SecProbe.io

CORRESP
1
filename1.htm

Correspondence

José Manuel de Araluce Larraz

Subdirector General

Cumplimiento y Relaciones Institucionales

October 23, 2009

Ms. Rebekah Blakeley Moore

Senior Accountant

Division of Corporation Finance

U.S. Securities and Exchange Commission

100 F Street, N.E.; mail stop 4561

Washington, D.C. 20549

U.S.A.

    Re:

    Banco Santander, S.A.

Form 20-F

Filed June 30, 2009

File No. 001-12518

Dear Ms. Moore:

On behalf of Banco Santander, S.A. (“Santander” or the “Bank”), I hereby submit Santander’s
responses to the comments of the staff of the Division of Corporation Finance (the “Staff”) of the
United States Securities and Exchange Commission (the “Commission”) set forth in your letter dated
September 30, 2009 in connection with the above referenced Annual Report on Form 20-F (the “20-F”)
of Santander.

I set forth below our responses to each of the Staff’s comments, indicating each comment in
boldface text with our response below. All references to page numbers in Santander’s responses are
to pages in the filed version of the 20-F.

****************************

Item 4. Information on the Company

Business Overview

Impaired Assets, page 71

    1.

    We note that your non-performing assets balance has increased significantly in each
of the last three years 2006, 2007 and 2008 and for the six-month period ended June 30,
2009. Please tell us and revise your disclosure in future filings to address the
following:

    a.

    Provide a more detailed disclosure related to changes in (and
related trends in) your non-performing assets balance. In this regard, please
provide a more granular discussion of the reasons for the increase in your
ratio of non-performing assets to computable credit risk as well as the
decrease in the coverage ratio. These trends do not appear to be directionally
consistent with your disclosures on page 207 regarding general worldwide
credit trends and the trends identified in your risk factor on page 19.

    b.

    Consider revising your disclosure on page 72 to provide
additional detail relating to the types of loans included in the “other”
category of non-performing loans.

    c.

    In your revised disclosures, specifically quantify how much
of the increase in non-performing loans was related solely to acquisitions
during the year versus the increase due to economic conditions or credit
quality.

In response to the Staff’s comment, in future filings, we will revise our disclosure relating
to Impaired Assets as set forth below, updated to reflect then-current results and financial
condition. We have provided a blackline of the new text (marked against the disclosure from the
20-F) to facilitate the Staff’s comparison with our prior disclosures. For ease of comparison and
to simplify the presentation, we have eliminated some formatting discrepancies reflected in the
blackline and have also eliminated 2004/2005 information from the tables.

Impaired Assets

The following tables show our impaired assets, excluding country-risk. We do not keep records
classifying assets as non-accrual, past due, restructured or potential problem loans, as those
terms are defined by the SEC. However, we have estimated the amount of our assets that would have
been so classified, to the extent possible, below.

    IFRS – IASB

    At December 31,

    At June 30,

    Non-performing assets

    2008

    2007

    2006

    2009

    2008

    (in thousands of euros, except percentages)

    Past-due and other non-performing assets (1) (2) (3):

    Domestic

    6,405,803

    1,887,167

    1,288,857

    8,642,963

    3,515,763

    International

    7,785,010

    4,291,488

    3,318,690

    13,108,642

    5,011,231

    Total

    14,190,813

    6,178,655

    4,607,547

    21,751,605

    8,526,994

    Non-performing loans as a percentage of total loans
assets to computable credit risk

    2.02
    %

    0.94
    %

    0.78
    %

    2.82
    %

    1.33
    %

    Net loan charge-offs as a percentage of total loans

    0.55
    %

    0.41
    %

    0.31
    %

    0.49
    %

    0.27
    %

    (1)

    We estimate that the total amount of our non-performing assets fully provisioned under
IFRS and which under US banking practices would have been charged-off from the balance sheet was
€1,567.0 million,
€1,302.6 million, €1,206.5 million, €1,582.0 million and €2,877.6
million at December 31, 2004, 2005, 2006, 2007 and 2008 respectively and €1,696.1 million
and €2,271.7 million at June 30, 2008 and 2009 respectively.

    (2)

    Non-performing assets due to country risk were €122.4,
€121.1, €83.0,83.0
million, €6.7 million and
€2.6 million at December 31, 2004, 2005, 2006, 2007 and 2008
respectively, and €5.8 million and €3.7 million at June 30, 2008 and 2009,
respectively.

