2020 Banco Santander Annual Report

RNS Number : 2068X

Banco Santander S.A.

30 April 2021

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

Opinion

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.

Basis for opinion

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

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.

Key audit matter

Estimation of impairment of financial assets at amortised cost - loans and advances to customers - for credit risk

The complexity of the expected loss impairment calculation models has increased due to the adaptations made in the context of the covid-19 crisis by incorporating new estimates and judgments such as the consideration of certain flexibility measures applied to the operations subject to moratoriums, the consideration of government guarantees or the consideration of the adjustments to the models to determine the expected loss. These estimates require an elevated component of judgment by management and are one of the most significant and complex estimates in the preparation of the consolidated annual accounts as at December 31,2020, therefore it has been considered one of the key audit matters.

The main judgements and assumptions used by management are the following:

• The estimation of the Probability of Default (PD) and Loss Given Default (LGD) parameters.

• Identification and classification of the staging criteria of loans and advances to customers, including the criteria established in the context of covid-19.

• The definition and evaluation of post model adjustments to adapt the parameters estimated by the models to the current conditions and environment derived from the covid-19 crisis.

• The main assumptions used in the determination of provisions for risks estimated individually.

The Group's business is focused primarily on commercial banking products and is concentrated in nine key markets (Brazil, Chile, Spain, United States, Mexico, Poland, Portugal, United Kingdom and the consumer finance business in Europe). In this context, the Group uses internal models that allow it to estimate both the collective provisions and the provisions for risks estimated individually.

How our audit addressed the key audit matter

We have performed, in collaboration with our credit risk expert, an understanding of management's process to estimate the impairment of financial assets at amortised cost - loans and advances to costumers - over the estimation of impairment of financial assets assessed collectively and individually.

With respect to internal controls, we have focused on testing the design and operating effectiveness of controls for the following processes:

• Calculation methodologies, calibrations, monitoring and back-testing performed by management.

• Compliance with internal policies and functionality of the internal models approved by management.

• Reliability of the data sources used in the calculations and the suitability of the models taking into account the circumstances, placing special attention over the loan origination process subject to either moratoriums or government guarantees as a consequence of covid-19, if any.

• Periodic review process of borrower to determine proper staging criteria.

• Review process over the calculation of the principal models and portfolios.

• Review process of the post model adjustments made by management, placing special attention to those made as a consequence of covid-19.

In addition, we performed the following tests of details:

• Tests of principal models with respect to: i) calculation and segmentation methods; ii) methodology used for the estimation of the expected loss parameters; iii) data and main assumptions used, iv) staging criteria and v) scenario information and assumptions.

Key audit matter

As a result, during fiscal year 2020 the Group has recognised an amount of 12,363 million euros of impairment of financial assets at amortised cost.

Please refer to Notes 1, 2, 10 and 53 of the consolidated annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

• For a sample of loans subject to either moratoriums or government guarantees, if any, assess the documentation used in the origination process.

• Reperformance of collective impairment losses based on the expected credit loss models parameters.

• Evaluation of the post model adjustments made by management.

• On a sample basis, evaluating individual credit files to determine the adequacy of their accounting and classification, discounted cash flows and, where appropriate, corresponding impairment.

We have not identified exceptions outside of a reasonable range in the procedures outlined above.

Goodwill impairment assessment

Goodwill impairment assessment is an exercise that requires a high degree of judgment and estimation, therefore it has been considered one of the key audit matters .

Due to their relevance to Santander Group, management monitors goodwill and assesses goodwill for impairment at the end of each annual reporting period or whenever there is any indication of impairment. As at December 31, 2020, management's assessment has considered the updated economic and business environment resulting from covid-19, the current market conditions and the existing economic uncertainty that has impacted the main assumptions, with special focus on the following Cash Generating Units (CGUs): Santander UK, Santander Bank Polska, Santander Bank, National Association, Santander Consumer USA and Santander Consumer Nordics.

The assumptions used by management to estimate the value in use of the CGUs includes financial projections, discount rates, perpetual growth rates and market quotes (if available). Such valuations, and some of these assumptions, are performed by management's experts.

