41.0 38.7 +13.5 +7.0 Gross Expenses 2006 2007 oper. income
SANTANDER BRANCH NETWORK
Attributable profit was EUR 668 million. No extraordinary income was recorded in 2007, unlike in 2006 which included the capital gains from the sale of Urbis (EUR 1,181 million before tax) and an extraordinary allocation for an early retirement plan (EUR 256 million). On a like-for-like basis, excluding extraordinary capital gains and allowances, as well as the results of Urbis (recorded under discontinued operations), net profit from ordinary activity was 24.2% higher. Gross operating income was 14.8% higher and net operating income 23.7%.
Like other segments, Banesto’s figures were drawn up again in accordance with the criteria set out on page 82 of this report. The figures presented here, therefore, do not coincide with those published by Banesto itself.
Key factors for overcoming the strong competition and the tensions in the financial markets in the second half of the year were
the high level of business, active management of the balance sheet and of customer spreads. This produced notable growth in the balance sheet and in results and in meeting the objectives set for market share, profitability, efficiency and non-performing loans.
Banesto completed its branch expansion plan, begun in 2006, which saw the opening of 300 branches and a strengthening of its business capacity.
The business model, based on profitable, efficient and diversified growth, strict control of expenses and excellent risk quality, was also deepened, and more strategic projects were developed:
• The plan for SMEs, shops and the self-employed was
consolidated. This increased, in line with the year’s targets, the proportion of business in SMEs and companies and offset the downturn in the property market.
slightly upward trend one of the best of our peer group. Coverage was 248%.
The most striking development on the funding side, and one underscoring the business capacity of the Santander Branch Network, was the placement among more than 125,000 investors of a EUR 7,000 million issue of "Valores Santander", recorded in October.
This impact, however, is not shown in the unit’s liabilities as the issue is recorded in Financial Management given its nature as shareholders’ equity. As a result, the Network’s balance of deposits dropped 3% (including the "Valores
Santander" total on-balance sheet customer funds would have risen 12%). Mutual funds declined, in line with the rest of the market, while pension funds rose 6% and the balance of savings-investment insurance products doubled to EUR 3,646 million.
The second basic objective of the strategy is to improve the quality of service. "We Want to be your Bank" acted as a catalyst for a general improvement in customer satisfaction. On the one hand, the percentage of satisfied customers benefiting from the plan reached 94% and, on the other, customer complaints were at all time lows. The reduction in them in 2007 was more than 60%, and they also fell in 2006.
88
ATTRIBUTABLE PROFIT NET OPERATING INCOME
Million euros Million euros
SANTANDER BRANCH NETWORK
NPL COVERAGE NPL RATIO % % 2006 2007 2006 2007 296 248 -48 p.p. 0.57 0.65 +8 b.p.
SANTANDER BRANCH NETWORK
2006 2007 2006 2007 1,505 1,806 +19.9% 2,429 2,863 +17.9%
BANESTO
2006 2007 2006 2007 608 754 +24.2%* 1,060 1,312 +23.7%
• The consumer unit, which groups the businesses of cards, dealers and direct financing, has become in just two years an important centre of innovation and driver of cross-selling of products, via the branch network and new distribution channels. • In the segment for individual customers, we continued to
develop a strategy centred on offering greater value. The launch of new products focused on campaigns which, as well as covering the needs of financial services, enables customers to acquire the latest generation consumer goods in
advantageous conditions.
• The Menara Plan, launched in Janaury 2007 and conceived as an Efficiency Plan with the triple objective of optimising business processes, maximising commercial efficiency and improving the quality of service, began to yield its first results: significant rises in business volumes per employee and freeing up back-office staff for business tasks.
Net interest income increased 17.9% to EUR 1,455 million. The drivers were efficient management of the balance sheet, which produced sustained and quality growth in business, especially with SMEs and companies, and management of prices and spreads.
Net fees and insurance activity rose 7.9% to EUR 678 million. Those from services increased 7.3% to EUR 513 million, with larger rises in the revenue lines related to transactional business and linkage. Fees from mutual and pension funds, despite the drop in balances, amounted to EUR 192 million, 1.0% more than in 2006 thanks to the improvement in the average commission. Fees paid, linked to greater activity, grew 6.8%. Lastly, revenue from insurance activity was 25.6% higher at EUR 53 million.
Gains on financial transactions amounted to EUR 147 million (+18.3%). The main engine was the distribution of treasury products to customers.
