Banco Santander, S.A.
30 April 2020

Banco Santander, S.A.
(the "Company")

Publication of 2020 UK Annual Report

The Company's annual report for the year ended 31 December 2020, prepared in connection with the Company's obligations under the UK Disclosure and Transparency Rules (the "UK Annual Report"), has today been published and is available on the Company's website at https://www.santander.com/en/ or by pressing the below link:

http://www.rns-pdf.londonstockexchange.com/rns/2068X_1-2021-4-30.pdf

In compliance with Listing Rule 14.3.6R, a copy of the UK Annual Report has been submitted to the Financial Conduct Authority and will shortly be available for inspection on the National Storage Mechanism website at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

In compliance with Disclosure and Transparency Rule ("DTR") 6.3.5R, the UK Annual Report can also be downloaded in pdf format from the Company's website at https://www.santander.com/en/shareholders-and-investors/financial-and-economic-information#filings-with-other-regulatory-bodies.

In compliance with DTR 6.3.5R, the Appendix to this announcement contains certain information extracted from the UK Annual Report. This constitutes the information required to be communicated to the media in unedited full text through a Regulatory Information Service. This information is not a substitute for reading the full UK Annual Report.

Enquiries

Global Head of Shareholders & Investor Relations

Sergio Gámez   -  investor@gruposantander.com

30 April 2021

APPENDIX

The primary purpose of this announcement is to inform the market about the publication of the UK Annual Report.

The information below, which is extracted from the UK Annual Report, constitutes the material required for the purposes of compliance with DTR 6.3.5R and is included solely for the purpose of complying with DTR 6.3.5R. This announcement is not a substitute for reading the UK Annual Report. Page and note references in the extracted information below refer to, respectively, page numbers and notes in the UK Annual Report.

Auditor's report on the consolidated annual accounts of Banco Santander, S.A. and its subsidiaries (pages 513 to 523)

This version of our report is a free translation of the original, which was prepared in Spanish. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

Independent auditor's report on the consolidated annual accounts

To the shareholders of Banco Santander, S.A.

Report on the consolidated annual accounts

We have audited the consolidated annual accounts of Banco Santander, S.A. (the Parent company) and its subsidiaries (the Group), which comprise the balance sheet as at December 31, 2020, and the income statement, statement of recognised income and expense, statement of changes in total equity, statement of cash flows and related notes, all consolidated, for the year then ended.

In our opinion, the accompanying consolidated annual accounts present fairly, in all material respects, the equity and financial position of the Group as at December 31, 2020, as well as its financial performance and cash flows, all consolidated, for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain.

We conducted our audit in accordance with legislation governing the audit practice in Spain. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated annual accounts section of our report.

We are independent of the Group in accordance with the ethical requirements, including those relating to independence, that are relevant to our audit of the consolidated annual accounts in Spain, in accordance with legislation governing the audit practice. In this regard, we have not rendered services other than those relating to the audit of the accounts, and situations or circumstances have not arisen that, in accordance with the provisions of the aforementioned legislation, have affected our necessary independence such that it has been compromised.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual accounts of the current period. These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Other information comprises only the consolidated Directors' report for the 2020 financial year, the formulation of which is the responsibility of the Parent company's directors and does not form an integral part of the consolidated annual accounts.

Our audit opinion on the consolidated annual accounts does not cover the consolidated Directors' report. Our responsibility regarding the consolidated Directors' report, in accordance with legislation governing the audit practice, is to:

a)       Verify only that the statement of non-financial information and certain information included in the Annual Corporate Governance Report, as referred to in the Auditing Act, has been provided in the manner required by applicable legislation and, if not, we are obliged to disclose that fact.

b)       Evaluate and report on the consistency between the rest of the information included in the consolidated Directors' report and the consolidated annual accounts as a result of our knowledge of the Group obtained during the audit of the aforementioned financial statements, as well as to evaluate and report on whether the content and presentation of this part of the consolidated Directors' report is in accordance with applicable regulations. If, based on the work we have performed, we conclude that material misstatements exist, we are required to report that fact.

On the basis of the work performed, as described above, we have , we have verified that the information mentioned in section a) above has been provided in the manner required by applicable legislation and that the rest of the information contained in the consolidated Directors' report is consistent with that contained in the consolidated annual accounts for the 2020 financial year, and its content and presentation are in accordance with applicable regulations.