    (3)

    We estimate that at December 31, 2004, 2005, 2006, 2007 and 2008 (i) the total amount of our
non-performing past-due assets was €3,501.03,841.2 million,
€3,367.1 million,
€3,841.2, 4,918.2 million and €11,773.3 million at December 31, 2006, 2007 and 2008,
respectively, and €6,859.9 million and €18,087.3 million at June 30, 2008 and 2009
respectively, and (ii) the total amount of our other non-performing assets was
€613.7766.3 million, €974.4 million, €766.3, €1,260.5 million and €2,417.5
million at December 31, 2006, 2007 and 2008, respectively and €1,667.1 million and
€3,664.3 million at June 30, 2008 and 2009 respectively.

We do not believe that there is a material amount
of assets not included in the foregoing
table where known information about credit risk at December 31, 2008 (unrelated|June 30, 2009
(not related to transfer risk inherent in cross-border lending activities) gave rise to serious
doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.

Evolution of Impaired Assets

The following tables show|table shows the movement in our impaired assets (excluding
country-risk, see “—Country-Risk Outstandings”).

    IFRS-IASB

    Year ended December 31,

    Quarter ended

    (in thousands of euros)

    2006

    2007

    Mar. 31, 2008

    Jun. 30, 2008

    Sep. 30, 2008

    Dec. 31, 2008

    Mar. 31, 2009

    Jun. 30, 2009

    Opening balance

    4,341,500

    4,607,547

    6,178,655

    7,148,069

    8,603,616

    10,583,570

    14,190,814

    18,967,528

    Net additions

    2,567,912

    5,014,270

    1,964,351

    2,446,491

    3,089,943

    4,173,490

    5,290,125

    4,877,401

    Increase in scope of consolidation

    164,000

    1,000

    —

    —

    —

    2,029,000

    1,033,000

    —

    Exchange differences

    (96,000
    )

    (124,000
    )

    (110,498
    )

    4,775

    7,362

    (598,149
    )

    211,246

    369,976

    Write-offs

    (2,369,865
    )

    (3,320,162
    )

    (884,439
    )

    (995,719
    )

    (1,117,351
    )

    (1,997,097
    )

    (1,757,657
    )

    (2,463,300
    )

    Closing
balance (1)

    4,607,547

    6,178,655

    7,148,069

    8,603,616

    10,583,570

    14,190,814

    18,967,528

    21,751,605

    (1)

    Non-performing assets due to country-risk were €2.6 million, €6.7 million, €83.0
million, €121.1 million and €122.4 million at December 31, 2008, 2007, 2006, 2005 and 2004
respectively.

The Group’s non-performing assets (“NPA”) have increased during 2008 and 2009, mainly due
to (1) the rapid deterioration of the global macroeconomic environment and (2) the increase in the
Bank’s scope of consolidation (due to the acquisitions of Alliance & Leicester, Sovereign, Banco
Real, GE Money and RBS Europe). As shown in the table above, in the fourth quarter of 2008 and the
first quarter of 2009, the Group’s non-performing assets increased by €2.01 billion and €1.03
billion, respectively, due to acquisitions. Other
factors leading to the increase in the Group’s non-performing assets were the higher
volumes of lending in recent years and the change of mix (principally in Latin America) toward more
profitable products, but with a higher risk premium. The principal geographic drivers of the
increase in NPA, other than through acquisitions, were Spain, the United Kingdom and Brazil (which
together represent approximately 75% of the increase).

The increase in the NPA balance is also aggravated through the classification as
non-performing of the entire outstanding principal amount and accrued interest on any loan on which
any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this
effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client
drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk
exposure (including off-balance sheet risks) to a single obligor, whenever the amount of
non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding
non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case
of mortgages and corporate loans due to the greater average amount of these loans.

Notwithstanding the above, in the second quarter of 2009, the formerly increasing trend of
net additions to NPA has reversed into a diminishing trend, consistent with what appears to be the
start of the recovery from the current economic downturn.

Impaired Asset Ratios

The
following tables show|table shows the total amount of our computable credit risk, the
amount of our non-performing assets by category, our allowances for credit losses, the ratio of
our impaired assets to total computable credit risk and our coverage ratio at December 31, 2008,
2007, 2006, 2005 and 2004.|the dates indicated.