Gross operating income increased 14.8% to EUR 2,282 million. The Group’s disciplined control of costs meant that
operating expenses only rose by 4.4%, meeting the objectives of efficiency set in the expansion plan for the branch network started in 2006. This increase, significantly lower than the growth in gross operating income, produced a further improvement in the efficiency ratio from 45.3% in 2006 to 41.2% in 2007.
Net operating income amounted to EUR 1,312 million, up 23.7%.
The net loan-loss provisions of EUR 233 million was 22.9% more than in 2006. The main component were generic provisions (70%), resulting from increased lending. Credit quality control meant that specific provisions, net of recoveries, were only EUR 72 million (0.09% of total risk).
Profit before tax was 21.3% higher at EUR 1,083 million. Net profit from ordinary activity increased 24.2% to EUR 754 million.
89 EFFICIENCY
RATIO GROSS OPERATING
INCOME AND EXPENSES
% variation 2007 / 2006 %
BANESTO
45.3 41.2 +14.8 +4.4 Gross Expenses 2006 2007 oper. incomeNET PROFIT FROM ORDINARY ACTIVITY NET OPERATING INCOME
Million euros Million euros
BANESTO
NPL COVERAGE NPL RATIO % %BANESTO
(*) w/o extraordinary capital gains and allowances. Attributable profit, after discontinued operations: +14.2%
2006 2007 2006 2007
396
333 -63 p.p.
90
Lending, including securitisations, amounted to EUR 75,369 million at the end of 2007 (+21%). That to the private sector also increased 21%, with a balanced evolution by segments. Loans to SMEs and companies offset the lower growth in mortgages. Commercial bills rose 14%, secured loans 15% and other lending 32%.
Lending went hand in hand with rigorous control of credit
risk quality. The NPL ratio was 0.47% at the end of 2007, only 5 b.p. higher than in 2006 and coverage was 333% (396% a year earlier).
On-balance sheet managed funds amounted to EUR 81,932 million, 18% more than in 2006. Off-balance sheet ones, affected by the markets, were 16% lower, bringing total managed funds to EUR 96,034 million (+11%).
Santander Consumer Finance had a good year, due to the combination of three factors:
• Moderate growth in results in its traditional European platforms in a more complex environment for consumer finance business.
• Successful integration of Drive in the US whose results surpassed the initial goals in a slowing economy. Drive’s consolidation in 2007 had a big impact on growth in lending and results.
• Expansion into new business platforms in order to foster future business growth.
The combination enabled Santander Consumer Finance to increase its gross operating income by 44.5%, as the increase in the portfolio and the high spread on business in the US offset the lower return in Europe resulting from higher Eurozone interest rates.
The 22.6% rise in operating expenses reflects the enlarged perimeter and the launch of new business platforms. But the increase was much lower than the growth in gross operating income, as a result of which net operating income grew 55.5% and the efficiency ratio improved from 34.7% in 2006 to 29.6% in 2007.
The positive combination of revenues and expenses absorbed the higher loan-loss provisions (+112%), basically due to Drive’s incorporation. Net operating income excluding provisions was 27.5% higher and fed through to attributable profit which increased 27.1% to EUR 719 million.
Lending (including securitisations) amounted to EUR 48,000 million (+15%). Two-thirds of this was auto finance (38% for new vehicles and 28% for used ones), and 17% to consumer-dealer,
cards and direct credit, as the most profitable products. The three large countries accounted for 76% of total lending (Germany 36%, Spain 28% and Italy 12%), followed by the Nordic countries and the US (both with 7%).
On-balance sheet customer funds stood at EUR 33,000 million at the end of 2007 (+33%) and represented almost 70% of gross lending (60% in 2006). Growth was strongly backed by balances in marketable securities.
Santander Consumer Finance Europe
Despite the unfavourable market conditions (stagnant sales of cars with a 9% fall in Germany because of the rise in VAT, and increasing pressure on spreads from higher interest rates and tougher competition), Santander Consumer Finance’s attributable profit was 8.2% higher at EUR 612 million. This was due to a good relative performance of business and appropriate management of revenues-expenses-provisions.