The Parent company's directors are responsible for the preparation of the accompanying consolidated annual accounts, such that they fairly present the consolidated equity, financial position and financial performance of the Group, in accordance with International Financial Reporting Standards as adopted by the European Union and other provisions of the financial reporting framework applicable to the Group in Spain, and for such internal control as the directors determine is necessary to enable the preparation of consolidated annual accounts that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated annual accounts, the Parent company's directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the aforementioned directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The Parent company's audit committee is responsible for overseeing the process of preparation and presentation of the consolidated annual accounts.

Our objectives are to obtain reasonable assurance about whether the consolidated annual accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.

Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with legislation governing the audit practice in Spain will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated annual accounts.

As part of an audit in accordance with legislation governing the audit practice in Spain, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

·           Identify and assess the risks of material misstatement of the consolidated annual accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

·           Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

·           Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Parent company's directors.

·           Conclude on the appropriateness of the Parent company directors use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated annual accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

·           Evaluate the overall presentation, structure and content of the consolidated annual accounts, including the disclosures, and whether the consolidated annual accounts represent the underlying transactions and events in a manner that achieves fair presentation.

·           Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated annual accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the Parent company's audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Parent company's audit committee with a statement that we have complied with relevant ethical requirements, including those relating to independence, and we communicate with the audit committee those matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Parent company's audit committee, we determine those matters that were of most significance in the audit of the consolidated annual accounts of the current period and are therefore the key audit matters.

We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter.

Report on other legal and regulatory requirements

We have examined the digital files of the European single electronic format (ESEF) of Banco Santander, S.A. and its subsidiaries for the 2020 financial year that comprise an XHTML file which includes the consolidated annual accounts for the financial year and XBRL files with tagging performed by the entity, which will form part of the annual financial report.

The directors of Banco Santander, S.A. are responsible for presenting the annual financial report for the 2020 financial year in accordance with the formatting and markup requirements established in the Delegated Regulation (EU) 2019/815 of 17 December 2018 of the European Commission (hereinafter the ESEF Regulation).

Our responsibility is to examine the digital files prepared by the Parent company's directors, in accordance with legislation governing the audit practice in Spain. This legislation requires that we plan and execute our audit procedures in order to verify whether the content of the consolidated annual accounts included in the aforementioned digital files completely agrees with that of the consolidated annual accounts that we have audited, and whether the format and markup of these accounts and of the aforementioned files has been effected, in all material respects, in accordance with the requirements established in the ESEF Regulation.

In our opinion, the digital files examined completely agree with the audited consolidated annual accounts, and these are presented and have been marked up, in all material respects, in accordance with the requirements established in the ESEF Regulation.

The opinion expressed in this report is consistent with the content of our additional report to the Parent company's audit committee dated February 23, 2021.

The General Ordinary Shareholders' Meeting held on April 3, 2020 appointed us as auditors of the Group for a period of one year, for the year ended December 31, 2020.

Previously, we were appointed by resolution of the General Shareholders' Meeting for a period of 3 years and we have audited the accounts continuously since the year ended December 31, 2016.

Services, different to the audit, provided to the Group are detailed in Note 47 of the consolidated annual accounts.

Alejandro Esnal Elorrieta (19930)

February 23, 2021

Auditor's report on the annual accounts of Banco Santander, S.A. (pages 857 to 867)

This version of our report is a free translation of the original, which was prepared in Spanish. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation

Independent auditor's report on the annual accounts

To the shareholders of Banco Santander, S.A.,

Report on the annual accounts

We have audited the annual accounts of Banco Santander, S.A. (the Bank), which comprise the balance sheet as at December 31, 2020, and the income statement, statement of recognised income and expense, statement of changes in total equity, cash flow statement and related notes for the year then ended.

In our opinion, the accompanying annual accounts present fairly, in all material respects, the equity and financial position of the Bank as at December 31, 2020, as well as its financial performance and cash flows for the year then ended, in accordance with the applicable financial reporting framework (as identified in Note 1 of the notes to the annual accounts), and, in particular, with the accounting principles and criteria included therein.

We conducted our audit in accordance with legislation governing the audit practice in Spain. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the annual accounts section of our report.

