Banco Santander S A : Pilar III 2023

Think Value

Think Customer

Think Global

Starting a new phase of value creation

Pillar 3

Disclosure Report 2023

santander.com

Index

Introduction (Ch. 1)

• Santander overview

1. Santander Pillar 3 Report overview

1. Regulatory framework

1. Scope of consolidation

Capital (Ch. 2)

24 Capital

27 Capital function

29 Capital adequacy, management and profitability

33 Pillar 1 - Regulatory Capital

43 Leverage ratio

50 Pillar 2 - Economic Capital

50 Capital planning and stress tests

51 TLAC & MREL

Risks (Ch. 3, 4, 5, 6, 7, 8, 9, 10 and 11)

1. Global risk vision

1. Credit Risk

1. Counterparty Credit Risk

1. Credit Risk - Securitizations

1. Market Risk

1. Operational Risk

1. Liquidity Risk

1. ESG Risk

1. Other Risks

Risk taker's remunerations and Appendices (Ch. 11 and 12)

268 Risk taker's remunerations

283 Appendices

Other appendices available on the Santander website.

Access 2023 Pillar 3 Disclosures Report available on the Santander Group website

Note: Document translated from Spanish. In the event of a discrepancy, the Spanish version prevails.

Introduction

1. Introduction

1. Santander overview
2. Santander Pillar 3 report overview

1. Governance: policy, review and approval
2. Background information on Santander

1.2.3. Disclosure criteria

1. Regulatory framework

1. Solvency and Resolution
2. Sustainability
3. Digital
4. AML/FT

1. Scope of consolidation

1. Substantial amendments
2. Differences between the consolidation methods

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13

14

14

15

15

16

17

18

19

19

20

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2023 Pillar 3 Disclosures Report	Index Introduction
		Capital
		Risks
1.Introduction		Risk takers remunerations and Appendices

1.1. Santander overview

Our aim

Santander is one of the largest banks in the eurozone. As of December 2023, Banco Santander's market capitalization of EUR 61,168 million was the second largest in the eurozone and 21st largest in the world among financial institutions.

Santander aims to be the best open financial service platform, by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. Our purpose is to help people and businesses prosper.

Our business model: Based on 3 Pillars

01. Customer focus

Digital bank with branches

02. Our scale

Local and global scale

03. Diversification

Geographic and business

diversification

We are building a digital bank with branches to make life easier for our customers, giving them the power to decide how they want to interact with us.

165 Mn +5 Mn

Total customers / New customers

These five global businesses support value creation based on profitable growth and operational leverage.

The scale in each of our main markets in

volumes, together with our global capabilities

generate profitable growth and give us

advantages over local competitors.

Diversification and a medium-low risk profile deliver recurrent pre-provision profit, with among the lowest volatility across peers.

Our simple and focused range of products and services meets the needs of a broad spectrum of customers.

Our business model is a source of great strength and resilience.

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2023 Pillar 3 Disclosures Report	Index	Introduction
		Capital
		Risks
		Risk takers remunerations and Appendices

Economic and regulatory context

During 2023, Santander operated in an environment dominated by:

1

2

3

Higher interest rates as central banks looked to contain inflation, which gradually eased during the year.

Geopolitical tensions arising from ongoing conflicts.

A gradual slowdown in activity, however with resilient labour markets with unemployment rates at or close to full employment in two thirds of Santander's footprint.

In 2023, regulatory discussions were focused on four main areas: capital requirements and resolution framework, sustainability, digital (with a special focus on payments) and retail.

Regarding capital requirements, most of the discussions continued to focus on the legislative proposal to implement the Basel III prudential framework in Europe (CRR III-CRD VI). This reform aims to reduce the variability of risk-weighted assets and enhance comparability across institutions. It introduces other issues such as the prudential treatment of exposures to crypto-assets and provisions relating to Environmental, Social and Governance (ESG) risks. Regarding the latter, the European Banking Authority (EBA) is carrying out an analysis of potential prudential treatment of ESG risks. The Basel Committee published a first report on lessons learned from the Silicon Valley Bank and Credit Suisse crisis, highlighting the need to strengthen the supervisory framework, and announced that it will continue to analyse the need to reform the current framework on liquidity, interest rate risk and AT1 instruments.

Public policy

Santander has always supported the need for robust, high-quality regulation that reinforces the banking system strength and solvency, establishes strong consumer protection and market stability standards, and favours transparency regarding risk and resilience for investors and supervisors.

Capital and bank resilience

Although we believe that reforms in the last decade have made financial institutions more robust in terms of capital, helping banks grow in stress situations such as the covid-19 pandemic or the war in Ukraine, we continue to advocate for:

A strategy to continue working on the implementation of the Basel III prudential framework in Europe, which aims to reduce the variability of risk-weighted assets and enhance comparability between institutions, while also advocating that it takes into account a prudential treatment of crypto-assets and provisions relating to ESG risks.