We have obtained an understanding, with the assistance of our valuation experts, of the processes performed by management to assess the recoverable amount and the process performed over the goodwill impairment assessment.

With respect to internal controls, we have focused on the design and operating effectiveness of the controls in the following process:

• Definition of the Group's CGUs.

• Methodology used by management for the goodwill impairment assessment, including the controls in place to supervise the process and the related approvals.

• Budgeting process on which the projections used in the discounted cash flow projections are based on.

• Management's capability of reliable prediction through the comparison of previous years' estimations and impairment assessments with the actual results.

Key audit matter

As a result, the Group has recognised EUR 10,100 million of goodwill impairment during the year ended 2020 related to the following CGUs: Santander UK, Santander Bank Polska, Santander Bank, National Association, Santander Consumer USA and Santander Consumer Nordics. The Group's consolidated goodwill balance was EUR 12,471 million as at December 31, 2020.

Please refer to Notes 2 and 17 of the consolidated annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

• Evaluated the reasonableness of the discount rates and perpetual growth rates used by management's experts.

• Verified the mathematical accuracy of the valuation models used by management experts.

• Inspected the annual valuation reports regarding the evaluation of the goodwill impairment, performed by management's experts.

Based on the importance, we have conducted tests of details over the goodwill impairment assessment performed during 2020 for the following CGUs: Santander UK, Santander Bank Polska, Santander Bank, National Association, Santander Consumer USA and Santander Consumer Nordics. Considering market practices and specific sector expectations, as well as the current economic and business environment resulting from covid-19, we have performed the following procedures:

• Evaluated the reasonableness of the methodology and main assumptions used by management in its goodwill impairment assessment, including the financial projections, discount rates and perpetual growth rates, and compared to external market data, if available.

• Verified the mathematical accuracy of the goodwill impairment test, including the discounted cash flow projections.

• Performed a specific sensitivity analysis of the main assumptions such as those related to the: i) financial projections; ii) discount rates; and iii) perpetual growth rates.

• Inspected the valuation reports regarding the goodwill impairment test performed by management's internal and external experts.

In addition, we have performed, among others, the

following tests of details:

• Evaluated the discounted cash flow projections used by management in their estimation, considering market practices and specific sector expectations, including the verification of the assumptions, such as discount rates and perpetual growth rates, of the rest of CGU valuated by their value in use.

Key audit matter

How our audit addressed the key audit matter

• Compared the fair value of the listed CGUs to their recoverable amount.

• Verified the adequacy of the information disclosed in the consolidated annual accounts in accordance with applicable regulations.

We have not identified exceptions outside of a reasonable range in the procedures outlined above.

Recoverability of deferred tax assets - Spain and Brazil

Assessing the recoverability of deferred tax assets is an exercise that requires a high degree of judgement and estimation, with particular relevance to the Group in Spain and Brazil, therefore it has been considered one of the key audit matters.

Within the framework of the recoverability model defined by management, in relation to the Consolidated Tax Group, on an annual basis, or whenever there is any indication of impairment, each business unit compiles the assumptions that support the business plans that are projected over the time horizon established for that business . As a result of the impact of covid-19 on the main hypotheses on which financial projections are based, mainly derived by the changes in the macroeconomic variables and the actual results as compared to budget, the Group has evaluated the ability to generate future taxable profits in assessing the recoverability of the deferred tax assets recorded during fiscal year 2020.

The process carried out during this period includes specific considerations that management considers in assessing the recoverability of deferred tax assets, placing special attention to the environment and uncertainty resulting from the pandemic.

In collaboration with our tax experts, we have obtained an understanding of the estimation process undertaken by management.

With respect to internal controls, we have focused on testing the design and operating effectiveness of controls in the following processes:

• Process on which the financial projections used to estimate future taxable profits are based for the recoverability model of deferred tax assets.

• Calculation of deductible temporary difference, including the adequacy with the current tax regulation.

We also performed the following tests of details:

• Evaluated the accuracy of the calculations and the reasonableness of the estimations made by management for deductible temporary differences .