We are independent of the Bank in accordance with the ethical requirements, including those relating to independence, that are relevant to our audit of the annual accounts in Spain, in accordance with legislation governing the audit practice. In this regard, we have not rendered services other than those relating to the audit of the accounts, and situations or circumstances have not arisen that, in accordance with the provisions of the aforementioned legislation, have affected our necessary independence such that it has been compromised.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts of the current period. These matters were addressed in the context of our audit of the annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Other information comprises only the management report for the 2020 financial year, the formulation of which is the responsibility of the Banks's directors and does not form an integral part of the annual accounts.

Our audit opinion on the annual accounts does not cover the management report. Our responsibility regarding the management report, in accordance with legislation governing the audit practice, is to:

a)       Verify only that the statement of non-financial information and certain information included in the Annual Corporate Governance Report, as referred to in the Auditing Act, has been provided in the manner required by applicable legislation and, if not, we are obliged to disclose that fact.

b)       Evaluate and report on the consistency between the rest of the information included in the management report and the annual accounts as a result of our knowledge of the Bank obtained during the audit of the aforementioned financial statements, as well as to evaluate and report on whether the content and presentation of this part of the management report is in accordance with applicable regulations. If, based on the work we have performed, we conclude that material misstatements exist, we are required to report that fact.

On the basis of the work performed, as described above, we have verified that the information mentioned in section a) above has been provided in the manner required by applicable legislation and that the rest of the information contained in the management report is consistent with that contained in the annual accounts for the 2020 financial year, and its content and presentation are in accordance with applicable regulations.

The Bank's directors are responsible for the preparation of the accompanying annual accounts, such that they fairly present the equity, financial position and financial performance of the Bank, in accordance with the financial reporting framework applicable to the entity in Spain, and for such internal control as the directors determine is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error.

In preparing the annual accounts, the Bank's directors are responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Bank or to cease operations, or have no realistic alternative but to do so.

The audit committee is responsible for overseeing the process of preparation and presentation of the annual accounts.

Our objectives are to obtain reasonable assurance about whether the annual accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with legislation governing the audit practice in Spain will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts.

As part of an audit in accordance with legislation governing the audit practice in Spain, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

·           Identify and assess the risks of material misstatement of the annual accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

·           Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.

·           Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Bank's directors.

·           Conclude on the appropriateness of the directors use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the annual accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

·           Evaluate the overall presentation, structure and content of the annual accounts, including the disclosures, and whether the annual accounts represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the entity's audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the entity's audit committee with a statement that we have complied with relevant ethical requirements, including those relating to independence, and we communicate with the audit committee those matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the entity's audit committee, we determine those matters that were of most significance in the audit of the annual accounts of the current period and are therefore the key audit matters.

We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter.

Report on other legal and regulatory requirements

We have examined the digital file of the European single electronic format (ESEF) of Banco Santander, S.A. for the 2020 financial year that comprises an XHTML file of the annual accounts for the financial year, which will form part of the annual financial report.

The directors of Banco Santander, S.A. are responsible for presenting the annual financial report for the 2020 financial year in accordance with the formatting and markup requirements established in the Delegated Regulation (EU) 2019/815 of 17 December 2018 of the European Commission (hereinafter the ESEF Regulation).

Our responsibility is to examine the digital files prepared by the Parent company's directors, in accordance with legislation governing the audit practice in Spain. This legislation requires that we plan and execute our audit procedures in order to verify whether the content of the annual accounts included in the aforementioned digital files completely agrees with that of the consolidated annual accounts that we have audited, and whether the format and markup of these accounts and of the aforementioned files has been effected, in all material respects, in accordance with the requirements established in the ESEF Regulation.

In our opinion, the digital file examined completely agrees with the audited annual accounts, and these are presented, in all material respects, in accordance with the requirements established in the ESEF Regulation.

The opinion expressed in this report is consistent with the content of our additional report to the Bank's audit committee dated February 23, 2021.

The General Ordinary Shareholders' Meeting held on April 3, 2020 appointed us as auditors for a period of one year, as from the year ended December 31,2020.

Previously, we were appointed by resolution of the General Shareholders' Meeting for a period of 3 years and we have audited the accounts continuously since the year ended December 31,2016.

