whatever the legal instrument, unquoted debt securities and receivables from thepurchasers of goods, or the users of services, constituting part of the Groups business.The consolidated entities generally intend to hold the loans and credits granted by them until their finalmaturity and, therefore, they are presented in the consolidated balance sheet at their amortised cost(which includes any reductions required to reflect the estimated losses on their recovery).- Held-to-maturity investments: this category includes debt instruments traded in an active market, withfixed maturity and with fixed or determinable payments, for which the Group has both the intention andproven ability to hold to maturity.iii. Classification of financial assets for presentation purposesFinancial assets are classified by nature into the following items in the consolidated balance sheet:- Cash and balances with central banks: cash balances and balances receivable on demand relating todeposits with the Bank of Spain and other central banks.- Loans and advances: includes the debit balances of all credit and loans granted by the Group, other thanthose represented by securities, as well as finance lease receivables and other debit balances of afinancial nature in favour of the Group, such as cheques drawn on credit institutions, balances receivablefrom clearing houses and settlement agencies for transactions on the stock exchange and organisedmarkets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees anddebit balances arising from transactions not originating in banking transactions and services, such as thecollection of rentals and similar items. They are classified, depending on the institutional sector to whichthe debtor belongs, under:- Loans and advances to credit institutions: credit of any nature, including deposits and money marketoperations, in the name of credit institutions.- Loans and advances to customers: includes the remaining credit, including money market operationsthrough central counterparties.- Debt instruments: bonds and other securities that represent a debt for their issuer, that generate aninterest return, and that are in the form of certificates or book entries. 17 27. - Equity instruments: financial instruments issued by other entities, such as shares, which have the natureof equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entitiesor associates. Investment fund units are included in this item.- Trading derivatives: includes the fair value in favour of the Group of derivatives which do not form part ofhedge accounting, including embedded derivatives separated from hybrid financial instruments.- Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancingentry for the amounts credited to the consolidated income statement in respect of the measurement of theportfolios of financial instruments which are effectively hedged against interest rate risk through fair valuehedging derivatives.- Hedging derivatives: includes the fair value in favour of the Group of derivatives, including embeddedderivatives separated from hybrid financial instruments, designated as hedging instruments in hedgeaccounting.iv. Classification of financial liabilities for measurement purposesFinancial liabilities are initially classified into the various categories used for management and measurementpurposes, unless they have to be presented as Liabilities associated with non-current assets held for sale orthey relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interestrate risk (liability side), which are reported separately.Financial liabilities are classified for measurement purposes into one of the following categories:- Financial liabilities held for trading (at fair value through profit or loss): this category includes the financialliabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices,financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from theoutright sale of financial assets acquired under reverse repurchase agreements ("reverse repos") orborrowed (short positions).- Other financial liabilities at fair value through profit or loss: financial liabilities are included in this categorywhen more relevant information is obtained, either because this eliminates or significantly reducesrecognition or measurement inconsistencies (accounting mismatches) that would otherwise arise frommeasuring assets or liabilities or recognising the gains or losses on them on different bases, or because agroup of financial liabilities or financial assets and liabilities is managed and its performance is evaluatedon a fair value basis, in accordance with a documented risk management or investment strategy, andinformation about the group is provided on that basis to the Groups key management personnel.Liabilities may only be included in this category on the date when they are issued or originated.- Financial liabilities at amortised cost: financial liabilities, irrespective of their instrumentation and maturity,not included in any of the above-mentioned categories which arise from the ordinary borrowing activitiescarried on by financial institutions.v. Classification of financial liabilities for presentation purposesFinancial liabilities are classified by nature into the following items in the consolidated balance sheet:- Deposits: includes all repayable balances received in cash by the Group, other than those instrumentedas marketable securities and those having the substance of subordinated liabilities. This item alsoincludes cash bonds and cash consignments received the amount of which may be invested withoutrestriction. Deposits are classified on the basis of the creditors institutional sector into:18 28. - Deposits from central banks: deposits of any nature, including credit received and money marketoperations received from the Bank of Spain or other central banks.