• Assessed the completeness and appropriateness of the assumptions used by management in their calculation of the deductible temporary differences.

• Analysis of the key assumptions used by management in their estimation and monitoring of the recoverability of deferred tax assets, with special attention to the covid-19 impact, including:

^• Obtaining and analysing the financial projections carried out by the Group and the assumptions used, including the detail of the economic forecasts and indicators used in the analysis.

Key audit matter

The most significant considerations made by management in this respect are:

• Assuring that the tax regulations of each country are applied correctly and the temporary differences that meet the consideration as deductibles are duly recognised.

• Reviewing the projections that are part of the recoverability model of deferred tax assets which is in turn used to estimate the tax profits used to assess the recoverability of the deferred tax assets that will be recoverable in future periods, are indeed achievable.

• Applying the model and validating the calculations of this model to ensure that the valuation of tax assets and that the conclusions drawn regarding their recoverability are appropriate.

As a result, during the year ended 2020 the Group has estimated that 2,500 million euros of deferred tax assets are not recoverable.

Please refer to Notes 2 and 27 of the consolidated annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

- Analysis of the tax strategy planned by the Group for the recoverability of the deferred tax assets.

We have not identified exceptions outside of a reasonable range in the procedures outlined above.

Litigation provisions and contingencies

The Group is party to a range of tax and legal proceedings - administrative and judicial - which primarily arose in the ordinary course of its operations. Also, there are other situations not yet subject to any judicial process that, however, have required the registration of provisions, such as aspects of conduct with clients and their compensation.

These procedures generally take a long period of time to run their course, giving rise to complex processes in accordance with the applicable legislation, therefore it has been considered one of the key audit matters.

Management decides when to recognize a provision for these contingent liabilities, based on an estimate calculated using certain procedures consistent with the nature of the uncertainty of the obligations.

We have obtained an understanding and evaluated the estimation process performed by management for litigation provisions and contingencies.

With respect to internal controls, we have focused on testing the design and operating effectiveness of controls in the following process:

• A dditions, logs and updates over the completeness of the legal matters in the systems.

• Accuracy of the key data, maintained in the

systems, used in the calculation of the litigations provisions and contingencies.

Key audit matter

Among these provisions, the most significant are those that cover the tax and labour proceedings in Brazil.

The amount of the litigation provisions and contingencies as at December 31, 2020 is 4,425 million euros.

Please refer to Notes 2 and 25 of the consolidated annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

• Assessment of the criteria used to estimate the expected losses from litigation provisions and contingencies and evaluation of the adequacy over the calculation of the provisions for regulatory, legal or tax procedures and their recognition.

• Reconciliation between the minutes of the inspections and the amounts accounted for.

In addition, we performed the following tests of details:

• Analysis for reasonableness of the expected outcomes of the most significant tax and legal proceedings.

• Assessment of possible contingencies relating to compliance with the tax obligations for all the years open to inspection, of the communications with the regulatory bodies and analysis of the ongoing regulatory inspections.

• Obtaining confirmation letters from external and internal lawyers and external tax advisors who work with the Group and performing alternative procedures.

• Analysis of the recognition and reasonableness of the provisions recorded.

In the procedures described above, no exceptions were identified outside of a reasonable range.

Information systems

The Group's financial information is highly dependent on information technology (IT) systems and the geographies where it operates, therefore an adequate control of these systems is crucial to ensuring correct data processing.

In this context, it is vital to evaluate aspects such as the organization of the Group's Technology and Operations department, controls over software maintenance and development, physical and logical security controls, and controls over computer operations, therefore it has been considered one of the key audit matters.

We have evaluated, in collaboration with our IT system specialists, the internal controls over the IT systems, databases and applications that support the Group's financial reporting.

For this purpose, we performed procedures over internal control and test of details related to:

• The function of the IT governance framework.

• Access and logical security controls over the applications, operating systems and databases that support the relevant financial information.

Key audit matter

In this respect, management continues working to reinforce the internal controls over IT systems, improving the access control that support the Group's technology processes.

How our audit addressed the key audit matter

• Application development and change management.

• Maintenance of computer operations.