Services, different to the audit, provided to the Bank are described in Note 43 of the annual accounts.

Alejandro Esnal Elorrieta (19930)

February 23, 2021

Important events (page 853 to 856)

2.3 Important events

No significant events occurred from 1 January 2021 to 22 February 2021, being the date on which the consolidated financial statements were authorized for issue (see note 1.g to the consolidated financial statements).

The following significant events occurred from 23 February 2021 to the date of filing of this report:

Dividend announcement

On 3 February 2021, the Bank announced its 2020 results and the board of directors' intention to pay a cash dividend of €2.75 cents per share as shareholder remuneration for 2020, the maximum allowed in accordance with the limits set by the ECB recommendation of 15 December 2020.

The board of directors has now approved that this dividend will be paid in cash from 4 May 2021.

The last day to trade shares with a right to receive this dividend will be 29 April 2021, the ex-dividend date will be 30 April 2021 and the record date will be 3 May 2021.

This dividend will be paid under the resolution for the distribution of share premium approved at the Bank's general shareholders' meeting on 27 October 2020.

General Shareholders' Meeting

On 26 March 2021, the ordinary general meeting of shareholders of Banco Santander was held at the corporate headquarters of Boadilla del Monte (Madrid) which, in consideration of the existing situation in relation to COVID-19 and in accordance with the provisions of article 3 of Royal Decree-Law 34/2020, of 17 November, on urgent measures to support business solvency and the energy sector, and in tax matters, in its wording given by Royal Decree-Law 5/2021, of 12 March, took place exclusively online, that is, without physical or in-person attendance of shareholders, representatives or guests, except that of the members of the General Meeting Table (president and secretary), the CEO and the notary, and with the necessary security and distancing measures.

A total of 612,804 shareholders attended the meeting, among those present and represented, holding 11,735,176,840 shares, thus increasing the quorum to 67.674% of Banco Santander's share capital.

The resolutions submitted to a vote were approved with an average of 98.31% of favorable votes, having approved with 99.7% of the votes the corporate management of Banco Santander during financial year 2020. It was submitted to the binding approval of the boards the directors' remuneration policy, for the years 2021, 2022 and 2023, having obtained 93.26% of votes in favor.

All the proposed resolutions, the mandatory reports of administrators and other necessary legal documentation related to the general meeting were published on the occasion of its call, on February 23, on the corporate website. This documentation also included the Group's 2020 Annual Report, which contains the corresponding chapter on Corporate Governance where the main activities of the board and its committees in 2020 are reported, including detailed information on Banco Santander's corporate governance system, as well as the annual directors' remuneration report.

The meeting approved the ratification of Ms Gina Díez Barroso as independent director, appointed by co-option by the board on 22 December 2020, and the re-election of Mr. Javier Botín as external director, and of Ms Homaira Akbari, Mr. Alvaro Cardoso de Souza, Mr. Ramiro Mato and Mr. Bruce Carnegie-Brown as independent directors.

The meeting also approved the re-election of PricewaterhouseCoopers Auditores, S.L. as auditor of the individual and consolidated accounts of Banco Santander, S.A. for the financial year ending 31 December 2021.

All complete information on the agreements approved by the board of directors can be found on the corporate website (www.santander.com).

Modification of the Bylaws

At the aforementioned General Shareholders' Meeting, the modification of articles 18, 20, 27 and 34 of the Bylaws and the introduction of a new article 34 bis with the following purposes:

·      to attribute to the board of directors the power to issue non-convertible bonds (modification of articles 18 and 20);

·      to attribute to the board the competence to decide on the application of remuneration systems consisting of the delivery of shares or rights over them, as well as any other remuneration system that is referenced to the value of the shares, when the beneficiaries of such systems of remuneration are not directors of the Bank (modification of article 20);

·      to give the Bank greater flexibility to process the proxies granted and the votes cast remotely by the shareholders, without prejudice to the fact that, as up to now and on the occasion of each call, the board of directors may reduce the time required in advance, with respect to the day scheduled for the holding of the general meeting, for its reception by the Bank, giving it the same publicity that is given to the announcement of the call (modification of articles 27 and 34); and

·      to authorize, when the applicable regulations provide for it, the calling by the administrators of meetings to be held exclusively telematically, without physical assistance from the shareholders or their representatives (introduction of a new article 34 bis which includes the previous section 6 of article 34).