EFFICIENCY RATIO GROSS OPERATING
INCOME AND EXPENSES
% variation 2007 / 2006 %
SANTANDER CONSUMER FINANCE
34.7 29.6 +44.5 +22.6 Gross Expenses 2006 2007 oper. income
SANTANDER CONSUMER FINANCE
91
New loans rose 6% as a result of a mixed trend: on the one hand, a slight fall in auto finance (-1%), in line with the European market’s sales; on the other, stronger growth in the most profitable products, the result of business diversification. Of note was the 18% increase in cards and 20% in direct credit.
On the funding side, Openbank's good performance in business volumes (+14% in deposits) and spreads almost tripled its contribution, albeit moderate, to the area.
Gross operating income rose 7.4% with a higher contribution from fees linked to cross-selling (+34.1%) than from net interest income (+2.9%). The latter reflects, on one side, the net effect of the growth in the managed portfolio (+14%) and the reduction in the spread due to the rise in interest rates and, on the other, the better mix of more profitable products.
Operating expenses were 10.3% higher because of the expansion into new markets, as without them mature platforms’ expenses increased more or less in line with inflation. The efficiency ratio improved to 35.8% and net operating income was 5.7% higher at EUR 1,269 million.
Net loan-loss provisions, stable in previous quarters, were 9.9% higher but below the rise in the average managed portfolio. Credit quality ratios, however, remained within the standards of consumer finance business in Europe (NPL ratio of 2.77% and coverage of 97%).
Santander Consumer Finance USA (Drive)
In an environment of economic slowdown and tensions in US financial markets, Drive showed its capacity to grow profitably. Revenues reached a new high at the end of the year (the fourth quarter’s were 24% higher than the first’s).
The efficient business model and management of expenses improved the efficiency ratio by 3 p.p. between the first and fourth quarters to 11.9% in 2007. This improvement helped to push up net operating income in the fourth quarter by 28% over the first quarter.
This increase absorbed the higher provisions resulting from lending and the deterioration in the environment, in
accordance with its demanding internal risk models. Drive’s NPL ratio was 3.83% at the end of 2007, down from 3.88% in 2006 and despite a 40% rise in lending to EUR 3,130 million.
With all, Drive’s attributable profit showed a solid quarterly trend and at EUR 107 million was higher than initially envisaged.
Our growth platforms
Santander Consumer Finance made a great effort in 2007 to expand into high potential markets by acquiring small finance companies, setting up joint venures with local operators and/or creating start-ups.
An example of the latter was the launch of our businesses in Denmark and Finland. They joined the one already in the UK, which in its second full year met its plans with notable growth in business (+39% in the managed portfolio).
In Russia, the acquisition of Extrobank accelerated the launch of our start-up. In Mexico, the purchase of Alcanza finance company enabled us to begin to operate in auto finance. Lastly, we set up joint ventures with local partners in Chile (Bergé) and France (Banque Accord). They are due to start operating in the first half of 2008.
ATTRIBUTABLE PROFIT NET OPERATING INCOME
Million euros Million euros
SANTANDER CONSUMER FINANCE
NPL COVERAGE NPL RATIO % % 2006 2007 2006 2007 114 96 -18 p.p. 2.57 2.84 +27 b.p.
SANTANDER CONSUMER FINANCE
2006 2007 2006 2007 565 719 +27.1% 1,201 1,867 +55.5%
92
Santander Totta enjoyed a year of profitable growth. Its attributable profit rose by more than 20%, the efficiency ratio improved by 3.3 p.p. and ROE was 4.5 p.p. higher at 28.6%.
Attributable profit, including extraordinary income from the sale in the second quarter of a stake in the bank BPI, was EUR 527 million, 24.6% more than in 2006. Part of the capital gain was used for internal restructuring, long-term incentive plans and establishing a fund for possible contingencies. The net effect on profits was EUR 16 million. Eliminating this impact, attributable profit was 20.8% higher at EUR 511 million.
The Portuguese economy continued to recover moderately, based on still strong growth in exports, a small rise in
investment and the stabilisation of private consumption. Lending to companies accelerated and to individual customers decelerated.
From the financial standpoint, 2007 was a very competitive year, characterised by regulatory changes (with a direct impact on the profitability of banks in 2007, particularly in the second quarter, and in future years) and the lack of liquidity in financial markets, which produced sharp rises in interest rates.
In this environment, the Group continued to focus on its customer-centred business model. The number of customers increased, linkage levels rose and best practices in cross-selling were used.