In addition, considering the changes carried out by management to reinforce the internal controls over IT systems, our approach and audit plan focused on the following aspects:

• Evaluation of the changes made as part of the enhancements implemented in the access control environment of the Group.

• Testing of the design and operating effectiveness of the controls implemented by management.

In the procedures described above, no essential exceptions were identified related to this matter.

Other information: Consolidated Directors' report

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.

Responsibility of the directors and the audit committee for the consolidated annual accounts

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.

Auditor's responsibilities for the audit 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

European single electronic format

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.

Report to the Parent company's audit committee

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.

Appointment period

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 provided

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

PricewaterhouseCoopers Auditores, S.L. (S0242)

Alejandro Esnal Elorrieta (19930)

February 23, 2021

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

Independent auditor's report on the annual accounts

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

Report on the annual accounts

Opinion

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.

Basis for opinion

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

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.

Key audit matter

Estimation of impairment of financial assets at amortised cost - loans and advances to customers - for credit risk

The complexity of the expected loss impairment calculation models has increased due to the adaptations made in the context of the covid-19 crisis by incorporating new estimates and judgments such as the consideration of certain flexibility measures applied to the operations subject to moratoriums, the consideration of government guarantees or the consideration of the adjustments to the models to determine the expected loss. These estimates require an elevated component of judgment by management and are one of the most significant and complex estimates in the preparation of the annual accounts as of December 31,2020, therefore it has been considered one of the key audit matters

The main judgements and assumptions used by management are the following:

• The estimation of the Probability of Default (PD) and Loss Given Default (LGD) parameters.

• Identification and classification of the staging criteria of loans and advances to customers, including the criteria established in the context of covid-19 in the loans subject to either moratoriums or government guarantees.

• The definition and evaluation of post model adjustments to adapt the parameters estimated by the models to the current conditions and environment derived from the covid-19 crisis.

•

The main assumptions used in the determination of provisions for risks estimated individually.

The Bank's business is focused primarily on commercial banking products. In this context, the Bank uses internal models that allow it to estimate both the collective provisions and the provisions for risks estimated individually.

How our audit addressed the key audit matter

We have performed, in collaboration with our credit risk experts, an understanding of management's process to estimate the impairment of financial assets at amortised cost - loans and advances to costumers - over the estimation of impairment of financial assets assessed collectively and individually.

With respect to internal controls, we have focused on testing the design and operating effectiveness of controls for the following processes:

• Calculation methodologies, calibrations, and monitoring and back-testing performed by management.

• Compliance with internal policies and functionality of the internal models approved by management.

• Reliability of the data sources used in the calculations and the suitability of the models taking into account the circumstances , placing special attention over the loan origination process subject to either moratoriums or government guarantees as a consequence of covid-19.

• Periodic review process of borrower to determine proper staging criteria.

• Review process over the calculation of the principal models and portfolios.

• Review process of the post model adjustments made by management, placing special attention to those made as a consequence of covid-19.

In addition, we performed the following tests of details:

Key audit matter

As a result, during fiscal year 2020 the Bank has recognised an amount of 2,555 million euros of impairment of financial assets at amortised cost.

Please refer to Notes 1, 2, 6 and 10 of the annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

• For a sample of loans subject to either moratoriums or government guarantees, assess the documentation used in the origination process.

• Reperformance of collective impairment losses based on the expected credit loss models parameters.

• Evaluation of the post model adjustments made by m anagement.

• On a sample basis, evaluating individual credit files to determine the adequacy of their accounting and classification, discounted cash flows and, where appropriate, corresponding impairment.

We have not identified exceptions outside of a reasonable range in the procedures outlined above.

Recoverability of deferred tax assets

Assessing the recoverability of deferred tax assets is an exercise that requires a high degree of judgment and estimation, therefore it has been considered one of the key audit matters

Within the framework of the recoverability model defined by the Bank's management, in relation to the Consolidated Tax Group, on an annual basis, or whenever there is any indication of impairment, each business unit compiles the assumptions that support the business plans that are projected over the time horizon established for that business. As a result of the impact of covid-19 on the main hypotheses on which financial projections are based, mainly derived by the changes in the macroeconomic variables and the actual results as compared to budget, the Bank has evaluated the ability to generate future taxable profits in assessing the recoverability of the deferred tax assets recorded during fiscal year 2020.