Modification of the Rules and Regulations of the General Shareholders' Meeting

At the aforementioned General Shareholders' Meeting, the modification of articles 2, 8, 20 and 26 of the Rules and Regulations of the General Meeting of Shareholders was also approved with the following purposes:

·      to coordinate the text of the Rules and Regulations with the amendments to the bylaws approved at the General Shareholders' Meeting (amendment of article 2);

·      to introduce a technical precision in the regulation of the mechanisms to confer representation and cast votes from a distance (modification of articles 8 and 20); and

·      to incorporate any additional technical improvement (modification of article 26).

Santander to acquire minority interests in Santander Mexico

The Bank announced on 26 March 2021 that it intends to make a cash offer to repurchase the outstanding shares of Banco Santander México, S.A., Institución de Banca Múltiple and Grupo Financiero Santander México ("Santander Mexico") not already held by the Group, which represent c.8.3 per cent. of its Mexican subsidiary's share capital. The expected consideration for those shareholders who accept the offer would be 24 Mexican pesos for every share of Santander México and 120 Mexican pesos for every American Depositary Share ("ADS") of Santander Mexico or, if higher, the book value per share of Santander Mexico (and its equivalent for every ADS) as per the financial statements of Santander Mexico for the quarter immediately preceding the date on which the offer is launched (the "Offered Price").

The Offered Price represents a 24.3 per cent. premium on the closing market price on 25 March 2021 and a 23.6 per cent. premium over the last 30 trading days' volume weighted average price of Santander Mexico's shares. Acquiring the full 8.3 per cent. outstanding stake would require total consideration of c.€550 million .

Banco Santander will be seeking to cancel the registration of Santander Mexico's shares before the National Securities Registry of the Mexican National Banking and Securities Commission and, when permitted, before the U.S. Securities and Exchange Commission, as well as the delisting of the Santander Mexico shares from the Mexican Stock Exchange and the New York Stock Exchange following settlement of the offer.

The offer is therefore expected to be a mandatory delisting offer to purchase under the Mexican Securities Market Law and may not be carried out if the general shareholders meeting of Santander Mexico, which will be called for that purpose, were not to approve the delisting with the required majority.

The offer is expected to be launched and settled in the second and third quarters of the year 2021. The Offered Price assumes Santander Mexico will not pay any dividend on its shares before the offer is settled. In the event that any dividend is paid prior to settlement of the offer, the Offered Price will be reduced by the amount of the dividend per share.

The transaction is consistent with Banco Santander's strategy of increasing its weight in high-growth markets and reflects Banco Santander's confidence in Mexico and its Mexican subsidiary as well as their long-term growth potential. Banco Santander offers Santander Mexico's shareholders the opportunity to sell their shares for a premium. The Bank believes that the offer is attractive for shareholders of both Santander México and Banco Santander. Santander México shareholders will receive a price broadly in line with consensus target price for the next 12 months, as well as allowing them to divest a low-liquidity stock. The transaction is also beneficial for shareholders of Banco Santander, as it increases the Group's growth profile, as well as its capacity to generate capital organically.

The transaction is expected to have a return on invested capital (ROIC) of c.14 per cent. and improve Banco Santander's earnings per share (EPS) by 0.8 per cent. in 2023. It will increase the Group's capacity for organic capital generation and be neutral in terms of tangible net asset value (TNAV) per share. The acquisition of the outstanding shares would reduce the group's CET1 ratio by c.8 basis points.

Commencement of the offer and the offer itself will be subject to customary conditions for this type of transaction, including regulatory authorisations from the Mexican Comisión Nacional Bancaria y de Valores and a review from the U.S. Securities and Exchange Commission, the absence of any material adverse change in the financial condition, results of operations or prospects of Santander Mexico, as well as the approval of the delisting of the Santander Mexico shares from the Mexican Stock Exchange with the affirmative vote of the holders of at least 95 per cent. of the capital stock of Santander Mexico in an extraordinary shareholders' meeting.

New way to present financial information

Starting with the financial information for the first quarter of 2021, a change in the Group's reportable segments is to be carried out to reflect the Bank's new organisational structure, in line with the three strategic initiatives outlined in the 2020 Annual Report: One Santander, Digital Consumer Bank and PagoNxt.