    IFRS – IASB

    At December 31,

    At June 30,

    2008

    2007

    2006

    2009

    2008

    (in thousands of euros, except percentages)

    Computable credit risk (1)

    697,199,713

    649,342,484

    588,372,837

    771,854,783

    642,190,754

    Non-performing assets

    Mortgage loans

    3,564,812

    1,843,628

    1,364,317

    6,719,272

    2,408,444

    of which: individuals

    3,238,670

    1,584,516

    1,230,405

    5,947,223

    2,176,548

    Consumer loans

    5,711,326

    2,695,997

    2,093,490

    6,666,390

    3,462,714

    Credit cards and other

    1,163,543

    494,075

    383,658

    1,389,518

    770,918

    Enterprises

    2,534,192

    1,050,626

    709,896

    4,545,200

    1,736,176

    Corporate Banking

    1,130,459

    62,224

    38,300

    2,378,194

    115,906

    Public sector

    86,481

    32,105

    17,886

    53,031

    32,836

    Total non-performing assets

    14,190,813

    6,178,655

    4,607,547

    21,751,605

    8,526,994

    Allowances
for credit losses non-performing assets

    12,862,981

    9,302,230

    8,626,937

    15,726,617

    10,212,408

    Ratios

    Non-performing assets to computable credit risk

    2.02
    %

    0.94
    %

    0.78
    %

    2.82
    %

    1.33
    %

    Coverage ratio (2)

    90.64
    %

    150.55
    %

    187.23
    %

    72.30
    %

    119.77
    %

    (1)

    Computable credit risk is the sum of the face amounts of loans and leases (including
non-performing assets but excluding country risk loans), guarantees and documentary credits.

    (2)

    Allowances for credit losses non-performing assets as a percentage of non-performing
assets.

The ratio of non-performing assets to computable credit risk, or the NPL ratio, was 0.78%,
0.94%, 2.02%, 1.33% and 2.82% for the Group as a whole as of December 31, 2006, 2007, 2008 and June
30, 2008 and 2009, respectively. In the current economic downturn, the effect of which is
exacerbated by the drag effects described above, our non-performing loan ratio increased, and we
expect it will continue to do so although at a slower pace as highlighted by the recent quarterly
trend of diminishing net additions to NPAs discussed above.

The coverage ratio fell to 91% in December 2008, and further to 72.3% in June 2009. This
ratio is calculated as allowances for credit losses as a percentage of non-performing assets.

The main reasons for the increases in the NPL ratio and the decreases in the coverage
ratio are the following:

We establish our expectations of credit loss (and our corresponding allowances) for our
entire loan portfolio, not just for our non-performing assets. Our expectations of credit loss for
our whole portfolio typically increase at a slower rate than the rate at which our non-performing
assets increase, particularly during an economic downturn, when non-performing loans grow quickly
but the performing loan portfolio grows at a slower pace and with lower-risk loans, reflecting
caution due to macroeconomic conditions. As a result, the ratio of our non-performing assets to
computable credit risk typically increases since the numerator (non-performing assets) increases
faster than the denominator (computable credit risk). Similarly, our coverage ratio
typically decreases since, for the reasons discussed above, the numerator (allowances for
credit losses) does not increase as fast as the denominator (non-performing assets).

Additionally, to a lesser extent, the consolidation of Sovereign in the first quarter of
2009 with a coverage ratio of 66%, has also slightly decreased the Group’s average coverage
ratio.

We are currently highly exposed to real estate markets, especially in Spain and the United
Kingdom. Mortgage loans are one of our principal assets, comprising 49% of our loan portfolio as of
December 31, 2008, and we are focused on first home mortgages.  From 2002 to 2007, demand for
housing and mortgage financing in Spain increased significantly driven by, among other things,
economic growth, declining unemployment rates, demographic and social trends, and historically low
interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and
mortgage demand, driven by, among other things, economic growth, declining unemployment rates,
demographic trends and the increasing prominence of London as an international financial center. In
this favorable environment, the Group has maintained prudent risk management with an average loan
to value in Spain and the United Kingdom of 52% as of June 30, 2009. As a result of the general
macroeconomic deterioration in the second half of 2008, a percentage of these assets have become
non-performing and, as a result of the quality of the collateral, the inexistence of both option
ARM loans and of monthly payments below accrued interest, the requirements of allowances for these
non-performing assets have remained low.

As a result of the factors described above (the increase in the scope of consolidation,
the economic downturn, our higher lending volumes and the change of mix (principally in Latin
America)), our net impairment for credit losses were €4,677.2 million for the first half of
2009, an 88.9% or €2,200.7 million increase from €2,476.5 million for the same period in
2008. This increase did not have a significant impact on the attributable profit for the period due
to the positive evolution of income and the appropriate management of spreads.

Consolidated Financial Statements

1. Introduction, basis of presentation of the consolidated financial statements and other
information

(h) Events after the balance sheet date, page F-19

    2.

    We note your disclosure of the solution offered to customers affected by the Lehman
Brothers bankruptcy in February 2009 and the solution offered to your private banking
customers who had invested in Optimal Strategic affected by the Madoff fraud in January
2009. We further note that the cost of these solutions was recorded in your December 31,
2008 financial statements. Please include disclosure in future filings to clarify why
these events were adjusting events as that term is defined by paragraph 3 of IA