In collaboration with our tax experts, we have obtained an understanding of the estimation process undertaken by management.

With respect to internal controls, we have focused on testing the design and operating effectiveness of controls in the following processes:

• Process on which the financial projections used to estimate future taxable profits are based for the recoverability model of deferred tax assets.

• Calculation of deductible temporary difference, including the adequacy with the current tax regulation.

Key audit matter

The most significant considerations made by management in this respect are:

• Assuring that the tax regulations of each country are applied correctly and the temporary differences that meet the consideration as deductibles are duly recognised.

• Reviewing the projections that are part of the recoverability model of deferred tax assets which is in turn used to estimate the tax profits, used to assess the recoverability of the deferred tax assets that will be recoverable in future periods, are indeed achievable.

• Applying the model and validating the calculations of this model to ensure that the valuation of tax assets, and that the conclusions drawn regarding their recoverability, are appropriate.

As a result, during fiscal year 2020 the Bank has estimated that 1,632 million euros of deferred tax assets are not recoverable.

Please refer to Notes 2 and 24 of the annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

We also performed the following tests of details:

• Evaluated the accuracy of the calculations and the reasonableness of the estimations made by management for deductible temporary differences.

• Assessed the completeness and appropriateness of the assumptions used by management in their calculation of the deductible temporary differences.

• Analysis of the key assumptions used by management in their estimation and monitoring of the recoverability of deferred tax assets, with special attention to the covid-19 impact, including:

- Obtaining and analysing the financial projections carried out by the Bank and the assumptions used, including the detail of the economic forecasts and indicators used in the analysis.

- Analysis of the tax strategy planned by the Bank for the recoverability of the deferred tax assets.

We have not identified exceptions outside of a reasonable range in the procedures outlined above.

Litigation provisions and contingencies

The Bank is party to a range of tax and legal proceedings - administrative and judicial - of tax and legal nature which primarily arose in the ordinary course of its operations. Also, there are other situations not yet subject to any judicial process that, however, have required the registration of provisions, such as aspects of conduct with clients and their compensation.

The Bank's management decides when to recognise a provision for these contingent liabilities, based on an estimate calculated using certain procedures consistent with the nature of the uncertainty of the obligations.

We have obtained an understanding and

evaluated the estimation process performed by management for litigation provisions and contingencies.

With the respect to internal controls, we have

focused on testing the design and operating

effectiveness of controls in the following

processes:

• Additions, logs and updates over the completeness of the legal matters in the systems.

• Accuracy of the key data, maintained in the systems, used in the calculation of the litigations provisions and contingencies.

Key audit matter

Among these provisions, some of the most significant are those for customer compensation for the sale of certain products; these estimates are based on the number of claims expected to be received, the number expected to be accepted, and the estimated average pay out per case.

The amount of the litigation provisions and contingencies as of December 31, 2020 is

936 million euros.

Please refer to Notes 2 and 23 of the annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

• Reconciliation between the minutes of the inspections and the amounts accounted for.

In addition, we performed the following tests of details:

• Analysis for reasonableness of the expected outcomes of the most significant tax and legal proceedings.

• Assessment of possible contingencies relating to compliance with the tax obligations for all the years open to inspection, of the communications with the regulatory bodies, analysis of the ongoing regulatory inspections.

• Obtaining confirmation letters from external and internal lawyers and external tax advisors who work with the Bank and performing alternative procedures.

Analysis of the recognition and reasonableness of the provisions recorded.

In the procedures described above, no exceptions were identified outside of a reasonable range.

Impairment of investments in Company's subsidiaries

As indicated in Note 13 of the accompanying annual accounts, Banco Santander, S.A. is the parent company of a group of entities, whose fundamental activities are in the financial services sector. The accounting value of the investments Company's subsidiaries as at December 31, 2020 is 81,560 million euros, as indicated in Note 13 of the related notes to the accompanying annual accounts.