These changes align the segment information with their management and have no impact on the Group's consolidated figures.

The main changes to the Group's segments are:

·      Primary segments:

Creation of the new Digital Consumer Bank (DCB) segment, which includes Santander Consumer Finance (SCF), previously included in the Europe segment and Openbank, formerly included in the Santander Global Platform. The consumer finance business in the United Kingdom previously reported in the country will be reported in this new segment.

Elimination of the Santander Global Platform reporting segment: Openbank is now included within DCB, and Merchant Solutions, Trade Solutions and Consumer Solutions (Superdigital and Pago Next) will be assigned accordingly to each of the three main geographic regions.

·      Secondary segments:

Creation of the PagoNxt segment, which includes the Merchant Solutions, Trade Solutions and Consumer Solutions, previously recorded in Santander Global Platform.

Elimination of the Santander Global Platform reporting segment, now included under PagoNxt and Retail Banking (mainly Openbank).

An adjustment of the perimeter of the Global Customer Relationship Model between Retail Banking and Santander Corporate & Investment Banking and between Retail Banking and Wealth Management & Insurance.

Universalpay Payment Institution

Universalpay Entidad de Pago, S.L. has filed a proceeding against Banco Santander, S.A. for breach of the marketing alliance agreement (MAA). The claim is currently being processed in the Court of First Instance no. 81 of Madrid, ordinary procedure 156/2021. The MAA was originally entered into by Banco Popular Español, S.A. and its object is the business of acquiring services for businesses in the Spanish market. The claim is based mainly on the potential breach of clause 6 of the MAA, which establishes certain obligations of exclusivity, non-competition and customer referral. The claim is at a very early stage, and there are factual issues pending resolution, which may have legal consequences and affect eventual liability. This uncertainty makes it impossible to reliably predict the resolution of the issue, the timing or the significance of the potential impact.

Announcement of results for the first quarter of 2021

On 28 April 2021, Banco Santander, S.A. presented results for the Group for the first quarter of 2021, noting in particular that:

·      The Group earned €11.4 billion in quarterly revenue, up 8% year-on-year in constant euros (excluding currency movements), driven by growth in volumes with falling funding costs and good performance in all regions, reflecting the strength of its geographic and business diversification, and the long-term sustainability of its earnings.

·      Business volumes were higher in most markets. Lending and customer funds (deposit and mutual funds) grew 2% and 10% year-on-year, respectively, in constant euros.

·      Pre-provision profit (net operating income) grew by 15% year-on-year in constant euros to €6.3 billon, reflecting the quality and resilience of the bank's earnings.

·      During the quarter, the bank recorded €530 million in charges, net of tax, from expected restructuring costs for the year as a whole.

·      Credit quality continued to improve. The non-performing loan ratio fell five basis points (bps) year-on-year to 3.20%. Cost of credit improved by 20 bps from December to 1.08%, due to lower loan-loss provisions.

·      The group CET1 capital ratio rose 72 bps year-on-year to 12.30%, above its target range of 11-12%. The bank accrued 15 bps of capital for shareholder remuneration, the equivalent of 40% of underlying profit in the quarter. It will accrue 40% of underlying profit throughout the year for shareholder remuneration once authorized by supervisors (subject to board and, if applicable, general meeting resolutions on shareholder remuneration and dividend payment policy).

·      The bank also announces changes to its leadership team within the Europe region:

o  Antonio Simoes is to become chief executive officer of Santander Spain while retaining his responsibilities as regional head of Europe. His appointment as CEO of Santander Spain aligns the bank's management structure in Europe with North and South America, where the regional head positions are also held by a country CEO.

o  Antonio succeeds Rami Aboukhair, who has been appointed global head of cards and digital solutions reporting to Santander Group CEO, José Antonio Álvarez.

o  Nathan Bostock, CEO of Santander UK, is to take on a global role as head of investment platforms, responsible for overseeing all investment platforms owned or partly owned by Santander and managed by third parties, focused on high-return businesses that are complementary to traditional banking and can benefit from the Group's geographical and client footprints.