- Deposits from credit institutions: deposits of any nature, including credit received and money marketoperations in the name of credit institutions.- Customer deposits: includes the remaining deposits, including money market operations throughcentral counterparties. -Marketable debt securities: includes the amount of bonds and other debt represented by marketablesecurities, other than those having the substance of subordinated liabilities. This item includes thecomponent considered to be a financial liability of issued securities that are compound financialinstruments. -Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, includingembedded derivatives separated from the host contract, which do not form part of hedge accounting. -Short positions: includes the amount of financial liabilities arising from the outright sale of financial assetsacquired under reverse repurchase agreements or borrowed. -Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranksbehind ordinary debt. This category also includes the financial instruments issued by the Group which,although capital for legal purposes, do not meet the requirements for classification as equity, such ascertain preference shares issued. -Other financial liabilities: includes the amount of payment obligations having the nature of financialliabilities not included in other items, and liabilities under financial guarantee contracts, unless they havebeen classified as doubtful. -Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancingentry for the amounts charged to the consolidated income statement in respect of the measurement of theportfolios of financial instruments which are effectively hedged against interest rate risk through fair valuehedging derivatives. -Hedging derivatives: includes the fair value of the Groups liability in respect of derivatives, includingembedded derivatives separated from hybrid financial instruments, designated as hedging instruments inhedge accounting.d) Measurement of financial assets and liabilities and recognition of fair value changes In general, financial assets and liabilities are initially recognised at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows: i. Measurement of financial assets Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair 19 29. value cannot be determined in a sufficiently objective manner and financial derivatives that have those equityinstruments as their underlying and are settled by delivery of those instruments.The fair value of a financial instrument on a given date is taken to be the amount for which it could be boughtor sold on that date by two knowledgeable, willing parties in an arms length transaction acting prudently. Themost objective and common reference for the fair value of a financial instrument is the price that would bepaid for it on an active, transparent and deep market (quoted price or market price). At 31 December 2011,there were no significant investments in quoted financial instruments which have ceased to be recognised attheir quoted price because their market cannot be deemed to be active.If there is no market price for a given financial instrument, its fair value is estimated on the basis of the priceestablished in recent transactions involving similar instruments and, in the absence thereof, of valuationtechniques commonly used by the international financial community, taking into account the specific featuresof the instrument to be measured and, particularly, the various types of risk associated with it.All derivatives are recognised in the balance sheet at fair value from the trade date. If the fair value is positive,they are recognised as an asset and if the fair value is negative, they are recognised as a liability. The fairvalue on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price.The changes in the fair value of derivatives from the trade date are recognised in Gains/losses on financialassets and liabilities in the consolidated income statement. Specifically, the fair value of financial derivativestraded in organised markets included in the portfolios of financial assets or liabilities held for trading isdeemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determinedon a given date, these financial derivatives are measured using methods similar to those used to measureOTC derivatives.The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument,discounted to present value at the date of measurement (present value or theoretical close) using valuationtechniques commonly used by the financial markets: net present value (NPV), option pricing models andother methods.Loans and receivables and Held-to-maturity investments are measured at amortised cost using the effectiveinterest method. Amortised cost is understood to be the acquisition cost of a financial asset or liability plus orminus, as appropriate, the principal repayments and the cumulative amortisation (taken to the incomestatement) of the difference between the initial cost and the maturity amount. In the case of financial assets,amortised cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans andreceivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk orrisks being hedged are recognised.The effective interest rate is the discount rate that exactly matches the carrying amount of a financialinstrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financialinstruments, the effective interest rate coincides with the contractual interest rate established on theacquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form partof their financial return. In the case of floating rate financial instruments, the effective interest rate coincideswith the rate of return prevailing in all connections until the next benchmark interest reset date.Equity instruments whose fai