We have obtained an understanding of the valuation process of the investment in the Company's subsidiaries. In addition, where the valuation of investment requires the use of significant judgment, we have relied on the assistance of our valuation experts.

With respect to internal controls, we have focused on the design and operating effectiveness of the controls in the valuation process and over the methodology, inputs and relevant assumptions use by management for the year-end estimates, including the controls in place to supervise the process and the related approvals.

Key audit matter

Management performs an analysis of the potential losses in investments in the Company's subsidiaries that it has registered in its accounting records. This analysis is performed using different parameters such as the market price or the net equity adjusted for the unrealised gains existing at the valuation date, including goodwill net of its corresponding impairment.

The valuation or analysis of the impairment of some of these investments require the use of significant judgments, principally for those investments measured using the net equity adjusted for the unrealised gains existing at the valuation date including its goodwill, including those measured using the net book value, therefore it has been considered one of the key audit matters.

In this evaluation, the Bank's management is based on the analyses performed in the evaluation of goodwill, where using assumptions such as financial projections, discount rates, perpetual growth rates, market quotes (if available), market references (multiples). Such valuations, and some of these assumptions, are performed by management's experts.

Management's assessment has considered the updated economic and business environment resulting from covid-19, the current market conditions and the existing economic uncertainty.

As a result, during fiscal year 2020 the Bank has recognised an amount of 5,466 million euros of impairment of investments in Company's subsidiaries.

Please refer to Note 13 of the annual accounts as at December 31, 2020.

How our audit addressed the key audit matter

Additionally, we have performed tests of details consisting of the following, with special attention to the covid-19 impact:

• Verify the valuation performed by the Bank, using as a reference the recoverable balance of the investments in Company's subsidiaries.

• Verify that management's valuation methodology is in line with the applicable accounting standards, market practice and the specific expectations of the sector.

• For investments whose valuation is calculated including goodwill, we evaluated the reasonability of the discounted cash flow projections, including the validation of the key inputs with external data and performing a sensitivity analysis on them.

We have not identified exceptions, outside a reasonable range, in the test described above.

Information systems

The Bank's financial information is highly dependent on information technology (IT) systems, therefore an adequate control of these systems is crucial to ensuring correct data processing.

We have evaluated, in collaboration with our IT system specialists, the internal controls over the IT systems, databases and applications that support the Bank's financial reporting.

For this purpose, we have performed procedures over internal control and test of details related to:

• The function of the IT governance framework.

Key audit matter

In this context, it is vital to evaluate aspects such as the organization of the Bank's Technology and Operations department, controls over software development and maintenance, physical and logical security controls, and controls over computer operations.

In this respect, management continues working to reinforce the internal controls over IT systems, improving the access control and the cybersecurity model that support the Bank's technology processes.

How our audit addressed the key audit matter

• Access and logical security controls over the applications, operating systems and databases that support the relevant financial information.

• Application development and change management.

• Maintenance of computer operations.

In addition, considering the changes carried out by management to reinforce the internal controls over IT systems, our approach and audit plan focused on the following aspects:

• Evaluation of the changes made as part of the enhancements implemented in the access control environment of the Bank.

• Testing of the design and operating effectiveness of the controls implemented by management.

In the procedures described above, no essential exceptions were identified related to this matter.

Other information: Director's report

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:

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.

Responsibility of the directors and the audit committee for the annual accounts

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.

Auditor's responsibilities for the audit 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.

· 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

European single electronic format

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.

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.

Report to the audit committee

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.