The start of the year was marked by a strong institutional campaign to launch Santander Totta’s single brand known as "O Meu Banco". Other campaigns followed this, including
"Comissões Zero", and the branch network was further expanded. The number of linked customers rose by 9% and the ratio of products per customer improved.
We will now look at the income statement, but without taking into account the extraordinary results.
Net interest income was 8.8% higher at EUR 718 million. In an environment of regulatory changes (particularly the
rounding of interest rates in loans and greater facility of transfer and mobility of mortgages) and tough competition in funds, Santander Totta combined defence of spreads and dynamic activity.
Net fees and revenue from insurance activity amounted to EUR 389 million, 1.2% higher and the result of the initial impact of the launch of the "Comissões Zero" campaign, lower revenues from investment banking and the mentioned regulatory changes.
Gains on financial transactions (+85.1%) reflected the greater demand for treasury products and higher revenues from wholesale banking operations.
Gross operating income increased 10.1% to EUR 1,214 million. Santander Totta had another excellent year in expenses, which only rose 2.4% despite the opening of 39 branches (+5%).
Thanks to "jaws" of 8 p.p., the efficiency ratio improved 3.3 p.p. to 44.0% and net operating income was 17.8% higher.
Net losses from the deterioration of assets and other results amounted to EUR 42 million, 12.7% lower than in 2006. This was due to recoveries and sales of portfolios of bad debts.
As a result, profit before taxes was 20.6% higher at EUR 630 million and attributable recurrent profit increased 20.8% to EUR 511 million.
Total lending stood at EUR 30,119 million at the end of 2007 (+6%). The focus was on individual customers (+9%) and on SMEs/businesses (+21%). In order to increase the customer base and linkage in the segment of SMEs/businesses, the "Zero Euros" campaign was launched with a varied offer of solutions. Lending to companies and large companies declined 4%, mainly because of the latter whose balance dropped 10% (reflecting careful management of the Group’s balance sheet and capital).
Control of risk quality went hand in hand with growth in lending. The criteria for recording non-performing loans were changed at the beginning of 2007 and brought into line with the rest of the Group. On the basis of the same methodology for both years, the NPL ratio was 1.25% at the end of 2007, the same as a
EFFICIENCY RATIO GROSS OPERATING
INCOME AND EXPENSES
% variation 2007 / 2006 %
PORTUGAL
47.3 44.0 +10.1 +2.4 Gross Expenses 2006 2007 oper. incomePORTUGAL
93
year earlier, and coverage was 117% (130% in 2006).
Total customer funds increased 4% to EUR 33,766 million, as a result of growth combined with defence of spreads. The liquidity crisis in the markets and hence the greater aversion to risk had an impact on mutual funds which was offset by increases in on-balance sheet funds. Capitalisation insurance
remained virtually flat. By segments, the growth rates for funds were similar to those for assets: +6% from individual customers, +13% SMEs/businesses and a fall from large companies.
The magazine Euromoney named Santander Totta the "Best bank in Portugal" for the sixth year running. This prize is for the
The rest of businesses (Wholesale Banking, Asset
Management, Insurance and Banif) generated attributable profit of EUR 719 million, 83.4% more than in 2006. Global Wholesale Banking’s increased 143.7%, Asset Management 14.1%, Insurance 13.6% and Banif 41.0%.
The three main aspects of the income statement were: • Gross operating income was 21.7% higher at EUR 1,962
million and was spread across the units.
Global Wholesale Banking (strongly backed by fees, which rose 59.1% because of those from investment banking and securities) and Asset Management and Insurance increased their gross operating income by around 20%. Banif’s rose 32.5%, with net interest income up 69.2% and fees 22.2%, reflecting its expansion policy which continued in 2007 with
the opening of three new branches and an increase of 11% in managed balances.
• Expenses also rose strongly (by more than 30%) and in all cases due to spending on expansion projects by all the units included here. • Net loan-loss provisions were 75.5% lower. This sharp fall was
due to lower needs for generic provisions in wholesale banking (EUR 20 million in 2007 compared to EUR 308 million in 2006). This fall of EUR 288 million was due to the fact that the results for the second half of 2006 included large generic provisions for big corporate operations which, at the end of that year, had still not reached their definitive structure. In 2007, on the other hand, and more specifically in the first two quarters, there were partial releases of these provisions as the definitive structure was attained. Banif’s provisions only rose 7.2%.
ATTRIBUTABLE PROFIT NET OPERATING INCOME
Million euros Million euros