Principal risks (pages 433 to 434 and 435)

1.3 Santander's top and emerging risks

Our forward-looking risk management and control practices detect, examine and monitor threats to our strategic plan through regular analysis of top and emerging risks under various scenarios. The aim is to identify and understand relevant internal and external threats that could undermine our profitability, solvency and strategy.

Top risk detection is a bottom-up process. It considers risks in our subsidiaries and across Grupo Santander; these are identified in our first line of defence and then challenged by the second line of defence. We also use those risks as inputs for idiosyncratic scenarios in our ICAAP, ILAAP and the Group's recovery plan.

The pandemic caused an unprecedented downturn in the global economy while accelerating changes long underway. It acted as a catalyst for previously identified threats (detailed below), whose severity varies with the duration and shape of our recovery scenarios. It is already changing market dynamics and consumer behaviours, and accelerating the digitalization of the economy.

Our top management monitors and takes mitigating actions against major strategic risks such as:

A longer and more severe ("L" shaped) economic recession: the worldwide spread of the coronavirus and the measures taken to contain it brought on an economic downturn unlike any other. If the pandemic grows more intense, it may lead to a deeper, more protracted economic recession, political instability and global protectionism in core markets. Particularly, in the eurozone, under persistently low interest rates and potential tensions on trade and financial relations with the UK after Brexit, as well as in Latin American markets, also affected by uncertainty.

Balanced diversification between mature and developing markets and our product mix make Santander resilient to macroeconomic risks. Several mitigating actions we took this year helped reduce the severity of our exposure. These include:

·      Robust risk policies, procedures and proactive risk management, which keep our risk profile within the parameters of our risk appetite statement. Amid the pandemic, Grupo Santander shared with subsidiaries guidelines on treating affected assets, credit risks models, loan moratoria and other topics. This promoted the exchange of best practices and proved to be key in managing the crisis.

·      Strengthened disciplined risk management and recovery and collection plans.

·      Frequent follow-up meetings to monitor the liquidity risk profile, contingency plans and commercial, market and macroeconomic dynamics.

·      Continuous monitoring of the political and social situation in countries where we hold material exposures. Where necessary, we adjusted limits and exposures to our risk appetite.

Regulatory capital requirements: Despite the temporary flexibility of central banks and regulatory bodies to aid the financial system, we remain mindful of risks stemming from ever intense requirements of new Basel IV guidelines and the Targeted Reviews on Internal Models (TRIM).

Our key mitigating actions were:

·      Risk contribution to capital optimization: models enhancement and management, market and operational risk initiatives, and Credit Valuation Adjustment (CVA) improvement.

·      Managing capital to offset the effects of covid-19.

·      Adapting risk models to upcoming regulatory requirements.

Greater cyber-risk exposure: The new environment, with more people working remotely as a consequence of covid-19, heightens exposure to cyberattacks, phishing and malware. Espionage, data leaks, system failures and other digital risks are gaining importance in finance, much less the entire economy.

Our key mitigating actions were:

·      Expanding Global Cybersecurity alerts and monitoring to prevent attacks.

·      Making defence capabilities more agile, sustainable and risk-based to further standardize and strengthen internal defences, controls and insider threat protections.

Digital transformation and new competitive environment: In this new environment spurred on by covid-19, competition from existing players and new entrants increased, redefining business, customer experience and market expectations and accelerating the digitalization of companies. Regulation plays a key role, and can sometimes create asymmetries between new and traditional competitors.

Our key mitigating actions were:

·      Digitalising the bank to become a global platform. This has become paramount in this environment, and our partnerships and joint ventures are playing an important role in our transformation.

·      Prioritizing e-commerce lending, SMEs initiatives, collections reinforcement and other projects to mitigate the effects of covid-19.

·      Continuously embedding a group-wide culture of rapid experimentation, sharing best practises and business solutions.

Risks related to climate change: The initiatives governments, international organizations, supervisors and regulators are launching to assess the impact of climate change on the financial sector demand greater transparency and reporting of the risks it might pose to banks performance, resilience and business strategies. Proactive climate risk management is vital so banks can identify, and respond to, risks in a timely manner.

Climate-related risks fall into two categories: (1) risks relating to the transition to a low-carbon economy and (2) risks from the physical impacts of climate change.