Appointment period

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 provided

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

PricewaterhouseCoopers Auditores, S.L. (S0242)

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:

1.	Credit risk relates to financial loss arising from the default or credit quality deterioration of a customer or counterparty, to which Santander has directly provided credit or assumed a contractual obligation.
2.	Market risk results from changes in interest rates, exchange rates, equities, commodities and other market factors, and from their effect on profits or capital.
3.	Liquidity risk occurs if liquid financial resources are not enough to meet due obligations or can only be obtained at a high cost.
4.	Structural risk relates to the changing value or margin of assets or liabilities in the banking book owing to changes in market factors and balance sheet behaviour. It includes risks from insurance, pension activities or an inadequate quantity or quality of capital to fulfil internal business objectives, regulatory requirements or market expectations.
5.	Operational risk is the possibility of losses from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk and conduct risk.
6.	Regulatory compliance risk is the risk of not fulfilling legal and regulatory requirements and supervisors' expectations, and may lead to fines, financial penalties or other sanctions.
7.	Model risk involves potential losses resulting from inaccurate predictions that lead to sub-optimal decision making, or from a misuse or inadequate implementation of a model.
8.	Reputational risk consists of potential losses from damage to its reputation amongst employees, customers, shareholders/investors and the wider community.
9.	Strategic risk relates to losses or damage to the medium- and long-term interests of key stakeholders owing to strategic decision-making, poor execution of strategy or failure to adapt to external developments.

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.

EUR million
	2020
	Associates and joint ventures	Members of the board of directors	Executive vicepresident	Other related parties
Assets	8,473	-	24	95
Cash, cash balances at central banks and other deposits on demand	151	-	-	-
Loans and advances: credit institutions	562	-	-	-
Loans and advances: customers	6,934	-	24	95
Debt instruments	423	-	-	-
Others	403	-	-	-

Liabilities	3,593	4	16	159
Financial liabilities: credit institutions	944	-	-	-
Financial liabilities: customers	2,557	4	16	159
Marketable debt securities	12	-	-	-
Others	80	-	-	-

Income statement	1,269	-	-	3
Interest income	106	-	-	2
Interest expense	(8)	-	-	-
Gains/losses on financial assets and liabilities and others	49	-	-	-
Commission income	1,154	-	-	1
Commission expense	(32)	-	-	-

Other	4,097	1	1	52
Financial guarantees granted and Others	14	-	-	3
Loan commitments and Other commitments granted	253	1	1	13
Derivative financial instruments	3,830	-	-	36

EUR million
	2019
	Associates and joint ventures	Members of the board of directors	Executive vicepresident	Other related parties
Assets	9,659	-	26	104
Cash, cash balances at central banks and other deposits on demand	740	-	-	-
Loans and advances: credit institutions	961	-	-	-
Loans and advances: customers	6,950	-	26	104
Debt instruments	848	-	-	-
Others	160	-	-	-

Liabilities	2,689	41	12	57
Financial liabilities: credit institutions	563	-	-	-
Financial liabilities: customers	2,064	41	12	57
Marketable debt securities	-	-	-	-
Others	62	-	-	-

Income statement	1,386	-	-	2
Interest income	111	-	-	1
Interest expense	(15)	-	-	-
Gains/losses on financial assets and liabilities and others	47	-	-	-
Commission income	1,269	-	-	1
Commission expense	(26)	-	-	-

Other	4,219	7	3	49
Financial guarantees granted and Others	17	5	2	38
Loan commitments and Other commitments granted	197	1	1	6
Derivative financial instruments	4,005	1	-	5

EUR million
	2018
	Associates and joint ventures	Members of the board of directors	Executive vicepresident	Other related parties
Assets	7,202	-	30	256
Cash, cash balances at central banks and other deposits on demand	-	-	-	-
Loans and advances: credit institutions	704	-	-	-
Loans and advances: customers	6,142	-	30	256
Debt instruments	295	-	-	-
Others	61	-	-	-

Liabilities	1,650	19	12	363
Financial liabilities: credit institutions	8	-	-	-
Financial liabilities: customers	1,596	19	12	363
Marketable debt securities	8	-	-	-
Others	38	-	-	-

Income statement	993	-	-	31
Interest income	73	-	-	14
Interest expense	(3)	-	-	(1)
Gains/losses on financial assets and liabilities and others	82	-	-	-
Commission income	853	-	-	18
Commission expense	(12)	-	-	-

Other	4,707	9	3	782
Financial guarantees granted and Others	21	7	1	508
Loan commitments and Other commitments granted	393	1	2	64
Derivative financial instruments	4,293	1	-	210

The remaining required information is detailed in notes 5, 14 and 46.c.

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