The correction of the current regulatory bias that favours risk aversion over growth and competitiveness.

The need for a stable and predictable framework to facilitate institutions' management and investors' understanding of this agenda.

The building of a genuine single financial services market in Europe, which we believe is key to competitiveness.

Banking regulation that takes into account the realities of banks with a global footprint, does not penalize expansion to other countries and includes the recognition of the Multiple Point of Entry (MPE) resolution framework.

Common deposit insurance scheme for EU banks that breaks the bank/sovereign loop. Furthermore, the alignment of the different rules and the revitalization of the securitization market are essential for the construction of a Capital Markets Union.

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2023 Pillar 3 Disclosures Report

We delivered record profit ...

Index Introduction

Capital

Risks

Risk takers remunerations and Appendices

Record results with 5mn new customers YoY contributing to double-digit revenue growth

First year of ONE Transformation driving profitable growth and structural efficiency improvement

Strong balance sheet, with solid credit quality metrics and a higher capital ratio

Delivering double digit value creation and higher shareholder remuneration

FY'23 Attributable

Profit

€11.1 bn

+15%

Cost-to-income

44.1%

-173bps

CoR

1.18%

+0.19pp

TNAVps + DPS

15%

Cash DPSA + c.50%

FY'23 Revenue

€58bn

+11%

RoTE

15.1%

+169bps

FL CET1

12.3%

+0.2pp

EPS

22%

Note: YoY changes. In constant euros. TNAVps + DPS includes the €5.95 cent cash dividend paid in May 2023 and the €8.10 cent cash dividend paid in November 2023

Note: Based on underlying P&L. YoY changes in euros. In constant euros: attributable profit +18% and revenue +13%.

1. TNAVps + dividend per share (DPS) includes the €5.95 cent cash dividend paid in May 2023 and the €8.10 cent cash dividend paid in November 2023 Implementation of 2023 shareholder remuneration policy is subject to future corporate and regulatory decisions and approvals. For more details, see section 3.3 'Dividends and shareholder remuneration' in the 'Corporate Governance' chapter.

We achieved our 2023 Group financial targets

	2023 targets	2023 achievement
RevenueA	Double-digit growth	+13%
Efficiency ratio	44-45%	44.1%
Cost of risk	<1.2%	1.18%
RoTE	>15%	15.1%
FL CET1	>12%	12.3%

A. YoY in constant euros.

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2023 Pillar 3 Disclosures Report	Index	Introduction
		Capital
		Risks
		Risk takers remunerations and Appendices

Executive summary

Santander's capital levels exceed minimum regulatory requirements

Fully-loaded CET1 ratio evolution						Regulatory capital vs. regulatory requirement (phased-in)A
			11.3	11.4	11.9	12.0	12.0	12.3
	10.6	10.8
10.1

8.3

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Our business model and strategy allow us to accelerate profitable growth

and shareholder value creation.

	2025 target	2023 Achievement
CET1	>12%	12.3%
RWA with RoRWA > COE	85%	84%
Profitability (RoTE)	15-17%	15.1%
TNAVps	Double-digit growth	15%

(A ):The phased-in ratio includes the transitional treatment of IFRS 9, calculated in accordance with article 473a of the Capital Requirements Regulation (CRR II) and the subsequent amendments introduced by EU Regulation 2020/873. In addition, the total phased-in capital ratio includes the transitional treatment in accordance with Chapter 4, Title 1, Part 10 of CRR II.

Strong performance drove higher gross organic capital generation

+1.19
+0.09	12.5	12.3
12.0

-0.80	-0.26

Dec-22	Organic	Cash dividend and	Regulatory &	Dec-23 pre - SBB	New SBB EBA	Dec-23
	generation	first SBB (1)	Others	Q&A EBA	Q&A

1: The implementation of the shareholder remuneration policy is subject to future corporate and regulatory decisions and approvals.

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2023 Pillar 3 Disclosures Report	Index	Introduction
		Capital
		Risks
		Risk takers remunerations and Appendices

RWA distribution by type of risk A

RWA by credit approach AB

Credit (ex. CCR, SEC and Others) - €515 Bn			SA Method - €286 Bn
CCR - €14 Bn			FIRB Method - €57 Bn
Market - €16 Bn			AIRB Method - €138 Bn
Operational - €67 Bn			Slotting - €14 Bn
Securizations and Others - €12 Bn			Equities - € 4 Bn
Total: €624 Bn	Total: €515 Bn

• CRR Phased-in, NIIF9 Phased-in.

• Securisation and others are excluded. For more information, see table 9.OV1

RWA distribution by geographic areaAB

• Others is excluded. For more information, see Table 10. RWA by geographical region B CRR Phased-in,Phased-in IFRS 9

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