In an interconnected world where global problems demand global solutions, the pandemic highlighted the importance of coordination and cooperation to combat the health crisis and its economic consequences and therefore, the need to address climate change risks under that approach to avoid its potential consequences.

Our key mitigating actions were:

·      Direct involvement of our top management through the established governance.

·      A climate project jointly led by Responsible Banking, Santander Corporate & Investment Bank (SCIB) and Risk to develop risk measurement methodologies, climate related metrics, strategy, policies and products. The project also progresses in implementing the recommendations of the Task Force for Climate-related Financial Disclosures, the European Central Bank and other authorities on climate-related and environmental

·      Continue disclosing our progress in integrating climate initiatives into our processes and policies.

·      Working together with customers to support them in their transition to reduce carbon emissions. Supporting inclusive, sustainable growth and the transition to a low-carbon economy by financing renewable energy and smart infrastructures, always mindful of social and environmental risks and rewards.

·      Taking an active role in international forums and working groups to promote the energy transition scheme, including the United Nations Environment Programme Finance Initiative (UNEP FI) pilot to develop scenarios, models and metrics to assess climate-related risks and opportunities in the future.

Additionally, we identified "game changers" that could shape our long-term strategy and transformation plan, such as: asymmetry on natural resource availability, new consumer behaviours, the changing geopolitical landscape, political fragmentation, social and demographic changes, legal loopholes and others.

2.2 Risk Factors

Grupo Santander's classification of risks ensures effective risk management, control and reporting. Our risk framework distinguishes these key risk types:

We also consider environmental and climate-related risk drivers (whether physical or transition-led) as factors that could impact the exiting risks in the medium and long-term.

Directors' responsibility statements (page 853)

1. Responsibility statements

The directors of Banco Santander made the following responsibility statements with respect to the annual accounts which were approved by the board of directors, as included in the Spanish-language version of Banco Santander's Annual Report (pages 868 and 869) and of the individual annual accounts and directors' report and auditor's report (pages 319 and 320) for the year ended 31 December 2020, on 22 February 2021:

Responsibility statement with respect to the consolidated annual accounts:

The directors of Banco Santander, S.A., listed below with an indication of their respective positions, declare that, to the best of their knowledge, the company's consolidated annual accounts for the 2020 financial year were drawn up in accordance with the applicable accounting principles and give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and of the undertakings included in the consolidation taken as a whole, and that the consolidated directors' report includes a fair review of the development, performance and position of the company and of the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Responsibility statement with respect to the individual annual accounts:

The directors of Banco Santander, S.A., listed below with an indication of their respective positions, declare that, to the best of their knowledge, the company's individual annual accounts for the 2020 financial year were drawn up in accordance with the applicable accounting principles and give a true and fair view of the assets, liabilities, financial position and profit or loss of the company, and that the directors' report includes a fair review of the development, performance and position of the company, together with a description of the principal risks and uncertainties that it faces.

Name and position of the members of the board of directors of Banco Santander making the above responsibility statements:

ANA PATRICIA BOTÍN-SANZ DE SAUTUOLA Y O'SHEA 

Chairman

JOSÉ ANTONIO ÁLVAREZ ÁLVAREZ

Vice chairman and Chief Executive Officer

BRUCE CARNEGIE-BROWN

Vice chairman

HOMAIRA AKBARI

LUIS ISASI FERNÁNDEZ DE BOBADILLA

FRANCISCO JAVIER BOTÍN-SANZ DE SAUTUOLA Y O'SHEA

HENRIQUE MANUEL DRUMMOND BORGES CIRNE DE CASTRO

SOL DAURELLA COMADRÁN

SERGIO AGAPITO LIRES RIAL

GINA DÍEZ BARROSO

R. MARTÍN CHÁVEZ MÁRQUEZ

RAMIRO MATO GARCÍA-ANSORENA

BELÉN ROMANA GARCÍA

ÁLVARO ANTONIO CARDOSO DE SOUZA

PAMELA ANN WALKDEN

Related Parties (pages 756 to 757)

The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and joint ventures, the Bank's key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Following below is the balance sheet balances and amounts of the Group's income statement corresponding to operations with the parties related to it, distinguishing between associates and joint ventures, members of the Bank's board of directors, the Bank's executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those that prevail in arm's-length transactions or, when this was not the case, the related compensation in kind was recognized.